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

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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 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 consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K.

Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean our fiscal year.

Certain statements in this report constitute forward-looking statements. See Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report on Form 10-K for additional factors relating to these statements and 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.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 life sciences companies, manufacturers, providers, pharmacies, governments, and other healthcare organizations to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively.

We implemented a new segment reporting structure commencing with the second quarter of 2021, which resulted in four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and Prescription Technology Solutions (“RxTS”). Other, for retrospective periods presented, consists of our equity method investment in Change Healthcare LLC (“Change Healthcare JV”), which was split-off from McKesson in the fourth quarter of 2020. 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 22, “Segments of Business,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for further information regarding our reportable segments.

U.S. Pharmaceutical**, previously the U.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.
International** is a new reportable segment that includes our operations in Europe and Canada, 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 and McKesson Canada was previously included in Other.
Medical-Surgical Solutions** provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the United States (“U.S.”) and was unaffected by the segment realignment.
RxTS** is a new reportable segment that brings together existing businesses, including CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation, including Multi-Client Central Fill as a Service, to serve our biopharma and life sciences partners and patients. RxCrossroads was previously included in our former U.S. Pharmaceutical and Specialty Solutions reportable segment and CoverMyMeds, RelayHealth, and McKesson Prescription Automation were previously included in Other.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Executive Summary:

The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the year ended March 31, 2021.

Coronavirus disease 2019 (“COVID-19”) impacted our results of operations for the year ended March 31, 2021. Following the declaration of COVID-19 as a global pandemic by the World Health Organization (“WHO”) on March 11, 2020, there was a temporary increase in demand for pharmaceuticals across our businesses. Subsequently, pharmaceutical distribution volumes decreased during the first quarter as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government shutdowns and shelter-in-place orders. The recovery from the COVID-19 pandemic continued to fluctuate throughout our fiscal year. We benefited from demand for COVID-19 tests, favorable contributions from our vaccine and related ancillary supply kit distribution programs as discussed further below, and savings from reduced travel and meetings throughout 2021;
We expanded our existing contractual relationship with the Centers for Disease Control and Prevention (“CDC”) through an amendment to our existing Vaccines for Children Program contract to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. We have also partnered with the Department of Health and Human Services (“HHS”) and Pfizer to manage the assembly and distribution of the ancillary supplies needed to administer COVID-19 vaccines;
In December 2020, we began distributing certain COVID-19 vaccines under the direction of the CDC. Through the end of the fiscal year, we had distributed approximately 100 million of COVID-19 vaccine doses. For a more in-depth discussion of how COVID-19 impacted our business, operations, and outlook, refer to the COVID-19 section of "Trends and Uncertainties" included below;
Revenues of $238.2 billion, reflects a 3% increase from the prior year primarily in our U.S. Pharmaceutical segment driven by market growth;
Gross profit increased 1% from the prior year primarily in our Medical-Surgical Solutions segment driven by sales of COVID-19 tests;
Total operating expenses in 2021 includes the following:

◦a charge of $8.1 billion related to our estimated liability for opioid-related claims as further described in the Opioid-Related Litigation and Claims section of “Trends and Uncertainties” included below; and

◦charges of $115 million to impair certain long-lived assets within our International segment; partially offset by

◦a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program;

Other income, net in 2021 includes net gains of $133 million related to our equity investments;
Diluted loss per common share from continuing operations attributable to McKesson Corporation in 2021 of $28.26 reflects the aforementioned items, net of any respective tax impacts, and a lower share count compared to the prior year driven largely by the separation of our investment in Change Healthcare JV on March 10, 2020;
On November 1, 2020, we completed the contribution of our German pharmaceutical wholesale business to a newly formed joint venture with Walgreens Boots Alliance (“WBA”) in which we have a 30% ownership interest;
On December 3, 2020, we completed a public offering of 0.90% Notes due December 3, 2025 (the “2025 Notes”) in a principal amount of $500 million and repaid $1.0 billion of long-term debt in 2021. Refer to Financial Note 13, “Debt and Financing Activities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information;
We returned $1.0 billion of cash to shareholders through $770 million of common stock repurchases, including the value of equity awards surrendered for tax withholding, and $276 million of dividend payments during 2021. On July 29, 2020, we raised our quarterly dividend from $0.41 to $0.42 per common share; and
In January 2021, our Board of Directors (the “Board”) approved an increase of $2.0 billion for the authorized share repurchase of McKesson’s common stock.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Trends and Uncertainties:

COVID-19

In December 2019, a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported in Wuhan, China. The WHO declared COVID-19 a “Public Health Emergency of International Concern” on January 30, 2020 and a global pandemic on March 11, 2020.

We continue to evaluate the nature and extent of the impacts COVID-19 has on our business and operations. The pandemic developed rapidly during our fourth quarter of 2020 and continued to evolve throughout 2021. Infection rates varied throughout our fiscal year, peaking in January 2021. A significant number of new COVID-19 cases continue to be reported, particularly in the U.S. These also include cases from new and emerging COVID-19 variants, which could have the potential to be more severe, spread more easily, require different treatments, or change the effectiveness of current vaccines. However, vaccines which have met the U.S. Food and Drug Administration’s (“FDA’s”) standards for safety, effectiveness, and manufacturing quality needed to support Emergency Use Authorization (“EUA”), are currently being administered across the country, as further discussed below. As of March 31, 2021, nearly 154 million doses of COVID-19 vaccines have been administered in the U.S. according to the CDC. 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.

In response to the COVID-19 pandemic, federal, state, and local government directives and policies have been put in place in the U.S. to enhance availability of medications and supplies to meet the increased demand, assist front-line healthcare providers, manage public health concerns by creating social distancing, and address the economic impacts, including sharply reduced business activity, increased unemployment, and overall uncertainty presented by this healthcare emergency. Similar governmental actions have occurred in Canada and Europe, the timing of which has varied across geographies. In December 2020, the FDA issued an EUA for the Pfizer-BioNTech COVID-19 vaccine manufactured by Pfizer, Inc. (“Pfizer Vaccine”) and the Moderna COVID-19 vaccine manufactured by ModernaTX, Inc. (“Moderna Vaccine”) to be distributed in the U.S. These authorizations were followed by an EUA for the Janssen COVID-19 vaccine manufactured by Janssen Biotech Inc., a Janssen pharmaceutical company of Johnson & Johnson, (“Janssen Vaccine”) in February 2021. Government-coordinated administrative or allocation decisions at the federal, state, and local levels may cause variability in the timing and volume of COVID-19 vaccine distribution and administration activities. Our role in the distribution of COVID-19 vaccines in the U.S. as well as the assembly and distribution of related ancillary supply kits is discussed further below. Similar COVID-19 vaccine authorizations have occurred in Canada and Europe. McKesson Canada’s corporately owned retail pharmacy chain, Rexall, as well as independent pharmacy banners are supporting Canada’s vaccination efforts. McKesson Europe is also playing a role in helping support governments and public health entities in not only distributing COVID-19 vaccines across several European countries, but administering them in pharmacies as well.

As a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions, we are well positioned to respond to the COVID-19 pandemic in the U.S., Canada, and Europe. We have worked and continue to work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including personal protective equipment (“PPE”), and medicine reach our customers and patients.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 to mitigate the impact of COVID-19 on our business operations, including telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures, are intended to limit employee exposure to the virus that causes COVID-19. We expanded employee medical benefits covering COVID-19 related visits, treatments, and testing as well as expanded telehealth options to protect employee safety. We provided further support including additional emergency leave and an internal paid time off donation platform for employees impacted by COVID-19. For employees whose roles require presence at our facilities, we enhanced safety by promoting the practice of social distancing, providing reminders to wash or disinfect hands and avoid unnecessary face touching, making face masks available, placing hand sanitizers within our operating environments, and periodically cleaning and disinfecting our facilities. For employees whose roles do not require presence at our facilities, we added technology resources to support their working remotely. These responses were initially put in place during our fourth quarter of 2020. During the second quarter of 2021, we also implemented on-site workplace temperature screening as we continue to adapt our health and safety practices in response to the COVID-19 pandemic. When working in frozen vaccine storage environments, employees are provided with protective gear, including special clothing, gloves, and facial gear. These steps to protect employee safety have resulted in limited disruption from COVID-19 to our normal business operations, productivity trends, and have not materially impacted our operating expenses or operating margins.

We have evaluated the impact of our telecommuting and work-from-home policies on our system of internal controls and we have concluded that these policies did not have a material effect on our internal control over financial reporting during the year ended March 31, 2021. We also took various actions to mitigate the impact of COVID-19 on our results from operations through cost-containment and payroll-related expenses.

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, which drove unfavorability in our results of operations when comparing 2021 versus 2020.

During the first quarter of 2021, we experienced growth in pharmaceutical distribution and specialty drug volumes at a lower rate in the U.S., while pharmaceutical distribution volumes decreased in Europe and Canada due to the COVID-19 pandemic, as compared to the same prior year period. Specialty drug volumes increased, but were negatively impacted by lower demand for elective specialty drugs, as compared to the same prior year period. 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 both Europe and Canada.

