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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 2003 Commission File Number 1-11373
CARDINAL HEALTH, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-0958666
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7000 CARDINAL PLACE, DUBLIN, OHIO 43017
(Address of principal executive offices and zip code)
(614) 757-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes |X| No | |
The number of Registrant's Common Shares outstanding at the close of
business on April 30, 2003 was as follows:
Common Shares, without par value: 446,448,190
Page 1
CARDINAL HEALTH, INC. AND SUBSIDIARIES
Index *
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements:
Condensed Consolidated Statements of Earnings for the Three and Nine Months
Ended March 31, 2003 and 2002 (unaudited).......................................... 3
Condensed Consolidated Balance Sheets at March 31, 2003 and
June 30, 2002 (unaudited).......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2003 and 2002 (unaudited)................................................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 27
Item 4. Controls and Procedures............................................................ 27
Part II. Other Information:
Item 1. Legal Proceedings.................................................................. 27
Item 5. Other Information.................................................................. 30
Item 6. Exhibits and Reports on Form 8-K................................................... 30
* Items not listed are inapplicable.
Page 2
PART I. FINANCIAL INFORMATION
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Operating revenue $ 12,837.3 $ 11,541.3 $ 36,960.2 $ 32,628.4
Operating cost of products sold 11,643.2 10,472.8 33,679.7 29,644.7
----------- ----------- ----------- -----------
Operating gross margin 1,194.1 1,068.5 3,280.5 2,983.7
Bulk deliveries to customer warehouses and other 1,534.0 1,700.7 4,588.2 5,479.1
Cost of products sold - bulk deliveries and other 1,534.0 1,700.7 4,588.2 5,479.1
----------- ----------- ----------- -----------
Bulk gross margin -- -- -- --
Selling, general and administrative expenses 576.1 536.0 1,623.0 1,552.4
Special items - merger charges 15.9 39.1 49.3 68.2
Special items - other (6.1) -- (58.4) --
----------- ----------- ----------- -----------
Operating earnings 608.2 493.4 1,666.6 1,363.1
Interest expense and other 30.6 39.6 92.7 107.0
----------- ----------- ----------- -----------
Earnings before income taxes, discontinued operations,
and cumulative effect of change in accounting 577.6 453.8 1,573.9 1,256.1
Provision for income taxes 192.7 153.5 533.2 426.1
----------- ----------- ----------- -----------
Earnings from continuing operations before cumulative
effect of change in accounting 384.9 300.3 1,040.7 830.0
Loss from discontinued operations (net of tax of $1.1, see (1.8) -- (1.8) --
Note 12)
Cumulative effect of change in accounting (See Note 7) -- -- -- (70.1)
----------- ----------- ----------- -----------
Net earnings $ 383.1 $ 300.3 $ 1,038.9 $ 759.9
=========== =========== =========== ===========
Basic earnings per Common Share:
Continuing operations $ 0.86 $ 0.67 $ 2.34 $ 1.85
Discontinued operations (0.01) -- (0.01) --
Cumulative effect of change in accounting -- -- -- (0.16)
----------- ----------- ----------- -----------
Net basic earnings per Common Share $ 0.85 $ 0.67 $ 2.33 $ 1.69
=========== =========== =========== ===========
Diluted earnings per Common Share:
Continuing operations $ 0.85 $ 0.66 $ 2.30 $ 1.81
Discontinued operations (0.01) -- (0.01) --
Cumulative effect of change in accounting -- -- -- (0.15)
----------- ----------- ----------- -----------
Net diluted earnings per Common Share $ 0.84 $ 0.66 $ 2.29 $ 1.66
=========== =========== =========== ===========
Weighted average number of Common Shares outstanding:
Basic 449.1 449.9 445.8 449.8
Diluted 456.3 459.1 453.5 459.8
Cash dividends declared per Common Share $ 0.025 $ 0.025 $ 0.075 $ 0.075
See notes to condensed consolidated financial statements.
Page 3
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
MARCH 31, JUNE 30,
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and equivalents $ 545.2 $ 1,382.0
Trade receivables, net 2,845.3 2,295.4
Current portion of net investment in sales-type leases 185.7 218.3
Inventories 8,775.6 7,361.0
Prepaid expenses and other 710.5 649.9
Assets held for sale from discontinued operations 218.1 --
--------- ---------
Total current assets 13,280.4 11,906.6
--------- ---------
Property and equipment, at cost 3,655.5 3,509.3
Accumulated depreciation and amortization (1,650.4) (1,614.9)
--------- ---------
Property and equipment, net 2,005.1 1,894.4
Other assets:
Net investment in sales-type leases, less current portion 589.5 618.6
Goodwill and other intangibles 2,317.4 1,544.1
Other 288.1 474.3
--------- ---------
Total $18,480.5 $16,438.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 7.5 $ 0.8
Current portion of long-term obligations 19.0 17.4
Accounts payable 6,465.2 5,504.5
Other accrued liabilities 1,465.0 1,287.7
Liabilities from discontinued operations 90.2 --
--------- ---------
Total current liabilities 8,046.9 6,810.4
--------- ---------
Long-term obligations, less current portion 2,328.2 2,207.0
Deferred income taxes and other liabilities 860.8 1,027.6
Shareholders' equity:
Preferred Stock, without par value
Authorized - 0.5 million shares, Issued - none -- --
Common Shares, without par value
Authorized - 755.0 million shares, Issued - 464.7
million shares and 461.0 million shares at
March 31, 2003 and June 30, 2002, respectively 2,308.3 2,105.2
Retained earnings 6,161.3 5,156.1
Common Shares in treasury, at cost, 18.7 million shares
and 12.2 million shares at March 31, 2003 and
June 30, 2002, respectively (1,134.3) (737.0)
Other comprehensive loss (82.5) (120.9)
Other (8.2) (10.4)
--------- ---------
Total shareholders' equity 7,244.6 6,393.0
--------- ---------
Total $18,480.5 $16,438.0
========= =========
See notes to condensed consolidated financial statements.
Page 4
CARDINAL HEALTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
NINE MONTHS ENDED
MARCH 31,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations before cumulative effect of
change in accounting $1,040.7 $ 830.0
Adjustments to reconcile earnings from continuing operations before
cumulative effect of change in accounting to net cash from
operating activities:
Depreciation and amortization 195.2 181.5
Provision for bad debts 15.8 36.9
Change in operating assets and liabilities, net of effects from acquisitions:
Increase in trade receivables (474.3) (164.4)
Increase in inventories (1,386.7) (1,609.2)
Decrease in net investment in sales-type leases 61.7 133.9
Increase/(decrease) in accounts payable 895.6 (54.7)
Other operating items, net 167.8 203.2
-------- --------
Net cash provided by/(used in) operating activities 515.8 (442.8)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired (3.2) (10.9)
Proceeds from sale of property, equipment, and other assets 41.7 17.6
Additions to property and equipment (264.1) (186.1)
Proceeds from sale of discontinued operations 7.8 --
-------- --------
Net cash used in investing activities (217.8) (179.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in commercial paper and short-term debt 6.7 290.3
Reduction of long-term obligations (50.9) (9.7)
Proceeds from long-term obligations, net of issuance costs 9.4 318.4
Proceeds from issuance of Common Shares 125.3 107.7
Purchase of treasury shares (1,191.7) (115.7)
Dividends on Common Shares (33.6) (33.7)
-------- --------
Net cash provided by/(used in) financing activities (1,134.8) 557.3
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (836.8) (64.9)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,382.0 934.1
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 545.2 $ 869.2
======== ========
See notes to condensed consolidated financial statements.
Page 5
CARDINAL HEALTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The condensed consolidated financial statements of
Cardinal Health, Inc. (the "Company") include the accounts of all majority-owned
subsidiaries and all significant intercompany amounts have been eliminated.
These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and include all of the information
and disclosures required by generally accepted accounting principles for interim
reporting. In the opinion of management, all adjustments necessary for a fair
presentation have been included. Except as disclosed elsewhere in this Form
10-Q, all such adjustments are of a normal and recurring nature.
The condensed consolidated financial statements included herein should be
read in conjunction with the audited consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2002 (the "2002 Form 10-K"). Note 1 of the "Notes to
Consolidated Financial Statements" from the 2002 Form 10-K contains specific
accounting policies and is incorporated herein by reference.
RECENT FINANCIAL ACCOUNTING STANDARDS. In April 2003, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". This statement amends and clarifies the
financial accounting and reporting requirements, as were originally established
in FASB Statement No. 133, for derivative instruments and hedging activities.
FASB Statement No. 149 provides greater clarification of the characteristics of
a derivative instrument so that contracts with similar characteristics will be
accounted for consistently. This statement is effective for contracts entered
into or modified after June 30, 2003, as well as for hedging relationships
designated after June 30, 2003, excluding certain implementation issues that
have been effective prior to this date under FASB Statement No. 133. The
adoption of this statement is not anticipated to have a material effect on the
Company's financial position or results of operations.
In January 2003, the Emerging Issues Task Force ("EITF") finalized Issue
No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor". This issue requires that cash
consideration received by a customer from a vendor be recorded as a reduction of
cost of sales within a company's results of operations, excluding payments
received when a customer sells products and services to the vendor as well as
reimbursement of costs incurred by the customer in selling the vendor's product.
This issue also requires rebates or refunds provided to a customer as the result
of achieving certain purchase levels or other defined measures to be recorded as
a reduction of cost of sales. If the rebate or refund is probable and reasonably
estimable, it can be allocated over the time period in which it is earned. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that was
acquired before February 1, 2003. The Company currently has certain operating
lease agreements with entities it believes qualify as variable interest
entities. The Company does not believe that these entities will qualify as
variable interest entities as of the effective date of this interpretation and,
therefore, does not anticipate any material impact to the Company's financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," which amends FASB
Statement No. 123. This statement provides alternative methods of transition for
a voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of FASB Statement
No. 123. The transition guidance and annual disclosure provisions are effective
for fiscal years ending after December 15, 2002. The interim disclosure
provisions (shown below) are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002.
Page 6
At March 31, 2003, the Company maintained several stock incentive plans
for the benefit of certain officers, directors and employees. The Company
accounts for those plans under the intrinsic value method prescribed in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. The Company did not recognize compensation expense related to
employee stock options as the options granted under these plans had an exercise
price equal to the fair market value of the underlying common stock on the date
of grant. The Company did recognize compensation expense related to restricted
shares and restricted share units. Restricted shares and restricted share units
are awarded by the Company with an exercise price of zero and are amortized to
expense over the period in which participants perform services.
