CareFusion Reports Third Quarter Fiscal 2014 Results

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

Quarters Ended
March 31,

Nine Months Ended
March 31, 

(in millions, except per share amounts)

2014

2013

2014

2013

Revenue

$

968

$

901

$

2,720

$

2,647

Cost of Products Sold

496

425

1,359

1,264

Gross Profit

472

476

1,361

1,383

Selling, General and Administrative Expenses

258

244

763

737

Research and Development Expenses

47

47

142

142

Restructuring and Acquisition Integration Charges

9

9

30

14

Reserve for Expected Government Settlement

—

41

—

41

Share of Net (Earnings) Loss of Equity Method Investee

(1)

—

(1)

—

Operating Income

159

135

427

449

Interest Expense and Other, Net

27

17

68

55

Income Before Income Tax

132

118

359

394

Provision for Income Tax

30

34

82

115

Income from Continuing Operations

102

84

277

279

Loss from Discontinued Operations, Net of Tax

—

—

—

(3)

Net Income

$

102

$

84

$

277

$

276

Per Share Amounts:¹

Basic Earnings (Loss) per Common Share:

Continuing Operations

$

0.49

$

0.38

$

1.31

$

1.25

Discontinued Operations

$

—

$

—

$

—

$

(0.01)

Basic Earnings per Common Share

$

0.49

$

0.38

$

1.31

$

1.24

Diluted Earnings (Loss) per Common Share:

Continuing Operations

$

0.48

$

0.37

$

1.29

$

1.24

Discontinued Operations

$

—

$

—

$

—

$

(0.01)

Diluted Earnings per Common Share

$

0.48

$

0.37

$

1.29

$

1.23

Weighted-Average Number of Common Shares Outstanding:

Basic

208.0

222.5

210.8

222.4

Diluted

211.1

225.6

214.0

225.0

Gross Profit

$

479

$

476

$

1,371

$

1,383

Gross Margin³

49.5

%

52.8

%

50.4

%

52.2

%

Operating Expenses

$

284

$

275

$

853

$

833

Operating Income

$

196

$

201

$

519

$

550

Operating Margin³

20.2

%

22.3

%

19.1

%

20.8

%

Income from Continuing Operations

$

127

$

134

$

339

$

354

Diluted EPS from Continuing Operations

$

0.60

$

0.59

$

1.58

$

1.57

24.9

%

27.1

%

24.8

%

28.9

¹ Earnings per share calculations are performed separately for each component presented.  Therefore, the sum of the per share components from the table may not equal the per share amounts presented.

² Adjusted financial measures are non-GAAP measures that exclude amortization of acquired intangibles, as well as certain nonrecurring items, as discussed above under Use of Non-GAAP Financial Measures.  Commencing with the quarter ended December 31, 2013, the company began excluding from its adjusted results inventory valuation step-up charges from acquisitions. For the quarter and nine months ended March 31, 2013, adjusted financial measures also exclude $41 million related to the reserve for the expected government settlement, which we paid in January 2014. Financial information for historical periods has not been revised to reflect the exclusion of such inventory step-up charges, as the amounts were immaterial.  Additional information regarding inventory valuation step-up charges from acquisitions and a reconciliation of the adjusted financial measures to comparable GAAP measures can be found in the Reconciliation of Non-GAAP Financial Measures included in the pages that follow. 

³ Adjusted gross margin and adjusted operating margin reflect adjusted gross profit and adjusted operating income, in each case divided by revenue.  The Reconciliation of Non-GAAP Financial Measures included in the pages that follow present a reconciliation of adjusted gross profit and adjusted operating income from which adjusted gross margin and adjusted operating margin are derived.

