10-K 1 carefusion201410-k.htm FORM 10-K CAREFUSION 2014 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-34273
 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
(Address of principal executive offices, including zip code)
Telephone: (858) 617-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
  
Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share
  
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities         Act.  Yes  þ    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
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  þ    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  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
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.
    Large accelerated filer  þ
 
    Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The aggregate market value of the voting common stock held by non-affiliates based on the closing stock price on December 31, 2013, was $8,290,183,141. For purposes of this computation only, all executive officers and directors have been deemed affiliates.
The number of outstanding shares of the registrant’s common stock, as of August 1, 2014 was 202,863,748.
Documents Incorporated by Reference:
Portions of the registrant’s Proxy Statement to be filed for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.



TABLE OF CONTENTS
 
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Important Information Regarding Forward-Looking Statements
Portions of this Annual Report on Form 10-K (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 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K as well as other portions of this Annual Report on Form 10-K. 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 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 Annual Report on Form 10-K. 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.
 

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PART I
 
ITEM 1. BUSINESS
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. Our offerings include established brands used in hospitals throughout the United States and approximately 130 countries worldwide.
We offer a comprehensive portfolio of products in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care. Our primary product brands include:
 
Alaris intravenous (“IV”) infusion systems;
Pyxis and Rowa automated medication dispensing and supply management systems;
AVEA, Vela and LTV Series respiratory ventilators;
ChloraPrep skin antiseptic products;
MaxGuard, MaxPlus, MaxZero, SmartSite and Texium needle-free IV infusion valves, administration sets and accessories;
V. Mueller and Snowden-Pencer open surgical and laparoscopic instrumentation;
PleurX, Achieve and Temno interventional specialty products;
AirLife disposable ventilator circuits and oxygen masks used for providing respiratory therapy;
Vital Signs single-use consumables for respiratory care and anesthesiology;
Jaeger and SensorMedics cardiopulmonary diagnostic equipment; and
MedMined data mining surveillance software and analytics.
For the fiscal years ended June 30, 2014 and 2013, we generated revenue of $3.84 billion and $3.55 billion, respectively, and income from continuing operations of $417 million and $389 million, respectively. Approximately 23% of our fiscal year 2014 revenue was from customers outside of the United States.
Our Strengths
We possess a number of competitive advantages that distinguish us from our competitors, including:
Scale and focus.    We are one of the largest medical technology companies in the world, with long-standing customer relationships, a global presence, and a focus on helping clinicians improve patient safety and reduce overall treatment costs. Mitigating the impact of medical errors and healthcare associated infections (“HAIs”) on patient safety and treatment costs is among the top priorities for hospitals, regulators and payers in the United States and increasingly, worldwide. At the same time, hospitals and healthcare facilities are seeking to improve efficiencies and reduce costs through increased workforce productivity and better medication and supply chain management. We believe that our products and services are well-positioned to help hospitals and healthcare facilities address these global priorities.
Technology leadership and innovation.    We have a long history of innovation and developing products and services that enable our customers to deliver safer and more cost-effective patient care. We pioneered the concept of a “smart” infusion pump that alerts the clinician when a parameter is outside the institution’s pre-established limitations for that medication. We created the market for medication dispensing machines that automate the management of medications from the pharmacy to the nursing unit. We were the first to integrate automated supply dispensing systems with clinical information systems that enable clinicians to chart, charge and reorder supplies. We have integrated our products with numerous other information systems within the hospital, including financial and business systems that support patient admissions, discharges and transfers, operational systems that include inventory management and clinical systems that include pharmacy information and electronic medical records. We believe that our strong heritage of technology leadership and innovation provides us with a solid foundation for the continued development of safe and cost-effective products and services that will enable us to continue to grow our revenue.

Industry expertise.    We employ a wide range of experienced clinical professionals, including doctors, nurses and pharmacists, who have a detailed understanding of how providers use our products and the current state of clinical practice, including best practices for medication management, infection prevention and respiratory care. These experts enable us to develop innovative and industry-leading products and services because of their in-depth understanding of the medical and clinical protocols for our products.

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Focus on customer service.    As of June 30, 2014, we employed more than 700 sales people in the United States and over 1,400 field, clinical, and technical service personnel. We work with our customers to optimize their workflow as we meet their equipment needs, allowing them to deliver high levels of patient care and reduce operating costs. We also provide on-site clinical and technical support, product effectiveness tracking and customer training to provide the support necessary to help drive medication safety.
Strategy
We seek to grow our business by, among other things:
Focusing on healthcare safety and productivity.    Productivity and safety are rapidly becoming the standards by which healthcare providers are measured and compensated. We intend to continue to expand our product portfolio with additional and enhanced products that address global priorities of quality, patient safety, and cost efficiency in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care.
Focusing on innovative and proven products.    With hospitals and other healthcare providers increasingly adopting outcome-based standards as a key part of their decision-making processes, we intend to offer additional and enhanced products that demonstrate clinical differentiation and compelling economic benefits. We intend to continue to invest in research and development to bring to market products that make it easy for providers to follow evidence-based protocols in patient care. We have new and enhanced products at various stages of development in our innovation pipeline, including a number of products that are expected to be launched in the next few years.
Accelerating global growth.    Our industry-leading positions in the United States markets in which we currently operate provide us with a platform for accelerated growth globally. Because our products and technologies have similar applications around the world, we are focused on expanding our operations in select developed and emerging markets outside the United States. We are investing in our research and development capabilities to better tailor our products and technologies to the needs of international markets with practices different than the United States.
Pursuing strategic opportunities.    We intend to continue to explore organic growth, strategic alliances and acquisition opportunities that enable us to address our customers’ key concerns and global healthcare priorities. We intend to selectively pursue strategic opportunities that give us access to innovative technologies, complementary products or new markets, yet remain consistent with our focus on healthcare safety and productivity. Our business strategy also involves assessing our portfolio of products with a view of divesting non-core product lines that do not align with our objectives.
History of our Business
We were incorporated in Delaware on January 14, 2009 for the purpose of holding the clinical and medical products businesses of Cardinal Health, Inc. (“Cardinal Health”) in anticipation of spinning off from Cardinal Health. We completed the spinoff from Cardinal Health on August 31, 2009. Our business was formed principally through a series of acquisitions by Cardinal Health of established healthcare companies, including the acquisition in 2007 of VIASYS Healthcare Inc., a developer of respiratory care systems, and the acquisition in 2008 of the assets of Enturia, Inc., a manufacturer of skin-antiseptic products. Since the spinoff, we have taken steps to expand and refine our product offerings, including through the acquisitions and divestitures described below.

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Acquisitions: 
Date
  
Business
May 2010
  
Medegen, a manufacturer of clinically differentiated IV needleless access valves and administration sets, including our MaxGuard and MaxPlus products
April 2011
  
Vestara, a developer of technology solutions that enable the safe, efficient disposal and tracking of environmentally sensitive pharmaceutical waste
August 2011
  
Rowa, a German based company specializing in robotic medication storage and retrieval systems for retail and hospital pharmacies
April 2012
  
PHACTS, a technology and consulting company that helps hospital pharmacies better manage inventory, reduce pharmaceutical costs, and streamline operations
June 2012
  
UK Medical Holdings, a leading distributor of specialized medical products to the National Health Service and private healthcare sector in the United Kingdom
November 2012
  
Intermed, a leading respiratory technologies company based in Brazil
October 2013
 
Sendal, an infusion specialty disposable manufacturer in Spain that primarily serves the Western European market
December 2013
 
Vital Signs, a leading manufacturer of single-use consumables for respiratory care and anesthesiology, which also markets products for temperature management and patient monitoring consumables
In addition to the acquisitions listed above, we have acquired non-controlling equity interests in privately held companies, including our March 2014 investment in Caesarea Medical Electronics Ltd. (“CME”). CME is a global infusion pump manufacturer headquartered in Israel that designs, manufactures and markets a range of infusion and syringe pumps, as well as related accessories and disposable administration sets for both homecare and hospital settings.
Divestitures:
Date
  
Business
October 2009
  
Audiology, a manufacturer and marketer of hearing diagnostic equipment
May 2010
  
Research Services, a clinical trial service provider to pharmaceutical firms
March 2011
  
OnSite Services, a surgical instrument management and repair service provider
April 2011
  
International Surgical Products, a distributor of medical supplies and surgical products outside the United States
July 2012
  
Nicolet, a manufacturer of neurodiagnostic monitoring equipment
Business Segments
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 reportable 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 products with the Respiratory Technologies business line within the Medical Systems segment. Our respiratory diagnostics products had previously been reported within the Procedural Solutions segment as “Other.” Our historical financial information for all periods presented have been reclassified to reflect these changes to our operating and reportable segments. See note 18 to the audited consolidated financial statements for certain segment financial data relating to our business.
The following business discussion is based on our two segments as they were structured for fiscal year 2014.
Medical Systems Segment
The Medical Systems segment is organized around our medical equipment business lines. In our Medical Systems segment, we develop, manufacture and market capital equipment and related supplies for medication management, which includes our infusion and medication dispensing technologies, supply management, as well as respiratory ventilation and diagnostic technologies. Our products are designed to enable healthcare professionals to improve patient safety by reducing medication errors and improving administrative controls, while simultaneously improving workflow and increasing operational efficiency. We sell these products primarily through our direct sales force, but use third-party distributors as well, particularly outside the United States.

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Many of our products in this segment are integrated with the Healthcare Information Technology ("HCIT") systems within the hospital, allowing data integration and bi-directional information flow between our devices and our customers’ financial and business systems that support patient admissions, discharges and transfers, physician order entry, and other clinical and operational systems. This data integration capability supports robust analytics through our CareFusion Knowledge Portal applications, as well as our customers’ own analytic and decision support systems, enabling improved decision making, enhanced patient care, and reduced costs.
We offer comprehensive value-added services and programs, software and clinical education which are designed to enhance our customers’ utilization of our medical equipment products. Our project management, field service organization and customer call centers support our customers before, during and after product installation. Our project management teams assist customers with the development of project implementation plans which are designed to ensure rapid, seamless implementation of our products. Our field service organization provides on-site expertise to resolve customers’ service issues. Our customer call centers provide additional support to our customers. We also maintain a remote access system to help us quickly diagnose and rapidly resolve customers’ service issues.
The following chart presents the Medical Systems segment’s key business lines and core products:
Business Line
  
Core Products
Infusion Systems
  
IV medication safety and infusion therapy delivery systems, including infusion pumps, dedicated disposables, software applications and related patient monitoring equipment (sold primarily under the Alaris brand)
Dispensing Technologies
  
Automated dispensing machines and related applications for distributing and managing medication and medical supplies (sold primarily under the Pyxis and Rowa brands)
Respiratory Technologies
  
Respiratory ventilation and diagnostics equipment and dedicated consumables used during respiratory diagnostics and therapy (sold primarily under the AVEA, Vela, LTV and Jaeger brands)
In addition, our Medical Systems segment includes our MedMined business, which offers data mining surveillance software and analytics tools to help hospitals identify adverse drug events and HAIs.
Infusion Systems
We are a leader in the design, development and marketing of IV infusion systems that deliver medications and other fluids directly into a patient’s veins in precise, measured quantities over a wide range of infusion rates. We have the largest installed base of large volume infusion pumps (a key component of the infusion system) in the United States. We sell infusion products primarily to hospitals, ambulatory surgical centers and transport services.
Our Alaris System, sold primarily in the United States, is a sophisticated smart pump system that enables simultaneous IV medication and fluid administration from multiple infusion delivery modules, such as syringe pumps, large volume pumps, and patient controlled analgesia pumps, while at the same time monitoring vital signs such as respiratory activity and blood oxygen levels. The Alaris System utilizes our proprietary Guardrails software application that alerts a clinician when an infusion parameter is outside the institution’s pre-established limitations (known as a “data set”) for that medication, thereby helping hospitals reduce IV medication administration errors. Using a centralized server, data sets and continuous quality improvement (“CQI”) data from the Alaris System can be managed wirelessly. CQI data is then evaluated by clinicians and used to determine best practices and refine the data sets. In addition, data from the Alaris System may be transmitted to other hospital information systems, including electronic medication administration records, pharmacy information systems, alarms, management applications and documentation systems.

In North America, each of our current large volume infusion pumps uses only dedicated disposable administration sets designed and manufactured by or for us for that particular pump. Accordingly, when we sell a large volume infusion pump to a customer, the sale results in a long-term revenue stream associated with the dedicated disposables. It also establishes a long-term relationship with the customer that we believe provides an opportunity to sell additional products and services, including our specialty IV infusion valves, administration sets and accessories, which comprise part of our Infection Prevention business line of our Procedural Solutions segment.

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The international infusion systems market is more regionalized and fragmented than the United States market, and in many cases have different clinical practices than in the United States. We have developed infusion products tailored to meet the different needs of certain of these markets. As regions become more aware of the importance of patient safety, we expect the demand for more sophisticated products, like the Alaris System, will increase as it has in the United States. Our infusion systems have an established presence in countries with a focus on patient safety, such as the United Kingdom and Australia. In March 2014, in furtherance of our strategy to accelerate global growth, we acquired a non-controlling equity interest in CME, a global infusion pump manufacturer headquartered in Israel that designs, manufactures and markets a range of infusion and syringe pumps, as well as related accessories and disposable administration sets for both homecare and hospital settings.
Dispensing Technologies
We are the leading provider of point-of-care systems that automate the dispensing of medications and supplies in hospitals and other healthcare facilities in the United States. We sell our dispensing products primarily to hospitals and other healthcare facilities including oncology clinics, ambulatory surgical centers, long-term care facilities and physician offices.
Internationally, standards for clinical and pharmacy practice, the prevalence of clinical information systems and regulatory and reimbursement policies tend to vary by country and region. For that reason, the international market for our current medication and supply dispensing products is in an early stage of development and one which we consider a long-term growth opportunity. In August 2011, we acquired Rowa, a German based company whose robotic medication storage and retrieval systems are designed to address elements of pharmacy operations requirements which are common outside of the United States.
The complexity of the medication dispensing process is a significant contributor to hospital inefficiencies. In 1989, we championed the concept of decentralized medication management — where medications are securely maintained and accessed at the nurse’s unit — and became the first to introduce automated dispensing products to the market. Our dispensing technologies products are designed to help healthcare professionals reduce medication errors, enhance administrative controls, improve clinician workflow, increase operational efficiency and improve billing accuracy. In addition, our products enable healthcare professionals to provide safer patient care by helping to ensure that the right medications are delivered in the right doses via the right routes to the right patients at the right times.
Our Pyxis products automate the management of medications from the pharmacy to the nursing unit and integrate with our infusion analytics products, as well as other operational and information systems within the hospital. Other Pyxis products that are focused on medication management include the Pyxis Anesthesia System for medication dispensing in the operating room, the Pyxis Connect physician order management system which streamlines the physician order process, decreases order turnaround time and reduces transcription errors, and Pyxis Pharmogistics pharmacy inventory management software, which helps hospital pharmacies better manage inventory, reduce pharmaceutical costs, and streamline operations. In addition, we have other product offerings that are designed to help secure, track and replenish supplies of controlled substances and help ensure the accuracy of medication orders filled in the pharmacy and delivered to the Pyxis MedStation system.
In addition to medication dispensing, we also offer a comprehensive portfolio of medical supply management systems at the point of use, including the Pyxis SupplyStation system and the Pyxis ProcedureStation system, which are supply dispensing systems with controlled access and radio-frequency features that deliver custom solutions tailored to meet the needs of each customer. We also offer wireless handheld technology that supports both our infusion and dispensing businesses. Our positive patient identification applications for bedside verification are critical enablers of our integrated medication management and patient safety capabilities. We believe these technologies can also help healthcare providers improve patient charting and review.
To help provide financial flexibility to our customers, we offer them the opportunity to lease our dispensing products. We provide the financing for the majority of our customers under our leasing program rather than relying on third-party providers of credit.
Respiratory Technologies
We develop, manufacture, market and service mechanical ventilators and associated proprietary consumables for patients with respiratory disorders. Patients with a need for respiratory support are among the highest cost, highest risk, largest and fastest-growing hospital populations. We offer an extensive line of industry-leading mechanical ventilators marketed globally that treat respiratory insufficiency. These products are used in a variety of settings, from intensive care units to transport and homecare. Our respiratory care products are sold worldwide to a variety of customers including hospitals, sub-acute care facilities, homecare and transport providers.
Our AVEA ventilator system is a versatile neonatal, pediatric and adult critical care ventilator used in providing respiratory therapy in acute care settings. Our VELA ventilator offers a comprehensive range of modalities for pediatric and adult patients

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requiring either invasive or non-invasive ventilator support in both acute and alternate care settings. Our LTV Series ventilators provide portable invasive and non-invasive ventilation, and are used worldwide in a variety of care settings. Based on their compact size and versatility, LTV Series ventilators are used in critical care, emergency departments, long term care and home care, as well as emergency transport and military applications. In November 2012, we acquired Intermed, a Brazil based company that designs, manufactures and markets a variety of ventilators and respiratory care devices for infant, pediatric and adult patients that are used in hospitals in Brazil and across Latin America. Several of our ventilator systems, including the LTV Series ventilators, use only dedicated disposable ventilator circuits in the provision of respiratory therapy. Accordingly, when we sell an LTV Series ventilator, the sale results in a long-term revenue stream associated with the dedicated disposables.
We also manufacture and market specialty ventilators such as High Frequency Oscillatory Ventilators (“HFOV”) and SiPAP. Our HFOVs are designed to provide superior pulmonary gas exchange, while protecting the patient’s lungs from damage that may be caused by the cyclic expansion and contraction characteristic of conventional mechanical ventilation. Our HFOV products are primarily used to treat children and premature infants who suffer from acute respiratory failure and adults who suffer from acute lung injury. SiPAP is a unique form of non-invasive support for infants, which has been shown to lower work of breathing and reduce the need for more costly invasive forms of support.
Our customers face increasing pressure to manage costs and outcomes. To meet these challenges, we developed an innovative “system” approach to respiratory care by leveraging the experience gained by our infusion and dispensing businesses related to medical device interoperability. We now offer the CareFusion Ventilation System, which enables customers to access actionable information using our proprietary software analytics and reporting tool to support respiratory care and help them to improve clinical and operational outcomes. This system approach also enables a new level of interoperability with hospital electronic medical record applications.
In addition, our Respiratory Technologies business line includes our respiratory diagnostics products, which includes sleep diagnostics equipment, pulmonary function testing equipment, metabolic and stress testing equipment, spirometers and other equipment sold under our Jaeger, SensorMedics and other brands.