While we experienced improvements in prescription volumes and primary care patient visits during our second quarter of 2021, the impact and recovery of COVID-19 for the second half of our fiscal year was non-linear and tracked with patient mobility. We also saw increased demand for COVID-19 tests and continued sales of PPE throughout the year in our Medical-Surgical Solutions segment partially offset by the impacts of social distancing measures which resulted in a less severe cough, cold, and flu season, savings for reduced travel and meetings across the enterprise, as well as improvements of retail pharmacy foot traffic in Europe and Canada. The vaccine and related ancillary kit distribution in the U.S. favorably impacted our results in the second half of fiscal 2021 as further discussed below.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits

On August 14, 2020, we expanded our contractual relationship with the CDC through an amendment to our existing Vaccines for Children Program contract for the distribution of certain COVID-19 vaccines. The COVID-19 vaccine distribution agreement with the CDC was finalized during the third quarter of 2021. We support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. In the centralized model, the U.S. government directs us on the distribution of the vaccines and related supplies to point-of-care sites across the country. We make no decisions on where products are to be distributed nor how the products are allocated between the various provider sites and ultimately administered to the individuals receiving a vaccine. We utilize our expertise and capabilities to support the CDC’s efforts to vaccinate everyone in the U.S. who wants to receive a COVID-19 vaccine. The CDC and McKesson collaborated similarly in response to the 2009 H1N1 pandemic.

In December 2020, we began distributing the Moderna Vaccine in the U.S. and in March 2021, we began distributing the Janssen Vaccine. We may distribute other future authorized COVID-19 vaccines that are refrigerated or frozen. Ancillary supply kits may be shipped either together with the Moderna Vaccine and Janssen Vaccine or in advance of the vaccines. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. The Pfizer Vaccine, which is ultra-frozen, is not being distributed by McKesson, although we are providing ancillary supplies needed for its administration.

On September 23, 2020, we announced our contract with the HHS under which our Medical-Surgical Solutions segment manages the assembly and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies. We also have an agreement with Pfizer to assemble and distribute ancillary supply kits needed to administer that particular COVID-19 vaccine. Ancillary supply kits include alcohol prep pads, face shields, surgical masks, needles and syringes, and other vaccine administration items. For the Pfizer Vaccine, ancillary supply kits also include the diluent needed to administer the ultra-frozen vaccine. We began assembling the ancillary supply kits in September 2020 in preparation for vaccine authorization and subsequent distribution. Ancillary supply kits to administer the Pfizer Vaccine are shipped directly to point-of-care sites, and all other ancillary supply kits are shipped to our dedicated vaccine distribution centers. 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 the CDC and HHS depend on numerous uncertainties, which are described at the end of this COVID-19 section.

To manage the COVID-19 vaccine and ancillary supply kit distribution, we have set up special, dedicated vaccine distribution centers that include large-scale, custom freezers and refrigerators to safely store and process millions of vaccine doses. These facilities can scale to meet the demand of increasing volumes of vaccines being manufactured. We have also set up distribution centers for kitting and inventory management as part of our contract with the HHS. We are working with delivery partners to manage the delivery of vaccines and ancillary supply kits from our centralized vaccine distribution centers to point-of-care destinations as directed by the CDC. The capital expenditures we made during 2021 to prepare for vaccine and ancillary supply kit distribution were not material to our financial condition or liquidity.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Impact to our Results of Operations, Financial Condition, and Liquidity

For the year ended March 31, 2021, the demand for COVID-19 tests, the year over year impact from PPE and other related products, net of inventory charges, as well as the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately 20% in segment revenues and segment operating profit. Additionally, the distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed approximately 2% in segment operating profit for the year ended March 31, 2021. During our fourth quarter of 2020, we experienced a temporary increase in demand for pharmaceuticals. Subsequently, during the first quarter, we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income (loss) from continuing operations before income taxes for the year ended March 31, 2021. During the year ended March 31, 2021, selling, distribution, general, and administrative expenses decreased as a result of the pandemic, largely due to savings from restricted travel and decreased meetings. The favorable reduction in selling, distribution, general, and administrative expenses was partially offset by increased costs of transport, costs for enhanced procedures to sanitize operating facilities, and costs of providing PPE and other related products for employee use. Additionally, increased costs for certain PPE compressed our margins. 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 year ended March 31, 2021, we recorded charges totaling $136 million in cost of sales on certain PPE and other related products due to inventory impairments and excess inventory in our Medical-Surgical Solutions segment. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods, we are taking measures to mitigate such risk. Overall, these COVID-19 related items had a net favorable impact on consolidated income (loss) from continuing operations before income taxes for the year ended March 31, 2021 compared to the prior year. 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.

We were able to maintain appropriate labor and overall vendor supply levels during the year ended March 31, 2021. Our inventory levels have fluctuated in response to supply availability and customer demand patterns for certain products, with varying inventory level impacts depending on the specific product within our portfolio. We collaborated closely with the federal government and other healthcare stakeholders to source more critical PPE to the U.S. This collaboration expedited the shipment of critical medical supplies to areas hit hardest by COVID-19, as identified by the Federal Emergency Management Agency. As our supply levels improve, and the federal government evolves guidance on the prioritization of providers or geographic markets, we will continue to adapt our distribution policies.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic impact of the COVID-19 pandemic. Among other things, the CARES Act provides certain changes to tax laws and includes provisions to provide relief for citizens, companies, healthcare providers and patients, and others. We have deferred certain employer payroll taxes and continue to monitor the potential impact of other tax legislation changes as result of the CARES Act, including refundable payroll tax credits on certain qualified wages. We anticipate changes due to the CARES Act in the timing of certain cash flows, with no material impact to our financial results for the year ended March 31, 2021. On December 27, 2020, the U.S. government enacted the Consolidated Appropriations Act, 2021 (the “CA Act”), which enhances and expands certain provisions of the CARES Act. The CA Act did not have a material impact on our financial condition, results of operations, or liquidity for the year ended March 31, 2021 nor do we currently expect a material impact on our future financial results.

Our consolidated balance sheets and ability to maintain financial liquidity remains strong. We have experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. 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. At March 31, 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.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Impact to our Supply Chain

We also continue to monitor the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. We have assembled a Critical Care Drug Task Force, made up of our procurement specialists, clinical health systems pharmacists, and supply chain professionals, that is focused on securing additional product where available, sourcing back-up products, and protecting our operations across all locations and facilities. We are also working with manufacturers through several channels, including our ClarusONE Sourcing Services LLP (“ClarusONE”) and global sourcing teams in London, and our leaders are actively engaged in addressing potential shortages. We have engaged with industry partners and government agencies to gain visibility into supply and demand. Additionally, we have a robust Business Continuity and Disaster Recovery Program (“BCRP”) and we have proactively enhanced our BCRP in response to the COVID-19 pandemic to protect the supply chain to minimize disruption in healthcare, protect our customers, ensure the safety and security of our employees and workplaces, and ensure the continuity of critical business processes.

The situation remains fluid and we are taking a proactive approach to protect inventory during this crisis and ensure our provider partners have needed supplies and medications to help prevent the spread of the disease and treat those that are ill. COVID-19 has put an unprecedented strain on the supply of high-demand PPE, including N95 masks, gloves, as well as disinfecting sprays and wipes. The supply chain has improved over the initial impact of pandemic-related demand, and we continue to closely monitor demand by customer type and certain PPE and infection prevention items are still in short supply. Our allocation approach has helped us avoid stock outs in many critical product categories, allowing us to provide PPE supplies to many more customers for a much longer time. We anticipate these market conditions will remain for the foreseeable future. Our efforts to help the supply chain have included sourcing products from new suppliers all over the world, working closely with the federal government to help with the nation’s response and collaborating with partners to source, develop, and deliver new products to market.

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 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 strains or 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 as disclosed in Financial Note 4, “Restructuring, Impairment, and Related Charges,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K, and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a disclosure of risk factors related to COVID-19.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 the U.S., and in Puerto Rico and Canada. Those proceedings include approximately 2,900 federal cases and approximately 300 state court cases throughout the U.S., and cases in Puerto Rico and Canada. We continue to be involved in discussions with the objective of achieving broad resolution of opioid-related claims of states, their political subdivisions and other government entities (“governmental entities”). We are in ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework under which, in order to resolve the claims of governmental entities, the three largest U.S. pharmaceutical distributors would pay up to approximately $21.0 billion over a period of 18 years, with up to approximately $8.0 billion to be paid by us, of which more than 90% is anticipated to be used to remediate the opioids crisis. Most of the remaining amount relates to plaintiffs’ attorneys fees and costs, and would be payable over a shorter time period. In addition, the proposed framework would require the three distributors, including the Company, to adopt changes to anti-diversion programs.

We have concluded that discussions under that framework have reached a stage at which a broad settlement of opioid claims by governmental entities is probable, and the loss related thereto can be reasonably estimated as of March 31, 2021. As a result of that conclusion, and our assessment of certain other opioid-related claims, we recorded a charge of $8.1 billion for the year ended March 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. 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 of the timing of amounts that would be paid with respect to the charge, the charge was recorded in “Long-term litigation liabilities” in our Consolidated Balance Sheet as of March 31, 2021. Moreover, in light of this uncertainty, the amount of any ultimate loss may differ materially from the amount accrued.

While we continue to be involved in discussions regarding a potential broad settlement framework, 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 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K 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. In April 2018, the State 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 in New York. On December 19, 2018, the U.S. District Court for the Southern District of New York found the law unconstitutional and issued an injunction preventing the State of New York from enforcing the law. The State of New York appealed to the U.S. Court of Appeals for the Second Circuit. The State of New York has subsequently adopted an excise tax on sales of opioids in the State, which became effective July 1, 2019. The law adopting the excise tax made clear that the OSA would apply only to opioid sales on or before December 31, 2018. The excise tax applies only to the first sale occurring in New York, and thus may not apply to sales from our distribution centers in New York to New York customers.

