00011408599/302020FYfalseus-gaap:AccountingStandardsUpdate201409Memberus-gaap:AccountingStandardsUpdate201602MemberP4YP3YP3YP3Yus-gaap:AccountingStandardsUpdate201602Memberus-gaap:AccountsPayableAndAccruedLiabilitiesCurrentus-gaap:OtherLiabilitiesNoncurrent00011408592019-10-012020-09-30iso4217:USD00011408592020-03-31xbrli:shares00011408592020-10-3100011408592020-09-3000011408592019-09-30iso4217:USDxbrli:shares00011408592018-10-012019-09-3000011408592017-10-012018-09-300001140859us-gaap:CommonStockMember2017-09-300001140859us-gaap:AdditionalPaidInCapitalMember2017-09-300001140859us-gaap:RetainedEarningsMember2017-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-09-300001140859us-gaap:TreasuryStockMember2017-09-300001140859us-gaap:NoncontrollingInterestMember2017-09-3000011408592017-09-300001140859us-gaap:NoncontrollingInterestMember2017-10-012018-09-300001140859us-gaap:RetainedEarningsMember2017-10-012018-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2017-10-012018-09-300001140859us-gaap:CommonStockMember2017-10-012018-09-300001140859us-gaap:AdditionalPaidInCapitalMember2017-10-012018-09-300001140859us-gaap:TreasuryStockMember2017-10-012018-09-300001140859us-gaap:CommonStockMember2018-09-300001140859us-gaap:AdditionalPaidInCapitalMember2018-09-300001140859us-gaap:RetainedEarningsMember2018-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-09-300001140859us-gaap:TreasuryStockMember2018-09-300001140859us-gaap:NoncontrollingInterestMember2018-09-3000011408592018-09-300001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2018-09-300001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:NoncontrollingInterestMember2018-09-300001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2018-09-300001140859us-gaap:RetainedEarningsMember2018-10-012019-09-300001140859us-gaap:NoncontrollingInterestMember2018-10-012019-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-10-012019-09-300001140859us-gaap:CommonStockMember2018-10-012019-09-300001140859us-gaap:AdditionalPaidInCapitalMember2018-10-012019-09-300001140859us-gaap:TreasuryStockMember2018-10-012019-09-300001140859us-gaap:CommonStockMember2019-09-300001140859us-gaap:AdditionalPaidInCapitalMember2019-09-300001140859us-gaap:RetainedEarningsMember2019-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300001140859us-gaap:TreasuryStockMember2019-09-300001140859us-gaap:NoncontrollingInterestMember2019-09-300001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2019-09-300001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-09-300001140859us-gaap:RetainedEarningsMember2019-10-012020-09-300001140859us-gaap:NoncontrollingInterestMember2019-10-012020-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-10-012020-09-300001140859us-gaap:CommonStockMember2019-10-012020-09-300001140859us-gaap:AdditionalPaidInCapitalMember2019-10-012020-09-300001140859us-gaap:TreasuryStockMember2019-10-012020-09-300001140859us-gaap:CommonStockMember2020-09-300001140859us-gaap:AdditionalPaidInCapitalMember2020-09-300001140859us-gaap:RetainedEarningsMember2020-09-300001140859us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300001140859us-gaap:TreasuryStockMember2020-09-300001140859us-gaap:NoncontrollingInterestMember2020-09-300001140859abc:AccruedExpensesAndOtherLongTermLiabilitiesMember2019-10-0100011408592019-10-010001140859srt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2019-10-01xbrli:pure0001140859abc:WalgreensBootsAllianceIncMember2019-10-012020-09-300001140859abc:WalgreensBootsAllianceIncMember2020-09-300001140859abc:ExpressScriptsMember2019-10-012020-09-300001140859abc:ExpressScriptsMember2020-09-3000011408592018-07-012018-07-0100011408592019-01-012019-03-310001140859abc:PharmediumHealthcareHoldingsIncMember2019-03-310001140859us-gaap:CustomerRelationshipsMember2019-01-012019-03-310001140859us-gaap:TradeNamesMember2019-01-012019-03-310001140859us-gaap:ComputerSoftwareIntangibleAssetMember2019-01-012019-03-310001140859abc:PharmediumHealthcareHoldingsIncMember2019-12-3100011408592019-10-012019-12-3100011408592019-12-3100011408592020-01-012020-03-310001140859us-gaap:BuildingAndBuildingImprovementsMembersrt:MinimumMember2019-10-012020-09-300001140859us-gaap:BuildingAndBuildingImprovementsMembersrt:MaximumMember2019-10-012020-09-300001140859us-gaap:MachineryAndEquipmentMembersrt:MinimumMember2019-10-012020-09-300001140859us-gaap:MachineryAndEquipmentMembersrt:MaximumMember2019-10-012020-09-300001140859us-gaap:SoftwareAndSoftwareDevelopmentCostsMembersrt:MinimumMember2019-10-012020-09-300001140859us-gaap:SoftwareAndSoftwareDevelopmentCostsMembersrt:MaximumMember2019-10-012020-09-300001140859us-gaap:ShippingAndHandlingMember2019-10-012020-09-300001140859us-gaap:ShippingAndHandlingMember2018-10-012019-09-300001140859us-gaap:ShippingAndHandlingMember2017-10-012018-09-300001140859abc:NortheastVeterinarySupplyCompanyNEVSCOMember2017-12-012017-12-310001140859abc:NortheastVeterinarySupplyCompanyNEVSCOMember2017-12-310001140859abc:NortheastVeterinarySupplyCompanyNEVSCOMemberus-gaap:CustomerRelationshipsMember2017-12-012017-12-310001140859abc:H.D.SmithMember2018-01-012018-01-310001140859abc:H.D.SmithMember2018-01-310001140859abc:H.D.SmithMemberus-gaap:CustomerRelationshipsMember2018-01-310001140859abc:H.D.SmithMemberus-gaap:TradeNamesMember2018-01-310001140859abc:H.D.SmithMemberus-gaap:CustomerRelationshipsMember2018-01-012018-01-310001140859abc:H.D.SmithMemberus-gaap:TradeNamesMember2018-01-012018-01-310001140859abc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Member2018-01-012018-01-310001140859abc:ProfarmaJointVentureMember2018-01-012018-01-310001140859abc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Member2018-01-310001140859abc:ProfarmaJointVentureMember2018-01-310001140859abc:ProfarmaJointVentureMember2018-09-012018-09-300001140859abc:ProfarmaJointVentureMember2018-09-300001140859us-gaap:CustomerRelationshipsMemberabc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Member2018-01-310001140859abc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Memberus-gaap:TradeNamesMember2018-01-310001140859us-gaap:CustomerRelationshipsMemberabc:ProfarmaJointVentureMember2018-01-012018-01-310001140859srt:MinimumMemberabc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Memberus-gaap:TradeNamesMember2018-01-012018-01-310001140859abc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Memberus-gaap:TradeNamesMembersrt:MaximumMember2018-01-012018-01-310001140859us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberabc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Member2018-01-310001140859us-gaap:FairValueMeasurementsRecurringMemberus-gaap:FairValueInputsLevel2Memberabc:ProfarmaJointVentureMember2018-01-310001140859us-gaap:AccumulatedTranslationAdjustmentMember2017-10-012018-09-300001140859abc:ProfarmaJointVentureMember2017-10-012018-09-300001140859us-gaap:VariableInterestEntityPrimaryBeneficiaryMember2020-09-300001140859us-gaap:VariableInterestEntityPrimaryBeneficiaryMember2019-09-300001140859abc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Memberus-gaap:VariableInterestEntityPrimaryBeneficiaryMember2020-08-012020-08-310001140859abc:RetailBusinessMemberabc:ProfarmaDistribuidoradeProdutosFarmaceuticosS.A.Memberus-gaap:VariableInterestEntityPrimaryBeneficiaryMember2020-08-012020-08-310001140859us-gaap:LandMember2020-09-300001140859us-gaap:LandMember2019-09-300001140859us-gaap:BuildingAndBuildingImprovementsMember2020-09-300001140859us-gaap:BuildingAndBuildingImprovementsMember2019-09-300001140859us-gaap:MachineryAndEquipmentMember2020-09-300001140859us-gaap:MachineryAndEquipmentMember2019-09-300001140859abc:PharmediumHealthcareHoldingsIncMember2020-09-300001140859abc:PharmediumHealthcareHoldingsIncMember2019-10-012020-09-300001140859us-gaap:SwissFederalTaxAdministrationFTAMember2019-10-012020-09-300001140859us-gaap:SwissFederalTaxAdministrationFTAMember2020-09-300001140859abc:OpioidLawsuitsandInvestigationsMember2020-07-012020-09-300001140859abc:OpioidLawsuitsandInvestigationsMember2019-10-012020-09-300001140859abc:OpioidLawsuitsandInvestigationsMember2020-09-3000011408592018-10-012018-12-310001140859us-gaap:DomesticCountryMember2020-09-300001140859us-gaap:DomesticCountryMembersrt:MinimumMember2020-09-302020-09-300001140859us-gaap:DomesticCountryMembersrt:MaximumMember2020-09-302020-09-300001140859us-gaap:StateAndLocalJurisdictionMember2020-09-300001140859us-gaap:ForeignCountryMember2020-09-300001140859us-gaap:ForeignCountryMemberabc:AlternativeMinimumTaxMember2020-09-300001140859abc:USAOEDNYCivilClaimsMember2018-09-012018-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2018-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2018-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2018-10-012019-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2018-10-012019-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2019-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2019-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2019-10-012020-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2019-10-012020-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2020-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2020-09-300001140859us-gaap:TradeNamesMember2020-09-300001140859us-gaap:TradeNamesMember2019-09-300001140859us-gaap:CustomerRelationshipsMember2020-09-302020-09-300001140859us-gaap:CustomerRelationshipsMember2020-09-300001140859us-gaap:CustomerRelationshipsMember2019-09-300001140859abc:TradeNamesAndOtherMember2020-09-302020-09-300001140859abc:TradeNamesAndOtherMember2020-09-300001140859abc:TradeNamesAndOtherMember2019-09-300001140859abc:RevolvingCreditNoteMember2020-