Cardinal Health, Inc. — Fiscal 2021 Form 10-K
Reporting period: Fiscal year ended June 30, 2021. Although the request metadata says “2020 Q4,” the supplied filing is the FY2021 annual report. Cardinal Health distributes pharmaceuticals and manufactures, sources and distributes medical products through its Pharmaceutical and Medical segments.
Financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $162.5 billion | $152.9 billion |
| Gross margin | $6.78 billion | $6.87 billion |
| GAAP operating earnings/(loss) | $472 million | $(4.10) billion |
| Non-GAAP operating earnings | $2.26 billion | $2.38 billion |
| Net earnings/(loss) attributable to Cardinal Health | $611 million | $(3.70) billion |
| GAAP diluted EPS | $2.08 | $(12.61) |
| Non-GAAP diluted EPS | $5.57 | $5.45 |
| Operating cash flow | $2.43 billion | $1.96 billion |
| Cash and equivalents at year-end | $3.41 billion | $2.77 billion |
| Long-term obligations and short-term borrowings | $6.24 billion | $6.78 billion |
Revenue rose 6%, led by pharmaceutical distribution and specialty solutions. Gross margin declined 1%, and management said the gross margin rate also fell, reflecting product mix and a $197 million reserve for certain personal protective equipment (PPE). GAAP results were heavily affected by opioid litigation charges: $1.17 billion in FY2021 versus $5.63 billion in FY2020. FY2021 also included a $424 million tax benefit from a net operating loss carryback; the company filed for a $974 million federal tax refund and expected receipt within 12 months.
Pharmaceutical segment revenue was $145.8 billion, up 6%, while segment profit fell 4% to $1.68 billion, primarily due to lower generics-program volumes. Medical segment revenue was $16.7 billion, up 8%, while segment profit fell 13% to $577 million, primarily reflecting PPE inventory reserve impacts, partly offset by laboratory volumes and cost savings.
Cash, debt and liquidity
- Operating cash flow of $2.43 billion was offset in part by $573 million of dividends, $570 million of debt repayments, $400 million of capital expenditures and $200 million of share repurchases.
- Year-end cash was $3.41 billion. No amounts were outstanding under the $2.0 billion revolving credit facility, commercial paper program or $1.0 billion receivables sales facility; the company was in compliance with its leverage covenant.
- The balance sheet reported $871 million of current debt and short-term borrowings and $5.37 billion of long-term obligations, excluding the current portion. Total contractual obligations were $10.88 billion and did not include opioid settlement payments.
- Cardinal Health said available cash, committed facilities and projected operating cash flow were adequate for anticipated needs, including potential opioid settlement payments.
Material changes, outlook and notable items
- COVID-19: The company estimated the pandemic reduced FY2021 operating earnings by about $200 million more than in FY2020. Lower PPE prices and demand contributed to the $197 million inventory reserve. Management expected the pandemic’s operating-earnings impact to be less adverse in FY2022 than FY2021, but noted substantial uncertainty.
- Opioid matters: In July 2021, after fiscal year-end, Cardinal Health and two other distributors announced a proposed settlement process covering most governmental opioid lawsuits. Cardinal Health’s potential cash payment was up to approximately $6.37 billion, mostly over 18 years, subject to participation and other conditions. The company had accrued $6.73 billion at June 30, 2021, including matters beyond the proposed settlement. Private claims and certain other plaintiffs were not covered; the company could not estimate additional reasonably possible losses.
- Cordis divestiture: The sale closed August 2, 2021 for $927 million net of cash transferred. The company retained specified working capital and IVC-filter product-liability exposure. It expected up to $100 million of additional divestiture-related costs, approximately $800 million less annual Medical revenue and an approximately $80 million annual reduction in Medical segment profit.
- Costs and investment: Higher transportation, labor and commodity costs were expected to pressure Medical segment profit in FY2022. Capital expenditures were expected to be $400 million to $450 million in FY2022. Multi-year systems projects were expected to increase expenses and depreciation in FY2022 and beyond.
- Other exposures: CVS represented 26% of FY2021 revenue; the five largest customers represented 50%. The Medical Unit’s estimated fair value exceeded carrying value by only about 3% in the annual goodwill test, making impairment assumptions sensitive to adverse changes.
Non-GAAP measures exclude items including litigation, restructuring, acquisition-related costs and impairments; they are supplemental and not substitutes for GAAP results. The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether the proposed opioid settlement meets participation and approval conditions, and the eventual payment amount, timing and scope; also track private lawsuits and government investigations.
- Whether PPE demand and selling prices stabilize or require further inventory reserves, and whether Medical segment profit recovers.
- Receipt and tax-authority treatment of the $974 million refund claim, including related tax assumptions and the $424 million tax benefit.
- Actual Cordis exit costs, retained IVC-filter liabilities, stranded costs and post-sale impact on Medical revenue and profit.
- Progress on cost savings and information-system projects, alongside the effects of supply-chain inflation and generic-drug volume and pricing.