Cardinal Health 2013 Annual Report Download - page 22

Cardinal Health, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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expansion; contractual obligations; payments for tax settlements; and
current and projected debt service requirements, dividends and share
repurchases. During fiscal 2013, we completed the acquisition of
AssuraMed, which we funded through the issuance of $1.3 billion in fixed
rate notes and cash on hand, in addition to several other small acquisitions,
which we funded 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 to access capital in addition to cash on hand.
Cash and Equivalents
Our cash and equivalents balance was $1.9 billion at June 30, 2013,
compared to $2.3 billion at June 30, 2012. At June 30, 2013, our cash and
equivalents were held in cash depository accounts with major banks or
invested in high quality, short-term liquid investments. The decrease in
cash and equivalents during fiscal 2013 was driven by acquisitions of $2.2
billion, share repurchases of $450 million and dividends of $353 million,
offset by strong net cash provided by operating activities of $1.7 billion
and net proceeds from long-term obligations of $981 million. Net cash
provided by operating activities of $1.7 billion was driven primarily by
increased gross margin, product mix and working capital changes. As
expected, this increase was partially offset by the adverse impact of cash
tax payments and the expiration of our pharmaceutical distribution contract
with Express Scripts.
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 2012, we
received net proceeds from long-term obligations of $290 million.
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.
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
(quarterly revenue divided by 90 days). DIOH is calculated as inventories,
net divided by ((quarterly cost of products sold plus chargeback billings)
divided by 90 days). DPO is calculated as accounts payable divided by
((quarterly cost of products sold plus chargeback billings) divided by 90
days). Chargeback billings are the difference between a product’s
wholesale acquisition cost and the contract price. Chargeback billings
were $4.3 billion, $4.0 billion and $3.6 billion for fiscal 2013, 2012 and
2011, respectively. Beginning in the first quarter of fiscal 2013, we changed
our method of calculating DSO in order to align it with the 90-day
convention that we use in the calculation of DIOH and DPO. Prior to this
change, we calculated DSO by dividing trade receivables, net by (monthly
revenue divided by 30 days). In connection with this change, we have
revised prior-year information to conform to the new method of calculating
DSO.
2013 2012 2011
Days sales outstanding 22.3 21.4 20.7
Days inventory on hand 26.5 23.9 22.5
Days payable outstanding 38.9 35.6 34.8
Changes in working capital can vary significantly depending on factors
such as the timing of inventory purchases, customer payments of accounts
receivable and payments to vendors in the regular course of business.
DSO and DIOH increased in fiscal 2013 over fiscal 2012 primarily as a
result of the expiration of our pharmaceutical distribution contract with
Express Scripts. DPO increased primarily due to the expiration of our
pharmaceutical distribution contract with Express Scripts and brand-to-
generic conversions.
DSO increased in fiscal 2012 over fiscal 2011 due to the implementation
of our Medical segment's business transformation project, which led to an
increase in trade receivables at June 30, 2012. DIOH increased in fiscal
2012 as a result of inventory increases related to on-boarding a new
pharmaceutical customer and our Medical segment's business
transformation project implementation.
The cash and equivalents balance at June 30, 2013 included $428 million
of cash held by subsidiaries outside of the United States. Although the
vast majority of this cash is available for repatriation, permanently bringing
the money into the United States could trigger U.S. federal, state and local
income tax obligations. As a U.S. parent company, we may temporarily
access cash held by our foreign subsidiaries without becoming subject to
U.S. federal income tax through intercompany loans.
After the expiration of the Walgreens contract in fiscal 2014, we anticipate
a significant net working capital decrease based on reduced inventory and
accounts receivable, partially offset by reduced accounts payable. Based
on the expected working capital decrease and other factors, we anticipate
that the expiration of the Walgreens contract will result in a net after-tax
benefit to cash flow from operating activities in fiscal 2014 in excess of
$500 million.
Credit Facilities and Commercial Paper
Our sources of liquidity include a $1.5 billion revolving credit facility and
a $950 million committed receivables sales facility program. At times,
availability under our committed receivables sales facility program may
be less than $950 million based on receivables concentration limits and
our outstanding eligible receivables balance. We also have a commercial
paper program of up to $1.5 billion, backed by the revolving credit facility.
We had no outstanding borrowings from the commercial paper program
and no outstanding balance under the committed receivables sales facility
program at June 30, 2013 and 2012. We also had no outstanding balance
under the revolving credit facility at June 30, 2013 and 2012, except
for $43 million and $44 million, respectively, of standby letters of credit for
each year. Our revolving credit facility and committed receivables sales
facility program require us to maintain a consolidated interest coverage
ratio, as of any fiscal quarter end, of at least 4-to-1 and a consolidated
leverage ratio of no more than 3.25-to-1. As of June 30, 2013, we were in
compliance with these financial covenants.
On November 6, 2012, we renewed our $950 million committed
receivables sales facility program until November 6, 2014. Following the
expiration of our pharmaceutical distribution contract with Walgreens, we
expect that availability under our committed receivables sales facility
program will be less than $950 million based on our then outstanding
eligible receivables balance. On June 4, 2013, we extended the term of
our $1.5 billion revolving credit facility to June 4, 2018.
Long-term Obligations
As of June 30, 2013, we had total long-term obligations of $3.9 billion
compared to $2.9 billion at June 30, 2012. On February 19, 2013, we sold