Cardinal Health, Inc. (CAH) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Cardinal Health, Inc. Earnings Conference Call. My name is Stephanie and I will be your operator for today. [Operator Instructions] I'd like to turn the conference over to your host for today, Mr. Matthew Blake, Director of Investor Relations. Please proceed.

Thank you, Stephanie, and welcome to Cardinal Health First Quarter Fiscal 2012 Conference Call. Today, we will be making forward-looking statements. Matters addressed in the statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to the SEC filings and the forward-looking statements slide at the beginning of the presentation found on the Investor page of our website for a description of risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slides. Before I turn the call over to Chairman and CEO George Barrett, I would like to remind you of a few upcoming investment conferences and events in which we will be webcasting. Notably, the Crédit Suisse Healthcare conference on November 9 in Phoenix, and the Oppenheimer Healthcare conference on December 13 in New York. The details of these events are/or will be posted on the IR section of our website at cardinalhealth.com. So please make sure to visit the site often for updated information. We look forward to seeing you at the upcoming events. I also want to point out to you that we will be filing, in early November, 3 documents with the SEC. Our Q1 10-Q and 8-K, which will include the results from our November 2 Annual Shareholder Meeting and will reflect the reclassification of amortization of acquisition related intangible assets from distribution, selling, general and administrative expenses to acquisition-related costs on the income statements, and the exclusion of amortization of acquisition-related intangible assets from segment profit, and the last filing is an S8. Pending shareholder approval on November 2, the S8 will be filed to registered shares that maybe issued as compensation pursuant to the 2011 Long-Term Incentive Plan. Now I'd like to turn the call over to George Barrett.

Thanks, Matt, and good morning, everyone, and thanks to all of you for joining us, on our first quarter call. We're off to a good start in this new fiscal year and I'm encouraged to see strong execution on our key operational and strategic initiatives. We've created an increasingly balanced healthcare business model that, in a shifting landscape, better leverages our core strength and drives value for all of our customers, business partners and shareholders. Revenue for the first quarter was up 10% to $26.8 billion and non-GAAP operating earnings increased to $442 million, a 16% increase. This translates to a non-GAAP EPS of $0.73, an increase of 11% over the prior-year period. As noted in our release, this profit performance was driven by continued excellent results in our Pharmaceutical segment. While both the Pharmaceuticals and Medical segments recorded revenue growth of 10%, our Pharma segment grew profit 19% over the prior year, more than offsetting the anticipated 5% decline in our Medical segment profit. I want to underscore the fact that both of our segments recorded strong sales gains in the period. Our growth initiatives continue to gain momentum, and last year's acquisitions are yielding results at or above target. Business fundamentals are strong. We are managing our balance sheet with discipline, generating approximately $500 million in cash during the quarter. This past quarter, we increased our quarterly dividend payment by 10%, and share repurchases totaled $200 million. As part of our balanced capital deployment strategy, we have continued to pursue acquisitions which allow us to create value by extending our core capabilities through scale and reach or which leverage our capabilities by creating access to adjacent sectors for markets. The planned acquisition of Futuremed for approximately $155 million announced this past Tuesday morning actually accomplishes both. Futuremed is Canada's leading healthcare supplier for long-term care facilities. This business complements our existing acute-care medical and surgical platform in Canada and enhances our ability to serve Canadian patients across the healthcare continuum. Our goal is to close this transaction before January 1, 2012, and when completed, this acquisition will be reported as part of our Medical segment. Now let me provide some color on each segments' performance in the quarter. Our Pharma segment had another excellent quarter. Our 19% segment profit growth was driven primarily by the Pharma distribution business. Strong generic performance and contributions from Kinray and Cardinal Health China acquisitions, as well as from our Specialty Solutions businesses, drove an 11-basis-point margin expansion. All of these businesses continue to perform very well, and the integration of the acquisitions into Cardinal Health is largely complete. As we drove down into the Pharma distribution business, our efforts to rebalance our business mix, both customer and products, continue to bear fruit. In this year's first quarter, our non-bulk sales represented 57% of total Pharmaceutical segment sales versus 53% in the prior year's first quarter. Our generic revenues grew by 8% versus the prior year. This is more modest growth than in recent quarters, where we anticipated this given the limited number of new launches and a steeper wave of inflation coming from some key products which experienced new competition. We've continued to work closely with our branded pharmaceutical partners to develop tools which enable their strategies, including our work in specialty, which I'll come back to in a moment. Our recent agreement with GlaxoSmithKline, which leverages our new platform in China, is a great example of our collaboration with biopharmaceutical companies. Through our enhanced cold-chain distribution capability, we will help GSK expand its vaccine distribution network and geographic coverage, as well as insure the safety and quality of the vaccines. Turning to our Nuclear business, although raw material supply levels have been back to normal for some time, market demand for low-energy products has not returned to pre-shortage levels. This is associated with the general softness in low-energy cardiac imaging utilization rates. However, we continue to see solid progress in positron emission tomography, or PET sales, while supporting numerous clinical trials with our Pharma partners for new biomarkers and laying the foundation for future growth. We're moving into more kiosk markets with 3 new PET manufacturing facilities targeted to open this fiscal year. Our Center for the Advancement of Molecular Imaging, announced during our August call, is up and running. Our Specialty Solutions business has begun to accelerate as we build out our product offerings, expand our customer base, and recruit critical foundational talent. The business delivered a revenue increase of 29% driven by the growth in our legacy Specialty businesses and the increasing traction in our new specialty offerings. We are pleased to report that we have added a dozen new provider customers during the quarter, including 2 very large ones, Augusta Oncology and South Carolina Oncology Associates, the largest oncology practice in the state. In addition to utilizing our GPO benefits, these customers will also have access to our expertise in business intelligence, information, and clinical support solutions. We have some exciting new payor wins, including Keystone Mercy Health Plan, a new customer in oncology. Our fee-for-healthcare business will be teeming with this managed healthcare plan to launch an evidence-based program to improve cancer care for Medicaid patients in Southeastern Pennsylvania. I continue to be very encouraged by our building momentum in Specialty. Turning to our Medical segment. Solid revenue growth of 10% for the Medical segment was achieved primarily through increased sales to both new and existing customers, as well as from a few unique items that Jeff will touch on later. In spite of the published reports of sluggish or uneven utilization, the segment recorded revenue growth across all of its businesses, and continued to build on relationships with existing customers. We offer a unique set of solutions at a time when customers are seeking new ways to compete in a shifting healthcare landscape. The ratio of wins to losses is of increasing confidence that we are positioning thoughtfully for the future. Having said that, Medical segment profit -- operating profit was down 5%, as anticipated, negatively affected by the challenge of higher year-over-year commodity costs, which Jeff will discuss in more details. We did, however, experience a challenge which was not anticipated in our Presource kitting business. As we've been communicating for the past several months, we have been experiencing issues with kits imported from our Juarez, Mexico facility being detained by the FDA and as a result, have been making a number of changes to our component documentation processes for our Presource kit, both imported and those assembled domestically. Today, I want to provide some further background on the issue and update you on the status. Over the past few months, the FDA began requesting certain information related to the documentation associated with each individual component contained within all of our Presource medical kits assembled at our Juarez facility. For over 25 years, we have been following the typical industry practice for supplier certification in medical kitting, with the expectation that our FDA-registered suppliers bore the responsibility for the individual product certification. Given that we've placed over 10,000 components in our tens of thousands of kits, we were not able to immediately meet this documentation request. We've worked with FDA throughout August and September to comply with this request, instituting significant enhancement to our documentation processes. At the same time, we worked with customers and the FDA to mitigate and manage any potential customer interruption, which could result from any kit assembly delays. We are now through the heavy lifting on this, but we did absorb additional costs associated with our remediation plan and our enhanced processes. This negatively affected first quarter profit by approximately $11 million. We are now operating at full capacity and are working closely with customers to fully replenish inventories. The industry landscape is changing, and this is just another example. And while this situation has been enormously challenging for us and for our customers, the actions we've taken have positioned us well to lead the market in an environment in which higher standard will be the norm. We appreciate the enormous support of our customers in this period. We thank our employees for their unwavering dedication. They have worked around-the-clock for weeks to make sure that patient care was the highest priority. While meeting this challenge in the quarter, the Medical segment continued to move forward. We signed renewals on a number of large agreements. We made excellent progress with OptiFreight, our full-service freight management program, where we help customers achieve freight cost reductions through our in-depth knowledge of logistics and freight transaction data. And the growth of our Preferred products business is making a positive mark on the segment margin rate. The Ambulatory Care channel continued to see excellent growth of 15%, with particular strength in surgery centers. We also had solid growth in the physician office channel, expanding our sales team and adding expertise in a number of areas, including pharmaceuticals and laboratory products. And our Canadian Medical/Surgical business had another strong quarter, with revenues growing by more than 14%. Our organization is pushing hard to innovate our marketplace. This work is reflected in some new products. We launched our new [indiscernible] Protexis gloves, a latex, powder-free, hydrogel surgical glove. We also signed a new agreement with one of our largest hospital operators in the U.S. for SurgiCount, our safety-sponge system that will now bring the safety-enhancing surgical products to more than 200 hospitals. And we have just gained the exclusive distribution rights for MicroPhage, a Colorado-based company, to their new KeyPath MRSA/MSSA Blood Culture Test. This is a unique tool which provides same-day antibiotic, susceptibility and resistance results for these deadly infections. As I've said before, innovation is an important lever for our continued success, and these are just a few examples of the ways in which innovation can make the healthcare system safer and more cost-effective. Although I covered our Pharma segment a few minutes ago, I thought I would conclude with some comments on our China business. I just returned from a recent trip to visit our operations there. During my trip, we celebrated the opening of a new state-of-the-art distribution center in Shanghai. We now have 9 distribution centers in the country from the Chinese market. Our business in China continues to form ahead of plan. We will remain focused on executing on our core business there, expanding our business geographically and on adding business lines, including lab distribution, retail support and medical products. And Jeff will talk more about China during his remark. Finally, I'd like to welcome David King, CEO of LabCorp, to our Board of Directors. Dave is a terrific leader with enormous healthcare experience, and we're proud that he has agreed to serve on our Board of Directors. In summary, while I'm very pleased that our business is off to a good start to the new fiscal year, I'm equally excited to see that our investment in our strategic priority areas, including specialty, positron emission tomography, generics, ambulatory, preferred medical products in China are going extremely well. Our progress in these areas provide increasing confidence that we're taking the right steps to continue to deliver growth and value to all our stakeholders. Now I'll turn the call over to Jeff.

