UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~



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

For the quarterly period ended ~~December 31, 2018~~September 30, 2019



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

For the transition period fromto

Commission File Number: 1-13252

McKESSON CORPORATION

(Exact name of registrant as specified in its charter)



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

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

~~(415) 983-8300~~

6555 State Hwy 161,

Irving, TX75039

(Address of principal executive offices, including zip code)

(972) 446-4800

(Registrant’s telephone number, including area code)

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



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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company” and ~~“smaller reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Exchange~~ Act).

Yes o☐ No x☒

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



~~Class~~	~~Outstanding as of~~	~~December 31, 2018~~
~~Common stock, $0.01 par value~~	~~191,825,272 shares~~

180,187,900 shares of the issuer’s common stock were outstanding as of September 30, 2019.

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS


	Item	Page	Item	Page

	PART I—FINANCIAL INFORMATION		PART I—FINANCIAL INFORMATION

1.	Condensed Consolidated Financial Statements		Condensed Consolidated Financial Statements

			Condensed Consolidated Statements of Operations Quarters and Six Months Ended September 30, 2019 and 2018	3

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

	Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended December 31, 2018 and 2017	4	Condensed Consolidated Balance Sheets September 30, 2019 and March 31, 2019	5

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

	Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2018 and 2017	6	Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2019 and 2018	8

	Financial Notes	7	Financial Notes	9

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

3.	Quantitative and Qualitative Disclosures About Market Risk	52	Quantitative and Qualitative Disclosures About Market Risk	53

4.	Controls and Procedures	52	Controls and Procedures	53

	PART II—OTHER INFORMATION		PART II—OTHER INFORMATION

1.	Legal Proceedings	52	Legal Proceedings	53

1A.	Risk Factors	52	Risk Factors	53

2.	Unregistered Sales of Equity Securities and Use of Proceeds	52	Unregistered Sales of Equity Securities and Use of Proceeds	54

3.	Defaults Upon Senior Securities	53	Defaults Upon Senior Securities	54

4.	Mine Safety Disclosures	53	Mine Safety Disclosures	54

5.	Other Information	53	Other Information	54

6.	Exhibits	54	Exhibits	55

	Signatures	55	Signatures	56

Table of Contents

McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended September 30,						Six Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Revenues	$	56,208		$	53,617		$	161,890		$	156,729		$	57,616		$	53,075		$	113,344		$	105,682
Cost of Sales	(53,238		)	(50,902		)	(153,337		)	(148,620		)	(54,749		)	(50,271		)	(107,690		)	(100,099		)
Gross Profit	2,970			2,715			8,553			8,109			2,867			2,804			5,654			5,583
Operating Expenses	(2,156		)	(1,984		)	(6,219		)	(5,920		)	(2,196		)	(2,033		)	(4,326		)	(4,063		)
Goodwill Impairment Charges	(21		)	—			(591		)	(350		)	—			—			—			(570		)
Restructuring and Asset Impairment Charges	(110		)	(6		)	(288		)	(242		)
Gain from Sale of Business	—			109			—			109
Restructuring, Impairment and Related Charges													(45		)	(82		)	(68		)	(178		)
Total Operating Expenses	(2,287		)	(1,881		)	(7,098		)	(6,403		)	(2,241		)	(2,115		)	(4,394		)	(4,811		)
Operating Income	683			834			1,455			1,706			626			689			1,260			772
Other Income, Net	84			20			144			102
Loss from Equity Method Investment in Change Healthcare	(50		)	(90		)	(162		)	(271		)
Other Income (Expense), Net													(78		)	20			(41		)	60
Equity Earnings and Charges from Investment in Change Healthcare Joint Venture													(1,454		)	(56		)	(1,450		)	(112		)
Interest Expense	(67		)	(67		)	(194		)	(204		)	(64		)	(66		)	(120		)	(127		)
Income from Continuing Operations Before Income Taxes	650			697			1,243			1,333
Income Tax (Expense) Benefit	(123		)	263			(245		)	46
Income from Continuing Operations	527			960			998			1,379
(Loss) Income from Discontinued Operations, Net of Tax	(1		)	1			1			3
Net Income	526			961			999			1,382
Income (Loss) from Continuing Operations Before Income Taxes													(970		)	587			(351		)	593
Income Tax Benefit (Expense)													294			(35		)	158			(122		)
Income (Loss) from Continuing Operations													(676		)	552			(193		)	471
Income (Loss) from Discontinued Operations, Net of Tax													(1		)	1			(7		)	2
Net Income (Loss)													(677		)	553			(200		)	473
Net Income Attributable to Noncontrolling Interests	(57		)	(58		)	(169		)	(169		)	(53		)	(54		)	(107		)	(112		)
Net Income Attributable to McKesson Corporation	$	469		$	903		$	830		$	1,213
Net Income (Loss) Attributable to McKesson Corporation													$	(730	)	$	499		$	(307	)	$	361

Earnings Per Common Share Attributable to McKesson Corporation
Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Diluted
Continuing operations	$	2.41		$	4.32		$	4.17		$	5.75		$	(3.99	)	$	2.51		$	(1.62	)	$	1.79
Discontinued operations	(0.01		)	0.01			0.01			0.01			—			—			(0.03		)	0.01
Total	$	2.40		$	4.33		$	4.18		$	5.76		$	(3.99	)	$	2.51		$	(1.65	)	$	1.80
Basic
Continuing operations	$	2.42		$	4.34		$	4.19		$	5.78		$	(3.99	)	$	2.52		$	(1.62	)	$	1.80
Discontinued operations	(0.01		)	0.01			—			0.02			—			—			(0.03		)	0.01
Total	$	2.41		$	4.35		$	4.19		$	5.80		$	(3.99	)	$	2.52		$	(1.65	)	$	1.81

Dividends Declared Per Common Share	$	0.39		$	0.34		$	1.12		$	0.96

Weighted Average Common Shares
Diluted	195			208			199			210			183			199			185			201
Basic	194			207			198			209			183			198			185			200

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

Quarter Ended December 31, Nine Months Ended December 31,
2018
2017 2018 2017
Net Income $ 526
$ 961
$ 999
$ 1,382

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments arising during the period (113 ) 11
(216 ) 588

Unrealized gains (losses) on cash flow hedges arising during the period 35
(16 ) 37
(5 )

Retirement-related benefit plans 3
1
15
(7 )
Other Comprehensive Income (Loss), Net of Tax (75 ) (4 ) (164 ) 576

Comprehensive Income 451
957

835
1,958
Comprehensive Income Attributable to Noncontrolling Interests (46 ) (70 ) (114 ) (330 )
Comprehensive Income Attributable to McKesson Corporation $ 405
$ 887
$ 721
$ 1,628



	Quarter Ended September 30,						Six Months Ended September 30,
	2019			2018			2019			2018
Net Income (Loss)	$	(677	)	$	553		$	(200	)	$	473

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments	(32		)	26			12			(103		)

Unrealized gains on cash flow hedges	13			2			25			2

Changes in retirement-related benefit plans	75			4			96			12
Other Comprehensive Income (Loss), Net of Tax	56			32			133			(89		)

Comprehensive Income (Loss)	(621		)	585			(67		)	384
Comprehensive Income Attributable to Noncontrolling Interests	(35		)	(47		)	(95		)	(68		)
Comprehensive Income (Loss) Attributable to McKesson Corporation	$	(656	)	$	538		$	(162	)	$	316

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)


	December 31, 2018			March 31, 2018			September 30, 2019			March 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$	1,849		$	2,672		$	1,356		$	2,981
Receivables, net	18,932			17,711			18,984			18,246
Inventories, net	16,951			16,310			16,356			16,709
Prepaid expenses and other	587			443			657			529
Total Current Assets	38,319			37,136			37,353			38,465
Property, Plant and Equipment, Net	2,503			2,464			2,493			2,548
Operating Lease Right-of-Use Assets							2,002			—
Goodwill	10,519			10,924			9,408			9,358
Intangible Assets, Net	3,920			4,102			3,489			3,689
Equity Method Investment in Change Healthcare	3,566			3,728
Investment in Change Healthcare Joint Venture							2,167			3,513
Other Noncurrent Assets	2,184			2,027			2,082			2,099
Total Assets	$	61,011		$	60,381		$	58,994		$	59,672

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities
Drafts and accounts payable	$	32,091		$	32,177		$	32,560		$	33,853
Short-term borrowings	1,048			—
Short-term borrowing							549			—
Current portion of long-term debt	1,120			1,129			302			330
Current portion of operating lease liabilities							362			—
Other accrued liabilities	3,165			3,379			3,372			3,443
Total Current Liabilities	37,424			36,685			37,145			37,626

Long-Term Debt	7,616			6,751			7,342			7,265
Long-Term Deferred Tax Liabilities	2,983			2,804			2,718			2,998
Long-Term Operating Lease Liabilities							1,763			—
Other Noncurrent Liabilities	2,195			2,625			1,950			2,103
Redeemable Noncontrolling Interests	1,404			1,459			1,384			1,393
McKesson Corporation Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—			—			—			—
Common stock, $0.01 par value, 800 shares authorized at December 31, 2018 and March 31, 2018, 271 and 275 shares issued at December 31, 2018 and March 31, 2018	3			3
Common stock, $0.01 par value, 800 shares authorized at September 30, 2019 and March 31, 2019, 272 and 271 shares issued at September 30, 2019 and March 31, 2019							3			3
Additional Paid-in Capital	6,321			6,188			6,573			6,435
Retained Earnings	13,276			12,986			11,965			12,409
Accumulated Other Comprehensive Loss	(1,826		)	(1,717		)	(1,704		)	(1,849		)
Other	(2		)	(1		)	(2		)	(2		)
Treasury Shares, at Cost, 79 and 73 shares at December 31, 2018 and March 31, 2018	(8,587		)	(7,655		)
Treasury Shares, at Cost, 92 and 81 shares at September 30, 2019 and March 31, 2019							(10,353		)	(8,902		)
Total McKesson Corporation Stockholders’ Equity	9,185			9,804			6,482			8,094
Noncontrolling Interests	204			253			210			193
Total Equity	9,389			10,057			6,692			8,287
Total Liabilities, Redeemable Noncontrolling Interests and Equity	$	61,011		$	60,381		$	58,994		$	59,672

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended September 30, 2019
	Common Stock			Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount		Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares		Amount			Noncontrolling Interests			Total Equity
Balances, June 30, 2019	271	$	3	$	6,483	$	(1	)	$	12,770		$	(1,778	)	(86	)	$	(9,603	)	$	194		$	8,068
Issuance of shares under employee plans	1	—		56		—			—			—			—		—			—			56
Share-based compensation	—	—		34		—			—			—			—		—			—			34
Payments to noncontrolling interests	—	—		—		—			—			—			—		—			(37		)	(37		)
Other comprehensive income	—	—		—		—			—			74			—		—			—			74
Net income (loss)	—	—		—		—			(730		)	—			—		—			42			(688		)
Repurchase of common stock	—	—		—		—			—			—			(6	)	(750		)	—			(750		)
Cash dividends declared, $0.41 per common share	—	—		—		—			(75		)	—			—		—			—			(75		)
Other	—	—		—		(1		)	—			—			—		—			11			10
Balances, September 30, 2019	272	$	3	$	6,573	$	(2	)	$	11,965		$	(1,704	)	(92	)	$	(10,353	)	$	210		$	6,692



	Six Months Ended September 30, 2019
	Common Stock			Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount		Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares		Amount			Noncontrolling Interests			Total Equity
Balances, March 31, 2019	271	$	3	$	6,435	$	(2	)	$	12,409		$	(1,849	)	(81	)	$	(8,902	)	$	193		$	8,287
Opening Retained Earnings Adjustments: Adoption of New Accounting Standards	—	—		—		—			11			—			—		—			—			11
Balances, April 1, 2019	271	3		6,435		(2		)	12,420			(1,849		)	(81	)	(8,902		)	193			8,298
Issuance of shares under employee plans	1	—		78		—			—			—			—		(17		)	—			61
Share-based compensation	—	—		60		—			—			—			—		—			—			60
Payments to noncontrolling interests	—	—		—		—			—			—			—		—			(76		)	(76		)
Other comprehensive income	—	—		—		—			—			145			—		—			—			145
Net income (loss)	—	—		—		—			(307		)	—			—		—			85			(222		)
Repurchase of common stock	—	—		—		—			—			—			(11	)	(1,434		)	—			(1,434		)
Cash dividends declared, $0.80 per common share	—	—		—		—			(148		)	—			—		—			—			(148		)
Other	—	—		—		—			—			—			—		—			8			8
Balances, September 30, 2019	272	$	3	$	6,573	$	(2	)	$	11,965		$	(1,704	)	(92	)	$	(10,353	)	$	210		$	6,692

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended September 30, 2018
	Common Stock			Additional Paid-in Capital			Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount		Additional Paid-in Capital			Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares		Amount			Noncontrolling Interests			Total Equity
Balances, June 30, 2018	275	$	3	$	6,372		$	(1	)	$	12,932		$	(1,801	)	(76	)	$	(8,098	)	$	240		$	9,647
Issuance of shares under employee plans	—	—		16			—			—			—			—		—			—			16
Share-based compensation	—	—		24			—			—			—			—		—			—			24
Payments to noncontrolling interests	—	—		—			—			—			—			—		—			(42		)	(42		)
Other comprehensive income	—	—		—			—			—			39			—		—			—			39
Net income	—	—		—			—			499			—			—		—			43			542
Repurchase of common stock	—	—		—			—			—			—			(4	)	(580		)	—			(580		)
Cash dividends declared, $0.39 per common share	—	—		—			—			(78		)	—			—		—			—			(78		)
Other	—	—		(1		)	(1		)	1			—			—		—			(33		)	(34		)
Balances, September 30, 2018	275	$	3	$	6,411		$	(2	)	$	13,354		$	(1,762	)	(80	)	$	(8,678	)	$	208		$	9,534



	Six Months Ended September 30, 2018
	Common Stock			Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury					Noncontrolling Interests			Total Equity
	Shares	Amount		Additional Paid-in Capital		Other Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Shares		Amount			Noncontrolling Interests			Total Equity
Balances, March 31, 2018	275	$	3	$	6,188	$	(1	)	$	12,986		$	(1,717	)	(73	)	$	(7,655	)	$	253		$	10,057
Opening Retained Earnings Adjustments: Adoption of New Accounting Standards	—	—		—		—			154			—			—		—			—			154
Balances, April 1, 2018	275	3		6,188		(1		)	13,140			(1,717		)	(73	)	(7,655		)	253			10,211
Issuance of shares under employee plans	—	—		38		—			—			—			—		(11		)	—			27
Share-based compensation	—	—		49		—			—			—			—		—			—			49
Payments to noncontrolling interests	—	—		—		—			—			—			—		—			(106		)	(106		)
Other comprehensive loss	—	—		—		—			—			(45		)	—		—			—			(45		)
Net income	—	—		—		—			361			—			—		—			89			450
Repurchase of common stock	—	—		135		—			—			—			(7	)	(1,012		)	—			(877		)
Cash dividends declared, $0.73 per common share	—	—		—		—			(147		)	—			—		—			—			(147		)
Other	—	—		1		(1		)	—			—			—		—			(28		)	(28		)
Balances, September 30, 2018	275	$	3	$	6,411	$	(2	)	$	13,354		$	(1,762	)	(80	)	$	(8,678	)	$	208		$	9,534

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Nine Months Ended December 31,						Six Months Ended September 30,
	2018			2017			2019			2018
Operating Activities
Net income	$	999		$	1,382
Adjustments to reconcile to net cash provided by operating activities:
Net income (loss)							$	(200	)	$	473
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization	714			697			463			475
Goodwill and other asset impairment charges	671			539			12			611
Loss from equity method investment in Change Healthcare	162			271
Deferred taxes	170			(847		)	(380		)	60
Credits associated with last-in, first-out inventory method	(64		)	(5		)	(48		)	(43		)
Gain from sale of businesses and investments	(79		)	(155		)
Equity earnings and charges from investment in Change Healthcare Joint Venture							1,450			112
Non-cash operating lease expense							180			—
Other non-cash items	(16		)	(75		)	144			(138		)
Changes in operating assets and liabilities, net of acquisitions:
Changes in assets and liabilities, net of acquisitions:
Receivables	(1,543		)	(1,046		)	(866		)	(1,705		)
Inventories	(756		)	(1,410		)	331			(398		)
Drafts and accounts payable	175			1,203			(1,203		)	1,197
Taxes	(131		)	689			70			(99		)
Operating lease liabilities							(189		)	—
Other	(161		)	78			77			(227		)
Net cash provided by operating activities	141			1,321
Net cash provided by (used in) operating activities							(159		)	318

Investing Activities
Payments for property, plant and equipment	(309		)	(269		)	(126		)	(178		)
Capitalized software expenditures	(96		)	(123		)	(58		)	(70		)
Acquisitions, net of cash, cash equivalents and restricted cash acquired	(866		)	(1,979		)	(95		)	(840		)
Proceeds from sale of businesses and investments, net	81			329
Payments received on Healthcare Technology Net Asset Exchange	—			126
Other	39			(36		)	(6		)	105
Net cash used in investing activities	(1,151		)	(1,952		)	(285		)	(983		)

Financing Activities
Proceeds from short-term borrowings	30,392			12,699			8,670			19,735
Repayments of short-term borrowings	(29,346		)	(12,133		)	(8,122		)	(18,342		)
Proceeds from issuances of long-term debt	1,099			—
Repayments of long-term debt	(14		)	(545		)
Common stock transactions:
Issuances	46			114			78			38
Share repurchases, including shares surrendered for tax withholding	(1,388		)	(951		)	(1,452		)	(888		)
Dividends paid	(216		)	(192		)	(148		)	(139		)
Other	(256		)	(139		)	(229		)	(206		)
Net cash provided by (used in) financing activities	317			(1,147		)	(1,203		)	198
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(130		)	143			22			(87		)
Net decrease in cash, cash equivalents and restricted cash	(823		)	(1,635		)	(1,625		)	(554		)
Cash, cash equivalents and restricted cash at beginning of period	2,672			4,254			2,981			2,672
Cash, cash equivalents and restricted cash at end of period	$	1,849		$	2,619		$	1,356		$	2,118

See Financial Notes

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McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)


1.	Significant Accounting Policies

Nature of Operations: McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns) ~~delivers~~, currently ranked 7^th on the FORTUNE 500, is a ~~comprehensive offering of pharmaceuticals~~global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical ~~supplies~~products and ~~provides~~healthcare services to ~~help our customers improve~~ the ~~efficiency~~right patients at the right time, safely and ~~effectiveness of their healthcare operations. Commencing in the first quarter of 2019, our new segment reporting structure was implemented and we have reported~~cost-effectively. We report our financial results in ~~three~~3 reportable ~~segments on a retrospective basis:~~segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 18, “Segments of ~~Business”~~Business,” for more information.

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

We consider ourselves to control an entity if we ~~are the majority owner of or~~ have voting control over such entity. We also assess control through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business entity is the primary beneficiary of the VIE. We consolidate VIEs when it is determined that we are the primary beneficiary of the VIE. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. ~~Refer to Financial Note 5, “Healthcare Technology Net Asset Exchange” for further information on our equity method investment in Change Healthcare, LLC (“Change Healthcare”).~~

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

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

The results of operations for the quarter ~~and nine months~~ ended ~~December 31, 2018~~September 30, 2019 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2018~~2019 previously filed with the SEC on May ~~24, 2018~~15, 2019 (“~~2018~~2019 Annual Report”).

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

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Recently Adopted Accounting Pronouncements

~~Revenue Recognition:~~Leases: In the first quarter of ~~2019,~~2020, we adopted amended guidance for ~~revenue recognition~~leases using the modified retrospective method and ~~applied~~recorded a cumulative-effect adjustment to the ~~amended guidance to those contracts which were not completed as~~opening retained earnings on the date of ~~April 1, 2018.~~adoption. Under the amended guidance, ~~revenue is recognized when~~entities are required to recognize operating lease liabilities and operating lease right-of-use (“ROU”) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements.

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

Upon adoption of this amended guidance, we recorded $2.2 billion of operating lease liabilities, $2.1 billion of operating lease ROU assets and a ~~performance obligation~~cumulative-effect adjustment of $69 million to the opening retained earnings. The adjustment to the opening retained earnings included impairment charges of $89 million, net of tax to the ROU assets primarily related to previously impaired long-lived assets at the retail pharmacies in our United Kingdom (“U.K.”) and Canadian businesses, partially offset by ~~transferring control~~derecognition of ~~a promised good or service~~existing deferred gain on our sale-leaseback transaction related to ~~a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service.~~our former corporate headquarters building. The adoption of this amended guidance did not have a material impact on our condensed consolidated ~~financial statements. Our equity method investee, Change Healthcare, is required~~statements of operations and cash flows.

Refer to ~~adopt the amended guidance no later than our first quarter of 2020. Change Healthcare is currently evaluating the adoption impact.~~Financial Note 11, “Leases,” for more information.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

Revenues are recorded gross when we are the principal in the transaction, have the ability to direct the use of the goods or services prior to transfer to a customer, are responsible for fulfilling the promise to our customer, have latitude in establishing prices, and control the relationship with the customer. We record our revenues net of sales taxes. Revenues are measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, other discounts and rebates. Sales returns are accrued based on estimates using historical data. Assets for the right to recover products from customers and the associated refund liabilities for return allowances were not material as of December 31, 2018. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as fulfillment costs and are included in selling, distribution and administrative expenses. We record deferred revenues when payments are received or due in advance of our performance. Deferred revenues are primarily from our services arrangements and are recognized as revenues over the periods when services are performed.

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

We elected the practical expedient and generally expense costs to obtain a contract when incurred because the amortization period would have been one year or less. Additionally, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed and (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.

~~Share-Based Payments:~~ Hedging: In the first quarter of ~~2019,~~2020, we prospectively adopted amended guidance that allows us to include the Secured Overnight Financing Rate Overnight Index Swap Rate as a benchmark interest rate for employee share-based payment awards. This amendment provides guidance on which changes to 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 of 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.hedge accounting purposes. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

~~Compensation - Retirement Benefits~~:

Disclosure Update and Simplification: In the first quarter of ~~2019,~~2020, we retrospectively adopted amended guidance which requires us to report the service cost component of defined benefit pension plans and other postretirement plans in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Other components of net benefit costs are required to be presented in the statements of operations separately from the service cost component outside of operating income. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements. This amended guidance only resulted in a change in presentation of other components of net benefit costs on our condensed consolidated statement of operations (a reclassification from operating income to other income, net).

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

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

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

~~Income Taxes - Intra-Entity Transfers of Assets~~Accumulated Other ~~Than Inventory:~~ Comprehensive Income:In the first quarter of ~~2019,~~2020, we adopted on a modified retrospective basis amended guidance that requires entities to recognize income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Upon adoption of this amended guidance, we recorded $152 million of deferred tax assets with a corresponding cumulative-effect increase to the beginning balance of retained earnings in our condensed consolidated financial statements for the tax consequences relating to an intra-entity transfer of certain software on December 19, 2016.

~~Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments:~~ ~~In the first quarter of 2019, we retrospectively~~ adopted amended guidance that ~~provides clarification on cash flow classification~~allows for a reclassification of only those amounts related to ~~eight specific issues including contingent consideration payments made after~~the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) to retained earnings thereby eliminating the stranded tax effects. Previous guidance required that deferred tax liabilities and assets be adjusted for a ~~business combination and distributions received~~change in tax laws with the effect included in income from ~~equity method investees.~~continuing operations in the reporting period that includes the enactment date. We have elected not to reclassify the stranded tax effects within accumulated other comprehensive loss to retained earnings. The adoption of this amended guidance did not ~~have a material effect on~~affect our condensed consolidated financial statements.

