Cardinal Health 2012 Annual Report Download - page 19

Cardinal Health, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
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expenses in fiscal 2012 was primarily due to acquisitions ($65 million) and
business system investments, including the Medical segment business
transformation project. The increase in SG&A in fiscal 2011 was primarily
due to acquisitions, net of divestitures ($90 million).
SG&A expenses also included costs related to the Spin-Off of $2 million,
$10 million and $11 million for fiscal 2012, 2011 and 2010, respectively.
Segment Profit and Consolidated Operating Earnings
Change Segment Profit and Operating Earnings
(in millions) 2012 2011 2012 2011 2010
Pharmaceutical 17 % 31 % $ 1,558 $ 1,329 $ 1,011
Medical (11)% (13)% 332 373 429
Total segment profit 11 % 18 % 1,890 1,702 1,440
Corporate N.M. N.M. (98) (188) (133)
Total consolidated
operating earnings 18 % 16 % $ 1,792 $ 1,514 $ 1,307
Segment Profit
We evaluate the performance of the individual segments based upon,
among other things, segment profit, which is segment revenue, less
segment cost of products sold, less segment SG&A. We do not allocate
restructuring and employee severance, acquisition-related costs,
impairments and (gain)/loss on sale of assets, litigation (recoveries)/
charges, net, certain investment and other spending to our segments.
These costs are retained at Corporate. Investment spending generally
includes the first year spend for certain projects which require incremental
strategic investments in the form of additional operating expenses. We
encourage our segments to identify investment projects which will promote
innovation and provide future returns. As approval decisions for such
projects are dependent upon executive management, the expenses for
such projects are often retained at Corporate. In addition, Spin-Off costs
included within SG&A are not allocated to our segments. See Note 15 of
the "Notes to Consolidated Financial Statements" for additional
information on segment profit.
Pharmaceutical Segment Profit
The principal drivers for the increase in fiscal 2012 and 2011 were strong
performance in our generic pharmaceutical programs, including the impact
of new product launches, the positive impact of acquisitions, and increased
margin under branded pharmaceutical agreements, offset by the
unfavorable impact of pharmaceutical distribution customer pricing
changes. See the discussion of gross margin above for further information
on these drivers.
Segment profit from bulk sales increased $19 million in fiscal 2012 over
fiscal 2011 and was 10 percent of Pharmaceutical segment profit in both
years. Segment profit from non-bulk sales increased $210 million in fiscal
2012 over fiscal 2011 and was 90 percent of Pharmaceutical segment
profit in both years. The generic pharmaceutical programs and acquisitions
discussed above primarily impacted segment profit from non-bulk sales.
Medical Segment Profit
The principal drivers for the decrease in fiscal 2012 were the increased
cost of commodities used in our self-manufactured products and an
increase in SG&A expenditures, including the impact of business system
investments. These items were partially offset by the favorable impact of
product sales mix and increased net sales volume. See the discussion
above for further information on these drivers.
Results for fiscal 2011 were adversely affected by increased cost of
commodities used in our self-manufactured products partially offset by
increased sales volume. Results also were impacted by the negative year-
over-year impact of recognizing in fiscal 2010 a one-time gain related to
previously deferred intercompany revenue for sales to CareFusion.
Consolidated Operating Earnings
In addition to revenue, gross margin and SG&A discussed above,
operating earnings were impacted by the following:
(in millions) 2012 2011 2010
Restructuring and employee severance $21$15$91
Acquisition-related costs 33 90 19
Impairments and loss on disposal of assets 21 929
Litigation (recoveries)/charges, net (3) 6 (62)
Restructuring and Employee Severance
Fiscal 2011 and 2010 restructuring and employee severance charges
included $7 million and $65 million, respectively, of costs arising from the
Spin-Off.
Acquisition-Related Costs
Acquisition-related costs for fiscal 2012 included income realized upon
adjusting the contingent consideration obligation incurred in connection
with the P4 Healthcare acquisition. The former owners of P4 Healthcare
had the right to receive certain contingent payments based on targeted
earnings before interest, taxes, depreciation, and amortization
("EBITDA"). As a result of changes in our estimate of performance in future
periods due in large part to the loss of revenue from a significant customer
of the P4 Healthcare legacy business in fiscal 2012, we revised the timing
and amount of EBITDA estimates and made changes in probability
assumptions with respect to the likelihood of achieving the EBITDA targets.
These changes, coupled with the progress of discussions with the former
owners regarding an early termination and settlement of the contingent
consideration obligation, resulted in a $71 million decrease in the fair value
of the obligation to $4 million at June 30, 2012. In early July 2012, we
reached final settlement and payment of the remaining contingent
consideration liability for $4 million. See Note 2 of the "Notes to
Consolidated Financial Statements" for additional information on this item.
Amortization of acquisition-related intangible assets was $78 million, $67
million and $10 million for fiscal 2012, 2011 and 2010, respectively.
Impairments and Loss on Disposal of Assets
During fiscal 2012, we recorded a charge of $16 million to write off an
indefinite life intangible asset related to the P4 Healthcare trade name.
We have rebranded P4 Healthcare under the Cardinal Health Specialty
Solutions name.
During fiscal 2010, we recognized an impairment charge of $18 million
related to the write-down of SpecialtyScripts, LLC ("Specialty Scripts"), a
business within our Pharmaceutical segment. We sold SpecialtyScripts
during the third quarter of fiscal 2010.
Litigation (Recoveries)/Charges, Net
During fiscal 2010, we recognized income of $41 million resulting from
settlement of a class action antitrust claim in which we were a class
member. In addition, we recognized $26 million of income for insurance
proceeds released from escrow after litigation, commenced against
certain directors and officers in 2004, was resolved.
Earnings Before Income Taxes and Discontinued Operations
In addition to items discussed above, earnings before income taxes and