Thanks, George. Good morning, everyone. I'm pleased to be discussing a solid start to fiscal 2012. My focus today will be on some financial trends and drivers of our Q1 performance, then I'll touch briefly on our full-year outlook. Let's start with Slide 4. During the quarter, we grew our non-GAAP EPS by 11% to $0.73 per share, driven by 10% revenue and 16% non-GAAP operating earnings growth. $26.8 billion of revenue recognized in Q1 is another all-time high for Cardinal Health. Even if you exclude the year-on-your impact of mid-year fiscal '11 acquisitions, it contributed about 5.3 percentage points. Underlying sales growth is strong. Although non-GAAP operating expenses were up 11%, more than half of this growth represents the expenses added to the mid-year acquisitions. But the sizable portion of the remainder relate to our continued focus on business system investments. Consolidated gross margin and non-GAAP operating margin rates both increased year-on-year, up 11 and 8 basis points, respectively. Interest and other expense came in $13 million higher than last year, driven by moderately higher debt levels and the impact of the recent market downturn on the value of our deferred compensation plan, which shows $7 million of other expense. As a reminder, losses in our deferred compensation accounts that are reflected in other expense were offset 1 for 1 by gains within SG&A, so have a net neutral impact on our P&L. Our non-GAAP tax rate for the quarter was 38.1% versus 37.1% last year. The slightly higher rate this quarter reflects unfavorable net discrete items of $4 million versus a net favorable of $3 million in the prior year and the unfavorable effect of changes in income mix. Finally, fair build in our share count versus last year, which is driven by a $300 million of share buyback, we completed in July and August. Our share count in Q1 was about 349 million diluted average shares outstanding versus 352 million in the prior year's quarter. As shown on Slide 10, we've now reduced our share count outlook for the full year to 352 million from 353 million. This reflects the $50 million of additional share repurchase we opportunistically completed in the quarter beyond our initial guidance assumptions of $250 million. Now let me comment on consolidated cash flow in the balance sheet. We had operating cash flow of approximately $500 million in Q1, driven by our strong earnings performance and further working capital reduction. Much of the working capital improvement came in the form of inventory efficiencies generated from transitioning Kinray to our National Logistics Center, a noteworthy milestone in our integration plan. Overall, our net working capital days ended the quarter at 7.5 days versus 8.3 in the prior year. We ended September with approximately $2 billion in cash, of which about $300 million is held overseas. This cash balance does not include our investments in held-to-maturity fixed-income securities, which are classified as other assets on the balance sheet and totaled $131 million at quarter-end. We continue to deploy our capital in a prudent bounce and opportunistic manner, keeping sight of our identified strategic priorities. On top of the $300 million of repo in the quarter, we increased our dividend payments by 10% and made $44 million of capital expenditures, mostly in IT. And as announced on Tuesday, we've initiated a tender offer to acquire Futuremed in Canada, utilizing our overseas cash in a strategically and financially attractive manner. This $165 million acquisition, which includes $40 million in debt, is a great example of identifying tuck-in opportunities that enhance our existing businesses. We anticipate this accretive transaction to close before July 1, 2012. And finally on a related note, I'm happy to report that Moody's just upgraded our ratings outlook to positive, recognizing the continuous improvements in our business profile. Now let's move to Q1 segment performance, referring primarily to Slides 5 and 6 and starting with our Pharma segment. Revenue in the segment increased 9.6%, with the Yong Yu and Kinray acquisitions we completed mid last year contributing 5.7 percentage points to this growth rate. Let me walk through a few of the drivers. In our Pharmaceutical distribution business, growth with existing customers was a strong driver. We achieved close to 30% revenue growth in our Specialty Solutions business, which continues to add customers and capabilities. Within our Nuclear business, we have seen continued positive momentum in customer wins despite the low energy market volume softness that George mentioned, which has dampened growth in the cardiac imaging business to a much greater degree than we anticipated coming into the year. Given the higher relative margin of this business, this has a disproportionate impact on our earning projections for the remainder of fiscal '12. Pharma segment profit margin rate increased by 11 basis points compared to the prior year's Q1, in part, reflecting a mixed shift toward non-bulk that George mentioned. We realized strong contribution from the Kinray and China acquisitions in the quarter. As you might expect, the actual contribution to segment profit growth is getting harder to calculate as we continue our Kinray integration effort and fold this business into our overall domestic platform. But the benefit is estimated at a little over 10 percentage points in total from both acquisitions. We continue to see strong contributions from the ongoing success of our generics programs, even though there are notably fewer generic new item launches from the prior year's quarter. Net generic deflation for our portfolio products was slightly steeper this year than last. As George mentioned, this was driven by certain newer generic products which were launched last year, and they're experiencing steeper deflation at this stage in their life cycle. I would note, however, that we did see some material inflation for certain more mature generic products. Finally, we know that a favorable resolution of certain open manufacture-related disputes was a positive driver of earnings in Q1 for Pharma. Due primarily to our ability to successfully resolve a number of these outstanding issues during the quarter, we realized a net $17 million benefit in this area, a somewhat larger impact than we would typically see and somewhat unique to this quarter. As an upside, this amount represents the largest of the unique or nonrecurring items which were reflected in our consolidated Q1 non-GAAP results. It was worth about a positive $0.03. The other noteworthy items, which were on the negative side of things, include the medical Presource issue with both $0.02 and about $0.01 worth of net unfavorable discrete tax items. Net-net, the Pharma segment had another solid quarter, resulting in an increase in segment profit of 19% to $363 million. George touched on our China operations during his remarks, and I also want to pause here for a moment to highlight this business, which is now reflected in both of our reporting segments, more on that in a moment, but is most prominent within Pharma. Our revenue in China was again very strong. In particular, we grew our local direct distribution business, a key focus area, by 28% during the quarter. We