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 The Quarter Ended September 30, 1999 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)
(614) 757-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of Registrant's Common Shares outstanding at the close of
business on November 1, 1999 was as follows:
Common Shares, without par value: 280,250,372
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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, 1999 and 1998 (unaudited) ..................................... 3
Condensed Consolidated Balance Sheets at September 30, 1999 and
June 30, 1999 (unaudited) ......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 (unaudited) ........................................... 5
Notes to Condensed Consolidated Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14
Part II. Other Information:
-----------------
Item 1. Legal Proceedings.................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................... 15
* Items not listed are inapplicable.
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
Revenue:
Operating revenue $5,829.3 $5,017.4
Bulk deliveries to customer warehouses 954.4 781.7
-------- --------
Total revenue 6,783.7 5,799.1
Cost of products sold:
Operating cost of products sold 5,174.5 4,426.0
Cost of products sold - bulk deliveries 954.4 781.7
-------- --------
Total cost of products sold 6,128.9 5,207.7
Gross margin 654.8 591.4
Selling, general and administrative expenses 391.3 373.9
Merger-related costs 36.8 34.4
-------- --------
Operating earnings 226.7 183.1
Other income (expense):
Interest expense (23.3) (23.4)
Other, net (1.6) (0.9)
-------- --------
Earnings before income taxes 201.8 158.8
Provision for income taxes 79.8 64.1
-------- --------
Net earnings $ 122.0 $ 94.7
======== ========
Earnings per Common Share:
Basic $ 0.44 $ 0.34
Diluted $ 0.43 $ 0.33
Weighted average number of Common Shares outstanding:
Basic 280.0 276.8
Diluted 286.2 283.9
Cash dividends declared per Common Share $ 0.025 $ 0.020
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
SEPTEMBER 30, JUNE 30,
1999 1999
-------- --------
ASSETS
Current assets:
Cash and equivalents $ 185.4 $ 185.4
Trade receivables, net 1,750.9 1,602.1
Current portion of net investment in sales-type leases 157.7 152.5
Inventories 3,568.0 2,940.0
Prepaid expenses and other 497.8 320.6
-------- --------
Total current assets 6,159.8 5,200.6
-------- --------
Property and equipment, at cost 2,878.5 2,798.9
Accumulated depreciation and amortization (1,284.2) (1,237.4)
-------- --------
Property and equipment, net 1,594.3 1,561.5
Other assets:
Net investment in sales-type leases, less current portion 464.7 454.3
Goodwill and other intangibles 969.5 942.1
Other 249.0 246.0
-------- --------
Total $9,437.3 $8,404.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks and current portion of long-term
obligations $ 23.3 $ 40.2
Accounts payable 2,799.7 2,363.9
Other accrued liabilities 834.4 561.2
-------- --------
Total current liabilities 3,657.4 2,965.3
-------- --------
Long-term obligations, less current portion 1,519.6 1,223.9
Deferred income taxes and other liabilities 579.3 645.7
Shareholders' equity:
Common Shares, without par value 1,109.1 1,091.8
Retained earnings 2,636.7 2,544.0
Common Shares in treasury, at cost (17.2) (17.2)
Cumulative foreign currency adjustment (42.1) (44.0)
Other (5.5) (5.0)
-------- --------
Total shareholders' equity 3,681.0 3,569.6
-------- --------
Total $9,437.3 $8,404.5
======== ========
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 122.0 $ 94.7
Adjustments to reconcile net earnings to net cash
from operating activities:
Depreciation and amortization 61.7 59.7
Provision for bad debts 9.6 2.5
Change in operating assets and liabilities, net
of effects from acquisitions:
Increase in trade receivables (157.8) (93.0)
Increase in inventories (627.9) (110.9)
Increase in net investment in sales-type leases (15.5) (64.2)
Increase in accounts payable 442.6 34.0
Other operating items, net (13.3) (0.5)
------- -------
Net cash used in operating activities (178.6) (77.7)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition/divestiture of subsidiaries, net of cash acquired (48.3) 29.1
Proceeds from sale of property and equipment 2.6 1.9
Additions to property and equipment (81.6) (72.8)
Other 48.4 (2.3)
------- -------
Net cash used in investing activities (78.9) (44.1)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short term debt 356.0 0.4
Reduction of long-term obligations (79.0) (62.5)
Proceeds from long-term obligations, net of issuance costs -- 214.3
Proceeds from issuance of Common Shares 9.9 16.1
Dividends on Common Shares and cash paid
in lieu of fractional shares (7.1) (8.9)
Other (22.3) (43.6)
------- -------
Net cash provided by financing activities 257.5 115.8
