McKesson 2009 Annual Report Download - page 75

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
69
Concentrations of Credit Risk and Receivables: Our trade receivables subject us to a concentration of credit
risk with customers primarily in our Distribution Solutions segment. At March 31, 2009, revenues and accounts
receivable from our ten largest customers accounted for approximately 52% of consolidated revenues and
approximately 49% of accounts receivable. At March 31, 2009, revenues and accounts receivable from our two
largest customers, CVS Caremark Corporation and Rite Aid Corporation, represented approximately 14% and 12%
of total consolidated revenues and 14% and 10% of accounts receivable. Accordingly, any defaults in payment by
or a reduction in purchases from our large customers could have a significant negative impact on our financial
condition, results of operations and liquidity. In addition, trade receivables are subject to a concentration of credit
risk with customers in the institutional, retail and healthcare provider sectors, which can be affected by a downturn
in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the
customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full
collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An
allowance is recorded in our consolidated financial statements for these amounts.
Inventories: We state inventories at the lower of cost or market (“LCM.”) Inventories for our Distribution
Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of
the cost of domestic inventories is determined on the last-in, first-out (“LIFO”) method and Canadian inventories are
stated using the first-in, first-out (“FIFO”) method. Technology Solutions segment inventories consist of computer
hardware with cost determined by the standard cost method. Rebates, fees, cash discounts, allowances, chargebacks
and other incentives received from vendors are generally accounted for as a reduction in the cost of inventory and
are recognized when the inventory is sold. Total inventories were $8.5 billion and $9.0 billion at March 31, 2009
and 2008.
The LIFO method was used to value approximately 88% of our inventories at March 31, 2009 and 2008. At
March 31, 2009 and 2008, our LIFO reserves, net of LCM adjustments (discussed below), were $85 million and $77
million. LIFO reserves include both pharmaceutical and non-pharmaceutical products. In 2009, 2008 and 2007, we
recognized net LIFO expense of $8 million and net LIFO credits of $14 million and $64 million within our
consolidated statements of operations. A LIFO expense is recognized when the net effect of price increases on
branded pharmaceuticals and non-pharmaceutical products held in inventory exceeds the impact of price declines
and shifts towards generic pharmaceutical products, including the effect of branded pharmaceutical products that
have lost market exclusivity. A LIFO credit is recognized when the impact of price declines and shifts towards
generic pharmaceutical products exceeds the impact of price increases on branded pharmaceuticals and non-
pharmaceutical products held in inventory.
We believe that the FIFO inventory costing method provides a reasonable estimation of the current cost of
replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or inventory as
valued under FIFO. Primarily due to continued deflation in generic pharmaceutical inventories, pharmaceutical
inventories at LIFO were $107 million and $43 million higher than FIFO as of March 31, 2009 and 2008. As a
result, in 2009 and 2008, we recorded LCM charges of $64 million and $43 million within our consolidated
statements of operations to adjust our LIFO inventories to market.
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them under
the straight-line method at rates designed to distribute the cost of properties over estimated service lives ranging
from one to 30 years.