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 and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 previously filed with theSecurities and Exchange Commission onMay 12, 2021 ("2021 Annual Report"). Our fiscal year begins onApril 1 and ends onMarch 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 "Cautionary Notice About Forward-Looking Statements" included in this Quarterly Report on Form 10-Q. Overview of Our Business: We are a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively. We implemented a new segment reporting structure commencing with the second quarter of 2021, which resulted in four reportable segments:U.S. Pharmaceutical, Prescription Technology Solutions ("RxTS"), Medical-Surgical Solutions, and International. All prior segment information has been recast to reflect our new segment structure and current period presentation. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. The following summarizes our four reportable segments and the changes made to our reporting structure commencing in the second quarter of 2021. Refer to Financial Note 14, "Segments of Business," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding our reportable segments. •U.S. Pharmaceutical, previously theU.S. Pharmaceutical and Specialty Solutions reportable segment, continues to distribute branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services. •RxTS is a reportable segment that unifies the solutions and services ofCoverMyMeds , RelayHealth, RxCrossroads, and McKesson Prescription Automation to serve our biopharma and life sciences partners and patients. By combining automation and expert navigation of the healthcare ecosystem, RxTS connects pharmacies, providers, payers, and biopharma to address patients' medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives. RxCrossroads was previously included in the formerU.S. Pharmaceutical and Specialty Solutions reportable segment andCoverMyMeds , RelayHealth, and McKesson Prescription Automation were previously included in Other. •Medical-Surgical Solutions provides medical-surgical supply distribution, logistics, and other services to healthcare providers inthe United States ("U.S.") and was unaffected by the segment realignment. 31
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) •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. McKesson Europe was previously reflected as the European Pharmaceutical Solutions reportable segment andMcKesson Canada was previously included in Other. Executive Summary: The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the three months endedJune 30, 2021 . •Coronavirus disease 2019 ("COVID-19") continues to impact our year over year results. As previously disclosed in our 2021 Annual Report, pharmaceutical distribution volumes decreased across the enterprise during the first quarter of 2021 as a result of the weakened and uncertain global economic environment and COVID-19 restrictions following the onset of the pandemic. We remain in a dynamic environment and volume trends continue to be non-linear. However, the recovery from the pandemic is favorably reflected in our results when comparing 2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs during the first quarter of 2022 and a year over year increase in sales of COVID-19 tests; •In response to the global pandemic, McKesson plans to donate certain personal protective equipment ("PPE") to charitable organizations to assist with COVID-19 recovery efforts. During the first quarter of 2022, we recorded inventory charges totaling$164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. The majority of these charges are driven by the intent of management not to sell certain excess PPE inventory and instead direct it to charitable organizations. Refer to the "Trends and Uncertainties" section included below for further information on COVID-19 and related impacts; •Revenues of$62.7 billion for the three months endedJune 30, 2021 increased 13% from the prior year primarily driven by market growth in ourU.S. Pharmaceutical segment; •Gross profit increased 12% for the three months endedJune 30, 2021 compared to the prior year primarily in our International segment driven by favorable effects of foreign currency exchange fluctuations, and in ourU.S. Pharmaceutical segment driven by the contribution from our COVID-19 vaccine distribution program; •Total operating expenses for the three months endedJune 30, 2021 includes charges of$74 million related to our estimated liability for opioid-related claims as further described in the "Trends and Uncertainties" section included below; •Diluted earnings per common share from continuing operations attributable toMcKesson Corporation for the three months endedJune 30, 2021 of$3.09 reflects the aforementioned items, net of any respective tax impacts, discrete tax items recognized in the quarter, and a lower share count compared to the prior year due to the cumulative effect of share repurchases; •We paid$1.0 billion to purchase 34.5 million shares of McKesson Europe AG ("McKesson Europe") during the three months endedJune 30, 2021 through exercises of a put right by the noncontrolling shareholders pursuant to theDecember 2014 domination and profit and loss transfer agreement (the "Domination Agreement"); •We returned$1.1 billion of cash to shareholders during the three months endedJune 30, 2021 through$1.0 billion of share repurchases under an accelerated share repurchase ("ASR") program entered into inMay 2021 , and$69 million of dividend payments. OnJuly 23, 2021 , we raised our quarterly dividend from$0.42 to$0.47 per common share; •OnJuly 5, 2021 , we entered into an agreement to sell certain of our European businesses to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately$1.5 billion ), subject to certain adjustments under the agreement. Beginning in the second quarter of 2022, the disposal group will be reflected in our condensed consolidated financial statements as held for sale and will be remeasured to the lower of its carrying amount or fair value less costs to sell, which we estimate will result in a charge between$500 million and$700 million , primarily related to the inclusion of the accumulated other comprehensive income balances into the carrying amount of the disposal group and the impairment of internal-use software that will not be completed. The transaction is anticipated to close in 2023, pursuant to customary closing conditions, including receipt of required regulatory approvals. Refer to Financial Note 2, "Held for Sale," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information; 32
