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CARDINAL HEALTH INC Annual Report, Year Ended Jun 30, 2005

Filing Date
Filed September 12, 2005
Period End
June 30, 2005
Security
CAH
In the record · 2016–202610-K1110-Q328-K120

CAH filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 120 current reports (8-K) between 2016 and 2026.

  1. Restructuring8-K · Oct ’17Oct ’17
  2. Material agreement8-K · Oct ’19Oct ’19
  3. Leadership change8-K · Nov ’21Nov ’21
  4. Material agreement8-K · Oct ’25Oct ’25

01—Abstract

Summary

Summary of the 10-K filed September 12, 2005. Cited figures are marked; the original filing is the authoritative source.

Cardinal Health's fiscal 2005 10-K (year ended June 30, 2005) shows a company with revenue up 15% to $74.9 billiona, but earnings under pressure: operating earnings fell 25% to $1.76 billion and diluted EPS dropped 28% to $2.41, driven by lower branded pharmaceutical manufacturer compensation, Pyxis product weakness, Humacao facility problems, $264 million of special items (restructuring, SEC/internal review costs, a $25 million SEC reserve), and $118 million of asset impairments.

Net earnings were $1.05 billionb versus $1.47 billion a year earlier. Cash flow from operations was strong at $2.85 billion, helped by a $550 million receivables sales program, and the company returned capital through $500 million of buybacks in fiscal 2005, a new $1.0 billion authorization, and a dividend increase to $0.06 per quarter. The filing's most important investor issues are governance and legal.

The company is under a formal SEC investigation and a U.S. Attorney (SDNY) inquiry tied to revenue classification, cash discount timing, and reserve accounting, following restatements of fiscal 2000 to 2004. Two internal reviews are substantially complete, and settlement talks with the SEC have begun, with a $25 millionc reserve recorded. Multiple securities class actions and ERISA suits are pending, and management changed substantially, including a new CFO, Chief Ethics and Compliance Officer, and Chief Accounting Officer.

Management reports effective internal controls as of June 30, 2005, though the auditor noted significant deficiencies not rising to material weaknesses. Structural risk is also rising. The Pharmaceutical Distribution segment, the largest unit, is shifting from inflation-based manufacturer compensation to fee-for-service terms, which reduces earnings volatility but cuts margins.

Customer concentration is high: CVS is about 21% of revenue and Walgreens about 10%. A large Specialty Distribution customer representing about 16% of that segment's revenue plans to self-distribute from January 2006. Credit ratings are BBB/Baa3/BBB with negative outlooks at S&P and Fitch, and the company plans to repatriate $500 milliond of foreign earnings under the AJCA.

02—Key points

Key Highlights

  1. Revenue rose 15% to $74.9 billion, but operating earnings fell 25% to $1.76 billion and diluted EPS fell 28% to $2.41.
  2. Gross margin declined to about 3% of revenue as reduced branded pharma manufacturer compensation and competitive pricing pressured the Pharmaceutical Distribution business.
  3. Special items totaled $264.2 million, including $203 million of restructuring costs under the One Cardinal Health program, and $118 million of asset impairments were recorded.
  4. Active SEC formal investigation and U.S. Attorney (SDNY) inquiry; settlement talks have begun and a $25 million reserve was recorded, with outcome and timing unknown.
  5. Operating cash flow of $2.85 billion, aided by a $550 million receivables sales facility; $500 million of share repurchases in fiscal 2005 and a new $1.0 billion authorization.
  6. Customer concentration risk: CVS (21%) and Walgreens (10%) of revenue, with the top five customers at 37%; a major Specialty Distribution customer representing about 16% of that segment's revenue begins self-distribution in January 2006.
  7. Credit ratings at BBB/Baa3/BBB with negative outlooks at S&P and Fitch; dividend doubled to $0.24 annualized for fiscal 2006.

03—Questions

Frequently Asked Questions

  1. Why did Cardinal Health's earnings decline despite revenue growth of 15%?

    Margins compressed. Branded pharmaceutical manufacturers restricted inventory purchasing and shifted compensation away from pricing-driven practices, reducing vendor margins. Competitive pricing, the Pyxis product decline (revenue down about 17%), Humacao manufacturing underperformance, asset impairments of $118 million, and $264 million of special items also weighed on operating earnings.

  2. What is the status of the SEC investigation and what is the financial exposure?

    The SEC formal investigation, which concerns revenue classification, cash discount timing, and reserve accounting, is ongoing. Settlement discussions have recently begun, and the company reserved $25 million for fiscal 2005. The company says the reserve may prove insufficient and that additional restatements, fines, or proceedings involving current or former employees are possible. Outcomes cannot be predicted.

  3. How significant is customer concentration to Cardinal's business?

    Very significant. CVS accounts for about 21% of revenue and Walgreens about 10%, and the top five customers together represent about 37%. About 15% of revenue comes through group purchasing organizations, mainly Novation and Premier. Losing a major customer, or a large customer self-distributing as the Specialty Distribution customer will from January 2006, would materially affect results.

  4. What is the outlook for shareholder returns and capital allocation?

    The board authorized a $1.0 billion repurchase program in June 2005, with repurchases expected to begin in the first half of fiscal 2006. The quarterly dividend was raised to $0.06, implying about $0.24 per share for fiscal 2006. Repatriation of $500 million of foreign earnings under the AJCA will incur a $26.3 million tax liability. Dividends and buybacks depend on future earnings and board discretion.

04—Continue

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