Form 10-Q MCKESSON CORP For: Dec 31

February 5, 2015 4:44 PM

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 December�31, 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

(Registrants 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.



Large�accelerated�filer	�	x	��	Accelerated�filer	�	o
�	�	�	�	�	�	�
Non-accelerated filer	�	o�(Do not check if a smaller reporting company)	��	Smaller�reporting�company	�	o

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 issuers classes of common stock, as of the latest practicable date.



Class	�	Outstanding as of	January 31, 2015
Common stock, $0.01 par value	�	232,844,521�shares

Table of Contents

McKESSON CORPORATION

TABLE OF CONTENTS

�



�	Item	Page
�	�	�
�	PART IFINANCIAL INFORMATION	�
�	�	�
1.	Condensed Consolidated Financial Statements	�
�	�	�
�	Condensed Consolidated Statements of Operations Quarters and Nine Months Ended December 31, 2014 and 2013	3
�	�	�
�	Condensed Consolidated Statements of Comprehensive Income Quarters and Nine Months Ended December 31, 2014 and 2013	4
�	�	�
�	Condensed Consolidated Balance Sheets December 31, 2014 and March 31, 2014	5
�	�	�
�	Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2014 and 2013	6
�	�	�
�	Financial Notes	7
�	�	�
2.	Managements Discussion and Analysis of Financial Condition and Results of Operations	25
�	�	�
3.	Quantitative and Qualitative Disclosures About Market Risk	38
�	�	�
4.	Controls and Procedures	38
�	�	�
�	PART IIOTHER INFORMATION	�
�	�	�
1.	Legal Proceedings	38
�	�	�
1A.	Risk Factors	38
�	�	�
2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
�	�	�
3.	Defaults Upon Senior Securities	39
�	�	�
4.	Mine Safety Disclosures	39
�	�	�
5.	Other Information	39
�	�	�
6.	Exhibits	40
�	�	�
�	Signatures	41

Table of Contents

McKESSON CORPORATION

PART IFINANCIAL INFORMATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

�



�	Quarter Ended December 31,							�	Nine Months Ended December 31,
�	2014				2013			�	2014			�	2013
Revenues	$	47,005		�	$	34,336		�	$	135,821		�	$	99,560
Cost of Sales	(44,063		)	�	(32,486		)	�	(127,159		)	�	(93,759		)
Gross Profit	2,942			�	1,850			�	8,662			�	5,801
�	�			�	�			�	�			�	�
Operating Expenses	(2,162		)	�	(1,339		)	�	(6,406		)	�	(3,899		)
Litigation Charges				�	(18		)	�				�	(68		)
Total Operating Expenses	(2,162		)	�	(1,357		)	�	(6,406		)	�	(3,967		)
Operating Income	780			�	493			�	2,256			�	1,834
Other Income (Loss), Net	13			�	(6		)	�	57			�	9
Interest Expense	(97		)	�	(69		)	�	(297		)	�	(187		)
Income from Continuing Operations Before Income Taxes	696			�	418			�	2,016			�	1,656
Income Tax Expense	(183		)	�	(254		)	�	(587		)	�	(641		)
Income from Continuing Operations	513				164			�	1,429			�	1,015
Loss from Discontinued Operations, Net of Tax	(2		)		(99		)	�	(30		)	�	(122		)
Net Income	511				65			�	1,399			�	893
Net Income Attributable to Noncontrolling Interests	(39		)	�				�	(55		)	�
Net Income Attributable to McKesson Corporation	$	472		�	$	65		�	$	1,344		�	$	893
�	�			�	�			�	�			�	�
Earnings (Loss) Per Common Share Attributable to McKesson Corporation								�	�			�	�
Diluted	�				�			�	�			�	�
Continuing operations	$	2.01			$	0.70		�	$	5.84		�	$	4.36
Discontinued operations	(0.01		)		(0.42		)	�	(0.12		)	�	(0.53		)
Total	$	2.00			$	0.28		�	$	5.72		�	$	3.83
Basic	�			�	�			�	�			�	�
Continuing operations	$	2.04			$	0.71		�	$	5.93		�	$	4.43
Discontinued operations	(0.01		)		(0.43		)	�	(0.13		)	�	(0.53		)
Total	$	2.03			$	0.28		�	$	5.80		�	$	3.90
�	�			�	�			�	�			�	�
Dividends Declared Per Common Share	$	0.24		�	$	0.24		�	$	0.72		�	$	0.68
�	�			�	�			�	�			�	�
Weighted Average Common Shares	�			�	�			�	�			�	�
Diluted	236			�	234			�	235			�	233
Basic	232			�	230			�	232			�	229

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

�



�	Quarter Ended December 31,							�	Nine Months Ended December 31,
�	2014				2013			�	2014			�	2013
Net Income	$	511		�	$	65		�	$	1,399		�	$	893
�	�			�	�			�	�			�	�
Other Comprehensive Income (Loss), Net of Tax	�			�	�			�	�			�	�
Foreign currency translation adjustments arising during period	(416		)	�	(55		)	�	(995		)	�	(16		)
�	�			�	�			�	�			�	�
Unrealized gains (losses) on cash flow hedges arising during period	1			�	(1		)	�	(1		)	�	(2		)
�	�			�	�			�	�			�	�
Retirement-related benefit plans	(16		)	�	4			�	(8		)	�	15
Other Comprehensive Income (Loss), Net of Tax	(431		)	�	(52		)	�	(1,004		)	�	(3		)
�	�			�	�			�	�			�	�
Comprehensive Income	80			�	13			�	395			�	890
Comprehensive Loss Attributable to Noncontrolling Interests	13			�				�	148			�
Comprehensive Income Attributable to McKesson Corporation	$	93		�	$	13		�	$	543		�	$	890

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)



�	December�31, 2014			�	March�31, 2014
ASSETS	�			�	�
Current Assets	�			�	�
Cash and cash equivalents	$	4,587		�	$	4,193
Receivables, net	16,581			�	14,193
Inventories, net	15,378			�	13,308
Prepaid expenses and other	595			�	879
Total Current Assets	37,141			�	32,573
Property, Plant and Equipment, Net	2,156			�	2,222
Goodwill	9,956			�	9,927
Intangible Assets, Net	3,864			�	5,022
Other Assets	1,993			�	2,015
Total Assets	$	55,110		�	$	51,759
�	�			�	�
LIABILITIES AND STOCKHOLDERS EQUITY	�			�	�
Current Liabilities	�			�	�
Drafts and accounts payable	$	25,205		�	$	21,429
Short-term borrowings	407			�	346
Deferred revenue	1,231			�	1,236
Deferred tax liabilities	1,705			�	1,588
Current portion of long-term debt	1,006			�	1,424
Other accrued liabilities	3,224			�	3,478
Total Current Liabilities	32,778			�	29,501
Long-Term Debt	8,981			�	8,949
Other Noncurrent Liabilities	2,734			�	2,991
Commitments and Contingent Liabilities (Note 13)				�
Redeemable Noncontrolling Interests	1,461			�
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 December 31, 2014 and March 31, 2014, 383 and 381 shares issued at December 31, 2014 and March 31, 2014	4			�	4
Additional Paid-in Capital	6,875			�	6,552
Retained Earnings	12,628			�	11,453
Accumulated Other Comprehensive Loss	(804		)	�	(3		)
Other	(7		)	�	23
Treasury Shares, at Cost, 151 and 150 at December 31, 2014 and March 31, 2014	(9,612		)	�	(9,507		)
Total McKesson Corporation Stockholders Equity	9,084			�	8,522
Noncontrolling Interests	72			�	1,796
Total Equity	9,156			�	10,318
Total Liabilities, Redeemable Noncontrolling Interests and Equity	$	55,110		�	$	51,759

See Financial Notes

Table of Contents

McKESSON CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



�	Nine Months Ended December 31,
�	2014			�	2013
Operating Activities	�			�	�
Net income	$	1,399		�	$	893
Adjustments to reconcile to net cash provided by operating activities:	�			�	�
Depreciation and amortization	793			�	495
Deferred taxes	55			�	86
Charges associated with last-in-first-out inventory method	287			�	186
Share-based compensation expense	127			�	115
Other non-cash items	(53		)	�	83
Changes in operating assets and liabilities, net of acquisitions:	�			�	�
Receivables	(2,832		)	�	(875		)
Inventories	(2,654		)	�	(1,387		)
Drafts and accounts payable	4,164			�	581
Deferred revenue	(19		)	�	(12		)
Taxes	(203		)	�	151
Litigation charges				�	68
Litigation settlement payments				�	(86		)
Other	165			�	174
Net cash provided by operating activities	1,229			�	472
�	�			�	�
Investing Activities	�			�	�
Property acquisitions	(286		)	�	(191		)
Capitalized software expenditures	(119		)	�	(108		)
Acquisitions, net of cash and cash equivalents acquired	(40		)	�	(116		)
Proceeds from sale of businesses and equity investment	15			�	97
Other	(9		)	�	(104		)
Net cash used in investing activities	(439		)	�	(422		)
�	�			�	�
Financing Activities	�			�	�
Proceeds from short-term borrowings	2,451			�	150
Repayments of short-term borrowings	(2,327		)	�	(150		)
Proceeds from issuances of long-term debt	11			�
Repayments of long-term debt	(240		)	�
Common stock transactions:	�			�	�
Issuances	115			�	150
Share repurchases, including shares surrendered for tax withholding	(106		)	�	(128		)
Dividends paid	(171		)	�	(154		)
Other	15			�	59
Net cash used in financing activities	(252		)	�	(73		)
Effect of exchange rate changes on cash and cash equivalents	(144		)	�	(2		)
Net increase (decrease) in cash and cash equivalents	394			�	(25		)
Cash and cash equivalents at beginning of period	4,193			�	2,456
Cash and cash equivalents at end of period	$	4,587		�	$	2,431

See Financial Notes

Table of Contents

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 majorityowned 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 managements 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 (loss), 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 nine months ended December�31, 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 Companys fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Companys fiscal year.

Recently Adopted Accounting Pronouncements

Business Combinations: In November 2014, amended guidance related to pushdown accounting was issued and became effective immediately. This guidance provides an acquired entity with an option to use the acquirers accounting and reporting basis in the preparation of its separate financial statements when an acquirer obtains control of the acquired entity. The option to apply pushdown accounting can be elected for each individual change-of-control event.� The adoption of this amended guidance did not have a material effect on our consolidated financial statements.

Cumulative Translation Adjustments: In the first quarter of 2015, we adopted amended guidance for parents 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 the 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 consolidated financial statements.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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.

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

Celesio AG Acquisition

On October�24, 2013, we entered into (i) a Share Purchase Agreement (the SPA) with Franz Haniel & Cie. GmbH (Haniel) and (ii) a Business Combination Agreement (the BCA) with Celesio AG (Celesio). At that time, Celesios issued and outstanding share capital was 50.01% owned by Haniel. Under the original terms of the SPA and BCA, McKesson was to acquire a majority stake in Celesio for �23.00 per share from Haniel and launch a parallel voluntary public tender offer to purchase Celesios publiclytraded shares at �23.00�per share (the Share Offer) and tender offers for its outstanding convertible bonds (the Bond Offers and, together with the Share Offer, the 2013 Tender Offers).

In October 2013, we entered into a $5.5 billion 364-day unsecured Senior Bridge Term Loan Agreement (the 2013 Bridge Loan). Borrowings under the 2013 Bridge Loan were generally to bear interest based upon either a prime rate or the London Interbank Offered Rate. We originally intended to complete the Celesio acquisition by utilizing the 2013 Bridge Loan and cash on hand. In October 2013, we also entered into a foreign currency option (the Option) to hedge a portion of the Euro denominated acquisition purchase price. The Option was not designated for hedge accounting and, accordingly, changes in the fair value of the contract of $13 million were recorded directly in earnings for the quarter ended December 31, 2013.

