McKesson 2013 Annual Report Download - page 34

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Revenues for 2013 approximated 2012 and increased in 2012 compared to 2011. Revenues over the last two years
benefited from market growth, which includes growing drug utilization and price increases, in our Distribution Solutions
segment, which accounted for approximately 97% of our consolidated revenues, as well as due to our business acquisitions. In
addition, revenues for 2013 were impacted by price deflation associated with brand to generics drug conversion and the loss
of customers.
Gross profit and gross profit margin increased over each of the last two years. As a percentage of revenues, gross profit
increased 35 basis points (“bp”) to 5.70% in 2013 and 2 bp to 5.35% in 2012. Gross profit margin increased in 2013
compared to 2012 primarily due to higher generics income, business acquisitions, higher buy margin, a $44 million benefit
associated with the receipt of our share of settlements of antitrust class action lawsuits brought against drug manufacturers
and a lower proportion of revenues attributed to sales to customers' warehouses. Additionally, gross profit margin was
unfavorably impacted in 2012 by $31 million of product alignment charges. These increases in the 2013 gross profit margin
were partially offset by a decrease in sell margin.
Gross profit margin increased in 2012 compared to 2011 primarily due to business acquisitions, 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 $31 million of product alignment charges. Additionally,
gross profit margin in 2011 was impacted by a $51 million benefit associated with the receipt of our share of a settlement of
an antitrust class action lawsuit brought against a drug manufacturer and a $72 million asset impairment charge for capitalized
software held for sale.
Operating expenses increased over each of the last two years. Operating expenses increased in 2013 compared to 2012
primarily due to our acquisitions, higher employee compensation and benefit costs, a $40 million charge for a legal dispute
and a $36 million charge for goodwill impairment. These increases were partially offset by an $81 million gain on business
combination and lower Average Wholesale Price ("AWP") litigation charges. Operating expenses increased in 2012
compared to 2011 primarily due to expenses associated with supporting our higher revenues, business acquisitions, and higher
employee compensation and benefits costs. These increases were partially offset by lower AWP litigation charges. AWP
litigation charges were $72 million, $149 million and $213 million in 2013, 2012 and 2011.
On April 6, 2012, we purchased the remaining 50% ownership interest in our corporate headquarters building located in
San Francisco, California for $90 million, which was funded from cash on hand. We previously held a 50% ownership
interest and were the primary tenant in this building. This transaction was accounted for as a step acquisition, which requires
that we re-measure our previously held 50% ownership interest to fair value and record the difference between the fair value
and carrying value as a gain in the consolidated statements of operations. The re-measurement to fair value resulted in a non-
cash pre-tax gain of $81 million ($51 million after-tax), which was recorded as a gain on business combination within
Corporate in the consolidated statements of operations during the first quarter of 2013.
Other income, net was $35 million, $21 million and $36 million in 2013, 2012 and 2011.
Based on a recent evaluation we committed to a plan to sell our 49% equity interest in Nadro, S.A. de C.V ("Nadro") and
in the fourth quarter of 2013 recorded a pre-tax non-cash impairment charge of $191 million reducing the investment's
carrying value to its estimated fair value. The charge reflects deterioration in Nadro's market position, projected lower
revenue growth rates and operating margins and continued business challenges in the wholesale pharmaceutical distribution
business in Mexico.
Interest expense decreased in 2013 compared to 2012 and increased in 2012 compared with 2011. Interest expense
fluctuates based on timing, amounts and interest rates of term debt that is repaid and new debt issued, as well as fees paid on
bridge loan facilities used in acquiring businesses.
Our reported income tax rates were 30.3%, 26.9% and 30.9% in 2013, 2012 and 2011. 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, and discrete items. In 2013, 2012 and 2011, income tax expense includes
$29 million, $66 million and $34 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.