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, 2019



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

For the transition period fromto

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~~

6555 State Hwy 161,

Irving, TX75039

(Address of principal executive offices, including zip code)

(972) 446-4800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)
Common stock, $0.01 par value	MCK	New York Stock Exchange

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. Yesx☒ 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). Yesx☒ 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”~~filer,” “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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~~
~~Common stock, $0.01 par value~~	~~206,339,333 shares~~

184,904,125 shares of the issuer’s common stock were outstanding as of June 30, 2019.

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 Ended June 30, 2019 and 2018	3

	Condensed Consolidated Statements of Operations Quarters and Nine Months Ended December 31, 2017 and 2016	3	Condensed Consolidated Statements of Comprehensive Income Quarters Ended June 30, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended December 31, 2017 and 2016	4	Condensed Consolidated Balance Sheets June 30, 2019 and March 31, 2019	5

	Condensed Consolidated Balance Sheets December 31, 2017 and March 31, 2017	5	Condensed Consolidated Statements of Stockholders’ Equity Quarters Ended June 30, 2019 and 2018	6

	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, 2019 and 2018	7

	Financial Notes	7	Financial Notes	8

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	33

3.	Quantitative and Qualitative Disclosures About Market Risk	49	Quantitative and Qualitative Disclosures About Market Risk	46

4.	Controls and Procedures	49	Controls and Procedures	46

	PART II—OTHER INFORMATION		PART II—OTHER INFORMATION

1.	Legal Proceedings	49	Legal Proceedings	46

1A.	Risk Factors	49	Risk Factors	46

2.	Unregistered Sales of Equity Securities and Use of Proceeds	49	Unregistered Sales of Equity Securities and Use of Proceeds	47

3.	Defaults Upon Senior Securities	50	Defaults Upon Senior Securities	48

4.	Mine Safety Disclosures	50	Mine Safety Disclosures	48

5.	Other Information	50	Other Information	48

6.	Exhibits	51	Exhibits	49

	Signatures	52	Signatures	50

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			2019			2018
Revenues	$	53,617		$	50,130		$	156,729		$	149,820		$	55,728		$	52,607
Cost of Sales	(50,902		)	(47,318		)	(148,620		)	(141,345		)	(52,941		)	(49,828		)
Gross Profit	2,715			2,812			8,109			8,475			2,787			2,779
Operating Expenses	(1,984		)	(1,981		)	(5,920		)	(5,802		)	(2,130		)	(2,127		)
Gain from Sale of Business	109			—			109			—
Goodwill Impairment Charges	—			—			(350		)	(290		)	—			(570		)
Restructuring and Asset Impairment Charges	(6		)	—			(242		)	—			(23		)	(96		)
Gain from Escrow Settlement													—			97
Total Operating Expenses													(2,153		)	(2,696		)
Operating Income	834			831			1,706			2,383			634			83
Other Income, Net	20			23			102			65			37			40
Loss from Equity Method Investment in Change Healthcare	(90		)	—			(271		)	—
Income (Loss) from Equity Method Investment in Change Healthcare Joint Venture													4			(56		)
Interest Expense	(67		)	(74		)	(204		)	(231		)	(56		)	(61		)
Income from Continuing Operations Before Income Taxes	697			780			1,333			2,217			619			6
Income Tax Benefit (Expense)	263			(131		)	46			(570		)
Income from Continuing Operations	960			649			1,379			1,647
Income Tax Expense													(136		)	(87		)
Income (Loss) from Continuing Operations													483			(81		)
Income (Loss) from Discontinued Operations, Net of Tax	1			(3		)	3			(117		)	(6		)	1
Net Income	961			646			1,382			1,530
Net Income (Loss)													477			(80		)
Net Income Attributable to Noncontrolling Interests	(58		)	(13		)	(169		)	(48		)	(54		)	(58		)
Net Income Attributable to McKesson Corporation	$	903		$	633		$	1,213		$	1,482
Net Income (Loss) Attributable to McKesson Corporation													$	423		$	(138	)

Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Diluted
Continuing operations	$	4.32		$	2.86		$	5.75		$	7.07		$	2.27		$	(0.69	)
Discontinued operations	0.01			(0.01		)	0.01			(0.51		)	(0.03		)	0.01
Total	$	4.33		$	2.85		$	5.76		$	6.56		$	2.24		$	(0.68	)
Basic
Continuing operations	$	4.34		$	2.89		$	5.78		$	7.14		$	2.28		$	(0.69	)
Discontinued operations	0.01			(0.02		)	0.02			(0.52		)	(0.03		)	0.01
Total	$	4.35		$	2.87		$	5.80		$	6.62		$	2.25		$	(0.68	)

Dividends Declared Per Common Share	$	0.34		$	0.28		$	0.96		$	0.84		$	0.39		$	0.34

Weighted Average Common Shares
Diluted	208			222			210			226			189			202
Basic	207			221			209			224			188			202

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

Quarter Ended December 31, Nine Months Ended December 31,
2017
2016 2017 2016
Net Income $ 961
$ 646
$ 1,382
$ 1,530

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

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 )

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

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



	Quarter Ended June 30,
	2019			2018
Net Income (Loss)	$	477		$	(80	)

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments	44			(129		)

Unrealized gains on cash flow hedges	12			—

Changes in retirement-related benefit plans	21			8
Other Comprehensive Income (Loss), Net of Tax	77			(121		)

Comprehensive Income (Loss)	554			(201		)
Comprehensive Income Attributable to Noncontrolling Interests	(60		)	(21		)
Comprehensive Income (Loss) Attributable to McKesson Corporation	$	494		$	(222	)

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, 2019			March 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$	2,619		$	2,783		$	1,947		$	2,981
Receivables, net	20,015			18,215			19,287			18,246
Inventories, net	17,103			15,278			16,604			16,709
Prepaid expenses and other	458			672			590			529
Total Current Assets	40,195			36,948			38,428			38,465
Property, Plant and Equipment, Net	2,401			2,292			2,466			2,548
Operating Lease Right-of-Use Assets							2,031			—
Goodwill	11,828			10,586			9,441			9,358
Intangible Assets, Net	4,094			3,665			3,600			3,689
Equity Method Investment in Change Healthcare	3,704			4,063
Equity Method Investment in Change Healthcare Joint Venture							3,617			3,513
Other Noncurrent Assets	1,991			3,415			2,097			2,099
Total Assets	$	64,213		$	60,969		$	61,680		$	59,672

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities
Drafts and accounts payable	$	33,009		$	31,022		$	34,021		$	33,853
Short-term borrowings	749			183
Deferred revenue	68			346
Current portion of long-term debt	531			1,057			310			330
Current portion of operating lease liabilities							373			—
Other accrued liabilities	3,295			3,004			3,248			3,443
Total Current Liabilities	37,652			35,612			37,952			37,626

Long-Term Debt	7,514			7,305			7,382			7,265
Long-Term Deferred Tax Liabilities	2,833			3,678			3,058			2,998
Long-Term Operating Lease Liabilities							1,805			—
Other Noncurrent Liabilities	2,807			1,774			2,016			2,103
Redeemable Noncontrolling Interests	1,435			1,327			1,399			1,393
McKesson Corporation Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—			—			—			—
Common stock, $0.01 par value, 800 shares authorized at 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, 2019 and March 31, 2019, 271 shares issued at June 30, 2019 and March 31, 2019							3			3
Additional Paid-in Capital	6,253			6,028			6,483			6,435
Retained Earnings	14,202			13,189			12,770			12,409
Accumulated Other Comprehensive Loss	(1,726		)	(2,141		)	(1,778		)	(1,849		)
Other	(1		)	(2		)	(1		)	(2		)
Treasury Shares, at Cost, 68 and 62 at December 31, 2017 and March 31, 2017	(6,997		)	(5,982		)
Treasury Shares, at Cost, 86 and 81 shares at June 30, 2019 and March 31, 2019							(9,603		)	(8,902		)
Total McKesson Corporation Stockholders’ Equity	11,734			11,095			7,874			8,094
Noncontrolling Interests	238			178			194			193
Total Equity	11,972			11,273			8,068			8,287
Total Liabilities, Redeemable Noncontrolling Interests and Equity	$	64,213		$	60,969		$	61,680		$	59,672

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except per share amounts)

(Unaudited)



	Quarter Ended June 30, 2019
	Common Stock			Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount													Common Shares		Amount
Balances, March 31, 2019	271	$	3	$	6,435	$	(2	)	$	12,409		$	(1,849	)	(81	)	$	(8,902	)	$	193		$	8,287
Opening Retained Earnings Adjustments: Adoption of New Accounting Standards									11														11
Balances, April 1, 2019	271	3		6,435		(2		)	12,420			(1,849		)	(81	)	(8,902		)	193			8,298
Issuance of shares under employee plans				22													(17		)				5
Share-based compensation				26																			26
Payments to noncontrolling interests																				(39		)	(39		)
Other comprehensive income												71											71
Net income									423											43			466
Repurchase of common stock															(5	)	(684		)				(684		)
Cash dividends declared, $0.39 per common share									(73		)												(73		)
Other						1														(3		)	(2		)
Balances, June 30, 2019	271	$	3	$	6,483	$	(1	)	$	12,770		$	(1,778	)	(86	)	$	(9,603	)	$	194		$	8,068



	Quarter Ended June 30, 2018
	Common Stock			Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount													Common Shares		Amount
Balances, March 31, 2018	275	$	3	$	6,188	$	(1	)	$	12,986		$	(1,717	)	(73	)	$	(7,655	)	$	253		$	10,057
Opening Retained Earnings Adjustments: Adoption of New Accounting Standards									154														154
Balances, April 1, 2018	275	3		6,188		(1		)	13,140			(1,717		)	(73	)	(7,655		)	253			10,211
Issuance of shares under employee plans				22													(11		)				11
Share-based compensation				25																			25
Payments to noncontrolling interests																				(64		)	(64		)
Other comprehensive loss												(84		)									(84		)
Net income (loss)									(138		)									46			(92		)
Repurchase of common stock				135											(3	)	(432		)				(297		)
Cash dividends declared, $0.34 per common share									(69		)												(69		)
Other				2					(1		)									5			6
Balances, June 30, 2018	275	$	3	$	6,372	$	(1	)	$	12,932		$	(1,801	)	(76	)	$	(8,098	)	$	240		$	9,647

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			2019			2018
Operating Activities
Net income	$	1,382		$	1,530
Adjustments to reconcile to net cash provided by operating activities:
Net income (loss)							$	477		$	(80	)
Adjustments to reconcile to net cash used in operating activities:
Depreciation and amortization	697			663			229			235
Goodwill impairment and other asset impairment charges	539			290
Loss from equity method investment in Change Healthcare	271			—
Goodwill and other asset impairment charges							5			610
Deferred taxes	(847		)	122			16			45
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
Credits associated with last-in, first-out inventory method							(15		)	(21		)
Loss (Income) from equity method investment in Change Healthcare Joint Venture							(4		)	56
Other non-cash items	(132		)	50			121			(79		)
Changes in operating assets and liabilities, net of acquisitions:
Changes in assets and liabilities, net of acquisitions:
Receivables	(1,046		)	(654		)	(1,061		)	(1,414		)
Inventories	(1,410		)	(374		)	145			(114		)
Drafts and accounts payable	1,203			1,891			127			32
Deferred revenue	(134		)	(58		)
Taxes	689			52			82			(61		)
Other	214			(274		)	(173		)	(270		)
Net cash provided by operating activities	1,323			3,309
Net cash used in operating activities							(51		)	(1,061		)

Investing Activities
Payments for property, plant and equipment	(269		)	(246		)	(87		)	(101		)
Capitalized software expenditures	(123		)	(123		)	(24		)	(44		)
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							(46		)	(826		)
Other	(36		)	80			28			96
Net cash used in investing activities	(483		)	(3,619		)	(129		)	(875		)

Financing Activities
Proceeds from short-term borrowings	12,699			2,803			2,610			9,036
Repayments of short-term borrowings	(12,133		)	(1,405		)	(2,610		)	(7,005		)
Repayments of long-term debt	(545		)	(392		)
Common stock transactions:
Issuances	114			89			22			22
Share repurchases, including shares surrendered for tax withholding	(951		)	(2,060		)	(701		)	(307		)
Dividends paid	(192		)	(192		)	(75		)	(71		)
Other	(139		)	12			(118		)	(134		)
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							(872		)	1,541
Effect of exchange rate changes on cash, cash equivalents and restricted cash							18			(78		)
Net decrease in cash, cash equivalents and restricted cash							(1,034		)	(473		)
Cash, cash equivalents and restricted cash at beginning of period							2,981			2,672
Cash, cash equivalents and restricted cash at end of period							$	1,947		$	2,199

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), currently ranked 7^th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. We report our financial results in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 18, “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 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~~ 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, 2019 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~~2019 previously filed with the SEC on May ~~22, 2017~~15, 2019 (“~~2017~~2019 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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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:~~Leases: In the first quarter of ~~2018,~~2020, we adopted amended guidance for leases using the ~~equity method~~modified retrospective basis and recorded a cumulative-effect adjustment to the opening retained earnings on the date of ~~accounting. The~~adoption. Under the amended guidance, ~~simplifies~~entities are required to recognize operating lease liabilities and operating lease right-of-use (“ROU”) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements.

We elected the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification, lease classification and initial direct costs for leases commenced before April 1, 2019. We also elected not to separate lease from non-lease components for all leases and to exclude short-term leases with an initial term of 12 months or less from our condensed consolidated balance sheets.

Upon adoption of this amended guidance, we recorded $2.2 billion of operating lease liabilities, $2.1 billion of operating lease ROU assets and a cumulative-effect adjustment of $69 million to the ~~equity method~~opening retained earnings. The adjustment to the opening retained earnings included impairment charges of ~~accounting. This standard eliminates~~$89 million, net of tax to the requirement that when an existing cost method investment qualifies 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,ROU assets primarily related to previously impaired long-lived assets at the ~~point an investment qualifies~~retail pharmacies in our United Kingdom (“U.K.”) and Canadian businesses, partially offset by derecognition of existing deferred gain on our sale-leaseback transaction related to our former corporate headquarters building. The adoption of this amended guidance did not have a material impact on our condensed consolidated statements of operations and cash flows.

Refer to Financial Note 11, “Leases,” for more information.

Derivatives and Hedging: In the ~~equity method, any unrealized gain or loss in accumulated other comprehensive income (loss) will be recognized through earnings.~~first quarter of 2020, we prospectively adopted amended guidance that allows us to include the Secured Overnight Financing Rate Overnight Index Swap Rate as a benchmark interest rate for hedge accounting purposes. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~Derivatives~~Disclosure Update and ~~Hedging:~~Simplification: In the first quarter of ~~2018,~~2020, we adopted amended guidance that simplifies certain disclosure requirements and expands the disclosure requirements on the analysis of stockholders’ equity for ~~derivative instrument novations.~~interim financial statements. The ~~amendments clarify~~adoption of this amended guidance had no effect on our condensed consolidated statements of operations, comprehensive income, balance sheets and cash flows. This amended guidance resulted in a disclosure of the interim condensed consolidated statements of stockholders’ equity.

