CAREFUSION Corp - FORM 10-Q - February 6, 2015

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EX-32.1 - EXHIBIT 32.1 - CAREFUSION Corp	exhibit321_fy15q2.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended December 31, 2014



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

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

Telephone: (858) 617-2000

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

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

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

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

The number of outstanding shares of the registrant’s common stock, as of January 28, 2015 was 204,279,051.

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TABLE OF CONTENTS



IMPORTANT INFORMATION REGARDING FORWARD LOOKING STATEMENTS	3

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS	4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)	4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)	5
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)	6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4. CONTROLS AND PROCEDURES	40

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	40
ITEM 1A. RISK FACTORS	40
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41
ITEM 6. EXHIBITS	42

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Important Information Regarding Forward-Looking Statements

Portions of this Quarterly Report on Form 10-Q (including information incorporated by reference) include “forward-looking statements” based on our current beliefs, expectations and projections regarding our business strategies, market potential, future financial performance, industry and other matters. This includes, in particular, “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q as well as other portions of this Quarterly Report on Form 10-Q. The words “believe,” “expect,” “anticipate,” “project,” “could,” “would,” and similar expressions, among others, generally identify “forward-looking statements,” which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those projected, anticipated or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in “Item 1A—Risk Factors” of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 filed with the Securities and Exchange Commission on August 11, 2014. 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 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Quarters Ended December 31,					Six Months Ended December 31,
(in millions, except per share amounts)	2014			2013		2014			2013
Revenue	$	1,069		$	922	$	1,991		$	1,752
Cost of Products Sold	534			456		999			863
Gross Profit	535			466		992			889
Selling, General and Administrative Expenses	279			257		544			505
Research and Development Expenses	49			47		98			95
Restructuring and Acquisition Integration Charges	32			10		51			21
Share of Net (Earnings) Loss of Equity Method Investee	(3		)	—		(5		)	—
Operating Income	178			152		304			268
Interest Expense and Other, Net	26			21		54			41
Income Before Income Tax	152			131		250			227
Provision (Benefit) for Income Tax	(21		)	34		1			52
Net Income	$	173		$	97	$	249		$	175
PER SHARE AMOUNTS:
Basic Earnings per Common Share:
Basic Earnings per Common Share	$	0.85		$	0.46	$	1.22		$	0.83
Diluted Earnings per Common Share:
Diluted Earnings per Common Share	$	0.83		$	0.45	$	1.20		$	0.81
Weighted-Average Number of Common Shares Outstanding:
Basic	204.1			210.5		204.1			212.2
Diluted	207.3			213.7		207.2			215.5

See accompanying notes to unaudited condensed consolidated financial statements

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CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Quarters Ended December 31,					Six Months Ended December 31,
(in millions)	2014			2013		2014			2013
Net Income	$	173		$	97	$	249		$	175
Other Comprehensive Income (Loss), Net of Tax:
Foreign Currency Translation Adjustments	(38		)	2		(91		)	19
Unrealized Loss on Minimum Pension Liability	—			—		(1		)	—
Unrealized Gain on Derivatives	—			7		—			11
Comprehensive Income, Net of Tax	$	135		$	106	$	157		$	205

See accompanying notes to unaudited condensed consolidated financial statements

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CAREFUSION CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



(in millions, except per share data)	December 31, 2014			June 30, 2014
ASSETS
Current Assets:
Cash and Cash Equivalents	$	1,846		$	2,303
Trade Receivables, Net	517			574
Current Portion of Net Investment in Sales-Type Leases	228			290
Inventories, Net	503			441
Prepaid Expenses	34			29
Other Current Assets	147			84
Total Current Assets	3,275			3,721
Property and Equipment, Net	435			448
Net Investment in Sales-Type Leases, Less Current Portion	1,009			970
Goodwill	3,312			3,311
Intangible Assets, Net	972			1,016
Investments in Unconsolidated Entities	104			99
Other Assets	91			90
Total Assets	$	9,198		$	9,655
LIABILITIES AND EQUITY
Current Liabilities:
Current Portion of Long-Term Obligations and Other Short-Term Borrowings	$	4		$	454
Accounts Payable	177			206
Deferred Revenue	100			95
Accrued Compensation and Benefits	168			194
Other Accrued Liabilities	244			246
Total Current Liabilities	693			1,195
Long-Term Obligations, Less Current Portion	1,988			1,990
Deferred Income Taxes	610			607
Other Liabilities	400			473
Total Liabilities	3,691			4,265
Commitments and Contingencies
Stockholders’ Equity:
Preferred Stock (50.0 Authorized Shares; $.01 Par Value) Issued – None	—			—
Common Stock (1,200.0 Authorized Shares; $.01 Par Value) Issued – 236.6 and 234.5 shares at December 31, 2014 and June 30, 2014, respectively	2			2
Treasury Stock, at cost, 32.4 and 30.1 shares at December 31, 2014 and June 30, 2014, respectively	(1,185		)	(1,082		)
Additional Paid-In Capital	5,111			5,048
Retained Earnings	1,714			1,465
Accumulated Other Comprehensive Loss	(135		)	(43		)
Total Stockholders’ Equity	5,507			5,390
Total Liabilities and Stockholders’ Equity	$	9,198		$	9,655

See accompanying notes to unaudited condensed consolidated financial statements

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CAREFUSION CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended December 31,
(in millions)	2014			2013
Cash and Cash Equivalents at July 1	$	2,303		$	1,798
Cash Flows from Operating Activities:
Net Income	249			175
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization	99			93
Other Non-Cash Items	52			56
Change in Operating Assets and Liabilities, Excluding Impact of Acquired Assets and Assumed Liabilities:
Trade Receivables	53			15
Inventories	(60		)	(9		)
Net Investment in Sales-Type Leases	22			59
Accounts Payable	(30		)	(13		)
Other Accrued Liabilities and Operating Items, Net	(179		)	(79		)
Net Cash Provided by Operating Activities	206			297
Cash Flows from Investing Activities:
Cash Paid for Acquisitions, Net of Cash Received	(37		)	(501		)
Additions to Property and Equipment	(49		)	(37		)
Other Investing Activities	(4		)	(1		)
Net Cash Used in Investing Activities	(90		)	(539		)
Cash Flows from Financing Activities:
Repayment of Current Portion of Long-Term Obligations	(452		)	(1		)
Share Repurchase Programs	(111		)	(301		)
Proceeds from Stock Option Exercises	34			51
Other Financing Activities	(2		)	(8		)
Net Cash Used in Financing Activities	(531		)	(259		)
Effect of Exchange Rate Changes on Cash	(42		)	12
Net Decrease in Cash and Cash Equivalents	(457		)	(489		)
Cash and Cash Equivalents at December 31, Attributable to Net Income	$	1,846		$	1,309
Non-Cash Investing and Financing Activities:
Asset Acquired by Entering into Capital Lease	$	—		$	4

See accompanying notes to unaudited condensed consolidated financial statements

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

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

We were incorporated in Delaware on January 14, 2009, for the purpose of holding the clinical and medical products businesses of Cardinal Health in anticipation of spinning off from Cardinal Health. We completed the spinoff from Cardinal Health on August 31, 2009.

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements are unaudited and do not contain all the information required by U.S. Generally Accepted Accounting Principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at June 30, 2014, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended June 30, 2014, filed with the SEC with our Annual Report on Form 10-K on August 11, 2014, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

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

Our two global operating and reportable segments are Medical Systems and Procedural Solutions, which focus primarily on our medical equipment business lines and disposable products business lines, respectively:

Medical Systems. 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.”

Procedural Solutions. 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 intravenous (“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.

New Accounting Pronouncements

ASU 2014-09. In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 outlines a single comprehensive model for accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We will adopt the requirements of ASU 2014-09 once it becomes effective beginning with the Company’s first quarter of fiscal year 2018. We are currently assessing the impact on our financial condition, results of operations and cash flows as a result of the adoption of ASU 2014-09.

