Cardinal Health, Inc. 2026 Q4 Earnings Call

Welcome to Cardinal Health's fourth quarter fiscal 2026 earnings conference call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar, and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the investor relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in these statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP.

GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Good morning, and thank you for joining us. We delivered a strong fourth quarter, concluding a fiscal 2026 defined by consistent execution and broad-based performance across the enterprise. Our strategy remains clear, and our relentless focus on execution is producing sustained operational momentum, positioning us for further value creation in fiscal 2027 and beyond. Performance this quarter was once again led by Pharmaceutical and Specialty Solutions, where a resilient demand environment and continued strength across our specialty business, both upstream and downstream, drove strong results and extended the momentum we have built throughout fiscal 2026. The Global Medical Products and Distribution segment demonstrated continued progress against our improvement plan initiatives, and we benefited from a non-recurring tailwind in the quarter. In Cardinal Health brand, we again saw above-market growth when normalizing for the impact of the tariff refund.

We are pleased with the performance of our other growth businesses, who again collectively delivered double-digit profit growth this quarter. This performance highlights the value of these specialized assets and their meaningful impact on enterprise results. We continue to experience a favorable demand environment and supportive secular healthcare trends across these businesses. Coupled with our strategic long-term investments, we see significant opportunities ahead. We enter fiscal 2027 with momentum and a solid foundation for growth. Backed by the strength of a diversified portfolio, the resilience of our business model, and the dedication of our team, we are well-positioned to continue delivering long-term value for our shareholders, customers, and the patients that they serve. I will now turn the call over to Aaron Alt to detail our financial results.

Thank you, Jason Hollar, and good morning. Strong demand, strong execution, strong profit, strong adjusted free cash flow, strong liquidity, targeted and increased investments in the business, incremental return of capital to shareholders. We did what we said we would do, and as a result, delivered a successful financial fourth quarter to close out a successful fiscal 2026, even before including the positive impact of the anticipated tariff recovery. The anchor to the story for both the quarter and the fiscal year was broad-based and strong volume demand across the enterprise. At the enterprise level, we grew operating earnings 30% in the quarter and 30% on the year. We grew EPS by 40% in the quarter and 37% on the year. In addition to the outstanding P&L performance, the company generated $5 billion in adjusted free cash flow for the year.

We accomplished all of this while providing service levels at or near record levels to our customers, navigating regulatory changes, and navigating an evolving macroeconomic landscape. This success demonstrates the resiliency of our business model and our focus on execution. Let's look at our fourth quarter consolidated financial performance. Total company revenue for the quarter was $63.7 billion, an increase of 6%, driven by strong demand in our Pharmaceutical and Specialty Solutions segment, with contributions from our three growth businesses that make up Other. Gross profit for the quarter grew 16% to $2.6 billion, driven by broad-based contributions from all five of our operating segments. Gross profit growth outpaced consolidated SG&A, which grew 9.5% for the quarter. While remaining disciplined on cost, we continue to make intentional investments in automation, technology, and capability to drive long-term value. The inclusion of our acquisitions also contributed to year-over-year SG&A growth.

Overall, our efforts resulted in enterprise operating income of $935 million, up 30% versus last year. I will address segment drivers when I discuss segment performance. But upfront, I do want to call out in the quarter, we reported a one-time $100 million net operating earnings benefit from IEEPA tariff refunds in our GMPD segment. This reflects increased clarity and confidence in receiving approximately $200 million in IEEPA tariff refunds, offset primarily by payables to customers for the increased prices they paid related to the IEEPA tariffs. We view the refund as non-recurring and would note, on an ongoing basis, we continue to incur costs from the tariffs that replaced IEEPA. Below the line, interest and other expense was $53 million. The year-over-year increase was primarily driven by the impact of acquisition-related financing. We achieved a full-year tax rate of 19%, based on a fourth quarter rate of 22.5%.