CAREFUSION CORPORATION

SEGMENT AND SELECT BUSINESS LINE REVENUES

(UNAUDITED)

Quarters Ended
March 31,

Percent

Nine Months Ended
March 31,

Percent

(in millions)

2014

2013

Change

2014

2013

Change

Medical Systems

Dispensing Technologies

$

233

$

234

—%

$

680

$

738

(8)%

Infusion Systems

238

246

(3)%

704

678

4%

Respiratory Technologies

94

97

(3)%

278

300

(7)%

Other

6

7

(14)%

20

21

(5)%

Total Medical Systems

$

571

$

584

(2)%

$

1,682

$

1,737

(3)%

Procedural Solutions

Infection Prevention

$

168

$

150

12%

$

485

$

446

9%

Medical Specialties

91

88

3%

269

254

6%

Specialty Disposables

138

79

75%

284

210

35%

Total Procedural Solutions

$

397

$

317

25%

$

1,038

$

910

14%

Total CareFusion

$

968

$

901

7%

$

2,720

$

2,647

3%

CAREFUSION CORPORATION

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

Adjusted Financial Data:

Segment Profit

(in millions, except per share amounts)

Medical

Systems

Procedural

Solutions

Gross Profit

SG&A

Expenses

Operating
Expenses⁵

Operating
Income⁶

Income from Continuing Operations⁷

Diluted

EPS from

Continuing

Operations⁸

Quarter Ended March 31, 2014

GAAP

$

104

$

55

$

472

$

258

$

314

$

159

$

102

$

0.48

Restructuring and Acquisition Integration¹

4

5

—

—

(9)

9

7

0.03

Amortization of Acquired Intangibles²

10

11

—

(21)

(21)

21

14

0.07

Step-up of Acquired Inventory³

—

7

7

—

—

7

4

0.02

Adjusted

$

118

$

78

$

479

$

237

$

284

$

196

$

127

$

0.60

Nine Months Ended March 31, 2014

GAAP

$

287

$

140

$

1,361

$

763

$

935

$

427

$

277

$

1.29

Restructuring and Acquisition Integration¹

17

13

—

—

(30)

30

22

0.10

Amortization of Acquired Intangibles²

28

24

—

(52)

(52)

52

34

0.16

Step-up of Acquired Inventory³

—

10

10

—

—

10

6

0.03

Adjusted

$

332

$

187

$

1,371

$

711

$

853

$

519

$

339

$

1.58

Quarter Ended March 31, 2013

GAAP

$

122

$

54

$

476

$

244

$

341

$

135

$

84

$

0.37

Restructuring and Acquisition Integration¹

7

2

—

—

(9)

9

6

0.03

Amortization of Acquired Intangibles²

10

6

—

(16)

(16)

16

11

0.05

Reserve for Expected Government Settlement⁴

—

—

—

—

(41)

41

33

0.15

Adjusted

$

139

$

62

$

476

$

228

$

275

$

201

$

134

$

0.59

Nine Months Ended March 31, 2013

GAAP

$

347

$

143

$

1,383

$

737

$

934

$

449

$

279

$

1.24

Restructuring and Acquisition Integration¹

10

4

—

—

(14)

14

11

0.05

Amortization of Acquired Intangibles²

28

18

—

(46)

(46)

46

31

0.14

Reserve for Expected Government Settlement⁴

—

—

—

—

(41)

41

33

0.15

Adjusted

$

385

$

165

$

1,383

$

691

$

833

$

550

$

354

$

1.57

¹ Restructuring and acquisition integration charges primarily relate to nonrecurring expenses associated with rationalizing headcount and aligning operations.

² Amortization of acquired intangibles relate to the non-cash expenses associated with amortization of identifiable intangible assets of acquired businesses.

³ Step-up of acquired inventory relates to the non-cash expenses associated with inventory valuation step-up charges from acquisitions. In connection with acquisition transactions, the company acquires inventory that is recorded at fair value at the time of the acquisition. As the fair value of acquired finished goods inventory is recorded at the anticipated customer sales price less cost to sell, which is generally higher than the historical carrying value, the company must record a charge equal to the difference between the fair value and historical carrying value as the underlying product is sold.  The company began excluding from its adjusted results inventory valuation step-up charges from acquisitions during the quarter ended December 31, 2013, as the company does not believe such non-cash charges are reflective of ongoing operating results.  Financial information for historical periods has not been revised to reflect the exclusion of such inventory step-up charges, as the amounts were immaterial.  

⁴ Reserve for expected government settlement relates to the $41 million charge recorded in connection with the agreement in principle publicly disclosed on April 25, 2013, related to prior sales and marketing practices for its ChloraPrep® skin preparation product and its relationships with healthcare professionals. In January 2014, we entered into a final settlement agreement with the government, and we paid the settlement. These amounts have not been allocated to segment results.

