UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Fiscal Year Ended September 30, 2017 |
OR |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED September 30, 2020
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO___________
Commission file number 1-16671
AMERISOURCEBERGEN CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| Delaware | | 23-3079390 |
| (State or other jurisdiction of | | (I.R.S. Employer |
| incorporation or organization) | | Identification No.) |
| | | | |
Commission
File Number
| | Registrant, State of Incorporation
Address and Telephone Number
| | I.R.S. Employer
Identification Number
|
1-16671 | | AmerisourceBergen Corporation | | 23-3079390 |
| | (a Delaware Corporation)
1300 Morris Drive Chesterbrook, PA 19087-5594
610-727-7000
| Chesterbrook, | PA | | 19087-5594 |
| (Address of principal executive offices) | | (Zip Code) |
(610) 727-7000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share Registered on New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None | | | | | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of exchange on which registered |
| Common stock | ABC | New York Stock Exchange | (NYSE) |
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.:Act:
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐ |
| | | | | | | | |
Large accelerated filer þ
| | Accelerated filer o
| | Non-accelerated filer o
(Do not check if a smaller reporting company)
| | Smaller reporting company o
| | Emerging growth company o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o☐ No þ
The aggregate market value of voting stock held by non-affiliates of the registrant on March 31, 20172020 based upon the closing price of such stock on the New York Stock Exchange on March 31, 20172020 was $11,765,213,718.$10,238,925,461.
The number of shares of common stock of AmerisourceBergen Corporation outstanding as of October 31, 20172020 was 218,082,051.204,249,747.
Documents Incorporated by Reference
Portions of the following document are incorporated by reference in the Part of this report indicated below:
Part III — Registrant's Proxy Statement for the 20182021 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
As used herein, the terms "Company," "AmerisourceBergen," "we," "us," or "our" refer to AmerisourceBergen Corporation, a Delaware corporation.
AmerisourceBergen is 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. More specifically, we distribute a comprehensive offering of brand-name, specialty brand-name, and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, outsourced compounded sterile preparations, and related services to a wide variety of healthcare providers located in the United States and select global markets, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, physician practices, medical and dialysis clinics, veterinarians, and other customers. Additionally, we furnish healthcare providers and pharmaceutical manufacturers with an assortment of related services, including data analytics, outcomes research, reimbursement and pharmaceutical consulting services, niche premium logistics services, inventory management, pharmacy automation, pharmacy management, and packaging solutionssolutions.
Industry Overview
Pharmaceutical sales in the United States, as recently estimated by IQVIA, (formerly known as QuintilesIMS), an independent third partythird-party provider of information to the pharmaceutical and healthcare industry, are expected to grow at a compound annual growth rate of approximately 4.4%3.4% from 20162019 through 2021,2024, and the growth rate is dependent, in part, on pharmaceutical manufacturer price increases.
In addition to general economic conditions, factors that impact the growth of the pharmaceutical industry in the United States and other industry trends include:
Aging Population. The number of individuals age 65 and over in the United States is expected to exceed 5863 million by 20212024 and is the most rapidly growing segment of the population. This age group suffers from more chronic illnesses and disabilities than the rest of the population and accounts for a substantial portion of total healthcare expenditures in the United States.
Introduction of New Pharmaceuticals. Traditional research and development, as well as the advent of new research, production, and delivery methods, such as biotechnology and gene therapy, continue to generate new pharmaceuticals and delivery methods that are more effective in treating diseases. We believe ongoing research and development expenditures by the leading pharmaceutical manufacturers will contribute to continued growth of the industry. In particular, we believe ongoing research and development of biotechnology and other specialty pharmaceutical drugs will provide opportunities for the continued growth of our specialty pharmaceuticals business.
Increased Use of Generic Pharmaceuticals. A number of patents for widely used brand-name pharmaceutical products will continue to expire during the next several years. In addition, increased emphasis by managed care and other third partythird-party payors on utilization of generics has accelerated their growth. We consider the increase in generic usage a favorable trend because generic pharmaceuticals have historically provided us with a greater gross profit margin opportunity than brand-name products, although their lower prices reduce revenue growth. Generic pharmaceuticals currently account for approximately 90% of the prescription volume in the United States.
Increased Use of Drug Therapies. In response to rising healthcare costs, governmental and private payors have adopted cost containment measures that encourage the use of efficient drug therapies to prevent or treat diseases. While national attention has been focused on the overall increase in aggregate healthcare costs, we believe drug therapy has had a beneficial impact on healthcare costs by reducing expensive surgeries and prolonged hospital stays. Pharmaceuticals currently account for approximately 12%11% of overall healthcare costs. Pharmaceutical manufacturers' continued emphasis on research and development is expected to result in the continuing introduction of cost-effective drug therapies and new uses for existing drug therapies.
Legislative Developments. In recent years, regulation of the healthcare industry has changed significantly in an effort to increase drug utilization and reduce costs. In 2010, the federal government enacted major health reform legislation designed to expand access to health insurance, which increased the number of people in the United States who are eligible to be reimbursed for all or a portion of prescription drug costs. The health reform law provides for sweeping changes to Medicare and Medicaid policies (including drug reimbursement policies), expanded disclosure requirements regarding financial arrangements within the healthcare industry, enhanced enforcement authority to prevent fraud and abuse, and new taxes and fees on pharmaceutical and medical device manufacturers. Subsequent legislation and rules promulgated by government agencies have made additional changes to federal drug payment policies. These policies and other legislative developments (including potential revisions to or repeal of any portions of the health reform legislation) may affect our businesses directly and/or indirectly (see Government Regulation on page 6 and the risk factor titled Legal, regulatory, and legislative changes with respect to reimbursement, pricing, and contracting may adversely affect our business and results of operations, including through declining reimbursement rates on page 12 for further details).
COVID-19 Pandemic. In March 2020, the World Health Organization ("WHO") declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, we implemented measures designed to keep our employees safe and address business continuity issues at our distribution centers and other locations. We continue to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on our revenue, results of operations, and cash flows. These items include, but are not limited to, the financial condition of our customers and the realization of accounts receivable, decreased availability and demand for our products and services, and delays related to current and future projects. While our operational and financial performance may be significantly impacted by COVID-19, it is not possible for us to predict the duration or magnitude of the outbreak and whether it could have a material adverse impact on the Company's financial position, results of operations, or cash flows (see Risk Factor - We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business).
Other economic conditions and certain risk factors could adversely affect our business and prospects (see Item 1A. Risk Factors on page 8).
The Company
We currently serve our customers (healthcare providers and pharmaceutical and biotech manufacturers) through a geographically diverse network of distribution service centers and other operations in the United States and selectedselect global markets. In our pharmaceutical distribution business, we are typically the primary supplier of pharmaceutical and related products to our healthcare provider customers. We offer a broad range of services to our customers designed to enhance the efficiency and effectiveness of their operations, which allow them to improve the delivery of healthcare to patients and to lower overall costs in the pharmaceutical supply channel.
Strategy
Our business strategy is focused on the global pharmaceutical supply channel where we provide value-added distribution and global commercialization services to healthcare providers (primarily pharmacies, health systems, medical and dialysis clinics, physicians, and veterinarians) and pharmaceutical manufacturers that increaseimprove channel efficiencies and improve patient outcomes. We recently began to reorganize to further align our organization to our customer’ needsImplementing this disciplined and focused strategy in a more seamless and unified way while supporting corporate strategy and accelerating growth. Implementing this disciplined, focused strategy has allowed us to significantly expand our business, and we believe we are well-positionedwell positioned to grow revenue and increase operating income through the execution of the following key elements of our business strategy:
•Optimize and Grow Our Pharmaceutical Distribution and Strategic Global Sourcing Businesses. We believe we are well-positionedwell positioned in size and market breadth to continue to grow our distribution businesses as we invest to improve our operating and capital efficiencies. Distribution, including specialty pharmaceuticals, anchors our growth and position in the pharmaceutical supply channel as we provide superior distribution services and deliver value-added solutions, which improve the efficiency and competitiveness of both healthcare providers and pharmaceutical manufacturers, thus allowing the pharmaceutical supply channel to better deliver healthcare to patients.
We are a leader in distribution and services to community oncologists and have leading positions in other physician-administered products. We distribute plasma and other blood products, injectable pharmaceuticals, vaccines, and other specialty products. We are well-positionedwell positioned to service and support many of the new biotechnology therapies that are expected to be coming to market in the near future.
With the continued growth of generic pharmaceuticals in the U.S. market, weWe have introduced strategies to enhance our position in the generic marketplace, including our generic product private label program based in Ireland. We source generics globally, offer a value-added generic formulary program to our healthcare provider customers, and monitor our customers' compliance with our generics program. We also provide data and other valuable services to our manufacturingmanufacturer customers, which includes the expansion of our international presence intoin Switzerland where we lead our global manufacturer relations and commercialization strategy.
We offer value-added services and solutions to assist healthcare providers and pharmaceutical manufacturers to improve their efficiency and their patient outcomes. Services for manufacturers include: assistance with rapid new product launches, promotional and marketing services to accelerate product sales, product data reporting, and logistical support.
Our provider solutions include: our Good Neighbor Pharmacy® program, which enables independent community pharmacies to compete more effectively through pharmaceutical benefit and merchandising programs; Elevate Provider Network®, our managed care network, which connects our retail pharmacy customers to payor plans throughout the country and is one of the largest in the United States; generic product purchasing and private label services; hospital pharmacy consulting designed to improve operational efficiencies; and packaging solutions for institutional and retail healthcare providers.
We believe we have one of the lowest operating cost operating structures among all pharmaceutical distributors. Pharmaceutical Distribution Services has aOur robust distribution facility network totaling 28 distribution facilities in the United States. This network includes a national distribution center in Columbus, OH, which offers pharmaceutical manufacturers a single shipping destination. We continue to seek opportunities to achieve increased productivity and operating income gains as we invest in and continue to implement warehouse automation technology, adopt "best practices" in warehousing activities, and increase operating leverage by increasing volume per full-service distribution facility. We continue to seek opportunities to expand our offerings in our Pharmaceutical Distribution and Strategic Global Sourcing businesses.
•Optimize and Grow Our Global Commercialization Services and Animal Health Businesses. Our consulting service businesses help global pharmaceutical and biotechnology manufacturers commercialize their products in the channel.products. We believe we are the largest provider of reimbursement services that assist pharmaceutical companies in supporting access to branded drugs. We also provide outcomes research, contract field staffing, patient assistance and copay assistance programs, adherence programs, risk mitigation services, and other market access programs to pharmaceutical companies. World Courier is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. World Courier further strengthens our service offerings to global pharmaceutical manufacturers and provides an established platform for the introduction of our specialty services outside North America. MWI Animal Health (“MWI”) sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. MWI also offers its customers a variety of value-added services, including its e-commerce platform, technology management systems, pharmacy fulfillment, inventory management system, equipment procurement consultation, special order fulfillment, and educational seminars, which we believe closely integrate MWI with its customers' day-to-day operations and provide them with meaningful incentives to continue doing business with MWI. We continue to seek opportunities to expand our offerings in our Global Commercialization Services and Animal Health businesses.
•Acquisitions.In order to grow our core strategic offerings and to enter related markets, we have acquired and invested in businesses and will continue to consider additional acquisitions.
acquisitions and investments.
•Divestitures. In order to allow us to concentrate on our strategic focus areas, we have divested certain non-core businesses and may, from time to time, consider additional divestitures.
In January 2020, we decided to permanently exit the PharMEDium Healthcare Holdings LLC’s ("PharMEDium") compounding business, and, as a result, the Company ceased all commercial and administrative operations related to this business in fiscal 2020. The decision to permanently exit the PharMEDium business was due to a number of factors including, but not limited to, ongoing operational, regulatory, and commercial challenges.Operations
Operating Structure. We are organized based upon the products and services we provide to our customers. Our operations as of September 30, 20172020 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 reportable segment presentation. Effective September 30, 2017, we reorganized our operating structure resulting in the combination of the legacy AmerisourceBergen Drug Corporation ("ABDC") and AmerisourceBergen Specialty Group ("ABSG") operating segments into a single operating segment, Pharmaceutical Distribution Services. In addition, in connection with the completion of this reorganization, our non-title third party logistics business, which was included within the Pharmaceutical Distribution Services reportable segment, was combined with the World Courier operating segment in Other, while the AmerisourceBergen Consulting Services (“ABCS”) distribution business (previously included in Other) is included in the Pharmaceutical Distribution Services reportable segment. See Note 15 of the Notes to Consolidated Financial Statements for reportable segment information.
Pharmaceutical Distribution Services Segment
Servicing healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution Services segment's operations provide drug distribution, strategic global sourcing, and related services designed to reduce healthcare costs and improve patient outcomes.
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, outsourced compounded sterile preparations, 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 and includes ABCS,AmerisourceBergen Consulting Services ("ABCS"), World Courier, and MWI.
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 more than 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. MWI is a leading animal health distribution company in the United States and in the United 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.
Sales and Marketing. The majority of Pharmaceutical Distribution Services’ sales force is led nationally, with geographic focus and specialized by either healthcare provider type or size. Customer service representatives are centralized in order to respond to customer needs in a timely and effective manner. Pharmaceutical Distribution Services also has support professionals focused on its various technologies and service offerings. Pharmaceutical Distribution Services’ sales teams also serve national account customers through close coordination with local distribution centers and ensure that our customers are receiving service offerings that meet their needs. Our other operating segments each have independent sales forces that specialize in their respective product and service offerings. In addition, we have an enterprise-wide marketing groupteam that coordinates branding and all other marketing activities across the Company.
Customers. We have a diverse customer base that includes institutional and retail healthcare providers as well as pharmaceutical manufacturers. Institutional healthcare providers include acute care hospitals, health systems, mail order pharmacies, long-term care and other alternate care pharmacies, and providers of pharmacy services to such facilities, physicians, and physician group practices. Retail healthcare providers include national and regional retail drugstore chains, independent community pharmacies, pharmacy departments of supermarkets and mass merchandisers, and veterinarians. We are typically the primary source of supply for our healthcare provider customers. Our manufacturingmanufacturer customers include branded, generic, and biotechnology manufacturers of prescription pharmaceuticals, as well as over-the-counter product and health and beauty aid manufacturers. In addition, we offer a broad range of value-added solutions designed to enhance the operating efficiencies and competitive positions of our customers, thereby allowing them to improve the delivery of healthcare to patients and consumers.
Our two largest customers, Walgreens Boots Alliance, Inc. ("WBA") and Express Scripts, Inc. ("Express Scripts"), accounted for approximately 30%33% and approximately 15%12%, respectively, of revenue in the fiscal year ended September 30, 2017.2020. Our top 10 customers, including governmental agencies and group purchasing organizations ("GPOs"GPO"), represented approximately 66%64% of revenue in the fiscal year ended September 30, 2017.2020. The loss of any major customer or GPO relationship could adversely affect future revenue and results of operations. 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 not renewed or are extended, renewed, or replaced at less favorable terms, they may negatively impact our revenue, results of operations, and cash flows.
Suppliers. We obtain pharmaceutical and other products from manufacturers, none of which accounted for 10% or more of our purchases in the fiscal year ended September 30, 2017.2020. The loss of a supplier could adversely affect our business if alternate sources of supply are unavailable since we are committed to be the primary source of pharmaceutical products for a majority of our customers. We believe that our relationships with our suppliers are strong. The 10 largest suppliers in fiscal year ended September 30, 20172020 accounted for approximately 48%46% of our purchases.
Information Systems. The Pharmaceutical Distribution Services operating segment operatesrecently transitioned its full-service wholesalekey specialty distribution businesses onto its primary enterprise resource planning ("ERP") system. As a result, the pharmaceutical distribution facilities in the United States on two primary enterprise resource planning ("ERP") systems.all now operate under a single ERP system. Pharmaceutical Distribution Services’
ERP systems providesystem provides for, among other things, electronic order entry by customers, invoice preparation and purchasing, and inventory tracking. All of our other operating segments operate the majority of their businesses on their own common centralized ERPoperating systems resulting in operating efficiencies as well as the ability to rapidly deploy new capabilities. We are currently making significantcontinue to make investments to enhance and upgrade the ERPoperating systems utilized by our other operating segments.
Additionally, we are improving our entity-wide infrastructure environment to drive efficiency, capabilities, and speed to market.
We will continue to invest in advanced information systems and automated warehouse technology. For example, in an effort to comply with future pedigree and other supply chain custody requirements (see Risk Factor - Increasing governmental
efforts to regulate the pharmaceutical supply channel and pharmaceutical compounding may increase our costs and reduce our profitability), we expect to continue to make significant investments in our secure supply chain information systems.
In the fiscal 2017, Pharmaceutical Distribution Services continued makinghas made significant investments in its electronic ordering systems. Pharmaceutical Distribution Services’ systems are intended to strengthen customer relationships by allowing the customerhelping customers to lowerreduce operating costs, and by providing them a platform for a number of the basic and value-added services, offered to our customers, including product demand data, inventory replenishment, single-source billing, third partythird-party claims processing, real-time price and incentive updates, and price labels.
Pharmaceutical Distribution Services processes a substantial portion of its purchase orders, invoices, and payments electronically. However,electronically, and it continues to make substantial investments to expand its electronic interface with its suppliers. Pharmaceutical Distribution Services has warehouse operating systems, which are used to manage the majority of Pharmaceutical Distribution Services’ transactional volume. The warehouse operating systems have improved Pharmaceutical Distribution Services’ productivity and operating leverage.
A significant portion of our information technology activities aredata center operations, which were previously outsourced to IBM Global Services and other third party service providers.third-party providers, is now insourced.
Competition
We face a highly competitive global environment in the distribution of pharmaceuticals and related healthcare services. Our largest competitors are McKesson Corporation ("McKesson"), Cardinal Health, Inc. ("Cardinal"), FFF Enterprises, Henry Schein, Inc., and UPS Logistics, among others. Pharmaceutical Distribution Services competes with both McKesson and Cardinal, as well as national generic distributors and regional distributors within pharmaceutical distribution. In addition, we compete with manufacturers who sell directly to customers, chain drugstores who manage their own warehousing, specialty distributors, and packaging and healthcare technology companies. Our ABCS, World Courier, and MWI businesses also face competition from a variety of competitors.businesses. In all areas, competitive factors include price, product offerings, value-added service programs, service and delivery, credit terms, and customer support.
Intellectual Property
We use a number of trademarks and service marks. All of the principal trademarks and service marks used in the course of our business have been registered in the United States and, in some cases, in foreign jurisdictions or are the subject of pending applications for registration.
We have developed or acquired various proprietary products, processes, software, and other intellectual property that are used either to facilitate the conduct of our business or that are made available as products or services to customers. We generally seek to protect such intellectual property through a combination of trade secret, patent and copyright laws, and through confidentiality and other contractually imposed protections.
We hold patents and have patent applications pending that relate to certain of our products, particularly our automated pharmacy dispensing equipment, our medication and supply dispensing equipment, certain warehousing equipment, and some of our proprietary packaging solutions. We seek patent protection for our proprietary intellectual property from time to time as appropriate.
Although we believe that our patents or other proprietary products and processes do not infringe upon the intellectual property rights of any third parties, third parties may assert infringement claims against us from time to time.
Human Capital
We aspire to create healthier futures and accelerate business results by inspiring the best and brightest global talent across all dimensions of diversity to perform at their full potential.As of September 30, 2017,2020, we had approximately 20,00022,000 employees, of which approximately 19,00021,000 were full-time employees. More than 56% of our workforce is comprised of women, 49% is comprised of individuals with ethnically diverse backgrounds, and 30% of our Board of Directors are women. Additionally, our Executive Management Committee is made up of 43% women.
Approximately 2% of our employees are covered by collective bargaining agreements. We believe that our relationship with our employees is good. If any of our employees in locations that are unionized should engage in strikes or other such bargaining tactics in connection with the negotiation of new collective bargaining agreements upon the expiration of any existing collective bargaining agreements, such tactics could be disruptive to our operations and adversely affect our results of operations, butoperations. However, we believe we have adequate contingency plans in place to assure delivery of pharmaceuticals to our customers in the event of any such disruptions.
Government Regulation
We are subject to extensive oversight by various federal and state governmental entities and we are subject to, and affected by, a variety of federal and state laws, regulations, and policies.
The U.S. Drug Enforcement Administration ("DEA"), the U.S. Food and Drug Administration ("FDA"), the U.S. Department of Justice ("DOJ"), and various other federal and state regulatory authorities regulate the compounding, purchase, storage, and/or distribution of pharmaceutical products, including controlled substances. Wholesale distributors of controlled substances and entities that compound pharmaceuticals that contain controlled substances must hold valid DEA licenses, meet various security and operating standards, and comply with regulations governing the sale, marketing, compounding, packaging, holding, and distribution of controlled substances. Our Section 503B outsourcing facilities must comply with current Good Manufacturing Practices ("GMPs") and are inspected by the FDA periodically to determine that we are complying with such GMPs. The DEA, FDA, and state regulatory authorities have broad enforcement powers, including the ability to suspend our distribution centers or Section 503B outsourcing facilities from distributing pharmaceutical products including controlled substances, seize or recall products, and impose significant criminal, civil, and administrative sanctions. We have all necessary licenses or other regulatory approvals and believe that we are in compliance with all applicable pharmaceutical compounding and wholesale distribution requirements needed to conduct our current operations.
We and our customers are subject to fraud and abuse laws, including the federal anti-kickback statute.statute and False Claims Act. The anti-kickback statute prohibits persons from soliciting, offering, receiving, or paying any remuneration in order to induce the purchasing, leasing, or ordering, induce a referral to purchase, lease, or order, or arrange for or recommend purchasing, leasing, or ordering items or services that are in any way paid for by Medicare, Medicaid, or other federal healthcare programs. The False Claims Act prohibits knowingly submitting, or causing the submission, of false or fraudulent claims for payment to the government, and authorizes treble damages and substantial civil penalties in the case of violations. The fraud and abuse laws and regulations are broad in scope and are subject to frequent and varied interpretation.
In recent years, some states have passed or proposed laws and regulations that are intended to protect the safety of the pharmaceutical supply channel. These laws and regulations are designed to prevent the introduction of counterfeit, diverted, adulterated, or mislabeled pharmaceuticals into the distribution system. At the federal level, the supply chain security legislation known as the Drug Quality and Security Act (“DQSA”) became law in 2013. The DQSA establishes federal traceability standards requiring drugs to be labeled and tracked at the lot level, preempts state drug pedigree requirements, and will eventually require all supply-chain stakeholders to participate in an electronic, interoperable prescription drug traceability system. The DSQADQSA also establishes new requirements for drug wholesale distributors and third partythird-party logistics providers, including licensing requirements applicable in states that had not previously licensed such entities. Over the next few years,third-party logistics providers. We expect that the FDA, and eventually comparable state agencies, will promulgate implementing regulations governing wholesale distributor and third partythird-party logistics providers. One additional change resulting from the DQSA is the creation of 503B outsourcing facilities as a new category for providers of compounded sterile preparations ("CSP"), allowing such facilities to voluntarily register with the FDA. Our CSP business locations have registered with the FDA as Section 503B outsourcing facilities and have implemented policies and procedures to achieve compliance with current federal and state requirements for such facilities. There can be no assurance that we are fully compliant with the new DQSA requirements, or with additional related state regulatory and licensing requirements, for 503B outsourcing facilities, and any failure to comply may result in suspension or delay of certain operations and additional costs to bring our operations into compliance. These and other requirements will continue to increase the cost of our operations.
Federal The regulation of public and private health insurance and health care reform legislation known as the Affordable Care Act became law in 2010. The Affordable Care Act is intended to expand health insurance, including coverage for at least a portion of drug costs, through a combination of insurance market reforms, an expansion of Medicaid, subsidies,benefit programs can also affect our business and health insurance mandates. The Affordable Care Act contains many provisions designed to generate the revenues necessary to fund the coverage expansions and reduce the costs of Medicare and Medicaid. Among other things, the Affordable Care Act changed the formula for Medicaid federal upper payment limits for multiple source drugs available for purchase by retail community pharmacies on a nationwide basis to no less than 175% of the weighted average manufacturer price. Further, implementing regulations require state Medicaid programs to apply payment mechanisms for branded prescription drugs which are consistent with pharmacies' "actual acquisition costs" for drugs. These provisions could reduce prescription drug reimbursement levels under state Medicaid programs.
As a result of political, economic, and regulatory influences, scrutiny of the healthcare delivery systemand reimbursement systems in the United States can be expected to continue at both the state and federal levels. This process may result in additional legislation and/or regulation governing the production, delivery, or pricing of pharmaceutical products as well as additional changes to the structure of the presentand other healthcare delivery system.services. In addition, changes in the interpretations of existing regulations may result in significant additional compliance costs or the discontinuation of our ability to continue to operate certain of our distribution centers, or Section 503B outsourcing facilities, which may have a material adverse effect on our financial condition and results of operations.
Any future reductions in Medicare or Medicaid reimbursement rates could negatively impact our customers' businesses and their ability to continue to purchase drugs from us. We cannot predict what additional initiatives, if any, will be adopted, when they may be adopted, or what impact they may have on us.
We are subject to various federal, state, and local environmental laws, including with respect to the sale, transportation, storage, handling, and disposal of hazardous or potentially hazardous substances, as well as laws relating to safe working conditions and laboratory practices.
The costs, burdens, and/or impacts of complying with federal and state regulations could be significant and the failure to comply with any such legal requirements could have a significant impact on our results of operations and financial condition.
See "Risk Factors" belowbeginning on page 8 for a discussion of additional legal and regulatory developments, as well as enforcement actions or other litigation that may arise out of our failure to adequately comply with applicable laws and regulations that may negatively affect our results of operations and financial condition.
Health Information and Privacy Practices
The Health Information Portability and Accountability Act of 1996 ("HIPAA") and its implementing regulations set forth privacy and security standards designed to protect the privacy of and provide for the security of protected health information, as such term is defined under the HIPAA regulations. Some of our businesses collect, maintain, and/or access protected health information and are subject to the HIPAA regulations. Our operations, depending on their location, may also be subject to state or foreign regulations affecting personal data protection and the manner in which information services or products are provided. Significant criminal and civil penalties may be imposed for violation of HIPAA standards and other such laws. We have a HIPAA compliance program to facilitate our ongoing efforts to comply with the HIPAA regulations.
The Health Information Technology for Economic and Clinical Health Act ("HITECH Act"), enacted as part of the 2009 American Recovery and Reinvestment Act ("ARRA"), strengthened federal privacy and security provisions governing protected health information. Among other things, the HITECH Act expanded certain aspects of the HIPAA privacy and security rules, imposed new notification requirements related to health data security breaches, broadened the rights of the U.S. Department of Health and Human Services ("HHS") to enforce HIPAA, and directed HHS to publish more specific security standards. OnIn January 25, 2013, the Office for Civil Rights of HHS published the HIPAA omnibus final rule ("HIPAA Final Rule"), which amended certain aspects of the HIPAA privacy, security, and enforcement rules pursuant to the HITECH Act, extending certain HIPAA obligations to business associates and their subcontractors. Certain components of our business act as "business associates" within the meaning of HIPAA and are subject to these additional obligations under the HIPAA Final Rule.
Some of our businesses collect, maintain, and/or access other personal information (including sensitive personal information) that is subject to federal and state laws protecting such information, in addition to the requirements of HIPAA, the HITECH Act, and the implementing regulations. Personally identifiable information is also highly regulated in many other countries in which we operate. As such regulations continue to evolve, we need tomust comply with applicable privacy and security requirements of these countries, including but not limited to those in the European Union. Most notably certain aspects of our business will beare subject to the European Union's General Data Protection Regulation ("GDPR") which becomesbecame effective in the European Union on May 25, 2018.
2018, the California Consumer Protection Act ("CCPA"), which became effective on January 1, 2020, and Brazil's new General Data Protection Law (Lei Geral de Proteção de Dados Pessoais) – Law No. 13,709/208 ("LGPD") which became effective in August 2020. We have implemented a privacy and information security compliance program to facilitate our ongoing efforts to comply with the applicable privacy laws and regulations. There can be no assurances that compliance with these requirements will not impose new costs on our business.
Available Information
For more information about us, visit our website at www.amerisourcebergen.com. The contents of the website are not part of this Form 10-K. Our electronic filings with the Securities and Exchange Commission (including all Forms 10-K, 10-Q, and 8-K, and any amendments to these reports) are available free of charge through the "Investor Relations" section of our website at investor.amerisourcebergen.com immediately after we electronically file with or furnish them to the Securities and Exchange Commission and may also be viewed using their website at www.sec.gov.
ITEM 1A. RISK FACTORS
The following discussion describes certain risk factors that we believe could affect our business and prospects. These risk factors are in addition to those set forth elsewhere in this report. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider not to be material. The reader should not consider this list to be a complete statement of all risks and uncertainties.
Industry and Economic Risks
Our results of operations could be adversely impacted by manufacturer pricing changes and fewer generic pharmaceutical launches.changes.
In fiscal 2017,2020, we experiencedcontinued to experience unfavorable trends in brand and generic pharmaceutical pricing trends, which negatively impacted our Pharmaceutical Distribution Services reportable segment profit and our consolidated operating earnings. ThoseWe expect these trends are expected to continue in fiscal 2018, and2021, which could have a material andan adverse effect on our results of operations.
Certain Our contractual arrangements with pharmaceutical manufacturers for the purchase of brand pharmaceutical products generally use wholesale acquisition cost ("WAC") as the reference price. We sell brand pharmaceutical products to many of our customers using WAC as the reference price and to other customers based on their negotiated contract price. If manufacturers change their pricing policies or practices with regard to WAC or if prices charged by manufacturers do not align with prices negotiated to be paid by our customers, and we are unable to negotiate alternative ways to be compensated by manufacturers or customers for the value of our services, our results of operations could be adversely affected. Additionally, there are a number of government policy initiatives being considered which, if enacted, could directly or indirectly regulate or impact WAC prices. If such initiatives are passed or finalized and we are unable to negotiate equitable changes with our suppliers and/or customers, our results of operations could be adversely impacted.
The pharmaceutical products that we purchase are also subject to price inflation and deflation. Additionally, certain distribution service agreements that we have entered into with brandedbrand and generic pharmaceutical manufacturers continue to have an inflation-based compensationa price appreciation component to them. As a result, our gross profit from brand-name and generic manufacturerspharmaceuticals continues to be subject to fluctuation based upon the timing and extent of manufacturer price increases, which we do not control. If the frequency or rate of brandedbrand and generic pharmaceutical price increases slows, whether due to regulatory mandates, the implementation of legislative proposals, policy initiatives or voluntary manufacturer actions, our results of operations could be adversely affected. In addition, generic pharmaceuticals are also subject to price deflation. If the frequency or rate of generic pharmaceutical price deflation accelerates, the negative impact on our results of operations will be greater. A decline in the number of generic pharmaceutical launches, or launches that are less profitable than those in the past, could also adversely impact our results of operations.
Competition and industry consolidation may erode our profit.
As described in greater detail in the “Competition”"Competition" section beginning on page 5, the industries in which we operate are highly competitive. In addition, in recent years the healthcare industry has been subject to increasing consolidation, including among pharmaceutical manufacturers.manufacturers, retail pharmacies, and health insurers, which may create further competitive pressures on our pharmaceutical distribution business. If we do not compete successfully, it could have a material and adverse effect on our business and results of operations. The impact on us will be greater if consolidation among our customers, suppliers, and competitors gives the resulting enterprises greater bargaining power, which could lead to greater pressure on us to reduce prices for our products and services.
Increasing governmental effortsOur revenue and results of operations may suffer upon the bankruptcy, insolvency, or other credit failure of a significant customer.
Most of our customers buy pharmaceuticals and other products and services from us on credit. Credit is made available to regulate the pharmaceutical supply channelcustomers based upon our assessment and pharmaceutical compounding may increase our costsanalysis of creditworthiness. Although we often try to obtain a security interest in assets and reduce our profitability.
The healthcare industry in the United States is highly regulated at the federal and state levels. There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy, departments of health, and the FDA, to regulate the pharmaceutical distribution system and pharmacy compounding activities. Regulation of pharmaceutical distribution is intended to prevent diversion and the introduction of counterfeit, adulterated, and/or mislabeled drugs into the pharmaceutical distribution system. Consequently, we are subject to the risk of changes in various federal and state laws, which include operating and security standards of the DEA, the FDA, various state boards of pharmacy and comparable agencies. In recent years, some states have passed or proposed laws and regulations that areother arrangements intended to protect our credit exposure, we generally are either subordinated to the safety and securityposition of the supply channel but that alsoprimary lenders to our customers or substantially unsecured. Volatility of the capital and credit markets, general economic conditions, and regulatory changes, including changes in reimbursement, may substantially increaseadversely affect the costssolvency or creditworthiness of our customers. The COVID-19 pandemic has increased volatility of the capital and burdencredit markets and has led to a general worsening of pharmaceutical distributioneconomic conditions, which has put financial pressure on many of our customers and pharmaceutical compounding.
At the federal level, final regulations issued pursuantmay threaten certain customers’ ability to the Prescription Drug Marketing Act impose pedigree tracking and other chain of custody requirements that increase the costs and/or burdenmaintain liquidity sufficient to repay their obligations to us as they become due. The bankruptcy, insolvency, or other credit failure of sellingany customer that has a substantial amount owed to other pharmaceutical distributorsus could have a material adverse effect on our operating revenue and handling product returns. In addition, the FDA Amendments Actresults of 2007 requires the FDA to establish standardsoperations. As of September 30, 2020, our two largest trade receivable balances due from customers represented approximately 47% and identify and validate effective technologies for the purpose7% of securing the pharmaceutical supply chain against counterfeit drugs. These standards include track-and-trace and/or authentication technologies that leverage 2D data matrix barcodes that are applied by the manufacturer to the sellable units and cases. The FDA is also required to develop a standardized numerical identifier ("SNI") for prescription drugs. In March 2010, the FDA issued guidance regarding the development of SNIs for prescription drugs in which the FDA mandated package-level SNIs, as an initial step in the FDA's development of additional measures to secure the drug supply chain. In November 2013, Congress passed the Drug Quality and Security Act ("DQSA"). The DQSA establishes federal traceability standards requiring drugs to be labeled and tracked at the lot level, preempts state drug pedigree requirements, and will eventually require all supply-chain stakeholders to participate in an electronic, interoperable prescription drug traceability system. The DSQA also establishes new requirements for drug wholesale distributors and third party logistics providers, including licensing requirements in states that had not previously licensed such entities.accounts receivable, net.
One additional change resulting from the DQSA is the creation of Section 503B outsourcing facilities as a new category for producers of compounded sterile preparations ("CSPs"), allowing such facilities to voluntarily register with the FDA. Our CSP business locations have registered with the FDA as Section 503B outsourcing facilities and have implemented policies and procedures to achieve compliance with current DQSA requirements for such facilities. However, there can be no assurance that
we are fully compliant with the new requirements, and any failure to comply may result in additional costs to bring our CSP facilities into compliance. Moreover, the FDA will continue to issue draft and final guidance and to promulgate regulations in its efforts to implement the requirements in the DQSA, including those relating to current good manufacturing practices ("GMPs") and other matters related to 503B outsourcing facilities, which may require changes to our CSP business, some of which may be significant. Complying with these and other chain of custody and pharmaceutical compounding requirements will increase our costs and could otherwise adversely affect ourOur results of operations.operations may suffer upon the bankruptcy, insolvency, or other credit failure of a significant supplier.
Legal,Our relationships with pharmaceutical suppliers give rise to substantial amounts that are due to us from the suppliers, including amounts owed to us for returned goods or defective goods, chargebacks, and amounts due to us for services provided to the suppliers. Volatility of the capital and credit markets, general economic conditions, pending litigation, and regulatory and legislative changes may adversely affect the solvency or creditworthiness of our business and results of operations.
Both our business and our customers' businesses may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals and/suppliers. The bankruptcy, insolvency, or medical treatments or services or changing the methodology by which reimbursement levels are determined. Additionally, on occasion, price increases on certain branded and generic pharmaceuticals have been the subject of U.S. Congressional inquiries. Any law or regulation impacting pharmaceutical pricing, including as a result of pricing controls or legislative efforts at the federal or state level, could adversely affect our operations.
Federal insurance and health care reform legislation known as the Affordable Care Act ("ACA") became law in March 2010. The ACA is intended to expand health insurance coverage, including coverage for at least a portion of drug costs, through a combination of insurance market reforms, an expansion of Medicaid, subsidies, and health insurance mandates. The ACA contains many provisions designed to generate the revenues necessary to fund the coverage expansions and reduce the costs of Medicare and Medicaid. Given the scope of the changes made by the ACA and the ongoing implementation efforts, we cannot predict the impact of every aspect of the law on our operations. Likewise, we cannot predict the impactother credit failure of any efforts to change or repeal any provisions ofsupplier at a time when the ACA.
The ACA changed the formula for Medicaid federal upper payment limits (“FULs”) for multiple source drugs available for purchase by retail community pharmacies onsupplier has a nationwide basis to a limit of not less than 175% of the weighted average manufacturer price ("AMP"). On February 1, 2016, CMS published its final rule to implement the ACA's Medicaid covered outpatient drug provisions, under which CMS calculates FULs for multiple source drugs as 175% of the weighted average of AMPs, with certain exceptions. In addition, the rule requires state Medicaid programs to implement payment methods for brand (non-multiple source) products designed to be consistent with the actual acquisition cost of such drugs. The rule was generally effective on April 1, 2016, and states had until May 2016 to implement the FULs and have until April 1, 2017 to implement any changes necessary in light of the actual acquisition cost standard. Medicaid reimbursement for drugs calculated under the final rule may represent significant reductions from prior reimbursement levels, although the impact of the changes depends upon how the changes are implemented by each state Medicaid program. Any reduction in the Medicaid reimbursement rates to our customers may indirectly impact the prices that we can charge our customers for multisource pharmaceuticals and cause corresponding declines in our profitability.
The ACA also amended the Medicaid rebate statute to increase minimum Medicaid rebates paid by pharmaceutical manufacturers and made other changes expected to result in increased Medicaid rebate payments by pharmaceutical manufacturers, which could indirectly impact our business. In addition, the Bipartisan Budget Act of 2015 extended to generic drugs inflation-based Medicaid drug rebates similar to those that are paid on brand drugs. The federal government and state governments could take other actions in the future that impact Medicaid reimbursement and rebate amounts or the cost of drugs.
There can be no assurance that recent or future changes in Medicaid prescription drug reimbursement policies will not have an adverse impact on our business. Unless we are able to develop plans to mitigate the potential impact of these legislative and regulatory changes, these changes in reimbursement and related reporting requirements could adversely affect our results of operations.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 significantly expanded Medicare coverage for outpatient prescription drugs through the Medicare Part D program. The Part D program has increased the use of pharmaceuticals in the supply channel, which has had a positive impact on our revenues and profitability. There have been additional legislative and regulatory changes to the Part D program since its enactment. There can be no assurances that recent and future changes to the Part D program will not have an adverse impact on our business.
The federal government may adopt measures in the future that would further reduce Medicare and/or Medicaid spending or impose additional requirements on health care entities. For instance, under the "sequestration" provision of the Budget Control Act of 2011 (as amended), a 2% cut is being made to Medicare provider and plan payments, generally effective for services provided on or after April 1, 2013. Any future reductions in Medicare reimbursement rates could negatively impact our customers' businesses and their ability to continue to purchase such drugs from us. At this time, we can provide no assurances that future Medicare and/or Medicaid payment or policy changes, if adopted, would not have an adverse effect on our business.
Our business may be adversely affected in the future by the impact of declining reimbursement rates for pharmaceuticals and other economic factors.
Our Pharmaceutical Distribution Services segment sells specialty drugs directly to physicians and community oncology practices and provides a number of services to or through physicians. Drugs that are administered in a physician's office, such as drugs that are infused or injected, are typically covered under Medicare Part B. Declining reimbursement rates for Medicare Part B drugs and other economic factors have caused a number of physician practices, including some of our customers, to move from private practice to hospital settings, where they may purchase their specialty drugs under hospital prime vendor arrangements rather than from specialty distributors. Although this trend has slowed down in the past year, it could increase in the futuresubstantial account payable balance due to various factors, including legislative and regulatory requirements that affect how CMS reimburses for Medicare Part B drugs, as well as the ability of certain hospitals to purchase drugs at significant, statutorily-mandated discounts pursuant to the federal 340B drug discount program for groups of patients. In addition, federal changes in drug reimbursement policy could reduce the rate of reimbursement for drugs covered under Medicare Part B or physician services under Medicare, which could negatively impact our customers' businesses and their ability to continue to purchase such drugs from us and thereby result in corresponding declines in our profitability. On September 20, 2017, CMS issued a request for information seeking recommendations for payment models, which could include prescription drug models under Medicare Parts B and D and state Medicaid programs. CMS noted its interest in drug pricing and value-based purchasing models involving "novel arrangements between plans, manufacturers, and stakeholders across the supply chain." Additionally, CMS published a proposed rule on July 20, 2016 that would cut Medicare outpatient hospital reimbursement for separately payable drugs (other than vaccines) purchased through the 340B drug pricing program at average sales price (ASP) minus 22.5% (with certain exceptions), rather than ASP plus 6%. CMS finalized this rule on November 1, 2017. At this time, we can provide no assurances that future Medicare reimbursement or policy changes, if adopted, would not have an adverse effect on our business.
Changes to the U.S. healthcare environment may negatively impact our business and our profitability.
Our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently existing in the United States. In recent years, the healthcare industry has undergone significant changes in an effort to reduce costs and government spending. These changes include an increased reliance on managed care; cuts in certain Medicare funding affecting our healthcare provider customer base; consolidation of competitors, suppliers and customers; and the development of large, sophisticated purchasing groups. We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental funding at the state or federal level for certain healthcare services or adverse changes in legislation or regulations governing prescription drug pricing, pharmaceutical compounding, healthcare services or mandated benefits, may cause healthcare industry participants to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. We expect continued government and private payor pressure to reduce pharmaceutical pricing. Changes in pharmaceutical manufacturers' pricing or distribution policies could also significantly reduce our profitability.
If we fail to comply with laws and regulations in respect of healthcare fraud and abuse, we could suffer penalties or be required to make significant changes to our operations.
We are subject to extensive and frequently changing federal and state laws and regulations relating to healthcare fraud and abuse. The federal government continues to strengthen its scrutiny of practices potentially involving healthcare fraud affecting Medicare, Medicaid and other government healthcare programs. Our relationships with healthcare providers and pharmaceutical manufacturers subject our business to laws and regulations on fraud and abuse which, among other things, (i) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs and (ii) impose a number of restrictions upon referring physicians and providers of designated health services under Medicare and Medicaid programs. Legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel substantially increased funding, powers and remedies to pursue suspected fraud and abuse, and these enforcement authorities were further expanded by the ACA. While we believe that we are in compliance with applicable laws and regulations, many of the regulations applicable to us, including those relating to marketing incentives offered in connection with pharmaceutical sales, are vague or indefinite, and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could be subject to civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid, and other federal and state healthcare programs.
Public concern over the abuse of opioid medications, including increased legal and regulatory action, could negatively affect our business.
Certain governmental and regulatory agencies, as well as state and local jurisdictions, are focused on the abuse of opioid medications in the United States. State and local governmental agencies are investigating us, other pharmaceutical wholesale distributors, and others in the supply chain regarding our actions in connection with the distribution of opioid medications. In addition, multiple lawsuits have been filed against us and other pharmaceutical wholesale distributors alleging, among other claims, that we failed to provide effective controls and procedures to guard against the diversion of controlled substances, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of controlled substances in accordance with regulations. Additional governmental entities have indicated an intent to sue. We have sophisticated systems in place to detect and report suspicious orders (including through the use of data analytics), engage in significant due diligence of customers, and are committed to diversion control efforts. While we are vigorously defending ourselves in these lawsuits, the allegations may negatively affect our business in various ways, including through increased costs and harm to our reputation. Since these matters are at an early stage, we are unable to predict the outcome. The adverse resolution of any of these lawsuits or investigations could have an adverse effect on our business, results of operations, cash flows, and the price of our common stock.
Our business, results of operations, and cash flows could be adversely affected by qui tam litigation or other legal proceedings.
Our business involves the manufacture, distribution, and dispensing of healthcare products, which may cause us to become involved in legal disputes or proceedings. The defense and resolutions of these current and future proceedings could have a material adverse effect on our results of operationsoperations.
Our stock price and our ability to access credit markets may be adversely affected by financial condition. Violations of various federalmarket volatility and state laws governingdisruption or a downgrade in our credit ratings.
If the marketing, sale, purchase,capital and dispensing of pharmaceutical products can resultcredit markets experience significant disruption and volatility in criminal, civil, and administrative liability for whichthe future, there can be no assurance that we will not experience downward movement in our stock price without regard to our financial condition or results of operations or an adverse effect, which may be material, on our ability to access credit. Although we believe that our operating cash flow and existing credit arrangements give us the ability to meet our financing needs, there can be no assurance that disruption and volatility will not increase our costs of borrowing, impair our liquidity, or adversely impact our business.
Additionally, rating agencies continually review the ratings they have assigned to us and our outstanding debt securities. To maintain our ratings, we are required to meet certain financial performance ratios. Liabilities related to litigation or any significant related settlements, an increase in our debt or a decline in our earnings could result in downgrades in our credit ratings. Actual or anticipated changes or downgrades in our credit ratings, including any announcement that our ratings are under review for a downgrade or have been assigned a negative outlook, could limit our access to public debt markets, limit the institutions willing to provide credit to us, result in more restrictive financial damages, criminal and civil penalties,other covenants in our public and possible exclusion from participation in federalprivate debt, and state health programs. Any settlement, judgment or fine that is in excess ofwould likely increase our insurance limits, or that is not otherwise covered,overall borrowing costs and adversely affect our earnings.
Declining economic conditions could adversely affect our results of operations.operations and financial condition.
Among other things, statutory and/or regulatory violations can form the basis for qui tam complaints to be filed. The qui tam provisions of the federalOur operations and various state civil False Claims Acts authorize a private person, known as a relator, to file civil actions under these statutesperformance depend on behalf of the federal and state governments. Under False Claims Acts, the filing of a qui tam complaint by a relator imposes obligations on government authorities to investigate the allegations and determine whether or not to interveneeconomic conditions in the action. Such cases may involve allegations aroundUnited States and other countries where we do business. Deterioration in general economic conditions could adversely affect the marketing, sale, purchase, and/or dispensingamount of branded and/or genericprescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, wrongdoingtherefore, could reduce purchases by our customers, which would negatively affect our revenue growth and cause a decrease in our profitability. Negative trends in the marketing, sale, purchase, and/general economy, including interest rate fluctuations, financial market volatility, or dispensing of suchcredit market disruptions, may also affect our customers' ability to obtain credit to finance their businesses on acceptable terms and reduce discretionary spending on health products. Such complaints are filed under sealReduced purchases by our customers or changes in payment terms could adversely affect our revenue growth and remain sealed untilcause a decrease in our cash flow from operations. Bankruptcies or similar events affecting our customers may cause us to incur bad debt expense at levels higher than historically experienced. Declining economic conditions may also increase our costs. If the applicable court orders otherwise.
We have learned that there are filingseconomic conditions in onethe United States or more federal district courts that are under seal and may involve allegations against us (and/orin the countries where we do business deteriorate, our subsidiaries or businesses, including our group purchasing organization for oncologists and our oncology distribution business) relating to its distribution of certain pharmaceutical products to providers. With regard to any of these filings, our business, and results of operations or financial condition could be adversely affected if qui tam complaints are filed against us for alleged violations of any health lawsaffected.
Business and regulations and damages arising from resultant false claims, if the litigation proceeds whether or not government authorities decide to intervene in any such matters and/or if we are found liable for all or any portion of violations alleged in any such matters.Operational Risks
Our revenue, results of operations, and cash flows may suffer upon the loss, or renewal at less favorable terms, of a significant customer or group purchasing organization.
WBA accounted for approximately 30%33% of our revenue in the fiscal year ended September 30, 2017.2020. Express Scripts accounted for approximately 15%12% of our revenue in the fiscal year ended September 30, 2017.2020. Our top ten customers, including governmental agencies and GPOs, represented approximately 66%64% of revenue in the fiscal year ended September 30, 2017.2020. We may lose a significant customer or GPO relationship if any existing contract with such customer or GPO expires without being extended, renewed, renegotiated or replaced or is terminated by the customer or GPO prior to expiration, to the extent such early termination is permitted by the contract. A number of our contracts with significant customers or GPOs are typically subject to expiration each year and we may lose any of these customers or GPO relationships if we are unable to extend, renew, renegotiate or replace the contracts. The loss of any significant customer or GPO relationship could adversely affect our revenue, results of operations, and cash flows. Additionally, from time to time, significant contracts may be renewed or modified prior to their expiration date.date in furtherance of our strategic objectives. If those contracts are renewed or modified at less favorable terms, they may also negatively impact our revenue, results of operations, and cash flows.
The anticipated ongoing strategic and financial benefits of our relationship with WBA may not be realized.
In May 2016, we extended to 2026 our strategic arrangement with WBA - specifically, our distribution agreement under which we distribute drugs to Walgreens pharmacies and our generics purchasing services arrangement under which
Walgreens Boots Alliance Development GmbH ("WBAD") provides a variety of services, including negotiating acquisition pricing with generic manufacturers on our behalf. This reflected our expectation that partnering strategically with WBA would result in various benefits including, among other things, continued cost savings as a result of our generics purchasing services arrangement with WBAD, as well as the potential for exploring innovation together and sharing best practices. The processes and initiatives needed to achieve and maintain these benefits are complex, costly, and time-consuming. Achieving the anticipated benefits from the arrangement on an ongoing basis is subject to a number of significant challenges and uncertainties, including: the potential inability to realize and/or delays in realizing potential benefits resulting from participation in our generics purchasing services arrangement with WBAD, including improved generic drug pricing and terms, improved service fees from generic manufacturers, cost savings, innovations, or other benefits due to its inability to negotiate successfully with generic manufacturers or otherwise to perform as expected; the potential disruption of our plans and operations as a result of the terms under which we extended the duration of the distribution agreement and generics purchasing services agreement, including any disruption of our cash flow and ability to return value to our stockholders in accordance with our past practices and any reduction in our operational, strategic or financial flexibility; potential changes in supplier relationships and terms; unexpected or unforeseen costs, fees, expenses and charges incurred by us related to the transaction or the overall strategic relationship; unforeseen changes in the economic terms under which we distribute pharmaceuticals to WBA, including changes necessitated by changing market conditions or other unforeseen developments that may arise during the term of the distribution agreement, to the extent that any such changes are not offset by other financial benefits that we are able to obtain through collaboration in other aspects of our strategic relationship with WBA; and any potential issues that could impede our ability to continue to work collaboratively with WBA in an efficient and effective manner in furtherance of the anticipated strategic and financial benefits of the relationship.
In addition, WBA has the right, but not the obligation, under the transactions contemplated by the Framework and Shareholder Agreements dated March 18, 2013 to make certain additional investments in our common stock. WBA also has the right to sell any of the shares of our common stock that it has acquired so long as WBA has held the shares beyond the requisite dates specified in the Shareholder Agreement. Any sales in the public market of common stock currently held by WBA or acquired by WBA pursuant to open market purchases could adversely affect prevailing market prices of our common stock. We could also encounter unforeseen costs, circumstances, or issues with respect to the transactions and collaboration we anticipate pursuing with WBA. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased benefits and the diversion of management time and attention. If we are unable to achieve any of our objectives, within the anticipated time frame, or at all, the expected future benefits may not be realized fully or at all, or may take longer to realize than expected, which could have a material adverse impact on our business, financial condition, and results of operations and the price of our common stock.operations.
A disruption in our distribution or generic purchasing services arrangements with WBA could adversely affect our business and financial results.
We are the primary distributor of pharmaceutical products for WBA. Our generic pharmaceutical program has also benefited from the generics purchasing services arrangement with WBA. If the operations of WBA are seriously disrupted for any reason, whether by natural disaster, labor disruption, regulatory or governmental action, or otherwise, it could adversely affect our business and our sales and profitability. If the generics purchasing services arrangement does not continue to be successful, our margins and results of operations could also be adversely affected.
If our operations are seriously disrupted for any reason deemed within our control, we may have an obligation to pay or credit WBA for failure to supply products. In addition, upon the expiration or termination of the distribution agreement or generics purchasing services arrangement, there can be no assurance that we or WBA will be willing to renew, on terms favorable to us or at all.
Our generic pharmaceutical program has also benefited from the generics purchasing services arrangement with WBA. If the operations of WBA are seriously disrupted for any reason, whether by the global coronavirus ("COVID-19") pandemic, natural disaster, labor disruption, regulatory or governmental action, or otherwise, it could adversely affect our business and our sales and profitability. Moreover, if the economic benefits we are able to obtain through the generics purchasing services arrangement with WBA decline due to changes in market conditions or other changes impacting the fees and rebates that generic manufacturers make available through the arrangement, our margins and results of operations could also be adversely affected.
In addition, our business may be adversely affected by any operational, financial, or regulatory difficulties that WBA experiences, including any disruptions of certain of its existing distribution facilities or retail pharmacies resulting from ongoing inspections by the DEA and/or state regulatory agencies and possible revocation of the controlled substance registrations for those facilities and pharmacies.
