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, 2004 Commission File Number 1-11373
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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes X No
--- ---
The number of registrant's Common Shares outstanding at the close of
business on October 31, 2004 was as follows:
Common Shares, without par value: 432,076,130
--------------
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, 2004 and 2003 (unaudited)...................................... 3
Condensed Consolidated Balance Sheets at September 30, 2004 and
June 30, 2004 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2004 and 2003 (unaudited)............................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 35
Item 4. Controls and Procedures............................................................ 35
Part II. Other Information:
-----------------
Item 1. Legal Proceedings.................................................................. 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................ 38
Item 5. Other Information.................................................................. 39
Item 6. Exhibits........................................................................... 39
* Items not listed are inapplicable.
Page 2
PART I. FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
------------- -------------
Revenue $ 17,796.0 $ 15,388.2
Cost of products sold 16,709.5 14,315.4
------------- -------------
Gross margin 1,086.5 1,072.8
Selling, general and administrative expenses 693.1 547.6
Special items - merger charges 16.9 8.6
- other 15.0 4.6
------------- -------------
Operating earnings 361.5 512.0
Interest expense and other 41.2 28.0
------------- -------------
Earnings before income taxes, discontinued operations and
cumulative effect of change in accounting 320.3 484.0
Provision for income taxes 102.5 160.5
------------- -------------
Earnings from continuing operations before cumulative effect
of change in accounting 217.8 323.5
Loss from discontinued operations (net of tax $2.8 and $1.1 for the
quarters ending September 30, 2004 and 2003, respectively) (4.5) (1.8)
Cumulative effect of change in accounting -- (38.5)
------------- -------------
Net earnings $ 213.3 $ 283.2
============= =============
Basic earnings per Common Share:
Continuing operations $ 0.50 $ 0.73
Discontinued operations (0.01) --
Cumulative effect of change in accounting -- (0.09)
------------- -------------
Net basic earnings per Common Share $ 0.49 $ 0.64
============= =============
Diluted earnings per Common Share:
Continuing operations $ 0.50 $ 0.72
Discontinued operations (0.01) --
Cumulative effect of change in accounting -- (0.09)
------------- -------------
Net diluted earnings per Common Share $ 0.49 $ 0.63
============= =============
Weighted average number of Common Shares outstanding:
Basic 431.7 440.5
Diluted 434.7 446.4
Cash dividends declared per Common Share $ 0.030 $ 0.030
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,
2004 2004
---------------- -----------------
ASSETS
Current assets:
Cash and equivalents $ 1,152.4 $ 1,096.0
Trade receivables, net 3,368.1 3,432.7
Current portion of net investment in sales-type leases 207.3 202.1
Inventories 8,199.6 7,471.3
Prepaid expenses and other 814.7 795.4
Assets held for sale from discontinued operations 44.9 60.4
---------------- -----------------
Total current assets 13,787.0 13,057.9
---------------- -----------------
Property and equipment, at cost 4,403.5 4,300.1
Accumulated depreciation and amortization (2,003.6) (1,936.1)
---------------- -----------------
Property and equipment, net 2,399.9 2,364.0
Other assets:
Net investment in sales-type leases, less current portion 585.6 546.0
Goodwill and other intangibles, net 5,019.1 4,938.8
Other 477.5 462.4
---------------- -----------------
Total $ 22,269.1 $ 21,369.1
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and other short term borrowings $ 4.2 $ 5.6
Current portion of long-term obligations 358.2 855.0
Accounts payable 7,687.5 6,432.4
Other accrued liabilities 1,887.0 2,021.3
Liabilities from discontinued operations 55.4 55.1
---------------- -----------------
Total current liabilities 9,992.3 9,369.4
---------------- -----------------
Long-term obligations, less current portion 2,892.6 2,834.7
Deferred income taxes and other liabilities 1,165.2 1,188.7
Shareholders' equity:
Preferred Shares, without par value
Authorized - 0.5 million shares, Issued - none - -
Common Shares, without par value
Authorized - 755.0 million shares, Issued -
473.8 million shares and 473.1 million shares
at September 30, 2004 and June 30, 2004, respectively 2,683.9 2,653.8
Retained earnings 8,088.5 7,888.0
Common Shares in treasury, at cost, 41.8 million shares
and 42.2 million shares at September 30, 2004 and
June 30, 2004, respectively (2,561.7) (2,588.1)
Other comprehensive income 38.8 28.9
Other (30.5) (6.3)
---------------- -----------------
Total shareholders' equity 8,219.0 7,976.3
---------------- -----------------
Total $ 22,269.1 $ 21,369.1
================ =================
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,
2004 2003
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations before cumulative effect of
change in accounting $ 217.8 $ 323.5
Adjustments to reconcile earnings from continuing operations before
cumulative effect of change in accounting to net cash from operations:
Depreciation and amortization 92.5 68.7
Provision for bad debts 3.1 (4.8)
Change in operating assets and liabilities, net of effects
from acquisitions:
(Increase)/decrease in trade receivables 76.3 (205.7)
Increase in inventories (723.0) (620.5)
Increase in net investment in sales-type leases (44.8) (60.9)
Increase in accounts payable 1,247.7 866.9
Other accrued liabilities and operating items, net 23.6 (73.1)
---------------- ----------------
Net cash provided by operating activities 893.2 294.1
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (264.9) (15.0)
Proceeds from sale of property, equipment and other assets 4.2 2.5
Additions to property and equipment (107.5) (77.8)
Proceeds from sale of discontinued operations 2.8 -
---------------- ----------------
Net cash used in investing activities (365.4) (90.3)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt (635.6) (0.1)
Reduction of long-term obligations (362.2) (10.6)
Proceeds from long-term obligations, net of issuance costs 509.5 43.0
Proceeds from issuance of Common Shares 29.8 45.3
Purchase of treasury shares - (1,000.0)
Dividends on Common Shares (12.9) (13.4)
---------------- ----------------
Net cash used in financing activities (471.4) (935.8)
---------------- ----------------
NET INCREASE/(DECREASE) IN CASH AND EQUIVALENTS 56.4 (732.0)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,096.0 1,724.0
---------------- ----------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 1,152.4 $ 992.0
================ ================
See notes to condensed consolidated financial statements.
Page 5
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING INVESTIGATIONS AND RESTATEMENT
As more fully described in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2004 (the "2004 Form 10-K"), in October 2003, the
Securities and Exchange Commission (the "SEC") initiated an informal inquiry
regarding Cardinal Health, Inc. (the "Company"). The SEC's request sought
historical financial and related information including but not limited to the
accounting treatment of certain recoveries from vitamin manufacturers. The SEC's
request sought a variety of documentation, including the Company's accounting
records for fiscal 2001 through fiscal 2003, as well as notes, memoranda,
presentations, e-mail and other correspondence, budgets, forecasts and
estimates. In connection with the SEC's informal inquiry, the Audit Committee of
the Board of Directors of the Company commenced its own internal review in April
2004, assisted by independent counsel. On May 6, 2004, the Company was notified
that the SEC had converted the informal inquiry into a formal investigation. On
June 21, 2004, as part of the SEC's formal investigation, the Company received
an additional SEC subpoena that included a request for the production of
documents relating to revenue classification, and the methods used for such
classification, in the Company's Pharmaceutical Distribution business as either
"Operating Revenue" or "Bulk Deliveries to Customer Warehouses and Other." In
addition, the Company learned that the U.S. Attorney for the Southern District
of New York had also commenced an inquiry with respect to the Company that the
Company understands relates to the revenue classification issue. On October 12,
2004, in connection with the SEC's formal investigation, the Company received a
subpoena from the SEC requesting the production of documents relating to
compensation information for specific current and former employees and officers.
The Company continues to respond to the SEC's investigation and the Audit
Committee's internal review and provide all information required.
During September and October 2004, the Audit Committee reached certain
conclusions with respect to findings as of the date of the determination from
its internal review. These conclusions regarding certain items that impact
revenue and earnings relate to four primary areas of focus: (1) classification
of sales to customer warehouses between "Operating Revenue" and "Bulk Deliveries
to Customer Warehouses and Other" within the Company's Pharmaceutical
Distribution and Provider Services segment; (2) disclosure of the Company's
practice, in certain reporting periods, of accelerating its receipt and
recognition of cash discounts earned from suppliers for prompt payment; (3)
timing of revenue recognition within the Company's former Automation and
Information Services segment; and (4) certain balance sheet reserve and accrual
adjustments that have been identified in the internal review. These conclusions
are detailed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes 1 and 2 of "Notes to Consolidated Financial
Statements" included in the 2004 Form 10-K. The Audit Committee's internal
review with respect to the financial statement impact of the matters reviewed as
of the date of the determination is substantially complete. In connection with
these conclusions, the Audit Committee has determined that the consolidated
financial statements of the Company with respect to fiscal 2000, 2001, 2002 and
2003 as well as the first three quarters of fiscal 2004 should be restated to
reflect the conclusions from its internal review to date. As the Company
continues to respond to the SEC's investigation and the Audit Committee's
internal review, there can be no assurance that additional restatements will not
be required or that the historical consolidated financial statements included in
the 2004 Form 10-K or this Form 10-Q will not change or require amendment. In
addition, the Audit Committee may identify new issues, or make additional
findings if it receives additional information, that may impact the Company's
consolidated financial statements and the scope of the restatements described in
the 2004 Form 10-K and this Form 10-Q.
The Audit Committee's conclusions with respect to the second, third and
fourth areas of focus described above, which impact the reporting periods
discussed in this Form 10-Q, follows. There was no impact on the reporting
periods discussed in this Form 10-Q with respect to the first area of focus.
UNDISCLOSED EARNINGS IMPACT: Disclosure of the Company's Practice, in
Certain Reporting Periods, of Accelerating Its Receipt and Recognition of
Cash Discounts Earned From Suppliers for Prompt Payment
Historically, the Company recognized cash discounts as a reduction of cost
of products sold primarily upon payment of vendor invoices. Cash discounts are
discounts the Company receives from some vendors for timely payment of invoices.
The Company had a practice of accelerating payment of vendor invoices at the end
of certain reporting periods in order to accelerate the recognition of cash
discounts, which had the effect of improving operating results for those
reporting periods. Although the effect of these accelerated payments was
properly included in the Company's reported earnings, the impact of this
acceleration practice was not separately quantified and disclosed in the periods
in which the Company benefited from this practice. The net decrease in net
earnings as
Page 6
a result of this practice for the first quarter of fiscal 2004 was $0.2 million.
For additional information regarding the net increase (decrease) in net earnings
as a result of this practice for fiscal 2004, 2003 and 2002, see Note 1 of
"Notes to Consolidated Financial Statements" in the 2004 Form 10-K.
During the fourth quarter of fiscal 2004, the Company changed its
accounting method for recognizing cash discounts from recognition primarily upon
payment of vendor invoices to recording cash discounts as a component of
inventory cost and recognizing such discounts as a reduction to cost of products
sold upon sale by the Company of the purchased inventory. The Company believes
the change in accounting method provides a more objectively determinable method
of recognizing cash discounts and a better matching of inventory cost to
revenues. This change was made retroactively effective to the beginning of
fiscal 2004. As a result, the Company restated its previously reported fiscal
2004 quarterly results to reflect this change. See Note 12 below for further
discussion of this change in accounting.
REVENUE AND EARNINGS IMPACT: Timing of Revenue Recognition Within the
Company's Former Automation and Information Services Segment
Within its former Automation and Information Services segment (which is now
included in the Clinical Services and Technologies segment; see Note 7 below),
the Company's revenue recognition policy for equipment systems installed at a
customer's site is to recognize revenue once the Company's installation
obligations are complete and the equipment is functioning according to the
material specifications of the user's manual and the customer has accepted the
equipment as evidenced by signing an equipment confirmation document. As more
fully described in the 2004 Form 10-K, the Company learned of concerns during
the Audit Committee's internal review that some equipment confirmation documents
were being executed prior to the time when installations were complete and
revenue could be recognized. In order to assess the implications of any
premature execution of equipment confirmations and corresponding revenue
recognition, the Audit Committee review included: (a) document and process
reviews including a sample of equipment confirmation forms; (b) certifications
for selected employees involved in the installation process; (c) interviews of
selected employees across regions within the U.S. and at various levels of the
Company; (d) interviews of certain former employees of the Company; and (e)
interviews of selected customers across all regions within the U.S.
This inquiry indicated some equipment confirmations, particularly in some
sales regions, had been prematurely executed by customers at the request of
certain Company employees, including certain situations where inducements to the
customer (such as deferral of payments) were offered to obtain premature
execution. As a result, there was a material weakness in internal controls
because the Company did not have internal controls in place to assure that
equipment installations were in fact completed before the equipment
confirmations were executed. The Company concluded the impact of such actions
was as follows:
- Equipment confirmations in the last several weeks of a quarter were
the most likely to be executed early by the customer due to requests
from certain Company employees.
- No evidence was discovered of fictitious sales being recorded by the
Company.
- Revenue was recognized early primarily by one quarter. In most cases,
installations were completed in the following quarter.
- Impact on the Company's financial results was not deemed material for
any individual quarter or annually.
The net impact of this premature revenue recognition was assessed as of
June 30, 2004 based upon interviews of customers representing a substantial
percentage of the segment's end of quarter reported revenue. As a result, it was
determined that approximately 10.8% of revenue in the last 10 days of the fourth
quarter of fiscal 2004 was being recognized prematurely (based upon an
extrapolation). The Company recorded a $8.3 million reduction of revenue and a
$5.3 million reduction of operating earnings during the fourth quarter of fiscal
2004 to adjust for premature revenue recognition that was determined to have
occurred within that quarter. These revenues and operating earnings were
recognized in the first quarter of fiscal 2005 upon completion of the applicable
installation process.
Page 7
The Company does not maintain accounting records that allow it to determine
the precise impact of this matter on prior quarters. However, during the
investigation there was sufficient data accumulated independent of the
accounting systems to estimate the impact using a variety of methods. These
estimation methods were utilized solely to test the materiality of prior periods
and are not necessarily indicative of what the actual results would have been.
If the results of the June 30, 2004 interviews were applied to all quarters of
fiscal 2004 (i.e., utilizing the 10.8% exception rate) the net increase in
revenue and operating earnings for the first quarter of fiscal 2004, and the
related percentage of the former Automation and Information Services segment's
reported amounts, would have been as follows:
Operating
($ in millions) Revenue % Change Earnings % Change
--------------- ------------- -------------- -------------- --------------
FISCAL 2004
-----------
First Quarter $3.7 2.6% $2.4 4.5%
For additional information regarding the estimated net increase (decrease)
in revenue and operating earnings for fiscal 2002 and each previously reported
quarter of fiscal 2003 and 2004, and the related percentage of the former
Automation and Information Services segment's reported amounts, see Note 1 of
"Notes to Consolidated Financial Statements" in the 2004 Form 10-K. Using
different estimation methods than the methodology used to derive the table
above, the percentage change in operating earnings for the period noted above
would be 2.1%. The Company believes the impact of the adjustments resulting from
the estimation methods is not material to previously reported results as such
estimated adjustments do not distort trends in revenue and operating earnings
growth that were previously reported and would not alter the Company's previous
disclosures related to the former Automation and Information Services segment.
