Business context and reporting period
Cardinal Health provides pharmaceutical and medical products and services through its Pharmaceutical and Medical segments. The filing covers the quarter and nine months ended March 31, 2015 (fiscal 2015 Q3), not 2014 Q3 as stated in the request metadata. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $25,375; +18% year over year | $74,983; +10% |
| Gross margin | $1,459; +12% | $4,254; +9% |
| Operating earnings | $591; +16% | $1,603; +7% |
| Earnings from continuing operations | $365; +16% | $920; −1% |
| Net diluted EPS | $1.09 vs. $0.91 | $2.74 vs. $2.70 |
Quarterly gross margin was about 5.8% of revenue, versus 6.1% a year earlier; operating margin was about 2.3% versus 2.4%. Nine-month gross margin was about 5.7% versus 5.7%, and operating margin about 2.1% versus 2.2%.
Quarterly Pharmaceutical revenue rose 20% to $22,605 and segment profit increased 25% to $567. Medical revenue rose 4% to $2,774, while segment profit fell 8% to $102. For nine months, Pharmaceutical revenue rose 11% and segment profit 14%; Medical revenue rose 5% and segment profit fell 5%.
Nine-month operating cash flow was $1,672, down from $1,808. Working-capital movements included a $718 increase in receivables and an $850 increase in inventory, partly offset by a $1,657 increase in accounts payable. Capital expenditures were $139. Cash and equivalents were $3,183 at March 31, 2015, compared with $2,865 at June 30, 2014.
Total debt and other short-term borrowings were $4,003, including $283 current and $3,720 long-term, versus $3,972 at June 30, 2014. The company reported no outstanding borrowings under its $1.5 billion revolving credit facility or commercial paper program, and was in compliance with its financial covenants. Current assets were $19,631 and current liabilities $16,395. Nine-month dividends were $346 and share repurchases totaled $684.
Material changes and unusual items
- Revenue growth was driven primarily by existing and new pharmaceutical distribution customers, including branded drug price inflation and newly launched hepatitis C products. Nine-month growth was partly offset by the prior-year expiration of the Walgreens distribution contract.
- Gross margin benefited from customer and sales growth, acquisitions, and generic programs, including Red Oak Sourcing. Customer pricing changes, new-customer mix, and hepatitis C products pressured gross margin rates.
- Nine-month earnings included a $60 loss on debt extinguishment ($37 after tax) following redemption of older notes, partly offset by refinancing at lower rates and longer maturities. The prior-year period included a $32 gain on sale of investments.
- March 2015 binding offer to acquire Johnson & Johnson’s Cordis business for $1.9 billion cash, subject to adjustments, regulatory approval, and customary conditions. Expected financing: $1.0 billion of new long-term debt and cash on hand. Closing was anticipated in principal countries toward calendar year-end 2015, with remaining countries afterward. The company had entered into a $1.0 billion bridge loan and expected to terminate it after arranging long-term financing.
- Red Oak Sourcing, a 50/50 generic sourcing venture with CVS, began in July 2014 with a 10-year initial term. Cardinal is obligated to make 39 quarterly payments of $25.6 million to CVS; additional payments may be due if milestones are achieved.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said available capital, committed facilities, and projected operating cash flow were expected to cover working capital, planned capital expenditures, growth, obligations, debt service, dividends, and repurchases. Additional acquisitions could require access to further capital.
- Regulatory and litigation matters include the DEA investigation concerning controlled-substance controls, West Virginia litigation, and a qui tam action under DOJ investigation. The company stated it could not estimate reasonably possible losses for certain unresolved matters; outcomes could materially affect a particular period.
- In April 2015, after quarter-end, Cardinal settled the FTC matter without admitting liability, agreeing to a court order and injunction and a $27 million payment. The filing recorded the charge in the nine months ended March 31.
- Unrecognized tax benefits were $526 million at March 31. The company estimated a possible net decrease of zero to $175 million over the next 12 months, excluding penalties and interest; IRS audits of fiscal 2006–2010 were ongoing.
- Foreign currency translation reduced nine-month comprehensive income by $117 million. Management noted that repatriation of most of the $447 million of foreign-held cash could trigger U.S. taxes.
- Management reported no significant off-balance-sheet arrangements, no material change in market-risk disclosures, and effective disclosure controls as of March 31, 2015.
Key facts for investors to verify
- Confirm the intended period: this is the fiscal quarter ended March 31, 2015, not a 2014 Q3 filing.
- Track Cordis closing, regulatory approvals, final purchase-price adjustments, integration costs, and permanent financing terms.
- Assess whether Pharmaceutical growth and generic sourcing benefits can offset pricing, mix, and margin-rate pressure; monitor Medical segment profitability.
- Review working-capital cash demands, debt maturities and refinancing, and the impact of buybacks and dividends on liquidity.
- Monitor developments and potential cash exposure from the DEA, FTC, West Virginia, qui tam, and tax matters.