filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
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 condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021 previously filed with the United States (“U.S.”) Securities and Exchange Commission on May 12, 2021 (“2021 Annual Report”).
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 “Cautionary Notice About Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.
Overview of Our Business:
We are a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively.
We report our results in four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes.
The following summarizes our four reportable segments. Refer to Financial Note 14, “Segments of Business,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding our reportable segments.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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U.S. Pharmaceutical** distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services.
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RxTS** is a reportable segment that unifies the solutions and services of CoverMyMeds, RelayHealth, RxCrossroads, and McKesson Prescription Automation to serve our biopharma and life sciences partners and patients. By combining automation and expert navigation of the healthcare ecosystem, RxTS connects pharmacies, providers, payers, and biopharma to address patients’ medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives.
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Medical-Surgical Solutions** provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the U.S.
*•*International is a 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. During the nine months ended December 31, 2021, we entered into agreements to sell certain of our businesses in the European Union (“E.U.”), and to sell our retail and distribution businesses in the United Kingdom (“U.K.”). These divestitures are further described in the below “European Divestiture Activities” section.
European Divestiture Activities
On July 5, 2021, we entered into an agreement to sell certain of our businesses in the E.U. located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with our German headquarters and wound-care business, part of a shared services center in Lithuania, and our ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. We recorded charges of $26 million and $517 million for the three and nine months ended December 31, 2021, respectively, in total operating expenses to remeasure the E.U. disposal group to the lower of its carrying value or fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $230 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. The transaction is anticipated to close within the first half of fiscal year 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals, as applicable.
On November 1, 2021, we announced an agreement to sell our retail and distribution businesses in the U.K. (“U.K. disposal group”) to Aurelius Elephant Limited for a purchase price of £325 million (or, approximately $440 million), subject to certain adjustments. We recorded charges of $823 million for the three and nine months ended December 31, 2021 in total operating expenses to remeasure the U.K. disposal group to the lower of its carrying value or fair value less costs to sell. The remeasurement adjustment includes a $731 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. The transaction is expected to close in the fourth quarter of 2022.
On December 20, 2021, we announced an agreement with Quadrifolia Management GmbH for a management-led buyout of our Austrian business for a purchase price of €226 million (or, approximately $257 million), subject to certain adjustments. The transaction closed on January 31, 2022. We recorded a charge of $30 million for the three and nine months ended December 31, 2021 in total operating expenses to remeasure the Austrian business to the lower of its carrying value or fair value less costs to sell.
As of December 31, 2021, we had $5.5 billion of assets and $4.8 billion of liabilities classified as “Assets held for sale” and “Liabilities held for sale,” respectively, in the Condensed Consolidated Balance Sheet primarily related to the European divestiture activities described above. Refer to Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Executive Summary:
The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the three and nine months ended December 31, 2021.
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Coronavirus disease 2019 (“COVID-19”) continues to impact our year over year results. As previously disclosed in our 2021 Annual Report, pharmaceutical distribution volumes decreased across the enterprise during the first quarter of 2021 as a result of the weakened and uncertain global economic environment and COVID-19 restrictions following the onset of the pandemic. The recovery from the pandemic is favorably reflected in our results when comparing 2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs during 2022;
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In response to the global pandemic, McKesson plans to donate certain personal protective equipment (“PPE”) to charitable organizations to assist with COVID-19 recovery efforts. During the nine months ended December 31, 2021, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. The majority of these charges are driven by the intent of management not to sell certain excess PPE inventory and instead direct it to charitable organizations. Refer to the “Trends and Uncertainties” section included below for further information on COVID-19 and related impacts;
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Revenues of $68.6 billion and $197.9 billion for the three and nine months ended December 31, 2021, respectively, increased 10% primarily driven by market growth in our U.S. Pharmaceutical segment;
*•*Gross profit increased 9% and 11% for the three and nine months ended December 31, 2021, respectively, compared to the prior year primarily driven by improvements in primary care patient visits, and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment as well as the contribution from our COVID-19 vaccination distribution program and growth of specialty pharmaceuticals in our U.S. Pharmaceutical segment. Gross profit for the nine months ended December 31, 2021 also included higher sales of COVID-19 tests in our Medical-Surgical Solutions segment and favorable effects of foreign currency exchange fluctuations in our International segment;
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Total operating expenses for the three and nine months ended December 31, 2021 includes fair value remeasurement charges related to our “European Divestiture Activities” discussed above;
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Other income, net for the nine months ended December 31, 2021 includes net gains of $104 million related to our equity investments;
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On July 23, 2021, we completed a cash tender offer and paid an aggregate consideration of $1.1 billion to redeem certain notes with a principal amount of $922 million. As a result of the redemption, we incurred a loss on debt extinguishment in the second quarter of 2022 of $191 million, consisting of the premiums paid and a portion of the write-off of unamortized debt issuance costs in an amount proportional to the principal amount of debt retired. Refer to Financial Note 8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information;
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Diluted earnings (loss) per common share from continuing operations attributable to McKesson Corporation for the three and nine months ended December 31, 2021 of $(0.04) and $4.81, respectively, reflects the aforementioned items, net of any respective tax impacts, discrete tax items recognized, and a lower share count compared to the prior year due to the cumulative effect of share repurchases;
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We paid $1.0 billion to purchase 34.5 million shares of McKesson Europe during the nine months ended December 31, 2021 through exercises of a put right by the noncontrolling shareholders pursuant to the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”);
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On July 17, 2021, we redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021. The notes were redeemed using cash on hand. On August 12, 2021, we also completed a public offering of 1.30% notes due August 15, 2026 with a principal amount of $500 million for proceeds received, net of discounts and offering expenses, of $495 million. We utilized the net proceeds from this note for general corporate purposes;
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We returned $2.2 billion of cash to shareholders during the nine months ended December 31, 2021 through $2.0 billion of common stock repurchases and $206 million of dividend payments. On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share; and
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
- In December 2021, we announced that our Board of Directors (the “Board”) approved an increase of $4.0 billion for the authorized share repurchase of McKesson’s common stock.
Trends and Uncertainties:
COVID-19
The novel strain of coronavirus, which causes the infectious disease known as COVID-19, continues to evolve since it was declared a global pandemic on March 11, 2020 by the World Health Organization. We continue to evaluate the nature and extent of the ongoing impacts COVID-19 has on our business, operations, and financial results. Refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II of our 2021 Annual Report for a full disclosure of trends and uncertainties due to COVID-19 since the onset of the pandemic. The disclosures below include significant updates that occurred during the first nine months of 2022. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described in our “Risks and Forward-Looking Information” section below.