Accumulated Other Comprehensive Income: In the first quarter of 2020, we adopted amended guidance that allows for a ~~novation,~~reclassification of only those amounts related to the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) to retained earnings thereby eliminating the stranded tax effects. Previous guidance required that deferred tax liabilities and assets be adjusted for a change in tax laws with the ~~counterparty,~~effect included in income from continuing operations in the reporting period that includes the enactment date. We have elected not to ~~a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided all~~reclassify the stranded tax effects within accumulated other ~~hedge accounting criteria continue~~comprehensive loss to ~~be met.~~retained earnings. The adoption of this amended guidance did not ~~have an effect on~~affect 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.

~~Inventory:~~ In the first quarter of 2018, we 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 if 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 amended guidance is effective for us on a prospective basis commencing in the first quarter of 2019. 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,~~the first quarter of 2020, we adopted amended guidance ~~was issued to shorten~~on a modified retrospective basis that shortens the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The ~~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 ondid not affect our condensed consolidated financial statements.

~~Compensation - Retirement Benefits:~~Recently Issued Accounting Pronouncements Not Yet Adopted

Collaborative Arrangements: In ~~March 2017,~~November 2018, amended guidance was issued which ~~requires us to report~~clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under revenue recognition guidance when the ~~service cost component of defined benefit pension plans and other postretirement plans~~counterparty is a customer. The amended guidance precludes presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if 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. Thiscounterparty is not a customer for that transaction. The amended guidance is effective for us in the first quarter of ~~2019~~2021 on a retrospective ~~basis. Early adoption is permitted.~~basis with a cumulative-effect adjustment to beginning retained earnings. 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 requiredmay elect to apply this amended guidance retrospectively either to all contracts or only to contracts that are not completed at the ~~same time we apply the amended revenue guidance in the first quarter~~date of ~~2019. It allows for either full retrospective adoption or modified retrospective~~initial adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Business Combinations:~~

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Intangibles - Goodwill and Other - Internal-Use Software: In ~~January 2017,~~August 2018, amended guidance was issued ~~to clarify the definition of~~for a ~~business to assist entities~~customer’s accounting for implementation and other upfront costs incurred in ~~evaluating whether transactions should be accounted for as acquisitions of assets or businesses.~~a cloud computing arrangement that is a service contract. 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~~aligns the ~~fair value of the gross assets acquired is concentrated~~requirements for capitalizing implementation costs incurred in a ~~single identifiable asset or~~cloud computing arrangement that is a ~~group of similar identifiable assets,~~service contract with the ~~set is not~~requirements for capitalizing implementation costs for a ~~business. If the screen is not met, the amended guidance requires~~cloud computing arrangement that ~~to be considered~~has a ~~business, a set must include an input and a substantive process that together significantly contribute to the ability to create output.~~software license. The amended guidance is effective for us either on a retrospective or prospective basis 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.2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Statement of Cash Flows~~Compensation - ~~Classification of Certain Cash Receipts and Cash Payments:~~Retirement Benefits - Defined Benefit Plans: In August ~~2016,~~2018, amended guidance was issued for defined benefit pension or other postretirement plans. The amended guidance requires us to ~~provide clarification on~~disclose the weighted-average interest crediting rates for cash ~~flow classification~~balance plans and other plans with promised interest crediting rates, and an explanation of reasons for significant gains and losses related to ~~eight specific issues including contingent consideration payments made after a business combination and distributions received from equity method investees.~~changes in the benefit obligation for the period. The amended guidance also requires us to remove disclosures on the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs over the next fiscal year. The amended guidance is effective for us on a retrospective basis commencing in the ~~first quarter of 2019 on a retrospective basis.~~fiscal year ended March 31, 2021. 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.~~statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.

Fair Value Measurement: In August 2018, amended guidance was issued to remove, modify and add disclosure requirements on fair value measurements. The amended guidance removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains or losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance is effective for us commencing in the first quarter of 2021. Certain requirements will be applied prospectively while other changes will be applied retrospectively upon the effective date. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.

Financial Instruments - Credit Losses: In June 2016, amended guidance was issued, which will change the impairment model for most financial assets 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 guidance was further amended in May 2019 to provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. 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~~opening 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 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. Early adoption is permitted. We plan to adopt the new standard on the effective date and are currently evaluating the impact of this amended guidance on our consolidated financial statements. We anticipate 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. Equity Method Investment in Change Healthcare ~~Technology Net Asset Exchange~~Joint Venture

~~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~~form a joint venture, Change Healthcare LLC (“Change Healthcare JV”), 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.Change Healthcare Inc. In exchange for the contribution, we ~~own~~initially owned approximately 70% of the joint venture with the remaining equity ownership of approximately 30% held by ~~shareholders of Change.~~Change Healthcare Inc. The ~~joint venture~~Change Healthcare JV is jointly governed by usMcKesson and shareholders of ~~Change.~~

~~Gain from~~Change Healthcare ~~TechnologyNet Asset Exchange~~

~~We accounted for this transaction as a sale~~Inc. The initial investment in Change Healthcare JV represented the fair value of ~~the Core MTS Business and a subsequent purchase of a~~our 70% equity interest in the ~~newly formed~~ joint ~~venture. Accordingly,~~venture upon closing of the transaction.

We account for our investment in Change Healthcare JV using the equity method of accounting with a one-month reporting lag. The Company’s accounting policy is to disclose any intervening events of the joint venture in the ~~fourth quarter of 2017, we deconsolidated~~lag period that could materially affect our condensed consolidated financial statements. Effective April 1, 2019, Change Healthcare JV adopted the ~~Core MTS Business and recorded a pre-tax gain of $3,947 million (after-tax gain of $3,018 million). Additionally, in~~amended revenue recognition guidance. In the first quarter of ~~2018,~~2020, 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 settlementour proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net ~~working capital and other adjustments.~~of tax to the opening retained earnings.

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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 on a one-month reporting lag.~~ During the ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018,~~2019, we recorded our proportionate share of income of $4 million and loss of $56 million from Change Healthcare JV. Our proportionate share of ~~$90 million and $271 million, which included transaction and~~income or loss from this equity method investment includes integration expenses incurred by Change Healthcare JV and basis differences between the joint venture and McKesson including amortization of fair value adjustments ~~including~~primarily representing incremental intangible ~~assets amortization associated with basis differences. This amount was~~assets. These amounts were recorded under the caption, ~~“Loss~~“Income (Loss) from Equity Method Investment in Change Healthcare Joint Venture,” in our condensed consolidated ~~statement~~statements of operations.

AsAt June 30, 2019 and March 31, 2019, our investment is accounted for using a one-month lag, the effects of the enactment of the 2017 Tax Cuts 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 31, 2017, the~~ carrying value of this equity method investment was $3,617 million and $3,513 million. Our carrying value included equity method intangible assets and goodwill which caused our investment ~~was $3,704 million, which exceeded~~basis to exceed our proportionate share of the ~~joint venture’s~~Change Healthcare JV’s book value of net assets by approximately ~~$4,526~~$4,091 million ~~primarily reflecting~~and $4,158 million at June 30, 2019 and March 31, 2019.

Initial Public Offering by Change Healthcare Inc.

On June 27, 2019, common stock and certain other securities of Change Healthcare Inc. began trading on the NASDAQ (“IPO”). Change Healthcare Inc. is a holding company and does not own any material assets or have any operations other than through its interest in Change Healthcare JV.

On July 1, 2019, upon the completion of its IPO, Change Healthcare Inc. received net cash proceeds of approximately $888 million. Change Healthcare Inc. contributed the proceeds from its offering of common stock of $609 million to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change Healthcare Inc. to acquire certain securities of Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change Healthcare Inc. Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in Change Healthcare JV diluted from approximately 70% to approximately 58.5% and Change Healthcare Inc. now owns approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, we expect to recognize a pre-tax dilution loss of approximately $246 million associated with our reduction of our ownership in the Change Healthcare JV. The loss represents the difference between our proportionate share of the IPO proceeds and the dilution effect on our investment’s carrying value. Effective with the second quarter of 2020, we will recognize our proportionate share in net income or loss based on our reduced share of equity interest in Change Healthcare JV, adjusted for the effect of basis differences and other items as applicable.

Subsequent to the IPO, we now have a publicly available indication of the value of our investment in Change Healthcare JV. The fair value that was derived from trading prices of Change Healthcare Inc.’s common stock was below the carrying value of our investment in Change Healthcare JV indicating a potential impairment. Accordingly, we evaluated our equity method ~~intangible assets, goodwill~~investment for an other-than-temporary impairment (“OTTI”). We considered various factors in determining whether an OTTI has occurred, including the limited trading history available, our ability and ~~other~~intent to hold the investment until its fair value ~~adjustments.~~recovers, the implied EBITDA valuation multiples compared to public guideline companies, the joint venture’s ability to achieve milestones and any notable operational and strategic changes by the joint venture. After the evaluation, we determined that an OTTI has not occurred as of June 30, 2019 and as of the date of this Quarterly Report on Form 10-Q. However, we may be required to recognize an impairment loss in future reporting periods if and when a decline in fair value of our investment in Change Healthcare JV below the carrying value is determined to be other than temporary. Such determination will be based on the prevailing facts and circumstances at that time, including the reported results and disclosures of Change Healthcare Inc. as well as the market price of its common stock.

Related Party Transactions

In connection with the ~~transaction,~~formation of Change Healthcare JV, McKesson, Change Healthcare JV and certain shareholders of Change Healthcare Inc. 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 Agreement were not material to us during the first quarters of 2020 and 2019. At June 30, 2019 and March 31, ~~2017,~~2019, we had ~~a $136 million noncurrent liability~~no outstanding payable balance to the shareholders of Change ~~associated with~~Healthcare Inc. under 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 is 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~~these agreements with Change Healthcare JV were not material during the ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018.~~

2019. At ~~December 31, 2017, receivables due from the joint venture were $54 million~~June 30, 2019 and at March 31, ~~2017,~~2019, receivables due from the joint venture were not material.


3.	~~Goodwill Impairment Charges~~

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 impairment exist.

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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 accordanceConcurrent with the ~~amended goodwill guidance for this reporting unit prior~~IPO, Change Healthcare Inc. appointed two of our current executive officers and our former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting we apply to our ~~annual~~investment in Change Healthcare JV. There were no material transactions with Change Healthcare Inc.


3.	Restructuring and Asset Impairment Charges

We recorded pre-tax restructuring and asset impairment ~~test.~~

~~As a result~~charges of $23 million ($17 million after-tax) and $96 million ($85 million after-tax) during the ~~test, the estimated fair value~~first quarters 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~~2020 and ~~after-tax charge of $350 million to impair the carrying value of this reporting unit’s goodwill~~2019. These charges are included under the caption, ~~“Goodwill~~“Restructuring and Asset Impairment Charges” within operating expenses in the accompanying condensed consolidated ~~statement~~statements of operations.

Fiscal 2019 Initiatives

On April 25, 2018, the Company announced a strategic growth initiative intended to drive long-term incremental profit growth and to increase operational efficiency. The initiative consists of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through centralization, cost management and outsourcing of certain administrative functions.

As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. This set of the initiatives will be substantially completed by the end of 2020. We recorded pre-tax restructuring charges of $4 million ($3 million after-tax) during the first quarter of 2020. We expect to record total pre-tax charges of approximately $140 million to $180 million, of which $139 million of pre-tax charges were recorded to date. The charges primarily represent employee severance, exit-related costs and asset impairment charges. Estimated remaining charges primarily consist of exit-related costs.

As previously announced on November 30, 2018, the Company relocated its corporate headquarters, effective April 1, 2019, from San Francisco, California to Irving, Texas to improve efficiency, collaboration and cost competitiveness. We anticipate that the relocation will be completed by January 2021. As a result, during the first quarter of 2020, we recorded pre-tax charges of $8 million ($6 million after-tax) primarily representing employee retention expenses. We expect to record total pre-tax charges of approximately $80 million to $130 million, of which $41 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of lease and other exit-related costs, and employee-related expenses, including retention.

During the fourth quarter of 2019, the Company committed to additional programs to continue our operating model and cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through the expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further closures of retail pharmacy stores in Europe and closure of other facilities. We anticipate these additional programs will be substantially completed by the end of 2021. During the first quarter of 2020, we recorded pre-tax charges of $11 million ($8 million after-tax) primarily representing project consulting fees. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, of which $174 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.

Restructuring charges for our fiscal 2019 initiatives during the first quarter of 2020 consisted of the following:



(In millions)	U.S. Pharmaceutical and Specialty Solutions			European Pharmaceutical Solutions			Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	(1	)	$	(1	)	$	—	$	—	$	6	$	4
Exit and other-related costs ⁽¹⁾	—			1			2		1		10		14
Asset impairments and accelerated depreciation	—			3			1		—		1		5
Total	$	(1	)	$	3		$	3	$	1	$	17	$	23


(1)	Exit and other-related costs primarily include project consulting fees.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Restructuring charges for our fiscal 2019 initiatives during the first quarter of 2019 consisted of the following:



(In millions)	U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	3	$	10	$	1	$	—	$	14
Exit and other-related costs ⁽¹⁾	1		2		21		11		35
Asset impairments and accelerated depreciation	4		—		16		—		20
Total	$	8	$	12	$	38	$	11	$	69


(1)	Exit and other-related costs primarily include lease exit costs associated with closures of retail pharmacy stores within our Canadian business as well as project consulting fees.

The following table summarizes the activity related to the restructuring liabilities associated with our fiscal 2019 initiatives for the first quarter of 2020:



(In millions)	U.S. Pharmaceutical and Specialty Solutions			European Pharmaceutical Solutions			Medical-Surgical Solutions			Other			Corporate			Total
Balance, March 31, 2019 ⁽¹⁾	$	31		$	38		$	15		$	29		$	37		$	150
Restructuring charges recognized	(1		)	3			3			1			17			23
Non-cash charges	—			(3		)	(1		)	—			(1		)	(5		)
Cash payments	(1		)	(7		)	—			(12		)	(7		)	(27		)
Other	—			1			—			(6		)	(3		)	(8		)
Balance, June 30, 2019 ⁽²⁾	$	29		$	32		$	17		$	12		$	43		$	133


(1)	As of March 31, 2019, the total reserve balance was $150 million of which $117 million was recorded in other accrued liabilities and $33 million was recorded in other noncurrent liabilities.


(2)	As of June 30, 2019, the total reserve balance was $133 million of which $107 million was recorded in other accrued liabilities and $26 million was recorded in other noncurrent liabilities.

