Company Quick10K Filing
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Cardinal Health
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$46.75 298 $13,930
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-19 Officers
8-K 2019-02-07 Earnings, Regulation FD, Exhibits
8-K 2018-12-05 Officers, Regulation FD, Exhibits
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-11-07 Shareholder Vote
8-K 2018-09-24 Officers, Exhibits
8-K 2018-09-01 Officers
8-K 2018-08-24 Officers
8-K 2018-08-06 Earnings, Regulation FD, Exhibits
8-K 2018-05-03 Earnings, Regulation FD, Exhibits
8-K 2018-03-09 Other Events, Exhibits
8-K 2018-01-16 Officers
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WERN Werner Enterprises 2,430
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YRD Yirendai 936
MTW Manitowoc 633
GREAT Greater Cannabis Company 0
ACAN Americann 0
RYAA Ryanair Holdings 0
CAH 2018-12-31
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EX-10.4 a19q2_10qx123118xexhibit104.htm
EX-31.1 a19q2_10qx123118xexhibit311.htm
EX-31.2 a19q2_10qx123118xexhibit312.htm
EX-32.1 a19q2_10qx123118xexhibit321.htm
EX-99.1 a19q2_10qx123118xexhibit991.htm

Cardinal Health Earnings 2018-12-31

CAH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a19q2_10qx123118xform10-q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 1-11373
cvrpic63016a01a02a10.jpg
Cardinal Health, Inc.
(Exact name of registrant as specified in its charter)
Ohio
31-0958666
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
7000 Cardinal Place, Dublin, Ohio
43017
(Address of principal executive offices)
(Zip Code)
 
 
(614) 757-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  þ
The number of the registrant’s common shares, without par value, outstanding as of January 31, 2019, was the following: 298,016,653.




Cardinal Health  
Q2 Fiscal 2019 Form 10-Q

Table of Contents
 

About Cardinal Health
 
Cardinal Health, Inc. is an Ohio corporation formed in 1979 and is a globally integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices. We provide medical products and pharmaceuticals and cost-effective solutions that enhance supply chain efficiency. We connect patients, providers, payers, pharmacists and manufacturers for integrated care coordination and better patient management. We manage our business and report our financial results in two segments: Pharmaceutical and Medical. As used in this report, “we,” “our,” “us,” and similar pronouns refer to Cardinal Health, Inc. and its subsidiaries, unless the context requires otherwise. Our fiscal year ends on June 30. References to fiscal 2018 and fiscal 2017 are to the fiscal years ending or ended June 30, 2018 and June 30, 2017, respectively.
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q for the quarter ended December 31, 2018 (this "Form 10-Q") (including information incorporated by reference) includes "forward-looking statements" addressing expectations, prospects, estimates and other matters that are dependent upon future events or developments. Many forward-looking statements appear in Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), but there are others in this Form 10-Q, which may be identified by words such as "expect," "anticipate," "intend," "plan," "believe," "will," "should," "could," "would," "project," "continue," "likely," and similar expressions, and include statements reflecting future results, trends or guidance, statements of outlook and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those made, projected or implied. The most significant of these risks and uncertainties are described in Exhibit 99.1 to this Form 10-Q and in "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (our “2018 Form 10-K”). Forward-looking statements in this Form 10-Q speak only as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.
Non-GAAP Financial Measures
 
In the "Overview of Consolidated Results" section of MD&A, we use financial measures that are derived from our consolidated financial data but are not presented in our condensed consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). These measures are considered "non-GAAP financial measures" under the Securities and Exchange Commission ("SEC") rules. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the “Explanation and Reconciliation of Non-GAAP Financial Measures” section following MD&A in this Form 10-Q.


 
 
 
 1
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



MD&A
Overview
 



Management's Discussion and Analysis of Financial Condition and Results of Operations
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 December 31, 2018 and June 30, 2018, and in our condensed consolidated statements of earnings for the three and six months ended December 31, 2018 and 2017. 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 2018 Form 10-K.

Overview of Consolidated Results
Revenue
 
chart-f78d604ac0a55b22879.jpg
During the three and six months ended December 31, 2018, revenue increased 7 percent to $37.7 billion and 8 percent to $73.0 billion, respectively, primarily due to sales growth from pharmaceutical distribution and specialty pharmaceutical customers, partially offset by the February 2018 divestiture of our China distribution business.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
2



MD&A
Overview
 

GAAP and Non-GAAP Operating Earnings
 
chart-3083ca6ca7de5858bd8.jpgchart-b5851213db39514d9ac.jpg
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
GAAP operating earnings
$
504

 
$
399

 
26
 %
 
$
1,320

 
$
661

 
100
 %
State opioid assessment related to prior fiscal years
(29
)
 

 
 
 

 

 
 
Restructuring and employee severance
12

 
21

 
 
 
44

 
153

 
 
Amortization and other acquisition-related costs
157

 
184

 
 
 
314

 
368

 
 
Impairments and (gain)/loss on disposal of assets
8

 
68

 
 
 
(503
)
 
68

 
 
Litigation (recoveries)/charges, net
(15
)
 
58

 
 
 
3

 
90

 
 
Non-GAAP operating earnings
$
637

 
$
730

 
(13
)%
 
$
1,178

 
$
1,340

 
(12
)%
The sum of the components may not equal the total due to rounding.
The increase in GAAP operating earnings during the three months ended December 31, 2018 was primarily due to favorable changes in litigation recoveries and charges, the beneficial comparison to the prior-year write-down of the assets held for sale from the divestiture of our China distribution business and growth from our specialty pharmaceutical products distribution and services business. These positive factors were partially offset by the negative impact of our Pharmaceutical segment generics program performance.
The increase in GAAP operating earnings during the six months ended December 31, 2018 was primarily due to a $508 million gain from the divestiture of our naviHealth Holdings, LLC ("naviHealth") business and the same factors impacting GAAP operating earnings during the three months ended December 31, 2018. The beneficial comparisons to the prior-year $125 million of contract termination costs to transition the distribution of our Medical segment surgeon gloves in certain international markets from a third-party distribution arrangement to a direct distribution model and the prior-year fair value step-up of inventory acquired with the Patient Recovery Business also contributed to the increase in GAAP operating earnings during the six months ended December 31, 2018.
The decrease in non-GAAP operating earnings during the three months and six ended December 31, 2018 was primarily due to the negative impact of our Pharmaceutical segment generics program performance, increased costs related to Cardinal Health Brand products and the adverse impact of pharmaceutical customer contract renewals. These factors were partially offset by growth from our specialty pharmaceutical products distribution and services business and the beneficial comparison to the prior-year fair value step-up of inventory acquired with the Patient Recovery Business.


