CARDINAL HEALTH, INC. The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in our condensed consolidated balance sheets atSeptember 30, 2020 andJune 30, 2020 , and in our condensed consolidated statements of loss for the three months endedSeptember 30, 2020 and 2019. All comparisons presented are with respect to the prior-year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the MD&A included in our 2020 Form 10-K. 2Cardinal Health | Q1 Fiscal 2021 Form 10-Q --------------------------------------------------------------------------------
MD&A Overview
Overview of Consolidated Results
Revenue
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Revenue for the three months ended September 30, 2020 increased 5 percent to
$39.1 billion due to sales growth from pharmaceutical distribution and specialty
pharmaceutical customers.
GAAP and Non-GAAP Operating Earnings/(Loss)
Three Months Ended September 30,
(in millions) 2020 2019 Change
GAAP operating loss $ (624) $ (5,264) N.M.
Surgical gown recall costs (1) -
State opioid assessment related to prior fiscal years 41 5
Restructuring and employee severance 37 30
Amortization and other acquisition-related costs 118 132
Impairments and (gain)/loss on disposal of assets 9 1
Litigation (recoveries)/charges, net 1,038 5,673
Non-GAAP operating earnings $ 618 $ 577 7 %
The sum of the components and certain computations may reflect rounding
adjustments.
We had a GAAP operating loss of $624 million and $5.3 billion during the three
months ended September 30, 2020 and 2019, respectively, due to $1.02 billion and
$5.63 billion pre-tax charges, respectively, recognized for the estimated
liability associated with lawsuits and claims brought against us by states and
political subdivisions relating to the distribution of prescription opioid pain
medications. See further description of opioid lawsuits in the Significant
Developments in Fiscal 2021 and Trends section in this MD&A and Note 5 of
the "Notes to Condensed Consolidated Financial Statements."
The 7 percent increase in non-GAAP operating earnings to $618 million was
primarily due to Medical segment cost savings.
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MD&A Overview
GAAP and Non-GAAP Diluted EPS
Three Months Ended September 30,
2020 (2)
($ per share) (3) 2019 (2) (3) Change
GAAP diluted EPS (1) $ (0.86) $ (16.65) N.M.
State opioid assessment related to prior fiscal years 0.10 0.01
Restructuring and employee severance 0.09 0.08
Amortization and other acquisition-related costs 0.30 0.33
Impairments and (gain)/loss on disposal of assets (0.02) -
Litigation (recoveries)/charges, net 1.91 17.51
Non-GAAP diluted EPS (1) $ 1.51 $ 1.27 19 %
The sum of the components and certain computations may reflect rounding
adjustments.
(1) Diluted earnings/(loss) per share attributable to Cardinal Health, Inc.
("diluted EPS" or "diluted loss per share")
(2) The reconciling items are presented within this table net of tax. See
quantification of tax effect of each reconciling item in our GAAP to Non-GAAP
Reconciliations in the "Explanation and Reconciliation of Non-GAAP Financial
Measures".
(3) First quarter fiscal 2021 and 2020 GAAP diluted loss per share attributable
to Cardinal Health, Inc. ("GAAP diluted EPS") and the EPS impact from the GAAP
to non-GAAP per share reconciling items are calculated using a weighted average
of 293 and 296 million common shares, respectively, which excludes potentially
dilutive securities from the denominator due to their anti-dilutive effects
resulting from our GAAP net loss for the quarter. First quarter fiscal 2021 and
2020 non-GAAP diluted EPS is calculated using a weighted average of 295 and 297
million common shares, respectively, which includes potentially dilutive shares.
During the three months ended September 30, 2020 and 2019, we had GAAP diluted
losses attributable to Cardinal Health, Inc. ("GAAP diluted EPS") of $(0.86) and
$(16.65) , respectively, due to the charges we recognized for the estimated
liability associated with lawsuits and claims brought against us by states and
political subdivisions relating to the distribution of prescription opioid pain
medications. These opioid charges had a $(1.87) and $(17.40) after tax impact on
GAAP diluted EPS during the three months ended September 30, 2020 and 2019,
respectively. Refer to Significant Developments in Fiscal 2021 and Trends
section in this MD&A for additional detail.
During the three months ended September 30, 2020 , non-GAAP diluted EPS increased
19 percent to $1.51 per share. This increase was primarily due to the factors
discussed above impacting non-GAAP operating earnings and lower interest expense
due to less debt outstanding.
Cash and Equivalents
Our cash and equivalents balance was $2.7 billion at September 30, 2020 compared
to $2.8 billion at June 30, 2020 . Cash and equivalents were relatively unchanged
during the three months ended September 30, 2020 with operating cash flow of
$270 million offset primarily by $146 million paid in dividends and $78 million
of capital expenditures.
