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Cardinal Health, Inc. (CAH) Reports Second-Quarter Results


1/25/2007 3:41:43 PM

DUBLIN, Ohio, Jan. 25 /PRNewswire-FirstCall/ -- Cardinal Health, the leading provider of products and services supporting the health-care industry, today announced strong second-quarter results, highlighted by double-digit revenue and earnings growth, solid contributions from all four continuing business segments and a 17-percent increase in earnings per share.

For the second quarter ended Dec. 31, consolidated revenue increased 13 percent to $21.8 billion and earnings from continuing operations rose 10 percent to $316 million, or $0.77 per share. On a non-GAAP basis, earnings from continuing operations increased 15 percent to $341 million(1), or 20 percent to $0.83(2) on a diluted per-share basis.

The company also announced an agreement to acquire SpecialtyScripts Pharmacy to broaden its specialty pharmaceutical service offerings for pharmaceutical manufacturers. Terms were not disclosed.

"We performed well during the quarter with solid, top-line growth in each business segment, while maintaining the discipline in our operations to also deliver double-digit operating earnings growth in all four segments," said R. Kerry Clark, president and chief executive officer of Cardinal Health. "We feel very good about the momentum we have established through the first half of the year." Q2 FY07 Summary Q2 FY07 Q2 FY06 Y/Y Revenue $21.8 billion $19.3 billion 13% Operating Earnings $512 million $457 million 12% Non-GAAP Operating Earnings(3) $544 million $469 million 16% Earnings from Continuing Operations $316 million $286 million 10% Non-GAAP Earnings from Continuing Operations $341 million $297 million 15% Diluted EPS from Continuing Operations $0.77 $0.66 17% Non-GAAP Diluted EPS from Continuing Operations $0.83 $0.69 20% Second quarter segment results:

(Segment results include equity compensation previously held at the corporate level. Due to declining equity compensation levels, this had a favorable effect on segment earnings growth. Results for the Pharmaceutical Technologies and Services segment are included in discontinued operations for all periods presented).

* Revenue for the Healthcare Supply Chain Services-Pharmaceutical segment grew 13 percent to $19.2 billion, with direct-store-door (DSD) pharmaceutical sales growing 14 percent to $10.2 billion and bulk customer sales growing 22 percent to $8.7 billion. Strong generic sales combined with expense controls and synergies from the acquisition of the F. Dohmen Company to drive a 19-percent increase in operating earnings to $328 million. This growth was partially offset by lower pricing in the renewal of several large customer agreements. * Revenue for the Healthcare Supply Chain Services-Medical segment increased 6 percent to nearly $1.9 billion and operating earnings grew 12 percent to $78 million. The primary growth drivers for the segment included strong sales of laboratory and private brand products, and continued momentum with surgery center customers and within the segment's Canadian operations. Selling, general and administrative (SG&A) expenses declined as a percent of sales primarily due to disciplined expense control, reduced fuel costs and productivity gains from facility and back-office consolidations. * Revenue for the Clinical Technologies and Services segment increased 10 percent to $662 million, with strong demand for both the Alaris and Pyxis product lines increasing committed contracts above the first quarter. Operating earnings grew 16 percent from the prior year to $92 million, while the segment continued to make investments in new products and customer service initiatives. An upgrade to the flagship Pyxis MedStation was released during the quarter. In addition, the company will demonstrate a fully integrated bedside medication verification product in late February that integrates clinical data flow across its Alaris, Pyxis and Care Fusion product lines and will enhance the company's medication management and patient safety offerings. * Revenue for the Medical Products Manufacturing segment increased 15 percent to $455 million and operating earnings grew 21 percent to $51 million. Balanced results across the segment contributed to the strong quarter, including revenue and earnings growth in infection prevention products, medical specialties and from Canadian operations. Ongoing facility restructuring and operational excellence initiatives continued to deliver benefits during the quarter through improved manufacturing efficiency. Additional second-quarter and recent highlights include: * Repurchase of $300 million of Cardinal Health shares during the quarter and more than $900 million to date in the fiscal year. * Announcement of plans to divest the Pharmaceutical Technologies and Services (PTS) segment to focus resources on its four remaining segments serving health-care provider customers, such as hospitals and pharmacies. (A $425-million tax asset associated with the planned PTS divestiture has been recorded in discontinued operations and will be offset by the related tax expense on any gain over net book value in the quarter that the transaction closes.) * Signing the agreement to acquire SpecialtyScripts Pharmacy. With this acquisition, Cardinal Health intends to develop services for pharmaceutical manufacturers that complement and leverage the company's existing portfolio of nuclear pharmacies, third-party logistics offerings and distribution services for blood and plasma products. The acquisition is expected to close in the third quarter. * Completing the first full quarter with integrated sales teams focused on hospital networks in the U.S. and Canada, representing Cardinal Health's entire portfolio of products, services and integrated solutions. Outlook

