10-QPeriod: Q3 FY2002

CARDINAL HEALTH INC Quarterly Report for Q3 Ended Mar 31, 2002

Filed May 8, 2002For Securities:CAH

Summary

Cardinal Health, Inc. reported strong financial performance for the nine months ended March 31, 2002, with operating revenue increasing by 15% to $32.6 billion and net earnings growing to $759.9 million. This growth was driven across all segments, particularly in Pharmaceutical Distribution and Provider Services. The company also saw an improvement in its gross margin as a percentage of operating revenue due to better product mix and operational efficiencies. Despite significant investments in inventory and a slight decrease in cash from operations, the company's liquidity remains robust, supported by strong financing activities and an increase in shareholders' equity. The report highlights the successful integration of recent acquisitions and ongoing cost control measures contributing to improved operating leverage. Management expressed confidence in the company's ability to fund future growth and operational needs. However, investors should note the impact of ongoing merger-related costs and the potential for future integration expenses, though the company is actively managing these. A notable accounting change was implemented in the first quarter of fiscal 2002 regarding revenue recognition for pharmacy automation equipment, resulting in a cumulative effect adjustment. Additionally, the adoption of SFAS 142 led to the cessation of goodwill amortization, positively impacting reported earnings. The company also disclosed an acquisition of Magellan Laboratories, Inc. subsequent to the reporting period, further expanding its Pharmaceutical Technologies and Services segment.

Key Highlights

  • 1Operating revenue increased by 15% year-over-year to $32.6 billion for the nine months ended March 31, 2002.
  • 2Net earnings reached $759.9 million for the nine months ended March 31, 2002, a significant increase from the prior year.
  • 3Gross margin improved slightly year-over-year to 9.14% of operating revenue for the nine months, driven by favorable product mix and cost efficiencies.
  • 4The company ceased goodwill amortization in Q1 2002 due to the adoption of SFAS 142, positively impacting earnings.
  • 5Total shareholders' equity increased to $6.2 billion, driven by net earnings and employee stock investments, partially offset by share repurchases and dividends.
  • 6Significant investment in inventories ($1.6 billion increase) contributed to a decrease in net cash from operating activities for the nine months.
  • 7Subsequent to the period, Cardinal Health acquired Magellan Laboratories, Inc. to strengthen its Pharmaceutical Technologies and Services segment.

Frequently Asked Questions

The primary driver of Cardinal Health's revenue growth was a combination of higher sales volume to existing customers, pharmaceutical price increases, and the addition of new customers. This growth was observed across all business segments, with Pharmaceutical Distribution and Provider Services showing particularly strong performance.

The adoption of SFAS 142, 'Goodwill and Other Intangible Assets,' beginning in fiscal year 2002, led Cardinal Health to cease the amortization of goodwill and other intangible assets with indefinite lives. This change eliminated goodwill amortization expense, which positively impacted reported earnings and reduced selling, general, and administrative expenses as a percentage of operating revenue compared to prior periods.

Special charges, primarily related to merger integration costs (e.g., employee-related costs, exit costs, other integration costs), significantly reduced net earnings in both the three and nine-month periods compared to the prior year. For the nine months ended March 31, 2002, these charges reduced net earnings by $42.6 million. The company estimates an additional $132.2 million in future merger-related costs.

Cardinal Health's liquidity appears adequate. Working capital increased significantly, driven by higher inventory levels. While net cash from operations decreased due to inventory build-up, the company has access to capital through shelf registration statements and believes it has sufficient resources to fund anticipated expenditures, growth, and debt service requirements.