Business context and reporting period
Cardinal Health, Inc. is a healthcare services and products company with Pharmaceutical and Medical segments. This 10-Q covers the quarter ended March 31, 2022 (fiscal Q3 2022), filed May 5, 2022. The request metadata says “2021 Q3,” which does not match the filing period.
Financial results and liquidity
Amounts below are in U.S. dollars. Comparisons are with the prior-year period.
| Metric | Three months ended March 31, 2022 | Nine months ended March 31, 2022 |
|---|---|---|
| Revenue | $44.8 billion, up 14% | $134.3 billion, up 12% |
| Gross margin | $1.68 billion, down 7%; gross margin rate down 86 basis points | $4.94 billion, down 7%; gross margin rate down 74 basis points |
| GAAP operating earnings/(loss) | $(97) million, versus $473 million earnings | $(632) million, versus $310 million earnings |
| Non-GAAP operating earnings | $545 million, down 21% | $1.54 billion, down 20% |
| GAAP diluted EPS | $(5.05), versus $0.40 | $(3.82), versus $1.68 |
| Non-GAAP diluted EPS | $1.45, down 5% | $4.01, down 16% |
| Operating cash flow | Not separately stated for the quarter | $130 million, versus $1.76 billion |
GAAP losses included Medical-segment goodwill impairments of $474 million in Q3 and $1.8 billion year to date. The company reported a $1.253 billion income-tax provision for the quarter despite a pretax loss; the impairment-related tax treatment materially affected the rate. The filing estimates that approximately $180 million of impairment-related tax expense will reverse in Q4 FY2022.
Pharmaceutical revenue increased 17% for the quarter and 14% year to date, primarily on branded drug distribution and specialty pharmaceutical sales. Medical revenue declined 7% and 3%, respectively. Pharmaceutical segment profit declined 5% for the quarter and 1% year to date; Medical segment profit declined 66% and 64%.
At March 31, 2022, cash and equivalents were $2.36 billion, down from $3.41 billion at June 30, 2021. Total long-term obligations, including current obligations and other short-term borrowings, were $5.6 billion, down from $6.2 billion. No amounts were outstanding under the $2.0 billion commercial paper/revolving credit program or $1.0 billion receivables facility; the company was compliant with its leverage covenant. Current assets were $30.9 billion and current liabilities $28.7 billion. Shareholders’ equity was a deficit of $693 million.
Year-to-date cash uses included $1.0 billion for share repurchases, $597 million for debt repayment and $425 million for dividends. Capital expenditures were $223 million. Cordis divestiture proceeds were $923 million, net of cash transferred. The filing states that available capital resources and projected operating cash flow are expected to support anticipated needs, including settlement payments.
Material changes, outlook and risks
- Medical-segment profitability was pressured by inflation, especially freight, commodities and labor, and by supply-chain constraints. Management expects these pressures to continue to weigh on Medical profit; price increases, contracting changes and added supply-chain capacity are mitigation efforts, but may not fully offset costs.
- PPE demand and pricing changes adversely affected Medical results, with management expecting further pressure from lower volumes. Cordis’s sale also reduced Medical revenue and profit; management estimated a FY2022 reduction of about $700 million in Medical revenue and $70 million in Medical profit.
- The company recorded $1.8 billion of year-to-date non-cash goodwill impairment in Medical. Further impairment is possible if key estimates or operating conditions worsen. The filing gives an illustrative sensitivity: a 0.5 percentage-point higher discount rate or 1.5 percentage-point lower terminal growth rate would reduce estimated fair value by about $400 million.
- The opioid settlement became effective April 2, 2022. Cardinal Health expects to pay up to approximately $6.0 billion, mostly over 18 years; the final amount depends on participation and other factors. The company had accrued $6.70 billion at March 31, 2022 and paid $348 million during the nine months for related matters. Separate claims and investigations remain, and the ultimate loss may differ materially from the accrual.
- Other exposures include Cordis IVC filter litigation: $494 million accrued, net of estimated insurance recoveries, with an estimated high end of approximately $1.05 billion. The filing also describes private opioid suits, government investigations and other litigation. It says the SEC concluded its investigation without intending to recommend an enforcement action.
- The company received a $966 million tax refund in April 2022, net of adjustments, related to a prior-year tax-loss carryback. It also agreed in principle to a $124 million recovery from directors’ and officers’ insurers in a shareholder derivative settlement, subject to documentation, court approval and process.
- Disclosure controls were deemed effective. A multi-year Pharmaceutical IT-system transition affected internal controls during the quarter; continued transitions could adversely affect financial reporting controls.
Important facts for investors to verify
- Confirm the intended period: the source is Q3 FY2022, not Q3 2021.
- Track Medical-segment margins, inflation and supply-chain costs, PPE demand, and whether pricing and capacity actions deliver the expected mitigation.
- Review the assumptions behind Medical goodwill valuation and the risk of additional impairment.
- Monitor opioid-settlement participation, payment timing, remaining litigation and investigations, and whether the $6.70 billion accrual remains adequate.
- Assess cash conversion and working-capital movements, particularly receivables, inventory and payables, alongside planned dividends, buybacks and debt service.
- Consider GAAP results alongside non-GAAP measures and their exclusions, especially the impairment and litigation adjustments and unusual tax effects.