The following tables illustrate the effect on net income and earnings per
share if the Company adopted the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation":
For the Three Months For the Nine Months
Ended Ended
(in millions) March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Net earnings, as reported $ 383.1 $ 300.3 $ 1,038.9 $ 759.9
Stock based employee compensation expense
included in net earnings, net of related tax effects 0.4 0.7 1.3 2.5
Total stock-based employee compensation expense
determined under fair value method for all awards,
net of related tax effects (22.5) (21.4) (62.7) (53.5)
--------- --------- --------- ---------
Pro Forma net earnings $ 361.0 $ 279.6 $ 977.5 $ 708.9
========= ========= ========= =========
For the Three Months For the Nine Months
Ended Ended
March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Basic earnings per Common Share:
As reported $ 0.85 $ 0.67 $ 2.33 $ 1.69
Pro forma basic earnings per Common Share $ 0.80 $ 0.62 $ 2.19 $ 1.58
Diluted earnings per Common Share:
As reported $ 0.84 $ 0.66 $ 2.29 $ 1.66
Pro forma diluted earnings per Common Share $ 0.79 $ 0.61 $ 2.16 $ 1.54
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the enhanced disclosure requirements in the second
quarter of fiscal 2003. The adoption of the recognition and initial measurement
provisions during the third quarter of fiscal 2003 did not have a material
effect on the Company's financial position or results of operations.
In November 2002, the EITF finalized Issue No. 00-21 "Accounting for
Revenue Arrangements with Multiple Deliverables," effective for arrangements
entered into after June 15, 2003. This issue defines units of accounting for
arrangements with multiple deliverables resulting in revenue being allocated
over the units of accounting for revenue recognition purposes. The adoption of
this statement is not anticipated to have a material effect on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," effective for exit or disposal
activities that are initiated after December 31, 2002. This statement nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity, other than those associated with a
business combination, be recognized when the liability is incurred instead of
recognizing the liability at the date of an entity's commitment to
Page 7
an exit plan as was required in EITF Issue No. 94-3. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
2. EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Basic earnings per Common Share ("Basic") is computed by dividing net
earnings (the numerator) by the weighted average number of Common Shares
outstanding during each period (the denominator). Diluted earnings per Common
Share is similar to the computation for Basic, except that the denominator is
increased by the dilutive effect of stock options outstanding, computed using
the treasury stock method.
The following table reconciles the number of shares used to compute basic
and diluted earnings per Common Share:
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
(in millions) 2003 2002 2003 2002
------ ------ ------ ------
Weighted-average shares - basic 449.1 449.9 445.8 449.8
Effect of dilutive securities:
Employee stock options 7.2 9.2 7.7 10.0
------ ------ ------ ------
Weighted-average shares - diluted 456.3 459.1 453.5 459.8
====== ====== ====== ======
The potentially dilutive employee stock options that were antidilutive for
the three months ended March 31, 2003 and 2002 were 23.7 million and 12.6
million, respectively, and for the nine months ended March 31, 2003 and 2002
were 23.0 million and 0.1 million, respectively.
On January 28, 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.6 million Common
Shares having an aggregate cost of approximately $500 million during the quarter
ended March 31, 2003. The repurchased shares will be treasury shares available
to be used for general corporate purposes.
On August 7, 2002, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 0.9 million Common
Shares having an aggregate cost of approximately $49.0 million during the
quarter ended March 31, 2003. The cumulative amount repurchased under this
authorization, which was completed in January 2003, was approximately 7.8
million Common Shares having an aggregate cost of approximately $500 million.
The repurchased shares will be treasury shares available to be used for general
corporate purposes.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 3.2 million Common
Shares having an aggregate cost of approximately $191.7 million during the
quarter ended September 30, 2002. The cumulative amount repurchased under this
authorization, which was completed in August 2002, was approximately 8.3 million
Common Shares having an aggregate cost of approximately $500 million. The
repurchased shares will be treasury shares available to be used for general
corporate purposes.
3. COMPREHENSIVE INCOME
The following is a summary of the Company's comprehensive income for the
three and nine months ended March 31, 2003 and 2002:
For the Three Months Ended For the Nine Months Ended
March 31, March 31,
(in millions) 2003 2002 2003 2002
-------- -------- -------- --------
Net earnings $ 383.1 $ 300.3 $1,038.9 $ 759.9
Foreign currency translation adjustment 9.3 (12.6) 37.5 (8.6)
Unrealized gain on investment -- -- -- 2.2
Reclassification adjustment for
investment losses included in net earnings -- -- -- 3.2
Net unrealized gain/(loss) on derivative
instruments (11.5) 3.6 0.9 (0.7)
-------- -------- -------- --------
Total comprehensive income $ 380.9 $ 291.3 $1,077.3 $ 756.0
======== ======== ======== ========
Page 8
4. MERGER-RELATED COSTS AND OTHER SPECIAL ITEMS
The following is a summary of the special items for the three and nine
months ended March 31, 2003 and 2002.
Special Items Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- ----------------------
(in millions) 2003 2002 2003 2002
------- ------- ------- -------
Merger-Related Costs:
Employee-related costs $ (2.5) $ (9.9) $ (17.5) $ (18.6)
Pharmaceutical distribution center consolidation (6.8) (12.6) (16.6) (13.4)
Other exit costs (0.1) (2.2) (2.1) (6.4)
Other integration costs (6.5) (14.4) (13.1) (29.8)
------- ------- ------- -------
Total merger-related costs $ (15.9) $ (39.1) $ (49.3) $ (68.2)
------- ------- ------- -------
Other Special Items:
Employee-related costs $ (0.1) $ -- $ (1.5) $ --
Manufacturing facility closures (0.2) -- (21.4) --
Litigation settlements, net 6.8 -- 99.6 --
Asset impairment and other (0.4) -- (18.3) --
------- ------- ------- -------
Total other special items $ 6.1 $ -- $ 58.4 $ --
------- ------- ------- -------
Total special items $ (9.8) $ (39.1) $ 9.1 $ (68.2)
Tax effect of special items 3.4 14.4 (9.0) 25.6
------- ------- ------- -------
Net effect of special items $ (6.4) $ (24.7) $ 0.1 $ (42.6)
======= ======= ======= =======
MERGER-RELATED COSTS
Costs of integrating the operations of various merged companies are
recorded as merger-related costs when incurred. The merger-related costs
recognized as of March 31, 2003, were primarily a result of the merger or
acquisition transactions involving Syncor International Corporation ("Syncor"),
Boron, Lepore & Associates, Inc. ("BLP"), Magellan Laboratories Incorporated
("Magellan"), Bindley Western Industries, Inc. ("Bindley"), Bergen Brunswig
Medical Corporation ("BBMC"), Allegiance Corporation ("Allegiance") and R.P.
Scherer Corporation ("Scherer").
EMPLOYEE-RELATED COSTS. During the above-stated periods, the Company
incurred employee-related costs associated with certain of its mergers and
acquisitions. For the three months ended March 31, 2003, the costs primarily
related to amortization expense of noncompete agreements associated with the
Bindley and Allegiance merger transactions. For the nine months ended March 31,
2003, $8.8 million related to an approved plan to curtail certain defined
benefit pension plans within the Pharmaceutical Technologies and Services
segment. The remaining employee-related costs for the nine months ended March
31, 2003, primarily related to amortization expense of the noncompete agreements
noted above. For the three and nine months ended March 31, 2002, the
employee-related costs primarily consist of amortization expense of noncompete
agreements and severance as a result of certain of the Company's mergers and
acquisitions.
PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. In connection with the
merger transaction with Bindley, the Company anticipated closing and
consolidating a total of 16 Bindley distribution centers, Bindley's corporate
office, and one of the Company's data centers. These closures were to result in
the termination of approximately 1,250 employees. As of March 31, 2003, all 16
Bindley distribution centers and the Company's data center have been closed, and
the majority of the 1,250 employees have been terminated. The Company has
substantially completed the corporate office consolidation, and recorded
approximately $6.6 million related to this consolidation during the three months
ended March 31, 2003. The corporate office consolidation is expected to be
complete by June 30, 2003.
During the three and nine months ended March 31, 2003, the Company
recorded charges totaling $6.8 million and $16.6 million, respectively,
associated with the consolidations and closures noted above, as compared to
$12.6 million and $13.4 million, respectively, for the comparable periods in
fiscal 2002. The Company incurred employee-related costs, primarily from the
termination of employees due to the distribution center closures, as well as
exit costs to consolidate and close the various facilities mentioned above,
including asset impairment charges, inventory move costs, contract and lease
termination costs, and duplicate salary costs incurred during the shutdown
periods.
Page 9
OTHER EXIT COSTS. Other exit costs related primarily to costs associated
with lease terminations, moving expenses, and asset impairments as a direct
result of the merger transactions with BBMC, Allegiance and Scherer.
OTHER INTEGRATION COSTS. Other integration costs, which primarily relate
to the merger and acquisition transactions noted above, included charges
directly related to the integration of operations of the transactions noted,
such as consulting costs related to information systems and employee benefit
integration, as well as relocation and travel costs directly associated with the
integrations.
OTHER SPECIAL ITEMS
EMPLOYEE-RELATED COSTS. During the three and nine months ended March 31,
2003, the Company incurred $0.1 million and $1.5 million, respectively, of
employee-related costs associated with the restructuring of certain operations
within the Pharmaceutical Distribution and Provider Services segment. A
significant portion of the charges recorded represent severance accrued at the
time severance terms were communicated to employees during the second quarter of
fiscal 2003. The restructuring of operations is expected to be complete by June
30, 2003, and will result in the termination of approximately 30 employees.
MANUFACTURING FACILITY CLOSURES. During the three and nine months ended
March 31, 2003, the Company recorded a total of $0.2 million and $21.4 million,
respectively, as special charges related to the closure and consolidation of
certain manufacturing facilities. These closures and consolidations occurred
within the Medical Products and Services segment and the Pharmaceutical
Technologies and Services segment.
Within the Medical Products and Services segment, three manufacturing
facility closures were announced during the nine months ended March 31, 2003
(one during the first quarter of fiscal 2003 and two during the second quarter
of fiscal 2003). Two of the manufacturing facility closures were complete as of
December 31, 2002. The other closure is expected to be complete by June 30,
2003. Exit costs of $0.2 million and $2.9 million were incurred during the three
and nine months ended March 31, 2003, respectively, primarily related to
dismantling and moving machinery and equipment. Also, asset impairment charges
of $8.9 million were incurred during the nine months ended March 31, 2003. The
remaining $4.6 million for the nine months ended March 31, 2003, related to
severance costs due to the termination of employees as a result of these
closures. The Company expects to terminate approximately 530 employees due to
these closures. As of March 31, 2003, the majority of these employees have been
terminated.
The Company incurred special charges during the nine months ended March
31, 2003, related to two manufacturing facility closures within the
Pharmaceutical Technologies and Services segment. One closure was complete as of
December 31, 2002. The other is expected to be complete by June 30, 2003. Asset
impairment charges of $1.1 million were incurred during the nine months ended
March 31, 2003. Also, exit costs of $1.6 million were incurred during this same
period, primarily related to dismantling machinery and equipment and
transferring certain technologies to other existing facilities within the
Company. In addition, $1.6 million of severance costs, related to the
termination of approximately 75 employees, were incurred during the nine months
ended March 31, 2003, as a result of these closures. As of March 31, 2003, the
majority of these employees were terminated.
