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10-Q 1 d458665d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34273

LOGO

CareFusion Corporation

(Exact name of Registrant as specified in its charter)

Delaware

26-4123274

(State or other jurisdiction of

incorporation or organization)

(I.R.S Employer

Identification No.)

3750 Torrey View Court

San Diego, CA 92130

Telephone: (858) 617-2000

(Address of principal executive offices, zip code and Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of outstanding shares of the registrant’s common stock, as of January 18, 2013 was 222,590,735.

TABLE OF CONTENTS


IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS			3

PART I – FINANCIAL INFORMATION			4

ITEM 1. FINANCIAL STATEMENTS			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			34
ITEM 4. CONTROLS AND PROCEDURES			37

PART II – OTHER INFORMATION			38

ITEM 1. LEGAL PROCEEDINGS			38
ITEM 1A. RISK FACTORS			38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			38
ITEM 6. EXHIBITS			39

Important Information Regarding Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations and projections regarding our business strategies, market potential, future financial performance, industry and other matters. This includes, in particular, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in “Item 1A—Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the Securities and Exchange Commission on January 31, 2013. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Quarters Ended December 31,				Six Months Ended December 31,
(in millions, except per share amounts)	2012		2011		2012			2011

Revenue	$	909	$	890	$	1,746		$	1,718
Cost of Products Sold		438		443		839			848

Gross Margin		471		447		907			870

Selling, General and Administrative Expenses		249		261		493			525
Research and Development Expenses		48		36		95			73
Restructuring and Acquisition Integration Charges		3		7		5			14

Operating Income		171		143		314			258

Interest Expense and Other, Net		19		17		38			42

Income Before Income Tax		152		126		276			216
Provision for Income Tax		44		32		81			50

Income from Continuing Operations		108		94		195			166
Income (Loss) from Discontinued Operations, Net of Tax		—		1		(3	)		(1	)


Net Income	$	108	$	95	$	192		$	165


PER SHARE AMOUNTS:

Basic Earnings (Loss) per Common Share:
Continuing Operations	$	0.49	$	0.42	$	0.88		$	0.74
Discontinued Operations	$	—	$	—	$	(0.01	)	$	—
Basic Earnings per Common Share	$	0.49	$	0.42	$	0.87		$	0.74

Diluted Earnings (Loss) per Common Share:
Continuing Operations	$	0.48	$	0.41	$	0.87		$	0.73
Discontinued Operations	$	—	$	—	$	(0.01	)	$	—
Diluted Earnings per Common Share	$	0.48	$	0.42	$	0.86		$	0.73

Weighted-Average Number of Common Shares Outstanding:
Basic		222.6		224.7		222.3			224.3
Diluted		224.9		226.6		224.7			226.5

See accompanying notes to unaudited condensed consolidated financial statements

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Quarters Ended December 31,					Six Months Ended December 31,
(in millions)	2012		2011			2012		2011
Net Income	$	108	$	95		$	192	$	165


Other Comprehensive Income, Net of Tax:
Foreign Currency Translation Adjustments (net of tax expense of $0 million and $2 million for the three and six months, respectively, ended December 31, 2012 and tax benefit of $0 million and $3 million for the three and six months, respectively, ended December 31, 2011)		3		(18	)		25		(45	)
Unrealized Gain/(Loss) on Derivatives (net of tax expense of $0 million and $1 million for the three and six months, respectively, ended December 31, 2012 and tax benefit of $1 million and $2 million for the three and six months, respectively, ended December 31, 2011)		1		(1	)		2		(3	)
Unrealized Gain/(Loss) on Interest Rate Swaps (net of tax expense of $3 million and $2 million for the three and six months, respectively, ended December 31, 2012 and no tax effect for each of the three and six months ended December 31, 2011)		5		(3	)		3		(3	)

		9		(22	)		30		(51	)

Comprehensive Income, Net of Tax	$	117	$	73		$	222	$	114

See accompanying notes to unaudited condensed consolidated financial statements

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


(in millions, except per share data)	December 31, 2012			June 30, 2012
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,558		$	1,648
Trade Receivables, Net		440			441
Current Portion of Net Investment in Sales-Type Leases		376			374
Inventories, Net		401			390
Prepaid Expenses		30			25
Other Current Assets		208			167
Current Assets of Discontinued Operations		—			73

Total Current Assets		3,013			3,118


Property and Equipment, Net		423			431
Net Investment in Sales-Type Leases, Less Current Portion		989			978
Goodwill		3,081			3,039
Intangible Assets, Net		811			831
Other Assets		95			91

Total Assets	$	8,412		$	8,488


LIABILITIES AND EQUITY
Current Liabilities:
Current Portion of Long-Term Obligations and Other Short-Term Borrowings	$	2		$	251
Accounts Payable		179			176
Deferred Revenue		85			62
Accrued Compensation and Benefits		122			139
Other Accrued Liabilities		207			286
Current Liabilities of Discontinued Operations		—			19

Total Current Liabilities		595			933


Long-Term Obligations, Less Current Portion		1,151			1,151
Deferred Income Taxes		647			644
Other Liabilities		546			529

Total Liabilities		2,939			3,257


Commitments and Contingencies

Stockholders’ Equity:
Preferred Stock (50.0 Authorized Shares; $0.01 Par Value) Issued and Outstanding – None		—			—
Common Stock (1,200.0 Authorized Shares; $0.01 Par Value) Issued and Outstanding – 222.6 and 221.4 shares at December 31, 2012 and June 30, 2012, respectively		2			2
Treasury Stock, at cost, 4.1 shares at December 31, 2012 and June 30, 2012, respectively		(105	)		(105	)
Additional Paid-In Capital		4,779			4,759
Retained Earnings		855			663
Accumulated Other Comprehensive Loss		(58	)		(88	)

Total Stockholders’ Equity		5,473			5,231

Total Liabilities and Stockholders’ Equity	$	8,412		$	8,488

See accompanying notes to unaudited condensed consolidated financial statements

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended December 31,
(in millions)	2012			2011

Cash and Cash Equivalents at July 1, Attributable to Continuing Operations	$	1,648		$	1,370

Cash and Cash Equivalents at July 1, Attributable to Discontinued Operations	$	(1	)	$	1


Cash Flows from Operating Activities:
Net Income		192			165
Loss from Discontinued Operations		(3	)		(1	)

Income from Continuing Operations		195			166

Adjustments to Reconcile Income from Continuing Operations to Net Cash Provided by Operating Activities:
Depreciation and Amortization		91			98
Other Non-Cash Items		47			44
Change in Operating Assets and Liabilities:
Trade Receivables		3			33
Inventories		(9	)		(52	)
Net Investment in Sales-Type Leases		(13	)		(2	)
Accounts Payable		—			(41	)
Other Accrued Liabilities and Operating Items, Net		(57	)		(57	)

Net Cash Provided by Operating Activities – Continuing Operations		257			189
Net Cash Provided by Operating Activities – Discontinued Operations		1			2

Net Cash Provided by Operating Activities		258			191


Cash Flows from Investing Activities:
Cash Paid for Acquisition, Net of Cash Received		(62	)		(130	)
Other Investing Activities		(41	)		(48	)

Net Cash Used in Investing Activities – Continuing Operations		(103	)		(178	)

Net Cash Used in Investing Activities		(103	)		(178	)


Cash Flows from Financing Activities:
Reduction of Long-Term Obligations		(250	)		(1	)
Other Financing Activities		(9	)		(11	)

Net Cash Used in Financing Activities – Continuing Operations		(259	)		(12	)
Net Cash Used in Financing Activities – Discontinued Operations		—			(4	)

Net Cash Used in Financing Activities		(259	)		(16	)


Effect of Exchange Rate Changes on Cash – Continuing Operations		15			(23	)
Effect of Exchange Rate Changes on Cash – Discontinued Operations		—			2

Net Effect of Exchange Rate Changes on Cash		15			(21	)

Net Decrease in Cash and Cash Equivalents – Continuing Operations		(90	)		(24	)
Net Increase in Cash and Cash Equivalents – Discontinued Operations		1			—

Net Decrease in Cash and Cash Equivalents		(89	)		(24	)

Cash and Cash Equivalents at December 31, Attributable to Continuing Operations	$	1,558		$	1,346

Cash and Cash Equivalents at December 31, Attributable to Discontinued Operations	$	—		$	1

See accompanying notes to unaudited condensed consolidated financial statements

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

Basis of Presentation. References in these notes to the unaudited condensed consolidated financial statements to “CareFusion Corporation,” “CareFusion,” “we,” “us,” “our,” “the company” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in the notes to the unaudited condensed consolidated financial statements to “Cardinal Health” refer to Cardinal Health, Inc., an Ohio corporation, and its consolidated subsidiaries.

We were incorporated in Delaware on January 14, 2009 for the purpose of holding the clinical and medical products businesses of Cardinal Health in anticipation of spinning off from Cardinal Health. We completed the spinoff from Cardinal Health on August 31, 2009. In connection with the spinoff, Cardinal Health contributed the majority of the businesses comprising its clinical and medical products segment to us (“the contribution”) and distributed approximately 81% of our outstanding common stock, or approximately 179.8 million shares, to its shareholders (“the distribution”). Cardinal Health retained approximately 19% of our outstanding common stock, or approximately 41.4 million shares, in connection with the spinoff. As of September 15, 2010, Cardinal Health had sold all remaining shares of our common stock retained in connection with the spinoff.

