<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 2000 Commission File Number 0-12591
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)
(614) 757-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of Registrant's Common Shares outstanding at the close of
business on October 31, 2000 was as follows:
Common Shares, without par value: 279,118,513
--------------
<PAGE> 2
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information:
---------------------
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three Months
Ended September 30, 2000 and 1999 (unaudited)...................................... 3
Condensed Consolidated Balance Sheets at September 30, 2000 and
June 30, 2000 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2000 and 1999 (unaudited)............................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 14
Part II. Other Information:
-----------------
Item 1. Legal Proceedings.................................................................. 14
Item 6. Exhibits and Reports on Form 8-K................................................... 14
</TABLE>
* Items not listed are inapplicable.
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PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- ----------
<S> <C> <C>
Revenue:
Operating revenue $ 6,983.2 $ 5,829.3
Bulk deliveries to customer warehouses 1,751.4 954.4
----------- ----------
Total revenue 8,734.6 6,783.7
Cost of products sold:
Operating cost of products sold 6,246.8 5,174.5
Cost of products sold - bulk deliveries 1,751.4 954.4
----------- ----------
Total cost of products sold 7,998.2 6,128.9
Gross margin 736.4 654.8
Selling, general and administrative expenses 426.1 391.3
Merger-related costs 17.3 36.8
----------- ----------
Operating earnings 293.0 226.7
Interest expense and other (27.0) (24.9)
----------- ----------
Earnings before income taxes 266.0 201.8
Provision for income taxes 92.8 79.8
----------- ----------
Net earnings $ 173.2 $ 122.0
=========== ==========
Earnings per Common Share:
Basic $ 0.62 $ 0.44
Diluted $ 0.61 $ 0.43
Weighted average number of Common Shares outstanding:
Basic 277.6 280.0
Diluted 284.4 286.2
Cash dividends declared per Common Share $ 0.030 $ 0.025
</TABLE>
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 491.1 $ 504.6
Trade receivables, net 1,904.2 1,677.0
Current portion of net investment in sales-type leases 198.5 187.7
Inventories 4,468.4 3,865.3
Prepaid expenses and other 677.5 636.0
----------- -----------
Total current assets 7,739.7 6,870.6
----------- -----------
Property and equipment, at cost 3,025.1 2,937.8
Accumulated depreciation and amortization (1,370.8) (1,310.9)
----------- -----------
Property and equipment, net 1,654.3 1,626.9
Other assets:
Net investment in sales-type leases, less current portion 579.7 578.6
Goodwill and other intangibles 1,045.4 961.7
Other 205.5 227.1
----------- -----------
Total $ 11,224.6 $ 10,264.9
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 10.5 $ 19.1
Current portion of long-term obligations 10.6 9.3
Accounts payable 3,429.4 3,030.9
Other accrued liabilities 1,058.8 1,202.2
----------- -----------
Total current liabilities 4,509.3 4,261.5
----------- -----------
Long-term obligations, less current portion 1,973.3 1,485.8
Deferred income taxes and other liabilities 511.7 536.4
Shareholders' equity:
Common Shares, without par value 1,324.5 1,227.9
Retained earnings 3,337.9 3,173.4
Common Shares in treasury, at cost (315.8) (329.1)
Other comprehensive income (107.8) (81.9)
Other (8.5) (9.1)
----------- -----------
Total shareholders' equity 4,230.3 3,981.2
----------- -----------
Total $ 11,224.6 $ 10,264.9
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 173.2 $ 122.0
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization 64.0 61.7
Provision for bad debts 3.4 9.6
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (142.2) (157.8)
Increase in inventories (504.3) (627.9)
Increase in net investment in sales-type leases (11.9) (15.5)
Increase in accounts payable 341.9 442.6
Other operating items, net (189.1) (13.3)
-------- --------
Net cash used in operating activities (265.0) (178.6)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (239.9) (48.3)
Proceeds from sale of property and equipment 1.8 2.6
Additions to property and equipment (47.8) (81.6)
Other - 48.4
-------- --------
Net cash used in investing activities (285.9) (78.9)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 488.0 356.0
Reduction of long-term obligations (23.8) (79.0)
Proceeds from long-term obligations, net of issuance costs 15.4 -
Common Shares issued under employee benefit plans 66.3 9.9
Dividends on Common Shares and cash paid
in lieu of fractional shares (8.3) (7.1)
Other (0.2) (22.3)
-------- --------
Net cash provided by financing activities 537.4 257.5
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (13.5) -
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 504.6 185.4
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 491.1 $ 185.4
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. The condensed consolidated financial statements of Cardinal Health,
Inc. (the "Company") include the accounts of all majority-owned
subsidiaries and all significant intercompany amounts have been
eliminated. These condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and include
all of the information and disclosures required by generally accepted
accounting principles for interim reporting. In the opinion of
management, all adjustments necessary for a fair presentation have been
included. Except as disclosed elsewhere herein, all such adjustments
are of a normal and recurring nature.
The condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial
statements and related notes contained in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2000 (the "2000 Form
10-K"). Without limiting the generality of the foregoing, Note 1 of the
"Notes to Consolidated Financial Statements" from the 2000 Form 10-K is
specifically incorporated herein by reference.
Note 2. Basic earnings per Common Share ("Basic") is computed by dividing
net earnings (the numerator) by the weighted average number of Common
Shares outstanding during each period (the denominator). Diluted
earnings per Common Share is similar to the computation for Basic,
except that the denominator is increased by the dilutive effect of
stock options outstanding, computed using the treasury stock method.
Note 3. The Company's comprehensive income consists of net earnings, foreign
currency translation adjustments, unrealized loss on investment and net
unrealized loss on derivative instruments as follows:
<TABLE>
<CAPTION>
For the three months ended
(in millions) September 30,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Net earnings $ 173.2 $ 122.0
Foreign currency adjustments (20.3) 1.9
Unrealized loss on investment (5.4) -
Net unrealized loss on derivative instruments (0.2) -
------------ -----------
Total comprehensive income $ 147.3 $ 123.9
============ ===========
</TABLE>
Note 4. On August 16, 2000, the Company completed the purchase of Bergen
Brunswig Medical Corporation ("BBMC") for approximately $180 million,
subject to post-closing adjustments. BBMC distributes medical, surgical
and laboratory supplies to doctors' offices, long-term care and nursing
centers, hospitals and other providers of care. In addition, the
Company also completed several other individually immaterial
acquisitions during the quarter ended September 30, 2000. These
transactions were accounted for under the purchase method of
accounting. The condensed consolidated financial statements include the
results of operations from each of these business combinations as of
the date of acquisition. Had the transactions occurred on July 1, 1999,
results of operations would not have differed materially from reported
results.
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Note 5. Costs of effecting mergers and subsequently integrating the
operations of the various merged companies are recorded as
merger-related costs when incurred. The merger-related costs currently
being recognized are primarily a result of the merger transactions with
Automatic Liquid Packaging, Inc. ("ALP"), Allegiance Corporation
("Allegiance") and R.P. Scherer Corporation ("Scherer"). The following
is a summary of the merger-related costs for the three-month periods
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------------------------------------------------
(in millions) 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Transaction and employee-related costs $ (7.9) $ (21.3)
Exit costs (0.1) (4.3)
Restructuring costs (1.6) (6.9)
Other integration costs (7.7) (4.3)
---------------------------------------------------------------------------------
Total merger-related costs $ (17.3) $ (36.8)
Tax effect of merger-related costs 6.3 7.1
---------------------------------------------------------------------------------
Net effect of merger-related costs $ (11.0) $ (29.7)
=================================================================================
</TABLE>
During the above stated periods, the Company incurred direct
transaction costs related to its merger transactions. These expenses
primarily include investment banking, legal, accounting and other
professional fees associated with the respective merger transaction. In
addition, the Company incurred employee-related costs, which consist
primarily of severance and transaction/stay bonuses as a result of the
ALP, Allegiance and Scherer merger transactions. Partially offsetting
the transaction and employee-related costs recorded during the three
months ended September 30, 1999 was a $10.3 million credit recorded to
adjust the estimated transaction and employee-related costs previously
recorded in connection with the Allegiance merger transaction. Actual
billings and employee-related costs were less than the amounts
originally anticipated, resulting in a reduction of the merger-related
costs. Exit costs relate primarily to costs associated with lease
terminations and moving expenses as a direct result of the merger
transactions with ALP, Allegiance and Scherer. Other integration costs
include charges related to integrating the operations of previous
merger transactions.
