Cardinal Health(CAH) - 2025 Q4 - Annual Report

Management's Discussion and Analysis of Financial Condition and Results of Operations About Cardinal Health Cardinal Health is a global healthcare company operating through its Pharmaceutical (Pharma) and Medical Products (GMPD) segments, with a third "Other" category for smaller units - The company reports its financial results in two main segments: Pharmaceutical and Specialty Solutions ("Pharma") and Global Medical Products and Distribution ("GMPD")[19] - The Pharma segment distributes branded, generic, and specialty pharmaceuticals in the United States and provides related services to manufacturers and healthcare providers[19] - The GMPD segment manufactures, sources, and distributes Cardinal Health brand and national brand medical, surgical, and laboratory products across the U.S., Canada, Europe, and Asia[20] - The "Other" category comprises operating segments not large enough for separate disclosure, including Nuclear and Precision Health Solutions, at-Home Solutions, and OptiFreight Logistics[19][21][22] Consolidated Results Fiscal 2025 revenue decreased 2% to $222.6 billion, while GAAP operating earnings surged 83% and non-GAAP operating earnings grew 15% - Revenue for fiscal 2025 decreased by 2% to $222.6 billion, mainly due to the expiration of the OptumRx contracts, though this was partially offset by growth in branded and specialty pharmaceutical sales[23] Fiscal 2025 vs. 2024 Operating Earnings (GAAP and Non-GAAP) | (in millions) | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | GAAP operating earnings | $2,275 | $1,243 | 83% | | Non-GAAP operating earnings | $2,786 | $2,414 | 15% | - The increase in GAAP operating earnings was significantly driven by a favorable comparison to the prior year, which included $675 million in goodwill impairment charges, and by recognizing $171 million in net litigation recoveries in fiscal 2025[25] Fiscal 2025 vs. 2024 Diluted EPS (GAAP and Non-GAAP) | ($ per share) | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | GAAP diluted EPS | $6.45 | $3.45 | 87% | | Non-GAAP diluted EPS | $8.24 | $7.53 | 9% | - Cash and equivalents decreased from $5.1 billion at June 30, 2024, to $3.9 billion at June 30, 2025, with net cash from operations of $2.4 billion impacted by the OptumRx contract unwind and $798 million in opioid litigation payments[30] Significant Developments in Fiscal 2025 and Trends Fiscal 2025 was marked by strategic acquisitions totaling $5.3 billion, strong GLP-1 demand, and the adverse impact of the OptumRx contract expiration Key Acquisitions in Fiscal 2025 | Company | Closing Date | Purchase Price (in billions) | Business Description | | :--- | :--- | :--- | :--- | | Advanced Diabetes Supply (ADS) | Apr 1, 2025 | $1.1 | Diabetic medical supplies provider | | GI Alliance (GIA) | Jan 30, 2025 | $2.8 | Gastroenterology management services organization (MSO) | | Urology America | May 30, 2025 | $0.36 | Urology MSO (acquired through GIA) | | Integrated Oncology Network (ION) | Dec 2, 2024 | $1.1 | Independent community oncology network (MSO) | - The expiration of the OptumRx contracts, which accounted for 17% of consolidated revenue in fiscal 2024, adversely impacted results of operations, financial condition, and cash flows in fiscal 2025[42] - Sales of GLP-1 pharmaceuticals increased significantly, positively impacting revenue but not meaningfully contributing to segment profit[43] - The company faces risks from potential U.S. tariffs on goods from countries where it operates, which could lead to substantial additional costs, price increases, and supply disruptions[40][41] Results of Operations Total revenue decreased 2% to $222.6 billion, while gross margin grew 10% and total segment profit increased 15% to $2.9 billion Revenue Total revenue decreased 2% to $222.6 billion, driven by a 3% decline in the Pharma segment due to the OptumRx contract loss Revenue by Segment (in millions) | Segment | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | Pharmaceutical and Specialty Solutions | $204,644 | $210,019 | (3)% | | Global Medical Products and Distribution | $12,636 | $12,381 | 2% | | Other | $5,382 | $4,512 | 19% | | Total Segment Revenue | $222,662 | $226,912 | (2)% | Gross Margin Gross margin increased 10% to $8.2 billion, driven by acquisitions and a favorable product mix Gross Margin (in millions) | Metric | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | Gross Margin | $8,168 | $7,414 | 10% | - The increase in gross margin was primarily due to acquisitions (MSO platforms, ADS), increased contribution from branded and specialty pharmaceuticals, and BioPharma Solutions, partially offset by the OptumRx contract expiration[57] Distribution, Selling, General, and Administrative ("SG&A") Expenses SG&A expenses increased 8% to $5.4 billion, primarily due to the integration of recent acquisitions and higher operational costs SG&A Expenses (in millions) | Metric | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | SG&A Expenses | $5,382 | $5,000 | 8% | Segment Profit Total segment profit grew 15% to $2.9 