Company Quick10K Filing
Cardinal Health
Price47.57 EPS-14
Shares296 P/E-3
MCap14,081 P/FCF11
Net Debt6,148 EBIT-4,045
TEV20,229 TEV/EBIT-5
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-11
10-Q 2019-12-31 Filed 2020-02-06
10-Q 2019-09-30 Filed 2019-11-07
10-K 2019-06-30 Filed 2019-08-20
10-Q 2019-03-31 Filed 2019-05-09
10-Q 2018-12-31 Filed 2019-02-07
10-Q 2018-09-30 Filed 2018-11-08
10-K 2018-06-30 Filed 2018-08-22
10-Q 2018-03-31 Filed 2018-05-09
10-Q 2017-12-31 Filed 2018-02-08
10-Q 2017-09-30 Filed 2017-11-07
10-K 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-02
10-Q 2016-12-31 Filed 2017-02-07
10-Q 2016-09-30 Filed 2016-11-02
10-K 2016-06-30 Filed 2016-08-12
10-Q 2016-03-31 Filed 2016-05-03
10-Q 2015-12-31 Filed 2016-02-02
10-Q 2015-09-30 Filed 2015-11-03
10-K 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-05
10-Q 2014-12-31 Filed 2015-02-03
10-Q 2014-09-30 Filed 2014-11-05
10-K 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-06
10-Q 2013-12-31 Filed 2014-02-06
10-Q 2013-09-30 Filed 2013-11-07
10-K 2013-06-30 Filed 2013-08-20
10-Q 2013-03-31 Filed 2013-05-08
10-Q 2012-12-31 Filed 2013-02-06
10-Q 2012-09-30 Filed 2012-11-09
10-K 2012-06-30 Filed 2012-08-22
10-Q 2012-03-31 Filed 2012-05-08
10-Q 2011-12-31 Filed 2012-02-07
10-Q 2011-09-30 Filed 2011-11-04
10-K 2011-06-30 Filed 2011-08-26
10-Q 2011-03-31 Filed 2011-05-06
10-Q 2010-12-31 Filed 2011-02-08
10-Q 2010-09-30 Filed 2010-11-08
10-K 2010-06-30 Filed 2010-08-26
10-Q 2010-03-31 Filed 2010-05-06
10-Q 2009-12-31 Filed 2010-02-05
8-K 2020-06-24 Officers, Regulation FD, Exhibits
8-K 2020-05-11
8-K 2020-03-13
8-K 2020-02-06
8-K 2020-01-30
8-K 2020-01-21
8-K 2019-11-07
8-K 2019-11-06
8-K 2019-09-30
8-K 2019-08-07
8-K 2019-08-07
8-K 2019-07-12
8-K 2019-07-01
8-K 2019-06-27
8-K 2019-05-09
8-K 2019-02-19
8-K 2019-02-07
8-K 2018-12-05
8-K 2018-11-08
8-K 2018-11-07
8-K 2018-09-24
8-K 2018-09-01
8-K 2018-08-24
8-K 2018-08-06
8-K 2018-05-03
8-K 2018-03-09
8-K 2018-02-07
8-K 2018-01-16

CAH 10Q Quarterly Report

EX-31.1 a20q310q33120exhibit311.htm
EX-31.2 a20q310q33120exhibit312.htm
EX-32.1 a20q310q33120exhibit321.htm
EX-99.1 a20q310q33120exhibit991.htm

Cardinal Health Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
45362718902012201420172020
Assets, Equity
403122134-52012201420172020
Rev, G Profit, Net Income
4.81.8-1.1-4.1-7.0-10.02012201420172020
Ops, Inv, Fin

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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  o
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
 
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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  þ
The number of the registrant’s common shares, without par value, outstanding as of April 30, 2020, was the following: 291,986,422.



Cardinal Health  
Q3 Fiscal 2020 Form 10-Q

Table of Contents
 

About Cardinal Health
 
Cardinal Health, Inc. is an Ohio corporation formed in 1979 and is a globally integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices. We provide medical products and pharmaceuticals and cost-effective solutions that enhance supply chain efficiency. We connect patients, providers, payers, pharmacists and manufacturers for integrated care coordination and better patient management. We manage our business and report our financial results in two segments: Pharmaceutical and Medical. As used in this report, “we,” “our,” “us,” and similar pronouns refer to Cardinal Health, Inc. and its subsidiaries, unless the context requires otherwise. Our fiscal year ends on June 30. References to fiscal 2020 and fiscal 2019 are to the fiscal years ending or ended June 30, 2020 and June 30, 2019, respectively.
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (this "Form 10-Q") (including information incorporated by reference) includes "forward-looking statements" addressing expectations, prospects, estimates and other matters that are dependent upon future events or developments. Many forward-looking statements appear in Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), but there are others in this Form 10-Q, which may be identified by words such as "expect," "anticipate," "intend," "plan," "believe," "will," "should," "could," "would," "project," "continue," "likely," and similar expressions, and include statements reflecting future results, trends or guidance, statements of outlook and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those made, projected or implied. The most significant of these risks and uncertainties are described in Exhibit 99.1 to this Form 10-Q and in "Risk Factors" in this Form 10-Q and the forms 10-Q for the quarters ended September 30, 2019 and December 31, 2020 and our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (our “2019 Form 10-K”). Forward-looking statements in this Form 10-Q speak only as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.
Non-GAAP Financial Measures
 
In the "Overview of Consolidated Results" section of MD&A, we use financial measures that are derived from our consolidated financial data but are not presented in our condensed consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). These measures are considered "non-GAAP financial measures" under the United States Securities and Exchange Commission ("SEC") rules. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the “Explanation and Reconciliation of Non-GAAP Financial Measures” section following MD&A in this Form 10-Q.


