10-QPeriod: Q3 FY2014

CARDINAL HEALTH INC Quarterly Report for Q3 Ended Mar 31, 2014

Filed May 6, 2014For Securities:CAH

Summary

Cardinal Health Inc.'s (CAH) third-quarter fiscal year 2014 results show a notable revenue decline primarily due to the expiration of the Walgreens distribution contract. Despite this significant headwind, the company demonstrated resilience with flat gross margins for the quarter and a slight increase for the nine-month period, bolstered by acquisitions and strong generic program performance. Operating earnings saw an increase, demonstrating effective cost management and strategic execution in the face of revenue challenges. While the company is navigating the impact of the lost Walgreens contract, it is actively positioning for future growth through strategic initiatives like the CVS joint venture for generic sourcing and the announced acquisition of Access Closure. The balance sheet remains strong, with a significant increase in cash and equivalents, providing flexibility for continued capital deployment through dividends and share repurchases, signaling management's confidence in the company's ongoing operational performance and strategic direction.

Financial Highlights

47 data points
Beta

Revenue

$21.43B

6.1% Gross Margin

Net Income

$315.00M

1.5% Net Margin

EPS (Diluted)

$0.91

Total Assets

$24.70B

Cash & Equivalents

$3.04B

Free Cash Flow

$772.00M

Financial Statements
Beta
Revenue$21.43B
Cost of Revenue$20.13B
Gross Profit$1.30B
SG&A Expenses$736.00M
Operating Income$508.00M
Interest Expense$34.00M
Net Income$315.00M
EPS (Basic)$0.92
EPS (Diluted)$0.91
Shares Outstanding (Basic)342.00M
Shares Outstanding (Diluted)347.00M

Key Highlights

  • 1Revenue decreased by 13% for the three months and 10% for the nine months ended March 31, 2014, largely attributed to the expiration of the pharmaceutical distribution contract with Walgreens.
  • 2Gross margin remained flat for the three-month period and increased by 6% for the nine-month period, benefiting from acquisitions and strong generic program performance, which offset the impact of the Walgreens contract loss.
  • 3Operating earnings increased by 7% and 4% for the three and nine-month periods, respectively, driven by improved Medical segment performance and management of expenses, despite the revenue decline.
  • 4The company announced an agreement to form Red Oak Sourcing, LLC, a 50/50 joint venture with CVS Caremark Corporation for generic pharmaceutical sourcing, expected to be operational in July 2014.
  • 5Cardinal Health announced an agreement to acquire Access Closure, Inc. for $320 million, aiming to expand its portfolio of physician preference items.
  • 6Cash and equivalents significantly increased to $3.0 billion at March 31, 2014, from $1.9 billion at June 30, 2013, primarily due to strong operating cash flow and a decrease in net working capital.
  • 7The company continued its capital return program, paying dividends of $0.3025 per share and repurchasing $389 million of common stock during the nine-month period.

Frequently Asked Questions

The primary reason for the revenue decline is the expiration of Cardinal Health's pharmaceutical distribution contract with Walgreen Co. (Walgreens) on August 31, 2013. This contract represented a substantial portion of the company's revenue, and its loss had a direct and significant impact on period-over-period top-line performance.

Cardinal Health is mitigating the impact through several strategies. These include growing revenue from new and existing pharmaceutical distribution customers, strategic acquisitions that add new revenue streams (like AssuraMed and the pending Access Closure acquisition), and forming strategic partnerships such as the generic sourcing joint venture with CVS Caremark. The company is also focusing on operational efficiencies and cost management to maintain profitability.

The Red Oak Sourcing joint venture with CVS Caremark is a significant strategic move to enhance generic pharmaceutical sourcing capabilities. By combining their expertise, Cardinal Health and CVS aim to negotiate better supply contracts for generic drugs. This venture is expected to improve cost efficiencies and potentially offer competitive advantages in the generic market, although Cardinal Health will make quarterly payments to CVS as part of the arrangement.

Cardinal Health's cash and equivalents increased significantly due to strong operating cash flow and working capital management, partly related to the Walgreens contract expiration. The company plans to deploy this capital strategically to enhance shareholder value. This includes continuing to pay quarterly dividends, executing share repurchase programs, and pursuing strategic acquisitions, such as the announced acquisition of Access Closure.