CARDINAL HEALTH, INC. The discussion and analysis presented below is concerned with material changes in financial condition and results of operations, including amounts and certainty of cash flows from operations and from outside sources, between the periods specified in our condensed consolidated balance sheets atDecember 31, 2022 andJune 30, 2022 , and in our condensed consolidated statements of earnings/(loss) for the three and six months endedDecember 31, 2022 and 2021. 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 2022 Form 10-K. 2Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Overview
Overview of Consolidated Results
Revenue
During the three and six months ended
GAAP and Non-GAAP Operating Earnings/(Loss)
Three Months Ended December 31, Six Months Ended December 31,
(in millions) 2022 2021 Change 2022 2021 Change
GAAP operating earnings/(loss) $ (119) $ (950) (87) % $ 18 $ (535) N.M.
Surgical gown recall costs/(income) - 1 - 1
State opioid assessment related to prior (6) - (6) -
fiscal years
Shareholder cooperation agreement costs 2 - 8 - Restructuring and employee severance 17 7 46 25 Amortization and other acquisition-related 71 79 142 158
costs
Impairments and (gain)/loss on disposal of 710 1,295 863 1,293 assets, net Litigation (recoveries)/charges, net (207) 34 (180) 52 Non-GAAP operating earnings$ 467 $ 467 - %$ 891 $ 994 (10) %
The sum of the components and certain computations may reflect rounding adjustments.
We had a GAAP operating loss of$119 million and GAAP operating earnings of$18 million during the three and six months endedDecember 31, 2022 , respectively, which included the impact of pre-tax non-cash goodwill impairment charges related to the Medical segment of$709 million and$863 million , respectively. We had GAAP operating losses of$950 million and$535 million during the three and six months endedDecember 31, 2021 , respectively, which included the impact of a pre-tax non-cash goodwill impairment charge related to the Medical segment of$1.3 billion .
See "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A and Note 4 of the "Notes to Condensed Consolidated Financial Statements" for additional detail related to goodwill impairment.
Non-GAAP operating earnings during the three months endedDecember 31, 2022 was flat primarily due to an increase in Pharmaceutical segment profit largely driven by an increased contribution from branded pharmaceutical and specialty pharmaceutical products, mostly offset by a decrease in Medical segment profit largely resulting from lower volumes in products and distribution. Non-GAAP operating earnings during six months endedDecember 31, 2022 decreased 10 percent primarily due to a decrease in Medical segment profit largely resulting from lower volumes in products and distribution and net inflationary impacts, which primarily related to increased transportation and commodities costs, partially offset by price increases. This decrease was partially offset by an increase in Pharmaceutical segment profit primarily driven by the performance of our generics program. 3Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Overview
GAAP and Non-GAAP Diluted EPS
Three Months Ended December 31, Six Months Ended December 31,
($ per share) 2022 (2) 2021 Change 2022 (2) 2021 Change
GAAP diluted EPS (1) $ (0.50) $ 0.17 N.M. $ (0.08) $ 1.12 N.M.
State opioid assessment related to prior fiscal (0.02) - (0.02) -
years
Shareholder cooperation agreement costs 0.01 - 0.02 - Restructuring and employee severance 0.05 0.02 0.13 0.07 Amortization and other acquisition-related costs 0.20 0.21 0.40 0.41 Impairments and (gain)/loss on disposal of 2.06 0.77 2.46 0.78 assets, net (3) Litigation (recoveries)/charges, net (0.48) 0.10 (0.39) 0.15 Loss on early extinguishment of debt - - - 0.03 Non-GAAP diluted EPS (1)$ 1.32 $ 1.27 4 %$ 2.52 $ 2.56 (2) %
The sum of the components and certain computations may reflect rounding adjustments.
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."