⁵ Operating expenses consist of selling, general and administrative, research and development, restructuring and acquisition integration expenses, and the reserve for expected government settlement.

⁶ Operating income includes CareFusion's share of net earnings/loss from equity method investee.

⁷ Income from continuing operations is presented net of tax effect. Additional information about nonrecurring tax items related to nonrecurring expenses and the impact on the effective tax rate is included in the Reconciliation of the Adjusted Effective Tax Rate on the following page.

⁸ Earnings per share calculations are performed separately for each component presented.  Therefore, the sum of the per share components from the table may not equal the per share amounts presented.

CAREFUSION CORPORATION

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

Adjusted Effective Tax Rate:

(in millions)

GAAP

Nonrecurring Items^{1, 2}

Inventory
Step-Up³

Amortization of Acquired Intangibles⁴

Adjusted⁵

Quarter Ended March 31, 2014

Income Before Income Tax

$

132

$

9

$

7

$

21

$

169

Provision for Income Tax

$

30

$

2

$

3

$

7

$

42

Effective Tax Rate⁶

23.0

%

18.1

%

34.9

%

34.2

%

24.9

%

Nine Months Ended March 31, 2014

Income Before Income Tax

$

359

$

30

$

10

$

52

$

451

Provision for Income Tax

$

82

$

8

$

4

$

18

$

112

Effective Tax Rate⁶

22.9

%

28.5

%

34.9

%

34.2

%

24.8

%

Quarter Ended March 31, 2013

Income Before Income Tax

$

118

$

50

$

—

$

16

$

184

Provision for Income Tax

$

34

$

11

$

—

$

5

$

50

Effective Tax Rate⁶

28.6

%

21.6

%

—

%

34.2

%

27.1

%

Nine Months Ended March 31, 2013

Income Before Income Tax

$

394

$

55

$

—

$

46

$

495

Provision for Income Tax

$

115

$

11

$

—

$

15

$

141

Effective Tax Rate⁶

29.2

%

21.3

%

—

%

34.2

%

28.9

%

Adjusted EPS Outlook for Fiscal Year Ending June 30, 2014:

GAAP Diluted Earnings per Common Share from Continuing Operations

$1.91 - $2.01

Estimated charges for nonrecurring items related to restructuring and acquisition integration, net of tax (mid-point of an estimated range of $0.11 to $0.15 per diluted share)

$0.13

Estimated charges for inventory step-up from acquisitions

0.03

Estimated acquisition-related intangible amortization, net of tax

0.23

Adjusted Diluted Earnings per Common Share from Continuing Operations

¹ Reflects nonrecurring charges primarily related to nonrecurring restructuring and acquisition integration charges, and nonrecurring income tax items.  For the quarter and nine months ended March 31, 2013, nonrecurring items also include amounts related to the reserve for expected government settlement.

² Reserve for expected government settlement relates to the $41 million charge recorded in connection with the agreement in principle publicly disclosed on April 25, 2013, related to prior sales and marketing practices for its ChloraPrep^® skin preparation product and its relationships with healthcare professionals. In January 2014, we entered into a final settlement agreement with the government, and we paid the settlement.

³ Step-up of acquired inventory relates to the non-cash expenses associated with inventory step-up charges from acquisitions. The company began excluding inventory valuation step-up charges from acquisitions during the quarter ended December 31, 2013. Financial information for historical periods has not been revised to reflect the exclusion of such inventory step-up charges, as the amounts were immaterial.  

⁴ Amortization of acquired intangibles relate to the non-cash expenses associated with amortization of identifiable intangible assets of acquired businesses.

⁵ Adjusted financial information reflects GAAP results adjusted on a non-GAAP basis to exclude nonrecurring items, amortization of acquired intangibles, inventory valuation step-up charges, and nonrecurring income tax items noted above.

⁶ Effective tax rate calculations are performed based on whole dollar amounts, and therefore may not equal the calculations based on amounts rounded in millions presented in the table above.

