Quarterly Report (10-q)

Date : 10/30/2019 @ 8:05PM
Source : Edgar (US Regulatory)
Stock : McKesson Corp (MCK)
Quote : 142.75  0.0 (0.00%) @ 9:00AM

Quarterly Report (10-q)

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Table of Contents                  


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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.)

6555 State Hwy 161,
Irving, TX 75039
(Address of principal executive offices, including zip code)
(972) 446-4800
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Common stock, $0.01 par value
MCK
New York Stock Exchange

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      No  

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).  Yes      No  

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 
Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 180,187,900 shares of the issuer’s common stock were outstanding as of September 30, 2019.



McKESSON CORPORATION


TABLE OF CONTENTS
 
 
Item
Page
 
 
 
 
 
 
 
 
1.
 
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
9
 
 
 
2.
40
 
 
 
3.
53
 
 
 
4.
53
 
 
 
 
 
 
 
 
1.
53
 
 
 
1A.
53
 
 
 
2.
54
 
 
 
3.
54
 
 
 
4.
54
 
 
 
5.
54
 
 
 
6.
55
 
 
 
 
56



2

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,
 
2019

2018
 
2019
 
2018
Revenues
$
57,616

 
$
53,075

 
$
113,344

 
$
105,682

Cost of Sales
(54,749
)
 
(50,271
)
 
(107,690
)
 
(100,099
)
Gross Profit
2,867

 
2,804

 
5,654

 
5,583

Operating Expenses
(2,196
)
 
(2,033
)
 
(4,326
)
 
(4,063
)
Goodwill Impairment Charges

 

 

 
(570
)
Restructuring, Impairment and Related Charges
(45
)
 
(82
)
 
(68
)
 
(178
)
Total Operating Expenses
(2,241
)
 
(2,115
)
 
(4,394
)
 
(4,811
)
Operating Income
626

 
689

 
1,260

 
772

Other Income (Expense), Net
(78
)
 
20

 
(41
)
 
60

Equity Earnings and Charges from Investment in Change Healthcare Joint Venture
(1,454
)
 
(56
)
 
(1,450
)
 
(112
)
Interest Expense
(64
)
 
(66
)
 
(120
)
 
(127
)
Income (Loss) from Continuing Operations Before Income Taxes
(970
)
 
587

 
(351
)
 
593

Income Tax Benefit (Expense)
294

 
(35
)
 
158

 
(122
)
Income (Loss) from Continuing Operations
(676
)

552

 
(193
)
 
471

Income (Loss) from Discontinued Operations, Net of Tax
(1
)

1

 
(7
)
 
2

Net Income (Loss)
(677
)

553

 
(200
)
 
473

Net Income Attributable to Noncontrolling Interests
(53
)
 
(54
)
 
(107
)
 
(112
)
Net Income (Loss) Attributable to McKesson Corporation
$
(730
)
 
$
499

 
$
(307
)
 
$
361

 
 
 
 
 
 
 
 
Earnings (Loss) Per Common Share Attributable to McKesson Corporation



 
 
 
 
Diluted
 

 
 
 
 
 
Continuing operations
$
(3.99
)

$
2.51

 
$
(1.62
)
 
$
1.79

Discontinued operations



 
(0.03
)
 
0.01

Total
$
(3.99
)

$
2.51

 
$
(1.65
)
 
$
1.80

Basic
 
 
 
 
 
 
 
Continuing operations
$
(3.99
)

$
2.52

 
$
(1.62
)
 
$
1.80

Discontinued operations



 
(0.03
)
 
0.01

Total
$
(3.99
)

$
2.52

 
$
(1.65
)
 
$
1.81

 
 
 
 
 
 
 
 
Weighted Average Common Shares
 
 
 
 
 
 
 
Diluted
183

 
199

 
185

 
201

Basic
183

 
198

 
185

 
200



See Financial Notes
3

McKESSON CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Quarter Ended September 30,
 
Six Months Ended September 30,
 
2019

2018
 
2019
 
2018
Net Income (Loss)
$
(677
)
 
$
553

 
$
(200
)
 
$
473

 
 
 
 
 
 
 
 
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(32
)
 
26

 
12

 
(103
)
 
 
 
 
 
 
 
 
Unrealized gains on cash flow hedges
13

 
2

 
25

 
2

 
 
 
 
 
 
 
 
Changes in retirement-related benefit plans
75

 
4

 
96

 
12

Other Comprehensive Income (Loss), Net of Tax
56

 
32

 
133

 
(89
)
 
 
 
 
 
 
 
 
Comprehensive Income (Loss)
(621
)
 
585


(67
)
 
384

Comprehensive Income Attributable to Noncontrolling Interests
(35
)
 
(47
)
 
(95
)
 
(68
)
Comprehensive Income (Loss) Attributable to McKesson Corporation
$
(656
)
 
$
538

 
$
(162
)
 
$
316








See Financial Notes
4

McKESSON CORPORATION


CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)
 
September 30,
2019
 
March 31,
2019
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,356

 
$
2,981

Receivables, net
18,984

 
18,246

Inventories, net
16,356

 
16,709

Prepaid expenses and other
657

 
529

Total Current Assets
37,353

 
38,465

Property, Plant and Equipment, Net
2,493

 
2,548

Operating Lease Right-of-Use Assets
2,002

 

Goodwill
9,408

 
9,358

Intangible Assets, Net
3,489

 
3,689

Investment in Change Healthcare Joint Venture
2,167

 
3,513

Other Noncurrent Assets
2,082

 
2,099

Total Assets
$
58,994

 
$
59,672

 
 
 
 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
 
 
 
Current Liabilities
 
 
 
Drafts and accounts payable
$
32,560

 
$
33,853

Short-term borrowing
549

 

Current portion of long-term debt
302

 
330

Current portion of operating lease liabilities
362

 