LITIGATION SETTLEMENTS. During the three and nine months ended March 31,
2003, the Company recorded income from net litigation settlements of $6.8
million and $99.6 million, respectively. The settlements resulted primarily from
the recovery of antitrust claims against certain vitamin manufacturers for
amounts overcharged in prior years. The total recovery through March 31, 2003
was $136.4 million, of which $8.3 million was recorded during the three months
ended March 31, 2003. While the Company still has pending claims with smaller
vitamin manufacturers, the total amount of future recovery is not currently
estimable but the Company believes it is not likely to be a material amount. Any
future recoveries will be recorded as a special item in the period in which a
settlement is reached. During the three months ended March 31, 2003, the vitamin
litigation income was partially offset by a litigation settlement totaling $1.5
million.
ASSET IMPAIRMENT AND OTHER. During the nine months ended March 31, 2003,
the Company incurred asset impairment and other charges of $18.3 million, of
which $10.1 million related to asset impairment charges resulting from the
Company's decision to exit certain North American commodity operations in its
Pharmaceutical Technologies and Services segment. An additional $7.8 million
relates to a writeoff of design, tooling and development costs.
Page 10
ACCRUAL ROLLFORWARD
The following table summarizes the activity related to the liabilities
associated with the Company's special charges during the nine months ended March
31, 2003.
For the Nine
Months Ended
($ in millions) March 31, 2003
--------------
Balance at June 30, 2002 $ 64.7
Additions(1) 92.0
Payments (109.7)
------
Balance at March 31, 2003 $ 47.0
======
(1) Amount represents items that have been either expensed as incurred or
accrued according to generally accepted accounting principles. This amount does
not include litigation settlement income recorded during the nine months ended
March 31, 2003 of $101.1 million, which was reported as a reduction to special
charges.
SUMMARY
The net effect of special items recorded during the three months ended
March 31, 2003, was to decrease reported earnings from continuing operations by
$6.4 million to $384.9 million and to decrease reported diluted earnings per
Common Share from continuing operations by $0.01 per share to $0.85 per share.
In comparison, the net effect of special items recorded during the three months
ended March 31, 2002, was to reduce reported earnings from continuing operations
by $24.7 million to $300.3 million and to reduce reported diluted earnings per
Common Share from continuing operations by $0.05 per share to $0.66 per share.
The net effect of special items recorded during the nine months ended
March 31, 2003, was to increase reported earnings from continuing operations
before cumulative effect of change in accounting by $0.1 million to $1,040.7
million. The reported diluted earnings per Common Share from continuing
operations before cumulative effect of change in accounting remained unchanged.
In comparison, the net effect of special items recorded during the nine months
ended March 31, 2002, was to reduce reported earnings from continuing operations
before cumulative effect of change in accounting by $42.6 million to $830.0
million and to reduce reported diluted earnings per Common Share from continuing
operations before cumulative effect of change in accounting by $0.09 per share
to $1.81 per share.
5. SEGMENT INFORMATION
The Company is organized based on the products and services it offers.
Under this organizational structure, the Company operates within four operating
business segments: Pharmaceutical Distribution and Provider Services, Medical
Products and Services, Pharmaceutical Technologies and Services, and Automation
and Information Services. With the exception of the change noted in the
following paragraph, the Company has not made any significant changes in the
segments reported or the basis of measurement of segment profit or loss from the
information provided in the 2002 Form 10-K.
During the third quarter of fiscal 2003, the Company reclassified Central
Pharmacy Services, Inc. and Cord Logistics, Inc. from the Pharmaceutical
Distribution and Provider Services segment to the Pharmaceutical Technologies
and Services segment and therefore restated these segments' financial results.
All prior period financial results presented in this Form 10-Q have also been
restated to reflect this reclassification. In addition, with the completion of
the Syncor acquisition on January 1, 2003, Syncor is included within the
Pharmaceutical Technologies and Services segment.
The Pharmaceutical Distribution and Provider Services segment involves the
distribution of a broad line of pharmaceuticals, healthcare, and other specialty
pharmaceutical products and other items typically sold by hospitals, retail drug
stores and other healthcare providers. In addition, this segment provides
services to the healthcare industry through integrated pharmacy management,
temporary pharmacy staffing, as well as franchising of apothecary-style retail
pharmacies.
The Medical Products and Services segment involves the manufacture of
medical, surgical and laboratory products and the distribution of these products
as well as products not manufactured internally to hospitals, physician offices,
surgery centers and other healthcare providers.
Page 11
The Pharmaceutical Technologies and Services segment provides services to
the healthcare industry through the design of proprietary drug delivery systems
including softgel capsules, controlled release forms, Zydis(R) fast dissolving
wafers, and advanced sterile delivery technologies. It also provides
comprehensive packaging, radiopharmaceutical manufacturing, pharmaceutical
development and analytical science expertise, as well as medical education,
marketing and contract sales services.
The Automation and Information Services segment provides services to
hospitals and other healthcare providers through pharmacy automation equipment
and clinical information system services.
The Company evaluates the performance of the segments based on operating
earnings after the corporate allocation of administrative expenses. Special
charges are not allocated to the segments.
The following tables include revenue and operating earnings for the three
and nine months ended March 31, 2003 and 2002 for each segment and reconciling
items necessary to equal amounts reported in the condensed consolidated
financial statements:
NET REVENUE For the Three Months Ended For the Nine Months Ended
(in millions) March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Operating revenue:
Pharmaceutical Distribution and Provider Services $10,446.0 $ 9,513.5 $30,269.7 $26,637.3
Medical Products and Services 1,644.8 1,560.8 4,879.1 4,624.9
Pharmaceutical Technologies and Services 596.2 345.4 1,399.5 1,027.7
Automation and Information Services 166.2 142.3 464.6 390.3
Corporate (1) (15.9) (20.7) (52.7) (51.8)
--------- --------- --------- ---------
Total operating revenue $12,837.3 $11,541.3 $36,960.2 $32,628.4
========= ========= ========= =========
Bulk deliveries to customer warehouses and other:
Pharmaceutical Distribution and Provider Services $ 1,482.4 $ 1,700.7 $ 4,450.1 $ 5,479.1
Pharmaceutical Technologies and Services (2) 51.6 -- 138.1 --
--------- --------- --------- ---------
Total bulk deliveries to customer warehouses and
other $ 1,534.0 $ 1,700.7 $ 4,588.2 $ 5,479.1
========= ========= ========= =========
OPERATING EARNINGS For the Three Months Ended For the Nine Months Ended
(in millions) March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
Operating earnings:
Pharmaceutical Distribution and Provider Services $ 342.8 $ 309.7 $ 899.6 $ 779.9
Medical Products and Services 163.7 138.6 446.0 395.6
Pharmaceutical Technologies and Services 94.4 66.0 252.1 201.0
Automation and Information Services 64.3 53.4 179.8 138.3
Corporate (3) (57.0) (74.3) (110.9) (151.7)
--------- --------- --------- ---------
Total operating earnings $ 608.2 $ 493.4 $ 1,666.6 $ 1,363.1
========= ========= ========= =========
(1) Corporate operating revenue primarily consists of foreign currency
translation adjustments.
(2) At the beginning of fiscal 2003, the Company began classifying
out-of-pocket expenses received through its recently acquired sales and
marketing services' business within the bulk deliveries to customer
warehouses and other line item. The customer is contractually required to
reimburse the Company for these expenses. The Company does not generate
any margin from these reimbursements.
(3) Corporate operating earnings include special items of ($9.8) million and
($39.1) million in the three-month periods ended March 31, 2003 and 2002,
respectively, and $9.1 million and ($68.2) million for the nine-month
periods ended March 31, 2003 and 2002, respectively, and unallocated
corporate administrative expenses and investment spending. In addition, at
the beginning of fiscal 2003, the Company began expanding the use of its
shared service center, which previously supported the Medical Products and
Services segment, to benefit and support company-wide initiatives and
other business segments. Accordingly, the cost of the shared service
center, which was previously reported within the Medical Products and
Services segment, has been classified within Corporate operating earnings
for fiscal 2003 to
Page 12
be consistent with internal segment reporting. The cost of these services
for the three and nine months ended March 31, 2003 were approximately $4.7
million and $14.3 million, respectively. These costs are included within
Corporate operating earnings, a portion of which are included in the
general corporate cost allocation to each segment.
6. LEGAL PROCEEDINGS
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off,
Allegiance, which merged with a subsidiary of the Company on February 3, 1999,
agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare
Corporation ("BHC"), as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
arising from the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves. The
Company is not a party to any of the lawsuits and has not agreed to pay any
settlements to the plaintiffs.
As of March 31, 2003, there were 271 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products and some of these cases were proceeding to trial. The total dollar
amount of potential damages cannot be reasonably quantified. Some plaintiffs
plead damages in extreme excess of what they reasonably can expect to recover,
some plead a modest amount, and some do not include a request for any specific
dollar amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds twenty-five. Based on the significant differences
in the range of damages sought and based on the multiple number of defendants in
these lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore, Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in 831 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
March 31, 2003, Allegiance had resolved more than sixty percent of these cases.
About twenty percent of the lawsuits that have been resolved were concluded
without any liability to Baxter/Allegiance. No individual claim has been settled
for a material amount, nor have all the settled claims, in the aggregate,
comprised a material amount. Due to the number of claims filed and the ongoing
defense costs that will be incurred, Allegiance believes it is probable that it
will incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity and results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds. The Company believes a
substantial portion of any liability will be covered by insurance policies
Allegiance has with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency. The Company and Allegiance continue to believe that
insurance recovery is probable.
Shareholder Litigation against Cardinal Health
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. On or about March 21, 2003,
after the Company filed a Motion to Dismiss the complaint, an amended complaint
was filed alleging breach of fiduciary duties and corporate waste in connection
with the alleged failure by the Board of Directors of the Company to (a)
renegotiate or terminate the Company's proposed acquisition of Syncor, and (b)
determine the propriety of indemnifying Monty Fu, the former Chairman of Syncor.
The Company has filed a Motion to Dismiss the amended complaint and believes the
allegations made in the amended complaint are without merit and intends to
vigorously defend this action. The Company currently does not believe that the
impact of this lawsuit, if any, will have a material adverse effect on the
Company's financial position, liquidity or results of operations. The Company
currently believes that there will be some insurance coverage available under
the Company's directors' and officers' liability insurance policies in effect at
the time this action was filed.
Page 13
Shareholder Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor and
certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "federal securities actions").
All of these actions were filed in the United States District Court for the
Central District of California. The federal securities actions purport to be
brought on behalf of all purchasers of Syncor shares during various periods,
beginning as early as March 30, 2000, and ending as late as November 5, 2002 and
allege, among other things, that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act, by issuing a series of press
releases and public filings disclosing significant sales growth in Syncor's
international business, but omitting mention of certain allegedly improper
payments to Syncor's foreign customers, thereby artificially inflating the price
of Syncor shares. A lead plaintiff has been appointed by the court in the
federal securities actions and a consolidated complaint is expected to be filed
in May 2003.
