Cardinal Health, Inc. — Form 10-K Summary
Period clarification: The supplied filing is Cardinal Health’s fiscal 2015 Form 10-K for the year ended June 30, 2015, filed August 13, 2015. It is not a filing for fiscal 2014 Q4; fiscal 2015 fourth-quarter figures are included below.
Business context and reporting period
Cardinal Health is a healthcare services and products company operating through Pharmaceutical and Medical segments. Pharmaceutical distributes medicines and related products and provides pharmacy and specialty services. Medical distributes and manufactures medical, surgical and laboratory products and provides healthcare supply-chain services.
Financial performance and liquidity
| Metric | Fiscal 2015 | Prior comparable period |
|---|---|---|
| Revenue | $102.531 billion | $91.084 billion; up 13% |
| Gross margin | $5.712 billion; approximately 5.6% of revenue | $5.161 billion; approximately 5.7% |
| Operating earnings | $2.161 billion; up 15% | $1.885 billion |
| Earnings from continuing operations | $1.212 billion; up 4% | $1.163 billion |
| Net earnings | $1.215 billion | $1.166 billion |
| Diluted EPS | $3.62 net; $3.61 continuing operations | $3.38 net; $3.37 continuing operations |
| Operating cash flow | $2.540 billion | $2.524 billion |
| Cash and equivalents at year-end | $4.616 billion | $2.865 billion |
| Total debt and other short-term borrowings | $5.492 billion | $3.972 billion |
Fiscal 2015 non-GAAP operating earnings were $2.472 billion, up 16%, and non-GAAP diluted EPS was $4.38, up 14%. These company-defined measures exclude specified restructuring, acquisition-related, impairment, litigation and debt-extinguishment items; they are supplementary, not GAAP results. Interest expense was $141 million, and the effective tax rate rose to 38.4% from 35.3%.
Operating cash flow funded $1.036 billion of share repurchases, $503 million of acquisitions and $460 million of cash dividends. Capital expenditures were $300 million. Year-end current assets were $21.752 billion and current liabilities were $17.243 billion. The company reported compliance with its credit-facility covenants and no significant off-balance-sheet arrangements.
Material changes versus prior period
- Pharmaceutical revenue rose 14% to $91.116 billion, driven by existing and new customers, branded price inflation and newly launched hepatitis C products. The year-over-year comparison also reflects the prior-period expiration of the Walgreens distribution contract.
- Medical revenue increased 4% to $11.395 billion, primarily due to acquisitions, while Medical segment profit declined 3% to $433 million, reflecting lower contribution from national-brand distribution.
- Pharmaceutical segment profit increased 20% to $2.094 billion; total segment profit rose 15% to $2.527 billion.
- Gross margin grew 11% in dollars, but the gross margin rate contracted slightly. Management cited customer pricing changes, lower-margin hepatitis C product mix and new-customer mix, partly offset by generics performance and Red Oak Sourcing.
- Debt increased after new note issuances, including $1.5 billion issued in June 2015, and the company recorded a $60 million pretax loss on extinguishment of debt.
For fiscal 2015 Q4, revenue was $27.547 billion versus $22.894 billion in fiscal 2014 Q4; earnings from continuing operations were $293 million versus $234 million, and diluted continuing-operations EPS was $0.88 versus $0.68.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2016 capital expenditures of $510 million to $540 million, primarily for core-business growth, information technology and Cordis integration.
- Harvard Drug was acquired on July 2, 2015 for $1.1 billion net of cash acquired. The planned $1.9 billion Cordis acquisition remained subject to regulatory approval and closing conditions; management expected it to significantly reduce fiscal 2016 GAAP operating earnings and pretax earnings, largely due to amortization and acquisition-related costs. Interest expense was also expected to rise.
- Management cautioned that the earnings benefit from branded and generic price appreciation and future generic launches could be lower in fiscal 2016 than in fiscal 2015.
- Red Oak Sourcing, the 10-year 50/50 generic-drug sourcing venture with CVS Health, entails 39 quarterly payments of $25.6 million to CVS Health. Milestone-based increases could raise quarterly payments to as much as $45.6 million.
- CVS Health represented 27% of fiscal 2015 revenue and 20% of gross trade receivables, creating material customer concentration. Competition, pricing pressure, healthcare-sector changes, regulation, information-system and cybersecurity disruptions, supply constraints and acquisition integration were cited as risks.
- Cardinal recorded $41 million of fiscal 2015 charges and an accrued liability for the DEA investigation and related matters. It settled the FTC investigation for $27 million, without admitting liability. The company said unresolved proceedings could affect results in a particular period, though it did not believe currently known outcomes would materially adversely affect its overall financial position, results or cash flows.
Important facts for investors to verify
- Confirm the intended reporting period: the source is fiscal 2015, with Q4 ended June 30, 2015, not a fiscal 2014 Q4 filing.
- Assess whether fiscal 2015’s revenue and profit growth is sustainable after considering customer mix, hepatitis C product margins, generic launches and pharmaceutical price movements.
- Track Cordis closing, integration costs, amortization, financing and the effect on fiscal 2016 earnings; also review Harvard Drug’s post-acquisition contribution.
- Evaluate CVS Health concentration, Red Oak’s milestone payments and the commercial terms and renewal risks of major customer and supplier agreements.
- Monitor DEA-related matters, tax audits and unrecognized tax benefits, and other litigation or regulatory developments for changes in exposure.
- Reconcile GAAP performance with non-GAAP adjustments and review working-capital movements, debt maturities and cash deployment.