mck-20220630

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			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, TX 75039

(Address of principal executive offices, including 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
1.500% Notes due 2025	MCK25	New York Stock Exchange
1.625% Notes due 2026	MCK26	New York Stock Exchange
3.125% Notes due 2029	MCK29	New York Stock Exchange

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 ☒ 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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.

Large accelerated filer

☒

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 143,730,455 shares of the issuer’s common stock were outstanding as of July 29, 2022.

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS


Item		Page

	PART I—FINANCIAL INFORMATION

1	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations for the three months ended June 30, 2022 and 2021	3

	Condensed Consolidated Statements of Comprehensive Income for the three months ended June 30, 2022 and 2021	4

	Condensed Consolidated Balance Sheets as of June 30, 2022 and March 31, 2022	5

	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended June 30, 2022 and 2021	6

	Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2022 and 2021	7

	Financial Notes	8

	Note 1 - Significant Accounting Policies	8

	Note 2 - Held for Sale	9

	Note 3 - Restructuring, Impairment, and Related Charges , Net	11

	Note 4 - Income Taxes	13

	Note 5 - Redeemable Noncontrolling Interests and Noncontrolling Interests	13

	Note 6 - Earnings (Loss) per Common Share	14

	Note 7 - Goodwill and Intangible Assets, Net	15

	Note 8 - Debt and Financing Activities	17

	Note 9 - Pension Benefits	18

	Note 10 - Hedging Activities	18

	Note 11 - Fair Value Measurements	22

	Note 12 - Commitments and Contingent Liabilities	23

	Note 13 - Stockholders’ Equity (Deficit)	27

	Note 14 - Segments of Business	30

2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

3	Quantitative and Qualitative Disclosures About Market Risk	48

4	Controls and Procedures	49

	PART II—OTHER INFORMATION

1	Legal Proceedings	50

1A	Risk Factors	50

2	Unregistered Sales of Equity Securities and Use of Proceeds	50

3	Defaults Upon Senior Securities	51

4	Mine Safety Disclosures	51

5	Other Information	51

6	Exhibits	52

	Signatures	53

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McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)


	Three Months Ended June 30,
		2022		2021
Revenues		$	67,154	$	62,674
Cost of sales		(64,131)		(59,642)
Gross profit		3,023		3,032
Selling, distribution, general, and administrative expenses		(1,959)		(2,232)
Claims and litigation charges, net		(5)		(74)

Restructuring, impairment, and related charges, net		(23)		(158)
Total operating expenses		(1,987)		(2,464)
Operating income		1,036		568
Other income, net		15		43


Interest expense		(45)		(49)
Income from continuing operations before income taxes		1,006		562
Income tax expense		(199)		(26)
Income from continuing operations		807		536
Income (loss) from discontinued operations, net of tax		2		(3)
Net income		809		533
Net income attributable to noncontrolling interests		(41)		(47)
Net income attributable to McKesson Corporation		$	768	$	486

Earnings (loss) per common share attributable to McKesson Corporation
Diluted
Continuing operations		$	5.25	$	3.09
Discontinued operations		0.01		(0.02)
Total		$	5.26	$	3.07
Basic
Continuing operations		$	5.31	$	3.13
Discontinued operations		0.01		(0.02)
Total		$	5.32	$	3.11

Weighted-average common shares outstanding
Diluted		145.9		158.1
Basic		144.2		156.2

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)


	Three Months Ended June 30,
		2022		2021
Net income		$	809	$	533

Other comprehensive income, net of tax
Foreign currency translation adjustments		582		24
Unrealized gains on cash flow hedges		18		—
Changes in retirement-related benefit plans		36		2
Other comprehensive income, net of tax		636		26

Comprehensive income		1,445		559
Comprehensive income attributable to noncontrolling interests		(91)		(50)
Comprehensive income attributable to McKesson Corporation		$	1,354	$	509

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)


