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CAH > SEC Filings for CAH > Form 10-Q on 6-Feb-2014All Recent SEC Filings

Show all filings for CARDINAL HEALTH INC

Form 10-Q for CARDINAL HEALTH INC


6-Feb-2014

Quarterly Report


Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations for our condensed consolidated balance sheets at December 31, 2013 and June 30, 2013, and for our condensed consolidated statements of earnings for the three and six months ended December 31, 2013 and 2012. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2013 Form 10-K.
Portions of this Form 10-Q (including information incorporated by reference) include "forward-looking statements." The words "expect," "anticipate," "intend," "plan," "believe," "will," "should," "could," "would," "project," "continue," "likely," and similar expressions, among others, generally identify "forward-looking statements," which speak only as of the date the statements were made. The matters discussed in these forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. The most significant of these risks, uncertainties and other factors are described in "Part II, Item 1A: Risk Factors" of this Form 10-Q, Exhibit 99.1 to this Form 10-Q and "Part I, Item 1A: Risk Factors" of our 2013 Form 10-K. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Overview
We are a healthcare services company providing pharmaceutical and medical products and services that help pharmacies, hospitals, ambulatory surgery centers, clinical laboratories, physician offices and other healthcare providers focus on patient care while reducing costs, enhancing efficiency and improving quality. We also provide medical products to patients in the home. We report our financial results in two segments: Pharmaceutical and Medical. Revenue for the three and six months ended December 31, 2013 was $22.2 billion and $46.8 billion, a 12 percent and 9 percent decrease, respectively, from the prior-year periods largely due to the previously disclosed expiration of our pharmaceutical distribution contract with Walgreen Co. ("Walgreens") on August 31, 2013. Gross margin increased 10 percent to $1.3 billion and 9 percent to $2.6 billion for the three and six months ended December 31, 2013, respectively, reflecting the positive impact of acquisitions, margin rate expansion and sales growth from new and existing pharmaceutical distribution customers, partially offset by the expiration of our pharmaceutical distribution contract with Walgreens.
Operating earnings increased 2 percent to $519 million and 3 percent to $990 million for the three and six months ended December 31, 2013, respectively. Both periods were impacted by the factors discussed above as well as an increase in distribution, selling, general and administrative expenses and intangible asset amortization related to the acquisition of AssuraMed, Inc. ("AssuraMed"). Earnings from continuing operations were down 9 percent to $275 million and up 7 percent to $614 million for the three and six months ended December 31, 2013, respectively. Both periods were impacted by the factors discussed above and a tax charge ($56 million) due to proposed

assessments of additional tax. The six months ended December 31, 2013 also included a $63 million favorable impact from the settlement of federal and state tax controversies during the first quarter of fiscal 2014.
Our cash and equivalents balance was $2.7 billion at December 31, 2013, compared to $1.9 billion at June 30, 2013. The increase in cash and equivalents during the six months ended December 31, 2013 was driven by net cash provided by operating activities of $988 million, which includes the decrease in our net working capital associated with the expiration of our pharmaceutical distribution contract with Walgreens. We plan to continue to execute a balanced deployment of available capital to position ourselves for sustainable competitive advantage and to enhance shareholder value. Walgreens Contract
The expiration of our pharmaceutical distribution contract with Walgreens unfavorably impacted period-over-period comparisons of revenue and operating earnings during the three and six months ended December 31, 2013. We expect the contract expiration to have an adverse impact on our period-over-period comparisons of revenue and operating earnings during the remainder of fiscal 2014 and the first quarter of fiscal 2015. CVS Contracts
In December 2013, we announced the signing of an agreement with CVS Caremark Corporation ("CVS") to form a U.S.-based generic sourcing entity ("Sourcing JV"). Both companies are contributing their sourcing and supply chain expertise to the 50/50 joint venture and are committing to source generic pharmaceuticals through it. The Sourcing JV, which we expect to be operational as soon as July 1, 2014, will have an initial term of 10 years. Under this arrangement, the Sourcing JV will negotiate generic supply contracts on behalf of both companies; however, it will not own products or hold inventory on behalf of either company. The arrangement includes a quarterly payment of $25 million over the term that we will pay to CVS. No physical assets will be contributed by either company to the Sourcing JV, and minimal funding will be provided to capitalize the entity. The venture is subject to the completion of final documentation and customary closing conditions.
Also during the three months ended December 31, 2013, we entered into a three-year extension, through June 2019, of our existing pharmaceutical distribution contracts with CVS.
Acquisitions
We did not complete any acquisitions that were significant, individually or in the aggregate, during the six months ended December 31, 2013. In March 2013, we acquired AssuraMed, a provider of medical supplies to homecare providers and patients in the home. This acquisition increased revenue and operating earnings for the three and six months ended December 31, 2013. Trends
While pharmaceutical price appreciation on some generic products positively impacted our margins during the first half of fiscal 2014, there is no assurance that this price appreciation will continue in the future.


