NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of AmerisourceBergen Corporation and its subsidiaries, including less than wholly-owned subsidiaries in which AmerisourceBergen Corporation has a controlling financial interest (the "Company"), as of the dates and for the periods indicated. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial position as of
December 31, 2018
and the results of operations and cash flows for the interim periods ended
December 31, 2018
and
2017
have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2018
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605 - "Revenue Recognition" and most industry-specific guidance throughout the Codification. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard's core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 was originally scheduled to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. In July 2015, the FASB deferred the effective date of ASU 2014-09 by one year.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations" ("ASU 2016-08"), which clarifies the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which amends the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. The Company must adopt ASU 2016-08 and ASU 2016-10 with ASU 2014-09, collectively ASC 606.
The Company adopted ASC 606 as of October 1, 2018 on a modified retrospective basis for all open contracts as of October 1, 2018. The adoption had an immaterial impact on the Company’s October 1, 2018 retained earnings and will not have a material impact on the Company's revenues, results of operations, or cash flows. The Company did not record any material contract assets, contract liabilities, or deferred contract costs in its Consolidated Balance Sheet upon adoption.
The Company's revenues are primarily generated from the distribution of pharmaceutical products. The Company also generates revenues from global commercialization services, which include clinical trial support, post-approval and commercialization support, and global specialty transportation and logistics for the biopharmaceutical industry. See Note 13 for the Company's disaggregated revenue.
The Company recognizes revenue related to the distribution of products at a point in time when title and control transfers to customers and there is no further obligation to provide services related to such products. Service revenue is recognized over the period that services are provided to the customer. The Company is generally the principal in a transaction; therefore, revenue is
primarily recorded on a gross basis. When the Company is the principal in a transaction, it has determined that it controls the ability to direct the use of the product or service prior to transfer to a customer, it is primarily responsible for fulfilling the promise to provide the product or service to its customer, it has discretion in establishing pricing, and it controls the relationship with the customer. Revenue is recognized at the amount of consideration expected to be received, which is generally based on a purchase order, and is net of estimated sales returns and allowances, other customer incentives, and sales tax.
The Company’s customer sales return policy generally allows customers to return products only if the products can be resold at full value or returned to suppliers for full credit. The Company records an accrual for estimated customer sales returns at the time of sale to the customer based upon historical return trends. As of December 31, 2018 and September 30, 2018, the Company’s accrual for estimated customer sales returns was
$973.8 million
and
$988.8 million
, respectively. As of December 31, 2018, due to the adoption of ASC 606, the Company records an asset for the right to recover products from its customers in Right to Recover Asset on its Consolidated Balance Sheet. The Company's asset for the right to recover products from its customers was in Merchandise Inventories on its Consolidated Balance Sheet as of September 30, 2018 and for all prior periods.
The Company elected the practical expedient to expense costs to obtain a contract when incurred when the amortization period would have been one year or less. Additionally, the Company elected the practical expedients to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed, and (iii) for contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). ASU 2016-02 aims to increase transparency and comparability across organizations by requiring lease assets and lease liabilities to be recognized on the balance sheet as well as key information to be disclosed regarding lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years. Entities are permitted to adopt the standard early, and a modified retrospective application is required. The Company anticipates that the adoption of this new accounting standard will have a material impact on the Company's Consolidated Balance Sheets. However, the Company is continues to evaluate the impact of adopting this new accounting standard, and, therefore, cannot reasonably estimate the impact on the results of operations or cash flows at this time. The Company has begun the process of implementing the adoption of this standard, including the implementation of new policies, processes, and controls.The Company will adopt this standard in the first quarter of fiscal 2020.
As of
December 31, 2018
, there were no other recently-issued accounting standards that may have a material impact on the Company’s financial position, results of operations, or cash flows upon their adoption.
Note 2
. Acquisitions and Investments
NEVSCO
In December 2017, the Company acquired Northeast Veterinary Supply Company ("NEVSCO") for
$70.0 million
. NEVSCO was an independent, regional distributor of veterinary pharmaceuticals and medical supplies serving primarily the northeast region of the United States and strengthens MWI Animal Health's ("MWI") support of independent veterinary practices and provides even greater value and care to current and future animal health customers. NEVSCO is included within the MWI operating segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by
$30.4 million
, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was
$8.5 million
,
$6.7 million
, and
$2.9 million
, respectively. The fair value of the intangible assets acquired of
$29.8 million
primarily consisted of customer relationships, which the Company is amortizing over its estimated useful life of
15 years
. Goodwill and intangible assets resulting from the acquisition are deductible for income tax purposes.