	June 30, 2022		March 31, 2022
ASSETS
Current assets
Cash and cash equivalents	$	2,233	$	3,532
Receivables, net	19,900		18,583
Inventories, net	19,505		18,702
Assets held for sale	3,155		4,516
Prepaid expenses and other	590		898
Total current assets	45,383		46,231
Property, plant, and equipment, net	2,083		2,092
Operating lease right-of-use assets	1,598		1,548
Goodwill	9,368		9,451
Intangible assets, net	1,976		2,059
Other non-current assets	1,887		1,917
Total assets	$	62,295	$	63,298

LIABILITIES AND DEFICIT
Current liabilities
Drafts and accounts payable	$	39,708	$	38,086

Current portion of long-term debt	799		799
Current portion of operating lease liabilities	293		297
Liabilities held for sale	2,324		4,741
Other accrued liabilities	4,077		4,543
Total current liabilities	47,201		48,466
Long-term debt	4,976		5,080
Long-term deferred tax liabilities	1,541		1,418
Long-term operating lease liabilities	1,364		1,366
Long-term litigation liabilities	7,132		7,220
Other non-current liabilities	1,553		1,540

McKesson Corporation stockholders’ deficit
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—		—
Common stock, $0.01 par value, 800 shares authorized and 277 and 275 shares issued at June 30, 2022 and March 31, 2022, respectively	3		2
Additional paid-in capital	7,350		7,275
Retained earnings	9,732		9,030
Accumulated other comprehensive loss	(948)		(1,534)

Treasury shares, at cost, 133 and 130 shares at June 30, 2022 and March 31, 2022, respectively	(18,141)		(17,045)
Total McKesson Corporation stockholders’ deficit	(2,004)		(2,272)
Noncontrolling interests	532		480
Total deficit	(1,472)		(1,792)
Total liabilities and deficit	$	62,295	$	63,298

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(In millions, except per share amounts)

(Unaudited)


	Three Months Ended June 30, 2022
	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury			Noncontrolling Interests		Total Deficit
	Shares	Amount				Common Shares					Amount
Balance, March 31, 2022	275	$	2	$	7,275		$	9,030	$	(1,534)	(130)	$	(17,045)	$	480	$	(1,792)
Issuance of shares under employee plans, net of forfeitures	2	1		91			—		—		—	(152)		—		(60)
Share-based compensation	—	—		40			—		—		—	—		—		40
Payments to noncontrolling interests	—	—		—			—		—		—	—		(36)		(36)
Other comprehensive income	—	—		—			—		586		—	—		50		636
Net income	—	—		—			768		—		—	—		41		809
Repurchase of common stock	—	—		(56)			—		—		(3)	(944)		—		(1,000)


Reclassification of recurring compensation to other accrued liabilities	—	—		—			—		—		—	—		(2)		(2)
Cash dividends declared, $0.47 per common share	—	—		—			(67)		—		—	—		—		(67)
Other	—	—		—			1		—		—	—		(1)		—
Balance, June 30, 2022	277	$	3	$	7,350		$	9,732	$	(948)	(133)	$	(18,141)	$	532	$	(1,472)


	Three Months Ended June 30, 2021
	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss		Treasury			Noncontrolling Interests		Total Equity (Deficit)
	Shares	Amount				Common Shares					Amount
Balance, March 31, 2021	273	$	2	$	6,925		$	8,202	$	(1,480)	(115)	$	(13,670)	$	196	$	175
Issuance of shares under employee plans, net of forfeitures	1	—		71			—		—		—	(59)		—		12
Share-based compensation	—	—		33			—		—		—	—		—		33
Payments to noncontrolling interests	—	—		—			—		—		—	—		(39)		(39)
Other comprehensive income	—	—		—			—		23		—	—		—		23
Net income	—	—		—			486		—		—	—		39		525
Repurchase of common stock	—	—		(150)			—		—		(4)	(850)		—		(1,000)
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	—	—		178			—		(170)		—	—		—		8
Reclassification of McKesson Europe AG redeemable noncontrolling interests	—	—		—			—		—		—	—		287		287

Cash dividends declared, $0.42 per common share	—	—		—			(65)		—		—	—		—		(65)
Other	—	—		—			(5)		—		—	—		1		(4)
Balance, June 30, 2021	274	$	2	$	7,057		$	8,618	$	(1,627)	(119)	$	(14,579)	$	484	$	(45)

