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MarketScreener Homepage  >  Equities  >  Nyse  >  McKesson Corporation    MCK

MCKESSON CORPORATION

(MCK)
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MCKESSON : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

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05/22/2020 | 08:42am EDT

GENERAL

Management's discussion and analysis of financial condition and results of
operations, referred to as the "Financial Review," is intended to assist the
reader in the understanding and assessment of significant changes and trends
related to the results of operations and financial position of McKesson
Corporation together with its subsidiaries (collectively, the "Company," "we,"
"our," or "us" and other similar pronouns). This discussion and analysis should
be read in conjunction with the consolidated financial statements and
accompanying financial notes in Item 8 of Part II of this Annual Report on Form
10-K. Our fiscal year begins on April 1 and ends on March 31. Unless otherwise
noted, all references to a particular year shall mean our fiscal year.
Certain statements in this report constitute forward-looking statements. See
Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report
on Form 10-K for additional factors relating to these statements; also see Item
1A - Risk Factors in Part I of this Annual Report on Form 10-K for a list of
certain risk factors applicable to our business, financial condition and results
of operations.
Overview of Our Business:
We are a global leader in healthcare supply chain management solutions, retail
pharmacy, community oncology and specialty care, and healthcare technology. We
partner with life sciences companies, manufacturers, providers, pharmacies,
governments and other healthcare organizations to help provide the right
medicines, medical products and healthcare services to the right patients at the
right time, safely and cost-effectively.
We conduct our business through three reportable segments: U.S. Pharmaceutical
and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical
Solutions. All remaining operating segments and business activities that are not
significant enough to require separate reportable segment disclosure are
included in Other, which primarily consists of McKesson Canada, McKesson
Prescription Technology Solutions ("MRxTS") and our investment in Change
Healthcare LLC ("Change Healthcare JV"), which was split-off from the Company in
the fourth quarter of 2020 as further discussed in this Financial Review. Our
organizational structure also includes Corporate, which consists of income and
expenses associated with administrative functions and projects, and the results
of certain investments. The factors for determining the reportable segments
include the manner in which management evaluates the performance of the Company
combined with the nature of the individual business activities. We evaluate the
performance of our operating segments on a number of measures, including
revenues and operating profit before interest expense and income taxes. Refer to
Financial Note 24, "Segments of Business," to the accompanying consolidated
financial statements included in this Annual Report on Form 10-K for a
description of these segments.


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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Executive Summary:
The following executive summary provides highlights and key factors that
impacted our business, operating results and liquidity for the year ended
March 31, 2020. The coronavirus disease 2019 ("COVID-19") did not significantly
impact our financial condition, results of operations or liquidity in 2020. For
a more in-depth discussion of how COVID-19 impacted our business, operations,
and outlook, see the COVID-19 section of "Trends and Uncertainties" included
below.
•      Revenues of $231.1 billion, reflecting an 8% increase from the prior year

driven primarily by market growth in our U.S. Pharmaceutical and Specialty

       Solutions segment, including branded pharmaceutical price increases and
       higher volumes from retail national account customers;

• Gross profit increased 2% from the prior year primarily driven by market

growth in our Medical-Surgical Solutions segment;

• On October 21, 2019, we disclosed an opioid-related litigation settlement

       with two Ohio counties and recorded a related charge of $82 million in
       total operating expenses;

• On December 12, 2019, McKesson and Walgreens Boots Alliance announced an

agreement to create a joint venture that is expected to combine their

respective pharmaceutical wholesale businesses in Germany. As a result of

this agreement, we recognized fair value remeasurement charges of $275

million in total operating expenses within our European Pharmaceutical

Solutions segment;

• On March 10, 2020, we completed the previously announced separation of our

investment in Change Healthcare JV and recognized an estimated gain of

$414 million related to this transaction. We no longer hold an interest in

any securities of Change Healthcare JV or Change Healthcare, Inc.

("Change") following the separation. During the second quarter of 2020, we

recorded an other-than-temporary-impairment ("OTTI") charge of $1.2

billion and a dilution loss of $246 million related to our investment in

Change Healthcare JV;

• Diluted earnings per common share from continuing operations attributable

       to McKesson Corporation in 2020 of $4.99 reflects the aforementioned items
       and a lower share count compared to the prior year driven largely by share
       repurchases; and

• We returned $2.2 billion of cash to shareholders through $1.9 billion of

common stock repurchases and $294 million of dividend payments.



Trends and Uncertainties:
COVID-19
In December 2019, a novel strain of coronavirus, which causes the infectious
disease known as COVID-19, was reported in Wuhan, China. The World Health
Organization declared COVID-19 a "Public Health Emergency of International
Concern" on January 30, 2020 and a global pandemic on March 11, 2020.
We continue to evaluate the nature and extent COVID-19 may have to our business
and operations. The pandemic is developing rapidly and the full extent to which
COVID-19 will impact us depends on future developments, including the duration
and spread of the virus, as well as potential seasonality of new outbreaks.
In response to the COVID-19 pandemic, federal, state, and local government
directives and policies have been put in place in the United States to enhance
availability of medications and supplies to meet the increased demand, assist
front-line healthcare providers, manage public health concerns by creating
social distancing, and address the economic impacts, including sharply reduced
business activity, increased unemployment, and overall uncertainty presented by
this new healthcare challenge. Similar governmental actions have occurred in
Canada and Europe.
As a global leader in healthcare supply chain management solutions, retail
pharmacy, community oncology and specialty care, and healthcare information
technology, we are uniquely positioned to respond to the COVID-19 pandemic in
the United States, Canada, and Europe. We are working closely with national and
local governments, agencies, and industry partners to ensure supplies, including
personal protective equipment, and medicine reach our customers and patients
when they need them.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


We have taken the necessary steps to ensure that we continue to supply our
customers and protect the safety of our employees. The various responses we put
in place to mitigate the impact of COVID-19 on our business operations,
including telecommuting and work-from-home policies, restricted travel
requirements, employee support programs, and enhanced safety measures are
intended to limit exposure to COVID-19. These successful steps in our fourth
quarter of 2020 have resulted in limited disruption of our normal business
operations, productivity trends, and slightly compressed operating margins due
to increased operating expenses.
The financial impact to the year ended March 31, 2020 is muted due to the timing
of the COVID-19 pandemic late in our fourth quarter. We experienced higher
pharmaceutical distribution volumes in March, however, these increases were
partially offset by decreases in specialty drug volumes and decreased demand
within primary care medical-surgical supplies. Specialty drug volumes were
negatively impacted by lower demand for infusions, elective specialty drugs,
oncology, and dermatology practice sales. Demand for primary care
medical-surgical supplies were negatively impacted by deferrals in elective
procedures in hospitals and surgery centers as well as decreased traffic or
closures in doctor's offices. These positive and negative COVID-19 impacts drove
increased consolidated revenues by less than 1% in 2020.
The increased volumes and revenue due to COVID-19 favorably impacted income from
continuing operations before income taxes, but were mostly offset by increased
variable labor costs, enhanced sterilization procedures to sanitize operating
facilities, costs of personal protection equipment for our employees, and
increased costs of transport as well as increased other operating expenses.
Additionally, as previously mentioned, decreased specialty drug volumes and
demand challenges for primary care medical-surgical supplies weighed negatively
on income from continuing operations before income taxes. We also expanded
temporary employee benefits and incentives targeted for our front-line employees
to not only protect their safety, but to provide further support including
additional medical benefits, emergency leave as well as added compensation. The
overall impact to income from continuing operations before income taxes from the
favorable and unfavorable items mentioned above largely offset each other,
however, impacts to future periods due to COVID-19 may differ based on future
developments, including the duration and spread of the virus as well as
potential seasonality of new outbreaks. Overall operating margins were
compressed due to higher pharmaceutical distribution volumes, shifts in product
mix, higher demand by retail national accounts and increased operating expenses.
Our consolidated balance sheets and ability to maintain financial liquidity
remains strong. We have experienced no material impacts to our liquidity or net
working capital. With many of our customers anticipating extended declines in
their businesses due to the COVID-19 pandemic, we are monitoring closely for
trends that may impact their timing or ability to pay amounts owed to us. We
remain well-capitalized with access to liquidity from our revolving credit
facility. Long-term debt markets and commercial paper markets, our primary
sources of capital after cash flow from operations, have remained open during
the COVID-19 pandemic. While there are signs of stress in both markets, we do
not have an immediate need to access these markets and could use our revolving
credit facility to meet any near-term liquidity needs. We have seen some
improvement in conditions in the debt markets and commercial paper markets as
the Federal Reserve has taken steps to stabilize the markets. We believe we have
the ability to meet the covenants of our credit agreements.
We continue to monitor the COVID-19 pandemic impact on our supply chain. We were
able to maintain appropriate labor and overall vendor supply levels under the
circumstances in the fourth quarter, despite challenges including higher
sickness rates and service level issues with suppliers. Supplier shortages and
stock-outs for certain products have occurred in specific instances as demand in
excess of supply escalated for certain items tied to the COVID-19 pandemic
response, such as personal protective equipment and other preventive products.
Our inventory levels have fluctuated in response to these supply dynamics and
increased concentrated customer orders for certain products, with varying
inventory level impacts depending on the specific product within our portfolio
of offerings.
Although the availability of various products is dependent on our suppliers,
their location and the extent to which they are impacted by the COVID-19
pandemic, we are proactively working with manufacturers, industry partners, and
government agencies to meet the needs of our customers during the pandemic. We
have assembled a Critical Care Drug Task Force, made up of our procurement
specialists, clinical health systems pharmacists, and supply chain
professionals, focused on securing additional product where available, sourcing
back-up products, adjusting allocations to ensure equitable distribution and to
protect our operations across all locations and facilities. We have a robust
Business Continuity and Disaster Recovery Program ("BCRP") and we have
proactively enhanced our BCRP in response to the COVID-19 pandemic.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


