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, 2013~~
June 30, 2014



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

For the transition period from to

Commission File Number: 1-13252

McKESSON CORPORATION

(Exact name of registrant as specified in its charter)



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

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

(415) 983-8300

(Registrant’s telephone number, including area code)

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

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

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

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, 2013~~	June 30, 2014
Common stock, $0.01 par value	~~230,126,791~~231,599,218 shares

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS


	Item	Page	Item	Page

	PART I—FINANCIAL INFORMATION		PART I—FINANCIAL INFORMATION

1.	Condensed Consolidated Financial Statements		Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations Quarters and Nine Months Ended December 31, 2013 and 2012	3	Condensed Consolidated Statements of Operations Quarters Ended June 30, 2014 and 2013	3

	Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended December 31, 2013 and 2012	4	Condensed Consolidated Statements of Comprehensive Income Quarters Ended June 30, 2014 and 2013	4

	Condensed Consolidated Balance Sheets December 31, 2013 and March 31, 2013	5	Condensed Consolidated Balance Sheets June 30, 2014 and March 31, 2014	5

	Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2013 and 2012	6	Condensed Consolidated Statements of Cash Flows Quarters Ended June 30, 2014 and 2013	6

	Financial Notes	7	Financial Notes	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

3.	Quantitative and Qualitative Disclosures About Market Risk	32	Quantitative and Qualitative Disclosures About Market Risk	31

4.	Controls and Procedures	32	Controls and Procedures	31

	PART II—OTHER INFORMATION		PART II—OTHER INFORMATION

1.	Legal Proceedings	32	Legal Proceedings	31

1A.	Risk Factors	32	Risk Factors	31

2.	Unregistered Sales of Equity Securities and Use of Proceeds	33	Unregistered Sales of Equity Securities and Use of Proceeds	31

3.	Defaults Upon Senior Securities	34	Defaults Upon Senior Securities	32

4.	Mine Safety Disclosures	34	Mine Safety Disclosures	32

5.	Other Information	35	Other Information	32

6.	Exhibits	36	Exhibits	33

	Signatures	37	Signature	34

Table of Contents

McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
	2013			2012			2013			2012			2014			2013
Revenues	$	34,306		$	31,099		$	99,468		$	91,553		$	44,058		$	32,239
Cost of Sales	(32,466		)	(29,454		)	(93,699		)	(86,664		)	(41,261		)	(30,309		)
Gross Profit	1,840			1,645			5,769			4,889			2,797			1,930

Operating Expenses	(1,337		)	(1,147		)	(3,890		)	(3,230		)	(2,109		)	(1,260		)
Litigation Charges	(18		)	—			(68		)	(60		)	—			(15		)
Gain on Business Combination	—			—			—			81
Total Operating Expenses	(1,355		)	(1,147		)	(3,958		)	(3,209		)	(2,109		)	(1,275		)
Operating Income	485			498			1,811			1,680			688			655
Other Income (Loss), Net	(8		)	10			7			28
Other Income, Net													20			6
Interest Expense	(69		)	(59		)	(187		)	(170		)	(101		)	(59		)
Income from Continuing Operations Before Income Taxes	408			449			1,631			1,538			607			602
Income Tax Expense	(252		)	(143		)	(639		)	(454		)	(182		)	(174		)
Income from Continuing Operations	156			306			992			1,084			425			428
Loss from Discontinued Operations, Net of Tax	(92		)	(8		)	(100		)	(5		)	(14		)	(4		)
Net Income	$	64		$	298		$	892		$	1,079		411			424
Net Income Attributable to Noncontrolling Interests													(8		)	—
Net Income Attributable to McKesson Corporation													$	403		$	424

Earnings (Loss) Per Common Share
Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Diluted
Continuing operations	$	0.67		$	1.27		$	4.26		$	4.51		$	1.78		$	1.84
Discontinued operations	(0.39		)	(0.03		)	(0.43		)	(0.02		)	(0.06		)	(0.01		)
Total	$	0.28		$	1.24		$	3.83		$	4.49		$	1.72		$	1.83
Basic
Continuing operations	$	0.68		$	1.30		$	4.34		$	4.60		$	1.81		$	1.88
Discontinued operations	(0.40		)	(0.03		)	(0.44		)	(0.02		)	(0.06		)	(0.02		)
Total	$	0.28		$	1.27		$	3.90		$	4.58		$	1.75		$	1.86

Dividends Declared Per Common Share	$	0.24		$	0.20		$	0.68		$	0.60		$	0.24		$	0.20

Weighted Average Common Shares
Diluted	234			240			233			240			235			232
Basic	230			235			229			236			231			227

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,					Quarter Ended June 30,
	2013			2012			2013			2012		2014			2013
Net Income	$	64		$	298		$	892		$	1,079	$	411		$	424

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments, net of income tax expense (benefit) of nil, ($4), $24 and ($2)	(55		)	(16		)	(16		)	14
Foreign currency translation adjustments arising during period, net of income tax expense of nil and $2												98			(61		)

Unrealized gains (losses) on cash flow hedges and other, net of income tax expense of nil, nil, nil and nil	(1		)	—			(2		)	2
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax expense of nil and nil												(2		)	1

Retirement-related benefit plans, net of income tax expense of $4, $3, $11 and $8	4			5			15			14
Retirement-related benefit plans, net of income tax expense of $1 and $4												2			7
Other Comprehensive Income (Loss), Net of Tax	(52		)	(11		)	(3		)	30		98			(53		)

Comprehensive Income	$	12		$	287		$	889		$	1,109	509			371
Comprehensive Loss Attributable to Noncontrolling Interests												4			—
Comprehensive Income Attributable to McKesson Corporation												$	513		$	371

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)


	December 31, 2013			March 31, 2013			June 30, 2014			March 31, 2014
ASSETS
Current Assets
Cash and cash equivalents	$	2,431		$	2,456		$	4,105		$	4,193
Receivables, net	10,750			9,975			14,920			14,193
Inventories, net	11,462			10,335			14,124			13,308
Prepaid expenses and other	591			404			824			879
Total Current Assets	25,234			23,170			33,973			32,573
Property, Plant and Equipment, Net	1,359			1,321			2,209			2,222
Goodwill	6,300			6,405			10,431			9,927
Intangible Assets, Net	2,066			2,270			4,390			5,022
Other Assets	1,520			1,620			2,003			2,015
Total Assets	$	36,479		$	34,786		$	53,006		$	51,759

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Drafts and accounts payable	$	16,638		$	16,108		$	22,812		$	21,429
Short-term borrowings							507			346
Deferred revenue	1,286			1,359			1,124			1,236
Deferred tax liabilities	1,519			1,626			1,656			1,588
Current portion of long-term debt	353			352			25			1,424
Other accrued liabilities	2,108			1,912			3,121			3,478
Total Current Liabilities	21,904			21,357			29,245			29,501
Long-Term Debt	4,521			4,521			10,141			8,949
Other Noncurrent Liabilities	2,027			1,838			2,855			2,991
Commitments and Contingent Liabilities (Note 13)
Stockholders’ Equity
Commitments and Contingent Liabilities (Note 12)
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, 2013 and March 31, 2013, 380 and 376 shares issued at December 31, 2013 and March 31, 2013	4			4
Common stock, $0.01 par value, 800 shares authorized at June 30, 2014 and March 31, 2014, 383 and 381 shares issued at June 30, 2014 and March 31, 2014							4			4
Additional Paid-in Capital	6,442			6,078			6,686			6,552
Retained Earnings	11,138			10,402			11,800			11,453
Accumulated Other Comprehensive Loss	(68		)	(65		)
Accumulated Other Comprehensive Income (Loss)							107			(3		)
Other	16			14			(7		)	23
Treasury Shares, at Cost, 150 and 149 at December 31, 2013 and March 31, 2013	(9,505		)	(9,363		)
Total Stockholders’ Equity	8,027			7,070
Total Liabilities and Stockholders’ Equity	$	36,479		$	34,786
Treasury Shares, at Cost, 151 and 150 at June 30, 2014 and March 31, 2014							(9,611		)	(9,507		)
Total McKesson Corporation Stockholders’ Equity							8,979			8,522
Noncontrolling Interests							1,786			1,796
Total Equity							10,765			10,318
Total Liabilities and Equity							$	53,006		$	51,759

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Nine Months Ended December 31,						Quarter Ended June 30,
	2013			2012			2014			2013
Operating Activities
Net income	$	892		$	1,079		$	411		$	424
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	475			383			284			162
Deferred taxes	86			499			135			98
Share-based compensation expense	115			123
Gain on business combination	—			(81		)
Charges associated with last-in-first-out inventory method	186			5			98			—
Other non-cash items	83			49			14			32
Changes in operating assets and liabilities, net of acquisitions:
Receivables	(865		)	67			(699		)	(139		)
Inventories	(1,387		)	(313		)	(901		)	(60		)
Drafts and accounts payable	584			(1,078		)	1,368			589
Deferred revenue	20			72			(134		)	(116		)
Taxes	154			(90		)	(134		)	31
Litigation charges	68			60
Litigation settlement payments	(86		)	(470		)
Other	147			(29		)	(260		)	(305		)
Net cash provided by operating activities	472			276			182			716

Investing Activities
Property acquisitions	(188		)	(145		)	(86		)	(69		)
Capitalized software expenditures	(108		)	(111		)	(33		)	(32		)
Acquisitions, less cash and cash equivalents acquired	(116		)	(577		)
Proceeds from sale of business	55			—
Acquisitions, net of cash and cash equivalents acquired							(14		)	(74		)
Other	(65		)	49			21			(9		)
Net cash used in investing activities	(422		)	(784		)	(112		)	(184		)

Financing Activities
Proceeds from short-term borrowings	150			1,125			917			100
Repayments of short-term borrowings	(150		)	(1,525		)	(759		)	(100		)
Proceeds from issuances of long-term debt	—			892			6			—
Repayments of long-term debt							(230		)	—
Common stock transactions:
Issuances	150			112			34			50
Share repurchases, including shares surrendered for tax withholding	(128		)	(413		)	(102		)	(127		)
Dividends paid	(154		)	(147		)	(59		)	(53		)
Other	59			38			26			57
Net cash provided by (used in) financing activities	(73		)	82
Net cash used in financing activities							(167		)	(73		)
Effect of exchange rate changes on cash and cash equivalents	(2		)	3			9			(10		)
Net decrease in cash and cash equivalents	(25		)	(423		)
Net (decrease) increase in cash and cash equivalents							(88		)	449
Cash and cash equivalents at beginning of period	2,456			3,149			4,193			2,456
Cash and cash equivalents at end of period	$	2,431		$	2,726		$	4,105		$	2,905

See Financial Notes

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)


1.	Significant Accounting Policies

Basis of Presentation: The condensed consolidated financial statements of McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns) include the financial statements of all wholly-owned subsidiaries and ~~majority-owned~~majority‑owned or controlled companies. We also evaluate our ownership, contractual and other interests in entities to determine if they are variable interest entities (“VIEs”), if we have a variable interest in those entities and the nature and extent of those interests. These evaluations are highly complex and involve judgment and the use of estimates and assumptions based on available historical information and management’s judgment, among other factors. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements. ~~The consolidated VIEs~~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 ~~not material to~~accounted for using the equity method and our ~~condensed consolidated financial statements.~~proportionate share of income or loss is recorded in other income, net. Intercompany transactions and balances have been eliminated. 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 footnote 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 ended ~~quarter and nine months endedDecember 31,2013~~June 30, 2014 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, ~~2013~~2014 previously filed with the SEC on May ~~7, 2013~~14, 2014 (“~~2013~~2014 Annual Report”).

Certain prior period amounts ~~which primarily relate to discontinued operations,~~ have been reclassified to conform to the current period presentation. ~~Refer to Financial Note 7, “Discontinued Operations,” for more information.~~

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.

Recently Adopted Accounting Pronouncements

~~Balance Sheet Offsetting:~~Cumulative Translation Adjustments: In the first quarter of ~~2014,~~2015, we adopted disclosure guidance on a retrospective basis related to the offsetting of assets and liabilities. The guidance requires an entity to disclose information about offsetting assets and liabilities for derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific GAAP criteria or subject to a master netting arrangement or similar agreement. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements.

~~Comprehensive Income:~~ In the first quarter of 2014, we adopted disclosure guidance on a prospective basis related to the reporting of amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI”). The guidance requires disclosure of amounts reclassified out of AOCI by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance did not have a material effect on our condensed consolidated financial statements.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~Recently Issued Accounting Pronouncement Not Yet Adopted~~

~~Cumulative Translation Adjustments:~~ ~~In March 2013,~~ amended guidance ~~was issued~~ for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The amended guidance requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in case of sale of an equity method investment that is a foreign entity. The adoption of this amended guidance did not have a material effect on our condensed financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Discontinued Operations: In April 2014, amended guidance was issued for reporting of discontinued operations and disclosures of disposals of components. The amended guidance raises the threshold for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amended guidance is ~~applicable to~~effective for us ~~effective~~prospectively commencing in the first quarter of ~~fiscal 2015.~~2016. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our ~~condensed~~consolidated financial statements.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Revenue Recognition: In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. The amended guidance eliminated industry specific guidance and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. The amended guidance is effective for us commencing in the first quarter of 2018. The amended guidance allows for either full retrospective adoption or modified retrospective adoption. Early adoption is not permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.


2.	Business Combinations

On February ~~22, 2013~~,6, 2014, we ~~acquired all~~completed the acquisition of 77.6% of the then outstanding common shares of ~~PSS World Medical, Inc.~~Celesio AG (“~~PSS World Medical”~~Celesio”) and certain convertible bonds of ~~Jacksonville, Florida~~Celesio for~~$29.00~~ ~~per share plus the assumption of PSS World Medical’s debt, or approximately~~ ~~$1.9~~ ~~billion in aggregate, consisting of~~ cash consideration of ~~$1.3~~$4.5 billion, net of cash acquired ~~and~~(the “Acquisition”). Upon the ~~assumption of long-term~~acquisition, as required, we consolidated Celesio’s debt with a fair value of ~~$0.6~~ ~~billion.~~$2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common shares was 75.6%. The ~~cash paid at acquisition~~Acquisition was initially funded ~~from~~by utilizing a senior bridge loan, our existing accounts receivable sales facility and cash on ~~hand~~hand. Celesio is an international wholesale and ~~the issuance~~retail company and a provider of ~~long-term debt.~~ ~~PSS World Medical markets and distributes medical products~~logistics and services ~~throughout~~to the ~~United States~~.pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of ~~PSS World Medical~~Celesio expands our ~~existing Medical-Surgical business.~~global geographic area; the combined company is one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.

From February 7 to March 31, 2014, substantially all of the convertible bonds issued by Celesio (held by both third parties and us) were converted to 20.9 million common shares of Celesio. During the first quarter of 2015, we completed tender offers and we acquired approximately 1 million common shares of Celesio at €23.50 per share for a total of $32 million in cash, and the remaining convertible bonds were fully converted into 42,238 common shares of Celesio. At June 30, 2014 and March 31, 2014, we owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares.

On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary Dragonfly GmbH & Co. KGaA, entered into a domination and profit and loss transfer agreement (the “Agreement”). Under the Agreement, Celesio will subordinate its management to McKesson and undertake to transfer all of its annual profits to McKesson, and McKesson will undertake to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual recurring compensation of €0.83 per Celesio share and (ii) a put right for their Celesio shares at €22.99 per Celesio share. On July 15, 2014, the Agreement was approved at the general shareholders’ meeting of Celesio. The Agreement becomes effective upon its registration in the commercial register of Celesio at the local court of Stuttgart, Germany. Celesio’s obligation to transfer its annual profits under the Agreement will apply for the first time for the entire profit generated in Celesio’s fiscal period beginning on January 1, 2015 or the subsequent fiscal year in which the Agreement becomes effective. McKesson’s obligation to compensate the annual losses of Celesio under the Agreement will apply for the first time for the full fiscal period of Celesio during which the Agreement becomes effective. We currently anticipate the Agreement to be effective by the end of the calendar year, at which time, we will obtain operational control of Celesio.