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) •OnJuly 17, 2021 , we redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately$709 million ) prior to the maturity date ofAugust 17, 2021 . The notes were redeemed using cash on hand; and •OnJuly 23, 2021 , we completed a cash tender offer and paid an aggregate consideration of$1.1 billion to redeem certain notes with a principal amount of$922 million . As a result of the redemption, we incurred a loss on debt extinguishment in the second quarter of 2022, consisting of the premiums paid and a portion of the write-off of unamortized discounts and debt issuance costs in an amount proportional to the principal amount of debt retired. Refer to Financial Note 8, "Debt and Financing Activities," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information. Trends and Uncertainties: COVID-19 The novel strain of coronavirus, which causes the infectious disease known as COVID-19, continues to evolve since it was declared a global pandemic onMarch 11, 2020 by theWorld Health Organization . We continue to evaluate the nature and extent of the ongoing impacts COVID-19 has on our business, operations, and financial results. Refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2021 Annual Report for a full disclosure of trends and uncertainties due to COVID-19 since the onset of the pandemic. The disclosures below include significant updates that occurred during the first quarter of 2022. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described at the end of this COVID-19 section. Our Response to COVID-19 in the Workplace During this unprecedented time, we are committed in continuing to supply our customers and protect the safety of our employees. The various responses we put in place initially at the onset of the pandemic to mitigate the impact of COVID-19 on our business operations include telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures. During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, including a transition to a partial remote work model for certain employees on a go-forward basis as further discussed in this Financial Review and in Financial Note 3, "Restructuring, Impairment, and Related Charges," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. InJuly 2021 , we also lifted certain travel restrictions across the enterprise. We continue to enforce the safety measures in the workplace as recommended by theCenters for Disease Control and Prevention ("CDC"). Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits As a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions, we remain well positioned to respond to the COVID-19 pandemic in theU.S. ,Canada , andEurope . We have worked and continue to work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including PPE, and medicine reach our customers and patients. We continue to support theU.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines through a contract with theCDC . We have been distributing COVID-19 vaccines sinceDecember 2020 , when the first Emergency Use Authorization was issued by theU.S. Food and Drug Administration . In the first quarter of 2022, McKesson began supporting theU.S. government's commitment to donate COVID-19 vaccines worldwide. For this initiative, we are responsible for picking and packing the COVID-19 vaccines into temperature-controlled coolers and preparing them for pickup by an international partner. We will not manage the actual shipments of the vaccines to other countries. The results of operations related to our vaccine distribution are reflected in ourU.S. Pharmaceutical segment. We also continue to manage the assembly and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies, through agreements with both theDepartment of Health and Human Services ("HHS") and Pfizer, Inc. The results of operations for the kitting and distribution of ancillary supplies are reflected in our Medical-Surgical Solutions segment. The future financial impact of the arrangements with theCDC and HHS depend on numerous uncertainties, which are described at the end of this COVID-19 section.McKesson Canada and McKesson Europe are also playing a role in helping support governments and public health entities in not only distributing COVID-19 vaccines, but administering them in pharmacies as well. 33
