NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
Note 1. Summary of Significant Accounting Policies
AmerisourceBergean Corporation and its subsidiaries, including less than wholly-owned subsidiaries in which AmerisourceBergen Corporation has a controlling financial interest (the "Company"), is one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. The Company delivers innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health.
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of the Company as of the dates and for the periods indicated. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts due to uncertainties inherent in such estimates. Management periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness. Certain reclassifications have been made to prior-period amounts in order to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are exercised. It also allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. During the quarter ended December 31, 2016, the Company early adopted ASU 2016-09, which resulted in a cumulative adjustment to retained earnings and the establishment of a deferred tax asset as of October 1, 2016 of
$47.1 million
for previously unrecognized tax benefits. The Company elected to adopt the Statement of Cash Flows presentation of the excess tax benefits prospectively.
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 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.
The Company completed its evaluation of the impact of adopting ASU 2016-08, ASU 2016-10, and ASU 2014-09, collectively Accounting Standards Codification 606 or "ASC 606". The Company adopted ASC 606 as of October 1, 2018 on a modified retrospective basis. 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.
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 continues to evaluate the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact on the results of operations or cash flows at this time. The Company expects to adopt this standard in the first quarter of fiscal 2020.
As of
September 30, 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.
Business Combinations
The assets acquired and liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired businesses are included in the Company's operating results from the dates of acquisition.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Concentrations of Credit Risk and Allowance for Doubtful Accounts
The Company sells its merchandise inventories to a large number of customers in the healthcare industry that include institutional and retail healthcare providers. Institutional healthcare providers include acute care hospitals, health systems, mail order pharmacies, long-term care and other alternate care pharmacies and providers of pharmacy services to such facilities, and physician offices. Retail healthcare providers include national and regional retail drugstore chains, independent community pharmacies, pharmacy departments of supermarkets and mass merchandisers, and veterinarians. The financial condition of the Company's customers can be affected by changes in government reimbursement policies as well as by other economic pressures in the healthcare industry.
The Company's trade accounts receivables are exposed to credit risk. Revenue from the various agreements and arrangements with the Company's largest customer in the fiscal year ended September 30,
2018
, Walgreens Boots Alliance, Inc. ("WBA"), accounted for approximately
33%
of revenue and represented approximately
49%
of accounts receivable, net of incentives, as of
September 30, 2018
. Express Scripts, Inc., the Company's second largest customer in the fiscal year ended September 30,
2018
, accounted for approximately
13%
of revenue and represented approximately
8%
of accounts receivable, net as of
September 30, 2018
. The Company generally does not require collateral for trade receivables. In determining the appropriate allowance for doubtful accounts, the Company considers a combination of factors, such as the aging of trade receivables, industry trends, and its customers' financial strength, credit standing, and payment and default history. Changes in these factors, among others, may lead to adjustments in the Company's allowance for doubtful accounts. The calculation of the required allowance requires judgment by Company management as to the impact of those and other factors on the ultimate realization of its trade receivables. Each of the Company's business units performs ongoing credit evaluations of its customers' financial condition and maintains reserves for probable bad debt losses based upon historical experience and for specific credit problems when they arise. There were no significant changes to this process during the fiscal years ended
September 30, 2018
,
2017
, and
2016
, and bad debt expense was computed in a consistent manner during these periods.
The Company maintains cash and cash equivalents with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and, therefore, bear minimal credit risk. The Company seeks to mitigate such risks by monitoring the risk profiles of these counterparties. The Company also seeks to mitigate risk by monitoring the investment strategy of money market accounts in which it is invested, which are classified as cash equivalents.
Contingencies
Loss Contingencies:
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable.
The Company also performs an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, the Company provides disclosure of the loss contingency in the notes to its financial statements. The Company reviews all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made (see
Note 13
).
Gain Contingencies:
The Company records gain contingencies when they are realized. Gains from antitrust litigation settlements are realized upon the receipt of cash and recorded as a reduction to cost of goods sold because they represent a recovery of amounts historically paid to manufacturers to originally acquire the pharmaceuticals that were the subject of the antitrust litigation settlements (see
Note 14
).
Derivative Financial Instruments
The Company records all derivative financial instruments on the balance sheet at fair value and complies with established criteria for designation and effectiveness of hedging relationships. The Company's policy prohibits it from entering into derivative financial instruments for speculative or trading purposes.
The Company has
one
foreign currency denominated contract outstanding that hedges the foreign currency exchange risk of a
C$17.5 million
note outstanding as of
September 30, 2018
.
Foreign Currency
When the functional currency of the Company's foreign operations is the applicable local currency, assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates for the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss within Stockholders' Equity.
Goodwill and Other Intangible Assets
Goodwill 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. The Company elected to bypass performing the qualitative assessment and, in the fourth quarter of fiscal 2018, went directly to performing our annual quantitative assessments of the goodwill and indefinite-lived intangible assets for the current year. The Company may elect to perform the qualitative annual assessment in future periods.
The 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.
Goodwill arises from acquisitions or consolidations of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. The Company identifies its reporting units based upon the Company's management reporting structure, beginning with its operating segments. The Company evaluates whether the components within its operating segments have similar economic characteristics, which include the nature of the components' products, services, and production processes, the types of customers and the methods by which products or services are delivered to customers, and the components' regulatory environment. The Company's reporting units include Pharmaceutical Distribution Services, Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), AmerisourceBergen Consulting Services ("ABCS"), World Courier, and MWI Animal Health ("MWI").
The Company utilizes an income-based approach to value its 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. The Company generally believes that market participants would use a discounted cash flow analysis to determine the fair value of the Company's reporting units in a sale transaction. The annual goodwill impairment test requires the Company to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization, capital expenditures, and working capital requirements, which are based upon the Company's long-range plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While the Company uses the best available information to prepare its cash 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, the Company's overall methodology and the population of assumptions used have remained unchanged.
The impairment test for indefinite-lived intangibles other than goodwill (certain trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method. The Company believes the relief from royalty method is a widely used valuation technique for such assets. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such indefinite-lived trademarks and trade names and not having to pay a royalty for their use.
The Company completed its required annual impairment tests relating to goodwill and indefinite-lived intangible assets in the fourth quarter of the fiscal years ended
September 30, 2018
,
2017
, and
2016
. The Company recorded a goodwill impairment of
$59.7 million
in its Profarma reporting unit in connection with its fiscal 2018 annual impairment test (see Note 5). No goodwill impairments were recorded in the fiscal years ended September 30, 2017 and 2016. No indefinite-lived intangible asset impairments were recorded in the fiscal years ended September 30, 2018, 2017, and 2016.
In connection with the goodwill impairment recorded in the Profarma reporting unit, the Company first performed a recoverability assessment of Profarma's long-lived assets by comparing its undiscounted cash flows to the carrying value of the asset group, and it was determined to be recoverable; however, the forecasted undiscounted cash flows used to perform the recoverability assessment are inherently uncertain and include assumptions that could differ from actual results in future periods.
Finite-lived intangible assets are amortized using the straight-line method over the estimated useful lives of the assets. The Company performs a recoverability assessment of its long-lived assets when impairment indicators are present.
PharMEDium Healthcare Holdings, Inc.'s ("PharMEDium") long-lived assets were also tested for recoverability in fiscal 2018 due to the existence of an impairment indicator. The Company voluntarily suspended production activities in December 2017 at its largest compounding facility located in Memphis, Tennessee after U.S. Food and Drug Administration ("FDA") inspections of PharMEDium's compounding facilities. The Company concluded that the suspension of production activity represented an impairment indicator of PharMEDium's long-lived assets and, therefore, performed a recoverability assessment of PharMEDium's long-lived assets. The recoverability assessment was based on the carrying value of the PharMEDium asset group, excluding goodwill. The carrying value of the asset group was
$903 million
as of September 30, 2018. The Company concluded that PharMEDium's long-lived assets are recoverable as of September 30, 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.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities (commonly known as the asset and liability method). In assessing the need to establish a valuation allowance on deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based upon the technical merits of the position. Tax benefits associated with uncertain tax positions that have met the recognition criteria are measured and recorded based upon the highest probable outcome that is more than 50% likely to be realized after full disclosure and resolution of a tax examination.
Investment Securities Available-For-Sale
The Company's marketable debt securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and evaluates the classifications at each balance sheet date. The Company classifies its marketable debt securities as either short-term or long-term based upon each instrument's underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term. The Company's marketable debt securities are carried at fair value, with unrealized gains and losses reported as a component of Accumulated Other Comprehensive Loss in Stockholders' Equity, with the exception of unrealized losses believed to be other-than-temporary, which are reported in earnings in the current period. The cost of securities sold is based upon the specific identification method. As of
September 30, 2018
and
2017
, the Company had
no
investment securities available-for-sale.
Investments
The Company first evaluates its investments in accordance with the variable interest model to determine whether it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. If it has determined that an investment is a variable interest entity ("VIE"), the Company evaluates whether the VIE is required to be consolidated. When the Company holds rights that give it the power to direct the activities of an entity that most significantly impact the entity's economic performance, combined with the obligation to absorb an entity's losses and the right to receive benefits, the Company consolidates a VIE. If it is determined that an investment is not a VIE, the Company then evaluates its investments under the voting interest model and generally consolidates investments in which it holds an ownership interest of greater than 50%. When the Company consolidates less than wholly-owned subsidiaries, it discloses its noncontrolling interest in its consolidated financial statements.
The Company uses the equity method of accounting for its investments in entities in which it has significant influence; generally, this represents an ownership interest of between 20% and 50%. A decline in value that is determined to be other-than-temporary is recorded as an impairment charge as a component of earnings in the period in which that determination is made.
Leases
The Company is often involved in the construction of its distribution facilities. In certain cases, the Company makes payments for certain structural components included in the lessor's construction of the leased assets, which result in the Company being deemed the owner of the leased assets for accounting purposes. As a result, regardless of the significance of the payments, Accounting Standards Codification 840, Leases, ("ASC 840") defines those payments as automatic indicators of ownership and requires the Company to capitalize the lessor's total project cost with a corresponding financing obligation. Upon completion of the lessor's project, the Company performs a sale-leaseback analysis pursuant to ASC 840 to determine if these assets and the related financing obligations can be derecognized from the Company's Consolidated Balance Sheet. If the Company is deemed to have "continuing involvement," the leased assets and the related financing obligations remain on the Company's Consolidated Balance Sheet and are amortized over the life of the assets and the lease term, respectively. All other leases are considered operating leases in accordance with ASC 840. Assets subject to an operating lease and the related lease payments are not recorded on the Company's Consolidated Balance Sheet. Rent expense is recognized on a straight-line basis over the expected lease term and is recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Manufacturer Incentives
The Company considers fees and other incentives received from its suppliers relating to the purchase or distribution of inventory to represent product discounts, and, as a result, they are recognized within cost of goods sold upon the sale of the related inventory.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost for approximately
75%
and
80%
of the Company's inventories as of
September 30, 2018
and
2017
, respectively, has been determined using the last-in, first-out ("LIFO") method. If the Company had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately
$1,534.4 million
and
$1,467.0 million
higher than the amounts reported as of
September 30, 2018
and
2017
, respectively. The Company recorded LIFO expense of
$67.3 million
and
$200.2 million
in the fiscal years ended
September 30, 2018
and 2016, respectively, and a LIFO credit of
$157.8 million
in the fiscal year ended September 30,
2017
. The annual LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences, many of which are difficult to predict. Changes to any of the above factors can have a material impact to the Company's annual LIFO provision.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from
3
to
40
years for buildings and improvements and from
3
to
10
years for machinery, equipment, and other. The costs of repairs and maintenance are charged to expense as incurred.