Financial results for Celesio are included within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, since the date of acquisition.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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


(In millions)	Amounts Previously Recognized as of Acquisition Date (Provisional)⁽¹⁾			Measurement Period Adjustments			Amounts Recognized as of Acquisition Date (Provisional as Adjusted)			Amounts Previously Recognized as of Acquisition Date (Provisional)⁽¹⁾			Measurement Period Adjustments			Amounts Recognized as of Acquisition Date (Provisional as Adjusted)
Current assets, net of cash and cash equivalents acquired	$	706		$	5		$	711
Receivables										$	3,425		$	(3	)	$	3,422
Other current assets, net of cash and cash equivalents acquired										2,413			(3		)	2,410
Goodwill	1,145			(15		)	1,130			3,570			436			4,006
Intangible assets	557			11			568			3,018			(536		)	2,482
Other long-term assets	183			(1		)	182			1,272			(44		)	1,228
Current liabilities	(376		)	3			(373		)	(4,096		)	(6		)	(4,102		)
Current portion of long-term debt	(635		)	—			(635		)
Short-term borrowings and current portion of long-term debt										(1,990		)	—			(1,990		)
Long-term debt										(322		)	—			(322		)
Other long-term liabilities	(281		)	(3		)	(284		)	(1,293		)	156			(1,137		)
Fair value of net assets, less cash and cash equivalents										5,997			—			5,997
Less: Noncontrolling Interests										(1,500		)	—			(1,500		)
Net assets acquired, less cash and cash equivalents	$	1,299		$	—		$	1,299		$	4,497		$	—		$	4,497


(1)	As previously reported in our Form 10-K for the year ended March 31, ~~2013.~~2014.

During the first ~~nine months~~quarter of ~~2014~~,2015, the fair value measurements of assets acquired and liabilities assumed of ~~PSS World Medical~~Celesio as of the acquisition date were refined. ~~This refinement~~Among the adjustments recorded, the fair value of acquired intangible assets was decreased by $536 million. The fair value was primarily determined by applying the income approach using unobservable inputs for projected cash flows and a discount rate, which were refined during the current period, and are considered Level 3 inputs under the fair value measurements and disclosure guidance. These refinements did not have a significant impact on our condensed consolidated statements of operations, balance sheets or cash flows in any period and, therefore, we have not retrospectively adjusted our financial statements. These amounts are subject to change within the measurement period as our fair value assessments are finalized. Financial results for PSS World Medical have been included in the results of operations within our Medical-Surgical distribution and services business, which is part of our Distribution Solutions segment since the date of acquisition.

On ~~April 6, 2012, we purchased the remaining~~ ~~50%~~ ~~ownership interest in our corporate headquarters building located in San Francisco, California, for~~ ~~$90~~ ~~million, which was funded from cash on hand. We previously held a~~ ~~50%~~ ~~ownership interest and were the primary tenant in this building. This transaction was accounted for as a step acquisition, which required that we re-measure our previously held~~ ~~50%~~ ownership interest to fair value and record the difference between the fair value and carrying value as a gain in the consolidated statements of operations. The re-measurement to fair value resulted in a non-cash pre-tax gain of ~~$81~~ ~~million ($51~~ ~~million after-tax), which was recorded as a gain on business combination within Corporate operating expenses in the consolidated statements of operations during the first quarter of 2013.~~

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~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~The total fair value of the net assets acquired was~~ ~~$180~~ ~~million, which was allocated as follows: building and improvements of~~ ~~$113~~ ~~million and land of~~ ~~$58~~ million, with the remainder allocated for settlement of our pre-existing lease and lease intangible assets. The fair value of the building and improvements was determined based on current market replacement costs less depreciation and unamortized tenant improvement costs, as well as other relevant market information, which are considered to be Level 3 inputs under the fair value measurements and disclosure guidance. The building and improvements have a weighted average useful life of ~~30 years. The fair value of the land was determined using comparable sales of land within the surrounding market, which is considered to be a Level 2 input.~~

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

Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes. The pro forma results of operations for our business acquisitions and the results of operations for these acquisitions since the acquisition date have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.


3.	~~Acquisition of Celesio AG~~Noncontrolling Interests

~~On October 24, 2013,~~At June 30, 2014, we entered into (i) a Share Purchase Agreement (the “SPA”) with Franz Haniel & Cie. GmbH (“Haniel”) and (ii) a Business Combination Agreement (the “BCA”) with Celesio AG (“Celesio”). Celesio’s issued and outstanding share capital was 50.01% owned by Haniel. Celesio is an international wholesale and retail company and provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio operates in 14 countries and is headquartered in Stuttgart, Germany.approximately

Under the original terms of the SPA and BCA, McKesson was to acquire a majority stake in Celesio for €23.00 per share from Haniel and launch a parallel voluntary public tender offer to purchase Celesio’s publicly-traded shares at €23.00 per share (the “Share Offer”) and tender offers for its outstanding convertible bonds at a price corresponding to the value of the underlying shares implied by a €23.00 per share offer price (the “Bond Offers” and, together with the “Share Offer,” the “2013 Tender Offers”).

~~The total original proposed transaction, including the assumption~~75.9% of Celesio’s outstanding debt, was valued at approximately €6.1 billion (or, assuming a currency exchange ratio of $1.35/1€, approximately $8.3 billion). The SPA included provisions allowing either party to terminate the agreement if certain conditions were not met. In particular, if applicable antitrust approval was not received by the closing date, or if we did not acquire at least 75% of Celesio’s shares on aand fully diluted ~~basis, either Haniel or McKesson could terminate~~common shares, which was primarily obtained through our February 2014 acquisition of the ~~agreement. We intended~~then outstanding common shares and certain convertible bonds of Celesio. In April 2014, we completed tender offers and paid $32 million in cash to ~~complete the acquisition~~acquire approximately 1 million additional common shares of Celesio, which increased our ownership share by ~~utilizing the below described senior bridge term loan~~0.5% and ~~cash on hand.~~

~~In October 2013, we entered into a $5.5 billion 364-day unsecured Senior Bridge Term Loan Agreement (the “2013 Bridge Loan”).~~decreased noncontrolling interests by $35 million since March 31, 2014. The ~~2013 Bridge Loan contained terms substantially similar to those contained~~effect of changes in our ~~existing revolving credit facility. Borrowings under the 2013 Bridge Loan were generally~~ownership interest in Celesio on our equity of $3 million was recorded as an increase to ~~bear interest based upon either a prime rate or the London Interbank Offered Rate. In addition, the 2013 Bridge Loan required that we maintain a debt~~McKesson’s stockholders’ paid-in capital. Net income attributable to ~~capital ratio of no greater than 65% throughout the term of the 2013 Bridge Loan. We expected~~McKesson and transfers from noncontrolling interests to ~~refinance all or part of the outstanding amounts under the 2013 Bridge Loan with longer-term financing prior~~McKesson equity amounted to ~~the end of the 2013 Bridge Loan’s 364-day term.~~

In October 2013, we also entered into a foreign currency option (the “Option”) to hedge a portion of the Euro denominated acquisition purchase price. The Option provided the right but not the obligation to purchase €1.6 billion at $1.40/1€. The Option was not designated for hedge accounting and, accordingly, changes in the fair value of the contract of $13$406 million ~~were recorded directly in earnings~~ for the first quarter ~~ended December 31, 2013.~~

In November 2013, we amended our Accounts Receivable Sales Facility and Revolving Credit Facility (these facilities are described in Financial Note 10, “Debt and Financing Activities”). The amendments added an extended cure period to both facilities with respect to defaults under the facilities relating to Celesio. Additionally, the amendments increased the maximum debt to capital ratio covenant from 56.5% to 65% for the Accounts Receivable Sales Facility, and upon completion of ~~the acquisition of Celesio, for the Revolving Credit Facility.~~2015.

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~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

On December 5, 2013, we commenced the voluntary public tender offers. On January 9, 2014, we and Haniel amended the SPA to increase the price to be paid per share of Celesio from €23.00 to €23.50 and we increased the purchase price in the Share Offer to €23.50 per share and the purchase price offered in the Bond Offers to a price corresponding to the value of the underlying shares implied by a €23.50 per share offer price. The Tender Offers expired on January 9, 2014. On January 13, 2014, the commitments under the 2013 Bridge Loan automatically terminated upon the failure of the 2013 Tender Offers and the provisions of the amendments to the Accounts Receivable Sales Facility and Revolving Credit Facility terminated other than the increase to the debt to capital ratio for the Accounts Receivable Sales Facility, which remains in effect. On January 13, 2014, we announced that the 2013 Tender Offers had failed to meet the minimum 75% completion condition outlined in the 2013 Tender Offers. On January 17, 2014, the Option expired.

On January 23, 2014, we entered into (i) an amendment to the BCA, (ii) an amended and restated SPA with Haniel, and (iii) a Bond Purchase Agreement with Elliott International, L.P., The Liverpool Limited Partnership and Elliott Capital Advisers, L.P. (collectively, the “Acquisition”). Upon completion of the Acquisition, we will acquire approximately ~~75.99%~~ of Celesio’s shares currently outstanding for €23.50 per share. These agreements are not subject to any closing conditions. The Acquisition is expected to close during our fourth quarter of fiscal year 2014, which will result in McKesson achieving more than ~~75%~~ ownership of Celesio shares on a fully diluted basis following a conversion of the Celesio convertible bonds into Celesio shares. We intend to utilize the below described bridge term loan and cash on hand to complete the Acquisition. We also intend to launch and complete a voluntary tender offer ( the “2014 Tender Offer”) of ~~€23.50~~ ~~per Celesio share in the fourth quarter of fiscal year 2014. The total proposed transaction, including the assumption of Celesio’s outstanding debt, is currently valued at approximately~~ ~~€6.4 billion~~ ~~(or, assuming a currency exchange ratio of~~ ~~$1.37/1€ as of January 23, 2014, approximately~~ ~~$8.7 billion~~).

~~On January 23, 2014, we entered into a~~ ~~$5.5 billion364~~-day unsecured Senior Bridge Term Loan Agreement (the “2014 Bridge Loan”) under terms substantially similar to those previously in place for the 2013 Bridge Loan. The borrowings under the 2014 Bridge Loan will be made available to us at our request to: (i) pay the Acquisition consideration, (ii) fund additional acquisitions, if any, of Celesio shares and convertible bonds, including shares acquired in the 2014 Tender Offer and (iii) pay transaction costs associated with the Acquisition. The 2014 Bridge Loan requires that we maintain a debt to capital ratio of no greater than ~~65%~~ throughout the term of the 2014 Bridge Loan. In the fourth quarter of fiscal year 2014, we amended our Accounts Receivable Sales Facility and Revolving Credit Facility to revive the extended cure period under both facilities with respect to defaults relating to Celesio and to the Revolving Credit Facility to revive the change of the debt to capital ratio from ~~56.5%~~ to ~~65%. We expect that we will refinance all or part of the outstanding amounts under the 2014 Bridge Loan with longer-term financing prior to the end of the 2014 Bridge Loan’s~~ ~~364-day term.~~

During the quarter ended December 31, 2013, we incurred $35 million of expenses related to the acquisition of Celesio. These expenses primarily consisted of professional fees, Option costs and fees associated with the 2013 Bridge Loan. Amounts incurred prior to the third quarter were not material. Expenses were recorded within the Corporate segment as follows: $12 million in operating expenses, $13 million in other income (loss), net and $10 million in interest expense in our condensed consolidated statement of operations.


4.	~~Technology Solutions Charges~~

During the third quarter of 2014, our Technology Solutions segment recorded pre-tax charges totaling $57 million. These charges primarily consist of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of reduction-in-workforce severance charges. Included in the total charge was $35 million for severance for employees primarily in our research and development, customer services and sales functions, and $15 million for asset impairments which primarily represents the write-off of deferred costs related to a product that will no longer be developed. Charges were recorded in our condensed consolidated statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses.


5.	~~Sale of an Equity Investment~~

~~In September 2013, we completed the sale of our~~ ~~49%~~ ~~equity interest in Nadro, S.A. de C.V. (“Nadro”). Under the terms of the agreement, we received~~ ~~$41~~ million in total cash consideration. There was no material gain or loss on the disposition based on the adjusted net realizable value of the investment at the time of the sale. Prior to the sale, our investment in Nadro was accounted for under the equity method of accounting within our Distribution Solutions segment.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


6.4.	Discontinued Operations

In 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment and certain businesses from our Distribution Solutions segment. As required, we classified the results of operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements in 2014 and depreciation and amortization expense was not recognized.

During the third quarter of 2014, our Hospital Automation business was sold for net cash proceeds of $55 million and we recorded a pre-tax and after-tax loss of $5 million and $7 million.

During the third quarter of 2014, we recorded an $80 million pre-tax ($80 million after-tax) non-cash impairment charge to reduce the carrying value of our International Technology business to its estimated net realizable value (fair value less costs to sell). The charge was primarily the result of the terms of the preliminary purchase offers received for this business during the third quarter of 2014. The impairment charge was primarily attributed to goodwill and other long-lived assets and as a result, there was no tax benefit associated with this charge. During the first quarter of 2015, we entered into an agreement to sell the software business within our International Technology business. We completed the sale of the software business on July 1, 2014 and no material gain or loss is anticipated.

During the first quarter of 2015, we also decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the United Kingdom, which we now intend to wind down in 2016. As a result, we reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, as a continuing operation for all periods presented. During the first quarter of 2015, we also recorded a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our condensed consolidated statement of operations as follows: $32 million in cost of sales and $2 million in operating expenses.

A summary of results of discontinued operations is as follows:



	Quarter Ended June 30,
(In millions)	2014			2013
Revenues	$	36		$	85

Loss from discontinued operations	$	(15	)	$	(3	)
Income tax (expense) benefit	1			(1		)
Loss from discontinued operations, net of tax	$	(14	)	$	(4	)

The assets and liabilities of our discontinued operations are classified as held-for-sale effective in 2014. All applicable assets of the businesses to be sold are included under the caption “Prepaid expenses and other” and all applicable liabilities under the caption “Other accrued liabilities” within our condensed consolidated balance sheet at June 30, 2014 and March 31, 2014. The carrying values of the assets and liabilities classified as held-for-sale were $138 million and $144 million at June 30, 2014 and $267 million and $248 million at March 31, 2014.


5.	Income Taxes

As of ~~December 31, 2013~~June 30, 2014, we had $~~656~~582 million of unrecognized tax benefits, of which $~~500~~427 million would reduce income tax expense and the effective tax rate, if recognized. During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $~~227~~158 million. However, this amount may change ~~because~~as we continue to have ongoing negotiations with various taxing authorities throughout the year.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

We have received reassessments from the Canada Revenue Agency (“CRA”) for a total of ~~$210~~$261 million related to a transfer pricing matter impacting years 2003 through ~~2008. Payments of approximately $156 million of these reassessments have been made to the CRA to stop the accrual of interest. In prior years, we appealed the reassessment for~~ ~~2003~~ ~~to the Tax Court of Canada and filed a notice of objection for 2004 through 2008.~~2010. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment ~~with respect to 2003. On January 10, 2014,~~and we have filed a Notice of Appeal to the Federal Court of Appeal ~~from~~regarding this tax year. During the ~~judgment~~first quarter of 2015, we filed a Notice of Appeal with the Tax Court of ~~Canada. As a result of the unfavorable Tax Court Decision~~Canada relating to ~~2003, we recognized a discrete tax charge of $122 million in~~ the ~~quarter, which includes tax and interest for the years 2003~~2004 through ~~2013.~~2008 reassessments. The ultimate resolution of these issues could result in an increase or decrease to income tax expense.

