# MCKESSON CORP (MCK) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from MCKESSON CORP's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/927653/000092765322000051/mck-20220331.htm Accession: 0000927653-22-000051 Filing date: 2022-05-09 Report date: 2022-03-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/MCK/ All MD&A years: /company/MCK/mda/ Next year: /company/MCK/mda/fy2023/ (FY 2023) Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations. INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS [[GREPCENT_TABLE]] [["Section","Page"],["General","32"],["Overview of Our Business","32"],["Executive Summary","34"],["Trends and Uncertainties","35"],["Overview of Consolidated Results","40"],["Overview of Segment Results","46"],["Foreign Operations","50"],["Business Combinations","50"],["Fiscal 2023 Outlook","50"],["Critical Accounting Policies and Estimates","50"],["Financial Condition, Liquidity, and Capital Resources","55"],["Related Party Balances and Transactions","61"],["New Accounting Pronouncements","61"]] [[/GREPCENT_TABLE]] GENERAL Management’s discussion and analysis of financial condition and results of operations, referred to as the “Financial Review,” is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of McKesson Corporation together with its subsidiaries (collectively, the “Company,” “McKesson,” “we,” “our,” or “us” and other similar pronouns). This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K (“Annual Report”). Our fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean our fiscal year. Our Financial Review within this Form 10-K generally discusses 2022 and 2021 results and year-over-year comparisons between 2022 and 2021. For a discussion on our year-over-year comparisons between 2021 and 2020, refer to our Annual Report on Form 10-K for the year ended March 31, 2021, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of Part II, previously filed with the Securities and Exchange Commission on May 12, 2021. Certain statements in this report constitute forward-looking statements. See Item 1 - Business - Forward-Looking Statements in Part I of this Annual Report for additional factors relating to these statements and Item 1A - Risk Factors in Part I of this Annual Report for a list of certain risk factors applicable to our business, financial condition, and results of operations. Overview of Our Business: We are a diversified healthcare services leader dedicated to advancing health outcomes for patients everywhere. Our teams partner 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. 32 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) We report our results in four reportable segments: U.S. Pharmaceutical, Prescription Technology Solutions (“RxTS”), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. The following summarizes our four reportable segments. Refer to Financial Note 21, “Segments of Business,” to the consolidated financial statements included in this Annual Report for further information regarding our reportable segments. •U.S. Pharmaceutical is a reportable segment that distributes branded, generic, specialty, biosimilar, and over-the-counter pharmaceutical drugs and other healthcare-related products. This segment also provides practice management, technology, clinical support, and business solutions to community-based oncology and other specialty practices. In addition, the segment sells financial, operational, and clinical solutions to pharmacies (retail, hospital, alternate site) and provides consulting, outsourcing, technological, and other services. •Prescription Technology Solutions is a reportable segment that combines automation and our ability to navigate the healthcare ecosystem to connect pharmacies, providers, payers, and biopharma companies to address patients’ medication access, adherence, and affordability challenges to help people get the medicine they need to live healthier lives. •Medical-Surgical Solutions is a reportable segment that provides medical-surgical supply distribution, logistics, and other services to healthcare providers in the United States (“U.S.”). •International is a reportable segment that includes our operations in Europe and Canada, bringing together non-U.S.-based drug distribution services, specialty pharmacy, retail, and infusion care services. During 2022, we entered into agreements to sell certain of our businesses in the European Union (“E.U.”) and our retail and distribution businesses in the United Kingdom (“U.K.”), as well as completed the sale of our Austrian business. These divestitures are further described in the “European Divestiture Activities” section below. European Divestiture Activities On July 5, 2021, we entered into an agreement to sell certain of our businesses in the E.U. located in France, Italy, Ireland, Portugal, Belgium, and Slovenia, along with our German headquarters and wound-care business, part of a shared services center in Lithuania, and our ownership stake in a joint venture in the Netherlands (“E.U. disposal group”) to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately $1.4 billion) adjusted for certain items, including cash, net debt and working capital adjustments, and reduced by the value of the noncontrolling interest held by minority shareholders of McKesson Europe AG (“McKesson Europe”) at the transaction closing date. We recorded charges of $438 million for the year ended March 31, 2022 in total operating expenses to remeasure the E.U. disposal group to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $151 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. The transaction is anticipated to close within the second half of fiscal year 2023, pursuant to the satisfaction of customary closing conditions, including receipt of regulatory approvals. On November 1, 2021, we announced an agreement to sell our retail and distribution businesses in the U.K. (“U.K. disposal group”) to Aurelius Elephant Limited. In April 2022, we entered into an amendment to the agreement for a purchase price of £110 million (or, approximately $144 million), including certain adjustments. We recorded charges of $1.2 billion for the year ended March 31, 2022 in total operating expenses to remeasure the U.K. disposal group to fair value less costs to sell. The remeasurement adjustment includes a $734 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. The transaction closed on April 6, 2022, and at closing the buyer assumed and repaid a note payable to us of approximately $118 million. 33 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) On January 31, 2022, we completed the sale of our Austrian business to Quadrifolia Management GmbH in a management-led buyout for a purchase price of €244 million (or, approximately $276 million), including certain adjustments. We divested net assets of the Austrian business of $272 million, primarily within the International segment, and the buyer assumed a note payable to us of approximately $63 million which was paid to us in the fourth quarter of 2022. We recorded a charge of $32 million for the year ended March 31, 2022 in total operating expenses to remeasure the Austrian business to fair value less costs to sell. On January 31, 2022, we sold our 30% interest in the German pharmaceutical wholesale joint venture to Walgreens Boots Alliance (“WBA”). We recognized a $42 million gain within “Other income, net” in the Consolidated Statement of Operations for the year ended March 31, 2022 related to this sale. As of March 31, 2022, we had $4.5 billion of assets and $4.7 billion of liabilities classified as “Assets held for sale” and “Liabilities held for sale,” respectively, in the Consolidated Balance Sheet primarily related to the European divestiture activities described above. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information. Executive Summary: The following summary provides highlights and key factors that impacted our business, operating results, financial condition, and liquidity for the year ended March 31, 2022. •The pandemic disease caused by the SARS-CoV-2 coronavirus (“COVID-19”) impacted our results of operations for the year ended March 31, 2022. As previously disclosed in our 2021 Annual Report, pharmaceutical distribution volumes decreased across the enterprise during the first quarter of 2021 as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government-mandated business shutdowns and shelter-in-place orders, following the onset of the pandemic. The recovery from the pandemic is favorably reflected in our results when comparing 2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine and related ancillary supply kit distribution programs during 2022; •In 2021, we began distributing certain COVID-19 vaccines under the direction of the Centers for Disease Control and Prevention (“CDC”). Since 2021 and through the end of 2022, we distributed over 380 million COVID-19 vaccine doses to administration sites all across the U.S. and in support of the U.S. government’s international donation mission. For a more in-depth discussion of how COVID-19 impacted our business, operations, and outlook, refer to the COVID-19 section of "Trends and Uncertainties" included below; •Revenues of $264 billion, reflects an 11% increase from the prior year primarily driven by market growth in our U.S. Pharmaceutical segment; •Gross profit increased 8% from the prior year primarily driven by improvements in primary care patient visits and the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment as well as growth of specialty pharmaceuticals and the contribution from our COVID-19 vaccination distribution program in our U.S. Pharmaceutical segment; •Total operating expenses in 2022 includes fair value remeasurement charges related to our “European Divestiture Activities” discussed above; •Other income, net in 2022 includes net gains of $98 million related to our McKesson Ventures equity investments and $42 million related to the gain on sale of our 30% interest in the German pharmaceutical wholesale joint venture with WBA; •On July 23, 2021, we completed a cash tender offer and paid an aggregate consideration of $1.1 billion to redeem certain notes with a principal amount of $922 million. As a result of the redemption, we incurred a loss on debt extinguishment in the second quarter of 2022 of $191 million, consisting of the premiums paid and a portion of the write-off of unamortized debt issuance costs in an amount proportional to the principal amount of debt retired. Refer to Financial Note 12, “Debt and Financing Activities,” to the consolidated financial statements included in this Annual Report for more information; •Diluted earnings per common share from continuing operations attributable to McKesson Corporation in 2022 of $7.23 reflects the aforementioned items, net of any respective tax impacts, discrete tax items recognized, and a lower share count compared to the prior year due to the cumulative effect of share repurchases; 34 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) •We paid $1.0 billion to purchase 34.5 million shares of McKesson Europe in 2022 through exercises of a put right by the noncontrolling shareholders pursuant to the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”); •On July 17, 2021, we redeemed our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021. The notes were redeemed using cash on hand. On August 12, 2021, we also completed a public offering of 1.30% notes due August 15, 2026 with a principal amount of $500 million for proceeds received, net of discounts and offering expenses, of $495 million. We utilized the net proceeds from this note for general corporate purposes; •We returned $3.8 billion of cash to shareholders through $3.5 billion of common stock repurchases and $277 million of dividend payments during 2022. On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share; and •In December 2021, we announced that our Board of Directors (the “Board”) approved an increase of $4.0 billion for the authorized repurchases of our common stock. Trends and Uncertainties: The Impact of Inflationary and Global Events Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, increased competition for talent, and disruption of the supply chain, as well as by political or civil unrest or military action, including the conflict between Russia and Ukraine. Cost inflation during 2022 generally affects us by increasing transportation, operational, and other administrative costs associated with our normal business operations which we might not be able to fully pass along to our customers. Although, it is difficult to predict the impact that these factors may have on our business in the future, they did not have a material effect on our results of operations, financial condition, or liquidity for the year ended March 31, 2022. COVID-19 The SARS-CoV-2 novel strain of coronavirus, which causes the infectious disease known as COVID-19, continues to evolve since it was declared a global pandemic on March 11, 2020 by the World Health Organization. We continue to evaluate the nature and extent of the ongoing impacts COVID-19 has on our business, operations, and financial results. The full extent to which COVID-19 will impact us depends on many factors and future developments, which are described in our “Risks and Forward-Looking Information” section below. Our Response to COVID-19 in the Workplace We are committed to continuing to supply our customers and protect the safety of our employees. The various responses we put in place to mitigate the impact of COVID-19 on our business operations include telecommuting and work-from-home policies, restricted travel, employee support programs, and enhanced safety measures. During the first quarter of 2022, we approved changes to our real estate strategy to increase efficiencies and support flexibility for our employees, including a partial remote work model for certain employees as further discussed in this Financial Review and in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report. During the third quarter of 2022, we continued to refine our policies and apply safety measures in the workplace as recommended by the Centers for Disease Control and Prevention (“CDC”) as COVID-19 cases increased across North America and Europe driven by the highly contagious Omicron variant. During 2022, we continued COVID-19 vaccination protocols for our U.S. and Canada employees, which are designed to be consistent with federal, state, and local laws and with customer requirements and to protect the safety of our employees, customers, patients, and communities while also safeguarding the healthcare supply chain. In Europe, we followed applicable government guidelines. We continue to monitor all of these changing laws, requirements and guidelines. We have not observed a material increase in employee turnover as a result of COVID-19 vaccination protocols; however, we are unable to predict whether such protocols will have a material impact on our workforce in the future. 