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Investments</font><font style="font-family:Arial Narrow;font-size:13pt;color:#ee2724;font-style:normal;font-weight:bold;text-decoration:none;"> </font></div><div style="line-height:120%;padding-bottom:4px;text-align:justify;font-size:10pt;"><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">In August 2018, we sold our </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">98 percent</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> equity interest in naviHealth Holdings, LLC ("naviHealth") to investor entities controlled by Clayton, Dubilier &amp; Rice in exchange for cash proceeds of </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">$737 million</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> (after adjusting for certain fees and expenses) and a </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">40 percent</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> equity interest in a partnership that owns </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">100 percent</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> of the equity interest of naviHealth. We also have certain call rights to reacquire naviHealth. We have accounted for this investment using the equity method of accounting and on a one-month reporting lag.</font></div><div style="line-height:120%;padding-bottom:4px;text-align:justify;font-size:10pt;"><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">During the fiscal year ended </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">June&#160;30, 2019</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">, we recognized a pre-tax gain of </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">$508 million</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> related to this divestiture in impairments and (gain)/loss on disposal of assets in our consolidated statements of earnings/(loss). The carrying value of this investment was </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">$334 million</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> as of </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">June&#160;30, 2019</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">. </font></div><div style="line-height:120%;padding-bottom:4px;text-align:justify;font-size:10pt;"><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">In May 2020, we sold our </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">40 percent</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> equity interest in a partnership that owns </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">100 percent</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;"> of the equity interest of naviHealth in exchange for cash proceeds of [] and recognized a gain of [] related to this disposal in gain on sale of naviHealth stock in our consolidated statements of earnings/(loss). During the three and twelve months ended </font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">June&#160;30, 2020</font><font style="font-family:Arial Narrow;font-size:10pt;color:#000000;">, our proportionate share of naviHealth&#8217;s net loss, which was recorded in other (income)/ expense, net in the consolidated statements of earnings/(loss), was immaterial.</font></div></div> 0000721371 2019-07-01 2020-06-30 0000721371 2019-12-31 0000721371 2020-07-31 0000721371 2017-07-01 2018-06-30 0000721371 2018-07-01 2019-06-30 0000721371 2019-06-30 0000721371 2020-06-30 0000721371 us-gaap:NoncontrollingInterestMember 2017-07-01 2018-06-30 0000721371 us-gaap:RetainedEarningsMember 2019-07-01 2020-06-30 0000721371 us-gaap:NoncontrollingInterestMember 2019-07-01 2020-06-30 0000721371 2018-06-30 0000721371 us-gaap:TreasuryStockMember 2017-07-01 2018-06-30 0000721371 us-gaap:RetainedEarningsMember 2020-06-30 0000721371 us-gaap:TreasuryStockMember 2019-07-01 2020-06-30 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2020
or
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

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)
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares (without par value)
CAH
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  þ
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 such files).    Yes  þ    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
 
Non-accelerated filer
 
Smaller reporting company
 
 

 
Emerging growth company  
 
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  No  þ
The aggregate market value of voting stock held by non-affiliates on December 31, 2019, was the following: $14,729,138,108.
The number of the registrant’s common shares, without par value, outstanding as of July 31, 2020, was the following: 292,444,079.

Documents Incorporated by Reference:
Portions of the registrant’s Definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders are incorporated by reference into the sections of this Form 10-K addressing the requirements of Part III of Form 10-K.



Cardinal Health  
Fiscal 2020 Form 10-K

Table of Contents
 
 
Page



 1
Cardinal Health | Fiscal 2020 Form 10-K
 


Introduction
 
 


Introduction

References to Cardinal Health and Fiscal Years
As used in this report, "we," "our," "us," "Cardinal Health" and similar pronouns refer to Cardinal Health, Inc. and its majority-owned subsidiaries, unless the context requires otherwise. Our fiscal year ends on June 30.  References to fiscal 2021, 2020, 2019, 2018, 2017 and 2016 are to the fiscal years ended June 30, 2021, 2020, 2019, 2018, 2017 and 2016, respectively. Except as otherwise specified, information in this report is provided as of June 30, 2020.
Non-GAAP Financial Measures
In this report, including in the "Fiscal 2020 Overview" section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we use financial measures that are derived from consolidated financial data but are not presented in our financial statements that are 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 report.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Our MD&A within this Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-to-year comparisons between fiscal 2020 and fiscal 2019. Fiscal 2018 items and discussions of year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Important Information Regarding Forward-Looking Statements
This report (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 MD&A and Risk Factors, but there are others throughout this report, 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 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 projected, anticipated or implied. The most significant of these risks and uncertainties are described in “Risk Factors” in this report and in Exhibit 99.1 to the Form 10-K included in this report. Forward-looking statements in this report 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.
Available Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge on our website (www.cardinalhealth.com), under the “Investor Relations — Financial Reporting — SEC Filings” caption, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies.



 
Cardinal Health | Fiscal 2020 Form 10-K
2



MD&A
Results of Operations
 


Management's Discussion and Analysis of Financial Condition and Results of Operations
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, physician offices and patients in the home. We provide pharmaceuticals and medical products 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.
Pharmaceutical Segment
 
Our Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical and over-the-counter healthcare and consumer products in the United States. This segment also provides services to pharmaceutical manufacturers and healthcare providers for specialty pharmaceutical products; operates nuclear pharmacies and radiopharmaceutical manufacturing facilities; provides pharmacy management services to hospitals, as well as medication therapy management and patient outcomes services to hospitals, other healthcare providers and payers; and repackages generic pharmaceuticals and over-the-counter healthcare products.
 
Medical Segment
 
Our Medical segment manufactures, sources and distributes Cardinal Health branded medical, surgical and laboratory products, which are sold in the United States, Canada, Europe, Asia and other markets. In addition to distributing Cardinal Health branded products, this segment also distributes a broad range of medical, surgical and laboratory products known as national brand products and provides supply chain services and solutions to hospitals, ambulatory surgery centers, clinical laboratories and other healthcare providers in the United States and Canada. This segment also distributes medical products to patients' homes in the United States through our Cardinal Health at-Home Solutions division.


 3
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Results of Operations
 

Consolidated Results

Fiscal 2020 Overview
 
Revenue
Revenue for fiscal 2020 was $152.9 billion, a 5 percent increase from the prior year, primarily due to sales growth from pharmaceutical distribution and specialty solutions customers.
GAAP and Non-GAAP Operating Earnings
(in millions)
2020
 
2019
 
Change
GAAP operating earnings/(loss)
$
(4,098
)
 
$
2,060

 
N.M.

Surgical gown recall costs
85

 

 
 
State opioid assessment related to prior fiscal years
3

 

 
 
Restructuring and employee severance
122

 
125

 
 
Amortization and other acquisition-related costs
524

 
621

 
 
Impairments and (gain)/loss on disposal of assets
7

 
(488
)
 
 
Litigation (recoveries)/charges, net
5,741

 
36

 
 
Non-GAAP operating earnings
$
2,384

 
$
2,353

 
1
%
The sum of the components and certain computations may reflect rounding adjustments.
We had a GAAP operating loss of $4.1 billion during fiscal 2020 primarily due to a $5.63 billion pre-tax charge we recognized for the estimated liability associated with lawsuits and claims brought against us by states and political subdivisions relating to the distribution of prescription opioid pain medications as described in the Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements." GAAP operating earnings during fiscal 2019 were favorably impacted by a $508 million pre-tax gain from the divestiture of a majority interest in our naviHealth Holdings, LLC ("naviHealth") business.
The increase in non-GAAP operating earnings was primarily due to the beneficial impact of enterprise-wide cost-savings measures, a higher contribution from branded pharmaceutical sales mix, the favorable year-over-year impact of fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier and growth from specialty solutions, partially offset by the adverse impact of Pharmaceutical segment customer contract renewals and the adverse impact of the pandemic associated with the novel strain of coronavirus (“COVID-19”). See the Significant Developments in Fiscal 2020 and Trends section of this MD&A.
GAAP and Non-GAAP Diluted EPS
($ per share)
2020 (2) (3)
 
2019 (2)
 
Change
GAAP diluted EPS (1)
$
(12.61
)
 
$
4.53

 
N.M.

Surgical gown recall costs
0.22

 

 
 
State opioid assessment related to prior fiscal years
0.01

 

 
 
Restructuring and employee severance
0.31

 
0.31

 
 
Amortization and other acquisition-related costs
1.34

 
1.57

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

 
(1.25
)
 
 
Litigation (recoveries)/charges, net
17.84

 
0.09

 
 
Loss on early extinguishment of debt
0.04

 

 
 
Gain on sale of equity interest in naviHealth
(1.68
)
 

 
 
Transitional tax benefit, net
(0.01
)
 
0.03

 
 
Non-GAAP diluted EPS (1)
$
5.45

 
$
5.28

 
3
%
The sum of the components and certain computations may reflect rounding adjustments.
(1)
Diluted earnings/(loss) per share attributable to Cardinal Health, Inc. ("diluted EPS" or "diluted loss per share")
(2)
The reconciling items are presented within this table net of tax. See quantification of tax effect of each reconciling item in our GAAP to Non-GAAP Reconciliations in the "Explanation and Reconciliation of Non-GAAP Financial Measures."
(3)
For fiscal 2020, GAAP diluted loss per share attributable to Cardinal Health, Inc. and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 293 million common shares, which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the period. Fiscal 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 million common shares, which includes potentially dilutive shares.

