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 September 30, 2001 Commission File Number 0-11373
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 October 31, 2001 was as follows:
Common Shares, without par value: 450,889,276
--------------
Page 1
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
Page No.
Part I. Financial Information:
---------------------
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three Months
Ended September 30, 2001 and 2000 (unaudited)...................................... 3
Condensed Consolidated Balance Sheets at September 30, 2001 and
June 30, 2001 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2001 and 2000 (unaudited)............................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 16
Part II. Other Information:
-----------------
Item 1. Legal Proceedings.................................................................. 16
Item 6. Exhibits and Reports on Form 8-K................................................... 16
* Items not listed are inapplicable.
Page 2
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
----------- -----------
Revenue:
Operating revenue $ 9,865.4 $ 8,510.9
Bulk deliveries to customer warehouses 1,908.0 2,529.0
----------- -----------
Total revenue 11,773.4 11,039.9
Cost of products sold:
Operating cost of products sold 8,950.7 7,707.2
Cost of products sold - bulk deliveries 1,908.0 2,528.5
----------- -----------
Total cost of products sold 10,858.7 10,235.7
Gross margin 914.7 804.2
Selling, general and administrative expenses 502.4 455.3
Goodwill amortization - 12.1
Special charges 12.3 12.3
----------- -----------
Operating earnings 400.0 324.5
Interest expense and other 28.6 33.7
----------- -----------
Earnings before income taxes 371.4 290.8
Provision for income taxes 125.0 100.8
----------- -----------
Net earnings before cumulative effect of
change in accounting principle 246.4 190.0
Cumulative effect on prior years of change in
accounting principle, net of tax (See Note 8) 70.1 -
----------- -----------
Net earnings $ 176.3 $ 190.0
=========== ===========
Basic earnings per Common Share:
Before cumulative effect of change in
accounting principle $ 0.55 $ 0.43
Cumulative effect of change in
accounting principle (0.16) -
----------- -----------
Net basic earnings per Common Share $ 0.39 $ 0.43
=========== ===========
Diluted earnings per Common Share:
Before cumulative effect of change in
accounting principle $ 0.53 $ 0.42
Cumulative effect of change in
accounting principle (0.15) -
----------- -----------
Net diluted earnings per Common Share $ 0.38 $ 0.42
=========== ===========
Weighted average number of Common Shares outstanding:
Basic 449.6 438.9
Diluted 460.6 450.9
Cash dividends declared per Common Share $ 0.025 $ 0.020
See notes to condensed consolidated financial statements.
Page 3
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
SEPTEMBER 30, JUNE 30,
2001 2001
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 872.0 $ 934.1
Trade receivables, net 2,251.6 2,408.7
Current portion of net investment in sales-type leases 182.3 236.3
Inventories 7,704.7 6,286.1
Prepaid expenses and other 939.1 851.1
--------- ---------
Total current assets 11,949.7 10,716.3
--------- ---------
Property and equipment, at cost 3,380.2 3,345.9
Accumulated depreciation and amortization (1,532.3) (1,507.6)
--------- ---------
Property and equipment, net 1,847.9 1,838.3
Other assets:
Net investment in sales-type leases, less current portion 539.6 671.7
Goodwill and other intangibles 1,166.9 1,175.4
Other 217.4 240.7
--------- ---------
Total $15,721.5 $14,642.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 13.4 $ 8.3
Current portion of long-term obligations 12.5 5.9
Accounts payable 5,663.8 5,319.9
Other accrued liabilities 1,368.2 1,240.7
--------- ---------
Total current liabilities 7,057.9 6,574.8
--------- ---------
Long-term obligations, less current portion 2,288.6 1,871.0
Deferred income taxes and other liabilities 704.9 759.5
Shareholders' equity:
Common Shares, without par value 1,931.4 1,893.1
Retained earnings 4,313.7 4,146.0
Common Shares in treasury, at cost (444.0) (457.2)
Other comprehensive income (127.1) (140.3)
Other (3.9) (4.5)
--------- ---------
Total shareholders' equity 5,670.1 5,437.1
--------- ---------
Total $15,721.5 $14,642.4
========= =========
See notes to condensed consolidated financial statements.