4 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
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MD&A Overview
Significant Developments in Fiscal 2021 and
As previously disclosed, inOctober 2019 , we agreed in principle to a global settlement framework with a leadership group of state attorneys general that is designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions, but not private plaintiffs (the "Settlement Framework"). Negotiations under the Settlement Framework continue to and have centered on the amount and timing for payment of the cash component as well as standards for settling distributors' controlled substance anti-diversion programs. Definitive terms for a settlement continue to be negotiated, and there is no assurance that the necessary parties will agree to a definitive settlement agreement or that the contingencies to any agreement will be satisfied. In connection with the opioid lawsuits and these discussions, we recorded pre-tax charges of$1.02 billion and$5.63 billion during the three months endedSeptember 30, 2020 and 2019, respectively, in litigation (recoveries)/charges, net, in the condensed consolidated statements of loss. We accrue for contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. We regularly review these opioid litigation matters to determine whether our accrual is adequate. The amount of ultimate loss may differ materially from this accrual. See Note 5 of the "Notes to Condensed Consolidated Financial Statements" for additional information. Tax Effect of Opioid Litigation Charges The net tax benefits associated with the opioid litigation charges are$35 million and$488 million for fiscal 2021 and 2020, respectively. Our tax benefits are estimates, which reflect our current assessment of the estimated future deductibility of the amount that may be paid under the accrual taken in connection with the opioid litigation and are net of unrecognized tax benefits of$34 million and$469 million , respectively. Due to our assessment of non-deductibility for certain components considered in the fiscal 2021 and 2020 charges, the tax benefit for fiscal 2021 compared to fiscal 2020 resulted in a relatively lower tax benefit. Our assumptions and estimates around this benefit and uncertain tax position require significant judgment and the actual amount of tax benefit related to uncertain tax positions may differ materially from these estimates. Unless an item is considered discrete because it is unusual or infrequent, the tax impact of the item is included in our estimated annual effective tax rate. When items are recognized through our estimated annual effective tax rate, we apply our estimated annual effective tax rate to the earnings/(loss) before income taxes for the year-to-date period to compute our provision/(benefit) for income taxes for the current quarter and year-to-date period. The tax impacts of discrete items are recognized in their entirety in the period in which they occur. In conjunction with the initial opioid accrual during the three months endedSeptember 30, 2019 , the tax effect of the charge was treated as a discrete item because it was considered unusual or infrequent. However, the tax effect of the charge during the three months endedSeptember 30, 2020 was included in our estimated annual effective tax rate because it was no longer considered unusual or infrequent. Including the relatively lower tax benefit of the current quarter charge in our estimated annual effective tax rate significantly increased the estimated annual effective tax rate for fiscal 2021. As such, the amount of tax benefit in the current quarter increased by approximately$450 million over the tax expense that would have been recognized without the impact of the opioid litigation charge and is expected to significantly increase our provision for income taxes during the remainder of fiscal 2021. See Note 6 of the "Notes to the Condensed Consolidated Financial Statements" for additional information. COVID-19 The pandemic associated with the novel strain of coronavirus ("COVID-19") continues to affect theU.S. and global economies, and as previously disclosed in our Fiscal 2020 Form 10-K, the pandemic also affected our businesses in a variety of ways beginning in the third quarter of fiscal 2020 and continuing into fiscal 2021. As anticipated, Pharmaceutical segment profit was negatively impacted by COVID-19 during the three months endedSeptember 30, 2020 , largely due to volume declines in our generics program and Nuclear and Precision Health Solutions. Medical segment profit reflects an estimated minimal net impact from COVID-19 as the adverse effects of cancelled or deferred elective medical procedures were offset by the temporary reduction of certain costs and higher volumes in our laboratory business. Additionally, the impact of higher costs to source certain personal protective equipment ("PPE") was mostly mitigated by price increases. We currently anticipate that the COVID-19 pandemic will have a further negative impact on fiscal 2021 consolidated operating earnings, and Pharmaceutical and Medical segment profit. However, we cannot estimate the length or severity of the COVID-19 pandemic or of the
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MD&A Overview
relatedU.S. or global economic consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flow, and its impact may be greater or less than we anticipate. 6Cardinal Health | Q1 Fiscal 2021 Form 10-Q --------------------------------------------------------------------------------
MD&A Results of Operations
Results of Operations
Revenue
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Three Months Ended September 30,
(in millions) 2020 2019 Change
Pharmaceutical $ 35,112 $ 33,428 5 %
Medical 3,957 3,917 1 %
Total segment revenue 39,069 37,345 5 %
Corporate (4) (4) N.M.
Total revenue $ 39,065 $ 37,341 5 %
Pharmaceutical Segment
Pharmaceutical segment revenue increased during the three months ended
September 30, 2020 due to sales growth from pharmaceutical distribution and
specialty pharmaceutical customers, which together increased revenue by $1.7
billion .
Medical Segment
Medical segment revenue increased slightly during the three months ended
September 30, 2020 primarily due to sales growth from Cardinal Health at-Home
Solutions, which increased revenue by $48 million .
Cost of Products Sold
Cost of products sold increased 5 percent to
Cardinal Health | Q1 Fiscal 2021 Form 10-Q 7
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MD&A Results of Operations
Gross Margin
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Three Months Ended September 30,
(in millions) 2020 2019 Change
Gross margin $ 1,715 $ 1,679 2 %
Gross margin during the three months ended September 30, 2020 increased slightly
due to higher contribution from branded pharmaceutical sales mix.
