Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns) together with its subsidiaries. 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. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Certain statements in this report constitute forward-looking statements. See 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.

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. Refer to Financial Note 28, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for a description of these segments.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

RESULTS OF OPERATIONS

Overview:

(Dollars in millions, except per share data and ratios)	Years Ended March 31,												Change
2019				2018				2017				2019				2018
Revenues	$	214,319			$	208,357			$	198,533			3		%		5		%
Gross Profit	$	11,754			$	11,184			$	11,271			5		%		(1	)	%
Gross Profit Margin	5.48			%	5.37			%	5.68			%	11		bp		(31	)	bp
Operating Expenses:
Operating Expenses	$	(8,474	)		$	(8,263	)		$	(7,788	)		3		%		6		%
Goodwill Impairment Charges	(1,797		)		(1,738		)		(290		)		3				499
Restructuring and Asset Impairment Charges	(597		)		(567		)		(18		)		5				3,050
Gain from Sale of Business	—				109				—				(100	)			NM
Gain on Healthcare Technology Net Asset Exchange, Net	—				37				3,947				(100	)			(99	)
Total Operating Expenses	$	(10,868	)		$	(10,422	)		$	(4,149	)		4		%		151		%
Operating Expenses as a Percentage of Revenues	5.07			%	5.00			%	2.09			%	7		bp		291		bp
Other Income, Net	$	182			$	130			$	77			40		%		69		%
Loss from Equity Method Investment in Change Healthcare	(194		)		(248		)		—				(22	)			NM
Loss on Debt Extinguishment	—				(122		)		—				(100	)			NM
Interest Expense	(264		)		(283		)		(308		)		(7	)			(8	)
Income from Continuing Operations Before Income Taxes	610				239				6,891				155				(97	)
Income Tax (Expense) Benefit	(356		)		53				(1,614		)		(772	)			(103	)
Income from Continuing Operations	254				292				5,277				(13	)			(94	)
Income (Loss) from Discontinued Operations, Net of Tax	1				5				(124		)		(80	)			(104	)
Net Income	255				297				5,153				(14	)			(94	)
Net Income Attributable to Noncontrolling Interests	(221		)		(230		)		(83		)		(4	)			177
Net Income Attributable to McKesson Corporation	$	34			$	67			$	5,070			(49	)	%		(99	)	%
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	0.17			$	0.30			$	23.28			(43	)	%		(99	)	%
Discontinued Operations	—				0.02				(0.55		)		(100	)			(104	)
Total	$	0.17			$	0.32			$	22.73			(47	)	%		(99	)	%
Weighted Average Diluted Common Shares	197				209				223				(6	)	%		(6	)	%

bp - basis points

NM - not meaningful

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Revenues:

Revenues increased in 2019 and 2018 primarily due to market growth, including expanded business with existing customers and our business acquisitions, partially offset by loss of customers within our U.S. Pharmaceutical and Specialty Solutions segment. The increase in revenue for 2018 was also offset by the 2017 contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to form the Change Healthcare joint venture. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversion.

Gross Profit:

Gross profit and gross profit margin increased in 2019 compared to 2018. 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 last-in, first-out (“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 and gross profit margin decreased in 2018 compared to 2017. The decrease was primarily due to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture, significant government reimbursement reductions in the U.K., the competitive sell-side environment and weaker pharmaceutical manufacturer pricing trends. These decreases in 2018 were partially offset by market growth, procurement benefits realized through the joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”), higher LIFO credits and our business acquisitions.

Gross profit for 2019, 2018 and 2017 included LIFO credits of $210 million, $99 million and $7 million. Gross profit for 2017 benefited from $144 million of cash receipts representing our share of antitrust legal settlements.

Operating Expenses:

Operating expenses, and operating expenses as a percentage of revenues increased in 2019 and 2018. Operating expenses for 2019, 2018 and 2017 were affected by the following significant items:

2019

•

Non-cash pre-tax goodwill impairment charges of $1,776 million ($1,756 million after-tax) in our Consumer Solutions (“CS”) and Pharmacy Solutions (“PS”) 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 were primarily due to declines in the reporting units’ estimated future cash flows and the selection of higher discount rates. These impairment charges were generally not deductible for income tax purposes. The declines in estimated future cash flows were primarily 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 CS and PS reporting units had no remaining goodwill balances;

•	Pre-tax restructuring and asset impairment charges of $331 million ($273 million after-tax), primarily representing employee severance and exit-related costs related to the 2019 restructuring initiatives, as further discussed below;

•	Non-cash pre-tax long-lived asset impairment charges of $245 million ($207 million after-tax) primarily for our U.K. business (mainly pharmacy licenses) driven by additional government reimbursement reductions and competitive pressures in the U.K.;

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

•

Higher opioid-related costs of $151 million ($122 million after-tax) primarily related to litigation expenses. The Company is a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. In addition, the State of New York has recently adopted a tax on sales of opioids in the State, and other states are considering legislation that could require us to pay taxes, licensing fees, or assessments on the distribution of opioid medications in those states. Liabilities for taxes or assessments under any such laws will likely have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted. Refer to Financial Note 24, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for more information;

•	Gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to our 2017 acquisition of Rexall Health;

•	Pre-tax credit of $90 million ($66 million after-tax) related to the derecognition of a tax receivable agreement (“TRA”) payable to the shareholders of Change Healthcare Inc. (“Change”); and

•	Higher operating expenses due to our business acquisitions and to support growth

2018

•

Non-cash goodwill impairment charges of $1,283 million (pre-tax and after-tax) for the European Pharmaceutical Solutions segment and $455 million (pre-tax and after-tax) for our Rexall Health reporting unit in Other. 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, the Rexall Health reporting unit had no remaining goodwill related to our acquisition of Rexall Health;

•	Non-cash pre-tax long-lived asset impairment charges of $446 million ($410 million after-tax) primarily 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;

•	Pre-tax restructuring charges of $74 million ($67 million after-tax) primarily representing employee severance and lease exit costs related to the 2018 restructuring plan for our McKesson Europe business. Under this plan, we expect to record total pre-tax charges of approximately $90 million to $130 million, of which $92 million of pre-tax charges were recorded to date;

•	Higher expenses due to our business acquisitions;

•	Pre-tax charitable contribution expense of $100 million ($64 million after-tax) to a public benefit California foundation; and

•	Pre-tax gain of $109 million ($30 million after-tax) recognized from the sale of our EIS business within Other

2017

•	Pre-tax gain of $3,947 million ($3,018 million after-tax) related to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture; and

•	Non-cash pre-tax goodwill impairment charge of $290 million ($282 million after-tax) related to our EIS business within Other. This impairment charge was generally not deductible for income tax purposes.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Goodwill Impairments:

As a result of the 2019 annual goodwill impairment test, the estimated fair value of our reporting units excluding the CS and PS reporting units exceeded their carrying value. 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 McKesson Canada reporting unit in Other in future periods.

Fiscal 2019 Restructuring Initiatives

On April 25, 2018, the Company 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 the Company’s operating models and cost structures primarily through the centralization and outsourcing of certain administrative functions and cost management. As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. We expect to record total pre-tax charges of approximately $140 million to $180 million, of which we recorded pre-tax charges of $135 million ($122 million after-tax) in 2019. This set of the initiatives will be substantially completed by the end of 2020. Estimated remaining charges primarily consist of exit-related costs including contract termination costs.

As previously announced on November 30, 2018, the Company relocated its 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 completed by January 2021. We expect to record total pre-tax charges of approximately $80 million to $130 million, of which pre-tax charges of $33 million ($24 million after-tax) were recorded in 2019 primarily representing employee severance. Estimated remaining charges primarily consist of lease and other exit-related costs, employee retention and relocation expenses.

During the fourth quarter of 2019, the Company 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 as well as the further closures of retail pharmacy stores in Europe and facilities. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, which are expected to be completed by the end of 2021. In 2019, pre-tax charges of $163 million ($127 million after-tax) were recorded, which primarily represent employee severance and accelerated depreciation expense. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.

Refer to Financial Note 3, “Restructuring and Asset Impairment Charges,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for more information.

Other Income, Net: Other income, net, for 2019 and 2018 increased compared to the same periods a year ago primarily due to higher gains recognized from the sales of investments.

