Cardinal Health 2009 Annual Report Download - page 64

Download and view the complete annual report

Please find page 64 of the 2009 Cardinal Health annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 154

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154

manufacturer cash discounts ($80 million) due to increased sales volume. The growth of distribution service
agreement fees, pharmaceutical price appreciation and manufacturer cash discounts was less than the growth in
fiscal 2007 due to slower revenue growth.
Increases in SG&A expenses decreased segment profit by $42 million during fiscal 2008 partially as a result
of the impact of foreign exchange ($10 million).
Bulk and Non-Bulk Customers. The Healthcare Supply Chain Services segment differentiates between bulk
and non-bulk customers with respect to the distribution of pharmaceutical, radiopharmaceutical and
over-the-counter healthcare products because bulk customers generate significantly lower segment profit as a
percentage of revenue than that generated by non-bulk customers. Hereinafter all references to bulk and non-bulk
customers are confined to the product categories above. Bulk customers consist of retail chain customers’
centralized warehouse operations and customers’ mail order businesses. All other customers are classified as
non-bulk customers (for example, retail stores, pharmacies, hospitals and alternate care sites). Bulk customers
include the warehouse operations of retail chains whose retail stores are classified as non-bulk customers. A single
retail chain pharmacy customer may be both a bulk customer with respect to its warehouse operations and a
non-bulk customer with respect to its retail stores. Bulk customers have the ability to process large quantities of
products in central locations and self-distribute these products to their individual retail stores or customers.
Substantially all deliveries to bulk customers consist of product shipped in the same form as the product is received
from the manufacturer, but a small portion of deliveries to bulk customers are broken down into smaller units prior
to shipping. Non-bulk customers, on the other hand, require more complex servicing by the Company. These
services, all of which are performed by the Company, include receiving inventory in large or full case quantities and
breaking it down into smaller quantities, warehousing the product for a longer period of time, picking individual
products specific to a customer’s order and delivering that smaller order to a customer location.
The Company tracks revenue by bulk and non-bulk customers in its financial systems. An internal analysis
has been prepared to estimate segment profit from bulk and non-bulk customers by allocating segment expenses
(total of segment cost of products sold and segment SG&A expenses) separately for bulk and non-bulk
customers. The following table shows the allocation of segment expenses, segment profit and segment profit as a
percentage of revenue for bulk and non-bulk customers for fiscal 2009, 2008 and 2007 (prior period amounts
differ from those previously disclosed as they have been updated to remove Martindale which has been
reclassified to discontinued operations):
(in millions) 2009 2008 2007
Non-bulk customers:
Revenue from non-bulk customers ................................. $43,615 $41,751 $42,398
Segment expenses allocated to non-bulk customers (1) ................. 42,747 40,889 41,389
Segment profit from non-bulk customers (1) .......................... 868 862 1,009
Segment profit from non-bulk customers as a percentage of revenue from
non-bulk customers (1) ......................................... 2.0% 2.1% 2.4%
Bulk customers:
Revenue from bulk customers ..................................... $43,721 $37,313 $33,908
Segment expenses allocated to bulk customers (1) ..................... 43,547 37,136 33,695
Segment profit from bulk customers (1) ............................. 174 177 213
Segment profit from bulk customers as a percentage of revenue from bulk
customers (1) ................................................ 0.4% 0.5% 0.6%
(1) Amounts shown are estimates based upon the internal analysis described above. The preparation of this
internal analysis required the use of complex and subjective estimates and allocations based upon
assumptions, past experience and judgment that the Company believes are reasonable. The core
pharmaceutical distribution operation (“Distribution”) services both bulk and non-bulk customers.
Therefore, expenses associated with this operation were allocated between bulk and non-bulk customers as
42