Cardinal Health, Inc. — Q3 Fiscal 2024 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended March 31, 2024; comparisons are with the prior-year periods. The company reorganized its reporting structure effective January 1, 2024, into Pharmaceutical and Specialty Solutions (PSS), Global Medical Products and Distribution (GMPD), and Other; prior segment results were recast.
Financial performance
| Metric | Three months ended March 31, 2024 | Nine months ended March 31, 2024 |
|---|---|---|
| Revenue | $54.9 billion, up 9% | $167.1 billion, up 10% |
| Gross margin | $1.947 billion, up 9% | $5.561 billion, up 10% |
| GAAP operating earnings | $367 million, down 36% | $835 million, up 42% |
| Non-GAAP operating earnings | $666 million, up 10% | $1.799 billion, up 20% |
| GAAP diluted EPS | $1.05, down 22% | $2.49, versus $1.23 |
| Non-GAAP diluted EPS | $2.08, up 20% | $5.62, up 33% |
| Net cash provided by operating activities | Not provided for the quarter | $1.685 billion, versus $1.981 billion |
Quarterly GAAP earnings reflected a $90 million non-cash GMPD goodwill impairment and net litigation expense of $81 million. The litigation line included $193 million of opioid-related expense, partly offset by a $105 million benefit from discounted prepayments. Nine-month GAAP operating earnings included $671 million of goodwill impairment; the prior-year period included $863 million. Gross margin rates were relatively flat as product mix effects were largely offset by a favorable comparison with prior-year GMPD inflation.
- Segment profit, quarter: PSS $580 million, up 4%; GMPD $20 million, versus a $46 million loss; Other $111 million, up 5%. Total segment profit rose 15% to $711 million. Corporate expense was $344 million, versus $48 million.
- Segment profit, nine months: PSS $1.541 billion, up 11%; GMPD $18 million, versus a $175 million loss; Other $319 million, up 5%. Total segment profit rose 23% to $1.878 billion.
- Revenue growth was led by branded and specialty pharmaceutical sales to existing customers. PSS profit benefited from its generics program and, for the nine-month period, branded and specialty products and COVID-19 vaccine distribution. GMPD’s year-over-year profit comparison improved as inflationary pressures eased.
Cash, debt and liquidity
Cash and equivalents were $3.718 billion at March 31, 2024, compared with $4.043 billion at June 30, 2023. Nine-month operating cash flow included a $378 million annual opioid-settlement payment and $239 million of discounted settlement prepayments. Cash uses included $1.192 billion for the Specialty Networks acquisition, $750 million for share repurchases, $377 million in dividends and $318 million in capital expenditures. Operating cash flow was lower than the prior-year period, while inventory increased $1.371 billion.
Total long-term obligations and other short-term borrowings were $5.854 billion, versus $4.701 billion at June 30, 2023. In February 2024, the company issued $1.15 billion of notes: $650 million at 5.125% due 2029 and $500 million at 5.45% due 2034. At quarter-end, it had no borrowings under its $2.0 billion commercial paper program/revolving credit facility or $1.0 billion receivables facility, and was compliant with the facilities’ net leverage covenant. Management stated it believes available capital and projected operating cash flow are adequate for expected needs.
Material changes, outlook and risks
- OptumRx contract nonrenewal: Announced April 22, 2024, after quarter-end. Pharmaceutical distribution contracts expire at the end of June 2024 and will not be renewed. OptumRx generated 16% of consolidated revenue in fiscal 2023; its sales carry meaningfully lower-than-average PSS operating margins. Management expects adverse effects on results, financial condition and cash flows, including lower-than-average operating cash flow in fiscal 2025 as associated negative working capital unwinds.
- Specialty Networks: Acquired March 18, 2024 for $1.2 billion in cash, subject to adjustments. Management expects it to increase PSS revenue and profit, while increasing acquisition-related amortization and costs in the remainder of fiscal 2024 and fiscal 2025. Purchase-price allocation remained preliminary.
- Operating trends: Management expects GMPD inflationary impacts to continue through the rest of fiscal 2024, but at a significantly lower level than in fiscal 2023. It expects growth in Cardinal Health-branded medical products to continue, while noting uncertainty in timing and profit impact. The timing and profitability of COVID-19 vaccine distribution and the generics program are also uncertain. The filing provides no quantified full-year earnings guidance in the supplied text.
- Opioid matters: Accrued liabilities were $5.3 billion at March 31, 2024; the majority of remaining payments are expected through 2038. The company said it cannot estimate a range of reasonably possible additional losses. A Baltimore subdivision trial was scheduled for September 2024; a trial involving hospital plaintiffs in Alabama was scheduled for July 2024. Other private-party claims and government investigations remain ongoing.
- Other notable items: The company recorded a $90 million GMPD goodwill impairment in the quarter, following a $581 million impairment in Q1; cumulative fiscal-year impairment through March was $671 million. Restructuring and severance costs rose to $106 million for nine months, primarily related to cost savings and manufacturing rationalization. The fiscal-year tax benefit related to goodwill impairment is expected to include a $36 million interim benefit that reverses in Q4.
- Key risks include healthcare reimbursement and regulatory changes, pharmaceutical pricing and drug shortages, customer and supplier concentration or contract changes, litigation and opioid liabilities, inflation and supply-chain pressures, and uncertainty in the company’s mitigation actions. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Expected financial and working-capital effects of the OptumRx contract expiration, particularly fiscal 2025 cash flow and the ability to replace lost business.
- Underlying segment profitability and cash conversion, distinguishing GAAP results from non-GAAP results and one-time adjustments.
- Opioid settlement accrual adequacy, payment schedule, remaining litigation exposure and status of scheduled trials and investigations.
- GMPD goodwill valuation assumptions and whether further impairment indicators emerge.
- Specialty Networks integration, final purchase-price allocation, and realized revenue and profit contribution relative to added amortization.
- Debt maturities, financing costs, working-capital requirements and compliance with the 3.75-to-1 net leverage covenant.