Cardinal Health, Inc. — Q1 Fiscal 2023 Form 10-Q
Reporting period: Three months ended September 30, 2022; comparisons are with the three months ended September 30, 2021 unless otherwise noted. Cardinal Health operates Pharmaceutical and Medical segments.
Financial performance
| Metric | Q1 FY23 | Prior year | Change |
|---|---|---|---|
| Revenue | $49.603 billion | $43.968 billion | +13% |
| Gross margin | $1.614 billion | $1.642 billion | -2%; rate declined 48 basis points |
| GAAP operating earnings | $137 million | $415 million | -67% |
| Non-GAAP operating earnings | $423 million | $527 million | -20% |
| Net earnings attributable to Cardinal Health | $110 million | $271 million | -59% |
| GAAP diluted EPS | $0.40 | $0.94 | -57% |
| Non-GAAP diluted EPS | $1.20 | $1.29 | -7% |
| Operating cash flow | $23 million | $(646) million | Improved |
Pharmaceutical revenue rose 15% to $45.828 billion, while Medical revenue fell 9% to $3.778 billion. Pharmaceutical segment profit increased 6% to $431 million; Medical recorded an $8 million segment loss versus $123 million profit a year earlier. The $154 million non-cash Medical goodwill impairment was a major factor in lower GAAP results. The quarter’s tax benefit included an approximately $22 million interim benefit that the company expects to reverse later in FY23.
Liquidity, cash flow and debt
- Cash and equivalents were $3.492 billion at September 30, down from $4.717 billion at June 30, 2022.
- Operating cash flow was $23 million, including the $372 million annual opioid-settlement payment. Investing cash flow was $(70) million and financing cash flow was $(1.163) billion; the latter included $1.0 billion of share repurchases and $142 million of dividends paid.
- Total long-term obligations, including current maturities and other short-term borrowings, were $5.267 billion, approximately unchanged from June 30. No amounts were outstanding under the $2.0 billion commercial-paper/revolving-credit facilities or the $1.0 billion receivables facility. The company reported compliance with its 3.75-to-1 leverage covenant.
- Management stated that available capital resources and projected operating cash flow were adequate for anticipated needs, obligations, dividends, repurchases and opioid-settlement payments.
Material changes, outlook and risks
- Revenue growth was led by branded pharmaceutical distribution and specialty customers. Pharmaceutical profit benefited from generics and branded/specialty products, partly offset by transportation and labor inflation.
- Medical results were pressured by inflation in transportation, commodities and labor, as well as lower PPE pricing and volumes. PPE-related inventory charges included $18 million tied to the company’s simplification strategy. Management expects inflation to continue weighing on both segments in FY23 and Medical beyond FY23; price increases and contract changes are intended to mitigate the impact, but may not fully offset it.
- The Medical goodwill impairment followed interim testing prompted by adverse results, PPE uncertainty, inflation and higher risk-free interest rates. Management warned that further adverse assumption or market changes could cause additional impairment; a hypothetical 0.5-point increase in the discount rate or 1.75-point decrease in terminal growth would reduce estimated fair value by about $300 million.
- In September, Cardinal Health entered a cooperation agreement with Elliott, added four independent directors and formed a Board advisory Business Review Committee to review strategy, portfolio, capital allocation and operations. The company expects additional related costs; resulting actions could affect results, and the arrangement may create operational or strategic uncertainty.
- The company had accrued $6.03 billion for opioid matters at September 30, with most payments expected over 18 years. It also accrued $527 million for retained IVC-filter product liability matters; the estimated high end of the loss range was approximately $1.07 billion, net of estimated insurance recoveries. The company could not estimate reasonably possible additional losses for opioid matters.
- Other developments include an expected fiscal 2023 insurance payment of $124 million, less about $31 million in attorneys’ fees, from the approved derivative-litigation settlement; and $66 million of antitrust litigation proceeds received in October, expected to be recognized in the following quarter. No specific numerical earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Whether Pharmaceutical growth and generics performance can offset Medical inflation, PPE pricing and volume pressure.
- Progress on Medical pricing and cost actions, and whether updated assumptions could trigger further goodwill impairment.
- Cash generation and liquidity after share repurchases, dividends and scheduled opioid payments.
- Developments in opioid litigation, IVC-filter claims, insurance recoveries and related tax positions.
- Recommendations and costs arising from the Elliott-led business review, and any resulting changes to strategy or capital allocation.
- That non-GAAP results exclude specified items and should be considered alongside GAAP results.