Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2018 (third quarter of fiscal 2018), with year-to-date results for the nine months ended March 31, 2018. The request metadata says “2017 Q3,” but the filing itself covers Q3 fiscal 2018.
Business context and results
Cardinal Health is a healthcare services and products company with Pharmaceutical and Medical segments. It acquired Medtronic’s Patient Recovery Business for $6.1 billion in cash in July 2017 and completed the sale of its China distribution business in February 2018.
| Metric | Quarter ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Revenue | $33.633 billion, up 6% | $101.460 billion, up 5% |
| Gross margin | $1.913 billion, up 11%; gross margin rate increased 26 basis points | $5.446 billion, up 11%; gross margin rate increased 30 basis points |
| GAAP operating earnings | $546 million, down 10% | $1.206 billion, down 28% |
| Non-GAAP operating earnings | $781 million, up 3% | $2.121 billion, essentially flat |
| Net earnings attributable to Cardinal Health | $255 million, versus $381 million | $1.422 billion, versus $1.014 billion |
| GAAP diluted EPS | $0.81, down 33% | $4.50, up 42% |
| Non-GAAP diluted EPS | $1.39, down 9% | $3.99, down 3% |
Segments and material changes
- Pharmaceutical: Revenue was $29.720 billion for the quarter (+5%) and $89.786 billion year to date (+3%). Segment profit fell 3% to $596 million for the quarter and 6% to $1.576 billion year to date. Generic program performance and customer pricing changes weighed on profit; specialty distribution and services contributed positively.
- Medical: Revenue was $3.916 billion for the quarter (+15%) and $11.684 billion year to date (+16%). Segment profit rose 34% to $199 million for the quarter and 26% to $548 million year to date, primarily reflecting the Patient Recovery acquisition. Cordis operating costs and inventory reserves were a partial offset.
- Acquisition-related amortization and costs, litigation charges, and restructuring drove a wider gap between GAAP and non-GAAP operating results. The quarter included $64 million of net litigation charges; year-to-date charges were $155 million. Year-to-date restructuring expense of $155 million included $125 million of contract termination costs.
- GAAP year-to-date EPS benefited substantially from a provisional $911 million net transitional Tax Act benefit in the financial-statement reconciliation; the MD&A describes a $952 million provisional benefit from deferred-tax remeasurement, alongside the lower-rate benefit and $41 million repatriation tax. The filing’s tax accounting remains provisional and subject to adjustment.
Cash flow, debt and liquidity
- Operating cash flow was $2.214 billion for the nine months, versus $460 million in the prior-year period, largely reflecting working-capital changes. Investing activities used $5.468 billion, including $6.142 billion for acquisitions; financing activities used $1.467 billion.
- Cash and equivalents were $2.175 billion at March 31, 2018, down from $6.879 billion at June 30, 2017. The decline primarily reflected the acquisition, dividends, share repurchases and debt redemption, partly offset by operating cash flow and China-sale proceeds.
- Total long-term obligations, including current maturities and short-term borrowings, were $9.6 billion, compared with $10.4 billion at June 30, 2017. No commercial paper, revolving-credit-facility or committed-receivables-facility amounts were outstanding at quarter-end. The company was compliant with its leverage covenant.
- China divestiture proceeds were $1.2 billion gross and $861 million net of third-party debt and preliminary adjustments; a $57 million tax liability was recorded. The sale resulted in a $60 million net loss.
Outlook, risks and unusual items
- Management expects Cordis operating-cost and inventory challenges to pressure Medical segment profit through the remainder of fiscal 2018. Pharmaceutical segment profit is expected to be affected by customer pricing changes through fiscal 2018 and 2019, and by the previously announced loss of a large distribution customer in fiscal 2019. No numerical full-year EPS guidance is provided in the supplied filing text.
- Management expects the lower U.S. federal corporate tax rate to have a significant positive effect on fiscal 2019 EPS. Tax Act accounting and certain tax estimates remain provisional; further adjustments may be recorded.
- The company had accrued $247 million, net of expected insurance recoveries, for Cordis IVC-filter litigation losses and defense costs; it could not estimate reasonably possible losses above that amount. The opioid lawsuits and investigations were at early stages, and the company could not predict outcomes or estimate a range of losses.
- New York’s opioid assessment creates a $100 million annual aggregate charge across covered manufacturers and distributors. Cardinal Health could not estimate its share for 2017 or 2018. The filing also notes broader litigation, regulatory and reputational risks related to opioid distribution.
- The Medical Unit carried $5.7 billion of goodwill. After qualitative assessment and sensitivity analyses, management concluded an impairment was not more likely than not, but lower-than-expected profits—particularly at Cordis—were identified as a negative factor.
Most important facts for investors to verify
- How the Patient Recovery acquisition contributes to sustainable Medical segment profit after integration, inventory step-up effects and acquisition-related amortization.
- Whether Pharmaceutical generics, customer pricing changes and the lost distribution contract produce further segment-profit pressure.
- Final Tax Act accounting, including the provisional deferred-tax benefit, repatriation tax and fiscal 2019 tax effects.
- Developments in opioid litigation, state investigations and assessments, and any change in the company’s ability to estimate exposure.
- Changes in IVC-filter litigation accruals, insurance recoveries and potential losses above the recorded $247 million.
- Cash conversion and leverage after acquisition spending, working-capital movements, dividends and share repurchases.