Cardinal Health 2015 Annual Report Download - page 51

Notes to Financial Statements
Cardinal Health | Fiscal 2015 Form 10-K 50
Major Customers
The following table summarizes all of our customers that individually
account for at least 10 percent of revenue and their corresponding
percent of gross trade receivables. The customers in the table below
are primarily serviced through our Pharmaceutical segment.
Percent of Revenue
Percent of Gross
Trade Receivables
at June 30
2015 2014 2013 2015 2014
CVS Health 27% 28% 23% 20% 22%
Walgreen Co. —% 4% 20% —% —%
Our pharmaceutical distribution contract with Walgreen Co.
("Walgreens") expired on August 31, 2013.
We have entered into agreements with group purchasing
organizations (“GPOs”) which act as purchasing agents that
negotiate vendor contracts on behalf of their members. Novation,
LLC and Premier Purchasing Partners, L.P. are our two largest GPO
member relationships in terms of revenue. Sales to members of these
two GPOs collectively accounted for 18 percent, 17 percent and 13
percent of revenue for fiscal 2015, 2014 and 2013, respectively. Our
trade receivable balances are with individual members of the GPO,
and therefore no significant concentration of credit risk exists with
these types of arrangements.
Inventories
A substantial portion of our inventories (58 percent and 61 percent at
June 30, 2015 and 2014, respectively) are valued at the lower of cost,
using the last-in, first-out ("LIFO") method, or market. These
inventories are included within the core pharmaceutical distribution
facilities of our Pharmaceutical segment (“distribution facilities”) and
are primarily merchandise inventories. The LIFO method presumes
that the most recent inventory purchases are the first items sold, so
LIFO helps us better match current costs and revenue. We believe
that the average cost method of inventory valuation provides a
reasonable approximation of the current cost of replacing inventory
within these distribution facilities. As such, the LIFO reserve is the
difference between (a) inventory at the lower of LIFO cost or market
and (b) inventory at replacement cost determined using the average
cost method of inventory valuation.
If we had used the average cost method of inventory valuation for all
inventory within the distribution facilities, the value of our inventories
would not have changed in fiscal 2015 or 2014. Inventories valued
at LIFO were $114 million and $98 million higher than the average
cost value at June 30, 2015 and 2014, respectively. We do not record
inventories in excess of replacement cost. As such, we did not record
any changes in our LIFO reserve in fiscal 2015 and 2014. Our
remaining inventory is primarily stated at the lower of cost, using the
first-in, first-out method, or market.
Inventories presented in the consolidated balance sheets are net of
reserves for excess and obsolete inventory which were $57 million
and $44 million at June 30, 2015 and 2014, respectively. We reserve
for inventory obsolescence using estimates based on historical
experience, sales trends, specific categories of inventory and age of
on-hand inventory.
Cash Discounts
Manufacturer cash discounts are recorded as a component of
inventory cost and recognized as a reduction of cost of products sold
when the related inventory is sold.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Property and equipment held for sale are recorded at
the lower of cost or fair value less cost to sell. When certain events
or changes in operating conditions occur, an impairment assessment
may be performed on the recoverability of the carrying amounts.
Depreciation expense is computed using the straight-line method
over the estimated useful lives of the assets, including capital lease
assets which are depreciated over the terms of their respective
leases. We generally use the following range of useful lives for our
property and equipment categories: buildings and improvements—
3 to 39 years; machinery and equipment—3 to 20 years; and furniture
and fixtures—3 to 7 years. We recorded depreciation expense of
$254 million, $265 million and $269 million for fiscal 2015, 2014 and
2013, respectively.
The following table presents the components of property and
equipment, net at June 30:
(in millions) 2015 2014
Land, building and improvements $ 1,465 $ 1,419
Machinery and equipment 2,440 2,326
Furniture and fixtures 129 125
Total property and equipment, at cost 4,034 3,870
Accumulated depreciation and amortization (2,528) (2,411)
Property and equipment, net $ 1,506 $ 1,459
Repairs and maintenance expenditures are expensed as incurred.
Interest on long-term projects is capitalized using a rate that
approximates the weighted-average interest rate on long-term
obligations, which was 2.54 percent at June 30, 2015. The amount
of capitalized interest was immaterial for all periods presented.
Business Combinations
The assets acquired and liabilities assumed in a business
combination, including identifiable intangible assets, are recorded at
their estimated fair values as of the acquisition date. The excess of
the purchase price over the estimated fair value of the identifiable
net assets acquired is recorded as goodwill. We base the fair values
of identifiable intangible assets on detailed valuations that require
management to make significant judgments, estimates and
assumptions. Critical estimates and assumptions include: expected
future cash flows for customer relationships, trade names and other
identifiable intangible assets; discount rates that reflect the risk
factors associated with future cash flows; and estimates of useful
lives. When an acquisition involves contingent consideration, we
recognize a liability equal to the fair value of the contingent
consideration obligation at the acquisition date. The estimate of fair