 
Cardinal Health | Fiscal 2020 Form 10-K
4



MD&A
Results of Operations
 

We had a $12.61 GAAP diluted loss per share attributable to Cardinal Health, Inc. ("GAAP diluted EPS") during fiscal 2020 due to the charge we recognized for the estimated liability associated with lawsuits and claims brought against us by states and political subdivisions relating to the distribution of prescription opioid pain medications. The charge had a $(17.54) per share after tax impact on GAAP diluted EPS. GAAP diluted EPS during fiscal 2020 was favorably impacted by a $1.68 per share gain from the sale of the remainder of our equity interest in naviHealth described further in Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 2 of the "Notes to Consolidated Financial Statements". GAAP diluted EPS during fiscal 2019 included a $1.26 per share gain from the divestiture of our majority interest in naviHealth.
Fiscal 2020 non-GAAP diluted EPS increased 3% to $5.45. This increase was primarily due to the factors discussed above impacting non-GAAP operating earnings, as well as a lower share count as a result of share repurchases and lower interest expense due to less debt outstanding and lower interest rates. The year-over-year comparison was unfavorably impacted by a higher effective tax rate due to the benefit in the prior-year from discrete tax items, largely related to international legal entity changes.
Cash and Equivalents
 
Our cash and equivalents balance was $2.8 billion at June 30, 2020 compared to $2.5 billion at June 30, 2019. The increase in cash during fiscal 2020 was due to net cash provided by operating activities of $2.0 billion and $886 million of net cash proceeds from the sale of investments, offset by cash deployed of $1.4 billion for debt repayments, $569 million for dividends and $350 million for share repurchases.

 5
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Results of Operations
 

Significant Developments in Fiscal 2020 and Trends
COVID-19
 
The COVID-19 pandemic continues to severely impact the U.S. and global economies. Our businesses have been impacted in a variety of ways beginning in the third quarter of fiscal 2020, as discussed in the following paragraphs and under “Results of Operations.” We estimate that the COVID-19 pandemic had a net negative impact to operating earnings/(loss) of approximately $100 million in fiscal 2020.
Within our manufacturing and distribution facilities, we have implemented sustained protocols designed to protect the safety of our employees and maintain continuity of our operations, and have generally continued to operate our distribution and manufacturing facilities in the ordinary course of business. Additionally, in line with various governmental recommendations to reduce large gatherings and practice social distancing, we have enabled most office-based employees to work remotely. These measures have created additional burdens on our infrastructure and information technology systems. Furthermore, if a significant number of our employees are unable to perform their duties for a period of time, we may experience difficulties in operating one or more of our facilities which could adversely impact our financial results.
Since the third quarter of fiscal 2020, our Medical segment has seen dramatically increased demand for certain personal protective equipment (“PPE”), such as masks, gowns and gloves. We manufacture, source and distribute some PPE products and distribute PPE manufactured by others. This increased demand resulted in an increase in sales volume for certain products in fiscal 2020. The cost to manufacture and source certain PPE products has also significantly increased, which had a slight negative impact on our margin for these products in fiscal 2020 and is expected to have a larger negative impact in fiscal 2021. We continue to seek alternate and additional sources for these products and otherwise mitigate cost increases. We also are increasing certain PPE product prices to reflect some of our higher costs and are seeking to modify affected customer contracts. If these efforts are unsuccessful, our margins may be adversely impacted even more significantly. In addition, we could experience decreased sales and customer disputes.
Federal, state and local governmental policies and orders and certain private initiatives designed to reduce the transmission of COVID-19 also resulted in, among other things, the cancellation or deferral of many elective medical procedures and some of our customers closing or severely curtailing their operations. As a result, our Medical segment has experienced decreased sales volume (apart from PPE products described above), which had a negative impact on Medical segment profit in fiscal 2020 and which we currently assume will have a negative impact in fiscal 2021. The decrease in elective procedures and physician office visits has also resulted in a significant decrease in sales by our Nuclear and Precision Health Solutions division in our Pharmaceutical segment in fiscal 2020. Fluctuating or decreasing elective procedure volume may have a greater or lesser adverse impact on the sales of these products and services than we anticipate.
Our Pharmaceutical Distribution and Specialty Solutions businesses experienced a temporary increase in sales volume during the third quarter of fiscal 2020, which we believe to be related to accelerated purchasing by some customers due to the COVID-19 pandemic and which was largely offset by a decrease in sales volume in the fourth quarter of fiscal 2020. We assume fiscal 2021 Pharmaceutical segment revenue will be negatively impacted by COVID-19, and we are uncertain when sales volume will return to pre-COVID-19 levels.
Political, legal or regulatory actions taken in response to the COVID-19 pandemic in certain jurisdictions where we manufacture, source or distribute products have created supply disruptions within both our Medical and, to a lesser extent, our Pharmaceutical segments and are likely to cause additional supply disruptions or shortages in the future. We cannot currently predict the frequency, duration or scope of these governmental actions and supply disruptions. For example, several countries have increased or instituted new restrictions on the export of medical or pharmaceutical products that we distribute or use in our businesses, including key components or raw materials. Additionally, governmental authorities in many countries, including the U.S., are considering enacting legislative or regulatory changes to address the impact of the pandemic, which may restrict or require changes in our operations, increase our costs, or otherwise adversely affect our operations.
In March 2020, the U.S enacted the Coronavirus Aid, Relief and Economic Security Act, which provided a variety of benefits for businesses as a result of the COVID-19 pandemic. During fiscal 2020, we received a cash flow benefit related to the deferral of payroll and income tax payments and a small tax benefit from the employee retention credit under this Act.
We currently anticipate that the COVID-19 pandemic will have a further negative impact on fiscal 2021 consolidated operating earnings and Medical segment profit. However, we cannot estimate the length or severity of the COVID-19 pandemic or of the related U.S. or global economic consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flow, and its impact maybe greater or less than we anticipate.



 
Cardinal Health | Fiscal 2020 Form 10-K
6



MD&A
Results of Operations
 

Opioid Lawsuits
 
In October 2019, we agreed in principle to a global settlement framework with a leadership group of state attorneys general that is designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions, but not private plaintiffs (the "Settlement Framework"). This Settlement Framework is subject to contingencies and uncertainties as to final terms, but is the basis for our negotiation of definitive terms and documentation. The Settlement Framework includes (1) a cash component, pursuant to which we would pay up to $5.56 billion over eighteen years, (2) development and participation in a program for free or rebated distribution of opioid abuse treatment medications for a period of ten years, and (3) to-be specified industry-wide changes to distributor controlled substance anti-diversion programs. We also agreed, with two other national distributors, to a $215 million settlement with two plaintiff counties. Our portion of that settlement was $66 million, which was paid in January 2020.
In connection with these matters, we recorded a total pre-tax charge of $5.63 billion ($5.14 billion after tax) during fiscal year 2020 in litigation (recoveries)/charges, net, in the consolidated statement of earnings/(loss) for the cash component. We accrue for contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. Moreover, definitive terms for a settlement pursuant to the Settlement Framework continue to be negotiated, and there is no assurance that the necessary parties will agree to a definitive settlement agreement or that the contingencies to any agreement will be satisfied. We regularly review these opioid litigation matters to determine whether our accrual is adequate. The amount of ultimate loss may differ materially from this accrual. See Note 7 of the "Notes to Consolidated Financial Statements" for additional information.
Also in connection with these matters, we recorded a tax benefit of $488 million, which is net of unrecognized tax benefits of $469 million, during fiscal 2020, reflecting our current assessment of the estimated future deductibility of the amount that may be paid under the $5.63 billion accrual taken in connection with the opioid litigation. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination of the technical merits of the position, including resolutions of any related appeals or litigation. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. For tax benefits that do not qualify for recognition, we recognize a liability for unrecognized tax benefits. Our assumptions and estimates around this benefit and uncertain tax position require significant judgment since the definitive settlement terms and documentation, including provisions related to deductibility, under the Settlement Framework have not been negotiated and the U.S. tax law governing deductibility was changed by the U.S. Tax Cuts and Jobs Act (“Tax Act”). We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the Tax Act. Further, it is possible that the tax authorities could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of tax benefit related to uncertain tax positions may differ materially from these estimates. See Note 8 of the “Notes to the Consolidated Financial Statements” for additional information.
Gain on Sale of Equity Interest in naviHealth
 
As described further in Note 2 of the "Notes to Consolidated Financial Statements," in May 2020 we sold the remainder of our equity interest in a partnership that owned naviHealth. We recognized a pre-tax gain of $579 million ($493 million after tax) from this disposal in gain on sale of equity interest in naviHealth in our consolidated statements of earnings/(loss).
Other Trends
 
In addition to the trends and uncertainties described above under the caption Significant Developments in Fiscal 2020 and Trends, the performance of our Pharmaceutical segment generics program, which includes generic pharmaceutical customer pricing changes and Red Oak Sourcing, adversely impacted Pharmaceutical segment profit in fiscal 2019 and fiscal 2018; however, in fiscal 2020 our generics program had a slightly favorable impact on Pharmaceutical segment profit. As is generally the case, the frequency, timing, magnitude and profit impact of generic pharmaceutical customer pricing changes, customer contract renewals, and branded and generic pharmaceutical manufacturer pricing changes remain uncertain and their impact on Pharmaceutical segment profit and consolidated operating earnings in fiscal 2021 could be more or less than we expect.