Procedural Solutions Segment
The Procedural Solutions segment is organized around our disposable products and reusable surgical instruments business lines. In our Procedural Solutions segment, we develop, manufacture and market single-use skin antiseptic and other patient-preparation products, specialty IV infusion valves, administration sets and accessories, IV catheters, IV drug preparation products, reusable surgical instruments, non-dedicated ventilator circuits and other disposables used for providing respiratory therapy, as well as single-use consumables for respiratory care and anesthesiology. The majority of products in this segment are used in the operating room, interventional suites, the pharmacy and in the critical care departments of hospitals. We sell these products and services through a combination of direct sales representatives and third-party distributors.
The following chart presents the Procedural Solutions segment’s key business lines and core products:
Business Line
 
Core Products
Infection Prevention
 
Single-use skin antiseptic (sold under the ChloraPrep brand) and other patient-preparation, hair-removal and skin-care products and specialty IV infusion valves, administration sets and accessories, and IV drug preparation and administration products (sold under several brands, including MaxGuard, MaxPlus, MaxZero, SmartSite and Texium)
Medical Specialties
 
Surgical instruments (sold under the V. Mueller and Snowden-Pencer brands), interventional specialty products, such as diagnostic trays and biopsy needles, drainage catheters and vertebral augmentation products (sold under several brands, including PleurX, Achieve and Temno)
Specialty Disposables
 
Non-dedicated disposable ventilator circuits and oxygen masks used for providing respiratory therapy (sold primarily under the AirLife brand) and single-use consumables for respiratory care and anesthesiology (sold primarily under the Vital Signs brand)

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Infection Prevention
Our Infection Prevention business line consists mainly of single-use medical products used in surgical and vascular access procedures, including skin preparation products and specialty IV infusion valves, administration sets and accessories.
Our key skin preparation product is our line of ChloraPrep sterile single-use applicators, which are used by hospitals, ambulatory surgical centers and other healthcare settings as a skin antiseptic before surgical and vascular access procedures or before injections. ChloraPrep products use a 2% concentration of the skin antiseptic chlorhexidine gluconate (“CHG”) with 70% isopropyl alcohol. Numerous clinical studies have demonstrated the advantage of CHG as compared to traditional iodine-based products. As a result, more than a dozen internationally recognized agencies and organizations, including the United States Centers for Disease Control and Prevention, the Institute for Healthcare Improvement, the National Institutes of Health, the American Association of Critical Care Nurses and the American Academy of Pediatrics support the use of CHG-based formulations for patient skin preparation.
In addition to ChloraPrep products, we also manufacture, distribute and market a broad line of patient-preparation, hair-removal and skin-care products, including clippers and razors, special soaps, sponges and scrub brushes for surgeons and other operating room personnel. While our direct selling organization primarily promotes these products to acute care hospitals, our products are also used in ambulatory surgical centers and other healthcare settings such as home health and reference labs.
We have sales representatives or commissioned agents outside the United States. We currently have regulatory approval to sell ChloraPrep products in over 20 countries, and over time our intention is to use our sales organization outside the United States, commissioned agents and other third parties to bring ChloraPrep products to additional international markets.
Our Infection Prevention business line also includes a full range of specialty IV infusion valves, administration sets and accessories, many of which feature our proprietary MaxGuard, MaxPlus, MaxZero, SmartSite and Texium brand needle-free valves. Many of our valves and administration sets are clinically differentiated with antimicrobial and other technologies.
In addition, our portfolio includes IV drug preparation and administration products, such as our Chemo Safety System, which is an end-to-end closed system solution that helps protect healthcare personnel and patients from exposure to hazardous drugs used in chemotherapy treatments. In furtherance of our strategy to grow our operations outside the United States, in October 2013, we acquired Sendal, an infusion specialty disposable manufacturer in Spain that primarily serves the Western European market.
We also serve as a distributor for a variety of products sourced from manufacturers, including IV catheters, antimicrobial dressings, specialty infusion valves and surgical hand scrubs.

Medical Specialties
Our Medical Specialties business line consists mainly of specialty medical devices used in delivering interventional care and reusable surgical instrumentation products.
We develop, manufacture, and distribute a variety of reusable stainless steel open surgical instruments and minimally invasive laparoscopic instruments, including our V. Mueller and Snowden-Pencer brands. We offer over 25,000 unique surgical instruments, as well as surgical instrument information tracking systems and surgical instrument sterilization container systems. Key products include clamps, needle holders, retractors, specialty scissors and forceps. Our V. Mueller products are sold predominantly in the United States directly to hospitals through a direct selling organization.
We also develop and manufacture a variety of medical devices used primarily by interventional radiologists and surgeons in combination with certain image guidance technologies (for example, x-ray, computed tomography and ultrasound). We offer an extensive line of products that support interventional medicine for a variety of clinical disciplines in body and spine interventions. Our products include diagnostic trays, bone marrow and soft tissue biopsy needles and vertebral augmentation products. These products are sold predominantly in the United States directly to hospitals. In addition, we offer products for chronic and acute drainage, including our PleurX drainage system, which enables home management of pleural effusions and malignant ascites.
Specialty Disposables
Our Specialty Disposables business line focuses on providing clinicians with respiratory consumable products that work either independently or in conjunction with our range of ventilators. These products, sold primarily under our AirLife brand, include ventilator circuits and oxygen masks used for providing respiratory therapy. In December 2013, we acquired Vital Signs, a leading manufacturer of single-use consumables for respiratory care and anesthesiology, which also markets products for temperature management and patient monitoring consumables.

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We also serve as a distributor for a variety of products sourced from manufacturers, including humidifiers, nebulizers, oxygen masks, cannulae, suction catheters and other products used for providing respiratory therapy. Additionally, our Specialty Disposables business line provides contract manufacturing services.
Competition
The markets for our products are highly competitive. Although no one company competes with us across the breadth of our offerings, we face significant competition in each of our business lines from domestic and international companies. Our primary competitors in our Medical Systems segment include Baxter International; B. Braun; Fresenius Kabi; Hospira; Omnicell; McKesson; Dräger; and MAQUET. Our primary competitors in our Procedural Solutions segment include 3M; ICU Medical; Becton, Dickinson; Baxter International; B. Braun; Hospira; Smiths Medical; CR Bard; Integra Life Sciences; and Teleflex.
We compete based upon quality and reliability, technological innovation, price, customer service and support capabilities, brand recognition, patents and other intellectual property and the value proposition of helping hospitals improve patient care, while reducing overall costs associated with patient safety. We believe our product quality and brand strength give us a competitive advantage. We expect to continue to use our clinical expertise to offer innovative, industry-leading products and services for our customers.
Customers, Sales and Distribution
Sales to customers in the United States accounted for approximately 77% of our fiscal year 2014 revenue. Our primary end customers in the United States include hospitals, ambulatory surgical centers, clinics, long-term care facilities and physician offices. A substantial portion of our products in the United States are sold to hospitals that are members of a group purchasing organization (“GPO”), integrated delivery networks (“IDNs”), and through wholesalers and distributors. We have purchasing agreements for specified products with a wide range of GPOs in the United States. The scope of products included in these agreements varies by GPO.
Sales to customers outside the United States comprised approximately 23% of our fiscal year 2014 revenue, including sales to customers in approximately 130 countries. Our primary customers in markets outside the United States are hospitals and wholesalers, which are served through a direct sales force and commissioned agents, with a presence in more than 20 countries, and a network of distributors.
Our capital equipment products generally are delivered from our manufacturing facilities directly to the customer. Our disposables and other non-capital equipment products generally are delivered from our manufacturing facilities and from third-party manufacturers to warehouses and from there, the products are delivered to the customer. We contract with a wide range of transport providers to deliver our products by road, rail, sea and air.
Intellectual Property
Patents, trademarks and other proprietary rights are very important to our business. We also rely upon trade secrets, manufacturing know-how, continuing technological innovations and licensing opportunities to maintain and improve our competitive position. We review third-party proprietary rights, including patents and patent applications, as available, in an effort to develop an effective intellectual property strategy, avoid infringement of third-party proprietary rights, identify licensing opportunities and monitor the intellectual property owned by others.
We hold numerous patents and have numerous patent applications pending in the United States and in other countries that relate to aspects of the technology used in many of our products. Our policy is to file patent applications in the United States and other countries when we believe it is commercially advantageous to do so. We do not consider our business to be materially dependent upon any individual patent.
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Annual Report on Form 10-K include: CareFusion, Achieve®, Alaris®, Guardrails®, Pyxis®, AVEA®, VELA®, LTV®, Jaeger®, Vital Signs®, PleurX®, Rowa®, SensorMedics®, ChloraPrep®, V. Mueller®, Snowden-Pencer®, SmartSite®, Temno®, Texium®, PyxisConnect®, Pyxis MedStation®, Pyxis SupplyStation®, Pyxis ProcedureStation, Pyxis Pharmogistics, MedMined®, EnVe®, MaxGuard®, MaxPlus®, MaxZeroand AirLife® which may be registered or trademarked in the United States and other jurisdictions.

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Research and Development
We continuously engage in research and development to introduce new products and enhance the effectiveness, ease of use, safety and reliability of our existing products. Our research and development efforts include internal initiatives as well as collaborative development opportunities with third parties and licensing or acquiring technology from third parties. We employ engineers, software developers, clinicians and scientists in research and development worldwide. These experts help us to develop innovative, industry-leading products and services because of their in-depth understanding of the medical and clinical protocols for our portfolio of products. Our research and development expenses were $190 million, $192 million and $164 million in fiscal years 2014, 2013 and 2012, respectively. We evaluate developing technologies in areas where we have technological or marketing expertise for possible investment or acquisition.
We intend to continue our focus on research and development as a key strategy for growth, which will focus on internal and external investments in those fields that we believe will offer the greatest opportunity for growth and profitability.

Quality Management
We place significant emphasis on providing quality products and services to our customers. Quality management plays an essential role in understanding and meeting customer requirements, effectively resolving quality issues and improving our products and services. We have a network of quality systems throughout our business lines and facilities that relate to the design, development, manufacturing, packaging, sterilization, handling, distribution and labeling of our products. To assess and facilitate compliance with applicable requirements, we regularly review our quality systems to determine their effectiveness and identify areas for improvement. We also perform assessments of our suppliers of raw materials, components and finished goods. In addition, we conduct quality management reviews designed to inform management of key issues that may affect the quality of products and services.
From time to time, we may determine that products manufactured or marketed by us do not meet our specifications, published standards or regulatory requirements. When a quality issue is identified, we investigate the issue and seek to take appropriate corrective action, such as withdrawal of the product from the market, correction of the product at the customer location, notice to the customer of revised labeling or other actions. Any of these actions could have an adverse effect on our business.
Regulatory Matters
Regulation of Medical Devices in the United States
The development, manufacture, sale and distribution of our medical device products are subject to comprehensive governmental regulation. Most notably, all of our medical devices sold in the United States are subject to the Federal Food, Drug and Cosmetic Act (“FDC Act”), as implemented and enforced by the United States Food and Drug Administration (“FDA”). The FDA, and in some cases other government agencies, administers requirements for the design, testing, safety, effectiveness, manufacturing, labeling, advertising and promotion, distribution and post-market surveillance of our products. Unless an exemption applies, each medical device that we market must first receive either clearance (by submitting a premarket notification (“510(k)”)) or approval (by filing a premarket approval application (“PMA”)) from the FDA pursuant to the FDC Act. In addition, certain modifications made to marketed devices also may require 510(k) clearance or approval of a PMA supplement. The FDA’s 510(k) clearance process usually takes from four to twelve months, but it can last longer. The process of obtaining PMA approval is much more costly, lengthy and uncertain. It generally takes from one to three years or even longer.
After a device is placed on the market, numerous regulatory requirements continue to apply. Those regulatory requirements include the following: product listing and establishment registration; adherence to the Quality System Regulation (“QSR”) which requires stringent design, testing, control, documentation and other quality assurance procedures; labeling requirements and FDA prohibitions against the promotion of off-label uses or indications; adverse event reporting; post-approval restrictions or conditions, including post-approval clinical trials or other required testing; post-market surveillance requirements; the FDA’s recall authority, whereby it can ask for the recall of products from the market; and requirements relating to voluntary corrections or removals. The FDA also issued a final rule in September 2013 regarding the Unique Device Identification (“UDI”) System that will be phased in over seven years. The UDI System will require manufacturers to mark certain medical devices distributed in the United States with unique identifiers. While the FDA expects that the UDI System will help track products during recalls and improve patient safety, it will require us to make changes to our manufacturing and labeling.
Our manufacturing facilities, as well as those of certain of our suppliers, are subject to periodic and for-cause inspections to verify compliance with the QSR as well as other regulatory requirements. If the FDA were to find that we or certain of our suppliers have failed to comply with applicable regulations, it could institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, such as product recalls or seizures, monetary sanctions, consent decrees,

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injunctions to halt manufacturing and distributing products, civil or criminal sanctions, refusal to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside of the United States, restrictions on operations or withdrawal or suspension of existing approvals. The FDA also has the authority to request repair, replacement or refund of the cost of any medical device manufactured or distributed by us. As circumstances require, we take steps to ensure safety and efficacy of our products, such as removing products found not to meet applicable requirements from the market and improving the effectiveness of quality systems.
Regulation of Medical Devices Outside of the United States
Medical device laws also are in effect in many of the non-United States markets in which we do business. These laws range from comprehensive device approval requirements for some or all of our products to requests for product data or certifications. Inspection of and controls over manufacturing, as well as monitoring of device-related adverse events, are components of most of these regulatory systems. Most of our business is subject to varying degrees of governmental regulation in the countries in which we operate, and the general trend is toward increasingly stringent regulation. For example, the European Commission (“EC”) has harmonized national regulations for the control of medical devices through European Medical Device Directives with which manufacturers must comply. Under these regulations, manufacturers must have received product EC certification from a “notified body” in order to be able to sell products within the member states of the European Union. Certification allows manufacturers to stamp the products with an “EC” mark. Products covered by the EC regulations that do not bear the EC mark may not be sold or distributed within the European Union.
Regulation of Drugs
We market a line of topical antiseptics that are regulated by the FDA and comparable international authorities as nonprescription or over-the-counter (“OTC”) drugs. These products are marketed in the U.S. under a new drug application approved by the FDA and through appropriate international regulatory pathways, or through the OTC drug monograph process. OTC drugs are regulated and we must comply with good manufacturing practices; for example, our manufacturing facilities (or those of our contract manufacturers) must be registered and all facilities are subject to inspection by federal and state authorities. Outside the United States, regulatory authorities regulate our OTC products in a manner similar to the FDA. In the United States, advertising of OTC drugs is regulated by the Federal Trade Commission in conjunction with the FDA, which imposes certain restrictions on our promotional activities for these products. If we (or our suppliers) fail to comply with regulatory requirements, we could face sanctions ranging from warning letters, injunctions, product seizures, civil or criminal enforcement actions, consent decrees, or removal of the product from distribution. Any of these actions could have an adverse effect on our business.
Healthcare Laws
We are subject to various federal, state and local laws in the United States targeting fraud and abuse in the healthcare industry, which generally prohibit us from soliciting, offering, receiving or paying any remuneration in order to induce the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs. Healthcare costs have been and continue to be a subject of study, investigation and regulation by governmental agencies and legislative bodies around the world.

The United States federal government continues to scrutinize potentially fraudulent practices affecting Medicare, Medicaid and other government healthcare programs. Payers have become more influential in the marketplace and increasingly are focused on drug and medical device pricing, appropriate drug and medical device utilization and the quality and costs of healthcare. Violations of fraud and abuse-related laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in healthcare programs such as Medicare and Medicaid.

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Other Regulatory Requirements
We are also subject to the United States Foreign Corrupt Practices Act and similar anti-bribery laws applicable in non-United States jurisdictions that generally prohibit companies and their intermediaries from improperly offering or paying anything of value to non-United States government officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the United States are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance with anti-bribery laws may conflict with local customs and practices. In the sale, delivery and servicing of our medical devices and software outside of the United States, we must also comply with various export control and trade embargo laws and regulations, including those administered by the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”) which may require licenses or other authorizations for transactions relating to certain countries and/or with certain individuals identified by the United States government. Despite our global trade and compliance program, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. Violations of these requirements are punishable by criminal or civil sanctions, including substantial fines and imprisonment.
Raw Materials
We use a wide variety of resin, metals and electrical components for production of our products. We primarily purchase these materials from external suppliers, some of which are single-source suppliers. We purchase materials from selected suppliers based on quality assurance, cost effectiveness and constraints resulting from regulatory requirements, and we work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. Global commodity pricing can ultimately affect pricing of certain of these raw materials. Though we believe we have adequate available sources of raw materials, there can be no guarantee that we will be able to access the quantity of raw material needed to sustain operations as well as at a cost effective price.
Environmental
Our manufacturing operations worldwide are subject to many requirements under environmental laws. In the United States, the United States Environmental Protection Agency and similar state agencies administer laws that restrict the emission of pollutants into the air, discharges of pollutants into bodies of water and disposal of pollutants on the ground. Violations of these laws can result in significant civil and criminal penalties and incarceration. The failure to obtain a permit for certain activities may be a violation of environmental law and subject the owner and operator to civil and criminal sanctions. Most environmental agencies also have the power to shut down an operation if it is operating in violation of environmental law. United States laws also typically allow citizens to bring private enforcement actions in some situations. Outside the United States, the environmental laws and their enforcement vary and may be more burdensome. For example, some European countries impose environmental taxes or require manufacturers to take back used products at the end of their useful life, and others restrict the materials that manufacturers may use in their products and require redesign and labeling of products. Although such laws do not currently have a significant impact on our products, they are expanding rapidly in Europe. We have management programs and processes in place that are intended to minimize the potential for violations of these laws.