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2. PROPOSED MERGER WITH BECTON, DICKINSON AND COMPANY

On October 5, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Becton, Dickinson and Company, a New Jersey corporation (“BD”), and Griffin Sub, Inc., a Delaware corporation and wholly owned subsidiary of BD (“Merger Corp”). The Merger Agreement provides, among other things, that, upon the terms and subject to the conditions set forth therein, Merger Corp will merge with and into our company, with our company surviving as a wholly-owned subsidiary of BD (the “Merger”). In the Merger, holders of our common stock will receive (i) $49.00 in cash, without interest and (ii) 0.0777 of a share of common stock, par value $1.00 per share, of BD. Completion of the Merger is subject to customary closing conditions, including, among others, (1) the adoption of the Merger Agreement by our stockholders, (2) declaration of the effectiveness by the Securities and Exchange Commission (the “SEC”) of the Registration Statement on Form S-4 filed by BD in connection with the registration of the shares of BD Stock to be issued in the Merger, (3) approval for listing on the New York Stock Exchange of the BD Stock to be issued in the Merger, (4) obtaining antitrust approvals in the United States and Europe, (5) subject to certain exceptions, the accuracy of the representations and warranties in the Merger Agreement and (6) material compliance with the obligations under the Merger Agreement.

As of the date hereof, several of the closing conditions have been satisfied. On December 17, 2014, the SEC declared effective the Registration Statement on Form S-4 filed by BD, and on January 21, 2015, our stockholders voted to adopt the Merger Agreement. In addition, the closing condition related to antitrust approval in the United States was satisfied on November 19, 2014, when the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended expired.

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3. ACQUISITIONS

Acquisition of Vital Signs. On November 18, 2013, we announced the signing of a definitive agreement to acquire the Vital Signs business of General Electric Company’s Healthcare division (“Vital Signs”) for $500 million. Vital Signs is a leading manufacturer of single-use consumables for respiratory care and anesthesiology, and also markets products for temperature management and patient monitoring consumables. On December 30, 2013, we acquired the outstanding equity of certain entities included within the Vital Signs business and other business assets and liabilities in the U.S., China and certain other geographies using approximately $473 million of cash on hand. In March 2014, we completed additional closings for various countries using approximately $17 million of cash on hand. During the six months ended December 31, 2014, we completed the closing of the Vital Signs business in Germany, using approximately $8 million of cash on hand. The payment of purchase prices in connection with each closing is subject to customary closing conditions and regulatory review. The results of operations of all closings completed as of December 31, 2014, for the Vital Signs transaction are included in the Procedural Solutions segment.

The transaction has been accounted for as a business combination and requires, among other things, that assets acquired and liabilities assumed are recognized at their fair values as of the acquisition date.

Based on our estimate for the net working capital adjustment, and net of cash and cash equivalents acquired, we determined a net purchase price associated with the fiscal year 2014 and the fiscal year 2015 closings, as set forth below. The following table summarizes the assignment of the net purchase price to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed in these closings, based on their estimated fair values at the applicable acquisition date. Balances are reflected in the accompanying condensed consolidated balance sheets as of December 31, 2014.



(in millions)	Fiscal Year 2014 Closings			Fiscal Year 2015 Closings
Cash Paid	$	492		$	10
Cash and Cash Equivalents Acquired, Net of Net Working Capital Adjustments	(2		)	—
Net Purchase Price	$	490		$	10



(in millions)	Fiscal Year 2014 Closings			Fiscal Year 2015 Closings
Trade Receivables	$	19		$	—
Inventories	40			7
Other Current Assets	13			—
Property and Equipment	37			—
Intangible Assets	298			—
Goodwill	230			3
Current Liabilities and Borrowings	(41		)	—
Deferred Income Taxes	(101		)	—
Other Long-Term Liabilities	(5		)	—
Net Assets Acquired	$	490		$	10

Intangible assets represent customer relationships ($257 million), developed technology ($31 million), and trademarks and patents ($10 million) which have estimated weighted average useful lives of 20 years, 7 years and 6 years, respectively. The intangible assets have a total estimated weighted average useful life of 18 years. The estimated fair value of the identifiable intangible assets was determined using the “income based approach,” which is a valuation technique that provides an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of those asset valuations include the estimated net cash flows for each year for each asset or product (including net revenues, cost of sales, research and development expenses, selling and marketing costs and working capital/asset contributory asset charges), the appropriate

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors. The discount rates used to arrive at the present value of intangible assets as of the acquisition date ranged from 10.5% to 12.5% to reflect the internal rate of return and incremental commercial uncertainty in the cash flow projections. No assurances can be given that the underlying assumptions used to prepare the discounted cash flow analysis will not change. Actual results may vary significantly from estimated results.

Various factors contributed to the establishment of goodwill, including an expanded global footprint and scale, Vital Signs’ history of operating margins and profitability, and the opportunity for us to generate revenue by supplementing our existing respiratory and anesthesia consumables product portfolios. The goodwill recognized from the Vital Signs acquisition may be deductible for tax purposes to the extent related to the acquisition of identifiable intangible assets. All goodwill from the Vital Signs acquisition was assigned to the Procedural Solutions segment.

Deferred income taxes primarily result from fair value adjustments to identifiable intangible assets. In a stock acquisition associated with the purchase of a business, the fair value adjustments create excess book basis over the tax basis of those assets for which we record deferred income tax liabilities using the statutory tax rate for the jurisdiction in which the deferred income taxes exist.

For the quarter and six months ended December 31, 2014, revenue associated with Vital Signs was $70 million and $138 million, respectively. Pro forma results of operations have not been presented because the effect of the acquisition was not material to our unaudited condensed consolidated financial statements.

NOTE 4. INVESTMENTS IN UNCONSOLIDATED ENTITIES

Investments in unconsolidated entities reflect investments that we make from time to time in privately held companies. When an investment allows us to exert significant influence over the investee, we account for the investment under the equity method, and we record a share of the net earnings of the investee in our consolidated statements of income. When an investment does not allow us to exert significant influence, and it lacks a readily determinable fair value, we account for the investment under the cost method. The following table sets forth information relating to these investments:



(in millions)	December 31, 2014		June 30, 2014
Equity Method Investments
Cost	$	87	$	87
Share of Net Earnings of Equity Method Investee	7		3
Carrying Value of Equity Method Investments	$	94	$	90
Cost Method Investments
Carrying Value of Cost Method Investments	$	10	$	9
Total Investments in Unconsolidated Entities	$	104	$	99

As of December 31, 2014, our equity method investments consisted primarily of our investment in Caesarea Medical Electronics Ltd. (“CME”), a global infusion pump manufacturer. CME, headquartered in Israel, 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. We completed this investment transaction in March 2014 and received a 40 percent non-controlling equity interest in CME for approximately $86 million, which we funded with existing cash on hand. CME continues to operate independently from us. Additionally, we have the right to increase our ownership percentage by purchasing an additional 40 percent equity interest of CME (“Call Option”), exercisable any time before March 2017. The seller also has the right to require CareFusion to acquire the remaining 60 percent of CME (“Put Option”), which is exercisable only upon certain conditions, one of which is if we fail to exercise our Call Option. The Call Option and Put Option were deemed to be freestanding financial instruments. The Call Option does not meet the definition of a derivative and the Put Option's fair value is not significant. The Company determined that CME did not meet the definition of a Variable Interest Entity (“VIE”).

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5. EARNINGS PER SHARE

For the quarters and six months ended December 31, 2014 and 2013, basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated to give effect to all dilutive securities, using the treasury stock method.

The following table sets forth the reconciliation of basic and diluted earnings per share for the quarters and six months ended December 31, 2014 and 2013:



	Quarters Ended December 31,		Six Months Ended December 31,
(shares in millions)	2014	2013	2014	2013
Denominator for Basic Earnings per Share	204.1	210.5	204.1	212.2
Effect of Dilutive Securities:
Stock Options	2.3	2.1	2.1	2.1
Restricted Stock Units and Performance Stock Units	0.9	1.1	1.0	1.2
Denominator for Diluted Earnings per Share - Adjusted for Dilutive Securities	207.3	213.7	207.2	215.5

The potentially dilutive stock options, restricted stock units and performance stock units that would have been excluded because the effect would have been antidilutive for the quarters and six months ended December 31, 2014 were 0.0 million and 0.4 million, respectively, as compared to 2.0 million and 1.7 million for the quarter and six months ended December 31, 2013, respectively. Basic and diluted earnings per share amounts are computed independently in the unaudited condensed consolidated statements of income. Therefore, the sum of per share components may not equal the per share amounts presented.