~~We have received tax assessments of $98 million from~~Through the ~~U.S.~~appeals process, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006. ~~We disagree with~~As a ~~substantial portion~~result of ~~the tax assessments primarily relating to transfer pricing. We are pursuing administrative relief through the appeals process. We continue to believe in the merits~~this agreement we will pay additional taxes of ~~our tax positions and that we~~$21 million, which have ~~adequately provided for any potential adverse results relating to these examinations~~already been accrued in our financial statements. We are also recognizing a $17 million discrete tax benefit during the quarter to record a previously unrecognized tax benefit.

The IRS is currently examining our U.S. corporation income tax returns for 2007 through ~~2009~~.2009. The CRA is currently examining our Canadian ~~income~~Income tax returns for ~~2009~~2011 through 2013. In nearly all jurisdictions, the tax years prior to 2003 are no longer subject to examination.

We report interest and penalties on tax deficiencies as income tax expense. During the quarter, we recognized income tax expense of $4 million, before any tax benefit, related to interest and penalties in our condensed consolidated statements of operations. At ~~December 31, 2013~~June 30, 2014, before any tax benefits, our accrued interest and penalties on unrecognized tax benefits amounted to $~~180~~161 million. ~~We recognized an income tax expense of~~ ~~$44~~ ~~million and~~ ~~$50~~ ~~million, before any tax benefit, related to interest and penalties in our condensed consolidated statements of operations during the third quarter and first nine months of 2014.~~


7.	~~Discontinued Operations~~

In the first quarter of 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment and a small business from our Distribution Solutions segment. The results of operations and cash flows for these businesses are classified as discontinued operations for the ~~quarter and nine months endedDecember 31,2013~~ ~~and~~ ~~2012~~ ~~in our condensed consolidated financial statements.~~

During the third quarter of 2014, we recorded an $80 million non-cash pre-tax and after-tax impairment charge to reduce the carrying value of our International Technology business to its estimated net realizable value (fair value less costs to sell). The charge is primarily the result of the terms of the preliminary purchase offers received for this business during the third quarter of 2014. The ultimate selling price of our International Technology business may be higher or lower than our current assessment of fair value. The impairment charge is included in loss from discontinued operations, net of tax, in our condensed consolidated statement of operations. The impairment charge was primarily attributed to goodwill and other long-lived assets of our International Technology business which are included in the assets classified as held for sale at December 31, 2013. There was no tax benefit associated with the impairment charge.

~~On October 31, 2013, we sold our Hospital Automation business for net cash proceeds of $55 million and recorded a pre-tax and after-tax loss of $5 million and $7 million.~~

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~A summary of results of discontinued operations is as follows:~~

Quarter Ended December 31, Nine Months Ended December 31,
(In millions) 2013
2012 2013 2012
Revenues $ 78
$ 88
$ 304
$ 282

Loss from discontinued operations $ (85 ) $ (13 ) $ (98 ) $ (5 )
Loss on sale (5 ) —
(5 ) —
Loss from discontinued operations before income tax (90 ) (13 ) (103 ) (5 )
Income tax (expense) benefit (2 ) 5
3
—
Loss from discontinued operations, net of tax $ (92 ) $ (8 ) $ (100 ) $ (5 )

The assets and liabilities of our discontinued operations were classified as held-for-sale effective June 30, 2013. All applicable assets of the businesses to be sold are included under the caption “Prepaid expenses and other” and all applicable liabilities under the caption “Other accrued liabilities” within our condensed consolidated balance sheet at ~~December 31,2013. The carrying values of the assets and liabilities classified as held-for-sale were~~ ~~$258~~ ~~million and~~ ~~$207~~ ~~million at December 31, 2013.~~


8.6.	Earnings Per Common Share

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

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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


	Quarter Ended December 31,						Nine Months Ended December 31,						Quarter Ended June 30,
(In millions, except per share amounts)	2013			2012			2013			2012			2014			2013
Income from continuing operations	$	156		$	306		$	992		$	1,084		$	425		$	428
Net income attributable to noncontrolling interests													(8		)	—
Income from continuing operations attributable to McKesson													417			428
Loss from discontinued operations, net of tax	(92		)	(8		)	(100		)	(5		)	(14		)	(4		)
Net income	$	64		$	298		$	892		$	1,079
Net income attributable to McKesson													$	403		$	424

Weighted average common shares outstanding:
Basic	230			235			229			236			231			227
Effect of dilutive securities:
Options to purchase common stock	2			1			1			1			2			2
Restricted stock units	2			4			3			3			2			3
Diluted	234			240			233			240			235			232

Earnings (loss) per common share: ⁽¹⁾
Earnings (loss) per common share attributable to McKesson: ⁽¹⁾
Diluted
Continuing operations	$	0.67		$	1.27		$	4.26		$	4.51		$	1.78		$	1.84
Discontinued operations	(0.39		)	(0.03		)	(0.43		)	(0.02		)	(0.06		)	(0.01		)
Total	$	0.28		$	1.24		$	3.83		$	4.49		$	1.72		$	1.83
Basic
Continuing operations	$	0.68		$	1.30		$	4.34		$	4.60		$	1.81		$	1.88
Discontinued operations	(0.40		)	(0.03		)	(0.44		)	(0.02		)	(0.06		)	(0.02		)
Total	$	0.28		$	1.27		$	3.90		$	4.58		$	1.75		$	1.86


(1)	Certain computations may reflect rounding adjustments.

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately ~~nil~~2 million and 13 million potentially dilutive securities were excluded from the computations of diluted net earnings per common share for the quarters ended ~~December 31,2013~~June 30, 2014 and ~~2012~~ ~~and~~ ~~3 million~~ ~~and~~ ~~5 million~~ ~~potentially dilutive securities were excluded from the computations of diluted net earnings per common share for the~~ ~~nine months endedDecember 31,~~2013 ~~and~~ ~~2012~~, as they were anti-dilutive.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


9.7.	Goodwill and Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:


(In millions)	Distribution Solutions			Technology Solutions			Total			Distribution Solutions		Technology Solutions		Total
Balance at March 31, 2013	$	4,413		$	1,992		$	6,405
Balance, March 31, 2014										$	8,078	$	1,849	$	9,927
Goodwill acquired	45			—			45			14		—		14
Amount reclassified to assets held-for-sale	—			(127		)	(127		)
Acquisition accounting and other										445		—		445
Foreign currency translation adjustments and other	(13		)	(10		)	(23		)	41		4		45
Balance at December 31, 2013	$	4,445		$	1,855		$	6,300
Balance, June 30, 2014										$	8,578	$	1,853	$	10,431

As of ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014, the accumulated goodwill impairment losses were ~~$36~~$36 million in our Technology Solutions segment.

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~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Information regarding intangible assets is as follows:


	December 31, 2013								March 31, 2013							June 30, 2014								March 31, 2014
(Dollars in millions)	Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer lists	7	$	1,791	$	(804	)	$	987	$	1,761	$	(672	)	$	1,089	9	$	3,022	$	(937	)	$	2,085	$	3,384	$	(863	)	$	2,521
Service agreements	17	999		(157		)	842		1,018		(114		)	904		16	1,014		(189		)	825		995		(173		)	822
Pharmacy licenses																27	1,051		(28		)	1,023		1,219		(11		)	1,208
Trademarks and trade names	16	201		(53		)	148		208		(46		)	162		15	377		(68		)	309		371		(59		)	312
Technology	4	215		(170		)	45		271		(207		)	64		3	218		(177		)	41		219		(173		)	46
Other	6	86		(42		)	44		89		(38		)	51		4	173		(66		)	107		165		(52		)	113
Total		$	3,292	$	(1,226	)	$	2,066	$	3,347	$	(1,077	)	$	2,270		$	5,855	$	(1,465	)	$	4,390	$	6,353	$	(1,331	)	$	5,022

Amortization expense of intangible assets was $70130 million and $~~211~~71 million for the quarters ended ~~quarter and nine months endedDecember 31,2013~~June 30, 2014 and ~~$52 million~~ ~~and~~ ~~$147 million~~ ~~for the~~ ~~quarter and nine months endedDecember 31,2012~~2013. Estimated annual amortization expense of these assets is as follows: $~~279~~383 million, $~~261~~468 million, $~~229~~429 million, $~~207~~410 million and $~~190~~382 million for ~~2014~~the remainder of 2015 and each of the succeeding years through ~~2018~~2019 and $~~1,111~~2,318 million thereafter. All intangible assets were subject to amortization as of ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014.


~~10.~~8.	Debt and Financing Activities

Celesio Debt

Upon the acquisition of Celesio, as required, we consolidated Celesio’s debt including corporate bonds consisting of 4.00% bonds due October 18, 2016 and 4.50% bonds due April 26, 2017. At June 30, 2014 and March 31, 2014, $500 million and $507 million of the 4.00% bonds and $726 million and $737 million of the 4.50% bonds, for a total of $1,226 million and $1,244 million, were outstanding. As of March 31, 2014, these bonds were classified within current liabilities as bondholders had the option to redeem the bonds at par value plus accrued interest. This redemption option expired during the first quarter of 2015 and the remaining bonds outstanding will mature according to their respective maturity dates. Accordingly, as of June 30, 2014, these bonds have been classified as long-term debt.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

We also consolidated Celesio’s accounts receivable factoring facilities (the “Factoring Facilities”) with a total committed and uncommitted balance of $315 million. The Factoring Facilities will expire through September 2015. During the first quarter of 2015, Celesio borrowed and repaid $758 million and $746 million of short-term borrowings under the Factoring Facilities. At June 30, 2014 and March 31, 2014, there were $258 million and $246 million in secured borrowings and related securitized accounts receivable outstanding under the Factoring Facilities.

Celesio also maintains a syndicated €500 million five-year senior unsecured revolving credit facility, which expires in February 2018. Borrowings under this facility bear interest based upon the Euro Interbank Offered Rate plus an agreed margin. There were no borrowings under this facility during the first quarter of 2015 and there were no amounts outstanding under this facility as of June 30, 2014 and March 31, 2014.

Celesio also maintains bilateral credit lines with a total committed and uncommitted balance of $2.0 billion. During the first quarter of 2015, Celesio borrowed and repaid $159 million and $30 million under these credit lines primarily relating to short‑term borrowings. As of June 30, 2014 and March 31, 2014, there were $321 million and $188 million outstanding under these credit lines.

Accounts Receivable Sales Facility

~~In May 2013, we extended our existing~~We have an accounts receivable sales facility ~~for~~(the “Facility”) with a~~six~~ month period under terms substantially similar to those previously in place. In November 2013, we amended the facility to extend the term for an additional year, increased the maximum debt to capital ratio from ~~56.5%~~ to ~~65%~~ ~~and added an extended cure period with respect to defaults under the facility relating to Celesio. The~~ committed balance of ~~the facility is~~ $1.35 billion, although from ~~time-to-time,~~time to time, the available amount of the ~~facility~~Facility may be less than $1.35 billion based on accounts receivable concentration limits and other eligibility requirements. ~~On January 13, 2014, the amendment to the extended cure period terminated upon the failure of the 2013 Tender Offers.~~ The increase to the debt to capital ratio remains in effect. In the fourth quarter of fiscal 2014, we amended this facility to revive the extended cure period with respect to defaults relating to Celesio. The amended facilityFacility will expire in November 2014~~. We~~ and we anticipate renewing the ~~facility~~Facility before its expiration.

During the first ~~nine months~~quarter of ~~2014, we borrowed and repaid~~ ~~$150~~ ~~million of short-term borrowings under the facility; and for the first nine months of 2013, we borrowed and repaid~~ ~~$1,125~~ ~~million and $1,525 million. At December 31, 2013 and~~ ~~March 31, 2013~~2015, there were no borrowings under the Facility. During the first quarter of 2014, we borrowed and repaid $100 million of short-term borrowings under the Facility. At June 30, 2014 and March 31, 2014, there were no short‑term borrowings and related securitized accounts receivable outstanding under ~~this facility.~~the Facility.

The ~~facility~~Facility contains requirements relating to the performance of the accounts receivable and covenants relating to the Company. If we do not comply with these covenants, our ability to use the ~~facility~~Facility may be suspended and ~~repayments~~repayment of any outstanding balances under the ~~facility~~Facility may be required. At ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013,~~2014, we were in compliance with all covenants.

Revolving Credit Facility

We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which expires in September 2016. In November 2013, we amended this facility to increase the maximum debt to capital ratio from 56.5% to 65%, effective upon the Celesio acquisition date, and added an extended cure period with respect to defaults under the credit facility relating to Celesio. On January 13, 2014, the amendment to the Revolving Credit Facility terminated upon the failure of the 2013 Tender Offers. The maximum debt to capital ratio on this facility remained at 56.5% as of December 31, 2013. Borrowings under this facility bear interest based upon either the London Interbank Offered Rate or a prime rate. There were no borrowings under this facility during the first ~~nine months~~quarters of ~~2014~~2015 and ~~2013~~2014 ~~and as~~. As of ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014, there were no amounts outstanding under this facility. In


9.	Pension Benefits

Net periodic expense for the defined pension benefit plans of the Company and Celesio was $11 million for the first quarters of 2015 and 2014. Cash contributions to these plans were $15 million and $5 million for the first quarters of 2015 and 2014. The increase in contributions in 2015 compared to 2014 is primarily related to defined benefit pension plans of Celesio, which we acquired in the fourth quarter of ~~fiscal 2014, we amended this facility to revive the extended cure period with respect to defaults relating to Celesio and the change of the debt to capital ratio from~~ ~~56.5%~~ to ~~65%~~.2014.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

~~Refer to Financial Note 3, “Acquisition~~The net periodic expense for our pension plans, which includes net pension expense for Celesio in the first quarter of ~~Celesio AG”,~~2015, is as follows:



	U.S. Plans						Non-U.S. Plans
	Quarter Ended June 30,						Quarter Ended June 30,
(In millions)	2014			2013			2014			2013
Service cost - benefits earned during the year	$	—		$	1		$	4		$	1
Interest cost on projected benefit obligation	5			5			9			1
Expected return on assets	(5		)	(5		)	(7		)	(2		)
Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation	4			9			1			1
Net periodic pension expense	$	4		$	10		$	7		$	1

The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for ~~additional information regarding our financing activities.~~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.


~~11.~~10.	Hedging Activities

In the ~~first quarter~~normal course of ~~2013,~~business, we ~~settled~~are exposed to interest rate changes and foreign currency fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps and forward foreign exchange contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.

Foreign currency rate risk

Prior to the acquisition of Celesio, the majority of our operations were conducted in U. S. dollars; however, certain assets and liabilities, revenues and expense and purchasing activities were incurred in and exposed to other currencies. We have established certain foreign currency rate risk programs that manage the impact of foreign currency fluctuation. These programs are utilized on a transactional basis when we consider there to be a risk in fair value or volatility in cash flows. These programs reduce but do not entirely eliminate foreign currency rate risk.