------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS -- (6.0)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 185.4 389.1
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 185.4 $ 383.1
======= =======
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The condensed consolidated financial statements of Cardinal Health,
Inc. (the "Company") include the accounts of all majority-owned
subsidiaries and all significant intercompany amounts have been
eliminated. The condensed consolidated financial statements contained
herein have been restated to give retroactive effect to the merger
transactions with Pacific Surgical, Inc. ("PSI") on May 21, 1999 and
Automatic Liquid Packaging, Inc. ("ALP") on September 10, 1999, both of
which were accounted for as pooling of interests business combinations
(see Note 4).
These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the
information and disclosures required by generally accepted accounting
principles for interim reporting. In the opinion of management, all
adjustments necessary for a fair presentation have been included.
Except as disclosed elsewhere herein, all such adjustments are of a
normal and recurring nature.
The condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1999 (the "1999 Form
10-K").
Note 2. Basic earnings per Common Share ("Basic") is computed by dividing
net earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 3. The Company's comprehensive income consists of net earnings and
foreign currency translation adjustments. For the three months ended
September 30, 1999, total comprehensive income was $123.9 million,
comprised of $122.0 million of net earnings and $1.9 million gain on
foreign currency translation. Total comprehensive income for the
comparable period of fiscal year 1999 was $93.9 million, comprised of
$94.7 million of net earnings offset by $0.8 million of loss on foreign
currency translation.
Note 4. On September 10, 1999, the Company completed a merger transaction
with ALP (the "ALP Merger") which was accounted for as a pooling of
interests. In the ALP Merger, the Company issued approximately 5.8
million Common Shares to ALP stockholders.
On May 21, 1999, the Company completed a merger transaction with PSI
(the "PSI Merger") which was accounted for as a pooling of interests.
In the PSI Merger, the Company issued approximately 0.2 million Common
Shares to PSI stockholders.
The table below presents a reconciliation of total revenue and net
earnings available for Common Shares as reported in the accompanying
consolidated financial statements with those previously reported by the
Company. The term "Cardinal Health" as used herein refers to Cardinal
Health, Inc. and subsidiaries prior to the ALP and PSI mergers.
(in millions) Cardinal
Health ALP PSI Combined
------ --- --- --------
Quarter ended September 30, 1998
Total revenue $4,999.2 $16.7 $ 1.5 $5,017.4
Net earnings (loss) $ 90.8 $ 4.0 $(0.1) $ 94.7
Adjustments affecting net earnings and shareholders' equity resulting
from the ALP and PSI mergers to adopt the same accounting practices
were not material for any periods presented herein. There were no
material intercompany transactions.
Note 5. Costs of effecting mergers and subsequently integrating the
operations of the various merged companies are recorded as
merger-related costs when incurred. During the three months ended
September 30, 1999, merger-related costs totaling $36.8 million ($29.7
million, net of tax) were recorded. Of this amount,
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approximately $31.6 million related to transaction and employee-related
costs associated with the ALP merger transaction and $4.3 million
related to exit costs associated with the Company's merger transaction
with Allegiance Corporation ("Allegiance"). In addition, $6.9 million
was recorded associated with the business restructuring as a result of
the Company's merger transaction with R.P. Scherer Corporation
("Scherer"). As part of the business restructuring, the Company is
currently closing certain facilities. In connection with such closings,
the Company has incurred employee-related costs, asset impairment
charges and exit costs related to the termination of contracts and
lease agreements. Also, the Company recorded costs of $4.3 million
related to integrating the operations of companies that previously
engaged in merger transactions with the Company. Partially offsetting
the total charges recorded was a $10.3 million credit to adjust the
estimated transaction and employee-related costs previously recorded in
connection with the Allegiance merger transaction. Actual billings and
employee-related costs were less than the amounts originally
anticipated, resulting in a reduction of the merger-related costs.