The Company capitalizes project costs relating to computer software developed or obtained for internal use when the activities related to the project reach the application development stage. Costs that are associated with preliminary stage activities, training, maintenance, and all other post-implementation stage activities are expensed as they are incurred. Software development costs are depreciated using the straight-line method over the estimated useful lives, which range from
3
to
10
years.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, products have been delivered or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue, as reflected in the accompanying Consolidated Statements of Operations, is net of estimated sales returns and allowances, and other customer incentives.
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. As of
September 30, 2018
and
2017
, the Company's accrual for estimated customer sales returns was
$988.8 million
and
$1,001.7 million
, respectively.
The Company reports the gross dollar amount of bulk deliveries to customer warehouses in revenue and the related costs in cost of goods sold. Bulk delivery transactions are arranged by the Company at the express direction of the customer, and involve either drop shipments from the supplier directly to customers' warehouse sites or cross-dock shipments from the supplier to the Company for immediate shipment to the customers' warehouse sites. The Company is a principal to these transactions because it is the primary obligor and has the ultimate and contractual responsibility for fulfillment and acceptability of the products purchased, and it bears full risk of delivery and loss for products, whether the products are drop-shipped or shipped via cross-dock. The Company also bears full credit risk associated with the creditworthiness of any bulk delivery customer. As a result, the Company records bulk deliveries to customer warehouses as gross revenues. Gross profit earned by the Company on bulk deliveries was not material in any year presented.
Share-Based Compensation
The Company accounts for the compensation cost of all share-based payments at fair value. The Company estimates the fair value of option grants using a binomial option pricing model. The fair value of restricted stock units and performance stock units is based upon the grant date market price of the Company’s common stock.
Share-based compensation expense is recognized over the requisite service period within Distribution, Selling, and Administrative in the Consolidated Statements of Operations to correspond with the same line item as the cash compensation paid to employees. Compensation expense associated with nonvested performance stock units is dependent upon the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued.
The income tax effects of awards is recognized when the awards vest or are settled and are recognized in Income Tax Expense in the Company’s Consolidated Statements of Operations and in cash flows from operations in the Consolidated Statements of Cash Flows. Prior to fiscal 2017, tax benefits from share-based compensation were recorded as adjustments to Additional Paid-in Capital within Stockholders’ Equity and as cash flows from financing activities within the Statement of Cash Flows (see Recently Adopted Accounting Pronouncements).
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack, and deliver inventory to customers. These costs, which were
$590.8 million
,
$517.3 million
, and
$494.7 million
for the fiscal years ended
September 30, 2018
,
2017
, and
2016
, respectively, are included in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Supplier Reserves
The Company establishes reserves against amounts due from its suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them from the Company. These reserve estimates are established based upon the judgment of Company management after carefully considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs, and any other pertinent information available to the Company. The Company evaluates the amounts due from its suppliers on a continual basis and adjusts the reserve estimates when appropriate based upon changes in factual circumstances. The ultimate outcome of any outstanding claim may be different than the Company's estimate.
Warrants
The Company accounted for the warrants issued to subsidiaries of WBA (collectively, the "Warrants") in accordance with the guidance for equity-based payments to non-employees. Using a binomial lattice model approach, the fair value of the Warrants was initially measured at the date of issuance, and the related expenses were recognized over the vesting period as an operating expense. The fair value of the Warrants was remeasured at the end of each reporting period, and an adjustment was recorded in the statement of operations to record the impact as if the newly measured fair value of the awards had been used in recognizing expense starting when the awards were originally issued and through the remeasurement date. In the fiscal year ended September 30, 2016, the Warrants were exercised by WBA in full (see
Note 7
).
Note 2
. Acquisitions and Investments
PharMEDium
On November 6, 2015, the Company acquired PharMEDium for
$2.7 billion
in cash, which included certain purchase price adjustments. PharMEDium is a leading national provider of outsourced compounded sterile preparations to acute care hospitals in the United States. PharMEDium's operating results are included within the Pharmaceutical Distribution Services reportable segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by
$1.8 billion
, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable acquired was
$63.2 million
,
$43.1 million
, and
$22.8 million
, respectively. The fair value of the intangible assets acquired of
$1.1 billion
consisted of customer relationships of
$882.7 million
, trade name of
$167.6 million
, and software technology of
$52.6 million
. The Company established a deferred tax liability of
$356.1 million
primarily in connection with the intangible assets acquired. The Company is amortizing the fair values of the acquired customer relationships and trade name over their estimated useful lives of
15 years
. The fair value of the acquired software technology is being amortized over its estimated useful life of
10 years
. Goodwill and intangible assets resulting from the acquisition are not deductible for income tax purposes.
NEVSCO
In December 2017, the Company acquired Northeast Veterinary Supply Company ("NEVSCO") for
$70.0 million
in cash, subject to a final working capital adjustment. NEVSCO was an independent, regional distributor of veterinary pharmaceuticals and medical supplies serving primarily the northeast region of the United States and is expected to strengthen MWI's support of independent veterinary practices and provide even greater value and care to current and future animal health customers. NEVSCO has been included within the MWI operating segment.
The purchase price has been preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values on the date of acquisition. The preliminary allocation is pending the finalization of the appraisals of intangible assets and the finalization of working capital and income tax account balances. There can be no assurance that the estimated amounts recorded will represent the final fair values. The purchase price currently exceeds the estimated fair value of the net tangible and intangible assets acquired by
$30.9 million
, which has been allocated to goodwill. The estimated fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was
$10.3 million
,
$6.7 million
, and
$3.0 million
, respectively. The estimated fair value of the intangible assets acquired of
$29.8 million
primarily consists 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 expected to be 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
, subject to a final working capital adjustment. The Company funded the acquisition through the issuance of new long-term debt (see
Note 6
). 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 has been included within the Pharmaceutical Distribution reportable segment.
The purchase price has been preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values on the date of acquisition. The preliminary allocation is incomplete principally due to the finalization of income tax account balances. There can be no assurance that the estimated amounts recorded will represent the final fair values. The purchase price currently exceeds the estimated 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 estimated 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 estimated fair value of the customer relationships and the tradename over their estimated useful lives of
12
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 expected to be deductible for income tax purposes.
Profarma and Specialty Joint Venture
As of September 30, 2017, the Company held a noncontrolling ownership interest in Profarma, a leading pharmaceutical wholesaler in Brazil, and an ownership interest in a joint venture with Profarma to provide specialty distribution and services in 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 have been 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 has been preliminarily allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The preliminary allocation is pending the finalization of the appraisals of intangible assets and the finalization of working capital and income tax account balances. There can be no assurance that the estimated amounts recorded will represent the final fair values. The fair value of Profarma upon obtaining control exceeded the estimated fair value of the net tangible and intangible assets consolidated by
$142.0 million
, which was allocated to goodwill. The estimated 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 tradenames 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
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 expected to be 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 estimated fair values at the time of the January 2018 investment. The preliminary allocation is pending the finalization of the appraisals of intangible assets and the finalization of working capital and income tax account balances. There can be no assurance that the estimated amounts recorded will represent the final fair values. The fair value of the specialty joint venture currently exceeds the estimated fair value of the net tangible and intangible assets consolidated by
$3.5 million
, which was allocated to goodwill. The estimated 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 expected to be deductible for income tax purposes.
In connection with the incremental Brazil investments, the Company adjusted the carrying values of its previously held equity interests in Profarma and the specialty joint venture to equal their fair values, which were determined to be
$103.1 million
and
$31.2 million
, respectively. These represent Level 2 nonrecurring fair value measurements. The adjustments resulted in a pretax loss of
$42.3 million
and were comprised of foreign currency translation adjustments from Accumulated Other Comprehensive Loss of
$45.9 million
, a
$12.4 million
gain on the remeasurement of Profarma's previously held equity interest, and an
$8.8 million
loss on the remeasurement of the specialty joint venture's previously held equity interest.
Note 3
. Variable Interest Entity
As discussed in
Note 2
, the Company made an additional investment in Profarma. In connection with this investment, the Company obtained substantial governance rights, allowing it to direct the activities that significantly impact Profarma’s economic performance. As such, the Company consolidated the operating results of Profarma in its consolidated financial statements as of and for the periods ended
September 30, 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 Sheet:
|
|
|
|
|
|
(in thousands)
|
|
September 30,
2018
|
Cash and cash equivalents
|
|
$
|
26,801
|
|
Accounts receivables, net
|
|
144,646
|
|
Merchandise inventories
|
|
168,931
|
|
Prepaid expenses and other
|
|
61,924
|
|
Property and equipment, net
|
|
32,667
|
|
Goodwill
|
|
82,309
|
|
Other intangible assets
|
|
80,974
|
|
Other long-term assets
|
|
8,912
|
|
Total assets
|
|
$
|
607,164
|
|
|
|
|
Accounts payable
|
|
$
|
150,102
|
|
Accrued expenses and other
|
|
37,195
|
|
Short-term debt
|
|
115,461
|
|
Long-term debt
|
|
39,704
|
|
Deferred income taxes
|
|
46,137
|
|
Other long-term liabilities
|
|
31,988
|
|
Total liabilities
|
|
$
|
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
The following illustrates domestic and foreign income before income taxes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Domestic
|
|
$
|
704,935
|
|
|
$
|
394,721
|
|
|
$
|
906,415
|
|
Foreign
|
|
472,488
|
|
|
523,166
|
|
|
484,495
|
|
Total
|
|
$
|
1,177,423
|
|
|
$
|
917,887
|
|
|
$
|
1,390,910
|
|
The income tax (benefit) provision for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Current provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
247,755
|
|
|
$
|
141,071
|
|
|
$
|
11,892
|
|
State and local
|
|
39,328
|
|
|
35,950
|
|
|
26,741
|
|
Foreign
|
|
69,972
|
|
|
57,313
|
|
|
55,275
|
|
Total current provision
|
|
357,055
|
|
|
234,334
|
|
|
93,908
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(828,023
|
)
|
|
265,074
|
|
|
(119,218
|
)
|
State and local
|
|
33,887
|
|
|
54,995
|
|
|
(11,490
|
)
|
Foreign
|
|
(1,388
|
)
|
|
(1,000
|
)
|
|
(219
|
)
|
Total deferred (benefit) provision
|
|
(795,524
|
)
|
|
319,069
|
|
|
(130,927
|
)
|
(Benefit) provision for income taxes
|
|
$
|
(438,469
|
)
|
|
$
|
553,403
|
|
|
$
|
(37,019
|
)
|
A reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate for the periods indicated is as follows:
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
Statutory U.S. federal income tax rate
|
24.5%
|
|
35.0%
|
|
35.0%
|
State and local income tax rate, net of federal tax benefit
|
(0.1)
|
|
5.4
|
|
0.6
|
Foreign
|
(6.2)
|
|
(14.6)
|
|
(8.4)
|
Warrants
|
—
|
|
—
|
|
(32.8)
|
Valuation allowance
|
(1.4)
|
|
2.2
|
|
2.2
|
Excess tax benefits related to share-based compensation
|
(1.8)
|
|
(3.8)
|
|
—
|
Litigation settlements and accruals (see Note 13)
|
(6.3)
|
|
34.3
|
|
—
|
Goodwill impairment (see Note 5)
|
1.7
|
|
—
|
|
—
|
Tax reform
|
(52.0)
|
|
—
|
|
—
|
Capital gain on distribution
|
3.6
|
|
—
|
|
—
|
Other
|
0.8
|
|
1.8
|
|
0.7
|
Effective income tax rate
|
(37.2)%
|
|
60.3%
|
|
(2.7)%
|
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. SAB 118 provides guidance for registrants under three scenarios: (i) measurement of certain income tax effects is complete, (ii) measurement of certain income tax effects can be reasonably estimated, and (iii) measurement of certain income tax effects cannot be reasonably estimated. The Company has analyzed the income tax effects of the 2017 Tax Act and determined that measurement of the income tax effects can be reasonably estimated, and, as such, provisional amounts have been recorded. For the fiscal year ended September 30, 2018, the Company recognized income tax benefits of
$612.6 million
in Income Tax Expense (Benefit) on the Company's Consolidated Statements of Operations related to effects of the 2017 Tax Act, which are comprised of the following:
(a)
in accordance with
Accounting Standards Codification No. 740, which requires deferred taxes to be remeasured in the year of an income tax rate change, the Company recorded a deferred income tax benefit of
$897.6 million
in the fiscal year ended September 30, 2018 as a result of applying a lower U.S. federal income tax rate to the Company's net deferred tax liabilities as of December 31, 2017; and
(b) the 2017 Tax Act also requires a one-time transition tax to be recognized on historical foreign earnings and profits. In the fiscal year ended September 30, 2018, the Company initially recorded a current income tax expense of
$310.0 million
on
historical foreign earnings and profits through December 31, 2017. The Company decreased its provisional transition tax by
$25.0 million
in the fourth quarter of the fiscal year ended September 30, 2018 as a result of a decline in its foreign cash and cash equivalents position as of September 30, 2018. The Company expects to pay
$219.6 million
related to the transition tax, which is net of overpayments and tax credits. The transition tax is payable in installments over a six-year period commencing in January 2021.