The COVID-19 pandemic impacted our business operations and financial results
beginning in the fourth quarter of 2020. Although the financial impact on our
overall 2020 results is limited due to the timing of the outbreak, we face
numerous uncertainties in estimating the direct and indirect effects on our
future business operations, financial condition, results of operations, and
liquidity. Additionally, responses from authorities and regulators at all levels
of government may materially impact us in future periods. Due to several rapidly
changing variables related to the COVID-19 pandemic, we cannot reasonably
estimate future economic trends and the timing of when stability will return.
Refer to Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for
a disclosure of risk factors related to COVID-19.
Opioid-Related Litigation and Claims
We are a defendant in over 3,000 legal proceedings asserting claims related to
distribution of controlled substances (opioids) in federal and state courts
throughout the United States, and in Puerto Rico and Canada. We are vigorously
defending ourselves against such claims and proceedings and are a party to
discussions with the objective of achieving broad resolution of the remaining
claims. Because of the large number of parties involved, together with the
novelty and complexity of the issues, for which there may be different
considerations among the parties, we cannot predict the successful resolution
through a negotiated settlement. An adverse judgment or negotiated resolution in
any of these matters could have a material adverse impact on our financial
position, cash flows or liquidity, or results of operations. Refer to Financial
Note 21, "Commitments and Contingent Liabilities," to the accompanying
consolidated financial statements included in this Annual Report on Form 10­K
for more information.
RESULTS OF OPERATIONS
Overview of Consolidated Results:
(Dollars in millions, except per               Years Ended March 31,                    Change
share data and ratios)                  2020           2019           2018          2020      2019
Revenues                             $ 231,051$ 214,319$ 208,357         8   %     3   %
Gross Profit                            12,023         11,754         11,184         2         5
Gross Profit Margin                       5.20   %       5.48   %       5.37   %   (28 ) bp   11   bp
Total Operating Expenses             $  (9,534 )$ (10,868 )$ (10,422 )     (12 ) %     4   %
Total Operating Expenses as a
Percentage of Revenues                    4.13   %       5.07   %       5.00   %   (94 ) bp    7   bp
Other Income, Net                    $      12$     182$     130       (93 ) %    40   %
Equity Earnings and Charges from
Investment in Change Healthcare
Joint Venture                           (1,108 )         (194 )         (248 )     471       (22 )
Loss on Debt Extinguishment                  -              -           (122 )      NM      (100 )
Interest Expense                          (249 )         (264 )         (283 )      (6 )      (7 )
Income from Continuing Operations
Before Income Taxes                      1,144            610            239        88       155
Income Tax (Expense) Benefit               (18 )         (356 )           53       (95 )    (772 )
Income from Continuing Operations        1,126            254            292       343       (13 )
Income (Loss) from Discontinued
Operations, Net of Tax                      (6 )            1              5      (700 )     (80 )
Net Income                               1,120            255            297       339       (14 )
Net Income Attributable to
Noncontrolling Interests                  (220 )         (221 )         (230 )       -        (4 )
Net Income Attributable to McKesson
Corporation                          $     900$      34      $      

67 NM (49 ) %


Diluted Earnings (Loss) Per Common
Share Attributable to McKesson
Corporation
Continuing operations                $    4.99$    0.17$    0.30        NM       (43 ) %
Discontinued operations                  (0.04 )            -           0.02        NM      (100 )
Total                                $    4.95$    0.17$    0.32        NM       (47 ) %

Weighted Average Diluted Common
Shares                                     182            197            209        (8 ) %    (6 ) %


bp - basis points
NM - not meaningful

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Revenues
Revenues increased for the years ended March 31, 2020 and 2019 compared to the
respective prior years primarily due to market growth, including expanded
business with existing customers within our U.S. Pharmaceutical and Specialty
Solutions segment. Market growth includes growing drug utilization, price
increases and newly launched products, partially offset by price deflation
associated with brand to generic drug conversion. The increase in revenues for
2019 was also due to our 2019 first quarter acquisition of Medical Specialties
Distributors LLC ("MSD"), partially offset by loss of customers within our U.S.
Pharmaceutical and Specialty Solutions segment. The impact from COVID-19
increased revenues by less than 1% for the year ended March 31, 2020 and was
primarily attributable to our U.S. Pharmaceutical and Specialty Solutions and
European Pharmaceutical Solutions segments.
Gross Profit
Gross profit increased for the year ended March 31, 2020 compared to the prior
year primarily due to market growth in our Medical-Surgical Solutions segment,
partially offset by unfavorable effects of foreign currency exchange
fluctuations. Gross profit and gross profit margin for the year ended March 31,
2020 compared to the prior year were unfavorably impacted by a decrease in net
cash proceeds received of $22 million in 2020 compared to $202 million in 2019
representing our share of antitrust legal settlements, partially offset by
higher last-in, first-out ("LIFO") credits in 2020 due to higher generic
deflation. The impact from COVID-19 increased gross profit by less than 1% and
decreased gross profit margin by less than 10 basis points for the year ended
March 31, 2020.
Gross profit and gross profit margin increased for the year ended March 31, 2019
compared to the prior year. Gross profit increased due to market growth,
partially offset by loss of customers. The increase in gross profit and gross
profit margin for 2019 was also due to the receipt of net cash proceeds
representing our share of antitrust legal settlements of $202 million, higher
LIFO credits and our business acquisitions. These increases in 2019 were
partially offset by the incremental government reimbursement reductions in the
United Kingdom ("U.K."), government imposed generic price cuts in Canada and the
2018 third quarter sale of our Enterprise Information Solutions ("EIS")
business.
Gross profit for the years ended March 31, 2020, 2019 and 2018 included LIFO
inventory credits of $252 million, $210 million and $99 million. Refer to the
"Critical Accounting Policies and Estimates" section included in this Financial
Review for further information.
Total Operating Expenses
A summary of the components of our total operating expenses for the years ended
March 31, 2020, 2019 and 2018 is as follows:
                                             Years Ended March 31,          

Change

(Dollars in millions, except ratios) 2020 2019 2018

    2020      2019
Selling, distribution and
administrative expenses              $ 9,168$  8,403$  8,138         9   %     3   %
Research and development                  96            71           125        35       (43 )
Goodwill impairment charges                2         1,797         1,738      (100 )       3
Restructuring, impairment and
related charges                          268           597           567       (55 )       5
Gain from sale of business                 -             -          (109 )      NM      (100 )
Gain on healthcare technology net
asset exchange, net                        -             -           (37 )      NM      (100 )
Total Operating Expenses             $ 9,534$ 10,868$ 10,422       (12 ) %     4   %
Percent of Revenues                     4.13   %      5.07   %      5.00   %   (94 ) bp    7   bp

Total operating expenses and total operating expenses as a percentage of revenues decreased for the year ended March 31, 2020 compared to the prior year and increased for the year ended March 31, 2019 compared to the prior year.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Total operating expenses for the years ended March 31, 2020, 2019 and 2018 were
affected by the following significant items:
2020
•      Selling, distribution and administrative expenses ("SD&A") includes

charges of $275 million to remeasure assets and liabilities held for sale

to the lower of carrying value or fair value less costs to sell related to

the expected contribution of the majority of our German wholesale business

to create a joint venture in which McKesson will have a non-controlling

       interest within our European Pharmaceutical Solutions segment. Refer to
       Financial Note 3, "Held for Sale," to the accompanying consolidated
       financial statements included in this Annual Report on Form 10-K for more
       information;


•      SD&A includes opioid-related expenses of $232 million, primarily

litigation and related expenses, including the second quarter settlement

charge of $82 million recorded in connection with an agreement executed in

       December 2019 to settle all opioid-related claims filed by two Ohio
       counties;


•      Restructuring, impairment and related charges includes long-lived asset
       impairment charges of $112 million, primarily for our U.K. business

(mainly pharmacy licenses) and Rexall Health retail business ("Rexall

Health") in Other (mainly customer relationships), and the remaining $156

million primarily represents employee severance and exit-related costs

related to our 2019 restructuring initiatives, as further discussed below;

       and


•      Total operating expenses includes higher SD&A due to our business

acquisitions and to support business growth, as well as our technology

initiatives, partially offset by favorable effects of foreign currency

       exchange fluctuations.


2019

Goodwill impairment charges of $1.8 billion in our Retail Pharmacy ("RP",

formerly "Consumer Solutions") and Pharmaceutical Distribution ("PD",

formerly "Pharmacy Solutions") reporting units within the European

Pharmaceutical Solutions segment. Of these impairment charges, $238

million was recognized upon the 2019 first quarter segment changes, which

resulted in two new reporting units. The remaining charges primarily were

due to declines in the reporting units' estimated future cash flows and

the selection of higher discount rates. These impairment charges generally

were not deductible for income tax purposes. The declines in estimated

       future cash flows primarily were attributed to additional government
       reimbursement reductions and competitive pressures within the U.K. The
       risk of successfully achieving certain business initiatives was the
       primary factor in the use of a higher discount rate. At March 31, 2019,
       both RP and PD reporting units had no remaining goodwill balances;

• Restructuring, impairment and related charges primarily includes employee

severance and exit-related costs of $331 million for our 2019

restructuring initiatives, as further discussed below and long-lived asset

impairment charges of $245 million primarily for our U.K. business (mainly

       pharmacy licenses) driven by additional government reimbursement
       reductions and competitive pressures in the U.K.; and

• SD&A includes opioid-related costs of $151 million primarily related to

       litigation expenses and increased expenses due to our business
       acquisitions and to support growth, partially offset by a gain from an
       escrow settlement of $97 million representing certain indemnity and other
       claims related to our 2017 acquisition of Rexall Health and a credit of
       $90 million for the derecognition of a liability related to the tax
       receivable agreement ("TRA") payable to the shareholders of Change.


