McKesson 2009 Annual Report Download - page 40

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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On a segment basis, Distribution Solutions’ operating expenses increased over the past two years primarily due
to the $493 million AWP Litigation charge in 2009, business acquisitions (including OTN and McQueary Brothers)
and additional costs incurred to support our sales volume growth. Operating expenses as a percentage of revenues
increased primarily due to the AWP Litigation charge as well as additional costs incurred to support our sales
volume growth. Share-based compensation expense for this segment was $26 million for 2009 and 2008 and $17
million for 2007.
Technology Solutions segment’s operating expenses decreased in 2009 and increased in 2008. Operating
expenses for 2009 benefited from cost containment efforts and a decrease in bad debt expense, partially offset by an
increase in net research and development expenses and additional costs for business acquisitions. Operating
expenses increased in 2008 primarily reflecting higher employee compensation, an increase in net research and
development expenses, additional costs for business acquisitions and higher bad debt expense. Operating expenses
as a percentage of revenues for this segment have decreased over the last two years primarily reflecting the
segment’s cost containment efforts and a more favorable business mix. Share-based compensation expense for this
segment was $40 million, $35 million and $19 million for 2009, 2008 and 2007.
Corporate expenses increased in 2009 compared with 2008 primarily reflecting an increase in accounts
receivable sales facility fees, compensation expense and additional costs incurred to support various initiatives.
Corporate expenses decreased in 2008 compared with 2007 primarily reflecting a decrease in legal expenses
associated with our Securities Litigation, a decrease in charitable contributions and a decrease in other long-term
compensation. Share-based compensation expense for Corporate was $33 million, $30 million and $24 million for
2009, 2008 and 2007.
Other Income, net:
Years Ended March 31,
(In millions) 2009 2008 2007
By Segment
Distribution Solutions $ (20) $ 35 $ 39
Technology Solutions 7 11 10
Corporate 25 75 83
Total $ 12 $ 121 $ 132
In 2009, other income, net includes a pre-tax impairment charge of $63 million ($60 million after-tax) on two
equity-held investments (as further described below) and a pre-tax gain of $24 million ($14 million after-tax) from
the sale of our 42% equity interest in Verispan, L.L.C. (“Verispan,”) a data analytics company. The impairment
charge and the gain on sale of our investment were both recorded within our Distribution Solutions segment.
Excluding these items, other income, net decreased over the last two years primarily due to a decrease in interest
income due to lower cash balances and interest rates. Interest income, which is primarily recorded in Corporate
expenses, was $31 million, $89 million and $103 million in 2009, 2008 and 2007.
We evaluate our investments for impairment when events or changes in circumstances indicate that the carrying
values of such investment may have experienced an other than temporary decline in value. During the fourth quarter
of 2009, we determined that the fair value of our interest in Parata was lower than its carrying value and that such
impairment was other than temporary. Fair value was determined using a discounted cash flow analysis based on
estimated future results and market capitalization rates. We determined the impairment was other than temporary
based on our assessment of all relevant factors including a deterioration in the investee’s financial condition and
weak market conditions. As a result, we recorded a pre-tax impairment of $58 million ($55 million after-tax) on this
investment which is recorded within other income, net in the consolidated statements of operations. Our investment
in Parata is accounted for under the equity method of accounting within our Distribution Solutions segment.