Cardinal Health, Inc. — Fiscal 2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. Although the request metadata says “2017 Q4,” the filing covers fiscal 2018; the filing’s fourth-quarter results are noted separately below. Cardinal Health operates Pharmaceutical and Medical segments, distributing pharmaceuticals and manufacturing, sourcing and distributing medical products.
Financial results and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $136.809 billion | $129.976 billion | +5% |
| Gross margin | $7.181 billion; 5.25% of revenue | $6.544 billion; 5.03% | +10% |
| GAAP operating earnings | $126 million | $2.120 billion | −94% |
| Non-GAAP operating earnings | $2.585 billion | $2.769 billion | −7% |
| Net earnings attributable to Cardinal Health | $256 million | $1.288 billion | −80% |
| GAAP diluted EPS | $0.81 | $4.03 | −80% |
| Non-GAAP diluted EPS | $5.00 | $5.40 | −7% |
| Net cash from operating activities | $2.768 billion | $1.184 billion | Increased $1.6 billion |
| Cash and equivalents at year-end | $1.763 billion | $6.879 billion | Decreased $5.116 billion |
| Long-term obligations, including current portion | $9.013 billion | $10.395 billion | Decreased $1.382 billion |
Gross margin percentage and margin comparisons are calculated from reported figures. FY2018 GAAP results included a $1.372 billion non-cash Medical segment goodwill impairment, $707 million in amortization and other acquisition-related costs, $176 million in restructuring costs, and $159 million in net litigation charges. The company reported a $487 million income tax benefit, including a provisional net Tax Act benefit; the impairment itself generated no tax benefit. FY2018 operating cash flow was affected by working-capital timing, including customer and vendor payments related in part to a new finance and operating information system.
Segment revenue was $121.241 billion in Pharmaceutical (+4%) and $15.581 billion in Medical (+15%). Segment profit was $1.992 billion in Pharmaceutical (−9%) and $662 million in Medical (+16%). The Pharmaceutical segment’s profit decline reflected generic-program performance and customer contract renewals; Medical profit growth was mainly acquisition-related.
At June 30, 2018, current assets were $24.553 billion and current liabilities were $22.893 billion. The company reported a $2.0 billion commercial-paper program backed by a $2.0 billion revolving facility and a $1.0 billion committed receivables facility; neither facility had amounts outstanding at year-end. It was in compliance with its leverage covenant. The filing states management believed available capital resources and projected operating cash flow were adequate for anticipated needs.
Material changes and unusual items
- Cardinal Health acquired Medtronic’s Patient Recovery Business in July 2017 for $6.1 billion cash. The acquisition added $1.9 billion of Medical segment revenue in FY2018 and increased acquisition-related amortization and expenses.
- The company sold its China distribution business in February 2018 for $861 million net proceeds, recorded a $41 million pretax loss and accrued $59 million of related tax expense.
- In August 2018, after year-end, Cardinal Health completed the sale of its 98% naviHealth interest for $736 million net proceeds and a 44% interest in a partnership that owns naviHealth. It expected to record a pretax gain exceeding $500 million in FY2019 Q1.
- The $1.372 billion goodwill impairment followed inventory and cost challenges at Cordis. Cordis performance also reflected increased operating costs; excess and obsolete inventory reserves increased to $147 million from $76 million.
- FY2018 Q4 reported a net loss attributable to Cardinal Health of $1.166 billion, or diluted loss per share of $3.76, chiefly reflecting the Medical goodwill impairment.
Outlook, risks and contingencies
- Management expected FY2019 Pharmaceutical segment profit to be below FY2018, citing customer contract renewals, generic-program performance and the previously announced loss of a large distribution customer. Pricing changes and their profit effects were described as uncertain.
- Management expected the Patient Recovery acquisition to contribute further Medical segment profit in FY2019, while increasing amortization and acquisition-related costs. It expected Cordis performance to stabilize and said enterprise-wide cost-saving measures implemented early in FY2019 should reduce future operating expenses.
- Expected FY2019 capital expenditures were $360 million to $390 million. The annualized dividend was raised to $1.91 per share. In August 2018, the company also initiated a $600 million accelerated share repurchase.
- Opioid-related litigation and investigations remained significant: the company faced more than 1,000 lawsuits and investigations from multiple states, but said the matters were at an early stage and it could not estimate reasonably possible losses. New York’s opioid assessment could also create a liability whose amount the company could not yet estimate.
- For Cordis IVC-filter product-liability cases, Cardinal Health had accrued $259 million net of expected insurance recoveries and could not estimate reasonably possible losses above that amount.
- Customer concentration is material: CVS accounted for 25% of FY2018 revenue and 22% of gross trade receivables; its pharmaceutical distribution agreements extended through June 2019. The five largest customers represented 47% of revenue.
- Other disclosed risks include pricing and competitive pressure, regulation and product quality, cybersecurity and operational disruption, supplier and commodity exposure, tax uncertainty and potential further goodwill impairment. The Tax Act accounting remained provisional, with possible adjustments in the first half of FY2019.
Important facts for investors to verify
- Progress and economics of the CVS contract renewal, the lost distribution customer and the forecast decline in Pharmaceutical segment profit.
- Whether Cordis stabilizes and the Patient Recovery acquisition delivers expected profit, synergies and integration benefits without further impairments.
- Developments in opioid litigation, the New York assessment and IVC-filter claims, including any change to accruals or reasonably possible exposure.
- Final Tax Act accounting, tax-carryforward valuation allowances and the timing and amount of any future tax payments.
- Working-capital cash-flow sustainability, debt maturities and leverage-covenant headroom, alongside the effects of the naviHealth transaction and $600 million share repurchase.