DEF 14A 1 d395747ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

 

LOGO

CareFusion Corporation

 

(Name of Registrant as Specified In Its Charter)

 

  

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

  

 

  (2) Aggregate number of securities to which transaction applies:

 

  

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

  

 

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  (5) Total fee paid:

 

  

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

  

 

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  (4) Date Filed:

 

  

 


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LOGO

February 28, 2013

Dear Stockholders:

We cordially invite you to attend the CareFusion Corporation 2012 Annual Meeting of Stockholders. The meeting will be held on Monday, April 15, 2013, at 8:30 a.m. (Pacific Daylight Time) at CareFusion Headquarters, located at 3750 Torrey View Court, San Diego, CA 92130.

We are pleased to be utilizing the United States Securities and Exchange Commission’s rules allowing companies to provide proxy materials to their stockholders over the Internet. We believe that this will allow us to promptly provide proxy materials to you, while lowering the costs of distribution and reducing the environmental impact of our Annual Meeting.

In accordance with these rules, we are sending stockholders of record at the close of business on February 14, 2013, a Notice of Internet Availability of Proxy Materials on or about February 28, 2013. The Notice of Internet Availability of Proxy Materials contains instructions on how to access our Proxy Statement and Annual Report for the fiscal year ended June 30, 2012. The Notice also provides instructions on how to vote by Internet or telephone and includes instructions on how to receive a paper copy of the proxy materials by mail. If you received our Annual Meeting materials by mail, the Notice of Annual Meeting of Stockholders, Proxy Statement, Annual Report and proxy card were enclosed.

The Notice of Annual Meeting of Stockholders and Proxy Statement describing the business to be conducted at the meeting accompany this letter.

I look forward to sharing information with you about CareFusion Corporation at the Annual Meeting. Whether or not you plan to attend the meeting in person, I encourage you to vote as soon as possible so that your shares will be represented at the meeting.

Very truly yours,

 

LOGO

Kieran T. Gallahue

Chairman and Chief Executive Officer


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LOGO

 

 

NOTICE OF 2012 ANNUAL MEETING OF STOCKHOLDERS

To Be Held on April 15, 2013

 

 

The CareFusion Corporation 2012 Annual Meeting of Stockholders will be held on Monday, April 15, 2013 at 8:30 a.m. (Pacific Daylight Time) at CareFusion Headquarters, located at 3750 Torrey View Court, San Diego, CA 92130, for the following purposes:

 

  1. To elect the three Class III directors named in the attached Proxy Statement to hold office for a term of three years.

 

  2. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013.

 

  3. To hold a non-binding advisory vote on the compensation of our named executive officers.

 

  4. To consider a stockholder proposal to adopt simple majority voting if such proposal is properly presented at the Annual Meeting.

 

  5. To consider a stockholder proposal to repeal the classified board if such proposal is properly presented at the Annual Meeting.

 

  6. To consider such other business as may properly come before the meeting and any adjournments or postponements thereof.

Our Board of Directors recommends a vote “FOR” proposals 1 through 3 and a vote “AGAINST” proposals 4 and 5.

You are entitled to vote only if you were a CareFusion Corporation stockholder as of the close of business on February 14, 2013.

Your vote is important. We encourage you to read the Proxy Statement and to submit a proxy so that your shares will be represented and voted even if you do not attend the Annual Meeting. You may submit your proxy by Internet, telephone or mail. If you received a paper copy of the proxy card by mail, you may sign, date and return the proxy card in the enclosed envelope. If you attend the Annual Meeting, you may revoke your proxy and vote in person.

By order of the Board of Directors,

 

LOGO

Joan B. Stafslien

Executive Vice President, General Counsel,

    Chief Compliance Officer and Secretary

San Diego, California

February 28, 2013

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE CAREFUSION CORPORATION 2012 ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON APRIL 15, 2013

The CareFusion Corporation Proxy Statement and Annual Report for the fiscal year

ended June 30, 2012 are available electronically at https://materials.proxyvote.com/14170T


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IMPORTANT VOTING INFORMATION

Pursuant to New York Stock Exchange rule changes adopted by the United States Securities and Exchange Commission, your broker, bank or other financial institution is not permitted to vote on your behalf on the election of directors and other matters to be considered at the CareFusion Corporation 2012 Annual Meeting of Stockholders (except on ratification of the selection of Ernst & Young LLP as CareFusion’s independent registered public accounting firm for the 2013 fiscal year), unless you provide specific instructions as to how to vote. For your vote to be counted, you will need to communicate your voting decisions to your broker, bank or other financial institution before the date of the CareFusion Corporation 2012 Annual Meeting of Stockholders.

More Information Is Available

If you have any questions about the proxy voting process, please contact the broker, bank or other financial institution where you hold your shares. The United States Securities and Exchange Commission also has a website (www.sec.gov/spotlight/proxymatters.shtml) with more information about your rights as a stockholder. Additionally, you may contact CareFusion’s Investor Relations Department by email at ir@carefusion.com.

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE

CAREFUSION CORPORATION 2012 ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON APRIL 15, 2013

The CareFusion Corporation Proxy Statement and Annual Report for the fiscal year

ended June 30, 2012 are available electronically at https://materials.proxyvote.com/14170T


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LOGO       2012 Proxy Statement Summary

To assist you in reviewing the Proxy Statement for the CareFusion Corporation 2012 Annual Meeting of Stockholders (the “Annual Meeting”), we call your attention to the following summary information about the Annual Meeting; our corporate governance framework; our business and financial performance during fiscal 2012; and key executive compensation actions and decisions during the year. For more complete information, please review the CareFusion Corporation Proxy Statement and Annual Report for the fiscal year ended June 30, 2012.

Annual Meeting of Stockholders

 

  •  Date and Time:

   April 15, 2013 at 8:30 a.m. (Pacific Daylight Time)

  •  Place:

   CareFusion Corporation Headquarters at 3750 Torrey View Court, San Diego, CA 92130

  •  Record Date:

   February 14, 2013

  •  Voting:

   If you were either a “stockholder of record” or beneficial owner of shares held in “street name” as of the Record Date, you may vote your shares. You may vote either in person at the Annual Meeting or by the Internet, telephone or mail. See the “General Information About the Meeting and Voting” in the Proxy Statement for more detail regarding how you may vote your shares.

  •  Admission:

  

You are entitled to attend the Annual Meeting if: (i) you were a CareFusion Corporation stockholder as of the Record Date (or you are attending as a named representative of a stockholder or you are an immediate family member attending as a guest of a stockholder); and (ii) you present an admission card or proof of ownership of CareFusion common stock as of the Record Date. In addition to an admission card or proof of ownership as of the Record Date, stockholders of record, immediate family member guests and representatives will be required to present government-issued photo identification (e.g., driver’s license or passport) to gain admission to the Annual Meeting.

 

To request an admission card and register to attend the Annual Meeting, please contact the CareFusion Investor Relations Department by e-mail at ir@carefusion.com or by phone at (858) 617-4621. In addition, you can submit your request by fax at (858) 617-2311 or by mail at 3750 Torrey View Court, San Diego, CA 92130.

 

Please be advised that all purses, briefcases, bags, etc. that are brought into the facility may be subject to inspection. Cameras and other recording devices will not be permitted at the Annual Meeting.

 

 

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Meeting Agenda and Voting Recommendations

 

     Board Vote
Recommendation
   Page References
(for more  detail)

Management Proposals:

     

(1)   Election of three Class III directors

   FOR EACH
DIRECTOR NOMINEE
   18

(2)   Ratification of appointment of Ernst & Young LLP as our independent registered public accounting firm for fiscal 2013

   FOR    23

(3)   Non-binding advisory vote on the compensation of our named executive officers

   FOR    26

Stockholder Proposals:

     

(4)   Adopt simple majority voting

   AGAINST    28

(5)   Repeal the classified board

   AGAINST    31

Director Nominees

The following table provides summary information about each of the three directors nominated for election as Class III directors to serve a three-year term:

 

Name

  Age     Director
Since
   

Principal Occupation

 

Experience/
Qualifications

 

Committee
Memberships

    Independent?  

Philip L. Francis

    66        2009     

Former CEO of

PetSmart, Inc.

 

•  Leadership

•  Industry

•  Finance

 

•  Audit

•  Governance &
Compliance
(chair)

  Yes

Robert F. Friel

    57        2009      Chairman and CEO of
PerkinElmer, Inc.
 

•  Leadership

•  Industry

•  Finance

•  Global

  Human
Resources &
Compensation
  Yes

Gregory T. Lucier

    48        2009      Chairman and CEO of
Life Technologies Corp.
 

•  Leadership

•  Industry

•  Finance

•  Global

  Human
Resources &
Compensation
(chair)
  Yes

 

 

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Corporate Governance Summary Facts

The following table summarizes our Board structure and key elements of our corporate governance framework:

 

Size of Board

   9

Number of Independent Directors

   8

Chairman & CEO

   Combined

Presiding Independent Director

   Yes

Board Self-Evaluation

   Annual

Review of Independence of Board

   Annual

Independent Directors Meet Without Management Present

   Yes

Structure of Board

   Classified

Voting Standard for Election of Directors in Uncontested Elections

   Plurality

Diverse Board (as to background, experience and skills)

   Yes

Board Orientation / Education Program

   Yes

Fiscal 2012 Business and Financial Highlights

Fiscal 2012 was an important year, as we focused on reducing the complexity of our infrastructure, reducing administrative expenses, investing in research and development initiatives, and building a foundation for long-term growth. During fiscal 2012, we delivered strong financial performance in a challenging global economic and business environment, and we made significant progress against our long-term strategic plan, as highlighted below:

 

•        Growth in Revenue, Operating Income and Cash Flows. We grew revenue by $158 million, or 5 percent from the prior year, to $3.6 billion. In addition, we grew operating income by $70 million, or 14 percent from the prior year, to $574 million. Our strong focus on cash flows resulted in $648 million in cash provided by operating activities in fiscal 2012, nearly double the amount we reported for fiscal 2011.

•        Reduction in Administrative Expenses and Increase in Investment in Research and Development. As part of our efforts to reduce the complexity of our infrastructure and simplify our operations, we reduced selling, general, and administrative expenses by $34 million, or 3 percent from the prior year. During fiscal 2012, we reallocated these funds to increase our research and development investments by 12 percent from the prior year to $164 million.

 

 

LOGO

 

 

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•        Acquisitions and Divestitures. A core component of our business strategy is to pursue growth opportunities that give us access to innovative technologies, complementary product lines or new markets. Our business strategy also involves assessing our portfolio of businesses with a view of divesting non-core businesses and product lines that do not align with our objectives. During fiscal 2012, we acquired several companies and technologies that expand our geographic reach, strengthen our technology base and provide opportunities for growth, including Rowa, a German-based company specializing in robotic medication storage and retrieval systems for retail and hospital pharmacies; PHACTS, a technology and consulting company that helps hospital pharmacies better manage inventory, reduce pharmaceutical costs, and streamline operations; and UK Medical Holdings Ltd., a leading distributor of specialized medical products to the National Health Service and private healthcare sector in the United Kingdom. At the same time, we completed the sale of our Nicolet neurodiagnostic monitoring business, allowing us to simplify and focus on value-creating activities.

 

 

LOGO

•        Share Repurchase Program. With a focus on enhancing stockholder value, in February 2012, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $500 million of our common stock through open market and private transactions. The share repurchase program is expected to continue through December 2013. Through June 30, 2012, we repurchased a total of 3.9 million shares of our common stock under the share repurchase program for an aggregate of $100 million.

 

 

LOGO

Fiscal 2012 Executive Compensation Highlights

The primary objective of our executive compensation program is to align compensation with our overall business goals, core values and stockholder interests. Our compensation objective is to provide a competitive pay package that motivates achievement of above-market performance and emphasizes a long-term view in creating stockholder value. For fiscal 2012, total direct compensation of our named executive officers consisted of base salaries, annual cash incentives under our management incentive plan (“MIP”) and long-term equity-based incentive (“LTI”) awards. Consistent with our commitment to a “pay-for-performance” executive compensation program, a significant portion of the compensation of our named executive officers in fiscal 2012 was at-risk. For our Chief Executive Officer, 88% of total direct compensation was subject to annual performance goals or tied to the value of our common stock. For our other named executive officers as a group, 79% of total direct compensation was subject to annual performance goals or tied to the value of our common stock.

 

 

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Fiscal 2012 Total Direct Compensation

 

LOGO

Annual cash incentive awards under the MIP are performance-based, with payouts subject to the attainment of Company-wide and individual performance goals. For fiscal 2012, we established Company-wide financial performance goals related to revenue growth and operating margin. Fiscal 2012 annual LTI awards for our named executive officers were comprised of stock options, performance stock units and restricted stock units allocated 50%, 25% and 25%, respectively, of the total LTI target award values. For fiscal 2012, we granted performance stock units to our executive officers with performance goals based on the compounded annual growth rate of the Company’s fully diluted, adjusted earnings per share over the three year performance period beginning July 1, 2011 and ending June 30, 2014.

In designing our executive compensation program, we have implemented programs and policies to create alignment with our stockholders and that support our commitment to good compensation governance, as highlighted below:

 

Advisory Vote on Executive Compensation

   Annual

Clawback Policy for Variable Cash Compensation and Equity

   Yes

Tax Gross-Ups

   No

Independent Compensation Consultant

   Yes

Stock Ownership Guidelines

   Yes

Compensation Risk Assessment

   Annual

Hedging, Pledging and Margin Activities

   Prohibited

At our November 2, 2011 annual meeting of stockholders, our stockholders voted to support our “say-on-pay” proposal related to our fiscal 2011 executive compensation, with approximately 87% of votes cast in favor of the proposal. Given this result and after careful consideration, the Compensation Committee determined to retain the core design of our executive compensation program for fiscal 2012. However, the Compensation Committee continued to refine our executive compensation program to better align compensation with our overall business goals and stockholder interests, including the following actions that will apply to our fiscal 2013 executive compensation program:

 

 

Revised Comparator Group for Compensation Benchmarking. We are committed to benchmarking of our pay levels and executive compensation practices against a comparator group that is reasonable and appropriate for our Company. For fiscal 2013 compensation planning, our Human Resources and Compensation Committee considered that as a result of recent mergers, acquisitions and divestiture transactions — by the Company and by other companies in the healthcare sector — some of the Company’s financial metrics relative to other potential peer group companies have changed. Following review and analysis by our independent compensation consultant, we made adjustments to the comparator group so that the relative revenues, earnings, cash flows and market capitalizations of companies in the comparator group are more closely aligned with CareFusion.

 

 

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“Double-Trigger” Equity Award Agreements. Historically, our standard forms of agreements for LTI awards contained a “single trigger” vesting provision, meaning they will vest in full upon a change in control of the Company. In June 2012, the Human Resources and Compensation Committee approved new forms of LTI agreements for equity grants to eligible employees, including our named executive officers, that replace the existing single-trigger vesting provision with “double-trigger” vesting. Under these new agreements, the vesting of the awards (and exercisability in the case of stock options) will be accelerated only if the recipient’s employment is terminated by the Company other than for “cause” or by the recipient for “good reason,” in either case within two years following a change of control of the Company. The terms of these new agreements applied to the annual LTI award in August 2012, and will be used prospectively for all future LTI awards.

 

 

Amendment of Executive Severance Guidelines. In June 2012, the Human Resources and Compensation Committee approved the amendment and restatement of our Executive Severance Guidelines, which are guidelines to be considered in providing severance payments and benefits to certain executive-level employees in the event of a termination of employment by the Company without “cause” or by the executive for “good reason.” The amendment and restatement of the Executive Severance Guidelines was intended to reduce the number of executives subject to the guidelines and reduce the amount of severance payable under the guidelines.

 

 

Amendment of Executive Change in Control Severance Plan. In June 2012, the Human Resources and Compensation Committee also approved the amendment and restatement of our Executive Change in Control Severance Plan, which provides for benefits to our named executive officers in connection with a change in control of the Company. The amendment and restatement of the Executive Change in Control Severance Plan was intended to reduce the number of executives subject to the plan, provide additional clarity around various provisions, and reduce the amount of severance payable under the plan.

Additional information about our compensation philosophy and program, including the compensation actions summarized above, can be found in the “Compensation Discussion and Analysis” commencing on page 33 of the Proxy Statement. We encourage you to read the entire Proxy Statement and to vote your shares at the Annual Meeting. If you are unable to attend the Annual Meeting in person, we encourage you to submit a proxy so that your shares will be represented and voted.

 

LOGO

 

 

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TABLE OF CONTENTS

 

GENERAL INFORMATION ABOUT THE MEETING AND VOTING

    1   

GOVERNANCE OF OUR COMPANY

    7   

Overview

    7   

Corporate Governance Guidelines

    7   

Policies on Ethics and Compliance

    7   

Stockholder Recommendations for Director Nominees

    8   

Identification and Evaluation of Director Nominees

    8   

Director Independence

    9   

Board Leadership Structure

    10   

Executive Sessions

    11   

Board and Committee Effectiveness

    11   

Attendance at Annual Meeting of Stockholders

    11   

Oversight of Risk Management

    11   

Communicating with the Board

    12   

Board and Committee Membership and Structure

    12   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    15   

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    16   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    17   

Procedures for Approval of Related Person Transactions

    17   

Related Person Transactions

    17   

PROPOSAL 1—ELECTION OF DIRECTORS

    18   

Nominees for Election as Directors and Directors Continuing in Office

    18   

PROPOSAL 2—RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    23   

Audit Related Matters

    23   

Report of the Audit Committee

    24   

PROPOSAL 3—ADVISORY VOTE ON THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

    26   

PROPOSAL 4—STOCKHOLDER PROPOSAL TO ADOPT SIMPLE MAJORITY VOTING

    28   

PROPOSAL 5—STOCKHOLDER PROPOSAL TO REPEAL CLASSIFIED BOARD

    31   

COMPENSATION DISCUSSION AND ANALYSIS

    33   

Executive Overview

    33   

Introduction

    36   

Compensation Philosophy

    37   

Role of the Compensation Committee and Management

    37   

Role of the Compensation Consultant

    38   

Comparator Group and Benchmarking

    38   

Compensation Determinations

    39   

Agreements Regarding Executive Compensation

    46   

Severance Benefits and Payments Upon a Change in Control

    48   

Compensation Determinations for Fiscal 2013

    49   

Policies, Guidelines and Practices Related to Executive Compensation

    50   

Tax and Accounting Matters

    51   

Compensation Committee Report

    52   

EXECUTIVE COMPENSATION

    53   

Summary Compensation Table

    53   

Employment Agreements and Other Compensation Arrangements

    55   

Grants of Plan-Based Awards for Fiscal 2012

    56   

Compensation Plans

    57   

Outstanding Equity Awards at Fiscal Year-End for Fiscal 2012

    58   

Option Exercises and Stock Vested for Fiscal 2012

    59   

Nonqualified Deferred Compensation in Fiscal 2012

    60   

Potential Payments on Termination or Change in Control

    61   

Director Compensation

    66   

Compensation Committee Interlocks and Insider Participation

    68   

ADDITIONAL INFORMATION

    69   

Stockholder Proposals for 2013 Annual Meeting

    69   

Householding of Annual Meeting Materials

    69   

OTHER BUSINESS

    70   

 

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LOGO

CAREFUSION CORPORATION

3750 Torrey View Court, San Diego, California 92130

Telephone: (858) 617-2000

PROXY STATEMENT FOR THE 2012 ANNUAL MEETING OF STOCKHOLDERS

April 15, 2013

8:30 a.m. (Pacific Daylight Time)

GENERAL INFORMATION ABOUT THE MEETING AND VOTING

Why am I receiving these materials?

We have made these proxy materials available to you in connection with the solicitation by the Board of Directors (the “Board”) of CareFusion Corporation (the “Company” or “CareFusion”) of proxies to be voted at the CareFusion Corporation 2012 Annual Meeting of Stockholders to be held on April 15, 2013 (the “Annual Meeting”), and at any postponements or adjournments of the Annual Meeting. If you held shares of our common stock on February 14, 2013 (the “Record Date”), you are invited to attend the Annual Meeting and vote on the proposals described below under the heading “What am I voting on?” These proxy materials are first being made available to our stockholders on or about February 28, 2013.

Why did I receive a notice in the mail regarding the Internet availability of proxy materials instead of a full set of proxy materials?

In accordance with the rules adopted by the United States Securities and Exchange Commission (the “SEC”), we may elect to provide proxy materials, including this Proxy Statement and our Annual Report to Stockholders (the “Annual Report”), to our stockholders through the Internet instead of mailing printed copies. The majority of stockholders will not receive printed copies of the proxy materials unless they request them. Instead, we elected to mail the Notice of Internet Availability of Proxy Materials (the “Notice”) to most of our stockholders instructing them how to access and review all of the proxy materials on the Internet. All stockholders will have the ability to access the proxy materials on the website referred to in the Notice or your proxy card and to download printable versions of the proxy materials or to request and receive a printed set of the proxy materials from us. We believe that this will allow us to expeditiously provide proxy materials to our stockholders, while lowering the costs of distribution and reducing the environmental impact of our Annual Meeting.

What am I voting on?

There are five proposals scheduled to be voted on at the Annual Meeting:

 

   

Election of the three Class III directors named in this Proxy Statement to hold office for a term of three years.

 

   

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013.

 

   

To hold a non-binding advisory vote on the compensation of our named executive officers.

 

   

To consider a stockholder proposal to adopt simple majority voting if such proposal is properly presented at the Annual Meeting.

 

   

To consider a stockholder proposal to repeal the classified board if such proposal is properly presented at the Annual Meeting.

 

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How does the Board recommend that I vote?

Our Board recommends that you vote your shares:

 

   

“FOR” the election of each of the Class III directors named in this Proxy Statement to hold office for a term of three years.

 

   

“FOR” the ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013.

 

   

“FOR” the approval of the compensation of our named executive officers.

 

   

“AGAINST” the stockholder proposal to adopt simple majority voting if such proposal is properly presented at the Annual Meeting.

 

   

“AGAINST” the stockholder proposal to repeal the classified board if such proposal is properly presented at the Annual Meeting.

Who is entitled to vote at the Annual Meeting?

If you were a holder of CareFusion common stock, either as a stockholder of record or as the beneficial owner of shares held in street name as of the close of business on February 14, 2013, the Record Date for the Annual Meeting, you may vote your shares at the Annual Meeting. A complete list of stockholders of record entitled to vote at the Annual Meeting will be available for viewing by any stockholder during ordinary business hours for a period of ten days before the Annual Meeting at CareFusion’s principal offices located at 3750 Torrey View Court, San Diego, CA 92130.

As of the Record Date, there were 222,692,377 shares of our common stock outstanding, each of which is entitled to one vote. As summarized below, there are some distinctions between shares held of record and those owned beneficially in street name.

What does it mean to be a “stockholder of record”?

You are a “stockholder of record” if your shares are registered directly in your name with our transfer agent, Computershare Trust Company, N.A. As a stockholder of record, you have the right to grant your voting proxy directly to CareFusion or to vote in person at the Annual Meeting. If you requested to receive printed proxy materials, we have enclosed or sent a proxy card for you to use. You may also vote by Internet or telephone, as described in the Notice and below under the heading “How do I vote my shares of CareFusion common stock?”

What does it mean to beneficially own shares in “street name”?

You are deemed to beneficially own your shares in “street name” if your shares are held in an account at a brokerage firm, bank, broker-dealer, trust, or other similar organization. If this is the case, the Notice was forwarded to you by that organization. As the beneficial owner, you have the right to direct your broker, bank, trustee, or nominee how to vote your shares, and you are also invited to attend the Annual Meeting. If you hold your shares in street name and do not provide voting instructions to your broker, bank , trustee or nominee, your shares will not be voted on any proposals on which such party does not have discretionary authority to vote (a “broker non-vote”), as further described below under the heading “What is a broker non-vote?”

Since a beneficial owner is not the stockholder of record, you may not vote your shares in person at the Annual Meeting unless you obtain a “legal proxy” from the broker, bank, trustee, or nominee that holds your shares giving you the right to vote the shares at the meeting. If you do not wish to vote in person or you will not be attending the Annual Meeting, you may vote by proxy. You may also vote by Internet or telephone, as described in the Notice and below under the heading “How do I vote my shares of CareFusion common stock?”

 

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How many shares must be present or represented to conduct business at the Annual Meeting?

The quorum requirement for holding the Annual Meeting and transacting business is that holders of a majority of the voting power of the issued and outstanding common stock of CareFusion entitled to vote generally in the election of directors must be present in person or represented by proxy. Abstentions and shares represented by “broker non-votes” are counted for the purpose of determining the presence of a quorum. As of the Record Date, there were 222,692,377 shares of our common stock outstanding, and each share is entitled to one vote at the Annual Meeting.

What is the voting requirement to approve each of the proposals?

Election of Directors. Directors are elected by a plurality of the votes cast, which means that the three director nominees receiving the highest number of “FOR” votes will be elected.

Ratification of Auditors. Requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such proposal.

Approval of Advisory Vote on the Compensation of our Named Executive Officers. Requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such proposal. While this is an advisory vote and non-binding, our Board and the Human Resources and Compensation Committee will take these votes into consideration when making future executive compensation decisions.

Approval of Stockholder Proposal to Adopt Simple Majority Voting. Requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such proposal. It is important to note that stockholder approval of this proposal would not in itself change the voting standards established by our certificate of incorporation and by-laws (collectively, the “governance documents”). Under the governance documents, to change the voting standards, our Board must first authorize amendments to the Company’s governance documents and stockholders would then have to approve each of those amendments with an affirmative vote of at least 80% of the outstanding shares our common stock.

Approval of Stockholder Proposal to Repeal the Classified Board. Requires the affirmative vote of a majority of the shares present in person or represented by proxy at the Annual Meeting and entitled to vote on such proposal. It is important to note that stockholder approval of this proposal would not in itself change the classified Board structure established by our governance documents. Under the governance documents, to change the classified Board structure, our Board must first authorize amendments to the governance documents and stockholders would then have to approve each of those amendments with an affirmative vote of at least 80% of the outstanding shares our common stock.

How are votes counted?

You may vote “FOR” or “AGAINST” the election of each of the Class III directors, or you may “ABSTAIN” from voting for one or more director nominees. Neither a vote to “ABSTAIN” nor a broker non-vote will count as a vote cast “FOR” or “AGAINST” a director nominee, and will have no direct effect on the outcome of the election of directors. With respect to the proposal to ratify the appointment of Ernst & Young LLP, the proposal to approve the advisory vote on the compensation of our named executive officers and the two stockholder proposals, you may vote “FOR,” “AGAINST” or “ABSTAIN” on each of these proposals. If you “ABSTAIN,” it has the same effect as a vote “AGAINST.”

In tabulating the voting results for any particular proposal, shares that constitute broker non-votes are not considered entitled to vote on that proposal.

 

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What is a broker non-vote?

If your hold your shares in “street name” with a broker, bank or other financial institution and you do not provide voting instructions, it will be considered a “broker non-vote.” Broker non-votes are not counted or deemed to be present in person or by proxy for the purpose of voting on “non-routine” matters at the Annual Meeting. On matters on which a broker, bank or other financial institution is permitted to exercise discretionary voting authority (“routine” matters), your broker, bank or other financial institution may vote your shares in its discretion. As the ratification of our independent public accountants is considered a routine matter, your broker, bank or other financial institution may exercise discretionary voting authority on this proposal. All other proposals at the Annual Meeting are considered non-routine, and accordingly, your broker, bank or other financial institution may not exercise discretionary voting authority. If you have any questions about the proxy voting process, please contact the broker, bank or other financial institution where you hold your shares. The United States Securities and Exchange Commission also has a website (www.sec.gov/spotlight/proxymatters.shtml) with more information about your rights as a stockholder.

How do I vote my shares of CareFusion common stock?

If you are a stockholder of record, you can vote in the following ways:

 

   

By Internet: by following the Internet voting instructions included in the Notice or by following the instructions on the proxy card if you received a paper copy of the proxy materials at any time up until 11:59 p.m., Eastern Daylight Time, on April 14, 2013.

 

   

By Telephone: by following the telephone voting instructions included in the proxy card at any time up until 11:59 p.m., Eastern Daylight Time, on April 14, 2013.

 

   

By Mail: if you have received or requested a printed copy of the proxy materials from us by mail, you may vote by mail by marking, dating and signing your proxy card in accordance with the instructions on it and returning it by mail in the pre-addressed reply envelope provided with the proxy materials. The proxy card must be received prior to the Annual Meeting.

If your shares are held through a benefit or compensation plan or in street name, your plan trustee or your bank, broker or other nominee should give you instructions for voting your shares. In these cases, you may vote by Internet, telephone or mail by submitting a voting instruction form.

