Cardinal Health Inc. (CAH), while lowering its earnings outlook for this fiscal year because of hospital customers' spending delays, is sticking with a plan to spin off its clinical and medical products business this year.

The drug wholesaler and medical-equipment supplier lowered its full-year outlook Thursday, citing the effect on the clinical and medical products, or CMP, division of customer-spending delays related to tight credit markets.

As for the proposed spinoff of that business, "we're continuing to proceed forward," Chairman and Chief Executive R. Kerry Clark said during a conference call. The company plans to file appropriate forms by the end of this quarter and "will be ready to proceed by this summer," he said. The unfreezing in the credit markets "continues to keep us fairly optimistic that we are going to be able to execute this plan."

The CMP division has been growing faster and generating higher margins than Cardinal's sluggish core drug-distribution business. This year, as hospitals delay spending, the company expects CMP earnings to be flat with, or better than, last year's results.

Fitch Ratings warned of possible downgrades to Cardinal Health's credit ratings after the announcement, saying a spinoff would reduce the diversification of the company's business model. Also, the distribution business operates on lower margins, which would limit its flexibility, the rating agency said.

Cardinal considers the spending delay a temporary concern rather than a shift in underlying demand for the CMP business. The company had warned earlier that it was monitoring customer expenditures.

"Customers have been clear; they are only delaying their spending. In other words, we're not seeing any fundamental change in the competitive landscape, we're not losing business to competitors, customers are telling us that they are pausing for the credit markets to improve and to develop more certainty in their own outlooks," CMP division chief David Schlotterbeck said. Cardinal has instituted hiring freezes and taken other cost-cutting steps.

Cardinal now anticipates non-GAAP per-share earnings of $3.50 to $3.60 this year, compared with previous guidance of $3.80 to $3.95. It expects fiscal second-quarter per-share earnings of 90 cents, citing solid operating results and a better-than-expected tax rate.

Cardinal reaffirmed revenue and profit goals for its health-care supply chain services segment, which includes drug distribution, with expected revenue growth of more than 6% and profit flat to down 5%.

Analysts surveyed by Thomson Reuters had, on average, estimated fiscal second-quarter earnings of 85 cents a share and full-year earnings of $3.76 a share.

Cardinal faces other variables in 2009. Its largest customer, CVS Caremark Corp. (CVS), is also the biggest account for Cardinal competitor McKesson Corp. (MCK). The contracts are scheduled to expire in 2009, and some observers have expressed concern that CVS may consolidate its business.

In addition, Moody's Investors Services has expressed concern that Cardinal, McKesson and competitor AmerisourceBergen Corp. (ABC) have less cash and face tougher credit markets than in past years.

Cardinal shares recently traded up 2.1% at $36.70.

-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com

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