10-QPeriod: Q2 FY2020

CARDINAL HEALTH INC Quarterly Report for Q2 Ended Dec 31, 2019

Filed February 6, 2020For Securities:CAH

Summary

Cardinal Health Inc. (CAH) reported its second quarter fiscal year 2020 results, highlighting a 5% increase in total revenue to $39.7 billion, driven primarily by growth in its pharmaceutical distribution and specialty solutions businesses. While revenue showed positive momentum, the company's GAAP operating earnings were significantly impacted by a $96 million charge related to a voluntary surgical gown recall and a substantial $5.63 billion pre-tax charge for the estimated liability associated with opioid litigation. Despite these significant charges, the company's non-GAAP operating earnings saw a modest 1% increase for the quarter and a 4% increase for the six-month period, reflecting underlying operational performance that excludes these extraordinary items. Investors should note the company's proactive approach to managing its balance sheet, including debt repayments and share repurchases, alongside maintaining a strong cash position. The opioid litigation settlement framework, while substantial, provides a path toward resolution, though uncertainties remain regarding final terms and future liabilities related to treatment medications and program changes. The surgical gown recall, while impacting current quarter results, is not expected to materially impact the long-term goodwill of the Medical Unit at this time. The company reiterated its belief in having adequate capital resources to meet its obligations, including potential opioid settlement payments.

Financial Highlights

46 data points
Beta

Revenue

$39.73B

4.3% Gross Margin

Net Income

$220.00M

0.6% Net Margin

Total Assets

$41.04B

Cash & Equivalents

$1.66B

Free Cash Flow

$620.00M

Financial Statements
Beta
Revenue$39.73B
Cost of Revenue$38.02B
Gross Profit$1.71B
SG&A Expenses$1.16B
Operating Income$334.00M
Interest Expense$63.00M
Net Income$220.00M
Shares Outstanding (Basic)292.00M
Shares Outstanding (Diluted)294.00M

Key Highlights

  • 1Total revenue increased by 5% to $39.7 billion for the three months ended December 31, 2019, and by 6% to $77.1 billion for the six months ended December 31, 2019, driven by pharmaceutical distribution and specialty solutions.
  • 2GAAP operating earnings declined 34% for the quarter and were a loss of $4.93 billion for the six months due to significant charges, including $96 million for surgical gown recalls and a $5.63 billion pre-tax charge for opioid litigation.
  • 3Non-GAAP operating earnings increased 1% to $646 million for the quarter and 4% to $1.22 billion for the six months, demonstrating resilience in core operations.
  • 4Non-GAAP diluted EPS rose 18% to $1.52 for the quarter, indicating improved profitability on an adjusted basis.
  • 5The company agreed in principle to a global settlement framework for opioid lawsuits, involving a cash component of up to $5.56 billion over eighteen years, along with other commitments.
  • 6A voluntary recall of surgical gowns resulted in a $96 million charge in the quarter, with ongoing supply chain impacts anticipated.
  • 7Cash and equivalents decreased to $1.7 billion from $2.5 billion, with $44 million in net cash provided by operating activities during the first six months of the fiscal year, while capital was deployed for debt repayment, share repurchases, and dividends.

Frequently Asked Questions

Revenue growth was primarily driven by increased sales from pharmaceutical distribution and specialty solutions customers. For the three months ended December 31, 2019, this segment's sales grew by $2.0 billion, and for the six months ended December 31, 2019, it grew by $4.0 billion.

The opioid litigation resulted in a substantial pre-tax charge of $5.63 billion recognized in the six months ended December 31, 2019. The surgical gown recall led to a $96 million charge in the three months ended December 31, 2019, affecting cost of products sold and SG&A expenses. These charges significantly impacted GAAP operating earnings and net earnings.

While GAAP operating earnings and net earnings were significantly depressed by the opioid litigation and recall charges, the company's non-GAAP operating earnings showed growth. Non-GAAP operating earnings increased by 1% to $646 million for the quarter and by 4% to $1.22 billion for the six months. Non-GAAP diluted EPS also saw an 18% increase to $1.52 for the quarter, indicating that the core business operations are performing positively, excluding these one-time or extraordinary items.

Cardinal Health believes it has adequate capital resources to fund its working capital needs, capital expenditures, and operational growth. The company had $1.7 billion in cash and equivalents at the end of the quarter. Management expects its capital resources and projected operating cash flow to be sufficient to cover current obligations, debt service, dividends, share repurchases, and potential opioid settlement payments under the agreed-upon framework, which totals up to $5.56 billion over eighteen years.