Our Response to COVID-19 in the Workplace
We are committed in continuing to supply our customers and protect the safety of our employees. The various responses we put in place initially at the onset of the pandemic to mitigate the impact of COVID-19 on our business operations include telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures. During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, including a transition to a partial remote work model for certain employees on a go-forward basis as further discussed in this Financial Review and in Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. During the third quarter of 2022, we continued to refine our policies and apply safety measures in the workplace as recommended by the Centers for Disease Control and Prevention (“CDC”) as COVID-19 cases increased across North America and Europe driven by the highly contagious Omicron variant.
During the third quarter of 2022, we continued COVID-19 vaccination protocols, which are designed to be consistent with federal, state, and local laws and with customer requirements for our U.S. and Canada employees and to protect the safety of our employees, customers, patients, and communities while also safeguarding the healthcare supply chain. In Europe, we are following applicable government guidelines. We continue to monitor all of these changing requirements and guidelines. We have not observed a material increase in employee turnover as a result of COVID-19 vaccination protocols; however, we are unable to predict whether such protocols will have a material impact on our workforce in the future.
Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits
As a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions, we remain well positioned to respond to the COVID-19 pandemic in 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 PPE, and medicine reach our customers and patients.
We continue to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines through a contract with the CDC. We have been distributing COVID-19 vaccines that are refrigerated or frozen since December 2020, when the Emergency Use Authorization was issued by the U.S. Food and Drug Administration for the Moderna COVID-19 vaccine manufactured by ModernaTX, Inc. In the first quarter of 2022, McKesson began supporting the U.S. government’s commitment to donate COVID-19 vaccines worldwide. For this initiative, we are responsible for picking and packing the COVID-19 vaccines into temperature-controlled coolers and preparing them for pickup by an international partner. We do not manage the actual shipments of the vaccines to other countries. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. We also continue to manage the assembly, storage, and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies, through agreements with both the Department of Health and Human Services (“HHS”) and Pfizer, Inc. The results of operations for the kitting and distribution of ancillary supplies are reflected in our Medical-Surgical Solutions segment. The future financial impact of the arrangements with the CDC and HHS depend on numerous uncertainties, which are described in our “Risks and Forward-Looking Information” section below.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
McKesson Canada and McKesson Europe are playing a role by supporting governments and public health entities through distributing COVID-19 vaccines and administering them in pharmacies. Additionally, McKesson Canada and McKesson Europe are also distributing COVID-19 tests and certain PPE.
Trends in our Business
At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we had higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March. Subsequently, during the first nine months of 2021, pharmaceutical distribution volumes decreased as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government shutdowns and shelter-in-place orders. We also had a decrease in 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. This drove favorability in our results when comparing the first nine months of 2022 versus 2021, particularly during the first quarter.
We have observed improvements in prescription volumes and primary care patient visits during our first nine months of 2022 compared to the same prior year period; however, the recovery of COVID-19 continues to be non-linear and impacted by variants such as Omicron and ongoing fluctuations in case levels. We observed an increase in demand for tests able to detect SARS-CoV-2 and influenza A/B simultaneously during the three months ended December 31, 2021. While we had an increase in unit sales of our COVID-19 tests, we observed a decline in the average sales price during the three months ended December 31, 2021 due to an increase in competing product offerings and a shift in product mix which negatively impacted our revenue as compared to the prior year period. During the third quarter and first nine months of 2022, the COVID-19 vaccine, and related ancillary kit distribution in the U.S. favorably impacted our results. During the first nine months of 2022, we recognized higher sales for COVID-19 tests primarily due to limited product availability in the first quarter of 2021 and increased demand during the second and third quarters of 2022 corresponding with the spike in positive COVID-19 cases as a result of the Delta and Omicron variants.
Impact to our Supply Chain
We also continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. Overall, during 2022 we had an increase in supply chain costs primarily related to transportation and labor; however, this did not materially impact our results of operations for the three and nine months ended December 31, 2021. In our Medical-Surgical Solutions segment, we have observed certain supply chain disruptions for COVID-19 tests, which poses a potential risk for supply availability to meet the future demand. As potential shortages or disruptions of any products are identified we are acting to address supply continuity, which includes securing additional products when available, sourcing back-up products when needed, and following allocation procedures to maintain and protect supply as much as possible. We are also initiating business continuity action planning to maintain and protect operations across all locations and facilities.
Impact to our Results of Operations, Financial Condition, and Liquidity
For the three months ended December 31, 2021, COVID-19 tests and the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately $544 million, or 18%, to segment revenues, and contributed approximately $118 million, or 38% to segment operating profit. For the nine months ended December 31, 2021, these contributions were approximately $1.4 billion, or 16%, to segment revenues, and including total inventory charges as further described below, increased our segment operating profit by approximately $121 million, or 18%.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
The distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed less than 10% to segment operating profit for both the three and nine months ended December 31, 2021. The financial impact from our COVID-19 response efforts in the International segment during the three and nine months ended December 31, 2021 was not material to our consolidated results, but contributed to year over year favorability in segment operating results. During the nine months ended December 31, 2020, particularly during the first quarter, we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income from continuing operations before income taxes. The recovery of prescription volume trends and patient care visits, which are also described in more detail above in the Trends in our Business section, had a favorable impact year over year across our businesses when comparing 2022 versus 2021.
Additionally, certain PPE items held for resale were valued in our inventory at costs that were inflated by earlier COVID-19 pandemic demand levels. That inventory valuation, if not supported by market resale prices, may be written down to net realizable value. We may also write-off inventory due to decreased customer demand and excess inventory. During the nine months ended December 31, 2021, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Of this amount, we recorded $147 million in cost of sales driven by the intent of management not to sell certain excess PPE inventory, which required an inventory write-down to zero, and instead direct it to charitable organizations. We recorded $8 million in total operating expenses for excess inventory which has already been committed for donation during our first nine months of 2022. In addition, $9 million of inventory charges were recorded in cost of sales for PPE and other related products that management intends to sell. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods of other PPE and related product categories, we are taking measures to mitigate such risk.
Overall, these COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the three and nine months ended December 31, 2021 compared to the same prior year periods. Impacts to future periods due to COVID-19 may differ based on future developments, which is described at the end of this COVID-19 section.
During the nine months ended December 31, 2021, we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. We continue to monitor the COVID-19 situation closely and engage with manufacturers, industry partners, and government agencies to anticipate shortages and respond to demand for certain medications and therapies. We are monitoring our customers closely for changes to their timing of payments or ability to pay amounts owed to us as a result of COVID-19 pandemic impacts to their businesses. We remain well-capitalized with access to liquidity from our revolving credit facility. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. At December 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)
(UNAUDITED)
Opioid-Related Litigation and Claims
We are a defendant in a number of 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 2,800 federal cases and approximately 350 state court cases throughout the U.S., and cases in Puerto Rico and Canada.