~~Financial Instruments:~~Premium Amortization of Purchased Callable Debt Securities: In the first quarter of ~~2019,~~2020, we adopted amended guidance on a modified retrospective basis that ~~requires investments in equity~~shortens the amortization period for certain callable debt securities ~~excluding equity method investments or investees that are consolidated, to be measured~~held at ~~fair value with changes in fair value recognized in net income and enhanced disclosures about those investments.~~a premium. The amended guidance ~~also simplifies~~requires the ~~impairment assessments~~premium of ~~equity investments without readily determinable fair value.~~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 adoption of this amended guidance did not ~~have a material effect on~~affect our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Collaborative Arrangements: In November 2018, amended guidance was issued which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under revenue recognition guidance when the counterparty is a customer. The amended guidance precludes presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The amended guidance is effective for us in the first quarter of 2021 on a retrospective basis with a cumulative-effect adjustment to ~~beginning~~opening retained earnings. We may elect to apply this amended guidance retrospectively either to all contracts or only to contracts that are not completed at the date of initial adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Derivatives and Hedging:~~ In October 2018, amended guidance was issued which allowed for the inclusion of the Secured Overnight Financing Rate Overnight Index Swap Rate as a benchmark interest rate for hedge accounting purposes. Concerns about the sustainability of the London Interbank Offered Rate as a benchmark interest rate led to efforts to identify an alternative rate. The amended guidance is effective for us on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after 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.

910

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~Disclosure Update and Simplification:~~ In August 2018, the SEC issued a final rule to simplify certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. In August and September 2018, further amendments were issued to provide implementation guidance on adoption of the SEC rule and transition guidance for the new interim stockholders’ equity disclosure. The amended guidance is effective for us commencing in the first quarter of 2020. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.

Intangibles - Goodwill and Other - Internal-Use Software: In August 2018, amended guidance was issued for a customer’s accounting for implementation and other upfront costs incurred in a cloud computing arrangement that is a service contract. The amended guidance aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs ~~for~~in a cloud computing arrangement that has a software license. The amended guidance is effective for us either on a retrospective or prospective basis commencing in the first quarter of 2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

Compensation - Retirement Benefits - Defined Benefit Plans: In August 2018, amended guidance was issued for defined benefit pension or other postretirement plans. The amended guidance requires us to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of reasons for significant gains and losses related to changes in the benefit obligation for the period. The amended guidance also requires us to remove disclosures on the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs over the next fiscal year. The amended guidance is effective for us on a retrospective basis commencing in the fiscal year ended March 31, 2021. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.

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

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

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

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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 collectability of the reported amount in estimating credit losses. The guidance was further amended in May 2019 to provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The amended guidance becomes effective for us commencing in the first quarter of 2021 and will be applied through a cumulative-effect adjustment to the ~~beginning~~opening retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.

~~Leases:~~

2. Investment in Change Healthcare Joint Venture

In ~~February 2016,~~the fourth quarter of 2017, we contributed the majority of our McKesson Technology Solutions businesses to form a joint venture, Change Healthcare LLC (“Change Healthcare JV”), under a contribution agreement between McKesson and Change Healthcare Inc. and others, including shareholders of Change Healthcare Inc. In exchange for the contribution, we initially owned approximately 70% of the joint venture with the remaining equity ownership of approximately 30% held by Change Healthcare Inc. The Change Healthcare JV is jointly governed by McKesson and shareholders of Change Healthcare Inc. The initial investment in Change Healthcare JV represented the fair value of our 70% equity interest in the joint venture upon closing of the transaction.

We account for our investment in Change Healthcare JV using the equity method of accounting with a one-month reporting lag. The Company’s accounting policy is to disclose any intervening events of the joint venture in the lag period that could materially affect our condensed consolidated financial statements. Effective April 1, 2019, Change Healthcare JV adopted the amended guidance was issued for lease arrangements. The amended guidance requires lessees to recognize lease liabilities and right-of-use assets (“ROU”) on the balance sheet for all leases with terms longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The amended guidance is effective for us commencing inrevenue recognition guidance. In the first quarter of ~~2020. Early~~2020, we recorded our proportionate share of the joint venture’s adoption ~~is permitted. We plan to adopt the amended guidance on a modified retrospective basis and expect to elect the package of practical expedients which will allow us to record the adoption~~ impact ~~as a cumulative-effect adjustment to the beginning retained earnings in the period of adoption. We expect the adoption~~ of the amended revenue recognition guidance ~~will materially affect~~of approximately $80 million, net of tax to the opening retained earnings.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Initial Public Offering by Change Healthcare Inc.

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

On July 1, 2019, upon the completion of its IPO, Change Healthcare Inc. received net cash proceeds of approximately $888 million. Change Healthcare Inc. contributed the proceeds from its offering of common stock of $609 million to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change Healthcare Inc. to acquire certain securities of Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change Healthcare Inc. Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in Change Healthcare JV was diluted from approximately 70% to approximately 58.5% and Change Healthcare Inc. now owns approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, we recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between our proportionate share of the IPO proceeds and the dilution effect on our investment’s carrying value. Effective with the second quarter of 2020, we recognized our proportionate share of net income or loss based on our reduced equity interest in Change Healthcare JV, adjusted for the effect of basis differences and other items as applicable. This amount was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated ~~balance sheet and that~~statements of operations.

Since the ~~primary impact will be recognition~~completion of ~~minimum commitments at present~~its IPO in July 2019, the fair value from the trading prices of Change Healthcare Inc.’s public common stock has been below the corresponding carrying value of our ~~noncancelable~~investment in Change Healthcare JV, triggering an other-than-temporary impairment (“OTTI”) evaluation. As of September 30, 2019, we expect to exit our investment in Change Healthcare JV within the next six to twelve months. In light of our planned exit and the corresponding publicly-traded share price of Change Healthcare Inc., we concluded an OTTI has occurred during our second quarter of 2020 and recorded a pre-tax impairment charge of $1,157 million ($864 million after-tax), representing the difference between the carrying value of our investment and the fair value derived from the corresponding closing price of Change Healthcare Inc.’s common stock at September 30, 2019. This charge was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations.

We recorded our proportionate share of loss from investment in Change Healthcare JV of $51 million and $47 million for the second quarter and first six months of 2020, and $56 million and $112 million for the second quarter and first six months of 2019. Our proportionate share of income or loss from this investment includes integration expenses incurred by Change Healthcare JV and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible assets. These amounts were included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations.

At September 30, 2019 and March 31, 2019, our carrying value of this investment was $2,167 million and $3,513 million. Our carrying value included equity method intangible assets and goodwill which caused our investment basis to exceed our proportionate share of the Change Healthcare JV’s book value of net assets by approximately $2,090 million and $4,158 million at September 30, 2019 and March 31, 2019.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Related Party Transactions

In connection with the formation of Change Healthcare JV, McKesson, Change Healthcare JV and certain shareholders of Change Healthcare Inc. entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other agreements. Fees incurred or earned from Advisory Agreement were not material during the second quarters and first six months of 2020 and 2019. Fees incurred or earned from TSA were not material for the second quarter and first six months of 2020 and $26 million and $36 million for the second quarter and first six months of 2019. During the second quarter of 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change Healthcare Inc. agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from Change Healthcare JV that would otherwise have been required to be made to the shareholders of Change Healthcare Inc. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating ~~leases as lease liabilities~~expenses in the accompanying condensed consolidated statement of operations. At September 30, 2019 and ~~corresponding right-of-use assets. We~~March 31, 2019, we had 0 outstanding payable balance to the shareholders of Change Healthcare Inc. under the TRA.

Revenues recognized and expenses incurred under these agreements with Change Healthcare JV were not material during the second quarters and first six months of 2020 and 2019. At September 30, 2019 and March 31, 2019, receivables due from the Change Healthcare JV were not material.

Under the agreement executed in the second quarter of 2019 between Change Healthcare JV, McKesson, Change Healthcare Inc., and certain subsidiaries of Change Healthcare JV, McKesson has the ability to adjust the manner in which certain depreciation or amortization deductions are ~~continuing~~allocated among Change Healthcare Inc. and McKesson. McKesson currently intends to ~~evaluate~~exercise its right under the ~~impact that~~agreement and allocate certain depreciation and amortization deductions to Change Healthcare Inc. for the ~~amended lease guidance will~~tax year ended March 31, 2019. These allocated depreciation and amortization deductions are not expected to have a material effect on our condensed consolidated financial ~~statements, systems, processes~~statements.

Concurrent with the IPO, Change Healthcare Inc. appointed two of our current executive officers and ~~internal controls.~~our former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting we apply to our investment in Change Healthcare JV. There were no material transactions with Change Healthcare Inc.


2.3.	Restructuring, Impairment and ~~Asset Impairment~~Related Charges

We recorded pre-tax restructuring, impairment and ~~asset impairment~~related charges of ~~$110~~$45 million ($9235 million after-tax) and ~~$288~~$68 million ($~~244~~52 million after-tax) during the ~~third~~second quarter and first ~~nine~~six months of ~~2019,~~2020, and $6$82 million ($567 million after-tax) and ~~$242~~$178 million ($~~202~~152 million after-tax) during the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019. These charges are included under the caption, “Restructuring, Impairment and ~~Asset Impairment~~Related Charges” within operating expenses in the accompanying condensed consolidated statements of operations.

Fiscal 2019

~~Strategic Growth Initiative~~ Initiatives

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

As part of the ~~preliminary phase of the Growth Initiative,~~growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store ~~closures, which~~closures. This set of the initiatives will be substantially completed by the end of 2020. ~~In connection with this preliminary phase, we~~We recorded restructuring, impairment and related charges of $3 million (pre-tax and after-tax) and $7 million ($6 million after-tax) during the second quarter and first six months of 2020. We expect to record total ~~after-tax~~pre-tax charges of approximately ~~$150~~$140 million to ~~$210 million. We recorded~~$180 million, of which $142 million of pre-tax charges ~~of $19 million ($14 million after-tax) during the third quarter of 2019, and $130 million ($114 million after-tax) during the first nine months of 2019.~~were recorded to date. The charges primarily represent employee severance, exit-related costs and asset impairment charges. Estimated remaining charges primarily consist of exit-related costs.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

As previously announced on November 30, 2018, the Company ~~announced that~~relocated its corporate headquarters, ~~will be relocated~~effective April 1, 2019, from San Francisco, California to ~~Las Colinas,~~Irving, Texas to improve efficiency, collaboration and cost ~~competitiveness, effective April 1, 2019.~~competitiveness. We anticipate that the relocation will be completed by ~~the fourth quarter of~~January 2021. As a result, we recorded pre-tax charges of $12 million ($9 million after-tax) and $20 million ($15 million after-tax) during the ~~third~~second quarter and first six months of ~~2019, we recorded a pre-tax charge of $31 million ($23 million after-tax)~~2020, primarily representing employee ~~severance.~~retention expenses, asset impairments and accelerated depreciation. We expect to record total pre-tax charges of approximately ~~$60~~$80 million to ~~$120 million. The estimated~~$130 million, of which $53 million of pre-tax charges were recorded to date. Estimated remaining charges primarily ~~consists~~consist of lease ~~exit~~and other exit-related costs, and ~~employee retention~~employee-related expenses, including retention.

During the fourth quarter of 2019, the Company committed to additional programs to continue our operating model and ~~relocation expenses.~~

~~As part~~cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through the ~~Growth Initiative, we~~ expanded ~~the existing outsourcing~~ arrangement with a third-party vendor ~~in December 2018. We continue to commit~~ to achieve operational ~~efficiency through~~efficiency. The programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further ~~centralization~~closures of ~~certain functions~~retail pharmacy stores in Europe and ~~outsourcing.~~closure of other facilities. We anticipate these additional programs will be substantially completed by the end of 2021. We recorded pre-tax charges of $28 million ($22 million after-tax) and $39 million ($30 million after-tax) during the second quarter and first six months of 2020, primarily representing project consulting fees. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, of which $202 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.

Restructuring, impairment and related charges for our fiscal 2019 initiatives during the second quarter and first six months of 2020 consisted of the following:



	Quarter Ended September 30, 2019
(In millions)	U.S. Pharmaceutical and Specialty Solutions		European Pharmaceutical Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	2	$	3	$	1	$	1	$	10	$	17
Exit and other-related costs ⁽¹⁾	—		4		2		—		13		19
Asset impairments and accelerated depreciation	—		3		—		—		4		7
Total	$	2	$	10	$	3	$	1	$	27	$	43



	Six Months Ended September 30, 2019
(In millions)	U.S. Pharmaceutical and Specialty Solutions		European Pharmaceutical Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	1	$	2	$	1	$	1	$	16	$	21
Exit and other-related costs ⁽¹⁾	—		5		4		1		23		33
Asset impairments and accelerated depreciation	—		6		1		—		5		12
Total	$	1	$	13	$	6	$	2	$	44	$	66


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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Restructuring, impairment and related charges for our fiscal 2019 initiatives during the ~~Growth Initiative~~second quarter and first six months of 2019 consisted of the ~~following for the third quarter and first nine months of 2019:~~

Quarter Ended December 31, 2018
(In millions) U.S. Pharmaceutical and Specialty Solutions Medical-Surgical Solutions Other Corporate Total
Severance and employee-related costs, net $ 1
$ —
$ 9
$ 31
$ 41
Exit-related costs 1
5
—
—
6
Asset impairments and accelerated depreciation 2
1
—
—
3
Total $ 4
$ 6
$ 9
$ 31
$ 50
following:


	Nine Months Ended December 31, 2018										Quarter Ended September 30, 2018
(In millions)	U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Corporate		Total		U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	4	$	10	$	16	$	31	$	61	$	—	$	—	$	6	$	4	$	10
Exit-related costs ⁽¹⁾	7		12		56		—		75
Exit and other-related costs ⁽¹⁾											5		5		35		18		63
Asset impairments and accelerated depreciation	6		2		17		—		25		—		1		1		—		2
Total	$	17	$	24	$	89	$	31	$	161	$	5	$	6	$	42	$	22	$	75

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



	Six Months Ended September 30, 2018
(In millions)	U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	3	$	10	$	7	$	4	$	24
Exit and other-related costs ⁽¹⁾	6		7		56		29		98
Asset impairments and accelerated depreciation	4		1		17		—		22
Total	$	13	$	18	$	80	$	33	$	144


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

The following table summarizes the activity related to the restructuring liabilities associated with ~~the Growth Initiative during~~our fiscal 2019 initiatives for the first ~~nine~~six months of ~~2019:~~2020:



(In millions)	U.S. Pharmaceutical and Specialty Solutions			European Pharmaceutical Solutions			Medical-Surgical Solutions			Other			Corporate			Total
Balance, March 31, 2019 ⁽¹⁾	$	31		$	38		$	15		$	29		$	37		$	150
Restructuring, impairment and related charges	1			13			6			2			44			66
Non-cash charges	—			(6		)	(1		)	—			(5		)	(12		)
Cash payments	(3		)	(10		)	(1		)	(14		)	(22		)	(50		)
Other	—			(1		)	—			(7		)	(5		)	(13		)
Balance, September 30, 2019 ⁽²⁾	$	29		$	34		$	19		$	10		$	49		$	141

(In millions) U.S. Pharmaceutical and Specialty Solutions Medical-Surgical Solutions Other Corporate Total
Balance, March 31, 2018 $ —
$ —
$ —
$ —
$ —
Net restructuring charges recognized 17
24
89
31
161
Non-cash charges (6 ) (2 ) (17 ) —
(25 )
Cash payments (7 ) (13 ) (36 ) —
(56 )
Balance, December 31, 2018 ⁽¹⁾
$ 4
$ 9
$ 36
$ 31
$ 80


(1)	As of ~~December~~March 31, ~~2018,~~2019, the total reserve balance was ~~$80~~$150 million of which ~~$49~~$117 million was recorded in other accrued liabilities and ~~$31~~$33 million was recorded in other noncurrent liabilities.


(2)	As of September 30, 2019, the total reserve balance was $141 million of which $119 million was recorded in other accrued liabilities and $22 million was recorded in other noncurrent liabilities.

~~Asset Impairment Charges~~

~~During~~Other Plans

There were no material restructuring, impairment and related charges for other plans recorded during the ~~third quarter~~second quarters and first six months of 2020 and 2019. The restructuring liabilities for other plans as of September 30, 2019 we performed an interim impairment test of long-lived assets for our Rexall Health retail business due to the decline in the estimated future cash flows primarily driven by a lower projected overall growth rate resulting from the ongoing impact of government regulations. As a result, we recognized a non-cash charge of $35and March 31, 2019 were $48 million ~~(pre-tax~~ and after-tax) to impair certain long-lived assets at retail stores and certain intangible assets (primarily customer relationships). We utilized an income approach (a discounted cash flow (“DCF”) method) for estimating the fair value of the long-lived and intangible assets. The fair value of these assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.$87 million.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Long-Lived Asset Impairments

During the first quarter of 2019, we performed an interim impairment test of long-lived assets primarily for our ~~United Kingdom (“~~U.K.”) retail business due to the decline in the estimated future cash flows driven by additional U.K. government reimbursement reductions announced on June 29, 2018. As a result, we recognized a non-cash pre-tax charge of $20 million ($16 million after-tax) to impair the carrying value of certain intangible assets (primarily pharmacy licenses). We utilized 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.

~~Other~~

Additionally, during the third quarter and first nine months of 2019, we recorded pre-tax charges of $21 million ($16 million after-tax) and $54 million ($40 million after-tax) related to other smaller programs primarily representing other restructuring-related costs in corporate expenses.

~~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 decline in the estimated future cash flows driven by government reimbursement reductions in the U.K. As a result, we recognized a non-cash pre-tax charge of $189 million ($157 million after-tax) to impair the carrying value of certain intangible assets (notably pharmacy licenses) and store assets (primarily fixtures). We utilized a combination of the income approach (primarily DCF model) and the 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.

On September 29, 2017, we committed to a restructuring plan which primarily consists of the closures of under-performing retail stores in the U.K. and a reduction in workforce. The plan is expected to be substantially implemented by the end of 2019. As part of this plan, we recorded restructuring charges of $4 million (pre-tax and after-tax) and $15 million ($13 million after-tax) in operating expenses in the third quarter and first nine months of 2019 within the European Pharmaceutical Solutions segment primarily representing employee severance and lease exit costs. We recorded pre-tax charges of $6 million ($5 million after-tax) and $53 million ($45 million after-tax) primarily representing severance during the third quarter and first nine months of 2018. We made cash payments of $10 million and $26 million, primarily related to employee severance in the third quarter and first nine months of 2019. The reserve balances as of December 31, 2018 and March 31, 2018 were $24 million and $42 million, and are recorded in other accrued liabilities in our condensed consolidated balance sheets. We expect to record total pre-tax restructuring charges of approximately $90 million to $130 million for our European Pharmaceutical Solutions segment, of which $89 million of pre-tax charges were recorded to date.

~~Fiscal 2016 Cost Alignment Plan~~

On March 14, 2016, we committed to a restructuring plan to lower our operating costs (the “Cost Alignment Plan”). The Cost Alignment Plan primarily consists of a reduction in workforce, and business process initiatives.

There were no material restructuring charges recorded during the third quarters and first nine months of 2019 and 2018. We made cash payments of $3 million and $14 million during the third quarter and first nine months of 2019, and $9 million and $32 million during the third quarter and first nine months of 2018, primarily related to severance. The reserve balances as of December 31, 2018 and March 31, 2018 were $22 million and $39 million, recorded in other accrued liabilities, and $27 million and $30 million recorded in other noncurrent liabilities in our condensed consolidated balance sheets. The remaining programs under the Cost Alignment Plan primarily consist of exit-related activities for our European Pharmaceutical Solutions segment.

3.4. Goodwill Impairment Charges

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

2019 First Quarter

~~Table~~In the first quarter of ~~Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~As the results of interim goodwill impairment tests,~~2019, we recorded non-cash goodwill impairment charges of $570 million (pre-tax and after-tax) ~~during the first quarter of 2019 within~~for our ~~two~~2 reporting units ~~within~~in the European Pharmaceutical Solutions segment, and $350 million (pre-tax and after-tax) during the second quarter of 2018 within our former (prior to the 2019 first quarter realignment in our operating segment structure) Distribution Solutions segment. ~~During the third quarter of 2019, we also recorded a non-cash goodwill impairment charge of $21 million (pre-tax and after-tax) for our Rexall Health reporting unit, included in Other.~~ These charges were recorded under the caption, “Goodwill Impairment Charges” within operating expenses in the accompanying condensed consolidated statements of operations.

~~2019 First Quarter~~

Prior to implementing the new segment reporting structure in the first quarter of 2019, our European operations were considered a single reporting unit. Following the change in reportable segments, our European Pharmaceutical Solutions segment was split into ~~two~~2 distinct reporting units, ~~- retail pharmacy operations (“Consumer~~Retail Pharmacy and Pharmaceutical Distribution (formerly known as “Consumer Solutions”) and ~~wholesale operations (“Pharmacy~~“Pharmacy Solutions”) for purposes of goodwill impairment testing. As a result, we were required to perform a goodwill impairment test for these ~~two~~2 new reporting units upon the change in reportable ~~segment. We~~segments. Consequently, we recorded a non-cash goodwill impairment charge of $238 million (pre-tax and after-tax) in the first quarter of 2019 primarily because the estimated fair value of the ~~Pharmacy Solutions~~Pharmaceutical Distribution reporting unit was determined to be lower than its reassigned carrying value.

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

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

~~At December 31, 2018,~~ As previously disclosed in our ~~Consumer Solutions and Pharmacy Solutions reporting units’~~2019 Annual Report, we had impaired the entire remaining goodwill balances ~~were $461 million and $732 million.~~

~~Other risks, expenses and future developments, such as additional government reimbursement reductions, increased regulatory uncertainty including the impact~~ of ~~the U.K.’s potential exit from the European Union (commonly referred to as “Brexit”) and material changes in key market assumptions that we were unable to anticipate~~both reporting units as of the testing date may require us to further revise the projected cash flows, which could adversely affect the fair value of our reporting units in future periods. As a result, we may be required to record additional impairment charges in future reporting periods.March 31, 2019.

~~2018 Second Quarter~~

During the second quarter of 2018, our McKesson Europe reporting unit within our former Distribution Solutions segment, had a decline in its estimated future cash flows primarily triggered by government reimbursement reductions in their retail business in the U.K. 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 and we recorded a non-cash charge of $350 million (pre-tax and after-tax) to impair the carrying value of this reporting unit’s goodwill. There were no tax benefits associated with the goodwill impairment charge.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

The fair value of the reporting unit was determined using a combination of an income approach based on a 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.

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

4.5. Business Combinations

2019 ~~Acquisitions~~Acquisition

Medical Specialties Distributors LLC (“MSD”)

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

The adjusted provisional fair value of assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $245 million and $163 million. Approximately $376 million of the adjusted preliminary purchase price allocation has been assigned to goodwill, which reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition. The adjusted preliminary purchase price allocation includes acquired identifiable intangibles of $326 million primarily representing customer relationships with a weighted average life of 18 years. These amounts are provisional within the measurement period and subject to change as our fair value assessments are finalized.

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

(In millions) Amounts Recognized as of Acquisition Date (Provisional As Adjusted)
Receivables $ 115
Other current assets, net of cash and cash equivalents acquired 73
Goodwill 376
Intangible assets 326
Other long-term assets 57
Current liabilities (72 )
Other long-term liabilities (91 )
Net assets acquired, net of cash and cash equivalents $ 784

~~Other~~

During the first nine months of 2019, we also completed other smaller acquisitions in our European Pharmaceutical Solutions segment and Other. Financial results for our business acquisitions have been included in our condensed consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~2018 Acquisitions~~

~~RxCrossroads~~

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

The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement ~~period.~~period in the first quarter of 2020. As of ~~December 31, 2018,~~June 30, 2019, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were ~~$129~~$239 million and ~~$57~~$169 million. Approximately ~~$386~~$388 million of the final purchase price allocation was assigned to goodwill, which reflects the expected future benefits ~~from~~of certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of ~~$262~~$326 million primarily representing customer relationships ~~and trade names~~ with a weighted average life of 14eighteen years.

2018 Acquisition

CoverMyMeds LLC (“CMM”)

On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period in ~~April 2018.~~the first quarter of 2019. The financial results of CMM have been included in our condensed consolidated statements of operations within Other since the acquisition date.

