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| 1. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Cardinal Health, Inc., an Ohio corporation formed in 1979, is a healthcare services company providing pharmaceutical and medical products and services that help pharmacies, hospitals, surgery centers, physician offices and other healthcare providers focus on patient care while reducing costs, enhancing efficiency and improving quality. References to "we", "our" and similar pronouns in these consolidated financial statements are to Cardinal Health, Inc. and its majority-owned subsidiaries unless the context otherwise requires.
Our fiscal year ends on June 30. References to fiscal 2011, 2010 and 2009 in these consolidated financial statements are to the fiscal years ended June 30, 2011, 2010 and 2009, respectively.
Spin-Off of CareFusion Corporation. Effective August 31, 2009, we separated our clinical and medical products businesses through a distribution to our shareholders of 81 percent of the then outstanding common stock of CareFusion Corporation ("CareFusion") and retained the remaining 41.4 million shares of CareFusion common stock (the "Spin-Off"). During fiscal 2011 and 2010, we disposed of 30.5 million and 10.9 million shares of CareFusion common stock, respectively. While we are a party to a separation agreement and various other agreements relating to the separation, we have determined that we have no significant continuing involvement in the operations of CareFusion. Accordingly, the operating results of CareFusion are presented within discontinued operations for all periods presented through the date of the Spin-Off.
Our Relationship with CareFusion. On July 22, 2009, we entered into a separation agreement with CareFusion to effect the Spin-Off and provide a framework for our relationship with CareFusion after the Spin-Off. In addition, on August 31, 2009, we entered into a transition services agreement, a tax matters agreement and an accounts receivable factoring agreement with CareFusion, among other agreements. These agreements, including the separation agreement, provide for allocation of assets, employees, liabilities, and obligations (including investments, property and employee benefits; and tax-related assets and liabilities) attributable to periods prior to, at and after the Spin-Off and govern certain relationships between CareFusion and us after the Spin-Off.
Under the transition services agreement, during fiscal 2011 and 2010, we recognized $64.7 million and $99.2 million, respectively, in transition service fee income, which approximately offsets the costs associated with providing the transition services. Substantially all of the transition service arrangements expired in fiscal 2011 and early fiscal 2012.
Under the accounts receivable factoring agreement, during fiscal 2011 and 2010, we purchased $460.4 million and $605.6 million, respectively, of CareFusion trade receivables. The accounts receivable factoring arrangement expired on April 1, 2011.
Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to the Spin-Off. The indemnification receivable is included in our balance sheet and was $263.9 million and $244.6 million at June 30, 2011 and 2010, respectively.
Basis of Presentation. Our consolidated financial statements include the accounts of all majority-owned subsidiaries, and all significant intercompany transactions and amounts have been eliminated. Certain prior year balances have been reclassified to conform to the current year presentation. The results of businesses acquired or disposed of are included in the consolidated financial statements from the effective date of the acquisition or up to the date of disposal, respectively.
Use of Estimates. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in accordance with GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates, judgments and assumptions are used in the accounting and disclosure related to, among other items, allowance for doubtful accounts, inventory valuation, business combinations, goodwill and intangible asset impairment, vendor reserves, share-based compensation, and income taxes. Actual amounts could ultimately differ from these estimated amounts.
Cash Equivalents. We consider all liquid investments purchased with a maturity of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value
Receivables. Trade receivables are primarily comprised of amounts owed to us through our distribution businesses and are presented net of an allowance for doubtful accounts of $134.5 million and $123.5 million at June 30, 2011 and 2010, respectively. An account is considered past due on the first day after its due date. In accordance with contract terms, we generally have the ability to charge customers service fees or higher prices if an account is considered past due. We continuously monitor past due accounts and establish appropriate reserves to cover potential losses, which are based primarily on historical collection rates and the credit worthiness of the customer. We write-off any amounts deemed uncollectible against the established allowance for doubtful accounts.
We provide financing to various customers. Such financing arrangements range from 90 days to 10 years, at interest rates that are generally subject to fluctuation. Interest income on these arrangements is recognized as it is earned. The financings may be collateralized, guaranteed by third parties or unsecured. Finance notes and accrued interest receivables were $90.4 million (current portion $18.9 million) and $109.9 million (current portion $20.9 million) at June 30, 2011 and 2010, respectively, and are included in other assets (current portion is included in prepaid expenses and other). Finance notes receivable are reported net of an allowance for doubtful accounts of $14.9 million and $16.2 million at June 30, 2011 and 2010, respectively. We estimate an allowance for these financing receivables based on historical collection rates and the credit worthiness of the customer.
Concentrations of Credit Risk and Major Customers. We maintain cash depository accounts with major banks throughout the world and invest in high quality short-term liquid instruments. Such investments are made only in instruments issued or enhanced by high quality institutions. These investments mature within three months and we have not incurred any related losses.
Our trade receivables, lease receivables, finance notes, and accrued interest receivables are exposed to a concentration of credit risk with customers in the retail and healthcare sectors. Credit risk can be affected by changes in reimbursement and other economic pressures impacting the hospital and acute care sectors of the healthcare industry. Such credit risk is limited due to supporting collateral and the diversity of the customer base, including its wide geographic dispersion. We perform ongoing credit evaluations of our customers' financial conditions and maintain reserves for credit losses. Such losses historically have been within our expectations.
The following table summarizes all of our customers that individually account for at least 10 percent of revenue and their corresponding percent of gross trade receivables. The customers in the table below are serviced through our Pharmaceutical segment.
| Percent of Revenue | Percent of Gross Trade Receivables at June 30, |
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| 2011 | 2010 | 2009 | 2011 | 2010 | ||||||||||||||||
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Walgreen Co. |
23 | % | 24 | % | 24 | % | 31 | % | 32 | % | ||||||||||
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CVS Caremark Corporation |
22 | % | 22 | % | 21 | % | 20 | % | 21 | % | ||||||||||
We have entered into agreements with group purchasing organizations ("GPOs") which act as purchasing agents that negotiate vendor contracts on behalf of their members.
The following table summarizes the revenue that was derived from GPO members through the contractual arrangements established with Novation, LLC and Premier Purchasing Partners, L.P., our two largest GPO relationships in terms of revenue:
| Percent of Revenue | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
GPO members |
14 | % | 15 | % | 15 | % | ||||||
Our trade receivable balances are with individual members of the GPO, and therefore no significant concentration of credit risk exists with these types of arrangements
If we had used the average cost method of inventory valuation for all inventory within the distribution facilities, inventories would not have changed in fiscal 2011 or fiscal 2010. Inventories valued at LIFO were $7.6 million and $37.7 million higher than the average cost value as of June 30, 2011 and 2010, respectively. We do not record inventories in excess of replacement cost.
Our remaining inventory is primarily stated at the lower of cost, using the FIFO method, or market.
Inventories presented on the consolidated balance sheet are net of reserves for excess and obsolete inventory which were $40.0 million and $34.4 million at June 30, 2011 and 2010, respectively. We reserve for inventory obsolescence using estimates based on historical experience, sales trends, specific categories of inventory, and age of on-hand inventory.
Cash Discounts. Manufacturer cash discounts are recorded as a component of inventory cost and recognized as a reduction of cost of products sold when the related inventory is sold.
Property and Equipment. Property and equipment are carried at cost less accumulated depreciation. Property and equipment held for sale are recorded at the lower of cost or fair value less cost to sell. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets, including capital lease assets which are depreciated over the terms of their respective leases. We use the following range of useful lives for our property and equipment categories: buildings and improvements—1 to 50 years; machinery and equipment—2 to 20 years; furniture and fixtures—3 to 10 years.
The following table shows depreciation expense for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
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(in millions) |
2011 | 2010 | 2009 | |||||||||
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Depreciation expense |
$ | 243.7 | $ | 233.4 | $ | 206.9 | ||||||
When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts. Repairs and maintenance expenditures are expensed as incurred. Interest on long-term projects is capitalized using a rate that approximates the weighted average interest rate on long-term obligations, which was 4.21% at June 30, 2011. The amount of capitalized interest was immaterial for all fiscal years presented.
Business Combinations. The purchase price of an acquired business is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of acquisition, including identifiable intangible assets. When an acquisition involves contingent consideration, we recognize a liability equal to the fair value of the contingent consideration obligation at the date of acquisition. The excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired is recorded as goodwill. We base the fair values of identifiable intangible assets on detailed valuations that require management to make significant judgments, estimates and assumptions. Critical estimates and assumptions include: expected future cash flows for trade names, customer relationships and other identifiable intangible assets; discount rates that reflect the risk factors associated with future cash flows; and estimates of useful lives. See Note 2 for additional information regarding our acquisitions, including the contingent consideration related to the P4 Healthcare acquisition.
Goodwill and Other Intangibles. Purchased goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment annually or when indicators of impairment exist. Intangible assets with finite lives—primarily customer relationships, patents and trademarks—are amortized over their useful lives.
Goodwill impairment testing involves a comparison of estimated fair value of reporting units to the respective carrying amount. If estimated fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the estimated fair value, then a second step is performed to determine the amount of impairment, which would be recorded as an expense to our results of operations. Application of goodwill impairment testing involves judgment, including but not limited to the identification of reporting units and estimating the fair value of each reporting unit. A reporting unit is defined as an operating segment or one level below an operating segment. In fiscal 2011, we identified four reporting units: Pharmaceutical segment, excluding our nuclear and pharmacy services division and Yong Yu division; Medical segment; nuclear and pharmacy services division; and Yong Yu division. Fair values can be determined using market, income or cost-based approaches. Our determination of estimated fair value of the reporting units is based on a combination of income-based and market-based approaches. Under the market-based approach we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. Under the income-based approach, we use a discounted cash flow model in which cash flows anticipated over several periods, plus a terminal value at the end of that time horizon, are discounted to their present value using an appropriate rate of return. To further confirm the fair value, we compare the aggregate fair value of our reporting units to our market capitalization. The use of alternate estimates and assumptions or changes in the industry or peer groups could materially affect the determination of fair value for each reporting unit and potentially result in goodwill impairment.
