By Dinah Wisenberg Brin
Of DOW JONES NEWSWIRES
Hospital spending delays prompted by the weak economy continue to pressure medical goods supplier Cardinal Health Inc. (CAH), which announced another round of job cuts and cost-control measures Tuesday.
Those workforce reductions, plus the planned spinoff of a key business segment, mark the latest in Cardinal's efforts to shore up business and boost shareholder value while facing recessionary, industry and company-specific pressures.
The Dublin, Ohio, company said its clinical and medical products businesses, which it plans to spin off this year as CareFusion Corp., will cut 800 jobs over six months and an additional 500 positions through attrition and not filling open positions. Cardinal said it will implement cost-control measures and additional reductions in discretionary spending across all its businesses.
The 1,300 eliminated positions represent about 7.8% of the 16,700 workers in the CareFusion business and 3.25% of the total Cardinal workforce of some 40,000.
Those cuts will come in addition to the reduction of 600 positions that Cardinal announced last summer.
Cardinal Health Chairman and Chief Executive R. Kerry Clark said the "measures are necessary to help offset current economic conditions and will ultimately strengthen our businesses for the longer-term."
Cardinal, which also is one of the nation's largest pharmaceutical wholesalers, expects to record a restructuring charge of approximately $33 million for the rest of fiscal 2009 and a charge of $24 million in fiscal 2010 in connection with the workforce reduction. The company expects the action will bring savings of $110 million to $130 million within two years.
Cardinal provided new details about the previously announced spinoff. The company expects to dispense at least 80% of outstanding CareFusion common stock to Cardinal shareholders, with Cardinal Health keeping the other shares, then divesting them within five years. David L. Schlotterbeck, a Cardinal vice chairman, will serve as CareFusion's chairman and chief executive. CEO Clark will retire from Cardinal after the spinoff, to be replaced by George S. Barrett.
When Cardinal announced plans last year for the tax-free spinoff, the company said it aimed to unlock shareholder value. The clinical and medical products businesses were growing faster and producing higher margins than the more sluggish, core drug-distribution segment, although recent hospital capital spending delays sparked by the recession and credit crunch have damped them in recent months.
In January the company lowered its fiscal-year earnings outlook, citing the postponed hospital spending, and forecast lower operating per-share earnings companywide. Cardinal also faces company-specific and broad pressures in its drug-distribution business, an industry marked by relatively slow growth and thin profit margins. Cardinal and competitor McKesson Corp. (MCK) both are expected to experience margin pressure this year as their contracts with the biggest customer for both companies -- drug retailer and pharmacy benefits manager CVS Caremark Corp. (CVS) -- come up for renewal. CVS Caremark's contract decision is expected soon.
As for company-specific problems, Cardinal has faced several glitches in its line of Alaris pump products, most notably a 2006 recall of its Alaris SE infusion pumps because of a potential for overinfusion of medication. The pump business is part of CareFusion.
Separately, Cardinal aims to win back some $1 billion in business it lost after the Drug Enforcement Administration temporarily suspended controlled-substance licenses at three of the company's distribution centers.
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com
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