billion, with strong performance across all segments Segment Profit (in millions) | Segment | 2025 | 2024 | Change | | :--- | :--- | :--- | :--- | | Pharmaceutical and Specialty Solutions | $2,258 | $2,015 | 12% | | Global Medical Products and Distribution | $135 | $92 | 47% | | Other | $516 | $423 | 22% | | Total Segment Profit | $2,909 | $2,530 | 15% | Provision for Income Taxes The effective income tax rate decreased to 25.3% from 28.9%, mainly due to the absence of a prior-year goodwill impairment charge Effective Income Tax Rate Reconciliation | | 2025 | 2024 | | :--- | :--- | :--- | | Provision at Federal statutory rate | 21.0% | 21.0% | | Goodwill Impairment | — | 8.7% | | Specialty Alliance Share-based Compensation | 1.4% | — | | Other items, net | 2.9% | (1.8)% | | Effective income tax rate | 25.3% | 28.9% | Liquidity and Capital Resources Cash decreased to $3.9 billion as the company deployed $5.3 billion for acquisitions and returned capital to shareholders, funded partly by new debt - Cash and equivalents decreased to $3.9 billion at June 30, 2025, from $5.1 billion at June 30, 2024[80] - Net cash provided by operating activities was $2.4 billion in fiscal 2025, which includes the impact of unwinding the OptumRx contracts and $798 million in opioid litigation payments[81] - Major uses of cash in fiscal 2025 included $5.3 billion for acquisitions, $765 million for share repurchases, $547 million for capital expenditures, and $494 million for dividends[82] - The company issued new long-term debt with net proceeds of $2.9 billion and borrowed $800 million from a term loan to fund acquisitions and for general purposes[82][89] Contractual Obligations and Cash Requirements as of June 30, 2025 (in millions) | Obligation | Total | | :--- | :--- | | Long-term debt and short-term borrowings | $8,314 | | Interest on long term debt | $4,032 | | Lease obligations (Finance & Operating) | $1,157 | | Purchase obligations and other payments | $1,510 | | Opioid litigation settlement agreements | $4,829 | | Total | $19,842 | Critical Accounting Policies and Sensitive Accounting Estimates This section details key accounting policies requiring significant management judgment, including goodwill impairment, litigation contingencies, and inventory valuation Allowance for Doubtful Accounts Activity (in millions) | | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Beginning Balance | $233 | $240 | $207 | | Charged to costs and expenses | $89 | $108 | $165 | | Reductions/Write-offs | ($109) | ($115) | ($132) | | Ending Balance | $213 | $233 | $240 | - 52% of inventories at June 30, 2025, are valued using the last-in, first-out (LIFO) method, primarily for merchandise at core pharmaceutical distribution facilities[113] - In fiscal 2024, the company recognized a $675 million goodwill impairment charge related to the GMPD segment; no impairments were recorded for other reporting units in fiscal 2025[123][124] - The company has accrued $56 million for losses and legal defense costs related to IVC filter product liability lawsuits as of June 30, 2025[132] - A new tax law, the One Big Beautiful Bill Act (OBBBA), was signed in July 2025, and the company is currently evaluating its impact on the consolidated financial statements[145] Explanation and Reconciliation of Non-GAAP Financial Measures GAAP to Non-GAAP Reconciliations This section reconciles GAAP to non-GAAP financial measures, adjusting for items like restructuring, amortization, and litigation to reflect underlying business performance - Management uses non-GAAP financial measures internally to evaluate performance, for financial planning, and to determine incentive compensation, believing they better reflect the performance of the underlying, ongoing business[148] - Key exclusions from non-GAAP measures include LIFO charges/credits, restructuring and severance costs, amortization and other acquisition-related costs, impairments, and litigation charges/recoveries[149][158] Fiscal Year 2025 GAAP to Non-GAAP Reconciliation Summary (in millions, except EPS) | Metric | GAAP | Adjustments | Non-GAAP | | :--- | :--- | :--- | :--- | | Operating Earnings | $2,275 | $511 | $2,786 | | Net Earnings | $1,561 | $434 | $1,995 | | Diluted EPS | $6.45 | $1.79 | $8.24 | Quantitative and Qualitative Disclosures about Market Risk Market Risk Disclosures The company is exposed to market risks from foreign exchange, interest rates, and commodity prices, which it manages through a hedging program - The company's primary market risks are related to foreign exchange, interest rates, and commodity prices, which are managed through a hedging program[162] - Using a Value-At-Risk (VAR) model, the potential maximum loss in earnings from transactional foreign exchange exposure is estimated at $13 million for the upcoming fiscal year[165] - A hypothetical 50 basis point increase/decrease in interest rates would result in a $12 million increase/decrease in interest expense and a $14 million increase/decrease in interest income, respectively[168][169] - The company has a forecasted direct commodity exposure