MCKESSON CORP

Overview of Consolidated Results:

Revenues

Revenues increased for the three months ended June 30, 2024 compared to the same prior year period largely due to market growth in our U.S. Pharmaceutical segment, including growth in specialty pharmaceuticals and higher volumes largely from retail national account customers. Market growth includes growing drug utilization and newly launched products, partially offset by price deflation associated with branded to generic drug conversion. This revenue growth was also favorably impacted by higher pharmaceutical distribution volumes in our International segment.

Gross Profit

Gross profit increased for the three months ended June 30, 2024 compared to the same prior year period primarily in our U.S. Pharmaceutical segment driven by growth of specialty pharmaceuticals and in our International segment driven by higher volumes.

We recognized gains of $90 million and $118 million for the three months ended June 30, 2024 and 2023, 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.

A last-in, first out (“LIFO”) credit of $2 million and a charge of $32 million were recognized during the three months ended June 30, 2024 and 2023, respectively, primarily due to lower expected brand inflation, partially offset by lower planned launches in the current fiscal year.

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 months ended June 30, 2024 and 2023 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, 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 months ended June 30, 2024, total operating expenses and total operating expenses as a percentage of revenues increased compared to the same prior year period. Total operating expenses were impacted by the following significant items:

•SDG&A increased compared to the same prior year period due to increased operating expenses to support higher volumes and the gain of $28 million recognized in the prior year resulting from a fair value adjustment of our contingent consideration liability related to the Rx Savings Solutions, LLC acquisition;

•Claims and litigation charges, net primarily consists of a charge of $114 million related to our estimated liability for opioid-related claims as previously discussed in the Opioid-Related Litigation and Claims section of “Trends and Uncertainties;” and

•Restructuring, impairment, and related charges, net for the three months ended June 30, 2024 and 2023 were $10 million and $52 million, respectively, 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 2025 and fiscal 2024 did not indicate any impairment of goodwill, and no goodwill impairment charges were recorded during the three months ended June 30, 2024 and 2023. 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.

Restructuring Initiatives

We recorded restructuring, impairment, and related charges of $10 million and $52 million for the three months ended June 30, 2024 and 2023, respectively. 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 included headcount reductions and the exit or downsizing of certain facilities. We recorded charges of $36 million for the three months ended June 30, 2023 related to this program, which primarily includes real estate and other related asset impairments and facility costs within Corporate. This restructuring program was substantially complete in fiscal 2024.

Refer to Financial Note 2, “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 increased for the three months ended June 30, 2024 compared to the same prior year period primarily due to a net gain of $110 million related to our investments in equity securities of certain U.S. growth stage companies in the healthcare industry and a favorable impact to interest income compared to the prior year period, partially offset by a loss of $43 million related to one of our equity method investments.

Interest Expense

Interest expense increased for the three months ended June 30, 2024 compared to the same prior year period primarily due to increased average balances of the Company’s loan portfolio throughout the quarter and a prior year gain on debt extinguishment of $9 million. Refer to Financial Note 6, “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 Expense

For the three months ended June 30, 2024 and 2023, we recorded income tax expense of $124 million and $94 million, respectively. Our reported income tax rates were 11.4% and 8.6% for the three months ended June 30, 2024 and 2023, 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. For the three months ended June 30, 2024, we recognized a net discrete tax benefit of $125 million primarily driven by discrete tax benefits of $58 million related to an election to change the tax status of a foreign affiliate, $37 million related to the tax impact of share-based compensation, and $36 million related to the reduction in unrecognized tax benefits due to a change in case law. We recognized a net discrete tax benefit of $147 million in the three months ended June 30, 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 3, “Income Taxes,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests for the three months ended June 30, 2024 and 2023 primarily represents the proportionate results of third-party equity interests in ClarusONE Sourcing Services LLP, Vantage Oncology Holdings, LLC, and SCRI Oncology, LLC.

Net Income Attributable to McKesson Corporation

Net income attributable to McKesson Corporation was $915 million and $1.0 billion for the three months ended June 30, 2024 and 2023, respectively. Diluted earnings per common share attributable to McKesson Corporation was $7.00 and $7.02 for the three months ended June 30, 2024 and 2023, 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 130.7 million and 136.6 million for the three months ended June 30, 2024 and 2023, respectively. Weighted-average diluted shares outstanding for the three months ended June 30, 2024 decreased from the same prior year period primarily due to the cumulative effect of share repurchases.