1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended December 31, 2000 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)
(614) 757-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of Registrant's Common Shares outstanding at the close of
business on January 31, 2001 was as follows:
Common Shares, without par value: 280,367,358
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
Page No.
--------
Part I. Financial Information:
---------------------
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three and Six Months
Ended December 31, 2000 and 1999 (unaudited)....................................... 3
Condensed Consolidated Balance Sheets at December 31, 2000 and
June 30, 2000 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2000 and 1999 (unaudited)............................................. 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14
Part II. Other Information:
-----------------
Item 1. Legal Proceedings.................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Item 6. Exhibits and Reports on Form 8-K................................................... 15
* Items not listed are inapplicable.
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Revenue:
Operating revenue $7,745.1 $6,254.3 $14,728.3 $12,083.6
Bulk deliveries to customer warehouses 1,892.8 1,145.2 3,644.2 2,099.6
-------- -------- --------- ---------
Total revenue 9,637.9 7,399.5 18,372.5 14,183.2
Cost of products sold:
Operating cost of products sold 6,936.1 5,532.7 13,182.9 10,707.2
Cost of products sold - bulk deliveries 1,892.8 1,144.9 3,644.2 2,099.3
-------- -------- --------- ---------
Total cost of products sold 8,828.9 6,677.6 16,827.1 12,806.5
Gross margin 809.0 721.9 1,545.4 1,376.7
Selling, general and administrative expenses 445.4 415.3 871.5 806.6
Merger-related costs 7.0 5.5 24.3 42.3
-------- -------- --------- ---------
Operating earnings 356.6 301.1 649.6 527.8
Interest expense and other (30.5) (26.8) (57.5) (51.7)
-------- -------- --------- ---------
Earnings before income taxes 326.1 274.3 592.1 476.1
Provision for income taxes 116.9 100.8 209.7 180.6
-------- -------- --------- ---------
Net earnings $ 209.2 $ 173.5 $ 382.4 $ 295.5
======== ======== ========= =========
Earnings per Common Share:
Basic $ 0.75 $ 0.62 $ 1.37 $ 1.05
Diluted $ 0.73 $ 0.61 $ 1.34 $ 1.03
Weighted average number of Common Shares outstanding:
Basic 279.3 280.4 278.5 280.2
Diluted 286.4 285.1 285.5 285.8
Cash dividends declared per Common Share $ 0.030 $ 0.025 $ 0.060 $ 0.050
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
DECEMBER 31, JUNE 30,
2000 2000
------------ ---------
ASSETS
Current assets:
Cash and equivalents $ 416.2 $ 504.6
Trade receivables, net 2,225.3 1,677.0
Current portion of net investment in sales-type leases 218.4 187.7
Inventories 5,206.8 3,865.3
Prepaid expenses and other 707.9 636.0
--------- ---------
Total current assets 8,774.6 6,870.6
--------- ---------
Property and equipment, at cost 3,084.0 2,937.8
Accumulated depreciation and amortization (1,395.9) (1,310.9)
--------- ---------
Property and equipment, net 1,688.1 1,626.9
Other assets:
Net investment in sales-type leases, less current portion 600.8 578.6
Goodwill and other intangibles 1,022.2 961.7
Other 240.7 227.1
--------- ---------
Total $12,326.4 $10,264.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 20.6 $ 19.1
Current portion of long-term obligations 7.6 9.3
Accounts payable 4,350.0 3,030.9
Other accrued liabilities 976.9 1,202.2
--------- ---------
Total current liabilities 5,355.1 4,261.5
--------- ---------
Long-term obligations, less current portion 1,980.5 1,485.8
Deferred income taxes and other liabilities 659.0 536.4
Shareholders' equity:
Common Shares, without par value 1,363.4 1,227.9
Retained earnings 3,537.6 3,173.4
Common Shares in treasury, at cost (453.6) (329.1)
Other comprehensive income (108.8) (81.9)
Other (6.8) (9.1)
--------- ---------
Total shareholders' equity 4,331.8 3,981.2
--------- ---------
Total $12,326.4 $10,264.9
========= =========
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
SIX MONTHS ENDED
DECEMBER 31,
2000 1999
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 382.4 $ 295.5
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 130.7 125.3
Provision for bad debts 8.0 14.0
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (458.4) (301.4)
Increase in inventories (1,237.1) (1,102.3)
Increase in net investment in sales-type leases (52.9) (65.8)
Increase in accounts payable 1,252.3 675.5
Other operating items, net (147.5) 76.5
---------- ----------
Net cash used in operating activities (122.5) (282.7)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (262.3) (62.6)
Proceeds from sale of property and equipment 3.6 14.5
Additions to property and equipment (129.0) (149.3)
Other -- 48.3
---------- ----------
Net cash used in investing activities (387.7) (149.1)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 96.9 693.8
Reduction of long-term obligations (12.1) (140.8)
Proceeds from long-term obligations, net of issuance costs 409.2 --
Common shares issued under employee benefit plans 84.1 20.6
Dividends on Common Shares and cash paid
in lieu of fractional shares (16.7) (14.1)
Purchase of treasury shares (138.1) (22.6)
Other (1.5) --
---------- ----------
Net cash provided by financing activities 421.8 536.9
---------- ----------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS (88.4) 105.1
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 504.6 185.4
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 416.2 $ 290.5
========== ==========
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The condensed consolidated financial statements of Cardinal
Health, Inc. (the "Company") include the accounts of all
majority-owned subsidiaries and all significant intercompany amounts
have been eliminated. These condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and include all of the information and disclosures required
by generally accepted accounting principles for interim reporting. In
the opinion of management, all adjustments necessary for a fair
presentation have been included. Except as disclosed elsewhere
herein, all such adjustments are of a normal and recurring nature.