The measurement of income tax effects of the 2017 Tax Act cannot currently be completed due to the effective date of certain aspects of the 2017 Tax Act, including the impact on state taxes. Accordingly, the Company has recognized provisional amounts for the impact of the 2017 Tax Act within the accompanying consolidated financial statements as of and for the fiscal year ended September 30, 2018 and expects to finalize the measurement of all amounts related to the 2017 Tax Act in the fiscal quarter ending December 31, 2018.
Prior to the 2017 Tax Act, the Company intended to indefinitely reinvest its foreign cash in foreign investments and foreign operations. After further assessment of the impact of the 2017 Tax Act, the Company reevaluated its position and determined that it was no longer reinvested with respect to foreign subsidiaries whose undistributed earnings are able to be repatriated with minimal to no additional tax impact. Cumulative undistributed earnings of international subsidiaries were
$1.9 billion
as of
September 30, 2018
,
$1.1 billion
of which is considered permanently reinvested.
Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts. Significant components of the Company's deferred tax liabilities (assets) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
Merchandise inventories
|
|
$
|
1,189,801
|
|
|
$
|
1,519,779
|
|
Property and equipment
|
|
133,417
|
|
|
150,240
|
|
Goodwill and other intangible assets
|
|
853,747
|
|
|
1,214,597
|
|
Other
|
|
747
|
|
|
1,126
|
|
Gross deferred tax liabilities
|
|
2,177,712
|
|
|
2,885,742
|
|
|
|
|
|
|
Net operating loss and tax credit carryforwards
|
|
(421,808
|
)
|
|
(320,180
|
)
|
Capital loss carryforwards
|
|
—
|
|
|
(64,346
|
)
|
Allowance for doubtful accounts
|
|
(20,126
|
)
|
|
(25,871
|
)
|
Accrued expenses
|
|
(17,363
|
)
|
|
(36,188
|
)
|
Employee and retiree benefits
|
|
(10,210
|
)
|
|
(17,121
|
)
|
Share-based compensation
|
|
(28,888
|
)
|
|
(59,495
|
)
|
Other
|
|
(49,892
|
)
|
|
(81,009
|
)
|
Gross deferred tax assets
|
|
(548,287
|
)
|
|
(604,210
|
)
|
Valuation allowance for deferred tax assets
|
|
199,985
|
|
|
211,080
|
|
Deferred tax assets, net of valuation allowance
|
|
(348,302
|
)
|
|
(393,130
|
)
|
Net deferred tax liabilities
|
|
$
|
1,829,410
|
|
|
$
|
2,492,612
|
|
The following tax carryforward information is presented as of
September 30, 2018
. The Company had
$89.7 million
of potential tax benefits from federal net operating loss carryforwards,
$75.5 million
of which expires in
1
to
19
years,
$172.0 million
of potential tax benefits from state net operating loss carryforwards expiring in
1
to
20
years, and
$49.5 million
of potential tax benefits from foreign net operating loss carryforwards, which have varying expiration dates. The Company had
$3.9 million
of state tax credit carryforwards,
$122.9 million
in federal alternative minimum tax credit carryforwards, and
$2.1 million
in foreign alternative minimum tax credit carryforwards.
In the fiscal year ended September 30,
2018
, the Company decreased the valuation allowance on deferred tax assets by
$11.1 million
primarily due to the utilization of capital loss and foreign tax credit carryforwards for which a valuation allowance had been previously recorded. This decrease was offset in part by the additional valuation allowances on certain state and foreign net operating loss carryforwards. In the fiscal year ended September 30,
2017
, the Company increased the valuation allowance on deferred tax assets by
$45.5 million
primarily due to the addition of certain state and foreign net operating loss carryforwards. Included in the
$45.5 million
valuation allowance is a
$17.1 million
valuation allowance that was established in connection with the adoption of ASU 2016-09 (see Note 1). This amount was not recognized in the Consolidated Statement of Operations in the fiscal year ended September 30, 2017.
In the fiscal year ended September 30,
2018
and
2017
, tax benefits of
$22.7 million
and
$36.7 million
, respectively, related to the exercise of employee stock options and lapses of restricted stock units were recorded in Income Tax (Benefit) Expense
in the Company's Consolidated Statement of Operations. In the fiscal year ended September 30,
2016
, there were
no
tax benefits related to the exercise of employee stock options and lapses of restricted stock units. The tax benefits recognized in the fiscal year ended
September 30, 2018
and
2017
are not necessarily indicative of amounts that may arise in future periods.
Income tax payments, net of refunds, were
$104.0 million
,
$105.0 million
, and
$17.5 million
in the fiscal years ended
September 30, 2018
,
2017
, and
2016
, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2014.
As of
September 30, 2018
and
2017
, 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
$112.9 million
and
$338.4 million
, respectively (
$89.4 million
and
$304.2 million
, net of federal benefit, respectively). If recognized in the fiscal years ended
September 30, 2018
and
2017
,
$71.1 million
and
$289.2 million
, respectively, of these benefits would have reduced income tax expense and the effective tax rate. As of
September 30, 2018
and
2017
, included in the unrecognized tax benefits are
$14.8 million
and
$14.5 million
of interest and penalties, respectively, which the Company records in Income Tax (Benefit) Expense in the Company's Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Unrecognized tax benefits at beginning of period
|
|
$
|
323,869
|
|
|
$
|
75,766
|
|
|
$
|
44,722
|
|
Additions of tax positions of the current year
|
|
2,804
|
|
|
252,866
|
|
|
24,145
|
|
Additions to tax positions of the prior years
|
|
558
|
|
|
1,049
|
|
|
11,840
|
|
Reductions of tax positions of the prior years
|
|
(224,878
|
)
|
|
(668
|
)
|
|
(1,407
|
)
|
Settlements with taxing authorities
|
|
(1,847
|
)
|
|
(3,285
|
)
|
|
(2,589
|
)
|
Expiration of statutes of limitations
|
|
(2,382
|
)
|
|
(1,859
|
)
|
|
(945
|
)
|
Unrecognized tax benefits at end of period
|
|
$
|
98,124
|
|
|
$
|
323,869
|
|
|
$
|
75,766
|
|
Included in the additions of unrecognized tax positions in the fiscal year ended September 30, 2017 is approximately
$235.1 million
for an uncertain tax position related to the
$625.0 million
civil litigation reserve recognized during the fiscal year ended September 30, 2017 (see
Note 13
). In the fiscal year ended September 30, 2017, this reserve was considered to be non-deductible. In September 2018, the Company made a payment of
$625.0 million
, plus interest, to resolve this litigation and it was determined that a portion of the settlement is deductible. Accordingly, the Company reduced its uncertain tax position by
$224.9 million
. During the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately
$14.7 million
.
Other Information
In March 2013, the Company issued Warrants (as defined in
Note 7
) in connection with various agreements and arrangements with WBA, as successor in interest to Walgreen Co. ("Walgreens") and Alliance Boots GmbH ("Alliance Boots"). At that time, the Company determined that the Warrants had a fair value of
$242.4 million
on the date of issuance, which was an estimate of the approximate tax deductible amount that would be deducted ratably on the Company's income tax return over the
10
-year term of the various agreements, and that any value in excess of the initial fair value of the Warrants on the date of issuance would not be tax deductible. The Company reevaluated its position, and in November 2015, the Company received a private letter ruling from the Internal Revenue Service ("IRS"), which entitled it to an income tax deduction equal to the fair value of the Warrants on the date of exercise. As a result, the Company recorded a deferred tax asset and recognized a tax benefit adjustment of approximately
$456 million
, which represented the estimated benefit from the tax deduction for the increase in the fair value of the Warrants from the issuance date through September 30, 2015. This tax benefit adjustment had a significant impact to the Company's effective tax rate in the fiscal year ended September 30, 2016. In March 2016 and August 2016, the Warrants were exercised in full by WBA. In the aggregate, the total fair value of the Warrants based upon their respective exercise dates was
$1,565.9 million
. An additional tax benefit of approximately
$52 million
was recognized primarily related to the change in the fair value of the Warrants from September 30, 2015 to their respective exercise dates in the fiscal year ended September 30, 2016.