Pursuant to the agreement, McKesson ~~may pay up to an~~paid additional ~~$160 million of~~ contingent consideration ~~based on CMM’s financial performance for 2018~~of $69 million 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 sheets. The contingent consideration was estimated using a Monte Carlo simulation, which utilized Level 3 inputs under the fair value measurement and disclosure guidance, including estimated financial forecasts. The contingent liability is re-measured at fair value at each reporting date until the liability is extinguished with changes in fair value being recorded in our condensed consolidated statements of operations. The initial fair value of this contingent consideration was a non-cash investing activity. In May 2018, we made a cash payment of $68 million ~~representing the contingent consideration~~ for ~~2018. As~~each of ~~December 31, 2018~~May 2019 and ~~March 31, 2018, the contingent consideration liability was $66 million and $124 million.~~

~~Other~~

In the second quarter of 2018, we completed our acquisitions of intraFUSION, Inc. (“intraFUSION”), BDI Pharma, LLC (“BDI”) and Uniprix Group (“Uniprix”) for net cash consideration of $485 million, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed of intraFUSION, BDI and Uniprix as of the acquisition dates were finalized upon completion of the measurement period.2018. As of September 30, ~~2018,~~2019 and March 31, 2019, the ~~final amounts of fair value recognized for the assets acquired~~related liability was NaN and ~~liabilities assumed for these acquisitions as of the acquisition dates, excluding goodwill and intangibles, were $292 million and $160~~$69 million. Approximately $246 million of the final 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. The final purchase price allocation included acquired identifiable intangibles of $118 million primarily representing customer relationships. The financial results of intraFUSION and BDI have been included within our U.S. Pharmaceutical and Specialty Solutions segment since the acquisition dates. The financial results of Uniprix have been included within Other since the acquisition date.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

2017 Acquisition

Rexall Health

In the third quarter of 2017, we completed our acquisition of Rexall Health which operated approximately 400 retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars ~~(or, approximately~~(approximately $2.1 billion) was funded from cash on hand. The measurement period to finalize the accounting for this acquisition ended in the third quarter of 2018. During the first six months of 2018, we completed the sales of all 27 stores and received net cash proceeds of $116 million Canadian dollars (approximately $94 million) from a third-party buyer. We also received $147 million Canadian dollars (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. On May 23, 2018, as ~~the~~a result of resolving certain indemnity and other claims related to this acquisition, $125 million Canadian dollars (approximately $97 million) was released to us from an escrow account. The receipt of this cash was recorded as a settlement gain within operating expenses in our condensed consolidated statement of operations in the first ~~quarter~~six months of 2019.

Other Acquisitions

During the second quarters and first six months of 2020 and 2019, we also completed several other small acquisitions within our operating segments. Financial results for our business acquisitions have been included in our condensed consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

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

~~5. Healthcare Technology Net Asset Exchange~~

In the fourth quarter of 2017, we contributed the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the newly formed joint venture, Change Healthcare, under the terms of a contribution agreement previously entered into between McKesson and Change Healthcare Holdings, Inc. (“Change”) and others including shareholders of Change. We retained our RelayHealth Pharmacy 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 $3.9 billion (after-tax gain of $3.0 billion) in operating expenses. 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 net working capital settlement and other adjustments.

~~Equity Method Investment in Change Healthcare~~

Our investment in the joint venture is accounted for using the equity method of accounting with a one-month reporting lag. We recorded our proportionate share of loss from Change Healthcare of $50 million and $162 million for the third quarter and first nine months of 2019, and $90 million and $271 million for the third quarter and first nine months of 2018. Our proportionate share of income or loss from this equity method investment includes transaction and integration expenses incurred by the joint venture and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible amortization and removal of profit associated with the recognition of deferred revenue. These amounts were recorded under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statements of operations.

At December 31, 2018 and March 31, 2018, our carrying value of this equity method investment was $3,566 million and $3,728 million, which exceeded our proportionate share of the joint venture’s book value of net assets by approximately $4,226 million and $4,472 million, primarily reflecting equity method intangible assets, goodwill and other fair value adjustments.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~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”) and certain other commercial agreements. Fees incurred or earned from Advisory Agreement were not material for the third quarters and first nine months of 2019 and 2018. Fees incurred or earned from TSA were $12 million and $48 million for the third quarter and first nine months of 2019 and $22 million and $69 million for the third quarter and first nine months of 2018. Transition service fees are included within operating expenses in our condensed consolidated statements of operations.

Revenues recognized and expenses incurred under commercial arrangements with Change Healthcare were not material during the third quarters and first nine months of 2019 and 2018. At December 31, 2018 and March 31, 2018, receivables due from the joint venture were not material.

~~Tax Receivable Agreement~~

In connection with the net asset exchange transaction, we also entered into a tax receivable agreement (“TRA”) with the shareholders of Change. At March 31, 2018, we had a $90 million noncurrent liability payable to the shareholders of Change. During the second quarter of 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from Change Healthcare that would otherwise have been required to be made to the shareholders of Change. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying condensed consolidated statement of operations in the second quarter of 2019. We had no outstanding payable balance to the shareholders of Change at December 31, 2018.


6.	~~Divestitures~~ Income Taxes

~~Fiscal~~During the second quarters of 2020 and 2019,

~~Equity Investment~~

~~In November 2018, we divested all of our ownership interest in an equity investment included in Other for proceeds of approximately $61 million. As a result,~~ we recorded ~~a pre-tax gain~~income tax benefit of ~~$56~~$294 million ~~($41~~and expense of $35 million ~~after-tax)~~related to continuing operations. During the first six months of 2020 and 2019, we recorded income tax benefit of $158 million and expense of $122 million related to continuing operations. During the second quarter of 2020, no tax benefit was recognized for an agreement reached in principle with certain counties in the ~~third quarter~~State of ~~2019. The gain is included within other income, net, in our condensed consolidated statement of operations. Under the terms of agreements entered into~~Ohio. Refer to Financial Note 15, “Commitments and Contingent Liabilities,” for ~~this transaction, we elected to receive a cash consideration of $23 million and concurrently contribute $38 million~~more information. Upon finalization of the ~~proceeds to obtain an equity interest in a newly formed entity.~~

~~Fiscal 2018~~

~~Enterprise Information Solutions~~

~~On August 1, 2017, we entered into an~~settlement agreement, ~~with a third party to sell our EIS business for $185 million, subject to adjustments for net debt and working capital. As of September 30, 2017,~~ the ~~assets and liabilities of this business met~~Company will evaluate the criteria to be classified as held for sale. Accordingly, $243 million of assets, including a goodwill balance of $124 million and $190 million of liabilities, related to the EIS business were recorded as held for sale and included in prepaid expenses and other and other accrued liabilities in the condensed consolidated balance sheet as of September 30, 2017.

~~On October 2, 2017, the transaction closed upon satisfaction of all closing conditions including the termination~~tax deductibility of the waiting period under U.S. antitrust laws. We recognized a pre-tax gain of $109 million ($30 million after-tax) upon the disposition of this business in the third quarter of 2018 within operating expenses in Other.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~Equity Investment~~

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

These divestitures did not meet the criteria to qualify as discontinued operations. Pre- and after-tax income from continuing operations of these businesses were not material for the third quarter and first ninesix months of 2019, ~~and 2018.~~


7.	~~Income Taxes~~

~~Our reported~~0 tax benefits were recognized for the pre-tax goodwill impairment charges of $570 million related to our European Pharmaceutical Solutions segment given that these charges are not deductible for income tax ~~expense rates for the third quarter and first nine months of 2019 were 18.9% and 19.7% compared to income tax benefit rates of 37.7% and 3.5% for the third quarter and first nine months of 2018.~~purposes. Fluctuations in our reported income tax rates are primarily due to ~~discrete items mainly driven by~~ the ~~impact of the 2017 Tax Act, the~~prior year impact of nondeductible impairment charges as well as changes within our business mix of income and discrete items recognized in the ~~effect~~quarters.

Table of ~~an intercompany sale of software.~~Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

During the third quarter and first nine months of 2019, income tax expense related to continuing operations was $123 million and $245 million and included net discrete tax benefits of $31 million and $138 million. During the third quarter and first nine months of 2018, income tax benefit related to continuing operations was $263 million and $46 million and included net discrete tax benefits of $424 million and $420 million.

~~Our discrete tax benefits for the third~~second quarter of 2019, ~~included $58~~we sold software between wholly-owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. An entity based in the U.S. was the acquirer of the software and is entitled to amortize the purchase price of the assets for tax purposes. In the second quarter of 2019, in accordance with the recently adopted amended accounting guidance on income taxes, a discrete tax benefit of $42 million ~~of tax benefits primarily related~~was recognized with a corresponding increase to a ~~change in a~~deferred tax ~~method for inventory rebates approved by the tax authorities during the quarter, partially offset by $27 million of tax expense related to the impact of the 2017 Tax Act. Our discrete tax benefits~~asset for the ~~third quarter of 2018 included a provisional $370 million related to the impact of the 2017 Tax Act and other discrete~~future tax ~~benefits of $54 million primarily related to the conclusion of certain tax audits.~~

During the first nine months of 2019, no tax benefit was recognized for the 2019 pre-tax charge of $591 million to impair the carrying value of goodwill for our two reporting units within the European Pharmaceutical Solutions segment and Rexall Health reporting unit. Refer to Financial Note 3, “Goodwill Impairment Charges,” within operating expenses in the accompanying condensed consolidated statement of operations. amortization.

As of ~~December 31, 2018,~~September 30, 2019, we had ~~$1,010~~$985 million of unrecognized tax benefits, of which ~~$843~~$812 million would reduce income tax expense and the effective tax rate, if recognized. During the ~~third~~second quarter ~~and first nine months~~ of ~~2019, we~~2020, the Company signed a settlement agreement with the state of California regarding an outstanding refund claim. We recognized a ~~discrete tax expense of $17 million and a~~net discrete tax benefit of $6$28 million ~~for~~and a $91 million decrease in our unrecognized tax benefits ~~due to~~associated with the ~~issuance~~settlement of ~~new proposed tax regulations and the completion of our accounting for the impacts of the 2017 Tax Act.~~this matter. During the next twelve months, ~~we do not anticipate a significant increase or decrease to~~it is reasonably possible that our unrecognized tax benefits may decrease by as much as approximately $60 million due to settlements of tax examinations and statue of limitations expirations 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.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. ~~We are subject to audit by the~~The IRS is currently examining our U.S. corporation income tax returns for ~~fiscal years~~ 2013 through ~~the current fiscal year.~~2015. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years ~~2010~~2012 through the current fiscal year.

~~2017 Tax Act~~

On December 22, 2017, the U.S. government enacted the 2017 Tax Act, which was comprehensive new tax legislation. The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In accordance with this guidance, we recognized a tax benefit of $1,324 million in prior periods due to the re-measurement of certain deferred taxes to the lower U.S. federal tax rate. During the third quarter and first nine months of 2019, we have not made any measurement period adjustments to this amount. We recognized tax expense of $457 million in prior periods for the one-time transition tax on certain accumulated earnings and profits of our foreign subsidiaries resulting from the 2017 Tax Act. During the third quarter and first nine months of 2019, we recognized a discrete tax expense of $10 million and a discrete tax benefit of $5 million in measurement period adjustments to the one-time transition tax on certain accumulated earnings and profits of our foreign subsidiaries. Our accounting for the impact of the 2017 Tax Act has now been completed as of the period ending December 31, 2018.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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

The Company is allowed to make an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat the tax effect of GILTI as a current period expense when incurred.


8.7.	Redeemable Noncontrolling Interests and Noncontrolling Interests

Redeemable Noncontrolling Interests

Our redeemable noncontrolling interests primarily relate to our consolidated subsidiary, McKesson Europe AG (“McKesson Europe”). Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share and a one-time guaranteed dividend for calendar year 2014 of €0.83 per share reduced accordingly for any dividend paid by McKesson Europe in relation to that year. As a result, we recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $11 million and ~~$34~~$22 million during the ~~third~~second quarter and first ~~nine~~six months of ~~2019,~~2020 and ~~$12~~$11 million and ~~$32~~$23 million during the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019. All amounts were recorded within net income attributable to noncontrolling interests in our condensed consolidated statements of operations ~~within the caption, “Net Income Attributable to Noncontrolling Interests,”~~ and the corresponding liability balance was recorded within other accrued liabilities on our condensed consolidated balance sheets.

Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their noncontrolling shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”). The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. During the ~~third quarter~~second quarters and first ~~nine~~six months of 2020 and 2019, there were no material exercises of the Put Right. During the first nine months of 2018, we paid $50 million to purchase 1.9 million shares of McKesson Europe through the exercises of the Put Right by the noncontrolling shareholders, which decreased the carrying value of redeemable noncontrolling interests by $53 million. The balance of redeemable noncontrolling interests is reported as the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted each period for exchange rate fluctuations. At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018,~~2019, the carrying value of redeemable noncontrolling interests of ~~$1.40~~$1.38 billion and ~~$1.46~~$1.39 billion exceeded the maximum redemption value of ~~$1.26~~$1.20 billion and ~~$1.35~~$1.23 billion. At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018,~~2019, we owned approximately 77% of McKesson Europe’s outstanding common shares.

~~Appraisal Proceedings~~

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 Amount, annual recurring compensation amount, and/or the guaranteed dividend. During the pendency of the Appraisal Proceedings, such amount will be paid as specified currently in the Domination Agreement. On September 19, 2018, the Court ruled that the Put Amount shall be increased by €0.51 resulting in an adjusted Put Amount of €23.50. The annual recurring compensation amount and/or the guaranteed dividend remain unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe also appealed the decision. If upon final resolution of the appeal an upwards adjustment is ordered, we would be required to make certain additional payments for any shortfall to all McKesson Europe noncontrolling shareholders who previously received amounts under the Domination Agreement.

Noncontrolling Interests

Noncontrolling interests represent third-party equity interests in our consolidated entities primarily related to ClarusONE and Vantage Oncology Holdings, LLC, which were ~~$204~~$210 million and ~~$253~~$193 million at ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018~~2019 on our condensed consolidated balance sheets. We allocated a total of ~~$46~~$42 million and ~~$135~~$85 million of net income to noncontrolling interests during the ~~third~~second quarter and first ~~nine~~six months of ~~2019~~2020 and ~~$46~~$43 million and ~~$137~~$89 million during the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019.

2018

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Changes in redeemable noncontrolling interests and noncontrolling interests for the second quarter and first ~~nine~~six months of ~~2019~~2020 were as follows:


(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2018	$	253		$	1,459
Balance, June 30, 2019							$	194		$	1,399
Net income attributable to noncontrolling interests	135			34			42			11
Other comprehensive income	—			(55		)
Other comprehensive loss							—			(18		)
Reclassification of recurring compensation to other accrued liabilities	—			(34		)	—			(11		)
Payments to noncontrolling interests	(143		)	—			(37		)	—
Other	(41		)	—			11			3
Balance, December 31, 2018	$	204		$	1,404
Balance, September 30, 2019							$	210		$	1,384



(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2019	$	193		$	1,393
Net income attributable to noncontrolling interests	85			22
Other comprehensive loss	—			(12		)
Reclassification of recurring compensation to other accrued liabilities	—			(22		)
Payments to noncontrolling interests	(76		)	—
Other	8			3
Balance, September 30, 2019	$	210		$	1,384

Changes in redeemable noncontrolling interests and noncontrolling interests for the second quarter and first ~~nine~~six months of ~~2018~~2019 were as follows:


(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests			Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2017	$	178		$	1,327
Balance, June 30, 2018							$	240		$	1,422
Net income attributable to noncontrolling interests	137			32			43			11
Other comprehensive loss	—			161			—			(7		)
Reclassification of recurring compensation to other accrued liabilities	—			(32		)	—			(11		)
Payments of noncontrolling interests	(73		)	—
Exercises of Put Right	—			(53		)
Payments to noncontrolling interests							(42		)	—
Other	(4		)	—			(33		)	—
Balance, December 31, 2017	$	238		$	1,435
Balance, September 30, 2018							$	208		$	1,415

~~There were no material changes in our ownership interests related to redeemable noncontrolling interests during the first nine months~~

Table of 2019. The effect of changes in our ownership interests related to redeemable noncontrolling interests on our equity of $3 million resulting from exercises of the Put Right was recorded as a net increase to McKesson’s stockholders’ paid-in capital during the first nine months of 2018. Net income attributable to McKesson and transfers from redeemable noncontrolling interests were $830 million and $1,216 million during the first nine months of 2019 and 2018.Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)



(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2018	$	253		$	1,459
Net income attributable to noncontrolling interests	89			23
Other comprehensive loss	—			(44		)
Reclassification of recurring compensation to other accrued liabilities	—			(23		)
Payments to noncontrolling interests	(106		)	—
Other	(28		)	—
Balance, September 30, 2018	$	208		$	1,415


9.8.	Earnings Per Common Share

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

~~Table~~ Diluted loss per common share for the second quarter and first six months of ~~Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

2020 was calculated by excluding potentially dilutive securities from the denominator of the share computation due to their anti-dilutive effects.

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



	Quarter Ended September 30,						Six Months Ended September 30,
(In millions, except per share amounts)	2019			2018			2019			2018
Income (Loss) from continuing operations	$	(676	)	$	552		$	(193	)	$	471
Net income attributable to noncontrolling interests	(53		)	(54		)	(107		)	(112		)
Income (Loss) from continuing operations attributable to McKesson	(729		)	498			(300		)	359
Income (Loss) from discontinued operations, net of tax	(1		)	1			(7		)	2
Net income (loss) attributable to McKesson	$	(730	)	$	499		$	(307	)	$	361

Weighted average common shares outstanding:
Basic	183			198			185			200
Effect of dilutive securities:
Restricted stock units	—			1			—			1
Diluted	183			199			185			201

Earnings (Loss) per common share attributable to McKesson: ⁽¹⁾
Diluted
Continuing operations	$	(3.99	)	$	2.51		$	(1.62	)	$	1.79
Discontinued operations	—			—			(0.03		)	0.01
Total	$	(3.99	)	$	2.51		$	(1.65	)	$	1.80
Basic
Continuing operations	$	(3.99	)	$	2.52		$	(1.62	)	$	1.80
Discontinued operations	—			—			(0.03		)	0.01
Total	$	(3.99	)	$	2.52		$	(1.65	)	$	1.81

Quarter Ended December 31, Nine Months Ended December 31,
(In millions, except per share amounts) 2018 2017 2018 2017
Income from continuing operations $ 527
$ 960
$ 998
$ 1,379
Net income attributable to noncontrolling interests (57 ) (58 ) (169 ) (169 )
Income from continuing operations attributable to McKesson 470
902
829
1,210
(Loss) Income from discontinued operations, net of tax (1 ) 1
1
3
Net income attributable to McKesson $ 469
$ 903
$ 830
$ 1,213

Weighted average common shares outstanding:
Basic 194
207
198
209
Effect of dilutive securities:
Restricted stock units 1
1
1
1
Diluted 195
208
199
210

Earnings per common share attributable to McKesson: ⁽¹⁾

Diluted
Continuing operations $ 2.41
$ 4.32
$ 4.17
$ 5.75
Discontinued operations (0.01 ) 0.01
0.01
0.01
Total $ 2.40
$ 4.33
$ 4.18
$ 5.76
Basic
Continuing operations $ 2.42
$ 4.34
$ 4.19
$ 5.78
Discontinued operations (0.01 ) 0.01
—
0.02
Total $ 2.41
$ 4.35
$ 4.19
$ 5.80


(1)	Certain computations may reflect rounding adjustments.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately ~~$3 million and~~ $2 million potentially dilutive securities ~~for the third quarter and first nine months of 2019 and $2 million potentially dilutive securities for the third quarter and first nine months of 2018~~ were excluded from the computations of diluted net earnings per common share for the second quarter and first six months of 2019, as they were anti-dilutive.


~~10.~~9.	Goodwill and Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:



(In millions)	U.S. Pharmaceutical and Specialty Solutions			European Pharmaceutical Solutions			Medical-Surgical Solutions		Other		Total
Balance, March 31, 2019	$	4,078		$	—		$	2,451	$	2,829	$	9,358
Goodwill acquired	—			54			—		—		54
Acquisition accounting, transfers and other adjustments	—			4			7		—		11
Foreign currency translation adjustments, net	(18		)	(1		)	—		4		(15		)
Balance, September 30, 2019	$	4,060		$	57		$	2,458	$	2,833	$	9,408

(In millions) U.S. Pharmaceutical and Specialty Solutions European Pharmaceutical Solutions Medical-Surgical Solutions Other Total
Balance, March 31, 2018 $ 4,110
$ 1,850
$ 2,070
$ 2,894
$ 10,924
Goodwill acquired —
52
360
12
424
Goodwill impairment charges —
(570 ) —
(21 ) (591 )
Acquisition accounting, transfers and other adjustments 13
(4 ) 16
6
31
Foreign currency translation adjustments, net (49 ) (135 ) —
(85 ) (269 )
Balance, December 31, 2018 $ 4,074
$ 1,193
$ 2,446
$ 2,806
$ 10,519

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

As of December 31, 2018, accumulated goodwill impairment losses were $1,736 million and $452 million in our European Pharmaceutical Solutions segment and Other. As of March 31, 2018, accumulated goodwill impairment losses were $1,299 million and $456 million in our European Pharmaceutical segment and Other. Refer to Financial Note 3, “Goodwill Impairment Charges,” for more information on goodwill impairment charges.

Information regarding intangible assets is as follows:



	September 30, 2019								March 31, 2019
(Dollars in millions)	Weighted Average Remaining Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	11	$	3,787	$	(1,913	)	$	1,874	$	3,818	$	(1,801	)	$	2,017
Service agreements	11	1,019		(461		)	558		1,017		(430		)	587
Pharmacy licenses	25	530		(208		)	322		513		(209		)	304
Trademarks and trade names	13	852		(251		)	601		887		(232		)	655
Technology	4	178		(108		)	70		141		(94		)	47
Other	5	275		(211		)	64		288		(209		)	79
Total		$	6,641	$	(3,152	)	$	3,489	$	6,664	$	(2,975	)	$	3,689

December 31, 2018 March 31, 2018
(Dollars in millions)
Weighted
Average
Remaining
Amortization
Period
(years)

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
Customer relationships 12 $ 3,980
$ (1,856 ) $ 2,124
$ 3,619
$ (1,550 ) $ 2,069
Service agreements 11 1,011
(414 ) 597
1,037
(386 ) 651
Pharmacy licenses 25 767
(353 ) 414
684
(196 ) 488
Trademarks and trade names 13 884
(233 ) 651
932
(187 ) 745
Technology 4 139
(89 ) 50
147
(84 ) 63
Other 5 285
(201 ) 84
262
(176 ) 86
Total $ 7,066

$ (3,146 ) $ 3,920
$ 6,681
$ (2,579 ) $ 4,102

Amortization expense of intangible assets was ~~$122~~$118 million and ~~$365~~$230 million for the ~~third~~second quarter and ~~nine~~first six months ~~ended~~ ~~December 31, 2018~~of 2020 and ~~$123~~$121 million and ~~$370~~$243 million for the ~~third~~second quarter and ~~nine~~first six months ~~ended December 31, 2017.~~of 2019. Estimated ~~annual~~ amortization expense of these assets is as follows: ~~$112~~$232 million, ~~$429~~$438 million, ~~$412~~$358 million, ~~$379~~$261 million and ~~$274~~$245 million for the remainder of ~~2019~~2020 and each of the succeeding years through ~~2023~~2024 and ~~$2,314~~$1,955 million thereafter. All intangible assets were subject to amortization as of ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018~~2019.

Refer to Financial Note 2, “Restructuring and Asset Impairment Charges,” for more information on intangible asset impairments recorded during the first quarter of 2019 for our U.K. retail business and the third quarter of 2019 for our Rexall Health retail business.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


~~11.~~10.	Debt and Financing Activities

Long-Term Debt

Our long-term debt includes both U.S. dollar and foreign ~~currency denominated~~currency-denominated borrowings. At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018, $8,736~~2019, $7,644 million and ~~$7,880~~$7,595 million of total debt were outstanding, of which ~~$1,120~~$302 million and ~~$1,129~~$330 million were included under the caption “Current portion of long-term debt” within our condensed consolidated balance sheets.