The condensed consolidated financial statements included herein
should be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form
10-K"). Without limiting the generality of the foregoing, Note 1 of
the "Notes to Consolidated Financial Statements" from the 2000 Form
10-K is specifically incorporated herein by reference.
Note 2. Basic earnings per Common Share ("Basic") is computed by dividing
net earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
In March 2000, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $750
million. Through December 31, 2000, 7 million Common Shares, having
an aggregate cost of approximately $440.2 million had been
repurchased via an accelerated share repurchase program and placed
into treasury shares. In connection with the proposed merger with
Bindley Western Industries, Inc. ("Bindley") (see Note 10), the
Company's Board of Directors rescinded the remainder of this
repurchase program.
On November 1, 2000, the shareholders of the Company approved, and
the Company's articles of incorporation were amended to effect, an
increase in the number of authorized Common Shares, without par
value, from 500 million to 750 million.
Note 3. The Company's comprehensive income consists of net earnings,
foreign currency translation adjustments, unrealized loss on
investment and net unrealized loss on derivative instruments as
follows:
For the three months ended For the six months ended
(in millions) December 31, December 31,
2000 1999 2000 1999
------ ------ ------ ------
Net earnings $209.2 $173.5 $382.4 $295.5
Foreign currency adjustments (0.7) (1.2) (21.0) 0.7
Unrealized loss on investment -- -- (5.4) --
Net unrealized loss on derivative
instruments (0.3) -- (0.5) --
------ ------ ------ ------
Total comprehensive income $208.2 $172.3 $355.5 $296.2
====== ====== ====== ======
Note 4. On August 16, 2000, the Company completed the purchase of Bergen
Brunswig Medical Corporation ("BBMC") for approximately $180 million,
subject to post-closing adjustments. BBMC distributes medical,
surgical and laboratory supplies to doctors' offices, long-term care
and nursing centers, hospitals and other providers of care. In
addition, the Company also completed several other individually
immaterial acquisitions during the quarter and six months ended
December 31, 2000. These transactions were accounted for under the
purchase method of accounting. The condensed consolidated financial
statements include the results of operations from each of these
business combinations as of the date of acquisition. Had the
transactions occurred on July 1, 1999, results of operations would
not have differed materially from reported results.
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Note 5. Costs of effecting mergers and subsequently integrating the
operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs
currently being recognized are primarily a result of the merger
transactions with Automatic Liquid Packaging, Inc. ("ALP"),
Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation
("Scherer"). The following is a summary of the merger-related costs
for the three and six-month periods ended December 31, 2000 and 1999.
Three months ended Six months ended
December 31, December 31,
------------------------------------------------------------------------------------------------------
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
Transaction and employee-related costs $(2.8) $(0.4) $(10.7) $(21.7)
Exit costs (0.1) (0.5) (0.2) (4.8)
Restructuring costs -- (0.1) (1.6) (7.0)
Other integration costs (4.1) (4.5) (11.8) (8.8)
------------------------------------------------------------------------------------------------------
Total merger related costs $(7.0) $(5.5) $(24.3) $(42.3)
Tax effect of merger related costs 1.6 2.1 7.9 9.2
------------------------------------------------------------------------------------------------------
Net effect of special charges $(5.4) $(3.4) $(16.4) $(33.1)
======================================================================================================
During the above stated periods, the Company incurred direct
transaction costs related to its merger transactions. These expenses
primarily include investment banking, legal, accounting and other
professional fees associated with the respective merger transaction.
In addition, the Company incurred employee-related costs, which
consist primarily of severance and transaction/stay bonuses as a
result of the ALP, Allegiance and Scherer merger transactions.
Partially offsetting the transaction and employee-related costs
recorded during the first quarter of fiscal 2000 was a $10.3 million
credit recorded to adjust the estimated transaction and
employee-related costs previously recorded in connection with the
Allegiance merger transaction. Actual billings and employee-related
costs were less than the amounts originally anticipated, resulting in
a reduction of the merger-related costs. Exit costs relate primarily
to costs associated with lease terminations and moving expenses as a
direct result of the merger transactions with ALP, Allegiance and
Scherer. Other integration costs include charges related to
integrating the operations of previous merger transactions.
