Cardinal Health Reports Fiscal 2014 First-Quarter Results

Q1 FY14

Q1 FY13

Y/Y

Revenue

$24.5 billion

$25.9 billion

(5%)

Operating Earnings

$471 million

$457 million

3%

Non-GAAP Operating Earnings

$532 million

$469 million

13%

Earnings from Continuing Operations

$340 million

$272 million

25%

Non-GAAP Earnings from Continuing Operations

$378 million

$281 million

35%

Diluted EPS from Continuing Operations

$0.99

$0.79

25%

Non-GAAP Diluted EPS from Continuing Operations

$1.10

$0.81

36%

Q1 FY14

Q1 FY13

Y/Y

Revenue

$21.8 billion

$23.5 billion

(7%)

Segment Profit

$433 million

$400 million

8%

Q1 FY14

Q1 FY13

Y/Y

Revenue

$2.7 billion

$2.4 billion

13%

Segment Profit

$106 million

$74 million

43%

Schedule 1

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

First Quarter

(in millions, except per common share amounts)

2014

2013

% Change

Revenue

$

24,523

$

25,889

(5)

%

Cost of products sold

23,259

24,730

(6)

%

Gross margin

1,264

1,159

9

%

Operating expenses:

Distribution, selling, general and administrative expenses

732

690

6

%

Restructuring and employee severance

11

5

N.M.

Amortization and other acquisition-related costs

49

28

N.M.

Impairments and loss on disposal of assets

—

1

N.M.

Litigation (recoveries)/charges, net

1

(22)

N.M.

Operating earnings

471

457

3

%

Other income, net

(4)

(8)

N.M.

Interest expense, net

33

26

28

%

Earnings before income taxes and discontinued operations

442

439

1

%

Provision for income taxes

102

167

(39)

%

Earnings from continuing operations

340

272

25

Loss from discontinued operations, net of tax

(1)

(1)

N.M.

Net earnings

$

339

$

271

25

%

Basic earnings per common share:

Continuing operations

$

1.00

$

0.80

25

%

Discontinued operations

—

—

N.M.

Net basic earnings per common share

$

1.00

$

0.80

25

%

Diluted earnings per common share:

Continuing operations

$

0.99

$

0.79

25

%

Discontinued operations

—

—

N.M.

Net diluted earnings per common share

$

0.99

$

0.79

25

%

Weighted-average number of common shares outstanding:

Basic

340

341

Diluted

344

344

Schedule 2

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions)

September 30,
2013

June 30,
2013

(Unaudited)

Assets

Current assets:

Cash and equivalents

$

2,753

$

1,901

Trade receivables, net

4,898

6,304

Inventories, net

7,275

8,373

Prepaid expenses and other

1,111

1,192

Total current assets

16,037

17,770

Property and equipment, net

1,445

1,489

Goodwill and other intangibles, net

5,570

5,574

Other assets

764

986

Total assets

$

23,816

$

25,819

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

$

10,442

$

12,295

Current portion of long-term obligations and other short-term borrowings

190

168

Other accrued liabilities

1,875

2,127

Total current liabilities

12,507

14,590

Long-term obligations, less current portion

3,693

3,686

Deferred income taxes and other liabilities

1,319

1,568

Total shareholders' equity

6,297

5,975

Total liabilities and shareholders' equity

$

23,816

$

25,819

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

First Quarter

(in millions)

2014

2013

Cash flows from operating activities:

Net earnings

$

339

$

271

Loss from discontinued operations, net of tax

1

1

Earnings from continuing operations

340

272

Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:

Depreciation and amortization

117

88

Impairments and loss on disposal of assets

—

1

Share-based compensation

24

24

Provision for bad debts

12

1

Change in operating assets and liabilities, net of effects from acquisitions:

Decrease/(increase) in trade receivables

1,395

(71)

Decrease/(increase) in inventories

1,098

(207)

Increase/(decrease) in accounts payable

(1,852)

464

Other accrued liabilities and operating items, net

(183)

(4)

Net cash provided by operating activities

951

568

Cash flows from investing activities:

Acquisition of subsidiaries, net of cash acquired

(25)

(100)

Additions to property and equipment

(26)

(26)

Proceeds from maturities of held-to-maturity securities

—

23

Net cash used in investing activities

(51)

(103)

Cash flows from financing activities:

Net change in short-term borrowings

20

(10)

Reduction of long-term obligations

—

(4)

Proceeds from issuance of common shares

102

21

Net tax disbursements from share-based compensation

(15)

(22)

Dividends on common shares

(105)

(84)

Purchase of treasury shares

(50)

(200)

Net cash used in financing activities

(48)

(299)

Net increase in cash and equivalents

852

166

Cash and equivalents at beginning of period

1,901

2,274

Cash and equivalents at end of period

$

2,753

$

2,440

Schedule 4

Cardinal Health, Inc. and Subsidiaries

Total Company Business Analysis

Non-GAAP

First Quarter

First Quarter

(in millions)

2014

2013

2014

2013

Revenue

Amount

$

24,523

$

25,889

Growth rate

(5)

%

(3)

%

Operating earnings

Amount

$

471

$

457

$

532

$

469

Growth rate

3

%

11

%

13

%

6

%

Earnings from continuing operations

Amount

$

340

$

272

$

378

$

281

Growth rate

25

%

15

%

35

%

9

%

Refer to the GAAP/Non-GAAP reconciliation for definitions and calculations supporting the Non-GAAP balances.