Other environmental laws, primarily in the United States, address the contamination of land and groundwater and require the clean-up of such contamination. These laws may apply not only to the owner or operator of an on-going business, but also to the owner of land contaminated by a prior owner or operator. In addition, if a parcel is contaminated by the release of a hazardous substance, such as through its historic use as a disposal site, any person or company that has contributed to that contamination, whether or not it has a legal interest in the land, may be subject to a requirement to clean up the parcel.
Employees
At June 30, 2014, we employed approximately 16,000 people across our global operations, with approximately 6,800 employed in the United States. In Europe, some of our employees are represented by unions or works councils. Overall, we consider our employee relations to be good.

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Available Information
We post on our public website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission (the “SEC”). These materials can be found in the “Investors” section of our website by clicking the “Financial Information” link and then the “SEC Filings” link. Copies of any of these documents may be obtained free of charge through our website, www.carefusion.com, or by contacting our Investor Relations Department at 3750 Torrey View Court, San Diego, California, 92130, or by calling 858-617-4621.
You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy and information statements, and other information at www.sec.gov.
We have included the certifications of our Chief Executive Officer and Chief Financial Officer required by Section 302 and 906 of the Sarbanes-Oxley Act of 2002 and related rules, relating to the quality of our public disclosure, as exhibits to this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
We urge you to carefully consider the following risks and other information in this Annual Report on Form 10-K in evaluating us and our common stock. Any of the following risks, 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. The risk factors generally have been separated into two groups: risks related to our business and risks related to our common stock.
Risks Related to Our Business
We may be unable to effectively enhance our existing products or introduce and market new products or may fail to keep pace with advances in technology.
The healthcare industry is characterized by evolving technologies and industry standards, frequent new product introductions, significant competition and dynamic customer requirements that may render existing products obsolete or less competitive. As a result, our position in the industry could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. The success of our business depends on our ability to enhance our existing products and to develop and introduce new products and adapt to these changing technologies and customer requirements. The success of new product development depends on many factors, including our ability to anticipate and satisfy customer needs, obtain regulatory approvals and clearances on a timely basis, develop and manufacture products in a cost-effective and timely manner, maintain advantageous positions with respect to intellectual property and differentiate our products from those of our competitors. To compete successfully in the marketplace, we must make substantial investments in new product development whether internally or externally through licensing, acquisitions or joint development agreements. Our failure to enhance our existing products or introduce new and innovative products in a timely manner would have an adverse effect on our results of operations and financial condition.
Even if we are able to develop, manufacture and obtain regulatory approvals and clearances for our new products, the success of those products would depend upon market acceptance. Levels of market acceptance for our new products could be affected by several factors, including:
the availability of alternative products from our competitors;
the price and reliability of our products relative to that of our competitors;
the timing of our market entry; and
our ability to market and distribute our products effectively.

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We are subject to complex and costly regulation.
Our products are subject to regulation by the FDA and other national, supranational, federal and state governmental authorities. It can be costly and time-consuming to obtain regulatory clearance and/or approval to market a medical device or other product. Clearance and/or approval might not be granted for a new or modified device or other product on a timely basis, if at all. Regulations are subject to change as a result of legislative, administrative or judicial action, which may further increase our costs or reduce sales. Unless an exception applies, the FDA requires that the manufacturer of a new medical device or a new indication for use of, or other significant change in, an existing medical device obtain either 510(k) pre-market clearance or pre-market approval before those products can be marketed or sold in the United States. Modifications or enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, labeling, packaging, or manufacturing process may also require a new 510(k) clearance. The FDA has indicated that it intends to continue to enhance its pre-market requirements for medical devices. Although we cannot predict with certainty the future impact of these initiatives, it appears that the time and cost to get many of our medical devices to market could increase significantly.
In addition, we are subject to regulations that govern manufacturing practices, product labeling and advertising, and adverse-event reporting that apply after we have obtained clearance or approval to sell a product. Our failure to maintain clearances or approvals for existing products, to obtain clearance or approval for new or modified products, or to adhere to regulations for manufacturing, labeling, advertising or adverse event reporting could adversely affect our results of operations and financial condition. Further, if we determine a product manufactured or marketed by us does not meet our specifications, published standards or regulatory requirements, we may seek to correct the product or withdraw the product from the market, which could have an adverse effect on our business. Many of our facilities and procedures, and those of our suppliers are subject to ongoing oversight, including periodic inspection by governmental authorities. Compliance with production, safety, quality control and quality assurance regulations can be costly and time-consuming. In September 2013, the FDA also issued a final rule regarding the UDI System that will be phased in over seven years. The UDI System will require manufacturers to mark certain medical devices distributed in the United States with unique identifiers. While the FDA expects that the UDI System will help track products during recalls and improve patient safety, it will require us to make changes to our manufacturing and labeling, which could increase our costs.
The sales and marketing of medical devices is under increased scrutiny by the FDA and other enforcement bodies. If our sales and marketing activities fail to comply with FDA regulations or guidelines, or other applicable laws, we may be subject to warnings or enforcement actions from the FDA or other enforcement bodies. A number of companies in the healthcare industry have been the subject of enforcement actions related to their sales and marketing practices, including their relationships with doctors and off-label promotion of products. In 2011 and 2012, we received federal administrative subpoenas from the Department of Justice and the Office of Inspector General (“OIG”) of the Department of Health and Human Services requesting documents and other materials primarily related to our sales and marketing practices for our ChloraPrep skin preparation product and information regarding our relationships with healthcare professionals. In April 2013, we announced that we had reached an agreement in principle to pay the government approximately $41 million to resolve the government’s allegations. In connection with these matters, we also entered into a non-prosecution agreement and agreed to continue to cooperate with the government. During the year ended June 30, 2013, we recorded a charge to establish a reserve for the amount of the expected payment. In January 2014, we entered into a final settlement agreement with the government, and we paid the settlement. If we were to become the subject of an enforcement action, including any action resulting from the investigation by the Department of Justice or OIG, it could result in negative publicity, penalties, fines, the exclusion of our products from reimbursement under federally-funded programs and/or prohibitions on our ability to sell our products, which could have an adverse effect on our results of operations and financial condition.
Cost-containment efforts of our customers, purchasing groups, third-party payers and governmental organizations could adversely affect our sales and profitability.
Many existing and potential customers for our products within the United States are members of GPOs and IDNs in an effort to reduce costs. GPOs and IDNs negotiate pricing arrangements with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members. Due to the highly competitive nature of the GPO and IDN contracting processes, we may not be able to obtain or maintain contract positions with major GPOs and IDNs across our product portfolio. Furthermore, the increasing leverage of organized buying groups may reduce market prices for our products, thereby reducing our profitability.
While having a contract with a GPO or IDN can facilitate sales to members of that GPO or IDN, it is no assurance that sales volume of those products will be maintained. The members of such groups may choose to purchase from our competitors due to the price or quality offered by such competitors, which could result in a decline in our sales and profitability.

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In addition, our capital equipment products typically represent a sizeable initial capital expenditure for healthcare organizations. Changes in the budgets of these organizations, the timing of spending under these budgets and conflicting spending priorities, including changes resulting from adverse economic conditions, can have a significant effect on the demand for our capital equipment products and related services. In addition, the implementation of healthcare reform in the United States, which may reduce or eliminate the amount that healthcare organizations may be reimbursed for our capital equipment products and related services, could further impact demand. Any such decreases in expenditures by these healthcare facilities and decreases in demand for our capital equipment products and related services could have an adverse effect on our results of operations and financial condition.
Distributors of our products may begin to negotiate terms of sale more aggressively in an effort to increase their profitability. Failure to negotiate distribution arrangements having advantageous pricing or other terms of sale could adversely affect our results of operations and financial condition. In addition, if we fail to implement distribution arrangements successfully, it could cause us to lose market share to our competitors.
Outside the United States, we have experienced downward pricing pressure due to the concentration of purchasing power in centralized governmental healthcare authorities and increased efforts by such authorities to lower healthcare costs. Our failure to offer acceptable prices to these customers could adversely affect our sales and profitability in these markets.
Challenging economic conditions have and may continue to adversely affect our business, results of operations and financial condition.
We continue to face the effects of challenging economic conditions, which have impacted the economy and the economic outlook of the United States, Europe and other parts of the world. These challenging economic conditions, along with depressed levels of consumer and commercial spending, have caused, and may continue to cause our customers to reduce, modify, delay or cancel plans to purchase our products and have caused and may continue to cause vendors to reduce their output or change terms of sales. We have observed certain hospitals delaying as well as prioritizing capital purchasing decisions, which has had, and we expect will continue to have an adverse impact on our financial results into the foreseeable future.
In addition, our customers in and outside of the United States, including foreign governmental entities or other entities that rely on government healthcare systems or government funding, may be unable to pay their obligations on a timely basis or to make payment in full. If our customers’ cash flow or operating and financial performance deteriorate or fail to improve, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment of, accounts receivable owed to us. These conditions may also adversely affect certain of our suppliers, which could cause a disruption in our ability to produce our products.
We also extend credit through an equipment leasing program for a substantial portion of sales to our dispensing product customers. This program and any similar programs that we may establish for sales of our other capital equipment, exposes us to certain risks. We are subject to the risk that if these customers fail to pay or delay payment for the products they purchase from us, it could result in longer payment cycles, increased collection costs, defaults exceeding our expectations and an adverse impact on the cost or availability of financing. These risks related to our equipment leasing program may be exacerbated by a variety of factors, including adverse economic conditions, decreases in demand for our capital equipment products and negative trends in the businesses of our leasing customers.
Any inability of current and/or potential customers to pay us for our products or any demands by vendors for different payment terms may adversely affect our results of operations and financial condition.
We may be unable to realize any benefit from our cost reduction and restructuring efforts and our profitability may be hurt or our business otherwise might be adversely affected.
We have engaged in restructuring activities in the past and may engage in other restructuring activities in the future. These types of cost reduction and restructuring activities are complex. If we do not successfully manage our current restructuring activities, or any other restructuring activities that we may take in the future, any expected efficiencies and benefits might be delayed or not realized, and our operations and business could be disrupted. In addition, the costs associated with implementing restructuring activities might exceed expectations, which could result in additional future charges.

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We may be unable to protect our intellectual property rights or may infringe on the intellectual property rights of others.
We rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure agreements to protect our proprietary intellectual property. Our efforts to protect our intellectual property and proprietary rights may not be sufficient. We cannot be sure that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors or that these patents will remain valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications. In addition, our ability to enforce and protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by us.
Competitors also may harm our sales by designing products that mirror the capabilities of our products or technology without infringing our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.
We operate in an industry characterized by extensive patent litigation. Patent litigation is costly to defend and can result in significant damage awards, including treble damages under certain circumstances, and injunctions that could prevent the manufacture and sale of affected products or force us to make significant royalty payments in order to continue selling the affected products. At any given time, we are involved as either a plaintiff or a defendant in a number of patent infringement actions, the outcomes of which may not be known for prolonged periods of time. We can expect to face additional claims of patent infringement in the future. A successful claim of patent or other intellectual property infringement against us could adversely affect our results of operations and financial condition.
Defects or failures associated with our products and/or our quality system could lead to the filing of adverse event reports, product recalls or safety alerts with associated negative publicity and could subject us to regulatory actions.
Manufacturing flaws, component failures, design defects, off-label uses or inadequate disclosure of product-related information could result in an unsafe condition or the injury or death of a patient. These problems could lead to a recall of, or issuance of a safety alert relating to our products and result in significant costs and negative publicity. Due to the strong name recognition of our brands, an adverse event involving one of our products could result in reduced market acceptance and demand for all products within that brand, and could harm our reputation and our ability to market our products in the future. In some circumstances, adverse events arising from or associated with the design, manufacture or marketing of our products could result in the suspension or delay of regulatory reviews of our applications for new product approvals or clearances. We may also voluntarily undertake a recall of our products, temporarily shut down production lines, or place products on a shipping hold based on internal safety and quality monitoring and testing data.
Our future operating results will depend on our ability to sustain an effective quality control system and effectively train and manage our employee base with respect to our quality system. Our quality system plays an essential role in determining and meeting customer requirements, preventing defects and improving our products and services. While we have a network of quality systems throughout our business lines and facilities, quality and safety issues may occur with respect to any of our products. A quality or safety issue may result in a public warning letter from the FDA, or potentially a consent decree. In June 2014, we received a warning letter from the FDA related to our facility in Vernon Hills, Illinois, which we are working to address. We are also operating under an amended consent decree with the FDA, as discussed further below. In addition, we may be subject to product recalls or seizures, monetary sanctions, injunctions to halt manufacturing and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition.

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We are currently operating under an amended consent decree with the FDA and our failure to comply with the requirements of the amended consent decree may have an adverse effect on our business.
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 our subsidiary that manufactures and sells infusion pumps in the United States. In accordance with the amended consent decree, and in addition to the requirements of the original consent decree, we 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 could proceed to the audit inspection phase of the amended consent decree, which included the requirement to retain an independent expert to conduct periodic audits of our infusion pump facilities over a four-year period. While we are no longer subject to these periodic audits, the FDA maintains the ability to conduct inspections of our infusion pump facilities. The costs associated with any such inspections and any actions that we may need to take as a result, could be significant.
We have no reserves associated with compliance with the amended consent decree. As such, 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. Moreover, the matters addressed in the amended consent decree could lead to negative publicity that could have an adverse impact on our business. The amended consent decree 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 also be required to pay monetary damages if we fail to comply with any provision of the amended consent decree. See note 15 to the audited consolidated financial statements included in this Form 10-K for more information. Any of the foregoing matters could disrupt our business and have an adverse effect on our results of operations and financial condition.
We may incur product liability losses and other litigation liability.
We are, and may be in the future, subject to product liability claims and lawsuits, including potential class actions, alleging that our products have resulted or could result in an unsafe condition or injury. Any product liability claim brought against us, with or without merit, could be costly to defend and could result in settlement payments and adjustments not covered by or in excess of insurance. In addition, we may not be able to obtain insurance on terms acceptable to us or at all because insurance varies in cost and can be difficult to obtain. Our failure to successfully defend against product liability claims or maintain adequate insurance coverage could have an adverse effect on our results of operations and financial condition.
We are involved in a number of legal proceedings. Legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business, or we may enter into settlements of claims for monetary damages that exceed our insurance coverage, if any. In addition, we cannot predict the results of future legislative activity or future court decisions, any of which could lead to an increase in regulatory investigations or our exposure to litigation. Any such proceedings or investigations, regardless of the merits, may result in substantial costs, the diversion of management’s attention from other business concerns and additional restrictions on our sales or the use of our products, which could disrupt our business and have an adverse effect on our results of operations and financial condition.
We rely on the performance of our information technology systems, the failure of which could have an adverse effect on our business and performance.
Our business requires the continued operation of sophisticated information technology systems and network infrastructure. These systems are vulnerable to interruption by fire, power loss, system malfunction, computer viruses, cyber-attacks and other events, which are beyond our control. Systems interruptions could reduce our ability to manufacture and provide service for our products, and could have an adverse effect on our operations and financial performance. The level of protection and disaster-recovery capability varies from site to site, and there can be no guarantee that any such plans, to the extent they are in place, will be totally effective. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us, our employees, partners, customers, or our suppliers, which may result in significant costs and government sanctions. In particular, if we are unable to adequately safeguard individually identifiable health information, we may be subject to additional liability under domestic and international laws respecting the privacy and security of health information.