09-300001140859abc:RevolvingCreditNoteMember2019-09-300001140859abc:TermLoanAgreementMember2020-09-300001140859abc:TermLoanAgreementMember2019-09-30iso4217:GBP0001140859abc:OverdraftFacilityMember2020-09-300001140859abc:OverdraftFacilityMember2019-09-300001140859abc:ReceivablesSecuritizationFacilityMember2020-09-300001140859abc:ReceivablesSecuritizationFacilityMember2019-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMember2020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMember2019-09-300001140859abc:SeniorNotesDue2021Member2020-09-300001140859abc:SeniorNotesDue2021Member2019-09-300001140859abc:SeniorNotesDue2024Member2020-09-300001140859abc:SeniorNotesDue2024Member2019-09-300001140859abc:SeniorNotesDue2025Member2020-09-300001140859abc:SeniorNotesDue2025Member2019-09-300001140859abc:SeniorNotesDue2027Member2020-09-300001140859abc:SeniorNotesDue2027Member2019-09-300001140859abc:SeniorNotesDue2030Member2020-09-300001140859abc:SeniorNotesDue2030Member2019-09-300001140859abc:SeniorNotesDue2045Member2020-09-300001140859abc:SeniorNotesDue2045Member2019-09-300001140859abc:SeniorNotesDue2047Member2020-09-300001140859abc:SeniorNotesDue2047Member2019-09-300001140859abc:NonrecourseDebtMember2020-09-300001140859abc:NonrecourseDebtMember2019-09-300001140859abc:CorporationDebtMember2020-09-300001140859abc:CorporationDebtMember2019-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMemberabc:CdorLiborEuriborBankersAcceptanceStampingFeeMembersrt:MinimumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMemberabc:CdorLiborEuriborBankersAcceptanceStampingFeeMembersrt:MaximumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMemberabc:CdorLiborEuriborBankersAcceptanceStampingFeeMember2020-09-302020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMemberabc:AlternateBaseRateAndCanadianPrimeRateCdorRateMembersrt:MinimumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMemberabc:AlternateBaseRateAndCanadianPrimeRateCdorRateMembersrt:MaximumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMembersrt:MinimumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMembersrt:MaximumMember2019-10-012020-09-300001140859abc:MultiCurrencyRevolvingCreditFacilityMember2020-09-302020-09-300001140859us-gaap:CommercialPaperMember2020-09-300001140859us-gaap:CommercialPaperMember2019-09-3000011408592018-10-310001140859abc:TermLoanAgreementOctober2018Member2018-10-310001140859abc:SeniorNotesDue2030Memberus-gaap:NotesPayableToBanksMember2020-05-310001140859abc:SeniorNotesDue2030Memberus-gaap:NotesPayableToBanksMember2020-05-012020-05-310001140859us-gaap:NotesPayableToBanksMemberabc:SeniorNotesDue2021Member2020-05-310001140859us-gaap:NotesPayableToBanksMemberabc:SeniorNotesDue2021Member2020-05-012020-05-310001140859abc:SeniorNotesDue2027Member2017-12-310001140859abc:SeniorNotesDue2047Member2017-12-310001140859abc:SeniorNotesDue2019Member2017-12-3100011408592017-12-012017-12-310001140859us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2020-09-300001140859us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2019-09-300001140859us-gaap:AccumulatedTranslationAdjustmentMember2020-09-300001140859us-gaap:AccumulatedTranslationAdjustmentMember2019-09-300001140859abc:AccumulatedOtherAdjustmentsAttributabletoParentMember2020-09-300001140859abc:AccumulatedOtherAdjustmentsAttributabletoParentMember2019-09-300001140859abc:November2016ShareRepurchaseProgramMember2016-11-300001140859abc:November2016ShareRepurchaseProgramMember2017-10-012018-09-300001140859abc:November2016ShareRepurchaseProgramMember2018-10-012019-09-300001140859abc:October2018ShareRepurchaseProgramMember2018-10-310001140859abc:October2018ShareRepurchaseProgramMember2018-10-012019-09-300001140859abc:October2018ShareRepurchaseProgramMember2019-10-012020-09-300001140859abc:October2018ShareRepurchaseProgramMember2020-09-300001140859abc:May2020ShareRepurchaseProgramMember2020-05-310001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2020-09-300001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2019-10-012020-09-300001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2018-10-012019-09-300001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2017-10-012018-09-300001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2020-09-300001140859abc:WalgreensBootsAllianceIncMemberus-gaap:InvestorMember2019-09-300001140859abc:EmployeeContributionFirstThreePercentOfSalaryMember2017-01-012018-12-310001140859abc:EmployeeContributionFirstThreePercentOfSalaryMember2019-01-012019-12-310001140859abc:EmployeeContributionAdditionalTwoPercentOfSalaryMember2019-01-012019-12-3100011408592017-01-012018-12-3100011408592019-01-012019-12-310001140859us-gaap:EmployeeStockOptionMember2019-10-012020-09-300001140859abc:NonEmployeeMember2019-10-012020-09-3000011408592018-09-302018-09-3000011408592020-09-302020-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2019-10-012020-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2018-10-012019-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2017-10-012018-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2019-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2020-09-300001140859us-gaap:RestrictedStockUnitsRSUMember2020-09-302020-09-300001140859us-gaap:PerformanceSharesMember2019-10-012020-09-300001140859us-gaap:PerformanceSharesMembersrt:MinimumMember2018-10-012019-09-300001140859us-gaap:PerformanceSharesMembersrt:MaximumMember2018-10-012019-09-300001140859us-gaap:PerformanceSharesMembersrt:MinimumMember2019-10-012020-09-300001140859us-gaap:PerformanceSharesMembersrt:MaximumMember2019-10-012020-09-300001140859us-gaap:PerformanceSharesMember2018-10-012019-09-300001140859us-gaap:PerformanceSharesMember2017-10-012018-09-300001140859us-gaap:PerformanceSharesMember2019-09-300001140859us-gaap:PerformanceSharesMember2020-09-300001140859abc:OpioidLawsuitsandInvestigationsMember2018-10-012019-09-300001140859abc:OpioidLawsuitsandInvestigationsMember2017-10-012018-09-300001140859abc:SettlementwithOhioCountiesMember2019-10-012020-09-300001140859abc:MDLandOtherRelatedStateCourtLitigationMember2019-10-212019-10-21abc:numberOfDistributors0001140859abc:OpioidLawsuitsandInvestigationsMemberus-gaap:PendingLitigationMember2020-09-300001140859abc:OpioidLawsuitsandInvestigationsMemberus-gaap:PendingLitigationMember2019-10-012020-09-300001140859abc:OpioidLawsuitsandInvestigationsMembersrt:ScenarioForecastMember2020-10-012021-09-3000011408592018-07-0100011408592018-07-012018-09-3000011408592020-07-012020-09-30abc:country0001140859abc:WorldCourierMemberus-gaap:AllOtherSegmentsMember2020-09-300001140859us-gaap:OperatingSegmentsMemberabc:PharmaceuticalDistributionMember2017-10-012018-09-300001140859abc:MWIAnimalHealthMemberus-gaap:OperatingSegmentsMember2019-10-012020-09-300001140859abc:MWIAnimalHealthMemberus-gaap:OperatingSegmentsMember2018-10-012019-09-300001140859abc:MWIAnimalHealthMemberus-gaap:OperatingSegmentsMember2017-10-012018-09-300001140859abc:GlobalCommercializationServicesMemberus-gaap:OperatingSegmentsMember2019-10-012020-09-300001140859abc:GlobalCommercializationServicesMemberus-gaap:OperatingSegmentsMember2018-10-012019-09-300001140859abc:GlobalCommercializationServicesMemberus-gaap:OperatingSegmentsMember2017-10-012018-09-300001140859us-gaap:OperatingSegmentsMemberus-gaap:AllOtherSegmentsMember2017-10-012018-09-300001140859us-gaap:IntersegmentEliminationMember2019-10-012020-09-300001140859us-gaap:IntersegmentEliminationMember2018-10-012019-09-300001140859us-gaap:IntersegmentEliminationMember2017-10-012018-09-300001140859us-gaap:OperatingSegmentsMember2019-10-012020-09-300001140859us-gaap:OperatingSegmentsMember2018-10-012019-09-300001140859us-gaap:OperatingSegmentsMember2017-10-012018-09-300001140859us-gaap:MaterialReconcilingItemsMember2019-10-012020-09-300001140859us-gaap:MaterialReconcilingItemsMember2018-10-012019-09-300001140859us-gaap:MaterialReconcilingItemsMember2017-10-012018-09-300001140859us-gaap:OtherNonoperatingIncomeExpenseMember2018-10-012019-09-300001140859us-gaap:OtherNonoperatingIncomeExpenseMember2017-10-012018-09-300001140859abc:PharmaceuticalDistributionMember2019-10-012020-09-300001140859abc:PharmaceuticalDistributionMember2018-10-012019-09-300001140859abc:PharmaceuticalDistributionMember2017-10-012018-09-300001140859us-gaap:AllOtherSegmentsMember2019-10-012020-09-300001140859us-gaap:AllOtherSegmentsMember2018-10-012019-09-300001140859us-gaap:AllOtherSegmentsMember2017-10-012018-09-300001140859us-gaap:MoneyMarketFundsMemberus-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel1Member2020-09-300001140859us-gaap:MoneyMarketFundsMemberus-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel1Member2019-09-300001140859us-gaap:CarryingReportedAmountFairValueDisclosureMember2020-09-300001140859us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel2Member2020-09-300001140859us-gaap:CarryingReportedAmountFairValueDisclosureMember2019-09-300001140859us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:FairValueInputsLevel2Member2019-09-3000011408592020-04-012020-06-300001140859abc:PharmediumHealthcareHoldingsIncMember2020-01-012020-03-310001140859us-gaap:SwissFederalTaxAdministrationFTAMember2020-07-012020-09-300001140859abc:PharmediumHealthcareHoldingsIncMember2020-07-012020-09-3000011408592019-04-012019-06-3000011408592019-07-012019-09-300001140859us-gaap:SubsequentEventMember2020-11-012020-11-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2019-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2019-10-012020-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2020-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2018-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2018-10-012019-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2017-09-300001140859abc:AllowanceForReturnsAndDoubtfulAccountsMember2017-10-012018-09-300001140859abc:AllowanceForReturnsandDoubtfulAccountsNoncurrentMemberus-gaap:OtherNoncurrentAssetsMember2019-09-300001140859abc:AllowanceForReturnsandDoubtfulAccountsNoncurrentMemberus-gaap:OtherNoncurrentAssetsMember2018-09-30
