Cardinal Health 2008 Annual Report Download - page 59

Operating earnings decreased $471 million or 26% during fiscal 2007, which included increased special
items charges ($692 million) and impairments, (gain)/loss on sale of assets and other, net ($12 million).
Operating earnings were favorably impacted by gross margin growth ($431 million) and negatively impacted by
increased SG&A expenses ($200 million).
Interest Expense and Other
Interest expense and other increased $50 million or 41% during fiscal 2008 compared to the prior year.
Interest expense and other was impacted during fiscal 2008 by increased borrowing levels ($72 million) and the
impact of the prior year allocation of a portion of interest expense to discontinued operations ($26 million). The
increase in interest expense for fiscal 2008 was partially offset by the favorable impact of foreign exchange and
other items ($19 million) and increased investment income ($18 million).
The Company expects interest expense and other to increase in fiscal 2009 due primarily to the favorable
impact of foreign exchange that was experienced in fiscal 2008, which is not expected to continue in fiscal 2009.
Interest expense and other increased $17 million or 16% during fiscal 2007 primarily due to increased
borrowing levels and interest rates.
Provision for Income Taxes
In the first quarter of fiscal 2008, the Company adopted the provisions of FIN No. 48, “Accounting for
Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in
the financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This standard
provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit
that is greater than 50% likely of being realized upon settlement. The cumulative effect of adoption of this
interpretation was a $139 million reduction of retained earnings.
The Company had $763 million and $597 million of unrecognized tax benefits at June 30, 2008 and July 1,
2007, respectively. Included in the June 30, 2008 and July 1, 2007 balances are $529 million and $387 million,
respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate. The
remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but
for which there is uncertainty as to the timing of such deductibility and to tax positions related to acquired
companies in the amount of $19 million and $21 million at June 30, 2008 and July 1, 2007, respectively.
Recognition of these tax benefits would not affect the Company’s effective tax rate. The Company includes the
full amount of unrecognized tax benefits in deferred income taxes and other liabilities in the consolidated balance
sheets. A reconciliation of the unrecognized tax benefits from July 1, 2007 to June 30, 2008 is as follows:
(In millions)
Balance at July 1, 2007 ............................................. $596.6
Additions for tax positions of the current year ........................... 83.3
Additions for tax positions of prior years ............................... 189.4
Reductions for tax positions of prior years ............................. (75.6)
Settlements with tax authorities ...................................... (7.8)
Expiration of the statute of limitations ................................. (23.0)
Balance at June 30, 2008 ........................................... $762.9
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax
expense. As of June 30, 2008 and July 1, 2007, the Company had $195 million and $149 million, respectively,
accrued for the payment of interest and penalties. These balances are gross amounts before any tax benefits and
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