Cardinal Health (CAH) 10-K risk factor changes: FY2020 vs FY2019

[removed: | [Table] [added: Table] of [removed: Contents](#sF12C062ADA2B5B19A3748605BE141314) | | |][added: Contents]

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: Form 10-K][added: Form 10-K]

| [removed: þ] [added: ☑] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

For the fiscal year ended June 30, [removed: 2019][added: 2020]

| [removed: o] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: Cardinal] [added: Cardinal] Health, [removed: Inc.][added: Inc.]

[removed: (Exact] [added: (Exact] name of registrant as specified in its [removed: charter)][added: charter)]

| [removed: Ohio] [added: Ohio] | | [removed: 31-0958666] | [added: | | | 31-0958666 |]

| [removed: (State] [added: (State] or other jurisdiction [removed: of incorporation] [added: of incorporation] or [removed: organization)] [added: organization)] | | [removed: (IRS Employer Identification No.)] | [added: | | | (IRS Employer Identification No.) |]

| [removed: 7000] [added: 7000] Cardinal [removed: Place, Dublin, Ohio] [added: Place] | [added: ,] | [removed: 43017] [added: Dublin] | [added: , | Ohio | | 43017 |]

| [removed: (Address] [added: (Address] of principal executive [removed: offices)] [added: offices)] | | [removed: (Zip Code)] | [added: | | | (Zip Code) |]

| [removed: (614) 757-5000] | | | [added: | (614) | | 757-5000 |]

| [removed: (Registrant’s] [added: (Registrant’s] telephone number, including area [removed: code)] [added: code)] | | | [added: | | | |]

| [removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:] [added: Act:] | | |

| [removed: Title] [added: Title] of each [removed: class] [added: class] | [removed: Trading Symbol(s)] [added: Trading Symbol(s)] | [removed: Name] [added: Name] of each exchange on which [removed: registered] [added: registered] |

| [removed: Common] [added: Common] shares (without par [removed: value)] [added: value)] | [removed: CAH] [added: CAH] | [removed: New] [added: New] York Stock [removed: Exchange] [added: Exchange] |

| [removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the Act: [removed: None] [added: None] | | |

Yes þ No [removed: o][added: ☐]

Yes [removed: o] [added: ☐] No þ

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted [removed: and posted] 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 [removed: and post] such files).

| Large accelerated filer [added: |] þ | [added: |] Accelerated filer [removed: o] | [added: ☐ | |]

| Non-accelerated filer [removed: o] | [added: ☐ | |] Smaller reporting company [removed: o] | [added: ☐ | |]

| [added: | | |] Emerging growth company [removed: o] | [added: ☐] | [added: |]

| 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 | | [added: | | | |]

The aggregate market value of voting stock held by non-affiliates [removed: or registrant] on December 31, [removed: 2018,] [added: 2019,] was the following: [removed: $13,267,580,148.][added: $14,729,138,108.]

The number of the registrant’s common shares, without par value, outstanding as of July 31, [removed: 2019,] [added: 2020,] was the following: [removed: 298,133,678.][added: 292,444,079.]

[removed: Documents] [added: Documents] Incorporated by [removed: Reference:][added: Reference:]

Portions of the registrant’s Definitive Proxy Statement to be filed for its [removed: 2019] [added: 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.

| [removed: Cardinal Health Fiscal 2019] [added: Cardinal Health Fiscal 2020] Form [removed: 10-K] [added: 10-K] |

[removed: Table] [added: | [Table] of [removed: Contents][added: Contents](#sF3DBCA2E656157EDB1A7D54CCD0EEA92) | | |]

| | [removed: Page] [added: Page] |

| [removed: [Introduction](#s036642E9E8E25CC49B9A4B54DA25D34B)] [added: Introduction] | [removed: [2](#s036642E9E8E25CC49B9A4B54DA25D34B)] | [added: |]

[removed: | [Management's] [added: Management's] Discussion and Analysis of Financial Condition and Results of [removed: Operations](#sDD89655F9A0153668BBD64DC63C58B22) | [3](#sDD89655F9A0153668BBD64DC63C58B22) |][added: Operations]

| [removed: [Explanation] [added: Explanation] and Reconciliation of Non-GAAP Financial [removed: Measures](#s785354BBC9CF5C5F9E2C79F0B3A16C4D)] [added: Measures] | [removed: [20](#s785354BBC9CF5C5F9E2C79F0B3A16C4D)] | [added: |]

| [removed: [Selected] [added: Selected] Financial [removed: Data](#s9380AE7CE9EB53F4AB8C845AE5DB488B)] [added: Data] | [removed: [23](#s9380AE7CE9EB53F4AB8C845AE5DB488B)] | [added: |]

[removed: | [Quantitative] [added: Quantitative] and Qualitative Disclosures [removed: about] [added: About] Market [removed: Risk](#s902BB3B4D6405C5B8462AEBB4CB6F549) | [24](#s902BB3B4D6405C5B8462AEBB4CB6F549) |][added: Risk]

| [removed: [Business](#sA9FFD409620556479036BB620A458BB3)] [added: Business] | [removed: [26](#sA9FFD409620556479036BB620A458BB3)] | [added: |]

| 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 | | | | | |

| [Risk Factors](#sB887CB0119C25A08BEA9BE55BDBCD36D) | [33](#sB887CB0119C25A08BEA9BE55BDBCD36D) |