On July 21, 2021, we and the two other national pharmaceutical distributors announced that we had negotiated a comprehensive proposed settlement agreement which, if all conditions are satisfied, would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities. Under the proposed agreement, the three distributors would pay up to approximately $21 billion over a period of 18 years, with up to approximately $7.9 billion to be paid by us for our 38.1% portion if all eligible entities participate. In addition, the proposed agreement would require the three distributors, including the Company, to establish a clearinghouse for controlled substances distribution data and adopt changes to anti-diversion programs.
On September 4, 2021, we and the two other national distributors announced that 42 of 49 eligible states, all 5 U.S. territories, and Washington, DC, had affirmatively signed on to the proposed agreement. At that time, the attorneys general of Alabama, Georgia, Nevada, New Mexico, Oklahoma, Rhode Island, and Washington had not joined the proposed settlement. We further announced that we and the other two distributors had determined that enough states had signed on to the settlement for the proposed agreement to proceed to the next phase. Since that time, the attorneys general of Georgia, Nevada, New Mexico, and Rhode Island have announced that they will join the proposed agreement. In the period between September 4, 2021, and January 26, 2022, each participating state offered its political subdivisions, including those that have not sued, the opportunity to participate in the settlement. By February 25, 2022, we must determine whether a sufficient number of states and political subdivisions have joined for the settlement to proceed to implementation.
The proposed agreement only addresses the claims of U.S. state attorneys general and political subdivisions in participating states. The West Virginia subdivisions and Native American tribes are not part of this settlement process. The exact amount that would be due under the proposed agreement depends on several factors, including the participation rate of states and political subdivisions, the extent to which states take action to foreclose opioid lawsuits by political subdivisions, and the extent to which political subdivisions in settling states file additional opioid lawsuits against us after the proposed agreement becomes effective. The proposed agreement contemplates that if certain governmental entities do not agree to a settlement under the framework, but the distributors nonetheless conclude that there is sufficient participation to warrant the settlement, there would be a corresponding reduction in the amount due to account for the unresolved claims of the governmental entities that do not participate. Those non-participating governmental entities could continue to pursue their claims.
We believe that a broad settlement of opioid claims by governmental entities is probable, and that the loss related thereto can be reasonably estimated. We recorded a charge of $8.1 billion during the year ended March 31, 2021 related to our share of the global settlement as well as claims of West Virginia municipalities and the Native American tribes. In connection with the proposed settlement agreement and other opioid-related settlement accruals described above, we recorded additional charges of $193 million during the nine months ended December 31, 2021 within “Claims and litigation charges, net” in our Condensed Consolidated Statements of Operations. Our total estimated liability for opioid-related claims was $8.2 billion as of December 31, 2021, of which $1.1 billion was included in “Other accrued liabilities” for the amount estimated to be paid prior to December 31, 2022, and the remaining liability was included in “Long-term litigation liabilities” in our Condensed Consolidated Balance Sheet.
Consistent with the terms of the proposed agreement, we placed approximately $354 million into escrow on September 30, 2021. Those escrow amounts were presented as restricted cash within “Prepaid expenses and other” in our Condensed Consolidated Balance Sheet as of December 31, 2021. On January 25, 2022, we placed an additional approximately $19 million into escrow to reflect the participation of additional states. These amounts exclude the proportionate allocation under the proposed settlement for each non-participating state and would be disbursed when and if the proposed agreement becomes effective. Subsequent annual payments would be due on July 15 of each year. Because of the many uncertainties associated with any potential settlement arrangement or other resolution of opioid-related litigation, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Notwithstanding the progress toward a broad settlement, we also continue to prepare for trial in these pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q for more information.
Risks and Forward-Looking Information
The COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We still face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. The full extent to which COVID-19 will impact us depends on many factors and future developments, including: the duration and spread of the COVID-19 pandemic; potential seasonality of viral outbreaks; impacts of additional variants of the SARS-Cov-2 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 the results of governmental measures designed to mitigate the spread of the virus; the effectiveness of treatments of infected individuals; and changes or disruptions in product supply. We have experienced and may experience difficulties in sourcing products and changes in pricing due to the effects of the COVID-19 pandemic on supply chains. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when COVID-19 may no longer significantly impact our ability to forecast future financial performance remain 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 COVID-19 pandemic on industry and economic trends as well as on our business strategy and internal forecasts. Material changes to key assumptions and estimates can decrease the projected cash flows or increase the discount rates and have resulted in impairment charges of certain long-lived assets and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of our 2021 Annual Report for a disclosure of risk factors related to COVID-19.
During the three months ended December 31, 2021, a cybersecurity incident affecting a payroll timekeeping vendor resulted in an unavailability of the vendor’s platform. Although this incident caused operational inconveniences, it had an immaterial impact on our operations, internal controls over financial reporting, and financial condition. The vendor informed us that the incident did not result in a breach of McKesson’s or its employees’ confidential or sensitive information.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
RESULTS OF OPERATIONS
Overview of Consolidated Results:
| (In millions, except per share data) | Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||||||
| Revenues | $ | 68,614 | $ | 62,599 | 10 | % | $ | 197,864 | $ | 179,086 | 10 | % | |||||||||||||||||||||||||||||
| Gross profit | 3,428 | 3,151 | 9 | 9,812 | 8,851 | 11 | |||||||||||||||||||||||||||||||||||
| Gross profit margin | 5.00 | % | 5.03 | % | (3) | bp | 4.96 | % | 4.94 | % | 2 | bp | |||||||||||||||||||||||||||||
| Total operating expenses | $ | (3,130) | $ | (10,513) | (70) | % | $ | (8,407) | $ | (14,901) | (44) | % | |||||||||||||||||||||||||||||
| Total operating expenses as a percentage of revenues | 4.56 | % | 16.79 | % | (1,223) | bp | 4.25 | % | 8.32 | % | (407) | bp | |||||||||||||||||||||||||||||
| Other income, net | $ | 20 | $ | 54 | (63) | % | $ | 202 | $ | 152 | 33 | % | |||||||||||||||||||||||||||||
| Loss on debt extinguishment | — | — | — | (191) | — | — | |||||||||||||||||||||||||||||||||||
| Interest expense | (41) | (55) | (25) | (135) | (165) | (18) | |||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 277 | (7,363) | 104 | 1,281 | (6,063) | 121 | |||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (238) | 1,189 | (120) | (396) | 1,011 | (139) | |||||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations | 39 | (6,174) | 101 | 885 | (5,052) | 118 | |||||||||||||||||||||||||||||||||||
| Loss from discontinued operations, net of tax | — | — | — | (3) | (1) | 200 | |||||||||||||||||||||||||||||||||||
| Net income (loss) | 39 | (6,174) | 101 | 882 | (5,053) | 117 | |||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (46) | (52) | (12) | (136) | (152) | (11) | |||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to McKesson Corporation | $ | (7) | $ | (6,226) | (100) | % | $ | 746 | $ | (5,205) | 114 | % | |||||||||||||||||||||||||||||
| Diluted earnings (loss) per common share attributable to McKesson Corporation | |||||||||||||||||||||||||||||||||||||||||
| Continuing operations | $ | (0.04) | $ | (39.03) | (100) | % | $ | 4.81 | $ | (32.28) | 115 | % | |||||||||||||||||||||||||||||
| Discontinued operations | — | — | — | (0.02) | (0.01) | 100 | |||||||||||||||||||||||||||||||||||
| Total | $ | (0.04) | $ | (39.03) | (100) | % | $ | 4.79 | $ | (32.29) | 115 | % | |||||||||||||||||||||||||||||
| Weighted-average diluted common shares outstanding | 151.6 | 159.5 | (5) | % | 155.8 | 161.2 | (3) | % |
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
Revenues
Revenues increased for the three and nine months ended December 31, 2021 compared to the same prior year periods primarily due to market growth in our U.S. Pharmaceutical segment, partially offset by the contribution of our German pharmaceutical wholesale business to a joint venture with Walgreens Boots Alliance (“WBA”) on November 1, 2020. For the nine months ended December 31, 2021, revenues were also favorable year over year due to the recovery of pharmaceutical distribution volumes from the prior year impact of COVID-19 across our businesses. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Gross Profit
Gross profit increased for the three and nine months ended December 31, 2021 largely due to the pandemic, including the favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs and the recovery of the prior year impacts from COVID-19, such as disruptions of doctors’ office operations, deferred or cancelled elective procedures, lower demand for pharmaceuticals, and overall reduction of foot traffic in pharmacies. Gross profit was also favorably impacted by growth in specialty pharmaceuticals within our U.S. Pharmaceutical segment as well as by foreign currency exchange fluctuations for the three and nine months ended December 31, 2021, and unfavorably impacted by the contribution of our German pharmaceutical wholesale business to a joint venture with WBA on November 1, 2020. For the nine months ended December 31, 2021, gross profit was unfavorably impacted by inventory charges on certain PPE and other related products, partially offset by higher sales of COVID-19 tests.
