Cardinal Health 2009 Annual Report Download - page 78

operations such as closing facilities, moving a product to another location or outsourcing the production of a
product. Restructuring activities may also involve substantial re-alignment of the management structure of a
business unit in response to changing market conditions. Restructuring charges are recorded in accordance with
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS No. 146, a
liability is measured at its fair value and recognized as incurred.
Acquisition integration charges include costs to integrate acquired companies. Upon acquisition, certain
integration charges are included within the purchase price allocation in accordance with SFAS No. 141,
“Business Combinations,” and other integration charges are recorded as special items as incurred.
The Company recognizes income from the favorable outcome of legal settlements, judgments or other
resolution of legal and regulatory matters as special items on the consolidated financial statements when the
associated cash or assets are received. Generally, expenses due to the unfavorable outcome of legal settlements,
judgments or other resolution of legal and regulatory matters (“litigation settlement losses”) are charged to the
segment to which the matter relates and, as a result, are classified as SG&A expenses on the Company’s
consolidated financial statements. In certain circumstances, significant litigation settlement losses are classified
in special items on the consolidated statements of earnings. Factors considered in determining whether a
particular litigation settlement loss should be classified in special items include the size of the settlement, the
nature of the matter (i.e., significant matters that are infrequent, non-recurring or unusual in nature are classified
as special items), the age of the matter and the pervasiveness of the matter to the entire organization. The
Company also classifies legal fees and document preservation and production costs incurred in connection with
the previously-disclosed SEC investigation and related Audit Committee internal review and related matters as
special items.
The majority of the special items related to acquisition integration and restructurings can be classified in one
of the following categories: employee-related costs, exit costs (including lease termination costs), asset
impairments, IPR&D costs, and other integration costs. Employee-related costs include severance and
termination benefits. Lease termination costs include lease cancellation fees, forfeited deposits and remaining
payments due under existing lease agreements less estimated sublease income. Other facility exit costs include
costs to move equipment or inventory out of a facility as well as other costs incurred to shut down a facility. In
addition, other facility exit costs include certain costs related to the Spin-off such as costs to evaluate and execute
the transaction, costs to start up certain stand alone functions and information technology systems and other one-
time transaction related costs. Asset impairment costs include the reduction in value of the Company’s assets as a
result of the integration or restructuring activities. IPR&D costs include the write-off of research and
development projects in process at the time of acquisition, which had not yet reached technological feasibility
and were deemed to have no alternative use. Other integration costs primarily include charges directly related to
the integration plan such as consulting costs related to information systems and employee benefit plans as well as
relocation and travel costs directly associated with the integration plan. See Note 3 of “Notes to Consolidated
Financial Statements” for additional information.
Vendor Reserves
The Company maintains reserves to cover areas of exposure with its vendors. In determining appropriate
vendor reserves, the Company assesses historical experience and current outstanding claims. The Company has
established various levels of reserves based on the type of claim and status of review. The Company researches
and resolves various types of contested transactions based on discussions with vendors, Company policy and
findings of research performed. Though the transaction types are relatively consistent, the Company has
periodically refined its estimate methodology over the past few years by updating the reserve estimate
percentages based upon historical experiences. Changes to the estimate percentages have resulted in a financial
impact to the Company’s cost of products sold in the period in which the change was made.
Vendor reserves were $56.3 million and $37.3 million at June 30, 2009 and 2008, respectively.
Approximately 94% and 92% of the vendor reserve at June 30, 2009 and 2008, respectively, pertained to the
Healthcare Supply Chain Services segment. Fluctuations in the reserve balance are caused by the variations of
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