Tax legislation or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a large corporation with operations in the United States and select global markets. As such, we are subject to tax laws and regulations of the U.S. federal, state and local governments, and of various foreign jurisdictions. From time to time, various legislative initiatives, such as the repeal of last-in, first-out ("LIFO") treatment, may be proposed that could adversely affect our tax positions and/or our tax liabilities. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by legislation resulting from these initiatives. We believe that our historical tax positions are consistent with applicable laws, regulations, and existing precedent. In addition, U.S. federal, state and local, as well as foreign, tax laws and
regulations, are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
The suspension or revocation by federal or state authorities of any of the registrations that must be in effect for our distribution and 503B outsourcing facilities to purchase, compound, store, and/or distribute pharmaceuticals and controlled substances, the refusal by such authorities to issue a registration to any such facility, or any enforcement action or other litigation that arises out of our failure to comply with applicable laws and regulations governing distribution and 503B outsourcing facilities may adversely affect our reputation, our business and our results of operations.
The DEA, FDA, and various other federal and state regulatory authorities regulate the distribution of pharmaceuticals and controlled substances and the compounding of pharmaceuticals that contain controlled substances. We are required to hold valid DEA and state-level licenses, meet various security and operating standards and comply with the Controlled Substances Act and its implementing regulations governing the sale, marketing, packaging, compounding, holding and distribution of controlled substances. Government authorities may from time to time investigate whether we are in compliance with various security and operating standards applicable to the distribution of controlled substances including whether we are adequately detecting and preventing the illegal diversion of controlled substances. Although we have procedures in place that are intended to ensure compliance with such laws and regulations, there can be no assurance that a regulatory agency or tribunal would conclude that our operations are compliant with applicable laws and regulations. If we were found to be non-compliant with such laws and regulations, federal and state authorities have broad enforcement powers, including (i) the ability to suspend our distribution centers' and 503B outsourcing facilities' licenses to distribute and compound pharmaceutical products (including controlled substances), (ii) seize or recall products, and (iii) impose significant criminal, civil and administrative sanctions for violations of these laws and regulations, each of which could have a material adverse effect on our reputation, business and results of operations.
We have received, and may in the future receive, requests for information, letters and subpoenas from the DEA, FDA, various U.S. Attorneys' Offices of the U.S. Department of Justice, and/or state attorneys general and state regulatory authorities and agencies related to our distribution of controlled substances and our order monitoring program, which is designed to prevent and detect the illegal diversion of controlled substances, or other matters. We generally respond to subpoenas, requests, letters, and other authority and/or agency correspondence in a thorough and timely manner. These responses require time and effort and can result in considerable costs being incurred by us, such as costs related to addressing the observations listed on FDA Form 483 reports. Such subpoenas, requests and letters can also lead to the assertion of claims or the commencement of civil, criminal, or regulatory legal proceedings against us, as well as to settlements and the suspension or revocation of registrations required by our distribution and 503B outsourcing facilities, each of which could have a material adverse effect on our reputation, business and results of operations.
The FDA and other governmental entities enforce compliance with applicable current GMP requirements through periodic risk-based inspections. It is common for FDA Form 483 reports to be provided in connection with inspections of 503B outsourcing facilities, and FDA observations may be followed by warning letters or subsequent enforcement actions. Prior to our acquisition of the business, PharMEDium received a warning letter from the FDA in 2014 following the inspection of PharMEDium's Mississippi, New Jersey, Tennessee and Texas 503B outsourcing facilities in 2013. The FDA reinspected all of these facilities in 2015 and 2016 and issued FDA Form 483 reports at each of the facilities as well as at PharMEDium’s headquarters in Lake Forest, Illinois. We cannot be assured that the FDA will be satisfied with the sufficiency or timing of PharMEDium’s corrective actions in response to the FDA's Form 483 reports, including PharMEDium's meeting with the FDA on November 18, 2016, and, as such, we cannot predict when or if the FDA will consider the agency’s observations to be fully resolved. A failure to adequately address observations identified by the FDA in Form 483 reports or warning letters issued by the FDA or observations identified by any other federal and state regulatory authority, including a failure to resolve the observations identified by the FDA in the 2014 warning letter and subsequent FDA Form 483 reports relating to PharMEDium’s 503B outsourcing facilities, could lead to an enforcement action, monetary penalties and/or license revocation, each of which could have a material adverse effect on our reputation, business and results of operations.
The products compounded by our CSP business are administered by our customers to patients intravenously, and failures or errors in production, labeling or packaging could contribute to patient harm or death, which may subject us to significant liabilities and reputational harm.
The production, labeling, and packaging of CSPs is inherently risky. Our CSP business sells CSPs to acute care hospitals, freestanding hospital outpatient departments, and ambulatory surgery centers, who then administer the CSPs to patients intravenously or through other injectable routes of administration. There are a number of factors that could result in the injury or death of a patient who receives one of our CSPs, including quality issues, manufacturing or labeling flaws, improper packaging or unanticipated or improper uses of the products, any of which could result from human or other error. Any of these situations could lead to a recall of, or safety alert relating to, one or more of our products. In addition, in the ordinary course of business, we may voluntarily recall or retrieve products. Any recall or retrieval, whether voluntary or requested by the FDA or state regulatory
authorities, could result in significant costs and negative publicity. Negative publicity, including regarding a quality or safety issue, whether accurate or inaccurate, could reduce market acceptance of our products, harm our reputation, decrease demand for our products, result in the loss of customers, lead to product withdrawals, and harm our ability to successfully launch new products and services. These problems could also result in enforcement actions by state and federal authorities or other healthcare self-regulatory bodies, or product liability claims or lawsuits, including those brought by individuals or groups seeking to represent a class or establish multidistrict litigation proceedings. Any such action, litigation, recall or reputational harm resulting from patient harm or death caused by CSPs prepared by a competitor or a hospital pharmacy could result in a material adverse effect on our business, results of operations, financial condition and liquidity. Our current or future insurance coverage may prove insufficient to cover any liability claims brought against us. Because of the increasing cost of insurance coverage, we may not be able to maintain insurance coverage at a reasonable cost or obtain insurance coverage that will be adequate to satisfy any liability that may arise.
We may not realize the expected benefits from our reorganization and other business process initiatives.
In June 2017 we announced a new organizational structure, described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 below, designed to further align the organization to its customer needs in a more seamless and unified way, while supporting corporate strategy, accelerating growth, and improving efficiency. There can be no assurance that we will realize, in full or in part, the anticipated benefits of these changes. Our financial goals assume a level of productivity improvement from our business optimization initiatives. Our ability to successfully manage and execute these initiatives and realize expected savings and benefits is important to our business success. The reorganization and other initiatives could yield unintended consequences such as distraction of our management and employees, business disruption, attrition, inability to attract or retain key personnel, and reduced employee productivity which could negatively affect our business, sales, financial condition, and results of operations. Moreover, our restructuring and business process initiatives may result in charges and expenses that impact our operating results. There can be no assurance that the activities under any restructuring and business initiative will result in the desired benefits.
Our results of operations and financial condition may be adversely affected if we undertake acquisitions of or investments in businesses that do not perform as we expect or that are difficult for us to integrate.
As part of our strategy we seek to pursue acquisitions of and investments in other companies. At any particular time, we may be in various stages of assessment, discussion, and negotiation with regard to one or more potential acquisitions or investments, not all of which will be consummated. We make public disclosure of pending and completed acquisitions when appropriate and required by applicable securities laws and regulations.
Acquisitions involve numerous risks and uncertainties and may be of businesses in which we lack operational or market experience. If we complete one or more acquisitions, our results of operations and financial condition may be adversely affected by a number of factors, including: regulatory or compliance issues that could arise; changes in regulations and laws; the failure of the acquired businesses to achieve the results we have projected in either the near or long term; the assumption of unknown liabilities, including litigation risks; the fair value of assets acquired and liabilities assumed not being properly estimated; the difficulties of imposing adequate financial and operating controls on the acquired companies and their management and the potential liabilities that might arise pending the imposition of adequate controls; the difficulties in the integration of the operations, technologies, services and products of the acquired companies; and the failure to achieve the strategic objectives of these acquisitions.
Our business and results of operations may be adversely affected if we fail to manage and complete divestitures.
We regularly evaluate our portfolio in order to determine whether an asset or business may no longer help us meet our objectives. When we decide to sell assets or a business, we may encounter difficulty finding buyers or alternative exit strategies, which could delay the achievement of our strategic objectives. The impact of a divestiture on our results of operations could also be greater than anticipated.
Our results of operations and our financial condition may be adversely affected by our global operations.
Our operations in jurisdictions outside of the United States are subject to various risks inherent in global operations. We currently have operations in over 50 countries. We may conduct business in additional foreign jurisdictions in the future, which may carry operational risks in addition to the risks of acquisition described above. At any particular time, our global operations may be affected by local changes in laws, regulations, and the political and economic environments, including inflation, recession, currency volatility, and competition. Changes or uncertainty in U.S. or foreign policy, including any changes or uncertainty with respect to U.S. or international trade policies or tariffs, also can disrupt our global operations, as well as our customers and suppliers, in a particular location and may require us to spend more money to source certain products or materials that we purchase. Any of these factors could adversely affect our business, financial position, and results of operations.
We are subject to operational and logistical risks that might not be covered by insurance.
We have distribution centers and facilities located in the United States and throughout the world. Our business exposes us to risks that are inherent in the distribution of pharmaceuticals and the provision of related services, including with respect to cold chain storage and shipping. We anticipate that the volume of cold chain storage and shipping may increase due to the COVID-19 pandemic, as we assist with the strategic national stockpile as well as possible distribution of COVID-19 vaccines. Although we seek to maintain adequate insurance coverage, coverage on acceptable terms might be unavailable, or coverage might not cover our losses or may require large deductibles. Uninsured losses or operational losses that result in large deductible payments in order to receive insurance coverage might have an adverse impact on our business operations and our financial position or results of operations.
Litigation and Regulatory Risks
Increasing governmental efforts to regulate the pharmaceutical supply channel may increase our costs and reduce our profitability.
The healthcare industry in the United States is highly regulated at the federal and state levels. There have been increasing efforts by Congress and state and federal agencies, including state boards of pharmacy, departments of health, and the FDA, to regulate the pharmaceutical distribution system. Regulation of pharmaceutical distribution is intended to prevent diversion and the introduction of counterfeit, adulterated, and/or mislabeled drugs into the pharmaceutical distribution system. Consequently, we are subject to the risk of changes in various federal and state laws, which include operating and security standards of the DEA, the FDA, various state boards of pharmacy and comparable agencies. In recent years, some states have passed or proposed laws and regulations that are intended to protect the safety and security of the supply channel but that also may substantially increase the costs and burden of pharmaceutical distribution.
At the federal level, the DQSA establishes federal traceability standards requiring drugs to be labeled and tracked at the bottle level, preempts state drug pedigree requirements, and will require all supply-chain stakeholders to participate in an electronic, interoperable prescription drug traceability system by November 2023. The DQSA, and in particular Title II of the DQSA, the Drug Supply Chain Security Act ("DSCSA") also established requirements for drug wholesale distributors and
third-party logistics providers, including licensing requirements applicable in states that had not previously licensed third-party logistics providers.
There can be no assurance that we are fully compliant with the DQSA requirements, including the DSCSA requirements, or with additional related state regulatory and licensing requirements, and any failure to comply may result in suspension or delay of certain operations and additional costs to bring our facilities into compliance. Our international operations may also be subject to local regulations containing record-keeping and other obligations related to our distribution operations in those locations. Pedigree tracking laws increase our compliance burden and our pharmaceutical distribution costs and could have an adverse impact on our financial position or results of operations.
As discussed in the risk factor below about public concern over the abuse of opioid medications, certain governmental and regulatory agencies, as well as state and local jurisdictions, are focused on the abuse of opioid medications in the United States. In addition to conducting investigations and participating in litigation related to the misuse of prescription opioid medications, federal, state and local governmental and regulatory agencies are considering legislation and regulatory measures to limit opioid prescriptions and more closely monitor product distribution, prescribing, and dispensing of these drugs.
Complying with the DQSA requirements, including the DSCSA requirements, and other chain of custody and pharmaceutical distribution requirements, including follow-on actions related to current public concern over the abuse of opioid medications, could result in suspension or delays in our production and distribution activities which may increase our costs and could otherwise adversely affect our results of operations.
Legal, regulatory, and legislative changes with respect to reimbursement, pricing, and contracting may adversely affect our business and results of operations, including through declining reimbursement rates.
Both our business and our customers' businesses may be adversely affected by laws and regulations reducing reimbursement rates for pharmaceuticals and/or medical treatments or services, changing the methodology by which reimbursement levels are determined, or regulating pricing, contracting, and discounting practices with respect to medical products and services. Additionally, on occasion, price increases and pricing practices with respect to certain brand and generic pharmaceuticals have been the subject of U.S. Congressional inquiries, federal and state investigations and private litigation. Any law or regulation impacting pharmaceutical pricing or reimbursement, such as pricing controls or indexing models at the federal or state level, could adversely affect our operations.
Federal insurance and healthcare reform legislation known as the Affordable Care Act ("ACA") became law in March 2010, and included numerous reforms broadening healthcare access and affecting Medicare and Medicaid reimbursement, pricing, and contracting for prescription drugs, including changes to the Medicaid rebate statute. Given the scope of the changes made by the ACA and continuing implementation controversies, we cannot predict the impact of every aspect of the law on our operations. Likewise, we cannot predict the impact of any efforts to change or repeal any provisions of the ACA may have on the ACA or other healthcare legislation and regulation.
Subsequent legislation has made additional changes to federal drug payment policies, including the Bipartisan Budget Act of 2018, which increased the Medicaid rebate due with respect to line extensions of single source or innovator multiple source oral solid dosage form drugs. The federal government and state governments could take other actions in the future that impact Medicaid reimbursement and rebate amounts or the cost of drugs. Any reduction in the Medicaid reimbursement rates to our customers may indirectly impact the prices that we can charge our customers for multiple source pharmaceuticals and cause corresponding declines in our profitability. There can be no assurance that recent or future changes in Medicaid prescription drug reimbursement policies will not have an adverse impact on our business. Unless we are able to successfully advocate to prevent or mitigate the impact of these legislative and regulatory changes, these changes in reimbursement and related reporting requirements could adversely affect our results of operations.
Our businesses also sell specialty and other drugs to physicians, hospitals, community oncology practices and other providers that are reimbursed under Part B of the Medicare program. The Centers for Medicare & Medicaid Services ("CMS") published a final rule in November 2017 that reduces Medicare outpatient hospital reimbursement for separately payable drugs (other than vaccines) purchased through the 340B drug discount program from average sales price ("ASP") plus 6% to ASP minus 22.5% (with certain exceptions), effective January 2018. In July 2020, the United States Court of Appeals for the District of Columbia reversed the district court’s decision, which would allow the payment reductions to take effect. While the appeals process is still underway, CMS solicited comments in the proposed calendar year 2020 Medicare outpatient prospective payment system rule on appropriate payment for such 340B-acquired drugs, and finalized a rule in November 2019 that would impose the same ASP minus 22.5% rate that was the subject of the litigation described above. Separately, November 2018, CMS published a final rule that reduces from 6% to 3% the “add-on” payment for new, separately-payable Part B drugs and
biologicals that are paid based on WAC when ASP data during first quarter or sales is unavailable. There can be no assurance that recent or future rules established by CMS will not have an adverse impact on our business.
Further, even where the government does not affirmatively change drug price regulation standards, other parties in the drug manufacturing and distribution system may change their interpretation or approach to implementing or complying with those standards, in a manner that may adversely affect our business. For example, the 340B drug discount program requires manufacturers to provide discounts on outpatient drugs to “covered entity” safety net providers, and previous Health Resources and Services Administration (“HRSA”) guidance has allowed covered entities to dispense 340B discounted drugs through arrangements with multiple “contract pharmacies.” Recently, several manufacturers have announced initiatives that may inhibit or limit covered entities’ ability to use any, or multiple, contract pharmacies, and may direct us not to honor 340B discounted pricing requests on orders to be shipped to contract pharmacies (or may not honor chargebacks where such discounts are extended to contract pharmacies). HRSA has initially indicated that it lacks regulatory authority to enforce its prior guidance allowing multiple contract pharmacies, but recently advised that it is considering whether it may have other enforcement remedies in the event that manufacturers do not extend 340B discounts through contract pharmacy arrangements. Our customers include covered entities and organizations with significant participation as contract pharmacies, and the unavailability of 340B discounts through contract pharmacy arrangements may adversely affect such customers and, therefore, could adversely affect our business.
The federal government may adopt measures in the future that would further reduce Medicare and/or Medicaid spending or impose additional requirements on healthcare entities. Notably, the Trump Administration and members of Congress proposed numerous amendments to Part B drug distribution and payment models during 2018. The Trump Administration has also sought to implement demonstration projects that may affect drug payments. Some of these proposals could have significant effects on our business, including an Executive Order issued on September 13, 2020 to test a "Most Favored Nations" model for Part B and Part D drugs that tie reimbursement rates to international drug pricing metrics. Any future reductions in Medicare reimbursement rates or modifications to Medicare drug pricing regulations such as ASP calculations could negatively impact our customers' businesses and their ability to continue to purchase such drugs from us, or could indirectly affect the structure of our relationships with manufacturers and our customers. At this time, we can provide no assurances that future Medicare and/or Medicaid payment or policy changes, if adopted, would not have a material adverse effect on our business.
Finally, federal and state governments may adopt policies affecting drug pricing and contracting practices outside of the context of federal programs such as Medicare and Medicaid, which may adversely affect our business. For example, several states have adopted laws that require drug manufacturers to provide advance notice of certain price increases and to report information relating to those price increases, while others have taken legislative or administrative action to establish prescription drug affordability boards or multi-payer purchasing pools to reduce the cost of prescription drugs. On July 31, 2019, the Department of Health and Human Services announced a “Safe Importation Action Plan” that outlines two potential pathways to allow importation of certain drugs from foreign markets. On July 24, 2020, the Trump Administration issued an “Executive Order on Increasing Drug Importation to Lower Prices for American Patients” calling for the federal government to exercise its authority under the Federal Food, Drug, and Cosmetic Act to permit drug imports from Canada, re-importation of certain insulin products, and case-by-case waivers to certain importers provided such importation poses no risk to public safety and results in lower costs. There can be no assurances that future changes to drug reimbursement policies, drug pricing and contracting practices outside of federal healthcare programs, or to government drug price regulation programs such as the Medicaid rebate, ASP, or 340B program will not have an adverse impact on our business.
If we fail to comply with laws and regulations in respect of healthcare fraud and abuse, we could suffer penalties or be required to make significant changes to our operations.
We are subject to extensive and frequently changing federal and state laws and regulations relating to healthcare fraud and abuse. The federal government continues to strengthen its scrutiny of practices potentially involving healthcare fraud affecting Medicare, Medicaid and other government healthcare programs. Our relationships with healthcare providers and pharmaceutical manufacturers subject our business to laws and regulations on fraud and abuse which, among other things, (i) prohibit persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or the ordering or purchasing of items or services that are in any way paid for by Medicare, Medicaid or other government-sponsored healthcare programs and (ii) impose a number of restrictions upon referring physicians and providers of designated health services under Medicare and Medicaid programs. Legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel substantially increased funding, powers and remedies to pursue suspected fraud and abuse, and these enforcement authorities were further expanded by the ACA. Many states have enacted similar statutes which are not necessarily limited to items and services for which payment is made by federal healthcare programs. While we believe that we are in compliance with applicable laws and regulations, many of the regulations applicable to us, including those
relating to certain incentives offered in connection with sales of pharmaceutical products and related services, are vague or indefinite, and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could require us to make changes in our operations. If we fail to comply with applicable laws and regulations, we could be subject to civil and criminal penalties, including the loss of licenses or our ability to participate in Medicare, Medicaid, and other federal and state healthcare programs.
Public concern over the abuse of opioid medications, including increased legal and regulatory action, could negatively affect our business.
Certain governmental and regulatory agencies, as well as state and local jurisdictions, are focused on the abuse of opioid medications in the United States. Federal, state and local governmental and regulatory agencies are conducting investigations of us and others in the supply chain, including pharmaceutical manufacturers and other pharmaceutical wholesale distributors, regarding the distribution of opioid medications. In addition, a significant number of lawsuits have been filed against us, other pharmaceutical wholesale distributors, and others in the supply chain by state and local governmental entities and other plaintiffs for claims related to the Company’s distribution of opioid medications. The lawsuits against us and other pharmaceutical wholesale distributors allege, among other claims, that we failed to provide effective controls and procedures to guard against the diversion of controlled substances, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of controlled substances in accordance with regulations. Additional governmental and regulatory entities have indicated an intent to sue and may conduct investigations of us in the future and lawsuits could be brought against the Company by other plaintiffs under other theories related to opioid abuse. We are deeply committed to diversion control efforts, have sophisticated systems in place to identify orders placed warranting further review to determine if they are suspicious (including through the use of data analytics), and engage in significant due diligence and ongoing monitoring of customers. While we are vigorously defending ourselves in these lawsuits, the allegations may negatively affect our business in various ways, including through increased costs and harm to our reputation.
We are currently engaged in advanced discussions, which are ongoing, with the objective of reaching potential terms (which would include monetary payments and certain changes to our anti-diversion programs) for a global resolution of the multi-district opioid litigation involving certain state and local governmental entities and other related state court litigation described in Note 14 of the Notes to Consolidated Financial Statements. While a global settlement with respect to certain governmental entities within the Multidistrict Litigation ("MDL") and other related state court litigation remains subject to contingencies that could impact whether the parties ultimately decide to move forward, we believe a global settlement is probable and its liability related thereto can be reasonably estimated as of September 30, 2020. We have recorded a charge of $6.6 billion in the fourth quarter of the fiscal year ended September 30, 2020 related to the global settlement and other related opioid litigation. Until such time as a plaintiff participates in a global settlement or otherwise resolves its lawsuit, we will continue to litigate and prepare for trial in the cases pending in the multi-district opioid litigation, those remanded from the multi-district opioid litigation to federal district courts, as well as in state courts where lawsuits have been filed, and we intend to continue to vigorously defend ourselves in all such cases. Since these matters are still developing, we are unable to predict the outcome, but the result of these lawsuits could include excessive monetary verdicts and/or injunctive relief, including changes to our anti-diversion programs, that may affect how we operate our business. Further, any final settlement amongst parties may differ materially from our advanced discussions related to global resolution of the multi-district opioid litigation. The inability to reach a global settlement of the multi-district opioid litigation and adverse resolution of any of these lawsuits or investigations could have a material adverse effect on our business, results of operations, and cash flows and could result in a lower than historical level of capital available for deployment, including a lower level of capital returned to stockholders.
Legislative, regulatory or industry measures to address the misuse of prescription opioid medications may also affect our business in ways that we are not be able to predict. For example, New York has instituted an opioid excise tax, which went into effect on July 1, 2019 and replaces a prior assessment under New York's Opioid Stewardship Act, and taxes entities that make the initial sale or distribution of opioid medications into the state. In addition, Rhode Island and Delaware have enacted opioid taxes, Minnesota has enacted increased licensure fees, and other states are considering legislation that could require entities to pay an assessment or tax on the sale or distribution of opioid medications in those states. If additional state or local jurisdictions enact legislation that taxes or assesses the sale or distribution of opioid medications and we are not able to mitigate the impact on our business through operational changes or commercial arrangements where permitted, such legislation in the aggregate may have a material adverse effect on the Company's results of operations, cash flows, or financial condition.
Our business, results of operations, and cash flows could be adversely affected by legal proceedings.
We conduct our operations through a variety of businesses, including the distribution of pharmaceuticals, the dispensing of healthcare products, and the provision of services to the pharmaceutical industry. Each of our businesses may cause us to become involved in legal disputes or proceedings. These disputes or proceedings have involved or may involve
healthcare fraud and abuse, the False Claims Act, antitrust, class action, commercial, employment, environmental, intellectual property, licensing, public disclosures and various other claims, including claims related to opioid medications as discussed in the above risk factor. Litigation is costly, time-consuming, and disruptive to ordinary business operations. The defense and resolution of these current and future proceedings could have a material adverse effect on our results of operations and financial condition. Violations of various federal and state laws, including with respect to the marketing, sale, purchase, and dispensing of pharmaceutical products and the provision of services to the pharmaceutical industry, can result in criminal, civil, and administrative liability for which there can be significant financial damages, criminal and civil penalties, and possible exclusion from participation in federal and state health programs. Any settlement, judgment or fine could materially adversely affect our results of operations.
Statutory and/or regulatory violations could also form the basis for qui tam complaints. The qui tam provisions of the federal and various state civil False Claims Acts authorize a private person, known as a relator, to file civil actions under these statutes on behalf of the federal and state governments. Under False Claims Acts, the filing of a qui tam complaint by a relator imposes obligations on government authorities to investigate the allegations and determine whether or not to intervene in the action. Such cases may involve allegations around the marketing, sale, purchase, and/or dispensing of brand and/or generic pharmaceutical products or the provision of services to the pharmaceutical industry. Such complaints are filed under seal and remain sealed until the applicable court orders otherwise. Our business and results of operations could be adversely affected if qui tam complaints are filed against us for alleged violations of any health laws and regulations and damages arising from resultant false claims, if the litigation proceeds whether or not government authorities decide to intervene in any such matters, and/or if we are found liable for all or any portion of violations alleged in any such matters.
In fiscal 2018, we resolved potential civil claims and administrative action by entering into, among other things, a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services). The Corporate Integrity Agreement has a five-year term. Failure to comply with obligations under the Corporate Integrity Agreement could lead to monetary or other penalties.
Tax legislation or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are a large corporation with operations in the United States and select global markets. As such, we are subject to tax laws and regulations of the U.S. federal, state and local governments, and of various foreign jurisdictions. From time to time, various legislative initiatives, such as changes to the federal corporate tax rate, the repeal of last-in, first-out ("LIFO") treatment or the promulgation of state opioid taxes and fees, may be proposed that could adversely affect our tax positions and/or our tax liabilities. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by legislation resulting from these initiatives. We believe that our historical tax positions are consistent with applicable laws, regulations, and existing precedent. In addition, U.S. federal, state and local, as well as foreign, tax laws and regulations, are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act") was enacted and contains significant changes to U.S. income tax law. Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the 2017 Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our business and intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, material adjustments to our tax estimates may impact our provision for income taxes and our earnings per share, as well as our cash flows, in the period in which any such adjustments would be made. Further, we cannot predict the impact of any efforts to change or repeal the 2017 Tax Act or enact alternative legislation by the incoming presidential administration or the next Congress.
Violations of anti-bribery, anti-corruption, and/or international trade laws to which we are subject could have a material adverse effect on our business, financial position, and results of operations.
We are subject to laws concerning our business operations and marketing activities in foreign countries where we conduct business. For example, we are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”"FCPA"), U.S. export control and trade sanction laws, and similar anti-corruption and international trade laws in certain foreign countries, such as the U.K. Bribery Act, any violation of which could create substantial liability for us and also cause a loss of reputation in the market. The FCPA generally prohibits U.S. companies and their officers, directors, employees, and intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment. The FCPA also requires that U.S. public companies maintain books and records that fairly and accurately reflect transactions and maintain an adequate system of internal accounting controls. If we are found to have violated the FCPA, we may face sanctions including civil and criminal fines, disgorgement of profits, and suspension or debarment of our ability to contract with government agencies or receive export licenses. From time to time, we may face audits or investigations by one or
more domestic or foreign government agencies relating to our international business activities, compliance with which could be costly and time-consuming, and could divert our management and key personnel from our business operations. An adverse outcome under any such investigation or audit could subject us to fines or other penalties, which could adversely affect our business, financial position, and results of operations.
Our results of operations and our financial condition may be adversely affected by our global operations.
Our operations in jurisdictions outside of the United States are subject to various risks inherent in global operations. We currently have operations in over 50 countries worldwide. We may conduct business in additional foreign jurisdictions in the future, which may carry operational risks in addition to the risks of acquisition described above. At any particular time, our global operations may be affected by local changes in laws, regulations,Risks generally associated with data privacy regulation and the politicalinternational transfer of personal data.
We are required to comply with increasingly complex and economic environments, including inflation, recession, currency volatility, and competition. Any of these factors could adversely affect our business, financial position, and results of operations.
Declining economic conditions could adversely affect our results of operations and financial condition.
Our operations and performance depend on economic conditionschanging data privacy regulations both in the United States and beyond that regulate the collection, use, security, processing, and transfer of personal data, including particularly the transfer of personal data between or among countries. Many of these regulations also grant rights to individuals. Many foreign data privacy regulations (including GDPR in the European Union, Brazil's new General Data Protection Law, LGPD, and the Personal Information Protection and Electronic Documents Act in Canada) and certain state laws and regulations (including California's CCPA) impose requirements beyond those enacted under United States federal law including, in some instances, private rights of action. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could subject us to fines or other countries wherepenalties. That or other circumstances related to our collection, use, and transfer of personal data could cause a loss of reputation in the market and/or adversely affect our business and financial position.
Other Risks
We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business.
We face risks related to health epidemics and pandemics, including risks related to any responses thereto by the federal or state governments as well as customers and suppliers. The COVID-19 pandemic is adversely affecting, and is expected to continue to adversely affect, our operations, supply chains and distribution network, and we do business. Deteriorationhave experienced and expect to continue to experience unpredictable reductions in general economic conditions couldsupply and demand for certain of our products and services. Further, it is possible that the manufacturers that produce the products that we distribute may experience delays or shutdowns due to COVID-19, such as from disruptions in their supply chains or in a suspension of production at their own facilities. Accordingly, we expect the continued spread of COVID-19 to adversely affect the amountsupply of prescriptions that are filledproducts and/or potentially disrupt our ability to deliver products to customers. Any extended disruption in our ability to service our customers could have a material adverse effect on our revenue, results of operations, and cash flows.
We also face risks related to our employees' health and the amountimpact it may have on operations. Certain of pharmaceutical products purchased by consumersour employees have contracted COVID-19 which resulted in our decision to temporarily close, and therefore,subsequently reopen, a small number of our distribution centers in accordance with our internal protocols. We have implemented measures designed to keep our employees safe and have protocols in place to address business continuity issues at our distribution centers and other locations, but a widespread or sustained outbreak of COVID-19 at one or more locations could reduce purchases bydisrupt our customers, which would negatively affectability to service our customers.
Since April 2020, COVID-19 has adversely impacted and may continue to adversely impact our revenue, growthresults of operations, and cause a decreasecash flows. For instance, demand for certain animal health products in our profitability. Negative trendsMWI business declined during the COVID-19 pandemic, and this reduced demand may continue as customers reduce or postpone purchases viewed as discretionary. We also face risks related to a downturn in our customers' respective businesses, including the general economy, including interest rate fluctuations, financial market volatilityoperations of our retail pharmacy and health systems customers. An economic slowdown or credit market disruptions,recession related to COVID-19 may also affect our customers' ability to obtain credit to finance their businessesbusiness on acceptable terms, and reduce discretionarywhich could result in reduced spending on health products. Reduced purchases by our customers or changes in payment termsproducts and services.
Certain enterprise-wide initiatives intended to improve our operational efficiency and financial performance, such as technology initiatives related to enhancing and upgrading our information technology systems, may take longer than originally expected to complete as we focus on COVID-19-related issues. Additionally, a large portion of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
The impacts of the continued spread of COVID-19 could also cause other unpredictable events, each of which could adversely affect our revenue growth and cause a decrease in our cash flow from operations. Bankruptcies or similar events affecting our customers may cause us to incur bad debt expense at levels higher than historically experienced. Declining economic conditions may also increase our costs. If the economic conditions in the United States or in the countries where we do business, do not improve or deteriorate, ourrevenue, results of operations, cash flows or financial condition could be adversely affected.
Our stock price and our abilitycondition. For example, the continued spread of COVID-19 has led to access credit markets may be adversely affected by financial market volatility and disruption.
If the capital and credit markets experience significant disruption and volatility in the future, there can be no assurance that we will not experience downward movement inglobal capital markets, which could increase our stock price without regard to our financial condition or resultscost of operations or an adverse effect, which may be material, oncapital and adversely affect our ability to access credit. Although we believe that our operating cash flowthe capital markets. A sustained or prolonged outbreak could exacerbate the adverse impact of such events, and existing credit arrangements give us the ability to meet our financing needs, there can be no assurance that disruption and volatility will not increase our costsimpact of borrowing, impair our liquidity, or adversely impact our business.
Our revenue and results of operationsCOVID-19 may suffer upon the bankruptcy, insolvency, oralso exacerbate other credit failure of a significant customer.
Most of our customers buy pharmaceuticals and other products and services from us on credit. Credit is made available to customers based upon our assessment and analysis of creditworthiness. Although we often try to obtain a security interestrisks discussed in assets and other arrangements intended to protect our credit exposure, we generally are either subordinated to the position of the primary lendersItem 1A to our customers or substantially unsecured. VolatilityForm 10-K, any of the capital and credit markets, general economic conditions, and regulatory changes, including changes in reimbursement, may adversely affect the solvency or creditworthiness of our customers. The bankruptcy, insolvency, or other credit failure of any customer that has a substantial amount owed to uswhich could have a material adverse effect on our operating revenue and results of operations. As of September 30, 2017, our two largest trade receivable balances due from customers represented approximately 49% and 9% of accounts receivable, net.
Our results of operations may suffer upon the bankruptcy, insolvency or other credit failure of a significant supplier.
Our relationships with pharmaceutical suppliers, including generic pharmaceutical manufacturers, give rise to substantial amounts that are due to us from the suppliers, including amounts owed to us for returned goods or defective goods, chargebacks, and amounts due to us for services provided to the suppliers. Volatility of the capital and credit markets, general economic conditions, and regulatory changes may adversely affect the solvency or creditworthiness of our suppliers. The bankruptcy, insolvency or other credit failure of any supplier at a time when the supplier has a substantial account payable balance due to us could have a material adverse effect on our results of operations.
us.
Risks generally associated with our sophisticated information systems may adversely affect our business and results of operations.
Our businesses rely on sophisticated information systems to obtain, rapidly process, analyze, and manage data to facilitate the purchase and distribution of thousands of inventory items from numerous distribution centers; to receive, process, and ship orders on a timely basis; to account for other product and service transactions with customers; to manage the accurate billing and collections for thousands of customers; and to process payments to suppliers. Certain of our businessesWe continue to make substantial investments in data centers and information systems, including, but not limited to, the new patient support technology ecosystem, Fusion, at ABCS's services business and theexpanded implementation of a newour primary ERP system at World Courier, and third partyto integrate certain of our key business areas. Third-party service providers are also responsible for managing a significant portion of our information systems. To the extent our information systems are not successfully implemented or fail, or to the extent there are data center interruptions, our business and results of operations may be adversely affected. Our business and results of operations may also be adversely affected if a third partythird-party service provider does not perform satisfactorily, or if the information systems are interrupted or damaged by unforeseen events, including due to the actions of third parties.
Information security risks have generally increased in recent years because of the proliferation of cloud-based infrastructure and other services, new technologies, and the increased sophistication and activities of perpetrators of cyber attacks. A failure, ininterruption, or breach of our operational or information security systems, or those of our third partythird-party service providers, as a result of cyber attacks or information security breaches could disrupt our business, result in the disclosure or misuse of confidential or proprietary information or personal data, damage our reputation, cause loss of customers or revenue, increase our costs, result in litigation and/or regulatory action, and/or cause losses.other losses, any of which might have a materially adverse impact on our business operations and our financial position or results of operations. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a priority for us. Although we believe that we have robust information security procedures, controls and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
Risks generally associated with data privacy regulationAdditionally, as discussed above in the risk factor “We face risks related to health epidemics and pandemics, and the international transfercontinued spread of personal data.
WeCOVID-19 is adversely affecting our business,” a large portion of our employees are required to comply with increasingly complex and changing data privacy regulations both in the United States and beyond that regulate the collection, use and transferworking remotely. An extended period of personal data, including particularly the transfer of personal data between or among countries. Many of these foreign data privacy regulations (including the General Data Protection Regulation, which becomes effective in the European Union on May 25, 2018) are more stringent than those in the United States. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or auditremote work arrangements could subject us to fines or other penalties. That or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market and/or adversely affectstrain our business continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and financial position.impair our ability to manage our business.
Our goodwill, indefinite-lived intangible assets, or intangiblelong-lived assets may become impaired, which wouldmay require us to record a further significant charge to earnings in accordance with generally accepted accounting principles.
U.S. generally accepted accounting principles ("GAAP") require us to test our goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if indicators for potential impairment exist. Indicators that are considered include significant changes in performance relative to expected operating results, significant negative industry or economic trends, or a significant decline in our stock price and/or market capitalization for a sustained period of time. In addition, we periodically review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our intangiblelong-lived assets may not be recoverable include slower growth rates, the loss of a significant customer, or divestiture of a business or asset for below its carrying value. The testing required by GAAP involves estimates and judgments by management. Although we believe our assumptions and estimates are reasonable and appropriate, any changes in key assumptions, including a failure to meet business plans or other unanticipated events and circumstances such as a rise in interest rates, may affect the accuracy or validity of such estimates.
We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill, indefinite-lived intangible assets, or intangiblelong-lived assets is determined. Any such charge could have a material adverse impact on our results of operations.
Natural disasters or other unexpected events may disrupt our operations, adversely affect our results of operations and financial condition, and may not be covered by insurance.
TheWe face environmental risks and the occurrence of one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods, and other forms of severe hazards or accidents in the United States or in other countries in which we operate or are located could adversely affect our operations and financial performance. Extreme weather, natural disasters, power outages, or other unexpected events could result in physical damage to and complete or partial closure of one or more of distribution centers or outsourcing facilities, temporary or long-term disruption in the supply of products, delay in the delivery of products to our distribution centers, and/or
disruption of our ability to deliver products to customers. Current or future insurance arrangements may not provide protection for costs that may arise from such events, particularly if such events are catastrophic in nature or occur in combination. Further, the long-term effects of climate change on general economic
conditions and the pharmaceutical distribution industry in particular are unclear, and changes in the supply, demand, or available sources of energy and the regulatory and other costs associated with energy production and delivery may affect the availability or cost of goods and services, including natural resources, necessary to run our businesses. Existing insurance arrangements may not provide protection for the costs that may arise from such events, particularly if such events are catastrophic in nature or occur in combination. Any long-term disruption in our ability to service our customers from one or more distribution centers or outsourcing facilities could have a material adverse effect on our operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of September 30, 2017,2020, we conducted our business from office and operating facilities at owned and leased locations throughout the United States (including Puerto Rico) and select global markets. In the aggregate, our facilities occupy approximately 14 million square feet of office and warehouse space, which is either owned or leased under agreements that expire from time to time through 2040.
We lease approximately 185,000 square feetfacilities in Chesterbrook, Pennsylvania and approximately 106,000 square feet in Conshohocken, Pennsylvania for our corporate headquarters.
Pharmaceutical Distribution Services has 28 full-service wholesale pharmaceuticala robust distribution facilitiesfacility network in the United States, ranging in size from approximately 53,000 square feet to 408,000 square feet. The operations of Pharmaceutical Distribution Services comprise approximately 7.2 million square feet.States. Significant leased facilities are located in Puerto Rico plus the following states: Arizona, Colorado, Florida, Georgia, Hawaii, Indiana, Kentucky, Minnesota, Mississippi, New York, North Carolina, Utah, and Washington. Owned facilities are located in the following states: Alabama, California, Illinois, Massachusetts, Michigan, Missouri, Ohio, Pennsylvania, Texas, and Virginia.
As of September 30, 2017,2020, the Consulting Group's operations were conducted in leased locations, comprising approximately 0.9 million square feet.locations. Its headquarters are located in South Carolina and its other operations are primarily located in North Carolina and Maryland and internationally in Canada.
As of September 30, 2017,2020, World Courier's office and operating facilities are located in over 50 countries throughout the world.countries. Its headquarters are located in London, England. Most of the facilities are leased. Significant owned facilities are located in New York, and internationally in Germany, Japan, Singapore, and South Africa.
As of September 30, 2017,2020, MWI's operations were conducted in the United States and in the United Kingdom, ranging from approximately 41,000 square feet to 225,000 square feet, with an aggregate of approximately 2.0 million square feet.Kingdom. Leased facilities are located in California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, North Carolina, Pennsylvania, Texas, Washington, and internationally in the United Kingdom. Significant owned facilities are located in Alabama, Idaho, Texas, and Virginia and internationally in the United Kingdom. Its headquarters are located in Idaho.
We consider all of our operating and office properties to be in satisfactory condition.
ITEM 3. LEGAL PROCEEDINGS
Legal proceedings in which we are involved are discussed in Note 1314 (Legal Matters and Contingencies) of the Notes to Consolidated Financial Statements appearing in this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our executive officers and their ages and positions as of October 31, 2017.
|
| | | | | | | | | | | | | |
| Name | | Age | | Current Position with the Company |
| Steven H. Collis | | 5659 | | Chairman, President, and Chief Executive Officer |
| Silvana Battaglia | | 53 | | Executive Vice President and Chief Human Resources Officer |
| John G. Chou | | 6164 | | Executive Vice President and Chief Legal & Business Officer |
| Gina K. Clark | | 6063 | | Executive Vice President and Chief Communications & Administration Officer |
James F. Cleary Jr. | | 5457 | | Executive Vice President and Group President, Global Commercialization Services & Animal Health |
Dale Danilewitz | | 55 | | Executive Vice President and Chief Information Officer |
Kathy H. Gaddes | | 54 | | Executive Vice President and Chief Human Resources Officer |
Tim G. Guttman | | 58 | | Executive Vice President and Chief Financial Officer |
Peyton R. HowellLeslie E. Donato | | 5051 | | Executive Vice President and President, Health Systems & Specialty Care SolutionsChief Strategy Officer |
| Robert P. Mauch | | 5053 | | Executive Vice President and Group President Pharmaceutical Distribution & Strategic Global Sourcing |
Sun Park | | 41 | | Executive Vice President, Strategy and Development |
Unless indicated to the contrary, the business experience summaries provided below for our executive officers describe positions held by the named individuals during the last five years.
Mr. Collis has been President and Chief Executive Officer of the Company since July 2011 and Chairman since March 2016. From November 2010 to July 2011, he served as President and Chief Operating Officer. He served as Executive Vice President and President of AmerisourceBergen Drug Corporation from September 2009 to November 2010. He was Executive Vice President and President of AmerisourceBergen Specialty Group from September 2007 to September 2009 and was Senior Vice President of the Company and President of AmerisourceBergen Specialty Group from August 2001 to September 2007. Mr. Collis has been employed by the Company or one of its predecessors for 23over 25 years.
Ms. Battaglia has been Executive Vice President and Chief Human Resources Officer since January 2019. Prior to joining the Company, she worked at Aramark as Senior Vice President of Global Compensation, Benefits, and Labor Relations from August 2017 to December 2018 and as Senior Vice President, Global Field Human Resources from May 2011 to August 2017. She also previously worked for Day & Zimmerman and Merck Corporation.
Mr. Chou has been Executive Vice President of the Company since August 2011 and became the Chief Legal Officer in September 2019. He served as Chief Legal & Business Officer in June 2017.of the Company from May 2017 to September 2019. He served as General Counsel of the Company from January 2007 to June 2017. From January 2007 to August 2011, Mr. Chou was a Senior Vice President. He served as Secretary of the Company from February 2006 to May 2012.2012 and from September 2019 to May 2020. He was Vice President and Deputy General Counsel from November 2004 to January 2007 and Associate General Counsel from July 2002 to November 2004. Mr. Chou has been employed by the Company for 1518 years.
Ms. Clark has been Executive Vice President since November 2014 and became Chief Communication & Administration Officer in June 2017. She served as Chief Marketing Officer from November 2014 to June 2017. Ms. Clark was named Senior Vice President and Chief Marketing Officer in June 2011. She previously served as Senior Vice President of Marketing and Business Development for AmerisourceBergen Specialty Group from January 2007 to June 2011. Prior to joining the Company, she worked in executive leadership roles at Premier Inc. and HealthSouth, including Senior Vice President of Marketing and Alliance Relations, Group Vice President of Relationship Management, and Senior Vice President of Managed Care and National Contracting.
Mr. Cleary has been Executive Vice President since March 2015 and became Chief Financial Officer in November 2018. He served as Group President, Global Commercialization Services & Animal Health infrom June 2017.2017 to November 2018. He previously served as President, MWI Veterinary SupplyAnimal Health from March 2015 to June 2017. Prior to joining the Company, he was President and Chief Executive Officer of MWI Veterinary Supply, Inc. from June 2002.
Mr. Danilewitz becameMs. Donato has been Executive Vice President and Chief Information Officer in November 2014. Mr. Danilewitz has been Senior Vice President and Chief InformationStrategy Officer since June 2012. He served as Chief Information Officer of AmerisourceBergen Specialty Group from March 1999 to May 2012.July 2019. Prior to joining the Company, heshe held management positions within American Airlinesvarious leadership roles at Bayer from May 2009 to May 2019, including Vice President of Strategy, Pharmaceuticals Division, Vice President of Strategy, Bayer Healthcare US, and The Sabre Group. HeVice President & General Manager of Neurology & Hematology. She also worked for Whirlpool CorporationMcKinsey & Company where she was a Partner in the Advanced Technology Group.
Ms. Gaddes became Executive Vice President and Chief Human Resources Officer in April 2016. She served as Vice President, Group General Counsel and Secretary from May 2012 to April 2016. She served as Assistant General Counsel, Corporate and Securities from December 2011 to May 2012. Prior to joining the Company, Ms. Gaddes was Associate Corporate Secretary at ARCO Chemical Company.
Mr. Guttman became Executive Vice President and Chief Financial Officer in November 2014. Mr. Guttman was named Senior Vice President and Chief Financial Officer in May 2012. He served as Acting Chief Financial Officer from February 2012
to May 2012. He was Vice President and Corporate Controller from August 2002 to May 2012. Mr. Guttman has been employed by the Company for 15 years.
Ms. Howell has been Executive Vice President since November 2014 and became President, Health Systems & Specialty Care Solutions in June 2017. She served as President, Global Sourcing & Manufacturer Relations from November 2014 to June 2017. Ms. Howell previously served as Senior Vice President and President, Global Sourcing and Manufacturer Relations since December 2012. She served as Senior Vice President, Business Development and President of AmerisourceBergen Consulting Services from May 2010 to December 2012. She was President of Consulting Services and Health Policy, AmerisourceBergen Specialty Group from October 2007 to May 2010. She was President of Lash Group and AmerisourceBergen Specialty Group Manufacturer Services from November 1999 to October 2007. Ms. Howell has been employed by the Company or one of its predecessors for 26 years.Healthcare Practice.
Mr. Mauch has been Executive Vice President since February 2015 and became Group President in February 2019. He served as Group President, Pharmaceutical Distribution & Strategic Global Sourcing infrom June 2017.2017 to February 2019. He served as President, AmerisourceBergen Drug Corporation from February 2015 to June 2017. HeMr. Mauch previously served as Senior Vice President Chief Operating Officer, AmerisourceBergen Drug Corporation from March 2014 to February 2015. He was Senior Vice President, Operations, AmerisourceBergen Drug Corporation from April 2012 to March 2014. He was Senior Vice President of Sales and Marketing, AmerisourceBergen Drug Corporation from April 2011 to April 2012. He was Senior
Vice President, Alternate Care Sales and Marketing, AmerisourceBergen Drug Corporation from May 2010 to April 2011. Mr. Mauch has been employed by the Company or one of its predecessors for 23over 25 years.
Mr. Park became Executive Vice President, Strategy and Development in May 2016. He served as Senior Vice President, Business Development from November 2012 to May 2016. Prior to joining the Company, Mr. Park served in various leadership roles at MedImmune and AstraZeneca, and held positions at Charterhouse Group International and Merrill Lynch & Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the New York Stock Exchange under the trading symbol "ABC." As of October 31, 2017,2020, there were 2,6502,385 record holders of the Company's common stock. The following sets forth the high and low closing sale prices of the Company's common stock for the periods indicated.
PRICE RANGE OF COMMON STOCK
|
| | | | | | | | |
| | | High | | Low |
| Fiscal Year Ended September 30, 2017 | | |
| | |
|
| First Quarter | | $ | 81.33 |
| | $ | 69.03 |
|
| Second Quarter | | $ | 92.23 |
| | $ | 81.53 |
|
| Third Quarter | | $ | 96.38 |
| | $ | 80.94 |
|
| Fourth Quarter | | $ | 95.22 |
| | $ | 78.04 |
|
| Fiscal Year Ended September 30, 2016 | | |
| | |
|
| First Quarter | | $ | 105.02 |
| | $ | 92.71 |
|
| Second Quarter | | $ | 103.36 |
| | $ | 83.62 |
|
| Third Quarter | | $ | 91.89 |
| | $ | 73.66 |
|
| Fourth Quarter | | $ | 89.89 |
| | $ | 80.16 |
|
In November 2015, our2018, the Company's board of directors increased the quarterly dividend by 17%5% from $0.29$0.38 per share to $0.34$0.40 per share. In November 2016, ourJanuary 2020, the Company's board of directors increased the quarterly dividend by 7%5% from $0.34$0.40 per share to $0.365$0.42 per share. In November 2017, our2020, the Company's board of directors increased the quarterly dividend by 4%5% from $0.365$0.42 per share to $0.380$0.44 per share. The Company anticipates that it will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of the Company's board of directors and will depend upon the Company's future earnings, financial condition, capital requirements, and other factors.
Computershare is the Company's transfer agent. Computershare can be reached at (mail) AmerisourceBergen Corporation c/o Computershare, P.O. Box 30170, College Station, TX 77842;50500, Louisville, KY 40233-500; (telephone): Domestic 1-877-296-3711, Domestic TDD 1-800-231-5469,1-800-522-6645, International 1-201-680-6578, or International TDD 1-201-680-6610; and (internet) www.computershare.com.
www.computershare.com/investor.
ISSUER PURCHASES OF EQUITY SECURITIES
The following sets forth the total number of shares purchased, the average price paid per share, the total number of shares purchased as part of publicly announced programs, and the approximate dollar value of shares that may yet be purchased under the programs during each month in the fiscal year ended September 30, 2017.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number
of Shares
Purchased | | Average
Price
Paid Per
Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs | | Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the
Programs |
| October 1 to October 31 | | 928,528 | | | $ | 81.89 | | | 928,528 | | | $ | 385,099,144 | |
| November 1 to November 30 | | 383,920 | | | $ | 84.57 | | | 272,014 | | | $ | 362,228,055 | |
| December 1 to December 31 | | 367,012 | | | $ | 84.04 | | | 367,012 | | | $ | 331,384,669 | |
| January 1 to January 31 | | 193,502 | | | $ | 84.48 | | | 193,502 | | | $ | 315,037,604 | |
| February 1 to February 29 | | 352,025 | | | $ | 82.84 | | | 352,025 | | | $ | 285,874,551 | |
| March 1 to March 31 | | 2,643,138 | | | $ | 82.12 | | | 2,643,138 | | | $ | 68,813,634 | |
| April 1 to April 30 | | — | | | $ | — | | | — | | | $ | 68,813,634 | |
| May 1 to May 31 | | 159,247 | | | $ | 83.49 | | | 159,247 | | | $ | 555,518,116 | |
| June 1 to June 30 | | 784 | | | $ | 95.15 | | | — | | | $ | 555,518,116 | |
| July 1 to July 31 | | — | | | $ | — | | | — | | | $ | 555,518,116 | |
| August 1 to August 31 | | — | | | $ | — | | | — | | | $ | 555,518,116 | |
| September 1 to September 30 | | 1,342 | | | $ | 94.30 | | | — | | | $ | 555,518,116 | |
| Total | | 5,029,498 | | | $ | 82.60 | | | 4,915,466 | | | |
(a)In October 2018, the Company's board of directors authorized a share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2020, the Company purchased 4.9 million shares of its common stock for a total of $405.6 million, which excluded $14.8 million of September 2019 purchases that cash settled in October 2019. As of September 30, 2020, the Company had $55.5 million of availability under this program.
(b)In May 2020, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions.
(c)Employees surrendered 114,032 shares during the fiscal year ended September 30, 2020 to meet minimum tax-withholding obligations upon vesting of restricted stock.
