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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~December 31, 2017~~June 30, 2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-13252

McKESSON CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		94-3207296
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Post Street, San Francisco, California		94104
(Address of principal executive offices)		(Zip Code)

(415) 983-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class	Outstanding as of	~~December 31, 2017~~June 30, 2018
Common stock, $0.01 par value	~~206,339,333~~199,770,971 shares

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS


	Item	Page	Item	Page

	PART I—FINANCIAL INFORMATION		PART I—FINANCIAL INFORMATION

1.	Condensed Consolidated Financial Statements		Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations Quarters and Nine Months Ended December 31, 2017 and 2016	3	Condensed Consolidated Statements of Operations Quarters Ended June 30, 2018 and 2017	3

	Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended December 31, 2017 and 2016	4	Condensed Consolidated Statements of Comprehensive Income Quarters Ended June 30, 2018 and 2017	4

	Condensed Consolidated Balance Sheets December 31, 2017 and March 31, 2017	5	Condensed Consolidated Balance Sheets June 30, 2018 and March 31, 2018	5

	Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2017 and 2016	6	Condensed Consolidated Statements of Cash Flows Quarters Ended June 30, 2018 and 2017	6

	Financial Notes	7	Financial Notes	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

3.	Quantitative and Qualitative Disclosures About Market Risk	49	Quantitative and Qualitative Disclosures About Market Risk	40

4.	Controls and Procedures	49	Controls and Procedures	40

	PART II—OTHER INFORMATION		PART II—OTHER INFORMATION

1.	Legal Proceedings	49	Legal Proceedings	40

1A.	Risk Factors	49	Risk Factors	40

2.	Unregistered Sales of Equity Securities and Use of Proceeds	49	Unregistered Sales of Equity Securities and Use of Proceeds	40

3.	Defaults Upon Senior Securities	50	Defaults Upon Senior Securities	41

4.	Mine Safety Disclosures	50	Mine Safety Disclosures	41

5.	Other Information	50	Other Information	41

6.	Exhibits	51	Exhibits	42

	Signatures	52	Signatures	43

Table of Contents

McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
	2017			2016			2017			2016			2018			2017
Revenues	$	53,617		$	50,130		$	156,729		$	149,820		$	52,607		$	51,051
Cost of Sales	(50,902		)	(47,318		)	(148,620		)	(141,345		)	(49,828		)	(48,491		)
Gross Profit	2,715			2,812			8,109			8,475			2,779			2,560
Operating Expenses	(1,984		)	(1,981		)	(5,920		)	(5,802		)	(2,127		)	(1,927		)
Gain from Sale of Business	109			—			109			—
Goodwill Impairment Charges	—			—			(350		)	(290		)	(570		)	—
Restructuring and Asset Impairment Charges	(6		)	—			(242		)	—			(96		)	—
Gain from Escrow Settlement													97			—
Total Operating Expenses													(2,696		)	(1,927		)
Operating Income	834			831			1,706			2,383			83			633
Other Income, Net	20			23			102			65			40			13
Loss from Equity Method Investment in Change Healthcare	(90		)	—			(271		)	—			(56		)	(120		)
Interest Expense	(67		)	(74		)	(204		)	(231		)	(61		)	(68		)
Income from Continuing Operations Before Income Taxes	697			780			1,333			2,217			6			458
Income Tax Benefit (Expense)	263			(131		)	46			(570		)
Income from Continuing Operations	960			649			1,379			1,647
Income (Loss) from Discontinued Operations, Net of Tax	1			(3		)	3			(117		)
Net Income	961			646			1,382			1,530
Income Tax Expense													(87		)	(95		)
Income (Loss) from Continuing Operations													(81		)	363
Income from Discontinued Operations, Net of Tax													1			2
Net Income (Loss)													(80		)	365
Net Income Attributable to Noncontrolling Interests	(58		)	(13		)	(169		)	(48		)	(58		)	(56		)
Net Income Attributable to McKesson Corporation	$	903		$	633		$	1,213		$	1,482
Net Income (Loss) Attributable to McKesson Corporation													$	(138	)	$	309

Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Diluted
Continuing operations	$	4.32		$	2.86		$	5.75		$	7.07		$	(0.69	)	$	1.44
Discontinued operations	0.01			(0.01		)	0.01			(0.51		)	0.01			0.01
Total	$	4.33		$	2.85		$	5.76		$	6.56		$	(0.68	)	$	1.45
Basic
Continuing operations	$	4.34		$	2.89		$	5.78		$	7.14		$	(0.69	)	$	1.46
Discontinued operations	0.01			(0.02		)	0.02			(0.52		)	0.01			—
Total	$	4.35		$	2.87		$	5.80		$	6.62		$	(0.68	)	$	1.46

Dividends Declared Per Common Share	$	0.34		$	0.28		$	0.96		$	0.84		$	0.34		$	0.28

Weighted Average Common Shares
Diluted	208			222			210			226			202			213
Basic	207			221			209			224			202			211

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
	2017			2016			2017			2016			2018			2017
Net Income	$	961		$	646		$	1,382		$	1,530
Net Income (Loss)													$	(80	)	$	365

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments arising during the period	30			(398		)	715			(762		)	(129		)	312

Unrealized losses on net investment hedges arising during the period	(19		)	—			(127		)	—

Unrealized losses on cash flow hedges arising during the period	(16		)	(14		)	(5		)	(20		)
Unrealized gains on cash flow hedges arising during the period													—			14

Retirement-related benefit plans	1			8			(7		)	20			8			(5		)
Other Comprehensive Income (Loss), Net of Tax	(4		)	(404		)	576			(762		)	(121		)	321

Comprehensive Income (Loss)	957			242			1,958			768			(201		)	686
Comprehensive Loss (Income) Attributable to Noncontrolling Interests	(70		)	17			(330		)	47
Comprehensive Income Attributable to Noncontrolling Interests													(21		)	(172		)
Comprehensive Income (Loss) Attributable to McKesson Corporation	$	887		$	259		$	1,628		$	815		$	(222	)	$	514

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)


	December 31, 2017			March 31, 2017			June 30, 2018			March 31, 2018
ASSETS
Current Assets
Cash and cash equivalents	$	2,619		$	2,783		$	2,199		$	2,672
Receivables, net	20,015			18,215			19,093			17,711
Inventories, net	17,103			15,278			16,364			16,310
Prepaid expenses and other	458			672			558			443
Total Current Assets	40,195			36,948			38,214			37,136
Property, Plant and Equipment, Net	2,401			2,292			2,483			2,464
Goodwill	11,828			10,586			10,585			10,924
Intangible Assets, Net	4,094			3,665			4,258			4,102
Equity Method Investment in Change Healthcare	3,704			4,063			3,672			3,728
Other Noncurrent Assets	1,991			3,415			2,070			2,027
Total Assets	$	64,213		$	60,969		$	61,282		$	60,381

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities
Drafts and accounts payable	$	33,009		$	31,022		$	32,063		$	32,177
Short-term borrowings	749			183			2,033			—
Deferred revenue	68			346
Current portion of long-term debt	531			1,057			1,127			1,129
Other accrued liabilities	3,295			3,004			3,125			3,379
Total Current Liabilities	37,652			35,612			38,348			36,685

Long-Term Debt	7,514			7,305			6,592			6,751
Long-Term Deferred Tax Liabilities	2,833			3,678			2,825			2,804
Other Noncurrent Liabilities	2,807			1,774			2,448			2,625
Redeemable Noncontrolling Interests	1,435			1,327			1,422			1,459
McKesson Corporation Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—			—			—			—
Common stock, $0.01 par value, 800 shares authorized at December 31, 2017 and March 31, 2017, 274 and 273 shares issued at December 31, 2017 and March 31, 2017	3			3
Common stock, $0.01 par value, 800 shares authorized at June 30, 2018 and March 31, 2018, 275 shares issued at June 30, 2018 and March 31, 2018							3			3
Additional Paid-in Capital	6,253			6,028			6,372			6,188
Retained Earnings	14,202			13,189			12,932			12,986
Accumulated Other Comprehensive Loss	(1,726		)	(2,141		)	(1,801		)	(1,717		)
Other	(1		)	(2		)	(1		)	(1		)
Treasury Shares, at Cost, 68 and 62 at December 31, 2017 and March 31, 2017	(6,997		)	(5,982		)
Treasury Shares, at Cost, 76 and 73 at June 30, 2018 and March 31, 2018							(8,098		)	(7,655		)
Total McKesson Corporation Stockholders’ Equity	11,734			11,095			9,407			9,804
Noncontrolling Interests	238			178			240			253
Total Equity	11,972			11,273			9,647			10,057
Total Liabilities, Redeemable Noncontrolling Interests and Equity	$	64,213		$	60,969		$	61,282		$	60,381

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Nine Months Ended December 31,						Quarter Ended June 30,
	2017			2016			2018			2017
Operating Activities
Net income	$	1,382		$	1,530
Adjustments to reconcile to net cash provided by operating activities:
Net income (loss)							$	(80	)	$	365
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization	697			663			235			227
Goodwill impairment and other asset impairment charges	539			290
Goodwill and asset impairment charges							610			—
Loss from equity method investment in Change Healthcare	271			—			56			120
Deferred taxes	(847		)	122			45			85
Share-based compensation expense	57			109
Credits associated with last-in-first-out inventory method	(5		)	(151		)
Loss (gain) from sale of businesses and equity investments	(155		)	113
Charges (credits) associated with last-in-first-out inventory method							(21		)	26
Other non-cash items	(132		)	50			(79		)	7
Changes in operating assets and liabilities, net of acquisitions:
Receivables	(1,046		)	(654		)	(1,414		)	(363		)
Inventories	(1,410		)	(374		)	(114		)	(59		)
Drafts and accounts payable	1,203			1,891			32			463
Deferred revenue	(134		)	(58		)
Taxes	689			52			(61		)	(18		)
Other	214			(274		)	(270		)	(112		)
Net cash provided by operating activities	1,323			3,309
Net cash provided by (used in) operating activities							(1,061		)	741

Investing Activities
Payments for property, plant and equipment	(269		)	(246		)	(101		)	(75		)
Capitalized software expenditures	(123		)	(123		)	(44		)	(43		)
Acquisitions, net of cash and cash equivalents acquired	(1,979		)	(4,174		)
Proceeds from/ (payments for) sale of businesses and equity investments, net	329			(91		)
Payments received on Healthcare Technology Net Asset Exchange	126			—
Restricted cash for acquisitions	1,469			935
Acquisitions, net of cash, cash equivalents and restricted cash acquired							(826		)	(1,485		)
Other	(36		)	80			96			5
Net cash used in investing activities	(483		)	(3,619		)	(875		)	(1,598		)

Financing Activities
Proceeds from short-term borrowings	12,699			2,803			9,036			2,282
Repayments of short-term borrowings	(12,133		)	(1,405		)	(7,005		)	(2,463		)
Repayments of long-term debt	(545		)	(392		)	(2		)	(541		)
Common stock transactions:
Issuances	114			89			22			27
Share repurchases, including shares surrendered for tax withholding	(951		)	(2,060		)	(307		)	(300		)
Dividends paid	(192		)	(192		)	(71		)	(62		)
Other	(139		)	12			(132		)	(74		)
Net cash used in financing activities	(1,147		)	(1,145		)
Effect of exchange rate changes on cash and cash equivalents	143			(159		)
Net decrease in cash and cash equivalents	(164		)	(1,614		)
Cash and cash equivalents at beginning of period	2,783			4,048
Cash and cash equivalents at end of period	$	2,619		$	2,434
Net cash provided by (used in) financing activities							1,541			(1,131		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash							(78		)	75
Net decrease in cash, cash equivalents and restricted cash							(473		)	(1,913		)
Cash, cash equivalents and restricted cash at beginning of period							2,672			4,254
Cash, cash equivalents and restricted cash at end of period							$	2,199		$	2,341

See Financial Notes

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)


1.	Significant Accounting Policies

Nature of Operations: McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns) delivers a comprehensive offering of pharmaceuticals and medical supplies and provides services to help our customers improve the efficiency and effectiveness of their healthcare operations. Commencing in the first quarter of 2019, our new segment reporting structure was implemented and we have reported our financial results in three reportable segments on a retrospective basis: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 17, “Segments of Business” for more information.

Basis of Presentation: The condensed consolidated financial statements of McKesson ~~Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns)~~ include the financial statements of all wholly-owned subsidiaries and ~~majority‑owned~~majority-owned or controlled companies. For those consolidated subsidiaries where our ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income Attributable to Noncontrolling Interests” on the condensed consolidated statements of operations. All significant intercompany balances and transactions have been eliminated in consolidation including the intercompany portion of transactions with equity method investees.

We consider ourselves to control an entity if we are the majority owner of ~~and~~or have voting control over such entity. We also assess control through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business entity is the primary beneficiary of the VIE. We consolidate VIEs when it is determined that we are the primary beneficiary of the VIE. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange” for further information on our equity method investment in Change Healthcare, LLC (“Change Healthcare”).

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures normally included in the annual consolidated financial statements.

To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these financial statements and income and expenses during the reporting period. Actual amounts may differ from these estimated amounts. In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented.

The results of operations for the quarter ~~and nine months~~ ended ~~December 31, 2017~~June 30, 2018 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2018 previously filed with the SEC on May ~~22, 2017~~24, 2018 (“~~2017~~2018 Annual Report”).

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recently Adopted Accounting Pronouncements

~~Goodwill Impairment Testing:~~ The amended guidance simplifies goodwill impairment testing by eliminating the second step of the impairment test. Under the second step, the implied fair value of goodwill is calculated in a hypothetical analysis by subtracting the fair value of all assets and liabilities of the reporting unit, including any unrecognized intangible assets, from the fair value of the reporting unit calculated in the first step of the impairment test. If the carrying value of goodwill for the reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for that excess. The amended guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. The amended guidance would have been effective for us commencing in the first quarter of 2021; however, early adoption was permitted. We elected to early adopt this amended guidance in 2018 for interim and annual goodwill impairment tests on a prospective basis. Refer to Financial Note 3, “Goodwill Impairment Charges.”

~~Investments:~~Revenue Recognition: In the first quarter of ~~2018,~~2019, we adopted amended guidance for revenue recognition using the ~~equity~~modified retrospective method ~~of accounting. The~~and applied the amended guidance ~~simplifies~~to those contracts which were not completed as of April 1, 2018. Under the ~~transition to the equity method of accounting. This standard eliminates the requirement that~~amended guidance, revenue is recognized when an ~~existing cost method investment qualifies~~entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies for the equity method, any unrealized gainthat good or ~~loss in accumulated other comprehensive income (loss) will be recognized through earnings.~~service. The adoption of this amended guidance did not have a material ~~effect~~impact on our condensed consolidated financial statements. Our equity method investee, Change Healthcare, is required to adopt the amended guidance no later than our first quarter of 2020. Change Healthcare is currently evaluating the adoption impact.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~Derivatives~~Revenues generated from distribution of pharmaceutical and ~~Hedging:~~ Inmedical products represent the majority of our revenues. We order product from the manufacturer, receive and carry the product at our central distribution facilities and deliver the product directly to our customers’ warehouses, hospitals or retail pharmacies. The distribution business principally generates revenue from a contract related to a confirmed purchase order with a customer in a distribution arrangement. Revenue is recognized when control of goods is transferred to the customer which occurs upon our delivery to the customer or upon customer pick-up. We also earn revenues from a variety of other sources including our retail, services and technology businesses. Retail revenues are recognized at the point of sale. Service revenues, including technology service revenues, are recognized when services are provided to the customer. Revenues derived from distribution and retail business at the point of sale, and revenues derived from services represent approximately 98% and 2% of total revenues for the first quarter of ~~2018,~~2019.

Revenues are recorded gross when we ~~adopted amended guidance for derivative instrument novations. The amendments clarify that a novation, a change~~are the principal in the ~~counterparty,~~transaction, have ability to direct the use of the good or service prior to transfer to a ~~derivative instrument~~customer, are responsible for fulfilling the promise to our customer, have latitude in establishing prices, and control the relationship with the customer. We record our revenues net of sales taxes. Revenues are measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, other discounts and rebates. Sales returns are accrued based on estimates using historical data. Assets for the right to recover products from customers and the associated refund liabilities for return allowances were not material as of June 30, 2018. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in the selling, distribution and administrative expenses. We record deferred revenues when payments are received or due in advance of our performance. Deferred revenues are primarily from our services arrangements and are recognized as revenues over the periods when services are performed.

Upon adoption, we had no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets.

We have elected the practical expedient and generally expense costs to obtain a contract when incurred because the amortization period would have been ~~designated as~~one year or less. Additionally, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed and (iii) contracts for which the variable consideration is allocated entirely to a ~~hedging instrument does not, in and~~wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of itself, require dedesignation of that hedging relationship provided all other hedge accounting criteria continue to be met. The adoption of this amended guidance did not have an effect on our condensed consolidated financial statements.

~~Consolidation:~~ ~~In the first quarter of 2018, we adopted amended guidance for VIEs. The amended guidance requires~~ a single decision maker of a VIE to consider indirect economic interests in the entity held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. This amendment does not change the existing characteristics of a primary beneficiary. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.performance obligation.

~~Inventory:~~Share-Based Payments: In the first quarter of ~~2018,~~2019, we prospectively adopted amended guidance for the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The requirement would replace the current lower of cost or market evaluation. Accounting guidance is unchanged for inventory measured using the last-in, first-out (“LIFO”) or the retail method. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

~~Recently Issued Accounting Pronouncements Not Yet Adopted~~

~~Derivatives and Hedging:~~ In August 2017, amended guidance was issued to better align an entity’s risk management activities and financial reporting for hedging relationships. The amended guidance, among other provisions, will eliminate the existing requirement to recognize periodic hedge ineffectiveness for cash flow and net investment hedges in earnings. The amended guidance also allows us to perform the initial quantitative hedge assessment when necessary up until the end of the quarter in which the hedge was designated and to elect to perform subsequent effectiveness assessments qualitatively. This guidance is effective for us on a prospective basis commencing in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Share-Based Payments:~~ ~~In May 2017, amended guidance was issued~~ for employee share-based payment awards. This amendment provides guidance on which changes to ~~the~~ terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the amended guidance, we are required to account for the effects of a modification ifof the fair value, the vesting conditions or the classification (as an equity instrument or a liability instrument) of the modified award change from that of the original award immediately before the modification. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

Compensation - Retirement Benefits: In the first quarter of 2019, we retrospectively adopted amended guidance which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the statements of operations separately from the service cost component outside of operating income. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements. This amended guidance only resulted in a change in presentation of other components of net benefit costs on our condensed consolidated statement of operations (a reclassification from operating income to other income, net).

Derecognition of Nonfinancial Assets: In the first quarter of 2019, we adopted on a modified retrospective basis amended guidance that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Business Combinations: In the first quarter of 2019, we prospectively adopted amended guidance that clarifies the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires that to be considered a business, a set must include an input and a substantive process that together significantly contribute to the ability to create output. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

Restricted Cash: In the first quarter of 2019, we retrospectively adopted amended guidance that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash or restricted cash equivalents are not reported as cash flow activities in the statement of cash flows. Our restricted cash balances at June 30, 2018, March 31, 2018 and June 30, 2017 were not material. The adoption of this amended guidance had no effect on our consolidated statements of operations, comprehensive income or our consolidated balance sheets. This amended guidance resulted in a change in presentation of restricted cash on our condensed consolidated statement of cash flows.

Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory: In the first quarter of 2019, we adopted on a modified retrospective basis amended guidance that requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Upon adoption of this amended guidance, we recorded $152 million of deferred tax assets with a corresponding cumulative-effect increase to the beginning balance of retained earnings in our condensed consolidated financial statements for the tax consequences relating to an intra-entity transfer of certain software on December 19, 2016.

Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments: In the first quarter of 2019, we retrospectively adopted amended guidance that provides clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

Financial Instruments: In the first quarter of 2019, we adopted amended guidance that requires equity investments, excluding equity method investments or investees that are consolidated, to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. The amended guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Accumulated Other Comprehensive Income: In February 2018, amended guidance was issued to address a narrow-scope financial reporting issue that arose as a consequence of the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”). Existing guidance requires that deferred tax liabilities and assets be adjusted for a change in tax laws with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather in net income, such as amounts related to benefit plans and hedging activity. As a result, the tax effects of items within accumulated other comprehensive income do not reflect the appropriate tax rate. These differences are referred to as stranded tax effects. The amended guidance allows for a reclassification of only those amounts related to the 2017 Tax Act to retained earnings thereby eliminating the stranded tax effects. The amended guidance also requires certain disclosures about stranded tax effects. The amended guidance is effective for us ~~on a prospective basis commencing~~beginning in the first quarter of ~~2019.~~2020 on a prospective or retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

Premium Amortization of Purchased Callable Debt Securities: In March 2017, amended guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The amended guidance is effective for us on a modified retrospective basis commencing in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Compensation - Retirement Benefits:~~ In March 2017, amended guidance was issued which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the statements of operations separately from the service cost component outside of operating income. This amended guidance is effective for us in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We expect the adoption of this amended guidance to have no material effect on our condensed consolidated financial statements. This amended guidance is expected to only result in a change in presentation of other components of net benefit costs on our condensed consolidated statement of operations (a reclassification from operating income to non-operating income).

