McKesson 2005 Annual Report Download - page 32

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Segment Operating Profit and Corporate Expenses:
Segment operating profit includes gross margin, net of operating expenses, other income and gain (loss) on investments for our three
business segments. In addition to the significant items previously discussed, increases in operating profit reflect revenue growth and increased
operating profit in our Pharmaceutical Solutions segment, partially offset by lower operating profit in our Medical-Surgical Solutions and
Provider Technologies segments for 2005. Increases in operating profit in 2004 reflect revenue growth and increased operating profit in our
Pharmaceutical Solutions segment, combined with improved operating profits in our Medical-Surgical Solutions and Provider Technologies
segments.
Operating profit, as a percentage of revenues, over the last two years decreased in our Pharmaceutical Solutions segment. This decrease
primarily reflects a net decline in gross margins, offset in part with cost reductions by leveraging the segment’s fixed cost infrastructure and
productivity improvements in back-office and field operations. In addition, in 2004, operating profit included a $30.0 million bad debt
provision for a customer bankruptcy and a decrease in gains on sales of venture investments, offset in part by lower restructuring charges.
Medical-Surgical Solutions segment’s operating profit as a percentage of revenues declined in 2005 primarily reflecting an increase in gross
profit margins which were more than offset by a higher proportion of operating expenses. Operating expenses increased, in both dollars and as
a percentage of revenues, primarily due to the acquisition of MMC, and a higher proportion of costs incurred to serve the segment’s alternative
site customers, which have a higher cost-to-serve ratio than the segment’s other customers. Operating profit for 2005 was also impacted by the
lack of flu vaccine supply as well as a $7.4 million charge to operating expenses due to an increase in litigation reserves. Operating profit as a
percentage of revenues increased in 2004 for this segment primarily reflecting improvements in gross profit and a reduction in operating
expenses. The reduction in 2004 operating expenses reflects the removal of duplicate operating expenses as a result of the segment’s
2002/2003 distribution center network consolidation plan, as well as other operational improvements including a significant decrease in bad
debt expense. In 2003, operating profit benefited from $12.0 million in reversals of the prior year’s accrued restructuring charges as a result of
a modification to the segment’s distribution center network consolidation plan. This benefit was partially offset by an increase in bad debt
expense of approximately $11 million.
Provider Technologies segment’s operating profit as a percentage of revenues decreased in 2005 and increased in 2004. Operating profit for
2005 reflects a decrease in gross profit margin as well as an increase in operating expenses to support the segment’s revenue growth and a
decrease in customer settlement reserve reversals. Increases in operating profit as a percentage of revenues for 2004 reflects a higher gross
profit margin, $66.4 million of reversals of customer settlement reserves due to favorable settlements and negotiations (or $44.1 million more
than 2003), and better control of expenses. Operating profit for 2003 reflects a $51.0 million provision for expected losses on five multi-year
contracts within the segment’s international business and a $22.3 million credit for the reversal of a portion of customer settlement reserves.
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Years Ended March 31,
(Dollars in millions) 2005 2004 2003
Segment Operating Profit
Pharmaceutical Solutions $ 1,076.7 $ 980.1 $ 966.7
Medical-Surgical Solutions 102.1 106.4 79.4
Provider Technologies 106.7 128.2 101.6
Subtotal 1,285.5 1,214.7 1,147.7
Corporate Expenses, net (207.3) (183.1) (168.2)
Securities Litigation charge (1,200.0)
—
—
Interest Expense (118.0) (120.2) (128.1)
Income (Loss) from Continuing Operations, Before Income Taxes $ (239.8) $ 911.4 $ 851.4
Segment Operating Profit Margin
Pharmaceutical Solutions 1.41% 1.50% 1.82%
Medical-Surgical Solutions 3.53 3.79 2.79
Provider Technologies 8.20 10.66 8.33