of $491 million for the upcoming fiscal year; a hypothetical 10% fluctuation in commodity prices could result in a potential gain/loss of $49 million[172] Business Business Overview Cardinal Health is a global healthcare company distributing pharmaceuticals and medical products, recently expanding its specialty and at-home offerings through acquisitions - The Pharmaceutical and Specialty Solutions segment distributes a wide range of pharmaceutical products to retailers and hospitals, provides specialty pharma services, and operates MSO platforms[181] - The GMPD segment manufactures and sources Cardinal Health branded medical products and distributes a broad range of national brand medical, surgical, and laboratory products[182][184] - The company operates Red Oak Sourcing, a generic pharmaceutical sourcing venture with CVS Health, with a term extending through June 2029[182][183] Recent Major Acquisitions | Date | Company | Business | Acquisition Price (in billions) | | :--- | :--- | :--- | :--- | | 05/30/25 | Urology America | Urology MSO | $0.4 | | 04/01/25 | ADS | Diabetic medical supplies | $1.1 | | 01/30/25 | GI Alliance (GIA) | Gastroenterology MSO | $2.8 | | 12/02/24 | ION | Oncology MSO | $1.1 | | 03/18/24 | Specialty Networks | Multi-specialty GPO | $1.2 | Customers, Suppliers, and Competition The company has significant customer and supplier concentration and operates in a highly competitive market against national and regional distributors - Customer concentration is high: CVS Health accounted for 30% of fiscal 2025 revenue, and the top five customers accounted for 43%[194] - The five largest suppliers accounted for 37% of revenue in fiscal 2025, with the single largest supplier representing 9%[195] - Key competitors in the Pharma segment include McKesson Corporation and Cencora, Inc; in the GMPD segment, competitors include Medline Industries, Inc and Owens & Minor, Inc[197][198] Human Capital Management As of June 30, 2025, the company employed approximately 57,700 people globally, with a strategy focused on culture, talent, and safety - The company had approximately 57,700 employees globally as of June 30, 2025[201] - 35,000 employees work in distribution centers, manufacturing facilities, or pharmacies, while 21,000 work in other functions like finance, IT, and sales[202] - The Human Resources and Compensation Committee of the Board oversees human capital management strategies, including talent attraction, development, retention, and succession planning[204] Regulatory Matters The business is highly regulated by numerous U.S. and foreign agencies, covering areas from controlled substances and medical devices to data privacy - The business is subject to extensive regulation by agencies such as the FDA, DEA, NRC, and FTC in the U.S., as well as comparable agencies abroad[215][224] - Distribution of controlled substances is governed by the Controlled Substances Act (CSA), and the National Opioid Settlement Agreement (NOSA) imposes specific injunctive relief terms on anti-diversion programs until 2027[216][217] - Manufacturing and marketing of medical devices require clearance or approval, such as the 510(k) or PMA process in the U.S. and CE Mark Certification under the new Medical Device Regulation (MDR) in the EU[219][221][222] - The company is subject to evolving privacy laws, including HIPAA in the U.S. and GDPR in the EU, due to its handling of patient-identifiable health information[223][226] - The Drug Supply Chain Security Act (DSCSA) requires a national system for tracing prescription drugs, with compliance deadlines extended into 2025[228] Risk Factors Legal, Regulatory, & Compliance Risks The company faces significant risks from complex regulations, potential litigation, changes in tax laws, and ongoing opioid-related compliance obligations - The business is subject to rigorous regulatory and licensing requirements; failure to comply could result in suspension of operations, recalls, or sanctions[242] - The Department of Justice is investigating potential violations of the Anti-Kickback Statute and False Claims Act related to a 2022 GPO acquisition[244] - The company faces risks from potential adverse changes in tax laws and challenges by the IRS to its tax positions, including the deductibility of opioid litigation accruals and a self-insurance loss carryback under the CARES Act[254][256][258] - Opioid-related legal proceedings, including compliance with the National Opioid Settlement Agreement (NOSA) and lawsuits from private plaintiffs, could have additional negative effects on operations and financial results[265][266][267] Industry & Economic Risks The company is exposed to risks from international trade policies, generic drug market volatility, supply chain disruptions, and intense competitive pressure - Changes in U.S. or international trade policies, including tariffs, could disrupt global operations and negatively impact financial results by increasing costs and causing supply shortages[275][277] - The Pharma segment's profit margin is subject to volatility from generic pharmaceutical