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 fiscal years ended
September 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pharmaceutical
Distribution Services
|
|
Other
|
|
Total
|
Goodwill as of September 30, 2016
|
|
$
|
4,270,550
|
|
|
$
|
1,720,947
|
|
|
$
|
5,991,497
|
|
Goodwill recognized in connection with acquisitions
|
|
—
|
|
|
54,151
|
|
|
54,151
|
|
Goodwill disposed in connection with divestiture
|
|
—
|
|
|
(3,564
|
)
|
|
(3,564
|
)
|
Foreign currency translation
|
|
—
|
|
|
2,197
|
|
|
2,197
|
|
Goodwill as of September 30, 2017
|
|
4,270,550
|
|
|
1,773,731
|
|
|
6,044,281
|
|
Goodwill recognized in connection with acquisitions
|
|
641,909
|
|
|
39,352
|
|
|
681,261
|
|
Goodwill impairment
|
|
(59,684
|
)
|
|
—
|
|
|
(59,684
|
)
|
Foreign currency translation
|
|
—
|
|
|
(1,586
|
)
|
|
(1,586
|
)
|
Goodwill as of September 30, 2018
|
|
$
|
4,852,775
|
|
|
$
|
1,811,497
|
|
|
$
|
6,664,272
|
|
In connection with the Company's annual goodwill impairment test as of July 1, 2018, the Company recorded a goodwill impairment of
$59.7 million
in its Profarma reporting unit. The fair value of the reporting unit was determined based upon Profarma's publicly-traded stock price, plus an estimated purchase premium. This represents a Level 2 nonrecurring fair value measurement.
The following is a summary of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
(dollars in thousands)
|
|
Weighted Average Remaining Useful Life
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Indefinite-lived trade names
|
|
|
|
$
|
685,380
|
|
|
$
|
—
|
|
|
$
|
685,380
|
|
|
$
|
685,088
|
|
|
$
|
—
|
|
|
$
|
685,088
|
|
Finite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
14 years
|
|
2,549,245
|
|
|
(555,440
|
)
|
|
1,993,805
|
|
|
2,329,665
|
|
|
(408,636
|
)
|
|
1,921,029
|
|
Trade names and other
|
|
13 years
|
|
397,946
|
|
|
(129,303
|
)
|
|
268,643
|
|
|
325,353
|
|
|
(98,189
|
)
|
|
227,164
|
|
Total other intangible assets
|
|
|
|
$
|
3,632,571
|
|
|
$
|
(684,743
|
)
|
|
$
|
2,947,828
|
|
|
$
|
3,340,106
|
|
|
$
|
(506,825
|
)
|
|
$
|
2,833,281
|
|
Amortization expense for finite-lived intangible assets was
$181.2 million
,
$160.5 million
, and
$152.5 million
in the fiscal years ended
September 30, 2018
,
2017
, and
2016
, respectively. Amortization expense for finite-lived intangible assets is estimated to be
$182.9 million
in fiscal
2019
,
$175.4 million
in fiscal
2020
,
$171.4 million
in fiscal
2021
,
$170.1 million
in fiscal
2022
,
$169.1 million
in
2023
, and
$1,393.5 million
thereafter.
Note 6
. Debt
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
Revolving credit note
|
|
$
|
—
|
|
|
$
|
—
|
|
Receivables securitization facility due 2019
|
|
500,000
|
|
|
500,000
|
|
Term loans due 2020
|
|
398,665
|
|
|
547,860
|
|
Multi-currency revolving credit facility due 2021
|
|
—
|
|
|
—
|
|
Overdraft facility due 2021 (£30,000)
|
|
13,269
|
|
|
12,121
|
|
$400,000, 4.875% senior notes due 2019
|
|
—
|
|
|
398,399
|
|
$500,000, 3.50% senior notes due 2021
|
|
498,392
|
|
|
497,877
|
|
$500,000, 3.40% senior notes due 2024
|
|
497,255
|
|
|
496,766
|
|
$500,000, 3.25% senior notes due 2025
|
|
495,632
|
|
|
494,950
|
|
$750,000, 3.45% senior notes due 2027
|
|
742,258
|
|
|
—
|
|
$500,000, 4.25% senior notes due 2045
|
|
494,298
|
|
|
494,082
|
|
$500,000, 4.30% senior notes due 2047
|
|
492,222
|
|
|
—
|
|
Capital lease obligations
|
|
745
|
|
|
—
|
|
Nonrecourse debt
|
|
177,453
|
|
|
—
|
|
Total debt
|
|
4,310,189
|
|
|
3,442,055
|
|
Less AmerisourceBergen Corporation current portion
|
|
13,976
|
|
|
12,121
|
|
Less nonrecourse current portion
|
|
137,681
|
|
|
—
|
|
Total, net of current portion
|
|
$
|
4,158,532
|
|
|
$
|
3,429,934
|
|
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 upon 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
September 30, 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
September 30, 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
September 30, 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
September 30, 2018
and
2017
.
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 extended 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.
In connection with the Receivables Securitization Facility, AmerisourceBergen Drug Corporation sells on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. The facility is a financing vehicle utilized by the Company because it generally offers an attractive interest rate relative to other financing sources. The Company securitizes its trade accounts, which are generally non-interest bearing, in transactions that are accounted for as borrowings. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of
September 30, 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 February 2015, the Company entered into a
$1.0 billion
variable-rate term loan ("February 2015 Term Loan"), which matures in 2020. Through
September 30, 2018
, the Company elected to make principal payments, prior to the scheduled repayment dates, of
$925.0 million
on the February 2015 Term Loan, and as a result, the Company's next required principal payment is due upon maturity. The February 2015 Term Loan bears interest at a rate equal either to a base rate, plus a margin, or LIBOR, plus a margin. The margin is based on the public debt ratings of the Company and ranges from
75
basis points to
125
basis points over LIBOR (
100
basis points as of
September 30, 2018
) and
0
basis points to
25
basis points over a base rate. The February 2015 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of
September 30, 2018
.
In November 2015, the Company entered into a
$1.0 billion
variable-rate term loan ("November 2015 Term Loan"), which matures in 2020. Through
September 30, 2018
, the Company made a scheduled principal payment, as well as other principal payments prior to the scheduled repayment dates totaling
$675.0 million
on the November 2015 Term Loan, and as a result, the Company's next required principal payment is due upon maturity. The November 2015 Term Loan bears interest at a rate equal either to a base rate, plus a margin, or LIBOR, plus a margin. The margin is based on the public debt ratings of the Company and ranges from
75
basis points to
125
basis points over LIBOR (
100
basis points as of
September 30, 2018
) and
0
basis points to
25
basis points over a base rate. The November 2015 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of
September 30, 2018
.
The February 2015 and November 2015 Term Loans (collectively, the "Term Loans") were scheduled to mature in November 2020 and February 2020, respectively. In October 2018, the Company refinanced the Term Loans by issuing a new 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.
Senior Notes
In December 2017, the Company 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
. The 2027 and 2047 Notes rank pari passu to the Company's other senior notes, the Multi-Currency Revolving Credit Facility, the Revolving Credit Note, the Overdraft Facility, and the Term Loans.
The Company used the proceeds from the 2027 Notes and the 2047 Notes to finance the early retirement of the
$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 (see
Note 2
).
In May 2017, the Company repaid the
$600 million
of
1.15%
senior notes that became due.
The senior notes are collectively referred to as the "Notes." Interest on the Notes is payable semiannually in arrears. The Notes were sold at small discounts to the principal amounts and, therefore, have effective yields that are greater than the stated interest rates in the table above. Costs incurred in connection with the issuance of the Notes were deferred and are being amortized over the terms of the Notes. The indentures governing the Notes contain restrictions and covenants, which include limitations on additional indebtedness; distributions to stockholders; the repurchase of stock and the making of other restricted payments; issuance of preferred stock; creation of certain liens; transactions with subsidiaries and other affiliates; and certain corporate acts such as mergers, consolidations, and the sale of substantially all assets. An additional covenant requires compliance with a financial leverage ratio test, with which the Company was compliant as of
September 30, 2018
.
Nonrecourse Debt
The Company consolidated the short-term and long-term debt of Profarma and the specialty joint venture in connection with the incremental investments made in January 2018 (see
Note 2
and
Note 3
). Nonrecourse debt is repaid solely from the Brazil subsidiaries' cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiaries.
Other Information
Scheduled future principal payments of debt are
$148.8 million
in fiscal 2019,
$595.7 million
in fiscal 2020,
$336.9 million
in fiscal 2021,
$500.0 million
in fiscal 2022,
none
in fiscal 2023, and
$2.8 billion
thereafter.
Interest paid on the above indebtedness during the fiscal years ended
September 30, 2018
,
2017
, and
2016
was
$162.1 million
,
$125.3 million
, and
$123.5 million
, respectively.
Total amortization of financing fees and the accretion of original issue discounts, which are recorded as components of Interest Expense, Net on the Consolidated Statements of Operations, were
$7.7 million
,
$6.2 million
, and
$6.3 million
, for the fiscal years ended
September 30, 2018
,
2017
, and
2016
, respectively.
Note 7
. Stockholders' Equity and Weighted Average Common Shares Outstanding
The authorized capital stock of the Company consists of
600,000,000
shares of common stock, par value
$0.01
per share (the "common stock"), and
10,000,000
shares of preferred stock, par value
$0.01
per share (the "preferred stock").
The board of directors is authorized to provide for the issuance of shares of preferred stock in one or more series with various designations and preferences and relative, participating, optional, or other special rights and qualifications, limitations, or restrictions. Except as required by law, or as otherwise provided by the board of directors of the Company, the holders of preferred stock will have no voting rights and will not be entitled to notice of meetings of stockholders. Holders of preferred stock will be entitled to receive, when declared by the board of directors, out of legally available funds, dividends at the rates fixed by the board of directors for the respective series of preferred stock, and no more, before any dividends will be declared and paid, or set apart for payment, on common stock with respect to the same dividend period.
No
shares of preferred stock have been issued as of
September 30, 2018
.
The holders of the Company's common stock are entitled to one vote per share and have the exclusive right to vote for the board of directors and for all other purposes as provided by law. Subject to the rights of holders of the Company's preferred stock, holders of common stock are entitled to receive ratably on a per share basis such dividends and other distributions in cash, stock, or property of the Company as may be declared by the board of directors from time to time out of the legally available assets or funds of the Company.
The following illustrates the components of Accumulated Other Comprehensive Loss, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
Pension and postretirement adjustments
|
|
$
|
(5,065
|
)
|
|
$
|
(4,186
|
)
|
Foreign currency translation
|
|
(74,811
|
)
|
|
(92,164
|
)
|
Other
|
|
623
|
|
|
500
|
|
Total accumulated other comprehensive loss
|
|
$
|
(79,253
|
)
|
|
$
|
(95,850
|
)
|
In August 2013, the Company's board of directors authorized a share repurchase program allowing the Company to purchase up to
$750 million
of its outstanding shares of common stock, subject to market conditions. During the six months ended March 31, 2016, the Company purchased
1.1 million
shares of its common stock for a total of
$100.0 million
under this program. In May 2016, the Company's board of directors authorized a share purchase program that, together with availability remaining under the existing August 2013 share repurchase program, permitted the Company to purchase up to
$750 million
of its outstanding shares of common stock, subject to market conditions. In September 2016, the Company entered into an Accelerated Share Repurchase ("ASR") transaction with a financial institution and paid
$400.0 million
for the delivery of
4.5 million
shares of its common stock. The initial payment of
$400.0 million
funded stock purchases of
$380.0 million
and a share holdback of
$20.0 million
. The ASR transaction was settled in November 2016, at which time the financial institution delivered an additional
0.5 million
shares of the Company's common stock. The number of shares ultimately received was based upon the volume-weighted average price of the Company's common stock during the term of the ASR. The Company applied the
4.5 million
shares from the ASR to the May 2016 share repurchase program. In addition to the ASR, the Company purchased
2.9 million
shares of its common stock in fiscal 2016 for a total of
$231.2 million
under this program. During the fiscal year ended September 30, 2017, the Company purchased
2.1 million
shares of its common stock (included
0.5 million
shares of common stock received as part of the settlement of the ASR) for a total of
$118.8 million
to complete its authorization under this program.
