Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2009 (first quarter of fiscal 2010), compared with the quarter ended September 30, 2008. Financial statements are unaudited. Cardinal completed the CareFusion spin-off on August 31, 2009; CareFusion’s results through that date are presented as discontinued operations.
Key financial results
| Metric | Q1 FY2010 | Q1 FY2009 |
|---|---|---|
| Revenue | $24.781 billion | $23.437 billion |
| Gross margin | $908.8 million; 3.7% of revenue | $901.2 million; 3.8% of revenue |
| Operating earnings | $239.9 million; 1.0% of revenue | $286.6 million; 1.2% of revenue |
| Continuing operations earnings/(loss) | $(61.8) million | $172.2 million |
| Net earnings/(loss) | $(38.2) million; diluted EPS $(0.11) | $249.1 million; diluted EPS $0.69 |
| Operating cash flow, continuing operations | $261.6 million | $(492.0) million |
| Cash and equivalents, September 30 | $1.585 billion |
Revenue increased 6%, while gross margin rose only 1% and operating earnings fell 16%. Pharmaceutical segment revenue grew 5% to $22.562 billion, but segment profit declined 2% to $208.4 million. Medical revenue grew 10% to $2.237 billion and segment profit increased 17% to $114.9 million. Segment profit is a company-defined measure and excludes restructuring and impairment costs.
Cash, debt and liquidity
- Total operating cash flow, including discontinued operations, was $406.0 million. Investing cash outflow was $74.1 million; financing cash inflow was $31.3 million. These totals include CareFusion cash flows.
- Continuing operations generated $261.6 million from operations, used $64.2 million in investing, and used $1.253 billion in financing, primarily to repay debt.
- At September 30, total debt obligations were $2.466 billion, including $362.3 million current; long-term obligations, net of current amounts, were $2.104 billion. Cardinal tendered and purchased more than $1.1 billion of debt, recording a $39.9 million pretax extinguishment loss. It repaid $350 million of floating-rate notes at maturity on October 2.
- Liquidity included $1.5 billion of cash and unused commercial-paper and receivables-sale facilities, each with stated capacity of $1.5 billion and $950 million, respectively. The company reported compliance with its 4.0-to-1 interest-coverage and 3.25-to-1 leverage covenants.
- Cash dividends declared were $0.175 per share, versus $0.140 in the prior-year quarter. A new $500 million share-repurchase authorization was announced; no shares were purchased under it during the quarter.
Material changes, outlook and risks
- The CareFusion spin-off changed the company’s business scope and reporting segments to Pharmaceutical and Medical. Cardinal distributed approximately 81% of CareFusion shares and retained 41.4 million shares, approximately 19%; it is required to dispose of the retained shares within five years. The retained investment was valued at $902.4 million at quarter-end.
- Net results included a $171.9 million tax charge related to anticipated repatriation of foreign earnings and a $39.9 million pretax debt-extinguishment loss. Restructuring and severance expense increased to $59.7 million from $20.7 million, including spin-off costs and $18.6 million related to the CEO’s retirement. The company estimated about $52 million of additional restructuring costs from existing activities.
- A $22.5 million impairment was recorded for SpecialtyScripts, which was held for sale. Cardinal also planned to sell Martindale; its results are included in discontinued operations. CareFusion’s discontinued-operations earnings were lower partly because only two months of its results were included in the current quarter.
- Management reported revenue growth from pharmaceutical price appreciation and volume, but cited customer repricing, lower or delayed generic launches, and Medicine Shoppe repositioning as gross-margin pressures. It expected competitive pricing pressure and identified generic-launch timing, generic price deflation, customer-contract repricing and strategic repositioning as factors that could weigh on fiscal 2010 results. No numerical earnings or revenue guidance is provided in the filing text.
- Management said existing cash, operating cash flow and available capital resources were adequate for anticipated needs. Key risks include large-customer concentration, competitive pricing, healthcare and regulatory changes, supply interruptions (including a radioisotope shortage), financial-market conditions, and risks arising from the CareFusion separation and retained investment.
- The IRS proposed additional taxes of $598.1 million, excluding penalties and interest, on certain matters for tax years 2003–2005; $462.1 million relates to matters for which CareFusion may be liable under the tax agreement. Cardinal disputes the proposed adjustments and says it believes reserves are adequate. It reported $687.6 million of unrecognized tax benefits and estimated a possible decrease of up to $25 million over the next 12 months.
- Disclosure controls were assessed as effective as of September 30, 2009; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How recurring operating performance develops after the CareFusion spin-off, including segment margins and costs allocated to the continuing businesses.
- The composition and timing of the $171.9 million tax charge, the IRS disputes, and the effectiveness of CareFusion’s tax indemnification obligations.
- Execution and cash costs of the remaining restructuring plans, including the estimated $52 million of future costs.
- Progress on selling SpecialtyScripts and Martindale, and the timing and market impact of disposing of Cardinal’s retained CareFusion shares.
- Debt repayment and liquidity after the October 2 maturity, covenant headroom, and the effect of working-capital movements on cash generation.