Loss from Equity Method Investment in Change Healthcare: 2019 and 2018 include our proportionate share of the loss from the Change Healthcare joint venture of $194 million and $248 million, which includes amortization expenses associated with equity method intangible assets and integration expenses incurred by the joint venture. 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”). Refer to Financial Note 5, “Healthcare Technology Net Asset Exchange,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for more information.

Acquisition-Related Expenses and Adjustments

Acquisition-related expenses, which included transaction and integration expenses directly related to business acquisitions and the gain on the Healthcare Technology Net Asset Exchange were $228 million and $168 million in 2019 and 2018, and net credit of $3,797 million in 2017. 2019 and 2018 include our proportionate share of transaction and integration expenses incurred by Change Healthcare. 2018 includes a pre-tax gain of $37 million associated with the final net working capital and other adjustments from the Healthcare Technology Net Asset Exchange. 2017 includes a pre-tax gain of $3,947 million from the Healthcare Technology Net Asset Exchange.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Acquisition-related expenses and adjustments were recorded as follows:

	Years Ended March 31,
(Dollars in millions)	2019				2018				2017
Operating Expenses
Gain on Change Healthcare Net Asset Exchange, net	$	—			$	(37	)		$	(3,947	)
Transaction closing expenses	3				15				30
Restructuring, severance and relocation	12				36				25
Other (1)	103				54				85
Total	118				68				(3,807		)
Other Expenses (2)	110				100				10
Total Acquisition-Related Expenses and Adjustments	$	228			$	168			$	(3,797	)

(1)	These expenses primarily include outside service fees, costs associated with information technology and other integration activities.

(2)	Fiscal 2019 and 2018 includes our proportionate share of transaction and integration expenses incurred by Change Healthcare, excluding certain fair value adjustments, which were recorded within “Loss from Equity Method Investment in Change Healthcare”.

Amortization Expenses of Acquired Intangible Assets

Amortization expenses of acquired intangible assets directly related to business acquisitions and the formation of the Change Healthcare joint venture were $790 million, $792 million and $440 million in 2019, 2018 and 2017. These expenses were primarily recorded in our operating expenses and for 2019 and 2018 also in our proportionate share of loss from the equity method investment in Change Healthcare.

Income Taxes

We recorded income tax expense of $356 million, benefit of $53 million and expense of $1,614 million related to continuing operations in 2019, 2018 and 2017. Our reported income tax expense rate for 2019 was 58.4% compared to an income tax benefit rate of 22.2% for 2018 and an income tax expense rate of 23.4% in 2017. Fluctuations in our reported income tax rates are primarily due to the impact of the 2017 Tax Act, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.

Our reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax charges of $1,776 million ($1,756 million 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. As a result of the enactment of the 2017 Tax Act, the 2018 income tax benefit rate included a tax benefit of $1,324 million from the re-measurement 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. The reported income tax benefit and expense rates for 2018 and 2017 were also unfavorably affected by the non-cash goodwill impairment charges of $1,738 million (pre-tax and after-tax) and $290 million ($282 million after-tax), given that these charges are generally not deductible for tax purposes. Refer to Financial Note 2, “Goodwill Impairment Charges,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.

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.

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

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Income (Loss) from Discontinued Operations, Net of Tax: Income (Loss) from discontinued operations, net of tax, were income of $1 million and $5 million in 2019 and 2018, and loss of $124 million in 2017. Loss from discontinued operations, net for 2017 includes an after-tax loss of $113 million related to the sale of our Brazilian pharmaceutical distribution business within our European Pharmaceutical Solutions segment. We made a payment of approximately $100 million related to this sale in 2017. Refer to Financial Note 7, “Discontinued Operations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Net Income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests includes the annual recurring compensation that we are obligated to pay to the noncontrolling shareholders of McKesson Europe under the domination and profit and loss transfer agreement (the “Domination Agreement”). Net income attributable to noncontrolling interests also includes third-party equity interests in our consolidated entities including ClarusONE and Vantage. Noncontrolling interests with redemption features, such as put rights, that are not solely within the Company’s control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of Stockholders’ Equity on our consolidated balance sheet. Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $34 million, $67 million and $5,070 million in 2019, 2018 and 2017. Diluted earnings per common share were $0.17, $0.32 and $22.73 in 2019, 2018 and 2017.

Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share was calculated based on a weighted average number of shares outstanding of 197 million, 209 million and 223 million for 2019, 2018 and 2017. Weighted average diluted common shares outstanding is affected by the exercise and settlement of share-based awards and the cumulative effect of share repurchases.

Revenues:

	Years Ended March 31,												Change
(Dollars in millions)	2019				2018				2017				2019				2018
U.S. Pharmaceutical and Specialty Solutions	$	167,763			$	162,587			$	155,236			3		%		5		%
European Pharmaceutical Solutions	27,242				27,320				24,847				—				10
Medical-Surgical Solutions	7,618				6,611				6,244				15				6
Other	11,696				11,839				12,206				(1	)			(3	)
Total Revenues	$	214,319			$	208,357			$	198,533			3		%		5		%

U.S. Pharmaceutical and Specialty Solutions

U.S. Pharmaceutical and Specialty Solutions revenues increased over the past two years 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. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversions.

European Pharmaceutical Solutions

European Pharmaceutical Solutions revenues remained flat and increased 10% in 2019 and 2018. This segment’s revenues increased 1% and 5% in 2019 and 2018 primarily due to market growth, with the difference due to the effects of foreign currency exchange fluctuations. Revenues in 2019 were also unfavorably affected by the retail pharmacy closures and additional government reimbursement reductions in the U.K., and the competitive environment in France.

Medical-Surgical Solutions

Medical-Surgical Solutions revenues increased over the past two years compared to the same periods a year ago primarily due to our 2019 acquisition of Medical Specialties Distributors LLC (“MSD”) and market growth.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Other

Revenues in Other for 2019 and 2018 decreased 1% and 3% compared to the same periods a year ago. Revenues in Other for 2019 decreased 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 for 2019 are partially offset by growth in our Canadian and McKesson Prescription Technology Solutions (“MRxTS”) businesses and the effects of acquisitions in Canada. Revenues in Other for 2018 decreased primarily due to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture, partially offset by market growth, the effects of acquisitions in Canada and favorable effects of foreign currency exchange fluctuations of 2%.

Segment Operating Profit, Corporate Expenses, Net and Interest Expense:

	Years Ended March 31,													Change
(Dollars in millions, except ratios)	2019				2018				2017					2019				2018
Segment Operating Profit (1)
U.S. Pharmaceutical and Specialty Solutions	$	2,697			$	2,535			$	2,488				6		%		2		%
European Pharmaceutical Solutions (2)	(1,978		)		(1,681		)		173					18				NM
Medical-Surgical Solutions	455				461				401					(1	)			15
Other	394				(107		)		4,514					468				(102	)
Subtotal	1,568				1,208				7,576					30				(84	)
Corporate Expenses, Net	(694		)		(564		)		(377		)			23				50
Loss on Debt Extinguishment	—				(122		)		—					(100	)			NM
Interest Expense	(264		)		(283		)		(308		)			(7	)			(8	)
Income from Continuing Operations Before Income Taxes	$	610			$	239			$	6,891				155		%		(97	)	%
Segment Operating Profit Margin
U.S. Pharmaceutical and Specialty Solutions	1.61			%	1.56			%	1.60			%		5		bp		(4	)	bp
European Pharmaceutical Solutions	(7.26		)		(6.15		)		0.70					(111	)			(685	)
Medical-Surgical Solutions	5.97				6.97				6.42					(100	)			55

bp - basis points

NM - not meaningful

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

(2)	Operating profit of our European Pharmaceutical Solutions segment for 2019 and 2018 include non-cash pre-tax goodwill impairment charges of $1,776 million and $1,283 million. This segment’s operating profit for 2019 and 2018 also includes non-cash pre-tax long-lived asset impairment charges of $210 million and $446 million.

Segment Operating Profit

U.S. Pharmaceutical and Specialty Solutions: Operating profit increased for 2019 and 2018 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 representing our share of antitrust legal settlements and higher LIFO credits, partially offset by a $61 million pre-tax charge related to a customer bankruptcy. Operating profit and operating profit margin for 2018 were favorably affected by procurement benefits, higher LIFO credits and a pre-tax gain of $43 million recognized from the 2018 sale of an equity method investment, partially offset by competitive sell-side pricing environment and net cash proceeds representing our share of antitrust legal settlements received in 2017.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

European Pharmaceutical Solutions: Operating profit and operating profit margin decreased for 2019 and 2018 primarily due to the goodwill impairment charges recorded in 2019 and 2018. 2019 operating profit and operating profit margin also were negatively impacted by the effect of government reimbursement reductions and lower sales volume in the U.K. and the increased competition in France, partially offset by market growth. 2018 operating profit and operating profit margin were negatively impacted by the effect of government reimbursement reductions in the U.K.