 7
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Results of Operations
 

Results of Operations
Revenue
 
chart-df5fa58deb025709a81.jpgchart-148af8dedebd55ac9eb.jpg
 
Revenue
 
(in millions)
2020
 
2019
 
Change
Pharmaceutical
$
137,495

 
$
129,917

 
6
 %
Medical
15,444

 
15,633

 
(1
)%
Total segment revenue
152,939

 
145,550

 
5
 %
Corporate
(17
)
 
(16
)
 
N.M.

Total revenue
$
152,922

 
$
145,534

 
5
 %

Fiscal 2020 Compared to Fiscal 2019

Pharmaceutical Segment
Fiscal 2020 Pharmaceutical segment revenue grew primarily due to sales growth from pharmaceutical distribution and specialty solutions customers, which together increased revenue by $7.6 billion.
Medical Segment
Fiscal 2020 Medical segment revenue decreased due to the adverse impact of the COVID-19 pandemic, partially offset by sales growth from Cardinal Health at-Home Solutions.
Cost of Products Sold

Cost of products sold for fiscal 2020 increased $7.4 billion (5 percent) due to the factors affecting the changes in revenue and gross margin.



 
Cardinal Health | Fiscal 2020 Form 10-K
8



MD&A
Results of Operations
 

Gross Margin
 
chart-b8cf9d04cd0f5e60a69.jpgchart-94d908f3201c52649e7.jpg
 
Consolidated Gross Margin
 
 
(in millions)
2020
 
2019
 
Change
Gross margin
$
6,868

 
$
6,834

 
%
Fiscal 2020 Compared to Fiscal 2019

Fiscal 2020 consolidated gross margin is essentially flat with growth from pharmaceutical specialty solutions and higher contribution from branded pharmaceutical sales, mostly offset by the adverse impact of Pharmaceutical segment customer contract renewals. Gross margin comparison to the prior year benefitted from the fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier.
Gross margin rate declined during fiscal 2020 mainly due to the adverse impact of pharmaceutical customer contract renewals and changes in pharmaceutical distribution product mix.

Distribution, Selling, General and Administrative ("SG&A") Expenses
 
 
SG&A Expenses
 
(in millions)
2020
 
2019
 
Change
SG&A expenses
$
4,572

 
$
4,480

 
2
%
 
Fiscal 2020 Compared to Fiscal 2019

Fiscal 2020 SG&A expenses increased due to higher costs to support sales growth and a $37 million charge in connection with a voluntary recall for Association for the Advancement of Medical Instrumentation ("AAMI") Level 3 surgical gowns and a voluntary recall and field actions for surgical procedure packs containing affected gowns (together, the "Recalls"), as described further within Note 7 of the "Notes to Consolidated Financial Statements".


 9
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Results of Operations
 

Segment Profit
 
We evaluate segment performance based on segment profit, among other measures. See Note 13 of the "Notes to Consolidated Financial Statements" for additional information on segment profit.
chart-785fc250b4225182a09.jpgchart-460dfd3e426b549eabf.jpg
 
Segment Profit and Operating Earnings
 
(in millions)
2020
 
2019
 
Change
Pharmaceutical
$
1,753

 
$
1,834

 
(4
)%
Medical
663

 
576

 
15
 %
Total segment profit
2,416

 
2,410

 
 %
Corporate
(6,514
)
 
(350
)
 
N.M.

Total consolidated operating earnings
$
(4,098
)
 
$
2,060

 
N.M.

Fiscal 2020 Compared to Fiscal 2019
 
Pharmaceutical Segment Profit
Fiscal 2020 Pharmaceutical segment profit decreased largely due to the adverse impact of customer contract renewals, partially offset by higher contribution from our branded pharmaceutical sales mix and growth from specialty solutions.
Pharmaceutical segment financial results do not include the $5.63 billion charge associated with the opioid litigation. See Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements" for additional information.
Medical Segment Profit
Fiscal 2020 Medical segment profit increased largely due to benefits from cost-savings measures and the favorable year-over-year impact of the fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier, partially offset by decreased sales resulting from the COVID-19 pandemic.
Medical segment financial results do not include the $85 million charge incurred during fiscal 2020 in connection with the Recalls, as described further within Note 7 of the "Notes to Consolidated Financial Statements".
Corporate
The changes in Corporate during fiscal 2020 are due to the factors discussed in the Other Components of Consolidated Operating Earnings/(Loss) section that follows.



 
Cardinal Health | Fiscal 2020 Form 10-K
10



MD&A
Results of Operations
 

Other Components of Consolidated Operating Earnings/(Loss)
 
In addition to revenue, gross margin, and SG&A expenses discussed previously, consolidated operating earnings/(loss) were impacted by the following:
(in millions)
2020
 
2019
Restructuring and employee severance
$
122

 
$
125

Amortization and other acquisition-related costs
524

 
621

Impairments and (gain)/loss on disposal of assets, net
7

 
(488
)
Litigation (recoveries)/charges, net
5,741

 
36

Restructuring and Employee Severance
In fiscal 2020 and 2019, restructuring costs are primarily related to implementation of certain enterprise-wide cost-savings measures.
Amortization and Other Acquisition-Related Costs
Amortization of acquisition-related intangible assets was $512 million and $531 million for fiscal 2020 and 2019, respectively.
Transaction and integration costs associated with the acquisition of the Patient Recovery Business were $7 million and $75 million during fiscal 2020 and 2019, respectively.
Impairments and (Gain)/Loss on Disposal of Assets, Net
During fiscal 2019, we recognized a pre-tax gain of $508 million related to the divestiture of our majority interest in naviHealth. See also “Gain on Sale of Equity Interest in naviHealth” below with respect to the sale of the remainder of our equity interest in naviHealth in fiscal 2020.
Litigation (Recoveries)/Charges, Net
During fiscal 2020, we recognized a pre-tax charge of $5.63 billion ($5.14 billion after tax) associated with the opioid litigation. See Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements" for additional information.
During fiscal 2020 and 2019, we recognized $103 million and $117 million, respectively, of estimated losses and legal defense costs associated with inferior vena cava ("IVC") filter product liability claims.
During fiscal 2020 and 2019, we recognized income of $16 million and $94 million, respectively, for recoveries in class action antitrust lawsuits in which we were a class member.
Other Components of Earnings/(Loss) Before Income Taxes

In addition to the items discussed above, earnings/(loss) before income taxes was impacted by the following:
(in millions)
2020
 
2019
 
Change
Other (income)/expense, net
$
(1
)
 
$
15

 
N.M.

Interest expense, net
238

 
294

 
(19
)%
Loss on early extinguishment of debt
16

 

 
N.M.

Gain on sale of equity interest in naviHealth
(579
)
 

 
N.M.

Interest Expense, Net
 

Fiscal 2020 interest expense decreased from fiscal 2019 primarily due to lower debt outstanding and lower interest rates.
Loss On Early Extinguishment Of Debt
During fiscal 2020, we recognized a $16 million loss in connection with the redemption and early debt repurchases as described further in Note 6 of the "Notes to Consolidated Financial Statements."
Gain on Sale of Equity Interest in naviHealth
During fiscal 2020, we recognized a pre-tax gain of $579 million from the sale of our equity interest in a partnership that owned naviHealth, as described further in the Significant Developments in Fiscal 2020 and Trends section of this MD&A and Note 2 of the "Notes to Consolidated Financial Statements." See also “Impairments and (Gain)/Loss on Disposal of Assets, Net” above with respect to the fiscal 2019 sale of our majority interest in naviHealth.

 11
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Results of Operations
 

Provision for Income Taxes
 
Generally, fluctuations in the effective tax rate are due to changes in the distribution of income among taxing jurisdictions with differing income tax rates and other reconciling items.
A reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate from continuing operations is as follows (see Note 8 of the "Notes to Consolidated Financial Statements" for additional information):
 
2020 (1)
 
2019 (2)
Provision at Federal statutory rate
21.0
 %
 
21.0
 %
State and local income taxes, net of federal benefit
2.5

 
0.9

Tax effect of foreign operations

 
(0.7
)
Nondeductible/nontaxable items
(0.1
)
 
2.5

Tax Act
0.1

 
(0.8
)
Change in valuation allowances
1.5

 
4.5

Foreign tax credits
0.5

 
(1.0
)
Legal entity reorganization

 
(3.6
)
Opioid litigation
(23.2
)
 

Other
(0.2
)
 
(0.7
)
Effective income tax rate
2.1
 %
 
22.1
 %
(1)
The effective income tax rate for fiscal 2020 represents an income tax benefit tax rate.
(2)
The effective income tax rate for fiscal 2019 represents an income tax expense tax rate.
Fiscal 2020

The fiscal 2020 effective income tax rate was impacted by the Settlement Framework, as described further in the Significant Developments in Fiscal 2020 and Trends section in this MD&A.
Ongoing Audits
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. Tax laws are complex and subject to varying interpretations. Tax authorities have challenged some of our tax positions, including U.S. Internal Revenue Service ("IRS") challenges to our international transfer pricing for the periods from 2008 to 2014, and it is possible that they will challenge others. These challenges may adversely affect our effective tax rate or tax payments.