Given the premature revenue recognition practices identified at fiscal
year-end 2004, the Company completed a similar review of the installation
process during the first quarter of fiscal 2005, including interviews with
selected customers representing a substantial percentage of the former
Automation and Information Services segment's end of quarter reported revenue.
While the results from the interviews performed in the first quarter of fiscal
2005 suggested a lower incidence of premature revenue recognition than at fiscal
year-end 2004, the sample of customers interviewed was more limited than was
completed at fiscal year-end 2004. In addition, the Company's efforts to improve
its system of internal controls were in the early stages. As a result, the
Company, in conjunction with the Audit Committee, decided to adjust reported
revenue utilizing the same error rate, 10.8%, as was utilized at fiscal year-end
2004. Utilizing the same 10.8% assumed error rate, the Company recorded a $4.2
million reduction in revenue and a $2.5 million reduction in operating earnings
during the first quarter of fiscal 2005. This adjustment is exclusive of the
recognition of the $8.3 million in revenue and $5.3 million of operating
earnings in the first quarter of fiscal 2005 described above.
Following the completion of the first quarter of fiscal 2005, the Company
has reiterated the revenue recognition policy for equipment systems installed at
a customer's site for its former Automation and Information Services segment,
and has instructed all employees to strictly adhere to this policy. The Company
is currently in the process of implementing corrective actions in response to
these findings regarding its revenue recognition practices within its former
Automation and Information Services segment, as more fully described in Note 1
of "Notes to Consolidated Financial Statements" in the 2004 Form 10-K.
RESTATED EARNINGS: Certain Balance Sheet Reserve and Accrual Adjustments
The Audit Committee's internal review included a review to determine if
period-end adjustments to balance sheet reserve accounts and other accruals
recorded in fiscal 2000 through fiscal 2004 were properly recorded in accordance
with generally accepted accounting principles ("GAAP"). Based upon the Audit
Committee's internal review, the Company determined there were various
situations where the (a) amount of reserve, (b) timing of reserve recognition,
or (c) timing of reserve adjustments could not be substantiated or was in error.
As a result, as more fully described in the 2004 Form 10-K, the financial
statements for certain prior fiscal quarters and years have been restated by the
Company.
Page 8
Some of the types of balance sheet reserves and accrual adjustments that
were restated consist of the following:
1. Errors arising from misapplication of GAAP. These errors primarily
include (a) reductions in reserve accounts made in periods subsequent to
the period in which the excess had been identified by the Company, (b) a
last-in, first-out, or LIFO, inventory adjustment, and (c) a change in
accounting policy for dividends to recognition when declared versus when
paid. The net impact of these errors on the first quarter of fiscal 2004 is
reflected in the table below.
2. Errors made in previous periods which were identified and appropriately
corrected in a subsequent period when discovered. These items were not
reported as prior period corrections at the time of their discovery because
they were deemed immaterial. At this time, however, the Company has
restated its prior financial statements to correct for such items
identified during the internal review. The net impact of these errors on
the first quarter of fiscal 2004 is reflected in the table below.
The following table summarizes the restatement impact on previously
reported net earnings as defined above for the first quarter of fiscal 2004:
Misapplication Total
(in millions) of GAAP Errors Restatement
------------------------------- ----------------- ------------- ----------------
FISCAL 2004
-----------
First Quarter $ (0.3) $ (4.5) $ (4.8)
The impact of these restatements on both basic and diluted earnings per
Common Share from continuing operations was a decrease of $0.01.
For additional information regarding the restatement impact on previously
reported net earnings for fiscal 2004, 2003 and 2002, see Note 1 of "Notes to
Consolidated Financial Statements" in the 2004 Form 10-K.
The SEC investigation, the U.S. Attorney inquiry and the Audit Committee
internal review remain ongoing. While the Company is continuing in its efforts
to respond to the SEC's investigation and the Audit Committee's internal review
and provide all information required, the Company cannot predict the outcome of
the SEC investigation or the U.S. Attorney inquiry. The outcome of the SEC
investigation, the U.S. Attorney inquiry and any related legal and
administrative proceedings could include the institution of administrative,
civil injunctive or criminal proceedings as well as the imposition of fines and
other penalties, remedies and sanctions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The condensed consolidated financial statements of
the Company include the accounts of all majority-owned subsidiaries, and all
significant inter-company 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 GAAP 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 2004 Form 10-K. Without limiting the generality
of the foregoing, Note 3 of the "Notes to Consolidated Financial Statements"
from the 2004 Form 10-K is specifically incorporated herein by reference.
RECENT FINANCIAL ACCOUNTING STANDARDS. In May 2004, the Financial
Accounting Standards Board ("FASB") issued FASB Staff Position Statement of
Financial Accounting Standards ("SFAS") 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." This statement provides guidance on the accounting,
disclosure, effective date, and transition requirements related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FASB Staff
Position SFAS 106-2 is effective for interim or annual periods beginning after
June 15, 2004. The adoption of this pronouncement had no material impact on the
Company's financial position or results of operations.
Page 9
ACCOUNTING FOR STOCK-BASED COMPENSATION. At September 30, 2004, the Company
maintained several stock incentive plans for the benefit of certain employees.
The Company accounts for these plans in accordance with Accounting Principles
Bulletin 25, and related interpretations. Except for costs related to restricted
shares and restricted share units, no compensation expense has been recognized
in net earnings, as all options granted had an exercise price equal to the
market value of the underlying stock on the date of grant. The following tables
illustrate the effect on net earnings and earnings per share if the Company had
adopted the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation:"
Three Months Ended
September 30,
--------------------------------
(in millions) 2004 2003
---------------- ---------------
Net earnings, as reported $ 213.3 $ 283.2
Stock-based employee compensation expense
included in net earnings, net of related tax effects 1.3 0.4
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (1) (35.4) (24.8)
-------- --------
Pro Forma Net earnings $ 179.2 $ 258.8
======== ========
Three Months Ended
September 30,
--------------------------------
2004 2003
---------------- ---------------
Basic earnings per Common Share:
As reported $ 0.49 $ 0.64
Pro forma basic earnings per Common Share $ 0.42 $ 0.59
Diluted earnings per Common Share:
As reported $ 0.49 $ 0.63
Pro forma diluted earnings per Common Share (2) $ 0.42 $ 0.58
(1) The total stock-based employee compensation expense was adjusted to
include employee stock purchase plan expense of $2.9 million and $3.6
million for the quarters ended September 30, 2004 and 2003,
respectively.
(2) The Company uses the treasury stock method when calculating diluted
earnings per Common Share as presented in the table above. Under the
treasury method, diluted shares outstanding is adjusted for the
weighted-average unrecognized compensation component should the Company
adopt SFAS 123.
3. EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Basic earnings per Common Share ("Basic EPS") 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 ("Diluted EPS") is similar to the computation for Basic EPS, except that
the denominator is increased by the dilutive effect of stock options
outstanding, computed using the treasury stock method.
Page 10
The following table reconciles the number of Common Shares used to compute
Basic EPS and Diluted EPS for the quarters ended September 30, 2004 and 2003:
Three Months Ended
September 30,
------------------------
(in millions) 2004 2003
------------------------
Weighted-average Common Shares - basic 431.7 440.5
Effect of dilutive securities:
Employee stock options 3.0 5.9
------------------------
Weighted-average Common Shares - diluted 434.7 446.4
========================
The potentially dilutive employee stock options that were antidilutive for
the quarters ended September 30, 2004 and 2003 were 32.0 million and 21.9
million, respectively.
4. COMPREHENSIVE INCOME
The following is a summary of the Company's comprehensive income for the
three months ended September 30, 2004 and 2003:
Three Months Ended
September 30,
----------------------------------------
(in millions) 2004 2003
----------------------------------------
Net earnings $ 213.3 $ 283.2
Foreign currency translation adjustments 9.1 (8.9)
Net unrealized gain on derivative instruments and
investments 0.8 3.2
-------- --------
Total comprehensive income $ 223.2 $ 277.5
======-- --======
5. MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
The following is a summary of the Company's special items for the
three-month periods ended September 30, 2004 and 2003.
Three Months Ended
September 30,
- --------------------------------------------------------------------------------------------------------
(in millions, except for Diluted EPS amounts) 2004 2003
- --------------------------------------------------------------------------------------------------------
Merger-related costs $ 16.9 $ 8.6
Restructuring costs 7.5 7.3
Litigation settlements, net - (2.7)
Other special items 7.5 -
- --------------------------------------------------------------------------------------------------------
Total special items $ 31.9 $ 13.2
Tax effect of special items (1) (11.9) (4.5)
- --------------------------------------------------------------------------------------------------------
Net earnings effect of special items $ 20.0 $ 8.7
========================================================================================================
Net decrease on Diluted EPS $ 0.05 $ 0.02
========================================================================================================
(1) The Company applies varying tax rates to its special items depending
upon the tax jurisdiction where the item was incurred. The overall
effective tax rate varies each period depending upon the unique nature
of the Company's special items and the tax jurisdictions where the
items were incurred.
MERGER-RELATED COSTS
Costs of integrating operations of merged companies are recorded as
merger-related costs when incurred. The merger-related costs incurred during the
first quarter of fiscal 2005 were primarily a result of the acquisitions of
ALARIS Medical Systems, Inc. (which has been given the legal designation of
Cardinal Health 303, Inc. and is
Page 11
referred to in this Form 10-Q as "ALARIS") and Syncor International Corporation
(which has been given the legal designation of Cardinal Health 414, Inc. and is
referred to in this Form 10-Q as "Syncor"). The merger-related costs incurred
during the first quarter of fiscal 2004 were primarily a result of the Syncor
acquisition. During the periods noted above, the Company also incurred
merger-related costs for other smaller acquisitions. The following table and
paragraphs provide additional detail regarding the types of merger-related costs
incurred by the Company.
Three Months Ended
September 30,
- --------------------------------------------------------------------------------------------------------
(in millions) 2004 2003
- --------------------------------------------------------------------------------------------------------
Merger-related costs:
Employee-related costs $ 4.6 $ 1.6
Asset impairments and other exit costs 0.4 0.2
Debt issuance cost writeoff 8.7 -
Integration costs and other 3.2 6.8
- --------------------------------------------------------------------------------------------------------
Total merger-related costs $ 16.9 $ 8.6
=========================================
EMPLOYEE-RELATED COSTS. During the first quarters of fiscal 2005 and 2004,
the Company incurred employee-related costs associated with certain merger and
acquisition transactions of $4.6 million and $1.6 million, respectively. These
costs primarily consist of severance, stay bonuses and other forms of
compensatory payouts made to employees as a direct result of the mergers or
acquisitions. For the three months ended September 30, 2004, the
employee-related costs consisted primarily of severance and retention bonuses
paid as a result of the ALARIS and Syncor acquisitions. For the three months
ended September 30, 2003, the employee-related costs consisted primarily of
severance and retention bonuses paid as a result of the Syncor acquisition.
ASSET IMPAIRMENTS AND OTHER EXIT COSTS. During the first quarters of fiscal
2005 and 2004, the Company incurred asset impairment and other exit costs of
$0.4 million and $0.2 million, respectively. The asset impairment and other exit
costs incurred during the first quarter of fiscal 2005 relate primarily to plans
to consolidate operations as a result of the Syncor acquisition. The asset
impairment and other exit costs incurred during the first quarter of fiscal 2004
relate primarily to the integration of acquired companies into the Company's
overall information technology system structure.
DEBT ISSUANCE COST WRITEOFF. During the first quarter of fiscal 2005, the
Company incurred a charge of $8.7 million related to the writeoff of debt
issuance costs and other debt tender offer costs related to the Company's
decision to retire certain ALARIS debt instruments which carried higher interest
rates than the Company's cost of debt. As a result, the Company retired such
debt instruments in advance of the original maturity dates.
INTEGRATION COSTS AND OTHER. During the first quarters of fiscal 2005 and
2004, the Company incurred integration costs and other costs of $3.2 million and
$6.8 million, respectively. The costs included in this category generally
related to expenses incurred to integrate merged or acquired companies'
operations and systems into the Company's pre-existing operations and systems.
The costs include, but are not limited to, the integration of information
systems, employee benefits and compensation, accounting/finance, tax, treasury,
internal audit, risk management, compliance, administrative services and sales
and marketing. The costs incurred within this category during the first quarters
of fiscal 2005 and 2004 resulted primarily from the Syncor acquisition.
RESTRUCTURING COSTS
The following table segregates the Company's restructuring costs into the
various reportable segments impacted by the restructuring projects. However,
costs incurred across all of the Company's reportable segments, in connection
with the Company's recently announced company-wide restructuring program, are
combined in the following table and discussed in the aggregate. See the
paragraphs that follow for additional information regarding the Company's
restructuring plans.
Page 12
Three Months Ended
September 30,
- --------------------------------------------------------------------------------------------------------
(in millions) 2004 2003
- --------------------------------------------------------------------------------------------------------
Restructuring costs:
Company-wide restructuring program $ 2.5 $ -
Medical Products and Services 0.7 4.9
Pharmaceutical Technologies and Services 4.0 1.7
Other 0.3 0.7
- --------------------------------------------------------------------------------------------------------
Total restructuring costs $ 7.5 $ 7.3
=========================================
COMPANY-WIDE RESTRUCTURING PROGRAM. During the first quarter of fiscal
2005, the Company announced a company-wide restructuring program (referred to as
"Operation One Cardinal Health") aimed at reducing costs and improving operating
efficiencies to better align the Company's cost structure with its changing
business models. All of the Company's reportable segments and corporate
departments will be impacted by this initiative. The Company has announced its
desired goal of realizing $125 million of cost savings in fiscal 2005. The
Company is in the process of completing a detailed review of actions to be
implemented as a result of this restructuring, including, but not limited to,
workforce reductions, consolidation and realignment of operating facilities and
asset impairments. To date, only limited actions have been approved and
implemented by management. During the first quarter of fiscal 2005, the Company
incurred costs of $2.5 million related to this company-wide restructuring
program. These costs primarily consist of severance accrued upon communication
of terms to employees and project management fees incurred during initial
reviews of certain business operations.