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 fiscal year ended September 30, 2017, the Company purchased
2.7 million
shares of its common stock for a total of
$211.1 million
under this program. During the fiscal year ended September 30, 2018, the Company purchased
7.7 million
shares of its common stock for a total of
$663.1 million
, which included
$24.0 million
of September 2018 purchases that cash settled in October 2018. As of September 30, 2018, the Company had
$125.8 million
of availability remaining 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.
Warrants and Related Hedging Activity
In March 2013, the Company and WBA entered into various agreements and arrangements pursuant to which subsidiaries of WBA were granted the right to purchase a minority equity position in the Company, beginning with the right, but not the obligation, to purchase up to
19,859,795
shares of the Company's common stock in open market transactions (approximately
7%
of the Company's common stock on a fully diluted basis as of the date of issuance of the Warrants described below, assuming their exercise in full). In connection with these arrangements, wholly-owned subsidiaries of WBA were issued (a) warrants to purchase up to an aggregate of
22,696,912
shares of the Company's common stock at an exercise price of
$51.50
per share, exercisable during a
six
-month period beginning in March 2016 (the "2016 Warrants"), and (b) warrants to purchase up to an aggregate of
22,696,912
shares of the Company's common stock at an exercise price of
$52.50
per share, exercisable during a
six
-month period beginning in March 2017 (the "2017 Warrants" and, together with the 2016 Warrants, the "Warrants").
In June 2013, the Company commenced a strategy to mitigate the dilutive effect of the Warrants upon exercise. Prior to fiscal 2016, the Company purchased
18.8 million
shares of its common stock for
$1,774.1 million
under special share repurchase programs. During the fiscal year ended September 30, 2016, the Company purchased
26.3 million
shares of its common stock for a total of
$1,535.1 million
under a special share repurchase program.
In March 2016, the 2016 Warrants were exercised by WBA for
$1,168.9 million
in cash. The shares issued for the 2016 Warrants were from the Company's treasury stock on a first-in, first-out basis, and were originally purchased for
$866.0 million
. The Company recognized a reissuance gain in Additional Paid-in Capital of
$302.9 million
.
In August 2016, the Company and WBA amended the 2017 Warrants so that they became exercisable in whole or in part during the
six
-month period beginning in August 2016 at an exercise price of
$52.50
. In August 2016, the 2017 Warrants were exercised by WBA for
$1,191.6 million
in cash. The shares issued for the 2017 Warrants were from the Company's treasury stock
on a first-in, first-out basis, and were originally purchased for
$1,157.5 million
. The Company recognized a reissuance gain in Additional Paid-in Capital of
$34.1 million
.
Common Shares Outstanding
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, restricted stock, restricted stock units, the unsettled ASR transaction, and the Warrants during the periods presented.
The following illustrates the components of diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Weighted average common shares outstanding - basic
|
|
217,872
|
|
|
218,375
|
|
|
212,206
|
|
Effect of dilutive securities - stock options, restricted stock, restricted stock units, and the unsettled ASR transaction
|
|
2,464
|
|
|
3,227
|
|
|
3,338
|
|
Dilutive effect of the Warrants
|
|
—
|
|
|
—
|
|
|
10,415
|
|
Weighted average common shares outstanding - diluted
|
|
220,336
|
|
|
221,602
|
|
|
225,959
|
|
The potentially dilutive stock options, restricted stock, restricted stock units, the unsettled ASR transaction, and the Warrants that were antidilutive for the fiscal years ended September 30,
2018
,
2017
, and
2016
were
3.2 million
,
4.1 million
, and
3.1 million
, respectively.
Note 8. Related Party Transactions
WBA owns more than
10%
of the Company's outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement pursuant to which the Company distributes pharmaceutical products to WBA and an agreement that provides the Company the ability to access favorable economic pricing and generic products through a generic purchasing services arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Revenue from the various agreements and arrangements with WBA was
$54.7 billion
,
$45.4 billion
, and
$43.4 billion
in the fiscal years ended
September 30, 2018
,
2017
, and
2016
, respectively. The Company's receivable from WBA, net of incentives, was
$5.6 billion
and
$5.0 billion
as of
September 30, 2018
and
2017
, respectively.
Note 9
. Retirement and Other Benefit Plans
The Company sponsors various retirement benefit plans and a deferred compensation plan covering eligible employees.
The Compensation and Succession Planning Committee ("Compensation Committee") of the Company's board of directors has delegated the administration of the Company's retirement and other benefit plans to its Benefits Committee, an internal committee, comprised of senior finance, human resources, and legal executives. The Benefits Committee is responsible for the investment options under the Company's savings plans, as well as performance of the investment advisers and plan administrators.
Defined Benefit Plans
The Company approved the termination, effective August 1, 2014, of a salaried defined benefit pension plan, under which approximately
3,200
participants, including
500
active employees, had accrued benefits. In fiscal 2015, the Company obtained regulatory approval from the IRS to settle the plan.
In December 2015, the Company completed the settlement of plan benefits through the combination of lump-sum distributions to participants and the purchase of a nonparticipating annuity contract, which transferred the remaining obligation from the plan. Plan assets were sufficient to satisfy the obligations of the plan. During the fiscal year ended September 30, 2016, the Company recorded a pension settlement charge of
$47.6 million
, which primarily consisted of the recognition of unrecognized actuarial losses that were included in Accumulated Other Comprehensive Loss, net of the related deferred tax assets.
In June 2016, the Company transferred the surplus plan assets to its defined contribution 401(k) plan and recorded a charge of
$17.1 million
in Employee Severance, Litigation, and Other in the Company's Consolidated Statement of Operations.
Defined Contribution Plans
The Company sponsors the AmerisourceBergen Employee Investment Plan (the "Plan"), which is a defined contribution 401(k) plan covering salaried and certain hourly employees. Eligible participants may contribute to the plan from
1%
to
50%
of their regular compensation before taxes. Prior to January 1, 2017, the Company contributed
$1.00
for each $1.00 invested by the participant up to the first
3%
of the participant's salary and
$0.50
for each additional $1.00 invested by the participant of up to an additional
2%
of salary. Effective January 1, 2017, the Company contributes
$1.00
for each $1.00 invested by the participant up to the first
3%
of the participant's salary. Effective January 1, 2019, the Company will contribute
$1.00
for each $1.00 invested by the participant up to the first
3%
of the participant's salary and
$0.50
for each additional $1.00 invested by the participant of up to an additional
2%
of salary. An additional discretionary contribution, in an amount not to exceed the limits established by the Internal Revenue Code ("IRC"), may also be made depending upon the Company's performance. In connection with the termination of the salaried defined benefit plan, as discussed above,
$17.1 million
was transferred to the 401(k) plan in June 2016. In March 2017, the funds were contributed to participants who were eligible to participate in the 401(k) plan as of December 31, 2015, based upon their eligible calendar 2016 earnings. Based on the Company's performance in fiscal 2018, the Company recognized an expense for a discretionary contribution to the Plan in the fiscal year ended September 30, 2018. There was
no
discretionary contribution recognized for in the fiscal year ended September 30, 2017. All contributions are invested at the direction of the employee in one or more funds. All contributions vest immediately except for the discretionary contributions made by the Company, which vest in full after
five
years of credited service.
The Company also sponsors the AmerisourceBergen Corporation Benefit Restoration Plan. This unfunded plan provides benefits to selected key management, including all of the Company's executive officers. Prior to January 1, 2017, the Company contributed an amount equal to
4%
of the participant's total cash compensation to the extent that his or her compensation exceeded the annual compensation limit established by Section 401(a) (17) of the IRC. Effective January 1, 2017, this plan provides eligible participants with an annual amount equal to
3%
of the participant's total cash compensation to the extent that his or her compensation exceeds the annual compensation limit established by Section 401(a) (17) of the IRC. Effective January 1, 2019, this plan will provide eligible participants with an annual amount equal to
4%
of the participant's total cash compensation to the extent that his or her compensation exceeds the annual compensation limit established by Section 401(a) (17) of the IRC.
Costs of the defined contribution plans charged to expense for the fiscal years ended
September 30, 2018
,
2017
, and
2016
were
$37.9 million
,
$28.3 million
, and
$34.4 million
, respectively.
Deferred Compensation Plan
The Company sponsors the AmerisourceBergen Corporation 2001 Deferred Compensation Plan. This unfunded plan, under which
2.96 million
shares of common stock are authorized for issuance, allows eligible officers, directors, and key management employees to defer a portion of their annual compensation. The amount deferred may be allocated by the employee to cash, mutual funds, or stock credits. Stock credits, including dividend equivalents, are equal to the full and fractional number of shares of common stock that could be purchased with the participant's compensation allocated to stock credits based upon the average of closing prices of common stock during each month, plus, at the discretion of the board of directors, up to one-half of a share of common stock for each full share credited. Stock credit distributions are made in shares of common stock.
No
shares of common stock have been issued under the deferred compensation plan through
September 30, 2018
. The Company's liability relating to its deferred compensation plan as of
September 30, 2018
and
2017
was
$27.5 million
and
$26.3 million
, respectively.
Note 10
. Share-Based Compensation
Stock Options
The Company's employee stock option plans provide for the granting of incentive and nonqualified stock options to acquire shares of common stock to employees at a price not less than the fair market value of the common stock on the date the option is granted. Option terms and vesting periods are determined at the date of grant by the Compensation Committee of the board of directors. Employee options generally vest ratably, in equal amounts, over a
four
-year service period and expire in
seven
years. The Company's non-employee director stock option plans provide for the granting of nonqualified stock options to acquire shares of common stock to non-employee directors at the fair market value of the common stock on the date of the grant. Non-employee director options vest ratably, in equal amounts, over a
three
-year service period and expire in
ten
years. Non-employee director options have not been granted since February 2011.
As of
September 30, 2018
, employee and non-employee director stock options for an additional
15.6 million
shares may be granted under the AmerisourceBergen Corporation Omnibus Incentive Plan (the "Plan").
The estimated fair value of options granted is expensed on a straight-line basis over the requisite service periods of the awards and are net of estimated forfeitures. The Company estimates the fair values of option grants using a binomial option pricing model. Expected volatilities are based upon the historical volatility of the Company's common stock and other factors, such as implied market volatility. The Company uses historical exercise data, taking into consideration the optionees' ages at grant date, to estimate the terms for which the options are expected to be outstanding. The Company anticipates that the terms of options granted in the future will be similar to those granted in the past. The risk-free rates during the terms of such options are based upon the U.S. Treasury yield curve in effect at the time of grant.
