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mckesson Annual Report and Letter to Stockholders 2008

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Brochure Title May Be Stacked If Long Lorem Ipsum Dolor Sit Amet This set-up line one is for example only. This set-up line two is for example only. This set-up line three is for example only. McKesson solution copy for example only. All type is shown in black for position only. See examples in the guidelines for cor- rect color usage. Imagery area Business Unit Name (optional) Note: Volume 10 imag- ery may use 1.5 or 2 grid units for the imagery area.Annual ReportFISCAL YEAR 2008
FY08 Summary In fiscal year 2008, McKesson continued to execute exceptionally well, delivering superior stockholder returns. FINANCIAL RESULTS 20082007200620052004 $101.7 $93.0 $87.0 $79.1 $68.0 2008 2007 2006 2005 2004 $3.31 $2.71 $2.48 $2.19 $2.19 REVENUES (in billions) DILUTED EARNINGS PER SHARE* * A reconciliation between our net income per share reported under accounting standards generally accepted in the United States and our earnings per diluted share, excluding charges for the securities litigation reserves, is available in the enclosed Annual Report on Form 10-K on page 37. 200820072006200520042003 McKESSON CORPORATION S&P 500 INDEX VALUE LINE HEALTH CARE INDEX $240.76 $216.23$213.39 $153.74 $121.66 $100.00 FIVE-YEAR CUMULATIVE TOTAL RETURN† † Cumulative total return assumes $100 invested at the close of trading on March 31, 2003 in McKesson Corporation’s common stock, the S&P 500 Index and the Value Line Healthcare Sector Index, and assumes reinvestment of dividends when paid.
McKesson delivered another outstanding performance in fiscal year 2008. Our company’s ability to build and maintain strong customer relationships and sustain continued operational excellence propelled us to above-market revenue and earnings growth. We also made key investments and leveraged our diverse assets to expand our range of service and product offerings to deliver innovative solutions for our customers. To Our Stockholders: Extending our track record of superior stockholder returns Fiscal year 2008 was a year of milestones for McKesson. In January, we marked our 175th anniversary, a distinction rarely achieved in American business. Our revenues grew 9% to reach $101.7 billion, exceeding $100 billion for the first time. Perhaps most gratifying, we received numerous awards and significant recognition from our customers and industry groups for our superior service and solutions. I am very proud of our employees, whose efforts made these achievements possible. Our progress in fiscal year 2008 continued our track record of superior financial performance and stockholder returns. During the five-year period ending March 31, 2008, both our revenues and earnings per share (EPS) grew at a compound annual growth rate exceeding 8%. Over that time, McKesson’s stock price more than doubled, outperforming both the S&P 500 Index and the Value Line Health Care Index. McKesson’s stock price has also outperformed the shares of all other major pharmaceutical wholesalers since October 2004. Our financial strength over the past three years enabled us to make three major investments that create opportunities to increase stockholder value. In fiscal year 2008, we significantly enhanced our presence in the fastest-growing sector of the phar- maceutical market by acquiring Oncology Therapeutics Network (OTN), a leading distributor of specialty pharmaceuticals. In 2007, we made our largest acquisition since 1999 by joining forces with Per-Se Technologies, Inc. (Per-Se), gaining a collection of financial and administrative solutions for hospitals, physicians and retail pharmacies. Our acquisition of D&K Healthcare Resources (D&K) in fiscal year 2006 expanded our footprint among independent pharmacies in the Midwest. These are prominent examples of investments that create new avenues of growth and enhance the value we deliver to customers and stockholders. Drawing on our formidable array of assets, we are serving customers in ways that truly set McKesson apart in the market- place. We are the healthcare industry’s most complete solution provider, with the ability to deliver distribution and supply chain services, software solutions, claims processing capabilities, consulting services, pharmacy management systems, hospital automation, disease management programs and many other innovative offerings that satisfy our customers’ needs. We are combining our capabilities in bold new ways to create unique, innovative solutions that expand and redefine the segments in which we compete and drive improvements across the entire healthcare spectrum. Building mutually rewarding relationships with our customers and manufacturer partners At McKesson, we succeed when our customers succeed. Our abil- ity to build mutually rewarding, long-term relationships with our customers leads to future business opportunities and superior returns for our stockholders. We take pride in the value we deliver to our customers and are particularly gratified when they acknowledge the role we play in their success. In Distribution Solutions this past year, our U.S. Pharmaceutical business renewed agreements with CVS Caremark, Rite Aid, Safeway, Cigna, Humana and Costco. We also received “Business Partner of the Year” honors from Kinney Drugs. In the hospital seg- ment, we were the only wholesaler to receive the “2008 VHA Service Excellence Award,” as recognized by VHA’s member- ship, which includes 28% of the nation’s community-owned,
not-for-profit hospitals, and by the leadership team of Novation, the nation’s largest hospital group purchasing organization. On the Technology Solutions side of our business, 18 McKesson products were rated in the top three in their categories in the 2007 “Year-End Top 20: Best in KLAS Awards” report issued by KLAS Enterprises, an independent monitor of healthcare information technology vendors. Our manufacturer partners who produce branded and generic pharmaceuticals recognize the integral role McKesson plays in the overall supply chain. The majority of our U.S. pharmaceutical distribution agreements with manufacturers are structured to ensure that we are compensated for the services we provide. These agreements provide a significant source of stable, predictable revenue to McKesson and tremendous value to pharmaceutical manufacturers. McKesson is continually focused on expanding these relationships beyond distribution to include anti-counterfeit pedigree solutions, clinical trial sourcing, streamlined shipping and other strategic programs that help manufacturers grow profits and cut costs. As we move into fiscal year 2009 and beyond, McKesson has never been stronger or more capable. Our 175th anniversary theme — Taking Care Forward — celebrates our proud healthcare legacy while focusing attention on the future and the remarkable opportunities we have at McKesson. Healthcare has reached a critical point, and we are uniquely qualified to make a difference through our unparalleled capabilities, longstanding customer relationships and strong competitive position in the markets we serve. Our mission is to advance the healthcare system by advancing the success of our partners, and we are fulfilling this mission across every customer segment. Helping pharmacists play an expanded role in care delivery Today, pharmacies face unprecedented challenges posed by declining reimbursements, new federal and state regulations, and increasing competition. With our expertise and solutions, we are helping pharmacies navigate these challenges while helping them operate more efficiently and effectively. In doing so, we help free pharmacists to devote more time and attention to providing care, and we empower them to earn new sources of revenue by delivering expanded clinical services. “We are combining our capabilities in bold new ways to create unique, innovative solutions that expand and redefine the segments in which we compete and drive improvements across the entire healthcare spectrum.” FY08FY07FY06 1,851 1,236 262 HEALTH MART STORES (at fiscal year end) FACTS – We deliver more than $1 billion in medicines to pharmacies, hospitals, physician offices, and other health- care sites every week — one-third of the medicines used each day in North America. – We distribute more than 150,000 medical-surgical products — ranging from gloves and bandages, to surgi- cal lasers, to flu vaccines — to more than 300,000 physician offices and other customers. – Our bar-code scanning solutions in hospitals prevent 700,000 medication errors every week. – We help insurers, including the top 25 managed care organizations, pay claims accurately and faster for more than 160 million plan members. – Physicians log onto our physician portal 3.7 million times per month to gain secure access to their patients’ records.
Our Health Mart® franchise offers comprehensive solutions that help independent pharmacies attract new business, maximize the value of existing customer relationships and enhance operational efficiency. In fiscal year 2008, Health Mart grew by more than 600 new stores, bringing the total to more than 1,850. The growth of Health Mart contributed to another excellent year for our generics business, which grew sales by 11%, significantly above overall market growth for generics. We have expanded our industry-leading OneStop Generics® program to serve regional chains and hospital group purchasing organizations. For larger pharmacies and chains, McKesson invests in strategic programs like central fill, bulk repackaging and pharmacy management systems to help our customers maximize their operational and financial success. The acquisition of Per-Se significantly enhanced our pharmacy systems offering by providing a new, contemporary software platform for retail chain and mail order customers. We support all pharmacy customers with a robust infrastructure that includes Supply Management Online, our customer Internet portal that accounts for more than $2 billion in pharmaceutical orders each month. Our RelayHealth intelligent network processes 70% of all retail pharmacy claims nationwide. We continue to build and strengthen relationships within the pharmacy segment by combining our assets in unique ways to help pharmacists and patients. Formed last year, McKesson Patient Relationship Solutions (MPRS) engages pharmacists in using their counseling skills to help patients stay on their prescribed medications. MPRS provides 225 adherence pro- grams that are supported by more than 50 pharmaceutical manufacturers. One feature of this program, our LoyaltyScript® card, is used by 11,000 patients each day. We are also encouraged by our Medication Therapy Management pilot program, a unique service that strengthens communications among pharmacists, physicians and payors to improve patient outcomes by helping patients increase medication adherence and reduce adverse drug events. Connecting hospital caregivers for a safer, more patient-focused experience McKesson continues to extend its lead in providing hospitals with solutions that improve quality and patient safety, reduce the cost and variability of care, and improve resource and financial management. We are the only company with a com- plete suite of patient-safety solutions from the loading dock to the patient bedside. We are also benefiting from opportunities in our growing roster of “One McKesson” customers who use our products and services to address multiple needs through the combination of McKesson-provided information technology, automation and pharmaceutical distribution solutions. One of these customers is St. Luke’s Episcopal Healthcare System in Houston, which recently added extensive new clinical IT functionality to its three hospitals and 18 clinics. St. Luke’s also added more than 300 McKesson AcuDose-Rx® medication dispensing cabinets, a superior, yet affordable software and hardware solution that drives patient safety and process efficiency. This was the largest contract ever signed in McKesson’s automation business. St. Luke’s is also a McKesson pharmaceutical distribution customer. Our focus on innovation has kept our software offerings among the highest-rated in the industry. In fact, over the past three years, we have had 20 products ranked within the KLAS top three, several of which have received either a “Best in KLAS” or a “Category Leadership” designation multiple times. Helping physicians deliver better care and improve practice performance With the acquisitions of Per-Se, Practice Partner® and OTN over the past two years, we have significantly expanded our customer base and solution set in the physician office segment. We now deliver a full range of solutions to physicians, from medical supplies, equipment and vaccines, to electronic medical record “Drawing on our formidable array of assets, we are serving customers in ways that truly set McKesson apart in the marketplace.”
and practice management software, to outsourced billing and collections services. A portion of the assets we acquired from Per-Se helped us form RelayHealth, McKesson’s “connectivity” business, which provides powerful capabilities to each one of our customer segments. In the physician segment, RelayHealth facilitates ePrescribing and online patient-doctor consultations known as webVisits® , innovations that provide cost and efficiency benefits to physicians and improve patient care. Strengthening our position in the fast-growing specialty pharmaceutical market, the OTN acquisition expanded our physician customer base by almost 6,000 oncologists, rheu- matologists and other providers. We also gained OTN’s state-of-the-art Lynx® technology platform that automates practice management for oncologists and other physicians. Helping payors provide their members with the best, most cost-effective care In our payor business, we offer a range of services to the public and private sectors that help manage the cost and quality of care. We are the largest provider of disease management programs to state Medicaid agencies, helping millions of people with chronic diseases lead longer, healthier lives. In the private sector, we provide clinical decision support tools to health plans, employers and large medical groups that help create better health outcomes for their members. We renewed all expiring disease management contracts in fiscal year 2008, a strong validation of the value we deliver to both payors and patients. For example, working with the Illinois Department of Healthcare and Family Services, we helped the state of Illinois achieve nearly $34 million in net savings in one year. On the software side of our payor business, the contracts we signed with Aetna and CIGNA were the two largest in the history of that business. Altogether we serve more than 85% of payors and continue to sell these customers new products and services that strengthen the relationships we have with them. Hospitals also use these products. Last year, 300 hospitals signed contracts to use InterQual® Criteria, our suite of industry- leading clinical decision support tools. This represents a 40% increase over the previous year. Executing our strategy for stockholder value creation Our strong operating performance has produced significant cash flow from operations, strengthening our balance sheet and enabling us to pursue a more aggressive strategy for stockholder value creation. Taking a portfolio approach to capital deployment over the past three years, we have spent $8 billion to reshape the organization in a manner that is consistent with our evolving strategy. From fiscal year 2006 through 2008, we completed a total of $3.1 billion in strategic acquisitions. Many of these were smaller acquisitions that enhanced our value proposition to customers in both distribution and information technology. Our larger acquisitions, including D&K, OTN and Per-Se, created opportu- nities for us to broaden our portfolio of innovative solutions and deliver them to an expanded customer base. Recently, we announced two new acquisitions that advance our long-term strategy. In May, we acquired McQueary Brothers Drug Company, a regional distributor to more than 400 independent and regional chain pharmacies in the Midwest. This acquisition expands McKesson’s distribution footprint in the independent pharmacy segment and provides fertile, new ground for growing the Health Mart franchise and expanding the McKesson OneStop Generics program. And in Technology Solutions, we acquired Rosebud Solutions (Rosebud), a provider of software to track and manage instruments, endo- scopes, tissue implants and other hospital assets. Rosebud’s “As we move into fiscal year 2009 and beyond, McKesson has never been stronger or more capable.”
