Business context and reporting period
Cardinal Health, Inc. is a healthcare services and products company operating through Pharmaceutical and Medical segments. The filing is a Form 10-Q for the quarter and nine months ended March 31, 2019 (fiscal 2019 Q3); this differs from the “2018 Q3” period in the request metadata.
Financial performance and liquidity
| Metric | Quarter ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $35.2B, up 5% | $108.2B, up 7% |
| GAAP operating earnings | $432M, down 21% | $1.752B, up 45% |
| Non-GAAP operating earnings | $667M, down 15% | $1.845B, down 13% |
| Net earnings attributable to Cardinal Health | $296M vs. $255M | $1.169B vs. $1.422B |
| GAAP diluted EPS | $0.99 vs. $0.81 | $3.88 vs. $4.50 |
| Non-GAAP diluted EPS | $1.59 vs. $1.39 | $4.17 vs. $3.99 |
Gross margin was $1.764B for the quarter, down 8%, and $5.160B for nine months, down 5%. Gross margin rate declined 68 and 60 basis points, respectively. Pharmaceutical revenue rose 6% for the quarter and 7% for nine months; Medical revenue fell 1% for the quarter and was approximately flat for nine months. Pharmaceutical segment profit fell 10% and 12%, respectively; Medical segment profit fell 22% and 13%.
For nine months, operating cash flow was $2.216B, compared with $2.214B a year earlier. Capital expenditures were $192M. Cash and equivalents were $3.438B at March 31, 2019, versus $1.763B at June 30, 2018. Total obligations, including current amounts and short-term borrowings, were $9.1B. No amounts were outstanding under the $2.0B commercial paper/revolving credit facilities or $1.0B receivables facility at quarter-end; the company was in compliance with its leverage covenant. Current liabilities exceeded current assets; the filing does not provide a separate management conclusion on that comparison.
Material changes versus prior comparable periods
- Revenue growth was led by pharmaceutical distribution and specialty pharmaceutical customers; the China distribution divestiture partly offset growth.
- Lower generic-program contribution and adverse pharmaceutical customer contract renewals pressured Pharmaceutical results. Medical profit was affected by Cardinal Health Brand product performance.
- Nine-month GAAP operating earnings included a $508M pre-tax gain on the naviHealth divestiture, which contributed to the increase despite lower segment profit. The sale generated $737M in cash proceeds and a 44% equity interest in a partnership owning naviHealth.
- Quarterly GAAP EPS benefited from a lower effective tax rate (20.0% versus 45.1%). Nine-month comparisons were affected by the prior-year $952M provisional net Tax Act transition benefit; prior-year nine-month effective tax rate was negative 48.6%.
Outlook, risks, contingencies and unusual items
The filing does not provide a clear full-year earnings or EPS guidance figure. Management said available cash, committed facilities and projected operating cash flow were adequate for anticipated needs. It expected June 30 cash to be lower, primarily because it planned to repay $1.0B of 1.948% notes maturing in June 2019; it also expected fourth-quarter operating cash flow to be lower than the March quarter, mainly due to working-capital timing and inventory purchases.
In May 2019, Cardinal Health announced renewal of its pharmaceutical distribution contracts with CVS Health for four years, through June 2023. Enterprise-wide cost-saving measures were underway; employee severance costs were $60M for nine months.
Key risks and contingencies include more than 2,000 opioid-related lawsuits and investigations; the company said outcomes and reasonably possible losses could not be estimated. It had accrued $359M, net of estimated insurance recoveries, for Cordis IVC filter litigation, with an estimated high end of the loss range of approximately $729M, net of insurance. A prior $34M accrual for the New York opioid assessment was reversed after a court enjoined the law; the state appealed and later amended the law, subject to that appeal. Cardinal Health also disclosed risk of further Medical-segment goodwill impairment following a $1.4B impairment in fiscal 2018 if assumptions or business performance deteriorate.
Other notable items include $94M of nine-month antitrust litigation recoveries, partly offset by IVC filter costs; a $130M estimated fiscal 2019 tax expense related to the naviHealth transaction; and $795M of cash held outside the United States. Non-GAAP measures exclude specified items, including restructuring, acquisition costs, litigation, asset gains or impairments and transitional tax effects, and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether generic-program economics, customer renewals and Medical branded-product performance improve, and how these affect segment profit and margins.
- Cash generation and working-capital trends after the disclosed inventory timing effects, as well as repayment of the $1.0B June 2019 notes.
- Developments and potential financial exposure from opioid litigation and investigations, IVC filter claims, and the New York opioid assessment appeal.
- Medical goodwill impairment assumptions and any changes in reporting-unit performance or valuation.
- The reconciliation of GAAP to non-GAAP results, particularly the naviHealth gain and tax effects driving period comparisons.