01—Abstract
Summary
Summary of the 10-K filed August 27, 2008. Cited figures are marked; the original filing is the authoritative source.
Cardinal Health's fiscal 2008 10-K (year ended June 30, 2008) shows a company with $91.1 billiona in revenue, up 5%, but earnings that fell sharply from the prior year's inflated level.
Net earnings were $1.30 billionb, down 33%, and diluted EPS was $3.57, down 25%. The decline is largely a comparison effect: fiscal 2007 included a $1.1 billion after-tax gain on the PTS Business sale and a $600 million shareholder litigation charge. Operating earnings rose 54% to $2.12 billion, mainly because the prior-year litigation charge did not recur.
Underlying margins were pressured: Healthcare Supply Chain Services—Pharmaceutical segment profit fell 14%c on repriced customer contracts, bulk-customer mix shifts, and the loss of non-bulk customers tied to DEA license suspensions. The Clinical and Medical Products businesses were the bright spot, with segment profit rising 29% in Clinical Technologies and 52% in Medical Products, though the latter was helped by the Viasys acquisition. The company is also at a strategic inflection point.
On August 7, 2008, management said it is exploring a possible tax-free spin-off of the Clinical and Medical Products businesses, with a decision expected within 60 to 90 days. Capital returns were heavy in fiscal 2008: about $1.2 billiond of share repurchases plus $173 million of dividends, and the quarterly dividend was raised 17% to $0.14. Management expects lower repurchases in fiscal 2009, partly because of the separation review.
Balance sheet risk is rising. Total assets were $23.4 billion, long-term debt was $3.7 billion, and the company faces potential IRS adjustments of roughly $777 million ($179 million plus $598 million) on transfer pricing and receivables-sale deductions, which it says it will contest.
Key risks for investors include customer concentration (CVS and Walgreens are 22% and 19% of revenue), pharmaceutical pricing pressure, DRA-related Medicaid reimbursement changes, regulatory exposure from DEA and FDA matters, and the SEC investigation of individuals still ongoing. Overall, the filing points to a stable but lower-growth core distribution business, a higher-margin medical products franchise that may be separated, and meaningful tax and regulatory overhangs.
02—Key points
Key Highlights
- Revenue rose 5% to $91.1 billion, driven by pharmaceutical price appreciation (7.7% index) and bulk-customer volume, partly offset by $2.1 billion of lost customers.
- Net earnings fell 33% to $1.30 billion and diluted EPS fell 25% to $3.57, mainly because fiscal 2007 included a $1.1 billion after-tax PTS Business sale gain.
- Operating earnings rose 54% to $2.12 billion, benefiting from the non-recurrence of the $600 million shareholder litigation charge in fiscal 2007.
- Pharmaceutical segment profit fell 14% to $1.12 billion due to repriced large customer contracts, faster bulk-customer growth, and DEA-related non-bulk customer losses.
- Clinical Technologies (+29%) and Medical Products (+52%) segment profit grew strongly, supported by higher-margin products and the Viasys and Enturia acquisitions.
- Management is exploring a tax-free spin-off of the Clinical and Medical Products segments, with a decision expected within 60 to 90 days of August 7, 2008.
- Potential IRS exposure of about $777 million in proposed adjustments is being contested, and unrecognized tax benefits total $763 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Cardinal Health Inc kept $0.01.
- Revenue$87.41B100.0%
- Cost of revenue−$83.63B95.7%
- Gross profit$3.78B4.3%
- Operating costs−$2.38B2.7%
- Operating income$1.39B1.6%
- Interest, other & tax−$91.8M0.1%
- Net income$1.30B1.5%
Where FY2008 revenue went
$87.41B- Cost of revenue: $83.63B, 96% of revenue
- Net income: $1.30B, 1.5% of revenue
- SG&A: $2.34B, 2.7% of revenue
Kept 1.5% as net incomeNet income $1.30B · 1.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed August 27, 2008Financial Statements
| Revenue | $87.41B |
| Cost of Revenue | $83.63B |
| Gross Profit | $3.78B |
| SG&A Expenses | $2.34B |
| Operating Income | $1.39B |
| Interest Expense | $136.10M |
| Net Income | $1.30B |
| Shares Outstanding (Basic) | 358.20M |
| Shares Outstanding (Diluted) | 364.00M |
05—Questions
Frequently Asked Questions
Why did net earnings decline so sharply despite higher revenue and operating earnings?
Fiscal 2007 net earnings of $1.93 billion included a roughly $1.09 billion gain from discontinued operations, mainly from the sale of the PTS Business to Blackstone. Fiscal 2008 discontinued operations were a small loss of $15 million, so reported net earnings fell 33% even though operating earnings rose 54%.
What is driving the potential separation of the company's segments?
The Board supported management's recommendation to explore separating the Healthcare Supply Chain Services segments from the Clinical and Medical Products businesses. The separation could be a tax-free spin-off of all or part of Clinical and Medical Products. The company has not decided and says there is no assurance a transaction will occur or on what terms.
How concentrated is the customer base and what does that mean for risk?
CVS Caremark (22%) and Walgreens (19%) together accounted for 41% of fiscal 2008 revenue, and the five largest customers accounted for 52%. CVS and Walgreens also held 19% and 26% of gross trade receivables. Losing or repricing one of these customers could materially affect results.
What are the main regulatory and legal overhangs?
The DEA suspended controlled-substance distribution licenses at three distribution centers. The company reached an oral agreement in principle on August 7, 2008, and reserved $34 million, with license suspensions expected to be lifted by December 2008. Other issues include state attorney general Medicaid rebate inquiries on repackaged drugs, the DRA's AMP-based Medicaid pricing changes delayed to October 2009, and an ongoing SEC investigation of certain individuals.
How did the company use its cash in fiscal 2008, and what does that imply for fiscal 2009?
Operating cash flow from continuing operations was $1.56 billion. Cash went to $1.18 billion of share repurchases, $376 million of capital expenditures, $515 million of acquisitions net of divestitures, and $173 million of dividends. Management does not expect fiscal 2009 repurchases to match fiscal 2008's pace, and the separation review could also affect them.
06—Continue