Cardinal Health 2014 Annual Report Download - page 12

Cardinal Health, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
10
The discussion and analysis presented below refers to, and
should be read in conjunction with, the consolidated financial
statements and related notes included in this annual report.
Unless otherwise indicated, throughout this Management's
Discussion and Analysis of Financial Condition and Results of
Operations, we are referring to our continuing operations.
Overview
We are a healthcare services company providing
pharmaceutical and medical products and services that help
pharmacies, hospitals and other healthcare providers focus on
patient care while reducing costs, enhancing efficiency and
improving quality. We also provide medical products to patients
in the home.
We report our financial results in two segments: Pharmaceutical
and Medical.
During fiscal 2014, revenue decreased 10 percent to $91.1
billion largely due to the previously disclosed expiration of our
pharmaceutical distribution contract with Walgreen Co.
("Walgreens") on August 31, 2013.
Gross margin increased 5 percent to $5.2 billion reflecting the
positive impact of acquisitions and strong performance from
generic programs, offset in part by the impact of the Walgreens
contract expiration.
Operating earnings increased to $1.9 billion and earnings from
continuing operations increased to $1.2 billion due primarily to
an $829 million ($799 million, net of tax) non-cash goodwill
impairment charge related to our Nuclear Pharmacy Services
division in fiscal 2013.
Our cash and equivalents balance was $2.9 billion at June 30,
2014 compared to $1.9 billion at June 30, 2013. The increase
in cash and equivalents during fiscal 2014 was driven by net
cash provided by operating activities of $2.5 billion, which
includes the decrease in our net working capital associated with
the Walgreens contract expiration. Net cash provided by
operating activities was deployed for share repurchases ($673
million), acquisitions ($519 million) and dividends ($415 million).
We plan to continue to execute a balanced deployment of
available capital to position ourselves for sustainable
competitive advantage and to enhance shareholder value.
Walgreens Contract
The Walgreens contract expiration unfavorably impacted
period-over-period comparisons of revenue and operating
earnings for fiscal 2014, but favorably affected net cash provided
by operating activities due to a significant reduction in net
working capital. Because revenue from Walgreens was $3.3
billion during the first quarter of fiscal 2014, we expect the
contract expiration to have an adverse impact on our period-
over-period comparisons of revenue and operating earnings
during the first quarter of fiscal 2015.
Joint Venture With CVS Caremark
In July 2014, we established Red Oak Sourcing, LLC (“Red Oak
Sourcing”), a U.S.-based generic pharmaceutical sourcing
entity with CVS Caremark Corporation (“CVS”) with an initial
term of 10 years. Both companies have contributed sourcing
and supply chain expertise to the 50/50 joint venture and have
committed to source generic pharmaceuticals through
arrangements negotiated by it. Red Oak Sourcing will negotiate
generic pharmaceutical supply contracts on behalf of both
companies, but will not own products or hold inventory on behalf
of either company. We are required to pay 39 quarterly payments
of $25.6 million to CVS commencing in October 2014 and, only
if certain milestones are achieved, to pay additional
predetermined amounts to CVS beginning in fiscal 2016. The
fixed payments of $25.6 million will be expensed evenly
commencing with the ramp-up of the venture, which we expect
to begin by the end of the first quarter of fiscal 2015. No physical
assets were contributed by either company to Red Oak
Sourcing, and minimal funding has been provided to capitalize
the entity.
Acquisitions
We have completed several acquisitions since July 1, 2011, the
largest of which were AssuraMed, Inc. ("AssuraMed") in fiscal
2013 and Access Closure, Inc. ("AccessClosure") in fiscal 2014.
On May 9, 2014, we completed the acquisition of AccessClosure
for $320 million in an all-cash transaction. We funded the
acquisition with cash on hand. The acquisition of
AccessClosure, a manufacturer and distributor of extravascular
closure devices, expands the Medical segment's portfolio of self-
manufactured products.
On March 18, 2013, we completed the acquisition of AssuraMed
for $2.07 billion, net of cash acquired, in an all-cash transaction.
We funded the acquisition through the issuance of $1.3 billion
in fixed rate notes and cash on hand. The acquisition of
AssuraMed, a provider of medical supplies to homecare
providers and patients in the home, expands Medical segment's
ability to serve this patient base. The AssuraMed division is now
known as our Cardinal Health at Home division ("Home
division"). This acquisition increased revenue and operating
earnings during fiscal 2014. The increase in amortization and
other acquisition-related costs during fiscal 2014 was primarily
due to intangible assets from this acquisition. We expect the
amortization of acquisition-related intangible assets to continue
to be a significant expense in future periods.
See Note 2 of the "Notes to Consolidated Financial Statements"
for additional information on these acquisitions.
Goodwill
As part of our annual goodwill impairment test during fiscal 2013,
we concluded that the entire goodwill amount of our Nuclear
Pharmacy Services division was impaired, resulting in a non-