Summary and Outlook The fundamentals of our business are stronger than ever. Across the full range of our operations, we have not seen the impact of a slowing economy or tightening credit markets. We had strong top-line growth in both Distribution Solutions and Technology Solutions in fiscal year 2008, and while revenue growth rates have slowed, we maintain a positive outlook for fiscal year 2009. Celebrating our 175th anniversary is an occasion for all of us at McKesson to reflect on our history of achievement in healthcare. We are very proud of the role we have played in the advancement of this important industry. As we move into fiscal year 2009 and the next chapter in our legacy, our business has tremendous momentum. We’re very pleased with our progress, but we’re not stopping here. Our goal is to continually exceed the expectations of our customers, employees and stockholders. Our financial stability, unparalleled product mix and enviable customer base position McKesson for continued leadership and success in the years ahead. We believe the best is yet to come — for McKesson, our customers and the healthcare system as a whole. I would like to thank our employees for their hard work and commitment, our customers for their loyalty and partnership, our suppliers for their collaborative approach and dedication to our mutual success, and our stockholders for their continued support. solutions will help our customers make healthcare safer and more cost-effective. We are not afraid to take a hard look at our existing businesses. Since 2006, we have divested non-strategic or underper- forming businesses such as the acute care division of our Medical-Surgical business, which we sold in fiscal year 2007, as well as our pharmacy outsourcing business, McKesson Medication Management, the bulk of which we divested in April 2008. We regularly review our portfolio of assets to determine the optimal mix for future value creation. Our portfolio approach to capital deploy- ment has included an aggressive share repurchase program. Over the past three years, we have repurchased $3.7 billion of outstanding McKesson com- mon stock. Based on our positive out- look for the business, in April 2008 the Board of Directors authorized an additional $1 billion share repurchase program, bringing the total authoriza- tion then available to $1.3 billion. We are also committed to returning capital to stockholders, and earlier this year, the Board approved a policy to double our quarterly dividend from 6 cents to 12 cents per share. John H. Hammergren Chairman and Chief Executive Officer
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2008 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13252 McKESSON CORPORATION A Delaware Corporation I.R.S. Employer Identification Number 94-3207296 McKesson Plaza One Post Street, San Francisco, CA 94104 Telephone (415) 983-8300 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 whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 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 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. 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 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 Exchange Act. Yes No 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 2007, was approximately $16.3 billion. Number of shares of common stock outstanding on April 30, 2008: 277,279,250. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
McKESSON CORPORATION 2 TABLE OF CONTENTS Item Page PART I 1. Business........................................................................................................................................... 3 1A. Risk Factors..................................................................................................................................... 10 1B. Unresolved Staff Comments ........................................................................................................... 10 2. Properties......................................................................................................................................... 10 3. Legal Proceedings ........................................................................................................................... 10 4. Submission of Matters to a Vote of Security Holders..................................................................... 10 Executive Officers of the Registrant ............................................................................................... 11 PART II 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph.................................... 12 6. Selected Financial Data................................................................................................................... 13 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition.......... 14 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................... 14 8. Financial Statements and Supplementary Data ............................................................................... 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 14 9A. Controls and Procedures.................................................................................................................. 14 9B. Other Information............................................................................................................................ 14 PART III 10. Directors, Executive Officers and Corporate Governance .............................................................. 15 11. Executive Compensation................................................................................................................. 15 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............................................................................................................................................. 15 13. Certain Relationships and Related Transactions and Director Independence ................................. 17 14. Principal Accounting Fees and Services ......................................................................................... 17 PART IV 15. Exhibits and Financial Statement Schedule..................................................................................... 18 Signatures........................................................................................................................................ 19
McKESSON CORPORATION 3 PART I Item 1. Business General McKesson Corporation (“McKesson,” the “Company,” the “Registrant,” or “we” and other similar pronouns), is a Fortune 18 corporation providing supply, information and care management products and services designed to reduce costs and improve quality across the healthcare industry. 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 (the “Exchange Act”), as amended, are available free of charge on our Web site (www.mckesson.com under the “Investors – 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 Web site referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise. Business Segments We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services. This segment includes a 49% interest in Nadro, S.A. de C.V., (“Nadro”) the leading pharmaceutical distributor in Mexico and a 39% interest in Parata Systems, LLC (“Parata”), which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies. The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services. Our Payor group of businesses, which includes our InterQual®, clinical auditing and compliance and medical management software businesses and our care management programs, are also included in this segment. The segment’s customers include hospitals, physicians, homecare providers, retail pharmacies and payors from North America, the United Kingdom, other European countries and Asia Pacific. Net revenues for our segments for the last three years were as follows: (Dollars in billions) 2008 2007 2006 Distribution Solutions $ 98.7 97% $ 90.7 98% $ 85.1 98% Technology Solutions 3.0 3 2.3 2 1.9 2 Total $ 101.7 100% $ 93.0 100% $ 87.0 100% Distribution Solutions McKesson Distribution Solutions consists of the following businesses: McKesson U.S. Pharmaceutical, McKesson Canada, McKesson Medical-Surgical, McKesson Retail Automation and McKesson Specialty Distribution. We also own an approximate 49% interest in Nadro and an approximate 39% interest in Parata. U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and other healthcare related products to customers in three primary customer segments: 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 other acute-care facilities and long-term care providers).
McKESSON CORPORATION 4 Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a master 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, reliability and the best product availability for our customers. For example, in all of our distribution centers we use Acumax® Plus, a Smithsonian award-winning technology, which integrates and tracks all internal 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 our customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% 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 Supply Management OnlineSM , an Internet-based tool that provides item look-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure that our 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. Furthermore, we continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers. Our U.S. pharmaceutical distribution business’ major value-added offerings, by customer group, include the following: Retail National Accounts — Business solutions that help national accounts increase revenues and profitability: • Central Fill — Prescription refill service that enables pharmacies to refill prescriptions remotely, faster, more accurately and at a lower cost, while reducing inventory levels and improving customer service. • Redistribution Centers — Two facilities totaling 420 thousand square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologicals. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery. • RxPakSM — Bulk repackaging service that leverages our purchasing power 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. Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising, merchandising and purchasing that help independent pharmacists focus on patient care while improving profitability: • Health Mart® — Franchise program that provides independent pharmacies with managed care that drives Pharmacy Benefit Manager recognition, branding that drives consumer recognition, in-store programs that drive manufacturer and payor recognition, and community advocacy programs that drive industry recognition. • AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow. • McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, lower up-front pricing and one-stop shopping. • Prefer Rx — Discount program that offers aggressive prices on more than 100 branded drugs, helping retail independent pharmacies increase margins and eliminate rebate paperwork. • Sunmark® — Complete line of more than 1,000 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 Home Health Care — Comprehensive line of more than 1,800 home health care products, including durable medical equipment, diabetes supplies, self-care supplies and disposables from national brands and the Sunmark® line.
McKESSON CORPORATION 5 Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems that help improve efficiencies, save labor and improve asset utilization: • Fulfill-Rx™ — Ordering and inventory management system that integrates McKesson pharmaceutical distribution services with our automation solutions, thus empowering 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. Enables acute care, long-term care and institutional pharmacies to provide cost- effective, uniform packaging. • McKesson 340B Manager — Software solution that manages, tracks, and reports on the medication replenishment associated with the federal 340B Drug Pricing Program, helping institutional providers maximize their 340B return. • AccessHealth® — Expert service for third-party contracting and payment consolidation that helps institutional providers save time and accelerate reimbursement. • High Performance Pharmacy — Framework that identifies and categorizes hospital pharmacy best practices to help improve clinical outcomes and financial results. The High Performance Pharmacy Assessment Tool and the High Performance Pharmacy Benchmarking Service enable hospital pharmacies to measure against comparable institutions and chart a step-by-step path to high performance. International Pharmaceutical Distribution: McKesson Canada, a wholly-owned subsidiary, is the largest pharmaceutical distributor in Canada. McKesson Canada, through its network of 17 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 has automated over 2,500 retail pharmacies and is also active in hospital automation solutions, dispensing more than 100 million 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 Canadian patients. We also own an approximate 49% interest in Nadro, the leading pharmaceutical distributor in Mexico. Medical–Surgical Distribution: Medical-Surgical distribution 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 29 distribution centers within the U.S. This business is the 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, occupational health facilities and homecare sites (extended care). Through a variety of technology products and services geared towards the supply chain, our Medical-Surgical distribution business is focused on helping its customers operate more efficiently while providing the industry’s most extensive product offering, including our own private label line. This business also includes ZEE® Medical, North America’s leading provider of first aid, safety and training solutions, providing services to industrial and commercial customers. This business offers an extensive line of products and services aimed at maximizing productivity and minimizing the liability and cost associated with workplace illnesses and injuries. McKesson Retail Automation: This business supplies integrated pharmacy management systems and services to retail and institutional outpatient pharmacies as well as payors. We also own an approximate 39% interest in Parata which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies. McKesson Specialty Distribution: This business’ product-specific solutions are directed towards manufacturers, payors and physicians to enable delivery and administration of high-cost, often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The business facilitates patient and provider access to specialty pharmaceuticals across multiple delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing and access to retail pharmacy), provides clinical support and treatment compliance programs that help patients stay on complex therapies and offers reimbursement, data collection and analysis services.
McKESSON CORPORATION 6 Technology Solutions Our Technology Solutions segment provides a comprehensive portfolio of software, automation, support 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 markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payors. This segment also includes our Payor group of businesses, which includes our InterQual® and clinical auditing and compliance software businesses and our disease and medical management programs. The segment sells its solutions and services internationally through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, other European countries, Asia Pacific and Israel. 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, the Technology Solutions segment also offers 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). Key solution areas are as follows: Clinical management: Horizon Clinicals® is built with architecture to facilitate integration and enable modular system deployment. It includes a clinical data repository, clinical decision support/physician order entry, point-of- care documentation with bar-coded medication administration, enterprise laboratory, radiology, pharmacy, surgical management, an emergency department solution and an ambulatory EHR system. Horizon Clinicals® also includes solutions to facilitate physician access to patient information such as a Web-based physician portal and wireless devices that draw on information from the hospital’s information systems. In addition, the Horizon Clinicals® suite includes a comprehensive solution for homecare, including telehealth and hospice. Enterprise imaging: In addition to document imaging to facilitate maintenance and access to complete medical records, the segment provides a suite of enterprise medical imaging and information management systems, including a picture archiving communications system and a comprehensive cardiovascular information system. The segment’s 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. Financial management: The segment’s revenue cycle solutions are designed to reduce days in accounts receivable, prevent insurance claim denials, reduce costs and improve productivity. Examples of solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. The segment’s hospital information systems play a key role in managing the revenue cycle by automating the operation of individual departments and their respective functions within the inpatient environment. Resource management: Resource management solutions consist of an integrated suite of applications that enhance an organization’s ability to plan and optimize the delivery of quality patient care. These solutions automate the management of the workforce, supply chain, surgical and anesthesia documentation, and provide analytics for performance measurement. Linking resource requirements to care protocols, the resource management solutions enhance predictability, improve communication, reduce variability and lower overall costs associated with care delivery. Automation: Automation solutions include technologies that help hospitals re-engineer and improve their medication use and supply management processes. Examples include centralized pharmacy automation for unit- dose medications, unit-based cabinet technologies for secure medication storage and rapid retrieval, point-of-use supply automation systems for inventory management and revenue capture, and an automated medication administration system for ensuring accuracy at the point of care. Based on a foundation of bar-code scanning technology, these integrated solutions are designed to reduce errors and bring new levels of safety to patients.
McKESSON CORPORATION 7 Physician practice solutions: The segment provides a complete solution for physician practices of all sizes that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size, specialty or geographic location. The segment’s physician practice offering also includes outsourced billing and collection services as well as services that connect physicians with their patients, hospitals, retail pharmacies and payors. Revenue cycle outsourcing enables physician groups to avoid the infrastructure investment and administrative costs of their own in-house billing office. Services include clinical data collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice. Connectivity: Through the segment’s vendor-neutral RelayHealth® and its “intelligent” network, the company provides interactive solutions that streamline clinical, financial and administrative communication between patients, providers, payors, pharmacies 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, point-of-service resolution of pharmacy claims by payors, pre-visit financial clearance of patients by providers and post-visit settlement of provider bills by payors and patients. RelayHealth securely processes more than 12 billion financial and clinical transactions annually. In addition to the product offerings described above, the Technology Solutions segment offers a comprehensive range of services to help organizations derive greater value, enhance satisfaction and return on investment throughout the life of the solutions implemented. The range of services includes: Technology Services: The segment has worked with numerous healthcare organizations to support the smooth operation of their information systems by providing the technical infrastructure designed to maximize application accessibility, availability, security and performance. Professional Services: Professional services help customers achieve business results from their software or automation investment. The segment offers a wide array of quality service options, 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. Outsourcing Services: The segment helps organizations focus their resources on healthcare while the segment manages their information technology or operations through managed services, including outsourcing. Service options include remote hosting, managing hospital data processing operations, as well as strategic information systems planning and management, revenue cycle processes, payroll processing, business office administration and major system conversions. Payor Group: The following suite of services and software products is marketed to payors, employers and government organizations to help manage the cost and quality of care: • Disease management programs to improve the health status and health outcomes of patients with chronic conditions; • Nurse triage services to provide health information and recommend appropriate levels of care; • Clinical and analytical software to support utilization, case and disease management workflow; • Business intelligence tools for measuring, reporting and improving clinical and financial performance; • InterQual® Criteria for clinical decision support; and • Claims performance solutions to facilitate accurate and efficient medical claim payment. Acquisitions, Investments and Discontinued Operations We have undertaken 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. These initiatives are detailed in Financial Notes 2 and 3 to the consolidated financial statements, “Acquisitions and Investments” and “Discontinued Operations,” appearing in this Annual Report on Form 10-K.
McKESSON CORPORATION 8 Competition In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor 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 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. Our Technology Solutions segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, 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. Intellectual Property The principal trademarks and service marks of the Distribution Solutions segment include: AccessHealth®, Acumax®, Closed Loop DistributionSM , Comets®, ConsumerScriptSM ,.com Pharmacy Solutions®, Econolink®, Empowering Healthcare®, EnterpriseRx™, Expect More From MooreSM , FrontEdge™, Fulfill-Rx™, Health Mart®, High Performance PharmacySM , LoyaltyScriptSM , Max ImpactSM , McKesson®, McKesson Advantage®, McKesson Empowering Healthcare®, McKesson Max Rewards®, McKesson OneStop Generics®, McKesson Priority Express®, McKesson Supply ManagerSM , MediNet™, Medi-Pak®, Mobile ManagerSM , Moore Medical®, MoorebrandSM , NOA®, Pharma360®, PharmacyRx™, Pharmaserv®, PharmAssureSM , ProIntercept®, ProMed®, ProPBM®, RX PakSM , RX Savings Access®, ServiceFirst®, Staydry®, Sunmark®, Supply Management OnlineSM , TrialScript®, Valu-Rite®, XVIII B Medi Mart® and ZEE®. The substantial majority of technical concepts and codes embodied in our Technology Solutions segment’s computer programs and program documentation are protected as trade secrets. The principal trademarks and service marks for this segment are: AcuDose-Rx®, ANSOS™, Ask-A-Nurse®, Care Fully Connected™, CareEnhance®, CarePoint-RN™, Connect-RN™, Connect-Rx®, CRMS®, DataStat®, ePremis®, Episode Profiler®, E-Script™, Fulfill-RxSM , HealthQuest®, Horizon Admin-Rx™, Horizon Clinicals®, HorizonWP®, InterQual®, Lytec®, MedCarousel®, Medisoft™, One-Call®, One-Staff®, ORSOS™, PACMED™, Pak Plus-Rx®, Paragon®, Pathways 2000®, Patterns Profiler™, Per-Se®, Per-Se Technologies® (and logo), PerYourHealth.com®, Practice Partner®, Premis®, RelayHealth®, ROBOT-Rx®, SelfPace®, Series 2000™, STAR 2000™, SupplyScan™, TRENDSTAR® and WebVisit™. We also own other registered and unregistered trademarks and service marks and similar rights used by our business segments. All of the principal trademarks and service marks are registered in the United States, or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. We believe we have taken all necessary steps to preserve the registration and duration of our trademarks and service marks, although no assurance can be given that we will be able to successfully enforce or protect our rights thereunder in the event that they are subject to third-party infringement claims. We do not consider any particular patent, license, franchise or concession to be material to our business. We also hold copyrights in, and patents related to, many of our products.
McKESSON CORPORATION 9 Other Information About the Business Customers: In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2008, sales to our ten largest customers accounted for approximately 53% of our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation (“Caremark,”) and Rite Aid Corporation (“Rite Aid”) accounted for 14% and 13% of our total consolidated revenues. At March 31, 2008, accounts receivable from our ten largest customers were approximately 43% of total accounts receivable. Accounts receivable from Caremark and Rite Aid were approximately 12% and 11% of total accounts receivable. 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 9% of our purchases in 2008. 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 2008 accounted for approximately 48% of our purchases. A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. However, we also have certain distribution arrangements with manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our inventory being held 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 adversely impact our gross profit margin. In 2008 and 2007, we benefited from certain branded manufacturers’ price increases on selected drugs. Research and Development: Our development expenditures primarily consist of our investment in software development held for sale. We expended $420 million, $359 million and $285 million for development activities in 2008, 2007 and 2006, and of these amounts, we capitalized 17%, 21% and 22%. 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 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 to the consolidated financial statements, “Significant Accounting Policies,” appearing in this Annual Report on Form 10-K. Environmental Regulation: 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 17 to the consolidated financial statements, “Other Commitments and Contingent Liabilities,” appearing in this Annual Report on Form 10-K. Other than any expenditures that may be required in connection with those legal matters, 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 2008 and is not expected to be material in the next year. Employees: On March 31, 2008, we employed approximately 32,900 persons compared to 31,800 in 2007 and 26,400 in 2006. Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 21 to the consolidated financial statements, “Significant Accounting Policies” and “Segments of Business,” appearing in this Annual Report on Form 10-K.