The weighted average fair values of the options granted during the fiscal years ended
September 30, 2018
,
2017
, and
2016
were
$14.16
,
$13.57
, and
$17.43
, respectively. The following weighted average assumptions were used to estimate the fair values of options granted:
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
1.89%
|
|
1.26%
|
|
1.40%
|
Expected dividend yield
|
1.96%
|
|
1.80%
|
|
1.38%
|
Volatility of common stock
|
26.54%
|
|
26.78%
|
|
25.05%
|
Expected life of the options
|
3.76 years
|
|
3.74 years
|
|
3.72 years
|
Changes to the above valuation assumptions could have a significant impact on share-based compensation expense. During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the Company recognized stock option expense of
$22.6 million
,
$28.6 million
, and
$33.1 million
, respectively.
A summary of the Company's stock option activity and related information for its option plans for the fiscal year ended
September 30, 2018
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except exercise price and contractual term)
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding as of September 30, 2017
|
|
10,287
|
|
|
$70
|
|
4 years
|
|
$
|
170,856
|
|
Granted
|
|
1,538
|
|
|
$78
|
|
|
|
|
|
Exercised
|
|
(2,742
|
)
|
|
$51
|
|
|
|
|
|
Forfeited
|
|
(604
|
)
|
|
$84
|
|
|
|
|
|
Expired
|
|
(58
|
)
|
|
$95
|
|
|
|
|
Outstanding as of September 30, 2018
|
|
8,421
|
|
|
$77
|
|
4 years
|
|
$
|
142,557
|
|
Exercisable as of September 30, 2018
|
|
4,561
|
|
|
$72
|
|
3 years
|
|
$
|
98,863
|
|
Expected to vest after September 30, 2018
|
|
3,732
|
|
|
$82
|
|
5 years
|
|
$
|
41,982
|
|
The intrinsic value of stock option exercises during the fiscal years ended September 30,
2018
,
2017
, and
2016
was
$116.7 million
,
$116.6 million
, and
$120.9 million
, respectively.
A summary of the status of the Company's nonvested options as of
September 30, 2018
and changes during the fiscal year ended
September 30, 2018
is presented below:
|
|
|
|
|
|
|
(in thousands, except grant date fair value)
|
|
Options
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested as of September 30, 2017
|
|
4,752
|
|
|
$15
|
Granted
|
|
1,538
|
|
|
$14
|
Vested
|
|
(1,826
|
)
|
|
$14
|
Forfeited
|
|
(604
|
)
|
|
$15
|
Nonvested as of September 30, 2018
|
|
3,860
|
|
|
$15
|
During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the total fair values of options vested were
$25.8 million
,
$25.2 million
, and
$24.4 million
, respectively. Expected future compensation expense relating to the
3.9 million
nonvested options outstanding as of
September 30, 2018
is
$25.8 million
, which will be recognized over a weighted average period of
2.1
years.
Restricted Stock Units
Restricted stock units vest in full after
three
years. The estimated fair value of restricted stock units under the Company's restricted stock unit plans is determined by the product of the number of shares granted and the grant date market price of the Company's common stock. The estimated fair value of restricted stock units is expensed on a straight-line basis over the requisite service period and are net of estimated forfeitures. During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the Company recognized restricted stock unit expense of
$26.8 million
,
$25.1 million
, and
$19.5 million
, respectively.
A summary of the status of the Company's nonvested restricted stock units as of
September 30, 2018
and changes during the fiscal year ended
September 30, 2018
are presented below:
|
|
|
|
|
|
|
(in thousands, except grant date fair value)
|
|
Restricted
Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested as of September 30, 2017
|
|
819
|
|
|
$84
|
Granted
|
|
526
|
|
|
$78
|
Vested
|
|
(173
|
)
|
|
$91
|
Forfeited
|
|
(149
|
)
|
|
$81
|
Nonvested as of September 30, 2018
|
|
1,023
|
|
|
$80
|
During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the total fair values of restricted stock units vested were
$15.8 million
,
$13.8 million
, and
$17.8 million
, respectively. Expected future compensation expense relating to the
1.0 million
restricted stock units outstanding as of
September 30, 2018
is
$29.1 million
, which will be recognized over a weighted average period of
1.3
years.
Performance Stock Units
Performance stock units are granted to certain executive employees under the Plan and represent common stock potentially issuable in the future. Performance stock units vest at the end of a
three
-year performance period based upon achievement of specific performance goals. Based upon the extent to which the targets are achieved, vested shares for awards granted prior to fiscal 2018 may range from
0%
to
150%
of the target award amount. For awards granted beginning in fiscal 2018, vested shares may range from
0%
to
200%
of the target award amount. The fair value of performance stock units is determined by the grant date market price of the Company's common stock. Compensation expense associated with nonvested performance stock units is recognized over the requisite service period and is dependent on the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued. During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the Company recognized performance stock expense of
$12.8 million
,
$8.4 million
, and
$12.3 million
, respectively.
A summary of the status of the Company's nonvested performance stock units as of
September 30, 2018
and changes during the fiscal year ended
September 30, 2018
is presented below (based upon target award amounts).
|
|
|
|
|
|
|
(in thousands, except grant date fair value)
|
|
Performance
Stock
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested as of September 30, 2017
|
|
201
|
|
|
$85
|
Granted
|
|
150
|
|
|
$78
|
Vested
|
|
(80
|
)
|
|
$98
|
Forfeited
|
|
(27
|
)
|
|
$79
|
Nonvested as of September 30, 2018
|
|
244
|
|
|
$77
|
Shares that vested over the
three
-year performance period ended September 30,
2018
were distributed to employees in November
2018
.
Employee Stock Purchase Plan
The AmerisourceBergen Corporation Employee Stock Purchase Plan provides for an aggregate of
4,000,000
shares of common stock that may be sold to eligible employees (generally defined as employees with at least
30
days of service with the Company). Prior to July 1, 2018, the participants could elect to have the Company withhold up to
25%
of his or her base salary to purchase shares of the Company's common stock at a price equal to
95%
of the fair market value of the stock on the last business day of each
six
-month purchase period. Effective July 1, 2018, the participants may elect to have the Company withhold up to
25%
of his or her base salary to purchase shares of the Company's common stock at a price equal to
85%
of the fair market value of the stock on the last business day of each six-month period. Each participant is limited to
$25,000
of purchases during each calendar year. During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the Company acquired
72,198
shares,
75,904
shares, and
71,016
shares, respectively, from the open market for issuance to participants in this plan. As a result of increasing in the discount provided to employees from
5%
to
15%
, the Company began recognizing the
15%
discount as an expense in Distribution, Selling, and Administrative in the Statement of Operations. Prior to the increase in the discount, the Company recognized the discount in Additional Paid-in Capital in the Statement of Stockholders' Equity.
Note 11. Leases and Other Commitments
The Company has long-term leases for facilities and equipment. In the normal course of business, leases are generally renewed or replaced by other leases. Certain leases include escalation clauses. During the fiscal years ended September 30,
2018
,
2017
,
2016
, the Company recorded rental expense of
$114.9 million
,
$80.7 million
, and
$88.8 million
, respectively, in Distribution, Selling, and Administrative in the Consolidated Statements of Operations.
As of
September 30, 2018
, future minimum rental payments under noncancelable operating leases and financing obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year (in thousands)
|
|
Operating
Leases
|
|
Financing Obligations
1
|
|
Total
|
2019
|
|
$
|
89,589
|
|
|
$
|
26,561
|
|
|
$
|
116,150
|
|
2020
|
|
84,689
|
|
|
28,137
|
|
|
112,826
|
|
2021
|
|
75,929
|
|
|
27,974
|
|
|
103,903
|
|
2022
|
|
64,064
|
|
|
25,591
|
|
|
89,655
|
|
2023
|
|
54,168
|
|
|
24,401
|
|
|
78,569
|
|
Thereafter
|
|
143,714
|
|
|
107,146
|
|
|
250,860
|
|
Total minimum lease payments
|
|
$
|
512,153
|
|
|
$
|
239,810
|
|
|
$
|
751,963
|
|
|
|
|
|
|
|
|
1
Represents the portion of future minimum lease payments relating to facility leases where the Company was determined to be the accounting owner (see Note 1). These payments are recognized as reductions to the financing obligation and as interest expense and exclude the future non-cash termination of the financing obligation.
|
The 2017 Tax Act requires a one-time transition tax to be recognized on historical foreign earnings and profits. The Company currently estimates that its liability related to the transition tax is approximately
$219.6 million
, net of tax credits and refunds, as of
September 30, 2018
, which is payable in installments over a six-year period commencing in January 2021.
The Company outsources to IBM Global Services a significant portion of its data center operations. The remaining commitment under the Company's arrangement, which expires in
January 2021
, is approximately
$33.7 million
as of
September 30, 2018
, of which
$15.0 million
represents the Company's commitment in fiscal
2019
.
Note 12. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Employee severance
|
|
$
|
36,694
|
|
|
$
|
7,767
|
|
|
$
|
38,786
|
|
Litigation and opioid-related costs
|
|
61,527
|
|
|
917,573
|
|
|
—
|
|
Transfer of surplus plan assets
|
|
—
|
|
|
—
|
|
|
17,149
|
|
Customer contract dispute settlements
|
|
—
|
|
|
—
|
|
|
13,000
|
|
Other
|
|
85,299
|
|
|
33,987
|
|
|
33,976
|
|
Total employee severance, litigation, and other
|
|
$
|
183,520
|
|
|
$
|
959,327
|
|
|
$
|
102,911
|
|
Employee severance costs in the fiscal year ended September 30, 2018 primarily related to position eliminations resulting from the Company's business transformation efforts and restructuring activities related to its consulting business. Employee severance costs in the fiscal year ended September 30, 2017 primarily related to position eliminations as the Company began to reorganize to further align the organization to its customers' needs. Employee severance costs in the fiscal year ended September 30, 2016 primarily related to position eliminations as the Company reorganized certain of its business units and corporate functions to improve operating efficiency. Employees receive their severance benefits over a period of time, generally not in excess of 12 months, or in the form of a lump-sum payment.
Litigation and opioid-related costs in the fiscal year ended September 30, 2018 primarily related to opioid lawsuits, investigations, and related initiatives. Litigation and opioid-related costs in the fiscal year ended September 30, 2017 primarily related to litigation settlements and accruals.
During the fiscal year ended September 30, 2016, the Company recognized a
$17.1 million
charge related to the transfer of surplus assets from the Company's settled salaried defined benefit pension plan to its defined contribution 401(k) plan and
$13.0 million
of costs related to customer contract extensions (primarily related to the settlement of certain disputed items).
Other costs in the fiscal year ended September 30, 2018 included
$33.9 million
of acquisition-related deal and integration costs,
$33.0 million
related to the Company's business transformation efforts, and
$18.4 million
of other restructuring initiatives. Other costs in the fiscal year ended September 30, 2017 included
$17.0 million
of acquisition-related deal and integration costs,
$13.3 million
of other restructuring initiatives, and
$3.7 million
related to the Company's business transformation efforts. Other costs in the fiscal year ended September 30, 2016 included
$19.2 million
of acquisition-related deal and integration costs and
$14.7 million
of other restructuring initiatives.