Other Plans

There were no ~~tax benefits associated with~~material restructuring charges for other plans recorded during the ~~goodwill impairment charge.~~first quarters of 2020 and 2019. 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 managementrestructuring liabilities for other plans 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 eventsJune 30, 2019 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 rateMarch 31, 2019 were $60 million 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$87 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 reporting unit in future periods. As a result, we may be required to record additional impairment charges. Refer to Financial Note 4, “Restructuring andLong-Lived Asset ~~Impairment Charges,” 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 and Asset Impairment Charges~~

~~Fiscal 2018 McKesson Europe Plan~~Impairments

During the ~~second~~first quarter of ~~2018,~~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.

4. Goodwill Impairment Charges

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. Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit.

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In the first ~~half~~quarter 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 2018 second quarter2020, there was no goodwill impairment charge ~~of $350 million) were recorded during~~recorded.

2019 First Quarter

In the first ~~nine months~~quarter of ~~2018. Estimated remaining restructuring~~2019, we recorded non-cash goodwill impairment charges ~~primarily consist~~ of ~~lease termination~~$570 million (pre-tax and ~~other exit costs.~~

~~Long-lived asset impairment and restructuring~~after-tax) for our two reporting units in the European Pharmaceutical Solutions segment. These charges were recorded under the caption, ~~“Restructuring and Asset~~“Goodwill Impairment Charges” inwithin operating expenses in the accompanying condensed consolidated statements of operations.

~~Fiscal 2016 Cost Alignment Plan~~

InPrior to implementing the ~~fourth~~new segment reporting structure in the first quarter of ~~2016,~~2019, 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 and Pharmaceutical Distribution (formerly known as “Consumer Solutions” and “Pharmacy Solutions”) for purposes of goodwill impairment testing. As a result, we ~~committed~~were required to perform a ~~restructuring plan~~goodwill impairment test for these two new reporting units upon the change in reportable segment. Consequently, we recorded a non-cash goodwill impairment charge of $238 million (pre-tax and after-tax) in the first quarter of 2019 primarily because the estimated fair value of the Pharmaceutical Distribution reporting unit was determined to be lower than its reassigned carrying value.

During the first quarter of 2019, both reporting units projected a decline in the estimated future cash flows primarily triggered by additional U.K. government actions which were announced on June 29, 2018. Accordingly, we performed an interim goodwill impairment test for these reporting units. As a result, we determined that the carrying values of these reporting units exceeded their estimated fair values and recorded non-cash goodwill impairment charges of $332 million (pre-tax and after-tax) primarily for our ~~operating costs (the “Cost Alignment Plan”)~~Retail Pharmacy reporting unit. The discount rate and terminal growth rate used for the Retail Pharmacy reporting unit in the first quarter 2019 impairment test were 8.5% and 1.25%. The ~~Cost Alignment Plan primarily consists~~discount rate and terminal growth rate used for the Pharmaceutical Distribution reporting unit in the first quarter 2019 impairment test were 8.0% and 1.25%. As previously disclosed in our 2019 Annual Report, we had impaired the entire remaining goodwill balances of both reporting units as of March 31, 2019.

Refer to Financial Note 14, “Fair Value Measurements,” for more information on nonrecurring fair value measurements.

5. Business Combinations

2019 Acquisition

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 ~~reduction in workforce,~~leading national distributor of infusion 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,medical-surgical supplies as well as ~~the disposal~~a provider of biomedical services to alternate site and ~~abandonment~~home health providers. The financial results of certain non-core businesses. Under the Cost Alignment Plan, we recorded total pre-tax charges of $252 million since the inception of this plan through the third quarter of 2018. The remaining charges under this program primarily consist of exit-related costs and accelerated depreciation and amortization related to our Distribution Solutions segment.

~~There were no material restructuring charges recorded during the third quarters and first nine months of 2018 and 2017.~~

~~The following table summarizes the activity related to the restructuring 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 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, netMSD have been included in our condensed consolidated ~~statement~~statements of operations ~~during~~within our Medical-Surgical Solutions segment since the acquisition date.

The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period in the first ~~nine months~~quarter of ~~2018.~~

~~These divestitures did not meet~~2020. As of June 30, 2019, the ~~criteria to qualify as discontinued operations. Pre- and after-tax income from continuing operations~~final amounts of ~~these businesses were not material~~fair value recognized for the ~~third quarter~~assets acquired and ~~first nine months~~liabilities assumed as of ~~2018.~~the acquisition date, excluding goodwill and intangibles, were $239 million and $169 million. Approximately $388 million of the final purchase price allocation was assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of $326 million primarily representing customer relationships with a weighted average life of 18 years.

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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.Acquisition

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~~were finalized upon completion 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~~in the first ~~nine months~~quarter 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.2019. The financial results of ~~intraFUSION, BDI and Uniprix are~~CMM have been included in our condensed consolidated statements of operations within ~~our Distribution Solutions segment~~Other since the acquisition ~~dates.~~date.

~~The fair value~~Pursuant to the agreement, McKesson paid additional contingent consideration of ~~acquired intangibles from these acquisitions~~$69 million and $68 million for each of May 2019 and 2018. As of June 30, 2019 and March 31, 2019, the related liability was ~~primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows~~nil and ~~a discount rate. These inputs are considered Level 3 inputs.~~

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$69 million.

2017 ~~Acquisitions~~

Acquisition

Rexall Health

~~On December 28, 2016,~~In the third quarter of 2017, we completed our acquisition of Rexall Health which ~~operates~~operated approximately ~~450~~400 retail pharmacies in Canada, ~~primarily~~particularly in Ontario and Western Canada. The ~~initial~~ net cash purchase consideration of $2.9 billion Canadian dollars ~~(or, approximately~~(approximately $2.1 billion) was funded from cash on hand. ~~As part~~On May 23, 2018, as a result of ~~the transaction, McKesson agreed~~resolving certain indemnity and other claims related 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 $116this acquisition, $125 million Canadian dollars ~~(or, approximately $94~~(approximately $97 million) was released to us from an escrow account. The receipt of this cash was recorded as 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~~within operating expenses in our ~~North America pharmaceutical distribution and services business within our Distribution Solutions segment since the acquisition date.~~

~~The fair value measurements~~condensed consolidated statement 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. Includedoperations in the ~~final purchase price allocation were acquired identifiable intangibles~~first quarter 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.2019.

Other

Acquisitions

During the first ~~nine months~~quarters of ~~2017, we completed our acquisitions of Vantage Oncology Holdings, LLC (“Vantage”), Biologics, Inc., UDG Healthcare Plc~~2020 and ~~other businesses for net cash payments of $2.0 billion.~~

~~Other Acquisitions~~

~~During the last two years,~~2019, we also completed several other small acquisitions within ~~both of~~ our operating segments. 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.

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.


7.6.	~~Discontinued Operations~~Income Taxes

InDuring the first quarters of 2020 and 2019, income tax expense related to continuing operations was $136 million and $87 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 benefits were recognized ~~an after-tax loss of $113 million within discontinued operations primarily~~ for the ~~settlement~~pre-tax goodwill impairment charges 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~~our European Pharmaceutical Solutions segment given that these charges are not deductible 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, the carrying amounts of total assets and liabilities of discontinued operations were not material.

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8.	~~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.~~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~~prior year impact of nondeductible impairment charges as well as changes within our business mix of income and ~~the effect of an intercompany sale of software.~~

~~During the third quarters of 2018 and 2017, income tax benefit was $263 million and income tax 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, 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.

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~~items recognized 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.quarter.

As of ~~December 31, 2017,~~June 30, 2019, we had ~~$944~~$1,071 million of unrecognized tax benefits, of which ~~$833~~$887 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.~~year.

~~2017 Tax Act~~

~~On December 22, 2017, the U.S. government enacted comprehensive new~~We file income 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~~returns in the U.S. federal ~~corporate~~jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. The IRS is currently examining our U.S. corporation income tax ~~rate from 35 percent~~returns for 2013 through 2015. We are generally subject to ~~21 percent;~~audit by taxing authorities in various U.S. states and ~~(2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of~~in foreign ~~subsidiaries.~~jurisdictions for fiscal years 2012 through the current fiscal year.

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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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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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 $11 million and $12 million during the first quarters of 2020 and 2019. 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 quarter~~first quarters of ~~2018,~~2020 and 2019, there were no material exercises of the Put Right. During the first nine months of 2018, we paid $50 million to purchase 1.9 million shares of McKesson Europe through the exercises of the Put Right by the noncontrolling shareholders, which decreased the carrying value of redeemable noncontrolling interests by $53 million. The balance of redeemable noncontrolling interests is reported as the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted each period for exchange rate ~~fluctuations each period.~~fluctuations. At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017,~~2019, the carrying value of redeemable noncontrolling interests of ~~$1.44~~$1.40 billion and ~~$1.33~~$1.39 billion exceeded the maximum redemption value of ~~$1.31~~$1.25 billion and ~~$1.21~~$1.23 billion. At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017,~~2019, we owned approximately 77% ~~and 76%~~ of McKesson Europe’s outstanding common shares.

Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share. As a result, we recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $12 million and $32 million during 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.

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~~Oncology Holdings, LLC, which were ~~$238~~$194 million and ~~$178~~$193 million at ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017. We~~2019 on our condensed consolidated balance sheets. During the first quarters of 2020 and 2019, we allocated a total of ~~$46~~$43 million and ~~$137~~$46 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 ~~2018~~2020 were as follows:


(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2017	$	178		$	1,327
Balance, March 31, 2019							$	193		$	1,393
Net income attributable to noncontrolling interests	137			32			43			11
Other comprehensive income	—			161			—			6
Reclassification of recurring compensation to other accrued liabilities	—			(32		)	—			(11		)
Payments to noncontrolling interests	(73		)	—			(39		)	—
Exercises of Put Right	—			(53		)
Other	(4		)	—			(3		)	—
Balance, December 31, 2017	$	238		$	1,435
Balance, June 30, 2019							$	194		$	1,399

1816

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Changes in redeemable noncontrolling interests and noncontrolling interests for the first ~~nine months~~quarter of ~~2017~~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		)	—
Other	5			—
Balance, June 30, 2018	$	240		$	1,422

(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

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


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

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

~~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 June 30,
(In millions, except per share amounts)	2019			2018
Income (Loss) from continuing operations	$	483		$	(81	)
Net income attributable to noncontrolling interests	(54		)	(58		)
Income (Loss) from continuing operations attributable to McKesson	429			(139		)
Income (Loss) from discontinued operations, net of tax	(6		)	1
Net income (loss) attributable to McKesson	$	423		$	(138	)

Weighted average common shares outstanding:
Basic	188			202
Effect of dilutive securities:
Restricted stock units	1			—
Diluted	189			202

Earnings (Loss) per common share attributable to McKesson: ⁽¹⁾
Diluted
Continuing operations	$	2.27		$	(0.69	)
Discontinued operations	(0.03		)	0.01
Total	$	2.24		$	(0.68	)
Basic
Continuing operations	$	2.28		$	(0.69	)
Discontinued operations	(0.03		)	0.01
Total	$	2.25		$	(0.68	)

Quarter Ended December 31, Nine Months Ended December 31,
(In millions, except per share amounts) 2017 2016 2017 2016
Income from continuing operations $ 960
$ 649
$ 1,379
$ 1,647
Net income attributable to noncontrolling interests (58 ) (13 ) (169 ) (48 )
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

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

Earnings (loss) per common share attributable to McKesson: ⁽¹⁾

Diluted
Continuing operations $ 4.32
$ 2.86
$ 5.75
$ 7.07
Discontinued operations 0.01
(0.01 ) 0.01
(0.51 )
Total $ 4.33
$ 2.85
$ 5.76
$ 6.56
Basic
Continuing operations $ 4.34
$ 2.89
$ 5.78
$ 7.14
Discontinued operations 0.01
(0.02 ) 0.02
(0.52 )
Total $ 4.35
$ 2.87
$ 5.80
$ 6.62


(1)	Certain computations may reflect rounding adjustments.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately 3 million and 2 million potentially dilutive securities for the first quarters of 2020 and 2019 were excluded from the computations of diluted net earnings per common share, ~~for each of the quarters ended~~ ~~December 31, 2017~~ ~~and~~ ~~2016~~ ~~and for the nine months ended December 31, 2017 and 2016,~~ as they were anti-dilutive.


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

Changes in the carrying amount of goodwill were as follows:



(In millions)	U.S. Pharmaceutical and Specialty Solutions		European Pharmaceutical Solutions		Medical-Surgical Solutions		Other		Total
Balance, March 31, 2019	$	4,078	$	—	$	2,451	$	2,829	$	9,358
Goodwill acquired	—		39		—		—		39
Acquisition accounting, transfers and other adjustments	1		1		7		—		9
Foreign currency translation adjustments, net	9		—		—		26		35
Balance, June 30, 2019	$	4,088	$	40	$	2,458	$	2,855	$	9,441

(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

~~Table of Contents~~

~~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, 2019 accumulated goodwill impairment losses ~~for~~were $2,913 million in our ~~Distribution~~European Pharmaceutical Solutions segment ~~were $350~~and $470 million ~~and nil, and nil and $290 million for our Technology Solutions segment. Refer to Financial Note 3, “Goodwill Impairment Charges,” for more information on~~in Other. As of March 31, 2019 accumulated goodwill impairment ~~charges recorded~~losses were $2,943 million in ~~the second quarters of 2018~~our European Pharmaceutical Solutions segment and ~~2017.~~$461 million in Other.

Information regarding intangible assets is as follows:



	June 30, 2019								March 31, 2019
(Dollars in millions)	Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	12	$	3,831	$	(1,871	)	$	1,960	$	3,818	$	(1,801	)	$	2,017
Service agreements	11	1,022		(447		)	575		1,017		(430		)	587
Pharmacy licenses	26	513		(210		)	303		513		(209		)	304
Trademarks and trade names	13	893		(244		)	649		887		(232		)	655
Technology	4	141		(98		)	43		141		(94		)	47
Other	5	282		(212		)	70		288		(209		)	79
Total		$	6,682	$	(3,082	)	$	3,600	$	6,664	$	(2,975	)	$	3,689

December 31, 2017 March 31, 2017
(Dollars in millions)
Weighted
Average
Remaining
Amortization
Period
(years)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
Customer relationships 12 $ 3,480
$ (1,458 ) $ 2,022
$ 2,893
$ (1,295 ) $ 1,598
Service agreements 12 1,043
(366 ) 677
1,009
(316 ) 693
Pharmacy licenses 26 630
(140 ) 490
741
(150 ) 591
Trademarks and trade names 14 914
(171 ) 743
845
(124 ) 721
Technology 4 148
(79 ) 69
69
(64 ) 5
Other 4 263
(170 ) 93
201
(144 ) 57
Total $ 6,478

$ (2,384 ) $ 4,094
$ 5,758
$ (2,093 ) $ 3,665

Amortization expense of intangible assets was ~~$123~~$112 million and ~~$370~~$122 million for the ~~third quarter~~quarters ended June 30, 2019 and ~~nine months ended December 31, 2017, and $102 million and $332 million for the third quarter and nine months ended December 31, 2016.~~2018. Estimated ~~annual~~ amortization expense of these assets is as follows: ~~$113~~$298 million, ~~$437~~$389 million, ~~$421~~$365 million, ~~$403~~$277 million and ~~$370~~$248 million for the remainder of ~~2018~~2020 and each of the succeeding years through ~~2022~~2024 and ~~$2,350~~$2,023 million thereafter. All intangible assets were subject to amortization as of ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017~~2019.