On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the federal securities actions described above), and a single purported class
action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corp. and the remaining two
Syncor directors, who are hereafter included in the term "director defendants."
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. An amended complaint was filed on December 6, 2002 in one of
these cases, purporting to allege direct claims on behalf of a class of
shareholders. The defendants' motion for a stay of these cases pending the
resolution of the Delaware actions (discussed above) was granted on April 30,
2003.
The Company recently learned that a proposed class action complaint was
filed on April 8, 2003, against the Company, Syncor, and certain officers and
employees of the Company by a purported participant in the Syncor Employees'
Savings and Stock Ownership Plan. The suit alleges that the defendants breached
certain fiduciary duties owed under the Employee Retirement Income Security Act
("ERISA").
Each of the actions described under the heading "Shareholder Litigation
against Syncor" is in its early stages and it is impossible to predict the
outcome of these proceedings or their impact on Syncor or the Company. However,
the Company currently does not believe that the impact of these actions will
have a material adverse effect on the Company's financial position, liquidity or
results of operations. The Company and Syncor believe the allegations made in
the complaints described above are without merit and intend to vigorously defend
such actions and have been informed that the individual director and officer
defendants deny liability for the claims asserted in these actions, believe they
have meritorious defenses and intend to vigorously defend such actions. The
Company and Syncor currently believe that there will be some insurance coverage
available under the Company's and Syncor's directors' and officers' liability
insurance policies in effect at the time these actions were filed.
Other Matters
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including, without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
clean-up costs. Although the ultimate resolution of the litigation referenced
herein cannot be forecast with certainty, the Company intends to vigorously
defend itself and does not currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's financial
position, liquidity and results of operation.
Page 14
7. CHANGE IN ACCOUNTING
In the first quarter of fiscal 2002, the method of recognizing revenue for
pharmacy automation equipment was changed from recognizing revenue when the
units were delivered to the customer to recognizing revenue when the units are
installed at the customer site. Management believes that the change in
accounting will provide for a more objectively determinable method of revenue
recognition. In addition, the Company has implemented other changes to better
service its customers and leverage operational efficiencies. The Company
recorded a cumulative effect of change in accounting of $70.1 million (net of
tax of $44.6 million) in the consolidated statement of earnings during the first
quarter of fiscal 2002. The after tax dilutive impact of the cumulative effect
was $0.15 per diluted share.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill for the nine months ended March
31, 2003, were as follows:
Pharmaceutical Medical
Distribution Products Pharmaceutical Automation and
and Provider and Technologies and Information
(in millions) Services Services Services Services Total
-------- -------- -------- -------- -----
Balance at June 30, 2002 $ 159.8 $ 675.4 $ 639.4 $ 50.7 $1,525.3
Goodwill acquired, net of purchase price
adjustments and other 5.2 11.3 715.3 -- 731.8
Goodwill write-off -- -- (7.6) -- (7.6)
-------- -------- -------- -------- --------
Balance at March 31, 2003 $ 165.0 $ 686.7 $1,347.1 $ 50.7 $2,249.5
======== ======== ======== ======== ========
For further details on the goodwill acquired as a result of the Syncor
acquisition, see Note 11.
During the second quarter of fiscal 2003, the Company made the decision to
exit certain North American commodity operations within the Pharmaceutical
Technologies and Services segment. As a result of this decision, the Company
recorded a write-off of goodwill totaling $7.6 million.
All intangible assets for the periods presented are subject to
amortization and are being amortized using the straight-line method over periods
that range from five to forty years. The detail of other intangible assets by
class as of March 31, 2003, and June 30, 2002 was as follows:
(in millions) Gross Accumulated Net
Intangible Amortization Intangible
---------- ------------ ----------
June 30, 2002
Trademarks and patents $ 28.7 $ 20.0 $ 8.7
Non-compete agreements 21.3 20.0 1.3
Other 17.7 8.9 8.8
------ ------ ------
Total $ 67.7 $ 48.9 $ 18.8
------ ------ ------
March 31, 2003
Trademarks and patents $ 47.9 $ 20.4 $ 27.5
Non-compete agreements 27.4 21.7 5.7
Other 46.3 11.6 34.7
------ ------ ------
Total $121.6 $ 53.7 $ 67.9
------ ------ ------
For further details on the intangible assets acquired as a result of the
Syncor acquisition, see Note 11.
Amortization expense for the three months ended March 31, 2003 and 2002
was $2.4 million and $1.0 million, respectively, and for the nine months ended
March 31, 2003 and 2002 was $4.1 million and $2.1 million, respectively.
The following table represents the estimated amortization expense for the
fiscal years ending June 30:
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Amortization expense $ 6.9 $ 9.7 $ 9.3 $ 9.0 $ 6.5
Page 15
9. OFF-BALANCE SHEET TRANSACTIONS
The Company formed Cardinal Health Lease Funding 2002A, LLC ("CHLF2002A")
for the sole purpose of acquiring a pool of sales-type leases and the related
leased equipment from Cardinal Health 301, Inc ("CH301"), formerly known as
Pyxis Corporation, and selling lease receivables and granting a security
interest in the related leased equipment to Cardinal Health Lease Funding
2002AQ, LLC ("CHLF2002AQ"). CHLF2002A is a wholly owned, special purpose,
bankruptcy-remote subsidiary of CH301. CHLF2002AQ was formed for the sole
purposes of acquiring lease receivables under sales-type leases from CHLF2002A
and granting a beneficial interest in the lease receivables and a security
interest in the related equipment to the leasing subsidiary of a third-party
bank. CHLF2002AQ is a wholly owned, special purpose, bankruptcy-remote
subsidiary of CHLF2002A. The transaction qualifies for sale treatment under SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and, accordingly, the related receivables are
not included in the Company's consolidated financial statements. As required by
U.S. generally accepted accounting principles, the Company consolidates
CHLF2002A and does not consolidate CHLF2002AQ, as CHLF2002AQ is a qualified
special purpose entity, as defined under SFAS No. 140. Both CHLF2002A and
CHLF2002AQ are separate legal entities that maintain separate financial
statements from Cardinal Health, Inc. and CH301. The assets of CHLF2002A and
CHLF2002AQ are available first and foremost to satisfy the claims of their
respective creditors. During the nine months ended March 31, 2003, CHLF2002A
sold $200.0 million of lease receivables to CHLF2002AQ and recognized an
immaterial gain that was classified as operating revenue within its results of
operations.
10. GUARANTEES
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (see Note 1). This interpretation enhances
a guarantor's disclosure requirements in its interim and annual financial
statements regarding obligations under certain guarantees. The Company adopted
the enhanced disclosure requirements in the second quarter of fiscal 2003. The
initial recognition and measurement provisions of the interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. For the quarter ended March 31, 2003, the Company did not
enter into any material guarantee arrangements where the fair value of the
guarantee would be required to be recorded.
The Company has contingent commitments related to certain operating lease
agreements. These operating leases consist of certain real estate and equipment
used in the operations of the Company. In the event of termination of these
operating leases, which range in length from one to five years, the Company
guarantees reimbursement for a portion of any unrecovered property cost. At
March 31, 2003, the maximum amount the Company could be required to reimburse
was $370.5 million. Based upon current information, the Company believes that
the proceeds from the sale of properties under these operating lease agreements
would exceed its payment obligation.
In the ordinary course of business, the Company, from time to time, agrees
to indemnify certain other parties under agreements with the Company, including
under acquisition agreements, customer agreements, and intellectual property
licensing agreements. Such indemnification obligations vary in scope and, when
defined, in duration. Generally, a maximum obligation is not explicitly stated
and, therefore, the overall maximum amount of the liability under such
indemnification obligations cannot be reasonably estimated. Where appropriate,
such indemnification obligations are recorded as a liability. Historically, the
Company has not, individually or in the aggregate, made payments under these
indemnification obligations in any material amounts. In certain circumstances,
the Company believes that its existing insurance arrangements, subject to the
general deduction and exclusion provisions, would cover portions of the
liability that may arise from these indemnification obligations. In addition,
the Company believes that the likelihood of material liability being triggered
under these indemnification obligations is not significant.
In the ordinary course of business, the Company, from time to time, enters
into agreements that obligate the Company to make fixed payments upon the
occurrence of certain events. Such obligations primarily relate to obligations
arising under acquisition transactions, where the Company has agreed to make
payments based upon the achievement of certain financial performance measures by
the acquired company. Generally, the obligation is capped at an explicit amount.
The Company's aggregate exposure for these obligations, assuming the achievement
of all financial performance measures, is not material. Any potential payment
for these obligations would be treated as an adjustment to the purchase price of
the related entity and would have no impact on the Company's results of
operations.
Page 16
11. ACQUISITIONS
On January 1, 2003, the Company completed the purchase of Syncor, a
Woodland Hills, California-based company which is a leading provider of nuclear
pharmacy services. As a result of the acquisition, the Company has become the
leading provider of nuclear pharmacy services in the United States.
The stock for stock transaction was valued at approximately $780 million
based on the issuance of approximately 12.5 million shares at an average market
price of the Company's stock over a period before and after the terms of the
agreement, as amended, were announced. In addition, the Company assumed
approximately $120 million in debt. Syncor's operations will be integrated with
the Company's existing Nuclear Pharmacy Services business and reported within
the Pharmaceutical Technologies and Services segment.
The allocation of the purchase price is not yet finalized and is subject
to adjustment as the Company is still assessing the value of the acquired
discontinued operations, the acquired intangible assets, and certain other
matters. The preliminary allocation of the purchase price has resulted in an
allocation to goodwill of $700.4 million and an allocation to identifiable
intangible assets of $36.8 million.
The Company valued intangible assets related to customer relationships,
vendor agreements, patents, trademarks, trade names and software. The breakdown
by category is as follows:
Amount Average
Category (in millions) Life(Years)
- -------- ----------- ----------
Trademarks, trade names and patents $ 10.1 10
Customer relationships and other 26.7 4
------
Total Intangible Assets Acquired $ 36.8 5
======
Supplemental pro forma results of operations are not required to be
disclosed as the impact to the Company of the acquisition of Syncor was not
material.
12. DISCONTINUED OPERATIONS
As discussed in Note 11, the Company acquired certain operations of Syncor
that were or will be discontinued. Prior to the acquisition, Syncor announced
the discontinuation of certain operations including the medical imaging business
("CMI") and certain overseas operations. The Company is continuing with these
plans and has added additional international and non-core domestic businesses to
the discontinued operations. In accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," the net assets and results of
operations of these businesses are presented as discontinued operations. The
Company is currently overseeing the planned sale of the discontinued operations
and is actively marketing these businesses. As of March 31, 2003, the Company
has certain commitments in place for the sale of certain of these discontinued
operations and expects to sell the remaining discontinued operations by January
1, 2004.
