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 ). The operating segments that focus on global commercialization services includeAmerisourceBergen Consulting Services ("ABCS") andWorld Courier .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. 21
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In lateJanuary 2020 we decided to exit thePharMEDium Healthcare Holdings, Inc. ("PharMEDium") compounding business and as a result, we will cease all commercial and administrative operations related to this business. The decision to exit the PharMEDium business was due to a number of factors including, but not limited to, ongoing operational, regulatory, and commercial challenges, such as PharMEDium's decision inJanuary 2020 to suspend production at the compounding facility inNew Jersey pending facility upgrades related to the air handling and filtration systems. In addition to the PharMEDium impairment charge of$138.0 million recognized in the three months endedDecember 31, 2019 (see Note 5 of the Notes to Consolidated Financial Statements), we expect that we will impair the majority of the remaining$55 million of PharMEDium tangible assets and all of the remaining$185 million of PharMEDium intangible assets in the three months endingMarch 31, 2020 . Additionally, we will incur other costs, such as employee separation costs, in connection with exiting the PharMEDium compounding business during the fiscal year endingSeptember 30, 2020 estimated to total approximately$80 million to$100 million .
As a result of the decision to exit the PharMEDium compounding business, we
expect to claim an ordinary income tax deduction and estimate that we will
realize a cash tax benefit in fiscal 2020 through fiscal 2022 totaling
approximately
Executive Summary
This executive summary provides highlights from the results of operations that
follow:
• Revenue increased 5.4% from the prior year quarter primarily due to
the revenue growth of our Pharmaceutical Distribution Services
segment;
• Total gross profit in the current year quarter decreased by 5.1% and
was unfavorably impacted by lower gains from antitrustlitigation
settlements, last-in, first-out ("LIFO") expense in the current year
quarter in comparison to a LIFO credit in the prior year, and the
prior year reversal of a previously-estimated assessment related to
the New York State Opioid Stewardship Act, offset in part byincreases
in gross profit in Other and Pharmaceutical Distribution Services.
Gross profit in Other increased 8.0% from the prior year quarter
primarily due to growth at MWI, World Courier , and the Lashconsulting
group. Pharmaceutical Distributions Services' gross profitincreased
1.6% from the prior year quarter primarily due to the increase in
revenue largely due to strong specialty product sales, offset in part
by our pharmaceutical compounding operations as it shipped fewer
units;
• Distribution, selling, and administrative expenses increased 4.5% from
the prior year quarter due to an increase in costs to support revenue
growth primarily in Other, offset in part by operational synergies
realized from the integration of H.D. Smith within Pharmaceutical
Distribution Services;
• Operating income decreased 44.9% in the current year quarter primarily
due to a $138.0 million impairment of PharMEDium's long-lived assets
(see Note 5 of the Notes to Consolidated Financial Statements), the
decline in total gross profit and the increase in distribution,
selling, and administrative expenses, as noted above;
• Our effective tax rates were 18.7% and 9.4% in the three months ended
December 31, 2019 and 2018, respectively. The effective tax rate in the three months endedDecember 31, 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$138.0 million impairment of PharMEDium's long-lived assets. The effective tax rate in the three months endedDecember 31, 2018 benefited from a$37.0 million decrease to our finalization of the estimated transition tax liability related to the Tax Cuts and Jobs Act (the "2017 Tax Act") and was favorably impacted by our international businesses inSwitzerland andIreland . • Net income attributable toAmerisourceBergen Corporation was significantly lower in the current year quarter primarily due to the$138.0 million impairment of long-lived assets, the decline in total gross profit, and the income tax benefit recognized in the prior year quarter as a result of the 2017 Tax Act. 22
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Results of Operations
Revenue
Three months ended
December 31,
(dollars in thousands) 2019 2018 Change
Pharmaceutical Distribution Services $ 46,036,828 $ 43,744,381 5.2%
Other:
MWI Animal Health 1,028,318 954,584 7.7%
Global Commercialization Services 818,666 716,354 14.3% Total Other 1,846,984 1,670,938 10.5% Intersegment eliminations (19,070 ) (22,867 ) Revenue$ 47,864,742 $ 45,392,452 5.4% We continue to expect our revenue growth percentage to be in the mid to high-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 inthe 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, and changes in government rules and regulations.