~~During the first nine months~~

Table of ~~2018, we repaid a €500 million bond that matured on April 26, 2017.~~Contents

McKESSON CORPORATION

~~Fiscal 2019 Debt Issuances~~FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

On November 30, 2018, we completed a public offering of 3.65% Notes due November 30, 2020 (the “2020 Notes”) in a principal amount of $700 million and 4.75% Notes due May 30, 2029 (the “2029 Notes”) in a principal amount of $400 million. Interest on the 2020 Notes and 2029 Notes is payable semi-annually on May 30^th ~~and November 30~~^th ~~of each year, commencing on May 30, 2019. We utilized the net proceeds from these notes of $1.1 billion, net of discounts and offering expenses, for general corporate purposes.~~

Each note, which constitutes a “Series”, is an unsecured and unsubordinated obligation of the Company and ranks equally with all of the Company’s existing and, from time-to-time, future unsecured and unsubordinated indebtedness outstanding. Each Series is governed by materially similar indentures and officers’ certificates. Upon required notice to holders of notes with fixed interest rates, we 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 that Series from the holders at a price equal to 101% of the then outstanding principal amount of that Series, plus accrued and unpaid interest to, but not including, the date of repurchase. The indenture and the related officers’ certificate for each Series, subject to the exceptions and in compliance with the conditions as applicable, specify that we may not consolidate, merge or sell all or substantially all of our assets, incur liens, or enter into sale-leaseback transactions exceeding specific terms, without lenders’ consent. The indentures also contain customary events of default provisions.

Revolving Credit Facilities

~~We have~~During the second quarter of 2020, we entered into a syndicated ~~$3.5~~$4 billion five-year senior unsecured ~~revolving~~ credit facility (the ~~“Global~~“2020 Credit Facility”), which has a ~~$3.15~~$3.6 billion aggregate sublimit of availability in Canadian dollars, British pound sterling and ~~Euros.~~Euro. The ~~Global~~2020 Credit Facility matures ~~on October 22, 2020.~~ in September 2024. The remaining terms and conditions of the 2020 Credit Facility are substantially similar to those previously in place under the $3.5 billion revolving credit facility which was terminated in September 2019. There were 0 borrowings under this facility during the second quarter of 2020 and 0 amounts outstanding under this facility as of September 30, 2019.

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 contains a financial covenant which obligates the Company to maintain a debt to capital ratio of no greater than 65% ~~and other customary investment grade covenants.~~. If we do not comply with ~~these covenants,~~the covenant, our 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, 2018,~~September 30, 2019, we were in compliance with ~~all covenants.~~the covenant.

We had a syndicated $3.5 billion five-year senior unsecured revolving credit facility (the “Global Facility”), which was scheduled to mature in October 2020. The Global Facility was terminated in connection with the execution of the $4 billion 2020 Credit Facility, as discussed above. There were no borrowings under this facility during the ~~third~~second quarters and first ~~nine~~six months of 2020 and 2019, and ~~2018, and no borrowings~~0 amounts outstanding as of ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018.~~2019.

We also maintain bilateral credit ~~lines~~facilities primarily denominated in ~~Euros~~Euro with a committed ~~balance~~amount of $9$8 million and an uncommitted ~~balance~~amount of ~~$198~~$188 million as of ~~December 31, 2018.~~September 30, 2019. Borrowings and repayments were not material during the second quarters and first ~~nine~~six months of ~~2019~~2020 and ~~2018~~2019 and amounts outstanding under these credit lines were not material as of ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018.~~2019.

Commercial Paper

We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, the Company can issue up to ~~$3.5~~$4 billion in outstanding commercial paper notes. During the first ~~nine~~six months of ~~2019~~2020 and ~~2018,~~2019, we borrowed ~~$30.4~~$8.7 billion and ~~$12.7~~$19.7 billion and repaid ~~$29.3~~$8.1 billion and ~~$12.1~~$18.3 billion under the program. At ~~December 31, 2018,~~September 30, 2019 there were ~~$1.1 billion of~~$549 million commercial paper notes outstanding with a weighted average interest rate of ~~3.20%~~2.42%. At March 31, ~~2018,~~2019, there were no0 commercial paper notes outstanding.


11.	Leases

Lessee

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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

Supplemental balance sheet information related to leases was as follows:



(In millions, except lease term and discount rate)	September 30, 2019
Operating leases
Operating Lease Right-of-Use Assets	$	2,002

Current portion of operating lease liabilities	$	362
Long-Term Operating Lease Liabilities	1,763
Total operating lease liabilities	$	2,125

Finance Leases
Property, Plant and Equipment, net	$	154

Current portion of long-term debt	$	11
Long-Term Debt	145
Total finance lease liabilities	$	156

Weighted Average Remaining Lease Term (Years)
Operating leases	8.1
Finance leases	12.2

Weighted Average Discount Rate
Operating leases	3.10		%
Finance leases	3.89		%

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The components of lease cost were as follows:



	Quarter Ended September 30,			Six Months Ended September 30,
(In millions)	2019			2019
Short-term lease cost	$	7		$	15
Operating lease cost	113			228

Finance lease cost:
Amortization of right-of-use assets	3			5
Interest on lease liabilities	1			2
Total finance lease cost	4			7

Variable lease cost ⁽¹⁾	31			62
Sublease income	(6		)	(14		)
Total lease cost ⁽²⁾	$	149		$	298


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


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

Supplemental cash flow information related to leases was as follows:



	Six Months Ended September 30,
(In millions)	2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(189	)
Operating cash flows from finance leases	(2		)
Financing cash flows from finance leases	(12		)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases ⁽¹⁾	$	2,331
Finance leases	151

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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



(In millions)	Operating Leases			Finance Leases			Total
The remainder of 2020	$	206		$	8		$	214
2021	418			17			435
2022	355			17			372
2023	296			16			312
2024	242			15			257
Thereafter	901			125			1,026
Total lease payments ⁽¹⁾	$	2,418		$	198		$	2,616
Less imputed interest	(293		)	(42		)	(335		)
Present value of lease liabilities	$	2,125		$	156		$	2,281


(1)	Total lease payments have not been reduced by minimum sublease income of $170 million due under future noncancelable subleases.

As of September 30, 2019, we entered into additional leases primarily for facilities that have not yet commenced with future lease payments of $170 million that are not reflected in the table above. These operating leases will commence between 2020 and 2024 with noncancelable lease terms of 5 to 15 years.

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



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


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


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

Lessor

We lease primarily certain owned equipment to the physician practices that are classified as direct financing or sales-type leases. As of September 30, 2019, the total lease receivable was $270 million with a weighted average remaining lease term of approximately seven years. Interest income from these leases recorded was not material during the second quarter and first six months of 2020.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


12.	Pension Benefits

The net periodic expense for our defined benefit pension ~~benefit~~ plans was $5$111 million and ~~$19~~$135 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2019~~2020 and $6$9 million and ~~$16~~$14 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019.

Cash contributions to these plans were $6$7 million and ~~$53~~$13 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2019~~2020 and $5$43 million and ~~$46~~$47 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019. The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods and expected life expectancy.

On May 23, 2018, the Company’s Board of Directors approved the termination of our frozen U.S. defined benefit pension plan (“Plan”). ~~The distribution~~During the first quarter of 2020, we offered the option of receiving a lump sum payment to certain participants with vested qualified Plan benefits in lieu of receiving monthly annuity payments. Approximately 1,300 participants elected to receive the settlement, and lump sum payments of approximately $49 million were made from plan assets ~~pursuant~~ to these participants in June 2019. The benefit obligation settled approximated payments to plan participants and a pre-tax settlement charge of $17 million ($12 million after-tax) was recorded during the ~~termination~~first quarter of 2020. During the second quarter of 2020, we transferred the remainder of the Plan’s pension obligation to a third-party insurance provider by purchasing annuity contracts for approximately $280 million which was fully funded directly by plan assets. The third-party insurance provider will ~~not be made until~~assume the ~~plan termination satisfies all regulatory requirements, which is expected~~obligation to ~~be completed by December 31,~~pay future pension benefits and provide administrative services commencing on November 1, 2019.

As a result, the remaining previously recorded unrecognized losses in accumulated other comprehensive loss for this Plan were recognized as expense and a pre-tax settlement charge of approximately $105 million ($78 million after-tax) were recorded within other income (expense), net, in our condensed consolidated statements of operations during the second quarter of 2020. As of ~~December 31, 2018 and~~ March 31, ~~2018,~~2019, this Plan had an accumulated other comprehensive loss of approximately ~~$115 million and $120~~$121 million.


13.	Hedging Activities

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

Foreign ~~currency exchange risk~~Currency Exchange Risk

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Non-Derivative Instruments Designated as Hedges

At ~~December~~September 30, 2019 and March 31, ~~2018,~~2019, we had €1.95 billion Euro-denominated notes ~~and~~designated as non-derivative net investment hedges. At March 31, 2019, we also had £450 million British pound sterling-denominated notes designated as non-derivative net investment hedges. Theses hedges ~~which~~are utilized to hedge portions of our net investments in non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For all notes that are designated as net investment hedges and meet ~~highly~~ effectiveness requirements, the changes in carrying value of the notes attributable to the change in spot rates are recorded in foreign currency translation adjustments within accumulated other comprehensive ~~income~~loss in the ~~statements~~condensed consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments. To the extent foreign currency denominated notes designated as net investment hedges are ~~not highly effective,~~ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. On September 30, 2019, we de-designated our £450 million British pounding sterling-denominated notes prospectively from net investment hedges as the hedging relationship ceased to be effective. Gains or losses from net investment hedges recorded inwithin other comprehensive income were ~~$39~~gains of $91 million and ~~$223~~$67 million during the ~~third~~second quarter and first ~~nine~~six months of ~~2019~~2020 and ~~losses~~gains of ~~$28~~$23 million and ~~$205~~$184 million during the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019. Ineffectiveness on our non-derivative net investment hedges during the second quarter and first six months of 2020 resulted in gains of $20 million and $30 million which were recorded in earnings within other income (expense), net. There was no ineffectiveness in our non-derivative net investment hedges asduring the second quarter and first six months of ~~December 31, 2018 and March 31, 2018.~~

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

2019.

Derivatives Designated as Hedges

~~In March 2018,~~On September 30, 2019, we entered into a number of cross-currency swaps designated as fair value hedges with total notional amounts of £450 million British pound sterling. Under the terms of the cross-currency swap contracts, we agree 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 designated as fair value hedges and the offsetting changes in the fair value of the hedged notes are recorded in earnings. Gains or losses from these fair value hedges recorded in earnings were not material during the second quarter and first six months of 2020. The swaps will mature in February 2023.

At September 30, 2019 and March 31, 2019, we had cross-currency swaps designated as net investment hedges with total gross notional amounts of ~~£432~~$1,499 million ~~British pound sterling, which are~~Canadian dollars. At March 31, 2019, we also had cross-currency swaps designated as net investment ~~hedges. In November 2018, we entered into cross-currency swap contracts~~hedges with total gross notional amounts of ~~£500~~£932 million British pound ~~sterling and $1 billion Canadian dollars, which are designated as net investment hedges.~~ sterling.

Under the terms of the cross-currency swap contracts, we agree with third parties to exchange fixed interest payments in one currency for fixed interest payments in another currency at specified intervals and to exchange principal in one currency for principal in another currency, calculated by reference to agreed-upon notional amounts. These swaps are utilized to hedge portions of our net investments denominated in British pound sterling and Canadian dollars against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. The changes in the fair value of these derivatives attributable to the changes in spot currency exchange rates and differences between spot and forward interest rates are recorded inwithin accumulated other comprehensive ~~income~~loss in the condensed consolidated statement of stockholders’ equity where they offset foreign currency translation gains and losses recorded on our net investments denominated in British pound sterling and Canadian dollars. To the extent foreign currency denominated notes designated as hedges are ineffective, changes in carrying value attributable to the change in spot rates are recorded in earnings. Gains or losses from these net investment hedges recorded inwithin other comprehensive income were gains of ~~$63~~$20 million and ~~$102~~$9 million during the ~~third~~second quarter and first ~~nine~~six months of 2020 and gains of $5 million and $39 million during the second quarter and first six months of 2019. ~~These~~During the first quarter of 2020, we terminated cross-currency swaps with total gross notional amounts of £932 million British pound sterling due to ineffectiveness in our hedges within our British pound sterling hedging program that arose due to 2019 impairments of goodwill and certain long-lived assets in our U.K. businesses. Proceeds from the termination of these swaps totaled $84 million and resulted in a settlement gain of $34 million for the first six months of 2020, recorded in earnings within other income (expense), net. There was no ineffectiveness in our hedges for the second quarter and first six months of 2019. The remaining cross-currency swaps will mature between November 2020 and November 2024.

At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018,~~2019, we had forward contracts to hedge the U.S. dollar against cash flows denominated in Canadian dollars with total gross notional ~~values~~amounts of ~~$162~~$81 million, which were designated as cash flow hedges. ~~These contracts~~The remaining contract will mature ~~between~~in March ~~2019 and March~~ 2020.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

From time to time, we also enter into cross-currency swaps to hedge intercompany loans denominated in non-functional currencies. These cross-currency swaps are designed to reduce the income statement effects ~~on the statements of operations~~ arising from fluctuations in foreign exchange rates and have been designated as cash flow hedges. At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018,~~2019, we had cross-currency swaps with total gross notional amounts of approximately ~~$3,279 million and $3,412~~$2,908 million, which are designated as cash flow hedges. These swaps will mature between ~~March 2019~~April 2020 and January 2024.

For forward contracts and cross-currency swaps that are designated as cash flow hedges, ~~and are highly~~the effective ~~the~~portion of changes in the fair value of the hedges is recorded inwithin accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings. Changes in fair values representing hedge ineffectiveness are recognized in current earnings. Gains or losses from cash flow hedges recorded inwithin other comprehensive income were ~~$40~~gains of $17 million and ~~$42~~$35 million induring the ~~third~~second quarter and first ~~nine~~six months of ~~2019. There were no~~2020 and not material ~~losses from cash flow hedges in~~during the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~2019. Gains or losses reclassified from accumulated other comprehensive income and recorded in operating expenses in the condensed consolidated statements of operations were not material in the ~~third~~second quarters and first ~~nine~~six months of ~~2019~~2020 and ~~2018.~~2019. There was no ineffectiveness in our cash flow hedges for the ~~third~~second quarters and first ~~nine~~six months of ~~2019~~2020 and ~~2018.~~2019.

Derivatives Not Designated as Hedges

Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with ~~changes~~the change in ~~values~~fair value included in earnings.

We have a number of forward contracts to hedge the Euro against cash flows denominated ~~primarily~~ in British pound sterling and other European currencies. At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018,~~2019, the total gross notional amounts of these contracts were ~~$10~~$44 million and ~~$29~~$28 million.

These contracts will mature through October 2020 and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly in earnings within operating expenses. Changes in the fair values were not material in the second quarters and first six months of 2020 and 2019. Gains or losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans.

During the second quarter and first six months of 2020, we also entered a number of forward contracts to offset a portion of the earnings impacts from the ineffectiveness of net investment hedges discussed above. These contracts matured in September 2019 and none of these contracts were designated for hedge accounting. Changes in the fair values for contracts not designated as hedges are recorded directly ~~into earnings and were not material for~~in earnings. During the ~~third quarters~~second quarter and first ~~nine~~six months of ~~2019~~2020, losses of $20 million and ~~2018. Gains or losses from these contracts are largely offset by changes~~$39 million were recorded in ~~the value of the underlying intercompany foreign currency loans.~~earnings within other income (expense), net.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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



	Balance Sheet Caption	September 30, 2019						March 31, 2019
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S. Dollar Notional
(In millions)		Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S. Dollar Notional
Derivatives designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	17	$	—	$	81	$	17	$	—	$	81
Cross-currency swaps (current)	Prepaid expenses and other/Other accrued liabilities	49		12		355		—		18		—
Cross-currency swaps (non-current)	Other Noncurrent Assets/Liabilities	68		5		4,237		91		33		5,283
Total		$	134	$	17			$	108	$	51
Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	—	$	—	$	21	$	—	$	—	$	14
Foreign exchange contracts (current)	Other accrued liabilities	—		—		23		—		—		14
Total		$	—	$	—			$	—	$	—

Balance Sheet
Caption
December 31, 2018 March 31, 2018

Fair Value of
Derivative
U.S. Dollar Notional
Fair Value of
Derivative
U.S. Dollar Notional
(In millions) Asset Liability Asset Liability
Derivatives designated for hedge accounting
Foreign exchange contracts (current) Prepaid expenses and other $ 19
$ —
$ 81
$ 15
$ —
$ 81
Foreign exchange contracts (noncurrent) Other Noncurrent Assets 18
—
81
14
—
81
Cross currency swaps (current) Prepaid expenses and other/Other accrued liabilities 40
16
371
—
7
504
Cross currency swaps (noncurrent) Other Noncurrent Assets/Liabilities 173
49
4,912
—
222
3,508
Total $ 250
$ 65
$ 29
$ 229

Derivatives not designated for hedge accounting
Foreign exchange contracts (current) Prepaid expenses and other $ —
$ —
$ 6
$ —
$ —
$ 13
Foreign exchange contracts (current) Other accrued liabilities —
—
4
—
—
16
Total $ —
$ —
$ —
$ —

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


14.	Fair Value Measurements

At ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018~~2019, the carrying amounts of cash, certain cash equivalents, restricted cash, marketable securities, receivables, drafts and accounts payable, short-term borrowings and other current liabilities approximated their estimated fair values because of the short maturity of these financial instruments.

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

Our long-term debt is carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were ~~$8.7~~$7.6 billion and ~~$9.0~~$8.3 billion at ~~December 31, 2018,~~September 30, 2019, and ~~$7.9~~$7.6 billion and ~~$8.1~~$7.9 billion at March 31, ~~2018.~~2019. The estimated fair value of our long-term debt was determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.

Assets Measured at Fair Value on a Recurring Basis

Cash and cash equivalents at ~~December 31, 2018~~September 30, 2019 and March 31, ~~2018~~2019 included investments in money market funds of ~~$528~~$199 million and ~~$799~~$1,205 million, which are reported at fair value. The fair value of money market funds was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Fair values of our ~~forward~~ foreign currency forward contracts were determined using observable inputs from available market information. Fair values of our cross-currency swaps were determined using quoted foreign currency exchange rates and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 13, “Hedging Activities,” for fair value and other information on our foreign currency derivatives including ~~forward~~ foreign currency forward contracts and cross-currency swaps.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the ~~third~~second quarters and first ~~nine~~six months of ~~2019~~2020 and ~~2018.~~2019.

Assets Measured at Fair Value on a Nonrecurring Basis

At ~~December~~September 30, 2019, assets measured at fair value on a nonrecurring basis consisted of our investment in Change Healthcare JV. Since the completion of its IPO in July 2019, the fair value from the trading prices of Change Healthcare Inc.’s public common stock has been below the corresponding carrying value of our investment in Change Healthcare JV, triggering an OTTI evaluation. As a result, for the second quarter of 2020, we concluded an OTTI has occurred and recorded a pre-tax impairment charge of $1,157 million ($864 million after-tax) associated with our investment in Change Healthcare JV which is considered a Level 2 fair value measurement. Refer to Financial Note 2, “Investment in Change Healthcare Joint Venture,” for more information.

At March 31, ~~2018,~~2019, assets measured at fair value on a nonrecurring basis primarily consisted of goodwill and long-lived assets for our ~~Rexall Health business within Other.~~

At March 31, 2018, assets measured at fair value on a nonrecurring basis consisted of goodwill, intangibles and other long-lived assets for our former (prior to the 2019 first quarter realignment in our operating segment structure) DistributionEuropean Pharmaceutical Solutions segment.

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 information. We considered a market approach as well as an income approach using the ~~DCF~~discounted cash flow (“DCF”) model to determine the fair value of the reporting unit.

~~Intangible~~

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Long-lived Assets

We ~~utilized a combination of an income approach~~utilize multiple approaches including the DCF model and market 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 long-range plans and include significant assumptions by management. Accordingly, the fair value assessment of the long-lived assets is considered a Level 3 fair value measurement.

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

~~At December 31, 2018~~We measure certain intangible and ~~March 31, 2018, we remeasured the contingent consideration liability related to our April 3, 2017 acquisition of CMM~~other long-lived assets at fair value on a nonrecurring ~~basis. Refer~~basis when they are deemed to ~~Financial Note 4, “Business Combinations” for more information on~~be other-than-temporarily impaired. An impairment charge is recorded when the cost of the asset exceeds its fair value ~~of the contingent consideration liability.~~and this condition is determined to be other-than-temporary.

There were 0 liabilities measured at fair value on a nonrecurring basis at September 30, 2019 and March 31, 2019.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


15.	Commitments and Contingent Liabilities

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

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

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

~~Significant developments in previously reported proceedings~~ and in ~~other litigation and claims, since the filing of~~Financial Note 24 to our ~~2018~~2019 Annual Report ~~and~~on Form 10-K as it was updated by Financial Note 15 to our Quarterly Report on Form 10-Q for the ~~quarters~~quarter ended June 30, ~~2018~~2019, which disclosure is incorporated in this footnote by this reference. The Company is vigorously defending itself against those claims and ~~September 30, 2018~~in those proceedings. Significant developments in those matters are ~~set out below. We are party to the legal proceedings~~ described below. ~~Unless otherwise stated,~~If we are ~~currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one~~unsuccessful in defending, or ~~a combination of more than one of these proceedings be successful, or should~~if we determine to settle, any ~~or a combination~~ of these matters, we may be required to pay substantial sums, ~~become~~be subject to ~~the entry of an~~ injunction and/or be forced to change ~~the manner in which~~how we operate our business, which could have a material adverse impact on our financial position or results of operations.

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

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

~~As previously disclosed, the~~The Company is a defendant in many cases ~~alleging~~asserting claims related to ~~the~~ distribution of controlled ~~substances to pharmacies, often together~~substances. We are named as defendants along with other pharmaceutical wholesale distributors, ~~and~~ pharmaceutical manufacturers and retail pharmacy ~~chains named as defendants.~~chains. The plaintiffs in these actions include state attorneys general, county and ~~city municipalities,~~municipal governments, hospitals, Indian tribes, pension funds, third-party payors and individuals. ~~The Company has~~These actions have been ~~served with more than 1,400 complaints~~ filed in state and federal courts throughout the United States, and in Puerto Rico and Canada. They seek monetary damages and other forms of relief based on a variety of causes of action, including negligence, public nuisance, unjust enrichment, civil conspiracy, as well as alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), state and federal controlled substances laws and other statutes.