Historically, we have entered into forward ~~contract~~contracts and a foreign currency option to hedge ~~British pound denominated~~against cash flows ~~with~~denominated primarily in Canadian dollars, Euros and British pounds. At June 30, 2014 and March 31, 2014, forward contracts having a ~~gross~~total notional value of $~~151~~463 million ~~million. In the third quarter of 2013, we entered into an additional forward contract to hedge a separately identifiable Canadian dollar denominated cash flow with a notional value of~~ ~~$177~~ million. This contract was renewed and was settled on its maturity in the first quarter of 2014. In the second quarter of 2014, we entered into and settled a forward contract to hedge Mexican peso denominated cash flows related to our sale of Nadro with a gross notional value of ~~$41~~ million. In the third quarter of 2014, we entered into a forward contract to hedge a separately identifiable Canadian dollar denominated cash flow with a notional value of $90 million. This contract matures in the fourth quarter of 2014. None of these contracts were designated for hedge ~~accounting~~accounting. These contracts will mature between March 2015 and ~~accordingly, changes~~March 2020. Changes in the fair values ~~of these~~for contracts ~~were recorded directly in earnings. Amounts recorded to earnings were not material for the quarters and nine months ended~~ ~~December 31, 2013~~ ~~and~~ ~~2012. At~~ ~~December 31, 2013~~ ~~and~~ ~~March 31, 2013, the gross notional values of the these contracts were $90 million and~~ ~~$172~~ ~~million.~~

~~In 2012, we entered into a number of forward contracts to hedge Canadian dollar denominated cash flows. These contracts mature over a period of eight years, ending in 2020, and have been~~ designated for hedge ~~accounting. Accordingly, changes in the fair values of these contracts~~accounting are recorded to accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings; amounts recorded to earnings for these contracts were not material during the first quarters of 2015 and 2014. Changes in the fair values for contracts not designated for hedge accounting are recorded directly to earnings; amounts recorded to earnings for these contracts were not material during the first quarter of 2014. All forward contracts were designated for hedge accounting during the first quarter of 2015.

Celesio has a number of forward contracts to hedge against cash flows denominated primarily in British pounds and other European currencies. These contracts will mature from July 2014 to June 2015. None of these contracts were designated for hedge accounting and accordingly, changes in the fair value of these contracts are recorded directly in earnings. At ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~,2014, the total notional values of these contracts were $1,449 million and $1,091 million. Amounts recorded to earnings were not material during the first quarter of 2015.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Interest rate risk

Celesio also has interest rate swaps to hedge the interest rate risk associated with Celesio’s variable rate debt. Interest rate swaps are used to modify the market risk exposures in connection with the variable rate debt to achieve primarily Euro dollar fixed rate interest expense. The interest rate swap transactions generally involve the exchange of floating or fixed interest payments. The interest rate swaps will mature through September 2014. These contracts are not designated for hedge accounting and, accordingly, changes in the fair value of the swaps are recorded directly in earnings. At June 30, 2014 and March 31, 2014, the total gross notional values of these contracts ~~designated for hedge accounting,~~ were ~~$503~~$68 million and $96 million. ~~No amounts were reclassified~~Amounts recorded to earnings inwere not material during the ~~quarters and nine months ended~~ ~~December 31, 2013~~ ~~and~~ ~~2012~~.first quarter of 2015.

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



	Balance Sheet Caption	June 30, 2014						March 31, 2014
		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	$	2	$	—	$	64	$	4	$	—	$	64
Foreign exchange contracts (non-current)	Other assets	15		—		399		27		—		399
Total		$	17	$	—			$	31	$	—
Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	2	$	—	$	174	$	2	$	—	$	255
Foreign exchange contracts (current)	Other accrued liabilities	—		26		1,275		—		13		836
Interest rate swap contracts (current)	Other accrued liabilities	—		—		68		—		1		96
Total		$	2	$	26			$	2	$	14

Refer to Financial Note ~~3, “Acquisition~~11, "Fair Value Measurements," for more information on these recurring fair value measurements.

Table of ~~Celesio AG,” for additional information regarding our hedging activities.~~Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


~~12.~~11.	Fair Value Measurements

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

At ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014, the carrying amounts of cash, cash equivalents, restricted cash, marketable securities receivables, drafts and accounts payable and other current liabilities generally approximated their estimated fair values because of the short maturity of these financial instruments.

Our long-term debt and other financing are carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were ~~$4.9~~$10.2 billion and ~~$5.1~~$10.7 billion at ~~December 31, 2013~~June 30, 2014 and ~~$4.9~~$10.4 billion and ~~$5.5~~$10.8 billion at March 31, ~~2013~~2014. The estimated fair values of our long-term debt and other financing were determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.

~~Cash~~Included in cash and cash equivalents at ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014 ~~included~~were investments in money market funds, time deposits and repurchase agreements of ~~$2.0~~$3.4 billion and ~~$1.6~~$2.9 billion, which are reported at fair value. The fair value of these investments 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.

Fair values of our forward foreign currency derivatives were determined using quoted market prices of similar instruments in an active market 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. ~~The fair value of these derivative contracts, which are subject~~Refer to ~~a master netting arrangement under certain circumstances, is presented~~Financial Note 10, "Hedging Activities," for more information on ~~a gross basis in the condensed consolidated balance sheet. Fair values for~~ our forward foreign currency ~~hedges were not material at~~ ~~December 31, 2013~~ ~~and~~ ~~March 31, 2013~~.derivatives.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the quarters ~~and nine months~~ ended June 30, ~~December 31, 2013~~2014 and ~~2012~~2013.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

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


~~13.~~12.	Commitments and Contingent Liabilities

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

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

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

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Significant developments in previously reported proceedings and in other litigation and claims, since the filing of our ~~2013~~2014 Annual Report ~~on Form 10-K and our Quarterly Report on Form 10-Q for the periods ended June 30, 2013 and September 30, 2013,~~ are set out below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.

I. Litigation, Government Subpoenas and Investigations

On May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against Dragonfly GmbH & Co KGaA (“Dragonfly”), a wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Dragonfly violated German takeover law in connection with the Company’s acquisition of Celesio by paying more to some holders of Celesio’s convertible bonds than it paid to the shareholders of Celesio’s stock, and seeking approximately $356,000 (or €261,000) in damages plus an unspecified amount of interest, Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, (No. 3-05 O 44/14). Other minority shareholders may seek to file similar lawsuits alleging the same claim, seeking damages based on their shares of Celesio stock. Dragonfly has not yet responded to the complaint.

On June 17, 2014, U.S. Oncology Specialty, LP (“USOS”), an indirect wholly-owned subsidiary of the Company, was served with a fifth amended qui tam complaint filed in the United States District Court for the Eastern District of New York by a relator, purportedly on behalf of the United States and twelve states, against USOS and fifteen oncology practices, alleging that USOS facilitated the payment of illegal “kickbacks” from Amgen to the oncology practices in violation of the Anti-Kickback Statute, the False Claims Act, and various state false claims statutes, and seeking damages, treble damages, civil penalties, attorneys’ fees and costs of suit, all in unspecified amounts, United States ex rel. Hanks v. U.S. Oncology Specialty, LP, et al., (CV 04-3983 (SJ)). Previously, the United States and the twelve states named in the operative complaint declined to intervene in the case. The Court set August 1, 2014 as the deadline for USOS and the other defendants to respond to the complaint.

From ~~time-to-time,~~time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely 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 ~~health care~~healthcare industry, as well as to settlements. Examples of such ~~requests~~subpoenas and investigations are included in the ~~Company's 2013~~Company’s 2014 Annual Report on Form 10-K, and ~~as previously reported,~~ include subpoenas from the U.S. Drug Enforcement ~~Agency~~Administration to certain of the ~~Company's~~Company’s pharmaceutical distribution facilities seeking information and records about the ~~Company's~~Company’s distribution of certain controlled substances. The Company is currently responding to these requests. In addition, as previously reported, the Company was informed in the third quarter of 2014 ~~the Company was informed~~ of an investigation by the United States Department of Justice through the United States Attorney’s Office for the Northern District of West Virginia of potential claims under the Comprehensive Drug Abuse Prevention and Control Act. The Company believes that the investigation is focused on the Company’s pharmaceutical distribution of certain controlled substances by its Landover, Maryland distribution center, which closed in 2012.

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~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

~~II. Average Wholesale Price (“AWP”) Litigation~~

The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving other public entity claims. Following our most recent review of the reserve for estimated probable losses from current and possible future public entity AWP claims, the Company recorded pre-tax charges of ~~$15~~ ~~million,~~ ~~$35~~ ~~million and $18 million (total of~~ ~~$68~~ ~~million) during the first, second and third quarters of 2014. The Company recorded pre-tax charges of~~ ~~$16~~ ~~million and~~ ~~$44~~ ~~million (total of~~ ~~$60~~ million) during the first and second quarters of 2013. No additional amounts were recorded in the third quarter of 2013. Pre-tax charges relating to changes in the Company’s AWP litigation reserve, including accrued interest, are recorded in our Distribution Solutions segment. The Company’s AWP litigation reserve is included in other current liabilities in the consolidated balance sheets. In view of the uncertainties of the timing and outcome of this type of litigation, it is possible that the ultimate costs of these matters may exceed or be less than the reserve.

~~The following is the activity related to the AWP litigation reserve for the first~~ ~~nine months of 2014 and 2013~~:

Nine Months Ended December 31,
(In millions) 2013 2012
AWP litigation reserve at beginning of period $ 42
$ 453
Charges incurred 68
60
Payments made (86 ) (470 )
AWP litigation reserve at end of period $ 24
$ 43


~~14.~~13.	Stockholders’ Equity

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

In July 2013, the Company’s quarterly dividend was raised from $0.20 to $0.24 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.

~~In the fourth quarter~~

Table of ~~2013, we entered into an accelerated share repurchase program with a third party financial institution to repurchase~~ ~~$150~~ ~~million of the Company’s common stock. As of~~ ~~March 31, 2013, we had received~~ ~~1.2~~ ~~million shares representing the minimum number of shares due under this program. This program was completed on April 17, 2013 and we received~~ ~~0.2~~ ~~million additional shares on April 22, 2013. The total number of shares repurchased under this program was~~ ~~1.4~~ ~~million shares at an average price per share of~~ ~~$107.63~~.Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at ~~December 31, 2013~~June 30, 2014.

~~Table of Contents~~

~~McKESSON CORPORATION~~

~~FINANCIAL NOTES (CONTINUED)~~

~~(UNAUDITED)~~

Other Comprehensive Income (Loss)

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

Quarter Ended December 31,
Nine Months Ended December 31,
(In millions) 2013
2012
2013
2012
Foreign currency translation adjustments
Foreign currency translation adjustments arising during period, net of income tax (benefit) of nil, ($4), nil and ($2) $ (55 ) $ (16 ) $ (60 ) $ 14
Reclassified to income statement, net of income tax expense of nil, nil, $24 and nil ⁽¹⁾
—
—
44
—
(55 ) (16 ) (16 ) 14

Unrealized gains (losses) on cash flow hedges and other
Unrealized gains (losses) on cash flow hedges and other arising during period, net of income tax expense of nil, nil, nil and nil (1 ) —
(2 ) 2

Changes in retirement-related benefit plans
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of $4, $3, $10 and $8 ⁽²⁾
3
5
16
14
Foreign currency translation adjustments, net of income tax expense of nil, nil, nil and nil 1
—
(2 ) —
Reclassified to income statement, net of income tax expense of nil, nil, $1 and nil —
—
1
—
4
5
15
14

Other Comprehensive Income (Loss), net of tax $ (52 ) $ (11 ) $ (3 ) $ 30



	Quarter Ended June 30,
(In millions)	2014			2013
Foreign currency translation adjustments
Foreign currency translation adjustments arising during period, net of income tax expense of nil and $2 ⁽¹⁾	$	98		$	(61	)

Unrealized gains on cash flow hedges
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax expense of nil and nil	(2		)	1

Changes in retirement-related benefit plans
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of $1 and $4 ⁽²⁾	3			7
Foreign currency translation adjustments, net of income tax expense of nil and nil	(1		)	—
	2			7

Other comprehensive income (loss), net of tax	$	98		$	(53	)

(1)

~~As a result~~The first quarter of ~~our sale of our~~ ~~49%~~ ~~equity interest in Nadro,~~2015 includes net foreign currency translation ~~net losses~~loss of ~~$44~~$12 million ~~were reclassified from AOCI~~attributable to other income, within our condensed consolidated statement of operations. Such losses were previously considered in our impairment evaluation of the investment when we committed to a plan to sell the investment during the fourth quarter of 2013, and accordingly did not impact the 2014 earnings period for the third quarter and first nine months of 2014.

noncontrolling interests.


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

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in ~~our~~McKesson’s accumulated other comprehensive ~~income (loss),~~loss, net of tax, by component are as follows:


(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Losses on Cash Flow Hedges and Other, Net of Tax			Unrealized Net Loss and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)			Foreign Currency Translation Adjustments, Net of Tax		Unrealized Losses on Cash Flow Hedges, Net of Tax			Unrealized Net Loss and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2013	$	136		$	(5	)	$	(196	)	$	(65	)
Balance at March 31, 2014													$	168	$	(11	)	$	(160	)	$	(3	)

Other comprehensive income (loss) before reclassifications	(60		)	(2		)	14			(48		)	110		(2		)	—			108
Amounts reclassified to earnings	44			—			1			45
Amounts reclassified to earnings and other													—		—			2			2
Other comprehensive income (loss)	(16		)	(2		)	15			(3		)	110		(2		)	2			110
Balance at December 31, 2013	$	120		$	(7	)	$	(181	)	$	(68	)
Balance at June 30, 2014													$	278	$	(13	)	$	(158	)	$	107

1819

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McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)


~~15.~~14.	Segment Information

We report our operations in two operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including operating profit before interest expense, income taxes and results from discontinued operations.

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

Quarter Ended December 31, Nine Months Ended December 31,
(In millions) 2013 2012 2013 2012
Revenues
Distribution Solutions ⁽¹⁾

Direct distribution & services $ 24,859
$ 22,386
$ 71,620
$ 64,625
Sales to customers’ warehouses 4,416
4,468
13,204
14,621
Total U.S. pharmaceutical distribution & services 29,275
26,854
84,824
79,246
Canada pharmaceutical distribution & services 2,785
2,633
7,984
7,559
Medical-Surgical distribution & services 1,462
874
4,286
2,542
Total Distribution Solutions 33,522
30,361
97,094
89,347
Technology Solutions
Services 658
598
1,975
1,777
Software 107
120
338
357
Hardware 19
20
61
72
Total Technology Solutions 784
738
2,374
2,206
Total Revenues $ 34,306
$ 31,099
$ 99,468
$ 91,553

Operating profit
Distribution Solutions ^{(2) (3) (4) (5)}
$ 552
$ 525
$ 1,856
$ 1,646
Technology Solutions ⁽⁶⁾
37
92
269
274
Total 589
617
2,125
1,920
Corporate Expenses, Net ⁽⁷⁾
(112 ) (109 ) (307 ) (212 )
Interest Expense (69 ) (59 ) (187 ) (170 )
Income Before Income Taxes from Continuing Operations $ 408
$ 449
$ 1,631
$ 1,538



	Quarter Ended June 30,
(In millions)	2014			2013
Revenues
Distribution Solutions ⁽¹⁾
North America pharmaceutical distribution and services	$	34,304		$	30,046
International pharmaceutical distribution and services	7,607			—
Medical-Surgical distribution & services	1,379			1,357
Total Distribution Solutions	43,290			31,403

Technology Solutions - products and services	768			836
Total Revenues	$	44,058		$	32,239

Operating profit
Distribution Solutions	$	748		$	619
Technology Solutions ⁽²⁾	68			127
Total	816			746
Corporate Expenses, Net	(108		)	(85		)
Interest Expense	(101		)	(59		)
Income from Continuing Operations Before Income Taxes	$	607		$	602


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


(2)	~~Operating~~Technology Solutions operating profit for the ~~third~~ quarter ofended June 30, 2014 includes ~~AWP litigation charges~~a charge of ~~$18~~ ~~million and for the first~~ ~~nine months of 2014 and 2013~~ ~~includes AWP litigation charges of~~ ~~$68~~ ~~million and~~ ~~$60~~ ~~million, which were recorded in operating expenses.~~


~~(3)~~	~~Operating profit for the third quarter and first nine months of 2014 includes last-in-first-out (“LIFO”) charges of~~ ~~$142~~ ~~million and $186 million and, for the third quarter and first nine months of 2013 includes LIFO charges of~~ $2 ~~million and $5 million, which were recorded in cost of sales.~~


~~(4)~~	~~Operating profit for the third quarter and first nine months of 2014 includes the receipt of $27 million and~~ $34 million and for the third quarter and first nine months of fiscal year 2013 the receipt of $8 million and $27 million representing our share of settlements of antitrust class action lawsuits brought against drug manufacturers, which was recorded as a reduction to cost of sales.