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| October 1 to October 31 | | — |
| | $ | — |
| | — |
| | $ | 118,760,836 |
|
| November 1 to November 30 | | 2,925,923 |
| | $ | 63.07 |
| | 2,814,017 |
| | $ | 943,157,508 |
|
| December 1 to December 31 | | 702,488 |
| | $ | 77.26 |
| | 702,450 |
| | $ | 888,885,792 |
|
| January 1 to January 31 | | — |
| | $ | — |
| | — |
| | $ | 888,885,792 |
|
| February 1 to February 28 | | 328 |
| | $ | 89.28 |
| | — |
| | $ | 888,885,792 |
|
| March 1 to March 31 | | — |
| | $ | — |
| | — |
| | $ | 888,885,792 |
|
| April 1 to April 30 | | — |
| | $ | — |
| | — |
| | $ | 888,885,792 |
|
| May 1 to May 31 | | 621 |
| | $ | 82.49 |
| | — |
| | $ | 888,885,792 |
|
| June 1 to June 30 | | 3,417 |
| | $ | 93.58 |
| | — |
| | $ | 888,885,792 |
|
| July 1 to July 31 | | — |
| | $ | — |
| | — |
| | $ | 888,885,792 |
|
| August 1 to August 31 | | 1,253,534 |
| | $ | 79.76 |
| | 1,253,534 |
| | $ | 788,906,335 |
|
| September 1 to September 30 | | 907 |
| | $ | 80.24 |
| | — |
| | $ | 788,906,335 |
|
| Total | | 4,887,218 |
| | $ | 69.42 |
| | 4,770,001 |
| | |
|
| |
(a) | In May 2016, the Company's board of directors authorized a share repurchase program that, together with the availability remaining under the existing August 2013 share repurchase program, permitted the Company to purchase up to $750 million of its outstanding shares or common stock, subject to market conditions. In September 2016, the Company entered into an Accelerated Share Repurchase ("ASR") transaction with a financial institution. The ASR transaction was settled in November 2016, at which time the financial institution delivered an additional 0.5 million shares of the Company's common stock. In addition to the ASR transaction settlement, the Company purchased 1.6 million shares of its common stock for a total of $118.8 million to complete its authorization under this program. |
| |
(b) | In November 2016, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2017, the Company purchased 2.7 million shares of its common stock for a total of $211.1 million under this program. As of September 30, 2017, the Company had $788.9 million of availability remaining under the November 2016 share repurchase program. |
| |
(c) | Employees surrendered 117,217 shares during the fiscal year ended September 30, 2017 to meet minimum tax-withholding obligations upon vesting of restricted stock. |
STOCK PERFORMANCE GRAPH
This graph depicts the Company's five year cumulative total stockholder returns relative to the performance of the Standard and Poor's 500 Composite Stock Index, the S&P Health Care Index, and an index of peer companies selected by the Company from the market close on September 30, 20122015 to September 30, 2017.2020. The graph assumes $100 invested at the closing price of the common stock of the Company and of each of the other indices on the New York Stock Exchange on September 30, 2012.2015. The points on the graph represent fiscal year-end index levels based upon the last trading day in each fiscal quarter. The Peer Group index (which is weighted on the basis of market capitalization) consists of the following companies engaged primarily in wholesale pharmaceutical distribution and related services: McKesson Corporation and Cardinal Health, Inc.
* $100 invested on September 30, 20122015 in stock or index, including reinvestment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with the consolidated financial statements, including the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 24.26.
| | | | | As of or for the Fiscal Year Ended September 30, | | | As of or for the Fiscal Year Ended September 30, |
| (Amounts in thousands, except per share amounts) | | 2017(a) | | 2016(b) | | 2015(c) | | 2014(d) | | 2013(e) | (Amounts in thousands, except per share amounts) | | 2020(a) | | 2019(b) | | 2018(c) | | 2017(d) | | 2016(e) |
| Statement of Operations Data: | | |
| | |
| | |
| | |
| | |
| Statement of Operations Data: | | | | | | | | | | |
| Revenue | | $ | 153,143,826 |
| | $ | 146,849,686 |
| | $ | 135,961,803 |
| | $ | 119,569,127 |
| | $ | 87,959,167 |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | $ | 167,939,635 | | | $ | 153,143,826 | | | $ | 146,849,686 | |
| Gross profit | | 4,546,002 |
| | 4,272,606 |
| | 3,529,313 |
| | 2,982,366 |
| | 2,507,819 |
| Gross profit | | 5,191,884 | | | 5,138,312 | | | 4,612,317 | | | 4,546,002 | | | 4,272,606 | |
| Operating expenses | | 3,485,660 |
| | 2,746,832 |
| | 3,107,093 |
| | 2,200,275 |
| | 1,605,417 |
| Operating expenses | | 10,327,238 | | | 4,026,389 | | | 3,168,632 | | | 3,485,660 | | | 2,746,832 | |
| Operating income | | 1,060,342 |
| | 1,525,774 |
| | 422,220 |
| | 782,091 |
| | 902,402 |
| |
| Operating (loss) income | | Operating (loss) income | | (5,135,354) | | | 1,111,923 | | | 1,443,685 | | | 1,060,342 | | | 1,525,774 | |
| Interest expense, net | | 145,185 |
| | 139,912 |
| | 109,036 |
| | 83,634 |
| | 80,326 |
| Interest expense, net | | 137,883 | | | 157,769 | | | 174,699 | | | 145,185 | | | 139,912 | |
| Income (loss) from continuing operations | | 364,484 |
| | 1,427,929 |
| | (138,165 | ) | | 281,776 |
| | 491,901 |
| |
| Net income (loss) | | 364,484 |
| | 1,427,929 |
| | (138,165 | ) | | 274,230 |
| | 432,173 |
| |
| Earnings per share from continuing operations — diluted | | $ | 1.64 |
| | $ | 6.32 |
| | $ | (0.63 | ) | | $ | 1.20 |
| | $ | 2.09 |
| |
| Net (loss) income | | Net (loss) income | | (3,399,558) | | | 854,135 | | | 1,615,892 | | | 364,484 | | | 1,427,929 | |
| Net (loss) income attributable to AmerisourceBergen Corporation | | Net (loss) income attributable to AmerisourceBergen Corporation | | $ | (3,408,716) | | | $ | 855,365 | | | $ | 1,658,405 | | | $ | 364,484 | | | $ | 1,427,929 | |
| Earnings per share — diluted | | $ | 1.64 |
| | $ | 6.32 |
| | $ | (0.63 | ) | | $ | 1.16 |
| | $ | 1.84 |
| Earnings per share — diluted | | $ | (16.65) | | | $ | 4.04 | | | $ | 7.53 | | | $ | 1.64 | | | $ | 6.32 | |
| Cash dividends declared per common share | | $ | 1.46 |
| | $ | 1.36 |
| | $ | 1.16 |
| | $ | 0.94 |
| | $ | 0.84 |
| Cash dividends declared per common share | | $ | 1.66 | | | $ | 1.60 | | | $ | 1.52 | | | $ | 1.46 | | | $ | 1.36 | |
| Weighted average common shares outstanding — diluted | | 221,602 |
| | 225,959 |
| | 217,786 |
| | 235,405 |
| | 235,345 |
| Weighted average common shares outstanding — diluted | | 204,783 | | | 211,840 | | | 220,336 | | | 221,602 | | | 225,959 | |
| Balance Sheet Data: | | |
| | |
| | |
| | |
| | |
| Balance Sheet Data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 2,435,115 |
| | $ | 2,741,832 |
| | $ | 2,167,442 |
| | $ | 1,808,513 |
| | $ | 1,231,006 |
| Cash and cash equivalents | | $ | 4,597,746 | | | $ | 3,374,194 | | | $ | 2,492,516 | | | $ | 2,435,115 | | | $ | 2,741,832 | |
| Accounts receivable, net | | 10,303,324 |
| | 9,175,876 |
| | 8,222,951 |
| | 6,312,883 |
| | 6,051,920 |
| Accounts receivable, net | | 13,846,301 | | | 12,386,879 | | | 11,314,226 | | | 10,303,324 | | | 9,175,876 | |
| Merchandise inventories | | 11,461,428 |
| | 10,723,920 |
| | 9,755,094 |
| | 8,593,852 |
| | 6,981,494 |
| |
| Inventories | | Inventories | | 12,589,278 | | | 11,060,254 | | | 11,918,508 | | | 11,461,428 | | | 10,723,920 | |
| Property and equipment, net | | 1,797,945 |
| | 1,530,682 |
| | 1,192,510 |
| | 1,044,831 |
| | 907,562 |
| Property and equipment, net | | 1,484,808 | | | 1,770,516 | | | 1,892,424 | | | 1,797,945 | | | 1,530,682 | |
| Total assets | | 35,316,470 |
| | 33,637,501 |
| | 27,962,982 |
| | 21,677,432 |
| | 19,022,639 |
| Total assets | | 44,274,830 | | | 39,171,980 | | | 37,669,838 | | | 35,316,470 | | | 33,637,501 | |
| Accounts payable | | 25,404,042 |
| | 23,926,320 |
| | 20,886,439 |
| | 15,592,834 |
| | 13,335,792 |
| Accounts payable | | 31,705,055 | | | 28,385,074 | | | 26,836,873 | | | 25,404,042 | | | 23,926,320 | |
| Long-term debt, including current portion | | 3,442,055 |
| | 4,186,703 |
| | 3,493,048 |
| | 1,995,632 |
| | 1,396,606 |
| |
| Stockholders' equity | | 2,064,461 |
| | 2,129,404 |
| | 616,386 |
| | 1,943,043 |
| | 2,308,143 |
| |
| Total liabilities and stockholders' equity | | $ | 35,316,470 |
| | $ | 33,637,501 |
| | $ | 27,962,982 |
| | $ | 21,677,432 |
| | $ | 19,022,639 |
| |
| Total debt | | Total debt | | 4,119,520 | | | 4,172,892 | | | 4,310,189 | | | 3,442,055 | | | 4,186,703 | |
| Total accrued litigation liability | | Total accrued litigation liability | | 6,606,925 | | | — | | | — | | | — | | | — | |
| Total (deficit) equity | | Total (deficit) equity | | (839,636) | | | 2,993,206 | | | 3,049,961 | | | 2,064,461 | | | 2,129,404 | |
| Total liabilities and stockholders' (deficit) equity | | Total liabilities and stockholders' (deficit) equity | | $ | 44,274,830 | | | $ | 39,171,980 | | | $ | 37,669,838 | | | $ | 35,316,470 | | | $ | 33,637,501 | |
(a)Includes a $5,528.4 million legal accrual for litigation relating the distribution of prescription opioid pain medications, net of income tax benefit of $1,078.6 million; $282.5 million impairment of PharMEDium's long-lived assets, net of income tax benefit of $79.2 million; $156.5 million of employee severance, litigation, and other costs, net of income tax benefit of $43.9 million; $46.4 million of PharMEDium exit and remediation costs, net of income tax benefit of $13.0 million; a $17.3 million loss on early retirement of debt; net of income tax benefit of $4.9 million; an $11.6 million estimated assessment related to the New York State Opioid Stewardship Act, net of income tax benefit of $3.2 million; a $9.5 million gain from an adjustment to Profarma's estimate of contingent consideration related to the purchase price of one of its prior business acquisitions, net of income tax expense of $2.7 million; a $7.1 million gain from antitrust litigation settlements, net of income tax expense of $2.0 million; and $5.8 million of LIFO expense, net of income tax benefit of $1.6 million.
| |
(a) | Includes $101.1 million of LIFO credit, net of income tax expense of $56.7 million, a $0.9 million gain from antitrust litigation settlements, net of income tax expense of $0.5 million, and $937.4 million of employee severance, litigation, and other costs, net of income tax benefit of $21.9 million. |
(b)Includes a $421.3 million impairment of PharMEDium's long-lived assets, net of income tax benefit of $148.7 million; $245.8 million of employee severance, litigation, and other costs, net of income tax benefit of $84.6 million; a $107.8 million gain from antitrust litigation settlements, net of income tax expense of $38.1 million; $51.3 million of PharMEDium remediation costs, net of income tax benefit of $18.1 million; a $16.7 million LIFO credit, net of income tax expense of $5.9 million; a $16.3 million reversal of an estimated assessment related to the New York State Opioid Stewardship Act, net of income tax expense of $5.7 million; and a $10.1 million gain on the sale of an equity investment, net of income tax expense of $3.6 million.
| |
(b) | Includes $367.2 million of Warrants income, net of income tax benefit of $507.5 million, $120.9 million of LIFO expense, net of income tax benefit of $79.3 million, an $80.8 million gain from antitrust litigation settlements, net of income tax expense of $53.0 million, $62.1 million of employee severance, litigation, and other costs, net of income tax benefit of $40.8 million, and a $28.7 million pension settlement charge, net of income tax benefit of $18.9 million. |
| |
(c) | Includes $887.5 million of Warrants expense, net of income tax benefit of $25.3 million, $336.2 million of LIFO expense, net of income tax benefit of $206.6 million, a $40.6 million gain from antitrust litigation settlements, net of income tax expense of $24.9 million, a $30.6 million impairment charge on an equity investment, with no income tax benefit, and $23.5 million of employee severance, litigation, and other costs, net of income tax benefit of $14.4 million. |
| |
(d) | Includes $397.5 million of Warrants expense, net of income tax benefit of $25.2 million, $214.6 million of LIFO expense, net of income tax benefit of $133.4 million, $20.3 million of loss on early retirement of debt, net of income tax benefit of $12.7 million, a $15.1 million gain from antitrust litigation settlements, net of income tax expense of $9.3 million, and $5.1 million of employee severance, litigation, and other costs, net of income tax benefit of $3.1 million. |
| |
(e) | Includes $169.8 million of LIFO expense, net of income tax benefit of $107.2 million, $76.3 million of Warrants expense, net of income tax benefit of $13.7 million, $14.7 million of employee severance, litigation, and other costs, net of income tax benefit of $8.8 million, and a $14.3 million gain from antitrust litigation settlements, net of income tax expense of $8.6 million. |
(c)Includes $61.3 million of employee severance, litigation, and other costs, net of income tax benefit of $122.2 million; a $59.7 million goodwill impairment with no income tax benefit; $48.6 million of LIFO expense, net of income tax benefit of $18.7 million; $47.8 million of PharMEDium remediation costs, net of income tax benefit of $18.4 million; a $42.3 million loss on consolidation of equity investments with no income tax benefit; a $30.0 million impairment on a non-customer note receivable with no income tax benefit; a $25.9 million gain from antitrust litigation settlements, net of income tax expense of $10.0 million; a $17.2 million loss on early retirement of debt, net of income tax benefit of $6.6 million; and $15.9 million of expense for an estimated assessment related to the New York State Opioid Stewardship Act, net of income tax benefit of $6.1 million.
(d)Includes a $101.1 million LIFO credit, net of income tax expense of $56.7 million; a $0.9 million gain from antitrust litigation settlements, net of income tax expense of $0.5 million; and $937.4 million of employee severance, litigation, and other costs, net of income tax benefit of $21.9 million.
(e)Includes $367.2 million of Warrants income, net of income tax benefit of $507.5 million; $120.9 million of LIFO expense, net of income tax benefit of $79.3 million; an $80.8 million gain from antitrust litigation settlements, net of income tax expense of $53.0 million; $62.1 million of employee severance, litigation, and other costs, net of income tax benefit of $40.8 million; and a $28.7 million pension settlement charge, net of income tax benefit of $18.9 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein.
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
Effective September 30, 2017, we reorganized our operating structure resulting in the combination of the legacy AmerisourceBergen Drug Corporation ("ABDC") and AmerisourceBergen Specialty Group ("ABSG") operating segments into a single operating segment, Pharmaceutical Distribution Services. In addition, in connection with the completion of this reorganization, our non-title third party logistics business, which was included within the Pharmaceutical Distribution Services reportable segment, was combined with the World Courier operating segment in Other, while the AmerisourceBergen Consulting Services ("ABCS") distribution business (previously included in Other) is now included in the Pharmaceutical Distribution Services reportable segment. We revised our previously-reported segment disclosures to reflect the aforementioned changes to our reporting structure. These changes did not have a material impact to our historical reportable segment operating results.
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, outsourced compounded sterile preparations, 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, injectibleinjectable 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 and includes ABCS, World Courier, and MWI(MWI Animal Health ("MWI"or "MWI"). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services ("ABCS") and World Courier.
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. MWI is a leading animal health distribution company in the United States and in the United 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.
Executive Summary
This executive summary provides highlights from the results of operations that follow:
•In March 2020, the World Health Organization ("WHO") declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, we implemented measures designed to keep our employees safe and address business continuity issues at our distribution centers and other locations. We continue to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on our revenue, results of operations, and cash flows (refer to our COVID-19 risk factor in Item 1A. Risk Factors on page 8);
•Revenue increased 4.3%5.7% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment;
•Total gross profit increased 6.4%1.0% and was favorably impacted by increases in gross profit in Pharmaceutical Distribution Services and Other and was offset in part by lower gains from antitrust litigation settlements, last-in, first-out ("LIFO") expense in comparison to a LIFO credit in the prior fiscal year, and an estimated assessment related to the New York State Opioid Stewardship Act ("OSA") compared to a reversal of a previously-estimated assessment related to the OSA. Pharmaceutical Distribution Services' gross profit increased 3.8% from the prior fiscal year primarily due to the reduction of last-in, first-out ("LIFO") expense, which was a credit of $157.8 millionstrong increase in the current fiscal year,specialty product sales. Gross profit in comparison to an expense of $200.2 million inOther increased 6.5% from the prior fiscal year due to growth at World Courier, MWI, and an increase in gross profit in Other, offset in part by a decrease in gains from antitrust litigation settlements of $132.4 million and a decrease in gross profit in Pharmaceutical Distribution Services. The LIFO credit in the current fiscal year was primarily driven by lower brand inflation and greater generic deflation for the fiscal year ended September 30, 2017 in comparison to the prior fiscal year;ABCS;
•Distribution, selling, and administrative expenses increased 1.8% from the prior fiscal year and as a percentage of revenue was 1.39% in the current fiscal year; a 3 basis point decline compared to the prior fiscal year. The decrease in expense as a percentage of revenue in comparison to the prior fiscal year was primarily due to initiatives taken in second half of the fiscal 2016 to improve operating efficiency across many of our businesses and certain administrative functions;
Total operating expenses increased $738.8 million3.9% from the prior fiscal year primarily due to an increase in operating costs to support our revenue growth;
•Employee severance, litigation, settlements and accrualsother increased $6.5 billion due to a legal accrual for litigation relating the distribution of $914.4 million recognized duringprescription opioid pain medications. We are currently in advanced discussions, which are ongoing, with the states and various plaintiffs’ representatives that would be necessary to reach a global settlement of the Multidistrict Litigation ("MDL") and other related state-court litigation brought by certain state and local governmental entities to be paid over 18 years in which our payment would be $6.5 billion assuming all parties participate. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. While a global settlement remains subject to contingencies that could impact whether the parties ultimately decide to move forward, we believe a global settlement is probable and our loss related thereto can be reasonably estimated as of September 30, 2020;
•Operating income decreased in the current fiscal year ended September 30, 2017. The increaseprimarily due to the $6.6 billion legal accrual in litigation costs wasconnection with opioid lawsuits, offset in part by an increase in segment operating income, a decrease in Warrants expense of $140.3 millionlower impairment charge relating to PharMEDium's assets, and a $47.6 million pension settlement charge, both of which were recognized during the fiscal year ended September 30, 2016;decline in depreciation and amortization;
•Our effective tax rates were 60.3%35.8% and (2.7)%11.7% in the fiscal years ended September 30, 20172020 and 2016,2019, respectively. Our effective tax rate in the fiscal year ended September 30, 20172020 was negatively impacted by legal settlementshigher than the U.S. statutory rate due to our operating loss, the tax benefits associated with our decision to permanently exit the PharMEDium compounding business, Swiss Tax Reform, the CARES Act, and accrual charges that we currently estimate to be non-deductibleother discrete items (see Note 135 of the Notes to Consolidated Financial Statements), and offset in part by certain discrete items, the growth of our international businesses in Switzerland and Ireland that have significantly lower income tax rates, and the benefit from stock option exercises and restricted stock vesting. Prior to the fiscal year ended September 30, 2017, tax benefits resulting from share-based compensation were recorded as adjustments to Additional Paid-In Capital within Stockholders' Equity (see Note 1impact of the Notesportion of the opioid legal accrual that is not expected to Consolidated Financial Statements).be tax deductible. Our effective tax rate in the fiscal year ended September 30, 20162019 was primarily benefited fromimpacted by the receipt$570.0 million impairment of an Internal Revenue Service ("IRS") private letter ruling that entitled us to an income tax deduction equal to the fair value of the Warrants on the dates of exercise.
Results of Operations
Year ended September 30, 2017 compared with Year ended September 30, 2016
Revenue
|
| | | | | | | | | | |
| | | Fiscal Year Ended September 30, | | |
| (dollars in thousands) | | 2017 | | 2016 | | Change |
| Pharmaceutical Distribution Services | | $ | 147,453,495 |
| | $ | 141,701,997 |
| | 4.1% |
| Other | | 5,747,863 |
| | 5,207,095 |
| | 10.4% |
| Intersegment eliminations | | (57,532 | ) | | (59,406 | ) | | (3.2)% |
| Revenue | | $ | 153,143,826 |
| | $ | 146,849,686 |
| | 4.3% |
Revenue increased by 4.3% from the prior fiscal year. See discussions below under "Pharmaceutical Distribution Services Segment" and "Other" for commentary regarding our revenue growth.
Based on our recently announced plan to acquire H.D. SmithPharMEDium's assets (see Note 181 of the Notes to Consolidated Financial Statements), we and legal settlements, which changed the mix of domestic and international income. The effective tax rate in the fiscal year ended September 30, 2019 was also impacted by a $37.0 million decrease to the Company's transition tax related to the U.S. Tax Cuts and Jobs Act (the "2017 Tax Act").
Results of Operations
Year ended September 30, 2020 compared to the Year ended September 30, 2019
Revenue
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2020 | | 2019 | | Change |
| Pharmaceutical Distribution Services | | $ | 182,467,189 | | | $ | 172,813,537 | | | 5.6% |
| Other: | | | | | | |
| MWI Animal Health | | 4,216,462 | | | 3,975,232 | | | 6.1% |
| Global Commercialization Services | | 3,308,640 | | | 2,893,109 | | | 14.4% |
| Total Other | | 7,525,102 | | | 6,868,341 | | | 9.6% |
| Intersegment eliminations | | (98,365) | | | (92,757) | | | |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | 5.7% |
We currently expect our revenue growth percentage to be in the mid-single digits in fiscal 2018 to increase between 8% and 11%.2021. 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 and biosimilars 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 and biosimilars, price increasesinflation 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 partythird-party reimbursement rates to our customers, and changes in federal government rules and regulations.regulations, and the impact of the COVID-19 pandemic (See Risk Factor - We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business).
Revenue increased by 5.7% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services Segmentsegment.
The Pharmaceutical Distribution Services segment grew its revenue by 4.1% from the prior fiscal year. Intrasegment revenue between legacy ABDC and legacy ABSG has been eliminated in the presentation of total Pharmaceutical Distribution Services revenue. Intrasegment revenues primarily consisted of legacy ABSG sales directly to legacy ABDC customer sites5.6%, or legacy ABSG sales to legacy ABDC facilities. Intrasegment revenues were $9.5$9.7 billion, and $7.6 billion in the fiscal years ended September 30, 2017 and 2016, respectively.
Legacy ABDC's revenue of $124.6 billion increased 4.0% from the prior fiscal year, (before intrasegment eliminations). The increase in revenue was primarily due to the organic growth of some of its largest customers, continued strong increased specialty pharmaceutical product sales (which generally have higher selling prices), and due to overall market growth withinprincipally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.
More specifically, the retail customerincrease in the Pharmaceutical Distribution Services segment offsetrevenue was largely attributable to the following (in billions):
| | | | | | | | |
| Increased sales to Walgreens, our largest customer | | $2.8 |
| Increased sales to specialty physician practices | | $2.8 |
| Increased sales to other customers | | $4.1 |
Revenue in part by a decline in sales of products that treat Hepatitis C.
Legacy ABSG's revenue of $31.5 billionOther increased 10.5%9.6% from the prior fiscal year (before intrasegment eliminations). The increase in revenue was primarily due to strong overall performance, especially in the sale of oncology products,growth at all three operating segments: ABCS, MWI, and increased sales in our third party logistics business.World Courier.
A number of our contracts with customers, including GPOs,group purchasing organizations, are typically subject to expiration each year. We may lose a significant customer if anyan existing contract with such customer expires without being extended, renewed, or replaced. During the fiscal year ended September 30, 2017,2020, no significant contracts expired without being renewed.expired. Over the next twelve months, there are no significant contracts scheduled to expire. Additionally, from time to time, other 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
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2020 | | 2019 | | Change |
| Pharmaceutical Distribution Services | | $ | 3,824,129 | | | $ | 3,682,986 | | | 3.8% |
| Other | | 1,399,553 | | | 1,314,172 | | | 6.5% |
| Intersegment eliminations | | (6,096) | | | (659) | | | |
| Gain from antitrust litigation settlements | | 9,076 | | | 145,872 | | | |
| LIFO (expense) credit | | (7,422) | | | 22,544 | | | |
| PharMEDium remediation costs | | (7,135) | | | (48,603) | | | |
| PharMEDium shutdown costs | | (5,421) | | | — | | | |
| New York State Opioid Stewardship Act | | (14,800) | | | 22,000 | | | |
| Gross profit | | $ | 5,191,884 | | | $ | 5,138,312 | | | 1.0% |
Gross profit increased 1.0%, or $53.6 million, from the prior fiscal year. Gross profit in the current fiscal year was favorably impacted by increases in gross profit in Pharmaceutical Distribution Services and Other and lower PharMEDium remediation costs, and was offset in part by lower gains from antitrust litigation settlements, LIFO expense in comparison to a LIFO credit in the prior fiscal year, and an estimated assessment related to the New York State OSA compared to a reversal of a previously-estimated assessment related to the OSA (see below).
Pharmaceutical Distribution Services gross profit increased 10.4%3.8%, or $141.1 million, from the prior fiscal year due to the strong increase in specialty product sales. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.10% in the current fiscal year decreased 3 basis points compared to the prior fiscal year primarily due to increased revenue from MWI duesales to strong growth in its companion animal business and ABCS due to its growth in manufacturer service programs. ABCS service program revenue growth can be significantly impacted by manufacturer product growth and launches.
Gross Profit
|
| | | | | | | | | | |
| | | Fiscal Year Ended September 30, | | |
| (dollars in thousands) | | 2017 | | 2016 | | Change |
| Pharmaceutical Distribution Services | | $ | 3,182,836 |
| | $ | 3,232,873 |
| | (1.5)% |
| Other | | 1,204,545 |
| | 1,106,309 |
| | 8.9% |
| Intersegment eliminations | | (556 | ) | | (104 | ) | | |
| Gain from antitrust litigation settlements | | 1,395 |
| | 133,758 |
| | |
| LIFO credit (expense) | | 157,782 |
| | (200,230 | ) | | |
| Gross profit | | $ | 4,546,002 |
| | $ | 4,272,606 |
| | 6.4% |
Gross profit in Other increased 6.4%6.5%, or $273.4$85.4 million, from the prior fiscal year. The increase inyear due to growth at World Courier, MWI, and ABCS. As a percentage of revenue, gross profit margin in Other of 18.60% in the current fiscal year decreased from 19.13% in the prior fiscal year was primarily due to a decrease in LIFO expense of $358.0 million and an increase in gross profit in Other, offset in part by a decrease inyear.
We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $132.4$9.1 million and a decrease in gross profit in Pharmaceutical Distribution Services. The LIFO credit in$145.9 million during the current fiscal year was primarily driven by lower brand inflation and greater generic deflation for fiscal yearyears ended September 30, 2017 in comparison2020 and 2019, respectively. The gains were recorded as reductions to cost of goods sold (see Note 15 of the prior fiscal year.Notes to Consolidated Financial Statements).
Our costscost of goods sold includes a LIFO provision that is affected by expected changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences, 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. The LIFO expense in the current fiscal year was primarily driven by lower generic deflation, offset in part by a higher generic inventory mix in comparison to the prior fiscal year.
Pharmaceutical
We incurred remediation costs in connection with the suspended production activities at PharMEDium. We also incurred shutdown costs in connection with permanently exiting the PharMEDium compounding business.
New York State ("NYS") enacted the OSA, which went into effect on July 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. In September 2018, we accrued $22.0 million as an estimate of our liability under the OSA for the period from January 1, 2017 through September 30, 2018. In December 2018, the OSA was ruled unconstitutional by the U.S. District Court for the Southern District of New York, and, as a result, we reversed the $22.0 million accrual in the quarter ended December 31, 2018. In September 2020, the United States Court of Appeals for the Second Circuit reversed the District Court’s decision, and, as a result, we accrued $14.8 million in the fourth quarter of the fiscal year ended September 30, 2020 as we revised our estimated liability for the 2017 and 2018 calendar years.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2020 | | 2019 | | Change |
| Distribution, selling, and administrative | | $ | 2,767,217 | | | $ | 2,663,508 | | | 3.9% |
| Depreciation and amortization | | 391,062 | | | 462,407 | | | (15.4)% |
| Employee severance, litigation, and other | | 6,807,307 | | | 330,474 | | | |
| Impairment of long-lived assets | | 361,652 | | | 570,000 | | | |
| Total operating expenses | | $ | 10,327,238 | | | $ | 4,026,389 | | | 156.5% |
Distribution, Services gross profit decreased 1.5%selling, and administrative expenses increased 3.9%, or $50.0$103.7 million, from the prior fiscal year. Gross profit in the current fiscal year was adversely impacted primarily by the prior year Kaiser contract renewal effective July 1, 2016 at less favorable terms, a prior year GPO customer contract renewal effective April 1, 2016 at less favorable terms, lower price appreciation, and a lower contribution from PharMEDium as it shipped fewer units while we increased our investment in quality control and quality assurance systems to enhance product quality and patient safety and to meet all of PharMEDium's commitments to the U.S. Food and Drug Administration ("FDA") pursuant to the new federal requirements for outsourcing facilities, all of which was offset in part by anThe increase in revenue. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.16% in the current fiscal year decreased 12 basis points from the prior fiscal year. The decrease from the prior fiscal year was primarily due to an increase in operating costs to support our revenue growth and costs incurred in connection with permanently exiting the above-mentionedPharMEDium compounding business, such as contract renewals, lower price appreciation, and increased sales to some of our larger customers that typically have a lower gross profit margin.
Gross profittermination fees, offset in Other increased 8.9%, or $98.2 million,part by operational synergies realized from the prior fiscal year. The increase was primarily due to revenue growthintegration of ABCS and MWI.H.D. Smith within Pharmaceutical Distribution Services. As a percentage of revenue, gross profit margin in Other of 20.96%distribution, selling, and administrative expenses were 1.46% in the current fiscal year, decreased from 21.25% in the prior fiscal year.
We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $1.4 million and $133.8 million during the fiscal years ended September 30, 2017 and 2016, respectively. The gains were recorded as reductions to cost of goods sold (see Note 14 of the Notes to Consolidated Financial Statements).
Operating Expenses
|
| | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2017 | | 2016 | | Change |
| Distribution, selling, and administrative | | $ | 2,128,730 |
| | $ | 2,091,237 |
| | 1.8% |
| Depreciation and amortization | | 397,603 |
| | 364,735 |
| | 9.0% |
| Warrants expense | | — |
| | 140,342 |
| | |
| Employee severance, litigation, and other | | 959,327 |
| | 102,911 |
| | |
| Pension settlement | | — |
| | 47,607 |
| | |
| Total operating expenses | | $ | 3,485,660 |
| | $ | 2,746,832 |
| | 26.9% |
Distribution, selling, and administrative expenses increased 1.8%, or $37.5 million from the prior fiscal year and asrepresents a percentage of revenue, was 1.39% in the current fiscal year; a 3 basis2-basis point declinedecrease compared to the prior fiscal year. The decrease in expense as a percentage of revenue in comparison to the prior fiscal year was primarily due to initiatives taken in the second half of fiscal 2016 to improve operating efficiency across many of our businesses and certain administrative functions.
Depreciation expense increased 11.7% from the prior fiscal year due to an increase in the amount of property and equipment placed into service relating to our distribution infrastructure and various technology assets. Amortization expense increased 5.3%
decreased 5.0% from the prior fiscal year primarily due to the amortizationreduction of intangibleH.D. Smith depreciable assets originatingin connection with the integration of its operations. Amortization expense decreased 33.8% from our November 6, 2015 acquisition of PharMEDium.
There was no Warrants expense in the currentprior fiscal year asprimarily due to the Warrants were exercisedfiscal 2020 and 2019 impairments of PharMEDium intangible assets.
Employee severance, litigation, and other in the fiscal year ended September 30, 2016. Warrants expense2020 included a $6.6 billion legal accrual (see Note 14 of the Notes to Consolidated Financial Statements) and $115.4 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations, $34.4 million of severance costs primarily related to position eliminations resulting from our decision to permanently exit the PharMEDium compounding business, $38.0 million related to our business transformation efforts, and $12.6 million of acquisition-related deal and integration costs and other restructuring initiatives.
Employee severance, litigation, and other in the fiscal year ended September 30, 2016 was $140.3 million.2019 included $34.1 million of severance costs primarily related to PharMEDium restructuring activities, position eliminations resulting from our business transformation efforts and the integration of H.D. Smith, and restructuring activities related to our consulting business, $185.1 million of litigation costs that consisted of legal settlements totaling $116.7 million and legal fees in connection with opioid lawsuits and investigations, $55.4 million related to our business transformation efforts, $43.2 million of acquisition-related deal and integration costs (primarily related to the integration of H.D. Smith), and $12.6 million of other restructuring initiatives.
Employee severance, litigation, and other for We recorded a $361.7 million impairment of PharMEDium's assets in the fiscal year ended September 30, 2017 included $38.12020 and a $570.0 million impairment of costs related to employee severance and other costs, $914.4 million for litigation settlements and accrualsPharMEDium's assets in the fiscal year ended September 30, 2019 (see Note 131 of the Notes to Consolidated Financial Statements for further details), and $6.8 millionStatements).
Table of deal-related transaction costs. During the fiscal year ended September 30, 2017, we began to reorganize to further align our organization to our customers' needs in a more seamless and unified way, while supporting corporate strategy and accelerating growth, and as a result, numerous positions were eliminated. Employee severance, litigation, and other for the fiscal year ended September 30, 2016 included $53.5 million of employee severance and other costs, $19.2 million of deal-related transaction costs (primarily related to professional fees with respect to the PharMEDium acquisition), a $17.1 million charge related to the transfer of surplus assets from our settled salaried defined benefit pension plan to our defined contribution 401(k) plan, and $13.0 million of costs related to customer contract extensions (primarily related to the settlement of certain disputed items). During the fiscal year ended September 30, 2016, we reorganized certain of our business units and corporate functions to improve operating efficiency, and as a result, numerous positions were eliminated.Contents
Operating Income
| | | | | Fiscal Year Ended
September 30, | | | | Fiscal Year Ended
September 30, | |
| (dollars in thousands) | | 2017 | | 2016 | | Change | (dollars in thousands) | | 2020 | | 2019 | | Change |
| Pharmaceutical Distribution Services | | $ | 1,643,629 |
| | $ | 1,702,725 |
| | (3.5)% | Pharmaceutical Distribution Services | | $ | 1,807,001 | | | $ | 1,671,251 | | | 8.1% |
| Other | | 373,797 |
| | 327,746 |
| | 14.1% | Other | | 400,139 | | | 380,660 | | | 5.1% |
| Intersegment eliminations | | (556 | ) | | (103 | ) | |
| Intersegment eliminations | | (2,693) | | | (659) | | |
| Total segment operating income | | 2,016,870 |
| | 2,030,368 |
| | (0.7)% | Total segment operating income | | 2,204,447 | | | 2,051,252 | | | 7.5% |
| | | | | | | |
| Gain from antitrust litigation settlements | | 1,395 |
| | 133,758 |
| | | Gain from antitrust litigation settlements | | 9,076 | | | 145,872 | | | |
| LIFO credit (expense) | | 157,782 |
| | (200,230 | ) | | | |
| LIFO (expense) credit | | LIFO (expense) credit | | (7,422) | | | 22,544 | | | |
| PharMEDium remediation costs | | PharMEDium remediation costs | | (16,165) | | | (69,423) | | |
| PharMEDium shutdown costs | | PharMEDium shutdown costs | | (43,206) | | | — | | |
| New York State Opioid Stewardship Act | | New York State Opioid Stewardship Act | | (14,800) | | | 22,000 | | |
| Contingent consideration adjustment | | Contingent consideration adjustment | | 12,153 | | | — | | |
| Acquisition-related intangibles amortization | | (156,378 | ) | | (147,262 | ) | | | Acquisition-related intangibles amortization | | (110,478) | | | (159,848) | | | |
| Warrants expense | | — |
| | (140,342 | ) | | | |
| Employee severance, litigation, and other | | (959,327 | ) | | (102,911 | ) | | | Employee severance, litigation, and other | | (6,807,307) | | | (330,474) | | | |
| Pension settlement | | — |
| | (47,607 | ) | | |
| Operating income | | $ | 1,060,342 |
| | $ | 1,525,774 |
| | | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | (361,652) | | | (570,000) | | |
| Operating (loss) income | | Operating (loss) income | | $ | (5,135,354) | | | $ | 1,111,923 | | | (561.8)% |
Segment operating income is evaluated before gain from antitrust litigation settlements; LIFO credit (expense); credit; PharMEDium remediation costs; PharMEDium shutdown costs; New York State Opioid Stewardship Act; contingent consideration adjustment; acquisition-related intangibles amortization; Warrants expense; employee severance, litigation, and other; and pension settlement.impairment of PharMEDium assets.
Pharmaceutical Distribution Services operating income decreased 3.5%increased 8.1%, or $59.1$135.8 million, from the prior fiscal year primarily due to the decreaseincrease in gross profit.profit, as noted above. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin was 0.99% and represented an increase of 1.11% decreased 92 basis points fromcompared to the prior fiscal year primarily due to the prior year contract renewals at less favorable terms, lower price appreciation, and increased sales to some of our larger customers that typically have lower gross profit margin, offset in part by our initiatives to improve operating efficiency.year.
Operating income in Other increased 14.1%5.1%, or $46.1$19.5 million, from the prior fiscal year primarily due to the increase in gross profit increases of ABCS and MWI,was offset in part by an increase in operating expenses.expenses, primarily warehousing costs (including incremental COVID-19 expenses) and freight costs.
One of our non-wholly-owned subsidiaries, Profarma, which we consolidate based on certain governance rights (see Note 3 of the Notes to Consolidated Financial Statements), adjusted its previous estimate of contingent consideration related to the purchase price of one of its prior business acquisitions.
an equity investment in Other (Income) Loss in the fiscal year ended September 30, 2019.
Interest expense, net and the respective weighted average interest rates were as follows:
| | | | | Fiscal Year Ended September 30, | | Fiscal Year Ended September 30, |
| | | 2017 | | 2016 | | | 2020 | | 2019 |
| (dollars in thousands) | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | (dollars in thousands) | | Amount | | Weighted Average
Interest Rate | | Amount | | Weighted Average
Interest Rate |
| Interest expense | | $ | 149,042 |
| | 2.99% | | $ | 144,349 |
| | 2.72% | Interest expense | | $ | 158,522 | | | 3.42% | | $ | 195,474 | | | 3.73% |
| Interest income | | (3,857 | ) | | 0.52% | | (4,437 | ) | | 0.45% | Interest income | | (20,639) | | | 0.69% | | (37,705) | | | 1.87% |
| Interest expense, net | | $ | 145,185 |
| | | | $ | 139,912 |
| | | Interest expense, net | | $ | 137,883 | | | | | $ | 157,769 | | | |
Interest expense, net increased 3.8%decreased 12.6%, or $5.3$19.9 million, from the prior fiscal year. The increaseyear primarily due to a decrease in interest expense netresulting from the prioradoption 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. Interest income was lower in the current fiscal year was primarily due to an increaseas a result of a decline in our financing obligations related to leased construction assets,investment interest rates, which was offset in part by a decrease of approximately $500 million$1.0 billion increase in average borrowings frominvested cash balances compared to the prior fiscal year.
Our interest expense in future periods may vary significantly depending upon changes in net borrowings, interest rates, amendments to our current borrowing facilities, and strategic decisions to deploy our invested cash.
Our effective tax rates were 60.3%35.8% and (2.7)%11.7% in the fiscal years ended September 30, 20172020 and 2016,2019, respectively. Our effective tax rate in the fiscal year ended September 30, 20172020 was negatively impacted by legal settlementshigher than the U.S. statutory rate due to our operating loss, the tax benefits associated with our decision to permanently exit the PharMEDium compounding business, Swiss Tax Reform, the CARES Act, and accrual charges that we currently estimate to be non-deductibleother discrete items (see Note 135 of the Notes to Consolidated Financial Statements), and offset in part by certain discrete items, the growthtax impact of our international businesses in Switzerland and Irelandthe portion of the opioid legal accrual that have significantly lower incomeis not expected to be tax rates, and the benefit from stock option exercises and restricted stock vesting. Prior to the fiscal year ended September 30, 2017, tax benefits resulting from share-based compensation were recorded as adjustments to Additional Paid-In Capital within Stockholders' Equity.deductible. Our effective tax rate in the fiscal year ended September 30, 20162019 was primarily benefited fromimpacted by the receipt$570.0 million impairment of an IRS private letter ruling that entitled usPharMEDium's assets (see Note 1 of the Notes to an incomeConsolidated Financial Statements) and legal settlements, which changed the mix of domestic and international income. The effective tax deduction equalrate in the fiscal year ended September 30, 2019 was also impacted by a $37.0 million decrease to the fair value ofCompany's transition tax related to the Warrants on the dates of exercise.2017 Tax Act.
Net income was $364.5 millionattributable to AmerisourceBergen and $1,427.9 milliondiluted earnings per share were significantly lower in the current fiscal years ended September 30, 2017 and 2016.year primarily due to the legal accrual recognized in connection with opioid lawsuits.
Year ended September 30, 20162019 compared withto the Year ended September 30, 20152018
Revenue
| | | | | Fiscal Year Ended September 30, | | | | Fiscal Year Ended
September 30, | |
| (dollars in thousands) | | 2016 | | 2015 | | Change | (dollars in thousands) | | 2019 | | 2018 | | Change |
| Pharmaceutical Distribution Services | | $ | 141,701,997 |
| | $ | 132,383,820 |
| | 7.0% | Pharmaceutical Distribution Services | | $ | 172,813,537 | | | $ | 161,699,343 | | | 6.9% |
| Other | | 5,207,095 |
| | 3,586,879 |
| | 45.2% | |
| Other: | | Other: | |
| MWI Animal Health | | MWI Animal Health | | 3,975,232 | | | 3,789,759 | | | 4.9% |
| Global Commercialization Services | | Global Commercialization Services | | 2,893,109 | | | 2,542,971 | | | 13.8% |
| Total Other | | Total Other | | 6,868,341 | | | 6,332,730 | | | 8.5% |
| Intersegment eliminations | | (59,406 | ) | | (8,896 | ) | |
| Intersegment eliminations | | (92,757) | | | (92,438) | | |
| Revenue | | $ | 146,849,686 |
| | $ | 135,961,803 |
| | 8.0% | Revenue | | $ | 179,589,121 | | | $ | 167,939,635 | | | 6.9% |
Revenue increased by 8.0%6.9% from the prior fiscal year. See discussions below under "Pharmaceutical Distribution Services" and "Other" for commentary regardingyear primarily due to the revenue growth of our revenue growth.
Pharmaceutical Distribution Services Segmentsegment.
The Pharmaceutical Distribution Services segment grew its revenue by 7.0% from6.9%, or by $11.1 billion, primarily due to the prior fiscal year. Intrasegment revenues between legacy ABDCorganic growth of some of its largest customers, continued strong increased specialty pharmaceutical product sales (which generally have higher selling prices), the impact of business combinations, and legacy ABSG have been eliminatedoverall market growth principally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.
More specifically, the presentation of totalincrease in the Pharmaceutical Distribution Services revenue. Intrasegment revenues primarily consisted of legacy ABSG sales directly to legacy ABDC customer sites or legacy ABSG sales to legacy ABDC facilities. Intrasegment revenues were $7.6 billion and $6.4 billion in the fiscal years ended September 30, 2016 and 2015, respectively.
Legacy ABDC's revenue of $119.8 billion increased 5.6% from the prior fiscal year (before intrasegment eliminations). The increase in legacy ABDC'ssegment revenue was primarily due to overall market growth, including sales to WBA. Revenue in the fiscal year ended September 30, 2016 was negatively impacted by lower sales of products that treat Hepatitis C.
Legacy ABSG's revenue of $28.5 billion increased 17.1% from the prior fiscal year (before intrasegment eliminations). The increase in legacy ABSG's revenue was duelargely attributable to the continued growth in our oncology business (including an increase in sales to community oncologists), increased sales in our third party logistics business, and increases in our blood products, vaccine, and physician office distribution businesses.following (in billions):
During the fiscal year ended September 30, 2016, no significant contracts expired. However, a significant contract with a GPO was renewed, effective April 1, 2016, and our agreement with Kaiser was renewed for a five-year term commencing on July 1, 2016, both at less favorable terms than the previous contracts.
Other | | | | | | | | |
| Increased sales to Walgreens, our largest customer | | $5.6 |
| Increased sales to specialty physician practices | | $3.0 |
| Increased sales to other customers | | $1.7 |
| Increased sales due to Profarma and H.D. Smith business combinations | | $0.8 |
Revenue in Other increased 45.2%8.5% from the prior fiscal year, primarily due to incremental revenue contribution fromABCS's growth in its Canadian operations, growth at MWI, which was acquiredgrowth at World Courier, and the January 2018 consolidation of the specialty joint venture in February 2015.Brazil.
Gross Profit
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2019 | | 2018 | | Change |
| Pharmaceutical Distribution Services | | $ | 3,682,986 | | | $ | 3,466,956 | | | 6.2% |
| Other | | 1,314,172 | | | 1,260,485 | | | 4.3% |
| Intersegment eliminations | | (659) | | | (609) | | | |
| Gain from antitrust litigation settlements | | 145,872 | | | 35,938 | | | |
| LIFO credit (expense) | | 22,544 | | | (67,324) | | | |
| PharMEDium remediation costs | | (48,603) | | | (61,129) | | | |
| New York State Opioid Stewardship Act | | 22,000 | | | (22,000) | | | |
| Gross profit | | $ | 5,138,312 | | | $ | 4,612,317 | | | 11.4% |
|
| | | | | | | | | | |
| | | Fiscal Year Ended September 30, | | |
| (dollars in thousands) | | 2016 | | 2015 | | Change |
| Pharmaceutical Distribution Services | | $ | 3,232,873 |
| | $ | 3,137,351 |
| | 3.0% |
| Other | | 1,106,309 |
| | 869,276 |
| | 27.3% |
| Intersegment eliminations | | (104 | ) | | — |
| | |
| Gain from antitrust litigation settlements | | 133,758 |
| | 65,493 |
| | |
| LIFO expense | | (200,230 | ) | | (542,807 | ) | | |
| Gross profit | | $ | 4,272,606 |
| | $ | 3,529,313 |
| | 21.1% |
Gross profit increased 21.1%11.4%, or $743.3$526.0 million, from the prior fiscal year. The increase was due toGross profit in the $342.6 million decrease in LIFO expense from the prior fiscal year the increase in the gross profit of Other,ended September 30, 2019was favorably impacted primarily by the increase in gross profit ofin Pharmaceutical Distribution Services, and the $68.3 millionincrease in gross profit in Other, an increase in gains from antitrust litigation settlements, fromthe LIFO credit in the current year in comparison to a LIFO expense in the prior fiscal year. The decrease in LIFO expense was primarily dueyear, and the reversal of a previously-estimated assessment related to lower brand inflation and higher generic drug deflation.the New York State Opioid Stewardship Act.
Pharmaceutical Distribution Services gross profit increased 3.0%6.2%, or $95.5$216.0 million, from the prior fiscal year. The increase wasyear primarily due to the contribution from our fiscal 2016 PharMEDium acquisitionincrease in revenue largely due to strong specialty product sales, the January 2018 consolidation of Profarma, and the growthJanuary 2018 acquisition of legacy ABSG's revenue. Gross profit growth in the current fiscal year benefited from the incremental income from legacy ABDC's participation in the WBA generic purchasing services arrangementH.D. Smith and was adverselynegatively impacted by lower generic price appreciation, an increase in generic price deflation, and contract renewals with the the Department of Defense, a significant GPO customer, and Kaiser, allour pharmaceutical compounding operations as production at less favorable terms.our Memphis facility had been suspended since December 2017. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.28%2.13% in the current fiscal year decreased 9 basis points fromended September 30, 2019 remained relatively flat compared to the prior fiscal year. The decrease from the prior fiscal year was primarily due to lower generic price appreciation, an increase in generic price deflation, contract renewals at less favorable terms, and increased sales to our larger customers that typically have a lower gross profit margin.
Gross profit in Other increased 27.3%4.3%, or $237.0$53.7 million, from the prior fiscal year. The increase wasyear primarily due to growth at World Courier and MWI, the contributionJanuary 2018 consolidation of our February 2015 acquisition of MWI,the specialty joint venture in Brazil, and to a lesser extent, the increaseABCS's growth in legacy ABCS's revenue.its Canadian operations. As a percentage of revenue, gross profit margin in Other of 21.25%19.13% in the current fiscal year ended September 30, 2019 decreased from 24.23%19.90% in the prior fiscal year. The decrease from the prior fiscal year was primarily due to the addition of MWI, which has a lower gross profit margin in comparison to other businesses within Other.
We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $133.8$145.9 million and $65.5$35.9 million during the fiscal years ended September 30, 20162019 and 2015,2018, respectively. The gains were recorded as reductions to cost of goods sold (see Note 15 of the Notes to Consolidated Financial Statements).
Operating Expenses
| | | | | Fiscal Year Ended
September 30, | | | | Fiscal Year Ended
September 30, | |
| (dollars in thousands) | | 2016 | | 2015 | | Change | (dollars in thousands) | | 2019 | | 2018 | | Change |
| Distribution, selling, and administrative | | $ | 2,091,237 |
| | $ | 1,907,840 |
| | 9.6% | Distribution, selling, and administrative | | $ | 2,663,508 | | | $ | 2,460,301 | | | 8.3% |
| Depreciation and amortization | | 364,735 |
| | 248,635 |
| | 46.7% | Depreciation and amortization | | 462,407 | | | 465,127 | | | (0.6)% |
| Warrants expense | | 140,342 |
| | 912,724 |
| | | |
| Employee severance, litigation, and other | | 102,911 |
| | 37,894 |
| | | Employee severance, litigation, and other | | 330,474 | | | 183,520 | | | |
| Pension settlement | | 47,607 |
| | — |
| | |
| Goodwill impairment | | Goodwill impairment | | — | | | 59,684 | | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | 570,000 | | | — | | |
| Total operating expenses | | $ | 2,746,832 |
| | $ | 3,107,093 |
| | (11.6)% | Total operating expenses | | $ | 4,026,389 | | | $ | 3,168,632 | | | 27.1% |
Distribution, selling, and administrative expenses increased 9.6%8.3%, or $183.4$203.2 million, from the prior fiscal year primarily due to our February 2015 acquisition of MWI, and to a lesser extent, our November 2015 acquisition of PharMEDium.year. As a percentage of revenue, distribution, selling, and administrative expenses were 1.42%1.48% in the current fiscal year ended September 30, 2019, and represents an
a 2-basis point increase of 2 basis points compared to the prior fiscal year. The increase of 2 basis points was primarily due to the addition of MWI, which has higher operating expenses as a percentage of revenue in comparison to the Pharmaceutical Distribution ServicesServices' segment offset in partexpenses increased by an initiative to improve operating efficiency across many of our businesses and certain administrative functions.
Depreciation expense increased 10.5%10.2% from the prior fiscal year due to an increase in the amount of property and equipment placed into service. Amortization expense increased 169.9% from prior fiscal year primarily due to an increase in costs to support revenue growth, the amortizationJanuary 2018 consolidation of intangible assets originating from ourProfarma, and the January 2018 acquisition of H.D. Smith. Distribution, selling, and administrative expenses in Other increased by 2.7% in the fiscal year ended September 30, 2019 due to an increase in costs to support revenue growth at MWI and PharMEDium acquisitions.the January 2018 consolidation of the specialty joint venture in Brazil, offset in part by a reduction in distribution, selling, and administrative expenses at ABCS.
WarrantsDepreciation expense decreased significantlyincreased 3.9% from the prior fiscal year primarily due to the decline in our stock price since September 30, 2015. The Warrants were issuedJanuary 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma. Amortization expense decreased 7.6% from the prior fiscal year primarily due to the impairment of PharMEDium intangible assets recorded in March 20132019, offset in connection withpart by the agreementsamortization of intangible assets originating from our January 2018 acquisition of H.D. Smith and arrangements that define our strategic relationship with WBA. The Warrants were exercised by WBA in fullthe January 2018 consolidation of Profarma.
Employee severance, litigation, and other in the fiscal year ended September 30, 2016.2019 included $34.1 million of severance costs primarily related to PharMEDium restructuring activities, position eliminations resulting from our business transformation efforts and the integration of H.D. Smith, and restructuring activities related to our consulting business, $185.1 million of litigation costs that consisted of legal settlements totaling $116.7 million and legal fees in connection with opioid lawsuits and investigations, $55.4 million related to our business transformation efforts, $43.2 million of acquisition-related deal and integration costs (primarily related to the integration of H.D. Smith), and $12.6 million of other restructuring initiatives.
Employee severance, litigation, and other for the fiscal year ended September 30, 2016 included $53.5 million of employee severance and other costs, $19.2 million of deal-related transaction costs (primarily related to professional fees with respect to the PharMEDium acquisition), a $17.1 million charge related to the transfer of surplus assets from our settled salaried defined benefit pension plan to our defined contribution 401(k) plan, and $13.0 million of costs related to customer contract extensions (primarily related to the settlement of certain disputed items). Employee severance, litigation, and other for the fiscal year ended September 30, 2015 included $5.3 million of employee severance and other costs and $32.6 million of deal-related transaction costs (primarily related to professional fees with respect to the MWI acquisition).
We recorded a pension settlement charge of $47.6 million in the fiscal year ended September 30, 20162018 included $36.7 million of severance costs primarily related to position eliminations resulting from our business transformation efforts and restructuring activities related to our consulting business, $61.5 million of litigation costs primarily related to legal fees in connection with opioid lawsuits and investigations and related initiatives, $33.9 million of acquisition-related deal and integration costs (primarily related to H.D. Smith), $33.0 million related to our business transformation efforts, and $18.4 million of other restructuring initiatives.
