Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended September 30, 2012; comparisons are with the three months ended September 30, 2011 unless otherwise noted. Cardinal Health distributes pharmaceutical and medical products and services through its Pharmaceutical and Medical segments. Unaudited interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $25.889 billion | $26.792 billion |
| Gross margin | $1.159 billion; approximately 4.5% of revenue | $1.084 billion; approximately 4.0% |
| Operating earnings | $457 million; approximately 1.8% of revenue | $412 million; approximately 1.5% |
| Earnings from continuing operations | $272 million | $237 million |
| Net earnings | $271 million | $237 million |
| Diluted EPS | $0.79 | $0.68 |
| Operating cash flow | $568 million | $504 million |
Revenue declined 3%, while gross margin increased 7%, operating earnings rose 11%, and continuing-operations earnings increased 15%. The improved earnings included a $22 million benefit from antitrust class-action settlements. Effective tax rate was 38.1%, versus 38.4%.
Cash, debt and liquidity: Cash and equivalents were $2.440 billion at September 30, up from $2.274 billion at June 30, 2012. Current assets were $18.007 billion and current liabilities $14.669 billion. Current and long-term obligations were $471 million and $2.408 billion, respectively. The company had no commercial-paper or receivables-facility borrowings and no revolving-credit borrowings other than $43 million in standby letters of credit. It reported compliance with its credit-facility covenants and considered available resources adequate for anticipated needs.
Operating cash flow was partly offset by $100 million in acquisitions, $26 million in capital expenditures, $84 million in dividends, and $200 million in share repurchases. Cash dividends declared per share were $0.2375, compared with $0.215 a year earlier. The company repurchased 4.9 million shares for $200 million during the quarter.
Material changes and operating drivers
- Pharmaceutical: Revenue fell 4% to $23.498 billion. Management attributed the decline primarily to brand-to-generic conversions, which lower product prices and can shift generic purchases directly to manufacturers. Generic-program performance helped increase segment profit to $400 million from $363 million.
- Medical: Revenue increased 1% to $2.393 billion, aided by acquisitions and growth in self-manufactured and private-brand products. Segment profit declined to $74 million from $79 million, with lower existing-customer volumes and costs and lost sales related to a business-transformation project among the factors cited.
- Consolidated SG&A increased 7% to $690 million, primarily due to acquisitions and business-system investments. Working-capital indicators worsened year over year: DSO was 22.4 days versus 20.9, DIOH 25.4 versus 23.0, and DPO 38.3 versus 36.1.
Outlook, risks and unusual items
- Management expected Pharmaceutical segment revenue to decline in fiscal 2013, citing brand-to-generic conversions and the expiration of its Express Scripts distribution contract on September 30, 2012. The contract’s revenue impact was expected to begin in the quarter ending December 31, 2012. No specific full-year earnings guidance is provided in the filing text.
- On October 30, 2012, the company announced a 16% increase in its quarterly dividend to $0.275 per share, payable January 15, 2013. It had $650 million remaining under its share-repurchase authorization.
- The DEA settlement kept the Lakeland, Florida controlled-substance distribution registration suspended until May 15, 2014. The company was responding to civil subpoenas from DEA and DOJ offices. West Virginia also brought claims concerning controlled-substance distribution, and DOJ issued a civil investigative demand concerning customer discounts. The company said it could not estimate reasonably possible losses for certain matters; outcomes could materially affect results in a particular period.
- The IRS proposed $849 million in additional taxes, excluding penalties and interest, concerning transfer-pricing and intellectual-property matters for fiscal years 2003–2007. Cardinal contests the proposed adjustments; CareFusion is responsible under the separation agreement for $592 million if the tax is ultimately payable. Unrecognized tax benefits totaled $657 million; the company estimated a possible decrease of zero to $265 million over the next 12 months.
- The quarter included $22 million in antitrust settlement income. The remaining P4 Healthcare contingent-consideration obligation was settled for $4 million in July 2012. The company renewed its $950 million receivables sales facility through November 6, 2014.
- Management reported disclosure controls were effective as of September 30, 2012. The Medical segment had substantially completed implementation of its new system, while continuing to refine some processes.
Important facts for investors to verify
- How much the Express Scripts contract expiration and further generic conversions affect Pharmaceutical revenue, margins, and cash flow.
- Developments in the DEA, DOJ, West Virginia, and related controlled-substance matters, including any potential fines or operational restrictions.
- Progress and potential resolution of the IRS dispute, including the CareFusion indemnification and possible changes in unrecognized tax benefits.
- Whether Medical transformation costs, customer volumes, and working-capital trends improve, particularly receivables and inventory.
- Whether operating cash generation supports the company’s dividend, repurchases, acquisitions, and debt-service plans.