If you satisfy the admission requirements to the Annual Meeting, as described below under the heading “How do I attend the Annual Meeting?”, you may vote your shares in person at the meeting. Even if you plan to attend the Annual Meeting, we encourage you to vote in advance by Internet, telephone or mail so that your vote will be counted in the event you later decide not to attend the Annual Meeting. Shares held through a benefit or compensation plan cannot be voted in person at the Annual Meeting.

How will my shares be voted at the Annual Meeting?

If you complete and submit your proxy card or voting instructions, the persons named as proxies will follow your instructions. If you are a stockholder of record and you submit a proxy card or voting instructions but do not direct how to vote on each item, the persons named as proxies will vote as the Board recommends on each proposal.

Who will count votes at the Annual Meeting?

We have engaged Broadridge Financial Solutions to serve as the tabulator of votes and an independent representative of Broadridge to serve as the Inspector of Election at the Annual Meeting.

 

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How do I attend the Annual Meeting?

To attend the Annual Meeting in person, you will need an admission card or proof of ownership of CareFusion common stock as of the Record Date. All stockholders planning to attend the Annual Meeting can request an admission card and register to attend by contacting the CareFusion Investor Relations Department, as set forth below. Admission to the Annual Meeting is limited to CareFusion stockholders as of the Record Date, a named representative of such a stockholder, or an immediate family member of such a stockholder attending as a guest. We reserve the right to limit the number of immediate family members or representatives who may attend the meeting. In addition to an admission card or proof of ownership as of the Record Date, stockholders and their representatives and immediate family members will be required to present government-issued photo identification (e.g., driver’s license or passport) to gain admission to the Annual Meeting.

To request an admission card and register to attend the Annual Meeting, please contact the CareFusion Investor Relations Department by e-mail at ir@carefusion.com or by phone at (858) 617-4621. In addition, you can submit your request by fax at (858) 617-2311 or by mail at 3750 Torrey View Court, San Diego, CA 92130.

Please include the following information in your request for an admission card to attend the Annual Meeting:

 

   

your name and complete mailing address;

 

   

whether you require special assistance at the meeting;

 

   

the name of your immediate family member guest, if one will accompany you;

 

   

if you will be naming a representative to attend the meeting on your behalf, the name, complete mailing address and telephone number of that individual; and

 

   

proof that you own CareFusion common stock as of the Record Date (such as a letter from your bank, broker, or other financial institution or a photocopy of a current brokerage or other account statement).

Please be advised that all purses, briefcases, bags, etc. that are brought into the facility may be subject to inspection. Cameras and other recording devices will not be permitted at the Annual Meeting.

What does it mean if I receive more than one Notice of Internet Availability of Proxy Materials or set of proxy materials?

It generally means you hold shares registered in multiple accounts. To ensure that all your shares are voted, please submit proxies or voting instructions for all of your shares.

May I change my vote or revoke my proxy?

Yes. If you are a stockholder of record, you may change your vote or revoke your proxy by:

 

   

filing a written statement to that effect with our Corporate Secretary, at or before the taking of the vote at the Annual Meeting;

 

   

voting again via the Internet or telephone at a later time before the closing of those voting facilities at 11:59 p.m. (Eastern Daylight Time) on April 14, 2013;

 

   

submitting a properly signed proxy card with a later date that is received at or prior to the Annual Meeting; or

 

   

attending the Annual Meeting, revoking your proxy and voting in person.

The written statement or subsequent proxy should be delivered to CareFusion Corporation, 3750 Torrey View Court, San Diego, CA 92130, Attention: Corporate Secretary, or hand delivered to the Corporate Secretary, before the taking of the vote at the Annual Meeting. If you are a beneficial owner and hold shares through a

 

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broker, bank or other nominee, you may submit new voting instructions by contacting your broker, bank or other nominee. You may also change your vote or revoke your voting instructions in person at the Annual Meeting if you obtain a signed proxy from the record holder (broker, bank or other nominee) giving you the right to vote the shares.

Could other matters be decided at the Annual Meeting?

We are currently unaware of any matters to be raised at the Annual Meeting other than those referred to in this Proxy Statement. If other matters are properly presented at the Annual Meeting for consideration and you are a stockholder of record and have submitted your proxy, the persons named in your proxy will have the discretion to vote on those matters for you.

Who will pay for the cost of soliciting proxies?

We will pay for the cost of soliciting proxies, including the cost of preparing and mailing the Notice and the proxy materials. Proxies may be solicited on our behalf by our directors, officers or employees (for no additional compensation) in person or by telephone, electronic transmission and facsimile transmission. We have hired Morrow & Co., LLC, at an estimated cost of $10,000, plus reimbursement of reasonable expenses, to assist in the solicitation of proxies from brokers, nominees, institutions and individuals. Arrangements will also be made with custodians, nominees and fiduciaries for forwarding a Notice or printed proxy materials, as applicable, to beneficial owners of shares held of record by such custodians, nominees and fiduciaries, and we will reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith.

How will we announce the voting results?

We will announce preliminary voting results at the Annual Meeting. We will report final results with the United States Securities and Exchange Commission in a current report on Form 8-K.

 

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GOVERNANCE OF OUR COMPANY

Overview

We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are fundamental to the overall success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our Corporate Governance Guidelines and Code of Conduct, together with our certificate of incorporation, amended and restated by-laws and the charters of our Board Committees, form the basis for our corporate governance framework. As discussed below under “—Board and Committee Membership and Structure”, our Board has established three standing committees to assist it in fulfilling its responsibilities to CareFusion and its stockholders: the Audit Committee, the Human Resources and Compensation Committee and the Governance and Compliance Committee.

Our Corporate Governance Guidelines (which includes our categorical standards of director independence), our Code of Conduct (which includes our policies on ethics and compliance), our Board Committee charters and other corporate governance information can be found in the “Investors” section of our website accessible at www.carefusion.com, by clicking the “Corporate Governance” link. Any stockholder also may request copies of these materials in print, without charge, by contacting our Investor Relations Department at 3750 Torrey View Court, San Diego, CA 92130, or by calling (858) 617-4621.

Corporate Governance Guidelines

Our Corporate Governance Guidelines are designed to ensure effective corporate governance of our Company. Our Corporate Governance Guidelines cover topics including, but not limited to, director qualification criteria, director responsibilities (including those of the Presiding Director), director compensation, director orientation and continuing education, communications from stockholders to the Board, succession planning and the annual evaluations of the Board and its Committees. Our Corporate Governance Guidelines are reviewed regularly by the Governance and Compliance Committee of our Board and revised when appropriate. The full text of our Corporate Governance Guidelines can be found in the “Investors” section of our website accessible at www.carefusion.com, by clicking the “Corporate Governance” link. A printed copy may also be obtained by any stockholder upon request to our Investor Relations Department.

Policies on Ethics and Compliance

Our Board adopted a Code of Conduct for our Company to help ensure that our business is conducted in a consistently legal and ethical manner. The Code of Conduct establishes policies pertaining to, among other things, employee conduct in the workplace, electronic communications and information security, accuracy of books, records and financial statements, securities trading, confidentiality, conflicts of interest, fairness in business practices, the Foreign Corrupt Practices Act, antitrust laws and political activities and solicitations. All of our employees, including our executive officers, as well as the members of our Board, are required to comply with our Code of Conduct. The full text of the Code of Conduct can be found in the “Investors” section of our website accessible to the public at www.carefusion.com, by clicking the “Corporate Governance” link. A printed copy may also be obtained by any stockholder upon request to our Investor Relations Department. The Audit Committee is responsible for reviewing and approving all amendments to the Code of Conduct and all waivers of the Code of Conduct for executive officers or directors, and providing for prompt disclosure of all amendments and waivers required to be disclosed under applicable law. We will disclose future amendments to our Code of Conduct, or waivers required to be disclosed under applicable law from our Code of Conduct for our principal executive officer, principal financial officer, principal accounting officer or controller, and our other executive officers and our directors, on our website, www.carefusion.com, within four business days following the date of the amendment or waiver.

 

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In August 2011, in furtherance of our commitment to the highest standards of ethical practice, corporate conduct and integrity, our Board adopted the CareFusion Compliance Program Declaration and Description. The purpose of the compliance program is to increase the likelihood of preventing, detecting, and correcting violations of law or Company policy, and the declaration provides additional descriptions of compliance policies, procedures and efforts to establish an effective compliance program. The Compliance Program Declaration and Description can be found in the “Ethics and Compliance” section of our website accessible at www.carefusion.com, by clicking the “Our Company” link.

In addition, we maintain a Conduct Line by which employees may report violations of the Code of Conduct or seek guidance on business conduct matters. The Conduct Line is operated by an independent, third-party company, and has multi-lingual representatives available to take calls confidentially 24 hours a day, seven days a week, and can also be accessed via the Internet at www.carefusionconductline.com.

Stockholder Recommendations for Director Nominees

In nominating candidates for election as a director, the Governance and Compliance Committee will consider a reasonable number of candidates recommended by a single stockholder who has held over 0.1% of CareFusion common stock for over one year and who satisfies the notice, information and consent provisions set forth in our amended and restated by-laws and Corporate Governance Guidelines. Stockholders who wish to recommend a candidate may do so by writing to the Governance and Compliance Committee in care of the Corporate Secretary, CareFusion Corporation, 3750 Torrey View Court, San Diego, CA 92130. The Governance and Compliance Committee will use the same evaluation process for director nominees recommended by stockholders as it uses for other director nominees. A printed copy of our amended and restated by-laws may be obtained by any stockholder upon request to our Investor Relations Department.

Identification and Evaluation of Director Nominees

Our Governance and Compliance Committee uses a variety of methods for identifying and evaluating director nominees. Our Governance and Compliance Committee regularly assesses the appropriate size and composition of the Board, the needs of the Board and the respective Board Committees, and the qualifications of candidates in light of these needs. Candidates may come to the attention of the Governance and Compliance Committee through stockholders, management, current members of the Board, or search firms. The evaluation of these candidates may be based solely upon information provided to the Governance and Compliance Committee or may also include discussions with persons familiar with the candidate, an interview of the candidate or other actions the Governance and Compliance Committee deems appropriate, including the use of third parties to review candidates.

While we do not have a stand-alone diversity policy, in considering whether to recommend any director nominee, including candidates recommended by stockholders, we believe that the backgrounds and qualifications of our directors, considered as a group, should provide a significant mix of experience, knowledge and abilities that will allow our Board and its Committees to fulfill their respective responsibilities. As set forth in our Corporate Governance Guidelines, these criteria generally include, among other things, an individual’s business experience and skills (including skills in core areas such as operations, management, technology, accounting and finance, strategic planning and international markets), as well as independence, judgment, knowledge of our business and industry, professional reputation, leadership, integrity and ability to represent the best interests of the Company’s stockholders. In addition, the Governance and Compliance Committee will also consider the ability to commit sufficient time and attention to the activities of the Board, as well as the absence of any potential conflicts with the Company’s interests. The Governance and Compliance Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective director nominees. Our Board will be responsible for selecting candidates for election as directors based on the recommendation of the Governance and Compliance Committee.

 

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We believe that our current Board includes individuals with a strong background in executive leadership and management, accounting and finance, and Company and industry knowledge. In addition, each of our directors has a strong professional reputation and has shown a dedication to his or her profession and community. We also believe that our directors’ diversity of backgrounds and experiences, which include medicine, academia, business and finance, results in different perspectives, ideas, and viewpoints, which make our Board more effective in carrying out its duties. We believe that our directors hold themselves to the highest standards of integrity and that they are committed to representing the long-term interests of our stockholders.

The Governance and Compliance Committee and the Board believe that each of the director nominees for election at the Annual Meeting brings a strong and unique set of qualifications, attributes and skills and provides the Board as a whole with an optimal balance of experience, leadership and competencies in areas of importance to our Company. Under “Proposal 1—Election of Directors,” we provide an overview of each director nominee’s principal occupation, business experience and other directorships, together with other key attributes that we believe provide value to the Board, the Company and its stockholders.

Director Independence

The Board has established categorical standards to assist it in making its determination of director independence. As embodied in our Corporate Governance Guidelines, using standards that the Board has adopted to assist it in assessing independence and in accordance with applicable SEC rules and the listing standards of the NYSE, the Board defines an “independent director” to be a director who:

 

   

is not and has not been during the last three years an employee of, and whose immediate family member is not and has not been during the last three years an executive officer of, the Company (provided, however, that, in accordance with NYSE listing standards, service as an interim executive officer, by itself, does not disqualify a director from being considered independent under this test following the conclusion of that service);

 

   

has not received, and whose immediate family member has not received other than for service as an employee (who is not an executive officer), more than $120,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), in any 12-month period during the last three years (provided however, that, in accordance with NYSE listing standards, compensation received by a director for former service as an interim executive officer need not be considered in determining independence under this test);

 

   

(a) is not a current partner or employee of a firm that is our internal or external auditor; (b) does not have an immediate family member who is a current partner of our internal or external auditor; and (c) is not and was not during the last three years, and whose immediate family member is not and was not during the last three years, a partner or employee of our internal or external auditor who personally worked on our audit within that time;

 

   

is not and has not been during the last three years employed, and whose immediate family member is not and has not been during the last three years employed, as an executive officer of another Company during a time when any of our present executive officers serve on that other company’s compensation committee;

 

   

is not, and whose immediate family member is not, serving as a paid consultant or advisor to the Company or to any of our executive officers, or a party to a personal services contract with the Company or with any of our executive officers;

 

   

is not a current employee of, and whose immediate family member is not a current executive officer of, a company that has made payments to, or received payments from, us for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues;

 

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is not, and whose immediate family member is not, an executive officer of a non-profit or other tax-exempt organization to which we have made contributions during the past three years that, in any single fiscal year, exceeded the greater of $1 million or 2% of the organization’s consolidated gross revenues (amounts that we contribute under matching gift programs are not included in the contributions calculated for purposes of this standard); and

 

   

has no other material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us).

The Board assesses on a regular basis, and at least annually, the independence of our directors and, based on the recommendation of the Governance and Compliance Committee, makes a determination as to which directors are independent. References to “us,” “we” or “the Company” above would include any subsidiary in a consolidated group with CareFusion Corporation. The terms “immediate family member” and “executive officer” above are expected to have the same meaning specified for such terms in the NYSE listing standards.

The Board has determined that the following directors, comprising all of our non-employee directors, are independent under the listing standards of the NYSE and our Corporate Governance Guidelines: Messrs. Philip L. Francis, Robert F. Friel, J. Michael Losh, Gregory T. Lucier, Michael D. O’Halleran and Robert P. Wayman and Drs. Jacqueline B. Kosecoff and Edward D. Miller.

Board Leadership Structure

Mr. Gallahue serves as our Chief Executive Officer and Chairman of the Board. The Board has determined that combining the Chief Executive Officer and Chairman positions is the appropriate leadership structure for CareFusion at this time. The Board believes that combining these roles fosters clear accountability, effective decision-making and alignment of corporate strategy. The Board also believes that this combined role promotes effective execution of strategic goals and facilitates information flow between management and the Board. Nevertheless, the Board intends to carefully evaluate from time to time whether our Chief Executive Officer and Chairman positions should be combined based on what the Board believes is best for the Company and its stockholders.

Our Board has determined that maintaining the independence of the Company’s non-employee directors, managing the composition and function of its Committees, and appointing an independent Presiding Director having the duties described below help maintain the Board’s strong, independent oversight of management. Eight of our nine Board members are independent non-employee directors. These independent, non-employee directors meet regularly in executive session without the presence of management (i.e., without the Chief Executive Officer). In addition, each of our Board Committees consists entirely of independent non-employee directors. Our Board has also appointed a Presiding Director as a matter of good corporate governance and believes that the appointment of the Presiding Director provides a balance for effective and independent oversight of management. Pursuant to our amended and restated by-laws and Corporate Governance Guidelines, the Presiding Director is selected annually by the independent non-employee directors. The Presiding Director presides at meetings of the non-management and independent directors, presides at all meetings of the Board at which the Chairman is not present and performs such other functions as the Board may direct, including advising on the selection of Committee chairs and advising management on the agenda for Board meetings. In addition, the Presiding Director serves as liaison between the Chairman and the independent non-employee directors and has the authority to call meetings of the independent non-employee directors.

The Board believes that this structure is in the best interest of CareFusion and will provide an environment in which its independent directors are fully informed, have significant input into the content of Board meetings and are able to provide objective and thoughtful oversight of management.

 

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Executive Sessions

Executive sessions of independent non-employee directors are held in connection with each regularly scheduled Board meeting and at other times as necessary, and are chaired by the Presiding Director. The Board’s policy is to hold executive sessions without the presence of management, including the Chief Executive Officer and other non-independent directors, if any. The Committees of our Board also generally meet in executive session at the end of each Committee meeting.

Board and Committee Effectiveness

The Board and each of its Committees performs an annual self-assessment to evaluate their effectiveness in fulfilling their obligations. The Governance and Compliance Committee also conducts an individual evaluation of each director at least once every three years, the results of which are shared with such individual director. The Governance and Compliance Committee last conducted the individual evaluation of each director in 2011. The Board, Committee and individual director evaluations cover a wide range of topics, including, among others, the fulfillment of the Board and Committee responsibilities identified in the Corporate Governance Guidelines and charters for each Committee.

Attendance at Annual Meeting of Stockholders

We encourage all of our directors to attend each annual meeting of stockholders. All of our directors attended the November 2, 2011 annual meeting of stockholders.

Oversight of Risk Management

The Board as a whole has responsibility for oversight of the Company’s risk management policies and procedures, with the primary responsibility for identifying and managing risk at the Company resting with senior management. The Board and its Committees are informed of and review, as appropriate, various areas of risk, including financial risks, strategic and operational risks and risks relating to regulatory and legal compliance. The Company’s Executive Vice President, General Counsel and Chief Compliance Officer works closely with the Company’s senior management to identify risks material to the Company and reports regularly to the Chief Executive Officer and the Board and its Committees, as appropriate, regarding the Company’s risk management policies and procedures.

While the Board as a whole has responsibility for oversight of the Company’s risk management policies and procedures, each of the Committees has a role in fulfilling the Board’s risk oversight responsibilities, as follows:

 

   

The Audit Committee considers risks related to financial accounting and reporting, internal accounting controls, auditing compliance and other related matters. The Audit Committee discusses with management the Company’s major risk exposures and the steps management has taken to monitor and control such exposures, including the guidelines and policies to govern the process by which risk assessment and risk management are undertaken.

 

   

The Governance and Compliance Committee considers risks related to quality and regulatory matters, ethics and compliance matters and other related matters. The Governance and Compliance Committee discusses with management the Company’s policies, practices and compliance efforts regarding compliance with pharmaceutical and medical device laws and other laws and regulations affecting the manufacture, distribution and sale of the Company’s products worldwide, as well as compliance with anti-bribery laws, competition laws and interactions with health care professionals.

 

   

The Human Resources and Compensation Committee considers risks related to the design of the Company’s compensation programs for our executives. The Human Resources and Compensation Committee discusses with management the Company’s policies and practices related to compensation, including the annual compensation risk assessment. For more information on the interaction between risk and our compensation practices, see below under the heading “Compensation Discussion and Analysis—Role of the Compensation Committee and Management.”

 

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Communicating with the Board

Our Corporate Governance Guidelines establish procedures by which stockholders and other interested parties may communicate with the Board, any Board Committee, any individual director (including the Presiding Director) or the independent non-employee directors as a group. Such parties can send communications by mail to the Board in care of the Corporate Secretary, CareFusion Corporation, 3750 Torrey View Court, San Diego, CA 92130. In addition, such parties can contact the Board by emailing the Corporate Secretary at corporatesecretary@carefusion.com. The name or title of any specific recipient or group should be noted in the communication. Communications from stockholders are distributed by the Corporate Secretary to the Board or to the Committee or director(s) to whom the communication is addressed, however the Corporate Secretary will not distribute items that are unrelated to the duties and responsibilities of the Board, such as spam, junk mail and mass mailings, business solicitations and advertisements, and communications that advocate the Company’s engaging in illegal activities or that, under community standards, contain offensive, scurrilous or abusive content.

Board and Committee Membership and Structure

Our Board has three standing Committees, comprised of the Audit Committee, the Human Resources and Compensation Committee and the Governance and Compliance Committee. Each Committee acts pursuant to a written charter, each of which has been posted in the “Investors” section of our website accessible at www.carefusion.com, by clicking the “Corporate Governance” link. Each Committee reviews its charter on an annual basis. In addition to the three standing Committees, the Board may approve from time to time the creation of special committees to assist the Board in carrying out its duties.

The Board held six meetings during the fiscal year ended June 30, 2012, and each director attended 75% or more of the meetings of the Board and Committees on which he or she served during the fiscal year. The following table summarizes the current membership of each of the standing Committees, as well as the number of times each of the Committees met during the fiscal year ended June 30, 2012.

 

    Audit
Committee
  Human Resources and
Compensation Committee
  Governance and
Compliance
Committee
  Independent
Non-Employee
Director

Committee Members

       

Kieran T. Gallahue (Chairman)

       

J. Michael Losh (Presiding Director)

  LOGO        

Edward D. Miller, M.D.

      LOGO    

Jacqueline B. Kosecoff, Ph.D.

  LOGO        

Michael D. O’Halleran

    LOGO      

Robert P. Wayman

  LOGO       LOGO    

Philip L. Francis

  LOGO       LOGO    

Robert F. Friel

    LOGO      

Gregory T. Lucier

    LOGO      

Number of Committee Meetings

  5   6   5  

 

LOGO    Committee Member    LOGO    Committee Chair      

Audit Committee. The main function of our Audit Committee, which was established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is to oversee our accounting and financial reporting processes, internal systems of control, independent auditor relationships, and the audits of our financial statements. As set forth in its charter, the Audit Committee’s responsibilities include, among others:

 

   

reviewing and reporting to the Board on the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

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selecting an independent auditor;

 

   

reviewing the independent auditor’s qualifications and independence;

 

   

pre-approving all audit services, internal control-related services and permitted non-audited services to be performed for us by our independent auditor;

 

   

meeting with our independent auditor to review the nature and scope of their proposed financial audit and quarterly reviews, as well as their results and recommendations upon the completion of the audit and such quarterly reviews;

 

   

overseeing the performance of our internal audit function; and

 

   

overseeing compliance with our internal controls and risk management policies.

The Audit Committee is comprised of Dr. Kosecoff, Mr. Francis, Mr. Wayman and Mr. Losh (Chair). Mr. Losh was appointed Chair of the Audit Committee effective November 7, 2012, succeeding Mr. Wayman who served as the Chair of the Audit Committee since November 3, 2010. In addition, Mr. Francis was appointed as a member of the Audit Committee effective November 7, 2012. The Board has determined that each member of the Audit Committee is an “audit committee financial expert” for purposes of the rules of the SEC. In reaching this determination, the Board considered, among other things, the prior experience of each of Messrs. Losh and Wayman as a chief financial officer and the prior experience of each of Dr. Kosecoff and Mr. Francis as a chief executive officer. The Board also made a qualitative assessment of our other non-employee directors, to determine their financial knowledge and experience, and determined that they each would also qualify as an “audit committee financial expert” for purposes of the rules of the SEC should they become a member of the Audit Committee in the future. In addition, the Board has determined that Mr. Losh’s simultaneous service on the audit committees of more than two other public companies does not impair his ability to effectively serve on the Audit Committee. In reaching this determination, the Board considered Mr. Losh’s ability to devote sufficient and substantial time to serve on the Audit Committee. In addition, the Board has determined that each of the members of the Audit Committee is “independent,” consistent with the NYSE listing standards, Section 10A(m)(3) of the Exchange Act and in accordance with our Corporate Governance Guidelines.

Additional information regarding the Audit Committee is set forth in the Report of the Audit Committee, which can be found on page 24 of this Proxy Statement.

Human Resources and Compensation Committee. The main function of our Human Resources and Compensation Committee is to assist the Board in discharging its responsibilities relating to our compensation programs. As set forth in its charter, the Human Resources and Compensation Committee’s responsibilities include, among others:

 

   

reviewing and approving our executive compensation policy;

 

   

reviewing and making recommendations to the Board with respect to compensation for our Chief Executive Officer, and reviewing and approving compensation for our other executive officers;

 

   

reviewing and approving any employment agreements or arrangements with our executive officers, including with respect to any perquisites and other personal benefits;

 

   

reviewing the adoption and terms of equity-based compensation, incentive compensation and other employee benefit plans that are subject to Board approval;

 

   

acting on behalf of the Board in administering equity-based compensation and other employee benefit plans approved by the Board and/or stockholders in a manner consistent with the terms of such plans;

 

   

reviewing the compensation of directors for service on the Board and its Committees and recommending changes to the Board as appropriate;

 

   

overseeing the management succession process for our Chief Executive Officer and selected senior executives; and

 

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reviewing the disclosures in the Company’s Compensation Discussion and Analysis with management and making recommendations to the Board as to the inclusion of the Compensation Discussion and Analysis in the Company’s annual public filings, as applicable.

The Human Resources and Compensation Committee is comprised of Mr. Friel, Mr. O’Halleran and Mr. Lucier (Chair). The Board has determined that each member of the Human Resources and Compensation Committee is “independent,” consistent with the NYSE listing standards and in accordance with our Corporate Governance Guidelines. In addition, the members of the Human Resources and Compensation Committee qualify as “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Tax Code”).

The Compensation Discussion and Analysis included in this Proxy Statement provides additional information regarding the Human Resources and Compensation Committee’s processes and procedures for considering and determining executive officer compensation.

Governance and Compliance Committee. The main function of our Governance and Compliance Committee is to identify and recommend individuals qualified to become members of the Board and its Committees, take a general leadership role in our corporate governance, and provide compliance oversight for quality and regulatory matters, ethics and compliance matters and other related matters. As set forth in its charter, the Governance and Compliance Committee’s responsibilities include, among others:

 

   

developing and recommending to the Board criteria for identifying, evaluating and recommending candidates for the Board;

 

   

establishing a procedure for and considering any nominations of director candidates validly made by our stockholders in accordance with our amended and restated by-laws and Corporate Governance Guidelines;

 

   

recommending candidates for election or reelection to the Board at each annual meeting of stockholders, which will include assessing the contributions and independence of individual incumbent directors;

 

   

making recommendations to the Board concerning the structure, size, composition and functioning of the Board and its Committees;

 

   

overseeing the annual evaluation of the Board’s effectiveness and performance, and periodically conducting an individual evaluation of each director;

 

   

overseeing the Company’s policies, practices and compliance efforts regarding compliance with pharmaceutical and medical device laws (including without limitation the Federal Food, Drug, and Cosmetic Act), laws related to advertising and promotion and other laws and regulations affecting the Company’s manufacture, distribution and sale of its products worldwide;

 

   

overseeing the Company’s policies, practices and compliance efforts regarding compliance with anti-bribery laws (including without limitation the Foreign Corrupt Practices Act), laws related to competition and conflicts of interest, and regulations related to interactions with medical and health care professionals;

 

   

evaluating matters relating to the Company’s policies, practices and compliance efforts regarding public policy and/or social responsibility matters that may have a significant impact on the Company; and

 

   

developing procedures for stockholders and other interested parties to communicate with the Board.

The Governance and Compliance Committee is comprised of Dr. Miller, Mr. Wayman and Mr. Francis (Chair). The Board has determined that each member of the Governance and Compliance Committee is “independent,” consistent with the NYSE listing standards and in accordance with our Corporate Governance Guidelines.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of our common stock as of February 14, 2013 (unless otherwise indicated below), with respect to (1) each person who is known by us who beneficially owns more than 5% of our common stock, (2) each director and named executive officer and (3) all of our directors and executive officers as a group. The address of each director and executive officer shown in the table below is c/o CareFusion Corporation, 3750 Torrey View Court, San Diego, CA 92130. We determined beneficial ownership under rules promulgated by the SEC, based on information obtained from questionnaires, Company records and filings with the SEC. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and also any shares which the individual or entity has the right to acquire within 60 days of February 14, 2013. For our directors and executive officers, this includes shares subject to stock options, restricted stock units and/or performance stock units that can be acquired (including as a result of expected vesting and/or delivery) within 60 days of February 14, 2013, which we refer to as presently vested equity. All percentages are based on our shares outstanding as of February 14, 2013. Except as noted below, each holder has sole voting and investment power with respect to all shares listed as beneficially owned by that holder.

