10-K 1 mck_10kx3312019.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2019
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 1-13252
McKESSON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
94-3207296
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
6555 State Hwy 161, Irving, Texas
 
75039
(Address of principal executive offices)
 
(Zip Code)
(972) 446-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Common stock, $0.01 par value
MCK
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ 
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 
Yes  ¨    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, September 30, 2018, was approximately $26 billion.
Number of shares of common stock outstanding on April 30, 2019: 189,961,556
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



McKESSON CORPORATION

TABLE OF CONTENTS
 
 
Item
Page
 
 
 
 
 
 
 
 
1.
 
 
 
1A.
 
 
 
1B.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
 
 
 
 
 
 
 
 
5.
 
 
 
6.
 
 
 
7.
 
 
 
7A.
 
 
 
8.
 
 
 
9.
 
 
 
9A.
 
 
 
9B.
 
 
 
 
 
 
 
 
10.
 
 
 
11.
 
 
 
12.
 
 
 
13.
 
 
 
14.
 
 
 
 
 
 
 
 
15.
 
 
 
16.
 
 
 
 



McKESSON CORPORATION

PART I
Item 1.
Business.
General
McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns), currently ranked 6th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. We partner with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively.
The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references in this document to a particular year shall mean the Company’s fiscal year.
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act,”) are available free of charge on our website (www.mckesson.com under the “Investors — Financial Information — SEC Filings” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC” or the “Commission”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The address of the website is www.sec.gov.
Business Segments
Commencing in the first quarter of 2019, we changed our operating structure into three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. We have reported our financial results on a retrospective basis in this Annual Report on Form 10-K to reflect the new operating structure.

Our U.S. Pharmaceutical and Specialty Solutions segment distributes branded, generic, specialty, biosimilar and over-the-counter (“OTC”) pharmaceutical drugs and other healthcare-related products. This segment provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices. This segment also provides solutions for life sciences companies including offering multiple distribution channels and clinical trial access to specific patient populations through our network of oncology physicians. It also sells financial, operational and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing and other services.

Our European Pharmaceutical Solutions segment provides distribution and services to wholesale, institutional and retail customers and serves patients and consumers in 13 European countries through our own pharmacies and participating pharmacies that operate under brand partnership and franchise arrangements.

Our Medical-Surgical Solutions segment distributes medical-surgical supplies and provides logistics and other services to healthcare providers in the United States.

Other primarily consists of the following:

McKesson Canada which distributes pharmaceutical and medical products and operates Rexall Health retail pharmacies;

McKesson Prescription Technology Solutions (“MRxTS”) which provides innovative technologies that support retail pharmacies; and

Our 70% equity ownership interest in a joint venture, Change Healthcare, which is accounted for by us using the equity investment method of accounting.


3

McKESSON CORPORATION

U.S. Pharmaceutical and Specialty Solutions Segment:
Our U.S. Pharmaceutical and Specialty Solutions segment provides distribution and logistics services for branded, generic, specialty, biosimilar and OTC pharmaceutical drugs and other healthcare-related products to customers. This business also provides solutions and services to pharmacies, hospitals, pharmaceutical manufacturers, physicians, payers and patients throughout the United States and Puerto Rico. We also source generic pharmaceutical drugs through our joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”).

Our U.S. Pharmaceutical and Specialty Solutions segment operates and serves customer through a network of 30 distribution centers, as well as a primary redistribution center, one strategic redistribution center and one repackaging facility. We invest in technology and other systems at all of our distribution centers to enhance safety and reliability and product availability. For example, we offer McKesson ConnectSM, an internet-based ordering system that provides item look-up and real-time inventory availability as well as ordering, purchasing, third-party reconciliation and account management functionality. We make extensive use of technology as an enabler to ensure customers have the right products at the right time in the right place.

To maximize distribution efficiency and effectiveness, we follow the Six Sigma methodology, which is an analytical approach that emphasizes setting high-quality objectives, collecting data and analyzing results to a fine degree in order to improve processes, reduce costs and enhance service accuracy and safety. We provide solutions to our customers including supply management technology, world-class marketing programs, managed care, repackaging products and services to help them meet their business and quality goals. We continue to implement information systems to help achieve greater consistency and accuracy both internally and for our customers.

We have three primary customer channels: (i) retail national accounts which include national and regional chains, food and drug combinations, mail order pharmacies and mass merchandisers, (ii) independent, small and medium chain retail pharmacies, and (iii) institutional healthcare providers such as hospitals, health systems, integrated delivery networks and long-term care providers.

Retail National Accounts: We provide business solutions that help retail national account customers increase revenues and profitability. Solutions include:
Central FillSM - Prescription refill service that enables pharmacies to more quickly refill prescriptions remotely, more accurately and at a lower cost, while reducing inventory levels and improving customer service.

Redistribution Centers - Two facilities totaling over 750,000 square feet that offer access to inventory for single source warehouse purchasing, including pharmaceuticals and biologics. These distribution centers also provide the foundation for a two-tiered distribution network that supports best-in-class direct store delivery.

McKesson SynerGx® - Generic pharmaceutical purchasing program and inventory management that helps pharmacies maximize their cost savings with a broad selection of generic drugs, competitive pricing and one-stop shopping.

RxPakSM - Bulk-to-bottle repackaging service that leverages our purchasing scale and supplier relationships to provide pharmaceuticals at competitive prices, help increase inventory turns and reduce working capital investment.

Inventory Management - An integrated solution comprising forecasting software and automated replenishment technologies that reduce inventory-carrying costs.

ExpressRx Track™ - Pharmacy automation solution featuring state-of-the-art robotics, upgraded imaging and expanded vial capabilities, and industry-leading speed and accuracy in a small footprint.


4

McKESSON CORPORATION

Independent, Small and Medium Chain Retail Pharmacies: We provide managed care contracting, branding and advertising, merchandising, purchasing, operational efficiency and automation that help independent pharmacists focus on patient care while improving profitability. Solutions include:
Health Mart® - Health Mart® is a national network of more than 5,000 independently-owned pharmacies and is one of the industry’s most comprehensive pharmacy franchise programs. Health Mart® provides franchisees support for managed care contracting, branding and local marketing solutions, the Health Mart private label line of products, merchandising solutions and programs for enhanced patient support.

Health Mart Atlas® - Comprehensive managed care and reconciliation assistance services that help independent pharmacies save time, access competitive reimbursement rates and improve cash flow.

McKesson Reimbursement AdvantageSM (“MRA”) - MRA is one of the industry’s most comprehensive reimbursement optimization packages, comprising financial services (automated claim resubmission), analytic services and customer care.

McKesson OneStop Generics® - Generic pharmaceutical purchasing program that helps pharmacies maximize their cost savings with a broad selection of generic drugs, competitive pricing and one-stop shopping.

Sunmark® - Complete line of more than 600 products that provide retail independent pharmacies with value-priced alternatives to national brands.

FrontEdge™ - Strategic planning, merchandising and price maintenance program that helps independent pharmacies maximize store profitability.

McKesson Sponsored Clinical Services (SCS) Network - Access to patient-support services that allow pharmacists to earn service fees and to develop stronger patient relationships.

McKesson RxOwnership Program - Assist independent pharmacist owners the opportunity to remain independent via succession planning and business operation loans.

Institutional Healthcare Providers: We provide electronic ordering/purchasing and supply chain management systems that help customers improve financial performance, increase operational efficiencies and deliver better patient care. Solutions include:
Fulfill-RxSM - Ordering and inventory management system that empowers hospitals to optimize the often complicated processes related to unit-based cabinet replenishment and inventory management.

Asset Management - Award-winning inventory optimization and purchasing management program that helps institutional providers lower costs while ensuring product availability.

SKY Packaging - Blister, Unit of Use and Unit dose packaging containing the most widely prescribed dosages and strengths in generic oral-solid medications. SKY Packaging enables acute care, long-term care and institutional pharmacies to provide cost-effective, uniform packaging.

McKesson Plasma and Biologics - A full portfolio of plasma-derivatives and biologic products.

McKesson OneStop Generics® - Described above.

This segment also provides a range of solutions to oncology and other specialty practices operating in communities across the country, to pharmaceutical and biotechnology suppliers who manufacture specialty drugs and vaccines, and to payers and hospitals. We have two core specialty business lines: Specialty Provider Organization and McKesson Life Sciences.


5

McKESSON CORPORATION

Specialty Provider Organization: This business offers community specialists (oncologists, rheumatologists, ophthalmologists, urologists, neurologists and other specialists) an extensive set of customizable products and services designed to strengthen core practice operations, enhance value-based care delivery and expand their service offering to patients. Tools and services include specialty drug distribution and group purchasing organization (“GPO”) services, technology solutions, practice consulting services, and vaccine distribution, including our exclusive distributor relationship with the Centers for Disease Control and Prevention’s (“CDC”) Vaccines for Children program. Community-based physicians in this business have broad flexibility and discretion to select the products and commitment levels that best meet their practice needs. This business also provides a variety of solutions, including practice operations, healthcare information technology, revenue cycle management and managed care contracting solutions, evidence-based guidelines and quality measurements to support U.S. Oncology Network, one of the nation’s largest networks of physician-led, integrated, community-based oncology practices dedicated to advancing high-quality, evidence-based cancer care. We also support U.S. Oncology Research, one of the nation’s largest research networks, specializing in oncology clinical trials.

McKesson Life Sciences: This business helps life sciences companies accelerate the approval and successful commercialization of branded, specialty, generic and biosimilar pharmaceuticals across the product life cycle. Our offerings to life sciences companies include specialty pharmacy services, third-party logistics (“3PL”), provider and patient engagement programs, clinical trial support, patient assistance programs, reimbursement services, analytics, and other tailored services. In addition, we help life sciences companies minimize reimbursement challenges while offering affordable, safe access to therapies through Risk Evaluation and Mitigation Strategies (“REMS”) programs. Our recent acquisitions of RxCrossroads and Biologics help expand our capabilities to support life sciences companies.

When we discuss specialty products or services, we consider the following factors: diseases requiring complex treatment regimens such as cancer and rheumatoid arthritis; plasma and biologics products; ongoing clinical monitoring requirements, high-cost, special handling, storage and delivery requirements and, in some cases, exclusive distribution arrangements. Our use of the term “specialty” may not be comparable to that used by other industry participants, including our competitors.

European Pharmaceutical Solutions Segment:
Our European Pharmaceutical Solutions segment provides distribution and services to wholesale, institutional and retail customers in 13 European countries where we own, partner or franchise with retail pharmacies, as further described below. The business consists of Pharmacy Solutions and Consumer Solutions.

Our Pharmacy Solutions business delivers pharmaceutical and other healthcare-related products to pharmacies across Europe. This business functions as a vital link connecting manufacturers to retail pharmacies. This business supplies medicines and other products sold in pharmacies.  Pharmaceutical and other healthcare-related products are stored at regional wholesale branches using technology-enabled management systems. Our European business leverages its scale and provides innovative and effective medical care services to create enhanced customer value.

Our Consumer Solutions business serves patients and consumers in European countries directly through approximately 2,000 of our own pharmacies and 6,900 participant pharmacies operating under brand partnership arrangements. In addition, this business includes outpatient dispensing and homecare arrangements mainly in the United Kingdom (“U.K.”).  This business provides traditional prescription pharmaceuticals, non-prescription products and medical services and operates under the Lloyds Pharmacy brand in Belgium, Ireland, Italy, Sweden and the U.K. In addition, we partner with independent pharmacies under our franchise program.


6

McKESSON CORPORATION

Medical-Surgical Solutions Segment:
Our Medical-Surgical Solutions segment delivers medical-supply distribution, logistics, biomedical and other services to healthcare providers across the alternate-site spectrum. Our more than 200,000 customers include physicians’ offices, surgery centers, post-acute care facilities, hospital reference labs, home health agencies, and occupational and alternative health sites. We distribute medical-surgical supplies (such as gloves, needles, syringes and wound care products), infusion pumps, laboratory equipment and pharmaceuticals. Through a network of distribution centers within the U.S., we offer more than 275,000 products from national brand manufacturers and McKesson’s own high-quality product line. Through the right mix of products and services, we help improve efficiencies, profitability and compliance. We also never lose focus on helping customers improve patient and business outcomes. With 85% of patient visits occurring outside the hospital, each customer has unique needs and challenges. We develop customized plans to address the product, operational and clinical support needs of our customers, including tackling reimbursements, reducing administrative burdens, and training and educating clinical staff. We care for our customers, so they can care for their patients.

Other:
Other primarily consists of the following operating segments and business activities: McKesson Canada, MRxTS and our equity method investment in Change Healthcare.
McKesson Canada: This business is one of the largest pharmaceutical wholesale and retail distributors in Canada. The wholesale business delivers their products to retail pharmacies, hospitals, long-term care centers, clinics and institutions in Canada through a network of 15 distribution centers and provides logistics and distribution services for manufacturers. Beyond wholesale pharmaceutical logistics and distribution, McKesson Canada provides automation solutions to its retail and hospital customers. McKesson Canada also provides health information exchange solutions that streamline clinical and administrative communication. The retail business operates approximately 410 owned pharmacies under the Rexall Health brand in Canada where we provide patients with greater choice and access, integrated pharmacy care and industry-leading service levels.
MRxTS: This business provides innovative technologies that support retail pharmacies and manufacturers that ultimately enable patients to fulfill their prescriptions. This business supports our customers, with a comprehensive, expanded portfolio of solutions designed to help them drive business growth, realize greater business efficiencies, deliver high-quality care, enhance medication adherence and safety, and more effectively connect with other players in the pharmaceutical supply chain.
Change Healthcare: Our 70% equity ownership interest in Change Healthcare is accounted for by us using the equity method of accounting. Change Healthcare provides software and analytics, network solutions and technology-enabled services that delivers wide-ranging financial, operational and clinical benefits to payers, providers and consumers. Change Healthcare Inc., the entity that owns 30% of the joint venture, filed a registration statement with the Securities and Exchange Commission on March 15, 2019 and amended on April 5, 2019 regarding its intent to pursue an initial public offering.

Restructuring, Business Combinations, Investments, Divestitures and Discontinued Operations
We have undertaken additional strategic initiatives in recent years designed to further focus on our core healthcare businesses and enhance our competitive position. We expect to continue to undertake such strategic initiatives in the future. These initiatives are detailed in Financial Notes 3, 4, 5, 6 and 7, “Restructuring and Asset Impairment Charges,” “Business Combinations”, “Healthcare Technology Net Asset Exchange,” “Divestitures,” and “Discontinued Operations” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

7

McKESSON CORPORATION

Competition
We face highly competitive global environments with strong competition from international, national, regional and local full-line, short-line and specialty distributors, service merchandisers, self-warehousing chain drug stores, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations.  In addition, we compete with other service providers, pharmaceutical and other healthcare manufacturers as well as other potential customers of our businesses, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by our businesses.  Our retail businesses also face competition from various local, regional, national and global retailers, including chain and independent pharmacies. In all areas, key competitive factors include price, quality of service, breadth of product lines, innovation and, in some cases, convenience to the customer.
Patents, Trademarks, Copyrights and Licenses
McKesson and its subsidiaries hold patents, copyrights, trademarks and trade secrets related to McKesson products and services. We pursue patent protection for our innovations, and obtain copyright protection for our original works of authorship, when such protection is advantageous. Through these efforts, we have developed a portfolio of patents and copyrights in the U.S. and worldwide. In addition, we have registered or applied to register certain trademarks and service marks in the U.S. and in foreign countries.
We believe that, in the aggregate, McKesson’s confidential information, patents, copyrights, trademarks and intellectual property licenses are important to its operations and market position, but we do not consider any of our businesses to be dependent upon any one patent, copyright, trademark, or trade secret, or any family or families of the same. We cannot guarantee that our intellectual property portfolio will be sufficient to deter misappropriation, theft, or misuse of our technology, nor that we can successfully enjoin infringers. We periodically receive notices alleging that our products or services infringe on third party patents and other intellectual property rights. These claims may result in McKesson entering settlement agreements, paying damages, discontinuing use or sale of accused products, or ceasing other activities. While the outcome of any litigation or dispute is inherently uncertain, we do not believe that the resolution of any of these infringement notices would have a material adverse impact on our results of operation.
We hold inbound licenses for certain intellectual property that is used internally, and in some cases, utilized in McKesson’s products or services. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products and services, we believe, based upon past experience and industry practice, such licenses generally can be obtained on commercially reasonable terms. We believe our operations and products and services are not materially dependent on any single license or other agreement with any third party.
Other Information about the Business
Customers: During 2019, sales to our ten largest customers, including GPOs accounted for approximately 49.9% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 19.4% of our total consolidated revenues. In May 2019, we extended our pharmaceutical distribution relationship with CVS to June 2023. At March 31, 2019, trade accounts receivable from our ten largest customers were approximately 31.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 18.4% of total trade accounts receivable. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivable balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. Substantially all of these revenues and accounts receivable are included in our U.S. Pharmaceutical and Specialty Solutions segment.
Suppliers: We obtain pharmaceutical and other products from manufacturers, none of which accounted for more than 6% of our purchases in 2019. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable. We believe that our relationships with our suppliers are generally sound. The ten largest suppliers in 2019 accounted for approximately 42% of our purchases.

