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    2020 Annual Report


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    Dear fellow shareholders, A year ago, I closed my letter to you with a reflection on our role in healthcare. Over the past several months, we have seen that now more than ever, what we do matters — to our customers, to the patients they serve, and to our communities. In my nearly 30 years as part of the Cardinal Health family, I have experienced significant transformation, both within our company and within the healthcare industry. We have expanded our products, services and markets, evolved with technological and regulatory changes, and adapted in the face of external challenges. In each of these moments, we have demonstrated agility and embraced change to emerge as a stronger company with an even more solidified role in healthcare. Now, as we navigate the unprecedented challenges of a global pandemic, we are leaning on that legacy of adaptability and dedication. In fiscal 2020, we delivered on our commitments and continued to execute on our long-term strategic priorities, all as we adapted our operations to address the unique challenges presented by COVID-19.


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    Our fiscal 2020 financial performance Across the company, in fiscal 2020, we demonstrated positive In the Medical segment, our cost savings initiatives, performance despite significant global challenges. We grew particularly within our global manufacturing and supply non-GAAP operating earnings, exceeded our non-GAAP chain, drove significant benefits throughout the year. We EPS guidance range, surpassed our cost savings target, and expect these workstreams to continue to deliver greater strengthened our balance sheet. In the year, we invested $375 efficiencies and additional value into the future. Also, during million back into the business, with a focus on enhancing our the year we continued to make investments that enhance IT infrastructure and fueling strategic growth opportunities. our strong strategic positions in our Cardinal Health at-Home We paid down $1.4 billion of debt, and we returned more and Medical services businesses. And, although the pace of than $900 million to shareholders through dividends and our commercial initiatives slowed as we and our customers share repurchases. shifted our focus to address the challenges presented by COVID-19, we remain committed to the strategies behind Pharmaceutical segment performance exceeded our these initiatives and to their future progress. expectations for the year. Importantly, our generics program experienced overall consistent market dynamics In fiscal 2020, we demonstrated our adaptability and ability and returned to growth this year. Also, we saw positive to execute through unprecedented changes. As these contributions from our Specialty business, and from dynamics continue into fiscal 2021, we will continue to our Connected Care business, and we made additional build upon our operational momentum and deliver on our investments in these areas for long-term growth. strategic growth plans. FY20 Highlights FY20 Financial summary Financial performance Portfolio and strategic positioning GAAP Non-GAAP • Grew non-GAAP operating basis ($M) basis ($M) earnings and exceeded non- • Divested noncontrolling FY20 FY20 GAAP EPS guidance range equity interest in naviHealth • Received positive • Continued focus in Operating $(4,098) $2,384 evolving growth areas with earnings/(loss)1 N.M. 1% contributions from investments and partnerships % change our generics program in Specialty, at-Home, • Surpassed enterprise cost Revenue $152,922 N/A and Medical services savings target, with excellent % change 5% savings contributions from COVID-19 response Medical global manufacturing Diluted EPS1,2 $(12.61) $5.45 • Maintained operations across % change N.M. 3% and supply chain all global manufacturing and distribution facilities as well Capital deployment as all our nuclear pharmacies 1 GAAP results include a pre-tax charge of $5.63 billion ($5.14 billion after tax) • Returned over $900M (>250 locations) in the first quarter of the fiscal year for the estimated liability associated with lawsuits and claims brought against us by states and political subdivisions to shareholders through relating to the distribution of prescription opioid pain medications 2 Attributable to Cardinal Health, Inc. dividends and • Leveraged Red Oak Please see “Explanation and Reconciliation of non-GAAP Financial Measures” share repurchases Sourcing capabilities to in our Fiscal Year 2020 Form 10-K for GAAP to Non-GAAP reconciliations. ensure minimal disruptions • Improved balance sheet by to pharmaceutical supply paying down $1.4B of long-term debt


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    What we value Integrity we hold ourselves to the highest ethical standards Inclusive we embrace differences to drive Our response to COVID-19 the best outcomes As the global pandemic continues to unfold, I continue to be humbled by and grateful for the contributions of every one of our employees, especially our frontline teams. Our greatest priority is the health and safety of our employees — and their families. The commitment of our teams enables us to fulfill our mission every day Innovative of delivering critical products and solutions to frontline healthcare we develop new ways workers around the world. of thinking, operating and serving customers To that end, in March, we quickly and seamlessly transitioned our office employees to a remote work model, and throughout the pandemic, we have continuously maintained operations in all of our distribution facilities, nuclear pharmacies and global manufacturing Accountable plants. We have teams across the enterprise deployed to modify we bring passion, existing strategies or adapt our operations to support our determination and customers through the pandemic. grit to deliver on our For example, to address the unprecedented and sustained increases commitments in demand for certain product categories that are creating supply challenges and cost pressures for us and for our customers, we have and will continue to expand our self-manufacturing capacity and sourcing capabilities. We have added new manufacturing lines or repurposed lines where possible, and we are also building a longer- Mission driven term strategy for supply assurance in the future, all with the focus we serve the greater on being a good partner for our customers so they can safely serve goal of healthcare their patients. How we’ll succeed Grow and develop Prioritize Optimize Invest our people our work our core for growth


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    Our strategic direction In response to these rapidly shifting global dynamics, in fiscal 2021 and beyond, we are focused on strengthening our core businesses and investing for growth. Pharmaceutical segment Across the company, our initiatives to enhance our We continue to enhance our infrastructure, deploying operations, processes and technologies are delivering technology across the segment to streamline our operations, meaningful value. We are on track to deliver savings beyond improve our processes and enhance our ecommerce our multi-year, $500 million target. This disciplined approach platforms. We are also growing in key areas of the segment, will enable strong cash flow and working capital efficiency such as Specialty and our Connected Care businesses, in fiscal 2021 and will position us for consistent, sustained through strategic investments. These investments will growth in the future. diversify our capabilities, bolster our value proposition and As I said at the beginning of this letter, what we do matters — improve the customer experience. and none of it would be possible without our people. We Medical segment are fully committed to fostering a best-in-class, respectful and diverse work environment that inspires excellence, First and foremost, we continue to prioritize our support for innovation and collaboration. This takes perseverance, our customers and their patients as our industry navigates awareness, humility, and at times, some uncomfortable the complexities of the pandemic. The unprecedented and conversations. We’re leaning into that discomfort, as it is sustained increases in demand for certain product categories necessary to create real change. I am meeting regularly with are creating supply challenges and cost pressures for us and our Diversity and Inclusion (D&I) Steering Council of senior for our customers. In response, we have and will continue leaders throughout the company to discuss diversity and to expand our self-manufacturing capacity and sourcing inclusion barriers, opportunities and successes. We will capabilities, while at the same time continuing to optimize continue these dialogues and continue to take actions, like our end-to-end global supply chain. Simultaneously, we unconscious bias training, D&I all employee meetings, and will continue investing in our at-Home and Medical services other educational opportunities, with a goal of fostering an businesses to further the long-term growth strategies in environment where everyone is truly comfortable bringing these areas. 100% of themselves to work every day. Overall, although this year presented significant global and industry challenges, we delivered on our commitments and our team responded with the grit and dedication to our mission that I’ve seen time and time again at Cardinal Health. Together, we will continue to support our customers and their patients and continue to invest for growth — so we can perform our essential role in healthcare now and into the future. With regards, Mike Kaufmann CEO Important Information Regarding Forward-Looking Statements: This Report includes forward-looking statements addressing expectations, prospects and other matters that are dependent upon future events or developments. These forward-looking statements may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “continue,” “likely,” and similar expressions. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. For more information about these risks and uncertainties, please review our Forms 10-K, 10-Q and 8-K and Exhibits to those Reports, which are available at ir.cardinalhealth.com. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement.


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    We aspire to be healthcare’s most trusted partner Where by building upon our scale and heritage in distribution, products, and solutions, while driving growth in evolving we are going areas of healthcare through customer insights, data and analytics, and focusing our resources on what matters most. We aspire to be healthcare’s most trusted partner At Cardinal Health, our more than 48,000 employees recognize that our work truly “ is ‘essential to care.’ We are focused each day on serving our customers so they can fulfill their critical role with patients around the world. — Ola Snow, Chief Human Resources Officer ” by building upon our scale and heritage in distribution, products, and solutions, Over the last nearly 50 years, we’ve grown and expanded across the “ continuum of care. Distribution has been and will continue to be a core capability across both of our segments. With this supply chain focus as our foundation, we have expanded and evolved our robust product portfolio and host of accompanying solutions across both segments. Now, more than ever, we will lean on that legacy to navigate ” current challenges and perform our critical role in healthcare. — Steve Mason, CEO, Medical Segment while driving growth in evolving areas of healthcare “ Going forward, we’re focused on growth to create long-term value. This includes organic growth opportunities and strategic investments to diversify our capabilities and enhance the customer experience in areas including our Specialty, Cardinal Health at-Home, Medical services, and Connected Care businesses. ” ” — Michele Holcomb, Chief Strategy and Business Development Officer


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    through customer insights, We are committed to understanding and supporting the ever-changing needs “ of our customers. Teams across the company are focused on continuing to enhance the customer experience through strengthening our e-commerce platforms and implementing new technologies. These efforts will improve our interactions with our customers and their patients and will drive efficiencies to create significant value. ” — Victor Crawford, CEO, Pharmaceutical Segment data and analytics, Data is critical to everything we do as a company, and to our future growth. We “ are making significant IT investments to build our data capabilities and using innovative new technologies like artificial intelligence and predictive analytics to monitor trends and develop new solutions. We’re also continuing to develop our innovation center, Fuse, so we can be at the forefront of evolving trends in the healthcare industry. ” — Brian Rice, EVP, Chief Information Officer and Customer Support Services and focusing our resources on what matters most. “ To enable growth across the enterprise, we are committed to thoughtful capital allocation and cost management. Our priorities of investing in both our business and our people, strengthening our balance sheet, and returning cash to shareholders remain unchanged. ” — Jason Hollar, Chief Financial Officer


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    Board of directors Gregory B. Kenny Patricia A. Hemingway Hall Chairman of the Board Retired President and Chief Executive Officer, Retired President and Chief Executive Officer, Health Care Service Corp. General Cable Corp. Committees: H, N Committees: N, AH, S Akhil Johri Colleen F. Arnold1 Retired Executive Vice President and Chief Financial Officer, Retired Senior Vice President, Sales and Distribution, United Technologies Corp. International Business Machines Corp. Committees: A, S Committees: A Michael C. Kaufmann Carrie S. Cox Chief Executive Officer, Cardinal Health, Inc. Retired Executive Vice President and President, Global Pharmaceuticals, Schering-Plough Corp. Nancy Killefer and Retired Chairman and Chief Executive Officer, Retired Senior Partner, Humacyte, Inc. Public Sector Practice, McKinsey & Company, Inc. Committees: H, AH Committees: H, S Calvin Darden J. Michael Losh Retired Senior Vice President, U.S. Operations, Retired Executive Vice President and United Parcel Service, Inc. Chief Financial Officer, General Motors Corp. Committees: H, AH Committees: A Bruce L. Downey Dean A. Scarborough Retired Chairman and Chief Executive Officer, Retired Chairman and Chief Executive Officer, Barr Pharmaceuticals, Inc. and Avery Dennison Corp. Partner, NewSpring Health Capital II, L.P. Committees: A Committees: N, AH John H. Weiland Sheri H. Edison Retired President and Chief Operating Officer, Executive Vice President, General Counsel, Amcor plc C. R. Bard, Inc. Committees: A, S David C. Evans Retired Chief Financial Officer, The Scotts Miracle-Gro Company and Battelle Memorial Institute Executive team Victor L. Crawford Jessica L. Mayer Chief Executive Officer, Pharmaceutical Segment Chief Legal and Compliance Officer Michele A.M. Holcomb Brian S. Rice Chief Strategy and Business Development Officer Executive Vice President, Chief Information Officer and Customer Support Services Jason M. Hollar Chief Financial Officer Ola M. Snow Chief Human Resources Officer Michael C. Kaufmann Chief Executive Officer Sarah D. Wills Executive Vice President, Chief Corporate Affairs Officer Stephen M. Mason Chief Executive Officer, Medical Segment Committee codes The Ad Hoc Committee of independent directors assists the Board in overseeing A: Audit the company’s response to the opioid crisis. AH: Ad Hoc The Surgical Gown Recall Oversight Committee of independent directors assists H: Human Resources and Compensation the Board in overseeing the company’s surgical gown recall. N: Nominating and Governance S: Surgical Gown Recall Oversight All Board members, with the exception of CEO Mike Kaufmann, are independent. 1 Colleen Arnold will not stand for re-election at the 2020 Annual Meeting of Shareholders.


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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2020 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number: 1-11373 Cardinal Health, Inc. (Exact name of registrant as specified in its charter) Ohio 31-0958666 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7000 Cardinal Place , Dublin , Ohio 43017 (Address of principal executive offices) (Zip Code) (614) 757-5000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common shares (without par value) CAH New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No 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 No 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 No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer 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 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. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No The aggregate market value of voting stock held by non-affiliates on December 31, 2019, was the following: $14,729,138,108. The number of the registrant’s common shares, without par value, outstanding as of July 31, 2020, was the following: 292,444,079. Documents Incorporated by Reference: Portions of the registrant’s Definitive Proxy Statement to be filed for its 2020 Annual Meeting of Shareholders are incorporated by reference into the sections of this Form 10-K addressing the requirements of Part III of Form 10-K.


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    Cardinal Health Fiscal 2020 Form 10-K Table of Contents Page Introduction 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 3 Explanation and Reconciliation of Non-GAAP Financial Measures 20 Selected Financial Data 23 Quantitative and Qualitative Disclosures about Market Risk 24 Business 26 Risk Factors 33 Properties 40 Legal Proceedings 40 Market for Registrant's Common Equity 41 Reports 43 Financial Statements and Supplementary Data 48 Directors, Executive Officers, and Corporate Governance 79 Exhibits 81 Form 10-K Cross Reference Index 85 Signatures 86 1 Cardinal Health | Fiscal 2020 Form 10-K


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    Introduction Introduction References to Cardinal Health and Fiscal Years As used in this report, "we," "our," "us," "Cardinal Health" and similar pronouns refer to Cardinal Health, Inc. and its majority-owned subsidiaries, unless the context requires otherwise. Our fiscal year ends on June 30. References to fiscal 2021, 2020, 2019, 2018, 2017 and 2016 are to the fiscal years ended June 30, 2021, 2020, 2019, 2018, 2017 and 2016, respectively. Except as otherwise specified, information in this report is provided as of June 30, 2020. Non-GAAP Financial Measures In this report, including in the "Fiscal 2020 Overview" section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we use financial measures that are derived from consolidated financial data but are not presented in our financial statements that are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These measures are considered “non-GAAP financial measures” under the Securities and Exchange Commission (“SEC”) rules. The reasons we use these non-GAAP financial measures and the reconciliations to their most directly comparable GAAP financial measures are included in the “Explanation and Reconciliation of Non-GAAP Financial Measures” section following MD&A in this report. Management's Discussion and Analysis of Financial Condition and Results of Operations Our MD&A within this Form 10-K generally discusses fiscal 2020 and fiscal 2019 items and year-to-year comparisons between fiscal 2020 and fiscal 2019. Fiscal 2018 items and discussions of year-to-year comparisons between fiscal 2019 and fiscal 2018 that are not included in this Form 10-K can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June 30, 2019. Important Information Regarding Forward-Looking Statements This report (including information incorporated by reference) includes forward-looking statements addressing expectations, prospects, estimates and other matters that are dependent upon future events or developments. Many forward-looking statements appear in MD&A and Risk Factors, but there are others throughout this report, which may be identified by words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “will,” “should,” “could,” “would,” “project,” “continue,” “likely,” and similar expressions, and include statements reflecting future results or guidance, statements of outlook and expense accruals. These matters are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these risks and uncertainties are described in “Risk Factors” in this report and in Exhibit 99.1 to the Form 10-K included in this report. Forward-looking statements in this report speak only as of the date of this document. Except to the extent required by applicable law, we undertake no obligation to update or revise any forward-looking statement. Available Information Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are available free of charge on our website (www.cardinalhealth.com), under the “Investor Relations — Financial Reporting — SEC Filings” caption, as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website (www.sec.gov) where you can search for annual, quarterly and current reports, proxy and information statements, and other information regarding us and other public companies. Cardinal Health | Fiscal 2020 Form 10-K 2