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Three Months Ended June 30,
	2022		2021
OPERATING ACTIVITIES
Net income	$	809	$	533
Adjustments to reconcile to net cash used in operating activities:
Depreciation	61		80
Amortization	87		138
Long-lived asset impairment charges	—		104
Deferred taxes	109		36
Credits associated with last-in, first-out inventory method	(13)		(23)
Non-cash operating lease expense	63		90
Gain from sales of businesses and investments	(33)		—
European businesses held for sale	20		—
Other non-cash items	102		194
Changes in assets and liabilities, net of acquisitions:
Receivables	(1,584)		(1,045)
Inventories	(955)		(901)
Drafts and accounts payable	1,006		(609)
Operating lease liabilities	(94)		(90)
Taxes	37		(54)
Litigation liabilities	(370)		74
Other	(186)		(149)
Net cash used in operating activities	(941)		(1,622)

INVESTING ACTIVITIES
Payments for property, plant, and equipment	(71)		(93)
Capitalized software expenditures	(29)		(66)
Acquisitions, net of cash, cash equivalents, and restricted cash acquired	(1)		(1)
Proceeds from sales of businesses and investments, net	240		83
Other	(100)		(22)
Net cash provided by (used in) investing activities	39		(99)

FINANCING ACTIVITIES






Repayments of long-term debt	(2)		(2)

Common stock transactions:
Issuances	91		71
Share repurchases	(1,000)		(1,008)
Dividends paid	(71)		(69)
Exercise of put right by noncontrolling shareholders of McKesson Europe AG	—		(1,031)
Other	(199)		(112)
Net cash used in financing activities	(1,181)		(2,151)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	18		11
Change in cash, cash equivalents, and restricted cash classified within Assets held for sale	470		—
Net decrease in cash, cash equivalents, and restricted cash	(1,595)		(3,861)
Cash, cash equivalents, and restricted cash at beginning of period	3,935		6,396
Cash, cash equivalents, and restricted cash at end of period	2,340		2,535
Less: Restricted cash at end of period included in Prepaid expenses and other	(107)		(112)

Cash and cash equivalents at end of period	$	2,233	$	2,423

See Financial Notes

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McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)

1. Significant Accounting Policies

Nature of Operations: McKesson Corporation (“McKesson,” or the “Company,”) is a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. McKesson partners with biopharma companies, care providers, pharmacies, manufacturers, governments, and others to deliver insights, products, and services to help make quality care more accessible and affordable. The Company reports its financial results in four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Refer to Financial Note 14, “Segments of Business,” for additional information.

Basis of Presentation: The condensed consolidated financial statements and accompanying notes are prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and therefore do not include all information and disclosures normally included in the annual consolidated financial statements.

The condensed consolidated financial statements of McKesson include the financial statements of all wholly-owned subsidiaries and majority-owned or controlled companies. For those consolidated subsidiaries where the Company’s ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net income attributable to noncontrolling interests” in the Condensed Consolidated Statements of Operations. All significant intercompany balances and transactions have been eliminated in consolidation, including the intercompany portion of transactions with equity method investees.

The Company considers itself to control an entity if it is the majority owner of or has voting control over such entity. The Company also assesses control through means other than voting rights and determines which business entity is the primary beneficiary of the variable interest entity (“VIE”). The Company consolidates VIEs when it is determined that it is the primary beneficiary of the VIE. Investments in business entities in which the Company does not have control but can exercise significant influence over operating and financial policies are accounted for using the equity method.

Fiscal Period: 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.

Reclassifications: Certain prior period amounts have been reclassified to conform to the current year presentation.

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these financial statements and income and expenses during the reporting period. Actual amounts could differ from those estimated amounts. The Company continues to evaluate the ongoing impacts, including the economic consequences, of the pandemic caused by the SARS-CoV-2 coronavirus (“COVID-19”), and therefore the Company’s accounting estimates and assumptions may change over time and may change materially in future periods. In the opinion of management, the unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the results of operations, financial position, and cash flows of McKesson for the interim periods presented.