35 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits As a diversified healthcare services leader, we remain well positioned to respond to the COVID-19 pandemic in the U.S., Canada, and Europe. We have worked and continue to work closely with national and local governments, agencies, and industry partners to ensure that available supplies, including PPE, and medicine reach our customers and patients. Through a contract with the CDC, we continue to support the U.S. government as a centralized distributor of COVID-19 vaccines and ancillary supplies needed to administer vaccines. We began distributing certain COVID-19 vaccines in December 2020. In the first quarter of 2022, McKesson began supporting the U.S. government’s commitment to donate COVID-19 vaccines worldwide. For this initiative, we are responsible for picking and packing the COVID-19 vaccines into temperature-controlled coolers and preparing them for pickup by an international partner. We do not manage the actual shipments of the vaccines to other countries. The results of operations related to our vaccine distribution are reflected in our U.S. Pharmaceutical segment. We also continue to manage the assembly, storage, and distribution of ancillary supply kits needed to administer COVID-19 vaccines, including sourcing some of those supplies, through agreements with both the Department of Health and Human Services (“HHS”) and Pfizer, Inc. The results of operations for the kitting and distribution of ancillary supplies are reflected in our Medical-Surgical Solutions segment. The future financial impact of the arrangements with the CDC and HHS depend on numerous uncertainties, which are described in our “Risks and Forward-Looking Information” section below. McKesson Canada and McKesson Europe are playing a role by supporting governments and public health entities through distributing COVID-19 vaccines and administering them in pharmacies. Additionally, McKesson Canada and McKesson Europe are distributing COVID-19 tests and certain PPE. Trends in our Business At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we had higher pharmaceutical distribution volumes and increased retail pharmacy foot traffic as our customers increased supplies on hand in March. During 2021, pharmaceutical distribution volumes decreased as a result of the weakened and uncertain global economic environment and COVID-19 restrictions, including government-mandated business shutdowns and shelter-in-place orders. We also had a decrease in demand for primary care medical-surgical supplies due to deferrals in elective procedures in hospitals and surgery centers as well as decreased traffic and closures of doctors’ offices, which was partially offset by demand for PPE and COVID-19 tests. Additionally, the decreased traffic in doctors’ offices and general shelter-in-place guidance by governmental authorities negatively impacted retail pharmacy foot traffic in both Europe and Canada. This drove favorability in our results when comparing 2022 versus 2021, particularly during the first quarter. We have observed improvements in prescription volumes and primary care patient visits during 2022 compared to the prior year period; however, the recovery of COVID-19 continues to be non-linear and impacted by virus variants such as Omicron and ongoing fluctuations in case levels. During the year ended March 31, 2022, the U.S. distribution of COVID-19 vaccines and related ancillary kits favorably impacted our results. We recognized higher sales for COVID-19 tests primarily due to limited product availability in the first quarter of 2021 and increased demand during 2022 corresponding with the spike in positive COVID-19 cases as a result of the Delta and Omicron variants. 36 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Impact to our Supply Chain We also continue to monitor and address the COVID-19 pandemic impacts on our supply chain. Although the availability of various products is dependent on our suppliers, their locations, and the extent to which they are impacted by the COVID-19 pandemic, we are proactively working with manufacturers, industry partners, and government agencies to meet the needs of our customers during the pandemic. Overall, during 2022 we had an increase in supply chain costs primarily related to transportation and labor; however, this did not materially impact our results of operations for the year ended March 31, 2022. In our Medical-Surgical Solutions segment, we have observed certain supply chain disruptions for COVID-19 tests, which poses a potential risk for supply availability to meet the future demand. As potential shortages or disruptions of any products are identified we address supply continuity, which includes securing additional products when available, sourcing back-up products when needed, and following allocation procedures to maintain and protect supply as much as possible. We utilize business continuity action planning to maintain and protect operations across all locations and facilities. Impact to our Results of Operations, Financial Condition, and Liquidity For the year ended March 31, 2022, COVID-19 tests and the kitting and distribution of ancillary supplies for COVID-19 vaccines in our Medical-Surgical Solutions segment contributed approximately $1.8 billion, or 16% to segment revenues, and including total inventory charges as further described below, increased our segment operating profit by approximately $208 million, or 22%. The distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment contributed less than 10% to segment operating profit during the year ended March 31, 2022. The financial impact from our COVID-19 response efforts in the International segment during 2022 was not material to our consolidated results, but contributed to year over year favorability in segment operating results. During the year ended March 31, 2021, particularly during the first quarter, we had lower pharmaceutical volumes, specialty drug volumes, and patient care visits that negatively impacted our consolidated revenues and income (loss) from continuing operations before income taxes. The recovery of prescription volume trends and patient care visits, which are also described in more detail above in the “Trends in our Business” section, had a favorable impact year over year across our businesses when comparing 2022 versus 2021. Additionally, certain PPE items held for resale were valued in our inventory at costs that were inflated by earlier COVID-19 pandemic demand levels. That inventory valuation, if not supported by market resale prices, may be written down to net realizable value. We may also write-off inventory due to decreased customer demand and excess inventory. During the year ended March 31, 2022, we recorded inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment. Of this amount, we recorded $147 million in cost of sales driven by the intent of management not to sell certain excess PPE inventory, which required an inventory write-down to zero, and instead direct it to charitable organizations or otherwise dispose. We recorded $8 million in total operating expenses for excess inventory which had already been committed for donation at the time of the charge and subsequently was delivered during 2022. In addition, $9 million of inventory charges were recorded in cost of sales for PPE and other related products that management intends to sell. Although market price volatility and changes to anticipated customer demand may require additional write-downs in future periods of other PPE and related product categories, we are taking measures to mitigate such risk. Overall, these COVID-19 related items had a net favorable impact on consolidated income from continuing operations before income taxes for the year ended March 31, 2022 compared to the prior year period. Impacts to future periods due to COVID-19 may differ based on future developments, which is described in our “Risks and Forward-Looking Information” section below. During the year ended March 31, 2022, we maintained appropriate labor and overall vendor supply levels and experienced no material impacts to our liquidity or net working capital due to the COVID-19 pandemic. We continue to monitor the COVID-19 situation closely and engage with manufacturers, industry partners, and government agencies to anticipate shortages and respond to demand for certain medications and therapies. We are monitoring our customers closely for changes to their timing of payments or ability to pay amounts owed to us as a result of COVID-19 pandemic impacts to their businesses. We remain well-capitalized with access to liquidity from our revolving credit facility. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, have remained open and accessible to us during the COVID-19 pandemic. At March 31, 2022, we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future. 37 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Risks and Forward-Looking Information The COVID-19 pandemic has disrupted the global economy and exacerbated uncertainties inherent in estimates, judgments, and assumptions used in our forecasts. We still face numerous uncertainties in estimating the direct and indirect effects of COVID-19 on our future business operations, financial condition, results of operations, and liquidity. The full extent to which COVID-19 will impact us depends on many factors and future developments, including: the duration and spread of the COVID-19 pandemic; potential seasonality of viral outbreaks; impacts of additional variants of the SARS-Cov-2 virus; the amount of COVID-19 vaccines and ancillary supply kits that we are contracted to distribute; the effectiveness of COVID-19 vaccines and governmental measures designed to mitigate the spread of the virus; the effectiveness of treatments of infected individuals; commercialization of COVID-19 vaccines; competition in COVID-19 vaccine distribution; and changes or disruptions in product supply. We have experienced and may experience difficulties in sourcing products and changes in pricing due to the effects of the COVID-19 pandemic on supply chains. Due to several rapidly changing variables related to the COVID-19 pandemic, estimations of future economic trends and the timing of when COVID-19 may no longer significantly impact our ability to forecast future financial performance remain challenging. Additionally, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Key assumptions and estimates about future values in our impairment assessments can be affected by a variety of factors, including the impacts of the COVID-19 pandemic on industry and economic trends as well as on our business strategy and internal forecasts. Material changes to key assumptions and estimates can decrease the projected cash flows or increase the discount rates and have resulted in impairment charges of certain long-lived assets and could potentially result in future impairment charges. Refer to Item 1A - Risk Factors in Part I of this Annual Report for a disclosure of risk factors related to COVID-19. Opioid-Related Litigation and Claims We are a defendant in many legal proceedings asserting claims related to the distribution of controlled substances (opioids) in federal and state courts throughout the U.S., and in Puerto Rico and Canada. The plaintiffs in these actions have included state attorneys general, county and municipal governments, tribal nations, hospitals, health and welfare funds, third-party payors, and individuals. On February 25, 2022, the Company and two other