# CARDINAL HEALTH INC (CAH) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from CARDINAL HEALTH INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/721371/000072137123000060/cah-20230630.htm Accession: 0000721371-23-000060 Filing date: 2023-08-15 Report date: 2023-06-30 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/CAH/ All MD&A years: /company/CAH/mda/ Previous year: /company/CAH/mda/fy2022/ (FY 2022) Next year: /company/CAH/mda/fy2024/ (FY 2024) Management's Discussion and Analysis of Financial Condition and Results of Operations Our MD&A within this Form 10-K generally discusses fiscal 2023 and fiscal 2022 items and year-over-year comparisons between fiscal 2023 and fiscal 2022. Fiscal 2021 items and discussions of year-over-year comparisons between fiscal 2022 and fiscal 2021 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, 2022 (the "Fiscal 2022 Form 10-K"). 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. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","2"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","About Cardinal Health"]] [[/GREPCENT_TABLE]] Management's Discussion and Analysis of Financial Condition and Results of Operations About Cardinal Health Cardinal Health, Inc., an Ohio corporation formed in 1979, is a global healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories, physician offices and patients in the home. We provide pharmaceuticals and medical products and cost-effective solutions that enhance supply chain efficiency. We connect patients, providers, payers, pharmacists and manufacturers for integrated care coordination and better patient management. We manage our business and report our financial results in two segments: Pharmaceutical and Medical. Pharmaceutical Segment Our Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical and over-the-counter healthcare and consumer products in the United States. This segment also provides services to pharmaceutical manufacturers and healthcare providers for specialty pharmaceutical products; provides pharmacy management services to hospitals and operates a limited number of pharmacies, including pharmacies in community health centers; operates nuclear pharmacies and radiopharmaceutical manufacturing facilities; and repackages generic pharmaceuticals and over-the-counter healthcare products. Medical Segment Our Medical segment manufactures, sources and distributes Cardinal Health branded medical, surgical and laboratory products, which are sold in the United States, Canada, Europe, Asia and other markets. This segment also distributes a broad range of medical, surgical and laboratory products known as national brand products and provides supply chain services and solutions to hospitals, ambulatory surgery centers, clinical laboratories and other healthcare providers in the United States and Canada. This segment also distributes medical products to patients' homes in the United States through our Cardinal Health at-Home Solutions division. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","3"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Overview"]] [[/GREPCENT_TABLE]] Consolidated Results Fiscal 2023 Overview Revenue Revenue for fiscal 2023 was $205.0 billion, a 13 percent increase from the prior year, primarily driven by Pharmaceutical segment sales growth. GAAP and Non-GAAP Operating Earnings/(Loss) [[GREPCENT_TABLE]] [["(in millions)","2023","","2022","","Change"],["GAAP operating earnings/(loss)","$","727","","","$","(596)","","","N.M."],["Surgical gown recall costs/(income)","\u2014","","","1"],["State opioid assessment related to prior fiscal years","(6)","","","\u2014"],["Shareholder cooperation agreement costs","8","","","\u2014"],["Restructuring and employee severance","95","","","101"],["Amortization and other acquisition-related costs","285","","","324"],["Impairments and (gain)/loss on disposal of assets, net","1,250","","","2,050"],["Litigation (recoveries)/charges, net","(302)","","","109"],["Non-GAAP operating earnings","$","2,057","","","$","1,990","","","3","%"]] [[/GREPCENT_TABLE]] The sum of the components and certain computations may reflect rounding adjustments. We had GAAP operating earnings of $727 million and a GAAP operating loss of $596 million during fiscal 2023 and 2022, respectively, which included $1.2 billion and $2.1 billion pre-tax non-cash goodwill impairment charges related to the Medical segment, respectively. See "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A and Note 4 of the "Notes to Consolidated Financial Statements" for additional detail. GAAP operating earnings during fiscal 2023 were favorably impacted by litigation recoveries as described further in Note 7 of the "Notes to Consolidated Financial Statements." Non-GAAP operating earnings during fiscal 2023 increased 3 percent to $2.1 billion, primarily driven by an increase in Pharmaceutical segment profit, partially offset by a decrease in Medical segment profit. GAAP and Non-GAAP Diluted EPS [[GREPCENT_TABLE]] [["($ per share)","2023 (2)","","2022 (2)(3)","","Change"],["GAAP diluted EPS (1)","$","1.00","","","$","(3.35)","","","N.M."],["State opioid assessment related to prior fiscal years","(0.02)","","","\u2014"],["Shareholder cooperation agreement costs","0.02","","","\u2014"],["Restructuring and employee severance","0.28","","","0.27"],["Amortization and other acquisition-related costs","0.80","","","0.87"],["Impairments and (gain)/loss on disposal of assets, net (4)","4.44","","","6.93"],["Litigation (recoveries)/charges, net","(0.73)","","","0.31"],["Loss on early extinguishment of debt","\u2014","","","0.03"],["Non-GAAP diluted EPS (1)","$","5.79","","","$","5.06","","","14","%"]] [[/GREPCENT_TABLE]] 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 section titled "Explanation and Reconciliation of Non-GAAP Financial Measures." (3)For fiscal 2022, 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 279 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 2022 non-GAAP diluted EPS is calculated using a weighted average of 280 million common shares, which includes potentially dilutive shares. (4)Impairments and (gain)/loss on disposals of assets, net includes pre-tax goodwill impairment charges of $1.2 billion and $2.1 billion, respectively, related to the Medical segment recorded during fiscal 2023 and 2022. The net tax benefits related to these charges were $82 million and $150 million, respectively. During fiscal 2023 and 2022, GAAP diluted EPS was adversely impacted by the goodwill impairment charges related to the Medical segment, which had a $(4.38) and $(6.94) per share after-tax impact, respectively. See "Critical Accounting Policies and Sensitive [[GREPCENT_TABLE]] [["4","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Overview"]] [[/GREPCENT_TABLE]] Accounting Estimates" section of this MD&A, and Note 4 and Note 8 of the "Notes to Consolidated Financial Statements" for additional detail. During fiscal 2023, GAAP diluted EPS was favorably impacted by litigation recoveries. See Note 7 of the "Notes to Consolidated Financial Statements." During fiscal 2023, non-GAAP diluted EPS increased 14 percent to $5.79 due to a lower share count, the factors impacting non-GAAP operating earnings described above and lower interest expense, net. Cash and Equivalents Our cash and equivalents balance was $4.0 billion at June 30, 2023 compared to $4.7 billion at June 30, 2022. During fiscal 2023, net cash provided by operating activities was $2.8 billion, which was offset by $2.0 billion in share repurchases, $579 million in debt repayments, $525 million of dividends and $481 million of capital expenditures. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","5"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Overview"]] [[/GREPCENT_TABLE]] Significant Developments in Fiscal 2023 and Trends Pharmaceutical Segment Generics Program The performance of our Pharmaceutical segment generics program positively impacted the year-over-year comparison of Pharmaceutical segment profit in fiscal 2023. The Pharmaceutical segment generics program includes, among other things, the impact of generic pharmaceutical product launches, customer volumes, pricing changes, the Red Oak Sourcing, LLC venture ("Red Oak Sourcing") with CVS Health Corporation ("CVS Health") and generic pharmaceutical contract manufacturing and sourcing costs. The frequency, timing, magnitude and profit impact of generic pharmaceutical customer volumes, pricing changes, customer contract renewals, generic pharmaceutical manufacturer pricing changes and generic pharmaceutical contract manufacturing and sourcing costs all impact Pharmaceutical segment profit and are subject to risks and uncertainties. These risks and uncertainties may impact Pharmaceutical segment profit and consolidated operating earnings in fiscal 2024. Medical Segment Inflationary Impacts Beginning in fiscal 2022, Medical segment profit was negatively affected by inflationary impacts, primarily related to transportation (including ocean and domestic freight), commodities, labor and global supply chain constraints. Since that time, we have taken actions to partially mitigate these impacts, including implementing certain price increases and evolving our pricing and commercial contracting processes to provide us with greater pricing flexibility. In addition, decreases in some product-related costs have been recognized as the higher-cost inventory moved through our supply chain and was replaced by lower cost inventory. These net inflationary impacts negatively affected Medical segment profit during fiscal 2023. We expect these net inflationary impacts to continue to affect Medical segment profit in fiscal 2024 and beyond, but to a significantly lesser extent than in fiscal 2023 and prior periods, due to our mitigation actions, together with continued decreases in certain product-related costs. However, these inflationary costs are difficult to predict and may be greater than we expect or continue longer than our current expectations. Our actions to increase prices and evolve our contracting strategies are subject to contingencies and uncertainties and it is possible that our results of operations will be adversely impacted to a greater extent than we currently anticipate or that we may not be able to mitigate the negative impact to the extent or on the timeline we anticipate. Volumes within Products and Distribution Medical segment profit was adversely impacted during fiscal 2023 on a year-over-year basis in part due to lower volumes within products and distribution, which includes our Cardinal Health branded medical products. We expect Cardinal Health branded medical products sales growth in fiscal 2024 and beyond. The timing, magnitude and profit impact of this anticipated sales growth is subject to risks and uncertainties, which may impact Medical segment profit. Medical Unit Goodwill Due to previously communicated changes in our long-term financial plan assumptions, including those related to Cardinal Health branded medical products sales growth, and increases in the risk-free interest rate, we performed goodwill impairment testing for the Medical operating segment (excluding our Cardinal Health at-Home Solutions division) (“Medical Unit”) during fiscal 2023. This testing resulted in cumulative pre-tax charges of $1.2 billion which were included in impairments and (gain)/loss on disposal of assets, net in our consolidated statements of earnings/(loss). See "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A and Note 4 of the "Notes to Consolidated Financial Statements" for additional detail. Adverse changes in key assumptions or a significant change in industry or economic trends during fiscal 2024 could result in additional goodwill impairment. Shareholder Cooperation Agreement In September 2022, we entered into a Cooperation Agreement (the "Cooperation Agreement") with Elliott Associates, L.P. and Elliott International, L.P.(together, "Elliott") under which our Board of Directors (the "Board"), among other things, (1) appointed four new independent directors, including a representative from Elliott, and (2) formed an advisory Business Review Committee of the Board, which is tasked with undertaking a comprehensive review of our strategy, portfolio, capital-allocation framework and operations. In May 2023, we extended the term of the Cooperation Agreement until the later of July 15, 2024 or until Elliott's representative ceases to serve on, or [[GREPCENT_TABLE]] [["6","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Overview"]] [[/GREPCENT_TABLE]] resigns from, the Board. In connection with this extension, the Board has extended the term of the Business Review Committee until July 15, 2024. The evaluation and implementation of any actions recommended by the Business Review Committee and the Board have impacted and may continue to impact our business, financial position and results of operations during fiscal 2024 and beyond. During fiscal 2023, we incurred $8 million of expenses related to the negotiation and finalization of the Cooperation Agreement and other consulting expenses. We have incurred, and expect to continue to incur additional legal, consulting and other expenses related to the Cooperation Agreement and the activities of the Business Review Committee. See "Risk Factors" section for additional detail related to risks associated with the Cooperation Agreement. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","7"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Results of Operations"]] [[/GREPCENT_TABLE]] Results of Operations Revenue [[GREPCENT_TABLE]] [["","Revenue"],["(in millions)","2023","","2022","","Change"],["Pharmaceutical","$","190,009","","","$","165,491","","","15","%"],["Medical","15,014","","","15,887","","","(5)","%"],["Total segment revenue","205,023","","","181,378","","","13","%"],["Corporate (1)","(11)","","","(14)","","","N.M."],["Total revenue","$","205,012","","","$","181,364","","","13","%"]] [[/GREPCENT_TABLE]] (1)Corporate revenue consists of the elimination of inter-segment revenue and other revenue not allocated to the segments. Pharmaceutical Segment Fiscal 2023 Pharmaceutical segment revenue grew by 15 percent primarily due to branded and specialty pharmaceutical sales growth largely from existing and net new customers, which increased revenue by $24.2 billion. Medical Segment Fiscal 2023 Medical segment revenue decrease was driven by products and distribution, which decreased revenue by $1.1 billion, primarily related to lower sales, largely due to an adverse impact from personal protective equipment ("PPE") pricing and volumes. This decrease was partially offset by sales growth in at-Home Solutions, which increased revenue by $215 million. Cost of Products Sold Cost of products sold for fiscal 2023 increased $23.3 billion (13 percent) due to the factors affecting the changes in revenue and gross margin. [[GREPCENT_TABLE]] [["8","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Results of