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    MD&A Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations About Cardinal Health Cardinal Health, Inc. is an Ohio corporation formed in 1979 and is a globally integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices and patients in the home. We provide pharmaceuticals and medical products and cost-effective solutions that enhance supply chain efficiency. We connect patients, providers, payers, pharmacists and manufacturers for integrated care coordination and better patient management. We manage our business and report our financial results in two segments: Pharmaceutical and Medical. Pharmaceutical Segment Medical Segment Our Pharmaceutical segment distributes branded and generic Our Medical segment manufactures, sources and distributes pharmaceutical, specialty pharmaceutical and over-the-counter Cardinal Health branded medical, surgical and laboratory products, healthcare and consumer products in the United States. This which are sold in the United States, Canada, Europe, Asia and other segment also provides services to pharmaceutical manufacturers markets. In addition to distributing Cardinal Health branded products, and healthcare providers for specialty pharmaceutical products; this segment also distributes a broad range of medical, surgical and operates nuclear pharmacies and radiopharmaceutical laboratory products known as national brand products and provides manufacturing facilities; provides pharmacy management services supply chain services and solutions to hospitals, ambulatory surgery to hospitals, as well as medication therapy management and patient centers, clinical laboratories and other healthcare providers in the outcomes services to hospitals, other healthcare providers and United States and Canada. This segment also distributes medical payers; and repackages generic pharmaceuticals and over-the- products to patients' homes in the United States through our Cardinal counter healthcare products. Health at-Home Solutions division. 3 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Results of Operations Consolidated Results Fiscal 2020 Overview Revenue Revenue for fiscal 2020 was $152.9 billion, a 5 percent increase from the prior year, primarily due to sales growth from pharmaceutical distribution and specialty solutions customers. GAAP and Non-GAAP Operating Earnings (in millions) 2020 2019 Change GAAP operating earnings/(loss) $ (4,098) $ 2,060 N.M. Surgical gown recall costs 85 — State opioid assessment related to prior fiscal years 3 — Restructuring and employee severance 122 125 Amortization and other acquisition-related costs 524 621 Impairments and (gain)/loss on disposal of assets 7 (488) Litigation (recoveries)/charges, net 5,741 36 Non-GAAP operating earnings $ 2,384 $ 2,353 1% The sum of the components and certain computations may reflect rounding adjustments. We had a GAAP operating loss of $4.1 billion during fiscal 2020 primarily due to a $5.63 billion pre-tax charge we recognized for the estimated liability associated with lawsuits and claims brought against us by states and political subdivisions relating to the distribution of prescription opioid pain medications as described in the Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements." GAAP operating earnings during fiscal 2019 were favorably impacted by a $508 million pre-tax gain from the divestiture of a majority interest in our naviHealth Holdings, LLC ("naviHealth") business. The increase in non-GAAP operating earnings was primarily due to the beneficial impact of enterprise-wide cost-savings measures, a higher contribution from branded pharmaceutical sales mix, the favorable year-over-year impact of fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier and growth from specialty solutions, partially offset by the adverse impact of Pharmaceutical segment customer contract renewals and the adverse impact of the pandemic associated with the novel strain of coronavirus (“COVID-19”). See the Significant Developments in Fiscal 2020 and Trends section of this MD&A. GAAP and Non-GAAP Diluted EPS ($ per share) 2020 (2) (3) 2019 (2) Change GAAP diluted EPS (1) $ (12.61) $ 4.53 N.M. Surgical gown recall costs 0.22 — State opioid assessment related to prior fiscal years 0.01 — Restructuring and employee severance 0.31 0.31 Amortization and other acquisition-related costs 1.34 1.57 Impairments and (gain)/loss on disposal of assets 0.02 (1.25) Litigation (recoveries)/charges, net 17.84 0.09 Loss on early extinguishment of debt 0.04 — Gain on sale of equity interest in naviHealth (1.68) — Transitional tax benefit, net (0.01) 0.03 Non-GAAP diluted EPS (1) $ 5.45 $ 5.28 3% The sum of the components and certain computations may reflect rounding adjustments. (1) Diluted earnings/(loss) per share attributable to Cardinal Health, Inc. ("diluted EPS" or "diluted loss per share") (2) The reconciling items are presented within this table net of tax. See quantification of tax effect of each reconciling item in our GAAP to Non-GAAP Reconciliations in the "Explanation and Reconciliation of Non-GAAP Financial Measures." (3) For fiscal 2020, GAAP diluted loss per share attributable to Cardinal Health, Inc. and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 293 million common shares, which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the period. Fiscal 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 million common shares, which includes potentially dilutive shares. Cardinal Health | Fiscal 2020 Form 10-K 4


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    MD&A Results of Operations We had a $12.61 GAAP diluted loss per share attributable to Cardinal Health, Inc. ("GAAP diluted EPS") during fiscal 2020 due to the charge we recognized for the estimated liability associated with lawsuits and claims brought against us by states and political subdivisions relating to the distribution of prescription opioid pain medications. The charge had a $(17.54) per share after tax impact on GAAP diluted EPS. GAAP diluted EPS during fiscal 2020 was favorably impacted by a $1.68 per share gain from the sale of the remainder of our equity interest in naviHealth described further in Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 2 of the "Notes to Consolidated Financial Statements". GAAP diluted EPS during fiscal 2019 included a $1.26 per share gain from the divestiture of our majority interest in naviHealth. Fiscal 2020 non-GAAP diluted EPS increased 3% to $5.45. This increase was primarily due to the factors discussed above impacting non- GAAP operating earnings, as well as a lower share count as a result of share repurchases and lower interest expense due to less debt outstanding and lower interest rates. The year-over-year comparison was unfavorably impacted by a higher effective tax rate due to the benefit in the prior-year from discrete tax items, largely related to international legal entity changes. Cash and Equivalents Our cash and equivalents balance was $2.8 billion at June 30, 2020 compared to $2.5 billion at June 30, 2019. The increase in cash during fiscal 2020 was due to net cash provided by operating activities of $2.0 billion and $886 million of net cash proceeds from the sale of investments, offset by cash deployed of $1.4 billion for debt repayments, $569 million for dividends and $350 million for share repurchases. 5 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Results of Operations Significant Developments in Fiscal 2020 and Trends COVID-19 The COVID-19 pandemic continues to severely impact the U.S. and global economies. Our businesses have been impacted in a variety of ways beginning in the third quarter of fiscal 2020, as discussed in the following paragraphs and under “Results of Operations.” We estimate that the COVID-19 pandemic had a net negative impact to operating earnings/(loss) of approximately $100 million in fiscal 2020. Within our manufacturing and distribution facilities, we have implemented sustained protocols designed to protect the safety of our employees and maintain continuity of our operations, and have generally continued to operate our distribution and manufacturing facilities in the ordinary course of business. Additionally, in line with various governmental recommendations to reduce large gatherings and practice social distancing, we have enabled most office-based employees to work remotely. These measures have created additional burdens on our infrastructure and information technology systems. Furthermore, if a significant number of our employees are unable to perform their duties for a period of time, we may experience difficulties in operating one or more of our facilities which could adversely impact our financial results. Since the third quarter of fiscal 2020, our Medical segment has seen dramatically increased demand for certain personal protective equipment (“PPE”), such as masks, gowns and gloves. We manufacture, source and distribute some PPE products and distribute PPE manufactured by others. This increased demand resulted in an increase in sales volume for certain products in fiscal 2020. The cost to manufacture and source certain PPE products has also significantly increased, which had a slight negative impact on our margin for these products in fiscal 2020 and is expected to have a larger negative impact in fiscal 2021. We continue to seek alternate and additional sources for these products and otherwise mitigate cost increases. We also are increasing certain PPE product prices to reflect some of our higher costs and are seeking to modify affected customer contracts. If these efforts are unsuccessful, our margins may be adversely impacted even more significantly. In addition, we could experience decreased sales and customer disputes. Federal, state and local governmental policies and orders and certain private initiatives designed to reduce the transmission of COVID-19 also resulted in, among other things, the cancellation or deferral of many elective medical procedures and some of our customers closing or severely curtailing their operations. As a result, our Medical segment has experienced decreased sales volume (apart from PPE products described above), which had a negative impact on Medical segment profit in fiscal 2020 and which we currently assume will have a negative impact in fiscal 2021. The decrease in elective procedures and physician office visits has also resulted in a significant decrease in sales by our Nuclear and Precision Health Solutions division in our Pharmaceutical segment in fiscal 2020. Fluctuating or decreasing elective procedure volume may have a greater or lesser adverse impact on the sales of these products and services than we anticipate. Our Pharmaceutical Distribution and Specialty Solutions businesses experienced a temporary increase in sales volume during the third quarter of fiscal 2020, which we believe to be related to accelerated purchasing by some customers due to the COVID-19 pandemic and which was largely offset by a decrease in sales volume in the fourth quarter of fiscal 2020. We assume fiscal 2021 Pharmaceutical segment revenue will be negatively impacted by COVID-19, and we are uncertain when sales volume will return to pre-COVID-19 levels. Political, legal or regulatory actions taken in response to the COVID-19 pandemic in certain jurisdictions where we manufacture, source or distribute products have created supply disruptions within both our Medical and, to a lesser extent, our Pharmaceutical segments and are likely to cause additional supply disruptions or shortages in the future. We cannot currently predict the frequency, duration or scope of these governmental actions and supply disruptions. For example, several countries have increased or instituted new restrictions on the export of medical or pharmaceutical products that we distribute or use in our businesses, including key components or raw materials. Additionally, governmental authorities in many countries, including the U.S., are considering enacting legislative or regulatory changes to address the impact of the pandemic, which may restrict or require changes in our operations, increase our costs, or otherwise adversely affect our operations. In March 2020, the U.S enacted the Coronavirus Aid, Relief and Economic Security Act, which provided a variety of benefits for businesses as a result of the COVID-19 pandemic. During fiscal 2020, we received a cash flow benefit related to the deferral of payroll and income tax payments and a small tax benefit from the employee retention credit under this Act. We currently anticipate that the COVID-19 pandemic will have a further negative impact on fiscal 2021 consolidated operating earnings and Medical segment profit. However, we cannot estimate the length or severity of the COVID-19 pandemic or of the related U.S. or global economic consequences on our business and operations, including whether and when historic economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flow, and its impact maybe greater or less than we anticipate. Cardinal Health | Fiscal 2020 Form 10-K 6


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    MD&A Results of Operations Opioid Lawsuits In October 2019, we agreed in principle to a global settlement framework with a leadership group of state attorneys general that is designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions, but not private plaintiffs (the "Settlement Framework"). This Settlement Framework is subject to contingencies and uncertainties as to final terms, but is the basis for our negotiation of definitive terms and documentation. The Settlement Framework includes (1) a cash component, pursuant to which we would pay up to $5.56 billion over eighteen years, (2) development and participation in a program for free or rebated distribution of opioid abuse treatment medications for a period of ten years, and (3) to-be specified industry-wide changes to distributor controlled substance anti-diversion programs. We also agreed, with two other national distributors, to a $215 million settlement with two plaintiff counties. Our portion of that settlement was $66 million, which was paid in January 2020. In connection with these matters, we recorded a total pre-tax charge of $5.63 billion ($5.14 billion after tax) during fiscal year 2020 in litigation (recoveries)/charges, net, in the consolidated statement of earnings/(loss) for the cash component. We accrue for contingencies when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. Moreover, definitive terms for a settlement pursuant to the Settlement Framework continue to be negotiated, and there is no assurance that the necessary parties will agree to a definitive settlement agreement or that the contingencies to any agreement will be satisfied. We regularly review these opioid litigation matters to determine whether our accrual is adequate. The amount of ultimate loss may differ materially from this accrual. See Note 7 of the "Notes to Consolidated Financial Statements" for additional information. Also in connection with these matters, we recorded a tax benefit of $488 million, which is net of unrecognized tax benefits of $469 million, during fiscal 2020, reflecting our current assessment of the estimated future deductibility of the amount that may be paid under the $5.63 billion accrual taken in connection with the opioid litigation. Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination of the technical merits of the position, including resolutions of any related appeals or litigation. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. For tax benefits that do not qualify for recognition, we recognize a liability for unrecognized tax benefits. Our assumptions and estimates around this benefit and uncertain tax position require significant judgment since the definitive settlement terms and documentation, including provisions related to deductibility, under the Settlement Framework have not been negotiated and the U.S. tax law governing deductibility was changed by the U.S. Tax Cuts and Jobs Act (“Tax Act”). We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the Tax Act. Further, it is possible that the tax authorities could challenge our interpretation of the Tax Act or the estimates and assumptions used to assess the future deductibility of these benefits. The actual amount of tax benefit related to uncertain tax positions may differ materially from these estimates. See Note 8 of the “Notes to the Consolidated Financial Statements” for additional information. Gain on Sale of Equity Interest in naviHealth As described further in Note 2 of the "Notes to Consolidated Financial Statements," in May 2020 we sold the remainder of our equity interest in a partnership that owned naviHealth. We recognized a pre-tax gain of $579 million ($493 million after tax) from this disposal in gain on sale of equity interest in naviHealth in our consolidated statements of earnings/(loss). Other Trends In addition to the trends and uncertainties described above under the caption Significant Developments in Fiscal 2020 and Trends, the performance of our Pharmaceutical segment generics program, which includes generic pharmaceutical customer pricing changes and Red Oak Sourcing, adversely impacted Pharmaceutical segment profit in fiscal 2019 and fiscal 2018; however, in fiscal 2020 our generics program had a slightly favorable impact on Pharmaceutical segment profit. As is generally the case, the frequency, timing, magnitude and profit impact of generic pharmaceutical customer pricing changes, customer contract renewals, and branded and generic pharmaceutical manufacturer pricing changes remain uncertain and their impact on Pharmaceutical segment profit and consolidated operating earnings in fiscal 2021 could be more or less than we expect. 7 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Results of Operations Results of Operations Revenue Revenue (in millions) 2020 2019 Change Pharmaceutical $ 137,495 $ 129,917 6% Medical 15,444 15,633 (1)% Total segment revenue 152,939 145,550 5% Corporate (17) (16) N.M. Total revenue $ 152,922 $ 145,534 5% Fiscal 2020 Compared to Fiscal 2019 Pharmaceutical Segment Fiscal 2020 Pharmaceutical segment revenue grew primarily due to sales growth from pharmaceutical distribution and specialty solutions customers, which together increased revenue by $7.6 billion. Medical Segment Fiscal 2020 Medical segment revenue decreased due to the adverse impact of the COVID-19 pandemic, partially offset by sales growth from Cardinal Health at-Home Solutions. Cost of Products Sold Cost of products sold for fiscal 2020 increased $7.4 billion (5 percent) due to the factors affecting the changes in revenue and gross margin. Cardinal Health | Fiscal 2020 Form 10-K 8


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    MD&A Results of Operations Gross Margin Consolidated Gross Margin (in millions) 2020 2019 Change Gross margin $ 6,868 $ 6,834 —% Fiscal 2020 Compared to Fiscal 2019 Fiscal 2020 consolidated gross margin is essentially flat with growth from pharmaceutical specialty solutions and higher contribution from branded pharmaceutical sales, mostly offset by the adverse impact of Pharmaceutical segment customer contract renewals. Gross margin comparison to the prior year benefitted from the fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier. Gross margin rate declined during fiscal 2020 mainly due to the adverse impact of pharmaceutical customer contract renewals and changes in pharmaceutical distribution product mix. Distribution, Selling, General and Administrative ("SG&A") Expenses SG&A Expenses (in millions) 2020 2019 Change SG&A expenses $ 4,572 $ 4,480 2% Fiscal 2020 Compared to Fiscal 2019 Fiscal 2020 SG&A expenses increased due to higher costs to support sales growth and a $37 million charge in connection with a voluntary recall for Association for the Advancement of Medical Instrumentation ("AAMI") Level 3 surgical gowns and a voluntary recall and field actions for surgical procedure packs containing affected gowns (together, the "Recalls"), as described further within Note 7 of the "Notes to Consolidated Financial Statements". 9 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Results of Operations Segment Profit We evaluate segment performance based on segment profit, among other measures. See Note 13 of the "Notes to Consolidated Financial Statements" for additional information on segment profit. Segment Profit and Operating Earnings (in millions) 2020 2019 Change Pharmaceutical $ 1,753 $ 1,834 (4)% Medical 663 576 15 % Total segment profit 2,416 2,410 —% Corporate (6,514) (350) N.M. Total consolidated operating earnings $ (4,098) $ 2,060 N.M. Fiscal 2020 Compared to Fiscal 2019 Pharmaceutical Segment Profit Fiscal 2020 Pharmaceutical segment profit decreased largely due to the adverse impact of customer contract renewals, partially offset by higher contribution from our branded pharmaceutical sales mix and growth from specialty solutions. Pharmaceutical segment financial results do not include the $5.63 billion charge associated with the opioid litigation. See Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements" for additional information. Medical Segment Profit Fiscal 2020 Medical segment profit increased largely due to benefits from cost-savings measures and the favorable year-over-year impact of the fiscal 2019 charges related to an exclusive distribution agreement with a Medical segment supplier, partially offset by decreased sales resulting from the COVID-19 pandemic. Medical segment financial results do not include the $85 million charge incurred during fiscal 2020 in connection with the Recalls, as described further within Note 7 of the "Notes to Consolidated Financial Statements". Corporate The changes in Corporate during fiscal 2020 are due to the factors discussed in the Other Components of Consolidated Operating Earnings/ (Loss) section that follows. Cardinal Health | Fiscal 2020 Form 10-K 10