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at June 30, 2012 has been derived from the audited consolidated and combined financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated and combined financial statements for our fiscal year ended June 30, 2012, filed with the SEC with our Annual Report on Form 10-K on January 31, 2013 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

We have evaluated subsequent events for recognition or disclosure through the date these financial statements were issued.

Reorganization of Segment Information. Leading up to our spinoff from Cardinal Health, we organized our businesses into two reportable segments: Critical Care Technologies and Medical Technologies and Services. During the quarter ended September 30, 2011, we realigned our businesses into two new global operating segments and reporting segments, Medical Systems and Procedural Solutions, in order to reduce complexity, provide clearer governance for our investments and make it easier for our customers to do business with us. Additionally, during the quarter ended September 30, 2012, we combined our respiratory diagnostics product line with our Respiratory Technologies business unit within our Medical Systems segment. Our respiratory diagnostics product line had previously been reported within our Procedural Solutions segment as “Other.” Financial information for all periods presented have been reclassified to reflect these changes to our operating and reporting segments.

The Medical Systems segment is organized around our medical equipment businesses. Within the Medical Systems segment, we operate our Dispensing Technologies, Infusion Systems and Respiratory Technologies business units. The Dispensing Technologies business unit includes equipment and related services for medication and supply dispensing. The Infusion Systems business unit includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business unit includes respiratory ventilators and dedicated disposable ventilator circuits and accessories, as well as our respiratory diagnostics product line. We also include our data mining surveillance service business within the Medical Systems segment, which we report as “Other.”

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business unit includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business unit includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy.

New Accounting Pronouncements (Adopted during Fiscal Year 2013)

ASU 2011-05 & ASU 2011-12, In June 2011, The Financial Accounting Standards Board (“FASB”) issued ASU 2011-05 – Presentation of Comprehensive Income (“ASU 2011-05”), and in December 2011 issued ASU 2011-12 – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-05 amends existing guidance around comprehensive income and aligns Other Comprehensive Income (“OCI”) disclosure requirements between GAAP and International Financial Reporting Standards. Previously, components of OCI could be presented as part of the statement of changes in stockholders’ equity; ASU 2011-05 requires entities to report these in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format used in existing GAAP, and the second statement would include components of OCI. ASU 2011-05 does not change the items that must be reported within OCI. ASU 2011-12 indefinitely defers portions of the new presentation requirements of ASU 2011-05 around reclassifications of items out of accumulated OCI. During the deferral period, entities will still need to comply with the existing requirements of GAAP for the presentation of reclassification adjustments. We adopted the provisions of ASU 2011-05 and ASU 2011-12 during the quarter ended September 30, 2012. The adoptions of ASU 2011-05 and ASU 2011-12 had no material impact on our financial condition, results of operations or cash flows.

NOTE 2. DISCONTINUED OPERATIONS

Nicolet Business

During the quarter ended March 31, 2012, we committed to a plan to sell our Nicolet neurodiagnostic and monitoring products business, resulting in held for sale classification of the underlying assets. As a result, the assets of the Nicolet business were written down to fair value less costs to sell. In April 2012, we entered into a definitive agreement to sell the Nicolet business for approximately $58 million in cash, subject to post closing adjustments related to working capital. As a result, we recorded a pre-tax impairment charge of approximately $78 million in the fiscal year ended June 30, 2012. On July 1, 2012 we completed the sale of the Nicolet business, resulting in an additional $5 million loss recorded in the quarter ended September 30, 2012, primarily related to the tax impact from the sale. The Nicolet business was historically part of our Procedural Solutions segment. Our decision to sell the Nicolet business is part of our continuing strategy of divesting product lines that do not align with our objectives.

NOTE 3. ACQUISITIONS

On November 14, 2012 we completed the acquisition of Intermed Equipamento Medico Hospitalar Ltda (“Intermed”), a privately held, leading respiratory technologies company based in Sao Paulo, Brazil. We funded the acquisition with existing cash and funds generated from operations. The acquisition of Intermed was not material to our unaudited condensed consolidated financial statements.

NOTE 4. EARNINGS PER SHARE

For the quarters and six months ended December 31, 2012 and 2011, basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated to give effect to all dilutive securities, using the treasury stock method.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The following table sets forth the reconciliation of the shares used to compute basic and diluted earnings per share for the quarters and six months ended December 31, 2012 and 2011:


	Quarters Ended December 31,				Six Months Ended December 31,
(shares in millions)	2012		2011		2012		2011
Denominator for Basic Earnings per Share		222.6		224.7		222.3		224.3
Effect of Dilutive Securities:
Stock Options		1.3		0.8		1.2		0.9
Restricted Stock Awards, Restricted Stock Units and Performance Stock Units		1.0		1.1		1.2		1.3

Denominator for Diluted Earnings per Share		224.9		226.6		224.7		226.5

The table below provides a summary of the securities that could potentially dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share because to do so would have been antidilutive for the period presented. Antidilutive securities were as follows for the quarters and six months ended December 31, 2012 and 2011:


	Quarters Ended December 31,				Six Months Ended December 31,
(securities in millions)	2012		2011		2012		2011
Number of Securities		7.9		11.3		7.8		9.8
Weighted Average Exercise Price	$	30.28	$	29.52	$	30.73	$	30.37

Basic and diluted earnings per share amounts are computed independently in the unaudited condensed consolidated statements of income, therefore, the sum of per share components may not equal the per share amounts presented.

In February 2012, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $500 million in shares of our common stock through open market and private transactions. The share repurchase program is expected to continue through December 2013. The cost of repurchased shares is included in treasury stock and reported as a reduction in total equity when a repurchase occurs. During fiscal year 2012, we repurchased a total of 3.9 million shares of our common stock under the share repurchase program for an aggregate of $100 million (excluding commissions and fees). Approximately $100 million of purchases were made under this program at June 30, 2012. No shares were repurchased under this program during the quarter and six months ended December 31, 2012. We expect to continue to manage the pace of the remaining $400 million of purchases under this program based on market conditions and other relevant factors.

NOTE 5. RESTRUCTURING AND ACQUISITION INTEGRATION CHARGES

Restructuring liabilities and associated charges are measured at fair value as incurred. Acquisition integration charges are expensed as incurred.

The following is a summary of restructuring and acquisition integration charges for the quarters and six months ended December 31, 2012 and 2011:


	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2012		2011		2012		2011
Restructuring Charges	$	3	$	7	$	5	$	14
Acquisition Integration Charges		—		—		—		—

Total Restructuring and Acquisition Integration Charges	$	3	$	7	$	5	$	14

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Restructuring Charges

We periodically incur costs to implement restructuring efforts for specific operations, which are recorded within our unaudited condensed consolidated statements of income as they are recognized. The restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount, and aligning operations in the most strategic and cost-efficient structure.

The following table includes information regarding our current restructuring programs:


	Six Months Ended December 31, 2012
(in millions)	Accrued at June 30, 2012¹		Accrued Costs		Cash Payments			Accrued at Dec. 31, 2012¹
Total Restructuring Programs	$	10	$	5	$	(9	)	$	6

¹	Included within “Other Accrued Liabilities” in the unaudited condensed consolidated balance sheets.

As discussed in note 1 to the unaudited condensed consolidated financial statements, in order to better align our operating and reporting structures with our updated business profile, commencing with the quarter ended September 30, 2011, we have
re-segmented our businesses into two new segments: Medical Systems and Procedural Solutions. Additionally, during the quarter ended September 30, 2012, we combined our respiratory diagnostics product line with our Respiratory Technologies business unit within our Medical Systems segment.

The following table segregates our restructuring charges into our reportable segments for the quarters ended December 31, 2012 and 2011, net of reclassification adjustments to conform to the current period presentation:


	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2012		2011¹		2012		2011¹
Medical Systems	$	2	$	3	$	3	$	8
Procedural Solutions		1		4		2		6

Total Restructuring Charges	$	3	$	7	$	5	$	14

¹	Restructuring charges include the global restructuring program initiated in the fiscal year ended June 30, 2011 (the “2011 Plan”). Substantially all of the costs associated with the 2011 Plan were incurred as of June 30, 2011.

Acquisition Integration Charges

Costs of integrating operations of various acquired companies are recorded as acquisition integration charges when incurred.

Certain restructuring and acquisition costs are based upon estimates. Actual amounts paid may ultimately differ from these estimates. If additional costs are incurred or recognized amounts exceed costs, such changes in estimates will be recognized when incurred.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 6. INVENTORIES

Inventories, accounted for at the lower of cost or market on the FIFO method, consisted of the following:


(in millions)	December 31, 2012			June 30, 2012
Raw Materials	$	151		$	145
Work-in-Process		21			20
Finished Goods		272			263

		444			428
Reserve for Excess and Obsolete Inventories		(43	)		(38	)

Inventories, Net	$	401		$	390

NOTE 7. FINANCING RECEIVABLES

Our net investment in sales-type leases are considered financing receivables. As our portfolio of financing receivables primarily arise from the leasing of our dispensing equipment, the methodology for determining our allowance for credit losses is based on the collective population and not stratified by class or portfolio segment. Allowances for credit losses on the entire portfolio are based on historical experience loss rates and the potential impact of anticipated changes in business practices, market dynamics, and economic conditions. We also reserve individual balances based on the evaluation of customers’ specific circumstances. We write off amounts that are deemed uncollectible. Financing receivables are generally considered past due 30 days after the billing date. We do not accrue interest on past due financing receivables.

