Cardinal Health 2013 Annual Report Download - page 35

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
33
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
2013 2012 2011 2013 2012
CVS Caremark Corporation 23% 22% 22% 19% 19%
Walgreen Co. 20% 21% 23% 24% 25%
On March 19, 2013, we announced that our pharmaceutical distribution
contract with Walgreen Co., which is scheduled to expire at the end of
August 2013, will not be renewed.
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
13 percent, 13 percent and 14 percent of revenue for fiscal 2013, 2012
and 2011, 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 (65 percent and 69 percent at
June 30, 2013 and 2012, 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. We believe 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.
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 2013 or 2012. Inventories valued at LIFO were
$97 million and $72 million higher than the average cost value as of
June 30, 2013 and 2012, 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 2013 and 2012. 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 $40 million and
$37 million at June 30, 2013 and 2012, 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.
As a result of the reductions in the anticipated future cash flows in our
Nuclear Pharmacy Services division, as discussed in Note 5, we also
performed recoverability testing for the long-lived assets of this division,
which consist primarily of improvements, machinery and equipment.
Based on the assessment performed, we determined that the carrying
amounts of the long-lived assets are recoverable.
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 $259 million, $241 million and $244
million, for fiscal 2013, 2012 and 2011, respectively.
The following table presents the components of property and equipment,
net at June 30:
(in millions) 2013 2012
Land, building and improvements $ 1,398 $ 1,126
Machinery and equipment 2,149 2,291
Furniture and fixtures 122 120
Total property and equipment, at cost 3,669 3,537
Accumulated depreciation and amortization (2,180) (1,986)
Property and equipment, net $ 1,489 $ 1,551
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 3.78
percent at June 30, 2013. 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 based on their estimated fair
values as of the acquisition date. The excess of the purchase price over
the estimated fair value of the net tangible and identifiable intangible 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 value of a contingent consideration obligation requires subjective
assumptions to be made regarding future business results, discount rates
and probabilities assigned to various potential business result scenarios.
Subsequent revisions to these assumptions could materially change the
estimate of the fair value of contingent consideration obligations and