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Cardinal Health Reports Record Second Quarter

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DUBLIN, Ohio, January 23, 2003 – – Cardinal Health, Inc. (NYSE: CAH), the leading provider of products and services supporting the health care industry, today reported record results for the second quarter ended December 31, 2002:

• Earnings per diluted share, before special items, rose 20 percent to $0.77.
• Operating revenues increased to $12.7 billion, up 13 percent.
• Operating earnings, before special items, expanded with return on sales rising to 4.36 percent.
• Return on committed capital, before special items, increased to 35.9 percent, up a substantial 530 basis points.
• Operating cash flow was $373 million, an $839 million improvement versus prior year.

‘Cardinal Health continues to generate outstanding financial results by leveraging leadership positions in the attractive health care market, consistent operational performance and productivity improvement, and expanding a diverse and proprietary products and services offering,’ said Robert D. Walter, chairman and chief executive officer. ‘Strong earnings and asset management are enabling the company to generate tremendous cash flow and record returns on committed capital which position us strongly for the future. This capital productivity enhances our ability to reinvest in existing businesses and seek new acquisitions, while at the same time maintaining our financial flexibility. We are well positioned to reach our financial commitment of EPS growth of 20 percent or more for fiscal year 2003.’

For the first two quarters of fiscal year 2003, Cardinal Health generated exceptionally strong revenue and earnings. Operating revenues increased 14 percent over prior year to $24.1 billion. Before special items and cumulative effect of change in accounting, net earnings rose 19 percent to $649 million and earnings per diluted share increased 21 percent to $1.44.

SECOND QUARTER FINANCIAL HIGHLIGHTS

Unless noted otherwise, the following discussion excludes special items. All percentage increases reflect year versus year comparisons.

• Earnings per diluted share rose 20 percent to a second quarter record $0.77.

• Operating earnings rose 14 percent to a second quarter record $553 million.

• Operating revenues increased 13 percent to an all-time record $12.7 billion while selling, general and administrative expenses (SG&A) grew only two percent, demonstrating the company’s ongoing focus on productivity and operational efficiency. Productivity improvements across the company resulted in a substantial 44 basis point decrease in SG&A as a percent of sales.

• The increased productivity combined with strong revenue growth resulted in a second quarter record return on sales of 4.36 percent, a two basis point improvement.

• Strategic investment spending, charged against current earnings, totaled approximately $30 million, up 50 percent, as the company continued to reinvest in growth opportunities including innovative new medical-surgical and Pyxis products, and proprietary offerings in the Pharmaceutical Technologies and Services segment.

• Net earnings grew faster than operating earnings, rising 18 percent to a second quarter record $345 million due to improved interest expense and tax efficiencies.

• Strong asset management and lower interest rates continued to have a favorable impact on interest expense and other income, yielding a year over year decrease of 19 percent. The reduction in interest expense was due primarily to lower average borrowing which was down approximately $1 billion for the quarter. Interest rates were substantially the same as last year.

• Tax efficiency improved as the tax rate declined 60 basis points to 33.8 percent based on international business activities.

• Return on committed capital increased to an all-time record 35.9 percent, up 530 basis points, reflecting the company’s focus on capital productivity, which also drove significant improvements in cash flow and enhanced financial flexibility.

• Operating cash flow was $373 million versus a use of cash of $466 million in the prior year. This improvement resulted from strong earnings across the business and efficient working capital management particularly in the Pharmaceutical Distribution and Provider Services and Medical Products and Services segments. Receivable days sales outstanding declined by 2.5 days in each of these segments, driving consolidated days sales outstanding down 2 days to a record low 17 days. This receivables reduction yielded approximately $300 million of cash flow improvement. Effective inventory management programs in pharmaceutical distribution generated a $300 million reduction in owned inventories versus a year ago. Additionally, $200 million of Pyxis leases were sold during the quarter which enhanced the company’s financial flexibility. The company expects to generate over $1 billion in operating cash flow in the fiscal year.

• The company’s ratio of net debt to total capital was a second quarter low of 16 percent, down from 26 percent a year ago even as the company repurchased $250 million of its shares during the quarter.

BUSINESS HIGHLIGHTS

• The second quarter was highlighted by the strength of the Pharmaceutical Distribution and Provider Services (PDPS) and Automation and Information Services (AIS) segments.

