Cardinal Health, Inc. — Q1 Fiscal 2022 Form 10-Q
Reporting period: Three months ended September 30, 2021. Cardinal Health is a healthcare services and products company with Pharmaceutical and Medical segments. Comparisons below are with the three months ended September 30, 2020, unless otherwise noted.
Financial results
| Metric | Q1 FY2022 | Prior year | Change / context |
|---|---|---|---|
| Revenue | $43.968 billion | $39.065 billion | Up 13% |
| Gross margin | $1.642 billion | $1.715 billion | Down 4%; margin rate fell 66 basis points |
| Operating earnings/(loss), GAAP | $415 million | $(624) million | Prior period included a $1.02 billion opioid litigation charge |
| Operating earnings, non-GAAP | $527 million | $618 million | Down 15% |
| Net earnings/(loss) attributable to Cardinal Health | $271 million | $(253) million | Prior period included the opioid charge |
| Diluted EPS, GAAP / non-GAAP | $0.94 / $1.29 | $(0.86) / $1.51 | Non-GAAP diluted EPS down 15% |
| Operating cash flow | $(646) million | $270 million | Use driven primarily by working capital and opioid settlement escrow payment |
| Cash and equivalents | $2.463 billion | $3.407 billion at June 30, 2021 | Quarter-end balance |
| Total long-term obligations and other short-term borrowings | $5.7 billion | $6.2 billion at June 30, 2021 | Includes current portion |
Pharmaceutical revenue rose 13% to $39.822 billion and segment profit increased 1% to $406 million. Medical revenue rose 5% to $4.149 billion, while segment profit fell 46% to $123 million. The effective tax rate was 26.3%, versus 61.8% a year earlier. Cash flow from investing was $862 million, including $927 million of net Cordis sale proceeds; financing cash use was $1.264 billion, including $587 million of debt repayment and $500 million of share repurchases.
Material changes and drivers
- Revenue growth was primarily driven by pharmaceutical distribution and specialty customers, especially branded pharmaceutical sales to large customers. Branded mix diluted the consolidated gross margin rate.
- Medical segment profit was pressured by higher commodity, transportation and labor costs, the prior-year favorable COVID-19 comparison, and Cordis’s divestiture.
- Cardinal Health sold Cordis in August 2021 for $927 million net of cash transferred. The company expects the divestiture to reduce FY2022 Medical revenue by about $700 million and Medical segment profit by about $70 million.
- The company redeemed $572 million of notes due June 2022 using available cash and recorded a $10 million early-extinguishment loss. No amounts were outstanding under its $2.0 billion commercial paper program/revolving facility or $1.0 billion receivables facility; it reported compliance with the 3.75-to-1 leverage covenant.
Outlook, risks and contingencies
- Management expects higher supply chain costs to continue to adversely affect Medical segment profit for the remainder of FY2022. Cost savings and price increases are expected to partly offset the pressure; the impact could be greater if costs persist or mitigation is insufficient. Increased Pharmaceutical transportation and labor costs were not expected to have a meaningful FY2022 segment-profit impact.
- Management anticipated the pandemic’s negative impact on consolidated operating earnings would be less in FY2022 than in the prior year, but said the duration and economic effects remain uncertain. It expected surgical-product demand to improve; lower elective-procedure demand remained a modest Medical headwind.
- The proposed opioid settlement remains contingent on sufficient participation and other conditions. Cardinal Health’s cash component could be up to approximately $6.37 billion, mostly over 18 years, with additional monitoring and compliance obligations. The company had accrued $6.68 billion for opioid matters at quarter-end and placed the majority of its first annual proposed-settlement payment into escrow; the payment would be returned if the agreement does not become effective. Management said ultimate losses may differ materially and it could not estimate a range of additional reasonably possible losses.
- Separate legal exposures include Cordis IVC-filter product liability claims: $547 million accrued net of estimated insurance recoveries, with an estimated high end of approximately $1.07 billion. The company also disclosed ongoing opioid-related trials and investigations, private opioid lawsuits not covered by the proposed settlement, an SEC inquiry concerning Cordis inventory and Medical goodwill, and other litigation and regulatory matters.
- Other risks include supply interruptions and commodity-cost volatility, possible employee attrition related to COVID-19 vaccination requirements, and potential Medical goodwill impairment if assumptions worsen. Management assessed at September 30 that Medical Unit fair value was more likely than not above carrying value. It also expected a $974 million federal tax refund within 12 months.
- The board approved a quarterly dividend of $0.4908 per share, or $1.96 annualized, and on November 4, 2021 approved a new $3.0 billion share repurchase program. Management stated available capital resources and projected operating cash flow were adequate for anticipated needs, including potential opioid settlement payments.
Important facts for investors to verify
- Progress toward the participation thresholds and effectiveness of the proposed opioid settlement, its final payment amount, and the treatment of claims outside the agreement.
- Whether Medical supply-chain cost inflation can be offset through pricing and cost savings, and how Medical segment profit and goodwill assumptions develop.
- Final Cordis sale-price adjustments, stranded and transition-service costs, and developments in retained IVC-filter claims and related insurance recoveries.
- Timing and receipt of the expected $974 million tax refund and the effect of working-capital movements on operating cash flow.
- Performance comparisons using both GAAP and non-GAAP measures; non-GAAP results exclude specified items and are not a substitute for GAAP results.