DUBLIN, Ohio, April 29, 2005 — Cardinal Health, Inc. (NYSE: CAH), the leading provider of products and services supporting the health-care industry, today announced that revenue in its fiscal third quarter rose 17 percent over the prior year to $19.1 billion, while earnings from continuing operations declined 15 percent to $368 million, or $0.84 per share.
Consolidated results for the quarter ended March 31 continued to improve sequentially due to revenue and earnings growth within Cardinal Health’s pharmaceutical distribution and medical products businesses, which were partially offset by earnings declines in sterile manufacturing and Pyxis products. Excluding special items of $28.5 million for the quarter, earnings from continuing operations decreased 9 percent to $396 million from $435 million in the prior year. Diluted earnings per share from continuing operations before special items declined 10 percent to $0.90 versus $1.00 last year. These results include non-recurring charges for the quarter of $16 million or $0.04 per share. Non-recurring charges had no effect on earnings per share in the year-earlier quarter.
“Results for our third quarter showed strong improvement within drug distribution and medical products and services, while earnings growth continued to be offset by issues within sterile manufacturing and Pyxis,” said Robert D. Walter, chairman and chief executive officer of Cardinal Health. “We remain committed to our long-term growth goals and took actions during the quarter to help both businesses reach their potential during fiscal 2006. We also made steady progress in transitioning pharmaceutical manufacturers to non-contingent distribution-service agreements and remain on schedule to convert the substantial majority of fiscal 2006 branded vendor margin by the end of the fiscal year.”
Year-to-date revenues climbed 15 percent to $55.5 billion, while ongoing margin pressures caused earnings from continuing operations to decline 30 percent to $789 million. Excluding special items, earnings from continuing operations for the fiscal year declined 20 percent to $909 million. Diluted earnings per share from continuing operations were $1.81, or $2.08 excluding special items, compared to $2.56 for the year-to-date period of fiscal 2004, or $2.58 excluding special items. These results include non-recurring charges of $88 million or $0.20 per share compared to a $0.01 non-recurring gain during the first nine-months of fiscal 2004.
Segment and Operational Results
Restructuring and efficiency programs initiated during fiscal 2005 continued to improve Cardinal Health’s cost structure during the quarter. The company remains on schedule to realize $125 million of operating-earnings improvements during fiscal 2005 and $200 million during fiscal 2006.
Cash flow from operations reached $532 million during the quarter and was approximately $2 billion for the fiscal year. Free cash flow was $460 million during the quarter and reached $1.7 billion for the year. Year-to-date free cash flow includes net proceeds of $800 million through an accounts-receivable securitization program.
As part of a previously announced $500 million share-repurchase program, 4.2 million common shares were bought during the quarter at an average price of $57.29. Under the program’s authorization, $258.1 million remains to repurchase additional shares.
(See the attached financial table for a reconciliation of the non-GAAP measures to their GAAP equivalents and a schedule of non-recurring items. Tables with specific segment results for the third quarter and fiscal 2005 year-to-date are also attached and available at the Investors page on www.cardinalhealth.com.)
Pharmaceutical Distribution and Provider Services
Revenue increased at its fastest rate in four quarters and earnings showed strong improvement within the Pharmaceutical Distribution and Provider Services segment. Revenue during the quarter rose 18 percent to $15.6 billion, driven by an increase in sales to health systems and retail chains. Operating earnings climbed 8 percent over the prior year to $344 million, the result of growth in generics, stabilizing sell margins and ongoing expense control measures. Selling, general and administrative expenses as a percent of sales again declined from the prior year. Earnings for the fiscal year continued to be negatively affected by branded vendor margins below fiscal 2003 and fiscal 2004 levels.
During the quarter, Cardinal Health continued to make progress in reaching new distribution service agreements with branded pharmaceutical manufacturers. These agreements are expected to create stronger, more predictable earnings growth for fiscal 2006 by establishing distribution fees based on services provided by Cardinal Health, and not primarily contingent on pharmaceutical price increases. To date, agreements have been reached to convert more than half of the company’s branded vendor margin for fiscal 2006 to non-contingent sources, and the company remains on schedule to convert the substantial majority by the end of the current fiscal year.
Medical Products and Services
Medical Products and Services revenue increased 7 percent over the prior year to $2.5 billion, and operating earnings grew 3 percent to $200 million. Recent hospital and group purchase organization contracts, as well as an increase in the distribution of specialty pharmaceuticals, drove the revenue increase. Earnings growth continued to be negatively affected by competitive pricing and rising costs of raw materials and fuel. Ongoing expense control and raw-material sourcing initiatives helped offset margin pressure during the quarter. Selling, general and administrative expenses as a percent of sales were again below prior-year levels.
