Cardinal Health 2013 Annual Report Download - page 43

Cardinal Health, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
41
federal statutory income tax rate to our effective income tax rate from
continuing operations:
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%
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). During the fourth quarter
of fiscal 2013, we recorded an out-of-period increase in income tax
expense of $14 million (of which generally less than $1 million pertained
to each of the first three quarters of fiscal 2013 and each of the quarters
in fiscal 2012 through 2008), which related to uncertain tax benefits, and
a decrease in retained earnings of $15 million, which related to the
adoption of accounting guidance for uncertain tax benefits in 2008. The
amounts were not material individually or in the aggregate to current or
prior periods.
At June 30, 2013, we had $1.8 billion of undistributed earnings from non-
U.S. subsidiaries that are intended to be permanently reinvested in non-
U.S. operations. Because these earnings are considered permanently
reinvested, no U.S. tax provision has been accrued related to the
repatriation of these earnings. It is not practicable to estimate the amount
of U.S. tax that might be payable on the eventual remittance of such
earnings.
Deferred income taxes arise from temporary differences between financial
reporting and tax reporting bases of assets and liabilities and operating
loss and tax credit carryforwards for tax purposes. The following table
presents the components of the deferred income tax assets and liabilities
at June 30:
(in millions) 2013 2012
Deferred income tax assets:
Receivable basis difference $ 50 $ 46
Accrued liabilities 115 107
Share-based compensation 66 90
Loss and tax credit carryforwards 158 120
Deferred tax assets related to uncertain tax positions 127 118
Other 82 85
Total deferred income tax assets 598 566
Valuation allowance for deferred income tax assets (88) (86)
Net deferred income tax assets $ 510 $ 480
Deferred income tax liabilities:
Inventory basis differences $ (1,160) $ (1,067)
Property-related (173) (180)
Goodwill and other intangibles (299) (146)
Unremitted foreign earnings —(64)
Other (6) (5)
Total deferred income tax liabilities (1,638) (1,462)
Net deferred income tax liability $ (1,128) $ (982)
Deferred income tax assets and liabilities in the preceding table, after
netting by taxing jurisdiction, are in the following captions in the
consolidated balance sheets at June 30:
(in millions) 2013 2012
Current deferred income tax asset (1) $ 15 $ 27
Noncurrent deferred income tax asset (2) 17 6
Current deferred income tax liability (3) (908) (858)
Noncurrent deferred income tax liability (4) (252) (157)
Net deferred income tax liability $ (1,128) $ (982)
(1) Included in prepaid expenses and other in the consolidated balance sheets.
(2) Included in other assets in the consolidated balance sheets.
(3) Included in other accrued liabilities in the consolidated balance sheets.
(4) Included in deferred income taxes and other liabilities in the consolidated balance
sheets.
At June 30, 2013, we had gross federal, state and international loss and
credit carryforwards of $146 million, $693 million and $114 million,
respectively, the tax effect of which is an aggregate deferred tax asset of
$158 million. Substantially all of these carryforwards are available for at
least three years. Approximately $76 million of the valuation allowance at
June 30, 2013 applies to certain federal, state and international loss
carryforwards that, in our opinion, are more likely than not to expire
unutilized. However, to the extent that tax benefits related to these
carryforwards are realized in the future, the reduction in the valuation
allowance would reduce income tax expense.
We had $650 million, $654 million and $747 million of unrecognized tax
benefits at June 30, 2013, 2012 and 2011, respectively. The June 30,
2013, 2012 and 2011 balances include $371 million, $337 million and $332
million, respectively, of unrecognized tax benefits that, if recognized, would
have an impact on the effective tax rate. The remaining unrecognized tax
benefits relate to tax positions for which ultimate deductibility is highly
certain but for which there is uncertainty as to the timing of such
deductibility. Recognition of these tax benefits would not affect our effective
tax rate. We include the full amount of unrecognized tax benefits in
deferred income taxes and other liabilities in the consolidated balance
sheets. The following table presents a reconciliation of the beginning and
ending amounts of unrecognized tax benefits:
(in millions) 2013 2012 2011
Balance at beginning of fiscal year $ 654 $ 747 $ 731
Additions for tax positions of the current year 22 16 16
Additions for tax positions of prior years 97 68 58
Reductions for tax positions of prior years (30) (3) (20)
Settlements with tax authorities (93) (172) (36)
Expiration of the statute of limitations —(2) (2)
Balance at end of fiscal year $ 650 $ 654 $ 747
It is reasonably possible that there could be a change in the amount of
unrecognized tax benefits within the next 12 months due to activities of
the Internal Revenue Service ("IRS") or other taxing authorities, including
proposed assessments of additional tax, possible settlement of audit
issues (primarily IRS audit settlements for various fiscal years),
reassessment of existing unrecognized tax benefits or the expiration of
applicable statutes of limitations. We estimate that the range of the
possible change in unrecognized tax benefits within the next 12 months
is a net decrease of approximately zero to $335 million, exclusive of
penalties and interest.