During the three month period ended September 30, 1998, merger-related
costs totaled $34.4 million ($27.8 million, net of tax). Of the amount
recorded during the first quarter of fiscal 1999, $22.3 million related
to transaction and employee-related costs and $12.5 million related to
business restructuring and asset impairment costs associated with the
Company's merger transaction with Scherer. In addition, the Company
recorded costs of $1.8 million related to integrating the operations of
companies that previously engaged in merger transactions with the
Company. Partially offsetting the charge recorded during the first
quarter of fiscal year 1999 was a $2.2 million credit to adjust the
Bergen Brunswig Corporation ("Bergen") transaction and termination
costs previously recorded. The actual billings for services provided by
third parties engaged by the Company were less than the estimate,
resulting in a reduction of the merger-related costs.
Since April 1998, ALP has been organized as an S-Corporation for tax
purposes. Accordingly, ALP was not subject to federal income tax from
April 1998 up to the date of the merger transaction. For the quarter
ended September 30, 1998, net earnings would have been reduced by $1.5
million if ALP had been subject to federal income taxes.
The net of tax effect of the various merger-related costs recorded and
pro forma adjustments related to ALP taxes during the three months
ended September 30, 1999 and 1998 was to reduce net earnings by $29.7
million to $122.0 million and by $26.3 million to $94.7 million,
respectively, and to reduce reported diluted earnings per Common Share
by $0.10 per share to $0.43 per share and by $0.10 per share to $0.33
per share, respectively.
Note 6. The Company is organized based on the products and services it offers.
Under this organizational structure, the Company operates in three
business segments: Pharmaceutical Distribution, Pharmaceutical Services
and Medical-Surgical Products. The Company has not made any significant
changes in the segments reported or the basis of measurement of segment
profit or loss from the information provided in the Company's 1999 Form
10-K.
The Pharmaceutical Distribution segment involves the distribution of a
broad line of pharmaceuticals, health and beauty care products,
therapeutic plasma and other specialty pharmaceutical products and
additional items typically sold by hospitals, retail drug stores and
other health-care providers.
The Pharmaceutical Services segment provides services to the
health-care industry through the design of unique drug delivery
systems, contract manufacturing, comprehensive packaging services,
integrated pharmacy management, reimbursement services, clinical
information system services and pharmacy automation equipment.
The Medical-Surgical Products segment involves the manufacture of
medical, surgical and laboratory products and the distribution of these
products to hospitals, physician offices, surgery centers and other
health-care providers.
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.
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The following table includes revenue and operating earnings for the
three months ended September 30, 1999 and 1998 for each segment and
reconciling items necessary to total to amounts reported in the
consolidated financial statements:
For the Three Months Ended
September 30,
---------------------
(in millions) Net Revenue
---------------------
1999 1998
---------------------
Operating revenue:
Pharmaceutical Distribution $4,183.2 $3,445.7
Pharmaceutical Services 510.2 490.2
Medical-Surgical Products 1,212.8 1,149.6
Inter-segment (1) (76.9) (68.1)
---------------------
Total operating revenue 5,829.3 5,017.4
Bulk Deliveries to Customer Warehouses:
Pharmaceutical Distribution 954.4 781.7
---------------------
Total Net Revenue $6,783.7 $5,799.1
-----------------------------------------------------------------
Operating Earnings
-------------------
1999 1998
-------------------
Pharmaceutical Distribution $ 106.6 $ 81.9
Pharmaceutical Services 79.5 68.8
Medical-Surgical Products 86.6 71.1
Corporate (2) (46.0) (38.7)
-------------------
Total operating earnings $ 226.7 $ 183.1
---------------------------------------------------------------
(1) Inter-segment revenue consists primarily of the elimination of
inter-segment activity-primarily sales from Pharmaceutical
Distribution to Pharmaceutical Services. Sales from one
segment to another are priced at the equivalent external
customer selling prices.