• PDPS experienced strong revenues, growing faster than the industry based primarily on favorable customer mix. This revenue performance, combined with a decline in SG&A expenses, drove the record earnings at the segment. New pharmaceutical distribution agreements with Express Scripts, Anthem and United Drug are expected to contribute more than $2 billion in annual revenue beginning late in the fiscal year.

• The substantial operating earnings expansion at AIS continued this quarter on the strength of demand for the overall Pyxis product line and improved gross margins from higher sales of MEDSTATION SN® products and continuing manufacturing productivity improvements. This resulted in an all-time record return on sales of 42.09 percent, an impressive 266 basis point increase.

• The acquisition of Syncor International Corporation., the leader in nuclear pharmacy services, was completed, effective January 1, 2003. The stock transaction was valued at $781 million, plus assumption of $120 million in debt. Syncor’s operations are being integrated with the company’s existing Nuclear Pharmacy Services business. The company continues with Syncor’s previously announced plans to divest the imaging business and rationalize the international operations. During the quarter the company’s nuclear pharmacy services business and Syncor’s domestic nuclear pharmacy services business each grew revenues and earnings at least 20 percent.

• The company continued it share repurchase program. During the first six months of fiscal year 2003, the company spent approximately $643 million, repurchasing a total of 10.1 million shares, 3.5 million of which were purchased during the second quarter. The current authorization was completed in January 2003 and company management intends to request that the Board of Directors authorize an extension of the program during the third quarter of fiscal year 2003.

SEGMENT HIGHLIGHTS

Cardinal Health reported balanced revenue and earnings growth across the company with each of the four segments posting record revenues and earnings.


Pharmaceutical Distribution and Provider Services (51 percent of operating earnings)

The segment delivered another outstanding quarter, highlighted by a dramatic increase in return on committed capital which rose to an all-time high. Revenues were also an all-time record while operating earnings and return on sales were second quarter records.

Total revenues grew 14 percent to $10.5 billion, led by strong growth across the segment. The fastest growing customer segments were chain stores with revenue growth at 17 percent and alternate sites which expanded 21 percent.

Operating expenses declined in absolute dollars and an impressive 42 basis points to an all-time low of 1.67 percent of revenues. While increased efficiency due to distribution automation and customer mix contributed to this performance, the primary driver was the full impact of Bindley Western Industries (BWI) merger synergies, as the operational integration of BWI has now been completed. With the closure of two distribution centers during the quarter, the segment is operating six fewer distribution centers than it had last year which has eliminated redundant expenses and inventories. In addition, the segment ended the quarter with an eight percent reduction in workforce versus prior year. These efficiencies were achieved while maintaining high service levels and customer satisfaction.

The operating expense performance drove operating earnings to $301 million, up 18 percent, and a return on sales improvement to 2.85 percent, a seven basis point increase. Strong earnings and exceptional working capital management, in both receivables and inventories, drove strong cash flow and the return on committed capital to an all-time record 36.2 percent.

Medical Products and Services (24 percent of operating earnings)

The segment delivered another solid quarter, posting all-time record revenues and operating earnings, while returns on sales and committed capital were second quarter records.

Revenues grew by five percent, exceeding the industry growth rate, to $1.6 billion reflecting balanced sales growth in both the distribution and self-manufactured businesses. Accelerating distribution sales were due to the implementation of new contracts with hospitals and health care networks and improved penetration into the surgery centers market. Stronger demand for higher margin self-manufactured products was driven by sales of surgeons’ gloves under a new Novation agreement and proprietary custom surgical procedure kits. In addition, prior investments in new products, including innovative surgical and radiology products, continue to contribute to the segment’s sales growth.

Substantial productivity gains were made as SG&A expense declined in absolute dollars. As a percentage of sales, SG&A declined 91 basis points to a second quarter record low 12.81 percent. This exceptional improvement was driven by the previously announced reorganization and streamlining of certain manufacturing processes which resulted in the consolidation of ten distribution and manufacturing facilities and reduction of 800 positions since last year. Service levels and customer satisfaction remain high. Operating earnings rose 10 percent to $144 million, and return on sales grew 37 basis points to 8.76 percent. Earnings growth combined with continued working capital improvement drove a strong gain in return on committed capital, which rose 390 basis points to 37.5 percent.


Pharmaceutical Technologies and Services (13 percent of operating earnings)

The segment delivered another solid quarter posting second quarter record revenues and operating earnings.

