Cardinal Health Inc
CAH
Delayed Nyse - 11/22 10:00:59 pm
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+2.24%

Cardinal Health : Management's Discussion and Analysis of Financial Condition and Results of Operations

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11/07/2017 | 10:25 pm


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 at September 30, 2017 and June 30,
2017
, and in our condensed consolidated statements of earnings for the three
months ended September 30, 2017 and 2016. 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 2017 Form
10-K.



Cardinal Health | Q1 Fiscal 2018 Form 10-Q 2




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MD&A Overview




Overview of Consolidated Results
Revenue



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Revenue for the three months ended September 30, 2017 increased 2 percent to
$32.6 billion due to sales growth from specialty and pharmaceutical distribution
customers, which was partially offset by the previously announced May 2017
expiration of a large pharmaceutical distribution mail order customer contract.
Medical segment acquisitions also contributed to the increase in revenue during
the three months ended September 30, 2017.
GAAP and Non-GAAP Operating Earnings




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Three Months Ended September 30,
(in millions) 2017 2016 Change
GAAP $ 262 $ 535 (51 )%
Restructuring and employee severance 132


9



Amortization and other acquisition-related costs 183


122



Impairments and (gain)/loss on disposal of assets 1


3



Litigation (recoveries)/charges, net 32 1
Non-GAAP $ 610 $ 669 (9 )%


The sum of the components may not equal the total due to rounding.
During the three months ended September 30, 2017, GAAP operating earnings
decreased 51 percent to $262 million and non-GAAP operating earnings decreased 9
percent to $610 million. The decrease in GAAP operating earnings was primarily
due to contract termination restructuring costs to transition the distribution
of our Medical segment's surgeon gloves in certain international markets from a
third-party distribution arrangement to a direct distribution model, increased
amortization of acquisition-related intangible assets as a result of the Patient
Recovery Business acquisition, and litigation charges. Our Pharmaceutical
segment generics program performance, which includes the negative impact of
generic pharmaceutical customer pricing changes offset by the benefits of Red
Oak Sourcing, also contributed to the decrease in GAAP and non-GAAP operating
earnings during the three months ended September 30, 2017.


3 Cardinal Health | Q1 Fiscal 2018 Form 10-Q



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MD&A Overview



GAAP and Non-GAAP Diluted EPS




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Three Months Ended September 30,
($ per share) 2017 2016 Change
GAAP $ 0.36 $ 0.96 (63 )%
Restructuring and employee severance 0.27


0.02



Amortization and other acquisition-related costs 0.40


0.25



Impairments and (gain)/loss on disposal of assets -


0.01



Litigation (recoveries)/charges, net 0.06 -
Non-GAAP $ 1.09 $ 1.24 (12 )%


The sum of the components may not equal the total due to rounding.
During the three months ended September 30, 2017, GAAP diluted earnings per
share attributable to Cardinal Health, Inc. ("diluted EPS") decreased 63 percent
to $0.36 per share and non-GAAP diluted EPS decreased 12 percent to $1.09 per
share. GAAP and non-GAAP diluted EPS decreased primarily due to the factors
impacting GAAP and non-GAAP operating earnings and partly due to an increase in
interest expense. The decrease in GAAP and non-GAAP diluted EPS was partially
offset by a lower effective tax rate.


Cash and Equivalents






Our cash and equivalents balance was $1.2 billion at September 30, 2017 compared
to $6.9 billion at June 30, 2017. The decrease in cash and equivalents during
the three months ended September 30, 2017 was driven by $6.1 billion paid for
acquisitions, net of cash acquired, $403 million to redeem our 1.7% notes due
2018, $150 million paid for share repurchases and $150 million paid in
dividends, offset in part by net cash provided by operating activities of $1.2
billion
.












Cardinal Health | Q1 Fiscal 2018 Form 10-Q 4




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MD&A Overview



Significant Developments in Fiscal 2018 and Trends



Acquisitions



On July 29, 2017, we acquired the Patient Care, Deep Vein Thrombosis, and
Nutritional Insufficiency businesses (the "Patient Recovery Business") from
Medtronic plc for $6.1 billion in cash. The Patient Recovery Business
manufactures 23 categories of medical products that are sold into multiple
healthcare channels, and includes numerous industry-leading brands, such as
Curity, Kendall, Dover, Argyle and Kangaroo. The acquisition further expands the
Medical segment's portfolio of self-manufactured products. We funded the
acquisition through $4.5 billion in new long-term debt, the use of existing
cash, and borrowings under our existing credit arrangements.
Trends






