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

Cardinal Health, Inc.
(Exact name of registrant as specified in its charter)

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 April 30, 2000 was as follows:

Common Shares, without par value: 275,317,457

CARDINAL HEALTH, INC. AND SUBSIDIARIES

Index *

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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)

See notes to condensed consolidated financial statements.

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CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)

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)

See notes to condensed consolidated financial statements.

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CARDINAL HEALTH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

      Management’s discussion and analysis presented below has been prepared to give retroactive effect to the pooling of interests business combinations with Pacific Surgical, Inc. (“PSI”) on May 21, 1999 and Automatic Liquid Packaging, Inc. (“ALP”) on September 10, 1999. The 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 March 31, 2000 and June 30, 1999, and for the condensed consolidated statements of earnings for the three and nine-month periods ended March 31, 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, 1999.

      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 three operating business segments: Pharmaceutical Distribution, Pharmaceutical Services and Medical-Surgical Products. See Note 6 of “Notes to Condensed Consolidated Financial Statements” for a description of these segments.

Results of Operations

      Operating revenue for the three and nine months ended March 31, 2000 increased 15% and 16% as compared to the same periods of the prior year. The majority of the operating revenue increase (approximately 87% and 83%, respectively for the three and nine-month periods ended March 31, 2000) came from existing customers in the form of increased volume and price increases. The remainder of the growth came from the addition of new customers.

      The Pharmaceutical Distribution segment’s operating revenue growth over the three and nine months ended March 31, 2000 was primarily related to strong sales to all customer segments, especially to retail pharmacy chains and through the Company’s specialty distribution businesses. All operating revenue growth was internal.

      The operating revenue growth for the Pharmaceutical Services segment was due primarily to growth in the Company’s pharmaceutical drug delivery systems, comprehensive packaging services, contract manufacturing and pharmacy franchising businesses as a result of both new business and organic growth. Cross selling opportunities

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within the Pharmaceutical Services segment and in conjunction with businesses in other segments also boosted revenue growth. Offsetting this growth was the impact of the pharmacy management business continuing to exit unprofitable accounts.

      The Medical-Surgical Products segment’s operating revenue growth was due to an increase in sales for virtually all product lines. In particular, sales of self-manufactured products increased during the quarter as compared to the same period a year ago. Offsetting this increase was a shift in volume from the third quarter to the second quarter of fiscal 2000 as a result of advance customer purchases related to Y2K. For the nine-month period ended March 31, 2000, distributed product sales, as well as self-manufactured product sales increased compared to prior year. Revenue growth was further enhanced by an increase in international revenues for the Medical-Surgical Products segment over the comparable quarter of fiscal 1999. In addition, several multiple year contracts have contributed to this growth.

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.

      The decrease in gross margin from the three and nine months ended March 31, 1999 to the comparable periods of fiscal 2000 was due primarily to a greater mix of lower margin pharmaceutical distribution during the first three quarters of fiscal 2000 compared to the same period a year ago. The Pharmaceutical Distribution segment’s contribution to total operating revenues increased to 42% and 40% the three and nine months ended March 31, 2000, respectively, from 41% and 38% for the comparable periods of the prior year.

      The Pharmaceutical Distribution 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 which 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 increase in the Pharmaceutical 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. In addition, the pharmacy management contract rationalization program has resulted in improved gross margins. Gross margin was also favorably impacted by an improvement in manufacturing processes as a result of improved productivity, ongoing plant modernization and rationalization programs.

      The decrease in the Medical-Surgical Products segment’s gross margin for the nine months ended March 31, 2000 over the comparable period of the prior year was primarily due to competitive pressures in the latex glove business. Competition in the cyclical exam gloves market has become focused on price, resulting in decreased margins for manufacturers. Gross margin for third quarter of fiscal 2000 increased over the third quarter of the prior year due primarily to an increase in mix of self-manufactured products.

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      The improvement in selling, general and administrative expenses as a percentage of operating revenue for the three and nine months ended March 31, 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 revenues. A greater mix of sales to retail pharmacy chains also reduced selling, general and administrative expenses as a percentage of operating revenues, as these customers have a relatively lower margin in connection with a lower cost of service. The growth of 2% in selling, general and administrative expenses experienced in the nine months ended March 31, 2000 compared to the same period a year ago, was due primarily to increases in personnel costs and depreciation expense. The nominal changes in selling, general and administrative expenses compare favorably to the 15% and 16% growth in operating revenue for the three and nine months ended March 31, 2000 as compared to the same periods of the 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 are primarily a result of the merger transactions with ALP, Allegiance Corporation (“Allegiance”) and R.P. Scherer Corporation (“Scherer”). The following is a summary of the merger-related costs for the three and nine-month periods ended March 31, 2000 and 1999.

