10-QPeriod: Q1 FY2006

CARDINAL HEALTH INC Quarterly Report for Q1 Ended Sep 30, 2005

Filed November 8, 2005For Securities:CAH

Summary

Cardinal Health Inc. (CAH) reported strong revenue growth of 9% for the three months ending September 30, 2005, reaching $19.37 billion, indicating broad-based demand across its four key segments. While net earnings saw a modest increase of 7% to $228.3 million, diluted earnings per share grew by 8% to $0.53. The company adopted new accounting standards for share-based payments (SFAS 123(R)) starting this quarter, significantly increasing equity-based compensation expense by $82.9 million compared to the prior year, which impacted reported operating earnings. Despite this, the company continues to execute its "One Cardinal Health" global restructuring program, aiming for approximately $190 million in operating earnings improvement in fiscal year 2006. Management highlighted strength in its Clinical Technologies and Services segment, particularly the Pyxis products business, and noted a significant increase in "Bulk Revenue" within its Pharmaceutical Distribution segment.

Key Highlights

  • 1Revenue increased by 9% to $19.37 billion for the quarter ended September 30, 2005, driven by growth across all segments.
  • 2Net earnings grew by 7% to $228.3 million, resulting in diluted EPS of $0.53, an 8% increase year-over-year.
  • 3Adoption of SFAS 123(R) led to a significant increase in equity-based compensation expense to $82.9 million, impacting operating earnings.
  • 4The global restructuring program is progressing, with expected operating earnings improvement of $190 million in fiscal year 2006.
  • 5The Pharmaceutical Distribution and Provider Services segment saw a substantial 24% increase in "Bulk Revenue".
  • 6Clinical Technologies and Services segment showed strong performance with 88% operating earnings growth, boosted by the Pyxis products business.
  • 7The company recorded a $25 million reserve for the ongoing SEC investigation.

Frequently Asked Questions

The adoption of SFAS 123(R) effective July 1, 2005, requires the expensing of equity-based compensation. This resulted in a significant increase in equity-based compensation expense to $82.9 million for the quarter ended September 30, 2005, compared to $2.1 million in the prior year. This increase negatively impacted reported operating earnings and diluted earnings per share.

The company is actively implementing its "One Cardinal Health" global restructuring program, expected to be substantially completed by the end of fiscal 2008. This program is anticipated to improve operating earnings by approximately $190 million in fiscal year 2006, focusing on business consolidations, process improvements, and workforce rationalization.

Cardinal Health is involved in multiple legal proceedings, including shareholder derivative actions, securities litigation, ERISA litigation, and various government investigations (SEC, U.S. Attorney, FTC, New York and Illinois Attorneys General). The company has recorded a $25 million reserve for the SEC investigation and believes, based on current information, that the outcome of most of these matters will not have a material adverse effect on its financial position, liquidity, or results of operations, though some are ongoing and unpredictable.

The Pharmaceutical Distribution and Provider Services segment experienced revenue growth of 9%. A key driver of this growth was "Bulk Revenue," which increased by 24% to $6.8 billion. This increase is attributed to higher volumes from existing and new customers, with some customers shifting from direct manufacturer purchases to purchasing through Cardinal Health.