Other accrued liabilities
3,372

 
3,443

Total Current Liabilities
37,145

 
37,626

Long-Term Debt
7,342

 
7,265

Long-Term Deferred Tax Liabilities
2,718

 
2,998

Long-Term Operating Lease Liabilities
1,763

 

Other Noncurrent Liabilities
1,950

 
2,103

Redeemable Noncontrolling Interests
1,384

 
1,393

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, 2019 and March 31, 2019, 272 and 271 shares issued at September 30, 2019 and March 31, 2019
3

 
3

Additional Paid-in Capital
6,573

 
6,435

Retained Earnings
11,965

 
12,409

Accumulated Other Comprehensive Loss
(1,704
)
 
(1,849
)
Other
(2
)
 
(2
)
Treasury Shares, at Cost, 92 and 81 shares at September 30, 2019 and March 31, 2019
(10,353
)
 
(8,902
)
Total McKesson Corporation Stockholders’ Equity
6,482

 
8,094

Noncontrolling Interests
210

 
193

Total Equity
6,692

 
8,287

Total Liabilities, Redeemable Noncontrolling Interests and Equity
$
58,994

 
$
59,672


See Financial Notes
5

McKESSON CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended September 30, 2019
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Other Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Treasury
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Common Shares
 
Amount
Balances, June 30, 2019
271

 
$
3

 
$
6,483

 
$
(1
)
 
$
12,770

 
$
(1,778
)
 
(86
)
 
$
(9,603
)
 
$
194

 
$
8,068

Issuance of shares under employee plans
1

 

 
56

 

 

 

 

 

 

 
56

Share-based compensation

 

 
34

 

 

 

 

 

 

 
34

Payments to noncontrolling interests

 

 

 

 

 

 

 

 
(37
)
 
(37
)
Other comprehensive income

 

 

 

 

 
74

 

 

 

 
74

Net income (loss)

 

 

 

 
(730
)
 

 

 

 
42

 
(688
)
Repurchase of common stock

 

 

 

 

 

 
(6
)
 
(750
)
 

 
(750
)
Cash dividends declared, $0.41 per common share

 

 

 

 
(75
)
 

 

 

 

 
(75
)
Other

 

 

 
(1
)
 

 

 

 

 
11

 
10

Balances, September 30, 2019
272

 
$
3

 
$
6,573

 
$
(2
)
 
$
11,965

 
$
(1,704
)
 
(92
)
 
$
(10,353
)
 
$
210

 
$
6,692

 
Six Months Ended September 30, 2019
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Other Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Treasury
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Common Shares
 
Amount
Balances, March 31, 2019
271

 
$
3

 
$
6,435

 
$
(2
)
 
$
12,409

 
$
(1,849
)
 
(81
)
 
$
(8,902
)
 
$
193

 
$
8,287

Opening Retained Earnings Adjustments: Adoption of New Accounting Standards

 

 

 

 
11

 

 

 

 

 
11

Balances, April 1, 2019
271

 
3

 
6,435

 
(2
)
 
12,420

 
(1,849
)
 
(81
)
 
(8,902
)
 
193

 
8,298

Issuance of shares under employee plans
1

 

 
78

 

 

 

 

 
(17
)
 

 
61

Share-based compensation

 

 
60

 

 

 

 

 

 

 
60

Payments to noncontrolling interests

 

 

 

 

 

 

 

 
(76
)
 
(76
)
Other comprehensive income

 

 

 

 

 
145

 

 

 

 
145

Net income (loss)

 

 

 

 
(307
)
 

 

 

 
85

 
(222
)
Repurchase of common stock

 

 

 

 

 

 
(11
)
 
(1,434
)
 

 
(1,434
)
Cash dividends declared, $0.80 per common share

 

 

 

 
(148
)
 

 

 

 

 
(148
)
Other

 

 

 

 

 

 

 

 
8

 
8

Balances, September 30, 2019
272

 
$
3

 
$
6,573

 
$
(2
)
 
$
11,965

 
$
(1,704
)
 
(92
)
 
$
(10,353
)
 
$
210

 
$
6,692



See Financial Notes
6

McKESSON CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except per share amounts)
(Unaudited)
 
Three Months Ended September 30, 2018
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Other Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Treasury
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Common Shares
 
Amount
Balances, June 30, 2018
275

 
$
3

 
$
6,372

 
$
(1
)
 
$
12,932

 
$
(1,801
)
 
(76
)
 
$
(8,098
)
 
$
240

 
$
9,647

Issuance of shares under employee plans

 

 
16

 

 

 

 

 

 

 
16

Share-based compensation

 

 
24

 

 

 

 

 

 

 
24

Payments to noncontrolling interests

 

 

 

 

 

 

 

 
(42
)
 
(42
)
Other comprehensive income

 

 

 

 

 
39

 

 

 

 
39

Net income

 

 

 

 
499

 

 

 

 
43

 
542

Repurchase of common stock

 

 

 

 

 

 
(4
)
 
(580
)
 

 
(580
)
Cash dividends declared, $0.39 per common share

 

 

 

 
(78
)
 

 

 

 

 
(78
)
Other

 

 
(1
)
 
(1
)
 
1

 

 

 

 
(33
)
 
(34
)
Balances, September 30, 2018
275

 
$
3

 
$
6,411

 
$
(2
)
 
$
13,354

 
$
(1,762
)
 
(80
)
 
$
(8,678
)
 
$
208

 
$
9,534


 
Six Months Ended September 30, 2018
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Other Capital
 
Retained Earnings
 
Accumulated Other
Comprehensive
Income (Loss)
 
Treasury
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Common Shares
 
Amount
Balances, March 31, 2018
275

 
$
3

 
$
6,188

 
$
(1
)
 
$
12,986

 
$
(1,717
)
 
(73
)
 
$
(7,655
)
 
$
253

 
$
10,057

Opening Retained Earnings Adjustments: Adoption of New Accounting Standards

 

