CAH

Cardinal Health, Inc. 10-Q Summary: Quarter Ended March 31, 1995

Business Context and Reporting Period

This Form 10-Q covers the third quarter and nine-month period ended March 31, 1995, for Cardinal Health, Inc. (formerly Cardinal Distribution, Inc.). The company operates as a wholesale drug distributor. Financial statements reflect the retroactive pooling-of-interests merger with Whitmire Distribution Corporation (effective February 7, 1994) and include the acquisitions of Humiston-Keeling, Inc. and Behrens Inc. during the fiscal year.

Key Financial Metrics

Liquidity: Working capital increased to $585.7 million from $471.1 million at June 30, 1994. The company maintains $310 million in line-of-credit arrangements, with $117 million outstanding as of March 31, 1995.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 32% in the quarter and 38% for the nine-month period compared to the prior year. Growth was driven by 23% internal business growth and acquisitions.
• Margin Compression: Gross margin percentage declined to 6.37% (quarter) and 5.91% (nine months) from 6.51% and 6.18% respectively. Management attributes this to a strategic shift in the customer base toward retail chains and hospitals, which command lower margins but offer better asset management.
• Expense Efficiency: Selling, general, and administrative (SG&A) expenses improved as a percentage of sales to 3.85% (quarter) and 3.84% (nine months), down from 4.07% and 4.05% in the prior year, due to economies of scale and distribution center consolidation.
• Comparability: The prior year period (ended March 31, 1994) included a nonrecurring merger charge of $35.9 million related to the Whitmire acquisition, which significantly depressed operating earnings for that period.

Guidance, Outlook, and Risks

Management Commentary: Management believes the shift to a more balanced customer mix (retail independent, chain, and hospital/managed care) allows for lower selling margins through improved distribution costs. The company anticipates adequate resources to meet capital expenditures and debt service.

Capital Markets: The company sold $100 million of 6.5% Notes due 2004 in February 1994. A registration statement for an additional $150 million of debt securities was filed in January 1995 but was not yet effective as of April 28, 1995.

Risks and Contingencies:

• Legal Proceedings: The company is a defendant in consolidated antitrust litigation regarding brand name prescription drug pricing. A Judgment Sharing Agreement limits the company's exposure to the lesser of 1% of any judgment or $1 million. The court has ruled the agreement valid and enforceable.
• Restructuring: Approximately $1.9 million of a prior fiscal year restructuring charge remains unexpended and is expected to be spent by June 30, 1995.

Investor Verification Checklist

• Verify the sustainability of gross margin compression as the customer mix continues to shift toward lower-margin chain and hospital accounts.
• Confirm the status of the $150 million "New Debt Securities" registration statement filed in January 1995.
• Monitor the outcome of the Brand Name Prescription Drug Litigation, despite the current limitation on liability exposure.
• Assess the impact of the $35.9 million merger costs recorded in the prior year on year-over-year earnings comparisons.
• Review the utilization of the $310 million credit facility, noting $117 million was outstanding at quarter-end.