 
 
 
 3
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



MD&A
Overview
 

GAAP and Non-GAAP Diluted EPS
 
chart-5021e54a3fca5373a82.jpgchart-7c5dbdd46b0a5307883.jpg
 
Three Months Ended December 31,
 
Six Months Ended December 31,
($ per share)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
GAAP (1)
$
0.93

 
$
3.33

 
(72
)%
 
$
2.88

 
$
3.68

 
(22
)%
State opioid assessment related to prior fiscal years
(0.07
)
 

 
 
 

 

 
 
Restructuring and employee severance
0.03

 
0.07

 
 
 
0.11

 
0.34

 
 
Amortization and other acquisition-related costs
0.40

 
0.46

 
 
 
0.79

 
0.85

 
 
Impairments and (gain)/loss on disposal of assets
0.02

 
0.35

 
 
 
(1.22
)
 
0.35

 
 
Litigation (recoveries)/charges, net
(0.04
)
 
0.13

 
 
 
0.01

 
0.19

 
 
Transitional tax benefit, net
0.01

 
(2.83
)
 
 
 
0.01

 
(2.82
)
 
 
Non-GAAP (1)
$
1.29

 
$
1.51

 
(15
)%
 
$
2.58

 
$
2.60

 
(1
)%
The sum of the components may not equal the total due to rounding.
(1)
diluted earnings per share attributable to Cardinal Health, Inc. ("diluted EPS")
During the three months ended December 31, 2018, GAAP diluted EPS decreased primarily due to transitional tax benefits related to the enactment of the U.S. Tax Cuts and Jobs Act ("Tax Act") in the prior year.
During the six months ended December 31, 2018, GAAP diluted EPS decreased primarily due to transitional tax benefits related to the enactment of the Tax Act in the prior year, partially offset by the factors impacting GAAP operating earnings and the benefit from a lower share count as a result of share repurchases.
During the three months ended December 31, 2018, non-GAAP diluted EPS decreased primarily due to the factors impacting non-GAAP operating earnings.
During the six months ended December 31, 2018, non-GAAP diluted EPS was down slightly. The factors impacting non-GAAP operating earnings were offset by the benefits from applying a lower federal tax rate to our U.S. pre-tax earnings under the Tax Act, discrete tax items and a lower share count as a result of share repurchases.
Cash and Equivalents
 
Our cash and equivalents balance was $2.2 billion at December 31, 2018 compared to $1.8 billion at June 30, 2018. The increase in cash and equivalents during the six months ended December 31, 2018 was due to $737 million of net cash proceeds from the sale of our naviHealth business and $736 million provided by operating activities, offset in part by $600 million paid for share repurchases and $293 million paid in dividends.

 






 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
4



MD&A
Overview
 

Significant Developments in Fiscal 2019

Divestitures
 
In August 2018, we sold our 98 percent ownership interest in naviHealth in exchange for cash proceeds of $737 million and a 44 percent equity interest in a partnership that owns 100 percent of naviHealth. We also have certain call rights to reacquire naviHealth. We recognized a pre-tax gain of $508 million related to this divestiture during the six months ended December 31, 2018.



 
 
 
 5
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



MD&A
Results of Operations
 

Results of Operations
Revenue

chart-57a45dce4bae5b88b2c.jpgchart-0760f0909b0b515c92c.jpg
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Pharmaceutical
$
33,740

 
$
31,146

 
8
 %
 
$
65,155

 
$
60,066

 
8
%
Medical
4,006

 
4,044

 
(1
)%
 
7,807

 
7,768

 
1
%
Total segment revenue
37,746

 
35,190

 
7
 %
 
72,962

 
67,834

 
8
%
Corporate
(6
)
 
(4
)
 
50
 %
 
(9
)
 
(7
)
 
29
%
Total revenue
$
37,740

 
$
35,186

 
7
 %
 
$
72,953

 
$
67,827

 
8
%
Pharmaceutical Segment
Pharmaceutical segment revenue growth was primarily due to sales growth from pharmaceutical distribution and specialty pharmaceutical customers, which together increased revenue by $3.4 billion and $6.7 billion during the three and six months ended December 31, 2018, respectively. The increase due to sales growth was partially offset by the February 2018 divestiture of our China distribution business.
Medical Segment
Medical segment revenue decreased slightly during the three months ended December 31, 2018 due to the divestitures of our China distribution and naviHealth businesses, largely offset by sales growth from existing customers.
Medical segment revenue increased slightly during the six months ended December 31, 2018 due to sales growth from existing customers and contributions from the Patient Recovery Business acquisition, largely offset by the divestitures of our China distribution and naviHealth businesses.
Cost of Products Sold
 
Cost of products sold for the three and six months ended December 31, 2018 increased $2.7 billion (8 percent) and $5.3 billion (8 percent) compared to the respective prior-year periods as a result of the factors affecting the changes in revenue and gross margin.





 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
6



MD&A
Results of Operations
 

Gross Margin
 
chart-bb7cb700aa2f5ca3871.jpgchart-159bf474274f54efa4c.jpg
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Gross margin
$
1,730

 
$
1,861

 
(7
)%
 
$
3,397

 
$
3,533

 
(4
)%
Gross margin decreased $131 million and $136 million during the three and six months ended December 31, 2018, respectively, primarily due to lower gross margin rate, partially offset by sales growth from our specialty pharmaceutical products distribution and services business.
Gross margin rate declined 71 and 55 basis points during the three and six months ended December 31, 2018, respectively, mainly due to changes in product mix, lower contribution from our Pharmaceutical segment generics program and the adverse impact of pharmaceutical customer contract renewals. Gross margin rate during the six months ended December 31, 2018 was positively impacted by the net impact of acquisitions and divestitures, which includes the Patient Recovery Business acquisition and the divestitures of our China distribution and naviHealth businesses.
Distribution, Selling, General and Administrative ("SG&A") Expenses
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
SG&A expenses
$
1,064

 
$
1,131

 
(6
)%
 
$
2,219

 
$
2,193

 
1
%
During the three months ended December 31, 2018, SG&A expenses benefited from the impact of divestitures and the reversal of the amount we accrued in the first quarter of fiscal 2019 for the New York Opioid Stewardship Act assessment for opioids sold or distributed in New York state. In December 2018, the U.S. Federal District Court ruled the New York Opioid Stewardship Act was unconstitutional.
During the six months ended December 31, 2018, SG&A expenses increased slightly due to certain costs to exit transition service agreements for our Patient Recovery Business and opioid-matter legal defense expenses, partially offset by the beneficial impact of divestitures.
See Note 9 of the "Notes to Condensed Consolidated Financial Statements" for additional information on the New York Opioid Stewardship Act and opioid lawsuits.


 
 
 
 7
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



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.
chart-2a41e8d32dba5fe1b1f.jpgchart-833df8da48235b4c8ec.jpg
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Pharmaceutical
$
443

 
$
514

 
(14
)%
 
$
851

 
$
981

 
(13
)%
Medical
188

 
220

 
(14
)%
 
323

 
348

 
(7
)%
Total segment profit
631

 
734

 
(14
)%
 
1,174

 
1,329

 
(12
)%
Corporate
(127
)
 
(335
)
 
(62
)%
 
146

 
(668
)
 
(122
)%
Total consolidated operating earnings
$
504

 
$
399

 
26
 %
 
$
1,320

 
$
661

 
100
 %
Pharmaceutical Segment Profit
Pharmaceutical segment profit during the three and six months ended December 31, 2018 was adversely impacted by our generics program performance and customer contract renewals. The decreases were partially offset by growth from our specialty pharmaceutical products distribution and services business.
Medical Segment Profit
The decreases in Medical segment profit during the three and six months ended December 31, 2018 were primarily due to increased costs related to Cardinal Health Brand products. The decreases were partially offset by the net impact of acquisitions and divestitures, which includes the beneficial comparison to the prior-year fair value step-up of inventory acquired with the Patient Recovery Business.
Corporate
The changes in Corporate during the three and six months ended December 31, 2018 were due to the factors discussed in the Other Components of Consolidated Operating Earnings section that follows.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
8



MD&A
Results of Operations
 

Other Components of Consolidated Operating Earnings
 
In addition to revenue, gross margin and SG&A expenses discussed previously, consolidated operating earnings were impacted by the following:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
2018
 
2017
Restructuring and employee severance
$
12

 
$
21

 
$
44

 
$
153

Amortization and other acquisition-related costs
157

 
184

 
314

 
368

Impairments and (gain)/loss on disposal of assets, net
8

 
68

 
(503
)
 
68

Litigation (recoveries)/charges, net
(15
)
 