The Company recorded charges of $1.6 million and $6.9 million during
the three months ended September 30, 2000 and 1999, respectively,
associated with the business restructuring as a result of the Company's
merger transaction with Scherer. As part of the business restructuring,
the Company is closing certain facilities. In connection with such
closings, the Company has incurred employee-related costs, asset
impairment charges and exit costs related to the termination of
contracts and lease agreements.
The net of tax effect of the various merger-related costs recorded
during the three months ended September 30, 2000 and 1999 was to reduce
net earnings by $11.0 million to $173.2 million and by $29.7 million to
$122.0 million, respectively, and to reduce reported diluted earnings
per Common Share by $0.04 per share to $0.61 per share and by $0.10 per
share to $0.43 per share, respectively.
Note 6. The Company is organized based on the products and services it
offers. Under this organizational structure, the Company operates in
four business segments: Pharmaceutical Distribution and Provider
Services, Medical-Surgical Products and Services, Pharmaceutical
Technologies and Services and Automation and Information Services. The
Company has not made any significant changes in the segments reported
or the basis of measurement of segment profit or loss from the
information provided in the Company's 2000 Form 10-K.
The Pharmaceutical Distribution and Provider Services segment involves
the distribution of a broad line of pharmaceuticals, healthcare and
beautycare products, therapeutic plasma and other specialty
pharmaceutical products and other items typically sold by hospitals,
retail drug stores and other healthcare providers. In addition, this
segment provides services to the healthcare industry through integrated
pharmacy management, temporary pharmacy staffing, as well as
franchising of apothecary-style retail pharmacies.
The Medical-Surgical Products and Services segment involves the
manufacture of medical, surgical and laboratory products and the
distribution of these and other products to hospitals, physician
offices, surgery centers and other healthcare providers, as well as
providing healthcare consulting services.
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The Pharmaceutical Technologies and Services segment provides services
to the pharmaceutical manufacturing industry through the design of
unique drug delivery systems, liquid fill contract manufacturing,
comprehensive packaging services and reimbursement services.
The Automation and Information Services segment provides services to
hospitals and other healthcare providers through pharmacy automation
equipment and clinical information system services.
The Company evaluates the performance of the segments based on
operating earnings after the corporate allocation of administrative
expenses. Special charges are not allocated to the segments.
The following table includes revenue and operating earnings for the
three-month periods ended September 30, 2000 and 1999 for each segment
and reconciling items necessary to equal amounts reported in the
condensed consolidated financial statements:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
----------------------------------
(in millions) Net Revenue
----------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Operating revenue:
Pharmaceutical Distribution and Provider Services $5,252.0 $4,289.7
Medical-Surgical Products and Services 1,378.5 1,212.8
Pharmaceutical Technologies and Services 272.1 258.9
Automation and Information Services 90.1 69.8
Other (9.5) (1.9)
---------------- ----------------
Total operating revenue 6,983.2 5,829.3
Bulk deliveries to customer warehouses:
Pharmaceutical Distribution and Provider Services 1,751.4 954.4
---------------- ----------------
Total net revenue $8,734.6 $6,783.7
-------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Operating Earnings
----------------------------------
2000 1999
---------------- ----------------
<S> <C> <C>
Operating earnings:
Pharmaceutical Distribution and Provider Services $151.1 $124.3
Medical-Surgical Products and Services 102.6 86.6
Pharmaceutical Technologies and Services 49.9 45.0
Automation and Information Services 23.1 17.1
Corporate (1) (33.7) (46.3)
---------------- ----------------
Total operating earnings $293.0 $226.7
-------------------------------------------------------------------------------------------------------
</TABLE>
(1) Corporate - operating earnings primarily consist of special
charges of $17.3 million and $36.8 million for the three
months ended September 30, 2000 and 1999 and unallocated
corporate depreciation and amortization and administrative
expenses.