The change in the allowance for credit losses on financing receivables for the six months ended December 31, 2012, consisted of the following:


(in millions)
Beginning balance of allowance for credit losses – June 30, 2012	$	10
Charge-offs		(1	)
Recoveries		(1	)
Provisions		1

Ending balance of allowance for credit losses – December 31, 2012	$	9

The following table summarizes the credit losses and recorded investment in sales-type leases as of December 31, 2012:


(in millions)
Allowance for credit losses:
Ending Balance at December 31, 2012	$	9

Ending Balance: individually evaluated for impairment	$	2

Ending Balance: collectively evaluated for impairment	$	7

Sales-Type Leases:
Ending Balance at December 31, 2012	$	1,365

Ending Balance: individually evaluated for impairment	$	8

Ending Balance: collectively evaluated for impairment	$	1,357

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table summarizes the changes in the carrying amount of goodwill, net of adjustments for discontinued operations:


(in millions)	Total
Balance at June 30, 2012	$	3,039
Goodwill Acquired, Net of Foreign Currency Translation Adjustments		42

Balance at December 31, 2012	$	3,081

As discussed in note 1 to the unaudited condensed consolidated financial statements, during the quarter ended September 30, 2012, we combined our respiratory diagnostics product line with our Respiratory Technologies business unit, which is included in the Medical Systems segment. As a result, goodwill was reassigned to the Medical Systems and Procedural Solutions operating segments using the relative fair value allocation accordingly.

As of December 31, 2012, goodwill for the businesses comprising the Medical Systems segment and the Procedural Solutions segment was $2,106 million and $975 million, respectively. As of June 30, 2012, goodwill for the businesses comprising the Medical Systems segment and the Procedural Solutions segment was $2,066 million and $973 million, respectively. The amount set forth above for goodwill acquired reflects the impact of business acquisitions.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Intangible Assets

Intangible assets with definite lives are amortized over their useful lives which range from 3 to 20 years. The detail of intangible assets by class is as follows:


(in millions)	Weighted Average Life (years)		Gross Intangibles		Accumulated Amortization		Net Intangibles
December 31, 2012
Unamortized Intangibles:
In-Process Research and Development		Indefinite	$	45	$	—	$	45
Trademarks		Indefinite		307		—		307

Total Unamortized Intangibles				352		—		352
Amortized Intangibles:
Trademarks and Patents		11		87		43		44
Developed Technology		9		365		177		188
Customer Relationships		16		480		264		216
Other		8		43		32		11

Total Amortized Intangibles		12		975		516		459

Total Intangibles			$	1,327	$	516	$	811


June 30, 2012
Unamortized Intangibles:
In-Process Research and Development		Indefinite	$	45	$	—	$	45
Trademarks		Indefinite		307		—		307

Total Unamortized Intangibles				352		—		352
Amortized Intangibles:
Trademarks and Patents		11		86		41		45
Developed Technology		9		353		154		199
Customer Relationships		16		478		253		225
Other		8		41		31		10

Total Amortized Intangibles		12		958		479		479

Total Intangibles			$	1,310	$	479	$	831

Amortization expense is as follows:


	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2012		2011		2012		2011
Amortization Expense	$	19	$	22	$	37	$	43

Amortization expense for each of the next five fiscal years is estimated to be:


(in millions)	2013		2014		2015		2016		2017
Amortization Expense	$	74	$	71	$	57	$	55	$	51

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 9. BORROWINGS

Borrowings consisted of the following:


(in millions)	December 31, 2012		June 30, 2012
Senior Notes due 2012, 4.125%, Effective Rate 4.37%	$	—	$	250
Senior Notes due 2014, 5.125% Less Unamortized Discount of $1.6 million at December 31, 2012, Effective Rate 5.36%		448		448
Senior Notes due 2019, 6.375% Less Unamortized Discount of $8.4 million at December 31, 2012, Effective Rate 6.60%		692		691
Euro Denominated Debt, Interest Averaging 3.51% at December 31, 2012, Due in Varying Installments through 2020		12		12
Other Obligations; Interest Averaging 9.24% at December 31, 2012 and 8.54% at June 30, 2012, Due in Varying Installments through 2014		1		1

Total Borrowings		1,153		1,402
Less: Current Portion		2		251

Long-Term Portion	$	1,151	$	1,151

Senior Unsecured Notes. In July 2009, we sold $1.4 billion aggregate principal amount of senior unsecured notes and received net proceeds of $1.374 billion. The discount on sale of the senior unsecured notes is amortized to interest expense utilizing the effective interest method. In August 2012, we used $250 million in cash to repay upon maturity the $250 million aggregate principal amount of the 4.125% senior notes due 2012.

Euro Denominated Debt. In connection with our acquisition of Rowa Automatisierungssysteme GmbH (“Rowa”) on August 1, 2011, we assumed a 9 million Euro debt facility comprised of four tranches with annual interest rates ranging from 2.65% to 3.75%. These loans are payable in quarterly or semi-annual installments, with the final payment due September 30, 2020. At December 31, 2012 and June 30, 2012, the aggregate outstanding balance on these loans was $12 million.

Revolving Credit Facility. In July 2011, we entered into a five-year senior unsecured revolving credit facility with an aggregate available principal amount of $550 million, under which no amounts were outstanding at December 31, 2012 or June 30, 2012. Effective as of December 10, 2012, we increased the aggregate commitments under the credit facility from $550 million to $750 million, pursuant to the exercise of the accordion feature under the credit facility.

The credit facility matures on July 6, 2016. Borrowings under the credit facility bear interest at a rate per annum based upon the British Bankers Association LIBOR Rate or the alternate base rate, in each case plus an applicable margin, which varies based upon CareFusion’s debt ratings. The credit facility also requires us to pay a quarterly commitment fee to the lenders under the credit facility on the amount of the lender’s unused commitments thereunder based upon CareFusion’s debt ratings.

The credit facility contains several customary covenants including, but not limited to, limitations on liens, subsidiary indebtedness, dispositions, and transactions with affiliates. In addition, the credit facility contains financial covenants requiring us to maintain a consolidated leverage ratio of no more than 3.50:1.00 as of the end of any period of four fiscal quarters, and a consolidated interest coverage ratio of at least 3.50:1.00 as of the end of any period of four fiscal quarters. The credit facility is subject to customary events of default, including, but not limited to, non-payment of principal or other amounts when due, breach of covenants, inaccuracy of representations and warranties, cross-default to other material indebtedness, certain ERISA-related events, certain voluntary and involuntary bankruptcy events, and change of control.

The failure to timely file the Annual Report on Form 10-K for the fiscal year ended June 30, 2012 and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 resulted in a breach of our covenant under the credit facility to periodically deliver our financial statements to the lenders. We obtained waivers from the lenders under the credit facility, and we have since become current in our filings with the SEC and have provided all required financial statements to the lenders.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

Other Borrowings. We maintain other borrowings that consist primarily of additional notes, loans and capital leases. These additional notes, loans and capital leases totaled $1 million at December 31, 2012 and June 30, 2012. Obligations related to capital leases are secured by the underlying assets.

Letters of Credit and Bank Guarantees. At December 31, 2012 and June 30, 2012, we had $24 million and $21 million, respectively, of letters of credit and bank guarantees outstanding.

NOTE 10. INCOME TAX

The effective tax rate was 29.1% and 29.4%, for the quarter and six months ended December 31, 2012, respectively, as compared to 25.1% and 23.2% for the quarter and six months ended December 31, 2011, respectively.

The difference between the effective tax rate for the quarter ended December 31, 2012 and the U.S. federal statutory rate of 35% is primarily attributable to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate, offset by unfavorable adjustments related to certain foreign earnings taxed in the United States.

During the quarter ended September 30, 2008, Cardinal Health received an IRS Revenue Agent’s Report for the fiscal years 2003 through 2005 that included Notices of Proposed Adjustment for additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among our subsidiaries, which we have appealed. The amount of additional tax proposed by the IRS in these notices totals $462 million, excluding penalties and interest, which may be significant. In addition, during the quarter ended December 31, 2010, we received an IRS Revenue Agent’s Report for fiscal years 2006 and 2007 that included Notices of Proposed Adjustment for additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries.

We and Cardinal Health disagree with the IRS regarding its application of the United States Treasury regulations to the arrangements under review and the valuations underlying such adjustments and intend to vigorously contest them. The tax matters agreement that we entered into with Cardinal Health in connection with the spinoff generally provides that the control of audit proceedings and payment of any additional liability related to our business is our responsibility. We are currently before the IRS Appeals office for fiscal years 2003 through 2007, and we are engaged in substantive discussions with the IRS Appeals office related to our 2003 through 2005 fiscal years. It is reasonably possible that we will reach a favorable settlement with the IRS in relation to the fiscal years 2003 through 2005 within the next twelve months.

During the quarter ended September 30, 2011, the IRS commenced the tax audit for the fiscal years 2008 and 2009 and the short period July 1, 2009 through August 31, 2009 as part of Cardinal Health’s tax audit of its federal consolidated returns for fiscal years 2008 through 2010. Furthermore, during the quarter ended December 31, 2011, the IRS commenced the tax audit for the short period September 1, 2009 through June 30, 2010.