McKESSON CORPORATION 10 Item 1A. Risk Factors Information regarding our risk factors is included in the Financial Review under the captions “Factors Affecting Forward-Looking Statements” and “Additional Factors That May Affect Future Results,” beginning on page 49 of this Annual Report on Form 10-K. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Because of the nature of our principal businesses, our plant, warehousing, office and other facilities are operated in widely dispersed locations. The warehouses 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 12 to the consolidated financial statements, “Lease Obligations,” 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 17 to our consolidated financial statements, “Other Commitments and Contingent Liabilities,” appearing in this Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended March 31, 2008.
McKESSON CORPORATION 11 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 chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and 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 ........... 49 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 – 12 years. Jeffrey C. Campbell.............. 47 Executive Vice President and Chief Financial Officer since April 2004; Senior Vice President and Chief Financial Officer from December 2003 to April 2004. Senior Vice President and Chief Financial Officer, AMR Corporation (2002- 2003). Service with the Company – 4 years. Paul C. Julian........................ 52 Executive Vice President, Group President since April 2004; Senior Vice President from August 1999 to April 2004; President of the Distribution Solutions business since March 2000. Service with the Company – 12 years. Paul E. Kirincic .................... 57 Executive Vice President, Human Resources since April 2004; Senior Vice President, Human Resources from January 2001 to April 2004. Service with the Company – 7 years. Marc E. Owen....................... 48 Executive Vice President, Corporate Strategy and Business Development since April 2004; Senior Vice President, Corporate Strategy and Business Development from September 2001 to April 2004. Service with the Company – 7 years. Pamela J. Pure ...................... 47 Executive Vice President, President, McKesson Technology Solutions (formerly, McKesson Provider Technologies) since April 2004; Chief Operating Officer of McKesson Information Solutions from January 2002 to April 2004. Service with the Company – 7 years. Laureen E. Seeger................. 46 Executive Vice President, General Counsel and Secretary since March 2006; Vice President and General Counsel of McKesson Provider Technologies from February 2000 to March 2006. Service with the Company – 8 years. Randall N. Spratt .................. 56 Executive Vice President, Chief Information Officer since July 2005; Senior Vice President, Chief Process Officer, McKesson Provider Technologies from April 2003 to July 2005; Senior Vice President, Imaging, Technology and Business Process Improvement from January 2000 to April 2003. Service with the Company – 22 years
McKESSON CORPORATION 12 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph (a) Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”). High and low prices for the common stock by quarter are included in Financial Note 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” appearing in this Annual Report on Form 10-K. (b) Holders: The number of record holders of the Company’s common stock at March 31, 2008 was approximately 9,500. (c) Dividends: Dividend information is included in Financial Note 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” appearing in this Annual Report on Form 10-K. In April 2008, the Company’s Board of Directors (“Board”) approved a change in the Company’s dividend policy by increasing the amount of the Company’s quarterly dividend from six cents to twelve cents per share, which will apply to ensuing quarterly dividend declarations until further action by the Board. (d) Share Repurchase Plans: The following table provides information on the Company’s share repurchases during the fourth quarter of 2008: 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 Program Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs January 1, 2008 – January 31, 2008 - $ - - $ 1,086 February 1, 2008 – February 29, 2008 8 58.64 8 630 March 1, 2008 – March 31, 2008 5 57.42 5 314 Total 13 58.14 13 314 (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. In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion of the Company’s common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28 million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase an additional $1.0 billion of the Company’s common stock. Stock repurchases may be made from time-to-time in open market or private transactions.
McKESSON CORPORATION 13 (e) 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). $0.00 $50.00 $100.00 $150.00 $200.00 $250.00 $300.00 2003 2004 2005 2006 2007 2008 McKesson Corporation S&P 500 Index Value Line Healthcare Sector Index March 31, 2003 2004 2005 2006 2007 2008 McKesson Corporation $ 100.00 $ 121.66 $ 153.74 $ 213.39 $ 240.76 $ 216.23 S&P 500 Index $ 100.00 $ 135.12 $ 144.16 $ 161.07 $ 180.13 $ 170.98 Value Line Healthcare Sector Index $ 100.00 $ 117.09 $ 122.89 $ 138.67 $ 146.74 $ 137.80 ∗ Assumes $100 invested in the Company’s common stock and in each index on March 31, 2003 and that all dividends are reinvested. Item 6. Selected Financial Data Selected financial data is presented in the Five-Year Highlights section of this Annual Report on Form 10-K.
McKESSON CORPORATION 14 Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition Management’s discussion and analysis of the Company’s results of operations and financial condition are presented in the Financial Review section of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Information required by this item is included in the Financial Review section of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data are included as separate sections of this Annual Report on Form 10-K. See Item 15. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, and have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Internal Control over Financial Reporting Management’s report on the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) in the Exchange Act), and the related report of our independent registered public accounting firm, are included on page 58 and page 59 of this Annual Report on Form 10-K, under the headings, “Management’s Annual Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” and are incorporated herein by reference. Changes in Internal Controls There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable.
McKESSON CORPORATION 15 PART III Item 10. Directors, Executive Officers and Corporate Governance Information about our Directors is incorporated by reference from the discussion under Item 1 of our Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy Statement”) under the heading “Election of Directors.” Information about compliance with Section 16(a) of the Exchange Act is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information about our Audit Committee, including the members of the committee, and our Audit Committee financial expert is incorporated by reference from the discussion under the headings “Audit Committee Report” and “Audit Committee Financial Expert” in our Proxy Statement. The balance of the information required by this item is contained in the discussion entitled “Executive Officers of the Registrant” in Item 4 of Part I of this Annual Report on Form 10-K. Pursuant to Section 303A.12 (a) of the NYSE Listed Company Manual, the Company’s Chief Executive Officer submitted to the NYSE a certification, dated August 20, 2007, stating that, as of such date, he was not aware of any violation by the Company of any NYSE corporate governance listing standards. Information about the Code of Ethics governing our Chief Executive Officer, Chief Financial Officer, Controller and Financial Managers can be found on our Web site, www.mckesson.com, under the Governance tab. The Company’s Corporate Governance Guidelines and Charters for the Audit and Compensation Committees and the Committee on Directors and Corporate Governance can also be found on our Web site under the Governance tab. Copies of these documents may be obtained from: Corporate Secretary McKesson Corporation One Post Street, 35th Floor San Francisco, CA 94104 (800) 826-9360 The Company intends to disclose required information regarding any amendment to or waiver under the Code of Ethics referred to above by posting such information on our Web site within four business days after any such amendment or waiver. Item 11. Executive Compensation Information with respect to this item is incorporated by reference from the discussion under the heading “Executive Compensation” in our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Principal Stockholders” in our Proxy Statement.
McKESSON CORPORATION 16 The following table sets forth information as of March 31, 2008 with respect to the plans under which the Company’s common stock is authorized for issuance: Plan Category (In millions, except per share amounts) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column ) Equity compensation plans approved by security holders(1) 16.5 $ 55.25 21.4(2) Equity compensation plans not approved by security holders(3),(4) 9.5 36.11 - (1) Includes shares available for purchase under the 2000 Employee Stock Purchase Plan (“ESPP”). Also includes options outstanding under the 1994 Stock Option and Restricted Stock Plan, which expired October 2004, the 2005 Stock Plan, and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which was replaced by the 2005 Stock Plan, following its approval by the stockholders on July 27, 2005. (2) Includes 5,565,419 shares available for purchase under the ESPP and 15,857,925 shares available for grant under the 2005 Stock Plan as of March 31, 2008. (3) Includes options that remain outstanding under the terminated broad-based 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, and two stock option plans, all of which were replaced by the 2005 Stock Plan following its approval by the stockholders on July 27, 2005. (4) As a result of acquisitions, the Company currently has five assumed option plans under which options are exercisable for 360,242 shares of Company common stock. No further awards will be made under any of the assumed plans and information regarding the assumed options is not included in the table above. The following are descriptions of equity plans that have been approved by the Company’s stockholders. The plans are administered by the Compensation Committee of the Board of Directors, except for the portion of the 2005 Stock Plan related to Non-Employee Directors, which is administered by the Committee on Directors and Corporate Governance. 2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005 and approved by the Company’s stockholders on July 27, 2005. The 2005 Stock Plan initially provided for the grant of up to 13 million shares in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance shares and other share-based awards. The 2005 Stock Plan was subsequently amended by the Board of Directors on May 23, 2007 to increase the common stock reserved for issuance by 15 million shares, which was approved by stockholders on July 25, 2007. For any one share of common stock issued in connection with a stock-settled stock appreciation right, restricted stock award, restricted stock unit award, performance share or other share-based award, two shares shall be deducted from the shares available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a stock appreciation right or option, shares used to pay the withholding taxes related to a stock award, or shares repurchased on the open market with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance under the 2005 Stock Plan. Options are granted at not less than fair market value and have a term of seven years. Options generally become exercisable in four equal annual installments beginning one year after the grant date, or after four years from the date of grant. The award or vesting of restricted stock, restricted stock units (“RSUs”) or performance based RSUs may be conditioned upon the attainment of one or more performance objectives. Vesting of such awards is generally a three year cliff. Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately; however, payment of any shares is delayed until the director is no longer performing services for the Company. The 2005 Stock Plan replaced the 1997 Non-Employee Directors Equity Compensation and Deferral Plan. 2000 Employee Stock Purchase Plan (the “ESPP”): The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. In March 2002, the Board amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international and certain other subsidiaries. As to those employees, the ESPP does not so qualify under Section 423 of the Internal Revenue Code. Currently, 16.1 million shares have been approved by stockholders for issuance under the ESPP.
McKESSON CORPORATION 17 The ESPP is implemented through a continuous series of three-month purchase periods (“Purchase Periods”) during which contributions can be made toward the purchase of common stock under the plan. Each eligible employee may elect to authorize regular payroll deductions during the next succeeding Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s common stock. The purchase price of each share of the Company’s common stock is based on 85% of the fair market value of each share on the last day of the applicable Purchase Period. In general, the maximum number of shares of common stock that may be purchased by a participant for each calendar year is determined by dividing $25,000 by the fair market value of one share of common stock on the offering date. The following are descriptions of equity plans that have not been submitted for approval by the Company’s stockholders: On July 27, 2005, the Company’s stockholders approved the 2005 Stock Plan which had the effect of terminating the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, the Stock Option Plans adopted in January 1999 and August 1999, which plans had not been submitted for approval by the Company’s stockholders, and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which had previously been approved by the Company’s stockholders. Prior grants under these plans include stock options, restricted stock and RSUs. Stock options under the terminated plans generally have a ten-year life and vest over four years. Restricted stock contains certain restrictions on transferability and may not be transferred until such restrictions lapse. Each of these plans has outstanding equity grants, which are subject to the terms and conditions of their respective plans, but no new grants will be made under these terminated plans. Item 13. Certain Relationships and Related Transactions and Director Independence Information with respect to certain transactions with management is incorporated by reference from the Proxy Statement under the heading “Certain Relationships and Related Transactions.” Additional information regarding related party transactions is included in the Financial Review section of this Annual Report on Form 10-K and Financial Note 20, “Related Party Balances and Transactions,” to the consolidated financial statements. Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is set forth under the heading “Ratification of Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal 2009” in our Proxy Statement and all such information is incorporated herein by reference.
McKESSON CORPORATION 18 PART IV Item 15. Exhibits and Financial Statement Schedule (a) Financial Statements, Financial Statement Schedule and Exhibits Page Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. See “Index to Consolidated Financial Information”................................................................................... 25 Supplementary Consolidated Financial Statement Schedule— Valuation and Qualifying Accounts........................................................................................................... 20 Financial statements and schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. Exhibits submitted with this Annual Report on Form 10-K as filed with the SEC and those incorporated by reference to other filings are listed on the Exhibit Index.................................................. 21
McKESSON CORPORATION 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MCKESSON CORPORATION Dated: May 7, 2008 /s/ Jeffrey C. Campbell Jeffrey C. Campbell Executive Vice President and Chief Financial Officer On behalf of the Registrant and pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated: * * John H. Hammergren Chairman, President and Chief Executive Officer (Principal Executive Officer) Marie L. Knowles, Director * * Jeffrey C. Campbell Executive Vice President and Chief Financial Officer (Principal Financial Officer) David M. Lawrence M.D., Director * Nigel A. Rees Vice President and Controller (Principal Accounting Officer) Edward A. Mueller, Director * * Andy D. Bryant, Director James V. Napier, Director * * Wayne A. Budd, Director Jane E. Shaw, Director * /s/ Laureen E. Seeger Alton F. Irby III, Director Laureen E. Seeger *Attorney-in-Fact * M. Christine Jacobs, Director Dated: May 7, 2008
McKESSON CORPORATION 20 SCHEDULE II SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2008, 2007 and 2006 (In millions) Additions Description Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts (3) Deductions From Allowance Accounts (1) Balance at End of Year (2) Year Ended March 31, 2008 Allowances for doubtful accounts ..................................$ 139 $ 41 $ 17 $ (34) $ 163 (4) Other allowances ........................ 11 - - (2) 9 $ 150 $ 41 $ 17 $ (36) $ 172 Year Ended March 31, 2007 Allowances for doubtful accounts ..................................$ 124 $ 24 $ 15 $ (24) $ 139 (4) Other allowances ........................ 7 4 - - 11 $ 131 $ 28 $ 15 $ (24) $ 150 Year Ended March 31, 2006 Allowances for doubtful accounts ..................................$ 113 $ 26 (5) $ 23 $ (38) (5) $ 124 Other allowances ........................ 3 3 1 - 7 $ 116 $ 29 $ 24 $ (38) $ 131 2008 2007 2006 (1) Deductions: Written off ..........................................................................$ 32 $ 24 $ 23 Credited to other accounts................................................... 2 - 15 (5) Total....................................................................................$ 34 $ 24 $ 38 (2) Amounts shown as deductions from receivables $ 172 $ 150 $ 131 (3) Primarily represents additions relating to acquisitions. (4) Includes a $10 million allowance for non-current receivables. (5) Includes a $15 million recovery of a previously reserved doubtful account.
McKESSON CORPORATION 21 EXHIBIT INDEX Exhibits identified under “Incorporated by Reference” in the table below are on file with the Commission and are incorporated by reference as exhibits hereto. Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on July 25, 2007. 10-Q 1-13252 3.1 October 31, 2007 3.2 Amended and Restated By-Laws of the Company, dated as of January 4, 2007. 8-K 1-13252 3.1 January 8, 2007 4.1 Indenture, dated as of March 11, 1997, between the Company, as Issuer, and The First National Bank of Chicago, as Trustee. 10-K 1-13252 4.4 June 19, 1997 4.2 Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20, 1997, among the Company, The First National Bank of Chicago, as Institutional Trustee, First Chicago, Inc., as Delaware Trustee, and the Regular Trustees. S-3 333-26443 4.2 June 18, 1997 4.3 Indenture, dated as of January 29, 2002, between the Company, as Issuer, and the Bank of New York, as Trustee. 10-K 1-13252 4.6 June 12, 2002 4.4 Indenture, dated as of March 5, 2007, by and between the Company, as Issuer, and The Bank of New York Trust Company, N.A., as Trustee. 8-K 1-13252 4.1 March 5, 2007 10.1 Letter Agreement, dated January 11, 2005, and Annex A (Stipulation and Agreement of Settlement between Lead Plaintiff and Defendants McKesson HBOC, Inc. and HBO & Company) thereto in connection with the consolidated securities class action. 8-K 1-13252 99.1 January 18, 2005 10.2* McKesson Corporation 1999 Stock Option and Restricted Stock Plan, as amended through May 26, 2004. - - - - 10.3* Statement of Terms and Conditions Applicable to certain Stock Options granted on August 16, 1999. 10-K 1-13252 10.38 June 13, 2000 10.4* McKesson Corporation 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, as amended through January 29, 2003. 10-K 1-13252 10.4 June 10, 2004 10.5* McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated as of January 29, 2003. 10-K 1-13252 10.6 June 6, 2003 10.6* McKesson Corporation Deferred Compensation Administration Plan, amended and restated effective October 28, 2004. 10-K 1-13252 10.6 May 13, 2005 10.7* † McKesson Corporation Deferred Compensation Administration Plan II, as amended and restated effective October 28, 2004, including Amendment No. 1 thereto effective July 25, 2007. - - - -
McKESSON CORPORATION 22 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.8* † McKesson Corporation Deferred Compensation Administration Plan III, effective January 1, 2005, including Amendment No. 1 thereto effective July 25, 2007. - - - - 10.9* McKesson Corporation 1994 Option Gain Deferral Plan, as amended and restated effective October 28, 2004. 10-K 1-13252 10.8 May 13, 2005 10.10* McKesson Corporation Management Deferred Compensation Plan, as amended and restated as of October 28, 2004. 10-K 1-13252 10.9 May 13, 2005 10.11* McKesson Corporation Executive Benefit Retirement Plan, as amended and restated as of May 22, 2007. 10-Q 1-13252 10.2 July 30, 2007 10.12* McKesson Corporation Executive Survivor Benefits Plan, as amended and restated as of October 28, 2004. 10-K 1-13252 10.11 May 13, 2005 10.13* McKesson Corporation Severance Policy for Executive Employees, as amended and restated January 1, 2005. 10-Q 1-13252 10.13 November 1, 2006 10.14* McKesson Corporation 2005 Management Incentive Plan, as amended and restated effective as of October 27, 2006. 10-Q 1-13252 10.14 November 1, 2006 10.15* McKesson Corporation Long-Term Incentive Plan, as amended and restated as of January 1, 2005. 10-Q 1-13252 10.15 November 1, 2006 10.16* McKesson Corporation Stock Purchase Plan, as amended through July 31, 2002. 10-K 1-13252 10.19 June 6, 2003 10.17* Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27, 1999. 10-K 1-13252 10.28 July 16, 1999 10.18* Form of Restricted Stock Unit Agreement under the 2005 Stock Plan. 10-K 1-13252 10.19 May 16, 2006 10.19* Statement of Terms and Conditions Applicable to Restricted Stock Units Granted to Outside Directors Pursuant to the 2005 Stock Plan, effective July 27, 2007. - - - - 10.20* Form of Stock Option Grant Notice under the 2005 Stock Plan. 10-K 1-13252 10.20 May 16, 2006 10.21* McKesson Corporation 2005 Stock Plan, as amended and restated on July 25, 2007. 10-Q 1-13252 10.1 October 31, 2007 10.22* Statement of Terms and Conditions Applicable to Options, Restricted Stock, Restricted Stock Units and Performance Shares Granted to Employees Pursuant to the 2005 Stock Plan, effective April 25, 2006. 10-K 1-13252 10.23 May 16, 2006 10.23* Statement of Terms and Conditions Applicable to Officers Pursuant to the 2005 Stock Plan. 8-K 1-13252 10.1 May 26, 2006 10.24* Statement of Terms and Conditions Applicable to the Chief Executive Officer Pursuant to the 2005 Stock Plan. 8-K 1-13252 10.2 May 26, 2006
McKESSON CORPORATION 23 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.25 ††† Deed of Settlement and Amendment in Relation to Human Resources and Payroll Services Contract dated as of June 22, 2005 between the Secretary of State for Health for the United Kingdom and McKesson Information Solutions UK Limited. 10-Q 1-13252 10.1 August 1, 2005 10.26 Amended and Restated Receivables Purchase Agreement, dated as of June 11, 2004, among the Company, as servicer, CGSF Funding Corporation, as seller, the several conduit purchasers from time to time party to the Agreement, the several committed purchasers from time to time party to the Agreement, the several managing agents from time to time party to the Agreement, and Bank One, N.A. (Main Office Chicago), as collateral agent. 10-K 1-13252 10.20 May 13, 2005 10.27 Amended and Restated Credit Agreement, dated as of June 8, 2007 among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A., as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank and Wachovia Bank, National Association, as Co-Syndication Agents, Wachovia Bank, National Association, as L/C Issuer, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, LTD., Seattle branch, as Co- Documentation Agents, and The Other Lenders Party Hereto Banc of America Securities LLC, as sole lead arranger and sole book manager. 8-K 1-13252 10.1 June 14, 2007 10.28 Purchase Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation. 10-K 1-13252 10.41 June 6, 2003 10.29 Services Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation. 10-K 1-13252 10.42 June 6, 2003 10.30 Interim Credit Agreement, dated as of January 26, 2007, among the Company, Bank of America N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, the other Lenders party there to, and Banc of America Securities LLC and Wachovia Capital Markets, LLC, as Joint Lead Arrangers and Joint Book Managers. 8-K 1-13252 10.1 January 26, 2007 10.31* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Chairman, President and Chief Executive Officer. 10-Q 1-13252 10.30 November 11, 2006 10.32* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and President, McKesson Technology Solutions. 10-Q 1-13252 10.31 January 30, 2007
McKESSON CORPORATION 24 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.33* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and Group President. 10-Q 1-13252 10.32 January 30, 2007 10.34* McKesson Corporation Change in Control Policy for Selected Executive Employees, effective as of November 1, 2006. 10-Q 1-13252 10.33 November 1, 2006 12 † Computation of Ratio of Earnings to Fixed Charges. - - - - 21 † List of Subsidiaries of the Registrant. - - - - 23 † Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP. - - - - 24 † Power of Attorney. - - - - 31.1 † Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - - - - 31.2 † Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - - - - 32 †† Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - - - - * Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate. † Filed herewith. †† Furnished herewith. ††† Confidential treatment has been granted for certain portions of this exhibit and such confidential portions have been filed with the Commission. Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of security holders with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of the total assets of the Registrant.
McKESSON CORPORATION 25 INDEX TO CONSOLIDATED FINANCIAL INFORMATION Page Five-Year Highlights 26 Financial Review 27 Management’s Annual Report on Internal Control Over Financial Reporting 58 Report of Independent Registered Public Accounting Firm 59 Consolidated Financial Statements: Consolidated Statements of Operations for the years ended March 31, 2008, 2007 and 2006 60 Consolidated Balance Sheets as of March 31, 2008 and 2007 61 Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007 and 2006 62 Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006 63 Financial Notes 64
McKESSON CORPORATION 26 FIVE-YEAR HIGHLIGHTS As of and for the Years Ended March 31, (In millions, except per share amounts and ratios) 2008 2007 2006 2005 2004 Operating Results Revenues $ 101,703 $ 92,977 $ 86,983 $ 79,096 $ 67,993 Percent change 9.4% 6.9% 10.0% 16.3% 22.0% Gross profit 5,009 4,332 3,777 3,342 3,107 Income (loss) from continuing operations before income taxes 1,457 1,297 1,171 (266) 869 Income (loss) after income taxes Continuing operations 989 968 745 (173) 621 Discontinued operations 1 (55) 6 16 26 Net income (loss) 990 913 751 (157) 647 Financial Position Working capital 2,438 2,730 3,527 3,658 3,706 Days sales outstanding for: (1) Customer receivables 22 21 22 23 25 Inventories 33 32 29 34 36 Drafts and accounts payable 44 43 41 40 40 Total assets 24,603 23,943 20,961 18,775 16,240 Total debt, including capital lease obligations 1,797 1,958 991 1,211 1,485 Stockholders’ equity 6,121 6,273 5,907 5,275 5,165 Property acquisitions 195 126 166 135 110 Acquisitions of businesses, net 610 1,938 589 76 49 Common Share Information Common shares outstanding at year-end 277 295 304 299 290 Shares on which earnings (loss) per common share were based Diluted 298 305 316 294 299 Basic 291 298 306 294 290 Diluted earnings (loss) per common share (2) Continuing operations $ 3.32 $ 3.17 $ 2.36 $ (0.59) $ 2.10 Discontinued operations - (0.18) 0.02 0.06 0.09 Total 3.32 2.99 2.38 (0.53) 2.19 Cash dividends declared 70 72 74 71 70 Cash dividends declared per common share 0.24 0.24 0.24 0.24 0.24 Book value per common share (3) 22.10 21.26 19.43 17.64 17.81 Market value per common share – year end 52.37 58.54 52.13 37.75 30.09 Supplemental Data Capital employed (4) 7,918 8,231 6,898 6,486 6,650 Debt to capital ratio (5) 22.7% 23.8% 14.4% 18.7% 22.3% Net debt to net capital employed (6) 6.6% 0.1% (24.1)% (12.6)% 13.1% Average stockholders’ equity (7) 6,344 6,022 5,736 5,264 4,835 Return on stockholders’ equity (8) 15.6% 15.2% 13.1% (3.0)% 13.4% Footnotes to Five-Year Highlights: (1) Based on year-end balances and sales or cost of sales for the last 90 days of the year. (2) Certain computations may reflect rounding adjustments. (3) Represents stockholders’ equity divided by year-end common shares outstanding. (4) Consists of total debt and stockholders’ equity. (5) Ratio is computed as total debt divided by capital employed. (6) Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by net debt and stockholders’ equity (“net capital employed”). (7) Represents a five-quarter average of stockholders’ equity. (8) Ratio is computed as net income (loss), divided by a five-quarter average of stockholders’ equity.
McKESSON CORPORATION FINANCIAL REVIEW 27 Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition GENERAL Management’s discussion and analysis of results of operations and financial condition, 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. 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. In April 2007, we reconfigured our operating segments to better align product development and selling efforts with the evolving needs of the healthcare market, resulting in the following operating segments: Distribution Solutions and Technology Solutions. See Financial Note 21 to the accompanying consolidated financial statements, “Segments of Business,” for a description of these segments. All periods presented have been reclassified to conform to the April 2007 changes in our organization. RESULTS OF OPERATIONS Overview: Years Ended March 31, (In millions, except per share data) 2008 2007 2006 Revenues $ 101,703 $ 92,977 $ 86,983 Securities Litigation pre-tax credits (charge), net 5 6 (45) Income from Continuing Operations Before Income Taxes $ 1,457 $ 1,297 $ 1,171 Income Tax Provision (468) (329) (426) Income from Continuing Operations 989 968 745 Discontinued Operations, net 1 (55) 6 Net Income $ 990 $ 913 $ 751 Diluted Earnings Per Share Continuing Operations $ 3.32 $ 3.17 $ 2.36 Discontinued Operations - (0.18) 0.02 Total $ 3.32 $ 2.99 $ 2.38 Revenues increased 9% to $101.7 billion and 7% to $93.0 billion in 2008 and 2007. The increase in revenues primarily reflects market growth rates in our Distribution Solutions segment, which accounted for 97% of our consolidated revenues. Revenues for 2008 also benefited from our acquisitions of Oncology Therapeutics Network (“OTN”) in October 2007 and Per-Se Technologies, Inc. (“Per-Se”) in January 2007. Revenues for 2007 also benefited from our acquisition of D&K Healthcare Resources, Inc. (“D&K”) in August 2005. Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a percentage of revenues, gross profit increased 27 basis points (“bp”) to 4.93% in 2008 and 32 bp to 4.66% in 2007. The increase in our 2008 gross profit margin primarily reflects a greater proportion of higher margin Technology Solutions products and an improvement in our Distribution Solutions’ segment margin. The increase in our 2007 gross profit margin primarily reflects improvement in our U.S. pharmaceutical distribution business, including a decrease in our receipt of antitrust class action lawsuits settlements. Our 2008, 2007 and 2006 gross profit includes the receipt of $14 million, $10 million and $95 million of cash proceeds representing our share of settlements of antitrust class action lawsuits.
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mckesson Annual Report and Letter to Stockholders 2008

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Recommended

mckesson Letter to Stockholders 2003
mckesson Letter to Stockholders 2003mckesson Letter to Stockholders 2003
mckesson Letter to Stockholders 2003finance2
 
mckesson 2006 Letter to Stockholders
mckesson 2006 Letter to Stockholdersmckesson 2006 Letter to Stockholders
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mckesson Letter to Stockholders 2007
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mckesson Letter to Stockholders 2007finance2
 
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mckesson Annual Report and Letter to Stockholders 2008

  • 1. Brochure Title May Be Stacked If Long Lorem Ipsum Dolor Sit Amet This set-up line one is for example only. This set-up line two is for example only. This set-up line three is for example only. McKesson solution copy for example only. All type is shown in black for position only. See examples in the guidelines for cor- rect color usage. Imagery area Business Unit Name (optional) Note: Volume 10 imag- ery may use 1.5 or 2 grid units for the imagery area.Annual ReportFISCAL YEAR 2008
  • 2. FY08 Summary In fiscal year 2008, McKesson continued to execute exceptionally well, delivering superior stockholder returns. FINANCIAL RESULTS 20082007200620052004 $101.7 $93.0 $87.0 $79.1 $68.0 2008 2007 2006 2005 2004 $3.31 $2.71 $2.48 $2.19 $2.19 REVENUES (in billions) DILUTED EARNINGS PER SHARE* * A reconciliation between our net income per share reported under accounting standards generally accepted in the United States and our earnings per diluted share, excluding charges for the securities litigation reserves, is available in the enclosed Annual Report on Form 10-K on page 37. 200820072006200520042003 McKESSON CORPORATION S&P 500 INDEX VALUE LINE HEALTH CARE INDEX $240.76 $216.23$213.39 $153.74 $121.66 $100.00 FIVE-YEAR CUMULATIVE TOTAL RETURN† † Cumulative total return assumes $100 invested at the close of trading on March 31, 2003 in McKesson Corporation’s common stock, the S&P 500 Index and the Value Line Healthcare Sector Index, and assumes reinvestment of dividends when paid.
