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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
32
Gross profit increased 10% to $6.6 billion in 2012 and 5% to $6.0 billion in 2011. As a percentage of revenues,
gross profit increased by 2 bp in 2012 and by 11 bp in 2011. Gross profit margin increased in 2012 primarily
reflecting higher gross profit margins from both of our operating segments and increased in 2011 primarily
reflecting higher gross profit margin from our Distribution Solutions segment.
Distribution Solutions segment’s gross profit margin increased in 2012 compared to 2011 primarily due to our
acquisition of US Oncology and increased sales of higher margin generic drugs, partially offset by a decline in sell
margin and the receipt of $51 million in 2011 representing our share of a settlement of an antitrust class action
lawsuit brought against a drug manufacturer.
Distribution Solutions segment’s gross profit margin increased in 2011 compared to 2010 primarily due to
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. Our Distribution
Solutions segment’s 2011 gross profit margin was also favorably affected by the receipt of $51 million representing
our share of a settlement of an antitrust class action lawsuit brought against a drug manufacturer. Buy margin
primarily reflects volume and timing of compensation from branded pharmaceutical manufacturers.
Our last-in, first-out (“LIFO”) net inventory expense was $11 million in 2012, $3 million in 2011 and
$8 million for 2010. 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. During 2012, we experienced a decline in deflationary trends in generic pharmaceuticals as
a result of a reduction in generic product launches as compared to the prior year. Additional information regarding
our LIFO accounting is included under the caption “Critical Accounting Policies and Estimates,” included in this
Financial Review.
Technology Solutions segment’s gross profit margin increased in 2012 compared to 2011, primarily due to an
increase in higher margin revenues, a $72 million asset impairment charge related to our Horizon Enterprise
ManagementTM (“HzERM”) software product in 2011 and lower amortization expense related to HzERM. These
increases were partially offset by product alignment charges of $31 million in 2012.
Technology Solutions segment’s gross profit margin decreased in 2011 compared to 2010 primarily due to a
$72 million asset impairment charge related to HzERM, the sale of MAP and continued investment in our clinical
and enterprise revenue management solutions products, partially offset by a shift to higher margin revenue.
During the third quarter of 2012, we approved a plan to align our hospital clinical and revenue cycle healthcare
software products within our Technology Solutions segment. As part of this alignment strategy, we will be
converging our core clinical and revenue cycle Horizon and Paragon product lines onto Paragon’s Microsoft®–
based platform over time. Additionally, we have stopped development of our HzERM software product. The plan
resulted in a pre-tax charge of $51 million in 2012, of which $31 million was recorded to cost of sales and $20
million was recorded to operating expenses within our Technology Solutions segment. The majority of these
charges were incurred in the third quarter of 2012. The pre-tax charge includes $24 million of non-cash asset
impairment charges, primarily for the write-off of prepaid licenses and commissions and capitalized internal use
software that were determined to be obsolete as they would not be utilized going forward, $10 million for severance,
$7 million for customer allowances and $10 million for other charges.