58

 
3

 
90

Restructuring and Employee Severance
During the three and six months ended December 31, 2018, we recognized $8 million and $34 million, respectively, of employee-related severance costs in connection with enterprise-wide cost-saving measures that began in fiscal 2019.
During the six months ended December 31, 2017, we incurred $125 million of contract termination costs to transition the distribution of our Medical segment surgeon gloves in certain international markets from a third-party distribution arrangement to a direct distribution model.
Amortization and Other Acquisition-Related Costs
Amortization of acquisition-related intangible assets was $133 million and $152 million for the three months ended December 31, 2018 and 2017, respectively, and $266 million and $287 million for the six months ended December 31, 2018 and 2017, respectively.
Transaction and integration costs associated with the Patient Recovery Business acquisition were $22 million and $24 million for the three months ended December 31, 2018 and 2017, respectively, and $44 million and $61 million for the six months ended December 31, 2018 and 2017, respectively.
Impairments and (Gain)/Loss On Disposal of Assets, Net
During the six months ended December 31, 2018, we recognized a pre-tax gain of $508 million related to the divestiture of our naviHealth business.
During the three and six months ended December 31, 2017 we recognized a $67 million write-down of the assets held for sale from the divestiture of our China distribution business.
Litigation (Recoveries)/Charges, Net
During both the three and six months ended December 31, 2018, we recognized $47 million of recoveries in class action antitrust lawsuits in which we were a class member. In addition, the costs we recognized in connection with the IVC filter product liability claims were $26 million and $45 million lower in the three and six months ended December 31, 2018, respectively, than the costs recognized in the comparable prior year periods.
Earnings Before Income Taxes

In addition to the items discussed above, earnings before income taxes were impacted by the following:
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Other (income)/expense, net
$
21

 
$
(5
)
 
N.M.

 
$
25

 
$
(4
)
 
N.M.

Interest expense, net
$
76

 
$
87

 
(13
)%
 
$
152

 
$
168

 
(10
)%
Loss on extinguishment of debt
$

 
$

 
N.M.

 
$

 
$
2

 
N.M.








 
 
 
 9
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



MD&A
Results of Operations
 

Provision for/(Benefit from) Income Taxes
 
During the three months ended December 31, 2018 and 2017, the effective tax rate was 31.0 percent and (231.9) percent, respectively. During the six months ended December 31, 2018 and 2017, the effective tax rate was 23.5 percent and (136.6) percent, respectively. The changes in the effective tax rates for the three and six months ended December 31, 2018 compared to the prior periods is primarily due to transitional tax benefits from the enactment of the Tax Act in the prior periods. The six months ended December 31, 2018 also included net discrete benefits of $38 million primarily related to international legal entity changes.
The transitional tax benefits from the Tax Act during the three and six months ended December 31, 2017 included a provisional net tax benefit of $935 million related to the remeasurement of our deferred tax assets and liabilities to the new federal statutory rate and a provisional tax expense of $41 million for the one-time repatriation tax applied to our undistributed foreign earnings. Our effective tax rates for the three and six months ended December 31, 2017 also included $57 million of tax expense recognized in connection with the sale of our China distribution business.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
10



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, dividends and share repurchases. If we decide to engage in one or more acquisitions, depending on the size and timing of such transactions, we may need to access capital markets for additional financing.
Cash and Equivalents
 
Our cash and equivalents balance was $2.2 billion at December 31, 2018 compared to $1.8 billion at June 30, 2018. At December 31, 2018, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments.
In August 2018, we completed the sale of our interest in naviHealth and received proceeds of $737 million and a 44 percent equity interest in a partnership that owns naviHealth. During the six months ended December 31, 2018, net cash provided by operating activities was $736 million, driven by net earnings and changes in net working capital. Also during the six months ended December 31, 2018, we deployed $600 million for share repurchases and $293 million for cash dividends.
The cash and equivalents balance at December 31, 2018 includes $695 million of cash held by subsidiaries outside of the United States.
 
Though our foreign earnings have been deemed to be repatriated from a U.S. federal tax perspective, we have not yet completed our assessment of pending and final Tax Act regulations on our plans to reinvest foreign earnings, and as such, we have not changed our prior conclusion that the earnings are indefinitely reinvested. If we decide to repatriate these earnings in the future, we may be subject to certain non-U.S. taxes at that time. See Note 8 of the "Notes to Condensed Consolidated Financial Statements" for additional information on the Tax Act.
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.
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 at December 31, 2018 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. At December 31, 2018, we had no amounts outstanding under our commercial paper program, revolving credit facility or our committed receivables sales facility. Under our commercial paper and committed receivables programs, we had maximum amounts outstanding of $215 million and $785 million, respectively, and an average daily amount outstanding of $4 million and $22 million during three and six months ended December 31, 2018, respectively.
 
On November 6, 2018, we increased the maximum consolidated leverage ratio permitted under our revolving credit and committed receivables facilities to provide that, as of the end of any calendar quarter, our maximum consolidated leverage ratio may be no more than 4.25-to-1. The maximum ratio will reduce to 4.00-to-1 in September 2019, to 3.75-to-1 in March 2020 and to 3.25-to-1 in September 2020. As of December 31, 2018, we were in compliance with our financial covenants.
Long-Term Debt
At December 31, 2018, we had total long-term obligations, including the current portion and other short-term borrowings, of $9.0 billion.


 
 
 
 11
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



MD&A
Liquidity and Capital Resources
 

Capital Deployment
 
Capital Expenditures
Capital expenditures during the six months ended December 31, 2018 and 2017 were $116 million and $168 million, respectively.
Dividends
On November 7, 2018, our Board of Directors approved a quarterly dividend of $0.4763 per share, or $1.91 per share on an annualized basis, payable on January 15, 2019 to shareholders of record on January 2, 2019.
On February 6, 2018, our Board of Directors approved a quarterly dividend of $0.4763 per share, or $1.91 per share on an annualized basis, payable on April 15, 2019 to shareholders of record on April 1, 2019.
 
Share Repurchases
During the six months ended December 31, 2018, we repurchased $600 million of our common shares pursuant to an accelerated share repurchase ("ASR") program, which was completed in October 2018. See Note 12 of the "Notes to condensed consolidated financial statements" for additional information.
On November 7, 2018, our Board of Directors approved a new $1.0 billion share repurchase program, which expires on December 31, 2021. At December 31, 2018, we had $1.3 billion for share repurchases remaining under all programs.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
12



MD&A
Other Items
 


Other Items
The MD&A in our 2018 Form 10-K addresses our contractual obligations and off-balance sheet arrangements, as of and for the fiscal year ended June 30, 2018. There have been no subsequent material changes outside of the ordinary course of business to those items.
Critical Accounting Policies and Sensitive Accounting Estimates
The discussion and analysis presented below is a supplemental disclosure to the critical accounting policies and sensitive accounting estimates specified in our consolidated balance sheets at June 30, 2018. This discussion and analysis should be read in conjunction with the Critical Accounting Policies and Sensitive Accounting Estimates included in our 2018 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. In this section, we describe the significant policies applied in preparing our consolidated financial statements that management believes are the most dependent on estimates and assumptions for goodwill impairment testing.
Goodwill
 
Purchased goodwill is tested for impairment annually or when indicators of impairment exist. Goodwill impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount, which may be performed utilizing either a qualitative or quantitative assessment. Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. A reporting unit is defined as an operating segment or one level below an operating segment (also known as a component).
Goodwill impairment testing involves judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit. Our qualitative evaluation considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
 
Medical Unit Goodwill Qualitative Assessment
During the fourth quarter of fiscal 2018, we recorded a $1.4 billion goodwill impairment within our Medical segment. Although we believe the assumptions used to arrive at the estimate of fair value during the fourth quarter of fiscal 2018 continue to be reasonable and appropriate, changes in key assumptions during the remainder of fiscal 2019, including a failure to meet expected earnings or other financial plans, or other unanticipated events and circumstances, such as a rise in interest rates or a significant change in industry or economic trends, may affect future estimates. Adverse changes in key assumptions may result in a further decline in fair value below the carrying value in the future and an additional impairment in our Medical segment in future periods, which could adversely affect our results of operations.