~~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~~currency-denominated borrowings. At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017, $8,045~~2019, $7,692 million and ~~$8,362~~$7,595 million of total ~~long-term~~ debt were outstanding, of which ~~$531~~$310 million and ~~$1,057~~$330 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.~~

2118

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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,~~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, 2019, we were in compliance with all covenants. There were no borrowings under this facility during the ~~third~~first quarters of 2020 and ~~first nine months of 2018 and 2017,~~2019, and no borrowings outstanding as of ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017.~~2019.

We also maintain bilateral credit lines primarily denominated in Euros with a ~~total~~ committed balance of $9 million and an uncommitted balance of ~~$314 million.~~$199 million as of June 30, 2019. Borrowings and repayments were not material during the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017. As of December 31, 2017~~2019 and ~~March 31, 2017,~~ amounts outstanding under these credit lines were not ~~material.~~material as of June 30, 2019 and March 31, 2019.

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 commercial paper notes. During the first ~~nine months~~quarters of ~~2018,~~2020 and 2019, we borrowed ~~$12,699 million~~$2.6 billion and $9.0 billion and repaid ~~$12,133 million~~$2.6 billion and $7.0 billion under the program. ~~During the first nine months of 2017,~~At June 30, 2019 and March 31, 2019, there were no ~~material commercial paper issuances. As 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%.~~outstanding.


~~13.~~11.	Leases

Lessee

We lease facilities and equipment primarily under operating leases. We recognize lease expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease. Remaining terms for facility leases generally range from one to fifteen years, while remaining terms for equipment leases generally range from one to six years. Most real property leases contain renewal options (typically for five-year increments). Generally, the renewal option periods are not included within the lease term as we are not reasonably certain to exercise that right at lease commencement. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

ROU assets and operating lease liabilities are recognized at the lease commencement date. ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating leases liabilities are recognized based on the present value of the future lease payments over the lease term discounted at our incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of our leases. We estimate the discount rate as our incremental borrowing rate based on qualitative factors including Company-specific credit rating, lease term, general economic and the interest rate environment. For existing leases that commenced prior to the adoption of the amended leasing guidance, we determined the discount rate on April 1, 2019 using the full lease term. Operating lease liabilities are recorded under the caption, “Current portion of operating lease liabilities” and “Long-Term Operating Lease Liabilities” and the corresponding lease assets are recorded under the caption, “Operating Lease Right-of-Use Assets,” in our condensed consolidated balance sheet. Finance lease assets are included in property, plant and equipment, net and finance lease liabilities are included in current portion of long-term debt and long-term debt in our condensed consolidated balance sheet.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Supplemental balance sheet information related to leases was as follows:



(In millions, except lease term and discount rate)	June 30, 2019
Operating leases
Operating Lease Right-of-Use Assets	$	2,031

Current portion of operating lease liabilities	$	373
Long-Term Operating Lease Liabilities	1,805
Total operating lease liabilities	$	2,178

Finance Leases
Property, Plant and Equipment, net	$	67

Current portion of long-term debt	$	7
Long-Term Debt	86
Total finance lease liabilities	$	93

Weighted Average Remaining Lease Term (Years)
Operating leases	8.56
Finance leases	11.76

Weighted Average Discount Rate
Operating leases	3.61		%
Finance leases	3.99		%

The components of lease cost were as follows:



	Quarter Ended June 30,
(In millions)	2019
Short-term lease cost	$	8
Operating lease cost	115

Finance lease cost:
Amortization of right-of-use assets	2
Interest on lease liabilities	1
Total finance lease cost	3

Variable lease cost ⁽¹⁾	31
Sublease income	(8		)
Total lease cost ⁽²⁾	$	149


(1)	These amounts include payments for maintenance, taxes, payments affected by the consumer price index and other similar metrics and payments contingent on usage.


(2)	These amounts were primarily recorded within operating expenses in the accompanying condensed consolidated statement of operations.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Supplemental cash flow information related to leases was as follows:



	Quarter Ended June 30,
(In millions)	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(99	)
Operating cash flows from finance leases	—
Financing cash flows from finance leases	(3		)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases ⁽¹⁾	$	2,290
Finance leases	55

(1) These amounts include the transition adjustment for the adoption of the amended leasing guidance discussed in Financial Note 1, “Significant Accounting Policies.”

Maturities of lease liabilities as of June 30, 2019 were as follows:



(In millions)	Operating Leases			Finance Leases			Total
The remainder of 2020	$	319		$	8		$	327
2021	401			10			411
2022	344			10			354
2023	286			10			296
2024	232			10			242
Thereafter	900			69			969
Total lease payments ⁽¹⁾	$	2,482		$	117		$	2,599
Less imputed interest	(304		)	(24		)	(328		)
Present value of lease liabilities	$	2,178		$	93		$	2,271


(1)	Total lease payments have not been reduced by minimum sublease income of $191 million due under future noncancelable subleases.

As of June 30, 2019, we entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $275 million that are not reflected in the table above. These operating leases will commence between 2020 and 2022 with noncancelable lease terms of 5 to 20 years.

As previously disclosed in our 2019 Annual Report and under the previous lease accounting, the minimum lease payments required under operating leases were as follows as of March 31, 2019:



(In millions)	Noncancelable Operating Leases
2020	$	454
2021	397
2022	343
2023	290
2024	236
Thereafter	936
Total minimum lease payments ^{(1) (2)}	$	2,656


(1)	Amount includes future minimum lease payments for the sale-leaseback transaction of $49 million.


(2)	Total minimum lease payments have not been reduced by minimum sublease income of $133 million due under future noncancelable subleases.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Lessor

We lease primarily certain owned equipment to the physician practices that are classified as direct financing or sales-type leases. As of June 30, 2019, the total lease receivable was $303 million with a weighted average remaining lease term of approximately nine years. Interest income from these leases recorded was not material during the first quarter of 2020.


12.	Pension Benefits

The net periodic expense for our defined pension benefit plans was $6$24 million and ~~$16~~$5 million for the ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018, and $8 million and $22 million for the third quarter and first nine months of 2017.~~2019.

Cash contributions to these plans were $5$6 million and ~~$46~~$3 million for the ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018 and $6 million and $16 million for the third quarter and first nine months of 2017.~~2019. 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 Plan was fully funded by its plan assets at June 30, 2019 and March 31, 2019. During the first quarter of 2020, we offered the option of receiving a lump sum payment to certain participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 1,300 participants elected to receive the settlement, and lump sum payments of approximately $49 million were made from plan assets to these participants in June 2019. The benefit obligation settled approximated payments to plan participants and a pre-tax settlement charge of $17 million was recorded during the first quarter of 2020. We expect to purchase non-participating annuity contracts from an insurer that will pay and administer the future pension benefits of the remaining participants, which is expected to be completed by September 30, 2019.

As of June 30, 2019 and March 31, 2019, this Plan had an accumulated other comprehensive loss of approximately $95 million and $121 million.


~~14.~~13.	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~~cross-currency swaps, ~~cross currency swaps and~~ foreign currency forward ~~contracts.~~contracts and interest rate swaps. 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~~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 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 from intercompany loans denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~Net Investment Hedges and Derivatives~~Non-Derivative Instruments Designated as Hedges

~~We have €1.2~~At June 30, 2019 and March 31, 2019, 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 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 Loss in the consolidated statement 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, changes in carrying value attributable to the change in spot rates are recorded in ~~current~~ earnings. Losses ~~from~~of $24 million and gains of $161 million for net investment hedges were recorded in other comprehensive income ~~were $28 million and $205 million~~ during the ~~third~~first quarters of 2020 and 2019. Ineffectiveness on our non-derivative net investment hedges during the first quarter ~~and first nine months~~ of ~~2018.~~2020 resulted in gains of $10 million which were recorded in earnings within other income, net. There was no ineffectiveness in our non-derivative net investment hedges during the first quarter of 2019.

Derivatives Designated as ~~of December 31, 2017~~Hedges

At June 30, 2019 and March 31, ~~2017.~~2019, we had cross-currency swaps designated as net investment hedges with total gross notional amounts of $1,499 million Canadian dollars. At March 2019, we also had cross-currency swaps designated as net investment hedges with total gross notional amounts of £932 million British pound sterling.

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 and Canadian dollars against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded in accumulated other comprehensive loss in the condensed consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments denominated in British pound sterling and Canadian dollars. To the extent foreign currency denominated notes designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. Losses of $11 million and gains of $34 million were recorded in other comprehensive income for net investment hedges during the first quarters of 2020 and 2019. During the first quarter of 2020, we terminated cross-currency swaps with total gross notional amounts of £932 million British pound sterling due to ineffectiveness in our hedges within our British pound sterling hedging program that arose due to 2019 impairments of goodwill and certain long-lived assets in our U.K. businesses. Proceeds from the termination of these swaps totaled $84 million and resulted in a settlement gain of $34 million recorded in earnings within other income, net. There was no ineffectiveness in our hedges for the first quarter of 2019. The remaining cross-currency swaps will mature between November 2020 and November 2024.

At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017,~~2019, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional ~~values~~amounts of ~~$243~~$81 million, which were designated as cash flow hedges. ~~These contracts~~The remaining contract will mature ~~between March 2018 and~~in March 2020.

From time to time, we also 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 arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges.

At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017,~~2019, we had ~~cross currency~~cross-currency swaps with total gross notional amounts of ~~$3,411 million and $2,663~~approximately $2,908 million, which are designated as cash flow hedges. These swaps will mature between ~~February 2018~~April 2020 and January 2024.

For forward contracts and ~~cross currency~~cross-currency swaps that are designated as cash flow hedges, the effective portion of 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~~from cash flow hedges recorded in other comprehensive income ~~and earnings~~ were not material during the first quarters of 2020 and 2019. Gains or losses reclassified from Accumulated Other Comprehensive Income and recorded in operating expenses in the ~~third~~consolidated statements of operations were not material during the first quarters of 2020 and 2019. There was no ineffectiveness in our cash flow hedges during the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017.~~2019.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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 the change in ~~Canadian dollars with total gross notional~~ value ~~of $173 million. These contracts matured~~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, 2019 and March 31, ~~2017,~~2019, the total gross notional amounts of these contracts were ~~$34 million and $62~~approximately $28 million.

These contracts will mature through ~~July 2018~~October 2020 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~~in earnings within operating ~~expenses and~~expenses. Changes in the fair values were not material ~~for~~during the ~~third~~first quarters of 2020 and ~~first nine months of 2018 and 2017. The gains~~2019. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.

~~Table~~During the first quarter of ~~Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

2020, we also entered a number of forward contracts to offset a portion of the earnings impacts from the ineffectiveness of net investment hedges discussed above. At June 30, 2019, the total gross notional amounts of these contracts were approximately $630 million. These contracts matured in July 2019 and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly in earnings. During the first quarter of 2020, losses of $19 million were recorded in earnings within other income, net.

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



	Balance Sheet Caption	June 30, 2019						March 31, 2019
		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
Derivatives designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	16	$	—	$	81	$	17	$	—	$	81
Foreign exchange contracts (non-current)	Other Noncurrent Assets	—		—		—		—		—		—
Cross-currency swaps (current)	Prepaid expenses and other/Other Accrued Liabilities	37		8		355		—		18		—
Cross-currency swaps (non-current)	Other Noncurrent Assets/Liabilities	15		61		3,681		91		33		5,283
Total		$	68	$	69			$	108	$	51
Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	—	$	—	$	655	$	—	$	—	$	14
Foreign exchange contracts (current)	Other accrued liabilities	—		—		3		—		—		14
Total		$	—	$	—			$	—	$	—

Balance Sheet
Caption
December 31, 2017 March 31, 2017

Fair Value of
Derivative
U.S. Dollar Notional
Fair Value of
Derivative
U.S. Dollar Notional
(In millions) Asset Liability Asset Liability
Derivatives designated for hedge accounting
Foreign exchange contracts (current) Prepaid expenses and other $ 14
$ —
$ 81
$ 17
$ —
$ 81
Foreign exchange contracts (non-current) Other Noncurrent Assets 27
—
162
32
—
162
Cross currency swaps (current) Prepaid expenses and other —
—
307
17
—
174
Cross currency swaps (non-current) Other Noncurrent Assets/Liabilities —
163
3,104
90
—
2,489
Total $ 41
$ 163
$ 156
$ —

Derivatives not designated for hedge accounting
Foreign exchange contracts (current) Prepaid expenses and other $ —
$ —
$ 28
$ 1
$ —
$ 198
Foreign exchange contracts (current) Other accrued liabilities —
—
6
—
—
37
Total $ —
$ —
$ 1
$ —

Refer to Financial Note ~~15,~~14, "Fair Value Measurements," for more information on these recurring fair value measurements.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


~~15.~~14.	Fair Value Measurements

At ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017~~2019, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.

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~~$8.1 billion at ~~December 31, 2017~~,June 30, 2019, and ~~$8.4~~$7.6 billion and ~~$8.7~~$7.9 billion at March 31, ~~2017~~.2019. 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.

Assets Measured at Fair Value on a Recurring Basis

Cash and cash equivalents at ~~December 31, 2017~~June 30, 2019 and March 31, ~~2017~~2019 included investments in money market funds of ~~$1,066~~$460 million and ~~$478~~$1,205 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.

~~Table of Contents~~

~~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~~13, “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 first quarters of 2020 and ~~nine months ended December 31,~~ ~~2017~~ ~~and~~ ~~2016~~.2019.

Assets Measured at Fair Value on a Nonrecurring Basis

At December 31, 2017, assets measured at fair value on a nonrecurring basis consisted of goodwill and intangible assets for our McKesson Europe business within our Distribution Solutions segment, as further discussed below.

At March 31, ~~2017,~~2019, assets measured at fair value on a nonrecurring basis primarily consisted of goodwill and long-lived assets for our ~~EIS business within our Technology~~European Pharmaceutical Solutions segment.

There were no assets measured at fair value on a nonrecurring basis at June 30, 2019.

Goodwill

As discussed in Financial Note 3, “Goodwill Impairment Charges,” we recorded non-cash pre-tax and after-tax impairment charges of $350 million during the second quarter of 2018 for our McKesson Europe reporting unit within the Distribution Solutions segment, and $290 million ($282 million after-tax) during the second quarter of 2017 for our EIS reporting unit within the Technology Solutions segment. The impairments primarily resulted from a decline in the reporting units’ estimated cash flows.

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~~discounted cash flow (“DCF”) model to determine the fair value of the reporting unit.

