INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS
Section Page General 33 Overview of o ur Business 33 Executive Summary 34 Trends and Uncertainties 35 Overview of Consolidated Results 38 Overview of Segment Results 42 New Accounting Pronouncements 44 Financial Condition, Liquidity, and Capital Resources 45 Cautionary Notice About Forward-Looking Statements 48
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 ofMcKesson Corporation together with its subsidiaries (collectively, the "Company," "McKesson," "we," "our," or "us" and other similar pronouns). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q ("Quarterly Report") and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 previously filed with theSecurities and Exchange Commission onMay 9, 2022 ("2022 Annual Report").
Our fiscal year begins on
Certain statements in this report constitute forward-looking statements. See "Cautionary Notice About Forward-Looking Statements" included in this Quarterly Report. Overview of our Business: We are a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. Our teams partner with biopharma companies, care providers, pharmacies, manufacturers, governments, and others to deliver insights, products, and services to help make quality care more accessible and affordable. We report our results in four reportable segments:U.S. Pharmaceutical, Prescription Technology Solutions ("RxTS"), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. 33
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) The following summarizes our four reportable segments. Refer to Financial Note 14, "Segments of Business," to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information regarding our reportable segments. •U.S. Pharmaceutical is a reportable segment that distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
•Prescription Technology Solutions is a reportable segment that combines automation and our ability to navigate the healthcare ecosystem to connect pharmacies, providers, payers, and biopharma companies to address patients' medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives.
•Medical-Surgical Solutions is a reportable segment that provides
medical-surgical supply distribution, logistics, and other services to
healthcare providers in
•International is a reportable segment that includes our operations inEurope andCanada , bringing together non-U.S. -based drug distribution services, specialty pharmacy, retail, and infusion care services. During fiscal 2022, we entered into agreements to sell certain of our businesses in theEuropean Union ("E.U.") and our retail and distribution businesses in theUnited Kingdom ("U.K."), as well as completed the sale of our Austrian business. During the three months endedJune 30, 2022 , we completed the sale of our retail and distribution businesses in theU.K. These divestitures are further described in the "European Divestiture Activities" section below.
European Divestiture Activities
OnJuly 5, 2021 , we entered into an agreement to sell certain of our businesses in the E.U. located inFrance ,Italy ,Ireland ,Portugal ,Belgium , andSlovenia , along with our German headquarters and wound-care business, part of a shared services center inLithuania , and our ownership stake in a joint venture inthe Netherlands ("E.U. disposal group") to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately$1.3 billion ) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG ("McKesson Europe") at the transaction closing date. We recorded a gain of$12 million for the three months endedJune 30, 2022 in total operating expenses to remeasure the E.U. disposal group to fair value less costs to sell, of which gains of$106 million are included within Corporate expenses, net, partially offset by charges of$94 million included within our International segment. The transaction is anticipated to close within the second half of fiscal 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals. OnApril 6, 2022 , we completed the previously announced sale of our retail and distribution businesses in theU.K. ("U.K. disposal group") toAurelius Elephant Limited for a purchase price of £110 million (or, approximately$144 million ), including certain adjustments. As part of the transaction, we divested net assets of$615 million and released$731 million of accumulated other comprehensive loss. As ofJune 30, 2022 , we had$3.2 billion of assets and$2.3 billion of liabilities classified as "Assets held for sale" and "Liabilities held for sale," respectively, in the Condensed Consolidated Balance Sheet primarily related to the pending sale of our E.U. disposal group described above. Refer to Financial Note 2, "Held for Sale," to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.
