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 physicianswho 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
-------------------------------------------------------------------------------- Table of Contents Executive Summary
This executive summary provides highlights from the results of operations that follow:
•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 theWHO 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). •Revenue increased by 0.3% from the prior year quarter. Operating segments within Other increased revenue by 4.4%, and the Pharmaceutical Distribution Services reportable segment's revenue grew by 0.1% primarily due to the onset of COVID-19 inMarch 2020 when many of our customers increased their purchases in the fiscal quarter endedMarch 31, 2020 , which resulted in fewer purchases in the fiscal quarter endedJune 30, 2020 . Revenue increased 5.0% from the prior year nine-month period, primarily due to the revenue growth in our Pharmaceutical Distribution Services reportable segment; •Total gross profit in the current year quarter decreased by 0.4% from the prior year quarter and decreased 2.7% from the prior year nine-month period and was unfavorably impacted by lower gains from antitrust litigation settlements and last-in, first-out ("LIFO") expense in comparison to a LIFO credit in the prior year periods, offset in part by relatively small increases in gross profit in Pharmaceutical Distribution Services and Other and lower PharMEDium remediation costs. The decline in the nine-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 3.0% from the prior year nine-month period primarily due to the strong increase in specialty product sales. Gross profit in Other increased 6.4% from the prior year nine-month period due to growth atWorld Courier , MWI, and ABCS; •Distribution, selling, and administrative expenses increased 1.5% compared to the prior year quarter and 5.4% compared to the prior year nine-month period. The increase from the prior year quarter was primarily due to an increase in warehousing and freight costs and was partially offset by lower corporate administrative expenses. The increase from the prior year nine-month period was primarily due to an increase in operating costs to support revenue growth 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 was relatively flat compared to the prior year quarter and increased by 4.9% from the prior year nine-month period. The increase from the prior year nine-month period was due to a lower impairment charge relating to PharMEDium assets and a decline in depreciation and amortization, which was partially offset by the decline in gross profit and an increase in distribution, selling, and administrative expenses, as noted above; •Our effective tax rates were 16.5% and (70.1)% for the three and nine months endedJune 30, 2020 , respectively. Our effective tax rates were 18.6% and 12.2% for the three and nine months endedJune 30, 2019 , respectively. The effective tax rates in the three months endedJune 30, 2020 and 2019 were favorably impacted by our international businesses inSwitzerland andIreland , which have lower income tax rates. The effective tax rate in the nine months endedJune 30, 2020 was lower than theU.S. statutory rate due to the tax benefits associated with our decision to permanently 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 inSwitzerland andIreland sinceU.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 nine months endedJune 30, 2020 . The effective tax rate in the nine months endedJune 30, 2019 was lower than theU.S. statutory rate due to a higher mix of foreign earnings at lower tax rates inSwitzerland andIreland sinceU.S. earnings were lower principally due to the$570.0 million impairment of PharMEDium's assets. The effective tax rate in the nine months endedJune 30, 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 24 -------------------------------------------------------------------------------- Table of Contents •Net income attributable toAmerisourceBergen and diluted earnings per share were significantly higher in the nine months endedJune 30, 2020 primarily due to the discrete income tax benefits recognized in the current year. 25 --------------------------------------------------------------------------------
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Results of Operations
Revenue
Three months ended Nine months ended
June 30, June 30,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical Distribution Services $ 43,579,119 $ 43,527,552 0.1% $ 135,178,617 $ 128,948,097 4.8%
Other:
MWI Animal Health 1,008,581 1,021,936 (1.3)% 3,079,915 2,923,813 5.3%
Global Commercialization Services 801,952 712,602 12.5% 2,454,195 2,147,092 14.3%
Total Other 1,810,533 1,734,538 4.4% 5,534,110 5,070,905 9.1%
Intersegment eliminations (22,875) (22,825) (63,569) (67,683)
Revenue $ 45,366,777 $ 45,239,265 0.3% $ 140,649,158 $ 133,951,319 5.0%
We expect our revenue growth percentage to be in the 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 0.3% from the prior year quarter. Operating segments
within Other increased revenue by 4.4%, and the Pharmaceutical Distribution
Services reportable segment's revenue grew by 0.1%. Revenue increased by 5.0%
from the prior year nine-month period, primarily due to the revenue growth in
our Pharmaceutical Distribution Services segment.