Since December 5, 2017, nearly all ~~the~~such cases pending in federal district courts have been transferred for consolidated pre-trial proceedings to a multi-district litigation (“MDL”) ~~proceeding~~ in the United States District Court for the Northern District of Ohio captioned In re: National Prescription Opiate Litigation,Case No. 17-md-28-04. ~~On January 29, 2019,~~At present, there are approximately 2,300 cases under the ~~court entered a new case management order setting forth new deadlines~~jurisdiction of the MDL court. In the suits filed against the Company by Cuyahoga County, Ohio in October 2017 and ~~moving~~Summit County, Ohio in December 2017, the ~~trial date to~~parties reached an agreement in principle on October 21, 2019 ~~for~~to settle all claims against the ~~three Ohio bellwether cases,~~ ~~The County of Summit, Ohio v. Purdue Pharma L.P., et al.,~~ ~~Case No. 18-OP-45090 (N.D. Ohio);~~ ~~The~~ Company. County of Cuyahoga v. Purdue Pharma L.P., et al., Case No. ~~17-OP-45004~~1:17-op-45004-DAP (N.D. Ohio); ~~and~~ ~~City~~County of ~~Cleveland~~Summit, Ohio et al. v. ~~AmerisourceBergen Drug Corp.~~Purdue Pharma L.P., etet. al., Case No. 18-OP-4532 (N.D. Ohio.) On October 5, 2018, the magistrate judge issued a report and recommendation to the district court judge on defendants’ motions to dismiss in these three cases. The defendants filed objections to this report. On December 19, 2018, the court dismissed the City of Akron’s public nuisance claim and denied dismissal of all other claims challenged in defendants’ motions to dismiss. On December 31, 2018, the Court issued an order creating a “Track Two” litigation and selected two cases for this track, ~~Cabell County Commission, West Virginia v. AmerisourceBergen Drug Corp., et al.,~~ ~~Case No. 17-OP-45053 (N.D. Ohio) and~~ ~~City of Huntington, West Virginia v. AmerisourceBergen Drug Corp., et al.,~~ ~~Case No. 17-OP-45054~~1:18-op-45090-DAP (N.D. Ohio). The ~~Court also set~~Company does not admit liability and expressly denies wrongdoing. As a ~~briefing schedule~~result, the Company recorded a pre-tax charge of $82 million related to 2 Ohio counties within operating expenses for the ~~parties to address the viability~~second quarter of ~~plaintiffs’ public nuisance claims in each state and territory where an MDL plaintiff is located. On January 15, 2019, the Company filed its answer to the second amended complaint.~~2020.

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We are a party to discussions with the objective of achieving broad resolution of the remaining claims. Because of the large number of parties involved, together with the novelty and complexity of the issues, for which there may be different considerations among the parties, we cannot predict the successful resolution through a negotiated settlement. We believe we have valid defenses to the litigation and claims pending against us, and therefore if we are not able to achieve broad resolution, we will vigorously defend against all such claims. At this time, a loss associated with these claims, whether through settlement or litigation, is not probable and a reasonably possible range of loss is not estimable. 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.

The Company is also named in approximately 370 similar state court cases pending in 37 states plus Puerto Rico. These include actions filed by 19 state attorneys general, and some by or on behalf of individuals, including wrongful death lawsuits and putative class action lawsuits brought on behalf of children with Neonatal Abstinence Syndrome due to alleged exposure to opioids in utero. Trial dates have been set in several of these state cases.

On ~~December 12, 2018,~~April 3, 2017, Eli Inzlicht, a purported shareholder, filed a shareholder derivative complaint in the United States District Court for the Northern District of California against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the Drug Enforcement Administration (“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, and seeking restitution and disgorgement of all profits, benefits and other compensation obtained by the defendants from the Company and attorneys’ fees, Inzlicht v. McKesson Corporation, et.al., No. 5:17-cv-01850. On July 26, 2017, Vladimir Gusinsky, as trustee for the Vladimir Gusinsky Living Trust, a purported shareholder, filed a shareholder derivative complaint in the same court based on similar allegations, Vladimir Gusinsky, as Trustee for the Vladimir Gusinsky Living Trust v. McKesson Corporation, et.al., No. 5:17-cv-4248. On October 9, 2017, the court in ~~Gobierno de Puerto Rico v. Cardinal Health, Inc.~~consolidated the 2 matters, In re McKesson Corporation Derivative Litigation, ~~et al.,~~ Estado Libre Asociado de Puerto Rico, Tribunal de Primera Instancia, Centro Judicial de Bayamón Sala Superior, Civil Núm. SJ2018cv03958, dismissed plaintiff’s unjust enrichment claim and declined to dismiss claims of public nuisance, negligence/fault, and violation of Puerto Rico’s Fair Competition Act. No. 4:17-cv-1850.

On ~~December 27, 2018, the distributor defendants~~October 17, 2017, Chaile Steinberg, a purported shareholder, filed a ~~motion~~shareholder derivative complaint in the Delaware Court of Chancery against certain officers and directors of the Company and the Company as a nominal defendant, alleging violations of fiduciary duties relating to the Company’s previously disclosed agreement with the DEA and the Department of Justice and various United States Attorneys’ offices to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for ~~reconsideration. On December 28, 2018,~~controlled substances, and seeking damages and disgorgement of all profits, benefits and other compensation obtained by the ~~court denied~~defendants from the ~~distributors’ motion to dismiss in a case~~Company and attorneys’ fees, Steinberg v. McKesson Corporation, et.al., No. 2017-0736. NaN similar suits were thereafter filed by ~~eight West Virginia counties~~purported shareholders in the ~~circuit court~~Court of ~~Marshall County, West Virginia,~~ ~~Boone County Commission, et al., v. Purdue Pharma L.P., et al.,~~ Civil Action No. 17-C-248. On January 8, 2019, the court overseeing the Connecticut actions granted defendants’ motion to dismiss and dismissed all claims in suits filed by 21 municipalities for lack of subject matter jurisdiction, ~~City of New Haven v. Purdue Pharma, L.P., et al.~~, Judicial District of Hartford, Connecticut Superior Court, Docket No. X07 HHD CV 17 6086134. These municipalities appealed this decision on January 22, 2019. As previously reported, the court in a consolidated proceeding pending in Suffolk County, New York Supreme Court, ~~In re Opioid Litigation,~~ ~~Index No. 400000/2017, denied the distributors’ motions to dismiss. The distributors appealed this decision to the Appellate Division of the Supreme Court~~Chancery of the State of ~~New York on August 3, 2018.~~Delaware, including Police & Fire Ret. Sys. of the City of Detroit v. McKesson Corporation, et al., No. 2017-0803, Amalgamated Bank v. McKesson Corporation, et al., No. 2017-0881, and Greene v. McKesson Corporation, et al., No. 2018-0042. The court ordered that all 4 actions be consolidated. The consolidated matter is captioned In re McKesson Corporation Stockholder Derivative Litigation, No. 2017-0736.

~~As previously disclosed,~~Subject to definitive documentation and court approval, the ~~two~~parties reached an agreement in principle to resolve the shareholder derivative ~~complaints~~lawsuits. The settlement does not include any admission of liability, and McKesson expressly denies wrongdoing.

II. Other Litigation and Claims

On May 17, 2013, the Company was served with a complaint filed in the United States District Court for the Northern District of California ~~were consolidated under the caption~~ ~~In re McKesson Corporation Derivative Litigation, No. 4:17-cv-1850. On September 17, 2018, a Special Litigation Committee established~~ by the Board of Directors of the Company moved to stay the litigation while the Special Litigation Committee conducts an independent investigation concerning the plaintiffs’ allegations. On November 13, 2018, the court granted the motion to stay as to deposition discovery and denied the motion in all other respects.

~~As previously disclosed, on June 15, 2018, an amended complaint was filed in the United States District Court for the Southern District of Illinois~~True Health Chiropractic Inc., alleging that McKesson ~~Medical-Surgical~~sent unsolicited marketing faxes in violation of the Telephone Consumer Protection Act of 1991 (“TCPA”), as amended by the Junk Fax Protection Act of 2005 or JFPA, True Health Chiropractic Inc.~~, among others, violated the Sherman Act by restraining trade in the sale of safety and conventional syringes and safety IV catheters.~~ ~~Marion Diagnostic Center, LLC v. Becton, Dickinson, and Co.~~, et al., No. 18:1059. On July 20, 2018, the defendants filed a motion to dismiss and a hearing was held on October 17, 2018. On November 30, 2018, the district court granted the motion to dismiss, and dismissed the complaint with prejudice. On December 27, 2018, plaintiffs appealed the order to the United States Court of Appeals for the Seventh Circuit. On September 25, 2018, plaintiffs filed a complaint in the Eastern District of Pennsylvania alleging that the Company and McKesson Medical-Surgical Inc., among others, violated the Sherman Act by restraining trade in the sale of generic drugs. ~~Marion Diagnostic Center, LLC~~ v. McKesson Corporation, et al.,No. ~~2:18-cv-4137.~~

~~As previously disclosed, on April~~CV-13-02219 (HG). Plaintiffs seek statutory damages from $500 to $1,500 per violation plus injunctive relief. True Health Chiropractic later amended its complaint, adding McLaughlin Chiropractic Associates as an additional named plaintiff and McKesson Technologies Inc. as a defendant. Both plaintiffs alleged that the Company violated the TCPA by sending faxes that did not contain notices regarding how to opt out of receiving the faxes. On July 16, ~~2013, the Company’s wholly-owned subsidiary, U.S. Oncology, Inc. (“USON”) was served with a third amended~~ ~~qui tam~~ complaint filed in the United States District Court for the Eastern District of New York alleging that USON solicited and received illegal “kickbacks” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, ~~United States ex rel. Piacentile v. Amgen, Inc., et al.,~~ ~~CV 04-3983. Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On April 4, 2014, USON~~2015, plaintiffs filed a motion for class certification and on August 22, 2016, the court denied this motion, based, in part, on the grounds that identifying solicited faxes would require individualized inquiries as to ~~dismiss~~consent. On August 13, 2019, the ~~claims against it. On September 17, 2018,~~court denied defendants’ motion for summary judgment on the issue of whether the provision of fax numbers through product registration and the End User License Agreement constituted prior express invitation or permission to receive the disputed faxes. Also on August 13, 2019, the court granted ~~USON’s~~plaintiffs’ renewed motion ~~to dismiss with leave to amend. On November 16, 2018, the relators filed~~for class certification. The court has set a ~~Fourth Amended Complaint. On January 25, 2019, USON filed a motion to dismiss.~~trial date of August 30, 2020.

~~As previously disclosed, on June 17, 2014, the Company’s subsidiary, U.S. Oncology Specialty, LP (“USOS”) was served with a fifth amended~~ ~~qui tam~~ complaint filed in the United States District Court for the Eastern District of New York alleging that USOS solicited and received illegal “kickback” from Amgen in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, ~~United States ex rel. Hanks v. Amgen, Inc., et al.,~~ CV 08-03096. Previously, the United States declined to intervene in the case as to all allegations and defendants except for Amgen. On August 1, 2014, USOS filed a motion to dismiss the claims against it. On September 17, 2018, the court granted USOS’s motion to dismiss and gave the relator leave to file another action after the ~~Piacentile~~ ~~action is no longer pending. The relator appealed the order to the United States Court of Appeals for the Second Circuit, and on December 11, 2018, the defendants moved to dismiss the appeal.~~

~~As previously disclosed, on March 5, 2018, the Company’s subsidiary, RxC Acquisition Company (doing business as RxCrossroads) was served with a~~ ~~qui tam~~ complaint filed in the United States District Court for the Southern District of Illinois alleging that UCB, Inc. provided illegal “kickbacks” to providers, including services provided through RxC Acquisition Company, in violation of the Anti-kickback statute, the False Claims Act, and various state false claims statutes. ~~United States ex rel. CIMZHNCA, LLC v. UCB, Inc., et al.,~~ No. 17-cv-00765. The United States and the named states declined to intervene in the case. On April 25, 2018, the defendants filed a motion to transfer the suit to the United States District Court for the District of New Jersey. On December 17, 2018, the Department of Justice filed a motion to dismiss the complaint in its entirety.

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~~On November 27, 2018, the Company’s subsidiary, RxC Acquisition Company (doing business as RxCrossroads) was served with a~~ ~~qui tam~~ complaint filed in the United States District Court for the Eastern District of Pennsylvania alleging that EMD Serono, Inc. and Pfizer, Inc. provided illegal “kickbacks” to providers, including services provided through RxC Acquisition Company and others, in violation of the Anti-kickback statute, the False Claims Act, and various state false claims statutes. ~~United States ex rel.Harris et al. v. EMD Serono, Inc. et al., No. 16-5594. The United States and the named states declined to intervene in the case.~~ On December ~~17, 2018, the Department of Justice filed a motion~~30, 2017, 4 investment funds, which had allegedly entered into swap transactions regarding shares in Celesio AG that would have enabled them to ~~dismiss the complaint~~decide whether to accept McKesson Europe Holdings’s (formerly known as “Dragonfly GmbH & Co KGaA”) takeover offer in its entirety. On December 28, 2018, relators filed a second amended complaint, and on January 7, 2019, relators and defendants jointly moved for a stay on the defendants’ response deadline until after the Departmentacquisition of ~~Justice’s motion to dismiss has been resolved.~~

~~As previously disclosed, on April 3, 2018, a second amended~~ ~~qui tam~~ complaint was filed in the United States District Court for the Eastern District of New York by a relator, purportedly on behalf of the United States, 30 states, the District of Columbia, and two cities against the Company, McKesson Specialty Care Distribution, McKesson Specialty Distribution LLC, McKesson Specialty Care Distribution Joint Venture, L.P., Oncology Therapeutics Network Corporation, Oncology Therapeutics Network Joint Venture, L.P., U.S. Oncology, Inc. and U.S. Oncology Specialty, L.P., alleging that from 2001 through 2010 the defendants repackaged and sold single-dose syringes of oncology medications in a manner that violated the federal False Claims Act and various state and local false claims statutes. ~~United States ex rel. Omni Healthcare Inc. v. McKesson Corporation, et al.~~, 12-cv-06440. The United States and the named states have declined to intervene in the case. On October 15, 2018, the defendants filed a motion to dismiss the complaint, and a hearing on that motion was held on January 10, 2019.

~~As previously disclosed, on December 29, 2017, two investment funds holding shares in~~ Celesio AG, filed a complaint, ~~against the Company’s wholly-owned subsidiary McKesson Europe Holdings in a German court in Stuttgart, Germany,~~ ~~Polygon European Equity Opportunity Master Fund~~Davidson Kempner International (BVI) Ltd. et al. v. McKesson Europe Holdings GmbH & Co. KGaA, ~~No. 18~~No.16 O ~~455/~~475/17 ~~(the “Polygon” matter). The complaint alleges~~, claiming that the public tender offer document published by McKesson Europe ~~in its acquisition of Celesio AG~~ incorrectly ~~states~~stated that McKesson Europe’s acquisition of convertible bonds would not be treated as a relevant acquisition of shares for the purposes of triggering minimum pricing considerations under the German Takeover Offer Ordinance. On ~~December 30, 2017, four additional funds filed a substantially identical claim,~~ ~~Davidson Kempner International (BVI) Ltd., et al. v. McKesson Europe Holdings GmbH & Co. KGaA,~~ ~~No. 16 O 475/17 (the “Davidson” matter.) On May 11, 2018,~~March 15, 2019, the lower court ~~in the Polygon matter~~ dismissed the ~~claims against McKesson Europe.~~case. Plaintiffs appealed tothis ruling and, on October 9, 2019, the Higher Regional Court ~~(Oberlandesgericht)~~(Oberlandesgericht) of ~~Stuttgart. On December 19, 2018, the Higher Regional Court~~Stuttgart confirmed the full ~~dismissal. McKesson Europe filed its statement~~dismissal of ~~defense in~~this matter.

On March 5, 2018, the ~~Davidson matter on April 21, 2018 and the hearing is scheduled to take place on January 31, 2019.~~

~~As previously disclosed, on May 17, 2013, the~~Company’s subsidiary, RxC Acquisition Company (d/b/a RxCrossroads), was served with a qui tamcomplaint filed in July 2017 in the United States District Court for the ~~Northern~~Southern District of ~~California~~Illinois by a relator against RxC Acquisition Company, among others, alleging that ~~the company sent unsolicited marketing faxes~~UCB, Inc., provided illegal “kickbacks” to providers, including nurse educator services and reimbursement assistance services provided through RxC Acquisition Company, in violation of the ~~Telephone Consumer Protection~~Anti-Kickback Statute, the False Claims Act, ~~of 1991, as amended by the Junk Fax Protection Action of 2005,~~ ~~True Health Chiropractic~~and various state false claims statutes. United States ex rel. CIMZNHCA, LLC v. UCB, Inc., et al. ~~v. McKesson Corporation, et al.~~, ~~CV-13-02219.~~No. 17-cv-00765. The complaint seeks treble damages, civil penalties, and further relief. The United States and the states named in the complaint have declined to intervene in the suit. On ~~August 22, 2016,~~December 17, 2018, the United States filed a motion to dismiss the complaint in its entirety; this motion was denied on April 15, 2019. On June 7, 2019, the court denied ~~plaintiffs’~~the United States’ motion for ~~class certification.~~reconsideration. On ~~November 16, 2016, plaintiffs were granted leave to appeal that ruling~~July 8, 2019, the United States appealed to the United States Court of Appeals for the ~~Ninth~~Seventh Circuit ~~(“Ninth Circuit.”) On July 17, 2018,~~seeking interlocutory review of the ~~Ninth Circuit affirmed in part and reversed in part the district court’s~~ denial of ~~class certification and remanded~~its motion for reconsideration of the ~~case~~denial of the motion to dismiss the complaint. On September 3, 2019, the United States District Court for the Southern District of Illinois stayed the district court ~~for further proceedings. On January 25, 2019,~~proceedings pending the ~~Company filed~~appeal. The court has set a ~~petition for writ~~trial date of ~~certiorari in the Supreme Court of the United States asking the court to review the ruling by the Ninth Circuit.~~April 5, 2021.

On January 24, 2019, the Company was served with a qui tam complaint that had previously been unsealed in the United States District Court for the Eastern District of Texas, alleging that the Company and its subsidiary, U.S. Oncology, Inc., among others, received payments for unnecessary medical services in violation of the False Claims Act and the Texas Medicaid Fraud Prevention Act. United States ex rel. Nguyenv. McKesson Corp., et al., No. 4:15-00814. Previously, the United States and Texas declined to intervene in the case.

On ~~December 12, 2018,~~October 7, 2019, the Court dismissed the case with no finding of any violation or liability of the Company or its affiliate.

On May 21, 2019, Jean E. Henry, a purported Company shareholder, filed a shareholder derivative complaint in the Superior Court of San Francisco, California against certain current and former officers and directors of the Company, and the Company as a nominal defendant, alleging violations of fiduciary duties and waste of corporate assets with respect to an alleged conspiracy to fix the prices of generic drugs, Henry v. Tyler, et al., CGC-19-576119. On May 23, 2019, the Company removed the case to the United States District Court for the Northern District of California, Case No. 19-cv-02869. On August 26, 2019, plaintiff filed an amended complaint, removing all claims except for an alleged breach of fiduciary duty by the named current and former officers and directors of the Company.

In October 2019, the Company’s subsidiary RelayHealth Corporation (“RelayHealth”) was served with a3 purported class action ~~complaint~~complaints filed in the United States District Court for the Northern District of ~~California, alleging~~Illinois by 6 pharmacies. The complaints allege that ~~McKesson and several of its officers~~RelayHealth violated the ~~Securities Exchange~~Sherman Act ~~of 1934~~ by ~~reporting profits~~entering into an agreement with co-defendant Surescripts, LLC not to compete in the electronic prescription routing market, and ~~revenues from 2013 until early 2017~~by conspiring with Surescripts, LLC to monopolize that ~~were false and misleading, due to an alleged conspiracy to fix the prices of generic drugs.~~ ~~Evanston Police Pension Fund~~market, Powell Prescription Center, et al. v. ~~McKesson Corporation~~Surescripts, LLC, et al., No. ~~3:18-06525. On December 26, 2018, several plaintiffs filed motions for appointment as lead plaintiff with the court.~~1:19-cv-06627; Intergrated Pharmaceutical Solutions LLC v. Surescripts, LLC, et al., 1:19-cv-06778; Falconer Pharmacy, Inc. v. Surescripts LLC, et al., No. 1:19-cv-06627. The complaints seek treble damages and attorney fees and costs.

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III. Government Subpoenas and Investigations

From time to time, the Company receives subpoenas or requests for information from various government agencies. For example, in January 2019, the Company was served with a subpoena by the U.S. Department of Health and Human Services, Office of Inspector General, related to the Company’s participation in the Medicaid Drug Rebate Program. 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.~~

~~New York Opioid Statute~~

~~Legislative, regulatory or~~health care industry, ~~measures~~as well as to ~~address~~settlements. In April and June 2019, the misuse of prescription opioid medications could affect the Company’s business in ways that we may not be able to predict. For example, in April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the creation of an aggregate $100 million annual surcharge on all manufacturers and 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 December 19, 2018, the U.S. District CourtUnited States Attorney’s Office for the ~~Southern~~Eastern District of New York ~~found~~served grand jury subpoenas seeking documents related to the ~~law unconstitutional~~Company’s anti-diversion policies and ~~issued an injunction preventing~~procedures and its distribution of Schedule II controlled substances. The Company believes the ~~State~~subpoenas are part of ~~New York from enforcing~~a broader investigation by that office into pharmaceutical manufacturers’ and distributors’ compliance with the ~~law. On January 17,~~Controlled Substances Act and related statutes. In July 2019, the ~~State filed a notice of appeal. In addition, other states are considering legislation that could require us to pay taxes or assessments~~Drug Enforcement Administration served an administrative inspection warrant on the Company’s distribution ~~of opioid medications~~center in ~~those states. These proposed bills vary in~~West Sacramento, California seeking information about the ~~amounts~~Company’s compliance with the Controlled Substances Act and the means of calculation. Liabilities for taxes or assessments under any such laws will likely have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted.related statutes.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~


16.	Stockholders’ Equity

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”).

In July ~~2018,~~2019, the Company’s quarterly dividend was raised from ~~$0.34~~$0.39 to ~~$0.39~~$0.41 per common share for dividends declared on or after such date by the Board. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company's future earnings, financial condition, capital requirements and other factors.

Share Repurchase Plans

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

In ~~March 2018,~~May 2019, we entered into an ASR program with a third-party financial institution to repurchase ~~$500~~$600 million of the Company’s common stock. We ~~received 2.5~~repurchased a total of 4.7 million shares ~~in March 2018 and an additional 1.0 million shares in the first quarter of 2019. The March 2018 ASR program was completed~~ at an average price per share of ~~$143.66~~$127.68 during the first quarter of ~~2019.~~

~~In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.~~2020.

During the first quarter of ~~2019,~~2020, we repurchased ~~2.0~~0.7 million of the Company’s shares for ~~$297~~$84 million through open market transactions at an average price per share of ~~$147.92.~~$128.64. During the second quarter of ~~2019,~~2020, we repurchased ~~4.6~~5.2 million of the Company’s shares for ~~$580~~$750 million through open market transactions at an average price per share of ~~$127.39. During the third quarter of 2019, we repurchased 2.0 million of the Company’s shares for $250 million through open market transactions at an average price per share of $125.53.~~$144.28.

In December 2018, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. As of December 31, 2018, we received 1.6 million shares (or $200 million at the initial per share price of $122.15) representing the initial number of shares due under the December 2018 ASR program. The total number of shares to be ultimately repurchased by the Company under the December 2018 ASR program will be determined at the completion of the program based on the average daily volume-weighted average price of the Company’s common stock during this program, less a discount. The program is anticipated to be completed during the fourth quarter of 2019. The total authorization outstanding for repurchases of the Company’s common stock was ~~$3.7~~$2.0 billion at ~~December 31, 2018.~~

During the third quarter of 2019, we retired 5.0 million or $542 million of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $472 million and $70 million during the third quarter ofSeptember 30, 2019.