From time to time, our Board of Directors authorizes share repurchase programs for the repurchase of our common stock through open market and private transactions. The manner and pace of our repurchases under these programs is based on market conditions and other relevant factors. As a result of the proposed merger with BD, we have suspended repurchases of our common stock under our share repurchase programs.

In August 2013, we announced that our Board of Directors had approved a share repurchase program authorizing the repurchase of up to $750 million of our common stock. We have repurchased a total of 16.9 million shares of our common stock under this program for an aggregate of $680 million (excluding commissions and fees). Under this program, we repurchased a total of 2.3 million shares for an aggregate of $103 million (excluding commissions and fees) during the quarter ended September 30, 2014. We did not repurchase any shares under this program during the quarter ended December 31, 2014.

In August 2014, our Board of Directors authorized the repurchase of an additional $750 million of our common stock through June 2016. We have not repurchased any shares under this program.

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6. RESTRUCTURING AND ACQUISITION INTEGRATION CHARGES

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

The following is a summary of restructuring and acquisition integration charges for the quarters and six months ended December 31, 2014 and 2013:



	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2014		2013		2014		2013
Restructuring Charges	$	7	$	10	$	17	$	21
Acquisition Integration Charges	25		—		34		—
Total Restructuring and Acquisition Integration Charges	$	32	$	10	$	51	$	21

Restructuring Charges

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

The following tables include information regarding our current restructuring programs:



	Six Months Ended December 31, 2014
(in millions)	Accrued at June 30, 2014¹		Accrued Costs		Cash Payments			Accrued at December 31, 2014¹
Total Restructuring Programs	$	10	$	17	$	(19	)	$	8

________________

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



	Six Months Ended December 31, 2013
(in millions)	Accrued at June 30, 2013¹		Accrued Costs		Cash Payments			Accrued at December 31, 2013¹
Total Restructuring Programs	$	7	$	21	$	(14	)	$	14

________________

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

The following table segregates our restructuring charges into our reportable segments for the quarters and six months ended December 31, 2014 and 2013:



	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2014		2013		2014		2013
Medical Systems	$	3	$	6	$	10	$	13
Procedural Solutions	4		4		7		8
Total Restructuring Charges	$	7	$	10	$	17	$	21

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Acquisition Integration Charges

Costs of integrating operations of various acquired companies are recorded as acquisition integration charges when incurred. The acquisition integration charges incurred during the quarter and six months ended December 31, 2014 were primarily costs related to the proposed merger with BD consisting of legal, advisory, and related transaction fees. For the quarter and six months, acquisition integration charges also include integration charges related to the acquisition of Vital Signs.

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

NOTE 7. INVENTORIES

Inventories, accounted for at the lower of cost or market on a first-in, first-out basis, consisted of the following:



(in millions)	December 31, 2014		June 30, 2014
Raw Materials	$	170	$	154
Work-in-Process	26		26
Finished Goods	307		261
Inventories, Net	$	503	$	441

The allowance for excess and obsolete inventories was $51 million and $52 million at December 31, 2014 and June 30, 2014, respectively.

NOTE 8. FINANCING RECEIVABLES

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

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The change in the allowance for credit losses on financing receivables for the six months ended December 31, 2014, consisted of the following:



(in millions)
Balance of allowance for credit losses at June 30, 2014	$	6
Charge-offs	(1		)
Recoveries	—
Provisions	1
Balance of allowance for credit losses at December 31, 2014	$	6

The following table summarizes the credit losses and recorded investment in sales-type leases as of December 31, 2014:



(in millions)
Allowance for credit losses:
Balance at December 31, 2014	$	6
Balance: individually evaluated for impairment	$	2
Balance: collectively evaluated for impairment	$	4
Net Investment in Sales-Type Leases:
Balance at December 31, 2014	$	1,237
Balance: individually evaluated for impairment	$	2
Balance: collectively evaluated for impairment	$	1,235

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The following table summarizes the changes in the carrying amount of goodwill:



(in millions)	Total
Balance at June 30, 2014	$	3,311
Goodwill Acquired, Net of Purchase Price Adjustments	20
Foreign Currency Translation Adjustments	(19		)
Balance at December 31, 2014	$	3,312

As of December 31, 2014, goodwill for the Medical Systems segment and the Procedural Solutions segment was $2,095 million and $1,217 million, respectively. As of June 30, 2014, goodwill for the Medical Systems segment and the Procedural Solutions segment was $2,107 million and $1,204 million, respectively. The amount set forth above for goodwill acquired reflects the impact of business acquisitions. See note 3 for further information.

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Intangible Assets

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



(in millions)	Weighted Average Life (years)	Gross Intangibles		Accumulated Amortization		Net Intangibles
December 31, 2014
Unamortized Intangibles:
Trademarks	Indefinite	$	307	$	—	$	307
Total Unamortized Intangibles		307		—		307
Amortized Intangibles:
Trademarks and Patents	10	101		56		45
Developed Technology	10	444		260		184
Customer Relationships	18	740		320		420
Other	6	60		44		16
Total Amortized Intangibles	14	1,345		680		665
Total Intangibles		$	1,652	$	680	$	972
June 30, 2014
Unamortized Intangibles:
Trademarks	Indefinite	$	307	$	—	$	307
Total Unamortized Intangibles		307		—		307
Amortized Intangibles:
Trademarks and Patents	10	100		55		45
Developed Technology	10	451		245		206
Customer Relationships	18	741		304		437
Other	7	61		40		21
Total Amortized Intangibles	14	1,353		644		709
Total Intangibles		$	1,660	$	644	$	1,016

Amortization expense is as follows:



	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2014		2013		2014		2013
Amortization Expense	$	22	$	18	$	44	$	37

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



(in millions)	2015		2016		2017		2018		2019
Amortization Expense	$	88	$	84	$	77	$	67	$	45

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NOTE 10. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME

The summary of activity of comprehensive income (loss) for the quarter and six months ended December 31, 2014 and 2013, is as follows:



	Quarter Ended December 31, 2014								Six Months Ended December 31, 2014
	Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount
(in millions)	Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) or Benefit		Net-of-Tax Amount
Foreign Currency Translation Adjustments:
Translation Adjustments Arising During the Period	$	(38	)	$	—	$	(38	)	$	(92	)	$	1	$	(91	)
Reclassification Adjustments Recognized in Net Income	—			—		—			—			—		—
Net Foreign Currency Translation Adjustments	(38		)	—		(38		)	(92		)	1		(91		)
Minimum Pension Liability:
Net Loss on Minimum Pension Liability Arising During the Period	—			—		—			(1		)	—		(1		)
Reclassification Adjustments Recognized in Net Income	—			—		—			—			—		—
Net Loss on Minimum Pension Liability	—			—		—			(1		)	—		(1		)
Total Other Comprehensive Income (Loss)	$	(38	)	$	—	$	(38	)	$	(93	)	$	1	$	(92	)



	Quarter Ended December 31, 2013							Six Months Ended December 31, 2013
	Before-Tax Amount		Tax (Expense) or Benefit			Net-of-Tax Amount		Before-Tax Amount		Tax (Expense) or Benefit			Net-of-Tax Amount
(in millions)	Before-Tax Amount		Tax (Expense) or Benefit			Net-of-Tax Amount		Before-Tax Amount		Tax (Expense) or Benefit			Net-of-Tax Amount
Foreign Currency Translation Adjustments:
Translation Adjustments Arising During the Period	$	2	$	—		$	2	$	21	$	(2	)	$	19
Reclassification Adjustments Recognized in Net Income	—		—			—		—		—			—
Net Foreign Currency Translation Adjustments	2		—			2		21		(2		)	19
Interest Rate Swaps:
Unrealized Gain (Loss) Arising During the Period	11		(4		)	7		18		(7		)	11
Reclassification Adjustment Recognized in Net Income	—		—			—		—		—			—
Net Gain (Loss) on Interest Rate Swaps	11		(4		)	7		18		(7		)	11
Total Other Comprehensive Income (Loss)	$	13	$	(4	)	$	9	$	39	$	(9	)	$	30

Reclassification adjustment gains and losses are included in the unaudited condensed consolidated statements of income in

“Interest Expense and Other, Net”.