The results of discontinued operations for the three and nine months ended
March 31, 2003 are summarized as follows:
Three and Nine
Months Ended
March 31,
(in millions) 2003
-------------
Revenue $ 51.6
Loss before income taxes (2.9)
Gain/(Loss) on sale of business -
Income tax benefit 1.1
------
Loss from discontinued operations $ (1.8)
======
Interest expense allocated to discontinued operations for the three and
nine months ended March 31, 2003, was $0.3 million. Interest expense was
allocated to the discontinued operations based upon a ratio of the net assets of
discontinued operations versus the overall net assets of Syncor.
Page 17
At March 31, 2003, the major components of assets and liabilities of the
discontinued operations were as follows:
March 31,
(in millions) 2003
Current Assets $ 83.7
Property and Equipment 115.9
Other Assets 18.5
------
Total Assets $218.1
======
Current Liabilities $ 55.2
Long Term Debt 36.2
Other Liabilities (1.2)
------
Total Liabilities $ 90.2
======
Cash flows generated from the discontinued operations are immaterial to
the Company and, therefore, are not disclosed separately.
Page 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's discussion and analysis is concerned with material changes in
financial condition and results of operations for the Company's condensed
consolidated balance sheets as of March 31, 2003 and June 30, 2002, and for the
condensed consolidated statements of earnings for the three and nine-month
periods ended March 31, 2003 and 2002.
This discussion and analysis should be read together with management's
discussion and analysis included in the 2002 Form 10-K.
Portions of management's discussion and analysis presented below include
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The words "believe", "expect", "anticipate",
"project", and similar expressions, among others, identify "forward-looking
statements", which speak only as of the date the statement was made. Such
forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to materially differ from those made,
projected or implied. The most significant of such risks, uncertainties and
other factors are described in Exhibit 99.01 to this Form 10-Q and on page 8 of
the 2002 Form 10-K and are incorporated herein by reference. The Company
disclaims any obligation to update any forward-looking statement.
GENERAL
The Company operates within four operating business segments:
Pharmaceutical Distribution and Provider Services, Medical Products and
Services, Pharmaceutical Technologies and Services, and Automation and
Information Services. See Note 5 of "Notes to Condensed Consolidated Financial
Statements" for a description of these segments.
RESULTS OF OPERATIONS
Percent of Total Percent of Total
Operating Revenues Operating Revenues
------------------ -----------------
Operating Revenue Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
Growth (1) 2003 2002 Growth (1) 2003 2002
---------- ---- ---- ---------- ---- ----
Pharmaceutical Distribution and Provider
Services 10% 81% 83% 14% 82% 82%
Medical Products and Services 5% 13% 13% 5% 13% 14%
Pharmaceutical Technologies and Services 73% 5% 3% 36% 4% 3%
Automation and Information Services 17% 1% 1% 19% 1% 1%
Total Company 11% 100% 100% 13% 100% 100%
-- --- --- -- --- ---
(1) Growth is calculated as the increase/(decrease) in the operating
revenue for the three and nine months ended March 31, 2003 as a
percentage of the operating revenue for the three and nine months
ended March 31, 2002, respectively.
Total operating revenue for the three and nine months ended March 31, 2003
increased 11% and 13% compared to the same periods of the prior year. This
increase is a result of a higher sales volume across each of the Company's
segments; the addition of new products; and the addition of new customers, some
of which was a result of new corporate agreements with healthcare providers. In
addition, the Syncor acquisition within the Pharmaceutical Technologies and
Services segment accounted for approximately 1% of the overall growth for the
three months ended March 31, 2003. The overall growth was partially offset by a
decline within the Company's non-core wholesaler to wholesaler pharmaceutical
trading business, as further discussed below.
The Pharmaceutical Distribution and Provider Services segment's operating
revenue growth during the three and nine months ended March 31, 2003 resulted
from strong sales to various customer segments. The most significant growth was
in the alternate site and chain pharmacies customer businesses, which yielded
growth of approximately 23% and 13%, respectively, for the three months ended
March 31, 2003 and 23% and 16%, respectively, for the nine months ended March
31, 2003, after considering the reduction in business with Kmart due to their
closures of various stores. The temporary slow down of operating revenue growth
for the segment during the three months
Page 19
ended March 31, 2003 was primarily driven by the lack of availability of certain
pharmaceutical products from manufacturers during the quarter which impacted
non-core wholesaler to wholesaler revenue from the pharmaceutical trading
business. This lack of availability was, in part, brought about by the increased
trend in the industry's use of inventory management agreements ("IMA's"). IMA's
generally provide for the Company to be compensated on a negotiated basis to
help manufacturers better match their shipments to meet market demand, thereby
resulting in less surplus inventory for the Company's trading business. Core
distribution operating revenue growth, excluding the pharmaceutical trading
business, was approximately 15%. The impact of the decline in the trading
business was significant in the current quarter due to that business reaching
record levels during the same quarter last year. This impact will significantly
diminish in future periods as the decline in trading business to current levels
began in the fourth quarter of fiscal 2002.
The Medical Products and Services segment's operating revenue growth
during the three and nine months ended March 31, 2003, resulted from an increase
in sales of distributed and self-manufactured products. The addition of several
new contracts with hospitals and health care networks and improved penetration
in the surgery center market increased demand for certain existing and new
products within this segment. In particular, the increased demand for
self-manufactured products such as the proprietary Procedure Based Delivery
Systems, custom sterile kits, and surgical and exam gloves helped contribute to
this segment's growth.
The Pharmaceutical Technologies and Services segment's operating revenue
growth during the three and nine months ended March 31, 2003, resulted from
strong demand for proprietary branded and sterile manufacturing products and
from acquisitions, primarily Syncor. Oral products that showed particular
strength included Lilly's Zyprexa(R) , an anti-psychotic and Amnesteem, the
generic for isotretinoin. Increased demand for sterile manufacturing included
Sepracor's Xopenex(R) (respiratory) and Pharmacia's Xalatan(R) (glaucoma). These
gains were partially offset by slower sales in non-core businesses such as
international health and nutritional products and the planned shut down of a
domestic sterile manufacturing facility to expand capacity. Excluding Syncor,
this segment experienced revenue growth in the high teens.
The Automation and Information Services segment's operating revenue growth
during the three and nine months ended March 31, 2003, resulted from strong
sales in the patient safety and supply management product lines, such as
MEDSTATION SN(R) and SUPPLYSTATION(R).
Bulk Deliveries to Customer Warehouses and Other
The Pharmaceutical Distribution and Provider Services segment reports bulk
deliveries made to customers' warehouses as revenue. These sales involve the
Company acting as an intermediary in the ordering and subsequent delivery of
pharmaceutical products. Fluctuations in bulk deliveries result largely from
circumstances that the Company cannot control, including consolidation within
the customers' industries, decisions by customers to either begin or discontinue
warehousing activities, and changes in policies by manufacturers related to
selling directly to customers. Due to the lack of margin generated through bulk
deliveries, fluctuations in their amount have no significant impact on the
Company's earnings.
The Pharmaceutical Technologies and Services segment records out-of-pocket
reimbursements received through its sales and marketing services' business as
revenue. These out-of-pocket expenses, which generally include travel expenses
and other incidental costs, are incurred to fulfill the services required by the
contract. Within these contracts, the customer agrees to reimburse the Company
for the expenses. Due to the Company not generating any margin from these
reimbursements, fluctuations in their amount have no impact on the Company's
earnings.
Gross Margin Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
(as a percentage of operating revenue) 2003 2002 2003 2002
---- ---- ---- ----
Pharmaceutical Distribution and Provider Services 4.88% 5.33% 4.70% 5.06%
Medical Products and Services 22.96% 22.39% 21.82% 21.98%
Pharmaceutical Technologies and Services 31.75% 33.70% 33.12% 34.28%
Automation and Information Services 69.89% 69.06% 71.45% 68.06%
Total Company 9.30% 9.26% 8.88% 9.14%
---- ---- ---- ----
The overall gross margin as a percentage of operating revenue increased
during the three months ended March 31, 2003 and decreased for the nine months
ended March 31, 2003 compared to the same periods of the prior year. For the
three months ended March 31, 2003 gross margin improvement was partially driven
by a greater mix of
Page 20
higher margin business combined with manufacturing and operational efficiencies
achieved within the Medical Products and Services and Automation and Information
Services segments. This was complemented by the acquisition of Syncor, which had
margins greater than the prior year average for the entire Company. For the nine
months ended March 31, 2003, gross margin declined primarily as a result of
changes in business and customer mix. These decreases were partially offset by
an increase in the Automation and Information Services segment and changes in
third quarter gross margin, as discussed above. The increase within the
Automation and Information Services segment was primarily due to changes within
the segment's product mix as well as productivity improvements.
The Pharmaceutical Distribution and Provider Services segment's gross
margin as a percentage of operating revenue decreased during the three and nine
months ended March 31, 2003. This decrease was due primarily to an increase in
sales to lower-margin customers where there is a lower cost of distribution that
helps offset the reduced gross margins. Operating revenue generated from sales
to chain pharmacy, alternate site, health system, and independent customers as a
percentage of total operating revenue for pharmaceutical distribution, the
largest operating unit within this segment, trended as follows:
Three Months Nine Months
Customer Class Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Chain Pharmacy 47% 47% 48% 47%
Alternate Site 22% 20% 21% 20%
Health System 18% 19% 18% 19%
Independent 13% 14% 13% 14%
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
The decrease in selling margins was partially offset by vendor margins from
favorable price increases and manufacturer marketing programs, including IMA's
whereby the Company is generally compensated on a negotiated basis to help
manufacturers better match their shipments with market demand. The Company has
seen changes in vendor policies related to product availability, including an
increasing trend within the industry for the use of IMA's. The Company expects
this trend to continue. Generally, the Company is compensated under its IMA's
based on the timing of the inventory price increase and the volume of inventory
purchases during the agreed upon period. The Company recognizes the benefit from
such agreements within gross margins based upon related inventory turns. As
these vendor policies continue to develop, the Company expects to negotiate
terms for the collective services offered to its vendors to permit the Company
to retain a similar level of overall profitability. There can be no assurance
that vendor programs that occurred in the first nine months of fiscal 2003 will
recur in the same form or at the same levels in the future or that the Company
will be successful in negotiating favorable terms in response to changes in
vendor policies.
The Medical Products and Services segment's gross margin as a percentage
of operating revenue increased during the three months ended March 31, 2003 and
decreased for the nine months ended March 31, 2003. For the three months ended
March 31, 2003, gross margin improvement was driven by customer and product mix
within the domestic distribution business and a greater mix of self manufactured
products driven by new product introduction (e.g., new synthetic surgeon
gloves). Manufacturing efficiencies achieved in this segment also contributed to
the gross margin improvement. For the nine months ended March 31, 2003, gross
margin continued to be impacted by new distribution agreements in which lower
margin distributed products have been sold at a faster rate initially as
compared to the rate of sale of higher margin self-manufactured products.