~~(5)~~	~~Operating profit for the third quarter and first nine months of 2013 includes a $40 million charge for a legal dispute in our Canadian business, which was recorded in operating expenses.~~

~~(6)~~

Technology Solutions segment results for the third quarter of 2014 include product alignment charges, integration-related expenses and reduction-in-workforce severance charges totaling $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses. This segment’s results for the first nine months of 2014 include product alignment charges, integration-related expenses and reduction-in-workforce severance charges totaling $60 million, of which $34 million was recorded in cost of sales and $26 million was recorded in operating expenses.

~~(7)~~

~~Corporate expenses, net for the third quarter and first nine months of 2014 include $25 million of acquisition-related expenses and for the first nine months of 2013 are net of an~~ ~~$81~~ ~~million pre-tax gain on business combination~~ related to the ~~acquisition of the remaining~~ ~~50%~~ ~~ownership interest in~~retained workforce business within our ~~corporate headquarters building.~~

International Technology business.

1920

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)


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

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of 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, ~~2013~~2014 previously filed with the SEC on May ~~7, 2013~~14, 2014 (“~~2013~~2014 Annual Report”).

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

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

Results of Operations

~~Financial~~ Overview:


(In millions, except per share amounts)	Quarter Ended December 31,									Nine Months Ended December 31,
(In millions, except per share amounts)	2013			2012			Change			2013			2012			Change

(Dollars in millions, except per share data)																			Quarter Ended June 30,
(Dollars in millions, except per share data)																			2014			2013			Change
Revenues	$	34,306		$	31,099		10		%	$	99,468		$	91,553		9		%	$	44,058		$	32,239		37		%

LIFO-Related Adjustments ⁽¹⁾	$	(142	)	$	(2	)	NM			$	(186	)	$	(5	)	NM
Gross Profit																			$	2,797		$	1,930		45		%

Litigation Charges	$	(18	)	$	—		—			$	(68	)	$	(60	)	13

Gain on Business Combination	$	—		$	—		NM			$	—		$	81		NM
Operating Expenses																			$	(2,109	)	$	(1,275	)	65

Income from Continuing Operations Before Income Taxes	$	408		$	449		(9	)	%	$	1,631		$	1,538		6		%	$	607		$	602		1
Income Tax Expense	(252		)	(143		)	76			(639		)	(454		)	41			(182		)	(174		)	5
Income from Continuing Operations	156			306			(49	)		992			1,084			(8	)		425			428			(1	)
Loss from Discontinued Operations, Net of Tax	(92		)	(8		)	NM			(100		)	(5		)	NM			(14		)	(4		)	NM
Net Income	$	64		$	298		(79	)		$	892		$	1,079		(17	)		411			424			(3	)
Net Income Attributable to Noncontrolling Interests																			(8		)	—			NM
Net Income Attributable to McKesson Corporation																			$	403		$	424		(5	)

Diluted Earnings (Loss) Per Common Share
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	0.67		$	1.27		(47	)	%	$	4.26		$	4.51		(6	)	%	$	1.78		$	1.84		(3	)	%
Discontinued Operations	(0.39		)	(0.03		)	NM			(0.43		)	(0.02		)	NM			(0.06		)	(0.01		)	NM
Total	$	0.28		$	1.24		(77	)		$	3.83		$	4.49		(15	)		$	1.72		$	1.83		(6	)

Weighted Average Diluted Common Shares	234			240			(3	)	%	233			240			(3	)	%	235			232			1		%

NM – not meaningful


~~(1)~~	~~Adjustments related to our last-in-first-out (“LIFO”) method of accounting for inventories.~~

2021

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Revenues for the ~~third~~first quarter of ~~2014~~2015 increased10~~% to~~ ~~$34.3 billion~~ ~~and for the~~ ~~first nine months of 2014~~ ~~increased~~ 9~~% to~~ ~~$99.5 billion~~ compared to the same ~~periods~~period a year ago primarily reflecting our February 2014 acquisition of Celesio AG (“Celesio”), our mix of business and market growth. Market growth ~~which~~ includes growing drug utilization and price increases, ~~our mix of business and our fourth quarter 2013 acquisition of PSS World Medical, Inc. (“PSS World Medical”) (as described under the caption “Business Combinations”). These increases were~~ partially offset by price deflation associated with brand to generic drug ~~conversions.~~conversion.

Gross profit and gross profit margin increased in the first quarter of 2015 primarily due to our acquisition of Celesio and growth in our North American distribution and services business, partially offset by a decline in our Technology Solutions segment. Gross profit in the first quarter of 2015 includes a LIFO-related inventory charge of $98 million; no charge was incurred in the first quarter of 2014.

Operating expenses increased in the first quarter of 2015 primarily due to our acquisition of Celesio, including higher intangible asset amortization and increases in acquisition-related expenses, and higher compensation and benefit costs.

Income from continuing operations before income taxes for the ~~third~~first quarter of ~~2014 decreased 9%~~2015 increased slightly as higher gross profit was almost fully offset by higher operating and interest expense. Interest expense increased primarily due to ~~$408 million and~~our Celesio acquisition.

Net income attributable to McKesson Corporation for the first ~~nine months~~quarters of 2015 and 2014 increased 6% to $1,631 million compared to the same periods a year ago. In addition to the items noted below, financial results benefited from higher operating profit in our Distribution Solutions segment which includes our acquisition of PSS World Medical.

~~Income from continuing operations before income taxes~~ was ~~impacted by:~~

~~Fiscal 2014:~~

~~LIFO-related charges of $142~~$403 million and ~~$186 million for the third quarter and first nine months,~~

~~Average Wholesale Price (“AWP”) litigation charges of $18 million and $68 million for the third quarter and first nine months,~~

$57 million of product alignment charges, integration-related expenses and reduction-in-workforce severance charges within our Technology Solutions segment for the third quarter and $60 million for the first nine months, and

$35 million of expenses associated with our acquisition of Celesio AG for the third quarter and first nine months. These expenses primarily consisted of professional fees, costs associated with a foreign currency option and bridge loan fees. Expenses were recorded as follows: $12 million in operating expenses, $13 million in other income (loss), net and $10 million in interest expense.

~~Fiscal 2013:~~

~~AWP litigation charges of $60 million for the first nine months,~~

~~A $40 million charge for a legal dispute in our Canadian business for the third quarter and first nine months, and~~

A non-cash $81 million pre-tax gain ($51 million after-tax) on a business combination associated with the purchase of the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California for the first nine months.

Income tax expense for the third quarter and first nine months of 2014 includes a charge of $122 million relating to our litigation with the Canadian Revenue Agency (“CRA”). The charge resulted from an unfavorable decision received in the third quarter of 2014 from the Tax Court of Canada with respect to transfer pricing issues.

In the first quarter of 2014, we committed to a plan to sell our International Technology and Hospital Automation businesses from our Technology Solutions segment and a small business from our Distribution Solutions segment and, accordingly, financial results for these businesses have been presented as discontinued operations. During the ~~third quarter of 2014~~, we recorded a non-cash pre-tax and after-tax impairment charge of $80 million to reduce the carrying value of our International Technology business to its estimated net realizable value based on preliminary offers received.

~~Net income for the~~ ~~third quarter of 2014~~ ~~decreased~~ 79~~% to~~ ~~$64 million~~ ~~and for the~~ ~~first nine months of 2014~~ ~~decreased~~ 17~~% to~~ ~~$892 million~~ ~~compared to the same periods a year ago.~~$424 million. Diluted earnings per common share attributable to McKesson for the ~~third quarter~~first quarters of ~~2014~~ ~~decreased~~ 77~~% to~~ ~~$0.28~~2015 and ~~for the~~ ~~first nine months of 2014~~ ~~decreased~~ 15~~% to~~ ~~$3.83~~ ~~compared to the same periods a year ago. Diluted earnings per common share for~~ 2014 ~~benefited from the cumulative effect of our stock repurchases.~~were $1.72 and $1.83.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

On ~~October 24, 2013,~~February 6, 2014, we ~~entered into (i)~~completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the acquisition, as required, we consolidated Celesio’s debt with a ~~Share Purchase Agreement (the “SPA”) with Franz Haniel & Cie. GmbH (“Haniel”)~~fair value of $2.3 billion as a liability on our consolidated balance sheet and ~~(ii)~~our ownership of Celesio’s fully diluted common shares was 75.6%. The Acquisition was initially funded by utilizing a ~~Business Combination Agreement (the “BCA”) with Celesio AG (“Celesio”). Celesio’s issued~~senior bridge loan, our existing accounts receivable sales facility and ~~outstanding share capital was 50.01% owned by Haniel.~~cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. ~~Celesio~~Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries ~~and is headquartered in Stuttgart, Germany. Under~~around the original terms of the SPA and BCA, McKesson was to acquire a majority stake in Celesio for €23.00 per share from Haniel and launch a parallel voluntary public tender offer to purchase Celesio’s publicly-traded shares at €23.00 per share (the “Share Offer”) and tender offers for its outstanding convertible bonds at a price corresponding to the value of the underlying shares implied by a €23.00 per share offer price (the “Bond Offers” and, together with the “Share Offer,” the “2013 Tender Offers”).world. The total original proposed transaction, including the assumption of Celesio’s outstanding debt, was valued at approximately €6.1 billion (or, assuming a currency exchange ratio of $1.35/1€, approximately $8.3 billion). On December 5, 2013, we commenced the voluntary public tender offers. On January 9, 2014, we and Haniel amended the SPA to increase the price to be paid per share of Celesio from €23.00 to €23.50 and we increased the purchase price in the Share Offer to €23.50 per share and the purchase price in the Bond Offers to a price corresponding to the value of the underlying shares implied by a €23.50 per share offer price. The 2013 Tender Offers expired on January 9, 2014. On January 13, 2014, we announced that the 2013 Tender Offers had failed to meet the minimum 75% completion condition outlined in the 2013 Tender Offers.

On January 23, 2014, we entered into (i) an amendment to the BCA, (ii) an amended and restated SPA with Haniel, and (iii) a Bond Purchase Agreement with Elliott International, L.P., The Liverpool Limited Partnership and Elliott Capital Advisers, L.P. (collectively, the “Acquisition”). Upon completion of the Acquisition, we will acquire approximately 75.99% of Celesio’s shares currently outstanding for €23.50 per share. These agreements are not subject to any closing conditions. The Acquisition is expected to close during our fourth quarter of fiscal year 2014, which will result in McKesson achieving more than 75% ownership of Celesio shares on a fully diluted basis following a conversion of the Celesio convertible bonds into Celesio shares. We intend to utilize a new $5.5 billion bridge loan and cash on hand to complete the Acquisition. We also intend to launch and complete a voluntary tender offer (the “2014 Tender Offer”) of €23.50 per Celesio share in the fourth quarter of fiscal year 2014. The total proposed transaction, including the assumption of Celesio’s outstanding debt, is currently valued at approximately €6.4 billion (or, assuming a currency exchange ratio of $1.37/1€ as of January 23, 2014, approximately $8.7 billion).

~~Details regarding our~~ acquisition of Celesio AGexpands our global geographic area; the combined company is one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.

Financial results for Celesio are included ~~in Financial Note 3, “Acquisition~~within our International pharmaceutical distribution and services business, which is part of ~~Celesio AG,” to~~our Distribution Solutions segment, since the ~~accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.~~date of acquisition.

Revenues:

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2013 2012 Change 2013 2012 Change
Distribution Solutions
Direct distribution & services $ 24,859
$ 22,386
11
% $ 71,620
$ 64,625
11
%
Sales to customers’ warehouses 4,416
4,468
(1 ) 13,204
14,621
(10 )
Total U.S. pharmaceutical distribution & services 29,275
26,854
9
84,824
79,246
7

Canada pharmaceutical distribution & services 2,785
2,633
6
7,984
7,559
6

Medical-Surgical distribution & services 1,462
874
67
4,286
2,542
69

Total Distribution Solutions 33,522
30,361
10
97,094
89,347
9

Technology Solutions
Services 658
598
10
1,975
1,777
11

Software 107
120
(11 ) 338
357
(5 )
Hardware 19
20
(5 ) 61
72
(15 )
Total Technology Solutions 784
738
6
2,374
2,206
8

Total Revenues $ 34,306
$ 31,099
10
$ 99,468
$ 91,553
9



	Quarter Ended June 30,
(Dollars in millions)	2014		2013		Change
Distribution Solutions
North America pharmaceutical distribution & services	$	34,304	$	30,046	14		%
International pharmaceutical distribution & services	7,607		—		NM
Medical-Surgical distribution & services	1,379		1,357		2
Total Distribution Solutions	43,290		31,403		38

Technology Solutions - products and services	768		836		(8	)
Total Revenues	$	44,058	$	32,239	37

Revenues for ~~2014~~the first quarter of 2015 increased 37% to $44.1 billion compared to the same ~~periods~~period a year ago primarily due to our Distribution Solutions segment, which accounted for approximately 98% of our consolidated revenues.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Direct~~Distribution Solutions: North America pharmaceutical distribution and services revenues increased in the first quarter of 2015 primarily due to our mix of business and market growth, ~~which includes~~reflecting growing drug utilization and price ~~increases, our mix of business, new customers and a shift of revenues from sales to customers’ warehouses.~~increases. These increases were partially offset by price deflation associated with brand to ~~generic~~generics drug ~~conversions.~~

Sales to customers’ warehouses were flat in the third quarter and decreased in the first nine months of 2014. The decrease was primarily due to a shift of revenues to direct distribution and services, including a customer transition, and loss of a customer.

~~Canadian~~conversion. International pharmaceutical distribution and services revenues ~~increased for~~of ~~2014~~$7.6 billion ~~compared to~~in the ~~same periods a year ago. These~~first quarter of 2015 represent revenues ~~were impacted by unfavorable foreign currency exchange rate fluctuations of 6% and 4% for~~from Celesio, acquired in the ~~third~~fourth quarter ~~and first nine months~~ of 2014. Excluding foreign currency exchange rate fluctuations, Canadian revenues increased 12% and 10% for the third quarter and first nine months of 2014 primarily due to market growth and a new customer, partially offset by government imposed price reductions for generic pharmaceuticals in certain provinces.

Medical-Surgical distribution and services revenues increased primarily due to ~~our acquisition~~market growth.

Table of ~~PSS World Medical and market growth.~~Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Technology Solutions: Technology Solutions revenues ~~increased~~decreased primarily due to ~~small business acquisitions~~a decline in software product revenues and the planned elimination of a product line, partially offset by a higher volume of claims ~~processing revenues. These increases were partially offset by a decrease in software product revenues.~~processing.

