McKesson 2009 Annual Report Download - page 42

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
36
Interest Expense: Interest expense increased slightly in 2009 and 43% to $142 million in 2008. Interest
expense for 2009 reflects the repayment of $150 million of long-term debt during the fourth quarter of 2008 and the
issuance of $700 million of long-term debt during the fourth quarter of 2009. Interest expense in 2008 reflects
additional expense associated with the issuance of $1.0 billion of long-term debt in the fourth quarter of 2007 as part
of our $1.8 billion acquisition of Per-Se. Refer to our discussion under the caption “Credit Resources” within this
Financial Review for additional information regarding our financing activities.
Income Taxes: Our reported tax rates were 22.7%, 32.1% and 25.4% in 2009, 2008 and 2007. In addition to
the items noted below, fluctuations in our reported tax rate are primarily due to changes within state and foreign tax
rates resulting from our business mix, including varying proportions of income attributable to foreign countries that
have lower income tax rates.
In 2009, we recorded a $182 million income tax benefit for the AWP Litigation accrual. The tax benefit could
change in the future depending on the resolution of the pending and expected claims.
In 2009, income tax expense included $111 million of net income tax benefits for discrete items, which
primarily consists of the recognition of previously unrecognized tax benefits and related accrued interest. The
recognition of these discrete items is primarily due to the lapsing of the statutes of limitations. Of the $111 million
of net tax benefits, $87 million represents a non-cash benefit to McKesson. In addition, included within these
discrete items is an income tax benefit of $3 million pertaining to our $63 million pre-tax impairment of two equity-
held investments. The income tax benefit on the impairment is net of a valuation allowance of $22 million.
In June 2008, the U.S. Internal Revenue Service (“IRS”) began its examination of fiscal years 2003 through
2006. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“Stabilization Act”), which
included a retroactive reinstatement of the federal research and development credit, was signed into law. The
Stabilization Act extends the federal research and development credit to December 31, 2009. In 2009, we recorded
a benefit to our income tax provision as a result of these research and development credits. In Canada, we received
an assessment from the Canada Revenue Agency (“CRA”) for a total of $19 million related to transfer pricing for
2004. We plan to appeal the assessment. We believe we have adequately provided for any potential adverse results
for 2004 and future years. In nearly all jurisdictions, the tax years prior to 2003 are no longer subject to
examination. We believe that we have made adequate provision for all remaining income tax uncertainties.
In 2008, the IRS completed an examination of our consolidated income tax returns for 2000 to 2002 resulting in
a signed Revenue Agent Report (“RAR”), which was approved by the Joint Committee on Taxation during the third
quarter of 2008. The IRS and the Company have agreed to certain adjustments, primarily related to transfer pricing
and income tax credits. As a result of the approved RAR, we recognized approximately $25 million of net federal
and state income tax benefits. In Canada, we received an assessment from the CRA for a total of $9 million related
to transfer pricing for 2003. We have filed an appeal with the Tax Court of Canada. We believe we have
adequately provided for any potential adverse results for 2003. During 2008, we also favorably concluded various
foreign examinations, which resulted in the recognition of approximately $4 million of income tax benefits. Income
tax expense for 2008 was also impacted by a non-tax deductible $13 million increase in a legal reserve.
In 2007, we recorded a credit to current income tax expense of $83 million which primarily pertained to our
receipt of a private letter ruling from the IRS holding that our payment of approximately $960 million to settle our
Consolidated Securities Litigation Action is fully tax-deductible. We previously established tax reserves to reflect
the lack of certainty regarding the tax deductibility of settlement amounts paid in the Consolidated Securities
Litigation Action and related litigation. In 2007, we also recorded $24 million in income tax benefits arising
primarily from settlements and adjustments with various taxing authorities and research and development
investment tax credits from our Canadian operations.