CENCORA, INC. Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 . We are one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. We deliver innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health. We are organized based upon the products and services we provide to our customers. Our operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure, and, therefore, have been included in Other for the purpose of our reportable segment presentation.
Pharmaceutical Distribution Services Segment
The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution (including plasma and other blood products, injectible pharmaceuticals, vaccines, and other specialty pharmaceutical products) and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, the Pharmaceutical Distribution Services reportable segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution Services reportable segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, it delivers packaging solutions to institutional and retail healthcare providers. Other
Other consists of operating segments that focus on global commercialization
services and animal health (
MWI Animal Health ("MWI") is a leading animal health distribution company inthe United States and in theUnited Kingdom . MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. Additionally, MWI offers demand-creating sales force services to manufacturers. ABCS, through a number of operating businesses, provides a full suite of integrated manufacturer services that range from clinical trial support to product post-approval and commercialization support.World Courier , which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. 23
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Table of ContentsRecent Development InMarch 2020 , theWorld Health Organization ("WHO") declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, we implemented measures designed to keep our employees safe and address business continuity issues at our distribution centers and other locations. We continue to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on our revenue, results of operations, and cash flows (refer to our COVID-19 risk factor in Item 1A. Risk Factors on page 37). In the fiscal quarter endedMarch 31, 2020 , we experienced increased demand for pharmaceuticals as many of our customers increased their purchases due to the onset of COVID-19, which resulted in higher revenue and gross profit. We also incurred operating expenses directly attributable to the onset of COVID-19, and therefore, the impact to our operating income was not significant. As a result, while the impact of COVID-19 on us is evolving rapidly and its impacts are difficult to assess or predict, we expect our third quarter revenue to be proportionately lower as the increased second quarter revenue partially reflected purchases that would have otherwise been made afterMarch 31, 2020 .
Executive Summary
This executive summary provides highlights from the results of operations that
follow:
• Revenue increased 9.5% and 7.4% from the prior year quarter and
six-month period, respectively, primarily due to the revenuegrowth of
our Pharmaceutical Distribution Services segment;
• Total gross profit in the current year quarter decreased by 2.6% from
the prior year quarter and decreased 3.8% from the prior year
six-month period and was unfavorably impacted by last-in,first-out
("LIFO") expense in comparison to a LIFO credit in the prior year
periods and significantly lower gains from antitrust litigation
settlements, offset in part by increases in gross profit in
Pharmaceutical Distribution Services and Other and lowerPharMEDium
remediation costs. The six-month period was also unfavorably impacted
by the prior year reversal of a previously-estimated assessment
related to the New York State Opioid Stewardship Act. Pharmaceutical
Distributions Services' gross profit increased 6.6% from the prior
year quarter and 4.2% from the prior year six-month periodprimarily
due to the increase in revenue largely due to strong specialty product
sales. Gross profit in Other increased 10.1% from the prior year
quarter primarily due to growth at MWI and World Courier and 9.1% from
the prior year six-month period primarily due to growth at MWI, World
Courier , and the Lash consulting group within ABCS;
• Distribution, selling, and administrative expenses increased 10.4%
compared to the prior year quarter and 7.4% compared to theprior year
six-month period primarily due to an increase in costs to support
revenue growth in Other primarily due to an increase in freight and
warehousing costs and an increase in bad debt expense due to our
current assessment of the collectibility of trade receivables as a
result of the COVID-19 pandemic;
• Operating income increased by $262.0 million from the prior year
quarter and increased by $47.6 million from the prior yearsix-month
period primarily due to impairments of PharMEDium's assets of
million and $361.7 million in the three and six months ended
2020 (see Note 5 of the Notes to Consolidated Financial Statements)
compared to the $570.0 million impairment of PharMEDium's assets in
the three and six months ended March 31, 2019 , the decline in total
gross profit and the increase in distribution, selling, and
administrative expenses, as noted above;
• Our effective tax rates were (251.6)% and (128.9)% for the three and
six months ended March 31, 2020 , respectively. Our effective tax rates
were (49.5)% and 7.0% for the three and six months ended March 31,
2019 , respectively. The effective tax rates in the three and six
months ended March 31, 2020 were lower than the U.S. statutory rate
due to the tax benefits associated with our decision topermanently
exit the PharMEDium compounding business, the Coronavirus Aid, Relief,
and Economic Security ("CARES") Act, and other discrete items (see
Note 4 of the Notes to Consolidated Financial Statements) and due to a
higher mix of foreign earnings at lower tax rates in Switzerland and
Ireland since U.S. earnings were lower principally due to the
impairment of PharMEDium's assets (see Note 5 of the Notes to
Consolidated Financial Statements) in the three and six months ended
March 31, 2020 . The effective tax rates in the three and six months
ended March 31, 2019 were lower than the U.S. statutory rate due to a
higher mix of foreign earnings at lower tax rates in Switzerland and
Ireland since U.S. earnings were lower principally due to the $570.0
million impairment of PharMEDium's assets. The effective tax rate in
the six months ended March 31, 2019 also benefited from a $37.0
million decrease to our finalization of the estimated transition tax
liability related to the Tax Cuts and Jobs Act of 2017 (the "2017 Tax
Act"); and
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• Net income attributable to
share were significantly higher in the current year quarter and six
months ended March 31, 2020 primarily due to the discrete income tax
benefits recognized in the current year periods.
