UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~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~~

September 30, 2021



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, TX 75039

(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
1.500% Notes due 2025	MCK25	New York Stock Exchange
1.625% Notes due 2026	MCK26	New York Stock Exchange
3.125% Notes due 2029	MCK29	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. Yes x☒ No o☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth 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.

Large accelerated filer

x☒

Accelerated filer

o☐

Non-accelerated filer

o ~~(Do not check if a smaller reporting company)~~

☐

Smaller reporting company

o☐

Emerging growth company

o☐

IfIf 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.

152,682,166 shares of the issuer’s common stock were outstanding as of September 30, 2021.



~~Class~~		~~Outstanding as of~~	~~December 31, 2017~~
~~Common stock, $0.01 par value~~	~~206,339,333 shares~~

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS


Item		Page

	PART I—FINANCIAL INFORMATION

1	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2021 and 2020	3

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2021 and 2020	4

	Condensed Consolidated Balance Sheets as of September 30, 2021 and March 31, 2021	5

	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended September 30, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2021 and 2020	8

	Financial Notes	9

	Note 1 - Significant Accounting Policies	9

	Note 2 - Held for Sale	10

	Note 3 - Restructuring, Impairment, and Related Charges	11

	Note 4 - Income Taxes	14

	Note 5 - Redeemable Noncontrolling Interests and Noncontrolling Interests	15

	Note 6 - Earnings (Loss) per Common Share	17

	Note 7 - Goodwill and Intangible Assets, Net	18

	Note 8 - Debt and Financing Activities	20

	Note 9 - Pension Benefits	22

	Note 10 - Hedging Activities	22

	Note 11 - Fair Value Measurements	25

	Note 12 - Commitments and Contingent Liabilities	27

	Note 13 - Stockholders’ Equity (Deficit)	32

	Note 14 - Segments of Business	36

2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

3	Quantitative and Qualitative Disclosures About Market Risk	60

4	Controls and Procedures	60

	PART II—OTHER INFORMATION

1	Legal Proceedings	61

1A	Risk Factors	61

2	Unregistered Sales of Equity Securities and Use of Proceeds	61

3	Defaults Upon Senior Securities	62

4	Mine Safety Disclosures	62

5	Other Information	62

6	Exhibits	63

	Signatures	64

Item Page

PART I—FINANCIAL INFORMATION

1.
Condensed Consolidated Financial Statements

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

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

Condensed Consolidated Balance Sheets
December 31, 2017 and March 31, 2017
5

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

Financial Notes
7

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

3.
Quantitative and Qualitative Disclosures About Market Risk
49

4.
Controls and Procedures
49

PART II—OTHER INFORMATION

1.
Legal Proceedings
49

1A.
Risk Factors
49

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

3.
Defaults Upon Senior Securities
50

4.
Mine Safety Disclosures
50

5.
Other Information
50

6.
Exhibits
51

Signatures
52

Table of Contents

McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)


	Three Months Ended September 30,				Six Months Ended September 30,
	2021		2020		2021		2020
Revenues	$	66,576	$	60,808	$	129,250	$	116,487
Cost of sales	(63,224)		(57,808)		(122,866)		(110,787)
Gross profit	3,352		3,000		6,384		5,700
Selling, distribution, general, and administrative expenses	(2,669)		(2,237)		(4,901)		(4,334)
Claims and litigation charges, net	(112)		—		(186)		131
Goodwill impairment charges	—		(69)		—		(69)
Restructuring, impairment, and related charges	(32)		(60)		(190)		(116)
Total operating expenses	(2,813)		(2,366)		(5,277)		(4,388)
Operating income	539		634		1,107		1,312
Other income, net	139		71		182		98
Loss on debt extinguishment	(191)		—		(191)		—

Interest expense	(45)		(50)		(94)		(110)
Income from continuing operations before income taxes	442		655		1,004		1,300
Income tax expense	(132)		(28)		(158)		(178)
Income from continuing operations	310		627		846		1,122
Loss from discontinued operations, net of tax	—		—		(3)		(1)
Net income	310		627		843		1,121
Net income attributable to noncontrolling interests	(43)		(50)		(90)		(100)
Net income attributable to McKesson Corporation	$	267	$	577	$	753	$	1,021

Earnings (loss) per common share attributable to McKesson Corporation
Diluted
Continuing operations	$	1.71	$	3.54	$	4.82	$	6.26
Discontinued operations	—		—		(0.02)		—
Total	$	1.71	$	3.54	$	4.80	$	6.26
Basic
Continuing operations	$	1.73	$	3.56	$	4.87	$	6.31
Discontinued operations	—		—		(0.02)		(0.01)
Total	$	1.73	$	3.56	$	4.85	$	6.30

Weighted-average common shares outstanding
Diluted	155.8		163.2		156.9		163.2
Basic	154.1		162.0		155.1		162.0

Quarter Ended December 31, Nine Months Ended December 31,
2017
2016 2017 2016
Revenues $ 53,617
$ 50,130
$ 156,729
$ 149,820
Cost of Sales (50,902 ) (47,318 ) (148,620 ) (141,345 )
Gross Profit 2,715
2,812
8,109
8,475
Operating Expenses (1,984 ) (1,981 ) (5,920 ) (5,802 )
Gain from Sale of Business 109
—
109
—
Goodwill Impairment Charges —
—
(350 ) (290 )
Restructuring and Asset Impairment Charges (6 ) —
(242 ) —
Operating Income 834
831
1,706
2,383
Other Income, Net 20
23
102
65
Loss from Equity Method Investment in Change Healthcare (90 ) —
(271 ) —
Interest Expense (67 ) (74 ) (204 ) (231 )
Income from Continuing Operations Before Income Taxes 697
780
1,333
2,217
Income Tax Benefit (Expense) 263
(131 ) 46
(570 )
Income from Continuing Operations 960

649
1,379

1,647
Income (Loss) from Discontinued Operations, Net of Tax 1

(3 ) 3

(117 )
Net Income 961

646
1,382

1,530
Net Income Attributable to Noncontrolling Interests (58 ) (13 ) (169 ) (48 )
Net Income Attributable to McKesson Corporation $ 903
$ 633
$ 1,213
$ 1,482

Earnings (Loss) Per Common Share Attributable to McKesson Corporation

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

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

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

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)


	Three Months Ended September 30,				Six Months Ended September 30,
	2021		2020		2021		2020
Net income	$	310	$	627	$	843	$	1,121

Other comprehensive income (loss), net of tax
Foreign currency translation adjustments	(48)		41		(24)		74
Unrealized gains (losses) on cash flow hedges	8		(19)		8		(24)
Changes in retirement-related benefit plans	2		(9)		4		(8)
Other comprehensive income (loss), net of tax	(38)		13		(12)		42

Comprehensive income	272		640		831		1,163
Comprehensive (income) loss attributable to noncontrolling interests	(43)		75		(93)		(36)
Comprehensive income attributable to McKesson Corporation	$	229	$	715	$	738	$	1,127

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

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)


	September 30, 2021		March 31, 2021
ASSETS
Current assets
Cash and cash equivalents	$	2,151	$	6,278
Receivables, net	20,140		19,181
Inventories, net	19,342		19,246
Assets held for sale	3,086		12
Prepaid expenses and other	861		665
Total current assets	45,580		45,382
Property, plant, and equipment, net	2,222		2,581
Operating lease right-of-use assets	1,768		2,100
Goodwill	9,473		9,493
Intangible assets, net	2,385		2,878

Other non-current assets	2,173		2,581
Total assets	$	63,601	$	65,015

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND EQUITY (DEFICIT)
Current liabilities
Drafts and accounts payable	$	38,922	$	38,975

Current portion of long-term debt	39		742
Current portion of operating lease liabilities	348		390
Liabilities held for sale	2,337		9
Other accrued liabilities	4,429		3,987
Total current liabilities	46,075		44,103
Long-term debt	5,946		6,406
Long-term deferred tax liabilities	1,352		1,411
Long-term operating lease liabilities	1,605		1,867
Long-term litigation liabilities	7,146		8,067
Other non-current liabilities	1,564		1,715
Redeemable noncontrolling interests	—		1,271
McKesson Corporation stockholders’ deficit
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—		—
Common stock, $0.01 par value, 800 shares authorized and 275 and 273 shares issued at September 30, 2021 and March 31, 2021, respectively	2		2
Additional paid-in capital	7,311		6,925
Retained earnings	8,812		8,202
Accumulated other comprehensive loss	(1,665)		(1,480)

Treasury shares, at cost, 122 and 115 shares at September 30, 2021 and March 31, 2021, respectively	(15,031)		(13,670)
Total McKesson Corporation stockholders’ deficit	(571)		(21)
Noncontrolling interests	484		196
Total equity (deficit)	(87)		175
Total liabilities, redeemable noncontrolling interests, and equity (deficit)	$	63,601	$	65,015

December 31,
2017 March 31,
2017
ASSETS
Current Assets
Cash and cash equivalents $ 2,619
$ 2,783
Receivables, net 20,015
18,215
Inventories, net 17,103
15,278
Prepaid expenses and other 458
672
Total Current Assets 40,195
36,948
Property, Plant and Equipment, Net 2,401
2,292
Goodwill 11,828
10,586
Intangible Assets, Net 4,094
3,665
Equity Method Investment in Change Healthcare 3,704
4,063
Other Noncurrent Assets 1,991
3,415
Total Assets $ 64,213
$ 60,969

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities
Drafts and accounts payable $ 33,009
$ 31,022
Short-term borrowings 749
183
Deferred revenue 68
346
Current portion of long-term debt 531
1,057
Other accrued liabilities 3,295
3,004
Total Current Liabilities 37,652
35,612

Long-Term Debt 7,514
7,305
Long-Term Deferred Tax Liabilities 2,833
3,678
Other Noncurrent Liabilities 2,807
1,774
Redeemable Noncontrolling Interests 1,435
1,327
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
Additional Paid-in Capital 6,253
6,028
Retained Earnings 14,202
13,189
Accumulated Other Comprehensive Loss (1,726 ) (2,141 )
Other (1 ) (2 )
Treasury Shares, at Cost, 68 and 62 at December 31, 2017 and March 31, 2017 (6,997 ) (5,982 )
Total McKesson Corporation Stockholders’ Equity 11,734
11,095
Noncontrolling Interests 238
178
Total Equity 11,972
11,273
Total Liabilities, Redeemable Noncontrolling Interests and Equity $ 64,213
$ 60,969

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In millions, except per share amounts)

(Unaudited)


	Three Months Ended September 30, 2021
	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury			Noncontrolling Interests		Total Equity (Deficit)
	Shares	Amount				Common Shares					Amount
Balances, June 30, 2021	274	$	2	$	7,057		$	8,618	$	(1,627)	(119)	$	(14,579)	$	484	$	(45)
Issuance of shares under employee plans, net of forfeitures	1	—		40			—		—		—	(1)		—		39
Share-based compensation	—	—		43			—		—		—	—		—		43
Payments to noncontrolling interests	—	—		—			—		—		—	—		(40)		(40)
Other comprehensive loss	—	—		—			—		(38)		—	—		—		(38)
Net income	—	—		—			267		—		—	—		43		310
Repurchase of common stock	—	—		171			—		—		(3)	(451)		—		(280)


Reclassification of recurring compensation to other accrued liabilities	—	—		—			—		—		—	—		(2)		(2)
Cash dividends declared, $0.47 per common share	—	—		—			(74)		—		—	—		—		(74)
Other	—	—		—			1		—		—	—		(1)		—
Balances, September 30, 2021	275	$	2	$	7,311		$	8,812	$	(1,665)	(122)	$	(15,031)	$	484	$	(87)


	Three Months Ended September 30, 2020
	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury			Noncontrolling Interests		Total Equity
	Shares	Amount				Common Shares					Amount
Balances, June 30, 2020	272	$	2	$	6,711		$	13,384	$	(1,735)	(110)	$	(12,916)	$	207	$	5,653
Issuance of shares under employee plans, net of forfeitures	1	—		18			—		—		—	—		—		18
Share-based compensation	—	—		36			—		—		—	—		—		36
Payments to noncontrolling interests	—	—		—			—		—		—	—		(50)		(50)
Other comprehensive income	—	—		—			—		138		—	—		—		138
Net income	—	—		—			577		—		—	—		40		617
Repurchase of common stock	—	—		—			—		—		(2)	(269)		—		(269)

Cash dividends declared, $0.42 per common share	—	—		—			(69)		—		—	—		—		(69)
Other	—	—		15			(2)		—		—	—		3		16
Balances, September 30, 2020	273	$	2	$	6,780		$	13,890	$	(1,597)	(112)	$	(13,185)	$	200	$	6,090

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In millions, except per share amounts)

(Unaudited)


	Six Months Ended September 30, 2021
	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss			Treasury				Noncontrolling Interests		Total Equity (Deficit)
	Shares	Amount								Common Shares		Amount
Balances, March 31, 2021	273	$	2	$	6,925	$	8,202	$	(1,480)		(115)		$	(13,670)	$	196	$	175
Issuance of shares under employee plans, net of forfeitures	2	—		111		—		—			—		(60)		—		51
Share-based compensation	—	—		76		—		—			—		—		—		76
Payments to noncontrolling interests	—	—		—		—		—			—		—		(79)		(79)
Other comprehensive loss	—	—		—		—		(15)			—		—		—		(15)
Net income	—	—		—		753		—			—		—		82		835
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	—	—		178		—		(170)			—		—		—		8
Repurchase of common stock	—	—		21		—		—			(7)		(1,301)		—		(1,280)
Reclassification of McKesson Europe AG redeemable noncontrolling interests	—	—		—		—		—			—		—		287		287
Reclassification of recurring compensation to other accrued liabilities	—	—		—		—		—			—		—		(2)		(2)
Cash dividends declared, $0.89 per common share	—	—		—		(139)		—			—		—		—		(139)
Other	—	—		—		(4)		—			—		—		—		(4)
Balances, September 30, 2021	275	$	2	$	7,311	$	8,812	$	(1,665)		(122)		$	(15,031)	$	484	$	(87)


	Six Months Ended September 30, 2020
	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury			Noncontrolling Interests		Total Equity
	Shares	Amount				Common Shares					Amount
Balances, March 31, 2020	272	$	2	$	6,663		$	13,022	$	(1,703)	(110)	$	(12,892)	$	217	$	5,309
Opening retained earnings adjustments: adoption of new accounting standard	—	—		—			(13)		—		—	—		—		(13)
Balances, April 1, 2020	272	2		6,663			13,009		(1,703)		(110)	(12,892)		217		5,296
Issuance of shares under employee plans, net of forfeitures	1	—		39			—		—		—	(24)		—		15
Share-based compensation	—	—		59			—		—		—	—		—		59
Payments to noncontrolling interests	—	—		—			—		—		—	—		(93)		(93)
Other comprehensive income	—	—		—			—		106		—	—		—		106
Net income	—	—		—			1,021		—		—	—		79		1,100
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	—	—		3			—		—		—	—		—		3
Repurchase of common stock	—	—		—			—		—		(2)	(269)		—		(269)

Cash dividends declared, $0.83 per common share	—	—		—			(136)		—		—	—		—		(136)
Other	—	—		16			(4)		—		—	—		(3)		9
Balances, September 30, 2020	273	$	2	$	6,780		$	13,890	$	(1,597)	(112)	$	(13,185)	$	200	$	6,090

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Six Months Ended September 30,
	2021		2020
OPERATING ACTIVITIES
Net income	$	843	$	1,121
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation	148		154
Amortization	265		285
Goodwill and long-lived asset impairment charges	127		104

Deferred taxes	(18)		(35)
Credits associated with last-in, first-out inventory method	(46)		(104)
Non-cash operating lease expense	152		172
Loss (gain) from sales of businesses and investments	(101)		1
European businesses held for sale	470		—
Other non-cash items	381		17
Changes in assets and liabilities, net of acquisitions:
Receivables	(2,311)		981
Inventories	(1,164)		(1,396)
Drafts and accounts payable	1,431		(1,305)
Operating lease liabilities	(186)		(185)
Taxes	40		(58)
Litigation liabilities	151		—
Other	(12)		207
Net cash provided by (used in) operating activities	170		(41)

INVESTING ACTIVITIES
Payments for property, plant, and equipment	(186)		(174)
Capitalized software expenditures	(93)		(91)
Acquisitions, net of cash, cash equivalents, and restricted cash acquired	(4)		(8)
Proceeds from sales of businesses and investments, net	179		9
Other	(53)		(14)
Net cash used in investing activities	(157)		(278)

FINANCING ACTIVITIES
Proceeds from short-term borrowings	3,020		5,303



Repayments of short-term borrowings	(3,020)		(5,303)
Proceeds from issuances of long-term debt	498		—
Repayments of long-term debt	(1,636)		(5)
Payments for debt extinguishments	(184)		—
Common stock transactions:
Issuances	111		39
Share repurchases	(1,272)		(248)
Dividends paid	(134)		(140)
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	(1,031)		(49)
Other	(246)		2
Net cash used in financing activities	(3,894)		(401)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	18		(63)
Net decrease in cash, cash equivalents, and restricted cash	(3,863)		(783)
Cash, cash equivalents, and restricted cash at beginning of period	6,396		4,023
Cash, cash equivalents, and restricted cash at end of period	2,533		3,240
Less: Restricted cash at end of period included in Prepaid expenses and other	(382)		(149)

Cash and cash equivalents at end of period	$	2,151	$	3,091

Nine Months Ended December 31,
2017 2016
Operating Activities
Net income $ 1,382
$ 1,530
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 697
663
Goodwill impairment and other asset impairment charges 539
290
Loss from equity method investment in Change Healthcare 271
—
Deferred taxes (847 ) 122
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
Other non-cash items (132 ) 50
Changes in operating assets and liabilities, net of acquisitions:
Receivables (1,046 ) (654 )
Inventories (1,410 ) (374 )
Drafts and accounts payable 1,203
1,891
Deferred revenue (134 ) (58 )
Taxes 689
52
Other 214
(274 )
Net cash provided by operating activities 1,323
3,309

Investing Activities
Payments for property, plant and equipment (269 ) (246 )
Capitalized software expenditures (123 ) (123 )
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
Other (36 ) 80
Net cash used in investing activities (483 ) (3,619 )

Financing Activities
Proceeds from short-term borrowings 12,699
2,803
Repayments of short-term borrowings (12,133 ) (1,405 )
Repayments of long-term debt (545 ) (392 )
Common stock transactions:
Issuances 114
89
Share repurchases, including shares surrendered for tax withholding (951 ) (2,060 )
Dividends paid (192 ) (192 )
Other (139 ) 12
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

See Financial Notes

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)

1.Significant Accounting Policies


1.	~~Significant Accounting Policies~~

Nature of Operations: McKesson Corporation (“McKesson,” or the “Company,”) is a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. McKesson partners with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively. The Company reports its financial results in 4 reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Refer to Financial Note 14, “Segments of Business,” for more information.

Basis of Presentation: The condensed consolidated financial statements of McKesson ~~Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns)~~ include the financial statements of all wholly-owned subsidiaries and ~~majority‑owned~~majority-owned or controlled companies. For those consolidated subsidiaries where ~~our~~the Company’s ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net ~~Income Attributable~~income attributable to ~~Noncontrolling Interests” on~~noncontrolling interests” in the ~~condensed consolidated statements~~Condensed Consolidated Statements of ~~operations.~~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~~The Company considers itself to control an entity if ~~we are~~it is the majority owner of ~~and have~~or has voting control over such entity. WeThe Company also ~~assess~~assesses control through means other than voting rights ~~(“variable interest entities” or “VIEs”)~~ and ~~determine~~determines which business entity is the primary beneficiary of the ~~VIE. We consolidate~~variable interest entity (“VIE”). The Company consolidates VIEs when it is determined that ~~we are~~it is the primary beneficiary of the VIE. Investments in business entities in which ~~we do~~the Company does not have control but ~~have~~has 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 (“U.S.”) 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. The Company continues to evaluate the ongoing impacts, including the economic consequences, of the coronavirus disease 2019 (“COVID-19”) pandemic. As COVID-19 further evolves, the Company’s accounting estimates and assumptions may change over time and may change materially in future periods. In ~~our~~the opinion of management, the ~~accompanying~~ unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of ~~our~~the financial position, results of operations, and cash flows of McKesson for the interim periods presented.

The results of operations for the ~~quarter~~three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2021 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~~the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2021, previously filed with the SEC on May ~~22, 2017~~12, 2021 (“~~2017~~2021 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:~~In the first quarter of ~~2018, we~~2022, the Company prospectively adopted ~~amended guidance~~Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for ~~the equity method of accounting. The amended guidance simplifies the transition~~Income Taxes, which eliminates certain exceptions related to the ~~equity method~~approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of ~~accounting. This standard eliminates the requirement that when an existing cost method investment qualifies~~deferred tax liabilities for ~~use~~outside basis differences. The guidance also simplifies and clarifies certain other aspects of ~~the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Additionally, at the point an investment qualifies~~accounting for ~~the equity method, any unrealized gain or loss in accumulated other comprehensive~~ income ~~(loss) will be recognized through earnings.~~taxes. The adoption of this amended guidance did not have a material ~~effect~~impact on ~~our~~the Company’s condensed consolidated financial ~~statements.~~statements or disclosures.

2. Held for Sale

Assets and liabilities to be disposed of by sale (“disposal groups”) are reclassified into “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The reclassification occurs when the disposal group is available for immediate sale and the sale is probable. These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell and long-lived assets included within the disposal group are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less cost to sell is reported as an adjustment to the carrying value of the disposal group. Assets and liabilities that have met the classification of held for sale were $3.1 billion and $2.3 billion, respectively, at September 30, 2021 and $12 million and $9 million, respectively, at March 31, 2021. The Company determined that the disposal groups classified as held for sale do not meet the criteria for classification as discontinued operations and are not considered to be significant disposals based on its quantitative and qualitative evaluation.

European Divestiture Activities

On July 5, 2021, the Company entered into an agreement to sell certain of its businesses in the European Union (“E.U.”) located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with its German headquarters and wound-care business, part of a shared services center in Lithuania, and its ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. The transaction is anticipated to close within the next twelve months, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals, as applicable. As of September 30, 2021, the E.U. disposal group, consisting of $3.1 billion of assets and $2.3 billion of liabilities primarily within the Company’s International segment, was classified as “Assets held for sale” and “Liabilities held for sale” in the Condensed Consolidated Balance Sheet.