Gross margin rate declined 11 basis points during the three months ended
September 30, 2020 mainly due to changes in pharmaceutical distribution product
mix. While branded pharmaceutical sales contributed positively to gross margin
dollars during the three months ended September 30, 2020 , they had a dilutive
impact on our overall gross margin rate.
Distribution, Selling, General, and Administrative ("SG&A") Expenses
Three Months Ended September 30,
(in millions) 2020 2019 Change
SG&A expenses $ 1,137 $ 1,107 3 %
During the three months ended September 30, 2020 , SG&A expenses increased due to
a judicial decision relating to a $41 million assessment on prescription opioid
medications that were sold or distributed in New York state in calendar year
2017 and 2018. See Note 5 of the "Notes to Condensed Consolidated Financial
Statements" for additional information on the New York Opioid Stewardship Act.
8 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
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MD&A Results of Operations
Segment Profit
We evaluate segment performance based on segment profit, among other measures.
See Note 11 of the "Notes to Condensed Consolidated Financial Statements"
for additional information on segment profit.
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Three Months Ended September 30,
(in millions) 2020 2019 Change
Pharmaceutical $ 402 $ 398 1 %
Medical 230 170 36 %
Total segment profit 632 568 11 %
Corporate (1,256) (5,832) N.M.
Total consolidated operating loss $ (624) $ (5,264) N.M.
Pharmaceutical Segment Profit During the three months endedSeptember 30, 2020 , Pharmaceutical segment profit increased compared to the prior year period primarily due to higher contribution from branded pharmaceutical sales mix. Pharmaceutical segment profit was adversely impacted by COVID-19, primarily as a result of volume declines in our generics program and Nuclear and Precision Health Solutions. Pharmaceutical segment financial results do not include the$1.02 billion and$5.63 billion charges associated with the opioid litigation during the three months endedSeptember 30, 2020 and 2019, respectively. See the Significant Developments in Fiscal 2021 and Trends section in this MD&A and Note 5 of the "Notes to Condensed Consolidated Financial Statements" for additional information. In addition, Pharmaceutical segment financial results do not include the$41 million assessment on prescription opioid medications that were sold or distributed in New York state in calendar year 2017 and 2018. See Note 5 of the "Notes to Condensed Consolidated Financial Statements" for additional information on the New York Opioid Stewardship Act. Medical Segment Profit The increase in Medical segment profit during the three months endedSeptember 30, 2020 was primarily due to cost savings, including global manufacturing efficiencies. Medical segment profit reflects an estimated minimal net impact from COVID-19 as the adverse effects of cancelled or deferred elective medical procedures were offset by the temporary reduction of certain costs and higher volumes in our laboratory business. Additionally, the impact of higher costs to source certain PPE was mostly mitigated by price increases. Corporate The changes in Corporate during the three months endedSeptember 30, 2020 are due to the factors discussed in the Other Components of Consolidated Operating Loss section that follows.
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MD&A Results of Operations
Other Components of Consolidated Operating Loss
In addition to revenue, gross margin, and SG&A expenses discussed previously, consolidated operating losses were impacted by the following:
Three Months Ended September 30,
(in millions) 2020 2019
Restructuring and employee severance $ 37 $ 30
Amortization and other acquisition-related costs 118 132
Impairments and (gain)/loss on disposal of assets, net 9 1
Litigation (recoveries)/charges, net 1,038 5,673
Restructuring and Employee Severance
During the three months ended September 30, 2020 and 2019, restructuring costs
were primarily related to implementation of certain enterprise-wide cost-savings
initiatives.
Amortization and Other Acquisition-Related Costs
Amortization of acquisition-related intangible assets was $115 million and $129
million for the three months ended September 30, 2020 and 2019, respectively.
Litigation (Recoveries)/Charges, Net
During the three months ended September 30, 2020 and 2019, we recognized pre-tax
charges of $1.02 billion and $5.63 billion , respectively, associated with
certain opioid matters. See Note 5 of the "Notes to Condensed Consolidated
Financial Statements" and the Significant Developments in Fiscal 2021 and Trends
section in this MD&A for additional information.
Loss Before Income Taxes
In addition to the items discussed above, loss before income taxes was impacted by the following:
Three Months Ended September 30,
(in millions) 2020 2019 Change
Other (income)/expense, net $ (7) $ 14 N.M.
Interest expense, net 45 66 (32) %
Loss on early extinguishment of debt 1 - N.M.
Other (Income)/Expense, Net
The increase in other (income)/expense, net during the three months ended
September 30, 2020 was primarily due to fluctuations in foreign exchange rates,
and increased returns from investments, which offset fluctuations in deferred
compensation liabilities that are included within SG&A and discussed further in
Note 7 of the "Notes to Condensed Consolidated Financial Statements".
Interest Expense, Net
The decrease in interest expense during the three months ended September 30,
2020 was primarily due to less debt outstanding.
Provision for/(Benefit from) Income Taxes
During the three months ended September 30, 2020 and 2019, the effective tax
rate was 61.8 percent and 7.9 percent, respectively. The increase in the
effective tax rate for the three months ended September 30, 2020 compared to the
prior year period was primarily due to the treatment of the tax impacts of the
opioid litigation accrual, partially offset by the prior-year benefit of
discrete tax items.
