Quarterly Report (10-q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

o (Do not check if a smaller reporting company)

Smaller reporting company

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2014



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

For the transition period from to

Commission File Number: 1-13252

McKESSON CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		94-3207296
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Post Street, San Francisco, California		94104
(Address of principal executive offices)		(Zip Code)

(415) 983-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class	Outstanding as of	September 30, 2014
Common stock, $0.01 par value	231,881,751 shares

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McKESSON CORPORATION

TABLE OF CONTENTS



	Item	Page

	PART I—FINANCIAL INFORMATION

1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Statements of Operations Quarters and Six Months Ended September 30, 2014 and 2013	3

	Condensed Consolidated Statements of Comprehensive Income Quarters and Six Months Ended September 30, 2014 and 2013	4

	Condensed Consolidated Balance Sheets September 30, 2014 and March 31, 2014	5

	Condensed Consolidated Statements of Cash Flows Six Months Ended September 30, 2014 and 2013	6

	Financial Notes	7

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

3.	Quantitative and Qualitative Disclosures About Market Risk	35

4.	Controls and Procedures	35

	PART II—OTHER INFORMATION

1.	Legal Proceedings	35

1A.	Risk Factors	35

2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

3.	Defaults Upon Senior Securities	36

4.	Mine Safety Disclosures	36

5.	Other Information	36

6.	Exhibits	37

	Signatures	38

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McKESSON CORPORATION

PART I—FINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)



	Quarter Ended September 30,						Six Months Ended September 30,
	2014			2013			2014			2013
Revenues	$	44,758		$	32,985		$	88,816		$	65,224
Cost of Sales	(41,835		)	(30,964		)	(83,096		)	(61,273		)
Gross Profit	2,923			2,021			5,720			3,951

Operating Expenses	(2,135		)	(1,300		)	(4,244		)	(2,560		)
Litigation Charges	—			(35		)	—			(50		)
Total Operating Expenses	(2,135		)	(1,335		)	(4,244		)	(2,610		)
Operating Income	788			686			1,476			1,341
Other Income, Net	24			9			44			15
Interest Expense	(99		)	(59		)	(200		)	(118		)
Income from Continuing Operations Before Income Taxes	713			636			1,320			1,238
Income Tax Expense	(222		)	(213		)	(404		)	(387		)
Income from Continuing Operations	491			423			916			851
Loss from Discontinued Operations, Net of Tax	(14		)	(19		)	(28		)	(23		)
Net Income	477			404			888			828
Net Income Attributable to Noncontrolling Interests	(8		)	—			(16		)	—
Net Income Attributable to McKesson Corporation	$	469		$	404		$	872		$	828

Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Diluted
Continuing operations	$	2.05		$	1.82		$	3.83		$	3.66
Discontinued operations	(0.06		)	(0.08		)	(0.12		)	(0.10		)
Total	$	1.99		$	1.74		$	3.71		$	3.56
Basic
Continuing operations	$	2.08		$	1.85		$	3.89		$	3.73
Discontinued operations	(0.06		)	(0.09		)	(0.12		)	(0.10		)
Total	$	2.02		$	1.76		$	3.77		$	3.63

Dividends Declared Per Common Share	$	0.24		$	0.24		$	0.48		$	0.44

Weighted Average Common Shares
Diluted	235			233			235			232
Basic	232			229			231			228

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Quarter Ended September 30,						Six Months Ended September 30,
	2014			2013			2014			2013
Net Income	$	477		$	404		$	888		$	828

Other Comprehensive Income (Loss), Net of Tax
Foreign currency translation adjustments arising during period	(677		)	100			(579		)	39

Unrealized losses on cash flow hedges arising during period	—			(2		)	(2		)	(1		)

Retirement-related benefit plans	6			4			8			11
Other Comprehensive Income (Loss), Net of Tax	(671		)	102			(573		)	49

Comprehensive Income (Loss)	(194		)	506			315			877
Comprehensive Loss Attributable to Noncontrolling Interests	131			—			135			—
Comprehensive Income (Loss) Attributable to McKesson Corporation	$	(63	)	$	506		$	450		$	877

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)



	September 30, 2014			March 31, 2014
ASSETS
Current Assets
Cash and cash equivalents	$	3,804		$	4,193
Receivables, net	15,391			14,193
Inventories, net	14,063			13,308
Prepaid expenses and other	621			879
Total Current Assets	33,879			32,573
Property, Plant and Equipment, Net	2,174			2,222
Goodwill	10,095			9,927
Intangible Assets, Net	4,099			5,022
Other Assets	1,985			2,015
Total Assets	$	52,232		$	51,759

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Drafts and accounts payable	$	22,656		$	21,429
Short-term borrowings	525			346
Deferred revenue	1,003			1,236
Deferred tax liabilities	1,734			1,588
Current portion of long-term debt	427			1,424
Other accrued liabilities	2,992			3,478
Total Current Liabilities	29,337			29,501
Long-Term Debt	9,620			8,949
Other Noncurrent Liabilities	2,749			2,991
Commitments and Contingent Liabilities (Note 13)
McKesson Corporation Stockholders’ Equity
Preferred stock, $0.01 par value, 100 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value, 800 shares authorized at September 30, 2014 and March 31, 2014, 383 and 381 shares issued at September 30, 2014 and March 31, 2014	4			4
Additional Paid-in Capital	6,759			6,552
Retained Earnings	12,211			11,453
Accumulated Other Comprehensive Loss	(425		)	(3		)
Other	(7		)	23
Treasury Shares, at Cost, 151 and 150 at September 30, 2014 and March 31, 2014	(9,611		)	(9,507		)
Total McKesson Corporation Stockholders’ Equity	8,931			8,522
Noncontrolling Interests	1,595			1,796
Total Equity	10,526			10,318
Total Liabilities and Equity	$	52,232		$	51,759

See Financial Notes

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McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Six Months Ended September 30,
	2014			2013
Operating Activities
Net income	$	888		$	828
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization	543			332
Deferred taxes	110			151
Charges associated with last-in-first-out inventory method	192			44
Share-based compensation expense	82			73
Other non-cash items	18			18
Changes in operating assets and liabilities, net of acquisitions:
Receivables	(1,535		)	(393		)
Inventories	(1,161		)	(235		)
Drafts and accounts payable	1,502			344
Deferred revenue	(251		)	(232		)
Taxes	(66		)	3
Litigation charges	—			50
Litigation settlement payments	—			(20		)
Other	(157		)	(150		)
Net cash provided by operating activities	165			813

Investing Activities
Property acquisitions	(191		)	(133		)
Capitalized software expenditures	(81		)	(66		)
Acquisitions, net of cash and cash equivalents acquired	(31		)	(116		)
Other	(4		)	41
Net cash used in investing activities	(307		)	(274		)

Financing Activities
Proceeds from short-term borrowings	1,790			150
Repayments of short-term borrowings	(1,572		)	(150		)
Proceeds from issuances of long-term debt	7			—
Repayments of long-term debt	(233		)	—
Common stock transactions:
Issuances	66			119
Share repurchases, including shares surrendered for tax withholding	(105		)	(128		)
Dividends paid	(115		)	(99		)
Other	(6		)	71
Net cash used in financing activities	(168		)	(37		)
Effect of exchange rate changes on cash and cash equivalents	(79		)	2
Net (decrease) increase in cash and cash equivalents	(389		)	504
Cash and cash equivalents at beginning of period	4,193			2,456
Cash and cash equivalents at end of period	$	3,804		$	2,960

See Financial Notes

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McKESSON CORPORATION

FINANCIAL NOTES

(UNAUDITED)


1.	Significant Accounting Policies

Basis of Presentation: The condensed consolidated financial statements of McKesson Corporation (“McKesson,” the “Company,” or “we” and other similar pronouns) include the financial statements of all wholly-owned subsidiaries and majority‑owned or controlled companies. We also evaluate our ownership, contractual and other interests in entities to determine if they are variable interest entities (“VIEs”), if we have a variable interest in those entities and the nature and extent of those interests. These evaluations are highly complex and involve judgment and the use of estimates and assumptions based on available historical information and management’s judgment, among other factors. Based on our evaluations, if we determine we are the primary beneficiary of such VIEs, we consolidate such entities into our financial statements. Investments in business entities in which we do not have control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method and our proportionate share of income or loss is recorded in other income, net. Intercompany transactions and balances have been eliminated. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and footnote disclosures normally included in the annual consolidated financial statements.

To prepare the financial statements in conformity with GAAP, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of these financial statements and income and expenses during the reporting period. Actual amounts may differ from these estimated amounts. In our opinion, the accompanying unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods presented.

The results of operations for the quarter and six months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the entire year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 previously filed with the SEC on May 14, 2014 (“2014 Annual Report”).

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

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Recently Adopted Accounting Pronouncements

Cumulative Translation Adjustments: In the first quarter of 2015, we adopted amended guidance for parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or group of assets within a foreign entity or of an investment in a foreign entity. The amended guidance requires the release of any cumulative translation adjustment into net income only upon complete or substantially complete liquidation of a controlling interest in a subsidiary or a group of assets within a foreign entity. Also, it requires the release of all or a pro rata portion of the cumulative translation adjustment to net income in case of sale of an equity method investment that is a foreign entity. The adoption of this amended guidance did not have a material effect on our condensed financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Discontinued Operations: In April 2014, amended guidance was issued for reporting of discontinued operations and disclosures of disposals of components. The amended guidance raises the threshold for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amended guidance is effective for us prospectively commencing in the first quarter of 2016. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Revenue Recognition: In May 2014, amended guidance was issued for recognizing revenue from contracts with customers. The amended guidance eliminated industry specific guidance and applies to all companies. Revenues will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. The amended guidance also requires additional quantitative and qualitative disclosures. The amended guidance is effective for us commencing in the first quarter of 2018. The amended guidance allows for either full retrospective adoption or modified retrospective adoption. Early adoption is not permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.


2.	Business Combinations

On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio AG (“Celesio”) and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the Acquisition, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common shares was 75.6%. The Acquisition was initially funded by utilizing a senior bridge loan, our existing accounts receivable sales facility and cash on hand. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expands our global geographic area; the combined company is one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide.

From February 7 to March 31, 2014, substantially all of the convertible bonds issued by Celesio (held by both third parties and us) were converted into 20.9 million common shares of Celesio. During the first quarter of 2015, we completed tender offers and acquired approximately 1 million common shares of Celesio at €23.50 per share for a total of $32 million in cash, and the remaining convertible bonds were fully converted into 42,238 common shares of Celesio. No additional common shares of Celesio were acquired during the second quarter of 2015. At September 30, 2014 and March 31, 2014, we owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares.

On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary Dragonfly GmbH & Co. KGaA, entered into a domination and profit and loss transfer agreement (the “Agreement”). Under the Agreement, Celesio will subordinate its management to McKesson and undertake to transfer all of its annual profits to McKesson, and McKesson will undertake to compensate any annual losses incurred by Celesio and to grant, subject to a potential court review, the noncontrolling shareholders of Celesio (i) an annual recurring compensation of €0.83 per Celesio share and (ii) a put right for their Celesio shares at €22.99 per Celesio share. On July 15, 2014, the Agreement was approved at the general shareholders’ meeting of Celesio. The Agreement becomes effective upon its registration in the commercial register of Celesio at the local court of Stuttgart, Germany. Celesio’s obligation to transfer its annual profits under the Agreement will apply for the first time for the entire profit generated in Celesio’s fiscal period beginning on January 1, 2015 or the subsequent fiscal year in which the Agreement becomes effective. McKesson’s obligation to compensate the annual losses of Celesio under the Agreement will apply for the first time for the full fiscal period of Celesio during which the Agreement becomes effective. On August 15, 2014, Magnetar Capital filed a lawsuit against Celesio with the Stuttgart District Court claiming that the shareholders’ approval of the Agreement was void under the German Stock Corporation Act. On September 2, 2014, Celesio filed an application for fast track proceedings with the Stuttgart Court of Appeals requesting the release of the action filed by Magnetar Capital and the registration of the Agreement. We continue to anticipate the Agreement will become effective by the end of the calendar year, at which time we will obtain operational control of Celesio.

Financial results for Celesio are included within our International pharmaceutical distribution and services business, which is part of our Distribution Solutions segment, since the date of Acquisition.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed as of the acquisition date.



(In millions)	Amounts Previously Recognized as of Acquisition Date (Provisional)⁽¹⁾			Measurement Period Adjustments			Amounts Recognized as of Acquisition Date (Provisional as Adjusted)
Receivables	$	3,425		$	(8	)	$	3,417
Other current assets, net of cash and cash equivalents acquired	2,413			(3		)	2,410
Goodwill	3,570			414			3,984
Intangible assets	3,018			(536		)	2,482
Other long-term assets	1,272			(43		)	1,229
Current liabilities	(4,096		)	2			(4,094		)
Short-term borrowings and current portion of long-term debt	(1,990		)	—			(1,990		)
Long-term debt	(322		)	—			(322		)
Other long-term liabilities	(1,293		)	159			(1,134		)
Fair value of net assets, less cash and cash equivalents	5,997			(15		)	5,982
Less: Noncontrolling Interests	(1,500		)	15			(1,485		)
Net assets acquired, less cash and cash equivalents	$	4,497		$	—		$	4,497


(1)	As previously reported in our Form 10-K for the year ended March 31, 2014.

During the first six months of 2015, the fair value measurements of assets acquired and liabilities assumed of Celesio as of the acquisition date were refined. Among the adjustments recorded, the fair value of acquired intangible assets was decreased by $536 million. The fair value was primarily determined by applying the income approach using unobservable inputs for projected cash flows and a discount rate, which were refined during the measurement period, and are considered Level 3 inputs under the fair value measurements and disclosure guidance. These refinements did not have a significant impact on our condensed consolidated statements of operations, balance sheets or cash flows in any period and, therefore, we have not retrospectively adjusted our financial statements. These amounts are subject to change within the measurement period as our fair value assessments are finalized.

During the last two years, we also completed a number of smaller acquisitions within both of our operating segments. Financial results for our business acquisitions have been included in our consolidated financial statements since their respective acquisition dates. Purchase prices for our business acquisitions have been allocated based on estimated fair values at the date of acquisition.

Goodwill recognized for our business acquisitions is generally not expected to be deductible for tax purposes. However, if we acquire the assets of a company, the goodwill may be deductible for tax purposes.


3.	Noncontrolling Interests

Noncontrolling interests within the equity section of our accompanying condensed consolidated balance sheet primarily represent our noncontrolling interests in Celesio. We owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares at September 30, 2014 and March 31, 2014.

In April 2014, we completed tender offers and paid $32 million in cash to acquire approximately 1 million additional common shares of Celesio, which increased our ownership share by 0.5% and decreased noncontrolling interests by $35 million.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

In July 2014, Celesio paid dividends to the noncontrolling shareholders of Celesio totaling $16 million (€0.30 per common share). In addition, on August 5, 2014, Celesio completed the purchase of the remaining 40% ownership interests in Oncoprod S.A., Sao Paulo (“Oncoprod”), a wholesaler for specialty pharmaceuticals in Brazil. Celesio previously held a 60% ownership interest in Oncoprod.

Changes in noncontrolling interests were as follows:



(In millions)	Noncontrolling Interests
Balance, March 31, 2014	$	1,796
Net income attributable to noncontrolling interests	16
Other comprehensive income	(151		)
Purchase of noncontrolling interests	(63		)
Dividends paid to noncontrolling interest shareholders	(16		)
Other	13
Balance, September 30, 2014	$	1,595

The effect of changes in our ownership interests with noncontrolling interests on our equity of $6 million and $3 million were recorded as a net decrease to McKesson’s stockholders’ paid-in capital during the second quarter and first six months of 2015. Net income attributable to McKesson and transfers from noncontrolling interests amounted to $463 million and $869 million during the second quarter and first six months of 2015.


4.	Discontinued Operations

In 2014, we committed to a plan to sell our International Technology and our Hospital Automation businesses from our Technology Solutions segment and certain businesses from our Distribution Solutions segment. As required, we classified the results of operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements in 2014 and depreciation and amortization expense was not recognized.

During the third quarter of 2014, we sold our Hospital Automation business for net cash proceeds of $55 million and recorded a pre-tax and after-tax loss of $5 million and $7 million.

During the third quarter of 2014, we recorded an $80 million pre-tax ($80 million after-tax) non-cash impairment charge to reduce the carrying value of our International Technology business to its estimated net realizable value (fair value less costs to sell). The charge was primarily the result of the terms of the preliminary purchase offers received for this business during the third quarter of 2014. The impairment charge was primarily attributed to goodwill and other long-lived assets and as a result, there was no tax benefit associated with this charge. During the first quarter of 2015, we entered into an agreement to sell the software business within our International Technology business. We completed the sale of this business during the second quarter of 2015, at which time we recorded a pre-tax and after-tax loss of $6 million.

During the first quarter of 2015, we decided to retain the workforce business within our International Technology business. This business consists of workforce management solutions for the National Health Service in the United Kingdom, which we now intend to wind down in 2016. As a result, we reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, as a continuing operation for all periods presented effective in the first quarter of 2015. During the first quarter of 2015, we also recorded a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our condensed consolidated statement of operations primarily in cost of sales.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

A summary of results of discontinued operations is as follows:



	Quarter Ended September 30,						Six Months Ended September 30,
(In millions)	2014			2013			2014			2013
Revenues	$	3		$	79		$	40		$	164

Loss from discontinued operations	$	(8	)	$	(25	)	$	(24	)	$	(28	)
Loss on sale	(6		)	—			(6		)	—
Loss from discontinued operations before income tax	(14		)	(25		)	(30		)	(28		)
Income tax benefit	—			6			2			5
Loss from discontinued operations, net of tax	$	(14	)	$	(19	)	$	(28	)	$	(23	)

The assets and liabilities of our discontinued operations are classified as held-for-sale effective in 2014. All applicable assets of the businesses to be sold are included under the caption “Prepaid expenses and other” and all applicable liabilities under the caption “Other accrued liabilities” within our condensed consolidated balance sheet at September 30, 2014 and March 31, 2014. The carrying values of the assets and liabilities classified as held-for-sale were $14 million and $14 million at September 30, 2014 and $267 million and $248 million at March 31, 2014.


5.	Sale of an Equity Investment

In September 2013, we completed the sale of our 49% equity interest in Nadro, S.A. de C.V. (“Nadro”). Under the terms of the agreement, we received $41 million in total cash consideration. There was no material gain or loss on the disposition based on the adjusted net realizable value of the investment at the time of the sale. Prior to the sale, our investment in Nadro was accounted for under the equity method of accounting within our Distribution Solutions segment.


6.	Income Taxes

During the second quarters of 2015 and 2014, income tax expense related to continuing operations was $222 million and $213 million and included net discrete tax benefit of $6 million and net discrete tax expense of $6 million. During the first six months of 2015 and 2014, income tax expense related to continuing operations was $404 million and $387 million and included net discrete tax benefit of $18 million and net discrete tax expense of nil.

As of September 30, 2014, we had $580 million of unrecognized tax benefits, of which $424 million would reduce income tax expense and the effective tax rate, if recognized. During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could potentially reduce our unrecognized tax benefits by up to $158 million. However, this amount may change as we continue to have ongoing negotiations with various taxing authorities throughout the year.

We have received reassessments from the Canada Revenue Agency (“CRA”) for a total of $261 million related to a transfer pricing matter impacting years 2003 through 2010. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. During the first quarter of 2015, we filed a Notice of Appeal with the Tax Court of Canada relating to the 2004 through 2008 reassessments. The ultimate resolution of these issues could result in an increase or decrease to income tax expense.

During the first quarter of 2015, we reached an agreement with the Internal Revenue Service (“IRS”) to settle all outstanding issues relating to years 2003 through 2006 and recognized a discrete tax benefit of $17 million to record a previously unrecognized tax benefit. During the second quarter of 2015, we paid additional taxes of $21 million, which were previously accrued.

The IRS is currently examining our U.S. corporation income tax returns for 2007 through 2009. The CRA is currently examining our Canadian income tax returns for 2011 through 2013. In nearly all jurisdictions, the tax years prior to 2003 are no longer subject to examination.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

We report interest and penalties on tax deficiencies as income tax expense. During the first six months of 2015, we recognized income tax expense of $7 million, before any tax benefit, related to interest and penalties in our condensed consolidated statements of operations. At September 30, 2014, before any tax benefits, our accrued interest and penalties on unrecognized tax benefits amounted to $161 million.


7.	Earnings Per Common Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted earnings per common share are computed similar to basic earnings per common share except that it reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock.

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



	Quarter Ended September 30,						Six Months Ended September 30,
(In millions, except per share amounts)	2014			2013			2014			2013
Income from continuing operations	$	491		$	423		$	916		$	851
Net income attributable to noncontrolling interests	(8		)	—			(16		)	—
Income from continuing operations attributable to McKesson	483			423			900			851
Loss from discontinued operations, net of tax	(14		)	(19		)	(28		)	(23		)
Net income attributable to McKesson	$	469		$	404		$	872		$	828

Weighted average common shares outstanding:
Basic	232			229			231			228
Effect of dilutive securities:
Options to purchase common stock	1			2			2			1
Restricted stock units	2			2			2			3
Diluted	235			233			235			232

Earnings (loss) per common share attributable to McKesson: ⁽¹⁾
Diluted
Continuing operations	$	2.05		$	1.82		$	3.83		$	3.66
Discontinued operations	(0.06		)	(0.08		)	(0.12		)	(0.10		)
Total	$	1.99		$	1.74		$	3.71		$	3.56
Basic
Continuing operations	$	2.08		$	1.85		$	3.89		$	3.73
Discontinued operations	(0.06		)	(0.09		)	(0.12		)	(0.10		)
Total	$	2.02		$	1.76		$	3.77		$	3.63


(1)	Certain computations may reflect rounding adjustments.

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. Approximately 1 million and 1 million potentially dilutive securities were excluded from the computations of diluted net earnings per common share for the quarters ended September 30, 2014 and 2013 and 2 million and 3 million potentially dilutive securities were excluded from the computations of diluted net earnings per common share for the six months ended September 30, 2014 and 2013, as they were anti-dilutive.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


8.	Goodwill and Intangible Assets, Net

Changes in the carrying amount of goodwill were as follows:



(In millions)	Distribution Solutions			Technology Solutions			Total
Balance, March 31, 2014	$	8,078		$	1,849		$	9,927
Goodwill acquired	20			—			20
Acquisition accounting and other	419			—			419
Foreign currency translation adjustments and other	(264		)	(7		)	(271		)
Balance, September 30, 2014	$	8,253		$	1,842		$	10,095

As of September 30, 2014 and March 31, 2014, the accumulated goodwill impairment losses were $36 million in our Technology Solutions segment.

Information regarding intangible assets is as follows:



	September 30, 2014								March 31, 2014
(Dollars in millions)	Weighted Average Remaining Amortization Period (years)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer lists	9	$	2,929	$	(1,003	)	$	1,926	$	3,384	$	(863	)	$	2,521
Service agreements	16	1,009		(202		)	807		995		(173		)	822
Pharmacy licenses	26	995		(43		)	952		1,219		(11		)	1,208
Trademarks and trade names	15	360		(73		)	287		371		(59		)	312
Technology	3	217		(178		)	39		219		(173		)	46
Other	4	169		(81		)	88		165		(52		)	113
Total		$	5,679	$	(1,580	)	$	4,099	$	6,353	$	(1,331	)	$	5,022

Amortization expense of intangible assets was $131 million and $261 million for the quarter and six months ended September 30, 2014 and $70 million and $141 million for the quarter and six months ended September 30, 2013. Estimated annual amortization expense of these assets is as follows: $254 million, $465 million, $426 million, $405 million and $381 million for the remainder of 2015 and each of the succeeding years through 2019 and $2,168 million thereafter. All intangible assets were subject to amortization as of September 30, 2014 and March 31, 2014.


9.	Debt and Financing Activities

Celesio Debt

Upon the acquisition of Celesio, as required, we consolidated Celesio’s debt including corporate bonds consisting of 4.00% bonds due October 18, 2016 and 4.50% bonds due April 26, 2017. At September 30, 2014 and March 31, 2014, $458 million and $507 million of the 4.00% bonds and $666 million and $737 million of the 4.50% bonds, for a total of $1,124 million and $1,244 million, were outstanding. As of March 31, 2014, these bonds were classified within current liabilities as bondholders had the option to redeem the bonds at par value plus accrued interest. This redemption option expired during the first quarter of 2015 and the remaining bonds outstanding will mature according to their respective maturity dates. Accordingly, as of September 30, 2014, these bonds are classified as long-term debt.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

We also consolidated Celesio’s accounts receivable factoring facilities (the “Factoring Facilities”) with a total committed balance of $315 million. The Factoring Facilities will expire through September 2015. During the first six months of 2015, Celesio borrowed and repaid $1,575 million and $1,545 million of short-term borrowings under the Factoring Facilities. At September 30, 2014 and March 31, 2014, there were $245 million and $246 million in secured borrowings and related accounts receivable outstanding under the Factoring Facilities.

Celesio also maintains a syndicated €500 million five-year senior unsecured revolving credit facility, which expires in February 2018. Borrowings under this facility bear interest based upon the Euro Interbank Offered Rate plus an agreed margin. There were no borrowings under this facility during the first six months of 2015 and there were no amounts outstanding under this facility as of September 30, 2014 and March 31, 2014.

Celesio also maintains bilateral credit lines with a total committed and uncommitted balance of $1.8 billion. During the first six months of 2015, Celesio borrowed and repaid $223 million and $44 million under these credit lines primarily relating to short‑term borrowings. As of September 30, 2014 and March 31, 2014, there were $349 million and $188 million outstanding under these credit lines.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility (the “Facility”) with a committed balance of $1.35 billion, although from time to time, the available amount of the Facility may be less than $1.35 billion based on accounts receivable concentration limits and other eligibility requirements. The Facility will expire in November 2014 and we anticipate renewing the Facility before its expiration.

During the first six months of 2015, there were no borrowings under the Facility. During the first six months of 2014, we borrowed and repaid $150 million of short-term borrowings under the Facility. At September 30, 2014 and March 31, 2014, there were no short‑term borrowings and related securitized accounts receivable outstanding under the Facility.

The Facility contains requirements relating to the performance of the accounts receivable and covenants relating to the Company. If we do not comply with these covenants, our ability to use the Facility may be suspended and repayment of any outstanding balances under the Facility may be required. At September 30, 2014 and March 31, 2014, we were in compliance with all covenants.

Revolving Credit Facility

We have a syndicated $1.3 billion five-year senior unsecured revolving credit facility, which expires in September 2016. Borrowings under this facility bear interest based upon either the London Interbank Offered Rate or a prime rate. There were no borrowings under this facility during the first six months of 2015 and 2014. As of September 30, 2014 and March 31, 2014, there were no amounts outstanding under this facility.


10.	Pension Benefits

Net periodic expense for the defined pension benefit plans of the Company and Celesio were $12 million and $23 million for the second quarter and first six months of 2015 and $10 million and $21 million for the second quarter and first six months of 2014. Cash contributions to these plans were $16 million and $31 million for the second quarter and first six months of 2015 and $1 million and $6 million for the second quarter and first six months 2014. The increase in contributions in 2015 compared to 2014 is primarily related to defined benefit pension plans of Celesio, which we acquired in the fourth quarter of 2014.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

The net periodic expense for our pension plans, which includes net pension expense for Celesio in 2015, is as follows:



	U.S. Plans						Non-U.S. Plans						U.S. Plans						Non-U.S. Plans
	Quarter Ended September 30,						Quarter Ended September 30,						Six Months Ended September 30,						Six Months Ended September 30,
(In millions)	2014			2013			2014			2013			2014			2013			2014			2013
Service cost - benefits earned during the year	$	—		$	1		$	5		$	1		$	1		$	2		$	9		$	2
Interest cost on projected benefit obligation	4			5			9			2			9			10			18			3
Expected return on assets	(5		)	(5		)	(8		)	(2		)	(11		)	(10		)	(15		)	(4		)
Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation	6			7			1			1			10			16			2			2
Net periodic pension expense	$	5		$	8		$	7		$	2		$	9		$	18		$	14		$	3

The projected unit credit method is utilized in measuring net periodic pension expense over the employees’ service life for the pension plans. Unrecognized actuarial losses exceeding 10% of the greater of the projected benefit obligation or the market value of assets are amortized straight-line over the average remaining future service periods.