 
Cardinal Health | Fiscal 2020 Form 10-K
12



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, early extinguishment of debt, dividends and share repurchases as well as potential opioid litigation settlement payments associated with the Settlement Framework. 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. To-date, the COVID-19 pandemic has not resulted in material changes to our liquidity and capital resources and has not impacted our ability to comply with financial commitments.
Cash and Equivalents
 
Our cash and equivalents balance was $2.8 billion at June 30, 2020 compared to $2.5 billion at June 30, 2019. The increase in cash during fiscal 2020 was due to net cash provided by operating activities of $2.0 billion, which reflects increases to working capital associated with the timing of payments to vendors, and $886 million of net cash proceeds from the sale of investments, substantially all of which was related to the sale of our equity interest in naviHealth, offset by cash deployed of $1.4 billion for debt repayments, $569 million for dividends and $350 million for share repurchases. At June 30, 2020, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments.
During fiscal 2019, our cash and equivalents increased by $700 million due to $2.7 billion of net cash provided by operating activities and $737 million of net cash proceeds from the sale of our majority interest in naviHealth, offset by $1.1 billion paid for debt repayments, $600 million paid for share repurchases, $577 million paid in dividends and $328 million paid for capital expenditures.
Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, payments to vendors and tax
 
payments in the regular course of business, as well as fluctuating working capital needs driven by customer and product mix.
The cash and equivalents balance at June 30, 2020 included $476 million of cash and equivalents held by subsidiaries outside of the United States.
In June 2020, we returned $140 million of cash held by foreign subsidiaries to the U.S.
As of June 30, 2020, foreign earnings of approximately $800 million are considered indefinitely reinvested for working capital and other offshore investment needs. The computation of tax required if those earnings are repatriated is not practicable. For amounts not considered indefinitely reinvested, we have recorded an immaterial amount of income tax expense in our financial statements in fiscal 2020.




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 June 30, 2020 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 June 30, 2020, we had no amounts outstanding under our commercial paper program, revolving credit facility or our committed receivables sales facility. During fiscal 2020, under our commercial paper program and our committed receivables program, we had maximum combined total daily amounts outstanding of $1.7 billion and an average combined daily amount outstanding of $195 million.
Our revolving credit and committed receivables sales facilities require us to maintain, as of the end of every fiscal quarter through December 2020, a consolidated net leverage ratio of no more than 4.00-to-1. The maximum permitted ratio will reduce to 3.75-to-1 in March 2021 and as of the end of every quarter thereafter. As of June 30, 2020, we were in compliance with this financial covenant.
 
Long-Term Obligations
At June 30, 2020, we had total long-term obligations, including the current portion and other short-term borrowings of $6.8 billion.
In June 2020, we redeemed $500 million aggregate principle amount of 4.625% Notes due December 2020 at a redemption price equal to 100% of the principal amount and accrued but unpaid interest, plus the make-whole premium applicable to the notes. In connection with the redemption, we recorded a $7 million loss on early extinguishment of debt.
In November 2019, we repaid the full principal of the 2.4% Notes due 2019 at maturity for $450 million.
During fiscal 2020, we also early repurchased $247 million of the 2.616% Notes due 2022, $11 million of the 3.2% Notes due 2022, $20 million of the Floating Rate Notes due 2022, $104 million of the 3.41% Notes due 2027, $6 million of the 4.6% Notes due 2043, $5 million of the 4.9% Notes due 2045, and $35 million of the 4.368% Notes due 2047.  In connection with these early debt

 13
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Liquidity and Capital Resources
 

repurchases, we recognized a $9 million loss on early extinguishment of debt.
In fiscal 2019, we repaid $1.0 billion of 1.948% notes at maturity and repurchased a total of $100 million of notes due in 2022 and 2027. The loss on early extinguishment of debt from the fiscal 2019 early repurchases was immaterial.
The redemption and repurchases were paid for with available cash and other short-term borrowings.
Risk Management
We use interest rate swaps, foreign currency contracts and commodity contracts to manage our exposure to cash flow variability.
 
We also use interest rate swaps to protect the value of our debt and use foreign currency forward contracts to protect the value of our existing and forecasted foreign currency assets and liabilities. See the "Quantitative and Qualitative Disclosures About Market Risk" section as well as Note 1 and Note 10 of the “Notes to Consolidated Financial Statements” for information regarding the use of financial instruments and derivatives as well as foreign currency, interest rate and commodity exposures.
Capital Deployment
 
Opioid Settlement Framework
In October 2019, we agreed in principle to a Settlement Framework which includes a cash component, pursuant to which we would pay up to $5.56 billion over eighteen years. If a definitive agreement is reached, and subject to participation by states and political subdivisions, we expect payment amounts under the Settlement Framework to be spread through the 18-year period. We cannot currently predict when those payments might begin, and it is possible that they may ultimately be made over a different time period, or not at all. See Significant Developments in Fiscal 2020 and Trends section in this MD&A for additional information.
Capital Expenditures
Capital expenditures during fiscal 2020 and 2019 were $375 million and $328 million, respectively.
We expect capital expenditures in fiscal 2021 to be between $400 million and $450 million and to be primarily for information technology and infrastructure projects.
 
Dividends
During fiscal 2020, we paid quarterly dividends totaling $1.92 per share, an increase of 1 percent from fiscal 2019.
On May 11, 2020, our Board of Directors approved a quarterly dividend of $0.4859 per share, or $1.94 per share on an annualized basis, which was paid on July 15, 2020 to shareholders of record on July 1, 2020.
On August 5, 2020, our Board of Directors approved a quarterly dividend of $0.4859 per share, payable on October 15, 2020 to shareholders of record on October 1, 2020.
Share Repurchases
During fiscal 2020 and 2019, we repurchased $350 million and $600 million, respectively, of our common shares. We funded the repurchases with available cash and short-term borrowing. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information. At June 30, 2020, we had $943 million authorized for share repurchases remaining under all programs.





 
Cardinal Health | Fiscal 2020 Form 10-K
14


MD&A
Other
 


Contractual Obligations
At June 30, 2020, our contractual obligations, including estimated payments due by period, were as follows:
(in millions)
2021
 
2022 to 2023
 
2024 to 2025
 
There-after
 
Total
Long-term debt and short-term borrowings (1)
$

 
$
1,967

 
$
1,222

 
$
3,552

 
$
6,741

Interest on long-term debt
226

 
411

 
336

 
1,671

 
2,644

Finance lease obligations (2)
10

 
18

 
6

 
2

 
36

Operating lease obligations (3)
117

 
168

 
95

 
123

 
503

Purchase obligations and other payments (4)
623

 
481

 
210

 
36

 
1,350

Total contractual obligations (5) (6)
$
976

 
$
3,045

 
$
1,869

 
$
5,384

 
$
11,274

(1)
Represents maturities of our long-term debt obligations and other short-term borrowings excluding finance lease obligations described below. See Note 6 of the “Notes to Consolidated Financial Statements” for further information.
(2)
Represents minimum finance lease obligations included within long-term obligations in our consolidated balance sheet and further described in Note 5 of the “Notes to Consolidated Financial Statements.”
(3)
Represents minimum operating lease obligations included within other accrued liabilities and deferred income taxes and other liabilities in our consolidated balance sheet and further described in Note 5 of the “Notes to Consolidated Financial Statements.”
(4)
A purchase obligation is defined as an agreement to purchase goods or services that is legally enforceable and specifies all significant terms, including fixed or
 
minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur. Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table. In addition, contracts that can be unilaterally canceled with no termination fee or with proper notice are excluded from our total purchase obligations except for the amount of the termination fee or the minimum amount of goods that must be purchased during the requisite notice period. Purchase obligations and other payments also includes quarterly payments of $45.6 million that we are required to pay CVS Health Corporation ("CVS") in connection with Red Oak Sourcing and will be in place for the remaining five years of the agreement. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information.
(5)
Long-term liabilities, such as unrecognized tax benefits, deferred taxes and other tax liabilities, have been excluded from the above table due to the inherent uncertainty of the underlying tax positions or because of the inability to reasonably estimate the timing of any cash outflows. See Note 8 of the "Notes to Consolidated Financial Statements" for further discussion of income taxes.
(6)
Total contractual obligations do not include payments that may be made in connection with the opioid litigation, as further described in Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements." If a definitive agreement is reached, and subject to participation by states and political subdivisions, we expect payment amounts under the Settlement Framework to be spread through the 18-year period. We cannot currently predict when those payments might begin, and it is possible that they may ultimately be made over a different time period, or not at all. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information.

Off-Balance Sheet Arrangements
We had no significant "off-balance sheet arrangements" at June 30, 2020, as that term is defined in the SEC rules.
Recent Financial Accounting Standards
See Note 1 of the “Notes to Consolidated Financial Statements” for a discussion of recent financial accounting standards.

