MCKESSON CORP

Overview of Consolidated Results:

Revenues

Revenues increased for the three and nine months ended December 31, 2023 compared to the same prior year periods largely due to market growth in our U.S. Pharmaceutical segment, including higher volumes from retail national account customers and growth in specialty pharmaceuticals. Market growth includes growing drug utilization, price increases, and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. This revenue growth was partially offset by lower revenues in our International segment driven by the completed divestiture of our E.U. disposal group and unfavorable effects of foreign currency exchange fluctuations.

Gross Profit

Gross profit decreased for the three and nine months ended December 31, 2023 compared to the same prior year periods primarily driven by the completed divestiture of our E.U. disposal group within our International segment, partially offset by growth of specialty pharmaceuticals, our share of antitrust legal settlements received in the first nine months of fiscal 2024, increased contributions from our generics programs in our U.S. Pharmaceutical segment, and increased technology services revenue from higher volumes in our RxTS segment.

We recognized gains of $23 million and $129 million for the three months ended December 31, 2023 and 2022, respectively, and $220 million and $129 million for the nine months ended December 31, 2023 and 2022, respectively, related to our share of antitrust legal settlements. We recognized these amounts within "Cost of sales" in the Condensed Consolidated Statements of Operations within our U.S. Pharmaceutical segment.

Last-in, first-out (“LIFO”) inventory charges recognized during the three months ended December 31, 2023 and 2022 were comparable, with $2 million and $5 million recorded in the third quarter of fiscal 2024 and fiscal 2023, respectively. A LIFO charge of $89 million and a credit of $31 million were recognized during the nine months ended December 31, 2023 and 2022, respectively, primarily due to higher brand inventory levels, slightly higher estimated brand inflation, lower estimated generics deflation, as well as lower off patent launch activity.

Our U.S. Pharmaceutical business uses the LIFO method of accounting for the majority of its inventories, which results in cost of sales that more closely reflects replacement cost than under other accounting methods. The business’ practice is to pass on to customers published price changes from suppliers. Manufacturers generally provide us with price protection, which limits price related inventory losses. A LIFO 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. Our quarterly LIFO adjustment is based on our estimates of the annual LIFO adjustment which is impacted by expected changes in year-end inventory quantities, product mix, and manufacturer pricing practices, which may be influenced by market and other external factors. Changes to any of the above factors could have a material impact to our annual LIFO adjustment. The actual valuation of inventory under the LIFO method is calculated at the end of the fiscal year.

Total Operating Expenses

A summary of the components of our total operating expenses for the three and nine months ended December 31, 2023 and 2022 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, provisions for bad debts, 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.

•Restructuring, impairment, and related charges, net: Charges recorded under this component include those 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.

For the three and nine months ended December 31, 2023, total operating expenses increased compared to the same prior year periods. Total operating expenses as a percentage of revenues increased for the three months ended December 31, 2023, however slightly decreased for the nine months ended December 31, 2023, when compared to the same prior year periods. Total operating expenses were impacted by the following significant items:

•SDG&A for the three and nine months ended December 31, 2023 includes a provision for bad debts of $515 million and $725 million, respectively, related to the bankruptcy of Rite Aid in October 2023. Refer to the Rite Aid Bankruptcy Proceedings section of"Trends and Uncertainties"for further discussion;

•SDG&A for the three and nine months ended December 31, 2023 includes fair value adjustment gains of $2 million and $78 million, respectively, which reduced our contingent consideration liability related to the RxSS acquisition, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;

•SDG&A for the three and nine months ended December 31, 2023 was impacted by lower operating expenses from the completed divestiture of our E.U. disposal group in fiscal 2023, as discussed in more detail in Financial Note 2, “Business Acquisitions and Divestitures,” to the accompanying condensed consolidated financial statements included in this Quarterly Report;

•Claims and litigation charges, net was not material. Refer to the Opioid-Related Litigation and Claims section of"Trends and Uncertainties"for further discussion; and

•Restructuring, impairment, and related charges, net were $4 million and $31 million, respectively, for the three months ended December 31, 2023 and 2022 and $84 million for each of the nine months ended December 31, 2023 and 2022, as discussed in more detail below under “Restructuring Initiatives.”

Goodwill Impairment

We evaluate goodwill for impairment on an annual basis in the first fiscal quarter, and at an interim date if indicators of potential impairment exist. The annual impairment testing performed in fiscal 2024 and fiscal 2023 did not indicate any impairment of goodwill, and no goodwill impairment charges were recorded during the three and nine months ended December 31, 2023 and 2022. However, other risks, expenses, and future developments, such as additional government actions, increased regulatory uncertainty, and material changes in key market assumptions limit our ability to estimate projected cash flows, which could adversely affect the fair value of various reporting units in future periods, including our McKesson Canada reporting unit within our International segment, where the risk of a material goodwill impairment is higher than other reporting units.

Restructuring Initiatives

We recorded restructuring, impairment, and related charges of $4 million and $31 million for the three months ended December 31, 2023 and 2022, respectively, and $84 million for each of the nine months ended December 31, 2023 and 2022. These charges were included in “Restructuring, impairment, and related charges, net” in the Condensed Consolidated Statements of Operations.

