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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 Quarter Ended September 30, 1996 Commission File Number 0-12591
Cardinal Health, Inc.
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(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.)
5555 GLENDON COURT, DUBLIN, OHIO 43016
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (614) 717-5000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No_______
The number of Registrant's Common Shares outstanding at the close of
business on October 25, 1996 was as follows:
Common Shares, without par value: 66,794,095
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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 Statements of Earnings for the Three Months Ended
September 30, 1996 and 1995........................................................ 3
Consolidated Balance Sheets at September 30, 1996 and June 30, 1996................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1996 and 1995........................................................ 5
Notes to Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 7
Part II. Other Information:
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Item 1. Legal Proceedings.................................................................. 9
Item 6. Exhibits and Reports on Form 8-K................................................... 10
* Items deleted are inapplicable.
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30,
1996 1995
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Net revenues $ 2,428,225 $ 2,096,845
Cost of products sold 2,245,962 1,932,799
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Gross margin 182,263 164,046
Selling, general and administrative expenses 111,644 107,358
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Operating earnings 70,619 56,688
Other income (expense):
Interest expense (6,559) (4,623)
Other, net -- primarily interest income 2,587 2,420
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Earnings before income taxes 66,647 54,485
Provision for income taxes 26,850 22,569
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Net earnings $ 39,797 $ 31,916
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Net earnings per Common Share:
Primary $ 0.61 $ 0.49
Fully diluted $ 0.61 $ 0.49
Weighted average number of Common
Shares outstanding:
Primary 65,236 64,628
Fully diluted 65,373 64,711
See notes to consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
September 30, June 30,
1996 1996
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ASSETS
Current assets:
Cash and equivalents $ 110,513 $ 287,802
Marketable securities available-for-sale 57,735 54,335
Trade receivables 604,947 564,881
Current portion of net investment in sales-type leases 37,477 37,953
Merchandise inventories 1,548,623 1,238,238
Prepaid expenses and other 54,766 56,568
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Total current assets 2,414,061 2,239,777
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Property and equipment, at cost 276,775 265,584
Accumulated depreciation and amortization (117,176) (112,122)
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Property and equipment, net 159,599 153,462
Other assets:
Net investment in sales-type leases, less current portion 108,666 111,604
Goodwill and other intangibles 91,946 92,428
Other 69,458 83,824
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Total $ 2,843,730 $ 2,681,095
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 104,561 $ 106,007
Accounts payable 1,235,904 1,126,065
Other accrued liabilities 132,796 153,585
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Total current liabilities 1,473,261 1,385,657
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Long-term obligations, less current portion 263,655 265,144
Deferred income taxes and other liabilities 114,258 99,584
Shareholders' equity:
Common Shares, without par value 508,466 484,446
Retained earnings 493,573 455,690
Common Shares in treasury, at cost (5,846) (5,426)
Other (3,637) (4,000)
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Total shareholders' equity 992,556 930,710
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Total $ 2,843,730 $ 2,681,095
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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 September 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 39,797 $ 31,916
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 8,523 7,129
Provision for bad debts 1,870 1,623
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (41,936) (54,858)
Increase in merchandise inventories (310,385) (51,215)
Increase (decrease) in net investment in sales-type leases 3,414 (10,441)
Increase in accounts payable 109,839 75,125
Other operating items, net 9,563 30,713
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Net cash provided by (used in) operating activities (179,315) 29,992
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired -- (26,982)
Proceeds from sale of property and equipment 1,167 --
Additions to property and equipment (14,487) (12,145)
Purchase of marketable securities available-for-sale (3,400) (25,485)
Proceeds from sale of marketable securities available-for-sale -- 27,922
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Net cash used in investing activities (16,720) (36,690)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity -- 16,800
Reduction of long-term obligations (2,935) (1,513)
Proceeds from issuance of Common Shares 19,120 2,763
Tax benefit of stock options 4,900 --
Dividends paid on Common Shares (1,919) (2,346)
Purchase of treasury shares (420) (164)
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Net cash provided by financing activities 18,746 15,540
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (177,289) 8,842
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 287,802 64,589
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CASH AND EQUIVALENTS AT END OF PERIOD $ 110,513 $ 73,431
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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 contained herein have been restated to give retroactive
effect to the mergers with Medicine Shoppe International, Inc.