8

McKESSON CORPORATION

Some of our distribution arrangements with the manufacturers provides us compensation based on a percentage of our purchases. In addition, we have certain distribution arrangements with pharmaceutical manufacturers that include an inflation-based compensation component whereby we benefit when the manufacturers increase their prices as we sell our existing inventory at the new higher prices. For these manufacturers, a reduction in the frequency and magnitude of price increases, as well as restrictions in the amount of inventory available to us, could have an adverse impact on our gross profit margin.
Research and Development: Research and development (“R&D”) expenses were $71 million, $125 million and $341 million during 2019, 2018 and 2017. R&D expenses were lower in 2019 due to the sale of our Enterprise Information Solutions (“EIS”) business. R&D costs were lower in 2018 due to the 2017 contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to the Change Healthcare joint venture.
Environmental Regulation: Our operations are subject to regulations under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party damage or personal injury claims, if in the future we were to violate or become liable under environmental laws.
We are committed to maintaining compliance with all environmental laws applicable to our operations, products and services and to reducing our environmental impact across all aspects of our business. We meet this commitment through an environmental strategy and sustainability program.
We sold our chemical distribution operations in 1987 and retained responsibility for certain environmental obligations. Agreements with the Environmental Protection Agency and certain states may require environmental assessments and cleanups at several closed sites. These matters are described further in Financial Note 24, “Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
The liability for environmental remediation and other environmental costs is accrued when the Company considers it probable and can reasonably estimate the costs. Environmental costs and accruals, including that related to our legacy chemical distribution operations, are presently not material to our operations or financial position. Although there is no assurance that existing or future environmental laws applicable to our operations or products will not have a material adverse impact on our operations or financial condition, we do not currently anticipate material capital expenditures for environmental matters. Other than the expected expenditures that may be required in connection with our legacy chemical distribution operations, we do not anticipate making substantial capital expenditures either for environmental issues, or to comply with environmental laws and regulations in the future. The amount of our capital expenditures for environmental compliance was not material in 2019 and is not expected to be material in the next year.
Employees: On March 31, 2019, we employed approximately 80,000 employees, including approximately 20,000 part-time employees.
Financial Information About Foreign and Domestic Operations: Certain financial information relating to foreign and domestic operations is included in Financial Note 28, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. See “Risk Factors” in Item 1A of Part I below for information regarding risks associated with our foreign operations.
Forward-Looking Statements
This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this report and the “Risk Factors” in Item 1A of Part I of this report, contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by use of forward-looking words such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans” or “estimates,” or the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include 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 may include, but are not limited to, the factors discussed in Item 1A of Part I of this report under “Risk Factors.”

9

McKESSON CORPORATION

These and other risks and uncertainties are described herein and in other information contained in our publicly available SEC filings and press releases. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements were first made. Except to the extent required by federal securities laws, we undertake no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.
Item 1A.
Risk Factors
The risks described below could have a material adverse impact on our financial position, results of operations, liquidity and cash flows. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the factors discussed below. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material. The reader should not consider this list to be a complete statement of all risks and uncertainties.
Changes in the United States healthcare industry and regulatory environment could have a material adverse impact on our results of operations.
Many of our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly in an effort to enhance efficiencies, reduce costs and improve patient outcomes. These changes have included cuts in Medicare and Medicaid reimbursement levels, changes in the basis for payments, shifting away from fee-for-service and towards value-based payments and risk-sharing models, increases in the use of managed care and consolidation in the healthcare industry. We expect the healthcare industry in the United States to continue to change and for healthcare delivery models to evolve in the future.
Changes in the healthcare industry’s or our pharmaceutical suppliers’ pricing, selling, inventory, distribution or supply policies or practices could significantly reduce our revenues and net income. Additionally, if we experience disruptions in our supply of generic drugs, our margins could be adversely affected. Due to the diverse range of healthcare supply management and healthcare information technology products and services that we offer, such changes could have a material adverse impact on our results of operations, while not affecting some of our competitors who offer a narrower range of products and services.
The majority of our U.S. pharmaceutical distribution business agreements with manufacturers are structured to ensure that we are appropriately and predictably compensated for the services we provide. Failure to successfully renew these contracts in a timely and favorable manner could have a material adverse impact on our results of operations. Certain distribution business agreements with manufacturers continue to have pharmaceutical price inflation as a component of our compensation. Consequently, our results of operations could be adversely affected if the frequency or magnitude of pharmaceutical price increases or decreases, which we do not control. In addition, we distribute generic pharmaceuticals, which can be subject to both price deflation and price inflation. Our generic pharmaceutical sourcing program has benefited from sourcing through our joint venture with Walmart, Inc., ClarusONE. If ClarusONE does not continue to be successful, our margins could be adversely affected. Our U.S. Pharmaceutical and Specialty Solutions segment experienced weaker pharmaceutical pricing trends over the last three years. Continued volatility in the availability, pricing trends or reimbursement of these generic drugs, or significant fluctuations in the nature, frequency and magnitude of generic pharmaceutical launches, could have a material adverse impact on our results of operations. Additionally, any future changes in branded and generics drug pricing could be significantly different than our projections.
Generic drug manufacturers are increasingly challenging the validity or enforceability of patents on branded pharmaceutical products. During the pendency of these legal challenges, a generics manufacturer may begin manufacturing and selling a generic version of the branded product prior to the final resolution of its legal challenge over the branded product’s patent. To the extent we source, contract manufacture, and distribute such generic products, the brand-name company could assert infringement claims against us. While we generally obtain indemnification against such claims from generic manufacturers as a condition of distributing their products, there can be no assurances that these rights will be adequate or sufficient to protect us.
The healthcare industry is highly regulated, and further regulation of our distribution businesses and technology products and services could impose increased costs, negatively impact our profit margins and the profit margins of our customers, delay the introduction or implementation of our new products, or otherwise negatively impact our business and expose the Company to litigation and regulatory investigations.

10

McKESSON CORPORATION

Healthcare Fraud: We are subject to extensive and frequently changing local, state and federal laws and regulations relating to healthcare fraud, waste and abuse. Local, state and federal governments continue to strengthen their position and scrutiny over practices involving fraud, waste and abuse affecting Medicare, Medicaid and other government healthcare programs. Our relationships with pharmaceutical and medical-surgical product manufacturers and healthcare providers, as well as our provision of products and services to government entities, subject our business to laws and regulations on fraud and abuse, which among other things: (1) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or to induce the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs; (2) impose a number of restrictions upon referring physicians and providers of designated health services under Medicare and Medicaid programs; and (3) prohibit the knowing submission of a false or fraudulent claim for payment to, and knowing retention of an overpayment by, a federal healthcare program such as Medicare and Medicaid. Many of the regulations applicable to us, including those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. The regulations may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could be subject to federal or state government investigations or qui tam actions, and could become liable for damages and suffer civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid and other federal and state healthcare programs.
Reimbursements: Our profit margins and the profit margins of our customers may be adversely affected by laws and regulations reducing reimbursement rates (including government rates) for pharmaceuticals, medical treatments and related services, imposing additional requirements on healthcare entities, or changing the methodology by which reimbursement levels are determined.
For example, on October 25, 2018, the Department of Health & Human Services (“HHS”) announced its intent to propose an International Pricing Index (“IPI”) payment model to reduce government payments for Medicare Part B drugs to levels more closely aligned with prices paid in other countries. If proposed and finalized, the far-reaching model could reduce Part B drug reimbursement by 30 percent between 2020 and 2025. The model would eliminate the “buy and bill” model and reintroduce the Competitive Acquisition Program (“CAP”). This could allow private vendors (including non-wholesaler entities) to procure and distribute drugs to physicians and hospitals, while Medicare would pay the vendor for the included drugs based on the target price driven by the IPI. Also, on January 31, 2019, the HHS Office of Inspector General released the Removal of Safe Harbor Protection for Rebates to Plans or Pharmacy Benefit Managers (“PBM”) Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection Proposed Rule. If finalized, the proposal would create significant change in the pharmaceutical value chain as manufacturers, PBM, managed care organizations and other industry stakeholders look to implement new transactional flows and adapt their business models. Additionally, federal and state lawmakers are increasingly exploring other policy proposals to reduce drug price, including price transparency measurers and drug reimportation.
There can be no assurance that the preceding changes would not have a material adverse impact on our results of operations.
Operating, Security and Licensure Standards: We are subject to the operating and security standards of the Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration (“FDA”), various state boards of pharmacy, state health departments, HHS, the Centers for Medicare & Medicaid Services (“CMS”) and other comparable agencies. Certain of our businesses may be required to register for permits and/or licenses with, and comply with operating and security standards of, the DEA, FDA, HHS, CMS, various state boards of pharmacy, state health departments and/or comparable state agencies as well as foreign agencies and certain accrediting bodies, depending upon the type of operations and location of product development, manufacture, distribution, and sale. For example, we are required to hold valid DEA and state-level registrations and licenses, meet various security and operating standards and comply with the Controlled Substances Act and its accompanying regulations governing the sale, marketing, packaging, holding, distribution, and disposal of controlled substances.
As part of these operating, security and licensure standards, we regularly receive requests for information and occasionally subpoenas from government authorities. In some instances, these can lead to monetary penalties and/or license revocation. In January 2017, we reached an agreement with the DEA and Department of Justice pursuant to which we paid $150 million to settle all potential administrative and civil claims relating to investigations about the Company’s suspicious order reporting practices for controlled substances. The DEA suspended, on a staggered basis for limited periods of time, McKesson’s DEA registrations to distribute certain controlled substances from four McKesson distribution centers. As of March 31, 2019, staggered suspensions have expired for two DEA registrations and two remain applicable.

11

McKESSON CORPORATION

Although we have enhanced our procedures to ensure compliance, there can be no assurance that a regulatory agency or tribunal would conclude that our operations are compliant with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses or any other regulatory approvals or obtain without significant delay future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could lead to litigation and have a material adverse impact on our results of operations.
Pedigree Tracking: There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy and departments of health and the FDA, to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, adulterated and/or mislabeled drugs into the pharmaceutical distribution system, otherwise known as pedigree tracking. In November 2013, Congress passed and the President signed into law the Drug Quality and Security Act (“DQSA”). The DQSA establishes federal standards requiring supply-chain stakeholders to participate in a prescription drug track and trace system. Track and trace began in 2015 at the lot-level and evolves to a serialized level electronic, interoperable system by November 2023. The law also preempts state drug pedigree requirements. The DSQA also establishes new requirements for drug wholesale distributors and third-party logistics providers, including licensing requirements in states that had not previously licensed such entities.
In addition, the Food and Drug Administration Amendments Act of 2007 requires the FDA to establish standards and identify and validate effective technologies for the purpose of securing the pharmaceutical supply chain against counterfeit drugs. These standards may include track and trace or authentication technologies, such as radio frequency identification devices, 2D data matrix barcodes and other similar technologies. On March 26, 2010, the FDA released the Serialized Numerical Identifier (“SNI”) guidance for manufacturers who serialize pharmaceutical packaging. We expect to be able to accommodate these SNI regulations in our distribution operations. The DQSA and other pedigree tracking laws and regulations could increase the overall regulatory burden and costs associated with our pharmaceutical distribution business, and could have a material adverse impact on our results of operations.
Privacy: There are numerous federal and state laws and regulations related to the privacy and security of personal information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) establish privacy and security standards that limit the use and disclosure of individually identifiable health information (known as “protected health information”) and require the implementation of administrative, physical and technological safeguards to protect the privacy of protected health information and ensure the confidentiality, integrity and availability of electronic protected health information. We are directly subject to certain provisions of the regulations as a “Business Associate” through our relationships with customers. We are also directly subject to the HIPAA privacy and security regulations as a “Covered Entity” with respect to our operations as a healthcare clearinghouse, specialty pharmacy and medical surgical supply business.
The privacy regulations established under HIPAA also provide patients with rights related to understanding and controlling how their protected health information is used and disclosed. To the extent permitted by applicable privacy regulations and our contracts with our customers, we may use and disclose protected health information to perform our services and for other limited purposes, such as creating de-identified information. Other uses and disclosures, such as marketing communications, require written authorization from the individual or must meet an exception specified under the privacy regulations. Determining whether protected health information has been sufficiently de-identified to comply with the HIPAA privacy standards and our contractual obligations may require complex factual and statistical analyses and may be subject to interpretation.
If we are unable to properly protect the privacy and security of protected health information entrusted to us, we could be found to have breached our contracts with our customers. Further, if we fail to comply with applicable HIPAA privacy and security standards, we could face civil and criminal penalties. HHS performs compliance audits of Covered Entities and Business Associates and enforces the HIPAA privacy and security standards. HHS has become an increasingly active regulator and has signaled its intention to continue this trend. HHS has the discretion to impose penalties without being required to attempt to resolve violations through informal means, such as implementing a corrective action plan. HHS enforcement activity can result in financial liability and reputational harm, and responses to such enforcement activity can consume significant internal resources. In addition to enforcement by HHS, state attorney generals are authorized to bring civil actions seeking either injunctions or damages in response to violations that threaten the privacy of state residents. Although we have implemented and maintained policies and processes to assist us in complying with these regulations and our contractual obligations, we cannot provide assurance regarding how these regulations will be interpreted, enforced or applied to our operations. In addition to the risks associated with enforcement activities and potential contractual liabilities, our ongoing efforts to comply with evolving laws and regulations at the federal and state level, including the California Consumer Protection Act, which becomes effective in 2020, might also require us to make costly system purchases and/or modifications from time to time.

