CAH

Business Context and Reporting Period

Company: Cardinal Health, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended March 31, 2008
Business Overview: Cardinal Health is a leading provider of healthcare products and services, operating as one of the largest distributors of pharmaceuticals and medical supplies. Operations are organized into four segments: Healthcare Supply Chain Services – Pharmaceutical, Healthcare Supply Chain Services – Medical, Clinical Technologies and Services, and Medical Products and Technologies.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 5% ($1.0 billion) for the quarter and 6% ($3.6 billion) for the nine months compared to the prior year. Growth was driven by pharmaceutical price appreciation, increased volume from existing customers, and acquisitions, partially offset by customer losses.
• Profitability Surge: Operating earnings improved significantly from a loss of $9.8 million in the prior year quarter to $576.5 million. This improvement is primarily attributable to the absence of a $600 million shareholder litigation reserve recorded in the prior year period.
• Segment Performance:
  • Pharmaceutical: Revenue grew 3%, but segment profit declined 21% due to repricing of large customer contracts and anti-diversion efforts.
  • Medical Products & Technologies: Revenue surged 48% and profit increased 72%, driven largely by the Viasys acquisition.
  • Clinical Technologies: Profit increased 29% due to revenue growth and favorable product mix.
• Special Items: Total special items decreased significantly to $35.6 million for the quarter (vs. $612.0 million prior year) and $87.7 million for the nine months (vs. $653.8 million prior year), reflecting the one-time litigation charge in the prior year.

Guidance, Outlook, Risks, and Unusual Items

• Acquisitions: The Company announced a definitive agreement to acquire Enturia Inc. for $490 million, expected to close in the fourth quarter of fiscal 2008. The Viasys acquisition integration continues.
• Share Repurchases: The Company repurchased approximately $1.1 billion of common shares during the nine months ended March 31, 2008. Approximately $1.7 billion remains available under current repurchase authorizations.
• Regulatory Risks (DEA): The Drug Enforcement Administration (DEA) suspended licenses for three distribution centers due to concerns over controlled substance diversion. The Company expects this to continue to have an adverse effect on revenue and results of operations through fiscal 2009.
• Tax Contingencies: The IRS issued Notices of Proposed Adjustment challenging deductions related to the sale of trade receivables, proposing an additional $178.9 million in tax. The Company intends to contest these adjustments.
• Litigation: The Company recorded reserves for various litigation matters, including shareholder and ERISA litigation against Syncor ($14.0 million total reserve in the quarter). A settlement of derivative actions resulted in $23.0 million of income recognized in the prior quarter, with remaining proceeds expected in the current quarter.

Investor Verification Checklist

• DEA Impact: Verify the extent of revenue loss and operational disruption caused by the DEA license suspensions and the effectiveness of new anti-diversion controls.
• Customer Contract Repricing: Assess the long-term impact of the repricing of large customer contracts in the Pharmaceutical segment on future gross margins.
• IRS Audit Outcome: Monitor the resolution of the IRS audit regarding trade receivable sales and the potential $178.9 million tax liability.
• Enturia Acquisition: Confirm the closing of the Enturia acquisition and the integration timeline within the Medical Products and Technologies segment.
• Discontinued Operations: Review the final adjustments related to the sale of the Pharmaceutical Technologies and Services (PTS) business, which resulted in a loss from discontinued operations in the current period.