MCKESSON CORP

Overview of Consolidated Results:

Revenues

Revenues increased for the three and nine months ended December 31, 2024 compared to the same prior year periods, primarily due to market growth in our U.S. Pharmaceutical segment, including higher volumes largely from retail national account customers and growth in specialty pharmaceuticals. Market growth includes growing drug utilization and newly launched products, partially offset by 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 and nine months ended December 31, 2024 compared to the same prior year periods 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 $31 million and $23 million for the three months ended December 31, 2024 and 2023, respectively, and $184 million and $220 million for the nine months ended December 31, 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.

Gross profit for the nine months ended December 31, 2024 was impacted by restructuring charges of $63 million related to a broad set of initiatives to drive operational efficiencies and increase cost optimization efforts as discussed in Financial Note 3, “Restructuring, Impairment, and Related Charges, Net,” to the accompanying condensed consolidated financial statements included in this Quarterly Report. We recorded this amount related to impairment of inventories within "Cost of sales" in the Condensed Consolidated Statements of Operations within our U.S. Pharmaceutical segment.

Last-in, first out (“LIFO”) charges of $89 million and $2 million were recognized during the three months ended December 31, 2024 and 2023, respectively, and charges of $85 million and $89 million were recognized during the nine months ended December 31, 2024 and 2023, respectively, primarily due to lower than expected generic deflation 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 and nine months ended December 31, 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, provision for bad debts and related recoveries, remeasurement charges to 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.

•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 December 31, 2024, total operating expenses and total operating expenses as a percentage of revenues decreased compared to the same prior year period. For the nine months ended December 31, 2024, total operating

expenses increased and total operating expenses as a percentage of revenues decreased compared to the same prior year period. Total operating expenses were impacted by the following significant items:

•SDG&A for the nine months ended December 31, 2024 includes charges of $666 million to remeasure our Canadian retail disposal group to fair value less costs to sell. The remeasurement adjustment includes a $48 million loss related to the accumulated other comprehensive loss balances associated with this disposal. Of the total charges recorded during the period, $604 million are included within our International segment and $62 million are included within Corporate expenses, net;

•SDG&A for the nine months ended December 31, 2024 includes a credit of $203 million, and 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 additional information;”

•SDG&A for the three and nine months ended December 31, 2023 include gains of $2 million and $78 million, respectively, 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 $108 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 were $32 million and $4 million for the three months ended December 31, 2024 and 2023, respectively, and $213 million and $84 million for the nine months ended December 31, 2024 and 2023, respectively, as discussed 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 and nine months ended December 31, 2024 and 2023. However, other risks, expenses, and future developments, such as 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 $32 million and $4 million for the three months ended December 31, 2024 and 2023, respectively, and $213 million and $84 million for the nine months ended December 31, 2024 and 2023, respectively. These charges were included in “Restructuring, impairment, and related charges, net” in the Condensed Consolidated Statements of Operations.

During the second quarter of fiscal 2025, we approved enterprise-wide initiatives to modernize and accelerate our technology service operating model, which are intended to improve business continuity, compliance, operating efficiency and advance investments to streamline the organization. These initiatives include cost reduction efforts and support other rationalization efforts within Corporate, and the Medical-Surgical Solutions, and U.S. Pharmaceutical segments to help realize long-term sustainable growth. We anticipate total charges related to these initiatives of $650 million to $700 million, consisting primarily of employee severance and other employee-related costs as well as facility, exit and other related costs, including long-lived asset impairments. These programs are anticipated to be substantially complete in fiscal 2028. For the three and nine months ended December 31, 2024, we recorded charges of $18 million and $245 million, respectively, related to the initiatives, which primarily includes severance and other employee-related costs as well as facility exit and other related costs, including long-lived asset impairments and $63 million for the nine months ended December 31, 2024 related to inventory impairments recorded within “Cost of sales” 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, primarily consisting of employee severance and other employee-related costs within our RxTS segment, and the exit or downsizing of certain facilities. 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 included 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 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 increased for the three and nine months ended December 31, 2024 compared to the same prior year periods primarily due to net gains from investments in our equity securities and a favorable impact from interest income. For the nine months ended December 31, 2024, Other income, net increased primarily due to a net gain of $101 million related to our investments in equity securities of certain U.S. growth stage companies in the healthcare industry, and a favorable impact from interest income, partially offset by a loss of $43 million related to one of our equity method investments.