Page 4
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings before cumulative effect of change in accounting principle $ 246.4 $ 190.0
Adjustments to reconcile net earnings before cumulative effect of change in
accounting principle to net cash from operating activities:
Depreciation and amortization 61.2 68.0
Provision for bad debts 9.3 3.4
Change in operating assets and liabilities, net of effects from acquisitions:
(Increase)/decrease in trade receivables 151.7 (133.0)
Increase in inventories (1,411.0) (779.8)
(Increase)/decrease in net investment in sales-type leases 186.0 (11.9)
Increase in accounts payable 342.9 491.7
Other operating items, net (67.2) (210.8)
-------- --------
Net cash used in operating activities (480.7) (382.4)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired - (239.9)
Proceeds from sale of property and equipment 9.6 3.4
Additions to property and equipment (58.3) (53.4)
-------- --------
Net cash used in investing activities (48.7) (289.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 405.1 608.0
Reduction of long-term obligations (13.4) (23.9)
Proceeds from long-term obligations, net of issuance costs 36.2 15.4
Common Shares issued under employee benefit plans 53.3 70.4
Dividends on Common Shares and cash paid in lieu of fractional shares (11.2) (9.0)
Other (2.7) (2.4)
-------- --------
Net cash provided by financing activities 467.3 658.5
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (62.1) (13.8)
CHANGE IN BINDLEY'S FISCAL YEAR - 47.6
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 934.1 539.5
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 872.0 $ 573.3
======== ========
See notes to condensed consolidated financial statements.
Page 5
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, 2001 (the "2001 Form
10-K"). Without limiting the generality of the foregoing, Note 1 of the
"Notes to Consolidated Financial Statements" from the 2001 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 September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million.
The repurchased shares will be held as treasury shares and used for
general corporate purposes. As of September 30, 2001, no shares had
been repurchased through this program.
Note 3. The Company's comprehensive income consists of net earnings, foreign
currency translation adjustments, unrealized (loss)/gain on investment,
reclassification adjustment for investment losses included in net
income, and net unrealized loss on derivative instruments as follows:
For the Three Months Ended
(in millions) September 30,
--------------------------
2001 2000
--------------------------
Net earnings $ 176.3 $ 190.0
Foreign currency translation adjustments 14.3 (20.3)
Unrealized (loss)/gain on investment 2.2 (5.4)
Reclassification adjustment for investment
losses included in net income 3.2 --
Net unrealized loss on derivative
instruments (6.5) (0.2)
---------- ---------
Total comprehensive income $ 189.5 $ 164.1
========== =========
Note 4. Pyxis Funding LLC ("Pyxis Funding") was organized during the first
quarter of fiscal year 2002 for the sole purpose of buying receivables
and selling them to certain investors. Pyxis Funding is a wholly owned,
special purpose, bankruptcy-remote subsidiary of Pyxis Corporation
("Pyxis"). During the first quarter of fiscal year 2002, Pyxis Funding
acquired a pool of sales-type leases from Pyxis, and sold an undivided
interest in those leases to an investor for approximately $150 million,
which approximated the fair value of the sold interest. This was
accounted for as a sale by the Company and Pyxis under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities." Although Pyxis Funding is consolidated
by the Company and Pyxis as required by generally accepted accounting
principles, it is a separate legal entity and maintains separate
financial statements. The assets of Pyxis Funding are available, first
and foremost, to satisfy claims of its creditors.
Page 6
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
Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig Medical
Corporation ("BBMC"), Automatic Liquid Packaging, Inc. ("ALP"),
Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation
("Scherer"). The following is a summary of the special charges for the
three-month periods ended September 30, 2001 and 2000.