 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Overview
 



Management's Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis presented below is concerned with material changes in financial condition and results of operations between the periods specified in our condensed consolidated balance sheets at March 31, 2020 and June 30, 2019, and in our condensed consolidated statements of earnings/(loss) for the three and nine months ended March 31, 2020 and 2019. All comparisons presented are with respect to the prior-year period, unless stated otherwise. This discussion and analysis should be read in conjunction with the MD&A included in our 2019 Form 10-K.



 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
2



MD&A
Overview
 

Overview of Consolidated Results
Revenue
 
chart-f71680c275d85d55b02.jpg
During the three and nine months ended March 31, 2020, revenue increased 11 percent to $39.2 billion and 7 percent to $116.2 billion, respectively, primarily due to sales growth from pharmaceutical distribution and specialty solutions customers, including a temporary increase in pharmaceutical sales in March, which we believe to be related to accelerated purchasing by some customers in connection with the outbreak in the United States of the novel strain of coronavirus (“COVID-19”). We have experienced below average sales volume since the end of March.
GAAP and Non-GAAP Operating Earnings/(Loss)
 

 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
GAAP operating earnings/(loss)
$
562

 
$
432

 
30
%
 
$
(4,368
)
 
$
1,752

 
N.M

Surgical gown recall costs
(1
)
 

 
 
 
95

 

 
 
State opioid assessment related to prior fiscal years

 

 
 
 
4

 

 
 
Restructuring and employee severance
(6
)
 
53

 
 
 
80

 
97

 
 
Amortization and other acquisition-related costs
130

 
154

 
 
 
395

 
468

 
 
Impairments and (gain)/loss on disposal of assets
(1
)
 
11

 
 
 
7

 
(492
)
 
 
Litigation (recoveries)/charges, net
35

 
17

 
 
 
5,729

 
20

 
 
Non-GAAP operating earnings
$
719

 
$
667

 
8
%
 
$
1,942

 
$
1,845

 
5
%
The sum of the components may not equal the total due to rounding.
The increase in GAAP operating earnings during the three months ended March 31, 2020 was primarily due to lower restructuring and employee severance, the performance of our Pharmaceutical segment generics program, and an increase in products and distribution within our Medical segment, partially offset by the adverse impact of Pharmaceutical segment customer contract renewals. The increase in sales due to the COVID-19 pandemic had a modest positive impact on GAAP operating earnings during the three months ended March 31, 2020.
The decrease in GAAP operating earnings during the nine months ended March 31, 2020 was 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 Condensed Consolidated Financial Statements". GAAP operating earnings during the nine months ended March 31, 2019 also include the favorable impact from a $508 million pre-tax gain from the divestiture of our naviHealth Holdings, LLC ("naviHealth") business.
The increase in non-GAAP operating earnings during the three months ended March 31, 2020 was primarily due to the performance of our Pharmaceutical segment generics program and an increase in products and distribution within our Medical segment, partially offset by the adverse impact of Pharmaceutical segment customer contract renewals. The increase in sales due to the COVID-19 pandemic had a modest positive impact on non-GAAP operating earnings during the three months ended March 31, 2020.


 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Overview
 

The increase in non-GAAP operating earnings during the nine months ended March 31, 2020 was primarily due to the beneficial impact of enterprise-wide cost-savings measures, the performance of our Pharmaceutical segment generics program and growth from Pharmaceutical specialty solutions, partially offset by the adverse impact of Pharmaceutical segment customer contract renewals.

GAAP and Non-GAAP Diluted EPS
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
($ per share)
2020 (2)
 
2019 (2)
 
Change
 
2020 (2) (3)
 
2019 (2)
 
Change
GAAP diluted EPS (1)
$
1.19

 
$
0.99

 
20
%
 
$
(14.84
)
 
$
3.88

 
N.M

Surgical gown recall costs

 

 
 
 
0.24

 

 
 
State opioid assessment related to prior fiscal years

 

 
 
 
0.01

 

 
 
Restructuring and employee severance
(0.01
)
 
0.13

 
 
 
0.21

 
0.24

 
 
Amortization and other acquisition-related costs
0.34

 
0.39

 
 
 
1.01

 
1.18

 
 
Impairments and (gain)/loss on disposal of assets

 
0.03

 
 
 
0.02

 
(1.20
)
 
 
Litigation (recoveries)/charges, net
0.09

 
0.03

 
 
 
17.80

 
0.04

 
 
Loss on extinguishment of debt
0.01

 

 
 
 
0.02

 

 
 
Transitional tax benefit, net

 
0.02

 
 
 
(0.04
)
 
0.03

 
 