Schedule 5

Cardinal Health, Inc. and Subsidiaries

Segment Business Analysis

First Quarter

First Quarter

(in millions)

2014

2013

(in millions)

2014

2013

Pharmaceutical

Medical

Revenue

Revenue

Amount

$

21,813

$

23,498

Amount

$

2,711

$

2,393

Growth rate

(7)

%

(4)

%

Growth rate

13

%

1

%

Mix

89

%

91

%

Mix

11

%

9

%

Segment profit

Segment profit

Amount

$

433

$

400

Amount

$

106

$

74

Growth rate

8

%

10

%

Growth rate

43

%

(6)

%

Mix

80

%

84

%

Mix

20

%

16

%

Segment profit margin

1.99

%

1.70

%

Segment profit margin

3.92

%

3.11

%

Refer to definitions for an explanation of calculations.

Total consolidated revenue for the three months ended September 30, 2013 was $24,523 million, which included total segment revenue of $24,524 million and Corporate revenue of $(1) million. Total consolidated revenue for the three months ended September 30, 2012 was $25,889 million, which included total segment revenue of $25,891 million and Corporate revenue of $(2) million. Corporate revenue consists primarily of elimination of inter-segment revenue.

Total consolidated operating earnings for the three months ended September 30, 2013 were $471 million, which included total segment profit of $539 million and Corporate costs of $(68) million. Total consolidated operating earnings for the three months ended September 30, 2012 were $457 million, which included total segment profit of $474 million and Corporate costs of $(17) million. Corporate includes, among other things, restructuring and employee severance, amortization and other acquisition-related costs, impairments and loss on disposal of assets, litigation (recoveries)/charges, net and certain investment spending that are not allocated to the segments.

Schedule 6

Cardinal Health, Inc. and Subsidiaries

Schedule of Notable Items

First Quarter

(in millions, except per common share amounts)

2014

2013

Restructuring and employee severance

$

(11)

$

(5)

Tax benefit

4

2

Restructuring and employee severance, net of tax

$

(7)

$

(3)

Decrease to diluted EPS from continuing operations

$

(0.02)

$

(0.01)

Amortization and Other Acquisition-Related Costs

Amortization of acquisition-related intangible assets

$

(45)

$

(21)

Tax benefit

17

8

Amortization of acquisition-related intangible assets, net of tax

$

(28)

$

(13)

Decrease to diluted EPS from continuing operations

$

(0.08)

$

(0.04)

Other acquisition-related costs

$

(3)

$

(7)

Tax benefit

1

2

Other acquisition-related costs, net of tax

$

(2)

$

(5)

Decrease to diluted EPS from continuing operations

$

(0.01)

$

(0.01)

Total amortization and other acquisition-related costs¹

$

(49)

$

(28)

Tax benefit¹

18

10

Total amortization and other acquisition-related costs, net of tax¹

$

(31)

$

(18)

Decrease to diluted EPS from continuing operations¹

$

(0.09)

$

(0.05)

Impairments and loss on disposal of assets

$

—

$

(1)

Tax benefit

—

—

Impairments and loss on disposal of assets, net of tax

$

—

$

(1)

Decrease to diluted EPS from continuing operations

$

—

$

—

Litigation recoveries/(charges), net

$

(1)

$

22

Tax expense

—

(9)

Litigation recoveries/(charges), net, net of tax

$

(1)

$

13

Increase to diluted EPS from continuing operations

$

—

$

0.04

Weighted-average number of diluted shares outstanding

344

344

¹ The sum of the components may not equal the total due to rounding.

We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.

Schedule 7

Cardinal Health, Inc. and Subsidiaries

Asset Management Analysis

First Quarter

2014

2013

Debt to total capital

38

%

31

%

Net debt to capital

15

%

7

%

Return on equity

22.1

%

17.3

%

Non-GAAP return on equity

24.7

%

17.9

%

Effective tax rate from continuing operations¹

23.2

%

38.1

%

Non-GAAP effective tax rate from continuing operations¹

24.7

%

37.8

%

¹ The settlement of federal and state tax controversies favorably impacted, for fiscal 2014 first quarter, both the effective tax rate from continuing operations and non-GAAP effective tax rate from continuing operations by 14.3 and 12.6 percentage points, respectively. The fiscal 2014 first quarter non-GAAP effective tax rate from continuing operations, excluding the impact of the tax settlement, would have been 37.3%.

Refer to the GAAP/Non-GAAP reconciliation for definitions and calculations supporting the Non-GAAP balances.

Given the expiration of our pharmaceutical distribution contract with Walgreen Co. on August 31, 2013, we do not believe that days sales outstanding, days inventory on hand, days payable outstanding and net working capital days provide meaningful measures of our working capital performance in fiscal 2014 first quarter.