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Results of Operations
Revenue
Three months ended Six months ended
March 31, March 31,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical
Distribution Services $ 45,562,670 $ 41,676,164 9.3% $ 91,599,498 $ 85,420,545 7.2%
Other:
MWI Animal Health 1,043,016 947,293 10.1% 2,071,334 1,901,877 8.9%
Global
Commercialization
Services 833,577 718,136 16.1% 1,652,243 1,434,490 15.2%
Total Other 1,876,593 1,665,429 12.7% 3,723,577 3,336,367 11.6%
Intersegment
eliminations (21,624 ) (21,991 ) (40,694 ) (44,858 )
Revenue $ 47,417,639 $ 43,319,602 9.5% $ 95,282,381 $ 88,712,054 7.4%
We expect our revenue growth percentage to be in the low to mid-single digits in
fiscal 2020. Our future revenue growth will continue to be affected by various
factors, such as industry growth trends, including drug utilization, the
introduction of new, innovative brand therapies (including biosimilars), the
likely increase in the number of generic drugs that will be available over the
next few years as a result of the expiration of certain drug patents held by
brand-name pharmaceutical manufacturers and the rate of conversion from brand
products to those generic drugs, price inflation and price deflation, general
economic conditions in the United States , competition within the industry,
customer consolidation, changes in pharmaceutical manufacturer pricing and
distribution policies and practices, increased downward pressure on government
and other third-party reimbursement rates to our customers, changes in
government rules and regulations, and the impact of the COVID-19 pandemic (refer
to our COVID-19 risk factor in Item 1A. Risk Factors on page 37).
Revenue increased by 9.5% and 7.4% from the prior year quarter and six-month
period, respectively, primarily due to the revenue growth in our Pharmaceutical
Distribution Services segment.
The Pharmaceutical Distribution Services segment's revenue grew by 9.3%, or $3.9
billion , and 7.2%, or $6.2 billion , from the prior year quarter and six-month
period, respectively, primarily due to the organic growth of some of its largest
customers (sales to our largest customer, Walgreens, increased $1.7 billion and
$2.0 billion from the prior year quarter and six-month period, respectively)
increased specialty pharmaceutical product sales (which generally have higher
selling prices), and overall market growth principally driven by unit volume
growth and, to a lesser extent, inflationary increases in brand drugs.
Revenue in Other increased 12.7% and 11.6% from the prior year quarter and
six-month period, respectively. The increase was due to growth at all three
operating segments: MWI, ABCS, and
In the fiscal quarter endedMarch 31, 2020 , we experienced increased demand for pharmaceuticals as many of our customers increased their purchases due to the onset of COVID-19, which resulted in higher revenue and gross profit. We also incurred operating expenses directly attributable to the onset of COVID-19, and therefore, the impact to our operating income was not significant. As a result, while the impact of COVID-19 on us is evolving rapidly and its impacts are difficult to assess or predict, we expect our third quarter revenue to be proportionately lower as the increased second quarter revenue partially reflected purchases that would have otherwise been made afterMarch 31, 2020 . A number of our contracts with customers, including group purchasing organizations, are typically subject to expiration each year. We may lose a significant customer if an existing contract with such customer expires without being extended, renewed, or replaced. During the six months endedMarch 31, 2020 , no significant contracts expired. Over the next twelve months, there are no significant contracts scheduled to expire. Additionally, from time to time, significant contracts may be terminated in accordance with their terms or extended, renewed, or replaced prior to their expiration dates. If those contracts are extended, renewed, or replaced at less favorable terms, they may also negatively impact our revenue, results of operations, and cash flows. 26
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Gross Profit
Three months ended Six months ended
March 31, March 31,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical
Distribution Services $ 1,057,139 $ 992,101 6.6% $ 1,950,052 $ 1,870,565 4.2%
Other 359,428 326,457 10.1% 710,560 651,483 9.1%
Intersegment
eliminations 328 (249 ) (579 ) (556 )
Gain from antitrust
litigation settlements 54 51,976 8,546 139,255
LIFO (expense) credit (23,853 ) 66,805 (37,134 ) 69,834
PharMEDium remediation
costs - (12,334 ) (7,135 ) (30,245 )
PharMEDium shutdown
costs (4,989 ) - (4,989 ) -
New York State Opioid
Stewardship Act - - - 22,000
Gross profit $ 1,388,107 $ 1,424,756 (2.6)% $
2,619,321