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We also are pursuing initiatives to transform our information technology systems and processes. Many of our business lines use disparate systems and processes, including those required to support critical functions related to our operations, sales, and financial close and reporting. We are implementing new systems to better streamline and integrate critical functions, which we expect to result in improved efficiency and, over time, reduced costs. While we believe these initiatives provide significant opportunity for us, they do expose us to inherent risks. We may suffer data loss or delays or other disruptions to our business, which could have an adverse effect on our results of operations and financial condition. If we fail to successfully implement new information technology systems and processes, we may fail to realize cost savings anticipated to be derived from these initiatives.
An interruption in our ability to manufacture our products, an inability to obtain key components or raw materials or an increase in the cost of key components or raw materials may adversely affect our business.
Many of our key products are manufactured at single locations, with limited alternate facilities. If we experience damage to one or more of our facilities, or our manufacturing capabilities are otherwise limited or stopped due to quality, regulatory or other reasons, it may not be possible to timely manufacture the relevant products at previous levels or at all. In addition, if the capabilities of our suppliers and component manufacturers are limited or stopped, due to quality, regulatory or other reasons, it could negatively impact our ability to manufacture our products and could expose us to regulatory actions. Further, for reasons of quality assurance or cost effectiveness, we purchase certain components and raw materials from sole suppliers. We may not be able to quickly establish additional or replacement sources for certain components or materials. A reduction or interruption in manufacturing, or an inability to secure alternative sources of raw materials or components that are acceptable to us, could have an adverse effect on our results of operations and financial condition.
Due to the highly competitive nature of the healthcare industry and the cost containment efforts of our customers and third-party payers, we may be unable to pass along cost increases for key components or raw materials through higher prices to our customers. If the cost of key components or raw materials increases and we are unable fully to recover these increased costs through price increases or offset these increases through other cost reductions, we could experience lower margins and profitability.
New regulations related to conflict minerals may increase our costs and adversely affect our business.
We are subject to the SEC’s newly adopted regulations, which require us to determine whether our products contain certain specified minerals, referred to under the regulations as “conflict minerals”, and, if so, to perform an extensive inquiry into our supply chain, in an effort to determine whether or not such conflict minerals originate from the Democratic Republic of Congo (“DRC”), or an adjoining country. We have determined that certain of our products contain such specified minerals and we have developed a process to identify where such minerals originated. As of the date of our conflict minerals report for the 2013 calendar year, we were unable to determine whether or not such minerals originate from the DRC or an adjoining country. We filed our Conflict Minerals Disclosure report on June 2, 2014. We expect to incur additional costs to comply with these disclosure requirements, including costs related to determining the sources of the specified minerals used in our products, in addition to the cost of any changes to products, processes, or sources of supply as a consequence of such verification activities, which may adversely affect our business. In addition, the number of suppliers who provide conflict-free minerals may be limited, which may make it difficult to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
We may engage in strategic transactions, including acquisitions, investments, or joint development agreements that may have an adverse effect on our business.
We may pursue transactions, including acquisitions of complementary businesses, technology licensing arrangements and joint development agreements to expand our product offerings and geographic presence as part of our business strategy, which could be material to our financial condition and results of operations. We may not complete transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the expected benefits of any acquisition, license arrangement or joint development agreement. Other companies may compete with us for these strategic opportunities. We also could experience negative effects on our results of operations and financial condition from acquisition-related charges, amortization of intangible assets and asset impairment charges, and other issues that could arise in connection with, or as a result of, the acquisition of an acquired company or business, including issues related to internal control over financial reporting, regulatory or compliance issues and potential adverse short-term effects on results of operations through increased costs or otherwise. These effects, individually or in the aggregate, could cause a deterioration of our credit profile and/or ratings and result in reduced availability of credit to us or in increased borrowing costs and interest expense.

17


We could experience difficulties, expenditures, or other risks in integrating an acquired company, business, or technology, including, among others:
diversion of management resources and focus from ongoing business matters;
retention of key employees following an acquisition;
demands on our operational resources and financial and internal control systems;
integration of an acquired company’s corporate and administrative functions and personnel;
liabilities of the acquired company, including litigation or other claims; and
consolidation of research and development operations.
In addition, we may face additional risks related to foreign acquisitions, including risks related to cultural and language differences and particular economic, currency, political, and regulatory risks associated with specific countries. If an acquired business fails to operate as anticipated or cannot be successfully integrated with our existing business, our results of operations and financial condition could be adversely affected.
We may engage in the divestiture of some of our non-core product lines which may have an adverse effect on our business.
Our business strategy involves assessing our portfolio of products with a view of divesting non-core product lines that do not align with our objectives. Any divestitures may result in a dilutive impact to our future earnings, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. Divestitures could involve additional risks, including difficulties in the separation of operations, services, products and personnel, the diversion of management’s attention from other business concerns, the disruption of our business and the potential loss of key employees. We may not be successful in managing these or any other significant risks that we encounter in divesting a product line. See note 2 to the audited consolidated financial statements included in this Form 10-K for a discussion of our divestitures.
We may face significant uncertainty in the industry due to government healthcare reform.
Political, economic and regulatory influences are subjecting the healthcare industry to fundamental changes. In March 2010, comprehensive healthcare reform legislation was signed into law in the United States through the passage of the Patient Protection and Affordable Health Care Act and the Health Care and Education Reconciliation Act (“PPACA”). Among other initiatives, the legislation implemented a 2.3% annual excise tax on the sales of certain medical devices in the United States, effective January 2013. As this excise tax is recorded as a selling, general and administrative expense, it has and will continue to have, an adverse effect on our operating expenses and results of operations. In fiscal year 2014, we paid approximately $23 million related to the medical device tax. We currently expect the impact of the tax to be approximately $25 million in fiscal year 2015 and annually thereafter. In addition, the PPACA significantly alters Medicare and Medicaid reimbursements for medical services and medical devices, which could result in downward pricing pressure and decreased demand for our products. As additional provisions of healthcare reform are implemented, we anticipate that Congress, regulatory agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. We cannot predict with certainty what healthcare initiatives, if any, will be implemented at the state level, or what ultimate effect federal healthcare reform or any future legislation or regulation may have on our customers’ purchasing decisions regarding our products and services. However, the implementation of new legislation and regulation may lower reimbursements for our products, reduce medical procedure volumes and adversely affect our business, possibly materially.
We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders.
We intend to continue to invest in research and development activities, expand our sales and marketing activities, and may make acquisitions. Our ability to take these and other actions may be limited by our available liquidity, including our ability to access our foreign cash balances in a tax-efficient manner. As a consequence, in the future, we may need to seek additional financing. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If we lose an investment grade credit rating or adequate funds are not available on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants. Additionally, our ability to make scheduled payments or refinance our obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond our control.

18


We are subject to risks associated with doing business outside of the United States.
Our operations outside of the United States are subject to risks that are inherent in conducting business under non-United States laws, regulations and customs. Sales to customers outside of the United States made up approximately 23% of our revenue in the fiscal year ended June 30, 2014, and we expect that non-United States sales will contribute to future growth as we continue to focus on expanding our operations in markets outside the United States. The risks associated with our operations outside the United States include:
healthcare reform legislation;
changes in medical reimbursement policies and programs;
changes in non-United States government programs;
multiple non-United States regulatory requirements that are subject to change and that could restrict our ability to manufacture and sell our products;
possible failure to comply with anti-bribery laws such as the United States Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions;
different local medical practices, product preferences and product requirements;
possible failure to comply with trade protection and restriction measures and import or export licensing requirements;
difficulty in establishing, staffing and managing non-United States operations;
different labor regulations or work stoppages or strikes;
changes in environmental, health and safety laws;
potentially negative consequences from changes in or interpretations of tax laws, including changes regarding taxation of income earned outside the United States;
political instability and actual or anticipated military or political conflicts;
economic instability, including the European financial crisis or other economic instability in other parts of the world and the impact on interest rates, inflation and the credit worthiness of our customers;
uncertainties regarding judicial systems and procedures;
minimal or diminished protection of intellectual property in some countries; and
regulatory changes that may place our products at a disadvantage.
These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. For example, we are subject to compliance with the United States Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.
We are also exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates. If the United States dollar strengthens in relation to the currencies of other countries such as the Euro, where we sell our products, our United States dollar reported revenue and income will decrease. Additionally, we incur significant costs in foreign currencies and a fluctuation in those currencies’ value can negatively impact manufacturing and selling costs. Changes in the relative values of currencies occur regularly and, in some instances, could have an adverse effect on our results of operations and financial condition.
We are subject to healthcare fraud and abuse regulations that could result in significant liability, require us to change our business practices and restrict our operations in the future.
We are subject to various United States federal, state and local laws targeting fraud and abuse in the healthcare industry, including anti-kickback and false claims laws. Violations of these laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from participation in healthcare programs such as Medicare and Medicaid. These laws and regulations are wide ranging and subject to changing interpretation and application, which could restrict our sales or marketing practices. Furthermore, since many of our customers rely on reimbursement from Medicare, Medicaid and other governmental programs to cover a substantial portion of their expenditures, our exclusion from such programs as a result of a violation of these laws could have an adverse effect on our results of operations and financial condition.

19


We have a significant amount of indebtedness, which could adversely affect our business and our ability to meet our obligations.
At June 30, 2014, we had outstanding $2.45 billion of senior unsecured notes. This significant amount of debt has important risks to us and our investors, including:
requiring a significant portion of our cash flow from operations to make interest payments on this debt;
making it more difficult to satisfy debt service and other obligations;
increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;
increasing our vulnerability to general adverse economic and industry conditions;
reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our business;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry;
placing us at a competitive disadvantage to our competitors that may not be as highly leveraged with debt as we are; and
limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common stock.
While we repaid $450 million aggregate principal amount of our senior unsecured notes upon maturity in August 2014, we had outstanding $2.0 billion of senior unsecured notes as of the filing of this Form 10-K. In addition, we maintain a $750 million senior unsecured revolving credit facility (maturing February 13, 2019). To the extent that we draw on our credit facility or otherwise incur additional indebtedness, the risks described above could increase. Further, if we increase our indebtedness, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.
As a result of various restrictive covenants in the agreements governing our senior unsecured revolving credit facility and our senior unsecured notes, our financial flexibility will be restricted in a number of ways. The agreement governing the credit facility subjects us to several financial and other restrictive covenants, including limitations on liens, subsidiary indebtedness and transactions with affiliates. In addition, the failure to timely file our periodic reports with the SEC could result in a default under our senior unsecured revolving credit facility and the indenture governing our senior unsecured notes.
Our credit facility also requires us to meet certain financial ratio tests on an ongoing basis that may require us to take action and reduce debt or act in a manner contrary to our business objectives. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. We cannot be sure that we will be able to meet those tests or that the lenders will waive any failure to meet those tests. A breach of any of these covenants would result in a default under our credit facility. If an event of default under our credit facility or senior unsecured notes occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If such an acceleration of indebtedness were to arise from an event of default, we may not have sufficient funds to repay such indebtedness. Any acceleration of our outstanding indebtedness could have a material adverse effect on our business and financial condition.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a large multinational corporation with operations in the United States and international jurisdictions. As such, we are subject to the tax laws and regulations of the United States federal, state and local governments and of many international jurisdictions. From time to time, various legislative initiatives may be proposed that could adversely affect our tax positions. We cannot be sure that our effective tax rate or tax payments will not be adversely affected by these initiatives. In addition, United States federal, state and local, as well as international, tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.

20


Our reserves against disputed tax obligations may ultimately prove to be insufficient.
We and Cardinal Health are currently before the Internal Revenue Service (“IRS”) Appeals office for fiscal years 2006 and 2007, and we are currently subject to IRS audits for fiscal years 2008 through 2012. The IRS audits for periods prior to our spinoff from Cardinal Health on August 31, 2009, are part of Cardinal Health’s tax audit of its federal consolidated returns. The IRS audits for the short period from September 1, 2009 through June 30, 2010, and fiscal years 2011 and 2012, relate to federal consolidated returns filed by us following the spinoff. 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.
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 related to transfer pricing arrangements between foreign and domestic subsidiaries. Additionally, during the quarter ended March 31, 2014, we received Notices of Proposed Adjustment for fiscal years 2008 and 2009 for additional taxes related to certain foreign earnings. 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.
We regularly review our tax reserves and make adjustments to our reserves when appropriate. Accounting for tax reserves involves complex and subjective estimates by management, which can change over time based on new information or changing events or circumstances, including events or circumstances outside of our control. Although we believe that we have provided appropriate tax reserves for any potential tax exposures, we may not be fully reserved and it is possible that we may be obligated to pay amounts in excess of our reserves. Any future change in estimate or obligation could adversely affect our results of operations and financial condition.
If there is a determination that the separation is taxable for United States federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS ruling or tax opinions are incorrect or for any other reason, then Cardinal Health and its shareholders that are subject to United States federal income tax could incur significant United States federal income tax liabilities and we could incur significant liabilities.
In connection with the separation, Cardinal Health received a private letter ruling from the IRS substantially to the effect that, among other things, the contribution and the distribution qualified as a transaction that is tax-free for United States federal income tax purposes under Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, (“the Code”). In addition, Cardinal Health received opinions of Weil, Gotshal & Manges LLP and Wachtell, Lipton, Rosen & Katz, co-counsel to Cardinal Health, to the effect that the contribution and the distribution qualified as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Code. The ruling and opinions relied on certain facts, assumptions, representations and undertakings from Cardinal Health and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings were incorrect or not otherwise satisfied, Cardinal Health and its shareholders may not be able to rely on the ruling or the opinions of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax counsel, the IRS could determine on audit that the separation is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct, have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Cardinal Health or us after the separation. If the separation is determined to be taxable for United States federal income tax purposes, Cardinal Health and its shareholders that are subject to United States federal income tax could incur significant United States federal income tax liabilities and we could incur significant liabilities.
Our success depends on our ability to recruit and retain key personnel.
Our success depends on the continued contributions of our senior management and other key research and development, sales, marketing and operations personnel. Experienced personnel in our industry are in high demand and competition for their talents is intense. If we are unable to recruit and retain key personnel, our business may be harmed. Achieving this objective may be difficult due to many factors, including the intense competition for such highly skilled personnel, fluctuations in global economic and industry conditions, changes in our senior management, competitors’ hiring practices, and the effectiveness of our compensation programs. If we are unable to attract, retain and motivate such personnel in sufficient numbers and on a timely basis, we may experience difficulty in implementing our business strategy, which could have an adverse effect on our results of operations and financial condition.

21


Risks Related to Our Common Stock
Your percentage of ownership in us may be diluted in the future.
As with any publicly-traded company, your percentage ownership in us may be diluted in the future because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we expect will be granted to our directors, officers and employees.
Our stock price may fluctuate significantly.
The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
actual or anticipated fluctuations in our operating results;
changes in earnings estimated by securities analysts or our ability to meet those estimates;
the operating and stock price performance of comparable companies; and
domestic and foreign economic conditions.
Certain provisions in our amended and restated certificate of incorporation and amended and restated by-laws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation, our amended and restated by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:
the inability of our stockholders to call a special meeting;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the right of our board to issue preferred stock without stockholder approval;
a provision that stockholders may only remove directors with cause;
the ability of our directors, and not stockholders, to fill vacancies on our board of directors; and
the requirement that stockholders holding at least 66 2/3% of our voting stock are required to amend certain provisions in our amended and restated certificate of incorporation and our amended and restated by-laws relating to the number, term and election of our directors, the filling of board vacancies, stockholder notice procedures and the calling of special meetings of stockholders.
Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of our company and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

22


ITEM 2. PROPERTIES
Our principal executive offices are located in a facility that we own in San Diego, California. At June 30, 2014, we owned or leased a total of approximately 4.0 million square feet of facility space worldwide to handle manufacturing, production, assembly, research, quality assurance testing, distribution, packaging, and administrative functions. At June 30, 2014, we had 25 manufacturing facilities of which 11 were located in the United States. We consider our operating facilities to be well-maintained and suitable for the operations conducted in them. We periodically evaluate our operating facilities and we may make additions, improvements and consolidations, when appropriate. None of our facilities experienced any significant idle time during fiscal year 2014.
The following table summarizes our facilities that are greater than 10,000 square feet by segment and by country as of June 30, 2014:
 
 
Square Feet (in thousands)
 
Number of
Facilities
  
 
Leased      
 
Owned      
 
Medical Systems1
 
 
 
 
 
 
Australia
 
20

 

 
1

Brazil
 

 
56

 
1

Canada
 
36

 

 
2

Germany
 
92

 
104

 
7

India
 
12

 

 
1

Italy
 

 
115

 
1

Malaysia
 
19

 

 
1

Mexico
 
226

 
319

 
2

Netherlands
 
11

 

 
1

New Zealand
 
12

 

 
1

South Africa
 
16

 

 
1

Switzerland
 
22

 

 
1

United Kingdom
 
58

 
21

 
5

United States
 
764

 
472

 
10

Medical Systems Total
 
1,288

 
1,087

 
35

Procedural Solutions1
 
 
 
 
 
 
China
 
118

 

 
1

Dominican Republic
 

 
35

 
1

Italy
 

 
115

 
1

Spain
 
71

 
150

 
4

United States
 
789

 
316

 
11

Procedural Solutions Total
 
978

 
616

 
18

Total
 
2,266

 
1,703

 
53

__________________
1 Certain of the facilities included in the table are utilized by more than one segment.
ITEM 3. LEGAL PROCEEDINGS
See note 15 to the audited consolidated financial statements for a summary of legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
None.


23


PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CFN”.
The price range per share of our common stock presented below represents the highest and lowest sales prices for our common stock on the NYSE during each quarter of the two most recent fiscal years.
Fiscal 2014
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
High
 
$
39.38

 
$
40.28

 
$
41.98

 
$
44.68

Low
 
$
35.02

 
$
36.73

 
$
37.87

 
$
37.76

Fiscal 2013
 
  
 
  
 
  
 
  
High
 
$
28.73

 
$
29.07

 
$
35.00

 
$
38.48

Low
 
$
23.93

 
$
26.04

 
$
28.77

 
$
32.48

As of August 1, 2014, there were 11,458 stockholders of record and 202,863,748 outstanding shares of common stock, and the closing price of our common stock on the NYSE was $43.75.
Dividends
We currently intend to retain any earnings to finance research and development, acquisitions and the operation and expansion of our business, and we do not anticipate paying any cash dividends for the foreseeable future. In addition, we use our excess cash to fund our share repurchase programs. 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 dividends in the future, there can be no assurance that we will continue to pay such dividends.