The results of operations for the three months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies, and financial notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022, previously filed with the SEC on May 9, 2022 (“2022 Annual Report”).

Recently Adopted Accounting Pronouncements

There were no adopted accounting standards during the first quarter of fiscal 2023 that had a material impact to the Company’s results of operations, financial position, cash flows, or notes to the financial statements upon their adoption.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2022, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and requires additional disclosure requirements. ASU 2022-03 is effective for the Company on a prospective basis for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of this guidance but does not expect it to have a material impact on its consolidated financial statements or related disclosures.

Subsequent Events

In July 2022, the Company exited one of its investments in equity securities for proceeds of $179 million. The Company expects to recognize a gain within “Other income, net” in its Condensed Consolidated Statement of Operations for the second quarter of fiscal 2023 related to the disposition. The cost basis of the investment was $38 million.

2. Held for Sale

In July 2021, the Company announced its intention to exit its businesses in Europe resulting in classification of certain assets and liabilities as held for sale. Assets and liabilities of $3.2 billion and $2.3 billion, respectively, at June 30, 2022, and $4.5 billion and $4.7 billion, respectively, at March 31, 2022, met the criteria for classification as held for sale, primarily consisting of disposal groups related to the Company’s European divestiture activities discussed below. The decrease in assets and liabilities held for sale during the first quarter of fiscal 2023 was primarily due to the divestiture of the Company’s U.K. disposal group in April 2022, as discussed in more detail below.

Assets and liabilities to be disposed of by sale (“disposal groups”) are classified as “held for sale” if their carrying amounts are principally expected to be recovered through a sale transaction rather than through continuing use. The classification occurs when the disposal group is available for immediate sale and the sale is probable. These criteria are generally met when an agreement to sell exists, or management has committed to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying amount or fair value less costs to sell, and long-lived assets included within the disposal group are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported as an adjustment to the carrying value of the disposal group. When the net realizable value of a disposal group increases during a period, a gain can be recognized to the extent that it does not increase the value of the disposal group beyond its original carrying value when the disposal group was reclassified as held for sale. The Company determined that the disposal groups classified as held for sale do not meet the criteria for classification as discontinued operations.

European Divestiture Activities

On July 5, 2021, the Company entered into an agreement to sell certain of its businesses in the European Union (“E.U.”) located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with its German headquarters and wound-care business, part of a shared services center in Lithuania, and its ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.3 billion) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. The transaction is anticipated to close within the second half of fiscal 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals, as applicable. As of June 30, 2022 and March 31, 2022, the E.U. disposal group within the Company’s International segment, was classified as “Assets held for sale” and “Liabilities held for sale,” respectively, in the Condensed Consolidated Balance Sheet.

During the three months ended June 30, 2022, the Company recorded a gain of $12 million to remeasure the E.U. disposal group to fair value less costs to sell. This amount was recorded within “Selling, distribution, general, and administrative expenses” in the Condensed Consolidated Statement of Operations. The Company’s measurement of the fair value of the E.U. disposal group was based on the total consideration expected to be received by the Company as outlined in the transaction agreement. Certain components of the total consideration included fair value measurements that fall within Level 3 of the fair value hierarchy.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The total assets and liabilities of the E.U. disposal group that have met the classification of held for sale in the Company’s Condensed Consolidated Balance Sheet are as follows:


(In millions)	June 30, 2022		March 31, 2022
Assets
Current assets
Receivables, net	$	1,277	$	1,322
Inventories, net	819		809
Prepaid expenses and other	92		72
Property, plant, and equipment, net	291		304
Operating lease right-of-use assets	217		224
Intangible assets, net	253		267
Other non-current assets	312		328
Remeasurement of assets of businesses held for sale to fair value less costs to sell (1)	(279)		(302)
Total assets held for sale	$	2,982	$	3,024

Liabilities
Current liabilities
Drafts and accounts payable	$	1,406	$	1,826
Current portion of long-term debt	4		4
Current portion of operating lease liabilities	30		33
Other accrued liabilities	403		473
Long-term debt	11		11
Long-term deferred tax liabilities	60		55
Long-term operating lease liabilities	168		180
Other non-current liabilities	122		138
Total liabilities held for sale	$	2,204	$	2,720

(1)Excludes charges in fiscal 2022 related to the impairment of individual assets, which are primarily comprised of a $113 million impairment of internally developed software recorded directly against the gross value of the assets impacted.