In connection with the $1.02 billion and $5.63 billion pre-tax charges for the
opioid litigation during the three months ended September 30, 2020 and 2019,
respectively, the net tax benefits are $35 million and $488 million for fiscal
2021 and 2020, respectively. Our tax benefits are estimates, which reflect our
current assessment of the estimated future deductibility of the amount that may
be paid under the accrual taken in connection with the opioid litigation and are
net of unrecognized tax benefits of $34 million and $469 million , respectively.
Due to our assessment of non-deductibility for certain components considered in
the fiscal 2021 and 2020 charges, the tax benefit for fiscal 2021 compared to
fiscal 2020 resulted in a relatively lower tax benefit. Our assumptions and
estimates around this benefit and uncertain tax position require significant
judgment and the actual amount of tax benefit related to uncertain tax positions
may differ materially from these estimates.
Unless an item is considered discrete because it is unusual or infrequent, the
tax impact of the item is included in our estimated annual effective tax rate.
When items are recognized through our estimated annual effective tax rate, we
apply our estimated annual effective tax
10 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
--------------------------------------------------------------------------------MD&A Results of Operations
rate to the earnings/(loss) before income taxes for the year-to-date period to compute our provision/(benefit) for income taxes for the current quarter and year-to-date period. The tax impacts of discrete items are recognized in their entirety in the period in which they occur. In conjunction with the initial opioid accrual during the three months endedSeptember 30, 2019 , the tax effect of the charge was treated as a discrete item because it was considered unusual or infrequent. However, the tax effect of the charge during the three months endedSeptember 30, 2020 was included in our estimated annual effective tax rate because it was no longer considered unusual or infrequent. Including the relatively lower tax benefit of the current quarter charge in our estimated annual effective tax rate significantly increased the estimated annual effective tax rate for fiscal 2021. As such, the amount of tax benefit in the current quarter increased by approximately$450 million over the tax expense that would have been recognized without the impact of the opioid litigation charge and is expected to significantly increase our provision for income taxes during the remainder of fiscal 2021. See Note 6 of the "Notes to the Condensed Consolidated Financial Statements" for additional information.
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MD&A Liquidity and Capital Resources
Liquidity and Capital Resources We currently believe that, based on available capital resources (cash on hand and committed credit facilities) and projected operating cash flow, we have adequate capital resources to fund working capital needs; currently anticipated capital expenditures; currently anticipated business growth and expansion; contractual obligations; tax payments; and current and projected debt service requirements, early extinguishment of debt, dividends and share repurchases as well as potential opioid litigation settlement payments associated with the Settlement Framework. Cash and Equivalents Our cash and equivalents balance was$2.7 billion atSeptember 30, 2020 compared to$2.8 billion atJune 30, 2020 . AtSeptember 30, 2020 , our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. Cash and equivalents were relatively unchanged during the three months endedSeptember 30, 2020 with operating cash flow of$270 million offset primarily by$146 million paid in dividends and$78 million of capital expenditures. Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases and payments to vendors in the regular course of business, as well as fluctuating working capital needs driven by customer and product mix. The cash and equivalents balance atSeptember 30, 2020 included$573 million of cash held by subsidiaries outside ofthe United States . Other Financing Arrangements and Financial Instruments Credit Facilities and Commercial Paper In addition to cash and equivalents and operating cash flow, other sources of liquidity atSeptember 30, 2020 include a$2.0 billion commercial paper program, backed by a$2.0 billion revolving credit facility. We also have a$1.0 billion committed receivables sales facility. AtSeptember 30, 2020 , we had no amounts outstanding under our commercial paper program, revolving credit facility or our committed receivables sales facility. Our revolving credit facility and committed receivables sales facilities require us to maintain, as of the end of every fiscal quarter from throughDecember 2020 , a consolidated net leverage ratio of no more than 4.00-to-1. The maximum permitted ratio will reduce to 3.75-to-1 inMarch 2021 and as of the end of every fiscal quarter thereafter. AtSeptember 30, 2020 , we were in compliance with our financial covenants. Long-Term Debt We had total long-term obligations, including the current portion and other short-term borrowings, of$6.7 billion and$6.8 billion atSeptember 30, 2020 andJune 30, 2020 , respectively. During the three months endedSeptember 30, 2020 , we repurchased a total of$37 million of notes due in 2022 with available cash. 12Cardinal Health | Q1 Fiscal 2021 Form 10-Q
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MD&A Liquidity and Capital Resources
Capital Deployment Opioid Settlement Framework We had$6.59 billion accrued atSeptember 30, 2020 related to certain opioid litigation, as further described within the Significant Developments in Fiscal 2021 and Trends section in this MD&A and Note 5 of the "Notes to Condensed Consolidated Financial Statements." Negotiations under the Settlement Framework continue regarding, among other things, the amount and timing for payment of the cash component. If a definitive agreement is reached, and subject to participation by states and political subdivisions, we expect the majority of payment amounts to be spread over 18 years. We cannot currently predict when those payments might begin, and it is possible that all or part may ultimately be made over a different time period, or not at all. Capital Expenditures Capital expenditures during the three months endedSeptember 30, 2020 and 2019 were$78 million and$72 million , respectively. Dividends On each ofMay 11, 2020 andAugust 6, 2020 , our Board of Directors approved a quarterly dividend of$0.4859 per share, or$1.94 per share on an annualized basis, which were paid onJuly 15, 2020 andOctober 15, 2020 to shareholders of record onJuly 1, 2020 andOctober 1, 2020 , respectively. OnNovember 4, 2020 , our Board of Directors approved a quarterly dividend of$0.4859 per share, or$1.94 per share on an annualized basis, payable onJanuary 15, 2021 to shareholders of record onJanuary 4, 2021 . Cardinal Health | Q1 Fiscal 2021 Form 10-Q 13
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MD&A Other Items
Other Items
The MD&A in our 2020 Form 10-K addresses our contractual obligations and
off-balance sheet arrangements, as of and for the fiscal year ended June 30,
2020 . There have been no subsequent material changes outside the ordinary course
of business to those items.