Non-GAAP diluted EPS (1)
$
1.62

 
$
1.59

 
2
%
 
$
4.41

 
$
4.17

 
6
%
The sum of the components may not equal the total due to rounding.
(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 the nine months ended March 31, 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. Year-to-date fiscal 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 million common shares, which includes potentially dilutive shares.
During the three months ended March 31, 2020, GAAP diluted EPS increased 20 percent primarily due to factors discussed above impacting GAAP operating earnings, partially offset by a higher effective tax rate primarily due to changes in discrete tax items and jurisdictional mix.
During the nine months ended March 31, 2020, we had a $(14.84) GAAP diluted loss per share 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 $(17.53) per share after tax impact on GAAP diluted EPS during the nine months ended March 31, 2020. GAAP diluted EPS during the nine months ended March 31, 2019 also reflects a $1.25 per share gain from the divestiture of naviHealth.
During the three months ended March 31, 2020, non-GAAP diluted EPS increased 2 percent to $1.62 per share. This increase was primarily due to the factors discussed above impacting non-GAAP operating earnings, mostly offset by a higher effective tax rate primarily due to changes in discrete tax items.
During the nine months ended March 31, 2020, non-GAAP diluted EPS increased 6 percent to $4.41 per share. This increase was primarily due to the factors discussed above impacting non-GAAP operating earnings, a lower share count as a result of share repurchases and lower interest expense due to less debt outstanding. 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 $2.3 billion at March 31, 2020 compared to $2.5 billion at June 30, 2019. During the nine months ended March 31, 2020, net cash provided by operating activities was $1.7 billion and we deployed $888 million for long-term debt repayments, $428 million for cash dividends and $350 million for share repurchases.




 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
4



MD&A
Overview
 

Significant Developments in Fiscal 2020 and Trends
COVID-19
 
As the COVID-19 pandemic continues to severely impact the U.S. and global economy, our businesses are being impacted in a variety of ways, beginning mostly in the last few weeks of the three months ended March 31, 2020 and continuing through the date of this filing, as discussed in the following paragraphs and under “Results of Operations”.
Within our manufacturing and distribution facilities, we have implemented preparedness plans that are designed to protect the safety of our employees and maintain continuity of our operations. Additionally, in line with various governmental recommendations to reduce large gatherings and practice social distancing, we have transitioned employees who can work remotely, to remote work locations. These measures have created additional burdens on our infrastructure and information technology systems and may result in decreased productivity. 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.
Within our Medical segment, we have seen dramatically increased demand for personal protective equipment (“PPE”), such as masks, gowns and gloves. We manufacture, source and distribute some of these PPE products and distribute PPE and other products manufactured by others. This increased demand resulted in an increase in sales volume for certain products in the three months ended March 31, 2020, but we do not expect continued increased sales due to supply shortages and disruptions for many of these products, which is likely to negatively impact our ability to meet customer demand. In addition, we may incur increased costs of PPE, which may adversely affect our results of operations.
Similarly, our Pharmaceutical Distribution and Specialty Solutions businesses experienced a temporary increase in sales volume toward the end of the three months ended March 31, 2020, which we believe to be related to accelerated purchasing by some customers due to the COVID-19 pandemic. We have experienced below average sales volume since the end of March and are uncertain when sales volume will return to expected levels.
Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 also have 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. To date, these policies and initiatives have resulted in a significant decrease in sales by our Nuclear and Precision Health Solutions division in our Pharmaceutical segment and reduced sales of certain Cardinal Health Brand products and Services in our Medical segment, among others. We cannot predict the duration of these policies and initiatives and expect that while they are in place, they will continue to have an adverse impact on the sales of these products and services.
Political, legal or regulatory actions as a result of the COVID-19 pandemic in 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, including India and China, 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. Governmental authorities in many countries, including the U.S., are 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.















 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Overview
 

Opioid Lawsuits Development
 
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 (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 distribution of opioid abuse treatment medications for a period of ten years, and (3) industry-wide changes to be specified to controlled substance anti-diversion programs. We continue to negotiate the definitive terms of the Settlement Framework.
In connection with this and with the October 2019 settlement to resolve all claims with two Ohio counties, we recorded a total pre-tax charge of $5.63 billion ($5.14 billion after tax) during the nine months ended March 31, 2020 in litigation (recoveries)/charges, net, in the condensed consolidated statement of earnings for the cash component. The amount of ultimate loss may differ materially from this accrual. See Note 7 of the "Notes to Condensed Consolidated Financial Statements" for additional information.
Also in connection with these matters, we recorded a tax benefit of $487 million, which is net of unrecognized tax benefits of $468 million, during the nine months ended March 31, 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. 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 Condensed Consolidated Financial Statements” for additional information.







 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
6



MD&A
Results of Operations
 

Results of Operations
Revenue

chart-63966054a2b856539df.jpgchart-c5eb687c6be4546d867.jpg
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Pharmaceutical
$
35,112

 
$
31,361

 
12
%
 
$
104,254

 
$
96,516

 
8
%
Medical
4,051

 
3,871

 
5
%
 
11,991

 
11,678

 
3
%
Total segment revenue
39,163

 
35,232

 
11
%
 
116,245

 
108,194

 
7
%
Corporate
(6
)
 
(4
)
 
N.M

 
(12
)
 
(13
)
 
N.M

Total revenue
$
39,157

 
$
35,228

 
11
%
 
$
116,233

 
$
108,181

 
7
%
Pharmaceutical Segment
Pharmaceutical segment revenue growth was primarily due to sales growth from pharmaceutical distribution and specialty solutions customers, which together increased revenue by $3.8 billion and $7.7 billion during the three and nine months ended March 31, 2020, respectively. This growth included a temporary increase in pharmaceutical sales in March, which we believe to be related to accelerated purchasing by some customers in connection with the outbreak in the United States of the COVID-19 pandemic. We have experienced below average sales volume since the end of March.
Medical Segment
Medical segment revenue increased during the three and nine months ended March 31, 2020 primarily due to sales growth from products and distribution and Cardinal Health at-Home Solutions.
Cost of Products Sold
 
Cost of products sold for the three and nine months ended March 31, 2020 increased $3.8 billion (11 percent) and $7.9 billion (8 percent) compared to the respective prior-year periods as a result of the factors affecting the changes in revenue and gross margin.





