1
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 Quarter Ended September 30, 1994 Commission File Number 0-12591
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CARDINAL HEALTH, INC.
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(Formerly known as Cardinal Distribution, Inc.)
(Exact name of registrant as specified in its charter)
Ohio 31-0958666
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
655 METRO PLACE SOUTH, SUITE 925, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (614) 761-8700
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
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The number of Registrant's Common Shares outstanding at November 2,
1994 was as follows:
common shares, without par value ("Class A Common Shares") 41,717,532
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CARDINAL HEALTH, INC.
AND SUBSIDIARIES
Index
Page No.
Part I. Financial Information:
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Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1994 and
June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Earnings for the Three Months
Ended September 30, 1994 and September 30, 1993 . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1994 and September 30, 1993 . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-9
Part II. Other Information:
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Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 10-13
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
September 30, 1994 June 30, 1994
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(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 126,781 $ 54,941
Trade receivables 473,137 340,911
Merchandise inventories 962,251 868,210
Prepaid expenses and other 26,656 23,062
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Total current assets 1,588,825 1,287,124
Property and equipment - at cost: 145,300 119,375
Accumulated depreciation and amortization (72,839) (59,346)
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Property and equipment-net 72,461 60,029
Other assets 65,867 48,449
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Total $1,727,153 $1,395,602
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $ $ 25,000
Current portion of long-term obligations 3,517 2,929
Accounts payable 937,215 705,702
Other accrued liabilities 93,753 82,411
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Total current liabilities 1,034,485 816,042
Long-term obligations - less current portion 211,491 210,086
Other liabilities 143 980
Shareholders' equity:
Common Shares-without par value 343,574 255,458
Retained earnings 144,623 120,399
Common Shares in treasury, at cost (3,438) (3,390)
Unamortized restricted stock awards (3,725) (3,973)
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Total shareholders' equity 481,034 368,494
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Total $1,727,153 $ 1,395,602
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<FN>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
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September 30, September 30,
1994 1993
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Net sales $1,818,687 $1,291,470
Cost of products sold 1,715,330 1,213,695
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Gross margin 103,357 77,775
Selling, general & administrative expenses (72,201) (53,556)
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Operating earnings 31,156 24,219
Other income (expense):
Interest expense (3,856) (4,227)
Other, net 401 1,242
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Earnings before income taxes 27,701 21,234
Provision for income taxes (11,676) (8,908)
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Net earnings 16,025 12,326
Preferred dividends declared/accretion (520)
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Earnings available for Common Shares $ 16,025 $ 11,806
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Earnings per Common Share:
Primary $ 0.39 $ 0.30
Fully diluted $ 0.39 $ 0.30
Weighted average number of Common
Shares outstanding:
Primary 40,614 39,028
Fully diluted 40,678 39,109
<FN>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
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September 30, September 30,
1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 16,025 $ 12,326
Adjustments to reconcile net earnings to net cash
from operations:
Depreciation and amortization 5,166 4,181
Provision for bad debts 1,650 933
Change in operating assets and liabilities
net of effects from acquisitions:
Increase in trade receivables (78,421) (20,238)
Increase in merchandise inventories (48,552) (70,893)
Increase in accounts payable 139,706 70,659
Other operating items - net (1,586) (13,762)
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Net cash provided by (used in) operating activities 33,988 (16,794)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (15,784)
Additions to property and equipment (6,833) (2,577)
Purchase of marketable securities (56,095)
Proceeds from sale of marketable securities 75,195
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Net cash provided by (used in) investing activities (22,617) 16,523
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term activity (25,000) (408)
Reduction of long-term obligations (1,012) (11,573)
Proceeds from issuance of Common Shares 70,792 54
Income tax credited to shareholders' equity 16,872
Dividends on common and preferred shares and cash paid
in lieu of fractional shares (1,135) (1,086)
Purchase of treasury shares (48)
Debenture conversion costs charged to shareholders' equity (13)
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Net cash provided by (used in) financing activities 60,469 (13,026)
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 71,840 (13,297)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 54,941 61,210
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CASH AND EQUIVALENTS AT END OF YEAR $ 126,781 $ 47,913
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Supplemental Disclosure of Noncash Investing & Financing Activities:
Debentures converted to Common Shares $ 74,920
Unamortized debenture offering costs charged
to Common Shares (1,767)
<FN>
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. The consolidated financial statements of the Company include the
accounts of all majority-owned subsidiaries and all significant
intercompany amounts have been eliminated. The consolidated
financial statements have been prepared to give retroactive effect to
the pooling-of-interests business combination with Whitmire
Distribution Corporation ("Whitmire") on February 7, 1994 (see Note
3). The term "Cardinal", as used herein, refers to Cardinal Health,
Inc. and its subsidiaries prior to the Whitmire Merger.
The consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q, and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related notes
of the Company contained in the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994.
Note 2. Earnings per Common Share are based on the weighted average number of
Common Shares outstanding during each period and the dilutive effect
of stock options and warrants from the date of grant computed using
the treasury stock method.
