On February 8, 2018 Cardinal Health (NYSE: CAH) reported second-quarter fiscal year 2018 revenue of $35.2 billion, an increase of 6 percent (Press release, Cardinal Health, FEB 8, 2018, View Source [SID1234523823]). The company also reported a decline in GAAP operating earnings of 26 percent to $399 million and an increase in GAAP diluted earnings per share (EPS) of 226 percent to $3.33. GAAP EPS included, among other items, $2.83 of transitional tax benefits related to the enactment of U.S. tax reform discussed below. Non-GAAP operating earnings increased 4 percent to $730 million, while non-GAAP EPS increased 13 percent to $1.51. Excluding a $0.20 benefit from a lower tax rate applied to year-to-date non-GAAP pre-tax earnings due to U.S. tax reform, non-GAAP EPS for the quarter was $1.31, a 2 percent decrease from non-GAAP EPS in the prior-year quarter.

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"Overall, we are very pleased with the quarter," said Mike Kaufmann, CEO of Cardinal Health. "Our Pharmaceutical Distribution business performed better than expected, and we continue to see strong growth in Specialty Solutions. In the Medical segment, the integration of the Patient Recovery business is progressing as planned, and we are excited by the opportunities in that business. In addition, we remain encouraged by how well our value proposition is resonating with customers.

"As we look to the remainder of the year," Kaufmann continued, "we anticipate our overall operating performance to be as expected."

U.S. tax reform

The enactment of the U.S. Tax Cuts and Jobs Act ("U.S. tax reform") has two primary components impacting Cardinal Health’s financial results. First, there is a tax benefit included in earnings that reflects the impact of applying a lower federal tax rate to U.S. earnings. Given the company’s June 30 fiscal year end, the lower tax rate will be phased in across fiscal years 2018 and 2019, resulting in a U.S. statutory federal rate of approximately 28 percent for fiscal year 2018. For the quarter ended Dec. 31, 2017, the application of this lower tax rate to fiscal year-to-date U.S. earnings resulted in a benefit of $0.20 per share. Any impact on the tax benefit from future changes in the estimated effective tax rate will be reflected in the applicable period of the change in estimate.

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Second, as part of U.S. tax reform, the company recorded transitional tax benefits totaling $2.83 per share. These benefits reflected the re-measurement of Cardinal Health’s net U.S. deferred tax liabilities and assets at the lower federal rate of 21 percent, partially offset by the required U.S. repatriation tax on undistributed foreign earnings. As these tax reform benefits are estimated, the company may record adjustments to these amounts during the next 12 months. These transitional tax benefits are excluded from the company’s reported non-GAAP earnings.

Fiscal year 2018 outlook
The company does not provide GAAP EPS outlook because it is unable to reliably forecast most of the items that are excluded from GAAP EPS to calculate non-GAAP EPS. These items could cause EPS to differ materially from non-GAAP EPS. See "Use of Non-GAAP Measures" following the attached schedules for additional explanation.
The company is raising its outlook for fiscal 2018 non-GAAP EPS to $5.25-$5.50, to reflect $0.40 per share of benefit from the lower federal rate due to U.S. tax reform.

Segment results

Pharmaceutical segment

Second-quarter revenue for the Pharmaceutical segment increased 5 percent to $31.1 billion due to sales growth from pharmaceutical and specialty distribution customers, which was partially offset by the previously announced expiration of a large, mail-order customer contract.

Segment profit for the quarter decreased 4 percent to $514 million, which was driven by costs related to the company’s ongoing investment in its Pharmaceutical IT platform, as well as the company’s generics program performance. These were partially offset by strong performance in the Specialty Solutions business.

Medical segment

Second-quarter revenue for the Medical segment increased 19 percent to $4 billion, which was driven by contributions from the acquisition of the Patient Recovery business and, to a lesser extent, new and existing customers.

Segment profit increased 38 percent to $220 million, driven by contributions from the acquisition of the Patient Recovery business, which were partially offset by performance in Cardinal Health Branded products, including Cordis. Segment profit for the quarter included the impact of the Patient Recovery business inventory fair value step-up expense. Excluding the $22 million step-up in the quarter, year-over-year Medical segment profit growth was 52 percent.

Additional second-quarter and recent highlights

The Cardinal Health board of directors approved a new authorization to repurchase up to $1 billion of Cardinal Health common shares, which will expire on Dec. 31, 2020. With this new authorization, Cardinal Health is now authorized to repurchase up to $1.3 billion of its common shares.

The company closed its divestiture of its Cardinal Health China distribution business on Feb. 1 with net proceeds of approximately $800 million.

Cordis and Medinol announced U.S. Food and Drug Administration approval of the EluNIR drug-eluting stent for the treatment of patients with narrowing or blockages to their coronary arteries. The companies also announced treatment of the first patients in the United States with the device following its approval.

The company launched the Opioid Action Program, aimed at helping communities in four of the nation’s hardest-hit states combat the opioid epidemic. The pilot program will deliver much needed front-line assistance to help prevent opioid abuse and support first responders in Ohio, Kentucky, Tennessee and West Virginia.

Webcast

Cardinal Health will host a webcast today at 8:30 a.m. Eastern to discuss second-quarter results. To access the webcast and corresponding slide presentation, go to the Investor Relations page at ir.cardinalhealth.com. No access code is required.
Presentation slides and a webcast replay will be available on the Cardinal Health website at ir.cardinalhealth.com until Feb. 7, 2019.

Upcoming webcasted investor events

Leerink Partners 7th Annual Global Healthcare Conference on Feb. 15 at 9 a.m. in New York City

2018 RBC Capital Markets Global Healthcare Conference on Feb. 21 at 8:30 a.m. in New York City

Cowen 38th Annual Health Care Conference on March 12 at 11:20 a.m. in Boston

Barclays Global Healthcare Conference on March 13 at 9 a.m. in Miami