Cardinal Health Reports Fiscal 2015 First-Quarter Results

Q1 FY15

Q1 FY14

Y/Y

Revenue

$21.2 billion

$21.8 billion

Segment Profit

$451 million

$433 million

4%

Q1 FY15

Q1 FY14

Y/Y

Revenue

$2.9 billion

$2.7 billion

5%

Segment Profit

$113 million

$106 million

6%

Schedule 1

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Unaudited)

First Quarter

(in millions, except per common share amounts)

2015

2014

% Change

Revenue

$

24,070

$

24,523

(2)

%

Cost of products sold

22,729

23,259

(2)

%

Gross margin

1,341

1,264

6

%

Operating expenses:

Distribution, selling, general and administrative expenses

775

732

6

%

Restructuring and employee severance

19

11

N.M.

Amortization and other acquisition-related costs

53

49

N.M.

Impairments and loss on disposal of assets

—

—

N.M.

Litigation (recoveries)/charges, net

28

1

N.M.

Operating earnings

466

471

(1)

%

Other income, net

(3)

(4)

N.M.

Interest expense, net

34

33

1

%

Earnings before income taxes and discontinued operations

435

442

(2)

%

Provision for income taxes

169

102

65

%

Earnings from continuing operations

266

340

(22)

%

Loss from discontinued operations, net of tax

—

(1)

N.M.

$

266

$

339

(22)

%

Basic earnings per common share:

Continuing operations

$

0.79

$

1.00

(21)

%

Discontinued operations

—

—

N.M.

Net basic earnings per common share

$

0.79

$

1.00

(21)

%

Diluted earnings per common share:

Continuing operations

$

0.78

$

0.99

(21)

%

Discontinued operations

—

—

N.M.

Net diluted earnings per common share

$

0.78

$

0.99

(21)

%

Weighted-average number of common shares outstanding:

Basic

336

340

Diluted

340

344

Schedule 2

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions)

September 30,
 2014

June 30,
 2014

(Unaudited)

Assets

Current assets:

Cash and equivalents

$

2,469

$

2,865

Trade receivables, net

5,662

5,380

Inventories, net

8,069

8,266

Prepaid expenses and other

1,338

1,428

Total current assets

17,538

17,939

Property and equipment, net

1,434

1,459

Goodwill and other intangibles, net

5,923

5,870

Other assets

816

765

Total assets

$

25,711

$

26,033

Liabilities and Shareholders' Equity

Current liabilities:

Accounts payable

$

11,995

$

12,149

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

843

801

Other accrued liabilities

2,058

2,165

Total current liabilities

14,896

15,115

Long-term obligations, less current portion

3,164

3,171

Deferred income taxes and other liabilities

1,395

1,346

Total shareholders' equity

6,256

6,401

Total liabilities and shareholders' equity

$

25,711

$

26,033

Schedule 3

Cardinal Health, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

First Quarter

(in millions)

2015

2014

Cash flows from operating activities:

Net earnings

$

266

$

Loss from discontinued operations, net of tax

—

1

Earnings from continuing operations

266

340

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

Depreciation and amortization

108

117

Gain on sale of other investments

(5)

—

Share-based compensation

25

24

Provision for bad debts

12

12

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

  Decrease/(increase) in trade receivables

(291)

1,395

  Decrease in inventories

199

1,098

  Decrease in accounts payable

(157)

(1,852)

  Other accrued liabilities and operating items, net

(96)

(183)

Net cash provided by operating activities

61

951

Cash flows from investing activities:

Acquisition of subsidiaries, net of cash acquired

(61)

(25)

Additions to property and equipment

(36)

(26)

Purchase of available-for-sale securities and other investments

(75)

—

Proceeds from sale of available-for-sale securities and other investments

91

—

Net cash used in investing activities

(81)

(51)

Cash flows from financing activities:

Net change in short-term borrowings

40

20

Net proceeds from issuance of common shares

25

75

Tax proceeds from share-based compensation

38

12

Dividends on common shares

(119)

(105)

Purchase of treasury shares

(360)

(50)

Net cash used in financing activities

(376)

(48)

Net increase/(decrease) in cash and equivalents

(396)

852

Cash and equivalents at beginning of period

2,865

1,901

Cash and equivalents at end of period

$

2,469

$

Schedule 4

Cardinal Health, Inc. and Subsidiaries

Total Company Business Analysis

Non-GAAP

First Quarter

First Quarter

(in millions)

2015

2014

2015

Revenue

Amount

$

24,070

$

24,523

Growth rate¹

(2)

%

(5)

%

Operating earnings

Amount

$

466

$

471

$

566

$

532

Growth rate

(1)

%

3

%

6

%

13

%

Earnings from continuing operations

Amount

$

266

$

340

$

340

$

378

Growth rate

(22)

%

25

%

(10)

%

35

%

Return on equity

16.8

%

22.1

%

21.5

%

24.7

%

Effective tax rate from continuing operations²

38.9

%

23.2

%

36.5

%

24.7

%

Debt to total capital

39

%

38

%

Net debt to total capital

20

%

15

%

¹

Revenue from Walgreens was $3.3 billion for the three months ended September 30, 2013. Excluding the impact of the Walgreens contract expiration, the fiscal 2015 first quarter revenue growth rate would have been 13 percent.

