Cardinal Health, Inc. — Fiscal 2023 Form 10-K
Period clarification: The filing covers the fiscal year ended June 30, 2023, not a standalone 2022 fourth quarter report. It does report a fourth-quarter Medical Unit goodwill impairment charge.
Business context
Cardinal Health is a healthcare services and products company with two reportable segments: Pharmaceutical, which distributes pharmaceuticals and provides related services, and Medical, which manufactures, sources and distributes medical products and provides supply-chain services.
Financial performance
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| Revenue | $205.0 billion | $181.4 billion | Up 13% |
| Pharmaceutical revenue | $190.0 billion | $165.5 billion | Up 15% |
| Medical revenue | $15.0 billion | $15.9 billion | Down 5% |
| Gross margin | $6.889 billion | $6.545 billion | Up 5%; gross margin rate declined 25 basis points |
| GAAP operating earnings/(loss) | $727 million | $(596) million | Improved, reflecting lower impairment charges and litigation recoveries |
| Non-GAAP operating earnings | $2.057 billion | $1.990 billion | Up 3% |
| Net earnings/(loss) attributable to Cardinal Health | $261 million | $(933) million | Returned to GAAP profitability |
| GAAP diluted EPS | $1.00 | $(3.35) | Improved |
| Non-GAAP diluted EPS | $5.79 | $5.06 | Up 14% |
| Net cash from operating activities | $2.839 billion | $3.122 billion | Down $283 million |
| Cash and equivalents at year-end | $4.043 billion | $4.717 billion | Down $674 million |
| Total long-term obligations and other short-term borrowings | $4.701 billion | $5.315 billion | Down $614 million |
FY2023 cash uses included $2.0 billion of share repurchases, $579 million of debt repayments, $525 million of dividends and $481 million of capital expenditures. Current assets were $33.833 billion and current liabilities were $33.706 billion at year-end. The company had no amounts outstanding under its $2.0 billion revolving credit facility, commercial paper program or $1.0 billion receivables facility and reported compliance with its net leverage covenant.
Material changes and unusual items
- Pharmaceutical segment profit rose 13% to $1.999 billion, aided by generic program performance and branded and specialty product contribution. Medical segment profit fell 49% to $111 million, reflecting inflation, lower volumes and unfavorable product mix.
- Medical Unit goodwill impairment charges totaled $1.231 billion in FY2023, including $368 million in the fourth quarter, versus $2.084 billion in FY2022. The non-cash charges materially affected GAAP results; the company cautioned that further impairment is possible if assumptions worsen.
- FY2023 GAAP operating earnings included $302 million of net litigation recoveries, including recoveries associated with IVC filter matters and antitrust settlements. These items are excluded from the company’s non-GAAP measures.
- Operating cash flow included the second annual $372 million payment under the National Opioid Settlement Agreement. The company had accrued $5.87 billion for opioid matters at June 30, 2023.
- In July 2023, the company completed the contribution of its Outcomes business in exchange for a minority stake and expected to record an approximately $60 million gain in FY2024’s first quarter.
Outlook, risks and contingencies
- Management expects Medical inflationary impacts to continue in FY2024 and beyond, but at a significantly lower level than in FY2023 and prior periods. It expects growth in Cardinal Health branded medical product sales; delivery and profit impact remain uncertain.
- Management identified generic pharmaceutical volumes, pricing, contract renewals, launches and sourcing costs as factors that could affect Pharmaceutical segment profit in FY2024. The supplied filing text does not provide a clear numerical FY2024 earnings or EPS guidance value.
- FY2024 capital expenditures are expected to be approximately $500 million, primarily for manufacturing and distribution infrastructure and technology.
- The National Opioid Settlement Agreement requires payments over time, with the majority expected through 2038; compliance monitoring continues through 2027 and funding of a data clearinghouse through 2032. Private opioid lawsuits and government investigations remain unresolved. The company reported approximately 403 private opioid lawsuits as of August 8, 2023.
- Cardinal Health retained Cordis IVC filter product liability after the Cordis divestiture. A settlement intended to resolve approximately 4,376 claims for $275 million was subject to conditions; the company reported $385 million accrued for IVC filter claims and defense costs at June 30, 2023.
- Other significant risks include Medical segment supply-chain and commodity costs, customer and supplier concentration, regulatory and product-quality requirements, cybersecurity and operational disruption, tax audits and uncertain tax positions. Unrecognized tax benefits were approximately $1.0 billion.
- An Elliott cooperation agreement extended through at least July 15, 2024 provides for a Board Business Review Committee examining strategy, portfolio, capital allocation and operations; recommendations and implementation could entail costs or disruption.
Most important facts for investors to verify
- Whether Pharmaceutical growth and generics-program economics can offset weaker Medical segment profitability and margin pressure.
- Whether Medical sales, costs and valuation assumptions support the remaining goodwill carrying value and avoid additional impairment.
- The timing, amount and funding of opioid and IVC filter payments, remaining litigation exposure and potential insurance recoveries.
- Cash-flow and working-capital trends, planned capital expenditures, debt maturities and the effect of continued share repurchases and dividends on liquidity.
- Customer concentration and contract renewal exposure, particularly CVS Health and the OptumRx agreement that extends through June 2024.