Operations"]] [[/GREPCENT_TABLE]] Gross Margin [[GREPCENT_TABLE]] [["","Consolidated Gross Margin"],["(in millions)","2023","","2022","","Change"],["Gross margin","$","6,889","","","$","6,545","","","5","%"]] [[/GREPCENT_TABLE]] Fiscal 2023 consolidated gross margin increased primarily due to the Pharmaceutical segment, which reflected the positive performance of our generics program and a higher contribution from branded and specialty pharmaceutical products. This increase was partially offset by the performance of products and distribution within the Medical segment, primarily driven by lower volumes and unfavorable product sales mix, partially offset by a net positive contribution from PPE. Gross margin rate declined 25 basis points during fiscal 2023 mainly due to changes in overall product mix, primarily driven by increased pharmaceutical distribution branded sales, which have a dilutive impact on our overall gross margin rate. This decline in gross margin rate was partially offset by a net positive contribution from PPE. Distribution, Selling, General and Administrative ("SG&A") Expenses [[GREPCENT_TABLE]] [["","SG&A Expenses"],["(in millions)","2023","","2022","","Change"],["SG&A expenses","$","4,834","","","$","4,557","","","6","%"]] [[/GREPCENT_TABLE]] Fiscal 2023 SG&A expenses increased primarily due to inflationary impacts, primarily related to increased transportation and labor costs, higher operating expenses, including higher costs to support sales growth, and enterprise-wide incentive compensation. These increases were partially offset by the beneficial impact of enterprise-wide cost-savings measures. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","9"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Results of Operations"]] [[/GREPCENT_TABLE]] Segment Profit We evaluate segment performance based on segment profit, among other measures. See Note 13 of the "Notes to Consolidated Financial Statements" for additional information on segment profit. [[GREPCENT_TABLE]] [["","Segment Profit and Operating Earnings"],["(in millions)","2023","","2022","","Change"],["Pharmaceutical","$","1,999","","","$","1,770","","","13","%"],["Medical","111","","","216","","","(49)","%"],["Total segment profit","2,110","","","1,986","","","6","%"],["Corporate","(1,383)","","","(2,582)","","","N.M."],["Total consolidated operating earnings/(loss)","$","727","","","$","(596)","","","N.M."]] [[/GREPCENT_TABLE]] Pharmaceutical Segment Profit Fiscal 2023 Pharmaceutical segment profit increased primarily due to the positive performance of our generics program and an increased contribution from branded and specialty pharmaceutical products, partially offset by inflationary impacts, primarily related to increased transportation and labor costs. Medical Segment Profit Fiscal 2023 Medical segment profit decreased primarily due to the performance of products and distribution, largely driven by net inflationary impacts, lower volumes and unfavorable product sales mix, partially offset by a net positive contribution from PPE. Corporate The changes in Corporate during fiscal 2023 are due to the factors discussed in the "Other Components of Consolidated Operating Earnings/(Loss)" section that follows. [[GREPCENT_TABLE]] [["10","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Results of Operations"]] [[/GREPCENT_TABLE]] Other Components of Consolidated Operating Earnings/(Loss) In addition to revenue, gross margin and SG&A expenses discussed previously, consolidated operating earnings/(loss) were impacted by the following: [[GREPCENT_TABLE]] [["(in millions)","2023","","2022"],["Restructuring and employee severance","$","95","","","$","101"],["Amortization and other acquisition-related costs","285","","","324"],["Impairments and (gain)/loss on disposal of assets, net","1,250","","","2,050"],["Litigation (recoveries)/charges, net","(302)","","","109"]] [[/GREPCENT_TABLE]] Restructuring and Employee Severance Restructuring and employee severance costs during fiscal 2023 and 2022 were primarily related to the implementation of certain enterprise-wide cost-savings measures and the divestiture of the Cordis business. During fiscal 2023, we also incurred restructuring costs related to certain projects resulting from reviews of our strategy, portfolio, capital-allocation framework and operations. During fiscal 2022, restructuring costs also included facility exit costs related to decreasing our overall office space. Amortization and Other Acquisition-Related Costs Amortization of acquisition-related intangible assets was $281 million and $311 million for fiscal 2023 and 2022, respectively. Impairments and (Gain)/Loss on Disposal of Assets, Net During fiscal 2023 and 2022, we recognized $1.2 billion and $2.1 billion of pre-tax non-cash goodwill impairment charges, respectively, related to our Medical segment, as discussed further in the "Critical Accounting Policies and Sensitive Accounting Estimates" section of this MD&A and Note 4 of the "Notes to Consolidated Financial Statements." Litigation (Recoveries)/Charges, Net During fiscal 2023, we recognized income of $103 million, primarily related to a reduction of the reserve for the estimated settlement and defense costs for the Cordis OptEase and TrapEase inferior vena cava ("IVC") product liability due to the execution of certain settlement agreements. During fiscal 2022, we recognized estimated losses and legal defense costs associated with the IVC filter product liability claims of $87 million. See Note 7 of the "Notes to Consolidated Financial Statements" for additional information. During fiscal 2023, we recognized income of $93 million due to net proceeds from the settlement of a shareholder derivative litigation matter as described further in the "Legal Proceedings" section. During fiscal 2023 and 2022, we recognized income of $130 million and $18 million, respectively, for net recoveries in class action antitrust lawsuits in which we were a class member or plaintiff. Other Components of Earnings/(Loss) Before Income Taxes In addition to the items discussed above, earnings/(loss) before income taxes was impacted by the following: [[GREPCENT_TABLE]] [["(in millions)","2023","","2022","","Change"],["Other (income)/expense, net","$","(4)","","","$","16","","","N.M."],["Interest expense, net","93","","","149","","","(38)","%"],["Loss on early extinguishment of debt","\u2014","","","10","","","N.M."],["(Gain)/Loss on sale of equity interest in naviHealth","\u2014","","","(2)","","","N.M."]] [[/GREPCENT_TABLE]] Interest Expense, Net Fiscal 2023 interest expense decreased from fiscal 2022 primarily due to increased interest income from cash and equivalents. Loss On Early Extinguishment of Debt During fiscal 2022, we recognized a loss of $10 million connection with the debt redemption as described further in Note 6 of the "Notes to Consolidated Financial Statements." [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","11"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Results of Operations"]] [[/GREPCENT_TABLE]] Provision for Income Taxes Fluctuations in the effective tax rates are primarily due to the impact of the goodwill impairment charges recognized in fiscal 2023 and 2022 related to the Medical segment . 