 

 

 
154

 

 

 

 

 
154

Balances, April 1, 2018
275

 
3

 
6,188

 
(1
)
 
13,140

 
(1,717
)
 
(73
)
 
(7,655
)
 
253

 
10,211

Issuance of shares under employee plans

 

 
38

 

 

 

 

 
(11
)
 

 
27

Share-based compensation

 

 
49

 

 

 

 

 

 

 
49

Payments to noncontrolling interests

 

 

 

 

 

 

 

 
(106
)
 
(106
)
Other comprehensive loss

 

 

 

 

 
(45
)
 

 

 

 
(45
)
Net income

 

 

 

 
361

 

 

 

 
89

 
450

Repurchase of common stock

 

 
135

 

 

 

 
(7
)
 
(1,012
)
 

 
(877
)
Cash dividends declared, $0.73 per common share

 

 

 

 
(147
)
 

 

 

 

 
(147
)
Other

 

 
1

 
(1
)
 

 

 

 

 
(28
)
 
(28
)
Balances, September 30, 2018
275

 
$
3

 
$
6,411

 
$
(2
)
 
$
13,354

 
$
(1,762
)
 
(80
)
 
$
(8,678
)
 
$
208

 
$
9,534




See Financial Notes
7

McKESSON CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended September 30,
 
2019
 
2018
Operating Activities
 
 
 
Net income (loss)
$
(200
)
 
$
473

Adjustments to reconcile to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
463

 
475

Goodwill and other asset impairment charges
12

 
611

Deferred taxes
(380
)
 
60

Credits associated with last-in, first-out inventory method
(48
)
 
(43
)
Equity earnings and charges from investment in Change Healthcare Joint Venture
1,450

 
112

Non-cash operating lease expense
180

 

Other non-cash items
144

 
(138
)
Changes in assets and liabilities, net of acquisitions:
 
 
 
Receivables
(866
)
 
(1,705
)
Inventories
331

 
(398
)
Drafts and accounts payable
(1,203
)
 
1,197

Taxes
70

 
(99
)
Operating lease liabilities
(189
)
 

Other
77

 
(227
)
Net cash provided by (used in) operating activities
(159
)
 
318

 
 
 
 
Investing Activities
 
 
 
Payments for property, plant and equipment
(126
)
 
(178
)
Capitalized software expenditures
(58
)
 
(70
)
Acquisitions, net of cash, cash equivalents and restricted cash acquired
(95
)
 
(840
)
Other
(6
)
 
105

Net cash used in investing activities
(285
)
 
(983
)
 
 
 
 
Financing Activities
 
 
 
Proceeds from short-term borrowings
8,670

 
19,735

Repayments of short-term borrowings
(8,122
)
 
(18,342
)
Common stock transactions:
 
 
 
Issuances
78

 
38

Share repurchases, including shares surrendered for tax withholding
(1,452
)
 
(888
)
Dividends paid
(148
)
 
(139
)
Other
(229
)
 
(206
)
Net cash provided by (used in) financing activities
(1,203
)
 
198

Effect of exchange rate changes on cash, cash equivalents and restricted cash
22

 
(87
)
Net decrease in cash, cash equivalents and restricted cash
(1,625
)
 
(554
)
Cash, cash equivalents and restricted cash at beginning of period
2,981

 
2,672

Cash, cash equivalents and restricted cash at end of period
$
1,356

 
$
2,118


See Financial Notes
8

McKESSON CORPORATION
FINANCIAL NOTES
(UNAUDITED)


1.
Significant Accounting Policies
Nature of Operations: McKesson Corporation (“McKesson,” the “Company,” the “Registrant” or “we” and other similar pronouns), currently ranked 7th on the FORTUNE 500, is a global leader in healthcare supply chain management solutions, retail pharmacy, healthcare technology, community oncology and specialty care. McKesson partners with life sciences companies, manufacturers, providers, pharmacies, governments and other healthcare organizations to help provide the right medicines, medical products and healthcare services to the right patients at the right time, safely and cost-effectively. We report our financial results in three reportable segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions and Medical-Surgical Solutions. All remaining operating segments and business activities that are not significant enough to require separate reportable segment disclosure are included in Other. Refer to Financial Note 18, “Segments of Business,” for more information.
Basis of Presentation: The condensed consolidated financial statements of McKesson include the financial statements of all wholly-owned subsidiaries and controlled companies. For those consolidated subsidiaries where our ownership is less than 100%, the portion of the net income or loss allocable to the noncontrolling interests is reported as “Net Income Attributable to Noncontrolling Interests” on the condensed consolidated statements of operations. All significant intercompany balances and transactions have been eliminated in consolidation including the intercompany portion of transactions with equity method investees.
We consider ourselves to control an entity if we have voting control over such entity. We also assess control through means other than voting rights (“variable interest entities” or “VIEs”) and determine which business entity is the primary beneficiary of the VIE. We consolidate VIEs when it is determined that we are the primary beneficiary of the VIE. 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.
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 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 ended September 30, 2019 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, 2019 previously filed with the SEC on May 15, 2019 (“2019 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 prior year amounts have been reclassified to conform to the current year presentation.


9

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Recently Adopted Accounting Pronouncements
Leases: In the first quarter of 2020, we adopted amended guidance for leases using the modified retrospective method and recorded a cumulative-effect adjustment to the opening retained earnings on the date of adoption. Under the amended guidance, entities are required to recognize operating lease liabilities and operating lease right-of-use (“ROU”) assets on the balance sheet for all leases with terms longer than 12 months and to provide enhanced disclosures on key information of leasing arrangements.
We elected the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification, lease classification and initial direct costs for leases commenced before April 1, 2019. We also elected not to separate lease from non-lease components for all leases and to exclude short-term leases with an initial term of 12 months or less from our condensed consolidated balance sheets.
Upon adoption of this amended guidance, we recorded $2.2 billion of operating lease liabilities, $2.1 billion of operating lease ROU assets and a cumulative-effect adjustment of $69 million to the opening retained earnings. The adjustment to the opening retained earnings included impairment charges of $89 million, net of tax to the ROU assets primarily related to previously impaired long-lived assets at the retail pharmacies in our United Kingdom (“U.K.”) and Canadian businesses, partially offset by derecognition of existing deferred gain on our sale-leaseback transaction related to our former corporate headquarters building. The adoption of this amended guidance did not have a material impact on our condensed consolidated statements of operations and cash flows.

