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Cardinal Health Reports Second Quarter Results, Revises EPS Outlook
01/29/2008
- Revenue increases 7 percent to $23 billion
- Diluted earnings per share from continuing operations increase 16 percent to $0.89 per share; Non-GAAP diluted EPS from continuing operations increase
- Full year Non-GAAP EPS now expected to be $3.75 to $3.85
- Renews three-year, multi-billon-dollar Walgreens contract
DUBLIN, Ohio, Jan. 29, 2008 — Cardinal Health, a global provider of products and services that improve the safety and productivity of health care, today reported a revenue increase of 7 percent to $23 billion during its second quarter, with earnings per share (EPS) rising 16 percent to $0.89. On a non-GAAP basis, EPS for the quarter ended Dec. 31 grew 8 percent to $0.901.
The company also announced a revision to its full year EPS outlook based on several factors affecting its largest operating segment in the second half of the year. Cardinal Health now expects non-GAAP EPS to be in a range of $3.75 to $3.85 for the year, an increase of 10 percent to 13 percent over the prior year.
“We have three of our four operating segments performing on track, showing favorable revenue growth, expanding margins and segment profit that is at or above our guidance for the current year,” said R. Kerry Clark, chairman and chief executive officer of Cardinal Health. “Within our supply chain pharmaceutical segment, we have revised our forecast to account for the impact of anti-diversion measures for controlled substances, changes in our expectations for branded price increases and the generics market, and the effect of contract repricings. We still expect double-digit EPS growth for the year and are resolved to strengthen the business as we fix the issues that have hampered our performance.
“We continue to engage in discussions with the DEA to resolve matters affecting three of our pharmaceutical distribution centers regarding the diversion of controlled substances,” Clark added. “More broadly, in the past 45 days we have been working to put in place an enhanced system of controls across our network to address the security threat that diversion poses to the pharmaceutical supply chain. The impact of these issues may cost more than $30 million for this fiscal year, but the safety and security of the pharmaceutical supply chain is core to our business and its protection is an important public policy priority for all of us.”
Q2 and FY08 Year-to-Date Summary
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Q2 FY08
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Q2 FY07
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Y/Y
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FY08 YTD
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Y/Y
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Revenue
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$23.3 billion
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$21.8 billion
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7%
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$45.3 billion
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6%
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Operating Earnings
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$519 million
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$512 million
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1%
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$1.0 billion
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5%
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Non-GAAP Operating Earnings2
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$526 million
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$544 million
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(3%)
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$1.0 billion
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2%
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Earnings from Continuing Operations
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$325 million
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$316 million
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3%
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$628 million
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4%
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Non-GAAP Earnings from Continuing Operations3
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$329 million
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$341 million
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(3%)
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$647 million
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-
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Diluted EPS from Continuing Operations
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$0.89
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$0.77
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16%
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$1.71
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16%
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Non-GAAP Diluted EPS from Continuing Operations
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$0.90
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$0.83
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8%
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$1.76
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12%
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Second quarter segment results
Healthcare Supply Chain Services Sector
Revenue in the Healthcare Supply Chain Services-Pharmaceutical segment grew 6 percent during the quarter to $20.4 billion, with sales to non-bulk customers increasing 1 percent to $10.7 billion and sales to bulk customers increasing 12 percent to $9.7 billion. Segment profit declined 21 percent to $258 million, driven by the timing of branded price increases, conditions in the market for generic pharmaceuticals, and the repricing of several large contracts. Results were also dampened by the impact of suspensions to distribute controlled substances from three facilities and enhancements to anti-diversion programs being implemented across the company’s entire distribution network. The company continues to expect segment profit to improve in the second half of the fiscal year. Following the close of the quarter, Cardinal Health also completed an early renewal of a three-year, multi-billion-dollar agreement with Walgreens to distribute pharmaceuticals to more than 6,000 drug stores nationwide.
The Healthcare Supply Chain Services-Medical segment saw revenue growth of 8 percent to $2 billion, with increased sales momentum from the prior quarter to hospital, laboratory and ambulatory care customers. Segment profit declined 13 percent to $72 million, primarily driven by a previously disclosed change in corporate cost allocation that reduced segment profit by 7 percentage points and softness in the surgical kitting business. The company continues to expect the segment to return to year-over-year profit growth in the second half of the year from strength in the hospital and laboratory supply businesses.
Clinical and Medical Products Sector
“This quarter, the Clinical and Medical Products (CMP) sector was again an exceptional value driver by accounting for 36 percent of our total segment profit,” Clark said. “CMP continues to play a substantial role in our overall results with leading products in the areas of patient safety and infection prevention, both essential and rapidly growing segments of health care.”
Revenue for the Medical Products and Technologies segment grew 47 percent to $667 million driven by strong sales of infection prevention products and surgical instruments, and the addition of VIASYS Healthcare, which the company acquired last June. Segment profit increased 46 percent to $69 million and benefited from the VIASYS acquisition, which remains ahead of schedule in delivering synergies of $85 million to $100 million per year by fiscal 2010.