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): [[GREPCENT_TABLE]] [["","2023 (1)","","2022 (1)"],["Provision at Federal statutory rate","21.0","%","","21.0","%"],["State and local income taxes, net of federal benefit","6.6","","","2.2"],["Tax effect of foreign operations","(4.2)","","","3.5"],["Nondeductible/nontaxable items","(1.1)","","","1.2"],["Impact of Divestitures","\u2014","","","(4.9)"],["Withholding Taxes","1.0","","","(1.1)"],["Change in Valuation Allowances","(5.3)","","","3.5"],["US Taxes on International Income (2)","(0.7)","","","3.2"],["Impact of Resolutions with IRS and other related matters","5.8","","","(0.6)"],["Opioid litigation","0.1","","","(0.5)"],["Goodwill Impairment","36.9","","","(49.5)"],["Other","(1.2)","","","0.8"],["Effective income tax rate","58.9","%","","(21.2)","%"]] [[/GREPCENT_TABLE]] (1)     This table reflects fiscal 2023 pretax income with tax expense and fiscal 2022 pretax loss with tax expense. (2)    Includes the tax impact of Global Intangible Low-Taxed Income ("GILTI") tax, the Foreign-Derived Intangible Income deduction and other foreign income that is taxable under the U.S. tax code. During fiscal 2023 and 2022, the effective tax rate was 58.9 percent and (21.2) percent, respectively. Included in the effective tax rate for fiscal 2023 and 2022 was $82 million and $150 million, respectively, of benefit related to the goodwill impairment charges related to the Medical Unit. 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 2015 through the current fiscal year. Tax laws are complex and subject to varying interpretations. New challenges related to future audits may adversely affect our effective tax rate or tax payments. [[GREPCENT_TABLE]] [["12","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Liquidity and Capital Resources"]] [[/GREPCENT_TABLE]] Liquidity and Capital Resources We currently believe that, based on available capital resources and projected operating cash flow, we have adequate capital resources to fund our operations and expected future cash needs as described below. 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. Cash and Equivalents Our cash and equivalents balance was $4.0 billion at June 30, 2023 compared to $4.7 billion at June 30, 2022. Net cash provided by operating activities was $2.8 billion, which includes the impact of our second annual payment of $372 million related to the April 2022 agreement to settle the vast majority of the opioid lawsuits filed by states and local governmental entities (the "National Opioid Settlement Agreement"). In addition, we deployed $2.0 billion for share repurchases, $579 million for debt repayments, $525 million for dividends and $481 million for capital expenditures. At June 30, 2023, our cash and equivalents were held in cash depository accounts with major banks or invested in high quality, short-term liquid investments. At June 30, 2022, our cash and equivalents were $4.7 billion. During fiscal 2022, net cash provided by operating activities of $3.1 billion included a refund of $966 million for the tax benefit from the net operating loss carryback related to a self-insurance pre-tax loss. We also received proceeds of $923 million, net of cash transferred, from the divestiture of the Cordis business and we deployed $1.0 billion for share repurchases, $885 million for debt repayments, $559 million for dividends and $387 million for capital expenditures. Changes in working capital, which impact operating cash flow, can vary significantly depending on factors such as the timing of customer payments, inventory purchases, payments to vendors and tax payments in the regular course of business, as well as fluctuating working capital needs driven by customer and product mix. The cash and equivalents balance at June 30, 2023 included $533 million of cash and equivalents held by subsidiaries outside of the United States. In fiscal 2023, we returned $189 million of cash held by foreign subsidiaries to the U.S. At June 30, 2023, foreign earnings of approximately $976 million are considered indefinitely reinvested for working capital and other offshore investment needs. The computation of tax required if those earnings are repatriated is not practicable. For amounts not considered indefinitely reinvested, we have recorded an immaterial amount of income tax expense in our consolidated financial statements in fiscal 2023. Other Financing Arrangements and Financial Instruments Credit Facilities and Commercial Paper In addition to cash and equivalents and operating cash flow, other sources of liquidity at June 30, 2023 include a $2.0 billion commercial paper program, backed by a $2.0 billion revolving credit facility. We also have a $1.0 billion committed receivables sales facility. At June 30, 2023, we had no amounts outstanding under our commercial paper program, revolving credit facility or our committed receivables sales facility. During fiscal 2023, under our commercial paper program and our committed receivables program, we had maximum combined total daily amounts outstanding of $445 million. In February 2023, we extended our revolving credit facility through February 25, 2028. In September 2022, we renewed our committed receivables sales facility program through Cardinal Health Funding, LLC ("CHF") through September 30, 2025. Our revolving credit and committed receivables sales facilities require us to maintain a consolidated net leverage ratio of no more than 3.75-to-1. As of June 30, 2023, we were in compliance with this financial covenant. Long-Term Obligations At June 30, 2023, we had total long-term obligations, including the current portion and other short-term borrowings of $4.7 billion. During fiscal 2023, we repaid the full principal of $550 million of the 3.2% Notes due 2023. During fiscal 2022, we redeemed all outstanding $572 million principal amount of 2.616% Notes due 2022 and recorded a $10 million loss on early extinguishment of debt. We also repaid the full principal of the $282 million Floating Rate Notes due 2022 as they became due. The early redemption and repayments were funded with available cash. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","13"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Liquidity and Capital Resources"]] [[/GREPCENT_TABLE]] Capital Deployment Opioid Litigation Settlement Agreement We had $5.87 billion accrued at June 30, 2023 related to certain opioid litigation, as further described within Note 7 of the "Notes to Consolidated Financial Statements." We expect the majority of payments to occur through 2038. During fiscal 2023, we paid our second annual payment of $372 million under the National Opioid Settlement Agreement. In July 2023, we made our third annual payment of $378 million under the National Opioid Settlement Agreement. The amounts of these future payments may differ from the payments that we have already made. Capital Expenditures Capital expenditures during fiscal 2023 and 2022 were $481 million and $387 million, respectively. We expect capital expenditures in fiscal 2024 to be approximately $500 million and primarily related to manufacturing and distribution infrastructure projects and technology investments. Dividends During fiscal 2023, we paid quarterly dividends totaling $1.98 per share, an increase of 1 percent from fiscal 2022. On May 11, 2023, our Board of Directors approved a quarterly dividend of $0.5006 per share, or $2.00 per share on an annualized basis, which was paid on July 15, 2023, to shareholders of record on July 3, 2023. On August 9, 2023, our Board of Directors approved a quarterly dividend of $0.5006 per share, or $2.00 per share on an annualized basis, which will be paid on October 15, 2023, to shareholders of record on October 3, 2023. Share Repurchases During fiscal 2023 