Cardinal Health 2013 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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million), including the impact of new product launches and price
appreciation on a few specific products, and acquisitions ($137 million).
Favorable Medical segment product sales mix and increased sales volume
resulted in a $100 million favorable impact to gross margin. Pricing
changes, including rebates (exclusive of the related volume impact),
adversely impacted gross margin ($205 million). The adverse impact of
these pricing changes was offset by sourcing programs and other sources
of margin. Increased cost of oil-based resins, cotton, latex and other
commodities used in our Medical segment self-manufactured products
decreased gross margin by $66 million.
Distribution, Selling, General and Administrative
("SG&A") Expenses
SG&A Expenses Change
(in millions) 2013 2012 2011 2013 2012
SG&A expenses $ 2,875 $ 2,677 $ 2,528 7% 6%
SG&A expenses increased during 2013 over fiscal 2012 primarily due to
acquisitions ($84 million) and investment spending ($17 million).
Increased SG&A expenses in fiscal 2012 over fiscal 2011 were primarily
due to acquisitions ($65 million) and business system investments,
including the Medical segment business transformation project.
Segment Profit and Consolidated Operating Earnings
Segment Profit and
Operating Earnings Change
(in millions) 2013 2012 2011 2013 2012
Pharmaceutical $ 1,734 $ 1,558 $ 1,329 11 % 17 %
Medical 372 332 373 12 % (11)%
Total segment profit 2,106 1,890 1,702 11 % 11 %
Corporate (1,110) (98) (188) N.M. N.M.
Total operating earnings $ 996 $ 1,792 $ 1,514 (44)% 18 %
Segment Profit
We evaluate segment performance based upon segment profit, among
other measures. Segment profit is segment revenue, less segment cost
of products sold, less segment SG&A expenses. We do not allocate
restructuring and employee severance, acquisition-related costs,
impairments and loss on disposal 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 that require incremental
investments in the form of additional operating expenses. We encourage
our segments to identify investment projects that 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. See Note 14 of the "Notes to Consolidated
Financial Statements" for additional information on segment profit.
Pharmaceutical Segment Profit
The principal drivers for the increase in fiscal 2013 over fiscal 2012 were
strong performance in our generic pharmaceutical programs and
increased margin from branded pharmaceutical distribution agreements.
These benefits were partially offset by the unfavorable impact of
pharmaceutical distribution pricing changes and significant market
softness in our Nuclear Pharmacy Services division.
The principal drivers for the increase in fiscal 2012 over fiscal 2011 were
strong performance in our generic pharmaceutical programs, including
the impact of new product launches, and the positive impact of
acquisitions, offset by the unfavorable impact of pharmaceutical
distribution pricing changes.
Segment profit from bulk sales decreased $36 million in fiscal 2013
compared to fiscal 2012 and was 7 percent and 10 percent of
Pharmaceutical segment profit in fiscal 2013 and 2012, respectively.
Segment profit from non-bulk sales increased $212 million in fiscal 2013
over fiscal 2012 and was 93 percent and 90 percent of Pharmaceutical
segment profit in fiscal 2013 and 2012, respectively. The generic
pharmaceutical programs discussed above primarily impacted segment
profit from non-bulk sales.
Medical Segment Profit
The principal drivers for the increase in fiscal 2013 over fiscal 2012 were
the positive impact of acquisitions and decreased cost of commodities
used in our self-manufactured products, partially offset by the unfavorable
impact of pricing changes, driven in part by customer and product mix.
Segment profit was also moderated by softness in procedural-based
utilization. The 2.3 percent excise tax on certain manufactured or imported
medical devices that became effective January 1, 2013 had a slightly
unfavorable impact on segment profit.
The principal drivers for the decrease in fiscal 2012 over fiscal 2011 were
the increased cost of commodities used in our self-manufactured products
and an increase in SG&A expenses, 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.
Corporate
As discussed further below, the principal driver for the decrease in
Corporate in fiscal 2013 was an $829 million non-cash goodwill impairment
charge related to our Nuclear Pharmacy Services division, in addition to
other costs not allocated to our segments.
Consolidated Operating Earnings
In addition to revenue, gross margin and SG&A expenses discussed
above, operating earnings were impacted by the following:
(in millions) 2013 2012 2011
Restructuring and employee severance $ 71 $ 21 $ 15
Acquisition-related costs 158 33 90
Impairments and loss on disposal of assets 859 21 9
Litigation (recoveries)/charges, net (38) (3) 6
Restructuring and Employee Severance
In addition to other restructuring activities during fiscal 2013, we
recognized $30 million of employee-related costs and $10 million of facility
exit and other costs related to the restructuring within our Medical segment.
We also recognized $11 million of employee-related costs as part of a
restructuring plan within our Nuclear Pharmacy Services division during
the fourth quarter of fiscal 2013.
Acquisition-Related Costs
Acquisition-related costs for fiscal 2013 included transaction costs
associated with the purchase of AssuraMed ($20 million). Additionally,
amortization of acquisition-related intangible assets was $118 million, $78
million and $67 million for fiscal 2013, 2012 and 2011, respectively. The