H.D. Smith
In January 2018, the Company acquired H.D. Smith Holding Company ("H.D. Smith") for
$815.0 million
. The Company funded the acquisition through the issuance of new long-term debt. H.D. Smith was the largest independent pharmaceutical
wholesaler in the United States and provides full-line distribution of brand, generic, and specialty drugs, as well as high-value services and solutions for manufacturers and healthcare providers. H.D. Smith's customers include retail pharmacies, specialty pharmacies, long-term care facilities, institutional/hospital systems, and independent physicians and clinics. The acquisition strengthens the Company's core business, expands and enhances its strategic scale in pharmaceutical distribution, and expands the Company's support for independent community pharmacies. H.D. Smith is included within the Pharmaceutical Distribution reportable segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by
$499.9 million
, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was
$163.1 million
,
$350.7 million
, and
$366.1 million
, respectively. The fair value of the intangible assets acquired of
$167.8 million
consisted of customer relationships of
$156.6 million
and a tradename of
$11.2 million
. The Company is amortizing the fair value of the customer relationships and the tradename over their estimated useful lives of
12
years and
2
years, respectively. The Company established a deferred tax liability of
$60.6 million
primarily in connection with the intangible assets acquired. Goodwill and intangible assets resulting from the acquisition are not deductible for income tax purposes.
Profarma and Specialty Joint Venture
As of September 30, 2017, the Company held a noncontrolling ownership interest in Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), a leading pharmaceutical wholesaler in Brazil, and an ownership interest in a joint venture with Profarma to provide specialty distribution and services to the Brazilian marketplace (the "specialty joint venture"). The Company had accounted for these interests as equity method investments, which were reported in Other Assets on the Company's Consolidated Balance Sheets. In January 2018, the Company invested an additional
$62.5 million
in Profarma and an additional
$15.6 million
in the specialty joint venture to increase its ownership interests to
38.2%
and
64.5%
, respectively. In connection with the additional investment in Profarma, the Company received substantial governance rights, thereby requiring it to begin consolidating the operating results of Profarma as of March 31, 2018 (see
Note 3
). The Company also began to consolidate the operating results of the specialty joint venture as of March 31, 2018 due to its majority ownership interest. In September 2018, the Company made an additional investment of
$23.6 million
in the specialty joint venture to increase its ownership interest to
89.9%
. Profarma and the specialty joint venture are included within the Pharmaceutical Distribution reportable segment and Other, respectively.
The fair value of Profarma, including the noncontrolling interest, was determined based upon an agreed-upon stock price and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of Profarma upon obtaining control exceeded the fair value of the net tangible and intangible assets consolidated by
$142.0 million
, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was
$160.1 million
,
$190.5 million
, and
$167.7 million
, respectively. The Company consolidated short-term debt and long-term debt of
$209.9 million
and
$12.4 million
, respectively, cash of
$150.8 million
, and recorded a noncontrolling interest of
$168.0 million
. The estimated fair value of the intangible assets consolidated of
$84.6 million
consisted of customer relationships of
$25.9 million
and a tradename of
$58.7 million
. The Company is amortizing the customer relationships over its estimated useful life of 15 years and the tradenames over their estimated useful lives of between
15 years
and
25
years. The Company established a deferred tax liability of
$50.1 million
primarily in connection with the intangible assets that were recognized. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
The fair value of the specialty joint venture was determined based upon the cost of the incremental ownership percentage acquired from the January 2018 investment and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of the specialty joint venture exceeded the fair value of the net tangible and intangible assets consolidated by
$3.5 million
, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was
$65.0 million
,
$29.1 million
, and
$54.3 million
, respectively. The Company consolidated short-term debt and cash of
$32.7 million
and
$28.9 million
, respectively. The estimated fair value of the intangible assets consolidated of
$4.6 million
is being amortized over its estimated useful life of
15
years. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
Note 3
. Variable Interest Entity
As discussed in
Note 2
, the Company made an additional investment in Profarma in January 2018. In connection with this investment, the Company obtained substantial governance rights, allowing it to direct the activities that significantly impact Profarma’s economic performance. As such, the Company consolidated the operating results of Profarma in its consolidated financial statements as of and for the periods ended
December 31, 2018
and September 30, 2018. The Company is not obligated to provide future financial support to Profarma.
