McKesson 2012 Annual Report Download - page 41

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Corporate expenses, net of other income increased in 2012 compared to 2011 primarily due an increase in
operating expenses and a decrease in other income. Corporate expenses, net of other income were flat in 2011
compared to 2010 primarily due to an increase in operating expenses, which were offset by an increase in other
income.
Litigation Credit, Net: In 2010, we recorded a net credit of $20 million relating to settlements for a securities
litigation.
Interest Expense: Interest expense increased in 2012 compared to 2011 primarily due to the $1.7 billion of
long-term debt issued in February 2011 in connection with our acquisition of US Oncology. Interest expense
increased in 2011 compared to 2010 primarily due to $25 million of bridge loan fees related to the acquisition of US
Oncology, interest expense associated with the assumed debt and the subsequent refinancing of the debt, and fees
from our accounts receivable sales facility, which are recorded in interest expense commencing in 2011. These
increases were partially offset by lower interest expense due to the repayment of $215 million of our long-term debt
in March 2010. Refer to our discussion under the caption “Credit Resources” within this Financial Review for
additional information regarding our financing activities.
Income Taxes: Our reported income tax rates were 26.9%, 30.9% and 32.2% in 2012, 2011 and 2010.
Fluctuations in our reported income tax rates are primarily due to changes within our business mix, including
varying proportions of income attributable to foreign countries that have lower income tax rates. In addition, in
2012, 2011 and 2010, income tax expense included $66 million, $34 million and $7 million of net income tax
benefits for discrete items, which primarily relates to the recognition of previously unrecognized tax benefits and
accrued interest. Included in the 2012 discrete tax benefit, is a $31 million credit to income tax expense as a result
of the reversal of an income tax reserve relating to our AWP litigation.
We have received tax assessments of $98 million from the U.S. Internal Revenue Service (“IRS”) relating to
2003 through 2006. We disagree with a substantial portion of the tax assessments primarily relating to transfer
pricing. We are pursuing administrative relief through the appeals process and an opening conference has been
scheduled for May 15, 2012. We have received assessments from the Canada Revenue Agency (“CRA”) for a total
of $169 million related to transfer pricing for 2003 through 2007. Payments of most of the assessments to the CRA
have been made to stop the accrual of interest. We have appealed the assessment for 2003 to the Tax Court of
Canada and have filed a notice of objection for 2004 through 2007. The trial between McKesson Canada
Corporation and the CRA, argued in the Tax Court of Canada, concluded in early February 2012, and we are waiting
for the decision. We continue to believe in the merits of our tax positions and that we have adequately provided for
any potential adverse results relating to these examinations in our financial statements. However, the final
resolution of these issues could result in an increase or decrease to income tax expense.
Discontinued Operation: In July 2010, our Technology Solutions segment sold its wholly-owned subsidiary,
MAP, a provider of phone and web-based healthcare services in Australia and New Zealand, for net sales proceeds
of $109 million. The divestiture generated a pre-tax and after-tax gain of $95 million and $72 million. As a result
of the sale, we were able to utilize capital loss carry-forwards for which we previously recorded a valuation
allowance of $15 million. The release of the valuation allowance is included as a tax benefit in our after-tax gain on
the divestiture. The after-tax gain on disposition was recorded as a discontinued operation in our consolidated
statement of operations in 2011. The historical financial operating results and net assets of MAP were not material
to our consolidated financial statements for all periods presented.
Net Income: Net income was $1,403 million, $1,202 million and $1,263 million in 2012, 2011 and 2010 and
diluted earnings per common share were $5.59, $4.57 and $4.62. Net income and diluted earnings per common
share for 2012 and 2011 include after-tax AWP litigation charges of $60 million and $149 million, or $0.24 and
$0.57 per diluted common share. Net income and diluted earnings per common share for 2010 include an after-tax
securities litigation credit of $12 million, or $0.04 per diluted common share. Net income and diluted earnings per
common share for 2011 also included an after-tax gain of $72 million, or $0.28 per diluted share relating to our sale
of MAP.