Critical Accounting Policies and Sensitive Accounting Estimates
The discussion and analysis presented below are supplemental disclosures to the
critical accounting policies and sensitive accounting estimates specified in our
consolidated balance sheets at June 30, 2020 . This discussion and analysis
should be read in conjunction with the Critical Accounting Policies and
Sensitive Accounting Estimates included in our 2020 Form 10-K.
Critical accounting policies are those accounting policies that (i) can have a
significant impact on our financial condition and results of operations and (ii)
require the use of complex and subjective estimates based upon past experience
and management's judgment. Other people applying reasonable judgment to the same
facts and circumstances could develop different estimates. Because estimates are
inherently uncertain, actual results may differ.
Loss Contingencies
In connection with the opioid litigation as described further in the Significant
Developments in Fiscal 2021 section in this MD&A, we recorded pre-tax charges of
$1.02 billion and $5.63 billion , during the three months ended September 30,
2020 and 2019, respectively. We accrue for contingencies when it is probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated.
Because loss contingencies are inherently unpredictable and unfavorable
developments or resolutions can occur, the assessment is highly subjective and
requires judgments about future events. Definitive terms for a settlement
pursuant to the Settlement Framework continue to be negotiated, and there is no
assurance that the necessary parties will agree to a definitive settlement
agreement or that the contingencies to any agreement will be satisfied. We
regularly review these opioid litigation matters to determine whether our
accrual is adequate. The amount of ultimate loss may differ materially from this
accrual. See Note 5 of the "Notes to Condensed Consolidated Financial
Statements" for additional information.
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MD&A Other Items
Provision for Income Taxes
Tax benefits from uncertain tax positions are recognized when it is more likely
than not that the position will be sustained upon examination of the technical
merits of the position, including resolutions of any related appeals or
litigation. The amount recognized is measured as the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon
settlement. For tax benefits that do not qualify for recognition, we recognize a
liability for unrecognized tax benefits.
In connection with the $1.02 billion and $5.63 billion pre-tax charges for the
opioid litigation during the three months ended September 30, 2020 and 2019,
respectively, the net tax benefits are $35 million and $488 million for fiscal
2021 and 2020, respectively. Our tax benefits are estimates, which reflect our
current assessment of the estimated future deductibility of the amount that may
be paid under the accrual taken in connection with the opioid litigation and are
net of unrecognized tax benefits of $34 million and $469 million , respectively.
Due to our assessment of non-deductibility for certain components considered in
the fiscal 2021 and 2020 charges, the tax benefit for fiscal 2021 compared to
fiscal 2020 resulted in a relatively lower tax benefit. Our assumptions and
estimates around this benefit and uncertain tax position require significant
judgment and the actual amount of tax benefit related to uncertain tax positions
may differ materially from these estimates.
Unless an item is considered discrete because it is unusual or infrequent, the
tax impact of the item is included in our estimated annual effective tax rate.
When items are recognized through our estimated annual effective tax rate, we
apply our estimated annual effective tax rate to the earnings/(loss) before
income taxes for the year-to-date period to compute our provision/(benefit) for
income taxes for the current quarter and year-to-date period. The tax impacts of
discrete items are recognized in their entirety in the period in which they
occur.
In conjunction with the initial opioid accrual during the three months ended
September 30, 2019 , the tax effect of the charge was treated as a discrete item
because it was considered unusual or infrequent. However, the tax effect of the
charge during the three months ended September 30, 2020 was included in our
estimated annual effective tax rate because it was no longer considered unusual
or infrequent. Including the relatively lower tax benefit of the current quarter
charge in our estimated annual effective tax rate significantly increased the
estimated annual effective tax rate for fiscal 2021. As such, the amount of tax
benefit in the current quarter increased by approximately $450 million over the
tax expense that would have been recognized without the impact of the opioid
litigation charge and is expected to significantly increase our provision for
income taxes during the remainder of fiscal 2021.