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~Derecognition of Nonfinancial Assets:~~ In February 2017, amended guidance was issued that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. We are required to apply this amended guidance at the same time we apply the amended revenue guidance in the first quarter of 2019. It allows for either full retrospective adoption or modified retrospective adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Business Combinations:~~ In January 2017, amended guidance was issued to clarify the definition of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires that to be considered a business, a set must include an input and a substantive process that together significantly contribute to the ability to create output. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted in certain circumstances. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Restricted Cash:~~ In November 2016, amended guidance was issued that requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. Transfers between cash and cash equivalents and restricted cash or restricted cash equivalents are not reported as cash flow activities in the statement of cash flows. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We expect the adoption of this amended guidance to have no effect on our condensed consolidated statements of operations, comprehensive income or our consolidated balance sheets. This amended guidance is expected to only result in a change in presentation of restricted cash and restricted cash equivalents on our condensed consolidated statement of cash flows.

~~Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory:~~ In October 2016, amended guidance was issued to require entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amended guidance is effective for us commencing in the first quarter of 2019 on a modified retrospective basis. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments:~~ In August 2016, amended guidance was issued to provide clarification on cash flow classification related to eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees. The amended guidance is effective for us commencing in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We intend to make policy elections within the amended standard that are consistent with our current presentations. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated financial statements.

Financial Instruments - Credit Losses: In June 2016, amended guidance was issued, which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the ~~collectibility~~collectability of the reported amount in estimating credit losses. The amended guidance becomes effective for us commencing in the first quarter of 2021 and will be applied through a cumulative-effect adjustment to the beginning retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Leases:In February 2016, amended guidance was issued for lease arrangements. The amended ~~standard~~guidance will require lessees to recognize assets and liabilities on the balance sheet for all leases with terms longer than 12 months and provide enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing in the first quarter of ~~2020, on a modified retrospective basis.~~2020. Early adoption is permitted. We plan to adopt the ~~new standard~~amended guidance on the effective date and ~~are currently evaluating the impact of this amended guidance on our consolidated financial statements. We anticipate~~expect that the adoption of the amended lease guidance will materially affect our ~~condensed~~ consolidated balance sheet and will require certain changes to our systems and processes.

~~Financial Instruments:~~ In January 2016, amended guidance was issued that requires equity investments to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. This guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The investments that are accounted for under the equity method of accounting or result in consolidation of the investee are excluded from the scope of this amended guidance. The amended guidance will become effective for us commencing in the first quarter of 2019 and will be applied through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Revenue Recognition:~~ In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. The amended guidance eliminates industry specific guidance and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. In March, April and May 2016, amended guidance was further issued including clarifying guidance on principal versus agent considerations, ability to choose an accounting policy election to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good, and provided certain scope improvements and practical expedients. The amended standard is effective for us commencing in the first quarter of 2019 and allows for either full retrospective adoption or modified retrospective adoption. Early adoption is permitted.

The majority of our revenue is generated from sales of pharmaceutical products, which will continue to be recognized when control of the goods is transferred to the customer. We generally anticipate having substantially similar performance obligations under the amended guidance as compared with deliverables and units of account currently being recognized. We intend to make policy elections within the amended standard that are consistent with our current accounting. We do not expect the adoption of this amended standard to have a material impact on our condensed consolidated financial statements. We anticipate adopting this amended standard on a modified retrospective basis in our first quarter of 2019.

2. Healthcare Technology Net Asset Exchange

~~On March 1,~~In the fourth quarter of 2017, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare, under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Holdings, Inc. (“Change”) and others including shareholders of Change. We retained our RelayHealth Pharmacy ~~(“RHP”)~~ and Enterprise Information Solutions (“EIS”) businesses. The EIS business was subsequently sold to a third party in the third quarter of 2018. In exchange for the contribution, we own 70% of the joint venture with the remaining equity ownership held by shareholders of Change. The joint venture is jointly governed by us and shareholders of ~~Change.~~Change.

Gain from Healthcare Technology Net Asset Exchange

We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture. Accordingly, in the fourth quarter of 2017, we deconsolidated the Core MTS Business and recorded a pre-tax gain of $3,947 million (after-tax gain of $3,018 million). Additionally, in the first quarter of 2018, we recorded a pre-tax gain of $37 million (after-tax gain of $22 million) in operating expenses in the accompanying condensed consolidated statement of operations upon the finalization of net working capital and other adjustments. ~~During the second quarter of 2018, we received $126 million in cash from Change Healthcare representing the final settlement of the net working capital and other adjustments.~~

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Equity Method Investment in Change Healthcare

Our investment in the joint venture is accounted for using the equity method of accounting onwith a one-month reporting lag. During the ~~third quarter~~first quarters of 2019 and ~~first nine months of~~ 2018, we recorded our proportionate share of loss from Change Healthcare of ~~$90~~$56 million and ~~$271~~$120 million, which included transaction and integration expenses incurred by the joint venture and fair value adjustments including incremental intangible assets amortization associated with basis differences. ~~This amount was~~These amounts were recorded under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statement of operations.

~~As our investment is accounted for using a one-month lag, the effects of the enactment of the 2017 Tax Cuts~~At June 30, 2018 and Jobs Act (the “2017 Tax Act”) are expected to be recognized in our condensed statement of operations in the fourth quarter of 2018. We expect our proportionate share of a provisional net benefit recognized by Change Healthcare from the enactment of the 2017 Tax Act to be approximately $70 million to $110 million primarily due to a reduction in future applicable tax rate. The impact of the 2017 Tax Act for Change Healthcare may differ materially from this provisional amount.

~~At December~~March 31, ~~2017,~~2018, the carrying value of our investment was ~~$3,704~~$3,672 million and $3,728 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately ~~$4,526~~$4,422 million and $4,472 million, primarily reflecting equity method intangible assets, goodwill and other fair value adjustments.

Summarized financial information (unaudited) of Change Healthcare is as follows:



	Quarter Ended June 30,
(In millions)	2018		2017
Revenues	$	856	$	865
Income (Loss) from Continuing Operations	7		(84		)
Net Income (Loss)	7		(84		)

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Our proportionate share of Change Healthcare’s net income or loss as reported for the first quarters of 2019 and 2018 was net income of $5 million (our 70% ownership of $7 million) and net loss of $59 million (our 70% ownership of $84 million). The effects of fair value adjustments from the joint venture’s carrying value to the initial fair value basis of accounting for McKesson were $61 million and $120 million for the first quarters of 2019 and 2018, which were included in our proportionate share of income or loss from this equity method investment. The amortization of fair value adjustments primarily included incremental intangible amortization and removal of profit associated with the recognition of deferred revenue, as well as the basis differences of long-term debt. There were also certain initial basis differences between the joint venture and McKesson.

Related Party Transactions

In connection with the transaction, McKesson, Change Healthcare and certain shareholders of Change entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other commercial agreements. Fees incurred or earned from TSA and Advisory agreements were not material for the first quarters of 2019 and 2018.

At June 30, 2018 and March 31, ~~2017,~~2018, we had a ~~$136~~$90 million noncurrent liability payable to Change Healthcare shareholders ~~of Change~~ associated with the TRA. ~~At December 31, 2017, the amount was reduced to $90 million reflecting a reduction in future applicable tax rate under the 2017 Tax Act.~~ The amount of liability is determined based on certain estimates and could become payable in periods after a disposition of our investment in Change Healthcare.

The total fees charged by us to the joint venture for various transition services under the TSA were $22 million and $69 million for the third quarter and first nine months of 2018. Transition services fees are included within operating expenses in our condensed consolidated statements of operations.

~~During the third quarter and first nine months of 2018, we did not earn material transaction and advisory fees under the Advisory Agreement.~~

Revenues recognized and expenses incurred under commercial arrangements with Change Healthcare were not material during the ~~third quarter~~first quarters of 2019 and ~~first nine months of~~ 2018.

At ~~December 31, 2017, receivables due from the joint venture were $54 million~~June 30, 2018 and at March 31, ~~2017,~~2018, receivables due from the joint venture were not material.


3.	3. Goodwill Impairment Charges

We recorded non-cash pre-tax goodwill impairment charges of $570 million within our European Pharmaceutical Solutions segment in the first quarter of 2019. The charges were recorded under the caption, “Goodwill Impairment Charges” in the accompanying condensed consolidated statement of operations.

Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or at one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit. We evaluate goodwill for impairment on an annual basis as of January 1 each year and at an interim date, if indicators of potential impairment exist.

Commencing in the first quarter of 2019, a new segment reporting structure was implemented which resulted in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions, as previously disclosed in our 2018 Annual Report. Prior to implementing the new segment reporting structure, our European operations were considered a single reporting unit. Following the change in reportable segments, our European Pharmaceutical Solutions segment was split into two distinct reporting units - retail pharmacy operations (“Consumer Solutions”) and wholesale operations (“Pharmacy Solutions”) for purposes of goodwill impairment testing. As a result, we were required to perform a goodwill impairment test for these two new reporting units upon the change in reportable segment. We recorded a non-cash goodwill impairment charge (pre-tax and after-tax) of $238 million as the estimated fair value of the Pharmacy Solutions reporting unit was determined to be lower than its reassigned carrying value.

During the first quarter of 2019, our Consumer Solutions and Pharmacy Solutions reporting units had a decline in the estimated future cash flows primarily triggered by additional U.K. government reimbursement reductions which were announced on June 29, 2018. Accordingly, we performed an interim goodwill impairment test for these reporting units. As a result, the estimated fair value of these reporting units was determined to be lower than the carrying value and we recorded non-cash goodwill impairment charges (pre-tax and after-tax) of $332 million.

The discount rate and terminal growth rate used for the Pharmacy Solutions reporting unit in the first quarter 2019 impairment test were 8.0% and 1.25%. The discount rate and terminal growth rate used for the Consumer Solutions reporting unit in the first quarter 2019 impairment test were 8.5% and 1.25%.

At June 30, 2018, our Consumer Solutions and Pharmacy Solutions reporting units’ remaining goodwill balances were $462 million and $751 million.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~McKesson Europe AG (“McKesson Europe”)~~

During the second quarter of 2018, our McKesson Europe reporting unit within our Distribution Solutions segment experienced a decline in its estimated future cash flows, primarily in our United Kingdom (“U.K.”) retail business, driven by significant government reimbursement reductions affecting retail pharmacy economics across the U.K. market. Accordingly, we performed an interim one-step goodwill impairment test in accordance with the amended goodwill guidance for this reporting unit prior to our annual impairment test.

As a result of the test, the estimated fair value of this reporting unit was determined to be lower than the carrying value. In the second quarter of 2018, we recorded a non-cash pre-tax and after-tax charge of $350 million to impair the carrying value of this reporting unit’s goodwill under the caption, “Goodwill Impairment Charges” in the accompanying condensed consolidated statement of operations. There were no tax benefits associated with the goodwill impairment charge. The fair value of the reporting unit was determined using a combination of an income approach based on a discounted cash flow (“DCF”) model and a market approach based on guideline public companies’ revenues and earnings before interest, tax, depreciation and amortization multiples. Fair value estimates result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions that have been deemed reasonable by management as of the measurement date. Any changes in key assumptions, including failure to improve operations of certain retail pharmacy stores, additional government reimbursement reductions, deterioration in the financial market, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry, or other unanticipated events and circumstances, may affect such estimates. Fair value assessments of the reporting unit are considered a Level 3 measurement due to the significance of unobservable inputs developed using company specific information. The discount rate and terminal growth rate used in our 2018 second quarter impairment testing for this reporting unit were 7.5% and 1.25% compared to 7.0% and 1.5% in our 2017 annual impairment test. No additional significant indicators of goodwill impairment exist during the third quarter of 2018. At December 31, 2017, the McKesson Europe reporting unit had a remaining goodwill balance of $2,692 million.

Other risks, expenses and future developments that we were unable to anticipate as of the ~~interim~~ testing date ~~in the second quarter of 2018~~ may require us to further revise the future projected cash flows, which could adversely affect the fair value of ~~this~~our reporting ~~unit~~units in future periods. As a result, we may be required to record additional impairment charges.

Refer to Financial Note ~~4, “Restructuring and Asset Impairment Charges,~~13, “Fair Value Measurements,” ~~for more information.~~

~~Enterprise Information Solutions~~

In conjunction with the Healthcare Technology Net Asset Exchange, we evaluated strategic options for our EIS business, which was a reporting unit within our Technology Solutions segment during 2017. In the second quarter of 2017, we recorded a non-cash pre-tax charge of $290 million ($282 million after-tax) to impair the carrying value of this reporting unit’s goodwill. The impairment primarily resulted from a decline in estimated cash flows. The amount of goodwill impairment for the EIS business was determined under the former accounting guidance on goodwill impairment testing, and computed as the excess of the carrying value of the reporting unit’s goodwill over the implied fair value of its goodwill. The charge was recorded under the caption, “Goodwill Impairment Charges,” within our Technology Solutions segment in the accompanying condensed consolidated statement of operations. Most of the goodwill impairment was not deductible for income tax purposes. Refer to Financial Note 5, “Divestitures” for more information on ~~the sale of the EIS business.~~

~~Refer to Financial Note 15, “Fair Value Measurements” for more information on these~~ nonrecurring fair value measurements.

4. ~~Restructuring~~Business Combinations

2019 Acquisitions

Medical Specialties Distributors LLC (“MSD”)

On June 1, 2018, we completed our acquisition of MSD for the net purchase consideration of $784 million, which was funded from cash on hand. MSD is a leading national distributor of infusion and ~~Asset Impairment Charges~~medical-surgical supplies as well as a provider of biomedical services to alternate site and home health providers. The financial results of MSD are included in our condensed consolidated statements of operations within our Medical-Surgical Solutions segment from the acquisition date.

~~Fiscal 2018 McKesson Europe Plan~~The provisional fair value of assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $245 million and $172 million. Approximately $360 million of the preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition. The preliminary purchase price allocation includes acquired identifiable intangibles of $351 million primarily representing customer relationships with a weighted average life of 18 years. Due to the recent timing and complexity of the acquisitions, these amounts are provisional and subject to change as our fair value assessments are finalized.

The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed for this acquisition as of the acquisition date.



(In millions)	Amounts Recognized as of Acquisition Date (Provisional)
Receivables	$	120
Other current assets, net of cash and cash equivalents acquired	74
Goodwill	360
Intangible assets	351
Other long-term assets	51
Current liabilities	(76		)
Other long-term liabilities	(96		)
Net assets acquired, net of cash and cash equivalents	$	784

Other

During the first quarter of 2019, we also completed a number of other acquisitions. Financial results for our business acquisitions have been included in our condensed consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

2018 Acquisitions

RxCrossroads

On January 2, 2018, we completed our acquisition of RxCrossroads for the net purchase consideration of $720 million, which was funded from cash on hand. The financial results of RxCrossroads are included in the condensed consolidated statements of operations within our U.S. Pharmaceutical and Specialty Solutions segment from the acquisition date.

The provisional fair value of assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $128 million and $42 million. Approximately $372 million of the preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition. The preliminary purchase price allocation includes acquired identifiable intangibles of $262 million primarily representing customer relationships and trade names with a weighted average life of 14 years. Amounts of assets and liabilities recognized as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized.

CoverMyMeds LLC (“CMM”)

On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed of CMM as of the acquisition date were finalized upon completion of the measurement period in April 2018. The financial results of CMM are included in our condensed consolidated statements of operations within Other from the acquisition date.

Pursuant to the agreement, McKesson may pay up to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. As a result, we recorded a liability for this remaining contingent consideration at its estimated fair value of $113 million as of the acquisition date on our consolidated balance sheet. The contingent consideration was estimated using a Monte Carlo simulation, which utilized Level 3 inputs under the fair value measurement and disclosure guidance, including estimated financial forecasts. The contingent liability is re-measured at fair value at each reporting date until the liability is extinguished with changes in fair value being recorded in our condensed consolidated statements of operations. As of June 30, 2018 and March 31, 2018, the contingent consideration liability was $54 million and $124 million. The initial fair value of this contingent consideration was a non-cash investing activity. In May 2018, we made a cash payment of $68 million representing the contingent consideration for 2018.

Other

In the second quarter of 2018, we completed our acquisitions of intraFUSION, Inc. (“intraFUSION”), BDI Pharma, LLC (“BDI”) and Uniprix Group (“Uniprix”) for net cash consideration of $485 million, which was funded from cash on hand. The adjusted provisional fair value of assets acquired and liabilities assumed for these acquisitions as of the acquisition date, excluding goodwill and intangibles, were $292 million and $160 million. Approximately $246 million of the adjusted preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the adjusted preliminary purchase price allocation for these acquisitions are acquired identifiable intangibles of $118 million primarily representing customer relationships. Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period until our fair value assessments are finalized. The financial results of intraFUSION and BDI are included within our U.S. Pharmaceutical and Specialty Solutions segment since the acquisition dates. The financial results of Uniprix are included within Other since the acquisition date.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

2017 Acquisitions

Rexall Health

In the third quarter of 2017, we completed our acquisition of Rexall Health which operated approximately 450 retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars (or, approximately $2.1 billion) was funded from cash on hand. The measurement period to finalize the accounting for this acquisition ended in the third quarter of 2018. On May 23, 2018, as the result of resolving certain indemnity and other claims related to this acquisition, $125 million Canadian dollars (or, approximately $97 million) was released to us from an escrow account. The receipt of this cash was recorded as a settlement gain within operating expenses in our condensed consolidated financial statements during the first quarter of 2019.

Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes.


5.	Restructuring and Asset Impairment Charges

We recorded pre-tax restructuring and asset impairment charges of $96 million ($85 million after-tax) during the first quarter of 2019, which were recorded under the caption, “Restructuring and asset impairment charges” in the accompanying condensed statement of operations. There were no material restructuring and asset impairment charges recorded during the first quarter of 2018.

Fiscal 2019 Strategic Growth Initiative

On April 25, 2018, the Company announced a multi-year strategic growth initiative. As part of the preliminary phase of this initiative, we committed to a restructuring plan to optimize our operating model and cost structure which will be substantially implemented by the end of 2019. As a result, we recorded pre-tax charges of $58 million ($55 million after-tax) primarily representing severance, exit-related costs and asset impairment charges during the first quarter of 2019. We expect to record total after-tax charges of approximately $150 million to $210 million during 2019. Estimated remaining restructuring charges primarily consist of exit-related costs. The reserve balance of $37 million is recorded in other accrued liabilities in our condensed consolidated balance sheets as of June 30, 2018.

Restructuring charges for our strategic growth initiative consisted of the following:



(In millions)	U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Total
Severance and employee-related costs, net	$	3	$	10	$	1	$	14
Exit-related costs ⁽¹⁾	1		2		21		24
Asset impairments and accelerated depreciation	4		—		16		20
Total	$	8	$	12	$	38	$	58

(1) Exit-related costs primarily include lease exit costs associated with closures of retail pharmacy stores within our Canadian business.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The following table summarizes the activity related to the restructuring liabilities associated with the strategic growth initiative for the first quarter of 2019:



(In millions)	U.S. Pharmaceutical and Specialty Solutions			Medical-Surgical Solutions		Other			Total
Balance, March 31, 2018	$	—		$	—	$	—		$	—
Net restructuring charges recognized	8			12		38			58
Non-cash charges	(4		)	—		(16		)	(20		)
Cash payments	(1		)	—		—			(1		)
Balance, June 30, 2018	$	3		$	12	$	22		$	37

Other

During the first quarter of 2019, we performed an interim impairment test of long-lived assets primarily for our U.K. retail business due to the previously discussed decline in the estimated future cash flows driven by ~~significant~~additional U.K. government reimbursement reductions ~~in the U.K.~~announced on June 29, 2018. As a result, we recognized a non-cash pre-tax ~~charges~~charge of ~~$189~~$20 million ($~~157~~16 million after-tax) to impair the carrying value of certain intangible assets ~~(notably~~(primarily pharmacy licenses) ~~and store assets (primarily fixtures) in the second quarter of 2018.~~. We utilized a combination of an income approach ~~(primarily DCF model)~~ and a market approach for estimating the fair value of intangible assets. The fair value of the intangible assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.

During the first quarter of 2019, we also recorded a pre-tax charge of $11 million ($8 million after-tax) related to other restructuring activities within Corporate.

