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Cardinal Health Announces Second Quarter Results, Updates Fiscal 2005 Outlook

DUBLIN, Ohio, Feb. 4, 2005 — Cardinal Health, Inc. (NYSE: CAH), the leading provider of products and services supporting the health care industry, today announced revenue for its second quarter rose 13 percent to $18.6 billion, while earnings from continuing operations declined to $204 million and diluted earnings per share from continuing operations declined to $0.47. 

Results for the quarter and first half of fiscal 2005, ended Dec. 31, were in line with the company’s previously revised guidance. Excluding special items of $71 million for the quarter, net earnings from continuing operations decreased 26 percent to $275 million compared to $370 million in the prior year. Diluted earnings per share from continuing operations before special items declined 25 percent to $0.63 versus $0.84 last year. These results include non-recurring charges for the quarter of $67 million or $0.10 per share.

First-half revenues climbed 15 percent to $36.4 billion, while ongoing margin pressure caused net earnings from continuing operations to decline 40 percent to $422 million. Excluding special items, earnings from continuing operations declined 27 percent to $513 million. Diluted earnings per share from continuing operations were $0.97, or $1.18 excluding special items. These results include non-recurring charges for the six months ended Dec. 31 of $107 million or $0.17 per share.

“Our second-quarter performance, while below Cardinal Health’s potential, was in line with our previously revised expectations and reflects steady progress in several key areas of the business, including the transition to non-contingent distribution contracts with pharmaceutical manufacturers,” said Robert D. Walter, chairman and chief executive officer. “We continued to experience earnings pressure as we manage this transition, which is not only important to Cardinal Health’s business, but paramount to the efficiency of the U.S. pharmaceutical supply chain.

“Cardinal Health’s highly efficient distribution network has helped drive billions of dollars of cost out of the supply chain, resulting in savings for pharmacies and ultimately lower prices for consumers,” Walter added. “We are committed to the transition and to our disciplined, fact-based approach in reaching new agreements with our manufacturer customers.”

Audit Committee Review and Vitamins Review
Cardinal Health said that the Audit Committee of its Board of Directors had reached conclusions concerning its assignment of responsibility for certain financial statement matters discussed in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2004, resulting in disciplinary actions for certain employees. In addition, a separate committee of the Board of Directors, with the assistance of independent counsel, is separately conducting an internal review to assign responsibility for matters relating to Cardinal Health’s accounting treatment of certain recoveries from vitamin manufacturers. (Additional information regarding the Audit Committee review and the separate vitamins review is included in the Form 8-K, filed today with the Securities and Exchange Commission, which can be found at the investor relations page of www.cardinalhealth.com.) The Audit Committee review, the separate vitamins review, and the previously announced investigations by the Securities and Exchange Commission and U.S. Attorney remain ongoing.

Segment and Operational Results
Operating earnings in each business segment improved from the first quarter, as Cardinal Health addressed key challenges and performance-improvement actions began to deliver results. The company also remains on schedule to improve its cost structure by $125 million during fiscal 2005 through a restructuring program initiated during the first quarter.

Lower capital requirements in its pharmaceutical distribution business enabled Cardinal Health to generate strong cash flow from operations of $626 million during the quarter, including net proceeds of $300 million through an accounts-receivable securitization program. Free cash flow exceeded $500 million during the quarter, an increase of more than 200 percent from the prior period, and reached $1.3 billion for the year-to-date, which includes net proceeds of $800 million through an accounts-receivable securitization program.

Pharmaceutical Distribution and Provider Services
Revenues within the Pharmaceutical Distribution and Provider Services segment increased 15 percent for the quarter to $15.1 billion, while operating earnings declined by 9 percent to $213 million. The operating-earnings decline was primarily due to lower branded pharmaceutical buy margins, driven by lower price appreciation and available inventory compared to prior years.

During the quarter, Cardinal Health continued its transition to non-contingent distribution-service agreements with pharmaceutical manufacturers, rather than agreements based on pharmaceutical price appreciation. Strong progress was made with a number of manufacturers, including signing multi-year contracts with Eli Lilly and Company during the quarter and with Eisai Inc. in January. By April 1, the company expects to have completed contracts that will transition the majority of branded vendor margin to non-contingent compensation.

