Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2012, compared with the corresponding periods of 2011. Cardinal Health distributes pharmaceutical and medical products and reports Pharmaceutical and Medical segments.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Year-over-year change | Six months ended Dec. 31, 2012 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $25.232 billion | Down 7% | $51.121 billion | Down 5% |
| Gross margin | $1.224 billion; 4.9% of revenue | Up 10% | $2.382 billion; 4.7% of revenue | Up 8% |
| Operating earnings | $506 million; 2.0% of revenue | Up 13% | $963 million; 1.9% of revenue | Up 12% |
| Earnings from continuing operations | $303 million | Up 15% | $575 million | Up 15% |
| Diluted EPS | $0.88 | Compared with $0.76 | $1.67 | Compared with $1.44 |
Pharmaceutical revenue fell 8% for the quarter and 6% for the six-month period; Medical revenue rose 3% and 2%, respectively. Pharmaceutical segment profit increased 12% for the quarter and 11% for the six months. Medical segment profit increased 11% and 3%, respectively.
Cash flow and liquidity: Six-month operating cash flow was $438 million, versus $390 million. Cash and equivalents were $2.255 billion at December 31, 2012, compared with $2.274 billion at June 30, 2012. Current assets were $17.861 billion and current liabilities $14.202 billion. Long-term obligations were $2.423 billion and current obligations and other short-term borrowings were $474 million. The company reported no commercial paper or receivables-facility borrowings and no revolving-credit borrowings other than $43 million of standby letters of credit. It said it had adequate capital resources and was in compliance with its financial covenants.
Six-month investing cash use was $117 million, including $126 million for acquisitions and $62 million for capital expenditures. Financing cash use was $340 million, including $200 million of share repurchases and $165 million of dividends. The declared quarterly dividend rose 16% to $0.275 per share.
Material changes and drivers
- Revenue declined mainly because the Express Scripts distribution contract expired on September 30, 2012, and brand-to-generic conversions reduced sales. New-customer business and specialty-solutions growth partly offset the decline.
- Gross margin and operating earnings improved, driven chiefly by strong Pharmaceutical generic-program performance and favorable customer and product mix. Antitrust class-action settlements contributed $12 million of income in the quarter and $34 million year to date.
- Pharmaceutical margin also faced customer pricing pressure and softness in nuclear pharmacy services. Medical results benefited from acquisitions, lower commodity costs and favorable product mix, partly offset by pricing pressure and lower customer volumes.
- Interest expense increased to $27 million for the quarter and $53 million for the six months, from $23 million and $46 million, respectively.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. A January 2013 Medical segment restructuring is expected to cost about $79 million pretax, with approximately $55 million recognized in the second half of fiscal 2013. Completion is expected by fiscal 2014 year-end; savings are expected to begin in fiscal 2014.
- CVS and Walgreens represented approximately 22% and 21% of fiscal 2012 revenue. Their distribution contracts were scheduled to expire in June and August 2013, respectively; both had issued requests for proposals, and Cardinal was participating.
- The IRS proposed $849 million of additional tax, excluding penalties and interest, for fiscal 2003–2007 transfer-pricing and intellectual-property matters. Cardinal disputes the adjustments; under a tax agreement, CareFusion would be liable for $592 million if the tax were ultimately payable. Cardinal reported $660 million of unrecognized tax benefits and estimated a possible decrease of up to $290 million within 12 months.
- The DEA settlement keeps the Lakeland, Florida controlled-substance distribution registration suspended until May 15, 2014. The company also reported related government inquiries and litigation, including West Virginia claims, a DOJ inquiry concerning customer discounts, and a sealed qui tam action. The filing says outcomes could materially affect results in a particular period, although it did not believe currently described matters would materially affect financial condition.
- Softness in the low-energy diagnostics market prompted interim goodwill testing for the nuclear pharmacy reporting unit. No impairment was recorded; estimated fair value was about 20% above carrying value, but adverse changes in assumptions could lead to impairment.
- Medical segment profit included favorable out-of-period vendor chargeback adjustments of $5 million for the quarter and $8 million for the six months; the company stated the amounts were not material to prior or current consolidated financial statements. The filing also identifies the antitrust settlement income as a contributor to earnings growth.
- A 2.3% excise tax on certain medical devices took effect January 1, 2013 and applies to devices Cardinal manufactures and sells.
Important facts for investors to verify
- Renewal outcomes and terms for the CVS and Walgreens contracts, and the ongoing effect of Express Scripts’ contract expiration and generic conversions.
- Progress and actual costs, timing and savings from the Medical restructuring.
- Developments in the IRS dispute, the potential CareFusion indemnification, and changes in unrecognized tax benefits.
- Developments in DEA, West Virginia, DOJ and other legal matters, including any resulting fines, restrictions or settlements.
- Trends in nuclear pharmacy cash flows and goodwill valuation assumptions, and the recurring versus nonrecurring contribution of settlements to earnings.