Business Context and Reporting Period
Company: Cardinal Health, Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 2009
Business Overview: Cardinal Health is a leading provider of healthcare products and services, operating primarily through its Healthcare Supply Chain Services segment (pharmaceutical and medical distribution) and Clinical and Medical Products segment (medical technology and devices). The company is in the process of spinning off its clinical and medical products businesses into a new entity, CareFusion Corporation, scheduled for August 31, 2009.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Revenue | $99,512.4 million | $90,975.5 million |
| Gross Margin | $5,526.4 million | $5,579.7 million |
| Operating Earnings | $1,885.7 million | $2,091.5 million |
| Net Earnings | $1,151.6 million | $1,300.6 million |
| Diluted EPS | $3.18 | $3.57 |
| Cash from Operating Activities | $1,558.3 million | $1,553.6 million |
| Total Assets | $25,118.8 million | $23,448.2 million |
| Long-term Obligations | $3,280.0 million | $3,687.4 million |
| Cash and Equivalents | $1,847.5 million | $1,291.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9% to $99.5 billion, driven by pharmaceutical price appreciation (8.8% index), increased volume from existing customers, and acquisitions. This was partially offset by the loss of customers ($972 million).
- Profit Decline: Operating earnings decreased 10% to $1.9 billion. The decline was primarily due to increased restructuring charges ($99 million) and a decrease in gross margin ($53 million).
- Gross Margin Pressure: Gross margin declined 1% due to deferral in hospital capital spending, product recalls (Alaris), FDA corrective action plans, and increased customer discounts ($356 million). These were partially offset by increased distribution service fees and manufacturer cash discounts.
- Special Items: Total special items were $177.4 million, primarily consisting of restructuring charges ($164.3 million) related to the CareFusion spin-off and segment restructuring.
- Segment Performance: Healthcare Supply Chain Services revenue grew 10% with flat profit. Clinical and Medical Products revenue was flat, but profit declined 9% due to economic headwinds and regulatory issues.
Guidance, Outlook, and Risks
- Spin-Off of CareFusion: The company plans to distribute 80.1% of CareFusion shares to shareholders on August 31, 2009. Post-spin-off, Cardinal Health will retain no more than 19.9% of CareFusion stock and will operate as two segments: Pharmaceutical and Medical. The company expects to incur approximately $261 million in pre-tax spin-off costs, with $113 million already incurred in fiscal 2009.
- Capital Structure: CareFusion will distribute approximately $1.4 billion in cash to Cardinal Health prior to the spin-off. Cardinal Health intends to use up to $1.2 billion of these proceeds for a debt tender offer and to pay off maturing debt.
- Outlook: Management expects continued competitive pricing pressures. Fiscal 2010 results are expected to be negatively impacted by the timing of generic launches, price deflation, and customer contract repricing. The deferral of hospital capital spending is expected to impact CareFusion results through mid-2010.
- Key Risks:
- Customer Concentration: The top five customers accounted for 54% of revenue; CVS and Walgreens individually accounted for 21% and 23%, respectively.
- Regulatory: Ongoing FDA scrutiny regarding infusion pumps (Alaris) and DEA compliance regarding controlled substances.
- Market Conditions: Economic downturns affecting hospital capital spending and increased bad debt expense.
- Spin-Off Uncertainty: Risks related to the successful consummation of the CareFusion distribution and potential credit rating downgrades.
Investor Verification Checklist
- Spin-Off Conditions: Verify the status of the IRS private letter ruling and rating agency opinions required to close the CareFusion distribution.
- Debt Tender Offer: Monitor the outcome of the $1.2 billion debt tender offer announced in August 2009 and its impact on the company's leverage ratio.
- Regulatory Resolutions: Track the implementation and cost of the FDA corrective action plan for Alaris infusion pumps and any associated penalties or recalls.
- Customer Concentration: Assess the financial stability of major customers (CVS, Walgreens) given their significant share of revenue and receivables.
- Generic Drug Pricing: Evaluate the impact of generic price deflation and the timing of new generic launches on future gross margins.