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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
32
Gross Profit:
Years Ended March 31,
(Dollars in millions)
2011
2010
2009
Gross Profit
Distribution Solutions
$
(1)
4,565
$
4,219
$
3,955
Technology Solutions
(2)
1,405
1,457
1,423
Total
$
5,970
$
5,676
$
5,378
Gross Profit Margin
Distribution Solutions
4.19%
4.00%
3.82%
Technology Solutions
43.97
46.64
46.44
Total
5.33
5.22
5.04
(1) Gross profit of our Distribution Solutions segment for 2011 includes a credit of $51 million representing our share of a
settlement of an antitrust class action lawsuit brought against a drug manufacturer, which was recorded as a reduction to cost
of sales.
(2) Gross profit of our Technology Solutions segment for 2011 includes a $72 million asset impairment charge for capitalized
software held for sale.
Gross profit increased 5% to $6.0 billion in 2011 and 6% to $5.7 billion in 2010. As a percentage of revenues,
gross profit increased by 11 bp in 2011 and 18 bp in 2010. Gross profit margin increased in 2011 primarily
reflecting higher gross profit margin from our Distribution Solutions segment and increased in 2010 primarily due to
an improved mix of higher margin revenues in both of our operating segments.
In 2011, our Distribution Solutions segment’s gross profit margin increased compared to 2010 primarily
reflecting higher buy margin, increased sales of higher margin generic drugs and due to our acquisition of US
Oncology, partially offset by a decline in demand associated with the flu season and a decrease in sell margin. Buy
margin primarily reflects volume and timing of compensation from branded pharmaceutical manufacturers. Our
Distribution Solutions segment’s 2011 gross profit margin was also favorably affected by a credit of $51 million
representing our share of a settlement of an antitrust class action lawsuit.
In 2010, our Distribution Solutions segment’s gross profit margin increased compared to 2009 primarily due to
an improved mix of higher margin revenues stemming from increased flu-related demand across our distribution
businesses. Gross profit margin was also favorably affected by a higher buy margin and increased sales of higher
margin generic drugs. These benefits were partially offset by a decline in sell margin.
Our last-in, first-out (“LIFO”) net inventory expense was $3 million in 2011 and $8 million for 2010 and 2009.
Our Distribution Solutions segment uses the LIFO method of accounting for the majority of its inventories, which
results in cost of sales that more closely reflects replacement cost than under other accounting methods. The
practice in the Distribution Solutions segment’s distribution businesses is to pass on to customers published price
changes from suppliers. Manufacturers generally provide us with price protection, which limits price-related
inventory losses. Price declines on many generic pharmaceutical products in this segment over the last few years
have moderated the effects of inflation in other product categories, which resulted in minimal overall price changes
in those years. Additional information regarding our LIFO accounting is included under the caption “Critical
Accounting Policies and Estimates,” included in this Financial Review.