Revenue increased by 5.4% from the prior year quarter primarily due to the revenue growth in our Pharmaceutical Distribution Services segment.
The Pharmaceutical Distribution Services segment's revenue grew by 5.2% from the prior year quarter primarily due to continued strong specialty product sales, the growth of some of its largest customers, and overall market growth. Revenue in Other increased 10.5% from the prior year quarter. The increase was primarily due to growth at MWI, ABCS's growth in its Canadian operations and the Lash consulting group, andWorld 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 three months endedDecember 31, 2019 , 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. Gross Profit Three months ended December 31, (dollars in thousands) 2019 2018 Change
Pharmaceutical Distribution Services
1.6%
Other 351,132 325,026
8.0%
Intersegment eliminations (907 ) (307 )
Gain from antitrust litigation settlements 8,492 87,279 LIFO (expense) credit
(13,281 ) 3,029
PharMEDium remediation costs (7,135 ) (17,911 )
New York State Opioid Stewardship Act - 22,000
Gross profit $ 1,231,214 $ 1,297,580 (5.1)%
Gross profit decreased 5.1%, or $66.4 million , from the prior year quarter.
Gross profit in the current year quarter was unfavorably impacted by lower gains
from antitrust litigation settlements, LIFO expense in the current year quarter
in comparison
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to a LIFO credit in the prior year quarter, and the prior year reversal of a previously-estimated assessment related to theNew York State Opioid Stewardship Act, offset in part by increases in gross profit in Other and Pharmaceutical Distribution Services. 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 . Pharmaceutical Distribution Services' gross profit increased 1.6%, or$14.4 million , from the prior year quarter. Gross profit in the current year quarter increased due to the increase in revenue largely due to strong specialty product sales, offset in part by our pharmaceutical compounding operations as it shipped fewer units. As a percentage of revenue, Pharmaceutical Distribution Services' gross profit margin of 1.94% in the current year quarter decreased 7 basis points from the prior year quarter. The decrease in gross profit margin from the prior year was primarily due to increased sales to our larger customers, which typically have lower gross profit margins, and lower sales from our pharmaceutical compounding operations. Gross profit in Other increased 8.0%, or$26.1 million , from the prior year quarter primarily due to growth at MWI,World Courier , and the Lash consulting group. As a percentage of revenue, gross profit margin in Other of 19.01% in the three months endedDecember 31, 2019 decreased from 19.45% in the prior year quarter. We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of$8.5 million and$87.3 million during the three months endedDecember 31, 2019 and 2018, respectively. The gains were recorded as reductions to Cost of Goods Sold (see Note 11 of the Notes to Consolidated Financial Statements). Operating Expenses Three months ended December 31, (dollars in thousands) 2019 2018 Change
Distribution, selling, and administrative
104,515 122,500 (14.7)%
Employee severance, litigation, and other 39,309 40,672 Impairment of long-lived assets
138,000 -
Total operating expenses $ 967,777 $ 819,757 18.1%
Distribution, selling, and administrative expenses increased 4.5%, or $29.4
million , compared to the prior year quarter due to an increase in costs to
support revenue growth primarily in Other. As a percentage of revenue,
distribution, selling, and administrative expenses were 1.43% in the current
year quarter and represent a 2 basis point decrease compared to the prior year
primarily as a result of realizing operational synergies from the integration of
H.D. Smith . Pharmaceutical Distribution Services segment's expenses were
relatively flat compared to the prior year as the increase in costs to support
revenue growth were largely offset by operational synergies realized from the
integration of H.D. Smith .
Depreciation expense decreased 8.1% from the prior year quarter primarily due to
the reduction of H.D. Smith depreciable assets in connection with the
integration of its operations. Amortization expense decreased 25.2% from the
prior year quarter primarily due to the March 2019 impairment of PharMEDium
intangible assets.
Employee severance, litigation, and other in the three month period ended
December 31, 2019 included $24.7 million of litigation costs that related to
legal fees in connection with opioid lawsuits and investigations, $8.5 million
related to our business transformation efforts, $4.9 million of other
restructuring initiatives, $0.8 million of severance costs, and $0.5 million of
acquisition-related deal and integration costs. Employee severance, litigation,
and other in the three month period ended December 31, 2018
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included$14.5 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations,$10.6 million of acquisition-related deal and integration costs (primarily related to the integration ofH.D. Smith ),$7.0 million related to our business transformation efforts,$4.8 million of severance costs primarily related to position eliminations resulting from our business transformation efforts and restructuring activities related to our consulting business, and$3.8 million of other restructuring initiatives. We recorded a$138.0 million impairment of PharMEDium's long-lived assets in the three months endedDecember 31, 2019 (see Note 5 of the Notes to Consolidated Financial Statements). Operating Income Three months ended December 31, (dollars in thousands) 2019 2018 Change Pharmaceutical Distribution Services$ 391,694 $ 373,207
5.0%
Other 104,479 98,934
5.6%
Intersegment eliminations (907 ) (307 ) Total segment operating income 495,266 471,834
5.0%
Gain from antitrust litigation settlements 8,492 87,279 LIFO (expense) credit
(13,281 ) 3,029
PharMEDium remediation costs (16,165 ) (20,495 )
New York State Opioid Stewardship Act - 22,000
Acquisition-related intangibles amortization (33,566 ) (45,152 ) Employee severance, litigation, and other (39,309 ) (40,672 ) Impairment of long-lived assets
(138,000 ) -
Operating income $ 263,437 $ 477,823 (44.9)%
Segment operating income is evaluated before gain from antitrust litigation
settlements; LIFO (expense) credit; PharMEDium remediation costs; New York State
Opioid Stewardship Act; acquisition-related intangibles amortization; employee
severance, litigation, and other; and impairment of long-lived assets.
Pharmaceutical Distribution Services' operating income increased 5.0%, or
Operating income in Other increased 5.6%, or
Interest expense, net and the respective weighted average interest rates in the
quarter ended
2019 2018
Weighted Average Weighted Average
(dollars in thousands) Amount Interest Rate Amount Interest Rate
Interest expense $ 41,602 3.60% $ 49,236 3.78%
Interest income (10,595 ) 1.38% (7,066 ) 1.80%
Interest expense, net $ 31,007 $ 42,170
Interest expense, net decreased 26.5%, or $11.2 million , from the prior year
quarter 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 Statement of Operations. Interest expense, net also
decreased due to the increase in interest income due to a $1.5 billion increase
in our average invested cash balance, offset in part by a decline in investment
interest rates.
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Our effective tax rates were 18.7% and 9.4% in the three months endedDecember 31, 2019 and 2018, respectively. The effective tax rate in the three months endedDecember 31, 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 a$138.0 million impairment of PharMEDium's long-lived assets (see Note 5 of the Notes to Consolidated Financial Statements). The effective tax rate in the three months endedDecember 31, 2018 benefited from a$37.0 million decrease to our finalization of the estimated transition tax liability related to the 2017 Tax Act and was favorably impacted by our international businesses inSwitzerland andIreland .
Net income attributable to
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 $ 499,037 $ -
$500,000 , 3.40% senior notes due 2024 497,866
-
$500,000 , 3.25% senior notes due 2025 496,481
-
$750,000 , 3.45% senior notes due 2027 743,309
-
$500,000 , 4.25% senior notes due 2045 494,568
-
$500,000 , 4.30% senior notes due 2047 492,555 - Nonrecourse debt 81,304 - Total fixed-rate debt 3,305,120 - Variable-Rate Debt: Revolving credit note - 75,000 Term loan due 2020 399,819 - Overdraft facility due 2021 (£30,000) 31,708
8,069
Receivables securitization facility due 2022 350,000
1,100,000
Multi-currency revolving credit facility due 2024 - 1,400,000 Nonrecourse debt 81,956 - Total variable-rate debt 863,483 2,583,069 Total debt$ 4,168,603 $ 2,583,069 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 ofDecember 31, 2019 andSeptember 30, 2019 , our cash and cash equivalents held by foreign subsidiaries were$1,079.7 million and$826.8 million , respectively, and are generally based inU.S. dollar denominated holdings. We have the ability 26
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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 three months endedDecember 31, 2019 and 2018 needed to be 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 three months endedDecember 31, 2019 and 2018 was$39.6 million and$19.4 million , respectively. We had$21.5 million and$72.3 million of cumulative intra-period borrowings that were repaid under our credit facilities during the three months endedDecember 31, 2019 and 2018, 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 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (91 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee as ofDecember 31, 2019 ) 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 ofDecember 31, 2019 ). 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 ofDecember 31, 2019 . 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 ofDecember 31, 2019 . 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 ofDecember 31, 2019 . 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 three months endedDecember 31, 2019 , we purchased$129.8 million of our common stock, which included$9.4 million ofDecember 2019 purchases that cash settled inJanuary 2020 and excluded$14.8 million ofSeptember 2019 purchases that cash settled inOctober 2019 . As ofDecember 31, 2019 , we had$331.4 million of availability remaining under this program. 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$863.5 million of variable-rate debt outstanding as ofDecember 31, 2019 . We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such 27