We performed annual impairment testing in fiscal 2011, 2010 and 2009 and concluded that there were no impairments of goodwill as the fair value of each reporting unit exceeded its carrying value. See Note 6 for additional information regarding goodwill and other intangible assets.
Income Taxes. We account for income taxes using the asset and liability method. The asset and liability method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax bases and financial reporting bases of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. Deferred taxes are not provided on the unremitted earnings of subsidiaries outside of the United States when it is expected that these earnings are permanently reinvested.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. See Note 9 for additional information regarding income taxes.
Accounting for Vendor Reserves. In the ordinary course of business, our vendors may dispute deductions taken against payments otherwise due to them or assert other billing disputes. These disputed transactions are researched and resolved based upon our policy and findings of the research performed. At any given time, there are outstanding items in various stages of research and resolution. In determining appropriate reserves for areas of exposure with our vendors, we assess historical experience and current outstanding claims. We have established various levels of reserves based on the type of claim and status of review. Though the transaction types are relatively consistent, we periodically refine our estimate methodology by updating the reserve estimate percentages to reflect actual historical experience. The ultimate outcome of certain claims may be different than our original estimate and may require an adjustment. All adjustments to vendor reserves are included in cost of products sold. In addition, the reserve balance will fluctuate due to variations of outstanding claims from period to period, timing of settlements and specific vendor issues, such as bankruptcies. The following table summarizes vendor reserves at June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Vendor reserves |
$ | 41.0 | $ | 27.8 | ||||
Third-party returns are excluded from the vendor reserves above. See separate section in Note 1 for a description of third-party returns.
Accounting for Vendor Incentives. Fees for services and other incentives received from vendors relating to the purchase or distribution of inventory are generally reported as a reduction of cost of products sold in the consolidated statements of earnings. We consider these fees and other incentives to represent product discounts, and as a result the amounts are recorded as a reduction of product cost and are recognized through cost of products sold upon sale of the related inventory.
Share-Based Compensation. All share-based compensation to employees, including grants of stock options, is recognized in the consolidated statements of earnings based on the grant date fair value of the awards. The fair value of stock options is determined using a lattice valuation model. We believe the lattice model provides for better estimates because it has the ability to take into account employee exercise patterns based on changes in our stock price and other variables and it provides for a range of input assumptions.
The compensation expense recognized for all share-based awards is net of estimated forfeitures and is recognized ratably over the service period of the awards. We classify share-based compensation expense within distribution, selling, general and administrative ("SG&A") expenses to correspond with the same line item as the majority of the cash compensation paid to employees. However, certain share-based compensation incurred in connection with the Spin-Off is classified within restructuring and employee severance. See Note 17 for additional information regarding share-based compensation.
Dividends. The following table summarizes the cash dividends per Common Share that we paid for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Cash dividends per Common Share |
$ | 0.78 | $ | 0.70 | $ | 0.56 | ||||||
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, product delivery has occurred or the services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue is recognized net of sales returns and allowances.
Pharmaceutical. This segment recognizes distribution revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise.
Revenue for deliveries that are directly shipped to customer warehouses from the manufacturer whereby we act as an intermediary in the ordering and delivery of products is recorded gross in accordance with accounting standards addressing reporting revenue on a gross basis as a principal versus on a net basis as an agent. This revenue is recorded on a gross basis since we incur credit risk from the customer, bear the risk of loss for incomplete shipments and do not receive a separate fee or commission for the transaction and, as such, are the primary obligor. Revenue from these sales is recognized when title transfers to the customer and we have no further obligation to provide services related to such merchandise.
Radiopharmaceutical revenue is recognized upon delivery of the product to the customer. Service-related revenue, including fees received for analytical services or sales and marketing services, is recognized upon the completion of such services.
Pharmacy management, third-party logistics and other service revenue is recognized as the services are rendered according to the contracts established. A fee is charged under such contracts through a capitation fee, a dispensing fee, a monthly management fee, or an actual costs-incurred arrangement. Under certain contracts, fees for services are guaranteed by us not to exceed stipulated amounts or have other risk-sharing provisions. Revenue is adjusted to reflect the estimated effects of such contractual guarantees and risk-sharing provisions.
Medicine Shoppe International, Inc. and Medicap Pharmacies Incorporated earn franchise fees. Franchise fees represent monthly fees that are either fixed or based upon franchisees' sales and are recognized as revenue when they are earned.
Medical. This segment recognizes distribution revenue when title transfers to its customers and the business has no further obligation to provide services related to such merchandise. Revenue from the sale of medical products and supplies is recognized when title and risk of loss transfers to its customers, which is typically upon delivery.
Sales Returns and Allowances. Revenue is recorded net of sales returns and allowances. We recognize sales returns as a reduction of revenue and cost of products sold for the sales price and cost, respectively, when products are returned. Our customer return policies generally require that the product be physically returned, subject to restocking fees, in a condition suitable to be added back to inventory and resold at full value, or returned to vendors for credit ("merchantable product"). Product returns are generally consistent throughout the year and typically are not specific to any particular product or customer. Amounts recorded in revenue and cost of products sold under this accounting policy closely approximate what would have been recorded had we accrued for sales returns and allowances at the time of the sale transaction.
The following table summarizes sales returns and allowances for the fiscal years ended June 30, 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Sales returns and allowances |
$ | 1,651.4 | $ | 1,516.2 | $ | 1,391.4 | ||||||
Third-party Returns. Since we generally do not accept non-merchantable product returns from our customers, many of our customers return non-merchantable pharmaceutical products to our vendors through third parties. Generally, our customers do not have a direct relationship with our vendors; as such, our vendors pass the value of the returns to us (usually in the form of an accounts payable deduction). We in turn pass the value received, less an administrative fee, to our customer. In certain instances, we pass the estimated value of the return to our customer prior to processing the deduction with our vendors. Although, in general, we believe we have satisfactory contractual protections, we could be subject to claims from customers or vendors if our administration of this overall process was deficient in some respect or our contractual terms with vendors are in conflict with our contractual terms with our customers. We have maintained reserves for some of these situations based on their nature and our historical experience with their resolution.
Distribution Service Agreement and Other Vendor Fees. Our Pharmaceutical segment recognizes fees received from its distribution service agreements and other fees received from vendors related to the purchase or distribution of the vendors' inventory when those fees have been earned and we are entitled to payment. We recognize the fees as a reduction in the carrying value of the inventory that generated the fees, and as such the fees are recognized as a reduction of cost of products sold in our statements of earnings when that inventory is sold.
Shipping and Handling. Shipping and handling costs are included in SG&A expenses in our consolidated statements of earnings. Shipping and handling costs include all delivery expenses as well as all costs to prepare the product for shipment to the end customer.
The following table summarizes shipping and handling costs for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
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|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Shipping and handling costs |
$ | 325.7 | $ | 293.5 | $ | 289.7 | ||||||
Revenue received for shipping and handling was immaterial for all periods presented.
Translation of Foreign Currencies. Financial statements of our subsidiaries outside the United States are generally measured using the local currency as the functional currency. Adjustments to translate the assets and liabilities of these foreign subsidiaries into U.S. dollars are accumulated in shareholders' equity through accumulated other comprehensive income utilizing period-end exchange rates. Revenues and expenses of these foreign subsidiaries are translated using average exchange rates during the year.
The following table summarizes the foreign currency translation gains/(losses) included in accumulated other comprehensive income at June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Foreign currency translation gains/(losses) |
$ | 71.1 | $ | (1.0 | ) | |||
Foreign currency transaction gains and losses for the period are included in the consolidated statements of earnings in other (income)/expense, net, and were immaterial for fiscal 2011, 2010 and 2009, respectively.
Interest Rate, Currency and Commodity Risk Management. All derivative instruments are recognized at fair value on the balance sheet, and all changes in fair value are recognized in net earnings or shareholders' equity through accumulated other comprehensive income, net of tax.
For contracts that qualify for hedge accounting treatment, our policy requires that the hedge contracts must be effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the contract. Hedge effectiveness is assessed periodically. Any contract not designated as a hedge, or so designated but ineffective, is adjusted to fair value and recognized in net earnings immediately. If a fair value or cash flow hedge ceases to qualify for hedge accounting the contract would continue to be carried on the balance sheet at fair value until settled, and future adjustments to the contract's fair value would be recognized in earnings immediately. If a forecasted transaction was no longer probable to occur, amounts previously deferred in accumulated other comprehensive income would be recognized immediately in earnings. See Note 12 for additional information regarding our derivative instruments, including the accounting treatment for instruments designated as fair value, cash flow and economic hedges.
Earnings per Common Share. Basic earnings per Common Share ("EPS") is computed by dividing net earnings (the numerator) by the weighted average number of Common Shares outstanding during each period (the denominator). Diluted EPS is similar to the computation for Basic EPS, except that the denominator is increased by the dilutive effect of vested and unvested stock options, restricted shares and restricted share units as computed using the treasury stock method.
Recent Financial Accounting Standards. In June 2009, the Financial Accounting Standards Board ("FASB") issued new accounting guidance on the accounting for transfers of financial assets. This guidance improves the relevance, representational faithfulness and comparability of information provided about a transfer of financial assets, the effects of a transfer of financial assets on an entity's financial statements, and a transferor's continuing involvement, if any, in financial assets transferred. This guidance was effective for fiscal years beginning after November 15, 2009. As a result of this new guidance, we determined that our committed receivables sales facility no longer qualified as an off-balance sheet arrangement beginning in fiscal 2011. At June 30, 2011 and 2010, we had no amounts outstanding under this facility.
In July 2010, the FASB issued new accounting guidance which requires additional disclosures regarding the allowance for credit loss for financing receivables. This guidance requires an entity to provide additional disclosures related to the credit risk related to financing receivables and how that risk is analyzed in determining the related allowance for credit losses. We adopted this guidance on January 1, 2011. The adoption of this guidance did not have a material impact on our financial position or results of operations.
