Cardinal Health : 2021 Annual Report (PDF 2.17 MB)

Annual

Report

21

Dear fellow shareholders,

As I look back on the last 18 months, the sheer volume of change has been remarkable, and the resilience that our employees, customers and communities have shown gives me optimism about the road ahead. The pandemic has illuminated to me the vital role our company plays in the global healthcare system. I've said before that what we do matters, and it is our privilege to serve our customers, their patients and their communities around the world.

Our response to COVID-19

As the pandemic began, our company, along with so many others, adapted with urgency. We kept all our facilities open and operating with new safety protocols, and our essential employees embodied our Company values of being accountable and mission-driven in their response

to the unprecedented needs of the healthcare system. We focused on protecting the health and safety of our employees, so they could deliver critical products and services to our customers.

We partnered with the Centers for Disease Control and Prevention (CDC) as a network administrator to enable retail independent, small chain and long-term care pharmacy customers to participate in the vaccination effort. Collectively to date, our enrolled network of 3,500- plus community pharmacy customers who participate in the Federal Retail Pharmacy Program have administered more than 3.6 million doses of COVID-19 vaccines. Nearly 2,000 of our participating pharmacies serve vulnerable populations.

We were awarded a Strategic National Stockpile contract to store and distribute 80,000 pallets of personal protective equipment (PPE).

We evaluated our entire supply chain following disruptions after the onset of the pandemic in early 2020. We diversified our sourcing to limit geographic concentrations and invested in additional self-manufacturing capabilities including increases in annual production of safety needles and syringes, isolation gowns, and surgical and procedure masks in our own North American facilities. We expanded capacity for our kitting operations so we can carry more inventory for customers. Also, we seized opportunities to innovate, by piloting technology solutions to incorporate robotics, automation and data analytics across our warehouse and distribution processes.

Our fiscal 2021 financial performance

We had a strong start to FY21, which was overshadowed by disappointing fourth quarter results. This was largely due to a $197 million inventory reserve adjustment driven by changing market conditions related to COVID-19 on certain highly commoditized PPE products. To meet our customer commitments during the pandemic, we carried higher levels of inventory in certain PPE categories during a period of significantly increased demand, higher prices and longer than normal supply chains.

Although I am not satisfied with our full year performance, we did see growth in both segments, excluding the impact of COVID-19. As we move into FY22 and as the pandemic's effects on our business lessen, this underlying growth gives me confidence in our strategy.

In FY21, we grew revenue 6% versus the prior year, and despite an estimated $200 million year-over-year operating earnings headwind related to COVID-19, we grew non-GAAP EPS. We continued to aggressively streamline our cost structure and surpassed our enterprise cost savings target for the third consecutive year. We generated strong operating cash flow, returned approximately $800 million to shareholders through dividends and share repurchases, and strengthened our balance sheet by paying down approximately $550 million of debt.

Throughout the past year, I've been taking action to drive performance, and will continue to move forward with urgency. For example, we divested the Cordis™ business, extended our Red Oak Sourcing™ agreement, extended our pharmaceutical distribution agreements with CVS Health™, and identified $250 million of additional cost savings opportunities.

At my direction, our management team is continually reviewing our business and seeking areas to improve. With the actions we've taken to date and our plans for FY22, I feel confident in our strategy, and am encouraged by the tailwinds behind our growth areas and strong cash flow generation.

FY21 Financial summary

	GAAP	Non-GAAP
	basis ($M)	basis ($M)
	FY21	FY21
Operating	$472	$2,255
earnings1	N.M.	(5)%
% change
Revenue	$162,467	N/A
% change	6%
Diluted EPS1,2	$2.08	$5.57
% change	N.M.	2%

• GAAP results include a pre-tax charge of $1.17 billion for the estimated liability associated with lawsuits and claims brought against the company by states and political subdivisions relating to the distribution of prescription opioid pain medications. This is incremental to the $5.63 billion charge incurred in the first quarter of fiscal year 2020. The total pre-tax accrual for these matters at June 30, 2021 is $6.73 billion.