Refer to Financial Note 11, “Leases,” for more information.

Derivatives and Hedging:  In the first quarter of 2020, we prospectively adopted amended guidance that allows us to include the Secured Overnight Financing Rate Overnight Index Swap Rate as a benchmark interest rate for hedge accounting purposes. The adoption of this amended guidance did not have a material effect on our condensed consolidated financial statements.

Disclosure Update and Simplification: In the first quarter of 2020, we adopted amended guidance that simplifies certain disclosure requirements and expands the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. The adoption of this amended guidance had no effect on our condensed consolidated statements of operations, comprehensive income, balance sheets and cash flows. This amended guidance resulted in a disclosure of the interim condensed consolidated statements of stockholders’ equity.
Accumulated Other Comprehensive Income: In the first quarter of 2020, we adopted amended guidance that allows for a reclassification of only those amounts related to the 2017 Tax Cuts and Jobs Act (the “2017 Tax Act”) to retained earnings thereby eliminating the stranded tax effects. Previous guidance required that deferred tax liabilities and assets be adjusted for a change in tax laws with the effect included in income from continuing operations in the reporting period that includes the enactment date. We have elected not to reclassify the stranded tax effects within accumulated other comprehensive loss to retained earnings. The adoption of this amended guidance did not affect our condensed consolidated financial statements.
Premium Amortization of Purchased Callable Debt Securities: In the first quarter of 2020, we adopted amended guidance on a modified retrospective basis that shortens the amortization period for certain callable debt securities held at a premium. The amended guidance requires the premium of callable debt securities to be amortized to the earliest call date but does not require an accounting change for securities held at a discount as they would still be amortized to maturity. The adoption of this amended guidance did not affect our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Collaborative Arrangements: In November 2018, amended guidance was issued which clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under revenue recognition guidance when the counterparty is a customer. The amended guidance precludes presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. The amended guidance is effective for us in the first quarter of 2021 on a retrospective basis with a cumulative-effect adjustment to opening retained earnings. We may elect to apply this amended guidance retrospectively either to all contracts or only to contracts that are not completed at the date of initial adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.


10

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Intangibles - Goodwill and Other - Internal-Use Software: In August 2018, amended guidance was issued for a customer’s accounting for implementation and other upfront costs incurred in a cloud computing arrangement that is a service contract. The amended guidance aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs in a cloud computing arrangement that has a software license. The amended guidance is effective for us either on a retrospective or prospective basis commencing in the first quarter of 2021. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.
Compensation - Retirement Benefits - Defined Benefit Plans: In August 2018, amended guidance was issued for defined benefit pension or other postretirement plans. The amended guidance requires us to disclose the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of reasons for significant gains and losses related to changes in the benefit obligation for the period. The amended guidance also requires us to remove disclosures on the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit costs over the next fiscal year. The amended guidance is effective for us on a retrospective basis commencing in the fiscal year ended March 31, 2021. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.
Fair Value Measurement: In August 2018, amended guidance was issued to remove, modify and add disclosure requirements on fair value measurements. The amended guidance removes disclosure requirements for transfers between Level 1 and Level 2 measurements and valuation processes for Level 3 measurements but adds new disclosure requirements including changes in unrealized gains or losses in other comprehensive income related to recurring Level 3 measurements. The amended guidance is effective for us commencing in the first quarter of 2021. Certain requirements will be applied prospectively while other changes will be applied retrospectively upon the effective date. Early adoption is permitted. We do not expect the adoption of this amended guidance to have a material effect on our condensed consolidated statements of operations, comprehensive income, balance sheets or cash flows. This amended guidance will result in changes in disclosures.
Financial Instruments - Credit Losses: In June 2016, amended guidance was issued which will change the impairment model for most financial assets and require additional disclosures. The amended guidance requires financial assets that are measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of financial assets. The amended guidance also requires us to consider historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount in estimating credit losses. The guidance was further amended in May 2019 to provide an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. The amended guidance becomes effective for us commencing in the first quarter of 2021 and will be applied through a cumulative-effect adjustment to the opening retained earnings in the year of adoption. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our condensed consolidated financial statements.
2.    Investment in Change Healthcare Joint Venture
In the fourth quarter of 2017, we contributed the majority of our McKesson Technology Solutions businesses to form a joint venture, Change Healthcare LLC (“Change Healthcare JV”), under a contribution agreement between McKesson and Change Healthcare Inc. and others, including shareholders of Change Healthcare Inc. In exchange for the contribution, we initially owned approximately 70% of the joint venture with the remaining equity ownership of approximately 30% held by Change Healthcare Inc. The Change Healthcare JV is jointly governed by McKesson and shareholders of Change Healthcare Inc. The initial investment in Change Healthcare JV represented the fair value of our 70% equity interest in the joint venture upon closing of the transaction.
We account for our investment in Change Healthcare JV using the equity method of accounting with a one-month reporting lag. The Company’s accounting policy is to disclose any intervening events of the joint venture in the lag period that could materially affect our condensed consolidated financial statements. Effective April 1, 2019, Change Healthcare JV adopted the amended revenue recognition guidance. In the first quarter of 2020, we recorded our proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax to the opening retained earnings.