Revenues rose 16 percent to $382 million on accelerating demand for proprietary branded and sterile manufacturing products, development services, and sales and marketing services. The growth in oral branded products was driven by sales of Lilly’s Zyprexa® (schizophrenia) and Abbott’s Kaletra® (HIV). In addition, Amnesteem™ (acne), the generic version of isotretinoin, received FDA approval and began shipping during the latter part of December. Increased demand for sterile manufacturing included Warrick’s generic albuterol (respiratory), Sepracor’s Xopenex® (respiratory), and Pharmacia’s Xalatan® (glaucoma). These gains were partially offset by slower sales of Claritin RediTabs® and in non-core businesses such as international health and nutritional products.

Operating earnings expanded 14 percent to $79 million on strong revenue and higher gross margins and favorable contributions from analytical and medical education services acquisitions made during the past year. Return on sales was a strong 20.64 percent. As a percentage of sales, both gross margin and SG&A expenses increased. These fluctuations were caused primarily by the business mix of the products and services sold in the segment. To meet growing market demand, infrastructure expansion continued at the pharmaceutical development center in Somerset, NJ and at the sterile manufacturing facilities in Albuquerque, NM and Raleigh, NC. Return on committed capital was strong for the quarter at 27.1 percent, up from 25 percent in the first quarter.

Automation and Information Services (12 percent of operating earnings)

This segment produced another exceptional quarter, posting second quarter record revenues and operating earnings while return on sales was an all-time record.

The segment’s momentum continued as revenues gained 18 percent to $165 million on substantial demand for new and existing proprietary automation products designed to address the critical challenges of cost management, patient safety and labor shortages faced by health care providers. Health care provider focus on medication safety drove strong sales in MEDSTATION SN® . In addition, the segment completed the first enterprise-wide installation of PATIENTSTATION ®, an integrated point-of-care medical information and entertainment system, at Detroit Medical Center. The segment’s backlog of committed contracts for products awaiting installation was up $19 million during the quarter, representing the second strongest quarter ever in terms of additions to the backlog. The resulting record backlog of $229 million at December 31, 2002, was an increase of 30 percent versus last year, and is a strong positive indicator of future segment growth.

Operating earnings improved faster than sales and were up 26 percent to $69 million. Return on sales improved 266 basis points to 42.09 percent driven by gross margin improvement to 73.51 percent due to continuing demand for the higher margin MEDSTATION SN®, and the manufacturing efficiencies gained from operating improvements. These gains were partially offset by an SG&A increase of 292 basis points to 31.42 percent of revenue, driven largely by product mix and building an infrastructure to meet the installation demand. Return on committed capital continued to excel at 44.3 percent.


INCOME INCLUDING SPECIAL ITEMS

Including special items, operating earnings increased 26 percent to $591 million, net earnings increased 30 percent to $368 million, and earnings per diluted share increased 32 percent to $0.82. The current quarter special items totaled $22.1 million and included income received from settlements resulting from the recovery of antitrust claims against certain vitamin manufacturers for amounts overcharged in prior years. This income was partially offset by merger-related costs and certain business restructuring charges incurred during the quarter.

WEBCAST TODAY

Cardinal Health will host a Webcast conference call today at 11 a.m. Eastern Time to discuss its second quarter performance. To access this discussion, please visit the Investor Relations page at www.cardinal.com or dial the telephone call-in number - 706-679-0766. A replay of the Webcast will be available from 3:00 p.m. Eastern Time on January 23 until 5:00 p.m. Eastern Time on January 27 at Cardinal Health’s Investor Relations webpage or by dialing 706-645-9291, pass code 7276928.

INVESTOR CONFERENCE

On February 13, 2003, the company will host its semi-annual investor conference in New York City. The presentations by company management will be Webcast from the Investor Relations page at www.cardinal.com. Interested parties can also listen to the presentations by calling 706-679-0766. A replay of the conference will be available at the Investor Relations page on www.cardinal.com until midnight on February 17.

ABOUT CARDINAL HEALTH

Cardinal Health, Inc. (www.cardinal.com) is the leading provider of products and services supporting the health care industry. Cardinal Health businesses 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. Headquartered in Dublin, Ohio, Cardinal Health employs approximately 50,000 people on five continents and produces annual revenues of more than $44 billion. Cardinal Health is ranked #23 on the current Fortune 500 list and was named one of ‘The World’s Best’ companies by Forbes magazine in 2002.

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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 (including all amendments to those 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 patterns or reimbursement rates for health-care products and/or services, the costs and other effects of governmental regulation and legal and administrative proceedings, and general economic and market conditions. Cardinal Health undertakes no obligation to update or revise any forward-looking statements.