Cardinal Health, Inc. — Fiscal 2020 Form 10-K
Reporting period: Fiscal year ended June 30, 2020; comparisons are primarily with fiscal 2019. The filing is a FY2020 annual report, not a standalone 2019 fourth-quarter filing. Cardinal Health distributes pharmaceuticals and manufactures, sources and distributes medical products through its Pharmaceutical and Medical segments.
Financial performance
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $152.9 billion | $145.5 billion | Up 5% |
| Gross margin | $6.868 billion | $6.834 billion | Essentially flat; gross margin rate declined |
| GAAP operating earnings/(loss) | $(4.098) billion | $2.060 billion | FY2020 includes major opioid litigation charge |
| GAAP net earnings/(loss) attributable to Cardinal Health | $(3.696) billion | $1.363 billion | GAAP diluted EPS $(12.61), versus $4.53 |
| Non-GAAP operating earnings | $2.384 billion | $2.353 billion | Up 1% |
| Non-GAAP diluted EPS | $5.45 | $5.28 | Up 3%; company-defined non-GAAP measure |
| Operating cash flow | $1.960 billion | $2.722 billion | Lower year over year |
| Cash and equivalents at year-end | $2.771 billion | $2.531 billion | Up $240 million |
| Long-term obligations and other short-term borrowings | $6.775 billion | $8.031 billion | Reduced through repayments and repurchases |
- Segment results: Pharmaceutical revenue increased 6% to $137.5 billion, while segment profit fell 4% to $1.753 billion, largely due to customer contract renewals. Medical revenue declined 1% to $15.4 billion; segment profit rose 15% to $663 million, reflecting savings and prior-year comparison benefits, partly offset by COVID-19 effects.
- Liquidity and capital: No amounts were outstanding at year-end under the $2.0 billion commercial paper program, its $2.0 billion revolving credit facility, or the $1.0 billion receivables facility. The company reported compliance with its leverage covenant. FY2020 cash uses included $1.399 billion of debt reductions, $569 million of dividends and $350 million of share repurchases.
- Quarterly context: FY2020 fourth-quarter revenue was $36.689 billion and net earnings attributable to Cardinal Health were $656 million; the quarter included a $579 million pretax gain on the remaining naviHealth interest sale.
Material changes and unusual items
- Opioid litigation: The company recorded a $5.63 billion pretax charge ($5.14 billion after tax), driving the GAAP loss. It accrued $5.56 billion for the cash component of a proposed settlement framework, potentially payable over 18 years. Definitive terms and required participation remained unresolved; the company could not estimate the range of possible loss or costs of other settlement components.
- naviHealth: Sale of the remaining interest generated a $579 million pretax gain ($493 million after tax). FY2019 included a separate $508 million pretax gain on the majority-interest divestiture.
- Surgical gown recall: Recall and field actions involving gowns and procedure packs resulted in an $85 million charge. The issue arose after a supplier shifted production to unapproved sites, preventing assurance of gown sterility.
- COVID-19: Management estimated a net negative operating earnings impact of about $100 million in FY2020. PPE demand increased, but higher sourcing and manufacturing costs pressured margins; deferred elective procedures reduced other Medical sales and nuclear services activity. Pharmaceutical customers’ early-quarter purchasing was largely offset by weaker fourth-quarter volume.
- Other legal exposure: The company reported a $468 million net reserve for Cordis IVC filter claims, with an estimated high end of the loss range of about $919 million. The opioid settlement framework does not cover private plaintiffs; related lawsuits and federal investigations continued.
Outlook, risks and management commentary
- Management expected COVID-19 to further negatively affect FY2021 consolidated operating earnings and Medical segment profit. It anticipated a larger negative FY2021 PPE margin impact and assumed Pharmaceutical revenue would also be negatively affected; timing of recovery was uncertain.
- FY2021 capital expenditures were expected to be $400 million to $450 million, primarily for IT and infrastructure. No numerical FY2021 earnings or EPS guidance is provided in the supplied filing text.
- Management stated available cash, committed facilities and projected operating cash flow were adequate for expected operating needs, debt service, dividends, repurchases and potential opioid settlement payments. Pandemic effects had not materially changed liquidity or impaired financial covenant compliance as of the filing.
- Notable risks include unresolved opioid claims and settlement terms, pandemic-related demand and supply disruptions, rising PPE costs, customer and supplier concentration, pricing pressure, regulatory and product-quality exposure, cybersecurity and operational-system risks, and potential impairment of Medical goodwill. Medical Unit fair value exceeded carrying value by only about 7% in the annual test; management disclosed that specified adverse assumption changes could reduce that cushion or produce impairment.
- Other items to note: the company paid approximately $8.4 million to the SEC in February 2020 to settle charges concerning controls over improper payments by employees of its former China distribution business. Unrecognized tax benefits were $998 million at year-end, including uncertainty around the tax treatment of the opioid accrual.
Important facts for investors to verify
- Whether a definitive opioid settlement is reached, its final payment schedule, participation levels, non-cash obligations and tax deductibility; compare these with the $5.56 billion cash accrual.
- FY2021 effects of COVID-19 on procedure volumes, Pharmaceutical customer purchasing, supply availability and PPE costs and pricing.
- Whether Cordis IVC claims develop beyond the $468 million net reserve, and the basis for the disclosed $919 million estimated high end.
- Medical Unit goodwill assumptions and remaining impairment cushion, particularly under weaker forecasts or higher discount rates.
- Customer concentration and renewal exposure: CVS represented 26% and OptumRx 14% of FY2020 revenue; the five largest customers together represented 49%.
- Cash conversion and working-capital movements, including the large operating cash-flow contribution from “other accrued liabilities and operating items,” and the sustainability of dividends and repurchases alongside litigation obligations.