 
 
 
 13
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



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, 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.
State opioid assessment related to prior fiscal years is the portion of the New York State assessment for prescription opioid medications that were sold or distributed in periods prior to fiscal 2019. This portion was excluded from non-GAAP financial measures because it related to sales in prior fiscal years and inclusion would have obscured analysis of the current fiscal year results of our underlying, ongoing business. Additionally, while the New York law would have required us to make payments on an ongoing basis, the portion of the assessment related to sales in periods prior to fiscal 2019 was contemplated to be a one-time, nonrecurring item. In December 2018, this assessment was declared unconstitutional. The charges we had previously recorded for the assessment related to periods prior to fiscal 2019 were reversed in the second quarter of our fiscal 2019 and also excluded from non-GAAP financial measures.
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 primarily for consistency with the presentation of the financial results of our peer group companies. 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.
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 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.





 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
14



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

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 the U.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 the U.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 Form 10-Q are determined by dividing the difference between current-period results and prior-period results by prior-period results.
Non-GAAP distribution, selling, general and administrative expenses or Non-GAAP SG&A: distribution, selling, general and administrative expenses, excluding state opioid assessment related to prior fiscal years.
Non-GAAP operating earnings: operating earnings excluding (1) LIFO charges/(credits), (2) state opioid assessment related to prior fiscal years, (3) restructuring and employee severance, (4) amortization and other acquisition-related costs, (5) impairments and (gain)/loss on disposal of assets, and (6) litigation (recoveries)/charges, net.
Non-GAAP earnings before income taxes: earnings before income taxes excluding (1) LIFO charges/(credits), (2) state opioid assessment related to prior fiscal years, (3) restructuring and employee severance, (4) amortization and other acquisition-related costs, (5) impairments and (gain)/loss on disposal of assets, (6) litigation (recoveries)/charges, net, and (7) loss on extinguishment of debt.
Non-GAAP net earnings attributable to Cardinal Health, Inc.: net earnings attributable to Cardinal Health, Inc. excluding (1) LIFO charges/(credits), (2) state opioid assessment related to prior fiscal years, (3) restructuring and employee severance, (4) amortization and other acquisition-related costs, (5) impairments and (gain)/loss on disposal of assets, (6) litigation (recoveries)/charges, net, (7) loss on extinguishment of debt, each net of tax, and (8) transitional tax benefit, net.
Non-GAAP effective tax rate: (provision for income taxes adjusted for (1) LIFO charges/(credits), (2) state opioid assessment related to prior fiscal years, (3) restructuring and employee severance, (4) amortization and other acquisition-related costs, (5) impairments and (gain)/loss on disposal of assets, (6) litigation (recoveries)/charges, net, (7) loss on extinguishment of debt, and (8) transitional tax benefit, (net) divided by (earnings before income taxes adjusted for the first seven items).
Non-GAAP diluted EPS attributable to Cardinal Health, Inc.: non-GAAP net earnings attributable to Cardinal Health, Inc. divided by diluted weighted-average shares outstanding.


 
 
 
 15
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

GAAP to Non-GAAP Reconciliations
(in millions, except per common share amounts)
SG&A1
SG&A1 Growth Rate
Operating Earnings
Operating Earnings Growth Rate
Earnings Before Income Taxes
Provision for Income Taxes
Net Earnings2
Net Earnings2 Growth Rate
Diluted EPS2
Diluted EPS2 Growth Rate
 
Three Months Ended December 31, 2018
GAAP
$
1,064

(6
)%
$
504

26
 %
$
407

$
126

$
280

(73
)%
$
0.93

(72
)%
State opioid assessment related to prior fiscal years
29


(29
)

(29
)
(8
)
(21
)

(0.07
)

Restructuring and employee severance


12


12

3

9


0.03


Amortization and other acquisition-related costs


157


157

39

119


0.40


Impairments and (gain)/loss on disposal of assets, net


8


8

1

7


0.02


Litigation (recoveries)/charges, net


(15
)

(15
)
(4
)
(11
)

(0.04
)

Transitional tax benefit, net3





(3
)
3


0.01


Non-GAAP
$
1,093

(3
)%
$
637

(13
)%
$
540

$
154

$
385

(19
)%
$
1.29

(15
)%
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 31, 2017
GAAP
$
1,131

24
 %
$
399

(26
)%
$
317

$
(736
)
$
1,053

225
 %
$
3.33

226
 %
Restructuring and employee severance


21


21

(2
)
23


0.07


Amortization and other acquisition-related costs


184


184

41

143


0.46


Impairments and (gain)/loss on disposal of assets, net


68


68

(43
)
111


0.35


Litigation (recoveries)/charges, net


58


58

17

41


0.13


Transitional tax benefit, net3





894

(894
)

(2.83
)

Non-GAAP
$
1,131

24
 %
$
730

4
 %
$
648

$
171

$
478

12
 %
$
1.51

13
 %
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2018
GAAP
$
2,219

1
 %
$
1,320

100
 %
$
1,143

$
269

$
873

(25
)%
$
2.88

(22
)%
Restructuring and employee severance


44


44

11

33


0.11


Amortization and other acquisition-related costs


314


314

74

240


0.79


Impairments and (gain)/loss on disposal of assets, net


(503
)

(503
)
(133
)
(370
)

(1.22
)

Litigation (recoveries)/charges, net


3


3


3


0.01


Transitional tax benefit, net3





(3
)
3


0.01


Non-GAAP
$
2,219

1
 %
$
1,178

(12
)%
$
1,001

$
218

$
782

(5
)%
$
2.58

(1
)%
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended December 31, 2017
GAAP
$
2,193

20
 %
$
661

(39
)%
$
495

$
(675
)
$
1,168

85
 %
$
3.68

87
 %
Restructuring and employee severance


153


153

45

108


0.34


Amortization and other acquisition-related costs


368


368

98

270


0.85


Impairments and (gain)/loss on disposal of assets, net


68


68

(43
)
111


0.35


Litigation (recoveries)/charges, net


90


90

30

60


0.19


Loss on extinguishment of debt




2

1

1




Transitional tax benefit, net3





894

(894
)

(2.82
)

Non-GAAP
$
2,193

20
 %
$
1,340

(2
)%
$
1,175

$
350

$
823

 %
$
2.60

1
 %
1 
Distribution, selling, general and administrative expenses.
2 
attributable to Cardinal Health, Inc.
3 
Reflects the estimated net transitional benefit from the remeasurement of our deferred tax assets and liabilities partially offset by the repatriation tax on cash and earnings of foreign subsidiaries. See Note 8 of the "Notes to Condensed Consolidated Financial Statements" for more information on the Tax Act.
The sum of the components may not equal the total due to rounding.
We generally apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
16



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 2018 Form 10-K since the end of fiscal 2018 through December 31, 2018.
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 of December 31, 2018. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2018, 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 the SEC 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 ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Legal Proceedings
The legal proceedings described in Note 9 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Legal Proceedings" section by reference.
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 2018 Form 10-K and our filings with the SEC since June 30, 2018. 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 Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased (1)
 
Average Price Paid per Share (2)
 
Total Number of Shares
Purchased
as Part of Publicly Announced Programs (2, 3)
 
Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under the Program (3)
(in millions)
October 2018
1,954,662

 
$
61.40

 
1,954,392

 
$
293

November 2018
271

 
53.00

 

 
1,293

December 2018
407

 
49.62

 

 
1,293

Total
1,955,340

 
$
61.40

 
1,954,392

 
$
1,293

(1)
Reflects 270, 271 and 407 common shares purchased in October, November and December 2018, respectively, through a rabbi trust as investments of participants in our Deferred Compensation Plan.
(2)
On August 16, 2018 we entered into an ASR program to purchase common shares for an aggregate purchase price of $600 million. The program completed on October 25, 2018 at a weighted average price per common share of $52.32. See Note 12 of the "Notes to Condensed Consolidated Financial Statements" for additional information.
(3)
On February 7, 2018, our Board of Directors approved a new $1.0 billion share repurchase program that expires on December 31, 2020. On November 7, 2018, our Board of Directors approved a new $1.0 billion share repurchase program that expires on December 31, 2021.