On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed the district court’s decision on procedural grounds. The Healthcare Distribution Alliance filed a petition for panel rehearing, or, in the alternative, for rehearing en banc with the U.S. Court of Appeals for the Second Circuit; that petition was denied on December 18, 2020. On February 12, 2021, the U.S. Court of Appeals for the Second Circuit granted a motion by the Healthcare Distribution Alliance to stay its mandate pending the filing and disposition of a petition for writ of certiorari before the U.S. Supreme Court. The due date for filing such a petition is May 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 accompanying consolidated financial statements on the assumption that the appellate court’s decision will stand. Refer to Note 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K for more information.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

RESULTS OF OPERATIONS

Overview of Consolidated Results:


(In millions, except per share data)	Years Ended March 31,									Change
2021			2020			2019			2021		2020
Revenues	$	238,228		$	231,051		$	214,319		3	%	8	%
Gross profit	12,148			12,023			11,754			1		2
Gross profit margin	5.10		%	5.20		%	5.48		%	(10)	bp	(28)	bp
Total operating expenses	$	(17,188)		$	(9,534)		$	(10,868)		80	%	(12)	%
Total operating expenses as a percentage of revenues	7.21		%	4.13		%	5.07		%	308	bp	(94)	bp
Other income, net	$	223		$	12		$	182		NM		(93)	%
Equity earnings and charges from investment in Change Healthcare Joint Venture	—			(1,108)			(194)			(100)		471

Interest expense	(217)			(249)			(264)			(13)		(6)
Income (loss) from continuing operations before income taxes	(5,034)			1,144			610			(540)		88
Income tax benefit (expense)	695			(18)			(356)			NM		(95)
Income (loss) from continuing operations	(4,339)			1,126			254			(485)		343
Income (loss) from discontinued operations, net of tax	(1)			(6)			1			(83)		(700)
Net income (loss)	(4,340)			1,120			255			(488)		339
Net income attributable to noncontrolling interests	(199)			(220)			(221)			(10)		-
Net income (loss) attributable to McKesson Corporation	$	(4,539)		$	900		$	34		(604)	%	NM

Diluted earnings (loss) per common share attributable to McKesson Corporation
Continuing operations	$	(28.26)		$	4.99		$	0.17		(666)	%	NM
Discontinued operations	—			(0.04)			—			(100)		NM
Total	$	(28.26)		$	4.95		$	0.17		(671)	%	NM

Weighted-average diluted common shares outstanding	160.6			181.6			197.3			(12)	%	(8)	%

bp - basis points

NM - computation not meaningful

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Revenues

Revenues increased for the years ended March 31, 2021 and 2020 compared to the respective prior years primarily due to market growth, including expanded business with existing customers, within our U.S. Pharmaceutical segment. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion.

Gross Profit

Gross profit increased for the year ended March 31, 2021 compared to the prior year primarily in our Medical-Surgical Solutions segment driven by the demand for COVID-19 tests and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by the unfavorable impact from PPE and other related products largely due to inventory charges. Gross profit was favorably impacted by growth of specialty pharmaceuticals and the contribution from our vaccine distribution programs in our U.S. Pharmaceutical segment. Gross profit was unfavorably impacted by the adverse impacts from COVID-19 largely during the first quarter of 2021, including disruptions of doctors’ office operations, deferred or cancelled elective procedures, lower demand for pharmaceuticals, and overall reduction of foot traffic in pharmacies.

Gross profit increased for the year ended March 31, 2020 compared to the prior year primarily due to market growth in our Medical-Surgical Solutions segment, partially offset by unfavorable effects of foreign currency exchange fluctuations. Gross profit and gross profit margin for the year ended March 31, 2020 compared to the prior year were unfavorably impacted by lower gains from antitrust legal settlements, partially offset by higher last-in, first-out (“LIFO”) credits in 2020. The impact from COVID-19 increased gross profit by less than 1% and decreased gross profit margin by less than 10 basis points for the year ended March 31, 2020.

Gross profit for the years ended March 31, 2021, 2020, and 2019 included LIFO inventory credits of $38 million, $252 million, and $210 million, respectively. The lower LIFO credits in 2021 compared to 2020 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. The higher LIFO credits in 2020 compared to 2019 is primarily driven by higher generic deflation. Refer to the “Critical Accounting Policies and Estimates” section included in this Financial Review for further information. Gross profit for the years ended March 31, 2021, 2020, and 2019 also included net cash proceeds received of $181 million, $22 million, and $202 million, respectively, representing our share of antitrust legal settlements.

Total Operating Expenses

A summary and description of the components of our total operating expenses for the years ended March 31, 2021, 2020, and 2019 is as follows:

Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, and administrative expenses.
Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expensed as incurred, are included within SDG&A. We have reclassified prior period amounts to conform to the current period presentation.

*•*Goodwill impairments charges: We perform an impairment test on goodwill balances annually in the third quarter and more frequently if indicators for potential impairment exist. The resulting goodwill impairment charges are reflected within this line item.

Restructuring, impairment, and related charges: Restructuring charges that are incurred for programs in which we change our operations, the scope of a business undertaken by our business units, or the manner in which that business is conducted as well as long-lived asset impairments.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)


	Years Ended March 31,									Change
(Dollars in millions)	2021			2020			2019			2021		2020
Selling, distribution, general, and administrative expenses	$	8,849		$	9,182		$	8,437		(4)	%	9	%
Claims and litigation charges, net	7,936			82			37			NM		122
Goodwill impairment charges	69			2			1,797			NM		(100)
Restructuring, impairment, and related charges, net	334			268			597			25		(55)
Total operating expenses	$	17,188		$	9,534		$	10,868		80	%	(12)	%
Percent of revenues	7.21		%	4.13		%	5.07		%	308	bp	(94)	bp

bp - basis points

NM - computation not meaningful

Total operating expenses and total operating expenses as a percentage of revenues increased for the year ended March 31, 2021 compared to the prior year, and decreased for the year ended March 31, 2020 compared to the prior year. Total operating expenses for the years ended March 31, 2021, 2020, and 2019 were affected by the following significant items:

2021

SDG&A includes opioid-related costs of $153 million, primarily related to litigation expenses;
SDG&A reflects cost savings of $95 million on travel and entertainment due to travel and meeting restrictions associated with COVID-19;
SDG&A reflects charges of $58 million to remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of the majority of our German pharmaceutical wholesale business to create a joint venture with WBA in which we have a 30% ownership interest within our International segment. Refer to Financial Note 3, “Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information;
SDG&A includes a charge of $50 million related to our estimated liability under the OSA as previously discussed in the “Trends and Uncertainties” section;
SDG&A also includes lower operating expenses due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA and a divestiture in our Medical-Surgical Solutions segment that closed in 2020;
Claims and litigation charges, net includes a charge of $8.1 billion related to our estimated liability for opioid-related claims as previously discussed in the “Trends and Uncertainties” section;
Claims and litigation charges, net includes a net gain of $131 million reflecting insurance proceeds received, net of attorneys' fees and expenses awarded to plaintiffs' counsel, in connection with the previously reported $175 million settlement of the shareholder derivative action related to our controlled substances monitoring program;
Goodwill impairment charges of $69 million were recorded in connection with our segment realignment that commenced in the second quarter of 2021. Refer to the “Goodwill Impairment” section below for further details;
Restructuring, impairment, and related charges, net includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe within our International segment, and the remaining $219 million primarily represents costs associated with our operating model and cost optimization efforts in our corporate headquarters and International segment; and
Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations.

2020

SDG&A includes charges of $275 million to remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of the majority of our German pharmaceutical wholesale business to create a joint venture with WBA;
SDG&A includes opioid-related costs of $150 million, primarily related to litigation expenses;

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Claims and litigation charges, net includes a settlement charge of $82 million recorded in connection with an agreement to settle all opioid-related claims filed by two Ohio counties;
Restructuring, impairment, and related charges, net includes long-lived asset impairment charges of $112 million, primarily for our United Kingdom (“U.K.”) business (mainly pharmacy licenses) and Rexall Health retail business (“Rexall Health”) (mainly customer relationships) within our International segment, and the remaining $156 million primarily represents employee severance and exit-related costs related to our 2019 restructuring initiatives, as further discussed below; and
Total operating expenses includes higher SDG&A due to our business acquisitions and to support business growth, as well as our technology initiatives, partially offset by favorable effects of foreign currency exchange fluctuations.

2019

SDG&A includes opioid-related costs of $114 million, primarily related to litigation expenses, and increased expenses due to our business acquisitions and to support growth, partially offset by a gain from an escrow settlement of $97 million representing certain indemnity and other claims related to our 2017 acquisition of Rexall Health and a credit of $90 million for the derecognition of a liability related to the tax receivable agreement (“TRA”) payable to the shareholders of Change Healthcare, Inc. (“Change”);
Goodwill impairment charges of $1.8 billion in our European Retail Pharmacy (“European RP”) and European Pharmaceutical Distribution (“European PD”) reporting units within the International segment. Of these impairment charges, $238 million was recognized upon the 2019 first quarter segment changes, which resulted in two new reporting units. The remaining charges primarily were due to declines in the reporting units’ estimated future cash flows and the selection of higher discount rates. These impairment charges generally were not deductible for income tax purposes. The declines in estimated future cash flows primarily were attributed to additional government reimbursement reductions and competitive pressures within the U.K. The risk of successfully achieving certain business initiatives was the primary factor in the use of a higher discount rate. At March 31, 2019, both the European RP and European PD reporting units had no remaining goodwill balances; and
Restructuring, impairment, and related charges, net primarily includes employee severance and exit-related costs of $352 million for our 2019 restructuring initiatives, as further discussed below and long-lived asset impairment charges of $245 million primarily for our U.K. business (mainly pharmacy licenses) within our International segment driven by additional government reimbursement reductions and competitive pressures in the U.K.

