Cardinal Health, Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended September 30, 2019; comparisons are with the quarter ended September 30, 2018 unless noted. Cardinal Health operates Pharmaceutical and Medical segments.
Financial results
| Metric | Q1 FY2020 | Prior-year quarter / change |
|---|---|---|
| Revenue | $37.341 billion | $35.213 billion; up 6% |
| Gross margin | $1.679 billion | $1.667 billion; up 1%; margin rate down 23 basis points |
| GAAP operating earnings/(loss) | $(5.264) billion | $816 million |
| Non-GAAP operating earnings | $577 million | $542 million; up 6% |
| GAAP net earnings/(loss) attributable to Cardinal Health | $(4.922) billion | $593 million |
| GAAP diluted EPS | $(16.65) | $1.94 |
| Non-GAAP diluted EPS | $1.27 | $1.29; down 2% |
| Net cash from/(used in) operating activities | $(653) million | $365 million provided |
The GAAP operating loss chiefly reflects a $5.63 billion pretax opioid-litigation charge ($5.14 billion after tax). Prior-year GAAP results included a $508 million pretax gain on the naviHealth divestiture. Non-GAAP results exclude specified items and are supplemental, not substitutes for GAAP measures.
Segment performance and material changes
- Pharmaceutical: Revenue rose 6% to $33.428 billion, primarily from pharmaceutical distribution and specialty customers. Segment profit fell 3% to $398 million, mainly due to customer contract renewals, partly offset by cost savings and specialty growth.
- Medical: Revenue rose 3% to $3.917 billion. Segment profit increased 26% to $170 million, supported by cost savings and higher contribution from distribution and products businesses.
- Total segment profit increased 4% to $568 million. Consolidated gross margin was nearly flat; the gross-margin rate decline reflected pharmaceutical customer renewals and product mix. SG&A fell 4% to $1.107 billion, benefiting from cost savings and lower state opioid assessments.
- Non-GAAP diluted EPS declined 2%, primarily reflecting the prior-year benefit of discrete tax items, partly offset by improved operating earnings and a lower share count.
Liquidity, debt and capital allocation
- Cash and equivalents were $1.212 billion at September 30, 2019, down from $2.531 billion at June 30, 2019. Operating cash use was attributed primarily to working-capital timing, including payments to vendors; management expected operating cash flow to improve in the December quarter.
- Cash uses included $350 million for share repurchases, $146 million for dividends and $72 million for capital expenditures. The company repurchased $74 million of debt during the quarter.
- Total long-term obligations, including current portions and other short-term borrowings, were approximately $8.0 billion. The company planned to repay $450 million of 2.40% notes at their November 2019 maturity.
- It reported no outstanding balance at quarter-end under its $2.0 billion commercial paper program, $2.0 billion revolving credit facility or $1.0 billion receivables sales facility, and was in compliance with leverage covenants. Management stated that available capital and projected operating cash flow were adequate for anticipated needs, including potential opioid settlement payments.
- The quarterly dividend was $0.4811 per share. The company began a $350 million accelerated share-repurchase program, expected to conclude in Q2 FY2020.
Outlook, contingencies and risks
- In October 2019, after the reporting quarter, Cardinal Health agreed in principle to a multistate opioid settlement framework. It contemplates cash payments of up to $5.56 billion over 18 years, ten years of free or rebated opioid-abuse treatment medications, and industry-wide anti-diversion program changes. The framework was subject to definitive terms, participation and other contingencies; it does not cover private plaintiffs.
- The company recorded a $5.63 billion pretax opioid-related charge, including a $5.56 billion framework accrual and $66 million for a separate settlement with two Ohio counties. It could not reasonably estimate potential treatment-medication or incremental anti-diversion costs, and the ultimate loss could differ materially. The company continued to dispute the allegations and said the framework was not an admission of wrongdoing.
- A $487 million tax benefit associated with the opioid charge was recorded, net of $468 million of unrecognized tax benefits. Deductibility and tax treatment depend on unsettled settlement terms and could be challenged by tax authorities.
- Cost-saving initiatives were expected to be substantially implemented in FY2020; $20 million of related expense was recognized in the quarter. Management also flagged potential future impairment risk for Medical goodwill if assumptions or expected performance deteriorate.
- Other disclosed exposures include Cordis IVC-filter product-liability litigation, for which $414 million net of estimated insurance recoveries was accrued, with an estimated high end of the loss range of approximately $836 million. The filing also describes shareholder litigation and ongoing tax audits and disputes.
Most important facts for investors to verify
- Whether the opioid settlement framework reaches definitive agreement, which parties participate, and how final cash, treatment-medication and compliance obligations compare with recorded accruals.
- Whether the $487 million tax benefit and related uncertain tax positions are sustained, and the resulting cash-tax impact.
- Whether working-capital improvements restore operating cash flow and support debt service, dividends, repurchases and any settlement payments.
- Progress and costs of FY2020 savings initiatives, alongside pharmaceutical contract-renewal trends and Medical segment performance.
- Developments in IVC-filter and other litigation, and whether the company’s related reserves remain adequate.