Cardinal Health reiterated its fiscal 2007 guidance range of $3.25 to $3.40 for non-GAAP diluted EPS from continuing operations, which excludes the impact of proceeds from the planned sale of its PTS business.

Conference Call

Cardinal Health will host a conference call and webcast at 11 a.m. Eastern Standard Time (EST) to discuss the results. To access the call and corresponding slide presentation, go to the Investor page at www.cardinalhealth.com. The conference call may also be accessed by calling 617-213-8067, conference passcode 22400322. An audio replay will be available until 1 p.m. EST on Feb. 1 at 617-801-6888, passcode 51497520. A transcript and audio replay will also be available at www.cardinalhealth.com.

About Cardinal Health

Headquartered in Dublin, Ohio, Cardinal Health, Inc. is an $81 billion, global company serving the health-care industry with a broad portfolio of products and services. Through its diverse offerings, Cardinal Health delivers health-care solutions that help customers reduce their costs, improve safety and productivity, and deliver better care to patients. The company manufactures, packages and distributes pharmaceuticals and medical supplies, offers a range of clinical services and develops automation products that improve the management and delivery of supplies and medication for hospitals, physician offices and pharmacies. Ranked No. 19 on the Fortune 500, Cardinal Health employs more than 55,000 people on six continents. More information about the company may be found at www.cardinalhealth.com.

(1) Non-GAAP earnings from continuing operations: Earnings from continuing operations excluding special items and impairment charges and other, both net of tax. (2) Non-GAAP diluted EPS from continuing operations: Non-GAAP earnings from continuing operations divided by diluted weighted average shares outstanding. (3) Non-GAAP operating earnings: Operating earnings excluding special items and impairment charges and other.

A reconciliation of the differences between these non-GAAP financial measures and their most directly comparable GAAP financial measures is provided in the attached tables and at http://www.cardinalhealth.com.

Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. These forward- looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Cardinal Health's Form 10-K, Form 10-Q and Form 8-K reports (including all amendments to those reports) and exhibits to those reports, and include (but are not limited to) the following: competitive pressures in its various lines of business; the loss of one or more key customer or supplier relationships or changes to the terms of those relationships; changes in the distribution patterns or reimbursement rates for health-care products and/or services; the results, consequences, effects or timing of any inquiry or investigation by or settlement discussions with any regulatory authority or any legal and administrative proceedings, including shareholder litigation; uncertainties related to divesting the PTS segment, including uncertainties as to the amount of proceeds and timing; the costs, difficulties and uncertainties related the integration of acquired businesses; with respect to future share repurchases, the approval of the board of directors, which is expected to consider Cardinal Health's then-current stock price, earnings, cash flows, financial condition and prospects as well as alternatives available to Cardinal Health at the time any such action is considered; and general economic and market conditions. Except to the extent required by applicable law, Cardinal Health undertakes no obligation to update or revise any forward-looking statement.

CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) Second Quarter (in millions, except per Common Share amounts) 2007 2006 % Change Revenue $21,784.6 $19,346.9 13 % Cost of products sold 20,484.7 18,181.2 13 % Gross margin 1,299.9 1,165.7 12 % Selling, general and administrative expenses 755.6 696.9 8 % Impairment charges and other 12.6 (2.6) N.M. Special items: Restructuring charges 10.0 9.3 N.M. Merger charges 9.1 5.9 N.M. Other 0.5 (0.9) N.M. Operating earnings 512.1 457.1 12 % Interest expense and other 32.4 26.6 22 % Earnings before income taxes and discontinued operations 479.7 430.5 11 % Provision for income taxes 164.0 144.7 13 % Earnings from continuing operations 315.7 285.8 10 % Earnings from discontinued operations (net of tax benefit/(expense) of $416.1 and $(1.7) for the second quarter of fiscal 2007 and 2006, respectively) 423.6 18.2 N.M. Net earnings $739.3 $304.0 143 % Basic Earnings per Common Share: Continuing operations $0.78 $0.67 16 % Discontinued operations 1.06 0.04 N.M. Net basic earnings per Common Share $1.84 $0.71 159 % Diluted Earnings per Common Share: Continuing operations $0.77 $0.66 17 % Discontinued operations 1.03 0.04 N.M. Net diluted earnings per Common Share $1.80 $0.70 157 % Weighted Average Number of Shares Outstanding: Basic 402.2 425.5 Diluted 410.6 431.9 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (in millions, except per Year-to-Date Common Share amounts) 2007 2006 % Change Revenue $42,722.1 $38,199.3 12 % Cost of products sold 40,221.7 35,932.0 12 % Gross margin 2,500.4 2,267.3 10 % Selling, general and administrative expenses 1,480.9 1,410.6 5 % Impairment charges and other 14.3 (0.6) N.M. Special items: Restructuring charges 21.8 16.8 N.M. Merger charges 11.1 12.8 N.M. Other 8.9 4.9 N.M. Operating earnings 963.4 822.8 17 % Interest expense and other 70.1 50.3 39 % Earnings before income taxes and discontinued operations 893.3 772.5 16 % Provision for income taxes 286.0 253.2 13 % Earnings from continuing operations 607.3 519.3 17 % Earnings from discontinued operations (net of tax benefit of $435.9 and $0.8 for fiscal 2007 and 2006 year-to-date, respectively) 402.7 13.0 N.M. Net earnings $1,010.0 $532.3 90 % Basic Earnings per Common Share: Continuing operations $1.50 $1.22 23 % Discontinued operations 1.00 0.03 N.M. Net basic earnings per Common Share $2.50 $1.25 100 % Diluted Earnings per Common Share: Continuing operations $1.47 $1.20 23 % Discontinued operations 0.98 0.03 N.M. Net diluted earnings per Common Share $2.45 $1.23 99 % Weighted Average Number of Shares Outstanding: Basic 403.4 425.9 Diluted 412.0 431.7 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) December 31, June 30, (in millions) 2006 2006 Assets Cash and equivalents $1,003.3 $1,186.3 Short-term investments available for sale 467.1 498.4 Trade receivables, net 4,394.5 3,808.8 Current portion of net investment in sales-type leases 330.3 290.1 Inventories 7,309.2 7,493.0 Prepaid expenses and other 579.8 582.5 Assets held for sale and discontinued operations 3,093.9 2,743.2 Total current assets 17,178.1 16,602.3 Property and equipment, net 1,518.5 1,505.0 Net investment in sales-type leases, less current portion 758.9 754.7 Goodwill and other intangibles, net 4,391.3 4,283.4 Other assets 290.4 259.3 Total assets $24,137.2 $23,404.7 Liabilities and Shareholders' Equity Current portion of long-term obligations and other short-term borrowings $48.9 $199.0 Accounts payable 8,984.7 8,907.8 Other accrued liabilities 2,139.6 1,948.8 Liabilities from businesses held for sale and discontinued operations 529.4 528.0 Total current liabilities 11,702.6 11,583.6 Long-term