In our U.S. Pharmaceutical segment, gross profit for the nine months ended December 31, 2021 also included net cash proceeds received of $46 million representing our share of antitrust legal settlements. There were no similar cash proceeds received for the same prior year period. Last-in, first-out (“LIFO”) inventory credits were $33 million and $11 million for the three months ended December 31, 2021 and 2020, respectively, and $79 million and $115 million for the nine months ended December 31, 2021 and 2020, respectively. LIFO credits are lower in the first nine months of 2022 compared to the same prior year period primarily due to a decrease in the volume of branded off-patent to generic drug launches and higher brand inflation. Our U.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price related inventory losses. A LIFO expense is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory. Our quarterly LIFO credit is based on our estimates of the annual LIFO credit which is impacted by expected changes in year-end inventory quantities, product mix, and manufacturer pricing practices, which may be influenced by market and other external factors. Changes to any of the above factors could have a material impact to our annual LIFO credit. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year.
Total Operating Expenses
A summary of the components of our total operating expenses for the three and nine months ended December 31, 2021 and 2020 is as follows:
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Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, remeasurement charges to the lower of carrying value or fair value less costs to sell, and other general charges.
-
Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expensed as incurred, are included within SDG&A.
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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.
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Restructuring, impairment, and related charges: Restructuring charges are incurred for programs in which we change our operations, the scope of a business undertaken by our business units, or the manner in which that business is conducted as well as long-lived asset impairments.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
| Three Months Ended December 31, | Nine Months Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||||||||||||||
| Selling, distribution, general, and administrative expenses | $ | 3,105 | $ | 2,291 | 36 | % | $ | 8,006 | $ | 6,625 | 21 | % | |||||||||||||||||||||||||||||
| Claims and litigation charges, net | 7 | 8,067 | (100) | 193 | 7,936 | (98) | |||||||||||||||||||||||||||||||||||
| Goodwill impairment charges | — | — | — | — | 69 | (100) | |||||||||||||||||||||||||||||||||||
| Restructuring, impairment, and related charges | 18 | 155 | (88) | 208 | 271 | (23) | |||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 3,130 | $ | 10,513 | (70) | % | $ | 8,407 | $ | 14,901 | (44) | % | |||||||||||||||||||||||||||||
| Percent of revenues | 4.56 | % | 16.79 | % | (1,223) | bp | 4.25 | % | 8.32 | % | (407) | bp |
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
For the three and nine months ended December 31, 2021, total operating expenses and total operating expenses as a percentage of revenues increased compared to the same prior year periods. Total operating expenses were impacted by the following significant items:
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SDG&A for the three and nine months ended December 31, 2021 includes charges totaling $823 million to remeasure our U.K. disposal group to the lower of its carrying value or fair value less costs to sell. The remeasurement adjustment includes a $731 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. Of the total charges recorded during the period, $787 million are included within our International segment and $36 million are included within Corporate expenses, net;
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SDG&A for the three and nine months ended December 31, 2021 includes charges of $26 million and $517 million, respectively, to remeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $230 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. Of the total charges recorded during the period, $400 million are included within our International segment and $117 million are included within Corporate expenses, net;
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SDG&A for the three and nine months ended December 31, 2021 reflects a cost reduction of $49 million and $82 million, respectively, related to the cessation of depreciation and amortization of long-lived assets and operating lease right-of-use assets classified as held for sale for our European divestiture disposal groups;
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SDG&A for the three months ended December 31, 2021 and 2020 includes opioid-related costs of $33 million and $34 million, respectively, and $104 million and $118 million for the nine months ended December 31, 2021 and 2020, respectively, primarily related to litigation expenses;
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SDG&A for the nine months ended December 31, 2021 includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business;
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SDG&A for the nine months ended December 31, 2020 includes a charge of $50 million related to our estimated liability under the State of New York’s Opioid Stewardship Act (“OSA”);
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SDG&A for the three and nine months ended December 31, 2020 reflects charges of $47 million and $57 million, respectively, to remeasure to fair value less costs to sell the assets and liabilities related to our German pharmaceutical wholesale business which was contributed to a joint venture with WBA;
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SDG&A for the three and nine months ended December 31, 2021 when compared to the same prior year periods also includes increased employee-related and transportation costs across our businesses, partially offset by lower operating expenses due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA;
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Claims and litigation charges, net for the nine months ended December 31, 2021 includes a charge of $193 million, and $8.1 billion for the three and nine months ended December 31, 2020 related to our estimated liability for opioid-related claims as previously discussed in the “Trends and Uncertainties” section;
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
-
Claims and litigation charges, net for the nine months ended December 31, 2020 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;
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Goodwill impairment charges of $69 million for the nine months ended December 31, 2020 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;
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Restructuring, impairment, and related charges for the three and nine months ended December 31, 2021 and 2020 primarily includes charges related to Corporate expenses, net, as well as our International segment. In addition, certain charges related to restructuring initiatives are included under the caption “Cost of sales” in our Condensed Consolidated Statements of Operations and were not material for the nine months ended December 31, 2020. Refer to the “Restructuring Initiatives and Long-Lived Asset Impairments” and “Segment Operating Profit and Corporate Expenses, Net” sections below as well as Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information; and
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Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations for the nine months ended December 31, 2021.