Gross profit decreased 2.6%, or$36.6 million , from the prior year quarter and 3.8%, or$103.0 million from the prior year six-month period and was unfavorably impacted by LIFO expense in comparison to a LIFO credit in the prior year periods and significantly lower gains from antitrust litigation settlements, offset in part by increases in gross profit in Pharmaceutical Distribution Services and Other and lower PharMEDium remediation costs. The six-month period was also unfavorably impacted by the prior year reversal of a previously-estimated assessment related to theNew York State Opioid Stewardship Act. Pharmaceutical Distribution Services' gross profit increased 6.6%, or$65.0 million , from the prior year quarter and 4.2%, or$79.5 million , from the prior year six-month period due to the increase in revenue largely due to strong specialty product sales. As a percentage of revenue, Pharmaceutical Distribution Services' gross profit margins of 2.32% and 2.13% in the current year quarter and six-month period, respectively, decreased 6 basis points from the prior year periods. The decreases in gross profit margin from the prior year periods was primarily due to increased sales to our larger customers, which typically have lower gross profit margins. Gross profit in Other increased 10.1%, or$33.0 million , from the prior year quarter primarily due to growth atMWI and World Courier . Gross profit in Other increased 9.1%, or$59.1 million , from the prior year six-month period primarily due to growth at MWI,World Courier , and the Lash consulting group within ABCS. As a percentage of revenue, gross profit margin in Other of 19.15% in the three months endedMarch 31, 2020 decreased from 19.60% in the prior year quarter. As a percentage of revenue, gross profit margin in Other of 19.08% in the six months endedMarch 31, 2020 decreased from 19.53% in the prior year six-month period. We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of$0.1 million and$52.0 million during the three months endedMarch 31, 2020 and 2019, respectively. We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of$8.5 million and$139.3 million during the six months endedMarch 31, 2020 and 2019, respectively. The gains were recorded as reductions to Cost of Goods Sold (see Note 11 of the Notes to Consolidated Financial Statements). Our cost of goods sold for interim periods includes a LIFO provision that is recorded ratably on a quarterly basis and is based on our estimated annual LIFO provision. The annual LIFO provision, which we estimate on a quarterly basis, is affected by manufacturer pricing practices, which may be impacted by market and other external influences, expected changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors may have a material impact to our annual LIFO provision.New York State ("NYS") enacted the Opioid Stewardship Act ("OSA"), which initially went into effect onJuly 1, 2018 . The OSA established an annual$100 million Opioid Stewardship Fund (the "Fund") and required manufacturers, distributors, and importers licensed in NYS to ratably source the Fund. The ratable share of the assessment for each licensee was to be based upon opioids sold or distributed to or within NYS. InSeptember 2018 , we accrued$22.0 million as an estimate of our liability under the OSA for the period fromJanuary 1, 2017 throughSeptember 30, 2018 . InDecember 2018 , the OSA was ruled unconstitutional by theU.S. District Court for the Southern District of New York , and, as a result, we reversed the$22.0 million accrual in the quarter endedDecember 31, 2018 . 27
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Operating Expenses
Three months ended Six months ended
March 31, March 31,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Distribution, selling,
and administrative $ 693,413 $ 628,036 10.4% $ 1,379,366 $ 1,284,621 7.4%
Depreciation and
amortization 93,795 123,766 (24.2)% 198,310 246,266 (19.5)%
Employee severance,
litigation, and other 67,732 55,389 107,041 96,061
Impairment of
PharMEDium assets 223,652 570,000 361,652 570,000
Total operating
expenses $ 1,078,592 $ 1,377,191 (21.7)% $ 2,046,369 $ 2,196,948 (6.9)%
Distribution, selling, and administrative expenses increased 10.4%, or $65.4
million , compared to the prior year quarter and 7.4%, or $94.7 million , compared
to the prior year six-month period primarily due to an increase in costs to
support revenue growth in Other primarily due to an increase in freight and
warehousing costs, an increase in bad debt expense due to our current assessment
of the collectibility of trade receivables as a result of the COVID-19 pandemic,
and costs incurred in connection with permanently exiting the PharMEDium
compounding business, such as contract termination fees, offset in part by
operational synergies realized from the integration of H.D. Smith within
Pharmaceutical Distribution Services. As a percentage of revenue, distribution,
selling, and administrative expenses were 1.46% and 1.45% in the current year
quarter and six-month period, respectively, a 1 basis point increase compared to
the prior year quarter and flat compared to the prior year six-month period.