The Pharmaceutical Technologies and Services segment's gross margin as a
percentage of operating revenue decreased during the three and nine months ended
March 31, 2003. This decrease was primarily driven by the addition of the Syncor
nuclear pharmacy services business. Syncor has a slightly lower gross margin
ratio than the other businesses within the segment. In addition to the impact of
the Syncor business, for the nine months ended March 31, 2003, the gross margin
comparison in this segment was negatively impacted by certain items that
occurred in fiscal year 2002 that did not recur in fiscal year 2003, including
the recording of pricing adjustments related to the minimum recovery expected to
be received for claims against vitamin manufacturers for amounts overcharged in
prior years (also, see Note 4 of "Notes to Condensed Consolidated Financial
Statements"). These pricing adjustments were recorded as a reduction of cost of
goods sold, consistent with the classification of the original overcharge, and
were based on the minimum amounts estimated to be recoverable based on the facts
and circumstances available at the time they were recorded. The amount recorded
for these pricing adjustments was $12.0 million in the first quarter of fiscal
2002.
Page 21
The Automation and Information Services segment's gross margin as a
percentage of operating revenue increased during the three and nine months ended
March 31, 2003. This increase resulted from increased sales within the
relatively higher margin MEDSTATION SN(R) and newer version supply control
products as well as productivity gains realized from the operational
improvements implemented early last fiscal year.
Selling, General & Administrative Expenses Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
(as a percentage of operating revenue) 2003 2002 2003 2002
---- ---- ---- ----
Pharmaceutical Distribution and Provider Services 1.60% 2.07% 1.73% 2.13%
Medical Products and Services 13.01% 13.51% 12.68% 13.43%
Pharmaceutical Technologies and Services 15.92% 14.60% 15.10% 14.72%
Automation and Information Services 31.17% 31.57% 32.75% 32.65%
Total Company 4.49% 4.64% 4.39% 4.76%
Selling, general and administrative expenses as a percentage of operating
revenue decreased during the three and nine months ended March 31, 2003 as
compared to the same periods of fiscal 2002. The decrease in the Pharmaceutical
Distribution and Provider Services segment was due to the synergies achieved
following the Bindley merger and the continued achievement of economies of scale
as this business continues to grow. From an operational perspective, the Bindley
distribution center integration is considered complete. This segment is
operating three fewer distribution centers than it had for the same period last
fiscal year and has substantially exited Bindley's corporate headquarters
facility. In addition, a portion of the decline in this segment is attributed to
increased efficiency due to distribution automation and customer mix. The
decline in the Medical Products and Services segment is primarily a result of
continued productivity improvements and efficiencies achieved from the
restructuring activities within the segment, which were initiated in the fourth
quarter of fiscal 2002. Partially offsetting the improvements in fiscal 2003 was
an increase in selling, general and administrative expenses as a percentage of
operating revenue for the Pharmaceutical Technologies and Services segment. This
increase was primarily a result of a change within the business mix of this
segment, largely driven by the acquisition of Syncor during the third quarter of
fiscal 2003. The decrease in selling, general and administrative expenses as a
percentage of operating revenue in the Automation and Information Services
segment was driven by improved productivity during the three months ending March
31, 2003. For the nine months ending March 31, 2003, increased expense as a
percentage of operating revenue in Automation and Information Services was
driven largely by product mix, increased research and development spending, and
the cost of increasing installation resources to meet future installation
requirements for the Company's products.
Special Items
The following is a summary of the special items for the three and nine
months ended March 31, 2003 and 2002.
Special Items Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
(in millions) 2003 2002 2003 2002
------- ------- ------- -------
Merger-Related Costs:
Employee-related costs $ (2.5) $ (9.9) $ (17.5) $ (18.6)
Pharmaceutical distribution center consolidation (6.8) (12.6) (16.6) (13.4)
Other exit costs (0.1) (2.2) (2.1) (6.4)
Other integration costs (6.5) (14.4) (13.1) (29.8)
------- ------- ------- -------
Total merger-related costs $ (15.9) $ (39.1) $ (49.3) $ (68.2)
------- ------- ------- -------
Other Special Items:
Employee-related costs $ (0.1) $ -- $ (1.5) $ --
Manufacturing facility closures (0.2) -- (21.4) --
Litigation settlements, net 6.8 -- 99.6 --
Asset impairment and other (0.4) -- (18.3) --
------- ------- ------- -------
Total other special items $ 6.1 $ -- $ 58.4 $ --
------- ------- ------- -------
Total special items $ (9.8) $ (39.1) $ 9.1 $ (68.2)
Tax effect of special items 3.4 14.4 (9.0) 25.6
------- ------- ------- -------
Net effect of special items $ (6.4) $ (24.7) $ 0.1 $ (42.6)
======= ======= ======= =======
Page 22
MERGER-RELATED COSTS
Costs of integrating the operations of various merged companies are
recorded as merger-related costs when incurred. The merger-related costs
recognized as of March 31, 2003, were primarily a result of the merger or
acquisition transactions involving Syncor, BLP, Magellan, Bindley, BBMC,
Allegiance and Scherer.
EMPLOYEE-RELATED COSTS. During the above-stated periods, the Company
incurred employee-related costs associated with certain of its mergers and
acquisitions. For the three months ended March 31, 2003, the costs primarily
related to amortization expense of noncompete agreements associated with the
Bindley and Allegiance merger transactions. For the nine months ended March 31,
2003, $8.8 million related to an approved plan to curtail certain defined
benefit pension plans within the Pharmaceutical Technologies and Services
segment. The remaining employee-related costs for the nine months ended March
31, 2003, primarily related to amortization expense of the noncompete agreements
noted above. For the three and nine months ended March 31, 2002, the
employee-related costs primarily consist of amortization expense of noncompete
agreements and severance as a result of certain of the Company's mergers and
acquisitions.
PHARMACEUTICAL DISTRIBUTION CENTER CONSOLIDATION. In connection with the
merger transaction with Bindley, the Company anticipated closing and
consolidating a total of 16 Bindley distribution centers, Bindley's corporate
office, and one of the Company's data centers. These closures were to result in
the termination of approximately 1,250 employees. As of March 31, 2003, all 16
Bindley distribution centers and the Company's data center have been closed, and
the majority of the 1,250 employees have been terminated. The Company has
substantially completed the corporate office consolidation and recorded
approximately $6.6 million related to this consolidation during the three months
ended March 31, 2003. The corporate office consolidation is expected to be
complete by June 30, 2003.
During the three and nine months ended March 31, 2003, the Company
recorded charges totaling $6.8 million and $16.6 million, respectively,
associated with the consolidations and closures noted above, as compared to
$12.6 million and $13.4 million, respectively, for the comparable periods in
fiscal 2002. The Company incurred employee-related costs, primarily from the
termination of employees due to the distribution center closures, as well as
exit costs to consolidate and close the various facilities mentioned above,
including asset impairment charges, inventory move costs, contract and lease
termination costs, and duplicate salary costs incurred during the shutdown
periods.
OTHER EXIT COSTS. Other exit costs related primarily to costs associated
with lease terminations, moving expenses, and asset impairments as a direct
result of the merger transactions with BBMC, Allegiance and Scherer.
OTHER INTEGRATION COSTS. Other integration costs, which primarily relate
to the merger and acquisition transactions noted above, included charges
directly related to the integration of operations of the transactions noted,
such as consulting costs related to information systems and employee benefit
integration, as well as relocation and travel costs directly associated with the
integrations.
OTHER SPECIAL ITEMS
EMPLOYEE-RELATED COSTS. During the three and nine months ended March 31,
2003, the Company incurred $0.1 million and $1.5 million, respectively, of
employee-related costs associated with the restructuring of certain operations
within the Pharmaceutical Distribution and Provider Services segment. A
significant portion of the charges recorded represent severance accrued at the
time severance terms were communicated to employees during the second quarter of
fiscal 2003. The restructuring of operations is expected to be complete by June
30, 2003, and will result in the termination of approximately 30 employees.
MANUFACTURING FACILITY CLOSURES. During the three and nine months ended
March 31, 2003, the Company recorded a total of $0.2 million and $21.4 million,
respectively, as special charges related to the closure and consolidation of
certain manufacturing facilities. These closures and consolidations occurred
within the Medical Products and Services segment and the Pharmaceutical
Technologies and Services segment.
Within the Medical Products and Services segment, three manufacturing
facility closures were announced during the nine months ended March 31, 2003
(one during the first quarter of fiscal 2003 and two during the second quarter
of fiscal 2003). Two of the manufacturing facility closures were complete as of
December 31, 2002. The other closure is expected to be complete by June 30,
2003. Exit costs of $0.2 million and $2.9 million were incurred during the three
and nine months ended March 31, 2003, respectively, primarily related to
dismantling and moving machinery and equipment. Also, asset impairment charges
of $8.9 million were incurred during the nine months ended March 31, 2003. The
remaining $4.6 million for the nine months ended March 31, 2003, related to
severance
Page 23
costs due to the termination of employees as a result of these closures. The
Company expects to terminate approximately 530 employees due to these closures.
As of March 31, 2003, the majority of these employees have been terminated.
The Company incurred special charges during the nine months ended March
31, 2003, related to two manufacturing facility closures within the
Pharmaceutical Technologies and Services segment. One closure was complete as of
December 31, 2002. The other is expected to be complete by June 30, 2003. Asset
impairment charges of $1.1 million were incurred during the nine months ended
March 31, 2003. Also, exit costs of $1.6 million were incurred during this same
period, primarily related to dismantling machinery and equipment and
transferring certain technologies to other existing facilities within the
Company. In addition, $1.6 million of severance costs, related to the
termination of approximately 75 employees, were incurred during the nine months
ended March 31, 2003, as a result of these closures. As of March 31, 2003, the
majority of these employees were terminated.
LITIGATION SETTLEMENTS. During the three and nine months ended March 31,
2003, the Company recorded income from net litigation settlements of $6.8
million and $99.6 million, respectively. The settlements resulted primarily from
the recovery of antitrust claims against certain vitamin manufacturers for
amounts overcharged in prior years. The total recovery through March 31, 2003
was $136.4 million, of which $8.3 million was recorded during the three months
ended March 31, 2003. While the Company still has pending claims with smaller
vitamin manufacturers, the total amount of future recovery is not currently
estimable but the Company believes it is not likely to be a material amount. Any
future recoveries will be recorded as a special item in the period in which a
settlement is reached. During the three months ended March 31, 2003, the vitamin
litigation income was partially offset by a litigation settlement totaling $1.5
million.
ASSET IMPAIRMENT AND OTHER. During the nine months ended March 31, 2003,
the Company incurred asset impairment and other charges of $18.3 million, of
which $10.1 million related to asset impairment charges resulting from the
Company's decision to exit certain North American commodity operations in its
Pharmaceutical Technologies and Services segment. An additional $7.8 million
relates to a writeoff of design, tooling and development costs.
SUMMARY
The net effect of special items recorded during the three months ended
March 31, 2003, was to decrease reported earnings from continuing operations by
$6.4 million to $384.9 million and to decrease reported diluted earnings per
Common Share from continuing operations by $0.01 per share to $0.85 per share.
In comparison, the net effect of special items recorded during the three months
ended March 31, 2002, was to reduce reported earnings from continuing operations
by $24.7 million to $300.3 million and to reduce reported diluted earnings per
Common Share from continuing operations by $0.05 per share to $0.66 per share.
The net effect of special items recorded during the nine months ended
March 31, 2003, was to increase reported earnings from continuing operations
before cumulative effect of change in accounting by $0.1 million to $1,040.7
million. The reported diluted earnings per Common Share from continuing
operations before cumulative effect of change in accounting remained unchanged.
In comparison, the net effect of special items recorded during the nine months
ended March 31, 2002, was to reduce reported earnings from continuing operations
before cumulative effect of change in accounting by $42.6 million to $830.0
million and to reduce reported diluted earnings per Common Share from continuing
operations before cumulative effect of change in accounting by $0.09 per share
to $1.81 per share.
The Company estimates that in future periods it will incur additional
merger-related costs, restructuring costs and integration expenses associated
with the various mergers and acquisitions it has completed as of March 31, 2003
(primarily related to the Bindley merger and the acquisitions of Syncor,
Magellan and BLP) of approximately $110 million ($70 million, net of tax). These
costs are expected to be incurred primarily in fiscal 2003 and 2004 and relate
to the exit of contractual arrangements, employee-related costs, and costs to
properly integrate operations and implement efficiencies. Such amounts will be
charged to expense when incurred.
Page 24
PROVISION FOR INCOME TAXES
The Company's provision for income taxes relative to pre-tax earnings was
33.4% for the third quarter of fiscal 2003 and 33.8% for the third quarter of
fiscal 2002. For the nine months ended March 31, 2003 and 2002, the Company's
provision for income taxes relative to pre-tax earnings was 33.9%. Fluctuations
in the effective tax rate are primarily due to the impact of recording certain
non-deductible special items during various periods as well as fluctuating state
and foreign effective tax rates as a result of the Company's business mix.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $5.2 billion at March 31, 2003 from $5.1
billion at June 30, 2002. This increase in working capital resulted primarily
from increases in inventories and accounts receivable of $1,414.6 million and
$549.9 million, respectively, partially offset by the decrease of cash and
equivalents of $836.8 million and an increase in accounts payable of $960.7
million. The increase in inventories is attributed to the general build-up for
seasonality within the pharmaceutical distribution business. The increase also
reflects the higher level of business volume in the Pharmaceutical Distribution
and Provider Services segment. The increase in accounts receivable is primarily
due to the Company's revenue growth and the acquisition of Syncor. The decrease
in cash and equivalents is primarily attributed to the repurchase of Common
Shares, resulting in a total cash outlay of $1,191.7 million, partially offset
by the sale of $200 million in sales-type leases within the Automation and
Information Services segment. The change in accounts payable is due primarily to
the timing of inventory purchases and related payments.
The increase in inventories noted above is less than in prior years due to
the impact of branded to generic product conversions and an increase in
inventory management agreements, both of which lower the Company's inventory
investment, as well as synergies realized from the Bindley integration. The
Company has also experienced liquidity improvements in its investment in trade
receivables over the comparable period in prior years.
Net investment in sales type leases decreased $61.7 million at March 31,
2003, as compared to June 30, 2002. This decrease was primarily the result of
the sale by CHLF2002A of a pool of sales-type leases to CHLF2002AQ at amounts
approximating their fair value. CHLF2002A obtained proceeds of approximately
$200.0 million related to the transaction (see Note 9 in the "Notes to Condensed
Consolidated Financial Statements" for further discussion). At March 31, 2003,
the Company has an investment in sales type leases totaling approximately $775
million which may serve as a future source of liquidity through similar sale
transactions.
Shareholders' equity increased by $ 851.6 million at March 31, 2003, as
compared to June 30, 2002. Shareholders' equity increased primarily due to net
earnings of $1,038.9 million, the issuance of shares held in treasury for the
Syncor acquisition, totaling approximately $780.8 million, and the valuation of
Syncor vested options acquired of approximately $47.2 million. This increase was
partially offset by the repurchase of Common Shares of $1,191.7 million and
dividends of $33.6 million.
On January 28, 2003, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 8.6 million Common
Shares having an aggregate cost of approximately $500 million during the quarter
ended March 31, 2003. The repurchased shares will be treasury shares available
to be used for general corporate purposes.
On August 7, 2002, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 0.9 million Common
Shares having an aggregate cost of approximately $49.0 million during the
quarter ended March 31, 2003. The cumulative amount repurchased under this
authorization, which was completed in January 2003, was approximately 7.8
million Common Shares having an aggregate cost of approximately $500 million.
The repurchased shares will be treasury shares available to be used for general
corporate purposes.
In September 2001, the Company's Board of Directors authorized the
repurchase of Common Shares up to an aggregate amount of $500 million. Pursuant
to this authorization, the Company repurchased approximately 3.2 million Common
Shares having an aggregate cost of approximately $191.7 million during the
quarter ended September 30, 2002. The cumulative amount repurchased under this
authorization, which was completed in August 2002, was approximately 8.3 million
Common Shares having an aggregate cost of approximately $500 million. The
repurchased shares will be treasury shares available to be used for general
corporate purposes.
Page 25
As of March 31, 2003, the Company had the capacity to issue approximately
$1 billion of equity and debt securities pursuant to effective registration
statements that were previously filed with the Securities and Exchange
Commission.
The Company has an unsecured bank credit facility providing for up to an
aggregate of $1.5 billion in borrowings of which $750 million expires on March
26, 2004, and $750 million expires on March 27, 2008. The facility expiring on
March 26, 2004, allows the Company, at its option, to extend the maturity of any
moneys borrowed for up to one year. At expiration, these facilities can be
extended upon mutual consent of the Company and the lending institutions. This
credit facility exists largely to support issuances of commercial paper as well
as other short-term borrowings and remained unused at March 31, 2003.
The Company believes that it has adequate capital resources at its
disposal to fund currently anticipated capital expenditures, business growth and
expansion, and current and projected debt service requirements, including those
related to business combinations.
Page 26
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes there has been no material change in the quantitative
and qualitative market risks from those discussed in the 2002 Form 10-K.
ITEM 4: CONTROLS AND PROCEDURES
Within 90 days prior to this filing, an evaluation was performed under the
supervision and with the participation of the Company's management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. To date, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of the
evaluation. Management will continue to review the Company's disclosure controls
and procedures on an ongoing basis, looking for opportunities to strengthen them
where appropriate.
Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files under the Exchange Act is accumulated and communicated to
management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The discussion below includes an update of material developments that have
occurred in various judicial proceedings, which are more fully described in Part
I, Item 3, of the 2002 Form 10-K, and are incorporated herein by reference.
The following disclosure should be read together with the disclosure set
forth in the 2002 Form 10-K, the Form 10-Q for the fiscal quarter ended
September 30, 2002, and December 31, 2002, and to the extent any portions of the
discussion below constitute "forward looking statements", reference is made to
Exhibit 99.01 of this Form 10-Q and page 8 of the 2002 Form 10-K.
Latex Litigation
On September 30, 1996, Baxter International Inc. ("Baxter") and its
subsidiaries transferred to Allegiance and its subsidiaries Baxter's U.S.
healthcare distribution business, surgical and respiratory therapy business and
healthcare cost-saving business as well as certain foreign operations (the
"Allegiance Business") in connection with a spin-off of the Allegiance Business
by Baxter (the "Baxter-Allegiance Spin-Off"). In connection with this spin-off,
Allegiance, which merged with a subsidiary of the Company on February 3, 1999,
agreed to indemnify Baxter, and to defend and indemnify Baxter Healthcare
Corporation ("BHC"), as contemplated by the agreements between Baxter and
Allegiance, for all expenses and potential liabilities associated with claims
arising from the Allegiance Business, including certain claims of alleged
personal injuries as a result of exposure to natural rubber latex gloves. The
Company is not a party to any of the lawsuits and has not agreed to pay any
settlements to the plaintiffs.
As of March 31, 2003, there were 271 lawsuits pending against BHC and/or
Allegiance involving allegations of sensitization to natural rubber latex
products and some of these cases were proceeding to trial. The total dollar
amount of potential damages cannot be reasonably quantified. Some plaintiffs
plead damages in extreme excess of what they reasonably can expect to recover,
some plead a modest amount, and some do not include a request for any specific
dollar amount. Not including cases that ask for no specific damages, the damage
requests per action have ranged from $10,000 to $240 million. All of these cases
name multiple defendants, in addition to Baxter/Allegiance. The average number
of defendants per case exceeds twenty-five. Based on the significant differences
in the range of damages sought and based on the multiple number of defendants in
these lawsuits, Allegiance cannot reasonably quantify the total amount of
possible/probable damages. Therefore, Allegiance and the Company do not believe
that these numbers should be considered as an indication of either reasonably
possible or probable liability.
Page 27
Since the inception of this litigation, Baxter/Allegiance have been named
as a defendant in 831 cases. During the fiscal year ended June 30, 2002,
Allegiance began settling some of these lawsuits with greater frequency. As of
March 31, 2003, Allegiance had resolved more than sixty percent of these cases.
About twenty percent of the lawsuits that have been resolved were concluded
without any liability to Baxter/Allegiance. No individual claim has been settled
for a material amount, nor have all the settled claims, in the aggregate,
comprised a material amount. Due to the number of claims filed and the ongoing
defense costs that will be incurred, Allegiance believes it is probable that it
will incur substantial legal fees related to the resolution of the cases still
pending. Although the Company continues to believe that it cannot reasonably
estimate the potential cost to settle these lawsuits, the Company believes that
the impact of such lawsuits upon Allegiance will be immaterial to the Company's
financial position, liquidity or results of operations, and could be in the
range of $0 to $20 million, net of insurance proceeds. The Company believes a
substantial portion of any liability will be covered by insurance policies
Allegiance has with financially viable insurance companies, subject to
self-insurance retentions, exclusions, conditions, coverage gaps, policy limits
and insurer solvency. The Company and Allegiance continue to believe that
insurance recovery is probable.
Vitamins Litigation
On May 17, 2000, Scherer, which was acquired by the Company in August
1998, filed a civil antitrust lawsuit in the United States District Court for
the District of Illinois against certain of its raw material suppliers and other
alleged co-conspirators alleging that the defendants unlawfully conspired to fix
vitamin prices and allocate vitamin production volume and vitamin customers in
violation of U.S. antitrust laws. The complaint seeks monetary damages and
injunctive relief. After the lawsuit was filed, it was consolidated for
pre-trial purposes with other similar cases. The case is pending in the United
States District Court for the District of Columbia (where it was transferred).
As of March 31, 2003, Scherer has entered into settlement agreements with the
majority of the defendants in consideration of payments of approximately $136
million, net of attorney fees and expenses withheld prior to the disbursement of
the funds to Scherer. While the Company still has pending claims with smaller
vitamin manufacturers and cannot predict the outcome of the claims against those
defendants, the total amount of any future recovery will not likely represent a
material amount.
Shareholder Litigation against Cardinal Health
On November 8, 2002, a complaint was filed by a purported shareholder
against the Company and its directors in the Court of Common Pleas, Delaware
County, Ohio, as a purported derivative action. Doris Staehr v. Robert D.
Walter, et al., No. 02-CVG-11-639. On or about March 21, 2003, after the Company
filed a Motion to Dismiss the complaint, an amended complaint was filed alleging
breach of fiduciary duties and corporate waste in connection with the alleged
failure by the Board of Directors of the Company to (a) renegotiate or terminate
the Company's proposed acquisition of Syncor and (b) determine the propriety of
indemnifying Monty Fu, the former Chairman of Syncor. The Company has filed a
Motion to Dismiss the amended complaint and believes the allegations made in the
amended complaint are without merit and intends to vigorously defend this
action. The Company currently does not believe that the impact of this lawsuit,
if any, will have a material adverse effect on the Company's financial position,
liquidity or results of operations. The Company currently believes that there
will be some insurance coverage available under the Company's directors' and
officers' liability insurance policies in effect at the time this action was
filed.
Shareholder Litigation against Syncor
Eleven purported class action lawsuits have been filed against Syncor and
certain of its officers and directors, asserting claims under the federal
securities laws (collectively referred to as the "federal securities actions").
All of these actions were filed in the United States District Court for the
Central District of California. These cases include Richard Bowe v. Syncor Int'l
Corp., et al., No. CV 02-8560 LGB (RCx) (C.D. Cal.), Alan Kaplan v. Syncor Int'l
Corp., et al., No. CV 02-8575 CBM (MANx) (C.D. Cal), Franklin Embon, Jr. v.
Syncor Int'l Corp., et al., No. CV 02-8687 DDP (AJWx) (C.D. Cal), Jonathan Alk
v. Syncor Int'l Corp., et al., No. CV 02-8841 GHK (RZx) (C.D. Cal), Joyce Oldham
v. Syncor Int'l Corp., et al., CV 02-8972 FMC (RCx) (C.D. Cal), West Virginia
Laborers Pension Trust Fund v. Syncor Int'l Corp., et al., No. CV 02-9076 NM
(RNBx) (C.D. Cal), Brad Lookingbill v. Syncor Int'l Corp., et al., CV 02-9248
RSWL (Ex) (C.D. Cal), Them Luu v. Syncor Int'l Corp., et al., CV 02-9583 RGK
(JwJx) (C.D. Cal), David Hall v. Syncor Int'l Corp., et al., CV 02-9621 CAS
(CWx) (C.D. Cal), Phyllis Walzer v. Syncor Int'l Corp., et al., CV 02-9640 RMT
(AJWx) (C.D. Cal) and Larry Hahn v. Syncor Int'l Corp., et al., CV 03-52 LGB
(RCx) (C.D. Cal.).
Page 28
The federal securities actions purport to be brought on behalf of all
purchasers of Syncor shares during various periods, beginning as early as March
30, 2000, and ending as late as November 5, 2002 and allege, among other things,
that the defendants violated Section 10(b) of the Securities Exchange Act of
1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder and Section
20(a) of the Exchange Act, by issuing a series of press releases and public
filings disclosing significant sales growth in Syncor's international business,
but omitting mention of certain allegedly improper payments to Syncor's foreign
customers, thereby artificially inflating the price of Syncor shares. A lead
plaintiff has been appointed by the court in the federal securities actions and
a consolidated complaint is expected to be filed in May 2003.
On November 14, 2002, two additional actions were filed by individual
stockholders of Syncor in the Court of Chancery of the State of Delaware (the
"Delaware actions") against seven of Syncor's nine directors (the "director
defendants"). The complaints in each of the Delaware actions were identical and
alleged that the director defendants breached certain fiduciary duties to Syncor
by failing to maintain adequate controls, practices and procedures to ensure
that Syncor's employees and representatives did not engage in improper and
unlawful conduct. Both complaints asserted a single derivative claim, for and on
behalf of Syncor, seeking to recover all of the costs and expenses that Syncor
incurred as a result of the allegedly improper payments (including the costs of
the federal securities actions described above), and a single purported class
action claim seeking to recover damages on behalf of all holders of Syncor
shares in the amount of any losses sustained if consideration received in the
merger by Syncor stockholders was reduced. On November 22, 2002, the plaintiff
in one of the two Delaware actions filed an amended complaint adding as
defendants the Company, its subsidiary Mudhen Merger Corp. and the remaining two
Syncor directors, who are hereafter included in the term "director defendants."
These cases include Alan Kaplan v. Monty Fu, et al., Case No. 20026-NC (Del.
Ch.), and Richard Harman v. Monty Fu, et al., Case No. 20027-NC (Del. Ch). These
cases have been consolidated under the caption "In re: Syncor International
Corp. Shareholders Litigation."
On November 18, 2002, two additional actions were filed by individual
stockholders of Syncor in the Superior Court of California for the County of Los
Angeles (the "California actions") against the director defendants. The
complaints in the California actions allege that the director defendants
breached certain fiduciary duties to Syncor by failing to maintain adequate
controls, practices and procedures to ensure that Syncor's employees and
representatives did not engage in improper and unlawful conduct. Both complaints
asserted a single derivative claim, for and on behalf of Syncor, seeking to
recover costs and expenses that Syncor incurred as a result of the allegedly
improper payments. These cases include Joseph Famularo v. Monty Fu, et al, Case
No. BC285478 (Cal. Sup. Ct., Los Angeles Cty.), and Mark Stroup v. Robert G.
Funari, et al., Case No. BC285480 (Cal. Sup. Ct., Los Angeles Cty.). An amended
complaint was filed on December 6, 2002 in the Famularo action, purporting to
allege direct claims on behalf of a class of shareholders. The defendants'
motion for a stay of the California actions pending the resolution of the
Delaware actions (discussed above) was granted on April 30, 2003.
The Company recently learned that a proposed class action complaint was
filed on April 8, 2003, against the Company, Syncor, and certain officers and
employees of the Company by a purported participant in the Syncor Employees'
Savings and Stock Ownership Plan. The suit alleges that the defendants breached
certain fiduciary duties owed under the Employee Retirement Income Security Act
("ERISA").
Each of the actions described under the heading "Shareholder Litigation
against Syncor" is in its early stages and it is impossible to predict the
outcome of these proceedings or their impact on Syncor or the Company. However,
the Company currently does not believe that the impact of these actions will
have a material adverse effect on the Company's financial position, liquidity or
results of operations. The Company and Syncor believe the allegations made in
the complaints described above are without merit and intend to vigorously defend
such actions and have been informed that the individual director and officer
defendants deny liability for the claims asserted in these actions, believe they
have meritorious defenses and intend to vigorously defend such actions. The
Company and Syncor currently believe that there will be some insurance coverage
available under the Company's and Syncor's directors' and officers' liability
insurance policies in effect at the time these actions were filed.
Other Matters
The Company also becomes involved from time-to-time in other litigation
incidental to its business, including, without limitation, inclusion of certain
of its subsidiaries as a potentially responsible party for environmental
clean-up costs. Although the ultimate resolution of the litigation referenced
herein cannot be forecast with certainty, the Company intends to vigorously
defend itself and does not currently believe that the outcome of any pending
litigation will have a material adverse effect on the Company's financial
position, liquidity or results of operations.
Page 29
ITEM 5: OTHER INFORMATION
William E. Bindley resigned from the Board of Directors of the Company,
effective February 14, 2003. Since this vacancy has not been filled, the number
of Directors serving on the Board has been reduced from 14 to 13 effective May
7, 2003.
On January 22, 2002, Kmart Corporation ("Kmart") filed for Chapter 11
bankruptcy court protection. Cardinal Distribution, the largest business within
the Pharmaceutical Distribution and Provider Services segment, has serviced
Kmart for more than ten years and continues to service approximately 1,138 of
its stores nationwide. On October 30, 2002, Kmart and Cardinal Distribution
extended and amended their supply agreement, and the bankruptcy court authorized
Kmart's post-petition assumption of the agreement. On May 6, 2003, Kmart
announced that it had emerged from bankruptcy. Sales to Kmart represent less
than 5% of the Company's total annual operating revenue, and earnings from these
sales are an even smaller percentage of the Company's total annual operating
earnings. Due to a unique consignment arrangement in which the Company still
owns the related pharmaceutical inventories, it has significantly limited its
credit exposure to Kmart.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Listing of Exhibits:
Exhibit Exhibit Description
------- -------------------
Number
------
10.01 First Amendment to the Prime Vendor Agreement between Cardinal
Distribution and Express Scripts, Inc. dated January 15, 2003
(includes the Prime Vendor Agreement between Cardinal
Distribution and Express Scripts, Inc. as in effect as of
January 15, 2003) (1).
10.02 364-Day Credit Agreement dated as of March 27, 2003 among the
Registrant, certain subsidiaries of the Registrant, certain
lenders, and Bank One, NA, as Administrative Agent, Bank of
America, as Syndication Agent, Wachovia Bank, National
Association, as Syndication Agent, Barclays Bank PLC, as
Documentation Agent, Duetsche Banc Alex. Brown Inc., as
Documentation Agent, First Union National Bank, as
Documentation Agent and Banc One Capital Markets, Inc., as
Lead Arranger and Book Manager.
10.03 Five-Year Credit Agreement dated as of March 27, 2003 among
the Registrant, certain subsidiaries of the Registrant,
certain lenders, and Bank One, NA, as Administrative Agent,
Bank of America, as Syndication Agent, Wachovia Bank, National
Association, as Syndication Agent, Barclays Bank PLC, as
Documentation Agent, Duetsche Banc Alex. Brown Inc., as
Documentation Agent, First Union National Bank, as
Documentation Agent and Banc One Capital Markets, Inc., as
Lead Arranger and Book Manager.
99.01 Statement Regarding Forward-Looking Information (2).
99.02 Additional Exhibit
Certification of the Chairman and Chief Executive Officer and
Executive Vice President and Chief Financial Officer of the
Registrant, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
- ----------
(1) Confidential treatment has been requested for portions of this
document, and the confidential information has been filed separately
with the Securities and Exchange Commission.
(2) Included as an exhibit to the Registrant's Annual Report on Form
10-K filed September 30, 2002 (File No. 1-11373) and incorporated
herein by reference.
(b) Reports on Form 8-K:
On January 2, 2003, the Company filed a Current Report on Form 8-K under
Item 5, disclosing the completion of its previously announced acquisition of
Syncor International Corporation.
Page 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARDINAL HEALTH, INC.
Dated: May 15, 2003 /s/ Robert D. Walter
----------------------------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
/s/ Richard J. Miller
----------------------------------------------------
Richard J. Miller
Executive Vice President and Chief Financial Officer
Page 31
CERTIFICATIONS
I, Robert D. Walter, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cardinal Health,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: May 15, 2003 /s/ Robert D. Walter
------------------------------
Robert D. Walter
Chairman and Chief Executive Officer
Page 32
I, Richard J. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cardinal Health,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: May 15, 2003 /s/ Richard J. Miller
------------------------------
Richard J. Miller
Executive Vice President, and
Chief Financial Officer
Page 33