and 2022, we deployed $2.0 billion and $1.0 billion, respectively, for repurchases of our common shares. We funded the repurchases with available cash. See Note 11 of the "Notes to Consolidated Financial Statements" for additional information. On November 4, 2021, our Board of Directors approved a $3.0 billion share repurchase program, which will expire on December 31, 2024. On June 7, 2023, our Board of Directors approved a $3.5 billion share repurchase program, which will expire on December 31, 2027. At June 30, 2023, we had $4.3 billion remaining authorized for share repurchases under these programs. [[GREPCENT_TABLE]] [["14","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Other"]] [[/GREPCENT_TABLE]] Contractual Obligations and Cash Requirements At June 30, 2023, our contractual obligations and future cash requirements, including estimated payments due by period, were as follows: [[GREPCENT_TABLE]] [["(in millions)","2024","","2025 to 2026","","2027 to 2028","","There-after","","Total"],["Long-term debt and short-term borrowings (1)","$","764","","","$","917","","","$","1,308","","","$","1,626","","","$","4,615"],["Interest on long-term debt","218","","","326","","","215","","","1,336","","","2,095"],["Finance lease obligations (2)","28","","","41","","","16","","","7","","","92"],["Operating lease obligations (3)","113","","","189","","","123","","","97","","","522"],["Purchase obligations and other payments (4)","645","","","311","","","188","","","105","","","1,249"],["Opioid litigation settlement agreements (5)","426","","","837","","","832","","","3,715","","","5,810"],["Total contractual obligations and cash requirements (6)","$","2,194","","","$","2,621","","","$","2,682","","","$","6,886","","","$","14,383"]] [[/GREPCENT_TABLE]] (1)Represents maturities of our long-term debt obligations and other short-term borrowings excluding finance lease obligations described below. See Note 6 of the “Notes to Consolidated Financial Statements” for further information. (2)Represents minimum finance lease obligations included within current portion of long-term obligations and other short-term borrowings and long-term obligations, less current portion in our consolidated balance sheets and further described in Note 5 of the “Notes to Consolidated Financial Statements.” (3)Represents minimum operating lease obligations included within other accrued liabilities and deferred income taxes and other liabilities in our consolidated balance sheets and further described in Note 5 of the “Notes to Consolidated Financial Statements.” (4)A purchase obligation is defined as an agreement to purchase goods or services that is legally enforceable and specifies all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur. Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table. In addition, contracts that can be unilaterally canceled with no termination fee or with proper notice are excluded from our total purchase obligations except for the amount of the termination fee or the minimum amount of goods that must be purchased during the requisite notice period. Purchase obligations and other payments also includes quarterly payments to CVS Health in connection with Red Oak Sourcing. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information. (5)Represents future cash obligations under the National Opioid Settlement Agreement as well as future cash obligations under separate settlement agreements with the States of Oklahoma, Washington and West Virginia and the Cherokee Nation. We have $5.87 billion accrued at June 30, 2023, of which $426 million is included in other accrued liabilities, and the remainder is included in deferred income taxes and other liabilities in our consolidated balance sheets. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information. (6)Long-term liabilities, such as unrecognized tax benefits, deferred taxes and other tax liabilities, have been excluded from the above table due to the inherent uncertainty of the underlying tax positions or because of the inability to reasonably estimate the timing of any cash outflows. See Note 8 of the "Notes to Consolidated Financial Statements" for further discussion of income taxes. Recent Financial Accounting Standards See Note 1 of the “Notes to Consolidated Financial Statements” for further information. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","15"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Critical Accounting Policies and Sensitive Accounting Estimates"]] [[/GREPCENT_TABLE]] 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. See Note 1 of the “Notes to Consolidated Financial Statements” for further discussion. Allowance for Doubtful Accounts The allowance for doubtful accounts includes general and specific reserves. We determine our allowance for doubtful accounts by reviewing accounts receivable aging, historical write-off trends, payment history, pricing discrepancies, industry trends, customer financial strength, customer credit ratings or bankruptcies. We regularly evaluate how changes in economic conditions may affect credit risks. A hypothetical 0.1 percent increase or decrease in the reserve as a percentage of trade receivables at June 30, 2023, would result in an increase or decrease in bad debt expense of $11 million. We believe the reserve maintained and expenses recorded in fiscal 2023 are appropriate. At this time, we are not aware of any analytical findings or customer issues that are likely to lead to a significant future increase in the allowance for doubtful accounts as a percentage of revenue. The following table presents information regarding our allowance for doubtful accounts over the past three fiscal years: [[GREPCENT_TABLE]] [["(in millions, except percentages)","2023","","2022","","2021"],["Allowance for doubtful accounts at beginning of period","$","273","","","$","243","","","$","207"],["Charged to costs and expenses","197","","","155","","","130"],["Reduction to allowance for customer deductions and write-offs","(171)","","","(125)","","","(94)"],["Allowance for doubtful accounts at end of period","$","299","","","$","273","","","$","243"],["Allowance as a percentage of customer receivables","2.6","%","","2.6","%","","2.7","%"],["Allowance as a percentage of revenue","0.15","%","","0.15","%","","0.15","%"]] [[/GREPCENT_TABLE]] Inventories LIFO Inventory A portion of our inventories (55 percent and 52 percent at June 30, 2023 and 2022, respectively) are valued at the lower of cost, using the last-in, first-out ("LIFO") method, or market. These are primarily merchandise inventories at the core pharmaceutical distribution facilities within our Pharmaceutical segment (“distribution facilities”). The LIFO impact on the consolidated statements of earnings/(loss) depends on pharmaceutical manufacturer price appreciation or deflation and our fiscal year-end inventory levels, which can be meaningfully influenced by customer buying behavior immediately preceding our fiscal year-end. Historically, prices for branded pharmaceuticals have generally tended to rise, resulting in an increase in cost of products sold, whereas prices for generic pharmaceuticals generally tend to decline, resulting in a decrease in cost of products sold. Using LIFO, if there is a decrease in inventory levels that have experienced pharmaceutical price appreciation, the result generally will be a decrease in future cost of products sold as our older inventory is held at a lower cost. Conversely, if there is a decrease in inventory levels