Cardinal Health, Inc. — Q1 Fiscal 2024 Form 10-Q
Reporting period: Three months ended September 30, 2023; comparisons are with the same period of fiscal 2023. Cardinal Health operates Pharmaceutical and Medical segments.
Financial performance
| Metric | Q1 FY24 | Q1 FY23 | Change |
|---|---|---|---|
| Revenue | $54.763 billion | $49.603 billion | Up 10% |
| Gross margin | $1.768 billion | $1.614 billion | Up 10%; margin rate relatively flat |
| GAAP operating earnings/(loss) | ($14) million | $137 million | Declined |
| Non-GAAP operating earnings | $571 million | $423 million | Up 35% |
| Net earnings attributable to Cardinal Health | $5 million | $110 million | Declined |
| GAAP diluted EPS | $0.02 | $0.40 | Declined |
| Non-GAAP diluted EPS | $1.73 | $1.20 | Up 44% |
| Net cash provided by operating activities | $545 million | $23 million | Improved |
Revenue growth reflected branded and specialty pharmaceutical sales, up $5.2 billion, largely from existing customers. Pharmaceutical segment profit rose 18% to $507 million; Medical segment profit was $71 million versus an $8 million loss. Corporate costs increased to $592 million from $286 million, contributing to the GAAP operating loss despite higher segment profit. SG&A was flat at $1.197 billion. Interest expense, net, fell to $14 million from $25 million.
The GAAP result included a $581 million non-cash Medical Unit goodwill impairment, compared with $154 million in the prior-year quarter. Other notable items included a $53 million gain on the Outcomes business divestiture and $41 million of net litigation recoveries. The effective tax rate was 122.5%, affected by the impairment and other discrete items; a roughly $99 million interim tax benefit is expected to reverse during the remainder of FY24. Non-GAAP results exclude specified items and should be considered alongside GAAP results.
Cash, debt and liquidity
Cash and equivalents were $3.854 billion at September 30, 2023, down from $4.043 billion at June 30, 2023. Operating cash flow included the $378 million annual National Opioid Settlement payment. Cash uses included $500 million for share repurchases, $131 million for dividends and $92 million for capital expenditures. Inventories increased $1.057 billion while accounts payable increased $1.727 billion during the quarter.
Total long-term obligations, including current obligations and other short-term borrowings, were $4.7 billion. No amounts were outstanding under the $2.0 billion commercial paper program, its $2.0 billion revolving credit facility, or the $1.0 billion receivables sales facility. The company reported compliance with the facilities’ maximum 3.75-to-1 consolidated net leverage covenant and said available resources and projected operating cash flow were adequate for expected needs. Total shareholders’ deficit was $3.490 billion.
Outlook, risks and contingencies
- Management expects seasonal benefits from COVID-19 vaccine distribution to continue into Q2 FY24, but said the timing, magnitude and profit impact remain uncertain.
- The generics program supported Pharmaceutical segment profit; volumes, pricing, contract renewals and sourcing costs could affect results for the rest of FY24.
- Medical inflationary impacts were less significant and favorable year over year in the quarter. Management expects them to remain less significant than in FY23, while noting costs and mitigation outcomes remain uncertain. The company expects Cardinal Health branded medical products sales growth in FY24 and beyond.
- The Medical Unit impairment followed a higher discount rate, primarily reflecting increased risk-free rates. Further adverse changes in assumptions or economic and industry trends could cause additional impairment; management disclosed sensitivity to changes in discount rates, terminal growth and gross margins.
- Opioid-related matters had a $5.45 billion accrued liability at quarter-end; the majority of expected payments extend through 2038. The company said ultimate losses may differ materially and it cannot estimate a range of reasonably possible additional losses. A trial involving the Alabama Attorney General was scheduled for February 2024; private opioid claims and federal investigations also remained outstanding.
- An IVC filter settlement covering 4,375 claims for $275 million was funded into a qualified settlement fund, subject to conditions; other claims remain. The company also reported approximately $304 million accrued for IVC filter claims and defense costs.
- The filing provides no consolidated earnings or EPS guidance. Forward-looking statements are subject to risks described in the filing and the FY23 Form 10-K.
Most important facts for investors to verify
- Whether Pharmaceutical growth, vaccine distribution and generics performance continue to support segment profit.
- Whether Medical results and assumptions underlying the $581 million impairment stabilize, or trigger further impairment.
- Future operating cash flow, working-capital movements and capacity to fund settlement obligations, dividends and repurchases.
- Developments in opioid litigation and investigations, including settlement adequacy and the timing and amount of future payments.
- The effects of the unusual tax rate and reversal of the interim tax benefit on subsequent quarterly results.