Goodwill Impairments

As discussed in the “Overview of Our Business” section, our operating structure was realigned commencing in the second quarter of 2021 into four reportable segments: U.S. Pharmaceutical, International, Medical-Surgical Solutions, and RxTS. These reportable segments encompass all operating segments of the Company. The second quarter segment realignment resulted in changes in multiple reporting units across the Company. As a result, we were required to perform a goodwill impairment test for these reporting units and recorded a goodwill impairment charge in our European RP reporting unit of $69 million during the second quarter of 2021. At March 31, 2021, the balance of goodwill for our reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of our reporting units in Canada.

We evaluate goodwill for impairment on an annual basis as of October 1, and at an interim date, if indicators of potential impairment exist. The annual impairment testing performed in 2021 did not indicate any impairment of goodwill. As of the testing date, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment and our RxCrossroads reporting unit within our RxTS segment, where the risk of a material goodwill impairment is higher than other reporting units. Refer to “Critical Accounting Policies and Estimates” included in this Financial Review for further information.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

On October 1, 2019, we voluntarily changed our annual goodwill impairment testing date from January 1 to October 1 to better align with the timing of our annual long-term planning process. This change was not material to our consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge. Refer to Note 12, “Goodwill and Intangible Assets, Net,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for further information.

Restructuring Initiatives and Long-Lived Asset Impairments

During the first quarter of 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily led us to rationalize our office space in North America. Where we determine to cease using office space, we plan to exit the portion of the facility no longer used. We also may retain and repurpose certain other office locations. We expect to incur total charges of approximately $180 million to $280 million for this initiative, consisting primarily of exit related costs, accelerated depreciation and amortization of long-lived assets, and asset impairments. This initiative is expected to be completed in 2022.

During the first quarter of 2021, we committed to an initiative within the U.K., which is included in our International segment, to further drive transformational changes in technologies and business processes, operational efficiencies, and cost savings. The initiative includes reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. We expect to incur total charges of approximately $85 million to $90 million, of which $57 million of charges were recorded to date. The initiative is expected to be substantially complete in 2022 and estimated remaining charges primarily consist of accelerated amortization of long-lived assets, facility and other exit costs, and employee-related costs.

In the fourth quarter of 2019, we committed to certain programs to continue our operating model and cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through an expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of business operations, related headcount reductions, the further closures of retail pharmacy stores in Europe, and closures of other facilities. Total charges of $297 million were recorded to date. This initiative was substantially complete in 2021 and remaining costs we expect to record under this initiative are not material.

We also committed to certain actions in connection with the previously announced relocation of our corporate headquarters from San Francisco, California to Irving, Texas, which became effective April 1, 2019. Total charges of $105 million were recorded to date. The relocation was substantially complete in January 2021 and remaining costs we expect to record under this initiative, primarily relating to lease costs, are not material.

In the second quarter of 2018, we committed to a restructuring plan, which primarily consisted of the closures of underperforming retail pharmacy stores in the U.K., and a reduction in workforce. The plan was substantially complete in 2020.

On April 25, 2018, we announced a strategic growth initiative intended to drive long-term incremental profit growth and to increase operational efficiency. The initiative consisted of multiple growth priorities and plans to optimize our operating models and cost structures primarily through centralization, cost management, and outsourcing of certain administrative functions. As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation, and store closures. This set of initiatives was substantially complete by the end of 2020.

Restructuring, impairment, and related charges for the years ended March 31, 2021, 2020, and 2019 also includes long-lived asset impairment charges of $115 million, $112 million, and $245 million, respectively, primarily related to our retail pharmacy businesses in Canada and Europe within our International segment. In addition, certain charges related to restructuring initiatives are included under the caption “Cost of sales” in our Consolidated Statements of Operations and were not material for the years ended March 31, 2021, 2020, and 2019.

Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Other Income, Net

Other income, net for the year ended March 31, 2021 increased compared to the prior year primarily due to net gains recognized from our equity investments of $133 million. This primarily reflects mark-to-market gains on our investments in certain U.S. growth stage companies in the healthcare industry and realized gains on the exit of some of these investments as further described in Financial Note 17, “Fair Value Measurements,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. In future periods, fair value adjustments recognized in our operating results for these types of investments may be adversely impacted by market volatility. Other income, net also increased year over year due to pension settlement charges of $122 million recognized in 2020 related to our previously approved termination of the frozen U.S. defined benefit pension plan. In connection with the pension plan termination, we purchased annuity contracts from an insurer that will pay and administer the future pension benefits of the remaining participants.

Other income, net, for the year ended March 31, 2020 decreased compared to the prior year primarily due to the 2020 pension settlement charges described above and higher gains recognized from the sale of investments in 2019, partially offset by higher net settlement gains in 2020 from our derivative contracts.

Equity Earnings and Charges from Investment in Change Healthcare Joint Venture

Until the separation of our investment in Change Healthcare JV on March 10, 2020, we accounted for this investment using the equity method of accounting. Excluding the impairment and transaction-related items described below, our proportionate share of loss from our investment in Change Healthcare JV for the years ended March 31, 2020 and 2019 was $119 million and $194 million, respectively, which primarily includes transaction and integration expenses incurred by the joint venture and basis differences between the joint venture and McKesson including amortization of fair value adjustments. During the first quarter of 2020 and for the year ended March 31, 2019, we owned approximately 70% of this joint venture.

On June 27, 2019, common stock and certain other securities of Change began trading on the NASDAQ (“IPO”). On July 1, 2019, upon the completion of its IPO, Change contributed net cash proceeds it received from its offering of common stock to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities were also used by Change to acquire certain securities of Change Healthcare JV. As a result, McKesson’s equity interest in Change Healthcare JV was reduced from 70% to approximately 58.5%, which was used to recognize our proportionate share in net loss from Change Healthcare JV, commencing in the second quarter of 2020. As a result of the ownership dilution to 58.5% from 70%, we recognized a dilution loss of approximately $246 million in the second quarter of 2020. Additionally, our proportionate share of income or loss from this investment was subsequently reduced as immaterial settlements of stock option exercises occurred after the IPO and further diluted our ownership.

In the second quarter of 2020, we recorded an other-than-temporary-impairment (“OTTI”) charge of $1.2 billion to our investment in Change Healthcare JV, representing the difference between the carrying value of our investment and the fair value derived from the corresponding closing price of Change’s common stock at September 30, 2019. This charge was included within “Equity earnings and charges from investment in Change Healthcare Joint Venture” in our Consolidated Statements of Operations for the year ended March 31, 2020.

On March 10, 2020, we completed the previously announced separation of our interest in Change Healthcare JV, which eliminated our investment in the joint venture. The separation was effected through the split-off of PF2 SpinCo, Inc. (“SpinCo”), a wholly owned subsidiary of the Company that held all of our interest in Change Healthcare JV, to certain of our stockholders through an exchange offer (“Split-off”), followed by the merger of SpinCo with and into Change, with Change surviving the merger (“Merger”).

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

In connection with the exchange offer, on March 9, 2020, we distributed all 176.0 million outstanding shares of common stock of SpinCo to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson common stock. Following consummation of the exchange offer, on March 10, 2020, the Merger was consummated, with each share of SpinCo common stock converted into one share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. The Split-off and Merger are intended to be generally tax-free transactions to McKesson and its shareholders for U.S. federal income tax purposes. Following the Split-off, we do not beneficially own any of Change’s outstanding securities. In connection with this transaction, we recognized a net gain for financial reporting purposes of $414 million during the fourth quarter of 2020, which was largely driven by the reversal of a related deferred tax liability. Under the agreement with Change Healthcare JV, McKesson, Change, and certain subsidiaries of the Change Healthcare JV, there may be changes in future periods to the amount reversed. Any such change is not expected to be material.

After the separation, Change Healthcare JV is required under the TRA to pay McKesson 85% of the net cash tax savings realized, or deemed to be realized, resulting from depreciation or amortization allocated to Change by McKesson. The receipt of any payments under the TRA is dependent upon Change benefiting from this depreciation or amortization in future tax return filings, which creates uncertainty over the amount, timing and probability of the gain recognized. As such, we accounted for the TRA as a gain contingency, with no receivable recognized as of March 31, 2021 nor 2020.

Interest Expense

Interest expense decreased in 2021 compared to the prior year primarily due to the repayment of $1.0 billion of long-term debt in the third quarter of 2021 and a decrease in the issuance of commercial paper. Interest expense decreased in 2020 compared to the prior year primarily due to a decrease in the issuance of commercial paper, partially offset by a decrease in interest income from our derivative contracts. Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.

Income Tax (Benefit) Expense

We recorded income tax (benefit) expense of ($695 million), $18 million, and $356 million for the years ended March 31, 2021, 2020, and 2019, respectively. Our reported income tax (benefit) expense rates were (13.8%), 1.6%, and 58.4% in 2021, 2020, and 2019, respectively.

Our reported income tax rate for 2021 was impacted by the charge for opioid-related claims of $8.1 billion ($6.8 billion after-tax).