The following assets and liabilities of Profarma are included in the Company's Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Cash and cash equivalents
|
|
$
|
11,768
|
|
|
$
|
26,801
|
|
|
Accounts receivables, net
|
|
157,307
|
|
|
144,646
|
|
|
Merchandise inventories
|
|
172,153
|
|
|
168,931
|
|
|
Prepaid expenses and other
|
|
60,395
|
|
|
61,924
|
|
|
Property and equipment, net
|
|
33,567
|
|
|
32,667
|
|
|
Goodwill
|
|
82,309
|
|
|
82,309
|
|
|
Other intangible assets
|
|
79,482
|
|
|
80,974
|
|
|
Other long-term assets
|
|
9,111
|
|
|
8,912
|
|
|
Total assets
|
|
$
|
606,092
|
|
|
$
|
607,164
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
145,413
|
|
|
$
|
150,102
|
|
|
Accrued expenses and other
|
|
58,611
|
|
|
37,195
|
|
|
Short-term debt
|
|
117,217
|
|
|
115,461
|
|
|
Long-term debt
|
|
44,885
|
|
|
39,704
|
|
|
Deferred income taxes
|
|
44,265
|
|
|
46,137
|
|
|
Other long-term liabilities
|
|
10,915
|
|
|
31,988
|
|
|
Total liabilities
|
|
$
|
421,306
|
|
|
$
|
420,587
|
|
Profarma's assets can only be used to settle its obligations, and its creditors do not have recourse to the general credit of the Company.
Note 4
. Income Taxes
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law. The 2017 Tax Act includes a broad range of tax reform provisions affecting businesses, including lower corporate tax rates, changes in business deductions, and international tax provisions. In response to the 2017 Tax Act, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. SAB 118 provides that the measurement period is complete when a company's accounting is complete and that measurement period shall not extend beyond one year from the enactment date.
The Company completed the accounting for the effects of the 2017 Tax Act in the fiscal quarter ended December 31, 2018 and recognized an income tax benefit of
$37.0 million
related to a decrease in its tax on historical foreign earnings and profits through December 31, 2017 (the "transition tax"). This measurement period adjustment favorably impacted the Company's effective tax rate by
8.5%
for the three months ended December 31, 2018. The Company expects to pay
$182.6 million
related to the transition tax, which is net of overpayments and tax credits, over a six-year period commencing in January 2021.
There were
no
adjustments recorded to deferred income taxes related to the 2017 Tax Act during the three months ended December 31, 2018.
Other Information
The Company files income tax returns in U.S. federal and state jurisdictions as well as various foreign jurisdictions. As of
December 31, 2018
, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, of
$106.6 million
(
$81.7 million
, net of federal benefit). If recognized,
$63.4 million
of these tax benefits would have reduced income tax expense and the effective tax rate. Included in this amount is
$15.7 million
of interest and penalties, which the Company records in Income Tax Expense (Benefit) in the Company's Consolidated Statements of Operations. In the
three
months ended
December 31, 2018
, unrecognized tax benefits decreased by
$6.3 million
. Over the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately
$4.5 million
.
The Company's effective tax rates were
9.4%
and
(140.1)%
for the three months ended
December 31, 2018
and 2017, respectively. The effective tax rate in the three months ended December 31, 2018 was primarily impacted by the
$37.0 million
decrease to the Company's transition tax related to the 2017 Tax Act. The effective tax rate in the three months ended December 31, 2017 was primarily impacted by the effect of the 2017 Tax Act. The Company's effective tax rates for both periods reported herein were 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.
Note 5. Goodwill and Other Intangible Assets
The following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the
three
months ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pharmaceutical
Distribution
Services
|
|
Other
|
|
Total
|
|
Goodwill as of September 30, 2018
|
|
$
|
4,852,775
|
|
|
$
|
1,811,497
|
|
|
$
|
6,664,272
|
|
|
Goodwill recognized in connection with acquisitions
|
|
—
|
|
|
35,871
|
|
|
35,871
|
|
|
Purchase price accounting adjustments
|
|
(512
|
)
|
|
—
|
|
|
(512
|
)
|
|
Foreign currency translation
|
|
—
|
|
|
(2,084
|
)
|
|
(2,084
|
)
|
|
Goodwill as of December 31, 2018
|
|
$
|
4,852,263
|
|
|
$
|
1,845,284
|
|
|
$
|
6,697,547
|
|
The following is a summary of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 30, 2018
|
|
(in thousands)
|
|
Weighted Average Remaining Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Indefinite-lived trade names
|
|
|
|
$
|
685,260
|
|
|
$
|
—
|
|
|
$
|
685,260
|
|
|
$
|
685,380
|
|
|
$
|
—
|
|
|
$
|
685,380
|
|
|
Finite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
14 years
|
|
2,550,198
|
|
|
(592,800
|
)
|
|
1,957,398
|
|
|
2,549,245
|
|
|
(555,440
|
)
|
|
1,993,805
|
|
|
Trade names and other
|
|
12 years
|
|
418,568
|
|
|
(136,528
|
)
|
|
282,040
|
|
|
397,946
|
|
|
(129,303
|
)
|
|
268,643
|
|
|
Total other intangible assets
|
|
|
|
$
|
3,654,026
|
|
|
$
|
(729,328
|
)
|
|
$
|
2,924,698
|
|
|
$
|
3,632,571
|
|
|
$
|
(684,743
|
)
|
|
$
|
2,947,828
|
|
Amortization expense for finite-lived intangible assets was
$47.1 million
and
$40.2 million
in the
three
months ended
December 31, 2018
and
2017
, respectively. Amortization expense for finite-lived intangible assets is estimated to be
$185.8 million
in fiscal
2019
,
$178.7 million
in fiscal
2020
,
$174.8 million
in fiscal
2021
,
$173.2 million
in fiscal
2022
,
$172.2 million
in fiscal
2023
, and
$1,402.0 million
thereafter.