Fiscal 2018 McKesson Europe Plan

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

On September 29, 2017, we committed to a restructuring plan which primarily consists of the closures of ~~underperforming~~under-performing retail stores in the U.K. and a reduction in workforce. The plan is expected to be substantially implemented prior to the first half of 2019. As part of this plan, we recorded a pre-tax ~~charge~~restructuring charges of $6$7 million ($56 million after-tax) ~~and $53 million ($45 million after-tax) during~~in operating expenses in the ~~third~~first quarter ~~and first nine months~~ of ~~2018~~2019 within the European Pharmaceutical Solutions segment primarily representing employee severance and lease exit costs.

We made $13 million of cash payments, primarily related to employee severance in the first quarter of 2019. The reserve balances as of June 30, 2018 and March 31, 2018 were $28 million and $42 million, recorded in other accrued liabilities in our condensed consolidated balance sheets. We expect to record total pre-tax ~~impairment and~~ restructuring charges of approximately ~~$650~~$90 million to ~~$750~~$130 million ~~during 2018~~ for our ~~McKesson Europe business,~~European Pharmaceutical Solutions segment, of which ~~$592~~$81 million of pre-tax charges ~~(including the 2018 second quarter goodwill impairment charge of $350 million)~~ were recorded ~~during the first nine months of 2018.~~to date. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs.

Long-lived asset impairment and restructuring charges were recorded under the caption, “Restructuring and Asset Impairment Charges” in operating expenses in the accompanying condensed consolidated statements of operations.

Fiscal 2016 Cost Alignment Plan

~~In the fourth quarter of~~On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses. ~~Under~~As a result of the Cost Alignment Plan, we ~~recorded~~expected to record total pre-tax charges of ~~$252~~approximately $250 million ~~since the inception~~to $270 million, of ~~this plan~~which $256 million of pre-tax charges were recorded through the ~~third~~first quarter of ~~2018.~~2019. The remaining charges under this program primarily consist of exit-related costs ~~and accelerated depreciation and amortization~~ related to our ~~Distribution~~European Pharmaceutical Solutions segment.

There were no material restructuring charges recorded during the ~~third~~first quarters of 2019 and 2018. In the first ~~nine months~~quarter of 2019 and 2018, we made $6 million and $14 million of cash payments, primarily related to severance. The reserve balances as of June 30, 2018 and ~~2017.~~

~~The following table summarizes the activity related to the restructuring~~March 31, 2018 were $28 million and $39 million, recorded in other accrued liabilities, ~~associated with the Cost Alignment Plan for the first nine months of 2018:~~

(In millions) Balance March 31, 2017 Net restructuring charges recognized Non-cash charges Cash Payments Other
Balance December 31, 2017 ⁽¹⁾
Cost Alignment Plan
Distribution Solutions $ 90
$ 8
$ —
$ (26 ) $ 3
$ 75
Technology Solutions 10
(1 ) —
(4 ) (5 ) —
Corporate 6
2
—
(2 ) (1 ) 5
Total $ 106
$ 9
$ —
$ (32 ) $ (3 ) $ 80


~~(1)~~	~~The reserve balances as of December 31, 2017 include $51 million recorded in other accrued liabilities and $29~~and $28 million and $30 million recorded in other noncurrent liabilities ~~in our condensed consolidated balance sheet.~~


5.	~~Divestitures~~

~~Enterprise Information Solutions~~

On August 1, 2017, we entered into an agreement with a third party to sell our EIS business for $185 million, subject to adjustments for net debt and working capital. On October 2, 2017, the transaction closed upon satisfaction of all closing conditions including the termination of the waiting period under U.S. antitrust laws. We received net cash proceeds of $169 million after $16 million of assumed net debt by the third party. We recognized a pre-tax gain of $109 million (after-tax gain of $30 million) upon the disposition of this business in the third quarter of 2018 within operating expenses in our Technology Solutions segment.

~~Equity Investment~~

On July 18, 2017, we completed the sale of an equity method investment from our Distribution Solutions segment to a third party for total cash proceeds of $42 million and recorded a pre-tax gain of $43 million ($26 million after-tax) within other income, net in our condensed consolidated ~~statement of operations during the first nine months of 2018.~~

These divestitures did not meet the criteria to qualify as discontinued operations. Pre- and after-tax income from continuing operations of these businesses were not material for the third quarter and first nine months of 2018.balance sheets.

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6.	~~Business Combinations~~

~~2018 Acquisitions~~

~~RxCrossroads~~

~~On January 2, 2018, we completed our acquisition of RxCrossroads for the net purchase consideration of~~ ~~$724 million~~, which was funded from cash on hand. RxCrossroads is headquartered in Louisville, Kentucky and provides tailored services to pharmaceutical and biotechnology manufacturers. This acquisition will enhance our existing commercialization solutions for manufacturers of branded, specialty, generic and biosimilar drugs. The financial results of the acquired business will be included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment commencing the fourth quarter of 2018.

~~CoverMyMeds LLC (“CMM”)~~

On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The cash consideration was initially paid into an escrow account prior to our 2017 fiscal year end, and was included in “Other Noncurrent Assets” within our consolidated balance sheet at March 31, 2017. CMM is headquartered in Columbus, Ohio and provides electronic prior authorization solutions to pharmacies, providers, payers, and pharmaceutical manufacturers. The financial results of CMM are included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment since the acquisition date.

Pursuant to the agreement, McKesson may pay up to an additional $160 million of contingent consideration based on CMM’s financial performance for 2018 and 2019. As a result, we recorded a liability for this remaining contingent consideration at its estimated fair value of $113 million as of the acquisition date on our condensed consolidated balance sheet. The contingent consideration was estimated using a Monte Carlo simulation, which utilized Level 3 inputs under the fair value measurement and disclosure guidance, including estimated financial forecasts. The contingent liability is re-measured at fair value at each reporting date until the liability is extinguished with changes in fair value being recorded to our statements of operations. There was no material change in the fair value of this contingent liability during the third quarter and the first nine months of 2018. The initial fair value of this contingent consideration was a non-cash investing activity.

During the third quarter and first nine months of 2018, we recorded certain measurement period adjustments to the provisional fair value of assets acquired and liabilities assumed as of the acquisition date. The adjusted provisional fair value of assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, was $52 million and $7 million. Approximately $870 million of the adjusted preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the adjusted preliminary purchase price allocation are acquired identifiable intangibles of $487 million primarily representing customer relationships with a weighted average life of 17 years. Amounts recognized as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized.

~~Other~~

During the first nine months of 2018, we also completed our acquisitions of intraFUSION, Inc. (“intraFUSION”), BDI Pharma, LLC (“BDI”) and Uniprix Group (“Uniprix”) for net cash consideration of $480 million, which was funded from cash on hand. intraFUSION is a healthcare management company based in Houston, Texas providing services to physician office infusion centers. BDI is a plasma distributor headquartered in Columbia, South Carolina. We acquired the Uniprix banner which serves 375 independent pharmacies in Quebec, Canada. The adjusted provisional fair value of assets and liabilities recognized as of the acquisition dates for these three acquisitions included approximately $235 million of goodwill and $118 million of identifiable intangibles, primarily representing customer relationships. The amounts as of the acquisition date are provisional and subject to change within the measurement period as our fair value assessments are finalized. The financial results of intraFUSION, BDI and Uniprix are included within our Distribution Solutions segment since the acquisition dates.

The fair value of acquired intangibles from these acquisitions was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~2017 Acquisitions~~

~~Rexall Health~~

On December 28, 2016, we completed our acquisition of Rexall Health which operates approximately 450 retail pharmacies in Canada, primarily in Ontario and Western Canada. The initial net cash purchase consideration of $2.9 billion Canadian dollars (or, approximately $2.1 billion) was funded from cash on hand. As part of the transaction, McKesson agreed to divest 27 stores that the Competition Bureau of Canada (the “Bureau”) identified during its review of the transaction. During the first nine months of 2018, we completed the sales of all 27 stores and received net cash proceeds of $116 million Canadian dollars (or, approximately $94 million) from a third-party buyer. We also received $147 million Canadian dollars (or, approximately $119 million) in cash from the third-party seller of Rexall Health as the settlement of the post-closing purchase price adjustment related to these store divestitures. No gain or loss was recognized from the sales of these stores. The financial results of Rexall Health are included in our North America pharmaceutical distribution and services business within our Distribution Solutions segment since the acquisition date.

The fair value measurements of assets and liabilities assumed of Rexall Health as of the acquisition date were finalized upon completion of the measurement period. At December 31, 2017, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $560 million and $210 million. Approximately $948 million of the final purchase price allocation was assigned to goodwill, which primarily reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. Included in the final purchase price allocation were acquired identifiable intangibles of $872 million, net of intangibles classified as held for sale, primarily representing trade names with a weighted average life of 19 years and customer relationships with a weighted average life of 19 years.

The fair value of acquired intangibles from the acquisition was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs.

~~Other~~

6.Income Taxes

During the first ~~nine months~~quarters of ~~2017, we completed our acquisitions of Vantage Oncology Holdings, LLC (“Vantage”), Biologics, Inc., UDG Healthcare Plc~~2019 and ~~other businesses for net cash payments of $2.0 billion.~~

~~Other Acquisitions~~

During the last two years, we also completed other acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

~~Goodwill recognized for our business acquisitions is generally not expected~~2018, income tax expense related to ~~be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes.~~


7.	~~Discontinued Operations~~

Incontinuing operations was $87 million and $95 million. During the first quarter of ~~2017, we completed the sale of our Brazilian pharmaceutical distribution business within our Distribution Solutions segment to a third party and~~2019, no tax benefit was recognized ~~an after-tax loss of $113 million within discontinued operations primarily~~ for the ~~settlement~~pre-tax charge of ~~certain indemnification matters as well as the release of cumulative translation losses. We made a payment of approximately $100~~$570 million ~~related~~ to ~~the sale of this business in the first quarter of 2017.~~

The results of discontinued operations for the third quarters and first nine months of 2018 and 2017 were not material except for the loss recognized upon the disposition of our Brazilian business in 2017. As of December 31, 2017 and March 31, 2017,impair the carrying ~~amounts~~value of ~~total assets and liabilities of discontinued operations were~~goodwill as described in our Financial Note 3, “Goodwill Impairment Charges,” given that this charge is not ~~material.~~

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


8.	~~Income Taxes~~

~~Our reported~~deductible for income tax ~~benefit rates were 37.7% and 3.5% for the third quarter and first nine months of 2018 compared to income tax expense rates of 16.8% and 25.7% for the third quarter and first nine months of 2017.~~purposes. Fluctuations in our reported income tax rates are primarily due to ~~discrete items mainly driven by the impact of the 2017 Tax Act, as discussed below,~~ the impact of nondeductible impairment charges as well as changes within our business mix of income and discrete items recognized in the ~~effect~~quarter.

On December 22, 2017, the U.S. government enacted comprehensive new tax legislation under the 2017 Tax Act. The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of ~~an intercompany sale~~the enactment date. During 2018, in accordance with this guidance, we recognized a provisional tax benefit of ~~software.~~

$1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries. During the ~~third quarters~~first quarter of ~~2018 and~~2019, we have not recognized any incremental adjustments to our provisional amounts. Our accounting for the impact of the 2017 Tax Act is incomplete because we have not yet obtained, prepared, or analyzed all the information needed to finalize the accounting requirement. We will continue to assess the income tax ~~benefit was $263~~effects of the 2017 Tax Act during the measurement period and record any necessary adjustments in the period such adjustments are identified.

The 2017 Tax Act made broad and complex changes to the U.S. tax code that affect our fiscal year 2019 in multiple ways, including but not limited to reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; creating the base erosion anti-abuse tax; creating a new provision designed to tax global intangible low-tax income; and generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries. We have estimated the impact of these changes in our income tax provision for the first quarter of 2019.

As of June 30, 2018, we had $1,178 million ~~and~~of unrecognized tax benefits, of which $1,018 million would reduce income tax expense ~~was $131 million related to continuing operations~~ and ~~included net discrete~~the effective tax ~~benefits of $424 million and $12 million.~~rate, if recognized. During the first ~~nine months~~quarter of ~~2018 and 2017, income~~2019, we recognized a $20 million discrete tax benefit ~~was $46 million and~~for the reduction in an unrecognized tax ~~expense was $570 million related~~benefit due to ~~continuing operations and included net discrete~~applicable administrative guidance issued by the tax authorities. During the next twelve months, we do not anticipate a significant increase or decrease to our unrecognized tax benefits ~~of $420 million~~based on the information currently available. However, this amount may change as we continue to have ongoing negotiations with various taxing authorities throughout the year and ~~$69 million.~~

~~Our discrete tax benefits for 2018 included a provisional $370 million~~complete our accounting related to the impact of the 2017 Tax Act, further described below, and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits. Our discrete tax benefits for the first nine months of 2017 included $47 million related to the adoption of the amended accounting guidance on employee share-based compensation.Act.

The non-cash pre-tax charge of $350 million to impair the carrying value of goodwill related to our McKesson Europe reporting unit within our Distribution Solutions segment, described in our Financial Note 3, “Goodwill Impairment Charges,” had an unfavorable impact on our effective tax rate in 2018 given that this charge was not tax deductible.

The non-cash pre-tax charge of $290 million to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment, described in Financial Note 3, "Goodwill Impairment Charges," had an unfavorable impact on our effective tax rate in 2017 given that approximately $269 million of the goodwill impairment charge was not tax deductible.

~~We signed the Revenue Agent’s Report from the U.S. Internal Revenue Services (“IRS”) relating to 2010 through 2012 on December 29, 2017.~~ We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We are subject to audit by the IRS for fiscal years 2013 through the current fiscal year. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2010 through the current fiscal year.

As of December 31, 2017, we had $944 million of unrecognized tax benefits, of which $833 million would reduce income tax expense and the effective tax rate, if recognized. The increase in unrecognized tax benefit is mainly due to uncertainty relating to the application of the 2017 Tax Act, partially offset by the impact of the IRS audit resolution. During the next twelve months, we do not anticipate a significant increase or decrease to our unrecognized tax benefits based on the information currently available. However, this amount may change as we continue to have ongoing negotiations with various taxing authorities throughout the year and complete our accounting related to the impact of the 2017 Tax Act.

~~2017 Tax Act~~

On December 22, 2017, the U.S. government enacted comprehensive new tax legislation referred to as the 2017 Tax Act. The 2017 Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year 2018, including but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; and (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries.

The 2017 Tax Act also establishes new tax provisions that will affect our fiscal year 2019, including, but not limited to, (1) eliminating the corporate alternative minimum tax (“AMT”); (2) creating the base erosion anti-abuse tax (“BEAT”); (3) establishing new limitations on deductible interest expense and certain executive compensation; (4) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (5) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

The accounting guidance on income taxes requires us to recognize the effects of new legislation upon enactment. Accordingly, we are required to recognize the effects of the 2017 Tax Act in the third quarter of 2018. Shortly after the enactment, however, the SEC staff issued guidance on accounting for the 2017 Tax Act. This guidance provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting for income taxes. In accordance with the SEC staff guidance, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting for the income taxes is complete. To the extent that a company’s accounting for the income tax effect of certain provisions of the 2017 Tax Act is incomplete but the company is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the accounting guidance on income taxes on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.

Regarding the new GILTI tax rules, we are allowed to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in U.S. taxable income as a current-period expense when incurred or (2) reflect such portion of the future GILTI inclusions in U.S. taxable income that relate to existing basis differences in the company’s current measurement of deferred taxes. Our analysis of the new GILTI rules and how they may impact us is incomplete. Accordingly, we have not made a policy election regarding the treatment of the GILTI tax.

In connection with our initial analysis of the impact of the 2017 Tax Act, we recorded a net discrete tax benefit of $370 million during the third quarter of 2018. This net benefit mainly arises from changing the expected future consequences of settling differences between the book and tax basis of assets and liabilities, mainly driven by a decrease of our deferred tax liabilities for inventories and investments; partially offset by establishing a new obligation for the taxation of certain unrepatriated earnings of our foreign subsidiaries. Although our accounting for the impact of the 2017 Tax Act is incomplete, we have made reasonable estimates and recorded provisional amounts as follows:

~~Reduction of U.S. federal corporate tax rate:~~ The 2017 Tax Act reduces the corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. U.S. tax law stipulates that our fiscal year 2018 will have a blended tax rate of 31.6 percent, which is based on the pro rata number of days in the fiscal year before and after the effective date. For the fiscal year 2019, the tax rate will be 21 percent. As a result, we have remeasured certain deferred tax assets and deferred tax liabilities and recorded a provisional net discrete tax benefit of $1.26 billion, mainly driven by a decrease of our deferred tax liabilities for inventories and investments. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate, it may be affected by, among other items, changes to estimates the company has utilized to calculate the reversal pattern of our existing temporary differences and the state effect of adjustments made to federal temporary differences.

~~Deemed Repatriation Transition Tax (“Transition Tax”):~~ The 2017 Tax Act imposes a Transition Tax on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries as well as the amount of non-U.S. income taxes paid on such earnings. We were able to make a reasonable estimate of the impact of the Transition Tax and recorded a provisional discrete tax expense of $434 million. This estimate may change as we gather additional information to more precisely compute the amount of the Transition Tax.

~~Uncertainty relating to the application of the new legislation:~~ The 2017 Tax Act makes broad and complex changes to the U.S. tax code, including substantial changes to the taxation of cumulative foreign earnings and the treatment of future U.S. inclusions. The application of certain provisions of the 2017 Tax Act may involve some uncertainty. Accordingly, we recognized a provisional discrete tax expense of $452 million to increase our unrecognized tax benefits and to reflect the amount of benefit that is more likely than not expected to be sustained. This estimate may change, among other things, due to clarifications of the application of certain provisions of the 2017 Tax Act.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


9.7.	Redeemable Noncontrolling Interests and Noncontrolling Interests

Redeemable Noncontrolling Interests

Our redeemable noncontrolling interests relate to our consolidated subsidiary, McKesson ~~Europe.~~Europe AG (“McKesson Europe”). Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share and a one-time guaranteed dividend for calendar year 2014 of €0.83 per share reduced accordingly for any dividend paid by McKesson Europe in relation to that year. As a result, we recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $12 million and $9 million during the first quarters of 2019 and 2018. All amounts were recorded in our condensed consolidated statements of operations within the caption, “Net Income Attributable to Noncontrolling Interests,” and the corresponding liability balance was recorded within other accrued liabilities on our condensed consolidated balance sheets.

Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their noncontrolling shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”). The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. During the ~~third~~first quarter of ~~2018,~~2019, there were no material exercises of the Put Right. During the first ~~nine months~~quarter of 2018, we paid $50 million to purchase 1.9 million shares of McKesson Europe through the exercises of the Put

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FINANCIAL NOTES (CONTINUED)

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Right by the noncontrolling shareholders, which decreased the carrying value of redeemable noncontrolling interests by $53 million. The balance of redeemable noncontrolling interests is reported as the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted each period for exchange rate ~~fluctuations each period.~~fluctuations. At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017,~~2018, the carrying value of redeemable noncontrolling interests of ~~$1.44~~$1.42 billion and ~~$1.33~~$1.46 billion exceeded the maximum redemption value of ~~$1.31~~$1.28 billion and ~~$1.21~~$1.35 billion. At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017,~~2018, we owned approximately 77% ~~and 76%~~ of McKesson Europe’s outstanding common shares.

Appraisal Proceedings

~~Under~~Subsequent to the Domination ~~Agreement, the~~Agreement’s registration, certain noncontrolling shareholders of McKesson Europe ~~are entitled~~initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court to ~~receive an~~challenge the adequacy of the Put Amount, annual recurring compensation amount, and/or the guaranteed dividend. During the pendency of ~~€0.83 per share. As a~~the Appraisal proceedings, such amount will be paid as specified currently in the Domination Agreement. If any such Appraisal Proceedings result in an adjustment, we ~~recorded a total attribution of net income~~would be required to ~~the~~make certain additional payments for any shortfall to all McKesson Europe noncontrolling shareholders ~~of McKesson Europe of $12 million and $32 million during~~who previously received the third quarter and first nine months of 2018 and $10 million and $33 million during the third quarter and first nine months of 2017. All amounts were recorded in our condensed consolidated statements of operations within the caption, “Net Income Attributable to Noncontrolling Interests,” and the corresponding liability balance was recorded within other accrued liabilities on our condensed consolidated balance sheets.Put Amount, compensation amount or guaranteed dividend.

Noncontrolling Interests

~~The balances of our noncontrolling~~Noncontrolling interests represent third-party equity interests in our consolidated entities, primarily related to ClarusONE and Vantage, ~~and ClarusONE Sourcing Services LLP, and~~which were ~~$238~~$240 million and ~~$178~~$253 million at ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017. We~~2018 on our condensed consolidated balance sheets. During the first quarters of 2019 and 2018, we allocated a total of $46 million and ~~$137~~$47 million of net income to noncontrolling ~~interests during the third quarter and first nine months of 2018, and $3 million and $15 million during the third quarter and first nine months of 2017.~~interests.