24


Performance Graph
This performance graph is furnished and shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended.
The following graph compares the cumulative total stockholders return on our common stock from September 1, 2009, when “regular way” trading in our common stock began on the NYSE, through June 30, 2014, with the comparable cumulative total return of the S&P 500 index and S&P 500 Health Care index. The graph assumes that $100 was invested in our common stock and each index on September 1, 2009. In addition, the graph assumes the reinvestment of all dividends paid. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
The following table shows total indexed return of stock price plus reinvestments of dividends, assuming an initial investment of $100 at September 1, 2009, for the indicated periods.
Fiscal Year
 
9/1/2009
 
6/30/2010
 
6/30/2011
 
6/30/2012
 
6/30/2013
 
6/30/2014
CareFusion Corporation
$
100
$
114
$
137
$
129
$
185
$
223
S&P 500 Index
 
100
 
105
 
137
 
145
 
175
 
217
S&P 500 Health Care Index
 
100
 
102
 
131
 
144
 
184
 
239


25


Purchases of Equity Securities
The following table contains information about our company’s purchases of equity securities during the quarter ended June 30, 2014:
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
1
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Publicly
Announced Program
2
April 1 – 30, 2014
 
750,900
 
$39.10
 
750,900
 
$310
May 1 – 31, 2014
 
1,244,900
 
$41.90
 
1,244,900
 
$258
June 1 – 30, 2014
 
1,952,520
 
$43.62
 
1,952,520
 
$173
Total
 
3,948,320
 
$42.21
 
3,948,320
 
$173
 __________________
1 In August 2013, we announced that our Board of Directors had approved a new share repurchase program authorizing the repurchase of up to $750 million of our common stock. Under this program, we are authorized to repurchase our shares in open market and private transactions through December 2015. During the fiscal year ended June 30, 2014, we purchased a total of 14.6 million shares under this program for an aggregate of $577 million (excluding commissions and fees). From July 1, 2014 through the date of this filing, we purchased an additional 2.3 million shares under this program for an aggregate of $103 million (excluding commissions and fees). In August 2014, our Board of Directors authorized the repurchase of an additional $750 million of our common stock through June 2016.  We expect to begin repurchasing shares under this new program upon completion of the $750 million program authorized in August 2013.
2 Dollars in millions.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected historical condensed consolidated financial data. The condensed consolidated statements of income data for each of the three fiscal years in the period ended June 30, 2014 and the condensed consolidated balance sheet data as of June 30, 2014 and 2013 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
The condensed consolidated statements of income data for the fiscal year ended June 30, 2011 and the condensed and combined statements of income data for the fiscal year ended June 30, 2010 and the condensed balance sheet data as of June 30, 2012 and 2011 are derived from our audited financial statements that are not included in this Form 10-K
The condensed and combined balance sheet data as of June 30, 2010 is derived from our unaudited financial statements that are not included in this Form 10-K.

The selected historical condensed consolidated financial and other operating data presented below should be read in conjunction with our audited consolidated financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K. Our consolidated financial information may not be indicative of our future performance.

26


 
 
 
At or for the Fiscal Year Ended June 30, 1,2
(in millions)
 
2014
 
2013
 
2012
 
2011
 
2010
Statements of Income Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
3,842

 
$
3,550

 
$
3,598

 
$
3,440

 
$
3,377

Gross Profit
 
1,908

 
1,850

 
1,804

 
1,768

 
1,691

Operating Income3,4
 
621

 
619

 
574

 
504

 
450

Income before Income Tax
 
532

 
543

 
487

 
425

 
345

Income from Continuing Operations
 
417

 
389

 
361

 
299

 
161

Income (Loss) from Discontinued Operations, Net of Tax5
 

 
(4
)
 
(68
)
 
(50
)
 
33

Net Income
 
417

 
385

 
293

 
249

 
194

Basic Earnings (Loss) per Common Share:
 
 
 
 
 
 
 
 
 
 
Continuing Operations
 
1.99

 
1.76

 
1.62

 
1.34

 
0.73

Discontinued Operations
 

 
(0.02
)
 
(0.31
)
 
(0.23
)
 
0.15

Basic Earnings per Common Share
 
1.99

 
1.74

 
1.31

 
1.11

 
0.88

Diluted Earnings (Loss) per Common Share:
 
 
 
 
 
 
 
 
 
 
Continuing Operations
 
1.96

 
1.74

 
1.60

 
1.32

 
0.72

Discontinued Operations
 

 
(0.02
)
 
(0.30
)
 
(0.22
)
 
0.15

Diluted Earnings per Common Share
 
1.96

 
1.72

 
1.30

 
1.10

 
0.87

Weighted-Average Number of Common Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
209.7

 
221.2

 
223.7

 
222.8

 
221.5

Diluted
 
212.9

 
224.0

 
226.0

 
225.1

 
223.0

Balance Sheet Data6:
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
9,655

 
$
8,553

 
$
8,488

 
$
8,185

 
$
7,900

Long-Term Obligations, less Current Portion and Other Short-Term Borrowings
 
1,990

 
1,444

 
1,151

 
1,387

 
1,386

Total Stockholders’ Equity or Parent Company Investment
 
5,390

 
5,386

 
5,231

 
5,070

 
4,676

 __________________
1 Amounts reflect business combinations for all periods presented. See note 3 to the audited consolidated financial statements for further information regarding the impact of acquisitions.
2 Amounts reflect restructuring and acquisition integration charges for all periods presented. Restructuring and acquisition integration charges were $43 million, $18 million, $33 million, $64 million, and $15 million, in fiscal years 2014, 2013, 2012, 2011, and 2010, respectively.
3 During the fiscal year ended June 30, 2013, we recorded a $41 million charge to establish a reserve in connection with the agreement in principle to resolve the previously disclosed government investigations related to prior sales and marketing practices for our ChloraPrep skin preparation product and relationships with healthcare professionals. In January 2014, we entered into a final settlement agreement with the government, and we paid the settlement.
4 Includes $3 million share of net earnings of equity method investee recorded during the fiscal year ended June 30, 2014.
5 A summary of our discontinued operations is presented in note 2 to the audited consolidated financial statements.
6 Fiscal year 2010 balance sheet data is unaudited.




27


ITEM 7. 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”) presented below refer to and should be read in conjunction with the audited consolidated financial statements and related notes included in this Annual Report on Form 10-K.
Unless the context otherwise requires, references to “CareFusion Corporation”, “CareFusion”, “we”, “us”, “our” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in this Annual Report on Form 10-K to “Cardinal Health” refers to Cardinal Health, Inc. and its consolidated subsidiaries.
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 a comprehensive portfolio of products in the areas of medication management, infection prevention, operating room and procedural effectiveness, and respiratory care. Our offerings include established brands used in hospitals throughout the United States and approximately 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.
Our primary customers in the United States include hospitals, ambulatory surgical centers, clinics, long-term care facilities and physician offices. For the fiscal years ended June 30, 2014 and 2013, we generated revenue of $3.84 billion and $3.55 billion, respectively. We generated income from continuing operations of $417 million in fiscal year 2014 and $389 million in fiscal year 2013. Approximately 23% of our fiscal year 2014 revenue was from customers outside of the United States.
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.
Factors Affecting Our Results of Operations
The Overall Global Economic Environment, Industry Growth and Trends
Healthcare-related industries are generally less susceptible than some other industries to fluctuations in the overall economic environment. However, some of our businesses rely on capital spending from our customers (primarily hospitals), which can be influenced by a variety of economic factors, including interest rates, access to financing and endowment fluctuations. Significant changes in these economic factors can affect the sales of our capital equipment products, such as infusion pumps, dispensing equipment and ventilators. Additionally, sales volumes for some of our businesses are dependent on hospital admissions. Changes in admissions due to difficult economic times can affect our results for surgical and single-use products, such as infusion and respiratory disposable sets, surgical instruments and skin antiseptic products.
Healthcare providers globally are focused on reducing the rising costs to deliver care. As a result, hospitals have prioritized and, in some cases, constrained their capital equipment purchases. Despite seeing some improvement during fiscal year 2013 and a stable environment in fiscal year 2014, we continue to anticipate it will take time before significant market improvements are realized. Even in this environment, we believe our Medical Systems business is well positioned, and will strengthen with improvements in hospital capital equipment spending.
Procedural volumes in acute care facilities represent one indicator for the demand of the disposable products sold within our Procedural Solutions operating segment and have remained relatively stable since fiscal year 2012. 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, our clinically differentiated product revenue has consistently outperformed trends in acute care facility procedural volumes.

28


Healthcare Reform
We are also affected by uncertainties in the healthcare industry related to healthcare reform. In March 2010, comprehensive healthcare reform was enacted in the United States through the passage of the Patient Protection and Affordable Health Care and the Health Care and Education Reconciliation Acts. Among other initiatives, the legislation implemented a 2.3% annual excise tax on the sales of certain medical devices in the United States, effective January 2013. As this excise tax is recorded as a selling, general and administrative expense, it has, and will continue to have, an adverse effect on our operating expenses and results of operations. In fiscal year 2014, we paid approximately $23 million related to the medical device tax. We currently expect the impact of the tax to be approximately $25 million in fiscal year 2015 and annually thereafter. In addition, as the United States federal government implements additional provisions of healthcare reform, we anticipate that Congress, regulatory agencies and certain state legislatures will continue to review and assess alternative healthcare delivery systems and payment methods with an objective of ultimately reducing healthcare costs and expanding access. The uncertainties regarding the implementation and impact of the enacted healthcare reform measures, as well as other potential reform initiatives in the future, may have an adverse effect on our customers’ purchasing decisions regarding our products and services.
Innovation and New Products
Our business strategy relies significantly on innovation to develop and introduce new products and to differentiate our products from our competitors. Our investment in research and development during fiscal year 2014 was $190 million, or 5% of revenues. Looking forward, we remain committed to producing a pipeline of innovative products to continue to support our growth strategies. Our internal and external investments will be focused on initiatives that we believe will offer the greatest opportunity for growth and profitability. With a significant investment in research and development, a strong focus on innovation and a well-managed innovation process, we believe we can continue to innovate and grow. If, however, our future innovations are not successful in meeting customers’ needs or prove to be too costly versus their perceived benefit, our growth may slow.
International and Foreign Exchange
We sell our products in approximately 130 countries and manufacture our products in 9 countries in North America, Europe, and Latin America. Due to the global nature of our business, our revenue and expenses are influenced by foreign exchange movements. In fiscal year 2014, approximately 18% of our sales were in currencies other than the United States dollar. Increases or decreases in the value of the United States dollar compared to other currencies will affect our reported results as we translate those currencies into United States dollars. The percentage of fiscal year 2014 sales by major currencies was as follows:
 
 
United States Dollar
82
%
Euro
8
%
British Pound
4
%
All Other
6
%
 
100
%
Acquisitions and Divestitures
Acquisitions have historically played a role in our growth, and we have made several significant acquisitions in the last five years. Our business was formed principally through a series of acquisitions by Cardinal Health of established healthcare companies, including the acquisition in 2007 of VIASYS Healthcare Inc., a developer of respiratory care systems, and the acquisition in 2008 of the assets of Enturia, Inc., a manufacturer of skin-antiseptic products. Since our spinoff from Cardinal Health, we have taken steps to expand and refine our product offerings, including through the acquisitions and divestitures described below.

29


Acquisitions:
Date
  
Business
May 2010
  
Medegen, a manufacturer of clinically differentiated IV needleless access valves and administration sets, including our MaxGuard and MaxPlus products
April 2011
  
Vestara, a developer of technology solutions that enable the safe, efficient disposal and tracking of environmentally sensitive pharmaceutical waste
August 2011
  
Rowa, a German based company specializing in robotic medication storage and retrieval systems for retail and hospital pharmacies
April 2012
  
PHACTS, a technology and consulting company that helps hospital pharmacies better manage inventory, reduce pharmaceutical costs, and streamline operations
June 2012
  
UK Medical Holdings, a leading distributor of specialized medical products to the National Health Service and private healthcare sector in the United Kingdom
November 2012
  
Intermed, a leading respiratory technologies company based in Brazil
October 2013
 
Sendal, an infusion specialty disposable manufacturer in Spain that primarily serves the Western European market
December 2013
 
Vital Signs, a leading manufacturer of single-use consumables for respiratory care and anesthesiology, which also markets products for temperature management and patient monitoring consumables
In addition to the acquisitions listed above, we have acquired non-controlling equity interests in privately held companies, including our March 2014 investment in Caesarea Medical Electronics Ltd. (“CME”). CME is a global infusion pump manufacturer headquartered in Israel that designs, manufactures and markets a range of infusion and syringe pumps, as well as related accessories and disposable administration sets for both homecare and hospital settings.
Divestitures:
Date
  
Business
October 2009
  
Audiology, a manufacturer and marketer of hearing diagnostic equipment
May 2010
  
Research Services, a clinical trial service provider to pharmaceutical firms
March 2011
  
OnSite Services, a surgical instrument management and repair service provider
April 2011
  
International Surgical Products, a distributor of medical supplies and surgical products outside the United States
July 2012
  
Nicolet, a manufacturer of neurodiagnostic monitoring equipment
Acquired In-Process Research and Development
During fiscal year 2010 we acquired and capitalized $45 million of in-process research and development (“IPR&D”) related to our acquisition of Medegen. The value of this IPR&D was calculated based on a discounted cash flow method, which involved a number of significant assumptions, including timing of product deployment, revenues, margin, and associated discount rates. Effective July 1, 2009, IPR&D associated with business combinations is initially recorded in the balance sheet at fair value and tested for impairment annually until it is put into service. Prior to July 1, 2009, all acquired IPR&D was expensed immediately. See note 11 to the audited consolidated financial statements.
During the quarter ended March 31, 2014, we reclassified IPR&D associated with the Medegen acquisition to developed technology due to commercialization. The developed technology will be amortized over 15 years.
Product Quality and Recalls
Product quality, particularly in life saving and sustaining technologies, plays a critical role in our success. A quality or safety issue may result in public warning letters, product recalls or seizures, monetary sanctions, consent decrees, injunctions to halt manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant clearances or approvals or delays in granting such clearances or approvals, import detentions of products made outside the United States, restrictions on operations or withdrawal or suspension of existing approvals. Any of the foregoing events could disrupt our business and have an adverse effect on our results of operations and financial condition. In addition, recalls may negatively affect sales due to customer concerns about product quality. For the fiscal years ended June 30, 2014 and 2013, net charges related to product recalls were not material. For the fiscal year ended June 30, 2012, net charges related to product recalls were $23 million.
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,

30


we and the FDA amended the consent decree (“amended 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 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 could proceed to the audit inspection phase of the amended consent decree, which included the requirement to retain an independent expert to conduct periodic audits of our infusion pump facilities over a four-year period. While we are no longer subject to these periodic audits, the FDA maintains the ability to conduct inspections of our infusion pump facilities. In addition, the amended consent decree 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 June 30, 2014, we do not believe that a loss is probable in connection with the amended consent decree, and accordingly, we have no reserves associated with compliance with the amended consent decree.
In response to infusion product recalls and the amended consent decree, we have made substantial investments in quality systems and quality personnel headcount over the past several years. While we believe that we have made significant improvements to our product quality and overall quality systems, further quality concerns, whether real or perceived, could adversely affect our results. Conversely, improving quality can be a competitive advantage and improve our results.
Infusion Business and Market Developments
Our consolidated results have also been affected by developments within our infusion business and the infusion market in the United States. Because of safety concerns, the FDA has increased its scrutiny of infusion pumps. During fiscal year 2011, three of our competitors recalled their infusion pumps to correct safety concerns. In addition, a fourth was ordered by the FDA to recall and destroy as many as 200,000 of its infusion pumps and to provide refunds to its customers or replace pumps at no cost. As a result, there was increased demand for infusion pumps in the United States in fiscal year 2011 and 2012, as healthcare providers sought to replace or upgrade their existing equipment. We experienced increased demand for our infusion pumps as a result, which contributed to higher infusion revenues for fiscal year 2011 and 2012. In order to successfully compete in this business environment, we temporarily discounted the pricing on our infusion pumps, in some cases up to 30% or more. In late fiscal year 2013, a competitor that recalled infusion pumps during fiscal year 2011, recalled additional infusion pumps to correct safety concerns, and it announced that it would stop selling several of its infusion pumps in the United States and seek to retire its older pump technologies from the market. As a result, we again experienced increased demand for our infusion pumps in the United States in fiscal year 2014.
Income Taxes
Prior to the spinoff, our operations were included in Cardinal Health’s United States federal and state tax returns or non-United States jurisdictions tax returns. In connection with the spinoff, we and Cardinal Health entered into a tax matters agreement that governs the parties’ respective rights, responsibilities and obligations with respect to taxes. The tax matters agreement generally provides that the control of audit proceedings and payment of any additional liability related to our business is our responsibility.

31


Basis of Presentation
The audited consolidated financial statements reflect the consolidated operations of CareFusion Corporation and its subsidiaries. Leading up to our spinoff from Cardinal Health, we organized our business into two reportable segments: Critical Care Technologies and Medical Technologies and Services. During the quarter ended September 30, 2011, we realigned our business into two new global operating and reportable 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 products with the Respiratory Technologies business line within the Medical Systems segment. Our respiratory diagnostics products had previously been reported within the Procedural Solutions segment as “Other.” Financial information for all periods presented have been reclassified to reflect these changes to our operating and reportable segments.
The Medical Systems segment is organized around our medical equipment business lines. Within the Medical Systems segment, we operate our Dispensing Technologies, Infusion Systems and Respiratory Technologies business lines. The Dispensing Technologies business line includes equipment and related services for medication and supply dispensing. The Infusion Systems business line includes infusion pumps and dedicated disposable infusion sets and accessories. The Respiratory Technologies business line includes respiratory ventilation and diagnostics equipment and dedicated consumables used during respiratory diagnostics and therapy. 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 and reusable surgical instruments business lines. Within the Procedural Solutions segment, we operate our Infection Prevention, Medical Specialties and Specialty Disposables business lines. The Infection Prevention business line includes single-use skin antiseptic and other patient-preparation products and specialty IV infusion valves, administration sets and accessories. The Medical Specialties business line includes interventional specialty products used for biopsy, drainage and other procedures, as well as reusable surgical instruments. The Specialty Disposables business line includes non-dedicated disposable ventilator circuits and oxygen masks used for providing respiratory therapy, as well as single-use consumables for respiratory care and anesthesiology.