The Company recorded charges of $1.6 million and $7.0 million during
the six months ended December 31, 2000 and 1999, respectively,
associated with the business restructuring as a result of the
Company's merger transaction with Scherer. As part of the business
restructuring, the Company is closing certain facilities. In
connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs
related to the termination of contracts and lease agreements.
The net of tax effect of the various merger-related costs recorded
during the three months ended December 31, 2000 and 1999 was to
reduce net earnings by $5.4 million to $209.2 million and by $3.4
million to $173.5 million, respectively, and to reduce reported
diluted earnings per Common Share by $0.02 per share to $0.73 per
share and by $0.01 per share to $0.61 per share, respectively. The
net of tax effect of the various merger-related costs recorded during
the six months ended December 31, 2000 and 1999 was to reduce net
earnings by $16.4 million to $382.4 million and by $33.1 million to
$295.5 million, respectively, and to reduce reported diluted earnings
per Common Share by $0.06 per share to $1.34 per share and by $0.12
per share to $1.03 per share, respectively.
Note 6. The Company is organized based on the products and services it
offers. Under this organizational structure, the Company operates in
four business segments: Pharmaceutical Distribution and Provider
Services, Medical-Surgical Products and Services, Pharmaceutical
Technologies and Services and Automation and Information Services.
The Company has not made any significant changes in the segments
reported or the basis of measurement of segment profit or loss from
the information provided in the Company's 2000 Form 10-K.
The Pharmaceutical Distribution and Provider Services segment
involves the distribution of a broad line of pharmaceuticals,
healthcare and beautycare products, therapeutic plasma and other
specialty pharmaceutical products and other items typically sold by
hospitals, retail drug stores and other healthcare providers. In
addition, this segment provides services to the healthcare industry
through integrated pharmacy management, temporary pharmacy staffing,
as well as franchising of apothecary-style retail pharmacies.
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The Medical-Surgical Products and Services segment involves the
manufacture of medical, surgical and laboratory products and the
distribution of these and other products to hospitals, physician
offices, surgery centers and other healthcare providers, as well as
providing healthcare consulting services.
The Pharmaceutical Technologies and Services segment provides
services to the pharmaceutical manufacturing industry through the
design of unique drug delivery systems, liquid fill contract
manufacturing and comprehensive packaging services.
The Automation and Information Services segment provides services to
hospitals and other healthcare providers through pharmacy automation
equipment and clinical information system services.
The Company evaluates the performance of the segments based on
operating earnings after the corporate allocation of administrative
expenses. Special charges are not allocated to the segments.
The following table includes revenue and operating earnings for the
three and six-month periods ended December 31, 2000 and 1999 for each
segment and reconciling items necessary to equal amounts reported in
the condensed consolidated financial statements:
For the three months ended For the six months ended
December 31, December 31,
-------------------------- ------------------------
(in millions) Net Revenue Net Revenue
----------------------- ------------------------
2000 1999 2000 1999
-------- -------- --------- ---------
Operating revenue:
Pharmaceutical Distribution and Provider
Services $5,885.3 $4,607.9 $11,137.3 $ 8,897.6
Medical-Surgical Products and Services 1,473.7 1,279.2 2,852.2 2,492.0
Pharmaceutical Technologies and Services 286.6 262.7 558.7 521.6
Automation and Information Services 119.5 104.1 209.6 173.9
Other (20.0) 0.4 (29.5) (1.5)
-------- -------- --------- ---------
Total operating revenue 7,745.1 6,254.3 14,728.3 12,083.6
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider
Services 1,892.8 1,145.2 3,644.2 2,099.6
-------- -------- --------- ---------
Total net revenue $9,637.9 $7,399.5 $18,372.5 $14,183.2
======== ======== ========= =========
Operating Earnings Operating Earnings
--------------------- ---------------------
2000 1999 2000 1999
------ ------ ------ ------
Operating earnings:
Pharmaceutical Distribution and Provider
Services $174.6 $135.1 $325.7 $259.4
Medical-Surgical Products and Services 105.0 88.9 207.6 175.5
Pharmaceutical Technologies and Services 58.9 51.3 108.8 96.3
Automation and Information Services 45.4 38.9 68.5 56.0
Corporate (1) (27.3) (13.1) (61.0) (59.4)
------ ------ ------ ------
Total operating earnings $356.6 $301.1 $649.6 $527.8
====== ====== ====== ======
(1) Corporate - operating earnings primarily consist of special
charges of $7.0 million and $5.5 million for the three
months ended December 31, 2000 and 1999, respectively, and
$24.3 million and $42.3 million for the six months ended
December 31, 2000 and 1999, respectively, and unallocated
corporate depreciation and amortization and administrative
expenses.
