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Sequential Improvements Reflect Momentum In Cardinal Health's Core Businesses During Third Quarter
04/27/2006
DUBLIN, Ohio, April 27, 2006 — Third-quarter earnings for Cardinal Health, the leading provider of products and services supporting the health-care industry, continued to strengthen sequentially as revenue reached a record level and operating margins improved in all segments from the first half of the fiscal year.
 
During the quarter ended March 31, revenue increased 9 percent to $20.6 billion from $19 billion last year.  Operating earnings of $559 million declined 5 percent from $591 million, primarily due to greater seasonality associated with its former ‘buy-and-hold’ business model during the third quarter of fiscal 2005.  Diluted earnings per share from continuing operations declined 3 percent to $0.83 from $0.86 in the prior year.
 
Results improved on a sequential basis, with operating earnings rising 13 percent and diluted earnings per share from continuing operations increasing 15 percent.  A strong quarter for pharmaceutical distribution and ongoing operational improvements in many Cardinal Health businesses contributed to the quarter-over-quarter gains.
 
Q3 FY06 Earnings Summary
 
Q3 FY06
Q3 FY05

Operating

Earnings ($MM)

Diluted EPS from Continuing Operations

Operating

Earnings ($MM)

Diluted EPS from Continuing Operations

GAAP Consolidated

$559

$0.83

$591

$0.86

Special Items

 $23

$0.04

 $43

$0.06

Impairment Charges & Other

 $8

$0.01

 $16

$0.03

Non-Recurring & Other Items

 $(2)

$(0.01)

 $7

$0.01

Equity Compensation

$49

$0.08

  $2

-

 
“We made considerable progress during the third quarter to focus our portfolio of businesses, invest in strategic areas such as new products and shared services, and continue to integrate operations for greater efficiency,” said Chairman Robert D. Walter.  “We have excellent momentum in our core businesses heading into the fourth quarter.”
 
FY 2006 Revenue, Operating Earnings Trend

(millions)

Q1

Q2

Q3

Y-T-D

Revenue

-Growth Rate (Y/Y)

$19,237

9%

$19,781

8%

$20,638

9%

$59,655

9%

Operating Earnings

- Operating Margin

$377

 

1.97%

$496

 

2.51%

$559

 

2.71%

$1,432

 

2.40%

Operating Earnings, excl. special items

- Operating Margin, excl. special items

 

$398

 

2.08%

 

$512

 

2.59%

 

$582

 

2.82%

 

$1,492

 

2.50%

 
(See attached tables or www.cardinalhealth.com for definitions of the non-GAAP measures used in this release, a reconciliation of non-GAAP measures to their comparable GAAP measures, and a schedule of notable items.)
 
President and Chief Executive Officer R. Kerry Clark, who joined Cardinal Health on April 17, said:  “My first 2 weeks at Cardinal Health have been spent meeting with employees and reviewing parts of our business, which has reinforced all the reasons why I joined the company and leaves me energized for our future.  With the transition to a new business model in pharmaceutical distribution completed, we see stable margins and less volatility in our largest segment; we have good performance on a sequential basis across the company; and we had
a standout quarter in our clinical technologies and services business, with strong demand and great leverage to the earnings line.”
 
Enhancing Core Business through Divestitures and Acquisitions
During the quarter, Cardinal Health took steps to divest certain businesses and made selective acquisitions, as part of its strategy to focus on core, market-leading products and services.  
 
These steps include:
  • Today, Cardinal Health and OTN are announcing the sale of the majority of Cardinal Health’s specialty distribution business to OTN, a wholly owned subsidiary of Oncology Holdings, Inc.  OTN, the second largest distributor to the community oncology market, will primarily acquire Cardinal Health’s oncology distribution capabilities and Cardinal Health will become a minority owner in the firm.

     
  • During the quarter, Cardinal Health entered into discussions with several interested parties for the sale of its health-care marketing services (HMS) and U.K.-based Intercare pharmaceutical distribution (IPD) businesses.  Results for both businesses have been reported in discontinued operations where the company recorded an after-tax loss of $209 million for the quarter.  Approximately $200 million of this item relates to a non-cash write-down of goodwill and other assets associated with these two businesses.

     
  • Cardinal Health sold its pharmacy staffing business during the quarter to Soliant Health, the health-care staffing unit of MPS Group.  Cardinal Health continues to operate its strategically important pharmacy management business, which supports hospitals with pharmacy directors and consulting to manage medication within the health-care facility.

     
  • Cardinal Health also acquired Parmed Pharmaceuticals, Inc. and signed a definitive agreement to acquire Denver Biomedical to extend its product and service offerings for key customers.  The Parmed acquisition complements Cardinal Health’s full-line pharmaceutical distribution capabilities and Denver Biomedical complements its current line of medical products.
“Consistent with our stated strategy, we are focused on business fundamentals and organic growth, and will deploy capital for acquisitions that build scale and complement our existing product and service portfolio, as we did during the quarter in the pharmaceutical distribution and medical products segments,” Walter added.  “With divestitures, our intent is to optimize our portfolio and focus on those products and services that can deliver the greatest value to our customers and shareholders.”
 