2018
•      Goodwill impairment charges of $1.3 billion for the European
       Pharmaceutical Solutions segment and $455 million for Rexall Health. There

were no tax benefits associated with these goodwill impairment charges.

       The impairments for Europe were triggered primarily by government
       reimbursement reductions in our retail business in the U.K. and a more
       competitive environment in France. The impairments for Rexall Health were

primarily driven by significant generics reimbursement reductions across

Canada and minimum wage increases in multiple provinces. At March 31,

       2018, Rexall Health had no remaining goodwill related to our acquisition
       of Rexall Health;



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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


•      Restructuring, impairment and related charges primarily includes

long-lived asset impairment charges of $446 million due to the declines in

estimated future cash flows in our European business including those

declines in our U.K. retail business driven by government reimbursement

       reductions. In addition, we recorded employee severance and lease exit
       costs of $74 million for our 2018 restructuring plan in our McKesson
       Europe business. The plan was substantially completed in 2020;


•      SD&A includes a charitable contribution expense of $100 million to a
       public benefit California foundation (the "Foundation");


•      SD&A includes increased expenses due to our business acquisitions,

partially offset by a gain from sale of business of $109 million related

to the sale of our EIS business within Other.



Goodwill Impairments
The impairment testing performed in 2020 did not indicate any material
impairment of goodwill. As of the testing date, other risks, expenses and future
developments, such as additional government actions, increased regulatory
uncertainty and material changes in key market assumptions limit our ability to
estimate projected cash flows, which could adversely affect the fair value of
various reporting units in future periods, including our McKesson Canada
reporting unit in Other where the risk of a material goodwill impairment is
higher than other reporting units. Refer to "Critical Accounting Policies and
Estimates" included in this Financial Review for further information.
On October 1, 2019, we voluntarily changed our annual goodwill impairment
testing date from January 1 to October 1 to better align with the timing of our
annual long-term planning process. This change was not material to our
consolidated financial statements as it did not delay, accelerate, or avoid any
potential goodwill impairment charge. Refer to Note 14, "Goodwill and Intangible
Assets, Net," to the accompanying consolidated financial statements included in
this Annual Report on Form 10-K for further information.
2019 Restructuring Initiatives
On April 25, 2018, we announced a strategic growth initiative intended to drive
long-term incremental profit growth and increase operational efficiency. The
initiative consists of multiple growth priorities and plans to optimize our
operating models and cost structures primarily through the centralization, cost
management and outsourcing of certain administrative functions. As part of the
growth initiative, we committed to implement certain actions including a
reduction in workforce, facility consolidation and store closures. This set of
the initiatives was substantially complete by the end of 2020 and we recorded
charges of $15 million and $135 million in 2020 and 2019 primarily representing
employee severance, exit-related costs and asset impairment charges. Any
remaining charges primarily consist of exit-related costs.
As previously announced on November 30, 2018, we relocated our corporate
headquarters from San Francisco, California to Irving, Texas to improve
efficiency, collaboration and cost competitiveness, effective April 1, 2019. We
anticipate that the relocation will be complete by January 2021. We expect to
incur total charges of approximately $80 million to $130 million, of which
charges of $44 million and $33 million were recorded in 2020 and 2019 primarily
representing employee retention expenses, asset impairments and accelerated
depreciation. The estimated remaining charges primarily consist of lease and
other exit-related costs, and employee-related expenses including retention.
During the fourth quarter of 2019, we committed to additional programs to
continue our operating model and cost optimization efforts. We continue to
implement centralization of certain functions and outsourcing through the
expanded arrangement with a third-party vendor to achieve operational
efficiency. The programs also include reorganization and consolidation of our
business operations and related headcount reductions, closures of retail
pharmacy stores in Europe and closures of other facilities. We anticipate these
additional programs will be substantially complete by the end of 2021. We expect
to incur total charges of approximately $300 million to $350 million for these
programs, of which charges of $72 million and $163 million were recorded in 2020
and 2019 primarily representing employee severance, accelerated depreciation
expense and project consulting fees. The estimated remaining charges primarily
consist of facility and other exit costs and employee-related costs.
Refer to Financial Note 4, "Restructuring, Impairment and Related Charges," to
the accompanying consolidated financial statements included in this Annual
Report on Form 10-K for more information.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Other Income, Net
Other income, net, for the year ended March 31, 2020 decreased compared to the
prior year primarily due to the 2020 pension settlement charges of $122 million
related to our previously approved termination of the frozen U.S. defined
benefit pension plan and higher gains recognized from the sale of investments in
2019, partially offset by higher settlement gains in 2020 from our derivative
contracts. In connection with the pension plan termination, we purchased annuity
contracts from an insurer that will pay and administer the future pension
benefits of the remaining participants.
Other income, net for the year ended March 31, 2019 increased compared to the
prior year primarily due to higher gains recognized from the sales of
investments.
Equity Earnings and Charges from Investment in Change Healthcare Joint Venture
Our investment in Change Healthcare JV is accounted for using the equity method
of accounting. Excluding the impairment and transaction-related items described
below, our proportionate share of loss from our investment in Change Healthcare
JV for the years ended March 31, 2020, 2019 and 2018 was $119 million, $194
million and $248 million, which primarily includes transaction and integration
expenses incurred by the joint venture and basis differences between the joint
venture and McKesson including amortization of fair value adjustments. 2018 also
includes certain transaction expenses, partially offset by a tax benefit of $76
million primarily due to a reduction in the future applicable tax rate related
to the 2017 Tax Cuts and Jobs Act (the "2017 Tax Act"). During the first quarter
of 2020 and for the years ended March 31, 2019 and 2018, we owned approximately
70% of this joint venture.
On June 27, 2019, common stock and certain other securities of Change began
trading on the NASDAQ ("IPO"). On July 1, 2019, upon the completion of its IPO,
Change contributed net cash proceeds it received from its offering of common
stock to Change Healthcare JV in exchange for additional membership interests of
Change Healthcare JV ("LLC Units") at the equivalent of its offering price of
$13 per share. The proceeds from the concurrent offering of other securities
were also used by Change to acquire certain securities of Change Healthcare JV.
As a result, McKesson's equity interest in Change Healthcare JV was reduced to
approximately 58.5%, which was used to recognize our proportionate share in net
loss from Change Healthcare JV, commencing the second quarter of 2020. As a
result of the ownership dilution to 58.5% from 70%, we recognized a dilution
loss of approximately $246 million in the second quarter of 2020. Additionally,
our proportionate share of income or loss from this investment was subsequently
reduced as immaterial settlements of stock option exercises occurred after the
IPO and further diluted our ownership.
In the second quarter of 2020, we recorded an OTTI charge of $1.2 billion to our
investment in Change Healthcare JV, representing the difference between the
carrying value of our investment and the fair value derived from the
corresponding closing price of Change's common stock at September 30, 2019. This
charge was included within equity earnings and charges from investment in Change
Healthcare joint venture in our consolidated statements of operations for the
year ended March 31, 2020.
On March 10, 2020, we completed the previously announced separation of our
interest in Change Healthcare JV. The separation was effected through the
split-off of SpinCo, a wholly owned subsidiary of the Company that held all of
our interest in Change Healthcare JV, to certain of our stockholders through an
exchange offer ("Split-off"), followed by the merger of SpinCo with and into
Change, with Change surviving the merger ("Merger").
In connection with the exchange offer, on March 9, 2020, we distributed all
176.0 million outstanding shares of common stock of SpinCo to participating
holders of the Company's common stock in exchange for 15.4 million shares of
McKesson common stock. Following consummation of the exchange offer, on March
10, 2020, the Merger was consummated, with each share of SpinCo common stock
converted into one share of Change common stock, par value $0.001 per share,
with cash being paid in lieu of fractional shares of Change common stock. The
Split-off and Merger are intended to be generally tax-free transactions to
McKesson and its shareholders for U.S. federal income tax purposes. Following
the Split-off, we do not beneficially own any of Change's outstanding
securities. In connection with this transaction, we recognized an estimated gain
for financial reporting purposes of $414 million during the fourth quarter of
2020, which was largely driven by the reversal of a related deferred tax
liability.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