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| 2. | ACQUISITIONS |
Fiscal 2011
During fiscal 2011, we completed several acquisitions, the most significant of which are described in more detail below. The results of the acquisitions described below are included within our Pharmaceutical segment. We also completed other acquisitions during this period that were not significant, individually or in the aggregate. The valuation of identifiable intangible assets utilizes significant unobservable inputs and thus represents a Level 3 fair value measurement. The fair value measurements of assets acquired and liabilities assumed as of the acquisition dates were completed during fiscal 2011. The consolidated financial statements include the results of operations from these business combinations from the date of acquisition. For fiscal 2011, these three acquisitions increased revenues by $2.9 billion and operating earnings by $61.3 million, compared to fiscal 2010.
Kinray. On December 21, 2010, we completed the acquisition of privately held Kinray, Inc. ("Kinray") for $1.3 billion in an all-cash transaction. Kinray is a wholesale pharmaceutical distribution company which serves retail independent pharmacies primarily in the New York metropolitan area.
Yong Yu. On November 29, 2010, we completed the acquisition of what is now our Yong Yu subsidiary for $457.7 million, including the assumption of $57.4 million in debt. Yong Yu is a health care distribution business headquartered in Shanghai, China.
P4 Healthcare. On July 15, 2010, we completed the acquisition of privately held Healthcare Solutions Holding, LLC ("P4 Healthcare") for $506.1 million in cash and certain contingent consideration. P4 Healthcare serves key participants across the chain of specialty care, including physicians, pharmaceutical companies and payors by providing essential tools, services and data to help improve the quality of patient outcomes and increase efficiency in the delivery of health care services.
In accordance with the agreement, the former owners of P4 Healthcare have the right to receive certain contingent payments based on targeted earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The contingent consideration was to be earned over four measurement periods, which spanned three years, and each measurement period had specific targets and payout amounts. The contingent consideration payout was limited to $150.0 million. Subsequent to June 30, 2011, we amended the agreement with the former owners to extend the fourth measurement period (beginning January 1, 2013) from six months to eighteen months and reduce the maximum contingent consideration payout to $100.0 million.
We determined the estimated fair value of the contingent consideration obligation based on a probability-weighted income approach derived from EBITDA estimates and probability assessments with respect to the likelihood of achieving the various EBITDA targets. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 fair value measurement. At each reporting date, we revalue the contingent consideration obligation to estimated fair value and record changes in fair value as income or expense in our consolidated statement of earnings as acquisition-related costs. Changes in the fair value of the contingent consideration obligation may result from changes in the terms of the contingent payments, changes in discount periods and rates, changes in the timing and amount of EBITDA estimates, and changes in probability assumptions with respect to the timing and likelihood of achieving the EBITDA targets. Actual progress toward achieving the EBITDA targets for the remaining measurement periods may be different than our expectations of performance in future measurement periods. Failure to meet current expectations of progress could increase the probability of not achieving the targets within the measurement periods and result in a material reduction in the fair value of the contingent consideration obligation. The fair value of the contingent consideration obligation was $75.4 million as of June 30, 2011, compared to the initial valuation of $92.0 million. The $16.6 million decrease in the contingent consideration liability reflects a cash payment of $10.2 million for the first measurement period and changes in our estimate of performance in future measurement periods.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the acquisition date for the three acquisitions described above:
|
(in millions) |
Kinray | Yong Yu | P4 Healthcare | |||||||||
|
Identifiable intangible assets |
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Trade names (1) |
$ | 16.8 | $ | 4.3 | $ | 16.0 | ||||||
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Customer relationships (2) |
116.0 | 51.7 | 163.0 | |||||||||
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Non-compete agreements (3) |
0.0 | 0.0 | 9.7 | |||||||||
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Other (4) |
0.0 | 0.0 | 37.0 | |||||||||
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Total identifiable intangible assets acquired |
132.8 | 56.0 | 225.7 | |||||||||
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Cash and equivalents |
0.0 | 3.9 | 0.0 | |||||||||
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Trade receivables, net |
297.3 | 243.8 | 9.2 | |||||||||
|
Inventories |
180.8 | 133.1 | 0.1 | |||||||||
|
Property and equipment, net |
3.5 | 3.7 | 2.3 | |||||||||
|
Other assets |
18.8 | 52.0 | 2.8 | |||||||||
|
Accounts payable |
(268.5 | ) | (218.8 | ) | (1.2 | ) | ||||||
|
Other accrued liabilities |
(12.4 | ) | (55.8 | ) | (8.3 | ) | ||||||
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Short-term borrowings |
0.0 | (56.1 | ) | 0.0 | ||||||||
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Long-term obligations |
0.0 | (1.3 | ) | 0.0 | ||||||||
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Contingent consideration obligation |
0.0 | 0.0 | (92.0 | ) | ||||||||
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Total identifiable net assets acquired |
352.3 | 160.5 | 138.6 | |||||||||
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Goodwill |
983.7 | 239.8 | 367.5 | |||||||||
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Total net assets acquired |
$ | 1,336.0 | $ | 400.3 | $ | 506.1 | ||||||
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| (1) | The weighted average lives of the trade names relating to the Kinray and Yong Yu acquisitions range from two to three years. P4 Healthcare trade names have indefinite lives. |
| (2) | The weighted average lives of customer relationships range from 4 to 15 years. |
| (3) | The weighted average life of non-compete agreements is five years. |
| (4) | The weighted average lives of other identified intangible assets range from 2 to 10 years. |
Fiscal 2010
During fiscal 2010, we completed an acquisition that individually was not significant. The aggregate purchase price of this acquisition, which was paid in cash, was $32.0 million, including the assumption of $1.9 million of liabilities. The consolidated financial statements include the results of operations from this business combination from the date of the acquisition.
Fiscal 2009
During fiscal 2009, we completed an acquisition that individually was not significant. The aggregate purchase price of this acquisition, which was paid in cash, was $128.6 million. Assumed liabilities of this acquired business were $102.1 million. The consolidated financial statements include the results of operations from this business combination from the date of acquisition.
Acquisition-Related Costs
We classify costs incurred in connection with acquisitions as acquisition-related costs. These costs consist primarily of transaction costs, integration costs and changes in the fair value of contingent payments. Transaction costs are incurred during the initial evaluation of a potential targeted acquisition and primarily relate to costs to analyze, negotiate and consummate the transaction as well as financial and legal due diligence activities. Integration costs relate to activities needed to combine the operations of an acquired enterprise into our operations. As described above, we record changes in the fair value of contingent payments relating to acquisitions as income or expense in our acquisition-related costs.
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| 3. | RESTRUCTURING AND EMPLOYEE SEVERANCE |
We consider restructuring activities as programs whereby we fundamentally change our operations such as closing facilities, moving manufacturing of a product to another location or outsourcing the production of a product. Restructuring activities may also involve substantial realignment of the management structure of a business unit in response to changing market conditions. A liability for a cost associated with an exit or disposal activity is recognized and measured initially at its fair value in the period in which it is incurred except for a liability for a one-time termination benefit, which is recognized over its future service period.
The following table summarizes activity related to our restructuring and employee severance costs during fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Employee-related costs (1) |
$ | 6.9 | $ | 32.9 | $ | 33.8 | ||||||
|
Facility exit and other costs (2) |
8.6 | 57.8 | 70.9 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total restructuring and employee severance |
$ | 15.5 | $ | 90.7 | $ | 104.7 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Employee-related costs primarily consist of one-time termination benefits provided to employees who have been involuntarily terminated and duplicate payroll costs during transition periods. |
| (2) | Facility exit and other costs consist of accelerated depreciation, equipment relocation costs, project consulting fees, and costs associated with restructuring our delivery of information technology infrastructure services. |
Restructuring and employee severance for fiscal 2011, 2010 and 2009 included costs related to the following significant projects:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Spin-Off (1) |
$ | 6.7 | $ | 64.5 | $ | 73.8 | ||||||
|
Segment Realignment (2) |
0.0 | 2.0 | 15.7 | |||||||||
| (1) | We incurred restructuring expenses related to the Spin-Off consisting of employee-related costs, share-based compensation, costs to evaluate and execute the transaction, costs to separate certain functions and information technology systems, and other one-time transaction related costs. See Note 17 for further information regarding share-based compensation incurred in connection with the Spin-Off. Also included within these costs is $18.6 million of costs related to the retirement of our former Chairman and Chief Executive Officer upon completion of the Spin-Off. |
| (2) | During fiscal 2009, we consolidated our businesses into two primary operating and reportable segments to reduce costs and align resources with the needs of each segment. In connection with the Spin-Off, these reportable segments were reorganized. Refer to Note 16 for additional information regarding our current reportable segments. |
In addition to the significant restructuring programs discussed above, from time to time, we incur costs to implement smaller restructuring efforts for specific operations within our segments. These restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing and distribution operations, rationalizing headcount and aligning operations in the most strategic and cost-efficient structure.
