McKesson 2008 Annual Report Download - page 39

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Operating expenses increased 15% to $3.5 billion in 2008 and 16% to $3.1 billion in 2007. Operating expenses
for 2008, 2007 and 2006 include pre-tax credits of $5 million and $6 million and a pre-tax charge of $45 million for
our Securities Litigation. Excluding the impact of our Securities Litigation, operating expenses increased 15% and
18% in 2008 and 2007. Operating expenses as a percentage of revenues increased 17 bp to 3.47% in 2008 and 25 bp
to 3.30% in 2007 (or 17 bp and 31 bp in 2008 and 2007, excluding the impact of our Securities Litigation).
Excluding the Securities Litigation credits, increases in operating expenses primarily reflect additional operating
expenses incurred to support our sales growth, expenses associated with our business acquisitions, and higher
employee compensation expenses including expenses for share-based compensation, research and development
expenses, foreign currency exchange rates and higher bad debt expense.
Operating expenses included the following significant items:
2008
−$91 million of share-based compensation expense or $31 million more than the previous year. On April 1,
2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,”
which requires the recognition of expense resulting from transactions in which we acquire goods and services
by issuing our shares, share options or other equity instruments. The incremental compensation expense was
recorded as follows: $9 million and $16 million in our Distribution Solutions and Technology Solutions
segments, and $6 million in Corporate expenses,
Due to the accelerated vesting of share-based awards prior to 2007, we anticipate the impact of SFAS No.
123(R) to increase in significance as future awards of share-based compensation are granted and amortized over
the requisite service period. Share-based compensation charges are affected by our stock price as well as
assumptions regarding a number of complex and subjective variables and the related tax impact. These
variables include, but are not limited to, the volatility of our stock price, employee stock option exercise
behavior, timing, level and types of our grants of annual share-based awards, the attainment of performance
goals and actual forfeiture rates. As a result, the actual future share-based compensation expense may differ
from historical levels of expense. Information regarding our share based payments is included in Financial
Note 19 to the consolidated financial statements, “Share-Based Payment,” appearing in this Annual Report on
Form 10-K,
−$14 million of restructuring charges primarily associated with the abandonment of a Technology Solutions
software project, the closure of two Distribution Solutions’ segment distribution centers and the integration of
OTN. An additional $5 million of these expenses were recorded to cost of sales. Information regarding our
restructuring activities is included in Financial Note 4 to the consolidated financial statements, “Restructuring
Activities,” appearing in this Annual Report on Form 10-K,
−$13 million increase in a legal reserve. During the third quarter of 2008, we engaged in discussions with a
governmental agency to settle claims arising out of an inquiry. As a result of these settlement discussions, we
recorded an increase in a legal reserve of $13 million within our Distributions Solutions segment. These claims
were settled in May 2008 consistent with this reserve. This reserve is not tax deductible, and
−$8 million of severance expense associated with the realignment of our Technology Solutions workforce. An
additional $2 million of severance expense was recorded to cost of sales. Although such actions do not
constitute a restructuring plan, they represent independent actions taken from time to time, as appropriate.