McKesson 2011 Annual Report Download - page 65

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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Concentrations of Credit Risk and Receivables: Our trade receivables are subject to a concentration of credit
risk with customers primarily in our Distribution Solutions segment. During 2011, sales to our ten largest customers
accounted for approximately 51% of our total consolidated revenues. Sales to our two largest customers, CVS
Caremark Corporation (“CVS”) and Rite Aid Corporation (“Rite Aid”), accounted for approximately 14% and 11%
of our total consolidated revenues. At March 31, 2011, accounts receivable from our ten largest customers were
approximately 43% of total accounts receivable. Accounts receivable from CVS, Wal-Mart Stores, Inc.
(“Walmart”) and Rite Aid were approximately 13%, 10% and 9% of total accounts receivable. As a result, our sales
and credit concentration is significant. A default in payment, a material reduction in purchases from these, or any
other large customers or the loss of a large customer could have a material adverse impact on our financial
condition, results of operations and liquidity. In addition, trade receivables are subject to a concentration of credit
risk with customers in the institutional, retail and healthcare provider sectors, which can be affected by a downturn
in the economy and changes in reimbursement policies. This credit risk is mitigated by the size and diversity of the
customer base as well as its geographic dispersion. We estimate the receivables for which we do not expect full
collection based on historical collection rates and ongoing evaluations of the creditworthiness of our customers. An
allowance is recorded in our consolidated financial statements for these amounts.
Financing Receivables: We assess and monitor credit risk associated with financing receivables, namely lease
and notes receivables, through regular review of our collection experience in determining our allowance for loan
losses. On an ongoing basis, we also evaluate credit quality of our financing receivables utilizing aging of
receivables and write-offs, as well as consider existing economic conditions, to determine if an allowance is
necessary. As of March 31, 2011, financing receivables and the related allowance were not material to our
consolidated financial statements.
Inventories: We report inventories at the lower of cost or market (“LCM”). Inventories for our Distribution
Solutions segment consist of merchandise held for resale. For our Distribution Solutions segment, the majority of
the cost of domestic inventories is determined using the last-in, first-out (“LIFO”) method and the cost of Canadian
inventories is determined using the first-in, first-out (“FIFO”) method. Technology Solutions segment inventories
consist of computer hardware with cost determined by the standard cost method. Rebates, fees, cash discounts,
allowances, chargebacks and other incentives received from vendors are generally accounted for as a reduction in
the cost of inventory and are recognized when the inventory is sold.
The LIFO method was used to value approximately 87% of our inventories at March 31, 2011 and 2010. At
March 31, 2011 and 2010, our LIFO reserves, net of LCM adjustments, were $96 million and $93 million. LIFO
reserves include both pharmaceutical and non-pharmaceutical products. In 2011, 2010 and 2009, we recognized net
LIFO expense of $3 million, $8 million and $8 million within our consolidated statements of operations. In 2011,
our $3 million net LIFO expense related to our non-pharmaceutical products. A LIFO expense is recognized when
the net effect of price increases on branded pharmaceuticals and non-pharmaceutical products held in inventory
exceeds the impact of price declines and shifts towards generic pharmaceuticals, including the effect of branded
pharmaceutical products that have lost market exclusivity. A LIFO credit is recognized when the net effect of price
declines and shifts towards generic pharmaceuticals exceeds the impact of price increases on branded
pharmaceuticals and non-pharmaceutical products held in inventory.
We believe that the FIFO inventory costing method provides a reasonable estimation of the current cost of
replacing inventory (i.e., “market”). As such, our LIFO inventory is valued at the lower of LIFO or inventory as
valued under FIFO. Primarily due to continued net deflation in generic pharmaceutical inventories, pharmaceutical
inventories at LIFO were $156 million and $112 million higher than FIFO as of March 31, 2011 and 2010. As a
result, in 2011 and 2010, we recorded LCM charges of $44 million and $5 million in cost of sales within our
consolidated statements of operations to adjust our LIFO inventories to market.
Shipping and Handling Costs: We include all costs to warehouse, pick, pack and deliver inventory to our
customers in distribution expenses.
Property, Plant and Equipment: We state our property, plant and equipment at cost and depreciate them under
the straight-line method at rates designed to distribute the cost of properties over estimated service lives ranging
from one to 30 years.