On December�5, 2013, we commenced the 2013 Tender Offers. On January�9, 2014, we and Haniel amended the SPA to increase the price to be paid per Celesio share from �23.00 to �23.50 and we increased the purchase price offered in the Share Offer to �23.50 per Celesio share and the price offered in the Bond Offers. The 2013 Tender Offers expired on January�9, 2014. On January 13, 2014, the commitments under the 2013 Bridge Loan automatically terminated upon the failure of the 2013 Tender Offers because we did not acquire at least 75% of Celesios shares on a fully diluted basis. On January 17, 2014, the Option expired.

On January�23, 2014, we entered into (i) an amendment to the BCA, (ii) an amended and restated SPA with Haniel, and (iii) a Bond Purchase Agreement with Elliott International, L.P., The Liverpool Limited Partnership and Elliott Capital Advisers, L.P. These agreements were not subject to any closing conditions. On January 23, 2014, we also entered into a $5.5 billion 364-day unsecured Senior Bridge Term Loan Agreement (the 2014 Bridge Loan) under terms substantially similar to those previously in place for the 2013�Bridge Loan.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

On February�6, 2014, pursuant to the agreements described above, 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 Celesios debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesios fully diluted common shares was 75.6%. The Acquisition was initially funded by utilizing the 2014 Bridge Loan, our existing accounts receivable sales facility and cash on hand. In March 2014, we repaid all of the outstanding amounts under the 2014 Bridge Loan with the proceeds from the issuance of long-term debt.

Celesio is an international wholesale and retail company and a provider of logistics and services to the pharmaceutical and healthcare sectors. Celesios 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.

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.

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 an additional 20.9 million common shares of Celesio. On February 28, 2014, we launched a voluntary tender offer for the remaining outstanding shares of Celesio pursuant to which we acquired approximately 1�million common shares of Celesio at �23.50 per share in April 2014 for a total of $32 million in cash. During the first quarter of 2015, the remaining convertible bonds were fully converted into an additional 42,238 common shares of Celesio. At March�31,�2014, we owned approximately 75.4% of Celesios outstanding and fully diluted common shares. Following the April 2014 tender offer and through December 31, 2014, we owned approximately 75.9% of Celesios outstanding and fully diluted common shares.

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		�	$	(58	)	�	$	3,367
Other current assets, net of cash and cash equivalents acquired	2,413			�	24			�	2,437
Goodwill	3,570			�	484			�	4,054
Intangible assets	3,018			�	(536		)	�	2,482
Other long-term assets	1,272			�	(45		)	�	1,227
Current liabilities	(4,096		)	�	(3		)	�	(4,099		)
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		)	�	119			�	(1,174		)
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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

During the first nine months of 2015, certain 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. We anticipate finalizing our fair value assessment of the assets acquired and liabilities assumed in the fourth quarter of 2015.

Domination and Profit and Loss Transfer Agreement

On May 22, 2014, Celesio and McKesson, through its wholly-owned subsidiary, McKesson Deutschland GmbH & Co. KGaA (McKesson Deutschland, formerly known as Dragonfly GmbH & Co. KGaA), entered into a domination and profit and loss transfer agreement (the Agreement) subject to Celesio shareholder approval and German registration requirements. Under the Agreement, Celesio subordinates its management to McKesson and undertakes to transfer all of its annual profits to McKesson, and McKesson undertakes 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 (Compensation Amount), (ii) a one-time dividend for Celesios fiscal year ended December 31, 2014 of �0.83 per Celesio share reduced accordingly for any dividend paid by Celesio in relation to its fiscal year ended December�31,�2014 (Guaranteed Dividend) and (iii) a right to put (Put Right) their Celesio 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 semiannually, less any Compensation Amount or Guaranteed Dividend already paid in respect of the relevant time period (Put Amount). The Agreement does not have an expiration date and can be terminated by McKesson without cause in writing no earlier than March�31,�2020. The Agreement was approved at the general shareholders meeting of Celesio on July 15, 2014, approved by the Stuttgart Higher Regional Court for registration on December�2,�2014, and was registered in the commercial register of Celesio at the local court of Stuttgart on December 2, 2014. As a result, McKesson obtained the ability to pursue integration of the two companies on December 2, 2014.

Under the Agreement, the noncontrolling shareholders of Celesio no longer participate in their percentage ownership of Celesios profits and losses, but instead have the right to receive the one-time Guaranteed Dividend and prospectively the Compensation Amount.

The Put Right specified in the Agreement may be exercised for a period of two months after the announcement regarding the registration of the Agreement; however, in the event of any appraisal challenges (Appraisal Proceedings) by noncontrolling shareholders of Celesio, the Put Right exercise period will be extended until two months after the announcement regarding the end of Appraisal Proceedings. In addition, if the Agreement is terminated, the Put Right may be exercised for a two-month period after the date of termination.

As of February 5, 2015, certain noncontrolling shareholders of Celesio have initiated Appraisal Proceedings with the Stuttgart Regional Court to challenge the Compensation Amount and/or the Put Amount. Other noncontrolling shareholders may also file appraisal applications until March 2, 2015. As long as any Appraisal Proceedings are pending, the Compensation Amount, the Guaranteed Dividend and/or the Put Amount will be paid as specified currently in the Agreement. If any such Appraisal Proceedings result in a higher equity valuation of Celesio, McKesson Deutschland would be required to make certain additional payments for any shortfall to all Celesio noncontrolling shareholders who previously received the Guaranteed Dividend, Compensation Amount or Put Amount.

On August 14, 2014, Magnetar Capital filed a lawsuit against Celesio with the Stuttgart Regional Court claiming that the shareholders approval of the Agreement was void under the German Stock Corporation Act (Main Proceedings). As the Agreement was registered in the commercial register of Celesio at the local court of Stuttgart, Germany on December 2, 2014 following the approval for registration by the Stuttgart Higher Regional Court, the outcome of the Main Proceedings will not impact the effectiveness of the Agreement and thus will not impact McKessons ability to direct the activities of Celesio.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Other Acquisitions

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

At March 31, 2014, we owned approximately 75.4% of Celesios outstanding and fully diluted common shares and the noncontrolling interests in Celesio were presented within the permanent equity section of our condensed consolidated balance sheet. Noncontrolling interests are generally adjusted for the net income or loss and other comprehensive income attributable to the noncontrolling shareholders and any distribution to those shareholders.

In April 2014, we completed a tender offer 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. In July�2014, Celesio paid dividends to the noncontrolling shareholders of Celesio relating to Celesios fiscal year ended December 31, 2013 totaling $16 million (�0.30 per common share).

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.

On December 2, 2014, the Agreement between Celesio and McKesson, through its wholly-owned subsidiary, McKesson Deutschland, became effective as previously discussed in Financial Note 2, Business Combinations. Prior to the effectiveness of the Agreement, the net income or loss from Celesio was attributed to the noncontrolling shareholders of Celesio based on their proportionate ownership interest in Celesio. Upon the effectiveness of the Agreement, McKesson became obligated to pay the $50�million Guaranteed Dividend to the noncontrolling shareholders of Celesio. As a result, during the third quarter of 2015, we recorded a $36 million net income attribution to increase the total attribution of net income to the noncontrolling shareholders of Celesio to $50 million for the first nine months of 2015. All amounts were recorded in our consolidated statement of operations within the caption, Net Income Attributable to Noncontrolling Interests, and the corresponding liability balance was recorded in other accrued liabilities on our condensed consolidated balance sheet.

In addition, because the noncontrolling interests in Celesio became redeemable as a result of a put right, the carrying value of noncontrolling interests related to Celesio of $1.5 billion was reclassified from Total Equity to Redeemable Noncontrolling Interests on our condensed consolidated balance sheet. The balance of redeemable noncontrolling interests will be reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. At December 31, 2014, the carrying value of redeemable noncontrolling interests amounted to $1.5 billion, which exceeded the maximum redemption value of $1.4 billion.

Effective January 1, 2015, we are also obligated to pay an annual recurring compensation amount of �0.83 per Celesio share for shares that are not redeemed. The recurring compensation amount will be recognized ratably during the applicable annual period and recorded in our consolidated statement of operations within the caption, Net Income Attributable to Noncontrolling Interests.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Changes in noncontrolling interests and redeemable noncontrolling interests were as follows:



(In millions)	Noncontrolling Interests			Redeemable Noncontrolling Interests
Balance, March 31, 2014	$	1,796		$
Net income attributable to noncontrolling interests ⁽¹⁾	5			50
Other comprehensive loss	(164		)	(39		)
Purchase of noncontrolling interests	(60		)
Dividends paid to noncontrolling interest shareholders	(16		)
Reclassification from Total Equity to Redeemable Noncontrolling Interests ⁽²⁾	(1,500		)	1,500
Reclassification of guaranteed dividends to other accrued liabilities				(50		)
Other	11
Balance, December 31, 2014	$	72		$	1,461


(1)	Includes the Guaranteed Dividend of $50 million for Celesios fiscal year ended December 31, 2014


(2)	Includes net foreign currency losses of $138 million attributable to noncontrolling interests

The effect of changes in our ownership interests with noncontrolling interests on our equity of nil and $3 million were recorded as a net decrease to McKessons stockholders paid-in capital during the third quarter and first nine months of 2015. Net income attributable to McKesson and transfers from noncontrolling interests amounted to $472 million and $1,341�million during the third quarter and first nine 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 non-cash pre-tax and after-tax 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 expect to transition to another service provider at the end of our current contract with the National Health Service during 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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

A summary of results of discontinued operations is as follows:



�	Quarter Ended December 31,							�	Nine Months Ended December 31,
(In millions)	2014			�	2013			�	2014			�	2013
Revenues	$	2		�	$	47		�	$	42		�	$	211
�	�			�	�			�	�			�	�
Loss from discontinued operations	$	(2	)	�	$	(95	)	�	$	(26	)	�	$	(122	)
Loss on sale				�	(5		)	�	(6		)	�	(5		)
Loss from discontinued operations before income tax	(2		)	�	(100		)	�	(32		)	�	(127		)
Income tax benefit				�	1			�	2			�	5
Loss from discontinued operations, net of tax	$	(2	)	�	$	(99	)	�	$	(30	)	�	$	(122	)

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 December�31, 2014 and March�31, 2014. The carrying values of the assets and liabilities classified as held for sale were $14 million and $12 million at December�31, 2014 and $267�million and $248 million at March�31, 2014.


5.	Technology Solutions Charges

During the third quarter of 2014, our Technology Solutions segment recorded pre-tax charges totaling $57 million. These charges primarily consist of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of severance charges. Included in the total charge was $35 million for severance for employees primarily in our research and development, customer services and sales functions, and $15 million for asset impairments which primarily represents the writeoff of deferred costs related to a product that will no longer be developed. Charges were recorded in our condensed consolidated statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses.


6.	Income Taxes

During the third quarters of 2015 and 2014, income tax expense related to continuing operations was $183�million and $254�million and included net discrete tax benefits of $10 million and net discrete tax expense of $119 million. During the first nine months of 2015 and 2014, income tax expense related to continuing operations was $587�million and $641�million and included net discrete tax benefits of $28 million and net discrete tax expense of $119 million.

As of December�31, 2014, we had $612 million of unrecognized tax benefits, of which $457 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 $169 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) 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 third quarter of 2015, we submitted additional information to the Federal Court of Appeal. 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 related to these years, which were previously accrued.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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.