Restructuring and Employee Severance Accrual Rollforward
The following table summarizes activity related to liabilities associated with our restructuring and employee severance projects during fiscal 2011, 2010 and 2009:
|
(in millions) |
Employee Related Costs |
Facility Exit and Other Costs |
Total | |||||||||
|
Balance at June 30, 2008 |
$ | 22.5 | $ | 0.4 | $ | 22.9 | ||||||
|
Additions |
33.8 | 70.9 | 104.7 | |||||||||
|
Payments and other adjustments |
(43.1 | ) | (59.0 | ) | (102.1 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at June 30, 2009 |
13.2 | 12.3 | 25.5 | |||||||||
|
Additions |
32.9 | 57.8 | 90.7 | |||||||||
|
Payments and other adjustments |
(36.9 | ) | (62.7 | ) | (99.6 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at June 30, 2010 |
9.2 | 7.4 | 16.6 | |||||||||
|
Additions |
6.9 | 8.6 | 15.5 | |||||||||
|
Payments and other adjustments |
(10.1 | ) | (11.4 | ) | (21.5 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at June 30, 2011 |
$ | 6.0 | $ | 4.6 | $ | 10.6 | ||||||
|
|
|
|
|
|
|
|||||||
|
|||
| 4. | IMPAIRMENTS AND LOSS ON SALE OF ASSETS |
During fiscal 2010, we recognized an $18.1 million impairment charge related to the write-down of SpecialtyScripts, LLC ("SpecialtyScripts"), a business within the Pharmaceutical segment, to net expected fair value less costs to sell. See Note 5 for further information regarding the sale of SpecialtyScripts. We did not recognize any material impairment charges during fiscal 2011.
|
|||
| 5. | DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE |
CareFusion
We are a party to a transition services agreement, and a tax matters agreement with CareFusion, among other agreements. We have determined that the continuing cash flows generated by these agreements do not constitute significant continuing involvement in the operations of CareFusion. Accordingly, the operating results of CareFusion are presented within discontinued operations for all periods presented through the date of the Spin-Off.
The results of CareFusion included in discontinued operations for fiscal 2011, 2010 and 2009 are summarized as follows:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 (1) | 2010 (2) | 2009 | |||||||||
|
Revenue |
$ | 0.0 | $ | 592.1 | $ | 3,520.9 | ||||||
|
Earnings before income taxes |
0.3 | 43.7 | 507.2 | |||||||||
|
Income tax expense |
(8.0 | ) | (28.7 | ) | (122.6 | ) | ||||||
|
Earnings/(loss) from discontinued operations |
(7.7 | ) | 15.0 | 384.6 | ||||||||
| (1) | Reflects subsequent changes in certain estimates made at the time of the Spin-Off. |
| (2) | Reflects the results of CareFusion through August 31, 2009, the date the Spin-Off was completed, and subsequent changes in certain estimates made at the time of the Spin-Off. |
Interest expense was allocated to historical periods considering the debt issued by CareFusion in connection with the Spin-Off and our overall debt balance. In addition, a portion of the corporate costs previously allocated to CareFusion have been reclassified to the remaining two segments.
The following table summarizes the interest expense allocated to discontinued operations for CareFusion during fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Interest expense allocated to CareFusion |
$ | 0.0 | $ | 12.8 | $ | 75.2 | ||||||
There were no assets and liabilities from businesses held for sale for CareFusion at June 30, 2011 or 2010. Cash flows from discontinued operations are presented separately on the consolidated statements of cash flows.
Other
During the fourth quarter of fiscal 2007, we sold our businesses within the former Pharmaceutical Technologies and Services segment, other than certain generic-focused businesses (the "PTS Business"). See Note 7 of the "Notes to Consolidated Financial Statements" from the Annual Report on Form 10-K for the fiscal year ended June 30, 2009 for information regarding the sale of the PTS Business. We incurred minor amounts of activity related to the PTS Business during fiscal 2009 as a result of changes in certain estimates made at the time of the sale, activity under a transition services agreement and other adjustments.
During the fourth quarter of fiscal 2009, we committed to plans to sell the United Kingdom-based Martindale injectable manufacturing business ("Martindale") within our Pharmaceutical segment, and Martindale met the criteria for classification as discontinued operations in the consolidated financial statements. During the fourth quarter of fiscal 2010, we completed the sale of Martindale resulting in a pre-tax gain of $36.3 million. Accordingly, the net assets of Martindale are presented separately as discontinued operations, and the operating results of Martindale are presented within discontinued operations for all periods presented through the date of sale.
During the fourth quarter of fiscal 2009, we also committed to plans to sell SpecialtyScripts within our Pharmaceutical segment, and SpecialtyScripts met the criteria for classification as held for sale in our consolidated financial statements. During the third quarter of fiscal 2010, we completed the sale of SpecialtyScripts. The results of SpecialtyScripts are reported within earnings from continuing operations on our consolidated statements of earnings through the date of sale because it did not satisfy the criteria for classification as discontinued operations.
The results included in discontinued operations of the PTS business for fiscal 2010 and 2009, and Martindale for fiscal 2011, 2010 and 2009, are summarized as follows:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 (1) | 2010 | 2009 | |||||||||
|
Revenue |
$ | 0.0 | $ | 99.1 | $ | 100.5 | ||||||
|
Earnings before income taxes |
0.5 | 47.0 | 17.4 | |||||||||
|
Income tax expense |
0.0 | (6.8 | ) | (8.6 | ) | |||||||
|
Earnings from discontinued operations |
0.5 | 40.2 | 8.8 | |||||||||
| (1) | Reflects subsequent changes in certain estimates made at the time of sale. |
There were no assets and liabilities from businesses held for sale for PTS Business, Martindale or SpecialtyScripts at June 30, 2011 and 2010.
|
|||
| 6. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill
The following table summarizes the changes in the carrying amount of goodwill, in total and by segment, during fiscal 2011 and 2010:
|
(in millions) |
Pharmaceutical | Medical | Total | |||||||||
|
Balance at June 30, 2009 |
$ | 1,232.8 | $ | 963.7 | $ | 2,196.5 | ||||||
|
Goodwill acquired, net of purchase price adjustments |
33.3 | 0.0 | 33.3 | |||||||||
|
Foreign currency translation adjustments and other |
(17.7 | ) | (6.7 | ) | (24.4 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at June 30, 2010 |
1,248.4 | 957.0 | 2,205.4 | |||||||||
|
Goodwill acquired, net of purchase price adjustments |
1,598.5 | 33.0 | 1,631.5 | |||||||||
|
Foreign currency translation adjustments and other |
5.8 | 2.9 | 8.7 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Balance at June 30, 2011 |
$ | 2,852.7 | $ | 992.9 | $ | 3,845.6 | ||||||
|
|
|
|
|
|
|
|||||||
The increase in the Pharmaceutical segment in fiscal 2011 is primarily due to the acquisitions of Kinray, Yong Yu and P4 Healthcare. Goodwill recognized in connection with these acquisitions primarily represents the expected benefit from synergies of integrating these businesses as well as the existing workforce of the acquired entities. See Note 2 for further discussion of these acquisitions.
Other Intangible Assets
Intangible assets with definite lives are amortized over their useful lives, which range from two to twenty years. The detail of other intangible assets by class as of June 30, 2011 and 2010 is as follows:
| June 30, 2011 | June 30, 2010 | |||||||||||||||||||||||
|
(in millions) |
Gross Intangible |
Accumulated Amortization |
Net Intangible |
Gross Intangible |
Accumulated Amortization |
Net Intangible |
||||||||||||||||||
|
Indefinite life intangibles: |
||||||||||||||||||||||||
|
Trademarks and patents |
$ | 26.5 | $ | 0.0 | $ | 26.5 | $ | 10.2 | $ | 0.0 | $ | 10.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total indefinite life intangibles |
26.5 | 0.0 | 26.5 | 10.2 | 0.0 | 10.2 | ||||||||||||||||||
|
Definite life intangibles: |
||||||||||||||||||||||||
|
Trademarks and patents |
43.4 | 25.2 | 18.2 | 20.3 | 14.1 | 6.2 | ||||||||||||||||||
|
Non-compete agreements |
14.0 | 5.4 | 8.6 | 3.8 | 2.8 | 1.0 | ||||||||||||||||||
|
Customer relationships |
392.7 | 89.2 | 303.5 | 48.4 | 41.1 | 7.3 | ||||||||||||||||||
|
Other |
86.5 | 29.9 | 56.6 | 47.2 | 24.1 | 23.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total definite life intangibles |
536.6 | 149.7 | 386.9 | 119.7 | 82.1 | 37.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Total intangibles |
$ | 563.1 | $ | 149.7 | $ | 413.4 | $ | 129.9 | $ | 82.1 | $ | 47.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The increase in identifiable intangible assets during fiscal 2011 is primarily due to the acquisitions of Kinray, Yong Yu and P4 Healthcare. See Note 2 for further discussion of these acquisitions.
The following table summarizes amortization expense during fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, |
||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Amortization expense |
$ | 67.7 | $ | 11.2 | $ | 15.0 | ||||||
Amortization expense for each of the next five fiscal years is estimated to be:
|
(in millions) |
2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||
|
Amortization expense |
$ | 74.3 | $ | 64.8 | $ | 56.6 | $ | 41.3 | $ | 34.0 | ||||||||||
|
|||
| 7. | HELD-TO-MATURITY INVESTMENTS |
As of June 30, 2011, our held-to-maturity investments included fixed income debt securities with an amortized cost of $142.0 million. The short-term portion of $93.2 million is included within prepaid expenses and other in our consolidated balance sheet. The long-term portion of $48.8 million is included within other long-term assets in our consolidated balance sheet. These investments vary in maturity date, ranging from three to sixteen months, and pay interest semi-annually. The held-to-maturity investments are stated at amortized cost, which approximates fair value. There were no held-to-maturity investments as of June 30, 2010.
|
|||
| 8. | LONG-TERM OBLIGATIONS AND OTHER SHORT-TERM BORROWINGS |
Long-term obligations and other short-term borrowings consist of the following as of June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
4.00% Notes due 2015 |
$ | 536.6 | $ | 534.7 | ||||
|
4.625% Notes due 2020 |
500.1 | 0.0 | ||||||
|
5.50% Notes due 2013 |
306.9 | 305.1 | ||||||
|
5.65% Notes due 2012 |
211.7 | 216.1 | ||||||
|
5.80% Notes due 2016 |
306.9 | 308.9 | ||||||
|
5.85% Notes due 2017 |
158.0 | 158.0 | ||||||
|
6.00% Notes due 2017 |
209.6 | 213.1 | ||||||
|
6.75% Notes due 2011 |
0.0 | 218.7 | ||||||
|
7.80% Debentures due 2016 |
37.1 | 44.1 | ||||||
|
7.00% Debentures due 2026 |
124.5 | 124.5 | ||||||
|
Other obligations |
110.6 | 6.1 | ||||||
|
|
|
|
|
|||||
|
Total |
2,502.0 | 2,129.3 | ||||||
|
Less: current portion and other short-term borrowings |
326.7 | 233.2 | ||||||
|
|
|
|
|
|||||
|
Long-term obligations, less current portion |
$ | 2,175.3 | $ | 1,896.1 | ||||
|
|
|
|
|
|||||
Maturities of long-term obligations and other short-term borrowings for the next five fiscal years and thereafter are as follows:
|
(in millions) |
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
|
Maturities of long-term obligations and other short-term borrowings |
$ | 326.7 | $ | 310.7 | $ | 1.3 | $ | 532.8 | $ | 0.0 | $ | 1,330.5 | $ | 2,502.0 | ||||||||||||||
Long-Term Debt
The 4.00%, 5.50%, 5.65%, 5.80%, 5.85%, 6.00% and 6.75% Notes represent unsecured obligations. The 7.80% and 7.00% Debentures represent unsecured obligations of Allegiance Corporation (a wholly-owned subsidiary), which Cardinal Health, Inc. has guaranteed. None of these obligations are subject to a sinking fund and the Allegiance obligations are not redeemable prior to maturity. Interest is paid pursuant to the terms of the obligations. These notes are effectively subordinated to the liabilities of our subsidiaries, including trade payables of $11.3 billion.