This transition will drive improvements in the second half of fiscal 2005 and create stronger, more predictable earnings growth for fiscal 2006. Expense control measures continue to drive efficiency, with selling, general and administrative expenses as a percent of sales declining from the prior year. In addition, efficiency and profitability within the segment will continue to be enhanced by the ramp up of Cardinal Health’s National Logistics Center, which began operations during September 2004.

Medical Products and Services
Revenue growth within Medical Products and Services increased 6 percent to $2.4 billion, with operating earnings equal to the second quarter of fiscal 2004 at $170 million. Sales of new products and recent hospital and group purchase organization (GPO) contract wins drove the revenue increase, while profitability continued to be affected by competitive pricing on a large GPO contract and rising costs of raw materials used in manufacturing. This pressure was partially offset by strong sales of Cardinal Health surgeon gloves, efficiency programs and profitable international performance. In addition, growth in specialty surgical instruments and sales of private label products contributed to operating earnings in the period. Selling, general and administrative expenses as a percent of sales were below prior year levels, the result of ongoing efficiency actions.

Continued emphasis on new products, operating efficiencies and implementation of new contracts are expected to improve Medical Products and Services earnings during the second half of the fiscal year.

Pharmaceutical Technologies and Services
Pharmaceutical Technologies and Services revenues increased 7 percent during the quarter to $760 million, driven by sales growth in oral technologies, nuclear pharmacy services and the year-over-year benefit of the Intercare acquisition, completed in December 2003. However, operating earnings declined 22 percent to $89 million for the quarter, primarily related to sterile-manufacturing costs associated with delays in opening new facilities and from existing facilities operating below their planned capacity. This weakness was partially offset by an increase in demand for softgel products, including Abbott’s protease inhibitor Kaletra®. Operating earnings for the period were not materially affected by acquisitions.

The company also continued to expand its relationships with pharmaceutical manufacturers during the quarter and said it now provides pharmaceutical development, manufacturing, packaging or marketing services for nearly 170 of the top 200 drugs worldwide.

Operating-earnings improvements during the second half of fiscal 2005 and fiscal 2006 will be driven by increases in production at Cardinal Health’s Albuquerque, N.M. and other sterile manufacturing facilities, and from restructuring benefits. New product opportunities in blow/fill/seal sterile manufacturing are also expected to contribute to earnings growth in 2006.

In addition, Cardinal Health has signed a letter of intent with VaxGen, Inc. to fill, finish and package a recombinant anthrax vaccine. The companies plan to have a full supply agreement in place by the end of June 2005, which is subject to the approval of the U.S. government. Cardinal Health expects the agreement would result in revenues of $100 million to $150 million over the two-year period ending December 2007.

Clinical Technologies and Services
(Results for this segment, which include Cardinal Health’s Alaris® products, Pyxis® products and Clinical Services and Consulting organizations, are being reported for the first time this fiscal year. Prior-year results used in comparisons have been adjusted to include Pyxis and Clinical Services and Consulting, but not Alaris, which was acquired by Cardinal Health in July 2004.)

Revenues for the Clinical Technologies and Services segment increased 38 percent to $547 million for the quarter, while operating earnings decreased 21 percent to $76 million. Excluding Alaris products, revenues declined 4 percent and operating earnings declined
51 percent. Strong revenues and operating earnings for Alaris products were offset by year-over-year revenue and operating-earnings declines for Pyxis products.

Pyxis sales growth was dampened by the delayed introduction of Pyxis MedSystem. This new product and service offering, which includes Pyxis MedStation® 3000, the next generation of Cardinal Health’s market-leading medication management system for the nurses’ station, was launched in December and is now being well-received by customers. In addition, Pyxis results were negatively affected by execution issues related to system installations. Revenue backlog from committed contracts ended the quarter at $206 million.