11

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Initial Public Offering by Change Healthcare Inc.
On June 27, 2019, common stock and certain other securities of Change Healthcare Inc. began trading on the NASDAQ (“IPO”). Change Healthcare Inc. is a holding company and does not own any material assets or have any operations other than through its interest in Change Healthcare JV.
On July 1, 2019, upon the completion of its IPO, Change Healthcare Inc. received net cash proceeds of approximately $888 million. Change Healthcare Inc. contributed the proceeds from its offering of common stock of $609 million to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change Healthcare Inc. to acquire certain securities of Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change Healthcare Inc. Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in Change Healthcare JV was diluted from approximately 70% to approximately 58.5% and Change Healthcare Inc. now owns approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, we recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between our proportionate share of the IPO proceeds and the dilution effect on our investment’s carrying value. Effective with the second quarter of 2020, we recognized our proportionate share of net income or loss based on our reduced equity interest in Change Healthcare JV, adjusted for the effect of basis differences and other items as applicable. This amount was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations.

Since the completion of its IPO in July 2019, the fair value from the trading prices of Change Healthcare Inc.’s public common stock has been below the corresponding carrying value of our investment in Change Healthcare JV, triggering an other-than-temporary impairment (“OTTI”) evaluation. As of September 30, 2019, we expect to exit our investment in Change Healthcare JV within the next six to twelve months. In light of our planned exit and the corresponding publicly-traded share price of Change Healthcare Inc., we concluded an OTTI has occurred during our second quarter of 2020 and recorded a pre-tax impairment charge of $1,157 million ($864 million after-tax), representing the difference between the carrying value of our investment and the fair value derived from the corresponding closing price of Change Healthcare Inc.’s common stock at September 30, 2019. This charge was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations.
We recorded our proportionate share of loss from investment in Change Healthcare JV of $51 million and $47 million for the second quarter and first six months of 2020, and $56 million and $112 million for the second quarter and first six months of 2019. Our proportionate share of income or loss from this investment includes integration expenses incurred by Change Healthcare JV and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible assets. These amounts were included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations.
At September 30, 2019 and March 31, 2019, our carrying value of this investment was $2,167 million and $3,513 million. Our carrying value included equity method intangible assets and goodwill which caused our investment basis to exceed our proportionate share of the Change Healthcare JV’s book value of net assets by approximately $2,090 million and $4,158 million at September 30, 2019 and March 31, 2019.


12

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Related Party Transactions
In connection with the formation of Change Healthcare JV, McKesson, Change Healthcare JV and certain shareholders of Change Healthcare Inc. entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other agreements. Fees incurred or earned from Advisory Agreement were not material during the second quarters and first six months of 2020 and 2019. Fees incurred or earned from TSA were not material for the second quarter and first six months of 2020 and $26 million and $36 million for the second quarter and first six months of 2019. During the second quarter of 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change Healthcare Inc. agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from Change Healthcare JV that would otherwise have been required to be made to the shareholders of Change Healthcare Inc. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying condensed consolidated statement of operations.  At September 30, 2019 and March 31, 2019, we had no outstanding payable balance to the shareholders of Change Healthcare Inc. under the TRA.

Revenues recognized and expenses incurred under these agreements with Change Healthcare JV were not material during the second quarters and first six months of 2020 and 2019. At September 30, 2019 and March 31, 2019, receivables due from the Change Healthcare JV were not material.
Under the agreement executed in the second quarter of 2019 between Change Healthcare JV, McKesson, Change Healthcare Inc., and certain subsidiaries of Change Healthcare JV, McKesson has the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change Healthcare Inc. and McKesson. McKesson currently intends to exercise its right under the agreement and allocate certain depreciation and amortization deductions to Change Healthcare Inc. for the tax year ended March 31, 2019. These allocated depreciation and amortization deductions are not expected to have a material effect on our condensed consolidated financial statements.
Concurrent with the IPO, Change Healthcare Inc. appointed two of our current executive officers and our former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting we apply to our investment in Change Healthcare JV. There were no material transactions with Change Healthcare Inc.
3.
Restructuring, Impairment and Related Charges
We recorded pre-tax restructuring, impairment and related charges of $45 million ($35 million after-tax) and $68 million ($52 million after-tax) during the second quarter and first six months of 2020, and $82 million ($67 million after-tax) and $178 million ($152 million after-tax) during the second quarter and first six months of 2019. These charges are included under the caption, “Restructuring, Impairment and Related Charges” within operating expenses in the accompanying condensed consolidated statements of operations.
Fiscal 2019 Initiatives
On April 25, 2018, the Company announced a strategic growth initiative intended to drive long-term incremental profit growth and to increase operational efficiency. The initiative consists of multiple growth priorities and plans to optimize the Company’s operating models and cost structures primarily through centralization, cost management and outsourcing of certain administrative functions.
As part of the growth initiative, we committed to implement certain actions including a reduction in workforce, facility consolidation and store closures. This set of the initiatives will be substantially completed by the end of 2020. We recorded restructuring, impairment and related charges of $3 million (pre-tax and after-tax) and $7 million ($6 million after-tax) during the second quarter and first six months of 2020. We expect to record total pre-tax charges of approximately $140 million to $180 million, of which $142 million of pre-tax charges were recorded to date. The charges primarily represent employee severance, exit-related costs and asset impairment charges. Estimated remaining charges primarily consist of exit-related costs.


13

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

As previously announced on November 30, 2018, the Company relocated its corporate headquarters, effective April 1, 2019, from San Francisco, California to Irving, Texas to improve efficiency, collaboration and cost competitiveness. We anticipate that the relocation will be completed by January 2021. As a result, we recorded pre-tax charges of $12 million ($9 million after-tax) and $20 million ($15 million after-tax) during the second quarter and first six months of 2020, primarily representing employee retention expenses, asset impairments and accelerated depreciation. We expect to record total pre-tax charges of approximately $80 million to $130 million, of which $53 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of lease and other exit-related costs, and employee-related expenses, including retention.