Executive Summary:
The following summary provides highlights and key factors that impacted our
business, operating results, financial condition, and liquidity for the three
months ended
•The pandemic disease caused by the SARS-CoV-2 coronavirus ("COVID-19") impacted our results of operations for the three months endedJune 30, 2022 . For a more in-depth discussion of how COVID-19 impacted our business, operations, and outlook, refer to the COVID-19 section of "Trends and Uncertainties" included below; 34
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) •For the three months endedJune 30, 2022 compared to the prior year, revenues increased by 7%, gross profit was flat, total operating expenses decreased by 19%, and other income, net decreased by 65%. Refer to the "Overview of Consolidated Results" section below for an analysis of these changes; •Diluted earnings per common share from continuing operations attributable toMcKesson Corporation for the three months endedJune 30, 2022 increased 70% to$5.25 , primarily driven by reduced corporate expenses, growth across our North American businesses, and a lower share count compared to the prior year due to the cumulative effect of share repurchases; and •We returned$1.1 billion of cash to shareholders during the three months endedJune 30, 2022 through$1.0 billion of common stock repurchases under an accelerated share repurchase ("ASR") program entered into inMay 2022 and$71 million of dividend payments. InJuly 2022 , our Board of Directors (the "Board") approved an increase of$4.0 billion in the authorization for repurchases of McKesson's common stock and raised our quarterly dividend from$0.47 to$0.54 per common share. Trends and Uncertainties:
The Impact of Inflationary and Global Events
Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, increased competition for talent, and disruption of the supply chain, as well as by political or civil unrest or military action, including indirect results such as commodity price increases from the conflict betweenRussia andUkraine ("Russo-Ukrainian War"). Cost inflation generally affects us by increasing transportation, operational, and other administrative costs associated with our business operations which we might not be able to fully pass along to our customers. Although it is difficult to predict the impact that these factors may have on our business in the future, they did not have a material effect on our results of operations, financial condition, or liquidity for the three months endedJune 30, 2022 .
COVID-19
COVID-19 has continued to evolve since it was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . We continue to evaluate the nature and extent of the ongoing impacts of COVID-19 on our business, operations, and financial results. Refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2022 Annual Report for additional disclosure of trends and uncertainties due to COVID-19. The disclosures below include significant updates that occurred during the first quarter of fiscal 2023 and the financial impacts compared to fiscal 2022.
Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits
As a diversified healthcare services leader, we are well positioned to respond to the COVID-19 pandemic in theU.S. ,Canada , andEurope . We work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including personal protective equipment ("PPE"), and medicine reach our customers and their patients. InDecember 2020 , we began distributing certain COVID-19 vaccines in support of theU.S. government through a contract with theCenters for Disease Control and Prevention ("CDC"). InJuly 2022 , we renewed our relationship with theCDC , under which we serve as a centralized distributor of COVID-19 vaccines and ancillary supplies used to administer vaccines. The results of operations related to our vaccine distribution are reflected in ourU.S. Pharmaceutical segment. We also extended our contract to manage the assembly, storage, and distribution of ancillary supply kits as directed by theDepartment of Health and Human Services ("HHS"), the results of which are reflected in our Medical-Surgical Solutions segment.
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Trends in our Business We observed increases in prescription volumes within ourU.S. Pharmaceutical segment and favorability in our primary care business within our Medical-Surgical Solutions segment during the three months endedJune 30, 2022 compared to the same prior year period. The contributions from COVID-19 tests and our vaccine and related kitting distribution programs have decreased year over year primarily driven by lower demand.
Impacts to our Supply Chain
We continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we proactively work with manufacturers, industry partners, and government agencies to meet the needs of our customers. During the quarter, we had an increase in supply chain costs primarily related to transportation and labor; however, this did not materially impact our results of operations for the three months endedJune 30, 2022 . As potential shortages or disruptions of any products are identified, we address supply continuity which includes securing additional products when available, sourcing back-up products when needed, and following allocation procedures to maintain and protect supply as much as possible. We utilize business continuity action planning to maintain and protect operations across all locations and facilities.
Impact to our Results of Operations, Financial Condition, and Liquidity
For the three months endedJune 30, 2022 , COVID-19 tests and the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately$201 million and$49 million to segment revenues and segment operating profit, respectively. For the three months endedJune 30, 2021 , the contribution was approximately$323 million to segment revenues and including total inventory charges that are further described below, reduced our segment operating profit by approximately$90 million . The distribution of COVID-19 vaccines in ourU.S. Pharmaceutical segment decreased during the first quarter of fiscal 2023 when compared to the same prior year period. The contribution was less than 10% to segment operating profit for each of the three months endedJune 30, 2022 and 2021. The financial impact from our COVID-19 response efforts in the International segment during the three months endedJune 30, 2022 and 2021 was not material to our consolidated results, but favorably contributed to our segment operating results. Additionally, we recorded inventory charges totaling$164 million on certain PPE and other related products in our Medical-Surgical Solutions segment during the three months endedJune 30, 2021 . We have taken measures to mitigate risks for market price volatility and changes to anticipated customer demand that may require additional write-downs in future periods of other PPE and related product categories. These COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the three months endedJune 30, 2022 compared to the same prior year period, primarily due to prior year inventory charges on certain PPE and other related products as mentioned above. During the three months endedJune 30, 2022 and 2021, we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic.