MEDICAL PRODUCTS AND SERVICES. During the first quarters of fiscal 2005 and
2004, the Company incurred costs of $0.7 million and $4.9 million, respectively,
to restructure operations (both domestically and internationally) within this
segment. These restructuring plans focused on various aspects of the segment's
operations, including closing and consolidating certain manufacturing
operations, rationalizing headcount both domestically and internationally, and
aligning certain distribution and manufacturing operations in the most strategic
and cost-efficient structure. In connection with implementing these
restructuring plans, the Company incurred costs which included, but were not
limited to, the following: (1) employee-related costs, the majority of which
represents severance accrued upon either communication of terms to employees or
management's commitment to the restructuring plan, depending upon the project;
and (2) exit costs, including asset impairment charges, costs incurred to
relocate physical assets and project management costs. The earliest of these
restructuring plans was initiated during fiscal 2002, with others being
implemented throughout fiscal 2003 and 2004. Some of these restructuring plans
were completed during fiscal 2003 and 2004, while other plans will be completed
throughout fiscal 2005. Overall, these restructuring plans will result in
termination of approximately 2,200 employees, of whom approximately 2,000 had
been terminated as of September 30, 2004.
PHARMACEUTICAL TECHNOLOGIES AND SERVICES. Separate from the company-wide
restructuring program discussed above, during the first quarters of fiscal 2005
and 2004, the Company incurred costs of $4.0 million and $1.7 million,
respectively, to restructure operations (both domestically and internationally)
within this segment. These restructuring plans focused on various aspects of the
segment's operations, including closing and consolidating certain manufacturing
and other business facilities, exiting non-strategic businesses, integrating and
aligning operations in the most strategic and cost-efficient manner, and
rationalizing headcount both domestically and internationally as a result of
integration plans and market changes. In connection with implementing these
restructuring plans, the Company incurred costs which included, but were not
limited to, the following: (1) employee-related costs, the majority of which
represents severance accrued upon communication of terms to employees; (2) asset
impairment charges, including the writedown of assets; and (3) other exit costs,
including lease/contract termination costs, costs to dismantle and move
machinery, equipment and other physical assets and costs to transfer certain
technologies to other existing facilities. The earliest of these restructuring
plans was initiated during fiscal 2001, with others being initiated throughout
fiscal 2003 and 2004. Some of the restructuring plans were completed during
fiscal 2003 and 2004, while other plans will be completed throughout fiscal
2005. Overall, these restructuring plans will result in the termination of
approximately 1,000 employees, of whom approximately 950 had been terminated as
of September 30, 2004.
Page 13
OTHER. During the first quarters of fiscal 2005 and 2004, the Company
incurred costs of $0.3 million and $0.7 million, respectively, related to
restructuring plans that impacted more than one segment. These costs related
primarily to a plan to restructure the Company's delivery of information
technology infrastructure services. The plan was initiated during fiscal 2003
and is expected to be completed during fiscal 2005. Overall, the restructuring
plan resulted in the termination of approximately 20 employees, all of whom have
been terminated as of September 30, 2004.
LITIGATION SETTLEMENTS, NET
The following table summarizes the Company's net litigation settlements
during the three months ended September 30, 2004 and 2003.
Three Months Ended
September 30,
- --------------------------------------------------------------------------------------------------------
(in millions) 2004 2003
- --------------------------------------------------------------------------------------------------------
Litigation settlements, net:
Vitamin litigation $ - $ (2.7)
- --------------------------------------------------------------------------------------------------------
Total litigation settlements, net $ - $ (2.7)
VITAMIN LITIGATION. During the first quarter of fiscal 2004, the Company
recorded income of $2.7 million resulting from the recovery of antitrust claims
against certain vitamin manufacturers for amounts overcharged in prior years.
The total recovery of antitrust claims against certain vitamin manufacturers
through September 30, 2004 was $144.7 million (net of attorney fees, payments
due to other interested parties and expenses withheld). The Company has settled
all but one known claim, and the total amount of any future recovery is not
likely to be a material amount.
OTHER SPECIAL ITEMS
During the first quarter of fiscal 2005, the Company incurred other special
items totaling $7.5 million. These costs primarily represent legal fees and
document preservation and production costs incurred in the SEC's investigation
and the Audit Committee's internal review. For further information regarding the
SEC's investigation and the Audit Committee's internal review, see Note 1.
SPECIAL ITEMS ACCRUAL ROLLFORWARD
The following table summarizes activity related to the liabilities
associated with the Company's special items during the quarter ended September
30, 2004.
Three Months Ended
(in millions) September 30, 2004
----------------------
Balance at June 30, 2004 $39.9
Additions (1) 31.9
Payments (30.6)
----------------------
Balance at September 30, 2004 $41.2
======================
(1) Amount represents items that have been either expensed as incurred or
accrued according to GAAP.
PURCHASE ACCOUNTING ACCRUALS
In connection with restructuring and integration plans related to The
Intercare Group, plc, the Company accrued, as part of its acquisition
adjustments, a liability of $10.4 million related to employee termination and
relocation costs and $11.0 million related to closing of certain facilities. As
of September 30, 2004, the Company had paid $2.2 million of employee-related
costs. No payments were made associated with the facility closures.
In connection with restructuring and integration plans related to Syncor,
the Company accrued, as part of its acquisition adjustments, a liability of
$15.1 million related to employee termination and relocation costs and $10.4
million related to closing of duplicate facilities. As of September 30, 2004,
the Company had paid $12.6 million of employee related costs, $1.6 million
associated with the facility closures and $1.5 million of other restructuring
costs.
Page 14
SUMMARY
Certain merger, acquisition and restructuring costs are based upon
estimates. Actual amounts paid may ultimately differ from these estimates. If
additional costs are incurred, or if recorded amounts exceed costs, such changes
in estimates will be recorded as special items when incurred.
The Company estimates it will incur additional costs in future periods
associated with various mergers, acquisitions and restructuring activities
totaling approximately $50 million (approximately $33 million net of tax). The
Company believes it will incur these costs to properly integrate and rationalize
operations, a portion of which represents facility rationalizations and
implementing efficiencies regarding information systems, customer systems,
marketing programs and administrative functions, among other things. Such
amounts will be expensed as special items when incurred. This estimate does not
include costs associated with the integration of ALARIS or the company-wide
restructuring project announced in September 2004, as the Company is still in
the process of determining the costs associated with these projects and seeking
requisite approvals.
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
The Company has two unsecured $750 million bank revolving credit
facilities, which provide for an aggregate $1.5 billion in borrowings. One of
these facilities expires on March 24, 2008, and the other expires on March 23,
2009. At expiration, these revolving credit facilities can be extended upon
mutual consent of the Company and the lending institutions. These revolving
credit facilities exist largely to support issuances of commercial paper as well
as other short-term borrowings. The Company borrowed $500 million in the
aggregate under these revolving credit facilities in the first quarter of fiscal
2005. Also outstanding under these facilities at September 30, 2004 was $43.4
million of standby letters of credit issued on behalf of the Company.
For additional information regarding notes payable and long-term
obligations, see Note 15 below and Note 6 of "Notes to Consolidated Financial
Statements" in the 2004 Form 10-K.
7. SEGMENT INFORMATION
The Company's operations are principally managed on a products and services
basis and are comprised of four reportable business segments: Pharmaceutical
Distribution and Provider Services, Medical Products and Services,
Pharmaceutical Technologies and Services and Clinical Technologies and Services
(formed during the first quarter of fiscal 2005). Clinical Technologies and
Services includes ALARIS, which was acquired in a transaction completed in early
July 2004, the Company's businesses formerly within the Automation and
Information Services segment and the Company's Clinical Services and Consulting
business, which was formerly reported under the Pharmaceutical Distribution and
Provider Services segment. Also during the first quarter of fiscal 2005, the
Company transferred its Specialty Pharmaceutical Distribution business,
previously included within the Pharmaceutical Distribution and Provider Services
segment, to the Medical Products and Services segment. These transfers were
effected to better align business operations with the current management and
reporting structure. Prior period financial results were adjusted to reflect
these changes.
The Pharmaceutical Distribution and Provider Services segment distributes a
broad line of pharmaceuticals, health care products and other items typically
sold by hospitals, retail drug stores and other health care providers. In
addition, this segment provides services to the health care industry through the
franchising of apothecary-style retail pharmacies.
The Medical Products and Services segment manufactures medical, surgical
and laboratory products and distributes these self-manufactured products as well
as products manufactured by other suppliers to hospitals, physician offices,
surgery centers and other health care providers. In addition, the segment
distributes oncology products and other specialty pharmaceuticals to hospitals,
clinics and other managed-care facilities through the use of telemarketing and
direct mail programs.
The Pharmaceutical Technologies and Services segment provides products and
services to the health care industry through the development and manufacture of
proprietary drug delivery systems including softgel capsules, controlled release
forms, Zydis(R) fast dissolving wafers and advanced sterile delivery
technologies. This segment also provides comprehensive packaging,
radiopharmaceutical manufacturing, pharmaceutical development and analytical
science expertise, as well as medical education, marketing and contract sales
services. It also manufactures sterile injectible pharmaceutical products for
pharmacies in the United Kingdom.
Page 15
The Clinical Technologies and Services segment provides services to
hospitals and other health care providers, focusing on patient safety through
unique and proprietary medication administration and automation and information
products and services. This segment also provides services to the health care
industry through integrated pharmacy management, temporary pharmacy staffing and
the gathering and recording of clinical information for review, analysis and
interpretation.
The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Information
about interest income and expense and income taxes is not provided on a segment
level. In addition, special charges are not allocated to the segments. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The following tables include revenue and operating earnings for the
three-month periods ended September 30, 2004 and 2003, for each segment and
reconciling items necessary to agree to amounts reported in the condensed
consolidated financial statements:
Three Months Ended
September 30,
-----------------------------
(in millions) 2004 2003
----------- -----------
Revenue:
Pharmaceutical Distribution and Provider Services $ 14,401.9 $ 12,442.0
Medical Products and Services 2,393.2 2,148.2
Pharmaceutical Technologies and Services (3) 705.4 646.8
Clinical Technologies and Services (4) 524.4 334.7
Corporate (1) (3) (4) (228.9) (183.5)
----------- -----------
Total revenue $ 17,796.0 $ 15,388.2
=========== ===========
Three Months Ended
September 30,
-----------------------
(in millions) 2004 2003
-------- --------
Operating earnings:
Pharmaceutical Distribution and Provider Services $ 163.4 $ 230.9
Medical Products and Services 138.4 160.4
Pharmaceutical Technologies and Services (3) 80.9 106.4
Clinical Technologies and Services (4) 46.0 67.6
Corporate (2) (3) (4) (67.2) (53.3)
-------- --------
Total operating earnings $ 361.5 $ 512.0
======== ========
The following table includes total assets at September 30, 2004 and
June 30, 2004 for each segment as well as reconciling items necessary to total
the amounts reported in the condensed consolidated financial statements:
At September 30, At June 30,
(in millions) 2004 2004
---------------- -----------
Assets:
Pharmaceutical Distribution and Provider Services $ 9,599.9 $ 8,512.2
Medical Products and Services 3,875.7 3,829.6
Pharmaceutical Technologies and Services 4,389.9 4,389.3
Clinical Technologies and Services 3,666.3 3,647.7
Corporate (5) 737.3 990.3
----------- -----------
Total assets $ 22,269.1 $ 21,369.1
=========== ===========
(1) Corporate revenue primarily consists of the elimination of intersegment
revenues.
(2) Corporate operating earnings include special items of $31.9 million and
$13.2 million in the three-month periods ended September 30, 2004 and
2003, respectively. See Note 5 for further discussion of the Company's
special items. Corporate operating earnings also include unallocated
corporate administrative expenses and investment spending.
(3) Effective the first quarter of fiscal 2005, the Pharmaceutical
Technologies and Services segment changed its basis for measuring the
impact of translating foreign subsidiaries' operating results into U.S.
dollars. Historically since 2000, this segment was not impacted by
foreign exchange fluctuations as the Company applied constant exchange
rates to translate its foreign operating results into U.S. dollars and
recorded the actual impact of foreign exchange rate changes within the
Corporate segment. The positive impact of foreign exchange rate
fluctuations on revenue and operating earnings for the Pharmaceutical
Technologies and Services segment for the first quarter of fiscal 2004
was $13.8 million and $5.0 million, respectively.
(4) Effective the first quarter of fiscal 2005, the Pyxis products business
did not receive an allocation adjustment from Corporate for the
estimated interest income related to the sale of certain lease
portfolios. In prior years, the Pyxis products business sold portions
of its leased asset portfolio, and the proceeds were transferred to
Corporate for general corporate purposes. In fiscal 2004, the Pyxis
products business received an allocation related to the estimated
interest income that would have been earned had the associated lease
portfolios not been sold. The positive impact of estimated interest
income related to sale of portions of the lease portfolios was $4.9
million on both revenue and operating earnings for the Pyxis products
business in the first quarter of fiscal 2004.
(5) The Corporate assets primarily include cash and cash equivalents,
Corporate net property and equipment and unallocated deferred taxes.
Page 16
8. COMMITMENTS AND CONTINGENT LIABILITIES
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance Corporation and its subsidiaries
("Allegiance"), Baxter's U.S. health care distribution business, surgical and
respiratory therapy business and health care cost-management 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 Corporation, which merged with a subsidiary of the Company on
February 3, 1999, agreed to indemnify Baxter, and to defend and indemnify Baxter
Healthcare Corporation, as contemplated by the agreements between Baxter
and Allegiance Corporation, for all expenses and potential liabilities
associated with claims arising from the Allegiance Business, including certain
claims of alleged personal injuries as a result of exposure to natural rubber
latex gloves. The Company is not a party to any of the lawsuits and has not
agreed to pay any settlements to the plaintiffs.
Since the inception of this litigation, Baxter/Allegiance have been sued by
872 plaintiffs in 834 lawsuits (excluding derivative claims filed by family
members). During fiscal 2002, Allegiance began settling some of these lawsuits
with greater frequency. As of September 30, 2004, Allegiance had resolved nearly
all of these cases and had only 18 cases remaining. About 20% of the lawsuits
that have been resolved were concluded without any liability to
Baxter/Allegiance. Of all the cases Allegiance has agreed to settle with the
plaintiffs, the settlement amounts have averaged approximately $42,000 per case,
for an aggregate amount of approximately $28 million. Allegiance believes it is
probable that it will incur additional legal fees related to the resolution of
the cases still pending.
During the first quarter of fiscal 2005, the Company reassessed its ability
to estimate the potential cost to settle these lawsuits. Following this
reassessment, the Company concluded that it was in a position to reasonably
estimate the total costs for this litigation. As such, during the first quarter
of fiscal 2005, the Company recognized a charge of $16.4 million as its
reasonable estimate of future costs to be incurred in defending or settling
outstanding claims as well as pursuing insurance recoveries. This charge is net
of expected proceeds under insurance policies in place with financially viable
insurance companies, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency. The Company
continues to believe that insurance recovery is probable. While the Company does
not anticipate significant charges in future periods, additional charges may be
required if there is a significant increase in the number of new lawsuits filed
or an adverse outcome from insurance recovery activities. Currently, the Company
considers both of these potential events to be remote.