After the separation, Change Healthcare JV is required under the TRA to pay
McKesson 85% of the net cash tax savings realized, or deemed to be realized,
resulting from depreciation or amortization allocated to Change by McKesson. The
receipt of any payments under the TRA is dependent upon Change benefiting from
this depreciation or amortization in future tax return filings, which creates
uncertainty over the amount, timing and probability of the gain recognized. As
such, we account for the TRA as a gain contingency, with no receivable
recognized as of March 31, 2020.
Loss on Debt Extinguishment
In 2018, we recognized a loss on debt extinguishment of $122 million primarily
representing premiums related to our February 2018 tender offers to redeem a
portion of our existing outstanding long-term debt.
Interest Expense
Interest expense decreased in 2020 compared to the prior year primarily due to a
decrease in the issuance of commercial paper, partially offset by a decrease in
interest income from our derivative contracts. Interest expense decreased in
2019 compared to the prior year primarily due to the refinancing of debt at
lower interest rates, partially offset by an increase in the issuance of
commercial paper. Interest expense fluctuates based on timing, amounts and
interest rates of term debt repaid and new term debt issued, as well as amounts
incurred associated with financing fees.
Income Tax (Expense) Benefit
We recorded income tax expense of $18 million and $356 million and tax benefit
of $53 million related to continuing operations for the years ended March 31,
2020, 2019 and 2018. Our reported income tax expense rates were 1.6% and 58.4%
in 2020 and 2019, and our income tax benefit rate was 22.2% in 2018.
Our reported income tax expense rate for 2020 was favorably impacted by an
estimated gain on the Change Healthcare JV divestiture of $414 million (pre-tax
and after-tax), which was intended to generally be a tax-free split-off for U.S.
federal income tax purposes, and unfavorably impacted by charges of $275 million
(pre-tax and after-tax) to remeasure the carrying value of assets and
liabilities held for sale related to the expected formation of a new German
wholesale joint venture within our European Pharmaceutical Solutions segment.
Refer to Financial Note 2,"Investment in Change Healthcare Joint Venture" and
Note 3,"Held for Sale," to the accompanying consolidated financial statements
included in this Annual Report on Form 10­K for more information.
Our reported income tax expense rate for 2019 was unfavorably impacted by
charges of $1.8 billion (pre-tax and after-tax) to impair the carrying value of
goodwill for our European Pharmaceutical Solutions segment, given that these
charges are generally not deductible for tax purposes. The reported income tax
benefit rate for 2018 was unfavorably impacted by the goodwill impairment
charges of $1.7 billion (pre-tax and after-tax), given that these charges are
generally not deductible for tax purposes. Refer to Financial Note 14, "Goodwill
and Intangible Assets, Net," to the accompanying consolidated financial
statements included in this Annual Report on Form 10­K for additional
information. As a result of the enactment of the 2017 Tax Act, the 2018 income
tax benefit rate included a tax benefit of $1.3 billion from the remeasurement
of certain deferred taxes to the lower U.S. federal tax rate, partially offset
by a tax expense of $457 million representing the one-time tax imposed on
certain accumulated earnings and profits of our foreign subsidiaries.
Significant judgments and estimates are required in determining the consolidated
income tax provision and evaluating income tax uncertainties. Although our major
taxing jurisdictions include the U.S., Canada and the U.K., we are subject to
income taxes in numerous foreign jurisdictions. Our income tax expense, deferred
tax assets and liabilities and uncertain tax liabilities reflect management's
best assessment of estimated current and future taxes to be paid. We believe
that we have made adequate provision for all income tax uncertainties.
Income (Loss) from Discontinued Operations, Net of Tax
Income (loss) from discontinued operations, net of tax, was a loss of $6 million
for the year ended March 31, 2020 and income of $1 million and $5 million for
the years ended March 31, 2019 and 2018.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests primarily represents
ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC and the accrual
of the annual recurring compensation amount of €0.83 per McKesson Europe AG
("McKesson Europe") share that McKesson is obligated to pay to the
noncontrolling shareholders of McKesson Europe under a domination and profit and
loss transfer agreement (the "Domination Agreement"). Noncontrolling interests
with redemption features, such as put rights, that are not solely within our
control are considered redeemable noncontrolling interests. Redeemable
noncontrolling interests are presented outside of Stockholders' Equity on our
consolidated balance sheet. Refer to Financial Note 9, "Redeemable
Noncontrolling Interests and Noncontrolling Interests," to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K
for additional information.
Net Income Attributable to McKesson Corporation
Net income attributable to McKesson Corporation was $900 million, $34 million
and $67 million for the years ended March 31, 2020, 2019 and 2018. Diluted
earnings per common share attributable to McKesson Corporation was $4.95, $0.17
and $0.32 for the years ended March 31, 2020, 2019 and 2018. Additionally, our
2020, 2019 and 2018 diluted earnings per share reflect the cumulative effects of
share repurchases.
Weighted Average Diluted Common Shares
Diluted earnings per common share was calculated based on a weighted average
number of shares outstanding of 182 million, 197 million and 209 million for the
years ended March 31, 2020, 2019 and 2018. Weighted average diluted common
shares outstanding is impacted by the exercise and settlement of share-based
awards and the cumulative effect of share repurchases, including the impact of
shares exchanged as part of the split-off from our investment in Change
Healthcare JV, as discussed above.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Overview of Segment Results:
Revenues:
                                                   Years Ended March 31,              Change
(Dollars in millions)                          2020         2019         2018      2020   2019
U.S. Pharmaceutical and Specialty Solutions $ 183,341$ 167,763$ 162,587     9 %   3   %
European Pharmaceutical Solutions              27,390       27,242       27,320     1     -
Medical-Surgical Solutions                      8,305        7,618        6,611     9    15
Other                                          12,015       11,696       11,839     3    (1 )
Total Revenues                              $ 231,051$ 214,319$ 208,357     8 %   3   %


U.S. Pharmaceutical and Specialty Solutions
2020 vs. 2019
U.S. Pharmaceutical and Specialty Solutions revenues for the year ended
March 31, 2020 increased 9% compared to the prior year primarily due to market
growth, including branded pharmaceutical price increases, higher volumes from
retail national account customers and growth in specialty pharmaceuticals,
partially offset by brand to generic drug conversions.
2019 vs. 2018
U.S. Pharmaceutical and Specialty Solutions revenues for the year ended
March 31, 2019 increased 3% compared to the prior year primarily due to market
growth, including expanded business with existing customers, growth of specialty
pharmaceuticals and our business acquisitions, partially offset by loss of
customers.
European Pharmaceutical Solutions
2020 vs. 2019
European Pharmaceutical Solutions revenues for the year ended March 31, 2020
increased 1% compared to the prior year. Excluding the unfavorable effect of
foreign currency exchange fluctuations, revenues for this segment increased 4%
primarily due to market growth in our pharmaceutical distribution business.
2019 vs. 2018
European Pharmaceutical Solutions revenues remained flat for the year ended
March 31, 2019 compared to the prior year. Excluding the unfavorable effect of
foreign currency exchange fluctuations, revenues for this segment increased 1%
primarily due to market growth, partially offset by the impact of retail
pharmacy closures and additional government reimbursement reductions in the
U.K., and the competitive environment in France.
Medical-Surgical Solutions
2020 vs. 2019
Medical-Surgical Solutions revenues for the year ended March 31, 2020 increased
9% compared to the prior year primarily due to market growth in our primary care
business.
2019 vs. 2018
Medical-Surgical Solutions revenues for the year ended March 31, 2019 increased
15% compared to the prior year primarily due to our 2019 first quarter
acquisition of MSD and market growth.
Other
2020 vs. 2019
Revenues in Other for March 31, 2020 increased 3% compared to the prior year
primarily due to market growth in our Canadian and MRxTS businesses.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


2019 vs. 2018
Revenues in Other for the year ended March 31, 2019 decreased 1% compared to the
prior year primarily due to unfavorable effects of foreign currency exchange
fluctuations of 2% and the effect of government imposed generic price cuts and
retail pharmacy closures related to our Canadian business. In addition, revenues
in Other for 2019 were negatively impacted by the 2018 sale of our EIS business.
These decreases are partially offset by growth in our Canadian and MRxTS
businesses and the effects of acquisitions in Canada.
Segment Operating Profit and Corporate Expenses, Net:
                                            Years Ended March 31,           

Change

(Dollars in millions, except ratios) 2020 2019 2018

   2020      2019
Segment Operating Profit (Loss) (1)
U.S. Pharmaceutical and Specialty
Solutions                            $ 2,767$ 2,697$ 2,535         3   %     6   %
European Pharmaceutical Solutions
(2)                                     (261 )     (1,978 )     (1,681 )     (87 )      18
Medical-Surgical Solutions               499          455          461        10        (1 )
Other (3)                               (595 )        394         (107 )    (251 )     468
Subtotal                               2,410        1,568        1,208        54        30
Corporate Expenses, Net (4)           (1,017 )       (694 )       (564 )      47        23
Loss on Debt Extinguishment                -            -         (122 )      NM      (100 )
Interest Expense                        (249 )       (264 )       (283 )      (6 )      (7 )
Income from Continuing Operations
Before Income Taxes                  $ 1,144$   610$   239

88 % 155 %


Segment Operating Profit (Loss)
Margin
U.S. Pharmaceutical and Specialty
Solutions                               1.51   %     1.61   %     1.56   %   (10 ) bp    5   bp
European Pharmaceutical Solutions      (0.95 )      (7.26 )      (6.15 )     631      (111 )
Medical-Surgical Solutions              6.01         5.97         6.97         4      (100 )


bp - basis points
NM - not meaningful
(1) Segment operating profit (loss) includes gross profit, net of operating

expenses, as well as other income (expense), net, for our reportable segments

and Other.

(2) Operating loss of our European Pharmaceutical Solutions segment for the year

ended March 31, 2020 includes charges of $275 million to remeasure to fair

value the assets and liabilities of our German wholesale business to be

contributed to a joint venture as well as long-lived asset impairment charges

of $82 million. This segment's operating loss for the years ended March 31,

2019 and 2018 include goodwill impairment charges of $1.8 billion and $1.3

billion as well as long-lived asset impairment charges of $210 million and

$446 million.

(3) Operating loss for Other for the year ended March 31, 2020 includes an

impairment charge of $1.2 billion and a dilution loss of $246 million related

to our investment in Change Healthcare JV, partially offset by an estimated

gain of $414 million related to the completed separation of our interest in

Change Healthcare JV during the fourth quarter of 2020.

(4) Corporate expenses, net for the year ended March 31, 2020 includes a pension

settlement charge of $122 million and a settlement charge of $82 million

related to opioid claims.