²

The settlements 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 settlements, would have been 37.3 percent.

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)

2015

2014

(in millions)

2015

2014

Pharmaceutical

Medical

Revenue

Amount

$

21,209

$

21,813

Amount

$

2,852

$

2,711

Growth rate¹

(3)

%

(7)

%

Growth rate

5

%

13

%

Segment profit

Segment profit

Amount

$

451

$

433

Amount

$

113

$

106

Growth rate

4

%

8

%

Growth rate

6

%

43

%

Segment profit margin

2.13

%

1.99

%

Segment profit margin

3.97

%

3.92

%

¹

Revenue from Walgreens was $3.3 billion for the three months ended September 30, 2013. Excluding the impact of the Walgreens contract expiration, the fiscal 2015 first quarter Pharmaceutical segment revenue growth rate would have been 15 percent.

Refer to definitions for an explanation of calculations.

Total consolidated revenue for the three months ended September 30, 2014 was $24,070 million, which included total segment revenue of $24,061 million and Corporate revenue of $9 million. 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.  Corporate revenue consists primarily of elimination of inter-segment revenue and other revenue not allocated to the segments.

Total consolidated operating earnings for the three months ended September 30, 2014 were $466 million, which included total segment profit of $564 million and Corporate costs of $(98) million. 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. 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

GAAP / Non-GAAP Reconciliation

First Quarter 2015

Operating

Earnings Before

Provision

Earnings

Earnings from

Diluted EPS

Diluted EPS

Earnings

Income Taxes

for

from

Continuing

from

from Continuing

(in millions, except per common share amounts)

Operating

Growth

and Discontinued

Income

Continuing

Operations

Continuing

Operations

Earnings

Rate

Operations

Taxes

Operations

Growth Rate

Operations

Growth Rate¹

GAAP

$

466

(1)

%

$

435

$

169

$

266

(22)

%

$

0.78

(21)

%

Restructuring and employee severance

19

19

7

12

0.04

Amortization and other acquisition-related costs

53

53

19

34

0.10

Impairments and loss on disposal of assets

—

—

—

—

—

Litigation (recoveries)/charges, net

28

28

—

28

0.08

Non-GAAP

$

566

6

%

$

535

$

195

$

340

(10)

%

$

1.00

(9)

%

First Quarter 2014

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

%

 ¹

The $63 million settlements of federal and state tax controversies favorably impacted, for fiscal 2014 first quarter, both diluted EPS from continuing operations and non-GAAP diluted EPS from continuing operations by $0.18. The fiscal 2015 first quarter growth rates for diluted EPS from continuing operations and non-GAAP diluted EPS from continuing operations, excluding the impact of the tax settlements, would have been (4) percent and 9 percent, respectively.

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

GAAP / Non-GAAP Reconciliation

First Quarter

(in millions)

2015

2014

GAAP return on equity

16.8

%

22.1

%

Non-GAAP return on equity

Net earnings

$

266

$

339

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

12

7

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

34

31

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

—

—

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

28

1

Adjusted net earnings

$

340

$

378

Annualized

$

1,360

$

1,512

First

Fourth

First

Fourth

Quarter

Quarter

Quarter

Quarter

2015

2014

2014

2013

Total shareholders' equity

$

6,256

$

6,401

$

6,297

$

5,975

Divided by average shareholders' equity

$

6,328

$

6,136

Non-GAAP return on equity

21.5

%

24.7

%

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

Schedule 8

Cardinal Health, Inc. and Subsidiaries

GAAP / Non-GAAP Reconciliation

First Quarter

(in millions)

2015

2014

GAAP effective tax rate from continuing operations¹

38.9

%

23.2

%

Non-GAAP effective tax rate from continuing operations

Earnings before income taxes and discontinued operations

$

435

$

442

Restructuring and employee severance

19

11

Amortization and other acquisition-related costs

53

49

Impairments and loss on disposal of assets

—

—

Litigation (recoveries)/charges, net

28

1

Adjusted earnings before income taxes and discontinued operations

$

535

$

503

Provision for income taxes

$

169

$

102

Restructuring and employee severance tax benefit

7

4

Amortization and other acquisition-related costs tax benefit

19

18

Impairments and loss on disposal of assets tax benefit

—

—

Litigation (recoveries)/charges, net tax benefit

—

—

Adjusted provision for income taxes

$

195

$

124

Non-GAAP effective tax rate from continuing operations¹

36.5

%

24.7

%

First Quarter

2015

2014

Debt to total capital

39

%

38

%

Net debt to capital

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

$

843

$

190

Long-term obligations, less current portion

3,164

3,693

Debt

$

4,007

$

3,883

Cash and equivalents

(2,469)