The Pharmaceutical Distribution Services segment's revenue grew by 0.1%, or
$0.1 billion primarily due to the onset of COVID-19 in March 2020 when many of
our customers increased their purchases in the fiscal quarter ended March 31,
2020 , which resulted in fewer purchases in the quarter ended June 30, 2020 . The
Pharmaceutical Distribution Services segment's revenue grew by 4.8%, or $6.2
billion , from the prior year nine-month period primarily due to the organic
growth of some of its largest customers (sales to our largest customer,
Walgreens, increased $2.0 billion from the prior year nine-month period),
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 4.4% from the prior year quarter primarily due to
growth at ABCS and World Courier , offset in part by a decrease in revenue at MWI
as a result of COVID-19. Revenue in Other increased 9.1% from the prior year
nine-month period due to growth at all three operating segments: ABCS, MWI, and
World Courier .
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 nine months ended June 30,
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.
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Gross Profit
Three months ended Nine months ended
June 30, June 30,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical Distribution
Services $ 906,663 $ 904,124 0.3%$ 2,856,715 $ 2,774,689 3.0% Other 328,942 325,562 1.0% 1,039,502 977,045 6.4% Intersegment eliminations (3,396) (142) (3,975) (698) Gain from antitrust litigation settlements - 3,480 8,546 142,735 LIFO (expense) credit (6,061) 9,913 (43,195) 79,747 PharMEDium remediation costs - (11,698) (7,135) (41,943) PharMEDium shutdown costs (432) - (5,421) -New York State Opioid Stewardship Act - - - 22,000 Gross profit$ 1,225,716 $ 1,231,239 (0.4)%$ 3,845,037 $ 3,953,575 (2.7)% Gross profit decreased 0.4%, or$5.5 million , from the prior year quarter and 2.7%, or$108.5 million , from the prior year nine-month period. Gross profit was unfavorably impacted by lower gains from antitrust litigation settlements and LIFO expense in comparison to a LIFO credit in the prior year periods and was offset in part by increases in gross profit in Pharmaceutical Distribution Services and Other and lower PharMEDium remediation costs. The decline in the nine-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 0.3%, or$2.5 million , from the prior year quarter primarily due to a slight increase in revenue as a result of COVID-19's impact on customer purchases in the current year quarter, as noted above. Pharmaceutical Distribution Services' gross profit increased 3.0%, or$82.0 million , from the prior year nine-month period due to the strong increase in specialty product sales. As a percentage of revenue, Pharmaceutical Distribution Services' gross profit margins were 2.08% and 2.11% in the current year quarter and nine-month period, respectively, flat compared to the prior year quarter and a 4-basis point decline from the prior year nine-month period. The decline in gross profit margin from the prior year nine-month period was primarily due to increased sales to our larger customers, which typically have lower gross profit margins. Gross profit in Other increased 1.0%, or$3.4 million , from the prior year quarter primarily due to growth atWorld Courier and was offset in part by a decrease in gross profit at MWI due to lower revenue. Gross profit in Other increased 6.4%, or$62.5 million , from the prior year nine-month period due to growth atWorld Courier , MWI, and ABCS. As a percentage of revenue, gross profit margin in Other of 18.17% in the three months endedJune 30, 2020 decreased from 18.77% in the prior year quarter. As a percentage of revenue, gross profit margin in Other of 18.78% in the nine months endedJune 30, 2020 decreased from 19.27% in the prior year nine-month period. We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of$8.5 million and$142.7 million during the nine months endedJune 30, 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 Nine months ended
June 30, June 30,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Distribution, selling, and
administrative $ 666,885 $ 656,943 1.5% $ 2,046,251 $ 1,941,564 5.4%
Depreciation and amortization 95,415 107,596 (11.3)% 293,725 353,862
(17.0)%
Employee severance, litigation, and other 58,585 60,006 165,626 156,067 Impairment of PharMEDium assets - - 361,652 570,000 Total operating expenses$ 820,885 $ 824,545 (0.4)%$ 2,867,254 $ 3,021,493 (5.1)% Distribution, selling, and administrative expenses increased 1.5%, or$9.9 million , compared to the prior year quarter and 5.4%, or$104.7 million , compared to the prior year nine-month period. The increase from the prior year quarter was primarily due to an increase in warehousing and freight costs and was partially offset by lower corporate administrative expenses. The increase in the nine-month period was primarily due to an increase in operating costs to support our revenue growth, 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 ofH.D. Smith within Pharmaceutical Distribution Services. As a percentage of revenue, distribution, selling, and administrative expenses