Changes in redeemable noncontrolling interests and noncontrolling interests for the first ~~nine months~~quarter of 2019 were as follows:



(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2018	$	253		$	1,459
Net income attributable to noncontrolling interests	46			12
Other comprehensive income	—			(37		)
Reclassification of recurring compensation to other accrued liabilities	—			(12		)
Payments to noncontrolling interests	(64		)	—
Exercises of Put Right	—			—
Other	5			—
Balance, June 30, 2018	$	240		$	1,422

Changes in redeemable noncontrolling interests and noncontrolling interests for the first quarter of 2018 were as follows:


(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2017	$	178		$	1,327		$	178		$	1,327
Net income attributable to noncontrolling interests	137			32			47			9
Other comprehensive income	—			161
Other comprehensive loss							—			116
Reclassification of recurring compensation to other accrued liabilities	—			(32		)	—			(9		)
Payments to noncontrolling interests	(73		)	—
Payments of noncontrolling interests							(18		)	—
Exercises of Put Right	—			(53		)	—			(53		)
Other	(4		)	—			3			—
Balance, December 31, 2017	$	238		$	1,435
Balance, June 30, 2017							$	210		$	1,390

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~~Changes~~

There were no material changes in our ownership interests related to redeemable noncontrolling interests ~~and noncontrolling interests for~~during the first ~~nine months~~quarter of ~~2017 were as follows:~~

(In millions)

Noncontrolling
Interests
Redeemable
Noncontrolling
Interests
Balance, March 31, 2016 $ 84
$ 1,406
Net income attributable to noncontrolling interests 15
33
Other comprehensive income —
(95 )
Reclassification of recurring compensation to other accrued liabilities —
(33 )
Purchase of noncontrolling interests 93
—
Other (32 ) —
Balance, December 31, 2016 $ 160
$ 1,311

2019. The effect of changes in our ownership interests ~~with~~related to redeemable noncontrolling interests on our equity of $3 million resulting from exercises of the Put Right was recorded as a net increase to McKesson’s stockholders’ paid-in capital during the first ~~nine months~~quarter of 2018. Net income attributable to McKesson and transfers from redeemable noncontrolling interests ~~amounted to $1,216~~were $312 million during the first ~~nine months~~quarter of 2018.


~~10.~~8.	Earnings Per Common Share

Basic earnings or loss per common share are computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share isare computed similar to basic earnings per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

~~Table~~ Diluted loss per share for the first quarter of ~~Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

2019 was calculated by excluding potentially dilutive securities from the denominator of the share computation due to their anti-dilutive effects.

The computations for basic and diluted earnings or loss per common share are as follows:


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
(In millions, except per share amounts)	2017			2016			2017			2016			2018			2017
Income from continuing operations	$	960		$	649		$	1,379		$	1,647
Income (loss) from continuing operations													$	(81	)	$	363
Net income attributable to noncontrolling interests	(58		)	(13		)	(169		)	(48		)	(58		)	(56		)
Income from continuing operations attributable to McKesson	902			636			1,210			1,599
Income (loss) from discontinued operations, net of tax	1			(3		)	3			(117		)
Net income attributable to McKesson	$	903		$	633		$	1,213		$	1,482
Income (loss) from continuing operations attributable to McKesson													(139		)	307
Income from discontinued operations, net of tax													1			2
Net income (loss) attributable to McKesson													$	(138	)	$	309

Weighted average common shares outstanding:
Basic	207			221			209			224			202			211
Effect of dilutive securities:
Options to purchase common stock	—			—			—			1			—			1
Restricted stock units	1			1			1			1			—			1
Diluted	208			222			210			226			202			213

Earnings (loss) per common share attributable to McKesson: ⁽¹⁾
Diluted
Continuing operations	$	4.32		$	2.86		$	5.75		$	7.07		$	(0.69	)	$	1.44
Discontinued operations	0.01			(0.01		)	0.01			(0.51		)	0.01			0.01
Total	$	4.33		$	2.85		$	5.76		$	6.56		$	(0.68	)	$	1.45
Basic
Continuing operations	$	4.34		$	2.89		$	5.78		$	7.14		$	(0.69	)	$	1.46
Discontinued operations	0.01			(0.02		)	0.02			(0.52		)	0.01			—
Total	$	4.35		$	2.87		$	5.80		$	6.62		$	(0.68	)	$	1.46


(1)	Certain computations may reflect rounding adjustments.

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately 2 million potentially dilutive securities were excluded from the computations of diluted net earnings per common share for ~~each of~~ the ~~quarters~~quarter ended ~~December 31,~~June 30, 2017, ~~and~~ ~~2016~~ ~~and for the nine months ended December 31, 2017 and 2016,~~ as they were anti-dilutive.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


~~11.~~9.	Goodwill and Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:

(In millions)
Distribution
Solutions

Technology
Solutions
Total
Balance, March 31, 2017 $ 10,132
$ 454
$ 10,586
Goodwill acquired 1,258
—
1,258
Acquisition accounting, transfers and other adjustments ⁽¹⁾
364
(330 ) 34
Goodwill impairment charges (350 ) —
(350 )
Goodwill disposed ⁽²⁾
—
(124 ) (124 )
Amount reclassified to assets held for sale (11 ) —
(11 )
Foreign currency translation adjustments, net 435
—
435
Balance, December 31, 2017 $ 11,828
$ —
$ 11,828



(In millions)	U.S. Pharmaceutical and Specialty Solutions			European Pharmaceutical Solutions			Medical-Surgical Solutions		Other			Total
Balance, March 31, 2018	$	4,110		$	1,850		$	2,070	$	2,894		$	10,924
Goodwill acquired	—			31			360		—			391
Goodwill impairment charges	—			(570		)	—		—			(570		)
Acquisition accounting, transfers and other adjustments	4			—			—		6			10
Foreign currency translation adjustments, net	(36		)	(98		)	—		(36		)	(170		)
Balance, June 30, 2018	$	4,078		$	1,213		$	2,430	$	2,864		$	10,585

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


~~(1)~~	~~Effective April 1, 2017, our RHP business was transitioned from the Technology Solutions segment to the Distribution Solutions segment.~~


~~(2)~~	~~Technology Solutions segment amount represents goodwill disposal associated with the sale of our EIS business. Refer to Financial Note 5, “Divestitures” for more information.~~

As of ~~December 31, 2017 and March 31, 2017,~~June 30, 2018, accumulated goodwill impairment losses ~~for~~were $1,793 million and $448 million in our ~~Distribution~~European Pharmaceutical Solutions segment and Other. As of March 31, 2018, accumulated goodwill impairment losses were ~~$350~~$1,299 million and ~~nil,~~$456 million in our European Pharmaceutical segment and ~~nil and $290 million for our Technology Solutions segment.~~Other. Refer to Financial Note 3, “Goodwill Impairment Charges,” for more information on goodwill impairment charges recorded in the ~~second quarters~~first quarter of ~~2018 and 2017.~~2019.

Information regarding intangible assets is as follows:


	December 31, 2017								March 31, 2017							June 30, 2018								March 31, 2018
(Dollars in millions)	Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	12	$	3,480	$	(1,458	)	$	2,022	$	2,893	$	(1,295	)	$	1,598	13	$	4,038	$	(1,724	)	$	2,314	$	3,619	$	(1,550	)	$	2,069
Service agreements	12	1,043		(366		)	677		1,009		(316		)	693		12	1,020		(392		)	628		1,037		(386		)	651
Pharmacy licenses	26	630		(140		)	490		741		(150		)	591		25	766		(336		)	430		684		(196		)	488
Trademarks and trade names	14	914		(171		)	743		845		(124		)	721		14	938		(207		)	731		932		(187		)	745
Technology	4	148		(79		)	69		69		(64		)	5		4	146		(87		)	59		147		(84		)	63
Other	4	263		(170		)	93		201		(144		)	57		5	285		(189		)	96		262		(176		)	86
Total		$	6,478	$	(2,384	)	$	4,094	$	5,758	$	(2,093	)	$	3,665		$	7,193	$	(2,935	)	$	4,258	$	6,681	$	(2,579	)	$	4,102

Amortization expense of intangible assets was ~~$123~~$122 million and ~~$370~~$121 million for the ~~third quarter~~quarters ended June 30, 2018 and ~~nine months ended December 31, 2017, and $102 million and $332 million for the third quarter and nine months ended December 31, 2016.~~2017. Estimated annual amortization expense of these assets is as follows: ~~$113~~$344 million, ~~$437~~$441 million, ~~$421~~$423 million, ~~$403~~$391 million and ~~$370~~$282 million for the remainder of ~~2018~~2019 and each of the succeeding years through ~~2022~~2023 and ~~$2,350~~$2,377 million thereafter. All intangible assets were subject to amortization as of ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017~~2018.

~~Refer to Financial Note 4, “Restructuring and Asset Impairment Charges,” for more information on intangible asset impairment charges recorded in the second quarter of 2018.~~


~~12.~~10.	Debt and Financing Activities

Long-Term Debt

Our long-term debt includes both U.S. dollar and foreign currency ~~(primarily Euro and British pound sterling)~~ denominated borrowings. At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017, $8,045~~2018, $7,719 million and ~~$8,362~~$7,880 million of total ~~long-term~~ debt were outstanding, of which ~~$531~~$1,127 million and ~~$1,057~~$1,129 million were included under the caption “Current portion of long-term debt” within ~~the~~our condensed consolidated balance sheets.

~~During the first nine months of 2018, we repaid a €500 million bond that matured on April 26, 2017.~~

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Revolving Credit Facilities

We have a syndicated $3.5 billion five-year senior unsecured revolving credit facility (the “Global Facility”), which has a $3.15 billion aggregate sublimit of availability in Canadian dollars, British pound sterling and Euros. The Global Facility matures on October 22, 2020. Borrowings under the Global Facility bear interest based upon the London Interbank Offered Rate, Canadian Dealer Offered Rate for credit extensions denominated in Canadian Dollars, a prime rate, or alternative overnight rates as applicable, plus agreed margins. The Global Facility contains a financial covenant which obligates the Company to maintain a debt to capital ratio of no greater than 65% and other customary investment grade covenants. If we do not comply with these covenants, our ability to use the Global Facility may be suspended and repayment of any outstanding balances under the Global Facility may be required. At ~~December 31, 2017,~~June 30, 2018, we were in compliance with all covenants. There were no borrowings outstanding under this facility during the ~~third~~first quarters of 2019 and ~~first nine months of~~ 2018 and ~~2017, and no borrowings outstanding~~ as of ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017.~~2018.

We also maintain bilateral credit lines primarily denominated in Euros with a total committed and uncommitted balance of ~~$314 million.~~$217 million as of June 30, 2018. Borrowings and repayments were not material during the first ~~nine months~~quarters of 2019 and 2018 and ~~2017. As of December 31, 2017 and March 31, 2017,~~ amounts outstanding under these credit lines were not ~~material.~~material as of June 30, 2018 and March 31, 2018.

Commercial Paper

We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, wethe Company can issue up to $3.5 billion in outstanding notes. During the first ~~nine months~~quarter of ~~2018,~~2019, we borrowed ~~$12,699 million~~$9.0 billion and repaid ~~$12,133 million~~$7.0 billion under the program. ~~During~~Borrowings and repayments were not material during the first ~~nine months~~quarter of ~~2017,~~2018. At June 30, 2018, there were ~~no material commercial paper issuances. As~~$2.0 billion of ~~December 31, 2017 and March 31, 2017, we had $749 million and $183 million~~ commercial paper notes outstanding with a weighted average interest rate of ~~2.07% and 1.20%~~2.43%. At March 31, 2018, there were no commercial paper notes outstanding.


~~13.~~11.	Pension Benefits

The net periodic expense for our defined pension benefit plans was $6$5 million and ~~$16~~$6 million for the ~~third quarter~~first quarters of 2019 and ~~first nine months of 2018, and $8 million and $22 million for the third quarter and first nine months of 2017.~~2018.

Cash contributions to these plans were ~~$5 million and $46~~$3 million for the ~~third quarter~~first quarters of 2019 and ~~first nine months of 2018 and $6 million and $16 million for the third quarter and first nine months of 2017.~~2018. The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods and expected life expectancy.

On May 23, 2018, the Company’s Board of Directors approved the termination of our frozen U.S. defined benefit pension plan (“Plan”). The distribution of plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to be completed by December 31, 2019.

As of June 30, 2018 and March 31, 2018, this Plan had an accumulated comprehensive loss of approximately $118 million and $120 million.


~~14.~~12.	Hedging Activities

In the normal course of business, we are exposed to interest rate and foreign currency exchange rate fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps, ~~cross currency~~cross-currency swaps and foreign currency forward contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.

Foreign currency exchange risk

We conduct our business ~~internationally~~worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on our financial results ~~that~~which are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies. We have certain foreign currency exchange rate risk programs that use foreign currency forward contracts and ~~cross currency~~cross-currency swaps. These forward contracts and ~~cross currency~~cross-currency swaps are generally used to offset the potential ~~income statement~~ effects on the statements of operations from intercompany loans ~~denominated in non-functional currencies. These programs reduce but do not eliminate foreign exchange rate risk.~~

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(UNAUDITED)

~~Net Investment Hedges and Derivatives Designated as Hedges~~denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.

~~We have €1.2~~At June 30, 2018, we had €1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges which hedge portions of our net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. ~~dollar (“Net Investment Hedges”).~~dollar. For all notes that are designated as net investment hedges and meet highly effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in ~~other comprehensive income (loss)~~foreign currency translation adjustments within Accumulated Other Comprehensive Income in the statements of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments. To the extent foreign currency denominated notes designated as net investment hedges are ~~ineffective,~~not highly effective, changes in carrying value attributable to the change in spot rates are recorded in ~~current~~ earnings. ~~Losses~~Gains or losses from net investment hedges recorded in other comprehensive income were ~~$28~~gains of $161 million and ~~$205~~losses of $114 million during the ~~third quarter~~first quarters of 2019 and ~~first nine months of~~ 2018. There was no ineffectiveness in our net investment hedges during the first quarters of 2019 and 2018.

Derivatives Designated as Hedges

In March 2018, we entered into cross-currency swap contracts with total gross notional amounts of ~~December 31, 2017~~£432 million, which are designated as net investment hedges. Under the terms of the cross-currency swap contracts, we agree with third parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, calculated by reference to agreed-upon notional amounts. These swaps are utilized to hedge portions of our net investments denominated in British pound sterling against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded in Accumulated Other Comprehensive Income in the statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments denominated in British pound sterling. Gains from these net investment hedges recorded in other comprehensive income were $34 million for first quarter of 2019. These cross-currency swaps will mature between February 2022 and February 2024.

At June 30, 2018 and March 31, ~~2017.~~

~~At December 31, 2017 and March 31, 2017,~~2018, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional values of ~~$243~~$162 million, which were designated as cash flow hedges. These contracts will mature between March ~~2018~~2019 and March 2020.

From time to time, we enter into ~~cross currency~~cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For our cross currency swap transactions, we agree with another party to exchange, at specified intervals, one currency for another currency at a fixed exchange rate, generally set at inception, calculated by reference to agreed upon notional amounts. These ~~cross currency~~cross-currency swaps are designed to reduce the ~~income statement~~ effects on the statements of operations arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges.

At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017,~~2018, we had ~~cross currency~~cross-currency swaps with total gross notional amounts of ~~$3,411 million and $2,663~~approximately $3,412 million, which are designated as cash flow hedges. These swaps will mature between ~~February~~July 2018 and January 2024.

For forward contracts and ~~cross currency~~cross-currency swaps that are designated as cash flow hedges ~~the~~and are highly effective, ~~portion of~~the changes in the fair value of the hedges is recorded ~~into other comprehensive income (loss)~~in Accumulated Other Comprehensive Income and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. ~~Gains or losses on these~~Losses from cash flow hedges ~~recorded in other comprehensive income and earnings~~ were not material in the ~~third quarters~~first quarter of 2019 and $14 million in the first ~~nine months~~quarter of 2018 and ~~2017.~~were recorded in other comprehensive income. Gains or losses reclassified from Accumulated Other Comprehensive Income and recorded in operating expenses in the condensed consolidated statements of operations were not material in the first quarters of 2019 and 2018. There was no ineffectiveness in our cash flow hedges for the first quarters of 2019 and 2018.

Derivatives Not Designated as Hedges

~~At March 31, 2017, we had forward contracts to hedge~~Derivative instruments not designated as hedges are marked-to-market at the ~~U.S. dollar against cash flows denominated~~end of each accounting period with changes in ~~Canadian dollars with total gross notional value of $173 million. These contracts matured~~values included in ~~April 2017 and none of these contracts were designated for hedge accounting. Losses from these contracts were not material for the third quarters and first nine months of 2018 and 2017.~~earnings.

We ~~also~~ have a number of forward contracts to hedge the Euro against cash flows denominated primarily in British pound sterling and other European currencies. At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017,~~2018, the total gross notional amounts of these contracts were ~~$34~~$39 million and ~~$62~~$29 million.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

These contracts will mature through ~~July~~December 2018 and none of these contracts were designated for hedge accounting. Changes in the fair values offor contracts not designated as hedges are recorded directly into ~~current earnings. Gains from these contracts were recorded within operating expenses~~earnings and were not material for the ~~third~~first quarters of 2019 and ~~first nine months of 2018 and 2017. The gains~~2018. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Information regarding the fair value of derivatives on a gross basis is as follows:


	Balance Sheet Caption	December 31, 2017						March 31, 2017						Balance Sheet Caption	June 30, 2018						March 31, 2018
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional			Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
(In millions)		Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional			Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional
Derivatives designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	14	$	—	$	81	$	17	$	—	$	81	Prepaid expenses and other	$	16	$	—	$	81	$	15	$	—	$	81
Foreign exchange contracts (non-current)	Other Noncurrent Assets	27		—		162		32		—		162
Foreign exchange contracts (noncurrent)														Other Noncurrent Assets	16		—		81		14		—		81
Cross currency swaps (current)	Prepaid expenses and other	—		—		307		17		—		174		Prepaid expenses and other/Other accrued liabilities	26		10		504		—		7		504
Cross currency swaps (non-current)	Other Noncurrent Assets/Liabilities	—		163		3,104		90		—		2,489
Cross currency swaps (noncurrent)														Other Noncurrent Assets/Liabilities	45		115		3,508		—		222		3,508
Total		$	41	$	163			$	156	$	—				$	103	$	125			$	29	$	229
Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	—	$	—	$	28	$	1	$	—	$	198	Prepaid expenses and other	$	—	$	—	$	32	$	—	$	—	$	13
Foreign exchange contracts (current)	Other accrued liabilities	—		—		6		—		—		37		Other accrued liabilities	—		—		7		—		—		16
Total		$	—	$	—			$	1	$	—				$	—	$	—			$	—	$	—

Refer to Financial Note ~~15,~~13, "Fair Value Measurements," for more information on these recurring fair value measurements.


~~15.~~13.	Fair Value Measurements

At ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017~~2018, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.

The fair value of our commercial paper was determined using quoted prices in active markets for identical liabilities, which are considered ~~to be~~ Level 1 inputs.

~~Assets Measured at Fair Value on a Recurring Basis~~

Our long-term debt is carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were ~~$8.0~~$7.7 billion and ~~$8.5~~$7.8 billion at ~~December 31, 2017~~,June 30, 2018, and ~~$8.4~~$7.9 billion and ~~$8.7~~$8.1 billion at March 31, ~~2017~~.2018. The estimated fair value of our long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.

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Assets Measured at Fair Value on a Recurring Basis

Cash and cash equivalents at ~~December 31, 2017~~June 30, 2018 and March 31, ~~2017~~2018 included investments in money market funds of ~~$1,066~~$165 million and ~~$478~~$799 million, which are reported at fair value. The fair value of the money market funds was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Fair values of our ~~derivatives~~forward foreign currency contracts were determined using ~~quoted market prices of similar instruments in an active market and other~~ observable inputs from available market information. Fair values of our ~~foreign currency~~cross-currency swaps were determined using ~~the~~ quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note ~~14, "Hedging~~12, “Hedging Activities,"” for ~~more~~fair value and other information on our foreign currency derivatives including forward foreign currency ~~forward~~ contracts and ~~cross currency~~cross-currency swaps.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the ~~quarters and nine months~~quarter ended ~~December 31,~~ ~~2017~~ ~~and~~ ~~2016~~.June 30, 2018.