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NOTE 11. BORROWINGS

Borrowings consisted of the following:



(in millions)	December 31, 2014		June 30, 2014
Senior Notes due 2014, 5.125% Less Unamortized Discount of $0.0 million at December 31, 2014 and $0.1 million at June 30, 2014, Effective Rate 5.360%	$	—	$	450
Senior Notes due 2019, 6.375% Less Unamortized Discount of $8.6 million at December 31, 2014 and $9.4 million at June 30, 2014, Effective Rate 6.601%	691		691
Senior Notes due 2023, 3.300% Less Unamortized Discount of $1.9 million at December 31, 2014 and $2.0 million at June 30, 2014, Effective Rate 3.311%	298		298
Senior Notes due 2017, 1.450% Less Unamortized Discount of $1.4 million at December 31, 2014 and $1.7 million at June 30, 2014, Effective Rate 1.498%	299		298
Senior Notes due 2024, 3.875% Less Unamortized Discount of $3.1 million at December 31, 2014 and $3.2 million at June 30, 2014, Effective Rate 3.895%	397		397
Senior Notes due 2044, 4.875% Less Unamortized Discount of $4.6 million at December 31, 2014 and $4.7 million at June 30, 2014, Effective Rate 4.919%	295		295
Euro Denominated Debt, Interest Averaging 3.52% at both December 31, 2014 and June 30, 2014, Due in Varying Installments through 2020	8		10
Other Obligations; Interest Averaging 8.86% at December 31, 2014 and 8.07% at June 30, 2014, Due in Varying Installments through 2017	4		5
Total Borrowings	1,992		2,444
Less: Current Portion	4		454
Long-Term Portion	$	1,988	$	1,990

Senior Unsecured Notes. We have outstanding unsecured senior obligations, including those indicated as “Senior Notes” in the borrowings table above (collectively, the “Senior Notes”). The Senior Notes are unsecured obligations and the discount on sale of the Senior Notes is amortized to interest expense utilizing the effective interest rate method. The indentures under which the Senior Notes were issued contain customary covenants, all of which we were in compliance with at December 31, 2014. We use the net proceeds from the sale of these Senior Notes for general corporate purposes, which include the repayment of our existing indebtedness.

On August 1, 2014, we used $450 million of our cash balances to repay upon maturity the $450 million aggregate principal amount of 5.125% senior notes due 2014.

For additional information regarding the terms of the Senior Notes, refer to note 13 to the audited consolidated financial statements included in our 2014 Annual Report on Form 10-K for the fiscal year ended June 30, 2014, filed with the SEC on August 11, 2014.

Euro Denominated Debt. In connection with our acquisition of Rowa in August 2011, we assumed a 9 million Euro debt facility comprised of four tranches with annual interest rates ranging from 2.65% to 3.75%. These loans are subject to certain customary covenants and payable in quarterly or semi-annual installments, with the final payment due in September 30, 2020. The aggregate outstanding balance on these loans was $8 million and $10 million at December 31, 2014 and June 30, 2014, respectively.

Revolving Credit Facility. We maintain a $750 million senior unsecured revolving credit facility which is set to mature on February 13, 2019. The credit facility, subject to certain conditions, provides us the option to increase the commitments by up to $250 million. At both December 31, 2014 and June 30, 2014, we had no amounts outstanding under the credit facility.

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the lenders under the credit facility on the amount of the lender’s unused commitments thereunder based upon CareFusion’s debt ratings. The credit facility also contains several customary covenants, all of which we were in compliance with at December 31, 2014. While entering into the Merger Agreement constituted an event of default under the credit facility, we obtained a waiver for this event of default from the lenders under the credit facility. For additional information regarding the terms of the credit facility, refer to note 13 to the audited consolidated financial statements included in our 2014 Annual Report on Form 10-K, filed with the SEC on August 11, 2014.

Other Borrowings. We maintain other borrowings that consist primarily of additional notes, loans and capital leases, which totaled $4 million and $5 million at December 31, 2014 and June 30, 2014, respectively. Obligations related to capital leases are secured by the underlying assets.

Letters of Credit and Bank Guarantees. At December 31, 2014 and June 30, 2014, we had $20 million and $23 million, respectively, of letters of credit and bank guarantees outstanding.

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NOTE 12. INCOME TAXES

The effective tax rate was -14.1% and 0.4% for the quarter and six months ended December 31, 2014, respectively, as compared to 26.0% and 22.8% for the quarter and six months ended December 31, 2013, respectively.

The difference between the effective tax rate for the quarter and six months ended December 31, 2014, and the U.S. federal statutory rate of 35% is attributable to the favorable impact of settlements with tax authorities, the remeasurement of prior year uncertain tax benefits, and foreign earnings taxed at less than the U.S. statutory rate partially offset by unfavorable adjustments related to the United States taxation of certain foreign earnings as Subpart F income.

During the quarter ended December 31, 2010, we received an IRS Revenue Agent’s Report for fiscal years 2006 and 2007 that included Notices of Proposed Adjustment for additional taxes related to transfer pricing arrangements between foreign and domestic subsidiaries. Additionally, during the quarter ended September 30, 2014, we received an IRS Revenue Agent’s Report for fiscal years 2008 and 2009 that included Notices of Proposed Adjustment 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. The tax matters agreement that we entered into with Cardinal Health in connection with the spinoff generally provides that the control of audit proceedings and payment of any additional liability related to our business is our responsibility. We are currently before the IRS Appeals office for fiscal years 2006 and 2007, and continue to engage in substantive discussions related to these fiscal years. We expect to appeal the Notices of Proposed Adjustment for fiscal years 2008 and 2009.

During the quarter ended December 31, 2014, we entered into a settlement with the IRS in connection with an IRS Revenue Agent’s Report for the short period September 1, 2009 through June 30, 2010 that included Notices of Proposed Adjustment for additional taxes related to various matters. As a part of the settlement, we agreed to pay $4 million ($3 million, net of tax) including $1 million of interest to resolve certain matters included in the Notices of Proposed Adjustment. As a result of this settlement, we remeasured prior year uncertain tax benefits which resulted in a $54 million benefit, the impact of which is included in our financial results for the quarter ended December 31, 2014. The IRS Revenue Agent’s Report for the short period September 1, 2009, through June 30, 2010 included Notices of Proposed Adjustment for additional taxes related to certain foreign earnings. We disagree with the IRS regarding its application of the United States Treasury regulations to the arrangements under review and we expect to appeal this Notice of Proposed Adjustment.

We are currently subject to IRS audits for fiscal years 2011 through 2013.

It is reasonably possible that the amount of unrecognized tax benefits will significantly change due to one or more of the following events in the next twelve months: expiring statutes, audit activity, tax payments, other activity, or final decisions in matters that are the subject of controversy in various taxing jurisdictions in which we operate. The majority of this possible change relates to issues involving transfer pricing among our subsidiaries. Depending upon open tax examinations and/or the expiration of applicable statutes of limitation, we believe that the total amount of unrecognized tax benefits may decrease in an amount up to $100 million a portion of which, if recognized upon audit settlement, statute expiration, or other activity, would affect the 2015 effective tax rate.

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

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NOTE 13. COMMITMENTS AND CONTINGENCIES

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

Administrative Subpoenas. In April 2011, we received a federal administrative subpoena from the U.S. Department of Justice (“Department of Justice”) through the U.S. Attorney for the District of Kansas. In addition, in September 2011, we received a federal administrative subpoena from the Office of Inspector General (“OIG”) of the Department of Health and Human Services. In August 2012, we received another federal subpoena from the Department of Justice containing additional information requests. All three subpoenas requested documents and other materials that related primarily 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.

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

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

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damages of $15,000 per day per violation if we fail to comply with any provision of the amended consent decree, up to $15 million per year.

We cannot currently predict the outcome of this matter, whether additional amounts will be incurred to resolve this matter, if any, or the matter’s ultimate impact on our business. We may be obligated to pay more costs in the future because, among other things, the FDA may determine that we are not fully compliant with the amended consent decree and therefore impose penalties under the amended consent decree, and/or we may be subject to future proceedings and litigation relating to the matters addressed in the amended consent decree. As of December 31, 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.

