Cardinal Health, Inc. has a market cap of $13.74 billion; its shares were traded at around $39.86 with a P/E ratio of 12.4 and P/S ratio of 0.1. The dividend yield of Cardinal Health, Inc. stocks is 2.4%. Cardinal Health, Inc. had an annual average earning growth of 0.2% over the past 10 years.
Highlight of Business Operations:Healthcare Fraud and Abuse LawsWe are subject to healthcare fraud and abuse laws. These laws generally prohibit companies from soliciting, offering, receiving or paying any compensation in order to induce someone to order or purchase items or services that are in any way paid for by Medicare, Medicaid or other United States government-sponsored healthcare programs. They also prohibit submitting or causing to be submitted any fraudulent claim for payment by the federal government. Violations of these laws may result in criminal or civil penalties, as well as claims under the federal False Claims Act and similar state acts under which private persons may file suit on behalf of the federal and state governments.Health and Personal Information PracticesServices and products provided by some of our businesses, including some provided by our nuclear and pharmacy services and specialty solutions divisions, involve access to patient-identifiable healthcare information. The Health Insurance Portability and Accountability Act of 1996, as augmented by the Health Information Technology for Economic and Clinical Health Act, as well as some state laws, regulate the use and disclosure of patient identifiable health information, including requiring specified privacy and security measures. Federal and state officials have increasingly focused on how patient-identifiable healthcare information should be handled, secured and disclosed. Some of our businesses collect and maintain other sensitive personal information that is subject to federal and state laws protecting such information. Security and disclosure of personal information is also highly regulated in many other countries in which we operate.Environmental, Health and Safety LawsIn the United States and other countries, we are subject to various federal, state and local environmental laws, as well as laws relating to safe working conditions, laboratory and manufacturing practices.Laws Relating to Foreign Trade and OperationsUnited States and international laws require us to abide by standards relating to the import and export of finished goods, raw materials and supplies and the handling of information. We also must comply with various export control and trade embargo laws, which may require licenses or other authorizations for transactions within some countries or with some counterparties.Similarly, we are subject to laws concerning the conduct of our foreign operations, including the United States Foreign Corrupt Practices Act and foreign anti-bribery laws. These laws generally prohibit companies and their intermediaries from offering, promising or making payments to officials of foreign governments for the purpose of obtaining or retaining business.Other InformationAlthough our agreements with manufacturers sometimes require us to maintain inventory levels within specified ranges, our distribution businesses are generally not required by our customers to maintain particular inventory levels other than as needed to meet service level requirements. Certain supply contracts with United States government entities require us to maintain sufficient inventory to meet emergency demands, but we do not believe those requirements materially affect inventory levels. Our customer return policies generally require that the product be physically returned, subject to restocking fees. We only allow customers to return products that can be added back to inventory and resold at full value, or that can be returned to vendors for credit. We offer market payment terms to our customers.Revenue and Long-Lived Assets by Geographic AreaSee Note 15 of the “Notes to Consolidated Financial Statements” for revenue and long-lived assets by geographic area.Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge on our website (www.cardinalhealth.com), under the “Investors—Financial information—SEC filings” caption, as soon as reasonably practicable after we electronically file them with, or furnish them to, the Securities and Exchange Commission (the “SEC”).You may read and copy any materials we file with the SEC at the SEC s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.Item 1A: Risk FactorsThe risks described below could materially and adversely affect our results of operations, financial condition, liquidity and cash flows. These are not the only risks we face. Our businesses also could be affected by risks that we are not presently aware of or that we currently consider immaterial to our operations.We could suffer the adverse effects of competitive pressures.As described in greater detail in "Item 1-Business" above, we operate in markets that are highly competitive. Because of competition, our businesses face continued pricing pressure from our customers and suppliers. If we are unable to offset margin reductions caused by these pricing pressures through steps such as effective sourcing and enhanced cost control measures, our results of operations and financial condition could be adversely affected.In addition, in recent years, the healthcare industry has continued to consolidate. Further consolidation among our customers and suppliers (including branded pharmaceutical manufacturers) could give the resulting enterprises greater bargaining power, which may adversely impact our results of operations.We have a few large customers that generate a significant amount of our revenue.Our sales and credit concentration is significant. CVS and Walgreens accounted for approximately 22 percent and 21 percent, respectively, of our fiscal 2012 revenue. The aggregate of our five largest customers, including CVS and Walgreens, accounted for approximately 59 percent of our fiscal 2012 revenue. In addition, Walgreens and CVS accounted for 25 percent and 19 percent,