Depreciation expense decreased 7.2% and 7.7% from the prior year quarter and
six-month period, respectively, primarily due to the reduction of H.D. Smith
depreciable assets in connection with the integration of its operations.
Amortization expense decreased 50.6% and 38.1% from the prior year quarter and
six-month period, respectively, primarily due to the fiscal 2020 and 2019
impairments of PharMEDium intangible assets.
Employee severance, litigation, and other in the three months ended March 31,
2020 included $30.8 million of litigation costs that related to legal fees in
connection with opioid lawsuits and investigations, $25.0 million of severance
costs primarily related to position eliminations resulting from our decision to
permanently exit the PharMEDium compounding business, $9.0 million related to
our business transformation efforts, $2.5 million of other restructuring
initiatives, and $0.3 million of acquisition-related deal and integration costs.
Employee severance, litigation, and other in the three months ended March 31,
2019 included $14.0 million of severance costs primarily related to PharMEDium
restructuring activities, position eliminations resulting from our business
transformation efforts and the integration of H.D. Smith , and restructuring
activities related to our consulting business, $13.8 million of litigation costs
that related to legal fees in connection with opioid lawsuits and
investigations, $11.5 million of acquisition-related deal and integration costs
(primarily related to the integration of H.D. Smith ), $9.9 million related to
our business transformation efforts, and $6.2 million of other restructuring
initiatives.
Employee severance, litigation, and other in the six months ended March 31, 2020
included $55.5 million of litigation costs that related to legal fees in
connection with opioid lawsuits and investigations, $25.8 million of severance
costs primarily related to position eliminations resulting from our decision to
permanently exit the PharMEDium compounding business, $17.5 million related to
our business transformation efforts, $7.4 million of other restructuring
initiatives, and $0.8 million of acquisition-related deal and integration costs.
Employee severance, litigation, and other in the six month period ended
March 31, 2019 included $28.4 million of litigation costs that related to legal
fees in connection with opioid lawsuits and investigations, $22.0 million of
acquisition-related deal and integration costs (primarily related to the
integration of H.D. Smith ), $18.8 million of severance costs primarily related
to PharMEDium restructuring activities, position eliminations resulting from our
business transformation efforts and restructuring activities related to our
consulting business and the integration of H.D. Smith , $16.9 million related to
our business transformation efforts, and $10.0 million of other restructuring
initiatives.
We recorded impairments of PharMEDium's assets of $223.7 million and $361.7
million in the three and six months ended March 31, 2020 , respectively (see Note
5 of the Notes to Consolidated Financial Statements). We recorded an impairment
of PharMEDium's assets of $570.0 million in the three and six months ended March
31, 2019 .
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Operating Income
Three months ended Six months ended
March 31, March 31,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical
Distribution Services $ 563,097 $ 517,034 8.9% $ 954,791 $ 890,241 7.3%
Other 108,260 99,879 8.4% 212,739 198,813 7.0%
Intersegment
eliminations 328 (249 ) (579 ) (556 )
Total segment
operating income 671,685 616,664 8.9% 1,166,951 1,088,498 7.2%
Gain from antitrust
litigation settlements 54 51,976 8,546 139,255
LIFO (expense) credit (23,853 ) 66,805 (37,134 ) 69,834
PharMEDium remediation
costs - (15,897 ) (16,165 ) (36,392 )
PharMEDium shutdown
costs (32,470 ) - (32,470 ) -
New York State Opioid
Stewardship Act - - - 22,000
Contingent
consideration
adjustment 12,153 - 12,153 -
Acquisition-related
intangibles
amortization (26,670 ) (46,594 ) (60,236 ) (91,746 )
Employee severance,
litigation, and other (67,732 ) (55,389 ) (107,041 ) (96,061 )
Impairment of
PharMEDium assets (223,652 ) (570,000 ) (361,652 ) (570,000 )
Operating income $ 309,515 $ 47,565 550.7% $ 572,952 $ 525,388 9.1%
Segment operating income is evaluated before gain from antitrust litigation
settlements; LIFO (expense) credit; PharMEDium remediation costs; PharMEDium
shutdown costs; New York State Opioid Stewardship Act; contingent consideration
adjustment; acquisition-related intangibles amortization; employee severance,
litigation, and other; and impairment of PharMEDium assets.
Pharmaceutical Distribution Services' operating income increased 8.9%, or $46.1
million , from the prior year quarter and 7.3%, or $64.6 million , from the prior
year six-month period primarily due to the increases in gross profit, offset in
part by increases in operating expenses. As a percentage of revenue,
Pharmaceutical Distribution Services' operating income margins were 1.24% and
1.04% in the quarter and six-month period ended March 31, 2020 , respectively,
and were flat compared to the prior year periods.
Operating income in Other increased 8.4%, or $8.4 million , from the prior year
quarter and 7.0%, or $13.9 million , from the period year six-month period
primarily due to the increases in gross profit, offset in part by increases in
operating expenses.
Interest expense, net and the respective weighted average interest rates in the
quarter ended
2020 2019
Weighted Average Weighted Average
(dollars in thousands) Amount Interest Rate Amount Interest Rate
Interest expense $ 41,982 3.57% $ 49,882 3.76%
Interest income (7,561 ) 1.06% (6,607 ) 1.86%
Interest expense, net $ 34,421 $ 43,275
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Interest expense, net and the respective weighted average interest rates in the
six months ended
2020 2019
Weighted Average Weighted Average
(dollars in thousands) Amount Interest Rate Amount Interest Rate
Interest expense $ 83,584 3.58% $ 99,118 3.75%
Interest income (18,156 ) 1.23% (13,673 ) 1.81%
Interest expense, net $ 65,428 $ 85,445
Interest expense, net decreased 20.5%, or $8.9 million , from the prior year
quarter, and 23.4%, or $20.0 million , from the prior year six-month period due
to a decrease in interest expense primarily due to the adoption of the new lease
accounting standard (see Note 1 of the Notes to Consolidated Financial
Statements) as of October 1, 2019 , which resulted in the derecognition of
financing obligations related to lease construction assets. Prior to October 1,
2019 , we recognized interest expense associated with these financing
obligations. Upon adoption of the new lease standard, we began recognizing rent
expense related to these leases in Distribution, Selling, and Administrative
expenses in our Consolidated Statements of Operations. Interest expense, net
also decreased due to the increase in interest income due to a $1.4 billion
increase in our average invested cash balances compared to the prior year
quarter and six-month period, offset in part by a decline in investment interest
rates. In response to the COVID-19 pandemic's impact on the U.S. economy, the
federal government lowered Treasury interest rates. If rates remain at their
current levels, we would expect our interest income to decrease in the future.
Our effective tax rates were (251.6)% and (128.9)% for the three and six months
ended March 31, 2020 , respectively. Our effective tax rates were (49.5)% and
7.0% for the three and six months ended March 31, 2019 , respectively. The
effective tax rates in the three and six months ended March 31, 2020 were lower
than the U.S. statutory rate due to the tax benefits associated with our
decision to permanently exit the PharMEDium compounding business, the CARES Act,
and other discrete items (see Note 4 of the Notes to Consolidated Financial
Statements) and due to a higher mix of foreign earnings at lower tax rates in
Switzerland and Ireland since U.S. earnings were lower principally due to the
impairment of PharMEDium's assets (see Note 5 of the Notes to Consolidated
Financial Statements) in the three and six months ended March 31, 2020 . The
effective tax rates in the three and six months ended March 31, 2019 were lower
than the U.S. statutory rate due to a higher mix of foreign earnings at lower
tax rates in Switzerland and Ireland since U.S. earnings were lower principally
due to the $570.0 million impairment of PharMEDium's assets. The effective tax
rate in the six months ended March 31, 2019 also benefited from a $37.0 million
decrease to our finalization of the estimated transition tax liability related
to the 2017 Tax Act.
Net income attributable to AmerisourceBergen and diluted earnings per share were
significantly higher in the current year quarter and six months ended March 31,
2020 primarily due to the discrete income tax benefits recognized in the current
year periods.