Our reported income tax expense rate for 2020 was favorably impacted by a net gain on the Change Healthcare JV divestiture of $414 million (pre-tax and after-tax), which was intended to generally be a tax-free split-off for U.S. federal income tax purposes, and unfavorably impacted by charges of $275 million (pre-tax and after-tax) to remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of the majority of our German pharmaceutical wholesale business to create a joint venture with WBA. Refer to Financial Note 2,“Investment in Change Healthcare Joint Venture” and Note 3,“Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K for more information.

Our reported income tax expense rate for 2019 was unfavorably impacted by charges of $1.8 billion (pre-tax and after-tax) to impair the carrying value of goodwill of our European RP and European PD reporting units within the International segment, given that these charges are generally not deductible for tax purposes. Refer to Financial Note 12, “Goodwill and Intangible Assets, Net,” to the accompanying consolidated financial statements included 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.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Income (Loss) from Discontinued Operations, Net of Tax

Income (loss) from discontinued operations, net of tax, was $(1) million, $(6) million, and $1 million for the years ended March 31, 2021, 2020, and 2019, respectively.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests primarily represents ClarusONE, Vantage Oncology Holdings, LLC, and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe AG (“McKesson Europe”) share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”). Noncontrolling interests with redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of McKesson Corporation stockholders’ equity (deficit) on our consolidated balance sheet. Refer to Financial Note 9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional information.

Net Income (Loss) Attributable to McKesson Corporation

Net income (loss) attributable to McKesson Corporation was $(4.5) billion, $900 million, and $34 million for the years ended March 31, 2021, 2020, and 2019, respectively. Diluted earnings (loss) per common share attributable to McKesson Corporation was $(28.26), $4.95, and $0.17 for the years ended March 31, 2021, 2020, and 2019, respectively. Net loss per diluted share for the year ended March 31, 2021 is calculated by excluding dilutive securities from the denominator due to their antidilutive effects. Additionally, our 2021, 2020, and 2019 diluted earnings (loss) per share reflect the cumulative effects of share repurchases.

Weighted-Average Diluted Common Shares Outstanding

Diluted earnings (loss) per common share was calculated based on a weighted-average number of shares outstanding of 160.6 million, 181.6 million, and 197.3 million for the years ended March 31, 2021, 2020, and 2019, respectively. Weighted-average diluted common shares outstanding is impacted by the exercise and settlement of share-based awards and the cumulative effect of share repurchases, including the impact of shares exchanged as part of the split-off from our investment in Change Healthcare JV, as discussed above.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Overview of Segment Results:

Segment Revenues:


	Years Ended March 31,						Change
(Dollars in millions)	2021		2020		2019		2021		2020
Segment revenues
U.S. Pharmaceutical	$	189,274	$	181,700	$	166,189	4	%	9	%
International	35,965		38,341		38,023		(6)		1
Medical-Surgical Solutions	10,099		8,305		7,618		22		9
Prescription Technology Solutions	2,890		2,705		2,489		7		9
Total revenues	$	238,228	$	231,051	$	214,319	3	%	8	%

U.S. Pharmaceutical

2021 vs. 2020

U.S. Pharmaceutical revenues for the year ended March 31, 2021 increased 4% compared to the prior year primarily due to market growth, including branded pharmaceutical price increases, growth in specialty pharmaceuticals, and higher volumes from retail national account customers, partially offset by branded to generic drug conversions. Revenues for this segment were unfavorably impacted by fluctuations in demand for pharmaceuticals in retail pharmacies and institutional healthcare providers due to COVID-19 largely during the onset of the pandemic in late March 2020 and during our first quarter of 2021 combined with the loss of certain customers.

2020 vs. 2019

U.S. Pharmaceutical revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily due to market growth, including branded pharmaceutical price increases, growth in specialty pharmaceuticals, higher volumes from retail national account customers, partially offset by branded to generic drug conversions.

International

2021 vs. 2020

International revenues for the year ended March 31, 2021 decreased 6% compared to the prior year. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 9% primarily due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA and to a lesser extent, the exit of unprofitable customers in our Canadian business. Revenues for this segment were also unfavorably impacted by lower volumes from the adverse impacts from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses within Europe.

2020 vs. 2019

International revenues for the year ended March 31, 2020 increased 1% compared to the prior year. Excluding the unfavorable effects of foreign currency exchange fluctuations, revenues for this segment increased 4% primarily due to market growth in our European pharmaceutical distribution and retail pharmacy businesses.

Medical-Surgical Solutions

2021 vs. 2020

Medical-Surgical Solutions revenues for the year ended March 31, 2021 increased 22% compared to the prior year largely due to sales of COVID-19 tests and PPE.

2020 vs. 2019

Medical-Surgical Solutions revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily due to market growth in our primary care business.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Prescription Technology Solutions

2021 vs. 2020

RxTS revenues for the year ended March 31, 2021 increased 7% compared to the prior year driven by increased volume with new and existing customers primarily in our CoverMyMeds business.

2020 vs. 2019

RxTS revenues for the year ended March 31, 2020 increased 9% compared to the prior year primarily driven by increased volume with new and existing customers.

Segment Operating Profit (Loss) and Corporate Expenses, Net:


	Years Ended March 31,									Change
(Dollars in millions)	2021			2020			2019			2021		2020
Segment operating profit (loss) (1)
U.S. Pharmaceutical (2)	$	2,763		$	2,745		$	2,710		1	%	1	%
International (3)	(37)			(161)			(1,903)			(77)		(92)
Medical-Surgical Solutions (4)	707			499			455			42		10
Prescription Technology Solutions (5)	395			396			355			-		12
Other (6)	—			(1,113)			(104)			(100)		970
Subtotal	3,828			2,366			1,513			62		56
Corporate expenses, net (7)	(8,645)			(973)			(639)			788		52
Interest expense	(217)			(249)			(264)			(13)		(6)
Income (loss) from continuing operations before income taxes	$	(5,034)		$	1,144		$	610		(540)	%	88	%

Segment operating profit (loss) margin
U.S. Pharmaceutical	1.46		%	1.51		%	1.63		%	(5)	bp	(12)	bp
International	(0.10)			(0.42)			(5.00)			32		458
Medical-Surgical Solutions	7.00			6.01			5.97			99		4
Prescription Technology Solutions	13.67			14.64			14.26			(97)		38

bp - basis points

(1)Segment operating profit (loss) includes gross profit, net of operating expenses, as well as other income (expense), net, for our reportable segments. For retrospective periods presented, operating loss for Other reflects equity earnings and charges from our equity method investment in Change Healthcare JV, which we split-off in the fourth quarter of 2020.

(2)Operating profit for our U.S. Pharmaceutical segment includes a charge of $50 million for the year ended March 31, 2021 related to our estimated liability under the OSA.

(3)Operating loss for our International segment for the years ended March 31, 2021 and 2020 includes charges of $58 million and $275 million, respectively, to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture with WBA. This segment’s operating loss for the years ended March 31, 2021 and 2019 includes goodwill impairment charges of $69 million and $1.8 billion, respectively, as well as long-lived asset impairment charges for the years ended March 31, 2021, 2020, and 2019 of $115 million, $112 million, and $245 million, respectively, primarily related to our retail pharmacy businesses in Canada and Europe.

(4)Operating profit for our Medical-Surgical Solutions segment for the year ended March 31, 2021 includes charges totaling $136 million on certain PPE and other related products due to inventory impairments and excess inventory.

(5)Operating profit for our RxTS segment for the year ended March 31, 2019 includes a gain of $56 million from the divestiture of an equity investment.

(6)Operating loss for Other for the year ended March 31, 2020 includes an OTTI charge of $1.2 billion and a dilution loss of $246 million related to our investment in Change Healthcare JV, partially offset by a net gain of $414 million related to the completed separation of our interest in Change Healthcare JV during the fourth quarter of 2020. Operating loss for the year ended March 31, 2019 includes a credit of $90 million for the derecognition of a liability related to the TRA payable to the shareholders of Change.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

(7)Corporate expenses, net for the year ended March 31, 2021 includes a charge of $8.1 billion related to our estimated liability for opioid-related claims, net gains of $133 million from our equity investments, and a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program. Corporate expenses, net for the year ended March 31, 2020 includes pension settlement charges of $122 million and a settlement charge of $82 million related to opioid claims.

U.S. Pharmaceutical

2021 vs. 2020

Operating profit increased for the year ended March 31, 2021 compared to the prior year primarily due to an increase in net cash proceeds received of $159 million in 2021 compared to 2020 representing our share of antitrust legal settlements, growth in specialty pharmaceuticals, and the contribution from our vaccine distribution programs. This was partially offset by a decrease in LIFO credits of $214 million, a charge of $50 million recorded in 2021 related to our estimated liability under the OSA, net impacts from COVID-19, including a less severe cough, cold, and flu season, as well as increased costs for strategic growth initiatives.

2020 vs. 2019

Operating profit increased for the year ended March 31, 2020 compared to the prior year primarily due to market growth in our specialty business. Operating profit and operating profit margin were favorably impacted by a charge of $61 million related to a customer bankruptcy in 2019 and an increase in LIFO credits of $42 million. Operating profit and operating profit margin were unfavorably impacted by customer mix and a decrease in net cash proceeds received of $180 million representing our share of antitrust legal settlements.