11.	Hedging Activities

In the normal course of business, we are exposed to interest rate changes and foreign currency fluctuations. At times, we limit these risks through the use of derivatives such as interest rate swaps and forward foreign exchange contracts. In accordance with our policy, derivatives are only used for hedging purposes. We do not use derivatives for trading or speculative purposes.

Foreign currency rate risk

The majority of McKesson’s operations are conducted in U.S. dollars; however, certain assets and liabilities, revenues and expense and purchasing activities are incurred in and exposed to other currencies. We have certain foreign currency rate risk programs that manage the impact of foreign currency fluctuation. These programs are utilized on a transactional basis when we consider there to be a risk in fair value or volatility in cash flows. These programs reduce but do not entirely eliminate foreign currency rate risk.

We enter into forward contracts and foreign currency options to hedge against cash flows denominated primarily in Canadian dollars, Euros and British pounds. At September 30, 2014 and March 31, 2014, forward contracts having a total notional value of $463 million were designated for hedge accounting. These contracts will mature between March 2015 and March 2020. Changes in the fair values for contracts designated for hedge accounting are recorded to accumulated other comprehensive income and reclassified into earnings in the same period in which the hedged transaction affects earnings; amounts recorded to earnings for these contracts were not material during the quarter and six months ended September 30, 2014 and 2013. Changes in the fair values for contracts not designated for hedge accounting are recorded directly to earnings; amounts recorded to earnings for these contracts were not material during the quarter and six months ended September 30, 2014 and 2013. All forward contracts were designated for hedge accounting during the first six months of 2015.

Celesio has a number of forward contracts to hedge against cash flows denominated primarily in British pounds and other European currencies. These contracts are used to offset the potential earnings effects from mostly intercompany foreign currency loans and will mature from October 2014 to June 2015. None of these contracts were designated for hedge accounting and accordingly, net losses from the changes in the fair value of these contracts of $30 million and $50 million were recorded within operating expenses during the second quarter and first six months of 2015. However, the losses from these contracts are largely offset by changes in the value of the underlying intercompany foreign currency loans. At September 30, 2014 and March 31, 2014, the total notional values of these contracts were $1,325 million and $1,091 million.

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FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Interest rate risk

From time to time, Celesio has entered into interest rate swaps to hedge the interest rate risk associated with Celesio’s variable rate debt. Interest rate swaps have been used to modify the market risk exposures in connection with the variable rate debt to achieve primarily Euro dollar fixed rate interest expense. The interest rate swap transactions generally involve the exchange of floating or fixed interest payments. Celesio’s interest rate swaps that were outstanding at March 31, 2014 all matured during the first six months of 2015. These contracts were not designated for hedge accounting and, accordingly, changes in the fair value of the swaps were recorded directly in earnings. At September 30, 2014 and March 31, 2014, the total gross notional values of these contracts were nil and $96 million. Amounts recorded to earnings were not material during the first six months of 2015.

Information regarding the fair value of derivatives is as follows:



	Balance Sheet Caption	September 30, 2014						March 31, 2014
		Fair Value of Derivative				U.S. Dollar Notional		Fair Value of Derivative				U.S Dollar Notional
(In millions)		Asset		Liability		U.S. Dollar Notional		Asset		Liability		U.S Dollar Notional
Derivatives designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	5	$	—	$	64	$	4	$	—	$	64
Foreign exchange contracts (non-current)	Other assets	30		—		399		27		—		399
Total		$	35	$	—			$	31	$	—
Derivatives not designated for hedge accounting
Foreign exchange contracts (current)	Prepaid expenses and other	$	3	$	—	$	199	$	2	$	—	$	255
Foreign exchange contracts (current)	Other accrued liabilities	—		47		1,126		—		13		836
Interest rate swap contracts (current)	Other accrued liabilities	—		—		—		—		1		96
Total		$	3	$	47			$	2	$	14

Refer to Financial Note 12, "Fair Value Measurements," for more information on these recurring fair value measurements.


12.	Fair Value Measurements

At September 30, 2014 and March 31, 2014, the carrying amounts of cash, cash equivalents, restricted cash, marketable securities receivables, drafts and accounts payable and other current liabilities generally approximated their estimated fair values because of the short maturity of these financial instruments.

Our long-term debt and other financing are carried at amortized cost. The carrying amounts and estimated fair values of these liabilities were $10.0 billion and $10.5 billion at September 30, 2014 and $10.4 billion and $10.8 billion at March 31, 2014. The estimated fair values of our long-term debt and other financing were determined using quoted market prices in a less active market and other observable inputs from available market information, which are considered to be Level 2 inputs, and may not be representative of actual values that could have been realized or that will be realized in the future.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Included in cash and cash equivalents at September 30, 2014 and March 31, 2014 were investments in money market funds, time deposits and repurchase agreements of $3.1 billion and $2.9 billion, which are reported at fair value. The fair value of these investments was determined by using quoted prices for identical investments in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosure guidance. The carrying value of all other cash equivalents approximates their fair value due to their relatively short-term nature.

Fair values of our forward foreign currency derivatives were determined using quoted market prices of similar instruments in an active market and other observable inputs from available market information. These inputs are considered Level 2 under the fair value measurements and disclosure guidance, and may not be representative of actual values that could have been realized or that will be realized in the future. Refer to Financial Note 11, "Hedging Activities," for more information on our forward foreign currency derivatives.

There were no transfers between Level 1, Level 2 or Level 3 of the fair value hierarchy during the quarters and six months ended September 30, 2014 and 2013.


13.	Commitments and Contingent Liabilities

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. As described below, many of these proceedings are at preliminary stages and many seek an indeterminate amount of damages.

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 loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.

Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. 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 loss or range of 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 negotiations with or decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and low estimates.

Significant developments in previously reported proceedings and in other litigation and claims, since the filing of our 2014 Annual Report are set out below. Unless otherwise stated, we are currently unable to estimate a range of reasonably possible losses for the unresolved proceedings described below. Should any one or a combination of more than one of these proceedings be successful, or should we determine to settle any or a combination of these matters, we may be required to pay substantial sums, become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a material adverse impact on our financial position or results of operations.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Litigation, Government Subpoenas and Investigations

As previously disclosed, on May 21, 2014, four hedge funds managed by Magnetar Capital filed a complaint against Dragonfly GmbH & Co KGaA (“Dragonfly”), a wholly-owned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Dragonfly violated German takeover law in connection with the Company’s acquisition of Celesio by paying more to some holders of Celesio’s convertible bonds than it paid to the shareholders of Celesio’s stock, Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, (No. 3-05 O 44/14). Dragonfly filed its Statement of Defense on August 5, 2014, and Magnetar filed a reply on September 18, 2014. The initial oral hearing in the matter is set for November 18, 2014.

On August 1, 2014, U.S. Oncology Specialty, LP (“USOS”), an indirect wholly-owned subsidiary of the Company, filed a motion to dismiss the previously reported qui tam complaint filed in the United States District Court for the Eastern District of New York by a relator, purportedly on behalf of the United States and twelve states, against USOS and fifteen oncology practices, United States ex rel. Hanks v. U.S. Oncology Specialty, LP, et al., (CV 04-3983 (SJ)). The United States chose not to intervene. The Court has not yet ruled on USOS’s motion to dismiss.

On July 25, 2012, a qui tam complaint was filed under seal in the United States District Court for the Middle District of Tennessee against the Company by a relator on behalf of the United States, United States ex rel. Terrell W. Fox v. McKesson Corporation, et al., Civil Action No. 3:12-cv-766. In August 2014, McKesson, the United States, and the relator reached a settlement of the litigation, resolving the previously reported investigation regarding the distribution procedures with respect to the Vaccine for Children’s Program administered by the Centers for Disease Control and Prevention. On August 8, 2014, the United States intervened for purposes of settlement and dismissal of the action. On August 11, 2014, the court entered orders unsealing and dismissing the action.

From time to time, the Company receives subpoenas or requests for information from various government agencies. The Company generally responds to such subpoenas and requests in a cooperative, thorough and timely manner. These responses sometimes require time and effort and can result in considerable costs being incurred by the Company. Such subpoenas and requests also can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the healthcare industry, as well as to substantial settlements. Examples of such subpoenas and investigations are included in the Company’s 2014 Annual Report on Form 10-K, and include subpoenas from the U.S. Drug Enforcement Administration to certain of the Company’s pharmaceutical distribution facilities seeking information and records about the Company’s distribution of certain controlled substances. The Company continues to receive and respond to these requests. In addition, as previously reported, the Company was informed in the third quarter of 2014 of an investigation by the United States Department of Justice through the United States Attorney’s Office for the Northern District of West Virginia of potential claims under the Comprehensive Drug Abuse Prevention and Control Act relating to the Company’s pharmaceutical distribution of certain controlled substances by its Landover, Maryland distribution center, which closed in 2012. The Company has also received in the second quarter of 2015 a letter from the United States Attorney’s Office for the District of Colorado advising of an investigation and similar potential claims relating to the Company’s distribution of certain controlled substances by its Aurora, Colorado distribution center. The Department of Justice and other United States Attorney’s offices are also involved in the distribution center investigations.

Average Wholesale Price Litigation and Claims

The Company has a reserve relating to Average Wholesale Price (“AWP”) public entity claims. AWP involves a benchmark which is utilized by some public and private payers to calculate a portion of the amount that pharmacies and other providers are reimbursed for dispensing certain covered prescription drugs. Our AWP litigation reserve is reviewed at least quarterly and whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving other public entity claims. During the second quarter and first six months of 2014, we recorded a pre-tax charge of $35 million and $50 million relating to these claims within our Distribution Solutions segment. At September 30, 2014 and March 31, 2014, the AWP litigation reserve was $5 million, which was included in other current liabilities in the condensed consolidated balance sheets.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


14.	Stockholders’ Equity

Each share of the Company’s outstanding common stock is permitted one vote on proposals presented to stockholders and is entitled to share equally in any dividends declared by the Company’s Board of Directors (the “Board”).

In July 2013, the Company’s quarterly dividend was raised from $0.20 to $0.24 per common share for dividends declared on or after such date by the Board. The Company anticipates that it 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 the Company's future earnings, financial condition, capital requirements and other factors.

The Company made no share repurchases during the second quarter and first six months of 2015 and nil and 0.2 million share repurchases during the second quarter and first six months of 2014.

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at September 30, 2014.

Other Comprehensive Income (Loss)

Information regarding other comprehensive income (loss) including noncontrolling interests, net of tax, by component are as follows:



	Quarter Ended September 30,						Six Months Ended September 30
(In millions)	2014			2013			2014			2013
Foreign currency translation adjustments
Foreign currency translation adjustments arising during period, net of income tax benefit of nil, $2, nil and nil ⁽¹⁾	$	(667	)	$	56		$	(569	)	$	(5	)
Reclassified to income statement, net of income tax expense of nil, $24, nil and $24⁽²⁾	(10		)	44			(10		)	44
	(677		)	100			(579		)	39

Unrealized losses on cash flow hedges
Unrealized losses on cash flow hedges arising during period, net of income tax expense of nil, nil, nil and nil	—			(2		)	(2		)	(1		)

Changes in retirement-related benefit plans
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of $2, $2, $3 and $6 ⁽³⁾	3			6			6			13
Foreign currency translation adjustments, net of income tax expense of nil, nil, nil and nil	3			(3		)	2			(3		)
Reclassified to income statement, net of income tax expense of nil, $1, nil and $1	—			1			—			1
	6			4			8			11

Other comprehensive income (loss), net of tax	$	(671	)	$	102		$	(573	)	$	49


(1)	The second quarter and first six months of 2015 include net foreign currency translation losses of $139 million and $151 million attributable to noncontrolling interests.


(2)	The second quarter and first six months of 2014 reflect net foreign currency losses of $44 million reclassified from accumulated other comprehensive income to other income within our consolidated statement of operations due to our sale of our 49% equity interest in Nadro.


(3)	Pre-tax amount reclassified into cost of sales and operating expenses in the condensed consolidated statements of operations. The related tax expense was reclassified into income tax expense in the consolidated statements of operations.

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McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in McKesson’s accumulated other comprehensive loss, net of tax, by component are as follows:



(In millions)	Foreign Currency Translation Adjustments, Net of Tax			Unrealized Losses on Cash Flow Hedges, Net of Tax			Unrealized Net Loss and Other Components of Benefit Plans, Net of Tax			Total Accumulated Other Comprehensive Income (Loss)
Balance at March 31, 2014	$	168		$	(11	)	$	(160	)	$	(3	)

Other comprehensive income (loss) before reclassifications	(418		)	(2		)	—			(420		)
Amounts reclassified to earnings and other	(10		)	—			8			(2		)
Other comprehensive income (loss)	(428		)	(2		)	8			(422		)
Balance at September 30, 2014	$	(260	)	$	(13	)	$	(152	)	$	(425	)

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McKESSON CORPORATION

FINANCIAL NOTES (CONCLUDED)

(UNAUDITED)


15.	Segment Information

We report our operations in two operating segments: McKesson Distribution Solutions and McKesson Technology Solutions. The factors for determining the reportable segments included the manner in which management evaluates the performance of the Company combined with the nature of the individual business activities. We evaluate the performance of our operating segments on a number of measures, including operating profit before interest expense, income taxes and results from discontinued operations.

Financial information relating to our reportable operating segments and reconciliations to the condensed consolidated totals is as follows:



	Quarter Ended September 30,						Six Months Ended September 30,
(In millions)	2014			2013			2014			2013
Revenues
Distribution Solutions ⁽¹⁾
North America pharmaceutical distribution and services	$	35,148		$	30,702		$	69,452		$	60,748
International pharmaceutical distribution and services	7,312			—			14,919			—
Medical-Surgical distribution & services	1,528			1,467			2,907			2,824
Total Distribution Solutions	43,988			32,169			87,278			63,572

Technology Solutions - products and services	770			816			1,538			1,652
Total Revenues	$	44,758		$	32,985		$	88,816		$	65,224

Operating profit
Distribution Solutions ^{(2) (3)}	$	793		$	685		$	1,541		$	1,304
Technology Solutions ⁽⁴⁾	125			120			193			247
Total	918			805			1,734			1,551
Corporate Expenses, Net ⁽⁵⁾	(106		)	(110		)	(214		)	(195		)
Interest Expense	(99		)	(59		)	(200		)	(118		)
Income from Continuing Operations Before Income Taxes	$	713		$	636		$	1,320		$	1,238


(1)	Revenues derived from services represent less than 2% of this segment’s total revenues.


(2)	Operating profit for the second quarter and first six months of 2014 includes AWP litigation charges of $35 million and $50 million, which were recorded in operating expenses.


(3)	Operating profit for the second quarter and first six months of 2015 includes last-in-first-out (“LIFO”) inventory charges of $94 million and $192 million. 2014 operating profit includes LIFO inventory charges of $44 million. The charges were all recorded in cost of sales.


(4)	Operating profit for the first six months of 2015 includes a charge of $34 million related to the retained workforce business within our International Technology business.


(5)	Corporate expenses, net, include $3 million and $10 million of acquisition-related expenses for the second quarter and first six months of 2015, and $1 million for the second quarter and first six months of 2014.

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McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)


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

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 the Company together with its subsidiaries. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 previously filed with the SEC on May 14, 2014 (“2014 Annual Report”).

The Company’s fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

Certain statements in this report constitute forward-looking statements. See “Factors Affecting Forward-Looking Statements” included in this Quarterly Report on Form 10-Q.

Results of Operations

Overview:



(Dollars in millions, except per share data)	Quarter Ended September 30,									Six Months Ended September 30,
(Dollars in millions, except per share data)	2014			2013			Change			2014			2013			Change
Revenues	$	44,758		$	32,985		36		%	$	88,816		$	65,224		36	%

Gross Profit	$	2,923		$	2,021		45		%	$	5,720		$	3,951		45	%

Operating Expenses	$	(2,135	)	$	(1,335	)	60			$	(4,244	)	$	(2,610	)	63

Income from Continuing Operations Before Income Taxes	$	713		$	636		12			$	1,320		$	1,238		7
Income Tax Expense	(222		)	(213		)	4			(404		)	(387		)	4
Income from Continuing Operations	491			423			16			916			851			8
Loss from Discontinued Operations, Net of Tax	(14		)	(19		)	(26	)		(28		)	(23		)	22
Net Income	477			404			18			888			828			7
Net Income Attributable to Noncontrolling Interests	(8		)	—			NM			(16		)	—			NM
Net Income Attributable to McKesson Corporation	$	469		$	404		16			$	872		$	828		5

Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation
Continuing Operations	$	2.05		$	1.82		13		%	$	3.83		$	3.66		5	%
Discontinued Operations	(0.06		)	(0.08		)	(25	)		(0.12		)	(0.10		)	20
Total	$	1.99		$	1.74		14			$	3.71		$	3.56		4

Weighted Average Diluted Common Shares	235			233			1		%	235			232			1	%

NM – not meaningful

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Revenues for the second quarter and first six months of 2015 increased compared to the same periods a year ago primarily reflecting our February 2014 acquisition of Celesio AG (“Celesio”), our mix of business and market growth. These increases were partially offset by price deflation associated with brand to generic drug conversion.

Gross profit increased for the second quarter and first six months of 2015 primarily due to our acquisition of Celesio and growth in our other Distribution Solutions businesses. These increases were partially offset by higher last-in, first-out (“LIFO”) inventory charges and a decline in our Technology Solutions segment. Gross profit margin increased for the second quarter and first six months of 2015 primarily due to our acquisition of Celesio, partially offset by our mix of business in our other Distribution Solutions businesses, higher LIFO inventory charges and for the six months ended September 30, 2014, a decline in gross profit margin for our Technology Solutions segment. LIFO inventory charges were $94 million and $192 million for the second quarter and first six months of 2015, compared to $44 million in the second quarter and first six months of 2014.

Operating expenses increased for the second quarter and first six months of 2015 primarily due to our acquisition of Celesio, including higher intangible asset amortization and acquisition-related expenses, and higher costs to support growth in our businesses. Additionally, operating expenses for the second quarter and first six months of 2014 were impacted by pre-tax charges of $35 million and $50 million relating to our Average Wholesale Price (“AWP”) litigation.

Income from continuing operations before income taxes for the second quarter and first six months of 2015 increased primarily due to higher operating profit from our Distribution Solutions segment, including our acquisition of Celesio, partially offset by higher interest expense. Interest expense increased primarily due to our Celesio acquisition.

Net income attributable to McKesson Corporation for the second quarter of 2015 increased 16% to $469 million and for the first six months of 2015 increased 5% to $872 million compared to the same periods a year ago. Diluted earnings per common share attributable to McKesson for the second quarter of 2015 increased 14% to $1.99 and for the first six months of 2015 increased 4% to $3.71 compared to the same periods a year ago.

On February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired (the “Acquisition”). Upon the Acquisition, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common shares was 75.6%. Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesio’s headquarters is in Stuttgart, Germany and it operates in 14 countries around the world. The acquisition of Celesio expands our global geographic area; the combined company is one of the largest pharmaceutical wholesalers and providers of logistics and services in the healthcare sector worldwide. We owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares at September 30, 2014 and March 31, 2014.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Revenues:



	Quarter Ended September 30,							Six Months Ended September 30,
(Dollars in millions)	2014		2013		Change			2014		2013		Change
Distribution Solutions
North America pharmaceutical distribution & services	$	35,148	$	30,702	14		%	$	69,452	$	60,748	14		%
International pharmaceutical distribution & services	7,312		—		NM			14,919		—		NM
Medical-Surgical distribution & services	1,528		1,467		4			2,907		2,824		3
Total Distribution Solutions	43,988		32,169		37			87,278		63,572		37

Technology Solutions - products and services	770		816		(6	)		1,538		1,652		(7	)
Total Revenues	$	44,758	$	32,985	36			$	88,816	$	65,224	36

NM - not meaningful

Revenues for 2015 increased compared to the same period a year ago primarily due to our Distribution Solutions segment, which accounted for approximately 98% of our consolidated revenues.

Distribution Solutions: North America pharmaceutical distribution and services revenues increased primarily due to our mix of business and market growth. Market growth reflects growing drug utilization, which includes newly launched drugs, and price and volume increases. In 2015, our revenues benefited from two recently launched drugs for the treatment of Hepatitis C. These increases were partially offset by price deflation associated with brand to generic drug conversion. International pharmaceutical distribution and services revenues represent revenues from Celesio, which was acquired in the fourth quarter of 2014. Medical-Surgical distribution and services revenues increased primarily due to market growth.

Technology Solutions: Technology Solutions revenues decreased primarily due to a decline in software product revenues, the planned elimination of a product line and the wind down of our workforce business within our International Technology business. These decreases were partially offset by a higher volume of claims processing.

Gross Profit:



	Quarter Ended September 30,									Six Months Ended September 30,
(Dollars in millions)	2014			2013			Change			2014			2013			Change
Gross Profit
Distribution Solutions	$	2,540		$	1,624		56		%	$	4,998		$	3,144		59		%
Technology Solutions	383			397			(4	)		722			807			(11	)
Total	$	2,923		$	2,021		45			$	5,720		$	3,951		45
Gross Profit Margin
Distribution Solutions	5.77		%	5.05		%	72		bp	5.73		%	4.95		%	78		bp
Technology Solutions	49.74			48.65			109			46.94			48.85			(191	)
Total	6.53			6.13			40			6.44			6.06			38

bp - basis points

Gross profit and gross profit margin increased for the second quarter and first six months of 2015 compared to the same periods a year ago primarily due to an increase in our Distribution Solutions operating segment, including our acquisition of Celesio.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Distribution Solutions

Distribution Solutions segment’s gross profit increased in the second quarter and first six months of 2015 primarily due to our acquisition of Celesio and growth in our other Distribution Solutions businesses. These increases were partially offset by higher LIFO inventory charges. Gross profit margin increased for the second quarter and first six months of 2015 primarily due to our acquisition of Celesio, partially offset by our mix of business in our other Distribution Solutions businesses. The segment’s gross profit margin for the second quarter of 2015 primarily reflects a decrease in sell margin and higher LIFO charges, partially offset by the sale of higher margin generic drugs. The segment’s gross profit margin for the first six months of 2014 reflects a decrease in sell margin and higher LIFO charges, partially offset by an increase in buy margin. Buy margin includes volume and timing of compensation from pharmaceutical manufacturers. The segment’s gross profit margin in 2015 was also negatively impacted by the revenues associated with the recently launched drugs for the treatment of Hepatitis C, which have lower margins.

Our LIFO inventory expense was $94 million and $192 million in the second quarter and first six months of 2015 compared to $44 million in the second quarter and first six months of 2014. Our North American distribution and services 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 practice in the businesses 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 expense 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. As a result of cumulative net price deflation from 2005 to 2013, we had a lower-of-cost or market (“LCM”) reserve of $60 million at March 31, 2013 which reduced pharmaceutical inventories at LIFO to the current cost of replacing inventory (i.e., “market”). During the second quarter and first six months of 2014, $23 million and $60 million of the LCM reserve was released, resulting in an increase in gross profit. As of March 31, 2014 and September 30, 2014, inventories at LIFO did not exceed market. Our annual LIFO expense, which we estimate on a quarterly basis, is affected by expected changes in year-end inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences. Changes to any of the above factors could have a material impact to our annual LIFO expense.

Technology Solutions

Technology Solutions segment’s gross profit decreased for the second quarter and first six months of 2015 primarily due to a decline in software product revenues. Gross profit margin for the second quarter of 2015 increased due to a favorable product mix. Gross profit margin for the first six months of 2015 decreased reflecting a pre-tax $34 million non-cash charge primarily related to depreciation and amortization as described further below.

In 2014, we committed to a plan to sell our International Technology and Hospital Automation businesses from our Technology Solutions segment and certain businesses from our Distributions Solutions segment. As required, we classified the results of operations and cash flows of these businesses as discontinued operations for all periods presented in our consolidated financial statements in 2014 and depreciation and amortization expense was not recognized.

During the first quarter of 2015, we decided to retain the workforce business within our International Technology business, which we now intend to wind down in 2016. As a result, we reclassified the workforce business, which had been designated as a discontinued operation since the first quarter of 2014, as a continuing operation for all periods presented effective in the first quarter of 2015. During the first quarter of 2015, we also recorded a non-cash pre-tax charge of $34 million ($27 million after-tax) primarily relating to depreciation and amortization expense for 2014 when the business was classified as held for sale. The non-cash charge was recorded in our condensed consolidated statement of operations primarily in cost of sales.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Operating Expenses and Other Income, Net:



	Quarter Ended September 30,									Six Months Ended September 30,
(Dollars in millions)	2014			2013			Change			2014			2013			Change
Operating Expenses
Distribution Solutions	$	1,766		$	945		87		%	$	3,494		$	1,850		89		%
Technology Solutions	260			277			(6	)		531			560			(5	)
Corporate	109			113			(4	)		219			200			10
Total	$	2,135		$	1,335		60			$	4,244		$	2,610		63

Operating Expenses as a Percentage of Revenues
Distribution Solutions	4.01		%	2.94		%	107		bp	4.00		%	2.91		%	109		bp
Technology Solutions	33.77			33.95			(18	)		34.53			33.90			63
Total	4.77			4.05			72			4.78			4.00			78

Other Income, Net
Distribution Solutions	$	19		$	6		217		%	$	37		$	10		270		%
Technology Solutions	2			—			NM			2			—			NM
Corporate	3			3			NM			5			5			NM
Total	$	24		$	9		167			$	44		$	15		193

Operating expenses increased in the second quarter and first six months of 2015 primarily due to our Distribution Solutions segment.

Distribution Solutions segment’s operating expenses increased in the second quarter and first six months of 2015 primarily due to our acquisition of Celesio, including higher intangible asset amortization and acquisition-related expenses, and higher costs to support growth in our businesses. Additionally, operating expenses for the second quarter and first six months of 2014 were impacted by pre-tax charges of $35 million and $50 million relating to our AWP litigation. Operating expenses as a percentage of revenues increased in the second quarter and first six months of 2015 primarily due to our acquisition of Celesio, partially offset by operating leverage in our other businesses and a decline in charges relating to our AWP litigation.

Technology Solutions segment’s operating expenses in the second quarter and first six months of 2015 decreased primarily due to restructuring activities taken during the prior year.

Corporate expenses for the second quarter of 2015 decreased slightly compared to the same period a year ago primarily due to lower compensation and benefit costs. Corporate expenses for the first six months of 2015 increased primarily due to higher acquisition-related expenses and expenses incurred to support our business growth, partially offset by lower compensation and benefit costs.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Acquisition Expenses and Related Adjustments

Acquisition expenses and related adjustments, which include transaction and integration expenses that are directly related to acquisitions made by the Company, were as follows:



	Quarter Ended September 30,				Six Months Ended September 30,
(Dollars in millions)	2014		2013		2014		2013
Operating Expenses
Integration related expenses	$	42	$	6	$	70	$	13
Severance and relocation	18		7		35		12
Transaction closing expenses	2		—		6		1
Total Acquisition Expenses and Related Adjustments	$	62	$	13	$	111	$	26

We incurred $21 million and $9 million of acquisition-related expenses associated with integrating our 2013 acquisition of PSS World Medical, Inc. for the second quarters of 2015 and 2014, and $35 million and $20 million for the first six months of 2015 and 2014. These expenses primarily relate to a distribution center rationalization and information technology conversions to common platforms.

During the second quarter and first six months of 2015, we incurred $40 million and $75 million of acquisition-related expenses associated with integrating our acquisition of Celesio. These expenses primarily relate to severance and other costs to integrate the business.