We report interest and penalties on tax deficiencies as income tax expense. During the first nine months of 2015, we recognized income tax expense of $12�million, before any tax benefit, related to interest and penalties in our condensed consolidated statements of operations. At December�31, 2014, before any tax benefits, our accrued interest and penalties on unrecognized tax benefits amounted to $162 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 December 31,							�	Nine Months Ended December 31,
(In millions, except per share amounts)	2014			�	2013			�	2014			�	2013
Income from continuing operations	$	513		�	$	164		�	$	1,429		�	$	1,015
Net income attributable to noncontrolling interests	(39		)	�				�	(55		)	�
Income from continuing operations attributable to McKesson	474			�	164			�	1,374			�	1,015
Loss from discontinued operations, net of tax	(2		)	�	(99		)	�	(30		)	�	(122		)
Net income attributable to McKesson	$	472		�	$	65		�	$	1,344		�	$	893
�	�			�	�			�	�			�	�
Weighted average common shares outstanding:	�			�	�			�	�			�	�
Basic	232			�	230			�	232			�	229
Effect of dilutive securities:	�			�	�			�	�			�	�
Options to purchase common stock	2			�	2			�	1			�	1
Restricted stock units	2			�	2			�	2			�	3
Diluted	236			�	234			�	235			�	233
�	�			�	�			�	�			�	�
Earnings (loss) per common share attributable to McKesson: ⁽¹⁾	�			�	�			�	�			�	�
Diluted	�			�	�			�	�			�	�
Continuing operations	$	2.01		�	$	0.70		�	$	5.84		�	$	4.36
Discontinued operations	(0.01		)	�	(0.42		)	�	(0.12		)	�	(0.53		)
Total	$	2.00		�	$	0.28		�	$	5.72		�	$	3.83
Basic	�			�	�			�	�			�	�
Continuing operations	$	2.04		�	$	0.71		�	$	5.93		�	$	4.43
Discontinued operations	(0.01		)	�	(0.43		)	�	(0.13		)	�	(0.53		)
Total	$	2.03		�	$	0.28		�	$	5.80		�	$	3.90


(1)	Certain computations may reflect rounding adjustments.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Potentially dilutive securities include outstanding stock options, restricted stock units, and performance-based and other restricted stock units. No potentially dilutive securities were excluded from the computations of diluted net earnings per common share for the quarters ended December�31, 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 nine months ended December 31, 2014 and 2013, as they were anti-dilutive.


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	26			�				�	26
Acquisition accounting	484			�				�	484
Foreign currency translation adjustments and other	(466		)	�	(15		)	�	(481		)
Balance, December 31, 2014	$	8,122		�	$	1,834		�	$	9,956

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

Information regarding intangible assets is as follows:



�	December�31, 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	�	$	2,880	�	$	(1,070	)	�	$	1,810	�	$	3,384	�	$	(863	)	�	$	2,521
Service agreements	16	�	980		�	(207		)	�	773		�	995		�	(173		)	�	822
Pharmacy licenses	26	�	958		�	(58		)	�	900		�	1,219		�	(11		)	�	1,208
Trademarks and trade names	15	�	349		�	(79		)	�	270		�	371		�	(59		)	�	312
Technology	3	�	213		�	(182		)	�	31		�	219		�	(173		)	�	46
Other	4	�	169		�	(89		)	�	80		�	165		�	(52		)	�	113
Total	�	�	$	5,549		$	(1,685	)	�	$	3,864	�	$	6,353	�	$	(1,331	)	�	$	5,022

Amortization expense of intangible assets was $125 million and $386 million for the quarter and nine months ended December�31, 2014 and $70 million and $211 million for the quarter and nine months ended December 31, 2013. Estimated annual amortization expense of these assets is as follows: $107 million, $424 million, $398�million, $380 million and $360 million for the remainder of 2015 and each of the succeeding years through 2019 and $2,195 million thereafter. All intangible assets were subject to amortization as of December�31, 2014 and March�31, 2014.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


9.	Debt and Financing Activities

Celesio Debt

Celesios debt includes corporate bonds consisting of 4.00% bonds due October 18, 2016 and 4.50% bonds due April 26,�2017. At December 31, 2014 and March 31, 2014, $440 million and $507�million of the 4.00% bonds and $639 million and $737 million of the 4.50% bonds, for a total of $1,079 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, these bonds were reclassified as long-term debt effective in the first quarter of 2015.

Celesio has accounts receivable factoring facilities (the Factoring Facilities) with a total committed balance of $283 million. The Factoring Facilities will expire through January 2016. During the first nine months of 2015, Celesio borrowed and repaid $2,200 million and $2,154 million of short-term borrowings under the Factoring Facilities. At December�31,�2014 and March�31,�2014, there were $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 nine months of 2015 and there were no amounts outstanding under this facility as of December�31, 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 nine months of 2015, Celesio borrowed and repaid $259 million and $196 million under these credit lines primarily relating to shortterm borrowings. As of December�31, 2014 and March�31, 2014, there were $225 million and $188�million outstanding under these credit lines.

Accounts Receivable Sales Facility

In November 2014, we extended our existing accounts receivable sales facility (the Facility) for a two-year period under terms substantially similar to those previously in place. The committed balance of the Facility is $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 2016 and we anticipate renewing the Facility before its expiration.

During the first nine months of 2015, there were no borrowings under the Facility. During the first nine months of 2014, we borrowed and repaid $150 million of short-term borrowings under the Facility. At December�31, 2014 and March 31, 2014, there were no shortterm 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 December�31, 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 nine months of 2015 and 2014. As of December�31, 2014 and March�31, 2014, there were no amounts outstanding under this facility.

Refer to Financial Note 2, Business Combinations, for additional information regarding our financing activities related to the acquisition of Celesio.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


10.	Pension Benefits

Net periodic expense for the defined pension benefit plans was $15 million and $38 million for the third quarter and first nine months of 2015 and $9 million and $30 million for the third quarter and first nine months of 2014. Cash contributions to these plans were $35 million and $65 million for the third quarter and first nine months of 2015 and $4 million and $9 million for the third quarter and first nine 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.

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 December 31,							�	Quarter Ended December 31,						�	Nine Months Ended December 31,							�	Nine Months Ended December 31,
(In millions)	2014			�	2013			�	2014			�	2013		�	2014			�	2013			�	2014			�	2013
Service cost - benefits earned during the year	$			�	$	1		�	$	4		�	$		�	$	1		�	$	3		�	$	13		�	$	2
Interest cost on projected benefit obligation	5			�	5			�	8			�	2		�	14			�	15			�	26			�	5
Expected return on assets	(5		)	�	(5		)	�	(8		)	�	(2	)	�	(16		)	�	(15		)	�	(23		)	�	(6		)
Amortization of unrecognized actuarial loss, prior service costs and net transitional obligation	5			�	8			�	1			�	1		�	15			�	24			�	3			�	3
Curtailment loss (gain)				�				�	5			�	(1	)	�				�				�	5			�	(1		)
Net periodic pension expense	$	5		�	$	9		�	$	10		�	$		�	$	14		�	$	27		�	$	24		�	$	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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


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 McKessons 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 currently maintain forward contracts and foreign currency options to hedge against cash flows denominated in Canadian dollars. At December�31, 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 nine months ended December 31, 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 nine months ended December 31, 2013. All forward contracts were designated for hedge accounting during the first nine 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 January 2015 to December 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 $24 million and $74 million were recorded within operating expenses during the third quarter and first nine 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 December�31, 2014 and March�31, 2014, the total notional values of these contracts were $1,808 million and $1,091 million.

Interest Rate Risk

From time to time, Celesio has entered into interest rate swaps to hedge the interest rate risk associated with Celesios variable rate debt. Interest rate swaps were used to modify the market risk exposures in connection with the variable rate debt to achieve primarily fixed rate Euro interest expense. The interest rate swap transactions generally involve the exchange of floating or fixed interest payments. Celesios interest rate swaps that were outstanding at March 31, 2014 all matured during the first half 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 March 31, 2014, the total gross notional value of these contracts was $96 million. Amounts recorded to earnings were not material during the first nine months of 2015.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Information regarding the fair value of derivatives on a gross basis is as follows:



�	Balance Sheet Caption	December 31, 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	$	7	$		$	64	�	$	4	$		$	64
Foreign exchange �contracts (non-current)	Other assets	42				399		�	27				399
Total	�	$	49	$		�		�	$	31	$		�
Derivatives not designated for hedge accounting	�	�		�		�		�	�		�		�
Foreign exchange �contracts (current)	Prepaid expenses and other	$		$		$	127	�	$	2	$		$	255
Foreign exchange �contracts (current)	Other accrued liabilities			34		1,681		�			13		836
Interest rate swap contracts (current)	Other accrued liabilities							�			1		96
Total	�	$		$	34	�		�	$	2	$	14	�

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


12.	Fair Value Measurements

Assets Measured at Fair Value on a Recurring Basis

At December�31, 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 December�31, 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 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.

Included in cash and cash equivalents at December�31, 2014 and March�31, 2014 were investments in money market funds, time deposits and repurchase agreements of $3.6 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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

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 nine months ended December�31, 2014 and 2013.

Assets Measured at Fair Value on a Non-Recurring Basis


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.

Table of Contents

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 McKesson Deutschland GmbH & Co. KGaA (formerly known as Dragonfly GmbH & Co. KGaA) (Dragonfly), a whollyowned subsidiary of the Company, in a German court in Frankfurt, Germany, alleging that Dragonfly violated German takeover law in connection with the Companys acquisition of Celesio by paying more to some holders of Celesios convertible bonds than it paid to the shareholders of Celesios stock (Magnetar Capital Master Fund Ltd. et al. v. Dragonfly GmbH & Co KGaA, No.�3-05�O�44/14).� On December 5, 2014, the court fully dismissed Magnetars lawsuit in Dragonflys favor and ruled that the plaintiffs must bear the court costs and Dragonflys taxable lawyers fees. Magnetar filed a notice of appeal on January 5, 2015.

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 Companys 2014 Annual Report on Form 10-K, and include subpoenas from the U.S. Drug Enforcement Administration (DEA) to a number of the Companys pharmaceutical distribution facilities seeking information and records about the Companys distribution of certain controlled substances. The Company continues to receive and respond to these requests.

As previously reported, the Company was informed in the third quarter of 2014 of an investigation by the U.S. Department of Justice (DOJ) through the United States Attorneys Office for the Northern District of West Virginia of potential claims under the Comprehensive Drug Abuse Prevention and Control Act relating to the Companys pharmaceutical distribution of certain controlled substances by its Landover, Maryland distribution center, which closed in 2012. The Company also received in the second quarter of 2015 a letter from the United States Attorneys Office for the District of Colorado advising of an investigation and similar potential claims relating to the Companys distribution of certain controlled substances by its Aurora, Colorado distribution center. The DOJ and other United States Attorneys offices are also involved in investigations of other distribution centers.

The Company has been engaged in discussions with the DOJ, United States Attorneys offices and the DEA with the purpose of resolving all potential claims under the Comprehensive Drug Abuse Prevention and Control Act. It is possible that the ultimate cost to resolve these matters may be significant and require changes to the Companys procedures for distributing certain controlled substances.

Value Added Tax Assessments

We operate in various countries outside the United States which�collect value added taxes (VAT).� The determination of the manner in which a VAT applies to our foreign operations is subject to varying interpretations arising from the complex nature of the tax laws. We have received�assessments for VAT�which are in�various stages of appeal. We disagree with these assessments and believe that we have strong legal arguments to defend our tax positions.� Certain�VAT assessments relate to years covered by an indemnification agreement.� Due to the complex nature of the tax laws, it is not possible to estimate the outcome of these matters.� However, based on the currently available information, we believe the ultimate outcome of these matters will not have a material adverse effect on our financial position, cash flows or�results of operations.

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 third quarter and first nine months of 2014, we recorded a pre-tax charge of $18�million and $68 million relating to these claims within our Distribution Solutions segment. No charges were recorded in 2015. At December 31, 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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)


14.	Stockholders Equity

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

In July 2013, the Companys 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 third quarter and first nine months of 2015 and nil and 0.2 million share repurchases during the third quarter and first nine months of 2014.

The total authorization outstanding for repurchases of the Companys common stock was $340�million at December�31, 2014.