On April 6, 2022, the Company completed the previously announced sale of its retail and distribution businesses in the United Kingdom (“U.K. disposal group”) to Aurelius Elephant Limited for a purchase price of £110 million (or, approximately $144 million), including certain adjustments. As part of the transaction, the Company divested net assets of $615 million and released $731 million of accumulated other comprehensive loss, within the International segment, and the buyer assumed and repaid a note payable to the Company of approximately $118 million.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Following the completion of the transaction on April 6, 2022, there were no assets or liabilities of the U.K. disposal group classified as held for sale in the Company’s Condensed Consolidated Balance Sheet. The total assets and liabilities of the U.K. disposal group that met the classification of held for sale in the Company’s Condensed Consolidated Balance Sheet at March 31, 2022 were as follows:


(In millions)	March 31, 2022
Assets
Current assets
Cash and cash equivalents	$	531
Receivables, net	931
Inventories, net	563
Prepaid expenses and other	50
Property, plant, and equipment, net	91
Operating lease right-of-use assets	270
Intangible assets, net	117
Other non-current assets	88
Remeasurement of assets of businesses held for sale to fair value less costs to sell	(1,159)
Total assets held for sale	$	1,482

Liabilities
Current liabilities
Drafts and accounts payable	$	1,593

Current portion of operating lease liabilities	50
Other accrued liabilities	59

Long-term deferred tax liabilities	16
Long-term operating lease liabilities	262
Other non-current liabilities	38
Total liabilities held for sale	$	2,018

3. Restructuring, Impairment, and Related Charges, Net

The Company recorded restructuring, impairment, and related charges, net of $23 million and $158 million for the three months ended June 30, 2022 and 2021, respectively. These charges were included in “Restructuring, impairment, and related charges, net” in the Condensed Consolidated Statements of Operations.

Restructuring Initiatives

During the first quarter of fiscal 2022, the Company approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of the Company’s office space in North America. Where the Company ceased using office space, it exited the portion of the facility no longer used. It also retained and repurposed certain other office locations. The Company recorded charges of $95 million for the three months ended June 30, 2021 primarily related to lease right-of-use and other long-lived asset impairments, lease exit costs, and accelerated depreciation and amortization. This initiative was substantially complete in fiscal 2022 and remaining costs the Company expects to record under this initiative are not material.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Restructuring, impairment, and related charges, net, for the three months ended June 30, 2022 and 2021 consisted of the following:


	Three Months Ended June 30, 2022
(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International		Corporate		Total
Severance and employee-related costs, net	$	3	$	—	$	—	$	—	$	(1)	$	2
Exit and other-related costs (1)	1		2		1		2		15		21
Asset impairments and accelerated depreciation	—		5		—		—		(5)		—
Total	$	4	$	7	$	1	$	2	$	9	$	23

(1)Exit and other-related costs primarily consist of accruals for costs to be incurred without future economic benefits, project consulting fees, and other exit costs expensed as incurred.


	Three Months Ended June 30, 2021
(In millions)	U.S. Pharmaceutical (1)		Prescription Technology Solutions (1)		Medical-Surgical Solutions (1)		International (2)		Corporate (1)		Total
Severance and employee-related costs, net	$	2	$	—	$	—	$	12	$	—	$	14
Exit and other-related costs (3)	2		1		2		14		21		40
Asset impairments and accelerated depreciation	8		17		4		34		41		104
Total	$	12	$	18	$	6	$	60	$	62	$	158

(1)Includes costs related to the transition to a partial remote work model described above.

(2)Includes costs related to the transition to a partial remote work model described above and U.K. operating model and cost optimization efforts, as well as costs for optimization programs in Canada.