~~Intangible~~Long-lived 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~~utilize multiple approaches including the ~~cost of an investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment, general~~DCF model and 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 approachapproaches 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 31, 2017, we remeasured the contingent consideration liability related to our acquisition of CMM~~We measure certain intangible and other long-lived assets at fair value on a nonrecurring ~~basis. Refer~~basis when they are deemed to ~~Financial Note 6, “Business Combinations,” for more information on~~be other-than-temporarily impaired. 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.

Table of ~~the contingent consideration liability.~~ Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

There were no liabilities measured at fair value on a nonrecurring basis at June 30, 2019 and March 31, ~~2017.~~2019.


~~16.~~15.	Commitments and Contingent Liabilities

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

in ~~Table of Contents~~Note 24 to our 2019 Annual Report on Form 10-K

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~When a loss~~ which disclosure is ~~considered probable~~incorporated in this footnote by this reference. The Company is vigorously defending itself against those claims 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.

those proceedings. 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, 2017those matters are ~~set out below. We are party to the legal proceedings~~ described below. ~~Unless otherwise stated,~~If we are ~~currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one~~unsuccessful in defending, or ~~a combination of more than one of these proceedings be successful, or should~~if we determine to settle any ~~or a combination~~ of these matters, we may be required to pay substantial sums, ~~become~~be subject to ~~the entry of an~~ injunction or be forced to change ~~the manner in which~~how we operate our business, which could have a material adverse impact on our financial position or results of operations.

Unless otherwise stated, we are unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for us to determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over many years. We review loss contingencies at least quarterly, to determine whether the loss probability has changed and whether we can make a reasonable estimate of the possible loss or range of loss. When we determine that a loss from a claim is probable and reasonably estimable, we record a liability in the amount of our estimate for the ultimate loss. We also provide disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed our recorded liability.

I. Litigation ~~Government Subpoenas~~ and ~~Investigations~~Claims Involving Distribution of Controlled Substances

~~As previously reported, the~~The Company is a defendant in many cases ~~alleging~~asserting claims related to ~~the~~ distribution of controlled substances to ~~pharmacies,~~pharmacies. We often ~~together~~are named as defendants along with other pharmaceutical wholesale distributors, ~~and~~ pharmaceutical manufacturers and retail pharmacy ~~chains named as defendants.~~chains. The ~~Company has~~plaintiffs in these actions include state attorneys general, county and municipal governments, hospitals, Indian tribes, pension funds, third-party payors and individuals. These actions have been ~~served with 192 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 VirginiaPuerto Rico and ~~Wisconsin. These complaints allege~~Canada. They contain a variety of causes of action, including negligence, public nuisance, unjust enrichment, civil conspiracy, as well as alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state and federal controlled ~~substance~~substances laws and ~~various~~ other ~~statutes in addition to common law claims, including negligence and public nuisance, and seek monetary damages and equitable relief. On~~statutes.

Since December 5, 2017, ~~the~~nearly all such cases pending in federal district courts ~~were~~have been transferred for consolidated pre-trial proceeding to a multi-district litigation ~~proceeding~~(“MDL”) in the United States District Court for the Northern District of Ohio captioned In re: National Prescription Opiate Litigation,Case No. ~~17-md-2804. Approximately 29~~17-md-28-04. At present, there are approximately 2,000 cases ~~remain~~under the jurisdiction of the MDL court. The court has set a trial date of October 21, 2019 for the claims brought by Cuyahoga County, Ohio and Summit County, Ohio. The Company has joined motions for summary judgments filed on July 19, 2019 addressing the RICO and Ohio Corrupt Practices Act claims, civil conspiracy, negligence per se, causation, preemption, and statute of limitations. On July 19, 2019, plaintiffs also filed motions for summary judgment addressing duties under the federal Controlled Substances Act and claims for abatement of public nuisance.

The Company is also named in more than 245 similar state court cases pending in 30 states plus Puerto Rico. These include actions filed by nineteen state attorneys general, and some by or on behalf of individuals, including wrongful death lawsuits and putative class action lawsuits brought on behalf of children with Neonatal Abstinence Syndrome due to alleged exposure to opioids in utero. In the Connecticut coordinated actions, the court granted defendants’ motion to dismiss and dismissed all claims filed by 21 municipalities; plaintiffs have appealed this decision. Defendants’ motions to dismiss have been denied by courts in ~~Connecticut, Florida, New Mexico,~~various other jurisdictions. Trial dates have been set in several of these state cases: March 2, 2020 for the New York ~~Pennsylvania, Tennessee~~State Coordinated Proceedings; March 9, 2020 for the action brought by the Washington Attorney General; March 23, 2020 for the action brought by the Alaska Attorney General; July 21, 2020 brought by the Ohio Attorney General; January 25, 2021 for the action brought by Shelby County, Tennessee; and ~~Texas.~~May 24, 2021 for the action brought by the Delaware Attorney General.

~~As previously disclosed,~~

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

II. Other Litigation and Claims

On May 17, 2013, the Company ~~and others~~was served with a complaint filed ~~suit~~ in the United States District Court for the Northern District of ~~Oklahoma,~~ California by True Health Chiropractic Inc., alleging that McKesson ~~Corporation,~~sent unsolicited marketing faxes in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA, True Health Chiropractic Inc., et al. ~~v. 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., CV-13-02219 (HG). Plaintiffs seek statutory damages from $500 to $1,500 per violation plus injunctive relief. True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. Both plaintiffs alleged that the Company violated the TCPA because it sent faxes that did not contain notices regarding how to opt out of receiving the faxes. On ~~January 9,~~July 16, 2015, plaintiffs filed a motion for class certification and on August 22, 2016, the court denied this motion, based, in part, on the grounds that identifying solicited faxes would require individualized inquiries as to consent. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. On July 17, 2018, the Ninth Circuit affirmed in part and reversed in part the district court’s denial of class certification and remanded the case to the district court for further proceedings. On June 24, 2019, the Supreme Court of the United States denied the Company’s petition for writ of certiorari asking the court to review the ruling by the Ninth Circuit.

On March 5, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads), was served with a qui tam complaint filed in July 2017 in the United States District Court for the Southern District of Illinois by a relator against RxC Acquisition Company, among others, alleging that UCB, Inc., provided illegal “kickbacks” to providers, including nurse educator services and reimbursement assistance services provided through RxC Acquisition Company, in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes. United States ex rel. CIMZNHCA, LLC v. UCB, Inc., et al., No. 17-cv-00765. The complaint seeks treble damages, civil penalties, and further relief, all in unspecified amounts. The United States and the states named in the complaint have declined to intervene in the suit. On December 17, 2018, the United States filed a motion to dismiss the complaint in its entirety; this motion was denied on April 15, 2019. On June 7, 2019, the court denied the United States’ motion for reconsideration. On July 8, 2019, the United States appealed to the United States Court of Appeals for the Seventh Circuit seeking interlocutory review of the denial of its motion for reconsideration of the denial of the motion to dismiss the complaint. The court has set a trial date of April 5, 2021.

On November 27, 2018, the Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads) was served with a qui tam complaint filed in the United States District Court for the Eastern District of Pennsylvania alleging that EMD Serono, Inc. and Pfizer, Inc. provided illegal “kickbacks” to providers, including services provided through RxC Acquisition Company and others, in violation of the Anti-Kickback statute, the False Claims Act, and various state false claims statutes. United States ex rel. Harris et al. v. EMD Serono, Inc. et al. No. 16-5594. The United States and the named states declined to intervene in the case. On December 17, 2018, the United States filed a motion to dismiss the complaint in its entirety. On April 3, 2019, the court granted the motion to dismiss. The time to appeal this ruling has expired.

On April 3, 2018, a second amended qui tam complaint was filed in the United States District Court for the Eastern District of New York by a ~~preliminary injunction enjoining~~relator, purportedly on behalf of the United States, 30 states, the District of Columbia, and two cities against McKesson Corporation, McKesson Specialty Care Distribution Corporation, McKesson Specialty Distribution LLC, McKesson Specialty Care Distribution Joint Venture, L.P., Oncology Therapeutics Network Corporation, Oncology Therapeutics Network Joint Venture, L.P., US Oncology, Inc. and US Oncology Specialty, L.P., alleging that from 2001 through 2010 the defendants ~~from taking any action~~repackaged and sold single-dose syringes of oncology medications in a manner that violated the ~~case pending~~federal False Claims Act and various state and local false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in ~~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~~unspecified amounts, United States ex rel. Omni Healthcare Inc. v. McKesson Corporation, et al., ~~Case no. CT-2081-11.~~12-CV-06440 (NG). The United States and the named states have declined to intervene in the case. On October 15, 2018, the Company filed a motion to dismiss the complaint as to all named defendants. On February 3, 2019, the court granted the motion to dismiss in part and denied it in part, leaving the Company and Oncology Therapeutics Network Corporation as the only remaining defendants in the case. On February 19, 2019, the relator filed a motion for reconsideration of the court’s dismissal of Oncology Therapeutics Network Joint Venture; this motion was denied by the court on June 28, 2019.

On September 25, 2018, plaintiffs filed a complaint in the United States District Court for the Eastern District of Pennsylvania alleging that the Company and its subsidiary, McKesson Medical-Surgical Inc., among others, violated the Sherman Act by restraining trade in the sale of generic drugs. Marion Diagnostic Center, LLC v. McKesson Corporation, et al., No. 2:18-cv-4137. On June 26, 2019, the court granted the Company’s motion to dismiss and authorized plaintiffs to seek leave to amend the claims against the Company.

~~As previously disclosed, two~~

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

On May 21, 2019, Jean E. Henry, a purported Company shareholder, filed a shareholder derivative ~~suits filed~~complaint in the Superior Court of San Francisco, California against certain current and former officers and directors of the Company, and the Company as a nominal defendant, alleging violations of fiduciary duties ~~relating~~and waste of corporate assets with respect to an alleged conspiracy to fix the ~~Company’s previously disclosed agreement with~~prices of generic drugs, Henry v. Tyler, et al., CGC-19-576119. On May 23, 2019, the ~~DEA and~~Company removed the ~~Department of Justice and various United States Attorneys’ offices~~case to ~~settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances were consolidated in~~ the United States District Court for the Northern District of California, as ~~In re McKesson Corporation Derivative Litigation~~,Case No. ~~4:17-cv-1850. On January 5, 2018, the defendants moved to dismiss the consolidated suit.~~19-cv-02869.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~As previously disclosed, Chaile Steinberg, a purported shareholder, filed a shareholder derivative complaint in the Court of Chancery of the State of Delaware against certain officers~~III. Government Subpoenas and directors 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, including ~~Police & Fire Ret. Sys of the City of Detroit v. McKessson Corporation, et al., No. 2017-0803, and~~ ~~Amalgamated Bank v. McKesson Corporation, et al.,~~ ~~No. 2017-0881. The Court of Chancery consolidated these three actions and the plaintiffs designated the complaint in the~~ ~~Steinberg~~ ~~action as 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 Court 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, alleging that McKesson Europe Holdings violated German takeover law in connection with the Company’s acquisition of McKesson Europe by paying more to some holders of McKesson Europe’s convertible bonds than it paid to the shareholders 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 ruling 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 ruling in favor of Magnetar was issued on December 12, 2017; this decision does not materially impact McKesson’s consolidated financial statements.

Investigations

From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely ~~matter.~~manner. 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 Annual Report on Form 10-K and previously filed 10-Qs.~~health care industry, as well as to settlements.


~~17.~~16.	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 $0.39 per common share. In July ~~26, 2017,~~2019, the Company’s quarterly dividend was raised from ~~$0.28~~$0.39 to ~~$0.34~~$0.41 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,~~May 2019, 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.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~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~~$600 million of the Company’s common stock. We repurchased a total of 4.7 million shares at an average price per share of $127.68 during the first quarter of 2020.

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,~~2020, we repurchased ~~1.8~~0.7 million of the Company’s shares for ~~$250~~$84 million through open market transactions at an average price per share of ~~$138.12.~~$128.64.

The total authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$2.8 billion at ~~December 31, 2017.~~June 30, 2019.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Other Comprehensive Income (Loss)

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

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)	2019			2018
Foreign currency translation adjustments ⁽¹⁾
Foreign currency translation adjustments arising during period, net of income tax benefit of nil and nil ^{(2) (3)}	$	70		$	(273	)
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	70			(273		)

Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of $9 and ($51) ⁽⁴⁾	(26		)	144
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	(26		)	144
Unrealized gains on cash flow hedges
Unrealized gains on cash flow hedges arising during period, net of income tax expense of $6 and nil	12			—
Reclassified to income statement, net of income tax expense of nil and nil	—			—
	12			—
Changes in retirement-related benefit plans ⁽⁵⁾
Net actuarial gain and prior service cost arising during the period, net of income tax expense of $1 and nil	6			—
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	2			7
Reclassified to income statement, net of income tax expense of $5 and nil ⁽⁷⁾	12			—
	21			8

Other comprehensive income (loss), net of tax	$	77		$	(121	)


(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 2020 and 2019.

(2)

During the ~~third~~first quarter of ~~2018,~~2020, the net foreign currency translation gains were primarily due to the strengthening of the Canadian dollar and Euro against the U.S. dollar from ~~October~~April 1, ~~2017~~2019 to ~~December 31, 2017. The~~June 30, 2019. During the first quarter of 2019, the net foreign currency translation ~~gains during the first nine months of 2018~~losses were primarily due to the ~~strengthening~~weakening of the Euro ~~Canadian dollar~~ and British pound sterling against the U.S. dollar from April 1, ~~2017~~2018 to December 31, 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.June 30, 2018.

(3)

The ~~third~~first quarter ~~and first nine months~~ of ~~2018 include~~2020 includes net foreign currency translation gains of ~~$12~~$6 million ~~and $160 million~~attributable to redeemable noncontrolling interests and the ~~third~~first quarter ~~and first nine months~~ of ~~2017 include~~2019 includes net foreign currency translation losses of ~~$31 million and $97~~$39 million attributable to redeemable noncontrolling interests.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


(4)	The first ~~nine months~~quarter of ~~2017~~2020 includes net foreign currency translation losses 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~~$24 million on the net investment hedges from the ~~€1.2~~€1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated ~~notes.~~notes and losses of $11 million on the net investment hedges from the cross-currency swaps. The first quarter of 2019 includes foreign currency gains of $161 million on the net investment hedges from the €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 cross-currency swaps.


~~(6)~~(5)	The ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018~~2019 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~~ 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.


(7)	The first quarter of 2020 reflects a reclassification of a pension settlement charge from accumulated other comprehensive loss to other income, net in our condensed consolidated statement of operations.