12

McKESSON CORPORATION

Healthcare Reform:    The Affordable Care Act (“ACA”) significantly expanded health insurance coverage to uninsured Americans and changed the way healthcare is financed by both governmental and private payers. While certain provisions of the ACA took effect immediately, others have delayed effective dates or require further rulemaking action or regulatory guidance by governmental agencies to implement and/or finalize (e.g. nondiscrimination in health programs and activities, excise tax on high-cost employer-sponsored health coverage). Further, as a result of the November 2016 U.S. presidential election and the November 2018 midterm election, there are continued uncertainties associated with efforts to change or repeal certain provisions of the ACA as well as moves to achieve universal healthcare coverage. While there is currently a substantial lack of clarity around the likelihood, timing and details of any such policies and reforms, such policies and reforms may have a material adverse impact on our results of operations.
Our foreign operations subject us to a number of operating, economic, political and regulatory risks that may have a material adverse impact on our financial position and results of operations.
We have operations based in, and we source and contract manufacture pharmaceutical and medical-surgical products in, a number of foreign countries. Moreover, in Europe, McKesson Europe AG (“McKesson Europe”), formerly known as Celesio AG, operates as a wholesale and retail company and provider of logistics and services to the pharmaceutical and healthcare sector.
Our foreign operations expose us to a number of risks including changes in trade protection laws, policies and measures and other regulatory requirements affecting trade and investment; changes in licensing regimes for pharmacies; unexpected regulatory, social, political, or economic changes in a specific country or region such as the reduction of reimbursement rates within the National Health Service in the United Kingdom (“U.K.”); changes in intellectual property, privacy and data protection; import/export regulations and trade sanctions in both the United States and foreign countries and difficulties in staffing and managing foreign operations. For example, the Falsified Medicines Directive became operational in most European Union (“EU”) countries on February 9, 2019 and required implementing safety features for medicines, including a unique identifier (a two-dimension barcode) and an anti-tampering device on outer packaging. Political changes, labor strikes, acts of war or terrorism and natural disasters, some of which may be disruptive, can interfere with our supply chain, our customers and all of our activities in a particular location.
In June 2016, voters in the U.K. approved a referendum to withdraw the U.K.'s membership from the EU, commonly referred to as "Brexit". In March 2017, the U.K. government officially gave notice to leave, starting a two-year negotiation process. The resulting Withdrawal Agreement was intended to ensure continuity, as the U.K. could remain a de facto member until the end of 2020, during which time the two sides could negotiate their future political and trade relations. However, the U.K. legislature has declined to ratify the Withdrawal Agreement, and no alternative agreement has been negotiated to govern the withdrawal of the U.K. from the EU. The U.K. and the EU agreed to an extension of the deadline for withdrawal until October 31, 2019, although the U.K. could leave the EU sooner than that date if the Withdrawal Agreement is ratified, or if the parties reach an alternative agreement governing the withdrawal of the U.K. from the EU. If no agreement is reached and the U.K. leaves the EU after the October 31, 2019 deadline, significant trade barriers would exist between the EU and the U.K.
We have operations in the U.K. and the EU, and as a result, we face risks associated with the potential uncertainty and disruptions that may lead up to and follow Brexit, including with respect to volatility in exchange rates and interest rates and potential material changes to the regulatory regime applicable to our operations in the U.K. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions, regulatory agencies and financial markets. For example, depending on the terms of Brexit, the U.K. could also lose access to the single EU market and to the global trade deals negotiated by the EU on behalf of its members. Disruptions and uncertainty caused by Brexit may also cause our clients to closely monitor their costs and reduce their spending budget on our solutions and services. Any of these effects of Brexit, and others we cannot anticipate or that may evolve over time, could adversely affect our business, results of operations and financial condition.

13

McKESSON CORPORATION

In addition, foreign operations are also subject to risks of violations of laws prohibiting improper payments and bribery, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar regulations in foreign jurisdictions. The U.K. Bribery Act, for example, prohibits both domestic and international bribery, as well as bribery across both private and public sectors. An organization that fails to prevent bribery committed by anyone associated with the organization can be charged under the U.K. Bribery Act unless the organization can establish the defense of having implemented adequate procedures to prevent bribery. Failure to comply with these laws could subject us to civil and criminal penalties that could have a material adverse impact on our financial position and results of operations.
We also may experience difficulties and delays inherent in sourcing products and contract manufacturing from foreign countries, including but not limited to: (1) difficulties in complying with the requirements of applicable federal, state and local governmental authorities in the United States and of foreign regulatory authorities; (2) inability to increase production capacity commensurate with demand or the failure to predict market demand; (3) other manufacturing or distribution problems including changes in types of products produced, limits to manufacturing capacity due to regulatory requirements, physical limitations, or scarce or inadequate resources that could impact continuous supply; and (4) damage to our reputation due to real or perceived quality issues. For example, the FDA has conducted investigations and banned certain generics manufacturers from selling certain raw materials and drug ingredients in the U.S. from overseas plants due to quality issues. Difficulties in manufacturing or access to raw materials could result in production shutdowns, product shortages and other similar delays in product manufacturing that could have a material adverse impact on our financial position and results of operations.
Changes in the Canadian healthcare industry and regulatory environment could have a material adverse impact on our results of operations.
Provincial governments in Canada provide partial funding for the purchase of pharmaceuticals and independently regulate the sale and reimbursement of drugs. Provincial governments in Canada have introduced significant changes in recent years in an effort to reduce the costs of publicly funded health programs. For instance, to reduce the cost for taxpayers, provincial governments have taken and will continue to take steps to reform the rules regarding the sale of generic drugs. These changes include increased powers of investigation, reporting and enforcement for provincial regulatory agencies, the significant lowering of prices for generic pharmaceuticals and, in some provinces, changes to the allowable amounts of professional allowances paid to pharmacists by generic manufacturers and the tendering of generic molecules on provincial drug formularies. These reforms may adversely affect the distribution of drugs as well as the pricing for prescription drugs for the Company’s operations in Canada. Additional provinces have implemented or are considering similar changes, which would also lower pharmaceutical pricing and service fees. Individually or in combination, such changes in the Canadian healthcare environment may significantly reduce our Canadian revenue and operating profit.
General European economic conditions, together with austerity measures being taken by certain European governments, could have a material adverse impact on our results of operations.
A slowdown within the European economy could affect our business in Europe by reducing the prices our customers may be able or willing to pay for our products and services. A slowdown may also reduce the demand for our products. Either of these could result in a material adverse impact on our results of operations.
In addition, in many European countries the government provides or subsidizes healthcare to consumers and regulates pharmaceutical prices, patient eligibility, and reimbursement levels to control costs for the government-sponsored healthcare system. In recent years, in response to the recessionary environment and financial crisis in Europe, a number of European governments, including the government in the U.K. in the past year, have announced or implemented austerity measures to reduce healthcare spending and constrain overall government expenditures. These measures, which include efforts aimed at reforming healthcare coverage and reducing healthcare costs, continue to exert pressure on the pricing of and reimbursement timelines for pharmaceuticals and may cause our customers to purchase fewer of our products and services and reduce the prices they are willing to pay.
Countries with existing healthcare-related austerity measures may impose additional laws, regulations, or requirements on the healthcare industry. In addition, European governments that have not yet imposed healthcare-related austerity measures may impose them in the future. New austerity measures may be similar to or vary from existing austerity measures and could have a material adverse impact on our results of operations.

14

McKESSON CORPORATION

Changes in the foreign regulatory environment regarding privacy and data protection regulations could have a material adverse impact on our results of operations.
Personal data is highly regulated in many other countries in which we operate. In addition, some of the data that we process, store and transmit may travel outside of the United States. In Europe, we are subject to the General Data Protection Regulation (“GDPR”) and in Canada, we are subject to the Personal Information Protection and Electronic Documents Act (“PIPEDA”). The GDPR and PIPEDA impose restrictions on the collection and use of personal data that, in some respects, are more stringent, and impose more significant burdens on subject businesses, than current privacy standards in the United States. The EU member state regulations establish several obligations that organizations must follow with respect to use of personal data, including a prohibition on the transfer of personal information from the EU to other countries whose laws do not protect personal data to an adequate level of privacy or security. Other countries have enacted or are considering enacting data localization laws that require certain data to stay within their borders. We may also face audits or investigations by one or more foreign government agencies relating to our compliance with these regulations that could result in the imposition of penalties or fines. The costs of compliance with, and other burdens imposed by, such laws, regulations and policies that are applicable to us may limit the use and adoption of our products and solutions and could have a material adverse impact on our results of operations.
Our results of operations, which are stated in U.S. dollars, could be adversely impacted by fluctuations in foreign currency exchange rates.
We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a significant adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign currency exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies.
We may from time to time enter into foreign currency contracts or other derivative instruments intended to hedge a portion of our foreign currency exchange rate risks. Additionally, we may use foreign currency borrowings to hedge some of our foreign currency exchange rate risks. These hedging activities may not completely offset the adverse financial effects of unfavorable movements in foreign currency exchange rates during the time the hedges are in place.
Our business could be hindered if we are unable to complete and integrate acquisitions successfully.
An element of our strategy is to identify, pursue and consummate acquisitions that either expand or complement our business. Integration of acquisitions involves a number of significant risks, including the diversion of management’s attention to the assimilation of the operations of businesses we have acquired; difficulties in the integration of operations and systems; the realization of potential operating synergies; the assimilation and retention of the personnel of the acquired companies; accounting, regulatory or compliance issues that could arise, including internal control over financial reporting; and challenges retaining the customers of the combined businesses. Further, acquisitions may have a material adverse impact on our operating results if unanticipated expenses or charges to earnings were to occur, including unanticipated depreciation and amortization expenses over the useful lives of certain assets acquired, as well as costs related to potential impairment charges, assumed litigation and unknown liabilities. In addition, we may potentially require additional financing in order to fund future acquisitions, which may or may not be attainable and is subject to potential volatility in the credit markets. If we are unable to successfully complete and integrate strategic acquisitions in a timely manner, our business and our growth strategies could be negatively affected.
Achieving the anticipated benefits of any acquisition is subject to a number of risks and uncertainties, including foreign exchange fluctuations, challenges of managing new domestic or international operations, and whether we can ensure continued performance or market growth of products and services. The integration process is subject to a number of uncertainties and no assurance can be given that the anticipated benefits of any transaction will be realized or, if realized, the timing of its realization. It is possible that the integration process could take longer than anticipated, and could result in the loss of employees, the disruption of each company’s ongoing businesses, processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements. Any of these events could adversely affect our ability to achieve the anticipated benefits of an acquisition and could have a material adverse impact on our results of operations.
Any significant diversion of management’s attention away from the ongoing businesses, and any difficulties encountered in the acquisition, transition and integration process, could adversely affect our financial results. Moreover, the failure to achieve the anticipated benefits of a transaction could result in increased costs or decreases in the amount of expected revenues, and could adversely affect our future business, financial position and operating results. Events outside of our control, including changes in regulations and laws, as well as economic trends, could also adversely affect our ability to realize the expected benefits from a transaction.

15

McKESSON CORPORATION

Our results of operations could be impacted if our investment in Change Healthcare fails to perform as expected.
On March 1, 2017, McKesson contributed the majority of our Core MTS Business and Change contributed substantially all of its businesses, excluding its pharmacy switch and prescription routing businesses, to form a joint venture, Change Healthcare. The purpose of the transaction was to create a new healthcare information technology company, bringing together the complementary strengths of the contributed assets to provide software and analytics, network solutions and technology-enabled services that will help customers obtain actionable insights, exchange mission-critical information, control costs, optimize revenue opportunities, increase cash flow and effectively navigate the shift to value-based healthcare. Change Healthcare is jointly governed by McKesson and Change. Operating a business under joint governance of unaffiliated, controlling members could lead to conflicts of interest or deadlocks on important and time-sensitive operational, financial or strategic decisions, and will require additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. If we are unable to manage our joint venture relationship and to realize the strategic and financial benefits that we expect, including an initial public offering of Change Healthcare Inc., such inability to manage the relationship or realize benefits may have a material adverse impact on our results of operations.
Our business and results of operations could be impacted if we fail to manage and complete divestitures.
We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. We may also experience greater dissynergies than expected, and the impact of the divestiture on our revenue growth may be larger than projected. After reaching an agreement with a buyer, we are subject to satisfaction of pre-closing conditions as well as to necessary regulatory and governmental approvals, which, if not satisfied or obtained, may prevent us from completing the sale. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could have a material adverse impact on our results of operations.
We are subject to legal and regulatory proceedings that could have a material adverse impact on our financial position and results of operations.
From time to time and in the ordinary course of our business, we and certain of our subsidiaries may become involved in various legal and regulatory proceedings involving false claims, healthcare fraud and abuse, antitrust, class actions, commercial, employment, environmental, intellectual property, licensing, tort and other various claims. For example, the Company is a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. The Company has been served with many complaints, often brought by governmental entities (including counties and municipalities) that allege violations of controlled substance laws and various other statutes in addition to common law claims, including negligence and public nuisance, and seek monetary damages and equitable relief. Some states and other governmental entities have indicated that they are considering filing similar suits. All such legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business or we may enter into settlements of claims for monetary payments. In some cases, substantial non-economic remedies or punitive damages may be sought. For some complaints filed against the Company, we are currently unable to estimate the amount of possible losses that might be incurred should these legal proceedings be resolved against the Company.
The outcome of litigation and other legal matters is always uncertain and outcomes that are not justified by the evidence or existing law can occur. The Company believes that it has valid defenses to the legal matters pending against it and is defending itself vigorously. Nevertheless, it is possible that resolution of one or any combination of more than one legal matter could result in a material adverse impact on our financial position or results of operations.
Litigation is costly, time-consuming and disruptive to normal business operations. The defense of these matters could also result in continued diversion of our management’s time and attention away from business operations, which could also harm our business. Even if these matters are not resolved against us, the uncertainty and expense associated with unresolved legal proceedings could harm our business and reputation. It is possible that resolution of one or any combination of more than one legal matter could result in a material adverse impact on our financial position or results of operations.

16

McKESSON CORPORATION

Competition and industry consolidation may erode our profit.
Our businesses face a highly competitive global environment with strong competition from international, national, regional and local full-line, short-line and specialty distributors, service merchandisers, self-warehousing chain drug stores, manufacturers engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, our businesses face competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by our businesses. In all areas, key competitive factors include price, quality of service, breadth of product lines, innovation and, in some cases, convenience to the customer.
In addition, in recent years, the healthcare industry has been subject to increasing consolidation. As a result, a small number of very large pharmaceutical suppliers could control a significant share of the market. Accordingly, we could depend on fewer suppliers for our products and therefore we may be less able to negotiate price terms with suppliers. Many of our customers, including healthcare organizations that purchase our products and services, have also consolidated to create larger enterprises with greater market power. If this consolidation trend continues among our customers, suppliers and competitors, it could reduce the number of market participants and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services. It would also increase counter-party credit risk as the number of market participants decreases. In addition, when our customers combine, they often consolidate infrastructure including IT systems, which in turn may erode the diversity of our customer and revenue base.
Our McKesson Prescription Technology Solutions business experiences substantial competition from many companies, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations, hardware vendors and internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered.
These competitive pressures and industry consolidation could have a material adverse impact on our results of operations.
A material reduction in purchases or the loss of a large customer or group purchasing organization, as well as substantial defaults in payment by a large customer or group purchasing organization, could have a material adverse impact on our financial position and results of operations.
In recent years, a significant portion of our revenue growth has been with a limited number of large customers. During 2019, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 49.9% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 19.4% of our total consolidated revenues. At March 31, 2019, trade accounts receivable from our ten largest customers were approximately 31.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 18.4% of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. A material default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or GPO could have a material adverse impact on our financial position, results of operations and liquidity.

We generally sell our products and services to customers on credit that is short-term in nature and unsecured. Any adverse change in general economic conditions can adversely reduce sales to our customers, affect consumer buying practices or cause our customers to delay or be unable to pay accounts receivable owed to us, which may in turn materially reduce our revenue growth and cause a material decrease in our profitability and cash flow. Further, interest rate fluctuations and changes in capital market conditions may also affect our customers’ ability to obtain credit to finance their business under acceptable terms, which in turn may materially reduce our revenue growth and cause a decrease in our profitability.