United States pharmaceutical distribution companies (collectively, "Distributors") determined that there is sufficient State and subdivision participation to proceed with an agreement ("Settlement") to settle a substantial majority of opioids-related lawsuits filed against the Distributors by U.S. states, territories and local governmental entities. Under the Settlement, 46 of 49 eligible states and their participating subdivisions, as well as the District of Columbia and all eligible territories (collectively, "Settling Governmental Entities"), have agreed to join the Settlement. The Settlement became effective on April 2, 2022. If all conditions to the Settlement are satisfied, including the receipt of approval by relevant courts of consent decrees to dismiss the lawsuits, the Distributors would pay the Settling Governmental Entities up to approximately $19.5 billion over 18 years, with up to approximately $7.4 billion to be paid by the Company for its 38.1% portion. Under the Settlement, a minimum of 85% of the settlement payments must be used by state and local governmental entities to remediate the opioid epidemic. Most of the remaining percentage relates to plaintiffs’ attorneys’ fees and costs, and would be payable over a shorter time period. Under the Settlement, the Distributors will establish a clearinghouse to consolidate their controlled-substance distribution data, which will be available to the settling U.S. states to use as part of their anti-diversion efforts. The Settlement provides that the Distributors do not admit liability or wrongdoing and do not waive any defenses. The Settlement only addresses the claims of attorneys general of U.S. states and territories and political subdivisions in participating states and territories. The terms under which the Distributors previously agreed to settle opioids claims of the states of New York, Ohio, Rhode Island, Florida and Texas, and each of their participating subdivisions, will become part of the Settlement. The previously disclosed agreement for the Distributors to settle opioids claims of the attorney general of West Virginia will remain a separate settlement arrangement that is not part of the Settlement. Governmental entities not participating in the Settlement may continue to pursue their claims. The states of Alabama, Oklahoma and Washington chose not to participate in the Settlement. We have reached separate agreements in principle with the attorneys general of Alabama and Washington to settle the claims of those states and their subdivisions. The Distributors previously settled with the Cherokee Nation and reached a separate agreement in principle to settle the claims of the remaining federally recognized Native American Tribes. 38 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) We recorded a charge of $8.1 billion during the year ended March 31, 2021 related to our estimated liability to U.S. governmental entities, including those expected to participate in the Settlement, the states and subdivisions that were not expected to participate or were not eligible, and the Native American tribes. In connection with the Settlement and other opioid-related settlement accruals described above, we recorded additional charges of $274 million during the year ended March 31, 2022 within “Claims and litigation charges, net” in our Consolidated Statement of Operations. Our total estimated liability for opioid-related claims was $8.3 billion as of March 31, 2022, of which $1.0 billion was included in “Other accrued liabilities” for the amount estimated to be paid prior to March 31, 2023, and the remaining liability was included in “Long-term litigation liabilities” in our Consolidated Balance Sheet. Although the vast majority of opioid claims have been brought by governmental entities in the U.S., the Company is also a defendant in cases brought in the U.S. by private plaintiffs, such as hospitals, health and welfare funds, third-party payors, and individuals, as well as four cases brought in Canada (three by governmental or tribal entities and one by an individual). These claims, and those of private entities generally, are not included in the Settlement or in the charges recorded by the Company, described above. The Company believes it has valid legal defenses in these matters and intends to mount a vigorous defense. Because of the many uncertainties associated with ongoing opioid-related litigation matters, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. In light of the uncertainty, the amount of any ultimate loss may differ materially from the amount accrued. Notwithstanding the Settlement, we also continue to prepare for trial in pending matters. We believe that we have valid defenses to the claims pending against us and, absent an acceptable settlement, intend to vigorously defend against all such claims. An adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity, or results of operations. Refer to Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report on Form 10‑K for more information. 39 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) RESULTS OF OPERATIONS Overview of Consolidated Results: [[GREPCENT_TABLE]] [["(In millions, except per share data)","Years Ended March 31,"],["2022","","2021","","","","Change"],["Revenues","$","263,966","","","$","238,228","","","","","11","","%"],["Gross profit","13,130","","","12,148","","","","","8"],["Gross profit margin","4.97","","%","5.10","","%","","","(13)","","bp"],["Total operating expenses","$","(11,092)","","","$","(17,188)","","","","","(35)","","%"],["Total operating expenses as a percentage of revenues","4.20","","%","7.21","","%","","","(301)","","bp"],["Other income, net","$","259","","","$","223","","","","","16","","%"],["Loss on debt extinguishment","(191)","","","\u2014","","","","","\u2014"],["Interest expense","(178)","","","(217)","","","","","(18)"],["Income (loss) from continuing operations before income taxes","1,928","","","(5,034)","","","","","138"],["Income tax benefit (expense)","(636)","","","695","","","","","(192)"],["Income (loss) from continuing operations","1,292","","","(4,339)","","","","","130"],["Loss from discontinued operations, net of tax","(5)","","","(1)","","","","","400"],["Net income (loss)","1,287","","","(4,340)","","","","","130"],["Net income attributable to noncontrolling interests","(173)","","","(199)","","","","","(13)"],["Net income (loss) attributable to McKesson Corporation","$","1,114","","","$","(4,539)","","","","","125","","%"],["Diluted earnings (loss) per common share attributable to McKesson Corporation"],["Continuing operations","$","7.26","","","$","(28.26)","","","","","126","","%"],["Discontinued operations","(0.03)","","","\u2014","","","","","\u2014"],["Total","$","7.23","","","$","(28.26)","","","","","126","","%"],["Weighted-average diluted common shares outstanding","154.1","","","160.6","","","","","(4)","","%"]] [[/GREPCENT_TABLE]] bp - basis points All percentage changes displayed above which are not meaningful are displayed as zero percent. 40 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Revenues Revenues increased for the years ended March 31, 2022 and 2021 compared to the respective prior years primarily due to market growth, including expanded business with existing customers within our U.S. Pharmaceutical segment. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. Gross Profit Gross profit increased for the year ended March 31, 2022 compared to the prior year primarily in our Medical-Surgical Solutions segment driven by improvements in patient care visits in our primary care business, the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines, partially offset by the unfavorable impact from PPE and other related products largely due to inventory charges. Gross profit was favorably impacted by growth of specialty pharmaceuticals and the contribution from our vaccine distribution programs in our U.S. Pharmaceutical segment. Gross profit was also driven by increased volume with new and existing customers in our RxTS segment. Gross profit for the years ended March 31, 2022 and 2021, included LIFO inventory credits of $23 million and $38 million, respectively. The lower LIFO credits in 2022 compared to 2021 is primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. Refer to the “Critical Accounting Policies and Estimates” section included in this Financial Review for further information. Gross profit for the years ended March 31, 2022 and 2021 also included net cash proceeds received of $46 million and $181 million, respectively, representing our share of antitrust legal settlements. Total Operating Expenses A summary and description of the components of our total operating expenses for the years ended March 31, 2022 and 2021 is as follows: •Selling, distribution, general, and administrative expenses (“SDG&A”): SDG&A consists of personnel costs, transportation costs, depreciation and amortization, lease costs, professional fee expenses, administrative expenses, remeasurement charges to the lower of carrying value or fair value less costs to sell, and other general charges. •Claims and litigation charges, net: These charges include adjustments for estimated probable settlements related to our controlled substance monitoring and reporting, and opioid-related claims, as well as any applicable income items or credit adjustments due to subsequent changes in estimates. Legal fees to defend claims, which are expensed as incurred, are included within SDG&A. •Goodwill impairments charges: We perform an impairment test on goodwill balances annually in the third quarter and more frequently if indicators for potential impairment exist. The resulting goodwill impairment charges are reflected within this line item. •Restructuring, impairment, and related charges, net: Restructuring charges that are incurred for programs in which we change our operations, the scope of a business undertaken by our business units, or the manner in which that business is conducted as well as long-lived asset impairments. [[GREPCENT_TABLE]] [["","Years Ended March 31,"],["(Dollars in millions)","2022","","2021","","","","Change"],["Selling, distribution, general, and administrative expenses","$","10,537","","","$","8,849","","","","","19","","%"],["Claims and litigation charges, net","274","","","7,936","","","","","(97)"],["Goodwill impairment charges","\u2014","","","69","","","","","(100)"],["Restructuring, impairment, and related charges, net","281","","","334","","","","","(16)"],["Total operating expenses","$","11,092","","","$","17,188","","","","","(35)","","%"],["Percent of revenues","4.20","","%","7.21","","%","","","(301)","","bp"]] [[/GREPCENT_TABLE]] bp - basis points All percentage changes displayed above which are not meaningful are displayed as zero percent. 41 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Total operating expenses and total operating expenses as a percentage of revenues decreased for the year ended March 31, 2022 compared to the prior year. Total operating expenses for the years ended March 31, 2022 and 2021 were affected by the following significant items: 2022 •SDG&A includes charges totaling $1.2 billion to remeasure our U.K. disposal group to fair value less costs to sell. The remeasurement adjustment includes a $734 million loss related to the accumulated other comprehensive income balances associated with the U.K. disposal group, driven by declines in the British pound sterling. Of the total charges recorded during the period, $1.1 billion are included within our International segment and $42 million are included within Corporate expenses, net; •SDG&A includes charges of $438 million to remeasure assets and liabilities of our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. The remeasurement adjustment includes a $151 million loss related to the accumulated other comprehensive income balances associated with the E.U. disposal group, driven by declines in the Euro. Of the total charges recorded during the period, $383 million are included within our International segment and $55 million are included within Corporate expenses, net; •SDG&A reflects a cost reduction of $142 million related to the cessation of depreciation and amortization of long-lived assets and operating lease right-of-use assets classified as held for sale for our European divestiture disposal groups; •SDG&A includes opioid-related costs of $130 million primarily related to litigation expenses; •SDG&A includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business; •SDG&A when compared to the same prior year period also includes increased employee-related and transportation costs across our businesses, partially offset by lower operating expenses due to the contribution of a majority of our German pharmaceutical business to a joint venture with WBA in the third quarter of 2021; •Claims and litigation charges, net includes a charge of $274 million related to our estimated liability for opioid-related claims as previously discussed in the “Trends and Uncertainties” section; •Restructuring, impairment, and related charges, net includes charges related to Corporate expenses, net, as well as our International segment. Refer to the “Restructuring Initiatives and Long-Lived Asset Impairments” and “Segment Operating Profit (Loss) and Corporate Expenses, Net” sections below as well as Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report for more information; and •Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations. 