Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2013. The filing was signed May 8, 2013. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter ended Mar. 31, 2013 | Quarter ended Mar. 31, 2012 | Nine months ended Mar. 31, 2013 | Nine months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Revenue | $24,552 | $26,918 | $75,673 | $80,788 |
| Gross margin | $1,291 | $1,207 | $3,673 | $3,405 |
| Operating earnings | $475 | $527 | $1,439 | $1,388 |
| Earnings from continuing operations | $346 | $332 | $921 | $834 |
| Net earnings | $345 | $333 | $920 | $832 |
| Diluted EPS | $1.00 | $0.95 | $2.67 | $2.38 |
| Operating cash flow | Not presented separately for the quarter | $1,427 | $1,283 |
Quarterly revenue fell 9%, while gross margin increased 7%; nine-month revenue declined 6% and gross margin rose 8%. Gross margin as a percentage of revenue was approximately 5.3% versus 4.5% for the quarter and 4.9% versus 4.2% year to date. Operating earnings declined 10% for the quarter but increased 4% year to date. The quarter’s operating comparison was affected by a $55 million favorable P4 Healthcare contingent-consideration adjustment in the prior-year quarter. Nine-month results included $37 million of antitrust settlement income. Continuing-operations earnings benefited from a $64 million tax-related item in both the quarter and year-to-date period.
Quarterly diluted EPS was $1.00; nine-month diluted EPS was $2.67. Cash dividends declared were $0.275 per share for the quarter and $0.7875 year to date.
Financial position and liquidity
- At March 31, 2013, cash and equivalents were $2.305 billion, compared with $2.274 billion at June 30, 2012. Current assets were $17.927 billion and current liabilities were $14.474 billion.
- Total long-term obligations and other short-term borrowings were $4.160 billion, up from $2.894 billion at June 30, 2012. Long-term obligations, less current portion, were $3.714 billion.
- Nine-month operating cash flow was $1.427 billion. Investing cash use was $2.257 billion, including $2.219 billion for acquisitions; financing provided $861 million, including $1.286 billion of long-term debt proceeds. Cash dividends were $258 million and share repurchases were $200 million.
- The company reported no commercial paper, receivables-facility or revolving-credit borrowings at March 31, apart from $43 million of standby letters of credit. It reported compliance with its credit-facility covenants and stated it believed available capital, operating cash flow and credit access were adequate for expected needs.
Material changes and business developments
- Pharmaceutical: Revenue fell 10% in the quarter and 7% year to date. The loss of the Express Scripts contract reduced revenue by approximately $2.3 billion and $4.5 billion, respectively; brand-to-generic conversions also reduced sales. New customers and specialty solutions partly offset the decline. Generic programs supported segment profit growth.
- Medical: Revenue rose 3% in the quarter and 2% year to date, partly reflecting acquisitions. Segment profit increased 12% and 6%, respectively, with benefits from acquisitions, product mix and lower commodity costs, partly offset by customer pricing and softer procedure-based utilization.
- AssuraMed: Acquired March 18, 2013 for $2.07 billion, net of cash acquired, funded with cash and $1.3 billion of fixed-rate notes. The purchase-price allocation remained preliminary. Management expected the acquisition to increase operating earnings in future periods excluding acquired-intangible amortization, which it said would be a significant expense.
- Walgreens: The pharmaceutical distribution contract, scheduled to expire at the end of August 2013, will not be renewed. Walgreens represented approximately 21% of fiscal 2012 consolidated revenue; about 60% of those sales were bulk sales, which generated lower segment profit as a percentage of revenue. Management anticipated a fiscal 2014 net after-tax operating-cash-flow benefit exceeding $500 million from working-capital reductions and other factors, and said it was working to mitigate the business impact.
- CVS: Cardinal announced renewal of its pharmaceutical distribution contracts with CVS Caremark on April 25, 2013. CVS represented approximately 22% of fiscal 2012 revenue.
Outlook, risks and unusual items
- No specific consolidated earnings guidance is provided in the supplied filing text. Management expected to begin realizing savings and other benefits from the Medical restructuring in fiscal 2014.
- The Medical restructuring plan was estimated to cost approximately $79 million pre-tax: $40 million had been recognized through March 31, 2013, with approximately $39 million expected through fiscal 2014. The plan includes production moves, facility and office consolidation, organizational changes and a planned sale of sterilization processes.
- Unusual quarterly items included $53 million of acquisition-related costs, $33 million of restructuring and severance expense, and $21 million of impairments and disposal losses. The impairment line included an $11 million write-down of gamma sterilization assets and an $8 million software-project write-off.
- The IRS proposed $849 million of additional tax, excluding penalties and interest, relating to transfer-pricing and intellectual-property matters for fiscal years 2003–2007. Cardinal disputed the adjustments; under the CareFusion tax matters agreement, CareFusion would be liable for $592 million if the tax were ultimately payable. Cardinal disclosed $682 million of unrecognized tax benefits and a possible net decrease of up to $420 million within 12 months.
- Other disclosed legal and regulatory matters include the DEA suspension of the Lakeland, Florida controlled-substance distribution registration through May 15, 2014, related civil subpoenas, a West Virginia controlled-substance distribution suit, a DOJ inquiry into customer discounts and a sealed qui tam action involving P4 Healthcare. The company said it could not estimate reasonably possible losses for the described matters; outcomes could be material to a particular period.
- Goodwill testing found no impairment for the nuclear pharmacy services division despite market softness. Its estimated fair value was approximately 20% above carrying value; management cautioned that adverse changes in projected cash flows, terminal value or discount rates could affect the estimate.
Most important facts for investors to verify
- How the Walgreens contract expiration affects revenue, segment profit, costs and the projected fiscal 2014 cash-flow benefit.
- Whether growth in Pharmaceutical generic programs and new-customer business can offset lower volumes and continued brand-to-generic conversions.
- AssuraMed integration performance, final purchase-price allocation, amortization expense and debt impact.
- Execution, total cost and expected savings of the Medical restructuring.
- Developments in the IRS audit dispute and the DEA, West Virginia, DOJ and qui tam matters, including potential financial exposure.
- Whether cash generation and liquidity remain adequate following the acquisition and increased debt.