 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Results of Operations
 

Gross Margin
 
chart-90453b3d6ed050ecbdc.jpgchart-84be621792a45ea38bb.jpg
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Gross margin
$
1,885

 
$
1,764

 
7
%
 
$
5,278

 
$
5,160

 
2
%
Gross margin during the three months ended March 31, 2020 increased $121 million compared to the prior-year period primarily due to the performance from our Pharmaceutical segment generics program and Medical segment products and distribution sales growth.
Gross margin during the nine months ended March 31, 2020 increased $118 million compared to the prior-year period primarily due to the performance from our Pharmaceutical segment generics program.
Gross margin rate declined 20 basis points during the three months ended March 31, 2020 mainly due to changes in pharmaceutical distribution product mix and the adverse impact of pharmaceutical customer contract renewals, partially offset by the performance of our Pharmaceutical segment generics program.
Gross margin rate declined 23 basis points during the nine months ended March 31, 2020 mainly due to the adverse impact of pharmaceutical customer contract renewals, changes in pharmaceutical distribution product mix, and the $55 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 Condensed Consolidated Financial Statements".
Distribution, Selling, General and Administrative ("SG&A") Expenses
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
SG&A expenses
$
1,165

 
$
1,097

 
6
%
 
$
3,435

 
$
3,315

 
4
%
During the three months ended March 31, 2020, SG&A expenses increased primarily due to enterprise-wide incentive compensation and higher costs to support sales growth.
During the nine months ended March 31, 2020, SG&A expenses increased primarily due to higher costs to support sales growth and the $40 million charge in connection with the Recalls as described further within Note 7 of the "Notes to Condensed Consolidated Financial Statements."




 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
8



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 Condensed Consolidated Financial Statements" for additional information on segment profit.
chart-d47fafa037625ec1989.jpgchart-b4b418d5d2515afb95c.jpg
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Pharmaceutical
$
534

 
$
536

 
 %
 
$
1,394

 
$
1,388

 
%
Medical
178

 
155

 
15
 %
 
543

 
479

 
13
%
Total segment profit
712

 
691

 
3
 %
 
1,937

 
1,867

 
4
%
Corporate
(150
)
 
(259
)
 
(42
)%
 
(6,305
)
 
(115
)
 
N.M

Total consolidated operating earnings/(loss)
$
562

 
$
432

 
30
 %
 
$
(4,368
)
 
$
1,752

 
N.M

Pharmaceutical Segment Profit
Pharmaceutical segment profit during the three months ended March 31, 2020 was essentially flat with the adverse impact of customer contract renewals offset by the favorable performance of our generics program. The increase in sales volume due to the COVID-19 pandemic had a modest positive impact on Pharmaceutical segment profit during the three months ended March 31, 2020.
Pharmaceutical segment profit during the nine months ended March 31, 2020 was essentially flat with the performance of our generics program and growth from specialty solutions, mostly offset by the adverse impact of customer contract renewals.
Medical Segment Profit
Medical segment profit during the three and nine months ended March 31, 2020 increased primarily due to the performance of products and distribution, including benefits from global manufacturing and cost-savings measures. The increase in sales volume due to the COVID-19 pandemic had a modest positive impact on Medical segment profit during the three months ended March 31, 2020.
Medical segment financial results do not include the $95 million charge incurred during the nine months ended March 31, 2020 in connection with the Recalls, as described further within Note 7 of the "Notes to Condensed Consolidated Financial Statements".
Corporate
The changes in Corporate during the three and nine months ended March 31, 2020 were due to the factors discussed in the Other Components of Consolidated Operating Earnings/(Loss) section that follows.


 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



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:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
2020
 
2019
Restructuring and employee severance
$
(6
)
 
$
53

 
$
80

 
$
97

Amortization and other acquisition-related costs
130

 
154

 
395

 
468

Impairments and (gain)/loss on disposal of assets, net
(1
)
 
11

 
7

 
(492
)
Litigation (recoveries)/charges, net
35

 
17

 
5,729

 
20

Restructuring and Employee Severance
Restructuring and employee severance during both the three and nine months ended March 31, 2020 and 2019 was primarily related to enterprise-wide cost-saving measures. The income during the three months ended March 31, 2020 was due to changes in estimates for accrued severance.
Amortization and Other Acquisition-Related Costs
Amortization of acquisition-related intangible assets was $129 million and $133 million for the three months ended March 31, 2020 and 2019, respectively, and $385 million and $399 million for the nine months ended March 31, 2020 and 2019, respectively.
Transaction and integration costs associated with the acquisition of the Patient Recovery Business were $1 million and $17 million for the three months ended March 31, 2020 and 2019, respectively, and $5 million and $62 million for the nine months ended March 31, 2020 and 2019, respectively.
Impairments and (Gain)/Loss on Disposal of Assets, Net
During the nine months ended March 31, 2019, we recognized a pre-tax gain of $508 million related to the divestiture of our naviHealth business.
Litigation (Recoveries)/Charges, Net
During the nine months ended March 31, 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 for additional information.
The costs we recognized in connection with the IVC filter product liability claims during the three months ended March 31, 2020 and 2019 were $30 million and $58 million, respectively, and $92 million and $104 million during the nine months ended March 31, 2020 and 2019, respectively.
Recoveries in class action antitrust lawsuits recognized were $46 million during the three months ended March 31, 2019, and $16 million and $94 million during the nine months ended March 31, 2020 and 2019, respectively.
Earnings/(Loss) Before Income Taxes