2021 •SDG&A includes opioid-related costs of $153 million, primarily related to litigation expenses; •SDG&A reflects cost savings of $95 million on travel and entertainment due to travel and meeting restrictions associated with COVID-19; •SDG&A reflects charges of $58 million to remeasure assets and liabilities held for sale to fair value less costs to sell related to the completed contribution of the majority of our German pharmaceutical wholesale business to create a joint venture with WBA in which we held a 30% ownership interest within our International segment. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information; •SDG&A includes a charge of $50 million related to our estimated liability under the State of New York Opioid Stewardship Act (“OSA”); •SDG&A also includes lower operating expenses due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA and a divestiture in our Medical-Surgical Solutions segment that closed in 2020; 42 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) •Claims and litigation charges, net includes a charge of $8.1 billion related to our estimated liability for opioid-related claims; •Claims and litigation charges, net includes a net gain of $131 million reflecting insurance proceeds received, net of attorneys' fees and expenses awarded to plaintiffs' counsel, in connection with the previously reported $175 million settlement of the shareholder derivative action related to our controlled substances monitoring program; •Goodwill impairment charges of $69 million were recorded in connection with our segment realignment that commenced in the second quarter of 2021. Refer to the “Goodwill Impairment” section below for further details; •Restructuring, impairment, and related charges, net includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe within our International segment, and the remaining $219 million primarily represents costs associated with our operating model and cost optimization efforts in our corporate headquarters and International segment. In addition, certain charges related to restructuring initiatives are included under the caption “Cost of sales” in our Consolidated Statements of Operations and were not material for the year ended March 31, 2021; and •Total operating expenses were unfavorably impacted by foreign currency exchange fluctuations. Goodwill Impairments As discussed in the “Overview of Our Business” section, our operating structure was realigned commencing in the second quarter of 2021 into four reportable segments: U.S. Pharmaceutical, RxTS, Medical-Surgical Solutions, and International. These reportable segments encompass all operating segments of the Company. The segment realignment resulted in changes in multiple reporting units across the Company. As a result, we were required to perform a goodwill impairment test for these reporting units and recorded a goodwill impairment charge in our Europe Retail Pharmacy reporting unit of $69 million during the second quarter of 2021. At March 31, 2022, the balance of goodwill for our reporting units in Europe was approximately nil and the remaining balance of goodwill in the International segment primarily relates to one of our reporting units in Canada. We evaluate goodwill for impairment on an annual basis as of October 1, and at an interim date, if indicators of potential impairment exist. The annual impairment testing performed in 2022 and 2021 did not indicate any impairment of goodwill. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment, where the risk of material goodwill impairment is higher than other reporting units. Refer to “Critical Accounting Policies and Estimates” included in this Financial Review for further information. Restructuring Initiatives and Long-Lived Asset Impairments During the first quarter of 2022, we approved an initiative to increase operational efficiencies and flexibility by transitioning to a partial remote work model for certain employees. This initiative primarily included the rationalization of our office space in North America. Where we ceased using office space, we exited the portion of the facility no longer used. We also retained and repurposed certain other office locations. We recorded charges of $124 million for the year ended March 31, 2022 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 2022 after which immaterial charges will continue to be incurred through the termination date of certain leases. During the first quarter of 2021, we committed to an initiative within the U.K., which is included in our International segment, to further drive transformational changes in technologies and business processes, operational efficiencies, and cost savings. The initiative included reducing the number of retail pharmacy stores, decommissioning obsolete technologies and processes, reorganizing and consolidating certain business operations, and related headcount reductions. Charges incurred for this initiative were not material for 2022, and were $57 million for the year ended March 31, 2021, primarily related to asset impairments and accelerated depreciation expense as well as employee severance and other employee-related costs. This initiative was substantially complete in 2022 and remaining costs we expect to record under this initiative are not material. 43 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) In 2022, we recognized charges totaling $36 million to impair certain long-lived assets within our International segment related to our operations in Denmark and our retail pharmacy businesses in Canada. Restructuring, impairment, and related charges, net for the year ended 2021 includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe within our International segment. Refer to Financial Note 3 , “Restructuring, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report for more information. Other Income, Net Other income, net for the years ended March 31, 2022 and 2021 includes net gains recognized from our equity investments of $98 million and $133 million, respectively. This primarily reflects mark-to-market gains on our investments in certain U.S. growth stage companies in the healthcare industry and realized gains on the exit of some of these investments as further described in Financial Note 16, “Fair Value Measurements,” to the consolidated financial statements included in this Annual Report. In future periods, fair value adjustments recognized in our operating results for these types of investments may be adversely impacted by market volatility. Other income, net for the year ended March 31, 2022 also includes a gain of $42 million related to the sale of our 30% interest in the German pharmaceutical wholesale joint venture with WBA. Loss on Debt Extinguishment The loss on debt extinguishment recorded for the year ended March 31, 2022 of $191 million includes premiums of $182 million as well as the write-off of unamortized debt issuance costs and transaction fees incurred of $9 million, and was driven by our July 2021 tender offer to redeem a portion of our existing debt. Refer to Financial Note 12, “Debt and Financing Activities,” to the consolidated financial statements included in this Annual Report for more information. Interest Expense Interest expense decreased in 2022 compared to the prior year primarily due to the repayment of $1.0 billion of long-term debt in the third quarter of 2021 and our tender offer activity in the second quarter of 2022. Interest expense fluctuates based on timing, amounts and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees. Income Tax (Benefit) Expense We recorded income tax (benefit) expense of $636 million and ($695 million) for the years ended March 31, 2022 and 2021, respectively. Our reported income tax (benefit) expense rates were 33.0% and (13.8%) in 2022 and 2021, respectively. Fluctuations in our reported income tax rates are primarily due to non-cash charges related to remeasuring the value of certain of our European businesses to fair value less costs to sell, the impact of opioid-related claims, and changes in our mix of earnings between various taxing jurisdictions. Refer to Financial Note 7, “Income Taxes,” to the consolidated financial statements included in this Annual Report for more information. Our reported income tax rate for 2021 was impacted by the charge for opioid-related claims of $8.1 billion ($6.8 billion after-tax). 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. Loss from Discontinued Operations, Net of Tax Loss from discontinued operations, net of tax, was $5 million and $1 million and for the years ended March 31, 2022 and 2021, respectively. 44 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Net Income Attributable to Noncontrolling Interests Net income attributable to noncontrolling interests primarily represents ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and the accrual of the annual recurring compensation amount of €0.83 per McKesson Europe AG (“McKesson Europe”) share that McKesson is obligated to pay to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. Noncontrolling interests with redemption features, such as put rights, that are not solely within our control are considered redeemable noncontrolling interests. Redeemable noncontrolling interests are presented outside of McKesson Corporation stockholders’ deficit in our consolidated balance sheet. Refer to the “Selected Measures of Liquidity and Capital Resources” section of this Financial Review and Financial Note 8, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the consolidated financial statements included in this Annual Report for additional information on changes to our redeemable and noncontrolling interests that occurred during the first quarter of 2022. Net Income (Loss) Attributable to McKesson Corporation Net income (loss) attributable to McKesson Corporation was $1.1 billion and $(4.5) billion for the years ended March 31, 2022 and 2021, respectively. Diluted earnings (loss) per common share attributable to McKesson Corporation was $7.23 and $(28.26) for the years ended March 31, 2022 and 2021, respectively. Net loss per diluted share for the year ended March 31, 2021 is calculated by excluding dilutive securities from the denominator due to their antidilutive effects. Additionally, our 2022 and 2021 diluted earnings (loss) per share reflect the cumulative effects of share repurchases. Weighted-Average Diluted Common Shares Outstanding Diluted earnings (loss) per common share was calculated based on a weighted-average number of shares outstanding of 154.1 million and 160.6 million for the years ended March 31, 2022 and 2021, respectively. Weighted-average diluted common shares outstanding is impacted by the exercise and settlement of share-based awards and the cumulative effect of share repurchases. 45 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Overview of Segment Results: Segment Revenues: [[GREPCENT_TABLE]] [["","Years Ended March 31,"],["(Dollars in millions)","2022","","2021","","","","Change"],["Segment revenues"],["U.S. Pharmaceutical","$","212,149","","","$","189,274","","","","","12","","%"],["Prescription Technology Solutions","3,864","","","2,890","","","","","34"],["Medical-Surgical Solutions","11,608","","","10,099","","","","","15"],["International","36,345","","","35,965","","","","","1"],["Total revenues","$","263,966","","","$","238,228","","","","","11","","%"]] [[/GREPCENT_TABLE]] The changes in revenues for each of our segments for the year ended March 31, 2022 compared to the prior year consisted of the following: [[GREPCENT_TABLE]] [["(Dollars in millions)","Increase (decrease)"],["Sales to pharmacies and institutional healthcare providers","$","20,577"],["Sales to specialty practices and other (1)","2,298"],["Total change in U.S. Pharmaceutical revenues","$","22,875"],["Total change in Prescription Technology Solutions revenues","$","974"],["Sales to primary care customers","$","1,300"],["Sales to extended care customers","(138)"],["Other (2)","347"],["Total change in Medical-Surgical Solutions revenues","$","1,509"],["Sales in Europe, excluding FX impact","$","(2,159)"],["Sales in Canada, excluding FX impact","1,560"],["Impact from FX","979"],["Total change in International revenues","$","380"],["Total change in revenues","$","25,738"]] [[/GREPCENT_TABLE]] FX - foreign currency exchange fluctuations. We calculate the impact from FX by converting current year period results of our operations in foreign countries, which are recorded in local currencies, into U.S. dollars by applying the average foreign currency exchange rates of the comparable prior year period. (1)Includes the results for the distribution of COVID-19 vaccines. (2)Includes the results for the kitting and distribution of ancillary supply kits needed to administer COVID-19 vaccines. 