 
 
 
 17
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Financial Statements
 
 

Condensed Consolidated Statements of Earnings
(Unaudited)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions, except per common share amounts)
2018
 
2017
 
2018
 
2017
Revenue
$
37,740

 
$
35,186

 
$
72,953

 
$
67,827

Cost of products sold
36,010

 
33,325

 
69,556

 
64,294

Gross margin
1,730

 
1,861

 
3,397

 
3,533

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Distribution, selling, general and administrative expenses
1,064

 
1,131

 
2,219

 
2,193

Restructuring and employee severance
12

 
21

 
44

 
153

Amortization and other acquisition-related costs
157

 
184

 
314

 
368

Impairments and (gain)/loss on disposal of assets, net
8

 
68

 
(503
)
 
68

Litigation (recoveries)/charges, net
(15
)
 
58

 
3

 
90

Operating earnings
504

 
399

 
1,320

 
661

 
 
 
 
 
 
 
 
Other (income)/expense, net
21

 
(5
)
 
25

 
(4
)
Interest expense, net
76

 
87

 
152

 
168

Loss on extinguishment of debt

 

 

 
2

Earnings before income taxes
407

 
317

 
1,143

 
495

 
 
 
 
 
 
 
 
Provision for/(benefit from) income taxes
126

 
(736
)
 
269

 
(675
)
Net earnings
281

 
1,053

 
874

 
1,170

 
 
 
 
 
 
 
 
Less: Net earnings attributable to noncontrolling interests
(1
)
 

 
(1
)
 
(2
)
Net earnings attributable to Cardinal Health, Inc.
$
280

 
$
1,053

 
$
873

 
$
1,168

 
 
 
 
 
 
 
 
Earnings per common share attributable to Cardinal Health, Inc.:
 
 
 
 
 
 
 
Basic
$
0.94

 
$
3.35

 
$
2.90

 
$
3.70

Diluted
0.93

 
3.33

 
2.88

 
3.68

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
299

 
315

 
302

 
315

Diluted
300

 
316

 
303

 
317

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.4763

 
$
0.4624

 
$
0.9526

 
$
0.9248

See notes to condensed consolidated financial statements.


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
18



Financial Statements
 
 

Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(in millions)
2018
 
2017
 
2018
 
2017
Net earnings
$
281

 
$
1,053

 
$
874

 
$
1,170

 
 
 
 
 
 
 
 
Other comprehensive income/(loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments and other
(26
)
 
(9
)
 
(29
)
 
31

Net unrealized gain/(loss) on derivative instruments, net of tax
(1
)
 

 
(2
)
 
(1
)
Total other comprehensive income/(loss), net of tax
(27
)
 
(9
)
 
(31
)
 
30

 
 
 
 
 
 
 
 
Total comprehensive income
254

 
1,044

 
843

 
1,200

 
 
 
 
 
 
 
 
Less: comprehensive income attributable to noncontrolling interests
(1
)
 

 
(1
)
 
(2
)
Total comprehensive income attributable to Cardinal Health, Inc.
$
253

 
$
1,044

 
$
842

 
$
1,198

See notes to condensed consolidated financial statements.



 
 
 
 19
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Financial Statements
 
 

Condensed Consolidated Balance Sheets
(Unaudited)
(in millions)
December 31, 2018
 
June 30, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
2,182

 
$
1,763

Trade receivables, net
7,932

 
7,800

Inventories, net
13,037

 
12,308

Prepaid expenses and other
1,940

 
1,926

Assets held for sale

 
756

Total current assets
25,091

 
24,553

 
 
 
 
Property and equipment, net
2,376

 
2,487

Goodwill and other intangibles, net
11,973

 
12,229

Other assets
1,022

 
682

Total assets
$
40,462

 
$
39,951

 
 
 
 
Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
20,610

 
$
19,677

Current portion of long-term obligations and other short-term borrowings
1,450

 
1,001

Other accrued liabilities
1,764

 
2,002

Liabilities related to assets held for sale


213

Total current liabilities
23,824

 
22,893

 
 
 
 
Long-term obligations, less current portion
7,599

 
8,012

Deferred income taxes and other liabilities
2,996

 
2,975

 
 
 
 
Redeemable noncontrolling interests

 
12

 
 
 
 
Shareholders’ equity:
 
 
 
Preferred shares, without par value:
 
 
 
Authorized—500 thousand shares, Issued—none

 

Common shares, without par value:
 
 
 
Authorized—755 million shares, Issued—327 million shares at December 31, 2018 and June 30, 2018, respectively
2,728

 
2,730

Retained earnings
5,233

 
4,645

Common shares in treasury, at cost: 29 million shares and 18 million shares at December 31, 2018 and June 30, 2018, respectively
(1,795
)
 
(1,224
)
Accumulated other comprehensive loss
(123
)
 
(92
)
Total shareholders’ equity
6,043

 
6,059

Total liabilities, redeemable noncontrolling interests and shareholders’ equity
$
40,462

 
$
39,951

See notes to condensed consolidated financial statements.



 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
20



Financial Statements
 
 

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended December 31,
(in millions)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
874

 
$
1,170

 
 
 
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
498

 
520

Impairments and (gain)/loss on sale of other investments
2

 
6

Impairments and (gain)/loss on disposal of assets, net
(503
)
 
68

Share-based compensation
41

 
40

Provision for bad debts
40

 
31

Change in operating assets and liabilities, net of effects from acquisitions and divestitures:
 
 
 
Increase in trade receivables
(191
)
 
(617
)
Increase in inventories
(753
)
 
(995
)
Increase in accounts payable
941

 
2,107

Other accrued liabilities and operating items, net
(213
)
 
(870
)
Net cash provided by operating activities
736

 
1,460

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of subsidiaries, net of cash acquired
(21
)
 
(6,141
)
Additions to property and equipment
(116
)
 
(168
)
Purchase of available-for-sale securities and other investments
(10
)
 
(6
)
Proceeds from sale of available-for-sale securities and other investments
1

 
65

Proceeds from maturities of available-for-sale securities
1

 

Proceeds from divestitures, net of cash sold, and disposal of property and equipment
740

 
1

Net cash provided by/(used in) investing activities
595

 
(6,249
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payment of contingent consideration obligation

 
(17
)
Net change in short-term borrowings

 
155

Purchase of noncontrolling interests

 
(106
)
Proceeds from long-term obligations, net of issuance costs

 
3

Reduction of long-term obligations
(2
)
 
(403
)
Net tax proceeds/(withholdings) from share-based compensation
(13
)
 
(16
)
Dividends on common shares
(293
)
 
(296
)
Purchase of treasury shares
(600
)
 
(150
)
Net cash used in financing activities
(908
)
 
(830
)
 
 
 
 
Effect of exchange rates changes on cash and equivalents
(4
)
 
7

Cash reclassified to assets held for sale

 
(18
)
 
 
 
 
Net increase/(decrease) in cash and equivalents
419

 
(5,630
)
Cash and equivalents at beginning of period
1,763

 
6,879

Cash and equivalents at end of period
$
2,182

 
$
1,249

See notes to condensed consolidated financial statements.


