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Cardinal Health Inc. Reports Operating Results (10-Q)

May 06, 2010 | About:

10qk

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Cardinal Health Inc. (CAH) filed Quarterly Report for the period ended 2010-03-31.

Cardinal Health Inc. has a market cap of $12.93 billion; its shares were traded at around $35.78 with a P/E ratio of 13.9 and P/S ratio of 0.1. The dividend yield of Cardinal Health Inc. stocks is 1.9%. Cardinal Health Inc. had an annual average earning growth of 6% over the past 10 years. GuruFocus rated Cardinal Health Inc. the business predictability rank of 3-star.CAH is in the portfolios of David Einhorn of Greenlight Capital Inc, Richard Pzena of Pzena Investment Management LLC, Edward Owens of Vanguard Health Care Fund, Chris Davis of Davis Selected Advisers, David Dreman of Dreman Value Management, Dodge & Cox, Jeremy Grantham of GMO LLC, George Soros of Soros Fund Management LLC, John Keeley of Keeley Fund Management, Richard Aster Jr of Meridian Fund, Bruce Kovner of Caxton Associates, Steven Cohen of SAC Capital Advisors.

Highlight of Business Operations:

Demand for the Companys products and services during the three and nine months ended March 31, 2010 led to revenue of $24.3 billion and $74.0 billion, up 1% and 3%, respectively, from the same periods in the prior year. Operating earnings were approximately $366 million and $973 million, down 4% and 1%, respectively, from the same periods in the prior year. Operating earnings were negatively impacted by increased distribution, selling, general and administrative expenses (SG&A) ($56 million and $78 million, respectively) and positively impacted by increased gross margin ($23 million and $73 million, respectively). In addition, operating earnings for the nine months ended March 31, 2010 were positively impacted by $26 million in litigation credits for insurance proceeds released from escrow and were negatively impacted by a $18 million impairment charge related to SpecialtyScripts. Net earnings for the three and nine months ended March 31, 2010 were $222 million and $419 million, respectively, and net diluted earnings per Common Share were $0.61 and $1.16, respectively. See Note 13 of Notes to the Condensed Consolidated Financial Statements for a reconciliation of Basic EPS to Diluted EPS.

Cash provided by operating activities totaled $1.8 billion during the nine months ended March 31, 2010, primarily due to operating earnings and changes in working capital. Cash provided by investing activities was $106 million primarily due to proceeds from the sale of CareFusion common stock ($271 million) partially offset by capital spending ($142 million). Cash used in financing activities was $498 million primarily due to the Companys repayment of long-term obligations ($1.6 billion, which includes a $66 million early tender premium) offset by permanent financing obtained by CareFusion prior to the Spin-Off ($1.4 billion). Also during the nine months ended March 31, 2010, the Company paid $190 million in dividends and repurchased $50 million of outstanding common shares.

Gross margin for the nine months ended March 31, 2010 increased $73 million or 3% compared to the same period in the prior year. Gross margin was favorably impacted by increased distribution service agreement fees and pharmaceutical price appreciation under branded manufacturer agreements (combined impact of $91 million), increased manufacturer cash discounts ($53 million), the favorable impact of cost of materials savings driven by the post-generic environment and operational efficiencies in the nuclear pharmacy business within the Pharmaceutical segment ($52 million) and a decrease in raw materials costs within the Medical segment ($38 million). Also, during the nine months ended March 31, 2010, gross margin was favorably impacted by the previously deferred intercompany revenue for sales to CareFusion ($14 million). Prior to the Spin-Off, the Company deferred revenue for products sold to CareFusion businesses until the products were sold to the end customers. In connection with the Spin-Off, the previously deferred revenue was recognized. Gross margin was negatively impacted for the nine months ended March 31, 2010 by an increase in customer discounts ($88 million) as a result of customer repricings and increased sales volume. Gross margin for the nine months ended March 31, 2010 also was negatively impacted by the timing and reduction in new generic launches ($42 million). Refer to the Segment Results of Operations below for further discussion of the specific factors affecting gross margin in each of the Companys reportable segments.

SG&A expenses for the three and nine months ended March 31, 2010 increased $56 million or 10% and $78 million or 4%, respectively, compared to the same periods in the prior year. SG&A expenses were negatively impacted during the three and nine months ended March 31, 2010 by an increase in employee incentive compensation expenses ($53 million and $81 million, respectively), primarily due to accruals at particularly low levels during the same periods in fiscal 2009 as compared to above-plan performance accruals for fiscal 2010. Employee incentive compensation expense includes the Companys annual performance-based management incentive plan and performance-based employer contribution to its 401(k) Savings Plan. Beginning in fiscal 2010, the Company replaced the 401(k) Savings Plan employer fixed-rate contribution with a new variable rate contribution that is dependent upon the Companys financial performance; this is applicable to all U.S. employees. SG&A expenses during the three and nine months ended March 31, 2010 also were negatively impacted by increases in incremental strategic project investments ($14 million and $45 million, respectively) and expenses related to the performance of the Companys deferred compensation plan ($5 million and $26 million, respectively). The expenses related to the performance of the Companys deferred compensation plan are offset by income presented within other (income)/expense, net. Also, SG&A expenses include expenses related to the Spin-Off of $4 million and $9 million, respectively, for the three and nine months ended March 31, 2010 and $1 million for both the three and nine months ended March 31, 2009.

Operating earnings decreased $15 million or 4% and $8 million or 1%, respectively, during the three and nine months ended March 31, 2010 compared to the same periods in the prior year. The decrease during the three and nine months ended March 31, 2010 was primarily due to increases in SG&A expenses ($56 million and $78 million, respectively) partially offset by increased gross margin ($23 million and $73 million, respectively). Operating earnings during the three months ended March 31, 2010 were also positively impacted by a decrease in restructuring and employee severance ($18 million). Operating earnings during the nine months ended March 31, 2010 were negatively impacted by increased impairments and loss on sale of assets ($17 million) and an increase in restructuring and employee severance ($15 million). Litigation (credits)/charges, net of $(29) million positively impacted operating earnings during the nine months ended March 31, 2010.

Other (income)/expense, net resulted in income of $1 million and $16 million, respectively, for the three and nine months ended March 31, 2010, which was an improvement of $8 million and $44 million, respectively, compared to the prior year periods. The improvement was primarily due to income related to the performance of the Companys deferred compensation plan assets ($5 million and $26 million, respectively) and the impact of foreign exchange ($3 million and $12 million, respectively). The income related to the performance of the Companys deferred compensation plan assets is offset by expense presented within SG&A expenses.

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10qk
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