On May 5, 2022 Cardinal Health (NYSE: CAH) reported third quarter fiscal year 2022 revenues of $44.8 billion, an increase of 14% from the third quarter of last year (Press release, Cardinal Health, MAY 5, 2022, View Source [SID1234613666]). Third quarter GAAP operating loss was $97 million, due to a non-cash, pre-tax goodwill impairment of $474 million in the Medical segment. GAAP diluted loss per share was $5.05, primarily due to this impairment, net of tax effects. Third quarter non-GAAP operating earnings decreased 21% to $545 million, primarily due to inflationary impacts and global supply chain constraints in the Medical segment. Non-GAAP diluted earnings per share (EPS) decreased 5% to $1.45, reflecting the change in non-GAAP operating earnings, partially offset by a lower non-GAAP effective tax rate and share count.
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Cardinal Health, Inc. is a global, integrated healthcare services and products company, providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices worldwide. (PRNewsfoto/Cardinal Health)
"While we’re taking action to drive performance across all our businesses, particularly the Medical segment, our third quarter results reflect continued inflationary impacts and global supply chain constraints," said Mike Kaufmann, chief executive officer of Cardinal Health. "We have updated our outlook for Medical to reflect the challenging environment, and reiterated our outlook for the Pharmaceutical segment in fiscal year 2022. Going forward, we remain confident in our ability to drive sustainable, long-term growth."
Third-quarter revenue for the Pharmaceutical segment increased 17% to $41.0 billion, driven by branded pharmaceutical sales growth from existing and net new Pharmaceutical Distribution and Specialty customers.
Pharmaceutical segment profit decreased 5% to $487 million in the third quarter, driven by higher operations expenses and previously anticipated investments in technology enhancements, partially offset by generics program performance.
Medical segment
Third-quarter revenue for the Medical segment decreased 7% to $3.9 billion, due to the divestiture of the Cordis business and lower products and distribution volumes, which includes the impact of global supply chain constraints.
Medical segment profit decreased 66% to $59 million in the third quarter, primarily due to net inflationary impacts and global supply chain constraints in products and distribution.
Opioid lawsuits developments
Cardinal Health, along with pharmaceutical distribution peers, finalized the previously announced national opioid settlement agreement (the "National Settlement"), which became effective on April 2, 2022. 46 of 49 eligible states, Washington DC, all eligible territories, and greater than 98 percent of litigating political subdivisions are participating in the National Settlement. This comprehensive agreement will settle the vast majority of the opioid lawsuits filed by state and local governmental entities. Under the National Settlement, the Company will pay participating states and subdivisions up to $6.0 billion2, the majority of which will be paid over 18 years. The settlement also includes injunctive relief terms related to distributors’ controlled substance anti-diversion programs, which are designed in part to provide increased transparency within the supply chain. As part of the injunctive relief terms, the distributors will engage a third-party vendor to act as a clearinghouse for data aggregation and reporting. Additional injunctive relief provisions include terms related to the training of controlled substance monitoring program employees, due diligence for new and existing customers, ordering limits for certain products and suspicious order monitoring.
Additionally, in May 2022, Cardinal Health, along with pharmaceutical distribution peers, reached an agreement with the State of Washington to resolve the opioid-related claims of the state and its participating subdivisions. Under this agreement, we will pay up to approximately $160 million, which is consistent with the amount that would have been allocated to Washington under the National Settlement, plus certain attorneys’ fees and costs. The payments will be made on timelines and terms consistent with the National Settlement. This agreement is subject to certain contingencies, including the rate of subdivision participation.
"These settlements are an important step forward for our company," said Kaufmann. "This is a significant milestone towards achieving broad resolution of governmental opioid claims and delivering meaningful relief to communities across the United States."
Fiscal year 2022 outlook1
The company updated its fiscal year 2022 guidance range for non-GAAP diluted earnings per share attributable to Cardinal Health, Inc. to $5.15 to $5.25, from $5.15 to $5.50.
The company also updated Medical segment profit outlook to a forty-five to fifty-five percent decline, from a thirty to forty-five percent decline. The fiscal year 2022 outlook for Medical segment profit includes a year-over-year net incremental headwind of nearly $300 million due to inflationary and global supply chain constraint impacts.
In addition to the updated Medical segment profit outlook, the new non-GAAP EPS guidance range reflects updated expectations3 for fiscal year 2022 non-GAAP effective tax rate of 22% to 23%, diluted weighted average shares outstanding of approximately 281 million, and capital expenditures of approximately $400 million.
The company does not provide forward-looking guidance on a GAAP basis as certain financial information, the probable significance of which cannot be determined, is not available and cannot be reasonably estimated. See "Use of Non-GAAP Measures" following the attached schedules for additional explanation.
Tax rate
During the third quarters of fiscal 2022 and 2021, GAAP effective tax rates were (916.5%) and 72.8%, respectively. The GAAP effective tax rate for the third quarter of fiscal 2022 included the impact of non-cash, pre-tax goodwill impairments of $1.8 billion in the Medical segment in fiscal 2022, which significantly decreased the estimated annual effective tax rate for fiscal year 2022. Applying the lower tax rate to the year-to-date loss resulted in recognizing an interim tax expense in the quarter of approximately $1.2 billion. The GAAP effective tax rate in the third quarter of fiscal 2021 reflected the tax effect of the litigation charge incurred in the first quarter of fiscal 2021.
The third quarter fiscal 2022 and 2021 non-GAAP effective tax rates of 20.1% and 31.2%, respectively, reflect the impact of certain discrete items. Third quarter fiscal 2021 effective tax rates also reflect the resolution of all open issues with the IRS for fiscal years 2008 to 2010 as well as certain transfer pricing matters for fiscal years 2011 to 2014.
Recent highlights
Cardinal Health announced plans to build a new 574,670 square foot medical distribution center in the central Ohio area, replacing a smaller nearby facility. The new, larger building will improve service and quality, deliver operational efficiencies, and better support fluctuations in volume and labor.
Cardinal Health plans to build a new manufacturing facility dedicated to increasing the supply of Protexis brand gloves, driving further growth in the surgical glove portfolio.
Cardinal Health partnered with Innara Health, the industry leader in feeding development for newborns and premature infants, to design Innara’s next generation NTrainer System, making it smaller, more intuitive, and easier to integrate into NICU feeding protocols.
Cardinal Health launched the first surgical incise drape using Avery Dennison’s patented BeneHoldTM CHG adhesive, which reduces the risk of surgical site contamination, yet still removes easily after surgery without harming a patient’s skin.
Cardinal Health partnered with Kinaxis to optimize digital supply chain planning and increase supply chain agility and medical product visibility to patients, with initial implementation in at-Home Solutions. Kinaxis’s Rapid ResponseTM platform supports fast, confident decisions using advanced insights and analytics in real time.
Forbes named Cardinal Health one of America’s Best Large Employers 2022.
Upcoming webcasted investor events
UBS Global Healthcare Conference at 8:30 a.m. EST, May 25, 2022
Webcast
Cardinal Health will host a webcast today at 8:30 a.m. Eastern to discuss third-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 until May 4, 2023.