Other Comprehensive Income (Loss)

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



�	Quarter Ended December 31,							�	Nine Months Ended December 31,
�(In millions)	2014			�	2013			�	2014			�	2013
Foreign currency translation adjustments	�			�	�			�	�			�	�
Foreign currency translation adjustments arising during period, net of income tax benefit of nil, nil, nil and nil ⁽¹⁾	$	(416	)	�	$	(55	)	�	$	(985	)	�	$	(60	)
Reclassified to income statement, net of income tax expense of nil, nil, nil and $24⁽²⁾				�				�	(10		)	�	44
�	(416		)	�	(55		)	�	(995		)	�	(16		)
�	�			�	�			�	�			�	�
Unrealized gains (losses) on cash flow hedges	�			�	�			�	�			�	�
Unrealized gains (losses) on cash flow hedges arising during period, net of income tax expense of nil, nil, nil and nil	1			�	(1		)	�	(1		)	�	(2		)
�	�			�	�			�	�			�	�
Changes in retirement-related benefit plans	�			�	�			�	�			�	�
Net actuarial loss and prior service credit arising during period, net of income tax benefit of $6, nil, $6 and nil	(21		)	�				�	(21		)	�
Amortization of actuarial loss, prior service cost and transition obligation, net of income tax expense of $2, $4, $5 and $10 ⁽³⁾	3			�	3			�	9			�	16
Foreign currency translation adjustments, net of income tax expense of nil, nil, nil and nil	2			�	1			�	4			�	(2		)
Reclassified to income statement, net of income tax expense of nil, nil, nil and $1				�				�				�	1
�	(16		)	�	4			�	(8		)	�	15
�	�			�	�			�	�			�	�
Other comprehensive income (loss), net of tax	$	(431	)	�	$	(52	)	�	$	(1,004	)	�	$	(3	)


(1)	The third quarter and first nine months of 2015 include net foreign currency translation losses of $13 million and $164 million attributable to noncontrolling interests and $39 million attributable to redeemable noncontrolling interests.


(2)	The first nine months of 2014 reflect net foreign currency losses of $44 million reclassified from accumulated other comprehensive income to other income (loss), net, within our consolidated statement of operations due to our sale of our 49% equity interest in Nadro, S.A. de C.V.


(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.

Table of Contents

McKESSON CORPORATION

FINANCIAL NOTES (CONTINUED)

(UNAUDITED)

Accumulated Other Comprehensive Income (Loss)

Information regarding changes in McKessons accumulated other comprehensive loss, net of tax, by component for the third quarter and first nine months of 2015 is as follows:



(In millions)	Foreign Currency Translation Adjustments, Net of Tax			�	Unrealized Gains (Losses) on Cash Flow Hedges, Net of Tax			�	Unrealized Net Gains (Losses) and Other Components of Benefit Plans, Net of Tax			�	Total Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2014	$	(260	)	�	$	(13	)	�	$	(152	)	�	$	(425	)
�	�			�	�			�	�			�	�
Other comprehensive income (loss) before reclassifications	(364		)	�	1			�	(21		)	�	(384		)
Amounts reclassified to earnings and other				�				�	5			�	5
Other comprehensive income (loss)	(364		)	�	1			�	(16		)	�	(379		)
Balance at December 31, 2014	$	(624	)	�	$	(12	)	�	$	(168	)	�	$	(804	)



Balance at March 31, 2014	$	168		�	$	(11	)	�	$	(160	)	�	$	(3	)
�	�			�	�			�	�			�	�
Other comprehensive loss before reclassifications	(782		)	�	(1		)	�	(21		)	�	(804		)
Amounts reclassified to earnings and other	(10		)	�				�	13			�	3
Other comprehensive loss	(792		)	�	(1		)	�	(8		)	�	(801		)
Balance at December 31, 2014	$	(624	)	�	$	(12	)	�	$	(168	)	�	$	(804	)

Table of Contents

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 December 31,							�	Nine Months Ended December 31,
(In millions)	2014			�	2013			�	2014			�	2013
Revenues	�			�	�			�	�			�	�
Distribution Solutions ⁽¹⁾	�			�	�			�	�			�	�
North America pharmaceutical distribution and services	$	37,398		�	$	32,060		�	$	106,850		�	$	92,808
International pharmaceutical distribution and services	7,288			�				�	22,207			�
Medical-Surgical distribution�& services	1,564			�	1,462			�	4,471			�	4,286
Total Distribution Solutions	46,250			�	33,522			�	133,528			�	97,094
�	�			�	�			�	�			�	�
Technology Solutions - products and services	755			�	814			�	2,293			�	2,466
Total Revenues	$	47,005		�	$	34,336		�	$	135,821		�	$	99,560
�	�			�	�			�	�			�	�
Operating profit	�			�	�			�	�			�	�
Distribution Solutions ^{(2) (3) (4)}	$	785		�	$	552		�	$	2,326		�	$	1,856
Technology Solutions ^{(5) (6)}	111			�	47			�	304			�	294
Total	896			�	599			�	2,630			�	2,150
Corporate Expenses, Net ⁽⁷⁾	(103		)	�	(112		)	�	(317		)	�	(307		)
Interest Expense	(97		)	�	(69		)	�	(297		)	�	(187		)
Income from Continuing Operations Before Income Taxes	$	696		�	$	418		�	$	2,016		�	$	1,656


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


(2)	Operating profit for the third quarter and first nine months of 2014 includes AWP litigation charges of $18 million and $68 million, which were recorded in operating expenses.


(3)	Operating profit for the third quarter and first nine months of 2015 includes last-in-first-out (LIFO) inventory charges of $95 million and $287 million. Operating profit for the third quarter and first nine months of 2014 includes LIFO inventory charges of $142 million and $186 million. The charges were all recorded in cost of sales.


(4)	Operating profit for the third quarter and first nine months of 2015 includes $51 million and $151 million of acquisition-related expenses, and $16�million and $38 million for the third quarter and first nine months of 2014.


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

(6)

Operating profit for the third quarter of 2014 includes product alignment charges, integration-related expenses and severance charges totaling $57 million, of which $34 million was recorded in cost of sales and $23 million was recorded in operating expenses. Operating profit for the first nine months of 2014 includes product alignment charges, integration-related expenses and severance charges totaling $60 million, of which $34 million was recorded in cost of sales and $26 million was recorded in operating expenses.


(7)	Corporate expenses, net, for the third quarter and first nine months of 2015 include $1 million and $11 million of acquisition-related expenses and $25�million and $26 million for the third quarter and first nine months of 2014.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW

(UNAUDITED)


Item 2.	Managements Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Managements 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 Companys fiscal year begins on April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Companys 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 December 31,							�		�	�	Nine Months Ended December 31,							�		�
(Dollars in millions, except per share data)	2014			�	2013			Change			�	2014			�	2013			Change
Revenues	$	47,005		�	$	34,336		37		%	�	$	135,821		�	$	99,560		36		%
�	�			�	�			�		�	�	�			�	�			�		�
Gross Profit	$	2,942		�	$	1,850		59		%	�	$	8,662		�	$	5,801		49		%
�	�			�	�			�		�	�	�			�	�			�		�
Operating Expenses	$	(2,162	)	�	$	(1,357	)	59		�	�	$	(6,406	)	�	$	(3,967	)	61		�
�	�			�	�			�		�	�	�			�	�			�		�
Income from Continuing Operations Before Income Taxes	$	696		�	$	418		67		�	�	$	2,016		�	$	1,656		22		�
Income Tax Expense	(183		)	�	(254		)	(28	)	�	�	(587		)	�	(641		)	(8	)	�
Income from Continuing Operations	513			�	164			213		�	�	1,429			�	1,015			41		�
Loss from Discontinued Operations, Net of Tax	(2		)	�	(99		)	(98	)	�	�	(30		)	�	(122		)	(75	)	�
Net Income	511			�	65			686		�	�	1,399			�	893			57		�
Net Income Attributable to Noncontrolling Interests	(39		)	�				NM		�	�	(55		)	�				NM		�
Net Income Attributable to McKesson Corporation	$	472		�	$	65		626		�	�	$	1,344		�	$	893		51		�
�	�			�	�			�		�	�	�			�	�			�		�
Diluted Earnings (Loss) Per Common Share Attributable to McKesson Corporation	�			�	�			�		�	�	�			�	�			�		�
Continuing Operations	$	2.01		�	$	0.70		187		%	�	$	5.84		�	$	4.36		34		%
Discontinued Operations	(0.01		)	�	(0.42		)	(98	)	�	�	(0.12		)	�	(0.53		)	(77	)	�
Total	$	2.00		�	$	0.28		614		�	�	$	5.72		�	$	3.83		49		�
�	�			�	�			�		�	�	�			�	�			�		�
Weighted Average Diluted Common Shares	236			�	234			1		%	�	235			�	233			1		%

NM not meaningful�

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

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

Income from continuing operations before income taxes for the third quarter and first nine months of 2015 increased compared to the same periods a year ago primarily due to our acquisition of Celesio and higher operating profit from both of our operating segments: Distribution Solutions and Technology Solutions. The increases were partially offset by higher interest expense primarily due to our Celesio acquisition.

Income from continuing operations before income taxes was also impacted by:

Fiscal 2015:


"	LIFO inventory charges of $95 million and $287 million recorded in cost of sales for the third quarter and first nine months,


"	$51 million and $162 million of acquisition-related expenses associated with the acquisitions of Celesio and PSS World Medical, Inc. (PSSI) for the third quarter and first nine months. These expenses were recorded primarily in operating expenses, and


"	A non-cash charge of $34 million for the first nine months related to the retained workforce business within our International Technology business, which was recorded primarily in cost of sales.

Fiscal 2014:


"	LIFO inventory charges of $142 million and $186 million for the third quarter and first nine months,


"	Average Wholesale Price (AWP) litigation charges of $18 million and $68 million for the third quarter and first nine months,


"	$57 million and $60 million of product alignment charges, integration-related expenses and severance charges for the third quarter and first nine months, of which $34 million was recorded in cost of sales for both periods, and


"	$52 million and $74 million of acquisition-related expenses associated with the acquisitions of Celesio and PSSI.

Income tax expense for the third quarter and first nine months of 2014 included a charge of $122 million relating to our litigation with the Canadian Revenue Agency (CRA). The charge resulted from an unfavorable decision received in the third quarter of 2014 from the Tax Court of Canada with respect to transfer pricing issues.

Loss from discontinued operations, net, for the third quarter and first nine months of 2014 includes a non-cash pre-tax and after-tax impairment charge of $80 million to reduce the carrying value of our International Technology business to its estimated net realizable value based on preliminary offers received. The software business within our International Technology business was sold in the second quarter of 2015.

Net income attributable to noncontrolling interests for the third quarter and first nine months of 2015 primarily reflects the $50 million of guaranteed dividends that we became obligated to pay to the noncontrolling shareholders of Celesio upon the effectiveness of the domination and profit and loss transfer agreement as further described below.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Net income attributable to McKesson Corporation for the third quarter and first nine months of 2015 increased compared to the same periods a year ago reflecting the above noted factors. Diluted earnings per common share attributable to McKesson for the third quarter and first nine months of 2015 were $2.00 and $5.72 compared to $0.28 and $3.83 for 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 Celesios debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesios 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. Celesios 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 75.4% and 75.9% of Celesios outstanding and fully diluted common shares at March 31, 2014 and December 31, 2014.

In addition, upon effectiveness of the Agreement, the noncontrolling interests in Celesio became redeemable as a result of a put right. Accordingly, the carrying value of noncontrolling interests related to Celesio of $1.5 billion was reclassified in the third quarter of 2015 from Total Equity to Redeemable Noncontrolling Interests on our condensed consolidated balance sheet. The balance of redeemable noncontrolling interests will be reported at the greater of its carrying value or its maximum redemption value at each reporting date. At December 31, 2014, the carrying value of redeemable noncontrolling interests amounted to $1.5 billion, which exceeded the maximum redemption value of $1.4 billion.

