Summary of CARDINAL HEALTH INC

Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations for our condensed consolidated balance sheets at September 30, 2012 and June 30, 2012, and for our condensed consolidated statements of earnings for the three months ended September 30, 2012 and 2011. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2012 Form 10-K.
Portions of this Form 10-Q (including information incorporated by reference) include "forward-looking statements." The words "expect," "anticipate," "intend," "plan," "believe," "will," "should," "could," "would," "project," "continue," "likely," and similar expressions, among others, generally identify "forward-looking statements," which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in Exhibit 99.1 to this Form 10-Q and in "Item 1A-Risk Factors" of our 2012 Form 10-K. Except to the 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. Overview
We are a healthcare services company providing pharmaceutical and medical products and services that help pharmacies, hospitals, surgery centers, physician offices and other healthcare providers focus on patient care while reducing costs, enhancing efficiency and improving quality. We report our financial results in two segments: Pharmaceutical and Medical.
Revenue for the three months ended September 30, 2012 was $25.9 billion, a 3 percent decrease from the prior year, largely due to the impact of brand-to-generic pharmaceutical conversions. Gross margin increased 7 percent to $1.2 billion and operating earnings increased 11 percent to $457 million, reflecting strong performance in our Pharmaceutical segment generic programs. Also contributing to the increase in operating earnings was $22 million of income resulting from settlements of class action antitrust claims. Earnings from continuing operations were up 15 percent to $272 million due to the factors discussed above.
Our cash and equivalents balance was $2.4 billion at September 30, 2012, compared to $2.3 billion at June 30, 2012. The increase in cash and equivalents was primarily attributable to net cash provided by operating activities of $568 million, offset by share repurchases of $200 million, acquisitions of $100 million and cash dividends of $84 million. We plan to continue to execute a balanced deployment of available capital to position ourselves for sustainable competitive advantage and to enhance shareholder value. Trends
Within our Pharmaceutical segment, we expect revenue to decrease in fiscal 2013. The factors contributing to this decrease include reduced revenue as a result of brand-to-generic pharmaceutical conversions and the expiration on September 30, 2012 of our pharmaceutical distribution contract with Express Scripts, Inc. Brand-to-generic pharmaceutical

conversions impacted our revenues in the three months ended September 30, 2012, while the expiration of the contract with Express Scripts, Inc. will impact our revenues beginning in the three months ended December 31, 2012. Spin-Off of CareFusion
Effective August 31, 2009, we separated our clinical and medical products businesses through a distribution to our shareholders of 81 percent of the then outstanding common stock of CareFusion Corporation ("CareFusion") and retained the remaining shares of CareFusion common stock (the "Spin-Off"). During fiscal 2010 and 2011, we disposed of the remaining shares of CareFusion common stock. While we are a party to a separation agreement and various other agreements relating to the separation, including a tax matters agreement, we have determined that we have no significant continuing involvement in the operations of CareFusion.
Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to the Spin-Off. The indemnification receivable was $267 million and $265 million at September 30, 2012 and June 30, 2012, respectively, and is included in other assets in the condensed consolidated balance sheets.

Results of Operations
Revenue
                         Three Months Ended September 30,
(in millions)                2012                 2011          Change
Pharmaceutical        $        23,498       $        24,418       (4 )%
Medical                         2,393                 2,380        1  %
Total segment revenue          25,891                26,798       (3 )%
Corporate                          (2 )                  (6 )   N.M.
Total revenue         $        25,889       $        26,792       (3 )%

Pharmaceutical Segment
Revenue for the three months ended September 30, 2012 compared to the prior year period was negatively impacted by a decrease in sales to existing customers ($1.4 billion), primarily as a result of the impact of brand-to-generic pharmaceutical conversions. Brand-to-generic pharmaceutical conversions impact our revenues because generic pharmaceuticals generally sell at a lower price than the corresponding brand product and because some of our customers primarily source generic products directly from manufacturers rather than purchasing from us. Revenue was positively impacted by revenue from net new customers ($352 million). Revenue from non-bulk customers increased by 7 percent. Medical Segment
Revenue for the three months ended September 30, 2012 compared to the prior year period was positively impacted by acquisitions ($48 million) and growth in our self-manufactured and private brand products ($20 million). This increase was partially offset by the impact of one fewer sales day in the current year period ($34 million) and lower volumes from existing customers ($22 million) driven in part by lower procedural volume.
Cost of Products Sold
Consistent with the decrease in revenue, cost of products sold decreased $978 million (4 percent) compared to the prior year period. See the gross margin discussion below for additional drivers impacting cost of products sold.

Table of Contents Cardinal Health, Inc. and Subsidiaries Financial Review (continued)

Gross Margin
Three Months Ended September 30, (in millions) 2012 2011 Change Gross margin $ 1,159 $ 1,084 7 %

Pharmaceutical Segment
Gross margin increased $53 million during the three months ended September 30, 2012.
Strong performance in our generic pharmaceutical programs increased gross margin by an estimated $95 million.
Pharmaceutical distribution customer pricing changes, including rebates (exclusive of the related volume impact), adversely impacted gross margin by an estimated $40 million. The adverse impact of these customer pricing changes was partially offset by product mix, sourcing programs and other sources of margin. Lower revenue, primarily as a result of the impact of brand-to-generic conversions, decreased gross margin by an estimated $25 million. Medical Segment
Gross margin increased $20 million during the three months ended September 30, 2012.
Acquisitions positively impacted gross margin by $11 million.
During the three months ended September 30, 2011, costs associated with the Presource® procedure kit import matter decreased gross margin by $10 million. SG&A Expenses
Three Months Ended September 30, (in millions) 2012 2011 Change SG&A expenses $ 690 $ 644 7 %

SG&A expenses increased during the three months ended September 30, 2012 primarily due to acquisitions ($12 million) and business system investments, including depreciation and other costs associated with the Medical segment business transformation project.
Segment Profit and Consolidated Operating Earnings