 
 
 
 21
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Notes to Financial Statements
 
 

Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the accounts of all majority-owned or controlled subsidiaries, and all significant intercompany transactions and amounts have been eliminated. References to "we," "our," and similar pronouns in these condensed consolidated financial statements refer to Cardinal Health, Inc. and its majority-owned or controlled subsidiaries unless the context requires otherwise.
Our fiscal year ends on June 30. References to fiscal 2019 and 2018 in these condensed consolidated financial statements are to the fiscal years ending or ended June 30, 2019 and June 30, 2018, respectively.
Our condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission ("SEC") instructions to Quarterly Reports on Form 10-Q and include the information and disclosures required by accounting principles generally accepted in the United States ("GAAP") for interim financial reporting. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the condensed consolidated financial statements and accompanying notes. Actual amounts may differ from these estimated amounts. In our opinion, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. Except as disclosed elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature. To conform to the current year presentation, certain prior year amounts have been reclassified. In addition, financial results presented for this fiscal 2019 interim period are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2019. These condensed consolidated financial statements are unaudited and, accordingly, should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (the "2018 Form 10-K").
Recent Financial Accounting Standards
In October 2018, the Financial Accounting Standards Board ("FASB") issued amended accounting guidance related to derivatives and hedging which permits the use of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") as a Benchmark Interest Rate for Hedge Accounting Purposes. This guidance will be effective for us in the first quarter of fiscal 2020 and must be applied on a prospective basis. We are currently evaluating the impact of adoption on our condensed consolidated financial statements.
In March 2018, the FASB issued amended accounting guidance to codify SEC staff accounting bulletin 118 (“SAB 118”), which was issued in connection with the Tax Cuts and Jobs Act (the “Tax Act”)
 
of December 2017. The guidance allows companies to use provisional estimates to record the effects of the Tax Act and also provides a measurement period (not to exceed one year from the date of enactment) to complete the accounting for the impacts of the Tax Act. We adopted this guidance in the second quarter of fiscal 2018 when it was initially issued as SAB 118. We completed our accounting for the impacts from enactment of the Tax Act during the three months ended December 31, 2018. Future adjustments to the financial statements may be necessary due to final Section 965 repatriation tax regulations, which were issued January 15, 2019, and any additional pending regulatory changes, the impact of which is being currently assessed, or will be assessed, as final regulations are issued. See Note 8 for additional information regarding income taxes.
In June 2016, the FASB issued amended accounting guidance that will require entities to measure credit losses on trade and other receivables, held-to-maturity debt securities, loans and other instruments using an "expected credit loss" model that considers historical experience, current conditions and reasonable supportable forecasts. This guidance also requires that credit losses on available-for-sale debt securities with unrealized losses be recognized as allowances rather than as deductions in the amortized cost of the securities. This guidance will be effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of adoption on our condensed consolidated financial statements.
In February 2016, the FASB issued amended accounting guidance that requires lessees to recognize most leases on the balance sheet as a lease liability and corresponding right-of-use asset. The guidance also requires disclosures that meet the objective of enabling financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases. We will adopt this guidance when it is effective for us in the first quarter of fiscal 2020 and we expect to elect the practical expedient which will allow us to not apply the amended lease accounting guidance to comparative periods that will be presented. The majority of our lease spend relates to certain real estate with the remaining lease spend primarily related to equipment. We anticipate that the adoption of the amended lease guidance will result in an increase to the assets and liabilities on our condensed consolidated balance sheet, but we are continuing to evaluate the impact of this standard on our condensed consolidated financial statements and the methods of adoption.
In May 2014, the FASB issued amended accounting guidance related to revenue recognition which we adopted in the first quarter of fiscal 2019 using the modified retrospective method and that we applied to customer contracts that were not completed as of June 30, 2018.
The adoption of the amended accounting guidance did not have a material impact on our condensed consolidated financial statements. We did not record any material contract assets, contract liabilities, or deferred contract costs in our condensed consolidated balance sheets upon adopting the amended accounting guidance. As a result of adoption, assets recorded for the right to recover products from


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
22



Notes to Financial Statements
 
 

customers and the associated refund liabilities for return allowances were not material.
Revenue in both segments is primarily related to the distribution of pharmaceutical and medical products, which we recognize at a point in time when title transfers to customers and we have no further obligation to provide services related to such merchandise. Service revenues are recognized over the period that services are provided to the customer. Revenues derived from services are not material for either segment for all periods presented.
We are generally the principal in a transaction, therefore our revenue is primarily recorded on a gross basis. When we are a principal in a transaction, we have determined that we control the ability to direct the use of the product or service prior to transfer to a customer, are primarily responsible for fulfilling the promise to provide the product or service to our customer, have discretion in establishing prices, and ultimately control the transfer of the product or services provided to the customer.
Revenue is recorded net of sales returns and allowances. Revenues are measured based on the amount of consideration that we expect to receive, reduced by estimates for return allowances, discounts, rebates and other variable consideration. Sales returns are recorded based on estimates using historical data. Shipping and handling costs are primarily included in distribution, selling, general and administrative ("SG&A") expenses in our condensed consolidated statements of earnings and include all delivery expenses as well as all costs to prepare the product for shipment to the end customer.  Shipping and handling costs incurred after control has transferred to the customer are treated as fulfillment costs.
We elected the practical expedient to expense costs to obtain a contract when incurred when the amortization period would have been one year or less. Additionally, we elected the practical expedients to not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less, contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed and for contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. See Note 14 for additional information regarding our disaggregation of revenue.
In the first quarter of fiscal 2019, we adopted the following Accounting Standards Updates ("ASU"). ASU 2016-01 Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities; ASU 2018-03 Technical Corrections and Improvements to Financial Instruments; ASU 2016-15 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments; ASU 2016-16 Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory; and ASU 2017-12 Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The adoption of these ASUs did not have a material impact on our condensed consolidated financial statements.
 
2. Acquisitions
Patient Recovery Business
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 acquisition further expands our Medical segment's portfolio of self-manufactured products.
Transaction and integration costs associated with the acquisition of the Patient Recovery business were $22 million and $24 million for the three months ended December 31, 2018 and 2017, respectively, and $44 million and $61 million for the six months ended December 31, 2018 and 2017, respectively. These costs are included in amortization and other acquisition-related costs in the condensed consolidated statements of earnings.
Fair Value of Assets Acquired and Liabilities Assumed
The allocation of the fair value of assets acquired and liabilities assumed for the acquisition of the Patient Recovery Business was finalized during the three months ended September 30, 2018, resulting in goodwill of $3.3 billion. There were no significant adjustments to the allocation of the fair value of assets acquired and liabilities assumed for the Patient Recovery Business acquisition from those disclosed in our fiscal 2018 Form 10-K.
3. Restructuring and Employee Severance
The following table summarizes restructuring and employee severance costs:
 
Three Months Ended December 31,
(in millions)
2018
 
2017
Employee-related costs (1)
$
12

 
$
15

Facility exit and other costs (2)