 

Name and Address of Beneficial Owner

   Number of Shares
of Common Stock
     Percent of
Common Stock
 

JPMorgan Chase & Co.1

     18,228,853         8.2

The Vanguard Group, Inc.2

     12,904,154         5.8

BlackRock, Inc.3

     12,314,322         5.5

Kieran T. Gallahue4

     801,238             

James F. Hinrichs4

     352,889             

Thomas J. Leonard4

     209,726             

Vivek Jain4

     270,249             

Joan B. Stafslien4

     218,324             

Philip L. Francis5,6

     56,090             

Robert F. Friel7

     25,313             

Jacqueline B. Kosecoff, Ph.D

     25,313             

J. Michael Losh5,7,8

     160,482             

Gregory T. Lucier7

     25,313             

Edward D. Miller, M.D.7

     25,313             

Michael D. O’Halleran5,7,9

     58,929             

Robert P. Wayman

     25,313             

All directors and executive officers as a group (17 persons)10

     2,593,445         1.2

 

* Less than 1%.
1 

Based on information obtained from a Schedule 13G filed with the SEC on January 22, 2013 by JPMorgan Chase & Co. (“JPMorgan”) on behalf of itself and its wholly owned subsidiaries, JPMorgan Chase Bank, National Association, J.P. Morgan Investment Management Inc., JPMorgan Asset Management (UK) Ltd., J.P. Morgan Trust Company of Delaware and JPMORGAN ASSET MANAGEMENT (CANADA) INC. JPMorgan reported that as of December 31, 2012 it had sole voting power with respect to 15,144,194 shares of our common stock, shared voting power with respect to 489,386 shares of our common stock, sole dispositive power with respect to 17,662,428 shares of our common stock, shared dispositive power with respect to 565,547 shares of our common stock, and that the shares are beneficially owned by JPMorgan and its wholly owned subsidiaries identified above. The address of JPMorgan is 270 Park Avenue, New York, NY 10017. The number of shares held by JPMorgan and its related entities may have changed since the filing of the Schedule 13G.

2 

Based on information obtained from a Schedule 13G filed with the SEC on February 12, 2013 by The Vanguard Group, Inc. (“Vanguard”) on behalf of itself and its wholly owned subsidiaries, Vanguard Fiduciary Trust Company and Vanguard Investments Australia, Ltd. Vanguard reported that as of December 31, 2012 it had sole voting power with respect to 378,396 shares of our common stock, sole dispositive power with respect

 

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  to 12,542,302 shares of our common stock, shared dispositive power with respect to 361,852 shares of our common stock, and that the shares are beneficially owned by Vanguard and its wholly owned subsidiaries identified above. The address of Vanguard is 100 Vanguard Blvd., Malvern, PA 19355. The number of shares held by Vanguard and its related entities may have changed since the filing of the Schedule 13G.
3 

Based on information obtained from a Schedule 13G filed with the SEC on February 8, 2013 by BlackRock, Inc. (“BlackRock”) on behalf of itself and its wholly owned subsidiaries, BlackRock Advisors, LLC, BlackRock Capital Management, Inc., BlackRock Financial Management, Inc., BlackRock Investment Management, LLC, BlackRock Investment Management (Australia) Limited, BlackRock (Luxembourg) S.A., BlackRock (Netherlands) B.V., BlackRock Fund Managers Limited, BlackRock Life Limited, BlackRock Asset Management Australia Limited, BlackRock Asset Management Canada Limited, BlackRock Asset Management Ireland Limited, BlackRock Advisors (UK) Limited, BlackRock Fund Advisors, BlackRock International Limited, BlackRock Institutional Trust Company, N.A., BlackRock Japan Co. Ltd., and BlackRock Investment Management (UK) Limited. BlackRock reported that as of December 31, 2012 it had sole voting power with respect to 12,314,322 shares of our common stock and sole dispositive power with respect to 12,314,322 shares of our common stock, and that the shares are beneficially owned by BlackRock and its wholly owned subsidiaries identified above. The address of BlackRock is 40 East 52nd Street, New York, NY 10022. The number of shares held by BlackRock and its related entities may have changed since the filing of the Schedule 13G.

4 

Common stock and the percent of class listed as beneficially owned by our named executive officers include presently vested equity, as follows: Mr. Gallahue—716,517 shares; Mr. Hinrichs—307,707 shares; Mr. Leonard—151,071 shares; Mr. Jain—187,905 shares; and Ms. Stafslien—155,471 shares.

5 

Common stock and the percent of class listed as beneficially owned by the listed director includes presently vested equity, as follows: Mr. Francis—22,690 shares; Mr. Losh—126,874 shares; and Mr. O’Halleran—26,285 shares.

6 

Includes 975 shares of common stock held by Mr. Francis’ spouse for the benefit of Mr. Francis’ daughter and 20,873 shares held in a trust for Mr. Francis’ benefit.

7 

Common stock and the percent of class listed as beneficially owned includes shares for which delivery has been deferred, as follows: Mr. Friel—19,780 shares; Mr. Losh—19,780 shares; Mr. Lucier—19,780 shares; Dr. Miller—6,019 shares; and Mr. O’Halleran—13,761 shares.

8 

Includes 750 shares of common stock held in a trust for the benefit of Mr. Losh’s daughters.

9 

Includes 3,750 shares of common stock held in a trust for Mr. O’Halleran’s benefit.

10 

Common stock and percent of class listed as beneficially owned by all directors and executive officers as a group include presently vested equity with respect to an aggregate of 1,962,789 shares of common stock. Certain of our executive officers meet the eligibility requirements for retirement under the 2009 Long-Term Incentive Plan (the “LTIP”). Due to their retirement eligibility and pursuant to the terms of the LTIP, their rights to certain stock options and restricted stock units have vested or will vest within 60 days of February 14, 2013; provided, however, that such awards will only become exercisable or payable, as the case may be, in accordance with their original vesting schedules. Accordingly, the 160,602 shares of common stock subject to these awards are not reflected in the above table as beneficially owned.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under Section 16(a) of the Securities Exchange Act of 1934 and rules and regulations promulgated by the SEC, our directors, executive officers and beneficial owners of more than 10% of any class of equity security are required to file periodic reports of their ownership, and changes in that ownership, with the SEC. Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that during the fiscal year ended June 30, 2012, our directors, executive officers, and 10% stockholders complied with all Section 16(a) filing requirements, except that Form 4 filings by J. Michael Losh and Thomas J. Leonard underreported total share ownership by 3,559 shares and 679 shares, respectively. In each case, these shares were received as a pro-rata distribution in conjunction with Cardinal Health’s spinoff of CareFusion. Due to an administrative error, these shares were inadvertently omitted from prior Form 4 filings. Messrs. Losh and Leonard each reported the correct total share ownership in filings on Form 5 on August 14, 2012.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Procedures for Approval of Related Person Transactions

The Board has adopted a written Related Person Transaction Policy and Procedures, which requires the approval or ratification by the Audit Committee of any transaction or series of transactions exceeding $120,000 in any year, in which we are a participant and any related person has a direct or indirect material interest. Related persons include our directors, nominees for election as a director, persons controlling over 5% of our common stock and executive officers and the immediate family members of each of these individuals.

Once a transaction has been identified as requiring such approval, the Audit Committee will review all of the relevant facts and circumstances and approve or disapprove of the transaction. The Audit Committee will take into account such factors as it considers appropriate, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances, the extent of the related person’s interest in the transaction and whether the transaction would be likely to impair (or create an appearance of impairing) the judgment of a director or executive officer to act in the best interests of the Company.

If advance Audit Committee approval of a transaction is not feasible, the transaction will be considered for ratification at the Audit Committee’s next regularly scheduled meeting. If a transaction relates to a director, that director will not participate in the Audit Committee’s deliberations. In addition, the Audit Committee Chair may pre-approve or ratify any related person transactions in which the aggregate amount is expected to be less than $500,000.

Related Person Transactions

During fiscal 2012, there were no transactions, or currently proposed transactions, in which we were or are to be a participant involving an amount exceeding $120,000, and in which any related person had or will have a direct or indirect material interest.

 

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PROPOSAL 1—ELECTION OF DIRECTORS

At the Annual Meeting, our stockholders will be asked to elect three directors nominated for election as Class III directors. Our Board of Directors currently consists of nine members and is divided into three classes, each comprised of three directors. The directors in each class serve three-year terms and in each case until their respective successors are duly elected and qualified. On August 8, 2012, the Board, upon recommendation of the Governance and Compliance Committee, unanimously nominated Philip L. Francis, Robert F. Friel and Gregory T. Lucier, the three current Class III directors whose terms expire at the Annual Meeting, for re-election as directors.

These nominees, as well as the Class I and Class II directors who are continuing to serve, are listed below together with information as of February 14, 2013 regarding each director’s principal occupation, business experience and other directorships, together with the qualifications, attributes and skills that led our Board to the conclusion that each of our directors should serve as a director.

Vote Required for Approval

Directors are elected by a plurality of the votes cast at the Annual Meeting, which means that the three director nominees receiving the highest number of “FOR” votes will be elected as Class III directors. Votes to “ABSTAIN” and broker non-votes are not counted as votes cast with respect to that director, and will have no direct effect on the outcome of the election of directors. All of the director nominees have indicated their willingness to serve if elected, but if any should be unable or unwilling to stand for election, the shares represented by proxies may be voted for a substitute as CareFusion may designate, unless a contrary instruction is indicated in the proxy.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE

“FOR” THE ELECTION OF PHILIP L. FRANCIS, ROBERT F. FRIEL AND GREGORY T. LUCIER TO THE BOARD OF DIRECTORS AS CLASS III DIRECTORS.

Nominees for Election as Directors and Directors Continuing in Office

The following sets forth information, as of February 14, 2013, regarding members of our Board, including the director nominees for election at the Annual Meeting, related to his or her business experience and service on other boards of directors. In addition, we discuss below the qualifications, attributes and skills that led our Board to the conclusion that each of our directors should serve as a director of CareFusion. As discussed above under “Governance of Our Company—Identification and Evaluation of Director Nominees”, we believe that our current Board includes individuals with a strong background in executive leadership and management, accounting and finance, and Company and industry knowledge. In addition, each of our directors has a strong professional reputation and has shown a dedication to his or her profession and community. We also believe that our directors’ diversity of backgrounds and experiences, which include medicine, academia, business and finance, results in different perspectives, ideas, and viewpoints, which make our Board more effective in carrying out its duties. We believe that our directors hold themselves to the highest standards of integrity and that they are committed to representing the long-term interests of our stockholders.

 

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Nominees for Election as Class III Directors

(Terms Expire 2015)

 

PHILIP L. FRANCIS

Director

 

Former Chief Executive Officer,

PetSmart, Inc.

(age 66)

  

Mr. Francis most recently served as executive chairman of PetSmart, Inc., a specialty pet retailer, from June 2009 until his retirement in January 2012. He previously served as chairman and chief executive officer of PetSmart from 1999 until his appointment as executive chairman. Mr. Francis is a director of PetSmart, Inc. and the lead director of SUPERVALU INC. During the prior five years, Mr. Francis also served on the board of Cardinal Health.

 

Qualifications: We believe Mr. Francis’ qualifications to serve on our Board of Directors include his many years of business, operational and executive management experience, including his prior service as chairman and chief executive officer of PetSmart. Mr. Francis also brings significant Company and industry knowledge to our Board, due to his prior service on the board of directors of Cardinal Health. In addition, his current and prior service on other public company boards permit him to contribute valuable strategic management insight to our Board.

ROBERT F. FRIEL

Director

 

Chairman and

Chief Executive Officer,

PerkinElmer, Inc.

(age 57)

  

Mr. Friel has served as president and chief executive officer of PerkinElmer, Inc., a global leader focused on improving the health and safety of people and the environment, since February 2008. He has also served as a director of PerkinElmer since January 2006, serving as vice chairman until he was appointed as chairman in April 2009. He joined PerkinElmer in 1999, serving as senior vice president and chief financial officer from February 1999 to October 2004, as executive vice president and chief financial officer from October 2004 to January 2006, as president of the Life and Analytical Sciences unit from January 2006 through August 2007, and as president and chief operating officer from August 2007 through February 2008. Mr. Friel is a director of Xylem Inc. During the prior five years, Mr. Friel also served on the boards of Fairchild Semiconductor International, Inc. and Millennium Pharmaceuticals, Inc.

 

Qualifications: We believe Mr. Friel’s qualifications to serve on our Board of Directors include his executive and financial leadership experience in the healthcare industry, including his current position as president and chief executive officer of PerkinElmer. Additionally, his prior service on other public company boards permits him to make valuable contributions to our Board.

GREGORY T. LUCIER

Director

 

Chairman and

Chief Executive Officer,

Life Technologies Corporation

(age 48)

  

Mr. Lucier has served as chairman and chief executive officer of Life Technologies Corporation, a biotechnology tools company, since November 2008 when Invitrogen Corporation and Applied Biosystems merged to form Life Technologies. Previously, he served as chief executive officer of Invitrogen Corporation from May 2003 to November 2008.

 

Qualifications: We believe Mr. Lucier’s qualifications to serve on our Board of Directors include his management and operational experience in the healthcare industry, including his current position as chairman and chief executive officer of Life Technologies. His leadership and business experience make his input valuable to our Board.

 

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Class I Directors Continuing in Office

(Terms Expire 2013)

 

KIERAN T. GALLAHUE

Chairman of the Board

 

Chief Executive Officer,

CareFusion Corporation

(age 49)

  

Mr. Gallahue is the Chairman of our Board of Directors and Chief Executive Officer. Prior to joining us in January 2011, he was the president, chief executive officer and a director of ResMed Inc., a medical device firm serving the sleep disordered breathing and respiratory markets. Mr. Gallahue joined ResMed in January 2003 as president and chief operating officer of the Americas and was promoted to ResMed’s president in September 2004. He served in that role until he was named president, chief executive officer and a director of ResMed in January 2008. Prior to joining ResMed, from January 1998 to December 2002, he held positions of increasing responsibility at Nanogen, Inc., a DNA research and medical diagnostics company, including president and chief financial officer. Prior to 1998, Mr. Gallahue held various marketing, sales and financial positions within Instrumentation Laboratory, The Procter & Gamble Company and General Electric Company. He is a director of Volcano Corporation. During the prior five years, Mr. Gallahue also served on the board of directors of ResMed.

 

Qualifications: We believe Mr. Gallahue’s qualifications to serve on our Board of Directors include his extensive executive management experience at medical device companies, including his current position as our Chief Executive Officer, as well as leadership experience from serving on other public company boards. In addition, Mr. Gallahue’s prior experience as a public company chief financial officer and as a member of a public company audit committee permit him to contribute valuable financial and accounting skills to our Board.

J. MICHAEL LOSH

Presiding Director

 

Former Chief Financial Officer,

Cardinal Health, Inc. and

General Motors Corporation

(age 66)

  

Mr. Losh serves as the Presiding Director of our Board of Directors. He most recently served as interim chief financial officer of Cardinal Health from July 2004 to May 2005. Previously, he was the chief financial officer of General Motors Corporation, an automobile manufacturer, from 1994 to 2000. He is a director of Prologis Inc., Aon Corporation, H.B. Fuller Company, Masco Corporation, and TRW Automotive Holdings Corporation. During the prior five years, Mr. Losh also served on the boards of AMB Property Corporation and Cardinal Health.

 

Qualifications: We believe Mr. Losh’s qualifications to serve on our Board of Directors include his business, leadership and financial experience, including his prior position as chief financial officer of General Motors. Mr. Losh also brings significant Company and industry knowledge to our Board, due to his long history with Cardinal Health. In addition, his current and prior positions on other public company boards and extensive experience serving on other public company audit committees, including on the audit committee of Cardinal Health prior to the spinoff, permit him to contribute valuable financial and accounting skills to our Board.

 

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EDWARD D. MILLER, M.D.

Director

 

Former Chief Executive Officer,

Johns Hopkins Medicine

(age 70)

  

Dr. Miller is a professor of anesthesiology and critical care medicine at The Johns Hopkins University School of Medicine. He previously served as chief executive officer of Johns Hopkins Medicine, which encompasses The Johns Hopkins University School of Medicine and The Johns Hopkins Health System and Hospital, and as dean of the medical faculty of The Johns Hopkins University School of Medicine from January 1997 until his retirement in June 2012. Dr. Miller joined Johns Hopkins in 1994 as a professor and director of the department of anesthesiology and critical care medicine. Prior to joining Johns Hopkins, Dr. Miller held positions as a professor, researcher and clinician at various hospitals and academic institutions. He is a director of PNC Mutual Funds, Inc. During the prior five years, he also served on the board of PNC Alternative Strategies Fund LLC.

 

Qualifications: We believe Dr. Miller’s qualifications to serve on our Board of Directors include his experience in the medical field and his prior position as chief executive officer of Johns Hopkins Medicine. His experience as a physician and clinician, and his awareness of the complexities that health care providers face, make Dr. Miller’s input and perspective valuable to our Board.

Class II Directors Continuing in Office

(Terms Expire 2014)

 

JACQUELINE B. KOSECOFF, PH.D.

Director

 

Managing Partner

Moriah Partners, LLC

(age 63)

  

Dr. Kosecoff has served as managing partner of Moriah Partners, LLC, a private equity firm focused on health services and technology, since March 2012. She has also served as a senior advisor to Warburg Pincus LLC, a global private equity company, since March 2012. From October 2007 to November 2011, Dr. Kosecoff served as chief executive officer of OptumRx (formerly Prescriptions Solutions), a pharmacy benefits management company and subsidiary of UnitedHealth Group, and continued to serve as a senior advisor to OptumRx from December 2011 to February 2012. She served as chief executive officer of Ovations Pharmacy Solutions, a subsidiary of UnitedHealth Group providing health and well-being services for people ages 50+, from December 2005 to October 2007. From July 2002 to December 2005, she served as executive vice president, Specialty Companies of PacifiCare Health Systems, Inc., a consumer health organization. She is a director of Sealed Air Corporation, Steris Corporation and athenahealth, Inc.

 

Qualifications: We believe Dr. Kosecoff’s qualifications to serve on our Board of Directors include her extensive knowledge of the healthcare industry and executive leadership experience, including her prior position as chief executive officer of OptumRx. In addition, her service on other public company boards permits her to make valuable contributions to our Board.

MICHAEL D. O’HALLERAN

Director

 

Senior Executive Vice President,

Aon Corporation

(age 62)

   Mr. O’Halleran has served as senior executive vice president of Aon Corporation, a provider of risk management, insurance and consulting services, since September 2004. From 1999 to 2004, Mr. O’Halleran served as president and chief operating officer of Aon Corporation. Mr. O’Halleran joined Aon in 1987 to lead its reinsurance division. Since that time, he has served in several significant management positions

 

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within the Aon group of companies including, since August 2007, as the executive chairman of Aon Benfield, the division of Aon Corporation that provides reinsurance and brokerage services. During the prior five years, Mr. O’Halleran served on the board of Cardinal Health.

 

Qualifications: We believe Mr. O’Halleran’s qualifications to serve on our Board of Directors include his extensive knowledge of our business and industry due to his prior service on the board of directors of Cardinal Health. In addition, his many years of executive leadership experience at Aon Corporation and Aon Benfield, including his international business experience, make Mr. O’Halleran a valuable member of our Board.

ROBERT P. WAYMAN

Director

 

Former Chief Financial Officer, Hewlett-Packard Company

(age 67)

  

Mr. Wayman served as chief financial officer of the Hewlett-Packard Company (“HP”), a computer and electronics company, from 1984 until his retirement in December 2006. He also served as executive vice president, finance and administration of HP from 1992 until his retirement after 37 years with the company. He served as interim chief executive officer of HP from February 2005 through March 2005. He is a director of Affymetrix, Inc. During the prior five years, Mr. Wayman also served on the boards of HP, Sybase, Inc. and Con-way, Inc. (formerly CNF, Inc.).

 

Qualifications: We believe Mr. Wayman’s qualifications to serve on our Board of Directors include his operational, financial and accounting experience, including his prior position as chief financial officer of HP. In addition, Mr. Wayman has served and currently serves on other public company boards and has extensive audit committee experience.

 

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PROPOSAL 2—RATIFICATION OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Audit Committee has selected Ernst & Young LLP as the Company’s independent registered public accounting firm (the “independent auditor”) to audit our financial statements for the fiscal year ending June 30, 2013. We are asking our stockholders to ratify the appointment of Ernst & Young LLP as our independent auditor because we value our stockholders’ views on the Company’s independent auditor even though the ratification is not required by our amended and restated by-laws or otherwise. If our stockholders fail to ratify the appointment, the Audit Committee will reconsider whether or not to retain Ernst & Young LLP as our independent auditor or whether to consider the selection of a different firm. Even if the appointment is ratified, the Audit Committee in its discretion may direct the appointment of a different independent auditor at any time during the fiscal year ending June 30, 2013

A representative of Ernst & Young LLP is expected to be present at the Annual Meeting, will have an opportunity to make a statement if he or she desires to do so, and will be available to respond to appropriate questions.

Vote Required for Approval

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013 requires the affirmative “FOR” vote of a majority of the shares of common stock of the Company present in person or represented by proxy at the Annual Meeting and entitled to vote. A vote to “ABSTAIN” will have the same effect as a vote “AGAINST” the proposal.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS

VOTE “FOR” THE RATIFICATION OF OUR SELECTION OF ERNST & YOUNG LLP

AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUTING FIRM FOR

THE FISCAL YEAR ENDING JUNE 30, 2013.

Audit Related Matters

Audit and Non-Audit Fees. The following table presents the fees for professional services earned by Ernst & Young LLP for services rendered to the Company for the fiscal years ended June 30, 2012 and 2011:

 

     2012      2011  

Audit Fees1

   $ 4,763,142       $ 5,300,637   

Audit-Related Fees2

     313,019         48,606   

Tax Fees3

     54,490         232,311   

All Other Fees4

     143,231         83,432   
  

 

 

    

 

 

 

Total

   $ 5,273,882       $ 5,664,986   
  

 

 

    

 

 

 

 

1 

Audit Fees include services relating to the integrated audit of the consolidated annual financial statements and internal control over financial reporting, the review of financial statements included in the Company’s quarterly reports on Form 10-Q and statutory and regulatory filings or engagements.

2 

Audit-Related Fees include services relating to employee benefit plan audits, accounting consultations and reviews, and due diligence services.

3 

Tax Fees include services relating to tax compliance, tax advice, and tax planning.

4 

All Other Fees consist of fees for products and services other than the services reported above.

Policy Regarding Pre-Approval of Services Provided by the Independent Auditor. The Audit Committee has established an Audit and Non-Audit Services Compliance Policy (the “Policy”) requiring pre-approval of all audit and permissible non-audit services performed by the independent auditor to monitor the auditor’s

 

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independence from the Company. The Policy provides for the annual pre-approval of specific types of services pursuant to policies and procedures adopted by the Audit Committee, and gives detailed guidance to management as to the specific services that are eligible for such annual pre-approval.

The Policy requires the specific pre-approval of all other permitted services. For both types of pre-approval, the Audit Committee considers whether the provision of a non-audit service is consistent with the SEC’s rules on auditor independence. Additionally, the Audit Committee considers whether the independent auditor is best positioned to provide the most effective and efficient service, for reasons such as its familiarity with the Company’s business, people, culture, accounting systems, risk profile and other factors, and whether the service might enhance the Company’s ability to manage or control risk or improve audit quality. Also, unless a service is a pre-approved service set forth in the Policy and within the established guidelines, it will require approval by the Audit Committee in order for it to be provided by the independent auditor. In its review, the Audit Committee will also consider the relationship between fees for audit and non-audit services in deciding whether to pre-approve such services.

As provided under the Sarbanes-Oxley Act of 2002 and the SEC’s rules, the Audit Committee has delegated pre-approval authority to the Chair of the Audit Committee to address certain requests for pre-approval of services for up to $250,000, and the Chair must report his or her pre-approval decisions to the Audit Committee at its next regular meeting. The Policy is designed to help ensure that there is no delegation by the Audit Committee of authority or responsibility for pre-approval decisions to management. The Audit Committee monitors compliance by requiring management to report to the Audit Committee on a regular basis regarding the pre-approved services rendered by the independent auditor. Management has also implemented internal procedures to promote compliance with the Policy.

The Audit Committee has selected Ernst & Young LLP to serve as our independent auditor for the fiscal year ending June 30, 2013, subject to ratification by our stockholders. Ernst & Young LLP has served as the independent auditor of the Company since the spinoff from Cardinal Health and also audited the Company’s financial statements while it was part of Cardinal Health. Representatives of Ernst & Young LLP will be present at the Annual Meeting.

Report of the Audit Committee

The Audit Committee has reviewed and discussed the annual consolidated financial statements with management and Ernst & Young LLP, the Company’s independent registered public accounting firm (the “independent auditor”). Management is responsible for the financial reporting process, the system of internal controls, including internal control over financial reporting, risk management and procedures designed to ensure compliance with accounting standards and applicable laws and regulations. The independent auditor is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, as well as expressing an opinion on the effectiveness of internal control over financial reporting.

The Audit Committee met on five occasions in the fiscal year ended June 30, 2012. The Audit Committee met with the independent auditor, with and without management present, to discuss the results of its audits and quarterly reviews of the Company’s financial statements. The Audit Committee also discussed with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU Section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee also received from the Company’s independent auditor the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding their communications with the Audit Committee concerning independence and has discussed with the independent auditor its independence from the Company. The Audit Committee also has considered whether the provision of non-audit services to the Company is compatible with the independence of the independent auditor.

 

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In performing its functions, the Audit Committee acts only in an oversight capacity and necessarily relies on the work and assurances of the Company’s management, internal audit group and independent auditor, which, in their reports, express opinions on the conformity of the Company’s annual financial statements with U.S. generally accepted accounting principles.

Based on the review of the consolidated financial statements and discussions referred to in this Report, the Audit Committee recommended to the Board that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012, for filing with the SEC.

Submitted by the Audit Committee of the Board of Directors:

J. Michael Losh, Chair

Robert P. Wayman

Philip L. Francis

Jacqueline B. Kosecoff, Ph.D.

 

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PROPOSAL 3—ADVISORY VOTE ON THE COMPENSATION OF OUR

NAMED EXECUTIVE OFFICERS

At our 2011 annual meeting of stockholders, our stockholders recommended, on a non-binding advisory basis, that we hold an annual advisory vote to approve the compensation of our named executive officers. The Board of Directors determined to follow the recommendation of our stockholders and hold the vote on an annual basis until the next required advisory vote on the frequency of such advisory votes, which is expected to occur at the 2017 annual meeting of stockholders. Accordingly, the Board of Directors is requesting that our stockholders approve, pursuant to a non-binding vote, the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis, the compensation tables, narrative disclosures and related footnotes included in this Proxy Statement.

As discussed in the Compensation Discussion and Analysis, the primary objective of our executive compensation program is to align compensation with our overall business goals, core values and stockholder interests. Our compensation objective is to provide a competitive pay package that motivates achievement of above-market performance and emphasizes a long-term view in creating stockholder value. Compensation actions taken in fiscal 2012 demonstrate our continued commitment to pay-for-performance, with a substantial portion of each named executive officer’s compensation being at-risk and subject to important performance measures aligned with long-term stockholder value. In particular, our executive compensation program links a significant portion of executive compensation to the value of our common stock, which is intended to align the interests of our named executive officers with our stockholders. We also have established stock ownership guidelines that require our named executive officers to acquire and hold a meaningful ownership interest in our Company. We believe that this emphasizes a longer-term view in creating stockholder value.

In addition, we endeavor to maintain good governance standards with respect to our executive compensation practices. We utilize benchmarking and peer company analysis to set compensation for our named executive officers consistent with market practice, and we seek to establish compensation practices that are reasonable and do not contain features that would be considered problematic or egregious.

In designing our executive compensation program, we have implemented programs and policies to create alignment with our stockholders and that support our commitment to good compensation governance, as highlighted below:

 

Advisory Vote on Executive Compensation

   Annual

Clawback Policy for Variable Cash Compensation and Equity

   Yes

Tax Gross-Ups

   No

Independent Compensation Consultant

   Yes

Stock Ownership Guidelines

   Yes

Compensation Risk Assessment

   Annual

Hedging, Pledging and Margin Activities

   Prohibited

At our November 2, 2011 annual meeting of stockholders, our stockholders voted to support our “say-on-pay” proposal for our fiscal 2011 compensation of our named executive officers, with approximately 87% of votes cast voting in favor of the proposal.

The Board of Directors believes that CareFusion’s executive compensation program is designed to meet the objectives discussed above and in more detail in the Compensation Discussion and Analysis. Accordingly the Board recommends that stockholders vote in favor of the following resolution:

RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation awarded to the named executive officers, as described in the Compensation Discussion and Analysis, tabular disclosures, and other narrative compensation disclosures in the Proxy Statement.

 

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Vote Required for Approval

Approval of this resolution requires the affirmative “FOR” vote by a majority of the shares of common stock of the Company present in person or represented by proxy at the Annual Meeting and entitled to vote. A vote to “ABSTAIN” will have the same effect as a vote “AGAINST” the resolution. Because broker non-votes are not counted as votes “FOR” or “AGAINST” this resolution, they will have no effect on the outcome of the vote.