We believe that we have provided adequate contingent tax reserves for these matters. However, if upon the conclusion of these audits, the ultimate determination of taxes owed is for an amount that is materially different than our current reserves, our overall tax expense and effective tax rate may be materially impacted in the period of adjustment.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

NOTE 11. COMMITMENTS AND CONTINGENCIES

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages, investigations relating to governmental laws and regulations and other matters arising out of the normal conduct of our business. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our consolidated financial statements. An estimated loss contingency is accrued 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 could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability. We regularly review contingencies to determine the adequacy of our accruals and related disclosures. The amount of ultimate loss may differ from these estimates. It is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material effect on our business, financial condition, results of operations or cash flows will depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such losses, damages or remedies may have on our consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.

Administrative Subpoenas. In April 2011, we received a federal administrative subpoena from the U.S. Department of Justice (“Department of Justice”) through the U.S. Attorney for the District of Kansas. In addition, in September 2011, we received a federal administrative subpoena from the Office of Inspector General (“OIG”) of the Department of Health and Human Services. In August 2012, we received another federal administrative subpoena from the Department of Justice containing additional information requests. All three subpoenas request for documents and other materials that relate primarily to our sales and marketing practices for our ChloraPrep skin preparation product and information regarding our relationships with healthcare professionals. We are cooperating with the Department of Justice and the OIG to respond to these requests. We are unable to determine when these matters will be resolved, whether any additional areas of inquiry will be opened, or any outcome of these matters. We cannot estimate what, if any, impact these matters and any results from these matters could have on our business, financial position, operating results or cash flows.

FDA Consent Decree. We are operating under an amended consent decree with the FDA related to our infusion pump business in the United States. We entered into a consent decree with the FDA in February 2007 related to our Alaris SE pumps, and in February 2009, we and the FDA amended the consent decree to include all infusion pumps manufactured by or for CareFusion 303, Inc., our subsidiary that manufactures and sells infusion pumps in the United States. The amended consent decree does not apply to intravenous administration sets and accessories.

While we remain subject to the amended consent decree, which includes the requirements of the consent decree, we have made substantial progress in our compliance efforts. In accordance with the consent decree, we reconditioned Alaris SE pumps that had been seized by the FDA, remediated Alaris SE pumps in use by customers, and had an independent expert inspect the Alaris SE pump facilities and provide a certification to the FDA as to compliance. As a result of these efforts, in January 2010, we announced that the FDA had given us permission to resume the manufacturing and marketing of our Alaris SE pumps. In accordance with the amended consent decree, and in addition to the requirements of the original consent decree, we also implemented a corrective action plan to bring the Alaris System and all other infusion pumps in use in the United States market into compliance, had our infusion pump facilities inspected by an independent expert, and had our recall procedures and all ongoing recalls involving our infusion pumps inspected by an independent recall expert. In July 2010, the FDA notified us that we can proceed to the audit inspection phase of the amended consent decree, which includes the requirement to retain an independent expert to conduct periodic audits of our infusion pump facilities. The amended consent decree

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

authorizes the FDA, in the event of any violations in the future, to order us to cease manufacturing and distributing, recall products and take other actions. We may be required to pay damages of $15,000 per day per violation if we fail to comply with any provision of the amended consent decree, up to $15 million per year.

We cannot currently predict the outcome of this matter, whether additional amounts will be incurred to resolve this matter, if any, or the matter’s ultimate impact on our business. We may be obligated to pay more costs in the future because, among other things, the FDA may determine that we are not fully compliant with the amended consent decree and therefore impose penalties under the amended consent decree, and/or we may be subject to future proceedings and litigation relating to the matters addressed in the amended consent decree. As of December 31, 2012, we do not believe that a loss is probable in connection with the amended consent decree, and accordingly, we have no reserves to cover any possible future costs and expenses of compliance with the amended consent decree.

Other Matters. In addition to the matters described above, we also become involved in other litigation and regulatory matters incidental to our business, including, but not limited to, product liability claims, employment matters, commercial disputes, intellectual property matters, inclusion as a potentially responsible party for environmental clean-up costs, and litigation in connection with acquisitions and divestitures. We intend to defend ourselves in any such matters and do not currently believe that the outcome of any such matters will have a material adverse effect on our financial condition, results of operations and cash flows.

We may also determine that products manufactured or marketed by us, or our sales and marketing practices for such products, do not meet our specifications, published standards or regulatory requirements. When a quality or regulatory issue is identified, we investigate the issue and take appropriate corrective action. We may be required to report such issues to regulatory authorities, which could result in fines, sanctions or other penalties. In some cases, we may also withdraw a product from the market, correct a product at the customer location, notify the customer of revised labeling and take other actions. We have recalled, and/or conducted field alerts relating to, certain of our products from time to time. These activities can lead to costs to repair or replace affected products, temporary interruptions in product sales and action by regulators, and can impact reported results of operations. We currently do not believe that these activities (other than those specifically disclosed herein) have had or will have a material adverse effect on our business or results of operations.

NOTE 12. FINANCIAL INSTRUMENTS

We use derivative instruments to partially mitigate our business exposure to foreign currency exchange and interest rate risk. We may enter into foreign currency forward contracts to offset some of the foreign exchange risk of expected future cash flows on certain forecasted revenues and expenses and on certain assets and liabilities. We hedge foreign currency exposure up to a maximum period of twelve months. We may also enter into interest rate swap agreements to manage variability of expected future cash flows and interest expense related to our existing debt, and future debt issuances.

The following table summarizes the fair value of our assets and liabilities related to derivative instruments as of December 31, 2012 and June 30, 2012:


(in millions)	December 31, 2012		June 30, 2012
Assets:
Derivatives Designated as Hedging Instruments:
Foreign Currency Forward Contracts¹	$	—	$	2

Total Assets	$	—	$	2


Liabilities:
Derivatives Designated as Hedging Instruments:
Foreign Currency Forward Contracts²	$	—	$	3
Forward Interest Rate Swap Agreements³		11		17

Total Liabilities	$	11	$	20

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

¹	All foreign currency forward contracts classified as derivative assets are recorded as “Other Current Assets” in the unaudited condensed consolidated balance sheets.

²	All foreign currency forward contracts classified as derivative liabilities are recorded as “Other Accrued Liabilities” in the unaudited condensed consolidated balance sheets.

³	All forward interest rate swap agreements classified as derivative liabilities are recorded as either “Other Accrued Liabilities” or “Other Liabilities” in the unaudited condensed consolidated balance sheets, depending on the expected settlement dates.

Cash Flow Hedges. We enter into foreign currency forward contracts to protect the value of anticipated foreign currency revenues and expenses associated with certain forecasted transactions. We also enter into interest rate swap contracts to manage variability of expected future cash flows from changing interest rates. These derivative instruments are designated and qualify as cash flow hedges. Accordingly, the effective portion of the gain (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 (loss) on the derivative instrument is recognized in earnings immediately. The impact of foreign currency forward contract cash flow hedges is included in the consolidated statements of cash flows in “Other Accrued Liabilities and Operating Items, Net”.

At December 31, 2012 and June 30, 2012, we held foreign currency forward contracts to hedge probable, but not firmly committed, revenue, inventory purchases and expenses. At December 31, 2012 and June 30, 2012, we also held forward interest rate swap contracts to hedge probable, but not firmly committed, future transactions associated with our debt.

The following table shows the notional amount of the outstanding cash flow hedges as of December 31, 2012 and June 30, 2012:


	December 31, 2012		June 30, 2012
(in millions)	Notional Amount		Notional Amount
Foreign Currency Forward Contracts	$	8	$	47
Interest Rate Swap Agreements		750		750

Total	$	758	$	797

As of December 31, 2012, the foreign currency forward contracts are expected to mature through March 2013.

During the quarter ended September 30, 2012, we entered into forward interest rate swap agreements with an aggregate notional amount totaling $300 million. During the year ended June 30, 2012, we entered into forward interest rate swap agreements with an aggregate notional amount totaling $750 million, of which $300 million expired during the quarter ended September 30, 2012. These agreements hedge the variability in future interest rates due to changes in the benchmark interest rate.

Credit risk of these contracts was not material as of December 31, 2012 and June 30, 2012. The unrealized net loss included in OCI on the unaudited condensed consolidated balance sheet was $11 million and $18 million at December 31, 2012 and June 30, 2012, respectively. The amounts reclassified from OCI to the consolidated statements of income for the quarters and six months ended December 31, 2012 and 2011 were not material. The amount of ineffectiveness associated with these derivative instruments was not material.

Fair Value (Non-Designated) Hedges. We enter into foreign currency forward contracts to manage 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. The gain (loss) recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in the unaudited condensed consolidated statements of income in “Interest Expense and Other, Net”. The maximum period of time that we hedge exposure for foreign currency fair value hedges is 31 days.

The following table summarizes the notional amount of the fair value hedges outstanding as of December 31, 2012 and June 30, 2012:


	December 31, 2012		June 30, 2012
(in millions)	Notional Amount		Notional Amount
Foreign Currency Forward Contracts	$	63	$	59

During the quarters ended December 31, 2012 and 2011, we recognized a $1 million gain and a $1 million loss, respectively, within “Interest Expense and Other, Net”, for foreign currency forward contracts. No net amounts were recognized related to foreign currency forward contracts during the six months ended December 31, 2012 and December 31, 2011.