International

2021 vs. 2020

Operating loss and operating loss margin improved for the year ended March 31, 2021 compared to the prior year primarily due to a decrease in the charges recorded to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture with WBA, of which $58 million and $275 million was reflected for the years ended March 31, 2021 and 2020, respectively. This was partially offset by a goodwill impairment charge of $69 million recorded in the second quarter of 2021 related to our European retail pharmacy business. The impacts from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses within Europe also caused unfavorability in our segment results year over year.

2020 vs. 2019

Operating loss and operating loss margin improved for the year ended March 31, 2020 compared to the prior year primarily due to goodwill impairment charges of $1.8 billion in 2019 and a decrease in long-lived asset impairment charges of $112 million in 2020 compared to $245 million in 2019. This was partially offset by the fair value remeasurement charges in 2020 described above and a gain from an escrow settlement of $97 million in 2019 related to our 2017 acquisition of Rexall Health.

Medical-Surgical Solutions

2021 vs. 2020

Operating profit and operating profit margin increased for the year ended March 31, 2021 compared to prior year primarily due to COVID-19, including demand for COVID-19 tests and PPE, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. This was partially offset by inventory charges on certain PPE and other related products, unfavorability in our primary care business due to customer closures largely during the first quarter of 2021, and a less severe cough, cold, and flu season. Additionally, operating profit was favorable year over year due to lower operating expenses, including a decrease in our provision for bad debts.

2020 vs. 2019

Operating profit and operating profit margin increased for the year ended March 31, 2020 compared to prior year primarily due to market growth in our primary care business and lower restructuring charges, partially offset by the remeasurement of assets and liabilities to fair value related to a divestiture that was completed in 2020 and higher operating expenses, including an increase in our provision for bad debts.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Prescription Technology Solutions

2021 vs. 2020

Operating profit remained relatively flat for the year ended March 31, 2021 compared to prior year primarily due to higher operating expenses to support business growth, offset by increased volume with new and existing customers. Operating profit margin decreased for the year ended March 31, 2021 compared to prior year primarily due to higher operating expenses.

2020 vs. 2019

Operating profit and operating profit margin increased for the year ended March 31, 2020 compared to prior year primarily due to increased volumes with new and existing customers, integration costs incurred in 2019 for our acquisition of RxCrossroads that closed during the fourth quarter of 2018, partially offset by a gain of $56 million from the divestiture of an equity investment in 2019.

Other

Operating loss for Other for the year ended March 31, 2020 includes an OTTI charge of $1.2 billion and a dilution loss of $246 million related to our investment in Change Healthcare JV, partially offset by a net gain of $414 million related to the completed separation of our interest in Change Healthcare JV during the fourth quarter of 2020. Operating loss for Other for the year ended March 31, 2019 includes a credit of $90 million for the derecognition of a liability related to the TRA payable to the shareholders of Change. Operating loss for Other also includes our proportionate share of loss from Change Healthcare JV of $119 million and $194 million for the years ended March 31, 2020 and 2019, respectively.

Corporate

2021 vs. 2020

Corporate expenses, net increased for the year ended March 31, 2021 compared to the prior year due to a charge of $8.1 billion related to our estimated liability for opioid-related claims.

Corporate expenses, net for 2021 also includes net gains recognized from our equity investments of $133 million and a net gain of $131 million recognized in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program. Corporate expenses, net, for 2020 includes pension settlement charges of $122 million, an opioid claim settlement charge of $82 million, and net settlement gains of $26 million recognized from our derivative contracts.

2020 vs. 2019

Corporate expenses, net, increased for the year ended March 31, 2020 compared to the prior year primarily due to the pension settlement charges and opioid claim settlement charge mentioned above, as well as higher costs for technology initiatives, partially offset by net settlement gains recognized in 2020 from our derivative contracts. Corporate expenses, net, for 2020 also included charitable contribution expenses of approximately $20 million primarily for the McKesson Foundation.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Foreign Operations

Our foreign operations represented approximately 15%, 17%, and 18% of our consolidated revenues in 2021, 2020, and 2019, respectively. 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 exchange fluctuations,” which refers to the effect of changes in foreign currency exchange rates used to convert the local currency results of our operations in 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 exchange rate fluctuations. In computing the foreign currency exchange fluctuations, we translate our current year results of our operations in foreign countries recorded in local currencies into U.S dollars by applying their respective average foreign currency 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 reported in U.S. dollars. Additional information regarding our foreign operations is included in Financial Note 22, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

Business Combinations

Refer to Financial Note 5, “Business Acquisitions and Divestitures,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Fiscal 2022 Outlook

Information regarding the Company’s fiscal 2022 outlook is contained in our Form 8-K dated May 6, 2021. That Form 8-K should be read in conjunction with the forward-looking statements in the "Trends and Uncertainties" section of this Financial Review, as well as the cautionary statements in Item 1, "Business - Forward-Looking Statements," and Item 1A, "Risk Factors," in Part I of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated financial statements for these amounts.

The Company considers historical experience, the current economic environment, customer credit ratings or bankruptcies, and reasonable and supportable forecasts to develop its allowance for doubtful accounts. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Sales to the Company’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 51% of total consolidated revenues in 2021 and comprised approximately 32% of total trade accounts receivable at March 31, 2021. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 21% of our total consolidated revenues in 2021 and comprised approximately 19% of total trade accounts receivable at March 31, 2021. 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 2021 are appropriate and consistent in the context of historical methodologies employed, as well as assessment of trends currently available.

At March 31, 2021, trade and notes receivables were $17.5 billion prior to allowances of $211 million. In 2021, 2020 and, 2019, our provision for bad debts was $4 million, $91 million, and $132 million, respectively. At March 31, 2021 and 2020, the allowance as a percentage of trade and notes receivables was 1.2% and 1.4%, respectively. An increase or decrease of a hypothetical 0.1% in the 2021 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $18 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst-case scenarios. Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on Form 10-K.

Inventories: Inventories consist of merchandise held for resale. We report inventories at the lower of cost or net realizable value, except for inventories determined using the LIFO method which are valued at the lower of LIFO cost or market. LIFO method presumes that the most recent inventory purchases are the first items sold and the inventory cost under LIFO approximates market. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign and certain domestic locations is based on the first-in, first-out (“FIFO”) method and weighted-average purchase prices. Rebates, cash discounts and other incentives received from vendors relating to the purchase or distribution of inventory are considered product discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold.

At March 31, 2021 and 2020, total inventories, net were $19.2 billion and $16.7 billion, respectively, in our Consolidated Balance Sheets. The LIFO method was used to value approximately 58% and 60% of our inventories at March 31, 2021 and 2020, respectively. If we had used the moving average method of inventory valuation, inventories would have been approximately $406 million and $444 million higher than the amounts reported at March 31, 2021 and 2020, respectively. These amounts are equivalent to our LIFO reserves. The lower LIFO credits in 2021 compared to 2020 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. We recognized LIFO credits of $38 million, $252 million, and $210 million, respectively, in 2021, 2020, and 2019 in our Consolidated Statements of Operations. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Excluding LIFO reserves, our inventory reserves as of March 31, 2021 and 2020 were $263 million and $96 million, respectively. The increase was primarily due to 2021 charges totaling $136 million on certain PPE and other related products due to inventory impairments and excess inventory within our Medical-Surgical Solutions segment.

We believe that the 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, 2021 and 2020, inventories at LIFO did not exceed market.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

In determining whether an inventory valuation allowance is required, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete as a result of these reviews. These factors could make our estimates of inventory valuation differ from actual results.

Business Combinations: The Company accounts for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair values as of the date that the Company obtains control of the acquired business. Any purchase consideration in excess of the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.

Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use a method that is a form or variation of the income approach, whereby a forecast of future cash flows attributable to the asset are discounted to present value using a risk-adjusted discount rate. Some of the more significant estimates and assumptions inherent in the income approach include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s expected useful life. Refer to Financial Note 5, “Business Acquisitions and Divestitures,” to the consolidated financial statements included in this Annual Report on Form 10-K for additional information regarding our acquisitions.

Goodwill and Long-Lived Assets: As a result of acquiring businesses, we have $9.5 billion and $9.4 billion of goodwill at March 31, 2021 and 2020, respectively, and $2.9 billion and $3.2 billion of intangible assets, net at March 31, 2021 and 2020, respectively. We perform an impairment test on goodwill balances annually in the third quarter and 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.

We apply the goodwill impairment test by comparing the estimated fair value of a reporting unit to its carrying value and recording an impairment charge equal to the amount of excess carrying value above the estimated fair value, if any, but not to exceed the amount of goodwill allocated to the reporting unit.

To estimate the fair value of our reporting units, we generally use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow (“DCF”) model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the fair values.

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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 testing date and are based on expectations and assumptions that have been deemed reasonable by management. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge. Under the market approach, significant estimates and assumptions also include the selection of appropriate guideline companies and the determination of appropriate valuation multiples to apply to the reporting unit. Under the income approach, significant estimates and assumptions also include the determination of discount rates. The discount rates represent the weighted-average cost of capital measuring the reporting unit’s cost of debt and equity financing, which are weighted by the percentage of debt and percentage of equity in a company’s target capital structure. Included in the estimate of the weighted-average cost of capital is the assumption of an unsystematic risk premium to address incremental uncertainty related to the reporting units’ future cash flow projections. An increase in the unsystematic risk premium increases the discount rate.