completed a small tuck-in acquisition in August, our first in China since establishing our platform last November to the Yong Yu deal. This acquisition provides us with direct presence in the Sichuan Province, key geographic area. We'll continue to pursue additional acquisitions to expand our geographic presence in the country and have a number of smaller deals in the pipeline. As George mentioned, we opened our ninth distribution center in China during Q1. We also continue to move forward in our evaluation and piloting of opportunities in other business areas. In summary, we continue to make great progress in China and remain very excited about the future of this platform. Now turning to our Medical segment. For the quarter, revenue increased by 9.7% to $2.4 billion, driven by increased sales for existing customers across all channels and net new customers. Within this performance are a number of highlights: Volume from net customer wins was again positive in the quarter. We saw a good increase in revenue from our Preferred products, which is particularly noteworthy as it is occurring in what has been reported externally as a continuing sluggish surgical procedure market. As we've highlighted in the past, this is a key growth and margin expansion opportunity for us. Another key growth opportunity we've highlighted is our Ambulatory business, which also had another strong quarter. Overall, ambulatory revenue growth of 15% is driven by well-above market performance in both the surgery center and physician office channels. And Cardinal Health Canada posted excellent revenue growth of more than 14%. We also had a couple of unique items which amplified our reported revenue growth that I wanted to bring to your attention. First is the ongoing effect of having transitioned our business with CareFusion with traditional brand of distribution model, a move that we highlighted in our Q3 earnings call last year. This change added 2 percentage points or $44 million to revenue and had the effect of depressing our segment profit margin rate during Q1 by 10 basis points. Secondly, heading into this year, we also made a refinement in the way we report results for international commercial operations. Previously, our results for our Puerto Rico and China businesses were reported as part of our Pharma segment, while Canada was included within the Medical segment. As an enhancement, and to be consistent with how we treat our U.S. operation, we are now splitting the results for these businesses based on the underlying business activity. We're doing this now while our international businesses are relatively small, in preparation for the future as they grow and become more relevant to both segment. But, for example, our med/surg distribution activity in China will now be recorded as part of our Medical segment financial results instead of within Pharma. I mentioned that international reporting change here because it contributed 1.7 percentage points to the Medical segment revenue growth rate in the quarter while having a relatively insignificant impact on segment profit growth. Now turning to Medical segment profit, which as we expected heading into the quarter declined 5% to $79 million, primarily driven by the negative impact of commodity prices on our cost of products sold and the impact of the Presource kit issue, which George described in more detail in his remarks. Specifically, commodity prices impacted our current period cost of goods sold by $18 million versus last year. For the full year, given the general reduction in commodity price levels since our last call, we are now forecasting a gross headwind of approximately $70 million in FY '12 versus the $80 million reflected in our prior guidance, which is a positive trend. We have seen some significant recent reductions in cotton, latex and oil. However, that rate of decrease has not yet been seen in the price of some of our oil derivative inputs such as resins. And one of our key raw components used in gloves, nitrile, has increased in price due to process involvements. But overall, the positive movement is good to see. At this point, much of this $70 million headwind is now locked in due to the lagging effect between price movements and the corresponding impact on our cost of products sold. Overpriced levels over the next couple months will be important as it relates to the impact in Q4 and beyond. Related to the Presource matter, we saw an impact of approximately $11 million in the quarter, coming from inventory reserves, incremental operating expenses and other related items. I should note that this amount, and any expected smaller residual impacts from our ongoing resolution plans, are reflected in our fiscal '12 guidance range. On the positive side of the ledger, the effect of these negative items was partially offset by the impact of increased volume to existing customers at net new business, as well as the margin benefit of increasing our sales of Preferred products. One final but very important note on the Medical segment. We successfully launched our Medical Business Transformation pilot at the beginning of October with no major issues. We remain on track for national implementation in our fiscal second half. Let's turn to Slide 7, which I'll just summarize. In total, GAAP results in the quarter include items that had negative $0.05 per share net after-tax impact, primarily from the exclusion of $0.04 of amortization of acquisition-related intangible assets of our non-GAAP results. This compares to $0.18 of net benefit in our GAAP results last year, mostly driven by $0.21 in gains on the sale of CareFusion stock. Now let me briefly comment on our fiscal '12 full-year outlook. We're maintaining our non-GAAP EPS guidance range at $3.04 to $3.19. This range excludes any potential impact from the Futuremed transaction, as we wouldn't typically reflect acquisitions in our guidance until they are closed. As we consider the full-year outlook in the context of our first quarter results, we remain positive about the year in front of us. There are clearly a few puts and takes. A Presource issue and a weaker-than-expected demand in nuclear low energy cardiac imaging are downsized to our original full-year expectations. Our commodity prices, lower share count and a favorable Q1 resolution on the Pharma manufacture-related issues should benefit the year. Although there's just one quarter behind us, there's still plenty of year to play out, including some key factors such as generic launch timing and value, generic deflation, granted price increases and further commodity price movements. One comment on the second quarter I'd like to make is to remind everyone that we expect Q2 to be our toughest period in terms of EPS growth rate, due in large part to the abnormally low tax rate we had in the second quarter of fiscal 2011. It also appears that Q2 might be the most difficult compare for the year-on-year commodity price impact within our Medical segment. I'm going to wrap up by saying I am very pleased with how we started the year. We continue to execute well in our base business and increase our momentum in our key strategic growth drivers, positioning us well for the future. Now let me turn it over to our operator to begin the Q&A session. Operator?