In addition to the items discussed above, earnings/(loss) before income taxes were impacted by the following:
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions)
2020
 
2019
 
Change
 
2020
 
2019
 
Change
Other (income)/expense, net
$
19

 
$
(13
)
 
N.M

 
$
21

 
$
13

 
N.M

Interest expense, net
60

 
75

 
(20
)%
 
189

 
227

 
(17
)%
Loss on extinguishment of debt
5

 

 
N.M

 
9

 

 
N.M

Other (Income)/Expense, Net
During the three and nine months ended March 31, 2020, other (income)/expense, net was unfavorable compared to the respective prior-year periods primarily due to decreased returns from investments, which are used to offset fluctuations in deferred compensation liabilities that are included within SG&A and discussed further in Note 9.
Interest Expense, Net
The decrease in interest expense during the three and nine months ended March 31, 2020 was primarily due to less debt outstanding.



 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
10



MD&A
Results of Operations
 

Provision for/(Benefit from) Income Taxes
 
During the three months ended March 31, 2020 and 2019, the effective tax rate was 26.8 percent and 20.0 percent, respectively. The increase in the effective tax rate for the three months ended March 31, 2020 compared to the prior period was primarily due to changes in discrete tax items and jurisdictional mix.
During the nine months ended March 31, 2020 and 2019, the effective tax rate was 5.2 percent and 22.6 percent, respectively. The decrease in the effective tax rate for the nine months ended March 31, 2020 compared to the prior period was primarily due to the Settlement Framework, as described further in the Significant Developments in Fiscal 2020 and Trends section in this MD&A.


 
 
 
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Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



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. We do not currently expect the impacts of the COVID-19 pandemic to result in material changes to our liquidity and capital resources or our ability to comply with financial commitments.
Cash and Equivalents
 
Our cash and equivalents balance was $2.3 billion at March 31, 2020 compared to $2.5 billion at June 30, 2019. At March 31, 2020, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments.
During the nine months ended March 31, 2020, net cash provided by operating activities was $1.7 billion and we deployed $888 million for long-term debt repayments, $428 million for cash dividends and $350 million for share repurchases.
Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases and payments to vendors in the
 
regular course of business, as well as fluctuating working capital needs driven by customer and product mix. In addition, financial hardship to our customers or vendors as a result of the COVID-19 pandemic could adversely impact our working capital.
The cash and equivalents balance at March 31, 2020 includes $805 million of cash held by subsidiaries outside of the United States.



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 March 31, 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 March 31, 2020, we had no amounts outstanding under our commercial paper program, revolving credit facility, or our committed receivables sales facility. During the nine months ended March 31, 2020, we had maximum amounts outstanding under our commercial paper program and our committed receivables program of $1.7 billion and $700 million, respectively. The maximum combined total daily amounts outstanding was $1.7 billion and the average daily amount outstanding was $244 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 March 31, 2020, we were in compliance with this financial covenant.
Long-Term Debt and Other Short-Term Borrowings
At March 31, 2020, we had total long-term obligations, including the current portion and other short-term borrowings, of $7.3 billion. In November 2019, we repaid the full principal of the 2.4% Notes due 2019 at maturity for $450 million. During the nine months ended March 31, 2020, we 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. The repurchases were paid for with available cash and other short-term borrowings. In connection with the early debt repurchases, we recorded a $9 million loss on extinguishment of debt.


 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
12



MD&A
Liquidity and Capital Resources
 

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 these payments will 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 the nine months ended March 31, 2020 and 2019 were $239 million and $192 million, respectively.
Dividends
On each of May 8, 2019, August 7, 2019, November 6, 2019 and February 11, 2020, our Board of Directors approved a quarterly dividend of $0.4811 per share, or $1.92 per share on an annualized basis, which were paid on July 15, 2019, October 15, 2019, January 15, 2020 and April 15, 2020, respectively.
Share Repurchases
During the nine months ended March 31, 2020, we repurchased $350 million of our common shares under an accelerated share repurchase ("ASR") program. We funded the ASR program with available cash and short-term borrowings. See Note 11 of the "Notes to Condensed Consolidated Financial Statements" for additional information. At March 31, 2020, we had $943 million authorized for share repurchases.


 
 
 
 13
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Other Items
 


Other Items
The MD&A in our 2019 Form 10-K addresses our contractual obligations and off-balance sheet arrangements, as of and for the fiscal year ended June 30, 2019. There have been no subsequent material changes outside of the ordinary course of business to those items except for the agreement in principle on a global settlement framework designed to resolve all pending and future opioid lawsuits and claims brought by states and political subdivisions described in the Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Condensed Consolidated Financial Statements."