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McKESSON CORPORATION

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 quarter~~first quarters of 2020 and ~~first nine months of 2018 is~~2019 are 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 Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2017	$	(1,336	)	$	(116	)	$	(20	)	$	(238	)	$	(1,710	)
Balance at March 31, 2019																$	(1,628	)	$	53		$	(37	)	$	(237	)	$	(1,849	)

Other comprehensive income (loss) before reclassifications	30			(19		)	(16		)	—			(5		)	70			(26		)	12			8			64
Amounts reclassified to earnings and other	—			—			—			1			1			—			—			—			13			13
Other comprehensive income (loss)	30			(19		)	(16		)	1			(4		)	70			(26		)	12			21			77
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	12			—			—			—			12			6			—			—			—			6
Other comprehensive income (loss) attributable to McKesson	18			(19		)	(16		)	1			(16		)	64			(26		)	12			21			71
Balance at December 31, 2017	$	(1,318	)	$	(135	)	$	(36	)	$	(237	)	$	(1,726	)
Balance at June 30, 2019																$	(1,564	)	$	27		$	(25	)	$	(216	)	$	(1,778	)



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

Other comprehensive income (loss) before reclassifications	(273		)	144			—			8			(121		)
Amounts reclassified to earnings and other	—			—			—			—			—
Other comprehensive income (loss)	(273		)	144			—			8			(121		)
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(39		)	—			—			2			(37		)
Other comprehensive income (loss) attributable to McKesson	(234		)	144			—			6			(84		)
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)


17.	Related Party Balances and Transactions

During the fourth quarter of 2018, a public benefit California foundation (“Foundation”) was established to provide opioid education to patients, caregivers, and providers, address policy issues, and increase patient access to life-saving treatments. Certain officers of the Company also serve as directors and officers of the Foundation. 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 the first quarter of 2019.

Refer to Financial Note 2, “Equity Method Investment in Change Healthcare Joint Venture,” for information regarding related party balances and transactions with Change Healthcare Inc.


18.	~~Segment Information~~Segments of Business

We ~~currently~~ report our ~~operations~~financial results in ~~two operating~~three reportable segments: ~~McKesson Distribution~~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 revenues and operating profit before interest expense and income ~~taxes~~taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.

Our U.S. Pharmaceutical and ~~results from discontinued operations.~~Specialty Solutions segment distributes pharmaceutical and other healthcare-related products and also provides pharmaceutical solutions to life sciences companies 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.

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 equity method investment in Change Healthcare JV

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)

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,
(In millions) 2017 2016 2017 2016
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
Total Revenues $ 53,617
$ 50,130
$ 156,729
$ 149,820

Operating profit
Distribution Solutions ^{(3) (4)}
$ 819
$ 813
$ 1,920
$ 2,592
Technology Solutions ^{(5) (6)}
65
132
(46 ) 126
Total 884
945
1,874
2,718
Corporate Expenses, Net (120 ) (91 ) (337 ) (270 )
Interest Expense (67 ) (74 ) (204 ) (231 )
Income from Continuing Operations Before Income Taxes $ 697
$ 780
$ 1,333
$ 2,217



	Quarter Ended June 30,
(In millions)	2019			2018
Revenues
U.S. Pharmaceutical and Specialty Solutions ⁽¹⁾	$	44,165		$	40,977
European Pharmaceutical Solutions ⁽¹⁾	6,710			6,935
Medical-Surgical Solutions ⁽¹⁾	1,903			1,703
Other	2,950			2,992
Total Revenues	$	55,728		$	52,607

Operating profit ⁽²⁾
U.S. Pharmaceutical and Specialty Solutions ⁽³⁾	$	579		$	543
European Pharmaceutical Solutions ⁽⁴⁾	5			(560		)
Medical-Surgical Solutions	125			93
Other ^{(5) (6)}	141			114
Total	850			190
Corporate Expenses, Net ⁽⁷⁾	(175		)	(123		)
Interest Expense	(56		)	(61		)
Income from Continuing Operations Before Income Taxes	$	619		$	6

Revenues, net by geographic area
United States	$	46,321		$	42,890
Foreign	9,407			9,717
Total Revenues	$	55,728		$	52,607


(1)	Revenues derived from services represent less than 1% of our U.S. Pharmaceutical and Specialty Solutions segment’s total revenues, less than 10% of our European Pharmaceutical Solutions segment’s total revenues and less than 2% of ~~this~~our Medical-Surgical Solutions segment’s total revenues.

(2)

~~2018 revenues~~Segment operating profit includes gross profit, net of operating expenses, as well as other income, net, for ~~the Technology Solutions segment only include the results 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.operating segments.

(3)

~~Distribution~~Our U.S. Pharmaceutical and Specialty Solutions segment’s operating profit for the ~~third quarter~~first quarters of 2020 and ~~first nine months of 2018 include pre-tax credits of $2~~2019 includes $15 million and $5$21 million ~~and for the third quarter and first nine months of 2017 include~~ pre-tax credits ~~of $155 million and $151 million~~ related to our ~~LIFO~~last-in, first-out (“LIFO”) method of accounting for inventories. ~~LIFO credits were higher in 2017 compared to 2018 primarily due to changes made to full year expectations~~Operating profit for ~~net price increases during~~ the ~~third~~first quarter of ~~2017 and changes in estimated year end inventory levels. Additionally, the first nine months of 2017 included $144~~2019 also include $35 million of ~~net~~ cash ~~proceeds representing~~receipts for our share of ~~net settlements of~~ antitrust ~~class action lawsuits against drug manufacturers.~~legal settlements.

(4)

~~Operating~~European Pharmaceutical Solutions segment’s operating profit ~~for our Distribution Solutions segment~~ for the first ~~nine months~~quarter of ~~2018~~2019 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~~$570 million ~~for the McKesson Europe reporting unit.~~(pre-tax and after-tax).

(5)

Operating profit for our Technology 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, operating profitOther for the first ~~nine months~~quarter of ~~2018~~2019 includes a 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 and an escrow settlement gain of ~~$37~~$97 million ~~from the Healthcare Technology Net Asset Exchange~~(pre-tax and after-tax) representing certain indemnity and other claims related to ~~the final net working capital and other adjustments.~~our 2017 third quarter acquisition of Rexall Health.


(6)	~~The~~Operating profit for Other also includes our proportionate share of income of $4 million and loss of $56 million from Change Healthcare JV for the first ~~nine months~~quarters of ~~2017~~2020 and 2019.


(7)	Corporate expenses, net, for the first quarter of 2020 include pre-tax net settlement gains of $25 million from our net investment hedges and forward contracts and a ~~non-cash~~ pre-tax ~~goodwill impairment~~settlement charge of ~~$290~~$17 million ~~for~~from the ~~EIS reporting unit within~~termination of our ~~Technology Solutions segment.~~defined benefit pension plan.

~~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.

Table of Contents

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~~2019 previously filed with the SEC on May ~~22, 2017~~15, 2019 (“~~2017~~2019 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~~“Cautionary Notice About Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

Operating Segments

We report our financial results in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other . The factors for determining the reportable segments 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 revenues and operating profit before interest expense and income taxes. Refer to Financial Note 18, “Segments of Business,” 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)

~~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,									Quarter Ended June 30,
(Dollars in millions, except per share data)	2017			2016			Change			2017			2016			Change			2019				2018				Change
Revenues	$	53,617		$	50,130		7		%	$	156,729		$	149,820		5		%	$	55,728			$	52,607			6		%

Gross Profit	$	2,715		$	2,812		(3	)	%	$	8,109		$	8,475		(4	)	%	$	2,787			$	2,779			—

Gross Profit Margin	5.06			5.61			(55	)	bp	5.17			5.66			(49	)	bp	5.00			%	5.28			%	(28	)	bp

Operating Expenses:
Operating Expenses	$	(1,984	)	$	(1,981	)	-		%	$	(5,920	)	$	(5,802	)	2		%	$	(2,130	)		$	(2,127	)		—		%
Gain from Sale of Business	109			—			NM			109			—			NM
Goodwill Impairment Charges	—			—			NM			(350		)	(290		)	21			—				(570		)		(100	)
Restructuring and Asset Impairment Charges	(6		)	—			NM			(242		)	—			NM			(23		)		(96		)		(76	)
Gain from Escrow Settlement																			—				97				(100	)
Total Operating Expenses	$	(1,881	)	$	(1,981	)	(5	)	%	$	(6,403	)	$	(6,092	)	5		%	$	(2,153	)		$	(2,696	)		(20	)	%

Loss from Equity Method Investment in Change Healthcare	$	(90	)	$	—		NM			$	(271	)	$	—		NM
Operating Expenses as a Percentage of Revenues																			3.86			%	5.12			%	(126	)	bp

Other Income, Net																			$	37			$	40			(8	)	%

Income (Loss) from Equity Method Investment in Change Healthcare Joint Venture																			4				(56		)		107

Interest Expense																			(56		)		(61		)		(8	)

Income from Continuing Operations Before Income Taxes	$	697		$	780		(11	)	%	$	1,333		$	2,217		(40	)	%	619				6				NM
Income Tax Benefit (Expense)	263			(131		)	(301	)		46			(570		)	(108	)
Income from Continuing Operations	960			649			48			1,379			1,647			(16	)
Income Tax Expense																			(136		)		(87		)		56
Income (Loss) from Continuing Operations																			483				(81		)		696
Income (Loss) from Discontinued Operations, Net of Tax	1			(3		)	(133	)		3			(117		)	(103	)		(6		)		1				(700	)
Net Income	961			646			49			1,382			1,530			(10	)
Net Income (Loss)																			477				(80		)		696
Net Income Attributable to Noncontrolling Interests	(58		)	(13		)	346			(169		)	(48		)	252			(54		)		(58		)		(7	)
Net Income Attributable to McKesson Corporation	$	903		$	633		43		%	$	1,213		$	1,482		(18	)	%
Net Income (Loss) Attributable to McKesson Corporation																			$	423			$	(138	)		407		%

Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	4.32		$	2.86		51		%	$	5.75		$	7.07		(19	)	%	$	2.27			$	(0.69	)		429		%
Discontinued Operations	0.01			(0.01		)	(200	)		0.01			(0.51		)	(102	)		(0.03		)		0.01				(400	)
Total	$	4.33		$	2.85		52		%	$	5.76		$	6.56		(12	)	%	$	2.24			$	(0.68	)		429		%

Weighted Average Diluted Common Shares	208			222			(6	)	%	210			226			(7	)	%	189				202				(6	)	%

bp - basis points

NM - not meaningful

Revenues

Revenues increased ~~for 2018~~in the first quarter of 2020 compared to ~~2017~~the same period a year ago primarily due to market growth, ~~our business acquisitions and~~including expanded business with existing ~~customers within our North America pharmaceutical distribution businesses.~~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.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Gross Profit

Gross profit ~~decreased~~remained flat in ~~2018~~the first quarter of 2020 primarily due to ~~the 2017 fourth quarter contribution~~market growth and an acquisition, partially offset by unfavorable effects of ~~the majority~~foreign currency exchange fluctuations. Gross profit margin decreased in 2020 due to our mix of ~~our McKesson Technology Solutions businesses (“Core MTS Business”) to a joint venture, as further discussed below, significant~~businesses. Gross profit and gross profit margin for 2020 were also unfavorably affected by continuous lower government ~~reimbursement reductions~~reimbursements in the United Kingdom (“U.K.”)~~, the competitive sell-side environment~~ and lower last-in, first-out (“LIFO”) credits. ~~These decreases~~Additionally, gross profit 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~~quarter of ~~2018 was unfavorably affected by weaker pharmaceutical manufacturer pricing trends, and for the first nine months of 2017 benefited from $144~~2019 included $35 million of net cash ~~receipts~~proceeds representing our share of antitrust legal settlements.

LIFO inventory credits were $2$15 million and ~~$155~~$21 million ~~for~~in the ~~third~~first quarters of ~~2018~~2020 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)~~

2019. 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~~

~~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 increased compared to the same periods a year ago primarily due to market growth, procurement benefits realized through ClarusONE, our business acquisitions and the transition of our RHP business from our Technology Solutions segment. These increases were partially offset by significant government reimbursement reductions in the U.K., the competitive sell-side pricing environment, and our mix of business. Gross profit for the third quarter and first nine months of 2018 reflected lower LIFO credits, as further discussed below. Gross profit for the first nine months of 2017 included $144 million of cash receipts representing our share of antitrust legal settlements. Gross profit margin for the first nine months of 2018 was also unfavorably affected by weaker pharmaceutical manufacturer pricing trends.

Distribution Solutions segment’s gross profit for the third 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. Our North America distributionPharmaceutical 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~~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. ~~LIFO credits were higher in 2017~~

Operating Expenses

Operating expenses, and operating expenses as a percentage of revenues decreased for the first quarter of 2020 compared to ~~2018 primarily due to changes made to full~~the same period a 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~~ago primarily due to the 2019 first quarter goodwill impairment charges of $570 million (pre-tax and after-tax) for our European Pharmaceutical Solutions segment and lower restructuring and asset impairment charges. Additionally, operating expenses decreased due to favorable effects of foreign currency exchange fluctuations. Refer to Financial Note 4, “Goodwill Impairment Charges,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q for more information.

Operating expenses were also affected by the following significant items:

Opioid-related pre-tax expenses of $36 million and $42 million in the first quarters of 2020 and 2019 primarily related to litigation expenses. Refer to Financial Note 15, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q;

First quarter 2019 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; and

First quarter 2019 gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to our third quarter 2017 ~~fourth quarter deconsolidation~~acquisition of Rexall Health.

Restructuring Initiatives

During 2019, we committed to various restructuring initiatives intended to drive long-term incremental profit growth and increase operational efficiency. The initiatives consist of the ~~Core MTS Business,~~optimization of the ~~transition~~Company’s operating models and cost structures primarily through centralization and outsourcing of certain administrative functions and cost management. The initiatives also consist of implementing certain actions including a reduction in workforce, reorganization and consolidation of our ~~RHP~~ business operations and related headcount reductions, the closures of retail pharmacy stores in Europe as well as other facility closures. This set of initiatives are expected to ~~our Distribution Solutions segment~~be completed by the end of 2021. Additionally, we committed to certain actions in ~~April 2017 and~~connection with the ~~sale~~previously announced relocation of our ~~EIS business~~corporate headquarters from San Francisco, California to Irving, Texas, which became effective April 1, 2019. We anticipate that the relocation will be completed by January 2021. In connection with these initiatives, we expect to record total pre-tax charges of approximately $520 million to $660 million, of which $354 million of pre-tax charges were recorded to date primarily representing employee severance, exit-related costs, asset impairment charges and accelerated depreciation. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs. Refer to Financial Note 3, “Restructuring and Asset Impairment Charges,” to the accompanying condensed consolidated financial statements appearing in ~~October 2017. As a result,~~ this ~~segment’s 2018 gross profit included only our EIS business.~~Quarterly Report on Form 10-Q for more information on various initiatives.

3935

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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

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~~As previously disclosed in our 2019 Annual Report on Form 10-K, the estimated fair value of our McKesson Canada reporting unit exceeded the carrying value as part of our 2019 annual goodwill impairment ~~charge~~test. However, other risks, expenses and ~~restructuring~~future developments, such as additional government actions and ~~asset impairment charges.~~material changes in key market assumptions that we were unable to anticipate as of the 2019 testing date may require us to revise the projected cash flows, which could adversely affect the fair value of our McKesson Canada reporting unit in Other in future periods.