U.S. Pharmaceutical and Specialty Solutions
2020 vs. 2019
Operating profit increased for the year ended March 31, 2020 compared to the
prior year primarily due to market growth in our specialty business. Operating
profit and operating profit margin were favorably impacted by a charge related
to a customer bankruptcy in 2019 and higher LIFO credits in 2020. Operating
profit and operating profit margin were unfavorably impacted by customer mix and
lower net cash proceeds received of $22 million in 2020 compared to $202 million
in 2019 representing our share of antitrust legal settlements.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


2019 vs. 2018
Operating profit increased for the year ended March 31, 2019 compared to the
prior year primarily due to market growth, including growth in our specialty
business, partially offset by loss of customers. Operating profit and operating
profit margin for 2019 benefited from the net cash proceeds of $202 million
representing our share of antitrust legal settlements and higher LIFO credits of
$210 million in 2019 compared to $99 million in 2018, partially offset by a $61
million charge related to a customer bankruptcy.
European Pharmaceutical Solutions
2020 vs. 2019
Operating loss and operating loss margin improved for the year ended March 31,
2020 compared to the prior year primarily due to 2019 goodwill impairment
charges of $1.8 billion and decreased long-lived asset impairment charges of $82
million in 2020 compared to $210 million in 2019, partially offset by 2020
charges of $275 million for the fair value remeasurement related to our German
wholesale business to be contributed to a joint venture.
2019 vs. 2018
Operating loss and operating loss margin were negatively impacted for the year
ended March 31, 2019 compared to the prior year primarily due to goodwill
impairment charges of $1.8 billion in 2019 compared to $1.3 billion in 2018, the
effect of government reimbursement reductions and lower sales volume in the
U.K., and increased competition in France. This was partially offset by market
growth and long-lived asset impairment charges of $210 million in 2019 compared
to $446 million in 2018.
Medical-Surgical Solutions
2020 vs. 2019
Operating profit and operating profit margin increased for the year ended
March 31, 2020 compared to prior year primarily due to market growth in our
primary care business and lower restructuring charges, partially offset by the
remeasurement of assets and liabilities to fair value related to a divestiture
that was completed in the fourth quarter of 2020 and higher operating expenses,
including an increase in our provision for bad debts.
2019 vs. 2018
Operating profit decreased for the year ended March 31, 2019 compared to the
prior year primarily due to higher restructuring charges, partially offset by
market growth. Operating profit margin for 2019 decreased primarily due to
higher restructuring charges and changes in our mix of business, partially
offset by ongoing cost management.
Other
Operating profit for Other decreased for 2020 and increased in 2019 compared to
the respective prior years. Operating profit for Other for the years ended
March 31, 2020, 2019 and 2018 were affected by the following significant items:
2020
•      OTTI charge of $1.2 billion and the dilution loss of $246 million related

to our investment in Change Healthcare JV both recognized in the second

quarter of 2020, partially offset by an estimated gain of $414 million

related to the completed separation of our interest in Change Healthcare

JV during the fourth quarter of 2020;

• Long-lived asset impairment charges of $30 million recognized for Rexall

Health; and

• Market growth in our MRxTS and Canadian businesses.

2019

• Market growth in our MRxTS business;

• Lower operating profit due to the 2018 sale of our EIS business;


•      Gain from an escrow settlement of $97 million related to our 2017
       acquisition of Rexall Health;

• Credit of $90 million for the derecognition of a liability related to the

       TRA payable to the shareholders of Change;



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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)

• Higher restructuring and asset impairment charges related to closures of

our retail pharmacy stores in Canada;

• Lower amount of our proportionate share of losses from our equity method

investment in Change Healthcare JV during 2019;

Goodwill and long-lived asset impairment charges of $56 million recognized

for Rexall Health;

• Gain of $56 million from the divestiture of an equity investment; and

• Government imposed generic price cuts in Canada.


2018
•      Lower operating profit due to the 2017 contribution of the Core MTS
       Business to the Change Healthcare JV;

Goodwill charges of $455 million and long-lived asset impairment charges

of $33 million recognized for Rexall Health;

• Market growth in our MRxTS business;

• Our proportionate share of losses from our equity method investment in

Change Healthcare JV during 2018;

$109 million gain from the sale of our EIS business in 2018;

$46 million credit representing a reduction of our TRA liability related

to the adoption of the 2017 Tax Act; and

• Gain of $37 million resulting from the finalization of net working capital

and other adjustments related to the contribution of the Core MTS Business

to Change Healthcare JV.