Gross Profit:


	Quarter Ended December 31,									Nine Months Ended December 31,									Quarter Ended June 30,
(Dollars in millions)	2013			2012			Change			2013			2012			Change			2014			2013			Change
Gross Profit
Distribution Solutions	$	1,499		$	1,287		16		%	$	4,642		$	3,841		21		%	$	2,458		$	1,520		62		%
Technology Solutions	341			358			(5	)		1,127			1,048			8			339			410			(17	)
Total	$	1,840		$	1,645		12			$	5,769		$	4,889		18			$	2,797		$	1,930		45

Gross Profit Margin
Distribution Solutions	4.47		%	4.24		%	23		bp	4.78		%	4.30		%	48		bp	5.68		%	4.84		%	84		bp
Technology Solutions	43.49			48.51			(502	)		47.47			47.51			(4	)		44.14			49.04			(490	)
Total	5.36			5.29			7			5.80			5.34			46			6.35			5.99			36

bp - basis points

Gross profit increased 45% to $2.8 billion and as a percentage of revenue, gross profit margin increased ~~for~~36 bp in the ~~third quarter and~~ first ~~nine months of 2014~~quarter compared to the same ~~periods~~period a year ~~ago~~ago. These increases primarily ~~as a result of growth~~reflect an increase in our Distribution Solutions ~~segment.~~operating segment, including our acquisition of Celesio.

Distribution Solutions

Distribution Solutions segment’s gross profit margin increased primarily due to our acquisition of ~~PSS World Medical, increased~~Celesio and growth in our North American distribution and services business which reflects sales of higher margin generic drugs and an increase in buy margin, ~~and a lower proportion of revenues within the segment attributed to sales to customers’ warehouses. These increases were~~ partially offset by ~~a charge related to the LIFO method of accounting for inventories and~~ a decrease in sell margin. Buy margin ~~primarily reflects~~includes volume and timing of compensation from ~~branded~~pharmaceutical manufacturers.

Our last-in, first-out (“LIFO”) net inventory expense was $98 million in the first quarter of 2015 compared to nil in the first quarter of 2014. Our North American distribution and generic pharmaceutical manufacturers. Our Distribution Solutions segment's gross profit margin for the third quarter and first nine months of 2014 was also favorably affected by the receipt of $27 million and $34 million and for the third quarter and first nine months of 2013 the receipt of $8 million and $27 million, representing our share of settlements of antitrust class action lawsuits brought against drug manufacturers.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

~~Our Distribution Solutions segment~~services 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.~~cost than under other accounting methods. The practice in the ~~Distribution Solutions segment's distribution and services business~~businesses is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related inventory losses. A LIFO expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory.

~~From 2005 through 2011, we experienced net price deflation and in 2012 and 2013, we experienced net price inflation in our pharmaceutical inventories.~~ As a result of ~~this~~historical cumulative net price deflation ~~at March 31,~~from 2005 to 2013, ~~pharmaceutical inventories at LIFO were $60 million more than market and, accordingly,~~we had a ~~$60 million~~ lower-of-cost or market (“LCM”) reserve of $60 million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to market. ~~During~~In the first quarter of 2014, ~~we experienced net inflation in our pharmaceutical inventories. As a result, we recorded LIFO charges of $142~~$37 million ~~and $186 million to cost of sales, net~~ of the LCM reserve ~~release,~~was released, resulting in ~~the third quarter and first nine months of 2014 compared to LIFO charges of $2 million and $5 million~~an increase in ~~the third quarter and first nine months of 2013.~~gross profit. As of ~~December 31, 2013, the LCM reserve was nil. At December 31, 2013 and~~ March 31, ~~2013, our~~2014, inventories at LIFO ~~reserves, net of LCM adjustments were $306 million and $120 million.~~did not exceed market.

Technology Solutions

Technology Solutions segment’s gross profit and gross profit margin decreased primarily ~~due~~reflecting a pre-tax non-cash charge of $32 million for depreciation and amortization as described further below. Additionally, gross profit decreased as a result of a decline in revenue.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

In 2014, we committed to ~~$34 million~~a plan to sell our International Technology and Hospital Automation businesses from our Technology Solutions segment and certain businesses from our Distributions Solutions segment. As required, we classified the results of ~~charges recorded~~operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements in 2014 and depreciation and amortization expense was not recognized.

During the first quarter of 2015, we entered into an agreement to sell the software business within our International Technology business. We completed the sale of the software business on July 1, 2014 and no material gain or loss is anticipated. During the first quarter of 2015, we also decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the ~~third quarter of 2014. During~~United Kingdom, which we now intend to wind down in 2016. As a result, we reclassified the ~~third~~workforce business, which had been designated as a discontinued operation since the first quarter of 2014, as a continuing operation for all periods presented. During the ~~Technology Solutions segment~~first quarter of 2015, we also recorded a non-cash pre-tax ~~charges totaling $57 million. These charges~~charge of $34 million ($27 million after-tax) primarily ~~consist of $35 million of product alignment charges, $15 million of integration-related expenses~~relating to depreciation and ~~$7 million of reduction-in-workforce severance charges. Included in~~amortization expense for 2014 when the ~~total~~business was classified as held for sale. The non-cash charge was $35 million for severance for employees primarily in our research and development, customer services and sales functions, and $15 million for asset impairments which primarily represents the write-off of deferred costs for a product that will no longer be developed. Charges were recorded in our condensed consolidated statement of operations as follows: ~~$34~~$32 million in cost of sales and ~~$23~~$2 million in operating expenses.

Operating Expenses and Other Income, ~~(Loss),~~ Net:


	Quarter Ended December 31,										Nine Months Ended December 31,									Quarter Ended June 30,
(Dollars in millions)	2013				2012			Change			2013				2012			Change		2014			2013			Change
Operating Expenses
Distribution Solutions	$	950			$	769		24		%	$	2,799			$	2,212		27	%	$	1,728		$	905		91		%
Technology Solutions	303				266			14			857				777			10		271			283			(4	)
Corporate	102				112			(9	)		302				220			37		110			87			26
Total	$	1,355			$	1,147		18			$	3,958			$	3,209		23		$	2,109		$	1,275		65

Operating Expenses as a Percentage of Revenues
Distribution Solutions	2.83			%	2.53		%	30		bp	2.88			%	2.48		%	40	bp	3.99		%	2.88		%	111		bp
Technology Solutions	38.65				36.04			261			36.10				35.22			88		35.29			33.85			144
Total	3.95				3.69			26			3.98				3.51			47		4.79			3.95			84

Other Income (Loss), Net
Other Income, Net
Distribution Solutions	$	3			$	7		NM			$	13			$	17		NM		$	18		$	4		NM
Technology Solutions	(1		)		—			NM			(1		)		3			NM		—			—			NM
Corporate	(10		)		3			NM			(5		)		8			NM		2			2			NM
Total	$	(8	)		$	10		NM			$	7			$	28		NM		$	20		$	6		NM

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Operating expenses and operating expenses as a percentage of revenues increased ~~for~~in the ~~third~~first quarter ~~and first nine months~~ of ~~2014 compared to the same periods a year ago~~2015 primarily due to our ~~PSS World Medical~~acquisition of Celesio, including higher intangible asset amortization and increases in acquisition-related expenses, and higher compensation and benefit costs.

Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenue increased in the first quarter of 2015 primarily due to our Celesio acquisition. ~~Additionally,~~

Technology Solutions segment’s operating expenses in the first quarter of 2015 decreased slightly primarily due to lower compensation and benefit costs.

Corporate expenses for the first ~~nine months~~quarter of ~~2013 included an $81~~2015 increased primarily due to higher compensation and benefit costs and increases in acquisition-related expenses.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Acquisition Expenses and Related Adjustments

Acquisition expenses and related adjustments, which include transaction and integration expenses that are directly related to acquisitions by the Company were $49 million ~~pre-tax gain on business combination.~~

~~Operating expenses include charges~~ and $13 million in the first quarters of ~~$40 million~~2015 and ~~$66 million for acquisition expenses during the third quarter and first nine months of 2014 compared to a charge of $10 million and a net credit of $67 million~~2014. Expenses for the ~~third~~first quarter ~~and first nine months~~ of ~~2013. Expenses in 2014~~2015 were primarily related to our ~~integration~~acquisition of Celesio and expenses for the first quarter of 2014 primarily pertained to our 2013 acquisition of PSS World ~~Medical~~Medical.

Acquisition expenses and ~~our acquisition of Celesio. The net credit for the first nine months of 2013 was primarily due to the $81 million pre-tax gain on business combination.~~related adjustments were as follows:



	Quarter Ended June 30,
(Dollars in millions)	2014		2013
Operating Expenses
Integration related expenses	$	29	$	8
Severance and relocation	17		5
Transaction closing expenses	3		—
Total Acquisition Expenses and Related Adjustments	$	49	$	13

During the ~~third~~first quarter ~~and first nine months~~ of ~~2014,~~2015, amortization expense of acquired intangible assets purchased in connection with acquisitions by the Company increased by $59 million compared to ~~the same periods~~ a year ago primarily reflecting our ~~PSS World Medical~~Celesio acquisition. Amortization expense by segment was as follows:


	Quarter Ended December 31,				Nine Months Ended December 31,				Quarter Ended June 30,
(In millions)	2013		2012		2013		2012
(Dollars in millions)									2014		2013
Distribution Solutions	$	55	$	37	$	161	$	103	$	118	$	54
Technology Solutions	11		12		35		35		12		17
Total	$	66	$	49	$	196	$	138	$	130	$	71

~~Distribution Solutions segment’s operating expenses and operating expenses as~~Other Income, Net:Other income, net increased in the first quarter of 2015 compared to the same period a ~~percentage of revenues increased~~year ago primarily due to our PSS World Medical acquisition and higher AWP charges. These increases were partially offset by the impact of a $40 million charge for a legal dispute in our Canadian business in the third quarter of 2013. AWP charges were $18 million and $68 million for the third quarter and first nine months of 2014, and nil and $60 million for the comparable prior year periods.

Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenues increased primarily due to small business acquisitions, product alignment charges, integration-related expenses and reduction-in-workforce severance charges, and continued investment in research and development activities.

Corporate expenses decreased for the third quarter of 2014 primarily reflecting a decrease in compensation and environmental related expenses. These decreases were partially offset with expenses for the acquisition of Celesio.

Segment Operating Profit, Corporate ~~expenses for the first nine months of 2014 increased primarily reflecting the prior year $81 million gain on business combination, expenses associated with the acquisition of Celesio~~Expenses, Net and ~~spending on certain initiatives. These increases were partially offset by a decrease in environmental related expenses.~~Interest Expense:

~~Other income, net for the third quarter and first nine months of 2014 decreased primarily due to a loss on an option contract relating to the acquisition of Celesio AG.~~

In September 2013, we completed the sale of our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”). Under the terms of the agreement, we received $41 million in total cash consideration. There was no material gain or loss on the disposition based on the adjusted net realizable value of the investment at the time of the sale. Prior to the sale, our investment in Nadro was accounted for under the equity method of accounting within our Distribution Solutions segment.



	Quarter Ended June 30,
(Dollars in millions)	2014				2013				Change
Segment Operating Profit ⁽¹⁾
Distribution Solutions	$	748			$	619			21		%
Technology Solutions	68				127				(46	)
Subtotal	816				746				9
Corporate Expenses, Net	(108		)		(85		)		27
Interest Expense	(101		)		(59		)		71
Income from Continuing Operations Before Income Taxes	$	607			$	602			1

Segment Operating Profit Margin
Distribution Solutions	1.73			%	1.97			%	(24	)	bp
Technology Solutions	8.85				15.19				(634	)


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

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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

Quarter Ended December 31, Nine Months Ended December 31,
(Dollars in millions) 2013 2012 Change 2013 2012 Change
Segment Operating Profit
Distribution Solutions $ 552
$ 525
5
% $ 1,856
$ 1,646
13
%
Technology Solutions 37
92
(60 ) 269
274
(2 )
Subtotal 589
617
(5 ) 2,125
1,920
11

Corporate Expenses, Net (112 ) (109 ) 3
(307 ) (212 ) 45

Interest Expense (69 ) (59 ) 17
   (187 ) (170 ) 10

Income from Continuing Operations Before Income Taxes $ 408
$ 449
(9 )    $ 1,631
$ 1,538
6


Segment Operating Profit Margin
Distribution Solutions 1.65
% 1.73
% (8 ) bp 1.91
% 1.84
% 7
bp
Technology Solutions 4.72
12.47
(775 ) 11.33
12.42
(109 )

Margin:Operating profit margin for our Distribution Solutions segment decreased ~~for~~in the ~~third~~first quarter of ~~2014 and increased for the first nine months of 2014. Operating profit margin for our Distribution Solutions segment in 2014 was impacted by increased gross profit margin and~~2015 primarily due to higher operating expenses as a percentage of revenues, ~~associated with our acquisition of PSS.~~

partially offset by an increase in gross profit margin. Operating profit margin for ~~our~~ Technology Solutions segment decreased in the first quarter of 2015 primarily ~~reflecting lower gross profit margin and higher operating expenses as percentage~~due to a non-cash pre‑tax charge of ~~revenues.~~$34 million recorded in connection with the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations.

Corporate: Corporate expenses, net of other income for the first quarter of 2015increased primarily due to ~~higher operating~~increases in acquisition-related expenses and ~~lower other income,~~higher compensation and ~~for the first nine months of 2014 due to the prior year $81 million gain on business combination.~~benefit costs.

Interest Expense: Interest expense for the ~~third~~first quarter ~~and first nine months~~ of ~~2014~~2015 increased primarily due to the March 2014 issuance of ~~$1.8~~$4.1 billion of ~~notes in 2013~~new debt issued to fund the acquisition of Celesio and ~~bridge loan fees associated with the Celesio acquisition.~~due to interest on Celesio’s debt. These increases were partially offset by the repayment of ~~$500~~$350 million of the current portion of our long-term debt in ~~March 2013. Interest rates on the notes issued in 2013 were substantially lower than the interest rate on the debt repaid in March 2013.~~February 2014.

Income Taxes:Our reported income tax rates for the ~~third~~first quarters of ~~2014~~2015 and ~~2013~~2014 were ~~61.8%~~30.0% and ~~31.8%~~ ~~and for the first nine months of 2014 and 2013 were~~ ~~39.2%~~ ~~and~~ ~~29.5%~~28.9%. Fluctuations in our reported income tax rates are primarily due to ~~changes within our estimated business mix, including~~ varying proportions of income attributable to foreign countries that have lower income tax rates and discrete tax items. Income tax expense for the ~~third~~first quarters of ~~2014~~2015 and ~~2013~~2014 included ~~discrete tax expenses of $119 million and $3 million and, for the first~~ ~~nine months of 2014 and 2013, included discrete tax expenses of $119 million and~~net discrete tax benefits of ~~$21~~$12 million and $5 million. ~~Discrete tax expenses for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues.~~

~~Income from Continuing Operations: Income from continuing operations was~~ ~~$156 million~~ ~~and~~ ~~$306 million~~ ~~for the~~ ~~third quarters of 2014 and 2013, or~~ ~~$0.67~~ ~~and~~ ~~$1.27~~ ~~per diluted common share. Income from continuing operations was~~ ~~$992 million~~ ~~and~~ ~~$1,084 million~~ ~~for the first~~ ~~nine months of 2014 and 2013, or~~ ~~$4.26~~ ~~and~~ ~~$4.51~~ ~~per diluted common share.~~

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Loss from Discontinued ~~Operations:~~Operations, Net of Tax: Loss from discontinued operations, net of tax, was $9214 million and $4 million for the ~~third quarter~~first quarters of 2015 and 2014 ~~compared to a~~. Diluted loss of ~~$8 million~~ ~~for the third quarter of 2013. Loss from discontinued operations, net of tax, was~~ ~~$100 million~~ ~~for the first nine months of 2014 compared to a loss of~~ ~~$5 million~~ ~~for the first nine months of 2013. Loss~~per common share from discontinued operations for ~~2014 includes a non-cash pre-tax and after-tax impairment charge of $80 million to reduce~~ the carrying value of our International Technology business to its estimated net realizable value. The charge is primarily the result of the terms of the preliminary purchase offers received for this business during the thirdfirst quarter of ~~2014. The ultimate selling price of this business may be higher or lower than our current assessment of fair value. The impairment charge~~2015 was ~~primarily attributed~~$0.06 compared to ~~goodwill and other long-lived assets of our International Technology business which are included in~~$0.01 for the ~~assets classified as held for sale at December 31, 2013. There~~same period a year ago.