During the fourth quarter of 2019, the Company committed to additional programs to continue our operating model and cost optimization efforts. We continue to implement centralization of certain functions and outsourcing through the expanded arrangement with a third-party vendor to achieve operational efficiency. The programs also include reorganization and consolidation of our business operations and related headcount reductions as well as the further closures of retail pharmacy stores in Europe and closure of other facilities. We anticipate these additional programs will be substantially completed by the end of 2021. We recorded pre-tax charges of $28 million ($22 million after-tax) and $39 million ($30 million after-tax) during the second quarter and first six months of 2020, primarily representing project consulting fees. We expect to incur total pre-tax charges of approximately $300 million to $350 million for these programs, of which $202 million of pre-tax charges were recorded to date. Estimated remaining charges primarily consist of facility and other exit costs and employee-related costs.

Restructuring, impairment and related charges for our fiscal 2019 initiatives during the second quarter and first six months of 2020 consisted of the following:
 
Quarter Ended September 30, 2019
(In millions)
U.S. Pharmaceutical and Specialty Solutions
 
European Pharmaceutical Solutions
 
Medical-Surgical Solutions
 
Other
 
Corporate
 
Total
Severance and employee-related costs, net
$
2

 
$
3

 
$
1

 
$
1

 
$
10

 
$
17

Exit and other-related costs (1)

 
4

 
2

 

 
13

 
19

Asset impairments and accelerated depreciation

 
3

 

 

 
4

 
7

Total
$
2

 
$
10

 
$
3

 
$
1

 
$
27

 
$
43

 
Six Months Ended September 30, 2019
(In millions)
U.S. Pharmaceutical and Specialty Solutions
 
European Pharmaceutical Solutions
 
Medical-Surgical Solutions
 
Other
 
Corporate
 
Total
Severance and employee-related costs, net
$
1

 
$
2

 
$
1

 
$
1

 
$
16

 
$
21

Exit and other-related costs (1)

 
5

 
4

 
1

 
23

 
33

Asset impairments and accelerated depreciation

 
6

 
1

 

 
5

 
12

Total
$
1

 
$
13

 
$
6

 
$
2

 
$
44

 
$
66


(1)
Exit and other-related costs primarily include project consulting fees.


14

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)


Restructuring, impairment and related charges for our fiscal 2019 initiatives during the second quarter and first six months of 2019 consisted of the following:
 
Quarter Ended September 30, 2018
(In millions)
U.S. Pharmaceutical and Specialty Solutions
 
Medical-Surgical Solutions
 
Other
 
Corporate
 
Total
Severance and employee-related costs, net
$

 
$

 
$
6

 
$
4

 
$
10

Exit and other-related costs (1)
5

 
5

 
35

 
18

 
63

Asset impairments and accelerated depreciation

 
1

 
1

 

 
2

Total
$
5


$
6


$
42


$
22

 
$
75

 
Six Months Ended September 30, 2018
(In millions)
U.S. Pharmaceutical and Specialty Solutions
 
Medical-Surgical Solutions
 
Other
 
Corporate
 
Total
Severance and employee-related costs, net
$
3

 
$
10

 
$
7

 
$
4

 
$
24

Exit and other-related costs (1)
6

 
7

 
56

 
29

 
98

Asset impairments and accelerated depreciation
4

 
1

 
17

 

 
22

Total
$
13


$
18


$
80


$
33

 
$
144

(1)
Exit and other-related costs primarily include lease exit costs associated with closures of retail pharmacy stores within our Canadian business as well as project consulting fees.
The following table summarizes the activity related to the restructuring liabilities associated with our fiscal 2019 initiatives for the first six months of 2020:
(In millions)
U.S. Pharmaceutical and Specialty Solutions
 
European Pharmaceutical Solutions
 
Medical-Surgical Solutions
 
Other
 
Corporate
 
Total
Balance, March 31, 2019 (1)
$
31

 
$
38

 
$
15

 
$
29

 
$
37

 
$
150

Restructuring, impairment and related charges
1

 
13

 
6

 
2

 
44

 
66

Non-cash charges

 
(6
)
 
(1
)
 

 
(5
)
 
(12
)
Cash payments
(3
)
 
(10
)
 
(1
)
 
(14
)
 
(22
)
 
(50
)
Other

 
(1
)
 

 
(7
)
 
(5
)
 
(13
)
Balance, September 30, 2019 (2)
$
29

 
$
34

 
$
19

 
$
10

 
$
49

 
$
141


(1)
As of March 31, 2019, the total reserve balance was $150 million of which $117 million was recorded in other accrued liabilities and $33 million was recorded in other noncurrent liabilities.
(2)
As of September 30, 2019, the total reserve balance was $141 million of which $119 million was recorded in other accrued liabilities and $22 million was recorded in other noncurrent liabilities.

Other Plans

There were no material restructuring, impairment and related charges for other plans recorded during the second quarters and first six months of 2020 and 2019. The restructuring liabilities for other plans as of September 30, 2019 and March 31, 2019 were $48 million and $87 million.