Note 7. On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
Healthcare distribution business, surgical and respiratory therapy
business and healthcare cost-saving business, as well as certain
foreign operations (the "Allegiance Business") in connection with a
spin-off of the Allegiance Business by Baxter. In connection with this
spin-off, Allegiance, which was acquired by the Company on February 3,
1999, assumed the defense of litigation involving claims related to
the Allegiance Business from Baxter Healthcare Corporation ("BHC"),
including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. Allegiance will be defending
and indemnifying BHC, as contemplated by the agreements between Baxter
and Allegiance, for all expenses and potential liabilities associated
with claims pertaining to the litigation assumed by Allegiance. As of
September 30, 2000, there were approximately 563 lawsuits involving
BHC and/or Allegiance containing allegations of sensitization to
natural rubber latex products. Some of the cases are now proceeding to
trial. Because of the increase in claims filed and the ongoing defense
costs that will be incurred, the Company believes it is probable that
it will continue to incur significant expenses related to
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the defense of cases involving natural rubber latex gloves. At this
time, the Company is unable to evaluate the extent of any potential
liability, and unable to estimate any potential loss. AEIA, one of the
insurers for the latex glove litigation, has advised the Company of its
intent to resolve through arbitration the extent of its obligation to
reimburse the Company for certain defense costs and loss expenses
incurred in connection with the litigation. The Company believes a
substantial portion of any liability will be covered by insurance,
subject to self-insurance retentions, exclusions, conditions, coverage
gaps, policy limits and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of
certain of its subsidiaries as a potentially responsible party for
environmental clean-up costs. Although the ultimate resolution of the
litigation referenced herein cannot be forecast with certainty, the
Company intends to vigorously defend itself and does not believe that
the outcome of any pending litigation will have a material adverse
effect on the Company's consolidated financial statements.
Note 8. As of July 1, 2000, the Company adopted the Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by
Statement of Financial Accounting Standards No. 138 ("SFAS 138"),
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such
instruments at fair value. The adoption of these statements did not
have a material impact on the Company's consolidated financial
statements.
In September 2000, the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 140 ("SFAS 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which is effective for any activities
occurring after March 31, 2001. SFAS 140 replaces SFAS 125 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," therefore revising the disclosure for securitizations and
other transfers of financial assets or collateral. The Company does not
anticipate that the adoption of SFAS 140 will have a material impact on
the consolidated financial statements.
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements" which
requires adoption during the fourth quarter of fiscal 2001. At this
time, the Company does not anticipate that the adoption of SAB 101 will
have a material impact on the consolidated financial statements. The
Company will continue to analyze the impact of SAB 101, including any
amendments or further interpretation, based upon the relevant facts and
circumstances at the time of adoption.
Note 9. On November 1, 2000, the shareholders of the Company approved, and
the Company's articles of incorporation were amended to effect, an
increase in the number of authorized Common Shares, without par value,
from 500 million to 750 million.