In December 2010, we sold $500.0 million aggregate principal amount of fixed rate notes due 2020 with interest at 4.625% per year ("the 4.625% Notes") in a registered offering. The 4.625% Notes mature on December 15, 2020. The notes are unsecured and unsubordinated obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. We used the proceeds for general corporate purposes and to repay $219.7 million of our 6.75% Notes on February 15, 2011.
The 5.65% Notes due 2012, 5.50% Notes due 2013, 6.00% Notes due 2017, and 4.625% Notes require us to offer to purchase the notes at 101% of the principal amount plus accrued and unpaid interest, if we have a defined change of control and specified ratings below investment grade by S&P, Moody's, and Fitch.
On September 24, 2009, we completed a debt tender announced on August 27, 2009 for an aggregate purchase price, including an early tender premium but excluding accrued interest, fees and expenses, of $1.1 billion of the following series of debt securities: (i) 7.80% Debentures due October 15, 2016 of Allegiance Corporation; (ii) our 6.75% Notes due February 15, 2011; (iii) our 6.00% Notes due June 15, 2017; (iv) 7.00% Debentures due October 15, 2026 of Allegiance Corporation; (v) our 5.85% Notes due December 15, 2017; (vi) our 5.80% Notes due October 15, 2016; (vii) our 5.65% Notes due June 15, 2012; (viii) our 5.50% Notes due June 15, 2013; and (ix) our 4.00% Notes due June 15, 2015. In connection with the debt tender, we incurred a pre-tax loss for the early extinguishment of debt of approximately $39.9 million, which included an early tender premium of $66.4 million, the write-off of $5.3 million of unamortized debt issuance costs and an offsetting $31.8 million fair value adjustment to the respective debt related to previously terminated interest rate swaps. The debt tender was completed using a portion of the $1.4 billion of cash distributed to us from CareFusion in connection with the Spin-Off.
Other Financing Arrangements
In addition to cash and equivalents, at June 30, 2011 and 2010, our sources of liquidity included a $1.5 billion commercial paper program backed by a $1.5 billion revolving credit facility. On May 12, 2011, we replaced our prior revolving credit facility with a new $1.5 billion facility that expires in May 2016. The revolving credit facility exists largely to support issuances of commercial paper as well as other short-term borrowings for general corporate purposes.
We also maintain a $950.0 million committed receivables sales facility program. On November 9, 2010, we amended our committed receivables sales facility to extend its term to November 2012. The committed receivables sales facility exists largely to provide liquidity by selling interests in our receivables.
We had no outstanding borrowings from the commercial paper program and no outstanding balance under the committed receivables sales facility program at June 30, 2011 and 2010. We also had no outstanding balance under the revolving credit facility at June 30, 2011 and 2010, except for $44.3 million and $48.2 million, respectively, of standby letters of credit. Our revolving credit facility and committed receivables sales facility 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, 2011, we were in compliance with these financial covenants.
We also maintain other short-term credit facilities and an unsecured line of credit that allowed for borrowings up to $173.9 million and $4.8 million at June 30, 2011 and 2010, respectively. The $110.6 million and $6.1 million balance of other obligations at June 30, 2011 and 2010, respectively, consisted primarily of additional notes, loans and capital leases.
|
|||
|
Earnings before income taxes and discontinued operations are as follows for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
U.S. Operations |
$ | 1,299.5 | $ | 979.6 | $ | 959.2 | ||||||
|
Non-U.S. Operations |
218.8 | 232.0 | 200.6 | |||||||||
|
|
|
|
|
|
|
|||||||
| $ | 1,518.3 | $ | 1,211.6 | $ | 1,159.8 | |||||||
|
|
|
|
|
|
|
|||||||
The provision for income taxes from continuing operations consists of the following for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Current: |
||||||||||||
|
Federal |
$ | 387.5 | $ | 429.4 | $ | 192.2 | ||||||
|
State and local |
19.7 | 63.3 | 45.6 | |||||||||
|
Non-U.S. |
16.9 | 11.7 | 14.4 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
424.1 | 504.4 | 252.2 | |||||||||
|
Deferred: |
||||||||||||
|
Federal |
92.5 | 103.0 | 125.0 | |||||||||
|
State and local |
28.6 | 18.2 | 23.0 | |||||||||
|
Non-U.S. |
6.9 | (1.0 | ) | 1.4 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Total |
128.0 | 120.2 | 149.4 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total provision |
$ | 552.1 | $ | 624.6 | $ | 401.6 | ||||||
|
|
|
|
|
|
|
|||||||
A reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate from continuing operations is as follows for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||
| 2011 | 2010 | 2009 | ||||||||||
|
Provision at Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State and local income taxes, net of federal benefit |
2.2 | 4.7 | 1.8 | |||||||||
|
Foreign tax rate differential |
(2.5 | ) | (3.3 | ) | (3.8 | ) | ||||||
|
Nondeductible/nontaxable items |
0.6 | 0.2 | 1.6 | |||||||||
|
Deferred state tax rate adjustment |
0.4 | (0.5 | ) | 1.5 | ||||||||
|
Change in measurement of an uncertain tax position |
2.4 | 1.3 | 0.0 | |||||||||
|
Valuation allowances |
(0.6 | ) | (2.3 | ) | (3.1 | ) | ||||||
|
Unremitted foreign earnings |
(0.1 | ) | 13.9 | 0.0 | ||||||||
|
Other |
(1.0 | ) | 2.6 | 1.6 | ||||||||
|
|
|
|
|
|
|
|||||||
|
Effective income tax rate |
36.4 | % | 51.6 | % | 34.6 | % | ||||||
|
|
|
|
|
|
|
|||||||
As of June 30, 2011, we had $2.1 billion of total undistributed earnings from non-U.S. subsidiaries, of which $1.4 billion are intended to be permanently reinvested in non-U.S. operations. We recorded a charge of $168.3 million during fiscal 2010 to reflect the anticipated repatriation of certain foreign earnings. With respect to the earnings that 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 components of the deferred income tax assets and liabilities as of June 30, 2011 and 2010 are as follows:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Deferred income tax assets: |
||||||||
|
Receivable basis difference |
$ | 46.0 | $ | 43.5 | ||||
|
Accrued liabilities |
104.9 | 132.1 | ||||||
|
Share-based compensation |
96.6 | 112.6 | ||||||
|
Loss and tax credit carryforwards |
198.9 | 206.1 | ||||||
|
Deferred tax assets related to uncertain tax positions |
157.0 | 152.7 | ||||||
|
Other |
97.0 | 113.2 | ||||||
|
|
|
|
|
|||||
|
Total deferred income tax assets |
700.4 | 760.2 | ||||||
|
Valuation allowance for deferred income tax assets |
(157.7 | ) | (182.6 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred income tax assets |
542.7 | 577.6 | ||||||
|
|
|
|
|
|||||
|
Deferred income tax liabilities: |
||||||||
|
Inventory basis differences |
(980.1 | ) | (878.7 | ) | ||||
|
Property-related |
(159.3 | ) | (156.8 | ) | ||||
|
Goodwill and other intangibles |
(69.4 | ) | (66.1 | ) | ||||
|
Unremitted foreign earnings |
(140.0 | ) | (142.0 | ) | ||||
|
Other |
(3.1 | ) | (3.7 | ) | ||||
|
|
|
|
|
|||||
|
Total deferred income tax liabilities |
(1,351.9 | ) | (1,247.3 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred income tax liabilities |
$ | (809.2 | ) | $ | (669.7 | ) | ||
|
|
|
|
|
|||||
Deferred tax assets and liabilities in the preceding table, after netting by taxing jurisdiction, are in the following captions in the consolidated balance sheet at June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Current deferred tax asset (1) |
$ | 29.2 | $ | 42.5 | ||||
|
Noncurrent deferred tax asset (2) |
9.5 | 3.5 | ||||||
|
Current deferred tax liability (3) |
(762.9 | ) | (616.8 | ) | ||||
|
Noncurrent deferred tax liability (4) |
(85.0 | ) | (98.9 | ) | ||||
|
|
|
|
|
|||||
|
Net deferred tax liability |
$ | (809.2 | ) | $ | (669.7 | ) | ||
|
|
|
|
|
|||||
| (1) | Included in "Prepaid Expenses and Other" in our consolidated balance sheets. |
| (2) | Included in "Other Assets" in our consolidated balance sheets. |
| (3) | Included in "Other Accrued Liabilities" in our consolidated balance sheets. |
| (4) | Included in "Deferred Income Taxes and Other Liabilities" in our consolidated balance sheets. |
At June 30, 2011, we had gross federal, state and international loss and credit carryforwards of $225.4 million, $568.9 million and $131.8 million, respectively, the tax effect of which is an aggregate deferred tax asset of $189.9 million. Substantially all of these carryforwards are available for at least three years or have an indefinite carryforward period. Approximately $142.9 million of the valuation allowance at June 30, 2011 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 $746.8 million, $730.6 million and $848.8 million of unrecognized tax benefits at June 30, 2011, 2010 and 2009, respectively. The June 30, 2011, 2010 and 2009 balances include $332.4 million, $311.3 million and $610.9 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. A reconciliation of the beginning and ending amounts of unrecognized tax benefits for fiscal 2011, 2010 and 2009 is as follows:
| June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Balance at beginning of fiscal year |
$ | 730.6 | $ | 848.8 | $ | 762.9 | ||||||
|
Additions for tax positions of the current year |
15.9 | 43.1 | 64.5 | |||||||||
|
Additions for tax positions of prior years |
58.3 | 90.0 | 118.7 | |||||||||
|
Reductions for tax positions of prior years |
(20.1 | ) | (240.0 | ) | (54.3 | ) | ||||||
|
Settlements with tax authorities |
(35.8 | ) | (10.7 | ) | (37.8 | ) | ||||||
|
Expiration of the statute of limitations |
(2.1 | ) | (0.6 | ) | (5.2 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Balance at end of fiscal year |
$ | 746.8 | $ | 730.6 | $ | 848.8 | ||||||
|
|
|
|
|
|
|
|||||||
We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2011, 2010 and 2009, we had $267.2 million, $233.0 million and $246.8 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 sheet. For the year ended June 30, 2011, we recognized $36.0 million of 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. With few exceptions, we are subject to audit by taxing authorities for fiscal 2001 through the current fiscal year.