 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
14



MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

Critical Accounting Policies and Sensitive Accounting Estimates
The discussion and analysis presented below is a supplemental disclosure to the critical accounting policies and sensitive accounting estimates specified in our consolidated balance sheet at June 30, 2019. This discussion and analysis should be read in conjunction with the Critical Accounting Policies and Sensitive Accounting Estimates included in our 2019 Form 10-K and our Forms 10-Q for the quarters ended September 30, 2019 and December 31, 2019.
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.
Goodwill
 
Purchased goodwill is tested for impairment annually or when indicators of impairment exist. Goodwill impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount, which may be performed utilizing either a qualitative or quantitative assessment. Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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 elected to bypass the qualitative assessment for our annual impairment test in fiscal 2019. Additionally, we elected to bypass the qualitative assessment and perform an interim goodwill impairment test for our Medical Unit at March 31, 2020. A reporting unit is defined as an operating segment or one level below an operating segment (also known as a component).
Goodwill impairment testing involves judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists, and, if necessary, the estimation of the fair value of the applicable reporting unit. Our qualitative evaluation considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
 
Medical Unit Goodwill
As noted within Note 7 of the "Notes to Condensed Consolidated Financial Statements", we recorded a charge of $95 million within Corporate during the nine months ended March 31, 2020 in connection with the Recalls that is allocated to the Medical Unit for purposes of goodwill impairment testing. Primarily due to the risks and uncertainties to the business from both the Recalls and the COVID-19 pandemic, we elected to bypass the qualitative assessment and perform interim goodwill impairment testing for the Medical Unit during the three months ended March 31, 2020. The carrying value of this reporting unit at March 31, 2020 was $10.1 billion, of which $4.2 billion was goodwill. The fair value of the reporting unit was estimated to be approximately 10 percent in excess of its carrying value, using a combination of the income-based approach (using a discount rate of 8.5 percent and a terminal growth rate of 2 percent), and the market-based approach.
Adverse changes in key assumptions, including related to our current assumptions about the impact of the Recalls and 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 increase the discount rate by 1.0 percent, the carrying value would have exceeded the fair value for our Medical Unit by approximately 1 percent at March 31, 2020.

Loss Contingencies
 
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 the nine months ended March 31, 2020. 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. 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 will regularly review opioid litigation matters to determine whether our accrual is adequate. The amount of ultimate loss may differ materially from this accrual.
    


 
 
 
 15
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



MD&A
Critical Accounting Policies and Sensitive Accounting Estimates
 

Provision for Income Taxes
 
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 the nine months ended March 31, 2020 we recorded a tax benefit of $487 million, which is net of unrecognized tax benefits of $468 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 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 of the Notes to the "Condensed Consolidated Financial Statements" 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.

Explanation and Reconciliation of Non-GAAP Financial Measures
The "Overview of Consolidated Results" section within MD&A in this Form 10-Q contains financial measures that are not calculated in accordance with GAAP.
In addition to analyzing our business based on financial information prepared in accordance with GAAP, we use these non-GAAP financial measures internally to evaluate our performance, engage in financial and operational planning, and, in most cases, 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.
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.


 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
16



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

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.
Loss on extinguishment of debt is excluded because it does not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of this type of charge is not consistent and is significantly impacted by the timing and size of debt extinguishment transactions.
Transitional tax benefit, net related to the Tax Cuts and Jobs Act is excluded because it results from the one-time impact of a very significant change in the U.S. federal corporate tax rate and, due to the significant size of the benefit, obscures analysis of trends and financial performance. The transitional tax benefit includes the initial estimate and subsequent adjustments for the re-measurement of deferred tax assets and liabilities due to the reduction of the U.S. federal corporate income tax rate and the repatriation tax on undistributed foreign earnings.
The tax effect for each of the items listed above, other than the transitional tax benefit item, is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded. The gross, tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations.
Definitions
Growth rate calculation: growth rates in this Form 10-Q are determined by dividing the difference between current-period results and prior-period results by prior-period results.
Non-GAAP 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, and (8) loss on extinguishment of debt.
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 extinguishment of debt, each net of tax, and (9) transitional tax benefit, net.
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.


 
 
 
 17
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

GAAP to Non-GAAP Reconciliation
(in millions, except per common share amounts)
Operating Earnings/(Loss)
Operating Earnings Growth Rate
Earnings/(Loss) Before Income Taxes
Provision for/(Benefit from) Income Taxes
Net Earnings/(Loss)1
Net Earnings/(Loss)1 Growth Rate
Diluted EPS1,2
Diluted EPS1 Growth Rate
 
Three Months Ended March 31, 2020
GAAP
$
562

30
 %
$
478

$
127

$
350

18
 %
$
1.19

20
 %
Surgical gown recall costs
(1
)
 
(1
)

(1
)



Restructuring and employee severance
(6
)

(6
)
(3
)
(3
)

(0.01
)

Amortization and other acquisition-related costs
130


130

31

99


0.34


Impairments and (gain)/loss on disposal of assets, net
(1
)

(1
)
(1
)




Litigation (recoveries)/charges, net
35


35

8

27


0.09


Loss on extinguishment of debt


5

1

4


0.01


Transitional tax benefit, net



1

(1
)



Non-GAAP
$
719

8
 %
$
639

$
164

$
474

 %
$
1.62

2
 %
 
Three Months Ended March 31, 2019
GAAP
$
432

(21
)%
$
370

$
74

$
296

16
 %
$
0.99

22
 %
Restructuring and employee severance
53


53

14

39


0.13


Amortization and other acquisition-related costs
154


154

38

116


0.39


Impairments and (gain)/loss on disposal of assets, net
11


11

4

7


0.03


Litigation (recoveries)/charges, net
17


17

7

10


0.03


Transitional tax benefit, net



(5
)
5


0.02


Non-GAAP
$
667

(15
)%
$
605

$
130

$
475

9
 %
$
1.59

14
 %
 
Nine Months Ended March 31, 2020
GAAP 
$
(4,368
)
N.M

$
(4,587
)
$
(237
)
$
(4,352
)
N.M

$
(14.84
)
N.M

Surgical gown recall costs
95

 
95

25

70

 
0.24

 
State opioid assessment related to prior fiscal years
4


4

1

3


0.01


Restructuring and employee severance
80


80

18

62


0.21


Amortization and other acquisition-related costs
395


395

98

297


1.01


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


7

1

6


0.02


Litigation (recoveries)/charges, net3
5,729


5,729

509

5,220


17.80


Loss on extinguishment of debt


9

2

7


0.02


Transitional tax benefit, net



12

(12
)