Derivative Actions
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. Doris Staehr v. Robert D.
Walter, et al., No. 02-CVG-11-639. On or about March 21, 2003, after the Company
filed a Motion to Dismiss the complaint, an amended complaint was filed alleging
breach of fiduciary duties and corporate waste in connection with the alleged
failure by the Board of Directors of the Company to (a) renegotiate or terminate
the Company's proposed acquisition of Syncor, and (b) determine the propriety of
indemnifying Monty Fu, the former Chairman of Syncor. The Company filed a Motion
to Dismiss the amended complaint, and the plaintiffs subsequently filed a second
amended complaint that added three new individual defendants and included new
allegations that the Company improperly recognized revenue in December 2000 and
September 2001 related to settlements with certain vitamin manufacturers. The
Company filed a Motion to Dismiss the second amended complaint, and on November
20, 2003, the Court denied the motion. Discovery is proceeding in this action.
The defendants intend to vigorously defend this action. The Company currently
does not believe that the impact of this lawsuit will have a material adverse
effect on the Company's financial position, liquidity or results of operations.
On July 9, 2004, a complaint, captioned Donald Bosley, Derivatively on
behalf of Cardinal Health, Inc. v. David Bing, et al., was filed by a purported
shareholder against the members of the Company's Board of Directors and the
Company as a nominal defendant in the Court of Common Pleas, Franklin County,
Ohio, as a purported derivative action. The complaint alleges that the
individual defendants failed to implement adequate internal controls for the
Company and thereby violated their fiduciary duty of good faith, GAAP and the
Company's Audit
Page 17
Committee charter. The complaint seeks money damages and equitable relief
against the defendant directors and an award of attorney's fees. None of the
defendants has responded to the complaint yet, nor has the Company.
On August 27, 2004, a complaint, captioned Sam Wietschner v. Robert D.
Walter, et al., was filed by a purported shareholder against members of the
Company's Board of Directors, current and former officers and/or employees of
the Company and the Company as a nominal defendant in the Court of Common Pleas,
Franklin County, Ohio, as a purported derivative action. The complaint alleges
that the individual defendants breached various fiduciary duties owed to the
Company. The complaint seeks money damages and equitable relief against the
individual defendants and an award of attorney's fees. None of the defendants
has responded to the complaint yet, nor has the Company.
On September 22, 2004, a complaint, captioned Green Meadow Partners, LLP,
Derivatively on behalf of Cardinal Health, Inc. v. David Bing, et al., was filed
by a purported shareholder against the members of the Company's Board of
Directors and the Company as a nominal defendant in the Court of Common Pleas,
Franklin County, Ohio, as a purported derivative action. The complaint alleges
that the individual defendants failed to implement adequate internal controls
for the Company and thereby violated their fiduciary duty of good faith, GAAP
and the Company's Audit Committee charter. The complaint seeks money damages and
equitable relief against the defendant directors and an award of attorney's
fees. None of the defendants has responded to the complaint yet, nor has the
Company.
Shareholder/ERISA Litigation against Cardinal Health
Since July 2, 2004, 10 purported class action complaints have been filed by
purported purchasers of the Company's securities against the Company and certain
of its officers and directors, asserting claims under the federal securities
laws (collectively referred to as the "Cardinal Health federal securities
actions"). To date, all of these actions have been filed in the United States
District Court for the Southern District of Ohio. These cases include: Gerald
Burger v. Cardinal Health, Inc., et al. (04 CV 575), Todd Fener v. Cardinal
Health, Inc., et al. (04 CV 579), E. Miles Senn v. Cardinal Health, Inc., et al.
(04 CV 597), David Kim v. Cardinal Health, Inc. (04 CV 598), Arace Brothers v.
Cardinal Health, Inc., et al. (04 CV 604), John Hessian v. Cardinal Health,
Inc., et al. (04 CV 635), Constance Matthews Living Trust v. Cardinal Health,
Inc., et al. (04 CV 636), Mariss Partners, LLP v. Cardinal Health, Inc., et al.
(04 CV 849), The State of New Jersey v. Cardinal Health, Inc., et al. (04 CV
831) and First New York Securities, LLC v. Cardinal Health, Inc., et al. (04 CV
911). The Cardinal Health federal securities actions purport to be brought on
behalf of all purchasers of the Company's securities during various periods
beginning as early as October 24, 2000 and ending as late as July 26, 2004 and
allege, among other things, that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange Act by issuing a series
of false and/or misleading statements concerning the Company's financial
results, prospects and condition. The alleged misstatements relate to the
Company's accounting for recoveries relating to antitrust litigation against
vitamin manufacturers, and to classification of revenue in the Company's
Pharmaceutical Distribution business as either operating revenue or revenue from
bulk deliveries to customer warehouses, among other matters. The alleged
misstatements are claimed to have caused an artificial inflation in the
Company's stock price during the proposed class period. The complaints seek
unspecified money damages and equitable relief against the defendants and an
award of attorney's fees. None of the defendants has yet responded to any of the
complaints in the Cardinal Health federal securities actions.
Since July 2, 2004, 14 purported class action complaints have been filed
against the Company and certain officers, directors and employees of the Company
by purported participants in the Cardinal Health Profit Sharing, Retirement and
Savings Plan (collectively referred to as the "Cardinal Health ERISA actions").
To date, all of these actions have been filed in the United States District
Court for the Southern District of Ohio. These cases include: David McKeehan and
James Syracuse v. Cardinal Health, Inc., et al. (04 CV 643), Timothy Ferguson v.
Cardinal Health, Inc., et al. (04 CV 668), James DeCarlo v. Cardinal Health,
Inc., et al. (04 CV 684), Margaret Johnson v. Cardinal Health, Inc., et al. (04
CV 722), Harry Anderson v. Cardinal Health, Inc., et al. (04 CV 725), Charles
Heitholt v. Cardinal Health, Inc., et al. (04 CV 736), Dan Salinas and Andrew
Jones v. Cardinal Health, Inc., et al. (04 CV 745), Daniel Kelley v. Cardinal
Health, Inc., et al. (04 CV 746), Vincent Palyan v. Cardinal Health, Inc., et
al. (04 CV 778), Saul Cohen v. Cardinal Health, Inc., et al. (04 CV 789), Travis
Black v. Cardinal Health, Inc., et al. (04 CV 790), Wendy Erwin v. Cardinal
Health, Inc., et al. (04 CV 803), Susan Alston v. Cardinal Health, Inc., et al.
(04 CV 815), and Jennifer Brister v. Cardinal Health, Inc., et al. (04 CV 828).
The Cardinal Health ERISA actions purport to be brought on behalf of
participants in the Cardinal Health Profit Sharing, Retirement and Savings Plan
(the "Plan"), and also on behalf of the Plan itself. The complaints allege that
the defendants breached certain fiduciary duties owed under the Employee
Retirement Income Security Act ("ERISA"), generally asserting that the
defendants failed to make full disclosure of the risks to Plan participants of
investing in the Company's stock, to the
Page 18
detriment of the Plan's participants and beneficiaries, and that Company stock
should not have been made available as an investment alternative for Plan
participants. The misstatements alleged in the Cardinal Health ERISA actions
significantly overlap with the misstatements alleged in the Cardinal Health
federal securities actions. The complaints seek unspecified money damages and
equitable relief against the defendants and an award of attorney's fees. None of
the defendants has yet responded to any of the complaints in the Cardinal Health
ERISA actions.
With respect to the proceedings described under the headings "Derivative
Actions" and "Shareholder/ERISA Litigation against Cardinal Health," the Company
currently believes that there will be some insurance coverage available under
the Company's insurance policies in effect at the time the actions were filed.
Such policies are with financially viable insurance companies, and are subject
to self-insurance retentions, exclusions, conditions, coverage gaps, policy
limits and insurer solvency.
Shareholder/ERISA Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor and
certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "Syncor federal securities
actions"). All of these actions were filed in the United States District Court
for the Central District of California. These cases include Richard Bowe v.
Syncor Int'l Corp., et al., No. CV 02-8560 LGB (RCx) (C.D. Cal.), Alan Kaplan v.
Syncor Int'l Corp., et al., No. CV 02-8575 CBM (MANx) (C.D. Cal), Franklin
Embon, Jr. v. Syncor Int'l Corp., et al., No. CV 02-8687 DDP (AJWx) (C.D. Cal),
Jonathan Alk v. Syncor Int'l Corp., et al., No. CV 02-8841 GHK (RZx) (C.D. Cal),
Joyce Oldham v. Syncor Int'l Corp., et al., CV 02-8972 FMC (RCx) (C.D. Cal),
West Virginia Laborers Pension Trust Fund v. Syncor Int'l Corp., et al., No. CV
02-9076 NM (RNBx) (C.D. Cal), Brad Lookingbill v. Syncor Int'l Corp., et al., CV
02-9248 RSWL (Ex) (C.D. Cal), Them Luu v. Syncor Int'l Corp., et al., CV 02-9583
RGK (JwJx) (C.D. Cal), David Hall v. Syncor Int'l Corp., et al., CV 02-9621 CAS
(CWx) (C.D. Cal), Phyllis Walzer v. Syncor Int'l Corp., et al., CV 02-9640 RMT
(AJWx) (C.D. Cal), and Larry Hahn v. Syncor Int'l Corp., et al., CV 03-52 LGB
(RCx) (C.D. Cal.). The Syncor federal securities actions purport to be brought
on behalf of all purchasers of Syncor shares during various periods, beginning
as early as March 30, 2000, and ending as late as November 5, 2002. The actions
allege, among other things, that the defendants violated Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder and Section 20(a) of the
Exchange Act by issuing a series of press releases and public filings disclosing
significant sales growth in Syncor's international business, but omitting
mention of certain allegedly improper payments to Syncor's foreign customers,
thereby artificially inflating the price of Syncor shares. A lead plaintiff has
been appointed by the Court in the Syncor federal securities actions, and a
consolidated amended complaint was filed May 19, 2003, naming Syncor and 12
individuals, all former Syncor officers, directors and/or employees, as
defendants. The consolidated complaint seeks unspecified money damages and other
unspecified relief against the defendants. Syncor filed a Motion to Dismiss the
consolidated amended complaint on August 1, 2003, and on December 12, 2003, the
Court granted the Motion to Dismiss without prejudice. A second amended
consolidated class action complaint was filed on January 28, 2004, naming Syncor
and 14 individuals, all former Syncor officers, directors and/or employees, as
defendants. Syncor filed a Motion to Dismiss the second amended consolidated
class action complaint on March 4, 2004. On July 6, 2004, the Court granted
Defendants' Motion to Dismiss without prejudice as to defendants Syncor, Monty
Fu, Robert Funari and Haig Bagerdjian. As to the other individual defendants,
the Motion to Dismiss was granted with prejudice. On September 14, 2004, the
lead plaintiff filed a Motion for Clarification of the Court's July 6, 2004
dismissal order.
On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the Syncor federal securities actions described above), and a single purported
class action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received by Syncor
stockholders in the Company's merger with Syncor was reduced. On November 22,
2002, the plaintiff in one of the two Delaware actions filed an amended
complaint adding as defendants the Company, its subsidiary Mudhen Merger
Corporation and the remaining two Syncor directors, who are hereafter included
in the term "director defendants." These cases have been consolidated under the
caption In re: Syncor International Corp. Shareholders Litigation (the
"consolidated Delaware action"). On August 14, 2003, the Company filed a Motion
to Dismiss the operative complaint in the consolidated Delaware action. At the
end of September 2003, plaintiffs in the consolidated Delaware action moved the
Court to file a second amended complaint. Plaintiffs' request was granted in
February 2004. Monty Fu was the only named defendant in the second amended
complaint. On September 15, 2004, the
Page 19
Court granted Monty Fu's Motion to Dismiss the second amended complaint. The
Court dismissed the second amended complaint with prejudice.
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. These cases include Joseph Famularo v. Monty Fu, et al., Case
No. BC285478 (Cal. Sup. Ct., Los Angeles Cty.), and Mark Stroup v. Robert G.
Funari, et al., Case No. BC285480 (Cal. Sup. Ct., Los Angeles Cty.). An amended
complaint was filed on December 6, 2002 in one of the cases, purporting to
allege direct claims on behalf of a class of shareholders. The defendants'
motion for a stay of the California actions pending the resolution of the
Delaware actions (discussed above) was granted on April 30, 2003.
A purported class action complaint, captioned Pilkington v. Cardinal
Health, et al, was filed on April 8, 2003, against the Company, Syncor and
certain officers and employees of the Company by a purported participant in the
Syncor Employees' Savings and Stock Ownership Plan (the "Syncor ESSOP"). A
related purported class action complaint, captioned Donna Brown, et al. v.
Syncor International Corp, et al., was filed on September 11, 2003, against the
Company, Syncor and certain individual defendants. Another related purported
class action complaint, captioned Thompson v. Syncor International Corp., et
al., was filed on January 14, 2004, against the Company, Syncor and certain
individual defendants. Each of these actions was brought in the United States
District Court for the Central District of California. A consolidated complaint
was filed on February 24, 2004 against Syncor and certain former Syncor
officers, directors and/or employees alleging that the defendants breached
certain fiduciary duties owed under ERISA based on the same underlying
allegations of improper and unlawful conduct alleged in the federal securities
litigation. The consolidated complaint seeks unspecified money damages and other
unspecified relief against the defendants. On April 26, 2004, the defendants
filed Motions to Dismiss the consolidated complaint. On August 24, 2004, the
Court granted in part and denied in part Defendants' Motions to Dismiss. The
Court dismissed, without prejudice, all claims against defendants Ed Burgos and
Sheila Coop, all claims alleging co-fiduciary liability against all defendants,
and all claims alleging that the individual defendants had conflicts of interest
precluding them from properly exercising their fiduciary duties under ERISA. A
claim for breach of the duty to prudently manage plan assets was upheld against
Syncor, and a claim for breach of the alleged duty to "monitor" the performance
of Syncor's Plan Administrative Committee was upheld against defendants Monty Fu
and Robert Funari. In addition, the United States Department of Labor is
conducting an investigation of the Syncor ESSOP with respect to its compliance
with ERISA requirements. The Company has responded to a subpoena received from
the Department of Labor and continues to cooperate in the investigation.
It is impossible to predict the outcome of the proceedings described under
the heading "Shareholder/ERISA Litigation against Syncor" or their impact on the
Company. However, the Company currently does not believe that the impact of
these actions will have a material adverse effect on the Company's financial
position, liquidity or results of operations. The Company believes the
allegations made in the complaints described above are without merit and it
intends to vigorously defend such actions. The Company has been informed that
the individual director and officer defendants deny liability for the claims
asserted in these actions, believe they have meritorious defenses and intend to
vigorously defend such actions. The Company currently believes that a portion of
any liability will be covered by insurance policies that the Company and Syncor
have with financially viable insurance companies, subject to self-insurance
retentions, exclusions, conditions, coverage gaps, policy limits and insurer
solvency.