We recorded a $570.0 million impairment of PharMEDium's long-lived assets in the final settlement of our salaried defined benefit planfiscal year ended September 30, 2019 (see Note 91 of the Notes to Consolidated Financial Statements).
We recorded a $59.7 million goodwill impairment charge at our Profarma reporting unit in the fiscal year September 30, 2018 in connection with our annual goodwill impairment assessment.
Operating Income
| | | | | Fiscal Year Ended
September 30, | | | | Fiscal Year Ended
September 30, | |
| (dollars in thousands) | | 2016 | | 2015 | | Change | (dollars in thousands) | | 2019 | | 2018 | | Change |
| Pharmaceutical Distribution Services | | $ | 1,702,725 |
| | $ | 1,666,110 |
| | 2.2% | Pharmaceutical Distribution Services | | $ | 1,671,251 | | | $ | 1,626,748 | | | 2.7% |
| Other | | 327,746 |
| | 238,137 |
| | 37.6% | Other | | 380,660 | | | 355,091 | | | 7.2% |
| Intersegment eliminations | | (103 | ) | | — |
| | Intersegment eliminations | | (659) | | | (609) | | |
| Total segment operating income | | 2,030,368 |
| | 1,904,247 |
| | 6.6% | Total segment operating income | | 2,051,252 | | | 1,981,230 | | | 3.5% |
| | | | | | | |
| Gain from antitrust litigation settlements | | 133,758 |
| | 65,493 |
| | | Gain from antitrust litigation settlements | | 145,872 | | | 35,938 | | | |
| LIFO expense | | (200,230 | ) | | (542,807 | ) | | | |
| LIFO credit (expense) | | LIFO credit (expense) | | 22,544 | | | (67,324) | | | |
| PharMEDium remediation costs | | PharMEDium remediation costs | | (69,423) | | | (66,204) | | |
| New York State Opioid Stewardship Act | | New York State Opioid Stewardship Act | | 22,000 | | | (22,000) | | |
| Acquisition-related intangibles amortization | | (147,262 | ) | | (54,095 | ) | | | Acquisition-related intangibles amortization | | (159,848) | | | (174,751) | | | |
| Warrants expense | | (140,342 | ) | | (912,724 | ) | | | |
| Employee severance, litigation, and other | | (102,911 | ) | | (37,894 | ) | | | Employee severance, litigation, and other | | (330,474) | | | (183,520) | | | |
| Pension settlement | | (47,607 | ) | | — |
| | |
| Goodwill impairment | | Goodwill impairment | | — | | | (59,684) | | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | (570,000) | | | — | | |
| Operating income | | $ | 1,525,774 |
| | $ | 422,220 |
| | | Operating income | | $ | 1,111,923 | | | $ | 1,443,685 | | | (23.0)% |
Segment operating income is evaluated beforeexcluding gain from antitrust litigation settlements; LIFO expense;credit (expense); PharMEDium remediation costs; New York State Opioid Stewardship Act; acquisition-related intangibles amortization; Warrants expense; employee severance, litigation, and other; goodwill impairment; and pension settlement.impairment of PharMEDium assets.
Pharmaceutical Distribution Services operating income increased 2.2%2.7%, or $36.6$44.5 million, from the prior fiscal year primarily due to the increase in gross profit, offset in part by thean increase in operating expenses. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin decreased 64 basis points from the prior fiscal year primarily due to lower generic price appreciation, an increase in generic price deflation, contract renewals at less favorable terms, and increased sales to our larger customers that typically have a lower gross profit margin, offset in part bycontribution from our initiative to improve operating efficiency.pharmaceutical compounding operations.
Operating income in Other increased 37.6%7.2%, or $89.6$25.6 million, from the prior fiscal year primarily due to the February 2015 acquisitionincrease in gross profit, offset in part by an increase in operating expenses.
We recorded a $13.7 million gain on the sale of MWI.an equity investment in Other (Income) Loss in the fiscal year ended September 30, 2019.
We recorded a $30.0 million impairment on a non-customer note receivable related to a start-up venture in Other (Income) Loss in the fiscal year ended September 30, 2018.
Interest expense, net and the respective weighted average interest rates were as follows:
| | | | | Fiscal Year Ended September 30, | | Fiscal Year Ended September 30, |
| | | 2016 | | 2015 | | | 2019 | | 2018 |
| (dollars in thousands) | | Amount | | Weighted Average Interest Rate | | Amount | | Weighted Average Interest Rate | (dollars in thousands) | | Amount | | Weighted Average
Interest Rate | | Amount | | Weighted Average
Interest Rate |
| Interest expense | | $ | 144,349 |
| | 2.72% | | $ | 112,021 |
| | 2.88% | Interest expense | | $ | 195,474 | | | 3.73% | | $ | 189,640�� | | | 3.59% |
| Interest income | | (4,437 | ) | | 0.45% | | (2,985 | ) | | 0.18% | Interest income | | (37,705) | | | 1.87% | | (14,941) | | | 1.18% |
| Interest expense, net | | $ | 139,912 |
| | | | $ | 109,036 |
| | | Interest expense, net | | $ | 157,769 | | | | | $ | 174,699 | | | |
Interest expense, net increased 28.3%decreased 9.7%, or $30.9$16.9 million, from the prior fiscal year due to an increase of $1.3 billionyear. The decrease in average borrowingsinterest expense, net from the prior fiscal year primarilywas due to an increase in interest income due to a $752 million increase in our average invested cash balance during the fiscal year ended September 30, 2019 and an increase in investment interest rates, offset in part by an increase in interest expense due to the February 2015December 2017 issuance of senior notes totaling $1.0 billionto finance our January 2018 acquisition of H.D. Smith and the February 2015January 2018 consolidation of Profarma's debt and November 2015 variable-rate term loan borrowings to financerelated interest expense.
For the fiscal year ended September 30, 2018, we recorded a portion$42.3 million loss in connection with the January 2018 consolidations of Profarma and the specialty joint venture in Brazil and a $23.8 million loss on the early retirement of our $400 million of 4.875% senior notes that were due in 2019. The loss on the early retirement of the MWIdebt included a $22.3 million prepayment premium and PharMEDium acquisitions, respectively. Our average borrowing rate was lower during the current fiscal year primarily as a result$1.5 million of the recent variable-rate financings, which bear interest at lower rates.an unamortized debt discount and unamortized debt issuance costs.
Our effective tax rates were (2.7%)11.7% and 151.4%(37.2)% in the fiscal years ended September 30, 20162019 and 2015,2018, respectively. Our effective tax rate in the fiscal year ended September 30, 20162019 was primarily benefited from an IRS private letter ruling that entitled us to an income tax benefit equal toimpacted by the fair value$570.0 million impairment of PharMEDium assets (see Note 1 of the Warrants onNotes to Consolidated Financial Statements) and legal settlements, which changed the datesmix of exercise. Ourdomestic and international income. The effective tax rate was also favorably impacted in fiscal 2016 by growth of our international businesses in Switzerland and Ireland that have significantly lower income tax rates.
Net income was $1,427.9 million in the fiscal year ended September 30, 2016. Net loss2019 was $138.2also impacted by a $37.0 million decrease to the Company's transition tax related to the 2017 Tax Act. Our effective tax rate in the fiscal year ended September 30, 2015.2018 was primarily impacted by the effect of 2017 Tax Act. Our total income tax benefit in the fiscal year ended September 30, 2018 of $438.5 million reflects $612.6 million of tax benefits recognized and a reduction in the U.S. federal income tax rate from 35% to 21%, both resulting from the 2017 Tax Act. Additionally, during the fourth quarter of fiscal 2018, a portion of a 2017 legal settlement charge was determined to be deductible, which favorably impacted our effective tax rate for the fiscal year ended September 30, 2018. Our effective tax rates for the fiscal years ended September 30, 2019 and 2018 were also favorably impacted by the Company's international businesses in Switzerland and Ireland, which have lower income tax rates, and the benefit from stock option exercises and restricted stock vesting.
Net income and earnings per share were significantly lower in the fiscal year ended September 30, 2019 primarily due to the $570.0 million impairment of PharMEDium assets and the significant income tax benefit recognized in the prior fiscal year as a result of the 2017 Tax Act. Critical Accounting Policies and Estimates
Critical accounting policies are those policies whichthat involve accounting estimates and assumptions that can have a material impact on our financial position and results of operations and require the use of complex and subjective estimates based upon past experience and management's judgment. Actual results may differ from these estimates due to uncertainties inherent in such estimates. Below are those policies applied in preparing our financial statements that management believes are the most dependent onupon the application of estimates and assumptions. For a complete list of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.
AllowanceAllowances for Returns and Doubtful Accounts and Reserve for Customer Sales Returns
Trade receivables are primarily comprised of amounts owed to us for our pharmaceutical distribution and services activities and are presented net of an allowance for doubtful accounts and a reserve for customer sales returns.returns and an allowance for doubtful accounts. Our customer sales return policy generally allows customers to return products only if the products can be resold at full value or returned to suppliers for full credit. We record an accrual for estimated customer sales returns at the time of sale to the customer based upon historical customer return trends. The allowance for returns as of September 30, 2020 and 2019 was $1,344.6 million and $1,147.5 million, respectively.
In determining the appropriate allowance for doubtful accounts, we consider a combination of factors, such as the aging of trade receivables, industry trends, and our customers' financial strength, credit standing, and payment and default history.history, and macroeconomic conditions. Changes in the aforementioned factors, among others, may lead to adjustments in our allowance for doubtful accounts. The calculation of the required allowance requires judgment by our management as to the impact of these and other factors on the ultimate realization of our trade receivables. Each of our business units performs
ongoing credit evaluations of its customers' financial condition and maintains reserves for probable bad debt losses based upon historical experience and for specific credit problems when they arise. We write off balances against the reserves when collectability is deemed remote. Each business unit performs formal, documented reviews of the allowance at least quarterly, and our largest business units perform such reviews monthly. There were no significant changes to this process during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, and bad debt expense was computed in a consistent manner during these periods. The bad debt expense for any period presented is equal to the changes in the period end allowance for doubtful accounts, net of write-offs, recoveries, and other adjustments. Schedule II of this Form 10-K sets forth a rollforward of the allowance for doubtful accounts and reserve for customer sales returns.
Bad debt expense for the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 was $8.9$11.9 million, $13.1$25.2 million, and $8.1$16.7 million, respectively. An increase or decrease of 0.1% in the 20172020 allowance as a percentage of trade receivables would result in an increase or decrease in the provision on accounts receivable of approximately $10.4$13.9 million. The allowance for doubtful accounts was $66.6$72.7 million and $69.8$76.4 million as of September 30, 20172020 and 2016,2019, respectively.
this Form 10-K sets forth a rollforward of allowances for returns and doubtful accounts.
Business Combinations
The assets acquired and liabilities assumed fromupon the acquiredacquisition or consolidation of a business are recorded at fair value, with the residual of the purchase price recorded asallocated to goodwill. We engage third partythird-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant judgments, estimates, and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include, but are not limited to: discount rates and expected future expected cash flows from and economic lives of customer relationships, trade names, existing technology, and other intangible assets. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions or estimates.
Equity InvestmentsGoodwill and Other Intangible Assets
We useGoodwill arises from acquisitions or consolidations of specific operating companies and is assigned to the equity method of accounting for our investments in entitiesreporting unit in which we have significant influence; generally, this represents an ownership interest of between 20% and 50%. Unrealized losses that are determined to be other-than-temporary impairment losses are recorded as a component of earnings in the period in which that determination is made.particular operating company resides. We recorded an impairment charge of $30.6 million in the fiscal year ended September 30, 2015 related toidentify our minority ownership interest in a pharmaceutical wholesaler in Brazil. The impairment charge wasreporting units based upon our determinationmanagement reporting structure, beginning with our operating segments. We aggregate two or more components within an operating segment that have similar economic characteristics. We evaluate whether the decline incomponents within our operating segments have similar economic characteristics, which include the pharmaceutical wholesaler's stock price fromsimilarity of long-term gross margins, the date onnature of the components' products, services, and production processes, the types of customers and the methods by which products or services are delivered to customers, and the investment was made to September 30, 2015 was other-than-temporary. There were no impairment charges on equity investments in the fiscal years ended September 30, 2017 or 2016.
Goodwillcomponents' regulatory environment. Our reporting units include Pharmaceutical Distribution Services, Profarma, ABCS, World Courier, and Intangible AssetsMWI.
Goodwill and other intangible assets with indefinite lives, such as certain trademarks and trade names, are not amortized; rather, they are tested for impairment at least annually. For the purpose of these impairment tests, we can elect to perform a qualitative assessment to determine if it is more likely than not that the fair values of its reporting units and indefinite livedindefinite-lived intangible assets are less than the respective carrying values of those reporting units and indefinite livedindefinite-lived intangible assets, respectively. Such qualitative factors can include, among other, industry and market conditions, overall financial performance, and relevant entity-specific events. If we conclude based on our qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. We elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2020, with the exception of our testing of goodwill and indefinite-lived intangibles in the MWI and the Profarma reporting units. We elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2019, with the exception of our testing in the Profarma reporting unit. In the fourth quarter of fiscal 2018, we elected to bypass performing the qualitative assessment and in the fourth quarter of fiscal 2017, went directly to performing our annual quantitative assessments of the goodwill and indefinite-lived intangible assets for the current year. We also completed a qualitative assessment immediately after our reorganization in the fourth quarter of fiscal 2017. We may elect to perform the qualitative annual assessment in future periods.assets.
The quantitative goodwill impairment test requires us to compare the carrying value of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount exceeds the fair value, the difference between the carrying value and the fair value is recorded as an impairment loss, the amount of which may not to exceed the total amount of goodwill allocated to the reporting unit.
We identify our reporting units based upon our management reporting structure, and our reporting units are the same as our operating segments. Generally, goodwill arises from acquisitions of specific operating companies and is assigned to the reporting unit in whichWhen performing a particular operating company resides.
Wequantitative impairment assessment, we utilize an income-based approach to value our reporting units.units, with the exception of the Profarma reporting unit, the fair value of which is based upon its publicly-traded stock price, plus an estimated control premium. The income-based approach relies on a discounted cash flow analysis, which considers forecasted cash flows discounted at an appropriate discount rate, to determine the fair value of each reporting unit. We generally
believe that market participants would use a discounted cash flow analysis to determine the fair value of our reporting units in a sale transaction. The annual goodwill impairment test requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization, capital expenditures, and working capital requirements, which are based upon our long-range plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While we use the best available information to prepare our cash flowflows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, our overall methodology and the population of assumptions used have remained unchanged.
The quantitative impairment test for indefinite-lived intangibles other than goodwill (certain trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of our indefinite-lived intangibles using the relief from royalty method. We believe the relief from royalty method is a widely used valuation technique for such assets. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such indefinite-lived trademarks and trade names and not having to pay a royalty for their use.
We completed our required annual impairment tests relating toof goodwill and otherindefinite-lived intangible assets in the fourth quarter of the fiscal years ended September 30, 2020, 2019, and 2018. We recorded a goodwill impairment of $59.7 million in our Profarma reporting unit in connection with our fiscal 2018 annual impairment test. No goodwill impairments were recorded in the fiscal years ended September 30, 2020 and 2019. No indefinite-lived intangible impairments were recorded in the fiscal years ended September 30, 2020, 2019, and 2018.
We perform a recoverability assessment of our long-lived assets when impairment indicators are present.
After U.S. Food and Drug Administration ("FDA") inspections of PharMEDium's compounding facilities, we voluntarily suspended production activities in December 2017 2016,at its largest compounding facility located in Memphis, Tennessee pending execution of certain remedial measures.
As a result of the suspension of production activities at PharMEDium's compounding facility located in Memphis, Tennessee and 2015,the regulatory matters, we performed a recoverability assessment of PharMEDium's long-lived assets and determinedrecorded a $570.0 million impairment loss in the quarter ended March 31, 2019 for the amount that therethe carrying value of the PharMEDium asset group exceeded its fair value. Prior to the impairment, the carrying value of the asset group was $792 million. The fair value of the asset group was $222 million as of March 31, 2019. The PharMEDium asset group was included in the Pharmaceutical Distribution Services reportable segment. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 15% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. We believed that our fair value assumptions were no impairments.representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represents a Level 3 nonrecurring fair value measurement. We allocated $522.1 million of the impairment to finite-lived intangibles ($420.8 million of customer relationships, $79.9 million of a trade name, and $21.4 million of software technology) and $47.9 million of the impairment to property and equipment.
We updated our recoverability assessment of PharMEDium's long-lived assets as of September 30, 2019, and we concluded that PharMEDium’s long-lived assets were recoverable as of September 30, 2019.
As a result of the continued suspension of the production activities at PharMEDium's compounding facility located in Memphis, Tennessee, certain regulatory matters, ongoing operational challenges, and lower-than-expected operating results, we updated our recoverability assessment of PharMEDium’s long-lived assets as of December 31, 2019. The recoverability assessment was based upon comparing PharMEDium's forecasted undiscounted cash flows to the carrying value of its asset group. Using forecasted undiscounted cash flows that were based on the weighted average of multiple strategic alternatives, we concluded that the carrying value of the PharMEDium long-lived asset group was not recoverable as of December 31, 2019. The forecasted undiscounted cash flows as of December 31, 2019 were lower than the forecasted undiscounted cash flows as of September 30, 2019 due to a change in weighting of multiple strategic alternatives and lower operating results in the three months ended December 31, 2019 compared to expectations. We then performed an impairment test by comparing the PharMEDium asset group's fair value of $145 million to its carrying value, which resulted in a $138.0 million impairment loss in the three months ended December 31, 2019. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 17% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. We believed
that our fair value assumptions were representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represented a Level 3 nonrecurring fair value measurement. We allocated $123.2 million of the impairment to finite-lived intangibles, $11.6 million of the impairment to property and equipment, and $3.2 million to ROU assets.
In January 2020, we decided to permanently exit the PharMEDium compounding business, and, as a result, we ceased all commercial and administrative operations related to this business in fiscal 2020. The decision to permanently 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 in January 2020 to suspend production at the compounding facility in New Jersey pending facility upgrades related to the air handling and filtration systems. In connection with the decision to exit the PharMEDium business, we recorded an impairment of PharMEDium's assets of $223.7 million in the three months ended March 31, 2020, which included impairments of the remaining finite-lived intangible assets and the majority of the remaining tangible assets.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and uncertain tax positions reflect management's assessment of estimated future taxes to be paid on items in the financial statements. Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, as well as net operating loss and tax credit carryforwards for tax purposes.
We have established a valuation allowance against certain deferred tax assets for which the ultimate realization of future benefits is uncertain. Expiring carryforwards and the required valuation allowances are adjusted annually. After application of the valuation allowances described above, we anticipate that no limitations will apply with respect to utilization of any of the other deferred income tax assets described above.
We prepare and file tax returns based upon our interpretation of tax laws and regulations and record estimates based upon these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions' tax court systems. Significant judgment is exercised in applying complex tax laws and regulations across multiple global jurisdictions where we conduct our operations. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based upon the technical merits of the position.
We believe that our estimates for the valuation allowances against deferred tax assets and the amount of benefits recognized in our financial statements for uncertain tax positions are appropriate based upon current facts and circumstances. However, others applying reasonable judgment to the same facts and circumstances could develop a different estimate and the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.
The significant assumptions and estimates described in the preceding paragraphs are important contributors to the ultimate effective tax rate in each year. If any of our assumptions or estimates were to change, an increase or decrease in our effective tax rate by 1% on income before income taxes would have caused income tax expense to change by $9.2$52.9 million in the fiscal year ended September 30, 2017.2020.
For a complete discussion of the impact of the CARES Act, the PharMEDium worthless stock deduction, Swiss Tax Reform, the legal accrual related to opioid litigation, and the 2017 Tax Act, refer to Note 5 of the Notes to Consolidated Financial Statements.
Inventories
Inventories are stated at the lower of cost or market. Cost for approximately 70% and 75% of our inventories as of September 30, 2020 and 2019, respectively, has been determined using the LIFO method. If we had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,519.2 million and $1,511.8 million higher than the amounts reported as of September 30, 2020 and 2019, respectively. We recorded LIFO expenses of $7.4 million and $67.3 million in the fiscal years ended September 30, 2020 and 2018, respectively. We recorded a LIFO credit of $22.5 million in the fiscal year ended September 30, 2019. The annual LIFO provision is affected by manufacturer pricing practices, which may be impacted by market and other external influences, changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors can have a material impact to our annual LIFO provision.
Loss Contingencies
In the ordinary course of business, we become involved in lawsuits, administrative proceedings, government subpoenas, government investigations, stockholder demands, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve. We record a liability when it is both probable that a loss has been incurred and the amount iscan be reasonably estimable.estimated. We also perform an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the loss contingency and whether a reasonable estimate of the loss or the range of the loss can made in the footnotes to our financial statements. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made.
Merchandise Inventories
Inventories are stated at Among the lower of cost or market. Cost for approximately 80% of our inventories as of September 30, 2017 and 2016 has been determined usingloss contingencies we considered in accordance with the LIFO method. If we had usedforegoing in connection with the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,467.0 million and $1,624.8 million higher than the amounts reported as of September 30, 2017 and 2016, respectively. We recorded a LIFO credit of $157.8 million in the fiscal year ended September 30, 2017 and LIFO expense of $200.2 million and $542.8 million in fiscal years ended September 30, 2016 and 2015, respectively. The annual LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences, many of which are difficult to predict. Changes to anypreparation of the above factors can have a material impact to our annual LIFO provision.
Share-Based Compensation
We account foraccompanying financial statements were the compensation cost of all share-based payments at fair value. We utilize a binomial option pricing model to determine the fair value of share-based compensation expense, which involves the use of several assumptions, including expected termopioid matters described in Note 14 of the option, expected volatility, risk-free interest rate, dividend yield, and forfeiture rate. The expected term of options represents the period of time that the options granted are expectedNotes to be outstanding and is based upon historical experience. Expected volatility is based upon historical volatility of our common stock as well as other factors, such as implied volatility. The fair value of performance stock units is determined by the grant date market price of our common stock and the compensation expense associated with the non-vested performance stock units is dependent on our periodic assessment of the probability of financial targets being achieved and our estimate of the number of shares that will ultimately be issued.Consolidated Financial Statements.
Supplier Reserves
We establish reserves against amounts due from our suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them. These reserve estimates are established based upon the judgment of management after carefully considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs, and any other pertinent information available to us. We evaluate the amounts due from our suppliers on a continual basis and adjust the reserve estimates when appropriate based upon changes in factual circumstances. An increase or decrease of 0.1% in the 2017 supplier reserve balances as a percentage of trade payables would result in an increase or decrease in cost of goods sold by approximately $25.4 million. The ultimate outcome of any outstanding claim may be different from our estimate.
Liquidity and Capital Resources
The following illustrates our debt structure as of September 30, 2017,2020, including availability under the multi-currency revolving credit facility, the receivables securitization facility, the revolving credit note, and the overdraft facility:
| | | (in thousands) | | Outstanding Balance | | Additional Availability | (in thousands) | | Outstanding
Balance | | Additional
Availability |
| Fixed-Rate Debt: | | |
| | |
| Fixed-Rate Debt: | | | | |
| $400,000, 4.875% senior notes due 2019 | | $ | 398,399 |
| | $ | — |
| |
| $500,000, 3.50% senior notes due 2021 | | 497,877 |
| | — |
| |
| $500,000, 3.40% senior notes due 2024 | | 496,766 |
| | — |
| $500,000, 3.40% senior notes due 2024 | | 498,232 | | | — | |
| $500,000, 3.25% senior notes due 2025 | | 494,950 |
| | — |
| $500,000, 3.25% senior notes due 2025 | | 496,990 | | | — | |
| $750,000, 3.45% senior notes due 2027 | | $750,000, 3.45% senior notes due 2027 | | 743,940 | | | — | |
| $500,000, 2.80% senior notes due 2030 | | $500,000, 2.80% senior notes due 2030 | | 494,045 | | | — | |
| $500,000, 4.25% senior notes due 2045 | | 494,082 |
| | — |
| $500,000, 4.25% senior notes due 2045 | | 494,730 | | | — | |
| $500,000, 4.30% senior notes due 2047 | | $500,000, 4.30% senior notes due 2047 | | 492,755 | | | — | |
| Nonrecourse debt | | Nonrecourse debt | | 58,081 | | | — | |
| Total fixed-rate debt | | 2,382,074 |
| | — |
| Total fixed-rate debt | | 3,278,773 | | | — | |
| | | | | | | | | |
| Variable-Rate Debt: | | |
| | |
| Variable-Rate Debt: | | | | |
| Revolving credit note | | — |
| | 75,000 |
| Revolving credit note | | — | | | 75,000 | |
| Receivables securitization facility due 2019 | | 500,000 |
| | 950,000 |
| |
| Term loans due in 2020 | | 547,860 |
| | — |
| |
| Multi-currency revolving credit facility due 2021 | | — |
| | 1,400,000 |
| |
| Overdraft facility due in 2021 (£30,000) | | 12,121 |
| | 28,066 |
| |
| Term loan due October 2020 | | Term loan due October 2020 | | 399,982 | | | — | |
| Overdraft facility due 2021 (£30,000) | | Overdraft facility due 2021 (£30,000) | | — | | | 38,770 | |
| Receivables securitization facility due 2022 | | Receivables securitization facility due 2022 | | 350,000 | | | 1,100,000 | |
| Multi-currency revolving credit facility due 2024 | | Multi-currency revolving credit facility due 2024 | | — | | | 1,400,000 | |
| Nonrecourse debt | | Nonrecourse debt | | 90,765 | | | — | |
| Total variable-rate debt | | 1,059,981 |
| | 2,453,066 |
| Total variable-rate debt | | 840,747 | | | 2,613,770 | |
| Total debt | | $ | 3,442,055 |
| | $ | 2,453,066 |
| Total debt | | $ | 4,119,520 | | | $ | 2,613,770 | |
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 repurchasespurchases 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 repurchasespurchases 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.requirements, including the opioid litigation payments that are expected to be made over 18 years (see below).
As discussed in Note 14 of the Notes to Consolidated Financial Statements, in the fourth quarter of fiscal 2020, with regard to litigation relating to the distribution of prescription opioid pain medications, we recorded a $6.6 billion ($5.5 billion, net of an income tax benefit) charge. We are in advanced discussions, which are ongoing, to reach a global settlement of the MDL and related state-court litigation brought by certain state and local governmental entities in which our payment would be over 18 years to resolve cases currently filed and that could be filed by states, counties, municipalities, and other government entities. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. The
aforementioned litigation accrual has not and is not expected to have an impact on our compliance with our debt covenants or our ability to pay dividends.
As of September 30, 20172020 and 2016,2019, our cash and cash equivalents held by foreign subsidiaries were $995.7$675.9 million and $582.9$826.8 million, respectively, and are generally based in U.S. dollar denominated holdings. We expect thathave the ability to repatriate the majority of our cash and cash equivalents held by foreign subsidiaries may continue to grow. Amounts held outside of the United States are generally utilized
to support non-U.S. liquidity needs, including future acquisitions of non-U.S. entities, although a portion of these amounts may from time to time be subject to short-term intercompany loans to U.S. subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the United States. We do not have any plans to repatriate these amounts to the United States, as our foreign subsidiaries intend to indefinitely reinvest this cash in foreign investments or foreign operations.without incurring significant 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, canmay require the use of our credit facilities to fund short-term capital needs. Our cash balance in the fiscal years ended September 30, 20172020 and 20162019 needed to be supplemented by intra-period credit facility borrowings to cover short-term working capital needs. Our cash balance in the fiscal year ended September 30, 2016 also needed to be supplemented by intra-period credit facility borrowings to cover a portion of the purchase price of PharMEDium in advance of securing long-term financing. The largest amount of intra-period borrowings under our revolving and securitization credit facilities that was outstanding at any one time during the fiscal years ended September 30, 20172020 and 20162019 was $626.1$39.6 million and $1,018.2$240.6 million, respectively. We had $9,324.7$117.4 million, $8,333.7$606.0 million, and $111.1$25,115.3 million of cumulative intra-period borrowings that were repaid under our credit facilities during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively. Additionally,
In May 2020, we issued $500 million of 2.80% senior notes due May 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 on November 15, 2020.
We used the fiscal year ended September 30, 2016, we borrowed $500.0 million under our receivables securitization facility that we usedproceeds from the 2030 Notes to finance principal payments that we elected to make on the November 2015 Term Loan (see below).
Inearly retirement of the fiscal year ended September 30, 2017, we repaid the $600$500 million of 1.15%3.50% senior notes that becamewere due in 2021 and made a $21.4 million prepayment premium in connection with this early retirement.
In December 2017, we repaid $150issued $750 million of amounts outstanding under3.45% senior notes due December 15, 2027 (the "2027 Notes") and $500 million of 4.30% senior notes due December 15, 2047 ("the 2047 Notes"). The 2027 Notes were sold at 99.76% of the principal amount and have an effective yield of 3.48%. The 2047 Notes were sold at 99.51% of the principal amount and have an effective yield of 4.33%. Interest on the 2027 Notes and the 2047 Notes is payable semi-annually in arrears and commenced on June 15, 2018.
We used the proceeds from the 2027 Notes and the 2047 Notes to finance the early retirement of our term loans.$400 million of 4.875% senior notes that were due in 2019, including the payment of a $22.3 million prepayment premium, and to finance the acquisition of H.D. Smith, which was completed in January 2018.
We have a $1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which expires in November 2021, with a syndicate of lenders.lenders, which is scheduled to expire in September 2024. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based upon our debt rating and ranges from 70 basis points to 110112.5 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 September 30, 2017)2020) and from 0 basis points to 1012.5 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 upon our debt rating, ranging from 5 basis points to 1512.5 basis points, annually, of the total commitment (9 basis points as of September 30, 2017)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 September 30, 2017.2020.
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 September 30, 20172020 and 2016.2019.
We have a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which expiresis scheduled to expire in November 2019. In fiscal 2016, we utilized the capacity to borrow $500 million on the Receivables Securitization Facility to finance $500 million of principal payments that we elected to make on the November 2015 Term Loan (defined below), as the Receivables Securitization Facility bears interest at a lower rate.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 upon 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 September 30, 2017.2020.
In April 2019, we elected to repay $150.0 million of our outstanding Receivables Securitization Facility balance prior to the scheduled maturity date.
In connection with the Receivables Securitization Facility, AmerisourceBergen Drug Corporation sellsand a specialty distribution subsidiary sell on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. We use the facility as a financing vehicle because it generally offers an attractive interest rate relative to other financing sources.
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.
In February 2015,October 2018, we entered intorefinanced $400 million of outstanding term loans by issuing a $1.0 billionnew $400 million variable-rate term loan ("February 2015October 2018 Term Loan"), which matures in October 2020. Through September 30, 2017, we elected to make principal payments, prior to the scheduled repayment dates, of $775 million on the February 2015 Term Loan, and as a result, our next required principal payment is due upon maturity. The February 2015October 2018 Term Loan bears interest at a rate equal either to a base rate plus a margin, or LIBOR, plus a margin.margin of 65 basis points. The margin is based upon our public debt ratings and ranges from 75 basis points to 125 basis points over LIBOR (100 basis points as of September 30, 2017) and 0 to 25 basis points over a base rate. The February 2015October 2018 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which we were compliant as of September 30, 2017. We used2020.
In October 2020, we repaid the proceeds from the February 2015$400 million October 2018 Term Loan to finance a portion of the cash consideration paid in connection with the acquisition of MWI.that became due.
In November 2015, we entered into a $1.0 billion variable-rate term loan ("November 2015 Term Loan"), which matures in 2020. Through September 30, 2017, we made a scheduled principal payment, as well as other principal payments prioraddition to the scheduled repayment dates totaling $675 million on2027 Notes, the November 2015 Term Loan,2030 Notes, and as a result, our next required principal payment is due upon maturity. The November 2015 Term Loan bears interest at a rate equal either to a base rate, plus a margin, or LIBOR, plus a margin. The margin is based upon our public debt ratings and ranges from 75 basis points to 125 basis points over LIBOR (100 basis points as of September 30, 2017) and 0 basis points to 25 basis points over a base rate. The November 2015 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which2047 Notes, we are compliant as of September 30, 2017. We used the proceeds from the November 2015 Term Loan to finance a portion of the cash consideration paid in connection with the acquisition of PharMEDium.
We have $400 million of 4.875% senior notes due November 15, 2019, $500 million of 3.50% senior notes due November 15, 2021, $500 million of 3.40% senior notes due May 15, 2024, $500 million of 3.25% senior notes due March 1, 2025, and $500 million of 4.25% senior notes due March 1, 2045 (collectively, the "Notes"). Interest on the Notes is payable semiannually in arrears.
In August 2013, our board Nonrecourse debt is comprised of directors authorized a program allowing usshort-term and long-term debt belonging to purchase up to $750 million in shares of our common stock, subject to market conditions. During the fiscal years ended September 30, 2014Brazil subsidiaries and 2015, we purchased $174.7 millionis repaid solely from the Brazil subsidiaries' cash flows and $300.8 million, respectively, under this share repurchase program. Duringsuch debt agreements provide that the six months ended March 31, 2016, we purchased $100.0 million of our common stock under this program. In May 2016, our board of directors authorized a new share purchase program that, together with availability remaining under the existing August 2013 share repurchase program, permitted us to purchase up to $750 million in shares of our common stock, subject to market conditions. In September 2016, we entered into an Accelerated Share Repurchase ("ASR") transaction with a financial institution and paid $400 million for shares of our common stock. The initial payment of $400 million funded stock purchases of $380.0 million and a share holdback of $20.0 million. The ASR transaction was settled in November 2016, at which time the financial institution delivered additional shares to us. The number of shares ultimately received was based upon the volume-weighted average price of our common stock during the termrepayment of the ASR. We appliedloans (and interest thereon) is secured solely by the $400 million ASR tocapital stock, physical assets, contracts, and cash flows of the May 2016 share repurchase program. In addition to the ASR, during the fiscal year ended September 30, 2016, we purchased $231.2 million of our common stock under the May 2016 program. During the fiscal year ended September 30, 2017, we purchased $118.8 million of our common stock to complete our authorization under this program.Brazil subsidiaries.
In November 2016, our board of directors authorized a new share repurchase program allowing us to purchase up to $1.0 billion in shares of our common stock, subject to market conditions. During the fiscal year ended September 30, 2017,2018, we purchased $211.1$663.1 million of our common stock under this program. Asprogram, which included $24.0 million of September 30, 2017, we had $788.9 million of availability remaining under this program.
In March 2013, we and WBA entered into various agreements and arrangements pursuant to which subsidiaries of WBA were granted the right to purchase a minority equity position2018 purchases that cash settled in us, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of our common stock in open market transactions (approximately 7% of our common stock on a fully diluted basis as of the date of issuance of the Warrants described below, assuming their exercise in full). In connection with these arrangements, wholly-owned subsidiaries of WBA were issued (a) warrants to purchase up to an aggregate of 22,696,912 shares of our common stock at an exercise price of $51.50 per share, exercisable during a six-month period beginning in March 2016 (the "2016 Warrants"), and (b) warrants to purchase up to 22,696,912 shares of our common stock at an exercise price of $52.50 per share, exercisable during a six-month period beginning in March 2017 (the "2017 Warrants" and together with the 2016 Warrants, the "Warrants").
In June 2013, we commenced a hedging strategy by entering into a contract with a financial institution pursuant to which we executed a series of issuer capped call transactions ("Capped Calls"). The Capped Calls gave us the right to buy shares of our common stock subject to the Warrants at specified prices at maturity. This hedge transaction was completed in January 2014 and included the purchase of Capped Calls on a total of 27.2 million shares of our common stock for a total premium of $368.7 million.
Subsequently, we paid a premium of $100.0 million in January 2015 to increase the cap price on certain of the Capped Calls subject to the 2016 Warrants. The Capped Calls allowed us to acquire shares of our common stock at strike prices of $51.50 and $52.50 and have expiration dates ranging from February 2016 through October 2017. The Capped Calls permitted net share settlement, which is limited by caps on the market price of our common stock. We accounted for the Capped Calls as equity contracts and therefore the above premiums were recorded as a reduction to paid-in capital.
In2018. During the fiscal yearsyear ended September 30, 2014 and 2015,2019, we purchased $1,774.1$125.8 million of our common stock under special share repurchase programsthis program, which excluded $24.0 million of September 2018 purchases that cash settled in October 2018, to further mitigate the potentially dilutive effect of the Warrants and supplementcomplete our previously executed warrant hedging strategy.authorization under this program.
In March 2015, we further supplemented our hedging strategy by entering into a contract with a financial institution pursuant to which we executed a series of issuer call options ("Call Options"). The Call Options gave us the right to buy shares of our common stock subject to the Warrants at specified prices between April 2015 and October 2015. In total, we purchased Call Options on six million shares of our common stock for a total premium of $80.0 million. We accounted for the Call Options as equity contracts and therefore, the above premium was recorded as a reduction to paid-in capital.
In September 2015,2018, our board of directors authorized a special share repurchase program allowing us to purchase up to $2.4$1.0 billion inof our shares of our common stock, subject to market conditions. During the fiscal year ended September 30, 2016,2019, we purchased $1,535.1$538.9 million of our common stock under (all underthis program, which included $14.8 million of September 2019 purchases that cash settled in October 2019. During the Call Options and Capped Calls) this program. Wefiscal year ended September 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 September 30, 2020, we had $740.9$55.5 million of availability remaining under this specialprogram.
In May 2020, our board of directors authorized a new share repurchase program as of September 30, 2016. However, this availability will not be utilized as the earnings per share dilutive effect of the Warrants was fully mitigated byallowing us concurrent with the August 2016 exercise of the 2017 Warrants (see below).
In March 2016, the 2016 Warrants were exercised for $1,168.9 million in cash. In August 2016, the 2017 Warrants were amended so that they became exercisable in whole or in part during the six-month period beginning in August 2016 at an exercise price of $52.50. In August 2016, the 2017 Warrants were exercised by WBA for $1,191.6 million in cash.
The earnings per share dilutive effect of the Warrants was fully mitigated by our hedging a portionto purchase up to $500 of our obligation to deliveroutstanding shares of common stock, with a financial institution and repurchasing additional shares of our common stock under the special share repurchase programs, as described above, for our own account over time.subject to market conditions.
The following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancelablenoncancellable operating leases, and financing obligations, and minimum payments on our other commitments as of September 30, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period (in thousands) | | Debt, Including Interest Payments | | Operating
Leases | | Other Commitments | | Total |
| Within 1 year | | $ | 617,096 | | | $ | 117,680 | | | $ | 97,192 | | | $ | 831,968 | |
| 1-3 years | | 628,756 | | | 216,196 | | | 66,970 | | | 911,922 | |
| 4-5 years | | 1,210,455 | | | 177,253 | | | 84,898 | | | 1,472,606 | |
| After 5 years | | 3,285,045 | | | 376,396 | | | 58,251 | | | 3,719,692 | |
| Total | | $ | 5,741,352 | | | $ | 887,525 | | | $ | 307,311 | | | $ | 6,936,188 | |
|
| | | | | | | | | | | | | | | | | | | | |
| Payments Due by Period (in thousands) | | Debt, Including Interest Payments | | Operating Leases | | Financing Obligations 1 | | Other Commitments | | Total |
| Within 1 year | | $ | 126,298 |
| | $ | 61,676 |
| | $ | 28,706 |
| | $ | 50,585 |
| | $ | 267,265 |
|
| 1-3 years | | 1,332,536 |
| | 95,338 |
| | 62,477 |
| | 35,661 |
| | 1,526,012 |
|
| 4-5 years | | 963,936 |
| | 61,952 |
| | 58,656 |
| | 6,061 |
| | 1,090,605 |
|
| After 5 years | | 2,052,750 |
| | 76,511 |
| | 159,345 |
| | — |
| | 2,288,606 |
|
| Total | | $ | 4,475,520 |
| | $ | 295,477 |
| | $ | 309,184 |
| | $ | 92,307 |
| | $ | 5,172,488 |
|
| | | | | | | | | | | |
1 Represents the portion of future minimum lease payments relating to facility leases where we were determined to be the accounting owner (see Note 1 of the Notes to Consolidated Financial Statements). These payments are recognized as reductions to the financing obligation and as interest expense and exclude the future non-cash termination of the financing obligation. |
The 2017 Tax Act required a one-time transition tax to be recognized on historical foreign earnings and profits. We outsourcecurrently estimate that our liability related to IBM Global Services a significant portionthe transition tax is $182.6 million, net of our data center operations. The remaining commitment under our arrangement, which expires in January 2021, is approximately $67.7 millionoverpayments and tax credits, as of September 30, 2017, of2020, which $35.0 million represents ouris payable in installments over a six-year period commencing in January 2021. The transition tax commitment in fiscal 2018, and is included in "Other commitments"Commitments" in the above table.
Our liability for uncertain tax positions was $338.4$498.3 million (including interest and penalties) as of September 30, 2017. This2020. Included in this balance is $371.5 million for an uncertain tax position related to the $6.6 billion legal accrual for litigation related to the distribution of prescription opioid pain medications, as disclosed in Note 14 of the Notes to Consolidated Financial Statements. As of September 30, 2020, a settlement has not been reached, and, therefore, we applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible for U.S. federal and state purposes. In estimating the amount that would ultimately be deductible, we considered prior U.S. tax case law, the amount and character of the damages sought in the opioid litigation, the inherent uncertainty related to litigation of this nature and magnitude, and other relevant factors. While we believe that our estimate of the uncertain tax position appropriately reflects these considerations, it is reasonably possible that the uncertain tax position recognized as of September 30, 2020 may be revised in future periods as the settlement with the various plaintiffs is finalized. The remaining amount of the liability represents an estimate of tax positions that we have taken in our tax returns or expect to take in future 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 fiscal yearyears ended September 30, 2017,2020 and 2019, our operating activities provided $1,504.1cash of $2,207.0 million of cash in comparison to cash provided of $3,178.5and $2,344.0 million, in the prior fiscal year.respectively. Cash provided by operations in the fiscal year ended September 30, 20172020 was principally the result of an increase in the accrued litigation liability of $6,198.9 million, an increase in accounts payable of $1,473.4$3,300.8 million, and an increase in accrued expenses of $661.2$524.0 million, non-cash items of $672.5 million, and net income of $364.5 million,largely offset in part by a net loss of $3,399.6 million, an increase in accounts receivable of $1,277.9$1,629.0 million, an increase in inventories of $1,621.1 million, non-cash items of $662.4 million, and an increase in merchandise inventoriesincome taxes receivable of $431.5$482.6 million. The non-cash itemsincreases in the accrued litigation liability and accrued expenses were comprised primarily
prescription opioid pain medications (see Note 14 of $262.4 million of depreciation expense, $169.9 million of amortization expense, a LIFO credit of $157.8 million, and $319.1 million of deferred income tax expense.the Notes to Consolidated Financial Statements). The increase in accounts payable was primarily driven by the increase in merchandise inventories and the timing of scheduled payments to our suppliers. We increased our merchandise inventories as of September 30, 2017 to support the increase in business volume. The increase in accrued expenses was primarily driven by a current year litigation accrual of $625.0 million (see Note 13 of the Notes to Consolidated Financial Statements). The increase in accounts receivable was the result of our revenue growth and a gradual changethe timing of payments from our customers. The increase in payment terms with our largest customer that occurred between May 2016 and February 2017 as partinventories was due to an increase in business volume. Non-cash items were comprised primarily of a contract amendment that, among other things, extendeddeferred income tax benefit of $1,545.0 million primarily related to a legal accrual in connection with opioid lawsuits and Swiss Tax Reform, offset in part by a $361.7 million impairment of PharMEDium's long-lived assets (see Note 1 of the termNotes to Consolidated Financial Statements), $290.7 million of our relationshipdepreciation expense, and $117.3 million of amortization expense. The increase in income taxes receivable was the result of a benefit recorded in connection with certain discrete items (see Note 5 of the customer.Notes to Consolidated Financial Statements).
Deterioration inof general economic conditions, among other factors, could adversely affect the amountnumber of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, could reduce purchases by our customers. In addition, volatility in financial markets may also negatively impact our customers' ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our customers or changes in the ability of our customers to remit payments to us could adversely affect our revenue growth, our profitability, and our cash flow from operations.
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 an annual 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.
|
| | | | | | |
| | | Fiscal Year Ended September 30, |
| | | 2017 | | 2016 | | 2015 |
| Days sales outstanding | | 23.8 | | 21.6 | | 20.0 |
| Days inventory on hand | | 30.1 | | 30.0 | | 29.5 |
| Days payable outstanding | | 57.4 | | 56.9 | | 51.9 |
The increase in days sales outstanding from the prior fiscal year was the result of a gradual change in payment terms with our largest customer that occurred between May 2016 and February 2017. | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| | | 2020 | | 2019 | | 2018 |
| Days sales outstanding | | 24.8 | | 25.2 | | 24.5 |
| Days inventory on hand | | 28.9 | | 28.4 | | 29.9 |
| Days payable outstanding | | 57.8 | | 57.6 | | 56.7 |
Our cash flows from operating activities can vary significantly from period to period based upon fluctuations in our period end working capital. 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 fiscal year ended September 30, 20172020 included $125.3$150.7 million of interest payments and $105.0$139.4 million of income tax payments, net of refunds. Operating cash flows during the fiscal year ended September 30, 20162019 included $123.5$167.4 million of interest payments and $17.5$117.7 million of income tax payments, net of refunds. Operating cash flows during the fiscal year ended September 30, 2018 included $162.1 million of interest payments and $104.0 million of income tax payments, net of refunds.
During the fiscal years ended September 30, 2019 and 2018, our operating activities provided cash of $2,344.0 million and $1,411.4 million, respectively. Cash provided by operations in the fiscal year ended September 30, 2016, our operating activities provided $3,178.5 million of cash in comparison to cash provided by operations of $3,922.2 million in fiscal 2015. Cash provided by operations in fiscal 20162019 was principally the result of an increase in accounts payable of $3,011.5$1,561.0 million, non-cash items of $1,120.7 million, and net income of $1,427.9 million, and non-cash items of $722.4$854.1 million, offset in part by an increase in accounts receivable of $912.7 million and an increase in merchandise inventories of $1,107.3$1,241.9 million. The non-cash items were comprised primarily of $232.5 million of depreciation expense, $200.2 million of LIFO expense, and $159.6 million of amortization expense. The increase in accounts payable was primarily driven by the increase in merchandise inventories and the timing of scheduled payments to our suppliers. AccountsNon-cash items were comprised primarily of a $570 million impairment of PharMEDium's long-lived assets (see Note 1 of the Notes to Consolidated Financial Statements), $321.1 million of depreciation expense, and $176.4 million of amortization expense. The increase in accounts receivable and merchandise inventories increased as awas the result of our overall revenue growth.growth and the timing of payments from our customers.
Capital expenditures in the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 were $466.4$369.7 million, $464.6$310.2 million, and $231.6$336.4 million, respectively. Significant capital expenditures in fiscal 20172020 included investments in various technology initiatives, including costs related to enhancing and upgrading our primary information technology operating systems. Significant capital expenditures in fiscal 2019 included costs associated with expanding distribution capacitythe construction of a new support facility and technology initiatives, including costs related to enhancing and upgrading our enterprise resource planning systems ("ERP").information technology systems. Significant capital expenditures in fiscal 2016 included costs associated with expanding distribution capacity, technology initiatives, including costs related to the development of track-and-trace technology, and the expansion of support facilities. Significant capital expenditures in fiscal 20152018 included technology initiatives, including costs related to the further development ofenhancing and upgrading our primary ERP system,information technology systems and costs associated with building our nationalexpanding distribution center, and expansion of support facilities.capacity.
We currently expect to spend approximately $325$400 million for capital expenditures during fiscal 2018.2021. Larger 20182021 capital expenditures will include investments related to various technology initiatives and new facilities.
We acquired businesses to support customer ordering, track-and-trace technology,our animal health business for $54.0 million and new operating systems for our business units.
Cost of acquired companies, net of cash acquired,$70.0 million in the fiscal years ended September 30, 2019 and 2018, respectively. In the fiscal year ended September 30, 20162018, we acquired H.D. Smith, the largest independent pharmaceutical wholesaler in the United States, for $815.0 million. In addition, we made incremental investments in Brazil totaling $78.1 million. The cash used for the above investments was $2,731.4offset by $179.6 million and primarily consisted of our PharMEDium acquisition. Cost of acquired companies, net of cash acquired,consolidated in connection with the fiscal year ended September 30, 2015 was $2,633.4 million and primarily consistedBrazil investments (see Note 2 of our MWI acquisition.
the Notes to Consolidated Financial Statements).
Net cash used in financing activities in the fiscal year ended September 30, 2017 primarily included the $600 million repayment of our 1.15% senior notes, $329.92020 principally related to $420.4 million in purchases of our common stock, and $320.3$343.6 million in cash dividends paid on our common stock.
Net cash provided by financing activities in the fiscal year ended September 30, 2016 primarily included $2,360.5 million received upon the exercise of the Warrants by WBA and $1.0 billion of borrowings under our November 2015 Term Loan, offset in part by $2,266.3 million in purchases of our common stock. We used a portion of the proceeds from the exercise of the Warrants to purchase our common stock under our special share repurchase program.We used the proceeds from the November 2015 Term Loan to fund a portion of our November 2015 acquisition of PharMEDium.
Net cash used in financing activities in the fiscal year ended September 30, 2015 primarily included $1.0 billion of borrowings under our February 2015 Term Loan and $996.4 million of proceeds2019 principally related to the February 2015 issuance of our 2025 Notes and 2045 Notes, offset in part by $1,859.1$674.0 million in purchases of our common stock and $180.0$339.0 million to purchase or amend Capped Calls and Call Options, to hedge the potential dilution associated with the Warrants upon their exercise. Wein cash dividends paid on our common stock.
Net cash used the proceeds from thesein financing activities to fund a portionin the fiscal year ended September 30, 2018 principally included the early retirement of the $400 million of 4.875% senior notes, $639.2 million in purchases of our February 2015 acquisitioncommon stock, and $333.0 million in cash dividends paid on our common stock, offset in part by the issuance of MWI.$750.0 million of 3.45% senior notes and $500 million of 4.3% senior notes.
Our board of directors approved the following quarterly dividend increases:
| | | Dividend Increases | Dividend Increases | Dividend Increases |
| | | Per Share | | | | | Per Share | | |
| Date | | New Rate | | Old Rate | | % Increase | Date | | New Rate | | Old Rate | | % Increase |
| November 2014 | | $0.290 | | $0.235 | | 23% | |
| November 2015 | | $0.340 | | $0.290 | | 17% | |
| November 2016 | | $0.365 | | $0.340 | | 7% | |
| November 2017 | | $0.380 | | $0.365 | | 4% | November 2017 | | $0.380 | | $0.365 | | 4% |
| November 2018 | | November 2018 | | $0.400 | | $0.380 | | 5% |
| January 2020 | | January 2020 | | $0.420 | | $0.400 | | 5% |
| November 2020 | | November 2020 | | $0.440 | | $0.420 | | 5% |
We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of our board of directors and will depend upon our future earnings, financial condition, capital requirements, and other factors.
Market Risk
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 uponon our working capital requirements. We had $1.1$0.8 billion of variable-rate debt outstanding as of September 30, 2017.2020. 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 September 30, 2017.2020.
We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $2,435.1$4,597.7 million in cash and cash equivalents as of September 30, 2017.2020. The unfavorable impact of a hypothetical decrease in
interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every $100 million of cash invested that is in excess of variable-rate debt, a 10 basis10-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 Euro, the U.K. Pound Sterling, the Canadian Dollar, and the Brazilian Real. Revenue from our foreign operations is approximately onetwo 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. As of September 30, 2017, we had one foreign currency denominated contract outstanding that hedges the foreign currency exchange risk of a C$27.6 million outstanding note.
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," "will," "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 changechanges in circumstances.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 pharmaceutical market growth rates; 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;channel; 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; increased public concern over the abuse of opioid medications;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, including the reserve recorded in connectioncosts; failure to comply with the proceedings with the United States Attorney’s Office for the Eastern District of New York;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'sCompany’s tax positions and/or the Company'sCompany’s tax liabilities or adverse resolution of challenges to the Company'sCompany’s tax positions; regulatory action in connection with the production, labeling or packaging of products compounded by our compounded sterile preparations (CSP) business; failure to realize the expected benefits from our reorganization and other business process initiatives; the acquisition of businesses that do not perform as expected, or that are difficult to integrate or control, including the integration of H. D. Smith and PharMEDium, or the inability to capture all of the anticipated synergies related thereto; managing foreign expansion, including non-compliance with the U.S. Foreign Corrupt Practices Act, anti-bribery laws, and economic sanctions and import laws and regulations; declining economic conditions in the United States and abroad; financial market volatility and disruption; substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer;customer, including as a result of COVID-19; the loss, bankruptcy or insolvency of a major supplier;supplier, including as a result of COVID-19; financial market volatility and disruption; 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'sCompany’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'sCompany’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 Management's Discussion and Analysis of Financial Condition and Results of Operations, (ii) in Item 1A (Risk Factors), (iii) Item 1 (Business), (iv) elsewhere in this report, and (v) 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's most significant market risks are the effects of changing interest rates, foreign currency risk, and the changes in the price of the Company's common stock. See discussion on page 4043 under the heading "Market Risk," which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and the Board of Directors and Stockholders of AmerisourceBergen Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AmerisourceBergen Corporation and subsidiaries (the Company) as of September 30, 20172020 and 2016, and2019, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2017. Our audits also included2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). TheseIn our opinion, the consolidated financial statements and schedule arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statementsCompany at September 30, 2020 and schedule based on our audits.
