Cardinal Health, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended March 31, 2020 (fiscal Q3 2020); filed May 11, 2020. The request metadata says “2019 Q3,” but the filing covers fiscal 2020 Q3. Cardinal Health operates Pharmaceutical and Medical segments, providing pharmaceutical distribution, medical products and healthcare supply-chain services.
Financial performance
| Metric | Three months ended March 31, 2020 | Nine months ended March 31, 2020 |
|---|---|---|
| Revenue | $39.16 billion, up 11% | $116.23 billion, up 7% |
| GAAP operating earnings/(loss) | $562 million, up 30% | $(4.37) billion, versus $1.75 billion earnings |
| GAAP net earnings/(loss) attributable to Cardinal Health | $350 million, versus $296 million | $(4.35) billion, versus $1.17 billion earnings |
| GAAP diluted EPS | $1.19, up 20% | $(14.84), versus $3.88 |
| Non-GAAP operating earnings | $719 million, up 8% | $1.94 billion, up 5% |
| Non-GAAP diluted EPS | $1.62, up 2% | $4.41, up 6% |
Gross margin was $1.89 billion for the quarter and $5.28 billion year to date; gross margin rate declined 20 and 23 basis points, respectively, largely due to pharmaceutical product mix and customer contract renewals. Quarterly Pharmaceutical segment profit was essentially flat at $534 million; Medical segment profit rose 15% to $178 million.
Operating cash flow was $1.72 billion for the nine months, down from $2.22 billion. Cash and equivalents were $2.33 billion at March 31, versus $2.53 billion at June 30, 2019. Total long-term obligations and other short-term borrowings were $7.26 billion, down from $8.03 billion. Current assets were $25.85 billion and current liabilities $24.67 billion. No amounts were outstanding under the commercial paper, revolving credit or receivables facilities at period-end; the company reported covenant compliance.
Material changes and unusual items
- A $5.63 billion pre-tax opioid-litigation charge ($5.14 billion after tax) drove the year-to-date GAAP loss and included the estimated cash settlement component. Fiscal 2019 year-to-date results included a $508 million pre-tax gain on the naviHealth divestiture.
- Cardinal Health recorded a $95 million charge for surgical gown and procedure-pack recalls: $55 million in cost of products sold and $40 million in SG&A.
- Quarterly revenue increased in both segments: Pharmaceutical revenue rose 12% to $35.11 billion and Medical revenue rose 5% to $4.05 billion. The company attributed Pharmaceutical growth partly to temporary accelerated customer purchasing in March.
- Year-to-date cash uses included $888 million for long-term debt repayments, $428 million for dividends and $350 million for share repurchases. The quarterly dividend was $0.4811 per share.
Outlook, risks and contingencies
- Management said COVID-19 impacts were evolving and could not be predicted. Following temporary March purchasing increases, sales volume was below average after March. Elective-procedure cancellations and customer curtailments reduced some sales; PPE demand, supply shortages, export restrictions, higher sourcing costs and operating disruptions posed risks. Management did not expect a material change to liquidity or ability to meet financial commitments at that time.
- The opioid settlement framework remained subject to definitive terms and participation contingencies. It contemplated up to $5.56 billion in cash over 18 years, a 10-year treatment-medication program and industry anti-diversion changes. The company stated the ultimate loss could differ materially from the accrual and that costs for non-cash components were not reasonably estimable.
- At March 31, the company had accrued $466 million, net of estimated insurance recoveries, for Cordis IVC filter claims; the estimated high end was approximately $900 million.
- Interim goodwill testing estimated the Medical Unit’s fair value at about 10% above its $10.1 billion carrying value. The filing noted that a 1 percentage-point increase in the discount rate would have put carrying value about 1% above fair value.
- Management reported adequate capital resources, including committed facilities and projected operating cash flow, to fund expected needs and potential opioid settlement payments. No specific earnings guidance was provided in the supplied filing text.
Key facts for investors to verify
- Progress and final terms of the opioid settlement framework, including its total cost, timing, contingencies and tax treatment.
- COVID-19 effects on sales, elective procedures, PPE availability and costs, suppliers, customers and operating capacity.
- Recall-related costs, possible regulatory actions or claims, and any effects on Medical segment performance and goodwill assumptions.
- Cash conversion, working-capital movements, debt maturities and ongoing covenant compliance.
- Non-GAAP comparisons alongside GAAP results, especially the exclusions for opioid litigation, recalls and the prior-year naviHealth gain.