that have experienced a pharmaceutical price decline, the result generally will be an increase in future cost of products sold as our older inventory is held at a higher cost. We believe that the average cost method of inventory valuation provides a reasonable approximation of the current cost of replacing inventory within these distribution facilities. As such, the LIFO reserve is the difference between (a) inventory at the lower of LIFO cost or market and (b) inventory at replacement cost determined using the average cost method of inventory valuation. At June 30, 2023 and 2022, respectively, inventories valued at LIFO cost were $476 million and $416 million higher than the average cost value. We do not record inventories in excess of replacement cost. As such, we did not write-up the value of our inventory from average cost to LIFO cost at June 30, 2023 or 2022. FIFO Inventory Our remaining inventory, including inventory in our Medical segment and certain inventory in our Pharmaceutical segment, 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 ("FIFO") method, or net realizable value. We reserve for the lower of cost or net realizable value using the estimated selling prices and estimated sales demand in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. In fiscal 2021, we recorded a reserve of $197 million, primarily related to certain categories of gloves, to reduce the carrying value of certain PPE to its net realizable value. Our estimates for selling prices and demand are inherently uncertain and if our assumptions decline in the future, additional inventory reserves may be required. [[GREPCENT_TABLE]] [["16","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Critical Accounting Policies and Sensitive Accounting Estimates"]] [[/GREPCENT_TABLE]] Excess and Obsolete Inventory We reserve for inventory obsolescence using estimates based on historical experience, historical and projected sales trends, specific categories of inventory, age and expiration dates of on-hand inventory and manufacturer return policies. Inventories presented in the consolidated balance sheets are net of reserves for excess and obsolete inventory which were $139 million and $147 million at June 30, 2023 and 2022, respectively. If actual conditions are less favorable than our assumptions, additional inventory reserves may be required. Goodwill and Other Indefinite-Lived Intangible Assets Purchased goodwill and intangible assets with indefinite lives are tested for impairment annually or when indicators of impairment exist. Goodwill impairment testing involves a comparison of the estimated fair value of reporting units to the respective carrying amount, which may be performed utilizing either a qualitative or quantitative assessment. Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There is an option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. We have elected to bypass the qualitative assessment for the annual goodwill impairment test in the current year. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount. A reporting unit is defined as an operating segment or one level below an operating segment (also known as a component). We have two operating segments, which are the same as our reportable segments: Pharmaceutical and Medical. These operating segments are comprised of divisions (which are components), for which discrete financial information is available. Components are aggregated into reporting units for purposes of goodwill impairment testing to the extent that they share similar economic characteristics. Our reporting units are: Pharmaceutical operating segment (excluding our Nuclear and Precision Health Solutions division); Nuclear and Precision Health Solutions division; Medical operating segment (excluding our Cardinal Health at-Home Solutions division) (“Medical Unit”); and Cardinal Health at-Home Solutions division. Goodwill impairment testing involves judgment, including the identification of reporting units, qualitative evaluation of events and circumstances to determine if it is more likely than not that an impairment exists and, if necessary, the estimation of the fair value of the applicable reporting unit. Our determination of estimated fair value of our reporting units in fiscal 2023 was based on a combination of the income-based and market-based approaches (using discount rates ranging from 9.5 to 11 percent). We use discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and in our internally-developed forecasts. Under the market-based guideline public company method, we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. We also use the market-based guideline transaction method to determine fair value based on pricing multiples derived from the sale of companies that are similar to our reporting units. Estimating the fair value of reporting units requires the use of estimates and significant judgments that are based on a number of factors including actual operating results. The use of alternate estimates and assumptions, changes in the industry or peer groups, or changes in weightings assigned to the discounted cash flow method, guideline public company method or guideline transaction method could materially affect the determination of fair value for each reporting unit and potentially result in goodwill impairment. If a reporting unit fails to achieve expected earnings or operating cash flow, or otherwise fails to meet current financial plans, or if there were changes to any other key assumptions used in the tests, the reporting unit could incur a goodwill impairment in a future period. We performed annual impairment testing in fiscal 2023, 2022 and 2021 and concluded that there were no impairments of goodwill for Pharmaceutical operating segment (excluding our Nuclear and Precision Health Solutions division); Nuclear and Precision Health Solutions division; and Cardinal Health at-Home Solutions division as the estimated fair value of each reporting unit exceeded its carrying value. See additional detail on Medical Unit goodwill below. Medical Unit Goodwill Due to previously communicated changes in our long-term financial plan assumptions made during fiscal 2023, including those related to Cardinal Health branded medical products sales growth and net inflationary impacts, we elected to bypass the qualitative assessment and perform quantitative goodwill impairment testing for the Medical Unit at June 30, 2023. This quantitative testing resulted in the carrying amount of the Medical Unit exceeding the fair value, resulting in a pre-tax impairment charge of $368 million in the fourth quarter and cumulative pre-tax impairment charges of $1.2 billion due to the impairment charges recognized during the second and first quarters of fiscal 2023 as described further below. The fourth quarter impairment charge was primarily driven by the impact of the reductions in our long-term financial plan assumptions. The impairment charges are included in impairments and (gain)/loss on disposal of assets, net in our consolidated statements of earnings/(loss). The carrying value of the Medical Unit at June 30, 2023 after recognizing the impairment charges was $5.7 billion, of which $725 million was goodwill. See Note 4 of the "Notes to Consolidated Financial Statements" for further discussion. [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","17"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Critical Accounting Policies and Sensitive Accounting Estimates"]] [[/GREPCENT_TABLE]] We performed