Jason Hollar
Chief Financial Officer at Cardinal Health
Thanks, Mike. I really appreciate the kind words and the opportunity to work closely with you these past two years. Let me start by saying how excited I am to be taking on this new responsibility. I am grateful for the trust and the confidence the Board of Directors is placing on me.
I would also like to thank you, Mike, for the leadership and many contributions to the company over the years. I hope to preserve the culture that you helped ingrain into the fabric of our organization and I look forward to what I know, will be a smooth transition. I also want to welcome Patricia English, who'll be serving as our Interim Chief Financial Officer.
First and most recently served as our Chief Accounting Officer and as amended a valuable member of the Cardinal Health family for over 16 years. I look forward to continuing to work with this new capacity, while we conduct an external search for a permanent CFO.
First stepping into the details of our financial performance for the quarter, let me step back and summarize the key points this past year. Within our Pharma segment, while we experienced effects of industry wide inflation and incurred incremental technology investments, we grew the business 5%, consistent with both our original guidance for the year as well as our long-term growth targets.
Medical business was more significantly impacted by these inflationary dynamics, which drove a significant impact on our results. However, we have strong mitigation actions in place including pricing and we'll present a plan to you today that mitigates all the inflationary and global supply chain constraints impacts, plus an additional 8% of compounded annual growth by fiscal '25. Underlying these operating results this past year was a significant focus on cash flow, which results in increased financial flexibility. We are absolutely focused on shareholder value and intend to deploy these incremental funds to additional share repurchases for fiscal '23.
While we remain in a dynamic environment, I'm excited to share further details of our plans with you today and commit to continuing to provide increased clarity to the drivers and the key metrics, underlying our performance.
Let's now turn to some of the details driving our results in the fourth quarter, beginning with the Pharma segment on Slide 6. Fourth quarter revenue increased 13% to $43 billion driven by branded pharmaceutical sales growth from existing and net new PD and specialty customers. Segment profit increased 26% to $451 million driven by generics program performance and a higher contribution from brand sales mix, partially offset by inflationary supply chain costs.
As we've previously noted, this also reflects a favorable comparison due to the prior year inventory adjustments. During the quarter our generics program including Red Oak, saw strong performance and continue to experience consistent market dynamics.
Regarding the inflationary supply chain costs. We saw impact in areas such as transportation and labor, which we expect to continue into next year. We also incurred higher costs supporting sales growth, and with ongoing progress in opioid litigation matters, we saw a decrease of approximately $15 million in opioid-related legal costs.
Turning to Medical on Slide 7. Fourth quarter revenue decreased 11% to $3.8 billion due to the divestiture of the Cordis business and lower products and distribution volumes. Medical segment loss of $16 million in the fourth quarter was due to net inflationary impacts and global supply chain constraints in products and distribution. On a year-over-year basis, a favorable comparison to the prior year $197 million PPE inventory reserve was mostly offset by the net inflationary and global supply chain constraint impacts, a lower contribution from PPE and the Cordis divestiture.
During the quarter, our products and distribution business saw an approximate $100 million impact from net incremental inflation in supply chain constraints. This reflects the gross impact of approximately $125 million, and approximately 25 million CAD offset from our mitigation actions, which includes our initial wave of price increases on 5 Cardinal Health brand categories that went into effect back in March. I'll elaborate on our plans for further mitigation in fiscal '23 and beyond shortly.
As mentioned, it continues to be a highly dynamic medical environment, and our Q4 results came in lower than we had previously expected. This primarily reflects overall volume softness in our product and distribution business, including a lower contribution from PPE.
Stepping back demand for PPE has fluctuated significantly over the past couple of years, we saw lower volumes as we exited Q3 in the fourth quarter experienced further declines. We believe this primarily reflects customers higher inventory levels and to a lesser extent some PPE category specific customer losses, driven by supply constraints during the pandemic.
We continue to have strong conviction in our overall value proposition, which includes leading brands and clinically differentiated products. For context, PPE represents approximately 15% of sales of overall Cardinal Health brand portfolio. As you'll see on Slide 20.
Moving below line, interest and other increased by $36 million to $64 million, due to a decrease in the value of our deferred compensation plan investments compared to gains in the prior year. As a reminder, deferred compensation gains or losses reported in interest and other are fully offsetting corporate SG&A and net neutral to our bottom line.