During the second quarter of and first six months of 2015, amortization expense of acquired intangible assets purchased in connection with acquisitions by the Company increased by $61 million and $120 million compared to the same periods a year ago primarily reflecting our Celesio acquisition. Amortization expense by segment was as follows:



	Quarter Ended September 30,				Six Months Ended September 30,
(Dollars in millions)	2014		2013		2014		2013
Distribution Solutions	$	118	$	53	$	236	$	107
Technology Solutions	13		17		25		34
Total	$	131	$	70	$	261	$	141

Other Income, Net: Other income, net increased in the second quarter and first six months of 2015 compared to the same periods a year ago primarily due to our acquisition of Celesio.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Segment Operating Profit, Corporate Expenses, Net and Interest Expense:



	Quarter Ended September 30,											Six Months Ended September 30,
(Dollars in millions)	2014				2013				Change			2014				2013				Change
Segment Operating Profit ⁽¹⁾
Distribution Solutions	$	793			$	685			16		%	$	1,541			$	1,304			18		%
Technology Solutions	125				120				4			193				247				(22	)
Subtotal	918				805				14			1,734				1,551				12
Corporate Expenses, Net	(106		)		(110		)		(4	)		(214		)		(195		)		10
Interest Expense	(99		)		(59		)		68			(200		)		(118		)		69
Income from Continuing Operations Before Income Taxes	$	713			$	636			12			$	1,320			$	1,238			7

Segment Operating Profit Margin
Distribution Solutions	1.80			%	2.13			%	(33	)	bp	1.77			%	2.05			%	(28	)	bp
Technology Solutions	16.23				14.71				152			12.55				14.95				(240	)


(1)	Segment operating profit includes gross profit, net of operating expenses, plus other income for our two operating segments.

Segment Operating Profit Margin: Operating profit for our Distribution Solutions segment increased in 2015 due to growth in our businesses and our acquisition of Celesio. Operating profit margin for the segment decreased in 2015 primarily due to our acquisition of Celesio and our mix of business. Operating profit and operating profit margin were also negatively impacted by higher LIFO related charges in 2015, partially offset by lower charges related to our AWP litigation.

Operating profit for our Technology Solutions segment in the second quarter of 2015 approximated that of the prior year and operating profit margin increased primarily reflecting a higher gross profit margin and reduced operating expenses. Operating profit and operating profit margin decreased in the first six months of 2015 primarily due to a non-cash pre‑tax charge of $34 million recorded in connection with the reclassification of the workforce business within our International Technology business from discontinued operations to continuing operations.

Corporate: Corporate expenses, net of other income, for the second quarter of 2015 decreased slightly compared to the same period a year ago, and for the first six months of 2015 increased primarily due to higher expenses, as previously discussed.

Interest Expense: Interest expense for the second quarter and first six months of 2015 increased primarily due to the March 2014 issuance of $4.1 billion of new debt to fund the acquisition of Celesio and due to interest on Celesio’s debt. These increases were partially offset by the repayment of $350 million of the current portion of our long-term debt in February 2014.

Income Taxes: Our reported income tax rates for the second quarters of 2015 and 2014 were 31.1% and 33.5% and for the first six months of 2015 and 2014 were 30.6% and 31.3%. Fluctuations in our reported income tax rates are primarily due to varying proportions of income attributable to foreign countries that have lower income tax rates and discrete tax items. Income tax expense for the second quarters of 2015 and 2014 included net discrete tax benefit of $6 million and net discrete tax expense of $6 million and for the first six months of 2015 and 2014 included net discrete tax benefit of $18 million and nil.

Loss from Discontinued Operations, Net of Tax: Loss from discontinued operations, net of tax, was $14 million and $19 million for the second quarters of 2015 and 2014 and $28 million and $23 million for the first six months of 2015 and 2014. During the first quarter of 2015, we entered into an agreement to sell the software business within our International Technology business. On July 1, 2014, we completed the sale of the software business and recorded a pre-tax and after-tax loss of $6 million, which was included in 2015 loss from discontinued operations, net.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Diluted loss per common share from discontinued operations for the second quarter of 2015 was $0.06 compared to $0.08 for the same period a year ago and $0.12 compared to $0.10 for the first six months of 2015 and 2014.

Net income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests was $8 million and $16 million for the second quarter and first six months of 2015. This expense primarily relates to the noncontrolling interests share in Celesio.

Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $469 million and $404 million, and diluted earnings per common share attributable to McKesson Corporation were $1.99 and $1.74 for the second quarters of 2015 and 2014. Net income attributable to McKesson Corporation was $872 million and $828 million, and diluted earnings per common share attributable to McKesson Corporation were $3.71 and $3.56 for the first six months of 2015 and 2014.

Weighted Average Diluted Common Shares Outstanding: Diluted earnings per common share were calculated based on a weighted average number of shares outstanding of 235 million and 233 million for the second quarters of 2015 and 2014 and 235 million and 232 million for the first six months of 2015 and 2014. The weighted average number of shares outstanding increased slightly primarily due to the issuance of share-based awards.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Business Combinations

As previously discussed, on February 6, 2014, we completed the acquisition of 77.6% of the then outstanding common shares of Celesio and certain convertible bonds of Celesio for cash consideration of $4.5 billion, net of cash acquired. Upon the acquisition, as required, we consolidated Celesio’s debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesio’s fully diluted common shares was 75.6%. From February 7 to March 31, 2014, substantially all of the convertible bonds issued by Celesio (held by both third parties and us) were converted into 20.9 million common shares of Celesio. During the first quarter of 2015, we completed tender offers and acquired approximately 1 million common shares of Celesio at €23.50 per share for a total of $32 million in cash, and the remaining convertible bonds were fully converted into 42,238 common shares of Celesio. No additional common shares of Celesio were acquired during the second quarter of 2015. At September 30, 2014 and March 31, 2014, we owned approximately 75.9% and 75.4% of Celesio’s outstanding and fully diluted common shares.

Refer to Financial Note 2, “Business Combinations,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q for further information.

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 accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Financial Condition, Liquidity and Capital Resources

We expect our available cash generated from operations, together with our existing sources of liquidity from our accounts receivable sales facility, the revolving credit facility and commercial paper issuance, will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. In addition, from time to time, we may access the long-term debt capital markets to discharge our other liabilities.

Operating activities generated cash of $165 million and $813 million during the first six months of 2015 and 2014. Cash flows from operations can be significantly impacted by factors such as timing of receipts from customers, inventory receipts and payments to vendors. Additionally, working capital is a function of sales activity and inventory requirements.

Investing activities utilized cash of $307 million and $274 million during the first six months of 2015 and 2014. Investing activities primarily reflect cash paid for business and property acquisitions and capitalized software.

Financing activities utilized cash of $168 million and $37 million during the first six months of 2015 and 2014. Financing activities for the first six months of 2015 include cash receipts of $1,790 million and payments of $1,572 million for short-term borrowings incurred by Celesio. Long-term debt repayments for the first six months of 2015 were primarily cash paid on Celesio’s promissory notes. Financing activities for 2015 also reflect $32 million of cash payment made to acquire approximately 1 million additional common shares of Celesio through the tender offers. Financing activities for the first six months of 2014 include cash receipts and payments of $150 million for short-term borrowings. Additionally, financing activities for the first six months of 2015 and 2014 included $105 million and $128 million of cash paid for stock repurchases, including shares surrendered for tax withholding.

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at September 30, 2014. Stock repurchases may be made from time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. 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.

We believe that our 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 future volatility and 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



(Dollars in millions)	September 30, 2014			March 31, 2014
Cash and cash equivalents	$	3,804		$	4,193
Working capital	4,542			3,072
Debt, net of cash and cash equivalents	6,768			6,526
Debt to capital ratio ⁽¹⁾	54.2		%	55.7		%
Net debt to net capital employed ⁽²⁾	43.1			43.4
Return on stockholders’ equity ⁽³⁾	15.4			16.2


(1)	Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders’ equity excluding noncontrolling interests.


(2)	Ratio is computed as total debt, net of cash and cash equivalents (“net debt”), divided by the sum of net debt and McKesson stockholders’ equity excluding noncontrolling interests (“net capital employed”).


(3)	Ratio is computed as net income attributable to McKesson Corporation for the last four quarters, divided by a five-quarter average of McKesson stockholders’ equity excluding noncontrolling interests.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Cash equivalents, which are available-for-sale, are carried at fair value. Cash equivalents are primarily invested in AAA rated prime and U.S. government money market funds denominated in U.S. dollars, AAA rated prime money market funds denominated in Euros, overnight repurchase agreements collateralized by U.S. Treasury bonds, Canadian government securities and/or securities that are guaranteed or sponsored by the U.S. government and an AAA rated prime money market fund denominated in British pound sterling.

The remaining cash and cash equivalents are deposited with several financial institutions. 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. Within the Celesio operations, the majority of deposits are placed in Germany only with banks that are part of deposit protection programs.

Our cash and cash equivalents balance as of September 30, 2014 included approximately $2.1 billion of cash held by our subsidiaries outside of the United States. Our primary intent is to utilize this cash for foreign operations as well as to fund certain research and development activities for an indefinite period of time. Although the vast majority of cash held outside the United States is available for repatriation, doing so could subject us to U.S. federal, state and local income tax.

Working capital primarily includes cash and cash equivalents, receivables and inventories net of drafts and accounts payable, deferred revenue and other current liabilities. Our Distribution Solutions segment requires a substantial investment in working capital that is 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.

Our ratio of net debt to net capital employed decreased slightly in 2015.

Credit Resources

We fund our working capital requirements primarily with cash and cash equivalents, as well as, short-term borrowings under the accounts receivable sales facility, revolving credit facility and from commercial paper issuances.

Celesio Debt

Upon the acquisition of Celesio, as required, we consolidated Celesio’s debt including their accounts receivable factoring facilities (the “Factoring Facilities”) with a total committed balance of $315 million. The Factoring Facilities will expire through September 2015. During the first six months of 2015, Celesio borrowed and repaid $1,575 million and $1,545 million of short-term borrowings under the Factoring Facilities. At September 30, 2014 and March 31, 2014, there were $245 million and $246 million in secured borrowings and related accounts receivable outstanding under the Factoring Facilities.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Accounts Receivable Sales Facility

Revolving Credit Facility

Debt Covenants

Our various borrowing facilities and long-term debt are subject to certain covenants. Our principal financial covenant is our U.S. dollar denominated debt to capital ratio under our $1.3 billion unsecured revolving credit facility, which cannot exceed 65%. For the purpose of calculating this ratio, borrowings under the $1.35 billion accounts receivable sales facility are excluded. If we exceed this ratio, repayment of debt outstanding under the revolving credit facility could be accelerated. As of September 30, 2014 and March 31, 2014, we were in compliance with our financial covenants.

Funds necessary for future debt maturities and our other cash requirements are expected to be met by existing cash balances, cash flow from operations, existing credit sources and other capital market transactions.

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McKESSON CORPORATION

FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Some of these statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or the negative of these words and other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the following factors. The reader should not consider this list to be a complete statement of all potential risks and uncertainties:


▪	changes in the U.S. healthcare industry and regulatory environment;


▪	changes in the Canadian healthcare industry and regulatory environment;


▪	changes in the European regulatory environment;


▪	foreign operations subject us to a number of operating, economic, political and regulatory risks;


▪	the Company’s ability to successfully identify, consummate and integrate strategic acquisitions;


▪	material adverse resolution of pending legal proceedings;


▪	European economic conditions together with austerity measures taken by certain European governments;


▪	competition;


▪	substantial defaults in payments or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization;


▪	the loss of government contracts as a result of compliance or funding challenges;


▪	public health issues in the United States or abroad;


▪	implementation delay, malfunction, failure or breach of internal information systems;


▪	the adequacy of insurance to cover property loss or liability claims;


▪	the Company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances;


▪	the Company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others;


▪	system errors or failure of our technology products and solutions to conform to specifications;


▪	disaster or other event causing interruption of customer access to the data residing in our service centers;


▪	the delay or extension of our sales or implementation cycles for external software products;


▪	changes in circumstances that could impair our goodwill or intangible assets;


▪	new or revised tax legislation or challenges to our tax positions;


▪	general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the Company, its customers or suppliers;


▪	changes in accounting principles generally accepted in the United States of America; and


▪	significant liability if we withdraw from participation in one or more multiemployer pension plans.

These and other risks and uncertainties are described herein and in other information contained in our publicly available Securities and Exchange Commission filings and press releases. Readers are cautioned not to place undue reliance on forward‑looking statements, which speak only as of the date such statements were first made. Except to the extent required by law, we undertake no obligation to publicly release the result of any revisions to our forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

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McKESSON CORPORATION


Item 3.	Quantitative and Qualitative Disclosures about Market Risk.

We believe there has been no material change in our exposure to risks associated with fluctuations in interest and foreign currency exchange rates as disclosed in our 2014 Annual Report on Form 10-K.


Item 4.	Controls and Procedures.

Our Chief Executive Officer and our Chief Financial Officer, with the participation of other members of the Company’s management, have evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this quarterly report, and our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

There were no changes in our “internal control over financial reporting” (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15 that occurred during our second quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The Company acquired Celesio on February 6, 2014 and is in the process of reviewing the internal control structure of Celesio. If necessary, the Company will make appropriate changes as it integrates Celesio into the Company’s overall internal control over financial reporting processes.

PART II—OTHER INFORMATION


Item 1.	Legal Proceedings.

The information set forth in Financial Note 13, “Commitments and Contingent Liabilities,” to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q is incorporated herein by reference.


Item 1A.	Risk Factors.

There have been no material changes during the period covered by this Quarterly Report on Form 10-Q to the risk factors disclosed in Part I, Item 1A, of our 2014 Annual Report on Form 10-K.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

Stock repurchases may be made from time to time in open market transactions, privately negotiated transactions, through accelerated share repurchase programs, or by any combination of such methods. 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.

The total authorization outstanding for repurchases of the Company’s common stock was $340 million at September 30, 2014.

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McKESSON CORPORATION

The following table provides information on the Company’s share repurchases during the second quarter of 2015.



	Share Repurchases ⁽¹⁾
(In millions, except price per share)	Total Number of Shares Purchased		Average Price Paid Per Share	Total Number of Shares Purchased As Part of Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs
July 1, 2014 – July 31, 2014	—	$	—	—	$	340
August 1, 2014 – August 31, 2014	—		—	—		340
September 1, 2014 – September 30, 2014	—		—	—		340
Total	—			—		340


(1)	This table does not include shares tendered to satisfy the exercise price in connection with cashless exercises of employee stock options or shares tendered to satisfy tax withholding obligations in connection with employee equity awards.


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Mine Safety Disclosures.

Not Applicable


Item 5.	Other Information.

None

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McKESSON CORPORATION


Item 6.	Exhibits.



Exhibit Number	Description
10.1*	McKesson Corporation Supplemental Profit Sharing Investment Plan II, as amended and restated July 29, 2014.

10.2*	McKesson Corporation Deferred Compensation Administration Plan III, as amended and restated July 29, 2014.

10.3*	Forms of Statement and Terms and Conditions applicable to Awards Pursuant to the McKesson Corporation 2013 Stock Plan.

31.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32†	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	The following materials from the McKesson Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Operations, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, and (v) related Financial Notes.


*	Management contract or compensation plan or arrangement in which directors and/or executive officers are eligible to participate.


†	Furnished herewith.

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McKESSON CORPORATION

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		MCKESSON CORPORATION

Date:	October 28, 2014	/s/ James A. Beer
		James A. Beer
		Executive Vice President and Chief Financial Officer



		MCKESSON CORPORATION

Date:	October 28, 2014	/s/ Nigel A. Rees
		Nigel A. Rees
		Vice President and Controller

Exhibit 10.1

McKESSON CORPORATION

SUPPLEMENTAL PSIP II

Effective January 1, 2014

(Amended and Restated July 29, 2014)

TABLE OF CONTENTS



	Item	Page


A.	PURPOSE	3

B.	ERISA PLAN	3

C.	PARTICIPATION	3

D.	AMOUNTS OF DEFFERRAL	5

E.	COMPANY CONTRIBUTIONS	5

F.	PAYMENT OF DEFERRED COMPENSATION	6

G.	BENEFICIARY DESIGNATION	9

H.	SOURCE OF PAYMENT	9

I.	MISCELLANEOUS	9

J.	ADMINISTRATION OF THE PLAN	10

K.	AMENDMENT OR TERMINATION OF THE PLAN	10

l.	CLAIMS AND APPEALS	11

M.	DEFINITIONS	12

N.	SUCCESSORS	14

O.	EXECUTION	14

APPENDIX A Example of Deferrals under Plan		15

McKESSON CORPORATION

SUPPLEMENTAL PSIP II

Effective January 1, 2014


A.	PURPOSE

This Plan is established to allow certain executives of the Company to elect to defer compensation which cannot be deferred under the McKesson Corporation Profit Sharing Investment Plan (“PSIP”) because of limitations of tax laws and to provide for a Monthly Company Match and an Additional Company Match on those deferrals at a rate equivalent to the PSIP’s “Matching Employer Contribution” and “Additional Matching Employer Contribution.”

This Plan is the successor plan to the Supplemental PSIP, as in effect on December 31, 2004 (the “Prior Plan”). Effective December 31, 2004, the Prior Plan was frozen and no new deferrals shall be made to it nor shall any matching contributions be allocated or vested under it after such date; provided, however, that any deferrals that were made to the Prior Plan or matching contributions that were allocated and vested under the Prior Plan before January 1, 2005 shall continue to be governed by the terms and conditions of the Prior Plan as in effect on December 31, 2004.


3.	Any deferrals made to or matching contributions that were allocated or vested under the Prior Plan after December 31, 2004 are deemed to have been made or allocated under this Plan and all such deferrals and matching contributions shall be governed by the terms and conditions of this Plan as it may be amended from time to time.


4.	This Plan is intended to comply with the requirements of Code Section 409A.


5.	Capitalized terms used in this Plan shall have the meaning set forth in Section M hereof.


B.	ERISA PLAN

This Plan is an unfunded deferred compensation program for a select group of management or highly compensated employees of the Company. The Plan, therefore, is covered by Title I of ERISA except that it is exempt from Parts 2, 3, and 4 of Title I of ERISA.


C.	PARTICIPATION

Eligibility to Participate. The Administrator may, at his or her discretion, and at any time, and from time to time, select executives of an Employer who may elect to participate in this Plan (“Eligible Executives”). Selection of Eligible Executives may be evidenced by the terms of the executive’s employment contract with the Company, or by inclusion among the persons specified in writing by the Administrator. The Administrator may, at his or her discretion, and at any time, and from time to time, provide that executives previously designated as Eligible Executives are no longer Eligible Executives. If the Administrator determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the

Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier).

Election to Participate by Eligible Executives and Deferral Election. Each Eligible Executive may become a Participant in the Plan by electing to defer Compensation, or by the Company crediting a Discretionary Contribution to an Account on behalf of an Eligible Executive, in accordance with the terms of this Plan. An election to defer shall be in writing and shall be made at the time and in the form specified by the Administrator. On electing to defer Compensation (or by accepting a Discretionary Contribution credited by the Company to an Account on behalf of an Eligible Executive) under this Plan, the Eligible Executive shall be deemed to accept all other terms and conditions of this Plan.


(a)	Timing of Elections. All elections to defer amounts under this Plan shall be irrevocable and shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned. An election to defer Compensation shall be made prior to the beginning of the Plan Year in which it is earned and shall become irrevocable on the December 31 preceding such Plan Year.

(b)

Newly Eligible Executive Elections. However, if an executive becomes an Eligible Executive after the beginning of a Plan Year, he or she may make an election to defer Compensation for that Plan Year no later than 30 days after the date he or she becomes an Eligible Executive, which election shall become irrevocable at the end of the 30-day period or an earlier date that the Administrator prescribed; provided, however, such election shall apply only to Compensation earned after the election becomes irrevocable or at such later time the Administrator prescribes.

(c)

Modification of Elections. An election filed in accordance with the provisions of the preceding paragraphs (a) and (b) shall be applicable to the Plan Year with respect to which it is made and shall continue for subsequent Plan Years until suspended or modified in a writing delivered by the Participant to the Administrator, as described in this paragraph (c). An election to suspend further deferrals or to increase or decrease the amount deferred under the Plan shall apply only to Compensation otherwise payable to the Participant after the end of the Plan Year in which the election is delivered to the Administrator and such election shall become irrevocable on the date that the Administrator prescribes, but in no event later than December 31 of the Plan Year in which such election is made.


3.	Relation to Other Plans.

(a)

Other Plans. An Eligible Executive may participate in this Plan and may also participate in DCAP III or any successor plan. No amounts may be deferred under this Plan which have been deferred under any other plan of the Company and the Administrator may modify or render invalid a Participant’s election prior to such election becoming irrevocable to accommodate deferrals made under other plan(s).


(b)	Effect on Other Plans. For all other benefit programs maintained by the Company, amounts deferred by an Eligible Executive under this Plan may result in a reduction of benefits payable under the Social Security Act, the McKesson Corporation Retirement Plan, the PSIP and the McKesson Corporation Executive Benefit Retirement Plan.


D.	AMOUNTS OF DEFERRAL

PSIP Supplement. This Plan allows an Eligible Executive to defer Compensation, and receive credit for a Monthly Company Match and Additional Company Match, to the extent that such deferrals (and corresponding Monthly Company Match and Additional Company Match) cannot be made under the PSIP because of the limitations in Code Section 401(a)(17) (limiting the amount of annual compensation to be taken into account under the PSIP to $210,000 in 2005, as adjusted from time to time under the Code).


2.	Amount of Deferrals. As illustrated in Appendix A, an Eligible Executive may elect to defer under this Plan up to an amount equal to (a) minus (b), where:


(a)	is the maximum rate of deferral for “Basic Contributions” under the PSIP multiplied by the Eligible Executive’s Compensation, and


(b)	is the maximum amount that the Eligible Executive is able to defer as a “Basic Contribution” under the PSIP, taking into account the limits of Code Section 401(a)(17).


E.	COMPANY CONTRIBUTIONS


1.	Company Match.


(a)	Eligibility.


(i)	Monthly Company Match. A Monthly Company Match shall be credited, with respect to each calendar month, to the Accounts of Eligible Executives who actually defer Compensation under this Plan for such calendar month.


(ii)	Additional Company Match. An Additional Company Match may be credited, with respect to each PSIP plan year, to the Accounts of Eligible Executives who actually defer Compensation under this Plan.


(b)	Amount of Match.

(i)

Monthly Company Match. The amount of the Monthly Company Match to be credited to the Account of an Eligible Executive for any calendar month shall be a percentage of the Eligible Executive’s deferrals under this Plan for the calendar month. This percentage shall be the same percentage as the “Matching Employer Contribution” (as defined in the PSIP) percentage that would have been credited to the Eligible Executive’s PSIP account if the Eligible Executive’s deferrals under this Plan had been made under the PSIP. In determining this amount, the Administrator shall take into account the different “Matching Employer Contribution” rates that may apply.

(ii)

Additional Company Match. The amount of the Additional Company Match to be credited to the Account of an Eligible Executive for any PSIP plan year shall be a percentage of the Eligible Executive’s deferrals under this Plan for the PSIP plan year. This percentage shall be the same percentage as the “Additional Matching Employer Contribution” (as defined in the PSIP) percentage that would have been credited to the Eligible Executive’s PSIP

account if the Eligible Executive’s deferrals under this Plan had been made under the PSIP. In determining this amount, the Administrator shall take into account the different “Additional Matching Employer Contribution” rates that may apply.

Discretionary Contribution. The Compensation Committee shall have the sole discretion to determine an amount credited to an Eligible Executive’s Account as a “Discretionary Contribution.” A Discretionary Contribution may be subject to such terms or conditions, including but not limited to vesting, as the Compensation Committee may specify in its discretion at the time the Discretionary Contribution is credited to a Participant’s Account. Except with respect to the Company’s executive officers, the Compensation Committee may delegate its authority under this Section E.2 to the Administrator.


F.	PAYMENT OF DEFERRED COMPENSATION

Book Account and Interest Credit. Both Compensation deferred by a Participant and any Monthly Company Match, Additional Company Match or vested Discretionary Contribution for the benefit of a Participant shall be credited to a separate bookkeeping account maintained for such Participant (the “Account”). Interest or earnings shall be credited to each Account for each Plan Year at a rate equal to a rate declared or any other measurement device (the “Declared Rate”) approved by the Compensation Committee acting in its sole discretion after taking into account, among other things, the following factors: McKesson’s cost of funds, corporate tax brackets, expected amount and duration of deferrals, number and age of eligible Participants, expected time and manner of payment of deferred amounts, and expected performance of available fixed-rate insurance contracts covering the lives of Participants. Notwithstanding the foregoing, if a Change in Control occurs, the Declared Rate for the balance of the calendar year in which the Change in Control occurs and for the two calendar years immediately following the year in which the Change in Control occurs shall not be less than the Declared Rate as in effect on the day before the Change in Control occurs. Interest or earnings on each Account balance shall be compounded daily on each business day within the Plan Year to yield the Declared Rate for the Plan Year. Interest or earnings shall be credited to each Account as of the end of each business day.


2.	Vesting.


(a)	A Participant shall be 100% vested at all times in the value of the Participant’s elective deferrals and earnings thereon credited to the Participant’s Account.

(b)

A Participant shall vest in the amounts of Monthly Company Match and the Additional Company Match and earnings thereon credited to the Participant’s Account at the same time and in the same manner as if these amounts were “Matching Employer Contributions” or “Additional Matching Employer Contributions” under the PSIP and as if the rules of the PSIP concerning vesting applied to such amounts. For this purpose, any Monthly Company Match shall be deemed to be credited to an Account as of the last day of the calendar month with respect to which such Monthly Company Match is determined and any Additional Company Match shall be deemed to be credited to an Account as of the March 31 with respect to which such Company Match is determined. Any amounts that would be forfeited under the rules of the PSIP applicable to “Matching Employer Contributions” or “Additional Matching Employer Contributions” under the PSIP shall be forfeited hereunder. Any forfeiture under this

Plan of any portion of the Monthly Company Match or the Additional Company Match credited to a Participant’s Account shall eliminate any obligation of the Company to pay the forfeited amount hereunder.

(c)

Unless the Compensation Committee determines otherwise, a Participant’s Discretionary Contribution will be forfeited at the time of Participant’s Separation from Service for any reason, if such Participant has not satisfied the applicable terms and conditions, including vesting requirements, that the Compensation Committee imposed on the Discretionary Contribution under Section E.2. Any forfeiture under this Plan of any portion of the Discretionary Contribution credited to a Participant’s Account shall eliminate any obligation of the Company to pay the forfeited amount hereunder.


3.	Election of Methods of Payment. A Participant shall elect in writing, and file with the Administrator, a method of payment of benefits under this Plan from the following methods based upon the nature of the Payment Event. This election must be made no later than the later of (i) December 31, 2007 or (ii) 30 days after the date the Participant first becomes an Eligible Executive.


(a)	Retirement or Disability. If the Payment Event is due to the Participant’s Retirement or Disability, the Participant may choose one of the following payment methods:

(i)

Payment of the vested amounts credited to the Participant’s Account in any specified number of approximately equal annual installments, not in excess of the number of whole years remaining of the Participant’s life expectancy, determined as of his or her Retirement or Disability and based upon the mortality tables then in use under the McKesson Corporation Retirement Plan, the first installment to be paid at a designated interval following the Payment Event. For purposes of the Plan, installment payments shall be treated as a single distribution under Code Section 409A.


(ii)	Payment of the vested amounts credited to the Participant’s Account in a single lump sum upon the occurrence of the Retirement or Disability.


(iii)	If a Participant does not make any election with respect to the payment of the Participant’s Account, then such benefit shall be payable in a lump sum upon the occurrence of Participant’s Retirement or Disability, whichever is applicable.

Payment under this paragraph (a) pursuant to Participant’s Retirement, is subject to Section 5.

(b)

Death. Each Participant shall make an election of the manner in which any amount remaining in the Participant’s Account at the time of the Participant’s death shall be paid to his or her Beneficiary if such Participant has not yet received or begun receiving a distribution under the Plan. At the election of the Participant, benefits shall be paid in a lump sum or in up to ten annual installments; provided, however, if a Participant is in-pay status at the time of death, distribution of the Account, or portion of the Account, that is in-pay shall continue to be distributed to the Beneficiary as Participant elected to receive such distribution. A Beneficiary may not elect to accelerate, change

the form of the payments pursuant to the Participant’s election, or further defer the payment of the Participant’s Account as described in Section F.4.