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    MD&A Results of Operations Other Components of Consolidated Operating Earnings/(Loss) In addition to revenue, gross margin, and SG&A expenses discussed previously, consolidated operating earnings/(loss) were impacted by the following: (in millions) 2020 2019 Restructuring and employee severance $ 122 $ 125 Amortization and other acquisition-related costs 524 621 Impairments and (gain)/loss on disposal of assets, net 7 (488) Litigation (recoveries)/charges, net 5,741 36 Restructuring and Employee Severance In fiscal 2020 and 2019, restructuring costs are primarily related to implementation of certain enterprise-wide cost-savings measures. Amortization and Other Acquisition-Related Costs Amortization of acquisition-related intangible assets was $512 million and $531 million for fiscal 2020 and 2019, respectively. Transaction and integration costs associated with the acquisition of the Patient Recovery Business were $7 million and $75 million during fiscal 2020 and 2019, respectively. Impairments and (Gain)/Loss on Disposal of Assets, Net During fiscal 2019, we recognized a pre-tax gain of $508 million related to the divestiture of our majority interest in naviHealth. See also “Gain on Sale of Equity Interest in naviHealth” below with respect to the sale of the remainder of our equity interest in naviHealth in fiscal 2020. Litigation (Recoveries)/Charges, Net During fiscal 2020, we recognized a pre-tax charge of $5.63 billion ($5.14 billion after tax) associated with the opioid litigation. See Significant Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of the "Notes to Consolidated Financial Statements" for additional information. During fiscal 2020 and 2019, we recognized $103 million and $117 million, respectively, of estimated losses and legal defense costs associated with inferior vena cava ("IVC") filter product liability claims. During fiscal 2020 and 2019, we recognized income of $16 million and $94 million, respectively, for recoveries in class action antitrust lawsuits in which we were a class member. Other Components of Earnings/(Loss) Before Income Taxes In addition to the items discussed above, earnings/(loss) before income taxes was impacted by the following: (in millions) 2020 2019 Change Other (income)/expense, net $ (1) $ 15 N.M. Interest expense, net 238 294 (19)% Loss on early extinguishment of debt 16 — N.M. Gain on sale of equity interest in naviHealth (579) — N.M. Interest Expense, Net Fiscal 2020 interest expense decreased from fiscal 2019 primarily due to lower debt outstanding and lower interest rates. Loss On Early Extinguishment Of Debt During fiscal 2020, we recognized a $16 million loss in connection with the redemption and early debt repurchases as described further in Note 6 of the "Notes to Consolidated Financial Statements." Gain on Sale of Equity Interest in naviHealth During fiscal 2020, we recognized a pre-tax gain of $579 million from the sale of our equity interest in a partnership that owned naviHealth, as described further in the Significant Developments in Fiscal 2020 and Trends section of this MD&A and Note 2 of the "Notes to Consolidated Financial Statements." See also “Impairments and (Gain)/Loss on Disposal of Assets, Net” above with respect to the fiscal 2019 sale of our majority interest in naviHealth. 11 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Results of Operations Provision for Income Taxes Generally, fluctuations in the effective tax rate are due to changes in the distribution of income among taxing jurisdictions with differing income tax rates and other reconciling items. A reconciliation of the provision based on the federal statutory income tax rate to our effective income tax rate from continuing operations is as follows (see Note 8 of the "Notes to Consolidated Financial Statements" for additional information): 2020 (1) 2019 (2) Provision at Federal statutory rate 21.0% 21.0% State and local income taxes, net of federal benefit 2.5 0.9 Tax effect of foreign operations — (0.7) Nondeductible/nontaxable items (0.1) 2.5 Tax Act 0.1 (0.8) Change in valuation allowances 1.5 4.5 Foreign tax credits 0.5 (1.0) Legal entity reorganization — (3.6) Opioid litigation (23.2) — Other (0.2) (0.7) Effective income tax rate 2.1% 22.1% (1) The effective income tax rate for fiscal 2020 represents an income tax benefit tax rate. (2) The effective income tax rate for fiscal 2019 represents an income tax expense tax rate. Fiscal 2020 The fiscal 2020 effective income tax rate was impacted by the Settlement Framework, as described further in the Significant Developments in Fiscal 2020 and Trends section in this MD&A. Ongoing Audits We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With few exceptions, we are subject to audit by taxing authorities for fiscal years 2008 through the current fiscal year. Tax laws are complex and subject to varying interpretations. Tax authorities have challenged some of our tax positions, including U.S. Internal Revenue Service ("IRS") challenges to our international transfer pricing for the periods from 2008 to 2014, and it is possible that they will challenge others. These challenges may adversely affect our effective tax rate or tax payments. Cardinal Health | Fiscal 2020 Form 10-K 12


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    MD&A Liquidity and Capital Resources Liquidity and Capital Resources We currently believe that, based on available capital resources (cash on hand and committed credit facilities) and projected operating cash flow, we have adequate capital resources to fund working capital needs; currently anticipated capital expenditures; currently anticipated business growth and expansion; contractual obligations; tax payments; and current and projected debt service requirements, early extinguishment of debt, dividends and share repurchases as well as potential opioid litigation settlement payments associated with the Settlement Framework. If we decide to engage in one or more acquisitions, depending on the size and timing of such transactions, we may need to access capital markets for additional financing. To-date, the COVID-19 pandemic has not resulted in material changes to our liquidity and capital resources and has not impacted our ability to comply with financial commitments. Cash and Equivalents Our cash and equivalents balance was $2.8 billion at June 30, 2020 payments in the regular course of business, as well as fluctuating compared to $2.5 billion at June 30, 2019. The increase in cash working capital needs driven by customer and product mix. during fiscal 2020 was due to net cash provided by operating activities The cash and equivalents balance at June 30, 2020 included $476 of $2.0 billion, which reflects increases to working capital associated million of cash and equivalents held by subsidiaries outside of the with the timing of payments to vendors, and $886 million of net cash United States. proceeds from the sale of investments, substantially all of which was In June 2020, we returned $140 million of cash held by foreign related to the sale of our equity interest in naviHealth, offset by cash subsidiaries to the U.S. deployed of $1.4 billion for debt repayments, $569 million for dividends and $350 million for share repurchases. At June 30, 2020, As of June 30, 2020, foreign earnings of approximately $800 million our cash and equivalents were held in cash depository accounts with are considered indefinitely reinvested for working capital and other major banks or invested in high quality, short-term liquid investments. offshore investment needs. The computation of tax required if those earnings are repatriated is not practicable. For amounts not During fiscal 2019, our cash and equivalents increased by $700 considered indefinitely reinvested, we have recorded an immaterial million due to $2.7 billion of net cash provided by operating activities amount of income tax expense in our financial statements in fiscal and $737 million of net cash proceeds from the sale of our majority 2020. interest in naviHealth, offset by $1.1 billion paid for debt repayments, $600 million paid for share repurchases, $577 million paid in dividends and $328 million paid for capital expenditures. Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, payments to vendors and tax Other Financing Arrangements and Financial Instruments Credit Facilities and Commercial Paper Long-Term Obligations In addition to cash and equivalents and operating cash flow, other At June 30, 2020, we had total long-term obligations, including the sources of liquidity at June 30, 2020 include a $2.0 billion commercial current portion and other short-term borrowings of $6.8 billion. paper program, backed by a $2.0 billion revolving credit facility. We In June 2020, we redeemed $500 million aggregate principle amount also have a $1.0 billion committed receivables sales facility. At of 4.625% Notes due December 2020 at a redemption price equal June 30, 2020, we had no amounts outstanding under our to 100% of the principal amount and accrued but unpaid interest, commercial paper program, revolving credit facility or our committed plus the make-whole premium applicable to the notes. In connection receivables sales facility. During fiscal 2020, under our commercial with the redemption, we recorded a $7 million loss on early paper program and our committed receivables program, we had extinguishment of debt. maximum combined total daily amounts outstanding of $1.7 In November 2019, we repaid the full principal of the 2.4% Notes due billion and an average combined daily amount outstanding of $195 2019 at maturity for $450 million. million. During fiscal 2020, we also early repurchased $247 million of Our revolving credit and committed receivables sales facilities require the 2.616% Notes due 2022, $11 million of the 3.2% Notes due us to maintain, as of the end of every fiscal quarter through December 2022, $20 million of the Floating Rate Notes due 2022, $104 2020, a consolidated net leverage ratio of no more than 4.00-to-1. million of the 3.41% Notes due 2027, $6 million of the 4.6% Notes The maximum permitted ratio will reduce to 3.75-to-1 in March 2021 due 2043, $5 million of the 4.9% Notes due 2045, and $35 million of and as of the end of every quarter thereafter. As of June 30, 2020, the 4.368% Notes due 2047. In connection with these early debt we were in compliance with this financial covenant. 13 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Liquidity and Capital Resources repurchases, we recognized a $9 million loss on early We also use interest rate swaps to protect the value of our debt and extinguishment of debt. use foreign currency forward contracts to protect the value of our In fiscal 2019, we repaid $1.0 billion of 1.948% notes at maturity and existing and forecasted foreign currency assets and liabilities. See repurchased a total of $100 million of notes due in 2022 and 2027. the "Quantitative and Qualitative Disclosures About Market Risk" The loss on early extinguishment of debt from the fiscal 2019 early section as well as Note 1 and Note 10 of the “Notes to Consolidated repurchases was immaterial. Financial Statements” for information regarding the use of financial instruments and derivatives as well as foreign currency, interest rate The redemption and repurchases were paid for with available cash and commodity exposures. and other short-term borrowings. Risk Management We use interest rate swaps, foreign currency contracts and commodity contracts to manage our exposure to cash flow variability. Capital Deployment Opioid Settlement Framework Dividends In October 2019, we agreed in principle to a Settlement Framework During fiscal 2020, we paid quarterly dividends totaling $1.92 per which includes a cash component, pursuant to which we would pay share, an increase of 1 percent from fiscal 2019. up to $5.56 billion over eighteen years. If a definitive agreement is On May 11, 2020, our Board of Directors approved a quarterly reached, and subject to participation by states and political dividend of $0.4859 per share, or $1.94 per share on an annualized subdivisions, we expect payment amounts under the Settlement basis, which was paid on July 15, 2020 to shareholders of record on Framework to be spread through the 18-year period. We cannot July 1, 2020. currently predict when those payments might begin, and it is possible On August 5, 2020, our Board of Directors approved a quarterly that they may ultimately be made over a different time period, or not dividend of $0.4859 per share, payable on October 15, 2020 to at all. See Significant Developments in Fiscal 2020 and Trends shareholders of record on October 1, 2020. section in this MD&A for additional information. Share Repurchases Capital Expenditures During fiscal 2020 and 2019, we repurchased $350 million and $600 Capital expenditures during fiscal 2020 and 2019 were $375 million million, respectively, of our common shares. We funded the and $328 million, respectively. repurchases with available cash and short-term borrowing. See Note We expect capital expenditures in fiscal 2021 to be between $400 11 of the "Notes to Consolidated Financial Statements" for additional million and $450 million and to be primarily for information technology information. At June 30, 2020, we had $943 million authorized for and infrastructure projects. share repurchases remaining under all programs. Cardinal Health | Fiscal 2020 Form 10-K 14


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    MD&A Other Contractual Obligations At June 30, 2020, our contractual obligations, including estimated minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation payments due by period, were as follows: amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur. Purchase orders 2022 to 2024 to There- and authorizations to purchase that involve no firm commitment from either (in millions) 2021 2023 2025 after Total party are excluded from the above table. In addition, contracts that can be unilaterally canceled with no termination fee or with proper notice are excluded Long-term debt and short- from our total purchase obligations except for the amount of the termination fee term borrowings (1) $ — $ 1,967 $ 1,222 $ 3,552 $ 6,741 or the minimum amount of goods that must be purchased during the requisite notice period. Purchase obligations and other payments also includes quarterly Interest on long-term debt 226 411 336 1,671 2,644 payments of $45.6 million that we are required to pay CVS Health Corporation Finance lease obligations ("CVS") in connection with Red Oak Sourcing and will be in place for the (2) 10 18 6 2 36 remaining five years of the agreement. See Note 7 of the “Notes to Consolidated Operating lease Financial Statements” for additional information. obligations (3) 117 168 95 123 503 (5) Long-term liabilities, such as unrecognized tax benefits, deferred taxes and other tax liabilities, have been excluded from the above table due to the inherent Purchase obligations and uncertainty of the underlying tax positions or because of the inability to other payments (4) 623 481 210 36 1,350 reasonably estimate the timing of any cash outflows. See Note 8 of the "Notes Total contractual to Consolidated Financial Statements" for further discussion of income taxes. obligations (5) (6) $ 976 $ 3,045 $ 1,869 $ 5,384 $ 11,274 (6) Total contractual obligations do not include payments that may be made in connection with the opioid litigation, as further described in Significant (1) Represents maturities of our long-term debt obligations and other short-term Developments in Fiscal 2020 and Trends section in this MD&A and Note 7 of borrowings excluding finance lease obligations described below. See Note 6 of the "Notes to Consolidated Financial Statements." If a definitive agreement is the “Notes to Consolidated Financial Statements” for further information. reached, and subject to participation by states and political subdivisions, we (2) Represents minimum finance lease obligations included within long-term expect payment amounts under the Settlement Framework to be spread through obligations in our consolidated balance sheet and further described in Note 5 the 18-year period. We cannot currently predict when those payments might of the “Notes to Consolidated Financial Statements.” begin, and it is possible that they may ultimately be made over a different time (3) Represents minimum operating lease obligations included within other accrued period, or not at all. See Note 7 of the “Notes to Consolidated Financial liabilities and deferred income taxes and other liabilities in our consolidated Statements” for additional information. balance sheet and further described in Note 5 of the “Notes to Consolidated Financial Statements.” (4) A purchase obligation is defined as an agreement to purchase goods or services that is legally enforceable and specifies all significant terms, including fixed or Off-Balance Sheet Arrangements We had no significant "off-balance sheet arrangements" at June 30, 2020, as that term is defined in the SEC rules. Recent Financial Accounting Standards See Note 1 of the “Notes to Consolidated Financial Statements” for a discussion of recent financial accounting standards. 15 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Critical Accounting Policies and Sensitive Accounting Estimates Critical Accounting Policies and Sensitive Accounting Estimates Critical accounting policies are those accounting policies that (i) can have a significant impact on our financial condition and results of operations and (ii) require the use of complex and subjective estimates based upon past experience and management’s judgment. Other people applying reasonable judgment to the same facts and circumstances could develop different estimates. Because estimates are inherently uncertain, actual results may differ. In this section, we describe the significant policies applied in preparing our consolidated financial statements that management believes are the most dependent on estimates and assumptions. For further discussion of accounting policies for items within this section and of additional accounting policies, see Note 1 of the “Notes to Consolidated Financial Statements.” The COVID-19 pandemic has severely impacted, and continues to severely impact the U.S. and global economies and, beginning in the third quarter of fiscal 2020, our businesses have been impacted in a variety of ways. We cannot estimate the length or severity of the COVID-19 pandemic or the related U.S. and global economic consequences on our business and operations, including whether and when normal economic and operating conditions will resume or the extent to which the disruption may impact our business, financial position, results of operations or cash flow. Our estimates, judgments and assumptions related to the COVID-19 pandemic could ultimately differ over time. Allowance for Doubtful Accounts The allowance for doubtful accounts includes general and specific on trade and other receivables using an "expected credit loss" model reserves. We determine our allowance for doubtful accounts by that considers historical experience, current conditions and reviewing accounts receivable aging, industry trends, customer reasonable supportable forecasts is effective for us in the first quarter financial strength and credit standing, historical write-off trends and of fiscal 2021. We have evaluated the impact of adopting this new payment history. We regularly evaluate how changes in economic guidance and have determined it will not have a material impact on conditions, including the economic impact of the COVID-19 our consolidated financial statements or disclosures. The following pandemic, may affect credit risks. See Note 1 of the “Notes to table presents information regarding our allowance for doubtful Consolidated Financial Statements” for further information on our accounts over the past three fiscal years: policy for Receivables and Allowance for Doubtful Accounts. (in millions, except percentages) 2020 2019 2018 A hypothetical 0.1 percent increase or decrease in the reserve as a Allowance for doubtful accounts at beginning of percentage of trade receivables at June 30, 2020, would result in an period $ 193 $ 139 $ 137 increase or decrease in bad debt expense of $8 million. We believe Charged to costs and expenses 140 141 114 the reserve maintained and expenses recorded in fiscal 2020 are Reduction to allowance for customer appropriate. deductions and write-offs (127) (87) (111) At this time, we are not aware of any analytical findings or customer Allowance for doubtful accounts at end of period $ 206 $ 193 $ 139 issues that are likely to lead to a significant future increase in the Allowance as a percentage of customer receivables 2.5% 2.3% 1.8% allowance for doubtful accounts as a percentage of revenue. In Allowance as a percentage of revenue 0.13% 0.13% 0.10% addition, the Financial Accounting Standards Board’s amended The sum of the components may not equal the total due to rounding. accounting guidance that requires entities to measure credit losses Inventories A substantial portion of our inventories (56 percent at both June 30, Using LIFO, if there is a decrease in inventory levels that have 2020 and 2019) are valued at the lower of cost, using the last-in, first- experienced pharmaceutical price appreciation, the result generally out ("LIFO") method, or market. These are primarily merchandise will be a decrease in future cost of products sold as our older inventory inventories at the core pharmaceutical distribution facilities within our is held at a lower cost. Conversely, if there is a decrease in inventory Pharmaceutical segment (“distribution facilities”). The LIFO impact levels that have experienced a pharmaceutical price decline, the on the consolidated statements of earnings/(loss) depends on result generally will be an increase in future cost of products sold as pharmaceutical manufacturer price appreciation or deflation and our our older inventory is held at a higher cost. fiscal year-end inventory levels, which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end. Historically, prices for branded pharmaceuticals have generally tended to rise, resulting in an increase in cost of products sold, whereas prices for generic pharmaceuticals generally tend to decline, resulting in a decrease in cost of products sold. See Note 1 of the “Notes to Consolidated Financial Statements” for further information on our policy for Inventories. Cardinal Health | Fiscal 2020 Form 10-K 16