  • 3. McKesson delivered another outstanding performance in fiscal year 2008. Our company’s ability to build and maintain strong customer relationships and sustain continued operational excellence propelled us to above-market revenue and earnings growth. We also made key investments and leveraged our diverse assets to expand our range of service and product offerings to deliver innovative solutions for our customers. To Our Stockholders: Extending our track record of superior stockholder returns Fiscal year 2008 was a year of milestones for McKesson. In January, we marked our 175th anniversary, a distinction rarely achieved in American business. Our revenues grew 9% to reach $101.7 billion, exceeding $100 billion for the first time. Perhaps most gratifying, we received numerous awards and significant recognition from our customers and industry groups for our superior service and solutions. I am very proud of our employees, whose efforts made these achievements possible. Our progress in fiscal year 2008 continued our track record of superior financial performance and stockholder returns. During the five-year period ending March 31, 2008, both our revenues and earnings per share (EPS) grew at a compound annual growth rate exceeding 8%. Over that time, McKesson’s stock price more than doubled, outperforming both the S&P 500 Index and the Value Line Health Care Index. McKesson’s stock price has also outperformed the shares of all other major pharmaceutical wholesalers since October 2004. Our financial strength over the past three years enabled us to make three major investments that create opportunities to increase stockholder value. In fiscal year 2008, we significantly enhanced our presence in the fastest-growing sector of the phar- maceutical market by acquiring Oncology Therapeutics Network (OTN), a leading distributor of specialty pharmaceuticals. In 2007, we made our largest acquisition since 1999 by joining forces with Per-Se Technologies, Inc. (Per-Se), gaining a collection of financial and administrative solutions for hospitals, physicians and retail pharmacies. Our acquisition of D&K Healthcare Resources (D&K) in fiscal year 2006 expanded our footprint among independent pharmacies in the Midwest. These are prominent examples of investments that create new avenues of growth and enhance the value we deliver to customers and stockholders. Drawing on our formidable array of assets, we are serving customers in ways that truly set McKesson apart in the market- place. We are the healthcare industry’s most complete solution provider, with the ability to deliver distribution and supply chain services, software solutions, claims processing capabilities, consulting services, pharmacy management systems, hospital automation, disease management programs and many other innovative offerings that satisfy our customers’ needs. We are combining our capabilities in bold new ways to create unique, innovative solutions that expand and redefine the segments in which we compete and drive improvements across the entire healthcare spectrum. Building mutually rewarding relationships with our customers and manufacturer partners At McKesson, we succeed when our customers succeed. Our abil- ity to build mutually rewarding, long-term relationships with our customers leads to future business opportunities and superior returns for our stockholders. We take pride in the value we deliver to our customers and are particularly gratified when they acknowledge the role we play in their success. In Distribution Solutions this past year, our U.S. Pharmaceutical business renewed agreements with CVS Caremark, Rite Aid, Safeway, Cigna, Humana and Costco. We also received “Business Partner of the Year” honors from Kinney Drugs. In the hospital seg- ment, we were the only wholesaler to receive the “2008 VHA Service Excellence Award,” as recognized by VHA’s member- ship, which includes 28% of the nation’s community-owned,
  • 4. not-for-profit hospitals, and by the leadership team of Novation, the nation’s largest hospital group purchasing organization. On the Technology Solutions side of our business, 18 McKesson products were rated in the top three in their categories in the 2007 “Year-End Top 20: Best in KLAS Awards” report issued by KLAS Enterprises, an independent monitor of healthcare information technology vendors. Our manufacturer partners who produce branded and generic pharmaceuticals recognize the integral role McKesson plays in the overall supply chain. The majority of our U.S. pharmaceutical distribution agreements with manufacturers are structured to ensure that we are compensated for the services we provide. These agreements provide a significant source of stable, predictable revenue to McKesson and tremendous value to pharmaceutical manufacturers. McKesson is continually focused on expanding these relationships beyond distribution to include anti-counterfeit pedigree solutions, clinical trial sourcing, streamlined shipping and other strategic programs that help manufacturers grow profits and cut costs. As we move into fiscal year 2009 and beyond, McKesson has never been stronger or more capable. Our 175th anniversary theme — Taking Care Forward — celebrates our proud healthcare legacy while focusing attention on the future and the remarkable opportunities we have at McKesson. Healthcare has reached a critical point, and we are uniquely qualified to make a difference through our unparalleled capabilities, longstanding customer relationships and strong competitive position in the markets we serve. Our mission is to advance the healthcare system by advancing the success of our partners, and we are fulfilling this mission across every customer segment. Helping pharmacists play an expanded role in care delivery Today, pharmacies face unprecedented challenges posed by declining reimbursements, new federal and state regulations, and increasing competition. With our expertise and solutions, we are helping pharmacies navigate these challenges while helping them operate more efficiently and effectively. In doing so, we help free pharmacists to devote more time and attention to providing care, and we empower them to earn new sources of revenue by delivering expanded clinical services. “We are combining our capabilities in bold new ways to create unique, innovative solutions that expand and redefine the segments in which we compete and drive improvements across the entire healthcare spectrum.” FY08FY07FY06 1,851 1,236 262 HEALTH MART STORES (at fiscal year end) FACTS – We deliver more than $1 billion in medicines to pharmacies, hospitals, physician offices, and other health- care sites every week — one-third of the medicines used each day in North America. – We distribute more than 150,000 medical-surgical products — ranging from gloves and bandages, to surgi- cal lasers, to flu vaccines — to more than 300,000 physician offices and other customers. – Our bar-code scanning solutions in hospitals prevent 700,000 medication errors every week. – We help insurers, including the top 25 managed care organizations, pay claims accurately and faster for more than 160 million plan members. – Physicians log onto our physician portal 3.7 million times per month to gain secure access to their patients’ records.
  • 5. Our Health Mart® franchise offers comprehensive solutions that help independent pharmacies attract new business, maximize the value of existing customer relationships and enhance operational efficiency. In fiscal year 2008, Health Mart grew by more than 600 new stores, bringing the total to more than 1,850. The growth of Health Mart contributed to another excellent year for our generics business, which grew sales by 11%, significantly above overall market growth for generics. We have expanded our industry-leading OneStop Generics® program to serve regional chains and hospital group purchasing organizations. For larger pharmacies and chains, McKesson invests in strategic programs like central fill, bulk repackaging and pharmacy management systems to help our customers maximize their operational and financial success. The acquisition of Per-Se significantly enhanced our pharmacy systems offering by providing a new, contemporary software platform for retail chain and mail order customers. We support all pharmacy customers with a robust infrastructure that includes Supply Management Online, our customer Internet portal that accounts for more than $2 billion in pharmaceutical orders each month. Our RelayHealth intelligent network processes 70% of all retail pharmacy claims nationwide. We continue to build and strengthen relationships within the pharmacy segment by combining our assets in unique ways to help pharmacists and patients. Formed last year, McKesson Patient Relationship Solutions (MPRS) engages pharmacists in using their counseling skills to help patients stay on their prescribed medications. MPRS provides 225 adherence pro- grams that are supported by more than 50 pharmaceutical manufacturers. One feature of this program, our LoyaltyScript® card, is used by 11,000 patients each day. We are also encouraged by our Medication Therapy Management pilot program, a unique service that strengthens communications among pharmacists, physicians and payors to improve patient outcomes by helping patients increase medication adherence and reduce adverse drug events. Connecting hospital caregivers for a safer, more patient-focused experience McKesson continues to extend its lead in providing hospitals with solutions that improve quality and patient safety, reduce the cost and variability of care, and improve resource and financial management. We are the only company with a com- plete suite of patient-safety solutions from the loading dock to the patient bedside. We are also benefiting from opportunities in our growing roster of “One McKesson” customers who use our products and services to address multiple needs through the combination of McKesson-provided information technology, automation and pharmaceutical distribution solutions. One of these customers is St. Luke’s Episcopal Healthcare System in Houston, which recently added extensive new clinical IT functionality to its three hospitals and 18 clinics. St. Luke’s also added more than 300 McKesson AcuDose-Rx® medication dispensing cabinets, a superior, yet affordable software and hardware solution that drives patient safety and process efficiency. This was the largest contract ever signed in McKesson’s automation business. St. Luke’s is also a McKesson pharmaceutical distribution customer. Our focus on innovation has kept our software offerings among the highest-rated in the industry. In fact, over the past three years, we have had 20 products ranked within the KLAS top three, several of which have received either a “Best in KLAS” or a “Category Leadership” designation multiple times. Helping physicians deliver better care and improve practice performance With the acquisitions of Per-Se, Practice Partner® and OTN over the past two years, we have significantly expanded our customer base and solution set in the physician office segment. We now deliver a full range of solutions to physicians, from medical supplies, equipment and vaccines, to electronic medical record “Drawing on our formidable array of assets, we are serving customers in ways that truly set McKesson apart in the marketplace.”
  • 6. and practice management software, to outsourced billing and collections services. A portion of the assets we acquired from Per-Se helped us form RelayHealth, McKesson’s “connectivity” business, which provides powerful capabilities to each one of our customer segments. In the physician segment, RelayHealth facilitates ePrescribing and online patient-doctor consultations known as webVisits® , innovations that provide cost and efficiency benefits to physicians and improve patient care. Strengthening our position in the fast-growing specialty pharmaceutical market, the OTN acquisition expanded our physician customer base by almost 6,000 oncologists, rheu- matologists and other providers. We also gained OTN’s state-of-the-art Lynx® technology platform that automates practice management for oncologists and other physicians. Helping payors provide their members with the best, most cost-effective care In our payor business, we offer a range of services to the public and private sectors that help manage the cost and quality of care. We are the largest provider of disease management programs to state Medicaid agencies, helping millions of people with chronic diseases lead longer, healthier lives. In the private sector, we provide clinical decision support tools to health plans, employers and large medical groups that help create better health outcomes for their members. We renewed all expiring disease management contracts in fiscal year 2008, a strong validation of the value we deliver to both payors and patients. For example, working with the Illinois Department of Healthcare and Family Services, we helped the state of Illinois achieve nearly $34 million in net savings in one year. On the software side of our payor business, the contracts we signed with Aetna and CIGNA were the two largest in the history of that business. Altogether we serve more than 85% of payors and continue to sell these customers new products and services that strengthen the relationships we have with them. Hospitals also use these products. Last year, 300 hospitals signed contracts to use InterQual® Criteria, our suite of industry- leading clinical decision support tools. This represents a 40% increase over the previous year. Executing our strategy for stockholder value creation Our strong operating performance has produced significant cash flow from operations, strengthening our balance sheet and enabling us to pursue a more aggressive strategy for stockholder value creation. Taking a portfolio approach to capital deployment over the past three years, we have spent $8 billion to reshape the organization in a manner that is consistent with our evolving strategy. From fiscal year 2006 through 2008, we completed a total of $3.1 billion in strategic acquisitions. Many of these were smaller acquisitions that enhanced our value proposition to customers in both distribution and information technology. Our larger acquisitions, including D&K, OTN and Per-Se, created opportu- nities for us to broaden our portfolio of innovative solutions and deliver them to an expanded customer base. Recently, we announced two new acquisitions that advance our long-term strategy. In May, we acquired McQueary Brothers Drug Company, a regional distributor to more than 400 independent and regional chain pharmacies in the Midwest. This acquisition expands McKesson’s distribution footprint in the independent pharmacy segment and provides fertile, new ground for growing the Health Mart franchise and expanding the McKesson OneStop Generics program. And in Technology Solutions, we acquired Rosebud Solutions (Rosebud), a provider of software to track and manage instruments, endo- scopes, tissue implants and other hospital assets. Rosebud’s “As we move into fiscal year 2009 and beyond, McKesson has never been stronger or more capable.”
  • 7. Summary and Outlook The fundamentals of our business are stronger than ever. Across the full range of our operations, we have not seen the impact of a slowing economy or tightening credit markets. We had strong top-line growth in both Distribution Solutions and Technology Solutions in fiscal year 2008, and while revenue growth rates have slowed, we maintain a positive outlook for fiscal year 2009. Celebrating our 175th anniversary is an occasion for all of us at McKesson to reflect on our history of achievement in healthcare. We are very proud of the role we have played in the advancement of this important industry. As we move into fiscal year 2009 and the next chapter in our legacy, our business has tremendous momentum. We’re very pleased with our progress, but we’re not stopping here. Our goal is to continually exceed the expectations of our customers, employees and stockholders. Our financial stability, unparalleled product mix and enviable customer base position McKesson for continued leadership and success in the years ahead. We believe the best is yet to come — for McKesson, our customers and the healthcare system as a whole. I would like to thank our employees for their hard work and commitment, our customers for their loyalty and partnership, our suppliers for their collaborative approach and dedication to our mutual success, and our stockholders for their continued support. solutions will help our customers make healthcare safer and more cost-effective. We are not afraid to take a hard look at our existing businesses. Since 2006, we have divested non-strategic or underper- forming businesses such as the acute care division of our Medical-Surgical business, which we sold in fiscal year 2007, as well as our pharmacy outsourcing business, McKesson Medication Management, the bulk of which we divested in April 2008. We regularly review our portfolio of assets to determine the optimal mix for future value creation. Our portfolio approach to capital deploy- ment has included an aggressive share repurchase program. Over the past three years, we have repurchased $3.7 billion of outstanding McKesson com- mon stock. Based on our positive out- look for the business, in April 2008 the Board of Directors authorized an additional $1 billion share repurchase program, bringing the total authoriza- tion then available to $1.3 billion. We are also committed to returning capital to stockholders, and earlier this year, the Board approved a policy to double our quarterly dividend from 6 cents to 12 cents per share. John H. Hammergren Chairman and Chief Executive Officer
  • 8. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2008 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-13252 McKESSON CORPORATION A Delaware Corporation I.R.S. Employer Identification Number 94-3207296 McKesson Plaza One Post Street, San Francisco, CA 94104 Telephone (415) 983-8300 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 whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 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 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. 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 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 Exchange Act. Yes No 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 2007, was approximately $16.3 billion. Number of shares of common stock outstanding on April 30, 2008: 277,279,250. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s Proxy Statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
  • 9. McKESSON CORPORATION 2 TABLE OF CONTENTS Item Page PART I 1. Business........................................................................................................................................... 3 1A. Risk Factors..................................................................................................................................... 10 1B. Unresolved Staff Comments ........................................................................................................... 10 2. Properties......................................................................................................................................... 10 3. Legal Proceedings ........................................................................................................................... 10 4. Submission of Matters to a Vote of Security Holders..................................................................... 10 Executive Officers of the Registrant ............................................................................................... 11 PART II 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph.................................... 12 6. Selected Financial Data................................................................................................................... 13 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition.......... 14 7A. Quantitative and Qualitative Disclosures About Market Risk......................................................... 14 8. Financial Statements and Supplementary Data ............................................................................... 14 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 14 9A. Controls and Procedures.................................................................................................................. 14 9B. Other Information............................................................................................................................ 14 PART III 10. Directors, Executive Officers and Corporate Governance .............................................................. 15 11. Executive Compensation................................................................................................................. 15 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............................................................................................................................................. 15 13. Certain Relationships and Related Transactions and Director Independence ................................. 17 14. Principal Accounting Fees and Services ......................................................................................... 17 PART IV 15. Exhibits and Financial Statement Schedule..................................................................................... 18 Signatures........................................................................................................................................ 19
  • 10. McKESSON CORPORATION 3 PART I Item 1. Business General McKesson Corporation (“McKesson,” the “Company,” the “Registrant,” or “we” and other similar pronouns), is a Fortune 18 corporation providing supply, information and care management products and services designed to reduce costs and improve quality across the healthcare industry. 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 (the “Exchange Act”), as amended, are available free of charge on our Web site (www.mckesson.com under the “Investors – 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 Web site referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise. Business Segments We operate in two segments. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products throughout North America. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers, sells pharmacy software and provides consulting, outsourcing and other services. This segment includes a 49% interest in Nadro, S.A. de C.V., (“Nadro”) the leading pharmaceutical distributor in Mexico and a 39% interest in Parata Systems, LLC (“Parata”), which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies. The McKesson Technology Solutions segment delivers enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services. Our Payor group of businesses, which includes our InterQual®, clinical auditing and compliance and medical management software businesses and our care management programs, are also included in this segment. The segment’s customers include hospitals, physicians, homecare providers, retail pharmacies and payors from North America, the United Kingdom, other European countries and Asia Pacific. Net revenues for our segments for the last three years were as follows: (Dollars in billions) 2008 2007 2006 Distribution Solutions $ 98.7 97% $ 90.7 98% $ 85.1 98% Technology Solutions 3.0 3 2.3 2 1.9 2 Total $ 101.7 100% $ 93.0 100% $ 87.0 100% Distribution Solutions McKesson Distribution Solutions consists of the following businesses: McKesson U.S. Pharmaceutical, McKesson Canada, McKesson Medical-Surgical, McKesson Retail Automation and McKesson Specialty Distribution. We also own an approximate 49% interest in Nadro and an approximate 39% interest in Parata. U.S. Pharmaceutical Distribution: This business supplies pharmaceuticals and other healthcare related products to customers in three primary customer segments: 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 other acute-care facilities and long-term care providers).