Note 10. During the first quarter of fiscal year 2001, Cardinal Health Funding
LLC ("CHF") sold an undivided interest in a defined pool of trade
receivables to a bank at amounts approximating their fair value. CHF
obtained proceeds of approximately $85 million related to the
transaction and all amounts were repaid early in the second quarter of
fiscal year 2001. CHF was organized for the sole purpose of buying
receivables and selling those receivables to certain financial
institutions or other investors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis is concerned with material changes in
financial condition and results of operations for the Company's condensed
consolidated balance sheets as of September 30, 2000 and June 30, 2000, and for
the condensed consolidated statements of earnings for the three month periods
ended September 30, 2000 and 1999.
This discussion and analysis should be read together with management's
discussion and analysis included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2000.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to materially differ from those made,
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to this Form 10-Q and are
incorporated herein by reference. The Company disclaims any obligation to update
any forward-looking statement.
GENERAL
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and
Services, Pharmaceutical Technologies and Services and Automation and
Information Services. See Note 6 of "Notes to Condensed Consolidated Financial
Statements" for a description of these segments.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Operating Revenue Percent of Total
Operating Revenues
---------------------------------
Three months ended September 30, Growth (1) 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pharmaceutical Distribution and Provider Services 22% 75% 74%
Medical-Surgical Products and Services 14% 20% 20%
Pharmaceutical Technologies and Services 5% 4% 4%
Automation and Information Services 29% 1% 2%
Total Company 20% 100% 100%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The growth rate applies to the three-month period ended
September 30, 2000 compared to the corresponding period of the
prior year.
Total operating revenue for the three months ended September 30, 2000
increased 20% compared to the same period of the prior year. The majority of the
operating revenue increase came from existing customers in the form of increased
volume and price increases. A portion of the growth was a result of acquisitions
during the quarter ended September 30, 2000 (see Note 4 of "Notes to Condensed
Consolidated Financial Statements"). The remainder of the growth came from the
addition of new customers, some of which was a result of cross-selling
opportunities among the various businesses.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth over the quarter ended September 30, 1999 was primarily due to
strong sales to all customer segments, especially pharmacy chain stores. All
operating revenue growth for this segment was internal and was the result of
increased volume to existing customers and new contracts.
The increase in the Medical-Surgical Products and Services segment's
operating revenue during the first quarter of fiscal 2001 was mainly due to an
increase in sales of distributed products. Bergen Brunswig Medical Corporation
("BBMC") was acquired in the current quarter and accounted for as a purchase
transaction. As prior year revenues for this segment were not restated, the
inclusion of BBMC revenues for a portion of the quarter ended September 30, 2000
further increased first quarter 2001 revenues over prior year for distributed
products.
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The growth in operating revenue for the Pharmaceutical Technologies and
Services segment during the first quarter of fiscal 2001 was the result of
strong sales volume for all businesses in the segment, with pharmaceutical
packaging and liquid fill contract manufacturing being the largest contributors.
The pharmaceutical packaging business' growth was attributable to a mix of new
customers and increased volume from existing customers. The liquid fill contract
manufacturing business' revenue growth was primarily a result of increased
volume from existing customers. In addition, cross-selling opportunities among
the businesses within this segment contributed to an increase in operating
revenue.
The increase in operating revenue for the Automation and Information
Services segment over the first quarter of the prior year was primarily due to
sales of new products and existing automation product sales to acute care
customers. In addition, the first quarter of fiscal 2000 had lower than average
unit sales due to customer concentration on Y2K.
Bulk Deliveries to Customer Warehouses. The Company reports as revenue bulk
deliveries made to customers' warehouses, whereby the Company acts as an
intermediary in the ordering and subsequent delivery of pharmaceutical products.
Fluctuations in bulk deliveries result largely from circumstances that are
beyond the control of the Company, including consolidation within customers'
industries, decisions by customers to either begin or discontinue warehousing
activities, and changes in policies by manufacturers related to selling directly
to customers. Due to the lack of margin generated through bulk deliveries,
fluctuations in their amount have no significant impact on the Company's
operating earnings.