("Medicine Shoppe") on November 13, 1995 and Pyxis Corporation
("Pyxis") on May 7, 1996. Such business combinations were accounted
for under the pooling-of-interests method (see Note 3).
These consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments necessary for a fair presentation have been included. All
such adjustments are of a normal and recurring nature.
The consolidated financial statements included herein should be read
in conjunction with the audited consolidated financial statements and
related notes contained in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 1996.
Note 2. Net 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 from the date of grant, computed
using the treasury stock method.
Note 3. As a result of the mergers with Medicine Shoppe and Pyxis in fiscal
1996, the Company recorded costs totaling $67.3 million ($47.8
million, net of tax). During the three months ended September 30,
1996, the Company paid approximately $2.8 million related to these
costs, and has paid an aggregate amount of approximately $24.9 million
through September 30, 1996. The Company's current estimates of the
merger costs ultimately to be incurred are not materially different
from the amounts originally recorded. If additional costs are
incurred, such items will be expensed in subsequent periods.
Note 4. On July 24, 1996, the Company announced that it had entered into a
definitive merger agreement with PCI Services, Inc. ("PCI"). The merger
was approved by PCI shareholders and completed on October 11, 1996. The
merger will be accounted for as a pooling-of-interests. In the merger,
the Company issued approximately 2,092,000 Common Shares to PCI
shareholders and PCI's outstanding stock options were converted into
options to purchase approximately 153,000 Common Shares. The Company
expects to record a one-time charge to reflect transaction and other
costs incurred as a result of the PCI merger in the second quarter of
fiscal 1997. If the merger had been consummated as of September 30,
1996, the impact on the Company's revenue, net income and earnings per
share for the periods disclosed herein would not have been significant.
Note 5. On October 29, 1996, the Board of Directors of the Company declared
a three-for-two stock split which will be effected as a stock dividend
and distributed on December 16, 1996 to shareholders of record on
December 2, 1996. The effect of the split will be reflected in the
financial statements in the second quarter of fiscal 1997.
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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 combinations with
Medicine Shoppe on November 13, 1995 and Pyxis on May 7, 1996 (see Note 3 of
"Notes to Consolidated Financial Statements"). This discussion and analysis is
concerned with material changes in financial condition and results of operations
for the Company's consolidated balance sheets as of September 30, 1996 and June
30, 1996, and for the consolidated statements of earnings for the three months
ended September 30, 1996 and 1995.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks, uncertainties and other factors which could cause actual results to
materially differ from those projected or implied. The most significant of such
risks, uncertainties and other factors are described in Exhibit 99.01 to this
Form 10-Q.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased 16% for the first quarter of fiscal
1997 primarily due to internal revenue growth from pharmaceutical distribution
activities, including the addition of new customers, increased sales to existing
customers and price increases. Specifically contributing to the first quarter
increase was the expansion of the Company's existing relationship with its
largest customer, Kmart Corporation ("Kmart"), as well as opportunities created
by the deterioration of the financial condition of a major competitor.
Gross Margin. As a percentage of net revenues, gross margin for the
three months ended September 30, 1996, decreased to 7.51% from 7.82% for the
comparative quarter. The decrease in gross margin is primarily due to the shift
in net revenues mix caused by significant increases in the relatively lower
margin pharmaceutical distribution activities (see "Net Revenues" above). The
impact of this shift was partially offset by the impact of increased
merchandising and marketing programs with customers and suppliers. The gross
margin continues to be affected by a highly competitive market and a greater
mix of high volume customers, where a lower cost of distribution and better
asset management enable the Company to offer lower selling margins.
Selling, General and Administration Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.60% for
the three months ended September 30, 1996 from 5.12% for the prior period. The
improvement reflects economies associated with the Company's revenue growth from
pharmaceutical distribution activities, as well as significant productivity
gains resulting from cost control efforts and the consolidation and selective
automation of distribution facilities.
Interest Expense. The increase in interest expense of $1.9 million in the
first quarter of fiscal 1997 compared to fiscal 1996 is due to the Company's
issuance of $150 million, 6% Notes due 2006, in a public offering in January
1996.