Details regarding our acquisition of Celesio are included in Financial Note 2, Business Combination, to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10-Q.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Revenues:

�

Quarter Ended December 31,

�

Nine Months Ended December 31,

�

(Dollars in millions)

2014

�

2013

Change

�

2014

�

2013

Change

�

Distribution Solutions

�

North America pharmaceutical

distribution & services

37,398

�

32,060

�

106,850

�

92,808

�

International pharmaceutical

distribution & services

7,288

�

22,207

�

Medical-Surgical distribution�& services

1,564

�

1,462

�

4,471

�

4,286

�

Total Distribution Solutions

46,250

�

33,522

�

133,528

�

97,094

�

Technology Solutions - products and services

755

�

814

)

�

2,293

�

2,466

)

�

Total Revenues

47,005

�

34,336

�

135,821

�

99,560

�

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 market growth and our mix of businesses. Market growth reflects growing drug utilization, which includes newly launched drugs, and price and volume increases. In 2015, our revenues benefited from recently launched drugs for the treatment of Hepatitis C. These increases were partially offset by price deflation associated with brand to generic drug conversions. 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 in 2015 primarily due to a decline in software product and service revenues, the planned elimination of a product line and the workforce business within our International Technology business, which we now expect to transition to another service provider during 2016. These decreases were partially offset by a higher volume in our other transaction processing businesses.

Gross Profit:

�

Quarter Ended December 31,

�

Nine Months Ended December 31,

�

(Dollars in millions)

2014

�

2013

�

Change

�

2014

�

2013

�

Change

Gross Profit

�

Distribution Solutions

2,571

�

1,499

�

7,569

�

4,642

�

Technology Solutions

371

�

351

�

1,093

�

1,159

�

)

�

Total

2,942

�

1,850

�

��

�

8,662

�

5,801

�

Gross Profit Margin

�

Distribution Solutions

5.56

4.47

109

bp�

�

5.67

4.78

bp�

Technology Solutions

49.14

�

43.12

�

602

�

47.67

�

47.00

�

Total

6.26

�

5.39

�

6.38

�

5.83

�

bp - basis points

Gross profit and gross profit margin increased for the third quarter and first nine months of 2015 primarily due to an increase in our Distribution Solutions segment. Gross profit margin for 2015 also reflects an increase in gross profit margin from our Technology Solutions segment as further discussed below.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Distribution Solutions

Distribution Solutions segments gross profit increased in the third quarter and first nine months of 2015 primarily due to our acquisition of Celesio and growth in our other Distribution Solutions businesses.� Gross profit margin increased in 2015 primarily due to our acquisition of Celesio and higher buy margin reflecting higher volume and price increases of pharmaceutical products. These increases were partially offset by a decrease in sell margin primarily driven by higher sales volume and the increased sales associated with the recently launched drugs for the treatment of Hepatitis C, which have lower margins. The gross profit margin for the third quarter and first nine months of 2014 was favorably affected by the receipt of $27 million and $34 million, representing our share of settlements of antitrust class action lawsuits brought against drug manufacturers.

Gross profit and gross profit margin were also impacted by LIFO inventory expenses, which were $95 million and $287 million in the third quarter and first nine months of 2015 compared to $142 million and $186 million in the third quarter and first nine 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 reflect replacement cost compared to 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 December 31, 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 segments gross profit increased for the third quarter of 2015 and decreased for the first nine months of 2015.� Changes in our gross profit primarily reflect:


"	A decline in revenues,

$34 million of pre-tax charges in the third quarter and first nine months of 2014 related to product alignment and other actions taken during the third quarter of 2014. The amount was part of a $57 million charge recorded in the third quarter of 2014, which primarily consisted of $35 million of product alignment charges, $15 million of integration-related expenses and $7 million of severance charges.� Charges were recorded in our condensed consolidated statement of operations as follows: $34 million in cost of sales and $23 million in operating expenses, and

$34 million of pre-tax charges in the first nine months of 2015 primarily representing depreciation and amortization for 2014 when the workforce business within our International Technology business was classified as held for sale. �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 expect to transition to another service provider at the end of our current contract with the National Health Service during 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. Accordingly, during the first quarter of 2015, we recorded the pre-tax charge of $34�million.

This segments gross profit margin increased in 2015 primarily reflecting the above charges, the planned elimination of a product line and our mix of businesses.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Operating Expenses and Other Income (Loss), Net:�

�

Quarter Ended December 31,

�

Nine Months Ended December 31,

�

(Dollars in millions)

2014

�

2013

�

Change

�

2014

�

2013

�

Change

Operating Expenses

�

Distribution Solutions

1,794

�

950

�

5,288

�

2,799

�

Technology Solutions^�

261

�

305

�

(14

)

��

�

792

�

866

�

)

�

�Corporate

107

�

102

�

��

�

326

�

302

�

Total

2,162

�

1,357

�

6,406

�

3,967

�

Operating Expenses as a Percentage of Revenues

�

Distribution Solutions

3.88

2.83

105

bp�

�

3.96

2.88

108

bp�

Technology Solutions

34.57

�

37.47

�

(290

)

��

�

34.54

�

35.12

�

(58

)

�

Total

4.60

�

3.95

�

4.72

�

3.98

�

Other Income (Loss), Net

�

Distribution Solutions

�

167

�

246

Technology Solutions

�

��

�

200

�

Corporate

�

(10

)

�

)

�

Total

�

)

�

533

�

Operating expenses increased in 2015 primarily due to our Distribution Solutions segment, partially offset by a decline for our Technology Solutions segment.

Distribution Solutions segments operating expenses increased in the third quarter and first nine months of 2015 primarily due to our acquisition of Celesio, including higher intangible asset amortization, and higher costs to support growth in our businesses. Additionally, operating expenses for the third quarter and first nine months of 2014 were impacted by pre-tax charges of $18�million and $68 million relating to our AWP litigation. �Operating expenses as a percentage of revenues increased in the third quarter and first nine months of 2015 primarily due to our acquisition of Celesio, partially offset by operating leverage in our other businesses.

Technology Solutions segments operating expenses and operating expenses as a percentage of revenue in the third quarter and first nine months of 2015 decreased primarily due to product alignment charges, integration-related expenses and severance charges recorded in 2014, as well as lower benefit and compensation costs.

Corporate expenses for the third quarter and first nine months of 2015 increased primarily due higher compensation and benefit costs and higher expenses incurred to support business growth, partially offset by lower acquisition-related expenses.

Table of Contents

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 December 31,					�	Nine Months Ended December 31,
(Dollars in millions)	2014		�	2013		�	2014		�	2013
Cost of Sales	$	1	�	$	3	�	$	1	�	$	3
Operating Expenses	�		�	�		�	�		�	�
Integration related expenses	38		�	20		�	118		�	31
Severance and relocation	10		�	8		�	36		�	21
Other	2		�	12		�	7		�	14
Other Loss - Corporate			�	13		�			�	13
Interest Expense ⁽¹⁾- Corporate			�	10		�			�	10
Total Acquisition Expenses and Related Adjustments	$	51	�	$	66	�	$	162	�	$	92


(1)	Represents bridge loan fees.

Acquisition expenses and related adjustments by segment were as follows:



�	Quarter Ended December 31,						�	Nine Months Ended December 31,
(Dollars in millions)	2014			�	2013		�	2014		�	2013
Distribution Solutions	$	51		�	$	16	�	$	151	�	$	38
Technology Solutions	(1		)	�	15		�			�	18
Corporate	1			�	35		�	11		�	36
Total Acquisition Expenses and Related Adjustments	$	51		�	$	66	�	$	162	�	$	92

During the third quarter and first nine months of 2015, we incurred $17 million and $92 million related to the acquisition of Celesio. These expenses primarily consisted of professional fees, severance and other costs to integrate the business and were recorded in operating expenses. During the third quarter of 2014, we incurred $35 million in Celesio acquisition-related expenses.� Amounts incurred prior to the third quarter of 2014 were not material.� The 2014 expenses primarily consisted of professional fees, loss on a foreign currency option and fees associated with the 2013 bridge loan and were recorded within the Corporate segment.

We also incurred $35 million and�$69 million during the third quarter and first nine months of 2015, and $15 million and $35 million during the third quarter and first nine months of 2014 in acquisition-related expenses associated with our 2013 acquisition of PSSI.� These expenses primarily relate to a distribution center rationalization, information technology conversions to common platforms, employee retention incentives and other costs of integrating the business and were recorded in operating expenses within the Distribution Solutions segment.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Amortization Expenses of Acquired Intangible Assets

During the third quarter of and first nine months of 2015, amortization expense of intangible assets acquired in connection with acquisitions by the Company increased by $55 million and $175�million compared to the same periods a year ago primarily reflecting our acquisition of Celesio. Amortization expense by segment was as follows:



�	Quarter Ended December 31,					�	Nine Months Ended December 31,
(Dollars in millions)	2014		�	2013		�	2014		�	2013
Distribution Solutions	$	112	�	$	55	�	$	348	�	$	162
Technology Solutions	13		�	15		�	38		�	49
Total	$	125	�	$	70	�	$	386	�	$	211

Other Income (Loss), Net: Other income (loss), net, increased in the third quarter and first nine months of 2015 compared to the same periods a year ago primarily due to our acquisition of Celesio. The third quarter and the first nine months of 2014 also include a $13 million loss on an option relating to the acquisition of Celesio, which was recorded within the Corporate segment.

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

�

Quarter Ended December 31,

�

Nine Months Ended December 31,

�

(Dollars in millions)

2014

�

2013

�

Change

�

2014

�

2013

�

Change

Segment Operating Profit ⁽¹⁾

�

Distribution Solutions

785

�

552

�

2,326

�

1,856

�

Technology Solutions

111

�

136

�

304

�

294

�

Subtotal

896

�

599

�

2,630

�

2,150

�

Corporate Expenses, Net

(103

)

�

(112

)

�

)

�

(317

)

�

(307

)

�

Interest Expense

(97

)

�

(69

)

�

��

�

(297

)

�

(187

)

�

Income from Continuing Operations

Before Income Taxes

696

�

418

�

��

�

2,016

�

1,656

�

Segment Operating Profit Margin

�

Distribution Solutions

1.70

1.65

bp�

�

1.74

1.91

(17

)

bp�

Technology Solutions

14.70

�

5.77

�

893

�

13.26

�

11.92

�

134

�


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

Segment Operating Profit:�

Distribution Solutions: Operating profit for our Distribution Solutions segment increased in 2015 primarily reflecting growth in our businesses and our acquisition of Celesio.� Operating profit margin for the third quarter of 2015 increased primarily due to our mix of businesses, partially offset by our acquisition of Celesio. Operating profit margin for the first nine months of 2015 decreased primarily due to our acquisition of Celesio, partially offset by our mix of businesses.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Technology Solutions: Operating profit and operating profit margin for the third quarter and first nine months of 2015 increased due to higher gross profit margin and a reduction in operating expenses and operating expense margin.

Corporate:� Corporate expenses, net of other income, for the third quarter of 2015 decreased primarily due to�higher other income. For the first nine months of 2015, corporate expenses, net, increased primarily due to higher operating expenses, offset by higher other income.

Interest Expense: Interest expense for the third quarter and first nine 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 Celesios 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 third quarters of 2015 and 2014 were 26.3% and 60.8% and for the first nine months of 2015 and 2014 were 29.1% and 38.7%. 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, discrete tax items and legislative changes in the United States. Income tax expense for the third quarters of 2015 and 2014 included net discrete tax benefits of $10 million and net discrete tax expenses of $119 million, and for the first nine months of 2015 and 2014 included net discrete tax benefit of $28 million and net discrete tax expense of $119�million. Discrete tax expense for 2014 was primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. Income tax expense for the third quarter and first nine months of 2015 include a $20 million benefit pertaining to the Tax Increase Prevention Act of 2014 which was signed by the President of the United States on December 19, 2014.