Additionally, in the fourth quarter, a one-time write-down of an equity investment impacted EPS by $0.06 per share. The increase in other expense was partially offset by lower interest due to debt reduction actions. As indicated, we repaid the $280 million of remaining June 2022 notes at maturity.
Our fourth quarter effective tax rate finished at 25.4% approximately 3 percentage points higher than the prior year. The net result was fourth quarter EPS of $1.05, an increase of 36%, primarily reflecting the growth in pharma segment profit.
Now transitioning to our consolidated results for the year. Fiscal '22 revenues increased 12% to $181 billion, driven by the pharma segment. Gross margin decreased 3% to $6.5 million due to the quarter's divestiture. Total Company SG&A increased 1%, reflecting inflationary supply chain costs, our previously mentioned IT investments and higher cost to support sales growth, mostly offset by the quarter's divestiture and benefits from cost savings initiatives.
Operating earnings decreased 12%, which primarily reflects a year-over-year headwind of approximately $300 million related to net inflationary impacts in global supply chain constraints in medical, partially offset by Pharma segment profit growth. Interest and other increased 24% to $265 million, largely due to the items affecting the fourth quarter. Of note, this came in higher than our guidance primarily due to the equity investment write-down in the quarter. Our annual effective tax rate finished at 22.1%. The net result was fiscal '22 EPS of $5.06.
Now turning to the balance sheet. In fiscal 2022 we generated robust operating cash flow of $3.1 billion. This includes the previously defined tax refund of nearly $1 billion and favorable timing of working capital. Additionally, in fiscal '22, we made approximately $500 million in litigation payments, primarily related to opioid settlements. In July, we made our second annual payment under the national opioid settlement agreement of approximately $375 million, which will be reflected in Q1 fiscal '23 operating cash flow.
We are focused on deploying capital in a balanced disciplined and shareholder-friendly manner. This year, we invested approximately $385 million of CapEx, back into the business to drive future growth. Paid down approximately $850 million in debt to reduce leverage and returned $1.6 billion to shareholders through share repurchases and dividends. We ended the year with a cash position of $4.7 billion, which does reflect some timing favorability with no outstanding borrowings on our credit facilities.
As for the segment's full-year results, beginning with Pharma on Slide 10. Pharma revenue increased 14% to $165 billion, reflecting consistent drivers with the fourth quarter. Pharma segment profit increased 5% to $1.8 billion driven primarily by generics program performance and an improvement in volumes compared to the prior year. This was partially offset by investments in technology enhancements and inflationary supply chain costs.
Would be helpful. The tailwind from improved volumes and the headwinds from incremental IT investments effectively offset in fiscal '22, each approximately $80 million on a year-over-year basis. Additionally, we saw an approximate $50 million headwind from inflationary supply chain costs, primarily in the second half of the year.
Moving to Medical on Slide 11. Fiscal '22 Medical revenue decreased 5% to $15.9 billion, primarily due to the divestiture of the Cordis business. To a lesser extent, lower product and distribution volumes were partially offset by growth in at-Home solutions. Segment profit decreased 63% to $216 million, primarily due to the net inflationary impacts on global supply chain constraints and products and distribution. Additionally, the favorable comparison to the prior year PPE inventory reserve was offset by a lower contribution from PPE and the divestiture of the Cordis business.
Now for our fiscal '23 guidance, on Slide 13. We expect earnings per share in the range of $5.05 to $5.40, which reflects the following assumptions. First, over the enterprise, we expect interest and other between $140 million to $170 million which assumes approximately $550 million in debt paydown for the March 2023 notes at-or before maturity.
We are assuming a non-GAAP effective tax rate in the range of 23% to 25%. We anticipate diluted weighted average shares outstanding between $262 million and $266 million, reflecting our plan to complete between $1.5 million to $2 billion in share repurchases over the course of the year. And supporting our capital allocation priorities, we expect adjusted free cash flow in the range of $1.5 billion to $2 billion, which excludes litigation payments and any other significant and unusual or non-recurring items.