Assets Measured at Fair Value on a Nonrecurring Basis

At ~~December 31, 2017,~~June 30, 2018, assets measured at fair value on a nonrecurring basis consisted of goodwill and intangible assets for ~~our McKesson Europe business~~two reporting units within our ~~Distribution~~European Pharmaceutical Solutions ~~segment, as further discussed below.~~

segment. Refer to Financial Note 3, “Goodwill Impairment Charges,” and Financial Note 5, “Restructuring and Asset Impairment Charges” for more information.

At March 31, ~~2017,~~2018, assets measured at fair value on a nonrecurring basis ~~primarily~~ consisted of goodwill, ~~for our EIS business within our Technology Solutions segment.~~

~~Goodwill~~

~~As discussed in Financial Note 3, “Goodwill Impairment Charges,” we recorded non-cash pre-tax~~intangible and ~~after-tax impairment charges of $350 million during the second quarter of 2018~~other long-lived assets for our McKesson Europe and Rexall Health reporting ~~unit~~units within ~~the~~our former Distribution Solutions segment, ~~and $290 million ($282 million after-tax) during~~which existed prior to the ~~second~~2019 first quarter ~~of 2017 for~~realignment in our ~~EIS reporting unit within the Technology Solutions segment. The impairments primarily resulted from a decline in the reporting units’ estimated cash flows.~~operating segment structure.

Goodwill

Fair value assessments of the reporting unit and the reporting unit's net assets, which are performed for goodwill impairment tests, are considered a Level 3 measurement due to the significance of unobservable inputs developed using ~~company specific~~company-specific information. We considered a market approach as well as an income approach using the DCF model to determine the fair value of the reporting unit.

Intangible Assets

We measure certain long-lived assets at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. If the cost of an investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment, general market conditions, the duration and extent to which the fair value is less than cost and the financial outlook for the industry and location. An impairment charge is recorded when the cost of the asset exceeds its fair value and this condition is determined to be other-than-temporary.

As discussed in Financial Note 4, “Restructuring and Asset Impairment Charges,” we recorded non-cash pre-tax charges of $189 million ($157 million after-tax) during the second quarter of 2018 to impair the carrying values of certain long-lived assets including intangible assets. We utilized a combination of an income approach ~~(primarily DCF method)~~ and a market approach for estimating the fair value of intangible assets. The future cash flows used in the analysis are based on internal cash flow projections based on our long-range plans and include significant assumptions by management. Accordingly, the fair value assessment of the ~~intangible~~long-lived assets is considered a Level 3 fair value measurement.

Liabilities Measured at Fair Value on a Nonrecurring Basis

At ~~December~~June 30, 2018 and March 31, ~~2017,~~2018, we remeasured the contingent consideration liability related to our April 2018 acquisition of CMM at fair value on a nonrecurring basis. Refer to Financial Note 6,4, “Business ~~Combinations,”~~Combinations” for more information on the fair value of the contingent consideration liability. ~~There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2017.~~


~~16.~~	~~Commitments and Contingent Liabilities~~

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.

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(UNAUDITED)

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or range of loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.

Significant developments in previously reported proceedings and in other litigation and claims, since the filing of our 2017 Annual Report and our Quarterly Report on Form 10-Q for the quarters ended June 30, 2017 and September 30, 2017 are set out below. We are party to the legal proceedings described below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.


14.	Commitments and Contingent Liabilities

Litigation, Government Subpoenas and Investigations

As previously ~~reported,~~disclosed, the Company is a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. The plaintiffs in these actions include state attorneys general, county and city municipalities, hospitals, Indian tribes, pension funds, and third-party payors. The Company has been served with ~~192~~740 complaints filed in state and federal courts throughout the United States and in Alabama, Arkansas, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Texas, West Virginia and Wisconsin. These complaints allege violations of controlled substance laws and various other statutes in addition to common law claims, including negligence and public nuisance, and seek monetary damages and equitable relief. OnPuerto Rico. Since December 5, 2017, nearly all the cases pending in federal district courts ~~were~~have been transferred to a multi-district litigation proceeding in the United States District Court for the Northern District of Ohio captioned In re: National Prescription Opiate Litigation, Case No. ~~17-md-2804. Approximately 29~~17-md-28-04. Fifteen of the cases ~~remain~~pending in state ~~courts~~court in ~~Connecticut, Florida, New Mexico,~~ New York ~~Pennsylvania, Tennessee and Texas.~~have been transferred to a consolidated proceeding in Suffolk County Supreme Court captioned

In re Opioid Litigation, Index No. 400000/2017. On July 17, 2018, the court denied the distributors’ motion to dismiss these matters.

As previously disclosed, the ~~Company and others~~four shareholder derivative complaints filed ~~suit~~ in the Delaware Court of Chancery were consolidated under the caption In re McKesson Corporation Stockholder Derivative Litigation, No. 2017-0736. On May 25, 2018, the court stayed further proceedings in the matter in favor of the previously disclosed consolidated shareholder derivative action pending the United States District Court for the Northern District of ~~Oklahoma,~~California, In re McKesson Corporation ~~et al. v. Todd Hembree, Attorney General of the Cherokee Nation, et al.,~~ ~~seeking a declaratory judgment that the Cherokee Nation District Court has no jurisdiction over the claims asserted by the Cherokee Nation in the suit captioned~~ ~~Cherokee Nation v. McKesson Corporation, et al.~~ On January 9, 2018, the court granted the motion for a preliminary injunction enjoining the defendants from taking any action in the case pending in the tribal court. On January 19, 2018, the Cherokee Nation refiled its suit against the Company and five other original defendants in the district court of Sequoyah County, Oklahoma. ~~The Cherokee Nation v. McKesson Corporation, et al.~~Derivative Litigation, ~~Case no. CT-2081-11.~~No. 4:17-cv-1850.

As previously disclosed, ~~two shareholder derivative suits filed against certain officers and directors of~~on May 17, 2013, the Company ~~and the Company as~~was served with a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances were consolidatedcomplaint filed in the United States District Court for the Northern District of California as ~~In re McKesson Corporation Derivative Litigation, No. 4:17-cv-1850. On January 5, 2018,~~alleging that the ~~defendants moved to dismiss the consolidated suit.~~

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~As previously disclosed, Chaile Steinberg, a purported shareholder, filed a shareholder derivative complaint~~company sent unsolicited marketing faxes in ~~the Court of Chancery~~violation of the ~~State~~Telephone Consumer Protection Act of ~~Delaware against certain officers and directors~~1991, as amended by the Junk Fax Protection Action of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances. Two similar suits were then filed by purported shareholders, including2005, ~~Police & Fire Ret. Sys of the City of Detroit v. McKessson Corporation,~~True Health Chiropractic Inc., et al.~~, No. 2017-0803, and~~ ~~Amalgamated Bank~~ v. McKesson Corporation, et al., ~~No. 2017-0881. The~~CV-13-02219. On August 22, 2016, the court denied plaintiffs’ motion for class certification. On November 16, 2016, plaintiffs were granted leave to appeal that ruling to the United States Court of ~~Chancery consolidated these three actions~~Appeals for the Ninth Circuit (“Ninth Circuit.”) On July 17, 2018, the Ninth Circuit affirmed in part and reversed in part the ~~plaintiffs designated~~district court’s denial of class certification and remanded the case to the district court for further proceedings.

On June 15, 2018, an amended complaint was filed in the ~~Steinberg~~ ~~action as~~United States District Court for the ~~operative complaint on January 11, 2018. The consolidated matter is captioned~~ ~~In re McKesson Corporation Stockholder Derivative Litigation,~~ No. 2017-0736. The defendants filed a motion to dismiss this action on January 18, 2018. On January 19, 2018, purported shareholder Katielou Greene filed a shareholder derivative complaint in the CourtSouthern District of ~~Chancery that is similar to the operative complaint in~~ ~~In re McKesson Corporation Stockholder Derivative Litigation~~. ~~Greene v. McKesson Corporation, et al.~~

On May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against McKesson Europe Holdings GmbH & Co. KGaA (“McKesson Europe Holdings”, formerly known as “Dragonfly GmbH & Co. KGaA”), a wholly‑owned subsidiary of the Company, in a German court in Frankfurt, Germany,Illinois alleging that McKesson ~~Europe Holdings~~Medical-Surgical Inc., among others, violated ~~German takeover law~~the Sherman Act by restraining trade in ~~connection with~~ the ~~Company’s acquisition~~sale of ~~McKesson Europe by paying more to some holders~~safety and conventional syringes and safety IV catheters. Marion Diagnostic Center, LLC v. Becton, Dickinson, and Co., No. 18:1059. The action is filed on behalf of ~~McKesson Europe’s convertible bonds than it paid to the shareholders~~a purported class of ~~McKesson Europe’s stock,~~ ~~Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA~~, No. 3-05 O 44/14. On December 5, 2014, the court dismissed Magnetar’s lawsuit. Magnetar subsequently appealed that ruling. On January 19, 2016, the Appellate Court reversed the lower court’s rulingpurchasers, and entered judgment against McKesson Europe Holdings. On February 22, 2016, McKesson Europe Holdings filed a notice of appeal, on which oral argument was heard by the German Federal Supreme Court on November 7, 2017. The final decision upholding the Appellate Court’s rulingseeks treble damages and further relief, all in ~~favor of Magnetar was issued on December 12, 2017; this decision does not materially impact McKesson’s consolidated financial statements.~~unspecified amounts.

From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely matter. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the healthcare industry. Examples of such subpoenas and investigations are included in the Company’s ~~2017~~2018 Annual Report on Form ~~10-K~~10-K.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

New York Opioid Statute

Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that we may not be able to predict. For example, in April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and ~~previously~~distributors licensed to sell or distribute opioids in New York. The initial surcharge payment is due on January 1, 2019 for opioids sold or distributed during calendar year 2017. It is uncertain at this point in time what proportion of this estimated liability will be ultimately borne by the Company because the Company’s share of the surcharge depends heavily on what other licensees report. The Company has estimated and reflected a liability for the OSA surcharge in its accompanying condensed consolidated financial statements. However, it is possible that the ultimate costs may exceed or be less than the reserve. Moreover, on July 6, 2018, the Healthcare Distribution Alliance filed ~~10-Qs.~~a lawsuit challenging the constitutionality of the law and seeking an injunction against its enforcement. We are not able to predict whether this lawsuit will be successful. In addition, other states are considering legislation that could require us to pay taxes or assessments on the distribution of opioid medications in those states. These proposed bills vary in the amounts and the means of calculation. Liabilities for taxes or assessments under any such laws will likely have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted.


~~17.~~15.	Stockholders’ Equity

Each share of the Company’s outstanding common stock is permitted one vote on proposals presented to stockholders and is entitled to share equally in any dividends declared by the Company’s Board of Directors (the “Board”).

OnThe Company currently pays quarterly dividends of $0.34 per common share. In July ~~26, 2017,~~2018, the Company’s quarterly dividend was raised from ~~$0.28~~$0.34 to ~~$0.34~~$0.39 per common share for dividends declared on or after such date by the Board. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company's future earnings, financial condition, capital requirements and other factors.

Share Repurchase Plans

Stock repurchases may be made from ~~time to time~~time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.

In March ~~2017,~~2018 we entered into an ASR program with a third-party financial institution to repurchase ~~$250~~$500 million of the Company’s common ~~stock and~~stock. We received ~~1.4~~2.5 million shares ~~as the initial share settlement. In April 2017, we received~~in March 2018 and an additional ~~0.3~~1.0 million shares ~~upon~~in the ~~completion~~first quarter of ~~this~~2019. The March 2018 ASR ~~program.~~program was completed at an average price per share of $143.66 during the first quarter of 2019.

In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.

In the first quarter of 2019, we repurchased 2.0 million of the Company’s shares for $297 million through open market transactions at an average price per share of $147.92.

The total authorization outstanding for repurchases of the Company’s common stock was $4.8 billion at June 30, 2018.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

In June 2017 and August 2017, we entered into two separate ASR programs with third-party financial institutions to repurchase $250 million and $400 million of the Company’s common stock. During the first nine months of 2018, we received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. The June 2017 ASR program was completed in the second quarter of 2018 and the August 2017 ASR program was completed in the third quarter of 2018.

~~In November 2017, we repurchased 1.8 million of the Company’s shares for $250 million through open market transactions at an average price per share of $138.12.~~

~~The total authorization outstanding for repurchases of the Company’s common stock was $1.8 billion at December 31, 2017.~~

Other Comprehensive Income (Loss)

Information regarding other comprehensive income (loss) including redeemable noncontrolling interests, net of tax, by component is as follows:

Quarter Ended December 31, Nine Months Ended December 31,
(In millions) 2017 2016 2017 2016
Foreign currency translation adjustments ⁽¹⁾

Foreign currency translation adjustments arising during period, net of income tax expense (benefit) of nil, nil, nil and $1 ^{(2) (3)}
$ 30
$ (398 ) $ 715
$ (782 )
Reclassified to income statement, net of income tax expense of nil, nil, nil and nil ⁽⁴⁾
—
—
—
20
30
(398 ) 715
(762 )
Unrealized gains (losses) on net investment hedges ⁽⁵⁾

Unrealized gains (losses) on net investment hedges arising during period, net of income tax benefit of $9, nil, $78 and nil (19 ) —
(127 ) —
Reclassified to income statement, net of income tax expense of nil, nil, nil and nil —
—
—
—
(19 ) —
(127 ) —
Unrealized gains (losses) on cash flow hedges
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax expense of $2, nil, $2 and nil (16 ) (14 ) (5 ) (20 )

Changes in retirement-related benefit plans ⁽⁶⁾

Net actuarial loss and prior service cost arising during the period, net of income tax benefit of nil, nil, nil and nil —
—
—
—
Amortization of actuarial loss and prior service costs, net of income tax expense of nil, $1, nil and $3 ⁽⁷⁾
1
2
3
6
Foreign currency translation adjustments and other, net of income tax expense of nil, nil, nil and nil —
6
(10 ) 14
1
8
(7 ) 20

Other comprehensive income (loss), net of tax $ (4 ) $ (404 ) $ 576
$ (762 )



	Quarter Ended June 30,
(In millions)	2018			2017
Foreign currency translation adjustments ⁽¹⁾
Foreign currency translation adjustments arising during period, net of income tax benefit of nil and nil ^{(2) (3)}	$	(273	)	$	382
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	(273		)	382

Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of ($51) and $44 ⁽⁴⁾	144			(70		)
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	144			(70		)
Unrealized gains on cash flow hedges
Unrealized gains on cash flow hedges arising during period, net of income tax expense of nil and nil	—			14
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	—			14
Changes in retirement-related benefit plans ⁽⁵⁾
Net actuarial loss and prior service cost arising during the period, net of income tax benefit of nil and nil	—			—
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of nil and nil ⁽⁶⁾	1			1
Foreign currency translation adjustments and other, net of income tax expense of nil and nil	7			(6		)
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	8			(5		)

Other comprehensive income (loss), net of tax	$	(121	)	$	321


(1)	Foreign currency translation adjustments primarily result from the conversion of non-U.S. dollar financial statements of our foreign ~~subsidiaries~~subsidiary, McKesson Europe, into the Company’s reporting currency, U.S. ~~dollars.~~dollars, during the first quarters of 2019 and 2018.

(2)

During the ~~third~~first quarter of 2019, the net foreign currency translation losses were primarily due to the weakening of the Euro and British pound sterling against the U.S. dollar from April 1, 2018 to June 30, 2018. During the first quarter of 2018, the net foreign currency translation gains were primarily due to the strengthening of the Euro against the U.S. dollar from October 1, 2017 to December 31, 2017. The net foreign currency translation gains during the first nine months of 2018 were primarily due to the strengthening of the Euro, Canadian dollar and British pound sterling against the U.S. dollar from April 1, 2017 to ~~December 31,~~June 30, 2017. During the third quarter and first nine months of 2017, the currency translation losses were primarily due to the weakening of the British pound sterling and Euro against the U.S. dollar from April 1, 2016 to December 31, 2016.

(3)

The ~~third~~first quarter ~~and~~of 2019 includes net foreign currency translation losses of $39 million attributable to redeemable noncontrolling interests. The first ~~nine months~~quarter of 2018 ~~include~~includes net foreign currency translation gains of ~~$12 million and $160 million and the third quarter and first nine months of 2017 include net foreign currency translation losses of $31 million and $97~~$115 million attributable to redeemable noncontrolling interests.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


(4)	The first ~~nine months~~quarter of ~~2017~~2019 includes ~~net~~ foreign currency ~~translation losses~~gains of $20 million reclassified from accumulated other comprehensive income (loss) to loss from discontinued operations, net of tax, within our condensed consolidated statements of operations due to the sale of our Brazilian pharmaceutical distribution business.

~~(5)~~

~~The third quarter and first nine months of 2018 include foreign currency losses of $28 million and $205~~$161 million on the net investment hedges from the ~~€1.2~~€1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated notes and gains of $34 million on the net investment hedges from the cross-currency swaps. The first quarter of 2018 includes foreign currency losses of $114 million on the net investment hedges from the €1.20 billion Euro-denominated notes and £450 million British pound sterling-denominated notes.


~~(6)~~(5)	The ~~third quarter~~first quarters of 2019 and ~~first nine months of~~ 2018 ~~include net actuarial losses of nil and $1 million, and the third quarter and first nine months of 2017~~ include net actuarial losses of $2 million and $3$1 million ~~which are~~ attributable to redeemable noncontrolling interests.


~~(7)~~(6)	Pre-tax amount reclassified into cost of sales and operating expenses in our condensed consolidated statements of operations. The related tax expense was reclassified into income tax expense ~~(benefit)~~ in our condensed consolidated statements of operations.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in our accumulated other comprehensive income (loss), net of tax, by component for the ~~third~~first quarter ~~and first nine months~~ of ~~2018~~2019 is as follows:


	Foreign Currency Translation Adjustments															Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Losses on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustments, Net of Tax			Unrealized Losses on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2017	$	(1,336	)	$	(116	)	$	(20	)	$	(238	)	$	(1,710	)
Balance at March 31, 2018																$	(1,258	)	$	(188	)	$	(61	)	$	(210	)	$	(1,717	)

Other comprehensive income (loss) before reclassifications	30			(19		)	(16		)	—			(5		)	(273		)	144			—			8			(121		)
Amounts reclassified to earnings and other	—			—			—			1			1
Amounts reclassified to earnings																—			—			—			—			—
Other comprehensive income (loss)	30			(19		)	(16		)	1			(4		)	(273		)	144			—			8			(121		)
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	12			—			—			—			12			(39		)	—			—			2			(37		)
Other comprehensive income (loss) attributable to McKesson	18			(19		)	(16		)	1			(16		)	(234		)	144			—			6			(84		)
Balance at December 31, 2017	$	(1,318	)	$	(135	)	$	(36	)	$	(237	)	$	(1,726	)
Balance at June 30, 2018																$	(1,492	)	$	(44	)	$	(61	)	$	(204	)	$	(1,801	)

Foreign Currency Translation Adjustments
(In millions) Foreign Currency Translation Adjustments, Net of Tax
Unrealized Losses on Net Investment Hedges,
Net of Tax

Unrealized Gains (Losses) on Cash Flow Hedges,
Net of Tax
Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2017 $ (1,873 ) $ (8 ) $ (31 ) $ (229 ) $ (2,141 )

Other comprehensive income (loss) before reclassifications 715
(127 ) (5 ) (10 ) 573
Amounts reclassified to earnings and other —
—
—
3
3
Other comprehensive income (loss) 715
(127 ) (5 ) (7 ) 576
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests 160
—
—
1
161
Other comprehensive income (loss) attributable to McKesson 555
(127 ) (5 ) (8 ) 415
Balance at December 31, 2017 $ (1,318 ) $ (135 ) $ (36 ) $ (237 ) $ (1,726 )

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


~~18.~~16.	~~Segment Information~~Related Party Balances and Transactions

~~We currently report our operations~~During the fourth quarter of 2018, a public benefit California foundation (“Foundation”) was established to provide opioid education to patients, caregivers, and providers, address policy issues, and increase patient access to life-saving treatments. Certain officers of the Company also serve as directors and officers of the Foundation. The Company had a pledge payable balance of $100 million ($64 million after-tax) to the Foundation as of March 31, 2018, which was paid in ~~two operating segments: McKesson Distribution~~the first quarter of 2019.

Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,” for information regarding related party balances and transactions with Change Healthcare.


17.	Segments of Business

Commencing in the first quarter of 2019, a new segment reporting structure was implemented which resulted in three reportable segments on a retrospective basis: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and ~~McKesson Technology~~Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including operating profit before interest expense, income taxes and results from discontinued operations. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.

Our U.S. Pharmaceutical and Specialty Solutions segment distributes pharmaceutical and other healthcare-related products and also provides pharmaceutical solutions to pharmaceutical manufacturers in the United States.

