McKesson 2012 Annual Report Download - page 63

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 2012, sales to our ten largest customers
accounted for approximately 52% of our total consolidated revenues. Sales to our two largest customers, CVS
Caremark Corporation (“CVS”) and Rite Aid Corporation (“Rite Aid”), accounted for approximately 16% and 10%
of our total consolidated revenues. At March 31, 2012, accounts receivable from our ten largest customers were
approximately 49% of total accounts receivable. Accounts receivable from CVS, Wal-Mart Stores, Inc.
(“Walmart”) and Rite Aid were approximately 17%, 10% and 9% of total accounts receivable. As a result, our sales
and credit concentration is significant. We also have agreements with group purchasing organizations (“GPOs”),
each of which functions as a purchasing agent on behalf of member hospitals, pharmacies and other healthcare
providers. The accounts receivables balances are with individual members of the GPOs. 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, 2012 and 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 generally determined by the standard cost method, which approximates
average cost. 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 88% and 87% of our inventories at March 31, 2012 and
2011. At March 31, 2012 and 2011, our LIFO reserves, net of LCM adjustments, were $107 million and
$96 million. LIFO reserves include both pharmaceutical and non-pharmaceutical products. In 2012, 2011 and
2010, we recognized net LIFO expense of $11 million, $3 million and $8 million within our consolidated statements
of operations, which 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 average cost or 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
market. Primarily due to continued net deflation in generic pharmaceutical inventories, pharmaceutical inventories
at LIFO were $76 million and $156 million higher than market as of March 31, 2012 and 2011. As a result, we
recorded a LCM credit of $80 million in 2012 and a LCM charge of $44 million in 2011 within our consolidated
statements of operations to adjust our LIFO inventories to market.