 15
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

Critical Accounting Policies and Sensitive Accounting Estimates
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 further discussion of accounting policies for items within this section and of additional accounting policies, see Note 1 of the “Notes to Consolidated Financial Statements.”
The COVID-19 pandemic has severely impacted, and continues to severely impact the U.S. and global economies and, beginning in the third quarter of fiscal 2020, our businesses have been impacted in a variety of ways. We cannot estimate the length or severity of the COVID-19 pandemic or the related U.S. and global economic consequences on our business and operations, including whether and when normal economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flow. Our estimates, judgments and assumptions related to the COVID-19 pandemic could ultimately differ over time.
Allowance for Doubtful Accounts
 
The allowance for doubtful accounts includes general and specific reserves. We determine our allowance for doubtful accounts by reviewing accounts receivable aging, industry trends, customer financial strength and credit standing, historical write-off trends and payment history. We regularly evaluate how changes in economic conditions, including the economic impact of the COVID-19 pandemic, may affect credit risks. See Note 1 of the “Notes to Consolidated Financial Statements” for further information on our policy for Receivables and Allowance for Doubtful Accounts.
A hypothetical 0.1 percent increase or decrease in the reserve as a percentage of trade receivables at June 30, 2020, would result in an increase or decrease in bad debt expense of $8 million. We believe the reserve maintained and expenses recorded in fiscal 2020 are appropriate.
At this time, we are not aware of any analytical findings or customer issues that are likely to lead to a significant future increase in the allowance for doubtful accounts as a percentage of revenue. In addition, the Financial Accounting Standards Board’s amended accounting guidance that requires entities to measure credit losses
 
on trade and other receivables using an "expected credit loss" model that considers historical experience, current conditions and reasonable supportable forecasts is effective for us in the first quarter of fiscal 2021. We have evaluated the impact of adopting this new guidance and have determined it will not have a material impact on our consolidated financial statements or disclosures. The following table presents information regarding our allowance for doubtful accounts over the past three fiscal years:
(in millions, except percentages)
2020
 
2019
 
2018
Allowance for doubtful accounts at beginning of period
$
193

 
$
139

 
$
137

Charged to costs and expenses
140

 
141

 
114

Reduction to allowance for customer deductions and write-offs
(127
)
 
(87
)
 
(111
)
Allowance for doubtful accounts at end of period
$
206

 
$
193

 
$
139

Allowance as a percentage of customer receivables
2.5
%
 
2.3
%
 
1.8
%
Allowance as a percentage of revenue
0.13
%
 
0.13
%
 
0.10
%
The sum of the components may not equal the total due to rounding.
Inventories
 
A substantial portion of our inventories (56 percent at both June 30, 2020 and 2019) are valued at the lower of cost, using the last-in, first-out ("LIFO") method, or market. These are primarily merchandise inventories at the core pharmaceutical distribution facilities within our Pharmaceutical segment (“distribution facilities”). The LIFO impact on the consolidated statements of earnings/(loss) depends on pharmaceutical manufacturer price appreciation or deflation and our fiscal year-end inventory levels, which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end. Historically, prices for branded pharmaceuticals have generally tended to rise, resulting in an increase in cost of products sold, whereas prices for generic pharmaceuticals generally tend to decline, resulting in a decrease in cost of products sold. See Note 1 of the “Notes to Consolidated Financial Statements” for further information on our policy for Inventories.
 
Using LIFO, if there is a decrease in inventory levels that have experienced pharmaceutical price appreciation, the result generally will be a decrease in future cost of products sold as our older inventory is held at a lower cost. Conversely, if there is a decrease in inventory levels that have experienced a pharmaceutical price decline, the result generally will be an increase in future cost of products sold as our older inventory is held at a higher cost.

 
Cardinal Health | Fiscal 2020 Form 10-K
16



MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

We believe that the average cost method of inventory valuation provides a reasonable approximation of the current cost of replacing inventory within these distribution facilities. As such, the LIFO reserve is the difference between (a) inventory at the lower of LIFO cost or market and (b) inventory at replacement cost determined using the average cost method of inventory valuation. At June 30, 2020 and 2019, respectively, inventories valued at LIFO cost were $411 million and $230 million higher than the average cost value. We do not record inventories in excess of replacement cost. As such, we did not write-up the value of our inventory from average cost to LIFO cost at June 30, 2020 or 2019.
Our remaining inventory that is not valued at the lower of LIFO cost or market is stated at the lower of cost, using the first-in, first-out method, or net realizable value. Net realizable value is defined as
 
the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Inventories presented in the consolidated balance sheets are net of reserves for excess and obsolete inventory which were $155 million and $171 million at June 30, 2020 and 2019, respectively. We reserve for inventory obsolescence using estimates based on historical experience, historical and projected sales trends, specific categories of inventory, age and expiration dates of on-hand inventory and manufacturer return policies.
If actual conditions are less favorable than our assumptions, additional inventory reserves may be required.

Goodwill and Other Indefinite-Lived Intangible Assets
 
Purchased goodwill and intangible assets with indefinite lives are 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. There is an option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. We have elected to bypass the qualitative assessment for the annual goodwill impairment test in the current year. 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).
We have two operating segments, which are the same as our reportable segments: Pharmaceutical and Medical. These operating segments are comprised of divisions (which are components), for which discrete financial information is available. Components are aggregated into reporting units for purposes of goodwill impairment testing to the extent that they share similar economic characteristics. Our reporting units are: Pharmaceutical operating segment (excluding our Nuclear and Precision Health Solutions division); Nuclear and Precision Health Solutions division; Medical operating segment (excluding our Cardinal Health at-Home Solutions division) (“Medical Unit”); and Cardinal Health at-Home Solutions division.
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 determination of estimated fair value of our reporting units is based on a combination of the income-based and market-based approaches (using discount rates ranging from 8.5 percent to 10.5 percent). We use discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and in our
 
internally-developed forecasts. Under the market-based guideline public company method, we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. We also use the market-based guideline transaction method to determine fair value based on pricing multiples derived from the sale of companies that are similar to our reporting units.
Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. The use of alternate estimates and assumptions, changes in the industry or peer groups, or changes in weightings assigned to the discounted cash flow method, guideline public company method or guideline transaction method could materially affect the determination of fair value for each reporting unit and potentially result in goodwill impairment. If a reporting unit fails to achieve expected earnings or operating cash flow, or otherwise fails to meet current financial plans, or if there were changes to any other key assumptions used in the tests, the reporting unit could incur a goodwill impairment in a future period.
We performed annual impairment testing in fiscal 2020, 2019 and 2018 and, with the exception of our Medical Unit in fiscal 2018, concluded that there were no impairments of goodwill as the estimated fair value of each reporting unit exceeded its carrying value.
For our annual impairment test in fiscal 2020, the fair value of our Medical Unit exceeded its carrying value of $10.1 billion by approximately 7 percent. For this test, we used a discount rate of 8.5 percent and a terminal growth rate of 2 percent. Additionally, we assigned a weighting of 80 percent to the discounted cash flow method, 10 percent to the guideline public company method, and 10 percent to the guideline transaction method. The goodwill balance for our Medical Unit was $4.2 billion at June 30, 2020.
Adverse changes in key assumptions, such as assumptions related to the COVID-19 pandemic which could cause a decrease in future cash flows; an increase in the discount rate; or a decrease in the terminal growth rate, among other things, could result in a goodwill impairment for the Medical Unit. For example, if we were to use a

 17
Cardinal Health | Fiscal 2020 Form 10-K
 


MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

discount rate of 9.5 percent, the carrying value would have exceeded the fair value for our Medical Unit by 5.0 percent for fiscal 2020. Similarly, if we were to use a terminal growth rate of 0.5 percent, the carrying value would have exceed the fair value for our Medical Unit by less than 1.0 percent for fiscal 2020. For any of our other reporting units, the fair value would not have been less than the carrying amount for fiscal 2020 if we increased the discount rate by 1.0 percentage point or decreased the terminal growth rate by 1.0 percentage point. As discussed further in Note 1 of the "Notes to Consolidated Financial Statements," during the fourth quarter of fiscal 2018 we recognized a $1.4 billion goodwill impairment charge related to our Medical Unit, which is included in impairments and (gain)/loss on disposal of assets in our consolidated statements of earnings/(loss). There was no tax benefit related to the goodwill impairment charge.
 
The impairment test for indefinite-lived intangibles other than goodwill (primarily IPR&D) involves first assessing qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If so, then a quantitative test is performed to compare the estimated fair value of the indefinite-lived intangible asset to the respective asset's carrying amount. Our qualitative evaluation requires the use of estimates and significant judgments and 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 the indefinite-lived intangible asset is less than its carrying amount.
See Note 1 of "Notes to Consolidated Financial Statements" for additional information regarding goodwill and other intangible assets.

Loss Contingencies and Self-Insurance
 
We accrue for contingencies related to disputes, litigation and regulatory matters if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because these matters are inherently unpredictable and unfavorable developments or outcomes can occur, assessing contingencies is highly subjective and requires judgments about future events.
We also self-insure for employee healthcare, certain product liability matters, auto liability, property and workers' compensation and maintain insurance for individual losses exceeding certain limits when available.
Self-insurance accruals include an estimate for expected settlements on pending claims, defense costs, administrative fees, claims adjustment costs and an estimate for claims incurred but not reported. For certain types of exposures, we develop the estimate of expected ultimate costs to settle each claim based on specific information related to each claim if available. Other estimates are based on an assessment of outstanding claims, historical analysis and current payment trends. For claims incurred but not reported, the liabilities are calculated and derived in accordance with generally accepted actuarial practices or using an estimated lag period.
We regularly review contingencies and self-insurance accruals to determine whether our accruals and related disclosures are adequate. Any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs.
 