DuPont Litigation
On September 11, 2003, E.I. Du Pont De Nemours and Company ("DuPont") filed
a lawsuit against the Company and others in the United States District Court for
the Middle District of Tennessee. E.I. Du Pont De Nemours and Company v.
Cardinal Health, Inc., BBA Materials Technology and BBA Nonwovens Simpsonville,
Inc., No. 3-03-0848. The complaint alleges various causes of action against the
Company relating to the production and sale of surgical drapes and gowns by the
Company's Medical Products and Services segment. DuPont's claims generally fall
into the categories of breach of contract, false advertising and patent
infringement. The complaint does not request a specific amount of damages. The
Company believes that the claims made in the complaint are without merit, and it
intends to vigorously defend this action. Although this action is in its early
stages and it is impossible to accurately predict the outcome of the proceedings
or their impact on the Company, the Company believes that it is owed a defense
and indemnity from its co-defendants with respect to DuPont's claim for patent
infringement. The
Page 20
Company currently does not believe that the impact of this lawsuit, if any, will
have a material adverse effect on the Company's financial position, liquidity or
results of operations.
Other Matters
In addition to the legal proceedings disclosed above, 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
as well as in connection with future and prior acquisitions. The Company intends
to vigorously defend itself against this other litigation and does not currently
believe that the outcome of this other litigation will have a material adverse
effect on the Company's financial position, liquidity or results of operations.
See also the discussion of the SEC investigation, U.S. Attorney inquiry and
Audit Committee internal review in Note 1.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the quarter ended September
30, 2004 were as follows:
Pharmaceutical Medical
Distribution Products Pharmaceutical Clinical
and Provider and Technologies and Technologies
(in millions) Services Services Services and Services Total
- -----------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2004 (2) $211.0 $677.2 $1,843.6 $1,587.5 $4,319.3
Goodwill acquired - net of purchase price
adjustments, foreign currency
translation adjustments and other 5.3 2.6 81.9 7.7 97.5
Transfer (1) (60.1) - - 60.1 -
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 $156.2 $679.8 $1,925.5 $1,655.3 $4,416.8
=======================================================================================================================
(1) During the first quarter of fiscal 2005, the Company transferred its
Clinical Services and Consulting business, previously reported within
the Pharmaceutical Distribution and Provider Services segment, to its
Clinical Technologies and Services segment to better align business
operations. This transfer resulted in approximately $60.1 million of
goodwill being reclassed between the segments.
(2) The June 30, 2004 balances for the Automation and Information Services
segment and ALARIS were combined herein under Clinical Technologies and
Services.
The allocation of the purchase price related to the ALARIS acquisition is
not yet finalized and is subject to adjustment as the Company is still assessing
the value of the pre-acquisition contingencies, as well as finalizing the
evaluation of plans to close and relocate certain facilities and certain other
matters. The Company expects any future adjustments to the allocation of the
purchase price to be recorded to goodwill. In addition, the Company completed
several smaller acquisitions during the quarter and has not yet finalized the
purchase price allocations related to these acquisitions.
Page 21
Intangible assets with limited lives are being amortized using the
straight-line method over periods that range from five to forty years. The
detail of other intangible assets by class as of September 30 and June 30, 2004,
was as follows:
Gross Accumulated Net
(in millions) Intangible Amortization Intangible
- -----------------------------------------------------------------------------------------------
June 30, 2004:
Trademarks and patents $345.9 $23.4 $322.5
Non-compete agreements 32.0 24.8 7.2
Customer relationships 231.4 6.8 224.6
Other 82.4 17.2 65.2
- -----------------------------------------------------------------------------------------------
Total $691.7 $72.2 $619.5
- -----------------------------------------------------------------------------------------------
September 30, 2004:
Trademarks and patents $347.9 $26.8 $321.1
Non-compete agreements 31.5 25.0 6.5
Customer relationships 231.9 13.8 218.1
Other 75.7 19.1 56.6
- -----------------------------------------------------------------------------------------------
Total $687.0 $84.7 $602.3
- -----------------------------------------------------------------------------------------------
There were no significant acquisitions of other intangible assets for the
periods presented. Amortization expense for the quarters ended September 30,
2004 and 2003 was $12.2 million and $2.3 million, respectively.
Amortization expense for each of the next five fiscal years is estimated to
be:
------------------------------------------------------------------
(in millions) 2005 2006 2007 2008 2009
------------------------------------------------------------------
Amortization expense $46.9 $46.7 $45.8 $43.1 $40.9
10. GUARANTEES
The Company has contingent commitments related to certain operating lease
agreements. These operating leases consist of certain real estate and equipment
used in the operations of the Company. In the event of termination of these
operating leases, which range in length from one to ten years, the Company
guarantees reimbursement for a portion of any unrecovered property cost. At
September 30, 2004, the maximum amount the Company could be required to
reimburse was $397.3 million. Based upon current information, the Company
believes that the proceeds from the sale of properties under these operating
lease agreements would exceed its payment obligation. In accordance with FASB
Interpretation No. 45, the Company has a liability of $4.2 million recorded as
of September 30, 2004, related to these agreements.
In the ordinary course of business, the Company, from time to time, agrees
to indemnify certain other parties under agreements with the Company, including
under acquisition and disposition agreements, customer agreements and
intellectual property licensing agreements. Such indemnification obligations
vary in scope and, when defined, in duration. In many cases, a maximum
obligation is not explicitly stated and, therefore, the overall maximum amount
of the liability under such indemnification obligations cannot be reasonably
estimated. Where appropriate, such indemnification obligations are recorded as a
liability. Historically, the Company has not, individually or in the aggregate,
made payments under these indemnification obligations in any material amounts.
In certain circumstances, the Company believes that its existing insurance
arrangements, subject to the general deduction and exclusion provisions, would
cover portions of the liability that may arise from these indemnification
obligations. In addition, the Company believes that the likelihood of material
liability being triggered under these indemnification obligations is not
significant.
In the ordinary course of business, the Company, from time to time, enters
into agreements that obligate the Company to make fixed payments upon the
occurrence of certain events. Such obligations primarily relate to obligations
arising under acquisition transactions, where the Company has agreed to make
payments based upon the achievement of certain financial performance measures by
the acquired business. Generally, the obligation is capped at an explicit
amount. The Company's aggregate exposure for these obligations, assuming the
achievement of all financial performance measures, is not material. Any
potential payment for these obligations would be treated as an adjustment to the
purchase price of the related entity and would have no impact on the Company's
results of operations.
Page 22
11. DISCONTINUED OPERATIONS
In connection with the acquisition of Syncor, the Company acquired certain
operations of Syncor that were or will be discontinued. Prior to the
acquisition, Syncor announced the discontinuation of certain operations
including the medical imaging business and certain overseas operations. The
Company is continuing with these plans and has added additional international
and non-core domestic businesses to the discontinued operations. In accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," the net assets and results of operations of these businesses are
presented as discontinued operations. The Company is currently overseeing the
planned sale of the discontinued operations and is actively marketing these
businesses. The Company expects to sell substantially all of the remaining
discontinued operations by the end of the second quarter of fiscal 2005. The net
liabilities at September 30, 2004 and net assets at June 30, 2004, for the
discontinued operations are included within the Pharmaceutical Technologies and
Services segment.
The results of discontinued operations for the three months ended September
30, 2004 and 2003 are summarized as follows:
Three Months Ended
September 30,
----------------------------------
(in millions) 2004 2003
----------------------------------
Revenue $ 2.8 $ 26.2
Loss before income taxes (7.3) (2.9)
Income tax benefit 2.8 1.1
----------------------------------
Loss from discontinued operations $ (4.5) $ (1.8)
==================================
There was no interest expense allocated to discontinued operations for the
three months ended September 30, 2004, as the note assumed in connection with
the Syncor acquisition was paid off in the fourth quarter of fiscal 2004.
Interest expense allocated to discontinued operations for the three months ended
September 30, 2003 was $0.1 million. Interest expense was allocated to the
discontinued operations based upon a ratio of the net assets of discontinued
operations versus the overall net assets of Syncor.
At September 30, 2004 and June 30, 2004, the major components of assets and
liabilities of the discontinued operations were as follows:
September 30, June 30,
----------------------------------
(in millions) 2004 2004
----------------------------------
Current assets $ 17.0 $ 21.2
Property and equipment, net 14.6 22.0
Other assets 13.3 17.2
----------------------------------
Total assets $ 44.9 $ 60.4
==================================
Current liabilities $ 33.9 $ 30.9
Long term debt 21.5 24.2
----------------------------------
Total liabilities $ 55.4 $ 55.1
==================================
Cash flows generated from the discontinued operations are immaterial to the
Company and, therefore, are not disclosed separately.
Page 23
12. CHANGE IN ACCOUNTING
Effective as of the first quarter of fiscal 2004, the Company changed its
method of recognizing cash discounts from recognizing cash discounts as a
reduction of cost of products sold primarily upon payment of vendor invoices to
recording cash discounts as a component of inventory cost and recognizing such
discounts as a reduction to cost of products sold upon the sale of inventory.
The Company believes the change in accounting method provides a more objectively
determinable method of recognizing cash discounts and a better matching of
inventory cost to revenues. The Company recorded a $38.5 million (net of tax of
$22.5 million) cumulative effect of change in accounting in the condensed
consolidated statements of earnings. The cumulative effect reduced net diluted
earnings per Common Share by $0.09 in the first quarter of fiscal 2004.
13. OFF-BALANCE SHEET ARRANGEMENTS
Cardinal Health Funding ("CHF") was organized for the sole purpose of
buying receivables and selling those receivables to multi-seller conduits
administered by third-party banks or other third-party investors. CHF was
designed to be a special purpose, bankruptcy-remote entity. Although
consolidated in accordance with GAAP, CHF is a separate legal entity from the
Company. The sale of receivables by CHF qualifies for sales treatment under SFAS
No. 140 and accordingly is not included in the Company's consolidated financial
statements.
At September 30, 2004, the Company had a committed receivables sales
facility program available through CHF with capacity to sell $800 million in
receivables. During the first quarter of fiscal 2005, the capacity under the
committed receivables sales facility program was increased from $500 million to
$800 million. Recourse is provided under the CHF program by the requirement that
CHF retain a percentage subordinated interest in the sold receivables. The
Company sold $500 million of receivables and retained subordinated interests of
$257.1 million under this committed receivables sales facility program during
the first quarter of fiscal 2005. At June 30, 2004, there were no outstanding
receivables or subordinated interests related to this facility.
For additional information regarding off-balance sheet arrangements, see
Note 15 below and Note 10 of "Notes to Consolidated Financial Statements" in
the 2004 Form 10-K.
14. EMPLOYEE RETIREMENT BENEFIT PLANS
Components of the Company's net periodic benefit costs for the three months
ended September 30, 2004 and 2003, were as follows:
Three Months Ended
September 30,
---------------------------
(in millions) 2004 2003
---------------------------
Components of net periodic benefit cost:
Service cost $ 0.3 $ 0.4
Interest cost 2.5 2.3
Expected return on plan assets (1.7) (1.4)
Net amortization and other(1) 0.6 0.7
--------------------------
Net amount recognized $ 1.7 $ 2.0
==========================
(1) Amount primarily represents the amortization of actuarial
(gains)/losses, as well as the amortization of the transition
obligation and prior service costs.
The Company sponsors other postretirement benefit plans which are
immaterial for all periods presented.
Page 24
15. SUBSEQUENT EVENTS
Subsequent to September 30, 2004, the Company borrowed $750 million in the
aggregate on its two $750 million revolving credit facilities. After this
borrowing, the aggregate outstanding under these revolving credit facilities was
$1.25 billion. The proceeds of this borrowing were utilized primarily for
general corporate purposes, including the establishment of pharmaceutical
inventory at the Company's new National Logistics Center in Groveport, Ohio. The
Company has since repaid its borrowings under its revolving credit facilities,
due to stabilization in its short-term liquidity requirements in light of, among
other things, the Company having substantially completed the initial
establishment of inventory for the National Logistics Center. See Note 6 above
for further discussion regarding the nature and terms of the Company's bank
revolving credit facilities.
Also subsequent to September 30, 2004, the Company received a commitment
letter for a $500 million committed borrowing facility to be used for general
corporate purposes. The Company has since decided not to move forward with this
$500 million borrowing facility, which would have provided incremental borrowing
capacity.
Also subsequent to September 30, 2004, the Company sold in the aggregate
$300 million of receivables under its committed receivables sales facility
program. After these sales, the Company had sold in the aggregate $800 million
under its committed receivables sales facility program. See Note 13 above for
further information regarding this facility.
Page 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis presented below is concerned with material
changes in financial condition and results of operations for the Company's
condensed consolidated balance sheets as of September 30, 2004 and June 30,
2004, and for the condensed consolidated statements of earnings for the
three-month periods ended September 30, 2004 and 2003.
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, 2004 (the "2004 Form 10-K").
In connection with certain conclusions made by the Audit Committee during
September and October 2004 as part of its ongoing internal review, the Company
made certain reclassification and restatement adjustments to its fiscal 2004 and
prior historical financial statements, as more fully described in Note 1 of
"Notes to Condensed Consolidated Financial Statements." Revenue previously
disclosed separately as "Bulk Deliveries to Customer Warehouses and Others" has
been aggregated with "Operating Revenue" resulting in combined "Revenue" being
reported in the financial statements. In addition, the Company changed its
accounting method for recognizing income from cash discounts. The Company also
reduced its fourth quarter fiscal 2004 results of operations for premature
revenue recognition within its former Automation and Information Services
segment after assessing the impact this segment's sales practice had on the
Company's results of operations for the three year period ended June 30, 2004.
Lastly, the Company restated its financial statements for fiscal 2000, 2001,
2002 and 2003 and the first three quarters of fiscal 2004 as a result of various
misapplications of generally accepted accounting principles ("GAAP") and errors
relating primarily to balance sheet reserve and accrual adjustments recorded in
prior periods. As a result, the Company supplemented its historical disclosures
within "Management's Discussion and Analysis of Financial Condition and Results
of Operations" to reflect these reclassification and restatement adjustments on
previously reported Company and business segment operating earnings performance.
All prior period disclosures presented in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" have been adjusted to reflect
these changes.
Portions of this Quarterly Report on Form 10-Q (including information
incorporated by reference) include "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended. The
words "believe," "expect," "anticipate," "project," and similar expressions,
among others, generally identify "forward-looking statements," which speak only
as of the date the statement was made. 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 in the 2004 Form 10-K (including in the section titled "Risk
Factors That May Affect Future Results" within "Item 1: Business") and are
incorporated herein by reference. Except to the limited extent required by
applicable law, the Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
OVERVIEW
The following summarizes the Company's results of operations for the three
months ended September 30, 2004 and 2003.