Note 13
. 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.
Government Enforcement and Related Litigation Matters
The Company is, at various times, involved in government investigations and litigation arising from the marketing, promotion, sale, and dispensing of pharmaceutical products in the United States. Some of these investigations originate through
what are known as
qui tam
complaints of the Federal False Claims Act. The qui tam provisions of the Federal False Claims Act and various state and local civil False Claims Acts permit a private person, known as a "relator" or whistleblower, to file civil actions under these statutes on behalf of the federal, state, and local governments. Qui tam complaints are initially filed by the relator under seal (or on a confidential basis) and the filing of the complaint imposes obligations on government authorities to investigate the allegations in the complaint and to determine whether or not to intervene in the action. Qui tam complaints remain sealed until the court in which the case was filed orders otherwise.
Under the Federal False Claims Act, the government (or relators who pursue the claims without the participation of the government in the case) may seek to recover up to three times the amount of damages in addition to a civil penalty for each purported false claim submitted to the government for payment. Generally speaking, these cases take several years for the investigation to be completed and, ultimately, to be resolved (either through litigation or settlement) after the complaint is unsealed. In addition, some states have pursued investigations under state false claims statutes or consumer protection laws, either in conjunction with a government investigation or separately. There is often collateral litigation that arises from public disclosures of government investigations, including the filing of class action lawsuits by third party payors or by shareholders alleging violations of the securities laws.
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 generally responds to such subpoenas and requests in a cooperative manner. These responses often require time and effort and can result in considerable costs being incurred by the Company. 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.
Since fiscal 2012, the Company and its subsidiary AmerisourceBergen Specialty Group ("ABSG") have been responding to subpoenas from the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY") requesting production of documents and information relating to the pre-filled syringe program of ABSG’s subsidiary Medical Initiatives, Inc., ABSG's oncology distribution center, its group purchasing organization for oncologists, and intercompany transfers of certain oncology products. Medical Initiatives, Inc. voluntarily ceased operations in early 2014.
On September 27, 2017, pursuant to the terms of a plea agreement, ABSG entered a guilty plea to a one-count strict-liability misdemeanor violation of the Federal Food, Drug, and Cosmetic Act in the United States District Court of the Eastern District of New York. Under the terms of the agreement, which were approved by the Court, ABSG paid a total criminal fine and forfeiture of
$260.0 million
in fiscal 2017. The guilty plea resolves the federal criminal investigation related to the failure of Medical Initiatives, Inc. to duly register with the FDA. The Company also entered into a Compliance Agreement with the United States Department of Justice for a period of three years. During the year ended September 30, 2017, the Company recognized the
$260.0 million
settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
The USAO-EDNY also pursued alleged civil claims under the False Claims Act. As previously disclosed, ABSG reached an agreement in principle with the USAO-EDNY during the quarter ended December 31, 2017, which the Company expected would resolve the alleged civil claims in their entirety. In the fiscal quarter ended September 30, 2018, the Company reached final terms of the settlement agreement with the USAO-EDNY, resolved potential administrative action by the Office of Inspector General of the U.S. Department of Health and Human Services by entering into a Corporate Integrity Agreement, and obtained dismissal with prejudice of the potential civil claims. The Corporate Integrity Agreement has a five-year term, which commenced on September 28, 2018, and requires, among other things, the maintenance of a compliance program, an independent review organization and a financial recoupment program. Pursuant to the terms of the settlement agreement with the USAO-EDNY, ABSG made a payment on September 28, 2018 to resolve the civil litigation without making any admission of liability in the amount of
$625.0 million
, plus interest from December 1, 2017. As previously disclosed, as a result of the agreement in principle, the Company had previously accrued a reserve in the amount of
$625.0 million
in the fiscal year ended September 30, 2017. The reserve was recognized in Employee Severance, Litigation, and Other on the Company's Statement of Operations and in Accrued Expenses and Other on the Company's Consolidated Balance Sheet.
The Company’s subsidiary U.S. Bioservices Corporation ("U.S. Bio") settled claims with the U.S. Attorney’s Office for the Southern District of New York ("USAO-SDNY") and with various states arising from the previously disclosed matter involving the dispensing of one product and U.S. Bio’s relationship with the manufacturer of that product. In accordance with the settlement agreements, the United States’ complaint against U.S. Bio was dismissed and the participating states agreed not to bring, and to dismiss with prejudice, any state law claims that they had the authority to bring against U.S. Bio. The Company paid the United States
$10.7 million
in fiscal 2017 and paid the participating states
$2.8 million
in fiscal 2018. During the year ended September
30, 2017, the Company recognized the
$13.4 million
settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
In January 2017, U.S. Bio received a subpoena for information from the USAO-EDNY relating to U.S. Bio’s 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 is engaged in discussions with the USAO-WDTN and has produced documents in response to the subpoena.
Opioid Lawsuits and Investigations
In June 2012, the Attorney General of the State of West Virginia ("West Virginia AG") filed complaints, which were amended, in the Circuit Court of Boone County, West Virginia, against a number of pharmaceutical wholesale distributors, including the Company's subsidiary AmerisourceBergen Drug Corporation ("ABDC"), alleging, among other claims, that the distributors failed to provide effective controls and procedures to guard against diversion of controlled substances for illegitimate purposes in West Virginia, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of uncontrolled substances in accordance with state regulations. The West Virginia AG was seeking monetary damages and injunctive and other equitable relief. This matter was dismissed with prejudice on January 9, 2017 pursuant to a settlement agreement that provided for the payment of
$16.0 million
and express denial of the allegations in the complaints and any wrongdoing. During the year ended September 30, 2017, the Company recognized the
$16.0 million
settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations. The Company paid the
$16.0 million
settlement in fiscal 2017.
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 ABDC), pharmaceutical manufacturers, retail chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications. Additionally, several counties and municipalities have 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.
After a motion filed by certain plaintiffs and a hearing before the Judicial Panel on Multidistrict Litigation in November 2017, an initial group of cases was consolidated for Multidistrict Litigation ("MDL") proceedings before the United States District Court for the Northern District of Ohio. Additional cases have been, and will likely continue to be, transferred to the MDL. In April 2018, the United States, through the Department of Justice ("DOJ"), filed a motion to participate (i) in settlement discussions and (ii) as a friend of the Court by providing information to facilitate non-monetary remedies. The DOJ’s motion to participate in settlement discussions was granted on June 19, 2018. On April 11, 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 September 2019. Dispositive motion practice and fact discovery have commenced in certain bellwether cases. On October 5, 2018, Magistrate Judge Ruiz issued a Report & Recommendation on the first of the bellwether dispositive motions, which recommended dismissal of certain public nuisance claims but recommended that the majority of the suit be allowed to continue with discovery. The parties will file objections to the Report & Recommendation and, thereafter, Judge Polster will either adopt or modify the Report & Recommendation. Additionally, 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.
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, on September 18, 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. During the fiscal year ended September 30, 2018, the Company also received administrative subpoenas from the USAO-EDNY, the U.S. Attorney's Office for the District of Colorado, the U.S. Attorney's Office for the Northern District of West Virginia, the U.S. Attorney's Office for the Western District of Michigan, and the U.S. Attorney's Office for the Middle District of Florida. 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.
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 is based upon opioids sold or distributed to or within NYS. The OSA requires licensees to initially report transaction data for the 2017 calendar year by August 1, 2018, which NYS will use to calculate ratable shares of the assessment. The initial payment to NYS is due on January 1, 2019 for opioids sold or distributed during calendar year 2017, and future assessments, beginning with the 2018 calendar year, will be payable quarterly beginning on April 1, 2019. The OSA expires on June 30, 2024. The Company accrued
$22.0 million
as an estimate of its liability under the OSA for opioids distributed from January 1, 2017 through September 30, 2018. The Company recognized this reserve in Cost of Goods Sold on its Consolidated Statement of Operations for the fiscal year ended September 30, 2018 and in Accrued Expenses and Other on its Consolidated Balance Sheet as of September 30, 2018. If other state or local jurisdictions enact similar legislation, such legislation in the aggregate may have a material adverse effect on the Company's results of operations, cash flows, or financial condition.
The 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 Practices ("GMPs") and are inspected by the FDA periodically to determine that PharMEDium is complying with such GMPs. The FDA and the DOJ have broad enforcement powers, including the ability to suspend the Company’s Section 503B outsourcing facilities from distributing pharmaceutical products.
The Company continues to be in active communication with the FDA and the Consumer Protection Branch of the Civil Division of the DOJ regarding the ongoing compliance efforts of PharMEDium, including efforts to resume commercial distribution at the Memphis 503B outsourcing facility where it voluntarily suspended production activities in December 2017. 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. Further discussions are anticipated, including with regard to the possible entry
of a consent decree. A failure to adequately address observations identified by the FDA and the DOJ could lead to the suspension of facilities currently in operation, an enforcement action, monetary penalties and/or license revocation.
Note 14
. Litigation Settlements
Antitrust Settlements
Numerous class action lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. The Company has not been a named a plaintiff in any of these class actions, but has been a member of the direct purchasers' class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the class actions have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds. During the fiscal years ended
September 30, 2018
,
2017
, and
2016
, the Company recognized gains of
$35.9 million
,
$1.4 million
, and
$133.8 million
, respectively, relating to these class action lawsuits. 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 15
. Business Segment Information
The Company is organized based upon the products and services it provides to its customers. The Company's operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure and, therefore, have been included in Other for the purpose of reportable segment presentation. Other consists of operating segments that focus on global commercialization services and animal health and includes ABCS, World Courier, and MWI.
The chief operating decision maker ("CODM") of the Company is the Chairman, President & Chief Executive Officer of the Company, whose function is to allocate resources to, and assess the performance of, the Company's operating segments.
The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, outsourced compounded sterile preparations, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution (including plasma and other blood products, injectible pharmaceuticals, vaccines, and other specialty pharmaceutical products) and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, the Pharmaceutical Distribution Services reportable segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution Services reportable segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, it delivers packaging solutions to institutional and retail healthcare providers.
ABCS, through a number of operating businesses, provides a full suite of integrated manufacturer services that range from clinical trial support to product post-approval and commercialization support. World Courier, which operates in over
50
countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. MWI is a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. Additionally, MWI offers demand-creating sales force services to manufacturers.
The following illustrates reportable segment revenue information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Pharmaceutical Distribution Services
|
|
$
|
161,699,343
|
|
|
$
|
147,453,495
|
|
|
$
|
141,701,997
|
|
Other
|
|
6,332,730
|
|
|
5,747,863
|
|
|
5,207,095
|
|
Intersegment eliminations
|
|
(92,438
|
)
|
|
(57,532
|
)
|
|
(59,406
|
)
|
Revenue
|
|
$
|
167,939,635
|
|
|
$
|
153,143,826
|
|
|
$
|
146,849,686
|
|
Intersegment eliminations primarily represent the elimination of certain Pharmaceutical Distribution Services reportable segment sales to MWI.