respectively, of our gross trade receivable balance at June 30, 2012. Our contracts with CVS and Walgreens are scheduled to expire in June 2013 and August 2013, respectively. If CVS, Walgreens or one of our other large customers terminates or does not renew its contract, defaults in payment, or significantly reduces its purchases of our products, our results of operations and financial condition could be adversely affected. For example, in July 2012, Express Scripts, Inc. informed us that it had not awarded us the combined pharmaceutical distribution contract following its merger with Medco Health Solutions, Inc. Our contract with Express Scripts, Inc. expires on September 30, 2012 and provided approximately $9.0 billion of revenue in fiscal 2012, all of which was classified as bulk sales. The expiration of that contract will have an adverse effect on our results of operations and operating cash flow.Our Pharmaceutical segment's margin may be affected by fewer or less profitable generic pharmaceutical launches, prices established by manufacturers and other factors that are beyond our control.As described in greater detail in "Item 1-Business" above, margin in our Pharmaceutical segment consists, in part, of generic manufacturer margin and margin from branded pharmaceutical price appreciation.The number of new generic pharmaceutical launches varies from year to year, and the margin impact of new launches varies from product to product. Fewer generic pharmaceutical launches or launches that are less profitable than those previously experienced will have an adverse effect on our year-over-year margins. Additionally, prices for existing generic pharmaceuticals generally decline over time, although this may vary. Price deflation on existing generic pharmaceuticals will have an adverse effect on our margins.With respect to branded pharmaceutical price appreciation, if branded manufacturers increase prices less frequently or by amounts smaller than have been experienced historically, we will earn less margin on branded pharmaceuticals. The United States healthcare environment is changing in many ways, some of which may not be favorable to us, including changes resulting from federal healthcare legislation.The healthcare industry continues to undergo significant changes designed to increase access to medical care, improve safety and contain costs. Medicare and Medicaid reimbursement levels have declined; the use of managed care has increased; distributors, manufacturers, healthcare providers and pharmacy chains have consolidated; and large purchasing groups are prevalent. In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “Healthcare Reform Acts”) were enacted. Among other things, the Healthcare Reform Acts seek to expand health insurance coverage to over 30 million uninsured Americans. Many of the significant changes in the Healthcare Reform Acts do not take effect until 2014, including a requirement that most Americans carry health insurance. We expect expansion of access to health insurance to increase the demand for our products and services, but other provisions of the Healthcare Reform Acts could affect us adversely. The Healthcare Reform Acts contain many provisions designed to generate the revenues necessary to fund the coverage expansions, including, as discussed in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations” below, a tax to be paid by medical device manufacturers.In addition, the Healthcare Reform Acts have provisions designed to reduce costs of Medicare and Medicaid, including changing the federal upper payment limit for Medicaid reimbursement to no less than 175 percent of the average weighted manufacturer's price ("AMP") from 250 percent of the lowest AMP for generic pharmaceuticals. The Centers for Medicare and Medicaid Services is also considering providing states with alternatives to traditional reimbursement metrics.We could be adversely affected directly or indirectly (if our customers are adversely affected) by these and other changes in the delivery or pricing of, or reimbursement for, pharmaceuticals, medical devices or healthcare services.Our business is subject to rigorous regulatory and licensing requirements.The healthcare industry is highly regulated. As described in greater detail in "Item 1-Business" above, we are subject to regulation in the United States at both the federal and state level and in foreign countries. In addition, the United States federal and state governments are devoting greater resources to the enforcement of these laws. If we fail to comply with these regulatory requirements, or if allegations are made that we fail to comply, our results of operations and financial condition could be adversely affected.To lawfully operate our businesses, we are required to hold permits, licenses and other regulatory approvals from, and to comply with operating and security standards of, governmental bodies. Failure to maintain or renew necessary permits, licenses or approvals, or to comply with required standards, could have an adverse effect on our results of operations and financial condition. For example, see Note 9 of the "Notes to Consolidated Financial Statements" for a discussion of regulatory matters relating to our distribution of controlled substances.Products that we manufacture, source, distribute or market are required to comply with regulatory requirements. Noncompliance or concerns over noncompliance may result in suspension of our ability to distribute, import or manufacture products, product recalls or seizures, or criminal and civil sanctions.We are required to comply with laws relating to healthcare fraud and abuse. If we fail to comply with them, we could be subject to federal or state government investigations, or false claims act proceedings initiated by private parties, which could result in civil and criminal sanctions, including the loss of licenses or the ability to participate in Medicare, Medicaid and other federal and state healthcare programs. The requirements of these laws are complicated and subject to interpretation and may be applied by a regulator, prosecutor or judge in a manner that could negatively impact us or require us to change our operations.
