Cardinal Health 2008 Annual Report Download - page 66

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The Company tracks revenue by bulk and non-bulk customers in its financial systems. An internal analysis
has been prepared to allocate 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 2008, 2007 and 2006:
2008 2007 2006
Non-bulk customers:
Revenue from non-bulk customers ................................. $41,992 $42,673 $40,175
Segment expenses allocated to non-bulk customers (1)(2) ............... 41,047 41,586 39,186
Segment profit from non-bulk customers (1)(2) ....................... 945 1,087 962
Segment profit from non-bulk customers as a percentage of revenue from
non-bulk customers (1)(2) ...................................... 2.25% 2.55% 2.39%
Bulk customers:
Revenue from bulk customers ..................................... $37,292 $33,900 $29,872
Segment expenses allocated to bulk customers (1)(2) ................... 37,115 33,687 29,718
Segment profit from bulk customers (1)(2) ........................... 177 213 154
Segment profit from bulk customers as a percentage of revenue from bulk
customers (1)(2) .............................................. 0.47% 0.63% 0.52%
(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. During fiscal 2008, the Company
revised certain estimates used when allocating certain expenses between non-bulk customers and bulk
customers. Prior period information has been adjusted to reflect this change. The core pharmaceutical
distribution operation (“Distribution”) within the Healthcare Supply Chain Services—Pharmaceutical segment
services both bulk and non-bulk customers. Therefore, expenses associated with this operation were allocated
between bulk and non-bulk customers as described below. The brokerage operation (“Brokerage”) within the
Healthcare Supply Chain Services—Pharmaceutical segment only services bulk customers, therefore, expenses
associated with Brokerage are allocated to bulk customers. The remaining operations (i.e., excluding
Distribution) within the Healthcare Supply Chain Services—Pharmaceutical segment service non-bulk
customers, therefore, expenses associated with these operations were allocated to non-bulk customers.
The following describes the allocation of the major components of cost of products sold for Distribution
between bulk and non-bulk customers:
• Cost of products sold for pharmaceutical products is determined by specifically tracking the
manufacturer’s designated price of products, at the time the products are sold, by bulk and non-bulk
customers. The manufacturer’s designated price is then reduced by other components impacting cost of
products sold, including distribution service agreement fees, pharmaceutical price appreciation,
manufacturer cash discounts and manufacturer rebates and incentives. In addition, other inventory
charges and credits are added or subtracted, as appropriate, to arrive at cost of products sold. The
Company used the following methods that it believes provide a reasonable correlation to allocate the
remaining components of cost of products sold between bulk and non-bulk customers:
• Distribution service agreement fees and pharmaceutical price appreciation are tracked by
manufacturer. Therefore, the Company allocated the distribution service agreement fees and
pharmaceutical price appreciation associated with each manufacturer among their products in
proportion to sales of each product between bulk and non-bulk customers.
• Manufacturer cash discounts are recognized as a reduction to cost of products sold when the
related inventory is sold and were allocated in proportion to the manufacturer’s published price of
the product sold to bulk and non-bulk customers.
• Manufacturers’ rebates and incentives are based on the individual agreements entered into with
manufacturers related to specific products. Rebates and incentives were grouped by contract terms
and then allocated in proportion to sales to bulk and non-bulk customers.
42