[Operator Instructions] Your first question comes from the line of Charles Rhyee with Cowen and Company.

If I could just get a quick clarification, the discrete items on the Pharma distribution that benefited $0.03, I kind of missed that. Can you just kind of quickly go over that again?

Sure, Charles. It was a $17 million of what I referred to as resolution of some open manufacture-related disputes. And since this involves relationships with some of our business partners, I want to be a little bit careful about how I describe this here. But in general, it's related to successful settlements of certain reserves that we've had on the books related to dispute of product returns to manufacturers. And this is an issue actually that we referred to in our 10-K as third-party return reserves, and we've had some type of reserve on our books of order [ph] for some time.

Okay. Okay, that's helpful. The other day, one of your peers obviously had a pretty strong results, and part of their distribution results benefited from the timing of payments from branded manufacturers. Can you talk about sort of the timing and how you see those payments coming to you? How does that flow through your -- through the quarters in the way you look at it? And how should we kind of expect that? How much benefit was that in this quarter? How should we see that over the next few quarters?

Charles, I really can't comment on our competitors' results. But in terms of the impact on Cardinal, I would say, generally, it's flowing through as we expected. We didn't call it out as a major year on your driver either way. And you're referring specifically to timing of branded price increases. I would say, generally, price increases are happening in line with what we expected coming into the year, and our forecast for the year in that respect remains pretty consistent with what we thought coming into the year and pretty consistent with the price increases we saw last year.

Great. And if I could just ask one last on nuclear here. You kind of noted that your expectations for this segment are lower now than last quarter. Can you give us a sense on the magnitude of that difference now in your expectations? Clearly, you didn't change the guidance itself, but maybe give us a sense within that. How much of that -- how big of that is the delta, do you think, between your initial assumptions on utilization and today?

Yes, I'm not going to get into too much detail on that, Charles, other than to say that it's less about the year-on-year impact and more about it not growing as quickly as we would have expected coming into this year. Clearly, we have begun to see some momentum in the overall low energy market last year as we sort of emerged from the supply issues that we had experienced the year before. We're expecting sort of a continued sequential and year-on-year rate of growth in the overall market demand. And at least through Q1, that hasn't necessarily materialized for a number of reasons I imagine including, perhaps, the overall economic environment and the impact that may be having on utilization and the use of certain procedures, et cetera. So again, it's really a market issue, the overall market has not yet returned to the levels that we saw a couple years ago before the supply issue. And we just want to make sure that we remain cautious about our expectations there. I will point out, however, that in this relatively stagnant overall market, we continue to gain share which is very important. And also I'll emphasize that what I'm really speaking about right now is a low-energy cardiac market. The PET business continues to grow quite well, and we continue to remain certainly optimistic about the future of bio-tracers there that are in various stages of development.

Your next question comes from the line of Larry Marsh with Barclays Capital.

Just a quick elaboration on the puts and takes. So I know at the beginning, Jeff, you talked about, I guess, FX being a bit of a headwind and then LIFO charge expectation, as well as everything else. Is there any other change in those expectations as you come through the sort of first quarter?

No. Previously, we said that FX was going to be about a $15 million to $20 million headwind. For Q1, it ended up being about a $5 million headwind, and our revised forecast for the year is still pretty consistent with our original expectation. For LIFO, we said in the $15 million to $25 million range, that's something that sort of evolves as the year goes on based on price increases both in the generic and branded side as well as our respective levels of inventory. Nothing has changed so far this year to change that estimate at this point, but that will play out over the next couple quarters.

Right. And just a -- I mean, some of this is determining like Presource and then the settlement is really changing your outlook although it's sort of more onetime in nature as opposed to ongoing. I mean, it seems like the message really with Presource is there was an issue. It's been resolved, and you're pretty much back to normal. Is that right?

Yes, our production levels are pretty much at 100% now. Inventory levels have returned to close to normal. We've been able to satisfy all of our customers' needs at this point. So yes, I would say largely, the issue is behind us, but clearly we had to put in some remedial measures which will have some slight impact going forward. But I would say the vast bulk of the negative impact is behind us at this point. But obviously, it affects the full year.

I guess the second question is really on China, broadly. It seems like when you first announced Yong Yu as a great opportunity to get a footprint in China, it seems like when we had the call with you guys in September and now today, you talk about really broadening that footprint in different verticals. You talk about the vaccine distribution issue with GlaxoSmithKline lab. So is it fair to say that you've upsized the magnitude of the opportunity with China? And then from that, really think about a much bigger footprint there than you would have suggested a year ago when you added Yong Yu?