CONSOLIDATED RESULTS OF OPERATIONS
Fiscal Year Ended June 30, 2014 Compared to Fiscal Year Ended June 30, 2013
Below is a summary of comparative results of operations and a more detailed discussion of results for the fiscal years ended June 30, 2014 and 2013:
 
 
Fiscal Year Ended June 30,
(in millions)
 
2014
 
2013
 
Change
Revenue
 
$
3,842

 
$
3,550

 
$
292

Cost of Products Sold
 
1,934

 
1,700

 
234

Gross Profit
 
1,908

 
1,850

 
58

Selling, General and Administrative Expenses
 
1,061

 
980

 
81

Research and Development Expenses
 
190

 
192

 
(2
)
Restructuring and Acquisition Integration Charges
 
43

 
18

 
25

Gain on Sale of Assets
 
(4
)
 

 
(4
)
Reserve for Expected Government Settlement
 

 
41

 
(41
)
Share of Net (Earnings) Loss of Equity Method Investee
 
(3
)
 

 
(3
)
Operating Income
 
621

 
619

 
2

Interest Expense and Other, Net
 
89

 
76

 
13

Income Before Income Taxes
 
532

 
543

 
(11
)
Provision for Income Taxes
 
115

 
154

 
(39
)
Income from Continuing Operations
 
417

 
389

 
28

Loss from Discontinued Operations, Net of Tax
 

 
(4
)
 
4

Net Income
 
$
417

 
$
385

 
$
32


32


Revenue
The following table presents the revenue information for select business lines within each of our reportable segments for the fiscal years ended June 30, 2014 and 2013:
 
 
Fiscal Year Ended June 30,
(in millions)
 
2014
 
2013
 
Change
Medical Systems
 
 
 
 
 
 
Dispensing Technologies
 
$
954

 
$
993

 
$
(39
)
Infusion Systems
 
1,037

 
916

 
121

Respiratory Technologies
 
377

 
393

 
(16
)
Other
 
26

 
27

 
(1
)
Total Medical Systems
 
$
2,394

 
$
2,329

 
$
65

Procedural Solutions
 
 
 
 
 
 
Infection Prevention
 
$
656

 
$
594

 
$
62

Medical Specialties
 
364

 
344

 
20

Specialty Disposables
 
428

 
283

 
145

Total Procedural Solutions
 
$
1,448

 
$
1,221

 
$
227

Total CareFusion
 
$
3,842

 
$
3,550

 
$
292

 
Revenue in our Medical Systems segment increased 3% to $2,394 million compared to the prior fiscal year. The increase was primarily a result of increased revenues in the Infusion Systems ($121 million) business line, partially offset by a decrease in Dispensing Technologies ($39 million) business line.
Revenue in the Dispensing Technologies business line decreased $39 million to $954 million, primarily due to a decrease in the volume of equipment installations as we began to launch a new product release. Revenue in the Infusion Systems business line increased $121 million to $1,037 million, primarily due to the impact of an increase in the volume of pump installations, competitive displacements and higher dedicated disposables from a larger installed base. Revenue in the Respiratory Technologies business line decreased $16 million to $377 million, primarily due to the fulfillment of significant government orders in the prior year.
Revenue in our Procedural Solutions segment increased 19% to $1,448 million compared to the prior fiscal year. The increase in Procedural Solutions revenue was due to growth in the Specialty Disposables ($145 million), Infection Prevention ($62 million), and Medical Specialties ($20 million) business lines.
Revenue in the Specialty Disposables business line increased by $145 million to $428 million, primarily as a result of revenues associated with Vital Signs, which we acquired in December 2013, and increased distribution activities for bronchial hygiene products. Revenue in the Infection Prevention business line increased by $62 million to $656 million, primarily as a result of revenues associated with Sendal, which we acquired in October 2013, and increased sales of our clinically differentiated skin preparation products. Revenue in the Medical Specialties business line increased by $20 million to $364 million, primarily as a result of continued strength in pleural drainage and biopsy categories.
Gross Profit and Gross Margins
Gross profit increased 3% to $1,908 million compared to the prior fiscal year. As a percentage of revenue, gross margin was 49.7% and 52.1% for fiscal year 2014 and 2013, respectively.
The decrease in gross margin during the fiscal year was primarily due to product mix associated with lower dispensing equipment installation volumes, higher infusion capital placements and increased sales in lower margin product lines associated with our acquisition of Sendal and Vital Signs. In addition, the decrease in gross margins were further impacted by a key supplier winding down its business and the costs associated with transitioning to a new supplier.
Selling, General and Administrative and Research and Development Expenses
SG&A expenses increased 8% to $1,061 million compared to the prior fiscal year. The increase was primarily due to acquisition and operating costs associated with Sendal and Vital Signs, the impact of the medical device excise tax and costs associated with selling activities.

33


R&D expenses decreased 1% to $190 million compared to the prior fiscal year. During the fiscal year, we continued to invest in next generation platforms for Medical Systems and Procedural Solutions segments, with our R&D expense for Procedural Solutions increasing modestly over the prior fiscal year and our R&D expense for Medical Systems slightly decreasing over the prior fiscal year due to the current phase of our product development life cycle.
Restructuring and Acquisition Integration Charges
Restructuring and acquisition integration charges increased $25 million to $43 million compared to the prior fiscal year. The increase was primarily due to restructuring plans, which 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, partially offset by a gain on sale of assets of $4 million in connection with restructuring activities.
Share of Net Earnings of Equity Method Investee
Share of net earnings of equity method investee of $3 million during the fiscal year ended June 30, 2014 is associated with earnings from CME, a new investee in fiscal year 2014. See note 4 for further information.
Operating Income
Operating income increased $2 million to $621 million compared to the prior fiscal year.
Segment profit in our Medical Systems segment decreased $38 million to $433 million compared to the prior fiscal year. The 8% decrease in segment profit was primarily attributable to the impact of lower sales in the Dispensing Technologies and Respiratory Technologies business lines, partially offset by an increase in sales in the Infusion Systems business line.
Segment profit in our Procedural Solutions segment decreased $1 million to $188 million compared to the prior fiscal year. The 1% decrease in segment profit was primarily attributable to the costs associated with the acquisition of Sendal and Vital Signs and increased R&D expense, partially offset by increased sales of our clinically differentiated products across our portfolio.
Interest Expense and Other, Net
Interest expense and other, net increased 17% to $89 million compared to the prior fiscal year. This increase was primarily due to the settlement of a tax matter in connection with an uncertain tax position and the impact of higher interest expenses associated with our senior debt compared to the prior fiscal year.
Provision for Income Taxes
Income tax expense decreased by $39 million to $115 million compared to the prior fiscal year. The effective tax rate for fiscal year 2014 was 21.6% compared to 28.3% for fiscal year 2013. The decrease in the effective tax rate was primarily due to changes in our business income mix by jurisdiction, the settlement of tax matters under appeal with the IRS related to fiscal years 2003 through 2005 and a tax settlement with foreign tax authorities. The settlement with the foreign tax authorities resulted in a reduction in tax liability of $10 million, which was recorded in the consolidated statements of income in “Provision for Income Tax”. In connection with this settlement, the Company also recorded a loss of $10 million related to the write down of an indemnification receivable related to the tax liability, which is reflected in the consolidated statements of income in “Interest Expense and Other, Net.” Accordingly, the impact of this settlement on net income was zero.
During the fiscal year ended June 30, 2013, we and Cardinal Health entered into a closing agreement with the IRS to effectively settle $450 million of the $462 million of additional tax proposed by the IRS in connection with the audit of fiscal years 2003 through 2005 related to the transfer of intellectual property among our subsidiaries. In connection with the settlement, we agreed to pay $80 million ($69 million net of tax) including $26 million of interest. During the fiscal year ended June 30, 2014, we and Cardinal Health entered into a closing agreement with the IRS to effectively settle all remaining matters under appeal with the IRS related to fiscal years 2003 through 2005. As part of this closing agreement, we agreed to pay $12 million ($11 million net of tax), including $5 million of interest, which is reflected in our financial results for the quarter ended September 30, 2013. We were adequately reserved for these taxes and the settlement did not result in additional tax expense.
We are currently working with the IRS to join the IRS Compliance Assurance Process (“CAP”) program, a real-time audit process in which we and the IRS endeavor to agree on the treatment of all tax positions prior to the filing of our federal tax return. We believe that there are benefits to participating in the CAP program, as it is expected to reduce the period of time between the filing of our tax returns and settlement with the IRS. In order to participate in the CAP program, we must resolve open IRS audits and audits under appeal. Accordingly, we expect that we will continue to enter into settlement agreements with the IRS with respect to prior tax years as we progress in our efforts to join the CAP program.

34


For additional detail regarding the provision for income taxes, see note 14 to the consolidated financial statements.
Loss from Discontinued Operations, Net of Tax
During the fiscal year ended June 30, 2014, we had no discontinued operations, compared to loss from discontinued operations of $4 million for fiscal year 2013.
See note 2 to the consolidated financial statements for further information related to these discontinued operations.

Fiscal Year Ended June 30, 2013 Compared to Fiscal Year Ended June 30, 2012
Below is a summary of comparative results of operations and a more detailed discussion of results for the fiscal years ended June 30, 2013 and 2012:
 
 
Fiscal Year Ended June 30,
(in millions)
 
2013
 
2012
 
Change    
Revenue
 
$
3,550

 
$
3,598

 
$
(48
)
Cost of Products Sold
 
1,700

 
1,794

 
(94
)
Gross Profit
 
1,850

 
1,804

 
46

Selling, General and Administrative Expenses
 
980

 
1,033

 
(53
)
Research and Development Expenses
 
192

 
164

 
28

Restructuring and Acquisition Integration Charges
 
18

 
33

 
(15
)
Reserve for Expected Government Settlement
 
41

 

 
41

Operating Income
 
619

 
574

 
45

Interest Expense and Other, Net
 
76

 
87

 
(11
)
Income Before Income Taxes
 
543

 
487

 
56

Provision for Income Taxes
 
154

 
126

 
28

Income from Continuing Operations
 
389

 
361

 
28

Discontinued Operations
 
 
 
 
 
 
Loss from the Disposal of Discontinued Businesses, Net of Tax
 

 
(78
)
 
78

Income (Loss) from the Operations of Discontinued Businesses, Net of Tax
 
(4
)
 
10

 
(14
)
Loss from Discontinued Operations, Net of Tax
 
(4
)
 
(68
)
 
64

Net Income
 
$
385

 
$
293

 
$
92


35


Revenue
The following table presents the revenue information for select business lines within each of our reportable segments for the fiscal years ended June 30, 2013 and 2012:
 
 
Fiscal Year Ended June 30,
(in millions)
 
2013
 
2012
 
Change    
Medical Systems
 
 
 
 
 
 
Dispensing Technologies
 
$
993

 
$
1,038

 
$
(45
)
Infusion Systems
 
916

 
955

 
(39
)
Respiratory Technologies1
 
393

 
420

 
(27
)
Other
 
27

 
26

 
1

Total Medical Systems
 
$
2,329

 
$
2,439

 
$
(110
)
Procedural Solutions
 
 
 
 
 
 
Infection Prevention
 
$
594

 
$
576

 
$
18

Medical Specialties
 
344

 
317

 
27

Specialty Disposables
 
283

 
266

 
17

Total Procedural Solutions
 
$
1,221

 
$
1,159

 
$
62

Total CareFusion
 
$
3,550

 
$
3,598

 
$
(48
)
__________________ 
1Includes the respiratory diagnostics product line. See note 1 to the consolidated financial statements.
Revenue in our Medical Systems segment decreased 5% to $2,329 million compared to the prior fiscal year. The decrease was primarily a result of decreased revenues in the Dispensing Technologies ($45 million), Infusion Systems ($39 million), and Respiratory Technologies ($27 million) business lines.
Revenue in the Dispensing Technologies business line decreased $45 million to $993 million, primarily due to a decrease in the volume of equipment installations in advance of a new product release. Revenue in the Infusion Systems business line decreased $39 million to $916 million, primarily due to the net impact of a decrease in the volume of pump installations offset in part by an increase in equipment pricing and in dedicated disposable volumes. Revenue in the Respiratory Technologies business line decreased $27 million to $393 million as a result of continued constraints on hospital capital spending in the current year.
Revenue in our Procedural Solutions segment increased 5% to $1,221 million compared to the prior fiscal year. The increase in Procedural Solutions revenue was due to growth in the Medical Specialties ($27 million), Infection Prevention ($18 million), and Specialty Disposables ($17 million) business lines.
Revenue in the Infection Prevention business line increased by $18 million to $594 million as a result of increased sales of skin preparation products and non-dedicated infusion disposables. Revenue in the Medical Specialties business line increased by $27 million to $344 million primarily as a result of international expansion and continued strength in pleural drainage and biopsy categories. Increased revenue in the Specialty Disposables business line of $17 million to $283 million, is primarily attributable to an increase in demand as a result of a heavier flu season during the current year and increased distribution activities for bronchial hygiene products.
Gross Profit and Gross Margins
Gross profit increased 3% to $1,850 million compared to the prior fiscal year. As a percentage of revenue, gross margin was 52.1% and 50.1% for fiscal year 2013 and 2012, respectively.
The increase in gross margin was primarily the result of infusion capital pricing improvements, manufacturing savings, and lower recall charges compared to prior year. 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.

36


Selling, General and Administrative and Research and Development Expenses
SG&A and Research and Development expenses decreased 2% to $1,172 million compared to the prior fiscal year. The decrease was primarily due to savings associated with restructuring activities and a reduction in the amortization of intangible assets. These decreases were partially offset by the onset of the new medical device excise tax that was implemented in fiscal year 2013 as part of the healthcare reform in the United States and the costs associated with the operations of Intermed and UK Medical.
R&D expenses increased 17% to $192 million compared to the prior fiscal year as we continue to invest in next generation platforms primarily in each of our Medical Systems business lines.
Restructuring and Acquisition Integration Charges
Restructuring and acquisition integration charges decreased $15 million to $18 million compared to the prior fiscal year. We periodically incur costs to implement smaller restructuring efforts for specific operations. These 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.
Operating Income
Operating income increased $45 million, or 8%, to $619 million compared to the prior fiscal year.
Segment profit in our Medical Systems segment increased $32 million to $471 million compared to the prior fiscal year. The 7% increase in segment profit was primarily driven by manufacturing costs savings, improved infusion capital pricing, lower recall charges compared to the prior year, and a 5% reduction in SG&A, offset by a 17% increase in R&D expenses.
Segment profit in the Procedural Solutions segment increased $54 million to $189 million compared to the prior fiscal year. The 40% increase in segment profit was primarily attributable to increased gross margin and reductions in restructuring and acquisition integration charges as compared to the prior year.
Interest Expense and Other
Interest expense and other, net decreased 13% to $76 million compared to the prior fiscal year. This decrease was primarily due to lower interest expenses associated with our senior debt.

Provision for Income Taxes
Income tax expense increased by $28 million to $154 million compared to the prior fiscal year. The effective tax rate for fiscal year 2013 was 28.3% compared to 25.9% for fiscal year 2012. The increase in the effective tax rate was primarily due to changes in our business income mix by jurisdiction and an increase in tax expense as a result of the reserve for the expected government settlement accrued during the fiscal year ended June 30, 2013, a portion of which is not deductible.
During the quarter ended June 30, 2013, we and Cardinal Health entered into a closing agreement with the IRS to effectively settle $450 million of the $462 million of additional tax proposed by the IRS in connection with the audit of fiscal years 2003 through 2005 related to the transfer of intellectual property among our subsidiaries. In connection with the settlement, we agreed to pay $80 million ($69 million net of tax) including $26 million of interest. We were adequately reserved for these taxes and the settlement did not result in additional tax expense.
For additional detail regarding the provision for income taxes, see note 14 to the consolidated financial statements.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax totaled $4 million for fiscal year 2013 compared to loss from discontinued operations of $68 million for fiscal year 2012. The change is a result of a loss from the disposal of the Nicolet business, which we classified as discontinued operations during fiscal year 2012 and divested in July 2012.
On July 1, 2012 we completed the sale of the Nicolet business, resulting in an additional $4 million loss recorded in discontinued operations, primarily related to the tax impact from the sale.
See note 2 to the consolidated financial statements for further information related to these discontinued operations.

37


Liquidity and Capital Resources
Overview
Historically, we have generated, and expect to continue to generate, positive cash flow from operations. Cash flows from operations primarily represent 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. Cash flows from financing activities primarily represent net proceeds from debt issuance, settlement of long-term borrowings, and outflows related to the share repurchase program, as discussed below.
Our cash and cash equivalents balance at June 30, 2014 was $2,303 million. Of this balance, $1,153 million is held outside of the United States and is denominated in United States dollars as well as other currencies. We believe that our current domestic cash flow from operations, domestic cash balances, and senior unsecured revolving credit facility provides us with sufficient liquidity to meet domestic operating needs. It is our intention to indefinitely reinvest all foreign earnings in order to ensure sufficient working capital and expand existing operations outside the United States. To the extent our foreign operations have generated previously taxed income that will not be subject to additional United States federal income tax, we may decide to repatriate such earnings to 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, tax or interest.
Since July 1, 2011, we have issued $1.3 billion in senior unsecured notes. In March 2013, we issued $300 million aggregate principal amount of notes and received net proceeds of approximately $298 million, and in May 2014, we issued $1 billion aggregate principal amount of notes and received net proceeds of approximately $990 million. During this same period, we used $700 million of our cash balances to repay outstanding senior unsecured notes upon maturity, including the repayment of $250 million of notes upon maturity in August 2012, and $450 million of notes upon maturity in August 2014.
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, 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. This share repurchase program was completed in June 2013. Under this program, we repurchased a total of 15.3 million shares of our common stock for an aggregate of $500 million (excluding commissions and fees). In August 2013, we announced that our Board of Directors had approved a new share repurchase program authorizing the repurchase of up to $750 million of our common stock. Under this program, we are authorized to repurchase our shares in open market and private transactions through December 2015. During the fiscal year ended June 30, 2014, we repurchased a total of 14.6 million shares under this program for an aggregate of $577 million (excluding commissions and fees). From July 1, 2014 through the date of this filing, we purchased an additional 2.3 million shares under this program for an aggregate of $103 million (excluding commissions and fees). We expect to manage the pace of repurchases under this program based on market conditions and other relevant factors. In August 2014, our Board of Directors authorized the repurchase of an additional $750 million of our common stock through June 2016.  We expect to begin repurchasing shares under this new program upon completion of the $750 million program authorized in August 2013.
On January 9, 2014, we announced that we entered into a final settlement agreement to resolve government investigations related to prior sales and marketing practices for our ChloraPrep skin preparation product and our relationships with health care professionals. We previously disclosed on April 25, 2013, that we had reached an agreement in principle to pay the government approximately $41 million to resolve the allegations. We paid the settlement in January 2014, which was previously reserved during the year ended June 30, 2013. See note 15 to the consolidated financial statements for further information.
During the fiscal year ended June 30, 2013, we and Cardinal Health entered into a closing agreement with the IRS to effectively settle $450 million of the $462 million of additional tax proposed by the IRS in connection with the audit of fiscal years 2003 through 2005 related to the transfer of intellectual property among our subsidiaries. In connection with the settlement, we agreed to pay $80 million ($69 million net of tax) including $26 million of interest. During the fiscal year ended June 30, 2014, we and Cardinal Health entered into a closing agreement with the IRS to effectively settle all remaining matters under appeal with the IRS related to fiscal years 2003 through 2005. As part of this closing agreement, we agreed to pay $12 million ($11 million net of tax), including $5 million of interest, which is reflected in our financial results for the fiscal year ended June 30, 2014. See note 14 to the consolidated financial statements for further information.