Corporate

2020 vs. 2019
Corporate expenses, net, increased for the year ended March 31, 2020 compared to
the prior year primarily due to a $122 million pension settlement charge, an $82
million opioid claim settlement charge and higher costs for technology
initiatives, partially offset by higher net settlement gains in 2020 from our
derivative contracts. Corporate expenses, net, for 2020 also included charitable
contribution expenses of approximately $20 million primarily for the McKesson
Foundation.
2019 vs. 2018
Corporate expenses, net, increased for the year ended March 31, 2019 compared to
the prior year primarily due to an increase in opioid-related costs, higher
restructuring-related charges and costs for technology initiatives. Corporate
expenses, net, for 2018 included a charitable contribution expense of $100
million for the Foundation.
Foreign Operations
Our foreign operations represented approximately 17% of our consolidated
revenues in 2020 and approximately 18% in each of 2019 and 2018. Foreign
operations are subject to certain risks, including currency fluctuations. We
monitor our operations and adopt strategies responsive to changes in the
economic and political environment in each of the countries in which we operate.
We conduct our business worldwide in local currencies including Euro, British
pound sterling and Canadian dollar. As a result, the comparability of our
results reported in U.S. dollars can be affected by changes in foreign currency
exchange rates. In discussing our operating results, we may use the term
"foreign currency effect", which refers to the effect of changes in foreign
currency exchange rates used to convert the local currency results of foreign
countries where the functional currency is not the U.S. dollar. We present this
information to provide a framework for assessing how our business performed
excluding the effect of foreign currency rate fluctuations. In computing foreign
currency effect, we translate our current year results in local currencies into
U.S dollars by applying average foreign exchange rates of the corresponding
prior year periods, and we subsequently compare those results to the previously
reported results of the comparable prior year periods in U.S. dollars.
Additional information regarding our foreign operations is included in Financial
Note 24, "Segments of Business," to the consolidated financial statements
appearing in this Annual Report on Form 10-K.
Business Combinations
Refer to Financial Note 5, "Business Acquisitions and Divestitures," to the
consolidated financial statements appearing in this Annual Report on Form 10-K
for additional information.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Fiscal 2021 Outlook
Information regarding the Company's fiscal 2021 outlook is contained in our Form
8-K dated May 20, 2020. That Form 8-K should be read in conjunction with the
forward-looking statements in Item 7 - Trends and Uncertainties, and the
cautionary statements in Item 1 - Business - Forward-Looking Statements and Item
1A - Risk Factors in Part I of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to
make assumptions about matters that were uncertain at the time the accounting
estimate was made and if different estimates that we reasonably could have used
in the current period, or changes in the accounting estimate that are reasonably
likely to occur from period to period, could have a material impact on our
financial condition or results from operations. Below are the estimates that we
believe are critical to the understanding of our operating results and financial
condition. Other accounting policies are described in Financial Note 1,
"Significant Accounting Policies," to the consolidated financial statements
appearing in this Annual Report on Form 10-K. Because of the uncertainty
inherent in such estimates, actual results may differ from these estimates.
Allowance for Doubtful Accounts: We provide short-term credit and other customer
financing arrangements to customers who purchase our products and services.
Other customer financing primarily relates to guarantees provided to our
customers, or their creditors, regarding the repurchase of inventories. We also
provide financing to certain customers related to the purchase of pharmacies,
which serve as collateral for the loans. We estimate the receivables for which
we do not expect full collection based on historical collection rates and
specific knowledge regarding the current creditworthiness of our customers and
record an allowance in our consolidated financial statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes
general and specific reserves, the Company reviews accounts receivable aging,
industry trends, customer financial strength, credit standing, historical
write-off trends and payment history to assess the probability of collection. If
the frequency and severity of customer defaults due to our customers' financial
condition or general economic conditions change, our allowance for uncollectible
accounts may require adjustment. As a result, we continuously monitor
outstanding receivables and other customer financing and adjust allowances for
accounts where collection may be in doubt.
Sales to the Company's ten largest customers, including GPOs, accounted for
approximately 51% of total consolidated revenues in 2020 and comprised
approximately 37% of total trade accounts receivable at March 31, 2020. Sales to
our largest customer, CVS Health Corporation ("CVS"), accounted for
approximately 20% of our total consolidated revenues in 2020 and comprised
approximately 20% of total trade accounts receivable March 31, 2020. As a
result, our sales and credit concentration is significant. We also have
agreements with GPOs, each of which functions as a purchasing agent on behalf of
member hospitals, pharmacies and other healthcare providers, as well as with
government entities and agencies. The accounts receivables balances are with
individual members of the GPOs, and therefore no significant concentration of
credit risk exists. A material default in payment, a material reduction in
purchases from these or any other large customers, or the loss of a large
customer or GPO could have a material adverse impact on our financial position,
results of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and
economic, business and market trends. In addition, reserves are reviewed
quarterly and updated if unusual circumstances or trends are present. With many
of our customers anticipating extended declines in their businesses due to
COVID-19, we are monitoring closely for trends that may impact their timing or
ability to pay amounts owed to us. We believe the reserves maintained and
expenses recorded in 2020 are appropriate and consistent in the context of
historical methodologies employed, as well as assessment of trends currently
available.
At March 31, 2020, trade and notes receivables were $17.6 billion prior to
allowances of $252 million. In 2020, 2019 and 2018, our provision for bad debts
was $91 million, $132 million and $44 million. At March 31, 2020 and 2019, the
allowance as a percentage of trade and notes receivables was 1.4% and 1.8%. An
increase or decrease of a hypothetical 0.1% in the 2020 allowance as a
percentage of trade and notes receivables would result in an increase or
decrease in the provision for bad debts of approximately $18 million. The
selected 0.1% hypothetical change does not reflect what could be considered the
best or worst-case scenarios. Additional information concerning our allowance
for doubtful accounts may be found in Schedule II included in this Annual Report
on Form 10-K.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Inventories: Inventories consist of merchandise held for resale. Prior to 2018,
we reported inventories at the lower of cost or market ("LCM"). Effective in the
first quarter of 2018, we report inventories at the lower of cost or net
realizable value, except for inventories determined using the last-in, last-out
("LIFO") method which are valued at the lower of LIFO cost or market. LIFO
method presumes that the most recent inventory purchases are the first items
sold and the inventory cost under LIFO approximates market. The majority of the
cost of domestic inventories is determined using the LIFO method. The majority
of the cost of inventories held in foreign and certain domestic locations is
based on first-in, first-out ("FIFO") method and weighted average purchase
prices. Rebates, cash discounts and other incentives received from vendors
relating to the purchase or distribution of inventory are considered as product
discounts and are accounted for as a reduction in the cost of inventory and are
recognized when the inventory is sold.
At March 31, 2020 and 2019, total inventories, net were $16.7 billion on our
consolidated balance sheets. The LIFO method was used to value approximately 60%
and 62% of our inventories at March 31, 2020 and 2019. If we had used the moving
average method of inventory valuation, inventories would have been approximately
$444 million and $696 million higher than the amounts reported at March 31, 2020
and 2019. These amounts are equivalent to our LIFO reserves. Our LIFO valuation
amount includes both pharmaceutical and non-pharmaceutical products. We
recognized LIFO credits of $252 million, $210 million and $99 million in 2020,
2019 and 2018 in our consolidated statements of operations. A LIFO charge 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.
We believe that moving average inventory costing method provides a reasonable
estimation of the current cost of replacing inventory (i.e., "market"). As such,
our LIFO inventory is valued at the lower of LIFO or market. As of March 31,
2020 and 2019, inventories at LIFO did not exceed market.
In determining whether an inventory valuation allowance is required, we consider
various factors including estimated quantities of slow-moving inventory by
reviewing on-hand quantities, outstanding purchase obligations and forecasted
sales. Shifts in market trends and conditions, changes in customer preferences
due to the introduction of generic drugs or new pharmaceutical products or the
loss of one or more significant customers are factors that could affect the
value of our inventories. We write down inventories which are considered excess
and obsolete as a result of these reviews. These factors could make our
estimates of inventory valuation differ from actual results.
Business Combinations: The Company accounts for business combinations using the
acquisition method of accounting whereby the identifiable assets and liabilities
of the acquired business, as well as any noncontrolling interest in the acquired
business, are recorded at their estimated fair values as of the date that the
Company obtains control of the acquired business. Any purchase consideration in
excess of the estimated fair values of the net assets acquired is recorded as
goodwill. Acquisition-related expenses and related restructuring costs are
expensed as incurred.
Several valuation methods may be used to determine the fair value of assets
acquired and liabilities assumed. For intangible assets, we typically use a
method that is a form or variation of the income approach, whereby a forecast of
future cash flows attributable to the asset are discounted to present value
using a risk-adjusted discount rate. Some of the more significant estimates and
assumptions inherent in the income approach include the amount and timing of
projected future cash flows, the discount rate selected to measure the risks
inherent in the future cash flows and the assessment of the asset's expected
useful life. Refer to Financial Note 5, "Business Acquisitions and
Divestitures," to the consolidated financial statements included in this Annual
Report on Form 10-K for additional information regarding our acquisitions.
Goodwill and Long-Lived Assets: As a result of acquiring businesses, we have
$9.4 billion of goodwill at March 31, 2020 and 2019, and $3.2 billion and
$3.7 billion of intangible assets, net at March 31, 2020 and 2019. On October 1,
2019, we voluntarily changed our annual goodwill impairment testing date from
January 1 to October 1 to better align with the timing of our annual long-term
planning process. This change was not material to our consolidated financial
statements as it did not delay, accelerate, or avoid any potential goodwill
impairment charge. Refer to Note 14, "Goodwill and Intangible Assets, Net," to
the consolidated financial statements included in this Annual Report on Form
10-K for further information.
We perform an impairment test on goodwill balances annually or more frequently
if indicators for potential impairment exist. Indicators that are considered
include significant declines in performance relative to expected operating
results, significant changes in the use of the assets, significant negative
industry or economic trends, or a significant decline in the Company's stock
price and/or market capitalization for a sustained period of time.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Goodwill impairment testing is conducted at the reporting unit level, which is
generally defined as an operating segment or a component, one level below our
operating segments, for which discrete financial information is available and
segment management regularly reviews the operating results of that reporting
unit.
In 2018, we elected to early adopt, on a prospective basis, the amended guidance
that simplifies goodwill impairment testing by eliminating the second step of
the impairment test. The one-step impairment test under the amended guidance
requires an entity to compare the fair value of a reporting unit with its
carrying amount and recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit's fair value, if any, up to the
amount of goodwill the entity has recorded.
To estimate the fair value of our reporting units, we generally use a
combination of the market approach and the income approach. Under the market
approach, we estimate fair value by comparing the business to similar
businesses, or guideline companies whose securities are actively traded in
public markets. Under the income approach, we use a discounted cash flow ("DCF")
model in which cash flows anticipated over several periods, plus a terminal
value at the end of that time horizon, are discounted to their present value
using an appropriate rate that is commensurate with the risk inherent within the
reporting unit. In addition, we compare the aggregate of the reporting units'
fair values to our market capitalization as further corroboration of the fair
values.
Estimates of fair value result from a complex series of judgments about future
events and uncertainties and rely heavily on estimates and assumptions at a
point in time. Judgments made in determining an estimate of fair value may
materially impact our results of operations. The valuations are based on
information available as of the impairment testing date and are based on
expectations and assumptions that have been deemed reasonable by management. Any
material changes in key assumptions, including failure to meet business plans,
negative changes in government reimbursement rates, deterioration in the U.S.
and global financial markets, an increase in interest rates or an increase in
the cost of equity financing by market participants within the industry or other
unanticipated events and circumstances, may decrease the projected cash flows or
increase the discount rates and could potentially result in an impairment
charge. Under the market approach, significant estimates and assumptions also
include the selection of appropriate guideline companies and the determination
of appropriate valuation multiples to apply to the reporting unit. Under the
income approach, significant estimates and assumptions also includes the
determination of discount rates. The discount rates represent the weighted
average cost of capital measuring the reporting unit's cost of debt and equity
financing, which are weighted by the percentage of debt and percentage of equity
in a company's target capital structure. Included in the estimate of the
weighted average cost of capital is the assumption of an unsystematic risk
premium to address incremental uncertainty related to the reporting units'
future cash flow projections. An increase in the unsystematic risk premium
increases the discount rate.
Based on the 2019 annual goodwill impairment tests, the estimated fair values of
our reporting units excluding the Retail Pharmacy (formerly, Consumer Solutions)
and Pharmaceutical Distribution (formerly, Pharmacy Solutions) reporting units
in our European Pharmaceutical Solutions segment exceeded their carrying values.
However, other risks, expenses and future developments, such as additional
government actions, increased regulatory uncertainty and material changes in key
market assumptions that we were unable to anticipate as of the testing date may
require us to further revise the projected cash flows, which could adversely
affect the fair value of our other reporting units in future periods. The
estimated fair value of our McKesson Canada reporting unit within Other exceeded
the carrying value of this reporting unit by 11% in 2020. The goodwill balance
of this reporting unit was $1.4 billion at March 31, 2020 or approximately 15%
of the consolidated goodwill balance. Generally, a decline in estimated future
cash flows in excess of 12% or an increase in the discount rate in excess of 1%
could result in an indication of goodwill impairment for this reporting unit in
future reporting periods. Refer to Financial Note 14, "Goodwill and Intangible
Assets, Net," to the consolidated financial statements appearing in this Annual
Report on Form 10-K for additional information.
Currently, all of our intangible and other long-lived assets are amortized or
depreciated based on the pattern of their economic consumption or on a
straight-line basis over their estimated useful lives, ranging from one to 38
years. We review intangible assets for impairment at an asset group level
whenever events or changes in circumstances indicate that the carrying value of
the assets may not be recoverable. Determination of recoverability of intangible
assets is based on the lowest level of identifiable estimated future
undiscounted cash flows resulting from use of the asset and its eventual
disposition. Measurement of any impairment loss is based on the excess of the
carrying value of the asset group over its fair value. Assumptions and estimates
about future values and remaining useful lives of our purchased intangible
assets are complex and subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends, and internal
factors such as changes in our business strategy and our internal forecasts.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Our ongoing consideration of all the factors described previously could result
in further impairment charges in the future, which could adversely affect our
net income. Refer to Financial Note 4, "Restructuring, Impairment and Related
Charges" to the consolidated financial statements appearing in this Annual
Report on Form 10-K for additional information.
Equity Method Investments: We evaluate our investments for other-than-temporary
impairments when circumstances indicate those assets may be impaired. When the
decline in value is deemed to be other than temporary, an impairment is
recognized to the extent that the fair value is less than the carrying value of
the investment. We consider various factors in determining whether a loss in
value of an investment is other than temporary including: the length of time and
the extent to which the fair value has been below cost; the financial condition
of the investees, and our intent and ability to retain the investment for a
period of time sufficient to allow for recovery of value. Management makes
certain judgments and estimates in its assessment including but not limited to:
identifying if circumstances indicate a decline in value is other than
temporary, expectations about the business operations of investees, as well as
industry, financial and market factors. Any significant changes in assumptions
or judgments in assessing impairments could result in an impairment charge.
Restructuring Charges: We have certain restructuring reserves which require
significant estimates related to the timing and amount of future employee
severance and other exit-related costs to be incurred when the restructuring
actions take place. We generally recognize employee severance costs when
payments are probable and amounts are estimable. Costs related to contracts
without future benefit or contract termination are recognized at the earlier of
the contract termination or the cease-use dates. Other exit-related costs are
recognized as incurred. In connection with these restructuring actions, we also
assess the recoverability of long-lived assets used in the business, and as a
result, we may recognize accelerated depreciation reflecting shortened useful
lives of the underlying assets.
Income Taxes: Our income tax expense and deferred tax assets and liabilities
reflect management's best assessment of estimated current and future taxes to be
paid. We are subject to income taxes in the U.S. and numerous foreign
jurisdictions. Significant judgments and estimates are required in determining
the consolidated income tax provision and in evaluating income tax uncertainties
and include those used to conclude on the tax-free nature of the separation of
the Change Healthcare JV. We review our tax positions at the end of each quarter
and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and
financial statement recognition of revenue and expense. In evaluating our
ability to recover our deferred tax assets, we consider all available positive
and negative evidence including our past operating results, the existence of
cumulative net operating losses in the most recent years and our forecast of
future taxable income. In estimating future taxable income, we develop
assumptions including the amount of future federal, state and foreign pre-tax
operating income, the reversal of temporary differences and the implementation
of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are
consistent with the plans and estimates we use to manage the underlying
businesses.
Changes in tax laws and rates could also affect recorded deferred tax assets and
liabilities in the future. Should tax laws change, our tax expense and cash
flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for
uncertainties in the application of complex new tax regulations across multiple
global jurisdictions where we conduct our operations.
We recognize liabilities for tax and related interest for issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes and related interest will be due. If our current
estimate of tax and interest liabilities is less than the ultimate settlement,
an additional charge to income tax expense may result. If our current estimate
of tax and interest liabilities is more than the ultimate settlement, a
reduction to income tax expense may be recognized.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Loss Contingencies: We are subject to various claims, including claims with
customers and vendors, pending and potential legal actions for damages,
investigations relating to governmental laws and regulations and other matters
arising out of the normal conduct of our business. 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 material loss is reasonably possible or probable
but a reasonable estimate cannot be made, disclosure of the proceeding is
provided. Legal fees are recognized as incurred when the legal services are
provided.
We review all contingencies at least quarterly to determine whether the
likelihood of loss has changed and to assess whether a reasonable estimate of
the potential loss or range of the 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. In conjunction with the preparation of the accompanying
financial statements, we considered matters related to ongoing controlled
substances claims to which we are a party. While we are not able to predict the
outcome or reasonably estimate a range of possible losses in these matters, an
adverse judgment or negotiated resolution in any of these matters could have a
material adverse effect on our results of operations, consolidated financial
position, cash flows or liquidity. Refer to Financial Note 21, "Commitments and
Contingent Liabilities," to the consolidated financial statements included in
this Annual Report on Form 10-K for additional information.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations and our short-term
investment portfolio, together with our existing sources of liquidity from our
credit facilities and commercial paper program, will be sufficient to fund our
long-term and short-term capital expenditures, working capital and other cash
requirements. As described within "Trends and Uncertainties" above, the COVID-19
pandemic is developing rapidly. We continue to monitor its impact on demand
within parts of our business, as well as trends potentially impacting the timing
or ability for some of our customers to pay amounts owed to us. We remain
well-capitalized with access to liquidity from our revolving credit facility.
Additionally, long-term debt markets and commercial paper markets, our primary
sources of capital after cash flow from operations, have remained open during
the COVID-19 pandemic. While there are signs of stress in both markets, we do
not have an immediate need to access these markets and could use our revolving
credit facility to meet any near-term liquidity needs. We have seen some
improvement in conditions in the debt markets and commercial paper markets as
the Federal Reserve has taken steps to stabilize the markets. We believe we have
the ability to meet the covenants of our credit agreements.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)