During the three and six months ended September 30, 2021, the Company recorded charges totaling $491 million to remeasure the E.U. disposal group to the lower of its carrying value or fair value less costs to sell. These charges also included impairments of individual assets, such as certain internal-use software that will not be utilized in the future, prior to adjusting the E.U. disposal group as a whole. The remeasurement adjustment includes a $226 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group. The charges were recorded within “Selling, distribution, general, and administrative expenses” in the Condensed Consolidated Statements of Operations. The Company’s measurement of the fair value of the E.U. disposal group was based on the total consideration expected to be received by the Company as outlined in the transaction agreement. Certain components of the total consideration included fair value measurements that fall within Level 3 of the fair value hierarchy.

710

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The total assets and liabilities of the E.U. disposal group that have met the classification of held for sale in the Company’s Condensed Consolidated Balance Sheets are as follows:

~~Derivatives~~


(In millions)	September 30, 2021
Assets
Current assets
Receivables, net	$	1,298
Inventories, net	886
Prepaid expenses and other	113
Property, plant, and equipment, net	301
Operating lease right-of-use assets	224
Intangible assets, net	279
Other non-current assets	348
Remeasurement of assets of businesses held for sale to fair value less cost to sell (1)	(370)
Total assets held for sale	$	3,079

Liabilities
Current liabilities
Drafts and accounts payable	$	1,398
Current portion of long-term debt	4
Current portion of operating lease liabilities	34
Other accrued liabilities	449
Long-term debt	15
Long-term deferred tax liabilities	48
Long-term operating lease liabilities	198
Other non-current liabilities	184
Total liabilities held for sale	$	2,330

(1)Excludes charges related to the impairment of individual assets, which are primarily comprised of a $113 million impairment of internally developed software recorded directly against the gross value of the assets impacted.

On November 1, 2021, the Company announced an agreement to sell its retail and ~~Hedging:~~ Indistribution businesses in the ~~first~~United Kingdom (“U.K. disposal group”) to Aurelius Elephant Limited for purchase consideration of £325 million (or, approximately $438 million). The transaction is anticipated to close during the fourth quarter of ~~2018, we adopted amended guidance for derivative instrument novations. The amendments clarify that a novation, a change~~2022, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals. Beginning in the ~~counterparty, to a derivative instrument that has been designated as a hedging instrument does not,~~third quarter of 2022, the U.K. disposal group will be reflected in ~~and of itself, require dedesignation of that hedging relationship provided all other hedge accounting criteria continue to be met. The adoption of this amended guidance did not have an effect on our~~the Company’s condensed consolidated financial ~~statements.~~

~~Consolidation:~~ ~~In the first quarter of 2018, we adopted amended guidance~~statements as held for ~~VIEs. The amended guidance requires a single decision maker of a VIE~~sale and will be remeasured 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~~its carrying amount or ~~net realizable value. Net realizable~~fair 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 insell, 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, amended guidance was issued to shorten the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The amended guidance is effective for us on a modified retrospective basis commencing in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Compensation - Retirement Benefits:~~ In March 2017, amended guidance was issued which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit cost are required to be presented in the statements of operations separately from the service cost component outside of operating income. This amended guidance is effective for us in the first quarter of 2019 on a retrospective basis. Early adoption is permitted. We expect the adoption of this amended guidance to have no material effect on our condensed consolidated financial statements. This amended guidance is expected to onlyCompany estimates will result in a ~~change~~charge of between $700 million and $900 million, primarily related to the inclusion of the accumulated other comprehensive income balances into the carrying amount of the U.K. disposal group. While this range reflects the Company’s best estimate as of the date of this Quarterly Report on Form 10-Q, actual charges could differ based on operating results, changes in ~~presentation~~foreign exchange rates, and other factors prior to closing of ~~other components~~the transaction.

3.Restructuring, Impairment, and Related Charges

The Company recorded restructuring, impairment, and related charges of ~~net benefit costs on our condensed consolidated statement~~$32 million and $190 million during the three and six months ended September 30, 2021, respectively, and $60 million and $116 million during the three and six months ended September 30, 2020, respectively. These charges are included in “Restructuring, impairment, and related charges” in the Condensed Consolidated Statements of ~~operations (a reclassification from operating income~~Operations. In addition, charges related to ~~non-operating income).~~

restructuring initiatives are included in “Cost of sales” in the Condensed Consolidated Statements of Operations and were not material for the three and six months ended September 30, 2021 and 2020.

811

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Restructuring Initiatives

~~Derecognition of Nonfinancial Assets:~~ In February 2017, amended guidance was issued that defines the term “in substance nonfinancial asset” as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the asset that is promised is concentrated in nonfinancial assets. The scope of this amendment includes nonfinancial assets transferred within a legal entity including a parent entity’s transfer of nonfinancial assets by transferring ownership interests in consolidated subsidiaries. The amendment excludes all businesses and nonprofit activities from its scope and therefore all entities, with limited exceptions, are required to account for the derecognition of a business or nonprofit activity in accordance with the consolidation guidance once this amended guidance becomes effective. We are required to apply this amended guidance at the same time we apply the amended revenue guidance inDuring the first quarter of ~~2019.~~2022, the Company approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily includes the rationalization of the Company’s office space in North America. Where it determines to cease using office space, the Company plans to exit the portion of the facility no longer used. It ~~allows~~also may retain and repurpose certain other office locations. The Company expects to incur total charges of approximately $180 million to $280 million for ~~either full retrospective adoption or modified retrospective adoption. Early adoption is permitted. We are currently evaluating the impact~~this initiative, consisting primarily of ~~this amended guidance on our condensed consolidated financial statements.~~

~~Business Combinations:~~ ~~In January 2017, amended guidance was issued to clarify the definition~~exit related costs, accelerated depreciation and amortization of a business to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The amended guidance provides a practical screen to determine when an integrated set oflong-lived assets, and ~~activities (collectively referred to as a “set”)~~asset impairments. The Company recorded charges of $15 million and $110 million, respectively, in the three and six months ended September 30, 2021. This initiative is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amended guidance requires thatanticipated to be ~~considered a business, a set must include an input~~completed in 2022. Charges primarily relate to lease right-of-use and a substantive process that together significantly contribute to the ability to create output. The amended guidance is effective for us commencing in the first quarter of 2019 on a prospective basis. Early adoption is permitted in certain circumstances. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization.

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

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

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

~~Financial Instruments - Credit Losses:~~ In June 2016, amended guidance was issued, which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost, be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount in estimating credit losses. The amended guidance becomes effective for us commencing inDuring the first quarter of 2021, the Company committed to an initiative within the U.K., which is included in the Company’s International segment, to further drive operational changes in technologies and ~~will~~business processes, efficiencies, and cost savings. The initiative includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. The Company expects to incur total charges of approximately $85 million to $90 million, of which $64 million of charges were recorded to date. The Company recorded charges of $1 million and $7 million, respectively, in the three and six months ended September 30, 2021 and $27 million and $41 million, respectively, in the three and six months ended September 30, 2020, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. The initiative is anticipated to be ~~applied through a cumulative-effect adjustment~~substantially complete in 2022 and estimated remaining charges primarily consist of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.

Restructuring, impairment, and related charges during the three and six months ended September 30, 2021 consisted of the following:


	Three Months Ended September 30, 2021
(In millions)	U.S. Pharmaceutical (1)		Prescription Technology Solutions		Medical-Surgical Solutions		International		Corporate (1)		Total
Severance and employee-related costs, net	$	—	$	(1)	$	1	$	(2)	$	1	$	(1)
Exit and other-related costs (2)	2		1		—		1		6		10
Asset impairments and accelerated depreciation	8		—		1		2		12		23
Total	$	10	$	—	$	2	$	1	$	19	$	32

(1)Costs primarily relate to the ~~beginning retained earnings in~~transition to the ~~year~~partial remote work model described above.

(2)Exit and other-related costs primarily consist of ~~adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.~~

accruals for costs to be incurred without future economic benefits, project consulting fees, and other exit costs expensed as incurred.

912

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


	Six Months Ended September 30, 2021
(In millions)	U.S. Pharmaceutical (1)		Prescription Technology Solutions (1)		Medical-Surgical Solutions (1)		International (2)		Corporate (1)		Total
Severance and employee-related costs, net	$	2	$	(1)	$	1	$	10	$	1	$	13
Exit and other-related costs (3)	4		2		2		15		27		50
Asset impairments and accelerated depreciation	16		17		5		36		53		127
Total	$	22	$	18	$	8	$	61	$	81	$	190

~~Leases:~~ ~~In February 2016, amended guidance was issued~~(1)Costs primarily relate to the transition to the partial remote work model described above.

(2)Primarily represents costs related to the transition to the partial remote work model and U.K. operating model and cost optimization efforts described above, as well as costs for ~~lease arrangements. The amended standard will require lessees~~optimization programs in Canada.

(3)Exit and other-related costs primarily consist of accruals for costs to ~~recognize assets~~be incurred without future economic benefits, project consulting fees, and ~~liabilities on~~other exit costs expensed as incurred.

Restructuring, impairment, and related charges during the ~~balance sheet for all leases~~three and six months ended September 30, 2020 consisted of the following:


	Three Months Ended September 30, 2020
(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International (1)		Corporate (2)		Total
Severance and employee-related costs, net	$	6	$	—	$	3	$	3	$	4	$	16
Exit and other-related costs (3)	4		—		(1)		5		7		15
Asset impairments and accelerated depreciation	—		—		1		27		1		29
Total	$	10	$	—	$	3	$	35	$	12	$	60

(1)Primarily represents costs associated with ~~terms longer than 12 months~~the U.K. operating model and ~~provide enhanced disclosures on key information~~cost optimization efforts described above.

(2)Primarily represents costs associated with an operating model and cost optimization initiative and with the relocation of ~~leasing arrangements. The amended guidance is effective for us commencing~~the Company’s corporate headquarters. Both of these initiatives were substantially completed in the ~~first quarter of 2020, on a modified retrospective basis. Early adoption is permitted. We plan to adopt~~year ended March 31, 2021.

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


	Six Months Ended September 30, 2020
(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International (1)		Corporate (2)		Total
Severance and employee-related costs, net	$	7	$	—	$	3	$	20	$	24	$	54
Exit and other-related costs (3)	5		—		2		7		14		28
Asset impairments and accelerated depreciation	—		—		1		31		2		34
Total	$	12	$	—	$	6	$	58	$	40	$	116

(1)Primarily represents costs associated with the ~~new standard on~~U.K. operating model and cost optimization efforts described above, and an operating model and cost optimization initiative which was substantially completed in the ~~effective date~~year ended March 31, 2021.

(2)Primarily represents costs associated with an operating model and ~~are currently evaluating~~cost optimization initiative and with the ~~impact of this amended guidance on our consolidated financial statements. We anticipate that the adoption~~relocation 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 assessmentsCompany’s corporate headquarters. Both 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 commencingthese initiatives were substantially completed in the ~~first quarter of 2019~~year ended March 31, 2021.

(3)Exit and will be applied through a cumulative-effect adjustment. Early adoption is not permitted except for certain provisions. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

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

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

~~2. Healthcare Technology Net Asset Exchange~~

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

~~Gain from Healthcare TechnologyNet Asset Exchange~~

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

other-related costs primarily include project consulting fees.

1013

Table of Contents

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 and first nine months of 2018, we recorded our proportionate share of loss from Change Healthcare of $90 million and $271 million, which included transaction and integration expenses incurred by the joint venture and fair value adjustments including incremental intangible assets amortization associated with basis differences. This amount was recorded under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statement of operations.

As our investment is accounted for using a one-month lag, the effects of the enactment of the 2017 Tax Cuts 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 our investment was $3,704 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,526 million, primarily reflecting equity method intangible assets, goodwill and other fair value adjustments.

~~Related Party Transactions~~

In connection with the transaction, McKesson, Change Healthcare and certain shareholders of Change entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other commercial agreements.

At March 31, 2017, we had a $136 million noncurrent liability payable to shareholders of Change associated with the TRA. At December 31, 2017, the amount was reduced to $90 million reflecting a reduction in future applicable tax rate under the 2017 Tax Act. The amount 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 with Change Healthcare were not material during the third quarter and first nine months of 2018.~~

~~At December 31, 2017, receivables due from the joint venture were $54 million and at March 31, 2017, 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.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

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

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

Other risks, expenses and future developments that we were unable to anticipate as of the interim testing date in the second quarter of 2018 may require us to further revise the future projected cash flows, which could adversely affect the fair value of this reporting unit in future periods. As a result, we may be required to record additional impairment charges. Refer to Financial Note 4, “Restructuring and Asset Impairment Charges,” 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~~

During the second quarter of 2018, 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 government reimbursement reductions in the U.K. As a result, we recognized non-cash pre-tax charges of $189 million ($157 million after-tax) to impair the carrying value of certain intangible assets (notably 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.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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 2018 second quarter goodwill impairment charge of $350 million) were recorded during the first nine months of 2018. Estimated remaining restructuring charges primarily consist of lease termination and other exit costs.

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

~~Fiscal 2016 Cost Alignment Plan~~

In the fourth quarter of 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives that will be substantially implemented prior to the end of 2019. Business process initiatives primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative support functions, and technology platforms, as well as the disposal and abandonment of certain non-core businesses. Under 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~~Company’s restructuring initiatives for the ~~first nine~~six months ended September 30, 2021:


(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International		Corporate		Total
Balance, March 31, 2021 (1)	$	19	$	4	$	3	$	66	$	59	$	151
Restructuring, impairment, and related charges	22		18		8		61		81		190
Non-cash charges	(16)		(17)		(5)		(36)		(53)		(127)
Cash payments	(9)		(1)		(4)		(14)		(13)		(41)
Other	—		—		—		(6)		(6)		(12)
Balance, September 30, 2021 (2)	$	16	$	4	$	2	$	71	$	68	$	161

(1)As of ~~2018:~~March 31, 2021, the total reserve balance was $151 million, of which $99 million was recorded in “Other accrued liabilities” and $52 million was recorded in “Other non-current liabilities” in the Condensed Consolidated Balance Sheet.

(2)As of September 30, 2021, the total reserve balance was $161 million, of which $95 million was recorded in “Other accrued liabilities,” $36 million was recorded in “Liabilities held for sale,” and $30 million was recorded in “Other non-current liabilities” in the Condensed Consolidated Balance Sheet.

4. Income Taxes

(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~~During the three months ended September 30, 2021 and 2020, the Company recorded income tax expense of $132 million and $28 million, respectively. During the six months ended September 30, 2021 and 2020, the Company recorded income tax expense of $158 million and $178 million, respectively. The Company’s reported income tax rates were 29.9% and 4.3% for the three months ended September 30, 2021 and 2020, respectively and 15.7% and 13.7% for the six months ended September 30, 2021 and 2020, respectively. Fluctuations in the Company’s reported income tax rates are primarily due to non-cash charges related to remeasuring the value of its E.U. disposal group held for sale, changes in the mix of earnings between various taxing jurisdictions, and discrete items recognized in the quarters.

~~On August 1, 2017, we entered into an agreement with a third party~~During the second quarter of 2022, the Company recorded non-cash pre-tax charges totaling $491 million primarily to remeasure the E.U. disposal group to the lower of its carrying value or fair value less costs to sell, ~~our EIS business~~as described in Financial Note 2, “Held for ~~$185 million, subject~~Sale.” The Company’s reported income tax rates for the three and six months ended September 30, 2021 were unfavorably impacted by this due to ~~adjustments for net debt and working capital. On October 2, 2017,~~ the ~~transaction closed upon satisfaction of all closing conditions including the termination~~non-deductible nature of the ~~waiting period under U.S. antitrust laws. We received net cash proceeds~~majority of ~~$169 million after $16 million~~these charges for income tax purposes.

During the second quarter of ~~assumed net debt by~~2022, the ~~third party. We~~Company recognized a ~~pre-tax gain~~net discrete tax benefit of ~~$109~~$55 million ~~(after-tax gain of $30 million) upon the disposition of this business~~primarily related to a decrease in the ~~third~~global intangible low-tax income (“GILTI”) in its 2021 U.S. Federal income tax return.

During the second quarter of ~~2018~~2021, the Company sold intellectual property between wholly-owned legal entities within ~~operating expenses~~McKesson that are based in ~~our Technology Solutions segment.~~

~~Equity Investment~~

~~On July 18, 2017, we completed~~different tax jurisdictions. The transferor entity recognized a gain on the sale of ~~an equity method investment from our Distribution Solutions segment~~assets which was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. The acquiring entity of the intellectual property is entitled to amortize the purchase price of the assets for tax purposes. In accordance with ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” a discrete tax benefit of $105 million, which reduced the Company’s reported income tax rates by 16.0 percentage points and 8.1 percentage points for the three and six months ended September 30, 2020, respectively, was recognized with a corresponding increase to a third party for total cash proceeds of $42 million and recorded a pre-tax gain of $43 million ($26 million after-tax) within other income, net in our condensed consolidated statement of operations during the first nine months of 2018.

~~These divestitures did not meet the criteria to qualify as discontinued operations. Pre- and after-tax income from continuing operations of these businesses were not material~~deferred tax asset for the ~~third quarter~~temporary difference arising from the buyer’s excess tax basis.

As of September 30, 2021, the Company had $1.7 billion of unrecognized tax benefits, of which $1.3 billion would reduce income tax expense and ~~first nine~~the effective tax rate if recognized. During the six months ended September 30, 2021, the Company recognized a net discrete tax benefit of ~~2018.~~

$97 million primarily related to statute of limitation expirations in various taxing jurisdictions. During the next twelve months, the Company does not anticipate any material reduction in its unrecognized tax benefits. However, this may change as the Company continues to have ongoing negotiations with various taxing authorities throughout the year. The unrecognized tax benefit may also increase or decrease due to future developments in the Opioid related litigation and claims, as discussed in Financial Note 12, “Commitments and Contingent Liabilities.”

1314

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


6.	~~Business Combinations~~

~~2018 Acquisitions~~

~~RxCrossroads~~

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

~~CoverMyMeds LLC (“CMM”)~~

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

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

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

~~Other~~

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

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~2017 Acquisitions~~

~~Rexall Health~~

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

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

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

~~Other~~

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

~~Other Acquisitions~~

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

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


7.	~~Discontinued Operations~~

In 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 recognized an after-tax loss of $113 million within discontinued operations primarily for the settlement of certain indemnification matters as well as the release of cumulative translation losses. We made a payment of approximately $100 million related to the sale of this business in the first quarter of 2017.

The results of discontinued operations for the third quarters and first nine months of 2018 and 2017 were not material except for the loss recognized upon the disposition of our Brazilian business in 2017. As of December 31, 2017 and March 31, 2017, the carrying amounts of total assets and liabilities of discontinued operations were not material.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


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. Fluctuations in our reported income tax rates are primarily due to discrete items mainly driven by the impact of the 2017 Tax Act, as discussed below, the impact of nondeductible impairment charges, 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~~Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. ~~We are subject to audit by~~The Internal Revenue Service (“IRS”) is currently examining the ~~IRS~~Company’s U.S. corporation income tax returns for ~~fiscal years 2013 through the current fiscal year. We are~~2018 and 2019. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years ~~2010~~2013 through the current fiscal year.

~~As of December 31, 2017, we had $944 million of unrecognized tax benefits, of which $833 million would reduce income tax expense~~

5. Redeemable Noncontrolling Interests 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.Noncontrolling Interests

~~2017 Tax Act~~

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

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

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

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

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

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

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


9.	~~Redeemable Noncontrolling Interests and Noncontrolling Interests~~

Redeemable Noncontrolling Interests

~~Our~~The Company’s redeemable noncontrolling interests ~~relate~~primarily related to ~~our~~its consolidated subsidiary, McKesson Europe. Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe ~~have~~are entitled to receive an annual recurring compensation amount of €0.83 per share. As a result, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $8 million during the three months ended June 30, 2021, and $10 million and $21 million during the three and six months ended September 30, 2020, respectively. All amounts were recorded in “Net income attributable to noncontrolling interests” in the Company’s Condensed Consolidated Statements of Operations and the corresponding liability balance was recorded in “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets.

Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had 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~~Subsequent to the Domination Agreement’s registration, certain noncontrolling shareholders of McKesson Europe initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court (the “Court”) to challenge the adequacy of the Put ~~Right will reduce~~Amount, annual recurring compensation amount, and/or the ~~balance of redeemable noncontrolling interests.~~guaranteed dividend. During the ~~third quarter of 2018, there were no material exercises~~pendency of the Appraisal Proceedings, such amount was paid as specified in the Domination Agreement. On September 19, 2018, the Court ruled that the Put ~~Right. During~~Amount shall be increased by €0.51 resulting in an adjusted Put Amount of €23.50. The annual recurring compensation amount and/or the ~~first nine months of 2018, we paid $50 million to purchase 1.9 million shares~~guaranteed dividend remained unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe Holdings GmbH & Co. KGaA also appealed the decision. On April 12, 2021, the Company received notice that the Stuttgart Court of Appeals ruled that the Put Amount shall remain €22.99, thereby rejecting the lower court’s increase, and the recurring compensation remained at €0.83 per share.

During the six months ended September 30, 2021 and 2020, the Company paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through ~~the~~ exercises of the Put Right by the noncontrolling ~~shareholders, which~~shareholders. This decreased the carrying value of the noncontrolling interests by $983 million and $49 million, respectively, for the six months ended September 30, 2021 and 2020, and the Company recorded the associated effect of the increase in the Company’s ownership interest of $178 million and $3 million, respectively, as an increase to McKesson’s stockholders additional paid-in capital. The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, with a carrying value of $287 million, were transferred from “Redeemable noncontrolling interests” to “Noncontrolling interests” in the Condensed Consolidated Balance Sheet.

The redeemable noncontrolling interest was adjusted each period for the proportion of other comprehensive income, primarily due to changes in foreign currency exchange rates, attributable to the noncontrolling shareholders. Prior to expiration of the Put Right, the balance of the redeemable noncontrolling interests ~~by $53 million. The balance of redeemable noncontrolling interests is~~was reported as the greater of its carrying value or its maximum redemption value at each reporting date. ~~The redemption value is the Put Amount adjusted for exchange rate fluctuations each period.~~ At ~~December 31, 2017 and~~ March 31, ~~2017,~~2021, the carrying value of ~~redeemable noncontrolling interests of $1.44 billion and $1.33~~$1.3 billion exceeded the maximum redemption value of ~~$1.31~~$1.2 billion and ~~$1.21 billion. At December 31, 2017 and March 31, 2017, we~~the Company owned approximately ~~77% and 76%~~78% of McKesson Europe’s outstanding common shares.