We have made reasonable estimates and recorded amounts based on management's
judgment and our current understanding of the U.S. Tax Cuts and Jobs Act ("Tax
Act"); however, these estimates require significant judgment since the
definitive settlement terms and documentation, including provisions related to
deductibility, under the Settlement Framework have not been negotiated and the
U.S. tax law governing deductibility was changed by the Tax Act. Further, it is
possible that the tax authorities could challenge our interpretation of the Tax
Act or the estimates and assumptions used to assess the future deductibility of
these benefits. The actual amount of the tax benefit related to uncertain tax
positions may differ materially from these estimates. See Note 6 of the
"Notes to the Condensed Consolidated Financial Statements" for additional
information.
We file income tax returns in the U.S. federal jurisdiction, various U.S. state
jurisdictions and various foreign jurisdictions. With few exceptions, we are
subject to audit by taxing authorities for fiscal years 2008 through the current
fiscal year. Tax laws are complex and subject to varying interpretations. Tax
authorities have challenged some of our tax positions, including IRS challenges
to our international transfer pricing for the periods from 2008 to 2014, and it
is possible that they will challenge others. These challenges may adversely
affect our effective tax rate or tax payments.
Cardinal Health | Q1 Fiscal 2021 Form 10-Q 15
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Explanation and Reconciliation of Non-GAAP Financial Measures
Explanation and Reconciliation of Non-GAAP Financial Measures
The "Overview of Consolidated Results" section within MD&A in this Form 10-Q
contains financial measures that are not calculated in accordance with GAAP.
In addition to analyzing our business based on financial information prepared in
accordance with GAAP, we use these non-GAAP financial measures internally to
evaluate our performance, evaluate the balance sheet, engage in financial and
operational planning, and determine incentive compensation because we believe
that these measures provide additional perspective on and, in some circumstances
are more closely correlated to, the performance of our underlying, ongoing
business. We provide these non-GAAP financial measures to investors as
supplemental metrics to assist readers in assessing the effects of items and
events on our financial and operating results on a year-over-year basis and in
comparing our performance to that of our competitors. However, the non-GAAP
financial measures that we use may be calculated differently from, and therefore
may not be comparable to, similarly titled measures used by other companies. The
non-GAAP financial measures disclosed by us should not be considered a
substitute for, or superior to, financial measures calculated in accordance with
GAAP, and the financial results calculated in accordance with GAAP and
reconciliations to those financial statements set forth below should be
carefully evaluated.
Exclusions from Non-GAAP Financial Measures
Management believes it is useful to exclude the following items from the
non-GAAP measures presented in this report for its own and for investors'
assessment of the business for the reasons identified below:
•LIFO charges and credits are excluded because the factors that drive last-in
first-out ("LIFO") inventory charges or credits, such as pharmaceutical
manufacturer price appreciation or deflation and year-end inventory levels
(which can be meaningfully influenced by customer buying behavior immediately
preceding our fiscal year-end), are largely out of our control and cannot be
accurately predicted. The exclusion of LIFO charges and credits from non-GAAP
metrics facilitates comparison of our current financial results to our
historical financial results and to our peer group companies' financial results.
We did not recognize any LIFO charges or credits during the periods presented.
•Surgical gown recall costs includes inventory write-offs and certain
remediation and supply disruption costs arising from the January 2020 recall of
select Association for the Advancement of Medical Instrumentation ("AAMI") Level
3 surgical gowns and voluntary field actions (a recall of some packs and a
corrective action allowing overlabeling of other packs) for Presource Procedure
Packs containing affected gowns. We have excluded these costs from our non-GAAP
metrics to allow investors to better understand the underlying operating results
of the business and to facilitate comparison of our current financial results to
our historical financial results and to our peer group companies' financial
results.
•State opioid assessments related to prior fiscal years is the portion of state
assessments for prescription opioid medications that were sold or distributed in
periods prior to the period in which the expense is incurred. This portion is
excluded from non-GAAP financial measures because it is retrospectively applied
to sales in prior fiscal years and inclusion would obscure analysis of the
current fiscal year results of our underlying, ongoing business. Additionally,
while states' laws may require us to make payments on an ongoing basis, the
portion of the assessment related to sales in prior periods are contemplated to
be one-time, nonrecurring items. Reversals of these accruals have occurred when
the underlying assessments were invalidated by a Court.
•Restructuring and employee severance costs are excluded because they are not
part of the ongoing operations of our underlying business.
•Amortization and other acquisition-related costs, which include transaction
costs, integration costs, and changes in the fair value of contingent
consideration obligations, are excluded because they are not part of the ongoing
operations of our underlying business and to facilitate comparison of our
current financial results to our historical financial results and to our peer
group companies' financial results. Additionally, costs for amortization of
acquisition-related intangible assets are non-cash amounts, which are variable
in amount and frequency and are significantly impacted by the timing and size of
acquisitions, so their exclusion facilitates comparison of historical, current
and forecasted financial results. We also exclude other acquisition-related
costs, which are directly related to an acquisition but do not meet the criteria
to be recognized on the acquired entity's initial balance sheet as part of the
purchase price allocation. These costs are also significantly impacted by the
timing, complexity and size of acquisitions.