(2) Corporate operating earnings primarily consist of
merger-related costs of $36.8 million and $34.4 million for
the three months ended September 30, 1999 and 1998,
respectively, and unallocated corporate depreciation and
amortization and administrative expenses.
Note 7. During the three months ended September 30, 1999, Pyxis Corporation and
Pyxis Capital Corporation ("PCC"), a bankruptcy remote subsidiary of
the Company, entered into a 5 year agreement with a financial
institution whereby PCC has the option to sell, on a revolving basis,
an undivided percentage ownership interest in a defined pool of the
Company's sales-type leases, up to a maximum interest of $100 million.
The sales-type leases are sold for an amount equal to the remaining
cash flows of the underlying leases discounted at the leases' implicit
interest rates. At September 30, 1999, PCC has not sold any sales-type
lease receivables under this agreement.
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Note 8. On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance Corporation ("Allegiance") and
its subsidiaries their U.S. Healthcare distribution business, surgical
and respiratory therapy business and healthcare cost-saving business,
as well as certain foreign operations (the "Allegiance Business") in
connection with a spin-off of the Allegiance Business by Baxter. In
connection with this spin-off, Allegiance, which merged with the
Company on February 3, 1999, assumed the defense of litigation
involving claims related to the Allegiance Business from Baxter,
including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. Since none of the cases
involving natural rubber latex gloves has proceeded to a hearing on the
merits, the Company is unable to evaluate the extent of any potential
liability, and unable to estimate any potential loss. Because of the
increase in claims filed and the ongoing defense costs that will be
incurred, the Company believes it is probable that it will continue to
incur significant expenses related to the defense of cases involving
natural rubber latex gloves. The Company believes a substantial portion
of any potential liability and defense costs, excluding defense costs
already reserved, relating to natural latex gloves cases and claims
will be covered by insurance, subject to self-insurance retentions,
exclusions, conditions, coverage gaps, policy limits and insurer
solvency.
Although the ultimate resolution of litigation cannot be forecast with
certainty, the Company does not believe that the outcome of any pending
litigation would have a material adverse effect on the Company's
consolidated financial statements.
Note 9. As of July 1, 1999, the Company adopted the Statement of Position 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 provides guidance on accounting
for costs of computer software developed or obtained for internal use.
The adoption of this statement did not have a material impact on the
Company's financial statements.
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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
Pacific Surgical, Inc. ("PSI") on May 21, 1999 and Automatic Liquid Packaging,
Inc. ("ALP") on September 10, 1999. The discussion and analysis is concerned
with material changes in financial condition and results of operations for the
Company's condensed consolidated balance sheets as of September 30, 1999 and
June 30, 1999, and for the condensed consolidated statements of earnings for the
three-month periods ended September 30, 1999 and 1998.
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, 1999.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to materially differ from those made,
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999 and are incorporated herein by
reference. The Company disclaims any obligation to update any forward-looking
statement.
GENERAL
The Company operates within three operating business segments:
Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical
Products. See Note 6 of "Notes to Condensed Consolidated Financial Statements"
for a description of these segments.
RESULTS OF OPERATIONS
Operating Revenue
Percent of Total
Quarter ended September 30, 1999 Growth (1) Operating Revenues
- --------------------------------------------------------------------------------------------------
Pharmaceutical Distribution 21% 71%
Pharmaceutical Services 4% 9%
Medical-Surgical Products 5% 20%
- --------------------------------------------------------------------------------------------------
Total Company 16% 100%
==================================================================================================
(1) The growth rate applies to the three-month period ended
September 30, 1999 as compared to the corresponding period of
the prior year.