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Table of ContentsMcKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Trends in our Business At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we experienced higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March. Subsequently, during the first quarter of 2021, pharmaceutical distribution volumes decreased as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government shutdowns and shelter-in-place orders. We also experienced decreased demand for primary care medical-surgical supplies due to deferrals in elective procedures in hospitals and surgery centers as well as decreased traffic and closures of doctors' offices, which was partially offset by demand for PPE and COVID-19 tests. Additionally, the decreased traffic in doctors' offices and general shelter-in-place guidance by governmental authorities negatively impacted retail pharmacy foot traffic in bothEurope andCanada . This drove favorability in our results when comparing the first quarter of 2022 versus 2021. We have experienced significant improvements in prescription volumes and primary care patient visits during our first quarter of 2022 compared to the same prior year period, however, the recovery of COVID-19 continues to be non-linear and tracked with patient mobility. During the first quarter of 2022, the COVID-19 vaccine and related ancillary kit distribution in theU.S. favorably impacted our results. While demand for PPE remained relatively flat year over year, we saw higher sales for COVID-19 tests primarily due to limited product availability in the first quarter of 2021. Impact to our Results of Operations, Financial Condition, and Liquidity For the three months endedJune 30, 2021 , COVID-19 tests as well as the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately$323 million , or 13%, in segment revenues, and including total inventory charges which is further described below, reduced our segment operating profit by approximately$90 million , or 120%. Additionally, the distribution of COVID-19 vaccines in ourU.S. Pharmaceutical segment contributed less than 10% in segment operating profit for the three months endedJune 30, 2021 . The financial impact from the COVID-19 vaccine efforts in our International segment during the three months endedJune 30, 2021 was not material to our consolidated results, but contributed to year over year favorability in segment operating profit. During the three months endedJune 30, 2020 , we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income from continuing operations before income taxes. The recovery of prescription volume trends and patient care visits, which are also described in more detail above in the Trends in our Business section, resulted in favorability year over year across our businesses when comparing 2022 versus 2021. Additionally, certain PPE items held for resale were valued in our inventory at costs that were inflated by earlier COVID-19 pandemic demand levels. That inventory valuation, if not supported by market resale prices, may be written down to net realizable value. We may also write-off inventory due to decreased customer demand and excess inventory. During the three months endedJune 30, 2021 , we recorded inventory charges totaling$164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Of this amount, we recorded$147 million in cost of sales driven by the intent of management not to sell certain excess PPE inventory, which required an inventory write-down to zero, and instead direct it to charitable organizations. We recorded$8 million in total operating expenses for excess inventory which has already been committed for donation during our first quarter of 2022. In addition,$9 million of inventory charges were recorded in cost of sales for PPE and other related products that management intends to sell. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods of other PPE and related product categories, we are taking measures to mitigate such risk. Overall, these COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the three months endedJune 30, 2021 compared to the same prior year period. Impacts to future periods due to COVID-19 may differ based on future developments, which is described at the end of this COVID-19 section. During the three months endedJune 30, 2021 , we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. We continue to monitor the COVID-19 situation closely and engage with manufacturers, industry partners, and government agencies to anticipate shortages and respond to demand for certain medications and therapies. We are monitoring our customers closely for changes to their timing of payments or ability to pay amounts owed to us as a result of COVID-19 pandemic impacts to their businesses. We remain well-capitalized with access to liquidity from our revolving credit facility. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. AtJune 30, 2021 , we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future. 34
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Risks and Forward-Looking Information The COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We still face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. The full extent to which COVID-19 will impact us depends on many factors and future developments, including: the duration and spread of the virus; governmental actions to limit the spread of the virus; potential seasonality of viral outbreaks; potential new variants of the original virus; the amount of COVID-19 vaccines authorized, manufactured, distributed, and administered; the amount of ancillary supply kits assembled and distributed; the effectiveness of COVID-19 vaccines and governmental measures in controlling the spread of the virus; and the effectiveness of treatments of infected individuals. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when stability will return remains challenging. Additionally, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Key assumptions and estimates about future values in our impairment assessments can be affected by a variety of factors, including the impacts of the global pandemic on industry and economic trends as well as on our business strategy and internal forecasts. Material changes to key assumptions and estimates can decrease the projected cash flows or increase the discount rates and have resulted in impairment charges of certain long-lived assets and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of our 2021 Annual Report for a disclosure of risk factors related to COVID-19. Opioid-Related Litigation and Claims We are a defendant in approximately 3,200 legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout theU.S. , and inPuerto Rico andCanada . Those proceedings include approximately 2,900 federal cases and approximately 300 state court cases throughout theU.S. , and cases inPuerto Rico andCanada . OnJuly 21, 2021 , we and the two other national pharmaceutical distributors announced that we had negotiated a comprehensive proposed settlement agreement which, if all conditions are satisfied, would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities. Under the proposed agreement, the three distributors would pay up to approximately$21 billion over a period of 18 years, with up to approximately$7.9 billion to be paid by us for our 38.1% portion if all eligible entities participate. In addition, the proposed agreement would require the three distributors, including the Company, to establish a clearinghouse for controlled substances distribution data and adopt changes to anti-diversion programs. OnJuly 20, 2021 , we announced that we and the two other national pharmaceutical distributors had agreed to pay up to$1.2 billion , of which our portion would be 38.1%, in a settlement with theState of New York and its participating subdivisions, includingNassau andSuffolk Counties, to resolve opioid-related claims. This settlement was negotiated in connection with the broad proposed settlement described above, but provides assurance thatNew York and its participating subdivisions will receive a settlement amount consistent with their allocations under the broad settlement framework, as well as certain attorneys' fees and costs. If the broad settlement is finalized,New York and its participating subdivisions will become part of that broader agreement. We previously recorded a charge of$8.1 billion for the year endedMarch 31, 2021 within "Claims and litigation charges, net" in our Consolidated Statement of Operations, related to our share of the settlement framework described above, as well as other opioid-related claims. We have increased that by$74 million this quarter, including a charge of$27 million related to the settlement withNew York and its participating subdivisions and a charge of$47 million related to the proposed settlement agreement with state and local governmental entities. We also reclassified$545 million to "Other accrued liabilities" for the estimated payment due within one year, and the remaining liability is recorded in "Long-term litigation liabilities" in our Condensed Consolidated Balance Sheet as ofJune 30, 2021 . Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, including the uncertainty of the scope of participation by plaintiffs in any potential settlement, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued. 35
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McKESSON CORPORATION FINANCIAL REVIEW (CONTINUED) (UNAUDITED) Notwithstanding the progress toward a broad settlement, we also continue to prepare for trial in these pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 12, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10Q for more information. State Opioid Statutes Legislative, regulatory, or industry measures to address the misuse of prescription opioid medications could affect our business in ways that we may not be able to predict. InApril 2018 , theState of New York adopted the Opioid Stewardship Act ("OSA") which required the imposition of an annual surcharge on all manufacturers and distributors licensed to sell or distribute opioids inNew York . OnDecember 19, 2018 , theU.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing theState of New York from enforcing the law. TheState of New York appealed to theU.S. Court of Appeals for the Second Circuit . TheState of New York has subsequently adopted an excise tax on sales of opioids in the State, which became effectiveJuly 1, 2019 . The law adopting the excise tax made clear that the OSA would apply only to opioid sales on or beforeDecember 31, 2018 . The excise tax applies only to the first sale occurring inNew York , and thus may not apply to sales from our distribution centers inNew York toNew York customers. OnSeptember 14, 2020 , a panel of theU.S. Court of Appeals for the Second Circuit reversed the district court's decision striking down the OSA on procedural grounds.The Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with theU.S. Court of Appeals for the Second Circuit ; that petition was denied onDecember 18, 2020 . OnFebruary 12, 2021 , theU.S. Court of Appeals for the Second Circuit granted a motion by theHealthcare Distribution Alliance to stay its mandate pending the filing and disposition of a petition for writ of certiorari before theU.S. Supreme Court . A petition for certiorari was filed with theSupreme Court onMay 17, 2021 . Unless the appellate court's decision is overturned, the OSA will be reinstated for calendar years 2017 and 2018 (but not beyond those years), and, subject to any further legal challenge, we will have to pay our ratable share of the annual surcharge for those two years. During the second quarter of 2021, we reflected an estimated liability of$50 million for the OSA surcharge in our consolidated financial statements on the assumption that the appellate court's decision will stand. Refer to Note 12, "Commitments and Contingent Liabilities," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10Q for more information. 36
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