1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997 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
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The number of Registrant's Common Shares outstanding at the close of
business on October 31, 1997 was as follows:
Common Shares, without par value: 109,345,550
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
Page No.
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Part I. Financial Information:
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Item 1. Financial Statements:
Consolidated Statements of Earnings for the Three Months Ended
September 30, 1997 and 1996........................................................ 3
Consolidated Balance Sheets at September 30, 1997 and June 30, 1997................ 4
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996........................................................ 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
<FN>
* Items omitted are not applicable.
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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,
1997 1996
----------------- -----------------
Net revenues $ 2,869,971 $ 2,535,476
Cost of products sold 2,647,506 2,338,348
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Gross margin 222,465 197,128
Selling, general and administrative expenses 133,520 124,156
----------------- -----------------
Operating earnings 88,945 72,972
Other income (expense):
Interest expense (5,005) (6,606)
Other, net-- primarily interest income 4,962 2,837
----------------- -----------------
Earnings before income taxes 88,902 69,203
Provision for income taxes 34,672 27,802
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Net earnings $ 54,230 $ 41,401
================= =================
Earnings per Common Share:
Primary $ 0.49 $ 0.39
Fully diluted $ 0.49 $ 0.39
Weighted average number of Common Shares outstanding:
Primary 110,777 105,945
Fully diluted 110,940 106,150
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,
1997 1997
--------------- ----------------
ASSETS
Current assets:
Cash and equivalents $ 180,515 $ 243,061
Trade receivables 691,063 672,164
Current portion of net investment in sales-type leases 57,387 40,720
Merchandise inventories 1,627,640 1,453,120
Prepaid expenses and other 111,648 94,668
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Total current assets 2,668,253 2,503,733
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Property and equipment, at cost 491,663 476,544
Accumulated depreciation and amortization (206,493) (199,869)
--------------- ----------------
Property and equipment, net 285,170 276,675
Other assets:
Net investment in sales-type leases, less current portion 120,507 119,532
Goodwill and other intangibles 120,948 122,104
Other 78,007 86,502
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Total $ 3,272,885 $ 3,108,546
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 22,329 $ 22,159
Current portion of long-term obligations 5,095 6,158
Accounts payable 1,239,463 1,135,951
Other accrued liabilities 243,383 244,491
--------------- ----------------
Total current liabilities 1,510,270 1,408,759
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Long-term obligations, less current portion 277,882 277,766
Deferred income taxes and other liabilities 89,580 89,821
Shareholders' equity:
Common Shares, without par value 656,596 645,051
Retained earnings 750,798 699,366
Common Shares in treasury, at cost (6,432) (6,373)
Other (5,809) (5,844)
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Total shareholders' equity 1,395,153 1,332,200
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Total $ 3,272,885 $ 3,108,546
=============== ================
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,
1997 1996
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 54,230 $ 41,401
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 15,243 10,829
Provision for bad debts 3,057 2,013
Change in operating assets and liabilities
Increase in trade receivables (21,956) (46,348)
Increase in merchandise inventories (174,520) (319,777)
(Increase) decrease in net investment in sales-type leases (17,642) 3,414
Increase in accounts payable 103,512 114,570
Other operating items, net (10,168) 13,434
--------------- ---------------
Net cash used in operating activities (48,244) (180,464)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 315 1,324
Additions to property and equipment (20,783) (14,487)
Purchase of marketable securities available-for-sale -- (3,400)
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Net cash used in investing activities (20,468) (16,563)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowing activity 170 --
Reduction of long-term obligations (2,332) (2,936)
Proceeds from issuance of Common Shares 11,093 19,171
Tax benefit of stock options -- 5,075
Dividends paid on Common Shares (2,722) (1,919)
Purchase of treasury shares (43) (1,526)
--------------- ---------------
Net cash provided by financing activities 6,166 17,865
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NET DECREASE IN CASH AND EQUIVALENTS (62,546) (179,162)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 243,061 304,281
--------------- ---------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 180,515 $ 125,119
=============== ===============
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. 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, 1997.
