Business Context and Reporting Period
Company: Cardinal Health, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2005 (Second Quarter of Fiscal 2006)
Business Overview: Cardinal Health operates four reportable segments: Pharmaceutical Distribution and Provider Services, Medical Products and Services, Pharmaceutical Technologies and Services, and Clinical Technologies and Services. The company provides a diverse portfolio of products and services to health care providers, including distribution, manufacturing, and clinical technologies.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Dec 31, 2005 |
Three Months Ended Dec 31, 2004 |
Six Months Ended Dec 31, 2005 |
Six Months Ended Dec 31, 2004 |
|---|---|---|---|---|
| Revenue | $19,919.0 | $18,547.1 | $39,292.4 | $36,339.4 |
| Gross Margin | $1,307.2 | $1,209.3 | $2,520.4 | $2,299.8 |
| Operating Earnings | $484.4 | $326.2 | $856.8 | $688.5 |
| Net Earnings | $304.0 | $214.0 | $532.3 | $427.3 |
| Diluted EPS | $0.70 | $0.49 | $1.23 | $0.98 |
| Cash from Operations (6mo) | $1,384.9 | $1,520.6 | ||
| Cash & Equivalents (Dec 31, 2005) | $2,223.9 | |||
| Total Debt (Current + Long-term) | $3,009.6 |
Note: Total Debt calculated as Current portion of long-term obligations ($441.3M) + Long-term obligations ($2,568.3M).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 7% for the quarter and 8% for the six-month period compared to the prior year, driven by higher sales volume, new customers, and price increases in the Pharmaceutical Distribution segment.
- Profitability: Operating earnings increased 48% for the quarter and 24% for the six-month period. This significant improvement is largely due to a favorable year-over-year comparison regarding special items and impairment charges.
- Special Items: Total special items decreased significantly to $21.0 million for the quarter (vs. $103.1 million in 2004) and $43.7 million for the six months (vs. $135.0 million in 2004). This reduction is primarily due to lower restructuring costs and asset impairments compared to the prior year.
- Equity-Based Compensation: Operating earnings were adversely affected by the adoption of SFAS No. 123(R). Equity-based compensation expense increased to $55.8 million for the quarter and $138.7 million for the six months, compared to $2.8 million and $4.9 million in the prior year periods.
- Impairment Charges: Impairment charges and other decreased to $5.1 million for the quarter and $7.6 million for the six months, compared to $80.9 million and $84.7 million in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- SEC Investigation & Settlement: The Company has reached an agreement-in-principle with the SEC regarding an investigation into accounting and financial reporting matters. The proposed settlement includes a $35 million penalty. A reserve of $10 million was recorded in the quarter, in addition to a $25 million reserve recorded in the prior fiscal year.
- Restructuring Program: The "One Cardinal Health" global restructuring program is ongoing, with Phase I focusing on consolidation and Phase II on integration. The company expects to incur approximately $175 million in additional future costs associated with restructuring and integration.
- Discontinued Operations: The sterile pharmaceutical manufacturing business in Humacao, Puerto Rico, has been classified as discontinued operations. Net assets of $26.6 million are held for sale.
- Share Repurchase: The Company announced a $1 billion share repurchase program in June 2005. Approximately $468.2 million was repurchased during the quarter ended December 31, 2005.
- Regulatory Risks: Recent Medicaid reform legislation passed by Congress may indirectly adversely affect the Pharmaceutical Distribution segment by changing reimbursement formulas, effective January 1, 2007.
- Customer Concentration: The Specialty Distribution business within Medical Products and Services lost a major customer representing 16% of the segment's fiscal 2005 revenue, which will significantly impact results in the second half of fiscal 2006.
Investor Verification Checklist
- SEC Settlement Finality: Verify the final terms and timing of the $35 million SEC settlement and confirm if the current reserve is sufficient.
- Restructuring Cost Estimates: Monitor the execution of the global restructuring program and the accuracy of the estimated $175 million in future costs.
- Specialty Distribution Impact: Assess the financial impact of the loss of the major customer in the Specialty Distribution business starting January 1, 2006.
- Equity Compensation Expense: Track the run-rate of equity-based compensation expense under SFAS No. 123(R) and its impact on future operating margins.
- Medicaid Reform: Evaluate the potential impact of the new Medicaid reimbursement formula on the Pharmaceutical Distribution segment's margins starting in 2007.
- Discontinued Operations Sale: Confirm the timeline and proceeds from the sale of the Humacao, Puerto Rico, sterile pharmaceutical manufacturing assets.