~~Under the Domination Agreement, the noncontrolling shareholders~~15

Table 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.Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Noncontrolling Interests

~~The balances of our noncontrolling~~Noncontrolling interests represent third-party equity interests in ~~our~~the Company’s consolidated entities primarily ~~Vantage and~~related to ClarusONE Sourcing Services LLP and ~~were $238~~Vantage Oncology Holdings, LLC. As discussed above, after June 15, 2021 noncontrolling interests also represent minority shareholder equity interests in McKesson Europe. At September 30, 2021, the Company owned approximately 95%, of McKesson Europe’s outstanding common shares. The Company’s noncontrolling interest in McKesson Europe will be included in the sale of the E.U. disposal group, as discussed in Financial Note 2, “Held for Sale.” The Company allocated $43 million and ~~$178 million at December 31, 2017 and March 31, 2017. We allocated a total of $46 million and $137~~$82 million of net income to noncontrolling interests during the ~~third quarter~~three and ~~first nine~~six months ~~of 2018,~~ended September 30, 2021, respectively, and $3$40 million and ~~$15~~$79 million during the ~~third quarter~~three and ~~first nine~~six months ~~of 2017.~~

ended September 30, 2020, respectively.

Changes in redeemable noncontrolling interests and noncontrolling interests for the ~~first nine~~three and six months ~~of 2018~~ended September 30, 2021 were as follows:


(In millions)	Noncontrolling Interests		Redeemable Noncontrolling Interests
Balance, June 30, 2021	$	484	$	7
Net income attributable to noncontrolling interests	43		—

Reclassification of recurring compensation to other accrued liabilities	(2)		—
Payments to noncontrolling interests	(40)		—


Other	(1)		(7)
Balance, September 30, 2021	$	484	$	—

(In millions)

Noncontrolling
Interests
Redeemable
Noncontrolling
Interests
Balance, March 31, 2017 $ 178
$ 1,327
Net income attributable to noncontrolling interests 137
32
Other comprehensive income —
161
Reclassification of recurring compensation to other accrued liabilities —
(32 )
Payments to noncontrolling interests (73 ) —
Exercises of Put Right —
(53 )
Other (4 ) —
Balance, December 31, 2017 $ 238
$ 1,435

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


(In millions)	Noncontrolling Interests		Redeemable Noncontrolling Interests
Balance, March 31, 2021	$	196	$	1,271
Net income attributable to noncontrolling interests	82		8
Other comprehensive income	—		3
Reclassification of recurring compensation to other accrued liabilities	(2)		(8)
Payments to noncontrolling interests	(79)		—
Exercises of Put Right	—		(983)
Reclassification of McKesson Europe redeemable noncontrolling interests	287		(287)
Other	—		(4)
Balance, September 30, 2021	$	484	$	—

Changes in redeemable noncontrolling interests and noncontrolling interests for the ~~first nine~~three and six months ~~of 2017~~ended September 30, 2020 were as follows:


(In millions)	Noncontrolling Interests		Redeemable Noncontrolling Interests
Balance, June 30, 2020	$	207	$	1,414
Net income attributable to noncontrolling interests	40		10
Other comprehensive loss	—		(151)
Reclassification of recurring compensation to other accrued liabilities	—		(10)
Payments to noncontrolling interests	(50)		—

Other	3		2
Balance, September 30, 2020	$	200	$	1,265

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests			(In millions)	Noncontrolling Interests		Redeemable Noncontrolling Interests
Balance, March 31, 2016	$	84		$	1,406
Balance, March 31, 2020							Balance, March 31, 2020	$	217	$	1,402
Net income attributable to noncontrolling interests	15			33			Net income attributable to noncontrolling interests	79		21
Other comprehensive income	—			(95		)
Other comprehensive loss							Other comprehensive loss	—		(90)
Reclassification of recurring compensation to other accrued liabilities	—			(33		)	Reclassification of recurring compensation to other accrued liabilities	—		(21)
Purchase of noncontrolling interests	93			—
Payments to noncontrolling interests							Payments to noncontrolling interests	(93)		—
Exercises of Put Right							Exercises of Put Right	—		(49)
Other	(32		)	—			Other	(3)		2
Balance, December 31, 2016	$	160		$	1,311
Balance, September 30, 2020							Balance, September 30, 2020	$	200	$	1,265

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 2018.6.Earnings (Loss) Per Common Share


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

Basic earnings (loss) per common share are computed by dividing net income by the ~~weighted average~~weighted-average number of common shares outstanding during the reporting period. ~~Diluted~~The computation of diluted earnings (loss) per common share is ~~computed~~ similar to that of basic earnings (loss) 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 of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

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.~~

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. ~~Approximately~~Less than 1 million of potentially dilutive securities for the three and six months ended September 30, 2021 and approximately 2 million of potentially dilutive securities for the three and six months ended September 30, 2020 were excluded from the ~~computations~~computation 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.

Table of Contents


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

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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


	Three Months Ended September 30,				Six Months Ended September 30,
(In millions, except per share amounts)	2021		2020		2021		2020
Income from continuing operations	$	310	$	627	$	846	$	1,122
Net income attributable to noncontrolling interests	(43)		(50)		(90)		(100)
Income from continuing operations attributable to McKesson Corporation	267		577		756		1,022
Loss from discontinued operations, net of tax	—		—		(3)		(1)
Net income attributable to McKesson Corporation	$	267	$	577	$	753	$	1,021

Weighted-average common shares outstanding:
Basic	154.1		162.0		155.1		162.0
Effect of dilutive securities:
Stock options	0.2		—		0.2		—
Restricted stock units (1)	1.5		1.2		1.6		1.2
Diluted	155.8		163.2		156.9		163.2

Earnings (loss) per common share attributable to McKesson: (2)
Diluted
Continuing operations	$	1.71	$	3.54	$	4.82	$	6.26
Discontinued operations	—		—		(0.02)		—
Total	$	1.71	$	3.54	$	4.80	$	6.26
Basic
Continuing operations	$	1.73	$	3.56	$	4.87	$	6.31
Discontinued operations	—		—		(0.02)		(0.01)
Total	$	1.73	$	3.56	$	4.85	$	6.30

(1)Includes dilutive effect from restricted stock units, performance-based restricted stock units, and performance-based stock units.

(2)Certain computations may reflect rounding adjustments.

7. Goodwill and Intangible Assets, Net

In the second quarter of 2021, the Company implemented a new segment reporting structure which prompted changes in multiple reporting units across the Company. As a result, goodwill included in the impacted reporting units was reallocated using a relative fair value approach and assessed for impairment before and after the reallocation. The Company recorded a goodwill impairment charge of $69 million in the three and six months ended September 30, 2020 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of this reporting unit within the International segment. This impairment charge is included in “Goodwill impairment charges” in the Condensed Consolidated Statements of Operations.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Changes in the carrying amount of goodwill were as follows:

(In millions)
Distribution
Solutions

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

~~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, accumulated goodwill impairment losses for our Distribution Solutions segment were $350 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 goodwill impairment charges recorded in the second quarters of 2018 and 2017.


(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International		Total
Balance, March 31, 2021	$	3,963	$	1,542	$	2,453	$	1,535	$	9,493
Goodwill acquired	—		—		—		4		4



Foreign currency translation adjustments, net	(9)		—		—		(15)		(24)
Balance, September 30, 2021	$	3,954	$	1,542	$	2,453	$	1,524	$	9,473

Information regarding intangible assets is as follows:


	September 30, 2021								March 31, 2021
(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	$	3,241	$	(2,017)	$	1,224		$	3,739	$	(2,269)	$	1,470
Service agreements	10	1,082		(542)		540			1,081		(513)		568
Pharmacy licenses	22	308		(209)		99			497		(244)		253
Trademarks and trade names	12	872		(394)		478			925		(394)		531
Technology	3	136		(116)		20			150		(122)		28
Other	7	255		(231)		24			254		(226)		28
Total		$	5,894	$	(3,509)	$	2,385	(1)	$	6,646	$	(3,768)	$	2,878

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
(1)Excludes net intangible assets of approximately $279 million related to the E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale.” This amount was included under the caption “Assets held for sale” in the Condensed Consolidated Balance Sheet as of September 30, 2021. Amortization of these assets ceased upon reclassification to Assets held for sale in the second quarter of 2022.

Amortization expense of intangible assets was ~~$123~~$84 million and ~~$370~~$182 million ~~for~~during the ~~third quarter~~three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2021, respectively, and ~~$102~~$106 million and ~~$332~~$212 million ~~for~~during the ~~third quarter~~three and ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2020, respectively. Estimated ~~annual~~ amortization expense of these assets is as follows: ~~$113~~$167 million, ~~$437~~$242 million, ~~$421~~$230 million, ~~$403~~$225 million, and ~~$370~~$192 million for the remainder of ~~2018~~2022 and each of the succeeding years through ~~2022~~2026 and ~~$2,350 million~~$1.3 billion thereafter. All intangible assets were subject to amortization as of ~~December 31, 2017~~September 30, 2021 and March 31, ~~2017~~.2021.

~~Refer~~19

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

8.Debt and Financing Activities

Long-term debt consisted of the following:


(In millions)	September 30, 2021		March 31, 2021
U.S. Dollar notes (1) (2)
2.70% Notes due December 15, 2022	$	400	$	400
2.85% Notes due March 15, 2023	360		400
3.80% Notes due March 15, 2024	918		1,100
0.90% Notes due December 3, 2025	500		500
1.30% Notes due August 15, 2026	498		—
7.65% Debentures due March 1, 2027	150		167
3.95% Notes due February 16, 2028	343		600
4.75% Notes due May 30, 2029	197		400
6.00% Notes due March 1, 2041	220		282
4.88% Notes due March 15, 2044	255		411
Foreign currency notes (1) (3)
0.63% Euro Notes due August 17, 2021	—		704
1.50% Euro Notes due November 17, 2025	703		700
1.63% Euro Notes due October 30, 2026	588		587
3.13% Sterling Notes due February 17, 2029	602		627

Lease and other obligations (4)	251		270
Total debt	5,985		7,148
Less: Current portion	39		742
Total long-term debt	$	5,946	$	6,406

(1)These notes are unsecured and unsubordinated obligations of the Company.

(2)Interest on these notes is payable semi-annually.

(3)Interest on these foreign currency notes is payable annually.

(4)Excludes current and long-term debt of approximately $4 million and $15 million, respectively, as of September 30, 2021 related to the E.U. disposal group, as discussed in more detail in Financial Note ~~4, “Restructuring and Asset Impairment Charges,~~2, “Held for Sale.” These amounts were included under the caption “Liabilities held for ~~more information on intangible asset impairment charges recorded~~sale” in the ~~second quarter~~Condensed Consolidated Balance Sheet as of ~~2018.~~September 30, 2021.


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

Long-Term Debt

~~Our~~The Company’s long-term debt includes both U.S. dollar and foreign ~~currency (primarily Euro~~currency-denominated borrowings. Debt outstanding totaled $6.0 billion and ~~British pound sterling) denominated borrowings. At December 31, 2017~~$7.1 billion at September 30, 2021 and March 31, ~~2017, $8,045~~2021, respectively, of which $39 million and ~~$8,362~~$742 million, ~~of total long-term debt were outstanding, of which $531 million and $1,057 million were~~respectively, was included under the caption “Current portion of long-term debt” within the ~~condensed consolidated balance sheets.~~Company’s Condensed Consolidated Balance Sheets.

~~During~~On August 12, 2021, the ~~first nine months~~Company completed a public offering of ~~2018, we repaid~~1.30% Notes due August 15, 2026 (the “2026 Notes”) in a ~~€500 million bond that matured~~principal amount of $500 million. Interest on ~~April 26, 2017.~~the 2026 Notes is payable semi-annually on February 15th and August 15th of each year, commencing on February 15, 2022. Proceeds received from this note issuance, net of discounts and offering expenses, were $495 million. The Company utilized the net proceeds from this note for general corporate purposes.

2120

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The 2026 Notes, which constitutes a “Series,” are an unsecured and unsubordinated obligation of the Company and rank equally with all of the Company’s existing, and from time-to-time, future unsecured and unsubordinated indebtedness outstanding. The 2026 Notes are governed by materially similar indentures and officers’ certificates as those of other Series issued by the Company. Upon required notice to holders of notes with fixed interest rates, the Company may redeem those notes at any time prior to maturity, in whole or in part, for cash at redemption prices. In the event of the occurrence of both (1) a change of control of the Company and (2) a downgrade of a Series below an investment grade rating by each of Fitch Inc., Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services within a specified period, an offer must be made to purchase the 2026 Notes from the holders at a price equal to 101% of the then outstanding principal amount of the 2026 Notes, plus accrued and unpaid interest to, but not including, the date of repurchase. The indenture and the related officers’ certificate for the 2026 Note, subject to the exceptions and in compliance with the conditions as applicable, specify that the Company may not consolidate, merge or sell all or substantially all of its assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without lenders’ consent. The indentures also contain customary events of default provisions.

On July 17, 2021, the Company redeemed its 0.63% €600 million (or, approximately $709 million) total principal Euro-denominated notes, originally due on August 17, 2021, prior to maturity. The notes were redeemed at par value using cash on hand.

Tender Offer

On July 23, 2021, the Company completed a cash tender offer for a portion of its existing outstanding (i) 2.85% Notes due 2023, (ii) 3.80% Notes due 2024, (iii) 7.65% Debentures due 2027, (iv) 3.95% Notes due 2028, (v) 4.75% Notes due 2029, (vi) 6.00% Notes due 2041, and (vii) 4.88% Notes due 2044 (collectively referred to herein as the “Tender Offer Notes”). In connection with the tender offer, the Company paid an aggregate consideration of $1.1 billion to redeem $922 million principal amount of the notes at a redemption price equal to 100% of the principal amount and premiums of $182 million, plus accrued and unpaid interest of $14 million. The redemption of the Tender Offer Notes was accounted for as a debt extinguishment. As a result of the redemption, the Company incurred a pre-tax loss on debt extinguishment of $191 million, which included premiums of $182 million as well as the write-off of unamortized debt issuance costs and transaction fees incurred totaling $9 million.

Revolving Credit Facilities

~~We have~~The Company has a Credit Agreement, dated as of September 25, 2019 (the “2020 Credit Facility”), that provides a syndicated ~~$3.5~~$4.0 billion five-year senior unsecured ~~revolving~~ credit facility ~~(the “Global Facility”), which has~~with a ~~$3.15~~$3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling, and ~~Euros. The Global Facility matures on October 22, 2020.~~Euro. Borrowings under the ~~Global~~2020 Credit Facility bear interest based upon the London Interbank Offered Rate (“LIBOR”), 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~~2020 Credit Facility matures in September 2024 and had no borrowings during the three and six months ended September 30, 2021 and 2020 and no amounts outstanding as of September 30, 2021 and March 31, 2021.

On March 31, 2021, the Company entered into Amendment No. 2 to the 2020 Credit Facility, which superseded Amendment No. 1, dated as of February 1, 2021. The 2020 Credit Facility, as amended, contains various customary investment grade covenants, including a financial covenant which obligates the Company to maintain a ~~debt~~maximum Total Debt to ~~capital~~Consolidated EBITDA ratio, ~~of no greater than 65% and other customary investment grade covenants.~~as defined in the amended credit agreement. If ~~we do~~the Company does not comply with these covenants, ~~our~~its ability to use the ~~Global~~2020 Credit Facility may be suspended and repayment of any outstanding balances under the ~~Global~~2020 Credit Facility may be required. At ~~December 31, 2017, we were~~September 30, 2021, the Company was in compliance with all covenants. ~~There were no borrowings under this facility during the third quarters and first nine months of 2018 and 2017, and no borrowings outstanding as of December 31, 2017 and March 31, 2017.~~

WeThe Company also ~~maintain~~maintains bilateral credit ~~lines~~facilities primarily denominated in ~~Euros~~Euro with a ~~total~~ committed amount of $7 million and an uncommitted ~~balance~~amount of ~~$314 million.~~$116 million as of September 30, 2021. Borrowings and repayments were not material during the ~~first nine~~three and six months ~~of 2018~~ended September 30, 2021 and ~~2017. As of December 31, 2017~~2020, and ~~March 31, 2017,~~ amounts outstanding under these credit lines were not ~~material.~~material as of September 30, 2021 and March 31, 2021.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Commercial Paper

~~We maintain~~The Company maintains a commercial paper program to support ~~our~~its working capital requirements and for other general corporate purposes. Under the program, wethe Company can issue up to ~~$3.5~~$4.0 billion in outstanding commercial paper notes. During the ~~first nine~~six months ~~of 2018, we~~ended September 30, 2021, the Company borrowed ~~$12,699 million~~$3.0 billion and repaid ~~$12,133 million~~$3.0 billion under the program. During the ~~first nine~~six months ~~of 2017,~~ended September 30, 2020, the Company borrowed $5.3 billion and repaid $5.3 billion under the program. At September 30, 2021 and March 31, 2021, 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.~~	~~Pension Benefits~~

9.Pension Benefits

The net periodic expense for ~~our~~ defined benefit pension ~~benefit~~ plans was ~~$6 million and $16~~approximately $2 million for the ~~third quarter~~three and ~~first nine~~six months ~~of 2018,~~ended September 30, 2021 and $8$7 million and ~~$22~~$14 million for the ~~third quarter~~three and ~~first nine~~six months ~~of 2017.~~

ended September 30, 2020, respectively.

Cash contributions to these plans were $5$3 million and ~~$46~~$17 million for the ~~third quarter~~three and ~~first nine~~six months ~~of 2018~~ended September 30, 2021, respectively, and $6$4 million and ~~$16~~$11 million for the ~~third quarter~~three and ~~first nine~~six months ~~of 2017.~~ended September 30, 2020, respectively. 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 on a straight-line basis over the average remaining future service periods and expected life expectancy.

As part of the E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale,” pension liabilities of approximately $108 million were included under the caption “Liabilities held for sale” in the Condensed Consolidated Balance Sheet as of September 30, 2021.


~~14.~~	~~Hedging Activities~~

10.Hedging Activities

In the normal course of business, ~~we are~~the Company is exposed to interest rate and foreign currency exchange rate fluctuations. At times, ~~we limit~~the Company limits 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~~the Company’s policy, derivatives are only used for hedging purposes. ~~We do~~It does not use derivatives for trading or speculative purposes.

Foreign ~~currency exchange risk~~Currency Exchange Risk

~~We conduct our~~The Company conducts its business ~~internationally~~worldwide in U.S. dollars and the functional currencies of ~~our~~its foreign subsidiaries, including Euro, British pound sterling, and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on ~~our~~the Company’s financial results that are reported in U.S. dollars. ~~We are~~The Company is also exposed to foreign currency exchange rate risk related to ~~our~~its foreign subsidiaries, including intercompany loans denominated in non-functional currencies. ~~We have~~The Company has 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 and other obligations denominated in non-functional currencies. These programs reduce but do not entirely eliminate foreign currency exchange rate risk.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

~~We have €1.2~~At September 30, 2021 and March 31, 2021, the Company had €1.1 billion and €1.7 billion, respectively, of Euro-denominated notes ~~and £450 million British pound sterling-denominated notes which~~designated as non-derivative net investment hedges. These hedges are utilized to hedge portions of ~~our~~the Company’s net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. ~~dollar (“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 foreign currency translation adjustments in “Accumulated other comprehensive ~~income (loss)~~loss” in the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) where they offset foreign currency translation gains and losses recorded on ~~our~~the Company’s net investments. To the extent foreign currency denominated notes designated as net investment hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in ~~current~~ earnings. ~~Losses~~

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Gains or losses from net investment hedges recorded ~~in other~~within Other comprehensive income were ~~$28~~gains of $33 million and ~~$205~~$11 million during the ~~third quarter~~three and ~~first nine~~six months ended September 30, 2021, respectively, and losses of ~~2018.~~$83 million and $117 million during the three and six months ended September 30, 2020, respectively. There was no ineffectiveness in ~~our~~non-derivative net investment hedges during the three and six months ended September 30, 2021 and 2020.

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

At September 30, 2021 and March 31, ~~2017.~~

~~At December 31, 2017~~2021, the Company had cross-currency swaps designated as net investment hedges with a total gross notional amount of $500 million Canadian dollars. Under the terms of the cross-currency swap contracts, the Company agrees with third parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and ~~March 31, 2017, we had forward contracts~~to exchange principal in one currency for principal in another currency, calculated by reference to agreed-upon notional amounts. These swaps are utilized to hedge portions of the ~~U.S. dollar against cash flows~~Company’s net investments denominated in Canadian dollars against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded in “Accumulated other comprehensive loss” in the Condensed Consolidated Statements of Stockholders’ Equity (Deficit) where they offset foreign currency translation gains and losses recorded on the Company’s net investments denominated in Canadian dollars. To the extent cross-currency swaps designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. There was no ineffectiveness in the Company’s net investment hedges for the three and six months ended September 30, 2021 and 2020. The remaining cross-currency swaps will mature November 2024.

Gains or losses from the Company’s cross-currency swaps designated as net investment hedges recorded in Other comprehensive income were gains of $10 million and $5 million during the three and six months ended September 30, 2021, respectively, and losses of $12 million and $63 million during the three and six months ended September 30, 2020, respectively. There was no ineffectiveness in the Company’s cross-currency swap hedges for the three and six months ended September 30, 2021 and 2020.

The Company is a party to a number of cross-currency swaps designated as fair value hedges with total ~~gross~~ notional ~~values~~amounts of ~~$243~~£450 million British pound sterling. Under the terms of the cross-currency swap contracts, the Company agreed with third parties to exchange fixed interest payments in British pound sterling for floating interest payments in U.S. dollars based on three-month LIBOR plus a spread. These swaps are utilized to hedge the changes in the fair value of the underlying £450 million British pound sterling notes resulting from changes in benchmark interest rates and foreign exchange rates. The changes in the fair value of these derivatives, which ~~were~~are designated as ~~cash flow hedges. These contracts~~fair value hedges, and the offsetting changes in the fair value of the hedged notes are recorded in earnings. Gains from these fair value hedges recorded in earnings were largely offset by the losses recorded in earnings related to these notes. The swaps will mature ~~between March 2018 and March 2020.~~in February 2023.