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    MD&A Critical Accounting Policies and Sensitive Accounting Estimates We believe that the average cost method of inventory valuation the estimated selling prices in the ordinary course of business, less provides a reasonable approximation of the current cost of replacing reasonably predictable costs of completion, disposal and inventory within these distribution facilities. As such, the LIFO reserve transportation. Inventories presented in the consolidated balance is the difference between (a) inventory at the lower of LIFO cost or sheets are net of reserves for excess and obsolete inventory which market and (b) inventory at replacement cost determined using the were $155 million and $171 million at June 30, 2020 and 2019, average cost method of inventory valuation. At June 30, 2020 and respectively. We reserve for inventory obsolescence using estimates 2019, respectively, inventories valued at LIFO cost were $411 million based on historical experience, historical and projected sales trends, and $230 million higher than the average cost value. We do not record specific categories of inventory, age and expiration dates of on-hand inventories in excess of replacement cost. As such, we did not write- inventory and manufacturer return policies. up the value of our inventory from average cost to LIFO cost at If actual conditions are less favorable than our assumptions, June 30, 2020 or 2019. additional inventory reserves may be required. Our remaining inventory that is not valued at the lower of LIFO cost or market is stated at the lower of cost, using the first-in, first-out method, or net realizable value. Net realizable value is defined as Goodwill and Other Indefinite-Lived Intangible Assets Purchased goodwill and intangible assets with indefinite lives are internally-developed forecasts. Under the market-based guideline tested for impairment annually or when indicators of impairment exist. public company method, we determine fair value by comparing our Goodwill impairment testing involves a comparison of the estimated reporting units to similar businesses or guideline companies whose fair value of reporting units to the respective carrying amount, which securities are actively traded in public markets. We also use the may be performed utilizing either a qualitative or quantitative market-based guideline transaction method to determine fair value assessment. Qualitative factors are first assessed to determine if it based on pricing multiples derived from the sale of companies that is more likely than not that the fair value of a reporting unit is less are similar to our reporting units. than its carrying amount. There is an option to bypass the qualitative Estimating the fair value of reporting units requires the use of assessment for any reporting unit in any period and proceed directly estimates and significant judgments that are based on a number of to performing the quantitative goodwill impairment test. We have factors including actual operating results. The use of alternate elected to bypass the qualitative assessment for the annual goodwill estimates and assumptions, changes in the industry or peer groups, impairment test in the current year. The quantitative goodwill or changes in weightings assigned to the discounted cash flow impairment test involves a comparison of the estimated fair value of method, guideline public company method or guideline transaction the reporting unit to the respective carrying amount. A reporting unit method could materially affect the determination of fair value for each is defined as an operating segment or one level below an operating reporting unit and potentially result in goodwill impairment. If a segment (also known as a component). reporting unit fails to achieve expected earnings or operating cash We have two operating segments, which are the same as our flow, or otherwise fails to meet current financial plans, or if there were reportable segments: Pharmaceutical and Medical. These operating changes to any other key assumptions used in the tests, the reporting segments are comprised of divisions (which are components), for unit could incur a goodwill impairment in a future period. which discrete financial information is available. Components are We performed annual impairment testing in fiscal 2020, 2019 and aggregated into reporting units for purposes of goodwill impairment 2018 and, with the exception of our Medical Unit in fiscal 2018, testing to the extent that they share similar economic characteristics. concluded that there were no impairments of goodwill as the Our reporting units are: Pharmaceutical operating segment estimated fair value of each reporting unit exceeded its carrying value. (excluding our Nuclear and Precision Health Solutions division); For our annual impairment test in fiscal 2020, the fair value of our Nuclear and Precision Health Solutions division; Medical operating Medical Unit exceeded its carrying value of $10.1 billion by segment (excluding our Cardinal Health at-Home Solutions division) approximately 7 percent. For this test, we used a discount rate of 8.5 (“Medical Unit”); and Cardinal Health at-Home Solutions division. percent and a terminal growth rate of 2 percent. Additionally, we Goodwill impairment testing involves judgment, including the assigned a weighting of 80 percent to the discounted cash flow identification of reporting units, qualitative evaluation of events and method, 10 percent to the guideline public company method, and 10 circumstances to determine if it is more likely than not that an percent to the guideline transaction method. The goodwill balance impairment exists and, if necessary, the estimation of the fair value for our Medical Unit was $4.2 billion at June 30, 2020. of the applicable reporting unit. Adverse changes in key assumptions, such as assumptions related Our determination of estimated fair value of our reporting units is to the COVID-19 pandemic which could cause a decrease in future based on a combination of the income-based and market-based cash flows; an increase in the discount rate; or a decrease in the approaches (using discount rates ranging from 8.5 percent to 10.5 terminal growth rate, among other things, could result in a goodwill percent). We use discount rates that are commensurate with the risks impairment for the Medical Unit. For example, if we were to use a and uncertainty inherent in the respective reporting units and in our 17 Cardinal Health | Fiscal 2020 Form 10-K


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    MD&A Critical Accounting Policies and Sensitive Accounting Estimates discount rate of 9.5 percent, the carrying value would have exceeded The impairment test for indefinite-lived intangibles other than goodwill the fair value for our Medical Unit by 5.0 percent for fiscal 2020. (primarily IPR&D) involves first assessing qualitative factors to Similarly, if we were to use a terminal growth rate of 0.5 percent, the determine if it is more likely than not that the fair value of the indefinite- carrying value would have exceed the fair value for our Medical Unit lived intangible asset is less than its carrying amount. If so, then a by less than 1.0 percent for fiscal 2020. For any of our other reporting quantitative test is performed to compare the estimated fair value of units, the fair value would not have been less than the carrying amount the indefinite-lived intangible asset to the respective asset's carrying for fiscal 2020 if we increased the discount rate by 1.0 percentage amount. Our qualitative evaluation requires the use of estimates and point or decreased the terminal growth rate by 1.0 percentage point. significant judgments and considers the weight of evidence and As discussed further in Note 1 of the "Notes to Consolidated Financial significance of all identified events and circumstances and most Statements," during the fourth quarter of fiscal 2018 we recognized relevant drivers of fair value, both positive and negative, in a $1.4 billion goodwill impairment charge related to our Medical Unit, determining whether it is more likely than not that the fair value of which is included in impairments and (gain)/loss on disposal of assets the indefinite-lived intangible asset is less than its carrying amount. in our consolidated statements of earnings/(loss). There was no tax See Note 1 of "Notes to Consolidated Financial Statements" for benefit related to the goodwill impairment charge. additional information regarding goodwill and other intangible assets. Loss Contingencies and Self-Insurance We accrue for contingencies related to disputes, litigation and Examples of such contingencies include various lawsuits related to regulatory matters if it is probable that a liability has been incurred the distribution of prescription opioid pain medications and the Cordis and the amount of the loss can be reasonably estimated. Because IVC filter lawsuits. these matters are inherently unpredictable and unfavorable In connection with the opioid litigation as described further in the developments or outcomes can occur, assessing contingencies is Significant Developments in Fiscal 2020 and Trends section in this highly subjective and requires judgments about future events. MD&A, we recorded a pre-tax charge of $5.63 billion ($5.14 We also self-insure for employee healthcare, certain product liability billion after tax) during fiscal 2020. Definitive terms of a settlement matters, auto liability, property and workers' compensation and under the Settlement Framework continue to be negotiated, and there maintain insurance for individual losses exceeding certain limits when is no assurance that the necessary parties will agree to a definitive available. settlement agreement or that the contingencies to any agreement Self-insurance accruals include an estimate for expected settlements will be satisfied. on pending claims, defense costs, administrative fees, claims We develop and periodically update reserve estimates for the Cordis adjustment costs and an estimate for claims incurred but not reported. inferior vena cava ("Cordis IVC") claims, including those received to For certain types of exposures, we develop the estimate of expected date and expected to be received in the future and related costs. To ultimate costs to settle each claim based on specific information project future Cordis IVC claim costs, we use a methodology based related to each claim if available. Other estimates are based on an largely on recent experience, including claim filing rates, estimated assessment of outstanding claims, historical analysis and current indemnity severity by claim type, sales data, implant and injury to payment trends. For claims incurred but not reported, the liabilities report lag patterns and estimated defense costs. are calculated and derived in accordance with generally accepted The amount of loss may differ materially from these estimates. See actuarial practices or using an estimated lag period. Note 7 of the “Notes to Consolidated Financial Statements” for We regularly review contingencies and self-insurance accruals to additional information regarding loss contingencies and product determine whether our accruals and related disclosures are liability lawsuits. adequate. Any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Cardinal Health | Fiscal 2020 Form 10-K 18


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    MD&A Critical Accounting Policies and Sensitive Accounting Estimates Provision for Income Taxes We account for income taxes using the asset and liability method. could challenge our interpretation of the Tax Act or the estimates and Deferred tax assets and liabilities are measured using enacted tax assumptions used to assess the future deductibility of these benefits. rates in the respective jurisdictions in which we operate. Our income The actual amount of the tax benefit related to uncertain tax positions tax expense, deferred income tax assets and liabilities, and may differ materially from these estimates. See Note 8 for more unrecognized tax benefits reflect management’s assessment of information regarding these matters. estimated future taxes to be paid on items in the consolidated financial We file income tax returns in the U.S. federal jurisdiction, various statements. U.S. state jurisdictions and various foreign jurisdictions. With few The following table presents information about our tax position at exceptions, we are subject to audit by taxing authorities for fiscal June 30: years 2008 through the current fiscal year. Tax laws are complex and subject to varying interpretations. Tax authorities have challenged (in millions) 2020 2019 some of our tax positions, including IRS challenges to our Total deferred income tax assets (1) $ 1,412 $ 864 international transfer pricing for the periods from 2008 to 2014, and Valuation allowance for deferred income tax assets (2) (470) (542) it is possible that they will challenge others. These challenges may Net deferred income tax assets 942 322 adversely affect our effective tax rate or tax payments. Total deferred income tax liabilities (2,161) (2,035) Our assumptions and estimates around uncertain tax positions Net deferred income tax liability $ (1,219) $ (1,713) require significant judgment; the actual amount of tax benefit related (1) Total deferred income tax assets included $589 million and $621 million of loss to uncertain tax positions may differ from these estimates. See Note and tax credit carryforwards at June 30, 2020 and 2019, respectively. 8 of the “Notes to Consolidated Financial Statements” for additional (2) The valuation allowance primarily relates to federal, state and international loss information regarding unrecognized tax benefits. and credit carryforwards for which the ultimate realization of future benefits is We believe that our estimates for the valuation allowances against uncertain. deferred tax assets and unrecognized tax benefits are appropriate Expiring or unusable loss and credit carryforwards and the required based on current facts and circumstances. The amount we ultimately valuation allowances are adjusted quarterly when it is more likely pay when matters are resolved may differ from the amounts accrued. than not that at least a portion of the respective deferred tax assets Changes in our current estimates due to unanticipated market will not be realized. After applying the valuation allowances, we do conditions, tax law changes or other factors could have a material not anticipate any limitations on our use of any of the other net effect on our ability to utilize deferred tax assets. For a further deferred income tax assets described above. We operate in a discussion on Provision for Income Taxes, see Note 8 of the “Notes complex multinational tax environment and are subject to tax treaty to the Consolidated Financial Statements.” arrangements and transfer pricing guidelines for intercompany The calculation of our tax liabilities includes estimates for transactions that are subject to interpretation. Uncertainty in a tax uncertainties in the application of broad and complex changes to the position may arise as tax laws are subject to interpretation. U.S. tax code as per the Tax Act as enacted by the United States Tax benefits from uncertain tax positions are recognized when it is government on December 22, 2017. We have made reasonable more likely than not that the position will be sustained upon estimates and recorded amounts based on management judgment examination of the technical merits of the position, including and our current understanding of the Tax Act which is subject to further resolutions of any related appeals or litigation. The amount interpretation by the Internal Revenue Service ("IRS"). See Note 8 recognized is measured as the largest amount of tax benefit that is of the “Notes to Consolidated Financial Statements” for additional greater than 50 percent likely of being realized upon settlement. For information regarding the Tax Act. tax benefits that do not qualify for recognition, we recognize a liability for unrecognized tax benefits. In connection with the $5.63 billion pre-tax charge for the opioid litigation, during fiscal year 2020, we recorded a tax benefit of $488 million, which is net of unrecognized tax benefits of $469 million, reflecting our current assessment of the estimated future deductibility of the amount that may be paid. We have made reasonable estimates and recorded amounts based on management's judgment and our current understanding of the Tax Act; however, these estimates require significant judgment since the definitive settlement terms and documentation, including provisions related to deductibility, under the Settlement Framework have not been negotiated and the U.S. tax law governing deductibility was changed by the U.S. Tax Cuts and Jobs Act ("Tax Act"). Further, it is possible that the tax authorities 19 Cardinal Health | Fiscal 2020 Form 10-K