Loss from Discontinued Operations, Net of Tax: Loss from discontinued operations, net of tax, was $2 million and $99�million for the third quarters of 2015 and 2014, and $30 million and $122 million for the first nine months of 2015 and 2014. Loss from discontinued operations, net of tax, for 2014 included a non-cash pre-tax and after-tax impairment charge of $80 million to reduce the carrying value of our International Technology business to its estimated net realizable value. The charge was primarily the result of the terms of the preliminary purchase offers received for this business during the third quarter of 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 our 2015 loss from discontinued operations, net of tax. Additionally, 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. Diluted loss per common share from discontinued operations for the third quarter of 2015 was $0.01 compared to $0.42 for the same period a year ago and $0.12 compared to $0.53 for the first nine months of 2015 and 2014.�

Net income Attributable to Noncontrolling Interests: Net income attributable to noncontrolling interests for 2015 primarily represents the $50 million Guaranteed Dividend that we became obligated to pay to the noncontrolling shareholders of Celesio upon the effectiveness of the Agreement.�

Net Income Attributable to McKesson Corporation: Net income attributable to McKesson Corporation was $472 million and �$65 million, and diluted earnings per common share attributable to McKesson Corporation were $2.00 and $0.28 for the third quarters of 2015 and 2014. Net income attributable to McKesson Corporation was $1,344 million and $893 million, and diluted earnings per common share attributable to McKesson Corporation were $5.72 and $3.83 for the first nine 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 236 million and 234 million for the third quarters of 2015 and 2014 and 235�million and 233�million for the first nine months of 2015 and 2014.

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 (the Acquisition). Upon the Acquisition, as required, we consolidated Celesios debt with a fair value of $2.3 billion as a liability on our consolidated balance sheet and our ownership of Celesios fully diluted common shares was 75.6%. At March�31, 2014 and December 31,�2014, we owned approximately 75.4% and 75.9% of Celesios 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.

Table of Contents

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 $1,229 million and $472 million during the first nine 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 primarily a function of sales and purchase volumes, inventory requirements and vendor payment terms.

Investing activities utilized cash of $439 million and $422 million during the first nine months of 2015 and 2014. Investing activities primarily reflect cash paid for business and property acquisitions and capitalized software. Investing activities for 2015 and 2014 also reflect $15 million and $97 million of net proceeds from the sales of businesses and equity investments.

Financing activities utilized cash of $252 million and $73 million during the first nine months of 2015 and 2014. Financing activities for the first nine months of 2015 include cash receipts of $2,451 million and payments of $2,327 million for short-term borrowings incurred by Celesio. Long-term debt repayments for the first nine months of 2015 were primarily cash paid on Celesios promissory notes. Financing activities for 2015 also reflect $32 million of cash payments made to acquire approximately 1 million additional common shares of Celesio through the tender offers. Financing activities for the first nine months of 2014 include cash receipts and payments of $150�million for short-term borrowings.

The total authorization outstanding for repurchases of the Companys common stock was $340 million at December�31, 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 liquidity projections, corporate and regulatory requirements, restrictions under our debt obligations, our stock price 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)	December 31, 2014		�	March 31, 2014		�
Cash and cash equivalents	$	4,587	�	$	4,193	�
Working capital	4,363		�	3,072		�
Debt, net of cash and cash equivalents	5,807		�	6,526		�
Debt to capital ratio ⁽¹⁾	53.4		%	55.7		%
Net debt to net capital employed ⁽²⁾	39.0		�	43.4		�
Return on stockholders equity ⁽³⁾	19.7		�	16.2		�


(1)	Ratio is computed as total debt divided by the sum of total debt and McKesson stockholders equity, which excludes noncontrolling and redeemable 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, which excludes noncontrolling and redeemable 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.

Table of Contents

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. government securities, 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 shortterm 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 in Germany with banks that are part of a deposit protection program.

Our cash and cash equivalents balance as of December�31, 2014 included approximately $2.2 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 due to a decrease in our debt and an increase in cash and cash equivalents.

Upon the effectiveness of the Agreement on December 2, 2014, the noncontrolling interests in Celesio received a put right that enables them to put their Celesio shares to McKesson at �22.99 per share, which price is increased annually for interest in the amount of 5 percentage points above a base rate published by the German Bundesbank semiannually, less any compensation amount or guaranteed dividend already paid (Put Amount).� Accordingly, the noncontrolling interests in Celesio became redeemable as a result of the put right and the carrying value of noncontrolling interests related to Celesio of $1.5 billion was reclassified from Total Equity to Redeemable Noncontrolling Interests on our condensed consolidated balance sheet. The balance of redeemable noncontrolling interests will be reported at the greater of its carrying value or its maximum redemption value at each reporting date. The redemption value is the Put Amount adjusted for exchange rate fluctuations each period. At December 31, 2014, the carrying value of redeemable noncontrolling interests amounted to $1.5 billion, which exceeded the maximum redemption value of $1.4 billion. The ultimate amount and timing of any future cash payments related to the Put Amount are uncertain.

In July 2013, the Companys 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.

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.

Information regarding 2014 financing activities related to our acquisition of Celesio is included in Financial Note 2, Business Combinations, to the accompanying condensed consolidated financial statements appearing in this Quarterly Report on Form 10Q. �

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONTINUED)

(UNAUDITED)

Celesio Debt

Celesio has accounts receivable factoring facilities (the Factoring Facilities) with a total committed balance of $283 million. The Factoring Facilities will expire through January 2016. During the first nine months of 2015, Celesio borrowed and repaid $2,200 million and $2,154�million of short-term borrowings under the Factoring Facilities. At December�31, 2014 and March�31,�2014, there were $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 nine months of 2015 and there were no amounts outstanding under this facility as of December�31, 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 nine months of 2015, Celesio borrowed and repaid $259 million and $196 million under these credit lines primarily relating to shortterm borrowings. As of December 31, 2014 and March�31, 2014, there were $225 million and $188 million outstanding under these credit lines.

Accounts Receivable Sales Facility

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

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 nine months of 2015 and 2014. As of December�31, 2014 and March 31, 2014, there were no amounts outstanding under this 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 December�31, 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.

Table of Contents

McKESSON CORPORATION

FINANCIAL REVIEW (CONCLUDED)

(UNAUDITED)

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including Managements 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 Companys 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 Companys 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 Companys 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 forwardlooking 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.

Table of Contents

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 Companys management, have evaluated the effectiveness of the Companys 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 third 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 Companys overall internal control over financial reporting processes.

PART IIOTHER 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 Companys common stock was $340�million at December�31, 2014.

Table of Contents

McKESSON CORPORATION

The following table provides information on the Companys share repurchases during the third 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
October 1, 2014 October 31, 2014		$		�		$	340
November 1, 2014 November 30, 2014		�		�		�	340
December�1, 2014 December 31, 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

Table of Contents

McKESSON CORPORATION


Item 6.	Exhibits.



Exhibit Number	Description
10.1*	Forms of McKesson Corporation Statement of Terms and Conditions Applicable to Awards Pursuant to the Long-Term Incentive Plan, effective October 21, 2014.
�	�
10.2*	Form of McKesson Corporation Statement of Terms and Conditions Applicable to Awards Pursuant to the 2005 Management Incentive Plan, effective October 21, 2014.
�	�
10.3*	Forms of McKesson Corporation Statement and Terms and Conditions applicable to Awards Pursuant to the McKesson Corporation 2013 Stock Plan.
�	�
10.4	Amendment No. 5, dated as of November 14, 2014, Amendment No. 4, dated as of January 30, 2014, Amendment No. 3, dated as of November�15, 2013, Amendment No. 2, dated as of May�15, 2013, and Amendment No. 1, dated as of May�16, 2012, to the Fourth Amended and Restated Receivables Purchase Agreement and Fourth Amended and Restated Receivables Purchase Agreement, dated as of May�18, 2011, among the Company, as servicer, CGSF Funding Corporation, as seller, the several conduit purchasers from time to time party to the Agreement, the several committed purchasers from time to time party to the Agreement, the several managing agents from time to time party to the Agreement, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (as successor to JPMorgan Chase Bank, N.A.), as collateral agent.
�	�
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 December 31, 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.

Table of Contents

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:	February�5, 2015	�	/s/ James A. Beer
�	�	�	James A. Beer
�	�	�	Executive Vice President and Chief Financial Officer

�



�	�	�	MCKESSON�CORPORATION
�	�	�	�
Date:	February�5, 2015	�	/s/ Nigel A. Rees
�	�	�	Nigel A. Rees
�	�	�	Vice President and Controller

Exhibit 10.1

CEO

FORM OF

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS

APPLICABLE TO AWARDS MADE TO

THE CHIEF EXECUTIVE OFFICER

PURSUANT TO THE LONG-TERM INCENTIVE PLAN

The following terms and conditions shall apply to awards made under the McKesson Corporation Long-Term Incentive Plan on or after October 21, 2014 to a key executive of the Company (the Participant). Capitalized terms used herein are defined in Section 7.

1. Committee Action.

The Target Award is the amount specified by the Committee at the time of making the award. Notwithstanding any provision of the Plan to the contrary, no amount shall be payable with respect to a Performance Period unless the Committee certifies that it is satisfied that the requirements (performance or otherwise) associated with such payment have been fully met.

2. Performance Measures.

Any payment pursuant to the Target Award shall be contingent upon the Companys performance during the Performance Period. The final amount to be paid pursuant to the Target Award shall be calculated by determining the percentage, determined with reference to the Performance Chart (with interpolation), and then applying the result to the Target Award (such finally determined amount, the Actual Award). The Target Award and the Actual Award may be referred to herein cumulatively as the Awards.

The Committee reserves the right to reduce the individual payments determined according to the above formula.

Payment of the Actual Award, if any, shall be made in a lump sum as soon as reasonably practicable following the end of the Performance Period and the Committees certification as set forth in Section 1, subject to forfeiture as provided in Section 3 below or acceleration as provided in Section 4 below; provided, however, that the Actual Award shall not be paid later than following the end of the calendar year in which the Performance Period ends, unless as otherwise provided below.

3. Effect of a Termination of Employment.


(a)	Termination of Employment Due to Retirement, Death or Long-Term Disability Prior to Completion of One Half of the Performance Period; Termination for Any Reason Other Than Retirement, Death or Long-Term Disability Prior to Payment of the Actual Award

CEO

If the Participant ceases to be a bona fide employee of the Company prior to completion of one half of the Performance Period, for any reason, or prior to the payment of the Actual Award for any reason other than Retirement, death or Long-Term Disability, the Participants interest in the Awards shall be forfeited in its entirety and no amount shall be payable to the Participant with respect to service during the Performance Period.


(b)	Termination of Employment by Reason of Retirement, Death or Long-Term Disability On or After Completion of One Half of the Performance Period

If the Participant ceases to be a bona fide employee of the Company on or after completion of one half of the Performance Period, due to Retirement, death or Long-Term Disability, the Participant (or the Participants Beneficiary, if payment is made on account of the death of the Participant) shall be entitled to receive the following as soon as reasonably practicable after the end of the Performance Period, but prior to the end of the calendar year in which the Performance Period ends:

The pro-rata portion of the Actual Award adjusted by the actual service during the Performance Period; provided, the fraction representing the pro-rata amount shall be applied to the Actual Award, which is based on the actual performance during the Performance Period, and not the Target Award.

4. Effect of Change in Control.

In the event of the occurrence of a Change in Control prior to the termination of the Participants employment with the Company, the Actual Award will be calculated and replaced with an award of restricted cash with a dollar amount equal to the dollar amount of the Actual Award assuming attainment of target performance or actual performance achieved, if greater, as of the Change in Control and with the restrictions on such restricted cash award lapsing at the end of the Performance Period applicable to the Target Award without regard to the Change in Control. In the event that the Participants employment is terminated by the Company without Cause or for Retirement, death or Long Term Disability or by the Participant for Good Reason during the vesting period of the restricted cash award, such restricted cash award shall immediately vest and be paid out as follows:

The Participant shall receive a cash payment determined based on the Performance Chart measured through the last full fiscal year completed prior to the employment termination date, and paid as soon as practicable following the employment termination date, but in no event later than the date that is the later of (i) the end of the calendar year or (ii) two and one-half months after, such employment termination date.