(0.04
)

Non-GAAP 
$
1,942

5
 %
$
1,732

$
429

$
1,300

4
 %
$
4.41

6
 %
 
Nine Months Ended March 31, 2019
GAAP
$
1,752

45
 %
$
1,512

$
342

$
1,169

(18
)%
$
3.88

(14
)%
Restructuring and employee severance
97


97

25

72


0.24


Amortization and other acquisition-related costs
468


468

112

356


1.18


Impairments and (gain)/loss on disposal of assets, net
(492
)

(492
)
(129
)
(363
)

(1.20
)

Litigation (recoveries)/charges, net
20


20

7

13


0.04


Transitional tax benefit, net



(8
)
8


0.03


Non-GAAP
$
1,845

(13
)%
$
1,605

$
349

$
1,255

 %
$
4.17

5
 %











 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
18



Explanation and Reconciliation of Non-GAAP Financial Measures
 
 

1 
Attributable to Cardinal Health, Inc.
2 
For the nine months ended March 31, 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. Year-to-date 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.

The sum of the components may not equal the total due to rounding.
We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred.



 
 
 
 19
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



Other
 


Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the quantitative and qualitative market risk disclosures included in our 2019 Form 10-K since the end of fiscal 2019 through March 31, 2020.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of March 31, 2020. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of March 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Legal Proceedings
In addition to the proceeding described below, the legal proceedings described in Note 7 of the "Notes to Condensed Consolidated Financial Statements" are incorporated in this "Legal Proceedings" section by reference.
In June 2019, Melissa Cohen, a purported shareholder, filed an action on behalf of Cardinal Health, Inc. in the U.S. District Court for the Southern District of Ohio against certain current and former members of our Board of Directors alleging that the defendants breached their fiduciary duties by failing to effectively monitor Cardinal Health's distribution of controlled substances. The derivative complaint seeks, among other things, unspecified money damages against the defendants and an award of attorneys' fees. In December 2019 and January 2020, similar complaints were filed in the U.S. District Court for the Southern District of Ohio by purported shareholders, Stanley M. Malone and Michael Splaine, respectively. In January, 2020, the court consolidated the derivative cases under the caption In re Cardinal Health, Inc. Derivative Litigation and in March 2020, plaintiffs filed an amended complaint. The amended derivative complaint seeks, among other things, unspecified money damages against the defendants and an award of attorneys' fees.
Risk Factors
You should carefully consider the information in this Form 10-Q, including the risk factors below, and the risk factors discussed in "Risk Factors" and other risks discussed in our 2019 Form 10-K, our Forms 10-Q for the quarters ended September 30, 2019 and December 31, 2019, and other filings with the SEC since June 30, 2019. These risks could materially and adversely affect our results of operations, financial condition, liquidity, and cash flows. Our business also could be affected by risks that we are not presently aware of or that we currently consider immaterial to our operations.

We have been and expect to continue to be negatively affected by the ongoing COVID-19 pandemic.
In addition to the actual and possible effects of the COVID-19 pandemic and resulting disruptions on our business and operations discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we face other possible adverse impacts from the COVID-19 pandemic. Among other possible consequences, we may become subject to claims or lawsuits by employees, customers, suppliers or other parties regarding actions we take in our operations in response to the pandemic. Financial hardship to our customers and others could adversely impact the timing and collectability of payments to us from customers and require an increase in reserves against our accounts
 
receivable. Additionally, the situation has and will likely continue to give rise to or amplify other risks that could adversely affect our results of operations, financial condition, liquidity or cash flows
As a critical player in the global healthcare supply chain, we are participating in industry-wide collaboration with the U.S. government and other distributors intended to increase the availability of PPE in the U.S and may participate in additional efforts relating to other products. In connection with these efforts, we have received information requests from several members of the U.S. Congress and could be investigated or have enforcement actions instituted against us by one or more agencies of the U.S., state or international governments and have and could receive negative publicity.



 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
20



Other
 

We cannot estimate the length or severity of the COVID-19 pandemic or the related consequences on the U.S. and global economy and 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. The COVID-19 pandemic also may give rise to or heighten many of the risks we have previously identified, including risks associated with supplier relationships, international operations, regulatory and licensing, changes to the U.S. healthcare environment, cyber security, access to capital markets, and goodwill impairment, discussed further in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019, and our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2019 and December 31, 2019. COVID-19 may also adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider a significant risk.
The public health crisis involving the abuse of prescription opioid pain medication and our efforts to resolve related claims could have additional or unexpected material negative effects on our business.
Our Pharmaceutical segment distributes prescription opioid pain medications. In recent years, the abuse of prescription opioid pain medication has become a public health crisis.
A significant number of counties, municipalities and other plaintiffs, including a number of state attorneys general, have filed lawsuits against pharmaceutical manufacturers, pharmaceutical wholesale distributors (including us), retail chains and others relating to the manufacturing, marketing or distribution of prescription opioid pain medications. In addition, we are currently being investigated or sued by other states for the same activities and could be named as a defendant in additional lawsuits. The defense and resolution of current and future lawsuits and events relating to these lawsuits are subject to uncertainty and could have a material adverse effect on our results of operations, financial condition, cash flows, liquidity, our ability to pay dividends or repurchase our shares, or have adverse reputational or operational effects on our business.
In October 2019, we agreed in principle to a Settlement Framework and in connection with this development we recorded a pre-tax accrual of $5.56 billion in the nine months ended March 31, 2020. This Settlement Framework is subject to contingencies but is the basis for our negotiation of definitive terms and documentation. 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 will regularly review 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 Condensed Consolidated Financial Statements" for more information regarding these matters.
Other legislative, regulatory or industry measures related to the public health crisis involving the abuse of prescription opioid pain
 