(2,753)

Net debt

$

1,538

$

1,130

Total shareholders' equity

6,256

6,297

Capital

$

7,794

$

7,427

Net debt to capital

20

%

15

%

 ¹

The settlements 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 settlements, would have been 37.3 percent.

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

Forward-Looking Non-GAAP Financial Measures

We present non-GAAP earnings from continuing operations and non-GAAP effective tax rate from continuing operations (and presentations derived from these financial measures, including per share calculations) on a forward-looking basis. The most directly comparable forward-looking GAAP measures are earnings from continuing operations and effective tax rate from continuing operations. We are unable to provide a quantitative reconciliation of these forward-looking non-GAAP measures to the most directly comparable forward-looking GAAP measures because we cannot reliably forecast restructuring and employee severance, amortization and other acquisition-related costs, impairments and loss on disposal of assets, litigation (recoveries)/charges, net and LIFO charges/(credits), which are difficult to predict and estimate and are primarily dependent on future events. Please note that the unavailable reconciling items could significantly impact our future financial results.

Cardinal Health, Inc. and Subsidiaries

Use of Non-GAAP Measures

This earnings release contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP").  In general, the measures exclude items and charges that (i) management does not believe reflect Cardinal Health, Inc.'s (the "Company") core business and relate more to strategic, multi-year corporate activities; or (ii) relate to activities or actions that may have occurred over multiple or in prior periods without predictable trends. Management uses these non-GAAP financial measures internally to evaluate the Company's performance, evaluate the balance sheet, engage in financial and operational planning and determine incentive compensation.

Beginning in fiscal 2015, the Company will exclude last-in, first-out ("LIFO") inventory charges/(credits)⁵ from its non-GAAP earnings, for consistency with the presentation by some of its peers. The Company did not record any LIFO charges or credits in the first quarter of fiscal 2015 or 2014, respectively.

Management provides these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on its financial and operating results and in comparing the Company's performance to that of its competitors.  However, the non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth above should be carefully evaluated.

Definitions

Debt: long-term obligations plus short-term borrowings.

Debt to Total Capital: debt divided by (debt plus total shareholders' equity).

Net Debt: a Non-GAAP measure defined as debt minus (cash and equivalents).

Net Debt to Capital: a Non-GAAP measure defined as net debt divided by (net debt plus total shareholders' equity).

Non-GAAP Diluted EPS from Continuing Operations: non-GAAP earnings from continuing operations divided by diluted weighted-average shares outstanding.

Non-GAAP Earnings from Continuing Operations: earnings from continuing operations excluding (1) restructuring and employee severance¹, (2) amortization and other acquisition-related costs², (3) impairments and loss on disposal of assets³, (4) litigation (recoveries)/charges, net⁴ and (5) LIFO charges/(credits), each net of tax.

Non-GAAP Effective Tax Rate from Continuing Operations: (provision for income taxes adjusted for (1) restructuring and employee severance, (2) amortization and other acquisition-related costs, (3) impairments and loss on disposal of assets, (4) litigation (recoveries)/charges, net and (5) LIFO charges/(credits)) divided by (earnings before income taxes and discontinued operations adjusted for the same five items).

Non-GAAP Operating Earnings: operating earnings excluding (1) restructuring and employee severance, (2) amortization and other acquisition-related costs, (3) impairments and loss on disposal of assets, (4) litigation (recoveries)/charges, net and (5) LIFO charges/(credits).

Non-GAAP Return on Equity: (annualized current period net earnings excluding (1) restructuring and employee severance, (2) amortization and other acquisition-related costs, (3) impairments and loss on disposal of assets, (4) litigation (recoveries)/charges, net and (5) LIFO charges/(credits), each net of tax) divided by average shareholders' equity.

Return on Equity: annualized current period net earnings divided by average shareholders' equity.

Segment Profit: segment revenue minus (segment cost of products sold and segment distribution, selling, general and administrative expenses).

Segment Profit Margin: segment profit divided by segment revenue.

¹

Programs by which 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 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.

⁵

The inventories of the Company's core pharmaceutical distribution facilities in the Pharmaceutical segment are valued at the lower of cost, using the LIFO method, or market.  These charges or credits are included in cost of products sold, and represent changes in the Company's LIFO inventory reserve.