Note 7. On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their
U.S. Healthcare distribution business, surgical and respiratory
therapy business and healthcare cost-saving business, as well as
certain foreign operations (the "Allegiance Business") in connection
with a spin-off of the Allegiance Business by Baxter. In connection
with this spin-off, Allegiance, which was acquired by the Company on
February 3, 1999, assumed the defense of litigation
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involving claims related to the Allegiance Business from Baxter
Healthcare Corporation ("BHC"), including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex
gloves. Allegiance will be defending and indemnifying BHC, as
contemplated by the agreements between Baxter and Allegiance, for all
expenses and potential liabilities associated with claims pertaining
to the litigation assumed by Allegiance. As of December 31, 2000,
there were approximately 571 lawsuits involving BHC and/or Allegiance
containing allegations of sensitization to natural rubber latex
products. Some of the cases are now proceeding to trial. Because of
the increase in claims filed and the ongoing defense costs that will
be incurred, the Company believes it is probable that it will
continue to incur significant expenses related to the defense of
cases involving natural rubber latex gloves. At this time, the
Company is unable to evaluate the extent of any potential liability,
and unable to estimate any potential loss. AEIA, one of the insurers
for the latex glove litigation, has advised the Company of its intent
to resolve through arbitration the extent of its obligation to
reimburse the Company for certain defense costs and loss expenses
incurred in connection with the litigation. The Company believes a
substantial portion of any liability will be covered by insurance,
subject to self-insurance retentions, exclusions, conditions,
coverage gaps, policy limits and insurer solvency.
The Company also becomes involved from time-to-time in other
litigation incidental to its business, including without limitation
inclusion of certain of its subsidiaries as a potentially responsible
party for environmental clean-up costs. Although the ultimate
resolution of the litigation referenced herein cannot be forecast
with certainty, the Company intends to vigorously defend itself and
does not believe that the outcome of any pending litigation will have
a material adverse effect on the Company's condensed consolidated
financial statements.
Note 8. As of July 1, 2000, the Company adopted the Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. The adoption of these statements did not
have a material impact on the Company's consolidated financial
statements.
In September 2000, the Financial Accounting Standards Board issued
the Statement of Financial Accounting Standards No. 140 ("SFAS 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which is effective for any
activities occurring after March 31, 2001. SFAS 140 replaces SFAS 125
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities", therefore revising the disclosure for
securitizations and other transfers of financial assets or
collateral. The Company does not anticipate that the adoption of SFAS
140 will have a material impact on the consolidated financial
statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements" which
requires adoption during the fourth quarter of fiscal 2001. At this
time, the Company does not anticipate that the adoption of SAB 101
will have a material impact on the consolidated financial statements.
The Company will continue to analyze the impact of SAB 101, including
any amendments or further interpretation, based upon the relevant
facts and circumstances at the time of adoption.
Note 9. The Company periodically sells trade receivables to a special
purpose accounts receivable and financing entity ("SPE"), which is
exclusively engaged in purchasing trade receivables from, and making
loans to, the Company. During the quarter ended December 31, 2000,
the SPE, which is consolidated by the Company, issued $400 million in
preferred debt securities to parties not affiliated with the Company.
Those preferred securities must be retired or redeemed before the
Company can have access to the SPE's receivables.
Note 10. On December 4, 2000, the Company announced that it had entered into a
definitive merger agreement with Bindley, pursuant to which Bindley
will become a wholly owned subsidiary of the Company in a
stock-for-stock merger. This merger transaction is expected to be
accounted for as a pooling-of-interests for financial reporting
purposes. Under the terms of the proposed merger, shareholders of
Bindley will receive 0.4275 of a Company common share in exchange for
each outstanding common share of Bindley. The Bindley shareholders
have approved the merger, which will become effective at 5:00 pm on
February 14, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis is concerned with material changes in
financial condition and results of operations for the Company's condensed
consolidated balance sheets as of December 31, 2000 and June 30, 2000, and for
the condensed consolidated statements of earnings for the three and six-month
periods ended December 31, 2000 and 1999.
This discussion and analysis should be read together with management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to materially differ from those made,
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to this Form 10-Q and are
incorporated herein by reference. The Company disclaims any obligation to update
any forward-looking statement.
GENERAL
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services. See Note 6 of "Notes to Condensed Consolidated Financial
Statements" for a description of these segments.
RESULTS OF OPERATIONS
Operating Revenue Three months ended Six months ended
December 31, 2000 December 31, 2000
--------------------------------------------------------------------
Percent of Total Percent of Total
Growth (1) Operating Revenues Growth (1) Operating Revenues
- ---------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider
Services 28% 76% 25% 76%
Medical-Surgical Products and Services 15% 19% 14% 19%
Pharmaceutical Technologies and Services 9% 4% 7% 4%
Automation and Information Services 15% 1% 21% 1%
Total Company 24% 100% 22% 100%
- -------------------------------------------------------------------------------- ----------------------------------
(1) The growth rate applies to the applicable three and six-month
periods ended December 31, 2000 compared to the corresponding
periods of the prior year.
