Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2011, the first quarter of fiscal 2012. Comparative results are for the three months ended September 30, 2010. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $26.792 billion | $24.438 billion | Up 10% |
| Gross margin | $1.085 billion; 4.05% of revenue | $962.2 million; 3.94% | Up 13% |
| Operating earnings | $412.3 million; 1.54% of revenue | $363.9 million; 1.49% | Up 13% |
| Earnings from continuing operations | $237.1 million | $294.4 million | Down 19% |
| Net earnings | $236.8 million | $294.8 million | Down 20% |
| Diluted EPS | $0.68 | $0.84 | Down 19% |
| Cash from operating activities | $504.2 million | $217.7 million from continuing operations | Higher |
Revenue growth reflected approximately $1.3 billion from acquisitions and $1.0 billion from growth with existing customers. Pharmaceutical revenue rose 10% and segment profit rose 19% to $363.3 million. Medical revenue rose 10%, while segment profit declined 5% to $79.0 million.
Gross margin benefited from acquisitions, generic-program performance and favorable resolution of manufacturer disputes. Customer pricing changes reduced Pharmaceutical gross margin by $34 million. Medical gross margin benefited from mix and volume, but commodity costs and the Presource procedure-kit matter were adverse.
Liquidity, debt and capital allocation
At September 30, 2011, cash and equivalents were $2.011 billion, versus $1.929 billion at June 30, 2011. Current assets were $16.723 billion and current liabilities were $13.797 billion. Long-term obligations were $2.195 billion, with a further $333.1 million of current obligations and short-term borrowings. The filing reports no outstanding commercial-paper borrowings or balance under its committed receivables sales facility.
Operating cash flow was $504.2 million; investing activities used $41.6 million and financing activities used $381.3 million. Financing outflows included $300 million of share repurchases and $77.2 million of dividends. Capital expenditures were $44.3 million. The quarterly dividend was $0.215 per share; $450 million remained under the share-repurchase authorization. Management said available cash, projected operating cash flow and committed facilities should adequately fund anticipated needs. The company was in compliance with its credit-facility covenants.
Material changes and unusual items
- Prior-year earnings included a $74.8 million pretax gain from selling the remaining CareFusion investment; there was no comparable gain in Q1 FY2012. This was a principal reason continuing-operations earnings fell despite higher operating earnings.
- The effective tax rate rose to 38.4% from 30.6%. The prior-year rate benefited from a $28 million tax effect related to the CareFusion share sale; Q1 FY2012 also included $3.6 million of net unfavorable discrete tax items.
- Acquisition-related costs increased to $27.4 million from $11.7 million, including higher acquired-intangible amortization and integration costs. The company completed no significant acquisitions in the quarter; Kinray and Cardinal Health China acquisitions from the prior year contributed to current-quarter results.
- In late August, the FDA temporarily halted imports of certain Presource procedure kits assembled in Mexico, citing inadequate documentary support for components and no stated patient-safety concern. Imports resumed after remedial action. The matter reduced Medical segment profit by $11 million in the quarter; management expected minimal impact for the rest of fiscal 2012.
- The IRS proposed $849 million of additional taxes, excluding penalties and interest, relating to transfer pricing and intellectual-property matters for fiscal 2003–2007. Cardinal Health disputes the adjustments and says it is adequately reserved; CareFusion is responsible under an agreement for $591.5 million if the tax is ultimately payable.
- After quarter-end, Cardinal Health Canada agreed to make a cash bid for FutureMed for approximately $165 million, including $40 million of debt, subject to conditions and approvals.
Outlook, risks and controls
The filing provides no quantified company-wide earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It expected minimal remaining-fiscal-year impact from the Presource matter and stated that liquidity resources were adequate. Key exposures include tax audits and uncertain tax positions, litigation and regulatory matters, commodity costs, execution of acquisitions, and implementation of new Medical-segment systems. Management reported disclosure controls were effective at quarter-end; the planned systems transition could affect internal controls in fiscal 2012 and 2013.
Important facts for investors to verify
- How much future growth and profitability depends on acquired businesses versus existing-customer performance, and how acquisition integration costs and amortization evolve.
- Whether the IRS dispute, related reserves and CareFusion indemnification develop as expected; the filing notes possible changes in unrecognized tax benefits over the next 12 months.
- Whether the Presource import issue remains resolved and whether its expected limited impact is borne out.
- Cash conversion and working-capital trends, including receivables, inventory and supplier-payment timing, alongside continued repurchases and dividends.
- Completion, purchase economics and integration of the proposed FutureMed transaction, which remained subject to conditions.