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑ 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.) |
| | | | |
| 1300 Morris Drive | 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:
| | | | | | | | | | | |
| 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 every Interactive Data File required to be submitted 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 such files). Yes þ No 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:
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company ☐
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 ☐
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 ☐ No þ
The aggregate market value of voting stock held by non-affiliates of the registrant on March 31, 2020 based upon the closing price of such stock on the New York Stock Exchange on March 31, 2020 was $10,238,925,461.
The number of shares of common stock of AmerisourceBergen Corporation outstanding as of October 31, 2020 was 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 2021 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, 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 solutions.
Industry Overview
Pharmaceutical sales in the United States, as recently estimated by IQVIA, an independent third-party provider of information to the pharmaceutical and healthcare industry, are expected to grow at a compound annual growth rate of approximately 3.4% from 2019 through 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 63 million by 2024 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-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 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 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 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 select 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 improve channel efficiencies and patient outcomes. Implementing this disciplined and focused strategy in a seamless and unified way has allowed us to significantly expand our business, and we believe we are well 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 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 positioned to service and support many of the new biotechnology therapies that are expected to be coming to market in the near future.
We 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 manufacturer customers, which includes our international presence in 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 structures among all pharmaceutical distributors. Our robust distribution facility 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. 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 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, 2020 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.
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, 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 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 team 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 manufacturer 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 33% and approximately 12%, respectively, of revenue in the fiscal year ended September 30, 2020. Our top 10 customers, including governmental agencies and group purchasing organizations ("GPO"), represented approximately 64% of revenue in the fiscal year ended September 30, 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, 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, 2020 accounted for approximately 46% of our purchases.
Information Systems. The Pharmaceutical Distribution Services operating segment recently transitioned its key specialty distribution businesses onto its primary enterprise resource planning ("ERP") system. As a result, the pharmaceutical distribution facilities in the United States all now operate under a single ERP system. Pharmaceutical Distribution Services’
ERP system 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 operating systems resulting in the ability to rapidly deploy new capabilities. We continue to make investments to enhance and upgrade the operating 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.
Pharmaceutical Distribution Services has made significant investments in its electronic ordering systems. Pharmaceutical Distribution Services’ systems are intended to strengthen customer relationships by helping customers to reduce operating costs, and by providing them a platform for a number of the basic and value-added services, including product demand data, inventory replenishment, single-source billing, third-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, 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 data center operations, which were previously outsourced to 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. ABCS, World Courier, and MWI also face competition from a variety of 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, 2020, we had approximately 22,000 employees, of which approximately 21,000 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. 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 authorities regulate the purchase, storage, and/or distribution of pharmaceutical products, including controlled substances. Wholesale distributors of controlled substances must hold valid DEA licenses, meet various security and operating standards, and comply with regulations governing the sale, marketing, packaging, holding, and distribution of controlled substances.
We and our customers are subject to fraud and abuse laws, including the federal anti-kickback 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 require all supply-chain stakeholders to participate in an electronic, interoperable prescription drug traceability system. The DQSA also establishes 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. We expect that the FDA, and eventually comparable state agencies, will promulgate implementing regulations governing wholesale distributor and third-party logistics providers. There can be no assurance that we are fully compliant with the DQSA 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 operations into compliance. These and other requirements will continue to increase the cost of our operations.
The regulation of public and private health insurance and benefit programs can also affect our business and scrutiny of the healthcare delivery and 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 and other healthcare 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, 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" beginning 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 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") 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. In January 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 must 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 are subject to the European Union's General Data Protection Regulation ("GDPR") which became effective on May 25, 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 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.
In fiscal 2020, we continued to experience unfavorable brand and generic pharmaceutical pricing trends, which negatively impacted our Pharmaceutical Distribution Services reportable segment profit and our consolidated operating earnings. We expect these trends to continue in fiscal 2021, which could have an adverse effect on our results of operations.
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 brand and generic pharmaceutical manufacturers have a price appreciation component to them. As a result, our gross profit from brand-name and generic pharmaceuticals 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 brand 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.
Competition and industry consolidation may erode our profit.
As described in greater detail in the "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, 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.
Our 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 customers based upon our assessment and analysis of creditworthiness. Although we often try to obtain a security interest in assets and other arrangements intended to protect our credit exposure, we generally are either subordinated to the position of the primary 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 adversely affect the solvency or creditworthiness of our customers. The COVID-19 pandemic has increased volatility of the capital and credit markets and has led to a general worsening of economic conditions, which has put financial pressure on many of our customers and may threaten certain customers’ ability to maintain liquidity sufficient to repay their obligations to us as they become due. The bankruptcy, insolvency, or other credit failure of any customer that has a substantial amount owed to us could have a material adverse effect on our operating revenue and results of operations. As of September 30, 2020, our two largest trade receivable balances due from customers represented approximately 47% and 7% 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 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 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.