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    Explanation and Reconciliation of Non-GAAP Financial Measures Explanation and Reconciliation of Non-GAAP Financial Measures This report, including the "Fiscal 2020 Overview" section within MD&A, contains financial measures that are not calculated in accordance with GAAP. In addition to analyzing our business based on financial information prepared in accordance with GAAP, we use these non-GAAP financial measures internally to evaluate our performance, engage in financial and operational planning, and determine incentive compensation because we believe that these measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We provide these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results on a year-over-year basis and in comparing our performance to that of our competitors. However, the non-GAAP financial measures that we use may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies. The non-GAAP financial measures disclosed by us should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth below should be carefully evaluated. Exclusions from Non-GAAP Financial Measures Management believes it is useful to exclude the following items from the non-GAAP measures presented in this report for its own and for investors’ assessment of the business for the reasons identified below: LIFO charges and credits are excluded because the factors that drive last-in first-out ("LIFO") inventory charges or credits, such as pharmaceutical manufacturer price appreciation or deflation and year-end inventory levels (which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end), are largely out of our control and cannot be accurately predicted. The exclusion of LIFO charges and credits from non-GAAP metrics facilitates comparison of our current financial results to our historical financial results and to our peer group companies’ financial results. We did not recognize any LIFO charges or credits during the periods presented. Surgical gown recall costs includes inventory write-offs and certain remediation and supply disruption costs arising from the January 2020 recall of select Association for the Advancement of Medical Instrumentation ("AAMI") Level 3 surgical gowns and voluntary field actions (a recall of some packs and a corrective action allowing overlabeling of other packs) for Presource Procedure Packs containing affected gowns. We have excluded these costs from our non-GAAP metrics to allow investors to better understand the underlying operating results of the business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies’ financial results. State opioid assessments related to prior fiscal years is the portion of state assessments for prescription opioid medications that were sold or distributed in periods prior to the fiscal year of the initial assessment. This portion is excluded from non-GAAP financial measures because it is retrospectively applied to sales in prior fiscal years and inclusion would obscure analysis of the current fiscal year results of our underlying, ongoing business. Additionally, while states' laws may require us to make payments on an ongoing basis, the portion of the assessment related to sales in prior periods are contemplated to be one-time, nonrecurring items. Reversals of these accruals have occurred when certain assessments were found by a Court unconstitutional. Restructuring and employee severance costs are excluded because they are not part of the ongoing operations of our underlying business. Amortization and other acquisition-related costs, which include transaction costs, integration costs, and changes in the fair value of contingent consideration obligations, are excluded because they are not part of the ongoing operations of our underlying business and to facilitate comparison of our current financial results to our historical financial results and to our peer group companies' financial results. Additionally, costs for amortization of acquisition-related intangible assets are non-cash amounts, which are variable in amount and frequency and are significantly impacted by the timing and size of acquisitions, so their exclusion facilitates comparison of historical, current and forecasted financial results. We also exclude other acquisition-related costs, which are directly related to an acquisition but do not meet the criteria to be recognized on the acquired entity’s initial balance sheet as part of the purchase price allocation. These costs are also significantly impacted by the timing, complexity and size of acquisitions. Impairments and gain or loss on disposal of assets are excluded because they do not occur in or reflect the ordinary course of our ongoing business operations and are inherently unpredictable in timing and amount, and in the case of impairments, are non-cash amounts, so their exclusion facilitates comparison of historical, current and forecasted financial results. Litigation recoveries or charges, net are excluded because they often relate to events that may have occurred in prior or multiple periods, do not occur in or reflect the ordinary course of our business and are inherently unpredictable in timing and amount. Cardinal Health | Fiscal 2020 Form 10-K 20


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    Explanation and Reconciliation of Non-GAAP Financial Measures Loss on early extinguishment of debt is excluded because it does not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of this type of charge is not consistent and is significantly impacted by the timing and size of debt extinguishment transactions. Gain on sale of equity interest in naviHealth was incurred in connection with the sale of our remaining equity interest in naviHealth in fiscal 2020. The equity interest was retained in connection with the initial sale of our majority interest in naviHealth during fiscal 2019. We exclude this significant gain because gains or losses on investments of this magnitude do not typically occur in the normal course of business and are similar in nature to a gain or loss from a divestiture of a majority interest, which we exclude from non- GAAP results. The gain on the initial sale of our majority interest in naviHealth in fiscal 2019 was also excluded from our non-GAAP measures. Transitional tax benefit, net related to the Tax Cuts and Jobs Act is excluded because it results from the one-time impact of a very significant change in the U.S. federal corporate tax rate and, due to the significant size of the benefit, obscures analysis of trends and financial performance. The transitional tax benefit includes the initial estimate and subsequent adjustments for the re- measurement of deferred tax assets and liabilities due to the reduction of the U.S. federal corporate income tax rate and the repatriation tax on undistributed foreign earnings. The tax effect for each of the items listed above, other than the transitional tax benefit item, is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded. The gross, tax and net impact of each item are presented with our GAAP to non-GAAP reconciliations. Definitions Growth rate calculation: growth rates in this report are determined by dividing the difference between current period results and prior period results by prior period results. Non-GAAP operating earnings: operating earnings/(loss) excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, and (7) litigation (recoveries)/charges, net. Non-GAAP earnings before income taxes: earnings/(loss) before income taxes excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth. Non-GAAP net earnings attributable to Cardinal Health, Inc.: net earnings/(loss) attributable to Cardinal Health, Inc. excluding (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition-related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/ charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth, each net of tax, and (10) transitional tax benefit, net. Non-GAAP effective tax rate: provision for/(benefit from) income taxes adjusted for (1) LIFO charges/(credits), (2) surgical gown recall costs, (3) state opioid assessment related to prior fiscal years, (4) restructuring and employee severance, (5) amortization and other acquisition- related costs, (6) impairments and (gain)/loss on disposal of assets, (7) litigation (recoveries)/charges, net, (8) loss on early extinguishment of debt and (9) gain on sale of equity interest in naviHealth, each net of tax, and (10) transitional tax benefit, net divided by (earnings before income taxes adjusted for the first nine items). Non-GAAP diluted earnings per share attributable to Cardinal Health, Inc.: non-GAAP net earnings attributable to Cardinal Health, Inc. divided by diluted weighted-average shares outstanding. 21 Cardinal Health | Fiscal 2020 Form 10-K


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    Explanation and Reconciliation of Non-GAAP Financial Measures GAAP to Non-GAAP Reconciliations Provision Operating Earnings/ for/ Net Earnings/ (Loss) (Benefit Earnings/ Diluted Operating (Loss) Before From) Net (Loss)1 EPS1 Earnings/ Growth Income Income Earnings/ Growth Effective Diluted Growth (in millions, except per common share amounts) (Loss) Rate Taxes Taxes (Loss)1 Rate Tax Rate EPS1.2 Rate Fiscal Year 2020 GAAP $ (4,098) N.M. $ (3,772) $ (79) $ (3,696) N.M. 2.1% $ (12.61) N.M. Surgical gown recalls costs 85 85 22 63 0.22 State opioid assessment related to prior fiscal years 3 3 1 2 0.01 Restructuring and employee severance 122 122 29 93 0.31 Amortization and other acquisition-related costs 524 524 130 394 1.34 Impairments and (gain)/loss on disposal of assets 7 7 2 5 0.02 Litigation (recoveries)/charges, net3 5,741 5,741 514 5,227 17.84 Loss on early extinguishment of debt — 16 4 12 0.04 Gain on sale of equity interest in naviHealth — (579) (86) (493) (1.68) Transitional tax benefit, net4 — — 2 (2) (0.01) Non-GAAP $ 2,384 1% $ 2,147 $ 539 $ 1,605 1% 25.1% $ 5.45 3% Fiscal Year 2019 GAAP $ 2,060 N.M. $ 1,751 $ 386 $ 1,363 N.M. 22.1% $ 4.53 N.M. Restructuring and employee severance 125 125 32 93 0.31 Amortization and other acquisition-related costs 621 621 148 473 1.57 Impairments and (gain)/loss on disposal of assets5 (488) (488) (113) (375) (1.25) Litigation (recoveries)/charges, net 36 36 10 26 0.09 Transitional tax benefit, net4 — — (9) 9 0.03 Non-GAAP $ 2,353 (9)% $ 2,044 $ 453 $ 1,589 1% 22.1% $ 5.28 6% Fiscal Year 2018 GAAP $ 126 (94)% $ (228) $ (487) $ 256 (80)% 213.8% $ 0.81 (80)% Restructuring and employee severance 176 176 25 151 0.48 Amortization and other acquisition-related costs 707 707 176 531 1.69 Impairments and (gain)/loss on disposal of assets6 1,417 1,417 (44) 1,461 4.64 Litigation (recoveries)/charges, net 159 159 48 111 0.35 Loss on early extinguishment of debt — 2 1 1 — Transitional tax benefit, net4 — — 936 (936) (2.97) Non-GAAP $ 2,585 (7)% $ 2,233 $ 655 $ 1,575 (9)% 29.3% $ 5.00 (7)% 1 Attributable to Cardinal Health, Inc. 2 For fiscal 2020, GAAP diluted loss per share attributable to Cardinal Health, Inc. and the EPS impact from the GAAP to non-GAAP per share reconciling items are calculated using a weighted average of 293 million common shares, which excludes potentially dilutive securities from the denominator due to their anti-dilutive effects resulting from our GAAP net loss for the period. Fiscal 2020 non-GAAP diluted EPS is calculated using a weighted average of 295 million common shares, which includes potentially dilutive shares. 3 Litigation (recoveries)/charges, net includes a pre-tax charge of $5.63 billion ($5.14 billion after tax) recorded in the first quarter of fiscal 2020 related to the opioid litigation. 4 Reflects the net transitional benefit from the remeasurement of our deferred tax assets and liabilities partially offset by the repatriation tax on cash and earnings of foreign subsidiaries. See Note 8 of the "Notes to Consolidated Financial Statements" for more information on the Tax Act. 5 During fiscal 2019, we sold our majority interest in naviHealth and recognized a pre-tax gain of $508 million ($378 million after tax). 6 Fiscal year 2018 includes a goodwill impairment charge of $1.4 billion related to our Medical segment. There was no tax benefit related to this goodwill impairment charge. The sum of the components and certain computations may reflect rounding adjustments. We apply varying tax rates depending on the item's nature and tax jurisdiction where it is incurred. Cardinal Health | Fiscal 2020 Form 10-K 22


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    Selected Financial Data Selected Financial Data The consolidated financial data below includes all business combinations as of the date of acquisition that occurred during these periods. The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes and MD&A. (in millions, except per common share amounts) 20201,2,3 20194 20185,6 2017 2016 Earnings Data: Revenue $ 152,922 $ 145,534 $ 136,809 $ 129,976 $ 121,546 Operating earnings/(loss) (4,098) 2,060 126 2,120 2,459 Net earnings/(loss) (3,693) 1,365 259 1,294 1,431 Less: Net earnings attributable to noncontrolling interests (3) (2) (3) (6) (4) Net earnings/(loss) attributable to Cardinal Health, Inc. $ (3,696) $ 1,363 $ 256 $ 1,288 $ 1,427 Basic earnings/(loss) per common share attributable to Cardinal Health, Inc. $ (12.61) $ 4.55 $ 0.82 $ 4.06 $ 4.36 Diluted earnings/(loss) per common share attributable to Cardinal Health, Inc. $ (12.61) $ 4.53 $ 0.81 $ 4.03 $ 4.32 Cash dividends declared per common share $ 1.9292 $ 1.9100 $ 1.8635 $ 1.8091 $ 1.6099 Balance Sheet Data: Total assets $ 40,766 $ 40,963 $ 39,951 $ 40,112 $ 34,122 Long-term obligations, less current portion 6,765 7,579 8,012 9,068 4,952 Total Cardinal Health, Inc. shareholders' equity 1,789 6,328 6,059 6,808 6,554 1During fiscal 2020, we recorded a pre-tax charge of $5.63 billion ($5.14 billion after tax) related to the opioid litigation. 2During fiscal 2020, we recorded a total charge of $85 million in connection with the Recalls. 3During fiscal 2020, we sold the remainder of our equity interest in a partnership that owned naviHealth and recognized a pre-tax gain of $579 million ($493 million million after tax) within net earnings/(loss). 4During fiscal 2019, we sold our majority interest in naviHealth and recognized a pre-tax gain of $508 million ($378 million after tax) within operating earnings/(loss). 5During the fourth quarter of fiscal 2018, we recognized a non-cash goodwill impairment charge of $1.4 billion related to our Medical segment. There was no tax benefit related to this goodwill impairment charge. 6During fiscal 2018, the United States enacted the Tax Cuts and Jobs Act. In fiscal 2018 we recognized a net transitional tax benefit of $936 million related to the enactment of the act. See Note 8 for more information. 23 Cardinal Health | Fiscal 2020 Form 10-K


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    Disclosures about Market Risk Quantitative and Qualitative Disclosures About Market Risk We are exposed to cash flow and earnings fluctuations as a result of certain market risks. These market risks primarily relate to foreign exchange, interest rate, and commodity price-related changes. We maintain a hedging program to manage volatility related to some of these market exposures which employs operational, economic, and derivative financial instruments in order to mitigate risk. See Note 1 and Note 10 of the “Notes to Consolidated Financial Statements” for further discussion regarding our use of derivative instruments. Foreign Exchange Rate Sensitivity By the nature of our global operations, we are exposed to cash flow we perform sensitivity analyses on our forecasted transactional and earnings fluctuations resulting from foreign exchange rate exposure for the upcoming fiscal year. These analyses include the variation. These exposures are transactional and translational in estimated impact of our hedging program, which is designed to nature. The following foreign currencies represent the principal mitigate transactional exposure. Applying a VAR methodology to our drivers of our foreign exchange exposure: Canadian dollar, euro, Thai transactional exposure and including the impact of our hedging baht, Mexican peso, Chinese renminbi, Australian dollar, British program, the potential maximum loss in earnings for the upcoming pound and Japanese yen. fiscal year is estimated to be $12 million, which is based on a one- We apply a Value-At-Risk ("VAR") methodology to our transactional year horizon and a 95 percent confidence level. and translational exposures. The VAR model is a risk estimation tool Translational Exposure and is not intended to represent actual losses in fair value that could We have exposure related to the translation of financial statements be incurred. of our foreign operations into U.S. dollars, our functional currency. Transactional Exposure Applying a VAR methodology to our translational exposure, the Transactional exposure arises from the purchase and sale of goods potential maximum loss in earnings for the upcoming fiscal year is and services in currencies other than our functional currency or the estimated to be $5 million, which is based on a one-year horizon and functional currency of our subsidiaries. At the end of each fiscal year a 95 percent confidence level. Interest Rate Sensitivity We are exposed to changes in interest rates primarily as a result of We are also exposed to market risk from changes in interest rates our borrowing and investing activities to maintain liquidity and fund related to our cash and cash equivalents, which includes marketable operations. The nature and amount of our long-term and short-term securities that are carried at fair value in the consolidated balance debt can be expected to fluctuate as a result of business sheets. The fair value of our cash and cash equivalents is subject to requirements, market conditions and other factors. Our policy is to change primarily as a result of changes in market interest rates and manage exposures to interest rates using a mix of fixed and floating investment risk related to the issuers' credit worthiness. At June 30, rate debt as deemed appropriate by management. We utilize interest 2020, a hypothetical increase or decrease of 50 basis points in rate swap instruments to mitigate our exposure to interest rate interest rates would result in a hypothetical $5 million change in the movements. estimated fair value. As part of our risk management program, we perform an annual sensitivity analysis on our forecasted exposure to interest rates for the upcoming fiscal year. This analysis assumes a hypothetical 50 basis point change in interest rates. At June 30, 2020, the potential increase or decrease in annual interest expense under this analysis as a result of this hypothetical change would be $5 million. Cardinal Health | Fiscal 2020 Form 10-K 24


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    Disclosures about Market Risk Commodity Price Sensitivity We are directly exposed to market price changes for certain Our forecasted direct commodity exposures for the upcoming fiscal commodities, including oil-based resins, nitrile, cotton, diesel fuel and year is $445 million. The potential gain/loss given a hypothetical 10 latex. We typically purchase raw materials at either market prices or percent fluctuation in commodity prices, assuming pricing collectively prices tied to a commodity index and some finished goods at prices shifts in the same direction and we are unable to change customer based in part on a commodity price index. pricing in response to those shifts or otherwise offset, for the As part of our risk management program, we perform sensitivity upcoming fiscal year is $45 million at June 30, 2020. The hypothetical analysis on our forecasted direct commodity exposure for the offsetting impact of hedges in both periods was minimal. upcoming fiscal year. Our forecasted direct commodity exposure at June 30, 2020 increased approximately $10 million from June 30, 2019. At June 30, 2020 and 2019, we had hedged a portion of these direct commodity exposures (see Note 10 of the “Notes to Consolidated Financial Statements” for further discussion). 25 Cardinal Health | Fiscal 2020 Form 10-K