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Other Comprehensive Income (Loss)

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


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended September 30,					Six Months Ended September 30,
(In millions)	2018			2017			2018			2017			2019			2018		2019			2018
Foreign currency translation adjustments ⁽¹⁾
Foreign currency translation adjustments arising during period, net of income tax benefit of nil, nil, nil and nil ^{(2) (3)}	$	(188	)	$	30		$	(456	)	$	715		$	(114	)	$	5	$	(44	)	$	(268	)
Reclassified to income statement, net of income tax expense of nil, nil, nil and nil	—			—			—			—			—			—		—			—
	(188		)	30			(456		)	715			(114		)	5		(44		)	(268		)

Unrealized gains (losses) on net investment hedges arising during period, net of income tax (expense) benefit of ($27), $9, ($85) and $78 ⁽⁴⁾	75			(19		)	240			(127		)
Unrealized gains on net investment hedges arising during period, net of income tax expense of $29, $7, $20 and $58⁽⁴⁾													82			21		56			165
Reclassified to income statement, net of income tax expense of nil, nil, nil and nil	—			—			—			—			—			—		—			—
	75			(19		)	240			(127		)	82			21		56			165
Unrealized gains (losses) on cash flow hedges
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax (expense) benefit of ($5), $2, ($5) and $2	35			(16		)	37			(5		)
Unrealized gains on cash flow hedges
Unrealized gains on cash flow hedges arising during period, net of income tax expense of $4, nil, $10 and nil													13			2		25			2
Reclassified to income statement, net of income tax expense of nil, nil, nil and nil	—			—			—			—			—			—		—			—
	35			(16		)	37			(5		)	13			2		25			2
Changes in retirement-related benefit plans ⁽⁵⁾
Net actuarial loss and prior service cost arising during the period, net of income tax benefit of nil, nil, nil and nil	—			—			—			—
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense (benefit) of ($1), nil, $1 and nil ⁽⁶⁾	1			1			5			3
Net actuarial gain and prior service cost arising during the period, net of income tax benefit of $2, nil, $1 and nil													(9		)	—		(3		)	—
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of nil, $2, nil and $2 ⁽⁶⁾													1			3		2			4
Foreign currency translation adjustments and other, net of income tax expense of nil, nil, nil and nil	2			—			10			(10		)	5			1		7			8
Reclassified to income statement, net of income tax expense of $27, nil, $32 and nil ⁽⁷⁾													78			—		90			—
	3			1			15			(7		)	75			4		96			12

Other comprehensive income (loss), net of tax	$	(75	)	$	(4	)	$	(164	)	$	576		$	56		$	32	$	133		$	(89	)


(1)	Foreign currency translation adjustments primarily result from the conversion of non-U.S. dollar financial statements of our foreign subsidiary, McKesson Europe, into the Company’s reporting currency, U.S. dollars, during the ~~third~~second quarters and first ~~nine~~six months of ~~2019~~2020 and ~~2018.~~2019.

(2)

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

(3)

The ~~third~~second quarter and first ~~nine~~six months of ~~2019 include~~2020 includes net foreign currency translation losses of ~~$11~~$19 million and ~~$57~~$13 million and the ~~third~~second quarter and first ~~nine~~six months of ~~2018 include~~2019 includes net foreign currency translation ~~gains~~losses of ~~$12~~$7 million and ~~$160~~$46 million attributable to redeemable noncontrolling interests.

(4)

The ~~third~~second quarter and first ~~nine~~six months of 2020 include foreign currency gains of $91 million and $67 million on the net investment hedges from the €1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated notes and gain of $20 million and $9 million on the net investment hedges from the cross-currency swaps. The second quarter and first six months of 2019 include foreign currency gains of ~~$39~~$23 million and ~~$223~~$184 million on the net investment hedges from the €1.95 billion Euro-denominated notes and £450 million British pound sterling-denominated notes and gains of ~~$63~~$5 million and ~~$102~~$39 million on the net investment hedges from ~~the~~ cross-currency swaps. 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 €1.20 billion Euro-denominated notes and £450 million British pound sterling-denominated notes.


(5)	The ~~third~~second quarter and first ~~nine~~six months of 2020 include net actuarial gains of $1 million and the second quarter and first six months of 2019 include net actuarial gains of ~~nil~~NaN and ~~$2 million and the third quarter and first nine months of 2018 include net actuarial losses of nil and $1~~2 million which are attributable to redeemable noncontrolling interests.


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


(7)	The second quarter and first six months of 2020 reflect a reclassification of losses upon the termination of the Plan from accumulated other comprehensive loss to other income (expense), net in our condensed consolidated statement of operations.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in our accumulated other comprehensive income (loss), net of tax, by component, for the ~~third~~second quarter and ~~nine~~first six months of ~~2019 is~~2020 are as follows:


	Foreign Currency Translation Adjustments															Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustments, Net of Tax			Unrealized Gains 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, 2018	$	(1,480	)	$	(23	)	$	(59	)	$	(200	)	$	(1,762	)
Balance at June 30, 2019																$	(1,564	)	$	27	$	(25	)	$	(216	)	$	(1,778	)

Other comprehensive income (loss) before reclassifications	(188		)	75			35			2			(76		)	(114		)	82		13			(4		)	(23		)
Amounts reclassified to earnings and other	—			—			—			1			1			—			—		—			79			79
Other comprehensive income (loss)	(188		)	75			35			3			(75		)	(114		)	82		13			75			56
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(11		)	—			—			—			(11		)	(19		)	—		—			1			(18		)
Other comprehensive income (loss) attributable to McKesson	(177		)	75			35			3			(64		)	(95		)	82		13			74			74
Balance at December 31, 2018	$	(1,657	)	$	52		$	(24	)	$	(197	)	$	(1,826	)
Balance at September 30, 2019																$	(1,659	)	$	109	$	(12	)	$	(142	)	$	(1,704	)


	Foreign Currency Translation Adjustments															Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustments, Net of Tax			Unrealized Gains on Net Investment Hedges, Net of Tax		Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2018	$	(1,258	)	$	(188	)	$	(61	)	$	(210	)	$	(1,717	)
Balance at March 31, 2019																$	(1,628	)	$	53	$	(37	)	$	(237	)	$	(1,849	)

Other comprehensive income (loss) before reclassifications	(456		)	240			37			10			(169		)	(44		)	56		25			4			41
Amounts reclassified to earnings	—			—			—			5			5
Amounts reclassified to earnings and other																—			—		—			92			92
Other comprehensive income (loss)	(456		)	240			37			15			(164		)	(44		)	56		25			96			133
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(57		)	—			—			2			(55		)	(13		)	—		—			1			(12		)
Other comprehensive income (loss) attributable to McKesson	(399		)	240			37			13			(109		)	(31		)	56		25			95			145
Balance at December 31, 2018	$	(1,657	)	$	52		$	(24	)	$	(197	)	$	(1,826	)
Balance at September 30, 2019																$	(1,659	)	$	109	$	(12	)	$	(142	)	$	(1,704	)

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Information regarding changes in our accumulated other comprehensive income (loss), net of tax, by component for the second quarter and first six months of 2019 are as follows:



	Foreign Currency Translation Adjustments
(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Gains (Losses) on Net Investment Hedges, Net of Tax			Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at June 30, 2018	$	(1,492	)	$	(44	)	$	(61	)	$	(204	)	$	(1,801	)

Other comprehensive income before reclassifications	5			21			2			1			29
Amounts reclassified to earnings and other	—			—			—			3			3
Other comprehensive income	5			21			2			4			32
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(7		)	—			—			—			(7		)
Other comprehensive income attributable to McKesson	12			21			2			4			39
Balance at September 30, 2018	$	(1,480	)	$	(23	)	$	(59	)	$	(200	)	$	(1,762	)



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

Other comprehensive income (loss) before reclassifications	(268		)	165			2			8			(93		)
Amounts reclassified to earnings and other	—			—			—			4			4
Other comprehensive income (loss)	(268		)	165			2			12			(89		)
Less: amounts attributable to noncontrolling and redeemable noncontrolling interests	(46		)	—			—			2			(44		)
Other comprehensive income (loss) attributable to McKesson	(222		)	165			2			10			(45		)
Balance at September 30, 2018	$	(1,480	)	$	(23	)	$	(59	)	$	(200	)	$	(1,762	)

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


17.	Related Party Balances and Transactions

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

Refer to Financial Note ~~5, “Healthcare Technology Net Asset Exchange,~~2, “Investment in Change Healthcare Joint Venture,” for information regarding related party balances and transactions with Change ~~Healthcare.~~Healthcare Inc.


18.	Segments of Business

~~Commencing in the first quarter of 2019, a new segment reporting structure was implemented, and we~~We report our financial results in ~~three~~3 reportable ~~segments on a retrospective basis:~~segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in ~~Other also on a retrospective basis.~~Other. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. Assets by operating segment are not reviewed by management for the purpose of assessing performance or allocating resources.

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

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

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

Other primarily consists of the following:

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

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

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)

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


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended September 30,						Six Months Ended September 30,
(In millions)	2018			2017			2018			2017			2019			2018			2019			2018
Revenues
U.S. Pharmaceutical and Specialty Solutions ⁽¹⁾	$	44,279		$	41,969		$	126,866		$	122,854		$	45,979		$	41,610		$	90,144		$	82,587
European Pharmaceutical Solutions ⁽¹⁾	6,911			6,989			20,485			20,144			6,598			6,639			13,308			13,574
Medical-Surgical Solutions ⁽¹⁾	2,012			1,693			5,663			4,886			2,056			1,948			3,959			3,651
Other	3,006			2,966			8,876			8,845			2,983			2,878			5,933			5,870
Total Revenues	$	56,208		$	53,617		$	161,890		$	156,729		$	57,616		$	53,075		$	113,344		$	105,682

Operating profit ⁽⁸⁾
Operating profit (loss) ⁽²⁾
U.S. Pharmaceutical and Specialty Solutions ⁽²⁾⁽³⁾	$	671		$	565		$	1,824		$	1,750		$	639		$	610		$	1,218		$	1,153
European Pharmaceutical Solutions ⁽³⁾⁽⁴⁾	26			16			(524		)	(496		)	1			10			6			(550		)
Medical-Surgical Solutions	136			123			334			349			129			105			254			198
Other ^{(4) (5) (6)}	74			180			283			271
Other ^{(5) (6)}													(1,311		)	95			(1,170		)	209
Total	907			884			1,917			1,874			(542		)	820			308			1,010
Corporate Expenses, Net ⁽⁷⁾	(190		)	(120		)	(480		)	(337		)	(364		)	(167		)	(539		)	(290		)
Interest Expense	(67		)	(67		)	(194		)	(204		)	(64		)	(66		)	(120		)	(127		)
Income from Continuing Operations Before Income Taxes	$	650		$	697		$	1,243		$	1,333
Income (Loss) from Continuing Operations Before Income Taxes													$	(970	)	$	587		$	(351	)	$	593

Revenues, net by geographic area
United States	$	46,523		$	43,849		$	133,186		$	128,517		$	48,292		$	43,774		$	94,614		$	86,664
Foreign	9,685			9,768			28,704			28,212			9,324			9,301			18,730			19,018
Total Revenues	$	56,208		$	53,617		$	161,890		$	156,729		$	57,616		$	53,075		$	113,344		$	105,682


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


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

(3)

Our U.S. Pharmaceutical and Specialty Solutions segment’s operating profit for the ~~third~~second quarter and first ~~nine~~six months of 2020 includes $33 million and $48 million, and for the second quarter and first six months of 2019 includes ~~$21~~$22 million and ~~$64 million, and for the third quarter and first nine months of 2018 includes $2 million and $5~~$43 million pre-tax credits related to our last-in, first-out (“LIFO”) method of accounting for inventories. The higher LIFO inventory credits for the third quarter and first nine months of 2019 were primarily due to lower full year expectations for the net price increases compared to the same periods a year ago. Operating profit for the ~~third quarter and~~ first ~~nine~~six months of 2019 also includes ~~$104 million and $139~~$35 million of cash receipts for our share of antitrust legal settlements and a $60 million pre-tax charge related to a customer bankruptcy. In addition, operating profit for the first nine months of 2018 includes a pre-tax gain of $43 million ($26 million after-tax) recognized from the 2018 second quarter sale of an equity investment.settlements.

~~(3)~~(4)

European Pharmaceutical Solutions segment’s operating profit for the first ~~nine~~six months of 2019 includes non-cash goodwill impairment charges of $570 million (pre-tax and after-tax) of $570 million. European Pharmaceutical Solutions segment’s operating profit for the first nine months of 2018 includes pre-tax charges of $242 million ($202 million after-tax) primarily related to the impairment of certain long-lived assets and employee severance for our U.K. retail businesses as well as the previously discussed non-cash goodwill impairment charge (pre-tax and after-tax) of $350 million..

~~(4)~~(5)

Operating profit (loss) for Other for the ~~third~~second quarter and first ~~nine~~six months of 2019 includes goodwill and long-lived asset impairment charges of $56 million (pre-tax and after-tax) recognized for our Rexall Health retail business. The first nine months of 2019 operating profit for Other include pre-tax restructuring, impairment and ~~asset impairment~~related charges of ~~$89~~$42 million ~~($83~~and $80 million ~~after-tax)~~ primarily associated with the closure of retail pharmacy stores within our Canadian business. The first ~~nine~~six months of 2019 ~~includes a pre-tax and after-tax gain from~~include escrow settlement gain of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to our 2017 third quarter acquisition of Rexall Health. In addition, operating profit for the third quarter and first nine months of 2019 includes a pre-tax gain of $56 million ($41 million after-tax) recognized from the 2019 third quarter sale of an equity investment.

~~(5)~~(6)

Operating profit (loss) for Other for the second quarter and first ~~nine~~six months of 2020 includes pre-tax impairment charge of $1,157 million and a pre-tax dilution loss of $246 million associated with our investment in Change Healthcare JV. Operating profit (loss) for Other for the second quarter and first six months of 2019 includes a pre-tax credit of $90 million ~~($66 million after-tax)~~ representing the derecognition of the TRA liability payable to the shareholders of ~~Change.~~Change Healthcare Inc. Operating profit (loss) for Other also includes our proportionate share of loss from Change Healthcare JV of ~~$50~~$51 million and ~~$162~~$47 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2019,~~2020 and ~~$90~~$56 million and ~~$271~~$112 million for the ~~third~~second quarter and first ~~nine~~six months of ~~2018.~~

~~(6)~~

Operating profit for Other for the third quarter and first nine months of 2018 includes a pre-tax gain of $109 million ($30 million after-tax) from the 2018 third quarter sale of our EIS business and a pre-tax credit of $46 million ($30 million after-tax) representing a reduction in our TRA liability. Additionally, operating profit for Other for the first nine months of 2018 includes a pre-tax gain of $37 million ($22 million after-tax) from the Healthcare Technology Net Asset Exchange related to the final net working capital and other adjustments.2019.

(7)

Corporate expenses, net, for the ~~third~~second quarter and first ~~nine~~six months of 2020 include pre-tax settlement charges of $105 million and $122 million from the termination of our defined benefit pension plan and a settlement charge of $82 million (pre-tax and after-tax) related to opioid claims. The second quarter and first six months of 2020 includes $36 million and $72 million, and for the second quarter and first six months of 2019 ~~include a~~includes $43 million and $59 million pre-tax ~~restructuring charge~~charges of ~~$31 million ($23 million after-tax) related to our corporate headquarters relocation announced during the third quarter of 2019.~~


~~(8)~~	~~Segment operating profit includes gross profit, net of operating expenses, as well as other income, net, for our operating segments.~~opioid-related costs, primarily litigation expenses.

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McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)


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

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2018~~2019 previously filed with the SEC on May ~~24, 2018~~15, 2019 (“~~2018~~2019 Annual Report”).

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

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

~~2019~~ Operating Segments

~~Commencing in the first quarter of 2019, a new segment reporting structure was implemented, and we~~We report our financial results in three reportable ~~segments on a retrospective basis:~~segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in ~~Other also on a retrospective basis.~~Other. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. Refer to Financial Note 18, “Segments of ~~Business”~~Business,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

RESULTS OF OPERATIONS

Overview of Consolidated Results:


(Dollars in millions, except per share data)	Quarter Ended December 31,									Nine Months Ended December 31,									Quarter Ended September 30,											Six Months Ended September 30,
	2018			2017			Change			2018			2017			Change			2019				2018				Change			2019				2018				Change
Revenues	$	56,208		$	53,617		5		%	$	161,890		$	156,729		3		%	$	57,616			$	53,075			9		%	$	113,344			$	105,682			7		%

Gross Profit	2,970			2,715			9			8,553			8,109			5			$	2,867			$	2,804			2			$	5,654			$	5,583			1

Gross Profit Margin	5.28			5.06			22		bp	5.28			5.17			11		bp	4.98			%	5.28			%	(30	)	bp	4.99			%	5.28			%	(29	)	bp

Operating Expenses:
Operating Expenses	(2,156		)	(1,984		)	9		%	(6,219		)	(5,920		)	5		%	$	(2,196	)		$	(2,033	)		8		%	$	(4,326	)		$	(4,063	)		6		%
Goodwill Impairment Charges	(21		)	—			NM			(591		)	(350		)	69			—				—				—			—				(570		)		(100	)
Restructuring and Asset Impairment Charges	(110		)	(6		)	NM			(288		)	(242		)	19
Gain from Sale of Business	—			109			(100	)		—			109			(100	)
Restructuring, Impairment and Related Charges																			(45		)		(82		)		(45	)		(68		)		(178		)		(62	)
Total Operating Expenses	(2,287		)	(1,881		)	22		%	(7,098		)	(6,403		)	11		%	$	(2,241	)		$	(2,115	)		6		%	$	(4,394	)		$	(4,811	)		(9	)	%

Operating Expenses as a Percentage of Revenues	4.07			3.51			56		bp	4.38			4.09			29		bp	3.89			%	3.98			%	(9	)	bp	3.88			%	4.55			%	(67	)	bp

Other Income, Net	84			20			320		%	144			102			41		%
Other Income (Expense), Net																			$	(78	)		$	20			(490	)	%	$	(41	)		$	60			(168	)	%

Loss from Equity Method Investment in Change Healthcare	(50		)	(90		)	(44	)		(162		)	(271		)	(40	)

Equity Earnings and Charges from Investment in Change Healthcare Joint Venture																			(1,454		)		(56		)		NM			(1,450		)		(112		)		NM

Interest Expense	(67		)	(67		)	—			(194		)	(204		)	(5	)		(64		)		(66		)		(3	)		(120		)		(127		)		(6	)

Income from Continuing Operations Before Income Taxes	650			697			(7	)		1,243			1,333			(7	)
Income Tax (Expense) Benefit	(123		)	263			(147	)		(245		)	46			(633	)
Income from Continuing Operations	527			960			(45	)		998			1,379			(28	)
(Loss) Income from Discontinued Operations, Net of Tax	(1		)	1			(200	)		1			3			(67	)
Net Income	526			961			(45	)		999			1,382			(28	)
Income (Loss) from Continuing Operations Before Income Taxes																			(970		)		587				(265	)		(351		)		593				(159	)
Income Tax Benefit (Expense)																			294				(35		)		(940	)		158				(122		)		(230	)
Income (Loss) from Continuing Operations																			(676		)		552				(222	)		(193		)		471				(141	)
Income (Loss) from Discontinued Operations, Net of Tax																			(1		)		1				(200	)		(7		)		2				(450	)
Net Income (Loss)																			(677		)		553				(222	)		(200		)		473				(142	)
Net Income Attributable to Noncontrolling Interests	(57		)	(58		)	(2	)		(169		)	(169		)	—			(53		)		(54		)		(2	)		(107		)		(112		)		(4	)
Net Income Attributable to McKesson Corporation	$	469		$	903		(48	)	%	$	830		$	1,213		(32	)	%
Net Income (Loss) Attributable to McKesson Corporation																			$	(730	)		$	499			(246	)	%	$	(307	)		$	361			(185	)	%

Diluted Earnings Per Common Share Attributable to McKesson Corporation
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	2.41		$	4.32		(44	)	%	$	4.17		$	5.75		(27	)	%	$	(3.99	)		$	2.51			(259	)	%	$	(1.62	)		$	1.79			(191	)	%
Discontinued Operations	(0.01		)	0.01			(200	)		0.01			0.01			—			—				—				—			(0.03		)		0.01				(400	)
Total	$	2.40		$	4.33		(45	)	%	$	4.18		$	5.76		(27	)	%	$	(3.99	)		$	2.51			(259	)	%	$	(1.65	)		$	1.80			(192	)	%

Weighted Average Diluted Common Shares	195			208			(6	)	%	199			210			(5	)	%	183				199				(8	)	%	185				201				(8	)	%

bp - basis points

NM - not meaningful

3941

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Revenues

Revenues increased in ~~2019~~the second quarter and first half of 2020 compared to the same periods a year ago primarily due to market growth, including expanded business with existing customers and our business acquisitions including our 2019 first quarter acquisition of Medical Specialties Distributors LLC (“MSD”), partially offset by loss of customers within our U.S. Pharmaceutical and Specialty Solutions segment.customers. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversion.

Gross Profit

Gross profit increased in ~~2019~~the second quarter and first half of 2020 primarily due to market growth, partially offset by ~~loss~~unfavorable effects of ~~customers. In addition,~~foreign currency exchange fluctuations. Gross profit in the first half of 2020 was also favorably impacted by an acquisition. Gross profit margin decreased in 2020 due to our mix of businesses.

Additionally, gross profit in the second quarter and first half of 2020 was favorably affected by higher last-in, first-out (“LIFO”) credits, and gross profit ~~margin for~~in the ~~third quarter and~~ first ~~nine months~~half of 2019 ~~were favorably affected by~~included $35 million of net cash proceeds representing our share of antitrust legal settlements of $104 million and $139 million, our business acquisitions and higher last-in, first-out (“LIFO”) credits, as further discussed below. Gross profit and gross profit margin for 2019 were unfavorably affected by the government reimbursement reductions in the United Kingdom (“U.K.”) and generics price decline in Canada. Gross profit and gross profit margin for the nine months of 2019 were also unfavorably affected by the 2018 third quarter sale of our Enterprise Information Solutions (“EIS”) business.settlements.

LIFO inventory credits were ~~$21~~$33 million and $2$22 million in the ~~third~~second quarters of 2020 and 2019 and ~~2018 and $64~~$48 million and $5$43 million in the first ~~nine months~~half of ~~2019~~2020 and ~~2018.~~2019. Our U.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits ~~price-related~~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 or benefit~~credit is based on our estimates of annual LIFO ~~expense or benefit~~credit which are impacted by expected changes in year-end inventory quantities, product mix and manufacturer pricing practices, which may be influenced by market and other external influences. Changes to any of the above factors could have a material impact to our annual LIFO ~~expense or benefit.~~credit. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year. The higher LIFO inventory credits for the third quarter and first nine months of 2019 were primarily due to lower full year expectations for the net price increases compared to the same periods a year ago.

Operating Expenses

Operating expenses ~~and operating expenses as a percentage of revenues~~ increased for the ~~third~~second quarter of 2020 and decreased for the first ~~nine months~~half of ~~2019~~2020 compared to the same periods a year ago. Operating expenses as a percentage of revenues decreased for ~~2019~~the second quarter and ~~2018 were affected by~~first half of 2020 compared to the same periods a year ago. Operating expenses included the following significant items:

2019

~~Pre-tax restructuring and asset impairment charges of $110 million ($92 million after-tax) for the third~~ first quarter of 2019 and $288 million ($244 million after-tax) for the first nine months of 2019, primarily representing employee severance and exit-related costs related to our strategic growth initiative and asset impairment charges, as further discussed below;

~~Non-cash~~ goodwill impairment charges of $570 million (pre-tax and after-tax) ~~recognized in the first quarter of 2019 related to~~for our ~~two reporting units within the~~ European Pharmaceutical Solutions ~~segment, and $21 million (pre-tax and after-tax) recognized~~segment. Refer to Financial Note 4, “Goodwill Impairment Charges,” to the accompanying condensed consolidated financial statements appearing in ~~the third~~this Quarterly Report on Form 10-Q for more information;

2019 first quarter ~~of 2019 related to our Rexall Health reporting unit included in Other, as further described below;~~

~~Gain~~gain from an escrow settlement of $97 million (pre-tax and after-tax) ~~recognized in the first quarter of 2019~~ representing certain indemnity and other claims related to our third quarter 2017 acquisition of Rexall Health;

A2019 second quarter pre-tax credit of $90 million ~~($66 million after-tax) recognized in the second quarter of 2019~~ related to the derecognition of a ~~tax receivable agreement (“TRA”)~~ payable to the shareholders of Change Healthcare, ~~Holdings,~~ Inc. ~~(“Change”)~~;

2020 second quarter charge of $82 million (pre-tax and after-tax) in connection with an agreement reached in principle to settle all opioid-related claims filed by two Ohio counties, as further discussed below;

Opioid-related pre-tax expenses of $36 million and $34 million in the second quarters of 2020 and 2019, and $72 million and $76 million in the first half of 2020 and 2019, primarily related to litigation expenses; and

Lower restructuring, impairment and related charges and favorable effects of foreign currency exchange fluctuations for the second quarter and first half of 2020

4042

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

~~Higher operating expenses due~~Opioid-Related Litigation and Claims

The Company is a defendant in over 2,500 cases asserting claims related to ~~our business acquisitions~~distribution of controlled substances (opioids). Nearly all such cases pending in federal district courts were transferred to a multi-district litigation (“MDL”) in the United States District Court for the ~~third quarter~~Northern District of Ohio, while other cases are proceeding in state and ~~first nine months~~other courts. We regularly are named as a defendant in similar, new cases. We are a party to discussions with the objective of ~~2019;~~

~~An increase in charges~~achieving broad resolution of the remaining claims. Because of the large number of parties involved, together with the novelty and complexity of the issues, for which there may be different considerations among the parties, we cannot predict the successful resolution through a negotiated settlement. On October 21, 2019, we disclosed a settlement with two Ohio counties in the ~~third quarter and~~ first ~~nine months of 2019 related to a customer bankruptcy; and~~

~~Higher opioid-related costs primarily related to litigation expenses for the third quarter and first nine months of 2019, as further described below.~~

~~2018~~

A pre-tax gain of $109 million ($30 million after-tax) recognized from the fiscal 2018 third quarter sale of our Enterprise Information Solutions (“EIS”) business within our former (prior to the 2019 first quarter realignment in our operating segment structure) Technology Solutions segment;

~~A pre-tax credit of $46 million ($30 million after-tax) recognized in the third quarter of 2018 representing a reduction in our TRA liability within our former Technology Solutions segment as a result~~track of the ~~enactment~~MDL cases, for which we recorded a pre-tax charge of ~~the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”);~~

~~Pre-tax restructuring and asset impairment charges of $6~~$82 million ~~($5 million after-tax)~~within operating expense for the third quarter of 2018 and pre-tax restructuring and asset impairment charges of $242 million ($202 million after-tax) for the first nine months of 2018, primarily representing asset impairment charges (as further described below), exit-related costs and employee severance related to McKesson Europe’s U.K. retail business;

~~Non-cash goodwill impairment charges of $350 million (pre-tax and after-tax) recognized in~~ the second quarter of ~~2018 related~~2020. 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 ~~our McKesson Europe AG (“McKesson Europe”) reporting unit, within our former (prior~~Financial Note 15, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q for more information.