Our stock price and our ability to access credit markets may be adversely affected by financial market volatility and disruption or a downgrade in our credit ratings.
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 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 and other covenants in our public and private debt, and would likely increase our overall borrowing costs and adversely affect our earnings.
Declining economic conditions could adversely affect our results of operations and financial condition.
Our operations and performance depend on economic conditions in the United States and other countries where we do business. Deterioration in general economic conditions could adversely affect the amount of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, could reduce purchases by our customers, which would negatively affect our revenue growth and cause a decrease in our profitability. Negative trends in the general economy, including interest rate fluctuations, financial market volatility, or credit 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. Reduced purchases by our customers or changes in payment terms 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 deteriorate, our results of operations or financial condition could be adversely affected.
Business and 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 33% of our revenue in the fiscal year ended September 30, 2020. Express Scripts accounted for approximately 12% of our revenue in the fiscal year ended September 30, 2020. Our top ten customers, including governmental agencies and GPOs, represented approximately 64% of revenue in the fiscal year ended September 30, 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 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; 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, the expected future benefits may not be realized fully or may take longer to realize than expected, which could have a material adverse impact on our business, financial condition, and results of 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. 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.
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"), 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.
Risks generally associated with data privacy regulation and the international transfer of personal data.
We are required to comply with increasingly complex and changing 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 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 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 have experienced and expect to continue to experience unpredictable reductions in supply 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 supply of products 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 impact it may have on operations. Certain of our employees have contracted COVID-19 which resulted in our decision to temporarily close, and 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 disrupt our ability to service our customers.
Since April 2020, COVID-19 has adversely impacted and may continue to adversely impact our revenue, results of operations, and cash flows. For instance, demand for certain animal health products in our MWI 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 operations of our retail pharmacy and health systems customers. An economic slowdown or recession related to COVID-19 may affect our customers' ability to obtain credit to finance their business on acceptable terms, which could result in reduced spending on our products 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 business, revenue, results of operations, cash flows or financial condition. For example, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets. A sustained or prolonged outbreak could exacerbate the adverse impact of such events, and the impact of COVID-19 may also exacerbate other risks discussed in Item 1A to our Form 10-K, any of which could have a material adverse effect on 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. We continue to make substantial investments in data centers and information systems, including, but not limited to, the expanded implementation of our primary ERP system to integrate certain of our key business areas. Third-party service providers are also responsible for managing a 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-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, interruption, or breach of our operational or information security systems, or those of our third-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 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.
Additionally, as discussed above in the risk factor “We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business,” 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.
Our goodwill, indefinite-lived intangible assets, or long-lived assets may become impaired, which may 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 long-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.
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 long-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.
We face environmental risks and the occurrence of one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods, and other 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. 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, 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. We lease facilities in Chesterbrook, Pennsylvania and in Conshohocken, Pennsylvania for our corporate headquarters.
Pharmaceutical Distribution Services has a robust distribution facility network in the United 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, 2020, the Consulting Group's operations were conducted in leased locations. Its headquarters are located in South Carolina and internationally in Canada.
As of September 30, 2020, World Courier's office and operating facilities are located in over 50 countries. Its headquarters are located in London, England. Most of the facilities are leased.
As of September 30, 2020, MWI's operations were conducted in the United States and in the United Kingdom. Leased facilities are located in California, Colorado, Florida, 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 14 (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
The following is a list of our executive officers and their ages and positions as of November 15, 2020.
| | | | | | | | | | | | | | |
| Name | | Age | | Current Position with the Company |
| Steven H. Collis | | 59 | | Chairman, President, and Chief Executive Officer |
| Silvana Battaglia | | 53 | | Executive Vice President and Chief Human Resources Officer |
| John G. Chou | | 64 | | Executive Vice President and Chief Legal Officer |
| Gina K. Clark | | 63 | | Executive Vice President and Chief Communications & Administration Officer |
| James F. Cleary | | 57 | | Executive Vice President and Chief Financial Officer |
| Leslie E. Donato | | 51 | | Executive Vice President and Chief Strategy Officer |
| Robert P. Mauch | | 53 | | Executive Vice President and Group President |
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 over 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 since August 2011 and became the Chief Legal Officer in September 2019. He served as Chief Legal & Business Officer 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 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 18 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 from June 2017 to November 2018. He previously served as President, MWI Animal 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.
Ms. Donato has been Executive Vice President and Chief Strategy Officer since July 2019. Prior to joining the Company, she held various 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 Vice President & General Manager of Neurology & Hematology. She also worked for McKinsey & Company where she was a Partner in the 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 from June 2017 to February 2019. He served as President, AmerisourceBergen Drug Corporation from February 2015 to June 2017. Mr. 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 over 25 years.
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, 2020, there were 2,385 record holders of the Company's common stock.
In November 2018, the Company's board of directors increased the quarterly dividend by 5% from $0.38 per share to $0.40 per share. In January 2020, the Company's board of directors increased the quarterly dividend by 5% from $0.40 per share to $0.42 per share. In November 2020, the Company's board of directors increased the quarterly dividend by 5% from $0.42 per share to $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 50500, Louisville, KY 40233-500; (telephone): Domestic 1-800-522-6645, International 1-201-680-6578, and (internet) 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, 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.
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, 2015 to September 30, 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, 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, 2015 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 26.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of or for the Fiscal Year Ended September 30, |
| (Amounts in thousands, except per share amounts) | | 2020(a) | | 2019(b) | | 2018(c) | | 2017(d) | | 2016(e) |
| Statement of Operations Data: | | | | | | | | | | |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | $ | 167,939,635 | | | $ | 153,143,826 | | | $ | 146,849,686 | |
| Gross profit | | 5,191,884 | | | 5,138,312 | | | 4,612,317 | | | 4,546,002 | | | 4,272,606 | |
| Operating expenses | | 10,327,238 | | | 4,026,389 | | | 3,168,632 | | | 3,485,660 | | | 2,746,832 | |
| Operating (loss) income | | (5,135,354) | | | 1,111,923 | | | 1,443,685 | | | 1,060,342 | | | 1,525,774 | |
| Interest expense, net | | 137,883 | | | 157,769 | | | 174,699 | | | 145,185 | | | 139,912 | |
| Net (loss) income | | (3,399,558) | | | 854,135 | | | 1,615,892 | | | 364,484 | | | 1,427,929 | |
| Net (loss) income attributable to AmerisourceBergen Corporation | | $ | (3,408,716) | | | $ | 855,365 | | | $ | 1,658,405 | | | $ | 364,484 | | | $ | 1,427,929 | |
| Earnings per share — diluted | | $ | (16.65) | | | $ | 4.04 | | | $ | 7.53 | | | $ | 1.64 | | | $ | 6.32 | |
| Cash dividends declared per common share | | $ | 1.66 | | | $ | 1.60 | | | $ | 1.52 | | | $ | 1.46 | | | $ | 1.36 | |
Weighted average common shares outstanding — diluted | | 204,783 | | | 211,840 | | | 220,336 | | | 221,602 | | | 225,959 | |
| Balance Sheet Data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 4,597,746 | | | $ | 3,374,194 | | | $ | 2,492,516 | | | $ | 2,435,115 | | | $ | 2,741,832 | |
| Accounts receivable, net | | 13,846,301 | | | 12,386,879 | | | 11,314,226 | | | 10,303,324 | | | 9,175,876 | |
| Inventories | | 12,589,278 | | | 11,060,254 | | | 11,918,508 | | | 11,461,428 | | | 10,723,920 | |
| Property and equipment, net | | 1,484,808 | | | 1,770,516 | | | 1,892,424 | | | 1,797,945 | | | 1,530,682 | |
| Total assets | | 44,274,830 | | | 39,171,980 | | | 37,669,838 | | | 35,316,470 | | | 33,637,501 | |
| Accounts payable | | 31,705,055 | | | 28,385,074 | | | 26,836,873 | | | 25,404,042 | | | 23,926,320 | |
| Total debt | | 4,119,520 | | | 4,172,892 | | | 4,310,189 | | | 3,442,055 | | | 4,186,703 | |
| Total accrued litigation liability | | 6,606,925 | | | — | | | — | | | — | | | — | |
| Total (deficit) equity | | (839,636) | | | 2,993,206 | | | 3,049,961 | | | 2,064,461 | | | 2,129,404 | |
| 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.