(c)

Separation from Service Not Due to Retirement or Death. If the Payment Event occurs as a result of the Participant’s Separation from Service, and such separation is not due to the Participant’s death or Retirement, payment of the vested amounts credited to the Participant’s Account shall be made in a single lump sum upon the occurrence of the Participant’s Separation from Service, subject to Section 5.

(If any Monthly Company Match or Additional Company Match is payable under Section E hereunder, that amount or first installment amount, whichever is applicable, may be paid separately and at a later date as provided in such section but not later than the end of the calendar year in which the Monthly Company Match or Additional Company Match is credited to the Participant’s Account.)

Subsequent Change in Form of Payment. Once an election is made as to the form of payment upon a Payment Event, a Participant may alter the form of payment of amounts deferred under the Plan by a writing filed with the Administrator; provided that such alteration is made at least one year prior to the earliest Payment Event and does not provide for the receipt of such amounts earlier than five years from the previously scheduled Payment Event. A change to the form of a distribution may be modified or revoked until one year prior to the time a distribution is originally scheduled to be made, at which time such change shall become irrevocable. The last valid election accepted by the Administrator shall govern the payout. A change to the form of distribution may be modified or revoked until 12 months prior to the earliest scheduled Payment Event, at which time any such modification or revocation shall become irrevocable. The last valid election accepted by the Administrator shall govern the form of payment.

Deminimis Cashout. Notwithstanding the Participant’s election, the Administrator in its sole discretion may distribute an Account to a Participant or a Beneficiary in a single payment if the value of the Account, and any other plan or arrangement with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Treasury Regulation section 1.409A-1(c)(2), is less than the Code Section 401(g)(1)(B) limit.

Special Distribution Election on or before December 31, 2006. Participants who are identified by the Compensation Committee, in its sole discretion, may make a special distribution election to receive a distribution of their Account in calendar year 2007 or later; provided that the distribution election is made at least twelve months in advance of the newly elected distribution date (and the previously scheduled distribution date, if any) and the election is made no later than December 31, 2006. An election made pursuant to this Section F.6 shall be subject to any special administrative rules imposed by the Compensation Committee including rules intended to comply with Code Section 409A. No election under this Section F.6 shall (i) change the payment date of any distribution otherwise scheduled to be paid in 2006 or cause a payment to be paid in 2006, or (ii) be permitted after December 31, 2006.


7.	Date Payment Occurs. Payment shall be made or commence not later than ninety (90) days following the date the earliest Payment Event occurs. Notwithstanding the foregoing, a distribution scheduled to be made upon Separation from Service to a Participant who is identified as a Specified Employee as of the date he or she Separates from Service shall be

delayed for a minimum of six months following the Participant’s Separation from Service. Any payment that otherwise would have been made pursuant to this Section F during such six-month period, if any, shall be paid on the first day of the seventh month following the Participant’s Separation from Service. The identification of a Participant as a Specified Employee shall be made by the Administrator in his or her sole discretion in accordance with Section M.28 of the Plan and Code Sections 416(i) and 409A and the regulations promulgated thereunder.


8.	Prohibition on Acceleration. Notwithstanding any other provision of the Plan to the contrary, no distribution will be made from the Plan that would constitute an impermissible acceleration of payment as defined in Code Section 409A(a)(3) and the regulations promulgated thereunder.


G.	BENEFICIARY DESIGNATION

A Participant may designate any person or entity as his or her Beneficiary, but may not designate more than one person or any person that is not a natural person without the approval of the Administrator. Designation shall be in writing and shall become effective only when filed with McKesson. Such filing must occur before the Participant’s death. A Participant may change the Beneficiary, from time to time, by filing a completed beneficiary designation with McKesson in the manner prescribed by McKesson in its sole discretion. If the Participant fails to effectively designate a Beneficiary in accordance with the Administrator’s procedures or the person designated by the Participant is not living at the time the distribution is to be made, then his or her Beneficiary shall be his or her beneficiary under the PSIP.


H.	SOURCE OF PAYMENT

Amounts paid under this Plan shall be paid from the general funds of McKesson, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of McKesson with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary or create any fiduciary relationship between an Employer and any Participant or Beneficiary with respect to any assets of the Company.


I.	MISCELLANEOUS

Withholding. Each Participant and Beneficiary shall make appropriate arrangements with McKesson for the satisfaction of any federal, state, or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, McKesson may provide, at its discretion, for such withholding and tax payments as may be required.


2.	No Assignment. Except as otherwise provided in this Section I.2 or by applicable law, the benefits provided under this Plan may not be alienated, assigned, transferred, pledged, or hypothecated by any person, at any time. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions.

If a court of competent jurisdiction determines pursuant to a judgment, order or approval of a marital settlement agreement that all or any portion of the benefits payable hereunder to a Participant constitute community property of the Participant and his or her spouse or former spouse (hereafter, the "Alternate Payee") or property which is otherwise subject to division by the Participant and the Alternative Payee, a division of such property shall not constitute

a violation of this Section I.2, and any portion of such property may be paid or set aside for payment to the Alternate Payee. The preceding sentence, however, shall not create any additional rights and privileges for the Alternate Payee (or the Participant) not already provided under the Plan; in this regard, the Administrator shall have the right to refuse to recognize any judgment, order or approval of a martial settlement agreement that provides for any additional rights and privileges already not already provided under the Plan, including without limitation with respect to form and time of payment.

Applicable Law; Severability. The Plan hereby created shall be construed, administered, and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective.

No Right to Continued Employment, Etc. Neither the establishment or maintenance of the Plan nor the crediting of any amount to any Participant’s Account, nor the designation of an executive as an Eligible Executive, shall confer upon any individual any right to be continued as an employee of an Employer or shall affect the right of an Employer to terminate any executive’s employment or change any terms of any executive’s employment at any time.


J.	ADMINISTRATION OF THE PLAN

In General. The Plan Administrator shall be the Executive Vice President, Human Resources of McKesson. If the Executive Vice President, Human Resources is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Compensation Committee shall have authority and responsibility to interpret the Plan and shall adopt such rules and regulations for carrying out the Plan as it may deem necessary or appropriate. Decisions of the Compensation Committee shall be final and binding on all parties who have or claim any interest in the Plan. The Plan Administrator or Compensation Committee shall have the authority to delegate its authority under the Plan to an officer or group of officers of McKesson.


2.	Elections and Notices. All elections and notices made under this Plan shall be in writing and filed with the Administrator at the time and in the manner specified by him or her.


K.	AMENDMENT OR TERMINATION OF THE PLAN


1.	Amendment. The Compensation Committee may at any time, and from time to time, amend the Plan. Unless otherwise specified, such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under the Plan.


2.	Termination. The Board in its discretion may at any time terminate the Plan in accordance with Treasury Regulation section 1.409A-3(j)(4)(ix).


L.	CLAIMS AND APPEALS


1.	Informal Resolution of Questions. Any Participant or Beneficiary who has questions or concerns about his or her benefits under the Plan is encouraged to communicate with the Human Resources Department of McKesson. If this discussion does not give the Participant or Beneficiary satisfactory results, a formal claim for benefits may be made in accordance with the procedures of this Section L.

Formal Benefits Claim - Review by Executive Vice President, Human Resources. A Participant or Beneficiary may make a written request for review of any matter concerning his or her benefits under this Plan. The claim must be addressed to the Executive Vice President, Human Resources, McKesson Corporation, One Post Street, San Francisco, California 94104. The Executive Vice President, Human Resources or his or her delegate ("Executive Vice President") shall decide the action to be taken with respect to any such request and may require additional information if necessary to process the request. The Executive Vice President shall review the request and shall issue his or her decision, in writing, no later than 90 days after the date the request is received, unless the circumstances require an extension of time. If such an extension is required, written notice of the extension shall be furnished to the person making the request within the initial 90-day period, and the notice shall state the circumstances requiring the extension and the date by which the Executive Vice President expects to reach a decision on the request. In no event shall the extension exceed a period of 90 days from the end of the initial period.

Notice of Denied Request. If the Executive Vice President denies a request in whole or in part, he or she shall provide the person making the request with written notice of the denial within the period specified in Section L.2. The notice shall set forth the specific reason for the denial, reference to the specific Plan provisions upon which the denial is based, a description of any additional material or information necessary to perfect the request, an explanation of why such information is required, and an explanation of the Plan's appeal procedures and the time limits applicable to such procedures, including a statement of the claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review.


4.	Appeal to Executive Vice President.

(a)

A person whose request has been denied in whole or in part (or such person's authorized representative) may file an appeal of the decision in writing with the Executive Vice President within 60 days of receipt of the notification of denial. The appeal must be addressed to: Executive Vice President, Human Resources, McKesson Corporation, One Post Street, San Francisco, California 94104. The Executive Vice President, for good cause shown, may extend the period during which the appeal may be filed for another 60 days. The appellant and/or his or her authorized representative shall be permitted to submit written comments, documents, records and other information relating to the claim for benefits. Upon request and free of charge, the applicant should be provided reasonable access to and copies of, all documents, records or other information relevant to the appellant's claim.


(b)	The Executive Vice President's review shall take into account all comments, documents, records and other information submitted by the appellant relating to the claim, without regard to whether such information was submitted or considered in the

initial benefit determination. The Executive Vice President shall not be restricted in his or her review to those provisions of the Plan cited in the original denial of the claim.

(c)

The Executive Vice President shall issue a written decision within a reasonable period of time but not later than 60 days after receipt of the appeal, unless special circumstances require an extension of time for processing, in which case the written decision shall be issued as soon as possible, but not later than 120 days after receipt of an appeal. If such an extension is required, written notice shall be furnished to the appellant within the initial 60-day period. This notice shall state the circumstances requiring the extension and the date by which the Executive Vice President expects to reach a decision on the appeal.

(d)

If the decision on the appeal denies the claim in whole or in part, written notice shall be furnished to the appellant. Such notice shall state the reason(s) for the denial, including references to specific Plan provisions upon which the denial was based. The notice shall state that the appellant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits. The notice shall describe any voluntary appeal procedures offered by the Plan and the appellant's right to obtain the information about such procedures. The notice shall also include a statement of the appellant's right to bring an action under Section 502(a) of ERISA.


(e)	The decision of the Executive Vice President on the appeal shall be final, conclusive and binding upon all persons and shall be given the maximum possible deference allowed by law.

Exhaustion of Remedies. No legal or equitable action for benefits under the Plan shall be brought unless and until the claimant has submitted a written claim for benefits in accordance with Section L.2, has been notified that the claim is denied in accordance with Section L.3, has filed a written request for a review of the claim in accordance with Section L.4, and has been notified in writing that the Executive Vice President has affirmed the denial of the claim in accordance with Section L.4.


M.	DEFINITIONS

For purposes of the Plan, the following terms shall have the meanings indicated:


1.	“Account” shall mean the “Account” specified in Section F.l.


2.	“Additional Company Match” shall mean, with respect to any Plan Year, the amount credited to the Account of an Eligible Executive in accordance with Section E.l(a)(ii).


3.	“Administrator” shall mean the person specified in Section J.1.


4.	“Beneficiary” shall mean the person or entity described by Section G.


5.	“Board” shall mean the Board of Directors of McKesson.


6.	“Code” shall mean the Internal Revenue Code of 1986, as amended.


7.	“Company” shall mean McKesson and any affiliate that would be considered a service recipient for purposes of Treasury Regulation section 1.409A-1(g).


8.	“Compensation” shall mean “Compensation” as defined in Section 15.17 of the PSIP; provided, however, that Compensation for purposes of this Plan shall be determined without regard to the limit of Code Section 401(a)(17).


9.	“Compensation Committee” shall mean the Compensation Committee of the Board.


10.	“DCAP III” shall mean the McKesson Corporation Deferred Compensation Administration Plan III and predecessor or successor plans, if applicable.


11.	“Disability” shall mean that an individual is determined to be totally disabled by the Social Security Administration.


12.	“Discretionary Contribution” shall mean a Company contribution to a Participant’s Account made in the Compensation Committee’s discretion pursuant to Section E.2.


13.	“Eligible Executive” shall mean an employee of the Employer, or its affiliate or subsidiary, who is eligible to participate in this Plan under Section C.


14.	“Employer” shall mean McKesson and any other affiliate that would be considered a service recipient or employer for purposes of Treasury Regulation section 1.409A-1(h)(3).


15.	“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.


16.	“Identification Date” shall mean each December 31.


17.	“McKesson” shall mean McKesson Corporation, a Delaware corporation.


18.	“Monthly Company Match” shall mean, with respect to a calendar month, the amount credited to the Account of an Eligible Executive in accordance with Section E.1(a)(i).


19.	“Participant” shall be any Eligible Executive or former Eligible Executive for whom amounts are credited to an Account under this Plan. Upon a Participant’s death his or her Beneficiary shall be a Participant until all amounts are paid out of the decedent-Participant’s Account.


20.	“Payment Event” shall mean the earliest of the following: Retirement, death, Separation from Service other than due to Retirement or death, or Disability.


21.	“Plan” shall mean the McKesson Corporation Supplemental PSIP II.


22.	“Plan Year” shall mean the calendar year.


23.	“Prior Plan” shall mean the McKesson Corporation Supplemental PSIP.


24.	“PSIP” shall mean the McKesson Corporation Profit-Sharing Investment Plan, as amended from time to time.


25.	“Retirement” shall mean Separation from Service from the Employer after the date on which the Participant has attained age 50 and has at least five Years of Service.

26.

“Separation from Service” shall mean termination of employment with the Employer, except in the event of death or Disability, as provided under Treasury Regulation section 1.409A-1(h)(1)(ii). A Participant shall be deemed to have had a Separation from Service if the Participant’s service with the Employer is reduced to an annual rate that is equal to or less than twenty percent of the services rendered, on average, during the immediately preceding three years of service with the Employer (or if providing service to the Employer less than three years, such lesser period).


27.	“Service” shall mean an Eligible Executive’s employment with the Company, commencing with the first day of such employment and ending on the day the Eligible Executive has a Separation from Service.


28.	“Specified Employee” shall mean a Participant who, on an Identification Date, is:


(a)	An officer of the Company having annual compensation greater than the compensation limit in Section 416(i)(1)(A)(i) of the Code, provided that no more than fifty officers of the Company shall be determined to be Specified Employees as of any Identification Date;


(b)	A five percent owner of the Company; or


(c)	A one percent owner of the Company having annual compensation from the Company of more than $150,000.

For purposes of determining whether a Participant is a Specified Employee, Treasury Regulation section 1.415(c)-2(d)(4) shall be used to calculate compensation. If a Participant is identified as a Specified Employee on an Identification Date, then such Participant shall be considered a Specified Employee for purposes of the Plan during the period beginning on the first April 1 following the Identification Date and ending on the next March 31.


29.	“Year of Service” shall mean a period of 365 aggregate days of Service (including holidays, weekends and other non-working days).

N.SUCCESSORS

This Plan shall be binding on the Company and any successors or assigns thereto.


O.	EXECUTION

To record the adoption of the amended and restated Plan by the Compensation Committee of the Board of McKesson Corporation at a meeting held on July 29, 2014, effective as of January 1, 2014.

MCKESSON CORPORATION

/s/ Jorge L. Figueredo

Jorge L. Figueredo

Executive Vice President, Human Resources

APPENDIX A

EXAMPLE OF DEFERRALS UNDER PLAN

The following example illustrates the extent to which a Participant could make deferrals under this Plan. The example assumes that the applicable compensation limit under Code Section 401(a)(17) is $210,000.

E’s Compensation is $350,000. E elects to make Basic Contributions under PSIP at the rate of 5% of his Compensation. Because Code Section 401(a)(17) limits the amount of E’s compensation which may be considered by PSIP to $210,000, E’s Basic Contributions for the year are limited to $10,500 (5% of $210,000). Accordingly, E may defer $7,000 (5% of his Compensation in excess of $210,000) into this Plan. This deferral will then be eligible for a Monthly Company Match and an Additional Company Match based on the PSIP’s “Matching Employer Contribution” and “Additional Matching Employer Contribution” for the relevant PSIP calendar months and plan year.

Exhibit 10.2

McKESSON CORPORATION

DEFERRED COMPENSATION ADMINISTRATION PLAN III (“DCAP III”)

Effective January 1, 2014

(Amended and Restated July 29, 2014)

TABLE OF CONTENTS



	Item	Page


A.	PURPOSE	1

B.	ERISA PLAN	1

C.	PARTICIPATION	1

D.	AMOUNTS OF DEFFERRAL	2

E.	PAYMENT OF DEFERRED COMPENSATION	3

F.	SOURCE OF PAYMENT	6

G.	MISCELLANEOUS	6

H.	ADMINISTRATION OF THE PLAN	7

I.	AMENDMENT OR TERMINATION OF THE PLAN	7

J.	CLAIMS AND APPEAL	7

K.	DEFINITIONS	9

l.	SUCCESSORS	11

M.	EXECUTION	11

McKESSON CORPORATION

DEFERRED COMPENSATION ADMINISTRATION PLAN III

Effective January 1, 2014

(Amended and Restated July 29, 2014)


A.	PURPOSE

1.This Plan was established to enhance McKesson’s ability to attract and retain executive personnel and members of the Board who are not otherwise employees of McKesson.

2.This Plan is the successor plan to the Deferred Compensation Administration Plan II, as amended through October 28, 2004 (the “Prior Plan”). Effective December 31, 2004, the Prior Plan was frozen and no new allocations or deferrals are to be made to it; provided, however, that any vested allocations and deferrals made under the Prior Plan before January 1, 2005 shall continue to be governed by the terms and conditions of the Prior Plan as in effect on December 31, 2004.

3.Any allocations and deferrals made under the Prior Plan after December 31, 2004 and any allocations that were unvested on December 31, 2004 shall be deemed to have been made under this Plan and all such contributions, accruals and deferrals shall be governed by the terms and conditions of this Plan as it may be amended from time to time.

4.This Plan is intended to comply with the requirements of Section 409A of the Code.

5.Capitalized terms used in this Plan shall have the meaning set forth in Section K hereof.


B.	ERISA PLAN

This Plan is an unfunded deferred compensation program intended primarily for a select group of management or highly compensated employees of the Company and members of the Board who are not employees of the Company. The Plan, therefore, is covered by Title I of ERISA except that it is exempt from Parts 2, 3 and 4 of Title I of ERISA.


C.	PARTICIPATION

1.Eligibility to Participate.

a.Eligible Executives. The Administrator may, at his or her discretion, and at any time, and from time to time, select executives of the Company who may elect to participate in this Plan (“Eligible Executives”). Selection of Eligible Executives may be evidenced by the terms of the executive’s employment contract with the Company, or by inclusion among the persons or classes of persons specified by the Administrator.

The Administrator may, at his or her discretion, and at any time, and from time to time, designate additional Eligible Executives and/or provide that executives previously designated are no longer Eligible Executives. If the Administrator determines that an executive is no longer an Eligible Executive, he or she shall remain a Participant in the Plan until all amounts credited to his or her Account prior to such determination are paid out under the terms of the Plan (or until death, if earlier).

b.Eligible Directors. Each individual who is a member of the Board of McKesson and who is not a Company employee may participate in this Plan (“Eligible Directors”).

2.Election to Participate. An Eligible Executive or an Eligible Director may become a Participant in the Plan by electing to defer compensation, or the Company crediting a Discretionary Contribution to an Account on behalf of an Eligible Executive, in accordance with the terms of this Plan. An election to defer shall be in writing and shall be made at the time and in the form specified by the Administrator. On electing to defer compensation (or by accepting a Discretionary Contribution credited by the Company to an Account on behalf of an Eligible Executive) under this Plan, the Eligible Executive or Eligible Director shall be deemed to accept all of the terms and conditions of this Plan. All elections to defer amounts under this Plan shall be made pursuant to an election executed and filed with the Administrator before the amounts so deferred are earned.

a.Annual Election. Subject to the provisions of Sections 2(b) and 2(c) below, an election to defer compensation must be made and become irrevocable at the time that the Administrator prescribes, but in no event later than the last day of the Year preceding the Year in which the compensation being deferred is earned. A Participant’s election to defer compensation shall be suspended during the Year only if such Participant is faced with an Unforeseeable Emergency. Such suspension shall continue through the end of the Year in which the Participant is faced with an Unforeseeable Emergency and the Participant must submit a new election to defer compensation, effective the Year after the Year in which the Unforeseeable Emergency occurs, to resume participation in the Plan.

b.Initial Election. A newly Eligible Executive or a newly Eligible Director may be permitted by the Administrator to elect to participate in the Plan by submitting an election to defer compensation in a form and by a time as McKesson prescribes; provided that such election is made and becomes irrevocable not later than thirty days following the date such newly Eligible Executive or Eligible Director first becomes eligible to participate in the Plan and provided further that such election to defer compensation applies only to compensation earned after the date the deferral election becomes irrevocable or at such later time that the Administrator prescribes. In compliance with this Section 2(b), only a prorated portion of an Eligible Executive’s bonus (other than a bonus that is performance-based compensation as defined in Section 2(c) below) may be deferred if the Eligible Executive’s initial deferral election is made after the performance period applicable to the bonus has begun.

c.Election to Defer Performance-Based Compensation. To the extent that compensation paid under the Management Incentive Plan, the Long-Term Incentive Plan or any other Company-sponsored incentive plan is “performance-based compensation” as defined in Treasury Regulation section 1.409A-1(e), an election to defer payments made pursuant to the Management Incentive Plan, Long-Term Incentive Plan or other Company-sponsored bonus plan may be made not later than six months prior to the end of the applicable performance period or such earlier time as the Administrator may prescribe; provided, however, that such election shall be made prior to the date that compensation paid under the Management Incentive Plan compensation, Long-Term Incentive Plan or other Company-sponsored incentive plan, whichever is applicable, is substantially certain to be paid or readily ascertainable.

d.Election to Defer Other Compensation. The Administrator, in its sole discretion, may permit other types of compensation to be deferred under the Plan; provided, however, the Administrator terms and conditions of such deferrals shall be included in the applicable deferral election form and in accordance with Code Section 409A and the regulations promulgated and guidance issued thereunder.

3.Company Discretionary Contributions. The Compensation Committee shall have the sole discretion to determine an amount credited to a Participant’s Account as a “Discretionary Contribution.” A

Discretionary Contribution may be subject to such terms or conditions, including but not limited to vesting, as the Compensation Committee may specify in its discretion at the time the Discretionary Contribution is credited to a Participant’s Account. Except with respect to the Company’s executive officers, the Compensation Committee may delegate its authority under this Section C.3 to the Administrator.

4.Notification of Participants. The Administrator shall annually notify each Eligible Executive and each Eligible Director that he or she may participate in the Plan for the next Year. Such notice shall also set forth the Declared Rate for the next Year.

5.Relation to Other Plans.

a.Participation in Other Plans. An Eligible Executive or an Eligible Director may participate in this Plan and may also participate in any other benefit plan of the Company in effect from time to time for which he or she is eligible, unless the other plan may otherwise exclude participation on the basis of eligibility for, or participation in, this Plan. No amounts may be deferred under this Plan which have been deferred under any other plan of the Company and the Administrator may modify or render invalid a Participant’s election prior to such election becoming irrevocable to accommodate deferrals made under other plan(s). Deferrals under this Plan may result in a reduction of benefits payable under the Social Security Act, the Retirement Plan and the PSIP.

b.Automatic Deferral. An Eligible Executive’s base salary deferrals and annual bonus award deferrals (but not DCAP housing deferrals, sign-on and retention bonus deferrals and Long-Term Incentive Plan award deferrals) shall be credited, in a separate Account under the Plan with an amount calculated to be the Matching Employer Contribution percentage that would have been credited to the Eligible Executive’s PSIP account if five percent (5%) of such deferrals under DCAP III had been made under the PSIP. For these purposes, Matching Employer Contribution shall have the meaning defined in the PSIP.


D.	AMOUNTS OF DEFERRAL

1.Minimum Deferral. The minimum amount that an Eligible Executive may defer under this Plan for any Year is $5,000 of base salary, or $5,000 of any annual bonus award(s) and $5,000 of any Long-Term Incentive Plan award. The minimum amount of compensation that an Eligible Director may defer for any Year is $5,000.

2.Maximum Deferral for Eligible Executives. The maximum amount of compensation which an Eligible Executive may defer under this Plan for any Year is (i) 75% of the amount of such Eligible Executive’s base salary for such Year, and (ii) 90% of any annual bonus award and/or any Long-Term Incentive Plan award determined and payable to him or her in such Year. Additionally, the Administrator may change the maximum amount (expressed as a percentage limit) of base salary that Eligible Executives as a group may defer under the Plan for any Year. Notwithstanding these limits, deferrals may be reduced by the Company as permitted under Treasury Regulation section 1.409A-3(j)(4).

3.Maximum Deferral for Eligible Directors. The maximum amount of compensation which an Eligible Director may defer under this Plan for any Year is the amount of any annual retainer (other than the portion of the annual retainer subject to Mandatory Deferral under and as defined in the 1997 Non-Employee Directors’ Equity Compensation and Deferral Plan) and other fees from McKesson earned by him or her in any such Year.


E.	PAYMENT OF DEFERRED COMPENSATION

1.Book Account and Interest Credit. Compensation deferred by a Participant and any vested Discretionary Contributions under the Plan shall be credited to a separate bookkeeping account for such Participant (the “Account”). (Sub-Accounts may be established for each Year for which the Participant elects to defer compensation.) Interest or earnings shall be credited to each Account for each Year at a rate equal to a rate declared or any other measurement device (the “Declared Rate”) approved by the Compensation Committee acting in its sole discretion after taking into account, among other things, the following factors: McKesson’s cost of funds, corporate tax brackets, expected amount and duration of deferrals, number and age of eligible Participants, expected time and manner of payment of deferred amounts, and expected performance of available fixed-rate insurance contracts covering the lives of Participants. Notwithstanding the foregoing, if a Change in Control occurs, the Declared Rate for the balance of the calendar year in which the Change in Control occurs and for the two calendar years immediately following the year in which the Change in Control occurs shall not be less than the Declared Rate as in effect on the day before the Change in Control occurs. Interest or earnings on each Account balance shall be compounded daily on each business day within the Year to yield the Declared Rate for the Year. Interest or earnings shall be credited to each Account as of the end of each business day.

2.Interest shall be credited to each Account (including Sub-Accounts established thereunder) for each Year at a rate equal to a rate declared by the Compensation Committee acting in its sole discretion after taking into account, among other things, the following factors: McKesson’s cost of funds, corporate tax brackets, expected amount and duration of deferrals, number and age of eligible Participants, expected time and manner of payment of deferred amounts, and expected performance of available fixed-rate insurance contracts covering the lives of Participants (the “Declared Rate”). Notwithstanding the foregoing, if a Change in Control (as defined in Section K.5 below) occurs, the Declared Rate for the balance of the calendar year in which the Change in Control occurs and for the two calendar years immediately following the year in which the Change in Control occurs shall not be less than the Declared Rate as in effect on the day before the Change in Control occurs. Interest on each Account balance shall be compounded daily on each business day within the Year to yield the Declared Rate for the Year. In the case of installment payments as provided in Section E.4 below, interest shall be credited on all amounts remaining in a Participant’s Account until all amounts are paid out. Interest shall be credited to each Account as of the end of each business day .

3.Length of Deferral. An Eligible Executive or Eligible Director shall elect in writing, and file with the Administrator, at the same time as such Eligible Executive or Eligible Director makes any election to defer compensation, the period of deferral with respect to such election, subject to the minimum required period of deferral and the maximum permissible period of deferral. The minimum required period of deferral is five years after the end of the Year for which compensation is deferred. Notwithstanding the foregoing, the five-year minimum deferral period shall not apply to payments made as a result of death, Disability, Retirement, Separation from Service, a Change in Control or Unforeseeable Emergency. Payment must commence no later than the end of the maximum period of deferral, which is the January following the year in which the Eligible Executive reaches age 72 or, in the case of an Eligible Director, the January after McKesson’s annual meeting of stockholders next following the Eligible Director’s 72nd birthday; provided, however, no payment shall be paid or commence which will cause an impermissible acceleration of such payment under Treasury Regulation section 1.409A-(3)(j).