The following is a summary of all unsettled derivative instruments and the associated amount we would have paid or received to terminate these contracts based on quoted market prices for the same or similar instruments as of December 31, 2012 and June 30, 2012:


	December 31, 2012					June 30, 2012
(in millions)	Notional Amount		Fair Value Gain/(Loss)			Notional Amount		Fair Value Gain/(Loss)
Foreign Currency Forward Contracts	$	71	$	—		$	106	$	(1	)
Interest Rate Swap Agreements		750		(11	)		750		(17	)

Total	$	821	$	(11	)	$	856	$	(18	)

NOTE 13. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value at December 31, 2012:


(in millions)	Total		Level 1		Level 2		Level 3
Financial Assets:
Cash Equivalents	$	1,281	$	1,281	$	—	$	—
Other Investments		17		17		—		—

Total Financial Assets	$	1,298	$	1,298	$	—	$	—

Financial Liabilities:
Interest Rate Swap Agreements	$	11	$	—	$	11	$	—

Total Financial Liabilities	$	11	$	—	$	11	$	—

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The cash equivalents balance is comprised of highly liquid investments purchased with an original maturity of three months or less from the original purchase date. The other investments balance includes investments in mutual funds classified as “Other Assets” in the unaudited condensed consolidated balance sheets, all related to our deferred compensation plan. Both the cash equivalents and other investments were valued based on quoted market prices for identical instruments. Assets and liabilities classified as Level 2 relate to foreign currency forward contracts and interest rate swap agreements. The fair value of foreign currency forward contracts is determined by using observable market spot rates and forward points adjusted by risk-adjusted discount rates. The fair value of interest rate swap agreements is determined by using methodologies similar in nature to those of our foreign currency forward contracts. The value of our derivatives represents the present value of amounts estimated to be received for the assets or paid to transfer the liabilities at the measurement date from a marketplace participant in settlement of these instruments. See note 12 for additional information. The amount of level 3 assets and liabilities measured on a recurring basis at December 31, 2012 was immaterial.

Other Instruments. The estimated fair value of our long-term obligations and other short-term borrowings was $1,339 million and $1,577 million as of December 31, 2012 and June 30, 2012, respectively, as compared to the net carrying amounts of $1,153 million and $1,402 million at December 31, 2012 and June 30, 2012, respectively. The fair value of our senior notes at December 31, 2012 and June 30, 2012 was based on quoted market prices, which involved the use of Level 1 inputs. The fair value of the other obligations at December 31, 2012 and June 30, 2012, was based on either the quoted market prices for the same or similar debt, which involved the use of observable Level 2 inputs. The fair value of the Rowa debt facility at December 31, 2012 and June 30, 2012 was determined using a discounted cash flow analysis, which approximated its carrying value. We considered the interest rates of European instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs. See note 9 for additional information.

NOTE 14. PRODUCT WARRANTIES

We offer warranties on certain products for various periods of time. We accrue for the estimated cost of product warranties at the time revenue is recognized. Our product warranty liability reflects management’s best estimate of probable liability based on current and historical product sales data and warranty costs incurred.

The table below summarizes the changes in the carrying amount of the liability for product warranties for the quarter ended December 31, 2012:


(in millions)
Balance at June 30, 2012	$	31
Warranty Accrual		1
Warranty Claims Paid		(9	)
Adjustments to Preexisting Accruals		—

Balance at December 31, 2012	$	23

As of December 31, 2012 and June 30, 2012, approximately $11 million and $18 million, respectively, of the ending liability balances related to accruals for product recalls.

NOTE 15. SEGMENT INFORMATION

As discussed in note 1, in order to better align our operating and reportable segments with the manner in which we organize our businesses, commencing in the quarter ended September 30, 2011, we re-segmented our businesses into two new segments: Medical Systems and Procedural Solutions. Additionally, during the quarter ended September 30, 2012, we reclassified our respiratory diagnostics product line from the Procedural Solutions segment into the Medical Systems segment within our Respiratory Technologies business unit. Our operations are principally managed on a products and services basis, and the Medical Systems and Procedural Solutions segments focus primarily on our medical equipment businesses and disposable products businesses, respectively. Financial information for all periods presented have been reclassified to reflect these changes to our operating and reporting segments.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (“CODM”), for making decisions and assessing performance as the source of our reportable segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenues and operating income (loss) before interest and taxes. We have determined our reportable segments as follows based on the information used by the CODM.

Medical Systems. The Medical Systems segment is organized around our medical equipment businesses. Within the Medical Systems segment, we operate our Dispensing Technologies, Infusion Systems and Respiratory Technologies business units. The Dispensing Technologies business unit includes equipment and related services for medication and supply dispensing. The Infusion Systems business unit includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business unit includes respiratory ventilators and dedicated disposable ventilator circuits and accessories, as well as our respiratory diagnostics product line. We also include our data mining surveillance service business within the Medical Systems segment, which we report as “Other.”

Procedural Solutions. The Procedural Solutions segment is organized around our disposable products businesses. Within the Procedural Solutions segment, we operate our Infection Prevention, Medical Specialties and Specialty Disposables business units. The Infection Prevention business unit includes single-use skin antiseptic and other patient-preparation products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business unit includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business unit includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy.

We evaluate the performance of our operating segments based upon, among other things, segment profit. Segment profit is segment revenue less cost of products sold, SG&A expenses, research and development expenses and restructuring and acquisition integration charges. With the exception of goodwill, we do not identify or allocate assets by operating segment; accordingly, segment related disclosures with respect to assets have been omitted. See note 8.

The following table presents information about our reporting segments for the quarters ended December 31, 2012 and 2011, net of reclassification adjustments to conform to the current period presentation:


(in millions)	Medical Systems		Procedural Solutions¹		Total
December 31, 2012:
External Revenues	$	602	$	307	$	909
Depreciation and Amortization		33		13		46
Operating Income		123		48		171
Capital Expenditures		18		5		23

December 31, 2011:
External Revenues	$	604	$	286	$	890
Depreciation and Amortization		36		14		50
Operating Income		115		28		143
Capital Expenditures		20		4		24

¹	Segment results have been adjusted for discontinued operations. See note 2.

CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS–(Continued)

(Unaudited)

The following table presents information about our reporting segments for the six months ended December 31, 2012 and 2011, net of reclassification adjustments to conform to the current period presentation:


(in millions)	Medical Systems		Procedural Solutions¹		Total
December 31, 2012:
External Revenues	$	1,153	$	593	$	1,746
Depreciation and Amortization		65		26		91
Operating Income		225		89		314
Capital Expenditures		31		10		41
December 31, 2011:
External Revenues	$	1,150	$	568	$	1,718
Depreciation and Amortization		71		27		98
Operating Income		197		61		258
Capital Expenditures		39		9		48

¹	Segment results have been adjusted for discontinued operations. See note 2.

The following table presents revenue and net property and equipment by geographic area:


	Revenue								Property and Equipment, Net
	Quarters Ended December 31,				Six Months Ended December 31,				As of December 31,		As of June 30,
(in millions)	2012		2011		2012		2011		2012		2012
United States	$	709	$	687	$	1,372	$	1,342	$	312	$	323
International		200		203		374		376		111		108

		909		890		1,746		1,718		423		431

The following table presents the revenue information for select business lines within each of the segments for the quarters and six months ended December 31, 2012 and 2011:


	Quarter Ended				Six Months Ended
	December 31,				December 31,
(in millions)	2012		2011		2012		2011
Medical Systems
Dispensing Technologies	$	260	$	257	$	504	$	498
Infusion Systems		229		239		432		445

Respiratory Technologies¹		106		102		203		195
Other		7		6		14		12

	$	602	$	604	$	1,153	$	1,150

Procedural Solutions²
Infection Prevention	$	152	$	142	$	296	$	280
Medical Specialties		86		79		166		157
Specialty Disposables		69		65		131		131

	$	307	$	286	$	593	$	568

Total CareFusion	$	909	$	890	$	1,746	$	1,718

¹	Includes the respiratory diagnostics product line. See note 1.

²	Reflects the impact of businesses reclassified to discontinued operations. See note 2.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated and combined financial statements and related notes thereto for the fiscal year ended June 30, 2012, which were included in our Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on January 31, 2013.

The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.

Basis of Presentation

References in this MD&A to “CareFusion Corporation,” “CareFusion,” “we,” “us,” “our,” “the company” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in this MD&A to “Cardinal Health” refer to Cardinal Health, Inc., an Ohio corporation, and its consolidated subsidiaries.

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the SEC instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements presented elsewhere in this Form 10-Q and discussed below are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at June 30, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended June 30, 2012, filed with the SEC on Form 10-K on January 31, 2013 include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Leading up to our spinoff from Cardinal Health, we organized our businesses into two reportable segments: Critical Care Technologies and Medical Technologies and Services. During the quarter ended September 30, 2011, we realigned our businesses into two new global operating and reporting segments, Medical Systems and Procedural Solutions, in order to reduce complexity, provide clearer governance for our investments and make it easier for our customers to do business with us. Additionally, during the quarter ended September 30, 2012, we combined our respiratory diagnostics product line with our Respiratory Technologies business unit within our Medical Systems segment. Our respiratory diagnostics product line had previously been reported within our Procedural Solutions segment as “Other.” Financial information for all periods presented have been reclassified to reflect these changes to our operating and reporting segments.

dispensing. The Infusion Systems business unit includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business unit includes respiratory ventilators and dedicated disposable ventilator circuits and accessories, as well as our respiratory diagnostics product line. We also include our data mining surveillance service business within the Medical Systems segment, which we report as “Other.”

