McKesson 2011 Annual Report Download - page 40

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
34
Accordingly, there were no accounting consequences to the Company’s financial statements relating to the receipt of
the Unallocated Proceeds by the PSIP.
As a result of the PSIP’s receipt of the Unallocated Proceeds, in 2010 the Company contributed $1 million to
the PSIP. Accordingly, PSIP expense for 2010 was nominal. In 2011, the Company resumed its contributions to the
PSIP.
PSIP expense by segment for the last three years was as follows:
Years Ended March 31,
(In millions)
2011
2010
2009
Distribution Solutions
$
23
$
—
$
23
Technology Solutions
32
1
28
Corporate
4
—
2
PSIP expense
$
59
$
1
$
53
Cost of sales
$
(1)
17
$
—
$
12
Operating expenses
42
1
41
PSIP expense
$
59
$
1
$
53
(1) Amounts recorded to cost of sales pertain solely to our McKesson Technology Solutions segment.
On a segment basis, Distribution Solutions segment’s operating expenses increased in 2011 and decreased in
2010 primarily due to the AWP litigation charges of $213 million and $493 million in 2011 and 2009. Excluding
the AWP charge, operating expenses and operating expenses as a percentage of revenues increased in 2011
compared to 2010 primarily due to higher costs associated with employee compensation and benefits including PSIP
expenses and the addition of US Oncology. Operating expenses in 2011 also increased as a result of changes in
foreign currency exchange rates.
Excluding the AWP charge, Distribution Solutions segment’s operating expenses and operating expenses as a
percentage of revenues decreased in 2010 compared to 2009 primarily due to the sale of two businesses during 2009,
lower PSIP expense in 2010 and our continued focus on cost containment. These decreases were partially offset by
increased expenses associated with our 2009 business acquisitions.
As previously reported, in 2009 we reached an agreement to settle all private party claims relating to First
DataBank, Inc.’s published drug reimbursement benchmarks for $350 million. We also recorded an accrual of $143
million for pending and expected AWP claims by public payers. The combination of the settlement for all AWP
private party claims and the decision by us to establish an estimated accrual for the pending and expected AWP
claims by public payers resulted in a pre-tax, non-cash charge of $493 million in the third quarter of 2009. In the
second quarter of 2011, we recorded a pre-tax charge of $24 million for the settlement with the State of Connecticut
relating to AWP claims. The settlement included an express denial of liability and a release by Connecticut of the
Company as to all matters alleged or which could have been alleged in the action. A cash payment of $26 million
was made in the third quarter of 2011 for this settlement. During the third quarter of 2011, following a review of
the reserve for estimated probable losses from current and possible future public entity AWP claims, which review
included consideration of the pace and progress of settlement discussions during and after the third quarter relating
to state and federal Medicaid claims, we recorded a pre-tax charge of $189 million. All AWP litigation charges
were included in our Distribution Solutions segment’s operating expenses. As of March 31, 2011, the reserve
relating to AWP public entity claims was $330 million and was included in other current liabilities in our
consolidated balance sheet. Refer to Financial Note 17, “Other Commitments and Contingent Liabilities,” to the
consolidated financial statements appearing in this Annual Report on Form 10-K for further information.