01—Abstract
Summary
Summary of the 10-K/A filed January 7, 1998. Cited figures are marked; the original filing is the authoritative source.
Cardinal Health's FY1997 (fiscal year ended June 30, 1997) Form 10-K/A is a restatement filing that revises previously reported results to reflect the PCI pooling retroactively, shift certain merger and restructuring costs into the period incurred, reclassify some charges into SG&A, defer manufacturers' incentives against inventory, and eliminate a stale tax reserve.
Restated FY1997 net revenues were $10.97 billiona (up 17%), net earnings were $184.6 million, and fully diluted EPS was $1.69, compared with $181.1 million and $1.66 previously reported. Restated FY1997 total assets were $3.09 billion and shareholders' equity was $1.33 billion. The restatement changed the reported FY1997 earnings only modestly, but it shifted costs across periods and restated FY1996 earnings down to $127.2 million from $117.6 million.
Operationally, growth was driven by pharmaceutical distribution and pharmacy management services, including a new Kmart pharmaceutical services agreement and opportunities created by the weakened financial condition of a major competitor. Gross margin narrowed to 8.20% from 8.61% because of the mix shift toward lower-margin pharmaceutical distribution, while SG&A improved to 4.70% of revenues. Merger-related costs of about $50.9 millionb (after restatement) reduced after-tax earnings by $36.6 million, or $0.34 per share.
The balance sheet is conservative relative to its size: long-term debt was $283.9 millionc, cash was $243 million, working capital was $1.1 billion, and the company had $400 million of shelf debt capacity available. The main forward-looking issue is the pending mergers. Bergen Brunswig, announced August 23, 1997, would be a stock-for-stock pooling of roughly 40 million Cardinal shares plus about $386 million of assumed debt, and it would bring large integration charges that cannot yet be estimated.
A smaller MediQual pooling, expected to close in early calendar 1998, would add about 0.6 million shares. Investors should weigh the restated base results against those charges and the integration risk.
02—Key points
Key Highlights
- Restated FY1997 net revenues of $10.97 billion, up 17% year over year, driven by pharmaceutical distribution and pharmacy management services, including the Kmart agreement
- Restated FY1997 net earnings of $184.6 million and fully diluted EPS of $1.69, versus previously reported $181.1 million and $1.66
- Restated FY1996 net earnings reduced to $127.2 million from $117.6 million as previously reported, mainly from the retroactive PCI pooling and cost-timing changes
- Gross margin fell to 8.20% from 8.61% due to the shift toward lower-margin pharmaceutical distribution; SG&A improved to 4.70% of revenues from 5.47%
- Merger-related costs of $50.9 million in FY1997 (about $0.34 per share after tax) tied to the PCI, Owen, Pyxis, and Medicine Shoppe combinations
- Balance sheet remains conservative: long-term obligations of $283.9 million, $243 million in cash, $1.1 billion working capital, and $400 million of shelf debt capacity
- Pending Bergen Brunswig pooling (about 40 million shares plus $386 million of assumed debt) and MediQual pooling (about 0.6 million shares) represent significant future dilution and integration charges
03—Questions
Frequently Asked Questions
Why was this 10-K/A filed, and what changed?
The amendment restates fiscal 1995 through 1997 results after SEC staff review in connection with the MediQual Form S-4. Changes include retroactively applying the PCI pooling to prior years, recognizing merger costs as incurred rather than when the merger closed, reclassifying certain restructuring costs into SG&A, deferring manufacturers' incentives against inventory, and reversing an unneeded income tax reserve. FY1997 net earnings moved from $181.1 million to $184.6 million, and FY1996 net earnings moved from $117.6 million to $127.2 million.
What are the biggest risks from the pending Bergen Brunswig merger?
The deal would issue about 40 million Cardinal shares (about 0.775 Cardinal share per Bergen share) and assume about $386 million of debt. The company has not yet estimated the merger charges, and they will be large relative to current earnings. Completion depends on shareholder and regulatory approvals and is expected by the end of fiscal 1998's third quarter. Investors should expect dilution and near-term earnings pressure during integration.
Is Cardinal's core profitability improving despite thinner gross margins?
Partly. Gross margin declined to 8.20% because lower-margin pharmaceutical distribution grew faster, but operating efficiencies lowered SG&A to 4.70% of revenues. Operating earnings rose to $333.2 million from $245.6 million, though that comparison is distorted by the 1996 charges, and the restated 1997 operating figures still include $50.9 million of merger costs.
How strong is the balance sheet and liquidity position?
Liquidity is solid. Working capital is $1.1 billion, cash is $243 million, and the company had $95 million of committed and $279 million of uncommitted bank lines (with $22.2 million drawn). Long-term debt was reduced to $283.9 million after the $100 million 8% notes were retired, and the company has $400 million of shelf registration capacity with no current issuance plans. Shareholders' equity rose to $1.33 billion.
What drove the 17% revenue growth in fiscal 1997?
Growth came mainly from internal expansion, including new customers, higher volume from existing customers, and some price increases. Specific drivers were the expanded Kmart pharmaceutical services relationship and gains from competitor weakness. The two largest customers accounted for 13% of net revenues, which indicates meaningful customer concentration.
04—Continue