Returning Operating Cash Flow to Shareholders
Operating cash flow was $271 million and nearly $1.7 billion for the year-to-date.  The company’s previously stated, longer-term goal is to return up to 50 percent of operating cash flow to shareholders through share repurchase and dividends.  As of March 31, Cardinal Health completed its $1 billion share repurchase program that was announced in June 2005.  The company also announced today an additional $500 million program to repurchase shares.
 
Year-to-Date Results
Revenue for the fiscal year-to-date climbed 9 percent to nearly $60 billion and operating earnings improved 12 percent from the prior year to $1.4 billion.  Earnings from continuing operations rose 12 percent to $906 million.  Diluted earnings per share from continuing operations were $2.11, an increase of 15 percent from the prior year. 
 
Year-to-Date FY06 Earnings Summary

 

FY06 Year-to-Date

FY05 Year-to-Date

Operating

Earnings ($MM)

Diluted EPS from Continuing Operations

Operating

Earnings ($MM)

Diluted EPS from Continuing Operations

GAAP Consolidated

$1,432

$2.11

$1,278

$1.84

Special Items

    $60

$0.10

  $174

$0.27

Impairment Charges & Other

    $16

$0.02

   $99

$0.13

Non-Recurring & Other Items

   $26

$0.04

 $47

$0.07

Equity Compensation

 $185

$0.28

   $7

$0.01

 
Third-Quarter Segment Results
Operating margins continued to strengthen in all business segments from the first half of the fiscal year, even as selling, general and administrative (SG&A) expenses increased 15 percent during the quarter, 7 percentage points of which related to equity compensation that the company began to recognize as an expense this fiscal year.  The balance of the increase is due in part to a larger accrual for incentive compensation based on current year results and planned investments the company is making to increase efficiency and ultimately lower costs across the business segments.  As in prior quarters, segment earnings continue to be negatively affected by the allocation of these corporate costs. 
 
(See attached tables or the Investors page on www.cardinalhealth.com for specific segment results.)
 
Pharmaceutical Distribution and Provider Services
Revenue for the Pharmaceutical Distribution and Provider Services segment grew 10 percent during the quarter to $17.1 billion, including a 21 percent increase in bulk sales, primarily to retail chain customers, from the prior year to $7.6 billion.  Operating earnings declined 14 percent to $289 million.  This expected decline compared to last year is due to less earnings seasonality as the company now has 70 percent of its branded margin linked to non-seasonal distribution service fees.  Distribution service agreements with branded manufacturers, many signed last year, have reduced a large portion of this earnings seasonality for fiscal 2006.
 
The pricing environment during the quarter remained competitive, but expense controls kept operating margins stable during the first nine months of the fiscal year.  SG&A as a percent of revenue remained even with the prior year as the company continued to optimize its distribution network.  Compliance by manufacturers with distribution services agreements remained high and the company’s National Logistics Center continued to add new customers.
 
Operating earnings rose 20 percent from the second quarter and operating margins improved more than 30 basis points from the first half of the fiscal year. 
 
Medical Products and Services
Medical Products and Services’ revenue was slightly ahead of the prior year at $2.5 billion.  Within the medical products manufacturing and distribution businesses, revenue grew 6 percent during the quarter.  Pressure on revenue growth came from an expected decline in the company’s specialty pharmaceutical distribution (SPD) unit, which negatively affected growth in the segment by 6 percentage points.  Operating earnings declined 5 percent from the prior year to $173 million, and were also lowered by the declines in SPD and the allocation of increased corporate costs.
 
Cardinal Health announced today it will sell a substantial portion of the SPD business to OTN, therefore removing the revenue and earnings associated with these businesses from the segment following the close of the transaction.  For fiscal 2006, year-to-date revenue for these affected businesses was approximately $1.3 billion.
 
Growth in medical products distribution was led by strong demand from new prime vendor contracts, performance in recently acquired Source Medical in Canada, as well as improving margins from private-label products.  In medical products manufacturing, sales growth was led by demand for Cardinal Health’s glove and respiratory products.  Earnings from international operations were negatively affected by foreign exchange rates and slower sales in Europe.
 
Operating earnings increased 13 percent from the second quarter and operating margins improved 105 basis points from the first half of the year.
 
Pharmaceutical Technologies and Services
Revenue for the Pharmaceutical Technologies and Services segment reached $715 million, an increase of 6 percent from the prior year, while operating earnings declined 2 percent from the prior year to $78 million. 
 
The oral technologies, packaging services and nuclear pharmacy services businesses grew revenue and earnings over the prior year, with sequential gains in packaging services and nuclear pharmacy services.
 