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    Business Business General Cardinal Health, Inc. is a global integrated healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices and patients in the home. We provide medical products and pharmaceuticals and cost-effective solutions that enhance supply chain efficiency. Pharmaceutical Segment In the United States, our Pharmaceutical segment: Pharmaceutical Distribution through its Pharmaceutical Distribution division, distributes Our Pharmaceutical Distribution division’s gross margin includes branded and generic pharmaceutical and over-the-counter margin from our generic pharmaceutical program, from distribution healthcare and consumer products to retailers (including chain and services agreements with branded pharmaceutical manufacturers independent drug stores and pharmacy departments of and from over-the-counter healthcare and consumer products. It supermarkets and mass merchandisers), hospitals and other also includes manufacturer cash discounts. healthcare providers. This division: Margin from our generic pharmaceutical program includes price maintains prime vendor relationships that streamline the discounts and rebates from manufacturers and may in limited purchasing process resulting in greater efficiency and lower instances include price appreciation. Our earnings on generic costs for our retail, hospital and other healthcare provider pharmaceuticals are generally highest during the period customers; immediately following the initial launch of a product, because provides services to pharmaceutical manufacturers, including generic pharmaceutical selling prices are generally highest during distribution, inventory management, data reporting, new that period and tend to decline over time. product launch support and chargeback administration; Margin from distribution services agreements with branded through the connected care service offering, provides pharmaceutical manufacturers is derived from compensation we medication therapy management, telepharmacy and health receive for providing a range of distribution and related services to messaging services and seeks to develop solutions to improve manufacturers. Our compensation typically is a percentage of the patient care through improved coordination of manufacturers, wholesale acquisition cost that is set by manufacturers. In addition, payers, pharmacies and patients; under a limited number of agreements, branded pharmaceutical price appreciation, which is determined by the manufacturers, also provides pharmacy management services to hospitals and serves as part of our compensation. operates pharmacies, including in community health centers; and Sourcing Venture with CVS Health Corporation repackages generic pharmaceuticals and over-the-counter In July 2014, we established Red Oak Sourcing, a U.S.-based healthcare products; generic pharmaceutical sourcing venture with CVS with an initial term of 10 years. Red Oak Sourcing negotiates generic through its Specialty Solutions division, distributes specialty pharmaceutical supply contracts on behalf of both companies. pharmaceutical products to hospitals and other healthcare providers and provides consulting, patient support and other Specialty Pharmaceutical Products and Services services for specialty pharmaceutical products to pharmaceutical We refer to products and services offered by our Specialty Solutions manufacturers and healthcare providers; and division as “specialty pharmaceutical products and services.” The through its Nuclear and Precision Health Solutions division, Specialty Solutions division distributes oncology, rheumatology, operates nuclear pharmacies and manufacturing facilities, which urology, nephrology and other pharmaceutical products ("specialty manufacture, prepare and deliver radiopharmaceuticals for use in pharmaceutical products") and human-derived plasma products to nuclear imaging and other procedures in hospitals and physician hospitals, dialysis clinics, physician offices and other healthcare offices. This division also contract manufactures a providers; provides consulting, patient support, logistics, group radiopharmaceutical treatment (Xofigo) and holds the North purchasing and other services to pharmaceutical manufacturers American rights to manufacture and distribute Lymphoseek, a and healthcare providers primarily supporting the development, radiopharmaceutical diagnostic imaging agent. marketing and distribution of specialty pharmaceutical products; and provides specialty pharmacy services. Our use of the See Note 15 of the “Notes to Consolidated Financial Statements” for terminology "specialty pharmaceutical products and services" may Pharmaceutical segment revenue, profit and assets for fiscal 2020, not be comparable to the terminology used by other industry 2019 and 2018. participants. Cardinal Health | Fiscal 2020 Form 10-K 26


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    Business Medical Segment Our Medical segment manufactures and sources Cardinal Health The Medical segment also distributes a broad range of medical, branded general and specialty medical, surgical and laboratory surgical and laboratory products known as national brand products products and devices. These products include exam and surgical and provides supply chain services and solutions to hospitals, gloves; needle, syringe and sharps disposal; compression; ambulatory surgery centers, clinical laboratories and other incontinence; nutritional delivery; wound care; cardiovascular and healthcare providers in the United States and Canada and this endovascular; single-use surgical drapes, gowns and apparel; fluid segment also assembles and sells sterile and non-sterile procedure suction and collection systems; urology; operating room supply; and kits. electrode product lines. Our Cardinal Health Brand products are Through Cardinal Health at-Home Solutions, this segment also sold directly or through third-party distributors in the United States, distributes medical products to patients' homes in the United States. Canada, Europe, Asia and other markets. These products are generally higher-margin products. Acquisitions and Divestitures Acquisitions We also completed several smaller acquisitions during the last five We have acquired a number of businesses over the years that have fiscal years, including, in fiscal 2017, the acquisition of the North enhanced our core strategic areas of Cardinal Health Brand medical American rights to Lymphoseek, a radiopharmaceutical diagnostic products, generic pharmaceutical distribution and services, imaging agent, from Navidea Biopharmaceuticals, Inc. specialty pharmaceutical products and services, international and post-acute care. We expect to continue to pursue additional Divestitures Over the past three fiscal years, we have also completed several acquisitions in the future. divestitures. In February 2018, we completed the sale of our During the last five fiscal years, we completed the following three pharmaceutical and medical products distribution business in China large acquisitions: to Shanghai Pharmaceuticals Holding Co., Ltd. for proceeds of $861 million (after adjusting for third party indebtedness and preliminary Acquisition Lines Price transaction adjustments). Date Company Location of Business (in billions) In August 2018, we completed the sale of our equity interest in 07/17 Patient Recovery Mansfield, MA Patient Care, $6.1 naviHealth, Inc. to investor entities controlled by CD&R for proceeds Business of Deep Vein Medtronic, plc Thrombosis and of $737 million (after adjusting for certain fees and expenses) and a Nutritional noncontrolling equity interest in a partnership that owned naviHealth. Insufficiency In May 2020, we sold the remainder of our equity interest in 10/15 Cordis business of Fremont, CA Cardiovascular $1.9 Johnson & and endovascular naviHealth. Johnson products We had acquired our equity interest in naviHealth through a series 07/15 The Harvard Drug Livonia, MI Pharmaceutical $1.1 of transactions beginning in fiscal 2016, when we acquired a majority Group product distribution equity interest. 27 Cardinal Health | Fiscal 2020 Form 10-K


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    Business Customers Our largest customers, CVS and OptumRx, accounted for 26 percent members. Our two largest GPO relationships in terms of revenue and 14 percent of our fiscal 2020 revenue, respectively. In the are with Vizient, Inc. and Premier, Inc. Sales to members of these aggregate, our five largest customers, including CVS and OptumRx, two GPOs, under numerous contracts across our businesses, accounted for 49 percent of our fiscal 2020 revenue. collectively accounted for 16 percent of our revenue in fiscal 2020. We have agreements with group purchasing organizations (“GPOs”) that act as agents to negotiate vendor contracts on behalf of their Suppliers We rely on many different suppliers. Products obtained from our five largest suppliers accounted for an aggregate of 28 percent of our revenue during fiscal 2020, and our largest supplier’s products accounted for approximately 6 percent of revenue. Competition We operate in a highly competitive environment in the distribution of Pharmaceutical segment has experienced competition from a pharmaceuticals and consumer healthcare products. We also number of organizations offering generic pharmaceuticals, including operate in a highly competitive environment in the manufacturing and telemarketers. We also compete with manufacturers that sell their distribution of medical devices and surgical products. We compete products directly. on many levels, including price, service offerings, support services, In the Medical segment, we compete with many diversified healthcare breadth of product lines and product quality and efficacy. companies and national medical product distributors, such as In the Pharmaceutical segment, we compete with wholesale Medline Industries, Inc., Owens & Minor, Inc. and Becton, Dickinson distributors with national reach, including McKesson Corporation and and Company, as well as regional medical product distributors and AmerisourceBergen Corporation, regional wholesale distributors, companies that are focused on specific product categories. We also self-warehousing chains, specialty distributors, third-party logistics compete with companies that distribute medical products to patients' companies, companies that provide specialty pharmaceutical homes and third-party logistics companies. services and nuclear pharmacies, among others. In addition, the Employees At June 30, 2020, we had approximately 30,000 employees in the United States and approximately 18,000 employees outside of the United States. Intellectual Property We rely on a combination of trade secret, patent, copyright and We believe that we have taken all necessary steps to protect our trademark laws, nondisclosure and other contractual provisions, and proprietary rights, but no assurance can be given that we will be able technical measures to protect our products, services and intangible to successfully enforce or protect our rights in the event that they are assets. We hold patents, and continue to pursue patent protection infringed upon by a third party. While all of these proprietary rights throughout the world, relating to the manufacture, operation and use are important to our operations, we do not consider any particular of various medical and surgical products, to certain distribution and patent, trademark, license, franchise or concession to be material to logistics systems, to the production and distribution of our nuclear our overall business. pharmacy products and to other service offerings. We also operate under licenses for certain proprietary technologies, and in certain instances we license our technologies to third parties. Cardinal Health | Fiscal 2020 Form 10-K 28


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    Business Regulatory Matters Our business is highly regulated in the United States, at both the these requirements when we source certain Medical segment federal and state level, and in foreign countries. Depending upon the products from third-party manufacturers. specific business, we may be subject to regulation by government We need specific approval or clearance from, and registrations with, entities including: regulatory authorities before we can market and sell some products the U.S. Drug Enforcement Administration (the “DEA”); in the United States and certain other countries, including countries certain agencies within the U.S. Department of Health and Human in the European Union ("EU"). Services, including the U.S. Food and Drug Administration (the In the United States, authorization to commercially market a medical “FDA”), the Centers for Medicare and Medicaid Services, the Office device is generally received in one of two ways. The first, known as of Inspector General and the Office for Civil Rights; pre-market notification or the 510(k) process, requires us to state health departments, insurance departments, Medicaid demonstrate that a medical device is substantially equivalent to a departments or other comparable state agencies; legally marketed medical device. The second more rigorous process, known as pre-market approval (“PMA”), requires us to independently state boards of pharmacy and other controlled substance demonstrate that a medical device is safe and effective. Many of our authorities; Medical segment branded products are cleared through the 510(k) the U.S. Nuclear Regulatory Commission (the “NRC”); process and certain products must be approved through the PMA the U.S. Federal Trade Commission (the "FTC"); process. U.S. Customs and Border Protection; and In the EU, we are required to comply with the Medical Device Directive agencies comparable to those listed above in markets outside the ("MDD") and obtain CE Mark Certification in order to market medical United States. devices. In 2017, EU regulatory bodies finalized a new Medical Device Regulation ("MDR") which will replace the MDD when it is These regulatory agencies have a variety of civil, administrative and implemented in May 2021. Under the MDR, medical devices criminal sanctions at their disposal for failure to comply with marketed in the EU will require significant additional pre-market and applicable legal or regulatory requirements. They can suspend our post-market requirements, except that devices with valid CE Mark ability to manufacture and distribute products, require us to initiate issued before May 2020 can be marketed until May 2024. product recalls, seize products or impose criminal, civil and administrative sanctions. It can be costly and time-consuming to obtain regulatory approvals, clearances and registrations of medical devices, and they might not Distribution be granted on a timely basis, if at all. Even after we obtain approval State Boards of Pharmacy, FDA, DEA and various other state or clearance to market a product or obtain product registrations, the authorities regulate the marketing, purchase, storage and distribution product and our manufacturing processes are subject to continued of pharmaceutical and medical products under various federal and regulatory oversight, including periodic inspection of manufacturing state statutes including the federal Prescription Drug Marketing Act facilities by FDA and other regulatory authorities both in the United of 1987, Drug Quality and Security Act of 2013 (the “DQSA”), and States and internationally. Controlled Substances Act (the "CSA"). The CSA governs the sale, packaging, storage and distribution of controlled substances. From time to time, we may determine that products we manufacture Wholesale distributors of controlled substances must hold valid DEA or market do not meet our specifications, regulatory requirements or registrations and state-level licenses, meet various security and published standards. When we or a regulatory agency identify a operating standards including effective anti-diversion programs, and quality or regulatory issue, we investigate and take appropriate comply with the CSA. They must also comply with state requirements corrective action, which may include recalling the product, correcting relating to controlled substances that differ from state to state. the product at the customer location, revising product labeling and notifying customers. For example, in January, 2020, we issued a Manufacturing, Sourcing and Marketing voluntary recall for 9.1 million AAMI Level 3 surgical gowns and two We sell our manufactured products in the United States, Canada, voluntary field actions (a recall of some packs and a corrective action Europe, Asia, Latin America and other markets. The FDA and other allowing overlabeling of other packs) for 2.9 million Presource governmental agencies in the United States, as well as foreign Procedure Packs containing affected gowns because one of our governmental agencies, administer requirements that cover the FDA-registered suppliers in China had shifted production of some design, testing, safety, effectiveness, manufacturing (including good gowns to unapproved sites with uncontrolled environments, resulting manufacturing practices), quality systems, labeling, promotion and in us being unable to assure the sterility of the gowns. advertising (including restrictions on promoting or advertising a product other than for the product's cleared or approved uses), distribution, importation and post-market surveillance for most of our manufactured products. We are also responsible for compliance with 29 Cardinal Health | Fiscal 2020 Form 10-K


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    Business Any adverse regulatory action, depending on its magnitude, may limit Government Healthcare Programs our ability to effectively manufacture, source, market and sell our We are subject to U.S. federal healthcare fraud and abuse laws. products, limit our ability to obtain future premarket approvals or result These laws generally prohibit persons from soliciting, offering, in a substantial modification to our business practices and operations. receiving or paying any compensation in order to induce someone For additional information, please see our Risk Factor entitled "Our to order, recommend or purchase products or services that are in business is subject to rigorous regulatory and licensing any way paid for by Medicare, Medicaid or other federally-funded requirements." healthcare programs. They also prohibit submitting any fraudulent Privacy and Data Protection claim for payment by the federal government. There are similar state We are subject to various and evolving privacy laws and regulations healthcare fraud and abuse laws that apply to Medicaid and other in many jurisdictions. Because we collect, handle and maintain state-funded healthcare programs. Violations of these laws may patient-identifiable health information, we are subject to laws that result in criminal or civil penalties, as well as breach of contract claims require specified privacy and security measures and that regulate and qui tam actions (false claims cases initiated by private parties the use and disclosure of such information, including the U.S. Health purporting to act on behalf of federal or state governments). Insurance Portability and Accountability Act of 1996 ("HIPAA"), as Some businesses within each of our segments are Medicare-certified augmented by the Health Information Technology for Economic and suppliers or participate in other federal and state healthcare Clinical Health Act as well as state laws, in the United States. programs, such as state Medicaid programs and the federal 340B We also collect, handle, and maintain other sensitive personal and drug pricing program. These businesses are subject to accreditation financial information. Within the U.S., these activities are regulated and quality standards and other rules and regulations, including by certain federal and state laws. For example, the new California applicable reporting, billing, payment and record-keeping Consumer Privacy Act became effective in January 2020 and grants requirements. Other businesses within each segment manufacture specified rights to consumers over the use of their personal pharmaceutical or medical products or repackage pharmaceuticals information, including increased transparency. Other states are that are purchased or reimbursed through, or are otherwise governed considering adopting similar or different comprehensive privacy laws. by, federal or state healthcare programs. Failure to comply with Internationally, we are also subject to privacy and data protection applicable eligibility requirements, standards and regulations could laws that require significant compliance efforts, including the EU's result in civil or criminal sanctions, including the loss of our ability to General Data Protection Regulation (GDPR), Canada's Personal participate in Medicare, Medicaid and other federal and state Information Protection and Electronic Documents Act (PIPEDA) and healthcare programs. Japan's Act on the Protection of Personal Information (APPI), among Our U.S. federal and state government contracts are subject to many others. specific procurement requirements. Failure to comply with applicable Nuclear Pharmacies and Related Businesses rules or regulations or with contractual or other requirements may Our nuclear pharmacies and radiopharmaceutical manufacturing result in monetary damages and criminal or civil penalties as well as facilities (including for Xofigo) require licenses or permits and must termination of our government contracts or our suspension or abide by regulations issued by the NRC, applicable state boards of debarment from government contract work. pharmacy and the radiologic health agency or department of health Environmental, Health and Safety Laws of each state in which we operate, including pharmacy sterile In the United States and other countries, we are subject to various compounding standards and practices. In addition, our federal, state and local environmental laws, including laws regulating radiopharmaceutical manufacturing facilities also must comply with the production or use of hazardous substances, as well as laws FDA regulations, including good manufacturing practices. relating to safe working conditions and laboratory practices. Product Tracing and Supply Chain Integrity Antitrust Laws Title II of the DQSA, known as the Drug Supply Chain Security Act The U.S. federal government, most U.S. states and many foreign or "Track and Trace," establishes a phased-in national system for countries have laws that prohibit certain types of conduct deemed to tracing pharmaceutical products through the pharmaceutical be anti-competitive. Violations of these laws can result in various distribution supply chain to detect, prevent and rapidly respond to sanctions, including criminal and civil penalties. Private plaintiffs also the introduction of drugs that may be counterfeit, diverted, stolen, could bring civil lawsuits against us in the United States for alleged adulterated, subject of a fraudulent transaction or otherwise unfit for antitrust law violations, including claims for treble damages. distribution. The first phase of implementation began in 2015, and upon full implementation in 2023, we and other supply chain Laws Relating to Foreign Trade and Operations stakeholders will participate in an electronic, interoperable, U.S. and foreign laws require us to abide by standards relating to the prescription drug tracing system. In addition, the FDA also has issued import and export of finished goods, raw materials and supplies and regulations requiring most medical device labeling to bear a unique the handling of information. We also must comply with various export device identifier. These regulations are being phased in through control and trade embargo laws, which may require licenses or other 2020. The MDR, described above, also introduces a new unique authorizations for transactions within some countries or with some device identifier requirement. counterparties. Cardinal Health | Fiscal 2020 Form 10-K 30