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.

| GAAP operating earnings/(loss) | $ | (4,098 | ) | | $ | 2,060 | | | N.M. | |

| Surgical gown recall costs | 85 | | | | — | | | | | |

| State opioid assessment related to prior fiscal years | 3 | | | | — | | | | | |

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](#sD2716397D81358C69DCBB2A8D6E9CCCE) 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.

| Surgical gown recall costs | 0.22 | | | | — | | | | | |

| State opioid assessment related to prior fiscal years | 0.01 | | | | — | | | | | |

| Loss on early extinguishment of debt | 0.04 | | | | — | | | | | |

| Gain on sale of equity interest in naviHealth | (1.68 | | ) | | — | | | | | |

The sum of the components and certain computations may reflect rounding adjustments.

| (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. |

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](#s20ab24d9611f400f9fecc35ff4abdad4) 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.

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.

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.

10-K 1 a19q4_10kx063019xform10-k.htm 10-K

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| GAAP | $ | 2,060 | | | $ | 126 | | | N.M. | |

The sum of the components may not equal the total due to rounding.

During fiscal 2019, GAAP operating earnings increased to $2.1 billion from $126 million during fiscal 2018.

Non-GAAP operating earnings decreased 9 percent to $2.4 billion.

The increase in GAAP operating earnings was primarily due to the goodwill impairment charge related to our Medical segment in the prior year and the current year gain from the divestiture of our naviHealth Holdings, LLC ("naviHealth") business.

The decrease in non-GAAP operating earnings was primarily due to the negative impact of our Pharmaceutical segment generics program, performance of Medical segment Cardinal Health Brand products and the adverse impact of Pharmaceutical segment customer contract renewals.

These factors were partially offset by growth from our specialty pharmaceutical products and services business within our Pharmaceutical segment, the beneficial impact of enterprise-wide cost-savings measures and higher contribution from branded pharmaceutical sales and mix.

The sum of the components may not equal the total due to rounding.

Fiscal 2019 GAAP diluted EPS increased primarily due to the increase in GAAP operating earnings and the benefits from applying a lower federal statutory tax rate to our U.S. pre-tax earnings as a result of the U.S. Tax Cuts and Jobs Act ("Tax Act").

Fiscal 2019 non-GAAP diluted EPS increased primarily due to a $0.49 per share impact from a lower non-GAAP effective tax rate in the current period compared to the higher prior year non-GAAP effective tax rate.

Also contributing to the increase in non-GAAP diluted EPS was a lower share count as a result of share repurchases.

These factors were partially offset by the decrease in non-GAAP operating earnings.

The non-GAAP effective tax rate is lower in the current year primarily because of the benefits from applying a lower federal statutory tax rate to our U.S. pre-tax earnings as a result of the Tax Act.

Within our Pharmaceutical segment, we expect fiscal 2020 segment profit to be less than our fiscal 2019 segment profit due to the adverse impact of recent customer contract renewals and generics program performance, which includes the negative impact of generic pharmaceutical customer pricing changes partially offset by the benefits of Red Oak Sourcing.

On August 7, 2019, we were authorized to incur restructuring costs in connection with certain cost-savings initiatives intended to optimize and simplify our operating model and cost structure.

We expect these cost-savings initiatives, which will affect various functional and commercial areas across the Company, to be substantially implemented during fiscal year 2020.

As a result of these initiatives, we expect to record restructuring charges of approximately $120 million to $145 million, the majority of which are expected to be expensed during fiscal year 2020.

We may incur additional restructuring charges in connection with other projects.

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The increases were partially offset by the February 2018 divestiture of our China distribution business.

Fiscal 2019 Medical segment revenue was flat compared to fiscal 2018.

Sales growth from existing customers and the benefit from one additional month of contribution from the Patient Recovery acquisition were offset by the divestitures of our China distribution and naviHealth businesses.

Fiscal 2018 Compared to Fiscal 2017

Fiscal 2018 Pharmaceutical segment revenue grew primarily due to sales growth from pharmaceutical distribution and specialty pharmaceutical customers, which together increased revenue by $9.4 billion.

The increases were partially offset by the previously announced May 2017 expiration of a large pharmaceutical distribution mail order customer contract and the February 2018 divestiture of our China distribution business.

Fiscal 2018 Medical segment revenue grew mainly due to $1.9 billion of contributions from acquisitions, primarily the Patient Recovery Business acquisition.

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Fiscal 2019 consolidated gross margin decreased $347 million (5 percent) due to lower contribution from our Pharmaceutical segment generics program, performance of Medical segment's Cardinal Health Brand products, the net impact of acquisitions and divestitures and the adverse impact of Pharmaceutical segment customer contract renewals.

These factors were partially offset by sales growth from our specialty pharmaceutical products and services business and higher contribution from branded pharmaceutical sales and mix.

Fiscal 2018 Compared to Fiscal 2017

Fiscal 2018 consolidated gross margin increased $637 million (10 percent) and was favorably impacted by acquisitions ($809 million), primarily the Patient Recovery Business acquisition.

Gross margin rate grew during fiscal 2018 mainly due to acquisitions, primarily the Patient Recovery Business acquisition.