The Internal Revenue Service ("IRS") is currently conducting audits of fiscal years 2001 through 2010. We have received proposed adjustments from the IRS for fiscal years 2003 through 2007 related to our transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by us. The IRS proposed additional taxes of $849.0 million, excluding penalties and interest. If this tax ultimately must be paid, CareFusion is liable under the tax matters agreement for $591.5 million of the total amount. We disagree with these proposed adjustments and are vigorously contesting them. We believe we are adequately reserved for the uncertain tax positions related to these matters.
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 IRS or other taxing authorities, including proposed assessments of additional tax, possible settlement of audit issues, 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 decrease of approximately zero to $215.0 million, exclusive of penalties and interest.
|
|||
| 10. | 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, 2011 are:
|
(in millions) |
2012 | 2013 | 2014 | 2015 | 2016 | Thereafter | Total | |||||||||||||||||||||
|
Minimum rental payments |
$ | 72.2 | $ | 58.4 | $ | 38.3 | $ | 27.4 | $ | 19.2 | $ | 39.3 | $ | 254.8 | ||||||||||||||
Rental expense relating to operating leases was $78.8 million, $80.3 million and $84.7 million in fiscal 2011, 2010 and 2009, respectively. Sublease rental income was not material for any period presented herein.
Legal Proceedings
We become involved from time-to-time in litigation and regulatory matters incidental to our business, including governmental investigations, enforcement actions, personal injury claims, employment matters, commercial disputes, intellectual property matters, disputes regarding environmental clean-up costs, litigation in connection with acquisitions and divestitures, and other matters arising out of the normal conduct of our business. We intend to vigorously defend ourselves in such litigation. We do not believe that the outcome of any pending litigation will have a material adverse effect on the consolidated financial statements.
Occasionally, we may suspect that products we manufacture, market or distribute do not meet product specifications, published standards or regulatory requirements. In such circumstances, we investigate and take appropriate corrective action. Such actions can lead to product recalls, costs to repair or replace affected products, temporary interruptions in product sales, and action by regulators.
We accrue for contingencies related to litigation and regulatory matters. We accrue an estimated loss contingency in our consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions can occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine whether our accruals are adequate. The amount of ultimate loss may differ from these estimates.
We recognize income from the favorable outcome of litigation when we receive the associated cash or assets.
We recognize estimated loss contingencies for litigation and regulatory matters and income from favorable resolution of litigation in litigation (recoveries)/charges, net in our consolidated statements of earnings.
Insurance Proceeds
In fiscal 2010, we recognized $27.2 million of income related to insurance proceeds released from escrow following the resolution of previously disclosed and settled securities and derivative litigation against certain of our directors and officers. This amount is comprised of $25.7 million received from directors' and officers' insurance policies recognized in litigation (recoveries)/charges, net and $1.5 million of accrued interest income recognized in interest expense, net.
Antitrust Litigation Proceeds
In fiscal 2010, we recognized $40.8 million of income resulting from settlement of a class action antitrust claim in which we were a class member. This amount is recognized in litigation (recoveries)/charges, net.
Income Taxes
See Note 9 for discussion of contingencies related to our income taxes.
|
|||
| 11. | GUARANTEES |
In the ordinary course of business, we agree to indemnify certain other parties under acquisition and disposition agreements, customer agreements, intellectual property licensing agreements, and other agreements. Such indemnification obligations vary in scope and, when defined, in duration. In many cases, a maximum obligation is not explicitly stated, and therefore the overall maximum amount of the liability under such indemnification obligations cannot be reasonably estimated. Where appropriate, such indemnification obligations are recorded as a liability. Historically, we have not, individually or in the aggregate, made payments under these indemnification obligations in any material amounts. In certain circumstances, we believe that existing insurance arrangements, subject to the general deduction and exclusion provisions, would cover portions of the liability that may arise from these indemnification obligations. In addition, we believe that the likelihood of a material liability being triggered under these indemnification obligations is not significant.
We enter into agreements that obligate us to make fixed payments upon the occurrence of certain events. Such obligations primarily relate to obligations arising under acquisition transactions, where we have agreed to make payments based upon the achievement of certain financial performance measures by the acquired business. Generally, the obligation is capped at an explicit amount. See Note 2 for detail regarding the P4 Healthcare contingent consideration arrangement.
|
|||
| 12. | FINANCIAL INSTRUMENTS |
We utilize derivative financial instruments to manage exposure to certain risks related to our ongoing operations. The primary risks managed through the use of derivative instruments include interest rate risk, currency exchange risk and commodity price risk. We do not use derivative instruments for trading or speculative purposes. While the majority of our derivative instruments are designated as hedging instruments, we also enter into derivative instruments that are designed to hedge a risk, but are not designated as hedging instruments. These derivative instruments are adjusted to current fair value through earnings at the end of each period.
Interest Rate Risk Management. We are exposed to the impact of interest rate changes. Our objective is to manage the impact of interest rate changes on cash flows and the market value of our borrowings. We utilize a mix of debt maturities along with both fixed-rate and variable-rate debt to manage changes in interest rates. In addition, we enter into interest rate swaps to further manage our exposure to interest rate variations related to our borrowings and to lower our overall borrowing costs.
Currency Exchange Risk Management. We conduct business in several major international currencies and are subject to risks associated with changing foreign exchange rates. Our objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow management to focus its attention on business operations. Accordingly, we enter into various contracts that change in value as foreign exchange rates change to protect the value of existing foreign currency assets and liabilities, commitments and anticipated foreign currency revenue and expenses.
Commodity Price Risk Management. We are exposed to changes in the price of certain commodities. Our objective is to reduce earnings and cash flow volatility associated with forecasted purchases of these commodities to allow management to focus its attention on business operations. Accordingly, we enter into derivative contracts to manage the price risk associated with these forecasted purchases.
We are exposed to counterparty credit risk on all of our derivative instruments. Accordingly, we have established and maintain strict counterparty credit guidelines and enter into derivative instruments only with major financial institutions that are investment grade or better. We do not have significant exposure to any one counterparty; management believes the risk of loss is remote and, in any event, would not be material. Additionally, we do not require collateral under these agreements.
The following table summarizes the fair value of our assets and liabilities related to derivative financial instruments, and the respective line items in which they were recorded in the consolidated balance sheets as of June 30, 2011 and 2010:
|
(in millions) |
Balance Sheets Line Item |
June 30, 2011 |
June 30, 2010 |
|||||||
|
Assets: |
||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||
|
Pay-floating interest rate swaps |
Prepaid expenses and other | $ | 32.4 | $ | 23.4 | |||||
|
Foreign currency contracts |
Prepaid expenses and other | 0.8 | 3.9 | |||||||
|
Commodity contracts |
Prepaid expenses and other | 2.5 | 0.0 | |||||||
|
|
|
|
|
|||||||
|
Total assets |
$ | 35.7 | $ | 27.3 | ||||||
|
|
|
|
|
|||||||
|
Liabilities: |
||||||||||
|
Derivatives designated as hedging instruments: |
||||||||||
|
Foreign currency contracts |
Deferred income taxes and other liabilities |
$ | 2.9 | $ | 1.1 | |||||
|
Derivatives not designated as hedging instruments: |
||||||||||
|
Commodity contracts |
Other accrued liabilities | 0.7 | 0.0 | |||||||
|
|
|
|
|
|||||||
|
Total liabilities |
$ | 3.6 | $ | 1.1 | ||||||
|
|
|
|
|
|||||||
Fair Value Hedges
We enter into pay-floating interest rate swaps to hedge the changes in the fair value of fixed-rate debt resulting from fluctuations in interest rates. These contracts are designated and qualify as fair value hedges. Accordingly, the gain or loss recorded on the pay-floating interest rate swaps is directly offset by the change in fair value of the underlying debt. Both the derivative instrument and the underlying debt are adjusted to market value at the end of each period with any resulting gain or loss recorded in interest expense, net in the consolidated statements of earnings.
During fiscal 2011 and 2010, we entered into pay-floating interest rate swaps with total notional values of $250.0 million and $1.0 billion, respectively. The fair value of these pay-floating interest rate swaps is included in the consolidated balance sheet as of June 30, 2011 and 2010.