  • 11. McKESSON CORPORATION 4 Our U.S. pharmaceutical distribution business operates and serves thousands of customer locations through a network of 29 distribution centers, as well as a master 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, reliability and the best product availability for our customers. For example, in all of our distribution centers we use Acumax® Plus, a Smithsonian award-winning technology, which integrates and tracks all internal 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 our customers with real-time product availability and industry-leading order quality and fulfillment in excess of 99.9% 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 Supply Management OnlineSM , an Internet-based tool that provides item look-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. Together, these features help ensure that our 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. Furthermore, we continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers. Our U.S. pharmaceutical distribution business’ major value-added offerings, by customer group, include the following: Retail National Accounts — Business solutions that help national accounts increase revenues and profitability: • Central Fill — Prescription refill service that enables pharmacies to refill prescriptions remotely, faster, more accurately and at a lower cost, while reducing inventory levels and improving customer service. • Redistribution Centers — Two facilities totaling 420 thousand square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologicals. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery. • RxPakSM — Bulk repackaging service that leverages our purchasing power 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. Independent Retail Pharmacies — Solutions for managed care contracting, branding and advertising, merchandising and purchasing that help independent pharmacists focus on patient care while improving profitability: • Health Mart® — Franchise program that provides independent pharmacies with managed care that drives Pharmacy Benefit Manager recognition, branding that drives consumer recognition, in-store programs that drive manufacturer and payor recognition, and community advocacy programs that drive industry recognition. • AccessHealth® — Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow. • McKesson OneStop Generics® — Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, lower up-front pricing and one-stop shopping. • Prefer Rx — Discount program that offers aggressive prices on more than 100 branded drugs, helping retail independent pharmacies increase margins and eliminate rebate paperwork. • Sunmark® — Complete line of more than 1,000 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 Home Health Care — Comprehensive line of more than 1,800 home health care products, including durable medical equipment, diabetes supplies, self-care supplies and disposables from national brands and the Sunmark® line.
  • 12. McKESSON CORPORATION 5 Institutional Healthcare Providers — Electronic ordering/purchasing and supply chain management systems that help improve efficiencies, save labor and improve asset utilization: • Fulfill-Rx™ — Ordering and inventory management system that integrates McKesson pharmaceutical distribution services with our automation solutions, thus empowering 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. Enables acute care, long-term care and institutional pharmacies to provide cost- effective, uniform packaging. • McKesson 340B Manager — Software solution that manages, tracks, and reports on the medication replenishment associated with the federal 340B Drug Pricing Program, helping institutional providers maximize their 340B return. • AccessHealth® — Expert service for third-party contracting and payment consolidation that helps institutional providers save time and accelerate reimbursement. • High Performance Pharmacy — Framework that identifies and categorizes hospital pharmacy best practices to help improve clinical outcomes and financial results. The High Performance Pharmacy Assessment Tool and the High Performance Pharmacy Benchmarking Service enable hospital pharmacies to measure against comparable institutions and chart a step-by-step path to high performance. International Pharmaceutical Distribution: McKesson Canada, a wholly-owned subsidiary, is the largest pharmaceutical distributor in Canada. McKesson Canada, through its network of 17 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 has automated over 2,500 retail pharmacies and is also active in hospital automation solutions, dispensing more than 100 million 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 Canadian patients. We also own an approximate 49% interest in Nadro, the leading pharmaceutical distributor in Mexico. Medical–Surgical Distribution: Medical-Surgical distribution 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 29 distribution centers within the U.S. This business is the 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, occupational health facilities and homecare sites (extended care). Through a variety of technology products and services geared towards the supply chain, our Medical-Surgical distribution business is focused on helping its customers operate more efficiently while providing the industry’s most extensive product offering, including our own private label line. This business also includes ZEE® Medical, North America’s leading provider of first aid, safety and training solutions, providing services to industrial and commercial customers. This business offers an extensive line of products and services aimed at maximizing productivity and minimizing the liability and cost associated with workplace illnesses and injuries. McKesson Retail Automation: This business supplies integrated pharmacy management systems and services to retail and institutional outpatient pharmacies as well as payors. We also own an approximate 39% interest in Parata which sells automated pharmacy and supply management systems and services to retail and institutional outpatient pharmacies. McKesson Specialty Distribution: This business’ product-specific solutions are directed towards manufacturers, payors and physicians to enable delivery and administration of high-cost, often injectable, bio-pharmaceutical drugs used to treat patients with chronic disease. The business facilitates patient and provider access to specialty pharmaceuticals across multiple delivery channels (direct-to-physician wholesale, patient-direct specialty pharmacy dispensing and access to retail pharmacy), provides clinical support and treatment compliance programs that help patients stay on complex therapies and offers reimbursement, data collection and analysis services.
  • 13. McKESSON CORPORATION 6 Technology Solutions Our Technology Solutions segment provides a comprehensive portfolio of software, automation, support 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 markets its products and services to integrated delivery networks, hospitals, physician practices, home healthcare providers, retail pharmacies and payors. This segment also includes our Payor group of businesses, which includes our InterQual® and clinical auditing and compliance software businesses and our disease and medical management programs. The segment sells its solutions and services internationally through subsidiaries and/or distribution agreements in Canada, the United Kingdom, Ireland, other European countries, Asia Pacific and Israel. 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, the Technology Solutions segment also offers 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). Key solution areas are as follows: Clinical management: Horizon Clinicals® is built with architecture to facilitate integration and enable modular system deployment. It includes a clinical data repository, clinical decision support/physician order entry, point-of- care documentation with bar-coded medication administration, enterprise laboratory, radiology, pharmacy, surgical management, an emergency department solution and an ambulatory EHR system. Horizon Clinicals® also includes solutions to facilitate physician access to patient information such as a Web-based physician portal and wireless devices that draw on information from the hospital’s information systems. In addition, the Horizon Clinicals® suite includes a comprehensive solution for homecare, including telehealth and hospice. Enterprise imaging: In addition to document imaging to facilitate maintenance and access to complete medical records, the segment provides a suite of enterprise medical imaging and information management systems, including a picture archiving communications system and a comprehensive cardiovascular information system. The segment’s 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. Financial management: The segment’s revenue cycle solutions are designed to reduce days in accounts receivable, prevent insurance claim denials, reduce costs and improve productivity. Examples of solutions include online patient billing, contract management, electronic claims processing and coding compliance checking. The segment’s hospital information systems play a key role in managing the revenue cycle by automating the operation of individual departments and their respective functions within the inpatient environment. Resource management: Resource management solutions consist of an integrated suite of applications that enhance an organization’s ability to plan and optimize the delivery of quality patient care. These solutions automate the management of the workforce, supply chain, surgical and anesthesia documentation, and provide analytics for performance measurement. Linking resource requirements to care protocols, the resource management solutions enhance predictability, improve communication, reduce variability and lower overall costs associated with care delivery. Automation: Automation solutions include technologies that help hospitals re-engineer and improve their medication use and supply management processes. Examples include centralized pharmacy automation for unit- dose medications, unit-based cabinet technologies for secure medication storage and rapid retrieval, point-of-use supply automation systems for inventory management and revenue capture, and an automated medication administration system for ensuring accuracy at the point of care. Based on a foundation of bar-code scanning technology, these integrated solutions are designed to reduce errors and bring new levels of safety to patients.
  • 14. McKESSON CORPORATION 7 Physician practice solutions: The segment provides a complete solution for physician practices of all sizes that includes software, revenue cycle outsourcing and connectivity services. Software solutions include practice management and EHR software for physicians of every size, specialty or geographic location. The segment’s physician practice offering also includes outsourced billing and collection services as well as services that connect physicians with their patients, hospitals, retail pharmacies and payors. Revenue cycle outsourcing enables physician groups to avoid the infrastructure investment and administrative costs of their own in-house billing office. Services include clinical data collection, data input, medical coding, billing, contract management, cash collections, accounts receivable management and extensive reporting of metrics related to the physician practice. Connectivity: Through the segment’s vendor-neutral RelayHealth® and its “intelligent” network, the company provides interactive solutions that streamline clinical, financial and administrative communication between patients, providers, payors, pharmacies 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, point-of-service resolution of pharmacy claims by payors, pre-visit financial clearance of patients by providers and post-visit settlement of provider bills by payors and patients. RelayHealth securely processes more than 12 billion financial and clinical transactions annually. In addition to the product offerings described above, the Technology Solutions segment offers a comprehensive range of services to help organizations derive greater value, enhance satisfaction and return on investment throughout the life of the solutions implemented. The range of services includes: Technology Services: The segment has worked with numerous healthcare organizations to support the smooth operation of their information systems by providing the technical infrastructure designed to maximize application accessibility, availability, security and performance. Professional Services: Professional services help customers achieve business results from their software or automation investment. The segment offers a wide array of quality service options, 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. Outsourcing Services: The segment helps organizations focus their resources on healthcare while the segment manages their information technology or operations through managed services, including outsourcing. Service options include remote hosting, managing hospital data processing operations, as well as strategic information systems planning and management, revenue cycle processes, payroll processing, business office administration and major system conversions. Payor Group: The following suite of services and software products is marketed to payors, employers and government organizations to help manage the cost and quality of care: • Disease management programs to improve the health status and health outcomes of patients with chronic conditions; • Nurse triage services to provide health information and recommend appropriate levels of care; • Clinical and analytical software to support utilization, case and disease management workflow; • Business intelligence tools for measuring, reporting and improving clinical and financial performance; • InterQual® Criteria for clinical decision support; and • Claims performance solutions to facilitate accurate and efficient medical claim payment. Acquisitions, Investments and Discontinued Operations We have undertaken 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. These initiatives are detailed in Financial Notes 2 and 3 to the consolidated financial statements, “Acquisitions and Investments” and “Discontinued Operations,” appearing in this Annual Report on Form 10-K.
  • 15. McKESSON CORPORATION 8 Competition In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition, both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor 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 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. Our Technology Solutions segment experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, 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. Intellectual Property The principal trademarks and service marks of the Distribution Solutions segment include: AccessHealth®, Acumax®, Closed Loop DistributionSM , Comets®, ConsumerScriptSM ,.com Pharmacy Solutions®, Econolink®, Empowering Healthcare®, EnterpriseRx™, Expect More From MooreSM , FrontEdge™, Fulfill-Rx™, Health Mart®, High Performance PharmacySM , LoyaltyScriptSM , Max ImpactSM , McKesson®, McKesson Advantage®, McKesson Empowering Healthcare®, McKesson Max Rewards®, McKesson OneStop Generics®, McKesson Priority Express®, McKesson Supply ManagerSM , MediNet™, Medi-Pak®, Mobile ManagerSM , Moore Medical®, MoorebrandSM , NOA®, Pharma360®, PharmacyRx™, Pharmaserv®, PharmAssureSM , ProIntercept®, ProMed®, ProPBM®, RX PakSM , RX Savings Access®, ServiceFirst®, Staydry®, Sunmark®, Supply Management OnlineSM , TrialScript®, Valu-Rite®, XVIII B Medi Mart® and ZEE®. The substantial majority of technical concepts and codes embodied in our Technology Solutions segment’s computer programs and program documentation are protected as trade secrets. The principal trademarks and service marks for this segment are: AcuDose-Rx®, ANSOS™, Ask-A-Nurse®, Care Fully Connected™, CareEnhance®, CarePoint-RN™, Connect-RN™, Connect-Rx®, CRMS®, DataStat®, ePremis®, Episode Profiler®, E-Script™, Fulfill-RxSM , HealthQuest®, Horizon Admin-Rx™, Horizon Clinicals®, HorizonWP®, InterQual®, Lytec®, MedCarousel®, Medisoft™, One-Call®, One-Staff®, ORSOS™, PACMED™, Pak Plus-Rx®, Paragon®, Pathways 2000®, Patterns Profiler™, Per-Se®, Per-Se Technologies® (and logo), PerYourHealth.com®, Practice Partner®, Premis®, RelayHealth®, ROBOT-Rx®, SelfPace®, Series 2000™, STAR 2000™, SupplyScan™, TRENDSTAR® and WebVisit™. We also own other registered and unregistered trademarks and service marks and similar rights used by our business segments. All of the principal trademarks and service marks are registered in the United States, or registrations have been applied for with respect to such marks, in addition to certain other jurisdictions. The United States federal registrations of these trademarks have terms of ten or twenty years, depending on date of registration, and are subject to unlimited renewals. We believe we have taken all necessary steps to preserve the registration and duration of our trademarks and service marks, although no assurance can be given that we will be able to successfully enforce or protect our rights thereunder in the event that they are subject to third-party infringement claims. We do not consider any particular patent, license, franchise or concession to be material to our business. We also hold copyrights in, and patents related to, many of our products.
  • 16. McKESSON CORPORATION 9 Other Information About the Business Customers: In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2008, sales to our ten largest customers accounted for approximately 53% of our total consolidated revenues. Sales to our two largest customers, CVS Caremark Corporation (“Caremark,”) and Rite Aid Corporation (“Rite Aid”) accounted for 14% and 13% of our total consolidated revenues. At March 31, 2008, accounts receivable from our ten largest customers were approximately 43% of total accounts receivable. Accounts receivable from Caremark and Rite Aid were approximately 12% and 11% of total accounts receivable. 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 9% of our purchases in 2008. 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 2008 accounted for approximately 48% of our purchases. A significant portion of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. However, we also have certain distribution arrangements with manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our inventory being held 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 adversely impact our gross profit margin. In 2008 and 2007, we benefited from certain branded manufacturers’ price increases on selected drugs. Research and Development: Our development expenditures primarily consist of our investment in software development held for sale. We expended $420 million, $359 million and $285 million for development activities in 2008, 2007 and 2006, and of these amounts, we capitalized 17%, 21% and 22%. 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 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 to the consolidated financial statements, “Significant Accounting Policies,” appearing in this Annual Report on Form 10-K. Environmental Regulation: 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 17 to the consolidated financial statements, “Other Commitments and Contingent Liabilities,” appearing in this Annual Report on Form 10-K. Other than any expenditures that may be required in connection with those legal matters, 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 2008 and is not expected to be material in the next year. Employees: On March 31, 2008, we employed approximately 32,900 persons compared to 31,800 in 2007 and 26,400 in 2006. Financial Information About Foreign and Domestic Operations: Information as to foreign and domestic operations is included in Financial Notes 1 and 21 to the consolidated financial statements, “Significant Accounting Policies” and “Segments of Business,” appearing in this Annual Report on Form 10-K.