(3)Exit and other-related costs primarily consist of accruals for costs to be incurred without future economic benefits, project consulting fees, and other exit costs expensed as incurred.

The following table summarizes the activity related to the liabilities associated with the Company’s restructuring initiatives for the three months ended June 30, 2022:


(In millions)	U.S. Pharmaceutical		Prescription Technology Solutions		Medical-Surgical Solutions		International		Corporate		Total
Balance, March 31, 2022 (1)	$	11	$	3	$	1	$	56	$	59	$	130
Restructuring, impairment, and related charges, net	4		7		1		2		9		23
Non-cash charges	—		(5)		—		—		5		—
Cash payments	(2)		(2)		(1)		(2)		(15)		(22)
Other (2)	(1)		—		—		(15)		1		(15)
Balance, June 30, 2022 (3)	$	12	$	3	$	1	$	41	$	59	$	116

(1)As of March 31, 2022, the total reserve balance was $130 million, of which $58 million was recorded in “Other accrued liabilities,” $36 million was recorded in “Liabilities held for sale,” and $36 million was recorded in “Other non-current liabilities” in the Condensed Consolidated Balance Sheet.

(2)Other primarily includes cumulative translation adjustments and transfers to certain other liabilities.

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(3)As of June 30, 2022, the total reserve balance was $116 million, of which $62 million was recorded in “Other accrued liabilities,” $26 million was recorded in “Liabilities held for sale,” and $28 million was recorded in “Other non-current liabilities” in the Condensed Consolidated Balance Sheet.

4. Income Taxes

During the three months ended June 30, 2022 and 2021, the Company recorded income tax expense of $199 million and $26 million, respectively. The Company’s reported income tax expense rate was 19.8% and 4.6% for the three months ended June 30, 2022 and 2021, respectively. Fluctuations in the Company’s reported income tax rates are primarily due to discrete benefits recognized in the quarter. During the three months ended June 30, 2022, the Company recognized a net discrete tax benefit of $45 million primarily related to the tax impact of share-based compensation. During the three months ended June 30, 2021, the Company recognized a net discrete tax benefit of $97 million primarily related to statute of limitation expirations in various taxing jurisdictions.

As of June 30, 2022, the Company had $1.5 billion of unrecognized tax benefits, of which $1.3 billion would reduce income tax expense and the effective tax rate if recognized. During the next twelve months, it is reasonably possible that our unrecognized tax benefits may decrease by as much as $150 million to $190 million due to settlements of tax examinations and statute of limitation expirations based on the information currently available. However, this may change as the Company continues to have ongoing discussions with various taxing authorities throughout the year or statute of limitations expire, and if the ultimate resolution of unrecognized tax benefits differs from this estimated range, the Company will record any additional income tax expense or benefit as necessary in the appropriate period. The unrecognized tax benefit may also increase or decrease due to future developments in opioid-related litigation and claims, as discussed in Financial Note 12, “Commitments and Contingent Liabilities.”

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions, and various foreign jurisdictions. The Internal Revenue Service (“IRS”) is currently examining the Company’s U.S. corporation income tax returns for 2018 and 2019. The Company is generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2014 through the current fiscal year.

5. Redeemable Noncontrolling Interests and Noncontrolling Interests

Redeemable Noncontrolling Interests

The Company’s previously recognized redeemable noncontrolling interests primarily related to its consolidated subsidiary, McKesson Europe. Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share. As a result, the Company recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $8 million during the three months ended June 30, 2021. This amount was recorded in “Net income attributable to noncontrolling interests” in the Company’s Condensed Consolidated Statement of Operations and the corresponding liability balance was recorded in “Other accrued liabilities” in the Company’s Condensed Consolidated Balance Sheet.

Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put (“Put Right”) their noncontrolling shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published by the German Bundesbank semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”). During the three months ended June 30, 2021, the Company paid $1.0 billion to purchase 34.5 million shares of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders. This decreased the carrying value of the redeemable noncontrolling interests by $983 million for the three months ended June 30, 2021, and the Company recorded the associated effect of the increase in the Company’s ownership interest of $178 million as an increase to McKesson stockholders’ additional paid-in capital. The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, with a carrying value of $287 million, were transferred from “Redeemable noncontrolling interests” to “Noncontrolling interests” in the Condensed Consolidated Balance Sheet.