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

                                               Years Ended March 31,        

Change

(Dollars in millions)                      2020        2019         2018        2020        2019
Net cash provided by (used in):
Operating activities                     $ 4,374$ 4,036$  4,345$   338$  (309 )
Investing activities                        (579 )    (1,381 )     (2,993 )       802       1,612
Financing activities                      (2,734 )    (2,227 )     (3,084 )      (507 )       857
Effect of exchange rate changes on cash,
cash equivalents and restricted cash         (19 )      (119 )        150         100        (269 )
Net change in cash, cash equivalents and
restricted cash                          $ 1,042$   309$ (1,582 )$   733$ 1,891


Operating Activities
Net cash provided from operating activities was $4.4 billion, $4.0 billion and
$4.3 billion for the years ended March 31, 2020, 2019 and 2018. Cash flows from
operations can be significantly impacted by factors such as the timing of
receipts from customers and payments to vendors. Additionally, working capital
is primarily a function of sales and purchase volumes, inventory requirements
and vendor payment terms. Operating activities for the year ended March 31, 2020
were affected by increases in drafts and accounts payable primarily associated
with timing, replenishing inventory stocks and effective working capital
management, and an increase in receivables primarily due to revenue growth.
Operating activities for the year ended March 31, 2019 were primarily affected
by an increase in receivables due to the overall increase in sales volume and
timing of receipts, and increases in drafts and accounts payable, primarily due
to increased inventory purchases and timing of payments. Operating activities
for the year ended March 31, 2018 were primarily affected by a decrease in
receivables primarily due to timing of receipts and loss of customers, and
increases in drafts and accounts payable reflecting longer payment terms for
certain purchases.
During the year ended March 31, 2020, we made a cash payment of $114 million
from the executive benefit retirement plan. Other non-cash items within
operating activities for the year ended March 31, 2020 primarily includes fair
value remeasurement charges of $275 million related to our German wholesale
business to be contributed to a joint venture, a pension settlement charge of
$122 million and stock-based compensation of $119 million.
Investing Activities
Net cash used in investing activities was $579 million, $1.4 billion and $3.0
billion for the years ended March 31, 2020, 2019 and 2018. Investing activities
for the year ended March 31, 2020 include $362 million and $144 million in
capital expenditures for property, plant and equipment, and capitalized software
and $133 million of net cash payments for acquisitions.
Investing activities for the year ended March 31, 2019 include $905 million of
net cash payments for acquisitions, including $784 million for our acquisition
of MSD, $426 million and $131 million in capital expenditures for property,
plant and equipment, and capitalized software, and $101 million of net cash
proceeds from sales of businesses and investments.
Investing activities for the year ended March 31, 2018 include $2.9 billion of
net cash payments for acquisitions, including $1.3 billion and $720 million for
our acquisitions of CoverMyMeds, LLC and RxCrossroads, $405 million and $175
million in capital expenditures for property, plant and equipment, and
capitalized software, $374 million of net cash proceeds from sales of businesses
and investments and $126 million cash payment received related to the Healthcare
Technology Net Asset Exchange.
Financing Activities
Net cash used in financing activities was $2.7 billion, $2.2 billion and
$3.1 billion for the years ended March 31, 2020, 2019 and 2018. Financing
activities for the year ended March 31, 2020 include cash receipts of $21.4
billion and payments of $21.4 billion from short-term borrowings, primarily
commercial paper. Financing activities for the year ended March 31, 2020 also
include $2.0 billion of cash paid for stock repurchases, repayments of long-term
debt of $298 million and $294 million of dividends paid.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Financing activities for the year ended March 31, 2019 include cash receipts of
$37.3 billion and payments of $37.3 billion from short-term borrowings,
primarily commercial paper. We received cash from long-term debt issuances of
$1.1 billion and made repayments on long-term debt of $1.1 billion in 2019.
Financing activities for the year ended March 31, 2019 also include $1.6 billion
of cash paid for stock repurchases and $292 million of dividends paid.
Financing activities for the year ended March 31, 2018 include cash receipts of
$20.5 billion and payments of $20.7 billion from short-term borrowings,
primarily commercial paper. We received cash from long-term debt issuances of
$1.5 billion and made repayments on long-term debt of $2.3 billion in 2018.
Financing activities for the year ended March 31, 2018 also include $1.7 billion
of cash paid for stock repurchases, $262 million of dividends paid and $112
million of payments for debt extinguishment.
Share Repurchase Plans
The Company's Board has authorized the repurchase of McKesson's common stock
from time-to-time in open market transactions, privately negotiated
transactions, ASR programs, or by any combination of such methods. The timing of
any repurchases and the actual number of shares repurchased will depend on a
variety of factors, including our stock price, corporate and regulatory
requirements, restrictions under our debt obligations and other market and
economic conditions.
In 2018, we repurchased 3.5 million of our shares through open market
transactions and 6.7 million of our shares through ASR programs. We received an
additional 1.0 million shares in the first quarter of 2019 under the March 2018
ASR program. In 2019, we repurchased 10.4 million of our shares through open
market transactions and 2.1 million of our shares through the December 2018 ASR
program.
In 2019, we retired 5.0 million or $542 million of the Company's treasury shares
previously repurchased. Under the applicable state law, these shares resume the
status of authorized and unissued shares upon retirement. In accordance with our
accounting policy, we allocate any excess of share repurchase price over par
value between additional paid-in capital and retained earnings. Accordingly, our
retained earnings and additional paid-in capital were reduced by $472 million
and $70 million during 2019.
In 2020, we repurchased 9.2 million of the Company's shares for $1.3 billion
through open market transactions at an average price per share of $144.68. We
also entered into an ASR program with a third-party financial institution to
repurchase $600 million of the Company's common stock. The total number of
shares repurchased under this ASR program was 4.7 million shares at an average
price per share of $127.68.
On March 9, 2020, we completed the Split-off of our interest in the Change
Healthcare JV. In connection with the Split-off, we distributed all 176.0
million outstanding shares of SpinCo common stock, which held all of the
Company's interests in the Change Healthcare JV, to participating holders of the
Company's common stock in exchange for 15.4 million shares of McKesson stock,
which are now held as treasury stock on our consolidated balance sheet.
Following consummation of the exchange offer, on March 10, 2020, SpinCo merged
with and into Change with each share of SpinCo common stock converted into one
share of Change common stock, par value $0.001 per share, with cash being paid
in lieu of fractional shares of Change common stock. See Note 2, "Investment in
Change Healthcare Joint Venture" to the accompanying consolidated financial
statements included in this Annual Report on Form 10-K for more information.
                                            Years Ended March 31,

(In millions, except per share data) 2020 2019 2018 Number of shares repurchased (1) 13.9 13.5 10.5 Average price paid per share $ 138.94$ 130.72$ 151.06 Total value of shares repurchased (1) $ 1,934$ 1,627$ 1,650

(1) Excludes shares surrendered for tax withholding and shares related to the

Company's Split-off of the Change Healthcare JV described above.

