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31
McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
Gross Profit:
Years Ended March 31, Change
(Dollars in millions) 2013 2012 2011 2013 2012
Gross Profit
Distribution Solutions (1) $ 5,439 $ 5,057 $ 4,565 8 % 11 %
Technology Solutions (2) 1,545 1,510 1,405 2 7
Total $ 6,984 $ 6,567 $ 5,970 6 10
Gross Profit Margin
Distribution Solutions 4.57 % 4.23 % 4.19 % 34 bp 4 bp
Technology Solutions 45.43 45.62 43.97 (19) 165
Total 5.70 5.35 5.33 35 2
bp - basis points
(1) Gross profit for our Distribution Solutions segment for 2013 and 2011 includes receipt of $44 million and $51 million representing our share
of settlements of antitrust class action lawsuits brought against drug manufacturers, which were recorded as a reduction to cost of sales.
(2) Gross profit for our Technology Solutions segment for 2013, 2012 and 2011 includes an asset impairment charge for capitalized software held
for sale of $10 million, $31 million of product alignment charges and a $72 million asset impairment charge for capitalized software held for
sale.
Gross profit increased 6% to $7.0 billion in 2013 and 10% to $6.6 billion in 2012. As a percentage of revenues, gross
profit increased by 35 bp in 2013 and by 2 bp in 2012. Gross profit margin increased in 2013 primarily reflecting an increase
in our Distribution Solutions segment. Gross profit margin increased in 2012 reflecting increases in both of our operating
segments.
Distribution Solutions segment's gross profit margin increased in 2013 compared to 2012 primarily due to increased sales
of higher margin generic drugs, our business acquisitions, an increase in buy margin and a lower proportion of revenues
within the segment attributed to sales to customers' warehouses. These increases were partially offset by a decrease in sell
margin. Buy margin primarily reflects volume and timing of compensation from branded pharmaceutical manufacturers. Our
Distribution Solutions segment's gross profit margin for 2013 was also favorably affected by the receipt of $44 million
representing our share of settlements of antitrust class action lawsuits brought against drug manufacturers.
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.
Our last-in, first-out (“LIFO”) net inventory expense was $13 million in 2013, $11 million in 2012 and $3 million for
2011. 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. During 2013 and 2012,
we began to experience a modest net inflationary trend in our pharmaceuticals indices, as price increases on branded
pharmaceuticals exceeded the impact of price declines and shifts toward generic pharmaceuticals, including the effect of
branded pharmaceutical products that have lost market exclusivity. 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 decreased in 2013 compared to 2012, primarily due to a change in
product and services mix and a $10 million impairment of capitalized software held for sale. Additionally, 2012 gross profit
margin includes $31 million of product alignment charges.
Technology Solutions segment's gross profit margin increased in 2012 compared to 2011 primarily due 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.