Total operating revenue for the three and six months ended December 31,
2000 increased 24% and 22%, respectively, compared to the same period of the
prior year. The majority of the operating revenue increase came from existing
customers in the form of increased volume and price increases. A portion of the
growth was a result of acquisitions during the six months ended December 31,
2000 (see Note 4 of "Notes to Condensed Consolidated Financial Statements"). The
remainder of the growth came from the addition of new customers.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth during the three and six months ended December 31, 2000 was
primarily due to strong sales to all customer segments, especially pharmacy
chain stores. All operating revenue growth for this segment was internal and was
the result of increased volume to existing customers and new contracts.
The increase in the Medical-Surgical Products and Services segment's
operating revenue over the quarter and six months ended December 31, 1999 was
mainly due to an increase in sales of distributed products. Bergen Brunswig
Medical Corporation ("BBMC") was acquired in the first quarter of fiscal 2001
and accounted for as a purchase transaction. As prior year revenues for this
segment were not restated, the inclusion of BBMC revenues for the three
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and six months ended December 31, 2000 significantly increased revenues over the
prior year for distributed products.
The growth in operating revenue for the Pharmaceutical Technologies and
Services segment during the second quarter and first six months of fiscal 2001
was the result of higher sales volume in each of the businesses in the segment,
led by liquid fill contract manufacturing. The growth was attributable to a mix
of new products and customers and increased volume from existing customers. The
liquid fill contract manufacturing business' revenue growth was primarily a
result of increased volume from existing customers. In addition, cross-selling
opportunities among the businesses within this segment contributed to the
increase in operating revenue.
The increase in operating revenue for the Automation and Information
Services segment during the three and six months ended December 31, 2000 was
primarily due to sales of new products and further penetration of the market
with existing automation products.
Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
operating earnings.
Gross Margin Three months ended Six months ended
December 31, December 31,
- --------------------------------------------------------------------------------------------------------------------
(as a percentage of operating revenue) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.31% 5.69% 5.33% 5.71%
Medical-Surgical Products and Services 21.60% 22.97% 22.03% 22.99%
Pharmaceutical Technologies and Services 35.77% 34.96% 34.15% 33.39%
Automation and Information Services 68.30% 69.94% 66.59% 69.48%
Total Company 10.44% 11.54% 10.49% 11.39%
- --------------------------------------------------------------------------------------------------------------------
The decrease in consolidated gross margin as a percentage of operating
revenue during the three and six months ended December 31, 2000 was due
primarily to a greater mix of lower margin pharmaceutical distribution during
the quarter and six-month periods ended December 31, 2000, as well as a decrease
in margins for the Medical-Surgical Products and Services and Automation and
Information Services segments. The Pharmaceutical Distribution and Provider
Services segment's mix increased to 76% of total operating revenues for both the
three and six months ended December 31, 2000 from 74% during each of the
comparable periods of the prior year.
The Pharmaceutical Distribution and Provider Services segment's gross
margin as a percentage of operating revenue decreased primarily as a result of
lower selling margins due to a greater mix of sales to retail pharmacy chains.
Such customers have a relatively lower margin in connection with a lower cost of
service (see discussion in selling, general and administrative expenses). This
decrease was partially offset by higher vendor margins from favorable price
increases and manufacturer marketing programs.
The decrease in the Medical-Surgical Products segment's gross margin during
the three and six-month periods ended December 31, 2000 over the comparable
periods of prior year was primarily due to the purchase of BBMC. As expected,
this transaction shifted product mix toward lower margin distributed products.
Excluding the impact of the BBMC acquisition, segment gross margin was
relatively unchanged from the prior year.
The increase in the Pharmaceutical Technologies and Services segment's
gross margin was due primarily to the continued focus on higher margin
pharmaceutical products and services, especially in liquid fill contract
manufacturing, which had the strongest growth in this segment. Gross margin was
also favorably impacted by better profitability on certain vitamin products, as
well as an improvement in manufacturing processes as a result of improved
productivity and ongoing plant modernization.
The decrease in gross margin for the Automation and Information Services
segment for the periods ended December 31, 2000 was primarily due to product mix
with the "supply" product line (which carries a lower margin, as well as a lower
cost to service) growing faster than the "medication" product line.
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Selling, General & Administrative Expenses Three months ended Six months ended
December 31, December 31,
- --------------------------------------------------------------------------------------------------------------------
(as a percentage of operating revenue) 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.34% 2.76% 2.41% 2.80%
Medical-Surgical Products and Services 14.43% 16.02% 14.74% 15.95%
Pharmaceutical Technologies and Services 15.22% 15.41% 14.67% 14.91%
Automation and Information Services 30.31% 32.54% 33.91% 37.25%
Total Company 5.75% 6.64% 5.92% 6.67%
- --------------------------------------------------------------------------------------------------------------------
The improvement in selling, general and administrative expenses as a
percentage of operating revenue for the three and six-month periods ended
December 31, 2000 reflects economies of scale associated with the Company's
revenue growth, as well as significant productivity gains resulting from
continued cost control efforts and the consolidation and selective automation of
operating facilities. In addition, the Company is continuing to take advantage
of synergies from recent acquisitions to decrease selling, general and
administrative expenses as a percentage of operating revenue. The overall
increase of 7% and 8% in selling, general and administrative expenses
experienced in the three and six months ended December 31, 2000 compared to the
respective periods a year ago, was due primarily to increases in personnel costs
and depreciation expense. The increase in selling, general and administrative
expenses compares favorably to the 24% and 22% growth in operating revenue for
the three and six months ended December 31, 2000.