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Noncontrolling Interests

Noncontrolling interests represent third-party equity interests in the Company’s consolidated entities primarily related to ClarusONE Sourcing Services LLP and Vantage Oncology Holdings, LLC. As discussed above, after June 15, 2021, noncontrolling interests also represent minority shareholder equity interests in McKesson Europe. The Company’s noncontrolling interest in McKesson Europe will be included in the sale of the E.U. disposal group, as discussed in Financial Note 2, “Held for Sale.” The Company allocated $41 million and $39 million of net income to noncontrolling interests during the during the three months ended June 30, 2022 and 2021, respectively, which was recorded in “Net income attributable to noncontrolling interests” in the Company’s Condensed Consolidated Statements of Operations.

Changes in noncontrolling interests for the three months ended June 30, 2022 were as follows:


(In millions)	Noncontrolling Interests
Balance, March 31, 2022	$	480
Net income attributable to noncontrolling interests	41
Other comprehensive income	50
Reclassification of recurring compensation to other accrued liabilities	(2)
Payments to noncontrolling interests	(36)


Other	(1)
Balance, June 30, 2022	$	532

Changes in redeemable noncontrolling interests and noncontrolling interests for the three months ended June 30, 2021 were as follows:


(In millions)	Noncontrolling Interests		Redeemable Noncontrolling Interests
Balance, March 31, 2021	$	196	$	1,271
Net income attributable to noncontrolling interests	39		8
Other comprehensive income	—		3
Reclassification of recurring compensation to other accrued liabilities	—		(8)
Payments to noncontrolling interests	(39)		—
Exercises of Put Right	—		(983)
Reclassification of McKesson Europe redeemable noncontrolling interests	287		(287)
Other	1		3
Balance, June 30, 2021	$	484	$	7

6. Earnings (Loss) Per Common Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. The computation of diluted earnings per common share is similar to that of basic earnings per common share, except that the former reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Fewer than 1 million potentially dilutive securities for each of the three months ended June 30, 2022 and 2021, respectively, were excluded from the computation of diluted earnings per common share as they were anti-dilutive.

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The computations for basic and diluted earnings per common share are as follows:


	Three Months Ended June 30,
(In millions, except per share amounts)	2022		2021
Income from continuing operations	$	807	$	536
Net income attributable to noncontrolling interests	(41)		(47)
Income from continuing operations attributable to McKesson Corporation	766		489
Income (loss) from discontinued operations, net of tax	2		(3)
Net income attributable to McKesson Corporation	$	768	$	486

Weighted-average common shares outstanding:
Basic	144.2		156.2
Effect of dilutive securities:
Stock options	0.3		0.1
Restricted stock units (1)	1.4		1.8
Diluted	145.9		158.1

Earnings (loss) per common share attributable to McKesson Corporation: (2)
Diluted
Continuing operations	$	5.25	$	3.09
Discontinued operations	0.01		(0.02)
Total	$	5.26	$	3.07
Basic
Continuing operations	$	5.31	$	3.13
Discontinued operations	0.01		(0.02)
Total	$	5.32	$	3.11

(1)Includes dilutive effect from restricted stock units and performance-based stock units.

(2)Certain computations may reflect rounding adjustments.

7. Goodwill and Intangible Assets, Net

The Company evaluates goodwill for impairment on an annual basis and at an interim date, if indicators of potential impairment exist. The Company voluntarily changed its annual goodwill impairment testing date from October 1st to April 1st to align with a change in timing of the Company’s annual long-term planning process. Accordingly, management determined that the change in accounting principle is preferable under the circumstance. This change has been applied prospectively from April 1, 2022 as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and significant estimates used in earlier periods without the benefit of hindsight. This change was not material to the Company’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge. The annual impairment testing performed as of April 1, 2022 did not indicate an impairment of goodwill.

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Changes in the carrying amount of goodwill were as follows: