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Cardinal Health Reports Record Second-Quarter Results Including Strong Revenues And Earnings Growth

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Net Earnings Up 29%, EPS Rises 28% Before Special Items, Propelled by Growth in Revenues to Record $11.2 Billion

DUBLIN, Ohio, January 22, 2002 - Cardinal Health, Inc. (NYSE: CAH), a leading provider of products and services supporting the health-care industry, today reported record revenues, earnings and returns on sales and committed capital on strong, balanced performance across each of its four health-care business segments in the company's fiscal 2002 second quarter, which ended December 31, 2001.

Diluted earnings per share before special items rose 28 percent to $0.64 versus the prior-year quarter. Strong revenue growth of 17 percent to $11.2 billion drove operating earnings growth of 24 percent to $487 million, and net earnings up 29 percent to $294 million, before special items.

"This latest record quarter re-confirms the remarkable strength of Cardinal Health's family of complementary high-growth businesses," said Robert D. Walter, chairman and chief executive officer of Cardinal Health. "These results validate Cardinal Health's strategy to offer a broad portfolio of market-leading products and services to our health-care customers. Our financial formula is to combine strong revenue growth, disciplined expense management and accelerated investment in future opportunities. This enables us to consistently deliver robust earnings growth with rising returns on sales and capital. While all of our segments performed well in the second quarter, we are particularly pleased with our Pharmaceutical Distribution and Provider Services segment and our Automation and Information Services segment."


Financial Highlights

Fiscal 2002 results reflect the adoption of Statement of Financial Accounting Standards No. 142, which eliminated goodwill amortization beginning July 1, 2001. To facilitate comparison with the prior-year period in the discussion below, we have made a pro forma adjustment, eliminating goodwill amortization from the fiscal 2001 results. Unless noted otherwise, the following discussion also excludes special items, which are exclusively merger-related.

• Net earnings rose 23 percent to an all-time record $294 million from $238 million a year ago. Earnings per diluted share rose 21 percent over the year-earlier period to a second-quarter record 64 cents from 53 cents.
  
• Operating earnings rose 20 percent to an all-time record $487 million from $406 million a year ago. This growth was driven by strong performances in each of the company's four business segments.
  
  
  • Operating revenues, a key driver of the company's improved operating earnings, increased 17 percent to an all-time record $11.2 billion from $9.6 billion in the year-earlier period. The company's largest segment, Pharmaceutical Distribution and Provider Services, led the revenue performance, growing 20 percent overall and generating 22 percent growth in its full-line pharmaceutical distribution business.
    
  • Return on sales improved to record second-quarter levels of 4.34 percent for the company as a whole. Operating efficiencies drove higher productivity across the company. Cardinal lowered second-quarter selling, general and administrative expenses as a percent of sales by a significant 43 basis points versus the prior-year period.
    
    
• The company also continued its emphasis on strategic investment spending, funding research and development, as well as specific projects in several businesses. These investments in future growth, which are charged against current earnings, totaled more than $20 million in the second quarter.
  
• Cardinal Health continued to leverage interest expense in the quarter. Effective asset management and lower interest rates resulted in a 2 percent decline in interest cost. Ongoing long-term initiatives to improve tax efficiency, including increasing the mix of international activities, continue to provide earnings leverage, as the company's tax rate declined 50 basis points versus the prior-year period.
  
• Return on committed capital increased to record second-quarter levels, up 210 basis points to 30.6 percent due to strong operating earnings and excellent asset management. Accounts receivable days outstanding improved to 19 days, versus 22 days a year ago.
  
• The company's strong operating earnings performance provided the opportunity to invest in working capital and other growth opportunities during the quarter. The company used operating cash flow of $466 million in the quarter for normal seasonal inventory build and to position inventories for the purpose of driving high-yield growth in the second half of the year. The company reaffirmed its goal of generating $800 million to $900 million in operating cash flow for the full year.

Business-Segment Results

Continued strong demand for health-care services worldwide drove well-balanced growth in revenues and operating earnings, and robust productivity improvements across each of Cardinal Health's four operating segments. Contributing to Cardinal Health's growth is its consistent ability to sell a broader range of products to customers. In the quarter, the company signed seven new corporate agreements with health care providers, representing more than $140 million in incremental annual volume to several Cardinal companies.

Pharmaceutical Distribution and Provider Services

The Pharmaceutical Distribution and Provider Services segment, which represents 50 percent of Cardinal's operating earnings, recorded an outstanding quarter, with all-time high revenues leading to second-quarter record performance in operating earnings, returns on sales and committed capital. Total revenues in this segment grew 20 percent to $9.2 billion. Revenues from the pharmaceutical distribution portion of the segment grew 22 percent, with strong growth from all customer segments, yielding broad diversification of the segment's earnings. Strong earnings and exceptional working capital management drove the return on committed capital to 27.5 percent, a significant improvement over 25.5 percent a year ago.

The segment posted record second-quarter operating earnings of $256 million, up 25 percent over the fiscal 2001 second quarter. Return on sales improved to 2.78 percent from 2.67 percent in the prior year. Operating expenses, fully burdened with corporate expenses, declined a substantial 29 basis points to a record low of 2.09 percent. The main drivers of the positive performance in this segment were excellent top-line growth, vendor margin opportunities, strong expense leverage and synergies from the acquisition of Bindley Western Industries in February 2001.


Highlights

• The integration of Cardinal Health's merger with Bindley Western Industries is proceeding smoothly and contributing to the company's earnings performance as expected. The company has consolidated a total of 10 of 16 Bindley distribution centers, which duplicate existing facilities. Cardinal expects to consolidate four more by the end of the fiscal year. Upon completion of the integration and roll-up of the Bindley facilities, Cardinal anticipates having a total of 27 distribution centers. The process of realizing merger synergies remains on track and is expected to exceed $100 million by the end of the third year following the February 2001 merger.
  
  
• Cardinal's pharmacy management and nuclear pharmacy businesses also contributed to the strong segment performance, with notable improvements in earnings and return on capital. The return on sales and capital in these businesses exceeds the average for the segment.

Medical-Surgical Products and Services

Cardinal Health's Medical-Surgical Products and Services segment, which represents 25 percent of Cardinal's operating earnings, generated record revenues, operating earnings, return on sales and return on committed capital. The segment grew revenues by 5 percent in the quarter to $1.6 billion. Gross margins widened by 51 basis points to 22.11 percent on the strength of corporately manufactured product growth of 9 percent and productivity improvements in manufacturing operations. The segment continued to manage expenses effectively, with selling, general and administrative expenses declining by 17 basis points to a second-quarter record low 13.72 percent of revenues.

As a result, operating earnings rose 15 percent over the prior year to $131 million, and return on sales grew 68 basis points to 8.39 percent. Strong earnings growth, asset management and operating cash flow drove continued improvement in return on committed capital, which rose 340 basis points to a second-quarter record 33.6 percent from 30.2 percent a year ago.

Highlights

• Sales of Allegiance's corporately manufactured products grew a strong 9 percent in the quarter. Virtually all manufactured product categories accelerated, with particular strength in sales of medical gloves, surgical instruments, custom kitting products and other devices. Growth in corporately manufactured products remains key, as these revenue dollars carry significantly higher gross margins.
  
  
• The integration of the August 2000 acquisition of Bergen Brunswig Medical Corporation (BBMC) is progressing on schedule toward the projected realization of $30 million in operating earnings improvements by the third anniversary of the acquisition, as a result of new revenues and lower costs. The acquisition also is yielding expected improvements in gross margins and return on sales, driven by sales growth penetration from corporately manufactured products into BBMC's customer base.
  
  
• During the quarter, the company signed a number of new long-term contracts in its medical-surgical distribution business, including notable wins with Northwestern Memorial Hospital in Chicago, University of Wisconsin in Madison and Mayo Clinic's hospitals and clinics in Minnesota, Arizona and Florida. New contract wins in the quarter from these customers and from other hospitals associated with Novation, the supply company of VHA Inc. and the University HealthSystem Consortium, represent more than $200 million of new annual revenues. These new contracts are expected to begin contributing to the segment's accelerating revenue growth in the fiscal 2002 third quarter.

Pharmaceutical Technologies and Services

Second-quarter revenues in this segment gained a strong 15 percent to an all-time record $330 million on strong demand for drug-delivery technologies and packaging services. The segment, which represents 14 percent of Cardinal's operating earnings, achieved its largest gains from products that use the company's sterile-liquid and modified-release pharmaceutical technologies and its proprietary packaging offerings.

Operating earnings increased 15 percent to an all-time record $70 million with 7 percent productivity improvement. Return on sales declined slightly to 21.05 percent, from an all-time record high in the prior year. Return on committed capital was 27.9 percent versus 30.1 percent in the year-earlier period, but sequentially increased from 24.5 percent in the first quarter, reflecting favorable leverage on the capital invested in this segment. The company's goal for return on capital in this segment exceeds 35 percent within the next three years. In the second half of fiscal 2002, the company plans to drive further earnings expansion in this segment by launching several pharmaceutical products derived from Cardinal's proprietary technologies.

Highlights

• The Pharmaceutical Technologies and Services segment experienced accelerated demand in its modified-release business for Pharmacia Corporation's Detrol®LA, an incontinence pharmaceutical. In sterile-liquid technologies, the company continued to experience higher demand from Pharmacia for Xalatan®, a glaucoma drug, and from Sepracor for Xopenex®, a treatment for asthma.
  
  
• Solid top-line growth in the company's packaging services business was driven by new contracts, including Pharmacia's Bextra™, an anti-arthritis medication, and increased volume in existing accounts. Better productivity from capacity utilization and cost controls, as well as new contract volume, drove significant improvements in profitability in the packaging business.
  
  
• Outsourcing for product development, analytical chemistry and manufacturing and packaging are expected to accelerate growth in the segment's earnings over the next several quarters. Cardinal Health's $80-million Pharmaceutical Technologies and Services Center (PTSC) in New Jersey remains on schedule to open in the fourth quarter of fiscal 2002. The PTSC will enable the company to further expand its ability to offer a full range of outsourcing services and create increased future demand for the segment's products and services.

Automation and Information Services

The Automation and Information Services segment, which represents 11 percent of Cardinal Health's operating earnings, posted exceptional earnings growth on strong sales across the full suite of automation products. Revenues gained 17 percent to a second-quarter record $140 million from $120 million a year ago. Installations represented a notable 40 percent sequential gain from the first quarter, reflecting an increased capacity to install products. Operating earnings grew 21 percent to a second-quarter record $55 million and return on sales rose 121 basis points to an all-time record 39.43 percent, reflecting ongoing operational improvements at Pyxis.

Return on committed capital also improved significantly, rising to 44.9 percent from 27.6 percent in the prior year. Earnings gains, improved asset management and the securitization of $150 million of Pyxis' leases earlier in the fiscal year drove this considerable improvement.

Highlights

• § The business model changes announced at Pyxis in October 2001 continue to drive substantial improvement in operating performance. The shift from a build-to-inventory manufacturing process to a build-to-order process yielded significant results. New business processes have dramatically reduced inventories, freight costs and end-of-quarter customer purchasing incentives. In addition, Pyxis now benefits from automated sales and installation tracking systems. The company's robust backlog of uninstalled product indicates a strong outlook for Pyxis over the next several quarters.
  
  
• Adding to its beginning backlog of $177 million of committed contracts, Pyxis signed an additional $112 million of committed contracts during the quarter, a growth rate of more than 24 percent versus the prior year, primarily due to higher demand for MEDSTATION® SN and the SUPPLYSTATION® System 30. Committed contracts are defined as signed, non-cancelable lease agreements. Installations of prior committed contracts were $108 million in the quarter, resulting in an ending backlog of committed contracts for Pyxis of $181 million at December 31, 2001.
  