were 1.47% and 1.45% in the current year quarter and nine-month period, respectively, a 2-basis point increase compared to the prior year quarter and flat compared to the prior year nine-month period. Depreciation expense decreased 3.0% and 6.1% from the prior year quarter and nine-month period, respectively, primarily due to the reduction ofH.D. Smith depreciable assets in connection with the integration of its operations. Amortization expense decreased 28.0% and 35.3% from the prior year quarter and nine-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 endedJune 30, 2020 included$31.4 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations,$9.4 million related to our business transformation efforts,$8.3 million of acquisition-related deal and integration costs,$6.5 million of severance costs primarily related to position eliminations resulting from our decision to permanently exit the PharMEDium compounding business, and$2.9 million of other restructuring initiatives. Employee severance, litigation, and other in the three months endedJune 30, 2019 included$18.8 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations,$16.3 million related to our business transformation efforts,$12.3 million of acquisition-related deal and integration costs (primarily related to the integration ofH.D. Smith ),$10.8 million of severance costs primarily related to PharMEDium restructuring activities, position eliminations resulting from our business transformation efforts and the integration ofH.D. Smith , and restructuring activities related to our consulting business, and$1.8 million of other restructuring initiatives. Employee severance, litigation, and other in the nine months endedJune 30, 2020 included$86.9 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations,$32.4 million of severance costs primarily related to position eliminations resulting from our decision to permanently exit the PharMEDium compounding business,$26.9 million related to our business transformation efforts,$10.4 million of other restructuring initiatives, and$9.1 million of acquisition-related deal and integration costs. Employee severance, litigation, and other in the nine months endedJune 30, 2019 included$47.2 million of litigation costs primarily related to legal fees in connection with opioid lawsuits and investigations,$34.3 million of acquisition-related deal and integration costs (primarily related to the integration ofH.D. Smith ),$33.1 million related to our business transformation efforts,$29.6 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 ofH.D. Smith , and$11.8 million of other restructuring initiatives. We recorded a$361.7 million impairment of PharMEDium's assets in the nine months endedJune 30, 2020 (see Note 5 of the Notes to Consolidated Financial Statements) and a$570.0 million impairment of PharMEDium's assets in the nine months endedJune 30, 2019 . 28 --------------------------------------------------------------------------------
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Operating Income
Three months ended Nine months ended
June 30, June 30,
(dollars in thousands) 2020 2019 Change 2020 2019 Change
Pharmaceutical Distribution
Services $ 426,643 $ 411,707 3.6%$ 1,381,434 $ 1,301,948 6.1% Other 82,875 95,110 (12.9)% 295,614 293,923 0.6% Intersegment eliminations (1,996) (142) (2,575) (698) Total segment operating income 507,522 506,675 0.2% 1,674,473 1,595,173 5.0% Gain from antitrust litigation settlements - 3,480 8,546 142,735 LIFO (expense) credit (6,061) 9,913 (43,195) 79,747 PharMEDium remediation costs - (19,344) (16,165) (55,736) PharMEDium shutdown costs (12,936) - (45,406) -New York State Opioid Stewardship Act - - - 22,000 Contingent consideration adjustment - - 12,153 - Acquisition-related intangibles amortization (25,109) (34,024) (85,345) (125,770) Employee severance, litigation, and other (58,585) (60,006) (165,626) (156,067) Impairment of PharMEDium assets - - (361,652) (570,000) Operating income$ 404,831 $ 406,694 (0.5)%$ 977,783 $ 932,082 4.9% 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 3.6%, or$14.9 million , from the prior year quarter and 6.1%, or$79.5 million , from the prior year nine-month period. The increase from the prior year quarter was primarily due to lower corporate administrative expenses. The increase from the prior year nine-month period was primarily due to the increase in gross profit, as noted above. As a percentage of revenue, Pharmaceutical Distribution Services' operating income margins were 0.98% and 1.02% in the quarter and nine-month period endedJune 30, 2020 , respectively, and represented increases of 3 basis points and 1 basis point compared to the prior year periods, respectively. Operating income in Other decreased 12.9%, or$12.2 million , from the prior year quarter primarily due to impacts of COVID-19 at MWI. Operating income in Other increased 0.6%, or$1.7 million , from the period year nine-month period due to the increase in gross profit and was substantially offset by an increase in operating expenses, primarily warehousing costs (including incremental COVID-19 expenses) and freight costs.