Opioid-Related Litigation and Claims
We are a defendant in many legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout theU.S. , and inPuerto Rico andCanada . The plaintiffs in these actions have included state attorneys general, county and municipal governments, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. 36
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) OnFebruary 25, 2022 , the Company and two otherUnited States pharmaceutical distribution companies (collectively, "Distributors") determined that there was sufficient State and subdivision participation to proceed with an agreement ("Settlement") to settle a substantial majority of opioids-related lawsuits filed against the Distributors byU.S. states, territories and local governmental entities. Under the Settlement, 46 of 49 eligible states and their participating subdivisions, as well as theDistrict of Columbia and all eligible territories (collectively, "Settling Governmental Entities"), have agreed to join the Settlement. The Settlement became effective onApril 2, 2022 . If all conditions to the Settlement are satisfied, including the receipt of approval by relevant courts of consent decrees to dismiss the lawsuits, the Distributors would pay the Settling Governmental Entities up to approximately$19.5 billion over 18 years, with up to approximately$7.4 billion to be paid by the Company for its 38.1% portion. Under the Settlement, a minimum of 85% of the settlement payments must be used by state and local governmental entities to remediate the opioid epidemic. Most of the remaining percentage relates to plaintiffs' attorneys' fees and costs, and would be payable over a shorter time period. Under the Settlement, the Distributors will establish a clearinghouse to consolidate their controlled-substance distribution data, which will be available to the settlingU.S. states to use as part of their anti-diversion efforts. The Settlement provides that the Distributors do not admit liability or wrongdoing and do not waive any defenses. The Settlement only addresses the claims of attorneys general ofU.S. states and territories and political subdivisions in participating states and territories. Governmental entities not participating in the Settlement may continue to pursue their claims. The states ofAlabama ,Oklahoma andWashington chose not to participate in the Settlement, but, since the announcement of the Settlement, we have reached separate agreements in principle with the attorneys general of these states to settle the claims of the states and their subdivisions. The Distributors previously settled with theCherokee Nation and reached a separate agreement in principle to settle the claims of the remaining federally recognized Native American Tribes. We recorded a charge of$8.3 billion during the year endedMarch 31, 2022 related to our estimated liability toU.S. governmental entities, including those expected to participate in the Settlement, the states and subdivisions that were not expected to participate or were not eligible, and the Native American tribes. Our total estimated liability for opioid-related claims was$7.9 billion as ofJune 30, 2022 , of which$759 million was included in "Other accrued liabilities" for the amount estimated to be paid within the next twelve months, and the remaining liability was included in "Long-term litigation liabilities" in our Condensed Consolidated Balance Sheet. Although the vast majority of opioid claims have been brought by governmental entities in theU.S. , the Company is also a defendant in cases brought in theU.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as four cases brought inCanada (three by governmental or tribal entities and one by an individual). These claims, and those of private individuals or entities generally, are not included in the Settlement or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense. Because of the many uncertainties associated with ongoing opioid-related litigation matters, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued. Notwithstanding the Settlement, we also continue to prepare for trial in pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 12, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information. 37
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Risks and Forward-Looking Information
Recent events such as the COVID-19 pandemic, the Russo-Ukrainian War, and associated economic impacts have disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We have experienced and may experience difficulties in sourcing products and changes in costs and pricing due to the effects of these events on supply chains. Our participation in government-sponsored vaccination distribution and related ancillary supply kit programs with theCDC and HHS exposes us to various uncertainties, such as the scope and length of related agreements and the amount of COVID-19 vaccines and ancillary supply kits that we are contracted to distribute, which could materially impact our future financial performance. Additionally, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Key assumptions and estimates about future values in our impairment assessments can be affected by a variety of factors, including the impacts of socio-political events on industry and economic trends as well as on our business strategy and internal forecasts. Impairment charges have been recognized in prior periods due to the impact from the COVID-19 pandemic. Material changes to key assumptions and estimates could decrease the projected cash flows or increase the discount rates that could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of our 2022 Annual Report for a discussion of risk factors that could cause our actual results to differ materially from our projections.