Examples of such contingencies include various lawsuits related to the distribution of prescription opioid pain medications and the Cordis IVC filter lawsuits.
In connection with the opioid litigation as described further in the Significant Developments in Fiscal 2020 and Trends section in this MD&A, we recorded a pre-tax charge of $5.63 billion ($5.14 billion after tax) during fiscal 2020. Definitive terms of a settlement under the Settlement Framework continue to be negotiated, and there is no assurance that the necessary parties will agree to a definitive settlement agreement or that the contingencies to any agreement will be satisfied.
We develop and periodically update reserve estimates for the Cordis inferior vena cava ("Cordis IVC") claims, including those received to date and expected to be received in the future and related costs. To project future Cordis IVC claim costs, we use a methodology based largely on recent experience, including claim filing rates, estimated indemnity severity by claim type, sales data, implant and injury to report lag patterns and estimated defense costs.
The amount of loss may differ materially from these estimates. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information regarding loss contingencies and product liability lawsuits.

 
Cardinal Health | Fiscal 2020 Form 10-K
18



MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

Provision for Income Taxes
 
We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. Our income tax expense, deferred income tax assets and liabilities, and unrecognized tax benefits reflect management’s assessment of estimated future taxes to be paid on items in the consolidated financial statements.
The following table presents information about our tax position at June 30:
(in millions)
2020
 
2019
Total deferred income tax assets (1)
$
1,412

 
$
864

Valuation allowance for deferred income tax assets (2)
(470
)
 
(542
)
   Net deferred income tax assets
942

 
322

Total deferred income tax liabilities
(2,161
)
 
(2,035
)
   Net deferred income tax liability
$
(1,219
)
 
$
(1,713
)
(1)
Total deferred income tax assets included $589 million and $621 million of loss and tax credit carryforwards at June 30, 2020 and 2019, respectively.
(2)
The valuation allowance primarily relates to federal, state and international loss and credit carryforwards for which the ultimate realization of future benefits is uncertain.
Expiring or unusable loss and credit carryforwards and the required valuation allowances are adjusted quarterly when it is more likely than not that at least a portion of the respective deferred tax assets will not be realized. After applying the valuation allowances, we do not anticipate any limitations on our use of any of the other net deferred income tax assets described above. We operate in a complex multinational tax environment and are subject to tax treaty arrangements and transfer pricing guidelines for intercompany transactions that are subject to interpretation. Uncertainty in a tax position may arise as tax laws are subject to interpretation.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination of the technical merits of the position, including resolutions of any related appeals or litigation. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. For tax benefits that do not qualify for recognition, we recognize a liability for unrecognized tax benefits.
In connection with the $5.63 billion pre-tax charge for the opioid litigation, during fiscal year 2020, we recorded a tax benefit of $488 million, which is net of unrecognized tax benefits of $469 million, reflecting our current assessment of the estimated future deductibility of the amount that may be paid. We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the Tax Act; however, these estimates require significant judgment since the definitive settlement terms and documentation, including provisions related to deductibility, under the Settlement Framework have not been negotiated and the U.S. tax law governing deductibility was changed by the U.S. Tax Cuts and Jobs Act ("Tax Act"). Further, it is possible that the tax authorities
 
could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of the tax benefit related to uncertain tax positions may differ materially from these estimates. See Note 8 for more information regarding these 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. Tax laws are complex and subject to varying interpretations. Tax authorities have challenged some of our tax positions, including IRS challenges to our international transfer pricing for the periods from 2008 to 2014, and it is possible that they will challenge others. These challenges may adversely affect our effective tax rate or tax payments.
Our assumptions and estimates around uncertain tax positions require significant judgment; the actual amount of tax benefit related to uncertain tax positions may differ from these estimates. See Note 8 of the “Notes to Consolidated Financial Statements” for additional information regarding unrecognized tax benefits.
We believe that our estimates for the valuation allowances against deferred tax assets and unrecognized tax benefits are appropriate based on current facts and circumstances. The amount we ultimately pay when matters are resolved may differ from the amounts accrued. Changes in our current estimates due to unanticipated market conditions, tax law changes or other factors could have a material effect on our ability to utilize deferred tax assets. For a further discussion on Provision for Income Taxes, see Note 8 of the “Notes to the Consolidated Financial Statements.”
The calculation of our tax liabilities includes estimates for uncertainties in the application of broad and complex changes to the U.S. tax code as per the Tax Act as enacted by the United States government on December 22, 2017. We have made reasonable estimates and recorded amounts based on management judgment and our current understanding of the Tax Act which is subject to further interpretation by the Internal Revenue Service ("IRS"). See Note 8 of the “Notes to Consolidated Financial Statements” for additional information regarding the Tax Act.


 19
Cardinal Health | Fiscal 2020 Form 10-K
 


Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

Explanation and Reconciliation of Non-GAAP Financial Measures
This report, including the "Fiscal 2020 Overview" section within MD&A, 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. We did not recognize any LIFO charges or credits during the periods presented.
Surgical gown recall costs includes inventory write-offs and certain remediation and supply disruption costs arising from the January 2020 recall of select Association for the Advancement of Medical Instrumentation ("AAMI") Level 3 surgical gowns and voluntary field actions (a recall of some packs and a corrective action allowing overlabeling of other packs) for Presource Procedure Packs containing affected gowns. We have excluded these costs from our non-GAAP metrics to allow investors to better understand the underlying operating results of the business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies’ financial results.
State opioid assessments related to prior fiscal years is the portion of state assessments for prescription opioid medications that were sold or distributed in periods prior to the fiscal year of the initial assessment. This portion is excluded from non-GAAP financial measures because it is retrospectively applied to sales in prior fiscal years and inclusion would obscure analysis of the current fiscal year results of our underlying, ongoing business. Additionally, while states' laws may require us to make payments on an ongoing basis, the portion of the assessment related to sales in prior periods are contemplated to be one-time, nonrecurring items. Reversals of these accruals have occurred when certain assessments were found by a Court unconstitutional.
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 because they are not part of the ongoing operations of our underlying business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies' financial results. 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.

 
Cardinal Health | Fiscal 2020 Form 10-K
20



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

Loss on early 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.
Gain on sale of equity interest in naviHealth was incurred in connection with the sale of our remaining equity interest in naviHealth in fiscal 2020. The equity interest was retained in connection with the initial sale of our majority interest in naviHealth during fiscal 2019. We exclude this significant gain because gains or losses on investments of this magnitude do not typically occur in the normal course of business and are similar in nature to a gain or loss from a divestiture of a majority interest, which we exclude from non-GAAP results. The gain on the initial sale of our majority interest in naviHealth in fiscal 2019 was also excluded from our non-GAAP 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 report are determined by dividing the difference between current period results and prior period results by prior period results.
Non-GAAP operating earnings: operating earnings/(loss) excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, and (7) litigation (recoveries)/charges, net.
Non-GAAP earnings before income taxes: earnings/(loss) before income taxes excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth.
Non-GAAP net earnings attributable to Cardinal Health, Inc.: net earnings/(loss) attributable to Cardinal Health, Inc. excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth, each net of tax, and (10) transitional tax benefit, net.
Non-GAAP effective tax rate: provision for/(benefit from) income taxes adjusted for (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth, each net of tax, and (10) transitional tax benefit, net divided by (earnings before income taxes adjusted for the first nine items).
Non-GAAP diluted earnings per share attributable to Cardinal Health, Inc.: non-GAAP net earnings attributable to Cardinal Health, Inc. divided by diluted weighted-average shares outstanding.







 21
Cardinal Health | Fiscal 2020 Form 10-K
 


Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

GAAP to Non-GAAP Reconciliations
(in millions, except per common share amounts)
Operating Earnings/(Loss)
Operating Earnings/(Loss) Growth Rate
Earnings/(Loss) Before Income Taxes
Provision for/(Benefit From) Income Taxes
Net Earnings/(Loss)1
Net Earnings/(Loss)1 Growth Rate
Effective Tax Rate
Diluted EPS1.2
Diluted EPS1 Growth Rate
 
Fiscal Year 2020
GAAP
$
(4,098
)
N.M.

$
(3,772
)
$
(79
)
$
(3,696
)
N.M.

2.1
%
$
(12.61
)
N.M.

Surgical gown recalls costs
85

 
85

22

63

 
 
0.22

 
State opioid assessment related to prior fiscal years
3

 
3

1

2

 
 
0.01

 
Restructuring and employee severance
122

 
122

29

93

 
 
0.31

 
Amortization and other acquisition-related costs
524

 
524

130

394

 
 
1.34

 
Impairments and (gain)/loss on disposal of assets
7

 
7

2

5

 
 
0.02

 
Litigation (recoveries)/charges, net3
5,741

 
5,741

514

5,227

 
 
17.84

 
Loss on early extinguishment of debt

 
16

4

12

 
 
0.04

 
Gain on sale of equity interest in naviHealth

 
(579
)
(86
)
(493
)
 
 
(1.68
)
 
Transitional tax benefit, net4

 

2

(2
)
 
 
(0.01
)
 
Non-GAAP
$
2,384

1
 %
$
2,147

$
539

$
1,605

1
 %
25.1
%
$
5.45

3
 %
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year 2019
GAAP
$
2,060

N.M.

$
1,751

$
386

$
1,363

N.M.

22.1
%
$
4.53

N.M.

