Cardinal Health, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2011; filed August 25, 2011. Although the request metadata says “2010 Q4,” this filing reports fiscal 2011 and includes quarterly data for fiscal 2011, including its fourth quarter. Cardinal Health distributes pharmaceuticals and medical products and provides related services through its Pharmaceutical and Medical segments.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $102.644 billion | $98.503 billion |
| Gross margin | $4.162 billion; approximately 4.1% of revenue | $3.781 billion; approximately 3.8% |
| Operating earnings | $1.514 billion | $1.307 billion |
| Earnings from continuing operations | $966 million | $587 million |
| Net earnings | $959 million | $642 million |
| Diluted EPS, continuing operations | $2.74 | $1.62 |
| Cash from operating activities | $1.395 billion | $1.987 billion |
| Capital expenditures | $291 million | $260 million |
| Cash and equivalents at year-end | $1.929 billion | $2.755 billion |
| Total debt and other short-term borrowings | $2.502 billion | $2.129 billion |
Revenue increased 4%; operating earnings increased 16%. Pharmaceutical segment profit rose 26% to $1.265 billion, while Medical segment profit fell 14% to $370 million. The Pharmaceutical segment benefited from generic-program performance and acquisitions; the Medical segment was pressured by higher commodity costs. Gross margin increased about 10% year over year, while SG&A rose 8% to $2.595 billion. Operating cash flow declined approximately 30%, with working capital contributing to the change. Cash flow less capital expenditures was approximately $1.104 billion, compared with $1.726 billion in FY2010.
For FY2011 fourth quarter, revenue was $26.764 billion, earnings from continuing operations were $207 million, and diluted continuing-operations EPS was $0.58. The comparable FY2010 quarter reported revenue of $24.460 billion, continuing-operations earnings of $194 million, and diluted EPS of $0.54.
Material changes and capital position
- Cardinal Health acquired P4 Healthcare for approximately $506 million, Yong Yu for approximately $458 million including assumed debt, and Kinray for approximately $1.336 billion. Together, the acquisitions added $2.9 billion of revenue and $61 million of operating earnings versus FY2010.
- Acquisitions used approximately $2.3 billion of cash. The company also received $706 million from selling its remaining CareFusion shares; it no longer held a CareFusion investment at year-end.
- Total assets increased to $22.846 billion, largely reflecting acquisitions and related goodwill. Goodwill rose from $2.205 billion to $3.846 billion.
- Long-term obligations were $2.502 billion in total, including a new $500 million issue of 4.625% notes due 2020. The company had no commercial-paper borrowings or receivables-facility balance at year-end.
- Liquidity sources included a $1.5 billion revolving credit facility maturing in 2016 and a $950 million committed receivables sales facility. The company reported compliance with facility covenants and said available resources were adequate for anticipated needs.
- FY2011 dividends paid were $0.78 per share. The board approved a 10% quarterly dividend increase to $0.215 per share beginning in July 2011. Approximately $300 million of share repurchases occurred after year-end through August 12, 2011.
Outlook, risks and unusual items
- Management expected FY2012 branded pharmaceutical price appreciation to be similar to FY2011, but said new generic launches could contribute less than in FY2011 and their effect would depend on launch timing and competition. Acquisitions were expected to add to revenue and operating earnings.
- Management anticipated higher commodity costs to weigh on Medical segment results and expected healthcare utilization, including surgical procedures, to remain somewhat sluggish. FY2012 capital expenditures were expected to be generally in line with FY2011, with emphasis on information technology.
- In late August 2011, the FDA halted U.S. entry of procedure kits assembled in Mexico, citing inadequate documentation for certain components, not patient-safety concerns. The affected kits represented about 5% of FY2011 Medical segment revenue; Cardinal Health was shifting assembly to U.S. facilities.
- The IRS proposed $849 million of additional tax, excluding penalties and interest, related to transfer pricing and intellectual-property matters. Cardinal Health disputed the proposed adjustments; CareFusion was liable under the tax agreement for approximately $592 million of the amount if payable. The company said its accruals were adequate.
- Other prominent risks include dependence on a small number of large customers (Walgreens and CVS together generated about 45% of revenue), pricing and competitive pressure, regulation and product-quality matters, supply interruptions, commodity volatility, acquisition integration, and implementation of the Medical segment’s new supply-chain system during FY2012–FY2013.
- Unusual comparisons include the FY2010 effective tax rate of 51.6%, which included a $168 million charge related to foreign earnings no longer considered permanently reinvested, and FY2010 litigation-related income. FY2011 included a $75 million gain on sale of CareFusion shares. FY2011 continuing-operations effective tax rate was 36.4%.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at June 30, 2011.
Most important facts for investors to verify
- Whether the large acquisitions deliver expected integration benefits and earnings contributions, particularly given the substantial goodwill added.
- Whether Pharmaceutical segment growth and generic-launch margins can offset customer pricing pressure and possible FY2012 LIFO expense.
- How commodity inflation, sluggish procedure volumes, and the FDA import halt affect Medical segment revenue, margins, and customer retention.
- Progress and costs of the Medical supply-chain system transition, including any effects on operations or financial controls.
- Developments in the IRS audit and the extent and timing of any tax exposure after CareFusion indemnification.
- Working-capital trends, operating cash generation, customer concentration and credit exposure, and the capacity to fund debt service, dividends, buybacks, and further acquisitions.