RESULTS OF OPERATIONS
Overview of Consolidated Results:
Three Months Ended June 30, (Dollars in millions, except per share data) 2022 2021 Change Revenues$ 67,154 $ 62,674 7 % Gross profit 3,023 3,032 - Gross profit margin 4.50 % 4.84 % (34) bp Total operating expenses$ (1,987) $ (2,464) (19) % Total operating expenses as a percentage of revenues 2.96 % 3.93 % (97) bp Other income, net $ 15$ 43 (65) % Interest expense (45) (49) (8) Income from continuing operations before income taxes 1,006 562 79 Income tax expense (199) (26) 665 Income from continuing operations 807 536 51 Income (loss) from discontinued operations, net of tax 2 (3) 167 Net income 809 533 52 Net income attributable to noncontrolling interests (41) (47) (13) Net income attributable to McKesson Corporation $ 768$ 486 58 % Diluted earnings (loss) per common share attributable toMcKesson Corporation Continuing operations $ 5.25$ 3.09 70 % Discontinued operations 0.01 (0.02) 150 Total $ 5.26$ 3.07 71 % Weighted-average diluted common shares outstanding 145.9 158.1 (8) %
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points 38 --------------------------------------------------------------------------------
Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Revenues Revenues increased for the three months endedJune 30, 2022 compared to the same prior year period primarily due to market growth in ourU.S. Pharmaceutical segment. This was partially offset by lower revenues in our International segment driven by the completed divestiture of ourU.K. disposal group inApril 2022 and unfavorable effects of foreign currency exchange fluctuations. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. Gross Profit Gross profit was flat for the three months endedJune 30, 2022 compared to the same prior year period. Gross profit decreased in our International segment primarily driven by the completed divestiture of ourU.K. disposal group inApril 2022 and unfavorable effects of foreign currency exchange fluctuations. This was partially offset by an increase in gross profit in our Medical-Surgical Solutions segment due to prior year inventory charges on PPE and other related products as well as growth in our primary care business. Gross profit was also favorably impacted by growth of specialty pharmaceuticals in ourU.S. Pharmaceutical segment as well as increased volume with new and existing customers in our RxTS segment. Last-in, first-out ("LIFO") inventory credits were$13 million and$23 million for the three months endedJune 30, 2022 and 2021, respectively. LIFO credits were lower in the first quarter of fiscal 2023 compared to the same prior year period primarily due to higher expected brand inflation. OurU.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business' practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price related inventory losses. A LIFO expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our quarterly LIFO credit is based on our estimates of the annual LIFO credit which is impacted by expected changes in year-end inventory quantities, product mix, and manufacturer pricing practices, which may be influenced by market and other external factors. Changes to any of the above factors could have a material impact to our annual LIFO credit. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year.
Total Operating Expenses
A summary of the components of our total operating expenses for the three months
ended
•Selling, distribution, general, and administrative expenses ("SDG&A"): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, remeasurement charges to the lower of carrying value or fair value less costs to sell, and other general charges. •Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expensed as incurred, are included within SDG&A. •Restructuring, impairment, and related charges, net: Restructuring charges are incurred for programs in which we change our operations, the scope of a business undertaken by our business units, or the manner in which that business is conducted as well as long-lived asset impairments. 39 -------------------------------------------------------------------------------- Table of Contents MD&A Index McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Three Months Ended June 30, (Dollars in millions) 2022 2021 Change
Selling, distribution, general, and administrative expenses
$ 2,232 (12) % Claims and litigation charges, net 5 74 (93) Restructuring, impairment, and related charges, net 23 158 (85) Total operating expenses$ 1,987 $ 2,464 (19) % Percent of revenues 2.96 % 3.93 % (97) bp
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points For the three months endedJune 30, 2022 , total operating expenses and total operating expenses as a percentage of revenues decreased compared to the same prior year period. Total operating expenses were impacted by the following significant items:
•SDG&A for the three months ended
•Claims and litigation charges, net for the three months endedJune 30, 2022 and 2021 includes charges of$5 million and$74 million , respectively, related to our estimated liability for opioid-related claims as previously discussed in the "Trends and Uncertainties" section; •Restructuring, impairment, and related charges, net for the three months endedJune 30, 2021 includes charges of$158 million primarily related to our transition to a partial remote work model approved during the first quarter of fiscal 2022 and costs for optimization programs inCanada ; and
•Total operating expenses were favorably impacted by foreign currency exchange
fluctuations for the three months ended
Goodwill Impairment
We evaluate goodwill for impairment on an annual basis and at an interim date, if indicators of potential impairment exist. We voluntarily changed our annual goodwill impairment testing date fromOctober 1st to April 1st to align with the change in 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 Financial Note 7, "Goodwill and Intangible Assets, Net," to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information. The annual impairment testing performed in fiscal 2023 and fiscal 2022 did not indicate any impairment of goodwill and no goodwill impairment charges were recorded during the three months endedJune 30, 2022 and 2021. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including ourMcKesson Canada reporting unit within our International segment, where the risk of a material goodwill impairment is higher than other reporting units.
