Cardinal Health 2012 Annual Report Download - page 20

Cardinal Health, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations
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discontinued operations were impacted by the following:
Change Earnings Before Income Taxes
and Discontinued Operations
(in millions) 2012 2011 2012 2011 2010
Other income, net N.M. 61 % $(1)$ (22) $ (13)
Interest expense, net 2% (18)% 95 93 113
Loss on extinguishment of debt N.M. N.M. ——40
Gain on sale of Investment in
CareFusion common stock N.M. 67 % —(75) (45)
Interest Expense, Net
The decrease in interest expense for fiscal 2011 was primarily due to
favorable interest rate swaps.
Loss on Extinguishment of Debt
During fiscal 2010, we recognized a $40 million loss from the early
retirement of over $1.1 billion of debt securities through a tender offer.
Gain on Sale of Investment in CareFusion Common Stock
We recognized $75 million and $45 million of income during fiscal 2011
and 2010, respectively, related to the sale of our investment in CareFusion
common stock.
Provision for Income Taxes
Generally, fluctuations in the effective tax rate are due to changes within
international and United States state effective tax rates resulting from our
business mix and discrete items. A reconciliation of the provision based
on the federal statutory income tax rate to our effective income tax rate
from continuing operations is as follows for fiscal 2012, 2011 and 2010
(see Note 8 of “Notes to Consolidated Financial Statements” for a detailed
disclosure of the effective tax rate reconciliation):
2012 2011 2010
Provision at Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 2.3 2.6 4.2
Foreign tax rate differential (2.3) (2.5) (3.3)
Nondeductible/nontaxable items —0.6 0.2
Change in measurement of an uncertain tax position and
an IRS settlement 0.9 2.4 1.3
Valuation allowances 0.1 (0.6) (2.3)
Unremitted foreign earnings (0.2) (0.1) 13.9
Other 1.2 (1.0) 2.6
Effective income tax rate 37.0% 36.4% 51.6%
Fiscal 2012 Compared to Fiscal 2011
The fiscal 2012 effective tax rate was favorably impacted by a settlement
of the fiscal 2001 and 2002 Internal Revenue Service (the "IRS") audits
($40 million or 2.4 percentage points). The year-over-year comparison of
the effective tax rate was unfavorably impacted by the release in fiscal
2011 of a previously established deferred tax valuation allowance.
Fiscal 2011 Compared to Fiscal 2010
The effective tax rate was favorably impacted by $28 million, or 1.9
percentage points, attributable to recognizing no income tax expense on
the sale of CareFusion stock due to the release of a previously established
deferred tax valuation allowance. An unfavorable charge of $168 million,
or 13.9 percentage points, attributable to earnings no longer indefinitely
invested offshore in fiscal 2010 favorably impacted the year-over-year
comparison of the effective tax rate.
Ongoing Audits
During fiscal 2012, the IRS closed audits of fiscal 2001 and 2002, and is
currently conducting audits of fiscal years 2003 through 2010. We have
received proposed adjustments from the IRS for fiscal 2003 through 2007
related to our transfer pricing arrangements between foreign and domestic
subsidiaries and the transfer of intellectual property among subsidiaries
of an acquired entity prior to its acquisition by us. The IRS has proposed
additional taxes of $849 million, excluding penalties and interest. If this
tax ultimately must be paid, CareFusion is liable under the tax matters
agreement for $592 million of the total amount. We disagree with these
proposed adjustments, which we are contesting, and have accounted for
the unrecognized tax benefits related to them.
Earnings/(Loss) from Discontinued Operations
CareFusion operating results are included within earnings from
discontinued operations for all periods through the date of the Spin-Off,
and had a significant impact on earnings from discontinued operations for
fiscal 2010. See Note 5 in the “Notes to Consolidated Financial
Statements” for additional information on discontinued operations.
Liquidity and Capital Resources
We currently believe that, based upon available capital resources (cash
on hand), projected operating cash flow, and access to committed credit
facilities, we have adequate capital resources to fund working capital
needs; currently anticipated capital expenditures, business growth and
expansion; contractual obligations; payments for tax settlements; and
current and projected debt service requirements, dividends and share
repurchases. During fiscal 2012, we completed several small acquisitions
with cash on hand. If we decide to engage in one or more additional
acquisitions, depending on the size and timing of such transactions, we
may need supplemental funding.
Cash and Equivalents
Our cash and equivalents balance was $2.3 billion at June 30, 2012,
compared to $1.9 billion at June 30, 2011. At June 30, 2012, our cash and
cash equivalents were held in cash depository accounts with major banks
or invested in high quality, short-term liquid investments. The increase in
cash and equivalents during fiscal 2012 was primarily attributable to net
cash provided by operating activities of $1.2 billion and net proceeds of
$290 million from the sale and repayment of notes. During fiscal 2012, we
deployed $450 million of cash on share repurchases, $300 million on
dividends, $263 million on capital expenditures, and $174 million on
acquisitions.
During fiscal 2011, we deployed $2.3 billion of cash on acquisitions, $291
million on capital expenditures, $274 million on dividends and $270 million
on share repurchases. During fiscal 2011, we received $706 million in
proceeds from the sale of our remaining investment in CareFusion
common stock.
During fiscal 2010, we deployed $350 million of cash to repay floating rate
notes at maturity, $260 million on capital expenditures, $253 million on
dividends and $230 million on share repurchases. During fiscal 2010, we
completed a $1.1 billion debt tender using a portion of the $1.4 billion of
cash distributed to us from CareFusion in connection with the Spin-Off.
We also received $271 million in proceeds from the sale of our investment
in CareFusion common stock and $154 million from divestitures.
We use days sales outstanding (“DSO”), days inventory on hand (“DIOH”)
and days payable outstanding (“DPO”) to evaluate our working capital
performance. DSO is calculated as trade receivables, net divided by
average daily revenue during the last month of the reporting period. DIOH