 
6

Total restructuring and employee severance
$
12

 
$
21

 
Six Months Ended December 31,
(in millions)
2018
 
2017
Employee-related costs (1)
$
41

 
$
19

Facility exit and other costs (2)
3

 
134

Total restructuring and employee severance
$
44

 
$
153

(1)
Employee-related costs primarily consist of termination benefits provided to employees who have been involuntarily terminated, duplicate payroll costs and retention bonuses incurred during transition periods.
(2)
Facility exit and other costs primarily consist of product distribution and lease contract termination costs, lease costs associated with vacant facilities, accelerated depreciation, equipment relocation costs, project consulting fees, costs associated with restructuring our delivery of information technology infrastructure services and certain other divestiture-related costs.
In early fiscal 2019, we began implementing certain enterprise-wide cost-saving measures, which we expect to reduce our future operating expenses. As a result of these measures, we incurred pre-tax employee-related severance costs of $8 million and $34 million,


 
 
 
 23
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Notes to Financial Statements
 
 


during the three and six months ended December 31, 2018, respectively, which are reflected in restructuring and employee severance in the condensed consolidated statements of earnings.
In fiscal 2018, we entered into an agreement 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. The costs associated with this restructuring included $125 million, on a pre-tax basis, in contract termination costs that were paid during fiscal 2018. These costs are reflected in restructuring and employee severance in the condensed consolidated statements of earnings during the six months ended December 31, 2017.
The following table summarizes activity related to liabilities associated with restructuring and employee severance:
(in millions)
Employee-
Related Costs
 
Facility Exit
and Other Costs
 
Total
Balance at June 30, 2018
$
24

 
$
4

 
$
28

Additions
34

 
7

 
41

Payments and other adjustments
(19
)
 

 
(19
)
Balance at December 31, 2018
$
39

 
$
11

 
$
50

4. Divestitures
In August 2018, we sold our 98 percent ownership interest in naviHealth Holdings, LLC ("naviHealth") to investor entities controlled by Clayton, Dubilier & Rice in exchange for cash proceeds of $737 million (after adjusting for certain fees and expenses) and a 44 percent equity interest in a partnership that owns 100 percent of the equity interest of naviHealth. We also have certain call rights to reacquire naviHealth. Refer to Note 6 for further discussion regarding this investment.
During the six months ended December 31, 2018, we recognized a pre-tax gain of $508 million related to this divestiture in impairments and (gain)/loss on disposal of assets in our condensed consolidated statement of earnings. This gain includes our initial recognition of an equity method investment for $358 million and the derecognition of redeemable noncontrolling interests of $12 million. The fiscal 2019 tax expense as a result of this transaction will be approximately $130 million. We determined that the sale of the naviHealth business does not meet the criteria to be classified as discontinued operations. The naviHealth business operated within our Medical segment.
 
5. Goodwill and Other Intangible Assets
Goodwill
The following table summarizes the changes in the carrying amount of goodwill by segment and in total:
(in millions)
Pharmaceutical
 
Medical
 
Total
Balance at June 30, 2018
$
2,621

 
$
5,695

 
$
8,316

Goodwill acquired, net of purchase price adjustments
8

 
7

 
15

Foreign currency translation adjustments and other
(1
)
 
(13
)
 
(14
)
Balance at December 31, 2018
$
2,628

 
$
5,689

 
$
8,317

Other Intangible Assets
The following tables summarize other intangible assets by class at:
 
December 31, 2018
(in millions)
Gross
Intangible
 
Accumulated
Amortization
 
Net
Intangible
 
Weighted- Average Remaining Amortization Period (Years)
Indefinite-life intangibles:
 
 
 
 
 
 
 
IPR&D, trademarks and other
$
59

 
$

 
$
59

 
N/A
Total indefinite-life intangibles
59

 

 
59

 
N/A
 
 
 
 
 
 
 
 
Definite-life intangibles:
 
 
 
 
 
 
 
Customer relationships
3,523

 
1,353

 
2,170

 
14
Trademarks, trade names and patents
668

 
270

 
398

 
14
Developed technology and other
1,560

 
531

 
1,029

 
11
Total definite-life intangibles
5,751

 
2,154

 
3,597

 
13
Total other intangible assets
$
5,810

 
$
2,154

 
$
3,656

 
N/A


 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
24



Notes to Financial Statements
 
 


 
June 30, 2018
(in millions)
Gross
Intangible
 
Accumulated
Amortization
 
Net
Intangible
Indefinite-life intangibles:
 
 
 
 
 
IPR&D, trademarks and other
$
62

 
$

 
$
62

Total indefinite-life intangibles
62

 

 
62

 
 
 
 
 
 
Definite-life intangibles:
 
 
 
 
 
Customer relationships
3,513

 
1,191

 
2,322

Trademarks, trade names and patents
667

 
246

 
421

Developed technology and other
1,562

 
454

 
1,108

Total definite-life intangibles
5,742

 
1,891

 
3,851

Total other intangible assets
$
5,804

 
$
1,891

 
$
3,913

Total amortization of intangible assets was $133 million and $152 million for the three months ended December 31, 2018 and 2017, respectively, and $266 million and $287 million for the six months ended December 31, 2018 and 2017, respectively. For acquisitions closed on or before December 31, 2018, estimated annual amortization of intangible assets for the remainder of fiscal 2019 through 2023 is as follows: $264 million, $503 million, $435 million, $400 million and $351 million.
6. Investments
Investments in non-marketable equity securities are accounted for under the fair value, equity or net asset value method of accounting and are included in other assets in the condensed consolidated balance sheets. For equity securities without a readily determinable fair value, we use the fair value measurement alternative and measure the securities at cost less impairment, if any, including adjustments for observable price changes in orderly transactions for an identical or similar investment of the same issuer. For investments in which we can exercise significant influence but do not control, we use the equity method of accounting. Our share of the earnings and losses are recorded in other income, net in the condensed consolidated statements of earnings. We closely monitor our investments for other-than-temporary impairment by considering factors such as the operating performance of the investment and current economic and market conditions.
In connection with the naviHealth divestiture discussed in Note 4, we obtained a 44 percent equity interest in a partnership that owns 100 percent of the equity interest of naviHealth. We accounted for this investment initially at its fair value using Level 3 unobservable inputs based on expected sales proceeds following a competitive bidding process. Accordingly, we initially recognized a $358 million equity method investment.
We are accounting for our equity interest in naviHealth using the equity method of accounting on a one-month reporting lag. The impact of our proportionate share of naviHealth's results was not material to our condensed consolidated statements of earnings for the six months ended December 31, 2018. Upon the divestiture closing, we received a non-cash distribution of $14 million in the form
 
of the partnership's payment for certain of our divestiture transaction costs directly to the applicable third-party. At December 31, 2018 the carrying value of this investment was $343 million.
7. Long-Term Obligations and Other Short-Term Borrowings
Long-Term Debt
At both December 31, 2018 and June 30, 2018, we had total long term obligations, including the current portion and other short-term borrowings, of $9.0 billion. All the borrowings represent unsecured obligations of Cardinal Health, Inc. and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. Interest is paid pursuant to the terms of the obligations. These obligations are effectively subordinated to the liabilities of our subsidiaries, including trade payables of $20.6 billion.
Other Financing Arrangements
In addition to cash and equivalents and operating cash flow, other sources of liquidity 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.
On November 6, 2018, we increased the maximum consolidated leverage ratio permitted under our revolving credit and committed receivables facilities to provide that, as of the end of any calendar quarter, our maximum consolidated leverage ratio may be no more than 4.25-to-1. The maximum ratio will reduce to 4.00-to-1 in September 2019, to 3.75-to-1 in March 2020 and to 3.25-to-1 in September 2020. As of December 31, 2018, we were in compliance with our financial covenants.
In November 2016, we renewed our committed receivables sales facility program through Cardinal Health Funding, LLC (“CHF”) through November 1, 2019. CHF was organized for the sole purpose of buying receivables and selling undivided interests in those receivables to third-party purchasers. Although consolidated with Cardinal Health, Inc. in accordance with GAAP, CHF is a separate legal entity from Cardinal Health, Inc. and from our subsidiary that sells receivables to CHF. CHF is designed to be a special purpose, bankruptcy-remote entity whose assets are available solely to satisfy the claims of its creditors.
8. Income Taxes
Fluctuations in our provision for/(benefit from) income taxes as a percentage of pretax earnings (“effective tax rate”) are generally due to changes in international and U.S. state effective tax rates resulting from our business mix and discrete items.
U.S. Tax Cuts and Jobs Act
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act made broad and complex changes to the U.S. tax code that affected fiscal 2018 and will incrementally affect our fiscal year 2019 financial results in several ways. First, the U.S. statutory tax rate in fiscal 2019 is reduced to 21 percent. Second, the Tax Act established new tax provisions that