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. During the three months ended September 30, 1997, the Company
expended approximately $4.8 million related to the costs previously
recorded at the time of various mergers. The Company's current
estimates of the merger-related costs ultimately to be expended are
not materially different from the amounts originally recorded.
Note 4. On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"),
pursuant to which MediQual will become a wholly owned subsidiary of
the Company in a stock-for-stock merger expected to be accounted for
as a pooling-of-interests for financial reporting purposes. In
connection with the merger, the Company estimates that it will issue
approximately 0.6 million Common Shares. Upon consummation of the
merger, the Company will record a merger-related charge to reflect
transaction and other costs incurred as a result of the merger. The
amount of this charge is not expected to be significant. The merger is
expected to be completed by January 31, 1998, subject to the
satisfaction of certain conditions, including approval by shareholders
of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement
with Bergen Brunswig Corporation ("Bergen"), a distributor of
pharmaceuticals and medical-surgical supplies, pursuant to which
Bergen will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a
pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive a fixed
exchange ratio of .775 of a Company Common Share in exchange for each
outstanding common share of Bergen. The Company will issue
approximately 40 million Common Shares in the transaction and will
also assume approximately $418 million in long-term debt. Upon
consummation of the merger, the Company will record a merger-related
charge to reflect transaction and other costs incurred as a result of
the merger. Since the merger has not yet been consummated and
transition plans are currently being developed, the amount of this
charge cannot be estimated at this time. The merger is expected to be
completed by the end of the third quarter of fiscal 1998, subject to
the satisfaction of certain conditions, including approvals by the
stockholders of Bergen and the Company's shareholders, and the receipt
of certain regulatory approvals.
Note 5. In February 1997, the Financial Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which simplifies the computation of earnings per
share, and will require retroactive adoption in the quarter ending
December 31, 1997. Had the new standard been applied in the current
quarter, "basic" earnings per share (replaces primary) would have been
$.01 higher than primary and "diluted" earnings per share would have
been the same as fully diluted in the current presentation.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", both of which will require
adoption in fiscal 1999. These new statements will not impact the
Company's financial statements, but may require additional
disclosures. The Company is presently evaluating the applicability of
SFAS No.'s 130 and 131 to its operations.
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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 is concerned with
material changes in financial condition and results of operations for the
Company's consolidated balance sheets as of September 30, 1997 and June 30,
1997, and for the consolidated statements of earnings for the three months ended
September 30, 1997 and 1996. This 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, 1997.
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 the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 and
are incorporated herein by reference. The Company disclaims any obligation to
update any forward-looking statement.
RESULTS OF OPERATIONS
Net Revenues. Net revenues for the first quarter of fiscal 1998 increased
13% as compared to the first quarter in fiscal 1997. Distribution businesses
(those whose primary operations involve the wholesale distribution of
pharmaceuticals, representing 91% of total revenues) grew at a rate of 11% while
Service businesses (those that provide services to the healthcare industry
through pharmacy franchising, pharmacy automation equipment, pharmacy
management, and pharmaceutical packaging) grew at a rate of 46% primarily on the
strength of the Company's pharmacy automation and pharmacy management
businesses. The majority of the revenue increase (approximately 65%) came from
existing customers in the form of increased volume and price increases.
The remainder of the growth came from the addition of new customers.
Gross Margin. For the three months ended September 30, 1997 and 1996, gross
margin as a percentage of net revenues was 7.75% and 7.77%, respectively. The
gross margin stability is a result of a higher mix of Services revenues in the
first quarter of fiscal 1998 versus the same period of a year ago (9% in fiscal
1998 versus 7% in fiscal 1997) offset by a decline in Distribution gross margin.
The Service businesses gross margin rate was 30.72% versus 34.29% last year. The
decrease is primarily a function of the relatively higher revenue growth
experienced in the pharmacy management operations, which have lower margins
relative to the other Service businesses. The Distribution gross margin declined
from 5.69% in the first quarter of fiscal 1997 to 5.43% in the current period.