CEO

5. Section 409A.

It is the Companys intent that the Awards under the Plan do not constitute deferred compensation subject to section 409A of the Internal Revenue Code of 1986, as amended (Section 409A); however, to the extent any amount payable under the Plan, when considered together with any other payments or benefits which may be considered deferred compensation subject to Section 409A (as determined by the Company in its reasonable judgment), would result in the imposition of additional tax under Section 409A if paid on or within six months following such termination of employment, such amount shall instead be paid on the date that follows the date of such termination of employment by six months or such longer time as required to avoid tax liabilities under Section 409A. For purposes of this Statement of Terms and Conditions, termination of employment and similar iterations, shall have the same meaning as Separation from Service as defined in DCAP III.

6. Employment Agreement.

Notwithstanding the foregoing, no provision in this document herein shall adversely affect any provision in the employment agreement by and between the Participant and the Company, if any, in effect at the time when payments are made under the Plan.

7. Definitions.

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

(a)

Beneficiary means the person, persons or entity designated by a Participant in accordance with any procedures estab-lished by the Committee to receive any amounts distributable under the Plan in the event of the death of the Participant. If no Beneficiary is designated or if no designated Beneficiary is living when a distribu-tion is to be made, then the Beneficiary shall be the Participants current lawful spouse if then living or, if not, the Participants estate. A Participant may change or revoke a previous designation of a Beneficiary at any time.


(b)	Cause means termination of the Participants employment with the Company upon the Participants negligent or willful engagement in misconduct which, in the sole determination of the Chief Executive Officer (CEO) (or his designee), is injurious to the Company, its employees, or its customers.


(c)	Change in Control shall have the meaning set forth in Section 6 of the Plan.


(d)	Committee means the Compensation Committee of the Board of Directors of the Company.


(e)	Company means McKesson Corporation, a Delaware corporation, including its subsidiaries and affiliates.


(f)	DCAP III means the McKesson Corporation Deferred Compensation Administration Plan III, as amended from time to time.


(g)	Good Reason means any of the following actions, if taken without the express written consent of the Participant:

CEO

(i)

Any material change by the Company in the CEOs functions, duties or responsibilities as President and Chief Executive Officer, which change would cause the CEOs position with the Company to become of less dignity, responsibility, importance, or scope as compared to the position and attributes that applied to the CEO immediately prior to the Change in Control, or an adverse change in the CEOs title, position or his obligation and right to report directly to the Board;


(ii)	Any reduction in the CEOs 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 Company;


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


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


(v)	Cancellation of the automatic renewal mechanism set forth in the CEOs Employment Agreement;


(vi)	If the Board removes the CEO 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


(vii)	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 (A) has given written notice to the Board as to the details of the basis for such Good Reason within thirty (30) days following the date on which the Participant alleges the condition giving rise to such Good Reason initially occurs and the Company has failed to provide a reasonable cure within thirty (30) business days after its receipt of such notice and (B) Participants Separation from Service occurs within ninety (90) days of the time in which the condition giving rise to such Good Reason initially occurs.

(h)

Long-Term Disability shall mean a physical or mental condition in respect of which the administrator of the Companys 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 Companys long-term disability plan, a physical or mental condition that the administrator of the Companys long-term disability plan determines would have rendered the Participant eligible to receive income replacement benefits, had the Participant been enrolled in such plan.

CEO


(i)	The Performance Chart shall be the performance measure(s) and award scale(s), specified by the Committee at the time of making the award.


(j)	Performance Period is the period of time, identified by a beginning and end date, specified by the Committee at the time of making the award over which performance is measured.


(k)	Plan means the McKesson Corporation Long-Term Incentive Plan, as amended from time to time.


(l)	Retirement means Approved Retirement in accordance with the McKesson Executive Benefit Retirement Plan or having age plus service equal to or greater than 65 and designation as a retiree by the Compensation Committee of the Board.


(m)	Target Award means the amount specified by the Committee payable to a participant for the Performance Period and payable for achievement at 100%.

OFFICERS

FORM OF

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS

APPLICABLE TO AWARDS MADE TO

CERTAIN OFFICERS

PURSUANT TO THE LONG-TERM INCENTIVE PLAN

1. Committee Action.

The Target Award is the amount specified by the Committee at the time of making the award. The Committee reserves the right to adjust an individuals Target Award prior to the date of payment of such award if there is a change in an individuals duties and/or responsibilities. Notwithstanding any provision of the Plan to the contrary, no amount shall be payable with respect to a Performance Period unless the Committee certifies that it is satisfied that the requirements (performance or otherwise) associated with such payment have been fully met.

2. Performance Measures.

The Committee reserves the right to reduce the individual payments determined according to the above formula.

3. Effect of a Termination of Employment.


(a)	Termination of Employment Due to Retirement, Death or Long-Term Disability Prior to Completion of One Half of the Performance Period; Termination for Any Reason Other Than Retirement, Death or Long-Term Disability Prior to Payment of the Actual Award

OFFICERS

Participants interest in the Awards shall be forfeited in its entirety and no amount shall be payable to the Participant with respect to service during the Performance Period.


(b)	Termination of Employment by Reason of Retirement, Death or Long-Term Disability On or After Completion of One Half of the Performance Period

4. Effect of Change in Control.

5. Section 409A.

OFFICERS

6. Employment Agreement. ��

7. Definitions.

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

(a)

Beneficiary means the person, persons or entity designated by a Participant in accordance with any procedures established by the Committee to receive any amounts distributable under the Plan in the event of the death of the Participant. If no Beneficiary is designated or if no designated Beneficiary is living when a distribution is to be made, then the Beneficiary shall be the Participants current lawful spouse if then living or, if not, the Participants estate. A Participant may change or revoke a previous designation of a Beneficiary at any time.


(b)	Cause means termination of the Participants employment with the Company upon the Participants negligent or willful engagement in misconduct which, in the sole determination of the Chief Executive Officer (or his designee), is injurious to the Company, its employees, or its customers.


(c)	Change in Control shall have the meaning set forth in Section 6 of the Plan.


(d)	Committee means the Compensation Committee of the Board of Directors of the Company.


(e)	Company means McKesson Corporation, a Delaware corporation, including its subsidiaries and affiliates.


(f)	DCAP III means the McKesson Corporation Deferred Compensation Administration Plan III, as amended from time to time.


(g)	Good Reason means any of the following actions, if taken without the express written consent of the Participant:


(i)	Any material adverse change by the Company in the Participants authorities, duties, or responsibilities, which change would cause the Participants position with the Company 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;


(ii)	Any significant reduction in the Participants base salary immediately prior to the Change in Control, other than a reduction effected as part of an across-the-board reduction affecting all Plan participants;


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

OFFICERS


(iv)	The Companys 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; or


(v)	Any change in the person to whom the Participant reports, as this relationship existed immediately prior to a Change in Control;

(h)


(i)	The Performance Chart shall be the performance measure(s) and award scale(s), specified by the Committee at the time of making the award.


(j)	Performance Period is the period of time, identified by a beginning and end date, specified by the Committee at the time of making the award over which performance is measured.


(k)	Plan means the McKesson Corporation Long-Term Incentive Plan, as amended from time to time.


(l)	Retirement means Approved Retirement in accordance with the McKesson Executive Benefit Retirement Plan or having age plus service equal to or greater than 65 and designation as a retiree by the Compensation Committee of the Board.


(m)	Target Award means the amount specified by the Committee payable to a participant for the Performance Period and payable for achievement at 100%.

EMPLOYEES

FORM OF

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS

APPLICABLE TO AWARDS MADE TO

CERTAIN EMPLOYEES

PURSUANT TO THE LONG-TERM INCENTIVE PLAN

1. Committee Action.

2. Performance Measures.

The Committee reserves the right to reduce the individual payments determined according to the above formula.��

3. Effect of a Termination of Employment.


(a)	Termination of Employment Due to Retirement, Death or Long-Term Disability Prior to Completion of One Half of the Performance Period; Termination for Any Reason Other Than Retirement, Death or Long-Term Disability Prior to Payment of the Actual Award

EMPLOYEES


(b)	Termination of Employment by Reason of Retirement, Death or Long-Term Disability On or After Completion of One Half of the Performance Period

If the Participant ceases to be a bona fide employee of the Company or of its subsidiaries and affiliates, on or after completion of one half of the Performance Period, due to Retirement, death or Long-Term Disability, the Participant (or the Participants Beneficiary, if payment is made on account of the death of the Participant) shall be entitled to receive the following as soon as reasonably practicable after the end of the Performance Period, but prior to the end of the calendar year in which the Performance Period ends:

4. Effect of Change in Control.

5. Section 409A.

EMPLOYEES

6. Definitions.

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

(a)

Beneficiary means the person, persons or entity designated by a Participant in accordance with any procedures estab-lished by the Committee to receive any amounts distributable under the Plan in the event of the death of the Participant. If no Beneficiary is designated or if no designated Benefi-ciary is living when a distribu-tion is to be made, then the Beneficiary shall be the Participants current lawful spouse if then living or, if not, the Participants estate. A Participant may change or revoke a previous designation of a Beneficiary at any time.


(b)	Cause means termination of the Participants employment with the Company upon the Participants negligent or willful engagement in misconduct which, in the sole determination of the Chief Executive Officer (or his designee), is injurious to the Company, its employees, or its customers.


(c)	Change in Control shall have the meaning set forth in Section 6 of the Plan.


(d)	Committee means the Compensation Committee of the Board of Directors of the Company.


(e)	Company means McKesson Corporation, a Delaware corporation, including its subsidiaries and affiliates.


(f)	DCAP III means the McKesson Corporation Deferred Compensation Administration Plan III, as amended from time to time.


(g)	Good Reason means any of the following actions, if taken without the express written consent of the Participant:


(i)	Any material adverse change by the Company in the Participants authorities, duties, or responsibilities, which change would cause the Participants position with the Company 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;


(ii)	Any significant reduction in the Participants base salary immediately prior to the Change in Control, other than a reduction effected as part of an across-the-board reduction affecting all Plan participants;


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


(iv)	The Companys 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;

EMPLOYEES

(h)


(i)	The Performance Chart shall be the performance measure(s) and award scale(s), specified by the Committee at the time of making the award.


(j)	Performance Period is the period of time, identified by a beginning and end date, specified by the Committee at the time of making the award over which performance is measured.


(k)	Plan means the McKesson Corporation Long-Term Incentive Plan, as amended from time to time.


(l)	Retirement means Approved Retirement in accordance with the McKesson Executive Benefit Retirement Plan or having age plus service equal to or greater than 65 and designation as a retiree by the Compensation Committee of the Board.


(m)	Target Award means the amount specified by the Committee payable to a participant for the Performance Period and payable for achievement at 100%.

Exhibit 10.2

FORM OF

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS

APPLICABLE TO AWARDS

PURSUANT TO THE 2005 MANAGEMENT INCENTIVE PLAN

Effective October 21, 2014

The following terms and conditions shall apply to awards made under the McKesson Corporation 2005 Management Incentive Plan (the Plan) to an executive, managerial or professional employee of the Company who is specifically designated as a participant in the Plan. Capitalized terms used herein are defined in the Plan or in Section�10. In the event these terms and conditions conflict with the terms of the Plan document, the Plan document shall control.


1.	Participant.

Only an active employee of the Company who is employed in an executive, managerial or professional capacity may be designated as a Participant under the Plan; provided, however, that designation as a Participant is contingent upon the execution and delivery to the Company of an agreement, within a period following presentment and in a form that is satisfactory to the Company, regarding confidentiality, intellectual property and/or other restrictive covenants, as well as compliance with such agreement; and provided, further, that the Committee shall determine in its sole discretion whether the Participant has complied with the provisions of any such agreement, which determination shall be conclusive and binding on all interested persons.

The Committee shall review those employees who are eligible to participate in the Plan and recommended by management and determine which of those employees will become Plan Participants. The Committee may add to or delete individuals from the list of designated Participants at any time and from time to time, at its sole discretion. The Committee has delegated the authority to approve Plan Participants to the Chief Executive Officer of the Company.

Participation in the Plan during the Performance Period does not guarantee payment of an Actual Award under the Plan for the Performance Period. Participation in the Plan during one Performance Period does not guarantee participation during a subsequent Performance Period.