Operating revenue for the three-month period ended September 30, 1999
increased 16% as compared to the prior year. The majority of the operating
revenue increase (approximately 76% for the three-month period ended September
30, 1999) 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.
The Pharmaceutical Distribution segment's operating revenue growth over the
quarter ended September 30, 1998 was primarily related to strong sales to all
customer segments, especially to pharmacy chains and through the Company's
specialty distribution businesses. All operating revenue growth was internal.
The operating revenue growth for the Pharmaceutical Services segment was
primarily a result of growth in the Company's pharmaceutical drug delivery
systems and packaging businesses. The sales of health and nutritional products
in Asia and recent pharmaceutical introductions in the form of the Company's
proprietary drug delivery formulations contributed to this revenue growth.
Offsetting this growth was the impact of the pharmacy management business
continuing to exit unprofitable accounts and weak sales performance by the
pharmacy automation business due to customers delaying purchases to focus
internally on their Year 2000 readiness.
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The Medical-Surgical Products segment operating revenue growth was due to
an increase in sales of best value products and self-manufactured products. In
addition, international and service revenues for the Medical-Surgical Products
segment increased over the comparable quarter of fiscal 1999.
Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
operating earnings.
Gross Margin
(as a percentage of operating revenue)
Quarter ended September 30, 1999 1999 1998
- ----------------------------------------------------------------------------------------
Pharmaceutical Distribution 5.03% 5.05%
Pharmaceutical Services 32.48% 31.52%
Medical-Surgical Products 23.00% 22.85%
- ----------------------------------------------------------------------------------------
Total Company 11.23% 11.79%
========================================================================================
The decrease in gross margin from the first quarter of fiscal 1999 to the
comparable period of fiscal 2000 was due primarily to a greater mix of lower
margin pharmaceutical distribution business in the three months ended September
30, 1999 compared to the same period a year ago. The Pharmaceutical
Distribution segment's mix increased to 71% of total operating revenues for the
quarter ended September 30, 1999 from 68% for the comparable period of the prior
year.
The Pharmaceutical Distribution segment's gross margin as a percentage of
operating revenue was relatively stable as lower selling margins resulting from
a highly competitive market were offset by higher vendor margins from favorable
price increases and manufacturer marketing programs.
The increase in the Pharmaceutical Services segment's gross margin was due
to an improvement in the overall manufacturing processes as a result of improved
productivity, ongoing plant modernization and rationalization programs. The drug
delivery development business' gross margins improved primarily as a result of a
shift in mix to higher margin pharmaceutical products from lower margin health
and nutrition products. In addition, the pharmacy management contract
rationalization program has resulted in an improvement in gross margin.
The positive change in the gross margin for the Medical-Surgical Products
segment was primarily a result of increased sales of relatively higher margin
self-manufactured and distributed best value products. Lower manufacturing costs
also positively impacted the Medical-Surgical Products segment's gross margin.
Selling, General and Administrative Expenses
(as a percentage of operating revenue)
Quarter ended September 30, 1999 1999 1998
- -------------------------------------------------------------------------------------------
Pharmaceutical Distribution 2.48% 2.68%
Pharmaceutical Services 16.90% 17.48%
Medical-Surgical Products 15.86% 16.67%
- -------------------------------------------------------------------------------------------
Total Company 6.71% 7.45%
===========================================================================================
The improvement in selling, general and administrative expenses as a
percentage of operating revenue for the first quarter of fiscal 2000 reflects
economies of scale 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. The 4.65%
growth in selling, general and administrative expenses experienced in the three
months ended September 30, 1999 compared to the same period a year ago, was due
primarily to increases in personnel costs and depreciation expense, and compares
favorably to the 16% growth in operating revenue for the same respective
periods.