As for the segments beginning with Pharma on Slide 14, we expect revenue growth in the range of 10% to 14%, driven by growth in existing and net new PD and specialty customers. We expect segment profit growth in the range of 2% to 5% based on the following key assumptions. We expect continued stability in overall pharmaceutical volumes along with consistent market dynamics within our generics program. Continuation of the inflationary supply chain costs we've seen in the last two quarters should result in approximately $50 million headwind primarily in the first half of the year.
The completion of ERP technology enhancements should be an approximate $30 million tailwind. We expect opioid related legal costs including initial costs for implementation of the settlements injunctive relief terms of approximately $80 million in fiscal '23, and $20 million tailwind. And we see increased contributions from our growth areas, primarily specialty including biosimilars.
Before moving to Medical, a couple of points from the Pharma fiscal '23 cadence. Similar to last year, we expect the year-over-year segment profit growth to be significantly back half weighted, which primarily reflects the year-over-year impact of inflationary supply chain costs in the first half. Specifically in the first quarter of next year, we expect segment profit between $400 million and $420 million. While we do not typically provide quarterly guidance, we thought additional color maybe helpful, given the puts and takes over the last several quarters.
Now turning to Medical on Slide 15. We expect revenue to decline in the range of 3% to 6% due to lower PPE sales in lab testing volumes. We expect segment profit ranging from a decline of 10% to growth of 10%, reflecting the following assumptions. We expect a similar net impact of approximately $300 million from inflation global supply chain constraints and mitigation actions in fiscal '23 or a minimal impact on a year-over-year basis. This assumes an approximate $475 million gross impact from inflation and global supply chain constraints, partially offset by $175 million of mitigation actions, including pricing and evolving our commercial contracting.
While still significantly elevated relative to historical levels, we're encouraged by the recent improvement in spot rates in certain cost drivers such as international freight and some commodities. As a reminder, these product costs are capitalized and that's historically been reflected in our P&L results in a one to two quarter delay. However, in the current period of elongated supply chain it is closer to two quarters.
Our current assumption is that the impact of inflation and global supply chain constraints will peak in the first quarter of fiscal '23 and gradually decrease over the next couple of years. Additionally, along with the pricing actions that went into effect at the start of the year, we are implementing additional waves of increases over the course of fiscal '23. We continue to expect that as we exit fiscal '23, the run rate of our mitigation actions will offset at least 50% of the gross impact from inflation and global supply chain constraints.
In terms of other key assumptions for medical in fiscal '23. As the operating environment continues to normalize, we expect an approximate $50 million tailwind from an improvement in PPE margins. We plan to sell through the majority of higher cost PPE in the first half of the year and for PPE margins to normalize as we exit the year. We expect the PPE tailwind to be offset by a similar headwind from lower lab testing volumes. We also anticipate a headwind of approximately $50 million from re-baseline incentive compensation following fiscal '22 underperformance. And finally, we expect increased contributions from our strategic growth areas, primarily at-Home solutions.
Our Medical's quarterly cadence. While we are assuming a similar segment profit total in fiscal '23 versus fiscal '22, we do expect the cadence to be the reverse of the prior year. Specifically in the first quarter, we expect segment profit ranging from a loss of $20 million to profit of $20 million. We expect the gross impact of inflation and global supply chain constraints in the first quarter to be approximately $150 million with approximately 25% of this offset through our mitigation actions.
As for the rest of the year, we expect a substantial majority of segment profit to come in the second half of fiscal '23, particularly in the fourth quarter. The sequencing primarily reflects our assumptions around inflation, global supply chain constraints, inflation mitigation and PPE. While there are many moving parts in fiscal '23, we are confident in our long-term outlook and are reiterating our previously announced long-term targets for our businesses and for double-digit combined EPS growth and dividend yield over longer normalized periods. Additionally, we are introducing a new target for at least $650 million in Medical segment profit by fiscal '25, driven by the medical improvement plan that we are introducing today.
Slide 17 highlights our four areas of focus to improve Medical performance. Number one, mitigate inflation and global supply chain constraints. We plan to fully address the impact of inflation and global supply chain constraints through mitigation initiatives by the time we exit fiscal '24 and are targeting to exit fiscal '23 offsetting at least half of the gross impact on our business.
