Business context and reporting period
Cardinal Health, Inc. is a healthcare products and services company with Pharmaceutical and Medical segments. This filing is its Form 10-K for the fiscal year ended June 30, 2013; it also reports fourth-quarter results. The request metadata says “2012 Q4,” but the supplied filing covers fiscal 2013.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $101.1 billion | $107.6 billion |
| Gross margin | $4.921 billion; 4.9% of revenue | $4.541 billion |
| Operating earnings | $996 million; 1.0% of revenue | $1.792 billion |
| Earnings from continuing operations | $335 million | $1.070 billion |
| Diluted EPS from continuing operations | $0.97 | $3.06 |
| Net cash provided by operating activities | $1.727 billion | $1.176 billion |
| Cash and equivalents at year-end | $1.901 billion | $2.274 billion |
| Total long-term obligations and short-term borrowings | $3.854 billion | $2.894 billion |
Net earnings were $334 million, or $0.97 diluted per share; net margin was approximately 0.3%. Pharmaceutical segment profit rose 11% to $1.734 billion, while Medical segment profit increased 12% to $372 million. Fiscal 2013 includes an $829 million non-cash Nuclear Pharmacy Services goodwill impairment ($799 million after tax); the effective tax rate was 62.3%, substantially affected by the impairment’s nondeductibility.
Fourth-quarter FY2013 revenue was $25.420 billion, gross margin $1.247 billion, and loss from continuing operations $586 million, or $1.72 diluted per share. In fourth-quarter FY2012, revenue was $26.764 billion and earnings from continuing operations were $236 million.
Material changes versus the prior year
- Revenue fell 6%, chiefly reflecting the September 2012 expiration of the Express Scripts contract (about $6.7 billion of prior-year revenue) and brand-to-generic conversions. New customer growth and Specialty Solutions growth partly offset the decline.
- Gross margin increased 8%, led by $350 million of stronger generic-program performance, acquisitions, and higher branded distribution agreement margin. Nuclear Pharmacy Services gross margin fell $71 million amid market weakness.
- Operating earnings fell 44% and continuing-operations earnings fell 69%, primarily because of the goodwill impairment and higher restructuring and acquisition-related costs.
- Operating cash flow increased to $1.727 billion. Cash declined as acquisition spending, repurchases and dividends exceeded operating cash flow and debt proceeds.
- AssuraMed was acquired in March 2013 for $2.07 billion, net of cash acquired, expanding home medical supplies distribution. The acquisition was funded partly with $1.3 billion of notes; total obligations rose about $1.0 billion year over year.
Outlook, risks and unusual items
- The Walgreens pharmaceutical distribution contract, representing about 20% of FY2013 revenue, expires at the end of August 2013 and was not renewed. Management expects an adverse earnings impact and does not currently expect FY2014 diluted EPS from continuing operations to grow versus FY2013, excluding specified unusual items.
- Management expects the Walgreens-related working-capital reduction and other factors to produce a net after-tax FY2014 operating cash-flow benefit exceeding $500 million. It expects continued strength in generic programs and branded price appreciation, relatively flat procedural utilization, and FY2014 capital expenditures of $245–$265 million.
- A Medical segment restructuring is expected to cost approximately $79 million pre-tax in total; $51 million was recognized in FY2013, with about $28 million expected through FY2014. Management expects savings and other benefits to begin in FY2014.
- Liquidity included a $1.5 billion revolving credit facility and a $950 million receivables facility; neither had borrowings outstanding at year-end, and the company reported compliance with financial covenants. Contractual obligations totaled $5.699 billion, including estimated interest and lease commitments.
- Key risks include customer concentration and the Walgreens transition; CVS concentration (23% of FY2013 revenue); competitive pricing and generic-market changes; regulatory compliance; and reimbursement and utilization changes. DEA restrictions on controlled-substance distribution at the Lakeland, Florida facility remain in effect until May 2014 under a settlement. The filing also describes West Virginia controlled-substance litigation, a DOJ investigation into customer discount structures, and IRS transfer-pricing assessments being contested.
- The auditor issued unqualified opinions on the financial statements and internal controls. The internal-control assessment excluded AssuraMed, which accounted for 35% of net assets at year-end.
Investor verification priorities
- Track actual FY2014 performance against the no-EPS-growth outlook and the projected Walgreens-related cash-flow benefit; distinguish recurring results from exclusions.
- Assess customer replacement, retention and margin effects following the Walgreens contract expiration, alongside CVS contract performance.
- Review Nuclear Pharmacy Services operating trends and assumptions behind the full goodwill write-off.
- Monitor AssuraMed integration, acquisition-related amortization, debt levels and covenant headroom.
- Follow outcomes and potential cash exposure from DEA-related matters, the DOJ discount inquiry, West Virginia litigation and tax audits.