Results during the quarter and year continued to highlight growth within the company’s medical technology segments. Combined revenue for the Clinical Technologies and Services, and Medical Products and Technologies segments grew by 24 percent to $5.6 billion and profit increased 36 percent to nearly $800 million for the year.
Cardinal Health also announced that its board of directors has supported a management recommendation to actively explore a potential separation of the company’s primary operating and reporting segments, which could involve a tax-free spin-off of the clinical and medical products businesses as a separate, publicly traded company. Cardinal Health plans to announce its decision within approximately 60 to 90 days.
For two years, we have been taking steps to sharpen our focus on health care supply chain services and clinical and medical products, culminating with our announcement in July to operate these businesses in two distinct segments that reflect the unique characteristics and requirements of each,” said R. Kerry Clark, chairman and chief executive officer of Cardinal Health. “As we now consider a spin-off of our clinical and medical products businesses, our goal is simple: to have two thriving businesses, delivering maximum value to customers and shareholders over the long term.
Fiscal 2008 Results
Consolidated revenue for fiscal 2008 grew 5 percent to $91 billion and GAAP earnings from continuing operations rose 58 percent to $1.3 billion. Diluted earnings per share from continuing operations grew 76 percent to $3.64, or 11 percent to $3.80 on a non-GAAP basis. Earnings in the prior year were negatively affected by a $600 million expense to resolve securities litigation.
During the fourth quarter, ended June 30, consolidated revenue increased 3 percent to $23 billion, and earnings from continuing operations increased 39 percent to $330 million. Earnings in the fourth quarter of the prior year were dampened by merger-related charges from the company’s acquisition of VIASYS Healthcare. Excluding the impact of merger charges and other items, non-GAAP earnings from continuing operations increased 1 percent to $348 million2, or 9 percent to $0.97 on a diluted per-share basis.
“Overall, fourth quarter results were in line with our expectations,” Clark said. “We continued to demonstrate to customers the value of our clinically differentiated medical technologies, where we delivered a year of very strong growth on the top and bottom lines. We also made steady progress throughout the year in our medical supply chain segment and, in particular, are very pleased with the results in our hospital, lab and ambulatory care distribution business.
“In our pharmaceutical supply chain segment, we believe we are on the right path to resolve the license suspensions that have kept us from distributing controlled substances from three of our 24 distribution centers. This will be a critical step in our efforts to drive improvements in the business. And while we won’t speculate on the ultimate outcome, we are in constructive settlement discussions with the DEA and have recorded a reserve of $23.5 million in connection with those discussions. We have made good progress in enhancing our controls and are eager to return to full service levels for our customers.
Q4 and FY08 Summary
| Q4 FY08 | Q4 FY07 | Y/Y | FY08 | Y/Y | ||
| Revenue | $22 billion | $23 billion | 3% | $91 billion | 5% | |
| Operating Earnings | $543 million | $421 million | 29% | $2.1 billion | 55% | |
| Non-GAAP Operating Earnings3 | $568 million | $538 million | 6% | $2.2 billion | 3% | |
| Earnings from Continuing Operations | $330 million | $238 million | 39% | $1.3 billion | 58% | |
| Non-GAAP Earnings from Continuing Operations | $348 million | $345 million | 1% | $1.4 billion | – | |
| Diluted EPS from Continuing Operations | $0.92 | $0.61 | 51% | $3.64 | 76% | |
| Non-GAAP Diluted EPS from Continuing Operations | $0.97 | $0.89 | 9% | $3.80 | 11% |
Fourth-quarter and full-year segment results
Revenue for the Healthcare Supply Chain Services – Pharmaceutical segment increased 1 percent to $19.8 billion for the quarter with sales to bulk customers increasing by 9 percent. Sales to non-bulk customers decreased by 5 percent, primarily due to the transfer of volume from non-bulk to bulk sales by a large customer and the loss of business associated with controlled substance anti-diversion efforts. As expected, segment profit declined 15 percent to $258 million, driven by previously disclosed customer re-pricings, and direct-store-door customer losses, including the impact of anti-diversion efforts. The profit decline was partially offset by branded pharmaceutical price increases and greater profit from distribution service agreement fees.
For the year, segment revenue reached $79.3 billion, an increase of 4 percent, and segment profit was $1.1 billion, declining 14 percent from last year.
Fourth-quarter revenue for the Healthcare Supply Chain Services – Medical segment increased 8 percent to $2.1 billion, driven by increased sales to existing hospital, laboratory and ambulatory customers. Segment profit for the quarter decreased 3 percent to $81 million, but included a previously disclosed corporate allocation adjustment that reduced profit by 6 percentage points. Strong, double-digit profit growth from the distribution of medical and surgical products in the U.S. partially offset the decline in segment profit from other factors. As the company had forecasted, segment profit grew in the second half of fiscal 2008 compared to the second half of fiscal 2007.
Full-year revenue for the segment increased 8 percent to $8.1 billion, and full-year profit declined
5 percent to $303 million.