17

McKESSON CORPORATION

Contracts with foreign and domestic government entities and their agencies pose additional risks relating to future funding and compliance.
Contracts with foreign and domestic government entities and their agencies are subject to various uncertainties, restrictions and regulations, including oversight audits by various government authorities. Government contracts also are exposed to uncertainties associated with funding. Contracts with the U.S. federal government, for example, are subject to the uncertainties of Congressional funding. Governments are typically under no obligation to maintain funding at any specific level, and funds for government programs may even be eliminated. As a result, our government clients may terminate our contracts for convenience or decide not to renew our contracts with little or no prior notice. The loss of such contracts could have a material adverse impact on our results of operations.
In addition, because government contracts are subject to specific procurement regulations and a variety of other socio-economic requirements, we must comply with such requirements. For example, for contracts with the U.S. federal government, with certain exceptions, we must comply with the Federal Acquisition Regulation, the U.S. False Claims Act, the Procurement Integrity Act, the Buy American Act and the Trade Agreements Act. We must also comply with various other domestic and foreign government regulations and requirements as well as various statutes related to employment practices, environmental protection, recordkeeping and accounting. These regulations and requirements affect how we transact business with our clients and, in some instances, impose additional costs on our business operations. Government contracts also contain terms that expose us to higher levels of risk and potential liability than non-government contracts.
We also are subject to government audits, investigations, and oversight proceedings. For example, government agencies routinely review and audit government contractors to determine whether contractors are complying with specific contractual or legal requirements. If we violate these rules or regulations, fail to comply with a contractual or other requirement, or do not satisfy an audit, a variety of penalties can be imposed by a government including monetary damages and criminal and civil penalties. In addition, any of our government contracts could be terminated or we could be suspended or debarred from all government contract work. The occurrence of any of these actions could harm our reputation and could have a material adverse impact on our results of operations.
Our future results could be materially affected by public health issues whether occurring in the United States or abroad.
Public health issues, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have a broader adverse impact on consumer spending and confidence levels that would negatively affect our suppliers and customers. We have developed contingency plans to address infectious disease scenarios and the potential impact on our operations, and we will continue to update these plans as necessary. However, there can be no assurance that these plans will be effective in eliminating the negative impact of any such diseases on the Company’s operating results. We may be required to suspend operations in some or all of our locations, which could have a material adverse impact on our financial position and results of operations.
We rely on sophisticated computer systems to perform our business operations. Although we, our customers, our strategic partners and our external service providers use a variety of security measures to protect our and their computer systems, a failure or compromise of our, our customers’, our strategic partners’ or our external service providers’ computer systems from a cyberattack, natural disaster, or malfunction may result in material adverse operational and financial consequences.
Our business relies on the secure electronic transmission, storage, and hosting of sensitive information, including protected health information and other types of personal information, confidential financial information, proprietary information, and other sensitive information relating to our customers, company and workforce. We routinely process, store and transmit large amounts of data in our operations, including sensitive personal information, protected health information, financial information, and confidential information relating to our business or third parties. Additionally, we outsource some important IT functions to external service providers worldwide.
Our industry is subject to various evolving federal, state and international data and security laws and regulations, which impose operational costs to achieve compliance. Any failure to comply with these laws and regulations could result in regulatory enforcement activity and the imposition of fines and other costs. In addition, compliance with these requirements could require changes in business practices, complicate our operations, and increase our oversight needs.

18

McKESSON CORPORATION

The constant evolution of cyberattacks has caused us to spend more time and money to deal with increasingly sophisticated attacks. Despite our implementation of a variety of physical, technical and administrative security measures, our, our customers’ and our external service providers’ computer systems could be subject to cyberattacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other global companies, we and our customers have experienced threats to data and systems, including malware and ransomware attacks, unauthorized access, system failures, user errors and disruptions.
A failure or compromise of our, our customers’, our strategic partners’ or our external service providers’ computer systems may result in business disruption or jeopardize the sensitive information processed, stored, and transmitted through such computer systems. Such an event may result in significant damage to our reputation, financial losses, litigation, increased costs, regulatory penalties, notification costs, remediation expenses, customer attrition, brand impairment, or other business harm. These risks may increase in the future as we continue to expand our internet and mobile strategies and to build an integrated digital enterprise.
We could experience losses or liability not covered by insurance.
In order to provide prompt and complete service to our major customers, we maintain significant product inventory at certain of our distribution centers. While we seek to maintain property insurance coverage in amounts sufficient for our business, there can be no assurance that our property insurance will be adequate or available on acceptable terms. One or more large casualty losses caused by fire, earthquake or other natural disaster in excess of our coverage limits could have a material adverse impact on our results of operations.
Our business exposes us to risks that are inherent in the distribution, manufacturing, dispensing and administration of pharmaceuticals and medical-surgical supplies, the provision of ancillary services, the conduct of our payer businesses and the provision of products that assist clinical decision making and relate to patient medical histories and treatment plans. If customers or individuals assert liability claims against our products and/or services, any ensuing litigation, regardless of outcome, could result in a substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit our liability to customers by contract; however, the limitations of liability set forth in the contracts may not be enforceable or may not otherwise protect us from liability for damages. Additionally, we may be subject to claims that are not explicitly covered by contract, such as a claim directly by a patient. We also maintain general liability coverage; however, this coverage may not continue to be available on acceptable terms, may not be available in sufficient amounts to cover one or more large claims against us and may include larger self-insured retentions or exclusions for certain products. In addition, the insurer might disclaim coverage as to any future claim. A successful product or professional liability claim not fully covered by our insurance could have a material adverse impact on our results of operations.
Transactions like our acquisitions of McKesson Europe and Rexall Health expose us to additional risks related to providing pharmacy services. Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. Although we maintain liability insurance, the coverage may not be adequate to protect us against future claims. If our insurance coverage proves to be inadequate or unavailable, or we suffer reputational harm as a result of an error or omission, it could have a material adverse impact on our results of operations.
Proprietary protections may not be adequate, and products may be found to infringe the rights of third parties.
We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products and solutions. There can be no assurance that these protections will be adequate or that our competitors will not independently develop products or services that are equivalent or superior to ours. In addition, despite protective measures, we may be subject to unauthorized use of our technology due to copying, reverse-engineering or other infringement. Although we believe that our products and services do not infringe the proprietary rights of third parties, from time to time third parties have asserted infringement claims against us, and there can be no assurance that third parties will not assert infringement claims against us in the future. If we were found to be infringing others’ rights, we may be required to pay substantial damage awards and forced to develop non-infringing products or services, obtain a license or cease selling or using the products or services that contain the infringing elements. Additionally, we may find it necessary to initiate litigation to protect our trade secrets, to enforce our patent, copyright and trademark rights and to determine the scope and validity of the proprietary rights of others. These types of litigation can be costly and time consuming. These litigation expenses, damage payments or costs of developing replacement products or services could have a material adverse impact on our results of operations.

19

McKESSON CORPORATION

System errors or failures of our products or services to conform to specifications could cause unforeseen liabilities or injury, harm our reputation and have a material adverse impact on our results of operations.
The software and technology services that we sell or operate are complex. As with complex systems offered by others, our software and technology services may contain errors, especially when first introduced. For example, some of our systems are intended to provide information to healthcare professionals in the course of delivering patient care. Therefore, users of our software and technology services have a greater sensitivity to errors than the general market for software products. If clinicians’ use of our software and technology services leads to faulty clinical decisions or injury to patients, we could be subject to claims or litigation by our customers, clinicians or patients. In addition, such failures could damage our reputation and could negatively affect future sales.
Failure of a customer’s system to perform in accordance with our documentation could constitute a breach of warranty and could require us to incur additional expense in order to make the system comply with the documentation. If such failure is not remedied in a timely manner, it could constitute a material breach under a contract, allowing the client to cancel the contract, obtain refunds of amounts previously paid or assert claims for significant damages.
Various risks could interrupt customers’ access to their data residing in our service center, exposing us to significant costs.
We provide remote hosting services that involve operating both our software and the software of third-party vendors for our customers. The ability to access the systems and the data that we host and support on demand is critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (1) power loss and telecommunications failures; (2) fire, flood, hurricane and other natural disasters; (3) software and hardware errors, failures or crashes; and (4) cyberattacks, computer viruses, hacking and other similar disruptive problems. We attempt to mitigate these risks through various means including disaster recovery plans, separate test systems and change controls, information security procedures, and continued development and enhancement of our cyber security, but our precautions may not protect against all risks. If customers’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims, particularly if the access interruption is associated with problems in the timely delivery of medical care. If customers’ access is interrupted from failure or breach of our operational or information security systems, or those of our contractors or third-party service providers, we could suffer reputational harm or be exposed to liabilities arising from the unauthorized and improper use or disclosure of confidential or proprietary information. We must maintain disaster recovery and business continuity plans that rely upon third-party providers of related services and if those vendors fail us at a time that our center is not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our contractual service commitments. Any significant instances of system downtime could negatively affect our reputation and ability to sell our remote hosting services.
We may be required to record a significant charge to earnings if our goodwill, intangible and other long-lived assets, or investments become further impaired.
We are required under U.S. Generally Accepted Accounting Principles (“GAAP”) to test our goodwill for impairment annually or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry, or economic trends or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time. In addition, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances, such as a divestiture, indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangible and other long-lived assets may not be recoverable include slower growth rates, the loss of a significant customer, or divestiture of a business or asset for less than its carrying value. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or intangible and other long-lived assets is determined. This could have a material adverse impact on our results of operations. There are inherent uncertainties in management’s estimates, judgments and assumptions used in assessing recoverability of goodwill, intangible and other long-lived assets. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, a deterioration in the U.S. and global financial markets, an increase in interest rate or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge.

20

McKESSON CORPORATION

Our investment in Change Healthcare represents the fair value of our 70% equity interest in Change Healthcare. We may experience declines in its fair value. A decline in the fair value of our Change Healthcare investment may require that we review the carrying value for potential impairment, and such review could result in an impairment charge to our consolidated statements of operations.
Tax legislation initiatives or challenges to our tax positions could have a material adverse impact on our results of operations.
We are a large multinational corporation with operations in the United States and international jurisdictions. As such, we are subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time to time, legislation may be enacted that could adversely affect our tax positions. There can be no assurance that our effective tax rate and the resulting cash flow will not be adversely affected by these changes in legislation. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), which was comprehensive new tax legislation. The 2017 Tax Act made broad and complex changes to the U.S. tax code, including but not limited to reducing the U.S. federal corporate tax rate from 35% to 21%, creating the base erosion anti-abuse tax, creating a new provision designed to tax global intangible low-income and generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries. In addition, we were subject to a one-time transition tax in 2018 on certain accumulated earnings and profits of our foreign subsidiaries not previously subject to U.S. income tax. Our accounting for the impact of the 2017 Tax Act was completed as of the period ended December 31, 2018. The U.S. Treasury Department and IRS continue to issue regulations with respect to the 2017 Tax Act. Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the 2017 Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, material adjustments to our tax estimates may impact our provision for income taxes and our earnings per share, as well as our cash flows, in the period in which any such adjustments are made. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
The tax laws and regulations of the various countries where we have major operations are extremely complex and subject to varying interpretations. For example, we operate in various countries that collect value added taxes (“VAT”). The determination of the manner in which a VAT applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax laws and regulations. Although we believe that our historical tax positions are sound and consistent with applicable laws, regulations and existing precedent, there can be no assurance that these tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Even if we are successful in maintaining our positions, we may incur significant expense in defending challenges to our tax positions by tax authorities that could have a material impact on our financial position and results of operations.
In addition, as jurisdictions enact legislation to implement the recommendations of the recently concluded base erosion and profit shifting project undertaken by the Organization for Economic Cooperation and Development or as a result of the European Commission’s investigations into illegal state aid, changes to long-standing tax principles may result which could adversely impact our tax expense and cash flows.
We are currently subject to tax examinations in various jurisdictions, and these jurisdictions may assess tax liabilities against us. Developments in ongoing examinations could have a material impact on our provision for income taxes and our earnings per share, as well as our cash flows, in the period in which any such adjustments are made, and for prior and subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our tax reserves. Although we believe our estimates are reasonable, the final outcome of any ongoing tax controversy could be materially different from our historical tax accruals.
Volatility and disruption to the global capital and credit markets may adversely affect our ability to access credit, our cost of credit and the financial soundness of our customers and suppliers.
Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, or decreased liquidity and increased costs in the commercial paper market, may adversely affect the availability and cost of credit already arranged and the availability, terms and cost of credit in the future. Although we believe that our operating cash flow, financial assets, 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, there can be no assurance that volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.

21

McKESSON CORPORATION

Our business could also be negatively impacted if our customers or suppliers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy. As a result, customers may modify, delay or cancel plans to purchase or implement our products or services and suppliers may increase their prices, reduce their output or change their terms of sale. Additionally, if customers’ or suppliers’ operating and financial performance deteriorates or if they are unable to make scheduled payments or obtain credit, customers may not be able to pay, or may delay payment of accounts receivable owed to us and suppliers may restrict credit, impose different payment terms or be unable to make payments due to us for fees, returned products or incentives. Any inability of customers to pay us for our products and services or any demands by suppliers for different payment terms, may have a material adverse impact on our results of operations and cash flow.
Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our consolidated financial statements.
Our consolidated financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. From time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt may require changes to the current accounting treatment that we apply to our consolidated financial statements and may require us to make significant changes to our systems. Such changes could result in a material adverse impact on our financial position and results of operations.
We could face significant liability if we withdraw from participation in one or more multiemployer pension plans in which we participate, or if one or more multiemployer plans in which we participate is underfunded.
We participate in various multiemployer pension plans. In the event that we withdraw from participation in one of these plans, then applicable law could require us to make additional cash contributions to the plans in installments. Our withdrawal liability for any multiemployer plan would depend on the extent of the plan’s funding of vested benefits. The multiemployer plans could have significant unfunded vested liabilities. Such underfunding may increase in the event other employers become insolvent or withdraw from the applicable plan or upon the inability or failure of withdrawing employers to pay their withdrawal liability. In addition, such underfunding may increase as a result of lower than expected returns on pension fund assets or other funding deficiencies. The occurrence of any of these events could have a material adverse impact on our consolidated financial position, results of operations or cash flows.
We may not realize the expected benefits from our restructuring and business process initiatives.
From time to time, the Company may enter into restructuring and business process initiatives. These types of initiatives could yield unintended consequences such as distraction of our management and employees, business disruption, attrition beyond any planned reduction in workforce, inability to attract or retain key personnel, and reduced employee productivity which could negatively affect our business, sales, financial condition and results of operations. Moreover, our restructuring and business process initiatives result in charges and expenses that impact our operating results. We cannot guarantee that the activities under any restructuring and business initiative will result in the desired efficiencies and estimated cost savings.

We may experience difficulties with outsourcing and similar third-party relationships.
Our ability to conduct our business might be negatively impacted if we experience difficulties with outsourcing and managing similar third-party relationships. We outsource certain business and administrative functions and rely on third parties to perform certain services on our behalf. If we fail to develop, implement and monitor our outsourcing strategies, such strategies prove to be ineffective or fail to provide expected cost savings, or our third-party providers fail to perform as anticipated, we may experience operational difficulties and increased costs may adversely affect our results of operations.

22

McKESSON CORPORATION

Moreover, we utilize contractors and employees located outside of the United States to assist us in performing services or providing support for our customers. Certain of these resources may have access to personal information, including protected health information. Some of our customers have contractually limited or may seek to limit our ability to use our offshore resources which may increase our costs due to concerns regarding potential misuse of this information. Further, Congress and a number of states have considered legislation that would restrict the transmission of personal information of United States residents offshore. Some proposals impose liability on healthcare businesses resulting from misuse or prohibited transmission of personal information to individuals or entities outside the United States and may require the prior consent of the identifiable patient. Congress also has considered establishing a private civil cause of action enabling an individual to recover damages sustained as a result of a violation of these proposed restrictions. If our ability to utilize offshore resources is limited by our customers or legislative action, the work currently being performed offshore may be done at a lower margin or at a loss and we may be subject to sanctions if we are unable to comply with new legislative requirements. Use of offshore resources may increase our risk of violating data security and privacy obligations to our customers, which could adversely affect our results of operations.
We may face risks associated with our retail expansion.

In recent years, we have expanded our retail operations through a number of acquisitions. As we expand our retail footprint, we may face risks that are different from those we currently encounter. Our expansion into additional retail markets, such as those in Europe and Canada, could result in increased competitive, merchandising and distribution challenges. We may encounter difficulties in attracting customers to our retail locations due to a lack of customer familiarity with our brands and our lack of familiarity with local customer preferences and seasonal differences in the market. Our ability to expand successfully will depend on acceptance of our retail store experience by customers, including our ability to design our stores in a manner that resonates locally and to offer the correct product assortment to appeal to consumers. Furthermore, our continued growth in the retail sector may strain relations with certain of our distribution customers who also compete in the retail pharmacy sector. There can be no assurance that our retail locations will be received as well as, or achieve net sales or profitability levels consistent with, our projected targets or be comparable to those of our existing stores in the time periods estimated by us, or at all. If our retail expansion fails to achieve, or is unable to sustain, acceptable net sales and profitability levels, our business, results of operations and growth prospects may be materially adversely affected.