Interest expense, net and the respective weighted average interest rates in
the quarter ended
2020 2019
Weighted Average Weighted Average(dollars in thousands) Amount Interest Rate Amount Interest Rate
Interest expense$ 39,177 3.33%$ 48,710 3.73% Interest income (1,429) 0.21% (12,789) 1.99% Interest expense, net$ 37,748 $ 35,921 29
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Interest expense, net and the respective weighted average interest rates in
the nine months ended
2020 2019
Weighted Average Weighted Average
(dollars in thousands) Amount Interest Rate Amount Interest Rate
Interest expense $ 122,761 3.50% $ 147,828 3.74%
Interest income (19,585) 0.92% (26,462) 1.89%
Interest expense, net $ 103,176 $ 121,366
Interest expense, net increased 5.1%, or $1.8 million , from the prior year
quarter due to a decrease in interest income resulting primarily from a decline
in investment interest rates and was substantially offset by a decrease in
interest expense. Interest expense, net decreased 15.0%, or $18.2 million , from
the prior year nine-month period due to a decline in interest expense primarily
due to the adoption of the new lease accounting standard. Prior to October 1,
2019 , we recognized interest expense associated with financing obligations in
connection with lease construction assets (see Note 1 of the Notes to
Consolidated Financial Statements). Upon adoption of the new lease standard as
of October 1, 2019 , we began recognizing rent expense related to these leases in
Distribution, Selling, and Administrative expenses in our Consolidated
Statements of Operations. The decrease in interest expense was offset in part by
a decrease in interest income as a result of a decline in investment interest
rates, which was offset in part by a $1.0 billion increase in invested cash
balances compared to the prior year nine-month period.
Our effective tax rates were 16.5% and (70.1)% for the three and nine months
ended June 30, 2020 , respectively. Our effective tax rates were 18.6% and 12.2%
for the three and nine months ended June 30, 2019 , respectively. The effective
tax rates in the three months ended June 30, 2020 and 2019 were favorably
impacted by our international businesses in Switzerland and Ireland , which have
lower income tax rates. The effective tax rate in the nine months ended June 30,
2020 was 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 nine months ended June 30, 2020 . The
effective tax rate in the nine months ended June 30, 2019 was 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
nine months ended June 30, 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 nine months ended June 30, 2020 primarily due to the
discrete income tax benefits recognized in the current year.
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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 , 3.40% senior notes due 2024 $ 498,110 $ -
$500,000 , 3.25% senior notes due 2025 496,819
-
$750,000 , 3.45% senior notes due 2027 743,730
-
$500,000 , 2.80% senior notes due 2030 493,983
-
$500,000 , 4.25% senior notes due 2045 494,676
-
$500,000 , 4.30% senior notes due 2047 492,688 - Nonrecourse debt 79,893 - Total fixed-rate debt 3,299,899 - Variable-Rate Debt: Revolving credit note - 75,000 Term loan due 2020 399,928 - Overdraft facility due 2021 (£30,000) -
37,202
Receivables securitization facility due 2022 350,000
1,100,000
Multi-currency revolving credit facility due 2024 - 1,400,000 Nonrecourse debt 90,524 - Total variable-rate debt 840,452 2,612,202 Total debt$ 4,140,351 $ 2,612,202 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 ofJune 30, 2020 andSeptember 30, 2019 , our cash and cash equivalents held by foreign subsidiaries were$490.1 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 nine months endedJune 30, 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 nine months endedJune 30, 2020 and 2019 was$39.6 million and$240.6 million , respectively. We had$117.4 million and$573.7 million of cumulative intra-period borrowings that were repaid under our credit facilities during the nine months endedJune 30, 2020 and 2019, respectively. InMay 2020 , we issued$500 million of 2.80% senior notes dueMay 15, 2030 (the "2030 Notes"). The 2030 Notes were sold at 99.71% of the principal amount and have an effective yield of 2.81%. Interest on the 2030 Notes is payable semi-annually in arrears, commencing onNovember 15, 2020 . 31
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We used the proceeds from the 2030 Notes to finance the early retirement of the
We have a $1.4 billion multi-currency senior unsecured revolving credit
facility ("Multi-Currency Revolving Credit Facility"), which is scheduled to
expire in September 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 basis points
over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (91 basis
points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee as of June 30,
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 of June 30, 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 of
June 30, 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 of June 30, 2020 .