Restructuring and employee severance
125

 
125

32

93

 
 
0.31

 
Amortization and other acquisition-related costs
621

 
621

148

473

 
 
1.57

 
Impairments and (gain)/loss on disposal of assets5
(488
)
 
(488
)
(113
)
(375
)
 
 
(1.25
)
 
Litigation (recoveries)/charges, net
36

 
36

10

26

 
 
0.09

 
Transitional tax benefit, net4

 

(9
)
9

 
 
0.03

 
Non-GAAP
$
2,353

(9
)%
$
2,044

$
453

$
1,589

1
 %
22.1
%
$
5.28

6
 %
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year 2018
GAAP
$
126

(94
)%
$
(228
)
$
(487
)
$
256

(80
)%
213.8
%
$
0.81

(80
)%
Restructuring and employee severance
176

 
176

25

151

 
 
0.48

 
Amortization and other acquisition-related costs
707

 
707

176

531

 
 
1.69

 
Impairments and (gain)/loss on disposal of assets6
1,417

 
1,417

(44
)
1,461

 
 
4.64

 
Litigation (recoveries)/charges, net
159

 
159

48

111

 
 
0.35

 
Loss on early extinguishment of debt

 
2

1

1

 
 

 
Transitional tax benefit, net4

 

936

(936
)
 
 
(2.97
)
 
Non-GAAP
$
2,585

(7
)%
$
2,233

$
655

$
1,575

(9
)%
29.3
%
$
5.00

(7
)%
 
 
 
 
 
 
 
 
 
 
1 
Attributable to Cardinal Health, Inc.
2 
For fiscal 2020, GAAP diluted loss per share attributable to Cardinal Health, Inc. and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 293 million common shares, which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the period. Fiscal 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 million common shares, which includes potentially dilutive shares.
3 
Litigation (recoveries)/charges, net includes a pre-tax charge of $5.63 billion ($5.14 billion after tax) recorded in the first quarter of fiscal 2020 related to the opioid litigation.
4 
Reflects the 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 Consolidated Financial Statements" for more information on the Tax Act.
5 
During fiscal 2019, we sold our majority interest in naviHealth and recognized a pre-tax gain of $508 million ($378 million after tax).
6 
Fiscal year 2018 includes a goodwill impairment charge of $1.4 billion related to our Medical segment. There was no tax benefit related to this goodwill impairment charge.

The sum of the components and certain computations may reflect rounding adjustments.
We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.

 
Cardinal Health | Fiscal 2020 Form 10-K
22



Selected Financial Data
 
 


Selected Financial Data
The consolidated financial data below includes all business combinations as of the date of acquisition that occurred during these periods. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes and MD&A.
(in millions, except per common share amounts)
20201,2,3
 
20194
 
20185,6
 
2017
 
2016
Earnings Data:
 
 
 
 
 
 
 
 
 
Revenue
$
152,922

 
$
145,534

 
$
136,809

 
$
129,976

 
$
121,546

 
 
 
 
 
 
 
 
 
 
Operating earnings/(loss)
(4,098
)
 
2,060

 
126

 
2,120

 
2,459

 
 
 
 
 
 
 
 
 
 
Net earnings/(loss)
(3,693
)
 
1,365

 
259

 
1,294

 
1,431

Less: Net earnings attributable to noncontrolling interests
(3
)
 
(2
)
 
(3
)
 
(6
)
 
(4
)
Net earnings/(loss) attributable to Cardinal Health, Inc.
$
(3,696
)
 
$
1,363

 
$
256

 
$
1,288

 
$
1,427

 
 
 
 
 
 
 
 
 
 
Basic earnings/(loss) per common share attributable to Cardinal Health, Inc.
$
(12.61
)
 
$
4.55

 
$
0.82

 
$
4.06

 
$
4.36

 
 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per common share attributable to Cardinal Health, Inc.
$
(12.61
)
 
$
4.53

 
$
0.81

 
$
4.03

 
$
4.32

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
1.9292

 
$
1.9100

 
$
1.8635

 
$
1.8091

 
$
1.6099

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
40,766

 
$
40,963

 
$
39,951

 
$
40,112

 
$
34,122

Long-term obligations, less current portion
6,765

 
7,579

 
8,012

 
9,068

 
4,952

Total Cardinal Health, Inc. shareholders' equity
1,789

 
6,328

 
6,059

 
6,808

 
6,554

1During fiscal 2020, we recorded a pre-tax charge of $5.63 billion ($5.14 billion after tax) related to the opioid litigation.
2During fiscal 2020, we recorded a total charge of $85 million in connection with the Recalls.
3During fiscal 2020, we sold the remainder of our equity interest in a partnership that owned naviHealth and recognized a pre-tax gain of $579 million ($493 million million after tax) within net earnings/(loss).
4During fiscal 2019, we sold our majority interest in naviHealth and recognized a pre-tax gain of $508 million ($378 million after tax) within operating earnings/(loss).
5During the fourth quarter of fiscal 2018, we recognized a non-cash goodwill impairment charge of $1.4 billion related to our Medical segment. There was no tax benefit related to this goodwill impairment charge.
6During fiscal 2018, the United States enacted the Tax Cuts and Jobs Act. In fiscal 2018 we recognized a net transitional tax benefit of $936 million related to the enactment of the act. See Note 8 for more information.



 23
Cardinal Health | Fiscal 2020 Form 10-K
 

Disclosures about Market Risk
 

Quantitative and Qualitative Disclosures About Market Risk
We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to foreign exchange, interest rate, and commodity price-related changes. We maintain a hedging program to manage volatility related to some of these market exposures which employs operational, economic, and derivative financial instruments in order to mitigate risk. See Note 1 and Note 10 of the “Notes to Consolidated Financial Statements” for further discussion regarding our use of derivative instruments.
Foreign Exchange Rate Sensitivity
 
By the nature of our global operations, we are exposed to cash flow and earnings fluctuations resulting from foreign exchange rate variation. These exposures are transactional and translational in nature. The following foreign currencies represent the principal drivers of our foreign exchange exposure: Canadian dollar, euro, Thai baht, Mexican peso, Chinese renminbi, Australian dollar, British pound and Japanese yen.
We apply a Value-At-Risk ("VAR") methodology to our transactional and translational exposures. The VAR model is a risk estimation tool and is not intended to represent actual losses in fair value that could be incurred.
Transactional Exposure
Transactional exposure arises from the purchase and sale of goods and services in currencies other than our functional currency or the functional currency of our subsidiaries. At the end of each fiscal year
 
we perform sensitivity analyses on our forecasted transactional exposure for the upcoming fiscal year. These analyses include the estimated impact of our hedging program, which is designed to mitigate transactional exposure. Applying a VAR methodology to our transactional exposure and including the impact of our hedging program, the potential maximum loss in earnings for the upcoming fiscal year is estimated to be $12 million, which is based on a one-year horizon and a 95 percent confidence level.
Translational Exposure
We have exposure related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Applying a VAR methodology to our translational exposure, the potential maximum loss in earnings for the upcoming fiscal year is estimated to be $5 million, which is based on a one-year horizon and a 95 percent confidence level.
Interest Rate Sensitivity
 
We are exposed to changes in interest rates primarily as a result of our borrowing and investing activities to maintain liquidity and fund operations. The nature and amount of our long-term and short-term debt can be expected to fluctuate as a result of business requirements, market conditions and other factors. Our policy is to manage exposures to interest rates using a mix of fixed and floating rate debt as deemed appropriate by management. We utilize interest rate swap instruments to mitigate our exposure to interest rate movements.
As part of our risk management program, we perform an annual sensitivity analysis on our forecasted exposure to interest rates for the upcoming fiscal year. This analysis assumes a hypothetical 50 basis point change in interest rates. At June 30, 2020, the potential increase or decrease in annual interest expense under this analysis as a result of this hypothetical change would be $5 million.
 
We are also exposed to market risk from changes in interest rates related to our cash and cash equivalents, which includes marketable securities that are carried at fair value in the consolidated balance sheets. The fair value of our cash and cash equivalents is subject to change primarily as a result of changes in market interest rates and investment risk related to the issuers' credit worthiness. At June 30, 2020, a hypothetical increase or decrease of 50 basis points in interest rates would result in a hypothetical $5 million change in the estimated fair value.


 
Cardinal Health | Fiscal 2020 Form 10-K
24


Disclosures about Market Risk
 


Commodity Price Sensitivity
 
We are directly exposed to market price changes for certain commodities, including oil-based resins, nitrile, cotton, diesel fuel and latex. We typically purchase raw materials at either market prices or prices tied to a commodity index and some finished goods at prices based in part on a commodity price index.
As part of our risk management program, we perform sensitivity analysis on our forecasted direct commodity exposure for the upcoming fiscal year. Our forecasted direct commodity exposure at June 30, 2020 increased approximately $10 million from June 30, 2019. At June 30, 2020 and 2019, we had hedged a portion of these direct commodity exposures (see Note 10 of the “Notes to Consolidated Financial Statements” for further discussion).
 
Our forecasted direct commodity exposures for the upcoming fiscal year is $445 million. The potential gain/loss given a hypothetical 10 percent fluctuation in commodity prices, assuming pricing collectively shifts in the same direction and we are unable to change customer pricing in response to those shifts or otherwise offset, for the upcoming fiscal year is $45 million at June 30, 2020. The hypothetical offsetting impact of hedges in both periods was minimal.