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    Business Similarly, we are subject to U.S. and foreign laws concerning the conduct of our foreign operations, including the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other foreign anti-bribery laws. Among other things, these laws generally prohibit companies and their intermediaries from offering, promising or making payments to officials of foreign governments for the purpose of obtaining or retaining business. For example, in February 2020, we paid approximately $8.4 million to the Securities and Exchange Commission to settle charges that our internal controls were not sufficient to detect improper payments made by employees of our former China distribution business. 31 Cardinal Health | Fiscal 2020 Form 10-K


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    Business Other Information Although our agreements with manufacturers sometimes require us Our customer return policies generally require that the product be to maintain inventory levels within specified ranges, our distribution physically returned, subject to restocking fees. We only allow businesses are generally not required by our customers to maintain customers to return product for credit that can be added back to particular inventory levels other than as needed to meet service level inventory and resold at full value, or that can be returned to vendors requirements. Certain customer contracts require us to maintain for credit. sufficient inventory to meet emergency demands, but we do not We offer market payment terms to our customers. believe those requirements materially affect inventory levels. Cardinal Health | Fiscal 2020 Form 10-K 32


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    Risk Factors Risk Factors The risks described below could materially and adversely affect our governmental authorities in many countries, including the U.S., are results of operations, financial condition, liquidity or cash flows. These enacting legislative or regulatory changes to address the impact of are not the only risks we face. Our businesses also could be affected the pandemic, which may restrict or require changes in our by risks that we are not presently aware of or that we currently operations, increase our costs, or otherwise have an adverse effect consider immaterial to our operations. In addition to the effects of the on our operations. COVID-19 pandemic and resulting global disruptions on our business As a critical player in the global healthcare supply chain, we and operations discussed in “Management’s Discussion and Analysis participated in industry-wide collaboration with the U.S. government of Financial Condition and Results of Operations,” and in the risk and other distributors intended to increase the availability of PPE in factors below, additional or unforeseen effects from the COVID-19 the U.S. In connection with these efforts, we, along with other pandemic and the global economic climate may arise or may amplify distributor participants, have received information requests from many of the risks discussed below. several members of the U.S. Congress. We have been and expect to continue to be negatively affected Also, we may become subject to claims or lawsuits by employees, by the ongoing COVID-19 pandemic. customers, suppliers or other parties regarding actions we take in See the description of the actual and possible effects of the COVID-19 our operations in response to the pandemic. Financial hardship to pandemic and resulting disruptions on our business and operations our customers and others could adversely impact the timing and discussed above in “Management’s Discussion and Analysis of collectability of payments to us from customers and require an Financial Condition and Results of Operations.” In addition to the increase in reserves against our accounts receivable. adverse impacts and uncertainties from the COVID-19 pandemic We cannot estimate the length or severity of the COVID-19 pandemic identified there, we face additional possible adverse impacts, or the related consequences on the U.S. and global economy and including those described below. our business and operations, including whether and when normal The cost to manufacture and source certain PPE products has economic and operating conditions will resume or the extent to which significantly increased, which negatively impacted our margins for the disruption may impact our business, financial position, results of these products in fiscal 2020 and is expected to negatively impact operations or cash flow. The COVID-19 pandemic also may give rise our Medical segment profit in fiscal 2021. While we are seeking to new risks or heighten many of the risks we have previously alternate and additional sources for these products and otherwise identified, including risks associated with competitive pressures, seeking to mitigate cost increases, as well as increasing certain PPE supplier relationships, international operations, regulatory and product prices to reflect some of our higher costs and seeking to licensing, changes to the U.S. healthcare environment, cyber modify affected customer contracts, our segment profit may be security, and access to capital markets. COVID-19 may also adversely impacted more significantly than we expect to the extent adversely affect our operating and financial results in a manner that these efforts are not successful. In addition, we could experience is not currently known to us or that we do not currently consider a decreased sales and customer disputes. significant risk. Federal, state and local government policies and initiatives designed We could continue to suffer the adverse effects of competitive to reduce the transmission of COVID-19 also resulted in the pressures. cancellation or deferral of many elective medical procedures and As described in greater detail in the "Business" section, we operate some of our customers closing or severely curtailing their operations. in markets that are highly competitive and dynamic. In addition, If demand for these procedures does not return, or if these policies competitive pressures in our pharmaceutical and medical segments remain effective over a sustained period we could experience a may be increased by new business models, new entrants, new greater decrease in sales for the affected products and services than regulations, changes in consumer demand or general competitive we currently expect. Additionally, sustained changes in the manner dynamics. Our businesses face continued pricing pressure from in which patients access healthcare may result in shifts in consumer these factors, which adversely affects our margins. If we are unable preferences that may not be favorable to us. to offset margin reductions caused by these pricing pressures Political, legal or regulatory actions as a result of the COVID-19 through steps such as sourcing or cost control measures, additional pandemic in jurisdictions where we manufacture, source or distribute service offerings and sales of higher margin products, our results of products have created supply disruptions within both our Medical operations could continue to be adversely affected. and, currently to a lesser extent, our Pharmaceutical segments and Our Pharmaceutical segment’s generic pharmaceutical from time to time may cause additional supply disruptions or program may be adversely affected by pricing changes and shortages in the future. We cannot currently predict the frequency, fewer product launches. duration or scope of these governmental actions and supply The performance of our Pharmaceutical segment’s generic disruptions. For example, several countries, including India and pharmaceutical program declined in fiscal 2019, 2018 and 2017 and China, have increased or instituted new restrictions on the export of increased in fiscal 2020. Declines in earlier years were due, in large medical or pharmaceutical products that we distribute or use in our part, to generic pharmaceutical customer pricing deflation and less businesses, including key components or raw materials. Additionally, incremental benefit from new generic pharmaceutical launches, 33 Cardinal Health | Fiscal 2020 Form 10-K


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    Risk Factors which more than offset the benefits from sourcing generic retail chains and others relating to the manufacturing, marketing or pharmaceuticals through our Red Oak Sourcing venture with CVS. distribution of prescription opioid pain medications and additional If performance of our generic pharmaceutical program declines in public plaintiffs are likely to file similar lawsuits. In addition, we are future fiscal years and we are unable to offset the decline, our currently being sued by private plaintiffs, such as unions, other health Pharmaceutical segment profit and consolidated operating earnings and welfare funds, hospital systems and other healthcare providers, will be adversely affected. for the same activities and could be named as a defendant in The extent and magnitude of generic pharmaceutical pricing changes additional lawsuits. is uncertain in future fiscal years and may vary from what we We have also received federal grand jury subpoenas issued in anticipate. Similarly, the number of new generic pharmaceutical connection with investigations being conducted by the U.S. launches also varies from year to year, and the margin impact of Attorney’s Office for the Eastern District of New York and by the these launches varies from product to product. Finally, the benefit Fraud Section of the U.S. Department of Justice (DOJ). The from Red Oak Sourcing could be less than we anticipate. subpoenas seek documents and, with respect to the DOJ Changes in manufacturer approaches to pricing branded investigation, testimony relating to our anti-diversion policies and pharmaceutical products could have an adverse effect on our procedures, and our distribution of certain controlled substances. Pharmaceutical segment’s margins. In October 2019, we agreed in principle to a Settlement Framework Compensation under our contractual arrangements with that would resolve pending and future lawsuits and claims brought manufacturers for the purchase of branded pharmaceutical products by states and political subdivisions. In connection with this is generally based on the wholesale acquisition cost set by the development we recorded a pre-tax accrual of $5.56 billion in fiscal manufacturer. Sales prices of branded pharmaceutical products to 2020. This Settlement Framework is subject to contingencies but is our customers generally are a percentage discount from wholesale the basis for our negotiation of definitive terms and documentation. acquisition cost. Definitive terms of a settlement under the Settlement Framework continue to be negotiated, and there is no assurance that the Historically, pharmaceutical manufacturers have generally increased necessary parties will agree to a definitive settlement agreement or the wholesale acquisition cost of their branded pharmaceuticals each that the contingencies to any agreement will be satisfied. The amount year. However, the U.S. government has announced plans to, among of ultimate loss may differ materially from this accrual. See Note 7 of other things, adopt policies to encourage manufacturers to limit the "Notes to Consolidated Financial Statements" for more increases in (or reduce) wholesale acquisition cost. In fiscal 2019 information regarding these matters. and fiscal 2020, manufacturers, in the aggregate, increased prices less than in prior years. If manufacturers change their historical The defense and resolution of current and future lawsuits and events approach to setting and increasing wholesale acquisition cost and relating to these lawsuits are subject to uncertainty and could have we are unable to negotiate alternative ways to be compensated by a material adverse effect on our results of operations, financial manufacturers or customers for the value of our services, our condition, cash flows, liquidity, or our ability to pay dividends or Pharmaceutical segment profit and consolidated operating earnings repurchase our shares, beyond the amounts accrued. In addition, could be adversely affected. they could have adverse reputational or operational effects on our business. Also, almost all of our distribution services agreements with branded pharmaceutical manufacturers generally provide that we receive fees Other legislative, regulatory or industry measures related to the public from the manufacturers to compensate us for services we provide health crisis involving the abuse of prescription opioid pain them. However, under a limited number of agreements, branded medication and the distribution of these medications could affect our pharmaceutical price appreciation, which is determined by the business in ways that we may not be able to predict. For example, manufacturers also serves as a part of our compensation. If several states have now adopted taxes or other fees on the sale of manufacturers decide to reduce prices, not to increase prices or to opioids, and several other states have proposed similar legislative implement only small increases and we are unable to negotiate initiatives. These laws and proposals vary in the tax amounts imposed alternative ways to be compensated by manufacturers or customers and the means of calculation. Liabilities for taxes or assessments for the value of our services, our margins could be adversely affected. under any such laws could have an adverse impact on our results of operations unless we are able to mitigate them through operational The public health crisis involving the abuse of prescription changes or commercial arrangements where permitted. opioid pain medication and our efforts to resolve related claims could have additional or unexpected material negative effects Ongoing unfavorable publicity regarding the abuse or misuse of on our business. prescription opioid pain medications and the role of wholesale distributors in the supply chain of such prescription medications, as Our Pharmaceutical segment distributes prescription opioid pain well as the continued proliferation of the opioid lawsuits, medications. In recent years, the abuse of prescription opioid pain investigations, regulations and legislative actions, and unfavorable medication has become a public health crisis. publicity in relation to those lawsuits could have a material adverse A significant number of states, counties, municipalities and other effect on our reputation or results of operations. public plaintiffs, have filed lawsuits against pharmaceutical manufacturers, pharmaceutical wholesale distributors (including us), Cardinal Health | Fiscal 2020 Form 10-K 34


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    Risk Factors Products that we manufacture, source and market are subject operating standards, and comply with the CSA. Failure to maintain to strict quality and regulatory requirements. The recalls of or renew necessary permits, product registrations, licenses or certain surgical gowns and related Presource Procedure Packs approvals, or to comply with required standards, could have an had a negative impact on our financial results in fiscal 2020 and adverse effect on our results of operations and financial condition. may have additional negative financial and operational impacts. We collect, handle and maintain patient-identifiable health As described in greater detail in the "Business" section, products that information and other sensitive personal and financial information we manufacture, source, distribute or market must comply with which are subject to federal, state and foreign laws that regulate the quality and regulatory requirements. Noncompliance or concerns use and disclosure of such information. Regulations currently in place over noncompliance, including noncompliance by third-party contract continue to evolve, and new laws in this area could further restrict manufacturers, may result in suspension of our ability to distribute, our ability to collect, handle and maintain personal or patient import, manufacture or source products, as well as product bans, information, or could require us to incur additional compliance costs, recalls, safety alerts or seizures, or criminal or civil sanctions, which, either of which could have an adverse impact on our results of in turn, could result in product liability claims and lawsuits, including operations. Violations of federal, state or foreign laws concerning class actions. In addition, it can be costly and time-consuming to privacy and data protection could subject us to civil or criminal obtain regulatory approvals or product registrations to market a penalties, breach of contract claims, costs for remediation and harm medical device or other product, and such approvals or registrations to our reputation. might not be granted on a timely basis, if at all. We are required to comply with laws relating to healthcare fraud and In January, 2020, we issued a voluntary recall for 9.1 million AAMI abuse. The requirements of these laws are complex and subject to Level 3 surgical gowns and two voluntary field actions (a recall of varying interpretations. From time to time, regulatory authorities some packs and a corrective action allowing overlabeling of other investigate our policies or practices, and may challenge them. If we packs) for 2.9 million Presource Procedure Packs containing affected fail to comply with these laws, we could be subject to federal or state gowns (together, the "Recalls") because one of our FDA-registered government investigations or qui tam actions (false claims cases suppliers in China had shifted production of some gowns to initiated by private parties purporting to act on behalf of federal or unapproved sites with uncontrolled environments. Because of this, state governments), which could result in civil or criminal sanctions, we could not assure sterility of the gowns. including the loss of licenses or the ability to participate in Medicare, In connection with the Recalls, in fiscal year 2020, we recorded a Medicaid and other federal and state healthcare programs. total charge of $85 million, of which $48 million is within cost of Some businesses within each of our segments are Medicare-certified products sold and $37 million is within SG&A in the consolidated suppliers or participate in other federal and state healthcare statements of earnings/(loss). See Note 7 of the "Notes to programs, such as state Medicaid program and the federal 340B drug Consolidated Financial Statements" for more information regarding pricing program. In addition, some businesses manufacture these matters. pharmaceutical or medical products or repackage pharmaceuticals In addition, the Recalls may have other negative impacts, which could that are purchased or reimbursed through, or are otherwise governed include government investigations and enforcement actions by the by, federal or state healthcare programs. Failure to comply with U.S. Food and Drug Administration or other regulators or U.S. or applicable eligibility requirements, standards and regulations could international governmental bodies, which could possibly result in the result in civil or criminal sanctions, including the loss of our ability to suspension or revocation of the authority to produce, distribute and participate in Medicare, Medicaid and other federal and state sell products and other civil or criminal sanctions or penalties. healthcare programs. Our business is subject to other rigorous regulatory and Our government contracts are subject to specific procurement licensing requirements. requirements. Failure to comply with applicable rules or regulations or with contractual or other requirements may result in monetary In addition to regulatory requirements relating to manufacturing, damages and criminal or civil penalties as well as termination of our sourcing and marketing our products described in the Risk Factor government contracts or our suspension or debarment from immediately above and as described in greater detail in the government contract work. "Business" section, our business is highly regulated in the United States, at both the federal and state level, and in foreign countries. Our global operations are required to comply with the U.S. Foreign If we fail to comply with regulatory requirements, or if allegations are Corrupt Practices Act ("FCPA"), the U.K. Bribery Act and similar anti- made that we fail to comply, our results of operations and financial bribery laws in other jurisdictions and U.S. and foreign export control, condition could be adversely affected. trade embargo and customs laws. If we fail to comply, or are alleged to fail to comply, with any of these laws, we could suffer civil or criminal To lawfully operate our businesses, we are required to obtain and sanctions. For example, in February 2020, we paid approximately hold permits, product registrations, licenses and other regulatory $8.4 million to the Securities and Exchange Commission to settle approvals from, and to comply with operating and security standards charges that our internal controls were not sufficient to detect of, numerous governmental bodies. For example, as a wholesale improper payments made by employees of our former China distributor of controlled substances, we must hold valid DEA distribution business. registrations and state-level licenses, meet various security and 35 Cardinal Health | Fiscal 2020 Form 10-K


