01—Abstract
Summary
Summary of the 10-K filed September 2, 1999. Cited figures are marked; the original filing is the authoritative source.
Cardinal Health's fiscal 1999 10-K (year ended June 30, 1999) shows a company growing rapidly on the back of pharmaceutical distribution and serial pooling-of-interests acquisitions.
Operating revenue rose 19% to $21.48 billiona and total revenue reached $25.03 billion, while net earnings grew 7% to $456.3 million. However, diluted EPS of $1.64 was reduced by $0.42 from merger-related costs and special charges totaling $146.6 million pre-tax, so underlying profitability is somewhat better than reported results. Gross margin slipped to 12.03% from 12.33%, mainly because the low-margin Pharmaceutical Distribution segment saw margin compression from competitive pricing, offset by stronger margins in Pharmaceutical Services and Medical-Surgical Products.
The balance sheet strengthened, with shareholders' equity up 17% to $3.46 billionb and total assets of $8.29 billion, while long-term obligations declined to $1.22 billion. Cash flow from operations fell sharply to $345.7 million from $552.1 million, driven by heavy working capital investment in inventories (up $318.5 million) and sales-type leases (up $282.3 million).
Investors should watch this cash conversion gap, along with the 39.9% effective tax rate, which rose from 35.6% partly due to non-deductible merger costs. Key forward-looking items include a pending pooling-of-interests merger with Automatic Liquid Packaging, roughly $100 millionc of additional expected merger integration costs, the resolution of antitrust chargeback litigation (the wholesaler defendants were dismissed, subject to a pending rehearing petition), and about 430 natural rubber latex glove lawsuits assumed through Allegiance, for which the company cannot estimate potential liability.
02—Key points
Key Highlights
- Total revenue up 19% to $25.03 billion; operating revenue rose 19% to $21.48 billion, with Pharmaceutical Distribution growing 25%
- Net earnings of $456.3 million (+7%); diluted EPS $1.64 vs. $1.53, but includes $0.42 per share of merger-related and special charges ($146.6 million pre-tax)
- Gross margin declined to 12.03% from 12.33% due to lower selling margins in Pharmaceutical Distribution (5.29% vs. 5.58%), partially offset by Medical-Surgical margin gains to 23.29%
- Operating cash flow fell to $345.7 million from $552.1 million as inventories and sales-type leases absorbed significant working capital
- Shareholders' equity rose to $3.46 billion; long-term debt declined to $1.22 billion while the company maintains a $1.0 billion credit facility and $250 million shelf capacity
- Pending pooling-of-interests merger with Automatic Liquid Packaging; approximately $100 million of further merger-related integration costs expected in future periods
- Key litigation risks: about 430 latex glove suits tied to Allegiance (liability not estimable), and a Seventh Circuit appeal in the chargeback antitrust case with the wholesaler defendants currently dismissed
03—Questions
Frequently Asked Questions
Why did Cardinal Health's reported earnings lag its operating performance in fiscal 1999?
The company recorded $146.6 million in pre-tax merger-related costs and special charges, mainly tied to the Scherer and Allegiance mergers, which reduced net earnings by $117.6 million or $0.42 per diluted share. Without these charges, earnings would have been substantially higher, although management notes that similar integration costs are expected to continue.
Is the company's core pharmaceutical distribution business generating attractive margins?
Pharmaceutical Distribution, the largest segment at about 70% of operating revenue, operates on very thin margins. Its gross margin fell to 5.29% from 5.58% amid intense price competition and a shift toward high-volume customers. Growth is strong, but profitability per dollar of revenue remains low, and the segment depends heavily on large chain customers and group purchasing organizations.
What are the main risks from customer and supplier concentration?
The two largest customers accounted for 11% and 13% of operating revenue in fiscal 1999, and two GPOs (VHA and Premier) represented about 11.4% and 12.8% of revenue. The five largest suppliers accounted for about 15.9% of operating revenue. Most supplier agreements can be cancelled on 30 to 90 days' notice, so losing a major customer or supplier relationship could materially affect results.
How strong is the balance sheet and what is the liquidity position?
Shareholders' equity increased to $3.46 billion, and long-term obligations decreased to $1.22 billion. Cash fell to $165.2 million. Liquidity is supported by a $1.0 billion unsecured bank facility (of which $80.7 million was drawn), $175.8 million in bank lines, a $750 million commercial paper program, and $250 million of remaining shelf capacity. Management states that available capital resources are adequate for planned capital expenditures, growth, and debt service.
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