(1)Diluted earnings/(loss) per share attributable to
(2)For the three and six months endedDecember 31, 2022 , GAAP diluted EPS and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 261 million and 266 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 periods. For the three and six months endedDecember 31, 2022 , non-GAAP diluted EPS is calculated using a weighted average of 263 million and 268 million common shares, which includes potentially dilutive shares. (3)Impairments and (gain)/loss on disposal of assets, net included pre-tax impairment charges related to the Medical segment of$709 million and$863 million recorded during the three and six months endedDecember 31, 2022 , respectively. For fiscal 2023, the estimated net tax benefit related to the impairments is$68 million and is included in the annual effective tax rate. As a result, the amount of tax benefit increased approximately by an incremental$118 million and$140 million for the three and six months endedDecember 31, 2022 , respectively, and is expected to increase the provision for income taxes during the remainder of the fiscal year. During the three and six months endedDecember 31, 2021 , impairments and (gain)/loss on disposal of assets, net included a pre-tax impairment charge of$1.3 billion related to the Medical segment. For fiscal 2022, the estimated net tax benefit related to the impairment was$92 million and was included in the annual effective tax rate. As a result, the amount of tax benefit in the second quarter increased by approximately an incremental$1.0 billion and significantly increased the provision for income taxes during the remainder of fiscal 2022. GAAP diluted EPS was adversely impacted by the goodwill impairment charges related to the Medical segment, which had a$(2.05) and$(2.46) per share after-tax impact during the three and six months endedDecember 31, 2022 , respectively, and a$(0.77) and$(0.76) per share after tax impact during the three and six months endedDecember 31, 2021 , respectively. See "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A, and Note 4 and Note 7 of the "Notes to Condensed Consolidated Financial Statements" for additional detail. GAAP EPS during the three and six months endedDecember 31, 2022 also includes the favorable impact of litigation recoveries as described further in the "Results of Operations" section of this MD&A and Note 6 of "Notes to Condensed Consolidated Financial Statements." During the three months endedDecember 31, 2022 , non-GAAP diluted EPS increased 4 percent to$1.32 per share, due to a lower share count as a result of share repurchases, partially offset by unfavorable changes in discrete tax items. During the six months endedDecember 31, 2022 , non-GAAP diluted EPS decreased 2 percent to$2.52 per share due to the factors impacting non-GAAP operating earnings discussed above, partially offset by a lower share count as a result of share repurchases and net favorable changes in discrete tax items.
Cash and Equivalents
Our cash and equivalents balance was$3.7 billion atDecember 31, 2022 compared to$4.7 billion atJune 30, 2022 . During the six months endedDecember 31, 2022 , net cash provided by operating activities was$620 million , which includes the impact of our second annual payment of$372 million related to the agreement to settle the vast majority of the opioid lawsuits filed by states and local governmental entities (the "Settlement Agreement"). In addition, during the six months endedDecember 31, 2022 , we deployed$1.3 billion for share repurchases and$271 million for cash dividends. 4Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Overview
Significant Developments in Fiscal 2023 and Trends
Inflationary Impacts
Medical segment profit was negatively affected by inflationary impacts,
primarily related to transportation (including ocean and domestic freight),
commodities and labor during the three and six months ended
We expect these inflationary impacts to continue to adversely affect Medical segment profit in fiscal 2023 and beyond. In order to mitigate this impact, we have implemented certain price increases and are also evolving our pricing and commercial contracting processes to provide us with greater pricing flexibility. These inflationary costs are difficult to predict and may be greater than we expect or continue longer than our current expectations. In the event these costs decrease, the benefit to Medical segment profit will be delayed until the higher-cost inventory has moved through our supply chain. Our plans to continue to increase prices and evolve our contracting strategies are subject to contingencies and uncertainties and it is possible that our results of operations will be adversely impacted to a greater extent than we currently anticipate or that we may not be able to mitigate the negative impact to the extent or on the timeline we anticipate. To a lesser extent, inflationary impacts, primarily related to increased transportation and labor costs, also adversely affected Pharmaceutical segment profit during the three and six months endedDecember 31, 2022 and on a year-over-year basis. We expect these inflationary supply chain costs to continue to adversely impact Pharmaceutical segment profit during the remainder of fiscal 2023 on a year-over-year basis, but to a lesser extent than during the six months endedDecember 31, 2022 .
PPE Demand and Pricing
Personal protective equipment ("PPE") refers to protective clothing, medical
gloves, face shields, face masks and other equipment designed to protect the
wearer from injury or the spread of infection or illness.