(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.
(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
The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution (including plasma and other blood products, injectable pharmaceuticals, vaccines, and other specialty pharmaceutical products) and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, the Pharmaceutical Distribution Services reportable segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution Services reportable segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, it delivers packaging solutions to institutional and retail healthcare providers.
Other
Other consists of operating segments that focus on global commercialization services and animal health (MWI Animal Health or "MWI"). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services ("ABCS") and World Courier.
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 5.7% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment;
•Total gross profit increased 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 strong increase in specialty product sales. Gross profit in Other increased 6.5% from the prior fiscal year due to growth at World Courier, MWI, and ABCS;
•Distribution, selling, and administrative expenses increased 3.9% from the prior fiscal year primarily due to an increase in operating costs to support our revenue growth;
•Employee severance, litigation, and other increased $6.5 billion due to a legal accrual for litigation relating the distribution of prescription 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 primarily due to the $6.6 billion legal accrual in connection with opioid lawsuits, offset in part by an increase in segment operating income, a lower impairment charge relating to PharMEDium's assets, and a decline in depreciation and amortization;
•Our effective tax rates were 35.8% and 11.7% in the fiscal years ended September 30, 2020 and 2019, respectively. Our effective tax rate in the fiscal year ended September 30, 2020 was higher 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 other discrete items (see Note 5 of the Notes to Consolidated Financial Statements) and offset in part by the tax impact of the portion of the opioid legal accrual that is not expected to be tax deductible. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium's assets (see Note 1 of the Notes to Consolidated Financial Statements) 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 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, 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 inflation and price deflation, general economic conditions in the United States, competition within the industry, customer consolidation, changes in pharmaceutical manufacturer pricing and distribution policies and practices, increased downward pressure on government and other third-party reimbursement rates to our customers, changes in federal government rules and 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 segment.
The Pharmaceutical Distribution Services segment grew its revenue by 5.6%, or $9.7 billion, from the prior fiscal year, 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 overall market growth principally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.
More specifically, the increase in the Pharmaceutical Distribution Services segment revenue 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 Other increased 9.6% from the prior fiscal year due to growth at all three operating segments: ABCS, MWI, and World Courier.
A number of our contracts with customers, including group purchasing organizations, are typically subject to expiration each year. We may lose a significant customer if an existing contract with such customer expires without being extended, renewed, or replaced. During the fiscal year ended September 30, 2020, no significant contracts expired. Over the next twelve months, there are no significant contracts scheduled to expire. Additionally, from time to time, significant contracts may be terminated in accordance with their terms or extended, renewed, or replaced prior to their expiration dates. If those contracts are extended, renewed, or replaced at less favorable terms, they may also negatively impact our revenue, results of operations, and cash flows.
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 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 sales to our larger customers, which typically have lower gross profit margins.
Gross profit in Other increased 6.5%, or $85.4 million, from the prior fiscal year 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.
We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $9.1 million and $145.9 million during the fiscal years ended September 30, 2020 and 2019, respectively. The gains were recorded as reductions to cost of goods sold (see Note 15 of the Notes to Consolidated Financial Statements).
Our cost of goods sold includes a LIFO provision that 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 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.
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, selling, and administrative expenses increased 3.9%, or $103.7 million, from the prior fiscal year. The increase 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 PharMEDium compounding business, such as contract termination fees, offset in part by operational synergies realized from the integration of H.D. Smith within Pharmaceutical Distribution Services. As a percentage of revenue, distribution, selling, and administrative expenses were 1.46% in the current fiscal year, and represents a 2-basis point decrease compared to the prior fiscal year.
Depreciation expense decreased 5.0% from the prior fiscal year primarily due to the reduction of H.D. Smith depreciable assets in connection with the integration of its operations. Amortization expense decreased 33.8% from the prior fiscal year primarily due to the fiscal 2020 and 2019 impairments of PharMEDium intangible assets.
Employee severance, litigation, and other in the fiscal year ended September 30, 2020 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, 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.
We recorded a $361.7 million impairment of PharMEDium's assets in the fiscal year ended September 30, 2020 and a $570.0 million impairment of PharMEDium's assets in the fiscal year ended September 30, 2019 (see Note 1 of the Notes to Consolidated Financial Statements).
Operating Income
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2020 | | 2019 | | Change |
| Pharmaceutical Distribution Services | | $ | 1,807,001 | | | $ | 1,671,251 | | | 8.1% |
| Other | | 400,139 | | | 380,660 | | | 5.1% |
| Intersegment eliminations | | (2,693) | | | (659) | | | |
| Total segment operating income | | 2,204,447 | | | 2,051,252 | | | 7.5% |
| | | | | | |
| Gain from antitrust litigation settlements | | 9,076 | | | 145,872 | | | |
| LIFO (expense) credit | | (7,422) | | | 22,544 | | | |
| PharMEDium remediation costs | | (16,165) | | | (69,423) | | | |
| PharMEDium shutdown costs | | (43,206) | | | — | | | |
| New York State Opioid Stewardship Act | | (14,800) | | | 22,000 | | | |
| Contingent consideration adjustment | | 12,153 | | | — | | | |
| Acquisition-related intangibles amortization | | (110,478) | | | (159,848) | | | |
| Employee severance, litigation, and other | | (6,807,307) | | | (330,474) | | | |
| Impairment of PharMEDium assets | | (361,652) | | | (570,000) | | | |
| Operating (loss) income | | $ | (5,135,354) | | | $ | 1,111,923 | | | (561.8)% |
Segment operating income is evaluated before gain from antitrust litigation settlements; LIFO (expense) credit; PharMEDium remediation costs; PharMEDium shutdown costs; New York State Opioid Stewardship Act; contingent consideration adjustment; acquisition-related intangibles amortization; employee severance, litigation, and other; and impairment of PharMEDium assets.
Pharmaceutical Distribution Services operating income increased 8.1%, or $135.8 million, from the prior fiscal year primarily due to the increase in gross profit, as noted above. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin was 0.99% and represented an increase of 2 basis points compared to the prior fiscal year.
Operating income in Other increased 5.1%, or $19.5 million, from the prior fiscal year due to the increase in gross profit and was offset in part by an increase in operating 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.
We recorded a $13.7 million gain on the sale of 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, |
| | | 2020 | | 2019 |
| (dollars in thousands) | | Amount | | Weighted Average
Interest Rate | | Amount | | Weighted Average
Interest Rate |
| Interest expense | | $ | 158,522 | | | 3.42% | | $ | 195,474 | | | 3.73% |
| Interest income | | (20,639) | | | 0.69% | | (37,705) | | | 1.87% |
| Interest expense, net | | $ | 137,883 | | | | | $ | 157,769 | | | |
Interest expense, net decreased 12.6%, or $19.9 million, from the prior fiscal year primarily due to a decrease in interest expense resulting from the adoption of the new lease accounting standard. Prior to October 1, 2019, we recognized interest expense associated with financing obligations in connection with lease construction assets (see Note 1 of the Notes to Consolidated Financial Statements). Upon adoption of the new lease standard as of October 1, 2019, we began recognizing rent expense related to these leases in Distribution, Selling, and Administrative expenses in our Consolidated Statements of Operations. Interest income was lower in the current fiscal year as a result of a decline in investment interest rates, which was offset in part by a $1.0 billion increase in average invested 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 35.8% and 11.7% in the fiscal years ended September 30, 2020 and 2019, respectively. Our effective tax rate in the fiscal year ended September 30, 2020 was higher 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 other discrete items (see Note 5 of the Notes to Consolidated Financial Statements) and offset in part by the tax impact of the portion of the opioid legal accrual that is not expected to be tax deductible. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium's assets (see Note 1 of the Notes to Consolidated Financial Statements) 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 2017 Tax Act.
Net income attributable to AmerisourceBergen and diluted earnings per share were significantly lower in the current fiscal year primarily due to the legal accrual recognized in connection with opioid lawsuits.