2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 19, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
In our opinion,The critical audit matters communicated below are matters arising from the current period audit of the financial statements referredthat were communicated or required to above present fairly,be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in all material respects, the consolidated financial position of AmerisourceBergen Corporation and subsidiaries at September 30, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles. Also, inany way our opinion on the related financial statement schedule, when considered in relation to the basicconsolidated financial statements, taken as a whole, presents fairly in all material respectsand we are not, by communicating the information set forth therein.
We also have audited, in accordance withcritical audit matters below, providing separate opinions on the standards ofcritical audit matters or on the Public Company Accounting Oversight Board (United States), AmerisourceBergen Corporation’s internal control over financial reporting as of September 30, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated November 21, 2017 expressed an unqualified opinion thereon.
accounts or disclosures to which they relate. |
| | | | |
| Legal Matters and Contingencies - Opioid Lawsuits |
| Description of the Matter | /s/As discussed in Note 14 of the consolidated financial statements, the Company is involved in a significant number of lawsuits with counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as several tribes relating to the distribution of prescription opioid pain medications (“opioid litigation”). The Company recognizes a liability for those legal contingencies for which it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount is reasonably estimable. The Company has recognized a $6.6 billion ($5.5 billion after tax) charge related to the opioid litigation for the year ended September 30, 2020 and has disclosed that it is unable to estimate the range of possible loss in excess of the amount accrued. In connection with this charge, the Company recognized a related income tax benefit, which reflects an unrecognized tax benefit resulting from uncertainty in the amount that is more likely than not to be deductible for U.S. federal and state income tax purposes based in part upon the final terms and conditions of a settlement agreement. The Company used significant judgment in measuring the amount of income tax benefit that qualified for recognition and may ultimately be deductible for U.S. federal and state purposes. |
| |
| | | | | |
| Auditing management’s determination of whether the opioid litigation liability is probable and reasonably estimable, and the related measurement and disclosures, is highly subjective and requires significant judgment. For instance, auditing management’s judgments related to the opioid litigation was challenging due to the significant judgment applied in determining the timing and magnitude of the liability and whether a range of possible loss in excess of the amount accrued is reasonably estimable, based upon the progress of settlement discussions and a potential settlement framework. In addition, auditing management's estimate of the amount of income tax benefit related to the Company's uncertain tax position that qualified for recognition was challenging because the assumptions and estimates require significant judgment as they are based upon settlement terms and documentation, including provisions related to deductibility, that have not been finalized. |
| |
How We Addressed the Matter in Our Audit
| We tested the Company’s internal controls that address the risks of material misstatement related to the completeness, valuation, presentation and disclosure of the opioid litigation liability and related uncertain tax position. This included testing controls related to the Company’s process for identification, recognition, measurement and disclosure of the opioid litigation and testing controls related to the Company’s process to assess the technical merits of its tax position, including the Company’s assessment as to the amount of benefit that is more likely than not to be realized upon ultimate settlement with taxing authorities. For example, we inspected management’s review of correspondence from external legal counsel, historical legal settlements executed by the Company and those executed by other defendants, actions and statements made by the Company, and communications with the plaintiffs to determine the completeness and accuracy of the opioid litigation liability and the related financial statement footnote disclosures. |
| |
| To test the Company’s opioid litigation liability, our substantive audit procedures included, among others, testing the completeness of the opioid litigation contingencies subject to evaluation by the Company and evaluating the Company’s analysis of its assessment of the probability of outcome by considering the progress of settlement discussions involving the opioid litigation and communications with plaintiffs, as well as the experience of other similar entities when evaluating the Company’s conclusions. We inspected responses to inquiry letters sent to both internal and external legal counsel, held discussions with internal and external legal counsel to confirm our understanding of the settlement discussions, and obtained written representations from executives of the Company. We also compared the Company’s assessment with its relevant history of similar legal contingencies that have been settled or otherwise resolved to evaluate the consistency of the Company’s assessment for outstanding legal contingencies at the balance sheet date. In addition, we also evaluated the adequacy of the Company’s financial statement disclosures. |
| |
| We involved our tax subject matter professionals in assessing the technical merits and measurement of the Company’s tax position related to the opioid litigation liability. We examined the Company’s analysis and evaluated the underlying facts upon which the tax position was based. We used our knowledge of historical settlement activity to evaluate the Company’s measurement of the uncertain tax position associated with the opioid litigation. This included evaluating third-party advice obtained by the Company and performing inquiries of the Company’s external income tax advisers. We also evaluated the adequacy of the Company’s financial statement disclosures and obtained written representations from executives of the Company related to this income tax matter. |
| |
| | | | | |
| Other Legal Matters and Contingencies |
| Description of the Matter | As discussed in Note 14 of the consolidated financial statements, in addition to the opioid litigation addressed above, the Company is involved in government subpoenas, civil investigative demands, derivative actions, and other disputes. The Company recognizes a liability for those legal contingencies for which it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount is reasonably estimable. The Company also performs an assessment of the materiality of legal contingencies where a loss is either reasonably possible or it is reasonably possible that an exposure to loss exists in excess of the amount accrued. If it is reasonably possible that such a loss or an additional loss may have been incurred and the effect on the consolidated financial statements is material, the Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the consolidated financial statements. |
| |
| Auditing management’s determination of whether a loss for a legal contingency is probable and reasonably estimable, reasonably possible or remote, and the related measurement and disclosures, is highly subjective and requires significant judgment. For instance, auditing management’s judgments was challenging due to the significant judgment applied in determining the likelihood of resolution of the matters through settlement or litigation. |
| |
| How We Addressed the Matter in Our Audit | We tested the Company’s internal controls that address the risks of material misstatement related to the completeness, valuation, presentation and disclosure of legal contingencies. This included testing controls related to the Company’s process for identification, recognition, measurement and disclosure of legal contingencies. For example, we tested controls over management’s review of correspondence from external legal counsel, historical legal settlements executed by the Company and those executed by other defendants, actions and statements made by the Company, and communications with the plaintiffs to determine the completeness and accuracy of legal contingencies and the related financial statement footnote disclosures. We also tested controls over management’s assessment of the likelihood of the resolution of the matters through settlement or litigation. |
| |
| To test the Company’s legal contingencies, our substantive audit procedures included, among others, testing the completeness of the legal contingencies subject to evaluation by the Company and evaluating the Company’s analysis of its assessment of the probability of outcome for each material legal contingency through inspection of responses to inquiry letters sent to both internal and external legal counsel, discussions with internal and external legal counsel to confirm our understanding of the allegations, and obtaining written representations from executives of the Company. We also compared the Company’s assessment with its relevant history of similar legal contingencies that have been settled or otherwise resolved to evaluate the consistency of the Company’s assessment for outstanding legal contingencies at the balance sheet date. |
| |
| For those legal contingencies for which the Company has determined that a loss is probable and reasonably estimable and is therefore required to be recognized, and for those legal contingencies for which the Company has determined that a loss is either probable or reasonably possible, but the Company is unable to estimate the range of loss, and is therefore required to be disclosed, we evaluated the method of measuring the amounts of the recorded and disclosed contingencies. We assessed the Company’s estimate of the amount of the loss, for both contingencies that are probable and reasonably possible, through inspection of responses to inquiry letters sent to both internal and external legal counsel, direct discussions with internal and external legal counsel, inspection of court rulings, and inspection of settlement agreements. We also obtained written representations from executives of the Company. |
| |
We have served as the Company's auditor since 1985.
Philadelphia, Pennsylvania
November 21, 2017
19, 2020
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | September 30, | | September 30, |
| (in thousands, except share and per share data) | | 2017 | | 2016 | (in thousands, except share and per share data) | | 2020 | | 2019 |
| ASSETS | | |
| | |
| ASSETS | | | | |
| Current assets: | | |
| | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 2,435,115 |
| | $ | 2,741,832 |
| Cash and cash equivalents | | $ | 4,597,746 | | | $ | 3,374,194 | |
Accounts receivable, less allowances for returns and doubtful accounts: 2017 — $1,050,361; 2016 — $905,345 | | 10,303,324 |
| | 9,175,876 |
| |
| Merchandise inventories | | 11,461,428 |
| | 10,723,920 |
| |
Accounts receivable, less allowances for returns and doubtful accounts: 2020 — $1,417,308; 2019 — $1,222,906 | | Accounts receivable, less allowances for returns and doubtful accounts: 2020 — $1,417,308; 2019 — $1,222,906 | | 13,846,301 | | | 12,386,879 | |
| Inventories | | Inventories | | 12,589,278 | | | 11,060,254 | |
| Right to recover asset | | Right to recover asset | | 1,344,649 | | | 1,147,483 | |
| Income tax receivable (Note 5) | | Income tax receivable (Note 5) | | 488,428 | | | 5,859 | |
| Prepaid expenses and other | | 103,432 |
| | 210,219 |
| Prepaid expenses and other | | 189,300 | | | 157,385 | |
| Total current assets | | 24,303,299 |
| | 22,851,847 |
| Total current assets | | 33,055,702 | | | 28,132,054 | |
| | | | | | | | | |
| Property and equipment, at cost: | | |
| | |
| |
| Land | | 40,302 |
| | 40,290 |
| |
| Buildings and improvements | | 979,589 |
| | 859,148 |
| |
| Machinery, equipment, and other | | 2,071,314 |
| | 1,717,298 |
| |
| Total property and equipment | | 3,091,205 |
| | 2,616,736 |
| |
| Less accumulated depreciation | | (1,293,260 | ) | | (1,086,054 | ) | |
| Property and equipment, net | | 1,797,945 |
| | 1,530,682 |
| Property and equipment, net | | 1,484,808 | | | 1,770,516 | |
| | | | | | |
| Goodwill | | 6,044,281 |
| | 5,991,497 |
| Goodwill | | 6,706,719 | | | 6,705,507 | |
| Other intangible assets | | 2,833,281 |
| | 2,967,849 |
| Other intangible assets | | 1,886,107 | | | 2,294,836 | |
| Deferred income taxes | | Deferred income taxes | | 361,640 | | | 0 | |
| Other assets | | 337,664 |
| | 295,626 |
| Other assets | | 779,854 | | | 269,067 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 35,316,470 |
| | $ | 33,637,501 |
| TOTAL ASSETS | | $ | 44,274,830 | | | $ | 39,171,980 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| | |
| |
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | | | |
| | | | | | |
| Current liabilities: | | |
| | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 25,404,042 |
| | $ | 23,926,320 |
| Accounts payable | | $ | 31,705,055 | | | $ | 28,385,074 | |
| Accrued expenses and other | | 1,402,002 |
| | 743,839 |
| Accrued expenses and other | | 1,646,763 | | | 1,057,208 | |
| Short-term debt | | 12,121 |
| | 610,210 |
| Short-term debt | | 501,259 | | | 139,012 | |
| Total current liabilities | | 26,818,165 |
| | 25,280,369 |
| Total current liabilities | | 33,853,077 | | | 29,581,294 | |
| | | | | | | | | |
| Long-term debt | | 3,429,934 |
| | 3,576,493 |
| Long-term debt | | 3,618,261 | | | 4,033,880 | |
| Long-term financing obligation | | 351,635 |
| | 275,991 |
| |
| Long-term financing obligation (Note 1) | | Long-term financing obligation (Note 1) | | 0 | | | 320,518 | |
| Accrued income taxes | | Accrued income taxes | | 284,845 | | | 284,075 | |
| Deferred income taxes | | 2,492,612 |
| | 2,214,774 |
| Deferred income taxes | | 686,485 | | | 1,860,195 | |
| Other liabilities | | 159,663 |
| | 160,470 |
| Other liabilities | | 472,855 | | | 98,812 | |
| Accrued litigation liability | | Accrued litigation liability | | 6,198,943 | | | 0 | |
| Commitments and contingencies (Note 14) | | Commitments and contingencies (Note 14) | |
| | | | | | |
| Stockholders' equity: | | |
| | |
| |
Common stock, $0.01 par value — authorized, issued, and outstanding: 2017 — 600,000,000 shares, 280,584,076 shares and 217,993,598 shares; 2016 — 600,000,000 shares, 277,753,762 shares and 220,050,502 shares | | 2,806 |
| | 2,778 |
| |
| Stockholders' (deficit) equity: | | Stockholders' (deficit) equity: | | | | |
Common stock, $0.01 par value — authorized, issued, and outstanding: 2020 — 600,000,000 shares, 287,790,479 shares and 204,226,465 shares; 2019 — 600,000,000 shares, 285,295,170 shares and 206,760,654 shares | | Common stock, $0.01 par value — authorized, issued, and outstanding: 2020 — 600,000,000 shares, 287,790,479 shares and 204,226,465 shares; 2019 — 600,000,000 shares, 285,295,170 shares and 206,760,654 shares | | 2,878 | | | 2,853 | |
| Additional paid-in capital | | 4,517,635 |
| | 4,333,001 |
| Additional paid-in capital | | 5,081,776 | | | 4,850,142 | |
| Retained earnings | | 2,395,218 |
| | 2,303,941 |
| Retained earnings | | 518,335 | | | 4,235,491 | |
| Accumulated other comprehensive loss | | (95,850 | ) | | (114,308 | ) | Accumulated other comprehensive loss | | (108,830) | | | (111,965) | |
| Treasury stock, at cost: 2017 — 62,590,478 shares; 2016 — 57,703,260 shares | | (4,755,348 | ) | | (4,396,008 | ) | |
| Total stockholders' equity | | 2,064,461 |
| | 2,129,404 |
| |
| Treasury stock, at cost: 2020 — 83,564,014 shares; 2019 — 78,534,516 shares | | Treasury stock, at cost: 2020 — 83,564,014 shares; 2019 — 78,534,516 shares | | (6,513,083) | | | (6,097,604) | |
| Total AmerisourceBergen Corporation stockholders' (deficit) equity | | Total AmerisourceBergen Corporation stockholders' (deficit) equity | | (1,018,924) | | | 2,878,917 | |
| Noncontrolling interest | | Noncontrolling interest | | 179,288 | | | 114,289 | |
| Total (deficit) equity | | Total (deficit) equity | | (839,636) | | | 2,993,206 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 35,316,470 |
| | $ | 33,637,501 |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | $ | 44,274,830 | | | $ | 39,171,980 | |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands, except per share data) | | 2017 | | 2016 | | 2015 | (in thousands, except per share data) | | 2020 | | 2019 | | 2018 |
| Revenue | | $ | 153,143,826 |
| | $ | 146,849,686 |
| | $ | 135,961,803 |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | $ | 167,939,635 | |
| Cost of goods sold | | 148,597,824 |
| | 142,577,080 |
| | 132,432,490 |
| Cost of goods sold | | 184,702,042 | | | 174,450,809 | | | 163,327,318 | |
| Gross profit | | 4,546,002 |
| | 4,272,606 |
| | 3,529,313 |
| Gross profit | | 5,191,884 | | | 5,138,312 | | | 4,612,317 | |
| Operating expenses: | | |
| | |
| | |
| Operating expenses: | | | | | | |
| Distribution, selling, and administrative | | 2,128,730 |
| | 2,091,237 |
| | 1,907,840 |
| Distribution, selling, and administrative | | 2,767,217 | | | 2,663,508 | | | 2,460,301 | |
| Depreciation | | 237,100 |
| | 212,242 |
| | 192,144 |
| Depreciation | | 280,187 | | | 294,965 | | | 283,971 | |
| Amortization | | 160,503 |
| | 152,493 |
| | 56,491 |
| Amortization | | 110,875 | | | 167,442 | | | 181,156 | |
| Warrants | | — |
| | 140,342 |
| | 912,724 |
| |
| Employee severance, litigation, and other | | 959,327 |
| | 102,911 |
| | 37,894 |
| |
| Pension settlement | | — |
| | 47,607 |
| | — |
| |
| Operating income | | 1,060,342 |
| | 1,525,774 |
| | 422,220 |
| |
| | Employee severance, litigation, and other (Note 13) | | Employee severance, litigation, and other (Note 13) | | 6,807,307 | | | 330,474 | | | 183,520 | |
| Goodwill impairment | | Goodwill impairment | | 0 | | | 0 | | | 59,684 | |
| Impairment of PharMEDium assets (Note 1) | | Impairment of PharMEDium assets (Note 1) | | 361,652 | | | 570,000 | | | 0 | |
| Operating (loss) income | | Operating (loss) income | | (5,135,354) | | | 1,111,923 | | | 1,443,685 | |
| Other (income) loss | | (2,730 | ) | | (5,048 | ) | | 13,598 |
| Other (income) loss | | (1,581) | | | (12,952) | | | 25,469 | |
| Impairment charge on equity investment | | — |
| | — |
| | 30,622 |
| |
| Interest expense, net | | 145,185 |
| | 139,912 |
| | 109,036 |
| Interest expense, net | | 137,883 | | | 157,769 | | | 174,699 | |
| Income before income taxes | | 917,887 |
| | 1,390,910 |
| | 268,964 |
| |
| Income tax expense (benefit) | | 553,403 |
| | (37,019 | ) | | 407,129 |
| |
| Net income (loss) | | $ | 364,484 |
| | $ | 1,427,929 |
| | $ | (138,165 | ) | |
| Loss on consolidation of equity investments | | Loss on consolidation of equity investments | | 0 | | | 0 | | | 42,328 | |
| Loss on early retirement of debt | | Loss on early retirement of debt | | 22,175 | | | 0 | | | 23,766 | |
| (Loss) income before income taxes | | (Loss) income before income taxes | | (5,293,831) | | | 967,106 | | | 1,177,423 | |
| Income tax (benefit) expense | | Income tax (benefit) expense | | (1,894,273) | | | 112,971 | | | (438,469) | |
| Net (loss) income | | Net (loss) income | | (3,399,558) | | | 854,135 | | | 1,615,892 | |
| Net (income) loss attributable to noncontrolling interest | | Net (income) loss attributable to noncontrolling interest | | (9,158) | | | 1,230 | | | 42,513 | |
| Net (loss) income attributable to AmerisourceBergen Corporation | | Net (loss) income attributable to AmerisourceBergen Corporation | | $ | (3,408,716) | | | $ | 855,365 | | | $ | 1,658,405 | |
| | | | | | | | | | | | | |
| Earnings per share: | | |
| | |
| | |
| Earnings per share: | | | | | | |
| Basic | | $ | 1.67 |
| | $ | 6.73 |
| | $ | (0.63 | ) | Basic | | $ | (16.65) | | | $ | 4.07 | | | $ | 7.61 | |
| Diluted | | $ | 1.64 |
| | $ | 6.32 |
| | $ | (0.63 | ) | Diluted | | $ | (16.65) | | | $ | 4.04 | | | $ | 7.53 | |
| | | | | | | | |
| Weighted average common shares outstanding: | | |
| | |
| | |
| Weighted average common shares outstanding: | | | | | | |
| Basic | | 218,375 |
| | 212,206 |
| | 217,786 |
| Basic | | 204,783 | | | 210,165 | | | 217,872 | |
| Diluted | | 221,602 |
| | 225,959 |
| | 217,786 |
| Diluted | | 204,783 | | | 211,840 | | | 220,336 | |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Net income (loss) | | $ | 364,484 |
| | $ | 1,427,929 |
| | $ | (138,165 | ) |
| Other comprehensive income (loss): | | |
| | |
| | |
|
| Net change in foreign currency translation adjustments | | 16,540 |
| | (9,311 | ) | | (84,142 | ) |
| Benefit plan funded status adjustments net of tax of $928, $333, and $1,055, respectively | | 1,657 |
| | (562 | ) | | (4,607 | ) |
| Pension plan adjustment, net of tax of $19,054 | | — |
| | 31,538 |
| | — |
|
| Other | | 261 |
| | 360 |
| | 4,462 |
|
| Total other comprehensive income (loss) | | 18,458 |
| | 22,025 |
| | (84,287 | ) |
| Total comprehensive income (loss) | | $ | 382,942 |
| | $ | 1,449,954 |
| | $ | (222,452 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Net (loss) income | | $ | (3,399,558) | | | $ | 854,135 | | | $ | 1,615,892 | |
| Other comprehensive (loss) income: | | | | | | |
| Foreign currency translation adjustments | | (7,872) | | | (32,957) | | | (36,904) | |
| Loss on consolidation of equity investments | | 0 | | | 0 | | | 45,941 | |
| | | | | | |
| Other, net | | (1,074) | | | (271) | | | (756) | |
| Total other comprehensive (loss) income | | (8,946) | | | (33,228) | | | 8,281 | |
| Total comprehensive (loss) income | | (3,408,504) | | | 820,907 | | | 1,624,173 | |
| Comprehensive loss attributable to noncontrolling interest | | 2,923 | | | 1,746 | | | 50,829 | |
| Comprehensive (loss) income attributable to AmerisourceBergen Corporation | | $ | (3,405,581) | | | $ | 822,653 | | | $ | 1,675,002 | |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| | | (in thousands, except per share data) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury | | Total | (in thousands, except per share data) | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock | | Non-controlling Interest | | Total |
| September 30, 2014 | | $ | 2,711 |
| | $ | 2,749,185 |
| | $ | 1,556,573 |
| | $ | (52,046 | ) | | $ | (2,313,380 | ) | | $ | 1,943,043 |
| |
| Net loss | | |
| | |
| | (138,165 | ) | | |
| | |
| | (138,165 | ) | |
| Other comprehensive loss | | |
| | |
| | |
| | (84,287 | ) | | |
| | (84,287 | ) | |
| Cash dividends, $1.16 per share | | |
| | |
| | (253,919 | ) | | |
| | |
| | (253,919 | ) | |
| Exercises of stock options | | 36 |
| | 105,839 |
| | |
| | |
| | |
| | 105,875 |
| |
| Excess tax benefits related to share-based compensation | | |
| | 88,116 |
| | |
| | |
| | |
| | 88,116 |
| |
| Share-based compensation expense | | |
| | 60,944 |
| | |
| | |
| | |
| | 60,944 |
| |
| Common stock purchases for employee stock purchase plan | | |
| | (328 | ) | | |
| | |
| | |
| | (328 | ) | |
| Warrants expense | | |
| | 912,724 |
| | |
| | |
| | |
| | 912,724 |
| |
| Purchases of call options | | |
| | (180,000 | ) | | |
| | |
| | |
| | (180,000 | ) | |
| Purchases of common stock | | |
| | |
| | |
| | |
| | (1,823,106 | ) | | (1,823,106 | ) | |
| Employee tax withholdings related to restricted share vesting | | |
| | |
| | |
| | |
| | (14,511 | ) | | (14,511 | ) | |
| Other | | 3 |
| | (3 | ) | | |
| | |
| | |
| | — |
| |
| September 30, 2015 | | 2,750 |
| | 3,736,477 |
| | 1,164,489 |
| | (136,333 | ) | | (4,150,997 | ) | | 616,386 |
| |
| Net income | | |
| | |
| | 1,427,929 |
| | |
| | |
| | 1,427,929 |
| |
| Other comprehensive income | | |
| | |
| | |
| | 22,025 |
| | |
| | 22,025 |
| |
| Cash dividends, $1.36 per share | | |
| | |
| | (288,477 | ) | | |
| | |
| | (288,477 | ) | |
| Exercises of stock options | | 22 |
| | 74,746 |
| | |
| | |
| | |
| | 74,768 |
| |
| Share-based compensation expense | | |
| | 64,992 |
| | |
| | |
| | |
| | 64,992 |
| |
| Common stock purchases for employee stock purchase plan | | |
| | (548 | ) | | |
| | |
| | |
| | (548 | ) | |
| Warrants expense | | |
| | 140,342 |
| | |
| | |
| | |
| | 140,342 |
| |
| Exercises of warrants | | |
| | 336,998 |
| | |
| | |
| | 2,023,481 |
| | 2,360,479 |
| |
| Purchases of common stock | | |
| | |
| | |
| | |
| | (1,866,344 | ) | | (1,866,344 | ) | |
| Accelerated share repurchase transaction | | | | (20,000 | ) | | | | | | (380,000 | ) | | (400,000 | ) | |
| Employee tax withholdings related to restricted share vesting | | |
| | |
| | |
| | |
| | (22,148 | ) | | (22,148 | ) | |
| Other | | 6 |
| | (6 | ) | | |
| | |
| | |
| | — |
| |
| September 30, 2016 | | 2,778 |
| | 4,333,001 |
| | 2,303,941 |
| | (114,308 | ) | | (4,396,008 | ) | | 2,129,404 |
| |
| Adoption of ASU 2016-09 (see Note 1) | | | | | | 47,063 |
| | | | | | 47,063 |
| |
| Net income | | |
| | |
| | 364,484 |
| | |
| | |
| | 364,484 |
| |
| Other comprehensive income | | |
| | |
| | |
| | 18,458 |
| | |
| | 18,458 |
| |
| Cash dividends, $1.46 per share | | |
| | |
| | (320,270 | ) | | |
| | |
| | (320,270 | ) | |
| September 30, 2017 | | September 30, 2017 | | $ | 2,806 | | | $ | 4,517,635 | | | $ | 2,395,218 | | | $ | (95,850) | | | $ | (4,755,348) | | | $ | 0 | | | $ | 2,064,461 | |
| Consolidation of variable interest entity | | Consolidation of variable interest entity | | — | | | — | | | — | | | — | | | — | | | 167,966 | | | 167,966 | |
| Net income (loss) | | Net income (loss) | | — | | | — | | | 1,658,405 | | | — | | | — | | | (42,513) | | | 1,615,892 | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | — | | | — | | | 16,597 | | | — | | | (8,316) | | | 8,281 | |
| Cash dividends, $1.52 per share | | Cash dividends, $1.52 per share | | — | | | — | | | (333,041) | | | — | | | — | | | — | | | (333,041) | |
| Exercises of stock options | | 25 |
| | 102,898 |
| | |
| | |
| | |
| | 102,923 |
| Exercises of stock options | | 27 | | | 138,429 | | | — | | | — | | | — | | | — | | | 138,456 | |
| Share-based compensation expense | | |
| | 62,206 |
| | |
| | |
| | |
| | 62,206 |
| Share-based compensation expense | | — | | | 62,316 | | | — | | | — | | | — | | | — | | | 62,316 | |
| Common stock purchases for employee stock purchase plan | | |
| | (467 | ) | | |
| | |
| | |
| | (467 | ) | Common stock purchases for employee stock purchase plan | | — | | | (341) | | | — | | | — | | | — | | | — | | | (341) | |
| Purchases of common stock | | |
| | |
| | |
| | |
| | (329,929 | ) | | (329,929 | ) | Purchases of common stock | | — | | | — | | | — | | | — | | | (663,220) | | | — | | | (663,220) | |
| Settlement of fiscal 2016 accelerated share repurchase transaction | | | | 20,000 |
| | | |
|
| | (20,000 | ) | | — |
| |
| Employee tax withholdings related to restricted share vesting | | |
| | |
| | |
| | |
| | (9,411 | ) | | (9,411 | ) | Employee tax withholdings related to restricted share vesting | | — | | | — | | | — | | | — | | | (8,246) | | | — | | | (8,246) | |
| Other | | 3 |
| | (3 | ) | | |
| | |
| | |
| | — |
| Other | | 3 | | | (2,566) | | | — | | | — | | | — | | | — | | | (2,563) | |
| September 30, 2017 | | $ | 2,806 |
| | $ | 4,517,635 |
| | $ | 2,395,218 |
| | $ | (95,850 | ) | | $ | (4,755,348 | ) | | $ | 2,064,461 |
| |
| September 30, 2018 | | September 30, 2018 | | 2,836 | | | 4,715,473 | | | 3,720,582 | | | (79,253) | | | (5,426,814) | | | 117,137 | | | 3,049,961 | |
Adoption of ASC 606 (Note 1) | | Adoption of ASC 606 (Note 1) | | — | | | — | | | (1,482) | | | — | | | — | | | (1,102) | | | (2,584) | |
| Net income (loss) | | Net income (loss) | | — | | | — | | | 855,365 | | | — | | | — | | | (1,230) | | | 854,135 | |
| Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | — | | | (32,712) | | | — | | | (516) | | | (33,228) | |
| Cash dividends, $1.60 per share | | Cash dividends, $1.60 per share | | — | | | — | | | (338,974) | | | — | | | — | | | — | | | (338,974) | |
| Exercises of stock options | | Exercises of stock options | | 15 | | | 76,219 | | | — | | | — | | | — | | | — | | | 76,234 | |
| Share-based compensation expense | | Share-based compensation expense | | — | | | 58,874 | | | — | | | — | | | — | | | — | | | 58,874 | |
| Purchases of common stock | | Purchases of common stock | | — | | | — | | | — | | | — | | | (664,803) | | | — | | | (664,803) | |
| Employee tax withholdings related to restricted share vesting | | Employee tax withholdings related to restricted share vesting | | — | | | — | | | — | | | — | | | (5,987) | | | — | | | (5,987) | |
| Other | | Other | | 2 | | | (424) | | | — | | | — | | | — | | | — | | | (422) | |
| September 30, 2019 | | September 30, 2019 | | 2,853 | | | 4,850,142 | | | 4,235,491 | | | (111,965) | | | (6,097,604) | | | 114,289 | | | 2,993,206 | |
Adoption of ASC 842, net of tax (Note 1) | | Adoption of ASC 842, net of tax (Note 1) | | — | | | — | | | 35,138 | | | — | | | — | | | — | | | 35,138 | |
| Net (loss) income | | Net (loss) income | | — | | | — | | | (3,408,716) | | | — | | | — | | | 9,158 | | | (3,399,558) | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | | — | | | — | | | — | | | 3,135 | | | — | | | (12,081) | | | (8,946) | |
| Cash dividends, $1.66 per share | | Cash dividends, $1.66 per share | | — | | | — | | | (343,578) | | | — | | | — | | | — | | | (343,578) | |
| Exercises of stock options | | Exercises of stock options | | 21 | | | 159,512 | | | — | | | — | | | — | | | — | | | 159,533 | |
| Share-based compensation expense | | Share-based compensation expense | | — | | | 74,411 | | | — | | | — | | | — | | | — | | | 74,411 | |
| Purchases of common stock | | Purchases of common stock | | — | | | — | | | — | | | — | | | (405,692) | | | — | | | (405,692) | |
| Profarma retail equity offering | | Profarma retail equity offering | | — | | | (1,567) | | | — | | | — | | | — | | | 67,922 | | | 66,355 | |
| Employee tax withholdings related to restricted share vesting | | Employee tax withholdings related to restricted share vesting | | — | | | — | | | — | | | — | | | (9,787) | | | — | | | (9,787) | |
| Other | | Other | | 4 | | | (722) | | | — | | | — | | | — | | | — | | | (718) | |
| September 30, 2020 | | September 30, 2020 | | $ | 2,878 | | | $ | 5,081,776 | | | $ | 518,335 | | | $ | (108,830) | | | $ | (6,513,083) | | | $ | 179,288 | | | $ | (839,636) | |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| OPERATING ACTIVITIES | | |
| | |
| | |
| OPERATING ACTIVITIES | | | | | | |
| Net income (loss) | | $ | 364,484 |
| | $ | 1,427,929 |
| | $ | (138,165 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
| | |
| | |
| |
| Net (loss) income | | Net (loss) income | | $ | (3,399,558) | | | $ | 854,135 | | | $ | 1,615,892 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | |
| Depreciation, including amounts charged to cost of goods sold | | 262,420 |
| | 232,538 |
| | 193,290 |
| Depreciation, including amounts charged to cost of goods sold | | 290,744 | | | 321,102 | | | 318,483 | |
| Amortization, including amounts charged to interest expense | | 169,911 |
| | 159,628 |
| | 62,698 |
| Amortization, including amounts charged to interest expense | | 117,269 | | | 176,410 | | | 191,626 | |
| Provision for doubtful accounts | | 8,934 |
| | 13,124 |
| | 8,119 |
| Provision for doubtful accounts | | 11,912 | | | 25,196 | | | 16,660 | |
| Provision (benefit) for deferred income taxes | | 319,069 |
| | (130,927 | ) | | 20,826 |
| |
| Warrants expense | | — |
| | 140,342 |
| | 912,724 |
| |
| (Benefit) provision for deferred income taxes | | (Benefit) provision for deferred income taxes | | (1,544,971) | | | 28,537 | | | (795,524) | |
| | Share-based compensation expense | | 62,206 |
| | 64,992 |
| | 60,944 |
| Share-based compensation expense | | 74,411 | | | 58,874 | | | 62,316 | |
| LIFO (credit) expense | | (157,782 | ) | | 200,230 |
| | 542,807 |
| |
| Pension settlement | | — |
| | 47,607 |
| | — |
| |
| (Gain) loss on sale of businesses | | (3,677 | ) | | — |
| | 12,953 |
| |
| Impairment charge on equity investment | | — |
| | — |
| | 30,622 |
| |
| Other | | 11,421 |
| | (5,171 | ) | | (11,604 | ) | |
| LIFO expense (credit) | | LIFO expense (credit) | | 7,422 | | | (22,544) | | | 67,324 | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | 361,652 | | | 570,000 | | | 0 | |
| Gain on sale of an equity investment | | Gain on sale of an equity investment | | 0 | | | (13,692) | | | 0 | |
| Goodwill impairment | | Goodwill impairment | | 0 | | | 0 | | | 59,684 | |
| Impairment of non-customer note receivable | | Impairment of non-customer note receivable | | 0 | | | 0 | | | 30,000 | |
| Loss on consolidation of equity investments | | Loss on consolidation of equity investments | | 0 | | | 0 | | | 42,328 | |
| Loss on early retirement of debt | | Loss on early retirement of debt | | 22,175 | | | 0 | | | 23,766 | |
| | Other, net | | Other, net | | (3,044) | | | (23,193) | | | (19,078) | |
Changes in operating assets and liabilities, excluding the effects of acquisitions and divestitures: | | |
| | |
| | |
| Changes in operating assets and liabilities, excluding the effects of acquisitions and divestitures: | | | | | | |
| Accounts receivable | | (1,277,896 | ) | | (912,724 | ) | | (1,478,793 | ) | Accounts receivable | | (1,628,991) | | | (1,241,890) | | | (657,770) | |
| Merchandise inventories | | (431,454 | ) | | (1,107,252 | ) | | (1,379,189 | ) | |
| Inventories | | Inventories | | (1,621,143) | | | (167,990) | | | (4,923) | |
| Income tax receivable | | Income tax receivable | | (482,569) | | | (2,834) | | | 4,566 | |
| Prepaid expenses and other assets | | 33,646 |
| | (46,159 | ) | | (37,131 | ) | Prepaid expenses and other assets | | 28,050 | | | (3,899) | | | (61,777) | |
| Accounts payable | | 1,473,389 |
| | 3,011,508 |
| | 4,957,227 |
| Accounts payable | | 3,300,832 | | | 1,561,048 | | | 859,036 | |
| Income taxes payable | | Income taxes payable | | (3,289) | | | (13,353) | | | 209,899 | |
| Accrued expenses | | 661,174 |
| | (43,267 | ) | | 152,762 |
| Accrued expenses | | 524,021 | | | 239,688 | | | (537,905) | |
| Income taxes and other liabilities | | 8,293 |
| | 126,099 |
| | 12,138 |
| |
| Accrued litigation liability | | Accrued litigation liability | | 6,198,943 | | | 0 | | | 0 | |
| Other liabilities | | Other liabilities | | (46,826) | | | (1,572) | | | (13,215) | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | 1,504,138 |
| | 3,178,497 |
| | 3,922,228 |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | 2,207,040 | | | 2,344,023 | | | 1,411,388 | |
| INVESTING ACTIVITIES | | |
| | |
| | |
| INVESTING ACTIVITIES | | | | | | |
| Capital expenditures | | (466,397 | ) | | (464,616 | ) | | (231,585 | ) | Capital expenditures | | (369,677) | | | (310,222) | | | (336,411) | |
| Cost of acquired companies, net of cash acquired | | (61,648 | ) | | (2,731,356 | ) | | (2,633,412 | ) | Cost of acquired companies, net of cash acquired | | 0 | | | (63,951) | | | (785,299) | |
| Cost of equity investments | | (11,347 | ) | | (19,034 | ) | | — |
| Cost of equity investments | | (56,080) | | | 0 | | | 0 | |
| Proceeds from sales of businesses | | 12,094 |
| | — |
| | 17,163 |
| |
| Proceeds from sales of investment securities available-for-sale | | 74,778 |
| | 101,829 |
| | — |
| |
| Purchases of investment securities available-for-sale | | (48,635 | ) | | (42,083 | ) | | (86,214 | ) | |
| Other | | 3,114 |
| | (13,919 | ) | | 2,883 |
| |
| Proceeds on sale of property and equipment | | Proceeds on sale of property and equipment | | 36,364 | | | 1,295 | | | 8,100 | |
| Other, net | | Other, net | | 9,522 | | | (2,954) | | | 2,496 | |
| NET CASH USED IN INVESTING ACTIVITIES | | (498,041 | ) | | (3,169,179 | ) | | (2,931,165 | ) | NET CASH USED IN INVESTING ACTIVITIES | | (379,871) | | | (375,832) | | | (1,111,114) | |
| FINANCING ACTIVITIES | | |
| | |
| | |
| FINANCING ACTIVITIES | | | | | | |
| Term loan and senior notes borrowings | | — |
| | 1,000,000 |
| | 1,996,390 |
| |
| Senior notes and term loan repayments | | (750,000 | ) | | (800,000 | ) | | (500,000 | ) | |
| Senior notes and other loan borrowings | | Senior notes and other loan borrowings | | 599,480 | | | 506,948 | | | 1,314,430 | |
| Senior notes and other loan repayments | | Senior notes and other loan repayments | | (598,452) | | | (510,863) | | | (681,001) | |
| Borrowings under revolving and securitization credit facilities | | 9,336,400 |
| | 8,846,876 |
| | 111,100 |
| Borrowings under revolving and securitization credit facilities | | 116,946 | | | 640,126 | | | 25,129,704 | |
| Repayments under revolving and securitization credit facilities | | (9,335,953 | ) | | (8,333,662 | ) | | (111,100 | ) | Repayments under revolving and securitization credit facilities | | (149,980) | | | (769,284) | | | (25,127,438) | |
| Payment of premium on early retirement of debt | | Payment of premium on early retirement of debt | | (21,448) | | | 0 | | | (22,348) | |
| Purchases of common stock | | (329,929 | ) | | (2,266,344 | ) | | (1,859,106 | ) | Purchases of common stock | | (420,449) | | | (674,031) | | | (639,235) | |
| Exercises of warrants | | — |
| | 2,360,479 |
| | — |
| |
| Exercises of stock options, including excess tax benefits of $88,116 in fiscal 2015 | | 102,923 |
| | 74,768 |
| | 193,991 |
| |
| | Exercises of stock options | | Exercises of stock options | | 159,533 | | | 76,234 | | | 138,456 | |
| Cash dividends on common stock | | (320,270 | ) | | (288,477 | ) | | (253,919 | ) | Cash dividends on common stock | | (343,578) | | | (338,974) | | | (333,041) | |
| Purchases of call options | | — |
| | — |
| | (180,000 | ) | |
| Employee tax withholdings related to restricted share vesting | | (9,411 | ) | | (22,148 | ) | | (14,511 | ) | |
| Profarma retail equity offering | | Profarma retail equity offering | | 66,355 | | | 0 | | | 0 | |
| Tax withholdings related to restricted share vesting | | Tax withholdings related to restricted share vesting | | (9,787) | | | (5,987) | | | (8,246) | |
| Other | | (6,574 | ) | | (6,420 | ) | | (14,979 | ) | Other | | (2,237) | | | (10,682) | | | (14,154) | |
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | (1,312,814 | ) | | 565,072 |
| | (632,134 | ) | |
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | (306,717 | ) | | 574,390 |
| | 358,929 |
| |
| NET CASH USED IN FINANCING ACTIVITIES | | NET CASH USED IN FINANCING ACTIVITIES | | (603,617) | | | (1,086,513) | | | (242,873) | |
| INCREASE IN CASH AND CASH EQUIVALENTS | | INCREASE IN CASH AND CASH EQUIVALENTS | | 1,223,552 | | | 881,678 | | | 57,401 | |
| Cash and cash equivalents at beginning of year | | 2,741,832 |
| | 2,167,442 |
| | 1,808,513 |
| Cash and cash equivalents at beginning of year | | 3,374,194 | | | 2,492,516 | | | 2,435,115 | |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 2,435,115 |
| | $ | 2,741,832 |
| | $ | 2,167,442 |
| CASH AND CASH EQUIVALENTS AT END OF YEAR | | $ | 4,597,746 | | | $ | 3,374,194 | | | $ | 2,492,516 | |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172020
Note 1. Summary of Significant Accounting Policies
AmerisourceBergen Corporation and its subsidiaries, including less-than-wholly-owned subsidiaries in which AmerisourceBergen Corporation has a controlling financial interest (the "Company"), is 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. The Company delivers innovative programs and services designed to increaseimprove the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health.
Basis of Presentation
The accompanying financial statements present the consolidated financial statements include the accountsposition, results of operations, and cash flows of the Company and its wholly-owned subsidiaries as of the dates and for the fiscal yearsperiods indicated. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts due to uncertainties inherent in such estimates. Management periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness. Certain reclassifications have been made to prior-period amounts in order to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In April 2015,March 2020, the Financial Accounting Standards BoardWorld Health Organization ("FASB"WHO") issued ASU No. 2015-03, "Interest - Imputationdeclared a global pandemic attributable to the outbreak and continued spread of Interest (Subtopic 835-30): SimplifyingCOVID-19. In connection with the Presentationmitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, the Company implemented measures designed to keep its employees safe and address business continuity issues at its distribution centers and other locations. The Company continues to evaluate and plan for the potential effects of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 specifies that debt issuance costsa prolonged disruption and the related impacts on its revenue, results of operations, and cash flows. These items include, but are not limited to, the financial condition of its customers and the realization of accounts receivable, decreased availability and demand for its products and services, and delays related to a debt liability shallcurrent and future projects. While the Company's operational and financial performance may be reported onsignificantly impacted by COVID-19, it is not possible for the balance sheet as a direct reduction fromCompany to predict the face amountduration or magnitude of the debt liability. In August 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentationoutbreak and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" ("ASU 2015-15"). ASU 2015-15 specifies that debt issuance costs related to line-of-credit arrangements may be presented as an asset on the balance sheet and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. As of October 1, 2016, the Company adopted ASU 2015-03 and ASU 2015-15 onit could have a retrospective basis, which resulted in the reclassification of $18.7 million of debt issuance costs from Other Assets to Short-Term Debt of $0.9 million and to Long-Term Debt of $17.8 millionmaterial adverse impact on the Company's September 30, 2016 Consolidated Balance Sheet. The adoption had no impact on the Company’sfinancial position, results of operations, or cash flows.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation See Risk Factor - Stock Compensation (Topic 718): ImprovementsWe face risks related to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee's shares than it may currently for tax withholding purposes without triggering liability accountinghealth epidemics and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Entities are permitted to adopt the standard early in any interim or annual period. During the quarter ended December 31, 2016, the Company early adopted ASU 2016-09, which resulted in a cumulative adjustment to retained earningspandemics, and the establishmentcontinued spread of a deferred tax asset as of October 1, 2016 of $47.1 million for previously unrecognized tax benefits. The Company elected to adopt the Statement of Cash Flows presentation of the excess tax benefits prospectively. During the fiscal year ended September 30, 2017, the Company recognized tax benefits of $36.7 million in Income Tax Expense on the Company's Consolidated Statement of Operations. The tax benefits recognized in the fiscal year ended September 30, 2017 are not necessarily indicative of amounts that may arise in future periods.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. ASU 2017-04COVID-19 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Entities are permitted to adopt the standard early for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. During the quarter ended September 30, 2017, in conjunction with its annual goodwill impairment test, the Company early adopted ASU 2017-04 . The adoption had no impact on the Company's results of operations, cash flows, or financial position.
adversely affecting our business.
Recently IssuedAdopted Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605 - "Revenue Recognition" and most industry-specific guidance throughout the Codification. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard's core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 was originally scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. In July 2015, the FASB deferred the effective date of ASU 2014-09 by one year.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations" ("ASU 2016-08"), which clarifiesclarified the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which amendsamended the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. The Company mustwas required to adopt ASU 2016-08 and ASU 2016-10 with ASU 2014-09. Entities are permitted to adopt the standards as early as the original public entity effective date of ASU 2014-09, and either full or modified retrospective application is required.collectively ASC 606.
The Company continues to evaluateadopted ASC 606 as of October 1, 2018 on a modified retrospective basis for all open contracts as of October 1, 2018. The adoption had an immaterial impact on the impact of adopting ASU 2016-08, ASU 2016-10,Company's October 1, 2018 retained earnings and ASU 2014-09. It has conducted a preliminary assessment of the Pharmaceutical Distribution Services reportable segmentdid not and the operating segments in Other and doeswill not expect adoption of the new standard to have a material impact on the Company's revenues, results of operations, or cash flows. The Company did not record any material contract assets, contract liabilities, or deferred contract costs in its consolidated financial statements. For example,Consolidated Balance Sheet upon adoption.
The Company elected the majority ofpractical expedient to expense costs to obtain a contract when incurred when the Pharmaceutical Distribution Services reportable segment's revenue is generated from sales of pharmaceutical products, which will continue to be recognized when control of goods is transferred to the customer. This preliminary assessment is subject to change prior to adoption.amortization period would have been one year or less. Additionally, the Company expectselected the practical expedients to adopt this standard innot disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the first quarterCompany recognizes revenue at the amount to which it has the right to invoice for services
performed, and it(iii) for contracts for which the variable consideration is still evaluatingallocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
For the methodCompany's revenue recognition policy, refer to the "Revenue Recognition" section of adoption.Note 1.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02" or "ASC 842")." ASU 2016-02 aims to increase transparency and comparability across organizations by requiring lease assets and lease liabilities to be recognized on the balance sheet as well as key information to be disclosed regarding lease arrangements. ASU 2016-02 iswas effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Entities are permitted to adopt
The Company adopted ASC 842 as of October 1, 2019 and adopted it using the standard early, and a modified retrospective application is required.approach. The Company anticipateselected the transition package of practical expedients provided within the amended guidance, which eliminated the requirements to reassess lease identification, lease classification, and initial direct costs for leases that commenced before the effective date. The Company also elected to combine lease and non-lease components and to exclude short-term leases from its consolidated balance sheets. The Company did not elect the hindsight practical expedient in determining the lease term.
In connection with the adoption of this newASC 842, the Company recognized operating lease liabilities of $562.1 million, right-of-use ("ROU") assets of $526.3 million, and a $35.1 million, net of tax of $9.6 million, cumulative adjustment to retained earnings. The Company's lease liabilities were based on the present value of the remaining minimum lease commitments using the Company's incremental borrowing rates as of October 1, 2019, and the Company's ROU assets were based upon the operating lease liabilities adjusted for prepaid and deferred rents. The cumulative adjustment to retained earnings was primarily the result of derecognizing assets of $266.0 million in Property and Equipment, Net and $324.8 million of financing obligations in Long-Term Financing Obligation and Accrued Expenses and Other, all of which was associated with leased assets where the Company was deemed the owner of the leased assets for accounting standardpurposes. The Company finalized the impact that the amended lease guidance had on its systems, processes, and internal controls. The adoption of ASC 842 did not and will not have a material impact on the Company's Consolidated Balance Sheets. However, the Company is continuing to evaluate the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact on the results of operations or cash flows at this time.flows.
For the Company's lease policy, refer to the "Leases" section of Note 1.
Recently Issued Accounting Pronouncements Not Yet Adopted
In AugustJune 2016, the FASB issued ASU No. 2016-15, "Statement2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"Credit Losses on Financial Instruments" ("ASU 2016-15"2016-13"). ASU 2016-15 aims2016-13 requires financial assets measured at amortized cost to reduce diversitybe presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. An entity must use judgment in practicedetermining the relevant information and estimation methods that are appropriate in how certain transactions are classified in the statement of cash flows.its circumstances. ASU 2016-152016-13 is effective for annual reporting periods beginning after December 15, 2017 and2019, including interim periods within those fiscal years. Entities areyears, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company does not expect the adoption of this new accounting guidance to have a material impact on its financial position, results of operations, or cash flows.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with certain amendments applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, and others prospectively. Early adoption of this guidance is permitted, to adoptincluding the standard earlyadoption in any interim or annual period and a retrospective application is required.for public companies for periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact that the adoption of this standard will have on its financial statements.guidance.
As of September 30, 2017,2020, there were no other recently issued accounting standards that may have a material impact on the Company's financial position, results of operations, or cash flows upon their adoption.
Business Combinations
The assets acquired and liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired businesses are included in the Company's operating results from the dates of acquisition.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Concentrations of Credit Risk and Allowance for Doubtful Accounts
The Company sells its merchandise inventories to a large number of customers in the healthcare industry that include institutional and retail healthcare providers. Institutional healthcare providers include acute care hospitals, health systems, mail order pharmacies, long-term care and other alternate care pharmacies and providers of pharmacy services to such facilities, and physician offices. Retail healthcare providers include national and regional retail drugstore chains, independent community
pharmacies, pharmacy departments of supermarkets and mass merchandisers, and veterinarians. The financial condition of the Company's customers can be affected by changes in government reimbursement policies as well as by other economic pressures in the healthcare industry.
The Company's trade accounts receivables are exposed to credit risk. Revenue from the various agreements and arrangements with the Company's largest customer in the fiscal year ended September 30, 2017,2020, Walgreens Boots Alliance, Inc. ("WBA"), accounted for approximately 30% 33% of revenue and represented approximately 49%47% of accounts receivable, net of incentives, as of September 30, 2017.2020. Express Scripts, Inc., the Company's second largest customer in the fiscal year ended September 30, 2017,2020, accounted for approximately 15%12% of revenue and represented approximately 9%7% of accounts receivable net as of September 30, 2017.2020. The Company generally does not require collateral for trade receivables. In determining the appropriate allowance for doubtful accounts, the Company considers a combination of factors, such as the aging of trade receivables, industry trends, and its customers' financial strength, credit standing, and payment and default history. Changes in these factors, among others, may lead to adjustments in the Company's allowance for doubtful accounts. The calculation of the required allowance requires judgment by Company management as to the impact of those and other factors on the ultimate realization of its trade receivables. Each of the Company's business units performs ongoing credit evaluations of its customers' financial condition and maintains reserves for probable bad debt losses based upon historical experience and for specific credit problems when they arise. There were no significant changes to this process during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, and bad debt expense was computed in a consistent manner during these periods.
The Company maintains cash and cash equivalents with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and, therefore, bear minimal credit risk. The Company seeks to mitigate such risks by monitoring the risk profiles of these counterparties. The Company also seeks to mitigate risk by monitoring the investment strategy of money market accounts in which it is invested, which are classified as cash equivalents.
Contingencies
Loss Contingencies: In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, stockholder demands, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a liability when it is both probable that a loss has been incurred and the amount iscan be reasonably estimable.estimated. The Company also performs an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, the Company provides disclosure of the loss contingency in the notes to its financial statements. The Company reviews all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made (see made. Among the loss contingencies that the Company considered in accordance with the foregoing in connection with the preparation of the accompanying financial statements were the opioid matters described in Note 13).14.
Gain Contingencies: The Company records gain contingencies when they are realized. Gains from antitrust litigation settlements are realized upon the receipt of cash and recorded as a reduction to cost of goods sold because they represent a recovery of amounts historically paid to manufacturers to originally acquire the pharmaceuticals that were the subject of the antitrust litigation settlements (see Note 14)15).
Derivative Financial Instruments
The Company records all derivative financial instruments on the balance sheet at fair value and complies with established criteria for designation and effectiveness of hedging relationships. The Company's policy prohibits it from entering into derivative financial instruments for speculative or trading purposes.
The Company had one foreign currency denominated contract outstanding that hedges the foreign currency exchange risk of a C$27.6 million note outstanding as of September 30, 2017.
Equity Method Investments
The Company uses the equity method of accounting for its investments in entities in which it has significant influence; generally, this represents an ownership interest of between 20% and 50% (see Note 3). A decline in value that is determined to be other-than-temporary is recorded as an impairment charge as a component of earnings in the period in which that determination is made.
The Company recorded an impairment charge of $30.6 million in the fiscal year ended September 30, 2015 related to its minority interest in a pharmaceutical wholesaler in Brazil. The impairment charge was based upon the determination by the
Company that the decline in the pharmaceutical wholesaler's stock price from the date on which the investment was made to September 30, 2015 was other-than temporary. There were no impairment charges on equity investments in the fiscal years ended September 30, 2017 or 2016.
Foreign Currency
When the functional currency of the Company's foreign operations is the applicable local currency, assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates for the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss within Stockholders' Equity.
Goodwill and Other Intangible Assets
Goodwill arises from acquisitions or consolidations of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. The Company identifies its reporting units based upon the Company's management reporting structure, beginning with its operating segments. The Company aggregates two or more components within an operating segment that have similar economic characteristics. The Company evaluates whether the components within its operating segments have similar economic characteristics, which include the similarity of long-term gross margins, the nature of the components' products, services, and production processes, the types of customers and the methods by which products or services are delivered to customers, and the components' regulatory environment. The Company's reporting units include Pharmaceutical Distribution Services, Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), AmerisourceBergen Consulting Services ("ABCS"), World Courier, and MWI Animal Health ("MWI").
