McKesson 2006 Annual Report Download - page 34

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Operating expenses decreased 25% to $2.7 billion in 2006 and increased 61% to $3.6 billion in 2005. Operating expenses for 2006 and 2005
include $45 million and $1.2 billion in pre-tax charges for our Securities Litigation. Operating expenses as a percentage of revenues decreased
143 bp to 3.12% in 2006 and increased 129 bp to 4.55% in 2005 from 3.26% in 2004 (or 3.07% and 3.05% in 2006 and 2005, excluding the
Securities Litigation charges). Excluding the Securities Litigation charges, increases in operating expenses were primarily due to additional
expenses incurred to support our sales volume growth, including distribution expenses and higher foreign currency exchange rates for our
Canadian operations and increased research and development expenditures. Operating expenses were also impacted by our acquisitions of
D&K in 2006 and MMC in 2005, and by a $66 million credit pertaining to the reversal of a portion of customer settlement reserves in 2004.
Excluding the Securities Litigation charges, operating expenses as a percentage of revenues for 2005 declined mainly due to leveraging of our
fixed cost infrastructure and productivity improvements in back-office and field operations.
Operating expenses included the following significant items:
2006
2005
2004
30
– a $45 million net charge for our Securities Litigation and a decrease in legal expenses associated with the litigation which were recorded in
Corporate expenses, and
– a $15 million credit to bad debt expense due to a recovery of a previously reserved customer account.
– a $1.2 billion charge for our Securities Litigation and an increase in legal expenses associated with the litigation which were recorded in
Corporate expenses, and
– approximately $12 million of settlement charges pertaining to a non-qualified pension plan, which were primarily included in Corporate
expenses. In 2005, we made several lump sum cash payments totaling approximately $42 million from an unfunded U.S. pension plan. In
accordance with accounting standards, additional charges for settlements associated with lump sum payments of pension obligations were
expensed in the period in which the payments were made.
– a $21 million charge for uncollected balances on loans made to former employees for the purchase of McKesson common stock primarily in
February 1999, which were included in Corporate expenses,
– increases in pension expense of $14 million primarily for our U.S. defined benefit pension plans. In 2004 and 2003, we reduced the assumed
long-term rate of asset return and the discount rate for our U.S. defined benefit pension plans to better reflect long-term expectations for the
plans’ portfolios and rates for high-quality corporate long-term bonds,
– a $66 million credit pertaining to the reversal of a portion of customer settlement reserves in our Provider Technologies segment.
Information regarding this and other restructuring programs is included under the caption “Restructuring Activities,” included in this
Financial Review,
– a $30 million bad debt provision for a customer bankruptcy recorded in our Pharmaceutical Solutions segment, and
– $15 million of gains on the sales of three surplus properties, recorded primarily in Corporate expenses.