McKesson 2013 Annual Report Download - page 65

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McKESSON CORPORATION
FINANCIAL NOTES (Continued)
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 2013, sales to our ten largest customers accounted for
approximately 51% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation ("CVS"),
accounted for approximately 17% of our total consolidated revenues. At March 31, 2013, trade accounts receivable from our
ten largest customers were approximately 44% of total trade accounts receivable. Accounts receivable from CVS and Wal-
Mart Stores, Inc. ("Walmart") were approximately 16% and 10% of total trade 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 or customer groups 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
considering existing economic conditions, to determine if an allowance is necessary. As of March 31, 2013 and 2012,
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. Technology Solutions segment inventories consist of
computer hardware with cost generally determined by the standard cost method, which approximates average cost. Rebates,
cash discounts, and other incentives received from vendors are 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 80% and 88% of our inventories at March 31, 2013 and 2012. At
March 31, 2013 and 2012, our LIFO reserves, net of LCM adjustments, were $120 million and $107 million. Our LIFO
valuation amount includes both pharmaceutical and non-pharmaceutical products. In 2013, 2012 and 2011, we recognized net
LIFO expense of $13 million, $11 million and $3 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 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 historical
net deflation in our pharmaceutical inventories, pharmaceutical inventories at LIFO were $60 million and $76 million higher
than market as of March 31, 2013 and 2012. As a result, we recorded a LCM credit of $16 million and $80 million in 2013
and 2012 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
thirty years.