01—Abstract
Summary
Summary of the 10-K filed August 26, 1996. Cited figures are marked; the original filing is the authoritative source.
Cardinal Health's fiscal 1996 10-K (year ended June 30, 1996) shows a company growing revenue steadily while absorbing a sizable merger-related charge.
Net revenues rose about 10% to $8.86 billiona from $8.02 billion, driven mainly by internal growth in pharmaceutical wholesaling, new and existing customers, and price increases. Reported net earnings fell to $111.9 million, or $1.73 per share, from $137.5 million, or $2.14 per share, in fiscal 1995. The decline reflects $67.3 million of pre-tax unusual items ($47.8 million after tax) tied mainly to the Medicine Shoppe and Pyxis mergers.
Excluding those items, earnings were about $159.7 millionb, or $2.47 per share, which is a meaningful improvement. Gross margin improved to 8.07% from 7.79%, helped by the higher-margin pharmacy management business, while the effective tax rate rose to 44.6%. The balance sheet strengthened.
Shareholders' equity grew to $930.7 millionc, total assets reached $2.68 billion, and cash and equivalents rose to $287.8 million. Working capital increased to $854.1 million. Long-term debt increased, largely because of a $150 million 6% note offering in January 1996, and total long-term obligations stood at $371 million, with $106 million classified as current.
Investors should note that the company is heavily dependent on a few customers: Kmart accounted for about 12%d of net revenues, and the two largest customers accounted for roughly 25% of trade receivables. The company also faces antitrust litigation over chargeback pricing. A federal summary judgment was granted in its favor, but the plaintiffs have appealed.
Looking forward, the pending PCI Services acquisition, expected to close in fall 1996 as a stock-for-stock pooling-of-interests deal that issues about 2.1 million shares, continues the company's strategy of expanding into higher-margin health care services. Management says it has adequate capital resources to meet its needs. The main questions for investors are whether revenue growth can keep pace with acquisition-related costs and whether margins can improve further as the integration of the recent mergers is completed.
02—Key points
Key Highlights
- Net revenues increased about 10% to $8.86 billion in fiscal 1996, up from $8.02 billion in fiscal 1995, driven by internal growth in pharmaceutical wholesaling.
- Reported EPS was $1.73, down from $2.14, because of $67.3 million in pre-tax merger-related unusual items; excluding those items, EPS was $2.47.
- Gross margin improved to 8.07% from 7.79%, supported by higher-margin pharmacy management operations acquired through Allied and Pyxis.
- Shareholders' equity rose to $930.7 million, and total assets grew to $2.68 billion.
- Long-term obligations increased to $371 million, including a $150 million 6% Notes offering in January 1996 and $106 million of debt coming due in March 1997.
- Customer concentration is significant: Kmart represents about 12% of net revenues, and the top two customers account for roughly 25% of trade receivables.
- A pending stock-for-stock merger with PCI Services (about 2.1 million shares, pooling-of-interests) is expected to close in fall 1996.
03—Questions
Frequently Asked Questions
Why did Cardinal Health's reported earnings decline in fiscal 1996?
Reported net earnings fell to $111.9 million ($1.73 per share) from $137.5 million ($2.14 per share). The decline was driven mainly by $67.3 million in pre-tax unusual items ($47.8 million after tax) related to the Medicine Shoppe and Pyxis mergers, including transaction fees, restructuring charges, and personnel costs. Excluding these items, earnings were about $159.7 million, or $2.47 per share.
How dependent is Cardinal Health on its largest customers?
The company is meaningfully concentrated. Kmart accounted for about 12% of net revenues in fiscal 1996, and management states the business could be adversely affected if Kmart were lost. The two largest customers account for roughly 25% of total trade receivables, and the five largest suppliers represent about 22.5% of revenues.
What legal risks does Cardinal Health face?
The company and its subsidiary Whitmire are defendants in antitrust class actions over chargeback pricing for brand-name prescription drugs. A federal court granted summary judgment in favor of the wholesaler defendants in April 1996, but plaintiffs have appealed. Management believes the allegations are without merit and does not expect a material adverse effect on its financial condition or results of operations.
How is Cardinal Health's balance sheet and liquidity position?
The balance sheet is strong. Shareholders' equity reached $930.7 million, working capital increased to $854.1 million, and cash and equivalents rose to $287.8 million. The company had no borrowings under its $345 million of bank lines at June 30, 1996, and management believes its capital resources are adequate. Long-term debt rose to $371 million, with $106 million due within a year.
What is the outlook following the PCI Services acquisition?
The pending merger with PCI Services, a packaging services provider, is expected to close in fall 1996 as a pooling-of-interests transaction. Cardinal would issue about 2.1 million shares and record a one-time transaction charge at closing. The deal fits the company's strategy of expanding into health care services with higher gross margins than pharmaceutical distribution, though completion depends on PCI shareholder approval and other conditions.
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