Cardinal Health, Inc. — Form 10-Q Summary
Business context and period: Healthcare services company with Pharmaceutical and Medical segments. This filing covers the quarter and six months ended December 31, 2011 (fiscal 2012 Q2); statements are unaudited. Amounts below are in millions except per-share data.
Key financial results
| Metric | Three months ended Dec. 31, 2011 | Change year over year | Six months ended Dec. 31, 2011 | Change year over year |
|---|---|---|---|---|
| Revenue | $27,078 | +7% | $53,870 | +8% |
| Gross margin | $1,114; 4.1% of revenue | +$120; margin up from 3.9% | $2,198; 4.1% of revenue | +$242 |
| Operating earnings | $449; 1.7% of revenue | +31% | $862; 1.6% of revenue | +22% |
| Earnings from continuing operations | $264 | +23% | $501 | −2% |
| Net earnings | $262 | +$47 | $499 | −$11 |
| Diluted EPS | $0.75 | Up from $0.61 | $1.43 | Down from $1.45 |
| Operating cash flow | Not presented quarterly | — | $390 | Up from $361 |
- Segment performance: Quarterly Pharmaceutical revenue rose 6% to $24,665 and segment profit rose 30% to $394. Medical revenue rose 9% to $2,416, while segment profit fell 18% to $85. For six months, Pharmaceutical segment profit rose 24% to $758; Medical segment profit declined 12% to $164.
- Cash flow and uses: Six-month investing cash outflow was $84; financing cash outflow was $437. Cash declined $132 to $1,798. Significant uses included $300 of share repurchases, $152 of dividends and $101 of capital expenditures.
- Balance sheet and liquidity: At December 31, cash was $1,798, current assets $17,779 and current liabilities $14,624 (current ratio approximately 1.22). Long-term obligations plus current obligations and short-term borrowings totaled $2,553, compared with $2,502 at June 30. Shareholders’ equity was $5,928.
- Dividends and repurchases: Quarterly dividend declared was $0.215 per share, versus $0.195 a year earlier. The company had $450 remaining under its $750 repurchase authorization; the $300 of reported six-month repurchases occurred in the September quarter.
Material changes and management commentary
- Management attributed revenue growth to acquisitions and existing-customer growth. Acquisitions contributed approximately $1.0 billion of quarterly revenue and $2.4 billion for the six-month period.
- Pharmaceutical gross margin benefited from generic programs, acquisitions and improved manufacturer-agreement margins. Customer pricing changes, including rebates, reduced gross margin by $50 for the quarter and $85 for six months.
- Medical segment profit was pressured by higher commodity costs, the Presource procedure-kit import matter, and higher SG&A, including business-system investment; favorable sales mix and volume partly offset the pressure.
- Six-month continuing earnings were lower year over year partly because the prior-year period included a $75 gain on sale of the remaining CareFusion investment. The effective tax rate was 38.1% for the six months versus 32.3% a year earlier, reflecting, among other items, prior-year tax benefits and the CareFusion sale tax treatment.
- Management stated it believed cash, projected operating cash flow and access to committed facilities were adequate for working capital, planned capital spending, growth, debt service, dividends and repurchases. No specific financial guidance or quantified forward outlook is provided in the filing text.
Risks, contingencies and unusual items
- DEA controlled-substances license: On February 3, 2012, after quarter-end, the DEA suspended the Lakeland, Florida distribution center’s license, alleging inadequate diversion controls and violations of a 2008 agreement. A court granted a temporary restraining order restoring the license that day and scheduled a preliminary-injunction hearing for February 13. An upheld suspension could impair customer service and increase costs.
- Tax dispute: The IRS proposed $849 of additional taxes, excluding penalties and interest, relating to transfer pricing and intellectual-property matters for fiscal 2003–2007. Cardinal disputes the adjustments and has reserved for the uncertain tax positions. CareFusion is responsible for $592 under the tax matters agreement if the tax is ultimately payable. Unrecognized tax benefits were $733; the company estimated a possible net decrease of up to $335 over the next 12 months, excluding penalties and interest.
- Futuremed bid: A November 2011 cash bid to acquire Futuremed for approximately $165, including $40 of debt, remained subject to minimum tender, regulatory approvals and other conditions.
- Other items: The P4 Healthcare contingent-consideration liability was $77 at December 31. The company also noted that implementation of Medical segment software systems during fiscal 2012 and 2013 could affect internal controls; ineffective implementation could adversely affect control effectiveness. Disclosure controls were assessed as effective at quarter-end.
Investor verification priorities
- Track the outcome of the DEA proceedings and any operational or financial effects on the Lakeland facility.
- Review subsequent developments in the IRS audits, potential exposure, reserves and CareFusion indemnification.
- Assess whether Pharmaceutical margin gains are sustainable against customer pricing pressure, and whether Medical segment profitability recovers.
- Monitor working-capital needs, inventory growth, cash conversion, debt levels and capacity for planned capital returns.
- Check the status and terms of the Futuremed bid and the execution and control risks of the Medical systems transformation.