Restructuring Initiatives and Long-Lived Asset Impairments
During the first quarter of fiscal 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of our office space inNorth America . Where we ceased using office space, we exited the portion of the facility no longer used. We also retained and repurposed certain other office locations. We recorded charges of$95 million for the three months endedJune 30, 2021 primarily related to lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization. This initiative was substantially complete in fiscal 2022 and remaining costs we expect to record under this initiative are not material.
Refer to Financial Note 3, "Restructuring, Impairment, and Related Charges, Net," to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information on our restructuring initiatives.
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Other Income, Net Other income, net decreased for the three months endedJune 30, 2022 compared to the same prior year period primarily due to unfavorability from our equity investments and lower net equity in earnings. This was partially offset by the payment from a tax receivable agreement related to our previous joint venture with Change Healthcare, Inc., which was split-off inMarch 2020 . InJuly 2022 , we exited one of our investments in equity securities for proceeds of$179 million . We expect to recognize a gain within "Other income, net" in our Condensed Consolidated Statement of Operations for the second quarter of fiscal 2023 related to the disposition. The cost basis of the investment was$38 million .
Interest Expense
Interest expense decreased for the three months ended
Income Tax Expense
During the three months endedJune 30, 2022 and 2021, we recorded an income tax expense of$199 million and$26 million , respectively. Our reported income tax rates were 19.8% and 4.6% for the three months endedJune 30, 2022 and 2021, respectively. Fluctuations in our reported income tax rates are primarily due to discrete benefits recognized in the quarter. Refer to Financial Note 4, "Income Taxes," to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three months endedJune 30, 2022 and 2021 primarily representsClarusONE Sourcing Services LLP ,Vantage Oncology Holdings, LLC , and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under theDecember 2014 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. Refer to the "Selected Measures of Liquidity and Capital Resources" section of this Financial Review and Financial Note 5, "Redeemable Noncontrolling Interests and Noncontrolling Interests," to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information on changes to our redeemable and noncontrolling interests that occurred during the first quarter of fiscal 2022.
Net Income Attributable to
Net income attributable toMcKesson Corporation was$768 million and$486 million for the three months endedJune 30, 2022 and 2021, respectively. Diluted earnings per common share attributable toMcKesson Corporation was$5.26 and$3.07 for the three months endedJune 30, 2022 and 2021, respectively.
Weighted-Average Diluted Common Shares Outstanding
Diluted earnings per common share was calculated based on a weighted-average number of shares outstanding of 145.9 million and 158.1 million for the three months endedJune 30, 2022 and 2021, respectively. Weighted-average diluted shares outstanding for the three months endedJune 30, 2022 decreased from the same prior year period primarily due to the cumulative effect of shares repurchases. 41 -------------------------------------------------------------------------------- Table of Contents MD&A Index McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Overview of Segment Results: Segment Revenues: Three Months Ended June 30, (Dollars in millions) 2022 2021 Change Segment revenues U.S. Pharmaceutical$ 56,947 $ 50,019 14 % Prescription Technology Solutions 1,066 881 21 Medical-Surgical Solutions 2,592 2,528 3 International 6,549 9,246 (29) Total revenues$ 67,154 $ 62,674 7 % U.S. Pharmaceutical
Three Months Ended
U.S. Pharmaceutical revenues for the three months endedJune 30, 2022 increased$6.9 billion or 14% compared to the same prior year period. Within the segment, sales to pharmacies and institutional healthcare providers increased$6.6 billion and sales to specialty practices and other increased$315 million compared to the same prior year period. Other includes the results for the distribution of COVID-19 vaccines. Overall, these increases were primarily due to market growth, including growth in specialty pharmaceuticals driven by higher volumes from retail national account customers, and branded pharmaceutical price increases, partially offset by branded to generic drug conversions.