Special Charges Three Months Ended
September 30,
----------------------------------------------------------------------
(in millions) 2001 2000
----------------------------------------------------------------------
Merger-Related Costs:
Employee-related costs $ (4.1) $ (7.9)
Exit costs and asset impairment (2.6) (0.1)
Restructuring costs - (1.6)
Other integration costs (5.6) (7.7)
----------------------------------------------------------------------
Total merger-related costs $ (12.3) $ (17.3)
----------------------------------------------------------------------
Other Special Charges:
Litigation settlement $ - $ 5.0
----------------------------------------------------------------------
Total other special charges $ - $ 5.0
----------------------------------------------------------------------
Total special charges $ (12.3) $ (12.3)
Tax effect of special charges 4.7 6.3
----------------------------------------------------------------------
Net effect of special charges $ (7.6) $ (6.0)
======================================================================
Merger-Related Costs
During the above stated periods, the Company incurred employee-related
costs associated with certain of its merger transactions. These
expenses primarily consist of severance, noncompete agreements, and
transaction/stay bonuses as a result of the Bindley, BBMC, ALP,
Allegiance and Scherer merger transactions. Exit costs relate primarily
to costs associated with lease terminations, moving expenses, and asset
impairments as a direct result of the merger transactions with Bindley,
BBMC, ALP, Allegiance and Scherer. Other integration costs include
charges primarily related to integrating the operations of the above
mentioned merger transactions.
The Company incurred a restructuring charge of $1.6 million during the
three months ended September 30, 2000 relating to the Company's merger
transaction with Scherer. As part of the business restructuring, the
Company has closed 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.
Other Special Charges
During the first quarter of fiscal 2001, Bindley recorded a benefit of
approximately $5.0 million related to a reduction in a litigation
settlement accrual, which was previously recorded. The amount of the
final settlement was lower than originally anticipated.
Summary
The net effect of the various special charges recorded during the three
months ended September 30, 2001 and 2000 was to reduce net earnings
before cumulative effect of change in accounting principle by $7.6
million to $246.4 million and by $6.0 million to $190.0 million,
respectively, and to reduce reported diluted earnings per Common Share
before cumulative effect of change in accounting principle by $0.02 per
share to $0.53 per share and by $0.01 per share to $0.42 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.
With the exception noted in Note 8 for the Automation and Information
Page 7
Services segment, 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 2001 Form 10-K.
The Pharmaceutical Distribution and Provider Services segment involves
the distribution of a broad line of pharmaceuticals, healthcare and
beautycare products, radiopharmaceuticals, 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.
The Medical-Surgical Products and Services segment involves the
manufacture of medical, surgical and laboratory products and the
distribution of these products to hospitals, physician offices, surgery
centers and other healthcare providers.
The Pharmaceutical Technologies and Services segment provides services
to the healthcare manufacturing industry through the design of unique
drug delivery systems, liquid fill contract manufacturing,
comprehensive packaging services, and sales and marketing 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-month periods ended September 30, 2001 and 2000 for each segment
and reconciling items necessary to equal amounts reported in the
condensed consolidated financial statements:
For the Three Months Ended
September 30,
----------------------------------
(in millions) Net Revenue
----------------------------------
2001 2000
---------------- ----------------
Operating revenue:
Pharmaceutical Distribution and Provider Services $7,960.7 $6,779.7
Medical-Surgical Products and Services 1,509.5 1,378.5
Pharmaceutical Technologies and Services 300.7 272.1
Automation and Information Services 108.3 90.1
Other (13.8) (9.5)
---------------- ----------------
Total operating revenue 9,865.4 8,510.9
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 1,908.0 2,529.0
---------------- ----------------
Total net revenue $11,773.4 $11,039.9
-------------------------------------------------------------------------------------------------------
Operating Earnings
----------------------------------
2001 2000
---------------- ----------------
Operating earnings:
Pharmaceutical Distribution and Provider Services $221.8 $177.7
Medical-Surgical Products and Services 126.5 102.6
Pharmaceutical Technologies and Services 57.7 49.9
Automation and Information Services 29.8 23.1
Corporate (1) (35.8) (28.8)
---------------- ----------------
Total operating earnings $400.0 $324.5
-------------------------------------------------------------------------------------------------------
(1) Corporate - operating earnings primarily consist of special
charges of $12.3 million in each of the three month periods
ended September 30, 2001 and 2000 and unallocated corporate
depreciation and amortization and administrative expenses.
Page 8
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, agreed to indemnify Baxter Healthcare Corporation ("BHC") from
certain claims related to the Allegiance Business, 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 September 30,
2001, there were approximately 609 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 number of 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 resolution of cases
involving natural rubber latex gloves. AEIA, one of the insurers for
the latex glove litigation, previously 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. On October 22, 2001, BHC,
Allegiance and AEIA reached a settlement agreement resolving all issues
related to the Company's recovery of reimbursable expenses under the
AEIA insurance policy, the terms of which are confidential. 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 currently
believe that the outcome of any pending litigation will have a material
adverse effect on the Company's consolidated financial statements.