As a result of the continued suspension of production activities at PharMEDium Healthcare Holdings, Inc.'s ("PharMEDium") largest compounding facility located in Memphis, Tennessee (see Note 13), the Company updated its recoverability assessment of PharMEDium's long-lived assets as of December 31, 2018. The recoverability assessment was based upon comparing its undiscounted cash flows to the carrying value of the PharMEDium asset group, excluding goodwill. The carrying value of the asset group was
$849 million
as of December 31, 2018. The Company concluded that PharMEDium's long-lived assets are recoverable as of December 31, 2018; however, the forecasted undiscounted cash flows used to perform the recoverability assessment are inherently uncertain and include assumptions, such as the timing of resumed production activities and profitability, that could differ from actual results in future periods.
Note 6
. Debt
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2018
|
|
September 30,
2018
|
|
Revolving credit note
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Term loans due in 2020
|
|
399,601
|
|
|
398,665
|
|
|
Overdraft facility due 2021 (£30,000)
|
|
24,891
|
|
|
13,269
|
|
|
Receivables securitization facility due 2021
|
|
500,000
|
|
|
500,000
|
|
|
Multi-currency revolving credit facility due 2023
|
|
—
|
|
|
—
|
|
|
$500,000, 3.50% senior notes due 2021
|
|
498,521
|
|
|
498,392
|
|
|
$500,000, 3.40% senior notes due 2024
|
|
497,377
|
|
|
497,255
|
|
|
$500,000, 3.25% senior notes due 2025
|
|
495,802
|
|
|
495,632
|
|
|
$750,000, 3.45% senior notes due 2027
|
|
742,468
|
|
|
742,258
|
|
|
$500,000, 4.25% senior notes due 2045
|
|
494,352
|
|
|
494,298
|
|
|
$500,000, 4.30% senior notes due 2047
|
|
492,289
|
|
|
492,222
|
|
|
Capital lease obligations
|
|
69
|
|
|
745
|
|
|
Nonrecourse debt
|
|
176,306
|
|
|
177,453
|
|
|
Total debt
|
|
4,321,676
|
|
|
4,310,189
|
|
|
Less AmerisourceBergen Corporation current portion
|
|
24,927
|
|
|
13,976
|
|
|
Less nonrecourse current portion
|
|
131,349
|
|
|
137,681
|
|
|
Total, net of current portion
|
|
$
|
4,165,400
|
|
|
$
|
4,158,532
|
|
Multi-Currency Revolving Credit Facility
The Company has a
$1.4 billion
multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which was scheduled to expire in
November 2021
, with a syndicate of lenders. In October 2018, the Company entered into an amendment to, among other things, extend the maturity to October 2023 and modify certain restrictive covenants, including modifications to allow for indebtedness of foreign subsidiaries. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on the Company’s debt rating and ranges from
70 basis points
to
110 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
December 31, 2018
) and from
0 basis points
to
10 basis points
over
the alternate base rate and Canadian prime rate
, as applicable. The Company pays facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on its debt rating, ranging from
5 basis points
to
15 basis points
, annually, of the total commitment (
9 basis points
as of
December 31, 2018
). The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which the Company was compliant as of
December 31, 2018
.
Commercial Paper Program
The Company has a commercial paper program whereby it may from time to time issue short-term promissory notes in an aggregate amount of up to
$1.4 billion
at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed
365 days
from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase the Company’s borrowing capacity as it is fully backed by the Company’s Multi-Currency Revolving Credit Facility. There were
no
borrowings outstanding under the commercial paper program as of
December 31, 2018
.
Receivables Securitization Facility
The Company has a
$1,450 million
receivables securitization facility ("Receivables Securitization Facility"), which was scheduled to expire in
November 2019
. In October 2018, the Company entered into an amendment to extend the maturity date to October 2021. The Company has available to it an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to
$250 million
, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based on
prevailing market rates for short-term commercial paper or LIBOR, plus a program fee.