• Attributable to Cardinal Health, Inc.

Please see "Explanation and Reconciliation of Non-GAAP Financial Measures" in our Fiscal Year 2021 Form 10-K for GAAP to Non-GAAP reconciliations.

What we value

Integrity

we hold ourselves to the highest ethical standards

Inclusive

we embrace differences to drive the best outcomes

Innovative

we develop new ways of thinking, operating and serving customers

Accountable

we bring passion, determination and grit to deliver on our commitments

Mission driven

we serve the greater goal of healthcare

How we will grow

Grow & develop	Strengthen
our people	our core

Focus on the customer

Invest for the	Deliver
future	results

Moving forward

We're prioritizing investment in our strategic growth areas - Specialty Solutions, at-Home Solutions, Nuclear

• Precision Health Solutions, Medical Services and Outcomes™ - and expect these businesses to collectively realize double-digit growth in FY22. And across our business, we're enhancing our IT infrastructure in key areas to increase capabilities and digitization, improve the customer experience, and drive productivity.

In our Pharmaceutical segment, we're nearing the end of a multi-year project, accompanied by significant investment spending, to modernize our technology infrastructure which will simplify our processes, improve data insights, and enhance our ability to grow and generate better outcomes for our customers.

In the Medical segment, we have been taking quick, decisive action throughout the fiscal year to streamline and simplify our Medical business, and this work remains a top priority heading into FY22. We've recently restructured our organization to establish clearer lines of ownership and accountability and made management changes, including appointing a single leader to manage U.S. Medical Products and Distribution, as well as a single leader to manage International. With the divestiture of

Cordis™, we plan to significantly reduce our international commercial footprint - and have initially identified

36 markets we intend to exit - so we can focus on the locations where we have a competitive advantage and can generate sustained long-term growth.

With respect to the enterprise, I'm aggressively reviewing our cost structure to continue streamlining our operations and processes and intend to reinvest a portion of these savings to fuel future growth. In FY22, I plan to launch initiatives that we expect to deliver an additional $250 million in savings by FY23.

I will continue to take a balanced, disciplined and shareholder-friendly approach to capital deployment, with a focus on investing in the business, maintaining a strong balance sheet and returning cash to shareholders.

Opioid update

In July, we announced that we have negotiated a comprehensive proposed settlement agreement and settlement process designed to achieve broad resolution of governmental opioid claims. As I write this letter, we have determined that enough states have agreed to settle to proceed to the next phase, and each participating state will offer its political subdivisions the opportunity to participate in the settlement for an additional 120-day period, which ends January 2, 2022. If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities and, depending on the level of state and subdivision participation, we would pay up to $6.4 billion over 18 years.

This is an important step forward for our company. As we've consistently said, we remain committed to being a part of the solution to the U.S. opioid epidemic and believe the settlement would provide relief for our communities and certainty for our shareholders.

In closing

In January, we recognized our 50th anniversary. From our start as a grocery distributor, we've evolved and grown into the company we are today - a distributor of pharmaceuticals, a global manufacturer and distributor of medical and laboratory products, and a provider of technology-enabled performance and data solutions for healthcare facilities. While the events of the last year have introduced significant, rapid changes for our business and the world we live in, over 50 years we've learned that change is the only constant. We've adapted and pivoted at every step, using grit and determination to turn our challenges into opportunities.

I'm working to transform our business through growth, innovation and technology, positioning us to best serve our customers and their patients - now, and into the future.

Finally, I want to thank our 44,000 employees for their hard work and resilience. Their dedication makes it possible for Cardinal Health to fulfill its mission of improving the lives of people every day. I look forward to a healthier tomorrow.

With regards,

Mike Kaufmann

CEO

Important Information Regarding Forward-LookingStatements: 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.