10-QPeriod: Q2 FY2013

CARDINAL HEALTH INC Quarterly Report for Q2 Ended Dec 31, 2012

Filed February 6, 2013For Securities:CAH

Summary

Cardinal Health Inc. reported a net earnings of $303 million for the three months ended December 31, 2012, an increase from $262 million in the prior year period. Revenue for the quarter was $25.2 billion, a decrease of 7% compared to the prior year, primarily due to the expiration of a significant pharmaceutical distribution contract with Express Scripts and the impact of brand-to-generic pharmaceutical conversions. Despite the revenue decline, gross margin improved by 10% to $1.2 billion, driven by strong performance in generic pharmaceutical programs and favorable product mix in the Medical segment. Operating earnings also saw a healthy increase of 13% to $506 million. The company continued its focus on capital allocation, with $200 million in share repurchases and $165 million in dividends paid during the six-month period. Management reiterated confidence in the company's liquidity and ability to fund working capital, capital expenditures, and debt service requirements. However, the company faces ongoing litigation and investigations, including a significant proposed tax adjustment from the IRS related to transfer pricing, which is being contested. Additionally, the company announced a restructuring plan within its Medical segment, expected to incur approximately $79 million in pre-tax costs.

Financial Highlights

48 data points
Beta

Revenue

$25.23B

4.9% Gross Margin

Net Income

$303.00M

1.2% Net Margin

EPS (Diluted)

$0.88

Total Assets

$24.64B

Cash & Equivalents

$2.31B

Free Cash Flow

-$166.00M

Financial Statements
Beta
Revenue$25.23B
Cost of Revenue$24.01B
Gross Profit$1.22B
SG&A Expenses$699.00M
Operating Income$506.00M
Interest Expense$27.00M
Net Income$303.00M
EPS (Basic)$0.89
EPS (Diluted)$0.88
Shares Outstanding (Basic)340.00M
Shares Outstanding (Diluted)343.00M

Key Highlights

  • 1Net earnings increased to $303 million for the three months ended December 31, 2012, up from $262 million in the prior year.
  • 2Revenue declined 7% to $25.2 billion for the quarter, mainly impacted by the expiration of the Express Scripts contract and generic conversions.
  • 3Gross margin improved by 10% to $1.2 billion, driven by strong performance in generic pharmaceutical programs and favorable medical segment mix.
  • 4Operating earnings rose 13% to $506 million, demonstrating improved operational efficiency.
  • 5The company repurchased $200 million of its common stock and increased its dividend by 16% during the period.
  • 6Cardinal Health is facing a significant IRS proposed tax adjustment of $849 million (excluding penalties and interest), which it is contesting.
  • 7A restructuring plan was announced for the Medical segment, expected to incur approximately $79 million in pre-tax costs.

Frequently Asked Questions

The 7% decrease in revenue to $25.2 billion was primarily driven by the expiration of Cardinal Health's pharmaceutical distribution contract with Express Scripts, Inc. on September 30, 2012, and the ongoing impact of brand-to-generic pharmaceutical conversions, which generally result in lower revenue per unit.

Despite lower revenues, the gross margin increased by 10% to $1.2 billion. This improvement was mainly due to strong performance in the company's generic pharmaceutical programs and a favorable product and customer mix within its Pharmaceutical and Medical segments. Additionally, lower commodity costs for certain materials used in self-manufactured products in the Medical segment contributed positively.

The IRS is currently auditing fiscal years 2003 through 2010. The company has received proposed adjustments for fiscal years 2003 through 2007 related to transfer pricing and intellectual property transfers, with a proposed additional tax of $849 million (excluding penalties and interest). Cardinal Health disagrees with these proposed adjustments and is contesting them. Under a tax matters agreement related to the CareFusion spin-off, CareFusion would be liable for $592 million of this amount if it must be paid.

Cardinal Health announced a restructuring plan for its Medical segment involving the relocation of production, sale of property, consolidation of office space, and sale of sterilization processes. This plan is expected to incur approximately $79 million in pre-tax costs and is anticipated to lead to cost savings and other benefits starting in fiscal year 2014. The company expects to realize approximately $55 million of these costs in the second half of fiscal 2013.