10-QPeriod: Q2 FY2002

CARDINAL HEALTH INC Quarterly Report for Q2 Ended Dec 31, 2001

Filed February 13, 2002For Securities:CAH

Summary

Cardinal Health, Inc. reported strong revenue growth for the six months ended December 31, 2001, with a 17% increase year-over-year to $21.1 billion. This growth was driven by all segments, with Pharmaceutical Distribution and Provider Services being the largest contributor. While gross margins slightly compressed due to a shift in revenue mix towards lower-margin distribution services, operating expenses were managed effectively, leading to a significant increase in operating earnings. The company also adopted new accounting standards, including SFAS 142, which will cease goodwill amortization and move towards impairment testing, impacting reported earnings positively by removing prior amortization expenses. Financially, the company experienced a notable decrease in cash and equivalents, primarily due to a significant increase in inventories, reflecting growth strategies and seasonal buildup. Despite this, shareholders' equity grew, supported by net earnings and employee stock investments, partially offset by share repurchases and dividend payments. The company indicated it has adequate capital resources for its ongoing operations and expansion plans. A subsequent event notes the bankruptcy filing of Kmart, a significant customer, though Cardinal Health anticipates a minimal impact due to limited credit exposure and consignment inventory structures.

Key Highlights

  • 1Total operating revenue increased by 17% year-over-year to $21.1 billion for the six months ended December 31, 2001.
  • 2Pharmaceutical Distribution and Provider Services segment remains the largest revenue contributor, growing 19% and representing 81% of total revenue for the period.
  • 3Overall gross margin percentage slightly decreased to 9.08% from 9.35% in the prior year period, primarily due to a higher mix of lower-margin pharmaceutical distribution business.
  • 4Selling, general, and administrative expenses as a percentage of revenue decreased due to economies of scale, productivity gains, and the cessation of goodwill amortization under SFAS 142.
  • 5Net earnings before cumulative effect of accounting change increased by 28.7% to $529.7 million for the six months ended December 31, 2001.
  • 6The company adopted SFAS 142, ceasing goodwill amortization and transitioning to impairment testing, which positively impacted reported earnings.
  • 7Cash and equivalents significantly decreased from $934.1 million to $398.9 million, largely driven by a substantial increase in inventories.

Frequently Asked Questions

Revenue growth was driven by increased sales volume to existing customers, pharmaceutical price increases, and the addition of new customers across all segments. The Pharmaceutical Distribution and Provider Services segment showed particularly strong growth due to increased volume and pharmaceutical price adjustments.

Cardinal Health adopted SFAS 142, which eliminates the amortization of goodwill and other intangible assets with indefinite lives, replacing it with an annual impairment test. This change removed goodwill amortization expenses, positively impacting operating earnings and net earnings. For the three months ended December 31, 2001, this adjustment is reflected in the comparison table under Note 9.

While the company's working capital increased due to higher inventories and trade receivables, its cash and equivalents significantly decreased from $934.1 million to $398.9 million. This was primarily driven by a substantial increase in inventories, which the company attributes to vendor-margin programs, seasonality, and higher business volumes. Despite the decrease in cash, the company believes it has adequate capital resources.

Kmart, a significant customer, filed for Chapter 11 bankruptcy protection. Cardinal Health serviced approximately 1,600 Kmart stores, representing about 5% of its total volume, but a smaller percentage of earnings. Due to a unique consignment structure for pharmaceutical inventories, Cardinal Health has limited credit exposure to Kmart and does not anticipate a material impact on its financial statements from this event.