Merger-Related Costs. Costs of effecting mergers and subsequently
integrating the operations of the various merged companies are recorded as
merger-related costs when incurred. During the three months ended September
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30, 1999, merger-related costs totaling $36.8 million ($29.7 million, net of
tax) were recorded. Of this amount, approximately $31.6 million related to
transaction and employee-related costs associated with the ALP merger
transaction and $4.3 million related to exit costs associated with the Company's
merger transaction with Allegiance Corporation ("Allegiance"). In addition, $6.9
million was recorded in connection with the business restructuring as a result
of the Company's merger transaction with R.P. Scherer Corporation ("Scherer").
As part of the business restructuring, the Company is currently closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements. Also, the Company recorded costs
of $4.3 million related to integrating the operations of companies that
previously engaged in merger transactions with the Company. Partially offsetting
the total charges recorded was a $10.3 million credit to adjust the estimated
transaction and employee-related costs previously recorded in connection with
the Allegiance merger transaction. Actual billings and employee-related costs
were less than the amounts originally anticipated, resulting in a reduction of
the merger-related costs.
During the three-month period ended September 30, 1998, merger-related
costs totaled $34.4 million ($27.8 million, net of tax). Of the amount recorded
during the first quarter of fiscal 1999, $22.3 million related to transaction
and employee-related costs and $12.5 million related to business restructuring
and asset impairment costs associated with the Company's merger transaction with
Scherer. In addition, the Company recorded costs of $1.8 million related to
integrating the operations of companies that previously engaged in merger
transactions with the Company. Partially offsetting the charge recorded during
the first quarter of fiscal year 1999 was a $2.2 million credit to adjust the
Bergen Brunswig Corporation ("Bergen") transaction and termination costs
previously recorded. The actual billings for services provided by third parties
engaged by the Company were less than the estimate, resulting in a reduction of
the merger-related costs.
Since April 1998, ALP has been organized as an S-Corporation for tax
purposes. Accordingly, ALP was not subject to federal income tax from April 1998
up to the date of the merger transaction. For the quarter ended September 30,
1998, net earnings would have been reduced by $1.5 million if ALP had been
subject to federal income taxes.
The net of tax effect of the various merger-related costs recorded and pro
forma adjustments related to ALP tax treatment during the three months ended
September 30, 1999 and 1998 was to reduce net earnings by $29.7 million to
$122.0 million and by $26.3 million to $94.7 million, respectively, and to
reduce reported diluted earnings per Common Share by $0.10 per share to $0.43
per share and by $0.10 per share to $0.33 per share, respectively.
The Company estimates that it will incur additional merger-related costs
associated with the various mergers it has completed to date (primarily related
to the Scherer, Allegiance and ALP mergers) of approximately $89.0 million
($56.5 million, net of tax) in future periods (primarily fiscal 2000 and 2001)
related to the exit of contractual arrangements, employee-related costs, and
costs to properly integrate operations and implement efficiencies. Such amounts
will be charged to expense when incurred.
Provision for Income Taxes. The Company's provision for income taxes
relative to pre-tax earnings was 40% in the first quarters of both fiscal 2000
and 1999, respectively. The provision for income taxes excluding the impact of
merger-related charges was 37% in both the first quarters of fiscal years 2000
and 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $2.5 billion at September 30, 1999 from $2.2
billion at June 30, 1999. This increase from June 30, 1999 included additional
investments in inventories and trade receivables of $628.0 million and $148.8
million, respectively. Offsetting the increases in working capital during the
first quarter of fiscal year 2000 was an increase in accounts payable of $435.8
million. The Company's increase in inventories is associated with the
precautionary build up of inventory in order to meet any accelerated demand by
health-care providers preparing for Year 2000 needs. In addition, inventory
levels have risen due to the higher volume of current and anticipated business
in pharmaceutical distribution activities. The increase in trade receivables is
consistent with the Company's operating revenue growth (see "Operating Revenue"
above) and the change in accounts payable is due primarily to the timing of
inventory purchases and related payments.