The following table summarizes the interest rate swaps designated as fair value hedges outstanding as of June 30, 2011 and 2010:
| June 30, 2011 | June 30, 2010 | |||||||||||
|
(in millions) |
Notional Amount |
Maturity Date | Notional Amount |
Maturity Date | ||||||||
|
Pay-floating interest rate swaps |
$ | 1,256.0 | June 2012 – December 2020 | $ | 1,006.0 | June 2012 – June 2015 | ||||||
The following table summarizes the gain/(loss) recognized in earnings for interest rate swaps designated as fair value hedges for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||||
|
(in millions) |
Statements of Earnings Line Item |
2011 | 2010 | 2009 | ||||||||||
|
Pay-floating interest rate swaps |
Interest expense, net | $ | 36.2 | $ | 47.3 | $ | 21.6 | |||||||
|
Fixed-rate debt |
Interest expense, net | (36.2 | ) | (47.3 | ) | (21.6 | ) | |||||||
There was no ineffectiveness associated with these derivative instruments.
Cash Flow Hedges
We enter into derivative instruments to hedge our exposure to changes in cash flows attributable to currency, interest rate and commodity price fluctuations associated with certain forecasted transactions. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative instrument is recognized in earnings immediately.
We enter into foreign currency contracts to protect the value of anticipated foreign currency revenues and expenses. At June 30, 2011 and 2010, we held contracts to hedge probable, but not firmly committed, revenue and expenses. The principal currencies hedged are the Canadian dollar, European euro, Mexican peso and Thai baht.
We enter into commodity contracts to manage the price risk associated with forecasted purchases of certain commodities used in our Medical segment.
The following table summarizes the outstanding cash flow hedges as of June 30, 2011 and 2010:
| June 30, 2011 | June 30, 2010 | |||||||||||
|
(in millions) |
Notional Amount |
Maturity Date | Notional Amount |
Maturity Date | ||||||||
|
Foreign currency contracts |
$ | 163.0 | July 2011 – June 2012 | $ | 145.7 | July 2010 – June 2011 | ||||||
|
Commodity contracts |
22.4 | July 2011 – March 2014 | 24.2 | July 2010 – June 2013 | ||||||||
The following table summarizes the accumulated gain/(loss) included in OCI for derivative instruments designated as cash flow hedges as of June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Foreign currency contracts |
$ | (1.8 | ) | $ | 2.6 | |||
|
Commodity contracts |
2.5 | 0.0 | ||||||
The following table summarizes the gain/(loss) reclassified from accumulated OCI into earnings for derivative instruments designated as cash flow hedges for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||||
|
(in millions) |
Statements of Earnings Line Item |
2011 | 2010 | 2009 | ||||||||||
|
Pay-fixed interest rate swaps |
Interest expense, net | $ | 0.0 | $ | (2.1 | ) | $ | (7.6 | ) | |||||
|
Foreign currency contracts |
Revenue | 0.3 | 0.0 | 0.0 | ||||||||||
|
Foreign currency contracts |
Cost of products sold | (2.7 | ) | (10.5 | ) | 10.9 | ||||||||
|
Foreign currency contracts |
SG&A expenses | 3.1 | 1.4 | (4.0 | ) | |||||||||
|
Commodity contracts |
SG&A expenses | 1.6 | 0.2 | (0.6 | ) | |||||||||
The amount of ineffectiveness associated with these derivative instruments was not material.
Economic (Non-designated) Hedges
Foreign Currency. We enter into foreign currency contracts to manage our foreign exchange exposure related to intercompany financing transactions and other balance sheet items subject to revaluation that do not meet the requirements for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period through earnings. The gain or loss recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in other (income)/expense, net at the end of each period. During fiscal 2010, we received cash receipts from a cross currency swap settlement totaling $42.5 million. These proceeds are classified as cash provided by operating activities in the consolidated statement of cash flows.
Commodity Contracts. During fiscal 2011, we entered into swap contracts of certain commodities to mitigate price volatility for materials we purchase or use in our manufacturing and distribution businesses. These instruments do not qualify for hedge accounting and as such fair value changes as well as periodic settlements of these contracts are recorded within other (income)/expense, net in our consolidated statements of earnings.
The following table summarizes the economic (non-designated) derivative instruments outstanding as of June 30, 2011 and 2010:
| June 30, 2011 | June 30, 2010 | |||||||||||
|
(in millions) |
Notional Amount |
Maturity Date |
Notional Amount |
Maturity Date | ||||||||
|
Foreign currency contracts |
$ | 391.8 | July 2011 | $ | 472.6 | July 2010 | ||||||
|
Commodity contracts |
10.0 | July 2011 – June 2012 | 0.0 | — | ||||||||
The following table summarizes the gain/(loss) recognized in earnings for economic (non-designated) derivative instruments for fiscal 2011, 2010 and 2009:
| Fiscal Year Ended June 30, | ||||||||||||||
|
(in millions) |
Statements of Earnings Line Item |
2011 | 2010 | 2009 | ||||||||||
|
Foreign currency contracts |
Other income/expense, net | $ | 36.2 | $ | 23.7 | $ | (8.6 | ) | ||||||
|
Commodity contracts |
Other income/expense, net | (1.1 | ) | 0.0 | 0.0 | |||||||||
Fair Value of Financial Instruments
The carrying amounts of cash and equivalents, trade receivables, accounts payable, other short-term borrowings, and other accrued liabilities at June 30, 2011 and 2010 approximate their fair value due to their short-term maturities.
Cash balances are invested in accordance with our investment policy. These investments are exposed to market risk from interest rate fluctuations and credit risk from the underlying issuers, although this is mitigated through diversification.
The following table summarizes the estimated fair value of our long-term obligations and other short-term borrowings compared to the respective carrying amounts at June 30, 2011 and 2010:
| June 30, | ||||||||
|
(in millions) |
2011 | 2010 | ||||||
|
Long-term obligations and other short-term borrowings |
$ | 2,619.4 | $ | 2,310.4 | ||||
|
Carrying amount |
2,502.0 | 2,129.3 | ||||||
The fair value of our long-term obligations and other short-term borrowings is estimated based on either the quoted market prices for the same or similar issues or other inputs derived from available market information.
The following is a summary of the fair value gain/(loss) of our derivative instruments, based upon the estimated amount that we would receive (or pay) to terminate the contracts as of June 30, 2011 and 2010. The fair values are based on quoted market prices for the same or similar instruments.
| June 30, 2011 | June 30, 2010 | |||||||||||||||
|
(in millions) |
Notional Amount |
Fair Value Gain/(Loss) |
Notional Amount |
Fair Value Gain/(Loss) |
||||||||||||
|
Interest rate swaps |
$ | 1,256.0 | $ | 32.4 | $ | 1,006.0 | $ | 23.4 | ||||||||
|
Foreign currency contracts |
554.8 | (2.1 | ) | 618.3 | 2.8 | |||||||||||
|
Commodity contracts |
32.4 | 1.8 | 24.2 | 0.0 | ||||||||||||
See Note 13 for further information regarding fair value measurements.
|
|||
| 13. | FAIR VALUE MEASUREMENTS |
Fair value is defined as the price that would be received upon selling an asset or the price paid to transfer a liability on the measurement date. It focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are as follows:
|
Level 1 |
– | Observable prices in active markets for identical assets and liabilities. | ||
|
Level 2 |
– | Observable inputs other than quoted prices in active markets for identical assets and liabilities. | ||
|
Level 3 |
– | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. | ||
Recurring Fair Value Measurements
The following table presents the fair values for those assets and (liabilities) measured on a recurring basis as of June 30, 2011:
| Fair Value Measurements | ||||||||||||||||
|
(in millions) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Cash Equivalents (1) |
$ | 1,065.6 | $ | 0.0 | $ | 0.0 | $ | 1,065.6 | ||||||||
|
Forward Contracts (2) |
0.0 | 32.1 | 0.0 | 32.1 | ||||||||||||
|
Other Investments (3) |
79.7 | 0.0 | 0.0 | 79.7 | ||||||||||||
|
Contingent Consideration (4) |
0.0 | 0.0 | (75.4 | ) | (75.4 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,145.3 | $ | 32.1 | $ | (75.4 | ) | $ | 1,102.0 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The following table presents the fair values for those assets measured on a recurring basis as of June 30, 2010:
| Fair Value Measurements | ||||||||||||||||
|
(in millions) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|
Cash Equivalents (1) |
$ | 2,019.0 | $ | 0.0 | $ | 0.0 | $ | 2,019.0 | ||||||||
|
Investment in CareFusion (5) |
691.5 | 0.0 | 0.0 | 691.5 | ||||||||||||
|
Forward Contracts (2) |
0.0 | 26.2 | 0.0 | 26.2 | ||||||||||||
|
Other Investments (3) |
71.3 | 0.0 | 0.0 | 71.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 2,781.8 | $ | 26.2 | $ | 0.0 | $ | 2,808.0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | Cash equivalents are comprised of highly liquid investments purchased with a maturity of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities. |
| (2) | The fair value of foreign currency contracts, commodity contracts and interest rate swaps is determined based on the present value of expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Observable Level 2 inputs are used to determine the present value of expected future cash flows. See Note 12 for further information regarding the fair value of financial instruments. |
| (3) | The other investments balance includes investments in mutual funds, which are used to offset fluctuations in deferred compensation liabilities. These mutual funds are primarily comprised of large cap domestic and international equity securities. The fair value of these investments is determined using quoted market prices. |
| (4) | Contingent consideration represents the obligation incurred in connection with the acquisition of P4 Healthcare. The fair value of the contingent consideration obligation is determined based on a probability-weighted income approach derived from EBITDA estimates and probability assessments with respect to the likelihood of achieving the various EBITDA targets. The fair value measurement is based on significant inputs unobservable in the market and thus represents a Level 3 measurement. The $16.6 million decrease in the contingent consideration liability reflects a cash payment of $10.2 million for the first measurement period, and changes in our estimate of performance in future measurement periods. Failure to meet current expectations of progress could increase the probability of not achieving the targets within the measurement periods and result in a material reduction in the fair value of the contingent consideration obligation. See Note 2 for additional information regarding the contingent consideration obligation related to the P4 Healthcare acquisition. |
| (5) | The fair value of our investment in CareFusion common stock was determined using the quoted market price of the security. |
|
|||
| 16. | SEGMENT INFORMATION |
Our operations are principally managed on a products and services basis and are comprised of two reportable segments: Pharmaceutical and Medical. The factors for determining the reportable segments include the manner in which management evaluates our performance combined with the nature of the individual business activities. The results of the acquisitions of Kinray, Yong Yu and P4 Healthcare are included within our Pharmaceutical segment from the date of acquisition. See Note 2 for a description of these acquisitions.
The Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare and consumer products. It also operates nuclear pharmacies and cyclotron facilities that prepare and deliver radiopharmaceuticals for use in nuclear imaging and other procedures in hospitals and clinics. In addition, this segment provides third-party logistics support services to hospitals, clinics, and other providers; franchises retail pharmacies under the Medicine Shoppe® and Medicap® brands; and provides pharmacy services to hospitals and other healthcare facilities. This segment also distributes specialty pharmaceutical products and provides services to pharmaceutical manufacturers, third-party payors and healthcare service providers supporting the marketing, distribution and payment for specialty pharmaceutical products. This segment also provides pharmaceutical repackaging services; helps pharmaceutical manufacturers with services, including distribution, inventory management, data/reporting, new product launch support, and contract and chargeback administration; and maintains prime vendor relationships that streamline the purchasing process resulting in greater efficiency and lower costs for our customers. Through our Yong Yu business, this segment imports and distributes pharmaceuticals and healthcare products in China.
The Medical segment distributes a broad range of medical, surgical and laboratory products to hospitals, surgery centers, laboratories, physician offices and other healthcare providers. This segment also develops, manufactures and sources medical and surgical products. These products include sterile and non-sterile procedure kits; single-use surgical drapes, gowns and apparel; exam and surgical gloves; and fluid suction and collection systems. Our medical and surgical products are sold directly or through third-party distributors in the United States, Canada, Europe, South America, and the Asia/Pacific region.
The following table includes revenue for each reportable segment and reconciling items necessary to agree to amounts reported in the consolidated financial statements:
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Segment revenue: |
||||||||||||
|
Pharmaceutical (1) |
$ | 93,743.5 | $ | 89,789.9 | $ | 87,862.9 | ||||||
|
Medical (2) |
8,921.5 | 8,750.1 | 8,159.3 | |||||||||
|
|
|
|
|
|
|
|||||||
|
Total segment revenue |
102,665.0 | 98,540.0 | 96,022.2 | |||||||||
|
Corporate (3) |
(20.8 | ) | (37.2 | ) | (30.7 | ) | ||||||
|
|
|
|
|
|
|
|||||||
|
Total consolidated revenue |
$ | 102,644.2 | $ | 98,502.8 | $ | 95,991.5 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | The Pharmaceutical segment's revenue is primarily derived from the distribution of branded and generic pharmaceutical, over-the-counter healthcare, and consumer products. |
| (2) | The Medical segment's revenue is primarily derived from the manufacturing and distribution of medical, surgical and laboratory products and medical procedure kits. |
| (3) | Corporate revenue consists of the elimination of inter-segment revenue. |
We evaluate segment performance based upon segment profit, among other measures. Segment profit is segment revenue, less segment cost of products sold, less segment distribution, selling, general and administrative expense ("SG&A"). Segment SG&A expenses include equity share-based compensation expense as well as allocated corporate expenses for shared functions, including corporate management, corporate finance, financial shared services, human resources, information technology, legal and an integrated hospital sales organization. Corporate expenses are allocated to the segments based upon headcount, level of benefit provided and ratable allocation. Information about interest income and expense and income taxes is not provided at the segment level. In addition, restructuring and employee severance, acquisition-related costs, impairments and loss on sale of assets, litigation (recoveries)/charges, net, certain investment and other spending are not allocated to the segments. Investment spending generally includes the first year spend for certain projects that require incremental strategic investments in the form of additional operating expenses. We encourage our segments to identify investment projects that will promote innovation and provide future returns. As approval decisions for such projects are dependent upon executive management, the expenses for such projects are often retained at Corporate. Investment spending within Corporate was $13.8 million and $26.5 million for fiscal 2011 and 2010, respectively. See Notes 2, 3, 4 and 10, respectively, for further discussion of our acquisition-related costs, restructuring and employee severance, impairments and loss on sale of assets and litigation (recoveries)/charges, net. In addition, Spin-Off costs included in SG&A of $9.6 million and $10.8 million for fiscal 2011 and 2010, respectively, are not allocated to our segments. The accounting policies of the segments are the same as those described in Note 1.
The following table includes segment profit by reportable segment and reconciling items necessary to agree to amounts reported in the consolidated financial statements:
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Segment profit: |
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|
Pharmaceutical |
$ | 1,264.8 | $ | 1,001.8 | $ | 1,035.7 | ||||||
|
Medical |
369.9 | 427.7 | 384.9 | |||||||||
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|
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Total segment profit |
1,634.7 | 1,429.5 | 1,420.6 | |||||||||
|
Corporate |
(120.7 | ) | (122.6 | ) | (133.2 | ) | ||||||
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Total consolidated operating earnings |
$ | 1,514.0 | $ | 1,306.9 | $ | 1,287.4 | ||||||
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The following tables include depreciation and amortization expense and capital expenditures for fiscal 2011, 2010 and 2009 for each segment:
| Depreciation and Amortization Expense |
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| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Pharmaceutical |
$ | 106.3 | $ | 50.9 | $ | 50.6 | ||||||
|
Medical |
64.7 | 63.8 | 70.4 | |||||||||
|
Corporate |
142.3 | 139.7 | 104.8 | |||||||||
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|
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|
Total depreciation and amortization expense |
$ | 313.3 | $ | 254.4 | $ | 225.8 | ||||||
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|
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| Capital Expenditures | ||||||||||||
| Fiscal Year Ended June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Pharmaceutical |
$ | 55.0 | $ | 32.5 | $ | 105.3 | ||||||
|
Medical |
122.6 | 81.2 | 59.1 | |||||||||
|
Corporate |
113.7 | 146.6 | 256.8 | |||||||||
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|
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|
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Total capital expenditures |
$ | 291.3 | $ | 260.3 | $ | 421.2 | ||||||
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The following table includes total assets at June 30, 2011, 2010 and 2009 for each segment as well as reconciling items necessary to total the amounts reported in the consolidated financial statements:
| June 30, | ||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | |||||||||
|
Pharmaceutical |
$ | 16,125.9 | $ | 12,102.9 | $ | 12,638.9 | ||||||
|
Medical |
3,894.8 | 3,867.5 | 3,759.8 | |||||||||
|
Corporate |
2,825.2 | 4,019.8 | 8,720.1 | |||||||||
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|
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|
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|
Total consolidated assets |
$ | 22,845.9 | $ | 19,990.2 | $ | 25,118.8 | ||||||
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The following table presents revenue and net property and equipment by geographic area:
| Revenue | Property and Equipment, Net | |||||||||||||||||||||||
| For the Fiscal Year Ended June 30, | June 30, | |||||||||||||||||||||||
|
(in millions) |
2011 | 2010 | 2009 | 2011 | 2010 | 2009 | ||||||||||||||||||
|
United States |
$ | 101,080.2 | $ | 97,662.7 | $ | 95,248.2 | $ | 1,397.6 | $ | 1,355.0 | $ | 1,346.7 | ||||||||||||
|
International |
1,564.0 | 840.1 | 743.3 | 114.6 | 113.8 | 117.8 | ||||||||||||||||||
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|
|
|
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|
Total |
$ | 102,644.2 | $ | 98,502.8 | $ | 95,991.5 | $ | 1,512.2 | $ | 1,468.8 | $ | 1,464.5 | ||||||||||||
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| 18. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
The following is selected quarterly financial data for fiscal 2011 and 2010. The sum of the quarters may not equal year-to-date due to rounding.
|
(in millions, except per common share amounts) |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
||||||||||||
|
Fiscal 2011 |
||||||||||||||||
|
Revenue |
$ | 24,437.5 | $ | 25,371.8 | $ | 26,071.4 | $ | 26,763.5 | ||||||||
|
Gross margin |
962.2 | 994.2 | 1,162.2 | 1,043.4 | ||||||||||||
|
Distribution, selling, general and administrative expenses |
591.9 | 621.9 | 697.3 | 683.8 | ||||||||||||
|
Earnings from continuing operations |
294.4 | 215.0 | 249.5 | 207.3 | ||||||||||||
|
Earnings/(loss) from discontinued operations |
0.4 | 0.4 | (3.5 | ) | (4.6 | ) | ||||||||||
|
Net earnings |
294.8 | 215.4 | 246.0 | 202.7 | ||||||||||||
|
Earnings from continuing operations per Common Share: |
||||||||||||||||
|
Basic |
$ | 0.84 | $ | 0.62 | $ | 0.72 | $ | 0.59 | ||||||||
|
Diluted |
0.84 | 0.61 | 0.71 | 0.58 | ||||||||||||
|
(in millions, except per common share amounts) |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter (1) |
||||||||||||
|
Fiscal 2010 |
||||||||||||||||
|
Revenue |
$ | 24,780.7 | $ | 24,919.7 | $ | 24,342.8 | $ | 24,459.6 | ||||||||
|
Gross margin |
908.8 | 957.7 | 1,010.1 | 904.1 | ||||||||||||
|
Distribution, selling, general and administrative expenses |
586.1 | 605.2 | 628.6 | 588.2 | ||||||||||||
|
Earnings/(loss) from continuing operations |
(61.8 | ) | 230.2 | 224.8 | 193.8 | |||||||||||
|
Earnings/(loss) from discontinued operations |
23.6 | 4.3 | ||||||||||||||