This decline in Distribution gross margin continues to reflect 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 to its customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net revenues improved to 4.65% for
the three months ended September 30, 1997 from 4.89% for the prior period. The
improvement reflects economies associated with the Company's revenue growth, as
well as significant productivity gains resulting from continued cost control
efforts and the consolidation and selective automation of operating facilities.
Similar to gross margins, the shift in the current quarter to a greater mix of
Services business caused a higher level of expenses (Services have a 17.93%
ratio of expenses to revenues compared to Distribution with a ratio of 3.06%).
The 8% growth in selling, general and administrative expenses experienced in the
first quarter of fiscal 1998 was due primarily to increases in personnel costs
and depreciation expense.
Other Income (Expense). The decrease in interest expense of $1.6 million in
the first quarter of fiscal 1998 compared to fiscal 1997 is primarily due to
extinguishment of the Company's $100 million 8% Notes on March 1, 1997. The
increase in other income is due to higher investment income, in part due to
better asset management in the current quarter when only $63 million of cash was
used, compared to a use of $179 million in the first quarter of fiscal 1997.
Provision for Income Taxes. The Company's provision for income taxes
relative to pretax earnings was 39% and 40% for the three months ended September
30, 1997 and September 30, 1996, respectively. The decrease in the effective tax
rate is primarily due to a reduction in the state effective tax rate as a result
of the change in the Company's business mix.
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LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $1,158 million at September 30, 1997 from
$1,095 million at June 30, 1997. This increase included additional investments
in merchandise inventories and trade receivables of $174.5 million and $18.9
million, respectively. Offsetting the increases in working capital was a
decrease in cash and equivalents of $62.5 million and an increase in accounts
payable of $103.5 million. The increase in merchandise inventories reflects the
higher level of current and anticipated business volume in pharmaceutical
distribution activities. The increase in trade receivables is consistent with
the Company's net revenues growth (see "Net Revenues" above). The change in cash
and equivalents and accounts payable is due primarily to the timing of inventory
purchases and related payments.
Property and equipment, at cost, increased by $15.1 million from June 30,
1997. The property acquired included increased investment in management
information systems and customer support systems.
Shareholders' equity increased to $1,395.2 million at September 30, 1997
from $1,332.2 million at June 30, 1997, primarily due to net earnings of $54.2
million and the investment of $11.1 million by employees of the Company through
various stock incentive plans during the first quarter of fiscal 1998.
OTHER
On May 27, 1997, the Company announced that it had entered into a
definitive merger agreement with MediQual Systems, Inc. ("MediQual"), pursuant
to which MediQual will become a wholly owned subsidiary of the Company in a
stock-for-stock merger expected to be accounted for as a pooling-of-interests
for financial reporting purposes. In connection with the merger, the Company
estimates that it will issue approximately 0.6 million Common Shares. Upon
consummation of the merger, the Company will record a merger-related charge to
reflect transaction and other costs incurred as a result of the merger. The
amount of this charge is not expected to be significant. The merger is expected
to be completed by January 31, 1998, subject to the satisfaction of certain
conditions, including approval by shareholders of MediQual.
On August 23, 1997, the Company signed a definitive merger agreement with
Bergen Brunswig Corporation ("Bergen"), a distributor of pharmaceuticals and
medical-surgical supplies, pursuant to which Bergen will become a wholly owned
subsidiary of the Company in a stock-for-stock merger expected to be accounted
for as a pooling-of-interests for financial reporting purposes. Under the terms
of the proposed merger, shareholders of Bergen will receive a fixed exchange
ratio of .775 of a Company Common Share in exchange for each outstanding common
share of Bergen. The Company will issue approximately 40 million Common Shares
in the transaction and will also assume approximately $418 million in long-term
debt. Upon consummation of the merger, the Company will record a merger-related
charge to reflect transaction and other costs incurred as a result of the
merger. Since the merger has not yet been consummated and transition plans are
currently being developed, the amount of this charge cannot be estimated at this
time. The merger is expected to be completed by the end of the third quarter of
fiscal 1998, subject to the satisfaction of certain conditions, including
approvals by the stockholders of Bergen and the Company's shareholders, and the
receipt of certain regulatory approvals.