From time to time, ~~we enter~~the Company also enters into ~~cross currency~~cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. For ~~our cross currency~~cross-currency swap transactions, ~~we agree~~the Company agrees with ~~another party~~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, ~~at a fixed exchange rate, generally set at inception,~~ calculated by reference to ~~agreed upon~~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~~September 30, 2021 and March 31, ~~2017, we~~2021, the Company had ~~cross currency~~cross-currency swaps with total gross notional amounts of ~~$3,411 million~~approximately $2.4 billion and ~~$2,663 million,~~$2.6 billion, respectively, which are designated as cash flow hedges. These swaps will mature between ~~February 2018~~October 2021 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~~in Accumulated other comprehensive ~~income (loss)~~loss and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

On April 27, 2020, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with combined notional amounts of $500 million and €600 million, to hedge the variability of future benchmark interest rates on planned bond issuances. Under the terms of the forward interest rate swap contracts, the Company agreed with third parties to pay fixed interest payments for the $500 million swaps for floating interest payments in U.S. dollars based on three-month LIBOR and to pay fixed interest payments for floating interest payments in Euros based on six-month Euro Interbank Offered Rate (“EURIBOR”) for the €600 million swaps. The $500 million swaps were terminated upon the issuance of the 2025 Notes in November 2020. The settlement loss on the swaps was not material and is being amortized on a straight-line basis as interest expense over the five-year life of the 2025 Notes. The €600 million swaps were terminated in July 2021 and the loss on termination of the swaps recorded in interest expense was not material for the three and six months ended September 30, 2021. Refer to Financial Note 8, “Debt and Financing Activities,” for more information.

From September 20, 2021 to October 27, 2021, the Company entered into forward starting interest rate swaps designated as cash flow hedges, with a combined notional amount of $400 million, to hedge the variability of future benchmark interest rates on a planned bond issuance. Under the terms of the forward interest rate swap contracts, the Company agreed with third parties to pay fixed interest payments for the $400 million swaps for floating interest payments in U.S. dollars based on three-month LIBOR.

Gains or losses ~~on these~~from cash flow hedges recorded in Other comprehensive income were gains of $11 million during the three and six months ended September 30, 2021 and losses of $23 million and $28 million during the three and six months ended September 30, 2020, respectively. Gains or losses reclassified from Accumulated other comprehensive income and ~~earnings~~recorded in “Selling, distribution, general, and administrative expenses” in the Condensed Consolidated Statements of Operations were not material in the ~~third quarters~~three and ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017.~~2020. There was no ineffectiveness in the Company’s cash flow hedges for the three and six months ended September 30, 2021 and 2020.

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~~fair 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~~The Company has 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~~September 30, 2021 and March 31, ~~2017,~~2021, the total gross notional amounts of these contracts were ~~$34~~$19 million and ~~$62 million.~~

$39 million, respectively. These contracts will predominantly mature ~~through July 2018~~between October 2021 and December 2021 and none of these contracts were designated for hedge accounting. Changes in the fair values offor contracts not designated as hedges are recorded directly into ~~current earnings. Gains from these contracts were recorded within operating expenses~~earnings in “Selling, distribution, general, and administrative expenses” in the Condensed Consolidated Statements of Operations. Changes in the fair values were not material ~~for~~in the ~~third quarters~~three and ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017. The gains~~2020. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany ~~foreign currency loans.~~

obligations.

2324

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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


	Balance Sheet Caption	December 31, 2017						March 31, 2017							Balance Sheet Caption	September 30, 2021						March 31, 2021
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional				Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
(In millions)		Asset		Liability				Asset		Liability				(In millions)		Asset		Liability				Asset		Liability
Derivatives designated for hedge accounting														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

Cross-currency swaps (current)														Cross-currency swaps (current)	Prepaid expenses and other/Other accrued liabilities	$	2	$	36	$	838	$	4	$	47	$	826
Cross-currency swaps (non-current)														Cross-currency swaps (non-current)	Other non-current assets/liabilities	62		74		2,474		72		92		2,663
Forward starting interest rate swaps (current)														Forward starting interest rate swaps (current)	Other accrued liabilities	—		—		—		—		7		704
Forward starting interest rate swaps (non-current)														Forward starting interest rate swaps (non-current)	Other accrued liabilities	3		—		200		—		—		—
Total		$	41	$	163			$	156	$	—			Total		$	67	$	110			$	76	$	146
Derivatives not designated for hedge accounting														Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	—	$	—	$	28	$	1	$	—	$	198	Foreign exchange contracts (current)	Prepaid expenses and other	$	—	$	—	$	1	$	—	$	—	$	29
Foreign exchange contracts (current)	Other accrued liabilities	—		—		6		—		—		37		Foreign exchange contracts (current)	Other accrued liabilities	—		—		18		—		1		10
Total		$	—	$	—			$	1	$	—			Total		$	—	$	—			$	—	$	1

Refer to Financial Note ~~15,~~11, "Fair Value Measurements," for more information on these recurring fair value measurements.


~~15.~~	~~Fair Value Measurements~~

At ~~December 31, 2017~~11. Fair Value Measurements

The Company measures certain assets and ~~March 31, 2017, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts~~liabilities at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and ~~accounts payable, short-term borrowings and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.~~

Disclosures. The fair value hierarchy consists of ~~our commercial paper was determined using~~three levels of inputs that may be used to measure fair value as follows:

Level 1 - quoted prices in active markets for identical ~~liabilities,~~assets or liabilities.

Level 2 - significant other observable market-based inputs.

Level 3 - significant unobservable inputs for which little or no market data exists and requires considerable assumptions that are ~~considered~~significant to ~~be Level 1 inputs.~~the fair value measurement.

Assets and Liabilities 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 billion and $8.5 billion at~~ ~~December 31, 2017, and $8.4 billion and $8.7 billion at~~ ~~March 31, 2017~~. 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.

Cash and cash equivalents at ~~December 31, 2017~~September 30, 2021 and March 31, ~~2017~~2021 included investments in money market funds of ~~$1,066~~$361 million and ~~$478 million,~~$1.6 billion, respectively, which are reported at fair value. The fair value of ~~the~~ money market funds was determined using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Fair values for the Company’s marketable securities were not material at September 30, 2021 and March 31, 2021.

Fair values of ~~our derivatives~~the Company’s interest rate swaps, foreign currency forward contracts, and cross-currency swaps 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 swaps were determined using the~~information, including quoted interest rates, foreign currency exchange rates, and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note ~~14, "Hedging~~10, “Hedging Activities,"” for ~~more~~fair value and other information on ~~our~~the Company’s derivatives including interest rate swaps, forward foreign currency ~~forward~~ contracts, and ~~cross currency~~cross-currency swaps.

~~There~~

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The Company holds investments in equity securities of U.S. growth stage companies that address both current and emerging business challenges in the healthcare industry and which had carrying values of $357 million and $269 million, respectively, at September 30, 2021 and March 31, 2021. These investments primarily consist of equity securities without readily determinable fair values and are included in “Other non-current assets” in the Condensed Consolidated Balance Sheets. During the three months ended September 30, 2021, certain of the Company’s investments in equity securities without readily determinable fair values experienced transactions which resulted in changes in the observable price of those securities. During the three months ended September 30, 2020, three of the companies in which McKesson held investments in equity securities were ~~no transfers between~~converted into shares of public common stock through initial public offerings and an acquisition. Net gains related to the Company’s investments in these equity securities, primarily representing unrealized gains on the securities discussed above, were approximately $97 million and $104 million for the three and six months ended September 30, 2021 and $49 million and $59 million for the three and six months ended September 30, 2020, respectively. These net gains were recorded in “Other income, net,” in the Condensed Consolidated Statements of Operations. The carrying value of publicly traded investments was determined using quoted prices for identical investments in active markets and are considered to be Level 1 ~~Level 2 or Level 3 of the fair value hierarchy during the quarters~~inputs.

Assets and ~~nine months ended December 31,~~ ~~2017~~ ~~and~~ ~~2016~~.

~~Assets~~Liabilities Measured at Fair Value on a Nonrecurring Basis

In addition to assets and liabilities that are measured at fair value on a recurring basis, the Company’s assets and liabilities are also subject to nonrecurring fair value measurements. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.

At ~~December 31, 2017,~~September 30, 2021, the assets and liabilities associated with the E.U. disposal group held for sale were measured at the lower of cost or fair value less cost to sell, as discussed in more detail in Financial Note 2, “Held for Sale." At September 30, 2021 and 2020, assets measured at fair value on a nonrecurring basis ~~consisted~~included long-lived assets associated with the Company’s restructuring initiatives as discussed in more detail in Financial Note 3, “Restructuring, Impairment, and Related Charges.” Assets measured at fair value on a nonrecurring basis as of September 30, 2020 included goodwill of the Company’s Europe Retail Pharmacy reporting unit within the International segment. Refer to Financial Note 7, “Goodwill and ~~intangible assets~~Intangible Assets, Net,” for ~~our McKesson Europe business within our Distribution Solutions segment, as further discussed below.~~

more information. At March 31, ~~2017,~~2021, assets measured at fair value on a nonrecurring basis ~~primarily consisted~~included long-lived assets of the Company’s International segment and goodwill ~~for our EIS business within our Technology Solutions segment.~~

~~Goodwill~~

~~As discussed in Financial Note 3, “Goodwill Impairment Charges,” we recorded non-cash pre-tax and after-tax impairment charges~~ of ~~$350 million during~~ the ~~second quarter of 2018 for our McKesson~~Company’s Europe Retail Pharmacy reporting unit within the ~~Distribution Solutions segment,~~International segment.

The aforementioned investments in equity securities of U.S. growth stage companies include the carrying value of investments without readily determinable fair values, which were determined using a measurement alternative and ~~$290 million ($282 million after-tax) during~~are recorded at cost less impairment, plus or minus any changes in observable price from orderly transactions of the ~~second quarter~~same or similar security of ~~2017 for our EIS reporting unit within~~ the ~~Technology Solutions segment. The impairments primarily resulted from a decline~~same issuer. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the ~~reporting units’~~future.

There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2021 and March 31, 2021.

Other Fair Value Disclosures

At September 30, 2021 and March 31, 2021, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings, and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.

The Company determines the fair value of commercial paper using quoted prices in active markets for identical instruments, which are considered Level 1 inputs under the fair value measurements and disclosure guidance.

The Company’s long-term debt is recorded at amortized cost. The carrying value and fair value of the Company’s long-term debt was as follows:


	September 30, 2021				March 31, 2021
(In millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current maturities	$	5,985	$	6,496	$	7,148	$	7,785

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The estimated fair value of the Company’s long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.

Restricted Cash

Restricted cash, ~~flows.~~included within “Prepaid expenses and other” in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2021, primarily consists of $354 million held in escrow related to the initial payment under the proposed settlement agreement for opioid-related claims of governmental entities, as discussed in more detail in Financial Note 12, “Commitments and Contingent Liabilities.” Additionally, restricted cash as of September 30, 2021 and March 31, 2021 includes funds temporarily held on behalf of unaffiliated medical practice groups related to their COVID-19 business continuity borrowings. These amounts have been designated as restricted cash due to contractual provisions requiring their segregation from all other funds until utilized by the medical practices for a limited list of qualified activities and corresponding deposit liabilities associated with these funds have been recorded by the Company within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2021 and March 31, 2021.

Goodwill

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

~~Intangible~~Long-lived Assets

~~We measure~~The Company measures certain long-lived and intangible assets at fair value on a nonrecurring basis when ~~they are deemed to~~events occur that indicate an asset group may not be ~~other-than-temporarily impaired.~~recoverable. If the ~~cost~~carrying amount of an ~~investment exceeds its fair value, we evaluate, among other factors, our intent to hold the investment, general market conditions, the duration and extent to which the fair value~~asset group is ~~less than cost and the financial outlook for the industry and location. An~~not recoverable, an impairment charge is recorded ~~when~~to reduce the ~~cost of~~carrying amount by the ~~asset exceeds~~excess over its fair ~~value~~value.

The Company utilizes multiple approaches including the DCF model and ~~this condition is determined to be other-than-temporary.~~

As discussed in Financial Note 4, “Restructuring and Asset Impairment Charges,” we recorded non-cash pre-tax charges of $189 million ($157 million after-tax) during the second quarter of 2018 to impair the carrying values of certain long-lived assets including intangible assets. We utilized a combination of an income approach (primarily DCF method) and a market ~~approach~~approaches 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~~from its 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.

12.Commitments and Contingent 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 at fair value on a nonrecurring basis. Refer to Financial Note 6, “Business Combinations,” for more information on the fair value of the contingent consideration liability. There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2017.


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

In addition to commitments and obligations incurred in the ordinary course of business, ~~we are~~the Company is subject to ~~various~~a variety of claims and legal proceedings, 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~~and in Financial Note 19 to the Company’s 2021 Annual Report, which disclosure is incorporated in this footnote by this reference. The Company is vigorously defending itself against those claims and in those proceedings. Significant developments in those matters are described below. If the Company is unsuccessful in defending, or if it determines to settle, any of these ~~proceedings are at preliminary stages and many seek an indeterminate amount~~matters, it may be required to pay substantial sums, be subject to injunction and/or be forced to change how it operates its business, which could have a material adverse impact on its financial position or results of ~~damages.~~operations.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~When a loss~~Unless otherwise stated, the Company is ~~considered probable and~~unable to 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 possible loss ~~may not be practicable based on~~for the matters described below. Often, the Company is unable to determine that a loss is probable, or to reasonably estimate the amount of loss or a range of loss, for a claim because of the limited information available and the potential ~~effect~~effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the ~~contingency. Moreover, it~~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 ~~such matters~~claims to ~~be resolved~~remain unresolved over many ~~years, during which time relevant developments and new information must be reevaluated~~years. The Company reviews loss contingencies at least quarterly to determine ~~both~~whether the likelihood of ~~potential~~ loss has changed and whether it ~~is possible to reasonably estimate a range of possible loss. When a loss is probable but~~can make a reasonable estimate ~~cannot be made, disclosure~~ of the ~~proceeding~~loss or range of loss. When the Company determines that a loss from a claim is ~~provided.~~

~~Disclosure~~probable and reasonably estimable, it records a liability for an estimated amount. The Company also ~~is provided~~provides disclosure when it is reasonably possible that a loss ~~will~~may be incurred or when it is reasonably possible that the amount of a loss will exceed its recorded liability. Amounts included within “Claims and litigation charges, net” in the ~~recorded provision. We review all~~Condensed Consolidated Statement of Operations consist of estimated loss contingencies ~~at least quarterly~~related to ~~determine whether the likelihood~~opioid-related litigation matters.

Table of ~~loss has changed~~Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

I. Litigation and ~~to assess whether a reasonable estimate~~Claims Involving Distribution 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 systemControlled Substances

The Company and ~~other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.~~

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

~~Litigation, Government Subpoenas and Investigations~~

~~As previously reported, the Company is a defendant~~defendants in many cases ~~alleging~~asserting claims related to ~~the~~ distribution of controlled ~~substances to pharmacies, often together~~substances. They 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, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. These actions have been ~~served with 192 complaints~~ filed in state and federal courts throughout the U.S., 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 violations of controlled substance laws and various other statutes in addition to common law claims, including negligence and public nuisance, and~~Canada. They seek monetary damages and ~~equitable relief. On~~other forms of relief based on a variety of causes of action, including negligence, public nuisance, unjust enrichment, and civil conspiracy, as well as alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state and federal controlled substances laws, and other statutes.

Since December 5, 2017, ~~the~~nearly all such cases pending in federal district courts ~~were~~have been transferred for consolidated pre-trial proceedings 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~~At present, there are approximately 2,800 cases ~~remain~~under the jurisdiction of the MDL court.

The Company is also named in approximately 350 similar state ~~courts~~court cases pending in ~~Connecticut, Florida, New Mexico, New York, Pennsylvania, Tennessee~~38 states plus Puerto Rico, along with 4 cases in Canada. These include actions filed by 26 state attorneys general, and ~~Texas.~~some by or on behalf of individuals, including wrongful death lawsuits, and putative class action lawsuits brought on behalf of children with neonatal abstinence syndrome due to alleged exposure to opioids in utero. Trial dates have been set in several of these state court cases. For example, trial in the case brought by the Washington attorney general is scheduled for November 15, 2021; trial in the case brought by the Rhode Island attorney general is scheduled for January 17, 2022; and the case brought by Dallas County, Texas, is scheduled to be trial-ready by February 7, 2022. Trial in the case brought by the Alabama attorney general was postponed until April 18, 2022, and the parties continue to engage in settlement negotiations.

~~As previously disclosed,~~On July 21, 2021, the Company and ~~others filed suit~~the 2 other national pharmaceutical distributors announced that they had negotiated a comprehensive proposed settlement agreement which, if all conditions are satisfied, would result in the ~~United States~~settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities. If the proposed settlement agreement and settlement process leads to final settlement, the 3 distributors would pay up to approximately $21 billion over 18 years, with up to $7.9 billion to be paid by the Company for its 38.1% portion; a minimum of 85% of such payments must be used by state and local governmental entities to remediate the opioid epidemic. Most of the remaining percentage relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period.

The proposed agreement would also establish a clearinghouse that would consolidate controlled-substance distribution data from the 3 largest U.S. distributors, which will be available to the settling states to use as part of their anti-diversion efforts.

The proposed agreement only addresses the claims of U.S. state attorneys general and political subdivisions in participating states. The West Virginia subdivisions and Native American tribes are not part of this settlement process. The proposed agreement is subject to contingencies and will not become effective unless the Company determines that a sufficient number of states and political subdivisions, including those that have not sued, have agreed to be bound by the agreement (or otherwise had their claims foreclosed).

On September 4, 2021, the Company and the 2 other national distributors announced that 42 out of 49 eligible states, all 5 U.S. territories, and Washington, DC, had affirmatively signed on to the proposed agreement. The attorneys general of Alabama, Georgia, Nevada, New Mexico, Oklahoma, Rhode Island, and Washington have not joined the proposed settlement. The distributors further announced that they had determined that enough states had signed on to the settlement for the proposed agreement to proceed to the next phase. During this phase, which is expected to end on January 2, 2022, each participating state will offer its political subdivisions, including those that have not sued, the opportunity to participate in the settlement. After the conclusion of this period, the Company will have 30 days to determine whether a sufficient number of states and political subdivisions have joined for the settlement to proceed to implementation.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The exact amount that would be due under the proposed agreement depends on several factors, including the participation rate of states and political subdivisions, the extent to which states take action to foreclose opioid lawsuits by political subdivisions, and the extent to which political subdivisions in settling states file additional opioid lawsuits against the Company after the proposed agreement becomes effective. The proposed agreement contemplates that if certain governmental entities do not agree to a settlement under the framework, but the distributors nonetheless conclude that there is sufficient participation to warrant the settlement, there would be a corresponding reduction in the amount due from the Company to account for the unresolved claims of the governmental entities that do not participate. Those non-participating governmental entities would be entitled to pursue their claims against the Company and other defendants.

Consistent with the terms of the proposed agreement, the Company placed its first annual payment of approximately $354 million, into escrow on September 30, 2021. This amount excludes the proportionate allocation under the proposed settlement for each non-participating state and would be disbursed when and if the proposed agreement becomes effective. Subsequent annual payments would be due on July 15 of each year. The escrow payment was presented as restricted cash within “Prepaid expenses and other” in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2021.

On July 20, 2021, the Company announced that it and the 2 other national pharmaceutical distributors had agreed to pay up to $1.2 billion, of which the Company’s portion would be 38.1%, in a settlement with the State of New York and its participating subdivisions, including Nassau and Suffolk Counties, to resolve opioid-related claims. This settlement was negotiated in connection with the broad proposed settlement described above, but provides assurance that New York and its participating subdivisions will receive a settlement amount consistent with their allocations under the broad settlement framework, as well as certain attorneys’ fees and costs. If the broad settlement is finalized, New York and its participating subdivisions will become part of that broader agreement. On September 30, 2021, the Company paid its share of the first annual incremental payment of approximately $35 million to Nassau and Suffolk counties as a settlement of its liabilities over plaintiffs’ legal fees and costs.

On September 28, 2021, the Company and the 2 other national pharmaceutical distributors reached an agreement with the state of Ohio and its participating subdivisions and agreed to pay $881 million to resolve opioid-related claims. This settlement was negotiated in connection with the broad proposed settlement described above, but provides assurance that Ohio and its participating subdivisions will receive a settlement amount consistent with their allocations under the broad settlement framework, as well as certain attorneys’ fees and costs. If the broad settlement is finalized, Ohio and its participating subdivisions will become part of that broader agreement.

On September 28, 2021, the Company announced that it and the 2 other national distributors had reached an agreement with the Cherokee Nation to pay approximately $75 million over 6.5 years to resolve opioid-related claims, of which the Company’s portion would be 38.1%. This settlement was negotiated in parallel with ongoing negotiations toward a broad resolution of opioid-related claims brought by Native American tribes.

With respect to the West Virginia subdivisions, trial in the case of Cabell County and City of Huntington, occurred in the U.S. District Court for the ~~Northern~~Southern District of ~~Oklahoma,~~ ~~McKesson Corporation, et al. v. Todd Hembree, Attorney General~~West Virginia, and concluded on July 28, 2021. The outcome of ~~the Cherokee Nation, et al.,~~ ~~seeking a declaratory judgment~~ that ~~the Cherokee Nation District Court has no jurisdiction over the~~trial is pending. The claims ~~asserted by the Cherokee Nation in the suit captioned~~ ~~Cherokee Nation v. McKesson Corporation, et al.~~ ~~On January 9, 2018, the court granted the motion for a preliminary injunction enjoining the defendants from taking any action in the case~~of certain other West Virginia subdivisions are pending in the ~~tribal court.~~federal MDL and before the state Mass Litigation Panel. On ~~January 19, 2018,~~September 30, 2021, the ~~Cherokee Nation refiled its suit~~Mass Litigation Panel issued an order scheduling trial on the public nuisance claims of certain municipalities against the Company and ~~five~~the two other ~~original defendants~~national pharmaceutical distributors for July 5, 2022.

The Company believes that a broad settlement of opioid claims by governmental entities is probable, and that the loss related thereto can be reasonably estimated. The Company recorded a charge of $8.1 billion ($6.8 billion after-tax) in the ~~district court of Sequoyah County, Oklahoma.~~ ~~The Cherokee Nation v. McKesson Corporation, et al., Case no. CT-2081-11.~~

~~As previously disclosed, two shareholder derivative suits filed against certain officers and directors~~fiscal year ended March 31, 2021 related to its share of the ~~Company~~global settlement as well as claims of West Virginia municipalities and the Native American tribes. In connection with the matters described above, the Company recorded additional charges of $112 million ($93 million after-tax) and $186 million ($155 million after-tax) in the three and six months ended September 30, 2021 within “Claims and litigation charges, net” in the Condensed Consolidated Statements of Operations, in connection with the proposed settlement agreement and other opioid related settlement accruals.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The Company’s estimated accrued liability for opioid-related claims of governmental entities is as follows as of September 30, 2021:


(In millions)	September 30, 2021
Current litigation liabilities (1)	$	1,072
Long-term litigation liabilities	7,146

Total litigation liabilities	$	8,218

(1)This amount, recorded in “Other accrued liabilities” in the Condensed Consolidated Balance Sheet, is the amount estimated to be paid prior to September 30, 2022.