Item 7: Management s Discussion and Analysis of Financial Condition and Results of OperationsThe discussion and analysis presented below refers to, and should be read in conjunction with, the consolidated financial statements and related notes included in this Form 10-K. Unless otherwise indicated, throughout this Management s Discussion and Analysis of Financial Condition and Results of Operations, we are referring to our continuing operations.OverviewWe are 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. We report our financial results in two segments: Pharmaceutical and Medical.During fiscal 2012, we achieved revenue of $107.6 billion and increased our operating earnings by 18 percent to $1.8 billion. Our growth in revenue was due to increased volume from existing customers ($2.4 billion) and acquisitions ($2.4 billion). The increase in operating earnings reflects strong performance in our Pharmaceutical segment generic programs, the positive impact of acquisitions, and a $71 million gain realized upon adjusting the contingent consideration obligation associated with the P4 Healthcare acquisition. Earnings from continuing operations were up 11 percent for the twelve months ended June 30, 2012 due to the factors discussed above.Our cash and equivalents balance was $2.3 billion as of June 30, 2012, compared to $1.9 billion as of June 30, 2011. The increase in cash and equivalents was primarily attributable to net cash provided by operating activities of $1.2 billion, partially offset by share repurchases of $450 million and cash dividends of $300 million. We plan to continue to execute a balanced deployment of available capital to position ourselves for sustainable competitive advantage and to enhance shareholder value. TrendsWithin our Pharmaceutical segment, we expect revenue to decrease in fiscal 2013. The factors contributing to this decrease include reduced revenue as a result of branded-to-generic pharmaceutical conversions and the expiration on September 30, 2012 of our pharmaceutical distribution contract with Express Scripts, Inc. Branded-to-generic pharmaceutical conversions impact our revenues because generic pharmaceuticals generally sell at a lower price than the corresponding branded product and because some of our customers source generic products directly from manufacturers rather than purchasing from us. Our contract with Express Scripts, Inc. was not renewed in connection with the combined pharmaceutical distribution contract that was not awarded to us following that company's merger with Medco Health Solutions, Inc. We recognized approximately $9.0 billion of revenue from sales to Express Scripts, Inc. in fiscal 2012, all of which was classified as bulk sales. In our Pharmaceutical segment, we also anticipate fewer significant new generic pharmaceutical product launches in fiscal 2013. However, the impact of these launches on our gross margin can vary depending on the timing, size and number of entrants.Within our Medical segment, variability in the cost of commodities such as oil-based resins, cotton, latex, diesel fuel and other commodities can have a significant impact on the cost of products sold. Although commodity prices fluctuate, we do not expect changes in commodity prices to have a significant impact on our year-over-year results of operations in fiscal 2013. The Healthcare Reform Acts include a tax to be paid by medical device manufacturers equal to 2.3 percent of the price for which manufacturers sell their products, which is scheduled to begin January 1, 2013. We manufacture and sell devices that, based on the currently proposed rules, will be subject to this tax. There have been proposals to repeal this tax and modify the proposed rules, which if adopted, may reduce the impact of this tax on us. AcquisitionsWe have completed several acquisitions since July 1, 2009, the largest of which were Kinray, P4 Healthcare and Cardinal Health China, each of which was completed in fiscal 2011. In this Management's Discussion and Analysis, we identify the contribution of an acquisition until the one-year anniversary of the acquisition. Using this definition, for fiscal 2012 and 2011, acquisitions contributed revenues of $2.4 billion and $2.9 billion, respectively, and operating earnings of $79 million and $61 million, respectively. See Note 2 of the “Notes to Consolidated Financial Statements” for more information on acquisitions.Spin-Off of CareFusionEffective August 31, 2009, we separated our clinical and medical products business through the distribution to our shareholders of 81 percent of the then outstanding common stock of CareFusion and retained the remaining 41 million shares of CareFusion common stock. During fiscal 2011 and 2010, we disposed of 30 million and 11 million shares of CareFusion common stock, respectively.We entered into a separation agreement with CareFusion on July 22, 2009 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.Under the transition services agreement, during fiscal 2012, 2011 and 2010, we recognized $3 million, $65 million and $99 million, respectively, in transition service fee income.