The company continued to address production issues within its Albuquerque, N.M. sterile-manufacturing facility during the quarter.  It also made progress at its new sterile-manufacturing facility in North Raleigh with 5 customers entering into agreements for pilot projects that could eventually go to full-scale production at the site.
 
Operating earnings declined 6 percent from the second quarter; however operating margins improved by more than 140 basis points from the first half of the year.  Operating earnings are expected to improve substantially during the fourth quarter due to an increase in production in sterile manufacturing and continued steady performance in the oral technologies, nuclear pharmacy services and packaging services businesses.  The company continues to expect second-half margin improvement in the segment compared to the first half of fiscal 2006.
 
Clinical Technologies and Services
Revenue for the Clinical Technologies and Services segment rose 15 percent from the prior year to $603 million, led by 23 percent growth for Alaris and Pyxis products.  Revenue for clinical services and consulting grew 8 percent.  Operating earnings for the segment increased 73 percent from the prior year to $101 million.
 
The sharp increase in operating earnings resulted from another quarter of strong demand, combined with expense controls, manufacturing efficiency and ongoing improvements to customer service and the Pyxis installation process.  SG&A as a percent of sales declined and operating margins increased significantly from the prior year.
 
Committed contracts were again strong for both Alaris and Pyxis products, with the Pyxis backlog ending the quarter at $243 million.  Customers continued to transition to Cardinal Health’s Pyxis MedStation 3000, which accounted for nearly 75 percent of new Pyxis orders during the quarter.  In addition, approximately 40 percent of Alaris product sales during the quarter were from competitive displacements, with channel placements up significantly over last year.
 
Operating earnings increased 7 percent from the second quarter and third-quarter operating margins improved more than 200 basis points from the first half of the year.
 
Outlook
Cardinal Health reaffirmed its fiscal 2006 earnings-per-share guidance of $3.30 to $3.55, excluding special items, the impact of equity compensation expenses and impairment,
non-recurring and other items.
 
“With nine months of the fiscal year complete, we now have increased confidence that we will finish the year in the upper half of the EPS range we’ve provided,” Walter said.
 
The company also revised its forecast for equity compensation expenses to be approximately $0.35 to $0.37 per share for the full year, from $0.32 to $0.34 per share, due to recent management changes and impact of the stock price.  Cardinal Health continues to expect operating margins in the second half of fiscal 2006 to be stronger than in the first half.
 
Over the long term, the company expects 12 percent to 15 percent annual growth in earnings per share, excluding special items and impairment, non-recurring and other items.  It also has an annual goal of returning up to 50 percent of operating cash flow to shareholders through share buy-backs and dividends.  Return on equity excluding special items and the impact of equity compensation expenses is expected to be in the range of 15 percent to 20 percent.  It is also the company’s goal to increase dividends to up to 20 percent of earnings per share during the next several years.
 
 
Conference Call
Cardinal Health will host a conference call and webcast at 11 a.m. Eastern Daylight Time (EDT) to discuss its third-quarter results.  To access the discussion, go to the Investors page at www.cardinalhealth.com or dial 706-634-5100, passcode 7321519.  An audio replay will be available until 11 p.m. on April 29 at 706-645-9291, passcode 7321519. A transcript and audio replay will also be available at http://www.cardinalhealth.com.
 
About Cardinal Health
Headquartered in Dublin, Ohio, Cardinal Health, Inc. (NYSE: CAH) is a $75 billion, global company serving the health-care industry with a broad portfolio of products and services.  Through its diverse offerings, Cardinal Health delivers integrated health-care solutions that help customers reduce their costs, improve efficiency and deliver better care to patients.  The company manufactures, packages and distributes pharmaceuticals and medical supplies, offers
a range of clinical services and develops automation products that improve the management and delivery of supplies and medication for hospitals, physician offices and pharmacies.  Ranked No. 19 on the Fortune 500, Cardinal Health employs more than 55,000 people on six continents.  More information about the company may be found at www.cardinalhealth.com.
 

 
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 following: the costs, difficulties, and uncertainties related to the implementation of organizational changes and the integration of acquired businesses; the loss of one or more key customer or supplier relationships or changes to the terms of those relationships; difficulties and uncertainties related to transitions in senior management; 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 or settlement discussions with any regulatory authority or any legal and administrative proceedings; the impact of previously announced restatements; difficulties or delays or increased costs in implementing Cardinal Health's global restructuring program; difficulties in opening new facilities or fully utilizing existing capacity; with respect to future dividends, the decision by the board of directors to declare such dividends, which is expected to consider Cardinal Health’s surplus, earnings, cash flows, financial condition and prospects at the time any such action is considered; with respect to future share repurchases, the approval of the board of directors, which is expected to consider Cardinal Health’s then-current stock price, earnings, cash flows, financial condition and prospects as well as alternatives available to Cardinal Health at the time any such action is considered; and general economic and market conditions. Cardinal Health does not intend to update or revise any forward-looking statement.
 
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