 25
Cardinal Health | Fiscal 2020 Form 10-K
 


Business
 
 


Business
General
 
Cardinal Health, Inc. is a global integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices and patients in the home. We provide medical products and pharmaceuticals and cost-effective solutions that enhance supply chain efficiency.
Pharmaceutical Segment
 
In the United States, our Pharmaceutical segment:
through its Pharmaceutical Distribution division, distributes branded and generic pharmaceutical and over-the-counter healthcare and consumer products to retailers (including chain and independent drug stores and pharmacy departments of supermarkets and mass merchandisers), hospitals and other healthcare providers. This division:
maintains prime vendor relationships that streamline the purchasing process resulting in greater efficiency and lower costs for our retail, hospital and other healthcare provider customers;
provides services to pharmaceutical manufacturers, including distribution, inventory management, data reporting, new product launch support and chargeback administration;
through the connected care service offering, provides medication therapy management, telepharmacy and health messaging services and seeks to develop solutions to improve patient care through improved coordination of manufacturers, payers, pharmacies and patients;
provides pharmacy management services to hospitals and operates pharmacies, including in community health centers; and
repackages generic pharmaceuticals and over-the-counter healthcare products;
through its Specialty Solutions division, distributes specialty pharmaceutical products to hospitals and other healthcare providers and provides consulting, patient support and other services for specialty pharmaceutical products to pharmaceutical manufacturers and healthcare providers; and
through its Nuclear and Precision Health Solutions division, operates nuclear pharmacies and manufacturing facilities, which manufacture, prepare and deliver radiopharmaceuticals for use in nuclear imaging and other procedures in hospitals and physician offices. This division also contract manufactures a radiopharmaceutical treatment (Xofigo) and holds the North American rights to manufacture and distribute Lymphoseek, a radiopharmaceutical diagnostic imaging agent.
See Note 15 of the “Notes to Consolidated Financial Statements” for Pharmaceutical segment revenue, profit and assets for fiscal 2020, 2019 and 2018.
 
Pharmaceutical Distribution
Our Pharmaceutical Distribution division’s gross margin includes margin from our generic pharmaceutical program, from distribution services agreements with branded pharmaceutical manufacturers and from over-the-counter healthcare and consumer products. It also includes manufacturer cash discounts.
Margin from our generic pharmaceutical program includes price discounts and rebates from manufacturers and may in limited instances include price appreciation. Our earnings on generic pharmaceuticals are generally highest during the period immediately following the initial launch of a product, because generic pharmaceutical selling prices are generally highest during that period and tend to decline over time.
Margin from distribution services agreements with branded pharmaceutical manufacturers is derived from compensation we receive for providing a range of distribution and related services to manufacturers. Our compensation typically is a percentage of the wholesale acquisition cost that is set by manufacturers. In addition, under a limited number of agreements, branded pharmaceutical price appreciation, which is determined by the manufacturers, also serves as part of our compensation.
Sourcing Venture with CVS Health Corporation
In July 2014, we established Red Oak Sourcing, a U.S.-based generic pharmaceutical sourcing venture with CVS with an initial term of 10 years. Red Oak Sourcing negotiates generic pharmaceutical supply contracts on behalf of both companies.
Specialty Pharmaceutical Products and Services
We refer to products and services offered by our Specialty Solutions division as “specialty pharmaceutical products and services.” The Specialty Solutions division distributes oncology, rheumatology, urology, nephrology and other pharmaceutical products ("specialty pharmaceutical products") and human-derived plasma products to hospitals, dialysis clinics, physician offices and other healthcare providers; provides consulting, patient support, logistics, group purchasing and other services to pharmaceutical manufacturers and healthcare providers primarily supporting the development, marketing and distribution of specialty pharmaceutical products; and provides specialty pharmacy services. Our use of the terminology "specialty pharmaceutical products and services" may not be comparable to the terminology used by other industry participants.


 
Cardinal Health | Fiscal 2020 Form 10-K
26



Business
 
 


Medical Segment
 
Our Medical segment manufactures and sources Cardinal Health branded general and specialty medical, surgical and laboratory products and devices. These products include exam and surgical gloves; needle, syringe and sharps disposal; compression; incontinence; nutritional delivery; wound care; cardiovascular and endovascular; single-use surgical drapes, gowns and apparel; fluid suction and collection systems; urology; operating room supply; and electrode product lines. Our Cardinal Health Brand products are sold directly or through third-party distributors in the United States, Canada, Europe, Asia and other markets. These products are generally higher-margin products.
 
The Medical segment also distributes a broad range of medical, surgical and laboratory products known as national brand products and provides supply chain services and solutions to hospitals, ambulatory surgery centers, clinical laboratories and other healthcare providers in the United States and Canada and this segment also assembles and sells sterile and non-sterile procedure kits.
Through Cardinal Health at-Home Solutions, this segment also distributes medical products to patients' homes in the United States.

Acquisitions and Divestitures
 
Acquisitions
We have acquired a number of businesses over the years that have enhanced our core strategic areas of Cardinal Health Brand medical products, generic pharmaceutical distribution and services, specialty pharmaceutical products and services, international and post-acute care. We expect to continue to pursue additional acquisitions in the future.
During the last five fiscal years, we completed the following three large acquisitions:
Date
Company
Location
Lines
of Business
Acquisition
Price
(in billions)
07/17
Patient Recovery Business of Medtronic, plc
Mansfield, MA
Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency
$6.1
10/15
Cordis business of Johnson & Johnson
Fremont, CA
Cardiovascular and endovascular products
$1.9
07/15
The Harvard Drug Group
Livonia, MI
Pharmaceutical product distribution
$1.1
 
We also completed several smaller acquisitions during the last five fiscal years, including, in fiscal 2017, the acquisition of the North
American rights to Lymphoseek, a radiopharmaceutical diagnostic imaging agent, from Navidea Biopharmaceuticals, Inc.
Divestitures
Over the past three fiscal years, we have also completed several divestitures. In February 2018, we completed the sale of our pharmaceutical and medical products distribution business in China to Shanghai Pharmaceuticals Holding Co., Ltd. for proceeds of $861 million (after adjusting for third party indebtedness and preliminary transaction adjustments).
In August 2018, we completed the sale of our equity interest in naviHealth, Inc. to investor entities controlled by CD&R for proceeds of $737 million (after adjusting for certain fees and expenses) and a noncontrolling equity interest in a partnership that owned naviHealth. In May 2020, we sold the remainder of our equity interest in naviHealth.
We had acquired our equity interest in naviHealth through a series of transactions beginning in fiscal 2016, when we acquired a majority equity interest.




 27
Cardinal Health | Fiscal 2020 Form 10-K
 


Business
 
 


Customers
 
Our largest customers, CVS and OptumRx, accounted for 26 percent and 14 percent of our fiscal 2020 revenue, respectively. In the aggregate, our five largest customers, including CVS and OptumRx, accounted for 49 percent of our fiscal 2020 revenue.
We have agreements with group purchasing organizations (“GPOs”) that act as agents to negotiate vendor contracts on behalf of their
 
members. Our two largest GPO relationships in terms of revenue are with Vizient, Inc. and Premier, Inc. Sales to members of these two GPOs, under numerous contracts across our businesses, collectively accounted for 16 percent of our revenue in fiscal 2020.
Suppliers
 
We rely on many different suppliers. Products obtained from our five largest suppliers accounted for an aggregate of 28 percent of our revenue during fiscal 2020, and our largest supplier’s products accounted for approximately 6 percent of revenue.
Competition
 
We operate in a highly competitive environment in the distribution of pharmaceuticals and consumer healthcare products. We also operate in a highly competitive environment in the manufacturing and distribution of medical devices and surgical products. We compete on many levels, including price, service offerings, support services, breadth of product lines and product quality and efficacy.
In the Pharmaceutical segment, we compete with wholesale distributors with national reach, including McKesson Corporation and AmerisourceBergen Corporation, regional wholesale distributors, self-warehousing chains, specialty distributors, third-party logistics companies, companies that provide specialty pharmaceutical services and nuclear pharmacies, among others. In addition, the
 
Pharmaceutical segment has experienced competition from a number of organizations offering generic pharmaceuticals, including telemarketers. We also compete with manufacturers that sell their products directly.
In the Medical segment, we compete with many diversified healthcare companies and national medical product distributors, such as Medline Industries, Inc., Owens & Minor, Inc. and Becton, Dickinson and Company, as well as regional medical product distributors and companies that are focused on specific product categories. We also compete with companies that distribute medical products to patients' homes and third-party logistics companies.
Employees
 
At June 30, 2020, we had approximately 30,000 employees in the United States and approximately 18,000 employees outside of the United States.
Intellectual Property
 
We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions, and technical measures to protect our products, services and intangible assets. We hold patents, and continue to pursue patent protection throughout the world, relating to the manufacture, operation and use of various medical and surgical products, to certain distribution and logistics systems, to the production and distribution of our nuclear pharmacy products and to other service offerings. We also operate under licenses for certain proprietary technologies, and in certain instances we license our technologies to third parties. 
 
We believe that we have taken all necessary steps to protect our proprietary rights, but no assurance can be given that we will be able to successfully enforce or protect our rights in the event that they are infringed upon by a third party. While all of these proprietary rights are important to our operations, we do not consider any particular patent, trademark, license, franchise or concession to be material to our overall business.

 
Cardinal Health | Fiscal 2020 Form 10-K
28



Business