01—Abstract
Summary
Summary of the 10-K filed August 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Cardinal Health's fiscal 2009 10-K (year ended June 30, 2009) shows a company with roughly $99.5 billiona in revenue, up 9%, driven largely by pharmaceutical price appreciation and volume growth in its Healthcare Supply Chain Services segment.
Profitability softened: operating earnings fell 10% to $1.89 billionb, mainly on $164 million of restructuring charges and a $53 million drop in gross margin, and diluted EPS declined 11% to $3.18. Gross margin was pressured by customer discounts, hospital capital spending deferrals, and Alaris product recalls and FDA-related remediation in the Clinical and Medical Products segment. Balance sheet metrics remained solid, with $1.8 billion in cash, shareholders' equity of $8.7 billion, and operating cash flow of about $1.6 billion.
The central event is the planned spin-off of the clinical and medical products businesses as CareFusion, distributed on August 31, 2009 at 0.5 CareFusion shares per Cardinal share. After the spin-off, Cardinal will be a narrower pharmaceutical and medical distribution company, with two reportable segments (Pharmaceutical and Medical) and a retained stake of up to 19.9% in CareFusion that must be sold within five years. Cardinal is also restructuring its capital structure: CareFusion is raising about $1.4 billionc to fund a cash distribution to Cardinal, which will go toward a debt tender offer of up to $1.2 billion and repayment of maturing debt.
Moody's downgraded Cardinal's commercial paper to P-3 and carries a negative outlook, and the company announced a $500 milliond buyback to replace the cancelled $2.0 billion program. Investors should weigh a concentrated customer base (CVS and Walgreens are 21% and 23% of revenue, and the top five customers are 54%), thin pharmaceutical distribution margins, and significant tax exposure, including unrecognized tax benefits of $849 million and proposed IRS adjustments totaling about $777 million. Some of these risks are reduced by the spin-off, but the transaction itself carries conditions, including a private letter ruling from the IRS and investment-grade ratings, and it changes the company's diversification and earnings profile.
02—Key points
Key Highlights
- Revenue rose 9% to $99.5 billion, but operating earnings fell 10% to $1.89 billion and diluted EPS fell 11% to $3.18, largely due to restructuring charges and lower gross margin.
- Planned spin-off of CareFusion on August 31, 2009 (0.5 CareFusion shares per Cardinal share). Cardinal will retain up to 19.9% of CareFusion and must divest it within five years.
- Customer concentration is high: CVS (21%) and Walgreens (23%) of revenue, with the top five customers at 54%, and Walgreens 33% of gross trade receivables.
- Capital structure reset: CareFusion is raising about $1.4 billion to fund a cash distribution to Cardinal, to be used for a debt tender offer of up to $1.2 billion and repayment of maturing debt.
- Credit ratings pressure: Moody's downgraded commercial paper to P-3 and carries a negative outlook; S&P rates BBB+ and Fitch BBB.
- Clinical and Medical Products faced headwinds from deferred hospital capital spending, Alaris recalls, an FDA consent decree, and a ship hold on infusion products (lifted July 2009).
- Capital return shifts: the $2.0 billion buyback was cancelled and replaced with a $500 million program, and the quarterly dividend was raised 25% to $0.175.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Cardinal Health Inc kept $0.01.
- Revenue$95.99B100.0%
- Cost of revenue−$92.24B96.1%
- Gross profit$3.75B3.9%
- Operating costs−$2.46B2.6%
- Operating income$1.29B1.3%
- Interest, other & tax−$135.8M0.1%
- Net income$1.15B1.2%
Where FY2009 revenue went
$95.99B- Cost of revenue: $92.24B, 96% of revenue
- Net income: $1.15B, 1.2% of revenue
- SG&A: $2.33B, 2.4% of revenue
Kept 1.2% as net incomeNet income $1.15B · 1.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed August 27, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $95.99B$87.41B | +9.8% |
| Cost of Revenue | $92.24B$83.63B | +10.3% |
| Gross Profit | $3.75B$3.78B | −0.8% |
| SG&A Expenses | $2.33B$2.34B | −0.3% |
| Operating Income | $1.29B$1.39B | −7.5% |
| Interest Expense | $114.40M$136.10M | −15.9% |
| Net Income | $1.15B$1.30B | −11.5% |
| EPS (Basic) | $3.22— | — |
| EPS (Diluted) | $3.18— | — |
| Shares Outstanding (Basic) | 357.60M358.20M | −0.2% |
| Shares Outstanding (Diluted) | 361.50M364.00M | −0.7% |
05—Questions
Frequently Asked Questions
What is the CareFusion spin-off and why is Cardinal doing it?
Cardinal is separating its clinical and medical products businesses into a new public company, CareFusion, through a pro rata distribution of 0.5 CareFusion shares per Cardinal share, expected after the close of trading on August 31, 2009. The board cites improved strategic focus, the ability of each company to set its own capital and dividend policy, and incentive compensation more closely tied to each business's performance. Cardinal will retain no more than 19.9% of CareFusion and must sell that stake within five years.
How concentrated is Cardinal's customer base?
Very concentrated. CVS Caremark and Walgreens together account for about 44% of fiscal 2009 revenue (21% and 23%), and the five largest customers account for about 54%. Walgreens and CVS also represent 33% and 19% of gross trade receivables. Losing or defaulting on one of these customers could materially affect results.
Did earnings and cash flow hold up in fiscal 2009?
Partially. Net earnings were $1.15 billion and diluted EPS was $3.18, down 11%. Operating earnings fell 10% on higher restructuring costs (about $164 million in special items) and a $53 million gross margin decline. Operating cash flow from continuing operations was $1.56 billion, supported by $123 million in swap termination proceeds, and the company ended the year with $1.8 billion in cash.
What are the main tax risks?
Unrecognized tax benefits were $849 million at June 30, 2009. The IRS has proposed adjustments of about $179 million for fiscal 2001 to 2005, related to receivable securitization deductions, and another $598 million in new notices covering transfer pricing and intellectual property transfers. Cardinal disputes these and believes it is adequately reserved, but the outcome could be material. The spin-off also depends on an IRS private letter ruling and tax opinions, and a failure could create significant tax liability for the company and its shareholders.
What does the spin-off mean for the dividend and buybacks?
Cardinal expects to keep its quarterly dividend at $0.175 per share after the spin-off, though the board retains discretion over future payments. The previous $2.0 billion repurchase authorization, of which about $1.3 billion remained, was cancelled on August 5, 2009. It was replaced by a $500 million program expiring August 31, 2012, which the company plans to use mainly to offset equity plan issuances.
06—Continue