McKesson 2012 Annual Report Download - page 39

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
35
Distribution Solutions segment’s operating expenses increased in 2012 compared to 2011 primarily reflecting
the addition of US Oncology, higher employee compensation and benefits expenses and an increase in expenses
associated with supporting higher revenues, partially offset by a lower AWP litigation charge. Operating expenses
as a percentage of revenues decreased in 2012 compared to 2011 primarily due to operating leverage, partially offset
by the addition of US Oncology.
Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenues
increased in 2011 compared to 2010 primarily due to the AWP litigation charge of $213 million in 2011, higher
employee compensation and benefits expenses, including PSIP expenses, the addition of US Oncology and changes
in foreign currency exchange rates.
The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and
whenever events or circumstances indicate changes, including consideration of the pace and progress of discussions
relating to potentially resolving other public entity claims. Pre-tax charges relating to changes in the Company's
AWP litigation reserve, including accrued interest, are recorded in the Distribution Solutions segment. The
Company's AWP litigation reserve is included in other current liabilities in the consolidated balance sheets. In view
of the number of outstanding cases and expected future claims, and the uncertainties of the timing and outcome of
this type of litigation, it is possible that the ultimate costs of these matters may exceed or be less than the reserve.
The following is the activity related to the AWP litigation reserve for the years ended March 31, 2012, 2011 and
2010:
Years Ended March 31,
(In millions) 2012 2011 2010
AWP litigation reserve at beginning of period $
330
$
143
$ 143
Charges incurred
149
213
—
Payments made
(26)
(26)
—
AWP litigation reserve at end of period $
453
$
330
$ 143
The charges for 2012 primarily related to the Douglas County, Kansas Action settlement and the state and
federal Medicaid claims. The charges for 2011 primarily related to state and federal Medicaid claims.
On April 3, 2012, the Company entered into a settlement agreement with the United States Department of
Justice to resolve the federal share of Medicaid claims related to AWP. The total settlement amount of $191
million, which includes interest, was paid on April 9, 2012.
Refer to Financial Note 19, “Other Commitments and Contingent Liabilities,” to the consolidated financial
statements appearing in this Annual Report on Form 10-K for further information.
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenues
increased in 2012 compared to 2011 primarily due to continued investment in research and development activities, a
number of small acquisitions in 2012 and a charge of $20 million for a product alignment plan. These increases
were partially offset by cost containment efforts. Technology Solutions segment’s operating expenses and operating
expenses as a percentage of revenues increased in 2011 compared to 2010 primarily due to our increased investment
in research and development activities and higher employee compensation and benefit costs, which includes PSIP
expense, partially offset by the sale of MAP in the second quarter of 2011.
Corporate expenses for 2012 increased compared to 2011 primarily due to higher employee compensation and
benefits expenses and a charitable contribution. Corporate expenses for 2011 increased compared to 2010 primarily
due to higher compensation and benefits costs and an asset impairment charge for certain tangible property. These
increases were partially offset by lower fees associated with our accounts receivable facility. As a result of our
adoption of a new accounting standard for transfers of financial assets on April 1, 2010, fees associated with our
accounts receivable sales facility are recorded in interest expense. Prior to 2011, these fees were recorded in
Corporate administrative expenses.