4.Election of Form and Time of Payment. A Participant shall elect in writing, and file with the Administrator, at the same time as any election to defer compensation, a form and time of payment of benefits under this Plan from the following:

a.Form.

i.Payment of the amount credited to the Participant’s Account in a single sum.

ii.Payment of amounts credited to the Participant’s Account in any specified number of approximately equal annual installments (not in excess of ten). For purposes of this Plan, installment payments shall be treated as a single distribution under Section 409A of the Code.

b.Time.

i.The lump sum or first installment to be paid in the earlier of the first January or June that is at least six months following the Year of Participant’s Retirement, Disability or death.

ii.Subject to Section E.3, the lump sum or first installment to be paid in January of the year designated by the Participant; provided, however, Participant shall elect a payment date, or payment commence date, which is no later than the end of the Maximum Period of Deferral and if Participant elects a distribution date which is subsequent to the Maximum Period of Deferral, the election as to the time of distribution shall be deemed void immediately prior to the time such election is irrevocable and distributions shall be made under paragraph i. above.

iii.Subject to Section E.3, the lump sum or first installment to be paid in two or more Januarys designated by the Participant following the Year of Participant’s Retirement, Disability or death.

The Participant may elect a different time and/or form of distribution for Retirement, Disability or death.

c.Discretionary Contributions. If the Compensation Committee designates a Participant as eligible to receive a Discretionary Contribution, then the Participant may elect the time and form of payment with respect to such Discretionary Contribution prior to the first day of the calendar year in which the earlier of (i) the Discretionary Contribution is first credited (whether vested or unvested), or (ii) the Discretionary Contribution is earned, and otherwise in accordance with Section E.4.a and E.4.b. If a Participant does not or may not make an election with respect to the time and form of payment of a Discretionary Contribution, then such Discretionary Contribution will be distributed in the same time and form as provided in Participant’s election for other deferred compensation under this Plan for the year in which the Discretionary Contribution was first credited (whether vested or unvested) to Participant’s Account. In the absence of an applicable election, the Discretionary Contribution will be distributed in accordance with Section E.6.

5.Modification of Elections. Once such an election has been made, the Eligible Executive or Eligible Director may modify the time and/or form of distributions made under the Plan, provided that:

a.such alteration is made at least one year prior to the earliest date the Participant could have received distribution of the amounts credited to his or her Account under the earlier election, and

b.such alteration does not provide for the receipt of such amounts earlier than five years from the originally scheduled distribution date. A change to the time and form of a distribution may be modified or revoked until 12 months prior to the time a distribution is originally scheduled to be made, at which time such change shall become irrevocable. The last valid election accepted by the Administrator shall govern the payout; provided, however, if a modification under this Section E.5 is determined immediately prior to such modification becoming irrevocable to cause a payment date to be, or payment commence date begin, after later than the end of the Maximum Period of Deferral such modification shall be deemed to be

revoked immediately prior to the time such modification become irrevocable and distributions shall be made as if Participant had not modified his or her election.

6.Default Form of Distribution. If no valid election is made with respect to Section E.4, then payment of the amount credited to the Participant’s Account shall be made in a single sum to be paid in the earlier of the first January or June that is at least six months following the earlier of the Participant’s Retirement, Disability or death.

7.Payments on Separation from Service. If a Participant Separates from Service for any reason other than Retirement, Disability or death, then, notwithstanding the election made by the Participant pursuant to Section E.4 above, the entire undistributed amount credited to his or her Account shall be paid in the form of a lump sum in the earlier of the first January or June that is at least six months following the date the Participant Separates from Service.

8.Delayed Distribution to Specified Employees. Notwithstanding any other provision of this Section E to the contrary, a distribution scheduled to be made upon Separation from Service to a Participant who is identified as a Specified Employee as of the date he Separates from Service shall not be paid within the time that is six months following the Participant’s Separation from Service. Any payment that otherwise would have been made pursuant to this Section E during such six-month period, if any, shall be made in the seventh month following the month in which Participant’s Separation from Service occurs. The identification of a Participant as a Specified Employee shall be made by the Administrator in his or her sole discretion in accordance with Section K.27 of the Plan and Sections 416(i) and 409A of the Code and the regulations promulgated thereunder.

9.Payments on Death. An election made as to the the payment of the Participant’s Account pursuant to Participant’s death shall be paid to his or her Beneficiary if such Participant has not yet received or begun receiving a distribution under the Plan. If, however, a Participant is in-pay status at the time of death, distribution of the Account, or portion of the Account, that is in-pay shall continue to be distributed to the Beneficiary as Participant elected to receive such distribution. The Beneficiary shall have to right to elect a different time or form of payment of distributions made under the Plan.

10.Deminimis Cashout. Notwithstanding the Participant’s election, the Administrator in its sole discretion may distribute an Account to a Participant or a Beneficiary in a single payment if the value of the Account, and any other plan or arrangement with respect to which deferrals of compensation are treated as having been deferred under a single nonqualified deferred compensation plan under Treasury Regulation section 1.409A-1(c)(2), is less than the Code Section 401(g)(1)(B) limit.

11.Designation of Beneficiary. A Participant may designate any person(s) or any entity as his or her Beneficiary. Designation shall be in writing and shall become effective only when filed with the Administrator. Such filing must occur before the Participant’s death. A Participant may change the Beneficiary, from time to time, by filing a new written designation with the Administrator. If the Participant fails to effectively designate a Beneficiary in accordance with the Administrator’s procedures or the person designated by the Participant is not living at the time the distribution is to be made, then the Participant’s Beneficiary shall be the Participant’s surviving spouse, if any, or, if there is no surviving spouse, the Participant’s surviving children, if any, in equal shares, or if there are no surviving children, the Participant’s estate.

12.Payments Due to an Unforeseeable Emergency. The Administrator may, in his or her sole discretion, cancel Participant’s deferral election and direct payment to a Participant of all or of any portion of the Participant’s Account balance, if necessary, notwithstanding an election under Section E.4 above, at

any time that the Administrator determines that such Participant has suffered an Unforeseeable Emergency and requires action to be taken under this Section E.12.

13.Prohibition on Acceleration. Notwithstanding any other provision of the Plan to the contrary, no distribution will be made from the Plan that would constitute an impermissible acceleration of payment as defined in Section 409A(a)(3) of the Code and the regulations promulgated thereunder.


F.	SOURCE OF PAYMENT

Amounts paid under this Plan shall be paid from the general funds of McKesson, and each Participant and his or her Beneficiaries shall be no more than unsecured general creditors of McKesson with no special or prior right to any assets of the Company for payment of any obligations hereunder. Nothing contained in this Plan shall be deemed to create a trust of any kind for the benefit of any Participant or Beneficiary, or create any fiduciary relationship between the Company and any Participant or Beneficiary with respect to any assets of the Company.


G.	MISCELLANEOUS

1.Withholding. Each Participant and Beneficiary shall make appropriate arrangements with McKesson for the satisfaction of any federal, state or local income tax withholding requirements and Social Security or other employment tax requirements applicable to the payment of benefits under this Plan. If no other arrangements are made, McKesson may provide, at its discretion, for such withholding and tax payments as may be required.

2.No Assignment.

a.Other than as provided in Section G.2.b below, the benefits provided under this Plan may not be alienated, assigned, transferred, pledged or hypothecated by any person, at any time or to any person whatsoever. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishments or executions to the fullest extent allowed by law.

b.If a court of competent jurisdiction determines pursuant to a judgment, order or approval of a marital settlement agreement that all or any portion of the benefits payable hereunder to a Participant constitute community property of the Participant and his or her spouse or former spouse (hereafter, the “Alternate Payee”) or property which is otherwise subject to division by the Participant and the Alternate Payee, a division of such property shall not constitute a violation of Section G.2.a, and any portion of such property may be paid or set aside for payment to the Alternate Payee. The preceding sentence of this Section G.2.b, however, shall not create any additional rights and privileges for the Alternate Payee (or the Participant) not already provided under the Plan; in this regard, the Administrator shall have the right to refuse to recognize any judgment, order or approval of a martial settlement agreement that provides for any additional rights and privileges not already provided under the Plan, including without limitation, with respect to form and time of payment.

3.Applicable Law and Severability. The Plan hereby created shall be construed, administered and governed in all respects in accordance with ERISA and the laws of the State of California to the extent that the latter are not preempted by ERISA. If any provision of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereunder shall continue to be effective.


H.	ADMINISTRATION OF THE PLAN

1.In General. The Administrator of the Plan shall be the Executive Vice President, Human Resources, of McKesson. If the Executive Vice President, Human Resources, is a Participant, any discretionary action taken as Administrator which directly affects him or her as a Participant shall be specifically approved by the Compensation Committee. The Administrator shall have the authority and responsibility to interpret this Plan and shall adopt such rules and regulations for carrying out this Plan as it may deem necessary or appropriate. Decisions of the Administrator shall be final and binding on all parties who have or claim any interest in this Plan.

2.Elections and Notices. All elections and notices made under this Plan shall be filed with the Administrator at the time and in the manner specified by him or her. All elections to defer compensation under this Plan shall be irrevocable.


I.	AMENDMENT OR TERMINATION OF THE PLAN

1.Amendment. The Compensation Committee may at any time amend this Plan. Such action shall be prospective only and shall not adversely affect the rights of any Participant or Beneficiary to any benefit previously earned under this Plan. The foregoing notwithstanding, no amendment adopted following the occurrence of a Change in Control shall be effective if it (a) would reduce the Declared Rate for the balance of the calendar year in which the Change in Control occurs or for the two calendar years immediately following the year in which the Change in Control occurs to a rate lower than the Declared Rate as in effect on the day before the Change in Control occurred or (b) modify the provisions of (a) above.

2.Termination. The Board in its discretion may at any time terminate the Plan in accordance with Treasury Regulation section 1.409A-3(j)(4)(ix).


J.	CLAIMS AND APPEALS

1.Informal Resolution of Questions. Any Participant or Beneficiary who has questions or concerns about his or her benefits under the Plan is encouraged to communicate with the Human Resources Department of McKesson. If this discussion does not give the Participant or Beneficiary satisfactory results, a formal claim for benefits may be made in accordance with the procedures of this Section J.

2.Formal Benefits Claim - Review by Executive Vice President, Human Resources. A Participant or Beneficiary may make a written request for review of any matter concerning his or her benefits under this Plan. The claim must be addressed to the Executive Vice President, Human Resources, McKesson Corporation, One Post Street, San Francisco, California 94104. The Executive Vice President, Human Resources or his or her delegate (“Executive Vice President”) shall decide the action to be taken with respect to any such request and may require additional information if necessary to process the request. The Executive Vice President shall review the request and shall issue his or her decision, in writing, no later than 90 days after the date the request is received, unless the circumstances require an extension of time. If such an extension is required, written notice of the extension shall be furnished to the person making the request within the initial 90-day period, and the notice shall state the circumstances requiring the extension and the date by which the Executive Vice President expects to reach a decision on the request. In no event shall the extension exceed a period of 90 days from the end of the initial period.

3.Notice of Denied Request. If the Executive Vice President denies a request in whole or in part, he or she shall provide the person making the request with written notice of the denial within the period specified in Section J.2. The notice shall set forth the specific reason for the denial, reference to the specific

Plan provisions upon which the denial is based, a description of any additional material or information necessary to perfect the request, an explanation of why such information is required, and an explanation of the Plan’s appeal procedures and the time limits applicable to such procedures, including a statement of the claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on review.

4.Appeal to Executive Vice President.

a.A person whose request has been denied in whole or in part (or such person’s authorized representative) may file an appeal of the decision in writing with the Executive Vice President within 60 days of receipt of the notification of denial. The appeal must be addressed to: Executive Vice President, Human Resources, McKesson Corporation, One Post Street, San Francisco, California 94104. The Executive Vice President, for good cause shown, may extend the period during which the appeal may be filed for another 60 days. The appellant and/or his or her authorized representative shall be permitted to submit written comments, documents, records and other information relating to the claim for benefits. Upon request and free of charge, the applicant should be provided reasonable access to and copies of, all documents, records or other information relevant to the appellant’s claim.

b.The Executive Vice President’s review shall take into account all comments, documents, records and other information submitted by the appellant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The Executive Vice President shall not be restricted in his or her review to those provisions of the Plan cited in the original denial of the claim.

c.The Executive Vice President shall issue a written decision within a reasonable period of time but not later than 60 days after receipt of the appeal, unless special circumstances require an extension of time for processing, in which case the written decision shall be issued as soon as possible, but not later than 120 days after receipt of an appeal. If such an extension is required, written notice shall be furnished to the appellant within the initial 60-day period. This notice shall state the circumstances requiring the extension and the date by which the Executive Vice President expects to reach a decision on the appeal.

d.If the decision on the appeal denies the claim in whole or in part written notice shall be furnished to the appellant. Such notice shall state the reason(s) for the denial, including references to specific Plan provisions upon which the denial was based. The notice shall state that the appellant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits. The notice shall describe any voluntary appeal procedures offered by the Plan and the appellant’s right to obtain the information about such procedures. The notice shall also include a statement of the appellant’s right to bring an action under Section 502(a) of ERISA.

e.The decision of the Executive Vice President on the appeal shall be final, conclusive and binding upon all persons and shall be given the maximum possible deference allowed by law.

5.Exhaustion of Remedies. No legal or equitable action for benefits under the Plan shall be brought unless and until the claimant has submitted a written claim for benefits in accordance with Section J.2, has been notified that the claim is denied in accordance with Section J.3, has filed a written request for a review of the claim in accordance with Section J.4, and has been notified in writing that the Executive Vice President has affirmed the denial of the claim in accordance with Section J.4.


K.	DEFINITIONS

For purposes of this Plan, the following terms shall have the meanings indicated:

1.“Account” means the Account specified in Section E.1.

2.“Administrator” shall mean the person specified in Section H.

3.“Beneficiary” shall mean the person or entity described by Section E.11.

4.“Board” shall mean the Board of Directors of McKesson.

5.“Change in Control” shall mean the occurrence of any change in ownership of McKesson, change in effective control of McKesson, or change in the ownership of a substantial portion of the assets of McKesson, as defined in Treasury Regulation section 1.409A-3(i)(5), the regulations thereunder, and any other published interpretive authority, as issued or amended from time to time.

6.“Code” shall mean the Internal Revenue Code of 1986, as amended.

7.“Company” shall mean McKesson and any affiliate that would be considered a service recipient for purposes of Treasury Regulation section 1.409A-1(g).

8.“Compensation Committee” shall mean the Compensation Committee of the Board.

9.“Declared Rate” shall have the meaning described in Section E.1.

10.“Disabled” or “Disability” shall mean that an individual is determined by the Social Security Administration to be totally disabled.

11.“Discretionary Contribution” shall mean a contribution made to a Participant’s Account in the Compensation Committee’s discretion pursuant to Section C.3.

12.“Eligible Director” shall mean a member of the Board described by Section C.1.b.

13.“Eligible Executive” shall mean an employee of the Company selected as being eligible to participate in this Plan under Section C.1.a.

14.“Employer” shall mean McKesson and any other affiliate that would be considered a service recipient or employer for purposes of Treasury Regulation section 1.409A-1(h)(3).

15. “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

16.“Identification Date” shall mean each December 31.

17.“Maximum Period of Deferral” shall mean the January following the year in which the Eligible Executive reaches age 72 or, in the case of an Eligible Director, the January after McKesson’s annual meeting of stockholders next following the Eligible Director’s 72nd birthday.

18.“McKesson” shall mean McKesson Corporation, a Delaware corporation.

19.“Participant” shall be any executive of the Company or member of the Board for whom amounts are credited to an Account under this Plan. Upon the Participant’s death, the Participant’s Beneficiary shall be a Participant until all amounts are paid out of the Participant’s Account.

20.“Plan” shall mean the McKesson Corporation Deferred Compensation Administration Plan III (“DCAP III”).

21.“PSIP” shall mean the McKesson Corporation Profit-Sharing Investment Plan.

22.“Prior Plan” shall mean the McKesson Corporation Deferred Compensation Administration Plan II (“DCAP II”)

23.“Retirement” shall mean Separation from Service after the date in which the Participant attains age 50 and has at least five Years of Service with the Company. Notwithstanding the foregoing, for purposes of this Plan, Retirement for an Eligible Director shall mean cessation of service as a member of the Board on or after the completion of at least six successive years as a member of the Board.

24.“Retirement Plan” shall mean the McKesson Corporation Retirement Plan.

25.“Separation from Service” or “Separates from Service” shall mean termination of employment with the Employer, except in the event of death or Disability, as provided under Treasury Regulation section 1.409A-1(h)(1)(ii).. A Participant shall be deemed to have had a Separation from Service if the Participant’s service with the Employer is reduced to an annual rate that is equal to or less than twenty percent of the services rendered, on average, during the immediately preceding three years of service with the Employer (or if providing service to the Employer less than three years, such lesser period).

26.“Service” shall mean an Eligible Executive’s employment with the Company, commencing with the first day of such employment and ending on the day the Eligible Executive has a Separation from Service.

27.“Specified Employee” shall mean a Participant who, on an Identification Date, is:

a.An officer of the Company having annual compensation greater than the compensation limit in Section 416(i)(1)(A)(i) of the Code, provided that no more than fifty officers of the Company shall be determined to be Specified Employees as of any Identification Date;

b.A five percent owner of the Company; or

c.A one percent owner of the Company having annual compensation from the Company of more than $150,000.

28.“Unforeseeable Emergency” shall have the same meaning as provided in Section 409A(a)(2)(B)(ii) of the Code.

29.“Year” shall mean the calendar year.

30.“Year of Service” shall mean a period of 365 aggregate days of Service (including holidays, weekends and other non-working days).


L.	SUCCESSORS

This Plan shall be binding on McKesson and any successors or assigns thereto.


M.	Execution

To record the adoption of the amended and restated Plan by the Compensation Committee of the Board of Directors of McKesson Corporation at a meeting held on July 29, 2014, effective as of January 1, 2014.

MCKESSON CORPORATION

/s/ Jorge L. Figueredo

Jorge L. Figueredo

Executive Vice President, Human Resources

Exhibit 10.3

OUTSIDE DIRECTOR

McKESSON CORPORATION
STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO
RESTRICTED STOCK UNITS GRANTED TO
OUTSIDE DIRECTORS PURSUANT TO THE 2013 STOCK PLAN


I.	INTRODUCTION

The following terms and conditions shall apply to Restricted Stock Unit Awards granted under the Plan and are subject to the terms and conditions of the Plan. This Statement of Terms and Conditions is intended to meet the requirements of Code Section 409A and any regulations and rules promulgated thereunder. In the event of any inconsistency between this Statement of Terms and Conditions and the Plan, the Plan shall govern. Capitalized terms not otherwise defined in this Statement of Terms and Conditions shall have the meaning set forth in the Plan.


II.	RESTRICTED STOCK UNITS

1. Award Agreement. A Restricted Stock Unit Award granted to an Outside Director under the Plan shall be evidenced by a Restricted Stock Unit Agreement to be executed by the Outside Director and the Corporation setting forth the terms and conditions of the Restricted Stock Unit Award. Each Restricted Stock Unit Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions and together both documents shall constitute the Restricted Stock Unit Agreement. The Restricted Stock Units are also subject to the terms and conditions of the Plan.

2. Terms and Conditions. The Administrator administering the Plan has authority to determine the Outside Directors to whom, and the time or times at which, grants of Restricted Stock Units will be made, the number of Units to be awarded, and all other terms and conditions of such awards. With respect to annual Restricted Stock Unit Awards granted to Outside Directors under the Plan, such awards shall be subject to the following terms, conditions and restrictions.

(A) Grant Date. Each Outside Director may be granted a Restricted Stock Unit Award on the date of each annual meeting of stockholders. An Outside Director that is elected to the Board between annual meetings of stockholders may also be granted a Restricted Stock Unit Award on the date that the Board determines in its sole discretion.

(B) Number of Units. Unless otherwise determined by the Board or the Committee, the number of Units granted for the annual meeting grant will be determined by dividing

the Fair Market Value of a Share on the date of grant into $150,000 (with any fractional Unit rounded up to the nearest whole Unit). In addition, unless otherwise determined by the Board or the Committee, the Lead Independent Director shall be granted an annual meeting grant determined by dividing the Fair Market Value of a Share on the date of grant into $25,000 (with any fractional Unit rounded up to the nearest whole Unit). Notwithstanding the foregoing, in no event shall the aggregate number of Units granted to a director pursuant to such annual meeting grant or grants exceed 5,000. A newly elected Outside Director may receive a prorated annual meeting grant effective upon the date of the Outside Director’s election to the Board.

(C) No Restrictions. Each Restricted Stock Unit Award granted to an Outside Director will be fully vested on the date of grant.

3. Dividend Equivalents. Dividend equivalents in respect of Restricted Stock Units may be credited on behalf of an Outside Director to a deferred cash account or converted into additional Restricted Stock Units, which will be subject to all of the terms and conditions of the underlying Restricted Stock Unit Award. Currently, dividend equivalents in respect of Restricted Stock Units granted to Outside Directors are credited to a deferred cash account and accrue interest at a rate determined by the Committee until such time as the underlying Shares are issued.

4. Assignability. An Outside Director shall not be permitted to sell, transfer, pledge, assign or encumber Restricted Stock Units, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act.

5. No Stockholder Rights. Neither an Outside Director nor any person entitled to exercise an Outside Director’s rights in the event of the Outside Director’s death shall have any of the rights of a stockholder with respect to a Restricted Stock Unit Award except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to the underlying Shares paid upon the settlement of any Restricted Stock Unit Award as described in Section II.6 below.

6. Time of Payment of Restricted Stock Units. Except as noted in Section II.7 below, Restricted Stock Units granted to Outside Directors shall not be paid until after the Outside Director’s separation of service with the Corporation (“Automatic Deferral Requirement”). “Separation of service” shall have the meaning provided under the McKesson Corporation Deferred Compensation Administration Plan III (“DCAP III”). Payment shall be made in Shares in the form of an appropriate book entry entered in the records of the Corporation’s transfer agent recording the Outside Director’s unrestricted interest in the number of Shares subject to the Restricted Stock Unit Award.

7. Satisfaction of Director Stock Ownership Guidelines. For those Outside Directors who have met the Director Stock Ownership Guidelines in effect at the time, Restricted Stock Unit grants shall not be subject to the Automatic Deferral Requirement and such grants will be

immediately converted into Shares and distributed to the Outside Director; provided, however, that the Outside Director may elect to defer receipt of the Shares underlying the Restricted Stock Units.

8. Deferrals of Restricted Stock Units. Deferrals of Restricted Stock Units, whether elective or pursuant to the Automatic Deferral Requirement, shall be subject to the terms and conditions of DCAP III.


III.	MISCELLANEOUS

1. No Effect on Terms of Service with the Corporation. Nothing contained in this Statement of Terms and Conditions, the Plan or a Restricted Stock Unit Agreement shall affect the Corporation’s right to terminate the service of any Outside Director.

2. Grants to Outside Directors in Foreign Countries. If an Outside Director is not a United States citizen, the Board has the full discretion to deviate from this Statement of Terms and Conditions in order to adjust a Restricted Stock Unit Award to prevailing local conditions, including custom and legal and tax requirements. Furthermore, the Corporation reserves the right to impose other requirements on the Outside Director’s participation in the Plan, on the Award and on any Shares acquired under the Plan, to the extent the Corporation determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Plan, and to require the Outside Director to sign any additional agreements or undertaking that may be necessary to accomplish the foregoing.

3. Information Notification. Any information required to be given under the terms of a Restricted Stock Unit Award shall be addressed to the Corporation in care of its Corporate Secretary at McKesson Corporation, One Post Street, San Francisco, California 94104, and any notice to be given to an Outside Director shall be addressed to the Outside Director at the address indicated beneath the Outside Director’s name on the Restricted Stock Unit Agreement or such other address as either party may designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office.

4. Administrator Decisions Conclusive. All decisions of the Administrator administering the Plan upon any questions arising under the Plan, under this Statement of Terms and Conditions, or under a Restricted Stock Unit Agreement, shall be conclusive and binding on all persons.

5. No Effect on Other Benefit Plans. Nothing herein contained shall affect an Outside Director’s right, if any, to participate in and receive benefits from and in accordance with the then current provisions of any benefit plan or program offered by the Corporation.

6. Withholding. Each Outside Director shall agree to make appropriate arrangements with the Corporation for satisfaction of any applicable federal, state or local income tax withholding requirements or payroll tax requirements, if any is required.

7. Successors. This Statement of Terms and Conditions and the Restricted Stock Unit Agreements shall be binding upon and inure to the benefit of any successor or successors of the Corporation. “Outside Director” as used herein shall include the Outside Director’s Beneficiary.

8. Delaware Law. The interpretation, performance, and enforcement of this Statement of Terms and Conditions and all Restricted Stock Unit Agreements shall be governed by the laws of the State of Delaware.

CHIEF EXECUTIVE OFFICER

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO

OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS,

PERFORMANCE SHARES AND TSR UNIT AWARDS GRANTED TO
CHIEF EXECUTIVE OFFICER PURSUANT TO THE 2013 STOCK PLAN

Effective for Grants Beginning May 27, 2014


I.	INTRODUCTION

The following terms and conditions shall apply to an Award granted under the Plan and are subject to the terms and conditions of the Plan. This Statement of Terms and Conditions is intended to meet the requirements of Code Section 409A and any rules promulgated thereunder. In the event of any inconsistency between this Statement of Terms and Conditions and the Plan, the Plan shall govern. Capitalized terms not otherwise defined in this Statement of Terms and Conditions shall have the meaning set forth in the Plan.


II.	OPTIONS

1. Option Agreement. An Option granted under the Plan shall be evidenced by an Option Agreement setting forth the terms and conditions of the Option, including whether the Option is an Incentive Stock Option or a Nonstatutory Stock Option and the number of Shares subject to the Option. Each Stock Option Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions and together both documents shall constitute the Option Agreement. The Option is also subject to the terms and conditions of the Plan.

2. Exercise Price. The Exercise Price of an Option, as specified in the Option Agreement, shall be equal to or greater than the Fair Market Value of the Shares underlying the Option on the Grant Date.

3. Option Period. An Option shall be exercisable only during the applicable Option Period, and during such Option Period the exercisability of the Option shall be subject to the vesting provisions of Section II.4 as modified by the rules set forth in Sections II.5 and V. The Option Period shall be not more than seven years from the Grant Date.

4. Vesting of Right to Exercise Options.

Shares shall vest on the third anniversary of the Grant Date; and (iv) the remaining 25% of the Shares subject to the Option shall vest on the fourth anniversary of the Grant Date. Notwithstanding the foregoing, the Administrator may specify a different vesting schedule at the time the Option is granted, which will be specified in the Option Grant Notice.

(B) Any vested portion of an Option not exercised hereunder shall accumulate and be exercisable at any time on or before the Expiration Date, subject to the rules set forth in Sections II.5 and V. No Option may be exercised for less than 5% of the total number of Shares then available for exercise under such Option. In no event shall the Corporation be required to issue fractional Shares.

5. Limits on Option Period and Acceleration of Vesting. The Option Period may end before the Expiration Date, and in certain circumstances the vesting schedule of an Option may be accelerated (subject to the provisions of Section V), as follows:

(A) If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates during the Option Period for reasons other than for Cause, Long‑Term Disability, Normal Retirement, Early Retirement or death, the Option Period shall end on the earlier of (x) 90 days after the date of the Participant’s termination of employment and (y) the Expiration Date, and in all cases the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing Section II.4 at the time of such termination of employment. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(B) If the Participant’s employment is terminated for Cause during the Option Period, the Option Period shall end on the date of such termination of employment and the Option shall thereupon not be exercisable to any extent whatsoever.