Table of Contents Cardinal Health, Inc. and Subsidiaries Financial Review (continued)

Results of Operations
Revenue
                         Three Months Ended December 31
(in millions)               2013                 2012         Change
Pharmaceutical        $       19,443       $       22,747      (15 )%
Medical                        2,799                2,487       13  %
Total segment revenue         22,242               25,234      (12 )%
Corporate                         (2 )                 (2 )   N.M.
Total revenue         $       22,240       $       25,232      (12 )%


                         Six Months Ended December 31
(in millions)               2013               2012         Change
Pharmaceutical        $      41,256       $      46,244      (11 )%
Medical                       5,511               4,879       13  %
Total segment revenue        46,767              51,123       (9 )%
Corporate                        (4 )                (2 )   N.M.
Total revenue         $      46,763       $      51,121       (9 )%

Pharmaceutical Segment
Revenue for the three and six months ended December 31, 2013 compared to the prior-year periods was negatively impacted by the expiration of our pharmaceutical distribution contract with Walgreens ($5.2 billion and $6.9 billion, respectively). Revenue for the six months ended December 31, 2013 was also negatively impacted by the expiration of our pharmaceutical distribution contract with Express Scripts, Inc. on September 30, 2012 ($2.0 billion). These decreases were partially offset by sales growth from new and existing pharmaceutical distribution customers ($1.8 billion and $3.7 billion, respectively).
Medical Segment
Revenue for the three and six months ended December 31, 2013 compared to the prior-year periods reflects the benefit of acquisitions ($278 million and $547 million, respectively) and increased net volume from existing customers ($48 million and $121 million, respectively). Cost of Products Sold
As a result of the same factors affecting the change in revenue, cost of products sold decreased $3.1 billion (13 percent) and $4.6 billion (9 percent) compared to the prior-year periods. See the gross margin discussion below for additional drivers impacting cost of products sold. Gross Margin
Three Months Ended December 31

(in millions)                2013                    2012     Change
Gross margin  $          1,345                     $ 1,224      10 %


                     Six Months Ended December 31
(in millions)              2013                   2012     Change

Gross margin $ 2,608 $ 2,382 9 %

Gross margin increased during the three and six months ended December 31, 2013 compared to the prior-year periods, driven by the positive impact of acquisitions ($77 million and $150 million, respectively). The increase in gross margin also reflects margin rate expansion ($51 million and $18 million, respectively), excluding the impact from the expiration of our pharmaceutical distribution contract with Walgreens.

Margin rate expansion for both periods was driven by strong performance from both generic programs and branded agreements, including the impact of price appreciation. Gross margin for the three months ended December 31, 2013 was unfavorably impacted by $14 million due to lower sales, which includes the impact from the expiration of our pharmaceutical distribution contract with Walgreens and is partially offset by sales growth from new and existing pharmaceutical distribution customers. Gross margin for the six months ended December 31, 2013 was positively impacted by $51 million due to sales growth from new and existing pharmaceutical distribution customers and is partially offset by the expiration of our pharmaceutical distribution contract with Walgreens.
Distribution, Selling, General and Administrative ("SG&A") Expenses Three Months Ended December 31

(in millions)                 2013                     2012    Change
SG&A expenses $           766                         $ 699      10 %


                     Six Months Ended December 31
(in millions)              2013                   2012     Change

SG&A expenses $ 1,497 $ 1,388 8 %

SG&A expenses increased during the three and six months ended December 31, 2013 compared to the prior-year period primarily due to acquisitions ($37 million and $75 million, respectively).
Segment Profit and Consolidated Operating Earnings

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