obligations, less current portion and other short-term borrowings 2,935.8 2,588.6 Deferred income taxes and other liabilities 591.0 741.8 Total shareholders' equity 8,907.8 8,490.7 Total liabilities and shareholders' equity $24,137.2 $23,404.7 CARDINAL HEALTH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Second Quarter Year-to-Date (in millions) 2007 2006 2007 2006 Cash Flows From Operating Activities: Net earnings $739.3 $304.0 $1,010.0 $532.3 Earnings from discontinued operations (423.6) (18.2) (402.7) (13.0) Earnings from continuing operations 315.7 285.8 607.3 519.3 Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities: Depreciation and amortization 77.0 69.9 155.4 145.6 Asset impairments 12.7 (4.1) 14.4 (2.9) Equity compensation 34.1 46.7 71.5 120.7 Provision for bad debts 2.4 7.2 7.8 14.9 Change in operating assets and liabilities, net of effects from acquisitions: (Increase) / decrease in trade receivables (699.1) 101.4 (592.1) (160.1) Decrease in inventories 64.4 65.7 184.1 88.9 Increase in net investment in sales-type leases (23.5) (23.1) (44.3) (61.9) Increase in accounts payable 207.6 95.0 76.1 581.3 Other accrued liabilities and operating items, net (43.4) (60.5) 129.7 (4.3) Net cash provided by / (used in) operating activities - continuing operations (52.1) 584.0 609.9 1,241.5 Net cash provided by operating activities - discontinued operations 5.7 74.1 29.5 151.2 Net cash provided by / (used in) operating activities (46.4) 658.1 639.4 1,392.7 Cash Flows From Investing Activities: Acquisition of subsidiaries, net of divestitures and cash acquired (56.5) (75.8) (121.0) (72.5) Proceeds from sale of property and equipment 9.7 3.2 13.3 3.5 Additions to property and equipment (85.4) (116.9) (154.0) (161.5) Sale / (purchase) of investment securities available for sale, net (10.6) (219.1) 31.3 (319.2) Net cash used in investing activities - continuing operations (142.8) (408.6) (230.4) (549.7) Net cash used in investing activities - discontinued operations (11.5) (21.2) (7.9) (52.4) Net cash used in investing activities (154.3) (429.8) (238.3) (602.1) Cash Flows From Financing Activities: Net change in commercial paper and short-term borrowings (101.8) 2.6 3.7 4.9 Reduction of long-term obligations (661.4) (90.6) (689.2) (92.8) Proceeds from long-term obligations, net of issuance costs 850.0 500.4 851.7 500.3 Proceeds from issuance of Common Shares 18.0 33.7 75.3 68.5 Tax benefits from exercises of stock options 4.7 10.7 17.1 19.7 Dividends on Common Shares (36.5) (25.7) (73.4) (51.2) Purchase of treasury shares (300.0) (412.9) (745.3) (412.9) Net cash provided by / (used in) financing activities - continuing operations (226.9) 18.2 (560.1) 36.5 Net cash provided by / (used in) financing activities - discontinued operations (11.6) (2.3) (24.0) 3.3 Net cash provided by / (used in) financing activities (238.5) 15.9 (584.1) 39.8 Net increase / (decrease) in cash and equivalents (439.5) 244.2 (183.0) 830.4 Cash and equivalents at beginning of period 1,442.8 1,870.8 1,186.3 1,284.6 Cash and equivalents at end of period $1,003.3 $2,115.0 $1,003.3 $2,115.0 CARDINAL HEALTH, INC. AND SUBSIDIARIES SEGMENT BUSINESS ANALYSIS - SECOND QUARTER FISCAL YEAR 2007 HEALTHCARE SUPPLY CHAIN SERVICES (in millions) 2007 2006 PHARMACEUTICAL Revenue Amount $19,238 $16,977 Growth Rate 13 % 8 % Mix 87 % 86 % Operating Earnings Amount $328 $276 Growth Rate 19 % 8 % Mix 60 % 59 % Operating Margin 1.71 % 1.63 % MEDICAL Revenue Amount $1,872 $1,770 Growth Rate 6 % 5 % Mix 8 % 9 % Operating Earnings Amount $78 $70 Growth Rate 12 % (12)% Mix 14 % 15 % Operating Margin 4.18 % 3.93 % CARDINAL HEALTH, INC. AND SUBSIDIARIES