Prescription Technology Solutions
Three Months Ended
RxTS revenues for the three months endedJune 30, 2022 increased$185 million or 21% compared to the same prior year period. This increase was due to increased volumes with new and existing customers primarily in our third-party logistics and wholesale distribution services as well as higher technology service revenues.
Medical-Surgical Solutions
Three Months Ended
Medical-Surgical Solutions revenues for the three months endedJune 30, 2022 increased$64 million or 3% compared to the same prior year period. Within the segment, sales to primary care and extended care customers increased$87 million and$10 million , respectively, partially offset by a$33 million decline in sales primarily related to the results of the kitting and distribution of ancillary supply kits used to administer COVID-19 vaccines. The increase in our primary care business was driven by underlying revenue growth from physician office customers, partially offset by lower sales of COVID-19 tests.
International
Three Months Ended
International revenues for the three months endedJune 30, 2022 decreased$2.7 billion or 29% compared to the same prior year period. Within the segment, foreign currency exchange fluctuations were unfavorable by$574 million and sales inEurope declined by$2.3 billion , partially offset by increased sales inCanada of$169 million compared to the same prior year period. Excluding the unfavorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 23% largely due to the completed divestitures of ourU.K. disposal group inApril 2022 and Austrian business inJanuary 2022 . 42 --------------------------------------------------------------------------------
Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Segment Operating Profit (Loss) and Corporate Expenses, Net:
Three Months Ended June 30, (Dollars in millions) 2022 2021 Change Segment operating profit (loss) (1) U.S. Pharmaceutical$ 696 $ 682 2 % Prescription Technology Solutions 144 104 38 Medical-Surgical Solutions (2) 256 75 241 International (3) (6) 53 (111) Subtotal 1,090 914 19 Corporate expenses, net (4) (39) (303) (87) Interest expense (45) (49) (8) Income from continuing operations before income taxes$ 1,006 $ 562 79 % Segment operating profit (loss) margin U.S. Pharmaceutical 1.22 % 1.36 % (14) bp Prescription Technology Solutions 13.51 11.80 171 Medical-Surgical Solutions 9.88 2.97 691 International (0.09) 0.57 (66)
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
(1)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income, net, for our reportable segments.
(2)Operating profit for our Medical-Surgical Solutions segment for the three months endedJune 30, 2021 includes$164 million of inventory charges on certain PPE and other related products. (3)Operating loss for our International segment for the three months endedJune 30, 2022 includes charges of$94 million to remeasure our E.U. disposal group to fair value less costs to sell.
(4)Corporate expenses, net includes the following:
•gains of
•charges of$5 million and$74 million for the three months endedJune 30, 2022 and 2021, respectively, related to our estimated liability for opioid-related claims; •charges of$19 million and$35 million for the three months endedJune 30, 2022 and 2021, respectively, of opioid-related costs, primarily litigation expenses; and
•restructuring charges of
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)U.S. Pharmaceutical
Three Months Ended
Operating profit increased for this segment for the three months endedJune 30, 2022 compared to the same prior year period primarily due to growth in specialty pharmaceuticals, partially offset by a decrease in the contribution from our COVID-19 vaccine distribution program.
Prescription Technology Solutions
Three Months Ended
Operating profit for this segment increased for the three months ended
Medical-Surgical Solutions
Three Months Ended
Operating profit for this segment increased for the three months ended
International
Three Months Ended
Operating loss for this segment for the three months endedJune 30, 2022 compared to operating profit for the same prior year period was largely due to fair value remeasurement charges recorded during the first quarter of fiscal 2023 related to our E.U. disposal group, partially offset by the cessation of depreciation and amortization expenses from its assets classified as held for sale, as well as unfavorable impacts from the completed divestitures of our Austrian business andU.K. disposal group. These impacts were partially offset by lower restructuring expenses primarily due to optimization programs inCanada .
Corporate Expenses, Net
Three Months Ended
Corporate expenses, net decreased for the three months endedJune 30, 2022 compared to the same prior year period primarily due to fair value remeasurement gains recognized during the first quarter of fiscal 2023 related to our E.U. disposal group, lower charges related to our estimated liability for opioid-related claims, and prior year restructuring charges for the transition to a partial remote work model for certain employees.