Because your vote is advisory, it will not be binding upon the Company, the Board of Directors or the Human Resources and Compensation Committee. However, our Board of Directors and Human Resources and Compensation Committee value the opinions of our stockholders. To the extent that there is any significant vote against the compensation of our named executive officers, they will consider our stockholders’ concerns and will evaluate what actions, if any, may be appropriate to address those concerns.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS

VOTE “FOR” THE APPROVAL OF THE COMPENSATION OF THE COMPANY’S

NAMED EXECUTIVE OFFICERS AS STATED IN THE ABOVE RESOLUTION.

 

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PROPOSAL 4—STOCKHOLDER PROPOSAL TO ADOPT SIMPLE MAJORITY VOTING

We have been advised that Mr. Kenneth Steiner, owner of shares of CareFusion common stock with a market value of at least $2,000 for more than a year, will present the following resolution at the 2012 Annual Meeting. Mr. Steiner has appointed Mr. John Chevedden and/or Mr. Chevedden’s designee to act on his behalf in connection with the proposal. We will furnish the address and share ownership of the proponent and/or Mr. Chevedden promptly upon oral or written request.

In accordance with the rules of the SEC, the proposal and supporting statement are being reprinted as they were submitted to CareFusion’s Corporate Secretary by the proponent. We take no responsibility for the content of the proposal, including sources referenced therein. For the reasons set forth in our Board of Directors Statement in Opposition, which immediately follows the proposal, our Board of Directors unanimously recommends that stockholders vote “AGAINST” this proposal.

4—ADOPT SIMPLE MAJORITY VOTE

Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws that calls for a greater than simple majority vote be changed to require a majority of the votes cast for and against such proposals. If necessary this means the closest standard to a majority of the votes cast for and against such proposals consistent with applicable laws.

Shareowners are willing to pay a premium for shares of corporations that have excellent corporate governance. Supermajority voting requirements have been found to be one of six entrenching mechanisms that are not positively related to company performance according to “What Matters in Corporate Governance” by Lucien Bebchuk of the Harvard Law School.

This proposal topic won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. The proponents of these proposals included Ray T. Chevedden and James McRitchie.

Currently a 1%-minority can frustrate the will of our 79%-shareholder majority. Supermajority requirements are arguably most often used to block initiatives supported by most shareowners but opposed by management.

This proposal should also be evaluated in the context of our Company’s overall corporate governance as reported in 2012:

The Corporate Library, an independent investment research firm, rated our company “High Concern” in Takeover Defenses with 3-years between elections for directors. Plus our directors could be reelected with only one yes-vote and a resounding 200 million no-votes.

Our CEO Kieran Gallahue started in January 2011 and was given golden hellos of a $650,000 sign-on bonus and $7 million in performance stock units. Despite being CEO for less than six months in 2011, Mr. Gallahue was given $25 million in pay. Mr. Gallahue was given a mega-grant of 633,000 stock options and 380,000 restricted stock units, both of which simply vest after time. Options and other equity pay should have performance-vesting features in order to assure full alignment with shareholder interests. Despite his short tenure, Mr. Gallahue could be given $15 million for a change in control.

We had no shareholder right to elect each director annually, no right to act by written consent or to call a special meeting, no cumulative voting and no independent Board Chairman.

 

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Our Lead Director seemed to be over-extended with seats on 6 boards of directors – plus key board committee assignments. Plus he received 10-times more negative votes than some of our other directors and still made up 33% of our audit committee.

Please encourage our board to respond positively to this proposal to initiate improved governance and increase our competitiveness: Adopt Simple Majority Vote—Proposal 4.

BOARD OF DIRECTORS STATEMENT IN OPPOSITION

The Board of Directors has carefully considered the proposal set forth above to adopt a simple majority vote standard for every voting requirement in the Company’s certificate of incorporation and amended and restated by-laws (our “governance documents”), and is recommending that stockholders vote “AGAINST” the proposal. The Board believes that the voting standards established in our governance documents are appropriate and beneficial to the Company and its stockholders as a whole.

Under our governance documents, a simple majority vote requirement is the default standard for matters submitted for stockholder approval. As permitted by Delaware law, our governance documents do, however, provide that if certain significant actions are to be taken by stockholders, those actions will require a supermajority vote, including (i) amending certain provisions of the certificate of incorporation relating to the number of directors, the structure of the board, stockholder actions by written consent and calling special meetings, and (ii) amending certain provisions of the amended and restated by-laws relating to director nominations and elections, board vacancies and removal of directors.

The supermajority voting standards relate to fundamental elements of our corporate governance. In general, these provisions are designed to provide minority stockholders with a measure of protection against the self-interested actions of short-term investors. For example, if this proposal were implemented it would be possible for a small number of very large stockholders, whose interests may diverge from those of our other stockholders, to approve an amendment to the amended and restated by-laws and change the size or composition of our current Board.

Importantly, the supermajority voting requirements do not preclude changes to our governance documents. Rather, they help to ensure that certain fundamental changes to these documents are made only with a broad consensus of stockholders, rather than by a “simple majority” of stockholders (which may, in practice, be the holders of a minority of shares outstanding because not all stockholders elect to participate in the vote).

The supermajority voting standards further protect CareFusion stockholders by encouraging persons or firms making unsolicited takeover bids to negotiate directly with the Board, rather than to use governance changes or threats of governance changes to strengthen their position. Unlike stockholders, the Board has a fiduciary duty under the law to act in a manner that it believes to be in the best interests of the Company and its stockholders as a whole. In addition, eight of the Company’s nine Directors are ‘independent’ under the standards of New York Stock Exchange. Supermajority voting requirements encourage potential acquirers to deal directly with the Board, which in turn enhances the Board’s ability to consider the long-term interests of all stockholders. The Company believes that its independent Board is in the best position to evaluate proposed offers in the context of the Company’s intrinsic value, to consider the Company’s alternatives, and to protect stockholders against abusive tactics during a takeover process, and as appropriate, to negotiate the best possible return for all stockholders. Elimination of these supermajority provisions may make it more difficult for the Company’s independent, stockholder-elected Board to preserve and maximize value for all stockholders in the event of an unsolicited takeover bid that does not reflect the intrinsic value of the Company.

In addition, the proposal makes reference to the compensation paid to Mr. Gallahue as our Chief Executive Officer in our 2011 fiscal year, as well as the number of board seats held by our Presiding Director, Mr. Losh. As it relates to Mr. Gallahue, we fully disclosed and discussed Mr. Gallahue’s compensation in the proxy statement

 

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for our 2011 annual meeting of stockholders, including how his fiscal 2011 compensation was designed to recruit him as our new Chief Executive Officer using long-term performance-based compensation and to help compensate him for the value of forfeited equity awards granted by his former employer. Our stockholders were asked at the 2011 annual meeting of stockholders to vote to approve, on a non-binding advisory basis, the compensation of our named executive officers in our “say-on-pay” proposal. This proposal included Mr. Gallahue’s fiscal 2011 compensation. Based on the final tabulation of voting results, approximately 87% of votes cast at our 2011 annual meeting were in favor of our say-on-pay proposal. The Board believes that our stockholders understand and have already considered Mr. Gallahue’s compensation.

With regard to Mr. Losh, the proposal indicates that our Presiding Director “seemed to be overextended” with seats on multiple boards of directors. Our Board considers the ability of each Director to commit sufficient time and attention to the activities of the Board, and Mr. Losh has consistently demonstrated his full commitment and dedication to our Company. He has attended every Board and Board Committee meeting, and he regularly engages with our management team between meetings. As the retired Chief Financial Officer of General Motors Corporation, Mr. Losh brings valuable business leadership, financial and accounting experience and skills to our Board. On an annual basis, the Board elects an independent Director to serve as the Presiding Director, and based on his commitment to CareFusion and his leadership skills, the Board has elected Mr. Losh as its Presiding Director. The Board believes that our stockholders share this view of Mr. Losh and that they value Mr. Losh’s service as our Presiding Director. At the 2010 annual meeting of stockholders, over 89% of the votes cast in the election of Mr. Losh as a Director were in favor of his re-election to a new three-year term.

Lastly, the proponent of this proposal also contends that approval would serve as a means of improving the Company’s corporate governance profile. After careful consideration, the Board does not believe that implementation of this proposal would enhance the Company’s corporate governance profile. The Company’s Governance and Compliance Committee regularly considers and evaluates corporate governance developments and recommends changes to the Board. As discussed in this Proxy Statement, the Board operates under corporate governance principles and practices that are designed to help maximize long-term stockholder value, maintain the highest standards of business conduct and corporate governance, align the interests of the Board and management with those of our stockholders, and promote high ethical conduct among the members of our Board and employees.

Vote Required for Approval

It is important to note that this vote is advisory only and that approval of this proposal, would not, by itself, eliminate the supermajority voting standards in our governance documents. In order to change these voting standards, a subsequent proposal setting forth the actual text of proposed amendments to the Company’s certificate of incorporation and amended and restated by-laws would need to be submitted and approved by the Board of Directors and the holders of more than 80% of the Company’s outstanding shares.

The Board will continue to consider whether changes to our governance documents are appropriate and in the best interests of the stockholders and the Company in the future. For the reasons set forth above, however, the Board believes at this time that implementation of the proposal would not serve the best interests of the Company or its stockholders.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS

VOTE “AGAINST” THE STOCKHOLDER PROPOSAL TO ADOPT SIMPLE MAJORITY VOTING.

 

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PROPOSAL 5—STOCKHOLDER PROPOSAL TO REPEAL CLASSIFIED BOARD

We have been advised that The Los Angeles County Employees Retirement Association (LACERA), owner of shares of CareFusion common stock with a market value of at least $2,000 for more than a year, will present the following resolution at the 2012 Annual Meeting. LACERA has appointed the Harvard Law School Shareholder Rights Project (the “SRP”) and/or SRP’s designee to act on its behalf in connection with the proposal. We will furnish the address and share ownership of the proponent and/or the SRP promptly upon oral or written request.

In accordance with the rules of the SEC, the proposal and supporting statement are being reprinted as they were submitted to CareFusion’s Corporate Secretary by the proponent. We take no responsibility for the content of the proposal and the supporting statement, including sources referenced in the supporting statement. For the reasons set forth in our Board of Directors Statement in Opposition, which immediately follows the proposal, our Board of Directors unanimously recommends that stockholders vote “AGAINST” this proposal.

PROPOSAL TO REPEAL CLASSIFIED BOARD

RESOLVED, that shareholders of CareFusion Corporation urge the Board of Directors to take all necessary steps (other than any steps that must be taken by shareholders) to eliminate the classification of the Board of Directors and to require that all directors elected at or after the annual meeting held in 2013 be elected on an annual basis. Implementation of this proposal should not prevent any director elected prior to the annual meeting held in 2013 from completing the term for which such director was elected.

SUPPORTING STATEMENT

This resolution was submitted by the Los Angeles County Employees Retirement Association. The Harvard Law School Shareholder Rights Project represented and advised the Los Angeles County Employees Retirement Association in connection with this resolution.

The resolution urges the board of directors to facilitate a declassification of the board. Such a change would enable shareholders to register their views on the performance of all directors at each annual meeting. Having directors stand for elections annually makes directors more accountable to shareholders, and could thereby contribute to improving performance and increasing firm value.

Over the past decade, many S&P 500 companies have declassified their board of directors. According to data from FactSet Research Systems, the number of S&P 500 companies with classified boards declined by more than 50%; and the average percentage of votes cast in favor of shareholder proposals to declassify the boards of S&P 500 companies during the period January 1, 2010 – June 30, 2011 exceeded 75%.

The significant shareholder support for proposals to declassify boards is consistent with empirical studies reporting that classified boards could be associated with lower firm valuation and/or worse corporate decision-making. Studies report that:

 

   

Classified boards are associated with lower firm valuation (Bebchuk and Cohen, 2005; confirmed by Faleye (2007) and Frakes (2007));

 

   

Takeover targets with classified boards are associated with lower gains to shareholders (Bebchuk, Coates, and Subramanian, 2002):

 

   

Firms with classified boards are more likely to be associated with value-decreasing acquisition decisions (Masulis, Wang, and Xie, 2007); and

 

   

Classified boards are associated with lower sensitivity of compensation to performance and lower sensitivity of CEO turnover to firm performance (Faleye, 2007).

Please vote for this proposal to make directors more accountable to shareholders.

 

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BOARD OF DIRECTORS STATEMENT IN OPPOSITION

The Board of Directors has carefully considered the proposal set forth above to repeal the Company’s classified board, and is recommending that stockholders vote “AGAINST” the proposal. The Board recognizes that there are valid arguments in favor of, and in opposition to, classified boards. The Board, however, does not believe in a one-size fits all approach to corporate governance. For the reasons set forth below, the Board does not believe that it is appropriate to declassify the CareFusion Board at this time. The Board believes that for CareFusion, which is still in the early years following its spinoff from Cardinal Health, a classified Board structure continues to be appropriate and in the best interests of the Company’s stockholders. The Board encourages stockholders to consider the following when voting on the proposal:

 

   

As a recent spinoff, CareFusion and its stockholders benefit from a classified board structure, as it provides continuity and stability on the Board and allows the Directors to focus on the long-term interests of the Company and its stockholders. CareFusion has a limited operating history as an independent entity, and is still in the foundation-building phase of implementing its post-spinoff strategic growth initiatives. As the Company continues to focus on balancing its portfolio of businesses, investing in its research and development pipeline, and pursuing merger and acquisition activities to build a foundation for future growth, the Board believes it is in the best interests of the Company and its stockholders to manage the Company with a long-term perspective.

 

   

A classified board can be beneficial in the event of an unsolicited takeover attempt that does not reflect the intrinsic value of the Company, particularly in the potentially unpredictable years following a spinoff. A classified board structure makes it more difficult and time-consuming to change majority control of the Board, which reduces the vulnerability of the Company to an unsolicited takeover proposal. As we make the types of investments discussed above, and we address the inevitable challenges that young companies face, our stock price may experience volatility that may not reflect the long-term, intrinsic value of the Company. A classified board structure makes the Company less vulnerable during this period by encouraging persons attempting certain types of transactions that involve an actual or threatened change of control of the Company to first seek to negotiate with the Company, and may discourage pursuit of such transactions on a non-negotiated basis.

In addition, the Board disagrees with the assertion by the proponent of this proposal that annual Director elections will make the Board more accountable to CareFusion stockholders. Our Board members are subject to fiduciary duties under Delaware law as well as our comprehensive Code of Conduct and Corporate Governance Guidelines. The goal of these policies is to ensure that our Board members are accountable to, and their interests remain aligned with, CareFusion’s stockholders regardless of the length of their Board service or the frequency of their standing for re-election. In addition, eight of the Company’s nine Directors are ‘independent’ under the standards of New York Stock Exchange, and each of the Board Committees are comprised entirely of independent Directors. These independent Directors have a strong background in executive leadership and management, accounting and finance, and Company and industry knowledge, and they take seriously their obligations and accountability to our stockholders.

Vote Required for Approval

It is important to note that this vote is advisory only and that approval of the proponent’s proposal, would not, by itself, eliminate the Company’s classified board. In order to eliminate the classified board, a subsequent proposal setting forth the actual text of proposed amendments to the Company’s certificate of incorporation would need to be submitted and approved by the Board of Directors and the holders of more than 80% of the Company’s outstanding shares.

The Board will continue to consider whether changes to the Company’s classified board structure are appropriate and in the best interests of the stockholders and the Company in the future. For the reasons set forth above, however, the Board believes at this time that implementation of the proposal would not serve the best interests of our stockholders or the Company.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS

VOTE “AGAINST” THE STOCKHOLDER PROPOSAL TO REPEAL CLASSIFIED BOARD.

 

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COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis describes CareFusion’s executive compensation philosophy and program for the fiscal year ended June 30, 2012 (“fiscal 2012”). It should be read in conjunction with our tabular disclosures regarding the compensation of our named executive officers for fiscal 2012, which can be found starting on page 53 of this Proxy Statement under the heading “Executive Compensation.”

Executive Overview

In this Compensation Discussion and Analysis, we summarize our objectives regarding the compensation of our named executive officers, including how we determine the elements and amounts of executive compensation. Included below are discussions regarding our compensation philosophy, our compensation approach, our compensation determinations, and our policies and practices related to executive compensation. Our executive compensation program reflects a commitment to (1) align compensation with our overall business goals, core values and stockholder interests, (2) motivate and retain our key executives, (3) reinforce consistent attainment of above-market performance and (4) emphasize a long-term view in creating stockholder value.

Fiscal 2012 Business and Financial Performance. For fiscal 2012, we delivered strong financial performance in a challenging global economic and business environment, and we made significant progress against our long-term strategic plan, as highlighted below:

 

   

Growth in Revenue, Operating Income and Cash Flows. We grew revenue by $158 million, or 5 percent from the prior year, to $3.6 billion. In addition, we grew operating income by $70 million, or 14 percent from the prior year, to $574 million. Our strong focus on cash flows resulted in $648 million in cash provided by operating activities in fiscal 2012, nearly double the amount we reported for fiscal 2011.

 

   

Reduction in Administrative Expenses and Increase in Investment in Research and Development. As part of our efforts to reduce the complexity of our infrastructure and simplify our operations, we reduced selling, general, and administrative expenses by $34 million, or 3 percent from the prior year. During fiscal 2012, we reallocated these funds to increase our research and development investments by 12 percent from the prior year to $164 million.

 

   

Acquisitions and Divestitures. A core component of our business strategy is to pursue growth opportunities that give us access to innovative technologies, complementary product lines or new markets. Our business strategy also involves assessing our portfolio of businesses with a view of divesting non-core businesses and product lines that do not align with our objectives. During fiscal 2012, we acquired several companies and technologies that expanded our geographic reach, strengthen our technology base and provide opportunities for growth. We also divested a business, allowing us to simplify and focus on value-creating activities.

 

   

Share Repurchase Program. With a focus on enhancing stockholder value, in February 2012, our Board of Directors approved a share repurchase program authorizing the repurchase of up to $500 million of our common stock through open market and private transactions. The share repurchase program is expected to continue through December 2013. Through June 30, 2012, we repurchased a total of 3.9 million shares of our common stock under the share repurchase program for an aggregate of $100 million.

Fiscal 2012 Executive Compensation Program. In determining the compensation of our named executive officers, the Human Resources and Compensation Committee of our Board of Directors (the “Compensation Committee”) evaluates various factors, including the following:

 

   

the Company’s overall business and financial performance and/or the performance of the business unit or function for which the individual is responsible;

 

   

the individual’s performance, experience and skills;

 

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the terms of employment agreements or other arrangements with the individual;

 

   

compensation previously paid or awarded to the individual;

 

   

competitive market data for similar positions based on the Company’s comparator group; and

 

   

voting results from the prior year’s advisory vote on the compensation of our named executive officers.

For fiscal 2012, the Compensation Committee approved an executive compensation program that consists of three principal elements: base salary, annual cash incentives under our management incentive plan (“MIP”) and long-term equity-based incentive (“LTI”) awards. Our Compensation Committee believes that, by allocating compensation among these elements, our overall executive compensation program appropriately balances compensation-related risk and the desire to focus our named executive officers on specific short-term and long-term goals important to our overall success. Consistent with our pay-for-performance philosophy, a significant portion of the compensation of our named executive officers in fiscal 2012 was variable or at-risk. For our Chief Executive Officer, 88% of total direct compensation was subject to annual performance goals or tied to the value of our common stock. For our other named executive officers as a group, 79% of total direct compensation was subject to annual performance goals or tied to the value of our common stock.

Fiscal 2012 Total Direct Compensation

 

LOGO

The following table summarizes total direct compensation paid to our named executive officers in fiscal 2012:

 

    Base Salary     MIP Award     LTI Award  

Name and

Principal Position

  2012 Base
Salary
    Percent
Change1
    2012 MIP
Award Target
    2012 MIP
Award Payout
    2012 LTI Award
Target Value
    Percent
Change1
 

Kieran T. Gallahue

Chairman and CEO

  $ 1,150,000        —       $ 1,437,500      $ 1,282,969      $ 7,500,000        —    

James F. Hinrichs

Chief Financial Officer

  $ 530,450        3 %   $ 424,360      $ 360,706      $ 2,387,025        3 %

Thomas J. Leonard

President, Medical Systems

  $ 456,500        10 %   $ 365,200      $ 372,504      $ 1,141,250        22 %

Vivek Jain

President, Procedural Solutions

  $ 478,950        3 %   $ 383,160      $ 260,549      $ 1,197,375        14 %

Joan Stafslien

EVP, General Counsel, Chief

Compliance Officer and Secretary

  $ 458,350        3 %   $ 320,845      $ 272,718      $ 1,031,288        3 %

 

1 

Reflects percent change relative to fiscal 2011.

As set forth in the table above, Mr. Gallahue’s base salary and LTI award target value remained unchanged for fiscal 2012. Each of Mr. Hinrichs and Ms. Stafslien received a 3% increase in base salary and LTI award target value based on a review of market data and considering their performance during fiscal 2011. The increases set forth above for Mr. Leonard took into account market data for his new role as President, Medical

 

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Systems, which he assumed in August 2011, and were also intended to create greater alignment between the compensation for Mr. Leonard and Mr. Jain. For both of Messrs. Leonard and Jain, the amounts set forth above reflect a common LTI award target value (250% of base salary) and a common MIP award target (80% of base salary).

Annual cash incentive awards under the MIP are performance-based, with payouts subject to the attainment of Company-wide and individual performance goals. For fiscal 2012, we established Company-wide financial performance goals for fiscal 2012 related to revenue growth and operating margin. Despite delivering strong financial performance during the year and making significant progress against our long-term strategic plan, our performance relative to the pre-established targets for revenue growth and operating margin was below target, and the 2012 MIP award payouts to our named executive officers set forth above reflect a funding level below target, with the exception of Mr. Leonard. Mr. Leonard received a MIP payout above his 2012 MIP award target based on individual performance and the performance of the Medical Systems business during the year.

Consideration of 2011 Advisory Vote on Executive Compensation. At our November 2, 2011 annual meeting of stockholders, our stockholders voted in support of our “say-on-pay” proposal related to our fiscal 2011 executive compensation, with approximately 87% of votes cast in favor of the proposal. Given this result and after careful consideration, the Compensation Committee determined to retain the core design of our executive compensation program for fiscal 2012. However, the Compensation Committee continued to refine our executive compensation program to better align compensation with our overall business goals and stockholder interests, including the following actions that will apply to our fiscal 2013 executive compensation program:

 

   

Revised Comparator Group for Compensation Benchmarking. For fiscal 2013 compensation planning, our Compensation Committee considered that as a result of recent mergers, acquisitions and divestiture transactions—by the Company and by other companies in the healthcare sector—some of the Company’s financial metrics relative to potential peer group companies have changed. Following review and analysis by our independent compensation consultant, we made adjustments to the comparator group so that the relative revenues, earnings and market capitalizations of companies in the comparator group are more closely aligned with CareFusion.

 

   

“Double-Trigger” Equity Award Agreements. Historically, our standard forms of agreements for LTI awards contained a “single-trigger” vesting provision, meaning they will vest in full upon a change in control of the Company. In June 2012, the Compensation Committee approved new forms of LTI agreements for equity grants to eligible employees, including our named executive officers, that replace the existing single-trigger vesting provision with “double-trigger” vesting. Under these new agreements, vesting of the awards (and exercisability in the case of stock options) will be accelerated only if the recipient’s employment is terminated by the Company other than for “cause” or by the recipient for “good reason,” in either case within two years following a change of control of the Company.

 

   

Amendment of Executive Severance Guidelines. In June 2012, the Compensation Committee approved the amendment and restatement of our Executive Severance Guidelines, which are guidelines to be considered in providing severance payments and benefits to certain executive-level employees in the event of a termination of employment by the Company without “cause” or by the executive for “good reason.” The amendment and restatement of the Executive Severance Guidelines was intended to reduce the number of executives subject to the guidelines and reduce the amount of severance payable under the guidelines.

 

   

Amendment of Executive Change in Control Severance Plan. In June 2012, the Compensation Committee also approved the amendment and restatement of our Executive Change in Control Severance Plan, which provides for benefits to our named executive officers in connection with a change in control of the Company. The amendment and restatement of the Executive Change in Control Severance Plan was intended to reduce the number of executives subject to the plan, provide additional clarity around various provisions, and reduce the amount of severance payable under the plan.

 

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Commitment to Good Compensation Governance Practices. In designing our executive compensation program, we have implemented programs and policies to create alignment with our stockholders and that support our commitment to good compensation governance as follows:

 

   

Annual Advisory Vote to Approve Compensation of our Named Executive Officers. We provide our stockholders with the ability to vote annually on the compensation of our named executive officers.

 

   

Clawback Policy. We have the authority to require repayment of certain annual cash incentives, or subject outstanding equity incentive awards to forfeiture, in instances of executive misconduct.

 

   

No Tax Gross-Ups. Tax gross-ups are not provided to our executive officers for personal expenses or in the event of a change in control.

 

   

Independent Compensation Consultant. The Compensation Committee has engaged Frederic W. Cook & Co. as its independent compensation consultant. Frederic W. Cook & Co. provides services only to the Compensation Committee and provided no other services to the Company during fiscal 2012.

 

   

Stock Ownership Guidelines. We have established stock ownership guidelines to further align our executive officers’ interests with those of our stockholders. The guidelines require our named executive officers to acquire and hold a meaningful ownership interest in our Company.

 

   

Compensation Risk Assessment. The Compensation Committee oversees and evaluates an annual risk assessment of the Company’s compensation programs. Based on the fiscal 2012 risk assessment, it was concluded that the Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

   

Prohibitions on Hedging, Pledging and Margin Activities. Our insider trading policy prohibits hedging transactions by Company employees. Under the policy, all short-term, speculative or hedging transactions in CareFusion securities are prohibited by all employees. In addition, the policy was recently amended to specifically prohibit the use of CareFusion securities for pledging and margin activities.

The Compensation Committee believes that the programs and policies described above clearly demonstrate the Company’s commitment to, and consistent execution of, an effective performance-oriented executive compensation program.

Introduction

In accordance with SEC rules and regulations, our named executive officers for fiscal 2012 include our Chief Executive Officer, Chief Financial Officer and the three other most highly compensated executive officers serving as executive officers on June 30, 2012. They were:

 

   

Kieran T. Gallahue, Chairman and Chief Executive Officer

 

   

James F. Hinrichs, Chief Financial Officer

 

   

Thomas J. Leonard, President, Medical Systems

 

   

Vivek Jain, President, Procedural Solutions

 

   

Joan B. Stafslien, Executive Vice President, General Counsel, Chief Compliance Officer and Secretary

For a complete list of our current executive officers, see Part III, Item 10 in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the SEC on January 31, 2013.

 

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Compensation Philosophy

We believe that our named executive officers play a critical role in creating long-term value for our stockholders. The primary objective of our executive compensation program is to align compensation with our overall business goals, core values and stockholder interests. Our compensation objective is to provide a competitive pay package that motivates achievement of above-market performance with a long-term view in creating stockholder value. To this end, our executive compensation philosophy reflects:

 

   

a pay-for-performance model that delivers pay based on overall Company, business and individual performance;

 

   

an emphasis on long-term equity-based incentive awards that link a meaningful portion of executive compensation to the value of our common stock; and

 

   

benchmarking of our pay levels and compensation practices against a comparator group that is reasonable and appropriate for our Company.

Because we believe strongly in pay-for-performance, a substantial portion of our executive compensation program is comprised of performance-based compensation, including annual cash incentives and long-term equity-based incentives. We also believe in the importance of aligning executives’ interests with the interests of our stockholders, and accordingly we established stock ownership guidelines that require our executive officers to acquire and hold a meaningful ownership interest in our Company, as discussed below under the heading “Policies, Guidelines and Practices Related to Executive Compensation—Stock Ownership Guidelines.”

For fiscal 2012, our executive compensation program included the following elements:

 

   

base salary;

 

   

annual cash incentive awards; and

 

   

long-term equity-based incentive awards, comprised of stock options, RSUs and PSUs.

In addition to these elements of our executive compensation program, which together we refer to as “total direct compensation,” our named executive officers are eligible for limited benefits and perquisites, as discussed below under “Compensation Determinations—Other Benefits and Perquisites.” Our named executive officers are also eligible to participate in employee benefit programs generally offered to our other U.S. employees. Our Compensation Committee believes that, by allocating compensation among these elements, our overall executive compensation program appropriately balances compensation-related risk and the desire to focus our named executive officers on specific short-term and long-term goals important to our overall success.

Role of the Compensation Committee and Management

The Compensation Committee oversees our executive compensation policies and determines the amounts and elements of compensation for our executive officers. A discussion of the Compensation Committee’s responsibilities and a summary of the Compensation Committee charter can be found on page 13 of this Proxy Statement under the heading “Governance of Our Company—Board and Committee Membership and Structure—Human Resources and Compensation Committee.”