  • 17. McKESSON CORPORATION 10 Item 1A. Risk Factors Information regarding our risk factors is included in the Financial Review under the captions “Factors Affecting Forward-Looking Statements” and “Additional Factors That May Affect Future Results,” beginning on page 49 of this Annual Report on Form 10-K. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Because of the nature of our principal businesses, our plant, warehousing, office and other facilities are operated in widely dispersed locations. The warehouses 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 12 to the consolidated financial statements, “Lease Obligations,” 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 17 to our consolidated financial statements, “Other Commitments and Contingent Liabilities,” appearing in this Annual Report on Form 10-K. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the three months ended March 31, 2008.
  • 18. McKESSON CORPORATION 11 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 chosen annually to serve until the first meeting of the Board of Directors following the next annual meeting of stockholders and 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 ........... 49 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 – 12 years. Jeffrey C. Campbell.............. 47 Executive Vice President and Chief Financial Officer since April 2004; Senior Vice President and Chief Financial Officer from December 2003 to April 2004. Senior Vice President and Chief Financial Officer, AMR Corporation (2002- 2003). Service with the Company – 4 years. Paul C. Julian........................ 52 Executive Vice President, Group President since April 2004; Senior Vice President from August 1999 to April 2004; President of the Distribution Solutions business since March 2000. Service with the Company – 12 years. Paul E. Kirincic .................... 57 Executive Vice President, Human Resources since April 2004; Senior Vice President, Human Resources from January 2001 to April 2004. Service with the Company – 7 years. Marc E. Owen....................... 48 Executive Vice President, Corporate Strategy and Business Development since April 2004; Senior Vice President, Corporate Strategy and Business Development from September 2001 to April 2004. Service with the Company – 7 years. Pamela J. Pure ...................... 47 Executive Vice President, President, McKesson Technology Solutions (formerly, McKesson Provider Technologies) since April 2004; Chief Operating Officer of McKesson Information Solutions from January 2002 to April 2004. Service with the Company – 7 years. Laureen E. Seeger................. 46 Executive Vice President, General Counsel and Secretary since March 2006; Vice President and General Counsel of McKesson Provider Technologies from February 2000 to March 2006. Service with the Company – 8 years. Randall N. Spratt .................. 56 Executive Vice President, Chief Information Officer since July 2005; Senior Vice President, Chief Process Officer, McKesson Provider Technologies from April 2003 to July 2005; Senior Vice President, Imaging, Technology and Business Process Improvement from January 2000 to April 2003. Service with the Company – 22 years
  • 19. McKESSON CORPORATION 12 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, Issuer Purchases of Equity Securities and Stock Price Performance Graph (a) Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”). High and low prices for the common stock by quarter are included in Financial Note 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” appearing in this Annual Report on Form 10-K. (b) Holders: The number of record holders of the Company’s common stock at March 31, 2008 was approximately 9,500. (c) Dividends: Dividend information is included in Financial Note 22 to the consolidated financial statements, “Quarterly Financial Information (Unaudited),” appearing in this Annual Report on Form 10-K. In April 2008, the Company’s Board of Directors (“Board”) approved a change in the Company’s dividend policy by increasing the amount of the Company’s quarterly dividend from six cents to twelve cents per share, which will apply to ensuing quarterly dividend declarations until further action by the Board. (d) Share Repurchase Plans: The following table provides information on the Company’s share repurchases during the fourth quarter of 2008: 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 Program Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs January 1, 2008 – January 31, 2008 - $ - - $ 1,086 February 1, 2008 – February 29, 2008 8 58.64 8 630 March 1, 2008 – March 31, 2008 5 57.42 5 314 Total 13 58.14 13 314 (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. In April and September 2007, the Board approved two new plans to repurchase up to $2.0 billion of the Company’s common stock ($1.0 billion per plan). In 2008, we repurchased a total of 28 million shares for $1,686 million, fully utilizing the April 2007 plan, leaving $314 million remaining on the September 2007 plan. In April 2008, the Board approved a new plan to repurchase an additional $1.0 billion of the Company’s common stock. Stock repurchases may be made from time-to-time in open market or private transactions.
  • 20. McKESSON CORPORATION 13 (e) 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). $0.00 $50.00 $100.00 $150.00 $200.00 $250.00 $300.00 2003 2004 2005 2006 2007 2008 McKesson Corporation S&P 500 Index Value Line Healthcare Sector Index March 31, 2003 2004 2005 2006 2007 2008 McKesson Corporation $ 100.00 $ 121.66 $ 153.74 $ 213.39 $ 240.76 $ 216.23 S&P 500 Index $ 100.00 $ 135.12 $ 144.16 $ 161.07 $ 180.13 $ 170.98 Value Line Healthcare Sector Index $ 100.00 $ 117.09 $ 122.89 $ 138.67 $ 146.74 $ 137.80 ∗ Assumes $100 invested in the Company’s common stock and in each index on March 31, 2003 and that all dividends are reinvested. Item 6. Selected Financial Data Selected financial data is presented in the Five-Year Highlights section of this Annual Report on Form 10-K.
  • 21. McKESSON CORPORATION 14 Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition Management’s discussion and analysis of the Company’s results of operations and financial condition are presented in the Financial Review section of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Information required by this item is included in the Financial Review section of this Annual Report on Form 10-K. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data are included as separate sections of this Annual Report on Form 10-K. See Item 15. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. Item 9A. Controls and Procedures Disclosure Controls and Procedures Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, and have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Internal Control over Financial Reporting Management’s report on the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) in the Exchange Act), and the related report of our independent registered public accounting firm, are included on page 58 and page 59 of this Annual Report on Form 10-K, under the headings, “Management’s Annual Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm,” and are incorporated herein by reference. Changes in Internal Controls There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable.
  • 22. McKESSON CORPORATION 15 PART III Item 10. Directors, Executive Officers and Corporate Governance Information about our Directors is incorporated by reference from the discussion under Item 1 of our Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy Statement”) under the heading “Election of Directors.” Information about compliance with Section 16(a) of the Exchange Act is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement. Information about our Audit Committee, including the members of the committee, and our Audit Committee financial expert is incorporated by reference from the discussion under the headings “Audit Committee Report” and “Audit Committee Financial Expert” in our Proxy Statement. The balance of the information required by this item is contained in the discussion entitled “Executive Officers of the Registrant” in Item 4 of Part I of this Annual Report on Form 10-K. Pursuant to Section 303A.12 (a) of the NYSE Listed Company Manual, the Company’s Chief Executive Officer submitted to the NYSE a certification, dated August 20, 2007, stating that, as of such date, he was not aware of any violation by the Company of any NYSE corporate governance listing standards. Information about the Code of Ethics governing our Chief Executive Officer, Chief Financial Officer, Controller and Financial Managers can be found on our Web site, www.mckesson.com, under the Governance tab. The Company’s Corporate Governance Guidelines and Charters for the Audit and Compensation Committees and the Committee on Directors and Corporate Governance can also be found on our Web site under the Governance tab. Copies of these documents may be obtained from: Corporate Secretary McKesson Corporation One Post Street, 35th Floor San Francisco, CA 94104 (800) 826-9360 The Company intends to disclose required information regarding any amendment to or waiver under the Code of Ethics referred to above by posting such information on our Web site within four business days after any such amendment or waiver. Item 11. Executive Compensation Information with respect to this item is incorporated by reference from the discussion under the heading “Executive Compensation” in our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Principal Stockholders” in our Proxy Statement.
  • 23. McKESSON CORPORATION 16 The following table sets forth information as of March 31, 2008 with respect to the plans under which the Company’s common stock is authorized for issuance: Plan Category (In millions, except per share amounts) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column ) Equity compensation plans approved by security holders(1) 16.5 $ 55.25 21.4(2) Equity compensation plans not approved by security holders(3),(4) 9.5 36.11 - (1) Includes shares available for purchase under the 2000 Employee Stock Purchase Plan (“ESPP”). Also includes options outstanding under the 1994 Stock Option and Restricted Stock Plan, which expired October 2004, the 2005 Stock Plan, and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which was replaced by the 2005 Stock Plan, following its approval by the stockholders on July 27, 2005. (2) Includes 5,565,419 shares available for purchase under the ESPP and 15,857,925 shares available for grant under the 2005 Stock Plan as of March 31, 2008. (3) Includes options that remain outstanding under the terminated broad-based 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, and two stock option plans, all of which were replaced by the 2005 Stock Plan following its approval by the stockholders on July 27, 2005. (4) As a result of acquisitions, the Company currently has five assumed option plans under which options are exercisable for 360,242 shares of Company common stock. No further awards will be made under any of the assumed plans and information regarding the assumed options is not included in the table above. The following are descriptions of equity plans that have been approved by the Company’s stockholders. The plans are administered by the Compensation Committee of the Board of Directors, except for the portion of the 2005 Stock Plan related to Non-Employee Directors, which is administered by the Committee on Directors and Corporate Governance. 2005 Stock Plan: The 2005 Stock Plan was adopted by the Board of Directors on May 25, 2005 and approved by the Company’s stockholders on July 27, 2005. The 2005 Stock Plan initially provided for the grant of up to 13 million shares in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance shares and other share-based awards. The 2005 Stock Plan was subsequently amended by the Board of Directors on May 23, 2007 to increase the common stock reserved for issuance by 15 million shares, which was approved by stockholders on July 25, 2007. For any one share of common stock issued in connection with a stock-settled stock appreciation right, restricted stock award, restricted stock unit award, performance share or other share-based award, two shares shall be deducted from the shares available for future grants. Shares of common stock not issued or delivered as a result of the net exercise of a stock appreciation right or option, shares used to pay the withholding taxes related to a stock award, or shares repurchased on the open market with proceeds from the exercise of options shall not be returned to the reserve of shares available for issuance under the 2005 Stock Plan. Options are granted at not less than fair market value and have a term of seven years. Options generally become exercisable in four equal annual installments beginning one year after the grant date, or after four years from the date of grant. The award or vesting of restricted stock, restricted stock units (“RSUs”) or performance based RSUs may be conditioned upon the attainment of one or more performance objectives. Vesting of such awards is generally a three year cliff. Non-employee directors receive an annual grant of up to 5,000 RSUs, which vest immediately; however, payment of any shares is delayed until the director is no longer performing services for the Company. The 2005 Stock Plan replaced the 1997 Non-Employee Directors Equity Compensation and Deferral Plan. 2000 Employee Stock Purchase Plan (the “ESPP”): The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. In March 2002, the Board amended the ESPP to allow for participation in the plan by employees of certain of the Company’s international and certain other subsidiaries. As to those employees, the ESPP does not so qualify under Section 423 of the Internal Revenue Code. Currently, 16.1 million shares have been approved by stockholders for issuance under the ESPP.
  • 24. McKESSON CORPORATION 17 The ESPP is implemented through a continuous series of three-month purchase periods (“Purchase Periods”) during which contributions can be made toward the purchase of common stock under the plan. Each eligible employee may elect to authorize regular payroll deductions during the next succeeding Purchase Period, the amount of which may not exceed 15% of a participant’s compensation. At the end of each Purchase Period, the funds withheld by each participant will be used to purchase shares of the Company’s common stock. The purchase price of each share of the Company’s common stock is based on 85% of the fair market value of each share on the last day of the applicable Purchase Period. In general, the maximum number of shares of common stock that may be purchased by a participant for each calendar year is determined by dividing $25,000 by the fair market value of one share of common stock on the offering date. The following are descriptions of equity plans that have not been submitted for approval by the Company’s stockholders: On July 27, 2005, the Company’s stockholders approved the 2005 Stock Plan which had the effect of terminating the 1999 Stock Option and Restricted Stock Plan, the 1998 Canadian Stock Incentive Plan, the Stock Option Plans adopted in January 1999 and August 1999, which plans had not been submitted for approval by the Company’s stockholders, and the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, which had previously been approved by the Company’s stockholders. Prior grants under these plans include stock options, restricted stock and RSUs. Stock options under the terminated plans generally have a ten-year life and vest over four years. Restricted stock contains certain restrictions on transferability and may not be transferred until such restrictions lapse. Each of these plans has outstanding equity grants, which are subject to the terms and conditions of their respective plans, but no new grants will be made under these terminated plans. Item 13. Certain Relationships and Related Transactions and Director Independence Information with respect to certain transactions with management is incorporated by reference from the Proxy Statement under the heading “Certain Relationships and Related Transactions.” Additional information regarding related party transactions is included in the Financial Review section of this Annual Report on Form 10-K and Financial Note 20, “Related Party Balances and Transactions,” to the consolidated financial statements. Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services is set forth under the heading “Ratification of Appointment of Deloitte & Touche LLP as the Company’s Independent Registered Public Accounting Firm for Fiscal 2009” in our Proxy Statement and all such information is incorporated herein by reference.
  • 25. McKESSON CORPORATION 18 PART IV Item 15. Exhibits and Financial Statement Schedule (a) Financial Statements, Financial Statement Schedule and Exhibits Page Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm. See “Index to Consolidated Financial Information”................................................................................... 25 Supplementary Consolidated Financial Statement Schedule— Valuation and Qualifying Accounts........................................................................................................... 20 Financial statements and schedules not included have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements, financial notes or supplementary financial information. Exhibits submitted with this Annual Report on Form 10-K as filed with the SEC and those incorporated by reference to other filings are listed on the Exhibit Index.................................................. 21
  • 26. McKESSON CORPORATION 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MCKESSON CORPORATION Dated: May 7, 2008 /s/ Jeffrey C. Campbell Jeffrey C. Campbell Executive Vice President and Chief Financial Officer On behalf of the Registrant and pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated: * * John H. Hammergren Chairman, President and Chief Executive Officer (Principal Executive Officer) Marie L. Knowles, Director * * Jeffrey C. Campbell Executive Vice President and Chief Financial Officer (Principal Financial Officer) David M. Lawrence M.D., Director * Nigel A. Rees Vice President and Controller (Principal Accounting Officer) Edward A. Mueller, Director * * Andy D. Bryant, Director James V. Napier, Director * * Wayne A. Budd, Director Jane E. Shaw, Director * /s/ Laureen E. Seeger Alton F. Irby III, Director Laureen E. Seeger *Attorney-in-Fact * M. Christine Jacobs, Director Dated: May 7, 2008
  • 27. McKESSON CORPORATION 20 SCHEDULE II SUPPLEMENTARY CONSOLIDATED FINANCIAL STATEMENT SCHEDULE VALUATION AND QUALIFYING ACCOUNTS For the Years Ended March 31, 2008, 2007 and 2006 (In millions) Additions Description Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts (3) Deductions From Allowance Accounts (1) Balance at End of Year (2) Year Ended March 31, 2008 Allowances for doubtful accounts ..................................$ 139 $ 41 $ 17 $ (34) $ 163 (4) Other allowances ........................ 11 - - (2) 9 $ 150 $ 41 $ 17 $ (36) $ 172 Year Ended March 31, 2007 Allowances for doubtful accounts ..................................$ 124 $ 24 $ 15 $ (24) $ 139 (4) Other allowances ........................ 7 4 - - 11 $ 131 $ 28 $ 15 $ (24) $ 150 Year Ended March 31, 2006 Allowances for doubtful accounts ..................................$ 113 $ 26 (5) $ 23 $ (38) (5) $ 124 Other allowances ........................ 3 3 1 - 7 $ 116 $ 29 $ 24 $ (38) $ 131 2008 2007 2006 (1) Deductions: Written off ..........................................................................$ 32 $ 24 $ 23 Credited to other accounts................................................... 2 - 15 (5) Total....................................................................................$ 34 $ 24 $ 38 (2) Amounts shown as deductions from receivables $ 172 $ 150 $ 131 (3) Primarily represents additions relating to acquisitions. (4) Includes a $10 million allowance for non-current receivables. (5) Includes a $15 million recovery of a previously reserved doubtful account.