Merger-Related Costs. Costs of effecting mergers and subsequently integrating
the operations of the various merged companies are recorded as merger-related
costs when incurred. The merger-related costs currently being recognized are
primarily a result of the merger transactions with Automatic Liquid Packaging,
Inc. ("ALP"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation
("Scherer"). The following is a summary of the merger-related costs for the
three and six-month periods ended December 31, 2000 and 1999.
Three months ended Six months ended
December 31, December 31,
------------------------------------------------------------------------------------------------------------
(in millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
Transaction and employee-related costs $(2.8) $(0.4) $(10.7) $(21.7)
Exit costs (0.1) (0.5) (0.2) (4.8)
Restructuring costs -- (0.1) (1.6) (7.0)
Other integration costs (4.1) (4.5) (11.8) (8.8)
------------------------------------------------------------------------------------------------------------
Total merger related costs $(7.0) $(5.5) $(24.3) $(42.3)
Tax effect of merger related costs 1.6 2.1 7.9 9.2
------------------------------------------------------------------------------------------------------------
Net effect of special charges $(5.4) $(3.4) $(16.4) $(33.1)
============================================================================================================
During the above stated periods, the Company incurred direct transaction
costs related to its merger transactions. These expenses primarily include
investment banking, legal, accounting and other professional fees associated
with the respective merger transaction. In addition, the Company incurred
employee-related costs, which consist primarily of severance and
transaction/stay bonuses as a result of the ALP, Allegiance and Scherer merger
transactions. Partially offsetting the transaction and employee-related costs
recorded during the first quarter of fiscal 2000 was a $10.3 million credit
recorded to adjust the estimated transaction and employee-related costs
previously recorded in connection with the Allegiance merger transaction. Actual
billings and employee-related costs were less than the amounts originally
anticipated, resulting in a reduction of the merger-related costs. Exit costs
relate primarily to costs associated with lease terminations and moving expenses
as a direct result of the merger transactions with ALP, Allegiance and Scherer.
Other integration costs include charges related to integrating the operations of
previous merger transactions.
The Company recorded charges of $1.6 million and $7.0 million during the
six months ended December 31, 2000 and 1999, respectively, associated with the
business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements.
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The net of tax effect of the various merger-related costs recorded during
the three months ended December 31, 2000 and 1999 was to reduce net earnings by
$5.4 million to $209.2 million and by $3.4 million to $173.5 million,
respectively, and to reduce reported diluted earnings per Common Share by $0.02
per share to $0.73 per share and by $0.01 per share to $0.61 per share,
respectively. The net of tax effect of the various merger-related costs recorded
during the six months ended December 31, 2000 and 1999 was to reduce net
earnings by $16.4 million to $382.4 million and by $33.1 million to $295.5
million, respectively, and to reduce reported diluted earnings per Common Share
by $0.06 per share to $1.34 per share and by $0.12 per share to $1.03 per share,
respectively.
The Company estimates that it will incur additional merger-related costs
and integration expenses associated with the various mergers it has completed to
date (primarily related to the Allegiance, ALP and BBMC mergers) of
approximately $65.7 million ($42.7 million, net of tax) in future periods
(primarily fiscal 2001 and 2002) related to the exit of contractual
arrangements, employee-related costs, and costs to properly integrate operations
and implement efficiencies. Such amounts will be charged to expense when
incurred.
Provision for Income Taxes. The Company's provision for income taxes relative to
pre-tax earnings was 35.8% and 36.8%, respectively for the second quarters of
fiscal 2001 and 2000 and 35.4% and 37.9%, respectively for the six-month periods
ending December 31, 2000 and 1999. The decrease in the effective tax rate for
the periods was primarily the result of two factors. First, the tax rate
decreased due to lower nondeductible items associated with the business
combinations in the current year as compared to the prior year. The second
factor resulting in a decrease in the effective tax rate was the favorable mix
of international and domestic business. The provision for income taxes excluding
the impact of merger-related charges was 35.5% and 36.8%, respectively, for the
quarters ended December 31, 2000 and 1999 and 35.3% and 36.6%, respectively, for
the six months ended December 31, 2000 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $3.4 billion at December 31, 2000 from $2.6
billion at June 30, 2000. This increase from June 30, 2000 included additional
investments in inventories and trade receivables of $1.3 billion and $0.5
billion, respectively. Offsetting the increases in current assets was an
increase in accounts payable of $1.3 billion. The Company's trade receivable and
inventory levels have risen due to the higher volume of current business in
pharmaceutical distribution activities. A portion of the inventory increase can
also be attributed to the Company investing in inventories in conjunction with
various vendor-margin programs. In addition, the change in accounts payable is
due primarily to the timing of inventory purchases and related payments.