The Clinical Technologies and Services segment grew revenue 8 percent to $715 million for the quarter, with strong demand for Pyxis® dispensing and supply technologies and strength in Alaris® infusion products. Segment profit increased 26 percent to $115 million from favorable product mix and improved operating leverage. Segment profit was negatively affected by a $10 million charge for the Alaris® Pump module voluntary recall, bringing the total charges associated with the recall to $14 million.
Additional second quarter and recent highlights include:
- George S. Barrett joining the company on Jan. 28 as vice chairman and CEO of the company’s Healthcare Supply Chain Services sector. Barrett was previously the CEO of North America for Teva Pharmaceuticals. David L. Schlotterbeck, CEO of Cardinal Health’s Clinical and Medical Products sector, was also named vice chairman.
- Controlled commercial release of the Med Care Safety Solution, which enables clinicians to more easily monitor patient orders, pre-populate parameters for continuous IV infusions, verify the accuracy of medications administered and document to the hospital’s IT systems. The Lahey Clinic Medical Center in Boston will pilot this new solution that links the workflow across Cardinal Health’s Care Fusion®, Pyxis® and Alaris® products.
- Rollout of an $80 million agreement with a large health system to provide medical and surgical supplies to more than 100 affiliated hospitals nationwide.
- Signing agreements with two group-purchasing organizations for Presource® surgical kits. The agreements allow Cardinal Health to compete for kitting business at more than 60,000 health care sites.
- Repurchasing approximately $350 million of Cardinal Health shares during the quarter, bringing first and second quarter purchases to more than $940 million.
Outlook
Cardinal Health lowered and narrowed the range it expects for fiscal 2008 non-GAAP diluted EPS to $3.75 to $3.85. It previously expected non-GAAP EPS in a range of $3.95 to $4.15. In making the change, Cardinal Health cited several factors that are having an impact on its Healthcare Supply Chain Services-Pharmaceutical segment, including the timing of new launches and deflationary environment for generic pharmaceuticals; expectations for branded price increases; the repricing of some large customer contracts; and the impact of anti-diversion enhancements.
Conference Call
Cardinal Health will host a conference call and webcast at 8:30 a.m. EST to discuss the results.
To access the call and corresponding slide presentation, go to the Investor page at www.cardinalhealth.com . The conference call may also be accessed by calling 617-213-4852, passcode 75450455. An audio replay will be available until 11:30 p.m. EST on Jan. 31 at 617-801-6888, passcode 63030220. A transcript and audio replay will also be available at www.cardinalhealth.com.
About Cardinal Health
Headquartered in Dublin, Ohio, Cardinal Health, Inc. (NYSE: CAH) is an $87 billion, global company serving the health care industry with products and services that help hospitals, physician offices and pharmacies reduce costs, improve safety, productivity and profitability, and deliver better care to patients. With a focus on making supply chains more efficient, reducing hospital-acquired infections and breaking the cycle of harmful medication errors, Cardinal Health develops market leading technologies, including Alaris® IV pumps, Pyxis® automated dispensing systems, MedMined™ infection surveillance services and the CareFusion™ patient identification system. The company also manufactures medical and surgical products and is one of the largest distributors of pharmaceuticals and medical supplies worldwide. Ranked No. 19 on the Fortune 500 and No. 1 in its sector on Fortune's ranking of Most Admired firms, Cardinal Health employs more than 40,000 people on five continents. More information about the company may be found at www.cardinalhealth.com.
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1Non-GAAP diluted EPS from continuing operations: Non-GAAP earnings from continuing operations divided by diluted weighted average shares outstanding.
2Non-GAAP operating earnings: Operating earnings excluding special items and impairment charges and other.
3Non-GAAP earnings from continuing operations: Earnings from continuing operations excluding special items and impairment charges and other, both net of tax.
A reconciliation of the differences between these non-GAAP financial measures and their most directly comparable GAAP financial measures is provided in the attached tables and at http://www.cardinalhealth.com.
This news release contains forward-looking statements addressing expectations, prospects, estimates and other matters thatare dependent upon future events or developments. These matters 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 10-Q and Form 8-K reports (including all amendments to those reports) and exhibits to those reports, and include (but are not limited to) the following: competitive pressures in its various lines of business; the loss of one or more key customer or supplier relationships or changes to the terms of those relationships; uncertainties relating to timing of generic introductions and the frequency or rate of branded pharmaceutical price appreciation or generic pharmaceutical price deflation; 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 or administrative proceedings; future actions of regulatory bodies or government authorities relating to our manufacturing or sale of products and other costs or claims that could arise from our manufacturing, compounding or repackaging operations or from other services; the costs, difficulties and uncertainties related to the integration of acquired businesses; and general economic and market conditions. This news release reflects management’s views as of Jan. 29, 2008. Except to the extent required by applicable law, Cardinal Health undertakes no obligation to update or revise any forward-looking statement.