If a ~~nominal~~broad settlement is not reached under the proposed agreement, litigation will continue. The Company continues to prepare for trial in these pending matters, and believes that it has valid defenses to the claims pending against it, and it intends to vigorously defend against all such claims if acceptable settlement terms are not achieved.

Although the vast majority of opioid claims have been brought by governmental entities in the U.S., the Company is also a defendant in cases brought in the U.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as 4 cases brought in Canada (3 by governmental or tribal entities and 1 by an individual). These claims, and those of private entities generally, are not included in the settlement framework for governmental entities, or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense. One such case brought by a group of individual plaintiffs in Glynn County, Georgia Superior Court seeks to recover for damages allegedly arising from their family members’ abuse of prescription opioids. Poppell v. Cardinal Health, Inc. et al.,CE19-00472. The Company has not concluded a loss is probable in any of these matters; nor is the amount of any loss reasonably estimable.

Because of the many uncertainties associated with any potential settlement arrangement or other resolution of all of these opioid-related litigation matters, including the uncertain scope of participation by governmental entities in any potential settlement under the framework described above, the Company is not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on the Company’s financial position, cash flows or liquidity, or results of operations.

In December 2019, the Company was served with two qui tam complaints filed by the same two relators alleging violations of ~~fiduciary duties relating~~the federal False Claims Act, the California False Claims Act, and the California Unfair Business Practices statute based on alleged predicate violations of the Controlled Substances Act and its implementing regulations, United States ex rel. Kelley,19-cv-2233, and State of California ex rel. Kelley, CGC-19-576931. The complaints seek relief including treble damages, civil penalties, attorney fees, and costs in unspecified amounts. On February 16, 2021, the court in the federal action dismissed the second amended complaint with prejudice, and the relators appealed the dismissal to the ~~Company’s previously disclosed agreement~~U.S. Court of Appeals for the Ninth Circuit. On June 28, 2021, the court in the state action dismissed the complaint with ~~the DEA~~prejudice, and the ~~Department~~relators appealed the dismissal to the Superior Court of ~~Justice~~California, County of San Francisco.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

II. Other Litigation and ~~various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about~~Claims

On May 17, 2013, the ~~Company’s suspicious order reporting practices for controlled substances were consolidated~~Company was served with a complaint filed in the United States District Court for the Northern District of California as ~~In re~~by True Health Chiropractic Inc., alleging that McKesson ~~Corporation Derivative Litigation, No. 4:17-cv-1850. On January 5, 2018, the defendants moved to dismiss the consolidated suit.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~As previously disclosed, Chaile Steinberg, a purported shareholder, filed a shareholder derivative complaint~~sent unsolicited marketing faxes in ~~the Court of Chancery~~violation of the ~~State~~Telephone Consumer Protection Act of ~~Delaware against certain officers and directors~~1991 (“TCPA”), as amended by the Junk Fax Protection Act 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,~~2005, or JFPA, True Health Chiropractic Inc., et al.~~, No. 2017-0803, and~~ ~~Amalgamated Bank~~ v. McKesson Corporation, et al., No. ~~2017-0881. The Court~~CV-13-02219 (HG). Plaintiffs seek statutory damages from $500 to $1,500 per violation plus injunctive relief. True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. Both plaintiffs alleged that defendants violated the TCPA by sending faxes that did not contain notices regarding how to opt out of ~~Chancery consolidated these three actions and~~receiving the faxes. On July 16, 2015, 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 for class certification. On August 22, 2016, the court denied plaintiffs’ motion. On July 17, 2018, the United States Court of Appeals for the Ninth Circuit Court affirmed in part and reversed in part the district court’s denial of class certification and remanded the case to ~~dismiss this action on January 18, 2018.~~the district court for further proceedings. On ~~January 19, 2018, purported shareholder Katielou Greene filed a shareholder derivative complaint~~August 13, 2019, the court granted plaintiffs’ renewed motion for class certification. After class notice and the opt-out period, 9,490 fax numbers remain in the class, representing 48,769 faxes received. On October 8, 2021, the Court de-certified the class citing the plaintiffs lacked class-wide proof identifying the manner of ~~Chancery that is similar to~~receipt; the ~~operative complaint in~~ ~~In re McKesson Corporation Stockholder Derivative Litigation~~. ~~Greene v. McKesson Corporation, et al.~~October 18, 2021 trial date has been vacated.

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 rulingIII. Government Subpoenas 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~~health care industry, as well as to settlements of ~~such subpoenas and investigations are included~~claims against the Company. The Company responds to these requests in the ordinary course of business.

IV. State Opioid Statutes

Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that it may not be able to predict. For example, in April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids in New York. The initial surcharge payment would have been due on January 1, 2019 for opioids sold or distributed during calendar year 2017. On July 6, 2018, the Healthcare Distribution Alliance filed a lawsuit challenging the constitutionality of the law and seeking an injunction against its enforcement. On December 19, 2018, the U.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. The State appealed that decision. On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision on procedural grounds. The Company has accrued a $50 million pre-tax charge ($37 million after-tax) as its estimated share of the OSA surcharge for calendar years 2017 ~~Annual Report~~and 2018. This OSA provision was recognized in “Selling, distribution, general, and administrative expenses” in the Consolidated Statement of Operations for the year ended March 31, 2021 and in “Other accrued liabilities” in the Consolidated Balance Sheet as of March 31, 2021. The State of New York adopted an excise tax on ~~Form 10-K~~sales of opioids in the State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA does not apply to sales or distributions occurring after December 31, 2018. The Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with the U.S. Court of Appeals for the Second Circuit; that petition was denied on December 18, 2020. On February 12, 2021, the Court of Appeals for the Second Circuit granted a motion by the Healthcare Distribution Alliance to stay its mandate pending the filing and ~~previously filed 10-Qs.~~disposition of a petition for writ of certiorari before the U.S. Supreme Court. The petition was denied on October 4, 2021.

Table of Contents


~~17.~~	~~Stockholders’ Equity~~

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

13. Stockholders' Equity (Deficit)

Each share of the Company’s outstanding common stock is permitted ~~one~~1 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”).

On July ~~26, 2017,~~23, 2021, the ~~Company’s~~Company raised its quarterly dividend ~~was raised~~ from ~~$0.28~~$0.42 to ~~$0.34~~$0.47 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 in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by ~~any combination~~combinations of such ~~methods.~~methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including ~~our~~the Company’s stock price, corporate and regulatory requirements, restrictions under ~~our~~the Company’s debt obligations, and other market and economic conditions.

In ~~March 2017, we~~May 2021, the Company entered into an ASR program with a third-party financial institution to repurchase ~~$250 million~~$1.0 billion of the Company’s common ~~stock and~~stock. The total number of shares repurchased under this ASR program was 5.2 million shares at an average price per share of $193.22. The Company received ~~1.4~~4.3 million shares as the initial share ~~settlement. In April 2017, we~~settlement, and in August 2021 the Company received an additional ~~0.3~~0.9 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 million of the Company’s common stock.~~ During the ~~first nine~~three months ~~of 2018, we received a total of 1.5 million shares under~~ended September 30, 2021, the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. The June 2017 ASR program was completed in the second quarter of 2018 and the August 2017 ASR program was completed in the third quarter of 2018.

~~In November 2017, we~~Company repurchased ~~1.8~~an additional 1.4 million of the Company’s shares for ~~$250~~$280 million through open market transactions at an average price per share of ~~$138.12.~~$203.20, of which $16 million was accrued within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets for share repurchases that were executed in late September and settled in early October.

The total remaining authorization outstanding for repurchases of the Company’s common stock at September 30, 2021 was ~~$1.8 billion~~$1.5 billion.

During the three months ended September 30, 2020, the Company repurchased 1.8 million of the Company’s shares for $269 million through open market transactions at ~~December 31, 2017.~~

~~Other Comprehensive Income (Loss)~~

~~Information regarding other comprehensive income (loss) including redeemable noncontrolling interests, net~~an average price per share of ~~tax, by component is as follows:~~$151.23, of which $21 million was accrued within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheets for share repurchases that were executed in late September and settled in early October. There were no share repurchases during the three months ended June 30, 2020.

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 )
32


~~(1)~~	~~Foreign currency translation adjustments primarily result from the conversion of non-U.S. dollar financial statements of our foreign subsidiaries into the Company’s reporting currency, U.S. dollars.~~

~~(2)~~

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


~~(3)~~	The third quarter and first nine months of 2018 include net foreign currency translation gains of $12 million and $160 million and the third quarter and first nine months of 2017 include net foreign currency translation losses of $31 million and $97 million attributable to redeemable noncontrolling interests.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


~~(4)~~	The first nine months of 2017 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 million on the net investment hedges from the €1.2 billion Euro-denominated notes and £450 million British pound sterling-denominated notes.


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


~~(7)~~	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.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in ~~our accumulated~~the Company’s Accumulated other comprehensive income (loss), ~~net of tax,~~including noncontrolling interests and redeemable noncontrolling interests, by ~~component~~components for the ~~third quarter~~three and ~~first nine~~six months ~~of 2018 is~~ended September 30, 2021 and 2020 are as follows:


	Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax (1)		Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains on Cash Flow Hedges, Net of Tax		Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax		Total Accumulated Other Comprehensive Loss
Balance at June 30, 2021	$	(1,477)	$	(57)		$	13	$	(106)	$	(1,627)
Other comprehensive income (loss) before reclassifications	(81)		32		⁽²⁾	3		1		(45)
Amounts reclassified to income statement	1		—			5		1		7
Other comprehensive income (loss)	(80)		32			8		2		(38)
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	—		—			—		—		—
Other comprehensive income (loss) attributable to McKesson	(80)		32			8		2		(38)

Balance at September 30, 2021	$	(1,557)	$	(25)		$	21	$	(104)	$	(1,665)

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 September 30, 2017 $ (1,336 ) $ (116 ) $ (20 ) $ (238 ) $ (1,710 )

Other comprehensive income (loss) before reclassifications 30
(19 ) (16 ) —
(5 )
Amounts reclassified to earnings and other —
—
—
1
1
Other comprehensive income (loss) 30
(19 ) (16 ) 1
(4 )
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests 12
—
—
—
12
Other comprehensive income (loss) attributable to McKesson 18
(19 ) (16 ) 1
(16 )
Balance at December 31, 2017 $ (1,318 ) $ (135 ) $ (36 ) $ (237 ) $ (1,726 )
(1)Primarily result from the conversion of non-U.S. dollar financial statements of the Company’s operations in Europe and Canada into the Company’s reporting currency, U.S. dollars.

(2)Amounts recorded in the three months ended September 30, 2021 include gains of $33 million related to net investment hedges from the Euro-denominated notes and gains of $10 million related to net investment hedges from cross-currency swaps. These amounts are net of income tax loss of $11 million.

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 )
33

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


	Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax (1)		Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains on Cash Flow Hedges, Net of Tax		Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax		Total Accumulated Other Comprehensive Loss
Balance at March 31, 2021	$	(1,361)	$	(36)		$	13	$	(96)	$	(1,480)
Other comprehensive income (loss) before reclassifications	(47)		5		⁽²⁾	3		6		(33)
Amounts reclassified to income statement	18		—			5		(2)		21
Other comprehensive income (loss)	(29)		5			8		4		(12)
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	9		(6)			—		—		3
Other comprehensive income (loss) attributable to McKesson	(38)		11			8		4		(15)
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	(158)		—			—		(12)		(170)
Balance at September 30, 2021	$	(1,557)	$	(25)		$	21	$	(104)	$	(1,665)


~~18.~~	~~Segment Information~~

~~We currently report our~~(1)Primarily result from the conversion of non-U.S. dollar financial statements of the Company’s operations in ~~two operating~~Europe and Canada into the Company’s reporting currency, U.S. dollars.

(2)Amounts recorded in the six months ended September 30, 2021 include gains of $11 million related to net investment hedges from the Euro-denominated notes and gains of $5 million related to net investment hedges from cross-currency swaps. These amounts are net of income tax loss of $5 million.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


	Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax (1)		Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax		Unrealized Net Losses and Other Components of Benefit Plans, Net of Tax		Total Accumulated Other Comprehensive Loss
Balance at June 30, 2020	$	(1,742)	$	75		$	44	$	(112)	$	(1,735)
Other comprehensive income (loss) before reclassifications	111		(70)		⁽²⁾	(19)		(9)		13
Amounts reclassified to income statement	—		—			—		—		—
Other comprehensive income (loss)	111		(70)			(19)		(9)		13
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(119)		(1)			—		(5)		(125)
Other comprehensive income (loss) attributable to McKesson	230		(69)			(19)		(4)		138
Balance at September 30, 2020	$	(1,512)	$	6		$	25	$	(116)	$	(1,597)

(1)Primarily result from the conversion of non-U.S. dollar financial statements of the Company’s operations in Europe and Canada into the Company’s reporting currency, U.S. dollars.

(2)Amounts recorded in the three months ended September 30, 2020 include losses of $83 million related to net investment hedges from the Euro-denominated notes and losses of $12 million related to net investment hedges from cross-currency swaps. These amounts are net of income tax benefit of $25 million.


	Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax (1)		Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax		Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax		Total Accumulated Other Comprehensive Loss
Balance at March 31, 2020	$	(1,780)	$	138		$	49	$	(110)	$	(1,703)
Other comprehensive income (loss) before reclassifications	207		(133)		⁽²⁾	(24)		(10)		40
Amounts reclassified to income statement	—		—			—		2		2
Other comprehensive income (loss)	207		(133)			(24)		(8)		42
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(61)		(1)			—		(2)		(64)
Other comprehensive income (loss) attributable to McKesson	268		(132)			(24)		(6)		106
Balance at September 30, 2020	$	(1,512)	$	6		$	25	$	(116)	$	(1,597)

(1)Primarily result from the conversion of non-U.S. dollar financial statements of the Company’s operations in Europe and Canada into the Company’s reporting currency, U.S. dollars.

(2)Amounts recorded in the six months ended September 30, 2020 include losses of $117 million related to net investment hedges from the Euro-denominated notes and losses of $63 million related to net investment hedges from cross-currency swaps. These amounts are net of income tax benefit of $47 million.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

14. Segments of Business

The Company reports its financial results in 4 reportable segments: ~~McKesson Distribution~~U.S. Pharmaceutical, RxTS, Medical-Surgical Solutions, and ~~McKesson Technology Solutions.~~International. The organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. ~~We evaluate~~The Company evaluates the performance of ~~our~~its 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.

The U.S. Pharmaceutical segment distributes branded, generic, specialty, biosimilar, and ~~results from discontinued operations.~~over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.

The RxTS segment unifies the solutions and services of CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation to serve biopharma and life sciences partners and patients. By combining automation and expert navigation of the healthcare ecosystem, RxTS connects pharmacies, providers, payers, and biopharma to address patients’ medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives.

The Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics, and other services to healthcare providers, including physician offices, surgery centers, nursing homes, hospital reference labs, and home health care agencies. This segment offers more than 275,000 national brand medical-surgical products as well as McKesson’s own line of products through a network of distribution centers within the United States.

The International segment includes the Company’s operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. The Company’s operations in Europe provide distribution and services to wholesale, institutional, and retail customers in 12 European countries where it owns, partners, or franchises with retail pharmacies and operates through 2 businesses: Pharmaceutical Distribution and Retail Pharmacy. The Company’s Canada operations deliver vital medicines, supplies, and information technology services throughout Canada and includes Rexall Health retail pharmacies. In the second quarter of 2022, the Company entered into an agreement to sell the E.U. disposal group and, on November 1, 2021, the Company announced an agreement to sell its retail and distribution businesses in the United Kingdom. Refer to Financial Note 2, “Held for Sale,” for more information.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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


	Three Months Ended September 30,				Six Months Ended September 30,
(In millions)	2021		2020		2021		2020
Segment revenues (1)
U.S. Pharmaceutical	$	53,411	$	48,067	$	103,430	$	92,737
Prescription Technology Solutions	932		668		1,813		1,324
Medical-Surgical Solutions	3,124		2,533		5,652		4,334
International	9,109		9,540		18,355		18,092

Total revenues	$	66,576	$	60,808	$	129,250	$	116,487

Segment operating profit (loss) (2)
U.S. Pharmaceutical (3)	$	760	$	623	$	1,442	$	1,236
Prescription Technology Solutions	128		88		232		156
Medical-Surgical Solutions (4)	296		187		371		276
International (5)	(146)		(45)		(93)		(42)

Subtotal	1,038		853		1,952		1,626
Corporate expenses, net (6)	(360)		(148)		(663)		(216)
Loss on debt extinguishment (7)	(191)		—		(191)		—
Interest expense	(45)		(50)		(94)		(110)
Income from continuing operations before income taxes	$	442	$	655	$	1,004	$	1,300

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


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


~~(2)~~	2018 revenues 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.

~~(3)~~

Distribution Solutions operating profit for the third quarter and first nine months of 2018 include pre-tax credits of $2 million and $5 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 method of accounting for inventories. LIFO credits were higher in 2017 compared to 2018 primarily 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. Additionally, the first nine months of 2017 included $144 million of net cash proceeds representing our share of net settlements of antitrust class action lawsuits against drug manufacturers.

~~(4)~~

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

~~(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 profit for the first nine months of 2018 includes a pre-tax gain of $37 million from the Healthcare Technology Net Asset Exchange related to the final net working capital and other adjustments.


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

(1)Revenues from services on a disaggregated basis represent less than 1% of the U.S. Pharmaceutical segment’s total revenues, less than 40% of the RxTS segment’s total revenues, less than 3% of the Medical-Surgical Solutions segment’s total revenues, and less than 8% of the International segment’s total revenues. The International segment reflects foreign revenues. Revenues for the remaining three reportable segments are domestic.

(2)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income, net, for the Company’s reportable segments.

(3)The Company’s U.S. Pharmaceutical segment’s operating profit for the three and six months ended September 30, 2021 includes $23 million and $46 million, respectively, and for the three and six months ended September 30, 2020 includes $52 million and $104 million, respectively, of credits related to the last-in, first-out (“LIFO”) method of accounting for inventories. The three and six months ended September 30, 2021 includes $34 million and $46 million, respectively, of cash receipts for the Company’s share of antitrust legal settlements. The three and six months ended September 30, 2020 also includes a charge of $50 million recorded in connection with the Company’s estimated liability under the State of New York’s Opioid Stewardship Act, as discussed in more detail in Financial Note 12, “Commitments and Contingent Liabilities.”

(4)The Company’s Medical-Surgical Solutions segment’s operating profit for the six months ended September 30, 2021 includes inventory charges totaling $164 million on certain personal protective equipment and other related products.

(5)The Company’s International segment’s operating loss for the three and six months ended September 30, 2021 includes charges of $342 million to remeasure assets and liabilities of the E.U. disposal group to the lower of carrying value or fair value less costs to sell and to impair certain assets, including internal-use software that will not be utilized in the future, as discussed in more detail in Financial Note 2, “Held for Sale.” The three and six months ended September 30, 2021 includes a gain of $59 million related to the sale of the Company’s Canadian health benefit claims management and plan administrative services business. Operating loss for the three and six months ended September 30, 2020 includes restructuring, impairment, and related charges of $35 million and $58 million, respectively, primarily associated with the closure of retail pharmacy stores within the U.K. business, as discussed in more detail in Financial Note 3, “Restructuring, Impairment, and Related Charges,” and a goodwill impairment charge of $69 million related to one of the Company’s reporting units in Europe, as discussed in more detail in Financial Note 7, “Goodwill and Intangible Assets, Net.”

3137

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)

~~As previously disclosed in our Quarterly Report on Form 10-Q~~(6)Corporate expenses, net for the ~~quarter~~three and six months ended September 30, ~~2017, on January 2, 2018,~~2021 includes charges of $149 million primarily related to the ~~Executive Vice President and Group President who was our segment manager~~effect of ~~the Distribution Solutions segment retired~~accumulated other comprehensive loss components from the ~~Company. As a result,~~E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale.” Corporate expenses, net for the three and six months ended September 30, 2021 includes charges of $112 million and $186 million, respectively, related to the Company’s ~~chief operating decision maker is currently evaluating our management~~estimated liability for opioid-related claims, as discussed in more detail in Financial Note 12, “Commitments and ~~operating structure. We anticipate this evaluation will result~~Contingent Liabilities.” The three and six months ended September 30, 2021 includes $36 million and $71 million, respectively, and the three and six months ended September 30, 2020 includes $41 million and $84 million, respectively, of opioid-related costs, primarily litigation expenses. Corporate expenses, net for the six months ended September 30, 2020 includes a net gain of $131 million recorded in ~~a change in our existing operating segment structure, commencing~~connection with ~~our~~insurance proceeds received during the first quarter of ~~2019.~~2021 from the settlement of the shareholder derivative action related to the Company’s controlled substances monitoring program. Corporate expenses, net, for the three and six months ended September 30, 2021 includes $97 million and $104 million, respectively, and for the three and six months ended September 30, 2020 includes $49 million and $59 million, respectively, of net gains associated with certain of the Company’s equity investments.

(7)Loss on debt extinguishment for the three and six months ended September 30, 2021 consists of a charge of $191 million on debt extinguishment related to the Company’s July 2021 tender offer to redeem a portion of its existing debt, as discussed in more detail in Financial Note 8, “Debt and Financing Activities.”

3238

~~Table of Contents~~


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)

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

INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS


Section			Page

~~Item 2.~~ General			~~Management’s Discussion~~ 39

Overview of Our Business			39

Executive Summary			40

Trends and ~~Analysis~~Uncertainties			42

Overview of Consolidated Results			47

Overview of Segment Results			52

New Accounting Pronouncements			56

Financial Condition, Liquidity, and ~~Results of Operations.~~Capital Resources			56

Cautionary Notice About Forward-Looking Statements			60

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the ~~Financial~~“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,”~~together with its subsidiaries (collectively, the “Company,” “McKesson,” “we,” “our,” or ~~“we”~~“us” and other similar pronouns) ~~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~~2021 previously filed with the ~~SEC~~United States (“U.S.”) Securities and Exchange Commission on May ~~22, 2017~~12, 2021 (“~~2017~~2021 Annual Report”).

~~The Company’s~~Our 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~~our 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.

Overview of Our Business:

We are a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively.

We report our results in four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of 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.

The following summarizes our four reportable segments. Refer to Financial Note 14, “Segments of Business,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding our reportable segments.

3339

~~Table of Contents~~


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

•U.S. Pharmaceutical distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.

•RxTS is a reportable segment that unifies the solutions and services of CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation to serve our biopharma and life sciences partners and patients. By combining automation and expert navigation of the healthcare ecosystem, RxTS connects pharmacies, providers, payers, and biopharma to address patients’ medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives.