medication and the distribution of these medications could affect our business in ways that we may not be able to predict. For example, several states have now adopted taxes or other fees on the sale of opioids, and several other states have proposed similar legislative initiatives. These laws and proposals vary in the tax amounts imposed and the means of calculation. Liabilities for taxes or assessments under any such laws could have an adverse impact on our results of operations unless we are able to mitigate them through operational changes or commercial arrangements where permitted.
Ongoing unfavorable publicity regarding the abuse or misuse of prescription opioid pain medications and the role of wholesale distributors in the supply chain of such prescription medications, as well as the continued proliferation of the opioid lawsuits, investigations, regulations and legislative actions, and unfavorable publicity in relation to those lawsuits could have a material adverse effect on our reputation or results of operations.
We could be subject to adverse changes in the tax laws or challenges to our tax positions.
We are a large multinational corporation with operations in the United States and many foreign countries. As a result, we are subject to the tax laws of many jurisdictions.
From time to time, initiatives are proposed in the United States and other jurisdictions in which we operate that could adversely affect our tax positions, effective tax rate or tax payments. Specific initiatives that may impact us include the repeal of the LIFO (last-in, first-out) method of inventory accounting for income tax purposes, the establishment or increase in taxation at the U.S. state level on the basis of gross revenues, recommendations of the recently completed base erosion and profit shifting project undertaken by the Organization for Economic Cooperation and Development and the European Commission’s investigation into illegal state aid.
Additionally, in connection with the $5.63 billion pre-tax charge for the opioid litigation, in the nine months ended March 31, 2020, we recorded a tax benefit of $487 million, which is net of unrecognized tax benefits of $468 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 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 of the "Notes to Condensed Consolidated Financial Statements" 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


 
 
 
 21
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
 



Other
 

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.


 

Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number
of Shares
Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares
Purchased
as Part of Publicly Announced Programs (2)
 
Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under the Program (2)
(in millions)
January 2020
1,678

 
$
53.60

 

 
$
943

February 2020
223

 
58.58

 

 
943

March 2020
216

 
47.41

 

 
943

Total
2,117

 
$
53.49

 

 
$
943

(1)
Reflects 1,678, 223 and 216 common shares purchased in January, February and March 2020, respectively, through a rabbi trust as investments of participants in our Deferred Compensation Plan.
(2)
On February 7, 2018, our Board of Directors approved a $1.0 billion share repurchase program that was completed in December 2019. On November 7, 2018, our Board of Directors approved a $1.0 billion share repurchase program that expires on December 31, 2021 and as of March 31, 2020, we have $943 million authorized for share repurchases remaining under this program.



 
 
 
 
Cardinal Health | Q3 Fiscal 2020 Form 10-Q
22



Financial Statements
 
 


Condensed Consolidated Statements of Earnings/(Loss)
(Unaudited)
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
(in millions, except per common share amounts)
2020
 
2019
 
2020
 
2019
Revenue
$
39,157

 
$
35,228

 
$
116,233

 
$
108,181

Cost of products sold
37,272

 
33,464

 
110,955

 
103,021

Gross margin
1,885

 
1,764

 
5,278

 
5,160

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Distribution, selling, general and administrative expenses
1,165

 
1,097

 
3,435

 
3,315

Restructuring and employee severance
(6
)
 
53

 
80

 
97

Amortization and other acquisition-related costs
130

 
154

 
395

 
468

Impairments and (gain)/loss on disposal of assets, net
(1
)
 
11

 
7

 
(492
)
Litigation (recoveries)/charges, net
35

 
17

 
5,729

 
20

Operating earnings/(loss)
562

 
432

 
(4,368
)
 
1,752

 
 
 
 
 
 
 
 
Other (income)/expense, net
19

 
(13
)
 
21

 
13

Interest expense, net
60

 
75

 
189

 
227

Loss on extinguishment of debt
5

 

 
9

 

Earnings/(loss) before income taxes
478

 
370

 
(4,587
)
 
1,512

 
 
 
 
 
 
 
 
Provision for/(benefit from) income taxes
127

 
74

 
(237
)
 
342

Net earnings/(loss)
351

 
296

 
(4,350
)
 
1,170

 
 
 
 
 
 
 
 
Less: Net earnings attributable to noncontrolling interests
(1
)
 

 
(2
)
 
(1
)
Net earnings/(loss) attributable to Cardinal Health, Inc.
$
350

 
$
296

 
$
(4,352
)
 
$
1,169

 
 
 
 
 
 
 
 
Earnings/(loss) per common share attributable to Cardinal Health, Inc.:
 
 
 
 
 
 
 
Basic
$
1.20

 
$
0.99

 
$
(14.84
)
 
$
3.89

Diluted
1.19

 
0.99

 
(14.84
)
 
3.88