(C) If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates due to Long‑Term Disability during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated, the Option shall become fully exercisable and the Option Period shall end on the earlier of (x) three years after the date of the Participant’s termination of employment and (y) the Expiration Date.

(D) If the Participant’s employment is terminated:

(i) By reason of Normal Retirement, the vesting schedule of the Participant’s Option shall be accelerated and the Option shall become fully exercisable as of the date of Normal Retirement; or

(ii) By reason of Early Retirement, the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing Section II.4 at the time of such Early Retirement.

(iii) With respect to an Option held by a Participant at Normal Retirement or Early Retirement, the Option Period for that portion of the Option designated as a Nonstatutory Stock Option shall end on the earlier of (x) three years after the date of such retirement and (y) the Expiration Date.

(E) If a Participant should die (i) while in the employ of the Corporation or an Affiliate and (ii) during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated and the Option shall become fully exercisable, the Option Period shall end on the earlier of (x) three years after the date of death and (y) the Expiration Date, and the Participant’s Beneficiary may exercise the entire unexercised portion of the then exercisable Shares covered by such Option (or any lesser amount) remaining on the date of death.

(F) If a Participant who ceases to be a bona fide employee of the Corporation or an Affiliate is subsequently rehired prior to the expiration of the Participant's Option, then the Option shall continue to remain outstanding until the earlier of (x) such time as the Participant subsequently terminates employment and (y) the Expiration Date. Upon the Participant’s subsequent termination of employment, the post‑termination exercise period calculated pursuant to the terms and conditions of this Section II.5 shall be reduced by the number of days between the date of the Participant’s initial termination of employment and the Participant's re‑hire date; provided, however, that if the rehired Participant continues to be employed by the Corporation or an Affiliate for at least one year from the Participant's rehire date, then the post termination exercise period for the Option shall be determined in accordance with Sections II.5(A) through (E) and shall not be adjusted as described in this Section II.5(F).

6. Method of Exercise. A Participant may exercise an Option with respect to all or any part of the exercisable Shares as follows:

the Corporation may accept an attestation by the Participant, in a form prescribed by the Corporation or its authorized representative, that the Participant owns sufficient Shares of record or in an account in street name to satisfy the Exercise Price, and such attestation will be deemed a tender of Shares for purposes of this method of exercise. The Corporation or its authorized representative may accept payment of the amount due upon the exercise of the Option in the form of a Participant’s personal check. Payment may also be made by delivery (including by FAX transmission) to the Corporation or its authorized representative of an executed irrevocable Option exercise form together with irrevocable instructions to an approved registered investment broker to sell Shares in an amount sufficient to pay the Exercise Price plus any applicable Tax-Related Items (as defined in Section VIII.6) and to transfer the proceeds of such sale to the Corporation.

(B) If required by the Corporation, by giving satisfactory assurance in writing, signed by the Participant, the Participant shall give the Participant's assurance that the Shares subject to the Option are being purchased for investment and not with a view to the distribution thereof; provided that such assurance shall be deemed inapplicable to (1) any sale of the Shares by such Participant made in accordance with the terms of a registration statement covering such sale, which has heretofore been (or may hereafter be) filed and become effective under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of the Shares with respect to which, in the opinion of counsel for the Corporation, such assurance is not required to be given in order to comply with the provisions of the Securities Act.

(C) As soon as practicable after receipt of the notice and the assurance described in Sections II.6(A) and (B), the Corporation shall, without transfer or issue tax (except for withholding tax arrangements contemplated in Section VIII.6) and without other incidental expense to the Participant, credit the purchased Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the purchased Shares; provided, however, that the time of such delivery may be postponed by the Corporation for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Exchange Act, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act; and (iii) any Participant, who is a senior executive officer recommended by the Chief Executive Officer of the Corporation and approved by the Administrator may voluntarily transfer any Nonstatutory Stock Option to a Family Member as a gift or through a transfer to an entity in which more than 50% of the voting interests are owned by Family Members (or the Participant) in exchange for an interest in that entity. In the event of any attempt by a Participant to alienate, assign, pledge, hypothecate, or otherwise dispose of an Option or of any right thereunder, except as provided herein, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Corporation at its election may terminate the affected Option by notice to the Participant and the Option shall thereupon become null and void.

8. No Stockholder Rights. Neither a Participant nor any person entitled to exercise a Participant’s rights in the event of the Participant’s death shall have any of the rights of a stockholder with respect to the Shares subject to an Option except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to such Shares upon the exercise of an Option.


III.	RESTRICTED STOCK

1. Restricted Stock Agreement. A Restricted Stock Award granted under the Plan shall be evidenced by a Restricted Stock Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Award. Each Restricted Stock Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions and together both documents shall constitute the Restricted Stock Agreement. The Restricted Stock Award is also subject to the terms and conditions of the Plan.

2. Rights with Respect to Shares of Restricted Stock. Upon written acceptance of a Restricted Stock Award by a Participant, including the restrictions and other terms and conditions described in the Plan and the Restricted Stock Agreement, the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s interest in the Restricted Stock. From and after the Grant Date, the Participant shall have the rights of Common Stock ownership, including the right to vote and to receive dividends on Shares of Restricted Stock, subject to the terms, conditions and restrictions described in the Plan and the Restricted Stock Agreement.

3. Special Restrictions. Each Restricted Stock Award made under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator; provided, however, that no Restricted Stock grant shall be subject to additional terms, conditions and restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth elsewhere in the Plan or the Restricted Stock Agreement.

(A) Restrictions. Until the restrictions imposed on any Restricted Stock grant shall lapse (the “Restriction Period”), Shares of Restricted Stock granted to a Participant (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act and (ii) shall, if the Participant’s continuous employment with the Corporation or any of its Affiliates shall terminate for any reason (except as otherwise provided in the Plan or in Section III.3(B)) be returned to the Corporation forthwith, and all the rights of the Participant to such Shares shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(B) Termination of Employment by Reason of Death, Long‑Term Disability or Normal Retirement. Notwithstanding any provision contained herein or in the Plan or the Restricted Stock Agreement to the contrary, if a Participant who has been in the continuous employment of the Corporation or any of its Affiliates since the Grant Date of a Restricted Stock Award ceases to be a bona fide employee of the Corporation or an Affiliate as a result of death, Long‑Term Disability or Normal Retirement, then the restrictions imposed on any Restricted Stock Award shall lapse as to all Shares granted to such Participant pursuant to such Restricted Stock Award on the date of such termination.

(C) Restriction on Sale. The Compensation Committee reserves the right to impose a restriction on the sale of Shares that the Participant receives upon the vesting and settlement of a Restricted Stock Award, unless the Participant has satisfied the ownership targets applicable to the Participant as provided in the Stock Ownership Policy.

4. Dividends. Cash dividends paid with respect to Restricted Stock during the Restriction Period shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Restricted Stock Award. Stock dividends paid with respect to Restricted Stock during the Restriction Period shall be treated as Restricted Stock which shall be subject to the same restrictions as the original award for the duration of the Restricted Period.

arrangements satisfactory to the Administrator to pay to the Corporation in the year of such grant, any federal, state or local taxes required to be withheld with respect to such Shares in accordance with Section VIII.6 and (B) provide the Administrator with a copy of the election filed with the Internal Revenue Service.

6. Restrictive Legend. Each book entry in the records of the Corporation’s transfer agent evidencing Shares granted pursuant to a Restricted Stock grant may bear an appropriate legend referring to the terms, conditions and restrictions described in the Plan and/or the Restricted Stock Agreement.

7. Expiration of Restricted Period. If and when the Restriction Period applicable to the Restricted Stock expires without a prior forfeiture, Shares shall be credited to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then an appropriate book entry recording the Participant’s interest in the unrestricted Shares shall be entered on the records of the Corporation’s transfer agent.


IV.	RESTRICTED STOCK UNITS AND PERFORMANCE SHARES

1. Award Agreement.

(A) Restricted Stock Units granted under the Plan shall be evidenced by a Restricted Stock Unit Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Units. Each Restricted Stock Unit Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions and together both documents shall constitute the Restricted Stock Unit Agreement. The Restricted Stock Units are also subject to the terms and conditions of the Plan.

(B) Performance Shares granted under the Plan shall be evidenced by a Performance Share Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Performance Shares. Each Performance Share Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions and together both documents shall constitute the Performance Share Agreement. Performance Shares are also subject to the terms and conditions of the Plan.

2. Special Restrictions. Restricted Stock Units and Performance Shares granted under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator, consistent with the terms of the Plan.

(C) Restrictions. If a Participant ceases to be a bona fide employee of the Corporation or any Affiliate (except as otherwise provided in the Plan or in Section IV.2(B)) prior to the lapse of the restrictions imposed on the Award, the unvested Restricted Stock Units or

Performance Shares shall be canceled, and all the rights of the Participant to such Awards shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(D) Termination of Employment by Reason of Death, Long‑Term Disability or Normal Retirement. Notwithstanding any provision contained herein or in the Plan, the Restricted Stock Unit Agreement or Performance Share Agreement to the contrary, if a Participant who has been in the continuous employment of the Corporation or any of its Affiliates since the Grant Date shall, while in such employment, be terminated as a result of Death, Long‑Term Disability or Normal Retirement, then the restrictions imposed on any Award of Restricted Stock Units or Performance Shares shall lapse on the date of such termination.

(E) Restriction on Sale. The Compensation Committee reserves the right to impose a restriction on the sale of Shares that the Participant receives upon the settlement of Restricted Stock Units or Performance Shares, unless the Participant has satisfied the ownership targets applicable to the Participant as provided in the Stock Ownership Policy.

3. Dividend Equivalents. Subject to discretion of the Compensation Committee, dividend equivalents shall be credited in respect of Restricted Stock Units and Performance Shares. Cash dividends shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Award of Restricted Stock Units or Performance Shares (as applicable), and cash dividends, along with accrued interest (if any) on such cash dividends, shall be paid in a lump sum at the same time that the Shares underlying the Restricted Stock Unit or Performance Share Award, and to which the cash dividends relate, are distributed. Stock dividends shall be converted into additional Restricted Stock Units or Performance Shares, which will be subject to all of the terms and conditions of the underlying Restricted Stock Units or Performance Shares, including the same vesting restrictions as the underlying Award.

4. Assignability. A Participant shall not be permitted to sell, transfer, pledge, assign or encumber Restricted Stock Units or Performance Shares, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act.

a book entry has been entered in the records of the Corporation’s transfer agent with respect to the Shares paid upon the settlement of any vested Restricted Stock Units or Performance Shares.

6. Time of Payment of Restricted Stock Units and Performance Shares. Upon the lapse of the restriction imposed on Restricted Stock Units or Performance Shares, all Restricted Stock Units and Performance Shares that were not forfeited pursuant to Section IV.2(A) or V shall be paid to the Participant as soon as reasonably practicable after the restrictions lapse. Payment shall be made in Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then in the form of an appropriate book entry entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the number of Shares subject to the Restricted Stock Units or Performance Shares.

Notwithstanding the foregoing, if a Participant becomes eligible for Normal Retirement prior to the date of the lapse of restriction imposed on the Restricted Stock Units is scheduled to occur and the vesting provisions of Section IV.2(B) apply, then such Restricted Stock Units shall be paid to the Participant in full at the earlier of (x) the date on which the Participant has a Separation from Service, subject to the delay of payment (if applicable) provided in Section VIII.15, and (y) the fixed date on which the lapse of restrictions was originally scheduled to occur. The procedures set forth in Section VIII.6 will be applied for any taxes due upon the lapse of restriction imposed on the Restricted Stock Units due to a Participant’s Normal Retirement eligibility.


V.	TOTAL SHAREHOLDER RETURN (“TSR”) UNIT AWARDS

1. Award Agreement. TSR Unit Awards shall be evidenced by a TSR Unit Target Award Notification to be executed by the Participant and the Corporation setting forth the terms and conditions of the TSR Unit Award. TSR Unit Awards are “Other Share-Based Awards” as provided under Section 11 of the Plan. Each TSR Unit Target Notification shall incorporate by reference and be subject to this Statement of Terms and Conditions, and together both documents shall constitute the TSR Unit Award Agreement. TSR Unit Awards are also subject to the terms and conditions of the Plan.

2. Number of Shares Granted Based on Performance. The performance period of a TSR Unit Award shall be greater than one year, and performance shall be based on such criteria as the Compensation Committee shall determine in its discretion at the beginning of the performance period. Following the end of the performance period, the Compensation Committee shall determine the extent to which the criteria have been achieved, and shall authorize the grant and issuance of Shares in respect of the TSR Unit Award.

3. Special Conditions. TSR Unit Awards shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Compensation Committee, consistent with the terms of the Plan.

(A) Forfeiture. If a Participant ceases to be a bona fide employee of the Corporation or any Affiliate (except as otherwise provided in the Plan or in Section V.3(B)) prior to the end of the performance period, any then-outstanding TSR Unit Awards shall be canceled, and all the rights of the Participant to such Awards shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short-Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Compensation Committee may otherwise expressly determine.

(B) Termination of Employment by Reason of Death, Long-Term Disability or Normal Retirement. Notwithstanding any provision contained herein or in the Plan, the TSR Unit Award Agreement to the contrary, if a Participant who has been in the continuous employment of the Corporation or any of its Affiliates since the Grant Date of such Award ceases to be a bona fide employee of the Corporation or an Affiliate as a result of Death, Long-Term Disability or Normal Retirement, the Participant shall be eligible to receive, following completion of the applicable performance period, an amount in cash equal to the value of a prorated portion of each such TSR Unit Award, equal to (1) the target number of TSR Units subject to such Award, multiplied by (2) the performance criteria determined by the Compensation Committee to apply to such Award, multiplied by (3) a fraction, the numerator of which is the number of whole calendar months, rounded down to the nearest whole month, during which the Participant provided Service to the Corporation during the performance period applicable to such Award, and the denominator of which is the number of calendar months in such performance period; provided, that for purposes of this clause (3), “whole calendar months” shall be calculated commencing on the applicable Grant Date; and provided, however, that in no event shall such amount exceed any applicable cap or limitation set forth in the TSR Unit Target Award Notification. The amount, if any, to be paid under this Section V.3(B) shall be paid in accordance with Section V.7 and, if applicable, Section VIII.14.

(C) Restriction on Sale of Shares. The Compensation Committee reserves the right to impose a restriction on the sale of Shares that the Participant receives with respect to the settlement of a TSR Unit Award, unless the Participant has satisfied the ownership targets applicable to the Participant as provided in the Stock Ownership Policy.

4. Dividend Equivalents. Unless otherwise determined by the Administrator in its sole discretion, Dividend Equivalents shall not be accrued with respect to TSR Unit Awards during the performance period.

5. Assignability. A Participant shall not be permitted to sell, transfer, pledge, assign or encumber all or any portion of a TSR Unit Award.

6. No Stockholder Rights. Neither a Participant nor any person entitled to exercise a Participant’s rights in the event of the Participant’s death shall have any of the rights of a stockholder with respect to a TSR Unit Award, except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to the Shares paid upon the settlement of any TSR Unit Award.

7. Time of Payment of TSR Unit Awards. The Compensation Committee shall determine the extent to which Shares are payable pursuant to a TSR Unit Award as soon as practicable following the end of the performance period, and such Shares shall be paid as soon as practicable thereafter and in any event no later than the end of the period under which payment would be deemed to be a “short-term deferral” as defined in the regulations under Code Section 409A. Except as provided in Section V.3(B), payment shall be made in the form of Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then in the form of an appropriate book entry entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the number of Shares earned pursuant to the TSR Unit Award.


VI.	SPECIAL FORFEITURE AND REPAYMENT RULES

Any other provision of this Statement of Terms and Conditions to the contrary notwithstanding, if the Administrator determines that a Participant has engaged in any of the actions described in 3 below, the consequences set forth in 1 and 2 below shall result:

1. Any outstanding Option shall immediately and automatically terminate, be forfeited and shall cease to be exercisable, without limitation. In addition, any Award of Restricted Stock, Restricted Stock Units, or Performance Shares as to which the restrictions have not lapsed shall immediately and automatically be forfeited, TSR Unit Awards shall immediately and automatically be forfeited and any such Shares of Restricted Stock shall be returned to the Corporation and all of the rights of the Participant to such Awards and the underlying Shares shall immediately terminate.

2. If the Participant exercised an Option within 12 months prior to the date upon which the Corporation discovered that the Participant engaged in any actions described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained by the exercise of such Option measured at the date of exercise. In addition, if the restrictions imposed on any Award of Restricted Stock, Restricted Stock Units or Performance Shares (including any unpaid dividends or Dividend Equivalents) lapsed, or any TSR Unit Award was settled, within 12 months prior to the date the Corporation discovered that the Participant engaged in any action described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained with respect to such Award, measured at the date such Award vested.

3. The consequences described in 1 and 2 above shall apply if the Participant, either before or after termination of employment with the Corporation or its Affiliates:

(A) Discloses to others, or takes or uses for the Participant’s own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know‑how or any other proprietary information or intellectual property belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment, whether or not they are the Participant’s work product. Examples of such confidential information or trade secrets include, without limitation, customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the Participant knows or has reason to know that the Corporation or its Affiliates intends or expects secrecy to be maintained;

(B) Fails to promptly return all documents and other tangible items belonging to the Corporation or its Affiliates in the Participant’s possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to retirement or otherwise;

(C) Fails to provide the Corporation with at least 30 days’ written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Corporation or its Affiliates. As used herein, “business in competition” means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Corporation or its Affiliates at the time of the termination of the Participant’s employment with the Corporation or its Affiliates;

(D) Fails to inform any new employer, before accepting employment, of the terms of this paragraph and of the Participant’s continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment with the Corporation or any of its Affiliates;

(E) Induces or attempts to induce, directly or indirectly, any of the customers of the Corporation or its Affiliates, employees, representatives or consultants to terminate, discontinue or cease working with or for the Corporation or its Affiliates, or to breach any contract with the Corporation or any of its Affiliates, in order to work with or for, or enter into a contract with, the Participant or any third party;

(F) Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Corporation or its Affiliates; or

(G) Fails to meet the Participant’s continuing obligations with respect to non-disclosure, non-competition and/or non-solicitation under the Participant’s agreement with the Corporation or any Affiliate.

The Administrator shall determine in its sole discretion whether the Participant has engaged in any of the acts set forth in (A) through (G) above, and its determination shall be conclusive and binding on all interested persons.

Any provision of this Section V which is determined by a court of competent jurisdiction to be invalid or unenforceable should be construed or limited in a manner that is valid and enforceable and that comes closest to the business objectives intended by such invalid or unenforceable provision, without invalidating or rendering unenforceable the remaining provisions of this Section V.


VII.	CHANGE IN CONTROL

the effective date of the Change in Control) equal to the value of the Restricted Stock Award or Restricted Stock Unit Award (determined using the Corporation’s stock price as of the effective date of the Change in Control), with any restrictions on such restricted stock or restricted stock units lapsing at the same time and manner as the replaced Award; provided, however, that in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of any Replacement Award, the Replacement Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VIII.14), based on the fair market value of the underlying shares on the vesting date, or in the case of options, based on the excess of the fair market value of the underlying shares over the option exercise price on the vesting date. If any Option, Restricted Stock Award, Restricted Stock Unit Award, Performance Share Award or TSR Unit Award that is unvested at the effective time of the Change in Control is not replaced with a Replacement Award, such Award shall immediately vest and, in the case of a Performance Share Award or TSR Unit Award, shall vest based upon deemed attainment of target performance or actual performance achieved, if greater.

If as a result of a Change in Control, the Common Stock continues to be listed for trading on an Exchange, any unvested Option, Restricted Stock Award, or Restricted Stock Unit Award shall continue to vest according to the terms and conditions of such Award and any Performance Share Award or TSR Unit Award shall be replaced with a Restricted Stock Award or Restricted Stock Unit Award where the number of shares subject to such Restricted Stock Award or Restricted Stock Unit Award shall be equal to the number of Shares assuming attainment of target performance or actual performance achieved, if greater, as of the effective date of the Change in Control with any restrictions on such Restricted Stock Award or Restricted Stock Unit Award lapsing at the end of the measuring period over which performance for the replaced Performance Share Award or TSR Unit Award was to be measured prior to the granting of the replacement Award; provided however, that, in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of an Award, such Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VIII.14).


VIII.	MISCELLANEOUS

1. No Effect on Terms of Employment. Participation in the Plan shall not create a right to further employment with the Participant’s employer (the “Employer”) and shall not interfere with the ability of the Employer to terminate, with or without cause, or change the terms of employment of a Participant at any time.

2. Grants to Participants in Foreign Countries. In making grants to Participants in foreign countries, the Administrator has the full discretion to deviate from this Statement of Terms

and Conditions in order to adjust grants under the Plan to prevailing local conditions, including custom and legal and tax requirements. Furthermore, the Corporation reserves the right to impose other requirements on the Participant’s participation in the Plan on the Award and on any Shares acquired under the Plan, to the extent the Corporation determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Plan, and to require the Participant to sign any additional agreements or undertaking that may be necessary to accomplish the foregoing.

3. Information Notification. Any information required to be given under the terms of an Award shall be addressed to the Corporation in care of its Corporate Secretary at McKesson Corporation, One Post Street, San Francisco, California 94104, and any notice to be given to a Participant shall be addressed to such Participant at the address indicated beneath the Participant's name on the Award Agreement or such other address as either party may designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office.

4. Administrator Decisions Conclusive. All decisions of the Administrator administering the Plan upon any questions arising under the Plan or under an Award Agreement, shall be conclusive and binding on all interested persons.

5. No Effect on Other Benefit Plans. Nothing herein contained shall affect a Participant’s right to participate in and receive benefits from and in accordance with the then current provisions of any pensions, insurance or other employment welfare plan or program offered by the Corporation.

6. Withholding. Regardless of any action the Corporation or the Employer takes with respect to any federal, state or local income tax, social insurance, payroll tax, payment on account or other tax-related items related to the Participant’s participation in the Plan and legally applicable to the Participant (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and may exceed the amount actually withheld by the Corporation or the Employer. The Participant further acknowledges that the Corporation and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant, vesting or exercise of the Award, as applicable, the subsequent sale of Shares acquired pursuant to the Plan and the receipt of any dividends and/or dividend equivalents; and (2) do not commit and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Participant has become subject to tax in more than one jurisdiction between the Grant Date and the date of any relevant taxable event, the Participant acknowledges that the Corporation

and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

Prior to any relevant taxable or tax withholding event, as applicable, the Participant will pay or make adequate arrangements satisfactory to the Corporation and/or the Employer, or their respective agents, at their discretion, to satisfy the obligations with regard to all Tax-Related Items by one or a combination of the following: (1) withholding from the Participant’s wages or other cash compensation paid to the Participant by the Corporation and/or the Employer; (2) withholding from proceeds of the sale of Shares acquired under the Plan either through a voluntary sale or through a mandatory sale arranged by the Corporation (on the Participant’s behalf pursuant to this authorization and any other authorization the Corporation and/or the broker designated by the Corporation may require the Participant to sign in connection with the sale of Shares); or (3) withholding Shares to be issued upon grant, vesting/settlement or exercise, as applicable. Calculation of the number of Shares to be withheld shall be made based on the closing price of the Common Stock on the New York Stock Exchange on the date that the amount of tax to be withheld is determined. In no event, however, shall the Corporation be required to issue fractional Shares. With respect to an Award other than an Option, if adequate arrangements to satisfy the obligations with regard to all Tax-Related Items are not made by the Participant with the Corporation and/or the Employer prior to the relevant taxable event, the Corporation will satisfy such obligations as provided above in (3) of this paragraph.

To avoid negative accounting treatment, the Corporation may withhold or account for Tax-Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates. If the obligation for Tax-Related Items is satisfied by withholding in Shares, for tax purposes, the Participant will be deemed to have been issued the full number of Shares subject to the Award, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Participant’s participation in the Plan.

Finally, the Participant shall pay to the Corporation or the Employer any amount of Tax-Related Items that the Corporation or the Employer may be required to withhold or account for as a result of the Participant’s participation in the Plan that cannot be satisfied by the means previously described. The Corporation may refuse to issue or deliver the Shares or the proceeds of the sale of Shares if the Participant fails to comply with the Participant's obligations in connection with the Tax-Related Items.

The Administrator shall be authorized to establish such rules, forms and procedures as it deems necessary to implement the foregoing.

7. Successors. The Award Agreements shall be binding upon and inure to the benefit of any successor or successors of the Corporation. “Participant” as used herein shall include the Participant’s Beneficiary.

8. Delaware Law. The interpretation, performance, and enforcement of all Award Agreements shall be governed by the laws of the State of Delaware.

9. Nature of Grant. In accepting the grant, the Participant acknowledges that:

(A) the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Corporation at any time;

(B) the grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future Award grants, or benefits in lieu of Awards, even if Awards have been granted repeatedly in the past;

(D) the Participant is voluntarily participating in the Plan;

(E) the Award is not part of normal or expected compensation for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

(F) the Award will not be interpreted to form an employment contract or relationship with the Corporation; and furthermore, the Award will not be interpreted to form an employment contract with any subsidiary or Affiliate of the Corporation;

(G) the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(H) if the underlying Shares do not increase in value, the Options will have no value;

(I) in consideration of the grant of the Award, no claim or entitlement to compensation or damages shall arise from forfeiture of the Award which results from termination of the Participant’s employment with the Employer or the Corporation or one of its Affiliates (for any reason whatsoever) and the Participant irrevocably releases the Corporation or its Affiliates from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting the Award, the Participant shall be deemed irrevocably to have waived the Participant's entitlement to pursue such claim;

(J) for purposes of an Award, the Participant’s employment relationship will be considered terminated as of the date the Participant is no longer a bona fide employee of the Corporation or one of its Affiliates (regardless of the reason for such termination and whether or not later found to be invalid or in breach of the employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment agreement, if any), and unless otherwise expressly provided in this Award Agreement or determined by the Corporation in its sole discretion, the Participant’s right to receive Awards and vest in Awards under the Plan, if any, will terminate effective as of such date and will not be extended by any notice period mandated under local law; similarly, any right to exercise Options under the Plan after termination of employment will be measured as of the date the Participant is no longer a bona fide employee of the Corporation or one of its Affiliates and will not be extended by any notice period mandated under local law; the Administrator shall have the sole discretion to determine when the Participant is no longer a bona fide employee;

(K) the Corporation is not providing any tax, legal or financial advice, nor is the Corporation making any recommendations regarding participation in the Plan or the Participant’s acquisition or sale of Shares; and

(L) Participant is hereby advised to consult with the Participant's own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before taking any action related to the Plan.

10. Data Privacy. By accepting the Award, the Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant's personal data as described in this document by and among, as applicable, the Employer and the Corporation and its Affiliates for the exclusive purpose of implementing, administering and managing participation in the Plan.

Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Participant may elect to deposit any Shares acquired under the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage the Participant's participation in the Plan. The Participant understands that if the Participant resides outside of the United States, the Participant may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, without cost, by contacting in writing the local human resources representative. Further, the Participant understands that the Participant is providing the consents herein on a purely voluntary basis. If the Participant does not consent, or if the Participant later seeks to revoke the Participant's consent, the Participant’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Participant's consent is that the Corporation would not be able to grant the Participant Awards or administer or maintain such Awards. Therefore, the Participant understands that refusing or withdrawing consent may affect the Participant's ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that the Participant may contact the local human resources representative.

11. Severability. The provisions in this Statement of Terms and Conditions are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

12. Language. If the Participant has received this Statement of Terms and Conditions or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.

13. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or a third party designated by the Corporation.

14. Employment Agreement. Notwithstanding any provision contained in these Statement of Terms and Conditions, the Plan or the Grant Notice to the contrary, if there is a conflict between Statement of Terms and Conditions, the Plan or the Grant Notice and the employment agreement by and between the Participant and the Corporation, as amended from time to time (the “Employment Agreement”), then the Employment Agreement shall govern.

