McKesson 2006 Annual Report Download - page 35

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Other Income, net:
Other income, net increased in 2006 and 2005 primarily reflecting higher interest income due to the Company’s favorable cash balances
and, to a lesser extent, due to an increase in our equity in earnings of Nadro, S.A. de C.V. (“Nadro”). Interest income, which is primarily
recorded in Corporate expenses, net of other income, was $104 million, $41 million and $28 million in 2006, 2005 and 2004.
Segment Operating Profit and Corporate Expenses:
Segment operating profit includes gross margin, net of operating expenses, and other income for our three business segments. In addition to
the significant items previously discussed, operating profit increased in 2006 primarily reflecting revenue growth and an increase in gross profit
margin in our Pharmaceutical Solutions segment and improved operating profit in our Provider Technologies segment. These increases were
partially offset by a decline in operating profit in our Medical-Surgical Solutions segment. Increases in operating profit for 2005 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.
Operating profit as a percentage of revenues increased in 2006 in our Pharmaceutical Solutions segment reflecting an increase in gross profit
margins, including the increase in receipt of antitrust settlements, offset in part by an increase in operating expenses as a percentage of
revenues. Operating expenses increased in both dollars and as a percentage of revenues due to additional costs incurred to support our revenue
growth as well as due to the addition of D&K’s operating and integration expenses. Operating profit for this segment also benefited from a $15
million credit to bad debt expense due to a recovery on a previously reserved customer account and from an increase in equity earnings from
our investment in Nadro. Operating profit as a percentage of revenues decreased in 2005 primarily reflecting a net decline in gross margins,
offset in part with cost reductions by leveraging the segment’s fixed cost infrastructure, productivity improvements in back-office and field
operations, and an improvement in bad debt expense. In 2004, operating profit for this segment included a $30 million bad debt provision for a
customer bankruptcy.
31
Years Ended March 31,
(In millions) 2006 2005 2004
B
y
Se
g
ment
Pharmaceutical Solutions $ 36 $24 $22
Medical-Surgical Solutions 3 4 4
Provider Technologies 13 13 11
Corporate 86 27 11
Total $138 $68 $48
Years Ended March 31,
(Dollars in millions) 2006 2005 2004
Segment Operating Profit
Pharmaceutical Solutions $1,211 $ 1,071 $ 975
Medical-Surgical Solutions 70 102 107
Provider Technologies 143 107 127
Subtotal 1,424 1,280 1,209
Corporate Expenses, net (127) (207) (183)
Securities Litigation charges, net (45) (1,200) —
Interest Expense (94) (118) (120)
Income (Loss) from Continuing Operations, Before Income Taxes $1,158 $ (245) $ 906
Segment Operating Profit Margin
Pharmaceutical Solutions 1.45% 1.41%1.50%
Medical-Surgical Solutions 2.26 3.52 3.81
Provider Technologies 9.27 8.22 10.57