Spring Ritual at Cardinal Health: IRS Audit

1. President Obama’s cabinet picks are not the only ones facing tax problems these days. According to Cardinal Health’s (CAH-$38.10) recently filed second-quarter 2009 regulatory filing, the drug wholesaler and leading medical products supplier to acute care hospitals could be on the hook for more than $800 million in back taxes as the Internal Revenue Service audits questionable accounts receivable financing transactions and property transfers between foreign and domestic subsidiaries.
   
   The sale of trade receivables is a cost-effective financing alternative to traditional bank sources as a means of raising cash. For example, Cardinal has commitments in place that permit it to received up to $850 million in cash through its own receivables sales facility program. Unfortunately, the Internal Revenue Service announced a tax probe of Cardinal in 2008 related to a deal with the Dutch bank Rabobank Group, alleging that the bank helped Cardinal avoid paying taxes. Updates on the details on this and other ongoing IRS audits involving the company can be found in the company’s recent 10-Q regulatory filing:
   
   The Internal Revenue Service (“IRS”) currently has ongoing audits of fiscal years 2001 through 2005. During the three months ended March 31, 2008, the Company received Notices of Proposed Adjustments (“NPAs”) from the IRS related to fiscal years 2001 through 2005 challenging deductions arising from the sale of trade receivables to a special purpose accounts receivable and financing entity. The amount of additional tax, excluding penalties and interest, which may be significant, proposed by the IRS in these notices was $178.9 million. The Company disagrees with the proposed adjustments and intends to vigorously contest them. The Company anticipates that this transaction could be the subject of proposed adjustments by the IRS in tax audits of fiscal years 2006 to present. The Company, in normal course, terminated the transaction during the second quarter of fiscal 2009.
   
   During the six months ended December 31, 2008, the Company received an IRS Revenue Agent Report for tax years 2003 through 2005 which included the NPAs discussed above and new NPAs related to transfer pricing arrangements between foreign and domestic subsidiaries and the transfer of intellectual property among subsidiaries of an acquired entity prior to its acquisition by the Company. The amount of additional tax proposed by the IRS in these notices total $598.1 million, excluding penalties and interest which may be significant. The Company disagrees with these proposed adjustments and intends to vigorously contest them.
   
   

Although Cardinal has ample liquidity to pay the alleged taxes owed, with cash on hand of $773 million and $1.4 billion available in commercial credit, doing battle with the IRS at this time might not be prudent. The company is looking to spin-off its Clinical and Medical Products division. Before Cardinal can move forward with the planned transaction, it needs an IRS ruling on the tax status of the deal. The request was sent to the IRS in November. I can think of 800 million reasons why the IRS might be slow to respond to Cardinal’s petition.

Cardinal has refused to publicly comment on the IRS audits.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy. Cardinal

Brooks Automation Pays for Founder Bob Therrien's Lawyers

Automation equipment maker Brooks Automation (BRKS-$4.28) is aggressively moving to lower its cash breakeven level during the current semiconductor industry slump. Unfortunately, the company remains on the hook for millions in litigation costs being incurred by its former Chief Executive Officer Robert Therrien—currently on trial for income tax evasion in Massachusetts!

In response to deteriorating conditions in the semiconductor capital equipment industry and lowered revenue expectations in the quarters ahead, Brooks is looking to streamline its organizational structure (by combining product groups) and reducing its global workforce (by more than 20 percent). Brooks expects annual salary and benefit savings of approximately $8 million.

Pursuant to Brook’s prior employment agreement with Therrien, however, some employees who fell on their swords in service to Brooks will see their lost salaries directed to the benefit of Therrien for costs he incurs in connection with his trial, according to the company’s first-quarter 2009 regulatory 10-Q filing:

On July 25, 2007, a criminal indictment was filed in the United States District
Court for the District of Massachusetts charging Robert J. Therrien, the former
Chief Executive Officer and Chairman of the Company, with income tax evasion.
Trial is scheduled to commence on March 9, 2009. A separate civil complaint was
filed by the SEC on July 25, 2007 against Mr. Therrien in the United States
District Court for the District of Massachusetts charging him with violations of
federal securities laws. This matter has been stayed by the court pending the
outcome of the criminal matter. In accordance with the provisions of the
Company’s indemnification agreement with Mr. Therrien, the Company is advancing
Mr. Therrien for costs he incurs in connection with these matters, which
amounted to $1.8 million for the three months ended December 31, 2008.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Mechanics No Show at Universal Tech Institute

Although total starts increased by six percent to 3,319 newly enrolled students at auto mechanic training school Universal Technical Institute (UIT-$12.18), actual show rates—defined as is the number of student starts as a percentage of those who were scheduled to start during the same timeframe—fell by 220 basis points in the first quarter ended December. After careful assessment of the drivers behind the decline, UTI management believes that weaknesses in the economy and/or concerns with the health of the automotive industry impacted students’ ability to begin school as planned.

However, an increase in lending activity has increased default rates…. Read More….

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

Asset Impairment Issues at Avnet

While the analysis is not yet complete, Avnet (AVT-$19.74) has concluded that it will record a significant non-cash goodwill and intangible asset impairment charge for the quarter ended December 27, 2008. Customer relationships might be the most vulnerable of Avnet’s intangible assets. The electronics wholesaler has relationships with over three hundred of the world’s leading electronic component and computer product manufacturers and software developers…. Read More….

Reporting by contributor Debra Fiakas, who does not hold a financial interest in any stocks mentioned in this article. The 10-Q Detective has a Full Disclosure Policy.

Despite Rough Seas, Carnival Cruises Ahead With 17 Newbuilds

Despite limited visibility in forward operating profitability, resulting from falling demand and softer pricing, cruise operator Carnival Corp (CCL-$18.89) remains committed to expanding berth capacity by 22.5% Read More….

Love, exciting and new
Come Aboard.
We're expecting you.
Love, life's sweetest reward.
Let it flow, it floats back to you. ~ "Love Boat" TV Theme Song

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

$82 Million in Currency Losses at KLA-Tencor

In addition to the bad news that customer demand is forecasted to remain weak for the duration of 2009, as consumers in most countries slash discretionary spending for electronics and other goods that use semiconductor chips, KLA-Tencor (KLAC-$19.76) is being hit with another poke in the eye by volatile currency movements…. Read More….

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.