During the first quarter of fiscal 2001, the Company increased the capacity
under its commercial paper program from $1.0 billion to $1.5 billion in
aggregate maturity value. At December 31, 2000, commercial paper with an
aggregate maturity value of $0.6 billion was outstanding with a market interest
rate based upon LIBOR. The Company also maintains a $1.5 billion unsecured bank
credit facility. This credit facility exists largely to support issuance of
commercial paper and other short-term borrowings.
The Company periodically sells trade receivables to a special purpose
accounts receivable and financing entity ("SPE"), which is exclusively engaged
in purchasing trade receivables from, and making loans to, the Company. During
the quarter ended December 31, 2000, the SPE, which is consolidated by the
Company, issued $400 million in preferred debt securities to parties not
affiliated with the Company. Those preferred securities must be retired or
redeemed before the Company can have access to the SPE's receivables (see Note 9
of "Notes to Condensed Consolidated Financial Statements").
Property and equipment, at cost, increased by $146.2 million from June 30,
2000. The increase was the result of two main factors. First, the Company is
involved in ongoing plant expansion and manufacturing equipment purchases in
certain businesses, as well as additional investments made for management
information systems and upgrades to distribution facilities. Second, the Company
completed several acquisitions in the first six months of fiscal year 2001 that
were accounted for as purchase transactions (see Note 4 of "Notes to Condensed
Consolidated Financial Statements").
Shareholders' equity increased to $4.3 billion at December 31, 2000 from
$4.0 billion at June 30, 2000, primarily due to net earnings of $382.4 million
and the investment of $84.1 million by employees of the Company through various
employee stock benefit plans. These increases were offset by an increase in
treasury stock due to the settlement of the accelerated share repurchase program
in the amount of $137.4 million (see Note 2 of "Notes to Condensed Consolidated
Financial Statements"). In addition, shareholders' equity decreased due to
dividends paid of $16.7 million.
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The Company filed a combination shelf debt and equity registration
statement on Form S-3 with the Securities and Exchange Commission, which was
declared effective on September 29, 2000. The registration increases the
Company's shelf common shares and debt capacity for general corporate purposes
to an aggregate of $1.0 billion as of December 31, 2000. During February 2001,
the Company issued 500,000 Common Shares for aggregate proceeds of $47.7 million
which are to be used for general corporate purposes. The common shares were
issued in order for the Company to be able to satisfy all the conditions to
consummation of the merger recently announced by the Company pursuant to which
Bindley Western Industries Inc. ("Bindley") will become a subsidiary of the
Company. In addition, during February 2001, the Company issued $500 million of
6.75% Notes due 2011, the proceeds of which are to be used for early redemption
of Bindley debt and any remaining proceeds to be used for repayment of a portion
of the Company's commercial paper and general corporate purposes, which may
include working capital, capital expenditures, repayment or refinancing of
indebtedness, acquisitions and investments.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements.
OTHER
On December 4, 2000, the Company announced that it had entered into a
definitive merger agreement with Bindley, pursuant to which Bindley will become
a wholly owned subsidiary of the Company in a stock-for-stock merger. This
merger transaction is expected to be accounted for as a pooling-of-interests for
financial reporting purposes. Under the terms of the proposed merger,
shareholders of Bindley will receive 0.4275 of a Company common share in
exchange for each outstanding common share of Bindley. The Bindley shareholders
have approved the merger, which will become effective at 5:00 pm on February 14,
2001.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's Form 10-K for the fiscal year
ended June 30, 2000.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The following disclosure should be read together with the disclosure set
forth in the Company's Form 10-K for the fiscal year ended June 30, 2000, and to
the extent any such statements constitute "forward looking statements" reference
is made to Exhibit 99.01 of this Form 10-Q.
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
Healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, agreed to indemnify certain claims related to
the Allegiance Business from Baxter Healthcare Corporation ("BHC"), including
certain claims of alleged personal injuries as a result of exposure to natural
rubber latex gloves. Allegiance will be defending and indemnifying BHC, as
contemplated by the agreements between Baxter and Allegiance, for all expenses
and potential liabilities associated with claims pertaining to the litigation
assumed by Allegiance. As of December 31, 2000, there were approximately 571
lawsuits involving BHC and/or Allegiance containing allegations of sensitization
to natural rubber latex products. Some of the cases are now proceeding to trial.