PPE adversely impacted Medical segment revenue during the three and six months
ended December 31, 2022 and on a year-over-year basis, primarily due to declines
in pricing and volumes.
Medical segment profit was favorably impacted during the three and six months
ended
The demand and pricing for PPE is subject to risks and uncertainties, which may continue to impact Medical segment revenue, Medical segment profit and consolidated operating earnings/(loss) during the remainder of fiscal 2023.
MedicalGoodwill Due to certain reductions in our long-term financial plan assumptions made during the three months endedDecember 31, 2022 , including those related toCardinal Health branded medical products sales growth, we performed interim goodwill impairment testing for the Medical operating segment (excluding ourCardinal Health at-Home Solutions division) (the "Medical Unit") atDecember 31, 2022 . This testing resulted in a pre-tax goodwill impairment charge of$709 million . During the three months endedSeptember 30, 2022 , we performed interim goodwill impairment testing for the Medical Unit, which resulted in a pre-tax goodwill impairment charge of$154 million , primarily due to an increase in the risk-free interest rate. The cumulative pre-tax goodwill impairment charges of$863 million were recognized in impairments and (gain)/loss on disposal of assets, net in our condensed consolidated statements of earnings/(loss) for the six months endedDecember 31, 2022 . See "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A and Note 4 of the "Notes to Condensed Consolidated Financial Statements" for additional detail.
Adverse changes in key assumptions or a significant change in industry or economic trends during the remainder of fiscal 2023 could result in additional goodwill impairment.
Shareholder Cooperation Agreement
InSeptember 2022 , we entered into a Cooperation Agreement (the "Cooperation Agreement") withElliott Associates, L.P. andElliott International, L.P. (together, "Elliott") under which our Board of Directors (the "Board"), among other things, (1) appointed four new 5Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Overview
independent directors, including a representative from Elliott, and (2) formed an advisory Business Review Committee of the Board, which is tasked with undertaking a comprehensive review of our strategy, portfolio, capital-allocation framework and operations.
The evaluation and implementation of any actions recommended by the Business Review Committee and the Board may impact our financial position and results of operations during the remainder of fiscal 2023 and beyond. In addition, during the three and six months endedDecember 31, 2022 , we incurred$2 million and$8 million , respectively, of expenses related to the negotiation and finalization of the Cooperation Agreement and other consulting expenses. We expect to incur additional legal, consulting and other expenses related to the Cooperation Agreement and the activities of the Business Review Committee during the remainder of fiscal 2023. See "Risk Factors" section for additional detail related to risks associated with the Cooperation Agreement.
Pharmaceutical Segment Generics Program
The performance of our Pharmaceutical segment generics program positively impacted the year-over-year comparison of Pharmaceutical segment profit during the three and six months endedDecember 31, 2022 . The Pharmaceutical segment generics program includes, among other things, the impact of generic pharmaceutical product launches, customer volumes, pricing changes, theRed Oak Sourcing, LLC venture ("Red Oak Sourcing") with CVS Health Corporation ("CVS Health ") and generic pharmaceutical contract manufacturing and sourcing costs. During the three and six months endedDecember 31, 2022 , generic pharmaceutical contract manufacturing inventory-related charges adversely impacted the performance of our generics program. The frequency, timing, magnitude and profit impact of generic pharmaceutical customer volumes, pricing changes, customer contract renewals, generic pharmaceutical manufacturer pricing changes and generic pharmaceutical contract manufacturing and sourcing costs all impact Pharmaceutical segment profit and are subject to risks and uncertainties. These risks and uncertainties may impact Pharmaceutical segment profit and consolidated operating earnings/(loss) during the remainder of fiscal 2023. 6Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Results of Operations
Results of Operations
Revenue
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Three Months Ended December 31, Six Months Ended December 31,
(in millions) 2022 2021 Change 2022 2021 Change
Pharmaceutical $ 47,673 $ 41,375 15 % $ 93,501 $ 81,197 15 %
Medical 3,797 4,085 (7) % 7,575 8,234 (8) %
Total segment revenue 51,470 45,460 13 % 101,076 89,431 13 %
Corporate (1) (3) N.M. (4) (6) N.M.