•Impairments and gain or loss on disposal of assets are excluded because they do
not occur in or reflect the ordinary course of our ongoing business operations
and are inherently unpredictable in timing and amount, and in the case of
impairments, are non-cash amounts, so their exclusion facilitates comparison of
historical, current and forecasted financial results.
16 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
--------------------------------------------------------------------------------Explanation and Reconciliation of Non-GAAP Financial Measures
•Litigation recoveries or charges, net are excluded because they often relate to events that may have occurred in prior or multiple periods, do not occur in or reflect the ordinary course of our business and are inherently unpredictable in timing and amount. •Loss on early extinguishment of debt is excluded because it does not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of this type of charge is not consistent and is significantly impacted by the timing and size of debt extinguishment transactions. •Transitional tax benefit, net related to the Tax Cuts and Jobs Act is excluded because it results from the one-time impact of a very significant change in theU.S. federal corporate tax rate and, due to the significant size of the benefit, obscures analysis of trends and financial performance. The transitional tax benefit includes the initial estimate and subsequent adjustments for the re-measurement of deferred tax assets and liabilities due to the reduction of theU.S. federal corporate income tax rate and the repatriation tax on undistributed foreign earnings. The tax effect for each of the items listed above, other than the transitional tax benefit item, is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded. The gross, tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations. Definitions Growth rate calculation: growth rates in this report are determined by dividing the difference between current-period results and prior-period results by prior-period results. Non-GAAP operating earnings: operating loss excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, and (7) litigation (recoveries)/charges, net. Non-GAAP earnings before income taxes: loss before income taxes excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, and (8) loss on early extinguishment of debt. Non-GAAP net earnings attributable toCardinal Health, Inc. : net loss attributable toCardinal Health, Inc. excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt, each net of tax, and (9) transitional tax benefit, net. Non-GAAP effective tax rate: provision for/(benefit from) income taxes adjusted for (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt, and (9) transitional tax benefit, (net) divided by (loss before income taxes adjusted for the first eight items). Non-GAAP diluted earnings per share attributable toCardinal Health, Inc. : non-GAAP net earnings attributable toCardinal Health, Inc. divided by diluted weighted-average shares outstanding.
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Explanation and Reconciliation of Non-GAAP Financial Measures
GAAP to Non-GAAP Reconciliations
Provision for/
Operating Operating Earnings Earnings/(Loss) Before (Benefit from) Net Earnings/(Loss)1 Diluted Diluted EPS1
(in millions, except per common share amounts) Earnings/(Loss) Growth Rate Income Taxes Income Taxes Net Earnings/(Loss)1 Growth Rate
EPS1,2 Growth Rate
Three Months Ended September 30, 2020
GAAP $ (624) N.M. $ (663) $ (410) $ (253) N.M. $ (0.86) N.M.
Surgical gown recall costs (1) (1) - (1) -
State opioid assessment related to prior fiscal 41 41 10 31 0.10
years
Restructuring and employee severance 37 37 9 28 0.09 Amortization and other acquisition-related costs 118 118 29 89 0.30 Impairments and (gain)/loss on disposal of assets 9 9 16 (7) (0.02) Litigation (recoveries)/charges, net 3 1,038 1,038 479 559 1.91 Loss on early extinguishment of debt - 1 1 - - Non-GAAP $ 618 7 % $ 580 $ 134 $ 445 18 %$ 1.51 19 % Three Months Ended September 30, 2019 GAAP $ (5,264) N.M $ (5,344) $ (423) $ (4,922) N.M.$ (16.65) N.M. State opioid assessment related to prior fiscal 5 5 1 4 0.01
years
Restructuring and employee severance 30 30 8 22 0.08 Amortization and other acquisition-related costs 132 132 34 98 0.33 Impairments and (gain)/loss on disposal of assets 1 1 - 1 - Litigation (recoveries)/charges, net 3 5,673 5,673 498 5,175 17.51 Non-GAAP $ 577 6 % $ 496 $ 117 $ 378 (4) %$ 1.27 (2) % 1 Attributable toCardinal Health, Inc. 2 First quarter fiscal 2021 and 2020 GAAP diluted loss per share attributable toCardinal Health, Inc. ("GAAP diluted EPS") and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 293 and 296 million common shares, respectively, which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the quarter. First quarter fiscal 2021 and 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 and 297 million common shares, respectively, which includes potentially dilutive shares. 3 Litigation (recoveries)/charges, net includes pre-tax charges of$1.02 billion and$5.63 billion recorded in the first quarter of fiscal 2021 and 2020, respectively, related to the opioid litigation. For fiscal 2021, including the tax effects of opioid litigation charges in the calculation of the estimated annual effective tax rate increased the amount of tax benefit in the current quarter by approximately$450 million and is expected to significantly increase the provision for income taxes during the remainder of the fiscal year. The current estimate of net tax benefits is$35 million and$488 million for fiscal 2021 and 2020 in connection with opioid lawsuit developments. The sum of the components and certain computations may reflect rounding adjustments. We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred. 18 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
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Other
Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the quantitative and qualitative market risk disclosures included in our 2020 Form 10-K since the end of fiscal 2020 throughSeptember 30, 2020 . Controls and Procedures Evaluation of Disclosure Controls and Procedures We evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as ofSeptember 30, 2020 . Based on this evaluation, our principal executive officer and principal financial officer have concluded that as ofSeptember 30, 2020 , our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in theSEC rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter endedSeptember 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Implementation of Business Improvement Initiatives We have certain business improvement initiatives underway that we expect to affect internal control over financial reporting beginning in the three months endedDecember 31, 2020 . During fiscal 2021, as a part of an ongoing effort to optimize and simplify our operating model, we are in the process of transitioning portions of our finance operations to a global professional services firm. Additionally, the Pharmaceutical segment is in a multi-year project to implement a replacement of certain finance and operating information systems. If either of these initiatives are not effectively implemented, or fail to operate as intended, it could adversely affect our internal control over financial reporting.