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    Risk Factors We could be subject to adverse changes in the tax laws or industry shifting away from traditional healthcare venues like challenges to our tax positions. hospitals and into clinics, physician offices and patients’ homes. We are a large multinational corporation with operations in the United We expect the U.S. healthcare industry to continue to change States and many foreign countries. As a result, we are subject to the significantly in the future. Possible changes include further reduction tax laws of many jurisdictions. or limitations on governmental funding at the state or federal level, From time to time, initiatives are proposed in the United States and efforts by healthcare insurance companies to further limit payments other jurisdictions in which we operate that could adversely affect our for products and services or changes in legislation or regulations tax positions, effective tax rate or tax payments. Specific initiatives governing prescription pharmaceutical pricing, healthcare services that may impact us include possible increases in U.S. or foreign or mandated benefits. These possible changes, and the uncertainty corporate income tax rates or other changes in tax law to raise surrounding these possible changes, may adversely affect us. revenue, the repeal of the LIFO (last-in, first-out) method of inventory Our business and operations depend on the proper functioning accounting for income tax purposes, the establishment or increase of information systems, critical facilities and distribution in taxation at the U.S. state level on the basis of gross revenues, networks. recommendations of the recently completed base erosion and profit We rely on our and third-party service providers' information systems shifting project undertaken by the Organization for Economic for a wide variety of critical operations, including to obtain, rapidly Cooperation and Development and the European Commission’s process, analyze and manage data to: investigation into illegal state aid. facilitate the purchase and distribution of inventory items from Additionally, in connection with the $5.63 billion pre-tax charge for numerous distribution centers; the opioid litigation, in the fiscal year ended June 30, 2020, we receive, process and ship orders on a timely basis; recorded a tax benefit of $488 million, which is net of unrecognized tax benefits of $469 million, reflecting our current assessment of the manage accurate billing and collections for thousands of estimated future deductibility of the amount that may be paid. We customers; have made reasonable estimates and recorded amounts based on process payments to suppliers; management's judgment and our current understanding of the Tax facilitate manufacturing and assembly of medical products; and Act; however, these estimates require significant judgment since the generate financial information. definitive settlement terms and documentation, including provisions related to deductibility, under the Settlement Framework have not Our business also depends on the proper functioning of our and our been negotiated and the U.S. tax law governing deductibility was suppliers' critical facilities, including our national logistics center, and changed by the Tax Act. Further, the tax authorities could challenge our distribution networks. Our results of operations could be our interpretation of the Tax Act or the estimates and assumptions adversely affected if our or a service provider's information systems, used to assess the future deductibility of these benefits. The actual critical facilities or distribution networks are disrupted (including amount of tax benefit related to uncertain tax positions may differ disruption of access), are damaged or fail, whether due to physical materially from these estimates. See Note 7 of the "Notes to disruptions, such as fire, natural disaster, pandemic or power outage, Consolidated Financial Statements" for more information regarding or due to cyber-security incidents, ransomware or other actions of these matters. third parties, including labor strikes, political unrest and terrorist attacks. Manufacturing disruptions also can occur due to regulatory We file income tax returns in the U.S. federal jurisdiction, various action, production quality deviations, safety issues or raw material U.S. state jurisdictions and various foreign jurisdictions. With few shortages or defects, or because a key product or component is exceptions, we are subject to audit by taxing authorities for fiscal manufactured at a single manufacturing facility with limited alternate years 2008 through the current fiscal year. Tax laws are complex and facilities. subject to varying interpretations. Tax authorities have challenged some of our tax positions, including IRS challenges to our From time to time, our businesses perform business process international transfer pricing for the periods from 2008 to 2014, and improvements or infrastructure modernizations or use service it is possible that they will challenge others. These challenges may providers for key systems and processes, such as receiving and adversely affect our effective tax rate or tax payments. processing customer orders, customer service and accounts payable. For example, our Pharmaceutical segment is currently Changes to the U.S. healthcare environment may not be engaged in a multi-year project to implement a replacement of certain favorable to us. finance and operating information systems. If any of these initiatives Over a number of years, the U.S. healthcare industry has undergone are not successfully or efficiently implemented or maintained, they significant changes designed to increase access to medical care, could adversely affect our business and our internal control over improve safety and patient outcomes, contain costs and increase financial reporting. efficiencies. These changes include a general decline in Medicare and Medicaid reimbursement levels, efforts by healthcare insurance companies to limit or reduce payments to pharmacies and providers, the basis for payments beginning to transition from a fee-for-service model to value-based payments and risk-sharing models, and the Cardinal Health | Fiscal 2020 Form 10-K 36


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    Risk Factors Our business and results of operations could be adversely pandemics, such as COVID-19, and actions by U.S. or international affected if we experience a cyber-attack or other systems governments, including export restrictions or tariffs. In addition, due breach. to the stringent regulatory requirements regarding the manufacture Our business relies on the secure transmission, storage and hosting and sourcing of our products, we may not be able to quickly establish of patient-identifiable health information, financial information and additional or replacement sources for certain components, materials other sensitive protected information relating to our customers, or products. A sustained supply reduction or interruption, and an company and workforce. We have programs in place to detect, inability to develop alternative and additional sources for such supply, contain and respond to information security incidents. However, could result in lost sales, increased cost, damage to our reputation, because the techniques used to obtain unauthorized access, disable and may have an adverse effect on our business. or degrade service or sabotage systems change frequently and may Our manufacturing businesses use oil-based resins, pulp, cotton, be difficult to detect for long periods of time, we may be unable to latex and other commodities as raw materials in many products. anticipate these techniques or to implement adequate preventative Prices of oil and gas also affect our distribution and transportation measures. In addition, hardware, software or applications developed costs. Prices of these commodities are volatile and can fluctuate internally or procured from third parties may contain defects in design significantly, causing our costs to produce and distribute our products or manufacture or other problems that could unexpectedly to fluctuate. Due to competitive dynamics and contractual limitations, compromise information security. we may be unable to pass along cost increases through higher prices. Unauthorized parties have gained access and will continue to attempt If we cannot fully offset cost increases through other cost reductions, to gain access to our or a service provider's systems or facilities or recover these costs through price increases or surcharges, our through fraud, trickery or other forms of deception. We have been results of operations could be adversely affected. the target of cyber attacks, including incidents where certain Changes or uncertainty in U.S. or international trade policies customer account information was accessed. Although we do not and exposure to economic, political and currency risks, could believe these incidents had a material impact on us, similar incidents disrupt our global operations or negatively impact our financial or events in the future may negatively impact our business, reputation results. or financial results. We conduct our operations in various regions of the world outside of Any compromise of our or a service provider's information systems, the United States, including Europe, Asia and Latin America. Global including unauthorized access to or use or disclosure of sensitive developments can affect our business in many ways. Our global information, could adversely impact our operations, results of operations are affected by local economic environments, including operations or our ability to satisfy legal or regulatory requirements, inflation, recession and competition. Additionally, divergent or including the California Consumer Privacy Act (CCPA), the new EU unfamiliar regulatory systems and labor markets can increase the general data protection regulation (GDPR) and those related to risks and burdens of operating in numerous countries. patient-identifiable health information as further described in the Risk Our foreign operations expose us to a number of risks related to trade Factor titled “Our business is subject to rigorous regulatory and protection laws, tariffs, excise or other border taxes on goods sourced licensing requirements,” above. from certain countries or on the importation or exportation of products We depend on direct and indirect suppliers to make their or raw materials. Changes or uncertainty in U.S. or international trade products and raw materials available to us and are subject to policies or tariffs could impact our global operations, as well as our fluctuations in costs and availability of products and raw customers and suppliers. We may be required to spend more money materials. to source certain products or materials that we need or to manufacture We depend on others to manufacture some products that we market certain of our products. This could adversely impact our business and distribute. Our operations are also dependent on various and results of operations. components, compounds, raw materials and energy supplied by As a result of the COVID-19 pandemic, many governments, including others. We purchase many of these components, raw materials and the U.S., China and India have, or have considered, restrictions on energy, and source certain products from numerous suppliers in exports of medical and pharmaceutical products. If these restrictions various countries. In some instances, for reasons of quality are implemented or not lifted, we may experience a significant assurance, cost effectiveness, or availability, we procure certain disruption in our ability to source pharmaceutical and medical components and raw materials from a sole supplier. Any of our products and could experience increased prices and lost sales. supplier relationships could be interrupted, become less favorable In addition, we conduct our business in U.S. dollars and various to us or be terminated and the supply of these components, functional currencies of our foreign subsidiaries. Changes in foreign compounds, raw materials or products could be interrupted or currency exchange rates could adversely affect our financial results, become insufficient. These risks are currently heightened with which are reported in U.S. dollars. We may not be able to hedge to respect to certain PPE products due to the current and expected protect us against these exposures, and any hedges may not future demand for such products. These supply interruptions or other successfully mitigate these exposures. disruptions in manufacturing processes could be caused by events beyond our control, including natural disasters, supplier facility shut- downs, defective raw materials, the impact of epidemics or 37 Cardinal Health | Fiscal 2020 Form 10-K


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    Risk Factors Our sales and credit concentration is significant. of affected products or force us to make royalty payments in order CVS is a large customer that generates a significant amount of our to continue selling the affected products. revenue. CVS accounted for 26 percent of our fiscal 2020 revenue Our results of operations could be adversely impacted if we fail and 26 percent of our gross trade receivable balance at June 30, to manage and complete divestitures. 2020. If CVS does not renew our agreements, terminates the We regularly evaluate our portfolio of businesses to determine agreements due to an alleged default by us, defaults in payment or whether an asset or business may no longer help us meet our significantly reduces its purchases from us, our results of operations objectives or whether there may be a more advantaged owner for and financial condition could be adversely affected. that business. For example, in the past few years, we divested our Consolidation in the U.S. healthcare industry may negatively pharmaceutical and medical products distribution business in China impact our results of operations. and our ownership interest in naviHealth, Inc. When we decide to In recent years, U.S. healthcare industry participants, including sell assets or a business, we may encounter difficulty finding buyers distributors, manufacturers, suppliers, healthcare providers, insurers or alternative exit strategies, which could delay the achievement of and pharmacy chains, have consolidated or formed strategic our strategic objectives. We could also experience greater dis- alliances. Consolidations create larger enterprises with greater synergies than expected and the impact of the divestiture on our negotiating power, and also could result in the possible loss of a results of operations could be greater than anticipated. customer where the combined enterprise selects one distributor from Our ability to manage and complete acquisitions could impact two incumbents. If this consolidation trend continues, it could our strategic objectives and financial condition. adversely affect our results of operations. An important element of our growth strategy has been to acquire Legal proceedings could adversely impact our cash flows or other businesses that expand or complement our existing results of operations. businesses. Completion of acquisitions and the integration of Due to the nature of our business, which includes the distribution of acquired businesses involve a number of risks, including the controlled substances and other pharmaceutical products and the following: we may overpay for a business or fail to realize the sourcing, marketing and manufacturing of medical products, we synergies and other benefits we expect from the acquisition; our regularly become involved in disputes, litigation and regulatory management’s attention may be diverted to integration efforts; we matters. Litigation is inherently unpredictable and the unfavorable may fail to retain key personnel of the acquired business; future outcome of one or more of these legal proceedings could adversely developments may impair the value of our purchased goodwill or affect our results of operations or financial condition. intangible assets; we may face difficulties or delays establishing, integrating or combining operations and systems, including For example, we are subject to a number of lawsuits and manufacturing facilities; we may assume liabilities related to legal investigations related to the national health crisis involving the abuse proceedings involving the acquired business; we may face of opioid pain medication as described above in the Risk Factor titled challenges retaining the customers of the acquired business; or we "The public health crisis involving the abuse of prescription opioid may encounter unforeseen internal control, regulatory or compliance pain medication and our efforts to resolve related claims could have issues. additional or unexpected material negative effects on our business" and in Note 7 to the "Notes to Consolidated Financial Statements." We may not realize the expected benefits from planned cost- savings and business improvement initiatives. Additionally, some of the products that we distribute or manufacture have been and may in the future be alleged to cause personal injury, As a part of an ongoing effort to optimize and simplify our operating subjecting us to product liability claims. For example, we are a model, we expect to transition portions of our finance operations to defendant in product liability lawsuits that allege personal injuries a global professional services firm and we are making structural associated with the use of Cordis OptEase and TrapEase inferior changes to certain other functional and commercial areas of our vena cava (IVC) filter products and in lawsuits alleging impurities in organization as well. Additionally, our Pharmaceutical segment is in the active pharmaceutical ingredients in certain pharmaceutical a multi-year project to implement a replacement of certain finance products. In addition, product liability insurance for these types of and operating information systems. These initiatives, and any similar claims is becoming more limited and may not be available to us at initiatives identified and implemented in the future, could result in amounts that we historically have obtained or that we would like to unexpected charges and expenses that negatively impact our obtain. It is possible that a settlement of or judgment for a product financial results and we could fail to achieve the desired efficiencies liability claim may not be covered by insurance or exceed available and estimated cost savings. In addition, if we are not able to effectively insurance recoveries. If this happens, and if any such settlement or implement these initiatives, or if they fail to operate as intended, our judgment is in excess of any prior accruals, our results of operations internal control over financial reporting could be adversely affected. and financial condition could be adversely affected. Additionally, these types of initiatives could yield unintended We also operate in an industry characterized by extensive intellectual consequences such as distraction of management and employees, property litigation. Patent litigation can result in significant damage business disruption, an inability to attract or retain key personnel, awards and injunctions that could prevent the manufacture and sale which could negatively affect our business or financial condition and results of operations. Cardinal Health | Fiscal 2020 Form 10-K 38


  • Page 48

    Risk Factors If we are not able to effectively develop, implement and manage our outsourcing or similar third-party relationships, we may experience operational difficulties and increased costs, which may adversely affect our results of operations. Our goodwill may be further impaired, which would require us to record a significant charge to earnings in accordance with generally accepted accounting principles. U.S. GAAP requires us to test our goodwill for impairment on an annual basis, or more frequently if indicators for potential impairment exist. In the fourth quarter of fiscal year 2018, we recorded a $1.4 billion impairment to goodwill within our Medical segment. The testing required by GAAP involves estimates and significant judgments by management. Although we believe our assumptions and estimates are reasonable and appropriate, any changes in key assumptions, including a failure to meet business plans or other unanticipated events and circumstances such as a rise in interest rates, may affect the accuracy or validity of such estimates. It is possible that we may record significant charges related to other reporting units or we may record additional charges in our Medical segment, which charge or charges could adversely affect our results of operations. See "Critical Accounting Policies and Sensitive Accounting Estimates" in MD&A above for more information regarding goodwill impairment testing. 39 Cardinal Health | Fiscal 2020 Form 10-K


  • Page 49

    Properties and Legal Proceedings Properties In the United States, at June 30, 2020, the Pharmaceutical segment Our principal executive offices are headquartered in an owned operated one national logistics center; a number of primary building located at 7000 Cardinal Place in Dublin, Ohio. pharmaceutical and specialty distribution facilities as well as nuclear We consider our operating properties to be in satisfactory condition pharmacy and radiopharmaceutical manufacturing facilities. The and adequate to meet our present needs. However, we regularly Medical segment operated medical-surgical distribution, assembly, evaluate operating properties and may make further additions and manufacturing and other operating facilities in the United States. improvements or consolidate locations as we seek opportunities to At June 30, 2020, our Medical segment operated manufacturing expand or enhance the efficiency of our business. facilities in the United States, including Puerto Rico, Canada, Costa Rica, the Dominican Republic, Germany, Ireland, Japan, Malaysia, Malta, Mexico and Thailand. Legal Proceedings In addition to the proceedings described below, the legal proceedings described in Note 7 of the "Notes to 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. 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 consolidated derivative complaint seeks, among other things, unspecified money damages against the defendants and an award of attorneys' fees. In June 2020, the defendants filed a motion to dismiss the complaint. Cardinal Health | Fiscal 2020 Form 10-K 40


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    Market for Registrant's Common Equity Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common shares are listed on the New York Stock Exchange under the symbol “CAH.” At July 31, 2020 there were approximately 7,324 shareholders of record of our common shares. We anticipate that we will continue to pay quarterly cash dividends in the future. The payment and amount of future dividends remain, however, within the discretion of our Board of Directors and will depend upon our future earnings, financial condition, capital requirements and other factors. Issuer Purchases of Equity Securities Approximate Dollar Value of Total Number of Shares Shares That May Total Number Purchased Yet be Purchased of Shares Average Price Paid per as Part of Publicly Under the Programs (2) Period Purchased (1) Share Announced Programs (2) (in millions) April 2020 1,406 $ 49.91 — $ 943 May 2020 325 51.44 — 943 June 2020 217 52.38 — 943 Total 1,948 $ 50.44 — $ 943 (1) Reflects 1,406, 325 and 217 common shares purchased in April, May and June 2020, respectively, through a rabbi trust as investments of participants in our Deferred Compensation Plan. (2) On November 7, 2018, our Board of Directors approved a $1.0 billion share repurchase program that expires on December 31, 2021. As of June 30, 2020, we have $943 million authorized for share repurchases remaining under this program. 41 Cardinal Health | Fiscal 2020 Form 10-K

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