McKesson 2008 Annual Report Download - page 37

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
30
Canadian pharmaceutical distribution revenues increased over the last two years primarily reflecting market
growth rates and favorable foreign exchange rates. Additionally in 2008, these revenues benefited from new and
expanded business, partially offset by six fewer days of sales compared to 2007. Canadian revenues benefited from
a 12%, 5% and 7% foreign currency impact in 2008, 2007 and 2006.
Medical-Surgical distribution and services revenues increased in 2008 primarily reflecting market growth rates
and an acquisition, partially offset by the discontinuance of the distribution of a product line. Revenues associated
with this product line are now recorded by our U.S. pharmaceutical distribution business. In 2008, these revenues
were partially offset by one less week of sales compared to 2007. In 2007, revenues increased primarily reflecting
stronger than average market growth rates and due to the acquisition of Sterling Medical Services LLC (“Sterling”)
during the first quarter of 2007. Sterling is a national provider and distributor of disposable medical supplies, health
management services and quality management programs to the home care market.
Technology Solutions revenues increased in 2008 primarily due to the acquisition of Per-Se and increased
services revenues, primarily reflecting the segment’ s expanded customer bases and clinical software
implementations. During the fourth quarter of 2007, we acquired Per-Se, a leading provider of financial and
administrative healthcare solutions for hospitals, physicians and retail pharmacies. In 2007, revenues for this
segment benefited from increased clinical software implementations and to a lesser extent, our acquisition of Per-Se.
Gross Profit:
Years Ended March 31,
(Dollars in millions) 2008 2007 2006
Gross Profit
Distribution Solutions $ 3,586 $ 3,252 $ 2,883
Technology Solutions 1,423 1,080 894
Total $ 5,009 $ 4,332 $ 3,777
Gross Profit Margin
Distribution Solutions 3.63% 3.58% 3.39%
Technology Solutions 47.69 48.24 48.48
Total 4.93 4.66 4.34
Gross profit increased 16% to $5.0 billion in 2008 and 15% to $4.3 billion in 2007. As a percentage of
revenues, gross profit increased 27 bp in 2008 and 32 bp in 2007. Gross profit margin increased in 2008 primarily
reflecting a greater proportion of higher margin Technology Solutions products and an improvement in our
Distribution Solutions segment’ s margin. Gross profit margin increased in 2007 primarily due to an increase in our
Distribution Solutions segment’ s gross profit margin.
In 2008, our Distribution Solutions segment’ s gross profit margin increased slightly from that of the prior year.
Gross profit margin was impacted by higher buy side margins, the benefit of increased sales of generic drugs with
higher margins, a decline in impairment charges associated with the write-down of certain abandoned assets within
our retail automation group and an increase associated with a smaller proportion of revenues within the segment
attributed to sales to customers’ warehouses. These increases were partially offset by a decline in sell margin and
last-in, first-out (“LIFO”) inventory credits ($14 million in 2008 compared with $64 million in 2007).
For each of the last three years, we estimate that the Company’ s total gross profit margin on sales to customers’
warehouses represented about 5% of the segment’ s total gross profit dollars. As previously discussed, from 2006 to
2007 the percentage of total direct and warehouse revenue attributed to our retail chain customers grew faster than
our other customer groups. This change resulted in a negative impact on the Company’ s gross profit margin as this
customer group typically has lower margins as compared to our other customer groups. From 2007 to 2008, the
percentage of total direct and warehouse revenue attributed to our retail chain customers grew slower than our other
customer groups. This decline resulted in a positive impact on the Company’ s gross profit margin.