Net income attributable to McKesson Corporation: Net income attributable to McKesson Corporation was ~~no tax benefit associated with the impairment charge.~~

~~Additionally, on October 31, 2013, we sold our Hospital Automation business for net cash proceeds of $55~~$403 million and ~~recorded a pre-tax and after-tax loss of $5~~$424 million, and ~~$7 million.~~diluted earnings per common share attributable to McKesson Corporation were $1.72 and $1.83.

Weighted Average Diluted Common Shares ~~Outstanding:~~ Outstanding:Diluted earnings per common share were calculated based on a weighted average number of shares outstanding of ~~234~~235 million and ~~240~~232 million for the ~~third~~first quarters of ~~2014~~2015 and ~~2013~~ ~~and~~ ~~233 million~~ ~~and~~ ~~240 million~~ ~~for the first~~ ~~nine months of~~ 2014 ~~and 2013~~. The ~~decrease in the number of~~ weighted average diluted ~~common~~number of shares outstanding increased primarily ~~reflects~~due to the ~~cumulative effect of our share repurchases during the last twelve months, partially offset by exercises~~issuance of share-based awards.

Business Combinations

OnAs previously discussed, on February ~~22, 2013,~~6, 2014, we ~~acquired all~~completed the acquisition of 77.6% of the then outstanding common shares of ~~PSS World Medical~~Celesio and certain convertible bonds of ~~Jacksonville, Florida~~Celesio for ~~$29.00 per share plus the assumption of PSS World Medical’s debt, or approximately $1.9 billion in aggregate, consisting of~~ cash consideration of ~~$1.3~~$4.5 billion, net of cash ~~acquired, and~~acquired. Upon the ~~assumption of long-term~~acquisition, we consolidated Celesio’s debt with a fair value of $0.6 billion. The cash paid at acquisition was funded from cash on hand and the issuance of long-term debt. PSS World Medical markets and distributes medical products and services throughout the United States. The acquisition of PSS World Medical expands our existing Medical-Surgical business.

On April 6, 2012, we purchased the remaining 50% ownership interest in our corporate headquarters building located in San Francisco, California for $90 million, which was funded from cash on hand. We previously held a 50% ownership interest and were the primary tenant in this building. This transaction was accounted for$2.3 billion as a ~~step acquisition, which required that we re-measure~~liability on our ~~previously held 50%~~consolidated balance sheet and our ownership ~~interest~~of Celesio’s fully diluted common shares was 75.6%. From February 7 to ~~fair value~~March 31, 2014, substantially all of the convertible bonds issued by Celesio (held by both third parties and ~~record the difference between the fair value and carrying value as a gain in the condensed consolidated statements~~us) were converted to 20.9 million common shares of operations. The re-measurement to fair value resulted in a non-cash pre-tax gain of $81 million ($51 million after-tax), which was recorded as a gain on business combination within Corporate in the condensed consolidated statements of operations duringCelesio. During the first quarter of ~~2013.~~2015, we completed tender offers and we acquired approximately 1 million common shares of Celesio at €23.50 per share for a total of $32 million in cash, and the remaining convertible bonds were fully converted to 42,238 common shares of Celesio. At June 30, 2014 and March 31, 2014, we owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares.

~~During~~On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary Dragonfly GmbH & Co. KGaA, entered into a domination and profit and loss transfer agreement (the “Agreement”). Under the ~~last two years, we also completed~~Agreement, Celesio will subordinate its management to McKesson and undertake to transfer all of its annual profits to McKesson, and McKesson will undertake to compensate any annual losses incurred by Celesio and to grant, subject to a ~~number~~potential court review, the noncontrolling shareholders of ~~smaller acquisitions within both~~Celesio (i) an annual recurring compensation of ~~our operating segments. Financial results~~€0.83 per Celesio share and (ii) a put right for ~~our business acquisitions have been included in our consolidated financial statements since~~ their ~~respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values~~Celesio shares at €22.99 per Celesio share. On July 15, 2014, the Agreement was approved at the ~~date~~general shareholders’ meeting of ~~acquisition.~~

~~Goodwill recognized~~Celesio. The Agreement becomes effective upon its registration in the commercial register of Celesio at the local court of Stuttgart, Germany. Celesio’s obligation to transfer its annual profits under the Agreement will apply for ~~our business acquisitions is generally not expected~~the first time for the entire profit generated in Celesio’s fiscal period beginning on January 1, 2015 or the subsequent fiscal year in which the Agreement becomes effective. McKesson’s obligation to compensate the annual losses of Celesio under the Agreement will apply for the first time for the full fiscal period of Celesio during which the Agreement becomes effective. We currently anticipate the Agreement to be ~~deductible for tax purposes. However, if~~effective by the end of the calendar year, at which time, we ~~acquire the assets~~will obtain operational control of a company, the goodwill may be deductible for tax purposes. The pro forma results of operations for our business acquisitions and the results of operations for these acquisitions since the acquisition date have not been presented because the effects were not material to the consolidated financial statements on either an individual or an aggregate basis.Celesio.

Refer to Financial ~~Notes~~Note 2, ~~and 3,~~ “Business ~~Combinations” and “Acquisition of Celesio AG”,~~Combinations,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q for further information.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Financial Condition, Liquidity and Capital Resources

We expect our available cash generated from operations, together with our existing sources of liquidity from our accounts receivable sales ~~facility, short-term borrowings under the 2014 Bridge Loan~~ facility, the revolving credit facility and commercial paper issuance, 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,~~time to time, we may access the long-term debt capital markets to discharge our other ~~liabilities or to fund strategic initiatives.~~liabilities.

Operating activities generated cash of $~~472~~182 million and $~~276~~716 million during the first ~~nine months~~quarters of ~~2014~~2015 and ~~2013~~2014. ~~Operating activities for the first~~ ~~nine months of 2014 and 2013~~ ~~include~~ ~~$86 million~~ ~~and~~ ~~$470 million~~ ~~of payments made for AWP litigation settlements.~~ Cash flows from operations can be significantly impacted by factors such as ~~the~~ timing of receipts from customers, inventory receipts and payments to vendors. Additionally, working capital is a function of sales activity and inventory requirements.

Investing activities utilized cash of $~~422~~112 million and $~~784~~184 million during the first ~~nine months~~quarters of ~~2014~~2015 and ~~2013~~2014. Investing activities primarily reflect cash paid for business and property acquisitions and capitalized ~~software, partially offset by proceeds from the sales of our Hospital Automation business and our Nadro investment.~~software.

Financing activities utilized cash of $167 million and $73 million during the first ~~nine months~~quarters of ~~2014~~2015 and ~~generated cash of~~ ~~$82 million~~ ~~during the first~~ ~~first nine months of 2013~~2014. Financing activities for the first ~~nine months~~quarter of ~~2014~~2015 include cash receipts of $917 million and payments of ~~$150~~$759 million for short-term ~~borrowings.~~borrowings incurred by Celesio. Long-term debt repayments for the first quarter of 2015 were primarily cash paid on Celesio’s promissory notes. Financing activities for the first ~~nine months~~quarter of ~~2013~~2014 include $100 million of cash ~~receipts of~~ ~~$1,125 million~~ ~~from short-term borrowings~~received and ~~$892 million from the issuance of long-term debt, and cash paid of~~ ~~$1,525 million~~ ~~for~~ repayment of short-term borrowings. Additionally, financing activities for the first ~~nine months~~quarters of ~~2014~~2015 and ~~2013~~2014 included ~~$128~~$102 million and $~~413~~127 million of cash paid for stock ~~repurchases.~~

~~In the fourth quarter of 2013, we entered into an accelerated share repurchase program with a third party financial institution to repurchase~~ ~~$150 million~~ ~~of the Company’s common stock. As of~~ ~~March 31, 2013, we had received~~ ~~$1.2 million~~repurchases, including shares ~~representing the minimum number of shares due under this program. This program was completed on April 17, 2013 and we received~~ ~~0.2 million~~ ~~additional shares on April 22, 2013. The total number of shares repurchased under this program was~~ ~~1.4 million~~ ~~shares at an average price per share of~~ ~~$107.63~~.surrendered for tax withholding.

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at ~~December 31, 2013~~.

June 30, 2014. Stock repurchases may be made from ~~time-to-time~~time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. The timing of any repurchases 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.

We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, ~~and the senior bridge loan agreement,~~ 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.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Selected Measures of Liquidity and Capital Resources


(Dollars in millions)	December 31, 2013			March 31, 2013			June 30, 2014			March 31, 2014
Cash and cash equivalents	$	2,431		$	2,456		$	4,105		$	4,193
Working capital	3,330			1,813			4,728			3,072
Debt, net of cash and cash equivalents	2,443			2,417			6,568			6,526
Debt to capital ratio ⁽¹⁾	37.8		%	40.8		%	54.3		%	55.7		%
Net debt to net capital employed ⁽²⁾	23.3			25.5			42.2			43.4
Return on stockholders’ equity ⁽³⁾	16.6			18.3			15.2			16.2


(1)	Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ ~~equity.~~equity excluding noncontrolling interests.


(2)	Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity excluding noncontrolling interests (“net capital employed”).


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

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. Treasury bonds, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound 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. Within the Celesio operations, the majority of deposits are placed in Germany with only banks that are part of deposit protection programs.

Our cash and cash equivalents balance as of ~~December 31, 2013~~June 30, 2014 included approximately ~~$1.5~~$1.9 billion of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash for foreign operations as well as to fund certain research and development activities for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S. federal, state and local income tax.

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

~~In July 2013,~~Our ratio of net debt to net capital employed decreased slightly in 2015.

Effective 2014, the Company’s quarterly dividend ~~was raised from $0.20 to $0.24~~is $0.24 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.

~~McKESSON CORPORATION~~

~~FINANCIAL REVIEW (CONTINUED)~~

~~(UNAUDITED)~~

Credit Resources

We fund our working capital requirements primarily with cash and cash equivalents, as well as, short-term borrowings under ~~our~~the accounts receivable sales facility, revolving credit facility and from commercial paper issuances. ~~Our borrowing facilities are described in Financial Notes 3 and 10, “Acquisition~~

Celesio Debt

Upon the acquisition of Celesio, ~~AG”~~as required, we consolidated Celesio’s debt including their accounts receivable factoring facilities (the “Factoring Facilities”) with a total committed and ~~“Debt~~uncommitted balance of $315 million. The Factoring Facilities will expire through September 2015. During the first quarter of 2015, we borrowed and ~~Financing Activities,” to~~repaid $758 million and $746 million of short-term borrowings under the ~~accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q. Changes in our financing activities in~~Factoring Facilities. At June 30, 2014 ~~primarily consisted of:~~


–	~~In May 2013, we extended our Accounts Receivable Sales Facility for a six month period under terms substantially similar to those previously in place.~~

–

In connection with our acquisition of Celesio AG, in October 2013, we entered into a $5.5 billion 364-day unsecured Senior Bridge Term Loan Agreement (the “2013 Bridge Loan”). The 2013 Bridge Loan contained terms substantially similar to those contained in our existing Revolving Credit Facility except that the debt to capital ratio covenant was 65%. The commitments under the 2013 Bridge Loan automatically terminated on January 13, 2014 upon the failure of the Tender Offers.

–

In November 2013, we amended our Accounts Receivable Sales Facility and Revolving Credit Facility. The amendments added an extended cure period to both facilities with respect to defaults under the facilities relating to Celesio. Additionally, the amendments increased the maximum debt to capital ratio covenant from 56.5% to 65% for the Accounts Receivable Sales Facility, and upon completion of the acquisition of Celesio, for the Revolving Credit Facility. The Accounts Receivable Sales Facility was extended until November 2014. We anticipate renewing this facility before expiration. Upon the failure of the 2013 Tender Offers, the provisions of the amendments to both facilities terminated other than the increase to the debt to capital ratio for the Accounts Receivable Sales Facility, which remains in effect.

–

On January 23, 2014, we entered into a new $5.5 billion 364-day unsecured Senior Bridge Term Loan Agreement (the “2014 Bridge Loan”) under terms substantially similar to those previously in place for the 2013 Bridge Loan. The borrowings under the 2014 Bridge Loan will be made available to us at our request to: (i) pay the Acquisition consideration, (ii) fund additional acquisitions, if any, of Celesio shares and convertible bonds, including shares acquired in the 2014 Tender Offer and (iii) pay transaction costs associated with the Acquisition. The 2014 Bridge Loan requires that we maintain a debt to capital ratio of no greater than 65% throughout the term of the 2014 Bridge Loan. We expect that we will refinance all or part of the outstanding amounts under the 2014 Bridge Loan with longer-term financing prior to the end of the 2014 Bridge Loan’s 364-day term. In the fourth quarter of fiscal year 2014, we amended our Accounts Receivable Sales Facility and Revolving Credit Facility to revive the extended cure period under both facilities with respect to defaults relating to Celesio and to the Revolving Credit Facility to revive the change of the debt to capital ratio from 56.5% to 65%.

~~As of December 31, 2013~~ and March 31, ~~2013,~~2014, there were $258 million and $246 million in secured borrowings and related securitized accounts receivable outstanding under the Factoring Facilities.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Celesio also maintains bilateral credit lines with a total committed and uncommitted balance of $2.0 billion. During the first quarter of 2015, Celesio borrowed and repaid $159 million and $30 million under these ~~facilities.~~credit lines primarily relating to short‑term borrowings. As of June 30, 2014 and March 31, 2014, there were $321 million and $188 million outstanding under these credit lines.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility (the “Facility”) with a committed balance of $1.35 billion, although from time to time, the available amount of the Facility may be less than $1.35 billion based on accounts receivable concentration limits and other eligibility requirements. The Facility will expire in November 2014 and we anticipate renewing the Facility before its expiration.

During the first quarter of 2015, there were no borrowings under the Facility. During the first quarter of 2014, we borrowed and repaid $100 million of short-term borrowings under the Facility. At June 30, 2014 and March 31, 2014, there were no short‑term borrowings and related securitized accounts receivable outstanding under the Facility.

Revolving Credit Facility

We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which expires in September 2016. Borrowings under this facility bear interest based upon either the London Interbank Offered Rate or a prime rate. There were no borrowings under this facility during the first quarters of 2015 and 2014. As of June 30, 2014 and March 31, 2014, there were no amounts outstanding under this facility.

Debt Covenants

Our various borrowing facilities and long-term debt are subject to certain covenants. Our principal ~~debt~~financial covenant is our U.S. dollar denominated debt to capital ratio under our ~~Accounts Receivable Sales Facility and Revolving Credit Facility,~~$1.3 billion unsecured revolving credit facility, which cannot exceed 65% ~~and 56.5%~~. For the purpose of calculating this ratio, borrowings under the ~~Accounts Receivable Sales Facility~~$1.35 billion accounts receivable sales facility are excluded. If we exceed this ratio, repayment of debt outstanding under the ~~Revolving Credit Facility~~revolving credit facility could be accelerated. As of ~~December 31, 2013~~June 30, 2014 and March 31, ~~2013~~2014, we were in compliance with our financial covenants.

