Business context and reporting period
Cardinal Health, Inc. filed its Form 10-K for the fiscal year ended June 30, 2022 (FY2022), not a standalone 2021 fourth-quarter filing. The company distributes pharmaceuticals and manufactures, sources and distributes medical products through its Pharmaceutical and Medical segments.
Financial and operating results
- Revenue: $181.4 billion, up 12% from $162.5 billion. Pharmaceutical revenue rose 14% to $165.5 billion, primarily from branded drug sales and customer growth; Medical revenue fell 5% to $15.9 billion, largely reflecting the Cordis divestiture and lower volumes.
- Profit: GAAP operating loss was $596 million versus operating earnings of $472 million in FY2021. GAAP net loss attributable to Cardinal Health was $933 million, or $3.35 per diluted share, compared with net earnings of $611 million, or $2.08 per diluted share.
- Non-GAAP results: Operating earnings were $1.99 billion, down 12%; diluted EPS was $5.06, down 9% from $5.57. These company-defined measures exclude specified items and are not substitutes for GAAP results.
- Margins and segments: Gross margin was $6.55 billion, down 3%; gross margin rate declined 56 basis points. Pharmaceutical segment profit increased 5% to $1.77 billion; Medical segment profit decreased 63% to $216 million. Management cited inflation, freight and commodity costs, supply constraints and Cordis-related impacts in Medical.
- Cash flow and capital deployment: Operating cash flow was $3.12 billion, including a $966 million tax refund and favorable working-capital timing. The company received $923 million net proceeds from the Cordis sale. It spent $1.0 billion on share repurchases, $559 million on dividends, $885 million on debt repayments and $387 million on capital expenditures.
- Liquidity and debt: Cash and equivalents were $4.72 billion at year-end, versus $3.41 billion a year earlier. Total long-term obligations and other short-term borrowings were $5.32 billion. No amounts were outstanding under the $2.0 billion revolving credit/commercial-paper facilities or $1.0 billion receivables facility; the company was compliant with its 3.75-to-1 leverage covenant. Shareholders’ equity was a $706 million deficit.
Material changes versus FY2021
- Medical goodwill impairment charges of $2.08 billion drove the GAAP operating loss and reduced goodwill and other intangibles. The impairment followed weaker Medical results, supply-chain and inflation pressures, lower PPE volumes and higher discount rates.
- FY2021 included $1.17 billion of opioid-related charges and a $424 million tax benefit from a CARES Act net operating loss carryback. These unusual items make year-over-year GAAP earnings comparisons less representative of underlying operations.
- Cordis was sold in August 2021 for $923 million net proceeds. The divestiture reduced FY2022 Medical revenue by approximately $700 million and Medical segment profit by approximately $70 million, as anticipated.
Outlook, risks, contingencies and unusual items
- Management expects inflation and global supply-chain constraints to continue weighing on Medical segment profit in FY2023 and beyond, and transportation and labor inflation to continue affecting Pharmaceutical profit in FY2023. Planned price increases, contracting changes and supply-chain investments may not fully offset costs; management stated it does not expect to offset the full FY2023 cost impact. FY2023 capital expenditures are expected to be around $500 million.
- The effective opioid settlement includes payments of up to approximately $6.0 billion, mostly over 18 years. Cardinal accrued $6.36 billion at June 30, 2022 for the settlement and certain other opioid matters. Payment amounts remain subject to participation and other conditions. Private litigation and government investigations are not fully resolved, and the company cannot estimate additional reasonably possible losses for certain matters.
- Cardinal accrued $512 million, net of estimated insurance recoveries, for Cordis IVC-filter claims; it estimated the high end of the loss range at approximately $1.05 billion net of recoveries. The company retained this product liability after the Cordis sale.
- Additional risks include possible further Medical goodwill impairment, customer concentration (CVS Health and OptumRx accounted for 25% and 16% of revenue), regulatory and compliance exposure, cyber and operational disruptions, and the availability and cost of supplies and labor.
- After year-end, Cardinal announced that CEO Michael Kaufmann would depart effective September 1, 2022, and CFO Jason Hollar would become CEO on that date. A shareholder derivative settlement was preliminarily approved in July 2022; insurers would pay Cardinal $124 million, less any court-awarded fees and expenses, subject to final approval.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The filing identifies Medical goodwill, IVC-filter litigation, uncertain tax positions and opioid litigation as critical audit matters.
Most important facts for investors to verify
- Whether Medical segment margins and profit stabilize as inflation, supply constraints and PPE demand/pricing evolve, and whether planned price actions recover costs.
- The assumptions supporting the Medical Unit valuation and whether additional goodwill impairment is required.
- Final participation, payment obligations and compliance costs under opioid settlements, plus developments in private lawsuits, DOJ investigations and insurance recoveries.
- Cash-flow sustainability excluding the tax refund and favorable working-capital timing, alongside settlement payments, debt service, dividends and repurchases.
- Customer retention and concentration, particularly the terms and performance of the CVS Health and OptumRx relationships.