Larry, it's George. I think our perspective all along was that we wanted to be a meaningful player there. So I'm not sure that we've upsized our expectations. I think what's happened as we've -- it's a market where you learn a lot more every day. And I think what we've really started to focus on is making sure that we grow our footprint geographically, but also realize that there are opportunities of business lines. Their historical strength has really been in pharma distribution and the services associated with that. So as we've gotten deeper into the market there, we've realized, of course, there is opportunity for geographic expansion and there's a consolidation process going on, which we certainly want to participate in. But we've also seen opportunities in things like medical supplies, lab, even some areas in retail that are evolving. So we have always had a view of this that was with of some size, and we felt like we could make a difference there, and that's our goal.

And just to clarify then, George, when you think about the margin opportunity with China, would you say it's comparable to your pharma supply chain domestically, is it higher or lower as we think about it?

We've consistently described it as somewhat higher than the pharma supply chain. Although again, ultimately that's going to depend on what mix of businesses we end up with there. If we're just looking at core pharma distribution, I'd say it's marginally higher than the U.S. But ultimately, when you look at the entire business, it will depend on what the mix of businesses ultimately is. How much, for example, lab distribution and med device distribution and our retail pharmacy support. And it's still early in all of those various business line initiatives. And I suspect that some of them will end up being quite successful, others may not. And ultimately how that plays out will largely dictate the margin evolution as well.

[Operator Instructions] Your next question comes from the line of Ross Muken with Deutsche Bank.

So can you give a little bit more color on your commentary regarding generic pricing, inflation and changes you've seen with a few specific drugs? We've obviously heard different things about manufacturer-related issues and other facility-related issues on the generic side. Can you just give a little bit more detail on sort of areas, big picture where you're seeing it and sort of your expectations going forward?

Sure, I'll start. This is one of the interesting areas because you have a lot of players who comment on it all from a different perspective and how it affects our business, so we'll try to make sure that we're focusing on what we see. As Jeff described, overall, again, net-net, the level of generic inflation was a bit higher during this period as compared to last year's same period. This was largely the result of a couple of key products just hitting their stage of life cycle where they see more competition. We expected this, it was in our models, not a surprise. We are seeing some inflation stability and in some cases inflation on some of the more mature products. Or in some cases, as I've said before, on sort of event-specific instances. So we are seeing some inflation or early stability on some of the more mature products. And whether or not that -- the conditions that drive that are varying actually. But that's what we're seeing. And as I said, the overall effect, because of those few bigger product sets, that decline was slightly negative for the period.

Great. And obviously, we saw, just quickly on the Futuremed side, you made the purchase there. How would you sort of characterize the M&A landscape as you look at it today from a valuation standpoint or net attractiveness versus buying back your stock? Obviously, we've seen market multiples come in and you've been doing most of your work in the private market, although this was obviously a public deal. Have we seen private operators get a bit more rational with expectations? And how has that sort of changed your view on cap deployment?

Well, first, in general, it is always very difficult to predict how a private seller sees valuation at any given moment. As you know, there are often family conditions that come into play, personal issues. So those -- it's very difficult to describe a trend or pattern as it relates to private sellers. In terms of valuation, it varies a lot, as you probably know, from sector to sector. There's some that seem to get a lot of buzz and valuations get quite high, and others that the general view is less enthusiastic about it, and those are different. But I'm not sure that I would describe -- certainly, there's been some adjustment, but it varies a lot. We compete in a lot of different markets, and so we see different valuations in different sectors. Jeff, I don't know if you want to add anything to that.

No, in terms of the comparison to repo as an alternative, that's sort of a continuous process, right? We're always making that alternative and any time we look at a potential acquisition, we run the scenario, the alternative scenario, if we use that cash to buy back shares, what impact does that have on expected total shareholder return, et cetera. Obviously, that depends on the potential price we're paying, the economics of the transaction and our share price. And so that's sort of a continually moving target.

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets.

I guess first, one housekeeping item. The $19 million sort of amortization, can you just breakout where that was versus pharma versus the medical segment?

And actually, just to be clear, now that we're excluding acquisition-related intangible amortization from our non-GAAP earnings, it doesn't appear in either segment. We actually are pulling it out of the segment and holding it at the corporate level for the purpose of our GAAP reporting, I just want to be clear on that. But if we were attributing it to the respective segments, of that $19 million, the vast majority would be pharma, about $18 million of that would have been pharma.

Okay, perfect, appreciate the clarification. And then you're just wondering about utilization and what you see out there, across the spectrum, you've alluded to some sluggish areas as in nuclear, and maybe some of the med/surg market, underlying market being a little more sluggish. Just curious how you would characterize it and if you see any inflection points over the course of the last quarter that we should be thinking about?

Yes, this is a good question, Tom. And as you probably heard in our commentary, there is sometimes a disconnect between the data that we see publicly and the demand in our business, which you know was quite strong, at least quite solid, I would say. I would -- it depends on the area. There was as quite a stretch of very soft data in the physicians' office market. September, actually, saw a little bit of an uptick. But I would say, for quite some time that market has been soft. The surgical procedure market -- again, I would say on -- if you look at the public data, it has been relatively soft over the past months. We do see these month-to-month swings, so I would describe the data as a little bit choppy. I'm not sure that we can describe a trend break anywhere over these past few months. I would say it's largely been the same. Again, September saw this uptick in the doc's offices, but I'm not sure that we would necessarily draw a conclusion yet from that one piece of data. So that's what we've seen. IMS data, I would say, has been showing very modest prescription growth, and our numbers obviously are showing a little better than that. But that's what we're seeing in the public data, probably much of the same data you're accessing.

Right, just to be clear though, relative to that public data that we've all seen, it sounds like maybe you're suggesting your own market -- your own growth that you seen in terms of market trend is a little steadier and maybe the data is a little choppier along the way and there's really been no major inflection point that you can describe?

Yes, I would say that vast majority of our businesses have held up very well and have actually shown some pretty robust growth notwithstanding the external reports. So a lot of those reports, at least for Q1, didn't really manifest themselves and slowdown our volumes. I would say the one exception to that was what we mentioned related to nuclear that within our own results for nuclear, we definitely felt the effect of what appears to be a fairly soft market in the low-energy cardiac imaging area. So I'd say that would be the one exception.

Your next question comes from the line of Robert Jones with Goldman Sachs.