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in millions, except per share data)

March 31,

2014

June 30,
2013

ASSETS

Current Assets:

Cash and Cash Equivalents

$

1,269

$

1,798

Trade Receivables, Net

454

429

Current Portion of Net Investment in Sales-Type Leases

300

351

Inventories, Net

460

384

Prepaid Expenses

33

30

Other Current Assets

223

141

2,739

3,133

Property and Equipment, Net

442

409

Net Investment in Sales-Type Leases, Less Current Portion

981

1,001

Goodwill

3,307

3,081

Intangible Assets, Net

1,043

793

Investments in Unconsolidated Entities

95

—

Other Assets

56

136

$

8,663

$

8,553

LIABILITIES AND EQUITY

Current Liabilities:

Current Portion of Long-Term Obligations and Other Short-Term Borrowings

$

457

$

2

Accounts Payable

199

147

Deferred Revenue

69

51

Accrued Compensation and Benefits

146

150

Other Accrued Liabilities

203

242

Total Current Liabilities

1,074

592

Long-Term Obligations, Less Current Portion

999

1,444

Deferred Income Taxes

728

638

Other Liabilities

461

493

3,262

3,167

Commitments and Contingencies

Stockholders' Equity:

Preferred Stock (50.0 Authorized Shares; $.01 Par Value) Issued – None

—

—

Common Stock (1,200.0 Authorized Shares; $.01 Par Value) Issued – 233.7 and 229.4 shares at March 31, 2014 and June 30, 2013, respectively

2

2

Treasury Stock, at cost, 26.1 and 15.5 shares at March 31, 2014 and June 30, 2013, respectively

(915)

(505)

Additional Paid-In Capital

5,015

4,886

Retained Earnings

1,325

1,048

Accumulated Other Comprehensive Loss

(26)

(45)

Total Stockholders' Equity

5,401

5,386

$

8,663

$

8,553

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended
March 31,

(in millions)

2014

Cash and Cash Equivalents at July 1, Attributable to Continuing Operations

$

1,798

$

1,648

Cash and Cash Equivalents at July 1, Attributable to Discontinued Operations

$

—

$

Cash Flows from Operating Activities:

Net Income

277

276

Loss from Discontinued Operations

—

(3)

Income from Continuing Operations

277

279

Adjustments to Reconcile Income from Continuing Operations to Net Cash Provided by Operating Activities:

Depreciation and Amortization

146

137

Other Non-Cash Items

47

63

Change in Operating Assets and Liabilities, Excluding Impact of Acquired Assets and Assumed Liabilities:

Trade Receivables

4

6

Inventories

(32)

(6)

Net Investment in Sales-Type Leases

70

8

Accounts Payable

38

4

Other Accrued Liabilities and Operating Items, Net

(95)

(66)

Net Cash Provided by Operating Activities – Continuing Operations

455

425

Net Cash Provided by Operating Activities – Discontinued Operations

—

1

Net Cash Provided by Operating Activities

455

426

Cash Flows from Investing Activities:

Cash Paid for Acquisitions, Net of Cash Received

(517)

(66)

Cash Paid for Investments in Unconsolidated Entities

(94)

—

Additions to Property and Equipment

(61)

(63)

Other Investing Activities

(2)

(14)

Net Cash Used in Investing Activities – Continuing Operations

(674)

(143)

Net Cash Used in Investing Activities

(674)

(143)

Cash Flows from Financing Activities:

Repayment of Long-Term Obligations

(2)

(251)

Share Repurchase Programs

(407)

(108)

Proceeds from Issuance of Debt, Net

(1)

298

Proceeds from Stock Option Exercises

93

43

Other Financing Activities

(7)

(13)

Net Cash Used in Financing Activities – Continuing Operations

(324)

(31)

Net Cash Used in Financing Activities

(324)

(31)

Effect of Exchange Rate Changes on Cash

14

6

Net (Decrease) Increase in Cash and Cash Equivalents – Continuing Operations

(529)

257

Net Increase in Cash and Cash Equivalents – Discontinued Operations

—

1

Net (Decrease) Increase in Cash and Cash Equivalents

(529)

258

Cash and Cash Equivalents at March 31, Attributable to Continuing Operations

$

1,269

$

1,905

Cash and Cash Equivalents at March 31, Attributable to Discontinued Operations

$

—

$

—

Non-Cash Investing and Financing Activities:

Asset Acquired by Entering into Capital Lease

$

4

$

—

Share Repurchase Programs

$

3

$

4