~~(2)~~State Opioid Statutes

Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that we may not be able to predict. In April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the imposition of certain annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. On December 19, 2018, the U.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. The ~~amounts exclude~~State appealed to the ~~gain from sale~~U.S. Court of ~~business and goodwill impairment charge.~~

~~Operating Expenses~~

~~Operating expenses for~~Appeals to the Second Circuit but did not seek a stay of the district court’s ruling. During the third quarter of 2019, we reversed the previously accrued estimated liability under the New York State OSA. The State of New York has subsequently adopted an exercise tax on sales of opioids in the State, which became effective July 1, 2019. The excise tax would apply only to the first sale occurring in New York, and thus may not apply to sales from the Company’s distribution centers in New York to New York customers. In addition, certain states have now passed legislation that could require us to pay taxes or assessments on the distribution of opioid medications in those states. Other states are also considering similar legislation. These proposed and passed bills vary in the amounts and the means of calculation. Liabilities for taxes or assessments under any such laws could have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted.

Other Income, Net:Other income, net, for the first quarter of 2020 decreased ~~5% and first nine months of 2018 increased 5%~~slightly compared to the same ~~periods~~period a year ~~ago.~~ago primarily due to the 2019 higher gains recognized from the sale of investments and a pension settlement charge, as further discussed below. The decreases are partially offset by net settlement gains of $25 million from our net investment hedges and forward contracts.

Other income, net, for the first quarter of 2020 also includes a pre-tax settlement charge of $17 million related to the Company’s previously approved termination of its frozen U.S. defined benefit pension plan. In connection with the plan termination, we expect to purchase non-participating annuity contracts from an insurer that will pay and administer the future pension benefits of the remaining participants, which is expected to be completed during the second quarter of 2020. Upon transfer of the remaining pension liabilities to the insurer, we expect to record a pre-tax settlement charge for the remaining balance of the plan-related accumulated other comprehensive loss. As of June 30, 2019, this benefit plan had an accumulated other comprehensive loss of approximately $95 million.

4036

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~Distribution Solutions~~

Distribution Solutions segment’s operating expenses for the first nine months of 2018 increased primarily due to the 2018 second quarter non-cash goodwill impairment charge of $350 million (pre-tax and after-tax) for our McKesson Europe reporting unit, and the 2018 second quarter non-cash asset impairment charges of $189 million pre-tax ($157 million after-tax) and restructuring charges of $53 million pre-tax ($45 million after-tax) primarily related to McKesson Europe’s U.K. retail business. The increases for the third quarter 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 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 reduction 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.~~

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

~~Loss~~(Loss) from Equity Method Investment in Change ~~Healthcare:~~ ~~The third quarter~~Healthcare Joint Venture: Our investment in Change Healthcare LLC (“Change Healthcare JV”) is accounted for using the equity method of accounting. During the first quarters of 2019 and ~~first nine months~~2020, we owned approximately 70% of ~~2018 included our~~the joint venture with the remaining equity ownership of approximately 30% held by shareholders of Change Healthcare Inc. Our proportionate share of ~~loss~~income from equity method investment in Change Healthcare ~~of $90~~JV was $4 million and ~~$271~~loss of $56 million ~~which primarily consisted~~for the first quarters of ~~transaction~~2020 and 2019. Our proportionate share of income or loss for 2020 and 2019 includes amortization expenses associated with equity method intangible assets 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,~~venture. The amounts are recorded under the ~~effects of the enactment of the 2017 Tax Act are expected to be recognized~~caption, “Income (Loss) from Equity Method Investment in Change Healthcare Joint Venture,” in our condensed ~~statement~~consolidated statements of ~~operations~~operations.

On June 27, 2019, common stock and certain other securities of Change Healthcare Inc. began trading on the NASDAQ (“IPO.”). On July 1, 2019, upon the completion of its IPO, Change Healthcare Inc. received net cash proceeds of approximately $888 million. Change Healthcare Inc. contributed the proceeds from its offering of common stock of $609 million to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change Healthcare Inc. to acquire certain securities of Change Healthcare JV that substantially mirror the terms of other securities included in the ~~fourth~~offering by Change Healthcare Inc. As a result, McKesson’s equity interest in Change Healthcare JV was reduced to approximately 58.5%, which will be used to recognize our proportionate share in net income or loss from Change Healthcare JV, commencing the second quarter of ~~2018. We~~2020. As a result of this ownership dilution to 58.5% from 70%, we expect to recognize a pre-tax dilution loss of approximately $246 million in the second quarter of 2020. Additionally, our proportionate share of ~~a provisional net benefit recognized by~~income or loss from this equity method investment is expected to be further reduced as settlements of other securities may occur in the future reporting periods.

Subsequent to the IPO, the fair value that was derived from trading prices of Change Healthcare Inc.’s common stock was below the carrying value of our investment in Change Healthcare JV indicating a potential impairment. Accordingly, we evaluated our equity method investment in Change Healthcare JV for an other-than-temporary impairment (“OTTI”). We considered various factors in determining whether an OTTI has occurred, including the limited trading history available, our ability and intent to hold the investment until its fair value recovers, the implied EBITDA valuation multiples compared to public guideline companies, the joint venture’s ability to achieve milestones and any notable operational and strategic changes by the joint venture. After the evaluation, we determined that an OTTI has not occurred as of June 30, 2019 and as of the date of this Quarterly Report on Form 10-Q. However, we may be required to recognize an impairment loss in future reporting periods if and when a decline in fair value of our investment in Change Healthcare JV below the carrying value is determined to be other than temporary. Such determination will be based on the prevailing facts and circumstances at that time, including the reported results and disclosures of Change Healthcare Inc. as well as the market price of its common stock. Refer to Financial Note 2, “Equity Method Investment in Change Healthcare Joint Venture,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q for more information.

We expect to complete a tax-efficient exit from our equity method investment in Change Healthcare JV through a distribution of the shares of a subsidiary holding all of our interests in the Change Healthcare JV to our shareholders, followed by a merger of such subsidiary with and into Change Healthcare Inc. in exchange for shares of common stock in Change Healthcare Inc. (“Qualified McKesson Exit”). If the Qualified McKesson Exit does not qualify as a tax-efficient transaction, Change Healthcare Inc. has agreed to pay us 85% of related cash tax savings realized subsequent to the spin-off or split-off and, in certain circumstances, if the failure of the Qualified McKesson Exit to qualify as a tax efficient transaction is due to Change Healthcare Inc.’s failure to comply with a tax matters agreement, to indemnify us for certain tax-related losses. In the event of a partial exit, Change Healthcare Inc. will be required to pay us 85% of the net cash tax savings realized from the ~~enactment~~exchange of ~~the 2017 Tax Act to be approximately $70 million to $110 million primarily due to~~ a ~~reduction~~portion of our interest in ~~future applicable tax rate. The impact of the 2017 Tax Act for~~ Change Healthcare ~~may differ materially from this provisional amount.~~JV for shares of common stock in Change Healthcare Inc.

4137

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~Acquisition-Related~~Transaction-Related Expenses and Adjustments

~~Acquisition-related~~Transaction-related expenses ~~which~~generally included transaction and integration expenses that are directly related to business acquisitions and ~~the gain on the Healthcare Technology Net Asset Exchange, were $43 million~~divestitures.

Transaction-related expenses and ~~$75 million for the third quarters of 2018 and 2017, and $95 million and $165 million~~adjustments for the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017. The third quarter~~2019 were $44 million and ~~first nine months of 2018 include our proportionate share of transaction and integration expenses incurred by Change Healthcare. The first nine months of 2018 includes a $37~~$52 million, ~~gain associated with the final net working capital and other adjustments from the Healthcare Technology Net Asset Exchange.~~

~~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		2019		2018
Operating Expenses
Integration related expenses	$	12	$	22	$	27		$	67	$	17	$	16
Restructuring, severance and relocation	12		7		18			18		—		3
Transaction closing expenses	—		43		11			72		—		1
Gain on Healthcare Technology Net Asset Exchange	—		—		(37		)	—
Other Expense ⁽¹⁾	19		3		76			8
Acquisition Expenses and Related Adjustments	$	43	$	75	$	95		$	165
Other Expenses ⁽¹⁾										27		32
Transaction-Related Expenses and Adjustments										$	44	$	52


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

~~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 were $193 million and $102 million for the third quarters of 2018 and 2017 and $584 million and $332 million for the first nine months of 2018 and 2017. These expenses were primarily recorded in our ~~operating expenses and in our proportionate share of loss from the~~ equity method investment in Change ~~Healthcare.~~

~~Amortization expenses by segment~~Healthcare JV 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.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Segment Operating Profit, Corporate Expenses, Net~~$189 million 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~~


~~(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 Solutions:~~ Operating profit increased for the segment for 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 2018 primarily due to our mix of business and higher operating expenses as a percentage of revenues driven by our business acquisitions. Operating profit and operating profit margin decreased for the segment$199 million for the first ~~nine months~~quarters of ~~2018 compared to the same periods a year ago~~2020 and 2019. The amounts are primarily ~~due to our mix of business and higher~~recorded in operating expenses ~~as a percentage~~and under the caption, “Income (Loss) from Equity Method Investment in Change Healthcare Joint Venture”.

Income Taxes: During the first quarters of ~~revenues driven primarily by a~~2020 and 2019, income tax expense related to continuing operations was $136 million and $87 million. During the first quarter of 2019, no tax benefit was recognized for the pre-tax goodwill impairment charge ~~and restructuring and asset impairment charges~~of $570 million related to our McKesson Europe business. These decreases were partially offset by the improved gross profit margin primarily due to market growth within our North America distribution businesses, procurement benefits and our business acquisitions.

~~Technology Solutions:~~ ~~Operating profit~~European Pharmaceutical Solutions segment given that this charge is not deductible for the segment decreased for 2018 primarily due to the 2017 fourth quarter deconsolidation of our Core MTS Business and loss from the equity method investment in Change Healthcare. The decrease is partially offset by a gain from the sale of our EIS business and reduction in our TRA liability. Operating profit for the first nine months of 2017 included a goodwill impairment charge relating to our EIS business.

~~Corporate:~~ ~~Corporate expenses, net, increased for 2018 primarily due to higher operating expenses driven by Corporate initiatives and lower other income compared to 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.~~purposes. Fluctuations in our reported income tax rates are primarily due to ~~discrete items mainly driven by~~ the ~~impact of the 2017 Tax Act, the~~prior year impact of nondeductible impairment charges as well as changes within our business mix of income and discrete items recognized in the ~~effect~~quarter.

On June 7, 2019, after a rehearing, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany ~~sale of software.~~

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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 expense was $131 million~~cost-sharing arrangement to share expenses related to ~~continuing operations and included net discrete tax benefits of $424 million and $12 million. During~~share-based compensation. The opinion reversed 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~~prior decision of the ~~2017~~United States Tax ~~Act and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits. As previously discussed, the impact~~Court which had ruled in favor of the ~~2017 Tax Act~~taxpayer. We will continue to monitor developments in this case, including further appeals. The ultimate outcome may differ materially from this provisional amount. 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.

~~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~~have an ~~unfavorable~~adverse 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.rate.

~~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~~the first quarters of 2020 and 2019, primarily represents ClarusONE, Vantage Oncology Holdings, LLC 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 9,7, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form10-Q for ~~additional~~more information.

Net Income (Loss) Attributable to McKesson Corporation: Net income (loss) attributable to McKesson Corporation was ~~$903~~net income of $423 million and ~~$633~~a net loss of $138 million for the first quarters of 2020 and ~~diluted~~2019. Diluted earnings per common share attributable to McKesson Corporation ~~were $4.33 and $2.85 for~~was $2.24 in the ~~third quarters~~first quarter of ~~2018 and 2017. Net income attributable to McKesson Corporation was $1,213 million and $1,482 million,~~2020 and diluted ~~earnings~~loss per common share attributable to McKesson Corporation ~~were $5.76 and $6.56 for~~was $0.68 in the first ~~nine months~~quarter of ~~2018~~2019. 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 2020 and ~~2017.~~2019 diluted earnings per share reflect the cumulative effects of share repurchases.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Weighted Average Diluted Common Shares Outstanding:Diluted earnings per common share ~~were~~was calculated based on a weighted average number of shares outstanding of ~~208~~189 million and ~~222~~202 million for the ~~third~~first quarters of ~~2018~~2020 and ~~2017~~ ~~and 210 million and 226 million for the first nine months of 2018 and 2017.~~2019. Weighted average diluted shares for ~~2018~~2020 decreased from ~~2017~~2019 primarily reflecting common stock ~~repurchases~~repurchases.

Segment Results:

Revenues:



	Quarter Ended June 30,
(Dollars in millions)	2019		2018		Change
U.S. Pharmaceutical and Specialty Solutions	$	44,165	$	40,977	8		%
European Pharmaceutical Solutions	6,710		6,935		(3	)
Medical-Surgical Solutions	1,903		1,703		12
Other	2,950		2,992		(1	)
Total Revenues	$	55,728	$	52,607	6		%

U.S. Pharmaceutical and Specialty Solutions

U.S. Pharmaceutical and Specialty Solutions revenues for the first quarter of 2020 compared to the same period a year ago increased 8% primarily due to market growth, including expanded business with existing customers, and growth of specialty pharmaceuticals. 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 decreased 3% for the first quarter of 2020 compared to the same period a year ago primarily due to unfavorable effects of foreign currency exchange fluctuations of 6%, partially offset by market growth in our distribution businesses.

Medical-Surgical Solutions

Medical-Surgical Solutions revenues for the first quarter of 2020 compared to the same period a year ago increased 12% primarily due to our 2019 first quarter acquisition of Medical Specialties Distributors LLC (“MSD”) and market growth.

Other

Revenues in Other decreased 1% for the first quarter of 2020 compared to the same period a year ago. Revenues decreased primarily due to unfavorable effects of foreign currency exchange fluctuations of 3%, partially offset by growth in our McKesson Prescription Technology Solutions (“MRxTS”) business.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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



	Quarter Ended June 30,
(Dollars in millions)	2019				2018				Change
Segment Operating Profit ⁽¹⁾
U.S. Pharmaceutical and Specialty Solutions	$	579			$	543			7		%
European Pharmaceutical Solutions ⁽²⁾	5				(560		)		101
Medical-Surgical Solutions	125				93				34
Other	141				114				24
Subtotal	850				190				347
Corporate Expenses, Net	(175		)		(123		)		42
Interest Expense	(56		)		(61		)		(8	)	%
Income from Continuing Operations Before Income Taxes	$	619			$	6			NM

Segment Operating Profit (Loss) Margin
U.S. Pharmaceutical and Specialty Solutions	1.31			%	1.33			%	(2	)	bp
European Pharmaceutical Solutions	0.07				(8.07		)		814
Medical-Surgical Solutions	6.57				5.46				111

bp - basis points

NM - not meaningful


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


(2)	Operating profit of our European Pharmaceutical Solutions segment for 2019 includes a goodwill impairment charge of $570 million.