pricing, launches, and customer purchasing volumes, which may not be offset by sourcing ventures like Red Oak[279] - The company is subject to fluctuations in the cost and availability of raw materials (e.g., oil-based resins, cotton) and has experienced higher supply chain costs that negatively impacted GMPD segment profit[284] - Consolidation in the U.S. healthcare industry among distributors, manufacturers, and providers could create larger enterprises with greater negotiating power, potentially harming the company's results[292] Business & Operational Risks Key operational risks include dependency on information systems, cybersecurity threats, significant customer concentration, and challenges in integrating large acquisitions - Operations depend on the proper functioning of information systems and distribution networks, which are vulnerable to physical disruptions and cybersecurity incidents[295] - A material cyber-attack poses a significant risk, as unauthorized parties continuously attempt to gain access to systems, and the sophistication of these threats is increasing[297][298] - The company has significant customer concentration, with CVS Health accounting for 30% of fiscal 2025 revenue and 26% of gross trade receivables at year-end[305] - Integrating recent large acquisitions (ION, GIA, ADS) and entering new business lines like physician practice management present numerous risks, including regulatory challenges, unforeseen liabilities, and difficulties in retaining key personnel and customers[306][308][310] - The company recorded goodwill impairment charges of $675 million and $1.2 billion in fiscal 2024 and 2023, respectively, related to the GMPD segment; future impairments of goodwill or other long-lived assets remain a risk[321] Cybersecurity Cybersecurity Risk Management, Strategy, and Governance The company integrates cybersecurity into its enterprise risk management, using the NIST framework and providing Board-level oversight through the Audit Committee - The company's cybersecurity risk management strategy is benchmarked to industry standards like the NIST framework and includes measures such as penetration testing and tabletop exercises[322] - The Chief Information Security Officer (CISO), reporting to the CIO, leads the assessment and management of cybersecurity risks[324] - The Board's Audit Committee has primary responsibility for overseeing cybersecurity risks, receiving at least quarterly updates from the CISO and CIO[326] - To date, the company is not aware of any cybersecurity incidents that have materially affected or are reasonably likely to materially affect its business[324] Financial Statements and Supplementary Data Consolidated Financial Statements For fiscal 2025, the company reported revenue of $222.6 billion, net earnings of $1.56 billion, and total assets of $53.1 billion Consolidated Statement of Earnings Highlights (in millions) | Metric | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Revenue | $222,578 | $226,827 | $204,979 | | Gross Margin | $8,168 | $7,414 | $6,874 | | Operating Earnings | $2,275 | $1,243 | $752 | | Net Earnings Attributable to Cardinal Health, Inc. | $1,561 | $852 | $330 | Consolidated Balance Sheet Highlights (in millions) | Metric | June 30, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Cash and equivalents | $3,874 | $5,133 | | Total Current Assets | $36,373 | $34,884 | | Total Assets | $53,122 | $45,121 | | Total Current Liabilities | $38,897 | $35,640 | | Total Liabilities | $55,756 | $48,333 | | Total Shareholders' Deficit | ($2,634) | ($3,212) | Consolidated Statement of Cash Flows Highlights (in millions) | Metric | 2025 | 2024 | 2023 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,397 | $3,762 | $2,844 | | Net cash used in investing activities | ($5,593) | ($1,849) | ($454) | | Net cash provided by/(used in) financing activities | $1,940 | ($847) | ($3,051) | Notes to Consolidated Financial Statements The notes detail accounting policies and provide further information on acquisitions, goodwill, debt, litigation, and subsequent events - Note 2 (Acquisitions): Details the acquisitions of ADS ($1.1B), GIA (73% for $2.8B), and ION ($1.1B) in fiscal 2025, which significantly increased goodwill and intangible assets[476][478][481] - Note 5 (Goodwill): Goodwill increased from $4.7 billion to $9.7 billion, primarily due to the GIA and ION acquisitions in the Pharma segment and the ADS acquisition in the Other segment[503][504] - Note 7 (Debt): Total long-term obligations and other short-term borrowings increased to $8.5 billion from $5.1 billion, mainly from issuing $2.9 billion in new notes and borrowing $800 million under a term loan to fund acquisitions[513][516][522] - Note 8 (Litigation): As of June 30, 2025, the company has accrued $4.9 billion for opioid-related matters; during fiscal 2025, it made payments totaling $798 million related to these settlements[540] - Note 16 (Subsequent Events): On August 12, 2025, the company announced a definitive agreement to acquire Solaris Health, a urology MSO, for approximately $1.9 billion in cash[640]