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Other Legal Proceedings In addition to the proceeding described below, the legal proceedings described in Note 5 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Legal Proceedings" section by reference. InJune 2019 ,Melissa Cohen , a purported shareholder, filed an action on behalf ofCardinal Health, Inc. in theU.S. District Court for the Southern District of Ohio against certain current and former members of our Board of Directors alleging that the defendants breached their fiduciary duties by failing to effectively monitorCardinal Health's distribution of controlled substances and approving certain payments of executive compensation. InDecember 2019 andJanuary 2020 , similar complaints were filed in theU.S. District Court for the Southern District of Ohio by purported shareholders,Stanley M. Malone andMichael Splaine , respectively. In January, 2020, the court consolidated the derivative cases under the caption In reCardinal Health, Inc. Derivative Litigation and inMarch 2020 , plaintiffs filed an amended complaint. The amended consolidated derivative complaint seeks, among other things, unspecified money damages against the defendants and an award of attorneys' fees. InJune 2020 , the defendants filed a motion to dismiss the complaint.
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Other
Risk Factors You should carefully consider the information in this Form 10-Q and the risk factors discussed in "Risk Factors" and other risks discussed in our 2020 Form 10-K and our filings with theSEC sinceJune 30, 2020 . These risks could materially and adversely affect our results of operations, financial condition, liquidity, and cash flows. Our business also could be affected by risks that we are not presently aware of or that we currently consider immaterial to our operations.
Unregistered Sales of
Approximate
Dollar Value of
Total Number of Shares Shares That May
Total Number Purchased Yet be Purchased
of Shares Average Price as Part of Publicly Under the Program (2)
Period Purchased (1) Paid per Share Announced Programs (2) (in millions)July 2020 1,629 $ 52.25 - $ 943 August 2020 2,610 50.59 - 943 September 2020 250 48.63 - 943 Total 4,489 $ 51.08 - $ 943 (1)Reflects common shares purchased through a rabbi trust as investments of participants in our Deferred Compensation Plan. (2)OnNovember 7, 2018 , our Board of Directors approved a$1.0 billion share repurchase program that expires onDecember 31, 2021 and as ofSeptember 30, 2020 , we have$943 million authorized for share repurchases remaining under this program. Cardinal Health | Q1 Fiscal 2021 Form 10-Q 21
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Financial Statements
Condensed Consolidated Statements of Loss
(Unaudited)
Three Months Ended September 30,
(in millions, except per common share amounts) 2020 2019
Revenue $ 39,065 $ 37,341
Cost of products sold 37,350 35,662
Gross margin 1,715 1,679
Operating expenses:
Distribution, selling, general and administrative expenses 1,137 1,107
Restructuring and employee severance 37 30
Amortization and other acquisition-related costs 118 132
Impairments and (gain)/loss on disposal of assets, net 9 1
Litigation (recoveries)/charges, net 1,038 5,673
Operating loss (624) (5,264)
Other (income)/expense, net (7) 14
Interest expense, net 45 66
Loss on early extinguishment of debt 1 -
Loss before income taxes (663) (5,344)
Provision for/(benefit from) income taxes (410) (423)
Net loss (253) (4,921)
Less: Net earnings attributable to noncontrolling interests - (1)
Net loss attributable to Cardinal Health, Inc. $
(253)
Loss per common share attributable toCardinal Health, Inc. : Basic$ (0.86) $ (16.65) Diluted (0.86) (16.65) Weighted-average number of common shares outstanding: Basic 293 296 Diluted 293 296 Cash dividends declared per common share$ 0.4859 $ 0.4811 See notes to condensed consolidated financial statements. 22 Cardinal Health | Q1 Fiscal 2021 Form 10-Q
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Financial Statements
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
Three Months Ended September 30,
(in millions) 2020 2019
Net loss $ (253) $ (4,921)
Other comprehensive income/(loss):
Foreign currency translation adjustments and other 12 (17)
Net unrealized gain/(loss) on derivative instruments, net of tax 5 (5)
Total other comprehensive income/(loss), net of tax 17 (22)
Total comprehensive loss (236) (4,943)
Less: comprehensive income attributable to noncontrolling interests
- (1)
Total comprehensive loss attributable to
(236)
See notes to condensed consolidated financial statements.© Edgar Online, source
