Cardinal Health, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended March 31, 2021 (fiscal 2021). This is the Q3 FY2021 filing, despite the request metadata indicating 2020 Q3. Comparisons are with the prior-year periods.
Financial results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $39.275 billion, flat year over year | $119.881 billion, up 3% |
| GAAP operating earnings/(loss) | $473 million, down 16% | $310 million; prior year was a $4.368 billion loss |
| Non-GAAP operating earnings | $689 million, down 4% | $1.935 billion, approximately flat |
| GAAP net earnings/(loss) attributable to Cardinal Health | $119 million vs. $350 million | $495 million vs. a $4.352 billion loss |
| GAAP diluted EPS | $0.40 vs. $1.19 | $1.68 vs. a loss of $14.84 |
| Non-GAAP diluted EPS | $1.53 vs. $1.62, down 6% | $4.79 vs. $4.41, up 9% |
| Gross margin | $1.812 billion vs. $1.885 billion | $5.303 billion vs. $5.278 billion |
Gross margin rate declined 20 basis points in the quarter and 12 basis points year to date, mainly reflecting pharmaceutical distribution product and sales mix. Quarterly revenue was essentially unchanged as current pharmaceutical sales growth offset the prior-year March 2020 surge from customer purchasing ahead of pandemic-related disruption.
- Segments: Pharmaceutical revenue was flat at $35.104 billion in the quarter and rose 3% to $107.452 billion year to date. Pharmaceutical segment profit fell 4% in the quarter to $511 million and 5% year to date to $1.326 billion, primarily due to lower generics-program volumes and, year to date, lower Nuclear and Precision Health Solutions volumes. Medical revenue rose 3% in the quarter to $4.174 billion and 4% year to date to $12.441 billion. Medical profit declined 2% in the quarter to $174 million but increased 18% year to date to $640 million, supported by cost savings and pandemic-related laboratory and PPE activity.
- Cash flow and capital allocation: Nine-month operating cash flow was $1.764 billion, compared with $1.720 billion. Cash and equivalents were $3.499 billion at March 31, 2021, versus $2.771 billion at June 30, 2020. The company paid $432 million in dividends, spent $274 million on capital expenditures and repurchased $200 million of shares during the nine months.
- Debt and liquidity: Long-term obligations, including current portions and other short-term borrowings, totaled approximately $6.7 billion. No amounts were outstanding under the $2.0 billion commercial paper program/revolving credit facility or the $1.0 billion receivables sales facility; the company was in compliance with its leverage covenant. Management stated it believed available capital and projected operating cash flow were adequate for anticipated needs, including potential opioid settlement payments.
Material changes, outlook and key risks
- Opioid litigation: The company recorded $1.02 billion of pre-tax opioid litigation charges in the first nine months of FY2021, compared with $5.63 billion in the prior-year period, and reported a $6.59 billion accrued liability at March 31. Negotiations on a proposed settlement framework continued without definitive terms or assurance of agreement; the framework does not cover private plaintiffs. Management could not estimate reasonably possible additional losses. Trials and investigations remain ongoing.
- Taxes: A $419 million tax benefit from a CARES Act net operating loss carryback contributed to year-to-date results. The company filed for a $974 million federal tax refund, expected within 12 months, and recorded it as a current asset. It also increased its non-current deferred tax liability by approximately $700 million related to the matter. Tax treatment and refund assumptions may be challenged or affected by legislative changes.
- Cordis divestiture: Cardinal Health agreed to sell Cordis to Hellman & Friedman for $927 million cash, subject to adjustments and closing conditions; completion was expected in the first quarter of FY2022. The company recorded a $58 million pre-tax write-down and expects up to $125 million of exit and disposal costs. Cordis is expected to reduce annual Medical revenue by about $800 million and adversely affect Medical segment profit on a run-rate basis. Cardinal Health will retain specified liabilities, including U.S. and Canadian IVC filter product liability.
- Other legal and regulatory matters: The company accrued $514 million, net of estimated insurance recoveries, for Cordis IVC filter litigation; the estimated high end of the loss range was approximately $1.01 billion net of estimated insurance recoveries. It disclosed federal DOJ investigations related to controlled-substance distribution and anti-diversion practices, an SEC subpoena concerning Cordis inventory and Medical goodwill, and other litigation. Outcomes and additional losses were not clear from the filing.
- COVID-19 and operating risks: Pandemic effects remained uncertain. Generics volumes were expected to remain below pre-pandemic levels for the rest of FY2021, although management expected the year-over-year impact on Pharmaceutical profit to improve. Management expected a beneficial FY2021 comparison for Medical, while warning that lower PPE demand or prices could leave excess inventory and require additional reserves.
- Other unusual items: The quarter’s GAAP results included the Cordis write-down, restructuring costs and significant tax effects, including the tax effect of the opioid accrual. Non-GAAP measures exclude various items and are not substitutes for GAAP results. The company also reported approximately $100 million of proceeds from antitrust litigation settlements received in April 2021, to be recognized in Q4 FY2021.
- Guidance: The provided filing text gives qualitative business expectations but does not provide a clear numerical full-year earnings or EPS guidance value.
Most important facts for investors to verify
- Progress and final terms, payment schedule, tax deductibility and ultimate cost of the opioid settlement framework, as well as outcomes of private-plaintiff litigation and government investigations.
- Whether the Cordis sale closes on schedule and at expected proceeds, and the actual disposal costs, stranded costs and retained IVC filter liabilities.
- Receipt and tax treatment of the $974 million refund claim, including exposure to tax-authority challenges or legislative changes.
- Whether generics volumes, pandemic-related Medical demand and PPE pricing/inventory develop as management expects.
- GAAP-to-non-GAAP reconciliations and the impact of unusual legal, tax, divestiture and restructuring items on reported earnings and cash flows.