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Liquidity and Capital Resources
The following table illustrates our debt structure as of
Outstanding Additional
(in thousands) Balance Availability
Fixed-Rate Debt:
$500,000 , 3.50% senior notes due 2021 $ 499,165 $ -
$500,000 , 3.40% senior notes due 2024 497,988
-
$500,000 , 3.25% senior notes due 2025 496,650
-
$750,000 , 3.45% senior notes due 2027 743,520
-
$500,000 , 4.25% senior notes due 2045 494,622
-
$500,000 , 4.30% senior notes due 2047 492,622 - Nonrecourse debt 69,197 - Total fixed-rate debt 3,293,764 - Variable-Rate Debt: Revolving credit note - 75,000 Term loan due 2020 399,873 - Overdraft facility due 2021 (£30,000) 32,438
4,801
Receivables securitization facility due 2022 350,000
1,100,000
Multi-currency revolving credit facility due 2024 - 1,400,000 Nonrecourse debt 69,119 - Total variable-rate debt 851,430 2,579,801 Total debt$ 4,145,194 $ 2,579,801 Our operating results have generated cash flows, which, together with availability under our debt agreements and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, and to fund capital expenditures, acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and purchases of shares of our common stock. Our primary ongoing cash requirements will be to finance working capital, fund the repayment of debt, fund the payment of interest on debt, fund purchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements. As discussed in Note 10 of the Notes to Consolidated Financial Statements, we are a party to discussions with the objective of reaching potential terms of a broad resolution of the remaining opioid-litigation and claims. Although we are not able to predict the outcome or reasonably estimate a range of possible losses in these matters, an adverse judgment or negotiated resolution in any of these matters could have a material adverse impact on our financial position, cash flows or liquidity. As ofMarch 31, 2020 andSeptember 30, 2019 , our cash and cash equivalents held by foreign subsidiaries were$434.5 million and$826.8 million , respectively, and are generally based inU.S. dollar denominated holdings. We have the ability to repatriate the majority of our cash and cash equivalents held by our foreign subsidiaries without incurring additional taxes upon repatriation. We have increased seasonal needs related to our inventory build during the December and March quarters that, depending on our cash balance, may require the use of our credit facilities to fund short-term capital needs. Our cash balance in the six months endedMarch 31, 2020 and 2019 were supplemented by intra-period credit facility borrowings to cover short-term working capital needs. The largest amount of intra-period borrowings under our revolving and securitization credit facilities that was outstanding at any one time during the six months endedMarch 31, 2020 and 2019 was$39.6 million and$240.6 million , respectively. We had$54.7 million and$526.4 million of cumulative intra-period borrowings that were repaid under our credit facilities during the six months endedMarch 31, 2020 and 2019, respectively. We have a$1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which is scheduled to expire inSeptember 2024 , with a syndicate of lenders. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on our debt rating and ranges from 70 basis points to 112.5 31
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basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (91 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee as ofMarch 31, 2020 ) and from 0 basis points to 12.5 basis points over the alternate base rate and Canadian prime rate, as applicable. We pay facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on our debt rating, ranging from 5 basis points to 12.5 basis points, annually, of the total commitment (9 basis points as ofMarch 31, 2020 ). We may choose to repay or reduce our commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which we were compliant as ofMarch 31, 2020 . We have a commercial paper program whereby we may from time to time issue short-term promissory notes in an aggregate amount of up to$1.4 billion at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase our borrowing capacity as it is fully backed by our Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under our commercial paper program as ofMarch 31, 2020 . We have a$1,450 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire inSeptember 2022 . We have available to us an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to$250 million , subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee. We pay a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which we were compliant as ofMarch 31, 2020 . We have an uncommitted, unsecured line of credit available to us pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides us with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed$75 million . The Revolving Credit Note may be decreased or terminated by the bank or us at any time without prior notice. We also have a £30 million uncommittedU.K. overdraft facility ("Overdraft Facility"), which expires inFebruary 2021 , to fund short term normal trading cycle fluctuations related to our MWI business.
Nonrecourse debt is comprised of short-term and long-term debt belonging to the
InOctober 2018 , our board of directors authorized a share repurchase program allowing us to purchase up to$1.0 billion of outstanding shares of our common stock, subject to market conditions. During the six months endedMarch 31, 2020 , we purchased$392.3 million of our common stock, which excluded$14.8 million ofSeptember 2019 purchases that cash settled inOctober 2019 . As ofMarch 31, 2020 , we had$68.8 million of availability remaining under this program. InMay 2020 , our board of directors authorized a new share repurchase program allowing us to purchase up to$500 million of our outstanding shares of common stock, subject to market conditions. We have market risk exposure to interest rate fluctuations relating to our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt. The amount of variable-rate debt fluctuates during the year based on our working capital requirements. We had$851.4 million of variable-rate debt outstanding as ofMarch 31, 2020 . We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such instruments will be available in the combinations we want and/or on terms acceptable to us. There were no such financial instruments in effect as ofMarch 31, 2020 . We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had$3,691.9 million in cash and cash equivalents as ofMarch 31, 2020 . The unfavorable impact of a hypothetical decrease in interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every$100 million of cash invested that is in excess of variable-rate debt, a 10-basis point decrease in interest rates would increase our annual net interest expense by$0.1 million . We have minimal exposure to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Brazilian Real, the Euro, the U.K. Pound Sterling , and the Canadian Dollar. Revenue from our foreign operations is less than two percent of our consolidated revenue. We may utilize foreign currency 32
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denominated forward contracts to hedge against changes in foreign exchange rates. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes.
The following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancellable operating leases, and minimum payments on our other commitments as ofMarch 31, 2020 : Debt, Including Interest Operating
Payments Due by Period (in thousands) Payments Leases
Other Commitments Total Within 1 year$ 672,106 $ 114,388 $ 102,559$ 889,053 1-3 years 1,134,280 218,144 63,099 1,415,523 4-5 years 1,201,038 183,033 83,485 1,467,556 After 5 years 2,747,125 419,925 58,283 3,225,333 Total$ 5,754,549 $ 935,490 $ 307,426$ 6,997,465 The 2017 Tax Act requires a one-time transition tax to be recognized on historical foreign earnings and profits. We expect to pay$182.6 million , net of overpayments and tax credits, related to the transition tax as ofMarch 31, 2020 , which is payable in installments over a six-year period commencing inJanuary 2021 . The transition tax commitment is included in "Other Commitments" in the above table. Our liability for uncertain tax positions was$121.5 million (including interest and penalties) as ofMarch 31, 2020 . This liability represents an estimate of tax positions that we have taken in our tax returns which may ultimately not be sustained upon examination by taxing authorities. Since the amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated liability has been excluded from the above contractual obligations table. During the six months endedMarch 31, 2020 , our operating activities provided cash of$995.7 million in comparison to$1,103.3 million in the prior year period. Cash provided by operations during the six months endedMarch 31, 2020 was principally the result of an increase in accounts payable of$2,395.8 million , net income of$1,157.7 million , and non-cash items of$644.0 million , offset in part by increases in accounts receivable of$2,052.2 million and income taxes receivable of$693.6 million . The increase in accounts payable was primarily driven by the timing of scheduled payments to suppliers. The non-cash items were comprised primarily of a$361.7 million impairment of PharMEDium's assets (see Note 5 of the Notes to Consolidated Financial Statements),$143.6 million of depreciation expense, and$66.6 million of amortization expense. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. The increase in income taxes receivable was the result of a benefit recorded in connection with certain discrete items (see Note 4 of the Notes to Consolidated Financial Statements). During the six months endedMarch 31, 2019 , our operating activities provided$1,103.3 million of cash. Cash provided by operations during the six months endedMarch 31, 2019 was principally the result of an increase in accounts payable of$1,350.7 million , non-cash items of$820.4 million , and net income of$419.8 million , offset in part by increases in accounts receivable of$880.8 million and inventories of$420.2 million . The increase in accounts payable was primarily driven by the increase in inventories and the timing of scheduled payments to suppliers. The non-cash items were comprised primarily of a$570.0 million impairment of PharMEDium's assets,$171.8 million of depreciation expense, and$100.0 million of amortization expense. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. The increase in our inventories as ofMarch 31, 2019 reflects the increase in business volume. We use days sales outstanding, days inventory on hand, and days payable outstanding to evaluate our working capital performance. The below financial metrics are calculated based upon a quarterly average and can be impacted by the timing of cash receipts and disbursements, which can vary significantly depending upon the day of the week on which the month ends. Three months ended Six months ended March 31, March 31, 2020 2019 2020 2019
Days sales outstanding 24.9 25.8 24.6 25.2 Days inventory on hand 28.4 29.9 28.2 28.9 Days payable outstanding 58.5 59.3 57.5 58.2
Our cash flows from operating activities can vary significantly from period to period based upon fluctuations in our period-end working capital account balances. Additionally, any changes to payment terms with a significant customer or manufacturer supplier could have a material impact to our cash flows from operations. Operating cash flows during the six months endedMarch 31, 2020 included$76.2 million of interest payments and$101.9 million of income tax payments, net of refunds. 33
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Operating cash flows during the six months endedMarch 31, 2019 included$84.6 million of interest payments and$69.7 million of income tax payments, net of refunds. Capital expenditures for the six months endedMarch 31, 2020 and 2019 were$144.4 million and$161.5 million , respectively. Significant capital expenditures in the six months endedMarch 31, 2020 and 2019 included costs associated with various technology initiatives, including costs related to enhancing and upgrading our primary information technology operating systems. We currently expect to invest approximately$400 million for capital expenditures during fiscal 2020. Net cash used in financing activities in the six months endedMarch 31, 2020 principally resulted from$407.2 million in purchases of our common stock and$170.5 million in cash dividends paid on our common stock. Net cash used in financing activities in the six months endedMarch 31, 2019 principally resulted from$348.0 million in purchases of our common stock and$170.4 million in cash dividends paid on our common stock. InJanuary 2020 , our board of directors increased the quarterly dividend paid on common stock by 5% from$0.40 per share to$0.42 per share. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remains within the discretion of our board of directors and will depend upon future earnings, financial condition, capital requirements, and other factors. 34