•Medical-Surgical Solutions provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the U.S.

•International is a reportable segment that includes our operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. In the second quarter of 2022, we entered into an agreement to sell certain of our businesses in the European Union, primarily located in France, Italy, Ireland, Portugal, Belgium, and Slovenia. The sale also includes our German headquarters and wound-care business, part of a shared services center in Lithuania, and our ownership stake in a joint venture in the Netherlands (“E.U. disposal group”). Additionally, on November 1, 2021, we announced an agreement to sell our retail and distribution businesses in the United Kingdom (“U.K.”).

Executive Summary:

The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the three and six months ended September 30, 2021.

•Coronavirus disease 2019 (“COVID-19”) continues to impact our year over year results. As previously disclosed in our 2021 Annual Report, pharmaceutical distribution volumes decreased across the enterprise during the first quarter of 2021 as a result of the weakened and uncertain global economic environment and COVID-19 restrictions following the onset of the pandemic. We remain in a dynamic environment and volume trends continue to be non-linear. However, the recovery from the pandemic is favorably reflected in our results when comparing 2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs during the first half of 2022 and a year over year increase in sales of COVID-19 tests;

•In response to the global pandemic, McKesson plans to donate certain personal protective equipment (“PPE”) to charitable organizations to assist with COVID-19 recovery efforts. During the six months ended September 30, 2021, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. The majority of these charges are driven by the intent of management not to sell certain excess PPE inventory and instead direct it to charitable organizations. Refer to the “Trends and Uncertainties” section included below for further information on COVID-19 and related impacts;

•Revenues of $66.6 billion for the three months ended September 30, 2021 increased 9% from the prior year, and revenues of $129.3 billion for the six months ended September 30, 2021 increased 11% from the prior year. The increase in revenues is primarily driven by market growth in our U.S. Pharmaceutical segment;

•Gross profit increased 12% for both the three and six months ended September 30, 2021 compared to the prior year primarily driven by improvements in primary care patient visits, higher sales of COVID-19 tests, and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment as well as the contribution from our COVID-19 vaccination distribution program and growth of specialty pharmaceuticals in our U.S. Pharmaceutical segment. Gross profit for the six months ended September 30, 2021 also included favorable effects of foreign currency exchange fluctuations in our International segment;


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

•On July 5, 2021, we entered into an agreement to sell our E.U. disposal group to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion), subject to certain adjustments under the agreement. Beginning in the second quarter of 2022, the E.U. disposal group was reflected in our condensed consolidated financial statements as held for sale, at which point we discontinued recording depreciation and amortization expense on related assets. As a result of the transaction, we recorded charges totaling $491 million during the second quarter of 2022 in total operating expenses to remeasure assets and liabilities held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $226 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group. The transaction is anticipated to close within the next twelve months, pursuant to customary closing conditions, including receipt of required regulatory approvals. Refer to Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information;

•Total operating expenses for the three and six months ended September 30, 2021 includes charges of $112 million and $186 million, respectively, related to our estimated liability for opioid-related claims as further described in the “Trends and Uncertainties” section included below;

•Total operating expenses for the three and six months ended September 30, 2021 includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business;

•Other income, net for the three and six months ended September 30, 2021 includes net gains of $97 million and $104 million, respectively, related to our equity investments;

•On July 23, 2021, we completed a cash tender offer and paid an aggregate consideration of $1.1 billion to redeem certain notes with a principal amount of $922 million. As a result of the redemption, we incurred a loss on debt extinguishment in the second quarter of 2022 of $191 million, consisting of the premiums paid and a portion of the write-off of unamortized debt issuance costs in an amount proportional to the principal amount of debt retired. Refer to Financial Note 8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information;

•Diluted earnings per common share from continuing operations attributable to McKesson Corporation for the three and six months ended September 30, 2021 of $1.71 and $4.82, respectively, reflects the aforementioned items, net of any respective tax impacts, discrete tax items recognized, and a lower share count compared to the prior year due to the cumulative effect of share repurchases;

•We paid $1.0 billion to purchase 34.5 million shares of McKesson Europe AG (“McKesson Europe”) during the six months ended September 30, 2021 through exercises of a put right by the noncontrolling shareholders pursuant to the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”);

•On July 17, 2021, we redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021. The notes were redeemed using cash on hand. On August 12, 2021, we also completed a public offering of 1.30% notes due August 15, 2026 with a principal amount of $500 million for proceeds received, net of discounts and offering expenses, of $495 million. The Company utilized the net proceeds from this note for general corporate purposes;

•We returned $1.4 billion of cash to shareholders during the six months ended September 30, 2021 through $1.3 billion of share repurchases under an accelerated share repurchase (“ASR”) program entered into in May 2021, and $134 million of dividend payments. On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share; and

•On November 1, 2021, we announced an agreement to sell our retail and distribution businesses in the U.K. (“U.K. disposal group”) to Aurelius Elephant Limited for purchase consideration of £325 million (or, approximately $438 million). Beginning in the third quarter of 2022, the U.K. disposal group will be reflected in our condensed consolidated financial statements as held for sale and will be remeasured to the lower of its carrying amount or fair value less costs to sell, which we estimate will result in a charge between $700 million and $900 million, primarily related to the inclusion of the accumulated other comprehensive income balances into the carrying amount of the U.K. disposal group. Actual charges could differ based on operating results, changes in foreign exchange rates, and other factors prior to closing of the transaction. The transaction is anticipated to close during the fourth quarter of 2022, pursuant to customary closing conditions, including receipt of regulatory approvals.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Trends and Uncertainties:

COVID-19

The novel strain of coronavirus, which causes the infectious disease known as COVID-19, continues to evolve since it was declared a global pandemic on March 11, 2020 by the World Health Organization. We continue to evaluate the nature and extent of the ongoing impacts COVID-19 has on our business, operations, and financial results. Refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2021 Annual Report for a full disclosure of trends and uncertainties due to COVID-19 since the onset of the pandemic. The disclosures below include significant updates that occurred during the first half of 2022. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described at the end of this COVID-19 section.

~~Overview:~~Our Response to COVID-19 in the Workplace

We are committed in continuing to supply our customers and protect the safety of our employees. The various responses we put in place initially at the onset of the pandemic to mitigate the impact of COVID-19 on our business operations include telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures. During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, including a transition to a partial remote work model for certain employees on a go-forward basis as further discussed in this Financial Review and in Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. In July 2021, we also lifted certain travel restrictions across the enterprise. We continue to enforce the safety measures in the workplace as recommended by the Centers for Disease Control and Prevention (“CDC”). During the second quarter of 2022, we implemented new COVID-19 vaccination protocols designed to be consistent with customer requirements for our U.S. and Canada employees and to protect the safety of our employees, customers, patients, and communities while also safeguarding the healthcare supply chain. In Europe, we are following applicable government guidelines in local countries. We will continue to monitor all of these changing requirements. We have not observed a material increase in employee turnover as a result of our policies related to the COVID-19 vaccination mandates; however, we are unable to predict whether such policies or mandates will have a material impact on our workforce in the future.

Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits

As a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions, we remain well positioned to respond to the COVID-19 pandemic in the U.S., Canada, and Europe. We have worked and continue to work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including PPE, and medicine reach our customers and patients.

We continue to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines through a contract with the CDC. We have been distributing COVID-19 vaccines that are refrigerated or frozen since December 2020, when the Emergency Use Authorization was issued by the U.S. Food and Drug Administration for the Moderna COVID-19 vaccine manufactured by ModernaTX, Inc. In the first quarter of 2022, McKesson began supporting the U.S. government’s commitment to donate COVID-19 vaccines worldwide. For this initiative, we are responsible for picking and packing the COVID-19 vaccines into temperature-controlled coolers and preparing them for pickup by an international partner. We do not manage the actual shipments of the vaccines to other countries. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. We also continue to manage the assembly, storage, and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies, through agreements with both the Department of Health and Human Services (“HHS”) and Pfizer, Inc. The results of operations for the kitting and distribution of ancillary supplies are reflected in our Medical-Surgical Solutions segment. The future financial impact of the arrangements with the CDC and HHS depend on numerous uncertainties, which are described at the end of this COVID-19 section.

McKesson Canada and McKesson Europe are also playing a role in helping support governments and public health entities in not only distributing COVID-19 vaccines, but administering them in pharmacies as well. McKesson Europe is also distributing COVID-19 tests and certain PPE.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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

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

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

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

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

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

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

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

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

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

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

Weighted Average Diluted Common Shares 208
222
(6 ) % 210
226
(7 ) %
Trends in our Business

At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we experienced higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March. Subsequently, during the first half of 2021, pharmaceutical distribution volumes decreased as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government shutdowns and shelter-in-place orders. We also experienced decreased demand for primary care medical-surgical supplies due to deferrals in elective procedures in hospitals and surgery centers as well as decreased traffic and closures of doctors’ offices, which was partially offset by demand for PPE and COVID-19 tests. Additionally, the decreased traffic in doctors’ offices and general shelter-in-place guidance by governmental authorities negatively impacted retail pharmacy foot traffic in both Europe and Canada. This drove favorability in our results when comparing the first half of 2022 versus 2021, particularly during the first quarter.

We have experienced significant improvements in prescription volumes and primary care patient visits during our first half of 2022 compared to the same prior year period; however, the recovery of COVID-19 continues to be non-linear and tracked with patient mobility. During the first half of 2022, the COVID-19 vaccine and related ancillary kit distribution in the U.S. favorably impacted our results. During the first half of 2022, sales for PPE remained relatively flat year over year and we saw higher sales for COVID-19 tests primarily due to limited product availability in the first quarter of 2021 and increased demand during the second quarter of 2022 corresponding with the spike in positive COVID-19 cases as a result of the Delta variant.

Impact to our Supply Chain

We also continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. Overall, during 2022 we have experienced an increase in supply chain costs primarily related to transportation and labor; however, this did not materially impact our results of operations for the three or six months ended September 30, 2021. Additionally, in our Medical-Surgical Solutions segment, we have experienced certain supply chain disruptions for COVID-19 tests, which poses a potential risk for supply availability to meet the future demand. As potential shortages or disruptions of any products are identified we are acting to address supply continuity, which includes securing additional products when available, sourcing back-up products when needed, and following allocation procedures to maintain and protect supply as much as possible. We are also initiating business continuity action planning to maintain and protect operations across all locations and facilities.

Impact to our Results of Operations, Financial Condition, and Liquidity

For the three months ended September 30, 2021, COVID-19 tests and the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately $545 million, or 17%, to segment revenues, and contributed approximately $93 million, or 31% to segment operating profit. For the six months ended September 30, 2021, these contributions were approximately $868 million, or 15%, to segment revenues, and including total inventory charges as further described below, increased our segment operating profit by approximately 1%.

The distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed less than 10% to segment operating profit for both the three and six months ended September 30, 2021. The financial impact from our COVID-19 response efforts in the International segment during the three and six months ended September 30, 2021 was not material to our consolidated results, but contributed to year over year favorability in segment operating results. During the six months ended September 30, 2020, particularly during the first quarter, we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income from continuing operations before income taxes. The recovery of prescription volume trends and patient care visits, which are also described in more detail above in the Trends in our Business section, had a favorable impact year over year across our businesses when comparing 2022 versus 2021.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Additionally, certain PPE items held for resale were valued in our inventory at costs that were inflated by earlier COVID-19 pandemic demand levels. That inventory valuation, if not supported by market resale prices, may be written down to net realizable value. We may also write-off inventory due to decreased customer demand and excess inventory. During the six months ended September 30, 2021, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Of this amount, we recorded $147 million in cost of sales driven by the intent of management not to sell certain excess PPE inventory, which required an inventory write-down to zero, and instead direct it to charitable organizations. We recorded $8 million in total operating expenses for excess inventory which has already been committed for donation during our first half of 2022. In addition, $9 million of inventory charges were recorded in cost of sales for PPE and other related products that management intends to sell. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods of other PPE and related product categories, we are taking measures to mitigate such risk.

Overall, these COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the three and six months ended September 30, 2021 compared to the same prior year periods. Impacts to future periods due to COVID-19 may differ based on future developments, which is described at the end of this COVID-19 section.

During the six months ended September 30, 2021, we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. We continue to monitor the COVID-19 situation closely and engage with manufacturers, industry partners, and government agencies to anticipate shortages and respond to demand for certain medications and therapies. We are monitoring our customers closely for changes to their timing of payments or ability to pay amounts owed to us as a result of COVID-19 pandemic impacts to their businesses. We remain well-capitalized with access to liquidity from our revolving credit facility. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. At September 30, 2021, we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future.

Risks and Forward-Looking Information

The COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We still face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. The full extent to which COVID-19 will impact us depends on many factors and future developments, including: the duration and spread of the COVID-19 pandemic; potential seasonality of viral outbreaks; potential new variants of the original virus; the amount of COVID-19 vaccines authorized, manufactured, distributed, and administered; the amount of ancillary supply kits assembled and distributed; the effectiveness of COVID-19 vaccines and governmental measures in controlling the spread of the virus; and the effectiveness of treatments of infected individuals. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when COVID-19 may no longer significantly impact our ability to forecast future financial performance remains challenging. Additionally, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Key assumptions and estimates about future values in our impairment assessments can be affected by a variety of factors, including the impacts of the global pandemic on industry and economic trends as well as on our business strategy and internal forecasts. Material changes to key assumptions and estimates can decrease the projected cash flows or increase the discount rates and have resulted in impairment charges of certain long-lived assets and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of our 2021 Annual Report for a disclosure of risk factors related to COVID-19.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Opioid-Related Litigation and Claims

We are a defendant in a number of legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout the U.S., and in Puerto Rico and Canada. Those proceedings include approximately 2,800 federal cases and approximately 350 state court cases throughout the U.S., and cases in Puerto Rico and Canada.

On July 21, 2021, we and the two other national pharmaceutical distributors announced that we had negotiated a comprehensive proposed settlement agreement which, if all conditions are satisfied, would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities. Under the proposed agreement, the three distributors would pay up to approximately $21 billion over a period of 18 years, with up to approximately $7.9 billion to be paid by us for our 38.1% portion if all eligible entities participate. In addition, the proposed agreement would require the three distributors, including the Company, to establish a clearinghouse for controlled substances distribution data and adopt changes to anti-diversion programs.

On September 4, 2021, we and the two other national distributors announced that 42 of 49 eligible states, all 5 U.S. territories, and Washington, DC, had affirmatively signed on to the proposed agreement. The attorneys general of Alabama, Georgia, Nevada, New Mexico, Oklahoma, Rhode Island, and Washington have not joined the proposed settlement. We further announced that we and the other two distributors had determined that enough states had signed on to the settlement for the proposed agreement to proceed to the next phase. During this phase, which is expected to end on January 2, 2022, each participating state will offer its political subdivisions, including those that have not sued, the opportunity to participate in the settlement. After the conclusion of this period, we will have 30 days to determine whether a sufficient number of states and political subdivisions have joined for the settlement to proceed to implementation.

The proposed agreement only addresses the claims of U.S. state attorneys general and political subdivisions in participating states. The West Virginia subdivisions and Native American tribes are not part of this settlement process. The exact amount that would be due under the proposed agreement depends on several factors, including the participation rate of states and political subdivisions, the extent to which states take action to foreclose opioid lawsuits by political subdivisions, and the extent to which political subdivisions in settling states file additional opioid lawsuits against us after the proposed agreement becomes effective. The proposed agreement contemplates that if certain governmental entities do not agree to a settlement under the framework, but the distributors nonetheless conclude that there is sufficient participation to warrant the settlement, there would be a corresponding reduction in the amount due to account for the unresolved claims of the governmental entities that do not participate. Those non-participating governmental entities would be entitled to pursue their claims.

We believe that a broad settlement of opioid claims by governmental entities is probable, and that the loss related thereto can be reasonably estimated. We recorded a charge of $8.1 billion during the year ended March 31, 2021 related to our share of the global settlement as well as claims of West Virginia municipalities and the Native American tribes. In connection with the proposed settlement agreement and other opioid-related settlement accruals described above, we recorded additional charges of $112 million and $186 million during the three and six months ended September 30, 2021, respectively, within “Claims and litigation charges, net” in our Condensed Consolidated Statements of Operations. Our total estimated liability for opioid-related claims was $8.2 billion as of September 30, 2021, of which $1.1 billion was included in “Other accrued liabilities” for the amount estimated to be paid prior to September 30, 2022, and the remaining liability was included in “Long-term litigation liabilities” in our Condensed Consolidated Balance Sheet.

Consistent with the terms of the proposed agreement, we placed approximately $354 million into escrow on September 30, 2021. This amount excludes the proportionate allocation under the proposed settlement for each non-participating state and would be disbursed when and if the proposed agreement becomes effective. Subsequent annual payments would be due on July 15 of each year. The escrow payment was presented as restricted cash within “Prepaid expenses and other” in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2021. Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, including the uncertainty of the scope of participation by plaintiffs in any potential settlement, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Notwithstanding the progress toward a broad settlement, we also continue to prepare for trial in these pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q for more information.

State Opioid Statutes

Legislative, regulatory, or industry measures to address the misuse of prescription opioid medications could affect our business in ways that we may not be able to predict. In April 2018, the State of New York adopted the Opioid Stewardship Act (“OSA”) which required the imposition of an 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 State of New York appealed to the U.S. Court of Appeals for the Second Circuit. The State of New York has subsequently adopted an excise tax on sales of opioids in the State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA would apply only to opioid sales on or before December 31, 2018. The excise tax applies only to the first sale occurring in New York, and thus may not apply to sales from our distribution centers in New York to New York customers.

On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision striking down the OSA on procedural grounds. On October 4, 2021, the U.S. Supreme Court declined to hear a petition challenging the Second Circuit’s Decision. Thus, we expect that the OSA will be reinstated for calendar years 2017 and 2018 (but not beyond those years), and, subject to any further legal challenge, we will have to pay our ratable share of the annual surcharge for those two years. During the second quarter of 2021, we reflected an estimated liability of $50 million for the OSA surcharge in our consolidated financial statements on the assumption that the appellate court’s decision will stand. Refer to Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q for more information.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

RESULTS OF OPERATIONS

Overview of Consolidated Results:


(In millions, except per share data)	Three Months Ended September 30,								Six Months Ended September 30,
	2021			2020			Change		2021			2020			Change
Revenues	$	66,576		$	60,808		9	%	$	129,250		$	116,487		11	%
Gross profit	3,352			3,000			12		6,384			5,700			12
Gross profit margin	5.03		%	4.93		%	10	bp	4.94		%	4.89		%	5	bp
Total operating expenses	$	(2,813)		$	(2,366)		19	%	$	(5,277)		$	(4,388)		20	%
Total operating expenses as a percentage of revenues	4.23		%	3.89		%	34	bp	4.08		%	3.77		%	31	bp
Other income, net	$	139		$	71		96	%	$	182		$	98		86	%
Loss on debt extinguishment	(191)			—			—		(191)			—			—
Interest expense	(45)			(50)			(10)		(94)			(110)			(15)
Income from continuing operations before income taxes	442			655			(33)		1,004			1,300			(23)
Income tax expense	(132)			(28)			371		(158)			(178)			(11)
Income from continuing operations	310			627			(51)		846			1,122			(25)
Loss from discontinued operations, net of tax	—			—			—		(3)			(1)			200
Net income	310			627			(51)		843			1,121			(25)
Net income attributable to noncontrolling interests	(43)			(50)			(14)		(90)			(100)			(10)
Net income attributable to McKesson Corporation	$	267		$	577		(54)	%	$	753		$	1,021		(26)	%

Diluted earnings (loss) per common share attributable to McKesson Corporation
Continuing operations	$	1.71		$	3.54		(52)	%	$	4.82		$	6.26		(23)	%
Discontinued operations	—			—			—		(0.02)			—			—
Total	$	1.71		$	3.54		(52)	%	$	4.80		$	6.26		(23)	%

Weighted-average diluted common shares outstanding	155.8			163.2			(5)	%	156.9			163.2			(4)	%

All percentage changes displayed above which are not meaningful are displayed as zero percent.

bp - basis points

~~NM - not meaningful~~Revenues

Revenues increased for ~~2018~~the three and six months ended September 30, 2021 compared to ~~2017~~the same prior year periods primarily due to market growth in our U.S. Pharmaceutical segment, partially offset by the contribution of our German pharmaceutical wholesale business ~~acquisitions and expanded business~~to a joint venture with ~~existing customers within our North America~~Walgreens Boots Alliance (“WBA”) on November 1, 2020. For the six months ended September 30, 2021, revenues were also favorable year over year due to the recovery of pharmaceutical distribution volumes from the prior year impact of COVID-19 across our businesses. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with ~~brand~~branded to generic drug conversion.

~~Table of Contents~~


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Gross Profit

Gross profit ~~decreased in 2018 primarily~~increased for the three and six months ended September 30, 2021 largely due to the ~~2017 fourth quarter~~pandemic, including the favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs, the recovery of the prior year impacts from COVID-19, such as disruptions of doctors’ office operations, deferred or cancelled elective procedures, lower demand for pharmaceuticals, and overall reduction of foot traffic in pharmacies, as well as higher sales of COVID-19 tests. Gross profit was also favorably impacted by growth in specialty pharmaceuticals within our U.S. Pharmaceutical segment as well as by foreign currency exchange fluctuations for the three and six months ended September 30, 2021, and unfavorably impacted by the contribution of ~~the majority of~~ our ~~McKesson Technology Solutions businesses (“Core MTS Business”)~~German pharmaceutical wholesale business to a joint venture ~~as further discussed below, significant government reimbursement reductions in~~with WBA on November 1, 2020. For the ~~United Kingdom (“U.K.”), the competitive sell-side environment~~six months ended September 30, 2021, gross profit was unfavorably impacted by inventory charges on certain PPE and lower last-in, first-out (“LIFO”) credits. These decreases in 2018 were partially offset by market growth, procurement benefits realized through the joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”) andother related products.

In our ~~business acquisitions. Gross~~U.S. Pharmaceutical segment, gross profit for the ~~first nine~~three and six months ended September 30, 2021 also included net cash proceeds received of ~~2018 was unfavorably affected by weaker pharmaceutical manufacturer pricing trends,~~$34 million and ~~for the first nine months of 2017 benefited from $144~~$46 million, ~~of cash receipts~~respectively, representing our share of antitrust legal settlements. ~~LIFO~~There were no similar cash proceeds received for the same prior year periods. Last-in, first-out (“LIFO”) inventory credits were $2$23 million and ~~$155~~$52 million for the ~~third quarters of 2018~~three months ended September 30, 2021 and ~~2017,~~2020, respectively, and $5$46 million and ~~$151~~$104 million for the ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017.~~2020, respectively. 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 partyare lower in the ~~third~~second quarter and first half 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%~~2022 compared to the same ~~periods a~~prior year ~~ago. Additionally, operating expenses were affected by:~~

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

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

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

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

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

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

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

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

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.