Medical-Surgical Solutions: Operating profit decreased for 2019 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. Operating profit and operating profit margin for 2018 increased primarily due to higher bad debt expense in 2017. In addition, 2018 operating profit increased due to market growth.

Other:

Operating profit for Other increased for 2019 and decreased in 2018. Operating profit for Other in 2019, 2018 and 2017 were affected by the following significant items:

2019

•	Market growth in our MRxTS business;

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

•	Escrow settlement gain of $97 million (pre-tax) related to our 2017 acquisition of Rexall Health;

•	Pre-tax credit of $90 million resulting from the derecognition of a TRA liability payable to the shareholders of Change Healthcare;

•	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 during 2019;

•	Pre-tax goodwill and long-lived asset impairment charges of $56 million recognized for our Rexall Health retail business;

•	Pre-tax 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 joint venture;

•	Pre-tax goodwill charges of $455 million and long-lived asset impairment charges of $33 million recognized for our Rexall Health retail business;

•	Market growth in our MRxTS business;

•	Our proportionate share of losses from our equity method investment in Change Healthcare during 2018;

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

•	$46 million pre-tax credit representing a reduction of our TRA liability related to the adoption of the 2017 Tax Act; and

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

2017

•	Pre-tax gain of $3,947 million related to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture; and

•	Non-cash pre-tax goodwill impairment charge of $290 million related to our EIS reporting unit.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Corporate: Corporate expenses, net, increased for 2019 primarily due to an increase in opioid-related costs, higher restructuring-related charges and costs for technology initiatives. Corporate expenses, net, increased for 2018 primarily due to a charitable contribution expense of $100 million and higher professional fees incurred for Corporate initiatives.

Loss on Debt Extinguishment: In 2018, we recognized a pre-tax loss on debt extinguishment of $122 million ($78 million after-tax) 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 over the last two years 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.

Foreign Operations

Our foreign operations represented approximately 18%, 18% and 17% of our consolidated revenues in 2019, 2018 and 2017. 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 28, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Business Combinations

Refer to Financial Note 4, “Business Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Fiscal 2020 Outlook

Information regarding the Company’s fiscal 2020 outlook is contained in our Forms 8-K and 8-K/A dated May 8, 2019. These Forms should be read in conjunction with the sections 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.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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. During 2019, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 49.9% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 19.4% of our total consolidated revenues. At March 31, 2019, trade accounts receivable from our ten largest customers were approximately 31.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 18.4% of total trade accounts receivable. 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. We believe the reserves maintained and expenses recorded in 2019 are appropriate and consistent with historical methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead to a significant increase in our allowance for doubtful accounts as a percentage of net revenue in the foreseeable future.

At March 31, 2019, trade and notes receivables were $15,329 million prior to allowances of $273 million. In 2019, 2018 and 2017, our provision for bad debts was $132 million, $44 million and $93 million. At March 31, 2019 and 2018, the allowance as a percentage of trade and notes receivables was 1.8% and 1.3%. An increase or decrease of a hypothetical 0.1% in the 2019 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $15 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.

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 LIFO method. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign locations is based on first-in, first-out 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. Total inventories, net were $16,709 million and $16,310 million at March 31, 2019 and 2018.

The LIFO method was used to value approximately 62% and 63% of our inventories at March 31, 2019 and 2018. If we had used the moving average method of inventory valuation, inventories would have been approximately $696 million and $906 million higher than the amounts reported at March 31, 2019 and 2018. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. We recognized LIFO credits of $210 million, $99 million and $7 million in 2019, 2018 and 2017 within 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.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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, 2019 and 2018, inventories at LIFO did not exceed market.

