McKesson 2014 Annual Report Download - page 37

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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In 2012, we approved a plan to align our hospital clinical and revenue cycle healthcare software products within this 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. We also stopped development of our HzERM software product. As the result of this
plan, we recorded product alignment charges of $51 million, of which $31 million was recorded to cost of sales and $20 million
was recorded to operating expenses.
Operating Expenses:
Years Ended March 31, Change
(Dollars in millions) 2014 2013 2012 2014 2013
Operating Expenses
Distribution Solutions (1) $ 4,335 $ 3,068 $ 2,854 41 % 7 %
Technology Solutions 1,156 1,109 1,011 4 10
Corporate (2) 451 346 413 30 (16)
Total $ 5,942 $ 4,523 $ 4,278 31 6
Operating Expenses as a Percentage of Revenues
Distribution Solutions 3.22 % 2.58 % 2.39 % 64 bp 19 bp
Technology Solutions 36.32 36.69 34.90 (37) 179
Total 4.32 3.71 3.50 61 21
(1) Operating expenses for 2014, 2013 and 2012 include $68 million, $72 million and $149 million of AWP litigation charges.
(2) Corporate expenses for 2013 are net of an $81 million pre-tax gain on business combination.
Operating expenses increased 31% to $5.9 billion in 2014 and 6% to $4.5 billion in 2013. Operating expenses increased in
2014 and 2013 primarily due to our business acquisitions, including increases in acquisition-related expenses and higher intangible
asset amortization, and higher compensation and benefit costs. Additionally, 2013 operating expenses were impacted by a $40
million charge for a legal dispute in our Canadian business, a $36 million non-cash goodwill impairment charge, an $81 million
gain on business combination, and lower AWP charges.
Distribution Solutions
Distribution Solutions segment’s operating expenses and operating expenses as a percentage of revenues increased in 2014
and 2013 primarily due to our business acquisitions and higher employee compensation and benefit costs. Operating expenses in
2013 were also impacted by lower AWP charges and a $40 million charge for a legal dispute in our Canadian business.
The Company has a reserve relating to AWP public entity claims, which is reviewed at least quarterly and whenever events
or circumstances indicate changes, including consideration of the pace and progress of discussions relating to potentially resolving
other public entity claims. Charges related to AWP litigation, including accrued interest, are recorded in operating expenses within
our Distribution Solutions segment. Such pre-tax charges were $68 million, $72 million and $149 million in 2014, 2013 and 2012.
Refer to Financial Note 22, “Other Commitments and Contingent Liabilities,” to the consolidated financial statements
appearing in this Annual Report on Form 10-K for further information.
Technology Solutions
Technology Solutions segment’s operating expenses increased in 2014 compared to 2013 primarily due to small business
acquisitions, integration-related expenses, reduction-in-workforce severance charges, and continued investment in research and
development activities. These increases were partially offset by a $36 million goodwill impairment charge incurred in 2013.
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenues increased in 2013
compared to 2012 primarily due to our continued investment in research and development activities, a $36 million goodwill
impairment charge and acquisitions. These increases were partially offset by product alignment charges incurred in 2012. The
goodwill impairment was recorded to reduce the carrying value of goodwill within the applicable reporting unit to its implied fair
value.