Other Matters. In addition to the matters described above, we also become involved in other litigation and regulatory matters incidental to our business. These matters arise in the ordinary course and conduct of our business, and at times, as a result of our mergers, acquisitions and divestitures. They include, but are not limited to, product liability claims, employment matters, commercial disputes, intellectual property matters, inclusion as a potentially responsible party for environmental clean-up costs, and employment matters. As a result of the proposed Merger with BD, we are also subject to putative class action lawsuits in Delaware and California challenging the proposed merger transaction. On December 31, 2014, we entered into a memorandum of understanding providing for the settlement of the Delaware actions. If the proposed settlement is finally approved by the Delaware Court of Chancery, it will release all claims in all actions, including the Delaware actions and California actions, that were or could have been brought challenging any aspect of the proposed merger or the merger agreement and any disclosure made in connection therewith (excluding any demand for appraisal under Section 262 of the General Corporation Law of the State of Delaware). The impact of the settlements is not expected to be material to our consolidated financial statements.

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

NOTE 14. FINANCIAL INSTRUMENTS

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

We had no derivatives designated as hedging instruments as of December 31, 2014 and June 30, 2014.

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

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No foreign currency forward contracts were outstanding at December 31, 2014 and June 30, 2014.

No interest rate swap contracts were outstanding at December 31, 2014 and June 30, 2014.

The amounts reclassified from AOCI to the consolidated statements of income related to the interest rate swaps, which were settled in May 2014, were not material for the quarters and six months ended December 31, 2014 and 2013.

Fair Value (Non-Designated) Hedges. We enter into foreign currency forward contracts to manage foreign exchange exposure related to intercompany financing transactions and other balance sheet items subject to revaluation that do not meet the requirements for hedge accounting treatment. Accordingly, these derivative instruments are adjusted to current market value at the end of each period. The gain (loss) recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability. The settlement of the derivative instrument and the remeasurement adjustment on the foreign currency denominated asset or liability are both recorded in the unaudited condensed consolidated statements of income in “Interest Expense and Other, Net”. The maximum period of time that we hedge exposure for foreign currency fair value hedges is 31 days.

The following table summarizes the notional amount of the fair value hedges outstanding as of December 31, 2014 and June 30, 2014:



(in millions)	December 31, 2014		June 30, 2014
Foreign Currency Forward Contracts	$	77	$	60

The following table summarizes the gain (loss) recognized in earnings for fair value hedges outstanding for the quarters and six months ended December 31, 2014 and 2013:



	For the Quarters Ended December 31,				For the Six Months Ended December 31,
(in millions)	2014		2013		2014		2013
Foreign Currency Forward Contracts	$	2	$	—	$	4	$	(2	)

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NOTE 15. FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis. The following table presents information about our financial assets and liabilities that are measured at fair value on a recurring basis, and indicates the fair value hierarchy of the valuation techniques we utilize to determine such fair value as of December 31, 2014 and June 30, 2014:



	As of December 31, 2014
(in millions)	Total		Level 1		Level 2		Level 3
Financial Assets:
Cash Equivalents	$	1,494	$	1,494	$	—	$	—
Other Investments	28		24		4		—
Total Financial Assets	$	1,522	$	1,518	$	4	$	—
Financial Liabilities:
Contingent Consideration	$	2	$	—	$	—	$	2
Total Financial Liabilities	$	2	$	—	$	—	$	2



	As of June 30, 2014
(in millions)	Total		Level 1		Level 2		Level 3
Financial Assets:
Cash Equivalents	$	1,988	$	1,988	$	—	$	—
Other Investments	25		22		3		—
Total Financial Assets	$	2,013	$	2,010	$	3	$	—
Financial Liabilities:
Contingent Consideration	$	8	$	—	$	—	$	8
Total Financial Liabilities	$	8	$	—	$	—	$	8

The cash equivalents balance is comprised of highly liquid investments purchased with a maturity of three months or less from the original purchase date. The other investments balance includes investments in mutual funds classified as “Other Assets” in the unaudited condensed consolidated balance sheets, all related to our deferred compensation plan. Both the cash equivalents and other investments classified as Level 1 were valued based on quoted market prices for identical instruments. Assets classified as Level 2 relate to a portion of other investments not classified as Level 1. The fair value of other investments classified as Level 2 is determined based on quoted market prices for similar instruments or observable inputs other than quoted market prices. The amount of assets classified as Level 3 at December 31, 2014 and June 30, 2014 were not material. Liabilities classified as Level 3 relate to business combination contingent consideration arrangements and are recorded within either “Other Accrued Liabilities” or “Other Liabilities” in the unaudited condensed consolidated balance sheets based on the timing of the associated underlying payments. The corresponding purchase agreements require future payments based on the achievement of certain post-combination performance metrics of the acquired businesses, such as net revenues, gross profit, or date of first commercial sale and are summarized in the table below for the quarter ended December 31, 2014.

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The following table summarizes the changes in liabilities classified as contingent consideration:



(in millions)	Total
Future Gross Expected Payments at June 30, 2014	$	16
Carrying Value at June 30, 2014	$	8
Acquisition Date Fair Value of Contingent Consideration	2
Change in Fair Value Included in Expense	(8		)
Payments	—
Carrying Value at December 31, 2014	$	2
Future Gross Expected Payments at December 31, 2014	$	2

Other Instruments. The estimated fair value of our long-term obligations and other short-term borrowings was $2,145 million and $2,588 million as of December 31, 2014 and June 30, 2014, respectively, as compared to the net carrying amounts of $1,992 million and $2,444 million at December 31, 2014 and June 30, 2014, respectively. The fair value of our senior notes at December 31, 2014 and June 30, 2014 was based on quoted market prices, which involved the use of Level 1 inputs. The fair value of the other obligations at December 31, 2014 and June 30, 2014, was based on the quoted market prices for either the same or similar debt, which involved the use of observable Level 2 inputs. The fair value of the Rowa debt facility at December 31, 2014 and June 30, 2014 were determined using a discounted cash flow analysis, which approximated its carrying value. We considered the interest rates of European instruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs. See note 11 for further information.

NOTE 16. PRODUCT WARRANTIES

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

The tables below summarize the changes in the carrying amount of the liability for product warranties for the quarters ended December 31, 2014 and 2013:



(in millions)
Balance at June 30, 2014	$	16
Warranty Accrual	8
Warranty Claims Paid	(6		)
Adjustments to Preexisting Accruals	(2		)
Balance at December 31, 2014	$	16



(in millions)
Balance at June 30, 2013	$	18
Warranty Accrual	5
Warranty Claims Paid	(4		)
Adjustments to Preexisting Accruals	(4		)
Balance at December 31, 2013	$	15

As of December 31, 2014 and 2013, approximately $2 million and $4 million, respectively, of the ending liability balances related to accruals for product recalls.

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 17. SEGMENT INFORMATION

Our operations are principally managed on a products and services basis, and the Medical Systems and Procedural Solutions segments focus primarily on our medical equipment business lines and disposable products business lines, respectively.

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

Procedural Solutions. 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.

We evaluate the performance of our operating segments based upon, among other things, segment profit. Segment profit is segment revenue less segment cost of products sold, SG&A expenses, research and development expenses and restructuring and acquisition integration charges. With the exception of testing for goodwill impairment, we do not identify or allocate assets by operating segment; accordingly, certain segment related disclosures with respect to assets have been omitted. See note 9.