In determining whether 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: We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over 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 based on the income approach. Methods under the income approach start with a forecast of all of the expected future net cash flows associated with each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in methods based on 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 life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives. Refer to Financial Note 4, “Business Combinations,” to the consolidated financial statements appearing 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 $9,358 million and $10,924 million of goodwill at March 31, 2019 and 2018, $3,689 million and $4,102 million of intangible assets, net at March 31, 2019 and 2018. We perform an impairment test on goodwill balances annually in the fourth quarter 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.

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 recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any.

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 expected rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the fair values.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 review 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. For example, some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach include the selection of appropriate guideline companies, the determination of market value multiples for both the guideline companies and the reporting unit, the determination of applicable premiums and discounts based on any differences in marketability between the business and the guideline companies and for the income approach, the required rate of return used in the DCF method, which reflects capital market conditions and the specific risks associated with the business. Under the income approach, the fair value estimates in the goodwill impairment analysis are highly sensitive to the discount rates used in the discounting of expected cash flows attributable to the reporting units. The discount rates are the weighted average cost of capital measuring the reporting unit’s cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. The unsystematic risk premium is an input factor used in calculating discount rate that specifically addresses uncertainty related to the reporting units’ future cash flow projections. Increases in the unsystematic risk premium increase the discount rate.

As a result of the 2019 annual goodwill impairment test, the estimated fair value of our reporting units excluding the CS and PS reporting units exceeded their carrying value. 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. For example, the estimated fair value of our McKesson Canada reporting unit within Other exceeded the carrying value of this reporting unit by 8% in 2019. The goodwill balance of this reporting unit was $1,444 million at March 31, 2019 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 1.0% could result in an indication of goodwill impairment for this reporting unit in future reporting periods. Refer to Financial Note 2, “Goodwill Impairment Charges” 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.

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 3, “Restructuring and Asset Impairment Charges” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

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.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in facts and circumstances. The final outcome of any outstanding claims may differ from our estimate. The supplier reserves primarily pertain to our U.S. Pharmaceutical and Specialty Solutions segment.

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. 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, including those laws pertaining to LIFO, 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. For example, on December 22, 2017, the U.S. government enacted comprehensive new tax legislation referred to as the 2017 Tax Act. The 2017 Tax Act made broad and complex changes to the U.S. tax code. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.

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.

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.

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.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 issuance, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, we may access the long-term debt capital markets from time to time.

Net cash flow provided from operating activities was $4,036 million in 2019 compared to $4,345 million in 2018 and $4,744 million in 2017. Operating activities for 2019 were primarily affected by an increase in receivables due to 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 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. Operating activities for 2017 were primarily affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases and increases in receivables primarily associated with our revenue growth. 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 2017 included cash generated from our Core MTS business. Operating activities for 2017 were also affected by $150 million of a settlement payment.

Net cash used in investing activities was $1,381 million in 2019 compared to $2,993 million in 2018 and $3,269 million in 2017. Investing activities for 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 2018 include $2,893 million 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.

Investing activities for 2017 included $4,212 million of net cash payments for acquisitions including $2.1 billion for our acquisition of Rexall Health, $1,226 million of net payments received on the Healthcare Technology Net Asset Exchange, $404 million and $158 million in capital expenditures for property, plant and equipment, and capitalized software, and $206 million of net cash proceeds from sales of businesses and investments.

Financing activities utilized $2,227 million, $3,084 million and $2,069 million of cash in 2019, 2018 and 2017. Financing activities for 2019 include cash receipts of $37,265 million and payments of $37,268 million from short-term borrowings (primarily commercial paper). We received cash from long-term debt issuances of $1,099 million and made repayments on long-term debt of $1,112 million in 2019. Financing activities in 2019 also include $1,627 million of cash paid for stock repurchases and $292 million of dividends paid.

Financing activities for 2018 include cash receipts of $20,542 million and payments of $20,725 million from short-term borrowings (primarily commercial paper). We received cash from long-term debt issuances of $1,522 million and made repayments on long-term debt of $2,287 million in 2018. Financing activities in 2018 also include $1,650 million of cash paid for stock repurchases $262 million of dividends paid and $112 million of payments for debt extinguishment.