38


Sources and Uses of Cash
The following table summarizes our consolidated statements of cash flows from continuing operations for the fiscal years ended June 30, 2014, 2013, and 2012:
 
 
Fiscal Year Ended June 30,
(in millions)
 
2014
 
2013
 
2012
Cash Flow Provided by/(Used in)
 
 
 
 
 
 
Operating Activities
 
$
685

 
$
613

 
$
648

Investing Activities
 
$
(718
)
 
$
(171
)
 
$
(238
)
Financing Activities
 
$
522

 
$
(299
)
 
$
(99
)
Fiscal Years Ended June 30, 2014 and June 30, 2013
Net operating cash flow from continuing operations increased $72 million to $685 million for the year ended June 30, 2014 compared to the prior year. The increase in cash flow provided by continuing operations was driven by an increase in cash flow associated with net investment in sales type leases ($91 million), accounts payable ($76 million), and other operating activities ($93 million). These activities were partially offset by a decrease in net income adjusted for non-cash items ($47 million), a decrease in cash flow associated with trade receivables ($126 million), and inventories ($15 million).
Net cash used in continuing operations from investing activities increased $547 million for the year ended June 30, 2014 compared to the prior year, primarily due to an increase in amounts paid for acquisitions of $453 million, and for equity or cost investments of $108 million. Additionally, cash used in property and equipment increased $9 million. These activities were offset by a decrease in cash used for intangibles assets ($18 million).
Net cash provided by continuing operations from financing activities increased $821 million for the year ended June 30, 2014 compared to the prior year. This increase is largely due to net proceeds from the May 2014 issuance of senior notes ($990 million) compared to the repayment of senior notes ($250 million upon maturity in August 2012), and the receipt of net proceeds from the March 2013 issuance of senior notes ($298 million). Additionally, more cash was generated from stock option exercises, net of shares withheld for tax purposes ($49 million) as compared to the prior year. These activities were offset by our share repurchase activities, which increased cash outflows to $569 million, compared to $400 million of share repurchase activities during fiscal year 2013.
Fiscal Years Ended June 30, 2013 and June 30, 2012
Net operating cash flow from continuing operations decreased $35 million to $613 million for the year ended June 30, 2013 compared to the prior year. The decrease is primarily associated with trade receivables, which contributed a year-over-year reduction in cash flow of $80 million. This decrease is attributable to stabilization achieved during fiscal year 2013 in the accounts receivable portfolio as compared to the fiscal year 2012 domestic and international collection efforts. Additionally, a decrease in cash flows within operating assets and liabilities, including accounts payable, and other accrued liabilities and other operating items resulted in a cash flow decrease of $19 million. These decreases in cash flow were offset by an increase in income from continuing operations, adjusted for the impact of non-cash items, of $7 million, and an increase in cash flow resulting from changes in inventories and sales-type leases of $57 million.
Net cash used in continuing operations from investing activities decreased $67 million for the year ended June 30, 2013 compared to the prior year primarily due to a decrease in amounts paid for acquisitions of $122 million offset by a decrease in amounts received for divestitures of $59 million. Further, activities associated with long-lived asset investments resulted in a decrease in cash outflows of $4 million.
Net cash used in continuing operations from financing activities increased $200 million for the year ended June 30, 2013 compared to the prior year. This increase is largely due to our share repurchase activities, which increased to $400 million, compared to $100 million of repurchase activities during fiscal year 2012. Additionally, there was an increase in cash used in the repayment of senior notes ($250 million) upon maturity in August 2012. These increases in cash used were offset by receipt of net proceeds from the March 2013 issuance of senior notes ($298 million) and an increase in proceeds from stock option exercises, net of shares withheld for tax purposes ($61 million) as compared to the prior year.

39


Capital Resources
Senior Unsecured Notes.    The following table summarizes the aggregate principal amount of our outstanding senior unsecured notes as of June 30, 2014, 2013, and 2012:
 
 
For Fiscal Year Ended June 30,
(in millions)
 
2014
 
2013
 
2012
4.125% senior notes due 2012
 
$

 
$

 
$
250

5.125% senior notes due 2014*
 
450

 
450

 
450

1.450% senior notes due 2017
 
300

 

 

6.375% senior notes due 2019
 
700

 
700

 
700

3.300% senior notes due 2023
 
300

 
300

 

3.875% senior notes due 2024
 
400

 

 

4.875% senior notes due 2044
 
300

 

 

     Total senior notes
 
$
2,450

 
$
1,450

 
$
1,400

________
*Repaid upon maturity in August 2014
In anticipation of our spinoff from Cardinal Health, we sold $1.4 billion aggregate principal amount of senior unsecured notes in July 2009 and received net proceeds of $1.374 billion (the “July 2009 Notes”). In August 2012, we used $250 million in cash to repay upon maturity the $250 million aggregate principal amount of 4.125% senior notes due 2012. In March 2013, we issued $300 million aggregate principal amount of 3.300% senior notes due 2023 and received net proceeds of approximately $298 million (the “March 2013 Notes”). In May 2014, we issued $1 billion aggregate principal amount of senior notes and received net proceeds of approximately $990 million (the “May 2014 Notes”). In August 2014, we used a portion of the net proceeds of the May 2014 Notes issuance to repay upon maturity the $450 million aggregate principal amount of 5.125% senior notes due 2014.
The indentures governing the senior notes limit, among other things, our ability to incur certain secured debt, enter into certain sale and leaseback transactions and merge or consolidate with other companies. In accordance with the indentures, we may redeem the senior notes prior to maturity at a price that would equal or exceed the outstanding principal balance, as defined. In addition, if we undergo a change of control and experience a below investment grade rating event, we may be required to repurchase all of the senior notes at a purchase price equal to 101% of the principal balance plus any accrued and unpaid interest.
In connection with the issuance of the July 2009 Notes and the March 2013 Notes, we entered into separate registration rights agreements with the initial purchasers of the notes pursuant to which we agreed to file a registration statement with the SEC to conduct an exchange offer for the notes. In accordance with the registration rights agreements, we filed a Form S-4 with the SEC and conducted an exchange offer for the July 2009 Notes and the March 2013 Notes, which we completed on February 4, 2010 and January 24, 2014, respectively. The purpose of the exchange offers was to allow the holders of the July 2009 Notes and the March 2013 Notes, which were each issued in separate private placement transactions and were subject to transfer restrictions, to exchange their notes for new registered notes under the Securities Act that did not have these restrictions. The May 2014 Notes were offered in an underwritten public offering pursuant to an automatic shelf registration statement on Form S-3.

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. Effective as of December 10, 2012, we increased the aggregate commitments available under the credit facility from $550 million to $750 million, pursuant to the exercise of the accordion feature under the credit facility.
Effective February 13, 2014, we amended and restated the five-year senior unsecured revolving credit facility. This modification, among other things (i) extends the maturity date of the credit facility from July 6, 2016 to February 13, 2019; (ii) includes lower applicable interest rates; (iii) subject to certain conditions, provides CareFusion the option to increase the commitments under the credit facility by up to $250 million, to the extent that existing or new lenders agree to provide such additional commitments; (iv) includes a $25 million letter of credit sub-facility; and (v) provides additional flexibility for borrowings in currencies other than U.S. dollars. The other material terms of the credit facility, including covenants, remain unchanged.

40


Borrowings under the amended and restated credit facility bear interest at a rate per annum that is comprised of a reference rate, which is generally based on the British Bankers Association LIBOR Rate, Federal Funds Rate, or prime rate, plus an applicable margin, which varies based upon CareFusion’s debt ratings. The amended and restated credit facility also requires us to pay a quarterly commitment fee to the lenders on the amount of the lender’s unused commitments thereunder based upon CareFusion’s debt ratings.
The amended and restated credit facility contains several customary covenants including, but not limited to, limitations on liens, subsidiary indebtedness, dispositions, and transactions with affiliates. In addition, the amended and restated 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 the most recent four fiscal quarters, and a consolidated interest coverage ratio of at least 3.50:1.00 as of the end of any period of the most recent four fiscal quarters. The amended and restated 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.
At June 30, 2014, we had no amounts outstanding under the amended and restated credit facility.
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.

41


Contractual Obligations
As of June 30, 2014, our contractual obligations, including estimated payments due by fiscal year, are as follows:
 
 
Payments Due by Fiscal Year
(in millions)
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
 
Total
Long-Term Debt1
 
$
452

 
$
302

 
$
3

 
$
1,703

 
$
2,460

Other Long-Term Liabilities2
 
117

 
46

 
20

 
10

 
193

Interest on Long-Term Debt3
 
91

 
178

 
170

 
479

 
918

Operating Leases4
 
34

 
58

 
21

 
16

 
129

Purchase Obligations5
 
340

 
13

 
6

 
2

 
361

Total Financial Obligations
 
$
1,034

 
$
597

 
$
220

 
$
2,210

 
$
4,061

 __________________
1 Represents maturities of our long-term debt obligations, excluding capital lease obligations described below, as described in note 13 to the consolidated financial statements. Amounts are presented gross of debt issuance discounts of $21 million at June 30, 2014.
2 Represents cash outflows by period for certain of our long-term liabilities in which cash outflows could be reasonably estimated. Certain long-term liabilities, such as unrecognized tax benefits of $263 million and deferred taxes of $607 million, tax associated accruals of $89 million, deferred compensation obligations of $25 million and other long-term liabilities of $20 million, have been excluded from the table above because of the inherent uncertainty of the underlying tax positions or because of the inability to reasonably estimate the timing of any cash outflow. See note 14 to the consolidated financial statements for additional information.
3 Interest obligation is calculated based on each outstanding debt stated or coupon rate, or existing variable rate as of June 30, 2014, as applicable.
4 Represents minimum rental payments and the related estimated future interest payments for operating leases having initial or remaining non-cancelable lease terms as described in note 15 to the consolidated financial statements.
5 Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding and specifying all significant terms, including the following: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation amounts disclosed above represent estimates of the maximum for which we are obligated and the time period in which cash outflows will occur. Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table. In addition, contracts that can be unilaterally canceled with no termination fee or with proper notice are excluded from our total purchase obligations except for the amount of the termination fee or the minimum amount of goods that must be purchased during the requisite notice period.

In addition to the contractual obligations set forth above, we expect that we will make payments to the IRS related to prior tax years. We are currently before the IRS Appeals office for fiscal years 2006 and 2007, and we have commenced federal income tax audits for fiscal years 2008 through 2012. We believe that we have provided adequate 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. Further, even if we are adequately reserved for these matters, final settlement would require us to make a cash payment to the IRS, which could be material. If we determine to repatriate foreign cash or utilize our revolving credit facility to fund the payment to the IRS, it may result in increased costs. See note 14 to the consolidated financial statements for further information.
Off-Balance Sheet Arrangements
At June 30, 2014, we did not have any off-balance sheet arrangements.

42


Critical Accounting Policies and Sensitive Accounting Estimates
Our discussion and analysis of our results of operations and liquidity and capital resources are based on our audited consolidated financial statements, which have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Critical accounting policies are those accounting policies that can have a significant effect on the presentation of our financial condition and results of operations, and require use of complex and subjective estimates based upon past experience, trends, and management’s judgment. We evaluate our estimates and judgments on an ongoing basis and believe our estimates to be reasonable. Other companies applying reasonable judgment to the same facts and circumstances could develop different estimates. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies applied in preparing our audited consolidated financial statements that management believes are the most dependent on the application of estimates and assumptions. For additional accounting policies, see note 1 to the consolidated financial statements.
Revenue Recognition
We generate revenue through the sale and lease of equipment, software, services, medical products, supplies, and the income associated with the financing of our equipment leases. We recognize revenue when:
 
persuasive evidence of an arrangement exists;
product delivery has occurred or the services have been rendered;
the price is fixed or determinable; and
collectability is reasonably assured.
The timing of revenue recognition and the amount of revenue actually recognized in each case depends on a variety of factors, including the specific terms of each arrangement and the nature of our obligations. Determination of the appropriate amount of revenue recognized may involve subjective or complex judgments and estimates that we believe are reasonable, but actual results may differ from our estimates. The significant judgments and uncertainties that are sufficiently sensitive and could result in material differences under other assumptions and conditions are those described below.
Revenue Recognition for Leases
We evaluate our lease transactions to determine the classification of the leases against the following criteria:
 
The lease transfers ownership of the property to the lessee by the end of the lease term;
There is a bargain purchase option;
The lease term is equal to or greater than 75% of the economic life of the equipment; or
The present value of the minimum lease payments are equal to or greater than 90% of the fair market value of the equipment at the inception of the lease.
If a lease meets at least one of the criteria above, and collectability of the minimum lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of unreimbursable costs yet to be incurred under the lease, the lease is classified as a sales-type lease. All other leases are classified as operating leases.
The economic life of our leased products is the estimated remaining period during which the capital equipment products are expected to be economically usable by one or more users, with normal repairs and maintenance, for the purpose for which they were intended at the lease inception, without limitation by the lease term. The value of our products is driven principally by their technological features and is subject to obsolescence due to advancements in technological features of next generation models. We consider the economic life of our technology-dependent capital equipment products to be five years based on the anticipated future technological advances of our products or that of our competitors. Additionally, five years represents the most frequent contractual lease term for our technology-dependent principal products and virtually none of our leases are for original terms longer than five years. Our product configurations are customized for each customer’s specific specifications, and there is no significant after-market for our used equipment and the equipment is not re-leased upon return. Upon return of the leased products, they are broken down and certain parts are reclaimed, but most of the parts are scrapped or discarded. Thus, we believe five years is representative of the period during which the technology-dependent products are expected to be economically usable at the inception of the lease. Residual values, if any, are established at lease inception using estimates of the fair value of reclaimable component parts of the products at the end of the lease term.
We are required to estimate the fair value of our leased products for the purposes of lease classification and determination of the interest rate implicit in the lease. In accordance with Financial Accounting Standards Board Accounting Standards

43


Codification Topic 840, Leases (“ASC 840”), we define the fair value of a leased product at lease inception as its normal selling price, reflecting any volume or trade discounts that may apply. We estimate the fair value of our leased products on a quarterly basis based upon transacted cash sales prices during the preceding twelve month period. Our products are sold as part of customized systems to a diverse range of customers, many of which are affiliated with a GPO or IDN. Customers within each GPO or IDN affiliation have unique purchasing behaviors and characteristics. As a result of such diversity, there is a wide range of negotiated cash selling prices for our products. Consequently, our customers are grouped in customer classes and a best estimate of fair value is developed for each product specific to each customer class. Because our products are sold at a wide range of cash selling prices, we stratify our cash selling transactions based on product configuration and customer class, as discussed further below. Once we stratify our cash selling transactions, we calculate the weighted average selling price of each configured product using the interquartile range methodology. This statistical methodology is used to remove outliers from the population of normal cash selling prices, which narrows the range of selling prices within each stratified customer class. The resulting weighted average selling price is the single point estimate of fair value that we use as the normal selling price under ASC 840. Based on this fair value estimate, we determine the implicit interest rate for each product subject to a sales-type lease arrangement. The implicit interest rate is the rate that causes the fair value of the product to equal the present value of the minimum lease payments and the present value of the product’s residual value. The interest rate implicit to the lease is then used to determine the amount of revenue recognized at the inception of the lease and the revenue recognized over the life of the lease.
Estimating the fair value of our leased products can be subjective and thus subject to significant judgment. We offer our customers many types of dispensing products, each of which is generally customizable in 5-15 unique configurations. Our customers have the option of purchasing these products for cash or through a lease, with prices that can vary significantly based on their GPO or IDN affiliation. Accordingly, in order to estimate the fair value of our leased products, we stratify our cash selling transactions to narrow the range of transacted sales prices for a leased product based on product configuration and customer class. We believe that using these characteristics to narrow the range of cash selling prices to determine a single point estimate of fair value for each product, specific to each customer class, is appropriate because these characteristics are the primary drivers of the variability in our cash sales pricing:
 
Product configuration — We believe that stratifying our products based on product configuration is appropriate because our products can be customized into numerous configurations based on customer specifications. Our dispensing systems are highly configurable and custom designed for each customer based on size, site-specific needs and cost constraints.
Customer class — We stratify our cash selling prices of similar product configurations by similar classes of customers based upon GPO or IDN affiliation. We believe the characteristics of the GPO or IDN, including size, historical and expected purchasing volume, pre-negotiated trade discounts, and preferred provider relationship, is an appropriate basis to stratify transacted cash selling prices to establish the normal selling price reflective of any normal volume or trade discounts for that product configuration.
Approximately 15-25% of our lease transactions in a given year do not have corresponding cash selling transactions for the same product configuration and customer class. Therefore, for these transactions, the estimated fair value is determined by: (1) reviewing the estimated fair value of the same product line with the closest similar configuration sold to the same customer class and adjusting this fair value by the expected pricing impact of the difference in product configuration; or (2) reviewing the estimated fair value of the same product configuration sold to a different customer class and adjusting this fair value by the expected pricing impact of the difference in customer class.
We expect to experience variability in our fair value estimates for our dispensing products from period to period. Our single point estimate of fair value is calculated based on the weighted average selling price for a product within each stratified customer class. Consequently, period to period variability of such estimate may be caused by changes in the number and size of cash transactions for a particular product or group of products, as well as external factors such as changes in the competitive pricing environment and changes in the GPO or IDN landscape, which can impact our cash sales transactions and thus our calculated estimates of fair value. In addition, as our dispensing products progress through their life cycles and new products are introduced, we may sell fewer existing products or sell existing products at reduced prices, which can impact the cash transaction prices used to estimate the fair value of such products.

