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Cardinal Health Inc. (CAH - Analyst Report) posted fiscal 2013-fourth quarter earnings per share of 79 cents (excluding one-time charges and gains), up 8% year over year from 73 cents in the year-ago quarter. Earnings per share edged past the Zacks Consensus Estimate of 77 cents by 2.6%.

On a reported basis, Cardinal incurred net loss of $586 million (or $1.72 per share) in the reported quarter, a considerable slide from net earnings of $236 million (68 cents) in the prior-year quarter. The downfall was attributed to goodwill impairment charge within the company’s nuclear franchise.

Adjusted earnings per share in fiscal 2013 rose 16% to $3.73 from $3.21 a year ago, reflecting a beat of 5.7% over the Zacks Consensus Estimate of $3.53.


Revenues in the fourth quarter went down 5% to $25,420 million, due to lower revenues from the Pharmaceutical segment. Nonetheless, the top line beat the Zacks Consensus Estimate of $24,506 million.

Revenues in the fiscal year declined 6% to $101,093 million. However, it sailed past the Zacks Consensus Estimate of $100,237 million.

Segment Highlights

Cardinal’s mainstay Pharmaceutical segment witnessed a 6% decline in revenues to $22,783 million in the quarter, owing to non-renewal of the contract with Express Scripts Holding Company (ESRX - Analyst Report). The decline was partly mitigated by expanded customer relationships.

Revenues from the smaller Medical segment improved 11% to $2,697 million in the quarter, on the back of the AssuraMed buyout and robust contributions from the preferred products portfolio. The increase was partially offset by sustained volume pressure for procedures.


Gross profit climbed 10% from the year-ago quarter to $1,247 million. As a result, gross margin expanded 70 basis points (bps) to 4.9%. Adjusted operating earnings increased 11% to $472 million in the quarter. Consequently, adjusted operating margin expanded 30 bps to 1.9%.

Pharmaceutical segment profit rose 11% to $395 million on the heels of the generic wave and robust contributions from the branded manufacturer agreements. Segment profit margin improved to 1.73% from 1.46% a year ago.

Profit from the Medical segment shot up 31% to $104 million, led by good performance of preferred offerings and the takeover of AssuraMed. Segment profit margin was 3.86% in the quarter, up from 3.27% in the prior-year quarter.

Balance Sheet and Cash Flow

Cardinal exited fiscal 2013 with cash and equivalents of about $1,901 million, down 16.4% from $2,274 million as of Jun 30, 2012. Total borrowings at the end of the fiscal year stood at $3,854 million up 33.2% from $2,418 million as of Jun 30, 2012.

Net cash provided by operating activities was $300 million in the reported quarter. Net capital expenditure was $92 million in the quarter compared with $101 million a year ago.

Cardinal exhausted its $250 million share repurchase program in the fourth quarter. The company’s consistent share buyback activity led to a 1.4% reduction in share count, thereby leveraging earnings. Moreover, the company declared a 10% hike in its quarterly dividend to 30.25 cents per share.


For fiscal 2014, Cardinal forecast adjusted earnings per share from continuing operations in the band of $3.45 to $3.60. According to the company, the guidance takes into account the impact from the non-renewal of the Walgreens (WAG - Analyst Report) contract. The current Zacks Consensus Estimate of $3.54 for the year lies within the outlook band.

Our Take

Cardinal exited fiscal 2013 on a positive note with healthy quarterly results. Despite lower revenues, the company’s lower share count, margin improvement and favorable business mix led to higher earnings.

Although the company continued to struggle on the sales front, the top line in the fourth quarter as well as fiscal 2013 beat the Zacks Consensus Estimate by a significant margin. The company’s strategy of tuck-in acquisitions is yielding positive results as AssuraMed acquisition is paying off for the Medical segment.

We are also encouraged by the consistent margin improvement as Cardinal continues to benefit from the introduction of generic drugs in the pharmaceutical industry. The company’s generic program continues to catalyze profitability. Although margins are thin in its bulk pharmaceutical business, the evolving business mix in favor of the higher-margin medical business should lend further upside to company-wide margins.  

While Cardinal continues to ride the generic wave, we are wary that it might come to naught following the loss of lucrative contracts. Walgreens was largely a purchaser of generics from Cardinal. The existing contract between the companies is set to expire in Aug 2013 as Walgreens replaced its current pharmaceutical distributor Cardinal with a decade-long deal with AmerisourceBergen Corporation (ABC - Analyst Report).

Despite several growth drivers, Cardinal’s sluggish top-line, client concentration and loss of contract might hurt its performance going forward. The stock currently carries a Zacks Rank #3 (Hold).


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