Our retail stores may require additional management time and attention. Failure to properly supervise the operation and maintain the consistency of the customer experience in those retail stores could result in loss of customers and potentially adversely affect our results of operations.

We may be unable to keep existing retail store locations or open new retail locations in desirable places, which could materially adversely affect our results of operations.

We may be unable to keep existing retail locations or open new retail locations in desirable places in the future. We compete with other retailers and businesses for suitable retail locations. Local land use, local zoning issues, environmental regulations and other regulations may affect our ability to find suitable retail locations and also influence the cost of leasing or buying them. We also may have difficulty negotiating real estate leases for new stores, renewing real estate leases for existing stores or negotiating purchase agreements for new sites on acceptable terms. In addition, construction, environmental, zoning and real estate delays may negatively affect retail location openings and increase costs and capital expenditures. If we are unable to keep up our existing retail store locations or open new retail store locations in desirable places and on favorable terms, our results of operations could be materially adversely affected.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
Because of the nature of our principal businesses, our plant, warehousing, retail pharmacies, office and other facilities are operated in widely dispersed locations, primarily throughout North America and Europe. The warehouses and retail pharmacies are typically owned or leased on a long-term basis. We consider our operating properties to be in satisfactory condition and adequate to meet our needs for the next several years without making capital expenditures materially higher than historical levels. Information as to material lease commitments is included in Financial Note 22, “Lease Obligations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

23

McKESSON CORPORATION

Item 3.
Legal Proceedings.
Certain legal proceedings in which we are involved are discussed in Financial Note 24, “Commitments and Contingent Liabilities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Item 4.
Mine Safety Disclosures.
Not applicable.

24

McKESSON CORPORATION

Information about our Executive Officers
The following table sets forth information regarding the executive officers of the Company, including their principal occupations during the past five years. The number of years of service with the Company includes service with predecessor companies.
There are no family relationships between any of the executive officers or directors of the Company. The executive officers are elected on an annual basis generally and their term expires at the first meeting of the Board of Directors (“Board”) following the annual meeting of stockholders, or until their successors are elected and have qualified, or until death, resignation or removal, whichever is sooner.
Name
 
Age
 
Position with Registrant and Business Experience
 
 
 
 
 
Brian S. Tyler
 
52
 
Chief Executive Officer since April 2019; President and Chief Operating Officer from August 2018 to March 2019; Chairman of the Management Board of McKesson Europe AG from 2017 to 2018; President and Chief Operating Officer, McKesson Europe from 2016 to 2017; President of North America Distribution and Services from 2015 to 2016; Executive Vice President, Corporate Strategy and Business Development from 2012 to 2015; and a director since April 2019.  Service with the Company - 22 years.
 
 
 
 
 
Britt J. Vitalone
 
50
 
Executive Vice President and Chief Financial Officer since January 2018; Senior Vice President and Chief Financial Officer, U.S. Pharmaceutical from July 2014 to December 2017; Senior Vice President and Chief Financial Officer, U.S. Pharmaceutical and Specialty Health from October 2017 to December 2017; Senior Vice President of Corporate Finance and M&A Finance from March 2012 to June 2014.  Service with the Company - 13 years.
 
 
 
 
 
Jorge L. Figueredo
 
58
 
Executive Vice President and Chief Human Resources Officer since May 2008. Service with the Company - 11 years.
 
 
 
 
 
Kathleen D. McElligott
 
63
 
Executive Vice President, Chief Information Officer and Chief Technology Officer since July 2015; Chief Information Officer and Vice President, Information Technology, Emerson Electric from 2010 to July 2015. Service with the Company - 3 years.
 
 
 
 
 
Bansi Nagji
 
54
 
Executive Vice President and Chief Strategy and Business Development Officer since February 2015; Principal, Deloitte Consulting, LLP and Global Leader, Monitor Deloitte (which was formed by the global merger of Monitor Group with Deloitte) from January 2013 to February 2015; President, Monitor Group from July 2012 to January 2013; Partner, Monitor Group from 2001 to January 2013. Service with the Company - 4 years.
 
 
 
 
 
Lori A. Schechter
 
57
 
Executive Vice President, General Counsel and Chief Compliance Officer since June 2014; Associate General Counsel from January 2012 to June 2014; Litigation Partner, Morrison & Foerster LLP from 1995 to December 2011. Service with the Company - 7 years.


25

McKESSON CORPORATION

PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)
Market Information: The principal market on which the Company’s common stock is traded is the New York Stock Exchange (“NYSE”) under the trading symbol of “MCK”.
(b)
Holders: The number of record holders of the Company’s common stock at March 31, 2019 was approximately 5,333.
(c)
Dividends: In July 2018, the Company’s quarterly dividend was raised from $0.34 to $0.39 per common share for dividends declared on or after such date by the Board.  The Company declared regular cash dividends of $1.51 and $1.30 per share in the years ended March 31, 2019 and 2018
The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors.
(d)
Securities Authorized for Issuance under Equity Compensation Plans: Information relating to this item is provided under Part III, Item 12, to this Annual Report on Form 10-K.
(e)
Share Repurchase Plans: Stock repurchases may be made from time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.
During the last three years, our share repurchases were transacted through both open market transactions and ASR programs with third-party financial institutions.
In October 2016, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. 
In 2017, we repurchased 14.1 million of the Company’s shares for $2.0 billion through open market transactions at an average price per share of $140.96.  In March 2017, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. As of March 31, 2017, we had received 1.4 million shares under this program. This ASR program was completed in April 2017 and we received 0.3 million additional shares. The total number of shares repurchased under this ASR program was 1.7 million shares at an average price per share of $143.19.  During 2017, we completed the October 2015 share repurchase authorization. The total authorization outstanding for repurchases of the Company’s common stock was $2.7 billion at March 31, 2017.
In 2018, we repurchased 3.5 million of the Company’s shares for $500 million through open market transactions at an average price per share of $144.43. In June 2017, August 2017 and March 2018, we entered into three separate ASR programs with third-party financial institutions to repurchase $250 million, $400 million and $500 million of the Company’s common stock. As of March 31, 2018, we completed and received a total of 1.5 million shares under the June 2017 ASR program and a total of 2.7 million shares under the August 2017 ASR program. In addition, we received 2.5 million shares representing the initial number of shares due in March 2018 and an additional 1.0 million shares in the first quarter of 2019. The March 2018 ASR program was completed at an average price per share of $143.66 during the first quarter of 2019. The total authorization outstanding for repurchase of the Company’s common stock was $1.1 billion at March 31, 2018.
In May 2018, the Board authorized the repurchase of up to $4.0 billion of the Company’s common stock. The total authorization outstanding for repurchases of the Company’s common stock was increased to $5.1 billion.

During 2019, we repurchased 10.4 million of the Company’s shares for $1.4 billion through open market transactions at an average price per share of $132.14.

In December 2018, we entered into an ASR program with a third-party financial institution to repurchase $250 million of the Company’s common stock. The total number of shares repurchased under this ASR program was 2.1 million shares at an average price per share of $117.98. The total authorization outstanding for repurchase of the Company’s common stock was $3.5 billion at March 31, 2019.

26

McKESSON CORPORATION


In 2019, we retired 5.0 million or $542 million of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $472 million and $70 million during 2019.

The following table provides information on the Company’s share repurchases during the fourth quarter of 2019:
 
Share Repurchases (1)
(In millions, except price per share)
Total
Number of Shares
Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
January 1, 2019 - January 31, 2019

 
$

 

 
$
3,719

February 1, 2019 - February 28, 2019
2.3

 
130.57

 
2.3

 
3,469

March 1, 2019 - March 31, 2019

 

 

 
3,469

Total
2.3

 
 
 
2.3

 


(1)
This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax-withholding obligations in connection with employee equity awards.



27

McKESSON CORPORATION

(f)
Stock Price Performance Graph*: The following graph compares the cumulative total stockholder return on the Company’s common stock for the periods indicated with the Standard & Poor’s 500 Index and the S&P 500 Health Care Index. The S&P 500 Health Care Index was selected as a comparator because it is generally available to investors and broadly used by other companies in the same industry.
chart-923fd10603ca5d99b7d.jpg
 
March 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
McKesson Corporation
$
100.00

 
$
128.71

 
$
89.99

 
$
85.43

 
$
81.17

 
$
67.45

S&P 500 Index
$
100.00

 
$
112.73

 
$
114.74

 
$
134.45

 
$
153.26

 
$
167.81

S&P 500 Health Care Index
$
100.00

 
$
126.19

 
$
119.65

 
$
133.52

 
$
148.57

 
$
170.70

* Assumes $100 invested in McKesson Common Stock and in each index on March 31, 2014 and that all dividends are reinvested.

28

McKESSON CORPORATION

Item 6.
Selected Financial Data.
FIVE-YEAR HIGHLIGHTS
 
As of and for the Years Ended March 31,
(In millions, except per share data and ratios)
 
2019
 
2018
 
2017
 
2016
 
2015
Operating Results
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
214,319

 
$
208,357

 
$
198,533

 
$
190,884

 
$
179,045

Percent change
 
2.9
%
 
4.9
%
 
4.0
%
 
6.6
%
 
30.3
%
Gross profit
 
$
11,754

 
$
11,184

 
$
11,271

 
$
11,416

 
$
11,411

Income from continuing operations before income taxes (1)
 
610

 
239

 
6,891

 
3,250

 
2,657

Income (Loss) after income taxes
 
 
 
 
 
 
 
 
 
 
Continuing operations (1)
 
254

 
292

 
5,277

 
2,342

 
1,842

Discontinued operations
 
1

 
5

 
(124
)
 
(32
)
 
(299
)
Net income
 
255

 
297

 
5,153

 
2,310

 
1,543

Net income attributable to noncontrolling interests (2)
 
(221
)
 
(230
)
 
(83
)
 
(52
)
 
(67
)
Net income attributable to McKesson Corporation (1)
 
34

 
67

 
5,070

 
2,258

 
1,476

 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
839

 
$
451

 
$
1,336

 
$
3,366

 
$
3,173

Days sales outstanding for: (3)
 
 
 
 
 
 
 
 
 
 
Customer receivables
 
26

 
25

 
27

 
28

 
26

Inventories
 
31

 
30

 
30

 
32

 
31

Drafts and accounts payable
 
62

 
60

 
61

 
59

 
54

Total assets
 
$
59,672

 
$
60,381

 
$
60,969

 
$
56,523

 
$
53,870

Total debt, including capital lease obligations
 
7,595

 
7,880

 
8,545

 
8,114

 
9,844

Total McKesson stockholders’ equity (4)
 
8,094

 
9,804

 
11,095

 
8,924

 
8,001

Payments for property, plant and equipment
 
426

 
405

 
404

 
488

 
376

Acquisitions, net of cash, cash equivalents and restricted cash acquired
 
905

 
2,893

 
4,212

 
40

 
170

 
 
 
 
 
 
 
 
 
 
 
Common Share Information
 
 
 
 
 
 
 
 
 
 
Common shares outstanding at year-end
 
190

 
202

 
211

 
225

 
232

Shares on which earnings per common share were based
 
 
 
 
 
 
 
 
 
 
Diluted
 
197

 
209

 
223

 
233

 
235

Basic
 
196

 
208

 
221

 
230

 
232

Diluted earnings (loss) per common share attributable to McKesson Corporation (5)
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.17

 
$
0.30

 
$
23.28

 
$
9.84

 
$
7.54

Discontinued operations
 

 
0.02

 
(0.55
)
 
(0.14
)
 
(1.27
)
Total
 
0.17

 
0.32

 
22.73

 
9.70

 
6.27

Cash dividends declared
 
298

 
270

 
249

 
249

 
226

Cash dividends declared per common share
 
1.51

 
1.30

 
1.12

 
1.08

 
0.96

Book value per common share (5) (6)
 
42.60

 
48.53

 
52.58

 
39.66

 
34.49

Market value per common share - year-end
 
117.06

 
140.87

 
148.26

 
157.25

 
226.20

 
 
 
 
 
 
 
 
 
 
 
Supplemental Data
 
 
 
 
 
 
 
 
 
 
Debt to capital ratio (7)
 
43.3
%
 
40.6
%
 
39.2
%
 
43.6
%
 
50.3
%
Average McKesson stockholders’ equity (8)
 
$
9,163

 
$
11,016

 
$
9,282

 
$
8,688

 
$
8,703

Return on McKesson stockholders’ equity (9)
 
0.4
%
 
0.6
%
 
54.6
%
 
26.0
%
 
17.0
%

29

McKESSON CORPORATION

Footnotes to Five-Year Highlights:
(1)
2019 includes non-cash pre-tax goodwill impairment charges of $1,776 million ($1,756 million after-tax) primarily for our two reporting units within our McKesson European Pharmaceutical Solutions segment. 2018 includes total non-cash goodwill impairment charges of $1,738 million (pre-tax and after-tax) for our European Pharmaceutical Solutions segment and Other. These impairment charges are generally not deductible for income tax purposes. 2019 and 2018 also include non-cash asset impairment charges of $210 million ($172 million after-tax) and $446 million ($410 million after-tax) primarily for our U.K. retail businesses. 2017 includes a pre-tax gain of $3,947 million ($3,018 million after-tax) from the contribution of the majority of our Core MTS Business in connection with Healthcare Technology Net Asset Exchange.
(2)
Includes guaranteed dividends for 2015 and annual recurring compensation for 2016, 2017, 2018 and 2019 that McKesson became obligated to pay to the noncontrolling shareholders of McKesson Europe upon the effectiveness of the Domination Agreement in 2015. 2019, 2018 and 2017 include net income attributable to third-party equity interests in our consolidated entities including Vantage Oncology, LLC and ClarusONE Sourcing Services LLP, which was formed in 2017.
(3)
Based on year-end balances and sales or cost of sales for the last 90 days of the year.
(4)
Excludes noncontrolling and redeemable noncontrolling interests.
(5)
Certain computations may reflect rounding adjustments.
(6)
Represents McKesson stockholders’ equity divided by year-end common shares outstanding.
(7)
Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity excluding accumulated other comprehensive income (loss).
(8)
Represents a five-quarter average of McKesson stockholders’ equity.
(9)
Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity.

30

McKESSON CORPORATION
FINANCIAL REVIEW

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
GENERAL
Management’s discussion and analysis of financial condition and results of operations, referred to as the Financial Review, is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns) together with its subsidiaries. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.
Certain statements in this report constitute forward-looking statements. See Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report on Form 10-K for additional factors relating to these statements; also see Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a list of certain risk factors applicable to our business, financial condition and results of operations.
We conduct our business through three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 28, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for a description of these segments.