Our European Pharmaceutical Solutions segment provides distribution and services to wholesale, institutional and retail customers and serves patients and consumers in 13 European countries through our own pharmacies and participating pharmacies that operate under brand partnership and franchise arrangements.

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McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)

Our Medical-Surgical Solutions segment distributes medical-surgical supplies and provides logistics and other services to healthcare providers in the United States.

Other primarily consists of the following:

McKesson Canada which distributes pharmaceutical and medical products and operates Rexall Health retail pharmacies;

McKesson Prescription Technology Solutions which provides innovative technologies that support retail pharmacies; and

Our 70% equity ownership interest in a joint venture, Change Healthcare, which is accounted for by us using the equity investment method of accounting.

Financial information relating to our reportable operating segments and reconciliations to the condensed consolidated totals is as follows:


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
(In millions)	2017			2016			2017			2016			2018			2017
Revenues
Distribution Solutions ⁽¹⁾
North America pharmaceutical distribution and services	$	44,935		$	41,685		$	131,459		$	124,271
International pharmaceutical distribution and services	6,989			6,193			20,144			18,794
Medical-Surgical distribution and services	1,693			1,558			4,886			4,657
Total Distribution Solutions	53,617			49,436			156,489			147,722

Technology Solutions- products and services ⁽²⁾	—			694			240			2,098
U.S. Pharmaceutical and Specialty Solutions ⁽¹⁾													$	40,977		$	40,282
European Pharmaceutical Solutions ⁽²⁾													6,935			6,382
Medical-Surgical Solutions ⁽³⁾													1,703			1,533
Other													2,992			2,854
Total Revenues	$	53,617		$	50,130		$	156,729		$	149,820		$	52,607		$	51,051

Operating profit
Distribution Solutions ^{(3) (4)}	$	819		$	813		$	1,920		$	2,592
Technology Solutions ^{(5) (6)}	65			132			(46		)	126
U.S. Pharmaceutical and Specialty Solutions ⁽⁴⁾													$	543		$	475
European Pharmaceutical Solutions ⁽⁵⁾													(560		)	35
Medical-Surgical Solutions													93			108
Other ⁽⁶⁾													114			17
Total	884			945			1,874			2,718			190			635
Corporate Expenses, Net	(120		)	(91		)	(337		)	(270		)	(123		)	(109		)
Interest Expense	(67		)	(74		)	(204		)	(231		)	(61		)	(68		)
Income from Continuing Operations Before Income Taxes	$	697		$	780		$	1,333		$	2,217		$	6		$	458

Revenues, net by geographic area
United States													$	42,890		$	42,093
Foreign													9,717			8,958
Total Revenues													$	52,607		$	51,051


(1)	Revenues derived from services represent less than 2%1% of this segment’s total revenues.

(2)

~~2018 revenues for the Technology Solutions segment only include the results~~Revenues derived from services represent less than 10% of our EIS business. Effective April 1, 2017, our RHP business was transitioned from the Technology Solutions segment to the Distribution Solutions segment. The third quarter and first nine months of 2017 included the majority of our Core MTS Business which was contributed to Change Healthcare on March 1, 2017.this segment’s total revenues.


(3)	~~Distribution~~Revenues derived from services represent less than 1% of this segment’s total revenues.

(4)

Our U.S. Pharmaceutical and Specialty Solutions segment operating profit for the ~~third quarter~~first quarters of 2019 and ~~first nine months of~~ 2018 ~~include~~includes $21 million in pre-tax credits ~~of $2~~and $26 million ~~and $5 million, and for the third quarter and first nine months of 2017 include~~in pre-tax ~~credits of $155 million and $151 million~~charges related to our ~~LIFO~~last-in, first-out (“LIFO”) method of accounting for inventories. The LIFO ~~credits were higher~~inventory credit in ~~2017 compared to 2018~~the first quarter of 2019 was primarily due to ~~changes made to~~lower full year expectations for net price increases ~~during~~compared to the ~~third~~same period a year ago. Operating profit for the first quarter of ~~2017 and changes in estimated year end inventory levels. Additionally, the first nine months of 2017 included $144~~2019 also includes $35 million of ~~net~~ cash ~~proceeds representing~~receipts for our share of ~~net settlements of~~ antitrust ~~class action lawsuits against drug manufacturers.~~

~~(4)~~

Operating profit for our Distribution Solutions segment for the first nine months of 2018 includes a pre-tax gain of $43 million recognized from the 2018 second quarter sale of an equity investment. The first nine months of 2018 included a pre-tax non-cash charge of $189 million primarily to impair certain long-lived assets for our U.K. retail business, as well as non-cash pre-tax goodwill impairment charges of $350 million for the McKesson Europe reporting unit.legal settlements.

(5)

~~Operating profit for our Technology~~European Pharmaceutical Solutions segment for the third quarter and first nine months of 2018 includes a pre-tax gain of $109 million from the 2018 third quarter sale of our EIS business, a pre-tax credit of $46 million representing a reduction in our TRA liability and our proportionate share of loss from Change Healthcare of $90 million and $271 million. Additionally,segment’s operating profit for the first ~~nine months~~quarter of 2019 includes non-cash goodwill impairment charges (pre-tax and after-tax) of $570 million.

(6)

The first quarter of 2019 operating profit for Other includes pre-tax restructuring charges of $38 million (pre-tax and after-tax) primarily associated with the closure of retail pharmacy stores within our Canadian business. Operating profit for the first quarter of 2019 also includes a pre-tax gain from escrow settlement of $97 million representing certain indemnity and other claims related to our 2017 third quarter acquisition of Rexall Health. Operating profit for the first quarter of 2018 includes a pre-tax gain of $37 million ~~from~~(after-tax gain of $22 million) upon the ~~Healthcare Technology Net Asset Exchange related to the final~~finalization of net working capital and other ~~adjustments.~~adjustments related to the contribution of the majority of our Core MTS Business to Change Healthcare in the fourth quarter of 2017.


~~(6)~~	~~The first nine months of 2017 include a non-cash pre-tax goodwill impairment charge of $290 million for the EIS reporting unit within our Technology Solutions segment.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONCLUDED)~~

~~(UNAUDITED)~~

As previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, on January 2, 2018, the Executive Vice President and Group President who was our segment manager of the Distribution Solutions segment retired from the Company. As a result, the Company’s chief operating decision maker is currently evaluating our management and operating structure. We anticipate this evaluation will result in a change in our existing operating segment structure, commencing with our first quarter of 2019.

3228

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McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of ~~McKesson Corporation (“McKesson,”~~ the ~~“Company,” or “we” and other similar pronouns)~~Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2018 previously filed with the SEC on May ~~22, 2017~~24, 2018 (“~~2017~~2018 Annual Report”).

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Certain statements in this report constitute forward-looking statements. See “Factors Affecting Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

2019 Operating Segments

Commencing in the first quarter of 2019, a new segment reporting structure was implemented which resulted in three reportable segments on a retrospective basis: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including operating profit before interest expense, income taxes and results from discontinued operations. Refer to Financial Note 17, “Segments of Business” for more information.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~Results~~RESULTS OF OPERATIONS

Overview of ~~Operations~~

~~Overview:~~Consolidated Results:

(Dollars in millions, except per share data) Quarter Ended December 31,
Nine Months Ended December 31,
2017 2016 Change 2017 2016 Change
Revenues $ 53,617
$ 50,130
7
% $ 156,729
$ 149,820
5
%

Gross Profit $ 2,715
$ 2,812
(3 ) % $ 8,109
$ 8,475
(4 ) %

Gross Profit Margin 5.06
5.61
(55 ) bp 5.17
5.66
(49 ) bp

Operating Expenses:
Operating Expenses $ (1,984 ) $ (1,981 ) -
% $ (5,920 ) $ (5,802 ) 2
%
Gain from Sale of Business 109
—
NM
109
—
NM

Goodwill Impairment Charges —
—
NM
(350 ) (290 ) 21

Restructuring and Asset Impairment Charges (6 ) —
NM
(242 ) —
NM

Total Operating Expenses $ (1,881 ) $ (1,981 ) (5 ) % $ (6,403 ) $ (6,092 ) 5
%

Loss from Equity Method Investment in Change Healthcare $ (90 ) $ —
NM
$ (271 ) $ —
NM

Income from Continuing Operations Before Income Taxes $ 697
$ 780
(11 ) % $ 1,333
$ 2,217
(40 ) %
Income Tax Benefit (Expense) 263
(131 ) (301 ) 46
(570 ) (108 )
Income from Continuing Operations 960
649
48
1,379
1,647
(16 )
Income (Loss) from Discontinued Operations, Net of Tax 1
(3 ) (133 ) 3
(117 ) (103 )
Net Income 961
646
49
1,382
1,530
(10 )
Net Income Attributable to Noncontrolling Interests (58 ) (13 ) 346
(169 ) (48 ) 252

Net Income Attributable to McKesson Corporation $ 903
$ 633
43
% $ 1,213
$ 1,482
(18 ) %

Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations $ 4.32
$ 2.86
51
% $ 5.75
$ 7.07
(19 ) %
Discontinued Operations 0.01
(0.01 ) (200 ) 0.01
(0.51 ) (102 )
Total $ 4.33
$ 2.85
52
% $ 5.76
$ 6.56
(12 ) %

Weighted Average Diluted Common Shares 208
222
(6 ) % 210
226
(7 ) %

~~bp - basis points~~



(Dollars in millions, except per share data)	Quarter Ended June 30,
(Dollars in millions, except per share data)	2018			2017			Change
Revenues	$	52,607		$	51,051		3		%

Gross Profit	2,779			2,560			9

Gross Profit Margin	5.28			5.01			27		bp

Operating Expenses:
Operating Expenses	(2,127		)	(1,927		)	10
Goodwill Impairment Charges	(570		)	—			NM
Restructuring and Asset Impairment Charges	(96		)	—			NM
Gain from Escrow Settlement	97			—			NM
Total Operating Expenses	(2,696		)	(1,927		)	40

Operating Expenses as a Percentage of Revenues	5.12			3.77			135		bp

Other Income, Net	40			13			208

Loss from Equity Method Investment in Change Healthcare	(56		)	(120		)	(53	)

Interest Expense	(61		)	(68		)	(10	)

Income from Continuing Operations Before Income Taxes	6			458			(99	)
Income Tax Expense	(87		)	(95		)	(8	)
Income (Loss) from Continuing Operations	(81		)	363			(122	)
Income from Discontinued Operations, Net of Tax	1			2			(50	)
Net Income (Loss)	(80		)	365			(122	)
Net Income Attributable to Noncontrolling Interests	(58		)	(56		)	4
Net Income (Loss) Attributable to McKesson Corporation	$	(138	)	$	309		(145	)	%

Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	(0.69	)	$	1.44		(148	)	%
Discontinued Operations	0.01			0.01			-
Total	$	(0.68	)	$	1.45		(147	)	%

Weighted Average Diluted Common Shares	202			213			(5	)	%

NM - not meaningful

Revenues

Revenues for the first quarter of 2019 increased ~~for 2018~~ compared to ~~2017~~the same period a year ago primarily due to market growth, ~~our~~ business acquisitions and expanded business with existing customers within our ~~North America pharmaceutical distribution businesses.~~U.S. Pharmaceutical and Specialty Solutions segment, partially offset by loss of customers. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversion.

3430

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Gross profit decreased in 2018 primarily due to the 2017 fourth quarter contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to a joint venture, as further discussed below, significant government reimbursement reductions in the United Kingdom (“U.K.”), the competitive sell-side environment and lower last-in, first-out (“LIFO”) credits. These decreases in 2018 were partially offset by market growth, procurement benefits realized through the joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”) and our business acquisitions. Gross profit for the first nine months of 2018 was unfavorably affected by weaker pharmaceutical manufacturer pricing trends, and for the first nine months of 2017 benefited from $144 million of cash receipts representing our share of antitrust legal settlements. LIFO credits were $2 million and $155 million for the third quarters of 2018 and 2017, and $5 million and $151 million for the first nine months of 2018 and 2017. LIFO credits were higher in 2017 due to changes made to full year expectations for net price increases during the third quarter of 2017 and changes in estimated year end inventory levels.

Gross profit margin for 2018 decreased primarily due to the 2017 fourth quarter contribution of the Core MTS Business, the competitive sell-side pricing environment and our mix of business. These decreases were partially offset by our business acquisitions.

On March 1, 2017, we contributed our Core MTS Business to the newly formed joint venture, Change Healthcare, LLC (“Change Healthcare”) under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Holdings, Inc. (“Change”) and others including shareholders of Change. We retained our RelayHealth Pharmacy (“RHP”) and Enterprise Information Solutions (“EIS”) businesses. The EIS business was subsequently sold to a third party in the third quarter of 2018. We accounted for this transaction as a sale of the Core MTS Business and a subsequent purchase of a 70% interest in the newly formed joint venture. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q.

Operating expenses for the third quarter of 2018 decreased 5% and for the first nine months of 2018 increased 5% compared to the same periods a year ago. Additionally, operating expenses were affected by:

~~Higher operating expenses from our business acquisitions;~~

~~Pre-tax gain of $109 million (after-tax gain of $30 million) for the third quarter of 2018 from the sale of our EIS business in our Technology Solutions segment, as further discussed below;~~

Pre-tax credit of $46 million ($30 million after tax) for the third quarter of 2018 representing a reduction in our tax receivable agreement (“TRA”) liability due to the December 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”);

2018 second quarter non-cash goodwill impairment charge of $350 million (pre-tax and after-tax) related to our McKesson Europe AG (“McKesson Europe”) reporting unit within our Distribution Solutions segment for the first nine months of 2018, as further discussed below;

2017 second quarter non-cash goodwill impairment charge of $290 million pre-tax ($282 million after-tax) related to our EIS reporting unit within our Technology Solutions segment for the first nine months of 2017;

2018 second quarter non-cash asset impairment charge of $189 million pre-tax ($157 million after-tax) and restructuring charge of $53 million pre-tax ($45 million after-tax) for the first nine months of 2018 primarily related to our retail business in the U.K., as further discussed below. These charges were all recorded within our Distribution Solutions segment; and

2018 first quarter gain of $37 million pre-tax ($22 million after-tax) for the first nine months of 2018 from the final net working capital and other adjustments related to the Healthcare Technology Net Asset Exchange.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Our investment in Change Healthcare is accounted for using the equity method of accounting. During the third quarter and first nine months of 2018, we recorded our proportionate share of loss from Change Healthcare of $90 million and $271 million under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statements of operations. As our investment is accounted for using a one-month lag, the effects of the enactment of the 2017 Tax Act are expected to be recognized in our condensed statement of operations in the fourth quarter of 2018. We expect our proportionate share of a provisional net benefit recognized by Change Healthcare from the enactment of the 2017 Tax Act to be approximately $70 million to $110 million primarily due to reduction in future applicable tax rate. The impact of the 2017 Tax Act for Change Healthcare may differ materially from this provisional amount.

Income from continuing operations before income taxes for 2018 decreased primarily due to lower gross profit and our proportionate share of loss from our equity method investment in Change Healthcare. The results for the first nine months of 2018 decreased also due to higher operating expenses driven by the goodwill impairment charge and the restructuring and asset impairment charges related to our McKesson Europe business within our Distribution Solutions segment.

Our reported income tax benefit rates were 37.7% and 3.5% for the third quarter and first nine months of 2018 compared to income tax expense rates of 16.8% and 25.7% for the third quarter and first nine months of 2017. Fluctuations in our reported income tax rates are primarily due to discrete items mainly driven by the impact of the 2017 Tax Act, the impact of nondeductible impairment charges, changes within our business mix of income, and the effect of an intercompany sale of software.

In connection with our initial analysis of the impact of the 2017 Tax Act, we recorded a provisional net discrete tax benefit of $370 million during the third quarter of 2018. This net benefit mainly arises from changing the expected future consequences of settling differences between the book and tax basis of assets and liabilities, mainly driven by a decrease of our deferred tax liabilities for inventories and investments; partially offset by establishing a new obligation for the taxation of certain unrepatriated earnings of our foreign subsidiaries. Refer to Financial Note 8, “Income Taxes,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Our tax rates for 2018 and 2017 were unfavorably affected by non-deductible goodwill impairment charges. Income tax benefit for the first nine months of 2018 included a discrete tax benefit of $370 million related to the impact of the 2017 Tax Act, as described above, and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits. Income tax expense for the first nine months of 2017 included discrete tax benefits of $47 million related to the adoption of the amended accounting guidance on share-based compensation.

Loss from discontinued operations, net of tax, for the first nine months of 2017 included an after-tax loss from discontinued operations of $113 million resulting from the sale of our Brazilian pharmaceutical distribution business.

Net income attributable to McKesson Corporation for the third quarters of 2018 and 2017 was $903 million and $633 million and for the first nine months of 2018 and 2017 was $1,213 million and $1,482 million. Diluted earnings per common share attributable to McKesson for the third quarters of 2018 and 2017 were $4.33 and $2.85 and for the first nine months of 2018 and 2017 were $5.76 and $6.56. Additionally, our 2018 diluted earnings per share reflect the cumulative effects of share repurchases.

~~Operating Segments~~

~~Sale of EIS Business~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~McKesson Europe Impairments and Restructuring~~

During the second quarter of 2018, our McKesson Europe business within our Distribution Solutions segment experienced a decline in its estimated future cash flows, primarily in our U.K. retail business, driven by significant government reimbursement reductions affecting retail pharmacy economics across the U.K. market. As a result, we recognized a non-cash pre-tax and after-tax charge of $350 million to impair the carrying value of goodwill for our McKesson Europe reporting unit in the second quarter of 2018. Other risks, expenses and future developments that we were unable to anticipate in the second quarter of 2018 may require us to further revise the future projected cash flows, which could adversely affect the fair value of this reporting unit. Accordingly, we may be required to record additional goodwill impairment charges in future periods.

In the second quarter of 2018, we also recorded non-cash pre-tax charges of $189 million ($157 million after-tax) to impair the carrying value of certain intangible assets and other assets primarily related to McKesson Europe’s U.K. retail business. The charges were primarily due to the previously discussed government reimbursement reductions.

On September 29, 2017, we committed to a restructuring plan, which primarily consists of the closures of underperforming retail stores in the U.K. and a reduction in workforce. The plan is expected to be substantially implemented prior to the first half of 2019. As part of this plan, we recorded a pre-tax charge of $6 million ($5 million after-tax) and $53 million ($45 million after-tax) during the third quarter and first nine months of 2018 primarily representing employee severance and lease exit costs.

We expect to record total pre-tax impairment and restructuring charges of approximately $650 million to $750 million during 2018 for our McKesson Europe business, of which $592 million of pre-tax charges (including the $350 million goodwill impairment charge) were recorded during the first nine months of 2018. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs.

Refer to Financial Notes 3 and 4, “Goodwill Impairment Charges” and “Restructuring and Asset Impairment Charges,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Revenues:~~

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 Change 2017 2016 Change
Distribution Solutions
North America pharmaceutical distribution and services $ 44,935
$ 41,685
8
% $ 131,459
$ 124,271
6
%
International pharmaceutical distribution and services 6,989
6,193
13
20,144
18,794
7

Medical-Surgical distribution and services 1,693
1,558
9
4,886
4,657
5

Total Distribution Solutions 53,617
49,436
8
156,489
147,722
6

Technology Solutions - products and services —
694
NM
240
2,098
(89 )
Total Revenues $ 53,617
$ 50,130
7
% $ 156,729
$ 149,820
5
%

~~NM - not meaningful~~

~~Revenues for the third quarter and first nine months of 2018 increased 7% and 5% compared to the same periods a year ago due to our Distribution Solutions segment.~~

~~Distribution Solutions~~

North America pharmaceutical distribution and services revenues for the third quarter and first nine months of 2018 increased 8% and 6% primarily due to market growth, our business acquisitions including the 2017 third quarter acquisition of Rexall Health and expanded business with existing customers. The increases were partially offset by lost customers. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversions.

International pharmaceutical distribution and services revenues for the third quarter and first nine months of 2018 increased 13% and 7% compared to the same periods a year ago primarily due to our business acquisitions and market growth. International revenues were impacted by favorable foreign currency effects of 9% for the third quarter of 2018 primarily reflecting an increase in British pound sterling and Euro against the U.S. Dollar.

