McKesson 2009 Annual Report Download - page 37

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
31
Our Distribution Solutions segment uses the LIFO method of accounting for the majority of its inventories,
which results in cost of sales that more closely reflects replacement cost than other accounting methods, thereby
mitigating the effects of inflation and deflation on operating profit. The practice in the Distribution Solutions’
distribution 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. Price declines on many generic
pharmaceutical products in this segment over the last few years have moderated the effects of inflation in other
product categories, which resulted in minimal overall price changes in those years. Additional information
regarding our LIFO accounting is included under the caption “Critical Accounting Policies and Estimates” included
in this Financial Review.
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 2007 to
2009, the percentage of total direct and warehouse revenue attributed to our retail chain customers declined
compared to our other customer groups. This decline resulted in a positive impact on the Company’s gross profit
margin.
In 2008, our Distribution Solutions segment’s gross profit margin increased slightly compared to 2007. 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
Pharmacy Systems and Automation group and an increase associated with a lower proportion of revenues within the
segment attributed to sales to customers’ warehouses. These increases were partially offset by a decline in sell
margin and LIFO inventory credits ($14 million in 2008 compared with $64 million in 2007).
In 2007, we contributed $36 million in cash and $45 million in net assets primarily from our Pharmacy Systems
and Automation business to Parata Systems, LLC (“Parata,”) in exchange for a significant minority interest in
Parata. Parata is a manufacturer of pharmacy robotic equipment. In connection with the investment, we abandoned
certain assets which resulted in a $15 million charge to cost of sales and we incurred $6 million of other expenses
related to the transaction which were recorded within operating expenses. We did not recognize any additional
gains or losses as a result of this transaction as we believed the fair value of our investment in Parata approximated
the carrying value of consideration contributed to Parata.
In 2009, our Technology Solutions segment’s gross profit margin decreased compared to the prior year
primarily reflecting a change in product mix and the recognition in 2008 of $21 million of disease management
deferred revenues for which associated expenses were previously recognized as incurred. In 2008, Technology
Solutions segment’s gross profit margin decreased primarily reflecting a change in product mix which included a
higher proportion of lower margin Per-Se services revenues. Partially offsetting this decrease was the recognition of
$21 million of disease management deferred revenues for which associated expenses were previously recognized as
incurred.