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents information about our reportable segments for the quarters ended December 31, 2014 and 2013:



(in millions)	Medical Systems		Procedural Solutions		Total
December 31, 2014:
External Revenues	$	645	$	424	$	1,069
Depreciation and Amortization	28		22		50
Operating Income	125		53		178
December 31, 2013:
External Revenues	$	587	$	335	$	922
Depreciation and Amortization	32		15		47
Operating Income	109		43		152

The following table presents information about our reportable segments for the six months ended December 31, 2014 and 2013:



(in millions)	Medical Systems		Procedural Solutions		Total
December 31, 2014:
External Revenues	$	1,173	$	818	$	1,991
Depreciation and Amortization	56		43		99
Operating Income	209		95		304
December 31, 2013:
External Revenues	$	1,111	$	641	$	1,752
Depreciation and Amortization	64		29		93
Operating Income	183		85		268

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



	Revenue								Property and Equipment, Net
	Quarters Ended December 31,				Six Months Ended December 31,				As of December 31,		As of June 30,
(in millions)	2014		2013		2014		2013		2014		2014
United States	$	811	$	709	$	1,506	$	1,358	$	322	$	329
International	258		213		485		394		113		119
Total	$	1,069	$	922	$	1,991	$	1,752	$	435	$	448

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CAREFUSION CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents the revenue information for select business lines within each of the segments for the quarters and six months ended December 31, 2014 and 2013:



	Quarters Ended December 31,				Six Months Ended December 31,
(in millions)	2014		2013		2014		2013
Medical Systems
Dispensing Technologies	$	264	$	236	$	489	$	447
Infusion Systems	269		247		482		466
Respiratory Technologies	106		96		191		184
Other	6		8		11		14
Total Medical Systems	$	645	$	587	$	1,173	$	1,111
Procedural Solutions
Infection Prevention	$	180	$	168	$	347	$	317
Medical Specialties	96		89		187		178
Specialty Disposables	148		78		284		146
Total Procedural Solutions	$	424	$	335	$	818	$	641
Total CareFusion	$	1,069	$	922	$	1,991	$	1,752

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

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) contains forward-looking statements that involve risks and uncertainties. Please see “Important Information Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and our audited consolidated financial statements and related notes thereto for the fiscal year ended June 30, 2014, which were included in our Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on August 11, 2014.

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

Basis of Presentation

Unless the context otherwise requires, references in this MD&A to “CareFusion Corporation,” “CareFusion,” “we,” “us,” “our,” “the company” and “our company” refer to CareFusion Corporation and its consolidated subsidiaries. References in this MD&A to “Cardinal Health” refers to Cardinal Health, Inc. and its consolidated subsidiaries.

The unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared in accordance with the SEC instructions for Quarterly Reports on Form 10-Q. Accordingly, the condensed consolidated financial statements presented elsewhere in this Form 10-Q and discussed below are unaudited and do not contain all the information required by U.S. generally accepted accounting principles (“GAAP”) to be included in a full set of financial statements. The unaudited condensed consolidated balance sheet at June 30, 2014, has been derived from our audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for a complete set of financial statements. The audited consolidated financial statements for our fiscal year ended June 30, 2014, filed with the SEC on Form 10-K on August 11, 2014, include a summary of our significant accounting policies and should be read in conjunction with this Form 10-Q. In the opinion of management, all material adjustments necessary to present fairly the results of

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operations for such periods have been included in this Form 10-Q. All such adjustments are of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results of operations for the entire year.

Procedural Solutions. 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.

Overview

Proposed Merger with Becton, Dickinson and Company

For additional information related to the Merger Agreement, please refer to our Current Report on Form 8-K filed with the SEC on October 6, 2014 (the “October 6th Form 8-K”) and our definitive proxy statement related to the Merger filed with the SEC on December 19, 2014, and additional definitive proxy materials filed with the SEC on January 5, 2015. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to the October 6th Form 8-K. Our stockholders are urged to read all relevant documents filed with the SEC because they will contain important information about the proposed transaction. Investors and security holders are able to obtain the documents (once available) free of charge at the SEC’s web site, http://www.sec.gov, or for free by contacting CareFusion’s Investor Relations department by e-mail at ir@carefusion.com or by phone at (858) 617-4621.

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Our Business

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.

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.

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Consolidated Results of Operations

Quarter Ended December 31, 2014 Compared to the Quarter Ended December 31, 2013

Below is a summary of results of operations and a more detailed discussion of results for the quarters ended December 31, 2014 and 2013:



	Quarters Ended December 31,
(in millions)	2014			2013		Change
Revenue	$	1,069		$	922	$	147
Cost of Products Sold	534			456		78
Gross Profit	535			466		69
Selling, General and Administrative Expenses	279			257		22
Research and Development Expenses	49			47		2
Restructuring and Acquisition Integration Charges	32			10		22
Share of Net (Earnings) Loss of Equity Method Investee	(3		)	—		(3		)
Operating Income	178			152		26
Interest Expense and Other, Net	26			21		5
Income Before Income Taxes	152			131		21
Provision (Benefit) for Income Taxes	(21		)	34		(55		)
Net Income	$	173		$	97	$	76

Revenue

The following table presents the revenue information for select business lines within each of our reportable segments for the quarters ended December 31, 2014 and 2013:



	Quarters Ended December 31,
(in millions)	2014		2013		Change
Medical Systems
Dispensing Technologies	$	264	$	236	$	28
Infusion Systems	269		247		22
Respiratory Technologies	106		96		10
Other	6		8		(2		)
Total Medical Systems	$	645	$	587	$	58
Procedural Solutions
Infection Prevention	$	180	$	168	$	12
Medical Specialties	96		89		7
Specialty Disposables	148		78		70
Total Procedural Solutions	$	424	$	335	$	89
Total CareFusion	$	1,069	$	922	$	147

Revenue in our Medical Systems segment increased 10% to $645 million for the quarter ended December 31, 2014, compared to the prior fiscal year. The increase was primarily a result of growth in the Dispensing Technologies and Infusion Systems business lines. Revenue in the Dispensing Technologies business line increased $28 million to $264 million, primarily due to increased sales associated with the continued launch of a new product release in our Pyxis product line and increased international sales associated with our Rowa product line. Revenue in the Infusion Systems business line increased $22 million to $269 million, as a result of higher consumption of dedicated disposable infusion sets in the U.S. and strong

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capital sales globally. Revenue in the Respiratory Technologies business line increased by $10 million to $106 million, as a result of higher sales in the U.S.

Revenue in our Procedural Solutions segment increased 27% to $424 million for the quarter ended December 31, 2014, compared to the prior fiscal year. The increase in Procedural Solutions revenue was primarily due to growth in the Specialty Disposables ($70 million) and Infection Prevention ($12 million) business lines.

Revenue in the Specialty Disposables business line increased by $70 million to $148 million, primarily as a result of revenues associated with Vital Signs, which we acquired in December 2013. Revenue in the Infection Prevention business line increased by $12 million to $180 million, as a result of increased sales of our clinically differentiated skin preparation products, and increased sales of our specialty IV infusion valves.

Gross Profit and Cost of Products Sold

Gross profit increased 15% to $535 million during the quarter ended December 31, 2014, compared to the prior fiscal year. As a percentage of revenue, gross margin was 50.0% and 50.5% for the quarters ended December 31, 2014 and 2013, respectively.

The decrease in gross margin during the quarter ended December 31, 2014, was primarily due to increased sales in lower margin product lines associated with our acquisition of Vital Signs and higher installation costs for our Pyxis product line, partially offset by higher margins associated with the infusion product line.

Selling, General and Administrative and Research and Development Expenses

Selling, General and Administrative (“SG&A”) expenses increased 9% to $279 million during the quarter ended December 31, 2014, compared to the prior fiscal year. The increase was primarily due to costs associated with the operations of Vital Signs and increased incentive compensation expense, partially offset by cost saving initiatives.

Research and Development (“R&D”) expenses increased by $2 million to $49 million during the quarter ended December 31, 2014, compared to the prior year. As we continue to invest in next generation platforms for Medical Systems and Procedural Solutions, R&D expense for Procedural Solutions has increased modestly and Medical Systems has decreased due to the current phase of our product development life cycle.

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges increased by $22 million to $32 million during the quarter ended December 31, 2014, compared to the prior fiscal year. Restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount, and aligning operations in the most strategic and cost-efficient structure. The increase was primarily due to $16 million of costs associated with the proposed merger with BD, as well as $8 million of acquisition integration charges associated with the acquisition of Vital Signs incurred during the quarter ended December 31, 2014.

Share of Net Earnings of Equity Method Investee

In March 2014, we acquired a 40 percent non-controlling equity interest in CME, a global infusion pump manufacturer. Share of net earnings of equity method investee of $3 million during the quarter ended December 31, 2014, is associated with earnings from CME. See note 4 for further information.

Operating Income

Operating income increased $26 million, or 17%, to $178 million during the quarter ended December 31, 2014, compared to the prior fiscal year.

Segment profit in our Medical Systems segment increased by $16 million to $125 million during the quarter ended December 31, 2014, compared to the prior fiscal year. The increase in segment profit was attributable to higher revenues across Dispensing Technologies, Infusion Systems and Respiratory Technologies business lines.

