Cardinal Health 2013 Annual Report Download - page 21

Cardinal Health, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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increase in amortization during fiscal 2013 was primarily due to intangible
assets from the acquisition of AssuraMed.
Acquisition-related costs for fiscal 2012 included income recognized upon
adjustment of the contingent consideration obligation incurred in
connection with the Healthcare Solutions Holding, LLC ("P4 Healthcare")
acquisition ($71 million). In early fiscal 2013, we terminated and settled
the remaining contingent consideration obligation for $4 million.
Impairments and Loss on Disposal of Assets
During the fourth quarter of fiscal 2013, we recognized an $829 million
($799 million, net of tax) non-cash goodwill impairment charge related to
our Nuclear Pharmacy Services division, as discussed further in the
Overview section and in Note 5 of the "Notes to Consolidated Financial
Statements."
In connection with our Medical segment restructuring plan discussed in
Note 3, during fiscal 2013, we recognized an $11 million loss to write down
our gamma sterilization assets in El Paso, Texas to the estimated fair
value, less costs to sell. Also during fiscal 2013, we recorded an $8 million
write-off of commercial software under development within our
Pharmaceutical segment in connection with our decision to discontinue
this project.
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.
Litigation (Recoveries)/Charges, Net
During fiscal 2013, we recognized $38 million of income resulting from
settlements of class action antitrust claims in which we were a class
member.
Earnings Before Income Taxes and Discontinued
Operations
In addition to the items discussed above, earnings before income taxes
and discontinued operations were impacted by the following:
Earnings Before Income Taxes
and Discontinued Operations Change
(in millions) 2013 2012 2011 2013 2012
Other income, net $ (15) $ (1) $ (22) N.M. N.M.
Interest expense, net 123 95 93 29% 2%
Gain on sale of
investment in CareFusion —— (75) N.M. N.M.
Interest Expense, Net
The increase in interest expense, net for fiscal 2013 over fiscal 2012 was
primarily due to $1.3 billion of notes issued in connection with the
AssuraMed acquisition.
Gain on Sale of Investment in CareFusion
We recognized $75 million of income during fiscal 2011 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 (see Note 7 of the "Notes to
Consolidated Financial Statements" for a detailed disclosure of the
effective tax rate reconciliation):
2013 2012 2011
Provision at Federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit 2.5 2.3 2.6
Foreign tax rate differential (4.0) (2.2) (3.1)
Nondeductible/nontaxable items (0.5) — 0.6
Nondeductible goodwill impairment 33.2 — —
Change in measurement of an uncertain tax position
and impact of IRS settlements (5.7) 0.9 2.4
Other 1.8 1.0 (1.1)
Effective income tax rate 62.3% 37.0% 36.4%
Fiscal 2013 Compared to Fiscal 2012
The fiscal 2013 effective tax rate was unfavorably impacted by 33.2
percentage points ($295 million) due to the nondeductibility of substantially
all of the goodwill impairment which was partially offset by the favorable
impact of the revaluation of our deferred tax liability and related interest
on unrepatriated foreign earnings as a result of an agreement with tax
authorities ($64 million or 7.2 percentage points).
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 ("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.
Ongoing Audits
The IRS is currently conducting audits of fiscal years 2003 through 2010.
We have received proposed adjustments from the IRS for fiscal years
2003 through 2007 related to our transfer pricing arrangements between
foreign and domestic subsidiaries. The IRS has proposed additional taxes
of $399 million, excluding penalties and interest. If this tax ultimately must
be paid, CareFusion is liable under the tax matters agreement entered
into in connection with the CareFusion Spin-Off for $142 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. The IRS had also proposed additional taxes of $450 million,
excluding penalties and interest, related to the transfer of intellectual
property among subsidiaries of an acquired entity prior to its acquisition
by us, for which CareFusion would be liable under the tax matters
agreement. During the fourth quarter of fiscal 2013, CareFusion settled
this matter with the IRS. We have adjusted the indemnification receivable
that we had recorded for this matter. The settlement has no net impact on
our provision for income taxes.
Liquidity and Capital Resources
We currently believe that, based upon available capital resources (cash
on hand and access to committed credit facilities) and projected operating
cash flow, we have adequate capital resources to fund working capital
needs; currently anticipated capital expenditures, business growth and