44


Evaluation of the Significance of Embedded Software
We sell and lease products with embedded software. We regularly review these products to determine whether embedded software is more than incidental to the product as a whole. If the embedded software is more than incidental to the product as a whole, the product is classified as a software product unless it is determined that the tangible elements and software elements of the product work together to deliver the essential functionality of the product as a whole.
We consider the following characteristics to be indicators that embedded software is more than incidental to the product as whole:
 
software is a significant focus of the marketing effort or the software application is sold separately;
significant internally developed software costs have been incurred; and
if we provide telephone support, bug-fixes, and/or unspecified upgrades specific to the embedded software.
The evaluation process is often complex and subject to significant judgment as the products exhibit varying degrees of the indicators identified above, such as:
 
certain products are marketed as systems or solutions wherein it is implied, but not explicitly stated within marketing and sales collateral, that embedded software provides the basis for significant functionalities identified within the marketing efforts;
internal software development costs are incurred during the product development process;
separately priced extended warranty services provide post-installation support relative to repair parts and services and also include telephone support and bug-fixes for the software embedded within the products; and
we are required by law to provide medical safety related bug-fixes for products with embedded software elements.
In evaluating whether the tangible elements and software elements of the product together deliver the essential functionality of the product as a whole, we consider the following factors:
 
the frequency with which tangible elements are sold separately from the software elements; and
whether the non-software elements substantively contribute to the essential functionality of the product.

Although we believe the software embedded within our infusion products, when sold with safety software, patient identification products, and certain diagnostic equipment is more than incidental to the product as a whole, the tangible elements and software elements work together to deliver the essential functionality of these products as a whole and therefore these products are not classified as software. We have determined the embedded software within our other products, primarily our dispensing and respiratory products, is incidental to the products as a whole. Those products are therefore not classified as software.
Generally, we classify our stand alone software application sales and any related post contract support related to these sales as software.
Multiple Element Arrangements
The majority of our transactions qualify as multiple element arrangements. We use the relative selling price method to allocate contract proceeds to non-software products, which are then individually recognized to revenue. The selling price used for each deliverable is based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or management’s estimated selling price if neither vendor-specific objective evidence or third-party evidence is available.
The determination of vendor-specific objective evidence associated with our products and services is generally based on historical evidence of sales of the same product in stand-alone transactions and the contract renewal prices for post-contract support and separately priced extended warranty services. The determination of third-party evidence is generally based on market data on sales of similar products and services, if available; however in most cases we and our competitors execute large multiple element arrangements which reduces our ability to determine the prices for individual products and services. Management’s best estimate of selling price is developed consistent with the price at which we would transact if the deliverable were sold by us regularly on a stand-alone basis. In determining estimated selling price, we generally consider the following: stand-alone sales prices, established price lists, costs to produce, profit margins for similar products, market conditions, and customer stratification.
For software and software related products, we use the relative fair value method to allocate contract proceeds to each unit of accounting; whereby the evidence used in the determination of fair value estimates are based solely on vendor-specific

45


objective evidence. To the extent that vendor specific objective evidence does not exist for delivered elements of the transaction, we apply the residual method.
Different conclusions as to selling price estimates may significantly affect the timing and amount of revenue recognition, the classification of leasing transactions, and the classification of revenue as product, service, rental or other income. It is impossible to determine the effects of potential different conclusions as they relate to selling price estimates for components of our multiple element arrangements.
Business Combinations
Assumptions and estimates are used to determine the fair value of assets acquired and liabilities assumed in a business combination. A significant portion of the purchase price in many of our acquisitions is assigned to intangible assets, which requires management to use significant judgment in determining fair value. Current and future amortization expense for such intangibles is affected by purchase price allocations and by the assessment of estimated useful lives of such intangibles, excluding goodwill. We believe the assets recorded and the useful lives established are appropriate based upon current facts and circumstances.
In conjunction with the review of a transaction, the status of the acquired company’s research and development projects is assessed to determine the existence of IPR&D. In connection with certain acquisitions, we are required to estimate the fair value of acquired IPR&D, which requires selecting an appropriate discount rate and estimating future cash flows for each project. Management also assesses the current status of development, nature and timing of efforts to complete such development, uncertainties and other factors when estimating the fair value. Costs are not assigned to IPR&D unless future development is probable. IPR&D is recorded as an unamortized intangible asset until the underlying products are either completed and put into service, which would require commencing amortization over the estimated product life, or determining the products will not complete development, which would require impairing the portion of IPR&D associated with that product. Until either determination is made, IPR&D is subject to periodic impairment review, with impairments, if any, expensed to our consolidated statement of income. During fiscal year 2010, we completed the acquisition of Medegen, which resulted in approximately $45 million of IPR&D associated with new products under development being recorded as an intangible asset. During fiscal year 2014, we reclassified in-process research and development associated with the Medegen acquisition to developed technology due to commercialization. The developed technology will be amortized over 15 years.

Goodwill and Other Intangibles
Goodwill is the excess of the purchase price of an acquired business over the amounts assigned to assets and liabilities assumed in the business combination. Purchased goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually in the fourth quarter of each fiscal year, or more frequently if certain indicators are present or changes in circumstances suggest impairment exists. Intangible assets with finite lives are amortized over their useful lives.
We conduct our goodwill impairment testing at the reporting unit level which is comprised of our Medical Systems and Procedural Solutions operating segments, as the business lines comprising each of the operating segments service a common group of customers, offer complementary products, and share a common strategy.
In conducting the annual impairment test of our goodwill and indefinite-lived intangible assets, an optional qualitative assessment may be performed. If the results of this qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is not less than its carrying amount, then no further quantitative testing is required. The optional qualitative assessment was not used for annual impairment testing in fiscal year 2014. Otherwise, the calculated fair value of a reporting unit or indefinite-lived intangible asset is compared to its carrying amount, including goodwill by performing the quantitative impairment test. If the fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the fair value, further analysis is performed to assess impairment. There are no active or inactive markets for our reporting units or indefinite-lived intangible assets to derive approximate fair values, and accordingly, the valuation process is similar to the valuation of a closely-held company or acquired indefinite-lived intangible asset and considers valuation methods that are income-based and market-based. Our income-based approach is a discounted cash flow method which utilizes an estimated discount rate to the projected after-tax cash flows for the reporting unit or indefinite-lived intangible asset. Our market-based approach utilizes an estimated market-based multiple to the reporting units’ estimated earnings before interest, taxes, depreciation and amortization (“EBITDA”). The results of the income-based and market-based approaches are equally weighted to arrive at the total estimated fair value for each reporting unit for the purposes of our annual goodwill impairment testing. Based on our annual impairment test as of the fourth quarter of the fiscal year, we did not record any goodwill or other indefinite-lived intangible asset impairments.

46


The application of valuation methods requires significant judgment regarding appropriate inputs and assumptions and results in our best estimate of the fair value of an operating segment. As with any estimate, inputs and assumptions can be subject to varying degrees of uncertainty. Informed market participants can differ in their perception of value for a reporting unit. It is possible that one of our operating segments could experience goodwill impairment in the future.
Restructuring and Acquisition Integration Charges
We separately identify restructuring and acquisition integration charges in SG&A expenses. A restructuring activity is a program whereby we fundamentally change our operations such as closing facilities, moving a product to another location or outsourcing the production of a product. Restructuring activities may also involve substantial re-alignment of the management structure of a business line in response to changing market conditions.
Acquisition integration charges are activities and costs to integrate acquired companies into the operations of our existing activities, including such functions as selling, manufacturing, information systems, and corporate related functions.
The majority of the charges related to restructuring and acquisition integration can be classified in one of the following categories: employee-related costs, exit costs (including lease termination costs), asset impairments, and other integration costs. Employee-related costs include severance and termination benefits. Lease termination costs include lease cancellation fees, forfeited deposits and remaining payments due under existing lease agreements less estimated sublease income. Other facility exit costs include costs to move equipment or inventory out of a facility as well as other costs incurred to shut down a facility. Asset impairment costs include the reduction in value of our assets as a result of the integration or restructuring activities.
See note 6 to the consolidated financial statements for additional information.
Provision for Income Taxes
Our income tax expense, deferred tax assets and liabilities and measurement of uncertain tax positions reflect management’s assessment of estimated future taxes to be paid on items in the consolidated financial statements.
The proper treatment of various tax issues, including transfer pricing, are subjective determinations that depend on the specific facts and circumstances at issue. To estimate contingent tax reserves, management first concludes whether our positions are more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes. The reserve is then determined by evaluating and weighing the technical merits of alternative methodologies against each other and concluding on the positions that provide the largest amount of tax benefit that is more likely than not of being realized upon ultimate resolution. To the extent there are any administrative or case law developments that provide additional evidence in favor or against the valuation methodologies utilized, the contingent tax reserve will be adjusted in the period that such developments occur.
Loss Contingencies
We accrue for contingencies related to litigation and other claims arising out of our business based on degree of probability and range of possible loss. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because these claims are often inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. The amount of ultimate loss may differ from these estimates.
Share-Based Compensation
We maintain a stock incentive plan that provides for awards of non-qualified and incentive stock options, restricted stock, restricted stock units and performance stock units for the benefit of certain of our officers, directors and employees. At the time of the spinoff, Cardinal Health converted or adjusted outstanding stock options, restricted stock and restricted stock units (collectively, “share-based awards”) with respect to Cardinal Health common shares held by Cardinal Health and CareFusion employees. The manner of conversion for each employee was determined based on the date of the original share-based award and the employment status of the employee at the spinoff date of August 31, 2009.
We are responsible for fulfilling all share-based awards related to our common stock, and Cardinal Health is responsible for fulfilling all share-based awards related to Cardinal Health common shares, regardless of whether the employee holding the share-based award is an employee of the company or Cardinal Health. We record share-based compensation expense for the share-based awards with the offsetting impact recorded to “Additional Paid-In Capital” in our consolidated balance sheets. The fair value of stock options granted by the company during the fiscal years ended June 30, 2014, 2013, and 2012 was valued utilizing a Black-Scholes-Merton valuation model. In addition, for performance stock units granted during fiscal year 2011,

47


which were subject to performance goals based on market conditions associated with stock price appreciation, we estimated fair value by utilizing a Monte Carlo valuation model.

Our estimate of fair value depends on a complex process that requires the estimation of future uncertain events. These events, estimates of which are entered within the valuation model include, but are not limited to, stock price volatility, the expected life, expected dividend yield and forfeiture rates. Once fair values are determined, current accounting practices do not permit them to be changed, even if the estimates used in the valuation model are different from actual results. We are required to compare our estimated share-based forfeiture rates to actual forfeiture rates and record any adjustments as necessary. See note 20 to the consolidated financial statements for additional information regarding share-based compensation including the valuation process.
New Accounting Pronouncements
See note 1 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.
ITEM 7A. 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 cash 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 Accumulated Other Comprehensive Income (“AOCI”) 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.
As of June 30, 2014, we had no forward interest rate swap derivative instruments outstanding.
As of June 30, 2013, the notional amount of the forward interest rate swap derivative instruments was $450 million, with an estimated fair value gain of approximately $34 million. The agreements require us to make payments based on fixed interest rates and receive payments based on variable benchmark LIBOR interest rates.
As of June 30, 2014 and June 30, 2013, 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 both June 30, 2014 and June 30, 2013, there were no outstanding amounts under our five-year senior unsecured 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. In March 2013, we issued $300 million aggregate principal amount of senior notes and received net proceeds of approximately $298 million. In May 2014, we issued $1 billion aggregate principal amount of senior notes and received net proceeds of approximately $990 million, and in August 2014, we used a portion of the net proceeds to repay upon maturity $450 million of our outstanding senior notes. The tables below present information about our investment portfolio and debt obligations:

48


 
 
June 30, 2014
 
 
 
 
Maturing in Fiscal Year
 
Fair
Market
Value
3
(in millions)
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
315

 
$

 
$

 
$

 
$

 
$

 
$
315

 
$
315

Cash Equivalents
 
$
1,988

 
$

 
$

 
$

 
$

 
$

 
$
1,988

 
$
1,988

Weighted Average Interest Rate1
 
0.06
%
 

 

 

 

 

 
0.06
%
 

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Debt2
 
$
452

 
$
2

 
$
300

 
$
1

 
$
2

 
$
1,703

 
$
2,460

 
$
2,583

Weighted Average Coupon Rate
 
5.12
%
 
3.47
%
 
1.45
%
 
3.21
%
 
3.25
%
 
4.00
%
 
4.57
%
 
 
Other Obligations
 
$
2

 
$
1

 
$
1

 
$
1

 
$

 
$

 
$
5

 
$
5

Weighted Average Interest Rate
 
9.85
%
 
7.50
%
 
7.50
%
 
7.50
%
 

 

 
8.29
%
 

 
 
 
June 30, 2013
 
 
 
 
Maturing in Fiscal Year
 
Fair
Market
Value
3
(in millions)
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Cash Equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
246

 
$

 
$

 
$

 
$

 
$

 
$
246

 
$
246

Cash Equivalents
 
$
1,552

 
$

 
$

 
$

 
$

 
$

 
$
1,552

 
$
1,552

Weighted Average Interest Rate 1
 
0.05
%
 

 

 

 

 

 
0.05
%
 

LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Debt2
 
$
2

 
$
452

 
$
2

 
$
1

 
$
1

 
$
1,003

 
$
1,461

 
$
1,572

Weighted Average Coupon Rate
 
3.44
%
 
5.12
%
 
3.47
%
 
2.65
%
 
3.21
%
 
5.44
%
 
5.34
%
 

Other Obligations
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Weighted Average Interest Rate
 
12.43
%
 

 

 

 

 

 
12.43
%
 

 __________________
1 Represents weighted average interest rate for cash equivalents only; cash balances generally earn no interest.
2 Fixed rate notes are presented gross of $21 million and $15 million purchase discount at June 30, 2014 and June 30, 2013, respectively.
3 The estimated fair value of our long-term obligations and other short-term borrowings was $2,588 million and $1,572 million at June 30, 2014 and June 30, 2013, respectively. The fair value of our senior notes at June 30, 2014 and 2013 was based on quoted market prices. The fair value of the other obligations at June 30, 2014 and June 30, 2013, 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.

49


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 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 AOCI. As the forecasted exposures affect earnings, the realized gain or loss on the forward contract will be moved from AOCI to the consolidated statements of income.
The following table provides information about our foreign currency derivative instruments outstanding as of June 30, 2014 and June 30, 2013: 
 
 
June 30, 2014
 
June 30, 2013
(in millions)
 
Notional
Amount
 
Average
Contract
Rate
 
Notional
Amount
 
Average
Contract
Rate
Foreign Currency Forward Contracts:
 
 
 
 
 
 
 
 
(Receive USD/pay foreign currency)
 
 
 
 
 
 
 
 
Euro
 
$
11

 
1.4

 
$
4

 
1.3

Australian Dollar
 
10

 
0.9

 
7

 
0.9

New Zealand Dollar
 
7

 
0.9

 
8

 
0.8

South African Rand
 
3

 
10.7

 

 

Mexico Peso
 
7

 
13.0

 
11

 
13.3

Canadian Dollar
 
5

 
1.1

 
14

 
1.1

Swiss Franc
 

 

 
1

 
0.9

Japanese Yen
 

 

 
1

 
97.7

British Pound
 

 

 
12

 
1.5

Hong Kong Dollar
 
5

 
7.8

 
5

 
7.8

Total
 
$
48

 
 
 
$
63

 
 
Estimated Fair Value
 
$

 
 
 
$

 
 
Foreign Currency Forward Contracts:
 
 
 
 
 
 
 
 
(Pay USD/receive foreign currency)
 
 
 
 
 
 
 
 
Swiss Franc
 
$
1

 
0.9

 
$

 

British Pound
 
3

 
1.7

 

 

Total
 
$
4

 
 
 
$

 
 
Estimated Fair Value
 
$

 
 
 
$

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

 
0.8

 
$
8

 
0.9

Total
 
$
8

 
 
 
$
8

 
 
Estimated Fair Value
 
$

 
 
 
$

 
 
Commodity Price Risk Management
We purchase commodities such as resins, printed circuit boards, latex, metals, various fuel products and polystyrene, among others for use in our manufacturing processes. We typically purchase these commodities at market prices, and as a result are affected by market price fluctuations. We have decided not to hedge these exposures as they are deemed immaterial.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CAREFUSION CORPORATION