Goodwill Impairment
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 fiscal 2022 and 2021 did not indicate any impairment of goodwill. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment, where the risk of a material goodwill impairment is higher than other reporting units.
Our operating structure was realigned commencing in the second quarter of 2021 which prompted 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 of $69 million for the nine months ended December 31, 2020 in our Europe Retail Pharmacy reporting unit, which is included within the International reportable segment.
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 includes the rationalization of 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 $140 million to $180 million for this initiative, of which $115 million of charges were recorded to date. Charges primarily relate to lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization. This initiative is anticipated to be substantially complete in 2022 after which immaterial charges will continue to be incurred through the termination date of certain leases.
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 operational changes in technologies and business processes, 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. This initiative was substantially complete in the third quarter of 2022, and remaining costs the Company expects to record under this initiative are not material.
Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information on our restructuring initiatives and long-lived asset impairments.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Other Income, Net
Other income, net includes net gains from our equity investments for the nine months ended December 31, 2021 of $104 million and $30 million and $89 million for the three and nine months ended December 31, 2020, respectively. Refer to Financial Note 11, “Fair Value Measurements,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information. In future periods, fair value adjustments recognized in our operating results for these types of investments may be adversely impacted by market volatility.
Loss on Debt Extinguishment
The loss on debt extinguishment recorded for the nine months ended December 31, 2021 of $191 million includes premiums of $182 million as well as the write-off of unamortized debt issuance costs and transaction fees incurred of $9 million, and was driven by our July 2021 tender offer to redeem a portion of our existing debt. Refer to Financial Note 8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Interest Expense
Interest expense decreased for the three and nine months ended December 31, 2021 compared to the same prior year periods primarily due to the repayment of $1.0 billion of long-term debt in the third quarter of 2021 and our tender offer activity in the second quarter of 2022. Interest expense may also fluctuate based on timing, amounts, and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.
Income Tax (Expense) Benefit
During the three months ended December 31, 2021 and 2020, we recorded an income tax expense of $238 million and income tax benefit of $1.2 billion, respectively. During the nine months ended December 31, 2021 and 2020, we recorded an income tax expense of $396 million and income tax benefit of $1.0 billion, respectively. Our reported income tax rates were 85.9% and 16.1% for the three months ended December 31, 2021 and 2020, respectively, and 30.9% and 16.7% for the nine months ended December 31, 2021 and 2020, respectively. Fluctuations in our reported income tax rates are primarily due to non-cash charges related to remeasuring the value of our E.U. disposal group and U.K. disposal group held for sale to the lower of carrying value or fair value less costs to sell, changes in our mix of earnings between various taxing jurisdictions, and discrete items recognized in the quarters. Refer to Financial Note 4, “Income Taxes,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests for the three and nine months ended December 31, 2021 and 2020 primarily represents ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under 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’ deficit in our condensed consolidated balance sheets. Refer to the “Selected Measures of Liquidity and Capital Resources” section of this Financial Review and Financial Note 5, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on changes to our redeemable and noncontrolling interests that occurred during the first quarter of 2022.
Net Income (Loss) Attributable to McKesson Corporation
Net income (loss) attributable to McKesson Corporation was $(7) million and $(6.2) billion for the three months ended December 31, 2021 and 2020, respectively, and $746 million and $(5.2) billion for the nine months ended December 31, 2021 and 2020, respectively. Diluted earnings (loss) per common share attributable to McKesson Corporation was $(0.04) and $(39.03) for the three months ended December 31, 2021 and 2020, respectively, and $4.79 and $(32.29) for the nine months ended December 31, 2021 and 2020, respectively.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Weighted-Average Diluted Common Shares Outstanding
Diluted earnings (loss) per common share was calculated based on a weighted-average number of shares outstanding of 151.6 million and 159.5 million for the three months ended December 31, 2021 and 2020, respectively, and 155.8 million and 161.2 million for the nine months ended December 31, 2021 and 2020, respectively. Weighted-average diluted shares outstanding for the three and nine months ended December 31, 2021 decreased from the same prior year periods primarily due to the cumulative effect of shares repurchases.
Overview of Segment Results:
Segment Revenues:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||
| Segment revenues | ||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | $ | 55,041 | $ | 49,495 | 11 | % | $ | 158,471 | $ | 142,232 | 11 | % | ||||||||||||||||||||||||||
| Prescription Technology Solutions | 1,031 | 777 | 33 | 2,844 | 2,101 | 35 | ||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 3,082 | 3,054 | 1 | 8,734 | 7,388 | 18 | ||||||||||||||||||||||||||||||||
| International | 9,460 | 9,273 | 2 | 27,815 | 27,365 | 2 | ||||||||||||||||||||||||||||||||
| Total revenues | $ | 68,614 | $ | 62,599 | 10 | % | $ | 197,864 | $ | 179,086 | 10 | % |
The changes in revenues for each of our segments for the three and nine months ended December 31, 2021 compared to the same prior year periods consisted of the following:
| Increase (decrease) | |||||||||||
| (Dollars in billions) | Three Months Ended | Nine Months Ended | |||||||||
| Sales to pharmacies and institutional healthcare providers | $ | 5.0 | $ | 14.3 | |||||||
| Sales to specialty practices and other (1) | 0.5 | 1.9 | |||||||||
| Total change in U.S. Pharmaceutical revenues | $ | 5.5 | $ | 16.2 | |||||||
| Total change in Prescription Technology Solutions revenues | $ | 0.3 | $ | 0.8 | |||||||
| Sales to primary care customers | $ | — | $ | 1.1 | |||||||
| Sales to extended care customers | (0.1) | (0.1) | |||||||||
| Other (2) | 0.1 | 0.3 | |||||||||
| Total change in Medical-Surgical Solutions revenues | $ | — | $ | 1.3 | |||||||
| Sales in Europe, excluding FX impact | $ | (0.2) | $ | (2.0) | |||||||
| Sales in Canada, excluding FX impact | 0.4 | 1.2 | |||||||||
| Impact from FX | — | 1.3 | |||||||||
| Total change in International revenues | $ | 0.2 | $ | 0.5 | |||||||
| Total change in revenues | $ | 6.0 | $ | 18.8 |
FX - foreign currency exchange fluctuations. We calculate the impact from FX by converting current year period results of our operations in foreign countries, which are recorded in local currencies, into U.S. dollars by applying the average foreign currency exchange rates of the comparable prior year period.
(1)Includes the results for the distribution of COVID-19 vaccines.