Fiscal 2012 Compared to Fiscal 2011 The fiscal 2012 effective tax rate was favorably impacted by a settlement of the fiscal 2001 and 2002 IRS audits ($40 million or 2.4 percentage points). The year-over-year comparison of the effective tax rate was unfavorably impacted by the release in fiscal 2011 of a previously established deferred tax valuation allowance.Fiscal 2011 Compared to Fiscal 2010 The effective tax rate was favorably impacted by $28 million, or 1.9 percentage points, attributable to recognizing no income tax expense on the sale of CareFusion stock due to the release of a previously established deferred tax valuation allowance. An unfavorable charge of $168 million, or 13.9 percentage points, attributable to earnings no longer indefinitely invested offshore in fiscal 2010 favorably impacted the year-over-year comparison of the effective tax rate.Ongoing AuditsDuring fiscal 2012, the IRS closed audits of fiscal 2001 and 2002, and is currently conducting audits of fiscal years 2003 through 2010. We have received proposed adjustments from the IRS for fiscal 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 has proposed additional taxes of $849 million, excluding penalties and interest. If this tax ultimately must be paid, CareFusion is liable under the tax matters agreement for $592 million of the total amount. We disagree with these proposed adjustments, which we are contesting, and have accounted for the unrecognized tax benefits related to them. Earnings/(Loss) from Discontinued OperationsCareFusion operating results are included within earnings from discontinued operations for all periods through the date of the Spin-Off, and had a significant impact on earnings from discontinued operations for fiscal 2010. See Note 5 in the “Notes to Consolidated Financial Statements” for additional information on discontinued operations. Liquidity and Capital ResourcesWe currently believe that, based upon available capital resources (cash on hand), projected operating cash flow, and access to committed credit facilities, we have adequate capital resources to fund working capital needs; currently anticipated capital expenditures, business growth and expansion; contractual obligations; payments for tax settlements; and current and projected debt service requirements, dividends and share repurchases. During fiscal 2012, we completed several small acquisitions with cash on hand. If we decide to engage in one or more additional acquisitions, depending on the size and timing of such transactions, we may need supplemental funding.Cash and EquivalentsOur cash and equivalents balance was $2.3 billion at June 30, 2012, compared to $1.9 billion at June 30, 2011. At June 30, 2012, our cash and cash equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. The increase in cash and equivalents during fiscal 2012 was primarily attributable to net cash provided by operating activities of $1.2 billion and net proceeds of $290 million from the sale and repayment of notes. During fiscal 2012, we deployed $450 million of cash on share repurchases, $300 million on dividends, $263 million on capital expenditures, and $174 million on acquisitions.During fiscal 2011, we deployed $2.3 billion of cash on acquisitions, $291 million on capital expenditures, $274 million on dividends and $270 million on share repurchases. During fiscal 2011, we received $706 million in proceeds from the sale of our remaining investment in CareFusion common stock.During fiscal 2010, we deployed $350 million of cash to repay floating rate notes at maturity, $260 million on capital expenditures, $253 million on dividends and $230 million on share repurchases. During fiscal 2010, we completed a $1.1 billion debt tender using a portion of the $1.4 billion of cash distributed to us from CareFusion in connection with the Spin-Off. We also received $271 million in proceeds from the sale of our investment in CareFusion common stock and $154 million from divestitures.
Ownership of CareFusion Common StockDuring fiscal 2011 and 2010, we disposed of 30 million and 11 million shares of CareFusion common stock for cash proceeds of $706 million and $271 million, respectively. We have no remaining ownership in CareFusion.Credit Facilities and Commercial PaperOur sources of liquidity include a $1.5 billion revolving credit facility and a $950 million committed receivables sales facility program. At times, availability under our committed receivables sales facility program may be less than $950 million based on receivables concentration limits and our outstanding eligible receivables balance. Our revolving credit facility expires in May 2016 and our committed receivables sales facility program expires in November 2012. We also have a commercial paper program of up to $1.5 billion, backed by the revolving credit facility. We had no outstanding borrowings from the commercial paper program and no outstanding balance under the committed receivables sales facility program at June 30, 2012 and 2011. We also had no outstanding balance under the revolving credit facility at June 30, 2012 and 2011, except for $44 million of standby letters of credit in each fiscal year. Our revolving credit and committed receivables sales facility programs 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, 2012, we were in compliance with these financial covenants.Held-to-Maturity InvestmentsWe held high quality investment grade held-to-maturity fixed income debt securities with an amortized cost basis of $72 million and $142 million as of June 30, 2012 and 2011, respectively. These investments vary in maturity date, ranging from one to six months, and pay interest semi-annually.Long-Term ObligationsAs of June 30, 2012, we had total long-term obligations of $2.9 billion compared to $2.5 billion at June 30, 2011. In May 2012, we sold $250 million aggregate principal amount of fixed rate notes due 2017 with interest at 1.900% per year (“1.900% Notes”) in a registered offering. The 1.900% Notes mature on June 15, 2017. In May 2012, we also sold $250 million aggregate principal amount of fixed rate notes due 2022 with interest at 3.200% per year (“3.200% Notes”) in a registered offering. The 3.200% Notes mature on June 15, 2022. These 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 to repay $206 million of our 5.65% Notes due June 15, 2012. The remaining net proceeds will be used for general corporate purposes, which may include repayment of other indebtedness, including $300 million aggregate principal of our 5.50% Notes due June 15, 2013.
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