10-QPeriod: Q1 FY2019

CARDINAL HEALTH INC Quarterly Report for Q1 Ended Sep 30, 2018

Filed November 8, 2018For Securities:CAH

Summary

Cardinal Health's Q1 Fiscal Year 2019 report for the period ending September 29, 2018, shows a significant increase in GAAP operating earnings driven by the divestiture of its naviHealth business, which contributed a $508 million gain. However, non-GAAP operating earnings saw a 11% decrease due to challenges in the Pharmaceutical segment, including generics program performance and customer contract renewals, alongside increased costs for Cardinal Health Brand products. Revenue grew 8% to $35.2 billion, primarily from pharmaceutical distribution, though partially impacted by the prior divestiture of its China distribution business. Despite the operational headwinds in certain segments, the company demonstrated solid cash flow generation, with cash and equivalents increasing to $2.0 billion. This was bolstered by the naviHealth sale proceeds and operating activities, partially offset by significant share repurchases and dividend payments. The company's liquidity position remains strong, supported by its credit facilities. Investors should note the impact of the U.S. Tax Cuts and Jobs Act, which positively affected earnings per share, and be aware of ongoing litigation, particularly concerning opioid distribution, and potential future goodwill impairments in the Medical segment.

Financial Highlights

47 data points
Beta

Revenue

$35.21B

4.7% Gross Margin

Net Income

$593.00M

1.7% Net Margin

EPS (Diluted)

$1.94

Total Assets

$40.01B

Cash & Equivalents

$2.04B

Free Cash Flow

$307.00M

Financial Statements
Beta
Revenue$35.21B
Cost of Revenue$33.55B
Gross Profit$1.67B
SG&A Expenses$1.16B
Operating Income$816.00M
Interest Expense$77.00M
Net Income$593.00M
EPS (Basic)$1.95
EPS (Diluted)$1.94
Shares Outstanding (Basic)305.00M
Shares Outstanding (Diluted)306.00M

Key Highlights

  • 1Revenue increased 8% to $35.2 billion in Q1 FY2019, driven by pharmaceutical distribution and specialty pharmaceutical customers.
  • 2GAAP operating earnings surged 211% to $816 million, primarily due to a $508 million gain from the naviHealth divestiture.
  • 3Non-GAAP operating earnings decreased 11% to $542 million, impacted by pharmaceutical segment performance, customer contract renewals, and Cardinal Health Brand product costs.
  • 4GAAP diluted EPS rose 439% to $1.94, while non-GAAP diluted EPS grew 18% to $1.29, benefiting from the U.S. Tax Cuts and Jobs Act and discrete tax items.
  • 5Cash and equivalents increased to $2.0 billion, supported by $737 million in proceeds from the naviHealth sale and $365 million in net cash from operations.
  • 6The company deployed $600 million for share repurchases and paid $150 million in dividends during the quarter.
  • 7Cardinal Health has increased its maximum consolidated leverage ratio under its credit facilities to 4.25-to-1, with phased reductions planned through September 2020.

Frequently Asked Questions

The primary driver for the substantial increase in GAAP operating earnings was the gain of $508 million recognized from the divestiture of Cardinal Health's naviHealth business in August 2018.

Non-GAAP operating earnings decreased by 11% due to specific operational challenges, including weaker performance in the Pharmaceutical segment's generics program, adverse impacts from pharmaceutical customer contract renewals, and increased costs related to Cardinal Health Brand products like Cordis. These factors outweighed the revenue growth.

The Tax Cuts and Jobs Act has favorably impacted Cardinal Health's earnings. It led to a lower U.S. federal corporate tax rate, which benefited both GAAP and non-GAAP diluted EPS. The company is still finalizing its accounting for the Tax Act and may record further adjustments.

Cardinal Health's liquidity remains strong, with cash and equivalents totaling $2.0 billion at the end of the quarter. This balance was boosted by proceeds from the naviHealth sale. The company also has access to a $2.0 billion commercial paper program and a $2.0 billion revolving credit facility. While demonstrating a commitment to capital return through dividends and share repurchases, the company also adjusted its leverage ratio covenants to allow for greater financial flexibility.

Cardinal Health is facing numerous lawsuits related to the distribution of prescription opioid pain medications, with over 1,000 cases consolidated for pre-trial proceedings. The company is also involved in product liability lawsuits concerning its Cordis IVC filter products. Due to the uncertainty and early stages of these matters, the company is unable to predict their ultimate outcome or estimate a range of reasonably possible losses for the opioid litigation, though an accrual is in place for the IVC filter lawsuits.