(2)Includes the results for the kitting and distribution of ancillary supply kits needed to administer COVID-19 vaccines.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
U.S. Pharmaceutical
Three Months Ended December 31, 2021 vs. 2020
U.S. Pharmaceutical revenues for the three months ended December 31, 2021 increased 11% compared to the same prior year period primarily due to market growth, including higher volumes from retail national account customers, branded pharmaceutical price increases, and growth in specialty pharmaceuticals, partially offset by branded to generic drug conversions.
Nine Months Ended December 31, 2021 vs. 2020
U.S. Pharmaceutical revenues for the nine months ended December 31, 2021 increased 11% compared to the same prior year period primarily due to market growth, including higher volumes from retail national account customers, branded pharmaceutical price increases, and growth in specialty pharmaceuticals, partially offset by branded to generic drug conversions. Market growth was partially offset by unfavorability from one less sales day this year compared to the same prior year period. Revenues for this segment were also favorable year over year due to the recovery of prescription volumes from the prior year impact of COVID-19, including increased customer demand for pharmaceuticals in retail pharmacies and institutional healthcare providers.
Prescription Technology Solutions
Three Months Ended December 31, 2021 vs. 2020
RxTS revenues for the three months ended December 31, 2021 increased 33% compared to the same prior year period primarily due to increased volume with new and existing customers.
Nine Months Ended December 31, 2021 vs. 2020
RxTS revenues for the nine months ended December 31, 2021 increased 35% compared to the same prior year period primarily due to increased volume with new and existing customers and the recovery of prescription volumes from the prior year impact of COVID-19.
Medical-Surgical Solutions
Three Months Ended December 31, 2021 vs. 2020
Medical-Surgical Solutions revenues for the three months ended December 31, 2021 increased 1% compared to the same prior year period due to improvements in patient care visits in our primary care business and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by lower revenue from COVID-19 tests. Revenues for this segment were also unfavorably impacted by decreased PPE volume primarily in our extended care business.
Nine Months Ended December 31, 2021 vs. 2020
Medical-Surgical Solutions revenues for the nine months ended December 31, 2021 increased 18% compared to the same prior year period largely in our primary care business due to improvements in patient care visits and higher sales of COVID-19 tests in the first nine months of 2022. Revenues for this segment were also favorably impacted by the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines.
International
Three Months Ended December 31, 2021 vs. 2020
International revenues for the three months ended December 31, 2021 increased 2% compared to the same prior year period. Excluding the unfavorable effects of foreign currency exchange fluctuations, revenues for this segment increased 2% largely due to sales to new customers in our Canadian business, as well as favorability year over year due to the increase in volumes in our pharmaceutical distribution and retail pharmacy businesses across the segment. These favorable impacts were partially offset by the contribution of our German pharmaceutical wholesale business to a joint venture with WBA in our European business.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Nine Months Ended December 31, 2021 vs. 2020
International revenues for the nine months ended December 31, 2021 increased 2% compared to the same prior year period. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 3% largely due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. This was partially offset by favorability year over year due to the recovery of volumes from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment as well as sales to new customers in our Canadian business.
Segment Operating Profit and Corporate Expenses, Net:
| Three Months Ended December 31, | Nine Months Ended December 31, | |||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | 2021 | 2020 | Change | ||||||||||||||||||||||||||||||||
| Segment operating profit (loss) (1) | ||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical (2) | $ | 744 | $ | 635 | 17 | % | $ | 2,186 | $ | 1,871 | 17 | % | ||||||||||||||||||||||||||
| Prescription Technology Solutions | 129 | 114 | 13 | 361 | 270 | 34 | ||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions (3) | 308 | 260 | 18 | 679 | 536 | 27 | ||||||||||||||||||||||||||||||||
| International (4) | (668) | (71) | 841 | (761) | (113) | 573 | ||||||||||||||||||||||||||||||||
| Subtotal | 513 | 938 | (45) | 2,465 | 2,564 | (4) | ||||||||||||||||||||||||||||||||
| Corporate expenses, net (5) | (195) | (8,246) | (98) | (858) | (8,462) | (90) | ||||||||||||||||||||||||||||||||
| Loss on debt extinguishment | — | — | — | (191) | — | — | ||||||||||||||||||||||||||||||||
| Interest expense | (41) | (55) | (25) | (135) | (165) | (18) | ||||||||||||||||||||||||||||||||
| Income (loss) from continuing operations before income taxes | $ | 277 | $ | (7,363) | 104 | % | $ | 1,281 | $ | (6,063) | 121 | % | ||||||||||||||||||||||||||
| Segment operating profit (loss) margin | ||||||||||||||||||||||||||||||||||||||
| U.S. Pharmaceutical | 1.35 | % | 1.28 | % | 7 | bp | 1.38 | % | 1.32 | % | 6 | bp | ||||||||||||||||||||||||||
| Prescription Technology Solutions | 12.51 | 14.67 | (216) | 12.69 | 12.85 | (16) | ||||||||||||||||||||||||||||||||
| Medical-Surgical Solutions | 9.99 | 8.51 | 148 | 7.77 | 7.26 | 51 | ||||||||||||||||||||||||||||||||
| International | (7.06) | (0.77) | (629) | (2.74) | (0.41) | (233) |
All percentage changes displayed above which are not meaningful are displayed as zero percent.
bp - basis points
(1)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income, net, for our reportable segments.
(2)Operating profit for our U.S. Pharmaceutical segment includes a charge of $50 million for the nine months ended December 31, 2020 related to our estimated liability under the OSA.
(3)Operating profit for our Medical-Surgical Solutions segment for the nine months ended December 31, 2021 includes inventory charges totaling $164 million on certain PPE and other related products primarily driven by the intent of management not to sell certain excess PPE inventory and instead direct it to charitable organizations.
(4)Operating loss for our International segment for the three and nine months ended December 31, 2021 includes charges of $787 million to remeasure our U.K. disposal group held for sale to the lower of its carrying value or fair value less costs to sell. Operating loss for the three and nine months ended December 31, 2021 includes charges of $58 million and $400 million, respectively, to remeasure our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. Operating loss for the nine months ended December 31, 2021 also includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business. Operating loss includes restructuring, impairment, and related charges of $131 million and $189 million for the three and nine months ended December 31, 2020, respectively, driven largely by long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe as well as costs associated with the closure of certain retail pharmacy stores within our U.K. business. Operating loss for the nine months ended December 31, 2020 includes a goodwill impairment charge of $69 million related to our European retail business as well as charges of $47 million and $57 million for the three and nine months ended December 31, 2020, 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.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
(5)Corporate expenses, net for three and nine months ended December 31, 2021 includes credits of $32 million and charges of $117 million primarily related to the effect of accumulated other comprehensive loss components from our E.U. disposal group. Corporate expenses, net includes net gains from our equity investments of $104 million for the nine months ended December 31, 2021 and $30 million and $89 million for the three and nine months ended December 31, 2020, respectively. Corporate expenses, net includes a charge of $193 million for the nine months ended December 31, 2021, and $8.1 billion for the three and nine months ended December 31, 2020 related to our estimated liability for opioid-related claims. Corporate expenses, net includes $33 million and $104 million for the three and nine months ended December 31, 2021, respectively, and $34 million and $118 million for the three and nine months ended December 31, 2020, respectively, of opioid-related costs, primarily litigation expenses. Corporate expenses, net also includes a net gain of $131 million for the nine months ended December 31, 2020 recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program.