Three Months Ended
(in millions, except per Common Share September 30,
amounts) ------------------------------------
Growth(1) 2004 2003
----------------------------------------------------------------------------------
Revenue 16% $17,796.0 $15,388.2
Operating earnings (29)% $361.5 $512.0
Earnings from continuing operations before
cumulative effect of change in accounting (33)% $217.8 $323.5
Net earnings (25)% $213.3 $283.2
Diluted earnings per Common Share (22)% $0.49 $0.63
----------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) for the
three-month period ended September 30, 2004 compared to the three-month
period ended September 30, 2003.
Page 26
The results of operations during the three months ended September 30, 2004
reflect the breadth of products and services the Company offers and the
increasing demand for the Company's diverse portfolio of products and services,
which led to revenue growth in every segment of the Company. The Company
continues to experience strong demand for integrated solutions from health care
providers. These integrated solutions include products and services from
multiple lines of business within the Company. These arrangements currently
represent more than $7 billion of annual sales.
The Company has four reportable segments: Pharmaceutical Distribution and
Provider Services, Medical Products and Services, Pharmaceutical Technologies
and Services and Clinical Technologies and Services. See Note 7 of "Notes to
Condensed Consolidated Financial Statements" for a discussion of changes to
business segments during the first quarter of fiscal 2005.
As previously reported, the Company's Pharmaceutical Distribution business
is in the midst of a business model transition with respect to how it is
compensated for the logistical, capital and administrative services that it
provides to pharmaceutical manufacturers. Historically, the compensation
received by the Pharmaceutical Distribution business from pharmaceutical
manufacturers was based on each manufacturer's unique sales practices (e.g.,
volume of product available for sale, eligibility to purchase product, cash
discounts for prompt payment, rebates, etc.) and pharmaceutical pricing
practices (e.g., the timing, frequency and magnitude of product price
increases). Specifically, a significant portion of the compensation the
Pharmaceutical Distribution business received from manufacturers was derived
through the Company's ability to purchase pharmaceutical inventory in advance of
pharmaceutical price increases, hold that inventory as manufacturers increased
pharmaceutical prices, and generate a higher operating margin on the subsequent
sale of that inventory. This compensation system was dependent to a large degree
upon the sales practices of each pharmaceutical manufacturer, including
established policies concerning the volume of product available for purchase in
advance of a price increase, and on stable and predictable pharmaceutical
pricing practices. Beginning in fiscal 2003, pharmaceutical manufacturers began
to seek greater control over the amount of pharmaceutical product available in
the supply chain, and, as a result, began to change their sales practices by
restricting the volume of product available for purchase by pharmaceutical
wholesalers. In addition, manufacturers have increasingly sought more services
from the Company, including the provision of data concerning product sales and
distribution patterns. The Company believes these changes have been made to
provide greater visibility to pharmaceutical manufacturers over product demand
and movement in the market and to increase product safety and integrity by
reducing the risks associated with product being available to, and distributed
in, the secondary market. Nevertheless, the impact of these changes has
significantly reduced the compensation received by the Company from
pharmaceutical manufacturers. In addition, since the fourth quarter of fiscal
2004, pharmaceutical manufacturers' product pricing practices have become less
predictable, as the frequency and amount of product price increases generally
has slowed versus historical levels. As a result of these actions by
pharmaceutical manufacturers, the Company believes it is no longer being
adequately and consistently compensated for the reliable and consistent
logistical, capital and administrative services being provided by the Company to
these manufacturers.
In response to the developments discussed above, the Company is working to
establish a compensation system that is no longer dependent on manufacturers'
sales or pricing practices, but rather is based on the services provided by the
Company to meet the unique distribution requirements of each manufacturer's
products. To that end, the Company is working with individual pharmaceutical
manufacturers to define fee-for-service terms that will adequately compensate
the Company, in light of each product's unique distribution requirements, for
the logistical, capital and administrative services being provided by the
Company. To accelerate this process, in August 2004, the Company communicated to
its pharmaceutical manufacturing vendors a new policy which sets the earlier of
the next anniversary date of the manufacturers' existing agreement with the
Company, if any, or April 1, 2005, as the deadline by which manufacturers must
have entered into a mutually satisfactory distribution services agreement with
the Company providing for reliable, predictable and adequate compensation for
the Company's services. For any manufacturer with which the Company is unable to
enter into such a mutually satisfactory agreement, the Company plans to assist
such manufacturer in transitioning to another method of distribution. There can
be no assurance that this business model transition will be successful, or if
such transition is successful, of the timing of such a successful transition.
The Pharmaceutical Technologies and Services segment revenue and operating
earnings were dampened during the first quarter of fiscal 2005 by lower demand
within the Biotechnology and Sterile Life Sciences and Pharmaceutical
Development businesses and increased competition within the segment's Nuclear
Pharmacy Services business. The Biotechnology and Sterile Life Sciences business
was also adversely affected by continued regulatory delays and operational
expenses associated with these delays at its facility in Puerto Rico.
Page 27
Revenue and operating earnings within the Pyxis products business of the
Clinical Technologies and Services segment declined in the first quarter of
fiscal 2005. The decline was a result of softening demand for its core products
and increased competition within the industry. The Company believes this trend
may continue in the short-term; however, the Company remains confident in the
long-term prospects for this business as patient safety concerns combine with
innovative new products to drive future demand.
Future Strategies
The Company recently outlined its top strategies for the future in five
primary categories:
- strengthen presence in the hospital market;
- pursue growth outside the United States;
- create a leadership position at the patient point of care;
- identify basis for future advantage in the pharmaceutical distribution
industry; and
- participate in the highest value opportunities in the generic drug
market.
The Company has started to execute these strategies, but each will require
a higher level of integration and resources to ensure the Company's businesses
collaborate in a faster and more effective manner. The Company completed a
rigorous review of opportunities to focus, align and integrate the way it does
business inside the Company with the same discipline it is applying to how it
does business outside the Company with customers. Through this analysis, the
Company determined that there were significant opportunities to improve its
current operating structure and future strategic directions regarding certain
corporate initiatives, including the utilization of shared services and
strategic sourcing initiatives.
In order to capture these opportunities, the Company initiated "Operation
One Cardinal Health," of which the four main objectives are as follows:
- Strategic alignment - Create a management and operating infrastructure
more integrated around customers and markets and less around the
Company's legacies.
- Operational efficiency - Ensure operations are as simple and effective
as possible to maximize the Company's ability to effectively deliver
its breadth of offerings and resources.
- Support services - Drive support services to higher levels of cost
efficiency, service and quality.
- Strategic sourcing - Enhance strategic sourcing by leveraging buying
power across the entire Company.
The overall goal of Operation One Cardinal Health is to achieve cost
savings of $125 million in fiscal 2005, with greater annual savings targeted
over a three-year period. In conjunction with this review, the Company expects
each of its business segments to incur costs to restructure or exit certain
business activities. These costs will include one-time termination benefits,
asset impairments and various other costs to exit or move facilities. The first
phase of this project was approved by the Company's management on September 27,
2004. The estimated costs consist of one-time termination and other related
benefits to be paid to employees within the Pharmaceutical Technologies and
Services segment. The total cost of this activity is estimated to be
approximately $19 million and is expected to be incurred throughout fiscal 2005.
See Note 5 of "Notes to Condensed Consolidated Financial Statements" for
discussion of the restructuring costs incurred by the Company during the first
quarter of fiscal 2005 related to Operation One Cardinal Health.
Government Investigations and Audit Committee Internal Review
The Company is currently the subject of a formal investigation by the
Securities and Exchange Commission (the "SEC") relating to certain accounting
matters. The Company also learned that the U.S. Attorney for the Southern
District of New York has commenced an inquiry with respect to the Company. Also,
the Company's Audit Committee commenced its own internal review, assisted by
independent counsel. For further information regarding these matters, see Note 1
to "Notes to Condensed Consolidated Financial Statements."
Page 28
RESULTS OF OPERATIONS
Revenue
Percent of Company
Revenue
---------------------------------
Three months ended September 30, Growth(1) 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services 16% 80% 80%
Medical Products and Services 11% 13% 14%
Pharmaceutical Technologies and Services 9% 4% 4%
Clinical Technologies and Services 57% 3% 2%
Total Company 16% 100% 100%
- --------------------------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the
revenue for the three-month period ended September 30, 2004 compared
to the three-month period ended September 30, 2003.
Revenue for the three months ended September 30, 2004 increased 16%
compared to the same period of the prior year. This increase resulted from
higher sales volume across each of the Company's segments; addition of new
customers, some of which resulted from new corporate arrangements with health
care providers that integrate the Company's diverse offerings; addition of new
businesses; addition of new products; and pharmaceutical price increases.
The Pharmaceutical Distribution and Provider Services segment's revenue
growth of 16% during the first quarter of fiscal 2005 resulted from strong sales
to customers within this segment's core Pharmaceutical Distribution business.
The most significant growth was in Bulk Revenue, which increased approximately
25% from the prior year first quarter. See Bulk Revenue discussion below for
further details. Also contributing to the growth were sales to health systems
customers, which yielded growth of approximately 17%. In addition, annualized
pharmaceutical price increases for the first quarter of fiscal 2005 of
approximately 3% contributed to the growth in this segment. However, this rate
of pharmaceutical price increase activity is lower than rates experienced over
the past fiscal year.
As discussed in Note 2 of "Notes to Consolidated Financial Statements" in
the 2004 Form 10-K, during fiscal 2004, the Company decided to aggregate revenue
classes within the 2004 Form 10-K. "Operating Revenue" and "Bulk Deliveries to
Customer Warehouses and Other" were combined for all periods presented so that
total revenue and total cost of products sold are presented as single amounts in
the consolidated statements of earnings. Beginning with the 2004 Form 10-K,
information concerning the portion of the Company's revenue that arises from
Bulk Revenue is discussed in the Company's "Management's Discussion and Analysis
of Financial Condition and Results of Operations." For more information
regarding this reclassification, see Note 2 of "Notes to Consolidated Financial
Statements" in the 2004 Form 10-K.
The Pharmaceutical Distribution and Provider Services segment reports
transactions with the following characteristics as "Bulk Revenue": (a)
deliveries to customer warehouses whereby the Company acts as an intermediary in
the ordering and delivery of pharmaceutical products; (b) delivery of products
to the customer in the same bulk form as the products are received from the
manufacturer; (c) warehouse to customer warehouse or process center deliveries;
or (d) deliveries to customers in large or high volume full case quantities.
Bulk Revenue for the three months ended September 30, 2004 and 2003 was $5.5
billion and $4.4 billion, respectively. The increase in Bulk Revenue primarily
relates to new customers and additional volume from existing customers. The
increase from existing customers is primarily due to certain customers
purchasing directly from the Company rather than from the manufacturer.
The Medical Products and Services segment's revenue growth of 11% during
the first quarter of fiscal 2005 resulted primarily from new contracts signed
during fiscal 2004 within the medical-surgical distribution business and
increased revenues within the specialty distribution business. The 10% increase
in the medical-surgical distribution business was within the hospital supply and
ambulatory care customer segments. The 20% increase in the specialty
distribution business reflects increased revenue from the business' largest
customer and growth of the existing customer base. This segment's revenue growth
was adversely affected by slower growth in the distribution of self-manufactured
products and the loss of certain business from customers within a group
purchasing organization, or GPO.
Page 29
The Pharmaceutical Technologies and Services segment's revenue growth of 9%
during the first quarter of fiscal 2005 primarily resulted from the impact of
acquisitions. Excluding the impact of all acquisitions and divestitures within
this segment, revenue growth would have been flat for the first quarter of
fiscal 2005. The results of operations from these acquisitions are not included
in the prior period amounts. The segment's growth was adversely affected by
lower customer demand for certain products within the Biotechnology and Sterile
Life Sciences and Pharmaceutical Development businesses as well as from
continued regulatory delays in the start up of new operations in Humacao,
Puerto Rico. In addition, the Nuclear Pharmacy Services business was adversely
affected by increased competition in selected markets as new independent
pharmacies were opened. Effective the first quarter of fiscal 2005, the
Pharmaceutical Technologies and Services segment includes the impact of foreign
exchange rate fluctuations. Historically since 2000, this segment was not
impacted by foreign exchange fluctuations as the Company applied constant
exchange rates to translate its foreign operating results into U.S. dollars and
recorded the actual impact of foreign exchange rate changes within the Corporate
segment. This change adversely affected revenue growth in the first quarter of
fiscal 2005, as an adjustment of approximately $13.8 million had been recorded
in the first quarter of fiscal 2004.
The Clinical Technologies and Services segment's revenue growth of 57%
during the first quarter of fiscal 2005 resulted from the impact of the
acquisition of ALARIS Medical Systems, Inc. (which has been given the legal
designation of Cardinal Health 303, Inc. and is referred to in this Form 10-Q as
"ALARIS") and strong revenue growth of approximately 30% within the Clinical
Services and Consulting business. Excluding the impact of the ALARIS
acquisition, revenue growth would have been approximately 12% in the first
quarter of fiscal 2005. ALARIS' results of operations are not included in the
prior period amounts. The Pyxis products business experienced decreased revenue
of approximately 7% due to softening demand for its core products and increased
competition within the industry. These factors were also seen in the weakening
of the Pyxis products business' committed contract backlog. The Company believes
this trend may continue in the short-term; however, the Company remains
confident in the long-term prospects for this business and expects that patient
safety concerns will combine with innovative new products to drive future
demand. As more fully described in Note 1 of "Notes to Condensed Consolidated
Financial Statements," the Company recorded adjustments relating to the
premature revenue recognition in the fourth quarter of fiscal 2004 and the
first quarter of fiscal 2005. The net impact of these adjustments was to
increase Pyxis products revenue by $4.1 million in the first quarter of fiscal
2005 as revenue previously deferred due to this practice in the fourth quarter
of fiscal 2004 was recognized in the first quarter of fiscal 2005. In fiscal
2004, the Pyxis products business sold portions of its leased asset portfolio,
at the direction of Corporate. The proceeds were transferred to Corporate and
Pyxis products business received a $4.9 million allocation related to the
estimated interest income that would have been earned had the associated lease
portfolios not been sold. Effective the first quarter of fiscal 2005, the Pyxis
products business did not receive this Corporate allocation. See footnote 4 to
the table in Note 7 of "Notes to Condensed Consolidated Financial Statements"
for further details.
Operating Earnings
Percent of Company
Operating Earnings
---------------------------------
Three months ended September 30, Growth(1) 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution and Provider Services (29)% 38% 41%
Medical Products and Services (14)% 32% 28%
Pharmaceutical Technologies and Services (24)% 19% 19%
Clinical Technologies and Services (32)% 11% 12%
Total Company(2) (29)% 100% 100%
- --------------------------------------------------------------------------------------------------------------------
(1) Growth is calculated as the change (increase or decrease) in the
operating earnings for the three-month period ended September 30, 2004
compared to the three-month period ended September 30, 2003.