Because of the increase in claims filed and the ongoing defense costs that will
be incurred, the Company believes it is probable that it will continue to incur
significant expenses related to the defense of cases involving natural rubber
latex gloves. At this time, the Company is unable to evaluate the extent of any
potential liability, and unable to estimate any potential loss. AEIA, one of the
insurers for the latex glove litigation, has advised the Company of its intent
to resolve through arbitration the extent of its obligation to reimburse the
Company for certain defense costs and loss expenses incurred in connection with
the litigation. The Company believes a substantial portion of any liability will
be covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of certain of
its subsidiaries as a potentially responsible party for environmental clean-up
costs. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the
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15
Company intends to vigorously defend itself and does not believe that the
outcome of any pending litigation will have a material adverse effect on the
Company's condensed consolidated financial statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Registrant's 2000 Annual Meeting of Shareholders was held on
November 1, 2000.
(b) Proxies were solicited by Registrant's management pursuant to
Regulation 14A under the Securities Exchange Act of 1934; there was no
solicitation in opposition to management's nominees as listed in the
proxy statement; and all director nominees were elected to the class
indicated in the proxy statement pursuant to the vote of the
Registrant's shareholders.
(c) Matters voted upon at the Annual Meeting were as follows:
(i) Election of Dave Bing, John F. Finn, John F. Havens and
Robert D. Walter. The results of the shareholder vote were as follows:
Mr. Bing - 236,911,651 for, 0 against, 5,527,121 withheld, and 0
broker non-votes; Mr. Finn - 237, 971,531 for, 0 against, 4,467,241
withheld, and 0 broker non-votes; Mr. Havens - 237,834,077 for, 0
against, 4,604,695 withheld, and 0 broker non-votes; Mr. Walter -
237,966,746 for, 0 against, 4,472,026 withheld, and 0 broker
non-votes.
(ii) Adoption of an Amendment to the Company's Articles of Incorporation to
Increase the Number of Authorized Common Shares. The results of the
shareholder vote were as follows: 238,305,832 for, 3,364,681 against,
768,259 withheld, and 0 broker non-votes.
(iii) Re-approval of the Material Terms of the Performance Goals under the
Cardinal Health, Inc. Performance-Based Incentive Compensation Plan.
The results of the shareholder vote were as follows: 237,831,944 for,
3,593,321 against, 1,103,507 withheld, and 0 broker non-votes.
(iv) Proposal from Shareholders to Phase Out PVC Use in Manufacture of
Medical Supplies. The results of the shareholder vote were as follows:
6,547,936 for, 205,384,515 against, 7,162,217 withhold, and 23,344,104
broker non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Number Exhibit Description
-------------- -------------------
2.01 Agreement and Plan of Merger, dated as of December 2, 2000,
among the Registrant, Brick Merger Corp. and Bindley Western
Industries, Inc. (1)
2.02 Stock Option Agreement, dated as of December 2, 2000, between
the Registrant and Bindley Western Industries, Inc. (1)
2.03 Voting/Support Agreement, dated as of December 2, 2000,
between the Registrant and William E. Bindley (1)
2.04 Voting/Support Agreement, dated as of December 2, 2000,
between the Registrant and Thomas J. Salentine (1)
2.05 Voting/Support Agreement, dated as of December 2, 2000,
between the Registrant and Michael D. McCormick (1)
2.06 Voting/Support Agreement, dated as of December 2, 2000,
between the Registrant and Keith W. Burks (1)
3.01 Amended and Restated Articles of Incorporation of the
Registrant, as amended. (1) and (2)
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Exhibit Number Exhibit Description
-------------- -------------------
10.01 Extendible Commercial Notes Dealer Agreement 4(2) Program,
dated as of November 1, 2000, between the Registrant, as
Issuer, and Goldman, Sachs & Co., as Dealer; and Issuing and
Paying Agent Agreement dated as of November 1, 2000, between
the Registrant, as Issuer, and Bank One, N.A., as Issuing and
Paying Agent.
10.02 Change in Control Severance Agreement, by and among the
Registrant, Allegiance Corporation, and Kathy Brittain White;
Agreement, dated February 9, 2000 (the "2000 Agreement"),
between the Registrant and Kathy Brittain White.* ((3), except
for the 2000 Agreement, which is included as an Exhibit to
this Report on Form 10-Q)
10.03 Change in Control Severance Agreement, by and among the
Registrant, Allegiance Corporation and Ronald K. Labrum.* (3)
27.01 Financial Data Schedule - Six months ended December 31, 2000
99.01 Statement Regarding Forward-Looking Information
- ------------
(1) Included as an exhibit to the Registrant's Registration Statement on
Form S-4 (No. 333-53394) and incorporated herein by reference.
(2) Included as an exhibit to the Registrant's Current Report on Form 8-K
filed November 24, 1998 (File No. 0-12591) and incorporated herein by
reference.
(3) Included as an exhibit to Allegiance Corporation's Form S-1/A filed
with the Commission on September 30, 1996 (File No. 333-12525) and
incorporated herein by reference.
* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: February 14, 2001 By: /s/ Robert D. Walter
--------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ Richard J. Miller
--------------------------------------
Richard J. Miller
Executive Vice President and
Chief Financial Officer
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