Based on the 2019 annual goodwill impairment tests, the estimated fair values of our reporting units, excluding the Europe Retail Pharmacy and Europe Pharmaceutical Distribution reporting units in our International segment, exceeded their carrying values. The impairment testing performed in 2020 did not indicate any material impairment of goodwill. The segment change in the second quarter of 2021 prompted changes in multiple reporting units across the Company. As a result, goodwill included in impacted reporting units was reallocated using a relative fair value approach and assessed for impairment both before and after the reallocation. We recorded a goodwill impairment charge of $69 million in 2021 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of the Europe Retail Pharmacy reporting unit within the International segment. At March 31, 2021, the balance of goodwill for the reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of our reporting units in Canada.

The estimated fair values of our McKesson Canada reporting unit in our International segment and our RxCrossroads reporting unit in our RxTS segment exceeded the carrying values of these reporting units by 11% and 14%, respectively, in 2021. The goodwill balance of these reporting units was $1.5 billion for McKesson Canada and $312 million for RxCrossroads at March 31, 2021 or approximately 19% of the consolidated goodwill balance. Generally, a decline in estimated future cash flows in excess of 16% for McKesson Canada and 17% for RxCrossroads or an increase in the discount rate in excess of approximately 1.5% could result in an indication of goodwill impairment for these reporting units in future reporting periods. 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. Refer to Financial Note 12, “Goodwill and Intangible Assets, Net,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

Currently, all of our intangible and other long-lived assets are amortized or depreciated based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to 38 years. We review intangible assets for impairment at an asset group level whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability of intangible assets is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its eventual disposition. Measurement of any impairment loss is based on the excess of the carrying value of the asset group over its fair value. Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.

Our ongoing consideration of all the factors described previously could result in further impairment charges in the future, which could adversely affect our net income. Refer to Financial Note 4, “Restructuring, Impairment, and Related Charges” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Valuation of Equity Method Investments: We evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the decline in value is deemed to be other than temporary, an impairment is recognized to the extent that the fair value is less than the carrying value of the investment. We consider various factors in determining whether a loss in value of an investment is other than temporary including: the length of time and the extent to which the fair value has been below cost, the financial condition of the investees, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value is other than temporary, expectations about the business operations of investees, as well as industry, financial, and market factors. Any significant changes in assumptions or judgments in assessing impairments could result in an impairment charge.

Restructuring Charges: We have certain restructuring reserves which require significant estimates related to the timing and amount of future employee severance and other exit-related costs to be incurred when the restructuring actions take place. We generally recognize employee severance costs when payments are probable and amounts are estimable. Costs related to contracts without future benefit or contract termination are recognized at the earlier of the contract termination or the cease-use dates. Other exit-related costs are recognized as incurred. In connection with these restructuring actions, we also assess the recoverability of long-lived assets used in the business, and as a result, we may recognize accelerated depreciation and amortization reflecting shortened useful lives of the underlying assets.

Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax provision and in evaluating income tax uncertainties and include those used to conclude on the tax-free nature of the separation of the Change Healthcare JV and the unrecognized tax position related to opioid-related litigation and claims, which remains unfinalized, and which may differ from the actual amounts of tax benefit recognized. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years, and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, our tax expense and cash flows could be materially impacted.

In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex new tax regulations across multiple global jurisdictions where we conduct our operations.

We recognize liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax expense may be recognized.

Loss Contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as incurred when the legal services are provided.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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 future negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. In conjunction with the preparation of the accompanying financial statements, we considered matters related to ongoing controlled substances claims to which we are a party. As a result of ongoing, advanced discussions with state attorneys general and plaintiffs’ representatives regarding a framework to resolve the claims of governmental entities, and our assessment of certain other opioid-related claims, we have reached a stage at which a broad settlement of opioid claims by governmental entities is probable and recorded a charge of $8.1 billion for the year ended March 31, 2021 within “Claims and litigation charges, net” in our Consolidated Statement of Operations in this report. 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. While we are not able to predict the outcome or reasonably estimate a range of possible losses in these matters, an adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our results of operations, consolidated financial position, cash flows or liquidity. Refer to Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10-K for additional information.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities and commercial paper program, will be sufficient to fund our short-term and long-term capital expenditures, working capital, and other cash requirements. As described within the “Trends and Uncertainties” section above, the COVID-19 pandemic continues to develop rapidly. We continue to monitor its impact on demand within parts of our business, as well as trends potentially impacting the timing or ability for some of our customers to pay amounts owed to us. We remain well-capitalized with access to liquidity from our $4.0 billion revolving credit facility. Additionally, long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. We have seen continued improvement in conditions in the debt markets and commercial paper markets as the Federal Reserve has taken steps to stabilize the markets. At March 31, 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.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

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


	Years Ended March 31,						Change
(Dollars in millions)	2021		2020		2019		2021		2020
Net cash provided by (used in):
Operating activities	$	4,542	$	4,374	$	4,036	$	168	$	338
Investing activities	(415)		(579)		(1,381)		164		802
Financing activities	(1,693)		(2,734)		(2,227)		1,041		(507)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(61)		(19)		(119)		(42)		100
Net change in cash, cash equivalents, and restricted cash	$	2,373	$	1,042	$	309	$	1,331	$	733

Operating Activities

Net cash provided from operating activities was $4.5 billion, $4.4 billion, and $4.0 billion for the years ended March 31, 2021, 2020, and 2019, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for the year ended March 31, 2021 were affected by net income adjusted for non-cash items, including the pre-tax $8.1 billion (after-tax $6.8 billion) non-cash charge related to our estimated liability for opioid-related claims, an increase in inventory of $2.3 billion and an increase in drafts and accounts payable of $1.3 billion driven by higher inventory stock levels to meet increased volume demand as part of our inventory management, as well as a decrease in receivables of $1.1 billion driven by timing, higher sales recognized at the end of March 2020, and higher collections in our fourth quarter of 2021. Operating activities for the year ended March 31, 2020 were affected by increases in drafts and accounts payable of $4.0 billion primarily associated with timing, replenishing inventory stocks, and effective working capital management, and an increase in receivables of $2.5 billion primarily due to revenue growth. Operating activities for the year ended March 31, 2019 were affected by increases in drafts and accounts payable of $2.0 billion primarily due to increased inventory purchases and timing of payments, and an increase in receivables of $1.0 billion due to the overall increase in sales volume and timing of receipts.

Other non-cash items within operating activities for the year ended March 31, 2021 primarily includes stock-based compensation of $151 million and fair value remeasurement charges of $58 million related to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. Other non-cash items for the year ended March 31, 2020 primarily includes fair value remeasurement charges of $275 million described above, pension settlement charges of $122 million, and stock-based compensation of $119 million. Additionally, we made a cash payment of $114 million from the executive benefit retirement plan in 2020. Other non-cash items for the year ended March 31, 2019 primarily includes stock-based compensation of $95 million.

Investing Activities

Net cash used in investing activities was $415 million, $579 million, and $1.4 billion for the years ended March 31, 2021, 2020, and 2019, respectively. Investing activities for the year ended March 31, 2021 include $451 million and $190 million in capital expenditures for property, plant, and equipment and capitalized software, respectively. Investing activities for the year ended March 31, 2021 also includes net cash proceeds of $400 million from sales of businesses and investments, including $286 million in exchange for the contribution of our German pharmaceutical wholesale business to a joint venture with WBA.

Investing activities for the year ended March 31, 2020 include $362 million and $144 million in capital expenditures for property, plant, and equipment and capitalized software, respectively, and $133 million of net cash payments for acquisitions.

Investing activities for the year ended March 31, 2019 include $905 million of net cash payments for acquisitions, including $784 million for our acquisition of Medical Specialties Distributors LLC, $426 million and $131 million in capital expenditures for property, plant, and equipment and capitalized software, respectively, and $101 million of net cash proceeds from sales of businesses and investments.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Financing Activities

Net cash used in financing activities was $1.7 billion, $2.7 billion, and $2.2 billion for the years ended March 31, 2021, 2020, and 2019, respectively. Financing activities for the year ended March 31, 2021 include cash receipts of $6.3 billion and payments of $6.3 billion from short-term borrowings, primarily commercial paper, along with the issuance of the 2025 Notes in a principal amount of $500 million, the retirement of our $700 million total principal amount of notes due on November 30, 2020 at a fixed interest rate of 3.65% upon maturity, and the redemption of our 4.75% $323 million total principal of notes due on March 1, 2021 prior to maturity. The notes were redeemed using cash on hand and proceeds from the 2025 Notes. Financing activities for the year ended March 31, 2021 also include $770 million of cash paid for stock repurchases and $276 million of dividends paid. Cash used for other financing activities generally includes payments to noncontrolling interests and activity from our finance leases. Other financing activities for the year ended March 31, 2021 also include restricted cash net inflow related to funds temporarily held on behalf of unaffiliated medical practice groups and a payment of $49 million to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders.

Financing activities for the year ended March 31, 2020 include cash receipts of $21.4 billion and payments of $21.4 billion from short-term borrowings, primarily commercial paper. Financing activities for the year ended March 31, 2020 also include $2.0 billion of cash paid for stock repurchases, repayments of long-term debt of $298 million, and $294 million of dividends paid.

Financing activities for the year ended March 31, 2019 include cash receipts of $37.3 billion and payments of $37.3 billion from short-term borrowings, primarily commercial paper. We received cash from long-term debt issuances of $1.1 billion and made repayments on long-term debt of $1.1 billion in 2019. Financing activities for the year ended March 31, 2019 also include $1.6 billion of cash paid for stock repurchases and $292 million of dividends paid.

Share Repurchase Plans

The Board has authorized the repurchase of McKesson’s common stock from time to time in open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions.