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.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

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


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


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


▪	changes in the Canadian healthcare industry and regulatory environment;


▪	changes in the European regulatory environment;


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


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


▪	material adverse resolution of pending legal proceedings;


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


▪	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;


▪	implementation delay, malfunction, failure or breach of internal information systems;


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


▪	the Company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances;


▪	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;


▪	the delay or extension of our sales or implementation cycles for external software products;


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


▪	~~foreign currency fluctuations or disruptions to our foreign operations;~~


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


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


▪	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; ~~and~~


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


▪	significant liability if we withdraw from participation in one or more multiemployer pension plans.

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

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

We believe there has been no material change in our exposure to risks associated with fluctuations in interest and foreign currency exchange rates as disclosed in our ~~2013~~2014 Annual Report on Form 10-K.


Item 4.	Controls and Procedures.

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

There were no changes in our “internal control over financial reporting” (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that occurred during our ~~third~~first quarter of ~~2014~~2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company acquired Celesio on February 6, 2014 and is in the process of reviewing the internal control structure of Celesio. If necessary, the Company will make appropriate changes as it integrates Celesio into the Company’s overall internal control over financial reporting processes.

PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

The information set forth in Financial Note ~~13,~~12, “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.

~~Following is an update to our risk factors.~~ There have been no ~~other~~ 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 ~~2013~~2014 Annual Report on Form 10-K.

~~We are subject to risks and uncertainties associated with our acquisition of Celesio.~~

On January 23, 2014, we and our wholly-owned subsidiary, Dragonfly GmbH & Co. KGaA (“McKesson AcquiCo”), entered into (i) an amendment to the Business Combination Agreement dated October 24, 2013 (“BCA Amendment”) with Celesio AG (“Celesio”), (ii) an amended and restated Share Purchase Agreement dated October 24, 2013 (“SPA”) with Franz Haniel & Cie. GmbH (“Haniel”), and (iii) a Bond Purchase Agreement (“BPA” with Elliott International, L.P., The Liverpool Limited Partnership and Elliott Capital Advisers, L.P. (the “Elliott Group”). Following the execution of the Agreements, McKesson AcquiCo announced the commencement of a new voluntary public tender offer for the remaining shares of Celesio.

Under the terms of the SPA, McKesson AcquiCo will unconditionally acquire from Haniel a stake comprising approximately 75.99% of the Celesio shares currently outstanding for €23.50 per share. Under the terms of the BPA, McKesson AcquiCo will unconditionally acquire from the Elliott Group 4,840 of the 7,000 convertible bonds issued by Celesio Finance B.V. in the nominal aggregate amount of €350 million due in October 2014, and 2,180 of the 3,500 convertible bonds issued by Celesio Finance B.V in the nominal amount of €350 million due in April 2018 (together, the “Bonds”) currently outstanding. The SPA and BPA are expected to close on February 6, 2014, which will result in McKesson AcquiCo achieving more than 75% ownership of Celesio shares on a fully diluted basis following a conversion of the Bonds into Celesio shares. The total value of the SPA and BPA is approximately €3.7 billion (or, assuming a currency exchange ratio of $1.37/€1, approximately $5.1 billion). In addition to the risks and uncertainties that are described in Part I, Item 1A, of our 2013 Annual Report on Form 10-K under the heading “~~Risk Factors - Our business could be hindered if we are unable to complete and integrate acquisitions successfully,” we may face certain risks and uncertainties associated with our acquisition of Celesio.~~

~~Table of Contents~~

~~McKESSON CORPORATION~~

Achieving the anticipated benefits of the Celesio acquisition is subject to a number of risks and uncertainties, including foreign exchange fluctuations, challenges of managing new international operations, and whether we can ensure continued performance or market growth of Celesio’s product and services. While we have successfully integrated large companies into our operations in the past, and therefore expect a successful integration in this case, the integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of the transaction will be realized or, if realized, the timing of their realization. It is possible that the integration process could take longer than anticipated, and could result in the loss of employees, the disruption of each company’s ongoing businesses, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the Celesio acquisition and which could have a material adverse effect on our revenues, expenses, operating results and financial condition.

Any significant diversion of management’s attention away from the ongoing businesses, and any difficulties encountered in the acquisition, transition and integration process, could adversely affect our financial results, both prior to and after the acquisition of Celesio. Moreover, the failure to achieve the anticipated benefits of the acquisition could result in increased costs or decreases in the amount of expected revenues, and could adversely affect our future business, financial condition, operating results and prospects. Events outside of our control, including the market price of Celesio shares and convertible bonds that we will not acquire upon closing of the SPA and BPA, changes in regulations and laws, as well as economic trends, could also adversely affect our ability to realize the expected benefits from our acquisition of Celesio.

The process for acquiring Celesio, as contemplated by the share purchase, bond purchase and the business combination agreements, is complex and we do not expect to complete the steps required to exercise operating control of Celesio until late in the first half of our fiscal 2015. Our pursuit of the Celesio acquisition and the preparation for the integration of Celesio’s business over an extended period of time may place a significant burden on our management and internal resources, as well as the management and internal resources of Celesio. In the event that our acquisition of Celesio’s remaining outstanding common shares and convertible bonds thereof is significantly delayed, it may prevent the Celesio acquisition from being consummated on the anticipated timeline, which could have a material adverse effect on the market price of our common stock, and could result in our incurring significant expenses related to the Celesio acquisition without realizing the expected benefits.

We entered into a $5.5 billion senior bridge term loan agreement in connection with the acquisition of Celesio, which contains terms substantially similar to our existing revolving credit facility. While we believe that our operating cash flow, financial assets, current access to capital and credit markets, including the senior bridge term loan agreement and our existing revolving credit and sales facilities, will provide us with the ability to meet our financing needs for the foreseeable future (including the financing for the Celesio acquisition), there can be no assurance that our incurrence of additional indebtedness, or volatility and disruption in the global capital and credit markets, will not impair our liquidity, increase our costs of borrowing or adversely affect our ability to obtain at commercially acceptable terms permanent financing for our acquisition of Celesio.


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

Stock repurchases may be made from ~~time-to-time~~time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase 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 the fourth quarter of 2013, we entered into an accelerated share repurchase program with a third party financial institution to repurchase $150 million of the Company’s common stock. As of March 31, 2013, we had received 1.2 million shares representing the minimum number of shares due under this program. This program was completed on April 17, 2013 and we received 0.2 million additional shares on April 22, 2013. The total number of shares repurchased under this program was 1.4 million shares at an average price per share of $107.63.

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at ~~December 31, 2013~~.June 30, 2014.

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McKESSON CORPORATION

The following table provides information on the Company’s share repurchases during the ~~third~~first quarter of ~~2014~~2015.

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, 2013 – October 31, 2013 — $ — — $ 340
November 1, 2013 – November 30, 2013 — — — 340
December 1, 2013 – December 31, 2013 — — — 340
Total —
— 340



	Share Repurchases ⁽¹⁾
(In millions, except price per share)	Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased As Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
April 1, 2014 – April 30, 2014	—	$	—	—	$	340
May 1, 2014 – May 31, 2014	—		—	—		340
June 1, 2014 – June 30, 2014	—		—	—		340
Total	—			—		340


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


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Mine Safety Disclosures.

Not Applicable

~~Table of Contents~~

~~McKESSON CORPORATION~~


Item 5.	Other Information.

The other information shown below is being presented to reflect discontinued operations as described in Financial Note 7, “Discontinued Operations”, to the condensed financial statements appearing in this Quarterly Report on Form 10-Q. In the first quarter of 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment and a small business from our Distribution Solutions segment. We are required to reflect the change in presentation and disclosure for all periods presented in future filings with the SEC.

The table below presents our statements of operations for the years ended March 31, 2013, 2012, and 2011 as previously reported and as recast (unaudited) to reflect discontinued operations mentioned above.

Years Ended March 31,
2013 2012 2011
(In millions, except per share amounts)
As Previously
Reported
As
Recast (unaudited)

As Previously
Reported
As
Recast (unaudited)

As Previously
Reported
As
Recast (unaudited)
Revenues $ 122,455
$ 122,069
$ 122,734
$ 122,321
$ 112,084
$ 111,677
Cost of Sales (115,471 ) (115,221 ) (116,167 ) (115,919 ) (106,114 ) (105,880 )
Gross Profit 6,984
6,848
6,567
6,402
5,970
5,797

Total Operating Expenses (4,669 ) (4,523 ) (4,418 ) (4,278 ) (4,149 ) (4,031 )

Other Income, Net 35
34
21
20
36
35
Impairment of an Equity Investment (191 ) (191 ) —
—
—
—
Interest Expense (240 ) (240 ) (251 ) (251 ) (222 ) (222 )
Income from Continuing Operations
Before Income Taxes
1,919
1,928
1,919
1,893
1,635
1,579
Income Tax Expense (581 ) (581 ) (516 ) (514 ) (505 ) (496 )
Income from Continuing Operations 1,338
1,347
1,403
1,379
1,130
1,083
Income (Loss) from Discontinued Operations, Net of Tax —
(9 ) —
24
72
119
Net Income $ 1,338
$ 1,338
$ 1,403
$ 1,403
$ 1,202
$ 1,202

Earnings (Loss) Per Common Share
Diluted
Continuing Operations $ 5.59
$ 5.62
$ 5.59
$ 5.49
$ 4.29
$ 4.12
Discontinued Operations —
(0.03 ) —
0.10
0.28
0.45
Total $ 5.59
$ 5.59
$ 5.59
$ 5.59
$ 4.57
$ 4.57

Basic
Continuing Operations $ 5.71
$ 5.74
$ 5.70
$ 5.60
$ 4.37
$ 4.19
Discontinued Operations —
(0.03 ) —
0.10
0.28
0.46
Total $ 5.71
$ 5.71
$ 5.70
$ 5.70
$ 4.65
$ 4.65

None

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McKESSON CORPORATION


Item 6.	Exhibits.



Exhibit Number	Description
10.1*
~~10.1~~	~~Share Purchase Agreement, dated October 24, 2013, by~~Form of Statement and ~~among Franz Haniel & Cie. GmbH, Dragonfly GmbH & Co. KGaA~~Terms and ~~McKesson Corporation; (Exhibit 10.1~~Conditions applicable to Awards Pursuant to the ~~Company’s Current Report on Form 8-K, filed with the SEC on Octobert 25,~~McKesson Corporation 2013 ~~File No. 1-13252).~~Stock Plan.

~~10.2~~31.1	~~First Amendment~~Certification of the ~~Share Purchase Agreement, dated December 19, 2013, by~~Chief Executive Officer Pursuant to Rule 13a-14(a) and among Franz Haniel & Cie. GmbH, Dragonfly GmbH & Co. KGaA and McKesson Corporation; (Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on January 15, 2014, File No. 1-13252).

~~10.3~~	~~Second Amendment~~15d-14(a) of the ~~Share Purchase Agreement, dated January 9, 2014, by and among Franz Haniel & Cie. GmbH, Dragonfly GmbH & Co. KGaA and McKesson Corporation; (Exhibit 10.2~~Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the ~~Company’s Current Report on Form 8-K, filed with the SEC on January 15, 2014, File No. 1-13252).~~

~~10.4~~	Business Combination Agreement, dated October 24, 2013, by and between Dragonfly GmbH & Co. KGaA, McKesson Corporation and Celesio AG; (Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on October 25, 2013, File No. 1-13252).

~~10.5~~	~~Senior Bridge Term Loan Agreement, dated as~~Sarbanes-Oxley Act of October 23, 2013, among McKesson Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto; (Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on October 25, 2013, File No. 1-13252).

~~10.6~~	Amendment No. 1, dated as of November 13, 2013, to the Senior Bridge Term Loan Agreement, dated as of October 23, 2013, among McKesson Corporation, Bank of America, N.A., as Administrative Agent, and the Lenders party thereto. (Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2013, File No. 1-13252).

~~10.7~~	Amendment No. 1, dated November 15, 2013, to the Credit Agreement, dated as of September 23, 2011, among the Company and McKesson Canada Corporation, collectively, the Borrowers, Bank of America, N.A. as Administrative Agent, Bank of America, N.A. (acting through its Canada branch), as Canadian Administrative Agent, JPMorgan Chase Bank, N.A. and Wells Fargo Bank, National Association, as Co- Syndication Agents, Wells Fargo Bank, National Association as L/C Issuer, The Bank of Tokyo-Mitsubishi UFJ, LTD., The Bank of Nova Scotia and U.S. Bank National Association as Co-Documentation Agents, and The Other Lenders Party Thereto, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Sole Lead Arranger and Sole Book Manager. (Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2013, File No. 1-13252).

~~10.8~~	Amendment No. 3, dated as of November 15, 2013, Amendment No. 2, dated as of May 15, 2013, and Amendment No. 1, dated as of May 16, 2012, to the Fourth Amended and Restated Receivables Purchase Agreement and Fourth Amended and Restated Receivables Purchase Agreement, dated as of May 18, 2011, among the Company, as servicer, CGSF Funding Corporation, as seller, the several conduit purchasers from time to time party to the Agreement, the several committed purchasers from time to time party to the Agreement, the several managing agents from time to time party to the Agreement, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (as successor to JPMorgan Chase Bank, N.A.), as collateral agent. (Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the SEC on November 21, 2013, File No. 1-13252).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, 2013,~~June 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Financial Notes.


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


†	Furnished herewith.

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McKESSON CORPORATION

~~SIGNATURES~~SIGNATURE

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 30,~~July 31, 2014	/s/ James A. Beer
		James A. Beer
		Executive Vice President and Chief Financial Officer



		MCKESSON CORPORATION

Date:	~~January 30,~~July 31, 2014	/s/ Nigel A. Rees
		Nigel A. Rees
		Vice President and Controller

3734



	Years Ended March 31,
	2013						2012						2011
(In millions, except per share amounts)	As Previously Reported			As Recast (unaudited)			As Previously Reported			As Recast (unaudited)			As Previously Reported			As Recast (unaudited)
Revenues	$	122,455		$	122,069		$	122,734		$	122,321		$	112,084		$	111,677
Cost of Sales	(115,471		)	(115,221		)	(116,167		)	(115,919		)	(106,114		)	(105,880		)
Gross Profit	6,984			6,848			6,567			6,402			5,970			5,797

Total Operating Expenses	(4,669		)	(4,523		)	(4,418		)	(4,278		)	(4,149		)	(4,031		)

Other Income, Net	35			34			21			20			36			35
Impairment of an Equity Investment	(191		)	(191		)	—			—			—			—
Interest Expense	(240		)	(240		)	(251		)	(251		)	(222		)	(222		)
Income from Continuing Operations Before Income Taxes	1,919			1,928			1,919			1,893			1,635			1,579
Income Tax Expense	(581		)	(581		)	(516		)	(514		)	(505		)	(496		)
Income from Continuing Operations	1,338			1,347			1,403			1,379			1,130			1,083
Income (Loss) from Discontinued Operations, Net of Tax	—			(9		)	—			24			72			119
Net Income	$	1,338		$	1,338		$	1,403		$	1,403		$	1,202		$	1,202

Earnings (Loss) Per Common Share
Diluted
Continuing Operations	$	5.59		$	5.62		$	5.59		$	5.49		$	4.29		$	4.12
Discontinued Operations	—			(0.03		)	—			0.10			0.28			0.45
Total	$	5.59		$	5.59		$	5.59		$	5.59		$	4.57		$	4.57

Basic
Continuing Operations	$	5.71		$	5.74		$	5.70		$	5.60		$	4.37		$	4.19
Discontinued Operations	—			(0.03		)	—			0.10			0.28			0.46
Total	$	5.71		$	5.71		$	5.70		$	5.70		$	4.65		$	4.65

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