Note 8. In the first quarter of fiscal 2002, the method of recognizing
revenue for pharmacy automation equipment was changed from recognizing
revenue when the units were delivered to the customer to recognizing
revenue when the units are installed at the customer site. Management
believes that the change in accounting method will provide for a more
objectively determinable method of revenue recognition. In addition,
the Company has implemented other changes to better service its
customers and leverage operational efficiencies. The Company has
recorded a cumulative effect of change in accounting principle of $70.1
million (net of tax of $44.6 million) in the consolidated statement of
earnings during the first quarter of fiscal 2002. The after tax
dilutive impact of the cumulative effect is $0.15 per diluted share.
The estimated effect of the change for the three months ended September
30, 2001, is to reduce net earnings before the cumulative effect by
$4.2 million (or $0.01 per share). The pro-forma effect of this
accounting change on prior periods has not been presented as the
required information is not available.
Note 9. In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 142 "Goodwill and Other Intangible Asssets" which revises the
accounting for purchased goodwill and other intangible assets. SFAS 142
is effective for fiscal years beginning after December 15, 2001, with
earlier adoption permitted. The Company has elected to adopt SFAS 142
beginning with the first quarter of fiscal 2002. Under SFAS 142,
purchased goodwill and intangible assets with indefinite lives are no
longer amortized, but instead tested for impairment at least annually.
Accordingly, the Company has ceased amortization of all goodwill and
intangible assets with indefinite lives as of July 1, 2001. Intangible
assets with finite lives, primarily patents and trademarks, will
continue to be amortized over their useful lives. During the quarter
ended September 30, 2001, there have been no material changes to
goodwill as a result of acquisitions, impairment losses, or disposals.
SFAS 142 requires a two step impairment test for goodwill. The first
step is to compare the carrying amount of the reporting unit's assets
to the fair value of the reporting unit. If the carrying amount exceeds
the fair value then the second step is required to be completed, which
involves the fair value of the reporting unit being allocated to each
asset and liability with the excess being implied goodwill. The
impairment loss is the amount by which the recorded goodwill exceeds
the implied goodwill. The Company is required to complete a
"transitional" impairment test for goodwill as of the beginning of the
fiscal year in which the statement is adopted. This transitional
impairment test requires that the Company complete step one of the
goodwill impairment test within six months from the date of initial
Page 9
adoption, or December 31, 2001. The Company has not completed the
transitional impairment test but does not anticipate any material
impairment charges upon completion of the test.
The following table compares the Company's net earnings and per share
amounts before the cumulative effect of change in accounting principle
for the three months ended September 30, 2001, to net earnings and per
share amounts for the three months ended September 30, 2000, adjusted
for the amortization of intangible assets and goodwill.
For the Three Months Ended
(in millions, except per share amounts) September 30,
------------------------------------
2001 2000
------------------------------------
Earnings before cumulative effect
of change in accounting principle $246.4 $201.0
Basic earnings per share $0.55 $0.46
Diluted earnings per share $0.53 $0.44
Note 10. In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
This statement requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. The
Company does not believe that the prospective adoption of this standard
will have a material impact on its consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard is effective for fiscal years
beginning after June 15, 2002, and provides accounting requirements for
asset retirement obligations associated with tangible long-lived
assets. The Company does not believe that the adoption of this standard
will have a material impact on the Company's consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." This statement creates one
accounting model, based on the framework established in SFAS No. 121,
to be applied to all long-lived assets including discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company does not believe that the adoption of
this standard will have a material impact on the Company's consolidated
financial statements.
Page 10
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 September 30, 2001 and June 30, 2001, and for
the condensed consolidated statements of earnings for the three month periods
ended September 30, 2001 and 2000.
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, 2001.
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 Percent of Total
Operating Revenues
---------------------------------
Three months ended September 30, Growth (1) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 17% 81% 80%
Medical-Surgical Products and Services 10% 15% 16%
Pharmaceutical Technologies and Services 11% 3% 3%
Automation and Information Services 20% 1% 1%
Total Company 16% 100% 100%
- --------------------------------------------------------------------------------------------------------------------
(1) The growth rate applies to the three-month period ended
September 30, 2001 compared to the corresponding period of the
prior year.