The Procedural Solutions segment is organized around our disposable products businesses. Within the Procedural Solutions segment, we operate our Infection Prevention, Medical Specialties and Specialty Disposables business units. The Infection Prevention business unit includes single-use skin antiseptic and other patient-preparation products and non-dedicated disposable infusion administration sets and accessories. The Medical Specialties business unit includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business unit includes non-dedicated disposable ventilator circuits and oxygen masks used in respiratory therapy.

Overview

We are a global medical technology company with proven and industry-leading products and services designed to measurably improve the safety, quality, efficiency and cost of healthcare. We offer comprehensive product lines in the areas of medication management, infection prevention, operating room (“OR”) effectiveness, respiratory care and surveillance and analytics. Our offerings include established brands used in hospitals throughout the United States and more than 130 countries worldwide. Our strategy is to enhance growth by focusing on healthcare safety and productivity, driving innovation and clinical differentiation, accelerating our global growth and pursuing strategic opportunities.

Since the beginning of fiscal year 2009, challenges have existed in the healthcare capital equipment market as hospitals have prioritized their capital spending. Despite seeing small signs of improvement in overall hospital capital spending, we continue to anticipate it will take some time before significant market improvements are realized and prioritization will continue to be a significant factor as hospitals focus on attaining meaningful use capabilities within their information technology systems. We continue to believe that our Medical Systems business lines are well positioned to benefit from increases in hospital capital equipment spending as the market recovers over time.

Since 2010, procedural volumes in acute care facilities have decreased; although procedural volumes have been relatively stable during fiscal year 2012. Procedural volumes in acute care facilities represent one indicator for the demand of the disposable products sold within our Procedural Solutions operating segment. In addition to procedural volumes, demand for many of our Procedural Solutions products is created when physicians convert their existing practices away from legacy methods and adopt our clinically differentiated products. As a result, we believe our clinically differentiated product revenue has consistently outperformed trends in acute care facility procedural volumes.

Consolidated Results of Operations

Quarter Ended December 31, 2012 Compared to the Quarter Ended December 31, 2011

Below is a summary of comparative results of operations and a more detailed discussion of results for the quarters ended December 31, 2012 and 2011:


	Quarters Ended December 31,
(in millions)	2012		2011		Change

Revenue	$	909	$	890	$	19
Cost of Products Sold		438		443		(5	)

Gross Margin		471		447		24

Selling, General and Administrative Expenses		249		261		(12	)
Research and Development Expenses		48		36		12
Restructuring and Acquisition Integration Charges		3		7		(4	)

Operating Income		171		143		28

Interest Expense and Other, Net		19		17		2

Income Before Income Tax		152		126		26
Provision for Income Tax		44		32		12

Income from Continuing Operations		108		94		14
Loss from Discontinued Operations, Net of Tax		—		1		(1	)

Net Income	$	108	$	95	$	13

Revenue

The following table presents the revenue information for select business lines within each of the segments for the quarters ended December 31, 2012 and 2011:


	Quarters Ended December 31,
(in millions)	2012		2011		Change
Medical Systems
Dispensing Technologies	$	260	$	257	$	3
Infusion Systems		229		239		(10	)
Respiratory Technologies¹		106		102		4
Other		7		6		1

Total Medical Systems	$	602	$	604	$	(2	)

Procedural Solutions²
Infection Prevention	$	152	$	142	$	10
Medical Specialties		86		79		7
Specialty Disposables		69		65		4

Total Procedural Solutions	$	307	$	286	$	21

Total CareFusion	$	909	$	890	$	19

¹	Includes the respiratory diagnostics product line. See note 1.

²	Reflects the impact of businesses reclassified to discontinued operations. See note 2.

Revenue in our Medical Systems segment was essentially unchanged at $602 million for the quarter ended December 31, 2012 compared to the prior year. Increased revenues from our Dispensing Technologies and Respiratory Technologies business units ($7 million) were offset by decreased revenues from our Infusion Systems business unit ($10 million) compared to the prior year.

Revenues in our Infusion Systems business unit declined 4% primarily due to a decrease in the volume of pump installations. Revenues in our Respiratory Technologies business unit increased by $4 million as a result of the continued fulfillment of a significant government order, and revenues in our Dispensing Technologies business unit increased by $3 million as a result of sales to existing customers and new business from competitive displacements.

Revenue in our Procedural Solutions segment increased by 7% to $307 million for the quarter ended December 31, 2012 compared to the prior year. The increase in Procedural Solutions revenue was primarily due to growth in our Infection Prevention ($10 million) and Medical Specialties ($7 million) business units.

Gross Margin and Cost of Products Sold

Gross margin increased 5% to $471 million during the quarter ended December 31, 2012 compared to the prior year. As a percentage of revenue, gross margin was 51.8% for the quarter ended December 31, 2012 compared to 50.2% in the prior year.

The increase in gross margin was primarily the result of favorable product mix, infusion capital price improvements, and manufacturing savings. Changes in product mix toward higher margin products and favorable manufacturing cost reductions had a positive impact on gross margin as a percentage of revenue. Manufacturing savings resulted from: (a) cost benefits recognized through strategic sourcing of raw materials; (b) manufacturing efficiencies associated with lean transformation; and (c) reduced overhead spending.

Selling, General and Administrative and Research and Development Expenses

Selling, General and Administrative (“SG&A”) expenses decreased $12 million, or 5%, to $249 million during the quarter ended December 31, 2012 compared to the prior year primarily due to savings associated with restructuring activities.

Research and development (“R&D”) expenses increased $12 million, or 33%, to $48 million during the quarter ended December 31, 2012 compared to the prior year as we continue to invest in next generation platforms in each of our Medical Systems business units.

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges decreased $4 million to $3 million during the quarter ended December 31, 2012 compared to the prior year.

Operating Income

Segment profit in our Medical Systems segment increased $8 million to $123 million during the quarter ended December 31, 2012 compared to the prior year. The 7% increase in segment profit was primarily driven by favorable product mix, a 5% reduction in SG&A, and lower restructuring and acquisition integration charges ($1 million) offset by a 32% increase in R&D expenses.

Segment profit in our Procedural Solutions segment increased $20 million to $48 million during the quarter ended December 31, 2012. The increase in segment profit was primarily attributable to increased revenue and manufacturing and distribution cost savings as compared to the prior year.

Interest Expense and Other, Net

Interest expense and other, net increased 12% to $19 million during the quarter ended December 31, 2012, primarily due to a gain from investing activities recognized in the prior year; partially offset by lower interest expense. We repaid $250 million of senior notes upon their maturity in August 2012 and therefore recognized a lesser amount of interest expense on these notes in the current year.

Provision for Income Tax

Income tax expense increased to $44 million for the quarter ended December 31, 2012 compared to $32 million for the quarter ended December 31, 2011. The effective tax rate for the quarter ended December 31, 2012 was 29.1% compared to 25.1% for the quarter ended December 31, 2011. The increase in the effective tax rate was primarily due to an increase in tax expense as a result of changes in our business income mix by jurisdiction during the quarter ended December 31, 2012.

Generally, fluctuations in our effective tax rate are primarily due to changes within international and state effective tax rates resulting from our business mix and discrete items.

We are currently before the IRS Appeals office for fiscal years 2003 through 2007, and we are engaged in substantive discussions with the IRS Appeals office related to our 2003 through 2005 fiscal years. It is reasonably possible that we will reach a favorable settlement with the IRS in relation to the fiscal years 2003 through 2005 within the next twelve months.

On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law in the United States. This legislation includes the temporary extension of several expired business tax incentives retroactively to calendar year 2012 and prospectively through calendar year 2013. Among the extended tax provisions was the research and development tax credit and look-through treatment of payments between related controlled foreign corporations. The effects of the change in the tax law will be recognized in our third quarter of fiscal year 2013, which is the quarter the law was enacted.

For additional detail regarding the provision for income taxes, see note 10 to the unaudited condensed consolidated financial statements.

Loss from Discontinued Operations, Net of Tax

During the quarter ended December 31, 2012, there were no discontinued operations, compared to loss from discontinued operations of $1 million for the quarter ended December 31, 2011.

For additional details regarding discontinued operations, see note 2 to the unaudited condensed consolidated financial statements.

Six Months Ended December 31, 2012 Compared to the Six Months Ended December 31, 2011

Below is a summary of comparative results of operations and a more detailed discussion of results for the six months ended December 31, 2012 and 2011:


	Six Months Ended December 31,
(in millions)	2012			2011			Change

Revenue	$	1,746		$	1,718		$	28
Cost of Products Sold		839			848			(9	)

Gross Margin		907			870			37

Selling, General and Administrative Expenses		493			525			(32	)
Research and Development Expenses		95			73			22
Restructuring and Acquisition Integration Charges		5			14			(9	)

Operating Income		314			258			56

Interest Expense and Other, Net		38			42			(4	)

Income Before Income Tax		276			216			60
Provision for Income Tax		81			50			31

Income from Continuing Operations		195			166			29
Loss from Discontinued Operations, Net of Tax		(3	)		(1	)		2

Net Income	$	192		$	165		$	27

Revenue

The following table presents the revenue information for select business lines within each of the segments for the six months ended December 31, 2012 and 2011:


	Six Months Ended December 31,
(in millions)	2012		2011		Change
Medical Systems
Dispensing Technologies	$	504	$	498	$	6
Infusion Systems		432		445		(13	)
Respiratory Technologies¹		203		195		8
Other		14		12		2

Total Medical Systems	$	1,153	$	1,150	$	3

Procedural Solutions²
Infection Prevention	$	296	$	280	$	16
Medical Specialties		166		157		9
Specialty Disposables		131		131		—

Total Procedural Solutions	$	593	$	568	$	25

Total CareFusion	$	1,746	$	1,718	$	28

¹	Includes the respiratory diagnostics product line. See note 1.