The second wave of price increases went to effect on July 1 on four more categories. We plan on the next wave commencing on October 1. In addition, we've executed a distribution fee increases for certain suppliers, and we are actively working with customers and GPOs to adjust language in our product and distribution contracts as they renew, allowing with a greater price flexibility to respond to current and future macroeconomic dynamics.
Two, optimize and grow the Cardinal Health brand portfolio. Our $4.6 billion Cardinal Health brand portfolio which includes nearly $4 billion of non-PPE categories offers leading brands and clinically differentiated products. Wanted to grow Cardinal Health brand sales by a compounded annual growth rate of at least 3%, which will generate $75 million or more of incremental segment profit over the next 3 years.
This growth will be achieved through two key areas of focus. First, R&D and new product innovation. We see opportunities in key categories, such as nutritional delivery or we will be launching the next generation Kangaroo Enteral Feeding platform. Second, is increased product availability. As a result of investments within targeted categories such as surgical gloves and electrodes. For example, in our surgical glove portfolio, we are investing $125 million for construction of a new manufacturing facility dedicated to increase supply for leading Protexis brand gloves.
Third area of focus is to accelerate our growth businesses, primarily at-Home solutions. These businesses have the growth rates in excess of our core along with a higher margin opportunity and we've been making investments to drive at least $60 million of total segment profit by fiscal '25. At-Home solutions for example is now at $2.4 billion business that has consistently grown topline at around 10% as patient care continues to shift into the home.
And finally, our fourth area of focus is to continue our simplification and cost optimization efforts. We expect actions that increased productivity in our manufacturing plants, distribution centers, supply chain and back office to yield at least $50 million of net cost savings by fiscal '25. Going forward, we are focused on driving simplification through value increment projects, transportation management and further optimizing our sourcing and manufacturing footprint where possible. We expect these initiatives to contribute towards exceeding our existing enterprise $750 million cost savings goal by fiscal '23.
Following the topic of our supply chain, let me take a moment to share some additional color, where we have received a number of investor questions. We operate a highly diverse global supply chain with approximately two-thirds of our Cardinal Health brand revenue coming from self-manufactured products. We have invested in additional self manufacturing capabilities, many in our own North American facilities. And today approximately half our Cardinal Health brand revenue comes from North America in total.
To best serve our customers, we continue to believe in the importance of a diverse global supply chain and we are focused on responding to any global supply chain disruptions with resilience and agility.
In summary, we believe the introduction of measurable proof points in each of these four areas of focus provides visibility to measure progress against our plans going forward.
Now let's turn to the Pharmaceutical segment, where we continue to focus on strengthening our core PV business and investing in our growth businesses, primarily specialty. In Pharma distribution, with our significant technology enhancements that we've been working on over the past several years substantially completed. We now focus our attention on increasing productivity, maximizing working capital efficiency and prioritizing the customer experience. Our generics program anchored by the scale and expertise of Red Oak, we continue to further enhance our capabilities, as we focus on share of wallet and maximizing margins.
We recently held our Retail Business Conference where over 4,000 customers attended live for the first time in three years, and had an opportunity to see and experience our latest innovations. They also had the chance to register for services that would help them create an online shopping portal, advisory support to optimize reimbursement and central fill compliance packaging services.
In specialty, we are continuing to see downstream momentum in oncology and emerging therapeutic areas, driven by our offerings, including the Vista TS. We recently announced a tuck-in acquisition of the Banca GPO and investment in their main services organization. These will further strengthen Specialty Solutions Cornerstone rheumatology GPO, which offers innovative office management solutions and robust specialty drug access to over 1,300 rheumatology providers nationwide.
Upstream with biopharma manufacturers, we are investing for future growth in our 3PL business as evidenced through our cold chain storage expansion, which increases our current capacity by 200%. We also continue to see strong growth in SynXis, our patient hub where our technology solutions help biopharma customers remove barriers to patient care.
And with biosimilars, we are proactively addressing common barriers to adoption by investing in education campaigns to build awareness, clinical comfort and ensure accessibility. We continue to be excited about the future growth in this space and remain well positioned as new biosimilars come to market.
In closing, while there's a lot of work to be done, I'm excited to work with our 44,000 teammates and executing our plans to grow in fiscal '23 and beyond.
With that, I will now take your questions.