(2) The Company's overall operating earnings decrease of 29% includes the
effect of special items, which totaled $31.9 million and $13.2 million
during the three months ended September 30, 2004 and 2003,
respectively. Special items are not allocated to the segments.
Total operating earnings for the three months ended September 30, 2004
decreased 29% compared to the same period of the prior year. This overall
decrease resulted from operating earnings declines in each of the Company's
segments, with the largest percentage declines experienced in the Pharmaceutical
Distribution and Provider Services and Clinical Technologies and Services
segments. The Company's gross margins continue to be dampened by: (1) reduced
vendor margins within the Pharmaceutical Distribution business driven by changes
in pharmaceutical
Page 30
manufacturers' sales and pricing practices (see the "Overview" section for
further discussion) and competitive pricing; (2) increased mix of lower-margin
distribution business and competitive pricing within the Medical Products and
Services segment; (3) continued regulatory delays and reduced customer demand
for certain products in the Pharmaceutical Technologies and Services segment,
both of which have adversely affected manufacturing efficiencies within this
segment; and (4) unfavorable revenue mix and increased competition with respect
to products and pricing within the Clinical Technologies and Services segment.
Total operating earnings were also affected by the unfavorable quarter over
quarter impact, $18.7 million, related to special items. The increased costs
were associated with the SEC investigation, Operation One Cardinal Health and
the integration of acquisitions (see Note 5 of "Notes to Condensed Consolidated
Financial Statements" for additional information). The first quarter results
were also adversely impacted by a $16.4 million charge within the Medical
Products and Services segment related to estimated remaining liabilities for
outstanding latex litigation. In addition, the Company's expenses for the first
quarter of fiscal 2005 were impacted by an increase in incentive compensation
expense of $10.2 million versus the first quarter of fiscal 2004. There was no
incentive compensation expense recorded in the first quarter of fiscal 2004.
The Pharmaceutical Distribution and Provider Services segment's operating
earnings decrease of 29% during the first quarter of fiscal 2005 resulted from
changes in pharmaceutical manufacturers' sales and pricing practices, as
discussed above in the "Overview" section. The impact of these changes has
significantly reduced the margin the Company receives from pharmaceutical
manufacturers. As discussed above, pharmaceutical manufacturers have changed
their sales practices by restricting product available for purchase by
pharmaceutical wholesalers. In addition, since the fourth quarter of fiscal
2004, pharmaceutical manufacturers' product pricing practices have become less
predictable, as the frequency and amount of product price increases has slowed
versus historical levels. For the first quarter of fiscal 2005, annualized
pharmaceutical price increases were approximately 3% compared to 6% in the first
quarter of fiscal 2004. In response, the Company is working with individual
pharmaceutical manufacturers to develop non-contingent, fair-market-value
compensation that will adequately compensate the Company, in light of each
product's unique distribution requirements.
The Medical Products and Services segment's operating earnings decrease of
14% from the first quarter of fiscal 2004 resulted primarily from the $16.4
million charge for latex litigation described above. See Note 8 of "Notes to
Condensed Consolidated Financial Statements" for detail of the Company's latex
litigation. In addition, an increased mix of lower margin distributed products,
competitive pricing within the industry and increases in freight and raw
material prices led to decreased operating earnings. These items were partially
offset by operating earnings from new customers and other decreases in
manufacturing costs. Selling, general and administrative expenses grew 17%
during this period primarily due to the charge for latex litigation described
above and higher personnel costs associated with the overall business growth.
The Pharmaceutical Technologies and Services segment's operating earnings
decrease of 24% during the first quarter of fiscal 2005 resulted from lower
demand for certain products, continued regulatory delays and the impact of
hurricanes, which disrupted production at the Company's operations in Puerto
Rico and Florida. These regulatory and customer demand factors primarily
affected the Company's Biotechnology and Sterile Life Sciences and
Pharmaceutical Development businesses. In addition, the operating margins in
this segment's Nuclear Pharmacy Services business were adversely affected by
increased competition in selected markets as new independent pharmacies were
opened. As discussed above in the "Revenue" section, the Pharmaceutical
Technologies and Services segment historically since 2000 included an allocation
from Corporate for the impact of foreign exchange rate fluctuations. Effective
the first quarter of fiscal 2005, the segment did not receive this Corporate
allocation. This change adversely affected operating earnings growth in the
first quarter of fiscal 2005, as a positive adjustment of approximately $5.0
million was recorded in the first quarter of fiscal 2004.
Page 31
The Clinical Technologies and Services segment's operating earnings
decreased 32% during the first quarter of fiscal 2005 primarily from decreased
operating earnings within the Pyxis products business which were not offset by
an acquisition benefit from the ALARIS transaction completed in early July.
Pyxis products performance was impacted by the following:
- 7% decline in revenue;
- lower unit margins due to adverse year over year sales mix;
- increased year over year bad debt expense, $4.6 million, due to a
non-recurring favorable adjustment recorded in first quarter
fiscal 2004;
- adverse year over year comparison due to segment allocation
adjustment recorded in fiscal 2004, $4.9 million, for the
estimated interest income that the business would have earned from
assets sold as part of the leased asset portfolio sales (which
proceeds from such sales were returned to Corporate for general
corporate requirements);
- additional reserves recorded during the first quarter of fiscal
2005 for inventory valuation and customer commitment obligations,
$4.1 million; and
- favorable net impact, $2.8 million, of premature revenue
recognition adjustments recorded in the fourth quarter of fiscal
2004 and first quarter of fiscal 2005 (see Note 1 of "Notes to
Condensed Consolidated Financial Statements" for a more detailed
discussion of these adjustments).
Operating results from ALARIS, while incremental to the segment's results
year over year, were substantially reduced during the quarter due to the effect
of purchase accounting adjustments. These adjustments included an inventory
valuation adjustment to "fair value," with the adjusted, higher cost inventory
being sold during the quarter, adversely affecting gross margins by
approximately $20.6 million. ALARIS' margins are expected to return to
historical levels starting in the second quarter of fiscal 2005.
Special Items
The following is a summary of the special items for the three-month periods
ended September 30, 2004 and 2003.
Three Months Ended
September 30,
(in millions) 2004 2003
- -----------------------------------------------------------------------------
Merger-related costs $16.9 $8.6
Restructuring costs 7.5 7.3
Litigation settlements, net - (2.7)
Other special items 7.5 -
- -----------------------------------------------------------------------------
Total special items $31.9 $13.2
=============================================================================
See Note 5 of "Notes to Condensed Consolidated Financial Statements" for
detail of the Company's special items.
Interest Expense and Other
The increase in interest expense and other of $13.2 million during the
first quarter of fiscal 2005 compared to the first quarter of fiscal 2004
resulted primarily from increased net borrowings outstanding in the current
fiscal quarter, which increased interest expense by $8.3 million. The additional
borrowings were a result of short-term working capital needs primarily
associated with the acquisition of ALARIS and start-up of the new National
Logistics Center in Groveport, Ohio, which has been operational since August
2004, and other seasonal inventory requirements. Also included within interest
expense and other are gains and losses recognized from transactions outside the
Company's ordinary course of business (e.g., sales of lines of business or
individual facilities, as well as adjustments of equity investments). During the
first quarter of fiscal 2005, the Company recorded net losses of approximately
$5.9 million related to the writedown of certain investments. There were no
significant other gains and losses recorded in the first quarter of fiscal 2004.
Page 32
Provision for Income Taxes
The Company's provision for income taxes relative to earnings before income
taxes and discontinued operations was 32.0% and 33.2% for the first quarters of
fiscal 2005 and 2004, respectively. Fluctuations in the effective tax rate are
primarily due to changes within state and foreign effective tax rates resulting
from the Company's business mix and changes in the tax impact of special items,
which may have unique tax implications.
Loss from Discontinued Operations
See Note 11 in "Notes to Condensed Consolidated Financial Statements" for
information on the Company's discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
The following table summarizes the Company's Condensed Consolidated
Statements of Cash Flows for the three-month periods ended September 30, 2004
and 2003.
Three-Months Ended
September 30,
-------------------------------
(in millions) 2004 2003
- ---------------------------------------------------------------------------------------
Cash provided by/(used in):
Operating activities $893.2 $294.1
Investing activities $(365.4) $(90.3)
Financing activities $(471.4) $(935.8)
OPERATING ACTIVITIES. Net cash provided by operating activities during the
three months ended September 30, 2004 totaled $893.2 million, an increase of
$599.1 million when compared to the same period a year ago. The increase was
primarily due to an increase in accounts payable and a decrease in accounts
receivable. The $380.8 million increase in accounts payable was due to the
timing of payments at quarter-end, as well as inventory buys executed shortly
before quarter-end for the establishment of pharmaceutical inventory at the
Company's new National Logistics Center within the Company's Pharmaceutical
Distribution business. The decrease in accounts receivable was primarily a
result of the sale of $500 million of receivables during the quarter under the
Company's committed receivables sales facility program. These operating cash
flow benefits were adversely affected by a $105.7 million decrease in operating
earnings.
INVESTING ACTIVITIES. Cash used in investing activities primarily
represents the Company's use of cash to complete acquisitions. During the three
months ended September 30, 2004, the majority of the cash used in investing
activities related to costs associated with the acquisition of ALARIS and an
acquisition within the Nuclear Pharmacy Services business. In addition, capital
expenditures increased $29.7 million.
FINANCING ACTIVITIES. The Company's financing activities utilized cash of
$471.4 million and $935.8 million during the first quarter of fiscal 2005 and
2004, respectively. Cash used in financing activities during the three months
ended September 30, 2004 primarily reflects the Company's decision to retire the
Company's commercial paper, and certain debt acquired from the ALARIS
acquisition. These cash outflows for the first quarter of fiscal 2005 were
partially offset by net proceeds of $500 million received from the Company's
bank revolving credit facilities.
International Cash
The Company's cash balance of approximately $1.2 billion as of September
30, 2004 includes $244.7 million of cash held by its subsidiaries outside of the
United States. Although the vast majority of cash held outside the United States
is available for repatriation, doing so could subject it to U.S. federal income
tax.
Capital Resources
In addition to cash, the Company's sources of liquidity include a $1.5
billion commercial paper program backed by $1.5 billion of bank revolving credit
facilities. During the first quarter of fiscal 2005, the Company borrowed $500
million in aggregate on its revolving credit facilities. The proceeds of this
borrowing were utilized to repay a portion of the Company's commercial paper and
for general corporate purposes, including the establishment of
Page 33
pharmaceutical inventory at the Pharmaceutical Distribution business' National
Logistics Center in Groveport, Ohio. Subsequent to September 30, 2004, the
Company borrowed an additional $750 million in the aggregate on the revolving
credit facilities utilized primarily for the establishment of the National
Logistics Center. The Company has since fully repaid the $1.25 billion
outstanding balance under the bank revolving credit facilities. Also subsequent
to September 30, 2004, the Company received a commitment letter for a $500
million borrowing facility to be used for general corporate purposes. The
Company has since decided not to move forward with this $500 million borrowing
facility, which would have provided incremental borrowing capacity.
The Company's sources of liquidity also include a committed receivables
sales facility program with the capacity to sell $800 million in receivables.
See "Off-Balance Sheet Arrangements" below.
The Company's capital resources are more fully described in "Liquidity and
Capital Resources" within "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 6 of "Notes to Consolidated
Financial Statements" in the 2004 Form 10-K. See also Note 6 of "Notes to
Condensed Consolidated Financial Statements."
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, contractual obligations and current and projected debt service
requirements, including those related to business combinations.
Debt Covenants
The Company's various borrowing facilities and long-term debt, except for
the preferred debt securities as discussed below, are free of any financial
covenants other than minimum net worth which cannot fall below $4.1 billion at
any time. As of September 30, 2004, the Company was in compliance with this
covenant.
The Company's preferred debt securities contain a minimum adjusted tangible
net worth covenant (adjusted tangible net worth cannot fall below $3.0 billion)
and certain financial ratio covenants. As of September 30, 2004, the Company was
in compliance with these covenants. A breach of any of these covenants would be
followed by a cure period during which the Company may discuss remedies with the
security holders, or extinguish the securities, without causing an event of
default.
Contractual Obligations
There have been no material changes, outside the ordinary course of
business, in the Company's outstanding contractual obligations from those
disclosed within "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the 2004 Form 10-K.
OFF-BALANCE SHEET ARRANGEMENTS
During the first quarter of fiscal 2005, the Company sold $500 million in
receivables under the committed receivables sales facility program and
thereafter increased the capacity under the program from $500 million to $800
million. Subsequent to September 30, 2004, the Company sold an additional $300
million of receivables under this program. In the aggregate, $800 million in
receivables have been sold under this program to date. See Note 13 in "Notes to
Condensed Consolidated Financial Statements" for more information regarding
these off-balance sheet arrangements.
OTHER
See Note 2 in "Notes to Condensed Consolidated Financial Statements" for a
discussion of recent financial accounting standards.
Page 34
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that there has been no material change in the
quantitative and qualitative market risks from those discussed in the 2004 Form
10-K.
ITEM 4: CONTROLS AND PROCEDURES
The Company carried out an evaluation, as required by Rule 13a-15(b) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), under the
supervision and with the participation of the Company's management, including
the Company's principal executive officer and principal financial officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of the end of the period covered by this report. This
evaluation, which has taken into account conclusions reached to date in
connection with the internal review conducted by the Audit Committee of the
Company's Board of Directors, has allowed the Company to make conclusions, as
set forth below, regarding the state of its disclosure controls and procedures.
As noted below, material weaknesses have been identified in the Company's
internal controls.
The Company's disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed in its reports
filed under the Exchange Act, such as this Form 10-Q, is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and
forms. The Company's disclosure controls and procedures are also designed to
ensure that such information is accumulated and communicated to management to
allow timely decisions regarding required disclosure. The Company's internal
controls are designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of its financial statements in
conformity with GAAP.
As disclosed in Note 1 of "Notes to Condensed Consolidated Financial
Statements" and described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company has taken certain actions as a
result of the internal review undertaken by the Audit Committee with respect to
certain accounting matters. These actions include: a restatement of the
Company's financial statements for fiscal 2000, 2001, 2002 and 2003 and the
first three quarters of fiscal 2004; a reclassification of certain categories of
revenue; and expanded disclosure with respect to various items in the 2004 Form
10-K.