These operational and financial metrics culminated in fourth quarter diluted earnings per share of $2.91, a 40% increase over prior year. $0.31 of the EPS is due to recording the IEEPA tariff refund, or approximately 15 percentage points of the total 40 percentage point growth. Now I'll turn to cash, our capital allocation, and strategic updates for fiscal 2026. As I referenced, we generated $5 billion of adjusted free cash flow and ended the year with $4.9 billion of cash on hand. We did so while also maintaining our disciplined capital allocation framework to drive shareholder value. We continue to invest significant capital back into the business to enable profitable growth, deploying $264 million in CapEx in the fourth quarter and $649 million in CapEx for the year. These investments include automation, supply chain technology, customer solutions, and platform capabilities to enable future earnings growth.

We did not need to repay indebtedness, as we are already within our targeted leverage ratio. We did not fund a meaningful M&A in the quarter, but we did complete an incremental $350 million share repurchase program, which, when added to prior quarters, repurchase efforts totaled $1.35 billion of share repurchase during the year at an average price of $187 per share. For the full year, we repurchased $600 million more than our previous baseline commitment. With respect to liquidity, we are today confirming a new $4 billion revolver program, replacing three historic facilities. While we have a strong cash position, the updated facility provides us with strong liquidity on a simplified and more efficient basis than prior programs, which have been sunset. I will now transition to our segment level results, beginning with pharma. Fourth quarter revenue for the segment grew 6% to $58.8 billion.

We observed robust brand sales originating from our existing customer base and recognized roughly offsetting tailwinds from GLP-1 growth and headwinds from IRA WAC changes, each worth approximately 500 basis points. We also saw the profit positive impact of brand to generic conversion in our revenue results. Pharma segment profit was $645 million, growing 21%, driven by growth in our brand and specialty portfolios. We also saw positive performance across our generics program, observing continued strong demand aided by brand to generic conversions and consistent market dynamics. The core distribution business remains highly durable, and we have continued to demonstrate our ability to be compensated for value we provide during times of regulatory change. In our GMPD segment, fourth quarter revenue was $3.1 billion.

This represented a 2% decline and is impacted by the revenue reduction from expected payables to customers associated with our anticipated tariff refund and lower distribution volumes. This was partially offset by growth in Cardinal Health brand, which on a reported basis declined 2% in the U.S. Excluding this tariff impact, we saw the sixth consecutive quarter of at least mid-single digit Cardinal Health brand growth in the U.S. Fourth quarter GMPD segment profit increased $80 million in comparison to the prior year, growing to $150 million. GMPD segment profit was $50 million, normalized for the $100 million impact of the IEEPA tariff refund within the GMPD segment. While this industry and our business remain a work in progress, the significant increase in profitability reflects solid underlying operational performance and the impact of recording the one-time net IEEPA tariff refund benefit.

The team remains focused on executing our improvement plan, driving cost efficiencies, and managing supply chain resilience to serve our customers effectively. The multi-year progress and earnings expansion this plan has driven has created significant value for our shareholders, and we remain committed to prioritizing value creation. Next, our other growth businesses also had a successful quarter. This group delivered $1.7 billion in revenue, or 7% growth, and $183 million in segment profit, for a 14% growth. We experienced good demand in the at-Home Solutions business. We lapped the Advanced Diabetes Supply acquisition in the quarter, while at the same time purposely curating our customer base and category management opportunities through the ROI lens. We also continued our investment in infrastructure and technology to achieve increased economies of scale. The integration of Advanced Diabetes Supply is progressing well and is ahead of schedule on the integration synergies.

Nuclear and Precision Health Solutions continues to execute consistent with its strong position in radiopharmaceutical manufacturing and distribution and will continue to benefit from the rapid expansion of theranostics. This business posted another quarter of impressive revenue growth as we scale our manufacturing and pharmacy network. Finally, within OptiFreight Logistics, customers increasingly appreciate the strong economic value provided by our broad assortment of logistics solutions. The fundamental performance of these three distinct businesses continues to validate our decision to prioritize their investment profiles. Turning briefly to full year commentary for fiscal year 2026, the enterprise delivered remarkable financial results. We generated double-digit profit growth across all five of our operating segments, even when adjusting out the positive impact of the IEEPA tariff refunds in GMPD. For the full year, enterprise revenue grew 14% to $254 billion, driven by brand and specialty sales.