Segment Operating Profit

U.S. Pharmaceutical and Specialty Solutions: Operating profit increased for this segment for the first quarter of 2020 compared to the same period a year ago primarily due to market growth including growth in our specialty business. Operating profit margin slightly decreased primarily due to the 2019 net cash proceeds representing our share of antitrust legal settlements and lower LIFO credits, partially offset by lower opioid-related costs.

European Pharmaceutical Solutions: Operating profit and operating profit margin increased for the first quarter of 2020 compared to the same period a year ago primarily due to the 2019 goodwill impairment charges of $570 million and lower restructuring and asset impairment charges, partially offset by continuous lower government reimbursements in the ~~second half of 2017 and~~U.K. Operating profit in in the first ~~nine months~~quarter of ~~2018.~~2020 was also unfavorably impacted by lower sales volume in retail pharmacy U.K.

Medical-Surgical Solutions: Operating profit for this segment increased for the first quarter of 2020 compared to the same period a year ago primarily due to market growth. Operating profit margin for the first quarter of 2020 compared to the same period a year ago increased primarily due to lower restructuring charges and ongoing cost management.

Other: Operating profit for Other increased for the first quarter of 2020 compared to the same period a year ago primarily due to growth in our MRxTS business, lower restructuring charges related to our Canada business, partially offset by the 2019 gain from an escrow settlement of $97 million related to our 2017 acquisition of Rexall Health. Operating profit for Other for the first quarter of 2020 also includes income of $4 million from our equity method investment in Change Healthcare JV compared to a loss of $56 million in the same prior year period.

Corporate: Corporate expenses, net, increased for the first quarter of 2020 compared to the same period a year ago primarily due to an increase in opioid-related costs, a pension settlement charge, higher costs for technology initiatives, partially offset by net settlement gains from our net investment hedges and forward contracts. The first quarter of 2019 included gains recognized from the sale of investments.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Interest Expense: Interest expense for the first quarter of 2020 compared to the same period a year ago decreased primarily due to a decrease in the issuance of commercial paper. Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.

Business Combinations

Refer to Financial Note 6,5, “Business Combinations,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑~~Q for further information.~~Q.

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.

Critical Accounting Policies and Estimates

Except as noted below, there have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the "Critical Accounting Policies and Estimates" disclosed in Part II, Item 7 of our 2019 Annual Report on Form 10-K.

Equity Method Investments

We evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the decline in value is deemed to be other than temporary, an impairment is recognized to the extent that the fair value is less than the carrying value of the investment. We consider various factors in determining whether a loss in value of an investment is other than temporary including: the length of time and the extent to which the fair value has been below cost; the financial condition of the investees, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value is other than temporary, expectations about the business operations of investees, as well as industry, financial and market factors. Any significant changes in assumptions or judgments in assessing impairments could result in an impairment charge.

The carrying value of our equity method investment in the Change Healthcare JV was $3,617 million at June 30, 2019. We have not disposed of any LLC units in our investment in Change Healthcare JV and management believes it has the ability and intent to hold the investment for sufficient time to allow for the fair value to recover.

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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 ~~generated~~utilized cash of ~~$1,323~~$51 million and ~~$3,309~~$1,061 million during the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017.~~2019. Operating activities for the first ~~nine months~~quarter of ~~2018 and 2017~~2020 were affected by ~~higher drafts and accounts payable and~~ increases in receivables, and ~~inventories~~for the first quarter of 2019 were affected by increases in receivables and inventory, 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~~$129 million and ~~$3,619~~$875 million during the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017.~~2019. Investing activities for ~~2018~~2020 and 2019 include ~~$1,979~~$111 million and $145 million in capital expenditures for property, plant and equipment, and capitalized software. Investing activities for 2019 include $826 million of net cash payments for acquisitions, including ~~$1.3 billion~~$784 million 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.~~MSD. Investing activities for ~~2018~~2019 also included ~~$329 million of net cash proceeds from the sale of businesses and equity method investments and a $126~~$97 million cash ~~payment~~ received as a result of resolving certain indemnity and other claims related to ~~the Healthcare Technology Net Asset Exchange. Investing activities for~~our 2017 ~~included $4,174 million~~acquisition of ~~net cash payments for acquisitions,~~Rexall Health.

Table 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.Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Financing activities utilized cash of ~~$1,147 million and $1,145~~$872 million during the first ~~nine months~~quarter of ~~2018~~2020, and ~~2017.~~provided cash of $1,541 million during the first quarter of 2019. Financing activities for ~~2018~~2020 include cash receipts ~~of $12,699 million~~ and payments of ~~$12,133~~$2,610 million 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~~2019 included cash receipts of ~~$2,803~~$9,036 million and payments of ~~$1,405~~$7,005 million for short-term ~~borrowings and a payment of $392 million for long-term debt.~~borrowings. Financing activities for the first ~~nine months~~quarters of ~~2018~~2020 and ~~2017~~2019 include ~~$951~~$701 million and ~~$2,060~~$307 million of cash paid for stock repurchases, including shares surrendered for tax withholding. Additionally, financing activities for ~~the first nine months of 2018~~2020 and ~~2017~~2019 also include ~~$192~~$75 million and $71 million of cash paid for dividends.

The Company’s Board has authorized the repurchase of McKesson’s common stock from ~~time to time~~time-to-time in open market transactions, privately negotiated transactions, 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,~~May 2019, 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$600 million of the Company’s common stock. We repurchased a total of 4.7 million shares at an average price per share of $127.68 during the first quarter of 2020.

During the first six 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,~~2020, we repurchased ~~1.8~~0.7 million of the Company’s shares for ~~$250~~$84 million through open market transactions at an average price per share of ~~$138.12.~~ $128.64.

The total authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$2.8 billion at ~~December 31, 2017.~~June 30, 2019.

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, 2019			March 31, 2019
Cash and cash equivalents	$	2,619		$	2,783
Cash, cash equivalents and restricted cash							$	1,947		$	2,981
Working capital	2,543			1,336			476			839
Debt to capital ratio ⁽¹⁾	39.5		%	39.2		%	44.3		%	43.3		%
Return on McKesson stockholders’ equity ⁽²⁾	45.3		%	54.6		%	6.8			0.4


(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 (loss) 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.

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, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market ~~funds denominated in Euros, AAA rated prime money market funds~~fund denominated in British pound ~~sterling, time deposits, and Canadian government debentures.~~sterling.

The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our ~~short‑term~~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, 2019 included approximately ~~$1.2 billion~~$1,012 million of cash held by our subsidiaries outside of the United States. ~~Notwithstanding recent tax law changes regarding~~Our primary intent is to utilize this cash for foreign 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 foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the ~~U.S., our primary intent remains to invest this cash in our foreign businesses~~United States is generally no longer taxable for ~~an indefinite period~~federal income tax purposes.

Table of ~~time.~~ Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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 and other current liabilities. ~~Our Distribution Solutions segment requires~~We require 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 2020 primarily due to ~~an increase~~a decrease in ~~commercial paper outstanding balance.~~stockholders’ equity driven by share repurchases.

OnIn July ~~26, 2017,~~2019, the Company’s quarterly dividend was raised from ~~$0.28~~$0.39 to ~~$0.34~~$0.41 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.

The carrying value of redeemable noncontrolling interests related to McKesson Europe was ~~$1.44~~$1.40 billion at ~~December 31, 2017,~~June 30, 2019, which exceeded the maximum redemption value of ~~$1.31~~$1.25 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~~Upon the effectiveness of the Domination Agreement on December 2, 2014, the noncontrolling shareholders of McKesson Europe ~~have~~received a put right that enables them to put ~~(“Put Right”)~~ their McKesson Europe shares to McKesson at €22.99 per share, which price is increased annually for interest in the amount of 5 percentage points above a base rate published semiannually by the German Bundesbank, ~~semiannually,~~ less any compensation amount or guaranteed dividend already paid ~~by McKesson in respect of the relevant time period~~ (“Put Amount”). The ~~exercise of~~redemption value is the Put ~~Right will reduce~~Amount adjusted for exchange rate fluctuations each period. The ultimate amount and timing of any future cash payments related to the ~~balance~~Put Amount are uncertain. Additionally, we are obligated to pay an annual recurring compensation of ~~redeemable~~€0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling ~~interests.~~ shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.

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.~~

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~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

10-Q.

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.~~

issuances. 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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McKESSON CORPORATION

FINANCIAL ~~REVIEW (CONCLUDED)~~NOTES (CONTINUED)

(UNAUDITED)

~~FACTORS AFFECTING~~CAUTIONARY NOTICE ABOUT 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.~~1934. 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. Readers are cautioned not to place undue reliance on forward‑looking statements, which speak only as of the date such statements were first made. We undertake no obligation to publicly release any updates or revisions to our 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.~~factors, which are described in more detail in the Risk Factors discussion in Item 1A of Part I of our most recent Annual Report on Form 10-K, as updated in Item 1A of Part II of this report. The reader should not consider this list to be a complete statement of all potential risks and uncertainties:


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


▪	~~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~~

Changes in the U.S. and European healthcare industry and regulatory environments could have a material adverse impact on our results of operations.

Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial position and results of operations.

Changes in the Canadian healthcare industry and regulatory environment could have a material adverse impact on our results of operations.

General European economic conditions together with austerity measures taken by certain European governments could have a material adverse impact on our results of operations.

Changes in the European regulatory environment with respect to privacy and data protection regulations could have a material adverse impact on our results of operations.

Our results of operations, which are stated in U.S. dollars, could be adversely impacted by fluctuations in foreign currency exchange rates.

Our business could be hindered if we are unable to complete and integrate acquisitions successfully.

Our results of operations are impacted by our investment in Change Healthcare JV.

Our business and results of operations could be impacted if we fail to manage and complete divestitures and distributions.

We are subject to legal and regulatory proceedings that could have a material adverse impact on our financial position and results of operations.

Competition and industry consolidation may erode our profit.

A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as substantial defaults in payments by a large customer or group purchasing organization, could have a material adverse impact on our financial position and results of operations.

Contracts with foreign and domestic government entities and their agencies pose additional risks relating to future funding and compliance.

Our future results could be materially affected by public health issues whether occurring in the United States or abroad.

We rely on sophisticated computer systems to perform our business operations. Although we, our customers, our strategic partners and our external service providers use a variety of security measures to protect our and their computer systems, a failure or compromise of our, our customers’, our strategic partners’ or our external service providers’ computer systems from a cyberattack, disaster, or malfunction may result in material adverse operational and financial consequences.

We could experience losses or liability not covered by insurance.

Proprietary protections may not be adequate, and products may be found to infringe the rights of third parties.

System errors or failures of our products or services to conform to specifications cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our results of operations.

Various risks could interrupt customers’ access to their data residing in our service centers, exposing us to significant costs.

We may be required to record a significant charge to earnings if 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 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~~long-lived assets, or investments become further impaired.

Tax legislation initiatives or challenges to our tax positions could have a material adverse impact on our results of operations.

Volatility 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. Exceptdisruption to the ~~extent required~~global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.

Changes in accounting standards issued by ~~law,~~the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our consolidated financial statements.

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FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

We could face significant liability if we ~~undertake no obligation~~withdraw from participation in one or more multiemployer pension plans in which we participate, or if one or more multiemployer plans in which we participate is underfunded.

We may not realize the expected benefits from our restructuring and business process initiatives.

We may experience difficulties with outsourcing and similar third-party relationships.

We may face risks associated with our retail expansion.

We may be unable to ~~publicly release the result~~keep existing retail store locations or open new retail locations in desirable places, which could materially adversely affect our results 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.~~operations.

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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~~2019 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~~2020 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,~~15, “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~~Except as noted below, 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~~2019 Annual Report on Form 10-K.

Our results of operations are impacted by our investment in Change Healthcare JV.

Change Healthcare JV is jointly governed by McKesson and Change Healthcare Inc. Operating a business under joint governance of unaffiliated, controlling members could lead to conflicts of interest or deadlocks on important and time-sensitive operational, financial or strategic decisions, and will require additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. Any failure to manage the joint venture relationship or to realize the strategic and financial benefits that we expect, may have a material adverse impact on our results of operations.

Our business and results of operations could be impacted if we fail to manage and complete divestitures and distributions.

We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help us meet our objectives. When we decide to sell assets or otherwise exit a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. For example, we might experience unexpected challenges in our plans for a tax-efficient distribution of our investment in Change Healthcare JV that could delay our exit from that investment. We may also experience greater dissynergies than expected from divestitures, and the impact of any divestiture on our revenue growth may be larger than projected. After reaching an agreement with a buyer, we likely will be subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals, which, if not satisfied or obtained, may prevent us from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could have a material adverse impact on our results of operations.

We may be required to record a significant charge to earnings if our goodwill, intangible and other long-lived assets, or investments become further impaired.

We are required under U.S. Generally Accepted Accounting Principles (“GAAP”) to test our goodwill for impairment annually or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry, or economic trends or a significant decline in the Company’s stock price and/or market capitalization for a sustained time. In addition, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances, such as a divestiture, indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible and other long-lived assets may not be recoverable include slower growth rates, the loss of a significant customer, or divestiture of a business or asset for less than our carrying value. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible and other long-lived assets is determined. Any such charge could have a material adverse impact on our results of operations.

For example, we expect to continue to review the carrying value of our equity method investment in Change Healthcare JV for potential impairment, and we might incur a material impairment charge. Any such impairment charge could materially adversely affect our consolidated statements of operations. Refer to Financial Note 2, “Equity Method Investment in Change Healthcare Joint Venture,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q.

There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill, intangible, other long-lived assets, or investments. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, a deterioration in the U.S. and global financial markets, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge that could have a material adverse effect on our results of operations.


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

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.~~requirements, restrictions under our debt obligations and other market and economic conditions.

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 August 2017 ASR program was completed in the third quarter of 2018.~~

~~In November 2017,~~2020, we repurchased ~~1.8~~0.7 million of the Company’s shares for ~~$250~~$84 million through open market transactions at an average price per share of ~~$138.12.~~$128.64.

The total authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$2.8 billion at ~~December 31, 2017.~~June 30, 2019.

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The following table provides information on the Company’s share repurchases during the ~~third~~first quarter of ~~2018~~2020.

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, 2019 – April 31, 2019	—	$	—	—	$	3,469
May 1, 2019 – May 31, 2019	3.8		127.68	3.8		2,984
June 1, 2019 – June 30, 2019	1.6		128.08	1.6		2,785
Total	5.4			5.4


(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.


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Mine Safety Disclosures.

Not Applicable


Item 5.	Other Information.

Not Applicable

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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.

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, 2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and ~~(v)~~(vi) 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, 2018~~July 31, 2019	/s/ Britt J. Vitalone
		Britt J. Vitalone
		Executive Vice President and Chief Financial Officer



		MCKESSON CORPORATION

Date:	~~February 1, 2018~~July 31, 2019	/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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