15. Section 409A. If (i) the Participant is a Specified Employee at the time of the Participant’s Separation from Service, and (ii) some or any portion of the amounts payable to the Participant, if any, when considered together with any other payments or benefits which may be considered deferred compensation under section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”) and subject to the plan aggregation rules under Treasury Regulation section 1.409A-1(c)(3)(viii) (together, the “Deferred Compensation Benefits”) would result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six month period following the Separation from Service, then to the extent such portion of the Deferred Compensation Benefits resulting in the imposition of additional tax would otherwise have been payable on or within the first six months following the Separation from Service, it will instead become payable on the first payroll date that occurs in the seventh month following the Separation from Service (or such longer period as is required to avoid the imposition of additional tax under Section 409A). All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit.


IX.	DEFINITIONS

When capitalized in this Statement of Terms and Conditions, the following terms shall have the meaning set forth below:

1. “Award Agreement” means an agreement between the Participant and the Corporation evidencing the grant of an Option, Restricted Stock Award, Restricted Stock Award, Performance Shares or Other Share-Based Award, as applicable.

2. “Cause” means termination of the Participant’s employment with the Corporation or an Affiliate upon the Participant’s negligent or willful engagement in misconduct which, in the sole determination of the Board (or its designee), is injurious to the Corporation, its employees, or its customers.

3. “Early Retirement” means a termination of employment which occurs prior to Normal Retirement but on or after the date on which the Participant’s age (expressed in terms of years and completed months) plus service with the Corporation or an Affiliate equals 65. For purposes of determining eligibility for Early Retirement, the term “service” shall include years and completed whole months of service.

4. “Family Member” means any person identified as an “immediate family” member in Rule 16(a)‑1(e) of the Exchange Act, as such Rule may be amended from time to time. Notwithstanding the foregoing, the Administrator may designate any other person(s) or entity(ies) as a “family member.”

5. “Good Reason” means any of the following actions, if taken without the express written consent of the Participant, which shall not be affected by the Participant’s incapacity due to physical or mental illness:

(A) Any material change by the Corporation in the Participant’s functions, duties or responsibilities as President and Chief Executive Officer, which change would cause the Participant’s position with the Corporation to become of less dignity, responsibility, importance, or scope as compared to the position and attributes that applied to the Participant immediately prior to the Change in Control, or an adverse change in the Participant’s title, position or the Participant’s obligation and right to report directly to the Board, provided, however that Good Reason shall not be deemed to exist if the Participant ceases to serve as Chairman;

(B) Any reduction in the Participant’s base annual salary, MIP target or Long Term Incentive compensation (LTI) targets, which LTI targets include cash awards with performance periods greater than one year and equity based grants, except for reductions that are equivalent to reductions applicable to executive officers of the Corporation;

(C) Any material failure by the Corporation to comply with any of the provisions of an award (or of any employment agreement between the parties) subsequent to a Change in Control;

(D) The Corporation’s requiring the Participant to be based at any office or location more than 25 miles from the office at which the Participant is based on the date immediately preceding the Change in Control, except for travel reasonably required in the performance of the Participant’s responsibilities;

(E) Cancellation of the automatic renewal mechanism set forth in the Participant’s employment agreement;

(F) If the Board removes the Participant as Chairman at or after a Change in Control (or prior to a Change in Control if at the request of any third party participating in or causing the Change in Control), unless such removal is required by then‑applicable law; or

(G) A change in the majority of the members of the Board as it was construed immediately prior to the Change in Control;

Provided that the Participant gives notice to the Corporation of the existence of the Good Reason condition within 30 days of the initial existence of the Good Reason condition and the Corporation is provided 30 days after receipt of the Participant’s notice to remedy the Good Reason condition; provided further that the Participant’s Separation from Service must occur within six months from the initial existence of the Good Reason condition if the Corporation does not remedy such condition for such separation to be considered to be for Good Reason.

6. “Expiration Date” means the date that an Option expires as set forth in the Option Grant Notice as the “Expiration Date.”

7. “Grant Date” means the date the Administrator grants the Award.

8. “Grant Notice” means the notice of an Award granted to the Participant, which sets forth certain terms of such Award.

9. “Long‑Term Disability” means a physical or mental condition in respect of which the administrator of the Corporation’s long-term disability plan has determined that the Participant is eligible to receive income replacement benefits; or, if the Participant is not then a participant in the Corporation’s long-term disability plan, a physical or mental condition that the administrator of the Corporation’s long-term disability plan determines would have rendered the Participant eligible to receive income replacement benefits, had the Participant been enrolled in such plan.

10. “Normal Retirement” means retirement at age 65 (62, in the case of a participant in the McKesson Corporation 1984 Executive Benefit Retirement Plan) with at least 10 years of service with the Corporation or an Affiliate. For purposes of determining eligibility for Normal Retirement, “service” shall mean completed whole years of service (12 consecutive months).

11. “Option Period” means the period commencing on the Grant Date of an Option and, except at otherwise provided in Section II.5, ending on the Expiration Date.

12. “Separation from Service” means termination of employment with the Corporation or an affiliate. A Participant shall be deemed to have had a Separation from Service if the Participant’s service with the Corporation or an affiliate is reduced to an annual rate that is equal to or less than 20% of the services rendered, on average, during the immediately preceding three years of service with the Corporation or an affiliate (or, if providing service to the Corporation or an affiliate for less than three years, such lesser period).

13. “Short‑Term Disability” means short‑term disability as defined in the Corporation’s short‑term disability plan.

14. “Specified Employee” means those employees identified by the Corporation as "Specified Employees" for purposes of Section 409A of the Code.

15. “Stock Ownership Policy” means the Corporation’s Stock Ownership Policy, as amended from time to time, which can be found on McKNet. A Participant or a Participant’s beneficiary may also request a copy of the Stock Ownership Policy by writing to the Corporate Secretary at McKesson Corporation, One Post Street, San Francisco, CA 94104.

EMPLOYEES SUBJECT TO STOCK OWNERSHIP POLICY

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO

OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS AND

PERFORMANCE SHARES GRANTED TO EMPLOYEES

SUBJECT TO STOCK OWNERSHIP POLICY PURSUANT

TO THE 2013 STOCK PLAN


I.	INTRODUCTION


II.	OPTIONS

1.Option Agreement. An Option granted under the Plan shall be evidenced by an Option Agreement setting forth the terms and conditions of the Option, including whether the Option is an Incentive Stock Option or a Nonstatutory Stock Option and the number of Shares subject to the Option. Each Stock Option Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Option Agreement. The Option is also subject to the terms and conditions of the Plan.

2.Exercise Price. The Exercise Price of an Option, as specified in the Option Agreement, shall be equal to or greater than the Fair Market Value of the Shares underlying the Option on the Grant Date.

3.Option Period. An Option shall be exercisable only during the applicable Option Period, and during such Option Period the exercisability of the Option shall be subject to the vesting provisions of Section II.4 as modified by the rules set forth in Sections II.5 and V. The Option Period shall be not more than seven years from the Grant Date.

4.Vesting of Right to Exercise Options.

(B)Any vested portion of an Option not exercised hereunder shall accumulate and be exercisable at any time on or before the Expiration Date, subject to the rules set forth in Sections II.5 and V. No Option may be exercised for less than 5% of the total number of Shares then available for exercise under such Option. In no event shall the Corporation be required to issue fractional Shares.

5.Limits on Option Period and Acceleration of Vesting. The Option Period may end before the Expiration Date, and in certain circumstances, the vesting schedule of an Option may be accelerated (subject to the provisions of Section V), as follows:

(A)If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates during the Option Period for reasons other than for Cause, Long‑Term Disability, Normal Retirement, Early Retirement or death, the Option Period shall end on the earlier of (x) 90 days after the date of the Participant’s termination of employment and (y) the Expiration Date, and in all cases the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing Section II.4 at the time of such termination of employment. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(B)If the Participant’s employment is terminated for Cause during the Option Period, the Option Period shall end on the date of such termination of employment and the Option shall thereupon not be exercisable to any extent whatsoever.

(C)If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates due to Long‑Term Disability during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated, the Option shall become fully exercisable and the Option Period shall end on the earlier of (x) three years after the date of the Participant’s termination of employment and (y) the Expiration Date.

(D)If the Participant’s employment is terminated:

(i) By reason of Normal Retirement or Early Retirement, the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing Section II.4 at the time of such retirement.

(ii) With respect to an Option held by a Participant at Normal Retirement or Early Retirement, the Option Period for that portion of the Option designated as a Nonstatutory

Stock Option shall end on the earlier of (x) three years after the date of such retirement and (y) the Expiration Date.

(E)If a Participant should die (i) while in the employ of the Corporation or an Affiliate and (ii) during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated and the Option shall become fully exercisable, the Option Period shall end on the earlier of (x) three years after the date of death and (y) the Expiration Date, and the Participant’s Beneficiary may exercise the entire unexercised portion of the then exercisable Shares covered by such Option (or any lesser amount) remaining on the date of death.

(F)If a Participant who ceases to be a bona fide employee of the Corporation or an Affiliate is subsequently rehired prior to the expiration of the Participant's Option, then the Option shall continue to remain outstanding until the earlier of (x) such time as the Participant subsequently terminates employment and (y) the Expiration Date. Upon the Participant’s subsequent termination of employment, the post‑termination exercise period calculated pursuant to the terms and conditions of this Section II.5 shall be reduced by the number of days between the date of the Participant’s initial termination of employment and the Participant's re‑hire date; provided, however, that if the rehired Participant continues to be employed by the Corporation or an Affiliate for at least one year from the Participant's rehire date, then the post termination exercise period for the Option shall be determined in accordance with Sections II.5(A) through (E) and shall not be adjusted as described in this Section II.5(F).

6.Method of Exercise. A Participant may exercise an Option with respect to all or any part of the exercisable Shares as follows:

(A)By giving the Corporation, or its authorized representative designated for this purpose, written notice of such exercise specifying the number of Shares as to which the Option is so exercised. Such notice shall be accompanied by an amount equal to the Exercise Price multiplied by the number of Shares exercised, in the form of any one or combination of the following: cash or a certified check, bank draft, postal or express money order payable to the order of the Corporation in lawful money of the United States. Unless otherwise determined by the Administrator in its sole discretion, the Participant may pay the Exercise Price, in whole or in part, by tendering to the Corporation or its authorized representative Shares, which have been owned by the Participant for at least six months prior to said tender, and having a fair market value, as determined by the Corporation, equal to the Exercise Price, or in lieu of the delivery of actual Shares in such tender, the Corporation may accept an attestation by the Participant, in a form prescribed by the Corporation or its authorized representative, that the Participant owns sufficient Shares of record or in an account in street name to satisfy the Exercise Price, and such attestation will be deemed a tender of Shares for purposes of this method of exercise. The Corporation or its authorized representative may accept payment of the amount due upon the exercise of the Option in the form of a Participant’s personal check. Payment may also be made by delivery (including by FAX transmission) to the Corporation or its authorized representative of an executed irrevocable Option exercise form together with irrevocable instructions to an approved registered investment broker to sell Shares in an amount sufficient to pay the Exercise Price plus any applicable Tax-Related Items (as defined in Section VII.6) and to transfer the proceeds of such sale to the Corporation.

(B)If required by the Corporation, by giving satisfactory assurance in writing, signed by the Participant, the Participant shall give the Participant's assurance that the Shares subject to the Option are being purchased for investment and not with a view to the distribution thereof; provided that such assurance shall be deemed inapplicable to (1) any sale of the Shares by such Participant made in accordance with the terms of a registration statement covering such sale, which has heretofore been (or may hereafter be) filed and become effective under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of the Shares with respect to which, in the opinion of counsel for the Corporation, such assurance is not required to be given in order to comply with the provisions of the Securities Act.

(C)As soon as practicable after receipt of the notice and the assurance described in Sections II.6(A) and (B), the Corporation shall, without transfer or issue tax (except for withholding tax arrangements contemplated in Section VII.6) and without other incidental expense to the Participant, credit the purchased Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the purchased Shares; provided, however, that the time of such delivery may be postponed by the Corporation for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Exchange Act, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

7.Limitations on Transfer. An Option shall, during a Participant’s lifetime, be exercisable only by the Participant. No Option or any right granted thereunder shall be transferable by the Participant by operation of law or otherwise, other than by will or the laws of descent and distribution. Notwithstanding the foregoing: (i) a Participant may designate a beneficiary to succeed, after the Participant’s death, to all of the Participant’s Options outstanding on the date of death; (ii) a Nonstatutory Stock Option may be transferable pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act; and (iii) any Participant, who is a senior executive officer recommended by the Chief Executive Officer of the Corporation and approved by the Administrator may voluntarily transfer any Nonstatutory Stock Option to a Family Member as a gift or through a transfer to an entity in which more than 50% of the voting interests are owned by Family Members (or the Participant) in exchange for an interest in that entity. In the event of any attempt by a Participant to alienate, assign, pledge, hypothecate, or otherwise dispose of an Option or of any right thereunder, except as provided herein, or in the event of the levy of any attachment, execution, or similar process upon the rights or interest hereby conferred, the Corporation at its election may terminate the affected Option by notice to the Participant and the Option shall thereupon become null and void.

8.No Stockholder Rights. Neither a Participant nor any person entitled to exercise a Participant’s rights in the event of the Participant’s death shall have any of the rights of a stockholder with respect to the Shares subject to an Option except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to such Shares upon the exercise of an Option.


III.	RESTRICTED STOCK

1.Restricted Stock Agreement. A Restricted Stock Award granted under the Plan shall be evidenced by a Restricted Stock Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Award. Each Restricted Stock Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Restricted Stock Agreement. The Restricted Stock Award is also subject to the terms and conditions of the Plan.

2.Rights with Respect to Shares of Restricted Stock. Upon written acceptance of a Restricted Stock Award by a Participant, including the restrictions and other terms and conditions described in the Plan and the Restricted Stock Agreement, the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s interest in the Restricted Stock. From and after the Grant Date, the Participant shall have the rights of Common Stock ownership, including the right to vote and to receive dividends on Shares of Restricted Stock, subject to the terms, conditions and restrictions described in the Plan and the Restricted Stock Agreement.

3.Special Restrictions. Each Restricted Stock Award made under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator; provided, however, that no Restricted Stock grant shall be subject to additional terms, conditions and restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth elsewhere in the Plan or the Restricted Stock Agreement.

(A)Restrictions. Until the restrictions imposed on any Restricted Stock grant shall lapse (the “Restriction Period”), Shares of Restricted Stock granted to a Participant (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act and (ii) shall, if the Participant’s continuous employment with the Corporation or any of its Affiliates shall terminate for any reason (except as otherwise provided in the Plan or in Section III.3(B)) be returned to the Corporation forthwith, and all the rights of the Participant to such Shares shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(i)Death or Long‑Term Disability, then the restrictions imposed on any Restricted Stock Award shall lapse as to all Shares granted to such Participant pursuant to such Restricted Stock Award on the date of such termination; or

(ii)Normal Retirement, then, unless otherwise determined by the Administrator, with respect to any time-based Restricted Stock Award then held by such Participant as to which restrictions have not lapsed, the restrictions applicable to such Restricted Stock Award shall lapse on the effective date of such Normal Retirement as to that whole number of Shares, rounded down to the nearest whole Share, equal to (a) the total number of Shares subject to such Restricted Stock Award, multiplied by (b) a fraction, the numerator of which is the number of whole calendar months, rounded down to the nearest whole month, during which the Participant provided Service to the Corporation during the entire vesting period applicable to such Award, and the denominator of which is the number of calendar months in such entire vesting period, minus (c) the number of Shares originally subject to such Restricted Stock Award with respect to which restrictions shall have lapsed as of the effective date of such Normal Retirement; provided, that for purposes of clause (b) above, “whole calendar months” shall be calculated commencing on the applicable Grant Date; and provided further, that notwithstanding any other provision of the Plan or this Statement of Terms and Conditions, this Section III.3(B)(ii) shall not apply to any Restricted Stock Award the vesting of which is based, in whole or in part, on attainment of performance objectives.

4.Dividends. Cash dividends paid with respect to Restricted Stock during the Restriction Period shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Restricted Stock Award. Stock dividends paid with respect to Restricted Stock during the Restriction Period shall be treated as Restricted Stock which shall be subject to the same restrictions as the original award for the duration of the Restricted Period.

5.Election to Recognize Gross Income in the Year of Grant. If any Participant validly elects within 30 days of the Grant Date, to include in gross income for federal income tax purposes an amount equal to the fair market value of the Shares of Restricted Stock granted on the Grant Date, such Participant shall (at the same time or prior to the date that the Participant files the Participant's election with the Internal Revenue Service) (A) pay to the Corporation, or make arrangements satisfactory to the Administrator to pay to the Corporation in the year of such grant, any federal, state or local taxes required to be withheld with respect to such Shares in accordance with Section VII.6 and (B) provide the Administrator with a copy of the election filed with the Internal Revenue Service.

6.Restrictive Legend. Each book entry in the records of the Corporation’s transfer agent evidencing Shares granted pursuant to a Restricted Stock grant may bear an appropriate legend referring to the terms, conditions and restrictions described in the Plan and/or the Restricted Stock Agreement.

7.Expiration of Restricted Period. If and when the Restriction Period applicable to the Restricted Stock expires without a prior forfeiture, Shares shall be credited to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then an appropriate book entry recording the Participant’s interest in the unrestricted Shares shall be entered on the records of the Corporation’s transfer agent.


IV.	RESTRICTED STOCK UNITS AND PERFORMANCE SHARES

1.Award Agreement.

(A)Restricted Stock Units granted under the Plan shall be evidenced by a Restricted Stock Unit Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Units. Each Restricted Stock Unit Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Restricted Stock Unit Agreement. The Restricted Stock Units are also subject to the terms and conditions of the Plan.

(B)Performance Shares granted under the Plan shall be evidenced by a Performance Share Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Performance Shares. Each Performance Share Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Performance Share Agreement. Performance Shares are also subject to the terms and conditions of the Plan.

2.Special Restrictions. Restricted Stock Units and Performance Shares granted under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator, consistent with the terms of the Plan.

(A)Restrictions. If a Participant ceases to be a bona fide employee of the Corporation or any Affiliate (except as otherwise provided in the Plan or in Section IV.2(B)) prior to the lapse of the restrictions imposed on the Award, the unvested Restricted Stock Units or Performance Shares shall be canceled, and all the rights of the Participant to such Awards shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by

virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(B) Termination of Employment by Reason of Death, Long‑Term Disability or Normal Retirement. Notwithstanding any provision contained herein or in the Plan, the Restricted Stock Unit Agreement or Performance Share Agreement to the contrary, if a Participant who has been in the continuous employment of the Corporation or any of its Affiliates since the Grant Date of such Award ceases to be a bona fide employee of the Corporation or an Affiliate as a result of:

(i)Death or Long‑Term Disability, then the restrictions imposed on any Award of Restricted Stock Units or Performance Shares shall lapse on the date of such termination; or

(ii)Normal Retirement, then, unless otherwise determined by the Administrator, with respect to any time-based Restricted Stock Units then held by such Participant as to which restrictions have not lapsed, the restrictions applicable to such Award of Restricted Stock Units shall lapse on the effective date of such Normal Retirement as to that whole number of Shares, rounded down to the nearest whole Share, equal to (a) the total number of Restricted Stock Units subject to such Award, multiplied by (b) a fraction, the numerator of which is the number of whole calendar months, rounded down to the nearest whole month, during which the Participant provided Service to the Corporation during the entire vesting period applicable to such Award, and the denominator of which is the number of calendar months in such entire vesting period, minus (c) the number of Restricted Stock Units originally subject to such Award with respect to which restrictions shall have lapsed as of the effective date of such Normal Retirement; provided, that for purposes of clause (b) above, “whole calendar months” shall be calculated commencing on the applicable Grant Date; and provided further, that notwithstanding any other provision of the Plan or this Statement of Terms and Conditions, this Section IV.2(B)(ii) shall not apply to any Performance Shares or to any Restricted Stock Units the vesting of which is based, in whole or in part, on attainment of performance objectives.

(C) Restriction on Sale. The Compensation Committee reserves the right to impose a restriction on the sale of Shares that the Participant receives upon the settlement of Restricted Stock Units or Performance Shares, unless the Participant has satisfied the ownership targets applicable to the Participant as provided in the Stock Ownership Policy.

3.Dividend Equivalents. Subject to discretion of the Compensation Committee, dividend equivalents shall be credited in respect of Restricted Stock Units and Performance Shares. Cash dividends shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Award of Restricted Stock Units or Performance Shares (as applicable), and cash dividends, along with accrued interest (if any) on such cash dividends, shall be paid in a lump sum at the same time that the Shares underlying the Restricted Stock Unit or Performance Share Award, and to which the cash dividends relate, are distributed. Stock dividends shall be converted into additional Restricted Stock Units or Performance Shares,

which will be subject to all of the terms and conditions of the underlying Restricted Stock Units or Performance Shares, including the same vesting restrictions as the underlying Award.

4.Assignability. A Participant shall not be permitted to sell, transfer, pledge, assign or encumber Restricted Stock Units or Performance Shares, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act.

5.No Stockholder Rights. Neither a Participant nor any person entitled to exercise a Participant’s rights in the event of the Participant’s death shall have any of the rights of a stockholder with respect to an Award of Restricted Stock Units or Performance Shares except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to the Shares paid upon the settlement of any vested Restricted Stock Units or Performance Shares.

6.Time of Payment of Restricted Stock Units and Performance Shares. Upon the lapse of the restriction imposed on Restricted Stock Units or Performance Shares, all Restricted Stock Units and Performance Shares that were not forfeited pursuant to Section IV.2(A) or V shall be paid to the Participant as soon as reasonably practicable after the restrictions lapse. Payment shall be made in Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then in the form of an appropriate book entry entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the number of Shares subject to the Restricted Stock Units or Performance Shares.

Notwithstanding the foregoing, if a Participant becomes eligible for Normal Retirement prior to the date of the lapse of restriction imposed on the Restricted Stock Units is scheduled to occur and the vesting provisions of Section IV(2)(B)(ii) apply, then such Restricted Stock Units shall be paid to the Participant in full at the earlier of (x) the date on which the Participant has a Separation from Service, subject to the delay of payment (if applicable) provided in Section VII.14, and (y) the fixed date on which the lapse of restrictions was originally scheduled to occur. The procedures set forth in Section VII.6 will be applied for any taxes due upon the lapse of restriction imposed on the Restricted Stock Units due to a Participant’s Normal Retirement eligibility.


V.	SPECIAL FORFEITURE AND REPAYMENT RULES

1.Any outstanding Option shall immediately and automatically terminate, be forfeited and shall cease to be exercisable, without limitation. In addition, any Award of Restricted Stock, Restricted Stock Units or Performance Shares as to which the restrictions have not lapsed shall immediately and automatically be forfeited and such Shares of Restricted Stock shall be returned to the Corporation and all of the rights of the Participant to such Awards and the underlying Shares shall immediately terminate.

2.If the Participant exercised an Option within 12 months prior to the date upon which the Corporation discovered that the Participant engaged in any actions described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained by the exercise of such Option measured at the date of exercise. In addition, if the restrictions imposed on any Award of Restricted Stock, Restricted Stock Units or Performance Shares (including any unpaid dividends or Dividend Equivalents) lapsed within 12 months prior to the date the Corporation discovered that the Participant engaged in any action described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained with respect to such Award, measured at the date such Award vested.

3.The consequences described in 1 and 2 above shall apply if the Participant, either before or after termination of employment with the Corporation or its Affiliates:

(A)Discloses to others, or takes or uses for the Participant’s own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know‑how or any other proprietary information or intellectual property belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment, whether or not they are the Participant’s work product. Examples of such confidential information or trade secrets include, without limitation, customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the Participant knows or has reason to know that the Corporation or its Affiliates intends or expects secrecy to be maintained;

(B)Fails to promptly return all documents and other tangible items belonging to the Corporation or its Affiliates in the Participant’s possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to retirement or otherwise;

(C)Fails to provide the Corporation with at least 30 days’ written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Corporation or its Affiliates. As used herein, “business in competition” means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Corporation or its Affiliates at the time of the termination of the Participant’s employment with the Corporation or its Affiliates;

(D)Fails to inform any new employer, before accepting employment, of the terms of this paragraph and of the Participant’s continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment with the Corporation or any of its Affiliates;

(E)Induces or attempts to induce, directly or indirectly, any of the customers of the Corporation or its Affiliates, employees, representatives or consultants to terminate, discontinue

or cease working with or for the Corporation or its Affiliates, or to breach any contract with the Corporation or any of its Affiliates, in order to work with or for, or enter into a contract with, the Participant or any third party;

(F)Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Corporation or its Affiliates; or

(G)Fails to meet the Participant’s continuing obligations with respect to non-disclosure, non-competition and/or non-solicitation under the Participant’s agreement with the Corporation or any Affiliate.


VI.	CHANGE IN CONTROL

date of the Change in Control), with any restrictions on such restricted stock or restricted stock units lapsing at the same time and manner as the replaced Award; provided, however, that in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of any Replacement Award, the Replacement Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VII.14), based on the fair market value of the underlying shares on the vesting date, or in the case of options, based on the excess of the fair market value of the underlying shares over the option exercise price on the vesting date. If any Option, Restricted Stock Award, Restricted Stock Unit Award, or Performance Share Award that is unvested at the effective time of the Change in Control is not replaced with a Replacement Award, such Award shall immediately vest and, in the case of a Performance Share Award, shall vest based upon deemed attainment of target performance or actual performance achieved, if greater.

If as a result of a Change in Control, the Common Stock continues to be listed for trading on an Exchange, any unvested Option, Restricted Stock Award, or Restricted Stock Unit Award shall continue to vest according to the terms and conditions of such Award and any Performance Share Award shall be replaced with a Restricted Stock Award or Restricted Stock Unit Award where the number of shares subject to such Restricted Stock Award or Restricted Stock Unit Award shall be equal to the number of Performance Shares assuming attainment of target performance or actual performance achieved, if greater, as of the effective date of the Change in Control with any restrictions on such Restricted Stock Award or Restricted Stock Unit Award lapsing at the end of the measuring period over which performance for the replaced Performance Share Award was to be measured prior to the granting of the replacement Award; provided however, that, in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of an Award, such Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VII.14).


VII.	MISCELLANEOUS

1.No Effect on Terms of Employment. Participation in the Plan shall not create a right to further employment with the Participant’s employer (the “Employer”) and shall not interfere with the ability of the Employer to terminate, with or without cause, or change the terms of employment of a Participant at any time.

2.Grants to Participants in Foreign Countries. In making grants to Participants in foreign countries, the Administrator has the full discretion to deviate from this Statement of Terms and Conditions in order to adjust grants under the Plan to prevailing local conditions, including custom and legal and tax requirements. Furthermore, the Corporation reserves the right to impose other requirements on the Participant’s participation in the Plan on the Award and on any Shares acquired under the Plan, to the extent the Corporation determines it is necessary or advisable in order to comply with local law or facilitate the administration of the Plan, and to require the Participant to sign any additional agreements or undertaking that may be necessary to accomplish the foregoing.

3.Information Notification. Any information required to be given under the terms of an Award shall be addressed to the Corporation in care of its Corporate Secretary at McKesson Corporation, One Post Street, San Francisco, California 94104, and any notice to be given to a Participant shall be addressed to such Participant at the address indicated beneath the Participant's name on the Award Agreement or such other address as either party may designate in writing to the other. Any such notice shall be deemed to have been duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified and deposited (postage or registration or certification fee prepaid) in a post office or branch post office.

4.Administrator Decisions Conclusive. All decisions of the Administrator administering the Plan upon any questions arising under the Plan or under an Award Agreement, shall be conclusive and binding on all interested persons.

5.No Effect on Other Benefit Plans. Nothing herein contained shall affect a Participant’s right to participate in and receive benefits from and in accordance with the then current provisions of any pensions, insurance or other employment welfare plan or program offered by the Corporation.