15

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Long-Lived Asset Impairments
During the first quarter of 2019, we performed an interim impairment test of long-lived assets primarily for our U.K. retail business due to the decline in the estimated future cash flows driven by additional U.K. government reimbursement reductions announced on June 29, 2018. As a result, we recognized a non-cash pre-tax charge of $20 million ($16 million after-tax) to impair the carrying value of certain intangible assets (primarily pharmacy licenses). We utilized a market approach for estimating the fair value of intangible assets. The fair value of the intangible assets is considered a Level 3 fair value measurement due to the significance of unobservable inputs developed using company specific information.
4.    Goodwill Impairment Charges
We evaluate goodwill for impairment on an annual basis as of January 1 each year and at an interim date, if indicators of potential impairment exist. Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or one level below an operating segment (also known as a component), for which discrete financial information is available and segment management regularly reviews the operating results of that reporting unit.
2019 First Quarter
In the first quarter of 2019, we recorded non-cash goodwill impairment charges of $570 million (pre-tax and after-tax) for our two reporting units in the European Pharmaceutical Solutions segment. These charges were recorded under the caption, “Goodwill Impairment Charges” within operating expenses in the accompanying condensed consolidated statements of operations.
Prior to implementing the new segment reporting structure in the first quarter of 2019, our European operations were considered a single reporting unit. Following the change in reportable segments, our European Pharmaceutical Solutions segment was split into two distinct reporting units, Retail Pharmacy and Pharmaceutical Distribution (formerly known as “Consumer Solutions” and “Pharmacy Solutions”) for purposes of goodwill impairment testing. As a result, we were required to perform a goodwill impairment test for these two new reporting units upon the change in reportable segments. Consequently, we recorded a non-cash goodwill impairment charge of $238 million (pre-tax and after-tax) in the first quarter of 2019 primarily because the estimated fair value of the Pharmaceutical Distribution reporting unit was determined to be lower than its reassigned carrying value.
During the first quarter of 2019, both reporting units projected a decline in the estimated future cash flows primarily triggered by additional U.K. government actions which were announced on June 29, 2018. Accordingly, we performed an interim goodwill impairment test for these reporting units. As a result, we determined that the carrying values of these reporting units exceeded their estimated fair values and recorded non-cash goodwill impairment charges of $332 million (pre-tax and after-tax) primarily for our Retail Pharmacy reporting unit. The discount rate and terminal growth rate used for the Retail Pharmacy reporting unit in the first quarter 2019 impairment test were 8.5% and 1.25%. The discount rate and terminal growth rate used for the Pharmaceutical Distribution reporting unit in the first quarter 2019 impairment test were 8.0% and 1.25%. As previously disclosed in our 2019 Annual Report, we had impaired the entire remaining goodwill balances of both reporting units as of March 31, 2019.
Refer to Financial Note 14, “Fair Value Measurements,” for more information on nonrecurring fair value measurements.
5.    Business Combinations
2019 Acquisition
Medical Specialties Distributors LLC (“MSD”)
On June 1, 2018, we completed our acquisition of MSD for the net purchase consideration of $784 million, which was funded from cash on hand. MSD is a leading national distributor of infusion and medical-surgical supplies as well as a provider of biomedical services to alternate site and home health providers. The financial results of MSD have been included in our condensed consolidated statements of operations within our Medical-Surgical Solutions segment since the acquisition date.


16

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period in the first quarter of 2020. As of June 30, 2019, the final amounts of fair value recognized for the assets acquired and liabilities assumed as of the acquisition date, excluding goodwill and intangibles, were $239 million and $169 million. Approximately $388 million of the final purchase price allocation was assigned to goodwill, which reflects the expected future benefits of certain synergies and intangible assets that do not qualify for separate recognition. The final purchase price allocation included acquired identifiable intangibles of $326 million primarily representing customer relationships with a weighted average life of eighteen years.

2018 Acquisition
CoverMyMeds LLC (“CMM”)
On April 3, 2017, we completed our acquisition of CMM for the net purchase consideration of $1.3 billion, which was funded from cash on hand. The fair value of assets acquired and liabilities assumed as of the acquisition date were finalized upon completion of the measurement period in the first quarter of 2019. The financial results of CMM have been included in our condensed consolidated statements of operations within Other since the acquisition date.
Pursuant to the agreement, McKesson paid additional contingent consideration of $69 million and $68 million for each of May 2019 and 2018. As of September 30, 2019 and March 31, 2019, the related liability was nil and $69 million.
2017 Acquisition
Rexall Health
In the third quarter of 2017, we completed our acquisition of Rexall Health which operated approximately 400 retail pharmacies in Canada, particularly in Ontario and Western Canada. The net cash purchase consideration of $2.9 billion Canadian dollars (approximately $2.1 billion) was funded from cash on hand. On May 23, 2018, as a result of resolving certain indemnity and other claims related to this acquisition, $125 million Canadian dollars (approximately $97 million) was released to us from an escrow account. The receipt of this cash was recorded as a settlement gain within operating expenses in our condensed consolidated statement of operations in the first six months of 2019.
Other Acquisitions
During the second quarters and first six months of 2020 and 2019, we also completed several other small acquisitions within our operating segments. Financial results for our business acquisitions have been included in our condensed 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.
6.
Income Taxes
During the second quarters of 2020 and 2019, we recorded income tax benefit of $294 million and expense of $35 million related to continuing operations. During the first six months of 2020 and 2019, we recorded income tax benefit of $158 million and expense of $122 million related to continuing operations. During the second quarter of 2020, no tax benefit was recognized for an agreement reached in principle with certain counties in the State of Ohio. Refer to Financial Note 15, “Commitments and Contingent Liabilities,” for more information. Upon finalization of the settlement agreement, the Company will evaluate the tax deductibility of the expected payment. During the first six months of 2019, no tax benefits were recognized for the pre-tax goodwill impairment charges of $570 million related to our European Pharmaceutical Solutions segment given that these charges are not deductible for income tax purposes. Fluctuations in our reported income tax rates are primarily due to the prior year impact of nondeductible impairment charges as well as changes within our business mix of income and discrete items recognized in the quarters.


