Cardinal Health 2014 Annual Report Download - page 30

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
28
Our trade receivables and finance notes and related accrued
interest are exposed to a concentration of credit risk with
customers in the retail and healthcare sectors. Credit risk can
be affected by changes in reimbursement and other economic
pressures impacting the healthcare industry. Such credit risk is
limited due to supporting collateral and the diversity of the
customer base, including its wide geographic dispersion. We
perform ongoing credit evaluations of our customers’ financial
conditions and maintain reserves for credit losses. Historically,
such losses have been within our expectations.
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
2014 2013 2012 2014 2013
CVS 28% 23% 22% 22% 19%
Walgreen Co. 4% 20% 21% —% 24%
Our pharmaceutical distribution contract with Walgreen Co.
("Walgreens") expired on August 31, 2013.
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
17 percent, 13 percent and 13 percent of revenue for fiscal 2014,
2013 and 2012, 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 (61 percent and 65
percent at June 30, 2014 and 2013, 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. The LIFO method presumes that the most recent
inventory purchases are the first items sold, so LIFO helps us
better match current costs and revenue. We believe that the
average cost method of inventory valuation provides a
reasonable approximation of the current cost of replacing
inventory within these 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 2014 or 2013.
Inventories valued at LIFO were $98 million and $97 million
higher than the average cost value at June 30, 2014 and 2013,
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 2014 and 2013. 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
$44 million and $40 million at June 30, 2014 and 2013,
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.
During fiscal 2013, 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 leasehold 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 $265 million, $269 million and
$243 million, for fiscal 2014, 2013 and 2012, respectively.