Total revenue $ 51,469 $ 45,457 13 % $ 101,072 $ 89,425 13 %
Pharmaceutical Segment
Pharmaceutical segment revenue increased during the three and six months ended
December 31, 2022 primarily due to branded and specialty pharmaceutical sales
growth from existing and net new customers, which together increased revenue by
$6.2 billion and $12.2 billion , respectively.
Medical Segment
Medical segment revenue decreased during the three and six months endedDecember 31, 2022 primarily due to lower sales within products and distribution, which includes an adverse impact from PPE pricing and volumes, and was partially offset by sales growth in at-Home Solutions.
Cost of Products Sold
Cost of products sold for the three and six months ended
7 Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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MD&A Results of Operations
Gross Margin
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Three Months Ended December 31, Six Months Ended December 31,
(in millions) 2022 2021 Change 2022 2021 Change
Gross margin $ 1,663 $ 1,616 3 % $ 3,277 $ 3,258 1 %
Gross margin increased during the three and six months ended December 31, 2022
primarily due to the Pharmaceutical segment, which included the performance of
our generics program and a higher contribution from branded and specialty
pharmaceutical products. During the six months ended December 31, 2022 , the
increase in gross margin due to the Pharmaceutical segment was partially offset
by the adverse impact of lower volumes within products and distribution in the
Medical segment.
Gross margin rate declined 33 basis points and 40 basis points during the three
and six months ended December 31, 2022 , respectively, mainly due to changes in
overall product mix, primarily driven by increased pharmaceutical distribution
branded sales, which have a dilutive impact on our overall gross margin rate.
Distribution, Selling, General and Administrative ("SG&A") Expenses
Three Months Ended December 31, Six Months Ended December 31,
(in millions) 2022 2021 Change 2022 2021 Change
SG&A expenses $ 1,191 $ 1,151 3 % $ 2,388 $ 2,265 5 %
During the three and six months ended December 31, 2022 , SG&A expenses increased
largely due to inflationary impacts, primarily related to increased
transportation and labor costs, and higher operating expenses, partially offset
by the beneficial impact of enterprise-wide cost-savings measures.
During the three and six months ended December 31, 2022 , we incurred $2 million
and $8 million of expenses primarily related to the finalization of the
Cooperation Agreement. See the Significant Developments in Fiscal 2023 and
Trends section in this MD&A for additional detail related to the Cooperation
Agreement.
During the three and six months ended December 31, 2022 , we recorded $6 million
of income to reduce our accrual for the assessment on prescription opioid
medications that were sold or distributed in New York state in calendar year
2018 to the amount invoiced. See Note 6 of the "Notes to Condensed
Consolidated Financial Statements" for additional information.
8 Cardinal Health | Q2 Fiscal 2023 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 12 of the "Notes to Condensed Consolidated Financial Statements"
for additional information on segment profit.
Three Months Ended December 31, Six Months Ended December 31,
(in millions) 2022 2021 Change 2022 2021 Change
Pharmaceutical $ 464 $ 426 9 % $ 895 $ 832 8 %
Medical 17 50 (66) % 9 173 (95) %
Total segment profit 481 476 1 % 904 1,005 (10) %
Corporate (600) (1,426) N.M. (886) (1,540) N.M.
Total consolidated operating earnings/(loss)
(87) %$ 18 $ (535) N.M. Pharmaceutical Segment Profit Pharmaceutical segment profit increased during the three and six months endedDecember 31, 2022 primarily due to increased contribution from branded and specialty pharmaceutical products and the performance of our generics program, partially offset by inflationary impacts, primarily related to increased transportation and labor costs.
During the three and six months ended
Medical Segment Profit Medical segment profit decreased during the three and six months endedDecember 31, 2022 largely due to the lower volumes in products and distribution and net inflationary impacts, which primarily related to increased transportation and commodities costs, partially offset by price increases. Medical segment profit during the three months endedDecember 31, 2022 was favorably impacted by a net positive contribution from PPE, primarily driven by decreased costs.
Corporate
The changes in Corporate during the three and six months ended
9 Cardinal Health | Q2 Fiscal 2023 Form 10-Q
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