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Cautionary Note Regarding Forward-Looking Statements
Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expect," "likely," "outlook," "forecast," "would," "could," "should," "can," "project," "intend," "plan," "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances and speak only as of the date hereof. These statements are not guarantees of future performance and are based on assumptions and estimates that could prove incorrect or could cause actual results to vary materially from those indicated. Among the factors that could cause actual results to differ materially from those projected, anticipated, or implied are the following: unfavorable trends in brand and generic pharmaceutical pricing, including in rate or frequency of price inflation or deflation; competition and industry consolidation of both customers and suppliers resulting in increasing pressure to reduce prices for our products and services; changes inthe United States healthcare and regulatory environment, including changes that could impact prescription drug reimbursement under Medicare and Medicaid; increasing governmental regulations regarding the pharmaceutical supply channel and pharmaceutical compounding; declining reimbursement rates for pharmaceuticals; continued federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances; continued prosecution or suit by federal, state and other governmental entities of alleged violations of laws and regulations regarding controlled substances, including due to failure to achieve a global resolution of the multi-district opioid litigation and other related state court litigation, and any related disputes, including shareholder derivative lawsuits; increased federal scrutiny and litigation, including qui tam litigation, for alleged violations of laws and regulations governing the marketing, sale, purchase and/or dispensing of pharmaceutical products or services, and associated reserves and costs; failure to comply with the Corporate Integrity Agreement; material adverse resolution of pending legal proceedings; the retention of key customer or supplier relationships under less favorable economics or the adverse resolution of any contract or other dispute with customers or suppliers; changes to customer or supplier payment terms, including as a result of the COVID-19 impact on such payment terms; risks associated with the strategic, long-term relationship between Walgreens Boots Alliance, Inc. and the Company, including principally with respect to the pharmaceutical distribution agreement and/or the global generic purchasing services arrangement; changes in tax laws or legislative initiatives that could adversely affect the Company's tax positions and/or the Company's tax liabilities or adverse resolution of challenges to the Company's tax positions; regulatory or enforcement action in connection with our former compounded sterile preparations (CSP) business or the related consent decree; managing foreign expansion, including non-compliance with theU.S. Foreign Corrupt Practices Act, anti-bribery laws, economic sanctions and import laws and regulations; financial market volatility and disruption; the loss, bankruptcy or insolvency of a major supplier, including as a result of COVID-19; substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer, including as a result of COVID-19; financial and other impacts of COVID-19 on our operations or business continuity; changes to the customer or supplier mix; malfunction, failure or breach of sophisticated information systems to operate as designed; risks generally associated with data privacy regulation and the international transfer of personal data; natural disasters or other unexpected events that affect the Company's operations; the impairment of goodwill or other intangible assets (including any additional impairments with respect to foreign operations), resulting in a charge to earnings; the acquisition of businesses that do not perform as expected, or that are difficult to integrate or control, or the inability to capture all of the anticipated synergies related thereto or to capture the anticipated synergies within the expected time period; the Company's ability to manage and complete divestitures; the disruption of the Company's cash flow and ability to return value to its stockholders in accordance with its past practices; interest rate and foreign currency exchange rate fluctuations; declining economic conditions inthe United States and abroad; and other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting the Company's business generally. Certain additional factors that management believes could cause actual outcomes and results to differ materially from those described in forward-looking statements are set forth (i) elsewhere in this report (including in Item 1A (Risk Factors)), (ii) in Item 1A (Risk Factors), in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 and elsewhere in that report and (iii) in other reports filed by the Company pursuant to the Securities Exchange Act. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by the federal securities laws. 35
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