Goodwill and other intangible assets with indefinite lives, such as certain trademarks and trade names, are not amortized; rather, they are tested for impairment at least annually. For the purpose of these impairment tests, the Company can elect to perform a qualitative assessment to determine if it is more likely than not that the fair values of its reporting units and indefinite-lived intangible assets are less than the respective carrying values of those reporting units and indefinite-lived intangible assets, respectively. Such qualitative factors can include, among others, industry and market conditions, overall financial performance, and relevant entity-specific events. If the Company concludes based on its qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, it performs a quantitative analysis. The Company elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2020, with the exception of its testing of goodwill and indefinite-lived intangibles in the MWI and Profarma reporting units. The Company elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2019, with the exception of the its testing of goodwill in the Profarma reporting unit. In the fourth quarter of fiscal 2018, the Company elected to bypass performing the qualitative assessment and in the fourth quarter of fiscal 2017, performedwent directly to performing its annual quantitative assessments of the goodwill and indefinite-lived intangible assets for the current year. The Company also completed a qualitative assessment immediately after its reorganization in the fourth quarter of fiscal 2017 (see Note 15). The Company may elect to perform qualitative annual assessments in future years.assets.
The quantitative goodwill impairment test requires the Companyus to compare the carrying value of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying valueamount exceeds the fair value, the difference between the carrying value and the fair value is recorded as an impairment loss, the amount of which may not to exceed the total amount of goodwill allocated to the reporting unit.
TheWhen performing a quantitative impairment assessment, the Company identifies its reporting units based upon its management reporting structure, and its reporting units are the same as its operating segments. Generally, goodwill arises from acquisitions of specific operating companies and is assigned to the reporting unit in which a particular operating company resides.
The Company usesutilizes an income-based approach to value its reporting units.units, with the exception of the Profarma reporting unit, the fair value of which is based upon its publicly-traded stock price, plus an estimated control premium. The income-based approach relies on a discounted cash flow analysis, which considers forecasted cash flows discounted at an appropriate discount rate, to determine the fair value of each reporting unit. The Company generally believes that market participants would use a discounted cash flow analysis to determine the fair value of itsthe Company's reporting units in a sale transaction. The annual goodwill impairment test requires the Company to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization, capital expenditures, and working capital requirements, which are based upon the Company's long-range plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While the Company uses the best available information to prepare its cash flowflows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, the Company's overall methodology and the population of assumptions used have remained unchanged.
The quantitative impairment test for indefinite-lived intangibles other than goodwill (certain trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method. The Company believes the relief from royalty method is a widely used valuation technique for such assets. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such indefinite-lived trademarks and trade names and not having to pay a royalty for their use.
The Company completed its required annual impairment tests relating to goodwill and otherindefinite-lived intangible assets in the fourth quarter of the of fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018. The Company recorded a goodwill impairment of $59.7 million in its Profarma reporting unit in connection with its fiscal 2018 annual impairment test. NaN goodwill impairments were recorded in the fiscal years ended September 30, 2020 and as a result, determined that there2019. NaN indefinite-lived intangible asset impairments were no impairments.recorded in the fiscal years ended September 30, 2020, 2019, and 2018.
Finite-lived intangible assets are amortized using the straight-line method over the estimated useful lives of the assets. The Company performs a recoverability assessment of its long-lived assets when impairment indicators are present.
After U.S. Food and Drug Administration ("FDA") inspections of PharMEDium Healthcare Holdings, Inc.'s ("PharMEDium") compounding facilities, the Company voluntarily suspended production activities in December 2017 at its largest compounding facility located in Memphis, Tennessee pending execution of certain remedial measures.
As a result of the suspension of production activities at PharMEDium's compounding facility located in Memphis, Tennessee and the regulatory matters, the Company performed a recoverability assessment of PharMEDium's long-lived assets and recorded a $570.0 million impairment loss in the quarter ended March 31, 2019 for the amount that the carrying value of the PharMEDium asset group exceeded its fair value. Prior to the impairment, the carrying value of the asset group was $792 million. The fair value of the asset group was $222 million as of March 31, 2019. The PharMEDium asset group was included in the Pharmaceutical Distribution Services reportable segment. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 15% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. The Company believed that its fair value assumptions were representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represents a Level 3 nonrecurring fair value measurement. The Company allocated $522.1 million of the impairment to finite-lived intangibles ($420.8 million of customer relationships, $79.9 million of a trade name, and $21.4 million of software technology) and $47.9 million of the impairment to property and equipment.
The Company updated its recoverability assessment of PharMEDium's long-lived assets as of September 30, 2019. The Company concluded that PharMEDium’s long-lived assets were recoverable as of September 30, 2019.
As a result of the continued suspension of the production activities at PharMEDium's compounding facility located in Memphis, Tennessee, certain regulatory matters, ongoing operational challenges, and lower-than-expected operating results, the Company updated its recoverability assessment of PharMEDium’s long-lived assets as of December 31, 2019. The recoverability assessment was based upon comparing PharMEDium's forecasted undiscounted cash flows to the carrying value of its asset group. Using forecasted undiscounted cash flows that were based on the weighted average of multiple strategic alternatives, the Company concluded that the carrying value of the PharMEDium long-lived asset group was not recoverable as of December 31, 2019. The forecasted undiscounted cash flows as of December 31, 2019 were lower than the forecasted undiscounted cash flows as of September 30, 2019 due to a change in weighting of multiple strategic alternatives and lower operating results in the three months ended December 31, 2019 compared to expectations. The Company then performed an impairment test by comparing the PharMEDium asset group's fair value of $145 million to its carrying value, which resulted in a $138.0 million impairment loss in the three months ended December 31, 2019. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 17% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. The Company believed that its fair value assumptions were representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represented a Level 3 nonrecurring fair value measurement. The Company allocated $123.2 million of the impairment to finite-lived intangibles, $11.6 million of the impairment to property and equipment, and $3.2 million to ROU assets.
In January 2020, the Company decided to permanently exit the PharMEDium compounding business, and, as a result, the Company ceased all commercial and administrative operations related to this business in fiscal 2020. The decision to permanently 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 in January 2020 to suspend production at the compounding facility in New Jersey pending facility upgrades related to the air handling and filtration systems. In connection with the decision to exit the PharMEDium business, the Company recorded an impairment of PharMEDium's assets of $223.7 million in the three months ended March 31, 2020, which included impairments of the remaining finite-lived intangible assets and the majority of the remaining tangible assets.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities (commonly known as the asset and liability method). In assessing the need to establish a valuation allowance on deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, including settlements with tax authorities or resolutions of any related appeals or litigation processes, based upon the technical merits of the position. Tax benefits associated with uncertain tax positions that have met the recognition criteria are measured and recorded based upon the highest probable outcome that is more than 50% likely to be realized after full disclosure and resolution of a tax examination.
Investment Securities Available-For-SaleInventories
The Company's marketable debt securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investmentsInventories are stated at the timelower of purchasecost or market. Cost for approximately 70% and evaluates75% of the classifications at each balance sheet date. The Company classifies its marketable debt securitiesCompany's inventories as either short-term or long-term based upon each instrument's underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. The Company's marketable debt securities are carried at fair value, with unrealized gains and losses reported as a component of Accumulated Other Comprehensive Loss in Stockholders' Equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in earnings in the current period. The cost of securities sold is based upon the specific identification method. As of September 30, 2017,2020 and 2019, respectively, has been determined using the last-in, first-out ("LIFO") method. If the Company had no investment securities available-for-sale. Asused the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,519.2 million and $1,511.8 million higher than the amounts reported as of September 30, 2016,2020 and 2019, respectively. The Company recorded LIFO expense of $7.4 million and $67.3 million in the fiscal years ended September 30, 2020 and 2018, respectively, and a LIFO credit of $22.5 million in the fiscal year ended September 30, 2019. The annual LIFO provision is affected by manufacturer pricing practices, which may be impacted by market and other external influences, changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors can have a material impact to the Company's annual LIFO provision.
Investments
The Company first evaluates its investments in accordance with the variable interest model to determine whether it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. If it has determined that an investment is a variable interest entity ("VIE"), the Company evaluates whether the VIE is required to be consolidated. When the Company holds rights that give it the power to direct the activities of an entity that most significantly impact the entity's economic performance, combined with the obligation to absorb an entity's losses and the right to receive benefits, the Company consolidates a VIE. If it is determined that an investment is not a VIE, the Company then evaluates its investments under the voting interest model and generally consolidates investments in which it holds an ownership interest of greater than 50%. When the Company consolidates less-than-wholly-owned subsidiaries, it presents its noncontrolling interest in its consolidated financial statements.
For equity securities without a readily determinable fair value, the Company uses the fair value measurement alternative and measures the securities at cost less impairment, if any, including adjustments for observable price changes in orderly transactions for an identical or similar investment of the same issuer. For investments in which the Company can exercise significant influence but does not control, it uses the equity method of accounting. The Company's share of earnings and losses is recorded in Other (Income) Loss in the Consolidated Statements of Operations. The Company monitors its investments for impairment by considering factors such as the operating performance of the investment securities available-for-sale was $26.1 million, all of which was within Prepaid Expenses and Other on the Company's Consolidated Balance Sheet.current economic and market conditions.
Leases
The Company is often involved in the construction of its distribution facilities. InPrior to October 1, 2019, in certain cases, the Company makesmade payments for certain structural components included in the lessor's construction of the leased assets, which resultresulted in the Company being deemed the owner of the leased assets for accounting purposes. As a result, regardless of the significance of the payments, Accounting Standards CodificationASC 840, Leases, ("ASC 840") definesdefined those payments as automatic indicators of ownership and requiresrequired the Company to capitalize the lessor's total project cost with a corresponding financing obligation. Upon completion of the lessor's project, the Company performsperformed a sale-leaseback analysis pursuant to ASC 840 to determine if these assets and the related financing obligations cancould be derecognized from the Company's Consolidated Balance Sheet. If the Company iswas deemed to have had "continuing involvement," the leased assets and the related financing obligations remainremained on the Company's Consolidated Balance Sheet and arewere amortized over the life of the assets and the lease term, respectively. All other leases arewere considered operating leases in accordance with ASC 840. Assets subject to an operating lease and the related lease payments arewere not recorded on the Company's Consolidated Balance Sheet. Rent expense iswas recognized on a straight-line basis over the expected lease term and was recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Subsequent to the adoption of ASC 842 on October 1, 2019, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. At the lease commencement date, operating and finance lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable and, as such, the Company uses its incremental borrowing rate to discount the lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term in a similar economic environment. Certain adjustments to the ROU asset may be required for items such as incentives received. The Company does not recognize on the balance sheet leases with terms of one year or less.
The Company has operating leases that are primarily comprised of buildings, office equipment, distribution center equipment, and vehicles. Some of the Company's leases include options to extend or early terminate the lease, which are included in the lease term when it is reasonably certain to exercise and there is a significant economic incentive to exercise that option. Certain lease agreements contain provisions for future rent increases. Lease payments included in the measurement of the lease liability comprise fixed payments. The Company combines lease and non-lease components as a single component. Operating lease cost is recognized over the expected lease term on a straight-line basis and is recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations. Variable lease payments, which are primarily comprised of maintenance, taxes, and other payments based on usage, are recognized when the expense is incurred. The Company's leases do not contain residual value guarantees.
Manufacturer Incentives
The Company considers fees and other incentives received from its suppliers relating to the purchase or distribution of inventory to represent product discounts, and, as a result, they are recognized within cost of goods sold upon the sale of the related inventory.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost for approximately 80% of the Company's inventories as of September 30, 2017 and 2016 has been determined using the last-in, first-out ("LIFO") method. If the Company had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,467.0 million and $1,624.8 million higher than the amounts reported as of September 30, 2017 and 2016, respectively. The Company recorded a LIFO credit of $157.8 million in the fiscal year ended September 30, 2017 and LIFO expense of $200.2 million and $542.8 million in the fiscal years ended September 30, 2016 and 2015, respectively. The annual LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences, many of which are difficult to predict. Changes to any of the above factors can have a material impact to the Company's annual LIFO provision.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years for buildings and improvements and from 3 to 10 years for machinery, equipment, and other. The costs of repairs and maintenance are charged to expense as incurred.
The Company capitalizes project costs relating to computer software developed or obtained for internal use when the activities related to the project reach the application development stage. Costs that are associated with preliminary stage activities,
training, maintenance, and all other post-implementation stage activities are expensed as they are incurred. Software development costs are depreciated using the straight-line method over the estimated useful lives, which range from 3 to 10 years.
Revenue Recognition
The Company's revenues are primarily generated from the distribution of pharmaceutical products. The Company also generates revenues from global commercialization services, which include clinical trial support, post-approval and commercialization support, and global specialty transportation and logistics for the biopharmaceutical industry. See Note 16 for the Company's disaggregated revenue.
The Company recognizes revenue related to the distribution of products at a point in time when persuasive evidencetitle and control transfers to customers and there is no further obligation to provide services related to such products. Service revenue is recognized over the period that services are provided to the customer. The Company is generally the principal in a transaction; therefore, revenue is primarily recorded on a gross basis. When the Company is the principal in a transaction, it has determined that it controls the ability to direct the use of anthe product or service prior to the transfer to a customer, it is primarily responsible for fulfilling the promise to provide the product or service to its customer, it has discretion in establishing pricing, and it controls the relationship with the customer. Revenue is recognized at the amount of consideration expected to be received. For the distribution business, revenue is primarily generated from a contract related to a confirmed purchase order with a customer in a distribution arrangement exists, products have been delivered or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue, as reflected in the accompanying Consolidated Statements of Operations, is net of estimated sales returns and allowances, and other customer incentives.incentives, and sales tax.
The Company's customer sales return policy generally allows customers to return products only if the products can be resold at full value or returned to suppliers for full credit. The Company records an accrual for estimated customer sales returns at the time of sale to the customer.customer based upon historical return trends. As of September 30, 20172020 and 2016,2019, the Company's accrual for estimated customer sales returns was $1,001.7$1,344.7 million and $856.3$1,147.5 million, respectively.
The Company reports the gross dollar amount
Share-Based Compensation
The Company accounts for the compensation cost of all share-based payments at fair value. The Company estimates the fair value of option grants using a binomial option pricing model. The fair value of restricted stock restricted stock units and performance stock units is based upon the grant date market price of the Company’s common stock.
Share-based compensation expense is recognized over the requisite service period within Distribution, Selling, and Administrative in the Consolidated Statements of Operations to correspond with the same line item as the cash compensation paid to employees. Compensation expense associated with nonvested performance stock units is dependent onupon the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued.
The income tax effects of awards isare recognized when the awards vest or are settled and are recognized in Income Tax Expense in the Company’s Consolidated Statements of Operations and in cash flows from operations in the Consolidated Statements of Cash Flows. The Company recognized tax benefits of $36.7 million in the fiscal year ended September 30, 2017. Prior to fiscal 2017, tax benefits from share-based compensation were recorded as adjustments to Additional Paid-in Capital within Stockholders’ Equity and as cash flows from financing activities within the Statement of Cash Flows (see Recently Adopted Accounting Pronouncements). There were no tax benefits related to share-based compensation for the fiscal year ended September 30, 2016. Tax benefits related to share-based compensation were $88.1 million for the fiscal year ended September 30, 2015.
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack, and deliver inventory to customers. These costs, which were $517.3$665.3 million, $494.7$619.7 million, and $419.2$590.8 million for the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively, are included in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Supplier Reserves
The Company establishes reserves against amounts due from its suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them from the Company. These reserve estimates are established based upon the judgment of Company management after carefully considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs, and any other pertinent information available to the Company. The Company evaluates the amounts due from its suppliers on a continual basis and adjusts the reserve estimates when appropriate based upon changes in factual circumstances. The ultimate outcome of any outstanding claim may be different than the Company's estimate.
Warrants
The Company accounted for the warrants issued to subsidiaries of WBA (collectively, the "Warrants") in accordance with the guidance for equity-based payments to non-employees. Using a binomial lattice model approach, the fair value of the Warrants was initially measured at the date of issuance, and the related expenses were recognized over the vesting period as an operating expense. The fair value of the Warrants was remeasured at the end of each reporting period, and an adjustment was recorded in the statement of operations to record the impact as if the newly measured fair value of the awards had been used in recognizing expense starting when the awards were originally issued and through the remeasurement date. In the fiscal year ended September 30, 2016, the Warrants were exercised by WBA in full (see Note 7).
Note 2. Acquisitions and Investments
On February 24, 2015,NEVSCO
In December 2017, the Company acquired MWINortheast Veterinary Supply Inc.Company ("MWI" or "MWI Animal Health"NEVSCO") for a purchase price$70.0 million. NEVSCO was an independent, regional distributor of $2.6 billion. MWI is a leading animal health distribution company inveterinary pharmaceuticals and medical supplies serving primarily the northeast region of the United States and in the United Kingdom. For reportable segment presentation, MWI's operating results arestrengthens MWI Animal Health's ("MWI") support of independent veterinary practices and provides even greater value and care to current and future animal health customers. NEVSCO is included within Other.the MWI operating segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by $1.2 billion,$30.4 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was $346.9$8.5 million, $440.0$6.7 million, and $327.1$2.9 million, respectively. The fair value of the intangible assets acquired totaled $1.5 billion andof $29.8 million primarily consisted of customer relationships, of $1.1 billion, trade name of $344.0 million, and software technology of $11.0 million. The Company established a deferred tax liability of $570.7 million primarily in connection withwhich the intangible assets acquired. The Company is amortizing the fair valuesover its estimated useful life of the acquired customer relationships and software technology over the remaining useful lives of 20 years and 8 years, respectively. The trade name was determined to have an indefinite life.15 years. Goodwill and intangiblesintangible assets resulting from the acquisition are not deductible for income tax purposes.
On November 6, 2015,H.D. Smith
In January 2018, the Company acquired PharMEDium Healthcare Holdings, Inc.H.D. Smith Holding Company ("PharMEDium"H.D. Smith") for $2.7 billion in cash, which included certain purchase price adjustments. PharMEDium is a leading national provider$815.0 million. The Company funded the acquisition through the issuance of outsourced compounded sterile preparations to acute care hospitalsnew long-term debt (see Note 7). H.D. Smith was the largest independent pharmaceutical wholesaler in the United States. PharMEDium's operating results areStates and provides full-line distribution of brand, generic, and specialty drugs, as well as high-value services and solutions for manufacturers and healthcare providers. H.D. Smith's customers included withinretail pharmacies, specialty pharmacies, long-term care facilities, institutional/hospital systems, and independent physicians and clinics. The acquisition strengthens the Company's core business, expands and enhances its strategic scale in pharmaceutical distribution, and expands the Company's support for independent community pharmacies. H.D. Smith has been integrated into the Pharmaceutical Distribution Services reportable segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by $1.8 billion,
$499.9 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was $63.2$163.1 million, $43.1$350.7 million, and $22.8$366.1 million, respectively. The fair value of the intangible assets acquired of $1.1 billion$167.8 million consisted of customer relationships of $882.7 million, trade name of $167.6$156.6 million and software technologya tradename of $52.6$11.2 million. The Company is amortizing the fair value of the customer relationships and the tradename over their estimated useful lives of 12 years and 2 years, respectively. The Company established a deferred tax liability of $356.1$60.6 million primarily in connection with the intangible assets acquired. The Company is amortizing the fair values of the acquired customer relationships and trade name over their useful lives of 15 years. The fair value of the acquired software technology is being amortized over its estimated useful life of 10 years. Goodwill and intangible assets resulting from the acquisition are not deductible for income tax purposes.
Note 3. Equity Method Investments
In June 2014, the Company completed the acquisition of a minority ownership interest in Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), a leading pharmaceutical wholesaler in Brazil. In addition, the Company and Profarma launched a joint venture to provide enhanced specialty distribution and services to the Brazilian marketplace. The Company invested a total of $117.8 million to acquire both a minority ownership interest in Profarma of approximately 19.9% and a 50% ownership interest in the specialty joint venture.
The Company accounts for its interest in both Profarma and the specialty joint venture as equity method investments, which are reported in Other Assets on the Consolidated Balance Sheets.Specialty Joint Venture
In the fiscal year ended September 30, 2015, the Company recorded an impairment charge of $30.6 million relating to its 19.9% minority ownership interest in Profarma. The impairment charge was based upon the determination by the Company that the decline in Profarma's stock price from the date on which the investment was made to September 30, 2015 was other-than-temporary.
In the fiscal year ended September 30, 2016, the Company invested an additional $17.2 million in Profarma and the specialty joint venture. In the fiscal year ended September 30, 2017, the Company invested an additional $8.3 million in Profarma. As of September 30, 2017, the Company held a minoritynoncontrolling ownership interest in Profarma, a leading pharmaceutical wholesaler in Brazil, and an ownership interest in a joint venture with Profarma to provide specialty distribution and services to the Brazilian marketplace (the "specialty joint venture"). The Company had accounted for these interests as equity method investments, which were reported in Other Assets on the Company's Consolidated Balance Sheets. In January 2018, the Company invested an additional $62.5 million in Profarma and an additional $15.6 million in the specialty joint venture to increase its ownership interests to 38.2% and 64.5%, respectively. In connection with the additional investment in Profarma, the Company received substantial governance rights, thereby requiring it to begin consolidating the operating results of approximately 24.5%Profarma as of March 31, 2018 (see Note 3). The Company also began to consolidate the operating results of the specialty joint venture as of March 31, 2018 due to its majority ownership interest. In September 2018, the Company made an additional investment of $23.6 million in the specialty joint venture to increase its ownership interest to 89.9%. Profarma and the specialty joint venture are included within the Pharmaceutical Distribution Services reportable segment and Other, respectively.
The fair value of Profarma, including the noncontrolling interest, was determined based upon an agreed-upon stock price and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of Profarma upon obtaining control exceeded the fair value of the net tangible and intangible assets consolidated by $142.0 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was $160.1 million, $190.5 million, and $167.7 million, respectively. The Company consolidated short-term debt and long-term debt of $209.9 million and $12.4 million, respectively, cash of $150.8 million, and recorded a noncontrolling interest of $168.0 million. The estimated fair value of the intangible assets consolidated of $84.6 million consisted of customer relationships of $25.9 million and a 50%tradename of $58.7 million. The Company is amortizing the customer relationships over its estimated useful life of 15 years and the tradenames over their estimated useful lives of between 15 years and 25 years. The Company established a deferred tax liability of $50.1 million primarily in connection with the intangible assets that were recognized. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
The fair value of the specialty joint venture was determined based upon the cost of the incremental ownership percentage acquired from the January 2018 investment and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of the specialty joint venture exceeded the fair value of the net tangible and intangible assets consolidated by $3.5 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was $65.0 million, $29.1 million, and $54.3 million, respectively. The Company consolidated short-term debt and cash of $32.7 million and $28.9 million, respectively. The estimated fair value of the intangible assets consolidated of $4.6 million is being amortized over its estimated useful life of 15 years. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
In connection with the incremental January 2018 Brazil investments, the Company adjusted the carrying values of its previously held equity interests in Profarma and the specialty joint venture to equal their fair values, which were determined to be $103.1 million and $31.2 million, respectively. These represent Level 2 nonrecurring fair value measurements. The adjustments resulted in a pretax loss of $42.3 million in fiscal 2018 and were comprised of foreign currency translation adjustments from Accumulated Other Comprehensive Loss of $45.9 million, a $12.4 million gain on the remeasurement of Profarma's previously held equity interest, and an $8.8 million loss on the remeasurement of the specialty joint venture's previously held equity interest.
Note 3. Variable Interest Entity
As discussed in Note 2, the Company made an additional investment in Profarma in January 2018. In connection with this investment, the Company obtained substantial governance rights, allowing it to direct the activities that significantly impact Profarma’s economic performance. As such, the Company consolidated the operating results of Profarma in its consolidated financial statements as of and for the periods ended September 30, 2020 and September 30, 2019. The Company is not obligated to provide future financial support to Profarma.
The following assets and liabilities of Profarma are included in the Company's Consolidated Balance Sheet:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2020 | | September 30,
2019 |
| Cash and cash equivalents | | $ | 96,983 | | | $ | 9,431 | |
| Accounts receivables, net | | 120,486 | | | 154,491 | |
| Inventories | | 144,059 | | | 185,602 | |
| Prepaid expenses and other | | 52,885 | | | 64,119 | |
| Property and equipment, net | | 23,584 | | | 30,961 | |
| Goodwill | | 82,309 | | | 82,309 | |
| Other intangible assets | | 73,543 | | | 74,429 | |
| Other long-term assets | | 53,513 | | | 9,169 | |
| Total assets | | $ | 647,362 | | | $ | 610,511 | |
| | | | |
| Accounts payable | | $ | 141,147 | | | $ | 165,053 | |
| Accrued expenses and other | | 34,415 | | | 49,191 | |
| Short-term debt | | 98,399 | | | 106,439 | |
| Long-term debt | | 44,144 | | | 60,973 | |
| Deferred income taxes | | 38,854 | | | 42,371 | |
| Other long-term liabilities | | 43,413 | | | 5,303 | |
| Total liabilities | | $ | 400,372 | | | $ | 429,330 | |
Profarma's assets can only be used to settle its obligations, and its creditors do not have recourse to the general credit of the Company.
Profarma Retail Equity Offering
In August 2020, Profarma received $66.4 million through an equity offering of its retail business. The equity offering decreased Profarma's voting ownership interest in the specialty joint venture.retail business from 100% to 53.5%. Profarma continues to consolidate the operating results of the retail business in its consolidated financial statements.
Note 4. Property and Equipment
The following table summarizes the Company's property and equipment balances for the periods indicated:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30,
2020 | | September 30,
2019 |
| Property and equipment, at cost: | | | | |
| Land | | $ | 39,572 | | | $ | 44,142 | |
| Buildings and improvements | | 586,551 | | | 942,129 | |
| Machinery, equipment, and other | | 2,618,354 | | | 2,362,869 | |
| Total property and equipment | | 3,244,477 | | | 3,349,140 | |
| Less accumulated depreciation | | (1,759,669) | | | (1,578,624) | |
| Property and equipment, net | | $ | 1,484,808 | | | $ | 1,770,516 | |
As of September 30, 2017 and 2016, the carrying value of the Company's equity method investments in Brazil was $57.6 million and $56.7 million, respectively, after adjusting for changes in exchange rates, earnings, and impairment.
Note 4.5. Income Taxes
The following illustrates domestic and foreigntable summarizes the Company's (loss) income before income taxes:taxes for the periods indicated:
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| Domestic | | $ | 394,721 |
| | $ | 906,415 |
| | $ | 55,545 |
| Domestic | | $ | (5,961,269) | | | $ | 336,150 | | | $ | 704,935 | |
| Foreign | | 523,166 |
| | 484,495 |
| | 213,419 |
| Foreign | | 667,438 | | | 630,956 | | | 472,488 | |
| Total | | $ | 917,887 |
| | $ | 1,390,910 |
| | $ | 268,964 |
| Total | | $ | (5,293,831) | | | $ | 967,106 | | | $ | 1,177,423 | |
The components of the Company's consolidated income tax provision (benefit) is as follows:expense are summarized in the following table for the periods indicated:
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| Current provision: | | |
| | |
| | |
| |
| Current (benefit) provision: | | Current (benefit) provision: | | | | | | |
| Federal | | $ | 141,071 |
| | $ | 11,892 |
| | $ | 310,847 |
| Federal | | $ | (473,751) | | | $ | (12,801) | | | $ | 247,755 | |
| State and local | | 35,950 |
| | 26,741 |
| | 46,240 |
| State and local | | 30,236 | | | 15,246 | | | 39,328 | |
| Foreign | | 57,313 |
| | 55,275 |
| | 29,216 |
| Foreign | | 94,213 | | | 81,989 | | | 69,972 | |
| | | 234,334 |
| | 93,908 |
| | 386,303 |
| |
| Deferred provision (benefit): | | |
| | |
| | |
| |
| Total current (benefit) provision | | Total current (benefit) provision | | (349,302) | | | 84,434 | | | 357,055 | |
| Deferred (benefit) provision: | | Deferred (benefit) provision: | | | | | | |
| Federal | | 265,074 |
| | (119,218 | ) | | 1,283 |
| Federal | | (914,613) | | | 61,819 | | | (828,023) | |
| State and local | | 54,995 |
| | (11,490 | ) | | 18,201 |
| State and local | | (264,409) | | | (31,086) | | | 33,887 | |
| Foreign | | (1,000 | ) | | (219 | ) | | 1,342 |
| Foreign | | (365,949) | | | (2,196) | | | (1,388) | |
| | | 319,069 |
| | (130,927 | ) | | 20,826 |
| |
| Provision (benefit) for income taxes | | $ | 553,403 |
| | $ | (37,019 | ) | | $ | 407,129 |
| |
| Total deferred (benefit) provision | | Total deferred (benefit) provision | | (1,544,971) | | | 28,537 | | | (795,524) | |
| (Benefit) provision for income taxes | | (Benefit) provision for income taxes | | $ | (1,894,273) | | | $ | 112,971 | | | $ | (438,469) | |
A reconciliation of the statutory U.S. federal income tax rate to the Company's consolidated effective income tax rate is as follows:follows for the periods indicated:
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Statutory U.S. federal income tax rate | 21.0% | | 21.0% | | 24.5% |
| State and local income tax rate, net of federal tax benefit | (0.5) | | 2.4 | | (0.1) |
| Foreign tax rate differential | 1.0 | | (6.7) | | (6.2) |
| Litigation settlements and accruals (see Note 14) | (6.2) | | 0.1 | | (6.3) |
| U.S. Tax reform | 0 | | (3.6) | | (52.0) |
| PharMEDium worthless stock deduction | 12.4 | | 0 | | 0 |
| Swiss Tax reform | 6.8 | | 0 | | 0 |
| CARES Act | 1.2 | | 0 | | 0 |
| Goodwill impairment (see Note 1) | 0 | | 0 | | 1.7 |
| Capital gain on distribution | 0 | | 0 | | 3.6 |
| Other | 0.1 | | (1.5) | | (2.4) |
| Effective income tax rate | 35.8% | | 11.7% | | (37.2)% |
|
| | | | | |
| | Fiscal Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Statutory U.S. federal income tax rate | 35.0% | | 35.0% | | 35.0% |
| State and local income tax rate, net of federal tax benefit | 5.4 | | 0.6 | | 10.4 |
| Foreign | (14.6) | | (8.4) | | (20.4) |
| Warrants | — | | (32.8) | | 109.7 |
| Valuation allowance | 2.2 | | 2.2 | | 9.2 |
| Excess tax benefits related to share-based compensation | (3.8) | | — | | — |
| Non-deductible litigation settlements and accruals (see Note 13) | 34.3 | | — | | — |
| Other | 1.8 | | 0.7 | | 7.5 |
| Effective income tax rate | 60.3% | | (2.7)% | | 151.4% |
In The Coronavirus Aid, Relief, and Economic Security ("CARES") Act became law on March 2013,27, 2020. The CARES Act was a response to the market volatility and instability resulting from the coronavirus pandemic and included provisions to support businesses in the form of loans, grants, and tax changes, among other types of relief that were not previously available under the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"). As it relates to the Company, issued Warrants (as definedthe CARES Act provided relief through adjustments to net operating loss rules and the acceleration of available refunds for alternative minimum tax credit carryforwards.
PharMEDium
As discussed in Note 71, the Company decided in January 2020 to shut down and permanently exit the PharMEDium Healthcare Holdings LLC ("PharMEDium") compounding business. Following the decision to exit PharMEDium and in connection with various agreements and arrangements with WBA, as successorthe permanent shutdown of this business, PharMEDium underwent a voluntary change in interest to Walgreen Co. ("Walgreens") and Alliance Boots GmbH ("Alliance Boots"). At that time,tax status, which resulted in the Company determined that the Warrants hadrecognizing a fair value of $242.4 million on the date of issuance, which was an estimate of the approximate tax deductible amount that would be deducted ratably on the Company's income tax return over the 10-year term of the various agreements, and that any value in excess of the initial fair value of the Warrants on the date of issuance would not be tax deductible. The Company reevaluated its position, and in November 2015, the Company received a private letter ruling from the Internal Revenue Service ("IRS"), which entitled it to anworthless stock ordinary income tax deduction equal to the fair value of the Warrants on the date of exercise. As a result, the Company recorded a deferred tax assetapproximately $2.4 billion and, recognizedin turn, yielded a tax benefit adjustment of approximately $456 million, which represented$655 million. The estimated tax benefit is higher than it would have been prior to the estimated benefitenactment of the CARES Act as the net operating losses resulting from the worthless stock deduction can now be carried back to years with higher statutory tax rates.
In addition to the PharMEDium worthless stock deduction, for the increase in the fair value of the WarrantsCompany recognized other discrete tax benefits primarily resulting from the issuance date through September 30, 2015. ThisCARES Act. In the aggregate, the Company recognized discrete tax benefit adjustment had a significant impact to the Company's effective tax ratebenefits of $720.6 million in the fiscal year ended September 30, 2016. 2020.
The Company's September 30, 2020 Consolidated Balance Sheet includes a net current income tax receivable balance of $488.4 million primarily resulting from the recognition of the above discrete tax benefits.
Swiss Tax Reform
In March 2016August 2020, the Canton of Bern enacted tax reforms to comply with requirements imposed by earlier Swiss federal tax reforms, which are retroactively effective as of January 1, 2020. A key provision of the Swiss federal tax reforms was the elimination of cantonal preferential tax regimes, which had the effect of increasing overall tax rates on Swiss income. To phase in the tax rate increase, the canton of Bern has granted a tax ruling to the Company that effectively reduces the Company's Swiss tax rate for a period of 10 years.
As a result of the aforementioned Swiss tax law change and August 2016,ruling, the Warrants were exercisedCompany recorded a $582.4 million gross deferred tax asset, which was offset in fullpart by WBA. a $221.7 million valuation allowance for amounts that it is more likely than not will not be realized. The net $360.7 million deferred tax asset is expected to be realized over the next 10 years resulting in an increase in the Company’s consolidated effective tax rates.
Opioid Legal Accrual
In the aggregate,fourth quarter of fiscal 2020, the total fair valueCompany recorded a $6.6 billion legal accrual in connection with litigation relating to the distribution of prescription opioid pain medications. The Company is currently in advanced discussions, which are ongoing, with the states and various plaintiff's representatives that would be necessary to reach a global settlement of the Warrants based upon their respective exercise dates was
$1,565.9 million. An additionalMultidistrict Litigation ("MDL") and related state-court litigation brought by certain state and local governmental entities to be paid over 18 years assuming all parties participate (see Note 14). As a result, the Company recognized a deferred tax benefit of approximately $52$1.1 billion, which reflects an unrecognized tax benefit of $359.5 million
U.S. Tax Reform: Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Act was recognized primarily relatedsigned into law. The 2017 Tax Act included a broad range of tax reform provisions affecting businesses, including lower corporate tax rates, changes in business deductions, and new international tax provisions. In response to the change in2017 Tax Act, the fair value ofU.S. Securities and Exchange Commission staff issued guidance regarding the Warrants from September 30, 2015accounting for income taxes associated with the 2017 Tax Act to their respective exercise dates inallow companies to record provisional amounts during a one-year measurement period. For the fiscal year ended September 30, 2016.2018, the Company recognized income tax benefits of $612.6 million on the Company's Consolidated Statements of Operations related to effects of the 2017 Tax Act, which consisted of a deferred income tax benefit of $897.6 million as a result of applying a lower U.S. federal income tax rate to the Company's net deferred tax liabilities as of December 31, 2017 and a one-time transition tax on historical foreign earnings and profits. In the fiscal year ended September 30, 2018, the Company initially recorded a current U.S. income tax expense of $285.0 million on historical foreign earnings and profits through December 31, 2017. The Company completed the accounting for the effects of the 2017 Tax Act in the fiscal quarter ended December 31, 2018 and recognized an income tax benefit of $37.0 million related to a decrease in its foreign earnings and profits through December 31, 2017 (the "transition tax"). The Company expects to pay $182.6 million related to the transition tax, which is net of overpayments and tax credits, over a six-year period commencing in January 2021. There were 0 adjustments recorded to deferred income taxes related to the 2017 Tax Act during the one-year measurement period.
Prior to the 2017 Tax Act, the Company intended to indefinitely reinvest its foreign cash in foreign investments and foreign operations. After further assessment of the impact of the 2017 Tax Act, the Company reevaluated its position and determined that it was no longer reinvested with respect to foreign subsidiaries whose undistributed earnings are able to be repatriated with minimal to no additional tax impact. Cumulative undistributed earnings of international subsidiaries were $3
billion as of September 30, 2020, $2.3 billion of which is considered permanently reinvested. It is not practicable to estimate the taxes that would be due if such earnings were to be repatriated in the future.
Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts. Significant components of the Company's deferred tax liabilities (assets) are as follows:
| | | | | September 30, | | | September 30, |
| (in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
| Merchandise inventories | | $ | 1,519,779 |
| | $ | 1,281,364 |
| |
| Inventories | | Inventories | | $ | 1,309,815 | | | $ | 1,293,075 | |
| Property and equipment | | 150,240 |
| | 123,443 |
| Property and equipment | | 94,521 | | | 143,851 | |
| Goodwill and other intangible assets | | 1,214,597 |
| | 1,248,297 |
| Goodwill and other intangible assets | | 613,123 | | | 709,015 | |
| Right-of-use assets (Note 12) | | Right-of-use assets (Note 12) | | 113,220 | | | 0 | |
| Other | | 1,126 |
| | 6,709 |
| Other | | 1,888 | | | 1,892 | |
| Gross deferred tax liabilities | | 2,885,742 |
| | 2,659,813 |
| Gross deferred tax liabilities | | 2,132,567 | | | 2,147,833 | |
| | | | | | | | | |
| Net operating loss and tax credit carryforwards | | (320,180 | ) | | (321,541 | ) | Net operating loss and tax credit carryforwards | | (263,171) | | | (318,868) | |
| Capital loss carryforwards | | (64,346 | ) | | (65,535 | ) | |
| Allowance for doubtful accounts | | (25,871 | ) | | (25,272 | ) | Allowance for doubtful accounts | | (20,051) | | | (22,544) | |
| Accrued expenses | | (36,188 | ) | | (37,842 | ) | Accrued expenses | | (21,284) | | | (33,312) | |
| Accrued litigation liability | | Accrued litigation liability | | (1,078,555) | | | 0 | |
| Employee and retiree benefits | | (17,121 | ) | | (17,759 | ) | Employee and retiree benefits | | (13,891) | | | (12,420) | |
| Goodwill and other intangible assets | | Goodwill and other intangible assets | | (582,406) | | | 0 | |
| Lease liabilities (Note 12) | | Lease liabilities (Note 12) | | (121,182) | | | 0 | |
| Share-based compensation | | (59,495 | ) | | (52,238 | ) | Share-based compensation | | (38,914) | | | (39,961) | |
| Other | | (81,009 | ) | | (90,383 | ) | Other | | (79,916) | | | (60,215) | |
| Gross deferred tax assets | | (604,210 | ) | | (610,570 | ) | Gross deferred tax assets | | (2,219,370) | | | (487,320) | |
| Valuation allowance for deferred tax assets | | 211,080 |
| | 165,531 |
| Valuation allowance for deferred tax assets | | 411,648 | | | 199,682 | |
| Deferred tax assets, net of valuation allowance | | (393,130 | ) | | (445,039 | ) | Deferred tax assets, net of valuation allowance | | (1,807,722) | | | (287,638) | |
| Net deferred tax liabilities | | $ | 2,492,612 |
| | $ | 2,214,774 |
| Net deferred tax liabilities | | $ | 324,845 | | | $ | 1,860,195 | |
The following tax net operating loss and credit carryforward information is presented as of September 30, 2017.2020. The Company had $26.5$12.4 million of potential tax benefits from federal net operating loss carryforwards, expiringwhich expire in 1 to 1917 years, $118.1$201.2 million of potential tax benefits from state net operating loss carryforwards expiring in 1 to 20 years, and $23.8$58.9 million of potential tax benefits from foreign net operating loss carryforwards, which have varying expiration dates. The Company had $64.3$12.8 million of potential tax benefits from capital loss carryforwards expiring in 1 to 3 years. The Company had $12.3 million of foreign tax credit carryforwards expiring in 1 to 9 years. The Company had $2.6 million of state tax credit carryforwards and $140.0 million in federal alternative minimum tax credit carryforwards and $2.1 million in foreign alternative minimum tax credit carryforwards.
The Company had $9.9 million in federal researchassesses the available positive and developmentnegative evidence to determine whether deferred tax credit carryforwards expiring in 18assets are more likely than not to 20 years.
Inbe realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets. For the fiscal year ended September 30, 2017,2020 and 2019, the Company increased the valuation allowance on deferred tax assets by $45.5$212.0 million due to the addition of certain state and foreign net operating loss carryforwards. Included$0.3 million, respectively. The increase in the $45.5 million valuation allowance is a $17.1 million valuation allowance that was established in connection with the adoption of ASU 2016-09 (see Note 1). This amount was not recognized in the Consolidated Statement of Operations in the fiscal year ended September 30, 2017. In the fiscal year ended September 30, 2016, the Company increased the valuation allowance on deferred tax assets by $33.4 million2020 was primarily due to the addition of certain state and foreign net operating loss carryforwards.valuation allowance associated with the deferred tax asset established in connection with Swiss Tax Reform (see above).
In the fiscal year ended September 30, 2017,2020, 2019, and 2018 tax benefits of $36.7$3.9 million, $7.9 million and $22.7 million, respectively, related to the exercise of employee stock options and lapses of restricted sharesstock units were recorded in Income Tax (Benefit) Expense in the Company's Consolidated StatementStatements of Operations. InThe tax benefits recognized in the fiscal yearyears ended September 30, 2016, there were no tax benefits related to the exercise2020, 2019, and 2018 are not necessarily indicative of employee stock options and lapses of restricted shares. In the fiscal year ended September 30, 2015, tax benefits of $88.1 million related to the exercise of employee stock options and lapses of restricted shares were recorded within Additional Paid-In Capital (see Note 1).amounts that may arise in future periods.
Income tax payments, net of refunds, were $105.0$139.4 million, $17.5$117.7 million, and $299.6$104.0 million in the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is currently undergoing a U.S. federal income tax audit for fiscal year 2018 and certain state and local income tax audits for various years. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2013.2016. The Company believes it has adequate tax reserves to cover potential federal, state or foreign tax exposures.
As of September 30, 20172020 and 2016,2019, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company's financial statements, of $338.4$498.3 million and $88.2$124.2 million, respectively ($304.2455.5 million and $63.1$95.0 million, net of federal tax benefit, respectively). If
recognized in the fiscal years ended September 30, 20172020 and 2016, $289.22019, $437.2 million and $48.0$76.8 million, respectively, of these benefits would have reduced income
tax expense and the effective tax rate. As of September 30, 20172020 and 2016,2019, included in the unrecognized tax benefits are $14.5$19.9 million and $12.4$18.6 million of interest and penalties, respectively, which the Company records in Income Tax (Benefit) Expense in the Company's Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the periods indicated is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Unrecognized tax benefits at beginning of period | | $ | 105,657 | | | $ | 98,124 | | | $ | 323,869 | |
| Additions of tax positions of the current year | | 385,797 | | | 18,819 | | | 2,804 | |
| Additions to tax positions of the prior years | | 5,599 | | | 751 | | | 558 | |
| Reductions of tax positions of the prior years | | (6,480) | | | (10,317) | | | (224,878) | |
| Settlements with taxing authorities | | 0 | | | 0 | | | (1,847) | |
| Expiration of statutes of limitations | | (12,222) | | | (1,720) | | | (2,382) | |
| Unrecognized tax benefits at end of period | | $ | 478,351 | | | $ | 105,657 | | | $ | 98,124 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Unrecognized tax benefits at beginning of period | | $ | 75,766 |
| | $ | 44,722 |
| | $ | 42,908 |
|
| Additions of tax positions of the current year | | 252,866 |
| | 24,145 |
| | 3,616 |
|
| Additions to tax positions of the prior years | | 1,049 |
| | 11,840 |
| | — |
|
| Reductions of tax positions of the prior years | | (668 | ) | | (1,407 | ) | | (871 | ) |
| Settlements with taxing authorities | | (3,285 | ) | | (2,589 | ) | | (33 | ) |
| Expiration of statutes of limitations | | (1,859 | ) | | (945 | ) | | (898 | ) |
| Unrecognized tax benefits at end of period | | $ | 323,869 |
| | $ | 75,766 |
| | $ | 44,722 |
|
In the fiscal year ended September 30, 2017, the Company recorded a reserve associated with civil litigation that was considered to be non-deductible. In September 2018, the Company made a payment of $625.0 million, plus interest, to resolve this litigation, and it was determined that a portion of the settlement was deductible. Accordingly, the Company reduced its unrecognized tax benefit by $10.3 million and $224.9 million in the fiscal years ended September 30, 2019 and 2018, respectively. Included in the additions of unrecognized tax positionsbenefits in the fiscal year ended September 30, 20172020 is approximately $235.1$371.5 million for an uncertainunrecognized tax positionbenefit related to the $625.0 million civil$6.6 billion legal accrual for litigation reserve recognized duringrelated to the fiscal year endeddistribution of prescription opioid pain medications, as disclosed in Note 14. As of September 30, 2017 (see Note 13).2020, a settlement has not been reached, and, therefore, the Company applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible for U.S. federal and state purposes. In estimating the amount that would ultimately be deductible, the Company considered prior U.S. tax case law, the amount and character of the damages sought in the opioid litigation, the inherent uncertainty related to litigation of this nature and magnitude, and other relevant factors. While the Company believes that its estimate of the uncertain tax benefit appropriately reflects these considerations, it is reasonably possible that the unrecognized tax benefit recorded as of September 30, 2020 may be revised in future periods as the settlement with the various plaintiffs is finalized. During the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately $5.2$13.9 million.
Cumulative undistributed earnings of international subsidiaries were $1.3 billion at September 30, 2017. No deferred federal income taxes were provided for the undistributed earnings as they are permanently reinvested in the Company's international operations. It is not practicable to estimate the amount of U.S. tax that would result upon the eventual repatriation of such earnings.
Note 5.6. Goodwill and Other Intangible Assets
The following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the fiscal years ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Pharmaceutical
Distribution Services | | Other | | Total |
| Goodwill as of September 30, 2018 | | $ | 4,852,775 | | | $ | 1,811,497 | | | $ | 6,664,272 | |
| Goodwill recognized in connection with acquisitions | | 0 | | | 43,418 | | | 43,418 | |
| | | | | | |
| Foreign currency translation | | 0 | | | (2,183) | | | (2,183) | |
| Goodwill as of September 30, 2019 | | 4,852,775 | | | 1,852,732 | | | 6,705,507 | |
| | | | | | |
| | | | | | |
| Foreign currency translation | | 0 | | | 1,212 | | | 1,212 | |
| Goodwill as of September 30, 2020 | | $ | 4,852,775 | | | $ | 1,853,944 | | | $ | 6,706,719 | |
|
| | | | | | | | | | | | |
| (in thousands) | | Pharmaceutical Distribution Services | | Other | | Total |
| Goodwill as of September 30, 2015 | | $ | 2,438,437 |
| | $ | 1,705,954 |
| | $ | 4,144,391 |
|
| Goodwill recognized in connection with acquisitions | | 1,832,113 |
| | 18,196 |
| | 1,850,309 |
|
| Foreign currency translation | | — |
| | (3,203 | ) | | (3,203 | ) |
| Goodwill as of September 30, 2016 | | 4,270,550 |
| | 1,720,947 |
| | 5,991,497 |
|
| Goodwill recognized in connection with acquisitions | | — |
| | 54,151 |
| | 54,151 |
|
| Goodwill disposed in connection with divestiture | | — |
| | (3,564 | ) | | (3,564 | ) |
| Foreign currency translation | | — |
| | 2,197 |
| | 2,197 |
|
| Goodwill as of September 30, 2017 | | $ | 4,270,550 |
| | $ | 1,773,731 |
| | $ | 6,044,281 |
|
The following is a summary of other intangible assets:
| | | | | September 30, 2017 | | September 30, 2016 | | | September 30, 2020 | | September 30, 2019 |
| (dollars in thousands) | | Weighted Average Remaining Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (dollars in thousands) | | Weighted Average Remaining Useful Life | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Indefinite-lived trade names | | $ | 685,088 |
| | $ | — |
| | $ | 685,088 |
| | $ | 684,991 |
| | $ | — |
| | $ | 684,991 |
| Indefinite-lived trade names | | | | $ | 685,312 | | | $ | — | | | $ | 685,312 | | | $ | 685,324 | | | $ | — | | | $ | 685,324 | |
| Finite-lived: | | | | | | | | | | | | | Finite-lived: | |
| Customer relationships | | 15 years | | 2,329,665 |
| | (408,636 | ) | | 1,921,029 |
| | 2,322,404 |
| | (273,638 | ) | | 2,048,766 |
| Customer relationships | | 13 years | | 1,671,888 | | | (565,372) | | | 1,106,516 | | | 1,931,212 | | | (489,471) | | | 1,441,741 | |
| Trade names and other | | 11 years | | 325,353 |
| | (98,189 | ) | | 227,164 |
| | 307,234 |
| | (73,142 | ) | | 234,092 |
| Trade names and other | | 14 years | | 210,394 | | | (116,115) | | | 94,279 | | | 271,521 | | | (103,750) | | | 167,771 | |
| Total other intangible assets | | $ | 3,340,106 |
| | $ | (506,825 | ) | | $ | 2,833,281 |
| | $ | 3,314,629 |
| | $ | (346,780 | ) | | $ | 2,967,849 |
| Total other intangible assets | | $ | 2,567,594 | | | $ | (681,487) | | | $ | 1,886,107 | | | $ | 2,888,057 | | | $ | (593,221) | | | $ | 2,294,836 | |
Amortization expense for otherfinite-lived intangible assets was $160.5$110.9 million, $152.5$167.4 million, and $56.5$181.2 million in the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively. Amortization expense for finite-lived intangible assets is estimated to
be $161.8 million in fiscal 2018, $157.2 million in fiscal 2019, $152.8 million in fiscal 2020, $150.8$101.9 million in fiscal 2021, $149.6$100.3 million in fiscal 2022, $98.8 million in fiscal 2023, $97.4 million in fiscal 2024, $96.6 million in 2025, and $1,376.0$705.8 million thereafter.
Note 6.7. Debt
Debt consisted of the following:
| | | | | September 30, | | | September 30, |
| (in thousands) | | 2017 | | 2016 | (in thousands) | | 2020 | | 2019 |
| Revolving credit note | | $ | — |
| | $ | — |
| Revolving credit note | | $ | 0 | | | $ | 0 | |
| Receivables securitization facility due 2019 | | 500,000 |
| | 500,000 |
| |
| Term loans due in 2020 | | 547,860 |
| | 697,055 |
| |
| Multi-currency revolving credit facility due 2021 | | — |
| | — |
| |
| Overdraft facility due in 2021 | | 12,121 |
| | 11,275 |
| |
| $600,000, 1.15% senior notes due 2017 | | — |
| | 598,935 |
| |
| $400,000, 4.875% senior notes due 2019 | | 398,399 |
| | 397,669 |
| |
| Term loan due October 2020 | | Term loan due October 2020 | | 399,982 | | | 399,778 | |
| Overdraft facility due 2021 (£30,000) | | Overdraft facility due 2021 (£30,000) | | 0 | | | 32,573 | |
| Receivables securitization facility due 2022 | | Receivables securitization facility due 2022 | | 350,000 | | | 350,000 | |
| Multi-currency revolving credit facility due 2024 | | Multi-currency revolving credit facility due 2024 | | 0 | | | 0 | |
| $500,000, 3.50% senior notes due 2021 | | 497,877 |
| | 497,361 |
| $500,000, 3.50% senior notes due 2021 | | 0 | | | 498,908 | |
| $500,000, 3.40% senior notes due 2024 | | 496,766 |
| | 496,276 |
| $500,000, 3.40% senior notes due 2024 | | 498,232 | | | 497,744 | |
| $500,000, 3.25% senior notes due 2025 | | 494,950 |
| | 494,266 |
| $500,000, 3.25% senior notes due 2025 | | 496,990 | | | 496,311 | |
| $750,000, 3.45% senior notes due 2027 | | $750,000, 3.45% senior notes due 2027 | | 743,940 | | | 743,099 | |
| $500,000, 2.80% senior notes due 2030 | | $500,000, 2.80% senior notes due 2030 | | 494,045 | | | 0 | |
| $500,000, 4.25% senior notes due 2045 | | 494,082 |
| | 493,866 |
| $500,000, 4.25% senior notes due 2045 | | 494,730 | | | 494,514 | |
| $500,000, 4.30% senior notes due 2047 | | $500,000, 4.30% senior notes due 2047 | | 492,755 | | | 492,488 | |
| Nonrecourse debt | | Nonrecourse debt | | 148,846 | | | 167,477 | |
| Total debt | | $ | 3,442,055 |
| | $ | 4,186,703 |
| Total debt | | 4,119,520 | | | 4,172,892 | |
| Less current portion | | 12,121 |
| | 610,210 |
| |
| Less AmerisourceBergen Corporation current portion | | Less AmerisourceBergen Corporation current portion | | 399,982 | | | 32,573 | |
| Less nonrecourse current portion | | Less nonrecourse current portion | | 101,277 | | | 106,439 | |
| Total, net of current portion | | $ | 3,429,934 |
| | $ | 3,576,493 |
| Total, net of current portion | | $ | 3,618,261 | | | $ | 4,033,880 | |
Multi-Currency Revolving Credit Facility
The Company has a $1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which expiresis scheduled to expire in November 2021,September 2024, with a syndicate of lenders. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based upon the Company's debt rating and ranges from 70 basis points to 110112.5 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 September 30, 2017)2020) and from 0 basis points to 1012.5 basis points over the alternate base rate and Canadian prime rate, as applicable. The Company pays facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based uponon its debt rating, ranging from 5 basis points to 1512.5 basis points, annually, of the total commitment (9 basis points as of September 30, 2017)2020). The Company may choose to repay or reduce its 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 the Company was compliant as of September 30, 2017.2020. The opioid litigation accrual discussed in Note 14 has not and is not expected to have an impact on the Company's compliance with its debt covenants.