Information regarding the share repurchase activity over the last three years is as follows:


	Share Repurchases (1)
(In millions, except price per share data)		Total Number of Shares Purchased (2)	Average Price Paid Per Share		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
Balance, March 31, 2018					$	1,096
Shares repurchase plans authorized in May 2018					4,000
Shares repurchased - Open market		10.4	$	132.14	(1,377)
Shares repurchased - ASR		2.1	$	117.98	(250)
Balance, March 31, 2019					3,469
Shares repurchased - Open market		9.2	$	144.68	(1,334)
Shares repurchased - ASR		4.7	$	127.68	(600)
Balance, March 31, 2020					1,535
Shares repurchase plans authorized in January 2021					2,000
Shares repurchased - Open market (3)		4.7	$	160.33	(750)

Balance, March 31, 2021					$	2,785

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

(1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations. It also excludes shares related to the Split-off of the Change Healthcare JV as described below.

(2)The number of shares purchased reflects rounding adjustments.

(3)$8 million was accrued within “Other accrued liabilities” on our Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April.

During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third party financial institutions.

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, respectively.

On March 9, 2020, we completed the Split-off of our interest in the Change Healthcare JV. In connection with the Split-off, we distributed all 176.0 million outstanding shares of SpinCo common stock, which held all of the Company’s interests in the Change Healthcare JV, to participating holders of the Company’s common stock in exchange for 15.4 million shares of McKesson stock, which are now held as treasury stock on our consolidated balance sheet. Following consummation of the exchange offer, on March 10, 2020, SpinCo merged with and into Change and each share of SpinCo common stock was converted into one share of Change common stock, par value $0.001 per share, with cash being paid in lieu of fractional shares of Change common stock. See Note 2, “Investment in Change Healthcare Joint Venture” to the accompanying consolidated financial statements included in this Annual Report on Form 10-K for more information.

The total authorization outstanding for repurchase of the Company’s common stock was $2.8 billion at March 31, 2021.

We believe that our future operating cash flow, financial assets, and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that an increase in volatility or disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing. As described within the “Trends and Uncertainties” section above, the COVID-19 pandemic continues to develop rapidly. We continue to monitor its impact on demand within parts of our business, as well as trends potentially impacting the timing or ability for some of our customers to pay amounts owed to us.

Selected Measures of Liquidity and Capital Resources:


	March 31,
(Dollars in millions)	2021			2020			2019
Cash, cash equivalents, and restricted cash	$	6,396		$	4,023		$	2,981
Working capital	1,279			(402)			839
Days sales outstanding for: (1)
Customer receivables	26			26			26
Inventories	31			27			31
Drafts and accounts payable	63			61			62
Debt to capital ratio (2)	83.1		%	52.1		%	43.3		%
Return on McKesson stockholders’ equity (deficit) (3)	(142.5)		%	13.3		%	0.4		%

(1)Based on year-end balances and sales or cost of sales for the last 90 days of the year.

(2)This ratio describes the relationship and changes within our capital resources, and is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss.

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

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA-rated U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily denominated in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling, and Canadian dollars. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.

Our cash and cash equivalents balance as of March 31, 2021 and 2020 included approximately $2.3 billion and $1.7 billion of cash held by our subsidiaries outside of the U.S., respectively. 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 U.S. is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes.

Working capital primarily includes cash and cash equivalents, receivables, and inventories, net of drafts and accounts payable, short-term borrowings, current portion of long-term debt, and other current liabilities. Our businesses require substantial investments in working capital that are susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements. The COVID-19 pandemic has potential to increase the variations in our working capital, which we continue to monitor closely.

Consolidated working capital improved at March 31, 2021 compared to the prior year primarily due to an increase in cash and cash equivalents and inventory, partially offset by an increase in drafts and accounts payable and a decrease in receivables. Consolidated working capital decreased at March 31, 2020 compared to the prior year primarily due to an increase in drafts and accounts payable and the current portion of long-term debt for term notes due in 2021, partially offset by an increase in receivables and cash and cash equivalents.

Our debt to capital ratio increased for the year ended March 31, 2021 primarily due to a decrease in stockholders’ equity driven by net loss for the year and share repurchases. Our unfavorable return on McKesson’s stockholder’s equity (deficit) as of March 31, 2021 was also driven by net loss for the year. Net loss for the year ended March 31, 2021 includes an after-tax non-cash charge of $6.8 billion related to our estimated liability for opioid-related claims, as discussed in “Trends and Uncertainties” of this Financial Review and Financial Note 19, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements included in this Annual Report on Form 10‑K. Our debt to capital ratio increased for 2020 primarily due to a decrease in stockholders’ equity driven by the Split-off of our interest in Change Healthcare JV and share repurchases.

On July 29, 2020, we raised our quarterly dividend from $0.41 to $0.42 per common share for dividends declared on or after such date by the Board. Dividends were $1.67 per share in 2021, $1.62 per share in 2020, and $1.51 per share in 2019. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon our future earnings, financial condition, capital requirements, and other factors. In 2021, 2020, and 2019, we paid total cash dividends of $276 million, $294 million, and $292 million, respectively. Additionally, as required under the Domination Agreement, we are obligated to pay an annual recurring compensation amount of €0.83 per McKesson Europe share (effective January 1, 2015) to the noncontrolling shareholders of McKesson Europe.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

Contractual Obligations:

The table and information below presents our significant financial obligations and commitments at March 31, 2021:


			Years
(In millions)	Total		Within 1		Over 1 to 3		Over 3 to 5		After 5
On balance sheet
Total debt (1)	$	7,148	$	742	$	1,970	$	1,253	$	3,183
Operating lease obligations (2)	2,505		433		733		516		823
Other (3)	250		30		53		51		116

Off balance sheet
Interest on borrowings (4)	1,617		199		367		268		783
Purchase obligations (5)	7,354		7,268		76		10		—
Other (6)	472		268		59		26		119
Total	$	19,346	$	8,940	$	3,258	$	2,124	$	5,024

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

(2)Represents undiscounted minimum operating lease obligations under non-cancelable operating leases having an initial remaining term over one year and is not adjusted for imputed interest. Refer to Financial Note 11, “Leases” to the consolidated financial statements appearing in this Annual Report on Form 10-K for more information.

(3)Includes our estimated benefit payments for the unfunded benefit plans and minimum funding requirements for the pension plans.

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

(5)A purchase obligation is defined as an arrangement to purchase goods or services that is enforceable and legally binding on the Company. These obligations primarily relate to inventory purchases and capital commitments.

(6)Includes agreements under which we have guaranteed the repurchase of our customers’ inventory and our customers’ debt in the event these customers are unable to meet their obligations to those financial institutions.

The contractual obligations table above excludes the following obligations:

At March 31, 2021, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $738 million. Additionally, any future payments that may be made related to our estimated litigation liability of $8.1 billion for opioid-related claims, as described in the “Trends and Uncertainties” section in this Financial Review and Financial Note 19, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10-K, are excluded. The ultimate amount and timing of any future cash settlements related to these items cannot be predicted with reasonable certainty.

Our banks and insurance companies have issued $146 million of standby letters of credit and surety bonds at March 31, 2021. 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.

Our redeemable noncontrolling interests primarily relate to our consolidated subsidiary, McKesson Europe. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published semi-annually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid by McKesson (“Put Amount”). The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. During 2021, we paid $49 million to purchase 1.8 million shares of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders. During 2020 and 2019, there were no material exercises of the Put Right.

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McKESSON CORPORATION

FINANCIAL REVIEW (Continued)

The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. The carrying value of redeemable noncontrolling interests is also adjusted each period for the portion of other comprehensive income attributable to the noncontrolling shareholders, which is primarily due to changes in foreign currency exchange rates. At March 31, 2021 and 2020, the carrying value of redeemable noncontrolling interests related to McKesson Europe of $1.3 billion and $1.4 billion, respectively, exceeded the maximum redemption value of $1.2 billion. In future periods, unfavorable foreign currency exchange rate fluctuations between the Euro and the U.S. dollar could adversely impact the carrying value of our redeemable noncontrolling interests and require an adjustment to increase the balance of our redeemable noncontrolling interests to its maximum redemption value. Such adjustments would be recorded in “Net income attributable to noncontrolling interests” in our consolidated statements of operations.

Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six month’s advance notice. The Put Amount, Compensation Amount, and the guaranteed dividend were subject to ongoing appraisal proceedings. On April 12, 2021, we received the Stuttgart Court of Appeals’ final ruling confirming the original put value of €22.99 per share and the annual recurring compensation of €0.83 per McKesson Europe share. The Put Right exercise window will expire on June 15, 2021. While the ultimate amount of any future cash payments related to exercises of the Put Right are uncertain, Put Right exercises could result in cash payments of up to approximately $1.3 billion prior to the expiration of the Put Right.

Refer to Financial Note 9, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements included in this Annual Report on Form 10-K for additional information on redeemable noncontrolling interests.

Credit Resources:

We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements 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 13, “Debt and Financing Activities,” to the consolidated financial statements included in this Annual Report on Form 10-K.

RELATED PARTY BALANCES AND TRANSACTIONS

Information regarding our related party balances and transactions is included in Financial Note 2, “Investment in Change Healthcare Joint Venture,” and Financial Note 21, “Related Party Balances and Transactions,” to the consolidated financial statements included in this Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

New accounting pronouncements that we have recently adopted, as well as those that have been recently issued but not yet adopted by us, are included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

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