The Company pays a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of
December 31, 2018
.
Revolving Credit Note and Overdraft Facility
The Company has an uncommitted, unsecured line of credit available to it pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides the Company with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed
$75 million
. The Revolving Credit Note may be decreased or terminated by the bank or the Company at any time without prior notice. The Company also has a
£30 million
uncommitted U.K. overdraft facility ("Overdraft Facility"), which expires in February 2021, to fund short-term normal trading cycle fluctuations related to its MWI business.
Term Loans
In October 2018, the Company refinanced
$400 million
of outstanding terms 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 the Company was compliant as of December 31, 2018.
Nonrecourse Debt
Nonrecourse debt is comprised of short-term and long-term debt belonging to the Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiaries.
Note 7. Stockholders’ Equity and Earnings per Share
In
November 2018
, the Company’s board of directors increased the quarterly cash dividend by
5%
from
$0.38
per share to
$0.40
per share.
In November 2016, 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
three
months ended
December 31, 2018
, the Company purchased
1.4 million
shares of its common stock for a total of
$125.8 million
, which excluded
$24.0 million
of September 2018 purchases that cash settled in October 2018, to complete its authorization under this program.
In October 2018, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to
$1.0 billion
of its outstanding shares of common stock, subject to market conditions. During the three months ended December 31, 2018, the Company purchased
1.3 million
shares of its common stock for a total of
$100.0 million
, which included
$10.8 million
of December 2018 purchases that cash settled in January 2019. As of December 31 2018, the Company had
$900.0 million
of availability remaining under this program.
Basic earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding, plus the dilutive effect of stock options and restricted stock units during the periods presented.
The following illustrates the components of diluted weighted average shares outstanding for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Weighted average common shares outstanding - basic
|
|
212,054
|
|
|
218,323
|
|
|
Dilutive effect of stock options and restricted stock units
|
|
1,915
|
|
|
2,499
|
|
|
Weighted average common shares outstanding - diluted
|
|
213,969
|
|
|
220,822
|
|
The potentially dilutive stock options and restricted stock units that were antidilutive for the
three
months ended
December 31, 2018
and 2017 were
3.8 million
and
4.6 million
, respectively.
Note 8. Related Party Transactions
Walgreens Boots Alliance, Inc. ("WBA") owns more than
10%
of the Company’s outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement pursuant to which the Company distributes pharmaceutical products to WBA and an agreement that provides the Company the ability to access favorable economic pricing and generic products through a generic purchasing services arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Revenue from the various agreements and arrangements with WBA was
$15.3 billion
and
$12.7 billion
in the
three
months ended
December 31, 2018
and 2017, respectively. The Company’s receivable from WBA, net of incentives, was
$6.1 billion
and
$5.6 billion
as of
December 31, 2018
and
September 30, 2018
, respectively.
Note 9. Employee Severance, Litigation, and Other
The following illustrates the charges incurred by the Company relating to Employee Severance, Litigation, and Other for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Employee severance
|
|
$
|
3,765
|
|
|
$
|
7,671
|
|
|
Litigation and opioid-related costs
|
|
14,539
|
|
|
2,809
|
|
|
Other
|
|
22,368
|
|
|
19,541
|
|
|
Total employee severance, litigation, and other
|
|
$
|
40,672
|
|
|
$
|
30,021
|
|
Employee severance in the three months ended December 31, 2018 included costs primarily related to position eliminations resulting from our business transformation efforts and restructuring activities related to our consulting business. Employee severance in the three months ended December 31, 2017 included costs primarily related to position eliminations resulting from our business transformation efforts.
Litigation and opioid-related costs in the three months ended December 31, 2018 and 2017 primarily related to legal fees in connection with opioid lawsuits and investigations.
Other costs in the three months ended December 31, 2018 included
$11.6 million
of acquisition-related deal and integration costs,
$7.0 million
related to the Company's business transformation efforts, and
$3.8 million
of other restructuring initiatives. Other costs in the three months ended December 31, 2017 included
$10.7 million
of restructuring initiatives,
$4.7 million
related to the Company's business transformation efforts, and
$4.1 million
of acquisition-related deal and integration costs.
Note 10
. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range
of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
For those matters for which the Company has not recognized a liability, the Company cannot predict the outcome of their impact on the Company as uncertainty remains with regard to whether such matters will proceed to trial, whether settlements will be reached, and the amount and terms of any such settlements. Outcomes may include settlements in significant amounts that are not currently estimable, limitations on the Company's conduct, the imposition of corporate integrity obligations, and/or other civil and criminal penalties.