~~Medical-Surgical distribution and services revenues for 2018 increased primarily due to market growth.~~

~~Technology Solutions:~~ Technology Solutions revenues for 2018 decreased primarily due to the deconsolidation of the Core MTS Business in March 2017, the transition of our RHP business to our Distribution Solutions segment in April 2017 and the sale of our EIS business in October 2017. As a result, this segment’s 2018 revenues included only our EIS business.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Gross Profit:~~

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 Change 2017 2016 Change
Gross Profit
Distribution Solutions $ 2,715
$ 2,424
12
% $ 7,989
$ 7,333
9
%
Technology Solutions —
388
NM
120
1,142
(89 )
Total $ 2,715
$ 2,812
(3 ) % $ 8,109
$ 8,475
(4 ) %
Gross Profit Margin
Distribution Solutions 5.06
4.90
16
bp 5.11
4.96
15
bp
Technology Solutions —
55.91
NM
50.00
54.43
(443 )
Total 5.06
5.61
(55 ) bp 5.17
5.66
(49 ) bp

~~bp - basis points~~

~~NM - not meaningful~~Profit

Gross profit and gross profit margin ~~decreased~~ for ~~2018 compared to~~ the ~~same periods a year ago.~~

~~Distribution Solutions~~

~~Distribution Solutions segment’s gross profit and gross profit margin for 2018~~first quarter of 2019 increased compared to the same ~~periods~~period a year ago primarily due to market growth ~~procurement benefits realized through ClarusONE,~~and our business acquisitions, higher compensation from branded pharmaceutical manufacturers reflecting timing, and ~~the transition of our RHP business from our Technology Solutions segment.~~LIFO credits as further discussed below. These increases were partially offset by ~~significant~~ government reimbursement reductions inacross Canada and the United Kingdom (“U.K.”), ~~the competitive sell-side pricing environment,~~ and our mix of ~~business. Gross~~business and customer losses. Additionally, gross profit ~~for the third quarter and first nine months of 2018 reflected lower LIFO credits, as further discussed below. Gross profit for~~in the first ~~nine months~~quarter of ~~2017~~2019 included ~~$144~~$35 million of net cash ~~receipts~~proceeds representing our share of antitrust legal settlements. ~~Gross profit margin for~~

LIFO inventory credits were $21 million in the first ~~nine months~~quarter of ~~2018 was also unfavorably affected by weaker pharmaceutical manufacturer pricing trends.~~

~~Distribution Solutions segment’s gross profit for~~2019 and charges were $26 million in the ~~third~~first quarter ~~and first nine months~~ of 2018 includes pre-tax credits of $2 million and $5 million and for the third quarter and first nine months of 2017 includes pre-tax credits of $155 million and $151 million related to our LIFO method of accounting for inventories.2018. Our ~~North America distribution~~U.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related inventory losses. A LIFO expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our quarterly LIFO expense is based on our estimates of annual LIFO expense which isare impacted by expected changes in year-end inventory quantities, product mix and manufacturer pricing practices, which may be influenced by market and other external influences. Changes to any of the above factors could have a material impact to our annual LIFO expense. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year. The LIFO ~~credits were higher~~inventory credit in ~~2017 compared to 2018~~the first quarter of 2019 was primarily due to ~~changes made to~~lower full year expectations for net price increases ~~during the third quarter of 2017 and changes in estimated year end inventory levels.~~

~~Technology Solutions~~

~~Technology Solutions segment’s gross profit for 2018 decreased primarily due~~compared to the 2017 fourth quarter deconsolidation of the Core MTS Business, the transition of our RHP business to our Distribution Solutions segment in April 2017 and the sale of our EIS business in October 2017. Assame period a ~~result, this segment’s 2018 gross profit included only our EIS business.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Operating Expenses, Other Income, Net and Loss from Equity Method Investment:~~

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 Change 2017 2016 Change
Operating Expenses
Distribution Solutions
Operating Expenses ⁽¹⁾
$ 1,908
$ 1,628
17
% $ 5,572
$ 4,784
16
%
Goodwill Impairment Charge —
—
NM
350
—
NM

Restructuring and Asset Impairment Charges 6
—
NM
242
—
NM

Total Distribution Solutions 1,914
1,628
18
6,164
4,784
29

Technology Solutions

Operating Expenses ⁽²⁾
(46 ) 256
(118 )    5
727
(99 )
Gain from Sale of Business (109 ) —
NM
(109 ) —
NM

Goodwill Impairment Charge —
—
NM
—
290
NM

Total Technology Solutions (155 ) 256
(161 ) (104 ) 1,017
(110 )
Corporate 122
97
26
   343
291
18

Total $ 1,881
$ 1,981
(5 ) % $ 6,403
$ 6,092
5
%

Operating Expenses as a Percentage of Revenues
Distribution Solutions 3.57
3.29
28
bp 3.94
3.24
70
bp
Technology Solutions —
36.89
NM
   (43.33 ) 48.47
(9,180 )
Total 3.51
3.95
(44 ) bp 4.09
4.07
2
bp

Other Income, Net
Distribution Solutions $ 18
$ 17
6
% $ 95
$ 43
121
%
Technology Solutions —
—
NM
   1
1
-

Corporate 2
6
(67 ) 6
21
(71 )
Total $ 20
$ 23
(13 ) % $ 102
$ 65
57
%

Loss from Equity Method Investment in Change Healthcare - Technology Solutions $ 90
$ —
NM
$ 271
$ —
NM

~~bp - basis points~~

~~NM - not meaningful~~

~~(1) The amounts exclude the goodwill impairment charge and restructuring and asset impairment charges.~~

~~(2) The amounts exclude the gain from sale of business and goodwill impairment charge.~~year ago.

Operating Expenses

Operating expenses, and operating expenses as a percentage of revenues, for the ~~third~~first quarter ~~decreased 5% and first nine months~~ of ~~2018~~2019 increased 5% compared to the same ~~periods~~period a year ~~ago.~~ago primarily due to:

Non-cash goodwill impairment charges (pre-tax and after-tax) of $570 million for our European Pharmaceutical Solutions segment, as further described below;

Pre-tax restructuring and asset impairment charges of $96 million ($85 million after-tax) primarily representing employee severance, exit-related costs and asset impairment charges for our 2019 strategic growth initiative, as further described below; and

Higher expenses due to business acquisitions, partially offset by;

Pre-tax and after-tax gain from an escrow settlement of $97 million representing certain indemnity and other claims related to our third quarter 2017 acquisition of Rexall Health;

Pre-tax gain of $37 million (after-tax gain of $22 million) upon the finalization of net working capital and other adjustments related to the fourth quarter 2017 contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to a joint venture, Change Healthcare, LLC (“Change Healthcare”).

Goodwill Impairments

Upon the first quarter 2019 segment changes, our European Pharmaceutical Solutions segment was split into two distinct reporting units - retail pharmacy operations (“Consumer Solutions”) and wholesale operations (“Pharmacy Solutions”). As a result, we were required to perform a goodwill impairment test for these two new reporting units and recorded a non-cash goodwill impairment charge (pre-tax and after-tax) of $238 million. Additionally, during the first quarter of 2019, these two reporting units had a decline in the estimated future cash flows primarily driven by additional U.K. government reimbursement reductions which were announced on June 29, 2018. At June 30, 2018, our Consumer Solutions and Pharmacy Solutions reporting units’ remaining goodwill balances were $462 million and $751 million. Other risks, expenses and future developments that we were unable to anticipate as of the testing date may require us to further revise the future projected cash flows, which could adversely affect the fair value of our reporting units in future periods. As a result, we may be required to record additional impairment charges. Refer to Financial Note 3, “Goodwill Impairment Charges” to the accompanying condensed financial statements appearing in this Quarterly Report on Form 10-Q.

4031

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~Distribution Solutions~~Fiscal 2019 Strategic Growth Initiative

~~Distribution Solutions segment’s~~On April 25, 2018, the Company announced a multi-year strategic growth initiative. As part of the preliminary phase of this initiative, we committed to a restructuring plan to optimize our operating ~~expenses for~~model and cost structure which will be substantially implemented by the ~~first nine months~~end of ~~2018 increased~~2019. As a result, we recorded pre-tax charges of $58 million ($55 million after-tax) primarily ~~due to the 2018 second quarter non-cash goodwill impairment charge of $350 million (pre-tax~~representing severance, exit-related costs and ~~after-tax) for our McKesson Europe reporting unit, and the 2018 second quarter non-cash~~ asset impairment charges during the first quarter of ~~$189~~2019. We expect to record total after-tax charges of approximately $150 million ~~pre-tax ($157~~to $210 million ~~after-tax) and~~during 2019. Estimated remaining restructuring charges primarily consist of ~~$53 million pre-tax ($45 million after-tax) primarily related~~exit-related costs. Refer to ~~McKesson Europe’s U.K. retail business. The increases for the third quarter~~Financial Note 5, “Restructuring and first nine months of 2018 were also due to higher operating expenses from our business acquisitions. Additionally, fluctuation in foreign currency exchange rates had an unfavorable effect on operating expenses for the third quarter of 2018.

~~Technology Solutions~~

~~Technology Solutions segment’s operating expenses for 2018 decreased primarily due~~Asset Impairment Charges” to the 2017 fourth quarter deconsolidation of our Core MTS Business, a pre-tax gain of $109 million (after-tax gain of $30 million) from the 2018 third quarter sale of our EIS business and a pre-tax credit of $46 million ($30 million after-tax) representing a reductionaccompanying condensed consolidated financial statements appearing in our TRA liability. Operating expenses for the first nine months of 2018 included the 2018 first quarter gain of $37 million pre-tax (after-tax gain of $22 million) from the final net working capital and other adjustments related to the Healthcare Technology Net Asset Exchange. Operating expenses for the first nine months of 2017 included the 2017 second quarter non-cash goodwill impairment charge of $290 million pre-tax ($282 million after-tax) for our EIS reporting unit.

~~Corporate~~

~~Corporate expenses increased for 2018 compared to the same periods a year ago primarily due to higher professional fees incurred for Corporate initiatives.~~this Quarterly Report on Form 10-Q.

Other Income, Net: Other income, net, for the ~~third~~first quarter of ~~2018 decreased due to lower interest income for Corporate and first nine months of 2018~~2019 increased compared to the same ~~periods~~period a year ago primarily due to ~~a pre-tax gain of $43 million ($26 million after-tax) recognized from the~~gains on sale of an equity method ~~investment within our Distribution Solutions segment, partially offset by lower interest income for Corporate.~~investments.

Loss from Equity Method Investment in Change Healthcare: ~~The third quarter~~Our investment in Change Healthcare is accounted for using the equity method of accounting. During the first quarters of 2019 and ~~first nine months of~~ 2018, ~~included~~we recorded our proportionate share of loss from Change Healthcare of ~~$90~~$56 million and ~~$271~~$120 million, which primarily consisted of transaction and integration expenses incurred by the joint venture and ~~fair value adjustments including~~ amortization expenses associated with equity method intangible assets. ~~As our investment is accounted for using a one-month lag,~~This amount was recorded under the ~~effects of the enactment of the 2017 Tax Act are expected to be recognized~~caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statement of ~~operations~~operations. Refer to Financial Note 2, “Healthcare Technology Net Asset Exchange,” to the accompanying condensed consolidated financial statements appearing in the fourth quarter of 2018. We expect our proportionate share of a provisional net benefit recognized by Change Healthcare from the enactment of the 2017 Tax Act to be approximately $70 million to $110 million primarily due to a reduction in future applicable tax rate. The impact of the 2017 Tax Act for Change Healthcare may differ materially from this ~~provisional amount.~~Quarterly Report on Form 10‑Q.

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~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Acquisition-Related Expenses and Adjustments

Acquisition-related expenses, which included transaction and integration expenses that were directly related to business acquisitions and the gain on ~~the~~ Healthcare Technology Net Asset Exchange, were ~~$43~~$52 million and ~~$75~~$38 million ~~for~~in the ~~third~~first quarters of 2019 and 2018. 2018 ~~and 2017, and $95 million and $165 million for the first nine months of 2018 and 2017. The third quarter and first nine months of 2018 include~~reflects our proportionate share of transaction and integration expenses incurred by Change ~~Healthcare. The first nine months of 2018 includes a~~Healthcare, partially offset by the $37 million gain associated with the final net working capital and other ~~adjustments from the Healthcare Technology Net Asset Exchange.~~adjustments.

Acquisition-related expenses and adjustments were as follows:


	Quarter Ended December 31,				Nine Months Ended December 31,					Quarter Ended June 30,
(Dollars in millions)	2017		2016		2017			2016		2018		2017
Operating Expenses
Integration related expenses	$	12	$	22	$	27		$	67	$	16	$	9
Restructuring, severance and relocation	12		7		18			18		3		5
Transaction closing expenses	—		43		11			72		1		12
Gain on Healthcare Technology Net Asset Exchange	—		—		(37		)	—		—		(37		)
Other Expense ⁽¹⁾	19		3		76			8		32		49
Acquisition Expenses and Related Adjustments	$	43	$	75	$	95		$	165
Acquisition-Related Expenses and Adjustments										$	52	$	38


(1)	~~Fiscal 2018 includes~~Includes our proportionate share of transaction and integration expenses incurred by Change Healthcare, ~~excluding certain fair value adjustments,~~ which was recorded within “Loss from Equity Method Investment in Change Healthcare”.

~~Acquisition-related expenses and adjustments by segment were as follows:~~

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 2017 2016
Distributions Solutions $ 25
$ 43
$ 56
$ 103
Technology Solutions 16
33
37
58
Corporate 2
(1 ) 2
4
Acquisition-Related Expenses and Adjustments ⁽¹⁾
$ 43
$ 75
$ 95
$ 165


~~(1)~~	~~The amounts were recorded in operating expenses and other income, net.~~

Amortization Expenses of Acquired Intangible Assets

Amortization expenses of intangible assets directly related to business acquisitions and the ~~formation of the Change~~ Healthcare ~~joint venture~~Technology Net Asset Exchange were ~~$193~~$199 million and ~~$102 million for the third quarters of 2018 and 2017 and $584 million and $332~~$192 million for the first ~~nine months~~quarters of 2019 and 2018, ~~and 2017. These expenses~~which were primarily recorded in ~~our~~ operating expenses and ~~in our proportionate share of loss~~under the caption, “Loss from ~~the equity method investment~~Equity Method Investment in Change ~~Healthcare.~~Healthcare”.

~~Amortization expenses by segment were as follows:~~

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 2017 2016
Distribution Solutions $ 122
$ 100
$ 369
$ 311
Technology Solutions ⁽¹⁾
71
2
215
21
Total $ 193
$ 102
$ 584
$ 332


~~(1)~~	Fiscal 2018 primarily represents amortization expenses of equity method intangibles associated with the Change Healthcare joint venture, which were recorded in our proportionate share of the loss from Change Healthcare.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Income Taxes:During the first quarters of 2019 and 2018, income tax expense related to continuing operations was $87 million and $95 million. During the first quarter of 2019, we recognized a $20 million discrete tax benefit for the reduction in an unrecognized tax benefit due to applicable administrative guidance issued by the tax authorities. During the first quarter of 2019, no tax benefit was recognized for a pre-tax charge of $570 million to impair the carrying value of goodwill for two reporting units within our European Pharmaceutical Solution segment, as described in our Financial Note 3, “Goodwill Impairment Charges,” as this charge is not deductible for income tax purposes. Fluctuations in our reported income tax rates are primarily due to the impact of nondeductible impairment charges as well as changes within our business mix of income and discrete items recognized in the quarter.

On December 22, 2017, the U.S. government enacted comprehensive new tax legislation under the Tax Cuts and Jobs Act (the "2017 Tax Act"). The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. During 2018, in accordance with this guidance, we recognized a provisional tax benefit of $1,324 million due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate and a provisional tax expense of $457 million for the one-time tax imposed on certain accumulated earnings and profits (“E&P”) of our foreign subsidiaries. During the first quarter of 2019, we have not recognized any incremental adjustments to our provisional amounts. Our accounting for the impact of the 2017 Tax Act is incomplete because we have not yet obtained, prepared, or analyzed all the information needed to finalize the accounting requirement. We will continue to assess the income tax effects of the 2017 Tax Act during the measurement period and record any necessary adjustments in the period such adjustments are identified.

Net Income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests for the first quarter of 2019 primarily represents ClarusONE, Vantage Oncology Holdings, LLC (“Vantage”) and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe AG (“McKesson Europe”) share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under a domination and profit and loss transfer agreement (the “Domination Agreement”). Refer to Financial Note 7, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form10-Q for additional information.

Net Income (Loss) Attributable to McKesson Corporation: Net income (loss) attributable to McKesson Corporation was a net loss of $138 million and net income of $309 million for the first quarters of 2019 and 2018. Diluted loss per common share attributable to McKesson Corporation was $0.68 in the first quarter of 2019 and diluted earnings per common share attributable to McKesson Corporation was $1.45 in the first quarter of 2018. The first quarter of 2019 diluted loss per share was calculated by excluding dilutive securities from the denominator due to their anti-dilutive effects. Additionally, our 2019 and 2018 diluted earnings per share reflect the cumulative effects of share repurchases.

Weighted Average Diluted Common Shares Outstanding:Diluted earnings (loss) per common share was calculated based on a weighted average number of shares outstanding of 202 million and 213 million for the first quarters of 2019 and 2018. Weighted average diluted shares for 2019 decreased from 2018 primarily reflecting common stock repurchases in the first quarter of 2019.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Segment Results:

Revenues:



	Quarter Ended June 30,
(Dollars in millions)	2018		2017		Change
U.S. Pharmaceutical and Specialty Solutions	$	40,977	$	40,282	2	%
European Pharmaceutical Solutions	6,935		6,382		9
Medical-Surgical Solutions	1,703		1,533		11
Other	2,992		2,854		5
Total Revenues	$	52,607	$	51,051	3	%

U.S. Pharmaceutical and Specialty Solutions

U.S. Pharmaceutical and Specialty Solutions revenues for the first quarter of 2019 increased compared to the same period a year ago primarily due to market growth, our business acquisitions and expanded business with existing customers, partially offset by loss of customers. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversions.

European Pharmaceutical Solutions

European Pharmaceutical Solutions revenues for the first quarter of 2019 increased 9% compared to the same period a year ago. Excluding foreign currency effects, revenues increased 1% primarily due to market growth and business acquisitions, offset by the competitive environment in France and a reduction in McKesson owned retail pharmacies in the U.K. due to pharmacy closures or divestitures.

Medical-Surgical Solutions

Medical-Surgical Solutions revenues for the first quarter of 2019 increased 11% primarily due to market growth and our 2019 acquisition of Medical Specialties Distributors LLC (“MSD”).

Other

Other revenues for the first quarter of 2019 increased 5% compared to the same period a year ago. Excluding foreign currency effects, revenues increased 1% primarily due to market growth in our McKesson Canada business, partially offset by generic pricing government actions across Canada and the sale of our Enterprise Information Solutions (“EIS”) business in the third quarter of 2018.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Segment Operating Profit, Corporate Expenses, Net and Interest Expense:

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2017 2016 Change 2017 2016 Change
Segment Operating Profit (Loss) ⁽¹⁾

Distribution Solutions $ 819
$ 813
1
% $ 1,920
$ 2,592
(26 ) %
Technology Solutions 65
132
(51 ) (46 ) 126
(137 )
Subtotal 884
945
(6 ) 1,874
2,718
(31 )
Corporate Expenses, Net (120 ) (91 ) 32
(337 ) (270 ) 25

Interest Expense (67 ) (74 ) (9 )    (204 ) (231 ) (12 )
Income from Continuing Operations Before Income Taxes $ 697
$ 780
(11 ) % $ 1,333
$ 2,217
(40 ) %

Segment Operating Profit (Loss) Margin
Distribution Solutions 1.53
% 1.64
% (11 ) bp 1.23
% 1.75
% (52 ) bp
Technology Solutions —
19.02
NM
(19.17 ) 6.01
(2,518 )

~~bp - basis points~~

~~NM - not meaningful~~



	Quarter Ended June 30,
(Dollars in millions)	2018				2017				Change
Segment Operating Profit ⁽¹⁾
U.S. Pharmaceutical and Specialty Solutions	$	543			$	475			14		%
European Pharmaceutical Solutions	(560		)		35				(1,700	)
Medical-Surgical Solutions	93				108				(14	)
Other	114				17				571
Subtotal	190				635				(70	)
Corporate Expenses, Net	(123		)		(109		)		13
Interest Expense	(61		)		(68		)		(10	)
Income from Continuing Operations Before Income Taxes	$	6			$	458			(99	)	%

Segment Operating Profit Margin
U.S. Pharmaceutical and Specialty Solutions	1.33			%	1.18			%	15		bp
European Pharmaceutical Solutions	(8.07		)		0.55				(862	)
Medical-Surgical Solutions	5.46				7.05				(159	)


(1)	Segment operating profit ~~(loss)~~ includes gross profit, net of operating expenses, as well as other income, net, for our ~~two~~ operating segments.

Segment Operating Profit ~~(Loss)~~

~~Distribution~~U.S. Pharmaceutical and Specialty Solutions:Operating profit and operating profit margin increased for the U.S. Pharmaceutical and Specialty Solutions segment ~~for~~in 2019 compared to the third quarter of 2018 due primarily to higher gross profit from market growth, our business acquisitions and transition of our RHP business from our Technology Solutions segment. Operating profit margin decreased for the segment for the third quarter of 2018same prior year period primarily due to market growth, higher profit reflecting net cash proceeds representing our share of antitrust legal settlements, higher compensation from branded manufacturers reflecting timing and LIFO credits, partially offset by customer losses and our mix of ~~business and higher operating expenses as a percentage of revenues driven by our business acquisitions.~~ business.