Within our Pharmaceutical segment, we expect fiscal 2018 segment profit to be
less than our fiscal 2017 segment profit due primarily to generic pharmaceutical
customer pricing changes. However, as is generally the case, the frequency,
timing, magnitude, and profit impact of pharmaceutical customer pricing changes
and branded and generic pharmaceutical manufacturer pricing changes remain
uncertain and their impact on Pharmaceutical segment profit and consolidated
operating earnings in fiscal 2018 could be more or less than we expect.
The acquisition of the Patient Recovery Business increased Medical segment
revenue and profit during the three months ended September 30, 2017. Since the
acquisition, which closed on July 29, 2017, only contributed to results for two
months and also reflects an unfavorable impact from a fair value inventory step
up, we expect the acquisition to increase Medical segment profit more
significantly during the remainder of fiscal 2018 than it did during the three
months ended September 30, 2017. During the three months ended September 30,
2017
, the acquisition also increased amortization and other acquisition-related
costs due to the size and complexity of the acquisition, and we expect increased
amortization and other acquisition-related costs during the remainder of fiscal
2018.
During the three months ended September 30, 2017, the debt issued in June 2017
to fund a portion of the purchase price of the Patient Recovery Business
acquisition increased our interest expense and we expect increased interest
expense during the remainder of fiscal 2018.
We are exploring strategic alternatives for our China products and services
distribution business. If we agree to sell the business, it is possible that we
could recognize an impairment or loss.





5 Cardinal Health | Q1 Fiscal 2018 Form 10-Q



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MD&A Results of Operations



Results of Operations
Revenue



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Three Months Ended September 30,
(in millions) 2017 2016 Change
Pharmaceutical $ 28,920 $ 28,762 1 %
Medical 3,724 3,279 14 %
Total segment revenue 32,644 32,041 2 %
Corporate (3 ) (2 ) N.M.
Total revenue $ 32,641 $ 32,039 2 %



Pharmaceutical Segment
Pharmaceutical segment revenue increased slightly during the three months ended
September 30, 2017 due to sales growth from specialty and pharmaceutical
distribution customers, which was partially offset by the previously announced
May 2017 expiration of a large pharmaceutical distribution mail order customer
contract.


Medical Segment
Medical segment revenue growth for the three months ended September 30, 2017 was
primarily due to contributions from acquisitions of $333 million, including the
Patient Recovery Business.

Cost of Products Sold




Cost of products sold increased to $31.0 billion (2 percent) compared to the
prior-year period, as a result of the same factors affecting the change in
revenue and gross margin.










Cardinal Health | Q1 Fiscal 2018 Form 10-Q 6




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MD&A Results of Operations



Gross Margin




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Three Months Ended September 30,
(in millions) 2017 2016 Change
Gross margin $ 1,672 $ 1,590 5 %



Gross margin during the three months ended September 30, 2017 increased $82
million
(5 percent) versus the prior-year period. Acquisitions, including the
Patient Recovery Business, increased gross margin by $97 million.




Gross margin rate grew 16 basis points during the three months ended
September 30, 2017 due to acquisitions, including the Patient Recovery Business,
and Pharmaceutical segment generics program performance. Gross margin rate was
negatively impacted by changes in pharmaceutical distribution product mix.
Distribution, Selling, General, and Administrative ("SG&A") Expenses



Three Months Ended September 30,
(in millions) 2017 2016 Change
SG&A expenses $ 1,062 $ 920 15 %



The increase in SG&A expenses during the three months ended September 30, 2017
was due to acquisitions ($92 million), including the Patient Recovery Business,
and the costs related to a multi-year project to replace certain Pharmaceutical
segment finance and operating information systems.


7 Cardinal Health | Q1 Fiscal 2018 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 14 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) 2017 2016 Change
Pharmaceutical $ 467 $ 534 (13 )%
Medical 129 127 1 %
Total segment profit 596 661 (10 )%
Corporate (334 ) (126 )



165 %
Total consolidated operating earnings $ 262 $ 535 (51 )%






Pharmaceutical Segment Profit
The decrease in Pharmaceutical segment profit during the three months ended
September 30, 2017 was primarily due to our generic program performance, which
includes the negative impact of generic pharmaceutical customer pricing changes
offset by the benefits of Red Oak Sourcing. The costs related to a multi-year
project to replace certain Pharmaceutical segment finance and operating
information systems also contributed to the decrease in Pharmaceutical Segment
profit during the three months ended September 30, 2017.


Medical Segment Profit
Medical segment profit grew slightly during the three months ended September 30,
2017
. Acquisitions, which included the unfavorable cost of products sold impact
from the fair value step up of inventory acquired with the Patient Recovery
business, contributed to segment profit growth. The increase was mostly offset
by the previously announced loss of a portion of a large distribution customer
contract.
Corporate
As discussed further in sections that follow, the change in Corporate during the
three months ended September 30, 2017 was due to contract termination
restructuring costs to transition the distribution of our Medical segment's
surgeon gloves in certain international markets from a third-party distribution
arrangement to a direct distribution model, amortization and other
acquisition-related costs due to the Patient Recovery Business acquisition, and
litigation charges.




Cardinal Health | Q1 Fiscal 2018 Form 10-Q 8




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