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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
29
Gross profit and gross profit margin increased over each of the last two years. As a percentage of revenues,
gross profit increased 2 basis points (“bp”) to 5.35% in 2012 and 11 bp to 5.33% in 2011. Gross profit margin
increased in 2012 compared to 2011 primarily due to the addition of US Oncology, higher generics income in our
Distribution Solutions segment and an increase in higher margin revenues in our Technology Solutions segment.
These increases were partially offset by a decline in sell margin and by a $51 million benefit in 2011 associated with
the receipt of our share of a settlement of an antitrust class action lawsuit brought against a drug manufacturer in our
Distribution Solutions segment.
Gross profit margin increased in 2011 compared to 2010 primarily due to an increase in buy margin, higher
generics income and the receipt of $51 million from an antitrust class action settlement in our Distribution Solutions
segment. These increases were partially offset by a decline in our Technology Solutions segment margin, which
included a $72 million asset impairment charge.
Operating expenses increased over each of the last two years primarily reflecting an increase in expenses
associated with supporting our higher revenues, the addition of US Oncology, and higher employee compensation
and benefits costs, which includes expenses associated with our Profit Sharing Investment Plan (“PSIP”). Operating
expenses were also impacted by Average Wholesale Price (“AWP”) litigation charges of $149 million and $213
million in 2012 and 2011. Our litigation charges and PSIP expense are more fully described under the caption
“Operating Expenses” in this Financial Review.
Other income, net was $21 million, $36 million and $43 million in 2012, 2011 and 2010. In 2011, other
income, net includes the receipt of $16 million representing the reimbursement of post-acquisition interest expense
by the former shareholders of US Oncology. 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 Logistic Solutions, LLC (“MLS”).
Interest expense increased over each of the last two years primarily due to the assumption of US Oncology’s
debt and the subsequent refinancing of the debt, which includes $25 million of bridge loan financing fees incurred in
2011. Additionally, 2011 interest expense benefited from repayment of $215 million of long-term debt in March
2010.
Our reported income tax rates were 26.9%, 30.9% and 32.2% in 2012, 2011 and 2010. Fluctuations in our
reported income tax rates 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 addition, in 2012, 2011 and 2010,
income tax expense includes $66 million, $34 million and $7 million of net income tax benefits for discrete items,
which primarily relates to the recognition of previously unrecognized tax benefits and accrued interest. Included in
the 2012 discrete tax benefit, is a $31 million credit to income tax expense as a result of the reversal of an income
tax reserve relating to our AWP litigation.
Net income was $1,403 million, $1,202 million and $1,263 million in 2012, 2011 and 2010, and diluted
earnings per common share were $5.59, $4.57 and $4.62. Net income for 2012 and 2011 includes after-tax AWP
litigation charges of $60 million and $149 million. Additionally, net income for 2011 includes a $72 million after-
tax gain (or $0.28 per diluted share) on the sale of our Technology Solutions segment’s wholly-owned subsidiary,
McKesson Asia Pacific Pty Limited (“MAP”), which was sold in July 2010. Historical financial results for this
subsidiary were not material. Diluted earnings per common share were favorably affected by decreases in our
weighted average shares outstanding due to the cumulative effect of share repurchases over the past three years.
Weighted average diluted common shares outstanding decreased over each of the last two years due to our share
repurchases. In 2012, 2011, and 2010, we repurchased 20 million, 29 million and 8 million of our common shares.