In connection with the Audit Committee's internal review, since the end of
fiscal 2004, the Company has adopted and is in the process of implementing
various measures in connection with the Company's ongoing efforts to improve its
internal control processes and corporate governance. These measures are more
fully discussed under Item 9a of the 2004 Form 10-K. The Company is in the
process of implementing these control enhancements, which are intended to
improve the Company's control procedures and address the issues resulting in the
material weaknesses identified by the Company's independent auditor.
In connection with the completion of its audit with respect to the
Company's financial statements for fiscal 2004, including additional procedures
resulting from the Audit Committee's internal review, the Company's independent
auditor identified and communicated to the Company's management and the Audit
Committee a "material weakness" (as defined under standards established by the
American Institute of Certified Public Accountants) in the Company's entity
level controls relating to the Company's control environment through June 30,
2004. Further, the Company's independent auditor concluded that a material
weakness existed with respect to the timing of revenue recognition within the
Company's former Automation and Information Services segment. As described in
Note 1 in "Notes to Condensed Consolidated Financial Statements," the Company
became aware that some equipment confirmation forms were being executed prior to
completion of installation of Pyxis equipment. Equipment revenue is recognized
upon completion of equipment confirmation forms. See Note 1 in "Notes to
Condensed Consolidated Financial Statements" for a description of this revenue
recognition policy. The Company did not have controls in place to assure that
installations had in fact occurred before customer acceptance.
The Company's independent auditor also acknowledged that in connection with
the Audit Committee's internal review, since the end of fiscal 2004, the Company
has adopted and is in the process of implementing various measures in connection
with the Company's ongoing efforts to improve its internal control process and
corporate governance and address the Company's independent auditor's material
weakness conclusions.
The Company believes that the implementation of the enhancements identified
in Item 9a and Note 1 of "Notes to Consolidated Financial Statements" in the
2004 Form 10-K will correct these material weaknesses for future periods, and
the Company will continue to examine this issue for possible further
enhancements to its control processes.
Page 35
In addition, the Company and the Audit Committee will continue to implement
enhancements in the Company's control processes as necessary in response to
specific accounting and reporting issues arising out of the Audit Committee's
internal review. The Company will continue to develop policies and procedures
and reinforce compliance with existing policies and procedures in the Company's
effort to constantly improve its internal control environment.
The Company's management, including the Company's principal executive
officer and principal financial officer, does not expect that the Company's
disclosure controls and procedures and its internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by individual acts, collusion of two or more people, or
management override of the controls. The design of any system of controls is
also based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected. The Company monitors its disclosure
controls and procedures and internal controls on an ongoing basis and makes
modifications as necessary; the Company's intent in this regard is that the
disclosure controls and procedures and the internal controls will be maintained
as dynamic systems that change (including with improvements and corrections) as
conditions warrant.
Based on the evaluation of the effectiveness of the Company's disclosure
controls and procedures as of September 30, 2004, subject to the matters
described in this Item 4, the Company's principal executive officer and
principal financial officer have concluded that the material weakness with
respect to the timing of revenue recognition in the Company's former Automation
and Information Services segment remained in existence as of September 30, 2004,
and as such, such officers have further concluded that the Company's disclosure
controls and procedures needed improvement and were not effective as of
September 30, 2004. Other than the enhancements identified in Item 9a and Note 1
of "Notes to Consolidated Financial Statements" in the 2004 Form 10-K, which
enhancements the Company is in the process of implementing, there were no
changes in the Company's internal controls over financial reporting during the
quarter ended September 30, 2004 that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting. The Company believes, and its principal executive officer and
principal financial officer have concluded, that the implementation in fiscal
2005 of the improvements and enhancements described above should be sufficient
to provide for adequate and effective disclosure controls and procedures for
future periods.
Appearing as exhibits to this Form 10-Q are the certifications of the
Company's principal executive officer and the principal financial officer
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. The
disclosures set forth in this Item 4 contain information concerning the
evaluation of the Company's disclosure controls and procedures, and changes in
internal control over financial reporting, referred to in paragraphs 4(b) and
(c) of the certifications. This Item 4 should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The discussion herein is limited to certain of the legal proceedings in
which the Company is involved, including material developments to certain of
those proceedings. More of the legal proceedings in which the Company is
involved are described in "Item 3: Legal Proceedings" of the 2004 Form 10-K, and
are incorporated herein by reference. To the extent any statements therein
constitute "forward-looking statements," reference is made to Exhibit 99.01 of
this Form 10-Q and the section entitled "Risk Factors That May Affect Future
Results" within "Item 1: Business" of the 2004 Form 10-K.
The legal proceedings described in Note 8 of "Notes to Condensed
Consolidated Financial Statements" are incorporated herein by reference. Unless
otherwise indicated, all proceedings discussed in Note 8 remain pending.
Page 36
Vitamins Litigation
On May 17, 2000, R.P. Scherer Corporation (which was acquired by the
Company in August 1998, has been given the legal designation of Cardinal Health
409, Inc. and is referred to in this Form 10-Q as "Scherer") filed a civil
antitrust lawsuit in the United States District Court for the District of
Illinois against certain of its raw material suppliers and other alleged
co-conspirators alleging that the defendants unlawfully conspired to fix vitamin
prices and allocate vitamin production volume and vitamin customers in violation
of U.S. antitrust laws. The complaint seeks monetary damages and injunctive
relief. After the lawsuit was filed, it was consolidated for pre-trial purposes
with other similar cases. The case is pending in the United States District
Court for the District of Columbia (where it was transferred). As of September
30, 2004, Scherer has entered into settlement agreements with the majority of
the defendants in consideration of payments of approximately $144.7 million, net
of attorney fees, payments due to other interested parties and expenses withheld
prior to the disbursement of the funds to Scherer. The Company has settled all
known claims with all but one of the defendants, and the Company believes that
the total amount of any future recovery will not likely represent a material
amount. As more fully described in Note 1 of "Notes to Consolidated Financial
Statements" of the 2004 Form 10-K, the Company has decided, as a result of
discussions with the SEC staff, to reverse its previous recognition of estimated
recoveries from vitamin manufacturers for amounts overcharged in prior years and
to recognize the income from such recoveries as a special item in the period
cash was received from the manufacturers.
Antitrust Litigation against Pharmaceutical Manufacturers
During the past five years, numerous class action lawsuits have been filed
against certain prescription drug manufacturers alleging that the prescription
drug manufacturer, by itself or in concert with others, took improper actions to
delay or prevent generic drug competition against the manufacturer's brand name
drug. The Company has not been a name plaintiff in any of these class actions,
but has been a member of the direct purchasers' class (i.e., those purchasers
who purchase directly from these drug manufacturers). None of the class actions
have gone to trial, but some have settled in the past with the Company receiving
proceeds from the settlement fund. Currently, there are several such class
actions pending in which the Company is a class member. Total recoveries from
these actions through September 30, 2004 were $55.9 million. Additionally, in
October 2004, the Company received its share of the settlement proceeds for one
of these actions. Such amount, approximately $5.5 million, will be reported as a
special item in the Company's second quarter fiscal 2005 results. The Company is
unable at this time to estimate definitively future recoveries, if any, it will
receive as a result of these class actions.
SEC Investigation and U.S. Attorney Inquiry
On October 7, 2003, the Company received a request from the SEC, in
connection with an informal inquiry, for historical financial and related
information. The SEC's request sought a variety of documentation, including the
Company's accounting records for fiscal 2001 through fiscal 2003, as well as
notes, memoranda, presentations, e-mail and other correspondence, budgets,
forecasts and estimates.
On May 6, 2004, the Company was notified that the pending SEC informal
inquiry had been converted into a formal investigation. On June 21, 2004, as
part of the SEC's formal investigation, the Company received an SEC subpoena
that included a request for the production of documents relating to revenue
classification, and the methods used for such classification, in the Company's
Pharmaceutical Distribution business as either "Operating Revenue" or "Bulk
Deliveries to Customer Warehouses and Other." The Company has learned that the
U.S. Attorney's Office for the Southern District of New York has commenced an
inquiry that the Company understands relates to this same subject. On October
12, 2004, in connection with the SEC's formal investigation, the Company
received a subpoena from the SEC requesting the production of documents relating
to compensation information for specific current and former employees and
officers.
In connection with the SEC's inquiry, the Company's Audit Committee
commenced its own internal review in April 2004, assisted by independent
counsel. This internal review was prompted by documents contained in the
production to the SEC that raised issues as to certain accounting matters,
including but not limited to the establishment and adjustment of certain
reserves and their impact on quarterly earnings. The Audit Committee and its
independent counsel also have reviewed the revenue classification issue that is
the subject of the SEC's June 21, 2004 subpoena and are reviewing other matters
identified in the course of the Audit Committee's internal review. During
September and October 2004, the Audit Committee reached certain conclusions with
respect to findings as of the date of the determination from its internal
review, which are discussed in Note 1 of "Notes to Condensed Consolidated
Financial Statements" herein and Note 1 of "Notes to Consolidated Financial
Statements" contained in
Page 37
the 2004 Form 10-K, which was filed with the SEC on October 26, 2004. In
connection with the Audit Committee's conclusions, the Company made certain
reclassification and restatement adjustments to its fiscal 2004 and prior
historical financial statements, as described in Notes 1 and 2 of "Notes to
Consolidated Financial Statements" of the 2004 Form 10-K. The Audit Committee's
review with respect to the financial statement impact of the matters reviewed as
of the date of the determination is substantially complete. As the Company
continues to respond to the SEC's investigation and the Audit Committee's
internal review, there can be no assurance that additional restatements will not
be required or that the historical financial statements included in the 2004
Form 10-K or this Form 10-Q will not change or require amendment. In addition,
the Audit Committee may identify new issues, or make additional findings if it
receives additional information, that may impact the Company's financial
statements and the scope of the restatements described in the 2004 Form 10-K and
this Form 10-Q.
While the Company is continuing in its efforts to respond to the SEC's
investigation and the Audit Committee's internal review and provide all
information required, the Company cannot predict the outcome of the SEC
investigation or the U.S. Attorney inquiry. The outcome of the SEC
investigation, the U.S. Attorney inquiry and any related legal and
administrative proceedings could include the institution of administrative,
civil injunctive or criminal proceedings as well as the imposition of fines and
other penalties, remedies and sanctions.
Other Matters
In addition to the legal proceedings disclosed above, 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
as well as in connection with future and prior acquisitions. The Company intends
to vigorously defend itself against this other litigation and does not currently
believe that the outcome of this other litigation will have a material adverse
effect on the Company's financial position, liquidity or results of operations.
The health care industry is highly regulated, and government agencies
continue to increase their scrutiny over certain practices affecting government
programs and otherwise. From time to time, the Company receives subpoenas or
requests for information from various government agencies. The Company generally
responds to such subpoenas and requests in a timely and thorough manner, which
responses sometimes require considerable time and effort and can result in
considerable costs being incurred by the Company. The Company expects to incur
additional costs in the future in connection with existing and future requests.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases the Company made
of its Common Shares during the quarter ended September 30, 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------------------------------------------------------------------
Total Number of
Shares Purchased Approximate Dollar
Total Number as Part of Value of Shares that
of Shares Average Price Publicly Announced May Yet Be Purchased
Period Purchased Paid per Share Program Under the Program
- -----------------------------------------------------------------------------------------------------
July 1-31, 2004 10,894(1) $50.89 -- --
- -----------------------------------------------------------------------------------------------------
August 1-31, 2004 -- -- -- --
- -----------------------------------------------------------------------------------------------------
September 1-30, 2004 -- -- -- --
- -----------------------------------------------------------------------------------------------------
Total 10,894 $50.89 -- --
=====================================================================================================
(1) Reflects Common Shares owned and tendered by an employee to meet the
exercise price for an option exercise.
Page 38
ITEM 5: OTHER INFORMATION
(a) None.
(b) None.
The following information was not required to be disclosed on Form 8-K
during the quarter ended September 30, 2004, but rather is included in this
Quarterly Report on Form 10-Q pursuant to Exchange Act Rule 14a-5(f). The date
of the Company's Annual Meeting of Shareholders has been moved to December 8,
2004 (proxy materials were mailed on November 8, 2004). As a result, the
deadlines for submitting shareholder proposals within and outside the processes
of Rule 14a-8 were changed to July 11, 2004 and September 24, 2004,
respectively.
ITEM 6: EXHIBITS
Exhibit
Number Exhibit Description
------ -------------------
10.01 Amended and Restated Receivables Purchase Agreement, dated as of
May 21, 2004, among Cardinal Health Funding, LLC, as Seller,
Griffin Capital, LLC, as Servicer, the Conduits party thereto,
the Financial Institutions party thereto, the Managing Agents
party thereto and Bank One, NA (Main Office Chicago), as Agent
(confidential treatment has been requested for certain
confidential commercial and financial information, pursuant to
Rule 24b-2 under the Exchange Act)
10.02 Omnibus Amendment and Reaffirmation of Performance Guaranty,
dated as of August 18, 2004, by and among Cardinal Health
Funding, LLC, Griffin Capital, LLC, the Conduits party thereto,
the Financial Institutions party thereto, the Managing Agents
party thereto, Bank One, NA (Main Office Chicago), as the Agent,
and Cardinal Health, Inc. (confidential treatment has been
requested for certain confidential commercial and financial
information, pursuant to Rule 24b-2 under the Exchange Act)
10.03 Omnibus Limited Waiver and Second Omnibus Amendment and
Reaffirmation of Performance Guaranty, dated as of September 24,
2004, by and among Cardinal Health Funding, LLC, Griffin Capital,
LLC, the Conduits party thereto, the Financial Institutions party
thereto, the Managing Agents party thereto, Bank One, NA (Main
Office Chicago), as the Agent, and Cardinal Health, Inc.
(confidential treatment has been requested for certain
confidential commercial and financial information, pursuant to
Rule 24b-2 under the Exchange Act)
10.04 Amendment No. 3 to Amended and Restated Receivables Purchase
Agreement and Confirmations of Transfers, dated as of September
30, 2004, by and among Griffin Capital, LLC, Cardinal Health
Funding, LLC, each entity signatory thereto as a Conduit, each
entity signatory thereto as a Financial Institution, each entity
signatory thereto as a Managing Agent and Bank One, NA (Main
Office Chicago), as the Agent (confidential treatment has been
requested for certain confidential commercial and financial
information, pursuant to Rule 24b-2 under the Exchange Act)
10.05 Amended and Restated Performance Guaranty, dated as of September
30, 2004, executed by Cardinal Health, Inc. in favor of Cardinal
Health Funding, LLC
31.01 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.02 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.01 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.02 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Page 39
99.01 Statement Regarding Forward-Looking Information(1)
- --------------
(1) Included as an exhibit to the Company's Annual Report on Form
10-K filed October 26, 2004 (File No. 1-11373) and incorporated
herein by reference.
Page 40
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 9, 2004 /s/ Robert D. Walter
-------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
/s/ J. Michael Losh
-------------------------------------
J. Michael Losh
Chief Financial Officer
Page 41