Interest Expense

Interest expense increased for the three and nine months ended December 31, 2024 compared to the same prior year periods primarily due to increased average balances of the Company’s loan portfolio throughout the first nine months of the year. Interest expense for the nine months ended December 31, 2024 was unfavorably impacted by a prior year gain on debt extinguishment of $9 million compared to the nine months ended December 31, 2023. 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. Refer to Financial Note 7, “Debt and Financing Activities,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.

Income Tax Expense (Benefit)

For the three months ended December 31, 2024 and 2023, we recorded income tax expense of $298 million and (benefit) of ($18 million), respectively. For the nine months ended December 31, 2024 and 2023, we recorded income tax expense of $669 million and $289 million, respectively. Our reported income tax rates were 24.3% and (2.9)% for the three months ended December 31, 2024 and 2023, respectively, and 23.5% and 11.0% for the nine months ended December 31, 2024 and 2023, respectively.

Fluctuations in our reported income tax rates are primarily due to non-cash charges related to the remeasurement of our Canadian retail disposal group to fair value less costs to sell. Additionally, changes in our business mix of earnings between various taxing jurisdictions and discrete tax items recognized in the quarters. Refer to Financial Note 4, “Income Taxes,” to the accompanying condensed consolidated financial statements included in this Quarterly Report for more information.

During the nine months ended December 31, 2024, we recorded non-cash pre-tax charges of $666 million primarily to remeasure our Canadian retail disposal group to fair value less costs to sell, as described in Financial Note 2, “Business Acquisitions and Divestitures.” Our reported income tax rates for the three and nine months ended December 31, 2024 were unfavorably impacted by these charges as no net tax benefit was recognized for these charges.

For the nine months ended December 31, 2024, we recognized discrete tax benefits of $44 million related to the sale of certain intellectual property between McKesson wholly-owned legal entities based in foreign tax jurisdictions, $58 million related to an election to change the tax status of a foreign affiliate, $41 million related to the tax impact of share-based compensation, and $47 million related to the reduction in unrecognized tax benefits due to a change in case law, partially offset by a discrete tax expense of $56 million related to interest expense accrued on unrecognized tax benefits.

For the three and nine months ended December 31, 2023, we recognized a net discrete tax benefit of $141 million, primarily related to the release of a valuation allowance based on management’s reassessment of its deferred tax assets that were 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.

Net Income Attributable to Noncontrolling Interests

Net income attributable to noncontrolling interests for the three and nine months ended December 31, 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. The increase in net income attributable to noncontrolling interests was primarily driven by higher volumes in our ClarusONE joint venture.

Net Income Attributable to McKesson Corporation

Net income attributable to McKesson Corporation was $879 million and $589 million for the three months ended December 31, 2024 and 2023, respectively, and $2.0 billion and $2.2 billion for the nine months ended December 31, 2024 and 2023, respectively. Diluted earnings per common share attributable to McKesson Corporation was $6.95 and $4.42 for the three months ended December 31, 2024 and 2023, respectively, and $15.80 and $16.39 for the nine months ended December 31, 2024 and 2023, respectively. Our diluted earnings per share includes 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 126.6 million and 133.3 million for the three months ended December 31, 2024 and 2023, respectively, and 128.8 million and 134.9 million for the nine months ended December 31, 2024 and 2023, respectively. Weighted-average diluted shares outstanding for the three and nine months ended December 31, 2024 decreased from the same prior year periods primarily due to the cumulative effect of share repurchases, as discussed in the “Share Repurchases Plans” section of this Financial Review.