Compensation determinations for our named executive officers other than our Chief Executive Officer are made by the Compensation Committee with input provided by the Chief Executive Officer, which the Compensation Committee considers with the assistance of its independent compensation consultant (see below under “Role of the Compensation Consultant”). With respect to compensation for our Chief Executive Officer, the Compensation Committee makes recommendations to the Board for approval. Members of management may also provide input, make recommendations and provide ongoing assistance to the Compensation Committee with respect to the design, operation, objectives and values of the various elements of our compensation program in order to provide appropriate performance and retention incentives for our named executive officers.

 

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In addition, the Compensation Committee acts as the administrator of our equity and non-equity incentive plans covering executive officers and other employees. As it relates to employees who are not executive officers, the Compensation Committee may delegate its authority for administration of the plans to executive officers and other key employees.

The Compensation Committee also oversees an annual risk assessment of the Company’s compensation programs to determine whether such programs are reasonably likely to have a material adverse effect on the Company. During fiscal 2012, management conducted its annual risk assessment, which was supplemented with a review by the independent compensation consultant (see below under “Role of the Compensation Consultant”). Based on the Company’s analysis and the report prepared by the compensation consultant, the Compensation Committee concluded that the Company’s compensation programs were appropriately balanced to mitigate compensation-related risk with cash and stock elements, financial and non-financial goals, formal goals and discretion, and short-term and long-term rewards. The Company also has policies to mitigate compensation-related risk, including stock ownership guidelines, clawback provisions and prohibitions on employee hedging activities. Furthermore, the Compensation Committee believes that the Company’s policies on ethics and compliance along with its internal controls also mitigate against unnecessary or excessive risk taking.

Role of the Compensation Consultant

The Compensation Committee uses a compensation consultant primarily to provide input on compensation trends and developments and to assist with executive compensation benchmarking. The compensation consultant also provides a valuable outside perspective on executive compensation practices.

In establishing executive compensation for fiscal 2012, the Compensation Committee engaged Frederic W. Cook & Co. to serve as its independent compensation consultant. During fiscal 2012, Frederic W. Cook & Co. advised our Compensation Committee on executive compensation matters, including the selection of a comparator group for compensation benchmarking, competitive market analysis for executive compensation and plan design for our annual and long-term incentive programs. Frederic W. Cook & Co. also provided regular updates on compensation trends and developments and regulatory matters, and conducted a risk assessment of our executive compensation programs. As previously mentioned, Frederic W. Cook & Co. was engaged directly by the Compensation Committee and does not provide any other unrelated products or services to the Company.

Comparator Group and Benchmarking

For fiscal 2012, the Compensation Committee, with the assistance of Frederic W. Cook & Co., selected the following 18 companies to use as a comparator group to benchmark and set compensation for our named executive officers:

 

Allergan, Inc.    Cephalon, Inc.    Quest Diagnostics Inc.
Bard (C.R.) Inc.    Covidien Ltd.    St. Jude Medical Inc.
Beckman Coulter, Inc.    Edwards Lifesciences Corp.    STERIS Corp.
Becton, Dickinson and Co.    Hospira, Inc.    Stryker Corp.
Biogen Idec, Inc.    Life Technologies Corp.    Varian Medical Systems Inc.
Boston Scientific Corp.    Mylan Inc.    Zimmer Holdings, Inc.

On an annual basis, the Compensation Committee reviews the comparator group using objective criteria for selecting peers that include companies in the healthcare industry that focus primarily on medical technology and devices with revenues, earnings, and market capitalizations that are generally aligned with CareFusion. Based on its review of the fiscal 2011 comparator group, the Compensation Committee determined that it was appropriate to maintain the same comparator group for fiscal 2012 compensation benchmarking. In determining to maintain the existing comparator group, the Compensation Committee considered the benefit of maintaining consistency for comparability of competitive analysis.

 

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Compensation determinations for our executive officers were based on the executive compensation study conducted by Frederic W. Cook & Co., which included an analysis of executive compensation data for companies in the comparator group. For named executive officers, Frederic W. Cook & Co. utilized market data compiled from proxy statements by companies in the comparator group. Frederic W. Cook & Co.’s analysis included a review of each element of compensation, as well as the total direct compensation for each of our executive officers. Using this analysis, we established a goal to provide total direct compensation to our named executive officers for fiscal 2012 competitive with the comparator group, as discussed below under “Compensation Determinations.”

In connection with the fiscal 2011 “say-on-pay” proposal for the compensation of our named executive officers at our November 2, 2011, annual meeting of stockholders, a proxy advisory firm identified a concern with the Company’s comparator group for fiscal 2011. As we had already taken steps to implement our compensation program for fiscal 2012 based on the existing comparator group, the Compensation Committee considered this feedback when establishing the comparator group for fiscal 2013 compensation benchmarking. In particular, the Compensation Committee considered that as a result of recent mergers, acquisitions and divestiture transactions—by the Company and by other companies in the healthcare sector—some of the Company’s financial metrics relative to other potential peer group companies had changed. Following review and analysis by Frederic W. Cook & Co., the Compensation Committee determined it was appropriate to make adjustments to the comparator group for fiscal 2013 compensation planning so that the revenues, earnings, and market capitalizations of companies in the comparator group are more closely aligned with CareFusion. The Compensation Committee selected 21 peer companies for the fiscal 2013 comparator group, which reflects 15 continuing peer companies from the fiscal 2012 comparator group, three deletions and six additions, as follows:

 

Continuing Peer Companies

 

Deleted Peer Companies

 

New Peer Companies

Allergan, Inc.   Life Technologies Corp.   Beckman Coulter, Inc.   Alere Inc.
Bard (C.R.) Inc.   Mylan Inc.   Cephalon, Inc.   Covance Inc.
Becton, Dickinson and Co.   St. Jude Medical Inc.   Quest Diagnostics Inc.   Dentsply International Inc.
Biogen Idec, Inc.   STERIS Corp.     Hologic, Inc.
Boston Scientific Corp.   Stryker Corp.     PerkinElmer, Inc.
Covidien Ltd.   Varian Medical Systems Inc.     ResMed Inc.
Edwards Lifesciences Corp.   Zimmer Holdings, Inc.    
Hospira, Inc.      

Compensation Determinations

Our Compensation Committee made compensation determinations for our named executive officers for fiscal 2012 based on the analysis of pay levels compared to the comparator group, as discussed above. In making these determinations, we established compensation targets for our named executive officers based on the comparator group, as follows:

 

   

Base salaries were generally targeted at the 50th percentile;

 

   

Annual cash incentive awards were generally targeted at the 65th percentile; and

 

   

Long-term equity-based incentive awards were generally targeted within a range of the 50th to 65th percentile.

A substantial portion of the compensation for our named executive officers is comprised of at-risk performance-based compensation, including annual cash incentives and long-term equity-based incentives. Furthermore, we do not provide any material retirement benefits, such as defined-benefit pensions, and instead rely on LTI awards, our 401(k) Savings Plan and our Deferred Compensation Plan to provide a competitive package for wealth accumulation and retirement and to motivate and retain our named executive officers.

 

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Certain compensation decisions are formula-driven, while others require more judgment and discretion. For instance, the Compensation Committee considers market data and individual performance in determining a named executive’s base salary. For fiscal 2012, target annual cash incentives and LTI awards were established based on a multiple of base salary and were set using competitive market data. The Compensation Committee uses quantitative and qualitative metrics and exercises some judgment in determining achievement of the overall Company performance goals, as well as when assessing the individual performance of a named executive officer. In making compensation determinations, the Compensation Committee must also consider the terms of employment agreements or other arrangements with our named executive officers. As discussed below under the heading “Agreements Regarding Executive Compensation,” we are a party to employment agreements and offer letters with certain of our named executive officers that set forth compensation and other benefits.

Base Salary. In determining base salaries for our named executive officers, the Compensation Committee considered the market data, generally targeting the 50th percentile of the comparator group. The Compensation Committee also took into account individual performance, experience and skills, as well as the terms of employment agreements and offer letters with our named executive officers.

The following table sets forth the determinations of our Compensation Committee in August 2011 with respect to base salary rates for our named executive officers for fiscal 2012:

 

Name

  

Position

   Fiscal 2011
Base Salary Rate1
     Fiscal 2012
Base Salary Rate1
     Percent
Change
 

Kieran T. Gallahue

   Chairman and CEO    $ 1,150,000       $ 1,150,000         0

James F. Hinrichs

   Chief Financial Officer    $ 515,000       $ 530,450         3

Thomas J. Leonard

   President, Medical Systems    $ 415,000       $ 456,500         10

Vivek Jain

   President, Procedural Solutions    $ 465,000       $ 478,950         3

Joan B. Stafslien

   EVP, General Counsel, Chief Compliance Officer and Secretary    $ 445,000       $ 458,350         3

 

1 

Fiscal 2011 base salary rate reflects annual salary rate in effect at the end of fiscal 2011. Actual salary paid for fiscal 2011 and fiscal 2012 may differ from the salary rates reflected above based on the number of days of service by the named executive officer during the fiscal year, as well as the timing of any salary increase during the fiscal year.

As set forth in the table above, Mr. Gallahue’s base salary remained unchanged for fiscal 2012. Our Compensation Committee approved a 3% increase to the annual base salaries of Messrs. Hinrichs and Jain and Ms. Stafslien, which it believed was appropriate based on a review of market data and considering their performance during fiscal 2011. In approving the 10% increase to the annual base salary of Mr. Leonard, our Compensation Committee considered market data for Mr. Leonard in his new role as President, Medical Systems, which he assumed in August 2011, as well as his performance as President, Dispensing Technologies, during fiscal 2011. In this new role, Mr. Leonard, assumed responsibility for the entire Medical Systems segment, which includes our Dispensing Technologies, Infusion Systems and Respiratory Technologies businesses. Based on a review of market data, Mr. Leonard’s compensation in this new role was below the 50th percentile of the comparator group. In addition, the Compensation Committee recognized Mr. Leonard’s successful leadership of the Dispensing Technologies business, which delivered strong financial results in fiscal 2011 and took important steps in furtherance of the Company’s long-term strategic growth plan.

Annual Cash Incentive Awards. The CareFusion Corporation Management Incentive Plan (the “MIP”) provides for annual cash incentive awards to eligible employees, including our named executive officers. Effective July 1, 2010, we amended and restated the MIP, which was approved by our stockholders in November 2010. MIP awards are performance-based, and payouts for fiscal 2012 were subject to the attainment of Company-wide and individual performance goals. The Compensation Committee established a MIP target award value for each of our named executive officers for fiscal 2012 based on competitive market data for similar positions. Target awards are expressed as a percentage of base salary. In establishing the MIP target award value,

 

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the Compensation Committee targeted the 65th percentile of short-term cash incentive targets of the comparator group, which reflected the anticipated difficulty of achieving the performance goals. For fiscal 2012, MIP target awards represented a significant portion of total cash compensation for our named executive officers.

Fiscal 2012 Total Cash Compensation

 

LOGO

The following table sets forth the determinations of our Compensation Committee in August 2011 with respect to MIP targets for fiscal 2012, as well as the actual amount of the cash incentive awards received by our named executive officers upon payout of the fiscal 2012 MIP in September 2012:

 

Name

  

Position

   Fiscal 2012 MIP Target      Fiscal 2012 MIP
Award Payout
 
      Percentage of
Base Salary Rate
    Award
Value
    

Kieran T. Gallahue

   Chairman and CEO      125   $ 1,437,500       $ 1,282,969   

James F. Hinrichs

   Chief Financial Officer      80   $ 424,360       $ 360,706   

Thomas J. Leonard

   President, Medical Systems      80   $ 365,200       $ 372,504   

Vivek Jain

   President, Procedural Solutions      80   $ 383,160       $ 260,549   

Joan B. Stafslien

   EVP, General Counsel, Chief Compliance Officer and Secretary      70   $ 320,845       $ 272,718   

For fiscal 2012, our named executive officers were eligible to receive a cash award of 0% – 200% of their respective MIP target awards based on the achievement of Company-wide financial performance goals. In addition, the Compensation Committee may assign an individual performance factor of 0% – 150% related to the individual performance of the officer, which can result in an increase or decrease in actual MIP payment, provided that no MIP payment shall exceed 200% of an executive officer’s MIP target. In setting Company-wide MIP performance goals, the Compensation Committee determined to utilize new financial performance criteria for fiscal 2012. For fiscal 2011, the Compensation Committee selected financial metrics related to earnings before interest and taxes (“EBIT”) and cash flow from operations as performance criteria under the MIP. For fiscal 2012, the Compensation Committee selected financial metrics related to revenue growth and operating margin. Given the Company’s strategic focus on these metrics, and their importance to investors, the Compensation Committee determined to use them to create greater alignment with management performance goals under the MIP.

The Compensation Committee approved a MIP funding matrix for fiscal 2012, which established different funding levels based on performance against pre-established targets for “Revenue Growth of Continuing Operations” and “Adjusted Operating Margin,” calculated as follows:

 

   

“Revenue Growth of Continuing Operations,” calculated by subtracting 1.00 from the quotient of our revenue from continuing operations for fiscal 2012, divided by our revenue from continuing operations for fiscal 2011

 

   

“Adjusted Operating Margin,” calculated by dividing our adjusted operating earnings for fiscal 2012 by revenue for fiscal 2012

 

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In calculating Revenue Growth of Continuing Operations, we exclude from revenue in fiscal 2012 any revenue associated with acquisitions and divestitures completed during fiscal 2012, and we exclude from revenue in fiscal 2011 any revenue associated with divestitures in fiscal 2012 that do not qualify for discontinued operations treatment. In calculating Adjusted Operating Margin, we use adjusted operating earnings, which exclude certain one-time items such as restructuring charges; impairments; gains and losses on the sale of assets; merger, acquisition and divestiture charges; and other one-time charges as approved by management and the Board. In both calculations, we also exclude the impact of foreign currency exchange rate fluctuations. We exclude these items from the calculations in order to better measure core growth in revenue and operating margin and to facilitate comparisons to the prior year period. By excluding certain one-time items from the calculations, the Compensation Committee sought to reward management for achieving the annual MIP goals, while at the same time focusing on actions that drive long-term stockholder value.

The following table shows the Company-wide MIP performance goals at minimum, target and maximum performance levels for fiscal 2012:

 

Performance Metric

   Minimum
Performance
    Target
Performance
    Maximum
Performance
 

Revenue Growth of Continuing Operations

     1.5     4.5     7.5

Adjusted Operating Margin

     16.0     18.3     20.4

Revenue Growth of Continuing Operations and Adjusted Operating Margin are equally weighted and evaluated within a payout matrix, which provides for no payout unless minimum performance is achieved for both metrics, a target payout if target performance is achieved for both metrics, maximum payout only if maximum performance is achieved for both metrics, and payouts determined on an interpolated basis for performance between minimum and maximum.

In July 2012, the Compensation Committee reviewed our financial performance for fiscal 2012 and determined Revenue Growth of Continuing Operations to be 2.5% and Adjusted Operating Margin to be 17.5% for purposes of the fiscal 2012 MIP calculation. While these amounts met the minimum MIP performance goals, they fell short of the amounts established for MIP payout at target. In establishing MIP funding for fiscal 2012, the Compensation Committee reviewed the results of the MIP calculation and considered additional factors in light of the Company’s strong overall business and financial performance during fiscal 2012, as well as the Company’s progress on important long-term initiatives during the year that had a negative impact on the MIP calculation. Among other things, the Compensation Committee considered the following:

 

   

the financial performance of the Company’s Rowa business, which was acquired in August 2011; the Company’s success in integrating Rowa into the Dispensing Technologies business drove revenue growth and generated operating earnings ahead of the acquisition model, which was not captured by the MIP funding calculation.

 

   

the costs absorbed by the Company associated with divesting non-core businesses, including the divestiture of the Nicolet neurodiagnostics business; these “stranded costs” associated with divestitures negatively impacted the MIP funding calculation.

 

   

the important investments by the Company in manufacturing and other process improvements, including expenditures related to the Company’s quality systems and product quality, which negatively impacted the MIP funding calculation.

The Compensation Committee believed that these activities furthered the Company’s strategy and were in the long-term interests of the Company’s stockholders. The Compensation Committee considered these items, as well as the Company’s overall financial performance during fiscal 2012, in which the Company significantly grew operating income, adjusted earnings per share from continuing operations and operating cash flow. The Compensation Committee also acknowledged the Company’s progress in building a foundation for long-term growth, including efforts to reduce the complexity of our infrastructure, reduce administrative expenses and

 

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make additional investments in research and development initiatives. After considering the Company’s performance against the pre-established MIP targets, and the additional factors summarized above, the Compensation Committee approved MIP funding at 85% of target.

For both Mr. Hinrichs and Ms. Stafslien, the fiscal 2012 MIP award payouts set forth above reflect a MIP payout at 85% of target, consistent with the overall MIP funding. Messrs. Gallahue and Leonard each received a MIP payout above 85% of target for fiscal 2012, based on the application of the individual performance factor discussed above. The Compensation Committee recognized the contributions of Mr. Gallahue to the Company in his first full year as Chief Executive Officer, including his leadership in developing the Company’s long-term strategic growth plan, and driving reduced complexity of our infrastructure and increased investments in research and development initiatives. With respect to Mr. Leonard, the Compensation Committee recognized Mr. Leonard’s performance in his new role as President, Medical Systems, and that the performance of the Medical Systems segment in fiscal 2012 was a significant driver of the Company’s strong financial results for the year. In addition, the Medical Systems segment executed on key growth and expansion initiatives, including the successful acquisition and integration of companies like Rowa and PHACTS. For Mr. Jain, the Compensation Committee approved a MIP payout below 85% of target. In making this determination, the Compensation Committee acknowledged that the Procedural Solutions segment performed below expectations for fiscal 2012.

As discussed in the Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the SEC on January 31, 2013, we delayed the filing of our Form 10-K in connection with a review of our accounting for sales–type leases associated with our medication and supply dispensing products. As discussed in the Form 10-K, we concluded that a modification was necessary in order to properly apply lease accounting principles to our sales–type leases. This modification resulted in a change in the manner in which we estimate the fair value of leased assets in accounting for our sales–type leases, which impacts how we record revenue associated with our sales–type leases. As a result, we revised our historical financial information included in the Form 10-K, as well as our preliminary financial results for fiscal 2012. In January 2013, the Compensation Committee assessed the cumulative impact of the modification to the Company’s method of accounting for sales-type leases and the subsequent events described in the Form 10-K on the MIP calculations for fiscal years 2010 through 2012 and determined that the cumulative impact would not have been material. After considering the impact, as well as the facts and circumstances regarding the modification and the delay in the filing of the Annual Report on Form 10-K, the Compensation Committee reaffirmed its previously approved MIP funding and MIP award payouts to our named executive officers for fiscal 2012.

MIP award payouts to our named executive officers are designed to be performance-based compensation, and therefore to be fully tax deductible under the Tax Code. For fiscal 2012, our Compensation Committee established an overall Company performance criterion of $313 million of EBIT, which had to be satisfied before any payout could be made to our named executive officers under the MIP. For fiscal 2012, the Compensation Committee established a MIP framework whereby, if this performance criterion was met, each of our named executive officers could be awarded a MIP bonus up to 200% of his or her MIP target, subject to the Compensation Committee’s negative discretion to award incentive payments in lesser amounts. For fiscal 2012, the Company generated EBIT in excess of the threshold, which allowed the Compensation Committee to approve the MIP payouts discussed above. The Compensation Committee exercised its discretion to approve MIP payouts less than 200% based on Company performance relative to the MIP funding matrix and the additional considerations discussed above.

Long-Term Equity-Based Incentive Awards. Prior to the spinoff, Cardinal Health approved the CareFusion Corporation 2009 Long-Term Incentive Plan (the “LTIP”), which was then approved by our stockholders in November 2010. The LTIP provides for the grant of stock options, restricted stock, RSUs, performance cash, PSUs and other equity-based awards. We intend to grant long-term equity-based incentive awards under the LTIP to our eligible employees on an annual basis in connection with our compensation planning process each August. On August 15, 2011, we granted eligible employees, including our named executive officers, equity-based awards under the LTIP as part of our fiscal 2012 annual LTI award.

 

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In connection with the fiscal 2012 annual LTI award, we established target award values for each of our named executive officers using competitive market data for similar positions based on the comparator group. We targeted LTI award values within a range of the 50th to 65th percentile of the comparator group, primarily to reflect differences in individual performance, pay history, experience in role and internal equitability. We believe that this is consistent with a business emphasizing long-term growth and innovation. To accomplish the compensation objectives discussed above, we granted our named executive officers a combination of stock options, RSUs and PSUs during fiscal 2012.

Stock Options. Stock options are intended to align executives with the interests of stockholders in increasing sustainable, long-term stockholder value. We view stock options as an element of performance-based compensation because a stock option provides no realizable value upon grant. These instruments only deliver value to a recipient if the price of our common stock increases above the price at the time of grant and vesting requirements have been met. Our stock options are granted with an exercise price equal to the closing market price for our common stock on the date of grant and provide no cash benefit if the option is not exercised when the price of the stock exceeds the grant price during the option’s term. Our stock options typically vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

RSUs. We grant our executives RSUs primarily to ensure that our executives maintain an ownership stake in the Company. By providing an ownership stake in the Company, RSUs align executives’ financial interests with stockholders’ interests. We believe RSUs also aid in retention and provide value to our executives, given that we do not provide pensions. Our RSUs typically vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

PSUs. PSUs are intended to reward our executives for the achievement of specified multi-year performance goals. As performance-based compensation, PSUs will only vest if the performance goals are achieved during the specified performance period. In fiscal 2012, we granted PSUs to our executive officers with performance goals based on the achievement of the compounded annual growth rate (“CAGR”) of the Company’s fully diluted, adjusted earnings per share over the three year performance period beginning July 1, 2011 and ending June 30, 2014. The payout amount for these PSUs will vary between 0% – 200% of a target number of shares of common stock based on performance relative to the CAGR target established for the performance period. If the performance target is achieved, these awards will “cliff-vest” on the third anniversary of the grant date. If the Company does not meet the minimum performance target, then the PSUs will not vest and no shares will be delivered to the executive officer. As a general matter, achievement of targeted performance goals is difficult, requiring significant and sustained effort on the part of our executives. Achievement of the targeted performance goals for our PSUs requires superior performance relative to underlying market growth rates, although, as a general matter, we anticipate the minimum targets to be more readily achievable.

Fiscal 2012 annual LTI awards for our named executive officers were comprised of stock options, PSUs and RSUs allocated 50%, 25% and 25%, respectively, of the total LTI target award values. The following table sets forth the determinations of our Compensation Committee in August 2011 with respect to the fiscal 2012 annual LTI awards for our named executive officers:

 

Name

 

Position

  Total LTI Target
Award Value ($)
    Stock Options1
(# shares)
    RSUs1
(#  shares)
    PSUs1,2
(#  shares)
 

Kieran T. Gallahue

  Chairman and CEO   $ 7,500,000        503,306        73,357        73,357   

James F. Hinrichs

  Chief Financial Officer   $ 2,387,025        160,187        23,347        23,347   

Thomas J. Leonard

  President, Medical Systems   $ 1,141,250        76,586        11,162        11,162   

Vivek Jain

  President, Procedural Solutions   $ 1,197,375        80,353        11,711        11,711   

Joan B. Stafslien

  EVP, General Counsel, Chief Compliance Officer and Secretary   $ 1,031,288        69,207        10,087        10,087   

 

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1 

The fiscal 2012 annual LTI award was granted on August 15, 2011 pursuant to the LTIP. Stock options and RSUs vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date. Stock options granted as part of the fiscal 2012 annual LTI award have an exercise price of $25.56, the closing price of our common stock on the NYSE on the date of grant, and have a term of seven years. The 2012 annual LTI award amounts are based on the total award value, allocated to stock options, RSUs and PSUs, as discussed above. The share amounts for stock options were determined by dividing the award value allocated to stock options by the grant date fair value associated with an option to purchase our common stock using a Black-Scholes-Merton valuation model. The share amounts for RSUs and PSUs were determined by dividing the award values allocated to RSUs and PSUs by $25.56, the closing price of our common stock on the NYSE on the date of grant.

2 

Reflects target number of shares subject to PSUs, assuming all performance goals and other requirements are met. As discussed above, the PSUs will be earned from 0% – 200% of target based on the achievement of performance goals related to the Company’s ability to grow its earnings per share, with payment in shares following the conclusion of the three-year performance period.

The RSUs granted to our named executive officers are designed to be performance-based compensation under the Tax Code and to be fully tax deductible. For the RSUs granted to our named executive officers as part of the fiscal 2012 annual LTI award, our Compensation Committee established a performance condition of $313 million of EBIT, which had to be satisfied before the RSUs would vest. For fiscal 2012, the Company generated EBIT in excess of the threshold. Since the performance condition has been satisfied, the RSUs will vest as to 33 1/3% of the shares subject to the award on each of the first three anniversaries of the grant date.

Other Benefits and Perquisites. Our named executive officers are eligible to participate in employee benefit programs generally offered to our other employees. In addition, we provide certain other perquisites to our named executive officers that are not generally available to other U.S. employees, as described below. These perquisites are reported in the “Summary Compensation Table” included in the Executive Compensation section of this Proxy Statement.

Company Aircraft. The Company utilizes corporate-owned aircraft for business purposes to help increase the productivity of its global business operations, while also providing transportation flexibility and security. The Compensation Committee has approved an aircraft utilization policy that sets forth the guidelines and procedures for use of the aircraft by Company executives and members of the Board. While personal use of the corporate-owned aircraft is permitted, it is generally limited. During fiscal 2012, Mr. Gallahue was the only named executive officer to utilize the aircraft for personal travel, and the “Summary Compensation Table” included in the Executive Compensation section of this Proxy Statement reflects $3,702 related to such personal use.

Relocation Program. We maintain a relocation program that provides relocation benefits to our employees, including executive officers, who are relocated for business reasons. Under this program, we provide relocation assistance, which may include reimbursement for commuting expenses, temporary living expenses, home sale expenses, household goods moving and storage, and cost of living adjustments. In anticipation of the spinoff, Cardinal Health agreed to provide several of our executive officers with relocation benefits under the Cardinal Health relocation policy when they left existing positions with Cardinal Health to join CareFusion. We assumed obligations under this policy in connection with the spinoff, which included obligations to Messrs. Hinrichs, Jain and Leonard. During fiscal 2012, we paid Messrs. Jain and Hinrichs $20,769 and $2,378, respectively, related to these relocation benefits. For more detailed information regarding the relocation benefits provided to our named executive officers, see the “Summary Compensation Table” included in the Executive Compensation section of this Proxy Statement.

Deferred Compensation Plan. We maintain a non-qualified Deferred Compensation Plan to allow executives to accumulate wealth on a tax-deferred basis and to be competitive in recruiting and retaining executive talent. We do not provide for wealth accumulation for retirement through defined benefit pensions or supplemental executive retirement plans. For Cardinal Health employees who became our employees following

 

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the spinoff, including our named executive officers, we assumed the obligations for benefits accrued while Cardinal Health employees under the Cardinal Health Deferred Compensation Plan. Our Deferred Compensation Plan permits certain management employees to defer payment and taxation of a portion of salary and bonus and receive an investment return on the deferred amount based on several investment alternatives. In addition, we typically make additional matching and fixed contributions to the deferred balances of employees, including our named executive officers, subject to limits discussed below under the heading “Executive Compensation—Nonqualified Deferred Compensation in Fiscal 2012.” Contributions made by CareFusion with respect to our named executive officers are set forth in the “Summary Compensation Table” included in the Executive Compensation section of this Proxy Statement.

All other perquisites that we provide to our named executive officers are minimal. During fiscal 2012, Messrs. Gallahue, Leonard and Jain and their spouses participated in our annual sales incentive award trip for high-performing members of our sales team at Company expense. Participation by Messrs. Gallahue, Leonard and Jain was part of their management responsibility and was intended to enhance the overall value and meaningfulness of the sales award trip for our top sales performers. During fiscal 2011, we also paid the legal fees associated with the employment agreement with Mr. Gallahue. Our named executive officers are also eligible for reimbursement for executive physical examinations, and they participate in programs generally offered to our other employees, including medical insurance, dental insurance, life insurance and long-term disability insurance and our 401(k) Savings Plan. For more detailed information regarding benefits and perquisites provided to our named executive officers, see the “Summary Compensation Table” included in the Executive Compensation section of this Proxy Statement.

Agreements Regarding Executive Compensation

The Compensation Committee reviews and approves, or makes recommendations to the Board to approve, any employment agreements or offer letters with our named executive officers relating to compensation or separation payments. During fiscal 2011, we entered into an employment agreement with Mr. Gallahue when we hired him to become our Chairman and Chief Executive Officer, and we entered into an offer letter with Mr. Hinrichs in connection with his promotion to the position of Chief Financial Officer. We are also a party to offer letters that were previously entered into with our other named executive officers. These employment agreements and offer letters establish baseline compensation and benefits levels, which we believe has helped us to attract, retain and motivate our named executive officers, particularly in the context of the spinoff.

