Business Context and Reporting Period
Company: Cardinal Health, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended March 31, 2002
Business Overview: Cardinal Health operates in four segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. The company distributes pharmaceuticals, manufactures medical products, and provides pharmacy automation and clinical information services.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Mar 31, 2002 | 3 Months Ended Mar 31, 2001 | 9 Months Ended Mar 31, 2002 | 9 Months Ended Mar 31, 2001 |
|---|---|---|---|---|
| Operating Revenue | $11,541.3 | $10,334.2 | $32,628.4 | $28,405.8 |
| Operating Gross Margin | $1,068.5 | $946.1 | $2,983.7 | $2,634.7 |
| Operating Earnings | $493.4 | $349.9 | $1,363.1 | $1,060.1 |
| Net Earnings | $300.3 | $192.9 | $759.9 | $604.1 |
| Diluted EPS (Net) | $0.66 | $0.42 | $1.66 | $1.33 |
| Cash and Equivalents | $869.2 | $934.1 | $869.2 | $396.2 |
| Working Capital | $5,611.9 | $4,141.5 | $5,611.9 | $4,141.5 |
| Long-term Obligations | $2,464.0 | $1,871.0 | $2,464.0 | $1,871.0 |
Note: Working capital calculated as Total Current Assets ($12,382.6) minus Total Current Liabilities ($6,770.7) for March 31, 2002. Prior year working capital calculated as $10,716.3 - $6,574.8.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 12% for the quarter and 15% for the nine-month period compared to the prior year. Growth was driven by higher sales volume, pharmaceutical price increases, and new customer contracts.
- Profitability: Net earnings increased 56% for the quarter ($300.3M vs $192.9M) and 26% for the nine-month period ($759.9M vs $604.1M). Diluted EPS rose from $0.42 to $0.66 for the quarter.
- Special Charges: Special charges decreased significantly to $39.1M for the quarter (down from $86.3M) and $68.2M for the nine months (down from $106.6M). These charges primarily relate to merger integration costs.
- Accounting Changes: The company adopted SFAS 142, ceasing goodwill amortization effective July 1, 2001. Additionally, a change in revenue recognition for pharmacy automation equipment resulted in a one-time cumulative effect gain of $70.1M (net of tax) in the nine-month period.
- Liquidity: Working capital increased to $5.6 billion, driven by a $1.6 billion increase in inventories due to vendor-margin programs and higher business volume. Cash flow from operations was negative ($442.8M used) for the nine months, primarily due to inventory build-up.
Guidance, Outlook, and Risks
- Future Costs: Management estimates approximately $132.2 million ($82.3 million net of tax) in future merger-related and integration costs, primarily for fiscal years 2002 and 2003.
- Acquisitions: Subsequent to the quarter end, the company acquired Magellan Laboratories, Inc., to be integrated into the Pharmaceutical Technologies and Services segment.
- Capital Resources: The company issued $300 million in 4.45% Notes due 2005. It maintains capacity to issue approximately $700 million in additional equity or debt securities.
- Legal Risks: The company faces approximately 415 lawsuits regarding natural rubber latex glove sensitization (indemnifying Baxter Healthcare). While significant expenses are probable, the company believes a substantial portion will be covered by insurance and does not expect a material adverse effect on financial statements.
- Market Risks: No material change in exposure to market risk compared to the prior fiscal year.
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the $1.6 billion inventory increase and its impact on future cash flows.
- Merger Integration Costs: Monitor the realization of the estimated $132.2 million in future merger-related expenses.
- Accounting Change Impact: Assess the long-term effect of the revenue recognition change for automation equipment on future earnings stability.
- Latex Litigation: Track the resolution of the 415 pending lawsuits and the adequacy of insurance coverage.
- Debt Capacity: Review the utilization of the $700 million shelf registration capacity for future acquisitions or refinancing.