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Segment profit in our Procedural Solutions segment increased by $10 million to $53 million during the quarter ended December 31, 2014, compared to the prior fiscal year. The increase was due to higher sales across all business lines compared to the prior year.

Interest Expense and Other, Net

Interest expense and other, net increased 24% to $26 million during the quarter ended December 31, 2014, compared to the quarter ended December 31, 2013. This increase was due to the impact of higher interest expenses associated with a larger aggregate principal amount of our senior notes compared to the prior fiscal year as well as the impact of foreign currency exchange rates on the remeasurement of non-functional currency denominated receivables and payables.

Provision for Income Tax

Income tax expense decreased by $55 million to a benefit of $21 million for the quarter ended December 31, 2014 compared to an expense of $34 million for the quarter ended December 31, 2013. The effective tax rate for the quarter ended December 31, 2014 was -14.1% compared to 26.0% for the quarter ended December 31, 2013. The decrease in the effective tax rate was primarily due to the settlement of tax matters under exam with the IRS related to fiscal year 2010 and the remeasurement of prior year uncertain tax benefits based on these settlements which resulted in a $54 million benefit for the quarter ended December 31, 2014.

For additional detail regarding the provision for income taxes, see note 12 to the unaudited condensed consolidated financial statements.

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Six Months Ended December 31, 2014 Compared to the Six Months Ended December 31, 2013

Below is a summary of results of operations and a more detailed discussion of results for the six months ended December 31, 2014 and 2013:



	Six Months Ended December 31,
(in millions)	2014			2013		Change
Revenue	$	1,991		$	1,752	239
Cost of Products Sold	999			863		136
Gross Profit	992			889		103
Selling, General and Administrative Expenses	544			505		39
Research and Development Expenses	98			95		3
Restructuring and Acquisition Integration Charges	51			21		30
Share of Net (Earnings) Loss of Equity Method Investee	(5		)	—		(5	)
Operating Income	304			268		36
Interest Expense and Other, Net	54			41		13
Income Before Income Taxes	250			227		23
Provision for Income Taxes	1			52		(51	)
Net Income	$	249		$	175	74

Revenue

The following table presents the revenue information for select business lines within each of our reportable segments for the six months ended December 31, 2014 and 2013:



	Six Months Ended December 31,
(in millions)	2014		2013		Change
Medical Systems
Dispensing Technologies	$	489	$	447	$	42
Infusion Systems	482		466		16
Respiratory Technologies	191		184		7
Other	11		14		(3		)
Total Medical Systems	$	1,173	$	1,111	$	62
Procedural Solutions
Infection Prevention	$	347	$	317	$	30
Medical Specialties	187		178		9
Specialty Disposables	284		146		138
Total Procedural Solutions	$	818	$	641	$	177
Total CareFusion	$	1,991	$	1,752	$	239

Revenue in our Medical Systems segment increased 6% to $1,173 million for the six months ended December 31, 2014, compared to the prior fiscal year. The increase was primarily a result of increased revenues in the Dispensing Technologies business line. Revenue in the Dispensing Technologies business line increased $42 million to $489 million, primarily due to increased sales associated with the continued launch of a new product release in our Pyxis product line and increased international sales associated with our Rowa product line. Revenue in the Infusion Systems business line increased $16 million to $482 million, as a result of higher consumption of dedicated disposable infusion sets in the U.S. and strong capital sales globally.

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Revenue in our Procedural Solutions segment increased 28% to $818 million for the six months ended December 31, 2014, compared to the prior fiscal year. The increase in Procedural Solutions revenue was primarily due to growth in the Specialty Disposables ($138 million) and Infection Prevention ($30 million) business lines.

Revenue in the Specialty Disposables business line increased by $138 million to $284 million, primarily as a result of revenues associated with Vital Signs, which we acquired in December 2013. Revenue in the Infection Prevention business line increased by $30 million to $347 million, as a result of revenues associated with Sendal, which we acquired in October 2013, increased sales of our clinically differentiated skin preparation products, and increased sales of our specialty IV infusion valves.

Gross Profit and Cost of Products Sold

Gross profit increased 12% to $992 million during the six months ended December 31, 2014, compared to the prior fiscal year. As a percentage of revenue, gross margin was 49.8% and 50.7% for the six months ended December 31, 2014 and 2013, respectively.

The decrease in gross margin during the six months ended December 31, 2014, was primarily due to increased sales in lower margin product lines associated with our acquisition of Sendal and Vital Signs and higher installation costs associated with increased installation volumes for our Pyxis product line, partially offset by higher margins associated with the infusion product line.

Selling, General and Administrative and Research and Development Expenses

Selling, General and Administrative (“SG&A”) expenses increased 8% to $544 million during the six months ended December 31, 2014, compared to the prior fiscal year. The increase was primarily due to costs associated with the operations of Vital Signs and increased incentive compensation expense, partially offset by cost saving initiatives.

Research and Development (“R&D”) expenses increased by $3 million to $98 million during the six months ended December 31, 2014, compared to the prior year. As we continue to invest in next generation platforms for Medical Systems and Procedural Solutions, R&D expense for Procedural Solutions has increased modestly and Medical Systems has decreased due to the current phase of our product development life cycle.

Restructuring and Acquisition Integration Charges

Restructuring and acquisition integration charges increased by $30 million to $51 million during the six months ended December 31, 2014, compared to the prior fiscal year. Restructuring plans focus on various aspects of operations, including closing and consolidating certain manufacturing operations, rationalizing headcount, and aligning operations in the most strategic and cost-efficient structure. The increase was primarily due to $16 million of costs associated with the proposed merger with BD, as well as $17 million of acquisition integration charges associated with the acquisition of Vital Signs incurred during the six months ended December 31, 2014.

Share of Net Earnings of Equity Method Investee

In March 2014, we acquired a 40 percent non-controlling equity interest in CME, a global infusion pump manufacturer. Share of net earnings of equity method investee of $5 million during the six months ended December 31, 2014, is associated with earnings from CME. See note 4 for further information.

Operating Income

Operating income increased $36 million, or 13%, to $304 million during the six months ended December 31, 2014, compared to the prior fiscal year.

Segment profit in our Medical Systems segment increased by $26 million to $209 million during the six months ended December 31, 2014, compared to the prior fiscal year. The increase in segment profit was primarily attributable to higher revenues in the Dispensing Technologies business line and higher revenues and margins in the Infusion Systems business line.

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Segment profit in our Procedural Solutions segment increased by $10 million to $95 million during the six months ended December 31, 2014, compared to the prior fiscal year. The increase was due to strong sales across all business lines compared to the prior year.

Interest Expense and Other, Net

Interest expense and other, net increased 32% to $54 million during the six months ended December 31, 2014, compared to the six months ended December 31, 2013. This increase was primarily due to the impact of higher interest expenses associated with a larger aggregate principal amount of our senior notes compared to the prior fiscal year.

Provision for Income Tax

Income tax expense decreased by $51 million to $1 million for the six months ended December 31, 2014 compared to $52 million for the six months ended December 31, 2013. The effective tax rate for the quarter ended December 31, 2014 was 0.4% compared to 22.8% for the six months ended December 31, 2013. The decrease in the effective tax rate was primarily due to the $54 million benefit resulting from the favorable settlement of tax matters under appeal with the IRS related to fiscal year 2010, the remeasurement of prior year uncertain tax benefits, partially offset by adjustments of prior year uncertain tax benefits related to transfer pricing.

For additional detail regarding the provision for income taxes, see note 12 to the unaudited condensed consolidated financial statements.

Liquidity and Capital Resources

Overview

Historically, we have generated, and expect to continue to generate, positive cash flow from operations. Cash 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 programs, as discussed below.

Our cash and cash equivalents balance at December 31, 2014 was $1,846 million. Of this balance, $1,244 million is held outside of the United States and is denominated in United States dollars as well as other currencies. In May 2014, we issued $1 billion aggregate principal amount of notes and received net proceeds of approximately $990 million. In August 2014, we used a portion of the net proceeds of the May 2014 issuance to repay upon maturity $450 million our outstanding senior notes.

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.

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.

