Cardinal Health 2013 Annual Report Download - page 18

Cardinal Health, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
The discussion and analysis presented below refers to, and should be
read in conjunction with, the consolidated financial statements and related
notes included in this annual report. Unless otherwise indicated,
throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations, we are referring to our continuing
operations.
Overview
We are a healthcare services company providing pharmaceutical and
medical products and services that help pharmacies, hospitals,
ambulatory surgery centers, clinical laboratories, physician offices and
other healthcare providers focus on patient care while reducing costs,
enhancing efficiency and improving quality. We also provide medical
products to patients in the home.
We report our financial results in two segments: Pharmaceutical and
Medical.
During fiscal 2013, revenue decreased 6 percent to $101.1 billion, largely
due to the previously disclosed expiration of our pharmaceutical
distribution contract with Express Scripts, Inc. ("Express Scripts") and the
impact of brand-to-generic pharmaceutical conversions.
Gross margin increased 8 percent to $4.9 billion, reflecting strong
performance in our Pharmaceutical segment generic programs. Operating
earnings decreased 44 percent to $1.0 billion and earnings from continuing
operations decreased 69 percent to $335 million due to an $829 million
($799 million, net of tax) non-cash goodwill impairment charge related to
our Nuclear Pharmacy Services division.
Our cash and equivalents balance was $1.9 billion at June 30, 2013,
compared to $2.3 billion at June 30, 2012. The decrease in cash and
equivalents during fiscal 2013 was driven by acquisitions of $2.2 billion,
share repurchases of $450 million and dividends of $353 million, offset by
strong net cash provided by operating activities of $1.7 billion and net
proceeds from long-term obligations of $981 million. We plan to execute
a balanced deployment of available capital to position ourselves for
sustainable competitive advantage and to enhance shareholder value.
Large Customers
On April 25, 2013, we announced the renewal of our pharmaceutical
distribution contracts with CVS Caremark Corporation ("CVS"). CVS
accounted for approximately 23 percent of our fiscal 2013 revenue.
Our pharmaceutical distribution contract with Walgreen Co. ("Walgreens")
will expire at the end of August 2013. Because sales to Walgreens
generated approximately 20 percent of our consolidated revenue for fiscal
2013, we expect the expiration of this contract to have an adverse impact
on our results of operations. We are taking steps to reduce our costs and
otherwise mitigate the impact of the expiration of the Walgreens contract
in fiscal 2014 and afterward. Largely as a result of the contract expiration,
we do not currently expect diluted earnings per share from continuing
operations to grow in fiscal 2014 compared to fiscal 2013, excluding the
effects in both periods of restructuring and employee severance costs;
acquisition-related costs and credits; impairments and gains and losses
on disposal of assets (including the $829 million Nuclear Pharmacy
Services division goodwill impairment charge in fiscal 2013); net litigation
recoveries and charges; and charges and tax benefits associated with
each of these items. After the expiration of this contract, we also anticipate
a significant net working capital decrease based on reduced inventory and
accounts receivable, partially offset by reduced accounts payable. Based
on the expected working capital decrease and other factors, we anticipate
that the expiration of the Walgreens contract will result in a net after-tax
benefit to cash flow from operating activities in fiscal 2014 in excess of
$500 million.
Goodwill
In conjunction with the preparation of our consolidated financial
statements for the fiscal year ended June 30, 2013, we recently completed
our annual goodwill impairment test, which we perform annually in the
fourth quarter. As part of this annual test, we concluded that the entire
goodwill amount of our Nuclear Pharmacy Services division was impaired,
resulting in a non-cash impairment charge of $829 million ($799 million,
net of tax). This impairment charge does not impact our liquidity, cash
flows from operations, or compliance with debt covenants.
The majority of the goodwill of our Nuclear Pharmacy Services division
was acquired through our acquisition of Syncor International Corporation
in fiscal 2003 ($681 million of goodwill). Excluding the impact of the
impairment charge, we have a total of approximately $1.0 billion of invested
capital in our Nuclear Pharmacy Services division (inclusive of the Syncor
acquisition), accumulated over the past 12 years.
As previously disclosed in our Quarterly Reports on Form 10-Q for the
quarters ended December 31, 2012, and March 31, 2013, our Nuclear
Pharmacy Services division has experienced significant softness in the
low-energy diagnostics market. During the second half of fiscal 2013, we
experienced sustained volume declines and price erosion for the core,
low-energy products provided by this division. In addition, we experienced
reduced sales for some existing high-energy diagnostic products, slower-
than-expected adoption of new high-energy diagnostic products, and
recent reimbursement developments that may adversely impact the future
growth of these products. Using this information, we adjusted our outlook
and long-term business plans for this division during our annual budgeting
process, which we recently concluded. This update resulted in significant
reductions in the anticipated future cash flows and estimated fair value for
this reporting unit. See Note 5 of the “Notes to Consolidated Financial
Statements” for additional information.
Restructuring
On January 30, 2013, we announced a restructuring plan within our
Medical segment. Under this restructuring plan, we are moving production
of procedure kits from our facility in Waukegan, Illinois to other facilities
and selling property and consolidating office space in Waukegan, Illinois.
In addition, we reorganized our Medical segment and plan to sell our
sterilization processes in El Paso, Texas. We estimate the total costs
associated with this restructuring plan to be approximately $79 million on
a pre-tax basis, of which $51 million was recognized during fiscal 2013.
Of the estimated $28 million remaining costs to be recognized through the
end of fiscal 2014, we estimate that approximately $3 million will be
employee-related costs; $11 million will be facility exit and other costs;
and $14 million will be an expected loss on disposal of the property in
Waukegan, Illinois described above. We have evaluated this property and
have determined that at June 30, 2013 it does not meet the criteria for
classification as held for sale. The costs recognized during 2013 are
classified as restructuring and employee severance and impairments and
loss on disposal of assets in the consolidated statements of earnings. We
expect to start realizing cost savings and other benefits from the plan in
fiscal 2014.