Total operating revenue for the three months ended September 30, 2001
increased 16% compared to the same period of the prior year. The increase in
operating revenue resulted from a higher sales volume to existing customers;
pharmaceutical price increases; acquisitions; and addition of new customers,
some of which was a result of cross-selling opportunities among the various
businesses.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth during the first quarter of fiscal 2002 resulted from strong
sales to all customer segments, especially chain pharmacies and health systems.
All operating revenue growth for this segment was internal and was primarily the
result of increased volume to existing customers.
The Medical-Surgical Products and Services segment's operating revenue
growth during the first quarter of fiscal 2002 resulted from an increase in
sales of self-manufactured products and distributed products. Bergen Brunswig
Medical Corporation ("BBMC") was acquired in August of fiscal 2001 and accounted
for as a purchase transaction. As prior period revenues for this segment were
not restated, this resulted in one month of incremental revenues for distributed
products in fiscal 2002, which contributed to the operating revenue growth.
Page 11
The Pharmaceutical Technologies and Services segment's operating revenue
growth during the first quarter of fiscal 2002 resulted from higher sales volume
particularly involving sterile-liquid and controlled-release pharmaceutical
technologies, as well as its proprietary packaging offerings. The pharmaceutical
technologies business benefited from strong demand for several sterile-liquid
technologies. The pharmaceutical packaging business' growth was attributable to
the addition of several new customers and increased volume from existing
customers.
The Automation and Information Services segment's operating revenue growth
during the first quarter of fiscal 2002 resulted from strong sales of new
products, such as MEDSTATION SN(R) and SUPPLYSTATION(R) System 30, and further
penetration of the market with existing automation products.
Bulk Deliveries to Customer Warehouses. The Company reports bulk deliveries made
to customers' warehouses as revenue. These sales involve the Company acting as
an intermediary in the ordering and subsequent delivery of pharmaceutical
products. Fluctuations in bulk deliveries result largely from circumstances that
the Company cannot control, including consolidation within the 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
earnings.
Gross Margin Three Months Ended
September 30,
- ------------------------------------------------------------------------------------------------
(As a percentage of operating revenue) 2001 2000
- ------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 5.21% 5.16%
Medical-Surgical Products and Services 21.42% 22.50%
Pharmaceutical Technologies and Services 33.82% 32.44%
Automation and Information Services 66.92% 64.32%
Total Company 9.27% 9.45%
- ------------------------------------------------------------------------------------------------
The overall gross margin as a percentage of operating revenue decreased
during the first quarter of fiscal 2002. This decrease resulted primarily from a
greater mix of lower margin distributed products, especially within the
Pharmaceutical Distribution and Provider Services and Medical-Surgical Products
and Services segments. This decrease was partially offset by higher vendor
margins from favorable price increases and manufacturer marketing programs as
well as improved product mix.
The Pharmaceutical Distribution and Provider Services segment's gross
margin as a percentage of operating revenue increased as a result of vendor
margin opportunities from favorable price increases and manufacturer marketing
programs. This increase was partially offset by the continuing impact of lower
selling margins within the highly competitive distribution market.
The Medical-Surgical Products and Services segment's gross margin as a
percentage of operating revenue decreased due to the purchase of BBMC. This
acquisition has temporarily shifted product mix toward lower margin distributed
products.
The Pharmaceutical Technologies and Services segment's gross margin as a
percentage of operating revenue increased primarily from stronger sales volume
in the higher margin liquid fill contract manufacturing and drug delivery system
businesses. The drug delivery system business' shift to higher margin
pharmaceutical products from lower margin health and nutrition products also
contributed to the improvement in gross margin. The gross margin in this segment
was negatively impacted by certain items that occurred in fiscal year 2001 that
did not recur in fiscal year 2002, namely a milestone payment related to the use
of the Company's proprietary technology and a decline in business related to the
decision to reduce the Company's participation in the domestic health and
nutritional market. These declines were largely offset by the recording of the
minimum recovery expected to be received for claims against vitamin
manufacturers for amounts overbilled in prior years. This pricing adjustment was
recorded as a reduction of cost of goods sold, consistent with the
classification of the original overcharge.