A lot of detail around pharma, but I just want to dig into the margins a little bit. I was wondering if, Jeff, you could maybe give us a little bit of insight on the difference from the margin expansion from mixed shift versus generics versus acquisitions. Just trying to get a sense how to think about the run rate there.

Yes, it's a -- I'm not going to get to too many specifics here. And again, for some of our acquisitions, and Kinray is probably the best example, the ability as I said to sort of distinguish between what's Kinray and what's the rest of Cardinal Health is getting extremely difficult as we continue to integrate them. And just to give you a specific example, right? As we increase our generic volume as a result of the Kinray acquisition and hence, we're able to buy generics better, how do we attribute that to the acquisition versus the core business. And as I've said, that's probably as much an art as it is science. So I would say clearly, the 2 acquisitions or 3 if you include the specialty which we did at the beginning of last year, generally are all higher margin than the incumbent business. So as they continue to grow in over the quarters, they are definitely contributing to the margin expansion. The exact percentage point or exact number of basis points, I won't get into. In terms of contributions from just general margin rates in general, I guess the only other piece of detail I'd give you is that, within pharma non-bulk margins were are up 11 basis points versus last year, and bulk margins were down slightly 4 basis points. So that might give you some idea about the relative mix there.

And then, George, just on specialty, it looks like you guys added more large GPO oncology customers there. How does this -- or I guess, what is your expectation for these wins to translate into distribution?

Well, I think it's beginning to happen again. We've said all along that this is going to take time, that the key foundation in order to gain additional distribution in specialty is making sure that our presence in the oncology offices and the specialty offices is strong. So every one of these wins in terms of providing tools for an oncology practice that helps enable them to do their work, that provides clinical pathways, everyone of those creates a foundation for us to have the right to plan the distribution. And we're beginning to pick up some of that business. So I'm feeling optimistic that this business is starting to get a little bit of steam. We're pushing it hard but we also know that it just take some time. You don't walk in day one and have instant impact. But I like where it's going and we're beginning to see some signs of momentum.

That's helpful. And if I could just sneak one in on the medical side. It looks like the medical transformation pilot launch went off. I know the full launch is upcoming. Jeff, is there cost that we should think about rolling off as we move into launch mode within the Medical segment?

I would say not in launch mode. I think really, we're looking to FY '13 before we see a noticeable impact. Clearly, as we exit go -- into go-live, some costs are going to ramp up as we complete the final preparations. And then immediately after the national go-live, there'll be a period of 60 to 90 days during what we refer to as hyper care, where we're going to overinvest in certain resources to ensure that there's no hiccups and that our customers are properly served and that the system is working properly. Once we get through that period, which really is -- begins in FY '13, that's when those costs will all start to drop off, obviously the depreciation will kick in as well for the project. But more than offsetting that will be the significant benefits in the project throughout the medical income statement. So I really think it's more of an FY '13 issue, Bob.

[Operator Instructions] Your next question comes from the line of Lisa Gill with JPMorgan. Lisa C Gill - JP Morgan Chase & Co, Research Division: George, you made a comment earlier that the industry landscape within med/surg is changing. Can you maybe just talk about what you're seeing? The other day, one of your competitors talked about the fact that what the customers' expectations are, are different than what they were in the last few years and that there's going to be a bigger role around the relationship on medical supply distribution. So first off, can you talk about what you're seeing there? And then secondly, you did talk about growth in ambulatory. Is that an extension of some of your hospital relationships? As we're talking to some of the hospitals, we continue to hear about them acquiring physician practices and growing out the number of physicians that they have relationships with. So I'm just wondering how that's working.

Yes, so you sort of -- the questions -- the 2 parts of the questions actually relate. There really is a change. It's been unfolding for quite some time, and it will continue to unfold. So most broadly, if you look at the health system, it's no longer just thinking about an acute care hospital. You now have to think about an integrated healthcare system that has surgery centers and probably has a set of oncology practices, it has doctors, physicians practices, which it either owns or is affiliated with. And so what we're seeing is a broader need for value creation throughout the health system. They all feel under a fair amount of pressure in the environment. They know that as more people come into the system, they'll continue to be under pressure to do what they do incredibly efficiently. They're also going to be measured in different ways in terms of safety and quality and outcomes. And so the ability to provide tools that touch on all those value drivers, I think becomes increasingly important. And so this sort of does touch to your second part of your question which is, we are, as you are seeing, a growth in affiliation between IDNs and physicians offices. And yes, a good part of our growth in the ambulatory setting is coming from our very strong historical relationships with these integrated health systems. Lisa C Gill - JP Morgan Chase & Co, Research Division: So when I think about this from a financial perspective, when you talk about increase to existing customers, that's what you're talking about, so more touch points? But if I back out all the things, the detail that Jeff gave us on commodity prices and Presource kitting, et cetera, and I start to look at the underlying margin of your business, it actually looks like the margins for medical supply are improving. So as you take on more of this business, is the margin actually better? Is there a leverage in the existing relationship where you can drive margins over time? Or is it something else that's driving the margin improvement?

I think that's -- there are a number of things going on there that are driving improvement, including our preferred products mix. But I do think that you're touching on an important point, which is that the margin that we gain will come from the value creation we bring. That value creation runs deeper through these very integrated health systems and I think that probably is, for us, an opportunity to do what we do well and to gain additional margin. We are seeing some of that already.

Your next question comes from the line of A.J. Rice with Susquehanna Financial Group.

Maybe just first question following up on your comment about preferred products, can you give us a flavor of -- or it sounds like that's growing faster than the underlying business. So what percentage of the med/surg maybe does that represent today? And how much is growing faster? And what are the margin implications of that growing faster over time?

A.J., it's Jeff. Thanks for the question. So overall, preferred products represent about 40% of the total sales within the Medical segment. They did grow faster -- I'm sorry, 20% of sales, a little less than 40% of gross profit, just to be clear. They did grow faster than the underlying business during the quarter, closer to 10% versus if you look at some of the underlying growth if you back out some of the unusual revenue items, it was closer to 6%. So it did grow faster than the underlying business. Clearly, when you look at the 20% revenue, 40% gross profit profile, any growth that we can have in preferred products, particularly when its growing faster than the underlying business, it's a very good thing for margin, which is why it was a significant contributor to our margin growth in the quarter. And we expect it to continue in that respect.

Yes, I'd also add that to the extent that -- again, if we assume that the market has been in a relatively soft stage for some time, to the extent that you see any improvement. These are areas -- particularly in the surgical suites, this is an area where we have a pretty high rate of participation with preferred products. So those are things that could be beneficial to us as we see any uptick at all in the surgical procedures.

