Cardinal Health 2009 Annual Report Download - page 76

Download and view the complete annual report

Please find page 76 of the 2009 Cardinal Health annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 154

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154

Inventories
A substantial portion of inventories (approximately 71% and 70% at June 30, 2009 and 2008, respectively)
are stated at the lower of cost, using the LIFO method, or market. These inventories are included within the core
pharmaceutical distribution facilities within the Company’s Healthcare Supply Chain Services segment
(“Distribution facilities”) and are primarily merchandise inventories. The LIFO impact on the consolidated
statements of earnings in a given year is dependent on pharmaceutical price appreciation and the level of
inventory. Prices for branded pharmaceuticals are primarily inflationary, which results in an increase in cost of
products sold, whereas prices for generic pharmaceuticals are deflationary, which results in a decrease in cost of
products sold.
Under the LIFO method, it is assumed that the most recent inventory purchases are the first items sold. As
such, the Company uses LIFO to better match current costs and revenue. Therefore, reductions in the overall
inventory levels resulting from declining branded pharmaceutical inventory levels generally will result in a
decrease in future cost of products sold, as the remaining inventory will be held at a lower cost due to the
inflationary environment. Conversely, reductions in the overall inventory levels created by declining generic
pharmaceutical inventory levels would generally increase future cost of products sold, as the remaining inventory
will be held at a higher cost due to the deflationary environment. The Company believes that the average cost
method of inventory valuation provides a reasonable approximation of the current cost of replacing inventory
within the 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. In fiscal 2009 and 2008, the Company did not record any LIFO reserve reductions.
The remaining inventory is stated at the lower of cost, using the first-in, first-out (“FIFO”) method, or
market. If the Company had used the average cost method of inventory valuation for all inventory within the
Distribution facilities, inventories would not have changed in fiscal 2009 or fiscal 2008. In fact, primarily due to
continued deflation in generic pharmaceutical inventories, inventories at LIFO were $34.9 million and
$42.5 million higher than the average cost value as of June 30, 2009 and 2008, respectively. However, the
Company’s policy is not to record inventories in excess of its current market value.
Inventories recorded on the Company’s consolidated balance sheets are net of reserves for excess and
obsolete inventory which were $87.9 million and $93.1 million at June 30, 2009 and 2008, respectively. The
Company reserves for inventory obsolescence using estimates based on historical experiences, sales trends,
specific categories of inventory and age of on-hand inventory. If actual conditions are less favorable than the
Company’s assumptions, additional inventory reserves may be required, however these would not be expected to
have a material adverse impact on the Company’s consolidated financial statements.
Business Combinations
Assumptions and estimates are used in determining the fair value of assets acquired and liabilities assumed
in a business combination. A significant portion of the purchase price in many of the Company’s acquisitions is
assigned to intangible assets which requires management to use significant judgment in determining fair value. In
addition, current and future amortization expense for such intangibles is impacted by purchase price allocations
as well as the assessment of estimated useful lives of such intangibles, excluding goodwill. The Company
believes the assets recorded and the useful lives established are appropriate based upon current facts and
circumstances.
In conjunction with the review of a transaction, the status of the acquired company’s research and
development projects is assessed to determine the existence of IPR&D. In connection with certain acquisitions,
the Company is required to estimate the fair value of acquired IPR&D which requires selecting an appropriate
discount rate and estimating future cash flows for each project. Management also assesses the current status of
development, nature and timing of efforts to complete such development, uncertainties and other factors when
54