31

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


RESULTS OF OPERATIONS
Overview:
(Dollars in millions, except per share data and ratios)
Years Ended March 31,
 
Change
2019
 
2018
 
2017
 
2019
 
2018
Revenues
$
214,319

 
$
208,357

 
$
198,533

 
3

%
 
5

%
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
$
11,754

 
$
11,184

 
$
11,271

 
5

%
 
(1
)
%
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit Margin
5.48

%
5.37

%
5.68

%
11

bp
 
(31
)
bp
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
$
(8,474
)
 
$
(8,263
)
 
$
(7,788
)
 
3

%
 
6

%
Goodwill Impairment Charges
(1,797
)
 
(1,738
)
 
(290
)
 
3

 
 
499

 
Restructuring and Asset Impairment Charges
(597
)
 
(567
)
 
(18
)
 
5

 
 
3,050

 
Gain from Sale of Business

 
109

 

 
(100
)
 
 
NM

 
Gain on Healthcare Technology Net Asset Exchange, Net

 
37

 
3,947

 
(100
)
 
 
(99
)
 
Total Operating Expenses
$
(10,868
)
 
$
(10,422
)
 
$
(4,149
)
 
4

%
 
151

%
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses as a Percentage of Revenues
5.07

%
5.00

%
2.09

%
7

bp
 
291

bp
 
 
 
 
 
 
 
 
 
 
 
 
Other Income, Net
$
182

 
$
130

 
$
77

 
40

%
 
69

%
 
 
 
 
 
 
 
 
 
 
 
 
Loss from Equity Method Investment in Change Healthcare
(194
)
 
(248
)
 

 
(22
)
 
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on Debt Extinguishment

 
(122
)
 

 
(100
)
 
 
NM

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
(264
)
 
(283
)
 
(308
)
 
(7
)
 
 
(8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
610

 
239

 
6,891

 
155

 
 
(97
)
 
Income Tax (Expense) Benefit
(356
)
 
53

 
(1,614
)
 
(772
)
 
 
(103
)
 
Income from Continuing Operations
254

 
292

 
5,277

 
(13
)
 
 
(94
)
 
Income (Loss) from Discontinued Operations, Net of Tax
1

 
5

 
(124
)
 
(80
)
 
 
(104
)
 
Net Income
255

 
297

 
5,153

 
(14
)
 
 
(94
)
 
Net Income Attributable to Noncontrolling Interests
(221
)
 
(230
)
 
(83
)
 
(4
)
 
 
177

 
Net Income Attributable to McKesson Corporation
$
34

 
$
67

 
$
5,070

 
(49
)
%
 
(99
)
%
 
 
 
 
 
 
 
 
 
 
 
 
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
 
 
 
 
 
 
 
 
 
 
 
Continuing Operations
$
0.17

 
$
0.30

 
$
23.28

 
(43
)
%
 
(99
)
%
Discontinued Operations

 
0.02

 
(0.55
)
 
(100
)
 
 
(104
)
 
Total
$
0.17

 
$
0.32

 
$
22.73

 
(47
)
%
 
(99
)
%
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Diluted Common Shares
197

 
209

 
223

 
(6
)
%
 
(6
)
%
bp - basis points
NM - not meaningful


32

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Revenues:
Revenues increased in 2019 and 2018 primarily due to market growth, including expanded business with existing customers and our business acquisitions, partially offset by loss of customers within our U.S. Pharmaceutical and Specialty Solutions segment. The increase in revenue for 2018 was also offset by the 2017 contribution of the majority of our McKesson Technology Solutions businesses (“Core MTS Business”) to form the Change Healthcare joint venture. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversion.
Gross Profit:
Gross profit and gross profit margin increased in 2019 compared to 2018. Gross profit increased due to market growth, partially offset by loss of customers. The increase in gross profit and gross profit margin for 2019 was also due to the receipt of net cash proceeds representing our share of antitrust legal settlements of $202 million, higher last-in, first-out (“LIFO”) credits and our business acquisitions. These increases in 2019 were partially offset by the incremental government reimbursement reductions in the United Kingdom (“U.K.”), government imposed generic price cuts in Canada and the 2018 third quarter sale of our Enterprise Information Solutions (“EIS”) business.
Gross profit and gross profit margin decreased in 2018 compared to 2017. The decrease was primarily due to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture, significant government reimbursement reductions in the U.K., the competitive sell-side environment and weaker pharmaceutical manufacturer pricing trends. These decreases in 2018 were partially offset by market growth, procurement benefits realized through the joint sourcing entity, ClarusONE Sourcing Services LLP (“ClarusONE”), higher LIFO credits and our business acquisitions.
Gross profit for 2019, 2018 and 2017 included LIFO credits of $210 million, $99 million and $7 million. Gross profit for 2017 benefited from $144 million of cash receipts representing our share of antitrust legal settlements.
Operating Expenses:
Operating expenses, and operating expenses as a percentage of revenues increased in 2019 and 2018. Operating expenses for 2019, 2018 and 2017 were affected by the following significant items:
2019
Non-cash pre-tax goodwill impairment charges of $1,776 million ($1,756 million after-tax) in our Consumer Solutions (“CS”) and Pharmacy Solutions (“PS”) reporting units within the European Pharmaceutical Solutions segment. Of these impairment charges, $238 million was recognized upon the 2019 first quarter segment changes, which resulted in two new reporting units. The remaining charges were primarily due to declines in the reporting units’ estimated future cash flows and the selection of higher discount rates. These impairment charges were generally not deductible for income tax purposes. The declines in estimated future cash flows were primarily attributed to additional government reimbursement reductions and competitive pressures within the U.K. The risk of successfully achieving certain business initiatives was the primary factor in the use of a higher discount rate. At March 31, 2019, both CS and PS reporting units had no remaining goodwill balances;
Pre-tax restructuring and asset impairment charges of $331 million ($273 million after-tax), primarily representing employee severance and exit-related costs related to the 2019 restructuring initiatives, as further discussed below;
Non-cash pre-tax long-lived asset impairment charges of $245 million ($207 million after-tax) primarily for our U.K. business (mainly pharmacy licenses) driven by additional government reimbursement reductions and competitive pressures in the U.K.;

33

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Higher opioid-related costs of $151 million ($122 million after-tax) primarily related to litigation expenses. The Company is a defendant in many cases alleging claims related to the distribution of controlled substances to pharmacies, often together with other pharmaceutical wholesale distributors and pharmaceutical manufacturers and retail pharmacy chains named as defendants. In addition, the State of New York has recently adopted a tax on sales of opioids in the State, and other states are considering legislation that could require us to pay taxes, licensing fees, or assessments on the distribution of opioid medications in those states. Liabilities for taxes or assessments under any such laws will likely have an adverse impact on our results of operations, unless we are able to mitigate them through operational changes or commercial arrangements where permitted. Refer to Financial Note 24, “Commitments and Contingent Liabilities,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for more information;
Gain from an escrow settlement of $97 million (pre-tax and after-tax) representing certain indemnity and other claims related to our 2017 acquisition of Rexall Health;
Pre-tax credit of $90 million ($66 million after-tax) related to the derecognition of a tax receivable agreement (“TRA”) payable to the shareholders of Change Healthcare Inc. (“Change”); and
Higher operating expenses due to our business acquisitions and to support growth
2018
Non-cash goodwill impairment charges of $1,283 million (pre-tax and after-tax) for the European Pharmaceutical Solutions segment and $455 million (pre-tax and after-tax) for our Rexall Health reporting unit in Other. There were no tax benefits associated with these goodwill impairment charges. The impairments for Europe were triggered primarily by government reimbursement reductions in our retail business in the U.K. and a more competitive environment in France. The impairments for Rexall Health were primarily driven by significant generics reimbursement reductions across Canada and minimum wage increases in multiple provinces. At March 31, 2018, the Rexall Health reporting unit had no remaining goodwill related to our acquisition of Rexall Health;
Non-cash pre-tax long-lived asset impairment charges of $446 million ($410 million after-tax) primarily due to the declines in estimated future cash flows in our European business including those declines in our U.K. retail business driven by government reimbursement reductions;
Pre-tax restructuring charges of $74 million ($67 million after-tax) primarily representing employee severance and lease exit costs related to the 2018 restructuring plan for our McKesson Europe business. Under this plan, we expect to record total pre-tax charges of approximately $90 million to $130 million, of which $92 million of pre-tax charges were recorded to date;
Higher expenses due to our business acquisitions;
Pre-tax charitable contribution expense of $100 million ($64 million after-tax) to a public benefit California foundation; and
Pre-tax gain of $109 million ($30 million after-tax) recognized from the sale of our EIS business within Other
2017
Pre-tax gain of $3,947 million ($3,018 million after-tax) related to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture; and
Non-cash pre-tax goodwill impairment charge of $290 million ($282 million after-tax) related to our EIS business within Other. This impairment charge was generally not deductible for income tax purposes.

34

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Goodwill Impairments:
As a result of the 2019 annual goodwill impairment test, the estimated fair value of our reporting units excluding the CS and PS reporting units exceeded their carrying value. However, other risks, expenses and future developments, such as additional government actions, increased regulatory uncertainty and material changes in key market assumptions that we were unable to anticipate as of the testing date may require us to further revise the projected cash flows, which could adversely affect the fair value of our McKesson Canada reporting unit in Other in future periods.
Fiscal 2019 Restructuring Initiatives
On April 25, 2018, the Company announced a strategic growth initiative intended to drive long-term incremental profit growth and increase operational efficiency. The initiative consists of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through the centralization and outsourcing of certain administrative functions and cost management. As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. We expect to record total pre-tax charges of approximately $140 million to $180 million, of which we recorded pre-tax charges of $135 million ($122 million after-tax) in 2019. This set of the initiatives will be substantially completed by the end of 2020. Estimated remaining charges primarily consist of exit-related costs including contract termination costs.

As previously announced on November 30, 2018, the Company relocated its corporate headquarters from San Francisco, California to Irving, Texas to improve efficiency, collaboration and cost competitiveness, effective April 1, 2019. We anticipate that the relocation will be completed by January 2021. We expect to record total pre-tax charges of approximately $80 million to $130 million, of which pre-tax charges of $33 million ($24 million after-tax) were recorded in 2019 primarily representing employee severance. Estimated remaining charges primarily consist of lease and other exit-related costs, employee retention and relocation expenses.

During the fourth quarter of 2019, the Company committed to additional programs to continue our operating model and cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through the expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further closures of retail pharmacy stores in Europe and facilities. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, which are expected to be completed by the end of 2021. In 2019, pre-tax charges of $163 million ($127 million after-tax) were recorded, which primarily represent employee severance and accelerated depreciation expense. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.

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

Other Income, Net: Other income, net, for 2019 and 2018 increased compared to the same periods a year ago primarily due to higher gains recognized from the sales of investments.
Loss from Equity Method Investment in Change Healthcare: 2019 and 2018 include our proportionate share of the loss from the Change Healthcare joint venture of $194 million and $248 million, which includes amortization expenses associated with equity method intangible assets and integration expenses incurred by the joint venture. 2018 also includes certain transaction expenses, partially offset by a tax benefit of $76 million primarily due to a reduction in the future applicable tax rate related to the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”). Refer to Financial Note 5, “Healthcare Technology Net Asset Exchange,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10-K for more information.
Acquisition-Related Expenses and Adjustments
Acquisition-related expenses, which included transaction and integration expenses directly related to business acquisitions and the gain on the Healthcare Technology Net Asset Exchange were $228 million and $168 million in 2019 and 2018, and net credit of $3,797 million in 2017. 2019 and 2018 include our proportionate share of transaction and integration expenses incurred by Change Healthcare. 2018 includes a pre-tax gain of $37 million associated with the final net working capital and other adjustments from the Healthcare Technology Net Asset Exchange. 2017 includes a pre-tax gain of $3,947 million from the Healthcare Technology Net Asset Exchange.

35

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Acquisition-related expenses and adjustments were recorded as follows:

 
Years Ended March 31,
(Dollars in millions)
2019
 
2018
 
2017
Operating Expenses
 
 
 
 
 
Gain on Change Healthcare Net Asset Exchange, net
$

 
$
(37
)
 
$
(3,947
)
Transaction closing expenses
3

 
15

 
30

Restructuring, severance and relocation
12

 
36

 
25

Other (1)
103

 
54

 
85

Total
118

 
68

 
(3,807
)
Other Expenses (2)
110

 
100

 
10

Total Acquisition-Related Expenses and Adjustments
$
228

 
$
168

 
$
(3,797
)
(1)
These expenses primarily include outside service fees, costs associated with information technology and other integration activities.
(2)
Fiscal 2019 and 2018 includes our proportionate share of transaction and integration expenses incurred by Change Healthcare, excluding certain fair value adjustments, which were recorded within “Loss from Equity Method Investment in Change Healthcare”.
Amortization Expenses of Acquired Intangible Assets
Amortization expenses of acquired intangible assets directly related to business acquisitions and the formation of the Change Healthcare joint venture were $790 million, $792 million and $440 million in 2019, 2018 and 2017. These expenses were primarily recorded in our operating expenses and for 2019 and 2018 also in our proportionate share of loss from the equity method investment in Change Healthcare.
Income Taxes
We recorded income tax expense of $356 million, benefit of $53 million and expense of $1,614 million related to continuing operations in 2019, 2018 and 2017. Our reported income tax expense rate for 2019 was 58.4% compared to an income tax benefit rate of 22.2% for 2018 and an income tax expense rate of 23.4% in 2017. Fluctuations in our reported income tax rates are primarily due to the impact of the 2017 Tax Act, the impact of nondeductible impairment charges, and varying proportions of income attributable to foreign countries that have income tax rates different from the U.S. rate.
Our reported income tax expense rate for 2019 was unfavorably impacted by non-cash pre-tax charges of $1,776 million ($1,756 million after-tax) to impair the carrying value of goodwill for our European Pharmaceutical Solutions segment, given that these charges are generally not deductible for tax purposes. As a result of the enactment of the 2017 Tax Act, the 2018 income tax benefit rate included a tax benefit of $1,324 million from the re-measurement of certain deferred taxes to the lower U.S. federal tax rate, partially offset by a tax expense of $457 million representing the one-time tax imposed on certain accumulated earnings and profits of our foreign subsidiaries. The reported income tax benefit and expense rates for 2018 and 2017 were also unfavorably affected by the non-cash goodwill impairment charges of $1,738 million (pre-tax and after-tax) and $290 million ($282 million after-tax), given that these charges are generally not deductible for tax purposes. Refer to Financial Note 2, “Goodwill Impairment Charges,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.
Significant judgments and estimates are required in determining the consolidated income tax provision and evaluating income tax uncertainties. Although our major taxing jurisdictions include the U.S., Canada and the U.K., we are subject to income taxes in numerous foreign jurisdictions. Our income tax expense, deferred tax assets and liabilities and uncertain tax liabilities reflect management’s best assessment of estimated current and future taxes to be paid. We believe that we have made adequate provision for all income tax uncertainties.
On July 24, 2018, the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner requiring related parties in an intercompany cost-sharing arrangement to share expenses related to share-based compensation. This opinion reversed the prior decision of the United States Tax Court. On August 7, 2018, the opinion was withdrawn and a rehearing of the case took place on October 16, 2018. We will continue to monitor developments in this case and the ultimate outcome may have an adverse impact on our effective tax rate.

36

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Income (Loss) from Discontinued Operations, Net of Tax: Income (Loss) from discontinued operations, net of tax, were income of $1 million and $5 million in 2019 and 2018, and loss of $124 million in 2017. Loss from discontinued operations, net for 2017 includes an after-tax loss of $113 million related to the sale of our Brazilian pharmaceutical distribution business within our European Pharmaceutical Solutions segment. We made a payment of approximately $100 million related to this sale in 2017. Refer to Financial Note 7, “Discontinued Operations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Net Income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests includes the annual recurring compensation that we are obligated to pay to the noncontrolling shareholders of McKesson Europe under the domination and profit and loss transfer agreement (the “Domination Agreement”).  Net income attributable to noncontrolling interests also includes third-party equity interests in our consolidated entities including ClarusONE and Vantage. Noncontrolling interests with redemption features, such as put rights, that are not solely within the Company’s control are considered redeemable noncontrolling interests.  Redeemable noncontrolling interests are presented outside of Stockholders’ Equity on our consolidated balance sheet. Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $34 million, $67 million and $5,070 million in 2019, 2018 and 2017. Diluted earnings per common share were $0.17, $0.32 and $22.73 in 2019, 2018 and 2017.
Weighted Average Diluted Common Shares Outstanding:  Diluted earnings per common share was calculated based on a weighted average number of shares outstanding of 197 million, 209 million and 223 million for 2019, 2018 and 2017. Weighted average diluted common shares outstanding is affected by the exercise and settlement of share-based awards and the cumulative effect of share repurchases.
Revenues:
 
Years Ended March 31,
 
Change
(Dollars in millions)
2019
 
2018
 
2017
 
2019
 
2018
U.S. Pharmaceutical and Specialty Solutions
$
167,763

 
$
162,587

 
$
155,236

 
3

%
 
5

%
European Pharmaceutical Solutions
27,242

 
27,320

 
24,847

 

 
 
10

 
Medical-Surgical Solutions
7,618

 
6,611

 
6,244

 
15

 
 
6

 
Other
11,696

 
11,839

 
12,206

 
(1
)
 
 
(3
)
 
Total Revenues
$
214,319

 
$
208,357

 
$
198,533

 
3

%
 
5

%
U.S. Pharmaceutical and Specialty Solutions
U.S. Pharmaceutical and Specialty Solutions revenues increased over the past two years primarily due to market growth, including expanded business with existing customers, growth of specialty pharmaceuticals and our business acquisitions, partially offset by loss of customers. Market growth includes growing drug utilization, price increases and newly launched products, partially offset by price deflation associated with brand to generic drug conversions.
European Pharmaceutical Solutions
European Pharmaceutical Solutions revenues remained flat and increased 10% in 2019 and 2018. This segment’s revenues increased 1% and 5% in 2019 and 2018 primarily due to market growth, with the difference due to the effects of foreign currency exchange fluctuations. Revenues in 2019 were also unfavorably affected by the retail pharmacy closures and additional government reimbursement reductions in the U.K., and the competitive environment in France.
Medical-Surgical Solutions
Medical-Surgical Solutions revenues increased over the past two years compared to the same periods a year ago primarily due to our 2019 acquisition of Medical Specialties Distributors LLC (“MSD”) and market growth.