European Pharmaceutical Solutions: Operating profit and operating profit margin decreased for the European Pharmaceutical Solutions segment ~~for the first nine months of 2018 compared to the same periods a year ago~~in 2019 primarily due to ~~our mix of business and higher operating expenses as a percentage of revenues driven primarily by a~~non-cash goodwill impairment ~~charge~~charges (pre-tax and after-tax) of $570 million for our Pharmacy Solutions and Consumer Solutions reporting units within this segment, primarily triggered by additional U.K. government reimbursement reductions announced on June 29, 2018 and implementing a new segment reporting structure. Operating profit and operating profit margin in 2019 were also unfavorably affected by restructuring charges and asset ~~impairment charges related to our McKesson Europe business. These decreases were partially offset by~~impairments, incremental government reimbursement reductions in the ~~improved gross profit margin primarily due to market growth within our North America distribution businesses, procurement benefits~~U.K. and ~~our business acquisitions.~~the competitive environment in France.

~~Technology~~Medical-Surgical Solutions: Operating profit for the Medical-Surgical Solutions segment decreased ~~for 2018~~in 2019 compared to the same prior year period primarily due to restructuring charges. Operating profit margin decreased in 2019 compared to the ~~2017 fourth quarter deconsolidation of our Core MTS Business and loss from the equity method investment in Change Healthcare. The decrease is~~same prior year period primarily due to restructuring charges, partially offset by ~~a gain from the~~our mix of business.

Other: Operating profit for Other increased primarily due to market growth, our business acquisitions in McKesson Canada, partially offset by restructuring charges and generic pricing government actions related to our Canadian business, and sale of our EIS business ~~and reduction~~ in ~~our TRA liability.~~the third quarter of 2018. Operating profit for Other for the first ~~nine months~~quarter of ~~2017 included~~2019 also includes a ~~goodwill impairment charge relating~~gain from an escrow settlement of $97 million in the first quarter of 2019 representing certain indemnity and other claims related to our ~~EIS business.~~third quarter 2017 acquisition of Rexall Health. Growth in our McKesson Prescription Technology Solutions also contributed to the increase in 2019 operating profit. Operating profit for Other for the first quarter of 2018 includes a pre-tax gain of $37 million (after-tax gain of $22 million) upon the finalization of net working capital and other adjustments related to the contribution of the Core MTS Business to Change Healthcare, in the fourth quarter of 2017.

Corporate: Corporate expenses, net, increased for ~~2018~~the first quarter of 2019 primarily due to higher ~~operating~~restructuring charges and other expenses, ~~driven~~partially offset by ~~Corporate initiatives and lower other income compared to~~gains on the ~~same periods a year ago.~~

~~Interest Expense:~~ ~~Interest expense for 2018 decreased primarily due to the refinancing of debt at lower interest rates.~~

~~Income Taxes:~~Our reported income tax benefit rates were 37.7% and 3.5% for the third quarter and first nine months of 2018 compared to income tax expense rates of 16.8% and 25.7% for the third quarter and first nine months of 2017. Fluctuations in our reported income tax rates are primarily due to discrete items mainly driven by the impact of the 2017 Tax Act, the impact of nondeductible impairment charges, changes within our business mix of income, and the effect of an intercompany sale of ~~software.~~equity investments.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~During the third quarters of 2018 and 2017, income tax benefit was $263 million and income tax~~Interest Expense: Interest expense was $131 million related to continuing operations and included net discrete tax benefits of $424 million and $12 million. During the first nine months of 2018 and 2017, income tax benefit was $46 million and tax expense was $570 million related to continuing operations and included net discrete tax benefits of $420 million and $69 million.

Our discrete tax benefits for 2018 included a provisional $370 million related to the impact of the 2017 Tax Act and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits. As previously discussed, the impact of the 2017 Tax Act may differ materially from this provisional amount. Our discrete tax benefits for the first ~~nine months~~quarter of ~~2017 included $47 million related~~2019 decreased primarily due to the ~~adoption~~refinancing of ~~the amended accounting guidance on employee share-based compensation.~~

The non-cash pre-tax charge of $350 million to impair the carrying value of goodwill related to our McKesson Europe reporting unit within our Distribution Solutions segment had an unfavorable impact on our effective tax rate in 2018 given that this charge was not tax deductible. The non-cash pre-tax charge of $290 million to impair the carrying value of goodwill related to our EIS business within our Technology Solutions segment had an unfavorable impact on our effective tax rate in 2017 given that approximately $269 million of the goodwill impairment charge was not tax deductible.

~~Loss from Discontinued Operations, Net of Tax:~~ Loss from discontinued operations, net for the first nine months of 2017 included an after-tax loss of $113 million from the sale of our Brazilian pharmaceutical distribution business. Diluted loss per common share from discontinued operations for the first nine months of 2017 was $0.51.

~~Net Income Attributable to Noncontrolling Interests:~~ Net income attributable to noncontrolling interests for 2018 primarily represents ClarusONE, Vantage Oncology Holdings, LLC and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under a domination and profit and loss transfer agreement (the “Domination Agreement”). Refer to Financial Note 9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form10-Q for additional information.

~~Net Income Attributable to McKesson Corporation~~: Net income attributable to McKesson Corporation was $903 million and $633 million, and diluted earnings per common share attributable to McKesson Corporation were $4.33 and $2.85 for the third quarters of 2018 and 2017. Net income attributable to McKesson Corporation was $1,213 million and $1,482 million, and diluted earnings per common share attributable to McKesson Corporation were $5.76 and $6.56 for the first nine months of 2018 and 2017.

~~Weighted Average Diluted Common Shares Outstanding~~:~~Diluted earnings per common share were calculated based on a weighted average number of shares outstanding of~~ ~~208 million~~ ~~and 222 million for the~~ ~~third quarters of 2018 and 2017~~ and 210 million and 226 million for the first nine months of 2018 and 2017. Weighted average diluted shares for 2018 decreased from 2017 primarily reflecting common stock repurchases in the second half of 2017 and the first nine months of 2018.debt at lower interest rates, partially offset by increased short-term borrowings.

Business Combinations

Refer to Financial Note 6,4, “Business Combinations,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q for further information.

New Accounting Pronouncements

New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Financial Condition, Liquidity and Capital Resources

We expect our available cash generated from operations, together with our existing sources of liquidity from our credit facilities and commercial paper program will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, from time to time, we may access the long-term debt capital markets to discharge our other liabilities.

Operating activities utilized cash of $1.1 billion and generated cash of $~~1,323 million~~ ~~and~~ ~~$3,309~~741 million during the first ~~nine months~~quarters of ~~2018~~2019 and ~~2017.~~2018. Operating activities for the first ~~nine months~~quarters of ~~2018~~2019 and ~~2017~~2018 were affected by ~~higher drafts and accounts payable and~~ increases in receivables and inventories primarily associated with revenue growth. ~~Operating activities for 2017 included cash generated from our Core MTS business.~~ Cash flows from operations can be significantly impacted by factors such as ~~the~~ timing of receipts from customers, inventory receipts and payments to vendors. Additionally, working capital is primarily a function of sale and purchase volumes, inventory requirements and vendor payment terms.

Investing activities utilized cash of $~~483~~875 million and ~~$3,619 million~~$1.6 billion during the first ~~nine months~~quarters of ~~2018~~2019 and ~~2017.~~2018. Investing activities for 2019 include $826 million of net cash payments for acquisitions, including $784 million for our acquisition of MSD. Investing activities for 2019 also included $97 million cash received as a result of resolving certain indemnity and other claims related to our acquisition of Rexall Health. Investing activities for 2018 ~~include $1,979 million~~included $1.5 billion of ~~net~~ cash ~~payments~~paid for acquisitions, including $1.3 billion for our acquisition of CMM, which was prepaid before March 31, 2017 and was released from restricted cash balances in the first quarter of 2018. Investing activities for 2018 also included $329 million of net cash proceeds from the sale of businesses and equity method investments and a $126 million cash payment received related to the Healthcare Technology Net Asset Exchange. Investing activities for 2017 included $4,174 million of net cash payments for acquisitions, of which $935 million was prepaid before March 31, 2016 and was released from restricted cash balances in the first quarter of 2017. Investing activities for 2017 also included a payment of approximately $100 million to sell our Brazilian business.CoverMyMeds LLC.

Financing activities provided cash of $1.5 billion and utilized cash of ~~$1,147 million and $1,145 million~~$1.1 billion during the first ~~nine months~~quarters of ~~2018~~2019 and ~~2017.~~2018. Financing activities for ~~2018~~2019 include cash receipts of ~~$12,699 million~~$9.0 billion and payments of ~~$12,133 million~~$7.0 billion for short-term borrowings, ~~and a payment of $545 million for long-term debt.~~primarily commercial paper. Financing activities for the first ~~nine months~~quarter of ~~2017~~2018 included cash receipts of ~~$2,803 million~~$2.3 billion and payments of ~~$1,405 million~~$2.5 billion for short-term ~~borrowings and a payment of $392 million for long-term debt. Financing~~borrowings. Additionally, financing activities for the first ~~nine months~~quarters of 2019 and 2018 ~~and 2017~~ include ~~$951~~$307 million and $~~2,060~~300 million of cash paid for stock repurchases, including shares surrendered for tax withholding. ~~Additionally, financing activities for the first nine months of 2018 and 2017 include $192 million of cash paid for dividends.~~

~~The Company’s Board has authorized the repurchase of McKesson’s common stock~~Stock repurchases may be made from ~~time to time~~time-to-time in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic ~~conditions including our stock price.~~

conditions. In March ~~2017,~~2018 we entered into an ~~accelerated share repurchase (“ASR”)~~ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock and received 1.4 million shares as the initial share settlement. In April 2017, we received an additional 0.3 million shares upon the completion of this ASR program. In June 2017 and August 2017, we entered into two separate ASR programs with third-party financial institutions to repurchase $250 million and $400$500 million of the Company’s common stock. ~~During~~We received 2.5 million shares in March 2018 and an additional 1.0 million shares in the first ~~six months~~quarter of ~~2018, we received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program.~~2019. The ~~June 2017~~March 2018 ASR program was completed induring the ~~second~~first quarter of ~~2018 and~~2019.

In the ~~August 2017 ASR program was completed in the third~~first quarter of ~~2018. In November 2017,~~2019, we repurchased ~~1.8~~2.0 million of the Company’s shares for ~~$250~~$297 million through open market ~~transactions at an average price per share of $138.12. The total authorization outstanding for repurchases of the Company’s common stock was $1.8 billion at December 31, 2017.~~transactions.

We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that future volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Selected Measures of Liquidity and Capital Resources


(Dollars in millions)	December 31, 2017			March 31, 2017			June 30, 2018				March 31, 2018
Cash and cash equivalents	$	2,619		$	2,783
Cash, cash equivalents and restricted cash							$	2,199			$	2,672
Working capital	2,543			1,336			(134		)		451
Debt to capital ratio ⁽¹⁾	39.5		%	39.2		%	46.5			%	40.6		%
Return on McKesson stockholders’ equity ⁽²⁾	45.3		%	54.6		%	(3.6		)		0.6


(1)	Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive income (loss).


(2)	Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, AAA rated prime money market funds denominated in British pound sterling, time deposits, and Canadian government debentures.

The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our short‑term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.

Our cash and cash equivalents balance as of ~~December 31, 2017~~June 30, 2018 included approximately ~~$1.2~~$1.3 billion of cash held by our subsidiaries outside of the United States. ~~Notwithstanding recent tax law changes regarding the repatriation of cash to the U.S., our~~Our primary intent ~~remains~~is to ~~invest~~utilize this cash ~~in our~~for foreign ~~businesses~~operations for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S. federal, state and local income tax.

Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, short-term borrowings, ~~the~~ current portion of long-term debt, deferred revenue and other current liabilities. Our ~~Distribution~~U.S. Pharmaceutical and Specialty Solutions segment requires a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.

Our debt to capital ratio increased in ~~2018 compared to 2017~~the first quarter of 2019 primarily due to an increase in ~~commercial paper outstanding balance.~~short-term borrowing.

The carrying value of redeemable noncontrolling interests related to McKesson Europe was ~~$1.44~~$1.42 billion at ~~December 31, 2017,~~June 30, 2018, which exceeded the maximum redemption value of ~~$1.31~~$1.28 billion. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their McKesson Europe shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank ~~semiannually,~~semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson inwith respect ofto the relevant time ~~period (“Put Amount”).~~period. The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. Refer to Financial Note 9,7, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q for additional information.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Credit Resources

We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuance.

Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flow from operations, existing credit sources and other capital market transactions. Detailed information regarding our debt and financing activities is included in Financial Note ~~12,~~10, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

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FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. The reader should not consider this list to be a complete statement of all potential risks and uncertainties:


▪	changes in the U.S. and European healthcare industry and regulatory ~~environment;~~environments;


▪	foreign operations subject us to a number of operating, economic, political and regulatory risks;


▪	changes in the Canadian healthcare industry and regulatory environment;


▪	general European economic conditions together with austerity measures taken by certain European governments;


▪	changes in the European regulatory environment with respect to privacy and data protection regulations;


▪	foreign currency fluctuations;


▪	the Company’s ability to successfully identify, consummate, finance and integrate strategic acquisitions;


▪	failure for the Company’s investment in Change Healthcare to perform;


▪	the Company’s ability to manage and complete divestitures;


▪	material adverse resolution of pending legal and regulatory proceedings;


▪	competition;


▪	substantial defaults in payments or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization;


▪	the loss of government contracts as a result of compliance or funding challenges;


▪	public health issues in the United States or abroad;


▪	cyberattack, disaster, or malfunction to computer systems;


▪	the adequacy of insurance to cover property loss or liability claims;


▪	the Company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others;


▪	system errors or failure of our technology products and solutions to conform to specifications;


▪	disaster or other event causing interruption of customer access to the data residing in our service centers;


▪	changes in circumstances that could impair our goodwill or intangible assets;


▪	new or revised tax legislation or challenges to our tax positions;


▪	general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the Company, its customers or suppliers;


▪	changes in accounting principles generally accepted in the United States of America;


▪	withdrawal from participation in one or more multiemployer pension plans or if such plans are reported to have underfunded liabilities;


▪	expected benefits from our restructuring and business process initiatives;


▪	difficulties with outsourcing and similar ~~third party~~third-party relationships;


▪	new challenges associated with our retail expansion; and


▪	inability to keep existing retail store locations or open new retail locations in desirable places.

These and other risks and uncertainties are described herein and in other information contained in our publicly available Securities and Exchange Commission filings and press releases. Readers are cautioned not to place undue reliance on forward‑looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to publicly release the result of any revisions to our forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

We believe there has been no material change in our exposure to risks associated with fluctuations in interest and foreign currency exchange rates as disclosed in our ~~2017~~2018 Annual Report on Form 10-K.


Item 4.	Controls and Procedures.

Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Financial Officer 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.

There were no changes in our “internal control over financial reporting” (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that occurred during our ~~third~~first quarter of ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

The information set forth in Financial Note ~~16,~~14, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q is incorporated herein by reference.


Item 1A.	Risk Factors.

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of our ~~2017~~2018 Annual Report on Form 10-K.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

Stock repurchases may be made from time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases will depend on a variety of factors, including corporate and regulatory requirements.

In March ~~2017,~~2018, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock and received 1.4 million shares as the initial share settlement. In April 2017, we received an additional 0.3 million shares upon the completion of this ASR program.

~~In June 2017 and August 2017, we entered into two separate ASR programs with third-party financial institutions to repurchase $250 million and $400~~$500 million of the Company’s common stock. ~~During~~We received 2.5 million shares in March 2018 and an additional 1.0 million shares in the first ~~nine months~~quarter of ~~2018, we received a total of 1.5 million shares~~2019 under the ~~June 2017 ASR program and a total of 2.7 million shares under the August 2017~~March 2018 ASR program. The ~~June 2017~~March 2018 ASR program was completed at an average price per share of $143.66 in the ~~second~~first quarter of ~~2018 and August 2017 ASR program was completed in~~2019.

In the ~~third~~first quarter of ~~2018.~~

~~In November 2017,~~2019, we repurchased ~~1.8~~2.0 million of the Company’s shares for ~~$250~~$297 million through open market transactions at an average price per share of ~~$138.12.~~$147.92.

The total authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$4.8 billion at ~~December 31, 2017.~~June 30, 2018.

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The following table provides information on the Company’s share repurchases during the ~~third~~first quarter of ~~2018~~2019.

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
October 1, 2017 – October 31, 2017 0.6 $ 148.20 0.6 $ 2,096
November 1, 2017 – November 30, 2017 1.8 138.12 1.8 1,846
December 1, 2017 – December 31, 2017 — — 1,846
Total 2.4
2.4



	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
April 1, 2018 – April 30, 2018	0.5	$	143.66 ⁽²⁾	0.5	$	1,096
May 1, 2018 – May 31, 2018	0.5		143.66 ⁽²⁾	0.5		5,096
June 1, 2018 – June 30, 2018	2.0		147.92	2.0		4,799
Total	3.0			3.0


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


(2)	The average price of shares from the March 2018 ASR program was determined at the termination of the ASR program.


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Mine Safety Disclosures.

Not Applicable


Item 5.	Other Information.

~~Not Applicable~~On July 25, 2018, the Board of Directors appointed Sundeep G. Reddy, Senior Vice President and Controller. In that role, he will serve as our principal accounting officer. In connection with his appointment, Mr. Reddy’s annual base salary was increased to $360,000 and his target annual bonus opportunity under the Management Incentive Plan was increased to 45% of his salary earned during the performance period. In addition, his target award under the Company’s cash Long-Term Incentive Plan was increased to $85,000 and the Compensation Committee approved the grant of an option to purchase shares of the Company’s common stock under the 2013 Stock Plan having a grant date value of $100,000. He also will be eligible for certain executive-level benefits such as financial counseling and executive travel services. For more information on the Company’s executive compensation program, including a description of each plan identified above, please refer to the 2018 definitive proxy statement that was filed by the Company with the Securities and Exchange commission on June 15, 2018.

Mr. Reddy has no related party transactions with the Company that would require disclosure under Item 404(a) of Regulation S-K in connection with his appointment described above.

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Item 6.	Exhibits.

Exhibits identified in parentheses below are on file with the SEC and are incorporated by reference as exhibits hereto.



Exhibit Number	Description
10.1*	Forms of Statement of Terms and Conditions Applicable to Awards Pursuant to the McKesson Corporation 2013 Stock Plan.

10.2*	McKesson Corporation Deferred Compensation Administration Plan III, as amended and restated July 29, 2014, as amended effective July 1, 2018

10.3*	McKesson Corporation Supplemental Retirement Savings Plan, as amended and restated on July 29, 2014, as amended effective July 1, 2018 (formerly McKesson Corporation Supplemental Profit Sharing Investment Plan II, as amended and restated on July 29, 2014)

31.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as 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.

101	The following materials from the McKesson Corporation Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2017,~~June 30, 2018, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Financial Notes.


*	Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate.


†	Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		MCKESSON CORPORATION

Date:	~~February 1,~~July 26, 2018	/s/ Britt J. Vitalone
		Britt J. Vitalone
		Executive Vice President and Chief Financial Officer



		MCKESSON CORPORATION

Date:	~~February 1,~~July 26, 2018	/s/ ~~Erin M. Lampert~~Sundeep G. Reddy
		~~Erin M. Lampert~~ Sundeep G. Reddy
		Senior Vice President and Controller

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(In millions)	Balance March 31, 2017		Net restructuring charges recognized			Non-cash charges		Cash Payments			Other			Balance December 31, 2017 ⁽¹⁾
Cost Alignment Plan
Distribution Solutions	$	90	$	8		$	—	$	(26	)	$	3		$	75
Technology Solutions	10		(1		)	—		(4		)	(5		)	—
Corporate	6		2			—		(2		)	(1		)	5
Total	$	106	$	9		$	—	$	(32	)	$	(3	)	$	80



(In millions)	Distribution Solutions			Technology Solutions			Total
Balance, March 31, 2017	$	10,132		$	454		$	10,586
Goodwill acquired	1,258			—			1,258
Acquisition accounting, transfers and other adjustments ⁽¹⁾	364			(330		)	34
Goodwill impairment charges	(350		)	—			(350		)
Goodwill disposed ⁽²⁾	—			(124		)	(124		)
Amount reclassified to assets held for sale	(11		)	—			(11		)
Foreign currency translation adjustments, net	435			—			435
Balance, December 31, 2017	$	11,828		$	—		$	11,828

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