SEGMENT BUSINESS ANALYSIS - SECOND QUARTER FISCAL YEAR 2007 PHARMACEUTICAL AND MEDICAL PRODUCTS (in millions) 2007 2006 CLINICAL TECHNOLOGIES AND SERVICES Revenue Amount $662 $603 Growth Rate 10 % 10 % Mix 3 % 3 % Operating Earnings Amount $92 $79 Growth Rate 16 % 16 % Mix 17 % 17 % Operating Margin 13.87 % 13.15 % MEDICAL PRODUCTS MANUFACTURING Revenue Amount $455 $397 Growth Rate 15 % 3 % Mix 2 % 2 % Operating Earnings Amount $51 $42 Growth Rate 21 % (26)% Mix 9 % 9 % Operating Margin 11.11 % 10.54 % Segment results include equity compensation previously held at the corporate level. CARDINAL HEALTH, INC. AND SUBSIDIARIES SEGMENT BUSINESS ANALYSIS - FISCAL YEAR 2007 HEALTHCARE SUPPLY CHAIN SERVICES (in millions) 2007 2006 PHARMACEUTICAL Revenue Amount $37,770 $33,510 Growth Rate 13 % 9 % Mix 87 % 86 % Operating Earnings Amount $617 $501 Growth Rate 23 % 7 % Mix 62 % 59 % Operating Margin 1.63 % 1.50 % MEDICAL Revenue Amount $3,679 $3,533 Growth Rate 4 % 5 % Mix 8 % 9 % Operating Earnings Amount $139 $132 Growth Rate 5 % (15)% Mix 14 % 16 % Operating Margin 3.78 % 3.75 % CARDINAL HEALTH, INC. AND SUBSIDIARIES SEGMENT BUSINESS ANALYSIS - FISCAL YEAR 2007 PHARMACEUTICAL AND MEDICAL PRODUCTS (in millions) 2007 2006 CLINICAL TECHNOLOGIES AND SERVICES Revenue Amount $1,257 $1,179 Growth Rate 7 % 10 % Mix 3 % 3 % Operating Earnings Amount $143 $136 Growth Rate 5 % 26 % Mix 14 % 16 % Operating Margin 11.40 % 11.55 % MEDICAL PRODUCTS MANUFACTURING Revenue Amount $879 $780 Growth Rate 13 % 6 % Mix 2 % 2 % Operating Earnings Amount $100 $77 Growth Rate 29 % (9)% Mix 10 % 9 % Operating Margin 11.37 % 9.91 % Segment results include equity compensation previously held at the corporate level. CARDINAL HEALTH, INC. AND SUBSIDIARIES BUSINESS ANALYSIS TOTAL COMPANY Non-GAAP Second Quarter Second Quarter (in millions) 2007 2006 2007 2006 Revenue Amount $21,785 $19,347 Growth Rate 13 % 8 % Operating Earnings Amount $512 $457 $544 $469 Growth Rate 12 % 13 % 16 % 4 % Earnings from Continuing Operations Amount $316 $286 $341 $297 Growth Rate 10 % 11 % 15 % 3 % Non-GAAP Year-to-Date Year-to-Date (in millions) 2007 2006 2007 2006 Revenue Amount $42,722 $38,199 Growth Rate 12 % 8 % Operating Earnings Amount $963 $823 $1,019 $857 Growth Rate 17 % 14 % 19 % 7 % Earnings from Continuing Operations Amount $607 $519 $649 $544 Growth Rate 17 % 17 % 19 % 10 % See the GAAP / Non-GAAP Reconciliation for definitions and calculations supporting the non-GAAP balances. CARDINAL HEALTH, INC. AND SUBSIDIARIES ASSET MANAGEMENT ANALYSIS Second Quarter Year-to-Date 2007 2006 2007 2006 Receivable Days 19.2 14.4 Days Inventory on Hand 28 31 Debt to Total Capital 25 % 25 % Net Debt to Capital 15 % 4 % Return on Equity (1) 34.1% 13.8% 23.5% 12.2% Non-GAAP Return on Equity (1) 15.2% 14.6% 14.3% 12.9% Return on Invested Capital (1) 13.85% 5.70% 9.51% 5.02% Non-GAAP Return on Invested Capital (1) 6.53% 6.33% 6.22% 5.62% Effective Tax Rate from Continuing Operations 34.2% 33.6% 32.0% 32.8% Non-GAAP Effective Tax Rate from Continuing Operations 34.3% 32.9% 32.0% 32.5% See the GAAP / Non-GAAP Reconciliation for definitions and calculations supporting the non-GAAP balances. (1) See definitions for explanation of changes in method of calculating these financial measures from prior quarters. CARDINAL HEALTH, INC. AND SUBSIDIARIES SCHEDULE OF NOTABLE ITEMS Second Quarter Year-to-Date (in millions, except per Common Share amounts) 2007 2006 2007 2006 Special Items Restructuring charges $(10.0) $(9.3) $(21.8) $(16.8) Merger charges (9.1) (5.9) (11.1) (12.8) Other (0.5) 0.9 (8.9) (4.9) Total special items (19

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