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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
We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had$3,232.6 million in cash and cash equivalents as ofDecember 31, 2019 . 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$0.1 million . We have minimal exposure to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Brazilian Real, the Euro, the U.K. Pound Sterling , and the Canadian Dollar. Revenue from our foreign operations is less than two percent of our consolidated revenue. We may utilize foreign currency denominated forward contracts to hedge against changes in foreign exchange rates. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes. The following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancellable operating leases, and minimum payments on our other commitments as ofDecember 31, 2019 : Debt, Including Interest Operating
Payments Due by Period (in thousands) Payments Leases
Other Commitments Total Within 1 year$ 672,050 $ 117,956 $ 105,471$ 895,477 1-3 years 1,144,568 224,726 56,504 1,425,798 4-5 years 702,635 189,828 55,138 947,601 After 5 years 3,265,875 433,861 105,073 3,804,809 Total$ 5,785,128 $ 966,371 $ 322,186$ 7,073,685 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 ofDecember 31, 2019 , 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$125.2 million (including interest and penalties) as ofDecember 31, 2019 . 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 three months endedDecember 31, 2019 , our operating activities provided cash of$142.8 million in comparison to$479.0 million in the prior year period. Cash provided by operations during the three months endedDecember 31, 2019 was principally the result of an increase in accounts payable of$787.0 million , non-cash items of$341.0 million , and net income of$186.6 million , offset in part by an increases in inventories of$631.0 million and accounts receivable of$307.2 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$138.0 million impairment of PharMEDium's long-lived assets (see Note 5 of the Notes to Consolidated Financial Statements),$71.8 million of depreciation expense, and$37.5 million of amortization expense. The increase in our inventories reflects the increase in business volume and, consistent with prior years, due to seasonal needs. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. 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 in which the month ends. Three months ended December 31, 2019 2018 Days sales outstanding 24.3 24.7 Days inventory on hand 28.7 27.9 Days payable outstanding 56.6 57.1 28
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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 three months endedDecember 31, 2019 included$49.4 million of interest payments and$28.4 million of income tax payments, net of refunds. During the three months endedDecember 31, 2018 , our operating activities provided$479.0 million of cash. Cash provided by operations during the three months endedDecember 31, 2018 was principally the result of an increase in accounts payable of$1,498.6 million , net income of$391.8 million , and non-cash items of$206.9 million , offset in part by increases in inventories of$898.8 million and accounts receivable of$658.9 million . The increase in accounts payable was primarily driven by the increase in inventories and the timing of scheduled payments to suppliers. We increased our inventories as ofDecember 31, 2018 to support the increase in business volume and, consistent with prior years, due to seasonal needs. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. The non-cash items were comprised primarily of$86.0 million of depreciation expense,$49.2 million of amortization expense, and a$46.2 million deferred income tax provision. Capital expenditures for the three months endedDecember 31, 2019 and 2018 were$67.3 million and$79.2 million , respectively. Significant capital expenditures in the three months endedDecember 31, 2019 and 2018 included costs associated with technology initiatives, including costs related to enhancing and upgrading our information technology systems. We currently expect to invest approximately$400 million for capital expenditures during fiscal 2020. Net cash used in financing activities in the three months endedDecember 31, 2019 principally resulted from$135.1 million in purchases of our common stock and$83.1 million in cash dividends paid on our common stock. Net cash used in financing activities in the three months endedDecember 31, 2018 principally resulted from$239.0 million in purchases of our common stock and$85.5 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. 29
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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; 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 the production, labeling or packaging of products compounded by our 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; substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer; 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 the impairments at PharMEDium and 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, (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. 30
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