The Automation and Information Services segment's gross margin as a
percentage of operating revenue increased primarily from changes in its product
mix and improved productivity.
Page 12
Selling, General and Administrative Expenses Three Months Ended
September 30,
- --------------------------------------------------------------------------------------------------------
(As a percentage of operating revenue) 2001 2000
- --------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 2.42% 2.54%
Medical-Surgical Products and Services 13.03% 15.06%
Pharmaceutical Technologies and Services 14.62% 14.08%
Automation and Information Services 39.43% 38.68%
Total Company 5.09% 5.49%
- --------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses as a percentage of operating
revenue decreased during the first quarter of fiscal 2002 as compared to the
same period of fiscal 2001. This decrease reflects economies of scale associated
with the Company's revenue growth. Significant productivity gains resulting from
continued cost control efforts in all segments and the continuation of
consolidation and selective automation of operating facilities contributed to
the improvement. 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. In addition, the Company ceased amortizing
goodwill during the first quarter of fiscal 2002 due to the adoption of
Statement of Financial Accounting Standards 142 "Goodwill and Other Intangible
Assets" (see Note 9 in the "Notes to Condensed Consolidated Financial
Statements" for further discussion), which also contributed to the improvement.
Partially offsetting the improvements in fiscal 2002 was an increase in selling,
general and administrative expenses as a percentage of operating revenue for the
Pharmaceutical Technologies and Services segment. This change was primarily a
result of surplus capacity in the manufacturing facilities for this segment as
investments have been made in advance of expected future growth.
Selling, general and administrative expenses, including goodwill
amortization, grew 7% during the first quarter of fiscal 2002 as compared to the
same period in fiscal 2001. This increase is primarily attributed to increases
in personnel costs and depreciation expense, partially offset by the fact that
no goodwill amortization was recorded in fiscal 2002. The overall increase
compares favorably to the 16% growth in operating revenue for the same period.
Special Charges. 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 Bindley Western Industries, Inc.
("Bindley"), Bergen Brunswig Medical Corporation ("BBMC"), Automatic Liquid
Packaging, Inc. ("ALP"), Allegiance Corporation ("Allegiance") and R.P. Scherer
Corporation ("Scherer"). The following is a summary of the special charges for
the three-month periods ended September 30, 2001 and 2000.
Special Charges Three Months Ended
September 30,
- ------------------------------------------------------------------------------------------------
(in millions) 2001 2000
- ------------------------------------------------------------------------------------------------
Merger-Related Costs:
Employee-related costs $ (4.1) $ (7.9)
Exit costs and asset impairment (2.6) (0.1)
Restructuring costs - (1.6)
Other integration costs (5.6) (7.7)
- ------------------------------------------------------------------------------------------------
Total merger-related costs $ (12.3) $ (17.3)
- ------------------------------------------------------------------------------------------------
Other Special Charges:
Litigation settlement $ - $ 5.0
- ------------------------------------------------------------------------------------------------
Total other special charges $ - $ 5.0
- ------------------------------------------------------------------------------------------------
Total special charges $ (12.3) $ (12.3)
Tax effect of special charges 4.7 6.3
- ------------------------------------------------------------------------------------------------
Net effect of special charges $ (7.6) $ (6.0)
================================================================================================
Page 13
Merger-Related Costs. During the above stated periods, the Company incurred
employee-related costs associated with certain of its merger transactions. These
expenses primarily consist of severance, noncompete agreements, and
transaction/stay bonuses as a result of the Bindley, BBMC, ALP, Allegiance and
Scherer merger transactions. Exit costs relate primarily to costs associated
with lease terminations, moving expenses, and asset impairments as a direct
result of the merger transactions with Bindley, BBMC, ALP, Allegiance and
Scherer. Other integration costs include charges primarily related to
integrating the operations of the above mentioned merger transactions.
The Company incurred a restructuring charge of $1.6 million during the
three months ended September 30, 2000 relating to the Company's merger
transaction with Scherer. As part of the business restructuring, the Company has
closed 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.