The following illustrates reportable segment operating income information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Pharmaceutical Distribution Services
|
|
$
|
1,626,748
|
|
|
$
|
1,643,629
|
|
|
$
|
1,702,725
|
|
Other
|
|
355,091
|
|
|
373,797
|
|
|
327,746
|
|
Intersegment eliminations
|
|
(609
|
)
|
|
(556
|
)
|
|
(103
|
)
|
Total segment operating income
|
|
$
|
1,981,230
|
|
|
$
|
2,016,870
|
|
|
$
|
2,030,368
|
|
The following reconciles total segment operating income to income before income taxes for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Total segment operating income
|
|
$
|
1,981,230
|
|
|
$
|
2,016,870
|
|
|
$
|
2,030,368
|
|
Gain from antitrust litigation settlements
|
|
35,938
|
|
|
1,395
|
|
|
133,758
|
|
LIFO (expense) credit
|
|
(67,324
|
)
|
|
157,782
|
|
|
(200,230
|
)
|
PharMEDium remediation costs
|
|
(66,204
|
)
|
|
—
|
|
|
—
|
|
New York State Opioid Stewardship Act
|
|
(22,000
|
)
|
|
—
|
|
|
—
|
|
Acquisition-related intangibles amortization
|
|
(174,751
|
)
|
|
(156,378
|
)
|
|
(147,262
|
)
|
Warrants expense
|
|
—
|
|
|
—
|
|
|
(140,342
|
)
|
Employee severance, litigation, and other
|
|
(183,520
|
)
|
|
(959,327
|
)
|
|
(102,911
|
)
|
Pension settlement charge
|
|
—
|
|
|
—
|
|
|
(47,607
|
)
|
Goodwill impairment
|
|
(59,684
|
)
|
|
—
|
|
|
—
|
|
Operating income
|
|
1,443,685
|
|
|
1,060,342
|
|
|
1,525,774
|
|
Other loss (income)
|
|
25,469
|
|
|
(2,730
|
)
|
|
(5,048
|
)
|
Interest expense, net
|
|
174,699
|
|
|
145,185
|
|
|
139,912
|
|
Loss on consolidation of equity investments
|
|
42,328
|
|
|
—
|
|
|
—
|
|
Loss on early retirement of debt
|
|
23,766
|
|
|
—
|
|
|
—
|
|
Income before income taxes
|
|
$
|
1,177,423
|
|
|
$
|
917,887
|
|
|
$
|
1,390,910
|
|
Segment operating income is evaluated by the CODM of the Company and excludes gain from antitrust litigation settlements; LIFO (expense) credit; PharMEDium remediation costs; New York State Opioid Stewardship Act; acquisition-related intangibles amortization; Warrants expense; employee severance, litigation, and other; a pension settlement charge; and goodwill impairment. All corporate office expenses are allocated to each operating segment. Segment measures were adjusted in fiscal 2018 to exclude PharMEDium remediation costs, New York State Opioid Stewardship Act, and goodwill impairment as the CODM excludes these costs in the measurement of segment performance.
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 active 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 have had an initial meeting with the DOJ and the FDA to discuss potential resolution of ongoing matters and whether a consent decree is necessary (see Item 1A. Risk Factors on page 8). Further discussions are anticipated, including with regard to the possible entry of a consent decree. 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 fiscal year ended September 30, 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.
The Company recorded a
$30.0 million
impairment of a non-customer note receivable related to a start-up venture in Other Loss (Income) in the Company's Consolidated Statement of Operations in the fiscal year ended September 30, 2018.
The following illustrates total assets by reportable segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Pharmaceutical Distribution Services
|
|
$
|
31,892,621
|
|
|
$
|
29,691,127
|
|
|
$
|
28,605,047
|
|
Other
|
|
5,777,217
|
|
|
5,625,343
|
|
|
5,032,454
|
|
Total assets
|
|
$
|
37,669,838
|
|
|
$
|
35,316,470
|
|
|
$
|
33,637,501
|
|
The CODM does not review assets by operating segment for the purpose of assessing performance or allocating resources.
The following illustrates depreciation and amortization by reportable segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Pharmaceutical Distribution Services
|
|
$
|
225,608
|
|
|
$
|
188,065
|
|
|
$
|
170,973
|
|
Other
|
|
64,768
|
|
|
53,160
|
|
|
46,500
|
|
Acquisition-related intangibles amortization
|
|
174,751
|
|
|
156,378
|
|
|
147,262
|
|
Total depreciation and amortization
|
|
$
|
465,127
|
|
|
$
|
397,603
|
|
|
$
|
364,735
|
|
Depreciation and amortization includes depreciation and amortization of property and equipment and intangible assets, but excludes amortization of deferred financing costs and other debt-related items, which are included in interest expense.
The following illustrates capital expenditures by reportable segment for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
(in thousands)
|
|
2018
|
|
2017
|
|
2016
|
Pharmaceutical Distribution Services
|
|
$
|
190,191
|
|
|
$
|
339,478
|
|
|
$
|
359,391
|
|
Other
|
|
146,220
|
|
|
126,919
|
|
|
105,225
|
|
Total capital expenditures
|
|
$
|
336,411
|
|
|
$
|
466,397
|
|
|
$
|
464,616
|
|
Note 16. Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable as of
September 30, 2018
and
2017
approximate fair value based upon the relatively short-term nature of these financial instruments. Within Cash and Cash Equivalents, the Company had
$1,050.0 million
and
$800.0 million
of investments in money market accounts as of
September 30, 2018
and
2017
. 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
September 30, 2018
were
$4,158.5 million
and
$4,000.1 million
, respectively. The recorded amount of long-term debt and the corresponding fair value as of
September 30, 2017
were
$3,429.9 million
and
$3,522.5 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 17. Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2018
|
(in thousands, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenue
|
|
$
|
40,466,332
|
|
|
$
|
41,033,858
|
|
|
$
|
43,142,309
|
|
|
$
|
43,297,136
|
|
|
$
|
167,939,635
|
|
Gross profit (a)
|
|
$
|
1,112,652
|
|
|
$
|
1,255,683
|
|
|
$
|
1,211,341
|
|
|
$
|
1,032,641
|
|
|
$
|
4,612,317
|
|
Distribution, selling, and administrative expenses; depreciation; and amortization
|
|
663,658
|
|
|
736,814
|
|
|
746,593
|
|
|
778,363
|
|
|
2,925,428
|
|
Employee severance, litigation, and other
|
|
30,021
|
|
|
37,449
|
|
|
75,553
|
|
|
40,497
|
|
|
183,520
|
|
Goodwill impairment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59,684
|
|
|
59,684
|
|
Operating income
|
|
$
|
418,973
|
|
|
$
|
481,420
|
|
|
$
|
389,195
|
|
|
$
|
154,097
|
|
|
$
|
1,443,685
|
|
Net income (b)
|
|
$
|
861,853
|
|
|
$
|
282,160
|
|
|
$
|
277,875
|
|
|
$
|
194,004
|
|
|
$
|
1,615,892
|
|
Net income attributable to AmerisourceBergen Corporation (b)
|
|
$
|
861,853
|
|
|
$
|
287,455
|
|
|
$
|
275,809
|
|
|
$
|
233,288
|
|
|
$
|
1,658,405
|
|
Earnings per share operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.95
|
|
|
$
|
1.31
|
|
|
$
|
1.26
|
|
|
$
|
1.08
|
|
|
$
|
7.61
|
|
Diluted
|
|
$
|
3.90
|
|
|
$
|
1.29
|
|
|
$
|
1.25
|
|
|
$
|
1.07
|
|
|
$
|
7.53
|
|
__________________________________________________________
|
|
(a)
|
The second and third quarters of the fiscal year ended September 30,
2018
include gains from antitrust litigation settlements of
$0.3 million
and
$35.6 million
. The third quarter of the fiscal year ended September 30,
2018
includes a LIFO credit of
$16.1 million
. The fourth quarter of the fiscal year ended September 30,
2018
includes LIFO expense of
$83.5 million
. The second, third, and fourth quarters of the fiscal year ended September 30, 2018 include PharMEDium remediation costs of
$22.5 million
,
$12.0 million
, and
$26.6 million
. The fourth quarter of the fiscal year ended September 30, 2018 includes a
$22.0 million
estimate of our liability under the New York State Opioid Stewardship Act.
|
|
|
(b)
|
The first quarter of the fiscal year ended September 30, 2018 includes a loss on early retirement of debt of
$23.8 million
. The second quarter of the fiscal year ended September 30, 2018 includes a
$42.3 million
loss on consolidation of equity investments and a
$30.0 million
impairment of a non-customer note receivable. The first and fourth quarters of the fiscal year ended September 30, 2018 included discrete income tax benefits recognized in connection with the 2017 Tax Act of
$587.6 million
and
$25.0 million
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30, 2017
|
(in thousands, except per share amounts)
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenue
|
|
$
|
38,169,265
|
|
|
$
|
37,147,402
|
|
|
$
|
38,707,144
|
|
|
$
|
39,120,015
|
|
|
$
|
153,143,826
|
|
Gross profit (a)
|
|
$
|
1,037,680
|
|
|
$
|
1,256,427
|
|
|
$
|
1,079,875
|
|
|
$
|
1,172,020
|
|
|
$
|
4,546,002
|
|
Distribution, selling, and administrative expenses; depreciation; and amortization
|
|
616,627
|
|
|
619,512
|
|
|
624,982
|
|
|
665,212
|
|
|
2,526,333
|
|
Employee severance, litigation, and other (b)
|
|
21,066
|
|
|
11,934
|
|
|
284,517
|
|
|
641,810
|
|
|
959,327
|
|
Operating income (loss)
|
|
$
|
399,987
|
|
|
$
|
624,981
|
|
|
$
|
170,376
|
|
|
$
|
(135,002
|
)
|
|
$
|
1,060,342
|
|
Net income (loss)
|
|
$
|
247,246
|
|
|
$
|
411,473
|
|
|
$
|
50,352
|
|
|
$
|
(344,587
|
)
|
|
$
|
364,484
|
|
Earnings per share operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.13
|
|
|
$
|
1.89
|
|
|
$
|
0.23
|
|
|
$
|
(1.58
|
)
|
|
$
|
1.67
|
|
Diluted
|
|
$
|
1.11
|
|
|
$
|
1.86
|
|
|
$
|
0.23
|
|
|
$
|
(1.58
|
)
|
|
$
|
1.64
|
|
__________________________________________________________
|
|
(a)
|
The first quarter of the fiscal year ended September 30,
2017
includes gains from antitrust and litigation settlements of
$1.4 million
. The first quarter of the fiscal year ended September 30,
2017
includes LIFO expense of
$28.3 million
. The second, third, and fourth quarters of the fiscal year ended September 30, 2017 include LIFO credits of
$86.5 million
,
$24.7 million
, and
$74.9 million
, respectively.
|
|
|
(b)
|
The third quarter of the fiscal year ended September 30, 2017 includes
$273.4 million
for litigation settlements. The fourth quarter of the fiscal year ended September 30, 2017 includes a
$625.0 million
litigation accrual.
|
Note 18. Subsequent Event
In November 2018, the Company's board of directors increased the quarterly dividend paid on common stock by
5%
and declared a regular quarterly cash dividend of
$0.40
per share, payable on December 3, 2018 to shareholders of record on November 19, 2018.