Year ended September 30, 2019 compared to the Year ended September 30, 2018
Revenue
| | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended
September 30, | | |
| (dollars in thousands) | | 2019 | | 2018 | | Change |
| Pharmaceutical Distribution Services | | $ | 172,813,537 | | | $ | 161,699,343 | | | 6.9% |
| Other: | | | | | | |
| MWI Animal Health | | 3,975,232 | | | 3,789,759 | | | 4.9% |
| Global Commercialization Services | | 2,893,109 | | | 2,542,971 | | | 13.8% |
| Total Other | | 6,868,341 | | | 6,332,730 | | | 8.5% |
| Intersegment eliminations | | (92,757) | | | (92,438) | | | |
| Revenue | | $ | 179,589,121 | | | $ | 167,939,635 | | | 6.9% |
Revenue increased by 6.9% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment.
The Pharmaceutical Distribution Services segment grew its revenue by 6.9%, or by $11.1 billion, 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), the impact of business combinations, and overall market growth principally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.
More specifically, the increase in the Pharmaceutical Distribution Services segment revenue was largely attributable to the following (in billions):
| | | | | | | | |
| 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 8.5% from the prior fiscal year, primarily due to ABCS's growth in its Canadian operations, growth at MWI, growth at World Courier, and the January 2018 consolidation of the specialty joint venture in 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% |
Gross profit increased 11.4%, or $526.0 million, from the prior fiscal year. Gross profit in the fiscal year ended September 30, 2019 was favorably impacted primarily by the increase in gross profit in Pharmaceutical Distribution Services, the increase in gross profit in Other, an increase in gains from antitrust litigation settlements, the LIFO credit in the current year in comparison to a LIFO expense in the prior year, and the reversal of a previously-estimated assessment related to the New York State Opioid Stewardship Act.
Pharmaceutical Distribution Services gross profit increased 6.2%, or $216.0 million, from the prior fiscal year primarily due to the increase in revenue largely due to strong specialty product sales, the January 2018 consolidation of Profarma, and the January 2018 acquisition of H.D. Smith and was negatively impacted by our pharmaceutical compounding operations as production at our Memphis facility had been suspended since December 2017. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.13% in the fiscal year ended September 30, 2019 remained relatively flat compared to the prior fiscal year.
Gross profit in Other increased 4.3%, or $53.7 million, from the prior fiscal year primarily due to growth at World Courier and MWI, the January 2018 consolidation of the specialty joint venture in Brazil, and ABCS's growth in its Canadian operations. As a percentage of revenue, gross profit margin in Other of 19.13% in the fiscal year ended September 30, 2019 decreased from 19.90% in the prior fiscal year.
We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $145.9 million and $35.9 million during the fiscal years ended September 30, 2019 and 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, | | |
| (dollars in thousands) | | 2019 | | 2018 | | Change |
| Distribution, selling, and administrative | | $ | 2,663,508 | | | $ | 2,460,301 | | | 8.3% |
| Depreciation and amortization | | 462,407 | | | 465,127 | | | (0.6)% |
| Employee severance, litigation, and other | | 330,474 | | | 183,520 | | | |
| Goodwill impairment | | — | | | 59,684 | | | |
| Impairment of PharMEDium assets | | 570,000 | | | — | | | |
| Total operating expenses | | $ | 4,026,389 | | | $ | 3,168,632 | | | 27.1% |
Distribution, selling, and administrative expenses increased 8.3%, or $203.2 million, from the prior fiscal year. As a percentage of revenue, distribution, selling, and administrative expenses were 1.48% in the fiscal year ended September 30, 2019, and represents a 2-basis point increase compared to the prior fiscal year. Pharmaceutical Distribution Services' segment expenses increased by 10.2% from the prior fiscal year primarily due to an increase in costs to support revenue growth, the January 2018 consolidation of Profarma, 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 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.
Depreciation expense increased 3.9% from the prior fiscal year primarily due to the January 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 2019, offset in part by the amortization of intangible assets originating from our January 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma.
Employee severance, litigation, and other in the fiscal year ended September 30, 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 in the fiscal year ended September 30, 2018 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 fiscal year ended September 30, 2019 (see Note 1 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, | | |
| (dollars in thousands) | | 2019 | | 2018 | | Change |
| Pharmaceutical Distribution Services | | $ | 1,671,251 | | | $ | 1,626,748 | | | 2.7% |
| Other | | 380,660 | | | 355,091 | | | 7.2% |
| Intersegment eliminations | | (659) | | | (609) | | | |
| Total segment operating income | | 2,051,252 | | | 1,981,230 | | | 3.5% |
| | | | | | |
| Gain from antitrust litigation settlements | | 145,872 | | | 35,938 | | | |
| LIFO credit (expense) | | 22,544 | | | (67,324) | | | |
| PharMEDium remediation costs | | (69,423) | | | (66,204) | | | |
| New York State Opioid Stewardship Act | | 22,000 | | | (22,000) | | | |
| Acquisition-related intangibles amortization | | (159,848) | | | (174,751) | | | |
| Employee severance, litigation, and other | | (330,474) | | | (183,520) | | | |
| Goodwill impairment | | — | | | (59,684) | | | |
| Impairment of PharMEDium assets | | (570,000) | | | — | | | |
| Operating income | | $ | 1,111,923 | | | $ | 1,443,685 | | | (23.0)% |
Segment operating income is evaluated excluding gain from antitrust litigation settlements; LIFO credit (expense); PharMEDium remediation costs; New York State Opioid Stewardship Act; acquisition-related intangibles amortization; employee severance, litigation, and other; goodwill impairment; and impairment of PharMEDium assets.
Pharmaceutical Distribution Services operating income increased 2.7%, or $44.5 million, from the prior fiscal year primarily due to the increase in gross profit, offset in part by an increase in operating expenses. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin decreased 4 basis points from the prior fiscal year primarily due to a lower contribution from our pharmaceutical compounding operations.
Operating income in Other increased 7.2%, or $25.6 million, from the prior fiscal year primarily due to the increase in gross profit, offset in part by an increase in operating expenses.
We recorded a $13.7 million gain on the sale of 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, |
| | | 2019 | | 2018 |
| (dollars in thousands) | | Amount | | Weighted Average
Interest Rate | | Amount | | Weighted Average
Interest Rate |
| Interest expense | | $ | 195,474 | | | 3.73% | | $ | 189,640 | | | 3.59% |
| Interest income | | (37,705) | | | 1.87% | | (14,941) | | | 1.18% |
| Interest expense, net | | $ | 157,769 | | | | | $ | 174,699 | | | |
Interest expense, net decreased 9.7%, or $16.9 million, from the prior fiscal year. The decrease in interest expense, net from the prior fiscal year was 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 December 2017 issuance of senior notes to finance our January 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma's debt and related interest expense.
For the fiscal year ended September 30, 2018, we recorded a $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 debt included a $22.3 million prepayment premium and $1.5 million of an unamortized debt discount and unamortized debt issuance costs.
Our effective tax rates were 11.7% and (37.2)% in the fiscal years ended September 30, 2019 and 2018, respectively. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium assets (see Note 1 of the Notes to Consolidated Financial Statements) 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 2017 Tax Act. Our effective tax rate in the fiscal year ended September 30, 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 that 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 upon the application of estimates and assumptions. For a complete list of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.
Allowances for Returns and Doubtful Accounts
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 customer sales 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, payment and default 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, 2020, 2019, and 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.
Bad debt expense for the fiscal years ended September 30, 2020, 2019, and 2018 was $11.9 million, $25.2 million, and $16.7 million, respectively. An increase or decrease of 0.1% in the 2020 allowance as a percentage of trade receivables would result in an increase or decrease in the provision on accounts receivable of approximately $13.9 million. The allowance for doubtful accounts was $72.7 million and $76.4 million as of September 30, 2020 and 2019, respectively.
Schedule II of this Form 10-K sets forth a rollforward of allowances for returns and doubtful accounts.
Business Combinations
The assets acquired and liabilities assumed upon the acquisition or consolidation of a business are recorded at fair value, with the residual of the purchase price allocated to goodwill. We engage third-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 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.
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. We identify our reporting units based upon our management 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 components within our 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. Our reporting units include Pharmaceutical Distribution Services, Profarma, ABCS, World Courier, and 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, 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-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 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 went directly to performing our annual quantitative assessments of goodwill and indefinite-lived intangible 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 exceed the total amount of goodwill allocated to the reporting unit.