The Company utilizes computer technologies throughout its business to
effectively carry out its day to day operations. Similar to most companies, the
Company must determine whether its systems are capable of recognizing and
processing date sensitive information properly as the year 2000 approaches. The
Company has completed a preliminary assessment of its year 2000 requirements and
is currently correcting and replacing those systems which are not year 2000
compliant, in order to continue to meet its internal needs and those of its
customers. The Company believes it will be able to modify or replace its
affected systems in time to avoid any detrimental impact on its operations, and
expects this process to be substantially completed by the end of calendar year
1998. The Company is currently developing a complete cost estimate, but does not
anticipate that costs associated with this project will have a material adverse
effect on the Company's financial statements in future periods.
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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 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 (which is now
a subsidiary of the Company), 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.
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 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. On December
15, 1994, the plaintiffs filed a motion to declare the Judgment Sharing
Agreement unenforceable. On April 10, 1995, the court denied that motion and
ruled that the Judgment Sharing Agreement is valid and enforceable. The
plaintiffs filed a motion for reconsideration of the court's April 10, 1995
ruling, and the court denied that motion and reaffirmed its earlier decision on
April 24, 1995.
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 appealed this
decision. On August 15, 1997, the Court of Appeals for the Seventh Circuit,
along with other rulings, reversed the District Court's decision granting
summary judgment to the wholesaler defendants. On September 5, 1997, the
wholesaler defendants filed a motion for this decision to be reconsidered by the
Court of Appeals en banc. On October 8, 1997, the motion to reconsider was
denied by the Court of Appeals. The wholesaler defendants plan to seek review of
the Court of Appeals decision by the United States Supreme Court by writ of
certiorari. The Company continues to believe that the allegations against
Cardinal and Whitmire in such litigation are without merit, and it intends to
contest such allegations vigorously.
The Company also becomes involved from time to time in litigation
incidental to its business. Although the ultimate resolution of the litigation
referenced herein cannot be forecast with certainty, the Company does not
believe that the outcome of these lawsuits will have a material adverse effect
on the Company's financial statements.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
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Number
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2.01 Amended and Restated Agreement and Plan of Merger dated as of July
7, 1997, among MediQual Systems, Inc., Hub Merger Corp., and
Registrant (1)
2.02 Amendment dated as of November 4, 1997 to the Amended and Restated
Agreement and Plan of Merger dated as of July 7, 1997, among
MediQual Systems, Inc., Hub Merger Corp., and Registrant
2.03 Agreement and Plan of Merger dated as of August 23, 1997, among the
Registrant, Bruin Merger Corp., and Bergen Brunswig Corporation (2)
10.01 Cardinal Health, Inc. Incentive Deferred Compensation Plan, Amended
and Restated Effective July 1, 1997*
11.01 Computation of Per Share Earnings
27.01 Financial Data Schedule
99.01 Statement Regarding Forward-Looking Information (3)
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(1) Included as an annex to the Proxy Statement/Prospectus included in
the Registrant's Registration Statement on Form S-4 (No. 333-30889)
filed with the Commission on July 8, 1997, and incorporated herein
by reference.
(2) Included as an exhibit to the Registrant's Current Report on Form
8-K/A, Amendment No. 1 (No. 0-12591) filed with the Commission on
August 27, 1997, and incorporated herein by reference.
(3) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the year ended June 30, 1997 (No. 0-12591) filed with the
Commission on September 29, 1997, and incorporated herein by
reference.
*Management contract or compensation plan or arrangement.
(b) Reports on Form 8-K:
On August 26 and 27, 1997, the Company filed a report on Form 8-K and 8-K/A,
respectively, under Items 5 and 7 which reported, among other things, that it
had signed an Agreement and Plan of Merger, dated as of August 23, 1997, among
the Company, Bruin Merger Corporation and Bergen Brunswig Corporation.
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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 14, 1997 By: /s/ John C. Kane
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John C. Kane
President and Chief Operating 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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