Kieran T. Gallahue. On January 29, 2011, we entered into an employment agreement with Mr. Gallahue with respect to his employment as our Chairman and Chief Executive Officer. The agreement provides for an initial term of three years and will automatically renew thereafter for consecutive one-year terms unless earlier terminated by either party upon 180 days’ advance notice. The agreement provides that, during the term of the agreement, Mr. Gallahue will receive an annual base salary of not less than $1,150,000 and be eligible for a target annual bonus under the MIP of not less than 120% of his annual base salary payable based on performance objectives to be determined by the Compensation Committee. We also paid Mr. Gallahue a cash sign-on bonus of $650,000, which he was required to repay if he had voluntarily terminated his employment for certain reasons prior to January 29, 2012. The agreement also provides that Mr. Gallahue will be eligible to participate in the Company’s employee benefits programs, which include retirement savings, nonqualified deferred compensation, health and welfare, and perquisite programs, and will be given paid vacation, in accordance with plans and policies in effect for other senior executives. We also agreed to reimburse Mr. Gallahue for legal fees and expenses up to $45,000 in connection with his diligence of the Company and the negotiation and execution of the agreement.

Pursuant to the agreement, Mr. Gallahue was granted a sign-on equity award on February 15, 2011 comprised of PSUs based on a grant value of $7.2 million. These PSUs will vest on the third anniversary of the grant date, subject to the Company’s achievement of certain stock price targets after the first year, but prior to the third year from the date of grant and which are maintained for the requisite number of trading days. For

 

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additional details regarding these PSUs, see footnote 5 to the table of “Outstanding Equity Awards at Fiscal-Year-End for Fiscal 2012” included in the Executive Compensation section of this Proxy Statement. In addition, to compensate Mr. Gallahue for the forfeiture of the value of equity grants from his previous employer, the agreement provided for the grant of buy-out equity awards comprised of stock options with a value of $5.66 million and RSUs with a value of $10.58 million. The buy-out equity award included RSUs in an amount that was intended to correspond to the intrinsic value of the in-the-money stock options and the value of the RSUs that he would forfeit upon joining CareFusion, and stock options in an amount intended to compensate him for the difference between the accounting fair value and the intrinsic value of forfeited stock options. We granted these stock options and RSUs to Mr. Gallahue on February 15, 2011, which will vest in annual installments of 33 1/3% on each of the first three anniversaries of the grant date, provided that Mr. Gallahue is employed with the Company on the applicable vesting date. The agreement also provided that Mr. Gallahue would be eligible for the annual LTI award in fiscal 2012 and for future annual LTI awards consistent with the Company’s practices for equity grants to management then in effect. In the event we terminate Mr. Gallahue’s employment without cause or Mr. Gallahue terminates his employment for good reason, the buy-out equity awards shall vest, to the extent not then vested, as to the next annual installment; provided that, in the event that such a termination occurs within two years following a “change of control” (as defined in the agreement), the buy-out equity awards shall vest in full. With respect to the PSUs granted as a sign-on equity award, in the event of such a termination prior to the third anniversary of the grant date, all PSUs that would have vested prior to such date based on the achievement of the associated stock price targets will vest; provided that, in the event such a termination occurs within two years following a change of control, and is after the first anniversary but before the third anniversary of the grant date, all PSUs with an associated stock price target at or below the per share consideration in the change of control transaction shall vest in full. Pursuant to the agreement, Mr. Gallahue also agreed to a number of restrictive covenants during the term of the agreement and for a period thereafter. The agreement also establishes the amount of severance payments to be paid in connection with a termination of employment of Mr. Gallahue during the term of the agreement, as discussed below in the Executive Compensation section of this Proxy Statement under the heading “Potential Payments on Termination or Change in Control—Kieran T. Gallahue.”

James F. Hinrichs. On November 29, 2010, we entered into an offer letter with Mr. Hinrichs with respect to his employment as our Chief Financial Officer. The offer letter provides for an annual base salary of $515,000 and a target annual bonus under the MIP of 80% of his annual base salary. In addition, pursuant to the offer letter, Mr. Hinrichs was granted a sign-on equity award comprised of stock options with a value of $1.5 million. We granted these stock options to Mr. Hinrichs on December 15, 2010, which will vest in annual installments of 33 1/3% on each of the first three anniversaries of the grant date, provided that Mr. Hinrichs is employed with the Company on the applicable vesting date. The offer letter also provided that Mr. Hinrichs would be eligible for an annual LTI award in fiscal 2012, and the target expected value would be 450% of his base salary. The letter also provided for additional vesting in the event of certain terminations of employment on or before July 29, 2012. The offer letter also establishes the amount of severance payments to be paid in connection with a termination of employment of Mr. Hinrichs during the term of the agreement, as discussed below in the Executive Compensation section of this Proxy Statement under the heading “Potential Payments on Termination or Change in Control—James F. Hinrichs.”

Vivek Jain. Mr. Jain was hired by Cardinal Health as Executive Vice President – Corporate Development and Business Strategy in August 2007. In November 2008, in anticipation of the proposed spinoff of CareFusion from Cardinal Health, Mr. Jain accepted the position of President of the Medical Technologies and Services segment of Cardinal Health and agreed to relocate to San Diego. In connection with taking this new assignment based in San Diego, Cardinal Health entered into an offer letter with Mr. Jain. We assumed the obligations of Cardinal Health under the offer letter in connection with the spinoff. The offer letter established base salary, LTI target and MIP target for Mr. Jain as President of the Medical Technologies and Services segment. In addition, the offer letter provided for relocation benefits under the Cardinal Health executive relocation policy in connection with his relocation to San Diego from Ohio, which included a cost of living adjustment and a loss on home sale benefit. The offer letter also provides for severance payments to be paid in connection with a

 

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termination of employment of Mr. Jain under certain circumstances, as discussed below in the Executive Compensation section of this Proxy Statement under the heading “Potential Payments on Termination or Change in Control—Vivek Jain.”

Severance Benefits and Payments Upon a Change in Control

For our named executive officers with employment agreements or offer letters, severance and change in control benefits are generally included in these agreements, as discussed above. For our named executive officers who are not covered by specific agreements or arrangements, we maintain Executive Severance Guidelines, which establish indicative amounts of severance payments and benefits payable to executives in connection with a termination of employment by the Company without cause or by an executive for good reason, and an Executive Change in Control Severance Plan, which provides for severance payments and benefits to executives who experience an eligible termination within 24 months following a change in control of the Company. In addition, our standard forms of equity grant agreements and the LTIP include terms that provide for acceleration of vesting in connection with a change in control. You can find additional information regarding severance payments and benefits, as well as a tabular summary of these benefits, below in the Executive Compensation section of this Proxy Statement under the heading “Potential Payments on Termination or Change in Control.”

The Executive Severance Guidelines are considered by the Compensation Committee in providing severance payments and benefits to certain executive-level employees in the event of a termination of employment by the Company without “cause” or by the executive for “good reason.” The Executive Severance Guidelines are intended to establish an indicative amount of severance, and payments and benefits may be higher or lower than as recommended in the Executive Severance Guidelines, as determined in the sole discretion of the Compensation Committee. During fiscal 2012, the Executive Severance Guidelines provided for cash severance payments to eligible executives in an amount equal to one year of their base salary plus the average of their actual awards under the MIP for the two years prior to the year that employment is terminated. In addition, the Executive Severance Guidelines provided that these executive officers would also be entitled to a pro-rated MIP award based on actual performance for the year in which they are terminated. In June 2012, the Compensation Committee approved the amendment and restatement of the Executive Severance Guidelines, effective July 1, 2012. The amendment and restatement of the Executive Severance Guidelines was intended to reduce the number of executives subject to the guidelines and reduce the amount of severance payable under the guidelines. The Executive Severance Guidelines now provide for cash severance equal to one year of base salary, plus a potential additional payment in an amount up to the average of the prior two years’ annual cash incentive awards under the MIP. The amended and restated Executive Severance Guidelines also provide for health benefits continuation and outplacement services for a period of one year; however, they no longer provide for a pro-rated MIP award for the year of termination. All payments and benefits under the Executive Severance Guidelines are conditioned upon the receipt by the Company of a waiver and release of claims.

The Executive Change in Control Severance Plan (the “CIC Plan”) provides for benefits to our named executive officers in connection with a change in control of the Company. The purpose of the CIC Plan is to establish severance benefits for key executives in the event of a change in control, so they will continue to serve and provide objective advice and counsel to the Company and contribute meaningfully to change in control transactions that are in the best interests of the Company’s stockholders. During fiscal 2012, the CIC Plan provided that, upon an involuntary termination without “cause” or a voluntary termination for “good reason” within 24 months following a change in control, executives at or above the level of senior vice president would receive cash severance equal to two times their annual base salary and target annual bonus, as well as a pro-rated target bonus in the year of termination. The CIC Plan also provides for other post-termination benefits such as outplacement services and continuation of health insurance coverage for a certain period of time. In June 2012, the Compensation Committee approved the amendment and restatement of the CIC Plan, effective July 1, 2012. The amendment and restatement of the CIC Plan was intended to reduce the number of executives subject to the plan, provide additional clarity around various provisions, and reduce the amount of severance payable under the plan. Under the amended and restated CIC Plan, upon an involuntary termination without cause or a voluntary termination for good reason within 24 months following a change in control, executives at or above the level of

 

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executive vice president will receive cash severance equal to two times their annual base salary and target annual bonus; executives at the level of senior vice president will receive cash severance equal to 1.5 times their annual base salary and target annual bonus; and certain executives at the level of vice president will receive cash severance equal to one times their annual base salary and target annual bonus. The CIC Plan does not provide for tax gross-up payments relating to the payment of any excise tax on the extent to which an executive’s severance constitutes excess parachute payments under Sections 4999 and 280G of the Tax Code. However, the CIC Plan does provide for a “cutback,” so that to the extent severance payments to an executive under the CIC Plan would trigger the excise tax, payments will be reduced to the extent necessary to prevent any portion of the payments from becoming nondeductible by us under Section 280G of the Tax Code or subject to the excise tax imposed under Section 4999 of the Tax Code, but only if, by reason of that reduction, the net after-tax benefit received by the executive exceeds the net after-tax benefit the executive would receive if no reduction was made.

In addition, our named executive officers will receive accelerated vesting of their LTI awards in connection with a change in control. Historically, our standard forms of agreements for equity awards granted under the LTIP contained a “single-trigger” vesting provision, meaning they will vest in full upon a change in control. Single-trigger treatment of equity awards can ensure that ongoing employees are treated the same as terminated employees with respect to outstanding equity awards. In addition, single-trigger equity awards can assist in retaining key employees in the face of a potential change of control by providing a benefit if they remain with the Company through the date of the change of control. Our Compensation Committee recognizes that equity awards with a “double-trigger” vesting provision, meaning they will vest in full only if there is a change in control and an award recipient’s employment is terminated, can be a valuable retention tool. Such provisions can help ensure that executives remain with the Company before, during, and after a change in control, which can help protect the interests of the Company’s stockholders, but which can also provide value to an acquirer. In fiscal 2011, we granted Mr. Gallahue sign-on and buy-out equity awards that included a double-trigger vesting provision as discussed above under “Agreements Regarding Executive Compensation—Kieran T. Gallahue.” In June 2012, the Compensation Committee approved new forms of LTI agreements for equity grants to all employees, including our named executive officers, which replace the existing single-trigger vesting provision with double-trigger vesting. Under these new agreements, the vesting of the awards (and exercisability in the case of stock options) will be accelerated only if the recipient’s employment is terminated by the Company other than for “cause” or by the recipient for “good reason,” in either case within two years following the “change of control” (as such terms are defined in the amended agreements for the awards). The terms of these new agreements applied to the annual LTI award in August 2012, and will be used prospectively for future LTI awards.

Compensation Determinations for Fiscal 2013

In August 2012, our Compensation Committee considered the compensation of our named executive officers for fiscal 2013. The Compensation Committee determined to increase the annual base salaries of our named executive officers from fiscal 2012 levels by between 0% and 6%, primarily as a result of the U.S. merit budget funding and individual performance and taking into account assessment of market data. MIP targets as a percentage of base salary for these officers were not changed. The following table sets forth the determinations of our Compensation Committee with respect to our named executive officers for fiscal 2013 base salaries and fiscal 2013 MIP targets:

 

         Annual Base Salary Rate     Fiscal 2013 MIP Target  

Name

  

Position

  Fiscal 2012     Fiscal 2013     Percent
Change
    Percentage
of Base
Salary Rate
    Total Award
Value
 

Kieran T. Gallahue

   Chairman and CEO   $ 1,150,000      $ 1,150,000        0     125   $ 1,437,500   

James F. Hinrichs

   Chief Financial Officer   $ 530,450      $ 546,364        3     80   $ 437,091   

Thomas J. Leonard

   President, Medical Systems   $ 456,500      $ 483,890        6     80   $ 387,112   

Vivek Jain

   President, Procedural Solutions   $ 478,950      $ 478,950        0     80   $ 383,160   

Joan B. Stafslien

   EVP, General Counsel, Chief Compliance Officer and Secretary   $ 458,350      $ 481,268        5     70   $ 336,887   

 

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In August 2012, our Compensation Committee also approved the fiscal 2013 annual LTI award, which included equity-based awards for our named executive officers. Consistent with the prior year, the Compensation Committee determined to include stock options, RSUs and PSUs as part of the fiscal 2013 annual LTI award, with the stock options and RSUs subject to three-year vesting as to 33 1/3% of the shares subject to the award on each of the first three anniversaries of the grant date. The PSUs will be earned based on the achievement of performance goals, with payment in shares following the conclusion of the three-year performance period beginning July 1, 2012 and ending June 30, 2015. For the fiscal 2013 annual LTI award, the Compensation Committee established a performance goal for the PSUs based on the same financial metric used for PSUs granted in fiscal 2012, namely the Company’s ability to grow its adjusted earnings per share. Consistent with fiscal 2012, the fiscal 2013 annual LTI awards granted to our named executive officers were comprised of stock options, RSUs and PSUs, allocated 50%, 25% and 25%, respectively, of the total award values.

The following table sets forth the determinations of our Compensation Committee in August 2012 with respect to our named executive officers for the fiscal 2013 annual LTI award:

 

Name

  

Position

   Total LTI Target
Award Value ($)
     Stock  Options1
(# shares)
     RSUs1
(#  shares)
     PSUs1,2
(# shares)
 

Kieran T. Gallahue

   Chairman and CEO    $ 7,500,000         478,392         69,989         69,989   

James F. Hinrichs

   Chief Financial Officer    $ 2,458,636         156,826         22,944         22,944   

Thomas J. Leonard

   President, Medical Systems    $ 1,451,670         92,596         13,547         13,547   

Vivek Jain

   President, Procedural Solutions    $ 1,317,113         84,013         12,291         12,291   

Joan B. Stafslien

   EVP, General Counsel, Chief Compliance Officer and Secretary    $ 1,082,852         69,070         10,105         10,105   

 

1 

The fiscal 2013 annual LTI award was granted on August 15, 2012 pursuant to the LTIP. Stock options and RSUs vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date. These stock options have an exercise price of $26.79, the closing price of our common stock on the NYSE on the date of grant, and have a term of seven years. These RSUs are designed to be performance-based compensation under the Tax Code and to be fully tax deductible, and they include a performance condition of $313 million of EBIT, which has to be satisfied before the RSUs will vest. The 2013 annual LTI award amounts are based on the total award value, allocated to stock options, RSUs and PSUs, as discussed above. The share amounts for stock options were determined by dividing the award value allocated to stock options by the grant date fair value associated with an option to purchase our common stock using a Black-Scholes-Merton valuation model. The share amounts for RSUs and PSUs were determined by dividing the award values allocated to RSUs and PSUs by $26.79, the closing price of our common stock on the NYSE on the date of grant.

2 

Reflects target number of shares subject to PSUs, assuming all performance goals and other requirements are met. As discussed above, the PSUs will be earned from 0% – 200% of target based on the achievement of performance goals related to the Company’s ability to grow its earnings per share, with payment in shares following the conclusion of the three-year performance period.

Policies, Guidelines and Practices Related to Executive Compensation

Stock Ownership Guidelines. To more closely align our executive officers’ and directors’ interests with the interests of our stockholders, we maintain a set of stock ownership guidelines that require:

 

   

our Chief Executive Officer to accumulate and hold a number of shares of stock valued at five times his base salary within five years after becoming an officer;

 

   

our other executive officers to accumulate and hold a number of shares of stock valued at three times their base salaries within five years after becoming an officer; and

 

   

our directors to accumulate and hold a number of shares of stock valued at five times the annual cash retainer within five years after joining our Board.

 

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In addition to direct holdings, shares owned jointly or separately from a spouse and/or children, shares held in trust, shares subject to deferred delivery, and unvested RSUs are also counted for purposes of the stock ownership guidelines. As of June 30, 2012, all of our non-employee directors held shares valued in excess of five times the annual cash retainer. As our executive officers assumed their current roles with CareFusion in connection with or subsequent to the spinoff, they still have several years to accumulate the required number of shares set forth above.

Potential Impact on Compensation from Executive Misconduct. Under the LTIP and MIP, we have the authority to require repayment, or subject outstanding awards to forfeiture, in certain instances of executive officer misconduct. Under the LTIP and MIP, we can seek recovery when a payment was based on the achievement of financial results that were subsequently restated if the executive officer engaged in misconduct that caused or contributed to the need for the restatement of previously filed financial statements.

Under our standard form of stock option agreement, an unexercised option is forfeited if the holder has engaged in specified conduct, as described below, while employed by us or for a period of three years following termination of employment, and we may require the holder to repay the gross option gain realized from the exercise of the options exercised within three years prior to such conduct. Under our standard form of RSU agreement, unvested RSUs and deferred RSUs that vested within the look-back period (three years) of the RSU agreement are forfeited if the holder has engaged in specified conduct, described below, while employed by us or for three years after termination of employment. Moreover, we may require the holder to repay the value of the RSUs settled within three years prior to such conduct. The specified conduct includes:

 

   

disclosure or use of confidential information;

 

   

violation of our policies;

 

   

solicitation of business or our employees;

 

   

disparagement;

 

   

breach of any provision of an employment agreement or severance agreement; and

 

   

competitive actions (during employment and for a period of 12 months following termination of employment).

We may also terminate all vested stock options if the executive’s employment is terminated for cause. We may also seek damages for breach of contract or seek other equitable relief.

Equity Grant Practices. Our fiscal year ends on June 30, and we expect to grant an annual LTI award to eligible employees, including our named executive officers, on or about August 15 of each year. In the event of grants related to new hires, promotions, or other off-cycle awards, the grants are made on the 15th day of the month or the first business day to follow the 15th day of the month.

Policy on Stock Hedging, Pledging and Margin Activities. Our policy on buying and selling stock and securities prohibits hedging transactions by Company employees. Under the policy, all short-term, speculative or hedging transactions in CareFusion securities are now prohibited by all employees. In addition, the policy was recently amended to specifically prohibit the use of CareFusion securities for pledging and margin activities.

Tax and Accounting Matters

Section 162(m) of the Tax Code places a limit of $1,000,000 on the amount of compensation that we may deduct in any one year with respect to certain named executive officers. There is an exception to the $1,000,000 limitation for performance-based compensation meeting certain requirements. Our LTIP and MIP are also structured generally to allow for the payment of performance-based compensation meeting those requirements and, as such, to be fully deductible. In order to preserve the deductibility under Section 162(m) of the Tax Code

 

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of the compensation payable under our MIP and LTIP, we obtained stockholder approval of these plans at our November 3, 2010, annual meeting of stockholders to satisfy the requirements of Section 162(m) of the Tax Code. It is the Compensation Committee’s general policy to endeavor to minimize the adverse effect of Section 162(m) of the Tax Code on the deductibility of compensation expense; however, the Compensation Committee maintains flexibility in compensating executive officers in a manner designed to promote varying company goals.

The Compensation Committee also considers the impact of Section 409A of the Tax Code, and the compensation plans, programs and agreements are, in general, designed to be exempt from or comply with the requirements of that section so as to avoid possible adverse tax consequences that may result from noncompliance with Section 409A.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with the Company’s management. Based on this review and its discussions with management, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Submitted by the Human Resources and Compensation Committee of the Board of Directors:

Gregory T. Lucier, Chair

Michael D. O’Halleran

Robert F. Friel

 

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EXECUTIVE COMPENSATION

The following tables contain compensation information for our named executive officers for the fiscal year ended June 30, 2012. Until the completion of our spinoff from Cardinal Health on August 31, 2009, CareFusion was a wholly owned subsidiary of Cardinal Health. Accordingly, the information included below for periods prior to August 31, 2009 reflect amounts paid by Cardinal Health. The information included in the tables below should be read in conjunction with the Compensation Discussion and Analysis, which can be found on page 33 of this Proxy Statement.

Summary Compensation Table

 

Name and Principal
Position

  Year     Salary     Bonus     Stock
Awards1
    Option
Awards2
    Non-
Equity
Incentive
Plan
Compen-
sation3
    Change in
Pension Value
and Non-
qualified
Deferred
Compensation
Earnings
    All Other
Compen-
sation4
    Total  

Kieran T. Gallahue

Chairman and CEO

    2012      $ 1,150,000      $ —       $ 3,750,010      $ 3,749,630      $ 1,282,969      $     —      $ 34,003      $ 9,966,612   
    2011      $ 482,188      $ 650,000 5    $ 17,780,007 6    $ 5,660,003 6   $ 578,466      $      $ 72,193      $ 25,222,857   

James F. Hinrichs

Chief Financial Officer

    2012      $ 528,073      $ —       $ 1,193,499      $ 1,193,393      $ 360,706      $      $ 35,320      $ 3,310,991   
    2011      $ 447,736      $ —       $ 354,889      $ 1,855,068 7   $ 305,362      $      $ 51,647      $ 3,014,702   

Thomas J. Leonard

    2012      $ 450,115      $ —       $ 570,601      $ 570,566      $ 372,504      $      $ 41,738      $ 2,005,524   

President, Medical

    2011      $ 412,750      $ —       $ 245,418      $ 490,854      $ 469,352      $      $ 33,846      $ 1,652,220   

Systems

                 

Vivek Jain

    2012      $ 476,804      $ —       $ 598,666      $ 598,630      $ 260,549      $      $ 53,820      $ 1,988,469   

President,

    2011      $ 471,058      $ —       $ 264,371      $ 528,771      $ 179,001      $      $ 115,200      $ 1,558,401   

Procedural Solutions

    2010      $ 450,000      $ —       $ 1,771,865      $ 506,331      $ 702,675      $      $ 709,563 8    $ 4,140,434   

Joan Stafslien

    2012      $ 456,296      $ —       $ 515,647      $ 515,592      $ 272,718      $      $ 28,085      $ 1,788,338   

EVP, General Counsel,

                 

Chief Compliance

                 

Officer and Secretary

                 

 

1 

Stock awards consist of restricted stock units (“RSUs”) and performance stock units (“PSUs”). Amounts shown reflect grant date fair value computed in accordance with Accounting Standards Codification (“ASC”) Topic 718 (without regard to estimates of forfeitures related to service-based vesting), rather than an amount paid to or realized by the named executive officer. RSU and PSU awards were valued as of the grant date by multiplying the closing price of the common stock on the NYSE on that date by the number of shares subject to the awards. PSUs are displayed assuming performance goals are achieved and PSUs are paid out in shares at the target amount. For fiscal 2012, the following amounts represent the target PSU value included in the table by individual: Mr. Gallahue: $1,875,005; Mr. Hinrichs: $596,749; Mr. Leonard: $285,301; Mr. Jain: $299,333; and Ms. Stafslien: $257,823. The actual payout amount of the PSUs will vary between 0% – 200% of the target number of shares of common stock based on performance relative to the pre-established target (see “Grants of Plan-Based Awards for Fiscal 2012” table below).

2 

Amounts shown reflect grant date fair value computed in accordance with ASC Topic 718 (without regard to estimates of forfeitures related to service-based vesting), rather than an amount paid to or realized by the named executive officer. The stock option awards were valued as of the grant date by multiplying the closing price of the common stock on the NYSE on that date by the number of shares subject to the awards, and applying a Black-Scholes-Merton value. All options have a term of seven years. For a discussion of the calculation of the award value of these stock options, including assumptions and methodologies to value these stock options, please see Note 21—Share-Based Compensation to the Company’s financial statements included with the Company’s Annual Report on Form 10-K, filed with the SEC on January 31, 2012.

3 

Amounts represent payments under the CareFusion Corporation Management Incentive Plan (the “MIP”).

4 

The elements of compensation included in “All Other Compensation” for fiscal 2012 are set forth in the table below.

5 

Reflects cash sign-on bonus paid to Mr. Gallahue in connection with his hiring as our Chief Executive Officer in January 2011. For more information, see discussion above in the Compensation Discussion and Analysis under the heading “Agreements Regarding Executive Compensation—Kieran T. Gallahue.”

6 

Reflects sign-on equity award comprised of PSUs based on a grant value of $7.2 million and buy-out equity awards comprised of stock options and RSUs with a value of $5.66 million and $10.58 million, respectively. These awards were granted on February 15, 2011 in connection with the hiring of Mr. Gallahue as our Chief Executive Officer. For more information, see discussion above in the Compensation Discussion and Analysis under the heading “Agreements Regarding Executive Compensation—Kieran T. Gallahue.” The stock options and RSUs were granted with respect to 633,110 and 380,029 shares,

 

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  respectively. The PSUs were granted with respect to 450,094 shares that were issued in five separate tranches, which vest based on the achievement of closing stock price targets (see “Outstanding Equity Awards at Fiscal Year-End for Fiscal 2012” table below). The aggregate fair value of the PSUs was $7.2 million, with the number of shares subject to each tranche of the PSUs determined utilizing a Monte Carlo valuation model. For a discussion of the calculation of the fair value of these PSUs, including assumptions and methodologies to value these PSUs, please see Note 21—Share-Based Compensation to the Company’s financial statements included with the Company’s Annual Report on Form 10-K, filed with the SEC on January 31, 2013.
7 

Includes sign-on equity award comprised of stock options with a grant value of $1.5 million, granted with respect to 192,574 shares. This award was granted on December 15, 2010 in connection with the hiring of Mr. Hinrichs as our Chief Financial Officer. For more information, see discussion above in the Compensation Discussion and Analysis under the heading “Agreements Regarding Executive Compensation—James F. Hinrichs.”

8 

The elements of compensation included in “All Other Compensation” for fiscal 2010 consist primarily of amounts paid to Mr. Jain in connection with his relocation to San Diego, CA in 2008 under the Cardinal Health relocation policy, the obligation of which was assumed by CareFusion. Includes tax reimbursement amounts related to such relocation benefits.

 

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The amounts shown for “All Other Compensation” for fiscal 2012 include (1) contributions to the named executive’s account under the CareFusion 401(k) Savings Plan; (2) contributions to the named executive’s account under the CareFusion Deferred Compensation Plan; (3) perquisites and other personal benefits; (4) tax reimbursements; and (5) relocation payments and benefits in the following amounts:

 

Name

   401(k) Plan
Contributions
     Deferred
Compensation Plan
Contributions
     Perquisites
and Other
Personal
Benefits1
    Tax
Reimbursements
    Relocation2      Total  

Kieran T. Gallahue

   $ 22,312       $ 960       $ 10,731 3,4    $ —       $ —        $ 34,003   

James F. Hinrichs

   $ 20,300       $ 12,642       $ —       $ 196 2    $ 2,182       $ 35,320   

Thomas J. Leonard

   $ 23,825       $ 10,609       $ 7,304 4    $ —       $ —        $ 41,738   

Vivek Jain

   $ 21,393       $ 5,133       $ 6,525 4    $ —       $ 20,769       $ 53,820   

Joan B. Stafslien

   $ 21,800       $ 6,285       $ —       $ —       $ —        $ 28,085   

 

1 

The incremental cost of all perquisites and personal benefits is their actual cost, except for personal use of corporate aircraft. We own and operate our own aircraft, which is used to facilitate business travel of senior executives in as safe a manner as possible and with the best use of their time. Incremental cost is variable operating cost, which includes fuel per flight hour, “deadhead” flights (i.e., empty flights to and from the Company’s hangar or any other location), engine reserves per flight hour (engine reserves are an accrued expense for future maintenance on the aircraft engines), average repair and maintenance costs, travel expenses for flight crew and temporary pilot costs, and actual per flight hangar and parking ramp fees, landing fees, catering and miscellaneous handling charges for flights that actually transport executives, as well as any applicable federal excise tax. Fixed costs, such as flight crew salaries, wages and other employment costs, employee seminars and training, depreciation, building/hangar rent, aircraft lease expense, utilities, general liability insurance and other insurance costs, are not included in the calculation of incremental cost because we incur these expenses regardless of the personal use of the corporate aircraft by the executives. No tax reimbursements are provided to any of our executives for taxes on income attributed to their personal use or immediate family members’ personal use of our corporate aircraft. Amounts associated with personal use of our personal aircraft in fiscal 2012 were as follows: Mr. Gallahue: $3,702.

