McKesson 2010 Annual Report Download - page 42

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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In 2010, operating profit margin in our Technology Solutions segment increased compared to 2009 primarily
due to lower operating expenses as a percentage of revenues and an improvement in gross profit margin.
In 2009, operating profit margin in our Technology Solutions segment increased compared to 2008 primarily
due to a decrease in operating expenses as a percentage of revenues, partially offset by a decrease in gross profit
margin. Operating profit margin for this segment for the past two years has benefited from cost containment efforts
and a more favorable revenue mix.
Corporate expenses, net of other income increased in 2010 compared to 2009 primarily due to an increase in
operating expenses and a decrease in interest income. Corporate expenses, net of other income, increased in 2009
compared to 2008 primarily due to a decrease in interest income and an increase in operating expenses.
Litigation Credit, Net: In 2010 and 2008 we recorded net credits of $20 million and $5 million relating to
settlements for the securities litigation.
Interest Expense: 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 increased slightly in 2009 compared to the
prior year, which 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. Refer to our discussion under the
caption “Credit Resources” within this Financial Review for additional information regarding our financing
activities.
Income Taxes: Our reported tax rates were 32.2%, 22.7% and 32.1% in 2010, 2009 and 2008. In addition to
the items noted below, fluctuations in our reported tax rate 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 2009, we recorded a $182 million income tax benefit for the AWP litigation accrual. The tax benefit could
change in the future depending on the resolution of the pending and expected claims.
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 was primarily due to
the lapsing of the statutes of limitations.
In 2008, the U.S. Internal Revenue Service (“IRS”) began its examination of our fiscal years 2003 through
2006. In 2009 and 2010, we received assessments from the Canada Revenue Agency (“CRA”) for a total of
$62 million related to transfer pricing for 2003, 2004 and 2005. We paid the CRA assessments to stop the accrual of
interest. We have appealed the assessment for 2003 and have filed a notice of objection for 2004 and 2005. We
believe we have adequately provided for any potential adverse results. In nearly all jurisdictions, the tax years prior
to 2003 are no longer subject to examination. We believe that we have made adequate provision for all remaining
income tax uncertainties.
In 2008, the IRS completed an examination of our consolidated income tax returns for 2000 to 2002 resulting in
a signed Revenue Agent Report (“RAR”), which was subsequently approved by the Joint Committee on Taxation.
The IRS and the Company agreed to certain adjustments, primarily related to transfer pricing and income tax credits.
As a result of the approved RAR, we recognized approximately $25 million of net federal and state income tax
benefits in 2008.
Discontinued Operations: No charges for discontinued operations were incurred during 2010 and 2009. In
2008, discontinued operations included $1 million from the Company’s Acute Care business, which was sold in
2007.