Provision for Income Taxes. The Company's effective tax rate decreased from
the comparative quarter primarily due to the impact of income earned on
tax-exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $940.8 million at September 30, 1996 from
$854.1 million at June 30, 1996. This increase included additional investments
in merchandise inventories and trade receivables of $310.4 million and $40.1
million, respectively. Offsetting the increase in working capital was a decrease
in cash and equivalents of $177.3 million and an increase in accounts payable of
$109.8 million. Increases in merchandise inventories and accounts payable
reflects the higher level of current and anticipated business volume in
pharmaceutical distribution activities, including inventories required by the
new pharmaceutical services agreement with Kmart. The increase in trade
receivables is consistent with the Company's net revenues growth (see "Net
Revenues" above). The change in cash and equivalents is due to the timing of
inventory purchases and related payments.
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Property and equipment, at cost increased by $11.2 million from June 30,
1996. The property acquired included increased investment in management
information systems and customer support systems, as well as the construction
and automation of distribution facilities.
Shareholders' equity increased to $992.6 million at September 30, 1996 from
$930.7 million at June 30, 1996, primarily due to net earnings of $39.8 million
and issuances of Common Shares resulting from stock option exercises and the
related tax benefits in the amount of $24.0 million during the first quarter of
fiscal 1997.
OTHER
On July 24, 1996, the Company announced that it had entered into a
definitive merger agreement with PCI Services, Inc. ("PCI"). The merger was
approved by PCI shareholders and completed on October 11, 1996. The merger will
be accounted for as a pooling-of-interests. In the merger, the Company issued
approximately 2,092,000 Common Shares to PCI shareholders and PCI's outstanding
stock options were converted into options to purchase approximately 153,000
Common Shares. The Company expects to record a one-time charge to reflect
transaction and other costs incurred as a result of the PCI merger in the second
quarter of fiscal 1997 (see Note 4 of "Notes to Consolidated Financial
Statements").
On October 29, 1996, the Board of Directors of the Company declared a
three-for-two stock split which will be effected as a stock dividend and
distributed on December 16, 1996 to shareholders of record on December 2, 1996.
The effect of the split will be reflected in the financial statements in the
second quarter of fiscal 1997.
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PART II. OTHER INFORMATION
Item 1: Legal Proceedings
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), as well as other pharmaceutical wholesalers, 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 was filed which included allegations
that the wholesaler defendants, including the Company and Whitmire, conspired
with manufacturers to inflate prices by using a chargeback pricing system. In
addition to the Federal court cases described above, the Company and Whitmire
have also been named as defendants in a series of state court cases alleging
similar claims under various state laws regarding the sale of brand name
prescription drugs. These lawsuits are described in "Item 1 - Legal Proceedings"
of Part II of the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, which was filed with the Securities and Exchange Commission and
is incorporated herein by reference. On November 9, 1995, the Company, along
with the other wholesaler defendants, filed a motion for summary judgment in the
Brand Name Prescription Drug Litigation. On April 4, 1996, summary judgment was
granted in favor of the Company and the other wholesaler defendants. The
plaintiffs have appealed this decision. The Company believes that the
allegations against the Company and Whitmire in such litigation are without
merit, and it intends to contest such allegations vigorously. The Company does
not believe that the outcome of these lawsuits will have a material adverse
effect on the Company's financial condition or results of operations.
The Company also becomes involved from time to time in ordinary routine
litigation incidental to its business, none of which is expected to have a
material adverse effect on the Company's financial condition or results of
operations.
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Item 6: Exhibits and Reports on Form 8-K:
(a) Listing of Exhibits:
Exhibit 10.01 Employment Agreement dated July 23, 1996, among
PCI Services, Inc., Daniel F. Gerner, and the
Registrant.*
Exhibit 10.02 Employment Agreement dated August 26, 1995, among
Medicine Shoppe International, Inc., David A.
Abrahamson, and the Registrant.*
Exhibit 10.03 Pharmaceutical Services Agreement, dated as of
August 1, 1996, between Kmart Corporation and Cardinal
Health.
Exhibit 11.01 Computation of Per Share Earnings.
Exhibit 27.01 Financial Data Schedule.
Exhibit 99.01 Statement Regarding Forward-Looking Information.
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* Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
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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 6, 1996 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)
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