      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 nine months ended March 31, 2000 was a $10.3 million credit recorded in the first quarter of fiscal 2000 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.

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      The Company recorded charges of $0.5 million and $7.5 million during the three and nine months ended March 31, 2000 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.

      Charges of $4.0 million related to the write-down of impaired inventory associated with the merger transaction with Owen Healthcare, Inc. (“Owen”) were recorded during the three and nine months ended March 31, 1999. Also, during the second quarter of fiscal 1999, the Company recorded $1.1 million related to severance costs for a restructuring associated with the change in management that resulted from the merger transaction with Owen. Partially offsetting the total merger-related charges for the three and nine months ended March 31, 1999 was a credit recorded to adjust the estimated transaction and termination costs previously recorded in connection with the canceled merger transaction with Bergen Brunswig Corporation. The actual billings for services provided by third parties engaged by the Company were less than the estimate, resulting in a reduction of the merger-related costs.

      Since April 1998, ALP had been organized as an S-Corporation for tax purposes. Accordingly, ALP was not subject to federal income tax from April 1998 up to the date that the ALP merger transaction was consummated. For the quarter and nine months ended March 31, 1999, net earnings would have been reduced by $2.7 million and $7.0 million, respectively, if ALP had been subject to federal income taxes.

      The net of tax effect of the various merger-related costs recorded (as discussed previously) and pro forma adjustments related to ALP taxes (see Note 4 of “Notes to Condensed Consolidated Financial Statements”) during the three months ended March 31, 2000 and 1999 was to reduce net earnings by $9.1 million to $189.5 million and by $71.5 million to $89.2 million, respectively, and to reduce reported diluted earnings per Common Share by $0.03 per share to $0.67 per share and by $0.25 per share to $0.31 per share, respectively. The net of tax effect of the various merger-related costs recorded and pro forma adjustments related to ALP taxes during the nine months ended March 31, 2000 and 1999 was to reduce net earnings by $42.2 million to $485.0 million and by $96.9 million to $325.4 million, respectively, and to reduce reported diluted earnings per Common Share by $0.15 per share to $1.70 per share and by $0.34 per share to $1.14 per share, respectively.

      The Company estimates that it will incur additional merger-related costs associated with the various mergers it has completed to date (primarily related to the Scherer, Allegiance and ALP merger transactions) of approximately $81.1 million ($51.6 million, net of tax) in future periods (primarily fiscal 2000 and 2001) 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 as a percentage of pre-tax earnings was 37% and 46% for the third quarters of fiscal 2000 and 1999, respectively. For the nine-month periods ended March 31, 2000 and 1999, the Company’s income tax provision as a percentage of pre-tax earnings was 38% and 40%, respectively. The decrease in the effective tax rate for the quarter and nine months ended March 31, 2000 over the comparable periods of fiscal 1999 was due primarily to nondeductible items associated with the business combinations in the prior year as compared to the current year. This decrease was offset by the change in ALP tax status (See Note 4 of “Notes to Condensed Consolidated Financial Statements”).

Liquidity and Capital Resources

      Working capital increased to $3.0 billion at March 31, 2000 from $2.3 billion at June 30, 1999. This increase from June 30, 1999 included additional investments in inventories and trade receivables of $1.4 billion and $224.3 million, respectively. Offsetting these factors was an increase in accounts payable of $778.4 million. 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 consistent with the Company’s operating revenue growth (see “Operating Revenue”) and the change in accounts payable is due primarily to the timing of inventory purchases and related payments.

      During fiscal 2000, the Company increased the capacity under its commercial paper program from $750.0 million to $1.0 billion in aggregate maturity value. At March 31, 2000, commercial paper with an effective interest rate of 5.9% and an aggregate maturity value of $895.4 million was outstanding. During March 2000, the Company

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also increased the capacity under its unsecured bank credit facility from $1.0 billion to an aggregate value of up to $1.5 billion in borrowings. At March 31, 2000, no amounts were outstanding under this facility.