Commercial Paper Program
The Company has a commercial paper program whereby it 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 the Company's borrowing capacity as it is fully backed by the Company's Multi-Currency Revolving Credit Facility. There were no0 borrowings outstanding under the commercial paper program as of September 30, 20172020 and 2016.2019.
Receivables Securitization Facility
The Company has a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which expiresis scheduled to expire in November 2019.September 2022. The Company has available to it 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 uponon prevailing market rates for short-term commercial paper or LIBOR, plus a program fee. The Company pays a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility.
In connection with the Receivables Securitization Facility, AmerisourceBergen Drug Corporation sellsand a specialty distribution subsidiary sell on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored
by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. The facility is a financing vehicle utilized by the Company because it generally offers an attractive interest rate relative to other financing sources. The Company securitizes its trade accounts, which are generally non-interest bearing, in transactions that are accounted for as borrowings. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of September 30, 2017.2020.
Revolving Credit Note and Overdraft Facility
The Company has an uncommitted, unsecured line of credit available to it pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides the Company 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 the Company at any time without prior notice. The Company also has 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 its MWI business.
Term Loans
In February 2015,October 2018, the Company entered intorefinanced $400 million of outstanding Term Loans by issuing a $1.0 billionnew $400 million variable-rate term loan ("February 2015October 2018 Term Loan"), which maturesmatured and was repaid in October 2020. Through September 30, 2017,
Senior Notes
In May 2020, the Company elected to makeissued $500 million of 2.80% senior notes due May 15, 2030 (the "2030 Notes"). The 2030 Notes were sold at 99.71% of the principal payments, prioramount and have an effective yield of 2.81%. Interest on the 2030 Notes is payable semi-annually in arrears, commencing on November 15, 2020. The 2030 Notes rank pari passu to the scheduled repayment dates, of $775 million on the February 2015 Term Loan, and as a result, the Company's next required principal payment is due upon maturity. The February 2015 Term Loan bears interest at a rate equal either to a base rate plus a margin, or LIBOR, plus a margin. The margin is based upon the public debt ratings of the Company and ranges from 75 basis points to 125 basis points over LIBOR (100 basis points as of September 30, 2017) and 0 to 25 basis points over a base rate. The February 2015 Term Loan contains similar covenants toother senior notes, the Multi-Currency Revolving Credit Facility, the Revolving Credit Note, the and Overdraft Facility.
The Company used the proceeds from the 2030 Notes to finance the early retirement of the $500 million of 3.50% senior notes that were due in 2021 and made a $21.4 million prepayment premium in connection with which the Company was compliant as of September 30, 2017.this early retirement.
In November 2015, the Company entered into a $1.0 billion variable-rate term loan ("November 2015 Term Loan"), which matures in 2020. Through September 30,December 2017, the Company made a scheduledissued $750 million of 3.45% senior notes due December 15, 2027 (the "2027 Notes") and $500 million of 4.30% senior notes due December 15, 2047 (the "2047 Notes"). The 2027 Notes were sold at 99.76% of the principal payment, as well as otheramount and have an effective yield of 3.48%. The 2047 Notes were sold at 99.51% of the principal payments prioramount and have an effective yield of 4.33%. Interest on the 2027 Notes and the 2047 Notes is payable semi-annually in arrears and commenced on June 15, 2018. The 2027 and 2047 Notes rank pari passu to the scheduled repayment dates totaling $675 million on the November 2015 Term Loan, and as a result, the Company's next required principal payment is due upon maturity. The November 2015 Term Loan bears interest at a rate equal either to a base rate, plus a margin, or LIBOR, plus a margin. The margin is based upon the public debt ratings of the Company and ranges from 75 basis points to 125 basis points over LIBOR (100 basis points as of September 30, 2017) and 0 basis points to 25 basis points over a base rate. The November 2015 Term Loan contains similar covenants toother senior notes, the Multi-Currency Revolving Credit Facility, with which the Revolving Credit Note, the Overdraft Facility, and the October 2018 Term Loan.
The Company was compliant asused the proceeds from the 2027 Notes and the 2047 Notes to finance the early retirement of September 30, 2017.
Senior Notes
In May 2017, the Company repaid the $600$400 million of 1.15%4.875% senior notes that became due.were due in 2019, including the payment of a $22.3 million prepayment premium, and to finance the acquisition of H.D. Smith, which was completed in January 2018 (see Note 2).
The senior notes are collectively referred to as the "Notes." Interest on the Notes is payable semiannually in arrears. The Notes were sold at small discounts to the principal amounts and, therefore, have effective yields that are greater than the stated interest rates in the table above. Costs incurred in connection with the issuance of the Notes were deferred and are being amortized over the terms of the Notes. The indentures governing the Notes contain restrictions and covenants, which include limitations on additional indebtedness; distributions to stockholders; the repurchase of stock and the making of other restricted payments; issuance of preferred stock; creation of certain liens; transactions with subsidiaries and other affiliates; and certain corporate acts such as mergers, consolidations, and the sale of substantially all assets. An additional covenant requires compliance with a financial leverage ratio test, with which thetest. The Company was compliant with all covenants as of September 30, 2017.2020.
Nonrecourse Debt
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.
Other Information
Scheduled future principal payments of debt are $12.1 million in fiscal 2018, $1.1 billion in fiscal 2020, $325.0$493.1 million in fiscal 2021, $383.9 million in fiscal 2022, $8.0 million in fiscal 2023, $503.7 million in fiscal 2024, $500.0 million in fiscal 2022,2025, and $1.5$2.3 billion thereafter.
Interest paid on the above indebtedness during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 was $125.3$150.7 million, $123.5$167.4 million, and $91.5$162.1 million, respectively.
Total amortization of financing fees and the accretion of original issue discounts, which are recorded as components of Interest Expense, Net on the Consolidated Statements of Operations, were $6.2$6.4 million, $6.3$7.1 million, and $5.2$7.7 million, for the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively.
Note 7.8. Stockholders' Equity and Earnings per ShareWeighted Average Common Shares Outstanding
The authorized capital stock of the Company consists of 600,000,000 shares of common stock, par value $0.01 per share (the "common stock"), and 10,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock""preferred stock").
The board of directors is authorized to provide for the issuance of shares of Preferred Stockpreferred stock in one or more series with various designations and preferences and relative, participating, optional, or other special rights and qualifications, limitations, or restrictions. Except as required by law, or as otherwise provided by the board of directors of the Company, the holders of Preferred Stockpreferred stock will have no voting rights and will not be entitled to notice of meetings of stockholders. Holders of Preferred Stockpreferred stock will be entitled to receive, when declared by the board of directors, out of legally available funds, dividends at the rates fixed by the board of directors for the respective series of Preferred Stock,preferred stock, and no more, before any dividends will be declared and paid, or set apart for payment, on common stock with respect to the same dividend period. NoNaN shares of Preferred Stockpreferred stock have been issued as of September 30, 2017.2020.
The holders of the Company's common stock are entitled to one vote per share and have the exclusive right to vote for the board of directors and for all other purposes as provided by law. Subject to the rights of holders of the Company's Preferred Stock,preferred stock, holders of common stock are entitled to receive ratably on a per share basis such dividends and other distributions in cash, stock, or property of the Company as may be declared by the board of directors from time to time out of the legally available assets or funds of the Company. The opioid litigation accrual discussed in Note 14 has not and is not expected to impact the Company's ability to pay dividends.
The following illustrates the components of Accumulated Other Comprehensive Loss, net of income taxes:
|
| | | | | | | | |
| | | September 30, |
| (in thousands) | | 2017 | | 2016 |
| Pension and postretirement adjustments (see Note 9) | | $ | (4,186 | ) | | $ | (5,843 | ) |
| Foreign currency translation | | (92,164 | ) | | (108,704 | ) |
| Other | | 500 |
| | 239 |
|
| Total accumulated other comprehensive loss | | $ | (95,850 | ) | | $ | (114,308 | ) |
In August 2013, the Company's board of directors authorized a share repurchase program allowing the Company to purchase up to $750 million of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2014, the Company purchased 2.4 million shares of its common stock for a total of $174.7 million under this program, which included $18.0 million of fiscal 2014 purchases that cash settled in October 2014. During the fiscal year ended September 30, 2015, the Company purchased 3.3 million shares of its common stock for a total of $300.8 million under this program. During the six months ended March 31, 2016, the Company purchased 1.1 million shares of its common stock for a total of $100.0 million under this program. In May 2016, the Company's board of directors authorized a new share purchase program that, together with availability remaining under the existing August 2013 share repurchase program, permitted the Company to purchase up to $750 million of its outstanding shares of common stock, subject to market conditions. In September 2016, the Company entered into an Accelerated Share Repurchase ("ASR") transaction with a financial institution and paid $400.0 million for the delivery of 4.5 million shares of its common stock. The initial payment of $400.0 million funded stock purchases of $380.0 million and a share holdback of $20.0 million. The ASR transaction was settled in November 2016, at which time the financial institution delivered an additional 0.5 million shares of the Company's common stock. The number of shares ultimately received was based upon the volume-weighted average price of the Company's common stock during the term of the ASR. The Company applied the 4.5 million shares from the ASR to the May 2016 share repurchase program. In addition to the ASR, the Company purchased 2.9 million shares of its common stock in fiscal 2016 for a total of $231.2 million under this program. During the fiscal year ended September 30, 2017, the Company purchased 2.1 million shares of its common stock (includes 0.5 million shares of common stock received as part of the settlement of the ASR) for a total of $118.8 million to complete its authorization under this program. | | | | | | | | | | | | | | |
| | | September 30, |
| (in thousands) | | 2020 | | 2019 |
| Pension and postretirement adjustments | | $ | (5,761) | | | $ | (5,344) | |
| Foreign currency translation | | (103,043) | | | (107,252) | |
| Other | | (26) | | | 631 | |
| Total accumulated other comprehensive loss | | $ | (108,830) | | | $ | (111,965) | |
In November 2016, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2017,2018, the Company purchased 2.77.7 million shares of its common stock for a total of $211.1$663.1 million, under this program. Aswhich included $24.0 million of September 30, 2017, the Company had $788.9 million of availability remaining under this program.
Warrants and Related Hedging Activity
In March 2013, the Company and WBA entered into various agreements and arrangements pursuant to which subsidiaries of WBA were granted the right to purchase a minority equity position2018 purchases that cash settled in the Company, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of the Company's common stock in open market transactions (approximately 7%
of the Company's common stock on a fully diluted basis as of the date of issuance of the Warrants described below, assuming their exercise in full). In connection with these arrangements, wholly-owned subsidiaries of WBA were issued (a) warrants to purchase up to an aggregate of 22,696,912 shares of the Company's common stock at an exercise price of $51.50 per share, exercisable during a six-month period beginning in March 2016 (the "2016 Warrants"), and (b) warrants to purchase up to an aggregate of 22,696,912 shares of the Company's common stock at an exercise price of $52.50 per share, exercisable during a six-month period beginning in March 2017 (the "2017 Warrants" and, together with the 2016 Warrants, the "Warrants").
In June 2013, the Company commenced a hedging strategy by entering into a contract with a financial institution pursuant to which it executed a series of issuer capped call transactions ("Capped Calls"). The Capped Calls gave the Company the right to buy shares of its common stock subject to the Warrants at specified prices at maturity. This hedge transaction was completed in January 2014 and included the purchase of Capped Calls on a total of 27.2 million shares of the Company's common stock for a total premium of $368.7 million.
Subsequently, the Company paid a premium of $100.0 million in January 2015 to increase the cap price on certain of the Capped Calls subject to the 2016 Warrants. The Capped Calls allowed the Company to acquire shares of its common stock at strike prices of $51.50 and $52.50 and had expiration dates ranging from February 2016 through October 2017. The Capped Calls permitted net share settlement, which was limited by caps on the market price of the Company's common stock. The Company accounted for the Capped Calls as equity contracts, and therefore, the above premium was recorded as a reduction to paid-in capital.
In May 2014, the Company's board of directors authorized a special program that allowed the Company to purchase up to $650 million of its outstanding shares of common stock, subject to market conditions, as an opportunity to further mitigate the potentially dilutive effect of the Warrants and supplement the Company's previously executed warrants hedging strategy.2018. During the fiscal year ended September 30, 2014,2019, the Company purchased 3.41.4 million shares of its common stock for a total of $252.0$125.8 million, under this program, which included $18.0excluded $24.0 million of September 2018 purchases that cash settled in October 2014. During the fiscal year ended September 30, 2015, the Company purchased 4.3 million shares (1.6 million under the Call Options for a total of $151.2 million, as defined below) of its common stock for a total of $398.0 million under this program, which excluded $18.0 million of purchases that cash settled in October 2014,2018, to complete its authorization under this program.
In March 2015, the Company further supplemented its hedging strategy by entering into a contract with a financial institution pursuant to which it executed a series of issuer call options ("Call Options"). The Call Options gave the Company the right to buy shares of its common stock subject to the Warrants at specified prices between April 2015 and October 2015. In total, the Company purchased Call Options on six million shares of its common stock for a total premium of $80.0 million. The Company accounted for the Call Options as equity contracts, and therefore, the above premium was recorded as a reduction to paid-in capital.
In April 2015,2018, the Company's board of directors authorized a special share repurchase program allowing it to repurchase up to $1.0 billion in shares of its common stock, subject to market conditions, to further mitigate the potentially dilutive effect of the Warrants as part of its warrants hedging strategy. During the fiscal year ended September 30, 2015, the Company purchased 10.0 million shares (2.9 million under the Call Options for a total of $276.3 million) of its common stock for a total of $1.0 billion to complete its authorization under this program.
In September 2015, the Company's board of directors authorized a special share repurchase program allowing the Company to repurchasepurchase up to $2.4$1.0 billion inof its outstanding shares of its common stock, subject to market conditions. During the fiscal year ended September 30, 2015,2019, the Company purchased 1.26.7 million shares of its common stock for a total of $124.1$538.9 million under this program.program, which included $14.8 million of September 2019 purchases that cash settled in October 2019. During the fiscal year ended September 30, 2016,2020, the Company purchased 26.34.9 million shares of its common stock for a total of $1,535.1$405.6 million, which excluded $14.8 million of September 2019 purchases that cash settled in October 2019. As of September 30, 2020, the Company had $55.5 million of availability under this program. The Company had $740.9 million
In May 2020, the Company's board of availability remaining under this specialdirectors authorized a new share repurchase program as of September 30, 2016. However, this availability will not be utilized as the earnings per share dilution effect of the Warrants was fully mitigated byallowing the Company concurrent with the August 2016 exercise of the 2017 Warrants (see below).
In March 2016, the 2016 Warrants were exercised by WBA for $1,168.9to purchase up to $500 million in cash. The shares issued for the 2016 Warrants were from the Company's treasury stock on a first-in, first-out basis, and were originally purchased for $866.0 million. The Company recognized a reissuance gain in Additional Paid-in Capital of $302.9 million.
In August 2016, the Company and WBA amended the 2017 Warrants so that they became exercisable in whole or in part during the six-month period beginning in August 2016 at an exercise price of $52.50. In August 2016, the 2017 Warrants were exercised by WBA for $1,191.6 million in cash. The shares issued for the 2017 Warrants were from the Company's treasury stock on a first-in, first-out basis, and were originally purchased for $1,157.5 million. The Company recognized a reissuance gain in Additional Paid-in Capital of $34.1 million.
The earnings per share dilutive effect of the Warrants was fully mitigated by the Company hedging a portion of its obligation to deliveroutstanding shares of common stock, with a financial institution and repurchasing additional shares of its common stock under the special share repurchase programs, as described above, for the Company's own account over time.subject to market conditions.
Common Shares Outstanding
Basic earnings per share is computed on the basis ofby dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed on the basis ofby dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding, during the periods presented, plus the dilutive effect of stock options restricted stock,and restricted stock units during the unsettled ASR transaction, and the Warrants.periods presented.
The following illustrates the components of diluted weighted average shares outstanding:
|
| | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Weighted average common shares outstanding — basic | | 218,375 |
| | 212,206 |
| | 217,786 |
|
| Effect of dilutive securities — stock options, restricted stock, restricted stock units, and the unsettled ASR transaction | | 3,227 |
| | 3,338 |
| | — |
|
| Dilutive effect of the Warrants | | — |
| | 10,415 |
| | — |
|
| Weighted average common shares outstanding — diluted | | 221,602 |
| | 225,959 |
| | 217,786 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Weighted average common shares outstanding - basic | | 204,783 | | | 210,165 | | | 217,872 | |
| Effect of dilutive securities - stock options and restricted stock units | | 0 | | | 1,675 | | | 2,464 | |
| Weighted average common shares outstanding - diluted | | 204,783 | | | 211,840 | | | 220,336 | |
The potentially dilutive shares from employee stock options restricted stock,and restricted stock units the unsettled ASR transaction, and the Warrants that were antidilutive for the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 were 4.14.2 million, 3.14.6 million, and 18.63.2 million, respectively.
Note 8.9. Related Party Transactions
WBA owns more than 10% of the Company's outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement pursuant to which the Company distributes pharmaceutical products to WBA and an agreement that provides the Company the ability to access favorable economic pricing and generic products through a generic purchasing services arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Revenue from the various agreements and arrangements with WBA was $45.4$63.1 billion, $43.4$60.3 billion, and $40.5$54.7 billion in the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, respectively. The Company's receivable from WBA, net of incentives, was $5.0$6.6 billion and $4.0$6.1 billion as of September 30, 20172020 and 2016,2019, respectively.
Note 9.10. Retirement and Other Benefit Plans
The Company sponsors various retirement benefit plans and a deferred compensation plan covering eligible employees.
The Compensation and Succession Planning Committee ("Compensation Committee") of the Company's board of directors has delegated the administration of the Company's retirement and other benefit plans to its Benefits Committee, an internal committee, comprised of senior finance, human resources, and legal executives. The Benefits Committee is responsible for the investment options under the Company's savings plans, as well as performance of the investment advisers and plan administrators.
Defined Benefit Plans
The Company approved the termination, effective August 1, 2014, of a salaried defined benefit pension plan, under which approximately 3,200 participants, including 500 active employees, had accrued benefits. In fiscal 2015, the Company obtained regulatory approval from the IRS to settle the plan.
In December 2015, the Company completed the settlement of plan benefits through the combination of lump-sum distributions to participants and the purchase of a nonparticipating annuity contract, which transferred the remaining obligation from the plan. Plan assets were sufficient to satisfy the obligations of the plan. During the fiscal year ended September 30, 2016, the Company recorded a pension settlement charge of $47.6 million, which primarily consisted of the recognition of unrecognized actuarial losses that were included in Accumulated Other Comprehensive Loss, net of the related deferred tax assets.
In June 2016, the Company transferred the surplus plan assets to its defined contribution 401(k) plan and recorded a charge of $17.1 million to Employee Severance, Litigation, and Other in the Company's Consolidated Statement of Operations.
Defined Contribution Plans
The Company sponsors the AmerisourceBergen Employee Investment Plan (the "Plan"), which is a defined contribution 401(k) plan covering salaried and certain hourly employees. Eligible participants may contribute to the plan from 1% to 25%50% of their regular compensation before taxes. Prior toEffective January 1, 2017, the Company contributed $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary. Effective January 1, 2019, the Company contributes $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary and $0.50 for each additional $1.00 invested by the participant of up to an additional 2% of salary. Effective January 1, 2017, the Company contributes $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary. An additional discretionary contribution, in an amount not to exceed the limits established by the Internal Revenue Code ("IRC"), may also be made depending upon the Company's performance. In connection withBased on the termination ofCompany's performance in fiscal 2020, 2019, and 2018, the salaried defined benefit plan, as discussed above, $17.1 million was transferredCompany recognized an expense for discretionary contributions to the 401(k) planPlan in June 2016. In March 2017, the funds were contributed to participants who were eligible to participate in the 401(k) plan as of December 31, 2015, based upon their eligible calendar 2016 earnings. There were no discretionary contributions made for the fiscal years ended September 30, 20172020, 2019, and 2015.2018. All contributions are invested at the direction of the employee in one or more funds. All contributions vest immediately except for the discretionary contributions made by the Company, which vest in full after five years of credited service.
The Company also sponsors the AmerisourceBergen Corporation Benefit Restoration Plan. This unfunded plan provides benefits to selected key management, including all of the Company's executive officers. Prior toEffective January 1, 2017, the Company contributedthis plan provided eligible participants with an annual amount equal to 4%3% of the participant's total cash compensation to the extent that his or her compensation exceededexceeds the annual compensation limit established by Section 401(a) (17) of the IRC. Effective January 1, 2017,2019, this plan will provideprovides eligible participants with an annual amount equal to 3%4% of the participant's total cash compensation to the extent that his or her compensation exceeds the annual compensation limit established by Section 401(a) (17) of the IRC.
Costs of the defined contribution plans charged to expense for the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 were $28.3$45.9 million, $34.4$51.0 million, and $23.5$37.9 million, respectively.
Deferred Compensation Plan
The Company sponsors the AmerisourceBergen Corporation 2001 Deferred Compensation Plan. This unfunded plan, under which 2.96 million shares of common stock are authorized for issuance, allows eligible officers, directors, and key management employees to defer a portion of their annual compensation. The amount deferred may be allocated by the employee to cash, mutual funds, or stock credits. Stock credits, including dividend equivalents, are equal to the full and fractional number of shares of common stock that could be purchased with the participant's compensation allocated to stock credits based upon the average of closing prices of common stock during each month, plus, at the discretion of the board of directors, up to one-half of a share of common stock for each full share credited. Stock credit distributions are made in shares of common stock. NoNaN shares of common stock have been issued under the deferred compensation plan through September 30, 2017.2020. The Company's liability relating to its deferred compensation plan as of September 30, 20172020 and 20162019 was $26.3$31.1 million and $23.6$28.0 million, respectively.
Note 10.11. Share-Based Compensation
Stock Options
The Company's employee stock option plans provide for the granting of incentive and nonqualified stock options to acquire shares of common stock to employees at a price not less than the fair market value of the common stock on the date the option is granted. Option terms and vesting periods are determined at the date of grant by the Compensation Committee of the board of directors. Employee options generally vest ratably, in equal amounts, over a four-yearfour-year service period and expire in seven years (ten years for all grants issued prior to February 2008).years. The Company's non-employee director stock option plans provide for the granting of nonqualified stock options to acquire shares of common stock to non-employee directors at the fair market value of the common stock on the date of the grant. Non-employee director options vest ratably, in equal amounts, over a three-yearthree-year service period and expire in ten years. Non-employee director options have not been granted since February 2011.
As of September 30, 2017,2020, employee and non-employee director stock options and restricted stock units for an additional 18.19.2 million shares may be granted under the AmerisourceBergen Corporation Omnibus Incentive Plan (the "Plan").
The estimated fair value of options granted is expensed on a straight-line basis over the requisite service periods of the awards and are net of estimated forfeitures. The Company estimates the fair values of option grants using a binomial option pricing model. Expected volatilities are based upon the historical volatility of the Company's common stock and other factors, such as implied market volatility. The Company uses historical exercise data, taking into consideration the optionees' ages at grant date, to estimate the terms for which the options are expected to be outstanding. The Company anticipates that the terms ofit not will grant any stock options
granted in the future will be similar to those granted in the past.fiscal 2021. The risk-free rates during the terms of such options are based upon the U.S. Treasury yield curve in effect at the time of grant.
The weighted average fair values of the options granted during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 were $13.57, $17.43,$16.61, $18.60, and $14.91,$14.16, respectively. The following weighted average assumptions were used to estimate the fair values of options granted:
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, |
| | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | 1.66% | | 2.91% | | 1.89% |
| Expected dividend yield | 1.86% | | 1.79% | | 1.96% |
| Volatility of common stock | 28.17% | | 27.67% | | 26.54% |
| Expected life of the options | 3.79 years | | 3.77 years | | 3.76 years |
|
| | | | | |
| | Fiscal Year Ended September 30, |
| | 2017 | | 2016 | | 2015 |
| Risk-free interest rate | 1.26% | | 1.40% | | 1.23% |
| Expected dividend yield | 1.80% | | 1.38% | | 1.29% |
| Volatility of common stock | 26.78% | | 25.05% | | 23.12% |
| Expected life of the options | 3.74 years | | 3.72 years | | 3.73 years |
Changes to the above valuation assumptions could have a significant impact on share-based compensation expense. During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the Company recognized stock option expense of $28.6$13.0 million, $33.1$21.0 million, and $30.2$22.6 million, respectively.
A summary of the Company's stock option activity and related information for its option plans for the fiscal year ended September 30, 20172020 is presented below:
| | | (in thousands, except exercise price and contractual term) | | Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value | (in thousands, except exercise price and contractual term) | | Options | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term | | Aggregate
Intrinsic
Value |
| Outstanding as of September 30, 2016 | | 11,004 |
| | $63 | | 4 years | | $ | 247,586 |
| |
| Outstanding as of September 30, 2019 | | Outstanding as of September 30, 2019 | | 7,659 | | | $83 | | 4 years | | $ | 35,319 | |
| Granted | | 2,106 |
| | $76 | | | | |
| Granted | | 383 | | | $86 | | | | |
| Exercised | | (2,510 | ) | | $41 | | | | |
| Exercised | | (2,242) | | | $76 | | | | |
| Forfeited | | (284 | ) | | $86 | | | | |
| Forfeited | | (166) | | | $83 | | | | |
| Expired | | (29 | ) | | $92 | | | Expired | | (75) | | | $95 | |
| Outstanding as of September 30, 2017 | | 10,287 |
| | $70 | | 4 years | | $ | 170,856 |
| |
| Exercisable as of September 30, 2017 | | 5,535 |
| | $58 | | 3 years | | $ | 149,760 |
| |
| Expected to vest after September 30, 2017 | | 4,586 |
| | $84 | | 5 years | | $ | 20,376 |
| |
| Outstanding as of September 30, 2020 | | Outstanding as of September 30, 2020 | | 5,559 | | | $86 | | 3 years | | $ | 62,770 | |
| Exercisable as of September 30, 2020 | | Exercisable as of September 30, 2020 | | 3,430 | | | $88 | | 2 years | | $ | 33,107 | |
| Expected to vest after September 30, 2020 | | Expected to vest after September 30, 2020 | | 2,072 | | | $83 | | 5 years | | $ | 29,032 | |
The intrinsic value of stock option exercises during the fiscal years ended September 30, 2017, 2016,2020, 2019, and 20152018 was $116.6$42.6 million, $120.9$51.2 million, and $240.2$116.7 million, respectively.
A summary of the status of the Company's nonvested options as of September 30, 20172020 and changes during the fiscal year ended September 30, 20172020 is presented below:
| | | (in thousands, except grant date fair value) | | Options | | Weighted Average Grant Date Fair Value | (in thousands, except grant date fair value) | | Options | | Weighted
Average
Grant Date
Fair Value |
| Nonvested as of September 30, 2016 | | 5,061 |
| | $14 | |
| Nonvested as of September 30, 2019 | | Nonvested as of September 30, 2019 | | 3,265 | | | $16 |
| Granted | | 2,106 |
| | $14 | Granted | | 383 | | | $17 |
| Vested | | (2,131 | ) | | $12 | Vested | | (1,353) | | | $16 |
| Forfeited | | (284 | ) | | $15 | Forfeited | | (166) | | | $16 |
| Nonvested as of September 30, 2017 | | 4,752 |
| | $15 | |
| Nonvested as of September 30, 2020 | | Nonvested as of September 30, 2020 | | 2,129 | | | $16 |
During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the total fair values of options vested were $25.2$21.3 million, $24.4$22.7 million, and $20.7$25.8 million, respectively. Expected future compensation expense relating to the 4.82.1 million nonvested options outstanding as of September 30, 20172020 is $31.8$10.3 million, which will be recognized over a weighted average period of 2.21.7 years.
Restricted Stock and Restricted Stock Units
Restricted sharesstock units vest in full after three years. The estimated fair value of restricted sharesstock units under the Company's restricted stock unit plans is determined by the product of the number of shares granted and the grant date market price of the Company's common stock. The estimated fair value of restricted sharesstock units is expensed on a straight-line basis over the requisite service period, and are net of estimated forfeitures. During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the Company recognized restricted stock unit expense of $25.1$39.8 million, $19.5$29.2 million, and $20.1$26.8 million, respectively.
A summary of the status of the Company's nonvested restricted sharesstock units as of September 30, 20172020 and changes during the fiscal year ended September 30, 20172020 are presented below:
| | | (in thousands, except grant date fair value) | | Restricted Shares | | Weighted Average Grant Date Fair Value | (in thousands, except grant date fair value) | | Restricted
Stock Units | | Weighted
Average
Grant Date
Fair Value |
| Nonvested as of September 30, 2016 | | 608 |
| | $85 | |
| Nonvested as of September 30, 2019 | | Nonvested as of September 30, 2019 | | 1,222 | | | $81 |
| Granted | | 467 |
| | $76 | Granted | | 760 | | | $86 |
| Vested | | (201 | ) | | $69 | Vested | | (346) | | | $76 |
| Forfeited | | (55 | ) | | $89 | Forfeited | | (124) | | | $84 |
| Nonvested as of September 30, 2017 | | 819 |
| | $84 | |
| Nonvested as of September 30, 2020 | | Nonvested as of September 30, 2020 | | 1,512 | | | $85 |
During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the total fair values of restricted sharesstock units vested were $13.8$26.4 million, $17.8$14.5 million, and $10.9$15.8 million, respectively. Expected future compensation expense relating to the 0.81.5 million restricted sharesstock units outstanding as of September 30, 20172020 is $23.4$43.4 million, which will be recognized over a weighted average period of 1.51.4 years.
Performance Stock Units
Performance stock units are granted to certain executive employees under the Plan and represent common stock potentially issuable in the future. Performance stock units vest at the end of a three-yearthree-year performance period based upon achievement of specific performance goals. Based upon the extent to which the targets are achieved, vested shares for awards granted prior to fiscal 2018 may range from 0% to 150% of the target award amount. For awards granted beginning in fiscal 2018, vested shares may range from 0% to 200% of the target award amount. The fair value of performance stock units is determined by the grant date market price of the Company's common stock. Compensation expense associated with nonvested performance stock units is recognized over the requisite service period and is dependent on the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued. During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the Company recognized performance stock expense of $8.4$21.5 million, $12.3$8.5 million, and $10.6$12.8 million, respectively.
A summary of the status of the Company's nonvested performance stock units as of September 30, 20172020 and changes during the fiscal year ended September 30, 20172020 is presented below (based upon target award amounts).
| | | | | | | | | | | | | | |
| (in thousands, except grant date fair value) | | Performance
Stock
Units | | Weighted
Average
Grant Date
Fair Value |
| Nonvested as of September 30, 2019 | | 283 | | | $84 |
| Granted | | 150 | | | $86 |
| Vested | | (139) | | | $78 |
| Forfeited | | (6) | | | $89 |
| Nonvested as of September 30, 2020 | | 288 | | | $88 |
|
| | | | | |
| (in thousands, except grant date fair value) | | Performance Stock Units | | Weighted Average Grant Date Fair Value |
| Nonvested as of September 30, 2016 | | 164 |
| | $93 |
| Granted | | 119 |
| | $76 |
| Vested | | (82 | ) | | $89 |
| Nonvested as of September 30, 2017 | | 201 |
| | $85 |
Shares that vested over the three-yearthree-year performance period ended September 30, 20172020 were distributed to employees in November 2017.2020.
Employee Stock Purchase Plan
The AmerisourceBergen Corporation Employee Stock Purchase Plan provides for an aggregate of 4,000,000 shares of common stock that may be sold to eligible employees (generally defined as employees with at least 30 days of service with the Company). The participants may elect to have the Company withhold up to 25% of his or her base salary to purchase shares of the Company's common stock at a price equal to 95% of the fair market value of the stock on the last business day of each six-month purchase period. Each participant is limited to $25,000 of purchases during each calendar year. During the fiscal years ended September 30, 2017, 2016, and 2015, the Company acquired 75,904 shares, 71,016 shares, and 53,434 shares, respectively, from the open market for issuance to participants in this plan. As of September 30, 2017, the Company has withheld $1.5 million from eligible employees for the purchase of additional shares of common stock.
Note 11.12. Leases and Other Commitments
The Company has long-term leases for facilities and equipment. In the normal course of business, leases are generally renewed or replaced by other leases. Certain leases include escalation clauses. During
The following illustrates the components of lease cost for the period presented:
| | | | | | | | |
| (in thousands) | | Fiscal year ended September 30, 2020 |
| Operating lease cost | | $ | 118,144 | |
| Short-term lease cost | | 4,632 | |
| Variable lease cost | | 17,814 | |
| Total lease cost | | $ | 140,590 | |
The Company recorded rental expense of $108.9 million and $114.9 million in the fiscal years ended September 30, 2017, 2016, 2015,2019 and 2018, respectively.
The following summarizes balance sheet information related to operating leases:
| | | | | | | | |
| (in thousands, except for lease term and discount rate) | | September 30, 2020 |
| Right of use assets | | |
| Other assets | | $ | 443,522 | |
| | |
| Lease liabilities | | |
| Accrued expenses and other | | $ | 92,587 | |
| Other long-term liabilities | | 385,507 | |
| Total lease liabilities | | $ | 478,094 | |
| | |
| Weighted-average remaining lease term | | 6.50 years |
| Weighted-average discount rate | | 3.72% |
Other cash flow information related to operating leases is as follows:
| | | | | | | | |
| (in thousands) | | Fiscal year ended September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating lease cash payments | | $ | 115,028 | |
| | |
| Right-of-use assets obtained in exchange for lease liabilities | | |
| New operating leases | | $ | 61,779 | |
Leases recognized upon adoption of ASC 842 | | $ | 526,281 | |
Future minimum rental payments under noncancellable operating leases were as follows:
| | | | | | | | |
| Payments Due by Fiscal Year (in thousands) | | As of September 30, 2020 |
| 2021 | | $ | 117,680 | |
| 2022 | | 113,632 | |
| 2023 | | 102,564 | |
| 2024 | | 93,464 | |
| 2025 | | 83,789 | |
| Thereafter | | 376,396 | |
| Total future undiscounted lease payments | | 887,525 | |
Less: Future payments for leases that have not yet commenced 1 | | (308,431) | |
| Less: Imputed interest | | (101,000) | |
| Total lease liabilities | | $ | 478,094 | |
| | |
1 The Company has certain leases that it has executed for which it does not control the underlying assets; therefore, lease liabilities and ROU assets were not recorded on the Company's Consolidated Balance Sheet as of September 30, 2020. These future commitments primarily relate to the Company's new general corporate and administrative office. |
Under the Company recorded rental expense of $80.7 million, $88.8 million, and $78.6 million, respectively, in Distribution, Selling, and Administrative inprior accounting guidance, the Consolidated Statements of Operations.
As of September 30, 2017, future minimum rental payments under noncancelablenoncancellable operating leases and financing obligations were as follows:
|
| | | | | | | | | | | | |
| Payments Due by Fiscal Year (in thousands) | | Operating Leases | | Financing Obligations 1 | | Total |
| 2018 | | $ | 61,676 |
| | $ | 28,706 |
| | $ | 90,382 |
|
| 2019 | | 50,165 |
| | 30,913 |
| | 81,078 |
|
| 2020 | | 45,173 |
| | 31,564 |
| | 76,737 |
|
| 2021 | | 34,631 |
| | 30,182 |
| | 64,813 |
|
| 2022 | | 27,321 |
| | 28,474 |
| | 55,795 |
|
| Thereafter | | 76,511 |
| | 159,345 |
| | 235,856 |
|
| Total minimum lease payments | | $ | 295,477 |
| | $ | 309,184 |
| | $ | 604,661 |
|
| | | | | | | |
1 Represents the portion of future minimum lease payments relating to facility leases where the Company was determined to be the accounting owner (see Note 1). These payments are recognized as reductions to the financing obligation and as interest expense and exclude the future non-cash termination of the financing obligation. |
The Company outsources to IBM Global Services a significant portion of its data center operations. The remaining commitment under the Company's arrangement, which expires in January 2021, is approximately $67.7 million as of September 30, 2017, of which $35.0 million represents the Company's commitment in fiscal 2018.2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Payments Due by Fiscal Year (in thousands) | | Operating
Leases | | Financing Obligations 1 | | Total |
| 2020 | | $ | 94,958 | | | $ | 22,468 | | | $ | 117,426 | |
| 2021 | | 84,002 | | | 29,790 | | | 113,792 | |
| 2022 | | 72,224 | | | 36,914 | | | 109,138 | |
| 2023 | | 63,507 | | | 35,950 | | | 99,457 | |
| 2024 | | 56,377 | | | 35,276 | | | 91,653 | |
| Thereafter | | 177,267 | | | 270,410 | | | 447,677 | |
| Total minimum lease payments | | $ | 548,335 | | | $ | 430,808 | | | $ | 979,143 | |
| | | | | | |
1 Represents the portion of future minimum lease payments relating to facility leases where the Company was determined to be the accounting owner (see Note 1). These payments were recognized as reductions to the financing obligation and as interest expense and excluded the future non-cash termination of the financing obligation. |
Note 12.13. Employee Severance, Litigation, and Other
The following illustrates the charges incurred by the Company relating to Employee Severance, Litigation, and Other:Other for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Employee severance | | $ | 34,401 | | | $ | 34,147 | | | $ | 36,694 | |
| Litigation and opioid-related costs | | 6,722,346 | | | 185,145 | | | 61,527 | |
| Acquisition-related deal and integration costs | | 15,958 | | | 43,184 | | | 33,912 | |
| Business transformation efforts | | 37,961 | | | 55,437 | | | 32,963 | |
| Other restructuring initiatives | | (3,359) | | | 12,561 | | | 18,424 | |
| Total employee severance, litigation, and other | | $ | 6,807,307 | | | $ | 330,474 | | | $ | 183,520 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Employee severance and other costs | | $ | 38,095 |
| | $ | 53,519 |
| | $ | 5,336 |
|
| Litigation settlements and accruals | | 914,400 |
| | — |
| | — |
|
| Deal-related transaction costs | | 6,832 |
| | 19,243 |
| | 32,558 |
|
| Transfer of surplus plan assets | | — |
| | 17,149 |
| | — |
|
| Customer contract dispute settlements | | — |
| | 13,000 |
| | — |
|
| Total employee severance, litigation, and other | | $ | 959,327 |
| | $ | 102,911 |
| | $ | 37,894 |
|
DuringEmployee severance in the fiscal year ended September 30, 2017, the Company incurred $38.1 million of2020 included costs primarily related to employeeposition eliminations resulting from the Company's decision to permanently exit the PharMEDium compounding business. Employee severance and other costs, $914.4 million of charges for litigation settlements and accruals (see Note 13), and $6.8 million of deal-related transaction costs. Duringin the fiscal year ended September 30, 2017,2019 included costs primarily related to PharMEDium restructuring activities, position eliminations resulting from our business transformation efforts and the Company beganintegration of H.D. Smith, and restructuring activities related to reorganizeour consulting business. Employee severance in the fiscal year ended September 30, 2018 included costs primarily related to position eliminations resulting from the Company's business transformation efforts and restructuring activities related to our consulting business.
Litigation and opioid-related costs in the fiscal year ended September 30, 2020 included costs primarily related to a $6.6 billion legal accrual ($5.5 billion, net of an income tax benefit) (see Note 14) and legal fees in connection with opioid lawsuits and investigations. Litigation and opioid-related costs in the fiscal year ended September 30, 2019 consisted of $116.7 million of legal settlements and accruals and $68.5 million of legal fees in connection with opioid lawsuits and investigations. Litigation and opioid-related costs in the fiscal year ended September 30, 2018 primarily related to opioid lawsuits, investigations, and related initiatives.
Acquisition-related deal and integration costs in the fiscal year ended September 30, 2019 are primarily related to the integration of H.D. Smith. Integration costs primarily included costs to transition servicing legacy H.D. Smith customers to existing company distribution facilities and operating systems. Acquisition-related deal and integration costs in the fiscal year ended September 30, 2018 were primarily related to the acquisition of H.D. Smith.
Business transformation efforts in the fiscal years ended September 30, 2020, 2019, and 2018 were primarily related to costs associated with reorganizing the Company to further align the organization to its customers' needsneeds. The majority of these costs were related to services provided by third-party consultants, including certain technology initiatives.
Other restructuring initiatives in a more seamless and unified way, while supporting corporate strategy and accelerating growth, and as a result, numerous positions were eliminated. During the fiscal year ended September 30, 2016,2020 included a $19.1 million gain on the Company incurred $53.5 millionsale of employee severance and other costs, $19.2 million of deal-related transaction costs (primarily related to professional fees with respect to the PharMEDium acquisition), a $17.1 million charge related to the transfer of surplus assets from the Company's settled salaried defined benefit pension plan to its defined contribution 401(k) plan, and $13.0 million of costs related to customer contract extensions (primarily related to the settlement of certain disputed items). During the fiscal year ended September 30, 2016, the Company reorganized certain of its business units and corporate functions to improve operating efficiency, and as a result, numerous positions were eliminated. During the fiscal year ended September 30, 2015, the Company incurred $5.3 million of employee severance and other costs and $32.6 million of deal-related transaction costs (primarily related to professional fees in connection with the MWI acquisition).property.
Employees receive their severance benefits over a period of time, generally not in excess of 12 months, or in the form of a lump-sum payment.
Note 13.14. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, stockholder demands, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
For those matters for which the Company has not recognized a liability, the Company cannot predict the outcome of their impact on the Company as uncertainty remains with regard to whether such matters will proceed to trial, whether settlements will be reached, and the amount and terms of any such settlements. Outcomes may include settlements in significant amounts that are not currently estimable, limitations on the Company's conduct, the imposition of corporate integrity agreement obligations, consent decrees, and/or other civil and criminal penalties. From time to time, the Company is also involved in disputes with its customers, which the Company generally seeks to resolve through commercial negotiations. If negotiations are unsuccessful, the parties may litigate the dispute or otherwise attempt to settle the matter.
With respect to the specific legal proceedings and claims described below, except asunless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
Opioid Lawsuits and Investigations
A significant number of counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as numerous states and tribes, have filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and certain subsidiaries, such as AmerisourceBergen Drug Corporation ("ABDC") and H.D. Smith), pharmaceutical manufacturers, retail chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications. Other lawsuits regarding the distribution of prescription opioid pain medications have been filed by: third-party payors and similar entities; hospitals; hospital groups; and individuals, including cases styled as putative class actions. The lawsuits, which have been and continue to be filed in federal, state, and other courts, generally allege violations of controlled substance laws and various other statutes as well as common law claims, including negligence, public nuisance, and unjust enrichment, and seek equitable relief and monetary damages. An initial group of cases was consolidated for Multidistrict Litigation ("MDL") proceedings before the United States District Court for the Northern District of Ohio (the "Court") in December 2017. Additional cases have been, and will likely continue to be, transferred to the MDL. Further, in June 2018, the Court granted a motion permitting the United States, through the DOJ, to participate in settlement discussions and as a friend of the Court by providing information to facilitate non-monetary remedies.
In April 2018, the Court issued an order creating a litigation track, which includes dispositive motion practice, discovery, and trials in certain bellwether jurisdictions. In December 2018, the Court issued an order selecting two additional cases for a second bellwether discovery and trial track. In November 2019 and January 2020, the Court filed Suggestions of
Remand with the Judicial Panel on Multidistrict Litigation that identified four cases filed against the Company, including the two additional bellwether cases, for potential transfer from the MDL back to federal courts in California, Oklahoma, and West Virginia for the completion of discovery, motion practice, and trial. All four cases have now been remanded to those federal district courts and discovery has commenced. The two consolidated cases in West Virginia that were scheduled to commence trial on October 19, 2020 were postponed to January 4, 2021 due to COVID-19. For the California case, the current trial date is October 25, 2021. No trial date has been established for the Oklahoma case, in which the plaintiff is the Cherokee Nation.
On October 21, 2019, the Company announced an agreement in principle with two Ohio counties, Cuyahoga and Summit, to settle all claims brought by the two counties against the Company in the first track of the MDL. Pursuant to the settlement, claims against the Company were dismissed with prejudice and the Company made a payment of $66.7 million in December 2019. The Company had previously recorded a charge of $66.7 million in the fourth quarter of the fiscal year ended September 30, 2019 within Employee Severance, Litigation and Other in its Statement of Operations and in Accrued Expenses and Other on the Company’s Consolidated Balance Sheet.
On October 21, 2019, the Attorneys General for North Carolina, Pennsylvania, Tennessee, and Texas announced certain proposed settlement terms intended to provide a potential framework for a global resolution of the state and local government entity lawsuits in the MDL and in state courts, including cases currently filed and that could be filed. The attorneys general's announcement outlined that the three largest U.S. pharmaceutical distributors would be expected to pay an aggregate amount of up to $18.0 billion over 18 years, of which the Company's portion would be 31%, in addition to the development and participation in a program for free or rebated distribution of opioid-abuse medications for a period of 10 years and the implementation of industry-wide changes to be specified to controlled substance anti-diversion programs. Since that time, the Company has engaged in discussions that include the four attorneys general, as well as other attorneys general, plaintiffs' lawyers representing local governments, and other parties with the objective of reaching potential terms for a global resolution.
The Company is currently in advanced discussions, which are ongoing, with the states and various plaintiffs’ representatives that would be necessary to reach a global settlement of the MDL and related state-court litigation brought by certain state and local governmental entities by the 3 largest U.S. pharmaceutical distributors of $21.0 billion to be paid over 18 years in which the Company’s payment would be $6.5 billion assuming all parties participate. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. The discussions also involve certain changes to the Company's anti-diversion programs. While a global settlement remains subject to contingencies that could impact whether the parties ultimately decide to move forward, the Company believes a global settlement is probable and its loss related thereto can be reasonably estimated as of September 30, 2020. The Company has recorded a charge of $6.6 billion in the fourth quarter of the fiscal year ended September 30, 2020 within Employee Severance, Litigation and Other in its Statement of Operations related to the global settlement as well as other opioid-related litigation. The Company currently estimates that $408.0 million will be paid prior to September 30, 2021, which is recorded in Accrued Expenses and Other on the Company’s Consolidated Balance Sheet. The remaining liability of $6.2 billion is recorded in Accrued Litigation Liability on the Company's Consolidated Balance Sheet. While the Company has accrued its estimated liability for this matter, it is unable to estimate the range of possible loss associated with these opioid litigation matters. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. The Company will regularly review these opioid litigation matters to determine whether its accrual is adequate. The amount of ultimate loss may differ materially from the $6.6 billion accrual. Until such time as a plaintiff participates in a global settlement or otherwise resolves its lawsuit, the Company will continue to litigate and prepare for trial in the cases pending in the MDL, those remanded from the MDL to federal district courts, as well as in state courts where lawsuits have been filed, and intends to continue to vigorously defend itself in all such cases. Since these matters are still developing, the Company is unable to predict the outcome, but the result of these lawsuits could include excessive monetary verdicts and/or injunctive relief that may affect the Company's operations. Further, any final settlement among parties may differ materially from the Company's advanced discussions related to global resolution of the MDL and related state-court litigation involving certain state and local governmental entities.
In June 2019, attorneys for some of the plaintiffs filed a motion proposing a procedure to certify a nationwide "negotiation class" of cities and counties for the purpose of negotiating and settling with defendants engaged in the nationwide manufacturing, sale, or distribution of opioids. The attorneys subsequently withdrew the motion and refiled an amended motion on July 9, 2019. The Court granted the motion on September 11, 2019 and certain defendants, including ABDC filed an appeal with the U.S. Court of Appeals for the Sixth Circuit. On September 24, 2020, the Sixth Circuit reversed the Court's prior order. On October 8, 2020, certain of the plaintiffs filed a petition asking the Sixth Circuit to rehear the matter en banc, which has not yet been decided.
Notwithstanding the Company's accrual of $6.6 billion, a trial in New York state for cases brought by Nassau and Suffolk Counties and the New York Attorney General against a variety of defendants, including the Company, was scheduled to
begin on March 20, 2020. The trial is not part of the MDL and has been delayed due to the COVID-19 outbreak. The court has not yet set a new trial date but has expressed an intention to commence trial early in 2021, if possible. A trial in Ohio state court for a case brought by the Ohio Attorney General against ABDC and certain other pharmaceutical wholesale distributors was scheduled to begin trial on October 19, 2020 but has been postponed to March 8, 2021. Several other cases filed in various state courts have trial dates scheduled in 2021 and later, although all such dates are subject to change.
Aside from those parties that have already filed suit, other entities, including additional attorneys general’s offices, counties, and cities in multiple states, may continue to file additional lawsuits or enforcement proceedings. The Company is vigorously defending itself in the pending lawsuits and intends to vigorously defend itself against any threatened lawsuits or enforcement proceedings.
The Company has also received subpoenas, civil investigative demands, and other requests for information, requesting the production of documents regarding the distribution of prescription opioid pain medications from government agencies in other jurisdictions, including certain states. The Company is engaged in discussions with representatives from these government agencies regarding the requests and has been producing responsive documents. The Company cannot predict how these matters would be affected by a global settlement.
Since July 2017, the Company has received subpoenas from several U.S. Attorney's Offices, including grand jury subpoenas from the U.S. Attorney's Office for the District of New Jersey ("USAO-NJ") and the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY"). Those subpoenas request the production of a broad range of documents pertaining to the Company's distribution of controlled substances through its various subsidiaries, including ABDC, and its diversion control programs. The Company has been engaged in discussions with the various U.S. Attorney’s Offices, including the Health Care and Government Fraud Unit of the Criminal Division of the USAO-NJ, and has been producing documents in response to the subpoenas.
Government Enforcement and Related Litigation Matters
The Company is involved in government investigationsOn May 17, 2019, PharMEDium reached an agreement on the terms of the Consent Decree with the U.S. Food and litigation arising fromDrug Administration ("FDA") and the marketing, promotion, sale, and dispensing of pharmaceutical products inDOJ that was entered by the United States. SomeStates District Court for the Northern District of these investigations originate through what are knownIllinois on May 22, 2019. As previously disclosed, in late January 2020 the Company decided to permanently exit the PharMEDium compounding business. As a result the Company ceased all commercial operations related to this business as qui tam complaints well as all administrative operations other than those needed to complete the shutdown. While PharMEDium has ceased commercial operations, it remains subject to the terms of the Federal False Claims Act. The qui tam provisions ofConsent Decree and continues to work with the Federal Civil False Claims Act and various state and local civil False Claims Acts permit a private person, known as a "relator" or whistleblower, to file civil actions under these statutes on behalf of the federal, state, and local governments. Qui tam complaints are initially filed by the relator under seal (or on a confidential basis)FDA and the filing of the complaint imposes obligations on government authoritiesDOJ to investigate the allegations in the complaintcomply with applicable laws and to determine whether or not to intervene in the action. Qui tam complaints remain sealed until the court in which the case was filed orders otherwise.regulations.
Under the Federal False Claims Act, the government (or relators who pursue the claims without the participation of the government in the case) may seek to recover up to three times the amount of damages in addition to a civil penalty for each allegedly false claim submitted to the government for payment. Generally speaking, these cases take several years for the investigation to be completed and, ultimately, to be resolved (either through litigation or settlement) after the complaint is unsealed. In addition, some states have pursued investigations under state false claims statutes or consumer protection laws, either in conjunction with a government investigation or separately. There is often collateral litigation that arises from public disclosures of government investigations, including the filing of class action lawsuits by third party payors or by shareholders alleging violations of the securities laws.
The Federal Food, Drug, and Cosmetic Act ("FDCA") contains provisions relating to the sale and distribution of pharmaceutical products that are alleged to be adulterated or misbranded. The FDCA includes strict-liability criminal offenses that can be pursued by the government for violations of the FDCA and which can result in the imposition of substantial fines and penalties against corporations and individuals.
The Company has learned that there are filings in one or more federal district courts, including a qui tam complaint filed by one of its former employees, that are under seal and may involve allegations against the Company (and/or subsidiaries or businesses of the Company, including its group purchasing organization for oncologists and its oncology distribution business) relating to its distribution of certain pharmaceutical products to providers.
Subpoenas, and Ongoing Investigations, and Other Contingencies
From time to time, the Company receives subpoenas or requests for information from various government agencies relating to the Company's business or to the business of a customer, supplier, or other industry participant. The Company generally responds to such subpoenas and requests in a cooperative manner. TheseCompany's responses often require time and effort and can result in considerable costs being incurred by the Company.incurred. Most of these matters are resolved without incident; however, such subpoenas or requests can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the health carehealthcare industry, as well as to substantial settlements.
