Cardinal Health 2008 Annual Report Download - page 81

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 statement 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.
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 $37.3 million and $72.6 million at June 30, 2008 and 2007, respectively.
Approximately 78% and 61% of the vendor reserve at June 30, 2008 and 2007, respectively, pertained to the
Healthcare Supply Chain Services—Pharmaceutical segment. Fluctuations in the reserve balance are caused by
the variations of outstanding claims from period to period, timing of settlements and specific vendor issues, such
as bankruptcies (significant events would be described above in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”). Though vendor transactions remain relatively consistent from
period to period, unforeseen events such as the deterioration in the financial condition of a large vendor or a
settlement of numerous outstanding claims could cause the reserve to fluctuate, and thus, have a financial impact
on the period’s financial results.
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