New Accounting Pronouncements
New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, "Significant Accounting Policies," to the accompanying condensed consolidated financial statements included in this Quarterly Report.
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
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 short-term and long-term capital expenditures, working capital, and other cash requirements. We remain adequately capitalized with access to liquidity from our$4.0 billion revolving credit facility. AtJune 30, 2022 , we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future.
The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown:
Three Months Ended June 30, (Dollars in millions) 2022 2021 Change Net cash provided by (used in): Operating activities $ (941)$ (1,622) $ 681 Investing activities 39 (99) 138 Financing activities (1,181) (2,151) 970 Effect of exchange rate changes on cash, cash equivalents, and restricted cash 18 11 7
Change in cash, cash equivalents, and restricted cash classified within Assets held for sale (1)
470 - 470
Net change in cash, cash equivalents, and restricted cash
(1)This change reflects a reversal of cash, cash equivalents, and restricted cash previously classified within assets held for sale atMarch 31, 2022 as part of theU.K. disposal group and is offset by cash outflows primarily related to the settlement of liabilities which is reflected in operating activities. Refer to Financial Note 2, "Held for Sale," to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information.
Operating Activities
Operating activities used cash of$941 million and$1.6 billion during the three months endedJune 30, 2022 and 2021, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts, and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for the three months endedJune 30, 2022 were affected by net income adjusted for non-cash items and changes in receivables, drafts and accounts payables, and inventories classified as held for sale. Refer to the "Selected Measures of Liquidity and Capital Resources" section below of this Financial Review and Financial Note 2, "Held for Sale," to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information. Operating activities for the three months endedJune 30, 2022 were affected by increases in receivables of$1.6 billion , drafts and accounts payable of$1.0 billion , and inventory of$955 million , all primarily driven by higher revenues and timing. Our litigation liabilities also decreased by$370 million primarily driven by payments made during the first quarter of fiscal 2023 associated with the Settlement and separate settlement agreements of opioid-related claims of participating states, subdivisions, and Native American tribes. Operating activities for the three months endedJune 30, 2021 were affected by increases in receivables of$1.0 billion and inventory of$901 million , both primarily due to timing and higher revenues. Other non-cash items for the three months endedJune 30, 2021 includes non-cash inventory charges totaling$164 million on certain PPE and other related products in our Medical-Surgical Solutions segment.
Investing Activities
Investing activities provided cash of$39 million and used cash of$99 million during the three months endedJune 30, 2022 and 2021, respectively. Investing activities for the three months endedJune 30, 2022 includes proceeds from sales of businesses and investments of$240 million , primarily due to the completed divestiture of ourU.K. disposal group inApril 2022 . Investing activities for the three months endedJune 30, 2022 and 2021 includes$100 million and$159 million , respectively, in capital expenditures for property, plant, and equipment, and capitalized software. 45 --------------------------------------------------------------------------------
Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Financing Activities Financing activities used cash of$1.2 billion and$2.2 billion during the three months endedJune 30, 2022 and 2021, respectively. Financing activities for each of the three months endedJune 30, 2022 and 2021 includes$1.0 billion of cash paid for share repurchases as well as$71 million and$69 million of cash paid for dividends, respectively. Financing activities for the three months endedJune 30, 2021 includes a payment of$1.0 billion to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders. The put right option expired onJune 15, 2021 as further described below. Cash used for other financing activities generally includes shares surrendered for tax withholding and payments to noncontrolling interests.
Share Repurchase Plans
The Board has authorized the repurchase of McKesson's common stock from time-to-time in open market transactions, privately negotiated transactions, through ASR programs, or by combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including the Company's stock price, corporate and regulatory requirements, restrictions under the Company's debt obligations, and other market and economic conditions. The ASR programs discussed below were designed to comply with Rule 10b5-1(c). InMay 2022 , we entered into an ASR program with a third-party financial institution to repurchase$1.0 billion of the Company's common stock. Pursuant to the ASR agreement, we paid$1.0 billion to the financial institution and received an initial delivery of 2.6 million shares inMay 2022 . The transaction will be completed during the second quarter of fiscal 2023, at which point we expect to receive additional shares. The final number of shares repurchased and the average price per share paid will be determined based on the volume-weighted average price of the Company's common stock during the term of the ASR program, less a pre-negotiated discount. InFebruary 2022 , we entered into an ASR program with a third-party financial institution to repurchase$1.5 billion of the Company's common stock. The total number of shares repurchased under this ASR program was 5.1 million shares at an average price per share of$295.16 . We received 4.8 million shares as the initial share settlement, and inMay 2022 , we received an additional 0.3 million shares upon the completion of this ASR program. InMay 2021 , we entered into an ASR program with a third-party financial institution to repurchase$1.0 billion of the Company's common stock. The total number of shares repurchased under this ASR program was 5.2 million shares at an average price per share of$193.22 . We received 4.3 million shares as the initial share settlement, and inAugust 2021 , we received an additional 0.9 million shares upon the completion of this ASR program.