2 

We maintain a relocation program for certain employees, including executive officers, who are relocated for business reasons. Under this program, we provide relocation assistance, which may include reimbursement for commuting expenses, temporary living expenses, home sale expenses, household goods moving and storage, and cost of living adjustments. During fiscal 2012, we provided relocation benefits to Mr. Jain, who relocated to San Diego, CA in 2008, and Mr. Hinrichs, who relocated to San Diego, CA in 2009. The amounts included in the “Relocation” column reflect the fiscal 2012 relocation benefits for Messrs. Jain and Hinrichs. In addition, the amounts included in the “Tax Reimbursements” column reflect the tax reimbursement amounts related to the fiscal 2012 relocation benefits for Mr. Hinrichs.

3 

Includes $3,702 associated with personal use of the corporate aircraft.

4 

During fiscal 2012, Messrs. Gallahue, Leonard and Jain and their spouses participated in our sales incentive award trip for high-performing members of our sales team at Company expense. Participation by Messrs. Gallahue, Leonard and Jain was part of their management responsibility and was intended to enhance the overall value and effectiveness of the sales award trip. Amounts included in the “Perquisites and Other Personal Benefits” column represent the incremental cost to us of travel, hotel, meals, entertainment and other expenses for Messrs. Gallahue, Leonard and Jain and their spouses. Tax reimbursements were not provided to Messrs. Gallahue, Leonard or Jain with respect to the imputed income associated with the sales award trip.

Employment Agreements and Other Compensation Arrangements

We entered into an employment agreement with Mr. Gallahue in January 2011 related to his employment as our Chairman and Chief Executive Officer, and we entered into an offer letter with Mr. Hinrichs in November 2010 in connection with his promotion to the position of Chief Financial Officer. We are also a party to an offer letter with Mr. Jain, which we assumed in connection with the spinoff from Cardinal Health. These employment agreements and offer letters are discussed in the Compensation Discussion and Analysis under the heading “Agreements Regarding Executive Compensation.”

 

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Grants of Plan-Based Awards for Fiscal 2012

The following table supplements the Summary Compensation Table by providing additional information about plan-based compensation for fiscal 2012:

 

Name

   Grant
Date
    Estimated Potential Payouts
Under Non-Equity

Incentive Plan Awards1
    Estimated Potential Payouts
Under Equity Incentive Plan

Awards2
    All Other
Stock
Awards:
Number of
CareFusion

Stock or
Units3
    All Other
Option
Awards:
Number of
Securities
Underlying
CareFusion
Options4
    Exercise
or Base
Price of
Option
Awards5
    Grant
Date Fair
Value of
Stock and
Option
Awards
 
     Threshold     Target     Maximum     Threshold     Target     Maximum          

Kieran T. Gallahue

                      

MIP

     7/1/2011      $ 0      $ 1,437,500      $ 2,875,000                 

Stock Options

     8/15/2011                      503,306      $ 25.56      $ 3,749,630   

RSUs

     8/15/2011                    73,357          $ 1,875,005   

PSUs

     8/15/2011              0        73,357        146,714            $ 1,875,005   

James F. Hinrichs

                      

MIP

     7/1/2011      $ 0      $ 424,360      $ 848,720                 

Stock Options

     8/15/2011                      160,187      $ 25.56      $ 1,193,393   

RSUs

     8/15/2011                    23,347          $ 596,749   

PSUs

     8/15/2011              0        23,347        46,694            $ 596,749   

Thomas J. Leonard

                      

MIP

     7/1/2011      $ 0      $ 365,200      $ 730,400                 

Stock Options

     8/15/2011                      76,586      $ 25.56      $ 570,566   

RSUs

     8/15/2011                    11,162          $ 285,301   

PSUs

     8/15/2011              0        11,162        22,324            $ 285,301   

Vivek Jain

                      

MIP

     7/1/2011      $ 0      $ 383,160      $ 766,320                 

Stock Options

     8/15/2011                      80,353      $ 25.56      $ 598,630   

RSUs

     8/15/2011                    11,711          $ 299,333   

PSUs

     8/15/2011              0        11,711        23,422            $ 299,333   

Joan B. Stafslien

                      

MIP

     7/1/2011      $ 0      $ 320,845      $ 641,690                 

Stock Options

     8/15/2011                      69,207      $ 25.56      $ 515,592   

RSUs

     8/15/2011                    10,087          $ 257,823   

PSUs

     8/15/2011              0        10,087        20,174            $ 257,823   

 

1 

This information relates to award opportunities granted during fiscal 2012 under the MIP with respect to fiscal 2012 performance. The threshold, target and maximum potential payout amounts reflect 0%, 100% and 200% of target, respectively, based on achievement of Company-wide financial performance goals. As discussed in the Compensation Discussion and Analysis, MIP payouts may be increased or decreased at the discretion of the Compensation Committee based on individual performance using a multiplier of between 0% – 150%, provided that no MIP payment shall exceed 200% of an executive officer’s MIP target. MIP award payouts to our named executive officers are designed to be performance-based compensation under the Tax Code and to be tax deductible in accordance with Section 162(m) of the Tax Code. For fiscal 2012, our Compensation Committee established an overall Company performance criterion of $313 million of EBIT, which had to be satisfied before any payout could be made to our named executive officers under the MIP. For fiscal 2012, the Compensation Committee established a MIP framework whereby, if this performance criterion was met, each of our named executive officers could be awarded a MIP bonus up to 200% of his or her MIP target, subject to the Compensation Committee’s discretion to award bonuses in lesser amounts. For fiscal 2012, the Company generated EBIT in excess of the threshold, and the Compensation Committee exercised its discretion to approve MIP payouts less than 200% based on the performance factors discussed in the Compensation Discussion and Analysis under the heading “Compensation Determinations—Annual Cash Incentive Awards.”

2 

PSUs granted during the fiscal year under the LTIP are subject to the satisfaction of performance criteria during the three-year performance period beginning on July 1, 2011 and ending on June 30, 2014. Our Compensation Committee established performance goals for the PSUs based on the achievement of the Compounded Annual Growth Rate (“CAGR”) of fully diluted, adjusted earnings per share. The payout amount of the PSUs will vary between 0% – 200% of the target number of shares of common stock based on performance relative to the target established for CAGR during the performance period. If the performance target is achieved, these awards will “cliff-vest” on the third anniversary of the grant date. If the Company does not meet the minimum target, then the PSUs will not vest and no shares will be delivered to the executive officer. The grant date fair value of the PSUs is based on the closing price of CareFusion common stock on the NYSE on the grant date.

3 

All stock awards are RSUs granted during the fiscal year under the LTIP. RSUs granted on August 15, 2011, as part of the fiscal 2012 annual LTI award are structured to allow for the deduction of the RSU award value in accordance with Section 162(m) of the Tax Code. For the RSUs granted to our named executive officers as part of the fiscal 2012 annual LTI award, our Compensation Committee established a performance condition of $313 million of EBIT, which had to be satisfied before the RSUs would vest. For fiscal 2012, the Company generated EBIT in excess of the threshold. Since the performance condition has been satisfied, the RSUs will vest as to 33  1/3% of the shares subject to the award on each of the first three anniversaries of the grant date.

4 

All stock option awards are nonqualified stock options granted during the fiscal year under the LTIP, and vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date. All stock options have a term of seven years.

5 

Options have an exercise price equal to the closing price of CareFusion common stock on the NYSE on the grant date.

 

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Compensation Plans

Management Incentive Plan. In connection with the spinoff, the Compensation Committee adopted the MIP, which provides for cash incentive awards to eligible employees, including our named executive officers. Effective July 1, 2010, we amended and restated the MIP, which was approved by our stockholders in November 2010. The MIP is intended to advance the interests of the Company and its stockholders by providing our executive officers and other key employees with an annual bonus incentive to achieve strategic objectives of the Company and its subsidiaries; focus our executive officers and other key employees on measures that drive superior financial and management performance and value creation; provide compensation opportunities that are externally competitive and internally consistent with the Company’s strategic objectives and total rewards strategy; and provide bonus opportunities that reward our executive officers and other employees who are in positions to make significant contributions to the overall success of the Company. For a discussion of our fiscal 2012 MIP performance goals, our performance relative to our goals and our determinations of MIP payouts for fiscal 2012, please see page 40 of this Proxy Statement under the heading “Compensation Discussion and Analysis—Compensation Determinations—Annual Cash Incentive Awards.”

Long-Term Incentive Plan. Prior to the spinoff, Cardinal Health, in its capacity as our sole stockholder, approved the LTIP. The LTIP was approved by our stockholders in November 2010. The LTIP permits the issuance of long-term incentive awards to our employees, directors and employees of our subsidiaries to encourage alignment with stockholders’ interest and share in the Company’s success. Awards under the LTIP may be made in the form of stock options, restricted stock, RSUs, performance cash, PSUs and other equity-based awards. The LTIP is also intended to assist the Company in attracting and retaining individuals in key and critical positions. As set forth in the “Grants of Plan-Based Awards for Fiscal 2012” table above, during fiscal 2012 we granted stock options, RSUs, and PSUs to our named executive officers. For a discussion of the LTIP and the types of awards granted in fiscal 2012 pursuant to the LTIP, please see page 43 of this Proxy Statement under the heading “Compensation Discussion and Analysis—Compensation Determinations—Long-Term Equity-Based Incentive Awards.”

In addition, the LTIP provides for the grant of replacement awards in accordance with the terms of the employee matters agreement entered into with Cardinal Health in connection with the spinoff. The employee matters agreement addressed, among other things, the mechanism for the conversion and adjustment of equity awards (including stock options, stock appreciation rights and RSUs) in connection with the spinoff into replacement awards based on Cardinal Health common shares and/or our common stock, as applicable. For purposes of the vesting of the replacement awards, continued employment or service with Cardinal Health, or with us, will be treated as continued employment for purposes of both Cardinal Health’s and our equity awards. The adjusted Cardinal Health stock options and RSUs and the replacement awards that a holder received in connection with the spinoff were subject to substantially the same terms, vesting conditions and other restrictions, if any, that were applicable prior to the spinoff. Our named executive officers who were employees of Cardinal Health received replacement awards with respect to their outstanding Cardinal Health equity-based awards, which are reflected in the “Outstanding Equity Awards at Fiscal Year-End for Fiscal 2012” table below.

 

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Outstanding Equity Awards at Fiscal Year-End for Fiscal 2012

The following table shows the number of CareFusion shares underlying exercisable and unexercisable stock options and unvested RSUs and PSUs held by our named executive officers on June 30, 2012:

 

    Option Awards     Stock Awards  

Name

  Number of
Securities
Underlying
Unexercised
Options –
Exercisable
    Number of
Securities
Underlying
Unexercised
Options –
Unexercisable
    Option
Exercise
Price
    Option
Expiration
Date
    Number of
Shares or
Units of
Stock
That
Have Not
Vested
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested1
    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested1
 

Kieran T. Gallahue

    211,036       422,074 2   $ 27.84        2/15/2018           
    —          503,306 3,*   $ 25.56        8/15/2018           
    —          —          —          —          326,710 4,*   $ 8,389,913        523,451 5,6,*   $ 13,442,222   

James F. Hinrichs

    703        —        $ 17.77 7      9/2/2012           
    1,069        —        $ 17.77 7      8/15/2013           
    1,069        —        $ 17.77 7      3/15/2014           
    830        —        $ 17.77 7      8/15/2014           
    7,367        —        $ 25.09        8/23/2014           
    18,078        —        $ 31.90        8/15/2015           
    42,509        21,255 8    $ 20.71        9/15/2016           
    16,876        33,754 9   $ 22.59        8/16/2017           
    64,191        128,383 10   $ 24.41        12/15/2017           
    —          160,187 3,*   $ 25.56        8/15/2018           
    —          —          —          —          52,101 4,   $ 1,337,954        23,347 6,*   $ 599,551  

Thomas J. Leonard

    8,798        —        $ 29.25        7/15/2015           
    10,923        —        $ 31.90        8/15/2015           
    39,427        19,714 8   $ 20.71        9/15/2016           
    23,340        46,682 9    $ 22.59        8/16/2017           
    —          76,586 3,*   $ 25.56        8/15/2018           
    —          —          —          —          34,300 4,   $ 880,824        11,162 6,*   $ 286,640   

Vivek Jain

    6,876        —        $ 17.77 7      9/17/2014           
    28,160        —        $ 31.90        8/15/2015           
    50,532        25,266 8    $ 20.71        9/15/2016           
    25,143        50,288 9   $ 22.59        8/16/2017           
    —          80,353 3,*   $ 25.56        8/15/2018           
    —          —          —          —          39,884 4,   $ 1,024,221        11,711 6,*   $ 300,738   

Joan B. Stafslien

    621        —        $ 17.77 7      9/2/2012           
    690        —        $ 17.77 7      8/15/2013           
    477        —        $ 17.77 7      8/15/2014           
    7,379        —        $ 25.09        8/23/2014           
    10,213        —        $ 31.90        8/15/2015           
    42,422        21,211 8    $ 20.71        9/15/2016           
    25,005        50,011 9   $ 22.59        8/16/2017           
    —          69,207 3,*   $ 25.56        8/15/2018           
    —          —          —          —          34,949 4,   $ 897,490        10,087 6,*   $ 259,034   

 

* 

Indicates equity awards that are reported in the “Grants of Plan-Based Awards for Fiscal 2012” table.

1 

The market value is equal to the product of $25.68, the closing price of CareFusion’s common stock on the NYSE on June 29, 2012, and the number of unvested CareFusion RSUs or PSUs, as applicable.

2 

These awards were granted to Mr. Gallahue on February 15, 2011, and vest over a period of three years, with 33 1/3% of the shares subject to each award vesting on each of the first three anniversaries of the grant date.

3 

These awards were granted to our named executive officers on August 15, 2011. Stock options vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

 

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4 

Reflects RSUs granted in 2009, 2010 and/or 2011 that have not yet vested. Includes RSUs that are also reported in the “Grants of Plan Based Awards for Fiscal 2012” table as follows: Mr. Gallahue (73,357), Mr. Hinrichs (23,347), Mr. Leonard (11,162), Mr. Jain (11,711) and Ms. Stafslien (10,087). The RSUs granted in fiscal 2012 included a performance condition of $313 million of EBIT, which had to be satisfied before the RSUs would vest. For fiscal 2012, the Company generated EBIT in excess of the threshold. Since the performance condition has been satisfied, the RSUs will vest as to 33 1/3% of the shares subject to the award on each of the first three anniversaries of the grant date. See “Grants of Plan Based Awards for Fiscal 2012.”

5 

Includes 450,094 PSUs granted to Mr. Gallahue on February 15, 2011. This award has been issued in five separate tranches, and each tranche will vest on February 15, 2014, subject to: (1) CareFusion common stock meeting a specific closing price target for such tranche on a date that is after the 12 month anniversary of the grant date (a “Trigger Date”), (2) the achievement of an average closing price target for such tranche during the period that includes the Trigger Date and the immediately following 19 trading days, and (3) Mr. Gallahue remaining in continuous service with CareFusion through February 15, 2014. The number of shares subject to each tranche and the associated closing price target are as follows: Tranche 1 (85,833 shares, $30.00 target); Tranche 2 (80,432 shares, $35.00 target); Tranche 3 (80,432 shares, $40.00 target); Tranche 4 (92,179 shares, $45.00 target); Tranche 5 (111,218 shares, $50.00 target). Also includes 73,357 PSUs granted to Mr. Gallahue on August 15, 2011, as further discussed in footnote 6 below.

6 

Reflects PSUs granted to our named executive officers on August 15, 2011, which are subject to the satisfaction of performance criteria during the three-year performance period beginning on July 1, 2011 and ending on June 30, 2014. Our Compensation Committee established performance goals for the PSUs based on the achievement of the compounded annual growth rate (“CAGR”) of fully diluted, adjusted earnings per share. The payout amount of the PSUs will vary between 0% – 200% of the target number of shares of common stock based on performance relative to the target established for CAGR during the performance period. See “Grants of Plan Based Awards for Fiscal 2012.”

7 

These stock options were received in connection with Cardinal Health’s voluntary stock option exchange program, which was approved by its shareholders on June 23, 2009. This program, which was conducted prior to the spinoff, but during our fiscal 2010, allowed participants to exchange Cardinal Health stock options with exercise prices substantially above the then current grant price for a lesser number of Cardinal Health stock options with a lower exercise price. Pursuant to this program, options to purchase shares of Cardinal Health were surrendered in exchange for new stock options to purchase shares of Cardinal Health, which were granted on July 20, 2009. In connection with the spinoff, these new Cardinal Health stock options converted into options to purchase shares of CareFusion common stock, each with an exercise price of $17.77 per share.

8 

These stock options were granted on September 15, 2009, and vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

9 

These stock options were granted on August 16, 2010, and vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

10 

These stock options were granted on December 15, 2010, and vest over a period of three years, with 33 1/3% of the shares subject to the award vesting on each of the first three anniversaries of the grant date.

Option Exercises and Stock Vested for Fiscal 2012

The following table shows stock options exercised and RSUs and PSUs that vested during the fiscal year ended June 30, 2012:

 

     Option Awards      Stock Awards  

Name

   Number of Shares
Acquired on Exercise
     Value Realized on
Exercise
     Number of Shares
Acquired on Vesting
     Value Realized on
Vesting1
 

Kieran T. Gallahue

     —         $ —           126,676       $ 3,027,556   

James F. Hinrichs

     —         $ —           27,251       $ 670,691   

Thomas J. Leonard

     —         $ —           51,851       $ 1,265,032   

Vivek Jain

     —         $ —           66,759       $ 1,625,541   

Joan B. Stafslien

     —         $ —           53,974       $ 1,311,648   

 

1 

Under the terms of the LTIP, we calculate value realized on vesting using the closing price of our common stock on the NYSE on the day prior to the vesting date. The amounts set forth above reflect the value calculated by multiplying this closing price by the number of shares acquired on the vesting date before withholding taxes.

 

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Nonqualified Deferred Compensation in Fiscal 2012

We maintain a nonqualified Deferred Compensation Plan, (the “DCP”), which is further described below. The following table provides information regarding the participation of our named executive officers in the DCP:

 

Name

   Executive
Contributions
in Last FY1
     Registrant
Contribution
in Last FY2
     Aggregate
Earnings in
Last FY3
    Aggregate
Withdrawals/
Distributions
    Aggregate
Balance at Last
FYE
 

Kieran T. Gallahue

   $ 103,847       $ 960       $ 8,690      $ —        $ 161,610   

James F. Hinrichs

   $ 56,630       $ 12,642       $ (3,351   $ —        $ 358,014   

Thomas J. Leonard

   $ 59,337       $ 10,609       $ (3,602   $ —        $ 198,067   

Vivek Jain

   $ —         $ 5,133       $ (577   $ —        $ 26,515   

Joan B. Stafslien

   $ —         $ 6,285       $ (7,719   $ —        $ 145,545   

 

1 

Executive contributions are deducted from the salary we pay to our executives. Accordingly, executive contributions are included in the “Salary” column in the “Summary Compensation Table” above.

2 

Registrant DCP contributions are included in the “All Other Compensation” column of the Summary Compensation Table. Registrant contributions include the employer match and employer discretionary contributions, as described further below. Registrant DCP contributions included in the Summary Compensation Table for prior years are as follows:

 

     2011      2010  

Kieran T. Gallahue

   $ 10,000       $ n/a   

James. F. Hinrichs

   $ 9,958       $ 4,975   

Thomas J. Leonard

   $ 9,867       $ 6,947   

Vivek Jain

   $ 6,985       $ —     

Joan B. Stafslien

   $ 6,000       $ 1,686   

 

3 

The aggregate earnings with respect to DCP accounts are calculated based upon the change in value of the investment options selected by the named executive officer during the year, as described in more detail below. The aggregate earnings set forth above are not included in the Summary Compensation Table.

The DCP permits eligible employees, including named executive officers, to defer a portion of their cash compensation into any of several investment alternatives. Participants in the DCP may defer between 1% and 50% of base salary and between 1% and 100% of incentive compensation. In addition, we may, at our discretion, make additional matching or fixed contribution credits to the deferred balances of participating employees. In general, matching contribution credits may be made at the same rate applicable to the employee under our 401(k) Savings Plan. We may also credit to a participant’s account an amount (not to exceed $100,000) equal to a percentage of cash compensation which is greater than the dollar limitation in effect for the year under the Tax Code as a discretionary employer contribution credit. Contributions made with respect to our named executive officers are set forth in the “Summary Compensation Table” above.

To measure the amount of the Company’s obligation to each participant under the DCP, we maintain a separate bookkeeping record, which we refer to as an account, for each participant. The participants are permitted to direct the investment of the portion of the accounts allocable to that participant in the same manner the participant is permitted to direct the investment of the participant’s account under our 401(k) Savings Plan. The notional investment options available under the DCP are substantially the same investment options that are available in the 401(k) Savings Plan. We then credit or debit the participant’s account with the actual earnings or losses based upon the performance results of the notional investment options selected by the participant. The participant may change the allocation of his or her account among the investment alternatives then available under the DCP.

 

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For eligible employees, deferred balances are paid upon retirement, termination from employment, death or disability. Some contributions made by us and other account credits are subject to vesting provisions requiring that the participant has completed three years of service with the Company, which are fully accelerated upon a change in control (defined as described under “Potential Payments Upon Termination or Change in Control” below). If the participant terminates employment with us due to retirement, death, total disability, or pursuant to a change in control, all amounts subject to such vesting requirements shall vest. If a participant terminates employment before satisfying the vesting requirements, all amounts subject to the vesting requirements are forfeited.

DCP account balances are paid in cash. The plan is not intended to qualify under Section 401(a) of the Tax Code and is exempt from many of the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) as a “top hat” plan for a select group of management or highly compensated employees.

Potential Payments on Termination or Change in Control

We entered into agreements and maintain plans that provide for compensation to our named executive officers upon certain triggering events that result in termination of employment (including termination following a change in control of the Company). The “Potential Payments on Termination of Change in Control” table below includes information for each of our named executive officers related to potential payments assuming that a triggering event occurred as of June 30, 2012 and, if applicable, based on our closing stock price on that date. The following paragraphs describe the provisions of our various plans, including the LTIP and the MIP, and the benefits under these plans in the event of each triggering event and the assumptions that were used in creating the table.

Non-Compete and Non-Solicitation Agreements. Our standard stock option, RSU and PSU award agreements provide that if a named executive officer violates the provisions contained in the award agreements with respect to: (i) competitive actions, then unexercised stock options and unvested RSUs and PSUs will be forfeited, and we may seek repayment of gains realized or obtained by the named executive officer from vested stock options, RSUs and PSUs during a look-back period of one to three years from the violation, or (ii) confidentiality, non-disparagement or non-solicitation of business or our employees (during employment and for a period of 12 months following termination), or breaches our policies, then unexercised stock options and unvested RSUs and PSUs will be forfeited, we may seek repayment of gains realized or obtained by the named executive officer from vested stock options, RSUs and PSUs during a look-back period of one to three years from the violation, and we may bring an action for breach of contract or seek other equitable relief. Under the terms of the LTIP and MIP, all or a portion of a final award may be subject to an obligation of repayment to the Company if the named executive officer violates an applicable non-competition and/or confidentiality covenant.

Termination For Cause. Termination for cause under the LTIP and MIP means termination of employment on account of any act of fraud or intentional misrepresentation or embezzlement, misappropriation or conversion of assets of the Company or any subsidiary, or the intentional and repeated violation of our written policies or procedures. Our standard stock option, RSU and PSU award agreements provide that if a named executive officer is terminated for cause, then unexercised stock options and unvested RSUs and PSUs will be forfeited. Under the MIP, if a named executive officer is terminated for cause, then all rights to any bonus payment for such performance period will be forfeited. We may also seek repayment of gains realized or obtained by the named executive officer from MIP payments or equity awards under the LTIP during a look-back period.

Involuntary Termination Without Cause. Under the Executive Severance Guidelines in effect during fiscal 2012, executive officers that are terminated by us, other than for cause, would have been eligible to receive a payment of one year of their base salary plus the two year average of their actual award under the MIP for the two years prior to the year that employment is terminated. In addition, these executive officers would also be entitled to a pro-rated MIP award for the year in which they are terminated. The Executive Severance Guidelines generally apply only in circumstances where an executive officer is not party to an individual severance or

 

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employment agreement that provides for severance payments in connection with a termination without cause. As discussed above in the Compensation Discussion and Analysis, the Compensation Committee approved the amendment and restatement of the Executive Severance Guidelines in June 2012. The amendment and restatement of the Executive Severance Guidelines was intended to reduce the number of executives subject to the guidelines and reduce the amount of severance payable under the guidelines. Our standard stock option, RSU and PSU award agreements provide that if the employment of a named executive officer is terminated without cause, then unvested stock options, RSUs and PSUs will be forfeited.

Termination by Reason of Retirement. Generally, retirement means the termination of employment (other than by death or disability and other than in the event of termination for cause) by an employee after attaining the age of 55 and having at least 10 years of continuous service with the Company (including service with an affiliate of the Company prior to the time that such affiliate became an affiliate of the Company). Our standard stock option and RSU agreements provide that, if after six months from the date of grant of a stock option or RSU, a named executive officer is or becomes retirement eligible, then rights to the unvested portion of such awards will generally vest in full, provided, that the awards will only become exercisable or payable, as the case may be, in accordance with their original vesting schedules. Rights to PSUs would similarly vest, provided, that the payment of shares subject to such PSUs would occur only in accordance with the original payment schedule if the associated performance conditions are satisfied. In addition, vested stock options will remain exercisable through the remaining term of the option. Under the MIP, if employment is terminated due to retirement during the performance period, the final payout will be pro-rated based upon the length of time that the participant was employed during the performance period.

Termination by Reason of Disability. Our long-term disability plan currently provides that, to be considered disabled because of an illness or injury, the executive must: continuously be unable to perform substantial and material duties of the executive’s own job; not be gainfully employed in any occupation for which the executive is qualified by education, training or experience; and be under the regular care of a licensed physician. Our standard stock option and RSU agreements provide that, if after six months from the date of grant of a stock option or RSU, the employment of a named executive officer is terminated by reason of disability, then rights to the unvested portion of such awards will generally vest in full, and such awards shall become exercisable or payable, as the case may be, on the date of such termination. Rights to PSUs would similarly vest, provided, that the number of shares payable upon vesting would be calculated based on the timing of the termination event relative to the performance period for such PSUs. In addition, vested stock options will remain exercisable through the remaining term of the option. Under the MIP, if employment is terminated due to disability during the performance period, the final payout will be pro-rated based upon the length of time that the participant was employed during the performance period.

Termination by Death. Our standard stock option and RSU agreements provide that, if after six months from the date of grant of a stock option or RSU, the employment of a named executive officer is terminated by reason of death, then rights to the unvested portion of such awards will generally vest in full, and such awards shall become exercisable or payable, as the case may be, on the date of such termination. Rights to PSUs would similarly vest, provided, that the number of shares payable upon vesting will be calculated based on the timing of the termination event relative to the performance period for such PSUs. Under the MIP, if employment is terminated due to death during the performance period, the final payout will be pro-rated based upon the length of time that the participant was employed during the performance period.

Change of Control of the Company. Under the LTIP, unless an award agreement specifically provides otherwise, all stock options, RSUs, PSUs and other awards granted under the LTIP will generally vest in full upon a change of control, and such awards shall become exercisable or payable, as the case may be, on the date of such change of control; provided that the number of shares payable upon vesting of PSUs will be calculated based on the timing of the change of control event relative to the performance period for such PSUs. As discussed above in the Compensation Discussion and Analysis, the Compensation Committee approved new forms of LTI award agreements in June 2012, and commencing with the annual LTI award in August 2012, such

 

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awards will vest in full, and become exercisable or payable, as the case may be, only in the event of a qualifying termination that occurs within 24 months following a change of control. The MIP does not establish a separate payment framework related to a change of control. Accordingly, if a termination occurred in connection with a change of control of the Company, any payments under the MIP would be made in accordance with the termination provisions discussed above. Under the LTIP, a “change of control” means any of the following:

 

   

the acquisition by any entity of beneficial ownership of 25% or more of either our outstanding common stock or the combined voting power of the Company’s then-outstanding voting securities (other than any acquisition directly from the Company or any of our affiliates or employee benefit plans and any Non-Control Acquisition, defined below); or

 

   

a change in a majority of the members of our Board of Directors, other than directors approved by a vote of at least a majority of the incumbent directors (other than any director whose initial assumption of office resulted from an actual or threatened election or proxy contest); or

 

   

a reorganization, merger or consolidation or other sale of all or substantially all of our assets or our acquisition of assets or shares of another corporation, unless such transaction is a Non-Control Acquisition; or

 

   

our stockholders approve a complete liquidation or dissolution of the Company.