Okay, and just real quick is the second, on Futuremed, I know you said that you don't really bake anything in until it's closed, conceptually is it sort of a neutral to this fiscal year, and modestly positive to next year, can you give us any flavor as to what it might be if you do close it?

Sure. Again, it depends on when it closes during the year, but assuming it closes per our expectations this year, we expect it to be slightly accretive in fiscal '12, and then at least $0.04 accretive in fiscal '13.

Your next question comes from the line of Ricky Goldwasser with Morgan Stanley.

I have a question on the bulk revenue. I think that bulk accounted for about 43% of revenue in the quarter. So my question is, is this the steady state revenue mix we should be modeling or will bulk as a percent of the total revenue mix -- or distribution mix should come down as new generics come in?

Ricky, it's George. It's a little bit of a hard equation because there is a part that is related as you described, the swing from a branded product to a generic when the generic is launched. But there's also dynamic, which is that a number of our large national chains buy products both into their warehouses in bulk and into their stores in DSD. That can vary from time to time. And we don't necessarily control that. This is really part of the operating model of the customers. And so there's a bit of choppiness and variation in the way they do that, so it's a little bit hard to describe an exact steady state. I think the general direction for us has been to make sure that we try to balance, increase the balance of our business to more DSD, which we've been doing pretty successfully. But it's a little bit harder to model an exact trend line here because there's this part that we don't necessarily control.

Okay. And then when I think about the margins, I think, Jeff, you mentioned that non-bulk was up 11% basis points in the quarter, in a quarter that I don't think you had much new generic products that you would consider as kind of the highest-margin product. So what should -- how much should bulk margins be up kind of like in a quarter where you have more new generics and more generics that have more 180-type of profile?

Yes, first of all, the improvements that we saw in our non-bulk margin, it was a combination of all of our various margin initiatives that we have underway to continue to improve our margin. Clearly, the Kinray acquisition had a positive impact on margins, the growth of China has an impact on margin, the general strength of our generics programs has a positive impact on margins. So I mean, those are all benefiting our margin as planned. So I agree that there weren't a large number of new generic launches during the quarter, so the fact that we were able to increase non-bulk margins in spite of that, I view as a very positive sign. Ricky, I'm not sure I fully understood the second part of your question.

I guess the question is when you think -- when you look ahead to the second half of your fiscal year '12, where you will see a number of quite significant new generic product introductions, could you quantify for us what would be the impact on the non-bulk margin as a result of that kind of like mix shift?

Yes, I mean that's a very difficult thing to quantify at this point. So I probably won't be able to, Ricky. But I guess, as a generalization, I'd say all of it equal, that should be good for our non-bulk margins, but lots of other moving parts in there and it's still early, so it's difficult for me to quantify that exactly.

Your next question comes from the line of Steven Valiquette with UBS.

So on the -- just on generic drugs, it did seem that fiscal 1Q is maybe a difficult comp quarter for you guys, just given how strong the September 2010 quarter was for Cardinal in particular. So I'm just curious, we all know that your fiscal back-half year is going to be strong, but just curious for the December quarter, would you anticipate the year-over-year growth in generics to be maybe a little better than what it was in the just-reported fiscal 1Q or would it be about the same or maybe a bit tougher? Just trying to get a sense for the sequential trend there for -- just for you guys in particular.

Yes, Steve, thanks for the question. Again, it's -- I'm not going to get too specific here. Some is going to depend on how the generic launches that are transpiring play out. The ZYPREXA launch happened a few days ago. We've got the LIPITOR launch coming up later this month. So exactly how those both play out for the quarter is still a bit of unknown at this point. And so it's probably a little bit premature to guess too specifically, but yes, I think we're starting to see another generic wave across the transom, and it remains to be seen how it will play out.

Yes, let me just add, we're always going to be -- we don't really guide by quarter the generic impact. I think it's -- I think as you all well know, there are some key products that are -- that we expect to launch, and one that just did, and so our hope, and as you probably know, what we're modeling, as most folks are, a launch of a generic LIPITOR in November. So I think a lot of this will be influenced by the nature of the launches, the timing, the number of competitors, but we see good things ahead for generics.

Your next question comes from the line of George Hill with Citigroup.

George, maybe as we look a little further out, 2 questions on generics. Number one, can you talk about how conversations are evolving with customers that might normally buy generics around Cardinal with respect to your ability to hold on to some of that volume share? And then following onto that, with LIPITOR, you'll have some of the 180-day exclusivity period and then some of the multi-source period during the upcoming fiscal year. I guess, can you put some color around the conversations you're having with some of your preferred manufacturers around what lies after the 180 day exclusivity period looks like?

Thanks, George. It's a very fair question, a lot of which I can't comment on because these are really conversations between us and our business partners. Let me take the first one which is a little easier. Yes, we feel good about the value of our generic proposition to our customers. So our ability to hold -- following [ph] with our key customers feels pretty good. Obviously, there are -- there can be unique things happening with major launches like some that we're seeing in front of us, and so those always require some creativity around the system, and we're talking, of course, with our suppliers on how those are going to unfold. But I think right now, we feel that we're getting and have been getting better sort of every year at managing our generic portfolio, working closely with our suppliers and creating a very flexible value-creating tool for our customers, so I feel good about that. As it relates to the strategies of how a product plays out during its exclusive period and the subsequent period, that is really -- varies a lot by company, by product, by what the anticipated competitive level looks like post-exclusivity, and so we, I think I've said this to you before, it's almost like each is a strategy of one. It's very, very difficult to characterize a general direction rather than -- I think it's more appropriate to say each of these has its own unique characteristics. And we try to work closely with the suppliers to make sure that we're a valuable partner for them.

Your next question comes from the line of Steve Halper with Stifel, Nicolaus. Steven P. Halper - Stifel, Nicolaus & Co., Inc., Research Division: With respect to the China initiative, how do you think about capital deployment there? You built another distribution facility, you did a tuck-in acquisition, what are the objectives there in terms of capital deployment and returns?

Hi, Steve, the question -- as we said previously, for at least a 3-year period we expect China to be a net use of capital as we continue to build up the platform aggressively, as we make some small tuck-in acquisitions, as we put up additional DCs and as we grow the business and have the working capital needs to support that. In the past, I quantified that at somewhere between $100 million to $150 million per year for a 3-year period. And I think that's still a pretty accurate projection. Clearly, we expect to get a return on that investment, a good return on that investment, but we're in growth mode right now. And as a result, we'll be injecting capital prudently but with the desire to establish a major presence in China, and to consolidate and to build up some of these business lines that George and I referenced earlier. Steven P. Halper - Stifel, Nicolaus & Co., Inc., Research Division: The $100 million to $150 million per year, does that include the tuck-in acquisitions?