<TABLE>
<CAPTION>
Gross Margin Three Months Ended
September 30,
---------------------------------------------------------------------------------------------
(As a percentage of operating revenue) 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Pharmaceutical Distribution and Provider Services 5.37% 5.74%
Medical-Surgical Products and Services 22.50% 23.00%
Pharmaceutical Technologies and Services 32.44% 31.80%
Automation and Information Services 64.32% 68.79%
Total Company 10.55% 11.23%
---------------------------------------------------------------------------------------------
</TABLE>
The decrease in gross margin as a percentage of operating revenue during
the quarter ended September 30, 2000 was due primarily to a greater mix of lower
margin pharmaceutical distribution during the first quarter of fiscal 2001, as
well as a decrease in margins for the Automation and Information Services
segment. The Pharmaceutical Distribution and Provider Services segment's mix
increased to 75% of total operating revenues for the three months ended
September 30, 2000 from 74% for the comparable period of the prior year.
The Pharmaceutical Distribution and Provider Services segment's gross
margin as a percentage of operating revenue decreased primarily as a result of
lower selling margins due to a greater mix of sales to retail pharmacy chains.
Such customers have a relatively lower margin in connection with a lower cost of
service (see discussion in selling, general and administrative expenses). This
decrease was partially offset by higher vendor margins from favorable price
increases and manufacturer marketing programs.
The decrease in the Medical-Surgical Products segment's gross margin for
the three months ended September 30, 2000 over the comparable period of prior
year was primarily due to the purchase of BBMC. As expected, this transaction
shifted product mix toward lower margin distributed products. Excluding the
impact of the BBMC acquisition, segment gross margins increased slightly over
the first quarter of the prior year.
The increase in the Pharmaceutical Technologies and Services segment's
gross margin was due primarily to the drug delivery development business'
improvement as a result of a shift in mix to higher margin pharmaceutical
products from lower margin health and nutrition products. Gross margin was also
favorably impacted by an improvement in manufacturing processes as a result of
improved productivity and ongoing plant modernization.
The decrease in gross margin for the Automation and Information Services
segment for the three months ended September 30, 2000 was primarily due to
product mix.
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<PAGE> 12
<TABLE>
<CAPTION>
Selling, General and Administrative Expenses Three Months Ended
September 30,
--------------------------------------------------------------------------------------------------------
(As a percentage of operating revenue) 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pharmaceutical Distribution and Provider Services 2.49% 2.84%
Medical-Surgical Products and Services 15.06% 15.86%
Pharmaceutical Technologies and Services 14.08% 14.41%
Automation and Information Services 38.68% 44.28%
Total Company 6.10% 6.71%
--------------------------------------------------------------------------------------------------------
</TABLE>
The improvement in selling, general and administrative expenses as a
percentage of operating revenue for the three months ended September 30, 2000
reflects economies of scale associated with the Company's revenue growth, as
well as significant productivity gains resulting from continued cost control
efforts and the consolidation and selective automation of operating facilities.
In addition, the Company is continuing to take advantage of synergies from
recent acquisitions to decrease selling, general and administrative expenses as
a percentage of operating revenue. The overall increase of 9% in selling,
general and administrative expenses experienced in the three months ended
September 30, 2000 compared to the respective period a year ago, was due
primarily to increases in personnel costs and depreciation expense. The increase
in selling, general and administrative expenses compares favorably to the 20%
growth in operating revenue for the three months ended September 30, 2000 as
compared to the same period of prior year.