Since fiscal 2012, the Company and its subsidiary AmerisourceBergen Specialty Group ("ABSG") have been responding to subpoenas from the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY") requesting production of documents and information relating to the pre-filled syringe program of ABSG’s subsidiary Medical Initiatives, Inc., ABSG's oncology distribution center, its group purchasing organization for oncologists, and intercompany transfers of certain oncology products. Medical Initiatives, Inc. voluntarily ceased operations in early 2014. The Company has produced documents and witnesses, and has engaged in ongoing dialogue with the USAO-EDNY, since 2012.
On September 27, 2017, pursuant to the terms of a plea agreement, ABSG entered a guilty plea to a one-count strict-liability misdemeanor violation of the FDCA in the United States District Court of the Eastern District of New York. Under the terms of the agreement, which were approved by the Court, ABSG paid a total criminal fine and forfeiture of $260.0 million in fiscal 2017. The guilty plea resolves the federal criminal investigation related to the failure of Medical Initiatives, Inc. to duly register with the United States Food and Drug Administration. The Company also entered into a Compliance Agreement with the United States Department of Justice for a period of three years. During the year ended September 30,In January 2017, the Company recognized the $260.0 million settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
The USAO-EDNY also indicated that it intended to pursue alleged civil claims under the False Claims Act. ABSG recently reached an agreement in principle with the USAO-EDNY which the Company understands will resolve the alleged civil claims in their entirety. The agreement in principle is subject to negotiation of final terms, approval by the parties, execution of definitive documents, obtaining the satisfactory resolution of related issues with certain other interested parties, including the resolution of any potential administrative action by the Office of Inspector General of the U.S. Department of Health and Human Services, and approval by the Court. Under the terms of the agreement in principle with the USAO-EDNY, ABSG will pay $625.0 million. In connection with the agreement in principle, the Company accrued a $625.0 million reserve in the fiscal year ended September 30, 2017. The Company recognized this accrual in Employee Severance, Litigation, and Other on the Company's Consolidated Statement of Operations for the fiscal year ended September 30, 2017 and in Accrued Expenses and Other on the Company's Consolidated Balance Sheet as of September 30, 2017.
In fiscal 2012, the Company's subsidiary AmerisourceBergen Drug Corporation ("ABDC") received a subpoena from the U.S. Attorney's Office for the District of New Jersey ("USAO-NJ") in connection with a grand jury proceeding requesting documents concerning ABDC's program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific, and industrial purposes. ABDC also received a subpoena from the Drug Enforcement Administration ("DEA") in connection with the matter. Since fiscal 2012, ABDC has received and responded to a number of subpoenas from both the USAO-NJ and DEA requesting grand jury testimony and additional information related to electronically stored information, documents concerning specific customers' purchases of controlled substances, and DEA audits. In July 2017, the USAO-NJ and DEA served an administrative subpoena requesting documents relating to ABDC’s diversion control programs from 2013 to the present. The Company is responding to the 2017 subpoena and continues to engage in dialogue with the USAO-NJ, including discussions to attempt to reach a negotiated settlement. No conclusion can be drawn at this time as to any likely outcome in this matter.
Since fiscal 2013, the Company or ABDC has received subpoenas from the U.S. Attorney's Office for the District of Kansas and the U.S. Attorney's Office for the Northern District of Ohio in connection with grand jury proceedings requesting documents concerning ABDC's program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific and industrial purposes. As in the USAO-NJ matter described above, in addition to requesting information on ABDC's diversion control program generally, the subpoenas have also requested documents concerning specific customers' purchases of controlled substances. The Company has responded to the subpoenas and requests for information.
The Company’s subsidiary U.S. Bioservices Corporation ("USU.S. Bio") settled with the United States Attorney’s Office for the Southern District of New York ("USAO-SDNY") relating to all federal law claims arising from the previously disclosed matter involving the dispensing of one product and US Bio’s relationship with the manufacturer of that product, and it has reached an agreement in principle with various states relating to the state law claims arising from the same matter. In accordance with the executed settlement stipulation, the Court dismissed the matter between US Bio and the USAO-SDNY with prejudice, and the Company paid the United States $10.7 million in fiscal 2017, representing the federal government’s portion of the previously-disclosed $13.4 million settlement. The agreement in principle with the states, which will include payment by US Bio of $2.8 million, provided all eligible states participate in the settlement, is subject to approval by the parties and execution of definitive documents. Under the terms of the agreement in principle, the participating states agree not to bring and to dismiss with prejudice any state law claims that they have the authority to bring against US Bio. During the year ended September 30, 2017, the Company recognized the $13.4 million settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
In January 2017, US Bio received a subpoena for information from the USAO-EDNY relating to US Bio’sits activities in connection with billing for products and making returns of potential overpayments to government payers. A filed qui tam complaint related to the investigation was unsealed in April 2019 and the relator filed an amended complaint under seal in the U.S. District Court for the Eastern District of New York. In December 2019, the government filed a notice that it was declining to intervene. The court ordered that the relator's complaint against the Company, including subsidiaries AmerisourceBergen Specialty Group, LLC and U.S. Bio, be unsealed. The relator’s complaint alleged violations of the federal False Claims Act and the false claims acts of various states. The relator filed a second amended complaint, removing one state false claims act count. The Company is engagedfiled a motion to dismiss the second amended complaint and all briefing on the motion was filed with the court on October 9, 2020.
On October 11, 2019, Teamsters Local 443 Health Services & Insurance Plan, St. Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), Retirement Medical Funding Plan for the St. Paul Electrical Workers, and San Antonio Fire & Police Pension Fund filed a complaint for a purported derivative action in discussionsthe Delaware Court of Chancery against the Company and certain of its current and former officers and directors (collectively, "Defendants"). The complaint alleges that the Defendants breached their fiduciary duties by failing to oversee the compliance by certain of the Company's subsidiaries (including the Company's former subsidiary Medical Initiatives, Inc. ("MII")) with federal regulations, allegedly resulting in the payment of fines and penalties in connection with the settlements with the USAO-EDNY in fiscal 2017 and will be producing documents2018 that resolved claims arising from MII's pre-filled syringe program. In December 2019, Defendants filed a motion to dismiss the complaint. After briefing and oral argument, on August 24, 2020 the Delaware Court of Chancery denied Defendants' motion to dismiss. On September 24, 2020, the Board of Directors of the Company established a Special Litigation Committee to conduct an investigation concerning the plaintiffs’ allegations. On October 28, 2020, the Special Litigation Committee filed a motion to stay the litigation pending completion of its investigation. On November 10, 2020, the Delaware Court of Chancery granted the Special Litigation Committee’s motion to stay the litigation.
On July 17, 2020, CCAR Investments, Inc. filed a complaint for a purported derivative action in responsethe United States District Court for the District of Delaware against the Company and certain of its current and former officers and directors (“CCAR Defendants”). The complaint alleges claims for breach of fiduciary duty, corporate waste and unjust enrichment allegedly arising from the Company’s controlled substance diversion control programs and violation of Section 14(a) of the Securities Exchange Act of 1934. On July 30, 2020, a group of interested stockholders (the “Proposed Intervenors”) filed a motion to intervene and stay the proceedings filed by CCAR Investments, Inc. The CCAR Defendants opposed the motion to intervene and stay on August 13, 2020. CCAR Investments, Inc. also filed an opposition to the subpoena.
For those mattersmotion to intervene and stay. On August 14, 2020, the CCAR Defendants answered the complaint and filed a motion for which the Company has not recognized a liability, the Company cannot predict the outcome of ongoing investigations or their impactjudgment on the Company as uncertainty remains with regard to whether such matters will proceed to trial, whether settlements will be reached andpleadings. On October 13, 2020, the amount and termsUnited States District Court for the District of any such settlements. Outcomes may include settlements
in significant amounts that are not currently estimable, limitationsDelaware heard oral arguments on the Company's conduct,Proposed Intervenors' motion to intervene and stay the imposition of corporate integrity obligations and/litigation and denied Proposed Intervenors' motion without prejudice. On October 29, 2020 the parties filed a stipulation permitting CCAR Investments, Inc. to file an amended complaint on or other civilbefore November 20, 2020, and criminal penalties.
Opioid Lawsuits and InvestigationsCCAR Defendants shall respond to the amended complaint on or before December 18, 2020.
In June 2012,New York State ("NYS") enacted the Attorney GeneralOpioid Stewardship Act ("OSA"), which went into effect on July 1, 2018. The OSA established an annual $100 million Opioid Stewardship Fund (the "Fund") and requires manufacturers, distributors, and importers licensed in NYS to ratably source the Fund. The ratable share of the State of West Virginia ("West Virginia AG") filed complaints, which were amended, inassessment for each licensee was to be based upon opioids sold or distributed to or within NYS. In the Circuit Court of Boone County, West Virginia, against a number of pharmaceutical wholesale distributors, including the Company's subsidiary ABDC, alleging, among other claims, that the distributors failed to provide effective controls and procedures to guard against diversion of controlled substances for illegitimate purposes in West Virginia, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of uncontrolled substances in accordance with state regulations. The West Virginia AG was seeking monetary damages and injunctive and other equitable relief. This matter was dismissed with prejudice on January 9, 2017 pursuant to a settlement agreement that provided for the payment of $16.0 million and express denialfourth quarter of the allegations in the complaints and any wrongdoing. During thefiscal year ended September 30, 2017,2018, the Company accrued $22.0 million as an estimate of its liability under the OSA for opioids distributed from January 1, 2017 through September 30, 2018 and recognized the $16.0 million settlementthis reserve in Employee Severance, Litigation,Cost of Goods Sold on its Consolidated Statement of Operations and in Accrued Expenses and Other on its Consolidated Balance Sheet as of September 30, 2018. In December 2018, the Company's Consolidated StatementsOSA was ruled unconstitutional by the U.S. District Court for the Southern District of Operations.New York, and, as a result, the Company reversed the $22.0 million accrual in the fiscal quarter ended December 31, 2018. In September 2020, the United States Court of Appeals for the Second Circuit reversed the District Court's decision, and, as a result, the Company accrued $14.8 million in the fourth quarter of the fiscal year ended September 30, 2020 as it revised its estimated liability for the 2017 and 2018 calendar years. The Company paidhas been in compliance with subsequent legislation passed by NYS regarding sales of prescription opioids for calendar years beginning in 2019.
In December 2019, Reliable Pharmacy, together with other retail pharmacies and North Sunflower Medical Center, filed a civil antitrust complaint against multiple generic drug manufacturers, and also included claims against the $16.0 million settlement in fiscal 2017.
A significant numberCompany, H.D. Smith, and other drug distributors and industry participants. The case is filed as a putative class action and plaintiffs purport to represent a class of countiesdrug purchasers including other retail pharmacies and municipalities in Alabama, Illinois, Kentucky, New Hampshire, New York, Ohio, Oregon Pennsylvania, Texas, and West Virginia, as well ashealthcare providers. The case has been consolidated for multidistrict litigation proceedings before the StateUnited States District Court for the Eastern District of New Mexico and the Cherokee Nation, have filed lawsuits in various federal and state courts against pharmaceutical wholesale distributors (includingPennsylvania. The complaint alleges that the Company and ABDC), pharmaceutical manufacturersothers in the industry participated in a conspiracy to fix prices, allocate markets and retail chains relating torig bids regarding generic drugs. In March 2020, the distribution of prescription opioid pain medications. Other lawsuits regardingplaintiffs filed a further amended complaint. On July 15, 2020, the distribution of prescription opioid pain medications have been filed by two individuals in Kansas and on behalf of a county children’s service in Ohio. The lawsuits, which have been filed in various federal, stateCompany and other courts, allege violations of controlled substance laws and various other statutes as well as common law claims, including negligence, public nuisance and unjust enrichment, and seek equitable relief and monetary damages.
On September 25, 2017, the plaintiffs in several of these lawsuitsindustry participants filed a motion beforeto dismiss the Judicial Panel on Multidistrict Litigation to have all federal complaints transferred to a single federal court for consolidated and coordinated pretrial proceedings. The Company’s response to this motion was made on October 20, 2017.complaint.
The Company is vigorously defending itself in these lawsuits. Other entities, including additional attorneys general’s offices, counties, and cities in multiple states, have indicated their intent to sue. The Company intends to vigorously defend itself against the pending and any threatened lawsuits. The Company is not in a position to assess the likely outcome or its exposure, if any, with respect to these matters.
In addition, on September 18, 2017, the Company received a request for documents and information on behalf of Attorneys General from a coalition of States and Commonwealths who are investigating a number of manufacturers and distributors (including the Company) regarding the distribution of prescription opioid pain medications. The Company is engaged in discussions with the representatives of the Attorneys General regarding this request and will be producing documents in response to it. The Company has also produced documents regarding the distribution of prescription opioid pain medications in response to subpoenas it has received from the Attorneys General from the States of New Hampshire, Alaska, and Mississippi.
Other Litigation
On September 10, 2014, PharMerica Corp., Pharmacy Corporation of America and Chem Rx Pharmacy Services, LLC (collectively, "PMC"), customers of ABDC until March 3, 2015, filed a complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC. The original complaint alleged that ABDC failed to pay in excess of $8 million in rebates pursuant to a prime vendor agreement between PMC and ABDC under which ABDC distributed pharmaceuticals and other products to PMC. PMC subsequently amended its complaint three times. PMC’s current complaint alleges unpaid-rebate claims in excess of $33 million and additional breaches and damages for unspecified amounts, which amounts may exceed $100 million.
ABDC answered all of the complaints, denied PMC’s allegations, and filed counterclaims alleging, among other things, that PMC failed to pay nearly $50 million in invoices related to pharmaceutical products it received from ABDC. On April 1, 2016, the Jefferson Circuit Court granted ABDC’s motion for partial summary judgment on one counterclaim and entered judgment in the amount of $48.6 million against PMC. On August 1, 2017, ABDC and PMC entered into an agreement in principle to resolve all claims in the litigation,including the pending judgment against PMC, for a one-time payment from PMC to ABDC of $3.1 million. As a result of this agreement in principle, the Company expects no impact to its consolidated results of operations. As part of the agreement in principle, the parties obtained a stay of the judicial proceedings in Jefferson Circuit Court on August 4,
2017. The settlement of the litigation will not be effective unless and until a newly formed entity controlled by KKR & Co. L.P., with WBA as a minority investor, completes its acquisition of PMC, which is expected to be completed in early 2018.
Note 14.15. Litigation Settlements
Antitrust Settlements
Numerous class action lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are generally brought as class actions. The Company has not been a named a plaintiff in any of these class actions,lawsuits, but has been a member of the direct purchasers' class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the class actionslawsuits has gone to trial, but some have settled in the past with the Company receiving proceeds
from the settlement funds. During the fiscal years ended September 30, 2017, 2016,2020, 2019, and 2015,2018, the Company recognized gains of $1.4$9.1 million, $133.8$145.9 million, and $65.5$35.9 million, respectively, relating to the above-mentioned class actionthese lawsuits. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to Costcost of Goods Soldgoods sold in the Company's Consolidated Statements of Operations.
Note 15.16. Business Segment Information
The Company is organized based upon the products and services it provides to its customers. The Company's 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 reportable segment presentation. Other consists of operating segments that focus on global commercialization services and animal health and includes(MWI Animal Health). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services ("ABCS"), and World Courier, and MWI Animal Health ("MWI").
Effective September 30, 2017, the Company reorganized its operating structure resulting in the combination of the legacy AmerisourceBergen Drug Corporation and AmerisourceBergen Specialty Group operating segments into a single operating segment, Pharmaceutical Distribution Services. In addition, in connection with the completion of this reorganization, the Company's non-title third party logistics business, which was included within the Pharmaceutical Distribution Services reportable segment, was combined with the World Courier operating segment in Other, while the ABCS distribution business (previously included in Other) is now included in the Pharmaceutical Distribution Services reportable segment. The Company revised its previously-reported segment disclosures to reflect the aforementioned changes to the Company's reporting structure. These changes did not have a material impact to the Company's historical reportable segment operating results.Courier.
The chief operating decision maker ("CODM") of the Company is the Chairman, President & Chief Executive Officer of the Company, whose function is to allocate resources to, and assess the performance of, the Company's operating segments. The CODM does not review assets by operating segment for the purpose of assessing performance or allocating resources.
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, outsourced compounded sterile preparations, 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 consists of operating segments that focus on global commercialization services and animal health and includes ABCS, World Courier, and MWI.
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. MWI is a leading animal health distribution company in the United States and in the United 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.
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.
The following illustrates reportable and operating segment disaggregated revenue informationas required by ASC 606 for the periods indicated:
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| Pharmaceutical Distribution Services | | $ | 147,453,495 |
| | $ | 141,701,997 |
| | $ | 132,383,820 |
| Pharmaceutical Distribution Services | | $ | 182,467,189 | | | $ | 172,813,537 | | | $ | 161,699,343 | |
| Other | | 5,747,863 |
| | 5,207,095 |
| | 3,586,879 |
| |
| Other: | | Other: | |
| MWI Animal Health | | MWI Animal Health | | 4,216,462 | | | 3,975,232 | | | 3,789,759 | |
| Global Commercialization Services | | Global Commercialization Services | | 3,308,640 | | | 2,893,109 | | | 2,542,971 | |
| Total Other | | Total Other | | 7,525,102 | | | 6,868,341 | | | 6,332,730 | |
| Intersegment eliminations | | (57,532 | ) | | (59,406 | ) | | (8,896 | ) | Intersegment eliminations | | (98,365) | | | (92,757) | | | (92,438) | |
| Revenue | | $ | 153,143,826 |
| | $ | 146,849,686 |
| | $ | 135,961,803 |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | $ | 167,939,635 | |
Intersegment eliminations primarily represent the elimination of certain Pharmaceutical Distribution Services reportable segment sales to MWI.
The following illustrates reportable segment operating income information for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Pharmaceutical Distribution Services | | $ | 1,807,001 | | | $ | 1,671,251 | | | $ | 1,626,748 | |
| Other | | 400,139 | | | 380,660 | | | 355,091 | |
| Intersegment eliminations | | (2,693) | | | (659) | | | (609) | |
| Total segment operating income | | $ | 2,204,447 | | | $ | 2,051,252 | | | $ | 1,981,230 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Pharmaceutical Distribution Services | | $ | 1,643,629 |
| | $ | 1,702,725 |
| | $ | 1,666,110 |
|
| Other | | 373,797 |
| | 327,746 |
| | 238,137 |
|
| Intersegment eliminations | | (556 | ) | | (103 | ) | | — |
|
| Total segment operating income | | $ | 2,016,870 |
| | $ | 2,030,368 |
| | $ | 1,904,247 |
|
The following reconciles total segment operating income to income before income taxes:taxes for the periods indicated:
| | | | | Fiscal Year Ended September 30, | | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| Total segment operating income | | $ | 2,016,870 |
| | $ | 2,030,368 |
| | $ | 1,904,247 |
| Total segment operating income | | $ | 2,204,447 | | | $ | 2,051,252 | | | $ | 1,981,230 | |
| Gain from antitrust litigation settlements | | 1,395 |
| | 133,758 |
| | 65,493 |
| Gain from antitrust litigation settlements | | 9,076 | | | 145,872 | | | 35,938 | |
| LIFO credit (expense) | | 157,782 |
| | (200,230 | ) | | (542,807 | ) | |
| LIFO (expense) credit | | LIFO (expense) credit | | (7,422) | | | 22,544 | | | (67,324) | |
| PharMEDium remediation costs | | PharMEDium remediation costs | | (16,165) | | | (69,423) | | | (66,204) | |
| PharMEDium shutdown costs | | PharMEDium shutdown costs | | (43,206) | | | 0 | | | 0 | |
| New York State Opioid Stewardship Act | | New York State Opioid Stewardship Act | | (14,800) | | | 22,000 | | | (22,000) | |
| Contingent consideration adjustment | | Contingent consideration adjustment | | 12,153 | | | 0 | | | 0 | |
| Acquisition-related intangibles amortization | | (156,378 | ) | | (147,262 | ) | | (54,095 | ) | Acquisition-related intangibles amortization | | (110,478) | | | (159,848) | | | (174,751) | |
| Warrants expense | | — |
| | (140,342 | ) | | (912,724 | ) | |
| Employee severance, litigation, and other | | (959,327 | ) | | (102,911 | ) | | (37,894 | ) | Employee severance, litigation, and other | | (6,807,307) | | | (330,474) | | | (183,520) | |
| Pension settlement charge | | — |
| | (47,607 | ) | | — |
| |
| Operating income | | 1,060,342 |
| | 1,525,774 |
| | 422,220 |
| |
| Goodwill impairment | | Goodwill impairment | | 0 | | | 0 | | | (59,684) | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | (361,652) | | | (570,000) | | | 0 | |
| Operating (loss) income | | Operating (loss) income | | (5,135,354) | | | 1,111,923 | | | 1,443,685 | |
| Other (income) loss | | (2,730 | ) | | (5,048 | ) | | 13,598 |
| Other (income) loss | | (1,581) | | | (12,952) | | | 25,469 | |
| Impairment charge on equity investment | | — |
| | — |
| | 30,622 |
| |
| Interest expense, net | | 145,185 |
| | 139,912 |
| | 109,036 |
| Interest expense, net | | 137,883 | | | 157,769 | | | 174,699 | |
| Income before income taxes | | $ | 917,887 |
| | $ | 1,390,910 |
| | $ | 268,964 |
| |
| Loss on consolidation of equity investments | | Loss on consolidation of equity investments | | 0 | | | 0 | | | 42,328 | |
| Loss on early retirement of debt | | Loss on early retirement of debt | | 22,175 | | | 0 | | | 23,766 | |
| (Loss) income before income taxes | | (Loss) income before income taxes | | $ | (5,293,831) | | | $ | 967,106 | | | $ | 1,177,423 | |
Segment operating income is evaluated by the CODM of the Company beforeand excludes gain from antitrust litigation settlements; LIFO credit (expense); credit; PharMEDium remediation costs; PharMEDium shutdown costs; New York State Opioid Stewardship Act; contingent consideration adjustment; acquisition-related intangibles amortization; Warrants expense; employee severance, litigation, and other; a pension settlement charge other (income) loss;goodwill impairment; and impairment charge on equity investment;of PharMEDium assets. Segment measures were adjusted in fiscal 2020 to exclude PharMEDium shutdown costs and interest expense, net.contingent consideration adjustment as the CODM excludes these costs in the measurement of segment performance. All corporate office expenses are allocated to each operating segment.
The following illustrates total assets by reportable segment:
|
| | | | | | | | | | | | |
| | | September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Pharmaceutical Distribution Services | | $ | 29,691,127 |
| | $ | 28,605,047 |
| | $ | 23,135,738 |
|
| Other | | 5,625,343 |
| | 5,032,454 |
| | 4,827,244 |
|
| Total assets | | $ | 35,316,470 |
| | $ | 33,637,501 |
| | $ | 27,962,982 |
|
The CODM does not review assets bythe operating segment forlevel.
The Company incurred remediation costs in connection with the purposessuspended production activities at PharMEDium (see Note 1). These remediation costs are primarily classified in Cost of assessing performance or allocating resources.Goods sold in the Consolidated Statements of Operations. The Company incurred costs in connection with exiting the PharMEDium compounding business. These shutdown costs are primarily classified in Distribution, Selling, and Administrative expenses in the Consolidated Statement of Operations.
One of the Company's non-wholly-owned subsidiaries, Profarma, which the Company consolidates based on certain governance rights (see Note 3), adjusted its previous estimate of contingent consideration related to the purchase price of one of its prior business acquisitions.
The Company recorded a $13.7 million gain on the sale of an equity investment in Other (Income) Loss in the Company's Consolidated Statement of Operations in the fiscal year ended September 30, 2019.
The Company recorded a $30.0 million impairment of a non-customer note receivable related to a start-up venture in Other (Income) Loss in the Company's Consolidated Statement of Operations in the fiscal year ended September 30, 2018.
The following illustrates depreciation and amortization by reportable segment:segment for the periods indicated:
| | | | | Fiscal Year Ended September 30, | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 | (in thousands) | | 2020 | | 2019 | | 2018 |
| Pharmaceutical Distribution Services | | $ | 188,065 |
| | $ | 170,973 |
| | $ | 153,547 |
| Pharmaceutical Distribution Services | | $ | 203,062 | | | $ | 232,735 | | | $ | 225,608 | |
| Other | | 53,160 |
| | 46,500 |
| | 40,993 |
| Other | | 77,522 | | | 69,824 | | | 64,768 | |
| Acquisition-related intangibles amortization | | 156,378 |
| | 147,262 |
| | 54,095 |
| Acquisition-related intangibles amortization | | 110,478 | | | 159,848 | | | 174,751 | |
| Total depreciation and amortization | | $ | 397,603 |
| | $ | 364,735 |
| | $ | 248,635 |
| Total depreciation and amortization | | $ | 391,062 | | | $ | 462,407 | | | $ | 465,127 | |
Depreciation and amortization includes depreciation and amortization of property and equipment and intangible assets, but excludes amortization of deferred financing costs and other debt-related items, which are included in interest expense.expense, net.
The following illustrates capital expenditures by reportable segment:segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended September 30, |
| (in thousands) | | 2020 | | 2019 | | 2018 |
| Pharmaceutical Distribution Services | | $ | 201,144 | | | $ | 210,161 | | | $ | 190,191 | |
| Other | | 168,533 | | | 100,061 | | | 146,220 | |
| Total capital expenditures | | $ | 369,677 | | | $ | 310,222 | | | $ | 336,411 | |
|
| | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, |
| (in thousands) | | 2017 | | 2016 | | 2015 |
| Pharmaceutical Distribution Services | | $ | 339,478 |
| | $ | 359,391 |
| | $ | 179,582 |
|
| Other | | 126,919 |
| | 105,225 |
| | 52,003 |
|
| Total capital expenditures | | $ | 466,397 |
| | $ | 464,616 |
| | $ | 231,585 |
|
Note 16.17. Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable as of September 30, 20172020 and 20162019 approximate fair value based upon the relatively short-term nature of these financial instruments. Within cashCash and cash equivalents,Cash Equivalents, the Company had $800.0$2,548.0 million and $650.0$1,552.0 million of investments in money market accounts as of September 30, 20172020 and 2016.2019. The fair value of the money market accounts was determined based upon unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.
The Company had no investment securities available-for-sale as of September 30, 2017. The Company had $39.1 million of investment securities available-for-sale, $13.0 million of which were within cash and cash equivalents, as of September 30, 2016. The amortized cost of the investments was $39.1 million as of September 30, 2016. The fair value of the investments was based upon inputs other than quoted prices, otherwise known as Level 2 inputs.
The recorded amount of long-term debt (see Note 6)7) and the corresponding fair value as of September 30, 20172020 were $3,429.9$3,618.3 million and $3,522.5$4,026.4 million, respectively. The recorded amount of long-term debt and the corresponding fair value as of September 30, 20162019 were $3,576.5$4,033.9 million and $3,750.9$4,158.4 million, respectively. The fair value of long-term debt was determined based upon inputs other than quoted prices, otherwise known as Level 2 inputs, as defined above.inputs.
Note 17.18. Quarterly Financial Information (Unaudited)
| | | | | Fiscal Year Ended September 30, 2017 | | | Fiscal Year Ended September 30, 2020 |
| (in thousands, except per share amounts) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year | (in thousands, except per share amounts) | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Fiscal
Year |
| Revenue | | $ | 38,169,265 |
| | $ | 37,147,402 |
| | $ | 38,707,144 |
| | $ | 39,120,015 |
| | $ | 153,143,826 |
| Revenue | | $ | 47,864,742 | | | $ | 47,417,639 | | | $ | 45,366,777 | | | $ | 49,244,768 | | | $ | 189,893,926 | |
| Gross profit (a) | | $ | 1,037,680 |
| | $ | 1,256,427 |
| | $ | 1,079,875 |
| | $ | 1,172,020 |
| | $ | 4,546,002 |
| Gross profit (a) | | $ | 1,231,214 | | | $ | 1,388,107 | | | $ | 1,225,716 | | | $ | 1,346,847 | | | $ | 5,191,884 | |
| Distribution, selling, and administrative expenses; depreciation; and amortization | | 616,627 |
| | 619,512 |
| | 624,982 |
| | 665,212 |
| | 2,526,333 |
| Distribution, selling, and administrative expenses; depreciation; and amortization | | 790,468 | | | 787,208 | | | 762,300 | | | 818,303 | | | 3,158,279 | |
| Employee severance, litigation, and other (b) | | 21,066 |
| | 11,934 |
| | 284,517 |
| | 641,810 |
| | 959,327 |
| Employee severance, litigation, and other (b) | | 39,309 | | | 67,732 | | | 58,585 | | | 6,641,681 | | | 6,807,307 | |
| Impairment of PharMEDium assets | | Impairment of PharMEDium assets | | 138,000 | | | 223,652 | | | 0 | | | 0 | | | 361,652 | |
| Operating income (loss) | | $ | 399,987 |
| | $ | 624,981 |
| | $ | 170,376 |
| | $ | (135,002 | ) | | $ | 1,060,342 |
| Operating income (loss) | | $ | 263,437 | | | $ | 309,515 | | | $ | 404,831 | | | $ | (6,113,137) | | | $ | (5,135,354) | |
Net income (loss) | | $ | 247,246 |
| | $ | 411,473 |
| | $ | 50,352 |
| | $ | (344,587 | ) | | $ | 364,484 |
| | $ | 186,568 | | | $ | 971,111 | | | $ | 287,268 | | | $ | (4,844,505) | | | $ | (3,399,558) | |
| Net income (loss) attributable to AmerisourceBergen Corporation (c) | | Net income (loss) attributable to AmerisourceBergen Corporation (c) | | $ | 187,640 | | | $ | 960,277 | | | $ | 289,439 | | | $ | (4,846,072) | | | $ | (3,408,716) | |
| Earnings per share operations: | | |
| | |
| | |
| | |
| | |
| Earnings per share operations: | | | | | | | | | | |
| Basic | | $ | 1.13 |
| | $ | 1.89 |
| | $ | 0.23 |
| | $ | (1.58 | ) | | $ | 1.67 |
| Basic | | $ | 0.91 | | | $ | 4.68 | | | $ | 1.42 | | | $ | (23.74) | | | $ | (16.65) | |
| Diluted | | $ | 1.11 |
| | $ | 1.86 |
| | $ | 0.23 |
| | $ | (1.58 | ) | | $ | 1.64 |
| Diluted | | $ | 0.90 | | | $ | 4.64 | | | $ | 1.41 | | | $ | (23.74) | | | $ | (16.65) | |
| |
(a) | The first quarter of the fiscal year ended September 30, 2017 includes gains from antitrust litigation settlements of $1.4 million. The first quarter of the fiscal year ended September 30, 2017 includes LIFO expense of $28.3 million. The second, third, and fourth quarters of the fiscal year ended September 30, 2017 include LIFO credits of $86.5 million, $24.7 million, and $74.9 million, respectively. |
| |
(b) | The third quarter of the fiscal year ended September 30, 2017 includes $273.4 million for litigation settlements. The fourth quarter of the fiscal year ended September 30, 2017 includes a $625.0 million litigation accrual. |
(a)The first, second, and fourth quarters of the fiscal year ended September 30, 2020 include gains from antitrust litigation settlements of $8.5 million, $0.1 million, and $0.5 million, respectively. The first, second, and third quarters of the fiscal year ended September 30, 2020 include LIFO expense of $13.3 million, $23.9 million, and $6.1 million. The fourth quarter of the fiscal year ended September 30, 2020 includes LIFO credit of $35.8 million. The first quarter of the fiscal year ended September 30, 2020 includes PharMEDium remediation costs of $7.1 million. The second and third quarters of the fiscal year ended September 30, 2020 include PharMEDium shutdown costs of $5.0 million and $0.4 million, respectively.
|
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, 2016 |
| (in thousands, except per share amounts) | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Fiscal Year |
| Revenue | | $ | 36,709,046 |
| | $ | 35,698,357 |
| | $ | 36,881,680 |
| | $ | 37,560,603 |
| | $ | 146,849,686 |
|
| Gross profit (a) | | $ | 964,877 |
| | $ | 1,075,331 |
| | $ | 1,107,863 |
| | $ | 1,124,535 |
| | $ | 4,272,606 |
|
| Distribution, selling, and administrative expenses; depreciation; and amortization | | 608,039 |
| | 612,302 |
| | 610,706 |
| | 624,925 |
| | 2,455,972 |
|
| Warrants expense (income) | | 467,375 |
| | (503,946 | ) | | (83,704 | ) | | 260,617 |
| | 140,342 |
|
| Employee severance, litigation, and other and pension settlement | | 67,599 |
| | 16,493 |
| | 52,234 |
| | 14,192 |
| | 150,518 |
|
| Operating (loss) income | | $ | (178,136 | ) | | $ | 950,482 |
| | $ | 528,627 |
| | $ | 224,801 |
| | $ | 1,525,774 |
|
| Net income | | $ | 329,639 |
| | $ | 603,450 |
| | $ | 349,155 |
| | $ | 145,685 |
| | $ | 1,427,929 |
|
| Earnings per share operations: | | |
| | |
| | |
| | |
| | |
|
| Basic | | $ | 1.60 |
| | $ | 2.90 |
| | $ | 1.62 |
| | $ | 0.66 |
| | $ | 6.73 |
|
| Diluted | | $ | 1.45 |
| | $ | 2.68 |
| | $ | 1.55 |
| | $ | 0.64 |
| | $ | 6.32 |
|
| |
(a) | The first and third quarters of the fiscal year ended September 30, 2016 include gains from antitrust and litigation settlements of $12.8 million and $121.0 million, respectively. The first, second, and third quarters of the fiscal year ended September 30, 2016 include LIFO expense of $101.6 million, $92.4 million, and $80.4 million, respectively. The fourth quarter of the fiscal year ended September 30, 2016 includes a LIFO credit of $74.1 million. |
(b)The fourth quarter of the fiscal year ended September 30, 2020 includes a $6.6 billion legal expense accrual in connection with opioid lawsuits.
(c)The second quarter of the fiscal year ended September 30, 2020 includes discrete tax benefits of $741.0 million primarily related to the permanent shutdown of the PharMEDium business. The third quarter of the fiscal year ended September 30, 2020 includes a loss on the early retirement of debt of $22.2 million. The fourth quarter of the fiscal year ended September 30, 2020 includes tax benefits of $1.1 billion relating to the $6.6 billion legal expense accrual in connection with opioid lawsuits, $360.7 million relating to Switzerland tax reform, and a $20.4 million adjustment to the discrete tax benefits previously recognized primarily attributable to the income tax deductions resulting from the permanent shutdown of the PharMEDium business.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended September 30, 2019 |
| (in thousands, except per share amounts) | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | Fiscal
Year |
| Revenue | | $ | 45,392,452 | | | $ | 43,319,602 | | | $ | 45,239,265 | | | $ | 45,637,802 | | | $ | 179,589,121 | |
| Gross profit (a) | | $ | 1,297,580 | | | $ | 1,424,756 | | | $ | 1,231,239 | | | $ | 1,184,737 | | | $ | 5,138,312 | |
| Distribution, selling, and administrative expenses; depreciation; and amortization | | 779,085 | | | 751,802 | | | 764,539 | | | 830,489 | | | 3,125,915 | |
| Employee severance, litigation, and other | | 40,672 | | | 55,389 | | | 60,006 | | | 174,407 | | | 330,474 | |
| Impairment of PharMEDium assets | | 0 | | | 570,000 | | | 0 | | | 0 | | | 570,000 | |
| Operating income | | $ | 477,823 | | | $ | 47,565 | | | $ | 406,694 | | | $ | 179,841 | | | $ | 1,111,923 | |
| Net income (b) | | $ | 391,753 | | | $ | 28,073 | | | $ | 302,002 | | | $ | 132,307 | | | $ | 854,135 | |
| Net income attributable to AmerisourceBergen Corporation (b) | | $ | 393,652 | | | $ | 27,135 | | | $ | 301,959 | | | $ | 132,619 | | | $ | 855,365 | |
| Earnings per share operations: | | | | | | | | | | |
| Basic | | $ | 1.86 | | | $ | 0.13 | | | $ | 1.44 | | | $ | 0.64 | | | $ | 4.07 | |
| Diluted | | $ | 1.84 | | | $ | 0.13 | | | $ | 1.43 | | | $ | 0.63 | | | $ | 4.04 | |
(a)The first, second, third, and fourth quarters of the fiscal year ended September 30, 2019 include gains from antitrust litigation settlements of $87.3 million, $52.0 million, $3.5 million, and $3.1 million, respectively. The first, second, and third quarters of the fiscal year ended September 30, 2019 include LIFO credits of $3.0 million, $66.8 million, and $9.9 million, respectively. The fourth quarter of the fiscal year ended September 30, 2019 includes LIFO expense of $57.2 million. The first, second, third, and fourth quarters of the fiscal year ended September 30, 2019 include PharMEDium remediation costs of $17.9 million, $12.3 million, $11.7 million, and $6.7 million, respectively. The first quarter of the fiscal year ended September 30, 2019 includes a $22.0 million reversal of a previous estimate of a liability under the New York State Opioid Stewardship Act.
(b)The first quarter of the fiscal year ended September 30, 2019 includes a $37.0 million income tax benefit adjustment to the one-time transition tax on historical foreign earnings and profits through December 31, 2017. The second quarter of the fiscal year ended September 30, 2019 includes a gain on the sale of an equity investment of $13.7 million.
Note 18.19. Subsequent EventsEvent
Acquisition
On November 20, 2017, the Company announced that it has signed a definitive agreement to purchase H.D. Smith, the largest independent wholesaler in the United States, for $815.0 million in cash. The Company plans to fund the acquisition through the issuance of new long-term debt. The transaction is subject to regulatory review and other closing conditions and is expected to close in early calendar 2018.
H.D. Smith is the largest, privately held national wholesaler, which provides full-line distribution of brand, generic, and specialty drugs, as well as high-value services and solutions for manufacturers and healthcare providers. H.D. Smith customers include retail pharmacies, specialty pharmacies, long-term care facilities, institutional/hospital systems, and independent physicians and clinics.
The acquisition strengthens the Company's core business, expands and enhances its strategic scale in pharmaceutical distribution, and expands the Company's support for independent community pharmacies.
Dividend Increase
In November 2017,2020, the Company's board of directors increased the quarterly dividend paid on common stock by 4%5% and declared a regular quarterly cash dividend of $0.38$0.44 per share, payable on December 4, 2017November 30, 2020 to shareholders of record on November 20, 2017.16, 2020.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are intended to ensure that information required to be disclosed in the Company's reports submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also are intended to ensure that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
The Company's Chief Executive Officer and Chief Financial Officer, with the participation of other members of the Company's management, have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a — 15(e) and 15d — 15(e) under the Exchange Act) and have concluded that the Company's disclosure controls and procedures were effective for their intended purposes as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes during the fiscal quarter ended September 30, 20172020 in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, those controls.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of AmerisourceBergen Corporation ("AmerisourceBergen" or the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. AmerisourceBergen's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
AmerisourceBergen's management assessed the effectiveness of AmerisourceBergen's internal control over financial reporting as of September 30, 2017.2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on management's assessment and those criteria, management has concluded that AmerisourceBergen's internal control over financial reporting was effective as of September 30, 2017.2020.
AmerisourceBergen's independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of AmerisourceBergen's internal control over financial reporting. This report is set forth below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
TheTo the Stockholders and the Board of Directors and Stockholders of AmerisourceBergen Corporation
Opinion on Internal Control over Financial Reporting
We have audited AmerisourceBergen Corporation and subsidiaries’subsidiaries' internal control over financial reporting as of September 30, 2017,2020, based on criteria established in Internal Control — IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AmerisourceBergen Corporation and subsidiaries’subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2020 consolidated financial statements of the Company and our report dated November 19, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AmerisourceBergen Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AmerisourceBergen Corporation and subsidiaries as of September 30, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2017 of AmerisourceBergen Corporation and subsidiaries and our report dated November 21, 2017 expressed an unqualified opinion thereon.
Philadelphia, Pennsylvania
November 21, 2017
19, 2020
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information appearing in our Notice of Annual Meeting of Stockholders and Proxy Statement for the 20182021 Annual Meeting of stockholdersStockholders (the "2018"2021 Proxy Statement"), including information appearing under "Item 1"Proxy Statement Highlights - Election of Directors," "Codes of Ethics,Director Nominees and Board Summary," "Corporate Governance and Related Matters," "Audit Committee Matters," and "Section 16 (a) Beneficial Owner Reporting Compliance,"Delinquent Section 16(a) Reports," is incorporated herein by reference. We will file the 20182021 Proxy Statement with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year.
Information with respect to Executive Officers of the Company appears in Part I of this report.
We adopted a Code of Ethics for Designated Senior Officers that applies to our Chief Executive Officer, Chief Financial Officer, and Corporate Controller. A copy of this Code of Ethics is posted on our Internet website, which is www.amerisourcebergen.cominvestor.amerisourcebergen.com. Any amendment to, or waiver from, any provision of this Code of Ethics will be posted on our Internet website.
ITEM 11. EXECUTIVE COMPENSATION
Information contained in the 20182021 Proxy Statement, including information appearing under "Additional Information about the Directors, the Board"Corporate Governance and the Board Committees," "Compensation Committee Matters,"Related Matters" and "Executive Compensation"Compensation and Related Matters" in the 20182021 Proxy Statement, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information contained in the 20182021 Proxy Statement, including information appearing under "Beneficial Ownership of Common Stock" and "Equity Compensation Plan Information" in the 20182021 Proxy Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information contained in the 20182021 Proxy Statement, including information appearing under "Additional Information about the Directors, the Board,"Corporate Governance and the Board Committees," "Corporate Governance," "Employment Agreements,"Related Matters" and "Certain"Related Person Transactions" in the 20182021 Proxy Statement, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information contained in the 20182021 Proxy Statement, including information appearing under "Audit Committee Matters" in the 20182021 Proxy Statement, is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) List of Financial Statements and Schedules.
Financial Statements: The following consolidated financial statements are submitted in response to Item 15(a)(1):
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Financial Statement Schedule: The following financial statement schedule is submitted in response to Item 15(a)(2): | |
| |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(a) (3) List of Exhibits.*
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| | | | |
Exhibit
Number
| Description |
| 3.1 | |
| 3.2 | |
| 4.1 | |
| 4.2 | |
4.3 | |
4.4 | |
4.5 | |
4.6 | |
4.74.3 | |
4.84.4 | |
4.94.5 | |
4.104.6 | |
4.114.7 | |
10.14.80 | |
| 4.90 | |
| 4.10 | |
| 4.11 | |
| 4.12 | |
| 4.13 | |
| 4.14 | |
| 10.1 | |
| | | | | |
Exhibit
Number | Description |
| 10.2 | |
| ‡10.3 | |
|
| |
Exhibit
Number
| Description |
‡10.4 | |
‡10.510.4 | |
‡10.6 | |
‡10.710.5 | |
‡10.810.6 | |
‡10.910.7 | |
‡10.10 | |
‡10.11 | |
‡10.12 | |
‡10.1310.8 | |
‡10.1410.9 | |
‡10.1510.10 | |
‡10.1610.11 | |
‡10.17 | |
‡10.1810.12 | |
‡10.1910.13 | |
‡10.2010.14 | |
‡10.2110.15 | |
‡10.2210.16 | |
|
| |
Exhibit
Number
| Description |
‡10.2310.17 | |
‡10.2410.18 | |
‡10.25 | |
‡10.26 | |
‡10.27 | |
‡10.28 |
|
‡10.2910.19 | |
‡10.3010.20 | |
‡10.3110.21 | |
| | | | | |
‡10.32Exhibit
Number |
Description |
10.3310.22 | |
10.3410.23 | |
10.3510.24 | |
10.3610.25 | |
10.3710.26 | Omnibus Amendment, dated November 4, 2015 to (i) the Amended and Restated Receivables Purchase Agreement, dated as of April 29, 2010, as amended, among AmeriSource Receivables Financial Corporation, as Seller, AmerisourceBergen Drug Corporation, as Servicer, the Purchaser Agents and Purchasers party thereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrator and (ii) the Receivables Sale Agreement, dated as of July 10, 2003, as amended, among AmeriSource Receivables Financial Corporation as Buyer, and AmerisourceBergen Drug Corporation, as originator (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 4, 2015).
|
10.3810.27 |
|
10.3910.28 | |
| 10.29 | Amended and Restated Receivables Purchase Agreement, dated as of April 29, 2010, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the various purchaser groups party thereto, and Bank of America, National Association, as administrator (incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on May 5, 2010). |
|
| |
Exhibit
Number
| Description |
10.4010.30 | First Amendment to Amended and Restated Receivables Purchase Agreement, dated as of April 28, 2011, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, and Bank of America, National Association, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on May 4, 2011). |
10.4110.31 | Second Amendment to Amended and Restated Receivables Purchase Agreement, dated as of October 28, 2011, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, servicer, the purchaser agents and purchasers party thereto, and Bank of America, National Association, as administrator (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on October 28, 2011). |
10.4210.32 | Third Amendment to Amended and Restated Receivables Purchase Agreement, dated as of November 16, 2012, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, and Bank of America, National Association, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on November 21, 2012). |
10.4310.33 | Fourth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of January 16, 2013, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, and the Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on form 8-K filed on January 17, 2013). |
10.4410.34 | Fifth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of June 28, 2013, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, and the Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 3, 2013). |
10.4510.35 | Sixth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of October 7, 2013, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, Market Street Funding LLC, as assignor, PNC Bank, National Association, as assignee, and the Bank of Tokyo-Mitsubishi UFJ, LTD., New York Branch, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 10, 2013). |
| | | | | |
10.46Exhibit
Number | Description |
| 10.36 | Seventh Amendment to Amended and Restated Receivables Purchase Agreement, dated as of July 17, 2014, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto and the Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 22, 2014). |
10.4710.37 | Eighth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of December 5, 2014, by and among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the purchaser agents and purchasers party thereto, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on December 8, 2014). |
10.4810.38 | Tenth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of June 21, 2016, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, Working Capital Management Co., LP, as assignor, Advantage Asset Securitization Corp., Mizuho Bank, Ltd., as assignee, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 23, 2016).
|
10.4910.39 | Eleventh Amendment to Amended and Restated Receivables Purchase Agreement, dated as of November 18, 2016, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on November 22, 2016). |
10.5010.40 | Twelfth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of December 18, 2017, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as administrator (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017). |
| 10.41 | Thirteenth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of October 31, 2018, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, and MUFG Bank, Ltd. (f/k/a The Bank of Tokyo-Mitsubishi UFJ, Ltd.), as administrator (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on November 6, 2018). |
| 10.42 | Fourteenth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of September 18, 2019, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, and MUFG Bank, Ltd., as administrator (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 23, 2019). |
| 10.43 | Fifteenth Amendment to Amended and Restated Receivables Purchase Agreement, dated as of October 16, 2020, among AmeriSource Receivables Financial Corporation, as seller, AmerisourceBergen Drug Corporation, as servicer, the Purchaser Agents and Purchasers party thereto, and MUFG Bank, Ltd., as administrator (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on October 19, 2020). |
| 10.44 | |
10.5110.45 | |
|
| 10.46 | |
Exhibit
Number
10.47 | Description |
10.5210.48 | |
| 10.49 | Eighth Amendment and Restatement Agreement, dated as of NovemberSeptember 18, 2016,2019, among the Registrant,AmerisourceBergen Corporation, the borrowing subsidiaries party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 22, 2016)September 23, 2019). |
| | | | | |
10.53Exhibit
Number | Description |
| 10.50 | |
10.5410.51 | |
10.5510.52 | Amendment and RestatementTerm Credit Agreement, dated as of November 18, 2016,October 31, 2018, among the Registrant,AmerisourceBergen Corporation, the lenders party thereto and Wells Fargo Bank, of America, N.A., as administrative agentAdministrative Agent (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on November 22, 2016)6, 2018).
|
10.5610.53 | First Amendment and Restatementto the Term Credit Agreement, dated as of NovemberSeptember 18, 2016,2019, among the Registrant,AmerisourceBergen Corporation, the lenders party thereto and JPMorgan ChaseWells Fargo Bank, N.A.,National Association, as Administrative Agent (incorporated by reference to Exhibit 10.310.2 to the Registrant’s Current Report on Form 8-K filed on November 22, 2016)September 23, 2019).
|
1221 | |
21 | |
| 23 | |
| 31.1 | |
| 31.2 | |
| 32 | |
| 101 | Financial statements from the Annual Report on Form 10-K of AmerisourceBergen Corporation for the fiscal year ended September 30, 2017,2020, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| |
* | Copies of the exhibits will be furnished to any security holder of the Registrant upon payment of the reasonable cost of reproduction. |
| |
‡ | Each marked exhibit is a management contract or a compensatory plan, contract or arrangement in which a director or executive officer of the Registrant participates or has participated. |
‡ Each marked exhibit is a management contract or a compensatory plan, contract or arrangement in which a director or executive officer of the Registrant participates or has participated.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | | | | |
| | AMERISOURCEBERGEN CORPORATION |
Date: November 21, 201719, 2020 | | By: | | /s/ STEVEN H. COLLIS Steven H. Collis Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below as of November 21, 201719, 2020 by the following persons on behalf of the Registrant and in the capacities indicated.
|
| | | | | | | |
| Signature | | Title |
| | |
/s/ STEVEN H. COLLIS___________________________ Steven H. Collis | | Chairman, President and Chief Executive Officer
(Principal Executive Officer)
|
| | |
/s/ TIM G. GUTTMAN____________________________JAMES F. CLEARY____________________________ Tim G. GuttmanJames F. Cleary
| | Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
| | |
/s/ LAZARUS KRIKORIAN________________________ Lazarus Krikorian | | Senior Vice President and Corporate Controller Chief Accounting Officer
(Principal Accounting Officer) |
| | |
Ornella Barra
| | Director |
| | |
/s/ DOUGLAS R. CONANT_____________________________________________________________________ Douglas R. ConantOrnella Barra
| | Director |
| | |
/s/ D. MARK DURCAN____________________________ D. Mark Durcan | | Director |
| | |
/s/ RICHARD W. GOCHNAUER____________________ Richard W. Gochnauer | | Director |
| | |
/s/ LON R. GREENBERG__________________________ Lon R. Greenberg | | Director |
|
| | | | | | | |
| Signature | | Title |
| | |
/s/ JANE E. HENNEY, M.D.________________________ Jane E. Henney, M.D. | | Lead Independent Director |
| | |
/s/ KATHLEEN W. HYLE__________________________ Kathleen W. Hyle | | Director |
| | |
/s/ MICHAEL J. LONG____________________________ Michael J. Long | | Director |
| | |
/s/ HENRY W. MCGEE____________________________ Henry W. McGee | | Director |
| | |
/s/ DENNIS M. NALLY____________________________ Dennis M. Nally | | Director |
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| | | (In thousands) | | Balance at Beginning of Period | | Charged to Costs and Expenses (1) | | Deductions- Describe (2) | | Balance at End of Period (3) | (In thousands) | | Balance at
Beginning
of Period | | Charged to
Costs and
Expenses (1) | | Deductions-
Describe (2) | | Balance at
End of
Period (3) |
| Year Ended September 30, 2017 | | |
| | |
| | |
| | |
| |
| Year Ended September 30, 2020 | | Year Ended September 30, 2020 | | | | | | | | |
| Allowances for returns and doubtful accounts | | $ | 926,034 |
| | $ | 3,157,960 |
| | $ | (3,015,743 | ) | | $ | 1,068,251 |
| Allowances for returns and doubtful accounts | | $ | 1,223,887 | | | $ | 4,019,830 | | | $ | (3,826,409) | | | $ | 1,417,308 | |
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, 2016 | | |
| | |
| | |
| | |
| |
| Year Ended September 30, 2019 | | Year Ended September 30, 2019 | | | | | | | | |
| Allowances for returns and doubtful accounts | | $ | 923,755 |
| | $ | 2,882,914 |
| | $ | (2,880,635 | ) | | $ | 926,034 |
| Allowances for returns and doubtful accounts | | $ | 1,049,901 | | | $ | 3,720,642 | | | $ | (3,546,656) | | | $ | 1,223,887 | |
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, 2015 | | |
| | |
| | |
| | |
| |
| Year Ended September 30, 2018 | | Year Ended September 30, 2018 | | | | | | | | |
| Allowances for returns and doubtful accounts | | $ | 1,022,052 |
| | $ | 2,721,263 |
| | $ | (2,819,560 | ) | | $ | 923,755 |
| Allowances for returns and doubtful accounts | | $ | 1,068,251 | | | $ | 3,397,562 | | | $ | (3,415,912) | | | $ | 1,049,901 | |
| |
(1) | Represents the provision for returns and doubtful accounts. |
| |
(2) | Represents accounts receivable written off during year, net of recoveries and reductions to the returns allowance. |
| |
(3) | Includes an allowance for doubtful accounts for long-term accounts receivable within Other Assets on the Consolidated Balance Sheets of $17,890, $20,689 and $23,991, as of September 30, 2017, 2016, and 2015, respectively.
|
(1)Represents the provision for returns and doubtful accounts.
(2)Represents reductions to the returns allowance and accounts receivable written off during year, net of recoveries.
(3)Includes an allowance for doubtful accounts for long-term accounts receivable within Other Assets on the Consolidated Balance Sheets of $981 thousand and $13,568 thousand as of September 30, 2019, and 2018, respectively.