Restructuring Initiatives

During 2019, ~~first quarter realignment in our operating segment structure) Distribution Solutions segment; and~~

A pre-tax gain of $37 million ($22 million after-tax) for the first nine months of 2018, which was recognized in the first quarter of 2018 upon the finalization of net working capital and other adjustments relatedwe committed to ~~the fourth quarter 2017 contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the Change Healthcare joint venture.~~

~~Strategic Growth Initiative~~

~~On April 25, 2018, the Company announced a strategic growth initiative (the “Growth Initiative”)~~various restructuring initiatives intended to drive long-term incremental profit growth and increase operational efficiency. The ~~initiative consists~~initiatives consist of ~~multiple growth priorities and plans to optimize~~the optimization of the Company’s operating models and cost structures primarily through centralization and outsourcing of certain administrative functions and cost management.

~~As part~~ The initiatives also consist of ~~the preliminary phase of the Growth Initiative, we committed to implement~~implementing certain actions including a reduction in workforce, reorganization and consolidation of our business operations and related headcount reductions, the closures of retail pharmacy stores in Europe as well as other facility ~~consolidation and store closures, which will~~closures. This set of initiatives are expected to be ~~substantially~~ completed by ~~2020. In~~the end of 2021. Additionally, we committed to certain actions in connection with ~~this preliminary phase, we expect to record total after-tax charges~~the previously announced relocation of approximately $150 million to $210 million. We recorded pre-tax charges of $19 million ($14 million after-tax) during the third quarter of 2019, and $130 million ($114 million after-tax) during the first nine months of 2019. The charges primarily represent employee severance, exit-related costs and asset impairment charges. Estimated remaining charges primarily consist of exit-related costs.

~~On November 30, 2018, the Company announced that its~~our corporate headquarters ~~will be relocated~~ from San Francisco, California to ~~Las Colinas,~~Irving, Texas, ~~to improve efficiency, collaboration and cost competitiveness,~~which became effective April 1, 2019. We anticipate that the relocation will be completed by ~~the fourth quarter of~~January 2021. ~~As a result, during the third quarter of 2019,~~In connection with these initiatives, we ~~recorded a pre-tax charge of $31 million ($23 million after-tax) primarily representing employee severance. We~~ expect to record total pre-tax charges of approximately ~~$60~~$520 millionto ~~$120 million. The estimated~~$660 million, of which $397 million of pre-tax charges were recorded to date primarily representing employee severance, exit-related costs, asset impairment charges and accelerated depreciation. Estimated remaining charges primarily ~~consists~~consist of ~~lease~~facility and other exit costs and ~~employee retention and relocation expenses.~~

As part of the Growth Initiative, we expanded the existing outsourcing arrangement with a third-party vendor in December 2018. We continue to commit to achieve operational efficiency through further centralization of certain functions and outsourcing.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Asset Impairment Charges~~

During the third quarter of 2019, we performed an interim impairment test of long-lived assets for our Rexall Health retail business due to the decline in the estimated future cash flows primarily driven by a lower projected overall growth rate resulting from the ongoing impact of government regulations. As a result, we recognized a non-cash charge of $35 million (pre-tax and after-tax) to impair certain long-lived assets at retail stores and certain intangible assets (primarily customer relationships).

During the first quarter of 2019, we performed an interim impairment test of long-lived assets primarily for our U.K. retail business due to the decline in the estimated future cash flows driven by additional U.K. government reimbursement reductions announced on June 29, 2018. As a result, we recognized a non-cash pre-tax charge of $20 million ($16 million after-tax) to impair the carrying value of certain intangible assets (primarily pharmacy licenses).

employee-related costs. Refer to Financial Note 2,3, “Restructuring, Impairment and ~~Asset Impairment~~Related Charges,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form ~~10-Q.~~10-Q for more information on various initiatives.

~~Opioid-Related Costs~~Goodwill Impairment

As previously disclosed in our 2019 Annual Report on Form 10-K, the ~~Company is a defendant~~estimated fair value of our McKesson Canada reporting unit exceeded the carrying value as part of our 2019 annual goodwill impairment test. However, other risks, expenses and future developments, such as additional government actions and material changes in ~~many cases alleging claims related~~key market assumptions that we were unable to anticipate as of the ~~distribution~~2019 testing date may require us to revise the projected cash flows, which could adversely affect the fair value of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. In addition, legislative,our McKesson Canada reporting unit in Other in future periods.

State Opioid Statutes

Legislative, regulatory or industry measures to address the misuse of prescription opioid medications could affect the Company’s business in ways that we may not be able to predict. ~~For example, in~~In April 2018, the State of New York adopted the Opioid Stewardship Act (the “OSA”) which required the ~~creation~~imposition of an ~~aggregate $100 million~~ 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. ~~On January 17,~~The State of New York appealed to the U.S. Court of Appeals to the Second Circuit but did not seek a stay of the district court’s ruling. During the third quarter of 2019, we reversed the previously accrued estimated liability under the New York State OSA. The State of New York has subsequently adopted an excise tax on sales of opioids in the State, ~~filed a notice of appeal.~~which became effective July 1, 2019. The excise tax would apply only to the first sale occurring in New York, and thus may not apply to sales from the Company’s distribution centers in New York to New York customers. In addition, ~~other~~certain states ~~are considering~~have now passed legislation that could require us to pay taxes or assessments on the distribution of opioid medications in those states. Other states are also considering similar legislation. These proposed and passed bills vary in the amounts and the means of calculation. Liabilities for taxes or assessments under any such laws ~~will likely~~could have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted. ~~Operating expenses for~~Taxes or assessments incurred under state opioid statutes were not material during the ~~third~~second quarter and first ~~nine~~six months of 2020 and 2019.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Other Income (Expense), Net:Other income, net, decreased for the second quarter and first half of 2020 compared to the same periods a year ago primarily due to pension settlement charges, as further described below. In addition, other income, net for the first half of 2020 was unfavorably impacted by the 2019 ~~include opioid-related costs~~higher gains recognized from the sale of ~~$20~~investments, partially offset by higher settlement gains from our net investment hedges and forward contracts.

Other income, net, for the second quarter and first half of 2020 includes pre-tax settlement charges of $105 million ~~($15~~and $122 million ~~after-tax), and $96 million ($75 million after-tax) primarily~~ related to ~~litigation expenses.~~the Company’s previously approved termination of its frozen U.S. defined benefit pension plan. In connection with the plan termination, we purchased annuity contracts from an insurer that will pay and administer the future pension benefits of the remaining participants.

Equity Earnings and Charges from Investment in Change Healthcare Joint Venture: Our investment in Change Healthcare LLC (“Change Healthcare JV”) is accounted for using the equity method of accounting. Our proportionate share of loss from investment in Change Healthcare JV was $51 million and $56 million for the second quarters of 2020 and 2019, and $47 million and $112 million for the first half of 2020 and 2019. During the first quarter of 2020 and the second quarter and first half of 2019, we owned approximately 70% of this joint venture.

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

Since the completion of its IPO in July 2019, the fair value from the trading prices of Change Healthcare Inc.’s public common stock has been below the corresponding carrying value of our investment in Change Healthcare JV, triggering an other-than-temporary impairment (“OTTI”) evaluation. As of September 30, 2019, we expect to exit our investment in Change Healthcare JV within the next six to twelve months. In light of our planned exit and the corresponding publicly-traded share price of Change Healthcare Inc., we concluded an OTTI has occurred during our second quarter of 2020 and recorded a pre-tax impairment charge of $1,157 million, representing the difference between the carrying value of our investment and the fair value derived from the corresponding closing price of Change Healthcare Inc.’s common stock at September 30, 2019.

We expect to complete a tax-efficient exit from our investment in Change Healthcare JV through a distribution of the shares of a subsidiary holding all of our interests in the Change Healthcare JV to our shareholders, followed by a merger of such subsidiary with and into Change Healthcare Inc. in exchange for shares of common stock in Change Healthcare Inc. (“Qualified McKesson Exit”). If the Qualified McKesson Exit does not qualify as a tax-efficient transaction, Change Healthcare Inc. has agreed to pay us 85% of related cash tax savings realized subsequent to the spin-off or split-off and, in certain circumstances, if the failure of the Qualified McKesson Exit to qualify as a tax efficient transaction is due to Change Healthcare Inc.’s failure to comply with a tax matters agreement, to indemnify us for certain tax-related losses. In the event of a partial exit, Change Healthcare Inc. will be required to pay us 85% of the net cash tax savings realized from the exchange of a portion of our interest in Change Healthcare JV for shares of common stock in Change Healthcare Inc.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Transaction-Related Expenses and Adjustments

Transaction-related expenses and adjustments generally included transaction and integration expenses as well as gains and losses that are directly related to acquisitions and divestitures. These expenses were $282 million and $63 million for the second quarters of 2020 and 2019 and $326 million and $115 million for the first half of 2020 and 2019.

Transaction-related expenses and adjustments were as follows:



	Quarter Ended September 30,				Six Months Ended September 30,
(Dollars in millions)	2019		2018		2019		2018
Operating Expenses
Integration related expenses	$	16	$	35	$	33	$	51
Restructuring, severance and relocation	—		1		—		4
Transaction closing expenses	—		1		—		2
Other Expenses ⁽¹⁾	266		26		293		58
Transaction-Related Expenses and Adjustments	$	282	$	63	$	326	$	115

(1)

Includes our proportionate share of transaction and integration expenses incurred by Change Healthcare JV, excluding certain fair value adjustments, which were recorded within equity earnings and charges from investment in Change Healthcare joint venture. The second quarter and first half of 2020 includes a pre-tax dilution loss of $246 million as a result of the Change Healthcare JV investment ownership dilution from approximately 70% to approximately 58.5%.

Amortization Expenses of Acquired Intangible Assets

Amortization expenses of intangible assets directly related to business acquisitions and our investment in Change Healthcare JV were $181 million and $198 million for the second quarters of 2020 and 2019 and $370 million and $397 million for the first half of 2020 and 2019. The amounts are primarily recorded in operating expenses and equity earnings and charges from investment in Change Healthcare joint venture.

Income Taxes: During the second quarters of 2020 and 2019, we recorded income tax benefit of $294 million and expense of $35 million related to continuing operations. During the first half of 2020 and 2019, we recorded income tax benefit of $158 million and expense of $122 million related to continuing operations. During the second quarter of 2020, no tax benefit was recognized for an agreement reached in principle with certain counties in the State of Ohio. Refer to Financial Note 15, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q.

~~2019 Goodwill Impairments~~

Q for more information. Upon finalization of the settlement agreement, the Company will evaluate the tax deductibility of the expected payment. During the first ~~quarter~~half of 2019, ~~segment changes,~~no tax benefit was recognized for the pre-tax goodwill impairment charge of $570 million related to our European Pharmaceutical Solutions segment was split into two distinct reporting units - retail pharmacy operations (“Consumer Solutions”) and wholesale operations (“Pharmacy Solutions”). As a result, we were required to perform a goodwill impairment testgiven that this charge is not deductible for these two new reporting units and recorded a non-cash goodwill impairment charge of $238 million (pre-tax and after-tax) in the first quarter of 2019 primarily because the estimated fair value of the Pharmacy Solutions reporting unit was determined to be lower than its reassigned carrying value. Additionally, during the first quarter of 2019, these two reporting units had a decline in the estimated future cash flows primarily driven by additional U.K. government reimbursement reductions which were announced on June 29, 2018. Accordingly, we performed an interim goodwill impairment test for these reporting units. As a result, the estimated fair value of these reporting units was determined to be lower than the carrying value and we recorded non-cash goodwill impairment charges of $332 million (pre-tax and after-tax) primarily for our Consumer Solutions reporting unit within the European Pharmaceutical Solutions segment. During the third quarter of 2019, we also recorded a non-cash goodwill impairment charge of $21 million (pre-tax and after-tax) for our Rexall Health reporting unit, included in Other. The charges were recorded under the caption, “Goodwill Impairment Charges” within operating expenses in the accompanying condensed consolidated statements of operations. At December 31, 2018, our Consumer Solutions and Pharmacy Solutions reporting units’ remaining goodwill balances were $461 million and $732 million.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Other risks, expenses and future developments, such as additional government reimbursement reductions, increased regulatory uncertainty including the impact of the U.K.’s potential exit from the European Union (commonly referred to as “Brexit”) and material changes in key market assumptions that we were unable to anticipate as of the testing date may require us to further revise the projected cash flows, which could adversely affect the fair value of our reporting units in future periods. As a result, we may be required to record additional impairment charges in future reporting periods. Refer to Financial Note 3, “Goodwill Impairment Charges” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

~~Other Income, Net:Other income, net, for the third quarter and first nine months of 2019 increased compared to the same periods a year ago primarily due to higher gains recognized from the sales of investments.~~

~~Loss from Equity Method Investment in Change Healthcare:~~ Our investment in Change Healthcare is accounted for using the equity method of accounting. Our proportionate share of loss from equity method investment in Change Healthcare was $50 million and $90 million for the third quarters of 2019 and 2018, and $162 million and $271 million for the first nine months of 2019 and 2018. Our proportionate share of loss for 2019 and 2018 includes amortization expenses associated with equity method intangible assets and integration expenses incurred by the joint venture and for 2018 also includes certain transaction expenses. The amounts are recorded under the caption, “Loss from Equity Method Investment in Change Healthcare,” in our condensed consolidated statements of operations. Refer to Financial Note 5, “Healthcare Technology Net Asset Exchange,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q.

~~Acquisition-Related Expenses and Adjustments~~

Acquisition-related expenses, which primarily included transaction and integration expenses that were directly related to business acquisitions, were $52 million and $43 million in the third quarters of 2019 and 2018 and $167 million and $95 million for the first nine months of 2019 and 2018. The first nine months of 2018 also includes a pre-tax gain of $37 million ($22 million after-tax) associated with the final net working capital and other adjustments related to 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) 2018 2017 2018 2017
Operating Expenses
Integration related expenses $ 26
$ 12
$ 77
$ 27
Restructuring, severance and relocation —
12
4
18
Transaction closing expenses 1
—
3
11
Gain on Healthcare Technology Net Asset Exchange —
—
—
(37 )
Other Expenses ⁽¹⁾
25
19
83
76
Acquisition-Related Expenses and Adjustments $ 52
$ 43
$ 167
$ 95


~~(1)~~	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”.

~~Amortization Expenses of Acquired Intangible Assets~~

Amortization expenses of intangible assets directly related to business acquisitions and the Healthcare Technology Net Asset Exchange were $197 million and $193 million for the third quarters of 2019 and 2018, and $594 million and $584 million for the first nine months of 2019 and 2018. The amounts are primarily recorded in operating expenses and under the caption, “Loss from Equity Method Investment in Change Healthcare”.

~~Income Taxes:~~ ~~Our reported~~ income tax ~~expense rates for the third quarter and first nine months of 2019 were 18.9% and 19.7% compared to income tax benefit rates of 37.7% and 3.5% for the third quarter and first nine months of 2018.~~purposes. Fluctuations in our reported income tax rates are primarily due to ~~discrete items mainly driven by~~ the ~~impact of the 2017 Tax Act, the~~prior year impact of nondeductible impairment charges as well as changes within our business mix of income and ~~the effect of an intercompany sale of software.~~discrete items recognized.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Our discrete tax benefits for the third quarter of 2019 included $58 million of tax benefits primarily related to a change in a tax method for inventory rebates approved by the tax authorities during the quarter, partially offset by $27 million of tax expense related to the impact of the 2017 Tax Act. Our discrete tax benefits for the third quarter of 2018 included a provisional $370 million related to the impact of the 2017 Tax Act and other discrete tax benefits of $54 million primarily related to the conclusion of certain tax audits.

On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court. On August 7, 2018, the opinion was withdrawn and a rehearing of the case took place on October 16, 2018. We will continue to monitor developments in this case and the ultimate outcome may have an adverse impact on our effective tax rate.

Net Income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests for the ~~third~~second quarters and first ~~nine months~~half of ~~2019~~2020 and ~~2018,~~2019, primarily represents ClarusONE, Vantage Oncology Holdings, LLC and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe AG (“McKesson Europe”) share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under a domination and profit and loss transfer agreement (the “Domination Agreement”). Refer to Financial Note 8,7, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on ~~Form10-Q.~~Form10-Q for more information.

Net Income (Loss) Attributable to McKesson Corporation: Net income (loss) attributable to McKesson Corporation was ~~$469~~a net loss of $730 million and ~~$903~~$307 million for the ~~third quarters~~second quarter and first half of ~~2019~~2020 and ~~2018 and $830~~net income of $499 million and ~~$1,213~~$361 million for the second quarter and first ~~nine months~~half of ~~2019~~2019. Diluted loss per common share attributable to McKesson Corporation was $3.99 and ~~2018.~~$1.65 in the second quarter and first half of 2020. Diluted earnings per common share attributable to McKesson Corporation was ~~$2.40~~$2.51 and ~~$4.33~~$1.80 in the ~~third quarters~~second quarter and first half of ~~2019~~2019. The second quarter and ~~2018~~first half of 2020 were calculated by excluding dilutive securities from the denominator due to their anti-dilutive effects. Additionally, our 2020 and ~~$4.18 and $5.76 in the first nine months of~~ 2019 ~~and 2018. Our 2019 and 2018~~ diluted earnings per share reflect the cumulative effects of share repurchases.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Weighted Average Diluted Common Shares Outstanding:Diluted earnings (loss) per common share was calculated based on a weighted average number of shares outstanding of ~~195~~183 million and ~~208~~199 million for the ~~third~~second quarters of 2020 and 2019 and ~~2018~~ ~~and 199~~185 million and ~~210~~201 million infor the first ~~nine months~~half of ~~2019~~2020 and ~~2018.~~2019. Weighted average diluted shares for ~~2019~~2020 decreased from ~~2018~~2019 primarily reflecting common stock repurchases.

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~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Segment Results:

Revenues:


	Quarter Ended December 31,							Nine Months Ended December 31,						Quarter Ended September 30,							Six Months Ended September 30,
(Dollars in millions)	2018		2017		Change			2018		2017		Change		2019		2018		Change			2019		2018		Change
U.S. Pharmaceutical and Specialty Solutions	$	44,279	$	41,969	6		%	$	126,866	$	122,854	3	%	$	45,979	$	41,610	10		%	$	90,144	$	82,587	9		%
European Pharmaceutical Solutions	6,911		6,989		(1	)		20,485		20,144		2		6,598		6,639		(1	)		13,308		13,574		(2	)
Medical-Surgical Solutions	2,012		1,693		19			5,663		4,886		16		2,056		1,948		6			3,959		3,651		8
Other	3,006		2,966		1			8,876		8,845		—		2,983		2,878		4			5,933		5,870		1
Total Revenues	$	56,208	$	53,617	5		%	$	161,890	$	156,729	3	%	$	57,616	$	53,075	9		%	$	113,344	$	105,682	7		%

U.S. Pharmaceutical and Specialty Solutions

U.S. Pharmaceutical and Specialty Solutions revenues ~~increased 6%~~ for the ~~third~~second quarter and ~~3% for~~first half of 2020 compared to the ~~first nine months of 2019~~same periods a year ago increased10% and 9% primarily due to market growth, including expanded business with existing customers, and growth of specialty ~~pharmaceuticals and our business acquisitions, partially offset by loss of customers.~~pharmaceuticals. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversions.

European Pharmaceutical Solutions

European Pharmaceutical Solutions revenues decreased 1% ~~for the third quarter~~ and ~~increased~~ 2% for the second quarter and first ~~nine months~~half of ~~2019~~2020 compared to the same periods a year ~~ago. Excluding the~~ago primarily due to unfavorable effects of foreign currency exchange fluctuations ~~this segment’s revenues increased 2% for the third quarter~~ of ~~2019~~5% and ~~1% for the first nine months of 2019 primarily due to market growth and business acquisitions,~~6%, partially offset by ~~the retail pharmacy closures and additional government reimbursement reductions~~market growth in ~~the U.K. Revenues for the first nine months of 2019 were also unfavorably affected by the competitive environment in France and lower generics sales volume in the U.K.~~our distribution businesses.

Medical-Surgical Solutions

Medical-Surgical Solutions revenues for the ~~third~~second quarter and first ~~nine months~~half of ~~2019~~2020 increased ~~19%~~6% and ~~16%~~8% compared to the same periods a year ago primarily due to market ~~growth and our~~growth. Our 2019 first quarter acquisition of ~~MSD.~~Medical Specialties Distributors LLC (“MSD”) also favorably impacted revenues for the first half of 2020.

Other

Revenues in Other for the ~~third~~second quarter and first ~~nine months~~half of ~~2019~~2020 increased 1%4% and ~~was flat~~1% compared to the same periods a year ~~ago. Revenues in Other for the third quarter and first nine months of 2019 increased~~ago primarily due to growth in our Canadian and McKesson Prescription Technology Solutions (“MRxTS”) businesses, ~~and the effects of acquisitions in Canada. These increases for 2019 are~~ partially offset by the unfavorable effects of foreign currency exchange fluctuations of 4%1% and 2%, the effect of generics price decline and retail pharmacy closures related to our Canadian business. In addition, revenues in Other for the first nine months of 2019 were negatively impacted by the 2018 third quarter sale of our EIS business..

