Business context and reporting period
Cardinal Health, Inc. is a healthcare services and products company operating Pharmaceutical and Medical segments. The supplied filing is its fiscal 2019 Form 10-K for the year ended June 30, 2019—not a standalone 2018 Q4 filing. It also reports unaudited fiscal 2019 fourth-quarter results.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Revenue | $145.5 billion | $136.8 billion |
| Gross margin | $6.8 billion; 4.7% of revenue | $7.2 billion; 5.2% of revenue |
| GAAP operating earnings | $2.06 billion | $126 million |
| Non-GAAP operating earnings | $2.35 billion | $2.59 billion |
| Net earnings attributable to Cardinal Health | $1.36 billion | $256 million |
| Diluted EPS | $4.53 GAAP; $5.28 non-GAAP | $0.81 GAAP; $5.00 non-GAAP |
| Operating cash flow | $2.72 billion | $2.77 billion |
| Cash and equivalents at year-end | $2.53 billion | $1.76 billion |
Fiscal 2019 fourth-quarter revenue was $37.35 billion, net earnings attributable to Cardinal Health were $194 million, and diluted EPS was $0.65. Non-GAAP figures exclude items including restructuring, acquisition-related costs, impairments or asset-sale gains, and litigation charges or recoveries; they are supplemental and not GAAP substitutes.
Pharmaceutical segment revenue rose 7% to $129.9 billion, while segment profit fell 8% to $1.83 billion. Medical revenue was essentially flat at $15.6 billion; segment profit fell 13% to $576 million. Total segment profit declined 9% to $2.41 billion.
At June 30, 2019, total long-term obligations, including current maturities and other short-term borrowings, were $8.0 billion, down from $9.0 billion a year earlier. Current assets were $25.7 billion and current liabilities were $24.1 billion. Cardinal had no balances outstanding under its $2.0 billion revolving credit facility, commercial paper program, or $1.0 billion receivables facility; it reported compliance with the related leverage covenants. Capital expenditures were $328 million; dividends paid were $577 million and share repurchases were $600 million.
Material changes versus the prior year
- Revenue increased 6%, primarily from pharmaceutical distribution and specialty pharmaceutical customer growth; the China distribution divestiture partly offset growth.
- Gross margin declined 5%, reflecting weaker generics program contribution, Medical Cardinal Health Brand performance, customer contract renewals, and product mix.
- GAAP operating earnings rebounded from $126 million to $2.06 billion, principally because fiscal 2018 included a $1.4 billion Medical goodwill impairment and fiscal 2019 included a $508 million pre-tax naviHealth divestiture gain. Excluding specified items, operating earnings declined 9%.
- Non-GAAP diluted EPS rose 6%, helped by a lower effective tax rate and fewer shares outstanding, despite lower non-GAAP operating earnings.
- Cash increased by $768 million. Operating cash flow was broadly stable; debt repayments, dividends, share repurchases and capital spending were partly offset by $737 million of naviHealth sale proceeds.
Outlook, risks and unusual items
- Management expected fiscal 2020 Pharmaceutical segment profit to be below fiscal 2019, citing customer contract renewals and generics program performance. Pricing changes and their effects were identified as uncertain. The filing provides no clear consolidated earnings guidance.
- Fiscal 2020 capital expenditures were expected to be $320 million to $360 million. Cost-savings initiatives authorized in August 2019 were expected to generate restructuring charges of approximately $120 million to $145 million, mostly in fiscal 2020.
- Opioid-related litigation and investigations are a major contingency: Cardinal reported approximately 2,500 lawsuits and stated that it could not predict the outcome or reasonably estimate a loss range. The filing warns of potentially material effects on results, liquidity, cash flows, reputation and operations.
- For Cordis IVC filter product-liability lawsuits, the company accrued $368 million net of estimated insurance recoveries; its estimated high end of the loss range was approximately $762 million net. Outcomes and estimates remain uncertain.
- Medical goodwill remained sensitive: the Medical Unit’s estimated fair value exceeded carrying value by about 4% in fiscal 2019. A 0.5 percentage-point increase in the discount rate or decrease in terminal growth rate would, individually, have put carrying value above estimated fair value.
- CVS represented 26% of fiscal 2019 revenue and 24% of year-end gross trade receivables; distribution agreements were extended through fiscal 2023. Customer and supplier concentration, competitive pricing pressure, regulatory compliance, cyber and systems disruptions, and tax uncertainty are additional risks.
- The naviHealth sale produced a $508 million pre-tax gain; Cardinal retained a 44% equity interest. Fiscal 2018 included the $1.4 billion non-cash Medical goodwill impairment, while fiscal 2018 GAAP EPS also benefited from a $2.97-per-share transitional tax benefit.
Important facts for investors to verify
- Confirm the requested period: this is a fiscal 2019 annual filing, with fourth-quarter data reported separately, rather than a 2018 Q4 filing.
- Assess whether Pharmaceutical segment profit can stabilize amid generics pricing pressure and customer renewals, and compare subsequent results with management’s fiscal 2020 outlook.
- Track opioid litigation developments, possible settlements or judgments, and whether the company can estimate exposure; compare IVC claims and reserve changes with the disclosed range.
- Monitor Medical Unit performance and goodwill impairment assumptions, particularly the limited valuation cushion and sensitivity to forecasts and discount rates.
- Review cash conversion, working-capital movements, debt maturities and covenant headroom, as well as the balance between dividends, repurchases and debt reduction.
- Consider how much GAAP results depend on unusual gains, impairments, tax effects and other adjustments versus ongoing operating performance.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting.