Cardinal Health, Inc. — Form 10-K Summary
Period: Fiscal year ended June 30, 2012. The request metadata says “2011 Q4,” but the filing is for fiscal 2012; it also reports fourth-quarter results.
Business context
Cardinal Health distributes pharmaceuticals and medical products and provides related services. Its reportable segments are Pharmaceutical and Medical. Pharmaceutical distribution is a high-volume, low-margin business; segment profit varies with generic-drug launches, supplier agreements, customer pricing and sales mix.
Financial performance
- Revenue: $107.6 billion, up 5% from $102.6 billion in fiscal 2011. Pharmaceutical revenue was $97.9 billion (+4%); Medical revenue was $9.6 billion (+8%).
- Profit: Gross margin was $4.54 billion, up 9%; operating earnings were $1.79 billion, up 18%; earnings from continuing operations were $1.07 billion, up 11%. Diluted continuing-operations EPS was $3.06, versus $2.74. Net earnings were $1.07 billion.
- Margins: Gross margin was approximately 4.2% of revenue and operating margin approximately 1.7%. Pharmaceutical segment profit rose 17% to $1.56 billion; Medical segment profit fell 11% to $332 million.
- Cash flow: Operating cash flow was $1.18 billion, down from $1.40 billion. Capital expenditures were $263 million. Cash and equivalents ended the year at $2.27 billion, compared with $1.93 billion.
- Debt and liquidity: Total long-term obligations and other short-term borrowings were $2.89 billion, including $476 million due in fiscal 2013. The company had a $1.5 billion revolving credit facility and $950 million receivables facility; neither had borrowings outstanding at year-end, apart from $44 million of standby letters of credit. It reported compliance with debt covenants.
- Shareholder returns: Fiscal 2012 share repurchases were $450 million and cash dividends were $300 million. The quarterly dividend was increased 10% in May 2012.
Fourth-quarter results and changes versus prior year
Fiscal 2012 fourth-quarter revenue was $26.76 billion, gross margin was $1.14 billion, continuing-operations earnings were $236 million, and diluted continuing-operations EPS was $0.68. In the comparable fiscal 2011 quarter, revenue was also $26.76 billion, gross margin was $1.04 billion, continuing-operations earnings were $207 million, and diluted EPS was $0.58.
Full-year revenue growth reflected acquisitions and higher sales to existing customers. Pharmaceutical profit growth benefited from generic programs and acquisitions, partly offset by customer pricing changes. Medical profit declined, principally due to higher commodity costs and increased systems-investment spending. Working-capital measures worsened: DSO rose to 22.3 days from 20.3, and DIOH to 23.9 days from 22.5.
Outlook, risks and unusual items
- Management expected Pharmaceutical segment revenue to decline in fiscal 2013, including from branded-to-generic conversions and the loss of the Express Scripts distribution contract. That contract generated approximately $9.0 billion of fiscal 2012 revenue and expired September 30, 2012; management also anticipated fewer significant generic launches.
- Management expected fiscal 2013 operating cash flow to be adversely affected by approximately $500 million versus fiscal 2012, reflecting anticipated IRS payments and negative working-capital effects from the Express Scripts contract expiration. The timing and resolution of the tax audits were uncertain.
- CVS and Walgreens represented 22% and 21% of fiscal 2012 revenue, respectively; contracts were scheduled to expire in June and August 2013. The five largest customers together accounted for approximately 59% of revenue.
- On May 14, 2012, Cardinal settled with the DEA over controlled-substance distribution controls. Its Lakeland, Florida registration to distribute controlled substances remained suspended through May 15, 2014; other products could continue to ship from that facility. Related subpoenas and possible civil fines remained unresolved, with no loss range estimable. A West Virginia Attorney General action also alleged controlled-substance distribution violations; potential loss was not estimable.
- The IRS proposed $849 million of additional taxes, excluding penalties and interest, for fiscal 2003–2007 transfer-pricing and intellectual-property matters. Cardinal disputed the adjustments; CareFusion was contractually responsible for $592 million if the proposed tax were ultimately payable.
- Fiscal 2012 operating earnings included a $71 million gain from reducing the P4 Healthcare contingent consideration liability; the remaining $4 million was settled in July 2012. Cardinal also recorded a $16 million write-off of the P4 trade name. The effective tax rate was 37.0%, including a favorable $40 million IRS audit settlement.
- Other risks include competitive pricing pressure, generic-drug margin variability, healthcare reimbursement and regulatory changes, commodity costs, customer concentration, information-system implementation, and litigation. A Medical segment system transition was ongoing; management reported temporary compensating controls. Management and the auditor reported effective internal controls at year-end, and the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Post-expiration revenue, margin, cash-flow and working-capital effects from losing the Express Scripts business, and renewal outcomes for CVS and Walgreens.
- Results of the DEA-related proceedings, including any civil fines, and the financial impact of the Lakeland suspension and West Virginia litigation.
- Developments in the IRS audits, potential cash payments, and the extent to which CareFusion’s indemnification obligation is collectible.
- Whether Medical segment profit stabilizes as commodity costs and transformation-system implementation evolve.
- Whether fiscal 2013 generic launches, customer pricing and acquisitions support management’s outlook; the filing provides no numerical EPS guidance.