Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2009 (fiscal 2010); filed February 5, 2010. Cardinal Health had completed the August 31, 2009 spin-off of CareFusion and now reports Pharmaceutical and Medical segments. Comparative results include CareFusion in discontinued operations through the spin-off date.
Financial performance
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Revenue | $24.920 billion, up 3% year over year | $49.700 billion, up 5% |
| Gross margin | $957.7 million vs. $915.1 million; approximately 3.8% of revenue | $1.867 billion vs. $1.816 billion |
| Operating earnings | $366.8 million vs. $313.1 million, up 17% | $606.7 million vs. $599.7 million, up 1% |
| Earnings from continuing operations | $230.2 million vs. $169.0 million; diluted EPS $0.64 vs. $0.47 | $168.4 million vs. $341.2 million; diluted EPS $0.47 vs. $0.95 |
| Net earnings | $234.5 million vs. $316.5 million; diluted EPS $0.65 vs. $0.88 | $196.3 million vs. $565.6 million; diluted EPS $0.54 vs. $1.57 |
| Operating cash flow | Six-month continuing operations: $783.8 million, compared with use of $506.4 million; total including discontinued operations: $930.6 million vs. $211.2 million |
Quarterly gross margin improved modestly as a share of revenue. For the six-month period, reported continuing earnings were reduced by a $171.9 million tax charge related to anticipated repatriation of foreign earnings and a $39.9 million debt-extinguishment loss. Net earnings also fell sharply year over year because CareFusion earnings were no longer included after the spin-off.
Segments and material changes
- Pharmaceutical: Revenue rose 3% in the quarter and 4% for six months, while segment profit declined 1% and 2%, respectively. Customer repricing and discounts, fewer or delayed generic launches, and Medicine Shoppe repositioning pressured margins.
- Medical: Revenue increased 9% in both periods; segment profit rose 38% for the quarter and 26% for six months. Higher volume and lower raw-material costs contributed. Flu-related product demand supported revenue.
- Consolidated revenue growth reflected pharmaceutical price appreciation and volume, partly offset by lost customers. The company reported an 8.2% pharmaceutical price appreciation index for the trailing 12 months.
- Quarterly operating earnings benefited from a $25.4 million net litigation credit, primarily insurance proceeds; the six-month period included $70.4 million of restructuring costs and a $20 million SpecialtyScripts impairment.
Balance sheet, debt, and liquidity
- At December 31, cash and equivalents were $1.747 billion, up from $1.222 billion at June 30, 2009. Trade receivables were $4.928 billion and inventories $7.961 billion.
- Total obligations and short-term borrowings were $2.112 billion, down from $3.638 billion at June 30, following a debt tender and repayment of $350 million of maturing floating-rate notes. Long-term obligations excluding current amounts were $2.099 billion.
- Six-month continuing investing cash flow was positive $27.4 million, including $135 million of proceeds from CareFusion share sales, partly offset by $79.9 million of capital expenditures. Continuing financing cash use was $1.707 billion, including debt reduction and $127.2 million of dividends.
- Liquidity included a $1.5 billion commercial-paper program backed by a $1.5 billion revolver and a $950 million receivables-sales facility; neither had an outstanding balance at period-end. The company reported compliance with its financial covenants.
- Cardinal Health retained 35.9 million CareFusion shares valued at $897.4 million and said it expected to sell the remaining shares within 18 months, subject to market conditions.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said it expected competitive pricing pressure to continue and identified generic-launch timing, generic price deflation, customer contract repricing, and branded-product price appreciation as factors affecting fiscal 2010 results.
- Management estimated approximately $43 million of additional restructuring costs in future periods, primarily related to the spin-off. It stated that existing cash, operating cash flow, and available credit resources were adequate for anticipated needs.
- The nuclear-pharmacy business faced a prolonged shortage of raw material used to produce a radioisotope; the company was working with manufacturers on longer-term solutions.
- IRS audits and proposed adjustments remain significant uncertainties. The filing describes proposed additional tax of $598.1 million, excluding penalties and interest, on transfer-pricing and intellectual-property matters; $462.1 million relates to matters for which CareFusion may be liable under the tax matters agreement. Cardinal Health disputes the proposals and says it believes its reserve is adequate.
- Unrecognized tax benefits were $698.5 million and accrued penalties and interest were $222.3 million at December 31. The company estimated a possible decrease in unrecognized tax benefits of zero to $25 million over the next 12 months, excluding penalties and interest.
- The company disclosed that unfavorable litigation or regulatory outcomes, product-quality or compliance issues, and changing market conditions could affect results. It reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and cash flow reflects the CareFusion spin-off, discontinued operations, and other one-time items?
- Whether Pharmaceutical segment margins recover amid customer repricing, competitive pressure, and generic-launch changes.
- Progress on selling retained CareFusion shares and the resulting cash proceeds and realized gains or losses.
- Developments in the IRS audits, tax reserves, and CareFusion indemnification obligations.
- Whether the $43 million estimated future restructuring cost and the radioisotope supply shortage change from management’s expectations.