When performing a quantitative impairment assessment, we utilize an income-based approach to value our reporting 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 flows 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 of goodwill and indefinite-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 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, we 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. 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 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 $52.9 million in the fiscal year ended September 30, 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, 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 can be reasonably 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. Among the loss contingencies we considered in accordance with the foregoing in connection with the preparation of the accompanying financial statements were the opioid matters described in Note 14 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
The following illustrates our debt structure as of September 30, 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 |
| Fixed-Rate Debt: | | | | |
| $500,000, 3.40% senior notes due 2024 | | 498,232 | | | — | |
| $500,000, 3.25% senior notes due 2025 | | 496,990 | | | — | |
| $750,000, 3.45% senior notes due 2027 | | 743,940 | | | — | |
| $500,000, 2.80% senior notes due 2030 | | 494,045 | | | — | |
| $500,000, 4.25% senior notes due 2045 | | 494,730 | | | — | |
| $500,000, 4.30% senior notes due 2047 | | 492,755 | | | — | |
| Nonrecourse debt | | 58,081 | | | — | |
| Total fixed-rate debt | | 3,278,773 | | | — | |
| | | | |
| Variable-Rate Debt: | | | | |
| Revolving credit note | | — | | | 75,000 | |
| Term loan due October 2020 | | 399,982 | | | — | |
| Overdraft facility due 2021 (£30,000) | | — | | | 38,770 | |
| Receivables securitization facility due 2022 | | 350,000 | | | 1,100,000 | |
| Multi-currency revolving credit facility due 2024 | | — | | | 1,400,000 | |
| Nonrecourse debt | | 90,765 | | | — | |
| Total variable-rate debt | | 840,747 | | | 2,613,770 | |
| 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 purchases of shares of our common stock.
Our primary ongoing cash requirements will be to finance working capital, fund the repayment of debt, fund the payment of interest on debt, fund purchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements, 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, 2020 and 2019, our cash and cash equivalents held by foreign subsidiaries were $675.9 million and $826.8 million, respectively, and are generally based in U.S. dollar denominated holdings. We have the ability to repatriate the majority of our cash and cash equivalents held by our foreign subsidiaries without incurring 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, may require the use of our credit facilities to fund short-term capital needs. Our cash balance in the fiscal years ended September 30, 2020 and 2019 needed to be supplemented by intra-period credit facility borrowings to cover short-term working capital needs. The largest amount of intra-period borrowings under our revolving and securitization credit facilities that was outstanding at any one time during the fiscal years ended September 30, 2020 and 2019 was $39.6 million and $240.6 million, respectively. We had $117.4 million, $606.0 million, and $25,115.3 million of cumulative intra-period borrowings that were repaid under our credit facilities during the fiscal years ended September 30, 2020, 2019, and 2018, respectively.
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 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 this early retirement.
In December 2017, we issued $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 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 $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") with a syndicate of 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 112.5 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (91 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee as of September 30, 2020) and from 0 basis points to 12.5 basis points over the alternate base rate and Canadian prime rate, as applicable. We pay facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based upon our debt rating, ranging from 5 basis points to 12.5 basis points, annually, of the total commitment (9 basis points as of September 30, 2020). We may choose to repay or reduce our commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which we were compliant as of September 30, 2020.
We have a commercial paper program whereby we may from time to time issue short-term promissory notes in an aggregate amount of up to $1.4 billion at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase our borrowing capacity as it is fully backed by our Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under our commercial paper program as of September 30, 2020 and 2019.
We have a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in September 2022. We have available to us an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based 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, 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 and 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 October 2018, we refinanced $400 million of outstanding term loans by issuing a new $400 million variable-rate term loan ("October 2018 Term Loan"), which matures in October 2020. The October 2018 Term Loan bears interest at a rate equal to a base rate or LIBOR, plus a margin of 65 basis points. The October 2018 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which we were compliant as of September 30, 2020.
In October 2020, we repaid the $400 million October 2018 Term Loan that became due.
In addition to the 2027 Notes, the 2030 Notes, and the 2047 Notes, we have $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.
Nonrecourse debt is comprised of short-term and long-term debt belonging to the Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiaries.
In November 2016, our board of directors authorized a 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, 2018, we purchased $663.1 million of our common stock under this program, which included $24.0 million of September 2018 purchases that cash settled in October 2018. During the fiscal year ended September 30, 2019, we purchased $125.8 million of our common stock under this program, which excluded $24.0 million of September 2018 purchases that cash settled in October 2018, to complete our authorization under this program.
In October 2018, our board of directors authorized a share repurchase program allowing us to purchase up to $1.0 billion of our shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2019, we purchased $538.9 million of our common stock under this program, which included $14.8 million of September 2019 purchases that cash settled in October 2019. During the fiscal 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 $55.5 million of availability remaining under this program.
In May 2020, our board of directors authorized a new share repurchase program allowing us to purchase up to $500 of our outstanding shares of common stock, 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 noncancellable operating leases, and minimum payments on our other commitments as of September 30, 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 | |
The 2017 Tax Act required a one-time transition tax to be recognized on historical foreign earnings and profits. We currently estimate that our liability related to the transition tax is $182.6 million, net of overpayments and tax credits, as of September 30, 2020, which is payable in installments over a six-year period commencing in January 2021. The transition tax commitment is included in "Other Commitments" in the above table.
Our liability for uncertain tax positions was $498.3 million (including interest and penalties) as of September 30, 2020. 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 years ended September 30, 2020 and 2019, our operating activities provided cash of $2,207.0 million and $2,344.0 million, respectively. Cash provided by operations in the fiscal year ended September 30, 2020 was principally the result of an increase in the accrued litigation liability of $6,198.9 million, an increase in accounts payable of $3,300.8 million, and an increase in accrued expenses of $524.0 million, largely offset in part by a net loss of $3,399.6 million, an increase in accounts receivable of $1,629.0 million, an increase in inventories of $1,621.1 million, non-cash items of $662.4 million, and an increase in income taxes receivable of $482.6 million. The increases in the accrued litigation liability and accrued expenses were primarily due to a legal accrual for litigation relating to the distribution of prescription opioid pain medications (see Note 14 of the Notes to Consolidated Financial Statements). The increase in accounts payable was primarily driven by the increase in inventories and the timing of scheduled payments to suppliers. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. The increase in inventories was due to an increase in business volume. Non-cash items were comprised primarily of a deferred 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 Notes to Consolidated Financial Statements), $290.7 million of depreciation 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 Notes to Consolidated Financial Statements).
Deterioration of general economic conditions, among other factors, could adversely affect the number 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, |
| | | 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, 2020 included $150.7 million of interest payments and $139.4 million of income tax payments, net of refunds. Operating cash flows during the fiscal year ended September 30, 2019 included $167.4 million of interest payments and $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, 2019 was principally the result of an increase in accounts payable of $1,561.0 million, non-cash items of $1,120.7 million, and net income of $854.1 million, offset in part by an increase in accounts receivable of $1,241.9 million. The increase in accounts payable was primarily driven by the timing of scheduled payments to suppliers. Non-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 was the result of our revenue growth and the timing of payments from our customers.
Capital expenditures in the fiscal years ended September 30, 2020, 2019, and 2018 were $369.7 million, $310.2 million, and $336.4 million, respectively. Significant capital expenditures in fiscal 2020 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 the construction of a new support facility and technology initiatives, including costs related to enhancing and upgrading our information technology systems. Significant capital expenditures in fiscal 2018 included technology initiatives, including costs related to enhancing and upgrading our information technology systems and costs associated with expanding distribution capacity.
We currently expect to spend approximately $400 million for capital expenditures during fiscal 2021. Larger 2021 capital expenditures will include investments related to various technology initiatives and new facilities.
We acquired businesses to support our animal health business for $54.0 million and $70.0 million in the fiscal years ended September 30, 2019 and 2018, respectively. In the fiscal year ended September 30, 2018, 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 offset by $179.6 million of cash consolidated in connection with the Brazil investments (see Note 2 of the Notes to Consolidated Financial Statements).
Net cash used in financing activities in the fiscal year ended September 30, 2020 principally related to $420.4 million in purchases of our common stock, and $343.6 million in cash dividends paid on our common stock.
Net cash used in financing activities in the fiscal year ended September 30, 2019 principally related to $674.0 million in purchases of our common stock and $339.0 million in cash dividends paid on our common stock.
Net cash used in financing activities in 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 common stock, and $333.0 million in cash dividends paid on our common stock, offset in part by the issuance of $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 |
| | | Per Share | | |
| Date | | New Rate | | Old Rate | | % Increase |
| November 2017 | | $0.380 | | $0.365 | | 4% |
| November 2018 | | $0.400 | | $0.380 | | 5% |
| January 2020 | | $0.420 | | $0.400 | | 5% |
| 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 on our working capital requirements. We had $0.8 billion of variable-rate debt outstanding as of September 30, 2020. We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such instruments will be available in the combinations we want and/or on terms acceptable to us. There were no such financial instruments in effect as of September 30, 2020.