²	Reflects the impact of businesses reclassified to discontinued operations. See note 2.

Revenue in our Medical Systems segment increased slightly to $1,153 million for the six months ended December 31, 2012 compared to the prior year. The increase in Medical Systems revenue was primarily a result of continued growth from our Dispensing Technologies and Respiratory Technologies business units ($14 million), offset by decreased revenues from the Infusion Systems business unit ($13 million).

Revenues in our Infusion Systems business unit declined 3% primarily due to a decrease in the volume of pump installations. Revenues in our Respiratory Technologies business unit increased by $8 million as a result of the continued fulfillment of a significant government order and revenues in our Dispensing Technologies business unit increased by $6 million as a result of new business impact from competitive displacements and the impact of Rowa, which was acquired in August 2011.

Revenue in our Procedural Solutions segment increased by 4% to $593 million for the six months ended December 31, 2012 compared to the prior year. The increase in Procedural Solutions revenue was due to growth in our Infection Prevention ($16 million) and Medical Specialties ($9 million) business units.

Gross Margin and Cost of Products Sold

Gross margin increased 4% to $907 million during the six months ended December 31, 2012 compared to the prior year due to recall reserves in the prior year ($9 million). As a percentage of revenue, gross margin was 51.9% for the six months ended December 31, 2012 compared to 50.6% in the prior year.

The increase in gross margin was primarily the result of favorable product mix, infusion capital pricing improvements, manufacturing savings, and the impact of prior year recall charges ($9 million) which did not recur in the six months ended December 31, 2012. Changes in product mix toward higher margin products and favorable manufacturing cost reductions had a positive impact on gross margin as a percentage of revenue. Manufacturing savings resulted from: (a) cost benefits recognized through strategic sourcing of raw materials; (b) manufacturing efficiencies associated with lean transformation; and (c) reduced overhead spending.

Selling, General and Administrative and Research and Development Expenses

SG&A expenses decreased $32 million, or 6%, to $493 million during the six months ended December 31, 2012 compared to the prior year primarily due to savings associated with restructuring activities.

R&D expenses increased $22 million, or 30%, to $95 million during the six months ended December 31, 2012 compared to prior year as we continue to invest in next generation platforms in each of our Medical Systems businesses.

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges decreased $9 million to $5 million during the six months ended December 31, 2012 compared to the prior year due to charges of $5 million associated with the 2011 Plan in the prior year.

Operating Income

Segment profit in our Medical Systems segment increased $28 million to $225 million during the six months ended December 31, 2012 compared to the prior year. The 14% increase in segment profit was primarily driven by favorable product mix, improved infusion capital pricing, the impact of prior year recall charges ($9 million) which did not recur, an 8% reduction in SG&A, and lower restructuring charges ($5 million) partially offset by a 30% increase in R&D expenses.

Segment profit in our Procedural Solutions segment increased $28 million to $89 million during the six months ended December 31, 2012. The increase in segment profit was primarily attributable to increased revenue and manufacturing and distribution cost savings as compared to prior year.

Interest Expense and Other, Net

Interest expense and other, net decreased 10% to $38 million during the six months ended December 31, 2012, primarily due to lower interest expenses associated with our senior debt.

Provision for Income Tax

Income tax expense increased to $81 million for the six months ended December 31, 2012 compared to $50 million for the six months ended December 31, 2011. The effective tax rate for the six months ended December 31, 2012 was 29.4% compared to 23.2 % for the six months ended December 31, 2011. The increase in the effective tax rate was primarily due to changes in our business income mix by jurisdiction and an increase in discrete tax expense as a result of foreign tax refunds received in the six months ended December 31, 2011.

For additional detail regarding the provision for income taxes, see note 10 to the unaudited condensed consolidated financial statements.

Loss from Discontinued Operations, Net of Tax

During the six months ended December 31, 2012, loss from discontinued operations totaled $3 million, compared to loss from discontinued operations of $1 million for the six months ended December 31, 2011.

For additional details regarding discontinued operations, see note 2 to the unaudited condensed consolidated financial statements.

Liquidity and Capital Resources

Overview

Historically, we have generated, and expect to continue to generate, positive cash flow from operations. Cash flow from operations primarily represents inflows from net income (adjusted for depreciation and other non-cash items) and outflows from investment in sales-type leases entered into, as we sell and install dispensing equipment, and other increases in working capital needed to grow the business. Cash flows from investing activities represent our investment in intellectual property and capital equipment required to grow our business, as well as acquisitions. In the fiscal year ended June 30, 2012, cash flows from financing activities were primarily related to our share repurchase program, as discussed below.

Our cash balance at December 31, 2012 was $1,558 million. Of this balance, $1,168 million is held outside of the United States and is denominated in United States dollars as well as other currencies. In August 2012, we used $250 million of our cash balances to repay upon maturity $250 million of our outstanding senior notes. We believe that our current domestic cash flow from operations and domestic cash balances are sufficient to meet domestic operating needs. It is our intention to indefinitely reinvest all current and future foreign earnings in order to ensure sufficient working capital and expand existing operations outside the United States. Additionally, we intend to fund foreign acquisitions primarily through the use of unrepatriated cash held by foreign subsidiaries. However, should our domestic cash needs exceed our current or future domestic cash flows, we could repatriate foreign cash or utilize our senior unsecured revolving credit facility, both of which would result in increased expense.

We believe that our future cash from operations together with our access to funds available under our senior unsecured revolving credit facility and the capital markets will provide adequate resources to fund both short-term and long-term operating requirements, capital expenditures, acquisitions and new business development activities.

In February 2012, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $500 million in shares of our common stock through open market and private transactions. The share repurchase program is expected to continue through December 2013. The cost of repurchased shares is included in treasury stock and reported as a reduction in total equity when a repurchase occurs. Approximately $100 million of purchases were made under this program at June 30, 2012. No shares were repurchased under this program during the quarter and six months ended December 31, 2012. We expect to continue to manage the pace of the remaining $400 million of purchases under this program based on market conditions and other relevant factors.

We are currently before the IRS Appeals office for fiscal years 2003 through 2007. In addition, we have commenced federal income tax audits for fiscal years 2008 through 2010. We believe that we have provided adequate reserves for these matters. However, even if we are adequately reserved, final settlement of these matters may require us to make cash payments to the IRS which could be material. In addition, these payments may result in increased costs if we need to utilize our revolving credit facility or repatriate foreign cash to fund these payments. See note 10 to the unaudited condensed consolidated financial statements for further information.

Sources and Uses of Cash

The following table summarizes our condensed consolidated statements of cash flows from continuing operations:


	Six Months Ended December 31,
(in millions)	2012			2011			Change
Cash Flow (Used in)/Provided by:
Operating Activities	$	257		$	189		$	68
Investing Activities	$	(103	)	$	(178	)	$	75
Financing Activities	$	(259	)	$	(12	)	$	(247	)

Six Months Ended December 31, 2012 and 2011

Net operating cash flow provided by continuing operations for the six months ended December 31, 2012 increased $68 million to $257 million as compared to net operating cash flow provided by continuing operations of $189 million for the six months ended December 31, 2011. The increase in cash flow provided by continuing operations was primarily due to higher net income, adjusted for the impact of non-cash items ($25 million), a reduced amount of inventory build ($43 million) compared to the prior year, and an increase in cash flow associated with accounts payable ($41 million), partially offset by a decrease in trade receivables ($30 million).

Net cash used in investing activities from continuing operations decreased $75 million for the six months ended December 31, 2012 compared to the prior year. This was attributable to a decrease in the amount of net cash paid in connection with acquisition transactions in the six months ended December 31, 2012 (primarily associated with our acquisition of Intermed) as compared to the prior year (primarily associated with our acquisition of Rowa).

Net cash used in continuing operations from financing activities increased $247 million for the six months ended December 31, 2012 compared to the prior year due to the repayment of $250 million of senior notes upon their maturity in August 2012.

Capital Resources

Revolving Credit Facility. In July 2011, we entered into a five-year senior unsecured revolving credit facility with an aggregate available principal amount of $550 million, which matures in July 2016. Effective as of December 10, 2012, we increased the aggregate commitments under the credit facility from $550 million to $750 million, pursuant to the exercise of the accordion feature under the credit facility.

At December 31, 2012, there were no amounts outstanding under our senior unsecured revolving credit facility.

For additional detail regarding the five-year senior unsecured revolving credit facility, see note 9 to the unaudited condensed consolidated financial statements.

Dividends

We currently intend to retain any earnings to finance research and development, acquisitions and the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, we use our excess cash to fund our share repurchase program. The declaration and payment of any dividends in the future by us will be subject to the sole discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, covenants associated

with certain of our debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, should we pay any dividend in the future, there can be no assurance that we will continue to pay such dividends.

Off-Balance Sheet Arrangements, Contractual Obligations, Contingent Liabilities and Commitments

At December 31, 2012, we did not have any off-balance sheet arrangements. Other than the repayment upon maturity of $250 million of our outstanding senior notes in August 2012 as discussed above, we have had no material changes related to contractual obligations since June 30, 2012. For information on contractual obligations, see the table of Contractual Obligations in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report on Form 10-K, filed with the SEC on January 31, 2013.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, our operations are exposed to risks associated with changes in interest rates and foreign exchange rates. We seek to manage these risks using hedging strategies that involve the use of derivative instruments. We do not enter into any derivative agreements for trading or speculative purposes.