Other Special Charges. During the first quarter of fiscal 2001, Bindley
recorded a benefit of approximately $5.0 million related to a reduction in a
litigation settlement accrual, which was previously recorded. The amount of the
final settlement was lower than originally anticipated.
Summary. The net effect of the various special charges recorded during the
three months ended September 30, 2001 and 2000 was to reduce net earnings before
cumulative effect of change in accounting principle by $7.6 million to $246.4
million and by $6.0 million to $190.0 million, respectively, and to reduce
reported diluted earnings per Common Share before cumulative effect of change in
accounting principle by $0.02 per share to $0.53 per share and by $0.01 per
share to $0.42 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, BBMC, and Bindley mergers) of
approximately $130.0 million ($80.6 million, net of tax) in future periods
(primarily fiscal 2002 and 2003) 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, excluding the impact of goodwill amortization, was 33.7% and
33.6% for the first quarters of fiscal 2002 and 2001, respectively. Fluctuations
in the effective tax rate are primarily due to the impact of recording
non-deductible merger-related costs during various periods as well as
fluctuating state and foreign effective tax rates as a result of the Company's
business mix. The provision for income taxes excluding the impact of
merger-related charges and goodwill amortization was 33.8% and 34.3% for the
quarters ended September 30, 2001 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $4.9 billion at September 30, 2001 from $4.1
billion at June 30, 2001. This increase resulted from additional investment in
inventories partially offset by effective asset management. Inventories
increased by $1.4 billion during the first quarter of fiscal 2002. This reflects
the higher level of business volume in Pharmaceutical Distribution and Provider
Services' activities, as well as initiatives to augment inventories in support
of the Company's commitment to emergency-response readiness. A portion of the
inventory increase can also be attributed to the Company investing in
inventories in conjunction with various vendor-margin programs. Partially
offsetting the increase in inventories was a decrease in trade receivables of
$157.1 million and an increase in accounts payable of $343.9 million. The
decrease in trade receivables was a result of effective asset management and
focus on reducing the number of days sales outstanding. The change in accounts
payable is due primarily to the timing of inventory purchases and related
payments.
Property and equipment, at cost, increased by $34.3 million from June 30,
2001. The increase was primarily the result of ongoing plant expansion and
manufacturing equipment purchases in certain manufacturing businesses, as well
as additional investments made for management information systems and upgrades
to distribution facilities.
Net investment in sales-type leases, less current portion decreased $132.1
million during the first quarter of fiscal 2002. This decrease was primarily the
result of the sale by Pyxis Funding LLC ("Pyxis Funding") of an undivided
interest in a defined pool of sales-type leases to an investor at amounts
approximating their fair value. Pyxis Funding obtained proceeds of approximately
$150 million related to the transaction (see Note 4 in the "Notes to Condensed
Consolidated Financial Statements" for further discussion).
Page 14
Shareholders' equity increased to $5.7 billion at September 30, 2001 from
$5.4 billion at June 30, 2001, primarily due to net earnings of $176.3 million
and the investment of $53.3 million by employees of the Company through various
employee stock benefit plans. These increases were offset by dividends of $11.2
million.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. The
repurchased shares will be held as treasury shares and used for general
corporate purposes. As of September 30, 2001, no shares had been repurchased
through this program.
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, including those
related to business combinations.
Page 15
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, 2001.
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, 2001, 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 Baxter Healthcare
Corporation ("BHC") from certain claims related to the Allegiance Business,
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 September 30, 2001, there were
approximately 609 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 number of 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 resolution of
cases involving natural rubber latex gloves. AEIA, one of the insurers for the
latex glove litigation, previously 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. On October 22, 2001, BHC, Allegiance and AEIA reached a settlement
agreement resolving all issues related to the Company's recovery of reimbursable
expenses under the AEIA insurance policy, the terms of which are confidential.
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 currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's consolidated
financial statements.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
3.01 Amended and Restated Code of Regulations of the Registrant,
as amended
18.01 Letter Regarding Change in Accounting Principle
99.01 Statement Regarding Forward-Looking Information (1)
- --------------
(1) Included as an exhibit to the Registrant's Annual Report on Form
10-K filed August 24, 2001 (File No. 0-11373) and incorporated
herein by reference.
(b) Reports on Form 8-K:
None.
Page 16
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: November 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
Page 17