Yes, it does. Now, some years may be slightly higher depending on exactly what transpires, but yes, I would imagine that would include most of the acquisitions we've been looking at, because, quite frankly, most acquisitions we're looking at are relatively small. We have the major platform that we need. The goal now is really to build out additional geographic presence in a number of the cities that we don't currently have a presence. And in most cases, that involves picking up smaller regional players that have a presence in that particular city. Steven P. Halper - Stifel, Nicolaus & Co., Inc., Research Division: Last question, have those valuation expectations declined since you went in initially?

Yes. I'd say, perhaps marginally. I think in line with general economic conditions in China and the availability of funding, et cetera, but I would not say dramatically so. But we feel the acquisitions that we've been looking at, and we've been very selective about going after the ones that best fit our profile, I'd say they're available at reasonable multiples, perhaps higher multiples than what we see in the U.S., as you would expect just given the growth in that market. But again, the ones that we've been looking at and closing on or expect to close on, I would describe as high but reasonable.

Your next question comes from the line of John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: George, I wonder if you could just expand on your comments with the generic market, inflation versus deflation. And what are your latest thoughts on the effect on Cardinal if LIPITOR is a single source versus a dual source generic for a while?

Well, this is -- yes, I don't want to be too specific, John, on any particular product. Again, what we were assuming -- I think we've shared this, but I'll share it again. We're assuming a November launch, we're assuming that would be product that has statutory exclusivity and that there will be another launch associated with legal -- a legal agreement which allows for an authorized generic. So essentially 2 players in the market. That's what we're modeling, that's what we've been modeling all along, and it's still our expectation. Those are conditions that can be very good for us, but again, each product has its own characteristics. There is a general pattern, but we do find that occasionally, a company will price in a certain way, that the market will price in a certain way. And so these are generally conditions that are pretty good for our business and good for our profitability, and certainly, for our customers a chance to grow their generic business as well. The characteristics that I described earlier in terms of our overall pattern, it's not bad for us to see stabilizing prices in generics on some of these older products, but again, even that varies a little bit. But generally speaking, I would say that can be a good thing for us. I described the characteristics of some of the -- a more recent product experiencing the stage of evolution where they fear their first competition. But that's what we -- we see that fairly typically and model it usually pretty accurately. So the conditions that we're seeing right now are good, and our hope is that stabilizing prices is not a bad thing. Our hope is that, that will continue, but again it's pretty hard to model. The competitive dynamics tend to wax and wane a bit.

Your next question comes from the line of Eric Coldwell with Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: I know you've quantified the Presource custom kitting EBIT impact, but did you give the revenue impact from the hold?

No, we didn't, Eric, but actually in the scheme of things, the revenue impact was relatively light. Most of the impact is related to reserves we took on inventory that was held up at the border or additional operating costs that we incurred as our team worked to make sure that our customers had as much supply as we could humanly provide them. There were a few blips over the course of the quarter in terms of sales, week to week, due to spot outages of inventory, et cetera. But I would say overall, over the course of the quarter, it kind of evened out, and we were probably down very slightly, but it wasn't a significant sales impact. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Good. On Puerto Rico and China in the reclass of performance into the segment, did I understand correctly that you're going to split those 2 geographies by Pharma and Med/Surg, or is it all moving into Med/Surg? And then secondarily, do you plan to provide restated numbers for prior periods with future quarters or in a subsequent filings?

No. Great question. I'm glad you asked it. No. All 3 businesses that we consider international, Canada, China and Puerto Rico, I recognize it's not international, but for our purposes, we treat it as a nondomestic business. Yes, all 3 of those, we're going to split between the 2 segments, based on the underlying business. So no, we're not switching it totally to medical. We're just switching to medical, the relevant portion of those 3 respective geographies. We're not going to restate prior years, in part because the bottom line financial impact is very small. I'll call out the revenue impact each quarter for the rest of this year. In Q1, as I said, it added about 1.7 percentage points to the medical revenue growth rate. That was about USD $38 million it added, but the profit impact, if you apply it to the average medical operating margin rate to that, you can figure out the bottom line impact is relatively small. So we decided it really wasn't worth restating prior years for that small change.

Your next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

George or Jeff, is there any material cost or capital savings folding that Futuremed asset into the acute care footprint in Canada? And then maybe, can you speak more broadly to the market there? It's not exactly been a barnburner here in the U.S.

You take the first part, I'll take the second.

Thanks, Bob, it's Jeff. I always have to make a comment, I can't let -- but yes, it's a little bit premature because we're still prior to the close period there and going through the regulatory process, et cetera, so I need to be a little bit careful of what I comment, but I will say that the synergies of this deal are expected to be substantial, and that's both in the areas of capital and expense. There's a fair amount of geographic overlap in the country with our DCs, and the headquarters, I believe, running miles apart. So a significant part of the economics of the deal are the ability to fold Futuremed into the robust Cardinal Canada platform. So I would expect it'd be significant. That all said, we will be retaining some key management from the Futuremed company, including the existing CEO and President, Ray Stone, who will be joining the Cardinal health team and will be a very important part of our business going forward. Again, assuming this transaction closes.

Generally speaking, Bob, as I understand your comment on long-term care, it has had its complications here in the U.S. It's actually been a very solid growing market in Canada. They experienced the same demographic challenge we experienced, but their system and the financing system has been more stable, in fact, there's been a push towards taking care of folks in long-term care. So we actually like the characteristics of the market, it seems quite stable, growing and demographics are certainly moving in our favor there.

The last question comes from the line of David Larsen with Leerink Swann.

I'll be quick here. What were the offsets to that $17 million benefit you received from that dispute with the manufacturers? There were a couple that you mentioned, can you just remind me, please?

Sure. Thanks, Dave, for the question. One was the Presource issue which, as I said, was worth about $11 million in the quarter or roughly $0.02. And then the discrete tax items, which net were negative of about $4 million, again, equal to about $0.01 worth on the EPS line.

Okay. And those were all included in your adjusted EPS, correct?

Correct. They were all in our non-GAAP EPS, but I just wanted to call them out because they were somewhat unique for the quarter.

Ladies and gentlemen, that concludes the question-and-answer session. I would now like to turn the call over to Mr. George Barrett, Chairman and CEO, for any final remarks. Please proceed.

Thank you, Stephanie. We're off to a good start to our fiscal '12. So we look forward to the year in front of us. We thank all of you for joining us on today's call, and have a good day. Thank you.