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Segment Operating Profit (Loss), Corporate Expenses, Net and Interest Expense:


	Quarter Ended December 31,											Nine Months Ended December 31,											Quarter Ended September 30,											Six Months Ended September 30,
(Dollars in millions)	2018				2017				Change			2018				2017				Change			2019				2018				Change			2019				2018				Change
Segment Operating Profit ⁽¹⁾
Segment Operating Profit (Loss) ⁽¹⁾
U.S. Pharmaceutical and Specialty Solutions	$	671			$	565			19		%	$	1,824			$	1,750			4		%	$	639			$	610			5		%	$	1,218			$	1,153			6		%
European Pharmaceutical Solutions ⁽²⁾	26				16				63			(524		)		(496		)		6			1				10				(90	)		6				(550		)		101
Medical-Surgical Solutions	136				123				11			334				349				(4	)		129				105				23			254				198				28
Other(3)	74				180				(59	)		283				271				4			(1,311		)		95				NM			(1,170		)		209				(660	)
Subtotal	907				884				3			1,917				1,874				2			(542		)		820				(166	)		308				1,010				(70	)
Corporate Expenses, Net(4)	(190		)		(120		)		58			(480		)		(337		)		42			(364		)		(167		)		118			(539		)		(290		)		86
Interest Expense	(67		)		(67		)		—			(194		)		(204		)		(5	)		(64		)		(66		)		(3	)		(120		)		(127		)		(6	)
Income from Continuing Operations Before Income Taxes	$	650			$	697			(7	)	%	$	1,243			$	1,333			(7	)	%
Income (Loss) from Continuing Operations Before Income Taxes																							$	(970	)		$	587			(265	)	%	$	(351	)		$	593			(159	)	%

Segment Operating Profit Margin
Segment Operating Profit (Loss) Margin
U.S. Pharmaceutical and Specialty Solutions	1.52			%	1.35			%	17		bp	1.44			%	1.42			%	2		bp	1.39			%	1.47			%	(8	)	bp	1.35			%	1.40			%	(5	)	bp
European Pharmaceutical Solutions	0.38				0.23				15			(2.56		)		(2.46		)		(10	)		0.02				0.15				(13	)		0.05				(4.05		)		410
Medical-Surgical Solutions	6.76				7.27				(51	)		5.90				7.14				(124	)		6.27				5.39				88			6.42				5.42				100

bp - basis points

NM - not meaningful


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


(2)	Operating ~~profit~~loss of our European Pharmaceutical Solutions segment for the first ~~nine months~~half of 2019 ~~and 2018 includes pre-tax goodwill impairment charges of $570 million and $350 million, and for the first nine months of 2018 also~~ includes a ~~pre-tax long-lived asset~~goodwill impairment charge of ~~$189~~$570 million.


(3)	Operating loss for Other in the second quarter and first half of 2020 includes an impairment charge of $1,157 million and a dilution loss of $246 million related to our investment in Change Healthcare JV.


(4)	Corporate expenses, net for the ~~U.K. retail business.~~second quarter and first half of 2020 includes pension settlement charges of $105 million and $122 million and a settlement charge of $82 million related to opioid claims.

Segment Operating Profit (Loss)

U.S. Pharmaceutical and Specialty Solutions: Operating profit increased for this segment for the ~~third~~second quarter and first ~~nine months~~half of ~~2019 primarily due~~2020 compared to the same periods a year ago. Operating profit in 2020 benefited from market growth ~~partially offset by loss of customers.~~including growth in our specialty business. Operating profit and operating profit margin for the ~~third~~second quarter and first ~~nine months~~half of ~~2019 benefited~~2020 were favorably affected by higher LIFO credits, partially offset by our mix of business. Additionally, the first half of 2020 was favorably impacted from lower opioid-related costs, partially offset by the 2019 net cash proceeds representing our share of antitrust legal settlements and higher LIFO credits. Operating profit for the third quarter and first nine months of 2019 includes a $60 million pre-tax charge related to a customer bankruptcy and a reversal of the previously accrued estimated liability under the New York State OSA. In addition, operating profit for the first nine months of 2018 included a pre-tax gain of $43 million recognized from the second quarter 2018 sale of an equity method investment.settlements.

European Pharmaceutical Solutions: Operating profit and operating profit margin ~~increased~~ for the ~~third~~second quarter of ~~2019~~2020 decreased primarily due to ~~market growth in our distribution businesses~~store closures and higher ~~income from an equity method investment, partially offset by the effect of government reimbursement reductions in the U.K.~~operating expenses for UK retail pharmacy. Operating profit and operating profit margin ~~decreased~~ for the first ~~nine months~~half of ~~2019~~2020 increased primarily due to ~~higher~~the 2019 goodwill impairment charges ~~recorded in 2019 compared to 2018, the effect~~ of ~~government reimbursement reductions~~$570 million and lower ~~generics sales volume in the U.K. and the increased competition in France. These decreases~~restructuring charges. Operating profit margin for the second quarter and first ~~nine months~~half of ~~2019 were partially offset~~2020 was unfavorable affected by ~~the long-lived asset impairment charges recognized for~~ our ~~U.K. retail business in 2018.~~mix of business.

Medical-Surgical Solutions: Operating profit and operating profit margin for this segment increased for the ~~third~~second quarter and first half of ~~2019~~2020 compared to the same periods a year ago primarily due to market growth, ~~partially offset by higher restructuring charges.~~ ~~Operating profit decreased for the first nine months of 2019 primarily due to higher~~lower restructuring charges and ~~an increase in~~lower bad debt expenses, partially offset by market growth. Operating profit margin for the third quarter and first nine months of 2019 decreased primarily due to higher restructuring charges and changes in our mix of business. In addition, operating profit margin for the third quarter of 2019 was favorably affected by ongoing cost management.expenses.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Other:

Operating profit for Other decreased for the ~~third~~second quarter and first half of ~~2019~~2020 compared to the same period a year ago primarily due to the impairment charge of $1,157 million and ~~increased for~~ the ~~first nine months~~dilution loss of ~~2019. Operating profit for Other~~$246 million related to our investment in ~~2019~~Change Healthcare JV. The increase is partially offset by lower restructuring charges related to our Canada business and ~~2018 is affected by the following significant items:~~

~~2019~~

~~Goodwill and long-lived asset impairment charges of $56 million (pre-tax) recognized for our Rexall Health retail business in the third quarter of 2019;~~

~~Pre-tax gain of $56 million from the divestiture of an equity investment recognized in the third quarter of 2019;~~

~~Market~~ growth in our MRxTS ~~business during~~business. Operating profit for the ~~third~~second quarter ~~and first nine months of 2019;~~

~~Lower amount of our proportionate share of losses from our equity method investment in Change Healthcare during the third quarter and first nine months~~ of 2019 ~~compared to the same prior year periods;~~

~~Escrow settlement gain~~included a credit of ~~$97~~$90 million ~~(pre-tax) related to our 2017 acquisition of Rexall Health recognized in the first nine months of 2019;~~

~~$90 million pre-tax credit~~ resulting from the derecognition of a TRA liability payable to the shareholders of Change ~~recognized in~~Healthcare Inc. Operating profit for Other for the first ~~nine months~~half of ~~2019;~~

~~Higher restructuring and asset impairment charges~~2019 included the 2019 first quarter gain from an escrow settlement of $97 million related to ~~closures~~our 2017 acquisition of ~~our retail pharmacy stores in Canada during the first nine months of 2019, compared to the same period in 2018;~~Rexall Health.

~~Lower operating profit due to the 2018 third quarter sale of our EIS business during the first nine months of 2019, compared to the same prior year period; and~~

~~Generics price decline in Canada during the third quarter and first nine months of 2019.~~

~~2018~~

~~$109 million pre-tax gain from the sale of our EIS business in the third quarter of 2018;~~

~~$46 million pre-tax credit representing a reduction of our TRA liability related to the adoption of the 2017 Tax Act in the third quarter of 2018; and~~

Pre-tax gain of $37 million resulting from the finalization of net working capital and other adjustments related to the contribution of the Core MTS Business to Change Healthcare in the first nine months of 2018.

Corporate: Corporate expenses, net, increased for the ~~third~~second quarter and first ~~nine months~~half of ~~2019~~2020 compared to the same periods a year ago primarily due to ~~an increase in opioid-related costs~~pension settlement charges, opioid claim settlement charge and higher ~~restructuring-related charges.~~costs for technology initiatives. Corporate expenses, net, also increased for the ~~third quarter~~first half of ~~2019 include a pre-tax charge of $31 million (primarily employee severance) related~~2020 due to the ~~Company’s announcement~~2019 first quarter gains recognized from the sale of ~~its headquarters relocation in the third quarter of 2019.~~investments, partially offset by net settlement gains from our net investment hedges and forward contracts.

Interest Expense: Interest expense for the ~~third~~second quarter and first half of ~~2019 was flat primarily due~~2020 compared to the ~~refinancing of debt at lower interest rates, fully offset by increased short-term borrowings and long-term debt. Interest expense for the first nine months of 2019~~same periods a year ago decreased primarily due to a decrease in the ~~refinancing~~issuance of ~~debt at lower~~commercial paper. Interest expense fluctuates based on timing, amounts and interest rates ~~partially offset by increased short-term borrowings~~of term debt repaid and ~~long-term debt.~~new term debt issued, as well as amounts incurred associated with financing fees.

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~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Business Combinations

Refer to Financial Note 4,5, “Business Combinations,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10‑Q.

New Accounting Pronouncements

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

Critical Accounting Policies and Estimates

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the "Critical Accounting Policies and Estimates" disclosed in Part II, Item 7 of our 2019 Annual Report on Form 10-K, as updated in "Critical Accounting Policies and Estimates" section in Item 2 of Part I of our report on Form 10-Q for the quarter ended June 30, 2019.

Financial Condition, Liquidity and Capital Resources

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

Operating activities utilized cash of $159 million and generated cash of ~~$141~~$318 million ~~and~~ ~~$1,321 million~~ during the first ~~nine months~~half of ~~2019~~2020 and ~~2018.~~ 2019.Operating activities for the first ~~nine months~~half of ~~2019~~2020 were affected by decreases in draft and ~~2018~~accounts payable and inventories primarily associated with timing and an increase in receivables primarily due to revenue growth, and for the first half of 2019 were affected by increases in receivables, ~~inventories~~inventory and draft and accounts payable primarily associated with revenue growth. Cash flows from operations can be significantly impacted by factors such as timing of receipts from customers, inventory receipts and payments to vendors. Additionally, working capital is primarily a function of sale and purchase volumes, inventory requirements and vendor payment terms. Operating activities for the first ~~nine months~~half of 2020 also includes a non-cash pension settlement charge of $122 million and for the first half of 2019 ~~also include~~includes a non-cash derecognition of the TRA liability of $90 million.

Investing activities utilized cash of ~~$1,151~~$285 million and ~~$1,952~~$983 million during the first ~~nine months~~half of ~~2019~~2020 and ~~2018.~~2019. Investing activities for 2020 and 2019 include ~~$866~~$184 million and $248 million in capital expenditures for property, plant and equipment, and capitalized software. Investing activities for the first half of 2019 included $840 million of net cash payments for acquisitions, including $784 million for our acquisition of MSD. Investing activities for 2019 also included $97 million cash received as a result of resolving certain indemnity and other claims related to our 2017 acquisition of Rexall Health. ~~Investing activities for 2018 included $1,979 million~~

Table of cash paid for acquisitions, including $1.3 billion for our acquisition of CoverMyMeds LLC and a $126 million cash payment received related to the Healthcare Technology Net Asset Exchange. Investing activities for 2019 and 2018 also included receipts of $81 million and $329 million of net cash proceeds from the sale of businesses and investments.Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Financing activities ~~provided~~ utilizedcash of ~~$317 million and utilized cash of $1,147~~$1,203 million during the first ~~nine months~~half of ~~2019~~2020 and ~~2018.~~provided cash of $198 million during the first half of 2019. Financing activities for ~~2019 include~~the first half of 2020 included cash receipts of ~~$30,392~~$8,670 million and payments of ~~$29,346~~$8,122 million for short-term borrowings, primarily commercial paper. Financing activities for the first half of 2019 ~~also include~~included cash receipts ~~from issuance~~ of ~~long-term debt~~$19,735 million and payments of ~~$1,099 million.~~$18,342 million for short-term borrowings. Financing activities for the first ~~nine months~~half of ~~2018 included cash receipts of $12,699~~2020 and 2019 include $1,452 million and ~~payments of $12,133~~$888 million ~~for short-term borrowings. Additionally, financing activities for the first nine months of 2019 and 2018 include $1,388 million and~~ ~~$951 million~~ of cash paid for stock repurchases, including shares surrendered for tax withholding. ~~Financing~~Additionally, financing activities for ~~2019~~first half of 2020 and ~~2018~~2019 also include ~~$216~~$148 millionand ~~$192~~$139 million of cash paid for dividends.

~~Stock repurchases may be made~~

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

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

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~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

2020.

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

As previously discussed in this financial review, we are a party to discussions with the objective of achieving broad resolution of the remaining opioid-related litigation and claims. Although we are not able to predict the outcome or estimate a range of reasonably possible losses in these matters, 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.

Selected Measures of Liquidity and Capital Resources


(Dollars in millions)	December 31, 2018				March 31, 2018			September 30, 2019				March 31, 2019
Cash, cash equivalents and restricted cash	$	1,849			$	2,672		$	1,356			$	2,981
Working capital	895				451			208				839
Debt to capital ratio ⁽¹⁾	47.0			%	40.6		%	50.0			%	43.3		%
Return on McKesson stockholders’ equity ⁽²⁾	(3.2		)		0.6			(7.7		)		0.4


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


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

Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market ~~funds denominated in Euros, AAA rated prime money market funds~~fund denominated in British pound ~~sterling, time deposits, and Canadian government debentures.~~sterling.

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

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Our cash and cash equivalents balance as of ~~December 31, 2018~~September 30, 2019 included approximately ~~$893~~$979 million of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to ~~U.S.~~foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the United States is generally no longer taxable for federal ~~state and local~~ income ~~tax.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

tax purposes.

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

Our debt to capital ratio increased in ~~2019~~the first half of 2020 primarily due to ~~an increase~~a decrease in stockholders’ equity driven by share repurchases and higher short-term ~~borrowings and long-term debt.~~borrowings.

The carrying value of redeemable noncontrolling interests related to McKesson Europe was ~~$1.40~~$1.38 billion at ~~December 31, 2018,~~September 30, 2019, which exceeded the maximum redemption value of ~~$1.26~~$1.20 billion. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. ~~Under~~Upon the effectiveness of the Domination Agreement on December 2, 2014, the noncontrolling shareholders of McKesson Europe ~~have~~received a put right that enables them to put ~~(“Put Right”)~~ their McKesson Europe shares to McKesson at €22.99 per share, which price is increased annually for interest in the amount of 5 percentage points above a base rate published semiannually by the German Bundesbank, ~~semi-annually,~~ less any compensation amount or guaranteed dividend already paid ~~by McKesson with respect to the relevant time period~~ (“Put Amount”). The ~~exercise of~~redemption value is the Put ~~Right will reduce the balance~~Amount adjusted for exchange rate fluctuations each period. The ultimate amount and timing of ~~redeemable noncontrolling interests.~~

~~Subsequent~~any future cash payments related to the ~~Domination Agreement’s registration, certain~~Put Amount are uncertain. 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 initiated appraisal proceedings (“Appraisal Proceedings”) with the Stuttgart Regional Court (the “Court”) to challenge the adequacy of the Put Amount, annual recurring compensation amount, and/or the guaranteed dividend. During the pendency of the Appraisal Proceedings, such amount will be paid as specified currently inunder the Domination Agreement. ~~On September 19, 2018,~~The Compensation Amount is recognized ratably during the ~~Court ruled that the Put Amount shall~~applicable annual period. The Domination Agreement does not have an expiration date and can be ~~increased~~terminated by ~~€0.51 resulting~~McKesson without cause in an adjusted Put Amount of €23.50. The annual recurring compensation amount and/or the guaranteed dividend remain unadjusted. Noncontrolling shareholders of McKesson Europe appealed this decision. McKesson Europe also appealed the decision. If upon final resolution of the appeal an upwards adjustment is ordered, we would be required to make certain additional payments for any shortfall to all McKesson Europe noncontrolling shareholders who previously received amounts under the Domination Agreement.writing no earlier than March 31, 2020.

Refer to Financial Note 8,7, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Credit Resources

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

issuances. Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flow from operations, existing credit sources and other capital market transactions. Detailed information regarding our debt and financing activities is included in Financial Note ~~11,~~10, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form ~~10-Q.~~10-Q.

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McKESSON CORPORATION

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

(UNAUDITED)

~~FACTORS AFFECTING~~CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ~~as amended,~~ and Section 21E of the Securities Exchange Act of ~~1934, as amended.~~1934. Some of these statements can be identified by the use of ~~forward-looking~~ terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Readers are cautioned not to place undue reliance on forward‑looking statements, which speak only as of the date such statements were first made. We undertake no obligation to publicly release any updates or revisions to our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they ~~may~~ include ~~but are not limited to,~~ the following ~~factors.~~factors, which are described in more detail in the Risk Factors discussion in Item 1A of Part I of our most recent Annual Report on Form 10-K, as updated in Item 1A of Part II of our report on Form 10-Q for the quarter ended June 30, 2019 and of this report. The reader should not consider this list to be a complete statement of all potential risks and uncertainties:


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


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


▪	~~changes in the Canadian healthcare industry and regulatory environment;~~


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


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


▪	~~foreign currency fluctuations;~~


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


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


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


▪	~~material adverse resolution of pending legal and regulatory proceedings;~~


▪	~~competition;~~


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


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


▪	~~public health issues in the United States or abroad;~~


▪	~~cyberattack, disaster, or malfunction to computer systems;~~


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


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


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


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

▪

~~changes in circumstances that could impair~~

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

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

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

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

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

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

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

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

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

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

Competition and industry consolidation may erode our profit.

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

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

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

We rely on sophisticated computer systems to perform our business operations and elements of those systems are from time to time subject to cybersecurity incidents, such as malware and ransomware attacks, unauthorized access, system failures, user errors and disruptions. Although we, our customers, our strategic partners and our external service providers use a variety of security measures to protect our and their computer systems, a failure or compromise of our, our customers’, our strategic partners’ or our external service providers’ computer systems from a cyberattack, disaster, or malfunction may result in material adverse operational and financial consequences.

We could experience losses or liability not covered by insurance.

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

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

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

We may be required to record a significant charge to earnings if our goodwill, or intangible ~~assets;~~


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


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


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


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


▪	~~expected benefits from our restructuring and business process initiatives;~~


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


▪	~~new challenges associated with our retail expansion; and~~


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

~~These~~ and other ~~risks~~long-lived assets, or investments become further impaired.

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

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McKESSON CORPORATION

FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

Volatility and uncertainties are described herein and in other information contained in our publicly available Securities and Exchange Commission filings and press releases. Readers are cautioned not to place undue reliance on forward‑looking statements, which speak only as of the date such statements were first made. Exceptdisruption to the ~~extent required~~global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.

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

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

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

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

We may face risks associated with our retail expansion.

We may be unable to ~~publicly release the result~~keep existing retail store locations or open new retail locations in desirable places, which could materially adversely affect our results of ~~any revisions to our forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.~~operations.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

We believe there has been no material change in our exposure to risks associated with fluctuations in interest and foreign currency exchange rates as disclosed in our ~~2018~~2019 Annual Report on Form 10-K.


Item 4.	Controls and Procedures.

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

There were no changes in our “internal control over financial reporting” (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that occurred during our ~~third~~second quarter of ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

The information set forth in Financial Note 15, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q is incorporated herein by reference.


Item 1A.	Risk Factors.

~~There~~Except as noted below, there have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of our ~~2018~~2019 Annual Report on Form ~~10-K.~~10-K, as updated in Item 1A of Part II of our report on Form 10-Q for the quarter ended June 30, 2019.

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

From time to time and in the ordinary course of our business, the Company is named as a defendant in legal and regulatory proceedings, which may include asserted class actions. Regulatory proceedings can involve allegations such as false claims, healthcare fraud and abuse, and antitrust violations. Civil litigation proceedings may involve commercial, employment, environmental, intellectual property, tort and other claims. For example, the Company is a defendant in over 2,500 cases alleging claims related to the distribution of controlled substances (opioids). We regularly are named as a defendant in similar, new cases. The plaintiffs in those cases include governmental entities (such as states, counties and municipalities) as well as businesses, groups and individuals. The cases allege violations of controlled substance laws and other laws, and they make common law claims such as negligence and public nuisance. Many of these cases raise novel theories of liability. Any proceedings can have unexpected outcomes that are not justified by evidence or existing law. All proceedings involve significant expense, management time and distraction, and risk of loss that can be difficult to predict or quantify. It is not uncommon for claims to be resolved over many years. Proceedings can result in monetary damages, penalties and fines, and injunctive or other relief. Even when the Company has valid defenses and is vigorously defending itself, it may seek a negotiated outcome to resolve the proceedings. The outcome of any legal proceeding can materially and adversely affect our business operations and can have a material adverse impact on our financial position or results of operations.

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McKESSON CORPORATION


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

~~In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock.~~2020.

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The following table provides information on the Company’s share repurchases during the ~~third~~second quarter of ~~2019~~2020.

Share Repurchases ⁽¹⁾
(In millions, except price per share)
Total Number
of Shares
Purchased

Average Price
Paid Per Share

Total Number of
Shares Purchased
As Part of Publicly
Announced
Program

Approximate
Dollar Value of
Shares that May
Yet Be Purchased Under the Programs
October 1, 2018 – October 31, 2018 — $ — — $ 4,219
November 1, 2018 – November 30, 2018 0.6 125.53 0.6 4,144
December 1, 2018 – December 31, 2018 3.0
123.71 ⁽²⁾
3.0 3,719
Total 3.6
3.6



	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, 2019 – July 31, 2019	—	$	—	—	$	2,785
August 1, 2019 – August 31, 2019	5.2		144.28	5.2		2,035
September 1, 2019 – September 30, 2019	—		—	—		2,035
Total	5.2			5.2


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


~~(2)~~	The average price paid per share computation includes the initial share settlement of 1.6 million shares from the December 2018 ASR program, of which the actual average price of shares will be determined at the termination of the program in the fourth quarter of 2019.


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Mine Safety Disclosures.

Not Applicable


Item 5.	Other Information.

Not Applicable

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Item 6.	Exhibits.

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



Exhibit Number	Description
10.1*10.01	~~Forms~~Credit Agreement dated as of ~~Statement~~September 25, 2019, among the Company and certain subsidiaries, as borrowers, Bank of ~~Terms~~America, N.A., as administrative agent, Barclays Bank PLC, Citibank, N.A., Wells Fargo Bank, National Association, Goldman Sachs Bank USA, JPMorgan Chase Bank, N.A., and ~~Conditions Applicable to Awards Pursuant~~HSBC Securities (USA) Inc., as co-syndication agents, the lenders party thereto, the letter of credit issuers party thereto. (Exhibit 10.01 to the Company’s Current Report on Form 8-K, filed with the SEC on September 27, 2019, File No. 1-13252).

10.1†	McKesson Corporation ~~2013 Stock Plan.~~Deferred Compensation Administration Plan III, as amended and restated effective July 30, 2019.

10.2†	McKesson Corporation Supplemental Retirement Savings Plan, as amended and restated effective July 30, 2019.

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, 2018,~~September 30, 2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and ~~(v)~~(vi) related Financial Notes.


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


††	Furnished herewith.

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SIGNATURES

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



		MCKESSON CORPORATION

Date:	~~January 31,~~October 30, 2019	/s/ Britt J. Vitalone
		Britt J. Vitalone
		Executive Vice President and Chief Financial Officer



		MCKESSON CORPORATION

Date:	~~January 31,~~October 30, 2019	/s/ Sundeep G. Reddy
		Sundeep G. Reddy
		Senior Vice President and Controller

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	Quarter Ended December 31, 2018
(In millions)	U.S. Pharmaceutical and Specialty Solutions		Medical-Surgical Solutions		Other		Corporate		Total
Severance and employee-related costs, net	$	1	$	—	$	9	$	31	$	41
Exit-related costs	1		5		—		—		6
Asset impairments and accelerated depreciation	2		1		—		—		3
Total	$	4	$	6	$	9	$	31	$	50



(In millions)	Amounts Recognized as of Acquisition Date (Provisional As Adjusted)
Receivables	$	115
Other current assets, net of cash and cash equivalents acquired	73
Goodwill	376
Intangible assets	326
Other long-term assets	57
Current liabilities	(72		)
Other long-term liabilities	(91		)
Net assets acquired, net of cash and cash equivalents	$	784

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company