The Company paid a 25% stock dividend on June 30, 1994, to effect a
five-for-four split of the Company's Common Shares. All share and
per share amounts included in the consolidated financial statements
have been adjusted to reflect this stock split.
Note 3. On January 27, 1994, shareholders of Cardinal and Whitmire approved
and adopted the Agreement and Plan of Reorganization dated October
11, 1993 (the "Reorganization Agreement"), pursuant to which Cardinal
Merger Corp., a wholly owned subsidiary of Cardinal, was merged with
and into Whitmire effective February 7, 1994. In the merger, which
was accounted for as a pooling-of-interests business combination,
holders of outstanding Whitmire common stock received an aggregate of
approximately 6,802,000 Class A Common Shares and approximately
1,861,000 Class B common shares, without par value, in exchange for
all of the previously outstanding common stock of Whitmire. In
addition, Whitmire's outstanding stock options were converted into
options to purchase an aggregate of approximately 1,721,000
additional Class A Common Shares pursuant to the terms of such
options and the Reorganization Agreement.
Note 4. On July 1, 1994, the Company purchased all of the common stock of
Humiston-Keeling, Inc., a Calumet City, Illinois-based wholesale drug
distributor, in a transaction accounted for by the purchase method.
Had the purchase occurred at the beginning of Fiscal 1994, operating
results on a pro forma basis would not have been significantly
different.
Note 5. On July 18, 1994, the Company issued Class A Common Shares in
exchange for all of the common shares of Behrens Inc., a Waco, Texas-
based wholesale drug distributor, in a transaction accounted for as a
pooling-of-interests business combination. The impact of the Behrens
combination, on both an historical and pro forma basis, is not
significant. Accordingly, prior periods have not been restated for
the Behrens combination.
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Note 6. On September 26, 1994, 8,050,000 of the Company's Common Shares were
sold pursuant to a public offering. Approximately 1,867,000 Common
Shares (the "New Shares") were sold by the Company, and approximately
6,183,000 Common Shares (the "Existing Shares") were sold by certain
shareholders of the Company. Net proceeds received by the Company of
approximately $70 million from the sale of the New Shares will be
used to finance working capital growth and for other general
corporate purposes. The Company did not receive any of the proceeds
from the sale of the Existing Shares.
Note 7. The net earnings and earnings per Common Share, adjusted on a pro
forma basis to reflect the redemption of Whitmire's preferred stock
pursuant to the terms of the Reorganization Agreement (see Note 3),
would have been $12,201,000 and $0.31, respectively, for the three
months ended September 30, 1993. Such redemption is assumed to have
been funded from the liquidation of investments in tax-exempt
marketable securities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis presented below has been prepared
to give retroactive effect to the pooling-of-interests business combination
with Whitmire on February 7, 1994 (see Note 3 of "Notes to Consolidated
Financial Statements"). The discussion and analysis presented below is
concerned with material changes in financial condition and results of
operations for the Company's consolidated balance sheets as of September 30,
1994 and June 30, 1994, and for the consolidated statements of earnings for the
three months ended September 30, 1994 and September 30, 1993. Unless indicated
to the contrary for purposes of this discussion, all references to "1995" and
"1994" shall mean the Company's fiscal years ending June 30, 1995 and June 30,
1994, respectively.
NET SALES. Net sales for the first quarter of Fiscal 1995 increased
41% compared to the same period last year. The increase was due to internal
business growth of 30% and sales resulting from the acquisitions of
Humiston-Keeling, Inc. (see Note 4 of "Notes to Consolidated Financial
Statements"), Behrens Inc. (see Note 5 of "Notes to Consolidated Financial
Statements"), and PRN Services, Inc. The internal business growth in the first
quarter resulted primarily from the addition of new customers (partially as a
result of expanded sales territories), increased sales to existing customers
and price increases.
GROSS MARGIN. As a percentage of net sales, gross margin declined to
5.68% in the first quarter of Fiscal 1995 from 6.02% in the first quarter of
Fiscal 1994. The decrease in the gross margin percentage was due to (a) lower
selling margin rates, reflecting a more competitive market and a greater mix of
higher volume customers, where a lower cost of distribution and better asset
management and cash flow enabled the Company to offer lower selling margins,
and (b) reduced purchasing gains associated with lower drug price inflation.
The reduced purchasing gains were partially offset by a lower LIFO charge. The
Company expects the decline in gross margin rates to continue, but at a more
moderate rate.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses improved as a percentage of net sales to 3.97% in the
first quarter of Fiscal 1995 versus 4.15% in the prior year. The improvements
are due primarily to economies associated with the Company's significant sales
growth, particularly with major customers where support costs are generally
lower, and to productivity improvements.
