Cardinal Health, Inc. — Form 10-Q Summary
Business context and period: Cardinal Health provides pharmaceutical and medical products and services, reported in Pharmaceutical and Medical segments. This filing covers the quarter and nine months ended March 31, 2012 (fiscal 2012 third quarter); the financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Three months ended Mar. 31, 2012 | Three months ended Mar. 31, 2011 | Nine months ended Mar. 31, 2012 | Nine months ended Mar. 31, 2011 |
|---|---|---|---|---|
| Revenue | $26,917.5 | $26,071.4 | $80,787.5 | $75,880.7 |
| Gross margin | $1,206.7 | $1,162.2 | $3,405.0 | $3,118.7 |
| Operating earnings | $526.6 | $447.3 | $1,388.2 | $1,155.1 |
| Earnings from continuing operations | $332.5 | $249.5 | $833.9 | $758.8 |
| Net earnings | $333.4 | $246.0 | $832.2 | $756.3 |
| Diluted EPS, continuing operations | $0.95 | $0.71 | $2.39 | $2.16 |
| Net diluted EPS | $0.95 | $0.70 | $2.38 | $2.15 |
- For the quarter, revenue grew 3%, operating earnings 18%, and earnings from continuing operations 33%. For the nine-month period, revenue grew 6%, operating earnings 20%, and continuing-operations earnings 10%.
- Approximate gross margin was 4.5% of revenue in both comparable quarters; operating margin was about 2.0% versus 1.7% in the prior-year quarter.
- Quarterly segment revenue increased 3% in Pharmaceutical to $24.5 billion and 8% in Medical to $2.4 billion. Segment profit rose 9% in Pharmaceutical to $446.4 million, but fell 17% in Medical to $89.4 million.
- Quarterly dividends declared were $0.215 per share, versus $0.195. The board subsequently approved a 10.5% increase to $0.2375 per share, payable July 15, 2012.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $1,282.9, compared with $1,274.8. Investing activities used $266.1, versus $1,927.8, reflecting much lower acquisition spending than the prior period. Financing activities used $535.7, including $225.9 of dividends and $300.0 of share repurchases.
- Cash and equivalents increased to $2,410.4 at March 31, 2012 from $1,929.3 at June 30, 2011. Cash was partly offset by acquisitions of $142.6 and capital expenditures of $159.0.
- Total current assets were $18,070.2 and current liabilities $14,846.1, implying a current ratio of approximately 1.22. Long-term obligations were $2,207.9, with $345.5 reported as current obligations and short-term borrowings. Cash exceeded these reported obligations by approximately $143 million.
- Working-capital measures were 21.2 days sales outstanding, 25.0 days inventory on hand, and 38.3 days payable outstanding. Receivables days increased year over year, which management attributed in part to the Medical business transformation project.
- The company reported no outstanding commercial paper or receivables-facility borrowings and compliance with its credit facility covenants. Management said available cash, projected operating cash flow, and committed facilities were adequate for anticipated needs.
Changes, outlook, and material items
- Pharmaceutical growth and profit benefited from generic programs and acquisitions; customer pricing changes reduced gross margin. Medical profit declined due in part to higher commodity costs and increased SG&A, including business-system investment.
- A $54.7 reduction in the estimated P4 Healthcare contingent consideration liability, driven largely by the loss of a significant legacy customer and revised earnings estimates, increased earnings. The liability was $22.2 at quarter-end. A separate $16.0 P4 trade-name impairment was recorded following rebranding.
- Prior-year nine-month comparisons included a $71.5 gain on the sale of the CareFusion investment. Acquisitions contributed $2.4 billion of revenue and $76 million of operating earnings in the current nine-month period, as defined by the company.
- No specific earnings or revenue guidance was provided in the supplied filing text. Management described liquidity as adequate and approved a higher dividend; these statements are not a quantified forecast.
- The IRS proposed $849 million of additional taxes, excluding penalties and interest, relating to transfer pricing and intellectual-property matters for fiscal 2003–2007. Cardinal disputes the proposed adjustments; CareFusion would be responsible for $591.5 million under the tax matters agreement if the tax were ultimately payable. Unrecognized tax benefits were $671.9 million, and the company estimated a possible net decrease of up to $290 million within 12 months.
- The DEA reinstated its immediate suspension of the Lakeland, Florida distribution center’s controlled-substances registration after a court denied a preliminary injunction. Cardinal appealed, and an administrative hearing was scheduled for May 2012. The filing does not quantify the potential financial impact.
- The Medical segment was implementing a new information system through fiscal 2012 and 2013, with temporary compensating controls. Management concluded disclosure controls were effective as of March 31, 2012.
Most important facts for investors to verify
- Whether Pharmaceutical generic-program gains and acquisition contributions are sustainable, and the extent of customer pricing pressure and customer losses.
- Developments in the DEA proceeding affecting the Lakeland facility, including any operational or financial consequences.
- Progress and outcomes of the IRS audits, potential liabilities, and the scope and collectability of CareFusion’s tax indemnification.
- Whether the P4 customer loss changes contingent consideration further, and whether Medical transformation costs or control issues affect results.
- Cash conversion and working-capital trends, particularly receivables growth, alongside capital allocation through dividends, repurchases, and acquisitions.