Sales and earnings growth in Europe and Canada continued as important contributors for the segment, in part due to the strong Euro. New product sales were again led by growth of Cardinal Health’s Neu-Thera™ surgeon gloves. Continued emphasis on integrated offerings for hospitals and health systems, new products, international growth and operating efficiencies are expected to continue to contribute to earnings growth in the fourth quarter and fiscal 2006.
Pharmaceutical Technologies and Services
Pharmaceutical Technologies and Services revenue increased 3 percent during the quarter to $729 million, while operating earnings declined 28 percent to $82 million. The consistent performance of Cardinal Health’s Oral Technologies and Nuclear Pharmacy Services businesses, which both increased earnings over the prior year, continued to be offset by earnings declines in sterile manufacturing. Sterile-manufacturing earnings were again negatively affected by costs associated with delays in opening new facilities and from existing facilities operating below their planned capacity.
Positive developments during the quarter included an increase in sales of softgel products, particularly Wyeth’s Advil® and Abbott's Kaletra®, strong demand at the company’s sterile manufacturing facility in Albuquerque, N.M., the launch of branded pharmaceuticals using Cardinal Health’s Zydis® quick dissolve formulation, and ongoing productivity improvements.
Following the end of the quarter, the company decided to discontinue pharmaceutical manufacturing in Humacao, Puerto Rico as part of a previously announced company-wide restructuring program. These operations have underperformed relative to company expectations, due in part to continued regulatory issues at the facility. Cardinal Health is working with customers in an effort to transition projects to other manufacturing sites. The decision does not affect the company’s other operations in Puerto Rico or at other locations worldwide.
Clinical Technologies and Services
(Results for this segment, which include Cardinal Health’s Alaris® products, Pyxis® products and Clinical Services and Consulting organizations, are being reported for the first time this fiscal year. Prior-year results used in comparisons have been adjusted to include Pyxis and Clinical Services and Consulting, but not Alaris, which was acquired by Cardinal Health in July 2004.)
Revenue for the Clinical Technologies and Services segment increased 32 percent to $522 million for the quarter, while operating earnings decreased 25 percent to $65 million. A lengthening sales and installation cycle for Pyxis products continued to offset growth for the segment, while Alaris and Clinical Services and Consulting again made strong contributions to earnings. Excluding Alaris, which Cardinal Health acquired in July 2004, revenue declined 8 percent and operating earnings declined 57 percent.
Over the long term, earnings in the segment are expected to increase as additional efficiencies are gained from the formation of the segment, greater efficiency is realized in the installation process for new Pyxis products, and as lean manufacturing initiatives implemented during the second quarter begin to lower costs. The segment remains well positioned for growth with market-leading products and the clinical expertise to help customers with their expanding patient-safety and efficiency initiatives.
Cardinal Health expects full-year earnings per share to be in line with previously issued guidance, in a range of $3.10 to $3.20, excluding special items and non-recurring charges. Fourth-quarter earnings are expected to be negatively affected by the ongoing business transition and seasonal, sequential trends in Pharmaceutical Distribution and Provider Services, partially offset by sequential improvements in the Pharmaceutical Technologies and Services, Clinical Technologies and Services and Medical Products and Services segments.
Cardinal Health has scheduled a conference call at 11 a.m. Eastern Daylight Time to discuss its third-quarter results. To access the call and corresponding slide presentation, go to the Investors page at www.cardinalhealth.com. The conference call also may be accessed by calling 706-634-5100, passcode 4978287. An audio replay will be available until 11:00 p.m. on May 4 at 706-645-9291, passcode 4978287. A transcript and audio replay will also be available at www.cardinalhealth.com.
About Cardinal Health
Cardinal Health, Inc. (www.cardinalhealth.com) is the leading provider of products and services supporting the health-care industry. Cardinal Health develops, manufactures, packages and markets products for patient care; develops drug-delivery technologies; distributes pharmaceuticals and medical, surgical and laboratory supplies; and offers consulting and other services that improve quality and efficiency in health care. Headquartered in Dublin, Ohio, Cardinal Health employs more than 55,000 people on six continents and produces annual revenues of more than $65 billion.
Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and Form 10-Q reports (including all amendments to those reports) and exhibits to those reports, and include (but are not limited to) the costs, difficulties, and uncertainties related to the integration of acquired businesses, the loss of one or more key customer or supplier relationships or changes to the terms of those relationships, changes in the distribution patterns or reimbursement rates for health-care products and/or services, the results, consequences, effects or timing of any inquiry or investigation by any regulatory authority or any legal and administrative proceedings, the impact of previously announced restatements, difficulties in opening new facilities or fully utilizing existing capacity, difficulties and uncertainties associated with business model transitions, including the conversion of margin generated from branded pharmaceutical manufacturers to non-contingent consideration, and general economic and market conditions. Cardinal Health undertakes no obligation to update or revise any forward-looking statement.