While we believe we have designed an effective risk management program, there are inherent limitations in our ability to forecast our exposures, and therefore, we cannot guarantee that our programs will completely mitigate all risks associated with unfavorable movement in either foreign exchange rates or interest rates.

Additionally, the timing of the recognition of gains and losses related to derivative instruments can be different from the recognition of the underlying economic exposure. This may impact our consolidated operating results and financial position.

Interest Rate Risk

Interest income and expense on variable-rate instruments are sensitive to fluctuations in interest rates across the world. Changes in interest rates primarily affect the interest earned on our cash and equivalents and, to a significantly lesser extent, the interest expense on our debt. We seek to manage our interest rate risk by using derivative instruments such as swaps with financial institutions to hedge our risks on a portion of our probable future debt issuances. In general, we may hedge material interest rate exposures up to several years before the forecasted transaction; however, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.

To the extent that forward interest rate swap agreements qualify for hedge accounting, the gain (loss) will be recorded to 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 (loss) on the derivative instrument is recognized in earnings immediately.

The notional amount of forward interest rate swap derivative instruments outstanding was $750 million as of December 31, 2012 and June 30, 2012, with an estimated fair value loss of approximately $11 million and $17 million, respectively. The agreements require us to make payments based on fixed interest rates and receive payments based on variable benchmark LIBOR interest rates.

As of December 31, 2012 and June 30, 2012, substantially all of our outstanding debt balances are fixed rate debt. While changes in interest rates will have no impact on the interest we pay on this debt, interest on any borrowings under our revolving credit facility will be exposed to interest rate fluctuations as the rate on this facility is variable. At December 31, 2012, there were no outstanding amounts under our revolving credit facility. In August 2012, we used $250 million of our cash balances to repay upon maturity $250 million of our outstanding senior notes, as discussed above.

The tables below present information about our investment portfolio and debt obligations:


	December 31, 2012
	Maturing in Fiscal Year																					Fair Market Value ³
(in millions)	2013			2014			2015			2016			2017			Thereafter			Total			Fair Market Value ³
ASSETS
Cash and Cash Equivalents
Cash	$	277		$	—		$	—		$	—		$	—		$	—		$	277		$	277
Cash Equivalents	$	1,281		$	—		$	—		$	—		$	—		$	—		$	1,281		$	1,281
Weighted Average Interest Rate ¹		0.08	%		—			—			—			—			—			0.08	%		—
LIABILITIES
Debt Obligations
Fixed Rate Debt ²	$	1		$	2		$	452		$	2		$	1		$	704		$	1,162		$	1,338
Weighted Average Coupon Rate		3.41	%		3.47	%		5.12	%		3.47	%		2.65	%		6.35	%		5.86	%		—
Other Obligations	$	1		$	—		$	—		$	—		$	—		$	—		$	1		$	1
Weighted Average Interest Rate		7.31	%		12.43	%		—			—			—			—			9.24	%		—


	June 30, 2012
	Maturing in Fiscal Year																					Fair Market Value ³
(in millions)	2013			2014			2015			2016			2017			Thereafter			Total			Fair Market Value ³
ASSETS
Cash and Cash Equivalents
Cash	$	303		$	—		$	—		$	—		$	—		$	—		$	303		$	303
Cash Equivalents	$	1,345		$	—		$	—		$	—		$	—		$	—		$	1,345		$	1,345
Weighted Average Interest Rate ¹		0.09	%		—			—			—			—			—			0.09	%		—
LIABILITIES
Debt Obligations
Fixed Rate Debt ²	$	250		$	2		$	452		$	2		$	1		$	705		$	1,412		$	1,576
Weighted Average Coupon Rate		4.12	%		3.47	%		5.12	%		3.47	%		2.65	%		6.35	%		5.55	%		—
Other Obligations	$	1		$	—		$	—		$	—		$	—		$	—		$	1		$	1
Weighted Average Interest Rate		7.32	%		12.43	%		—			—			—			—			8.54	%		—

¹	Represents weighted average interest rate for cash equivalents only; cash balances generally earn no interest.

²	Fixed rate notes are presented gross of $10 million and $11 million purchase discounts at December 31, 2012 and June 30, 2012, respectively.

The estimated fair value of our long-term obligations and other short-term borrowings was $1,339 million and $1,577 million at December 31, 2012 and June 30, 2012, respectively. The fair value of our senior notes at December 31, 2012 and June 30, 2012 was based on quoted market prices. The fair value of the other obligations at December 31, 2012 and June 30, 2012, was based on either the quoted market prices for the same or similar debt and the current interest rates offered for debt or estimated based on discounted cash flows.

Foreign Currency Risk

We are a global company with operations in multiple countries and are a net recipient of currencies other than the United States dollar (USD). Accordingly, a strengthening of the USD will negatively impact revenues and gross margins expressed in consolidated USD terms.

Currently, we have foreign exchange risk associated with currency exposure related to existing assets and liabilities, committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. We seek to manage our foreign exchange risk by using derivative instruments such as forwards, swaps and options with

financial institutions to hedge our risks. In general, we may hedge material foreign exchange exposures up to twelve months in advance; however, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.

The realized and unrealized gains and losses of foreign currency forward contracts and the re-measurement of foreign currency denominated receivables, payables and loans are recorded in the unaudited condensed consolidated statements of income. To the extent that cash flow hedges qualify for hedge accounting, the gain or loss on the forward contract will be recorded to OCI. As the forecasted exposures affect earnings, the realized gain or loss on the forward contract will be moved from OCI to the unaudited condensed consolidated statements of income.

The following table provides information about our foreign currency derivative instruments outstanding as of December 31, 2012 and June 30, 2012:


	December 31, 2012				June 30, 2012
(in millions)	Notional Amount		Average Contract Rate		Notional Amount			Average Contract Rate
Foreign Currency Forward Contracts:
(Receive USD/pay foreign currency)
Euro	$	1		1.3	$	1			1.2
Australian Dollar		12		1.0		21			1.0
New Zealand Dollar		7		0.8		7			0.8
South African Rand		2		8.6		2			8.5
Canadian Dollar		15		1.0		14			1.0
Swiss Franc		—		—		2			1.0
Japanese Yen		1		85.6		2			79.4
Hong Kong Dollar		5		7.8		—			—
Mexican Peso		10		13.0		—			—

Total	$	53			$	49

Estimated Fair Value	$	—			$	—


Foreign Currency Forward Contracts:
(Pay USD/receive foreign currency)
Mexican Peso	$	4		13.0	$	23			13.8
Euro		—		—		1			1.2
Indian Rupee		—		—		1			57.4
Swiss Franc		1		0.9		11			1.0
British Pound		8		1.6		13			1.6

Total	$	13			$	49

Estimated Fair Value	$	—			$	(1	)


Foreign Currency Forward Contracts:
(Pay foreign currency/receive Euros)
British Pound	$	5		0.8	$	8			0.8

Total	$	5			$	8

Estimated Fair Value	$	—			$	—

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, has concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of the end of such period. This conclusion was based on the material weakness identified in our internal control over financial reporting related to our accounting for sales-type leases, as described below.

Changes in Internal Control Over Financial Reporting

As described in Item 9A in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, we identified a material weakness in our internal control over financial reporting related to our accounting for sales-type leases associated with our Pyxis medication and supply dispensing products. As discussed in the Form 10-K, we concluded that a modification was necessary in order to properly apply lease accounting principles to our sales–type leases, and we revised our historical financial results included in the Form 10-K to properly estimate the fair value of leased assets in accounting for sales–type leases associated with our Pyxis medication and supply dispensing products. As a result of the need to correct the manner in which we apply lease accounting principles to our sales-type leases, we did not historically have adequate internal controls and processes in place to account for our sales-type leases.

To remediate the material weakness in our internal control over financial reporting described above, we are developing and implementing new control procedures regarding our accounting for sales-type leases, including the revised fair value estimation process for our leased assets. However, the material weakness will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Except as described above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See note 11 to the unaudited condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, which we filed with the SEC on January 31, 2013. The risks and uncertainties described in “Item 1A – Risk Factors” of our Annual Report on Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table contains information about our company’s purchases of equity securities during the quarter ended December 31, 2012:


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Publically Announced Program^1,2
October 1 – 31, 2012		—	$	—		—	$	400
November 1 – 30, 2012		—		—		—		400
December 1 – 31, 2012		—		—		—		400

Total		—		—		—	$	400

In February 2012, we announced that our Board of Directors had approved a share repurchase program authorizing the repurchase of up to $500 million of our common stock through open market and private transactions. The share repurchase program is expected to continue through December 2013. Approximately $100 million of purchases were made under this program at June 30, 2012. No shares were repurchased under this program during the quarter and six months ended December 31, 2012. We expect to continue to manage the pacing of the remaining $400 million of purchases under this program based on market conditions and other relevant factors.

²	Dollars in millions.

ITEM 6. EXHIBITS


Exhibit Number		Description of Exhibits

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certifications pursuant to 18 U.S.C. Section 1350.*

101.INS		XBRL Instance Document^†

101.SCH		XBRL Taxonomy Extension Schema Document^†

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document^†

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document^†

101.LAB		XBRL Taxonomy Extension Label Linkbase Document^†

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document^†

*	Filed herewith.

†

XBRL (Extensible Business Reporting Language) information included herewith is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company