From time to time, our Board of Directors authorizes share repurchase programs for the repurchase of our common stock through open market and private transactions. As a result of the proposed merger with BD, we have suspended repurchases

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of our common stock under our share repurchase programs, and no shares were repurchased under our share repurchase programs during the quarter ended December 31, 2014. For additional detail regarding our share repurchase programs, see note 5 to the unaudited condensed consolidated financial statements.

Sources and Uses of Cash

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



	Six Months Ended December 31,
(in millions)	2014			2013			Change
Cash Flow (Used in)/Provided by:
Operating Activities	$	206		$	297		$	(91	)
Investing Activities	$	(90	)	$	(539	)	$	449
Financing Activities	$	(531	)	$	(259	)	$	(272	)

Six Months Ended December 31, 2014 and 2013

Net operating cash flow from continuing operations decreased $91 million to $206 million for the six months ended December 31, 2014, compared to the prior year. The decrease in cash flow provided by continuing operations was driven by a decrease in other operating activities ($100 million), inventories ($51 million), net investment in sales type leases ($37 million), and accounts payable ($17 million). These activities were offset by an increase in net income adjusted for non-cash items ($76 million), and trade receivables ($38 million).

Net cash used in continuing operations from investing activities decreased $449 million for the six months ended December 31, 2014, compared to the six months ended December 31, 2013. This decrease was primarily attributable to the closing of the acquisition of the Vital Signs business in the prior year.

Net cash used in continuing operations from financing activities for the six months ended December 31, 2014 increased $272 million compared to the prior year. This is primarily a result of the repayment of $450 million of our outstanding senior notes upon maturity in August 2014. During the six months ended December 31, 2014, less cash was generated from stock options exercises ($17 million) as compared to the prior year, partially offset by a decrease in cash used in share repurchase program ($190 million) compared to the prior year.

Capital Resources

Senior Unsecured Notes. The following table summarizes the aggregate principal amount of our outstanding senior unsecured notes as of December 31, 2014:



(in millions)		As of December 31, 2014
1.450% senior notes due 2017	$	300
6.375% senior notes due 2019		700
3.300% senior notes due 2023		300
3.875% senior notes due 2024		400
4.875% senior notes due 2044		300
Total senior notes	$	2,000

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.

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Borrowings under the credit facility bear interest at a rate per annum that is comprised of a reference rate, which is generally based upon 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 credit facility also requires us to pay a quarterly commitment fee to the lenders under the credit facility on the amount of the lender’s unused commitments thereunder based upon CareFusion’s debt ratings. The credit facility also contain several customary covenants, all of which we were in compliance with at December 31, 2014. While entering into the Merger Agreement with BD constituted an event of default under the credit facility, we obtained a waiver for this event of default from the lenders under the credit facility. For additional information regarding the terms of the credit facility, refer to note 13 to the audited consolidated financial statements included in our 2014 Annual Report on Form 10-K, filed with the SEC on August 11, 2014.

Dividends

We currently intend to retain any earnings to finance research and development, acquisitions and the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, we use our excess cash to fund our share repurchase program. The declaration and payment of any dividends in the future by us will be subject to the sole discretion of our board of directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our operating subsidiaries, covenants associated with certain of our debt obligations, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors. Moreover, should we pay any dividend in the future, there can be no assurance that we will continue to pay such dividends.

Off-Balance Sheet Arrangements and Contractual Obligations

As of December 31, 2014, we did not have any off-balance sheet arrangements and we had no material changes related to contractual obligations since June 30, 2014. For information on contractual obligations, see the table of Contractual Obligations in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Annual Report on Form 10-K, filed with the SEC on August 11, 2014.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

Interest Rate Risk

Interest income and expense on variable-rate instruments are sensitive to fluctuations in interest rates across the world. Changes in interest rates primarily affect the interest earned on our cash and 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 December 31, 2014 and June 30, 2014, we had no forward interest rate swap derivative instruments outstanding.

As of December 31, 2014, 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 five year senior unsecured revolving credit facility will be exposed to interest rate fluctuations as the rate on this facility is variable. As of December 31, 2014, there were no outstanding amounts under our amended and restated five year senior unsecured revolving credit facility. In May 2014, we issued $1 billion aggregate principal amount of senior notes and received net proceeds of approximately $990 million. In August 2014, we used a portion of the net proceeds of the this issuance to repay upon maturity $450 million of our outstanding senior notes.

Foreign Currency Risk

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

Currently, we have foreign exchange risk associated with currency exposure related to existing assets and liabilities, committed transactions, forecasted future cash flows and net investments in foreign subsidiaries. We seek to manage our foreign exchange risk by using derivative instruments such as forwards, swaps and options with financial institutions to hedge our risks. In general, we may hedge material foreign exchange exposures up to twelve months in advance; however, we may choose not to hedge some exposures for a variety of reasons including prohibitive economic costs.

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

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, have concluded that our disclosure controls and procedures were effective as of the end of such period.

Changes in Internal Control over Financial Reporting

In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See note 13 to the unaudited condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014. Except as set forth below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, 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.

Risks Related to Our Proposed Acquisition by Becton, Dickinson and Company

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For additional information related to the Merger Agreement, please refer to the Current Report on Form 8-K filed with the SEC on October 6, 2014 (the “October 6th Form 8-K”). The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement attached as Exhibit 2.1 to the October 6th Form 8-K.

The announcement and pendency of the Merger could adversely affect our business, results of operations and financial condition.

The announcement and pendency of the Merger of our company with BD could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, results of operations and financial condition, regardless of whether the proposed merger is completed. In particular, we could potentially lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the Merger. We could also potentially lose customers or suppliers, and new customer or supplier contracts could be delayed or decreased. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and results of operations.

We are subject to putative class action lawsuits challenging the Merger. The lawsuits seek, among other things, to enjoin the consummation of the Merger, rescission of the Merger if it is consummated, and an award of monetary damages, costs and fees. The costs, delay and management resources associated with litigation related to the Merger could adversely affect our business, results of operations and financial condition.

We are also subject to restrictions on the conduct of our business prior to the consummation of the Merger as provided in the Merger Agreement, including, among other things, certain restrictions on our ability to acquire other businesses, sell, transfer or license our assets, amend our organizational documents, and incur indebtedness. These restrictions could result in our inability to respond effectively to competitive pressures, industry developments and future opportunities and may otherwise harm our business, results of operations and financial condition.

Failure to complete the proposed merger could adversely affect our business and the market price of our common stock.

There is no assurance that the closing of the Merger will occur. Consummation of the Merger is subject to various conditions, including, among other things, the approval of the Merger Agreement and the Merger by the holders of a majority of our outstanding shares of common stock, and certain other customary conditions, including, among other things, the absence of laws or judgments prohibiting or restraining the merger and the receipt of certain regulatory approvals. While several closing conditions have been satisfied, including approval of the Merger Agreement and the Merger by our stockholders on January 21, 2015, we cannot predict with certainty whether and when the remaining closing conditions will be satisfied. In addition, the Merger Agreement may be terminated under certain specified circumstances. If the Merger Agreement is terminated, we may be required to pay BD an amount equal to fifty percent of BD’s out-of-pocket expenses incurred in connection with the Merger Agreement and the Merger and in certain other circumstances, we may be required to pay BD a termination fee of $367 million. If the Merger is not consummated, our stock price will likely decline as our stock has recently traded based on the proposed per share price for the Merger. We will have incurred significant costs, including, among other things, the diversion of management resources, for which we will have received little or no benefit if the closing of the Merger does not occur. A failed transaction may result in negative publicity and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and the market price of our common stock.

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

As a result of the proposed merger with BD, we have suspended repurchases of our common stock under our share repurchase programs, and no shares were repurchased under our share repurchase programs during the quarter ended December 31, 2014. For additional detail regarding our share repurchase programs, see note 5 to the unaudited condensed consolidated financial statements.

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ITEM 6. EXHIBITS



Exhibit Number		Description of Exhibits

2.1		Agreement and Plan of Merger, dated as of October 5, 2014, among CareFusion Corporation, Becton, Dickinson and Company and Griffin Sub, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on October 6, 2014, File No. 1-34273).

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

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

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

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

_________________

* Filed herewith.

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SIGNATURES

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




	CAREFUSION CORPORATION

Date: February 6, 2015	By:	/s/ James F. Hinrichs
		James F. Hinrichs,
		Chief Financial Officer
		(Principal financial officer and duly authorized signatory)

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