There were no other shares repurchased during the three months ended
The total remaining authorization outstanding for repurchases of the Company's common stock atJune 30, 2022 was$2.3 billion . InJuly 2022 , the Board approved an increase of$4.0 billion in the authorization for repurchase of McKesson's common stock. 46
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED)
Selected Measures of Liquidity and Capital Resources
(Dollars in millions) June 30, 2022 March 31, 2022 Cash, cash equivalents, and restricted cash$ 2,340 $ 3,935 Working capital (1,818) (2,235) Debt to capital ratio (1) 122.4 % 114.5 % (1)This ratio describes the relationship and changes within our capital resources, and is computed as total debt divided by the sum of total debt and McKesson stockholders' equity (deficit), which excludes noncontrolling interests and accumulated other comprehensive loss. Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA-ratedU.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily denominated inU.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 ofJune 30, 2022 andMarch 31, 2022 included approximately$821 million and$1.5 billion of cash held by our subsidiaries outside of theU.S. , respectively. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the majority of cash held outside theU.S. is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to theU.S. is generally no longer taxable for federal income tax purposes. Working capital primarily includes cash and cash equivalents, receivables, inventories, and net current assets or liabilities classified as held for sale, net of drafts and accounts payable, current portion of long-term debt, and other accrued liabilities. Our businesses require substantial investments in working capital that are susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements. Consolidated working capital improved atJune 30, 2022 compared toMarch 31, 2022 primarily due to increases in receivables, net assets classified as held for sale related to our European divestiture activities, and inventory, partially offset by an increase in drafts and accounts payable and a decrease in cash and cash equivalents.
Our debt to capital ratio increased for the three months ended
InJuly 2022 , we raised our quarterly dividend from$0.47 to$0.54 per common share for dividends declared on or after such date by the Board. 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.
Redeemable Noncontrolling Interests
Our previously recognized redeemable noncontrolling interests primarily related to our consolidated subsidiary, McKesson Europe. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put ("Put Right") their shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published semi-annually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid by McKesson ("Put Amount"). During the three months endedJune 30, 2021 , we paid$1.0 billion to purchase 34.5 million shares of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders, which reduced the balance of our redeemable noncontrolling interests. The Put Right expired onJune 15, 2021 , at which point the remaining shares owned by the minority shareholders, valued at$287 million , were transferred from redeemable noncontrolling interests to noncontrolling interests and as a result, we no longer have redeemable noncontrolling interests presented in our condensed consolidated balance sheets atJune 30, 2022 orMarch 31, 2022 . Our noncontrolling interest in McKesson Europe will be included in the sale of our E.U. disposal group. 47
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Table of Contents MD&A IndexMcKESSON CORPORATION FINANCIAL REVIEW (CONCLUDED) (UNAUDITED) Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the "Compensation Amount") to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six months' advance notice.
Refer to Financial Note 5, "Redeemable Noncontrolling Interests and Noncontrolling Interests," to the accompanying condensed consolidated financial statements included in this Quarterly Report for additional information on redeemable noncontrolling interests.
Credit Resources
We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements, including any future payments that may be made related to our total estimated litigation liability of$7.9 billion as ofJune 30, 2022 payable under the Settlement terms for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note 8, "Debt and Financing Activities," to the accompanying condensed consolidated financial statements included in this Quarterly Report. We believe that our future operating cash flow, financial assets, and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that an increase in volatility or disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of these statements can be identified by the use of terminology such as "believes," "expects," "anticipates," "may," "will," "should," "seeks," "approximately," "intends," "projects," "plans," "estimates," or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans, assumptions, or intentions may also include forward-looking statements. Readers should not place undue reliance on forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to update or revise our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, factors described in the Risk Factors discussion in Item 1A of Part I of our most recently filed Annual Report.
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