46 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) U.S. Pharmaceutical 2022 vs. 2021 U.S. Pharmaceutical revenues for the year ended March 31, 2022 increased 12% compared to the prior year primarily due to market growth, including growth in specialty pharmaceuticals, branded pharmaceutical price increases, and higher volumes from retail national account customers, partially offset by branded to generic drug conversions. Revenues for this segment were also favorable year over year driven by the recovery of prescription volumes from the prior year impact of COVID-19, including increased customer demand for pharmaceuticals in retail pharmacies and institutional healthcare providers. Prescription Technology Solutions 2022 vs. 2021 RxTS revenues for the year ended March 31, 2022 increased 34% compared to the prior year primarily due to increased volume with new and existing customers primarily in our third-party logistics and wholesale distribution services. Medical-Surgical Solutions 2022 vs. 2021 Medical-Surgical Solutions revenues for the year ended March 31, 2022 increased 15% compared to the prior year largely in our primary care business driven by improvements in patient care visits. Revenues for this segment were also favorably impacted by the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. International 2022 vs. 2021 International revenues for the year ended March 31, 2022 increased 1% compared to the prior year. Excluding the favorable effects of foreign currency exchange fluctuations, revenues for this segment decreased 2% largely due to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. This was partially offset by favorability year over year due to the recovery of volumes from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment as well as sales to new customers in our Canadian business. 47 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Segment Operating Profit (Loss) and Corporate Expenses, Net: [[GREPCENT_TABLE]] [["","Years Ended March 31,"],["(Dollars in millions)","2022","","2021","","","","Change"],["Segment operating profit (loss) (1)"],["U.S. Pharmaceutical (2)","$","2,879","","","$","2,763","","","","","4","","%"],["Prescription Technology Solutions","500","","","395","","","","","27"],["Medical-Surgical Solutions (3)","959","","","707","","","","","36"],["International (4)","(968)","","","(37)","","","","","\u2014"],["Subtotal","3,370","","","3,828","","","","","(12)"],["Corporate expenses, net (5)","(1,073)","","","(8,645)","","","","","(88)"],["Loss on debt extinguishment (6)","(191)","","","\u2014","","","","","\u2014"],["Interest expense","(178)","","","(217)","","","","","(18)"],["Income (loss) from continuing operations before income taxes","$","1,928","","","$","(5,034)","","","","","138","","%"],["Segment operating profit (loss) margin"],["U.S. Pharmaceutical","1.36","","%","1.46","","%","","","(10)","","bp"],["Prescription Technology Solutions","12.94","","","13.67","","","","","(73)"],["Medical-Surgical Solutions","8.26","","","7.00","","","","","126"],["International","(2.66)","","","(0.10)","","","","","(256)"]] [[/GREPCENT_TABLE]] All percentage changes displayed above which are not meaningful are displayed as zero percent. bp - basis points (1)Segment operating profit (loss) includes gross profit, net of total operating expenses, as well as other income (expense), net, for our reportable segments. (2)Operating profit for our U.S. Pharmaceutical segment includes cash receipts of our share of antitrust legal settlements of $46 million and $181 million for the years ended March 31, 2022 and 2021, respectively. Operating profit includes a charge of $50 million for the year ended March 31, 2021 related to our estimated liability under the OSA. (3)Operating profit for our Medical-Surgical Solutions segment for the years ended March 31, 2022 and 2021 includes charges totaling $164 million and $136 million, respectively, on certain PPE and other related products due to inventory impairments and excess inventory. (4)Operating loss for our International segment for the year ended March 31, 2022 includes charges of $1.1 billion to remeasure our U.K. disposal group held for sale to fair value less costs to sell. Operating loss for the year ended March 31, 2022 includes charges of $383 million to remeasure our E.U. disposal group held for sale to fair value less costs to sell and to impair certain internal-use software that will not be utilized in the future. Operating loss for the year ended March 31, 2022 also includes a gain of $59 million related to the sale of our Canadian health benefit claims management and plan administrative services business as well as a gain of $42 million related to the sale to WBA of our 30% interest in the German pharmaceutical wholesale joint venture to WBA. Operating loss for the year ended March 31, 2021 includes charges of $58 million to remeasure to fair value the assets and liabilities of our German pharmaceutical wholesale business which was contributed to a joint venture. Operating loss for the year ended March 31, 2021 includes long-lived asset impairment charges of $115 million primarily related to our retail pharmacy businesses in Canada and Europe. Operating loss for the year ended March 31, 2021 includes a goodwill impairment charge of $69 million related to our European retail business. (5)Corporate expenses, net for the year ended March 31, 2022 includes charges of $55 million primarily related to the effect of accumulated other comprehensive loss components from our E.U. disposal group. Corporate expenses, net for the year ended March 31, 2022 includes charges of $42 million primarily related to the effect of accumulated other comprehensive loss components from our U.K. disposal group. Corporate expenses, net includes net gains from our equity investments of $98 million and $133 million for the years ended March 31, 2022 and 2021, respectively. Corporate expenses, net includes charges of $274 million and $8.1 billion for the years ended March 31, 2022 and 2021, respectively, related to our estimated liability for opioid-related claims. Corporate expenses, net includes $130 million and $153 million for the years ended March 31, 2022 and 2021, respectively, of opioid-related costs, primarily litigation expenses. Corporate expenses, net for the year ended March 31, 2021 includes a net gain of $131 million recorded in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program. (6)Loss on debt extinguishment for the year ended March 31, 2022 consists of a charge of $191 million on debt extinguishment related to our July 2021 tender offer to redeem a portion of our existing debt. 48 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) U.S. Pharmaceutical 2022 vs. 2021 Operating profit increased for the year ended March 31, 2022 compared to the prior year primarily due to growth in specialty pharmaceuticals and the contribution from our COVID-19 vaccine distribution program. Operating profit was unfavorably impacted by a decrease in net cash proceeds received of $135 million representing our share of antitrust legal settlements, an increase in operating expenses, and product mix and volume. Prescription Technology Solutions 2022 vs. 2021 Operating profit increased for the year ended March 31, 2022 compared to prior year primarily driven by increased volumes with new and existing customers due to growth in our access and adherence solutions. Medical-Surgical Solutions 2022 vs. 2021 Operating profit increased for the year ended March 31, 2022 compared to prior year primarily due to favorability in our primary care business from improvements in patient care visits, as well as the contribution from kitting and distribution of ancillary supplies for COVID-19 vaccines. This increase was partially offset by inventory charges on certain PPE and other related products, and an increase in employee-related expenses to support business growth. International 2022 vs. 2021 Operating loss increased for the year ended March 31, 2022 compared to the prior year primarily due to fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group, partially offset by the cessation of depreciation and amortization expenses, a prior year goodwill impairment charge related to our European retail business and a gain recognized related to the sale of our Canadian health benefit claims management and plan administrative services business. This segment also observed favorability year over year due to the distribution of COVID-19 vaccines, COVID-19 tests, and PPE, as well as volume recovery from COVID-19 in our pharmaceutical distribution and retail pharmacy businesses across the segment. Corporate 2022 vs. 2021 Corporate expenses, net decreased for the year ended March 31, 2022 compared to the prior year due to a charge of $8.1 billion recorded in 2021 related to our estimated liability for opioid-related claims. The decrease in Corporate expenses, net was partially offset by $274 million recorded in 2022 related to our estimated liability for opioid-related claims, a net gain of $131 million recognized in 2021 in connection with insurance proceeds received from the settlement of the shareholder derivative action related to our controlled substances monitoring program, and fair value remeasurement charges related to our E.U. disposal group and our U.K. disposal group. 49 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) FOREIGN OPERATIONS Our foreign operations represented approximately 14% and 15% of our consolidated revenues in 2022 and 2021, respectively. Foreign operations are subject to certain risks, including currency fluctuations. Refer to Item 1A - Risk Factors in Part I of this Annual Report for a risk factor related to fluctuations in foreign currency exchange rates. We monitor our operations and adopt strategies responsive to changes in the economic and political environment in each of the countries in which we operate. We conduct our business worldwide in local currencies including Euro, British pound sterling, and Canadian dollar. As a result, the comparability of our results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. In discussing our operating results, we may use the term “foreign currency exchange fluctuations,” which refers to the effect of changes in foreign currency exchange rates used to convert the local currency results of our operations in foreign countries where the functional currency is not the U.S. dollar. We present this information to provide a framework for assessing how our business performed excluding the effect of foreign currency exchange rate fluctuations. In computing the foreign currency exchange fluctuations, we translate our current year results of our operations in foreign countries recorded in local currencies into U.S. dollars by applying their respective average foreign currency exchange rates of the corresponding prior year periods, and we subsequently compare those results to the previously reported results of the comparable prior year periods reported in U.S. dollars. In July 2021, we announced our intention to exit our businesses in Europe. In 2022, we entered into agreements to sell the E.U. disposal group and U.K. disposal group and completed the previously announced sale of our Austrian business. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for more information on these European divestitures. Additional information regarding our foreign operations is also included in Financial Note 21, “Segments of Business,” to the consolidated financial statements included in this Annual Report. BUSINESS COMBINATIONS Refer to Financial Note 4, “Business Acquisitions and Divestitures,” to the consolidated financial statements included in this Annual Report for additional information. FISCAL 2023 OUTLOOK Information regarding the Company’s fiscal 2023 outlook is contained in the release of our fourth quarter fiscal 2022 financial results included as an exhibit to our Form 8-K furnished to the SEC on May 5, 2022, which is not incorporated by reference into this Annual Report. That Form 8-K should be read in conjunction with the forward-looking statements in the "Trends and Uncertainties" section of this Financial Review, as well as the cautionary statements in Item 1, "Business - Forward-Looking Statements," and Item 1A, "Risk Factors," in Part I of this Annual Report. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We consider an accounting estimate to be critical if the estimate requires us to make assumptions about matters based upon past experience and management’s judgment 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 included in this Annual Report. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Allowances for Credit Losses: Our receivables primarily consist of short-term trade accounts receivable from customers that result from the sale of goods and services. We also provide 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. 50 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) The Company considers historical experience, the current economic environment, customer credit ratings or bankruptcies, legal disputes, and reasonable and supportable forecasts to develop its allowance for credit losses. Management reviews these factors quarterly to determine if any adjustments are needed to the allowance. Sales to the Company’s ten largest customers, including group purchasing organizations (“GPOs”), accounted for approximately 52% of total consolidated revenues in 2022 and comprised approximately 43% of total trade accounts receivable at March 31, 2022. Sales to our largest customer, CVS Health Corporation (“CVS”), accounted for approximately 21% of our total consolidated revenues in 2022 and comprised approximately 28% of total trade accounts receivable at March 31, 2022. 