Merger-Related Costs. Costs of effecting mergers and subsequently integrating
the operations of the various merged companies are recorded as merger-related
costs when incurred. The merger-related costs currently being recognized are
primarily a result of the merger transactions with Automatic Liquid Packaging,
Inc. ("ALP"), Allegiance Corporation ("Allegiance") and R.P. Scherer Corporation
("Scherer"). The following is a summary of the merger-related costs for the
three-month periods ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------------------------------------------------------------------
(in millions) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Transaction and employee-related costs $ (7.9) $ (21.3)
Exit costs (0.1) (4.3)
Restructuring costs (1.6) (6.9)
Other integration costs (7.7) (4.3)
--------------------------------------------------------------------------------------------
Total merger-related costs $ (17.3) $ (36.8)
Tax effect of merger-related costs 6.3 7.1
--------------------------------------------------------------------------------------------
Net effect of merger-related costs $ (11.0) $ (29.7)
============================================================================================
</TABLE>
During the above stated periods, the Company incurred direct transaction
costs related to its merger transactions. These expenses primarily include
investment banking, legal, accounting and other professional fees associated
with the respective merger transaction. In addition, the Company incurred
employee-related costs, which consist primarily of severance and
transaction/stay bonuses as a result of the ALP, Allegiance and Scherer merger
transactions. Partially offsetting the transaction and employee-related costs
recorded during the three months ended September 30, 1999 was a $10.3 million
credit recorded to adjust the estimated transaction and employee-related costs
previously recorded in connection with the Allegiance merger transaction. Actual
billings and employee-related costs were less than the amounts originally
anticipated, resulting in a reduction of the merger-related costs. Exit costs
relate primarily to costs associated with lease terminations and moving expenses
as a direct result of the merger transactions with ALP, Allegiance and Scherer.
Other integration costs include charges related to integrating the operations of
previous merger transactions.
The Company recorded charges of $1.6 million and $6.9 million during the
three months ended September 30, 2000 and 1999, respectively, associated with
the business restructuring as a result of the Company's merger transaction with
Scherer. As part of the business restructuring, the Company is closing certain
facilities. In connection with such closings, the Company has incurred
employee-related costs, asset impairment charges and exit costs related to the
termination of contracts and lease agreements.
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<PAGE> 13
The net of tax effect of the various merger-related costs recorded during
the three months ended September 30, 2000 and 1999 was to reduce net earnings by
$11.0 million to $173.2 million and by $29.7 million to $122.0 million,
respectively, and to reduce reported diluted earnings per Common Share by $0.04
per share to $0.61 per share and by $0.10 per share to $0.43 per share,
respectively.
The Company estimates that it will incur additional merger-related costs
and integration expenses associated with the various mergers it has completed to
date (primarily related to the Allegiance, ALP and BBMC mergers) of
approximately $72.7 million ($47.2 million, net of tax) in future periods
(primarily fiscal 2001 and 2002) related to the exit of contractual
arrangements, employee-related costs, and costs to properly integrate operations
and implement efficiencies. Such amounts will be charged to expense when
incurred.
Provision for Income Taxes. The Company's provision for income taxes relative to
pre-tax earnings was 35% and 40% for the first quarters of fiscal 2001 and 2000,
respectively. The decrease in the effective tax rate for the quarter ended
September 30, 2000 over the comparable period of prior year was primarily the
result of two factors. First, the tax rate decreased due to lower nondeductible
items associated with the business combinations in the current year as compared
to the prior year. The second factor resulting in a decrease in the effective
tax rate was the impact of international and domestic business mix. The
provision for income taxes excluding the impact of merger-related charges was
35% and 37% for the quarters ended September 30, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $3.2 billion at September 30, 2000 from $2.6
billion at June 30, 2000. This increase from June 30, 2000 included additional
investments in inventories and trade receivables of $0.6 billion and $0.2
billion, respectively. Offsetting the increases in current assets was an
increase in accounts payable of $0.4 billion. The Company's inventory levels
have risen due to the higher volume of current and anticipated business in
pharmaceutical distribution activities. A portion of the inventory increase can
also be attributed to the Company investing in inventories in conjunction with
various vendor-margin programs. The increase in trade receivables is less than
the Company's operating revenue growth (see "Operating Revenue" above) due to
the Company's focus on effective asset management. In addition, the change in
accounts payable is due primarily to the timing of inventory purchases and
related payments.