LIQUIDITY AND CAPITAL RESOURCES. Net working capital increased to
$554.3 million at September 30, 1994 from $471.1 million at June 30, 1994, and
included increased investments in trade receivables, merchandise inventories,
and cash and equivalents of $132.2 million, $94.0 million and $71.8 million
respectively, and a reduction of notes payable - banks of $25 million, offset
primarily by an increase in accounts payable of $231.5 million. The increase
in trade receivables was due primarily to internal business growth (see "Net
Sales" above) and the acquisitions of Humiston-Keeling and Behrens (see Notes 4
and 5 of "Notes to Consolidated Financial Statements"). The increases in
merchandise inventories and accounts payable reflect the timing of seasonal
purchases and related payments and the acquisitions of Humiston-Keeling and
Behrens. The increase in cash and equivalents was due primarily to (a) the net
proceeds received from the issuance of the Company's Common Shares pursuant to
a public offering (see Note 6 of "Notes to Consolidated Financial Statements"),
and (b) the increase in accounts payable offset by (i) the increased
investments in merchandise inventories and trade receivables, as described
above, (ii) the repayment of $25 million outstanding under the Company's
line-of-credit arrangements, and (iii) net cash paid of approximately $15.8
million to acquire all of the common stock of Humiston-Keeling.
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Shareholders' equity increased to $481.0 million at September 30, 1994
from $368.5 million at June 30, 1994 due primarily to (a) the issuance of
approximately 1,867,000 of the Company's Common Shares pursuant to a public
offering (see Note 6 of "Notes to Consolidated Financial Statements"), (b) the
recording of tax benefits related to the exercise of stock options of
approximately $16.9 million, (c) net earnings of approximately $16.0 million in
the first quarter of Fiscal 1995, and (d) the addition of Behrens shareholders'
equity of approximately $9.8 million at July 18, 1994 (the date of the
pooling-of-interests business combination) (see Note 5 of "Notes to
Consolidated Financial Statements"), less dividends paid by the Company of
approximately $1.1 million.
The Company has line-of-credit arrangements with various bank sources
aggregating $315 million, of which $100 million is represented by committed
line-of-credit arrangements and the balance is uncommitted. None of the
available lines-of-credit of $315 million were in use at September 30, 1994.
On May 6, 1993, the Company filed with the Securities and Exchange
Commission a Registration Statement for the public offering, from time-to-time,
of its debt securities (the "Debt Securities") issuable in one or more series
in an aggregate principal amount not to exceed $150 million. On February 23,
1994, the Company sold $100 million of 6.5% Notes due 2004, the net proceeds of
which were used for general corporate purposes, including the repayment of bank
lines of credit incurred as part of the Whitmire Merger. At September 30,
1994, $50 million of the Debt Securities remain issuable.
The Company believes that it has adequate resources at its disposal to
meet currently anticipated capital expenditures, routine business growth and
expansion, and current and projected debt service, including the additional
liquidity and capital requirements associated with recent business combinations
(see Notes 3, 4 and 5 of "Notes to Consolidated Financial Statements").
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In November 1993, Cardinal and Whitmire were each named as
defendants in a series of purported class action antitrust
lawsuits which were later consolidated and transferred by the
Judicial Panel for Multi District Litigation to the United
States District Court for the Northern District of Illinois (the
"Brand Name Prescription Drug Litigation"). Subsequent to the
consolidation, a new consolidated complaint ("amended complaint")
was filed which included allegations that the wholesaler
defendants, including Cardinal and Whitmire, conspired with
manufacturers to inflate prices by using a chargeback pricing
system. Cardinal and Whitmire have filed an answer denying the
allegations in the amended complaint. In addition to the federal
court case described above, Whitmire has been named as a
defendant in a series of state court cases alleging similar
claims under various state laws regarding the sale of Brand Name
Prescription Drugs.
Effective October 26, 1994, the Company entered into a
Judgment Sharing Agreement in the Brand Name Prescription Drug
Litigation with other wholesaler and pharmaceutical manufacturer
defendants. Under the Judgment Sharing Agreement: (A) the
manufacturer defendants agreed to reimburse the wholesaler
defendants for litigation costs incurred, up to an aggregate of
$9 million; and (B) if a judgment is entered into against both
manufacturers and wholesalers, the total exposure for joint and
several liability of the Company is limited to the lesser of 1%
of such judgment or one million dollars. In addition, the Company
has released any claims which it might have had against the
manufacturers for the claims presented by the plaintiffs in the
Brand Name Prescription Drug Litigation. The Judgment Sharing
Agreement covers the federal court litigation as well as the
cases which have been filed in various state courts.
The Company believes that both the federal and state court
allegations against Cardinal and Whitmire are without merit, and
it intends to contest such allegations vigorously.
Item 6. Exhibits and Reports on Form 8-K.
(a) Listing of Exhibits:
Exhibit 11.01 Computation of Fully Diluted Earnings Per Share
Exhibit 27.01 Financial Data Table
(b) Reports on Form 8-K:
(i) On September 13, 1994, the Company filed a current report
on Form 8-K stating that on July 18, 1994, it issued
common shares, without par value, in exchange for all of
the common shares of Behrens Inc. ("Behrens") in a
transaction accounted for as a pooling-of-interests
business combination. Included in the Form 8-K were
unaudited financial results combining the operating
results of the Company and Behrens for the thirty days
ended August 17, 1994, in order to satisfy the
requirements for publication of combined results of
operations with respect to affiliate trading restrictions
as specified in such accounting treatment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: November 2, 1994 By: /s/ Robert D. Walter
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Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ David Bearman
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David Bearman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)