37

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Other
Revenues in Other for 2019 and 2018 decreased 1% and 3% compared to the same periods a year ago. Revenues in Other for 2019 decreased primarily due to unfavorable effects of foreign currency exchange fluctuations of 2% and the effect of government imposed generic price cuts and retail pharmacy closures related to our Canadian business. In addition, revenues in Other for 2019 were negatively impacted by the 2018 sale of our EIS business. These decreases for 2019 are partially offset by growth in our Canadian and McKesson Prescription Technology Solutions (“MRxTS”) businesses and the effects of acquisitions in Canada. Revenues in Other for 2018 decreased primarily due to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture, partially offset by market growth, the effects of acquisitions in Canada and favorable effects of foreign currency exchange fluctuations of 2%.
Segment Operating Profit, Corporate Expenses, Net and Interest Expense:
 
Years Ended March 31,
 
 
Change
(Dollars in millions, except ratios)
2019
 
2018
 
2017
 
 
2019
 
2018
Segment Operating Profit (1)
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pharmaceutical and Specialty Solutions
$
2,697

 
$
2,535

 
$
2,488

 
 
6

%
 
2

%
European Pharmaceutical Solutions (2)
(1,978
)
 
(1,681
)
 
173

 
 
18

 
 
NM

 
Medical-Surgical Solutions
455

 
461

 
401

 
 
(1
)
 
 
15

 
Other
394

 
(107
)
 
4,514

 
 
468

 
 
(102
)
 
Subtotal
1,568

 
1,208

 
7,576

 
 
30

 
 
(84
)
 
Corporate Expenses, Net
(694
)
 
(564
)
 
(377
)
 
 
23

 
 
50

 
Loss on Debt Extinguishment

 
(122
)
 

 
 
(100
)
 
 
NM

 
Interest Expense
(264
)
 
(283
)
 
(308
)
 
 
(7
)
 
 
(8
)
 
Income from Continuing Operations Before Income Taxes
$
610

 
$
239

 
$
6,891

 
 
155

%
 
(97
)
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Operating Profit Margin
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Pharmaceutical and Specialty Solutions
1.61

%
1.56

%
1.60

%
 
5

bp
 
(4
)
bp
European Pharmaceutical Solutions
(7.26
)
 
(6.15
)
 
0.70

 
 
(111
)
 
 
(685
)
 
Medical-Surgical Solutions
5.97

 
6.97

 
6.42

 
 
(100
)
 
 
55

 
bp - basis points
NM - not meaningful
(1)
Segment operating profit includes gross profit, net of operating expenses, as well as other income, net, for our operating segments.
(2)
Operating profit of our European Pharmaceutical Solutions segment for 2019 and 2018 include non-cash pre-tax goodwill impairment charges of $1,776 million and $1,283 million. This segment’s operating profit for 2019 and 2018 also includes non-cash pre-tax long-lived asset impairment charges of $210 million and $446 million.

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

38

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


European Pharmaceutical Solutions: Operating profit and operating profit margin decreased for 2019 and 2018 primarily due to the goodwill impairment charges recorded in 2019 and 2018. 2019 operating profit and operating profit margin also were negatively impacted by the effect of government reimbursement reductions and lower sales volume in the U.K. and the increased competition in France, partially offset by market growth. 2018 operating profit and operating profit margin were negatively impacted by the effect of government reimbursement reductions in the U.K.
Medical-Surgical Solutions: Operating profit decreased for 2019 primarily due to higher restructuring charges, partially offset by market growth. Operating profit margin for 2019 decreased primarily due to higher restructuring charges and changes in our mix of business, partially offset by ongoing cost management. Operating profit and operating profit margin for 2018 increased primarily due to higher bad debt expense in 2017. In addition, 2018 operating profit increased due to market growth.
Other:
Operating profit for Other increased for 2019 and decreased in 2018. Operating profit for Other in 2019, 2018 and 2017 were affected by the following significant items:
2019
Market growth in our MRxTS business;
Lower operating profit due to the 2018 sale of our EIS business;
Escrow settlement gain of $97 million (pre-tax) related to our 2017 acquisition of Rexall Health;
Pre-tax credit of $90 million resulting from the derecognition of a TRA liability payable to the shareholders of Change Healthcare;
Higher restructuring and asset impairment charges related to closures of our retail pharmacy stores in Canada;
Lower amount of our proportionate share of losses from our equity method investment in Change Healthcare during 2019;
Pre-tax goodwill and long-lived asset impairment charges of $56 million recognized for our Rexall Health retail business;
Pre-tax gain of $56 million from the divestiture of an equity investment; and
Government imposed generic price cuts in Canada.
2018
Lower operating profit due to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture;
Pre-tax goodwill charges of $455 million and long-lived asset impairment charges of $33 million recognized for our Rexall Health retail business;
Market growth in our MRxTS business;
Our proportionate share of losses from our equity method investment in Change Healthcare during 2018;
$109 million pre-tax gain from the sale of our EIS business in 2018;
$46 million pre-tax credit representing a reduction of our TRA liability related to the adoption of the 2017 Tax Act; and
Pre-tax gain of $37 million resulting from the finalization of net working capital and other adjustments related to the contribution of the Core MTS Business to Change Healthcare.
2017
Pre-tax gain of $3,947 million related to the 2017 contribution of the Core MTS Business to the Change Healthcare joint venture; and
Non-cash pre-tax goodwill impairment charge of $290 million related to our EIS reporting unit.


39

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Corporate: Corporate expenses, net, increased for 2019 primarily due to an increase in opioid-related costs, higher restructuring-related charges and costs for technology initiatives. Corporate expenses, net, increased for 2018 primarily due to a charitable contribution expense of $100 million and higher professional fees incurred for Corporate initiatives.
Loss on Debt Extinguishment: In 2018, we recognized a pre-tax loss on debt extinguishment of $122 million ($78 million after-tax) primarily representing premiums related to our February 2018 tender offers to redeem a portion of our existing outstanding long-term debt.
Interest Expense: Interest expense decreased over the last two years primarily due to the refinancing of debt at lower interest rates, partially offset by an increase in the issuance of commercial paper. Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.
Foreign Operations
Our foreign operations represented approximately 18%, 18% and 17% of our consolidated revenues in 2019, 2018 and 2017. Foreign operations are subject to certain risks, including currency fluctuations. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. We conduct our business worldwide in local currencies including Euro, British pound sterling and Canadian dollar. As a result, the comparability of our results reported in U.S. dollars can be affected by changes in foreign currency exchange rates.  In discussing our operating results, we may use the term “foreign currency effect”, which refers to the effect of changes in foreign currency exchange rates used to convert the local currency results of foreign countries where the functional currency is not the U.S. dollar. We present this information to provide a framework for assessing how our business performed excluding the effect of foreign currency rate fluctuations.  In computing foreign currency effect, we translate our current year results in local currencies into U.S dollars by applying average foreign exchange rates of the corresponding prior year periods, and we subsequently compare those results to the previously reported results of the comparable prior year periods in U.S. dollars. Additional information regarding our foreign operations is included in Financial Note 28, “Segments of Business,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
Business Combinations
Refer to Financial Note 4, “Business Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Fiscal 2020 Outlook
Information regarding the Company’s fiscal 2020 outlook is contained in our Forms 8-K and 8-K/A dated May 8, 2019. These Forms should be read in conjunction with the sections Item 1 - Business - Forward-Looking Statements and Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters that were uncertain at the time the accounting estimate was made and if different estimates that we reasonably could have used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial condition or results from operations. Below are the estimates that we believe are critical to the understanding of our operating results and financial condition. Other accounting policies are described in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

40

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Allowance for Doubtful Accounts: We provide short-term credit and other customer financing arrangements to customers who purchase our products and services. Other customer financing primarily relates to guarantees provided to our customers, or their creditors, regarding the repurchase of inventories. We also provide financing to certain customers related to the purchase of pharmacies, which serve as collateral for the loans. We estimate the receivables for which we do not expect full collection based on historical collection rates and specific knowledge regarding the current creditworthiness of our customers and record an allowance in our consolidated financial statements for these amounts.
In determining the appropriate allowance for doubtful accounts, which includes general and specific reserves, the Company reviews accounts receivable aging, industry trends, customer financial strength, credit standing, historical write-off trends and payment history to assess the probability of collection. If the frequency and severity of customer defaults due to our customers’ financial condition or general economic conditions change, our allowance for uncollectible accounts may require adjustment. As a result, we continuously monitor outstanding receivables and other customer financing and adjust allowances for accounts where collection may be in doubt. During 2019, sales to our ten largest customers, including group purchasing organizations (“GPOs”) accounted for approximately 49.9% of our total consolidated revenues. Sales to our largest customer, CVS Health (“CVS”), accounted for approximately 19.4% of our total consolidated revenues. At March 31, 2019, trade accounts receivable from our ten largest customers were approximately 31.9% of total trade accounts receivable. Accounts receivable from CVS were approximately 18.4% of total trade accounts receivable. As a result, our sales and credit concentration is significant. We also have agreements with GPOs, each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare providers, as well as with government entities and agencies. The accounts receivables balances are with individual members of the GPOs, and therefore no significant concentration of credit risk exists. A material default in payment, a material reduction in purchases from these or any other large customers, or the loss of a large customer or GPO could have a material adverse impact on our financial position, results of operations and liquidity.
Reserve methodologies are assessed annually based on historical losses and economic, business and market trends. In addition, reserves are reviewed quarterly and updated if unusual circumstances or trends are present. We believe the reserves maintained and expenses recorded in 2019 are appropriate and consistent with historical methodologies employed. At this time, we are not aware of any internal process or customer issues that might lead to a significant increase in our allowance for doubtful accounts as a percentage of net revenue in the foreseeable future.
At March 31, 2019, trade and notes receivables were $15,329 million prior to allowances of $273 million. In 2019, 2018 and 2017, our provision for bad debts was $132 million, $44 million and $93 million. At March 31, 2019 and 2018, the allowance as a percentage of trade and notes receivables was 1.8% and 1.3%. An increase or decrease of a hypothetical 0.1% in the 2019 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $15 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst-case scenarios. Additional information concerning our allowance for doubtful accounts may be found in Schedule II included in this Annual Report on Form 10-K.
Inventories: Inventories consist of merchandise held for resale. Prior to 2018, we reported inventories at the lower of cost or market (“LCM”). Effective in the first quarter of 2018, we report inventories at the lower of cost or net realizable value, except for inventories determined using the LIFO method. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign locations is based on first-in, first-out method and weighted average purchase prices. Rebates, cash discounts and other incentives received from vendors relating to the purchase or distribution of inventory are considered as product discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold. Total inventories, net were $16,709 million and $16,310 million at March 31, 2019 and 2018.
The LIFO method was used to value approximately 62% and 63% of our inventories at March 31, 2019 and 2018. If we had used the moving average method of inventory valuation, inventories would have been approximately $696 million and $906 million higher than the amounts reported at March 31, 2019 and 2018. These amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. We recognized LIFO credits of $210 million, $99 million and $7 million in 2019, 2018 and 2017 within our consolidated statements of operations. A LIFO charge is recognized when the net effect of price increases on pharmaceutical and non-pharmaceutical products held in inventory exceeds the impact of price declines, including the effect of branded pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price declines exceeds the impact of price increases on pharmaceutical and non-pharmaceutical products held in inventory.

41

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


We believe that moving average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”).  As such, our LIFO inventory is valued at the lower of LIFO or market.  As of March 31, 2019 and 2018, inventories at LIFO did not exceed market.
In determining whether inventory valuation allowance is required, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete as a result of these reviews. These factors could make our estimates of inventory valuation differ from actual results.
Business Combinations: We account for acquired businesses using the acquisition method of accounting, which requires that once control of a business is obtained, 100% of the assets acquired and liabilities assumed, including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use a method based on the income approach. Methods under the income approach start with a forecast of all of the expected future net cash flows associated with each asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in methods based on the income approach include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives. Refer to Financial Note 4, “Business Combinations,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information regarding our acquisitions.
Goodwill and Long-Lived Assets: As a result of acquiring businesses, we have $9,358 million and $10,924 million of goodwill at March 31, 2019 and 2018, $3,689 million and $4,102 million of intangible assets, net at March 31, 2019 and 2018. We perform an impairment test on goodwill balances annually in the fourth quarter or more frequently if indicators for potential impairment exist. Indicators that are considered include significant declines in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time.
Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or a component, one level below our operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit.
In 2018, we elected to early adopt on a prospective basis, the amended guidance that simplifies goodwill impairment testing by eliminating the second step of the impairment test. The one-step impairment test under the amended guidance requires an entity to compare the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any.
To estimate the fair value of our reporting units, we generally use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow (“DCF”) model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate expected rate of return. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the fair values.

42

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact our results of operations.  The valuations are based on information available as of the impairment review date and are based on expectations and assumptions that have been deemed reasonable by management. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry or other unanticipated events and circumstances, may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge. For example, some of the more significant estimates and assumptions inherent in the goodwill impairment estimation process using the market approach include the selection of appropriate guideline companies, the determination of market value multiples for both the guideline companies and the reporting unit, the determination of applicable premiums and discounts based on any differences in marketability between the business and the guideline companies and for the income approach, the required rate of return used in the DCF method, which reflects capital market conditions and the specific risks associated with the business.  Under the income approach, the fair value estimates in the goodwill impairment analysis are highly sensitive to the discount rates used in the discounting of expected cash flows attributable to the reporting units.  The discount rates are the weighted average cost of capital measuring the reporting unit’s cost of debt and equity financing weighted by the percentage of debt and percentage of equity in a company’s target capital. The unsystematic risk premium is an input factor used in calculating discount rate that specifically addresses uncertainty related to the reporting units’ future cash flow projections. Increases in the unsystematic risk premium increase the discount rate.
As a result of the 2019 annual goodwill impairment test, the estimated fair value of our reporting units excluding the CS and PS reporting units exceeded their carrying value. However, other risks, expenses and future developments, such as additional government actions, increased regulatory uncertainty and material changes in key market assumptions that we were unable to anticipate as of the testing date may require us to further revise the projected cash flows, which could adversely affect the fair value of our other reporting units in future periods. For example, the estimated fair value of our McKesson Canada reporting unit within Other exceeded the carrying value of this reporting unit by 8% in 2019. The goodwill balance of this reporting unit was $1,444 million at March 31, 2019 or approximately 15% of the consolidated goodwill balance. Generally, a decline in estimated future cash flows in excess of 12% or an increase in the discount rate in excess of 1.0% could result in an indication of goodwill impairment for this reporting unit in future reporting periods. Refer to Financial Note 2, “Goodwill Impairment Charges” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Currently, all of our intangible and other long-lived assets are amortized or depreciated based on the pattern of their economic consumption or on a straight-line basis over their estimated useful lives, ranging from one to 38 years.  We review intangible assets for impairment at an asset group level whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  Determination of recoverability of intangible assets is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from use of the asset and its eventual disposition.  Measurement of any impairment loss is based on the excess of the carrying value of the asset group over its fair value.  Assumptions and estimates about future values and remaining useful lives of our purchased intangible assets are complex and subjective.  They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts.
Our ongoing consideration of all the factors described previously could result in further impairment charges in the future, which could adversely affect our net income. Refer to Financial Note 3, “Restructuring and Asset Impairment Charges” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.