During the first quarter of fiscal 2001, the Company increased the capacity
under its commercial paper program from $1.0 billion to $1.5 billion in
aggregate maturity value. At September 30, 2000, commercial paper with an
effective interest rate of 6.6% and an aggregate maturity value of $1.0 billion
was outstanding. The Company also maintains a $1.5 billion unsecured bank credit
facility. This credit facility exists largely to support issuance of commercial
paper and other short-term borrowings.
Property and equipment, at cost, increased by $87.3 million from June 30,
2000. The increase was the result of two main factors. First, the Company is
involved in ongoing plant expansion and manufacturing equipment purchases in
certain businesses, as well as additional investments made for management
information systems and upgrades to distribution facilities. Second, the Company
completed several acquisitions in the first quarter of fiscal year 2001 that
were accounted for as purchase transactions (see Note 4 of "Notes to Condensed
Consolidated Financial Statements").
Shareholders' equity increased to $4.2 billion at September 30, 2000 from
$4.0 billion at June 30, 2000, primarily due to net earnings of $173.2 million
and the investment of $66.3 million by employees of the Company through various
employee stock benefit plans. These increases were offset by dividends of $8.3
million.
The Company filed a combination shelf debt and equity registration
statement on Form S-3 with the Securities and Exchange Commission, which was
declared effective on September 29, 2000. The registration increases the
Company's shelf common shares and debt capacity for general corporate purposes
to an aggregate of $1.0 billion. No securities have been sold under this
registration statement.
The Company believes that it has adequate capital resources at its disposal
to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in its exposure to
market risk from that discussed in the Company's Form 10-K for the fiscal year
ended June 30, 2000.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The following disclosure should be read together with the disclosure set
forth in the Company's Form 10-K for the fiscal year ended June 30, 2000, and to
the extent any such statements constitute "forward looking statements" reference
is made to Exhibit 99.01 of this Form 10-Q.
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries their U.S.
Healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business, as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter. In connection with this spin-off, Allegiance, which was acquired by
the Company on February 3, 1999, assumed the defense of litigation involving
claims related to the Allegiance Business from Baxter Healthcare Corporation
("BHC"), including certain claims of alleged personal injuries as a result of
exposure to natural rubber latex gloves. Allegiance will be defending and
indemnifying BHC, as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
pertaining to the litigation assumed by Allegiance. As of September 30, 2000,
there were approximately 563 lawsuits involving BHC and/or Allegiance containing
allegations of sensitization to natural rubber latex products. Some of the cases
are now proceeding to trial. Because of the increase in claims filed and the
ongoing defense costs that will be incurred, the Company believes it is probable
that it will continue to incur significant expenses related to the defense of
cases involving natural rubber latex gloves. At this time, the Company is unable
to evaluate the extent of any potential liability, and unable to estimate any
potential loss. AEIA, one of the insurers for the latex glove litigation, has
advised the Company of its intent to resolve through arbitration the extent of
its obligation to reimburse the Company for certain defense costs and loss
expenses incurred in connection with the litigation. The Company believes a
substantial portion of any liability will be covered by insurance, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency.
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including without limitation inclusion of certain of
its subsidiaries as a potentially responsible party for environmental clean-up
costs. Although the ultimate resolution of the litigation referenced herein
cannot be forecast with certainty, the Company intends to vigorously defend
itself and does not believe that the outcome of any pending litigation will have
a material adverse effect on the Company's consolidated financial statements.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
27.01 Financial Data Schedule - Three months ended September 30, 2000
99.01 Statement Regarding Forward-Looking Information (1)
--------------
(1) Included as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended June 30, 2000 (No. 0-12591) and
incorporated herein by reference.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Date: November 13, 2000 By: /s/ Robert D. Walter
-------------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
By: /s/ Richard J. Miller
-------------------------------------------
Richard J. Miller
Executive Vice President and Chief Financial
Officer
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