Opioid Lawsuits and Investigations
A significant number of counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as several states and tribes, have filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and its subsidiary AmerisourceBergen Drug Corporation ("ABDC")), pharmaceutical manufacturers, retail chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications. Additionally, a significant number of counties and municipalities have also named H.D. Smith, a subsidiary that the Company acquired in January 2018, as a defendant in such lawsuits. Other lawsuits regarding the distribution of prescription opioid pain medications have been filed by: third-party payors and similar entities; hospitals; hospital groups; and individuals, including cases styled as putative class actions. The lawsuits, which have been filed in federal, state, and other courts, generally allege violations of controlled substance laws and various other statutes as well as common law claims, including negligence, public nuisance, and unjust enrichment, and seek equitable relief and monetary damages.
An initial group of cases was consolidated for Multidistrict Litigation ("MDL") proceedings before the United States District Court for the Northern District of Ohio (the "Court") in December 2017. Additional cases have been, and will likely continue to be, transferred to the MDL. In April 2018, the Court issued an order creating a litigation track, which includes dispositive motion practice, discovery, and trials in certain bellwether jurisdictions that are scheduled to commence in October 2019. In December 2018, the Court dismissed certain public nuisance claims in the first bellwether cases and allowed the majority of the claims to proceed. On December 31, 2018, the Court issued an order selecting two additional cases for a second bellwether discovery and trial track. The timing of discovery, motion practice, and trials for the second set of bellwether cases has not yet been determined.
The Court has continued to oversee court-ordered settlement discussions with attorneys for the plaintiffs and certain states that it instituted at the beginning of the MDL proceedings. Further, in June 2018, the Court granted a motion permitting the United States, through the Department of Justice ("DOJ"), to participate in settlement discussions and as a friend of the Court by providing information to facilitate non-monetary remedies.
Aside from those parties that have already filed suit, other entities, including additional attorneys general’s offices, counties, and cities in multiple states, have indicated their intent to sue. The Company is vigorously defending itself in the pending lawsuits and intends to vigorously defend itself against any threatened lawsuits. The Company is not in a position to assess the likely outcome or its exposure, if any, with respect to these matters.
In addition, in September 2017, the Company received a request for documents and information on behalf of attorneys general from a coalition of states who are investigating a number of manufacturers and distributors (including ABDC) regarding the distribution of prescription opioid pain medications. The Company is engaged in discussions with the representatives of the attorneys general regarding this request and has been producing responsive documents. The Company has also received subpoenas, civil investigative demands, and other requests for information, requesting the production of documents regarding the distribution of prescription opioid pain medications from government agencies in other jurisdictions, including certain states. The Company is engaged in discussions with representatives from these government agencies regarding the requests, and has been producing responsive documents.
Additionally, in fiscal 2012, ABDC received a subpoena from the U.S. Attorney's Office for the District of New Jersey ("USAO-NJ") in connection with a grand jury proceeding requesting documents concerning ABDC's program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific, and industrial purposes. ABDC also received a subpoena from the Drug Enforcement Administration ("DEA") in connection with the matter. Since fiscal 2012, ABDC has received and responded to a number of subpoenas from both the USAO-NJ and DEA requesting grand jury testimony and additional information related to electronically stored information, documents concerning specific customers' purchases of controlled substances, and DEA audits. In July 2017, the USAO-NJ and DEA served an administrative subpoena requesting documents relating to ABDC's diversion control programs from 2013 to the present. The Company is responding to the 2017 subpoena and continues to engage in dialogue with the USAO-NJ. Subsequent to the 2017 subpoena, the Company also
received administrative subpoenas from the U.S. Attorney's Offices for the Eastern District of New York, the District of Colorado, the Northern District of West Virginia, the Western District of Michigan, the Middle District of Florida, and the Eastern District of California. Those subpoenas are substantively similar to the subpoena received from the USAO-NJ in 2017. The Company has been engaged in discussions with the various U.S. Attorney’s Offices and has been producing documents in response to the subpoenas.
Since fiscal 2013, the Company has received subpoenas from the U.S. Attorney's Office for the Northern District of Ohio and ABDC has received subpoenas from the U.S. Attorney's Office for the District of Kansas in connection with grand jury proceedings requesting documents concerning ABDC's program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific, and industrial purposes. As in the USAO-NJ matter described above, in addition to requesting general information on ABDC's diversion control program, the subpoenas have also requested documents concerning specific customers' purchases of controlled substances. The Company has responded to the subpoenas and requests for information.
In May 2018, the Company received a grand jury subpoena from the U.S. Attorney's Office for the Southern District of Florida. The subpoena requests documents primarily relating to certain opioid products and communications with a pharmaceutical manufacturer. The Company is in the process of responding to the subpoena.
