McKesson 2008 Annual Report Download - page 41

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
34
Operating profit as a percentage of revenues in our Distribution Solutions segment decreased slightly in 2008
primarily reflecting higher operating expenses as a percentage of revenues, partially offset by improved gross profit
margin. Operating expenses increased in both dollars and as a percentage of revenues primarily due to a $13 million
increase in a legal reserve, our acquisition of OTN, which has a higher ratio of operating expenses as a percentage of
revenues and, to a lesser extent, an increase in share-based compensation. Increases in operating expenses were also
due to additional costs incurred to support our sales volume growth. Share-based compensation expense for this
segment was $26 million and $17 million for 2008 and 2007.
Operating profit as a percentage of revenues in our Distribution Solutions segment increased in 2007 primarily
reflecting an increase in gross profit margin, offset in part by an increase in operating expenses as a percentage of
revenues. Operating expenses increased in both dollars and as a percentage of revenues primarily due to additional
compensation expense, our acquisition of D&K which had a higher ratio of operating expenses as a percentage of
revenues, an increase in bad debt expense and, to a lesser extent, due to an increase in share-based compensation.
These increases were partially offset by an $11 million credit to operating expense due to an adjustment to a legal
reserve. Increases in operating expenses were also due to additional costs incurred to support our sales volume
growth. In 2006, operating profit benefited from a $15 million credit to bad debt expense due to a recovery on a
previously reserved customer account. Share-based compensation expense for this segment was $17 million and $4
million for 2007 and 2006.
Operating profit as a percentage of revenues in our Technology Solutions segment increased during 2008
primarily due to a decrease in operating expenses as a percentage of revenues partially offset by a decrease in gross
profit margin. Operating expenses as a percentage of revenues were favorably impacted by the acquisition of Per-Se
which has a lower ratio of operating expenses as a percentage of revenues. This decrease was partially offset by an
increase in share-based compensation and bad debt expense. Operating expenses increased primarily due to
business acquisitions, including Per-Se, investments in research and development activities and additional share-
based compensation. Share-based compensation expense for this segment was $35 million and $19 million for 2008
and 2007.
Operating profit as a percentage of revenues in our Technology Solutions segment decreased during 2007
primarily due to a decrease in gross profit margin as well as an increase in operating expenses as a percentage of
revenues. Operating expenses increased in both dollars and as a percentage of revenues primarily reflecting
additional compensation expense, including share-based compensation, severance charges incurred to reallocate
product development and marketing resources and to realign one of the segment’ s international businesses and
investments in research and development activities. Share-based compensation expense for this segment was $19
million and $1 million for 2007 and 2006.
Corporate expenses, net of other income, decreased in 2008 and increased in 2007. Corporate expenses, net of
other income, reflect additional costs incurred to support various initiatives and our revenue growth, an increase in
share-based compensation and a decrease in interest income. For 2008, these increases were fully offset by a
decrease in legal expenses associated with our Securities Litigation, a decrease in charitable contributions and a
decrease in other long-term compensation. Legal expenses associated with our Securities Litigation declined in
2007; however, other legal costs offset this benefit. Legal expenses associated with our Securities Litigation were
$4 million, $19 million and $27 million in 2008, 2007 and 2006. Share-based compensation expense for Corporate
was $30 million, $24 million and $11 million in 2008, 2007 and 2006.
Securities Litigation Credit/(Charge), Net: We recorded net credits of $5 million and $6 million in 2008 and
2007 and net charges of $45 million in 2006 relating to various settlements for our Securities Litigation. Recent
developments pertaining to our Securities Litigation are described in Financial Note 17, “Other Commitments and
Contingent Liabilities,” to the accompanying consolidated financial statements.