The total authorization outstanding for repurchase of the Company's common stock was $1.5 billion at March 31, 2020.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


We believe that our operating cash flow, financial assets and current access to
capital and credit markets, including our existing credit facilities, will give
us the ability to meet our financing needs for the foreseeable future. However,
there can be no assurance that continued or increased volatility and disruption
in the global capital and credit markets will not impair our liquidity or
increase our costs of borrowing. As described within "Trends and Uncertainties"
above, the COVID-19 pandemic is developing rapidly. We continue to monitor its
impact on demand within parts of our business, as well as trends potentially
impacting the timing or ability for some of our customers to pay amounts owed to
us.
Selected Measures of Liquidity and Capital Resources:
                                                          March 31,
(Dollars in millions, except ratios)           2020          2019         

2018

Cash, cash equivalents and restricted cash  $ 4,023$ 2,981$ 2,672
Working capital                                (402 )         839          451
Debt to capital ratio (1)                      52.1   %      43.3  %     

40.6 % Return on McKesson stockholders' equity (2) 13.3 % 0.4 % 0.6 %

(1) Ratio is computed as total debt divided by the sum of total debt and McKesson

stockholders' equity, which excludes noncontrolling and redeemable

noncontrolling interests and accumulated other comprehensive income (loss).

(2) Ratio is computed as net income attributable to McKesson Corporation for the

    last four quarters, divided by a five-quarter average of McKesson
    stockholders' equity, which excludes noncontrolling and redeemable
    noncontrolling interests.


Cash equivalents, which are readily convertible to known amounts of cash, are
carried at fair value. Cash equivalents are primarily invested in AAA-rated U.S.
government money market funds and overnight deposits with financial
institutions. Deposits with financial institutions are primarily denominated in
U.S. dollars and the functional currencies of our foreign subsidiaries,
including Euro, British pound sterling, and Canadian dollars. We mitigate the
risk of our short-term investment portfolio by depositing funds with reputable
financial institutions and monitoring risk profiles and investment strategies of
money market funds.
Our cash and cash equivalents balance as of March 31, 2020 and 2019 included
approximately $1.7 billion and $1.5 billion of cash held by our subsidiaries
outside of the United States. Our primary intent is to utilize this cash for
foreign operations for an indefinite period of time. Although the vast majority
of cash held outside the United States is available for repatriation, doing so
could subject us to foreign withholding taxes and state income taxes. Following
enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the
United States is generally no longer taxable for federal income tax purposes.
Working capital primarily includes cash and cash equivalents, receivables and
inventories net of drafts and accounts payable, short-term borrowings, current
portion of long-term debt and other current liabilities. We require a
substantial investment in working capital that is susceptible to large
variations during the year as a result of inventory purchase patterns and
seasonal demands. Inventory purchase activity is a function of sales activity
and other requirements. The COVID-19 pandemic has potential to increase the
variations in our working capital, which we will continue to monitor closely.
Consolidated working capital decreased at March 31, 2020 compared to the prior
year primarily due to an increase in drafts and accounts payable and an increase
in the current portion of long-term debt for term notes due in 2021, partially
offset by an increase in receivables and cash and cash equivalents. Consolidated
working capital increased at March 31, 2019 compared to the prior year primarily
due to an increase in the cash and cash equivalents, receivables, inventories
and a decrease in current portion of long-term debt, partially offset by an
increase in drafts and accounts payable.
Our debt to capital ratio increased for 2020 primarily due to decrease in
stockholders' equity driven by the Split-off of our interest in Change
Healthcare JV and share repurchases. Our debt to capital ratio increased for
2019 primarily due to a decrease in stockholder's equity driven by share
repurchases.
In July 2019, we raised our quarterly dividend from $0.39 to $0.41 per common
share for dividends declared on or after such date by the Board. Dividends were
$1.62 per share in 2020, $1.51 per share in 2019 and $1.30 per share in 2018. We
anticipate that we 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 our future earnings, financial
condition, capital requirements and other factors. In 2020, 2019 and 2018, we
paid total cash dividends of $294 million, $292 million and $262 million.
Additionally, as required under the Domination Agreement, we are obligated to
pay an annual recurring compensation amount of €0.83 per McKesson Europe share
(effective January 1, 2015) to the noncontrolling shareholders of McKesson
Europe.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Contractual Obligations:
The table and information below presents our significant financial obligations
and commitments at March 31, 2020:
                                                                       Years
(In millions)                Total         Within 1        Over 1 to 3       Over 3 to 5        After 5
On balance sheet
Long-term debt (1)        $    7,387$     1,052$       1,517$       1,128$     3,690
Operating lease
obligations (2)                2,274             398               681               465             730
Other (3)                        284              39                64                50             131

Off balance sheet
Interest on
borrowings (4)                 1,824             228               384               298             914
Purchase obligations (5)       6,964           6,889                48                27               -
Other (6)                        403             222                30                42             109
Total                     $   19,136$     8,828$       2,724$       2,010$     5,574

(1) Represents maturities of the Company's long-term obligations including an

immaterial amount of finance lease obligations.

(2) Represents undiscounted minimum operating lease obligations under

non-cancelable operating leases having an initial remaining term over one

year and is not adjusted for imputed interest. Refer to Financial Note 13,

"Leases" to the consolidated financial statements appearing in this Annual

Report on Form 10-K for more information.

(3) Includes our estimated benefit payments for the unfunded benefit plans and

minimum funding requirements for the pension plans.

(4) Primarily represents interest that will become due on our fixed rate

long-term debt obligations.

(5) A purchase obligation is defined as an arrangement to purchase goods or

services that is enforceable and legally binding on the Company. These

obligations primarily relate to inventory purchases and capital commitments.

(6) Includes agreements under which we have guaranteed the repurchase of our

customers' inventory and our customers' debt in the event these customers are

unable to meet their obligations to those financial institutions.



The contractual obligations table above excludes the following obligations:
At March 31, 2020, the liability recorded for uncertain tax positions, excluding
associated interest and penalties, was approximately $784 million. The ultimate
amount and timing of any related future cash settlements cannot be predicted
with reasonable certainty.
Our banks and insurance companies have issued $170 million of standby letters of
credit and surety bonds at March 31, 2020. These were issued on our behalf and
are mostly related to our customer contracts and to meet the security
requirements for statutory licenses and permits, court and fiduciary obligations
and our workers' compensation and automotive liability programs.
The carrying value of redeemable noncontrolling interests related to McKesson
Europe was $1.4 billion at March 31, 2020, which exceeded the maximum redemption
value of $1.2 billion. The balance of redeemable noncontrolling interests is
reported at the greater of its carrying value or its maximum redemption value at
each reporting date. Upon the effectiveness of the Domination Agreement on
December 2, 2014, the noncontrolling shareholders of McKesson Europe received a
put right that enables them to put their McKesson Europe shares to McKesson at
€22.99 per share, which price is increased annually for interest in the amount
of 5 percentage points above a base rate published semiannually by the German
Bundesbank, less any compensation amount or guaranteed dividend already paid
("Put Amount"). The redemption value is the Put Amount adjusted for exchange
rate fluctuations each period. The ultimate amount and timing of any future cash
payments related to the Put Amount are uncertain. Additionally, we are obligated
to pay an annual recurring compensation of €0.83 per McKesson Europe share (the
"Compensation Amount") to the noncontrolling shareholders of McKesson Europe
under the Domination Agreement. The Compensation Amount is recognized ratably
during the applicable annual period. The Domination Agreement does not expire,
but it may be terminated at the end of any fiscal year by giving at least six
month's advance notice.
Refer to Financial Note 9, "Redeemable Noncontrolling Interests and
Noncontrolling Interests," to the consolidated financial statements included in
this Annual Report on Form 10-K for additional information.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Continued)


Credit Resources:
We fund our working capital requirements primarily with cash and cash
equivalents as well as short-term borrowings from our credit facilities and
commercial paper issuances. Funds necessary for future debt maturities and our
other cash requirements are expected to be met by existing cash balances, cash
flow from operations, existing credit sources and other capital market
transactions. Detailed information regarding our debt and financing activities
is included in Financial Note 15, "Debt and Financing Activities," to the
consolidated financial statements included in this Annual Report on Form 10-K.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in
Financial Note 2, "Investment in Change Healthcare Joint Venture," and Financial
Note 23, "Related Party Balances and Transactions," to the consolidated
financial statements included in this Annual Report on Form 10-K.
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 consolidated
financial statements appearing in this Annual Report on Form 10-K.

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                              McKESSON CORPORATION
                          FINANCIAL REVIEW (Concluded)

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