Government Enforcement and Related Litigation Matters
The U.S. Food and Drug Administration ("FDA") and the Consumer Protection Branch of the Civil Division of the DOJ regulate the compounding of pharmaceutical products. The Company’s Section 503B outsourcing facilities must comply with current Good Manufacturing Practice ("cGMP") requirements and are inspected by the FDA periodically to determine whether PharMEDium is complying with such cGMP requirements. The FDA and the DOJ have broad enforcement powers, including the ability to enjoin PharMEDium's Section 503B outsourcing facilities from distributing pharmaceutical products.
The Company continues to be in communication with the FDA and the Consumer Protection Branch of the Civil Division of the DOJ regarding the ongoing compliance efforts of PharMEDium. A failure to adequately address observations identified by the FDA and the DOJ could lead to a consent decree, which could result in the suspension of operations at one or more facilities. If a consent decree is entered into, violations thereof could also result in monetary penalties. In November 2018, representatives of the Company and PharMEDium had an initial meeting with the FDA and the DOJ to discuss potential resolution of ongoing matters and whether a consent decree is necessary. Based on discussions to date, the Company believes that any resolution is likely to require the entry into a consent decree. The focus of ongoing negotiations relates to the scope of any such decree, including whether it will cover PharMEDium facilities other than the Memphis, Tennessee 503B outsourcing facility where production was voluntarily suspended in December 2017. Negotiations with FDA and DOJ have been impacted by the partial shutdown of the U.S. government. The Company cannot predict when the negotiations will be completed or the timing of any consent decree or other enforcement action.
Subpoenas and Ongoing Investigations
From time to time, the Company receives subpoenas or requests for information from various government agencies relating to the Company's business or to the business of a customer, supplier, or other industry participant. The Company's responses often require time and effort and can result in considerable costs being incurred. Most of these matters are resolved without incident; however, such subpoenas or requests can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the healthcare industry, as well as to substantial settlements.
In January 2017, the Company's subsidiary U.S. Bioservices Corporation received a subpoena for information from the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY") relating to its activities in connection with billing for products and making returns of potential overpayments to government payers. The Company is engaged in discussions with the USAO-EDNY and has been producing documents in response to the subpoena.
In November 2017, the Company’s subsidiary PharMEDium received a grand jury subpoena for documents from the U.S. Attorney's Office for the Western District of Tennessee ("USAO-WDTN") seeking various documents, including information generally related to the laboratory testing procedures of PharMEDium's products, and more specifically, for PharMEDium products packaged in a certain type of syringe at its Memphis, Tennessee facility. The Company engaged in discussions with the USAO-WDTN and produced documents in response to the subpoena.
Other Contingencies
New York State ("NYS") enacted the Opioid Stewardship Act ("OSA"), which went into effect on July 1, 2018. The OSA established an annual
$100 million
Opioid Stewardship Fund (the "Fund") and requires manufacturers, distributors, and importers licensed in NYS to ratably source the Fund. The ratable share of the assessment for each licensee was to be based upon opioids sold or distributed to or within NYS. In the fourth quarter of the fiscal year ended September 30, 2018, the Company accrued
$22 million
as an estimate of its liability under the OSA for opioids distributed from January 1, 2017 through September 30, 2018 and recognized this reserve in Cost of Goods Sold on its Consolidated Statement of Operations and in Accrued Expenses and Other on its Consolidated Balance Sheet as of September 30, 2018. In December 2018, the OSA was ruled unconstitutional by the U.S. District Court for the Southern District of New York, and, as a result, the Company reversed the
$22.0 million
accrual in the quarter ended December 31, 2018. NYS filed an appeal of the court decision on January 17, 2019; however, the Company does not believe a loss contingency is probable.
Note 11. Litigation Settlements
Antitrust Settlements
Numerous lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are generally brought as class actions. The Company is not typically named as a plaintiff in these lawsuits, but has been a member of the direct purchasers' class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the lawsuits have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds. During the three months ended December 31, 2018, the Company recognized gains of
$87.3 million
related to these lawsuits. The Company recognized
no
gains during the three months ended December 31, 2017. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold in the Company’s Consolidated Statements of Operations.
Note 12. Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable as of
December 31, 2018
and
September 30, 2018
approximate fair value based upon the relatively short-term nature of these financial instruments. Within Cash and Cash Equivalents, the Company had
$1,200.0 million
of investments in money market accounts as of
December 31, 2018
and had
$1,050.0 million
of investments in money market accounts as of
September 30, 2018
. The fair value of the money market accounts was determined based upon unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.