      Property and equipment, at cost, increased by $150.4 million from June 30, 1999. The increase was primarily due to ongoing plant expansion and manufacturing equipment purchases in certain service businesses, as well as additional investments made for management information systems and upgrades to distribution facilities.

      Shareholders’ equity increased to $3.8 billion at March 31, 2000 from $3.6 billion at June 30, 1999, primarily due to net earnings of $485.0 million and the investment of $50.5 million by employees of the Company through various stock incentive plans. These increases were offset by treasury share repurchases of $312.3 million, dividends of $21.1 million and a $22.3 million payment related to the repurchase of ALP common shares.

      On March 16, 2000, the Company’s Board of Directors authorized the repurchase of up to an aggregate of $750 million of Common Shares. Through March 31, 2000, approximately 7 million Common Shares, having an aggregate cost of $302.8 million, have been repurchased under an accelerated share repurchase program and placed into treasury shares.

      The Company believes that it has adequate capital resources at its disposal to fund currently anticipated capital expenditures, business growth and expansion, as well as current and projected debt service requirements.

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, 1999.

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, 1999, and to the extent any such statements constitute “forward looking statements” reference is made to Exhibit 99.01 of this Form 10-Q.

      In November 1993, the Company and Whitmire Distribution Corporation (“Whitmire”), one of the Company’s wholly-owned subsidiaries, as well as other pharmaceutical wholesalers, were named as defendants in a series of purported class action lawsuits which were later consolidated and transferred by the Judicial Panel for Multi-District Litigation to the United States District Court for the Northern District of Illinois. Subsequent to the consolidation, a new consolidated complaint was filed which included allegations that the wholesaler defendants, including the Company and Whitmire, conspired with manufacturers to inflate prices using a chargeback pricing system. The wholesaler defendants, including the Company and Whitmire, entered into a Judgment Sharing Agreement whereby the total exposure for the Company and its subsidiaries is limited to $1,000,000 or 1% of any judgment against the wholesalers and the manufacturers, whichever is less, and provided for a reimbursement mechanism for legal fees and expenses. The trial of the class action lawsuit began on September 23, 1998. On November 19, 1998, after the close of plaintiffs’ case-in-chief, both the wholesaler defendants and the manufacturer defendants moved for judgment as a matter of law in their favor. On November 30, 1998, the Court granted both of these motions and ordered judgment as a matter of law in favor of both the wholesaler defendants and the manufacturer defendants. On January 25, 1999, the class plaintiffs filed a notice of appeal of the District Court’s decision with the Court of Appeals for the Seventh Circuit. On July 13, 1999, the Court of Appeals for the Seventh Circuit issued its decision, which, in part, affirmed the dismissal of the wholesaler defendants, including the Company and Whitmire. On July 27, 1999, the class plaintiffs filed a Petition for Rehearing with the Court of Appeals for the Seventh Circuit, which was denied. On November 5, 1999, the class plaintiffs filed a petition for writ of certiorari with the United States Supreme Court. The United States Supreme Court denied the petition for writ of certiorari on February 22, 2000. In addition to the federal court cases described above, the Company and Whitmire have also been named as defendants in a series of related antitrust lawsuits brought by chain drug stores and independent pharmacies who opted out of the federal class action lawsuits, and in a series of state court cases alleging similar claims under various state laws regarding the sale of brand name prescription drugs. The Judgment Sharing Agreement mentioned above also covers these litigation matters.

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      On September 30, 1996, Baxter International, Inc. (“Baxter”) and its subsidiaries transferred to Allegiance and its subsidiaries their U.S. health-care distribution business, surgical and respiratory therapy business and health-care 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 merged with 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 described below. 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 March 31, 2000, there were approximately 515 lawsuits involving BHC and/or Allegiance containing allegations of sensitization to natural rubber latex products. Since none of these cases has proceeded to a hearing on the merits, the Company is unable to evaluate the extent of any potential liability, and unable to estimate any potential loss. 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. The Company believes a substantial portion of any potential liability and defense costs, excluding defense costs already reserved, relating to natural latex gloves cases and claims 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 (including environmental matters) incidental to its business. Although the ultimate resolution of the litigation referenced in this Item 1 cannot be forecast with certainty, the Company does not believe that the outcome of these lawsuits would 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:

(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.

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