interim quantitative goodwill impairment testing for the Medical Unit at December 31, 2022 and September 30, 2022, which resulted in pre-tax impairment charges of $709 million and $154 million, respectively. The impairment charge recognized in the second quarter was driven by certain reductions in our long-term financial plan assumptions, and the impairment charge recognized in the first quarter was driven by an increase in the discount rate primarily due to an increase in the risk-free interest rate. We also performed quantitative goodwill impairment testing at March 31, 2023 and concluded that there was no impairment of goodwill at March 31, 2023 as the estimated fair value of the Medical Unit exceeded its carrying value by approximately 4 percent. Our determinations of the estimated fair value of the Medical Unit were based on a combination of the income-based approach (using a terminal growth rate of 2 percent), and the market-based approaches. Additionally, we assigned a weighting of 80 percent to the discounted cash flow method, 10 percent to the guideline public company method and 10 percent to the guideline transaction method. For the income-based approach, we used discount rates of 10 percent, 10 percent, 10.5 percent and 10.5 percent for fourth, third, second and first quarters, respectively. The decrease in the discount rate for the testing performed at March 31, 2023 and June 30, 2023 was primarily due to a decrease in the risk-free interest rate. While we consider the assumptions used in our determination of the estimated fair value of the Medical Unit to be reasonable and appropriate, they are complex and subjective, and additional adverse changes in one key assumption or a combination of key assumptions during fiscal 2024 may significantly affect future estimates. These assumptions include, among other things, a failure to meet expected earnings or other financial plans, including the execution of key initiatives related to optimizing and growing sales of Cardinal Health branded medical products, increasing growth in certain strategic divisions within our Medical segment, and driving simplification efforts and cost optimization projects, or unanticipated events and circumstances, such as changes in assumptions about the duration and magnitude of increased supply chain and commodities costs and our efforts to mitigate such impact, including price increases or surcharges; further disruptions in the supply chain; manufacturing cost inefficiencies resulting from lower than anticipated sales volume; an increase in the discount rate; a decrease in the terminal growth rate; increases in tax rates; or a significant change in industry or economic trends. Adverse changes in key assumptions may result in a decline in fair value below the carrying value in the future and therefore, an impairment of our Medical Unit goodwill in future periods, which could adversely affect our results of operations. For example, if we were to increase the discount rate by a hypothetical 0.5 percent to 10.5 percent or decrease the terminal growth rate by a hypothetical 1.75 percent to 0.25 percent, the fair value for the Medical Unit would have further decreased by approximately $250 million. Additionally, a hypothetical 25 basis point decrease in long-term gross margin rates, which could be impacted by changes in Cardinal Health branded medical product sales growth rate assumptions, would have increased the impairment charge by approximately $220 million. Other indefinite-lived intangibles The impairment test for indefinite-lived intangibles other than goodwill (primarily trademarks) involves first assessing qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If so, then a quantitative test is performed to compare the estimated fair value of the indefinite-lived intangible asset to the respective asset's carrying amount. Our qualitative evaluation requires the use of estimates and significant judgments and considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. See Note 1 of "Notes to Consolidated Financial Statements" for additional information regarding goodwill and other intangible assets. Loss Contingencies and Self-Insurance We regularly review contingencies and self-insurance accruals to determine whether our accruals and related disclosures are adequate. Any adjustments for changes in reserves are recorded in the period in which the change in estimate occurs. Loss Contingencies We accrue for contingencies related to disputes, litigation and regulatory matters if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because these matters are inherently unpredictable and unfavorable developments or outcomes can occur, assessing contingencies is highly subjective and requires judgments about future events. Examples of such contingencies include various lawsuits related to the distribution of prescription opioid pain medications and the IVC filter lawsuits. [[GREPCENT_TABLE]] [["18","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Critical Accounting Policies and Sensitive Accounting Estimates"]] [[/GREPCENT_TABLE]] We develop and periodically update reserve estimates for all litigation matters, including IVC claims, received to date and expected to be received in the future and related costs. In April 2023, we executed a settlement agreement that, if certain conditions are satisfied, will resolve approximately 4,376 IVC filter product liability claims for $275 million. These settlements will not resolve all IVC filter product liability claims and we intend to continue to vigorously defend ourselves in the remaining lawsuits. To project future IVC claim costs, we use a methodology based largely on recent experience, including claim filing rates, blended average payout influenced by claim severity, historical sales data, implant and injury to report lag patterns and estimated defense costs. Self-Insurance We self-insure through a wholly-owned insurance subsidiary for employee healthcare, certain product liability matters, auto liability, property and workers' compensation and maintain insurance for losses exceeding certain limits. Self-insurance accruals include an estimate for expected settlements on pending claims, defense costs, administrative fees, claims adjustment costs and an estimate for claims incurred but not reported. For certain types of exposures, we develop the estimate of expected ultimate costs to settle each claim based on specific information related to each claim if available. Other estimates are based on an assessment of outstanding claims, historical analysis and current payment trends. For claims incurred but not reported, the liabilities are calculated and derived in accordance with generally accepted actuarial practices or using an estimated lag period. The amount of loss may differ materially from these estimates. See Note 7 of the “Notes to Consolidated Financial Statements” for additional information regarding loss contingencies and product liability lawsuits. Provision for Income Taxes We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. Our income tax expense, deferred income tax assets and liabilities and unrecognized tax benefits reflect management’s assessment of estimated future taxes to be paid on items in the consolidated financial statements. The following table presents information about our tax position at June 30: [[GREPCENT_TABLE]] [["(in millions)","2023","","2022"],["Total deferred income tax assets (1)","$","1,540","","","$","1,584"],["Valuation allowance for deferred income tax assets (2)","(421)","","","(468)"],["Net deferred income tax assets","1,119","","","1,116"],["Total deferred income tax liabilities","(3,164)","","","(3,110)"],["Net deferred income tax liability","$","(2,045)","","","$","(1,994)"]] [[/GREPCENT_TABLE]] (1)    Total deferred income tax assets included $671 million and $778 million of loss and tax credit carryforwards at June 30, 2023 and 2022, respectively. (2)    The valuation allowance primarily relates to federal, state and international loss and credit carryforwards for which the ultimate realization of future benefits is uncertain. Expiring or unusable loss and credit carryforwards and the required valuation allowances are adjusted quarterly when it is more likely than not that at least a portion of the respective deferred tax assets will not be realized. After applying the valuation allowances, we do not anticipate any limitations on our use of any of the other net deferred income tax assets described previously. 