Financing activities for 2017 include cash receipts of $8,294 million and payments of $8,124 million from short-term borrowings. We received cash from long-term debt issuances of $1,824 million and made repayments on long-term debt of $1,601 million in 2017. Financing activities in 2017 also include $2,250 million of cash paid for stock repurchases and $253 million of dividends paid.

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

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

In 2017, we repurchased 14.1 million of our shares through open market transactions and 1.4 million of our shares through an ASR program. We received 0.3 million additional shares in April 2017 for the 2017 ASR program. 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.

	Years Ended March 31,
(In millions, except per share data)	2019				2018				2017
Number of shares repurchased (1)	13.5				10.5				15.5
Average price paid per share	$	130.72			$	151.06			$	141.16
Total value of shares repurchased (1)	$	1,627			$	1,650			$	2,250

(1)	Excludes shares surrendered for tax withholding.

The total authorization outstanding for repurchase of the Company’s common stock was $3.5 billion at March 31, 2019.

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.

Selected Measures of Liquidity and Capital Resources:

	March 31,
(Dollars in millions, except ratios)	2019					2018					2017
Cash and cash equivalents	$	2,981				$	2,672				$	2,783
Working capital	839					451					1,336
Debt to capital ratio (1)	43.3			%		40.6			%		39.2			%
Return on McKesson stockholders’ equity (2)	0.4					0.6					54.6

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

The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our short-term 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, 2019 included approximately $1,450 million of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Act, the repatriation of cash to the United States is generally no longer taxable for federal income tax purposes.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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.

Consolidated working capital increased at March 31, 2019 compared to March 31, 2018 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 a increase in drafts and accounts payable. Consolidated working capital decreased at March 31, 2018 compared to March 31, 2017 primarily due to increases in drafts and accounts payable and a decrease in receivables, partially offset by an increase in inventories.

Our debt to capital ratio increased for 2019 and 2018 primarily due to a decrease in stockholders’ equity.

In July 2018, the Company’s quarterly dividend was raised from $0.34 to $0.39 per common share for dividends declared on or after such date by the Board. Dividends were $1.51 per share in 2019, $1.30 per share in 2018 and $1.12 per share in 2017. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors. In 2019, 2018 and 2017, we paid total cash dividends of $292 million, $262 million and $253 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.

Contractual Obligations:

The table and information below presents our significant financial obligations and commitments at March 31, 2019:

					Years
(In millions)	Total				Within 1				Over 1 to 3				Over 3 to 5				After 5
On balance sheet
Long-term debt (1)	$	7,595			$	330			$	1,737			$	1,900			$	3,628
Other (2)	648				223				91				89				245
Off balance sheet
Interest on borrowings (3)	2,018				234				413				348				1,023
Purchase obligations (4)	4,631				4,544				35				52				—
Operating lease obligations (5)	2,656				454				740				526				936
Other (6)	366				195				31				50				90
Total	$	17,914			$	5,980			$	3,047			$	2,965			$	5,922

(1)	Represents maturities of the Company’s long-term obligations including an immaterial amount of capital lease obligations.

(2)

Includes our estimated benefit payments, including assumed executive lump sum payments, for the unfunded benefit plans and minimum funding requirements for the pension plans. Actual lump sum payments could significantly differ from the estimated amounts depending on the timing of executive retirements and the lump sum interest rate in effect upon retirement. The estimated benefit payments do not reflect the potential effect of the termination of the U.S. defined benefit pension plan approved by the Company’s Board of Directors on May 23, 2018.

(3)	Primarily represents interest that will become due on our fixed rate long-term debt obligations.

(4)	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.

(5)	Represents minimum rental payments for operating leases.

(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, 2019, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $810 million. The ultimate amount and timing of any related future cash settlements cannot be predicted with reasonable certainty.

McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

During 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from the Change Healthcare joint venture that would otherwise have been required to be made to the shareholders of Change. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying consolidated statement of operations in 2019.

Our banks and insurance companies have issued $165 million of standby letters of credit and surety bonds at March 31, 2019. 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 $1.39 billion at March 31, 2019, which exceeded the maximum redemption value of $1.23 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 have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.

Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

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 16, “Debt and Financing Activities,” to the consolidated financial statements appearing 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 26, “Related Party Balances and Transactions,” to the consolidated financial statements appearing 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.

McKESSON CORPORATION

FINANCIAL REVIEW (Concluded)