In June 1998, the Company commenced a commercial paper program, providing
for the issuance of up to $750 million in aggregate maturity value of commercial
paper. At September 30, 1999, commercial paper with an effective interest rate
of 5.24% and an aggregate maturity value of $502.0 million was outstanding. At
June 30, 1999, the outstanding commercial paper balance was $49.2 million with
an effective interest rate of 4.82%.
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Property and equipment, at cost, increased by $79.6 million from June 30,
1999. The increase was primarily due to ongoing plant expansion and
manufacturing equipment purchases in certain service businesses, as well as
additional investments made for management information systems and upgrades to
distribution facilities.
Shareholders' equity increased to $3.7 billion at September 30, 1999 from
$3.6 billion at June 30, 1999, primarily due to net earnings of $122.0 million,
the investment of $9.9 million by employees of the Company through various stock
incentive plans which are offset by dividends of $7.1 million and a $22.3
million payment related to the repurchase of ALP common shares.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements. See "Other"
below.
OTHER
Year 2000 Project. The Company utilizes computer technologies in each of
its businesses to effectively carry out its day-to-day operations. Computer
technologies include both information technology in the form of hardware and
software, as well as embedded technology in the Company's facilities and
equipment. Similar to most companies, the Company must determine whether its
systems are capable of recognizing and processing date sensitive information
properly in the year 2000. The Company is utilizing a multi-phased concurrent
approach to address this issue.
The first of two project segments, "Mitigation and Validation," includes
specific awareness, assessment, remediation, validation and implementation
phases. The Company has completed all of the phases of this project segment. The
Company has corrected, replaced, mitigated, or retired the vast majority of
those business critical systems which were not year 2000 ready in order to
ensure the Company's ability to continue to meet its internal needs and those of
its suppliers and customers. This process included the multiple testing of
critical systems to ensure that year 2000 readiness has been accomplished.
The second project segment, "Business Protection," also includes several
phases - business dependency and risk assessment, contingency planning, and
situation management planning. The Company has made significant and substantial
progress with this segment. The Company has substantially completed the business
dependency and risk assessment phase and expects to substantially complete the
remaining two phases by November 30, 1999.
The Company currently believes it has been able to modify, replace, or
mitigate its affected systems in time to avoid any material detrimental impact
on its operations. While the Company is not presently aware of any significant
probability that its systems have not been properly remediated, there can be no
assurances that contingency plans will sufficiently mitigate the risk of an
unanticipated year 2000 readiness problem.
The Company estimates that the aggregate costs of its year 2000 project
will be approximately $27.0 million, including costs incurred to date.
Significant portions of these costs were not incremental costs, but rather
represented the redeployment of existing resources. This reallocation of
resources is not expected to have a significant impact on the day-to-day
operations of the Company. Since the initiation of the year 2000 project, the
Company estimates that it has incurred costs of approximately $23.1 million of
which approximately $6.9 million represented incremental costs. The anticipated
impact and costs of the project, as well as the date on which the Company
expects to complete the project, are based on management's best estimates using
information currently available and numerous assumptions about future events.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially. Based on its current estimates and
information currently available, the Company does not anticipate that the costs
associated with this project will have a material adverse effect on the
Company's consolidated financial statements.
The Company has formally communicated with its significant suppliers,
customers, and critical business partners to determine the extent to which the
Company may be vulnerable in the event that those parties fail to properly
remediate their own year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and is in the process of testing critical system
interfaces as the year 2000 approaches. The Company is in the process of
developing appropriate contingency plans in the event that a significant
exposure is identified
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relative to any dependency on third-party systems. Although the Company is not
presently aware of any such significant exposure, there can be no guarantee that
the systems of third parties on which the Company relies or with which the
Company interfaces will be converted in a timely manner, or that a failure to
properly remediate by a third party would not have a material adverse effect on
the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's Form 10-K for the fiscal year
ended June 30, 1999.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The following disclosure should be read together with the disclosure set
forth in the Company's Form 10-K for the fiscal year ended June 30, 1999, and to
the extent any such statements constitute "forward looking statements" reference
is made to Exhibit 99.01 of this Form 10-Q which incorporates by reference
Exhibit 99.01 of the Company's 1999 Form 10-K.
