McKesson 2013 Annual Report Download - page 38

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McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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 began converging our core clinical
and revenue cycle Horizon and Paragon product lines onto Paragon's Microsoft®-based platform. Additionally, we 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 included $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.
Our capitalized software held for sale is amortized over three years. At each balance sheet date, or earlier if an indicator
of an impairment exists, we evaluate the recoverability of unamortized capitalized software costs based on estimated future
undiscounted revenues net of estimated related costs over the remaining amortization period. At the end of the second quarter
of 2010, our HzERM software product became generally available. In October 2010, we decreased our estimated revenues
over the next 24 months for our HzERM software product and, as a result, concluded that the estimated future revenues, net
of estimated related costs, were insufficient to recover its carrying value. Accordingly, we recorded a $72 million non-cash
impairment charge in the second quarter of 2011 within our Technology Solutions segment's cost of sales to reduce the
carrying value of the software product to its net realizable value.
Operating Expenses:
Years Ended March 31, Change
(Dollars in millions) 2013 2012 2011 2013 2012
Operating Expenses
Distribution Solutions (1) (2) $ 3,071 $ 2,854 $ 2,673 8 % 7 %
Technology Solutions (3) 1,252 1,151 1,108 9 4
Corporate (4) 346 413 368 (16) 12
Total $ 4,669 $4,418 $4,149 6 6
Operating Expenses as a Percentage of Revenues
Distribution Solutions 2.58 %2.39 %2.45 % 19 bp (6) bp
Technology Solutions 36.81 34.77 34.68 204 9
Total 3.81 3.60 3.70 21 (10)
(1) Operating expenses for 2013, 2012 and 2011 include $72 million, $149 million and $213 million of AWP litigation charges.
(2) Operating expenses for 2013 include a $40 million charge for a legal dispute in our Canadian business.
(3) Operating expenses for 2013 and 2012 include a goodwill impairment charge of $36 million and product alignment charges of $20 million.
(4) Corporate expenses for 2013 are net of an $81 million pre-tax gain on business combination.
Operating expenses increased 6% to $4.7 billion in 2013 and 6% to $4.4 billion in 2012. Operating expenses increased in
2013 primarily due to our business acquisitions, higher employee compensation and benefit costs, a $40 million charge for a
legal dispute in our Canadian business and a $36 million non-cash pre-tax goodwill impairment charge. These increases were
partially offset by an $81 million gain on business combination and lower AWP litigation charges. Operating expenses
increased in 2012 primarily due to the addition of US Oncology, higher employee compensation and benefits costs and an
increase in expenses associated with supporting higher revenues, partially offset by lower AWP litigation charges. Operating
expenses include pre-tax charges of $72 million, $149 million and $213 million in 2013, 2012 and 2011 relating to our AWP
litigation.