We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $4,597.7 million in cash and cash equivalents as of September 30, 2020. The unfavorable impact of a hypothetical decrease in
interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every $100 million of cash invested that is in excess of variable-rate debt, a 10-basis point decrease in interest rates would increase our annual net interest expense by $0.1 million.
We have minimal exposure to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Euro, the U.K. Pound Sterling, the Canadian Dollar, and the Brazilian Real. Revenue from our foreign operations is approximately two percent of our consolidated revenue. We may utilize foreign currency denominated forward contracts to hedge against changes in foreign exchange rates. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes.
Cautionary Note Regarding Forward-Looking Statements
Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expect," "likely," "outlook," "forecast," "would," "could," "should," "can," "project," "intend," "plan," "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances and speak only as of the date hereof. These statements are not guarantees of future performance and are based on assumptions and estimates that could prove incorrect or could cause actual results to vary materially from those indicated. Among the factors that could cause actual results to differ materially from those projected, anticipated, or implied are the following: unfavorable trends in brand and generic pharmaceutical pricing, including in rate or frequency of price inflation or deflation; competition and industry consolidation of both customers and suppliers resulting in increasing pressure to reduce prices for our products and services; changes in the United States healthcare and regulatory environment, including changes that could impact prescription drug reimbursement under Medicare and Medicaid; increasing governmental regulations regarding the pharmaceutical supply channel; declining reimbursement rates for pharmaceuticals; continued federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances; continued prosecution or suit by federal, state and other governmental entities of alleged violations of laws and regulations regarding controlled substances, including due to failure to achieve a global resolution of the multi-district opioid litigation and other related state court litigation, and any related disputes, including shareholder derivative lawsuits; increased federal scrutiny and litigation, including qui tam litigation, for alleged violations of laws and regulations governing the marketing, sale, purchase and/or dispensing of pharmaceutical products or services, and associated reserves and costs; failure to comply with the Corporate Integrity Agreement; material adverse resolution of pending legal proceedings; the retention of key customer or supplier relationships under less favorable economics or the adverse resolution of any contract or other dispute with customers or suppliers; changes to customer or supplier payment terms, including as a result of the COVID-19 impact on such payment terms; risks associated with the strategic, long-term relationship between Walgreens Boots Alliance, Inc. and the Company, including principally with respect to the pharmaceutical distribution agreement and/or the global generic purchasing services arrangement; changes in tax laws or legislative initiatives that could adversely affect the Company’s tax positions and/or the Company’s tax liabilities or adverse resolution of challenges to the Company’s tax positions; managing foreign expansion, including non-compliance with the U.S. Foreign Corrupt Practices Act, anti-bribery laws, economic sanctions and import laws and regulations; substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer, including as a result of COVID-19; the loss, bankruptcy or insolvency of a major 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’s cash flow and ability to return value to its stockholders in accordance with its past practices; interest rate and foreign currency exchange rate fluctuations; declining economic conditions in the United States and abroad; and other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting the Company’s business generally. Certain additional factors that management believes could cause actual outcomes and results to differ materially from those described in forward-looking statements are set forth (i) elsewhere in this 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 43 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
To the Stockholders and the Board of Directors 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, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2020 and 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 also 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, 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to 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 any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | |
| Legal Matters and Contingencies - Opioid Lawsuits |
| Description of the Matter | 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 19, 2020
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | September 30, |
| (in thousands, except share and per share data) | | 2020 | | 2019 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 4,597,746 | | | $ | 3,374,194 | |
Accounts receivable, less allowances for returns and doubtful accounts: 2020 — $1,417,308; 2019 — $1,222,906 | | 13,846,301 | | | 12,386,879 | |
| Inventories | | 12,589,278 | | | 11,060,254 | |
| Right to recover asset | | 1,344,649 | | | 1,147,483 | |
Income tax receivable (Note 5) | | 488,428 | | | 5,859 | |
| Prepaid expenses and other | | 189,300 | | | 157,385 | |
| Total current assets | | 33,055,702 | | | 28,132,054 | |
| | | | |
| Property and equipment, net | | 1,484,808 | | | 1,770,516 | |
| Goodwill | | 6,706,719 | | | 6,705,507 | |
| Other intangible assets | | 1,886,107 | | | 2,294,836 | |
| Deferred income taxes | | 361,640 | | | — | |
| Other assets | | 779,854 | | | 269,067 | |
| | | | |
| TOTAL ASSETS | | $ | 44,274,830 | | | $ | 39,171,980 | |
| | | | |
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | | | | |
| | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 31,705,055 | | | $ | 28,385,074 | |
| Accrued expenses and other | | 1,646,763 | | | 1,057,208 | |
| Short-term debt | | 501,259 | | | 139,012 | |
| Total current liabilities | | 33,853,077 | | | 29,581,294 | |
| | | | |
| Long-term debt | | 3,618,261 | | | 4,033,880 | |
| Long-term financing obligation (Note 1) | | — | | | 320,518 | |
| Accrued income taxes | | 284,845 | | | 284,075 | |
| Deferred income taxes | | 686,485 | | | 1,860,195 | |
| Other liabilities | | 472,855 | | | 98,812 | |
Accrued litigation liability | | 6,198,943 | | | — | |
Commitments and contingencies (Note 14) | | | | |
| | | | |
| 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 | | 2,878 | | | 2,853 | |
| Additional paid-in capital | | 5,081,776 | | | 4,850,142 | |
| Retained earnings | | 518,335 | | | 4,235,491 | |
| Accumulated other comprehensive loss | | (108,830) | | | (111,965) | |
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 | | (1,018,924) | | | 2,878,917 | |
| Noncontrolling interest | | 179,288 | | | 114,289 | |
| Total (deficit) equity | | (839,636) | | | 2,993,206 | |
| | | | |
| 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, |
| (in thousands, except per share data) | | 2020 | | 2019 | | 2018 |
| Revenue | | $ | 189,893,926 | | | $ | 179,589,121 | | | $ | 167,939,635 | |
| Cost of goods sold | | 184,702,042 | | | 174,450,809 | | | 163,327,318 | |
| Gross profit | | 5,191,884 | | | 5,138,312 | | | 4,612,317 | |
| Operating expenses: | | | | | | |
| Distribution, selling, and administrative | | 2,767,217 | | | 2,663,508 | | | 2,460,301 | |
| Depreciation | | 280,187 | | | 294,965 | | | 283,971 | |
| Amortization | | 110,875 | | | 167,442 | | | 181,156 | |
| | | | | | |
| Employee severance, litigation, and other (Note 13) | | 6,807,307 | | | 330,474 | | | 183,520 | |
| Goodwill impairment | | — | | | — | | | 59,684 | |
Impairment of PharMEDium assets (Note 1) | | 361,652 | | | 570,000 | | | — | |
| Operating (loss) income | | (5,135,354) | | | 1,111,923 | | | 1,443,685 | |
| Other (income) loss | | (1,581) | | | (12,952) | | | 25,469 | |
| Interest expense, net | | 137,883 | | | 157,769 | | | 174,699 | |
| Loss on consolidation of equity investments | | — | | | — | | | 42,328 | |
| Loss on early retirement of debt | | 22,175 | | | — | | | 23,766 | |
| (Loss) income before income taxes | | (5,293,831) | | | 967,106 | | | 1,177,423 | |
| Income tax (benefit) expense | | (1,894,273) | | | 112,971 | | | (438,469) | |
| Net (loss) income | | (3,399,558) | | | 854,135 | | | 1,615,892 | |
| Net (income) loss attributable to noncontrolling interest | | (9,158) | | | 1,230 | | | 42,513 | |
| Net (loss) income attributable to AmerisourceBergen Corporation | | $ | (3,408,716) | | | $ | 855,365 | | | $ | 1,658,405 | |
| | | | | | |
| Earnings per share: | | | | | | |
| Basic | | $ | (16.65) | | | $ | 4.07 | | | $ | 7.61 | |
| Diluted | | $ | (16.65) | | | $ | 4.04 | | | $ | 7.53 | |
| | | | | | |
| Weighted average common shares outstanding: | | | | | | |
| Basic | | 204,783 | | | 210,165 | | | 217,872 | |
