McKesson 2016 Annual Report Download - page 48

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
primarily include plans to reduce operating costs of our distribution and pharmacy operations, administrative
support functions, and technology platforms, as well as the disposal and abandonment of certain non-core
businesses.
As a result of the Cost Alignment Plan, the Company expects to record total pre-tax charges of
approximately $270 million to $290 million. During the fourth quarter of 2016, we recorded $229 million of pre-
tax restructuring charges primarily representing severance and employee-related costs. The charges were
included in our results as follows: $26 million in cost of sales and $203 million in operating expenses. Estimated
remaining charges primarily consist of exit-related costs and accelerated depreciation and amortization, which
are largely attributed to our Distribution Solutions segment. Estimated savings in 2017 as a result of this plan are
approximately $200 million to $220 million. Additional information on our Cost Alignment Plan is included in
Financial Note 3, “Restructuring” to the consolidated financial statements appearing in this Annual Report on
Form 10-K.
Distribution Solutions
Distribution Solutions segment’s operating expenses for 2016 decreased 7% compared to the prior year.
Excluding unfavorable foreign currency effects of 5%, operating expenses decreased 2%. Operating expenses
and operating expenses as a percentage of revenues decreased primarily due to a $150 million charge associated
with the settlement of controlled substance distribution claims recorded in the prior year, lower acquisition-
related expenses relating to integration activities for our acquisitions and the sale of our ZEE Medical business,
including a $52 million pre-tax gain on sale. These decreases were partially offset by pre-tax charges of
$156 million associated with the Cost Alignment Plan, higher compensation and benefit costs and bad debt
expense.
Operating expense and operating expenses as a percentage of revenues increased in 2015 compared to the
prior year primarily due to our business acquisitions, including increases in acquisition-related expenses and
intangible asset amortization, and higher compensation and benefit costs. Operating expenses in 2015 also
included a $150 million charge associated with the settlement of controlled substance distribution claims with the
DEA, DOJ and various U.S. Attorney’s offices, and 2014 operating expenses included $68 million of charges
associated with our AWP litigation. Refer to Financial Note 24, “Commitments and Contingent Liabilities,” to
the consolidated financial statements in this Annual Report on Form 10-K for further information on the
controlled substance distribution claims and the AWP litigation.
Technology Solutions
Technology Solutions segment’s operating expenses and operating expenses as a percentage of revenues in
2016 decreased compared to the prior year primarily due to the sale of our nurse triage business in the first
quarter of 2016, including a pre-tax gain on sale of $51 million, and lower compensation and benefit costs. These
decreases were partially offset by pre-tax charges of $30 million for the Cost Alignment Plan as well as the
write-off of internal-use software. Operating expenses and operating expenses as a percentage of revenue in 2015
decreased from the comparable year primarily due to lower research and development expenses, integration-
related expenses and severance charges.
Corporate
Corporate expenses increased in 2016 compared to the prior year primarily due to pre-tax charges of
$17 million associated with the Cost Alignment Plan, partially offset by lower acquisition-related expenses and a
decrease in compensation and benefit costs. Corporate expenses increased in 2015 compared to the prior year
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