  • 28. McKESSON CORPORATION 21 EXHIBIT INDEX Exhibits identified under “Incorporated by Reference” in the table below are on file with the Commission and are incorporated by reference as exhibits hereto. Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 3.1 Amended and Restated Certificate of Incorporation of the Company as filed with the Delaware Secretary of State on July 25, 2007. 10-Q 1-13252 3.1 October 31, 2007 3.2 Amended and Restated By-Laws of the Company, dated as of January 4, 2007. 8-K 1-13252 3.1 January 8, 2007 4.1 Indenture, dated as of March 11, 1997, between the Company, as Issuer, and The First National Bank of Chicago, as Trustee. 10-K 1-13252 4.4 June 19, 1997 4.2 Amended and Restated Declaration of Trust of McKesson Financing Trust, dated as of February 20, 1997, among the Company, The First National Bank of Chicago, as Institutional Trustee, First Chicago, Inc., as Delaware Trustee, and the Regular Trustees. S-3 333-26443 4.2 June 18, 1997 4.3 Indenture, dated as of January 29, 2002, between the Company, as Issuer, and the Bank of New York, as Trustee. 10-K 1-13252 4.6 June 12, 2002 4.4 Indenture, dated as of March 5, 2007, by and between the Company, as Issuer, and The Bank of New York Trust Company, N.A., as Trustee. 8-K 1-13252 4.1 March 5, 2007 10.1 Letter Agreement, dated January 11, 2005, and Annex A (Stipulation and Agreement of Settlement between Lead Plaintiff and Defendants McKesson HBOC, Inc. and HBO & Company) thereto in connection with the consolidated securities class action. 8-K 1-13252 99.1 January 18, 2005 10.2* McKesson Corporation 1999 Stock Option and Restricted Stock Plan, as amended through May 26, 2004. - - - - 10.3* Statement of Terms and Conditions Applicable to certain Stock Options granted on August 16, 1999. 10-K 1-13252 10.38 June 13, 2000 10.4* McKesson Corporation 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan, as amended through January 29, 2003. 10-K 1-13252 10.4 June 10, 2004 10.5* McKesson Corporation Supplemental Profit Sharing Investment Plan, as amended and restated as of January 29, 2003. 10-K 1-13252 10.6 June 6, 2003 10.6* McKesson Corporation Deferred Compensation Administration Plan, amended and restated effective October 28, 2004. 10-K 1-13252 10.6 May 13, 2005 10.7* † McKesson Corporation Deferred Compensation Administration Plan II, as amended and restated effective October 28, 2004, including Amendment No. 1 thereto effective July 25, 2007. - - - -
  • 29. McKESSON CORPORATION 22 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.8* † McKesson Corporation Deferred Compensation Administration Plan III, effective January 1, 2005, including Amendment No. 1 thereto effective July 25, 2007. - - - - 10.9* McKesson Corporation 1994 Option Gain Deferral Plan, as amended and restated effective October 28, 2004. 10-K 1-13252 10.8 May 13, 2005 10.10* McKesson Corporation Management Deferred Compensation Plan, as amended and restated as of October 28, 2004. 10-K 1-13252 10.9 May 13, 2005 10.11* McKesson Corporation Executive Benefit Retirement Plan, as amended and restated as of May 22, 2007. 10-Q 1-13252 10.2 July 30, 2007 10.12* McKesson Corporation Executive Survivor Benefits Plan, as amended and restated as of October 28, 2004. 10-K 1-13252 10.11 May 13, 2005 10.13* McKesson Corporation Severance Policy for Executive Employees, as amended and restated January 1, 2005. 10-Q 1-13252 10.13 November 1, 2006 10.14* McKesson Corporation 2005 Management Incentive Plan, as amended and restated effective as of October 27, 2006. 10-Q 1-13252 10.14 November 1, 2006 10.15* McKesson Corporation Long-Term Incentive Plan, as amended and restated as of January 1, 2005. 10-Q 1-13252 10.15 November 1, 2006 10.16* McKesson Corporation Stock Purchase Plan, as amended through July 31, 2002. 10-K 1-13252 10.19 June 6, 2003 10.17* Statement of Terms and Conditions Applicable to Certain Stock Options Granted on January 27, 1999. 10-K 1-13252 10.28 July 16, 1999 10.18* Form of Restricted Stock Unit Agreement under the 2005 Stock Plan. 10-K 1-13252 10.19 May 16, 2006 10.19* Statement of Terms and Conditions Applicable to Restricted Stock Units Granted to Outside Directors Pursuant to the 2005 Stock Plan, effective July 27, 2007. - - - - 10.20* Form of Stock Option Grant Notice under the 2005 Stock Plan. 10-K 1-13252 10.20 May 16, 2006 10.21* McKesson Corporation 2005 Stock Plan, as amended and restated on July 25, 2007. 10-Q 1-13252 10.1 October 31, 2007 10.22* Statement of Terms and Conditions Applicable to Options, Restricted Stock, Restricted Stock Units and Performance Shares Granted to Employees Pursuant to the 2005 Stock Plan, effective April 25, 2006. 10-K 1-13252 10.23 May 16, 2006 10.23* Statement of Terms and Conditions Applicable to Officers Pursuant to the 2005 Stock Plan. 8-K 1-13252 10.1 May 26, 2006 10.24* Statement of Terms and Conditions Applicable to the Chief Executive Officer Pursuant to the 2005 Stock Plan. 8-K 1-13252 10.2 May 26, 2006
  • 30. McKESSON CORPORATION 23 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.25 ††† Deed of Settlement and Amendment in Relation to Human Resources and Payroll Services Contract dated as of June 22, 2005 between the Secretary of State for Health for the United Kingdom and McKesson Information Solutions UK Limited. 10-Q 1-13252 10.1 August 1, 2005 10.26 Amended and Restated Receivables Purchase Agreement, dated as of June 11, 2004, among the Company, as servicer, CGSF Funding Corporation, as seller, the several conduit purchasers from time to time party to the Agreement, the several committed purchasers from time to time party to the Agreement, the several managing agents from time to time party to the Agreement, and Bank One, N.A. (Main Office Chicago), as collateral agent. 10-K 1-13252 10.20 May 13, 2005 10.27 Amended and Restated Credit Agreement, dated as of June 8, 2007 among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A., as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank and Wachovia Bank, National Association, as Co-Syndication Agents, Wachovia Bank, National Association, as L/C Issuer, The Bank of Nova Scotia and The Bank of Tokyo-Mitsubishi UFJ, LTD., Seattle branch, as Co- Documentation Agents, and The Other Lenders Party Hereto Banc of America Securities LLC, as sole lead arranger and sole book manager. 8-K 1-13252 10.1 June 14, 2007 10.28 Purchase Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation. 10-K 1-13252 10.41 June 6, 2003 10.29 Services Agreement, dated as of December 31, 2002, between McKesson Capital Corp. and General Electric Capital Corporation. 10-K 1-13252 10.42 June 6, 2003 10.30 Interim Credit Agreement, dated as of January 26, 2007, among the Company, Bank of America N.A., as Administrative Agent, Wachovia Bank, National Association, as Syndication Agent, the other Lenders party there to, and Banc of America Securities LLC and Wachovia Capital Markets, LLC, as Joint Lead Arrangers and Joint Book Managers. 8-K 1-13252 10.1 January 26, 2007 10.31* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Chairman, President and Chief Executive Officer. 10-Q 1-13252 10.30 November 11, 2006 10.32* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and President, McKesson Technology Solutions. 10-Q 1-13252 10.31 January 30, 2007
  • 31. McKESSON CORPORATION 24 Incorporated by Reference Exhibit Number Description Form File Number Exhibit Filing Date 10.33* Amended and Restated Employment Agreement, dated as of November 1, 2006, by and between the Company and its Executive Vice President and Group President. 10-Q 1-13252 10.32 January 30, 2007 10.34* McKesson Corporation Change in Control Policy for Selected Executive Employees, effective as of November 1, 2006. 10-Q 1-13252 10.33 November 1, 2006 12 † Computation of Ratio of Earnings to Fixed Charges. - - - - 21 † List of Subsidiaries of the Registrant. - - - - 23 † Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP. - - - - 24 † Power of Attorney. - - - - 31.1 † Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - - - - 31.2 † Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended, and adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. - - - - 32 †† Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - - - - * Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate. † Filed herewith. †† Furnished herewith. ††† Confidential treatment has been granted for certain portions of this exhibit and such confidential portions have been filed with the Commission. Registrant agrees to furnish to the Commission upon request a copy of each instrument defining the rights of security holders with respect to issues of long-term debt of the Registrant, the authorized principal amount of which does not exceed 10% of the total assets of the Registrant.
  • 32. McKESSON CORPORATION 25 INDEX TO CONSOLIDATED FINANCIAL INFORMATION Page Five-Year Highlights 26 Financial Review 27 Management’s Annual Report on Internal Control Over Financial Reporting 58 Report of Independent Registered Public Accounting Firm 59 Consolidated Financial Statements: Consolidated Statements of Operations for the years ended March 31, 2008, 2007 and 2006 60 Consolidated Balance Sheets as of March 31, 2008 and 2007 61 Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007 and 2006 62 Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006 63 Financial Notes 64
  • 33. McKESSON CORPORATION 26 FIVE-YEAR HIGHLIGHTS As of and for the Years Ended March 31, (In millions, except per share amounts and ratios) 2008 2007 2006 2005 2004 Operating Results Revenues $ 101,703 $ 92,977 $ 86,983 $ 79,096 $ 67,993 Percent change 9.4% 6.9% 10.0% 16.3% 22.0% Gross profit 5,009 4,332 3,777 3,342 3,107 Income (loss) from continuing operations before income taxes 1,457 1,297 1,171 (266) 869 Income (loss) after income taxes Continuing operations 989 968 745 (173) 621 Discontinued operations 1 (55) 6 16 26 Net income (loss) 990 913 751 (157) 647 Financial Position Working capital 2,438 2,730 3,527 3,658 3,706 Days sales outstanding for: (1) Customer receivables 22 21 22 23 25 Inventories 33 32 29 34 36 Drafts and accounts payable 44 43 41 40 40 Total assets 24,603 23,943 20,961 18,775 16,240 Total debt, including capital lease obligations 1,797 1,958 991 1,211 1,485 Stockholders’ equity 6,121 6,273 5,907 5,275 5,165 Property acquisitions 195 126 166 135 110 Acquisitions of businesses, net 610 1,938 589 76 49 Common Share Information Common shares outstanding at year-end 277 295 304 299 290 Shares on which earnings (loss) per common share were based Diluted 298 305 316 294 299 Basic 291 298 306 294 290 Diluted earnings (loss) per common share (2) Continuing operations $ 3.32 $ 3.17 $ 2.36 $ (0.59) $ 2.10 Discontinued operations - (0.18) 0.02 0.06 0.09 Total 3.32 2.99 2.38 (0.53) 2.19 Cash dividends declared 70 72 74 71 70 Cash dividends declared per common share 0.24 0.24 0.24 0.24 0.24 Book value per common share (3) 22.10 21.26 19.43 17.64 17.81 Market value per common share – year end 52.37 58.54 52.13 37.75 30.09 Supplemental Data Capital employed (4) 7,918 8,231 6,898 6,486 6,650 Debt to capital ratio (5) 22.7% 23.8% 14.4% 18.7% 22.3% Net debt to net capital employed (6) 6.6% 0.1% (24.1)% (12.6)% 13.1% Average stockholders’ equity (7) 6,344 6,022 5,736 5,264 4,835 Return on stockholders’ equity (8) 15.6% 15.2% 13.1% (3.0)% 13.4% Footnotes to Five-Year Highlights: (1) Based on year-end balances and sales or cost of sales for the last 90 days of the year. (2) Certain computations may reflect rounding adjustments. (3) Represents stockholders’ equity divided by year-end common shares outstanding. (4) Consists of total debt and stockholders’ equity. (5) Ratio is computed as total debt divided by capital employed. (6) Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by net debt and stockholders’ equity (“net capital employed”). (7) Represents a five-quarter average of stockholders’ equity. (8) Ratio is computed as net income (loss), divided by a five-quarter average of stockholders’ equity.
  • 34. McKESSON CORPORATION FINANCIAL REVIEW 27 Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition GENERAL Management’s discussion and analysis of results of operations and financial condition, 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. 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. In April 2007, we reconfigured our operating segments to better align product development and selling efforts with the evolving needs of the healthcare market, resulting in the following operating segments: Distribution Solutions and Technology Solutions. See Financial Note 21 to the accompanying consolidated financial statements, “Segments of Business,” for a description of these segments. All periods presented have been reclassified to conform to the April 2007 changes in our organization. RESULTS OF OPERATIONS Overview: Years Ended March 31, (In millions, except per share data) 2008 2007 2006 Revenues $ 101,703 $ 92,977 $ 86,983 Securities Litigation pre-tax credits (charge), net 5 6 (45) Income from Continuing Operations Before Income Taxes $ 1,457 $ 1,297 $ 1,171 Income Tax Provision (468) (329) (426) Income from Continuing Operations 989 968 745 Discontinued Operations, net 1 (55) 6 Net Income $ 990 $ 913 $ 751 Diluted Earnings Per Share Continuing Operations $ 3.32 $ 3.17 $ 2.36 Discontinued Operations - (0.18) 0.02 Total $ 3.32 $ 2.99 $ 2.38 Revenues increased 9% to $101.7 billion and 7% to $93.0 billion in 2008 and 2007. The increase in revenues primarily reflects market growth rates in our Distribution Solutions segment, which accounted for 97% of our consolidated revenues. Revenues for 2008 also benefited from our acquisitions of Oncology Therapeutics Network (“OTN”) in October 2007 and Per-Se Technologies, Inc. (“Per-Se”) in January 2007. Revenues for 2007 also benefited from our acquisition of D&K Healthcare Resources, Inc. (“D&K”) in August 2005. Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a percentage of revenues, gross profit increased 27 basis points (“bp”) to 4.93% in 2008 and 32 bp to 4.66% in 2007. The increase in our 2008 gross profit margin primarily reflects a greater proportion of higher margin Technology Solutions products and an improvement in our Distribution Solutions’ segment margin. The increase in our 2007 gross profit margin primarily reflects improvement in our U.S. pharmaceutical distribution business, including a decrease in our receipt of antitrust class action lawsuits settlements. Our 2008, 2007 and 2006 gross profit includes the receipt of $14 million, $10 million and $95 million of cash proceeds representing our share of settlements of antitrust class action lawsuits.