~~Sale of EIS Business~~

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~~volume of ~~2018 within operating expenses in our Technology Solutions segment.~~

~~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.

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 brandbranded off-patent to generic drug ~~conversions.~~

~~International pharmaceutical distribution~~launches 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 thehigher brand inflation. Our 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~~credit is based on our estimates of the annual LIFO ~~expense~~credit which is 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.~~factors. Changes to any of the above factors could have a material impact to our annual LIFO ~~expense.~~credit. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year. ~~LIFO credits were higher in 2017 compared~~

Total Operating Expenses

A summary of the components of our total operating expenses for the three and six months ended September 30, 2021 and 2020 is as follows:

•Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, and other general charges.

•Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to ~~2018 primarily~~our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes ~~made~~in estimates. Legal fees to ~~full year expectations for net price increases during~~defend claims, which are expensed as incurred, are included within SDG&A. We have reclassified prior period amounts to conform to the current period presentation.

•Goodwill impairments charges: We perform an impairment test on goodwill balances annually in the third quarter and more frequently if indicators for potential impairment exist. The resulting goodwill impairment charges are reflected within this line item.

•Restructuring, impairment, and related charges: Restructuring charges are incurred for programs in which we change our operations, the scope of ~~2017 and changes~~a business undertaken by our business units, or the manner in ~~estimated year end inventory levels.~~

~~Technology Solutions~~

~~Technology Solutions segment’s gross profit for 2018 decreased primarily due to the 2017 fourth quarter deconsolidation of the Core MTS Business, the transition of our RHP~~which that 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 gross profit included only our EIS business.~~

is conducted as well as long-lived asset impairments.

3948

~~Table of Contents~~


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)


	Three Months Ended September 30,								Six Months Ended September 30,
(Dollars in millions)	2021			2020			Change		2021			2020			Change
Selling, distribution, general, and administrative expenses	$	2,669		$	2,237		19	%	$	4,901		$	4,334		13	%
Claims and litigation charges, net	112			—			—		186			(131)			(242)
Goodwill impairment charges	—			69			(100)		—			69			(100)
Restructuring, impairment, and related charges	32			60			(47)		190			116			64
Total operating expenses	$	2,813		$	2,366		19	%	$	5,277		$	4,388		20	%
Percent of revenues	4.23		%	3.89		%	34	bp	4.08		%	3.77		%	31	bp

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

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

Restructuring and Asset Impairment Charges 6
—
NM
242
—
NM

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

Technology Solutions

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

Goodwill Impairment Charge —
—
NM
—
290
NM

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

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

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

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

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

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

All percentage changes displayed above which are not meaningful are displayed as zero percent.

bp - basis points

~~NM - not meaningful~~

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

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

~~Operating Expenses~~

~~Operating expenses for the third quarter decreased 5% and first nine~~six months ~~of 2018 increased 5% compared to the same periods a year ago.~~

~~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 $46 million ($ended September 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 from Equity Method Investment in Change Healthcare:~~ The third quarter and first nine months of 2018 included our proportionate share of loss from Change Healthcare of $90 million and $271 million, which primarily consisted of transaction and integration expenses incurred by the joint venture and fair value adjustments including amortization expenses associated with equity method intangible assets. As our investment is accounted for using a one-month lag, 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 a reduction in future applicable tax rate. The impact of the 2017 Tax Act for Change Healthcare may differ materially from this provisional amount.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Acquisition-Related Expenses and Adjustments~~

Acquisition-related expenses, which included transaction and integration expenses directly related to business acquisitions and the gain on the Healthcare Technology Net Asset Exchange, were $43 million and $75 million for the third quarters of 2018 and 2017, and $95 million and $165 million for the first nine months of 2018 and 2017. The third quarter and first nine months of 2018 include our proportionate share of transaction and integration expenses incurred by Change Healthcare. The first nine months of 2018 includes a $37 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,
(Dollars in millions) 2017 2016 2017 2016
Operating Expenses
Integration related expenses $ 12
$ 22
$ 27
$ 67
Restructuring, severance and relocation 12
7
18
18
Transaction closing expenses —
43
11
72
Gain on Healthcare Technology Net Asset Exchange —
—
(37 ) —
Other Expense ⁽¹⁾
19
3
76
8
Acquisition Expenses and Related Adjustments $ 43
$ 75
$ 95
$ 165


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

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

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


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

~~Amortization Expenses of Acquired Intangible Assets~~

Amortization expenses of intangible assets directly related to business acquisitions and the formation of the Change Healthcare joint venture 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 our2021, total operating expenses and ~~in our proportionate share of loss from the equity method investment in Change Healthcare.~~

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

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


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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

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

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

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

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

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

~~bp - basis points~~

~~NM - not meaningful~~


~~(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 highertotal operating expenses as a percentage of revenues ~~driven by our business acquisitions. Operating profit and operating profit margin decreased for the segment for the first nine months of 2018~~increased compared to the same prior year periods. Total operating expenses were impacted by the following significant items:

•SDG&A for the three and six months ended September 30, 2021 includes charges of $491 million to remeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $226 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group. Of the total charges recorded during the period, $342 million are included within our International segment and $149 million are included within Corporate expenses, net;

•SDG&A for the three and six months ended September 30, 2021 includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business;

•SDG&A for the three months ended September 30, 2021 and 2020 includes opioid-related costs of $36 million and $41 million, respectively, and $71 million and $84 million for the six months ended September 30, 2021, respectively, primarily related to litigation expenses;

•SDG&A for the three and six months ended September 30, 2020 includes a charge of $50 million related to our estimated liability under the OSA as previously discussed in the “Trends and Uncertainties” section;

•SDG&A for the three and six months ended September 30, 2021 when compared to the same prior year periods ~~a year ago primarily~~also includes increased employee-related and transportation costs across our businesses, partially offset by lower operating expenses due to the contribution of our ~~mix~~German pharmaceutical wholesale business to a joint venture with WBA;

•Claims and litigation charges, net for the three months ended September 30, 2021 and 2020 includes charges of ~~business~~$112 million and ~~higher~~$186 million, respectively, related to our estimated liability for opioid-related claims as previously discussed in the “Trends and Uncertainties” section;

•Claims and litigation charges, net for the six months ended September 30, 2020 includes a net gain of $131 million reflecting insurance proceeds received, net of attorneys' fees and expenses awarded to plaintiffs' counsel, in connection with the previously reported $175 million settlement of the shareholder derivative action related to our controlled substances monitoring program;

•Goodwill impairment charges of $69 million for the three and six months ended September 30, 2020 were recorded in connection with our segment realignment that commenced in the second quarter of 2021. Refer to the “Goodwill Impairment” section below for further details;


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

•Restructuring, impairment, and related charges for the three months ended September 30, 2021 primarily includes charges related to Corporate expenses, net, as well as our U.S. Pharmaceutical segment, and for the six months ended September 30, 2021 primarily includes charges related to Corporate expenses, net, as well as our International segment. The three and six months ended September 30, 2020 primarily includes charges related to our International segment and Corporate expenses, net. In addition, certain charges related to restructuring initiatives are included under the caption “Cost of sales” in our Condensed Consolidated Statements of Operations and were not material for the three and six months ended September 30, 2020. Refer to the “Restructuring Initiatives and Long-Lived Asset Impairments” and “Segment Operating Profit and Corporate Expenses, Net”sections below as well as Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information; and

•Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations for the three and six months ended September 30, 2021.

Goodwill Impairment

We evaluate goodwill for impairment on an annual basis as of October 1, and at an interim date, if indicators of potential impairment exist. The annual impairment testing performed in fiscal 2021 did not indicate any impairment of goodwill. Additionally, no goodwill impairment charges were recorded during the three and six months ended September 30, 2021. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment and our RxCrossroads reporting unit within our RxTS segment, where the risk of a ~~percentage~~material goodwill impairment is higher than other reporting units.

Our operating structure was realigned commencing in the second quarter of ~~revenues driven primarily by~~2021 which prompted changes in multiple reporting units across the Company. As a result, we were required to perform a goodwill impairment test for these reporting units and recorded a goodwill impairment charge of $69 million for the three and six months ended September 30, 2020 in our Europe Retail Pharmacy reporting unit, which is included within the International reportable segment.

Restructuring Initiatives and Long-Lived Asset Impairments

During the first quarter of 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily includes the rationalization of our office space in North America. Where we determine to cease using office space, we plan to exit the portion of the facility no longer used. We also may retain and repurpose certain other office locations. We expect to incur total charges of approximately $180 million to $280 million for this initiative, of which $110 million of charges were recorded to date. This initiative is anticipated to be complete in 2022 and estimated remaining charges consist primarily of lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization.

During the first quarter of 2021, we committed to an initiative within the U.K., which is included in our International segment, to further drive operational changes in technologies and business processes, efficiencies, and cost savings. The initiative includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. We expect to incur total charges of approximately $85 million to $90 million for this initiative, of which $64 million of charges were recorded to date. The initiative is anticipated to be substantially complete in 2022 and estimated remaining charges consist primarily of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.

Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information on our restructuring initiatives and long-lived asset ~~impairment charges related~~impairments.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Other Income, Net

The increase in other income, net for the three and six months ended September 30, 2021 compared to ~~our McKesson Europe business. These decreases were partially offset by~~ the ~~improved gross profit margin~~same prior year periods was primarily due to higher net gains from our equity investments, of which $97 million and $49 million were recognized during the three months ended September 30, 2021 and 2020, respectively, and $104 million and $59 million were recognized during the six months ended September 30, 2021 and 2020, respectively. Refer to Financial Note 11, “Fair Value Measurements,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information. In future periods, fair value adjustments recognized in our operating results for these types of investments may be adversely impacted by market ~~growth within our North America distribution businesses, procurement benefits and our business acquisitions.~~volatility.

~~Technology Solutions:~~ ~~Operating profit~~Loss on Debt Extinguishment

The loss on debt extinguishment recorded for the ~~segment~~three and six months ended September 30, 2021 of $191 million includes premiums of $182 million as well as the write-off of unamortized debt issuance costs and transaction fees incurred of $9 million, and was driven by our July 2021 tender offer to redeem a portion of our existing debt. Refer to Financial Note 8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.

Interest Expense

Interest expense decreased for ~~2018~~the three and six months ended September 30, 2021 compared to the same prior year periods primarily due to the ~~2017 fourth~~repayment of $1.0 billion of long-term debt in the third 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:~~ 2021. Interest expense ~~for 2018 decreased primarily due to~~may also fluctuate 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.

Income Tax Expense

During the ~~refinancing~~three months ended September 30, 2021 and 2020, we recorded income tax expense of ~~debt at lower interest rates.~~

~~Income Taxes:~~$132 million and $28 million, respectively. During the six months ended September 30, 2021 and 2020, we recorded income tax expense of $158 million and $178 million, respectively. Our reported income tax ~~benefit~~ rates were ~~37.7%~~29.9% and ~~3.5%~~4.3% for the ~~third quarter~~three months ended September 30, 2021 and ~~first nine months of 2018 compared to income tax expense rates of 16.8%~~2020, respectively, and ~~25.7%~~15.7% and 13.7% for the ~~third quarter~~six months ended September 30, 2021 and ~~first nine months of 2017.~~2020, respectively. Fluctuations in our reported income tax rates are primarily due to ~~discrete items mainly driven by~~non-cash charges related to remeasuring the ~~impact~~value of ~~the 2017 Tax Act, the impact of nondeductible impairment charges,~~our E.U. disposal group held for sale, changes ~~within~~in our business mix of income between various taxing jurisdictions, and discrete items recognized in the ~~effect of an intercompany sale of software.~~

~~Table of Contents~~

~~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 related~~quarters. Refer 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~~Financial Note 4, “Income Taxes,” to the impact of the 2017 Tax Act and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits. As previously discussed, the impact of the 2017 Tax Act may differ materially fromaccompanying condensed consolidated financial statements included in this ~~provisional amount. Our discrete tax benefits~~Quarterly Report on Form 10-Q for ~~the first nine months of 2017 included $47 million related to the adoption of the amended accounting guidance on employee share-based compensation.~~more information.

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

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

Net Income Attributable to Noncontrolling ~~Interests:~~Interests

Net income attributable to noncontrolling interests for ~~2018~~the three months ended September 30, 2021 and 2020 primarily represents ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under ~~a domination and profit and loss transfer agreement (the “Domination Agreement”).~~the Domination Agreement. Noncontrolling interests with redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of McKesson Corporation stockholders’ deficit in our condensed consolidated balance sheets. Refer to the “Selected Measures of Liquidity and Capital Resources” section of this Financial Review and Financial Note 9,5, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements ~~appearing~~included in this Quarterly Report on ~~Form10-Q~~Form 10-Q for ~~additional information.~~more information on changes to our redeemable and noncontrolling interests that occurred during the first quarter of 2022.

Net Income Attributable to McKesson Corporation:

Net income attributable to McKesson Corporation was ~~$903~~$267 million and ~~$633~~$577 million for the three months ended September 30, 2021 and 2020, respectively, and $753 million and ~~diluted~~$1.0 billion for the six months ended September 30, 2021 and 2020, respectively. Diluted earnings per common share attributable to McKesson Corporation ~~were $4.33~~was $1.71 and ~~$2.85~~$3.54 for the ~~third quarters of 2018~~three months ended September 30, 2021 and ~~2017. Net income attributable to McKesson Corporation was $1,213 million~~2020, respectively, and ~~$1,482 million,~~$4.80 and ~~diluted earnings per common share attributable to McKesson Corporation were $5.76 and $6.56~~$6.26 for the ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017.~~2020, respectively.

~~Weighted Average~~


Table of Contents			MD&A Index

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~~weighted-average number of shares outstanding of~~208~~155.8 million and ~~222~~163.2 million for the ~~third quarters of 2018~~three months ended September 30, 2021 and ~~2017~~2020, respectively, and ~~210~~156.9 million and ~~226~~163.2 million for the ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017. Weighted average~~2020, respectively. Weighted-average diluted shares outstanding for ~~2018~~the three and six months ended September 30, 2021 decreased from ~~2017~~the same prior year periods primarily ~~reflecting common stock repurchases~~due to the cumulative effect of shares repurchases.

Overview of Segment Results:

Segment Revenues:


	Three Months Ended September 30,						Six Months Ended September 30,
(Dollars in millions)	2021		2020		Change		2021		2020		Change
Segment revenues
U.S. Pharmaceutical	$	53,411	$	48,067	11	%	$	103,430	$	92,737	12	%
Prescription Technology Solutions	932		668		40		1,813		1,324		37
Medical-Surgical Solutions	3,124		2,533		23		5,652		4,334		30
International	9,109		9,540		(5)		18,355		18,092		1
Total revenues	$	66,576	$	60,808	9	%	$	129,250	$	116,487	11	%

The changes in revenues for each of our segments for the three and six months ended September 30, 2021 compared to the same prior year periods consisted of the following:


	Increase (decrease)
(Dollars in billions)	Three Months Ended		Six Months Ended
Sales to pharmacies and institutional healthcare providers	$	4.7	$	9.3
Sales to specialty practices and other (1)	0.6		1.4
Total change in U.S. Pharmaceutical revenues	$	5.3	$	10.7

Total change in Prescription Technology Solutions revenues	$	0.3	$	0.5

Sales to primary care customers	$	0.5	$	1.1
Sales to extended care customers	—		—
Other (2)	0.1		0.2
Total change in Medical-Surgical Solutions revenues	$	0.6	$	1.3

Sales in Europe, excluding FX impact	$	(1.1)	$	(1.8)
Sales in Canada, excluding FX impact	0.4		0.8
Impact from FX	0.3		1.3
Total change in International revenues	$	(0.4)	$	0.3

Total change in revenues	$	5.8	$	12.8

FX - foreign currency exchange fluctuations. We calculate the impact from FX by converting current year period results of our operations in foreign countries, which are recorded in local currencies, into U.S. dollars by applying the average foreign currency exchange rates of the comparable prior year period.

(1)Includes the results for the distribution of COVID-19 vaccines.

(2)Includes the results for the kitting and distribution of ancillary supply kits needed to administer COVID-19 vaccines.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

U.S. Pharmaceutical

Three Months Ended September 30, 2021 vs. 2020

U.S. Pharmaceutical revenues for the three months ended September 30, 2021 increased11% compared to the same prior year period primarily due to market growth, including higher volumes from existing customers, growth in specialty pharmaceuticals, and branded pharmaceutical price increases, partially offset by branded to generic drug conversions. Market growth was partially offset by unfavorability from one less sales day this quarter compared to the same prior year period.

Six Months Ended September 30, 2021 vs. 2020

U.S. Pharmaceutical revenues for the six months ended September 30, 2021 increased12% compared to the same prior year period primarily due to market growth, including higher volumes from retail national account customers, growth in specialty pharmaceuticals, and branded pharmaceutical price increases, partially offset by branded to generic drug conversions. Market growth was partially offset by unfavorability from one less sales day this year compared to the same prior year period. Revenues for this segment were also favorable year over year due to the recovery of prescription volumes from the prior year impact of COVID-19, including increased customer demand for pharmaceuticals in retail pharmacies and institutional healthcare providers.

Prescription Technology Solutions

Three Months Ended September 30, 2021 vs. 2020

RxTS revenues for the three months ended September 30, 2021 increased 40% compared to the same prior year period primarily due to increased volume with new and existing customers.

Six Months Ended September 30, 2021 vs. 2020

RxTS revenues for the six months ended September 30, 2021 increased 37% compared to the same prior year period primarily due to increased volume with new and existing customers and the recovery of prescription volumes from the prior year impact of COVID-19.

Medical-Surgical Solutions

Three Months Ended September 30, 2021 vs. 2020

Medical-Surgical Solutions revenues for the three months ended September 30, 2021 increased 23% compared to the same prior year period largely in our primary care business due to higher sales of COVID-19 tests and improvements in patient care visits. Revenues for this segment were also favorably impacted by the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines.

Six Months Ended September 30, 2021 vs. 2020

Medical-Surgical Solutions revenues for the six months ended September 30, 2021 increased 30% compared to the same prior year period largely in our primary care business due to improvements in patient care visits and higher sales of COVID-19 tests in the first half of 2022. Revenues for this segment were also favorably impacted by the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines.

International

Three Months Ended September 30, 2021 vs. 2020

International revenues for the three months ended September 30, 2021 decreased 5% compared to the same prior year period. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 8% largely due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. This was partially offset by sales to new customers in our Canadian business as well as favorability year over year due to the recovery of volumes from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Six Months Ended September 30, 2021 vs. 2020

International revenues for the six months ended September 30, 2021 increased 1% compared to the same prior year period. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 6% largely due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. This was partially offset by favorability year over year due to the recovery of volumes from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment as well as sales to new customers in our Canadian business.

Segment Operating Profit and Corporate Expenses, Net:


	Three Months Ended September 30,								Six Months Ended September 30,
(Dollars in millions)	2021			2020			Change		2021			2020			Change
Segment operating profit (loss) (1)
U.S. Pharmaceutical (2)	$	760		$	623		22	%	$	1,442		$	1,236		17	%
Prescription Technology Solutions	128			88			45		232			156			49
Medical-Surgical Solutions (3)	296			187			58		371			276			34
International (4)	(146)			(45)			224		(93)			(42)			121

Subtotal	1,038			853			22		1,952			1,626			20
Corporate expenses, net (5)	(360)			(148)			143		(663)			(216)			207
Loss on debt extinguishment	(191)			—			—		(191)			—			—
Interest expense	(45)			(50)			(10)		(94)			(110)			(15)
Income from continuing operations before income taxes	$	442		$	655		(33)		$	1,004		$	1,300		(23)

Segment operating profit (loss) margin
U.S. Pharmaceutical	1.42		%	1.30		%	12	bp	1.39		%	1.33		%	6	bp
Prescription Technology Solutions	13.73			13.17			56		12.80			11.78			102
Medical-Surgical Solutions	9.48			7.38			210		6.56			6.37			19
International	(1.60)			(0.47)			(113)		(0.51)			(0.23)			(28)

All percentage changes displayed above which are not meaningful are displayed as zero percent.

bp - basis points

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

(2)Operating profit for our U.S. Pharmaceutical segment includes a charge of $50 million for the three and six months ended September 30, 2020 related to our estimated liability under the OSA.

(3)Operating profit for our Medical-Surgical Solutions segment for the six months ended September 30, 2021 includes inventory charges totaling $164 million on certain PPE and other related products primarily driven by the intent of management not to sell certain excess PPE inventory and instead direct it to charitable organizations.

(4)Operating loss for our International segment for the three and six months ended September 30, 2021 includes charges of $342 million to remeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. Operating loss for the three and six months ended September 30, 2021 also includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business. Operating loss for the three and six months ended September 30, 2020 includes a goodwill impairment charge of $69 million related to our European retail business.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

(5)Corporate expenses, net for the three and six months ended September 30, 2021 includes charges of $149 million related to the effect of accumulated other comprehensive loss components from our E.U. disposal group. Corporate expenses, net includes net gains from our equity investments of $97 million and $49 million for the three months ended September 30, 2021 and 2020, respectively, and $104 million and $59 million for the six months ended September 30, 2021 and 2020, respectively. Corporate expenses, net also includes charges of $112 million and $186 million for the three and six months ended September 30, 2021, respectively, related to our estimated liability for opioid-related claims and a net gain of $131 million for the six months ended September 30, 2020 recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program.

U.S. Pharmaceutical

Three Months Ended September 30, 2021 vs. 2020

Operating profit increased for this segment for the three months ended September 30, 2021 compared to the same prior year period primarily due to growth in specialty pharmaceuticals, the contribution from our COVID-19 vaccine distribution program, favorability from a $50 million charge recorded during the second quarter of 2021 related to our estimated liability under the OSA, and net cash proceeds received of $34 million representing our share of antitrust legal settlements. This was partially offset by a decrease in LIFO credits of $29 million and an increase in operating expenses.

Six Months Ended September 30, 2021 vs. 2020

Operating profit increased for this segment for the six months ended September 30, 2021 compared to the same prior year period primarily due to the contribution from our COVID-19 vaccine distribution program, growth in specialty pharmaceuticals, favorability from the prior year OSA charge described above, net cash proceeds received of $46 million representing our share of antitrust legal settlements, and the recovery of prescription volumes from the prior year impact of COVID-19. This was partially offset by a decrease in LIFO credits of $58 million and an increase in operating expenses.