 
 
 
 25
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
 



Notes to Financial Statements
 
 

affected us beginning July 1, 2018 including, (1) eliminating the U.S. manufacturing deduction; (2) establishing new limitations on deductible interest expense and certain executive compensation; (3) eliminating the corporate alternative minimum tax; (4) creating the base erosion anti-abuse tax; (5) creating a new provision designed to tax global intangible low-tax income (“GILTI”) and allow for a deduction related to foreign derived intangible income ("FDII"); (6) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; and (7) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
Regarding the new GILTI tax rules, we elected to treat taxes due on future GILTI inclusions in U.S. taxable income as a current period expense when incurred.
In accordance with SAB 118, we finalized our provisional estimates related to transitional tax benefits (i.e., remeasurement of deferred tax assets and liabilities and the repatriation tax on undistributed foreign earnings) which did not have a significant impact on tax expense during the three and six months ended December 31, 2018. Future adjustments to the financial statements may be necessary due to final Section 965 repatriation tax regulations which were issued January 15, 2019 and any additional pending regulatory changes, the impact of which is being currently assessed or will be assessed as final regulations are issued.
Effective Tax Rate
During the three months ended December 31, 2018 and 2017, the effective tax rate was 31.0 percent and (231.9) percent, respectively. The change in the effective tax rate from fiscal 2018 to fiscal 2019 is primarily due to transitional tax benefits from the enactment of the Tax Act in fiscal 2018.
During the six months ended December 31, 2018 and 2017, the effective tax rate was 23.5 percent and (136.6) percent, respectively. The change in the effective tax rate from fiscal 2018 to fiscal 2019 is primarily due to transitional tax benefits from the enactment of the Tax Act in fiscal 2018. The six months ended December 31, 2018 also included net discrete benefits of $38 million primarily related to international legal entity changes.
The transitional tax benefits from the Tax Act during the three and six months ended December 31, 2017 included a provisional net tax benefit of $935 million related to the remeasurement of our deferred tax assets and liabilities to the new federal statutory rate and a provisional tax expense of $41 million for the one-time repatriation tax applied to our undistributed foreign earnings. Our effective tax rates for the three and six months ended December 31, 2017 also included $57 million of tax expense recognized in connection with the sale of our China distribution business.
Unrecognized Tax Benefits
At December 31, 2018 and June 30, 2018, we had $496 million and $423 million of unrecognized tax benefits, respectively. The December 31, 2018 and June 30, 2018 balances include $333 million and $262 million of unrecognized tax benefits, respectively, that if recognized, would have an impact on the effective tax rate.
 
At December 31, 2018 and June 30, 2018, we had $116 million and $110 million, respectively, accrued for the payment of interest and penalties related to unrecognized tax benefits, which we recognize in the provision for/(benefit from) income taxes in the condensed consolidated statements of earnings. These balances are gross amounts before any tax benefits and are included in deferred income taxes and other liabilities in the condensed consolidated balance sheets.
It is reasonably possible that there could be a change in the amount of unrecognized tax benefits within the next 12 months due to activities of the U.S. Internal Revenue Service ("IRS") or other taxing authorities, possible settlement of audit issues, reassessment of existing unrecognized tax benefits or the expiration of statutes of limitations. We estimate that the range of the possible change in unrecognized tax benefits within the next 12 months is between zero and a net decrease of $35 million, exclusive of penalties and interest.
Other Tax Matters
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.
We are a party to a tax matters agreement with CareFusion Corporation ("CareFusion"), which has been acquired by Becton, Dickinson and Company. Under the tax matters agreement, CareFusion is obligated to indemnify us for certain tax exposures and transaction taxes prior to our fiscal 2010 spin-off of CareFusion. The indemnification receivable was $156 million and $151 million at December 31, 2018 and June 30, 2018, respectively, and is included in other assets in the condensed consolidated balance sheets.
As a result of the acquisition of the Patient Recovery Business, Medtronic plc is obligated to indemnify us for certain tax exposures and transaction taxes related to periods prior to the acquisition under the purchase agreement. The indemnification receivable was $23 million and $21 million at December 31, 2018 and June 30, 2018, respectively, and is included in other assets in the condensed consolidated balance sheet.
9. Commitments, Contingent Liabilities and Litigation
Commitments
Generic Sourcing Venture with CVS Health Corporation ("CVS Health")
Red Oak Sourcing, LLC ("Red Oak Sourcing") is a U.S.-based generic pharmaceutical sourcing venture with CVS Health for an initial term through June 2024. Red Oak Sourcing negotiates generic pharmaceutical supply contracts on behalf of its participants. Due to the achievement of predetermined milestones, we are required to make quarterly payments of $45.6 million to CVS Health for the initial term.




 
 
 
 
Cardinal Health | Q2 Fiscal 2019 Form 10-Q
26



Notes to Financial Statements
 
 

New York Opioid Stewardship Act
In April 2018, the State of New York passed a budget which included the Opioid Stewardship Act (the "OSA"). The OSA created an aggregate $100 million annual assessment on all manufacturers and distributors licensed to sell or distribute opioids in New York. Under the OSA, each licensed manufacturer and distributor would be required to pay a portion of the assessment based on its ratable share, as determined by the state, of the total morphine milligram equivalents sold or distributed in New York during the applicable calendar year, beginning in 2017.
In October, we received notices from the New York Department of Health of our estimated payment amount for calendar year 2017. At September 30, 2018, we recorded an aggregate accrual of $34 million for calendar year 2017 and the first three quarters of calendar 2018 based on the estimated payment amount, which reflected our best estimate of the OSA payments owed through September 30, 2018. In December 2018, the U.S. District Court for the Southern District of New York ruled that the OSA is unconstitutional and enjoined its enforcement (the "Ruling"). In January 2019, the State filed notice of its intent to appeal the Ruling. We accrue for contingencies if it is probable that a liability has been incurred and the amount can be estimated. As a result of the Ruling, in the three-months ended December 31, 2018, we reversed this accrual because we no longer believe it is probable that a liability has been incurred.
Legal Proceedings
We become involved from time to time in disputes, litigation and regulatory matters.
We may be named from time to time in qui tam actions initiated by private third parties. In such actions, the private parties purport to act on behalf of federal or state governments, allege that false claims have been submitted for payment by the government and may receive an award if their claims are successful. After a private party has filed a qui tam action, the government must investigate the private party's claim and determine whether to intervene in and take control over the litigation. These actions may remain under seal while the government makes this determination. If the government declines to intervene, the private party may nonetheless continue to pursue the litigation on his or her own purporting to act on behalf of the government.
From time to time, we become aware through employees, internal audits or other parties of possible compliance matters, such as complaints or concerns relating to accounting, internal accounting controls, financial reporting, auditing, or other ethical matters or relating to compliance with laws such as healthcare fraud and abuse, anti-corruption or anti-bribery laws. When we become aware of such possible compliance matters, we investigate internally and take appropriate corrective action. In addition, from time to time, we receive subpoenas or reques