Cardinal Health 2015 Annual Report Download - page 62

Notes to Financial Statements
61 Cardinal Health | Fiscal 2015 Form 10-K
We had $542 million, $510 million and $650 million of unrecognized
tax benefits at June 30, 2015, 2014 and 2013, respectively. The
June 30, 2015, 2014 and 2013 balances include $357 million, $322
million and $371 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) 2015 2014 2013
Balance at beginning of fiscal year $ 510 $ 650 $ 654
Additions for tax positions of the current
year 15 16 22
Additions for tax positions of prior years 69 94 97
Reductions for tax positions of prior years (42) (40) (30)
Settlements with tax authorities (10) (210) (93)
Balance at end of fiscal year $ 542 $ 510 $ 650
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 U.S. Internal Revenue Service ("IRS") or other taxing
authorities, possible settlement of audit issues, reassessment of
existing unrecognized tax benefits or the expiration of 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 zero to $210 million, exclusive of penalties and interest.
We recognize accrued interest and penalties related to unrecognized
tax benefits in the provision for income taxes. At June 30, 2015, 2014
and 2013, we had $169 million, $143 million and $198 million,
respectively, accrued for the payment of interest and penalties. These
balances are gross amounts before any tax benefits and are included
in deferred income taxes and other liabilities in the consolidated
balance sheets. During both fiscal 2015 and fiscal 2013, we
recognized $24 million of expense for interest and penalties in income
tax expense, respectively. During fiscal 2014, we recognized $46
million of benefit for interest and penalties in income tax expense.
We file income tax returns in the U.S. federal jurisdiction, various
U.S. state jurisdictions and various foreign jurisdictions. We are
subject to audit by the IRS for fiscal years 2006 through the current
fiscal year. We are generally subject to audit by taxing authorities in
various U.S. state and foreign jurisdictions for fiscal years 2003
through the current fiscal year.
During fiscal 2014, the IRS closed audits of fiscal years 2003 through
2005. The IRS is currently conducting audits of fiscal years 2006
through 2010, and our transfer pricing arrangements continue to be
under consideration as part of these audits. While the IRS has made
and could make proposed adjustments to our transfer pricing
arrangements, or other matters, we are defending our reported tax
positions, and have accounted for the unrecognized tax benefits
associated with our tax positions.
We are a party to a tax matters agreement with CareFusion
Corporation ("CareFusion"), which has been acquired by Becton,
Dickinson and Company. Under the tax matters agreement,
CareFusion is obligated to indemnify us for certain tax exposures
and transaction taxes prior to our fiscal 2010 spin-off of CareFusion.
The indemnification receivable was $219 million and $210 million at
June 30, 2015 and 2014, respectively, and is included in other assets
in the consolidated balance sheets.
9. Commitments, Contingent Liabilities and
Litigation
Commitments
The future minimum rental payments for operating leases having
initial or remaining non-cancelable lease terms in excess of one year
at June 30, 2015 for fiscal 2016 through 2020 and thereafter are as
follows: $103 million, $83 million, $63 million, $45 million, $35 million
and $77 million. Rental expense relating to operating leases was
$104 million, $107 million and $92 million in fiscal 2015, 2014 and
2013, respectively. Sublease rental income was immaterial for all
periods presented.
Generic Sourcing Venture With CVS Health Corporation
In July 2014, we established Red Oak Sourcing, LLC ("Red Oak
Sourcing"), a U.S.-based generic pharmaceutical sourcing venture
with CVS Health Corporation (“CVS Health”) with an initial term of
10 years. Both companies have contributed sourcing and supply
chain expertise to the 50/50 venture and have committed to source
generic pharmaceuticals through arrangements negotiated by the
venture. Red Oak Sourcing negotiates generic pharmaceutical
supply contracts on behalf of both companies. We are required to
pay 39 quarterly payments of $25.6 million to CVS Health which
commenced in October 2014. Due to the achievement of a milestone,
the quarterly payment to CVS Health will increase by $10 million
beginning in fiscal 2016. In addition, if an additional milestone is
achieved, the quarterly payment will increase in fiscal 2017 by a
further $10 million resulting in a maximum quarterly payment of $45.6
million if all milestones are met.
Cordis
As described in Note 2, on March 1, 2015, we entered into a binding
offer letter with Ethicon, Inc., a wholly-owned subsidiary of Johnson
& Johnson, to purchase its Cordis business for a purchase price of
$1.9 billion in cash, subject to certain adjustments. On May 27, 2015,
Ethicon accepted the offer. The acquisition is expected to close in
approximately 20 principal countries during the second quarter of
fiscal 2016 and in the remaining countries afterward, subject to
regulatory approval and customary closing conditions.
Legal Proceedings
We become involved from time to time in disputes, litigation and
regulatory matters incidental to our business.
We may be named from time to time in qui tam actions, which are
initiated by private third parties purporting to act on behalf of federal