We have a $1,450 million receivables securitization facility ("Receivables
Securitization Facility"), which is scheduled to expire in September 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 of June 30, 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 uncommitted U.K. overdraft
facility ("Overdraft Facility"), which expires in February 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 Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash
flows and such debt agreements provide that the repayment of the loans (and
interest thereon) is secured solely by the capital stock, physical assets,
contracts, and cash flows of the Brazil subsidiaries.
In October 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 nine months ended
June 30, 2020 , we purchased $405.6 million of our common stock, which excluded
$14.8 million of September 2019 purchases that cash settled in October 2019 . As
of June 30, 2020 , we had $55.5 million of availability remaining under this
program.
In May 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 $840.5 million of
variable-rate debt outstanding as of June 30, 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 of June 30, 2020 .
We also have market risk exposure to interest rate fluctuations relating to
our cash and cash equivalents. We had
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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 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 of June 30,
2020 :
Debt, Including Operating Other
Payments Due by Period (in thousands) Interest Payments Leases Commitments Total
Within 1 year $ 637,825 $ 117,963 $ 87,857 $ 843,645
1-3 years 632,614 220,777 62,777 916,168
4-5 years 1,221,825 183,369 84,164 1,489,358
After 5 years 3,293,437 406,238 58,276 3,757,951
Total $ 5,785,701 $ 928,347 $ 293,074 $ 7,007,122 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 ofJune 30, 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$112.8 million (including interest and penalties) as ofJune 30, 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 nine months endedJune 30, 2020 , our operating activities provided cash of$907.8 million in comparison to$1,671.2 million in the prior year period. Cash provided by operations during the nine months endedJune 30, 2020 was principally the result of net income of$1,444.9 million , non-cash items of$822.0 million , and an increase in accounts payable of$824.1 million , offset in part by increases in inventories of$910.8 million , income taxes receivable of$590.2 million , and accounts receivable of$436.2 million . 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),$215.2 million of depreciation expense, and$93.8 million of amortization expense. The increase in accounts payable was primarily driven by the increase in our inventories and the timing of scheduled payments to suppliers. 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). The increase in accounts receivable was the result of the timing of payments from our customers. During the nine months endedJune 30, 2019 , our operating activities provided$1,671.2 million of cash. Cash provided by operations during the nine months endedJune 30, 2019 was principally the result of an increase in accounts payable of$964.7 million , non-cash items of$957.2 million , and net income of$721.8 million , offset in part by an increases in accounts receivable of$672.7 million and inventories of$280.1 million . The increase in accounts payable was primarily driven by the increase in inventories and the timing of scheduled payments to suppliers. The noncash items were comprised primarily of a$570.0 million impairment of PharMEDium's long-lived assets,$246.3 million of depreciation expense, and$137.8 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 ofJune 30, 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. 33
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Three months ended Nine months ended
June 30, June 30,
2020 2019 2020 2019
Days sales outstanding 25.3 25.1 24.8 25.2
Days inventory on hand 31.2 28.0 29.2 28.6
Days payable outstanding 58.9 57.7 58.0 58.1
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 nine months ended June 30, 2020
included $125.4 million of interest payments and $120.7 million of income tax
payments, net of refunds. Operating cash flows during the nine months ended
June 30, 2019 included $137.6 million of interest payments and $94.3 million of
income tax payments, net of refunds.
Capital expenditures for the nine months ended June 30, 2020 and 2019 were
$251.1 million and $230.8 million , respectively. Significant capital
expenditures in the nine months ended June 30, 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 $375 million for capital expenditures
during fiscal 2020.
Net cash used in financing activities in the nine months ended June 30, 2020
principally resulted from $420.4 million in purchases of our common stock and
$256.8 million in cash dividends paid on our common stock. Net cash used in
financing activities in the nine months ended June 30, 2019 principally resulted
from $522.8 million in purchases of our common stock and $255.1 million in cash
dividends paid on our common stock.
In January 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.
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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 in the 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 the U.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 in the 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 ended September 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.
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