Over the long-term, growth in the segment will be driven by innovative product and service offerings that draw on the vast clinical resources assembled in this organization, the company said. In addition to Pyxis MedSystem, new products introduced during the quarter included the Alaris® Patient-Controlled Analgesia Module, Alaris® EtCO2 Module and upgrades to the Guardrails® Suite of safety software, all enhancements to the market-leading Alaris Medication Management System designed for the patient’s bedside.

Clinical Technologies and Services results are expected to improve during the year as customers adopt these new products and the company gains additional efficiencies from the formation of the segment. Significant progress was made during the quarter to improve efficiency, including implementation of lean manufacturing processes and a restructuring of customer support operations. In addition, the integration of Alaris with Cardinal Health is still expected to achieve synergies of $80 million to $100 million on a pre-tax basis by the end of fiscal 2007.

Outlook
Cardinal Health expects earnings per share for fiscal 2005 to be $3.20 to $3.40, excluding special items and non-recurring charges. Earnings expectations have been reduced from prior guidance to reflect uncertainty about branded pharmaceutical price increases, available inventory and the short-term impact of the transition to fee-based distribution service agreements in its Pharmaceutical Distribution business.

The new guidance also reflects the potential for continued delays in the installation of Pyxis committed contracts as a result of organizational re-staffing. For fiscal 2005, free cash flow is expected to be approximately $2 billion, including $800 million from an accounts-receivable securitization program.

The company expects to enter fiscal 2006, beginning July 1, 2005, with strong momentum. Earnings are expected to grow at a rate considerably above its long-term growth goal of mid-teens or better, excluding special items and non-recurring charges. The guidance is based on Cardinal Health’s confidence in signing agreements with pharmaceutical manufacturers during fiscal 2005 that will result in the substantial majority of vendor margins for fiscal 2006 being converted to non-contingent compensation.

The fiscal 2006 guidance is further based on the company’s confidence for substantial improvement in Pyxis sales and installation capability, continued strong demand and significant improvement in manufacturing efficiency for sterile product and overall continued strong performance in its other businesses. Cash flow for the year is expected to grow in-line with earnings growth.

George Fotiades, Cardinal Health President and COO, said “We are making progress on our most important operating issues identified for fiscal year 2005, as evidenced by our sequential improvement in operating earnings growth for all four of our segments. However, the pace of that progress has been slower than we originally expected. We believe that the second half of the fiscal year will show continued improvement and we are optimistic about the momentum that we expect to have as we enter our 2006 fiscal year.”

Conference Call
Cardinal Health has scheduled a conference call at 11 a.m. Eastern Standard Time to discuss its second-quarter results. To access the conference call and corresponding slide presentation, go to the Investor Relations page at www.cardinalhealth.com. The conference call may also be accessed by calling 706-634-5100, passcode 3250964. An audio replay will be available until 11:00 p.m. on Feb. 7 at 706-645-9291, passcode 3250964. A transcript and audio replay will also be available at www.cardinalhealth.com.

About Cardinal Health
Cardinal Health, Inc. (www.cardinalhealth.com) is the leading provider of products and services supporting the health care industry. Cardinal Health develops, manufactures, packages and markets products for patient care; develops drug-delivery technologies; distributes pharmaceuticals and medical, surgical and laboratory supplies; and offers consulting and other services that improve quality and efficiency in health care. Headquartered in Dublin, Ohio, Cardinal Health employs more than 55,000 people on six continents and produces annual revenues of more than $65 billion.


Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and Form 10-Q reports (including all amendments to those reports) and exhibits to those reports, and include (but are not limited to) the costs, difficulties, and uncertainties related to the integration of acquired businesses, the loss of one or more key customer or supplier relationships or changes to the terms of those relationships, changes in the distribution patterns or reimbursement rates for health-care products and/or services, the results, consequences, effects or timing of any inquiry or investigation by any regulatory authority or any legal and administrative proceedings, the impact of previously announced restatements, difficulties in opening new facilities or fully utilizing existing capacity, difficulties and uncertainties associated with business model transitions, and general economic and market conditions. Cardinal Health undertakes no obligation to update or revise any forward-looking statement.

 


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