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. We operate in a complex multinational tax environment and are subject to tax treaty arrangements and transfer pricing guidelines for intercompany transactions that are subject to interpretation. Uncertainty in a tax position may arise as tax laws are subject to interpretation. Tax Effects of Goodwill Impairment Charges During fiscal 2023 and 2022, we recognized cumulative pre-tax goodwill impairment charges of $1.2 billion and $2.1 billion, respectively, related to the Medical Unit. The net tax benefits related to these charges were $82 million and $150 million, respectively. 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 2015 through the current fiscal year. Tax laws are complex and subject to varying interpretations. During fiscal 2021, we resolved all open issues with respect to the Company’s activity within fiscal years 2008 through 2014 with the U.S. Internal Revenue Service ("IRS"). This resolution resulted in an adjustment to our provision for income taxes, including an impact to reserves for later years. New challenges related to future audits may adversely affect our effective tax rate or tax payments. Our assumptions and estimates around uncertain tax positions require significant judgment; the actual amount of tax benefit related to uncertain tax positions may differ from these estimates. See Note 8 of the “Notes to Consolidated Financial Statements” for additional information regarding unrecognized tax benefits. We believe that our estimates for the valuation allowances against deferred tax assets and unrecognized tax benefits are appropriate based on current facts and circumstances. The amount we [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","19"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["MD&A","Critical Accounting Policies and Sensitive Accounting Estimates"]] [[/GREPCENT_TABLE]] ultimately pay when matters are resolved may differ from the amounts accrued. Changes in our current estimates due to unanticipated market conditions, tax law changes or other factors could have a material effect on our ability to utilize deferred tax assets. For a further discussion on Provision for Income Taxes, see Note 8 of the “Notes to the Consolidated Financial Statements.” The calculation of our tax liabilities includes estimates for uncertainties in the application of broad and complex changes to the U.S. tax code as per the Tax Act as enacted by the United States government on December 22, 2017. We have made reasonable estimates and recorded amounts based on management judgment and our current understanding of the Tax Act which is subject to further interpretation by the IRS. See Note 8 of the “Notes to Consolidated Financial Statements” for additional information. [[GREPCENT_TABLE]] [["20","Cardinal Health | Fiscal 2023 Form 10-K"]] [[/GREPCENT_TABLE]] Explanation and Reconciliation of Non-GAAP Financial Measures Explanation and Reconciliation of Non-GAAP Financial Measures This report, including the "Fiscal 2023 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 or income includes inventory write-offs and certain remediation and supply disruption costs, net of related insurance recoveries, 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. Income from surgical gown recall costs represents insurance recoveries of these certain costs. 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 period in which the expense is incurred. 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. Income from state opioid assessments related to prior fiscal years represents reversals of accruals due to changes in estimates or when the underlying assessments were invalidated by a Court or reimbursed by manufacturers. •Shareholder cooperation agreement costs includes costs such as legal, consulting and other expenses incurred in relation to the agreement (the "Cooperation Agreement") entered into among Elliott Associates, L.P., Elliott International, L.P. (together, "Elliott") and Cardinal Health, including costs incurred to negotiate and finalize the Cooperation Agreement and costs incurred by the Business Review Committee of the Board of Directors, which was formed under this Cooperation Agreement. We have excluded these costs from our non-GAAP metrics because they do not occur in or reflect the ordinary course of our ongoing business operations and may obscure analysis of trends and financial performance. •Restructuring and employee severance costs are excluded because they are not part of the ongoing operations of our underlying business and include, but are not limited to, costs related to divestitures, closing and consolidating facilities, changing the way we manufacture or distribute our products, moving manufacturing of a product to another location, changes in production or business process outsourcing or insourcing, employee severance and realigning operations. •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 [[GREPCENT_TABLE]] [["","Cardinal Health | Fiscal 2023 Form 10-K","21"]] [[/GREPCENT_TABLE]] Explanation and Reconciliation of Non-GAAP Financial Measures 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, net 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. During fiscal 2022, we incurred a one-time contingent attorneys' fee of $18 million related to the finalization of the settlement agreement (the “National Opioid Settlement Agreement”) resulting in the settlement of the vast majority of opioid lawsuits filed by state and local governmental entities. Due to the unique nature and significance of the National Opioid Settlement Agreement, and the one-time, contingent nature of the fee, this fee was included in litigation recoveries or charges, net. Additionally, during fiscal 2022 our Pharmaceutical segment profit was positively impacted by a $16 million judgment for lost profits. This judgment was the result of an ordinary course intellectual property rights claim and, therefore, is not adjusted in calculating the litigation recoveries or charges, net adjustment. During fiscal 2021, we incurred a tax benefit related to a carryback of a net operating loss. Some pre-tax amounts, which contributed to this loss, relate to litigation charges. As a result, we allocated substantially all of the tax benefit to litigation charges. •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)/Loss 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. The tax effect for each of the items listed above 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.