McKesson 2010 Annual Report Download - page 34

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Gross profit increased 6% to $5.7 billion and 7% to $5.4 billion in 2010 and 2009. As a percentage of revenues,
gross profit increased 18 basis points (“bp”) to 5.22% and 11 bp to 5.04% in 2010 and 2009. Gross profit margin
increased in 2010 primarily reflecting an improved mix of higher margin revenues in both our Distribution Solutions
and Technology Solutions segments. The increase in our 2009 gross profit margin was primarily due to an
improvement in our Distribution Solutions segment margin, partially offset by a decline in our Technology
Solutions segment margin.
Operating expenses were $3.7 billion, $4.2 billion and $3.5 billion in 2010, 2009 and 2008. Operating expenses
for 2010 decreased compared to 2009, which included the AWP litigation charge as further discussed under the
caption “Operating Expenses” in this Financial Review. Excluding the AWP litigation charge, operating expenses
for 2010 approximated the same period a year ago primarily due to lower Profit Sharing Investment Plan (“PSIP”)
expense as more fully described under the caption “Operating Expenses” in this Financial Review, cost containment
efforts, the sale of two businesses during the first and third quarters in 2009 and the reversal of a previously
established litigation accrual. These decreases were partially offset by an increase in expenses associated with
employee compensation and benefit costs, our 2009 business acquisitions and other business initiatives. Operating
expenses for 2009 increased primarily due to additional expenses incurred to support our sales growth, expenses
associated with our business acquisitions and higher employee compensation. As noted above, operating expenses
for 2009 included a pre-tax charge of $493 million for the AWP litigation charge.
In 2010, other income, net includes a $17 million pre-tax gain ($14 million after-tax) from the sale of our 50%
equity interest in McKesson Logistics Solutions L.L.C. (“MLS”). In 2009, other income, net includes a pre-tax
impairment charge of $63 million ($60 million after-tax) on two equity-held investments and a pre-tax gain of
$24 million ($14 million after-tax) from the sale of an equity-held investment. Over the last two years, other
income, net was negatively affected by a decrease in interest income due to lower interest rates and in 2009 was
affected by a lower average cash and cash equivalents balance.
Interest expense increased 30% to $187 million in 2010 and 1% to $144 million in 2009. Interest expense
increased in 2010 compared to the prior year primarily due to our issuance of $700 million of long-term notes in
February 2009. 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.
Our reported income tax rates were 32.2%, 22.7% and 32.1% in 2010, 2009 and 2008. In 2009, current income
tax expense included $111 million of net income tax benefits for discrete items of which, $87 million represents a
non-cash benefit. These benefits primarily relate to 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.
Net income was $1,263 million, $823 million and $990 million in 2010, 2009 and 2008 and diluted earnings per
common share were $4.62, $2.95 and $3.32, which were favorably affected by decreases in our weighted average
shares outstanding due to the cumulative effect of share repurchases from 2008 to 2010.