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

43

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Supplier Reserves: We establish reserves against amounts due from suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based on judgment after considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs and any other pertinent information available. We evaluate the amounts due from suppliers on a continual basis and adjust the reserve estimates when appropriate based on changes in facts and circumstances. The final outcome of any outstanding claims may differ from our estimate. The supplier reserves primarily pertain to our U.S. Pharmaceutical and Specialty Solutions segment.
Income Taxes: Our income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax provision and in evaluating income tax uncertainties. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state and foreign pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, including those laws pertaining to LIFO, our tax expense and cash flows could be materially impacted.
In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex new tax regulations across multiple global jurisdictions where we conduct our operations. For example, on December 22, 2017, the U.S. government enacted comprehensive new tax legislation referred to as the 2017 Tax Act. The 2017 Tax Act made broad and complex changes to the U.S. tax code. Refer to Financial Note 10, “Income Taxes,” to the accompanying consolidated financial statements appearing in this Annual Report on Form 10‑K for additional information.
We recognize liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax expense may be recognized.
Loss Contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the potential loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties.

44

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities and commercial paper issuance, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, we may access the long-term debt capital markets from time to time.
Net cash flow provided from operating activities was $4,036 million in 2019 compared to $4,345 million in 2018 and $4,744 million in 2017. Operating activities for 2019 were primarily affected by an increase in receivables due to overall increase in sales volume and timing of receipts and increases in drafts and accounts payable primarily due to increased inventory purchases and timing of payments. Operating activities for 2018 were primarily affected by a decrease in receivables primarily due to timing of receipts and loss of customers and increases in drafts and accounts payable reflecting longer payment terms for certain purchases. Operating activities for 2017 were primarily affected by an increase in drafts and accounts payable reflecting longer payment terms for certain purchases and increases in receivables primarily associated with our revenue growth. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements and vendor payment terms. Operating activities for 2017 included cash generated from our Core MTS business. Operating activities for 2017 were also affected by $150 million of a settlement payment.
Net cash used in investing activities was $1,381 million in 2019 compared to $2,993 million in 2018 and $3,269 million in 2017. Investing activities for 2019 include $905 million of net cash payments for acquisitions, including $784 million for our acquisition of MSD, $426 million and $131 million in capital expenditures for property, plant and equipment, and capitalized software, and $101 million of net cash proceeds from sales of businesses and investments.
Investing activities for 2018 include $2,893 million of net cash payments for acquisitions, including $1.3 billion and $720 million for our acquisitions of CoverMyMeds, LLC and RxCrossroads, $405 million and $175 million in capital expenditures for property, plant and equipment, and capitalized software, $374 million of net cash proceeds from sales of businesses and investments and $126 million cash payment received related to the Healthcare Technology Net Asset Exchange.
Investing activities for 2017 included $4,212 million of net cash payments for acquisitions including $2.1 billion for our acquisition of Rexall Health, $1,226 million of net payments received on the Healthcare Technology Net Asset Exchange, $404 million and $158 million in capital expenditures for property, plant and equipment, and capitalized software, and $206 million of net cash proceeds from sales of businesses and investments.
Financing activities utilized $2,227 million, $3,084 million and $2,069 million of cash in 2019, 2018 and 2017. Financing activities for 2019 include cash receipts of $37,265 million and payments of $37,268 million from short-term borrowings (primarily commercial paper).  We received cash from long-term debt issuances of $1,099 million and made repayments on long-term debt of $1,112 million in 2019. Financing activities in 2019 also include $1,627 million of cash paid for stock repurchases and $292 million of dividends paid.  
Financing activities for 2018 include cash receipts of $20,542 million and payments of $20,725 million from short-term borrowings (primarily commercial paper). We received cash from long-term debt issuances of $1,522 million and made repayments on long-term debt of $2,287 million in 2018. Financing activities in 2018 also include $1,650 million of cash paid for stock repurchases $262 million of dividends paid and $112 million of payments for debt extinguishment.  
Financing activities for 2017 include cash receipts of $8,294 million and payments of $8,124 million from short-term borrowings.  We received cash from long-term debt issuances of $1,824 million and made repayments on long-term debt of $1,601 million in 2017. Financing activities in 2017 also include $2,250 million of cash paid for stock repurchases and $253 million of dividends paid. 
The Company’s Board has authorized the repurchase of McKesson’s common stock from time-to-time in open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by any combination of such methods. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations and other market and economic conditions.

45

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


In 2017, we repurchased 14.1 million of our shares through open market transactions and 1.4 million of our shares through an ASR program. We received 0.3 million additional shares in April 2017 for the 2017 ASR program. In 2018, we repurchased 3.5 million of our shares through open market transactions and 6.7 million of our shares through ASR programs. We received an additional 1.0 million shares in the first quarter of 2019 under the March 2018 ASR program. In 2019, we repurchased 10.4 million of our shares through open market transactions and 2.1 million of our shares through the December 2018 ASR program.

In 2019, we retired 5.0 million or $542 million of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we allocate any excess of share repurchase price over par value between additional paid-in capital and retained earnings. Accordingly, our retained earnings and additional paid-in capital were reduced by $472 million and $70 million during 2019.
 
Years Ended March 31,
(In millions, except per share data)
2019
 
2018
 
2017
Number of shares repurchased (1)
13.5

 
10.5

 
15.5

Average price paid per share
$
130.72

 
$
151.06

 
$
141.16

Total value of shares repurchased (1)
$
1,627

 
$
1,650

 
$
2,250

(1)
Excludes shares surrendered for tax withholding.

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

We believe that our operating cash flow, financial assets and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing.
Selected Measures of Liquidity and Capital Resources:
 
March 31,
(Dollars in millions, except ratios)
2019
 
2018
 
2017
Cash and cash equivalents
$
2,981

 
 
$
2,672

 
 
$
2,783

 
Working capital
839

 
 
451

 
 
1,336

 
Debt to capital ratio (1)
43.3

%
 
40.6

%
 
39.2

%
Return on McKesson stockholders’ equity (2)
0.4

 
 
0.6

 
 
54.6

 
(1)
Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive income (loss).
(2)
Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity, which excludes noncontrolling and redeemable noncontrolling interests.
Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, overnight repurchase agreements collateralized by U.S. government securities, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling.
The remaining cash and cash equivalents are deposited with several financial institutions. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds.
Our cash and cash equivalents balance as of March 31, 2019 included approximately $1,450 million of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes.  Following enactment of the 2017 Tax Act, the repatriation of cash to the United States is generally no longer taxable for federal income tax purposes.

46

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, short-term borrowings, current portion of long-term debt and other current liabilities. We require a substantial investment in working capital that is susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements.
Consolidated working capital increased at March 31, 2019 compared to March 31, 2018 primarily due to an increase in the cash and cash equivalents, receivables, inventories and a decrease in current portion of long-term debt, partially offset by a increase in drafts and accounts payable. Consolidated working capital decreased at March 31, 2018 compared to March 31, 2017 primarily due to increases in drafts and accounts payable and a decrease in receivables, partially offset by an increase in inventories.
Our debt to capital ratio increased for 2019 and 2018 primarily due to a decrease in stockholders’ equity.
In July 2018, the Company’s quarterly dividend was raised from $0.34 to $0.39 per common share for dividends declared on or after such date by the Board. Dividends were $1.51 per share in 2019, $1.30 per share in 2018 and $1.12 per share in 2017. The Company anticipates that it will continue to pay quarterly cash dividends in the future.  However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon the Company’s future earnings, financial condition, capital requirements and other factors. In 2019, 2018 and 2017, we paid total cash dividends of $292 million, $262 million and $253 million. Additionally, as required under the Domination Agreement, we are obligated to pay an annual recurring compensation amount of €0.83 per McKesson Europe share (effective January 1, 2015) to the noncontrolling shareholders of McKesson Europe.
Contractual Obligations:
The table and information below presents our significant financial obligations and commitments at March 31, 2019:
 
 
 
Years
(In millions)
Total
 
Within 1
 
Over 1 to 3
 
Over 3 to 5
 
After 5
On balance sheet
 
 
 
 
 
 
 
 
 
Long-term debt (1)
$
7,595

 
$
330

 
$
1,737

 
$
1,900

 
$
3,628

Other (2)
648

 
223

 
91

 
89

 
245

 
 
 
 
 
 
 
 
 
 
Off balance sheet
 
 
 
 
 
 
 
 
 
Interest on borrowings (3)
2,018

 
234

 
413

 
348

 
1,023

Purchase obligations (4)
4,631

 
4,544

 
35

 
52

 

Operating lease obligations (5)
2,656

 
454

 
740

 
526

 
936

Other (6)
366

 
195

 
31

 
50

 
90

Total
$
17,914

 
$
5,980

 
$
3,047

 
$
2,965

 
$
5,922

(1)
Represents maturities of the Company’s long-term obligations including an immaterial amount of capital lease obligations.
(2)
Includes our estimated benefit payments, including assumed executive lump sum payments, for the unfunded benefit plans and minimum funding requirements for the pension plans. Actual lump sum payments could significantly differ from the estimated amounts depending on the timing of executive retirements and the lump sum interest rate in effect upon retirement. The estimated benefit payments do not reflect the potential effect of the termination of the U.S. defined benefit pension plan approved by the Company’s Board of Directors on May 23, 2018.
(3)
Primarily represents interest that will become due on our fixed rate long-term debt obligations.
(4)
A purchase obligation is defined as an arrangement to purchase goods or services that is enforceable and legally binding on the Company. These obligations primarily relate to inventory purchases and capital commitments.
(5)
Represents minimum rental payments for operating leases.
(6)
Includes agreements under which we have guaranteed the repurchase of our customers’ inventory and our customers’ debt in the event these customers are unable to meet their obligations to those financial institutions.
The contractual obligations table above excludes the following obligations:
At March 31, 2019, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $810 million. The ultimate amount and timing of any related future cash settlements cannot be predicted with reasonable certainty.

47

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)


During 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability.  In exchange for the shareholders of Change agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from the Change Healthcare joint venture that would otherwise have been required to be made to the shareholders of Change.  As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying consolidated statement of operations in 2019. 
Our banks and insurance companies have issued $165 million of standby letters of credit and surety bonds at March 31, 2019. These were issued on our behalf and are mostly related to our customer contracts and to meet the security requirements for statutory licenses and permits, court and fiduciary obligations and our workers’ compensation and automotive liability programs.
The carrying value of redeemable noncontrolling interests related to McKesson Europe was $1.39 billion at March 31, 2019, which exceeded the maximum redemption value of $1.23 billion. The balance of redeemable noncontrolling interests is reported at the greater of its carrying value or its maximum redemption value at each reporting date. Upon the effectiveness of the Domination Agreement on December 2, 2014, the noncontrolling shareholders of McKesson Europe received a put right that enables them to put their McKesson Europe shares to McKesson at €22.99 per share, which price is increased annually for interest in the amount of 5 percentage points above a base rate published semiannually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid (“Put Amount”).  The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. The ultimate amount and timing of any future cash payments related to the Put Amount are uncertain. Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period. The Domination Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March 31, 2020.
Refer to Financial Note 11, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements appearing in this Annual Report on Form 10-K for additional information.
Credit Resources:
We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our credit facilities and commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flow from operations, existing credit sources and other capital market transactions. Detailed information regarding our debt and financing activities is included in Financial Note 16, “Debt and Financing Activities,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
RELATED PARTY BALANCES AND TRANSACTIONS
Information regarding our related party balances and transactions is included in Financial Note 26, “Related Party Balances and Transactions,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements that we have recently adopted, as well as those that have been recently issued but not yet adopted by us, are included in Financial Note 1, “Significant Accounting Policies,” to the consolidated financial statements appearing in this Annual Report on Form 10-K.

48

McKESSON CORPORATION
FINANCIAL REVIEW (Concluded)


Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk: Our long-term debt bears interest predominately at fixed rates, whereas our short-term borrowings are at variable interest rates.
Our cash and cash equivalents balances earn interest at variable rates. At March 31, 2019 and 2018, we had $3.0 billion and $2.7 billion and in cash and cash equivalents. The effect of a hypothetical 50 bp increase in the underlying interest rate on our cash and cash equivalents, net of short-term borrowings and variable rate debt, would have resulted in a favorable impact to earnings in 2019 and 2018 of approximately $4 million and $10 million.
Foreign exchange risk: We conduct our business worldwide in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling and Canadian dollars. Changes in foreign currency exchange rates could have a material adverse impact on our financial results that are reported in U.S. dollars. We are also exposed to foreign exchange rate risk related to our foreign subsidiaries, including intercompany loans denominated in non-functional currencies.
We have certain foreign exchange rate risk programs that use foreign currency forward contracts and cross-currency swaps. The forward contracts and cross-currency swaps are designated to reduce the income statement effects from fluctuations in foreign exchange rates and have been designated as cash flow hedges. These programs reduce but do not entirely eliminate foreign exchange risk.
As of March 31, 2019 and 2018, the effect of a hypothetical adverse 10% change in the underlying foreign currency exchange rates would have impacted the fair value of our foreign exchange contracts by approximately $581 million and $458 million. However, our risk management programs are designed such that the potential loss in value of these risk management portfolios described above would be largely offset by changes in the value of the underlying exposure. Refer to Financial Note 20, “Hedging Activities,” for more information on our foreign currency forward contracts and cross-currency swaps.
The selected hypothetical change in interest rates and foreign currency exchange rates does not reflect what could be considered the best or worst case scenarios.

49

McKESSON CORPORATION

Item 8.
Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL INFORMATION


50

McKESSON CORPORATION

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of McKesson Corporation is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control—Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management has concluded that our internal control over financial reporting was effective as of March 31, 2019.
Deloitte & Touche LLP, an independent registered public accounting firm, audited the financial statements included in this Annual Report on Form 10-K and has also audited the effectiveness of the Company’s internal control over financial reporting as of March 31, 2019. This audit report appears on page 52 of this Annual Report on Form 10-K.
May 15, 2019
 
/s/ Brian S. Tyler
Brian S. Tyler
Chief Executive Officer
(Principal Executive Officer)


 
/s/ Britt J. Vitalone
Britt J. Vitalone
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)


51

McKESSON CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of McKesson Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of McKesson Corporation and subsidiaries (the “Company”) as of March 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended March 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

52

McKESSON CORPORATION

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
/s/ Deloitte & Touche LLP
San Francisco, California
May 15, 2019

We have served as the Company’s auditor since 1968.

53

McKESSON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
 
Years Ended March 31,
 
2019
 
2018
 
2017
Revenues
$
214,319

 
$
208,357

 
$
198,533

Cost of Sales
(202,565
)
 
(197,173
)
 
(187,262
)
Gross Profit
11,754

 
11,184

 
11,271

Operating Expenses
 
 
 
 
 
Selling, distribution and administrative expenses
(8,403
)
 
(8,138
)
 
(7,447
)
Research and development
(71
)
 
(125
)
 
(341
)
Goodwill impairment charges
(1,797
)
 
(1,738
)
 
(290
)
Restructuring and asset impairment charges
(597
)
 
(567
)
 
(18
)
Gain from sale of business

 
109

 

Gain on healthcare technology net asset exchange, net

 
37

 
3,947

Total Operating Expenses
(10,868
)
 
(10,422
)
 
(4,149
)
Operating Income
886

 
762

 
7,122

Other Income, Net
182

 
130

 
77

Loss from Equity Method Investment in Change Healthcare
(194
)
 
(248
)
 

Loss on Debt Extinguishment

 
(122
)
 

Interest Expense
(264
)
 
(283
)
 
(308
)
Income from Continuing Operations Before Income Taxes
610

 
239

 
6,891

Income Tax (Expense) Benefit
(356
)
 
53

 
(1,614
)
Income from Continuing Operations
254

 
292