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Leading distributor of pharmaceuticals and medical supplies Cardinal Health, Inc. (CAH - Analyst Report) posted third-quarter fiscal 2013 adjusted (excluding one-time charges and gains) earnings per share from continuing operations of $1.20, thereby beating the Zacks Consensus Estimate of 95 cents as well as the year-ago earnings of 94 cents per share.

Net earnings from continuing operations were $346 million ($1.00 per share), up 4% year over year. Net earnings came to $345 million.

Revenues

Revenues in the fiscal third quarter were $24,552 million, down 9% on a year-over-year basis, almost in line with the Zacks Consensus Estimate of $24,635 million.

Segment Highlights

Pharmaceutical segment which is Cardinal’s mainstay, witnessed 10% year over year decline in revenues, grossing $22,070 million in the quarter, owing to branded-to-generic conversions as well as non-renewal of contract with Express Scripts Holding Company (ESRX - Analyst Report). The decline was partly offset by new clients.

Sales from the smaller Medical segment clambered 3% year over year to $2,484 million in the quarter, on the back of acquisitions partially offset by one less selling day.

Margins

Gross margin in the fiscal third quarter edged up to 5.3% from 4.5% in the year-ago quarter. Company-wide adjusted operating earnings increased 11% year over year to $579 million in the quarter.

Pharmaceutical segment profit surged 12% year over year to $498 million, partly reflecting robust performance by generics. Segment profit margin improved to 2.3%, up from 1.8% in the prior-year quarter.

Profit for the Medical segment improved 12% to $100 million reflecting good performance of preferred offerings and lower prices of commodities. Segment profit margin was 4% in the quarter, higher than 3.7% in the year-ago quarter.

Balance Sheet

Cardinal exited fiscal third quarter with cash and equivalents of about $2,305 million, down 4.4% on a year-over-year basis. Long-term obligations (without current portion) stood at $3,714 million, on Mar 31, 2013, up 68.2% year over year.

Guidance

For fiscal 2013, Cardinal raised its forecast for adjusted earnings per share from continuing operations to a band of $3.67 and $3.71 (from $3.42 to $3.50 earlier).

In late April 2013, Cardinal Health revealed that it inked a fresh agreement to provide pharmaceutical products to a chain of distribution facilities and retail pharmacies of CVS Caremark Corporation (CVS - Analyst Report) till the middle of 2016. The distribution facilities and stores to be served under the latest agreement remain similar to those served under the previous setup.

Cardinal Health is ranked among Fortune 500 companies. With over $100 billion in annual sales, the company remains one of the largest distributors of pharmaceuticals and medical supplies in the U.S., with a diversified product portfolio, which may partly insulate it from the current economic uncertainty.

Cardinal stands to gain from the gradual shift in mix from bulk to the higher margin non-bulk sector of the Pharmaceutical segment. Its mainstay Pharmaceutical segment is heavily influenced by the generic wave. Overall, Cardinal is benefiting from a spate of tuck-in acquisitions and capital deployment strategies. The company continues to deploy capital to boost investor confidence via share repurchases and dividend hikes.

However, Cardinal faces tough competition across all its business segments, which may continue to pressure pricing and margins.

Cardinal Health currently carries a Zacks Rank #3 (Hold) rating. Rite Aid Corporation (RAD - Analyst Report) carries a Zacks Rank #2 (Buy) and is expected to do well.

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