17

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

During the second quarter of 2019, we sold software between wholly-owned legal entities within the McKesson group that are based in different tax jurisdictions. The transferor entity recognized a gain on the sale of assets that was not subject to income tax in its local jurisdiction; such gain was eliminated upon consolidation. An entity based in the U.S. was the acquirer of the software and is entitled to amortize the purchase price of the assets for tax purposes. In the second quarter of 2019, in accordance with the recently adopted amended accounting guidance on income taxes, a discrete tax benefit of $42 million was recognized with a corresponding increase to a deferred tax asset for the future tax amortization.
As of September 30, 2019, we had $985 million of unrecognized tax benefits, of which $812 million would reduce income tax expense and the effective tax rate, if recognized. During the second quarter of 2020, the Company signed a settlement agreement with the state of California regarding an outstanding refund claim. We recognized a net discrete tax benefit of $28 million and a $91 million decrease in our unrecognized tax benefits associated with the settlement of this matter. During the next twelve months, it is reasonably possible that our unrecognized tax benefits may decrease by as much as approximately $60 million due to settlements of tax examinations and statue of limitations expirations based on the information currently available. However, this amount may change as we continue to have ongoing negotiations with various taxing authorities throughout the year.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. The IRS is currently examining our U.S. corporation income tax returns for 2013 through 2015. We are generally subject to audit by taxing authorities in various U.S. states and in foreign jurisdictions for fiscal years 2012 through the current fiscal year.
7.
Redeemable Noncontrolling Interests and Noncontrolling Interests
Redeemable Noncontrolling Interests

Our redeemable noncontrolling interests primarily relate to our consolidated subsidiary, McKesson Europe AG (“McKesson Europe”). Under the December 2014 domination and profit and loss transfer agreement (the “Domination Agreement”), the noncontrolling shareholders of McKesson Europe are entitled to receive an annual recurring compensation amount of €0.83 per share and a one-time guaranteed dividend for calendar year 2014 of €0.83 per share reduced accordingly for any dividend paid by McKesson Europe in relation to that year. As a result, we recorded a total attribution of net income to the noncontrolling shareholders of McKesson Europe of $11 million and $22 million during the second quarter and first six months of 2020 and $11 million and $23 million during the second quarter and first six months of 2019. All amounts were recorded within net income attributable to noncontrolling interests in our condensed consolidated statements of operations and the corresponding liability balance was recorded within other accrued liabilities on our condensed consolidated balance sheets.
Under the Domination Agreement, the noncontrolling shareholders of McKesson Europe have a right to put (“Put Right”) their noncontrolling shares at €22.99 per share increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semi-annually, less any compensation amount or guaranteed dividend already paid by McKesson with respect to the relevant time period (“Put Amount”). The exercise of the Put Right will reduce the balance of redeemable noncontrolling interests. During the second quarters and first six months of 2020 and 2019, there were no material exercises of the Put Right. The balance of redeemable noncontrolling interests is reported as the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted each period for exchange rate fluctuations. At September 30, 2019 and March 31, 2019, the carrying value of redeemable noncontrolling interests of $1.38 billion and $1.39 billion exceeded the maximum redemption value of $1.20 billion and $1.23 billion. At September 30, 2019 and March 31, 2019, we owned approximately 77% of McKesson Europe’s outstanding common shares.
Noncontrolling Interests
Noncontrolling interests represent third-party equity interests in our consolidated entities primarily related to ClarusONE and Vantage Oncology Holdings, LLC, which were $210 million and $193 million at September 30, 2019 and March 31, 2019 on our condensed consolidated balance sheets. We allocated a total of $42 million and $85 million of net income to noncontrolling interests during the second quarter and first six months of 2020 and $43 million and $89 million during the second quarter and first six months of 2019.



18

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

Changes in redeemable noncontrolling interests and noncontrolling interests for the second quarter and first six months of 2020 were as follows:
(In millions)
Noncontrolling Interests
 
Redeemable
Noncontrolling
Interests
Balance, June 30, 2019
$
194

 
$
1,399

Net income attributable to noncontrolling interests
42

 
11

Other comprehensive loss

 
(18
)
Reclassification of recurring compensation to other accrued liabilities

 
(11
)
Payments to noncontrolling interests
(37
)
 

Other
11

 
3

Balance, September 30, 2019
$
210

 
$
1,384

(In millions)
Noncontrolling Interests
 
Redeemable
Noncontrolling
Interests
Balance, March 31, 2019
$
193

 
$
1,393

Net income attributable to noncontrolling interests
85

 
22

Other comprehensive loss

 
(12
)
Reclassification of recurring compensation to other accrued liabilities

 
(22
)
Payments to noncontrolling interests
(76
)
 

Other
8

 
3

Balance, September 30, 2019
$
210

 
$
1,384

Changes in redeemable noncontrolling interests and noncontrolling interests for the second quarter and first six months of 2019 were as follows:
(In millions)
Noncontrolling Interests
 
Redeemable
Noncontrolling
Interests
Balance, June 30, 2018
$
240

 
$
1,422

Net income attributable to noncontrolling interests
43

 
11

Other comprehensive loss

 
(7
)
Reclassification of recurring compensation to other accrued liabilities

 
(11
)
Payments to noncontrolling interests
(42
)
 

Other
(33
)
 

Balance, September 30, 2018
$
208

 
$
1,415



19

McKESSON CORPORATION
FINANCIAL NOTES (CONTINUED)
(UNAUDITED)

(In millions)
Noncontrolling Interests
 
Redeemable
Noncontrolling
Interests
Balance, March 31, 2018
$
253

 
$
1,459

Net income attributable to noncontrolling interests
89

 
23

Other comprehensive loss

 
(44
)
Reclassification of recurring compensation to other accrued liabilities

 
(23
)
Payments to noncontrolling interests
(106
)
 

Other
(28
)
 

Balance, September 30, 2018
$
208

 
$
1,415


8.
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 similarly to basic earnings per common share except that the former reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock. Diluted loss per common share for the second quarter and first six months of 2020 was calculated by excluding potentially dilutive securities from the denominator of the share computation due to their anti-dilutive effects.
The computations for basic and diluted earnings or loss per common share are as follows:
  
Quarter Ended September 30,
 
Six Months Ended September 30,
(In millions, except per share amounts)
2019
 
2018
 
2019
 
2018
Income (Loss) from continuing operations
$
(676
)
 
$
552

 
$