During the fourth quarter of fiscal 2023, we approved a broad set of initiatives to drive operational efficiencies and increase cost optimization efforts, with the intent of simplifying our infrastructure and realizing long-term sustainable growth. These initiatives include headcount reductions and the exit or downsizing of certain facilities. We anticipate total charges of approximately $125 million across our RxTS and U.S. Pharmaceutical segments as well as Corporate, consisting primarily of employee severance and other employee-related costs, facility and other exit-related costs, as well as long-lived asset impairments. Of this amount, $101 million of cumulative charges were recorded through December 31, 2023. For the three and nine months ended December 31, 2023, we recorded charges of $2 million and $41 million related to this program, respectively, which primarily includes real estate and other related asset impairments and facility costs within Corporate. This restructuring program is anticipated to be substantially complete by the end of fiscal 2024.

Refer to Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for further information on our restructuring initiatives.

Other Income, Net

Other income, net decreased for the three and nine months ended December 31, 2023 compared to the same prior year periods primarily due to:

•a gain in the third quarter of fiscal 2023 of $126 million due to the cash received for the early termination of a tax receivable agreement (“TRA”) entered into as part of the formation of the joint venture with Change Healthcare Inc. (“Change”). This gain was recorded within Corporate expenses, net;

•a gain in the third quarter of fiscal 2023 of $97 million from the termination of fixed interest rate swaps accounted for as cash flow hedges within Corporate expenses, net; and

•a gain in the second quarter of fiscal 2023 of $142 million related to the exit of one of our investments in equity securities held within our U.S. Pharmaceutical segment.

Interest Expense

Interest expense decreased for the three months ended December 31, 2023 compared to the same prior year period primarily driven by changes in our loan portfolio. Interest expense increased for the nine months ended December 31, 2023 compared to the same prior year period primarily due to the impact of higher interest rates on our debt and derivative portfolios, partially offset by a $9 million gain on debt extinguishment in the first quarter of fiscal 2024. Refer to Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information. Interest expense may fluctuate based on timing, amounts, and interest rates of term debt repaid and new term debt issued, as well as amounts incurred associated with financing fees.

Income Tax (Benefit) Expense

For the three months ended December 31, 2023 and 2022, we recorded income tax (benefit) of ($18 million) and expense of $329 million, respectively. For the nine months ended December 31, 2023 and 2022, we recorded income tax expense of $289 million and $799 million, respectively. Our reported income tax rates were (2.9)% and 22.7% for the three months ended December 31, 2023 and 2022, respectively, and 11.0% and 21.6% for the nine months ended December 31, 2023 and 2022, respectively.

Fluctuations in our reported income tax rates are primarily due to changes in our business mix of earnings between various taxing jurisdictions and discrete tax items recognized in the quarters. We recognized a net discrete tax benefit of $141 million in the three months ended December 31, 2023, including $154 million related to the release of a valuation allowance based on management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. We also recognized a net discrete tax benefit of $147 million in the nine months ended December 31, 2023 primarily related to the repatriation of certain intellectual property between McKesson wholly-owned legal entities that are based in different tax jurisdictions. Refer to Financial Note 4, “Income Taxes,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.

Income (Loss) from Discontinued Operations, Net of Tax

Income (loss) from discontinued operations, net of tax, was $1 million and ($3 million) for the three and nine months ended December 31, 2022, respectively. Subsequent to our divestiture of the E.U. disposal group in October 2022, we no longer have discontinued operations.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests for the three and nine months ended December 31, 2023 and 2022 primarily represents the proportionate results of third-party equity interests in the Company’s consolidated entities of ClarusONE Sourcing Services LLP and Vantage Oncology Holdings, LLC. Net income attributable to noncontrolling interests also includes the proportionate results of third-party equity interest in SCRI Oncology, LLC (“SCRI Oncology”) from its formation on October 31, 2022.

Net Income Attributable to McKesson Corporation

Net income attributable to McKesson Corporation was $589 million and $1.1 billion for the three months ended December 31, 2023 and 2022, respectively, and $2.2 billion and $2.8 billion for the nine months ended December 31, 2023 and 2022, respectively. Diluted earnings per common share attributable to McKesson Corporation was $4.42 and $7.66 for the three months ended December 31, 2023 and 2022, respectively, and $16.39 and $19.30 for the nine months ended December 31, 2023 and 2022, respectively. Our diluted earnings per share also reflects the cumulative effects of share repurchases during each period.

Weighted-Average Diluted Common Shares Outstanding

Diluted earnings per common share was calculated based on a weighted-average number of shares outstanding of 133.3 million and 141.0 million for the three months ended December 31, 2023 and 2022, respectively, and 134.9 million and 143.7 million for the nine months ended December 31, 2023 and 2022, respectively. Weighted-average diluted shares outstanding for the three and nine months ended December 31, 2023 decreased from the same prior year periods primarily due to the cumulative effect of share repurchases.