  
• Building on the company's portfolio of products designed to enhance patient safety, Pyxis signed two strategic marketing agreements. These agreements extend the application of Pyxis' automation systems into remote, unit-dose packaging and computerized physician order entry. The agreements were signed with VisualMed Clinical System Corporation of Canada and AutoMed Technologies of Illinois, allowing Pyxis to offer automated solutions at every step of the medication management process, ranging from inventory and prescription to dispensing and administration. Manufacturers of innovative products continue to seek out Pyxis' exceptional sales and services capabilities to more effectively and quickly penetrate product market opportunities.
  
  
• Pyxis completed its acquisition of EON Media, Inc. of Quebec, Canada, extending its product development efforts surrounding Pyxis PATIENTSTATION™, its bedside information and monitoring system.

Special Items

Including merger-related charges of $10.3 million (after tax) in the second quarter versus $6.0 million in such charges for the prior year period, net earnings were $283 million, an increase of 22 percent from the year-earlier quarter, and an increase of 20 percent in earnings per diluted share to $0.62.

First-Half Results

Cardinal Health's strong first-quarter performance continued throughout the first half of fiscal 2002, setting records in revenues, earnings, and returns on capital and equity. This performance reflects growing customer demand, the realization of cross-selling synergies and solid execution of the company's strategy, which is to provide a broad array of proprietary products and services in health care, seek the #1 or #2 market position, and use the company's scale and resources to deliver exceptional value.

For the fiscal 2002 first half, operating revenues increased 17 percent over the prior year to $21 billion, operating earnings improved 19 percent to $899 million, net earnings before the cumulative effect of change in accounting principle rose 23 percent to $548 million, and earnings per diluted share increased 20 percent to $1.19.

In the first half, the company invested more than $40 million of current earnings in developmental activities to enhance future growth. At the same time, return on committed capital increased 240 basis points to 30.1 percent, and return on equity rose 100 basis points to 19.3 percent.

Including merger-related charges of $17.9 million (after tax) and the cumulative effect of the change in accounting principle related to the October 2001 business model changes at Pyxis, net earnings for the 2002 first half rose 6 percent to $460 million and earnings per diluted share were $1.00, a 4 percent increase.

Summary

"We confidently re-affirm our commitment to grow annual earnings per share by 20 percent and remain enthusiastic about our ability to generate consistently excellent earnings growth with rising returns and strong cash flow," Walter said. "We've built platforms for growth in a vital industry and have a healthy and well-balanced portfolio of leading businesses with improving profitability and productivity. Each of our segments has distinct and compelling opportunities for short- and long-term growth.

"We also benefit from substantial investment resources and have the capability to offer needed, system-wide solutions to providers and manufacturers that support the delivery and improvement of health care," Walter added. "In my view, however, our greatest strength comes from our culture of more than thirty years of disciplined financial management, superior market agility, and focus on driving profitable growth."

About Cardinal Health

Cardinal Health, Inc. (http://www.cardinal.com) is a leading provider of products and services supporting the health-care industry. Cardinal companies develop, manufacture, package and market products for patient care; develop drug-delivery technologies; distribute pharmaceuticals, medical-surgical and laboratory supplies; and offer consulting and other services that improve quality and efficiency in health care. The company employs more than 49,000 people on five continents and produces annual revenues of more than $40 billion.

Webcast Today

Cardinal Health has scheduled an Internet "Webcast" today to discuss its second-quarter performance and outlook. To access this discussion, please visit http://www.cardinal.com and follow directions to the company's Investor Center. The conference will begin at 11 a.m. Eastern Time today. If you have difficulty accessing the call via the Internet, the company has established a call-in number at 212-896-6106 for telephone access. A replay of the Webcast will be available until 1:00 p.m. Eastern Time January 26 on the Internet at cardinal.com's Investor Center or by dialing 858-812-6440, reservation number 20130775.

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Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and Form 10-Q reports and exhibits to those reports, and include (but are not limited to) the costs, difficulties, and uncertainties related to the integration of acquired businesses, the loss of one or more key customer or supplier relationships, changes in the distribution outsourcing patterns for health-care products and/or services, the costs and other effects of governmental regulation and legal and administrative proceedings, and general economic conditions. Cardinal undertakes no obligation to update or revise any forward-looking statements.