McKesson 2014 Annual Report Download - page 66

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
63
In determining whether an other-than-temporary decline in market value has occurred, we consider the duration that, and
extent to which, the fair value of the investment is below its cost, the financial condition and future prospects of the issuer or
underlying collateral of a security, and our intent and ability to retain the security in order to allow for an anticipated recovery in
fair value. Other-than-temporary declines in fair value from amortized cost for available-for-sale equity securities that we intend
to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis are charged to
other income (expense) in the period in which the loss occurs.
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 2014, sales to our ten largest customers accounted for
approximately 48% of our total consolidated revenues. Sales to our largest customer, CVS Caremark Corporation ("CVS"),
accounted for approximately 16% of our total consolidated revenues. At March 31, 2014, trade accounts receivable from our ten
largest customers were approximately 32% of total trade accounts receivable. Accounts receivable from CVS were approximately
12% 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. Financing receivables are derecognized if legal title to
them has been transferred and all related risks and rewards incidental to ownership have passed to the buyer. As of March 31,
2014 and 2013, 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. The majority of the cost of inventories held in foreign locations is
based on weighted average purchase prices using the first-in, first-out 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 67% and 80% of our inventories at March 31, 2014 and 2013. If we had
used the FIFO method of inventory valuation, which approximates current replacement costs, inventories would have been
approximately $431 million and $120 million higher than the amounts reported at March 31, 2014 and 2013, respectively. These
amounts are equivalent to our LIFO reserves. Our LIFO valuation amount includes both pharmaceutical and non-pharmaceutical
products. In 2014, 2013 and 2012, we recognized net LIFO expense of $311 million, $13 million and $11 million within our
consolidated statements of operations. 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 higher than market as of March 31, 2013.
As a result, we recorded a LCM credit of $60 million and $16 million in 2014 and 2013 within our consolidated statements of
operations to adjust our LIFO inventories to market.