The recorded amount of long-term debt (see
Note 6
) and the corresponding fair value as of
December 31, 2018
were
$4,165.4 million
and
$3,957.1 million
, respectively. The recorded amount of long-term debt and the corresponding fair value as of
September 30, 2018
were
$4,158.5 million
and
$4,000.1 million
, respectively. The fair value of long-term debt was determined based upon inputs other than quoted prices, otherwise known as Level 2 inputs.
Note 13. Business Segment Information
The Company is organized based upon the products and services it provides to its customers. The Company's operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure and, therefore, have been included in Other for the purpose of reportable segment presentation. Other consists of operating segments that focus on global commercialization services and animal health (MWI Animal Health). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services and World Courier.
The following illustrates reportable and operating segment revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Pharmaceutical Distribution Services
|
|
$
|
43,744,381
|
|
|
$
|
38,937,698
|
|
|
Other:
|
|
|
|
|
|
MWI Animal Health
|
|
954,584
|
|
|
958,572
|
|
|
Global Commercialization Services
|
|
716,354
|
|
|
586,379
|
|
|
Total Other
|
|
1,670,938
|
|
|
1,544,951
|
|
|
Intersegment eliminations
|
|
(22,867
|
)
|
|
(16,317
|
)
|
|
Revenue
|
|
$
|
45,392,452
|
|
|
$
|
40,466,332
|
|
Intersegment eliminations primarily represent the elimination of certain Pharmaceutical Distribution Services reportable segment sales to MWI.
The following illustrates reportable segment operating income for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Pharmaceutical Distribution Services
|
|
$
|
373,207
|
|
|
$
|
388,182
|
|
|
Other
|
|
98,934
|
|
|
100,275
|
|
|
Intersegment eliminations
|
|
(307
|
)
|
|
(407
|
)
|
|
Total segment operating income
|
|
$
|
471,834
|
|
|
$
|
488,050
|
|
The following reconciles total segment operating income to income before income taxes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Total segment operating income
|
|
$
|
471,834
|
|
|
$
|
488,050
|
|
|
Gain from antitrust litigation settlements
|
|
87,279
|
|
|
—
|
|
|
LIFO credit
|
|
3,029
|
|
|
—
|
|
|
PharMEDium remediation costs
|
|
(20,495
|
)
|
|
—
|
|
|
New York State Opioid Stewardship Act
|
|
22,000
|
|
|
—
|
|
|
Acquisition-related intangibles amortization
|
|
(45,152
|
)
|
|
(39,056
|
)
|
|
Employee severance, litigation, and other
|
|
(40,672
|
)
|
|
(30,021
|
)
|
|
Operating income
|
|
477,823
|
|
|
418,973
|
|
|
Other loss
|
|
3,097
|
|
|
324
|
|
|
Interest expense, net
|
|
42,170
|
|
|
35,864
|
|
|
Loss on early retirement of debt
|
|
—
|
|
|
23,766
|
|
|
Income before income taxes
|
|
$
|
432,556
|
|
|
$
|
359,019
|
|
Segment operating income is evaluated by the chief operating decision maker ("CODM") of the Company before gain from antitrust litigation settlements; LIFO credit; PharMEDium remediation costs; New York State Opioid Stewardship Act; acquisition-related intangibles amortization; employee severance, litigation, and other; other loss; interest expense, net; and loss on early retirement of debt. All corporate office expenses are allocated to the reportable segment level.
After FDA inspections of PharMEDium's compounding facilities, the Company voluntarily suspended production activities in December 2017 at its largest compounding facility located in Memphis, Tennessee pending execution of certain remedial measures. The Company has been in communication with the FDA and the Consumer Protection Branch of the Civil Division of the DOJ regarding its ongoing compliance efforts at PharMEDium, and representatives of the Company and PharMEDium had an initial meeting with the DOJ and the FDA in November 2018 to discuss potential resolution of ongoing matters and whether a consent decree is necessary. Based on discussions to date, the Company believes that any resolution is likely to require the entry into a consent decree. The focus of ongoing negotiations relates to the scope of any such decree, including whether it will cover PharMEDium facilities other than the Memphis, Tennessee 503B outsourcing facility. Negotiations with FDA and DOJ have been impacted by the partial shutdown of the U.S. government. The Company cannot predict when the negotiations will be completed or the timing of any consent decree or other enforcement action. The Company incurred remediation costs primarily in connection with the suspended production activities. These remediation costs are primarily classified in Cost of Goods sold in the Consolidated Statements of Operations in the three months ended December 31, 2018. Future remediation costs will also include costs related to remediation activities responsive to FDA inspectional observations generally applicable to all of PharMEDium’s 503B outsourcing facilities, including product stability studies.
