10-QPeriod: Q2 FY2006

CARDINAL HEALTH INC Quarterly Report for Q2 Ended Dec 31, 2005

Filed February 7, 2006For Securities:CAH

Summary

Cardinal Health, Inc. (CAH) reported solid revenue growth for the quarter and six months ending December 31, 2005, with an 8% increase in revenue year-over-year for the six-month period, reaching $39.3 billion. This growth was driven by increased sales volume across all segments, new customer acquisitions, and integrated solutions for healthcare providers. Operating earnings saw a significant increase of 48% for the quarter and 24% for the six months, largely due to favorable year-over-year impacts from special items and impairment charges, as well as operational improvements and revenue growth in key segments like Pharmaceutical Distribution and Provider Services, and Clinical Technologies and Services. The company also highlighted progress on its global restructuring program, 'One Cardinal Health,' aimed at improving efficiency and integration. While restructuring costs have decreased compared to the previous year, the program is expected to continue through fiscal 2008. Management is also actively engaged in settlement discussions with the SEC regarding a formal investigation, having reached an agreement in principle for a $35 million penalty, with $10 million reserved in this quarter. Despite these ongoing legal and regulatory matters, the company's liquidity remains strong, supported by operating cash flows and credit facilities.

Key Highlights

  • 1Revenue increased by 7% to $19.9 billion for the three months ended December 31, 2005, and by 8% to $39.3 billion for the six months ended December 31, 2005, compared to the prior year periods.
  • 2Operating earnings increased significantly by 48% to $484.4 million for the three months and 24% to $856.8 million for the six months, driven by revenue growth and favorable special items.
  • 3The company adopted SFAS No. 123(R) in the first quarter of fiscal 2006, resulting in a substantial increase in equity-based compensation expense to $55.8 million for the quarter and $138.7 million for the six months.
  • 4Global restructuring program costs decreased substantially to $11.0 million for the three months and $19.5 million for the six months, compared to $102.5 million and $105.0 million in the prior year, respectively.
  • 5Cardinal Health reached an agreement in principle with the SEC for a potential settlement, including a $35 million penalty, with a $10 million reserve recorded in the current quarter.
  • 6Cash provided by operating activities was $1.38 billion for the six months, a decrease from the prior year, primarily due to the prior year's significant receivables sale.
  • 7The company's liquidity remains robust, with $2.2 billion in cash and equivalents at period-end and access to a $1 billion revolving credit facility and a $500 million debt issuance.

Frequently Asked Questions

Cardinal Health experienced revenue growth driven by increased sales volume across all four of its segments, revenue growth from existing customers, acquisition of new customers (some through integrated solutions), and the addition of new products. Specifically, the Pharmaceutical Distribution and Provider Services segment saw strong sales to retail chain customers and a significant increase in 'Bulk Revenue'.

The adoption of SFAS No. 123(R) in the first quarter of fiscal 2006 requires the recognition of equity-based compensation expense based on grant date fair value. This has significantly increased expenses, with equity-based compensation totaling $55.8 million for the three months and $138.7 million for the six months ended December 31, 2005, compared to $2.8 million and $4.9 million in the prior year periods. This increase adversely affected operating earnings.

Cardinal Health is the subject of a formal SEC investigation and an inquiry by the U.S. Attorney's Office. The company has reached an agreement in principle on the basic terms of a potential settlement with the SEC staff, which includes a $35 million penalty. A reserve of $10 million was recorded in this quarter, in addition to $25 million recorded in the prior fiscal year. The settlement is subject to definitive documentation and regulatory approval. The company is cooperating with ongoing investigations.

The 'One Cardinal Health' global restructuring program, aimed at improving efficiency and integration, is progressing. Restructuring costs incurred were significantly lower in this period ($11.0 million for the quarter, $19.5 million for the six months) compared to the prior year ($102.5 million and $105.0 million, respectively). The program is expected to be substantially completed by the end of fiscal 2008.