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Cardinal Health, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
11
cash impairment charge of $829 million ($799 million, net of
tax). This impairment charge did not impact our liquidity, cash
flows from operations, or compliance with debt covenants. See
Note 5 of the “Notes to Consolidated Financial Statements” for
additional information.
Restructuring
On January 30, 2013, we announced a restructuring plan within
our Medical segment. Under this restructuring plan, among
other things, we have reorganized our Medical segment, moved
production of procedure kits from our facility in Waukegan,
Illinois to other facilities, and consolidated office space in
Waukegan, Illinois. In addition, we are selling property in
Waukegan, Illinois, and we are exiting our gamma sterilization
business in El Paso, Texas. We currently estimate the total costs
associated with this restructuring plan to be approximately $74
million on a pre-tax basis, of which $18 million and $51 million
was recognized in fiscal 2014 and fiscal 2013, respectively.
Trends
Within our Pharmaceutical segment, pharmaceutical price
appreciation on some generic products positively impacted our
margins during fiscal 2014, but the frequency and magnitude of
future generic product price appreciation is uncertain and the
impact on earnings may be less in fiscal 2015 than in fiscal 2014.
Results of Operations
Revenue
Revenue Change
(in millions) 2014 2013 2012 2014 2013
Pharmaceutical $80,110 $ 91,097 $ 97,925 (12)% (7)%
Medical 10,962 10,060 9,642 9 % 4 %
Total segment
revenue 91,072 101,157 107,567 (10)% (6)%
Corporate 12 (64) (15) N.M. N.M.
Total revenue $ 91,084 $101,093 $107,552 (10)% (6)%
Fiscal 2014 Compared to Fiscal 2013
Pharmaceutical Segment
Revenue for fiscal 2014 compared to fiscal 2013 was negatively
impacted by the Walgreens contract expiration ($16.9 billion)
and by the expiration of our pharmaceutical distribution contract
with Express Scripts, Inc. ("Express Scripts") on September 30,
2012 ($2.0 billion). This decrease was partially offset by sales
growth from existing pharmaceutical distribution customers
($7.1 billion).
Medical Segment
Revenue for fiscal 2014 compared to fiscal 2013 reflects the
benefit of acquisitions ($816 million).
Fiscal 2013 Compared to Fiscal 2012
Pharmaceutical Segment
Revenue for fiscal 2013 compared to fiscal 2012 was negatively
impacted by the expiration of our pharmaceutical distribution
contract with Express Scripts (approximately $6.7 billion).
Revenue from existing pharmaceutical distribution customers
decreased by approximately $3.6 billion, primarily as a result of
brand-to-generic pharmaceutical conversions. The decrease
was partially offset by increased pharmaceutical distribution
revenue from new customers (approximately $3.8 billion) and
revenue growth within our Specialty Solutions division ($961
million).
Medical Segment
Revenue for fiscal 2013 compared to fiscal 2012 reflects the
benefit of acquisitions ($459 million).
Cost of Products Sold
As a result of the same factors affecting the change in revenue,
cost of products sold decreased $10.2 billion (11 percent) and
$6.8 billion (7 percent) during fiscal 2014 and fiscal 2013,
respectively. See the gross margin discussion below for
additional drivers impacting cost of products sold.
Gross Margin
Gross Margin Change
(in millions) 2014 2013 2012 2014 2013
Gross margin $ 5,161 $ 4,921 $ 4,541 5% 8%
Fiscal 2014 Compared to Fiscal 2013
Gross margin increased during fiscal 2014 compared to
fiscal 2013 ($240 million), reflecting the positive impact of
acquisitions ($221 million).
Gross margin for fiscal 2014 was positively impacted by $32
million due to sales growth, which primarily reflects growth from
existing customers, and was largely offset by the impact of the
Walgreens contract expiration.
Gross margin rate, apart from the impact of the Walgreens
contract expiration, was flat for fiscal 2014. Gross margin rate
was positively impacted by strong performance from generic
programs, including the impact of generic pharmaceutical price
appreciation, and was adversely impacted by customer pricing
changes.
Fiscal 2013 Compared to Fiscal 2012
Gross margin increased in fiscal 2013 compared to fiscal 2012
driven by strong performance in our generic pharmaceutical
programs ($350 million) and acquisitions ($131 million).
Increased margin from branded pharmaceutical distribution
agreements (exclusive of the related volume impact) also had
a positive impact on gross margin ($81 million). Pricing changes,
including rebates (exclusive of the related volume impact),
adversely impacted gross margin ($211 million), driven in part
by customer and product mix. The adverse impact of these
pricing changes was offset by sourcing programs and other
sources of margin. As a result of significant market softness,
gross margin from our Nuclear Pharmacy Services division
decreased by $71 million in fiscal 2013.