6.Withholding. Regardless of any action the Corporation or the Employer takes with respect to any federal, state or local income tax, social insurance, payroll tax, payment on account or other tax-related items related to the Participant’s participation in the Plan and legally applicable to the Participant (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items is and remains the Participant's responsibility and may exceed the amount actually withheld by the Corporation or the Employer. The Participant further acknowledges that the Corporation and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant, vesting or exercise of the Award, as applicable, the subsequent sale of Shares acquired pursuant to the Plan and the receipt of any dividends and/or dividend equivalents; and (2) do not commit and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result. Further, if the Participant has become subject to tax in more than one jurisdiction between the Grant Date and the date of any relevant taxable event, the Participant acknowledges that the Corporation and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax-Related Items in more than one jurisdiction.

of the number of Shares to be withheld shall be made based on the closing price of the Common Stock on the New York Stock Exchange on the date that the amount of tax to be withheld is determined. In no event, however, shall the Corporation be required to issue fractional Shares. With respect to an Award other than an Option, if adequate arrangements to satisfy the obligations with regard to all Tax-Related Items are not made by the Participant with the Corporation and/or the Employer prior to the relevant taxable event, the Corporation will satisfy such obligations as provided above in (3) of this paragraph.

The Administrator shall be authorized to establish such rules, forms and procedures as it deems necessary to implement the foregoing.

7.Successors. The Award Agreements shall be binding upon and inure to the benefit of any successor or successors of the Corporation. “Participant” as used herein shall include the Participant’s Beneficiary.

8.Delaware Law. The interpretation, performance, and enforcement of all Award Agreements shall be governed by the laws of the State of Delaware.

9.Nature of Grant. In accepting the grant, the Participant acknowledges that:

(A)the Plan is established voluntarily by the Corporation, it is discretionary in nature and it may be modified, amended, suspended or terminated by the Corporation at any time;

(B)the grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future Award grants, or benefits in lieu of Awards, even if Awards have been granted repeatedly in the past;

(C)all decisions with respect to future Awards, if any, will be at the sole discretion of the Corporation;

(D)the Participant is voluntarily participating in the Plan;

(E)the Award is not part of normal or expected compensation for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

(F)the Award will not be interpreted to form an employment contract or relationship with the Corporation; and furthermore, the Award will not be interpreted to form an employment contract with any subsidiary or Affiliate of the Corporation;

(G)the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;

(H)if the underlying Shares do not increase in value, the Options will have no value;

(I)in consideration of the grant of the Award, no claim or entitlement to compensation or damages shall arise from forfeiture of the Award which results from termination of the Participant’s employment with the Employer or the Corporation or one of its Affiliates (for any reason whatsoever) and the Participant irrevocably releases the Corporation or its Affiliates from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by accepting the Award, the Participant shall be deemed irrevocably to have waived the Participant's entitlement to pursue such claim;

(J)for purposes of an Award, the Participant’s employment relationship will be considered terminated as of the date the Participant is no longer a bona fide employee of the Corporation or one of its Affiliates (regardless of the reason for such termination and whether or not later found to be invalid or in breach of the employment laws in the jurisdiction where the Participant is employed or the terms of the Participant’s employment agreement, if any), and unless otherwise expressly provided in this Award Agreement or determined by the Corporation in its sole discretion, the Participant’s right to receive Awards and vest in Awards under the Plan, if any, will terminate effective as of such date and will not be extended by any notice period mandated under local law; similarly, any right to exercise Options under the Plan after termination of employment will be measured as of the date the Participant is no longer a bona fide employee of the Corporation or one of its Affiliates and will not be extended by any notice period mandated under local law; the Administrator shall have the sole discretion to determine when the Participant is no longer a bona fide employee;

(K)the Corporation is not providing any tax, legal or financial advice, nor is the Corporation making any recommendations regarding participation in the Plan or the Participant’s acquisition or sale of Shares; and

(L)Participant is hereby advised to consult with the Participant's own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before taking any action related to the Plan.

10.Data Privacy. By accepting the Award, the Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant's personal data as described in this document by and among, as applicable, the Employer and the Corporation and its Affiliates for the exclusive purpose of implementing, administering and managing participation in the Plan.

The Participant understands that the Corporation and the Employer hold certain personal information about the Participant, including, but not limited, the Participant's name, home address and telephone number, date of birth, social insurance or other identification number, salary, nationality, job title, any Shares or directorships held in the Corporation, details of all Options, Restricted Stock, Restricted Stock Units, Performance Shares, Other Share-Based Awards, or any other entitlement to Shares awarded, canceled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Participant understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that recipients of Data may be located in the United States or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that if the Participant resides outside of the United States, the Participant may request a list with the names and addresses of any potential recipients of the Data by contacting the local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Participant may elect to deposit any Shares acquired under the Plan. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage the Participant's participation in the Plan. The Participant understands that if the Participant resides outside of the United States, the Participant may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, without cost, by contacting in writing the local human resources representative. Further, the Participant understands that the Participant is providing the consents herein on a purely voluntary basis. If the Participant does not consent, or if the Participant later seeks to revoke the Participant's consent, the Participant’s employment status or service and career with the Employer will not be adversely affected; the only adverse consequence of refusing or withdrawing the Participant's consent is that the Corporation would not be able to grant the Participant Awards or administer or maintain such Awards. Therefore, the Participant understands that refusing or withdrawing consent may affect the Participant's ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that the Participant may contact the local human resources representative.

11.Severability. The provisions in this Statement of Terms and Conditions are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.

12.Language. If the Participant has received this Statement of Terms and Conditions or any other document related to the Plan translated into a language other than English and if the

meaning of the translated version is different than the English version, the English version will control.

13.Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to current or future participation in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or a third party designated by the Corporation.

14.Section 409A. If (i) the Participant is a Specified Employee at the time of the Participant’s Separation from Service, and (ii) some or any portion of the amounts payable to the Participant, if any, when considered together with any other payments or benefits which may be considered deferred compensation under section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”) and subject to the plan aggregation rules under Treasury Regulation section 1.409A-1(c)(3)(viii) (together, the “Deferred Compensation Benefits”) would result in the imposition of additional tax under Section 409A if paid to the Participant on or within the six month period following the Separation from Service, then to the extent such portion of the Deferred Compensation Benefits resulting in the imposition of additional tax would otherwise have been payable on or within the first six months following the Separation from Service, it will instead become payable on the first payroll date that occurs in the seventh month following the Separation from Service (or such longer period as is required to avoid the imposition of additional tax under Section 409A). All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit.


VIII.	DEFINITIONS

When capitalized in this Statement of Terms and Conditions, the following terms shall have the meaning set forth below:

1.“Award Agreement” means an agreement between the Participant and the Corporation evidencing the grant of an Option, Restricted Stock Award, Restricted Stock Award, Performance Shares or Other Share-Based Award, as applicable.

2.“Cause” means termination of the Participant’s employment with the Corporation or an Affiliate upon the Participant’s negligent or willful engagement in misconduct which, in the sole determination of the Chief Executive Officer of the Corporation (or the Chief Executive Officer’s designee), is injurious to the Corporation, its employees, or its customers.

3.“Early Retirement” means a termination of employment which occurs prior to Normal Retirement but on or after the date on which the Participant’s age (expressed in terms of years and completed months) plus service with the Corporation or an Affiliate equals 65. For purposes of determining eligibility for Early Retirement, the term “service” shall include years and completed whole months of service.

4.“Family Member” means any person identified as an “immediate family” member in Rule 16(a)‑1(e) of the Exchange Act, as such Rule may be amended from time to time.

Notwithstanding the foregoing, the Administrator may designate any other person(s) or entity(ies) as a “family member.”

5. “Good Reason” means any of the following actions, if taken without the express written consent of the Participant:

(A) Any material change by the Corporation in the Participant’s functions, duties, or responsibilities, which change would cause the Participant’s position with the Corporation to become of less dignity, responsibility, importance, or scope from the position and attributes that applied to the Participant immediately prior to the Change in Control; provided, however, that, any such change attributable to the Corporation’s no longer being a company with publicly traded common stock shall not constitute Good Reason; and provided, further, that a reduction in the Participant’s functions, duties or responsibilities solely by virtue of the Corporation being acquired and made part of a larger entity (for example, if following a Change in Control the Participant retains the Participant’s position, or has a comparable position, with respect to a division or subsidiary of the acquirer that contains the Corporation’s business) shall not constitute Good Reason;

(B) Any significant reduction in the Participant’s aggregate base annual salary and target incentive opportunity, as in effect immediately prior to the Change in Control;

(C) Any material failure by the Corporation to comply with any of the provisions of an Award subsequent to a Change in Control; or

(D) The Corporation’s requiring the Participant to be based at any location which would increase the Participant’s regular one-way commute by more than 25 miles from that in effect immediately preceding the Change in Control, except for travel reasonably required in the performance of the Participant’s responsibilities;

6. “Expiration Date” means the date that an Option expires as set forth in the Option Grant Notice as the “Expiration Date.”

7. “Grant Date” means the date the Administrator grants the Award.

8. “Grant Notice” means the notice of an Award granted to the Participant, which sets forth certain terms of such Award.

the Corporation’s long-term disability plan, a physical or mental condition that the administrator of the Corporation’s long-term disability plan determines would have rendered the Participant eligible to receive income replacement benefits, had the Participant been enrolled in such plan.

11. “Option Period” means the period commencing on the Grant Date of an Option and, except at otherwise provided in Section II.5, ending on the Expiration Date.

13. “Short‑Term Disability” means short‑term disability as defined in the Corporation’s short‑term disability plan.

14. “Specified Employee” means those employees identified by the Corporation as "Specified Employees" for purposes of Section 409A of the Code.

EMPLOYEE

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO

OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS AND

PERFORMANCE SHARES GRANTED TO EMPLOYEES PURSUANT

TO THE 2013 STOCK PLAN


I.	INTRODUCTION


II.	OPTIONS

1.Option Agreement. An Option granted under the Plan shall be evidenced by an Option Agreement setting forth the terms and conditions of the Option, including whether the Option is an Incentive Stock Option or a Nonstatutory Stock Option and the number of Shares subject to the Option. Each Stock Option Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Option Agreement. The Option is also subject to the terms and conditions of the Plan.

2.Exercise Price. The Exercise Price of an Option, as specified in the Option Agreement, shall be equal to or greater than the Fair Market Value of the Shares underlying the Option on the Grant Date.

3.Option Period. An Option shall be exercisable only during the applicable Option Period, and during such Option Period the exercisability of the Option shall be subject to the vesting provisions of Section II.4 as modified by the rules set forth in Sections II.5 and V. The Option Period shall be not more than seven years from the Grant Date.

4.Vesting of Right to Exercise Options.

(A)Except as provided in Sections II.5 and V, an Option shall be exercisable during the Option Period in accordance with the following vesting schedule: (i) 25% of the Shares subject to the Option shall vest on the first anniversary of the Grant Date; (ii) an additional 25% of the Shares shall vest on the second anniversary of the Grant Date; (iii) an additional 25% of the Shares shall vest on the third anniversary of the Grant Date; and (iv) the remaining 25% of the Shares subject to the Option shall vest on the fourth anniversary of the Grant Date. Notwithstanding

the foregoing, the Administrator may specify a different vesting schedule at the time the Option is granted, which will be specified in the Option Grant Notice.

(B)Any vested portion of an Option not exercised hereunder shall accumulate and be exercisable at any time on or before the Expiration Date, subject to the rules set forth in Sections II.5 and V. No Option may be exercised for less than 5% of the total number of Shares then available for exercise under such Option. In no event shall the Corporation be required to issue fractional Shares.

5.Limits on Option Period and Acceleration of Vesting. The Option Period may end before the Expiration Date, and in certain circumstances the vesting schedule of an Option may be accelerated (subject to the provisions of Section V), as follows:

(A)If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates during the Option Period for reasons other than for Cause, Long‑Term Disability, Normal Retirement, Early Retirement or death, the Option Period shall end on the earlier of (x) 90 days after the date of the Participant’s termination of employment and (y) the Expiration Date, and in all cases the Option shall be exercisable only to the extent that it was exercisable under the provisions of the foregoing Section II.4 at the time of such termination of employment. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

(B)If the Participant’s employment is terminated for Cause during the Option Period, the Option Period shall end on the date of such termination of employment and the Option shall thereupon not be exercisable to any extent whatsoever.

(C)If a Participant ceases to be a bona fide employee of the Corporation or of its Affiliates due to Long‑Term Disability during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated, the Option shall become fully exercisable and the Option Period shall end on the earlier of (x) three years after the date of the Participant’s termination of employment and (y) the Expiration Date.

(D)If the Participant’s employment is terminated:

(ii) With respect to an Option held by a Participant at Normal Retirement or Early Retirement, the Option Period for that portion of the Option designated as a Nonstatutory Stock Option shall end on the earlier of (x) three years after the date of such retirement and (y) the Expiration Date.

(E)If a Participant should die (i) while in the employ of the Corporation or an Affiliate and (ii) during the Option Period, the vesting schedule of the Participant’s Option shall be accelerated and the Option shall become fully exercisable, the Option Period shall end on the earlier of (x) three years after the date of death and (y) the Expiration Date, and the Participant’s Beneficiary may exercise the entire unexercised portion of the then exercisable Shares covered by such Option (or any lesser amount) remaining on the date of death.

(F)If a Participant who ceases to be a bona fide employee of the Corporation or an Affiliate is subsequently rehired prior to the expiration of the Participant's Option, then the Option shall continue to remain outstanding until the earlier of (x) such time as the Participant subsequently terminates employment and (y) the Expiration Date. Upon the Participant’s subsequent termination of employment, the post‑termination exercise period calculated pursuant to the terms and conditions of this Section II.5 shall be reduced by the number of days between the date of the Participant’s initial termination of employment and the Participant's re‑hire date; provided, however, that if the rehired Participant continues to be employed by the Corporation or an Affiliate for at least one year from the Participant's rehire date, then the post termination exercise period for the Option shall be determined in accordance with Sections II.5(A) through (E) and shall not be adjusted as described in this Section II.5(F).

6.Method of Exercise. A Participant may exercise an Option with respect to all or any part of the exercisable Shares as follows:

(B)If required by the Corporation, by giving satisfactory assurance in writing, signed by the Participant, the Participant shall give the Participant's assurance that the Shares subject

to the Option are being purchased for investment and not with a view to the distribution thereof; provided that such assurance shall be deemed inapplicable to (1) any sale of the Shares by such Participant made in accordance with the terms of a registration statement covering such sale, which has heretofore been (or may hereafter be) filed and become effective under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and with respect to which no stop order suspending the effectiveness thereof has been issued, and (2) any other sale of the Shares with respect to which, in the opinion of counsel for the Corporation, such assurance is not required to be given in order to comply with the provisions of the Securities Act.

(C)As soon as practicable after receipt of the notice and the assurance described in Sections II.6(A) and (B), the Corporation shall, without transfer or issue tax (except for withholding tax arrangements contemplated in Section VII.6) and without other incidental expense to the Participant, credit the purchased Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the purchased Shares; provided, however, that the time of such delivery may be postponed by the Corporation for such period as may be required for it with reasonable diligence to comply with applicable registration requirements under the Securities Act, the Exchange Act, any applicable listing requirements of any national securities exchange and requirements under any other law or regulation applicable to the issuance or transfer of the Shares.

8.No Stockholder Rights. Neither a Participant nor any person entitled to exercise a Participant’s rights in the event of the Participant’s death shall have any of the rights of a stockholder with respect to the Shares subject to an Option except to the extent that a book entry has been entered in the records of the Corporation’s transfer agent with respect to such Shares upon the exercise of an Option.


III.	RESTRICTED STOCK

1.Restricted Stock Agreement. A Restricted Stock Award granted under the Plan shall be evidenced by a Restricted Stock Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Award. Each Restricted Stock Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Restricted Stock Agreement. The Restricted Stock Award is also subject to the terms and conditions of the Plan.

2.Rights with Respect to Shares of Restricted Stock. Upon written acceptance of a Restricted Stock Award by a Participant, including the restrictions and other terms and conditions described in the Plan and the Restricted Stock Agreement, the Corporation shall cause an appropriate book entry to be entered in the records of the Corporation’s transfer agent recording the Participant’s interest in the Restricted Stock. From and after the Grant Date, the Participant shall have the rights of Common Stock ownership, including the right to vote and to receive dividends on Shares of Restricted Stock, subject to the terms, conditions and restrictions described in the Plan and the Restricted Stock Agreement.

3.Special Restrictions. Each Restricted Stock Award made under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator; provided, however, that no Restricted Stock grant shall be subject to additional terms, conditions and restrictions which are more favorable to a Participant than the terms, conditions and restrictions set forth elsewhere in the Plan or the Restricted Stock Agreement.

(A)Restrictions. Until the restrictions imposed on any Restricted Stock grant shall lapse (the “Restriction Period”), Shares of Restricted Stock granted to a Participant (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act and (ii) shall, if the Participant’s continuous employment with the Corporation or any of its Affiliates shall terminate for any reason (except as otherwise provided in the Plan or in Section III.3(B)) be returned to the Corporation forthwith, and all the rights of the Participant to such Shares shall immediately terminate. If a Participant is absent from work with the Corporation or an Affiliate because of the Participant's Short‑Term Disability or because the Participant is on an approved leave of absence, the Participant shall not be deemed during the period of any such absence, by virtue of such absence alone, to have terminated employment with the Corporation or an Affiliate except as the Administrator may otherwise expressly determine.

4.Dividends. Cash dividends paid with respect to Restricted Stock during the Restriction Period shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Restricted Stock Award. Stock dividends paid with respect to Restricted Stock during the Restriction Period shall be treated as Restricted Stock which shall be subject to the same restrictions as the original award for the duration of the Restricted Period.

6.Restrictive Legend. Each book entry in the records of the Corporation’s transfer agent evidencing Shares granted pursuant to a Restricted Stock grant may bear an appropriate legend referring to the terms, conditions and restrictions described in the Plan and/or the Restricted Stock Agreement.

7.Expiration of Restricted Period. If and when the Restriction Period applicable to the Restricted Stock expires without a prior forfeiture, Shares shall be credited to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then an appropriate book entry recording the Participant’s interest in the unrestricted Shares shall be entered on the records of the Corporation’s transfer agent.


IV.	RESTRICTED STOCK UNITS AND PERFORMANCE SHARES

1.Award Agreement.

(A)Restricted Stock Units granted under the Plan shall be evidenced by a Restricted Stock Unit Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Restricted Stock Units. Each Restricted Stock Unit Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Restricted Stock Unit Agreement. The Restricted Stock Units are also subject to the terms and conditions of the Plan.

(B)Performance Shares granted under the Plan shall be evidenced by a Performance Share Agreement to be executed by the Participant and the Corporation setting forth the terms and conditions of the Performance Shares. Each Performance Share Grant Notice shall incorporate by reference and be subject to this Statement of Terms and Conditions, including the special terms and conditions in the Appendix for the Participant’s country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the Performance Share Agreement. Performance Shares are also subject to the terms and conditions of the Plan.

2.Special Restrictions. Restricted Stock Units and Performance Shares granted under the Plan shall be subject to the following terms, conditions and restrictions and such additional terms, conditions and restrictions as may be determined by the Administrator, consistent with the terms of the Plan.

been in the continuous employment of the Corporation or any of its Affiliates since the Grant Date of such Award ceases to be a bona fide employee of the Corporation or an Affiliate as a result of:

(i)Death or Long‑Term Disability, then the restrictions imposed on any Award of Restricted Stock Units or Performance Shares shall lapse on the date of such termination; or

3.Dividend Equivalents. Subject to discretion of the Compensation Committee, dividend equivalents shall be credited in respect of Restricted Stock Units and Performance Shares. Cash dividends shall be credited on behalf of the Participant to a deferred cash account (in a manner designed to comply with Code Section 409A) and the restrictions on such cash dividends shall lapse at the same time that the restrictions lapse on the associated Award of Restricted Stock Units or Performance Shares (as applicable), and cash dividends, along with accrued interest (if any) on such cash dividends, shall be paid in a lump sum at the same time that the Shares underlying the Restricted Stock Unit or Performance Share Award, and to which the cash dividends relate, are distributed. Stock dividends shall be converted into additional Restricted Stock Units or Performance Shares, which will be subject to all of the terms and conditions of the underlying Restricted Stock Units or Performance Shares, including the same vesting restrictions as the underlying Award.

4.Assignability. A Participant shall not be permitted to sell, transfer, pledge, assign or encumber Restricted Stock Units or Performance Shares, other than pursuant to a qualified domestic relations order as defined in the Code or Title I of the U.S. Employee Retirement Income Security Act.

a book entry has been entered in the records of the Corporation’s transfer agent with respect to the Shares paid upon the settlement of any vested Restricted Stock Units or Performance Shares.

6.Time of Payment of Restricted Stock Units and Performance Shares. Upon the lapse of the restriction imposed on Restricted Stock Units or Performance Shares, all Restricted Stock Units and Performance Shares that were not forfeited pursuant to Section IV.2(A) or V shall be paid to the Participant as soon as reasonably practicable after the restrictions lapse. Payment shall be made in Shares to the Participant’s brokerage account of record. If the Participant does not have a brokerage account of record, then in the form of an appropriate book entry entered in the records of the Corporation’s transfer agent recording the Participant’s unrestricted interest in the number of Shares subject to the Restricted Stock Units or Performance Shares.

Notwithstanding the foregoing, if a Participant becomes eligible for Normal Retirement prior to the date of the lapse of restriction imposed on the Restricted Stock Units is scheduled to occur and the vesting provisions of Section IV(2)(B)(ii) apply, then such Restricted Stock Units shall be paid to the Participant in full at the earlier of (x) the date on which the Participant has a Separation from Service, subject to the delay of payment (if applicable) provided in Section VII.14, and (y) the fixed date on which the lapse of restrictions was originally scheduled to occur. The procedures set forth in Section VII.6 will be applied for any taxes due upon the lapse of restriction imposed on the Restricted Stock Units due to a Participant’s Normal Retirement eligibility.


V.	SPECIAL FORFEITURE AND REPAYMENT RULES

1.Any outstanding Option shall immediately and automatically terminate, be forfeited and shall cease to be exercisable, without limitation. In addition, any Award of Restricted Stock, Restricted Stock Units or Performance Shares as to which the restrictions have not lapsed shall immediately and automatically be forfeited and such Shares of Restricted Stock shall be returned to the Corporation and all of the rights of the Participant to such Awards and the underlying Shares shall immediately terminate.

2.If the Participant exercised an Option within 12 months prior to the date upon which the Corporation discovered that the Participant engaged in any actions described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained by the exercise of such Option measured at the date of exercise. In addition, if the restrictions imposed on any Award of Restricted Stock, Restricted Stock Units or Performance Shares (including any unpaid dividends or Dividend Equivalents) lapsed within 12 months prior to the date the Corporation discovered that the Participant engaged in any action described in 3 below, the Participant, upon written notice from the Corporation, shall immediately pay to the Corporation the economic value realized or obtained with respect to such Award, measured at the date such Award vested.

3.The consequences described in 1 and 2 above shall apply if the Participant, either before or after termination of employment with the Corporation or its Affiliates:

(A)Discloses to others, or takes or uses for the Participant’s own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or know‑how or any other proprietary information or intellectual property belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment, whether or not they are the Participant’s work product. Examples of such confidential information or trade secrets include, without limitation, customer lists, supplier lists, pricing and cost data, computer programs, delivery routes, advertising plans, wage and salary data, financial information, research and development plans, processes, equipment, product information and all other types and categories of information as to which the Participant knows or has reason to know that the Corporation or its Affiliates intends or expects secrecy to be maintained;

(B)Fails to promptly return all documents and other tangible items belonging to the Corporation or its Affiliates in the Participant’s possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon termination of employment, whether pursuant to retirement or otherwise;

(C)Fails to provide the Corporation with at least 30 days’ written notice prior to directly or indirectly engaging in, becoming employed by, or rendering services, advice or assistance to any business in competition with the Corporation or its Affiliates. As used herein, “business in competition” means any person, organization or enterprise which is engaged in or is about to become engaged in any line of business engaged in by the Corporation or its Affiliates at the time of the termination of the Participant’s employment with the Corporation or its Affiliates;

(D)Fails to inform any new employer, before accepting employment, of the terms of this paragraph and of the Participant’s continuing obligation to maintain the confidentiality of the trade secrets and other confidential information belonging to the Corporation or its Affiliates and obtained by the Participant during the term of the Participant’s employment with the Corporation or any of its Affiliates;

(E)Induces or attempts to induce, directly or indirectly, any of the customers of the Corporation or its Affiliates, employees, representatives or consultants to terminate, discontinue or cease working with or for the Corporation or its Affiliates, or to breach any contract with the Corporation or any of its Affiliates, in order to work with or for, or enter into a contract with, the Participant or any third party;

(F)Engages in conduct which is not in good faith and which disrupts, damages, impairs or interferes with the business, reputation or employees of the Corporation or its Affiliates; or

(G)Fails to meet the Participant’s continuing obligations with respect to non-disclosure, non-competition and/or non-solicitation under the Participant’s agreement with the Corporation or any Affiliate.


VI.	CHANGE IN CONTROL

If as a result of a Change in Control, the Common Stock ceases to be listed for trading on a national securities exchange (an “Exchange”), any Option, Restricted Stock Award, Restricted Stock Unit Award, or Performance Share Award that is unvested on the effective date of the Change in Control shall continue to vest according to the terms and conditions of such Award, provided that such Award is replaced with an award for voting securities of the resulting corporation or the acquiring corporation, as the case may be, (including without limitation, the voting securities of any corporation which as a result of the Change in Control owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) (the “Surviving Company”) which are traded on an Exchange (a “Replacement Award”), which Replacement Award, (i) in the case of an Option, shall consist of an option with the number of underlying shares and exercise price determined in a manner consistent with Code Section 424(a) with vesting and any other terms continuing in the same manner as the replaced Option; (ii) in the case of a Performance Share Award, shall consist of restricted stock or restricted stock units with a value (determined using the Surviving Company’s stock price as of the effective date of the Change in Control) equal to the value of the Performance Share Award (determined using the Corporation’s stock price and assuming attainment of target performance or actual performance achieved, if greater, as of the effective date of the Change in Control), with any restrictions on such restricted stock or restricted stock units lapsing at the end of the measuring period over which performance for the replaced Performance Share Award was to be measured prior to the granting of the Replacement Award; and (iii) in the case of a Restricted Stock Award or Restricted Stock Unit Award, shall consist of restricted stock or restricted stock units with a value (determined using the Surviving Company’s stock price as of the effective date of the Change in Control) equal to the value of the Restricted Stock Award or Restricted Stock Unit Award (determined using the Corporation’s stock price as of the effective date of the Change in Control), with any restrictions on such restricted stock or restricted stock units lapsing at the same time and manner as the replaced Award; provided, however, that in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of any Replacement Award, the Replacement Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VII.14), based on the fair market value of the underlying shares on the vesting date, or in the case of options, based on the excess of the fair market value of the underlying shares over the option exercise price on the vesting date. If any Option, Restricted Stock Award, Restricted Stock Unit Award, or Performance Share Award that is unvested at the effective time of the Change in Control is not replaced with a Replacement Award, such Award shall immediately vest and, in the case of a Performance Share

Award, shall vest based upon deemed attainment of target performance or actual performance achieved, if greater.

If as a result of a Change in Control, the Common Stock continues to be listed for trading on an Exchange, any unvested Option, Restricted Stock Award, or Restricted Stock Unit Award shall continue to vest according to the terms and conditions of such Award and any Performance Share Award shall be replaced with a Restricted Stock Award or Restricted Stock Unit Award where the number of shares subject to such Restricted Stock Award or Restricted Stock Unit Award shall be equal to the number of Performance Shares assuming attainment of target performance or actual performance achieved, if greater, as of the effective date of the Change in Control with any restrictions on such Restricted Stock Award or Restricted Stock Unit Award lapsing at the end of the measuring period over which performance for the replaced Performance Share Award was to be measured prior to the granting of the replacement Award; provided however, that, in the event of the Participant’s involuntary Separation from Service by the Corporation without Cause or Separation from Service by the Participant for Good Reason during the vesting period of an Award, such Award shall immediately vest and be paid as soon as practicable following such Separation from Service (subject to Section VII.14).


VII.	MISCELLANEOUS