Schedule 8

Cardinal Health, Inc. and Subsidiaries

GAAP / Non-GAAP Reconciliation

First Quarter 2014

Operating

Earnings Before

Provision

Earnings

Earnings from

Diluted EPS

Diluted EPS

Earnings

Income Taxes

for

from

Continuing

from

from Continuing

Operating

Growth

and Discontinued

Income

Continuing

Operations

Continuing

Operations

(in millions, except per common share amounts)

Earnings

Rate

Operations

Taxes

Operations

Growth Rate

Operations

Growth Rate

GAAP

$

471

3

%

$

442

$

102

$

340

25

%

$

0.99

25

%

Restructuring and employee severance

11

11

4

7

0.02

Amortization and other acquisition-related costs

49

49

18

31

0.09

Impairments and loss on disposal of assets

—

—

—

—

—

Litigation (recoveries)/charges, net

1

1

—

1

—

Non-GAAP

$

532

13

%

$

503

$

124

$

378

35

%

$

1.10

36

%

First Quarter 2013

GAAP

$

457

11

%

$

439

$

167

$

272

15

%

$

0.79

16

%

Restructuring and employee severance

5

5

2

3

0.01

Amortization and other acquisition-related costs

28

28

10

18

0.05

Impairments and loss on disposal of assets

1

1

—

1

—

Litigation (recoveries)/charges, net

(22)

(22)

(9)

(13)

(0.04)

Non-GAAP

$

469

6

%

$

451

$

170

$

281

9

%

$

0.81

11

%

The sum of the components may not equal the total due to rounding.

We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.

Schedule 9

Cardinal Health, Inc. and Subsidiaries

GAAP / Non-GAAP Reconciliation

First Quarter

(in millions)

2014

2013

GAAP return on equity

22.1

%

17.3

%

Non-GAAP return on equity

Net earnings

$

339

$

271

Restructuring and employee severance, net of tax, in continuing operations

7

3

Amortization and other acquisition-related costs, net of tax, in continuing operations

31

18

Impairments and loss on disposal of assets, net of tax, in continuing operations

—

1

Litigation (recoveries)/charges, net, net of tax, in continuing operations

1

(13)

Adjusted net earnings

$

378

$

280

Annualized

$

1,512

$

1,120

First

Fourth

First

Fourth

Quarter

Quarter

Quarter

Quarter

2014

2013

2013

2012

Total shareholders' equity

$

6,297

$

5,975

$

6,281

$

6,244

Divided by average shareholders' equity

$

6,136

$

6,263

Non-GAAP return on equity

24.7

%

17.9

%

We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.

Schedule 10

Cardinal Health, Inc. and Subsidiaries

GAAP / Non-GAAP Reconciliation

First Quarter

(in millions)

2014

2013

GAAP effective tax rate from continuing operations¹

23.2

%

38.1

%

Non-GAAP effective tax rate from continuing operations

Earnings before income taxes and discontinued operations

$

442

$

439

Restructuring and employee severance

11

5

Amortization and other acquisition-related costs

49

28

Impairments and loss on disposal of assets

—

1

Litigation (recoveries)/charges, net

1

(22)

Adjusted earnings before income taxes and discontinued operations

$

503

$

451

Provision for income taxes

$

102

$

167

Restructuring and employee severance tax benefit

4

2

Amortization and other acquisition-related costs tax benefit

18

10

Impairments and loss on disposal of assets tax benefit

—

—

Litigation (recoveries)/charges, net tax expense

—

(9)

Adjusted provision for income taxes

$

124

$

170

Non-GAAP effective tax rate from continuing operations¹

24.7

%

37.8

%

First Quarter

2014

2013

Debt to total capital

38

%

31

%

Net debt to capital

Current portion of long-term obligations and other short-term borrowings

$

190

$

471

Long-term obligations, less current portion

3,693

2,408

Debt

$

3,883

$

2,879

Cash and equivalents

(2,753)

(2,440)

Net debt

$

1,130

$

439

Total shareholders' equity

6,297

6,281

Capital

$

7,427

$

6,720

Net debt to capital

15

%

7

%

¹ The settlement of federal and state tax controversies favorably impacted, for fiscal 2014 first quarter, both the effective tax rate from continuing operations and non-GAAP effective tax rate from continuing operations by 14.3 and 12.6 percentage points, respectively. The fiscal 2014 first quarter non-GAAP effective tax rate from continuing operations, excluding the impact of the tax settlement, would have been 37.3%.

We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.

¹          

Programs whereby the Company fundamentally changes its operations such as closing and consolidating facilities, moving manufacturing of a product to another location, production or business process sourcing, employee severance (including rationalizing headcount or other significant changes in personnel) and realigning operations (including substantial realignment of the management structure of a business unit in response to changing market conditions).

²          

Costs that consist primarily of amortization of acquisition-related intangible assets, transaction costs, integration costs and changes in the fair value of contingent consideration obligations.

³         

  Asset impairments and losses from the disposal of assets not eligible to be classified as discontinued operations are classified within impairments and loss on disposal of assets within the condensed consolidated statements of earnings.

⁴          

Loss contingencies related to litigation and regulatory matters and income from favorable resolution of legal matters.