In November 1993, the Company and Whitmire Distribution Corporation
("Whitmire"), one of the Company's wholly-owned subsidiaries, as well as other
pharmaceutical wholesalers, were named as defendants in a series of purported
class action 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. 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 using a chargeback pricing system. The wholesaler defendants,
including the Company and Whitmire, entered into a Judgment Sharing Agreement
whereby the total exposure for the Company and its subsidiaries is limited to
$1,000,000 or 1% of any judgment against the wholesalers and the manufacturers,
whichever is less, and provided for a reimbursement mechanism for legal fees and
expenses. The trial of the class action lawsuit began on September 23, 1998. On
November 19, 1998, after the close of plaintiffs' case-in-chief, both the
wholesaler defendants and the manufacturer defendants moved for judgment as a
matter of law in their favor. On November 30, 1998, the Court granted both of
these motions and ordered judgment as a matter of law in favor of both the
wholesaler defendants and the manufacturer defendants. On January 25, 1999, the
class plaintiffs filed a notice of appeal of the District Court's decision with
the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of
Appeals for the Seventh Circuit issued its decision, which, in part, affirmed
the dismissal of the wholesaler defendants, including the Company and Whitmire.
On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the
Court of Appeals for the Seventh Circuit, which was denied. On November 5,
1999, the class plaintiffs filed a petition for writ of certiorari with the
United States Supreme Court. In addition to the federal court cases described
above, the Company and Whitmire have also been named as defendants in a series
of related antitrust lawsuits brought by chain drug stores and independent
pharmacies who opted out of the federal class action lawsuits, and in a series
of state court cases alleging similar claims under various state laws regarding
the sale of brand name prescription drugs. The Judgment Sharing Agreement
mentioned above also covers these litigation matters.
On September 30, 1996, Baxter International, Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
health-care distribution business, surgical and respiratory therapy business and
health-care cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter. In connection with this spin-off, Allegiance, which merged with the
Company on February 3, 1999, assumed the defense of litigation involving
claims related to the Allegiance Business from Baxter Healthcare Corporation
("BHC"), including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves described below. Allegiance will be
defending and indemnifying BHC, as contemplated by the agreements between Baxter
and Allegiance, for all expenses and potential liabilities associated with
claims pertaining to the litigation assumed by Allegiance. As of September 30,
1999, there were approximately 469 lawsuits involving BHC and/or Allegiance
containing allegations of sensitization to natural rubber latex products. Since
none of these cases has proceeded to a hearing on the merits, the Company is
unable to evaluate the extent of any potential liability, and unable to estimate
any potential loss. Because of the increase in claims filed and the ongoing
defense costs that will be incurred, the Company believes it is probable that it
will continue to incur significant expenses related to the defense of cases
involving natural rubber latex gloves. The Company believes a substantial
portion of any potential liability and defense costs, excluding defense costs
already reserved, relating to natural latex gloves cases and claims will be
covered by insurance, subject to self-insurance retentions, exclusions,
conditions, coverage gaps, policy limits and insurer solvency.
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The Company also becomes involved from time-to-time in other litigation
(including environmental matters) incidental to its business. Although the
ultimate resolution of the litigation referenced in this Item 1 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 consolidated
financial statements.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
27.01 Financial Data Schedule - Three months ended September 30, 1999
27.02 Financial Data Schedule - Fiscal year ended June 30, 1999
27.03 Financial Data Schedule - Three months ended September 30, 1998
99.01 Statement Regarding Forward-Looking Information (1)
- -----------
(1) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 1999 (No. 0-12591) and
incorporated herein by reference.
(b) Reports on Form 8-K:
None.
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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 12, 1999 By: /s/ Robert D. Walter
--------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ Richard J. Miller
---------------------
Richard J. Miller
Corporate Vice President and
Chief Financial Officer
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