Prescription Technology Solutions

Three Months Ended September 30, 2021 vs. 2020

Operating profit for this segment increased for the three months ended September 30, 2021 compared to the same prior year period primarily due to increased volumes with new and existing customers.

Six Months Ended September 30, 2021 vs. 2020

Operating profit for this segment increased for the six months ended September 30, 2021 compared to the same prior year period primarily due to increased volumes with new and existing customers and the recovery of prescription volumes from the prior year impact of COVID-19.

Medical-Surgical Solutions

Three Months Ended September 30, 2021 vs. 2020

Operating profit for this segment increased for the three months ended September 30, 2021 compared to the same prior year period primarily due to favorability in our primary care business from improvements in patient care visits and higher sales of COVID-19 tests in the second quarter of 2022, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. This was partially offset by an increase in employee-related expenses to support business growth.

Six Months Ended September 30, 2021 vs. 2020

Operating profit for this segment increased for the six months ended September 30, 2021 compared to the same prior year period primarily due to favorability in our primary care business from improvements in patient care visits, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines and higher sales of COVID-19 tests in the first half of ~~2017~~2022. This was partially offset by inventory charges on certain PPE and other related products and an increase in employee-related expenses to support business growth.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

International

Three Months Ended September 30, 2021 vs. 2020

Operating loss for this segment increased for the three months ended September 30, 2021 compared to the same prior year period largely due to charges of $342 million to remeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future, partially offset by savings from ceased depreciation and amortization expense beginning in July 2021. This was also partially offset by favorability from a $69 million goodwill impairment charge recorded during the second quarter of 2021 related to our European retail business, a gain recognized of $59 million during the second quarter of 2022 related to the sale of our Canadian health benefit claims management and plan administrative services business, and lower restructuring charges from our initiative in the U.K. This segment also experienced favorability year over year due to the volume recovery from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment and to a lesser extent, the distribution of COVID-19 vaccines, COVID-19 tests, and PPE.

Six Months Ended September 30, 2021 vs. 2020

Operating loss for this segment increased for the six months ended September 30, 2021 compared to the same prior year period largely due to fair value remeasurement charges related to our E.U. disposal group, partially offset by a prior year goodwill impairment charge related to our European retail business and a gain recognized in the current quarter related to a certain Canadian business, all of which is described above. This segment also experienced favorability year over year due to the volume recovery from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment and to a lesser extent, the distribution of COVID-19 vaccines, COVID-19 tests, and PPE.

Corporate Expenses, Net

Corporate expenses, net increased for the three and six months ended September 30, 2021 compared to the same prior year period primarily due to charges recorded during the second quarter of 2022 of $149 million related to the effect of accumulated other comprehensive loss components from our E.U. disposal group and charges of $112 million and $186 million recorded for the three and six months ended September 30, 2021, respectively, related to our estimated liability for opioid-related claims. This was partially offset by higher net gains recognized from our equity investments.

Corporate expenses, net for the six months ended September 30, 2021 also increased compared to the same prior year period from a net gain of $131 million recognized during the first ~~nine months~~quarter of ~~2018.~~2021 in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program and higher restructuring charges for the transition to a partial remote work model for certain employees.

~~Business Combinations~~

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

New Accounting Pronouncements

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

FINANCIAL ~~REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Financial Condition, Liquidity and Capital Resources~~CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities and commercial paper program, will be sufficient to fund our ~~long-term~~short-term and ~~short-term~~long-term capital expenditures, working capital, and other cash requirements. ~~In addition,~~We remain well-capitalized with access to liquidity from ~~time~~our $4.0 billion revolving credit facility. At September 30, 2021, we were in compliance with all debt covenants, and believe we have the ability to ~~time, we may access~~continue to meet our debt covenants in the ~~long-term debt capital markets to discharge our other liabilities.~~future.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown:


	Six Months Ended September 30,
(Dollars in millions)	2021		2020		Change
Net cash provided by (used in):
Operating activities	$	170	$	(41)	$	211
Investing activities	(157)		(278)		121
Financing activities	(3,894)		(401)		(3,493)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	18		(63)		81
Net change in cash, cash equivalents, and restricted cash	$	(3,863)	$	(783)	$	(3,080)

Operating Activities

Operating activities ~~generated~~provided cash of ~~$1,323~~$170 million ~~and~~ ~~$3,309 million~~ during the ~~first nine~~six months ended September 30, 2021 and used cash of ~~2018 and 2017. Operating activities for~~$41 million during the ~~first nine~~six months of 2018 and 2017 were affected by higher drafts and accounts payable and increases in receivables and inventories primarily associated with revenue growth. Operating activities for 2017 included cash generated from our Core MTS business. ended September 30, 2020.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~~sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for the six months ended September 30, 2021 were affected by increases in drafts and accounts payable of $1.4 billion, receivables of $2.3 billion, and inventory of $1.2 billion, all primarily due to timing and higher revenues. Operating activities for the six months ended September 30, 2020 were affected by increases in inventory of $1.4 billion due to higher stock levels to meet sales demand, decreases in drafts and accounts payable of $1.3 billion primarily from effective working capital management at year end, and decreases in receivables of $981 million primarily due to higher sales recognized at the end of March 2020. Other non-cash items for the six months ended September 30, 2021 includes non-cash inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment.

Investing Activities

Investing activities ~~utilized~~used cash of ~~$483~~$157 million and ~~$3,619~~$278 million during the ~~first nine~~six months ~~of 2018~~ended September 30, 2021 and ~~2017.~~2020, respectively. Investing activities for ~~2018 include $1,979~~the six months ended September 30, 2021 and 2020 includes $279 million ~~of net cash payments~~and $265 million, respectively, in capital expenditures for ~~acquisitions, including $1.3 billion for our acquisition of CMM, which was prepaid before March 31, 2017~~property, plant, and ~~was released from restricted cash balances in the first quarter of 2018. Investing activities for 2018 also included $329 million of net cash proceeds from the sale of businesses~~equipment, and equity method investments and a $126 million cash payment received related to the Healthcare Technology Net Asset Exchange. Investing activities for 2017 included $4,174 million of net cash payments for acquisitions, of which $935 million was prepaid before March 31, 2016 and was released from restricted cash balances in the first quarter of 2017. Investing activities for 2017 also included a payment of approximately $100 million to sell our Brazilian business.capitalized software.

Financing Activities

Financing activities ~~utilized~~used cash of ~~$1,147 million~~$3.9 billion and ~~$1,145~~$401 million during the ~~first nine~~six months ended September 30, 2021 and 2020, respectively. In July 2021, we completed a cash tender offer and paid an aggregate consideration of ~~2018 and 2017. Financing activities for 2018 include cash receipts~~$1.1 billion to redeem certain notes with a principal amount of ~~$12,699~~$922 million and ~~payments~~also redeemed our 0.63% Euro-denominated notes with a principal amount of ~~$12,133~~€600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021 using cash on hand. This resulted in total repayments of long-term debt during the six months ended September 30, 2021 of $1.8 billion, including $184 million of cash paid for ~~short-term borrowings~~premiums and transaction fees. This was partially offset by the issuance of long-term debt in August 2021 from a ~~payment~~public offering of ~~$545~~1.30% notes due August 15, 2026 for proceeds received of $498 million, which was utilized for ~~long-term debt.~~general corporate purposes. Financing activities for the ~~first nine~~six months ~~of 2017 included cash receipts of $2,803~~ended September 30, 2021 and 2020 includes $1.3 billion and $248 million ~~and payments of $1,405 million for short-term borrowings and a payment of $392 million for long-term debt. Financing activities for the first nine months of 2018 and 2017 include $951 million and~~ ~~$2,060 million~~ of cash paid for ~~stock~~share repurchases, ~~including shares surrendered~~respectively, and $134 millionand $140 million of cash paid for ~~tax withholding.~~dividends, respectively. Additionally, financing activities for the ~~first nine~~six months ended September 30, 2021 and 2020 includes payments of ~~2018~~$1.0 billion and ~~2017 include $192~~$49 million, respectively, to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders. The put right option expired on June 15, 2021 as further described below. Financing activities for the six months ended September 30, 2021 includes cash ~~paid~~receipts and payments of $3.0 billion for ~~dividends.~~short-term borrowings, primarily commercial paper. Financing activities for the six months ended September 30, 2020 includes cash receipts and payments of $5.3 billion for short-term borrowings, primarily commercial paper. Cash used for other financing activities generally includes shares surrendered for tax withholding and payments to noncontrolling interests. Other financing activities for the six months ended September 30, 2020 also includes restricted cash inflow related to funds temporarily held on behalf of unaffiliated medical practice groups.

~~The Company’s~~


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Share Repurchase Plans

Our Board of Directors (the “Board”) has authorized the repurchase of McKesson’s common stock from time to time in open market transactions, privately negotiated transactions, ~~accelerated share repurchase~~ASR programs, or by ~~any combination~~combinations of such ~~methods.~~methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including 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 2021, 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 million$1.0 billion of the Company’s common stock. ~~During~~Pursuant to the ~~first six months~~ASR agreement, we paid $1.0 billion to the financial institution and received an initial delivery of ~~2018,~~4.3 million shares in May 2021. The transaction was completed in August 2021, at which point we received aadditional shares of 0.9 million. The total number of ~~1.5 million~~ shares repurchased under ~~the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. The June 2017~~this ASR program was ~~completed in~~5.2 million shares at an average price per share of $193.22.

During the ~~second quarter of 2018 and the August 2017 ASR program was completed in the third quarter of 2018. In November 2017,~~three months ended September 30, 2021, we also repurchased ~~1.8~~1.4 million of the Company’s shares for ~~$250~~$280 million through open market transactions at an average price per share of ~~$138.12.~~ $203.20, of which $16 million was accrued within “Other accrued liabilities” on our Condensed Consolidated Balance Sheets for share repurchases that were executed in late September and settled in early October.

The total remaining authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$1.5 billion at ~~December 31, 2017.~~September 30, 2021.

During the three months ended September 30, 2020, we repurchased 1.8 million of the Company’s shares for $269 million through open market transactions at an average price per share of $151.23, of which $21 million was accrued within “Other accrued liabilities” on our Condensed Consolidated Balance Sheets for share repurchases that were executed in late September and settled in early October. There were no share repurchases during the three months ended June 30, 2020.

We believe that our future 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~~an increase in volatility ~~and~~or 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)	September 30, 2021			March 31, 2021
Cash, cash equivalents, and restricted cash	$	2,533		$	6,396
Working capital	(495)			1,279
Debt to capital ratio (1)	84.5		%	83.1		%

(Dollars in millions) December 31, 2017 March 31, 2017
Cash and cash equivalents $ 2,619
$ 2,783

Working capital 2,543
1,336

Debt to capital ratio ⁽¹⁾
39.5
% 39.2
%
Return on McKesson stockholders’ equity ⁽²⁾
45.3
% 54.6
%
(1)This ratio describes the relationship and changes within our capital resources, and is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss.


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


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

Cash equivalents, which are ~~available-for-sale,~~readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in ~~AAA rated prime and~~AAA-rated U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily denominated in U.S. dollars ~~AAA rated prime money market funds denominated in Euros, AAA rated prime money market funds denominated in~~and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling, ~~time deposits,~~ and Canadian ~~government debentures.~~

~~The remaining cash and cash equivalents are deposited with several financial institutions.~~dollars. 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~~September 30, 2021 and March 31, ~~2017~~2021 included approximately ~~$1.2~~$1.2 billion and $2.3 billion of cash held by our subsidiaries outside of the ~~United States. Notwithstanding recent tax law changes regarding~~U.S., respectively. 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 U.S. 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~~ is generally no longer taxable for ~~an indefinite period of time.~~ federal income tax purposes.


Table of Contents			MD&A Index

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~~accrued liabilities. Our ~~Distribution Solutions segment requires a~~businesses require substantial ~~investment~~investments in working capital that isare susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.

Consolidated working capital decreased at September 30, 2021 compared to March 31, 2021 primarily due to a decrease in cash and cash equivalents and an increase in other accrued liabilities, partially offset by an increase in receivables, an increase in net current assets held for sale related to our E.U. disposal group, and a decrease in our current portion of debt from the redemption of our €600 million Euro-denominated notes in July 2021. The increase in other accrued liabilities is primarily due to the reclassification of $1.1 billion from long-term to short-term for the total amount we expect to pay for opioid-related claims within one year as of September 30, 2021, of which $354 million is held in escrow for the initial payment under the proposed settlement agreement for opioid-related claims of governmental entities, excluding the West Virginia subdivisions and Native American Tribes. The escrow payment is presented as restricted cash within “Prepaid expenses and other” on our Condensed Consolidated Balance Sheets. See “Trends and Uncertainties” of this Financial Review and Financial Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q for further information.

Our debt to capital ratio increased ~~in 2018 compared to 2017~~for the six months ended September 30, 2021 primarily due to an increase in ~~commercial paper outstanding balance.~~McKesson stockholders’ deficit driven by share repurchases, partially offset by net income for the year to date period. Our debt to capital ratio was also impacted by a decrease in total debt from the completion of a cash tender offer to redeem certain notes with a principal amount of $922 million and the redemption of our €600 million Euro-denominated notes both in July 2021, partially offset by the issuance of notes with a principal amount of $500 million in August 2021. We compute our return on equity (deficit) as net income (loss) attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity (deficit), excluding noncontrolling and redeemable noncontrolling interests. Our unfavorable return on equity (deficit) as of September 30, 2021 and March 31, 2021 was primarily driven by net loss for the year ended March 31, 2021, which includes an after-tax non-cash charge of $6.8 billion related to our estimated liability for opioid-related claims, as discussed in “Trends and Uncertainties” of this Financial Review and Financial Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q.

On July ~~26, 2017, the Company’s~~23, 2021, we raised our quarterly dividend ~~was raised~~ from ~~$0.28~~$0.42 to ~~$0.34~~$0.47 per common share for dividends declared on or after such date by the Board. ~~The Company anticipates~~We anticipate that itwe 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~~our future earnings, financial condition, capital requirements, and other factors.

~~The carrying value of~~Redeemable Noncontrolling Interests

Our redeemable noncontrolling interests primarily related to our consolidated subsidiary, McKesson ~~Europe was $1.44 billion at December~~Europe. At March 31, ~~2017, which exceeded~~2021, the ~~maximum redemption value of $1.31 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.~~was $1.3 billion and we owned approximately 78% of McKesson Europe’s outstanding common shares. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe ~~have~~had a right to put (“Put Right”) their ~~McKesson Europe~~ shares at €22.99 per share, increased annually for interest in the amount of 5five percentage points above a base rate published semi-annually 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~~During the six months ended September 30, 2021 and 2020, we paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through exercises of the Put Right ~~will reduce~~by the noncontrolling shareholders, which reduced the balance of our redeemable noncontrolling interests.

The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, valued at $287 million, were transferred from redeemable noncontrolling interests to noncontrolling interests. At September 30, 2021, we owned approximately 95% of McKesson Europe’s outstanding common shares. Our noncontrolling interest in McKesson Europe will be included in the sale of our E.U. disposal group.

Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six months’ advance notice.


Table of Contents			MD&A Index

McKESSON CORPORATION

FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

Refer to Financial Note 9,5, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements ~~appearing~~included in this Quarterly Report on Form 10-Q for additional ~~information.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

information on redeemable noncontrolling interests.

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, including any future payments that may be made related to our total estimated litigation liability of $8.2 billion for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note ~~12,~~8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements ~~appearing~~included in this Quarterly Report on Form 10-Q.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONCLUDED)~~

~~(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,” “projects,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans, assumptions, or intentions may also include forward-looking statements. Readers should not place undue reliance on forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to update or revise 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, factors described in the ~~following factors. The reader should not consider this list to be a complete statement~~Risk Factors discussion in Item 1A 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 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.~~

Part I of our most recently filed Annual Report on Form 10-K.

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

~~Table of Contents~~

~~McKESSON CORPORATION~~


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk.~~

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~~2021 Annual ~~Report on Form 10-K.~~Report.


~~Item 4.~~	~~Controls and Procedures.~~

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 quarter of 2018~~the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

McKESSON CORPORATION

PART II—OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings.~~

Item 1.Legal Proceedings.

The information set forth in Financial Note ~~16,~~12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements ~~appearing~~included in this Quarterly Report on Form 10-Q, and in Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021, is incorporated herein by reference. Disclosure of an environmental proceeding with a governmental agency generally is included only if we expect monetary sanctions in the proceeding to exceed $1 million, unless otherwise material.


~~Item 1A.~~	~~Risk Factors.~~

~~There~~Item 1A.Risk Factors.

Other than factual updates discussed in this Quarterly Report on Form 10-Q, there have been no material changes ~~during~~for the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of our ~~2017~~2021 Annual Report on Form 10-K.


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

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

Stock repurchases may be made from time to time in open market transactions, privately negotiated transactions, ~~through~~ accelerated share repurchase (“ASR”) programs, or by ~~any combination~~combinations of such ~~methods.~~methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company’s stock price, corporate and regulatory ~~requirements.~~requirements, restrictions under the Company’s debt obligations, and other market and economic conditions.

~~In June 2017 and August 2017, we entered into two separate ASR programs with third-party financial institutions to repurchase $250 million and $400 million of the Company’s common stock.~~ During the ~~first nine~~three months ~~of 2018, we received a total of 1.5 million shares under~~ended September 30, 2021, 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.

The total remaining authorization outstanding for repurchases of the Company’s common stock was ~~$1.8~~$1.5 billion at ~~December 31, 2017.~~September 30, 2021.

~~Table of Contents~~

~~McKESSON CORPORATION~~

The following table provides information on the Company’s share repurchases during the ~~third quarter~~three months ended September 30, 2021.


	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
July 1, 2021 – July 31, 2021	—	$	—	—	$	1,786
August 1, 2021 – August 31, 2021	1.4		195.98	1.4		1,684
September 1, 2021 – September 30, 2021	0.9		204.67	0.9		1,506
Total	2.3			2.3

(1)This table does not include the value of ~~2018~~.equity awards surrendered to satisfy tax withholding obligations.

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


~~(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.

Table of Contents

McKESSON CORPORATION


~~Item 3.~~	~~Defaults Upon Senior Securities.~~

~~None~~Item 3.Defaults Upon Senior Securities.

None.


~~Item 4.~~	~~Mine Safety Disclosures.~~

Item 4.Mine Safety Disclosures.

Not ~~Applicable~~applicable.


~~Item 5.~~	~~Other Information.~~

Item 5.Other Information.

Not ~~Applicable~~applicable.

5062

Table of Contents

McKESSON CORPORATION


~~Item 6.~~	~~Exhibits.~~

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
~~31.1~~4.1			O fficers ’ Certificate , dated as of August 12, 2021, and related Form of 2026 Note (incorporated by reference to Exhibit 4.1 of the Company ’s Current Report on Fo r m 8-K filed with the SEC on August 12 , 2021 ).

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,~~September 30, 2021, 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 (Deficit), (v) Condensed Consolidated Statements of Cash Flows, and ~~(v)~~(vi) related Financial Notes.


†104			~~Furnished herewith.~~Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101).

†† Furnished herewith.

5163

Table of Contents

McKESSON CORPORATION

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:		November 1, 2021	MCK~~ESSON~~ C~~ORPORATION~~

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


		MCKESSON CORPORATION

Date:	November 1, 2021	MCK~~ESSON~~ C~~ORPORATION~~ /s/ Kevin W. Emerson
		Kevin W. Emerson
~~Date:~~	~~February 1, 2018~~	~~/s/ Erin M. Lampert~~
	~~Erin M. Lampert~~
	Senior Vice President and Controller

5264



	Quarter Ended December 31,						Nine Months Ended December 31,
	2017			2016			2017			2016
Revenues	$	53,617		$	50,130		$	156,729		$	149,820
Cost of Sales	(50,902		)	(47,318		)	(148,620		)	(141,345		)
Gross Profit	2,715			2,812			8,109			8,475
Operating Expenses	(1,984		)	(1,981		)	(5,920		)	(5,802		)
Gain from Sale of Business	109			—			109			—
Goodwill Impairment Charges	—			—			(350		)	(290		)
Restructuring and Asset Impairment Charges	(6		)	—			(242		)	—
Operating Income	834			831			1,706			2,383
Other Income, Net	20			23			102			65
Loss from Equity Method Investment in Change Healthcare	(90		)	—			(271		)	—
Interest Expense	(67		)	(74		)	(204		)	(231		)
Income from Continuing Operations Before Income Taxes	697			780			1,333			2,217
Income Tax Benefit (Expense)	263			(131		)	46			(570		)
Income from Continuing Operations	960			649			1,379			1,647
Income (Loss) from Discontinued Operations, Net of Tax	1			(3		)	3			(117		)
Net Income	961			646			1,382			1,530
Net Income Attributable to Noncontrolling Interests	(58		)	(13		)	(169		)	(48		)
Net Income Attributable to McKesson Corporation	$	903		$	633		$	1,213		$	1,482

Earnings (Loss) Per Common Share Attributable to McKesson Corporation
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

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

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



	December 31, 2017			March 31, 2017
ASSETS
Current Assets
Cash and cash equivalents	$	2,619		$	2,783
Receivables, net	20,015			18,215
Inventories, net	17,103			15,278
Prepaid expenses and other	458			672
Total Current Assets	40,195			36,948
Property, Plant and Equipment, Net	2,401			2,292
Goodwill	11,828			10,586
Intangible Assets, Net	4,094			3,665
Equity Method Investment in Change Healthcare	3,704			4,063
Other Noncurrent Assets	1,991			3,415
Total Assets	$	64,213		$	60,969

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities
Drafts and accounts payable	$	33,009		$	31,022
Short-term borrowings	749			183
Deferred revenue	68			346
Current portion of long-term debt	531			1,057
Other accrued liabilities	3,295			3,004
Total Current Liabilities	37,652			35,612

Long-Term Debt	7,514			7,305
Long-Term Deferred Tax Liabilities	2,833			3,678
Other Noncurrent Liabilities	2,807			1,774
Redeemable Noncontrolling Interests	1,435			1,327
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
Additional Paid-in Capital	6,253			6,028
Retained Earnings	14,202			13,189
Accumulated Other Comprehensive Loss	(1,726		)	(2,141		)
Other	(1		)	(2		)
Treasury Shares, at Cost, 68 and 62 at December 31, 2017 and March 31, 2017	(6,997		)	(5,982		)
Total McKesson Corporation Stockholders’ Equity	11,734			11,095
Noncontrolling Interests	238			178
Total Equity	11,972			11,273
Total Liabilities, Redeemable Noncontrolling Interests and Equity	$	64,213		$	60,969



(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



	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