U.S. Pharmaceutical
Three Months Ended December 31, 2021 vs. 2020
Operating profit increased for this segment for the three months ended December 31, 2021 compared to the same prior year period primarily due to the contribution from our COVID-19 vaccine distribution program, growth in specialty pharmaceuticals, and an increase in LIFO credits of $22 million, partially offset by an increase in operating expenses.
Nine Months Ended December 31, 2021 vs. 2020
Operating profit increased for this segment for the nine months ended December 31, 2021 compared to the same prior year period primarily due to growth in specialty pharmaceuticals, the contribution from our COVID-19 vaccine distribution program, favorability from the prior year OSA charge described above, net cash proceeds received of $46 million representing our share of antitrust legal settlements, and the recovery of prescription volumes from the prior year impact of COVID-19. This was partially offset by a decrease in LIFO credits of $36 million and an increase in operating expenses.
Prescription Technology Solutions
Three Months Ended December 31, 2021 vs. 2020
Operating profit for this segment increased for the three months ended December 31, 2021 compared to the same prior year period primarily due to increased volumes with new and existing customers.
Nine Months Ended December 31, 2021 vs. 2020
Operating profit for this segment increased for the nine months ended December 31, 2021 compared to the same prior year period primarily due to increased volumes with new and existing customers and the recovery of prescription volumes from the prior year impact of COVID-19.
Medical-Surgical Solutions
Three Months Ended December 31, 2021 vs. 2020
Operating profit for this segment increased for the three months ended December 31, 2021 compared to the same prior year period primarily due to the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines as well as favorability from improvements in patient care visits in our primary care business, partially offset by lower profitability from COVID-19 tests largely in our primary care business.
Nine Months Ended December 31, 2021 vs. 2020
Operating profit for this segment increased for the nine months ended December 31, 2021 compared to the same prior year period primarily due to favorability in our primary care business from improvements in patient care visits, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines and higher sales of COVID-19 tests across the segment in the first nine months of 2022. This was partially offset by inventory charges on certain PPE and other related products and an increase in employee-related expenses to support business growth.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
International
Three Months Ended December 31, 2021 vs. 2020
Operating loss for this segment increased for the three months ended December 31, 2021 compared to the same prior year period largely due to charges to remeasure assets and liabilities of our E.U. disposal group and our U.K. disposal group held for sale to fair value less costs to sell, partially offset by lower restructuring charges in Europe and Canada and the cessation of depreciation and amortization expenses.
Nine Months Ended December 31, 2021 vs. 2020
Operating loss for this segment increased for the nine months ended December 31, 2021 compared to the same prior year period largely due to fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group, partially offset by the cessation of depreciation and amortization expenses, a prior year goodwill impairment charge related to our European retail business and a gain recognized related to the sale of our Canadian health benefit claims management and plan administrative services business. This segment also experienced favorability year over year due to the volume recovery from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment and to a lesser extent, the distribution of COVID-19 vaccines, COVID-19 tests, and PPE.
Corporate Expenses, Net
Corporate expenses, net decreased for the three and nine months ended December 31, 2021 compared to the same prior year period primarily due to a charge of $8.1 billion recorded in the third quarter of 2021 related to our estimated liability for opioid-related claims.
The decrease in Corporate expenses, net for the nine months ended December 31, 2021 was partially offset by $193 million related to our estimated liability for opioid-related claims, fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group, and a net gain of $131 million recognized during the first quarter of 2021 in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program.
New Accounting Pronouncements
New accounting pronouncements that we have recently adopted as well as those that have been recently issued but not yet adopted by us are included in Financial Note 1, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities and commercial paper program, will be sufficient to fund our short-term and long-term capital expenditures, working capital, and other cash requirements. We remain well-capitalized with access to liquidity from our $4.0 billion revolving credit facility. At December 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)
(UNAUDITED)
The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown:
| Nine Months Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | Change | ||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 1,547 | $ | 1,172 | $ | 375 | |||||||||||
| Investing activities | (272) | (210) | (62) | ||||||||||||||
| Financing activities | (4,332) | (1,176) | (3,156) | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 35 | (77) | 112 | ||||||||||||||
| Cash, cash equivalents, and restricted cash classified within Assets held for sale (1) | (215) | — | (215) | ||||||||||||||
| Net change in cash, cash equivalents, and restricted cash | $ | (3,237) | $ | (291) | $ | (2,946) | |||||||||||
(1)Refer to Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information.
Operating Activities
Operating activities provided cash of $1.5 billion and $1.2 billion during the nine months ended December 31, 2021 and 2020, respectively. Cash flows from operations can be significantly impacted by factors such as timing of receipts from customers, inventory receipts, and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for the nine months ended December 31, 2021 were affected by net income adjusted for non-cash items, including the losses on our European businesses held for sale and our classifications of receivables, drafts and accounts payables, and inventories as held for sale. Refer to Financial Note 2, “Held for Sale,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information. Excluding the aforementioned classifications, operating activities for the nine months ended December 31, 2021 were affected by increases in inventory of $1.7 billion and drafts and accounts payable of $1.6 billion due to timing of purchases, and an increase in receivables of $1.9 billion resulting from timing of collections and higher revenues. Other non-cash items for the nine months ended December 31, 2021 includes an adjustment to net income of $191 million related to loss on debt extinguishment and non-cash inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Operating activities for the nine months ended December 31, 2020 were affected by net income adjusted for non-cash items, a decrease in receivables of $1.5 billion and an increase in inventory of $2.0 billion, both primarily due to sales recognized at year end, as well as a decrease in drafts and accounts payable of $1.2 billion from effective working capital management at year end.