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 receivable 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 2022 are appropriate and consistent in the context of historical methodologies employed, as well as assessment of trends currently available. At March 31, 2022, trade and notes receivables were $16.8 billion prior to allowances of $99 million. In 2022, 2021 and, 2020, our provision for bad debts was $29 million, $4 million, and $91 million, respectively. At March 31, 2022 and 2021, the allowance as a percentage of trade and notes receivables was 0.6% and 1.2%, respectively. An increase or decrease of a hypothetical 0.1% in the 2022 allowance as a percentage of trade and notes receivables would result in an increase or decrease in the provision for bad debts of approximately $17 million. The selected 0.1% hypothetical change does not reflect what could be considered the best or worst-case scenarios. Additional information concerning our allowances for credit losses may be found in Schedule II included in this Annual Report. Inventories: Inventories consist of merchandise held for resale. We report inventories at the lower of cost or net realizable value, except for inventories determined using the LIFO method which are valued at the lower of LIFO cost or market. LIFO method presumes that the most recent inventory purchases are the first items sold and the inventory cost under LIFO approximates market. The majority of the cost of domestic inventories is determined using the LIFO method. The majority of the cost of inventories held in foreign and certain domestic locations is based on the first-in, first-out (“FIFO”) method and weighted-average purchase prices. Rebates, cash discounts, and other incentives received from vendors relating to the purchase or distribution of inventory are considered product discounts and are accounted for as a reduction in the cost of inventory and are recognized when the inventory is sold. In determining whether an inventory valuation allowance is required, we consider various factors including estimated quantities of slow-moving inventory by reviewing on-hand quantities, outstanding purchase obligations and forecasted sales. Shifts in market trends and conditions, changes in customer preferences due to the introduction of generic drugs or new pharmaceutical products or the loss of one or more significant customers are factors that could affect the value of our inventories. We write down inventories which are considered excess and obsolete as a result of these reviews. These factors could make our estimates of inventory valuation differ from actual results. At March 31, 2022 and 2021, total inventories, net were $18.7 billion and $19.2 billion, respectively, in our Consolidated Balance Sheets. The LIFO method was used to value approximately 63% and 58% of our inventories at March 31, 2022 and 2021, respectively. If we had used the moving average method of inventory valuation, inventories would have been approximately $383 million and $406 million higher than the amounts reported at March 31, 2022 and 2021, respectively. These amounts are equivalent to our LIFO reserves. 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. We recognized LIFO credits of $23 million, $38 million, and $252 million in 2022, 2021 and, 2020, respectively, in our Consolidated Statements of Operations. The lower LIFO credits in 2022 compared to 2021 are primarily due to higher brand inflation and delays of branded off-patent to generic drug launches. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical products. 51 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) We believe that the moving average inventory costing method provides a reasonable estimation of the current cost of replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or market. As of March 31, 2022 and 2021, inventories at LIFO did not exceed market. Business Combinations: We account for business combinations using the acquisition method of accounting whereby the identifiable assets and liabilities of the acquired business, as well as any noncontrolling interest in the acquired business, are recorded at their estimated fair values as of the date that we obtain control of the acquired business. Any purchase consideration in excess of the estimated fair values of the net assets acquired is recorded as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred. Several valuation methods may be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, we typically use a method that is a form or variation of the income approach, whereby a forecast of future cash flows attributable to the asset are discounted to present value using a risk-adjusted discount rate. Some of the more significant estimates and assumptions inherent in the income approach include the amount and timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash flows, and the assessment of the asset’s expected useful life. Refer to Financial Note 4, “Business Acquisitions and Divestitures,” to the consolidated financial statements included in this Annual Report for additional information regarding our acquisitions. Goodwill and Long-Lived Assets: Goodwill As a result of acquiring businesses, we have $9.5 billion of goodwill at March 31, 2022 and 2021, and $2.1 billion and $2.9 billion of intangible assets, net at March 31, 2022 and 2021, respectively. We perform an impairment test on goodwill balances annually in the third quarter and more frequently if indicators for potential impairment exist. Indicators that are considered include significant declines in performance relative to expected operating results, significant changes in the use of the assets, significant negative industry or economic trends, or a significant decline in the Company’s stock price and/or market capitalization for a sustained period of time. Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or a component, one level below our operating segments, for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit. We apply the goodwill impairment test by comparing the estimated fair value of a reporting unit to its carrying value and an impairment charge is recorded equal to the amount of excess carrying value above the estimated fair value, if any, but not to exceed the amount of goodwill allocated to the reporting unit. To estimate the fair value of our reporting units, we generally use a combination of the market approach and the income approach. Under the market approach, we estimate fair value by comparing the business to similar businesses, or guideline companies whose securities are actively traded in public markets. Under the income approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate that is commensurate with the risk inherent within the reporting unit. In addition, we compare the aggregate of the reporting units’ fair values to our market capitalization as further corroboration of the reasonableness of our concluded fair values. 52 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Estimates of fair value result from a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions at a point in time. Judgments made in determining an estimate of fair value may materially impact our results of operations. The valuations are based on information available as of the impairment testing date and are based on expectations and assumptions that have been deemed reasonable by management. Any material changes in key assumptions, including failure to meet business plans, negative changes in government reimbursement rates, deterioration in the U.S. and global financial markets, an increase in interest rates or an increase in the cost of equity financing by market participants within the industry, or other unanticipated events and circumstances may decrease the projected cash flows or increase the discount rates and could potentially result in an impairment charge. Under the market approach, significant estimates and assumptions also include the selection of appropriate guideline companies and the determination of appropriate valuation multiples to apply to the reporting unit. Under the income approach, significant estimates and assumptions also include the determination of discount rates. The discount rates represent the weighted-average cost of capital measuring the reporting unit’s cost of debt and equity financing, which are weighted by the percentage of debt and percentage of equity in a company’s target capital structure. Included in the estimate of the weighted-average cost of capital is the assumption of an unsystematic risk premium to address incremental uncertainty related to the reporting units’ future cash flow projections. An increase in the unsystematic risk premium increases the discount rate. The annual impairment testing performed for 2022, 2021, and 2020 did not indicate any impairment of goodwill. The segment change in the second quarter of 2021 prompted changes in multiple reporting units across the Company and as a result, goodwill included in impacted reporting units was reallocated using a relative fair value approach and assessed for impairment both before and after the reallocation. We recorded a goodwill impairment charge of $69 million in 2021 as the estimated fair value of the Europe Retail Pharmacy reporting unit was lower than its reassigned carrying value based on changes in the composition of the Europe Retail Pharmacy reporting unit within the International segment. At March 31, 2022 and 2021, the balance of goodwill in the International segment primarily relates to our McKesson Canada reporting unit. The estimated fair value of our McKesson Canada reporting unit in our International segment exceeded the carrying value of the reporting unit by 22% in 2022. The goodwill balance of this reporting unit was $1.5 billion at March 31, 2022, or approximately 16% of the consolidated goodwill balance. Generally, a decline in estimated future cash flows in excess of approximately 22% for McKesson Canada or an increase in the discount rate in excess of approximately 2% could result in an indication of goodwill impairment for this reporting unit in future reporting periods under the income approach. Other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions may require us to further revise the projected cash flows, which could adversely affect the fair value of our other reporting units in future periods. Refer to Financial Note 11, “Goodwill and Intangible Assets, Net,” to the consolidated financial statements included in this Annual Report for additional information. Long-Lived Assets Currently, all of our intangible and other long-lived assets are amortized or depreciated based on the pattern of their economic consumption or a straight-line basis over their estimated useful lives, ranging from one to 24 years. We review intangible and other long-lived 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 and other long-lived assets is based on the lowest level of identifiable estimated future undiscounted cash flows resulting from the 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, Impairment, and Related Charges, Net,” to the consolidated financial statements included in this Annual Report for additional information on our long-lived asset impairments. 53 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Long-lived assets classified as held for sale are measured at the lower of carrying amount or fair value less costs to sell, and are not depreciated or amortized. Fair value is determined based on the total consideration expected to be received by the Company. 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. Valuation of Equity Method Investments: We evaluate our investments for other-than-temporary impairments when circumstances indicate those assets may be impaired. When the decline in value is deemed to be other than temporary, an impairment is recognized to the extent that the fair value is less than the carrying value of the investment. We consider various factors in determining whether a loss in value of an investment is other than temporary including: the length of time and the extent to which the fair value has been below cost, the financial condition of the investees, and our intent and ability to retain the investment for a period of time sufficient to allow for recovery of value. Management makes certain judgments and estimates in its assessment including but not limited to: identifying if circumstances indicate a decline in value is other than temporary, expectations about the business operations of investees, as well as industry, financial, and market factors. Any significant changes in assumptions or judgments in assessing impairments could result in an impairment charge. 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, including those used to conclude on the tax-free nature of the separation of the Change Healthcare JV and the unrecognized tax position related to opioid-related litigation and claims, and may differ from the actual amounts of tax benefit recognized. We review our tax positions at the end of each quarter and adjust the balances as new information becomes available. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative net operating losses in the most recent years, and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future federal, state, and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Should tax laws change, our tax expense and cash flows could be materially impacted. In addition, the calculation of our tax liabilities includes estimates for uncertainties in the application of complex new tax regulations across multiple global jurisdictions where we conduct our operations. We recognize liabilities for tax and related interest for issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If our current estimate of tax and interest liabilities is less than the ultimate settlement, an additional charge to income tax expense may result. If our current estimate of tax and interest liabilities is more than the ultimate settlement, a reduction to income tax expense may be recognized. Loss Contingencies: We are subject to various claims, including claims with customers and vendors, pending and potential legal actions for damages, investigations relating to laws and regulations and other matters arising out of the normal conduct of our business. When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict, and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which time relevant developments and new information must be reevaluated at least quarterly to determine both the likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a material loss is reasonably possible or probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided. Legal fees are recognized as incurred when the legal services are provided. 54 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the potential loss or range of the loss can be made. As discussed above, development of a meaningful estimate of loss or a range of potential loss is complex when the outcome is directly dependent on future negotiations with or decisions by third parties, such as regulatory agencies, the court system, and other interested parties. In conjunction with the preparation of the consolidated financial statements included in this Annual Report, we considered matters related to ongoing controlled substances claims to which we are a party. On February 25, 2022, the Company and two other U.S. pharmaceutical distribution companies (collectively, “Distributors”) determined that there is sufficient state and subdivision participation to proceed with an agreement to settle a substantial majority of opioid-related lawsuits filed against the Distributors by U.S. states, territories, and local governmental entities. Based on our estimated liability under the Settlement and to governmental entities not expected to participate in the settlement, we recorded a charge of $8.1 billion for the year ended March 31, 2021 within “Claims and litigation charges, net” in our Consolidated Statement of Operations included in this Annual Report. In connection with the Settlement and other opioid-related settlement accruals, we recorded additional charges of $274 million during the year ended March 31, 2022 within “Claims and litigation charges, net,” in our Consolidated Statement of Operations. Because of the many uncertainties associated with the remaining opioid-related litigation matters, we are not able to reasonably estimate the upper or lower ends of the range of ultimate possible loss for all opioid-related litigation matters. While we are not able to predict the outcome or reasonably estimate a range of possible losses in these matters, an adverse judgment or negotiated resolution in any of these matters could have a material adverse effect on our results of operations, financial position, cash flows, or liquidity. Refer to Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report for additional information. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES We expect our available cash generated from operations and our short-term investment portfolio, together with our existing sources of liquidity from our credit facilities and commercial paper program, will be sufficient to fund our short-term and long-term capital expenditures, working capital, and other cash requirements. We remain well-capitalized with access to liquidity from our $4.0 billion revolving credit facility. At March 31, 2022, we were in compliance with all debt covenants, and believe we have the ability to continue to meet our debt covenants in the future. 55 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) The following table summarizes the net change in cash, cash equivalents, and restricted cash for the periods shown: [[GREPCENT_TABLE]] [["","Years Ended March 31,"],["(Dollars in millions)","2022","","2021","","Change"],["Net cash provided by (used in):"],["Operating activities","$","4,434","","","$","4,542","","","$","(108)"],["Investing activities","(89)","","","(415)","","","326"],["Financing activities","(6,321)","","","(1,693)","","","(4,628)"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","55","","","(61)","","","116"],["Cash, cash equivalents, and restricted cash classified within Assets held for sale (1)","(540)","","","\u2014","","","(540)"],["Net change in cash, cash equivalents, and restricted cash","$","(2,461)","","","$","2,373","","","$","(4,834)"]] [[/GREPCENT_TABLE]] (1)Refer to Financial Note 2, “Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report for further information. Operating Activities Net cash provided from operating activities was $4.4 billion and $4.5 billion for the years ended March 31, 2022 and 2021, respectively. Cash flows from operations can be significantly impacted by factors such as the timing of receipts from customers, inventory receipts, and payments to vendors. Additionally, working capital is primarily a function of sales and purchase volumes, inventory requirements, and vendor payment terms. Operating activities for the year ended March 31, 2022 were affected by net income adjusted for non-cash items, including the losses on our European businesses held for sale and our classifications of receivables, drafts and accounts payables, and inventories as held for sale. Refer to Financial Note 2, “Held for Sale,” to the consolidated financial statements included in this Annual Report for further information. Excluding the aforementioned classifications, operating activities for the year ended March 31, 2022 were affected by increases in inventory of $1.2 billion and drafts and accounts payable of $2.8 billion due to timing of purchases, and an increase in receivables of $1.8 billion resulting from timing of collections and higher revenues. Operating activities for the year ended March 31, 2021 were affected by net income adjusted for non-cash items, including the pre-tax $8.1 billion (after-tax $6.8 billion) non-cash charge related to our estimated liability for opioid-related claims, an increase in inventory of $2.3 billion and an increase in drafts and accounts payable of $1.3 billion driven by higher inventory stock levels to meet increased volume demand as part of our inventory management, as well as a decrease in receivables of $1.1 billion driven by timing, higher sales recognized at the end of March 2020, and higher collections in our fourth quarter of 2021. Other non-cash items within operating activities for the year ended March 31, 2022 includes an adjustment to net income of $191 million related to loss on debt extinguishment, non-cash inventory charges totaling $164 million on certain PPE and other related products in our Medical-Surgical Solutions segment, and stock-based compensation of $161 million. Other non-cash items for the year ended March 31, 2021 primarily includes stock-based compensation of $151 million and fair value remeasurement charges of $58 million related to the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. Investing Activities Net cash used in investing activities was $89 million and $415 million for the years ended March 31, 2022 and 2021, respectively. Investing activities for the year ended March 31, 2022 include $388 million and $147 million in capital expenditures for property, plant, and equipment and capitalized software, respectively. Investing activities for the year ended March 31, 2022 also includes net cash proceeds of $578 million from sales of businesses and investments, primarily driven by our European divestiture activities described above including the disposal of our Austria business, and the sale of certain of our equity investments. Investing activities for the year ended March 31, 2021 include $451 million and $190 million in capital expenditures for property, plant, and equipment and capitalized software, respectively. Investing activities for the year ended March 31, 2021 also includes net cash proceeds of $400 million from sales of businesses and investments, including $286 million in exchange for the contribution of our German pharmaceutical wholesale business to a joint venture with WBA. 56 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Financing Activities Net cash used in financing activities was $6.3 billion and $1.7 billion for the years ended March 31, 2022 and 2021, respectively. Financing activities for the year ended March 31, 2022 include cash receipts of $11.2 billion and payments of $11.2 billion for short-term borrowings of commercial paper. Financing activities for the year ended March 31, 2022 include a cash tender offer of $1.1 billion to redeem certain notes with a principal amount of $922 million and the redemption of our 0.63% Euro-denominated notes with a principal amount of €600 million (or, approximately $709 million) prior to the maturity date of August 17, 2021 using cash on hand. This resulted in total repayments of long-term debt during the year ended March 31, 2022 of $1.8 billion, including $184 million of cash paid for premiums and transaction fees. This was partially offset by the issuance of long-term debt in August 2021 from a public offering of 1.30% notes due August 15, 2026 for proceeds received of $498 million, which was utilized for general corporate purposes. Financing activities for the year ended March 31, 2022 also include $3.5 billion of cash paid for share repurchases and $277 million of cash paid for dividends. Additionally, financing activities for the year ended March 31, 2022 include payments of $1.0 billion to purchase shares of McKesson Europe through exercises of a put right option by noncontrolling shareholders. Cash used for other financing activities for the year ended March 31, 2022 includes payments to noncontrolling interests, and funds temporarily held on behalf of unaffiliated medical practice groups. Financing activities for the year ended March 31, 2021 include cash receipts of $6.3 billion and payments of $6.3 billion from short-term borrowings of commercial paper, along with the issuance of the 2025 Notes in a principal amount of $500 million, the retirement of our $700 million total principal amount of notes due on November 30, 2020 at a fixed interest rate of 3.65% upon maturity, and the redemption of our 4.75% $323 million total principal of notes due on March 1, 2021 prior to maturity. The notes were redeemed using cash on hand and proceeds from the 2025 Notes. Financing activities for the year ended March 31, 2021 also include $742 million of cash paid for stock repurchases and $276 million of dividends paid. Cash used for other financing activities generally includes payments to noncontrolling interests and activity from our finance leases. Other financing activities for the year ended March 31, 2021 also include restricted cash net inflow related to funds temporarily held on behalf of unaffiliated medical practice groups. Share Repurchase Plans The Board has authorized the repurchase of McKesson’s common stock from time to time in open market transactions, privately negotiated transactions, accelerated share repurchase (“ASR”) programs, or by combinations of such methods, any of which may use pre-arranged trading plans that are designed to meet the requirements of Rule 10b5-1(c) of the Securities Exchange Act of 1934. The timing of any repurchases and the actual number of shares repurchased will depend on a variety of factors, including our stock price, corporate and regulatory requirements, restrictions under our debt obligations, and other market and economic conditions. During the last two years, our share repurchases were transacted through both open market transactions and ASR programs with third-party financial institutions. Information regarding the share repurchase activity over the last two years is as follows: [[GREPCENT_TABLE]] [["","Share Repurchases (1)"],["(In millions, except price per share data)","","Total Number ofShares Purchased (2)","","Average Price Paid Per Share","","Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs"],["Balance, March 31, 2020","","","","","","$","1,535"],["Shares repurchase authorization increase in 2021","","","","","","2,000"],["Shares repurchased - Open market (3)","","4.7","","","$","160.33","","","(750)"],["Balance, March 31, 2021","","","","","","2,785"],["Shares repurchased - May 2021 ASR","","5.2","","","$","193.22","","","(1,000)"],["Shares repurchased - Open market","","4.6","","","$","217.73","","","(1,007)"],["Shares repurchase authorization increase in 2022","","","","","","4,000"],["Shares repurchased - February 2022 ASR (4)","","4.8","","","$","265.56","","","(1,500)"],["Balance, March 31, 2022","","","","","","$","3,278"]] [[/GREPCENT_TABLE]] 57 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) (1)This table does not include the value of equity awards surrendered to satisfy tax withholding obligations or forfeitures of equity awards. (2)The number of shares purchased reflects rounding adjustments. (3)Of the total dollar value, $8 million was accrued within “Other accrued liabilities” in our Consolidated Balance Sheet as of March 31, 2021 for share repurchases that were executed in late March and settled in early April. (4)In February 2022, the Company entered into an ASR program with a third-party financial institution to repurchase $1.5 billion of the Company’s common stock. The average price paid per share and total number of shares purchased under this program are estimates based on the initial share purchase price and initial delivery of shares under an ASR agreement and may differ from the average price paid per share and total number of shares purchased under the ASR program upon its final settlement in May 2022. We believe that our future operating cash flow, financial assets, and current access to capital and credit markets, including our existing credit facilities, will give us the ability to meet our financing needs for the foreseeable future. However, there can be no assurance that an increase in volatility or disruption in the global capital and credit markets will not impair our liquidity or increase our costs of borrowing. Selected Measures of Liquidity and Capital Resources [[GREPCENT_TABLE]] [["","March 31,"],["(Dollars in millions)","2022","","2021"],["Cash, cash equivalents, and restricted cash","$","3,935","","","","$","6,396"],["Working capital","(2,235)","","","","1,279"],["Days sales outstanding for: (1)"],["Customer receivables","22","","","","26"],["Inventories","27","","","","31"],["Drafts and accounts payable","55","","","","63"],["Debt to capital ratio (2)","114.5","","%","","83.1","","%"]] [[/GREPCENT_TABLE]] (1)Based on year-end balances and sales or cost of sales for the last 90 days of the year. (2)This ratio describes the relationship and changes within our capital resources, and is computed as the sum of short-term borrowings, current portion of long-term debt, and long-term debt divided by the sum of short-term borrowings, current portion of long-term debt, long-term debt, and McKesson stockholders’ equity (deficit), which excludes noncontrolling and redeemable noncontrolling interests and accumulated other comprehensive loss. Cash equivalents, which are readily convertible to known amounts of cash, are carried at fair value. Cash equivalents are primarily invested in AAA-rated U.S. government money market funds and overnight deposits with financial institutions. Deposits with financial institutions are primarily denominated in U.S. dollars and the functional currencies of our foreign subsidiaries, including Euro, British pound sterling, and Canadian dollars. We mitigate the risk of our short-term investment portfolio by depositing funds with reputable financial institutions and monitoring risk profiles and investment strategies of money market funds. Our cash and cash equivalents balance as of March 31, 2022 and 2021 included approximately $1.5 billion and $2.3 billion of cash held by our subsidiaries outside of the U.S., respectively. Our primary intent is to utilize this cash for foreign operations for an indefinite period of time. Although the vast majority of cash held outside the U.S. is available for repatriation, doing so could subject us to foreign withholding taxes and state income taxes. Following enactment of the 2017 Tax Cuts and Jobs Act, the repatriation of cash to the U.S. is generally no longer taxable for federal income tax purposes. Working capital primarily includes cash and cash equivalents, receivables, and inventories, net of drafts and accounts payable, short-term borrowings, current portion of long-term debt, and other accrued liabilities. Our businesses require substantial investments in working capital that are susceptible to large variations during the year as a result of inventory purchase patterns and seasonal demands. Inventory purchase activity is a function of sales activity and other requirements. 58 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Consolidated working capital decreased at March 31, 2022 compared to the prior year primarily due to a decrease in cash and cash equivalents and receivables, as well as an increase in other accrued liabilities and an increase in our current portion of debt, partially offset by a decrease in drafts and accounts payable, and an increase in net current assets held for sale related to our E.U. disposal group and U.K. disposal group. Consolidated working capital improved at March 31, 2021 compared to the prior year primarily due to an increase in cash and cash equivalents and inventory, partially offset by an increase in drafts and accounts payable and a decrease in receivables. Our debt to capital ratio increased for the year ended March 31, 2022 primarily due to an increase in McKesson stockholders’ deficit driven by share repurchases, partially offset by net income for the year to date period. Our debt to capital ratio was also impacted by a decrease in total debt from the completion of a cash tender offer to redeem certain notes with a principal amount of $922 million and the redemption of our €600 million Euro-denominated notes both in July 2021, partially offset by the issuance of notes with a principal amount of $500 million in August 2021. Our debt to capital ratio increased for 2021 primarily due to a decrease in stockholders’ equity driven by net loss for the year and share repurchases. On July 23, 2021, we raised our quarterly dividend from $0.42 to $0.47 per common share for dividends declared on or after such date by the Board. Dividends were $1.83 per share in 2022 and $1.67 per share in 2021. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Board and will depend upon our future earnings, financial condition, capital requirements, and other factors. In 2022 and 2021, we paid total cash dividends of $277 million and $276 million, respectively. Our redeemable noncontrolling interests primarily related to our consolidated subsidiary, McKesson Europe. At March 31, 2021, the carrying value was $1.3 billion and we owned approximately 78% of McKesson Europe’s outstanding common shares. Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe had a right to put (“Put Right”) their shares at €22.99 per share, increased annually for interest in the amount of five percentage points above a base rate published semi-annually by the German Bundesbank, less any compensation amount or guaranteed dividend already paid by McKesson (“Put Amount”). During 2022 and 2021, we paid $1.0 billion and $49 million, respectively, to purchase 34.5 million and 1.8 million shares, respectively, of McKesson Europe through exercises of the Put Right by the noncontrolling shareholders, which reduced the balance of our redeemable noncontrolling interests. The Put Right expired on June 15, 2021, at which point the remaining shares owned by the minority shareholders, valued at $287 million, were transferred from redeemable noncontrolling interests to noncontrolling interests. At March 31, 2022, we owned approximately 95% of McKesson Europe’s outstanding common shares. Additionally, we are obligated to pay an annual recurring compensation of €0.83 per McKesson Europe share (the “Compensation Amount”) to the noncontrolling shareholders of McKesson Europe under the Domination Agreement. The Compensation Amount is recognized ratably during the applicable annual period in “Net income attributable to noncontrolling interests” in the Consolidated Statements of Operations. The Domination Agreement does not expire, but it may be terminated at the end of any fiscal year by giving at least six months’ advance notice. Our noncontrolling interest in McKesson Europe will be included in the sale of our E.U. disposal group, as discussed in more detail in Financial Note 2, “Held for Sale,” to the accompanying consolidated financial statements included in this Annual Report. Refer to Financial Note 8, “Redeemable Noncontrolling Interests and Noncontrolling Interests,” to the accompanying consolidated financial statements included in this Annual Report for additional information regarding redeemable noncontrolling interests. 59 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Continued) Material Cash Requirements: The table and information below presents our significant financial obligations and commitments as of March 31, 2022: [[GREPCENT_TABLE]] [["","","","Years"],["(In millions)","Total","","Within 1","","Over 1 to 3","","Over 3 to 5","","After 5"],["On balance sheet"],["Total debt (1)","$","5,879","","","$","799","","","$","1,001","","","$","2,400","","","$","1,679"],["Operating lease obligations (2)","1,815","","","328","","","578","","","403","","","506"],["Other (3)","144","","","19","","","29","","","30","","","66"],["Off balance sheet"],["Interest on borrowings (4)","1,085","","","164","","","252","","","199","","","470"],["Purchase obligations (5)","6,294","","","6,195","","","99","","","\u2014","","","\u2014"],["Other (6)","451","","","309","","","51","","","27","","","64"],["Total","$","15,668","","","$","7,814","","","$","2,010","","","$","3,059","","","$","2,785"]] [[/GREPCENT_TABLE]] (1)Represents maturities of the Company’s long-term obligations, including an immaterial amount of finance lease obligations. (2)Represents undiscounted minimum operating lease obligations under non-cancelable operating leases having an initial remaining term over one year and is not adjusted for imputed interest. Refer to Financial Note 10, “Leases” to the consolidated financial statements included in this Annual Report for more information. (3)Includes our estimated benefit payments for the unfunded benefit plans and minimum funding requirements for the pension plans. (4)Represents interest that will become due on our fixed rate long-term debt obligations. (5)Primarily relates to the expected purchase of goods and services, including inventory and capital commitments, from vendors in the normal course of business. (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 material cash requirements table above excludes the following obligations: As of March 31, 2022, the Company accrued $8.3 billion related to the settlement of opioid-related litigation claims with governmental entities, as described in the “Trends and Uncertainties” section of this Financial Review and Financial Note 18, “Commitments and Contingent Liabilities,” to the consolidated financial statements included in this Annual Report. The majority of this amount relates to a global settlement payable in annual installments for up to 18 years pursuant to the schedule set forth in the agreement. We expect to pay $1.0 billion prior to March 31, 2023. At March 31, 2022, the liability recorded for uncertain tax positions, excluding associated interest and penalties, was approximately $1.0 billion. The ultimate amount and timing of any related future cash settlements cannot be predicted with reasonable certainty. Our banks and insurance companies have issued $214 million of standby letters of credit and surety bonds at March 31, 2022. 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, pension obligations in Europe, and our workers’ compensation and automotive liability programs. 60 [[GREPCENT_TABLE]] [["Table of Contents","MD&A Index"]] [[/GREPCENT_TABLE]] McKESSON CORPORATION FINANCIAL REVIEW (Concluded) Credit Resources: We fund our working capital requirements primarily with cash and cash equivalents as well as short-term borrowings from our commercial paper issuances. Funds necessary for future debt maturities and our other cash requirements, including any future payments that may be made related to our total estimated litigation liability of $8.3 billion as of March 31, 2022 for opioid-related claims, are expected to be met by existing cash balances, cash flow from operations, existing credit sources, and other capital market transactions. Long-term debt markets and commercial paper markets, our primary sources of capital after cash flow from operations, are open and accessible to us should we decide to access those markets. Detailed information regarding our debt and financing activities is included in Financial Note 12, “Debt and Financing Activities,” to the consolidated financial statements included in this Annual Report. RELATED PARTY BALANCES AND TRANSACTIONS Information regarding our related party balances and transactions is included in Financial Note 4, “Business Acquisitions and Divestitures,” and Financial Note 20, “Related Party Balances and Transactions,” to the consolidated financial statements included in this Annual Report. 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 included in this Annual Report.