The Medical Products and Technologies segment reported a 46 percent increase in fourth-quarter revenue to $727 million, primarily driven by the acquisitions of VIASYS Healthcare and Enturia, but also organic growth in the core infection prevention and respiratory businesses. Segment profit increased 63 percent to $95 million and included a favorable impact of 38 percentage points from acquisitions. During the quarter, the company discovered it had failed to recognize profit on a portion of intercompany sales from fiscal 2006 to 2008. As a result, approximately $16 million was recorded as income for the fourth quarter that pertained to prior periods. The VIASYS integration continues to be ahead of schedule to achieve planned synergy goals by 2010.
For the full year, segment revenue increased 47 percent to $2.7 billion and segment profit grew 52 percent to $300 million, including 39 percentage points from acquisitions.
Compared to a record quarter in the prior year, fourth-quarter revenue for the Clinical Technologies and Services segment increased 3 percent to $780 million, driven by continued strength in installations of medication dispensing products. Excluding Pharmacy Services, revenue increased 9 percent. Segment profit for the quarter exceeded company expectations, rising 8 percent to $156 million driven by favorable product mix and a positive impact from foreign exchange.
Full-year revenue for the segment increased 8 percent to $2.9 billion and segment profit increased
29 percent to $497 million.
Additional fourth-quarter and recent highlights include:
• Reaching a definitive agreement to sell Tecomet, a maker of orthopedic implants, to Charlesbank Capital Partners and Tecomet management, with plans to close within 60 days;
• Reaching a definitive agreement to acquire Borschow Medical and Hospital Supplies, Inc., the largest distributor of pharmaceutical products and medical supplies in Puerto Rico;
• Completing the acquisition of assets of privately held Enturia, Inc., the manufacturer of infection prevention products sold under the ChloraPrep® brand name;
• Introducing the Pyxis® DuoStation, a new system that leverages the company’s industry-leading dispensing technologies to enable clinicians access to a patient’s medications and medical supplies from one system;
• Launching four new offerings for retail independent pharmacies at the company’s 19th annual Retail Business Conference, including a private-label brand of durable medical equipment, front-of-store management system, automated calling technology and automated pill counting systems;
• A three-year agreement to serve as primary supply chain partner for Prime Therapeutics, one
of the nation’s largest pharmacy benefit managers, which serves approximately 14.6 million members nationwide;
• Contracts with Premier for Alaris® infusion systems, Presource® custom procedure packs, Convertors® surgical drapes and gowns, third-party instrument repair, respiratory equipment, Pyxis® medication and supply automation products, and ChloraPrep® brand chlorhexidine gluconate (CHG) skin prep products.
Outlook
“In fiscal 2009, we plan to make incremental investments of up to $100 million to strengthen R&D in the clinical and medical products business and improve information technology in the supply chain services business,” Clark said. “These investments will affect our earnings growth rates in fiscal 2009, but are important, foundational moves that we believe will accelerate future growth in both segments.”
For fiscal 2009, the company expects revenue growth of 6 to 7 percent. Non-GAAP diluted EPS
from continuing operations is expected to be in a range of $3.80 to $3.95 based on investments the company plans to make in new product development and information technology, and previously disclosed challenges in the pharmaceutical distribution business that are expected to continue through the first half of the fiscal year, coupled with a particularly unfavorable comparison in the first quarter due to strong branded price inflation in the prior year period.
As a result, non-GAAP EPS in the first quarter is expected to be around $0.70. The company forecasts EPS to return to more normal levels in the second quarter, with overall company results stronger in the second half of the year.
The Healthcare Supply Chain Services segment is expected to return to profitable growth in the second half of the year. The first half of the year will continue to be affected by the company’s ability to resolve license suspensions to distribute controlled substances from three of its pharmaceutical distribution centers, previously disclosed repricing of some major contracts and volatility in the Nuclear Pharmacy Services business leading to the launch of generic sestimibi.
The Clinical and Medical Products segment is expected to continue on a strong growth trajectory based on momentum in current product lines and approximately 50 new product introductions or enhancements planned during the next 18 months.
Conference Call
Cardinal Health will host a conference call and webcast at 8:30 a.m. EDT to discuss the results.
To access the call and corresponding slide presentation, go to the Investor page at www.cardinalhealth.com. The conference call may also be accessed by calling 617-213-4850 , conference passcode 97674427. An audio replay will be available until 11 p.m. EDT on Aug. 9 at 617-801-6888 , passcode 28260453. A transcript and audio replay will also be available at www.cardinalhealth.com.
About Cardinal Health
Headquartered in Dublin, Ohio, Cardinal Health, Inc. is a $91 billion, global company serving the health care industry with products and services that help hospitals, physician offices and pharmacies reduce costs, improve safety, productivity and profitability, and deliver better care to patients. With a focus on making supply chains more efficient, reducing hospital-acquired infections and breaking the cycle of harmful medication errors, Cardinal Health develops market leading technologies, including Alaris® IV pumps, Pyxis® automated dispensing systems, MedMined™ infection surveillance services and the CareFusion™ patient identification system. The company also manufactures medical and surgical products and is one of the largest distributors of pharmaceuticals and medical supplies worldwide. Ranked No. 19 on the Fortune 500, Cardinal Health employs more than 40,000 people on five continents. More information about the company may be found at www.cardinalhealth.com.