Investing Activities
Investing activities used cash of $272 million and $210 million during the nine months ended December 31, 2021 and 2020, respectively. Investing activities for the nine months ended December 31, 2021 and 2020 includes $380 million and $427 million, respectively, in capital expenditures for property, plant, and equipment, and capitalized software. Investing activities for the nine months ended December 31, 2020 also includes net cash proceeds of $297 million in exchange for the contribution of our German pharmaceutical wholesale business to a joint venture with WBA.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
Financing Activities
Financing activities used cash of $4.3 billion and $1.2 billion during the nine months ended December 31, 2021 and 2020, respectively. In July 2021, we completed a cash tender offer and paid an aggregate consideration of $1.1 billion to redeem certain notes with a principal amount of $922 million and also redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021 using cash on hand. This resulted in total repayments of long-term debt during the nine months ended December 31, 2021 of $1.8 billion, including $184 million of cash paid for premiums and transaction fees. This was partially offset by the issuance of long-term debt in August 2021 from a public offering of 1.30% notes due August 15, 2026 for proceeds received of $498 million, which was utilized for general corporate purposes. Financing activities for the nine months ended December 31, 2021 and 2020 includes $2.0 billion and $500 million of cash paid for share repurchases, respectively, and $206 million and $209 million of cash paid for dividends, respectively. Additionally, financing activities for the nine months ended December 31, 2021 and 2020 includes payments of $1.0 billion and $49 million, respectively, to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders. The put right option expired on June 15, 2021 as further described below. Financing activities for the nine months ended December 31, 2021 includes cash receipts of $3.6 billion and payments of $3.3 billion for short-term borrowings, primarily commercial paper. Financing activities for the nine months ended December 31, 2020 includes 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 the proceeds from the 2025 Notes. Financing activities for the nine months ended December 31, 2020 includes cash receipts of $5.5 billion and payments of $5.3 billion for short-term borrowings, primarily commercial paper. Cash used for other financing activities generally includes shares surrendered for tax withholding and payments to noncontrolling interests. Other financing activities for the nine months ended December 31, 2020 also includes restricted cash inflow related to funds temporarily held on behalf of unaffiliated medical practice groups.
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.
In May 2021, we entered into an ASR program with a third-party financial institution to repurchase $1.0 billion of the Company’s common stock. Pursuant to the ASR agreement, we paid $1.0 billion to the financial institution and received an initial delivery of 4.3 million shares in May 2021. The transaction was completed in August 2021, at which point we received additional shares of 0.9 million. The total number of shares repurchased under this ASR program was 5.2 million shares at an average price per share of $193.22.
During the three months ended December 31, 2021, the Company repurchased an additional 3.3 million of the Company’s shares for $728 million through open market transactions at an average price per share of $223.89, of which $30 million was accrued at December 31, 2021 within “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheet for share repurchases executed in late December and settled in early January. Additionally, during the three months ended September 30, 2021, the Company repurchased 1.4 million of the Company’s shares for $280 million through open market transactions at an average price per share of $203.20. There were no open market share repurchases during the three months ended June 30, 2021.
On December 8, 2021, the Company announced that the Board approved an increase of $4.0 billion in the authorization for repurchase of McKesson common stock. The total remaining authorization outstanding for repurchases of the Company’s common stock was $4.8 billion at December 31, 2021.
During the three months ended December 31, 2020, the Company repurchased 1.5 million of the Company’s shares for $231 million through open market transactions at an average price per share of $151.12. During the three months ended September 30, 2020, the Company repurchased 1.8 million of the Company’s shares for $269 million through open market transactions at an average price per share of $151.23. There were no share repurchases during the three months ended June 30, 2020.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONTINUED)
(UNAUDITED)
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.
Selected Measures of Liquidity and Capital Resources
| (Dollars in millions) | December 31, 2021 | March 31, 2021 | ||||||||||||
| Cash, cash equivalents, and restricted cash | $ | 3,159 | $ | 6,396 | ||||||||||
| Working capital | (954) | 1,279 | ||||||||||||
| Debt to capital ratio (1) | 94.3 | % | 83.1 | % |
(1)This ratio describes the relationship and changes within our capital resources, and is computed as the sum of short-term borrowings, current portion of long-term debt, and long-term debt divided by the sum of short-term borrowings, current portion of long-term debt, long-term debt, and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss.
Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA-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 December 31, 2021 and March 31, 2021 included approximately $795 million and $2.3 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 accrued liabilities. Our businesses require substantial investments in working capital that are susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.
Consolidated working capital decreased at December 31, 2021 compared to March 31, 2021 primarily due to a decrease in cash and cash equivalents and receivables, as well as an increase in other accrued liabilities, partially offset by a decrease in drafts and accounts payable, an increase in net current assets held for sale related to our E.U. disposal group and U.K. disposal group, and a decrease in our current portion of debt from the redemption of our €600 million Euro-denominated notes in July 2021. The increase in other accrued liabilities is primarily due to the classification of $1.1 billion from long-term to short-term for the total amount we expect to pay for opioid-related claims within one year as of December 31, 2021, of which $354 million is held in escrow for the initial payment under the proposed settlement agreement for opioid-related claims of governmental entities, excluding the West Virginia subdivisions and Native American Tribes. The escrow payment is presented as restricted cash within “Prepaid expenses and other” on our Condensed Consolidated Balance Sheets. See “Trends and Uncertainties” of this Financial Review and Financial Note 12, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10‑Q for further information.
Our debt to capital ratio increased for the nine months ended December 31, 2021 primarily due to an increase in McKesson stockholders’ deficit driven by share repurchases, partially offset by net income for the year to date period. Our debt to capital ratio was also impacted by a decrease in total debt from the completion of a cash tender offer to redeem certain notes with a principal amount of $922 million and the redemption of our €600 million Euro-denominated notes both in July 2021, partially offset by the issuance of notes with a principal amount of $500 million in August 2021.
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McKESSON CORPORATION
FINANCIAL REVIEW (CONCLUDED)
(UNAUDITED)
On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share for dividends declared on or after such date by the Board. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon our future earnings, financial condition, capital requirements, and other factors.
Redeemable Noncontrolling Interests
Our redeemable noncontrolling interests primarily related to our consolidated subsidiary, McKesson Europe. At March 31, 2021, the carrying value was $1.3 billion and we owned approximately 78% of McKesson Europe’s outstanding common shares. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put (“Put Right”) their shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published semi-annually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid by McKesson (“Put Amount”). During the nine months ended December 31, 2021 and 2020, we paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders, which reduced the balance of our redeemable noncontrolling interests.
The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, valued at $287 million, were transferred from redeemable noncontrolling interests to noncontrolling interests. At December 31, 2021, we owned approximately 95% of McKesson Europe’s outstanding common shares. Our noncontrolling interest in McKesson Europe will be included in the sale of our E.U. disposal group.
Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six months’ advance notice.
Refer to Financial Note 5, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on redeemable noncontrolling interests.
Credit Resources
We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements, including any future payments that may be made related to our total estimated litigation liability of $8.2 billion as of December 31, 2021 for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note 8, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of these statements can be identified by the use of terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “projects,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans, assumptions, or intentions may also include forward-looking statements. Readers should not place undue reliance on forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to update or revise our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, they include, but are not limited to, factors described in the Risk Factors discussion in Item 1A of Part I of our most recently filed Annual Report on Form 10-K.
McKESSON CORPORATION
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