A.	New Hires.

An employee hired after the beginning of the Performance Period must be in an eligible position and actively at work prior to the January�1 that falls within the Performance Period in order to be a Participant for the Performance Period.


B.	Transfers and Promotions.

An employee promoted into or transferred from an ineligible position to an eligible position during the Performance Period must be actively at work for a minimum of three months during the Performance Period in the new eligible position to be a Participant.

An employee designated as a Participant in the Plan for the Performance Period who is demoted from or transferred from an eligible position to an ineligible position during the Performance Period

must be actively at work in the eligible position for a minimum of three months during the Performance Period to be a Participant.


2.	Individual Target Award.

The Individual Target Award is the percentage of base annual salary specified at the beginning of the Performance Period (or beginning of participation, if later) for a Participant.


A.	Transfers, Promotions and Demotions.

A Participant who moves during the Performance Period from one eligible position to a new eligible position with a higher Individual Target Award will, in general, have the determination of his or her Actual Award prorated between the two Individual Target Awards, provided that the Participant is actively at work for a minimum of three months of the Performance Period in the new eligible position having the higher Individual Target Award.

A Participant who during the Performance Period is demoted to or transferred to a new eligible position with a lower Individual Target Award will have the determination of his or her Actual Award prorated in managements discretion.

Notwithstanding the foregoing, any proration must be based on the achievement of Performance Goals for the Performance Period.


3.	Performance Measures and Goals.

Each Participant shall have one or more Individual Performance Measures. Individual Performance Measures may be quantitative, qualitative or both. The Performance Goals (defined in Article�F of the Plan)�established for each segment of the Company are referred to as the Business Scorecard. A Participants Individual Performance Measures and the Performance Goals, taken as a whole, will determine the amount of the Participants Actual Award.

A Participant who changes jobs and / or organizations during the Performance Period may have different Business Scorecards applicable to each job / organization. The Participant may, in managements discretion, have the determination of his or her Actual Award prorated between the two Business Scorecards.


4.	Individual Performance Modifier.

Actual Awards will be adjusted, in managements discretion, to reflect the Participants individual contribution to Business Scorecard results and the Participants Individual Performance Measures.


5.	Other Individual Requirements.

Notwithstanding any provision of the Plan to the contrary, no amount shall be payable with respect to the Performance Period unless the Committee certifies that it is satisfied that the requirements (performance or otherwise) associated with such payment have been fully met. Such requirements may include, but are not limited to:


"	Completion of the Companys Legal and Regulatory Compliance and Ethics Training Program.


6.	Award Determination.

Any payment to a Participant shall be based on Business Scorecard results during the Performance Period as modified by the Participants Individual Performance Modifier. The Actual Award is determined by:


"	Taking the Covered Compensation received during the Performance Period;


"	Multiplying by the Individual Target Award;


"	Multiplying that result by the Business Scorecard results (actual�vs. target);


"	Adjusting the result determined above, up or down, by the Individual Performance Modifier.

Management and the Committee shall review and approve, modify or disapprove the Actual Award, if any, to be paid to a Participant for the Performance Period. Management and the Committee reserve the right to reduce or increase or eliminate the individual payments determined according to the above method. No Personal Modifier shall exceed 150%.

Notwithstanding the foregoing, any Awards to Covered Employees shall be made and determined in a manner consistent with the Plan and Section�162(m)�of the Code.


7.	Effect of a Termination of Employment, Prior to the End of the Performance Period, on Awards.


A.	Termination of Employment for Other Than Death, Retirement, Severance or LongTerm Disability.

If the Participant ceases to be a bona fide employee of the Company prior to the payment of the Actual Award, for any reason other than death, Retirement, Severance or Long-Term Disability, the Participants interest in the Awards shall be forfeited and no amount shall be payable to the Participant with respect to service during the Performance Period.


B.	Termination of Employment by Reason of Death or LongTerm Disability.

If the Participant ceases to be a bona fide employee of the Company due to death or LongTerm Disability during the Performance Period, the Participant (or the Participants Beneficiary, if payment is made on account of the death of the Participant)�shall be entitled to receive an Actual Award as calculated under Paragraph�6 above.


C.	Termination of Employment by Reason of Retirement.

If the Participant ceases to be a bona fide employee of the Company due to Retirement prior to January 1 of the Performance Period, the Participants interest in the Awards shall be forfeited and no amount shall be payable to the Participant with respect to service during the Performance Period.

If the Participant ceases to be a bona fide employee of the Company due to Retirement on or after January 1 of the Performance Period, the Participant shall be entitled to receive an Actual Award as calculated under Paragraph�6 above.


D.	Termination of Employment by Reason of Severance.

If the Participant ceases to be a bona fide employee of the Company due to Severance prior to January 1 of the Performance Period, the Participants interest in the Awards shall be forfeited and no amount shall be payable to the Participant with respect to service during the Performance Period.

If the Participant ceases to be a bona fide employee of the Company due to Severance on or after January 1 of the Performance Period, the Participant shall be entitled to receive an Actual Award as calculated under Paragraph�6 above.


8.	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 his or her personal data as described in this document by and among, as applicable, the Participants employer (the Employer) and the Company for the exclusive purpose of implementing, administering and managing participation in the Plan.

The Participant understands that the Company and the Employer hold certain personal information about the Participant, including but not limited to his or her name, home address and telephone number, date of birth, social insurance or other identification number, salary, nationality, job title, any shares of Company stock or directorships held in the Company, details of all compensation or any other entitlement to Company-sponsored benefits 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 these recipients may be located in the Participants country or elsewhere, such as in the United States of America, and that the recipients country may have different data privacy laws and protections than the Participants country. The Participant understands that he or she 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. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she 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. The Participant understands, however, that refusing or withdrawing consent may affect his or her ability to participate in the Plan. For more information on the consequences of refusal to consent or withdrawal of consent, the Participant understands that he or she may contact the local human resources representative.


9.	GOVERNING LAW.

The law of the State of Delaware shall govern all question concerning the construction, validity and interpretation of the Plan and any Awards, without regard to the states conflict of laws rules.


10.	Definitions.

Capitalized terms shall have the same meaning as provided in the Plan. Additional capitalized text that is not included in the Plan, but is used in this Statement of Terms and Conditions, shall have the meaning set forth below:


(a)	Actual Award means the finally determined amount payable under the Plan for a Performance Period.


(b)	Awards means, collectively, Individual Target Awards and Actual Awards.


(c)	Covered Compensation means regular wages earned by and paid to the Participant during the Performance Period, including any Paid Time Off (PTO)�pay. Covered Compensation does not include any other compensation received during the Performance Period, including, but not limited to, earnings received during a paid leave, overtime or commission pay.

(d)


(e)	Retirement means termination from the Company with age plus years of service equal to at least 65.


(f)	Severance means participation in and entitlement to benefits under the Companys Severance Pay Plan in accordance with the terms and conditions of such plan.

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

2013 Stock Plan STC (Employee)

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 Directors 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 Directors rights in the event of the Outside Directors 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 Corporations 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 Directors 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 Corporations transfer agent recording the Outside Directors 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 Corporations 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 Directors 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 Directors 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 Directors 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 Directors 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.

(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, LongTerm Disability, Normal Retirement, Early Retirement or death, the Option Period shall end on the earlier of (x)�90 days after the date of the Participants 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 ShortTerm 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 Participants 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 LongTerm Disability during the Option Period, the vesting schedule of the Participants 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 Participants termination of employment and (y) the Expiration Date.

(D)If the Participants employment is terminated:

(i)��By reason of Normal Retirement, the vesting schedule of the Participants 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 Participants 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 Participants 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 Participants subsequent termination of employment, the posttermination 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 Participants initial termination of employment and the Participant's rehire 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 Participants 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 Participants 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 Corporations transfer agent recording the Participants 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 Participants 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 Participants death, to all of the Participants 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 Participants rights in the event of the Participants 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 Corporations 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 Corporations transfer agent recording the Participants 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 Participants 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 ShortTerm 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, LongTerm 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, LongTerm 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.

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�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 Corporations 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 Participants brokerage account of record. If the Participant does not have a brokerage account of record, then an appropriate book entry recording the Participants interest in the unrestricted Shares shall be entered on the records of the Corporations transfer agent.


IV.	RESTRICTED STOCK UNITS AND PERFORMANCE SHARES

1.Award Agreement.

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.

(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 ShortTerm 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, LongTerm 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, LongTerm 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.

(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.

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 Participants rights in the event of the Participants 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 Corporations 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 Participants 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 Corporations transfer agent recording the Participants 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 Participants 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 Participants rights in the event of the Participants 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 Corporations 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 Participants 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 Corporations transfer agent recording the Participants 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 Participants own purpose or the purpose of others, any trade secrets, confidential information, knowledge, data or knowhow 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 Participants employment, whether or not they are the Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants continuing obligations with respect to non-disclosure, non-competition and/or non-solicitation under the Participants 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

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, Performance Share Award or TSR Unit 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 Corporations 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 or TSR Unit Award, shall consist of restricted stock or restricted stock units with a value (determined using the Surviving Companys stock price as of the effective date of the Change in Control) equal to the value of the Performance Share Award or TSR Unit Award (determined using the Corporations 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 or TSR Unit 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 Companys 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 Corporations 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants 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 Participants employment agreement, if any), and unless otherwise expressly provided in this Award Agreement or determined by the Corporation in its sole discretion, the Participants 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 Participants 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 Participants 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 Participants 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 recipients country may have different data privacy laws and protections than the Participants 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 Participants 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.

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 Participants 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 Participants employment with the Corporation or an Affiliate upon the Participants 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 Participants 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 Participants incapacity due to physical or mental illness:

(A)Any material change by the Corporation in the Participants functions, duties or responsibilities as President and Chief Executive Officer, which change would cause the Participants 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 Participants title, position or the Participants 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 Participants 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 Corporations 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 Participants responsibilities;

(E)Cancellation of the automatic renewal mechanism set forth in the Participants 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 thenapplicable 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 Participants notice to remedy the Good Reason condition; provided further that the Participants 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.��LongTerm Disability means a physical or mental condition in respect of which the administrator of the Corporations 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 Corporations long-term disability plan, a physical or mental condition that the administrator of the Corporations 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 Participants 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.��ShortTerm Disability means shortterm disability as defined in the Corporations shortterm 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 Corporations Stock Ownership Policy, as amended from time to time, which can be found on McKNet. A Participant or a Participants 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.

EXECUTIVE COMMITTEE OTHER THAN THE CEO

McKESSON CORPORATION

STATEMENT OF TERMS AND CONDITIONS APPLICABLE TO

OPTIONS, RESTRICTED STOCK, RESTRICTED STOCK UNITS,

PERFORMANCE SHARES AND TSR UNIT AWARDS GRANTED TO

EXECUTIVE COMMITTEE MEMBERS PURSUANT TO THE 2013 STOCK PLAN

Effective for Grants Beginning May 27, 2014


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 Participants 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.

4.Vesting of Right to Exercise Options.

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.

(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 Participants 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.

(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 Participants 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 Participants termination of employment and (y) the Expiration Date.

(D)If the Participants 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.

(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 Participants 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 Participants 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:

(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 Participants 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 Corporations transfer agent recording the Participants 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 Participants rights in the event of the Participants 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 Corporations 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 Participants 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.

(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:

(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.

(C)��Restriction on Sale. The Administrator 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.


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 Participants 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 Participants 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.

(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.

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.

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 in which the Participant has a Separation from Service, subject to the delay of payment (if applicable) provided in Section VIII.14, 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 Participants 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, including the special terms and conditions in the Appendix for the Participants country (if any) which forms part of this Statement of Terms and Conditions, and together both documents shall constitute the TSR Unit Award Agreement. The TSR Unit Awards are also subject to the terms and conditions of the Plan.

(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; 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.

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


VI.	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, 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.

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:

(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


VII.	CHANGE IN CONTROL


VIII.	MISCELLANEOUS