A “Non-Control Acquisition” means a business combination where: (1) the beneficial owners of our outstanding common stock and voting securities immediately prior to such business combination beneficially own more than 50% of the outstanding common and the combined voting power of the then-outstanding voting securities of the resulting corporation (including a corporation which as a result of such transaction owns the Company or all or substantially all of our assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such business combination; (2) no person beneficially owns 25% or more of our then-outstanding common stock or combined voting power of the resulting corporation (unless such ownership existed prior to the business combination); and (3) at least a majority of the members of the board of directors of the corporation resulting from the business combination were members of our Board of Directors (who were approved by a vote of at least a majority of the incumbent directors) at the time of the execution of the initial agreement, or the action of our Board of Directors, providing for such business combination.

Change in Control Severance Plan. The CIC Plan was established for CareFusion prior to the spinoff and provides for certain severance benefits to executives upon a termination of employment by the Company without “cause” or by the executive for “good reason” (as defined in the CIC Plan), in each case within 24 months following a change in control event affecting the Company (i.e., a “double-trigger” scenario). The CIC Plan provides for cash severance equal to a multiple of the sum of base salary and target bonus, a pro-rated target bonus for the year of termination, and health benefits continuation and outplacement services in varying amounts depending on the executive’s position with the Company. As discussed above in the Compensation Discussion and Analysis, the Compensation Committee approved the amendment and restatement of the CIC Plan, effective July 1, 2012. Under the CIC Plan as in effect at the end of fiscal 2012, our named executive officers would have been eligible to receive cash severance equal to two times their annual base salary and target annual bonus, as well as a pro-rated target bonus in the year of termination. The CIC Plan does not provide for tax gross-up payments relating to the payment of any excise tax on the extent to which an executive’s severance constitutes excess parachute payments under Sections 4999 and 280G of the Tax Code. However, the CIC Plan does provide for a “cutback,” so that to the extent severance payments to an executive under the CIC Plan would trigger the excise tax, payments will be reduced to the extent necessary to prevent any portion of the payments from becoming nondeductible by us under Section 280G of the Tax Code or subject to the excise tax imposed under Section 4999 of the Tax Code, but only if, by reason of that reduction, the net after-tax benefit received by the executive exceeds the net after-tax benefit the executive would receive if no reduction was made.

 

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Additional Assumptions and Valuation Methodology. For purposes of the table below, the following assumptions have been made:

 

   

the date of termination of employment is June 30, 2012, the end of our most recent fiscal year; and

 

   

the price of our common stock on the date of termination was $25.68 per share, the closing price of our common stock reported by the NYSE on June 29, 2012.

Stock options, RSUs and PSUs that were already vested as of June 30, 2012 are not reflected in the table below. For stock options subject to accelerated vesting upon termination or change in control, the value included in the table below is the difference between the closing price of our common stock on June 29, 2012 and the exercise price for each option for which vesting is accelerated. For RSUs and PSUs subject to accelerated vesting upon termination or change in control, the value included in the table below reflects the closing price of our common stock on June 29, 2012 multiplied by the number of RSUs and PSUs accelerated.

The table below reflects amounts that would have been payable as of June 30, 2012 to the named executive officers under our existing plans and employment agreements and arrangements. Benefits that are available to all our salaried employees on retirement, death or disability, including the 401(k) Savings Plan and other deferred compensation distributions, group and supplemental life insurance benefits and short-term and long-term disability benefits are not included. Please see the “Nonqualified Deferred Compensation in Fiscal 2012” table for payments or benefits payable in connection with triggering events. Under the DCP, some contributions made by us and other account credits are subject to vesting provisions requiring that the participant has completed three years of service with us. If the participant terminates employment with us due to retirement, death or disability or there has been a change in control, all amounts subject to such vesting requirements will vest. The table below includes only increased payments and the value of vesting and acceleration under the DCP in connection with the triggering events.

Kieran T. Gallahue. Under the terms of Mr. Gallahue’s employment agreement, in the event the Company terminates his employment without “cause” or Mr. Gallahue terminates his employment for “good reason” (each as defined in the Agreement), Mr. Gallahue will be entitled to (i) accrued and unpaid base salary through the termination date; (ii) a prorated MIP bonus payment for the year in which the termination occurs, (iii) a severance payment equal to the sum of (A) two times his annual base salary plus (B) two times his two-year average actual MIP bonus payment; and (iv) continued group health plan coverage through COBRA for 18 months. In the event of such a termination, Mr. Gallahue would also benefit from additional vesting of his equity awards, as discussed in the Compensation Discussion and Analysis under the heading “Employment Agreement and Other Compensation Arrangements—Kieran T. Gallahue.”

James F. Hinrichs. Under the offer letter with Mr. Hinrichs, in the event the Company terminates his employment without “cause” or Mr. Hinrichs terminates his employment with “good reason” (each as defined in the offer letter) on or before July 29, 2012, Mr. Hinrichs will be entitled to (i) accrued and unpaid base salary through the termination date; (ii) a prorated MIP bonus payment for the year in which the termination occurs, (iii) a severance payment equal to the sum of (A) one times his annual base salary plus (B) one times his two-year average actual MIP bonus payment and (iv) a cash payment of $500,000. In the event of such a termination, Mr. Hinrichs would also benefit from additional vesting of his equity awards, as discussed above in the Compensation Discussion and Analysis under the heading “Employment Agreement and Other Compensation Arrangements—James F. Hinrichs.” In the event his employment is terminated after such date, Mr. Hinrichs will be entitled to accrued and unpaid base salary through the termination date and any severance payments provided for under the Company’s severance guidelines as in effect on the termination date.

Vivek Jain. Under the offer letter with Mr. Jain, in the event we terminate Mr. Jain’s employment other than for “cause,” he will be entitled to one year of severance. The severance payment would consist of one year of base pay and bonus, with bonus based on the average of the prior two years of bonus.

 

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As we have not entered into individually negotiated arrangements with Mr. Leonard or Ms. Stafslien that establish post-termination benefits and payments, any benefits or payments provided to them in connection with a termination or change in control would be made in accordance with our plans, policies and guidelines discussed above.

Potential Payments on Termination or Change in Control

 

Name and Type of Payment/Benefit1

  Retirement or
Termination by
executive without
“Good Reason”
    Termination
without
“Cause” or by
executive with
“Good Reason”
          Change in Control2  
      Termination due to
Death or Disability
    Without
Termination
    Termination  

Kieran T. Gallahue

         

Base salary

  $ —        $ 2,300,000      $ —        $ —        $ 2,300,000   

Pro-rata fiscal 2012 MIP3

  $ —        $ 1,437,500      $ 1,437,500      $ —        $ 1,437,500   

Fiscal 2012 MIP target4

  $ —        $ 2,662,969      $ —        $ —        $ 2,875,000   

Value of accelerated equity awards5,6

  $ —        $ 3,253,040      $ 9,078,245      $ 3,828,012      $ 10,334,117   

Value of accelerated DCP balance7

  $ —        $ —        $ 12,557      $ —        $ 12,557   

Health benefits8

  $ —        $ —        $ —        $ —        $ 20,593   

Outplacement assistance

  $ —        $ —        $ —        $ —        $ 4,000   

Tax cutback9

          $ —     

Total

  $ —        $ 9,653,509      $ 10,528,302      $ 3,828,012      $ 16,983,767   

James F. Hinrichs

         

Base salary

  $ —        $ 530,450      $ —        $ —        $ 1,060,900   

Pro-rata fiscal 2012 MIP3

  $ —        $ 424,360      $ 424,360      $ —        $ 424,360   

Fiscal 2012 MIP target10

  $ —        $ 333,034      $ —        $ —        $ 848,720   

Value of accelerated equity awards5

  $ —        $ —        $ 1,930,010      $ 2,329,711      $ 2,329,711   

Health benefits8

  $ —        $ —        $ —        $ —        $ 13,697   

Outplacement assistance

  $ —        $ —        $ —        $ —        $ 4,000   

Other11

    $ 500,000      $ —        $ —        $ 500,000   

Tax cutback9

          $ (325,547

Total

  $ —        $ 1,787,844      $ 2,354,370      $ 2,329,711      $ 4,855,841   

Thomas J. Leonard

         

Base salary

  $ —        $ 456,500      $ —        $ —        $ 913,000   

Pro-rata fiscal 2012 MIP3

  $ —        $ 365,200      $ 365,200      $ —        $ 365,200   

Fiscal 2012 MIP target10

  $ —        $ 420,928      $ —        $ —        $ 730,400   

Value of accelerated equity awards5

  $ —        $ —        $ 1,227,787      $ 1,418,880      $ 1,418,880   

Health benefits8

  $ —        $ —        $ —        $ —        $ 13,697   

Outplacement assistance

  $ —        $ —        $ —        $ —        $ 4,000   

Tax cutback9

          $ —     

Total

  $ —        $ 1,242,628      $ 1,592,987      $ 1,418,880      $ 3,445,177   

Vivek Jain

         

Base salary

  $ —        $ 478,950      $ —        $ —        $ 957,900   

Pro-rata fiscal 2012 MIP3

  $ —        $ 383,160      $ 383,160      $ —        $ 383,160   

Fiscal 2012 MIP target10

  $ —        $ 219,755      $ —        $ —        $ 766,320   

Value of accelerated equity awards5

  $ —        $ —        $ 1,415,072      $ 1,615,564      $ 1,615,564   

Health benefits8

  $ —        $ —        $ —        $ —        $ 13,680   

Outplacement assistance

  $ —        $ —        $ —        $ —        $ 4,000   

Tax cutback9

          $ —     

Total

  $ —        $ 1,081,885      $ 1,798,232      $ 1,615,564      $ 3,740,624   

Joan B. Stafslien

         

Base salary

  $ —        $ 458,350      $ —        $ —        $ 916,700   

Pro-rata fiscal 2012 MIP3

  $ —        $ 320,845      $ 320,845      $ —        $ 320,845   

Fiscal 2012 MIP target10

  $ —        $ 255,621      $ —        $ —        $ 641,690   

Value of accelerated equity awards5

  $ —        $ —        $ 1,252,093      $ 1,424,782      $ 1,424,782   

Health benefits8

  $ —        $ —        $ —        $ —        $ 13,697   

Outplacement assistance

  $ —        $ —        $ —        $ —        $ 4,000   

Tax cutback9

          $ —     

Total

  $ —        $ 1,034,816      $ 1,572,938      $ 1,424,782      $ 3,321,714   

 

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1 

For purposes of this table, the following compensation levels are assumed: Mr. Gallahue: base salary of $1,150,000 and annual MIP target of $1,437,500; Mr. Hinrichs: base salary of $530,450 and annual MIP target of $424,360; Mr. Leonard: base salary of $456,500 and annual MIP target of $365,200; Mr. Jain: base salary of $478,950 and annual MIP target of $383,160; and Ms. Stafslien: base salary of $458,350 and annual MIP target of $320,845.

2 

In general, equity awards granted pursuant to the LTIP prior to August 2012 vest in full in the event of a change in control. As discussed above, the equity awards granted to Mr. Gallahue vest in full upon termination of employment following a change in control. A change in control without termination of employment would not have triggered additional cash payments to any of the named executive officers. As discussed above, we also maintain the CIC Plan, which provides for certain severance benefits to executives upon a termination of employment by the Company without “cause” or termination by the executive for “good reason” within 24 months following a change in control. Under the CIC Plan in effect as of June 30, 2012, the named executive officers would have been eligible to receive cash severance equal to two times annual salary and target annual bonus, plus a pro-rated MIP target payment for the current year upon such a termination, as well as continuation of medical benefits for 18 months and outplacement services for six months.

3 

Amount presented reflects fiscal 2012 MIP target. Actual MIP payments would be determined following the end of the performance period based on the achievement of the performance criteria for the MIP award. In the event a triggering event occurred on June 30, 2012, the actual amount payable may have been different than the amount presented.

4 

Amount presented reflects two times the average of Mr. Gallahue’s actual MIP payment for fiscal 2012 and full year MIP target for fiscal 2011. Mr. Gallahue’s fiscal 2011 MIP payment was pro-rated based on his length of service during fiscal 2011 as Chairman and Chief Executive Officer. In the event a triggering event occurred on June 30, 2012, the actual amount payable to Mr. Gallahue may have been less than the amount presented due to the pro-ration of his fiscal 2011 MIP award.

5 

Value of accelerated equity awards reflects number of unvested stock options, RSUs and PSUs that would have vested as of June 30, 2012, as a result of the applicable triggering event. The value of these RSUs and PSUs was calculated by multiplying the number of shares subject to these awards (using the target number of shares in the case of PSUs) by the closing price of our common stock on the NYSE on June 29, 2012 ($25.68). The value of these stock options was calculated by multiplying these stock options by the difference between the exercise price and the closing price of our common stock on the NYSE on June 29, 2012 ($25.68); provided that no amounts are included above for stock options that have an exercise price higher than the closing price on June 29, 2012.

6 

Value of accelerated equity awards for Mr. Gallahue does not include amounts related to PSUs granted as a sign-on equity award on February 15, 2011. As none of the minimum price targets for these PSU have been met based on the closing price of the Company’s common stock on the NYSE through June 30, 2012, these PSUs are not included in the table above.

7 

Reflects the unvested balance of DCP account as of June 30, 2012, that would become fully vested upon termination due to death, disability or in connection with a change in control of the Company, if such triggering event occurred prior to the completion of three years of continuous service with the Company.

8 

Value of health benefits calculated based on the cost to the Company of current benefits elections for each executive multiplied by the number of months specified by the applicable employment agreement or employment arrangement. Actual costs of providing these benefits may vary from amounts reflected above.

9 

Pursuant to the CIC Plan, as amended, to the extent severance payments would subject our named executive officers to an excise tax under Sections 4999 and 280G of the Tax Code, the payments will be reduced to the extent necessary to prevent any portion of the payments from becoming nondeductible by us under Section 280G of the Tax Code or subject to the excise tax imposed under Section 4999 of the Tax Code, but only if, by reason of that reduction, the net after-tax benefit received by the executive exceeds the net after-tax benefit the executive would receive if no reduction was made.

10 

Amounts included in the “Termination without Cause or by executive with Good Reason” column reflect average of actual MIP payments for fiscal 2012 and fiscal 2011. Amounts included in the “Termination” column in connection with a change in control reflect two times the MIP target for fiscal 2012.

11 

Reflects cash payment of $500,000 payable under offer letter with Mr. Hinrichs, dated November 29, 2010, as further discussed above.

Director Compensation

On an annual basis, the Compensation Committee reviews comparative market data and recommendations from its compensation consultant with regard to the structure of our non-employee director compensation and the amounts paid to our non-employee directors. In November 2011, based on the analysis of Frederic W. Cook & Co. and the recommendation of the Compensation Committee, our Board of Directors approved the following changes to our non-employee director compensation framework for fiscal 2012:

 

   

a $5,000 increase in the cash retainer payable to each director who serves as Chair of a Board Committee;

 

   

a $25,000 increase in the annual grant of RSUs to each director;

 

   

elimination of the initial grant of RSUs awarded to new directors upon election to the Board; and

 

   

elimination of tax gross-ups for directors related to spousal travel arrangements provided by the Company.

 

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The table below summarizes the elements and amount of compensation we paid to our non-employee directors for Board and Committee service in fiscal 2012:

 

Compensation Element

   Amount  

Annual Retainer

   $ 100,000   

Additional Retainer for the Presiding Director

   $ 20,000   

Additional Retainer for Committee Service:

  

Audit Committee (member /chair)

   $ 10,000 / $ 25,000  

Human Resources and Compensation Committee (member /chair)

   $ 10,000 / $ 25,000   

Governance and Compliance Committee (member /chair)

   $ 5,000 / $ 15,000   

Equity Grant1

  

RSUs (annual award)

   $ 150,000   

 

1 

On an annual basis, we grant each of our non-employee directors an equity award in the form of RSUs for a number of shares of our common stock with a value of $150,000 on the grant date. Director RSUs are generally granted on the date of our annual meeting of stockholders in November of each year and vest in full one year from the date of grant.

In fiscal 2012, directors were given the option to defer payment of their cash retainers and their RSUs into our DCP, and going forward, we intend to continue to allow directors to make such deferral elections. For directors, deferred cash balances under the DCP are paid upon termination from board service, death or disability. Payments generally will commence at least six months after the event triggering the payment, except in the case of death or disability. For RSUs, which would otherwise be settled in shares of common stock on the date of vesting, directors can defer delivery of the shares until after termination from Board service or until a fixed future date. We also reimburse directors for reasonable out-of-pocket travel expenses incurred in connection with attendance at Board and committee meetings and attendance at director education programs. We may also reimburse directors for out-of-pocket expenses incurred by the director’s spouse in connection with spousal participation in occasional board-related activities. As set forth above, do not provide a “gross-up” or otherwise reimburse directors for payment of taxes related to such reimbursement.

The following table reflects all compensation awarded to, earned by or paid to the Company’s non-employee directors during fiscal 2012:

 

Name

   Fees Earned or
Paid in Cash1($)
     Stock
Awards2($)
     Total ($)  

Philip L. Francis

   $ 113,750       $ 150,000       $ 263,750   

Robert F. Friel

   $ 110,000       $ 150,000       $ 260,000   

Jacqueline Kosecoff, Ph.D.

   $ 115,000       $ 150,000       $ 265,000   

J. Michael Losh

   $ 130,000       $ 150,000       $ 280,000   

Gregory T. Lucier

   $ 123,750       $ 150,000       $ 273,750   

Edward D. Miller, M.D.

   $ 105,000       $ 150,000       $ 255,000   

Michael D. O’Halleran

   $ 110,000       $ 150,000       $ 260,000   

Robert P. Wayman

   $ 128,750       $ 150,000       $ 278,750   

 

1 

Reflects cash retainer amounts paid quarterly in connection with the regularly-scheduled meetings of the Board and Board Committees held during fiscal 2012. Amounts reflect the increase in the cash retainers discussed above, which became effective November 2011.

2 

Reflects RSUs granted on November 2, 2011 pursuant to the LTIP that vest in full one year from the date of grant. Based on the award values set forth above, each RSU was granted with respect to 6,019 shares of CareFusion common stock. The share amounts for these RSU awards were determined by dividing the award value by $24.92, the closing price of our common stock on the NYSE on the date of grant. Amounts shown reflect grant date fair value computed in accordance with Accounting Standards Codification Topic 718, rather than an amount paid to or realized by the director.

 

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The following table shows the number of stock awards and stock option awards outstanding for each non-employee director as of June 30, 2012:

 

Name

   Unvested
Stock  Awards1
     Vested Stock Awards
Subject to Deferred Delivery2
     Stock
Option  Awards3
 

Philip L. Francis

     6,019         —           22,690   

Robert F. Friel

     6,019         13,761         —     

Jacqueline Kosecoff, Ph.D.

     6,019         —           —     

J. Michael Losh

     6,019         13,761         130,301   

Gregory T. Lucier

     6,019         13,761         —     

Edward D. Miller, M.D.

     6,019         —           —     

Michael D. O’Halleran

     6,019         13,761         29,712   

Robert P. Wayman

     6,019         —           —     

 

1 

Reflects RSUs granted on November 2, 2011 that vest in full one year from the date of grant.

2 

Reflects vested RSUs for which delivery has been deferred.

3 

Reflects stock options that were granted as replacement awards in connection with the spinoff with respect to stock options originally granted by Cardinal Health. Replacement awards have substantially the same terms, vesting conditions and other restrictions as the original award. All of the stock options in the table above are fully vested and exercisable, provided, however, that the exercise price for certain of these stock options exceeded the closing price of the Company’s common stock on the NYSE on June 30, 2012.

As discussed above in the Compensation Discussion and Analysis, we maintain stock ownership guidelines that apply to our executive officers and our non-employee directors. Under our stock ownership guidelines, our non-employee directors are required to accumulate and hold a number of shares of stock valued at five times the annual cash retainer within five years after joining our Board of Directors. As of June 30, 2012, all of our non-employee directors held shares valued in excess of five times the annual cash retainer. For more information about the shares of CareFusion common stock beneficially owned by our non-employee directors, please refer to “Security Ownership of Certain Beneficial Owners and Management” on page 15 of this Proxy Statement.

Compensation Committee Interlocks and Insider Participation

During fiscal 2012 and as of the date of this Proxy Statement, none of the members of the Compensation Committee has been an officer or employee of CareFusion or had a relationship with the Company requiring disclosure under Item 404 of Regulation S-K, and none of our executive officers serves on the board of directors or compensation committee of a company that has an executive officer that serves on our Board or our Compensation Committee.

 

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ADDITIONAL INFORMATION

Stockholder Proposals for 2013 Annual Meeting

Stockholders interested in submitting a proposal for consideration at our 2013 annual meeting must do so by sending such proposal to our Corporate Secretary at CareFusion Corporation, 3750 Torrey View Court, San Diego, CA 92130, Attention: General Counsel. This year’s annual meeting was delayed as a result of the delay in the filing of our Form 10-K for the fiscal year ended June 30, 2012. We plan, subject to approval by our Board of Directors, to hold our 2013 annual meeting on November 6, 2013. As a result, the deadline for submission of proposals to be included in our proxy materials for the 2013 annual meeting is expected to be May 30, 2013. Accordingly, in order for a stockholder proposal to be considered for inclusion in our proxy materials for the 2013 annual meeting, any such stockholder proposal must be received by our Corporate Secretary on or before May 30, 2013, and comply with the procedures and requirements set forth in Rule 14a-8 under the Securities Exchange Act of 1934, as well as the applicable requirements of our amended and restated by-laws. Any stockholder proposal received after May 30, 2013 will be considered untimely, and will not be included in our proxy materials. In addition, stockholders interested in submitting a proposal outside of Rule 14a-8 must properly submit such a proposal in accordance with our amended and restated by-laws.

Our amended and restated by-laws require advance notice of business to be brought before a stockholders’ meeting, including nominations of persons for election as directors. As set forth in our amended and restated by-laws, to be timely, notice to our Corporate Secretary must be received at our principal executive offices not less than 90 days but not more than 120 days prior to the 2013 annual meeting date and must contain specified information concerning the matters to be brought before such meeting and concerning the stockholder proposing such matters. We plan, subject to approval by our Board of Directors, to hold our 2013 annual meeting on November 6, 2013. Therefore, to be presented at our 2013 annual meeting, such a proposal must be received by the Company not earlier than July 9, 2013 and not later than the close of business on August 8, 2013.

Householding of Annual Meeting Materials

We have adopted “householding,” a procedure approved by the SEC under which CareFusion stockholders who share an address will receive a single copy of the Annual Report, Proxy Statement or Notice, as applicable, or a single notice addressed to those stockholders. This procedure reduces printing costs and mailing fees, while also reducing the environmental impact of the distribution. If you reside at the same address as another CareFusion stockholder and wish to receive a separate copy of the applicable materials, you may do so by making a written or oral request to: 3750 Torrey View Court, San Diego, CA 92130, Attention: Investor Relations or by calling, (858) 617-4621. Upon your request, we will promptly deliver a separate copy to you. The Proxy Statement and our Annual Report are also available at https://materials.proxyvote.com/14170T.

Some brokers household proxy materials, delivering a single proxy statement or notice to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be householding materials to your address, householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a separate proxy statement or notice, please notify your broker directly. You may also call (800) 542-1061 or write to: Householding Department, Broadridge, 51 Mercedes Way, Edgewood, New York 11717, and include your name, the name of your broker or other nominee, and your account number(s). Any stockholders who share the same address and currently receive multiple copies of the Annual Report, Proxy Statement or Notice, as applicable, who wish to receive only one copy in the future may contact their bank, broker, or other holder of record, or CareFusion’s Investor Relations at the contact information listed above, to request information about householding.

 

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OTHER BUSINESS

The Board does not know of any other matters to be brought before the meeting. If other matters are presented, the proxy holders have discretionary authority to vote all proxies in accordance with their best judgment.

By order of the Board of Directors,

 

LOGO

Joan B. Stafslien

Executive Vice President, General Counsel,

    Chief Compliance Officer and Secretary

San Diego, California

February 28, 2013

We make available, free of charge on our website, all of our filings that are made electronically with the SEC, including Forms 10-K, 10-Q and 8-K. These materials can be found in the “Investors” section of our website at www.carefusion.com, by clicking the “Financial Information” link and then the “SEC Filings” link. Copies of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, including financial statements and schedules thereto, filed with the SEC, are also available without charge to stockholders upon written request addressed to:

Corporate Secretary

CareFusion Corporation

3750 Torrey View Court

San Diego, CA 92130

 

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LOGO

2012 Annual Meeting of Stockholders

April 15, 2013 at 8:30 a.m. (Pacific Daylight Time)

CareFusion Headquarters

3750 Torrey View Court, San Diego, CA 92130

Meeting Attendance Instructions

 

 

To attend the CareFusion Corporation 2012 Annual Meeting of Stockholders in person, you will need an admission card or proof of ownership of CareFusion common stock as of February14, 2013, the record date for the Annual Meeting. We encourage all stockholders planning to attend the Annual Meeting to request an admission card and register to attend by contacting the CareFusion Investor Relations Department by e-mail at ir@carefusion.com or by phone at (858) 617-4621. In addition, you can submit your request by fax at (858) 617-2311 or by mail at 3750 Torrey View Court, San Diego, CA 92130. To gain admission to the Annual Meeting, attendees will also be required to present government-issued photo identification (e.g., driver’s license or passport).

 

 
 

If you submit your proxy by Internet or telephone, you do not need to return your proxy card.

Thank you for your proxy submission.

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting:

The Notice and Proxy Statement and Annual Report are available at www.proxyvote.com.

 
   

 

 

 

 

 

   

 

CAREFUSION CORPORATION

Annual Meeting of Stockholders

April 15, 2013

This proxy is solicited on behalf of the Board of Directors

 

The stockholder(s) hereby appoint(s) James F. Hinrichs and Joan B. Stafslien, or either of them, as proxies, each with the power to appoint his or her substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side of this ballot, all of the shares of common stock of CAREFUSION CORPORATION that the stockholder(s) is/are entitled to vote at the Annual Meeting of Stockholders to be held at 8:30 AM PDT on April 15, 2013, at CareFusion Headquarters, 3750 Torrey View Court, San Diego, 92130, and any adjournment or postponement thereof.

 

This proxy, when properly executed, will be voted in the manner directed herein. If no such direction is made, this proxy will be voted by the proxy holders in accordance with the Board of Directors’ recommendations.

 

Continued and to be signed on reverse side

   


Table of Contents

LOGO

 

CAREFUSION CORPORATION

3750 TORREY VIEW COURT

SAN DIEGO, CA 92130

   VOTE BY INTERNET - www.proxyvote.com
   Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form.
  

 

ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS

   If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years.
  

 

VOTE BY PHONE - 1-800-690-6903

   Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions.
  

 

VOTE BY MAIL

   Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717.

 

 

 

TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:

 

   M52242-P33879         KEEP THIS PORTION FOR YOUR RECORDS

 

THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.

   DETACH AND RETURN THIS PORTION ONLY

 

CAREFUSION CORPORATION                                        
    The Board of Directors recommends you vote FOR the following:            
   

 

1.

 

 

Election of Directors

                           
     

 

Nominees:

   

 

For

 

 

Against

 

 

 Abstain

                 
     

 

1a.  Philip L. Francis

   

 

¨

 

 

 ¨

 

 

¨

                 
     

 

1b.  Robert F. Friel

   

 

¨

 

 

 ¨

 

 

¨

                 
     

 

1c.   Gregory T. Lucier

   

 

¨

 

 

 ¨

 

 

¨

                 
   

 

The Board of Directors recommends you vote FOR proposals 2 and 3:

         

 

For

 

 

Against

 

 

Abstain

   
   

 

2.

 

 

Ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2013.

 

 

¨

 

 

  ¨

 

 

¨

   
   

 

3.

 

 

Approval of a non-binding advisory vote on the compensation of our named executive officers.

 

 

¨

 

 

  ¨

 

 

¨

   
   

 

The Board of Directors recommends you vote AGAINST the following proposals:

     

 

For

 

 

Against

 

 

Abstain

   
   

 

4.

 

 

Stockholder proposal to adopt simple majority voting, if properly presented at the Annual Meeting.

   

 

¨

 

 

  ¨

 

 

¨

   
   

 

5.

 

 

Stockholder proposal to declassify the Board of Directors, if properly presented at the Annual Meeting.

   

 

¨

 

 

  ¨

 

 

¨

   
   

 

NOTE: SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR ANY ADJOURNMENT THEREOF.

     
   

 

 

Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name by authorized officer.

 

       
                                   
                                   
   

Signature [PLEASE SIGN WITHIN BOX]

 

 

Date

 

                 

Signature (Joint Owners)

 

 

Date