NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of AmerisourceBergen Corporation and its wholly-owned subsidiaries (the “Company”) as of the dates and for the periods indicated. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q, and Rule 10-1 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial position as of
December 31, 2016
and the results of operations and cash flows for the interim periods ended
December 31, 2016
and
2015
have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted. The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts. Certain reclassifications have been made to prior-period amounts in order to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 specifies that debt issuance costs related to a debt liability shall be reported on the balance sheet as a direct reduction from the face amount of the debt liability. In August 2015, the FASB issued ASU No. 2015-15, "Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements" ("ASU 2015-15"). ASU 2015-15 specifies that debt issuance costs related to line-of-credit arrangements may be presented as an asset on the balance sheet and subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. As of October 1, 2016, the Company adopted ASU 2015-03 and ASU 2015-15, which resulted in the reclassification of
$18.7 million
of debt issuance costs from Other Assets to Short-Term Debt of
$0.9 million
and to Long-Term Debt of
$17.8 million
on the Company's September 30, 2016 Consolidated Balance Sheet. The adoption had no impact on the Company’s results of operations or cash flows.
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 settled. It also allows an employer to repurchase more of an employee's shares than it may currently for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. Entities are permitted to adopt the standard early in any interim or annual period. During the quarter ended December 31, 2016, the Company early adopted ASU 2016-09, which resulted in a cumulative adjustment to retained earnings and established a deferred tax asset as of October 1, 2016 of
$47.1 million
for previously unrecognized tax benefits. The Company elected to adopt the Statement of Cash Flows presentation of the excess tax benefits prospectively. During the three months ended December 31, 2016, the Company recognized a discrete tax benefit of
$4.2 million
in Income Tax Expense on the Company's Consolidated Statement of Operations.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification 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 Financial Accounting Standards Board 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. Entities are permitted to adopt the standards as early as the original public entity effective date of ASU 2014-09, and either full or modified retrospective application is required. The Company has not yet selected an adoption date or a transition method for ASU 2014-09, 2016-08, and 2016-10 and is currently evaluating the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact that the adoption of the above standards will have on its financial statements.
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 is currently evaluating the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact that the adoption of this standard will have on its financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"). ASU 2016-15 aims to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. Entities are permitted to adopt the standard early in any interim or annual period, and a retrospective application is required. The Company is currently evaluating the impact of adopting this new accounting guidance and, therefore, cannot reasonably estimate the impact that the adoption of this standard will have on its financial statements.
As of
December 31, 2016
, there were no other recently-issued accounting standards that may have a material impact on the Company’s financial position, results of operations, or cash flows upon their adoption.
Note 2. Revision of Previously Issued Financial Statements
In fiscal 2016, the Company engaged in a review of the accounting treatment of leases. As part of this review, the Company assessed its historical application of Accounting Standards Codification 840, "Leases," ("ASC 840") regarding lessee involvement in the construction of leased assets and identified corrections to be made in its accounting for these leases. In a number of its leases, the Company made payments for certain structural components included in the lessor's construction of the leased assets, which resulted in the Company being deemed the owner of the leased assets for accounting purposes. As a result, regardless of the significance of the payments, ASC 840 defines those payments as automatic indicators of ownership and requires the Company to capitalize the lessor's total project cost on the balance sheet with a corresponding financing obligation. In these situations, the Company had not historically accounted for the total project costs of the lessor as owned assets. Additionally, upon completion of the lessor's project, the Company must perform a sale-leaseback analysis pursuant to ASC 840 to determine if it can derecognize these assets and the related financing obligations from its consolidated balance sheet. In a substantial number of its leases, due to many of the same factors that require it to account for the total project costs as owned assets during the construction period (for example, the Company funding a portion of the construction costs), it was deemed to have "continuing involvement," which precluded the Company from derecognizing these leased assets when construction was complete. In such cases, the leased assets and the related financing obligations remain on the consolidated balance sheet and are amortized over the life of the assets and the lease term, respectively.
The Company revised the prior year's financial statements and reduced diluted earnings per share by
$0.01
in the three months ended December 31, 2015. The Company no longer reports rent expense for the leased facilities that are owned for accounting purposes. Instead, rental payments under the leases are recognized as a reduction of the financing obligation and as interest expense. Additionally, depreciation expense is recorded as construction assets are depreciated over their useful lives. These corrections had no impact on the net decrease in cash and cash equivalents during the three months ended December 31, 2015.
The following illustrates the impact the aforementioned adjustments had on the Company's previously issued financial statements:
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31, 2015
|
(in thousands, except per share data)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
Revenue
|
|
$
|
36,709,046
|
|
|
$
|
—
|
|
|
$
|
36,709,046
|
|
Cost of goods sold
|
|
35,744,169
|
|
|
—
|
|
|
35,744,169
|
|
Gross profit
|
|
964,877
|
|
|
—
|
|
|
964,877
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Distribution, selling, and administrative
|
|
528,296
|
|
|
(3,219
|
)
|
|
525,077
|
|
Depreciation
|
|
49,342
|
|
|
1,524
|
|
|
50,866
|
|
Amortization
|
|
32,096
|
|
|
—
|
|
|
32,096
|
|
Warrants
|
|
467,375
|
|
|
—
|
|
|
467,375
|
|
Employee severance, litigation, and other
|
|
18,868
|
|
|
—
|
|
|
18,868
|
|
Pension settlement
|
|
48,731
|
|
|
—
|
|
|
48,731
|
|
Operating loss
|
|
(179,831
|
)
|
|
1,695
|
|
|
(178,136
|
)
|
Other income
|
|
(310
|
)
|
|
—
|
|
|
(310
|
)
|
Interest expense, net
|
|
30,879
|
|
|
2,862
|
|
|
33,741
|
|
Loss before income taxes
|
|
(210,400
|
)
|
|
(1,167
|
)
|
|
(211,567
|
)
|
Income tax benefit
|
|
(540,777
|
)
|
|
(429
|
)
|
|
(541,206
|
)
|
Net income
|
|
$
|
330,377
|
|
|
$
|
(738
|
)
|
|
$
|
329,639
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.60
|
|
|
$
|
—
|
|
|
$
|
1.60
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
206,180
|
|
|
—
|
|
|
206,180
|
|
Diluted
|
|
226,718
|
|
|
—
|
|
|
226,718
|
|
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31, 2015
|
(in thousands)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
Net income
|
|
$
|
330,377
|
|
|
$
|
(738
|
)
|
|
$
|
329,639
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Net change in foreign currency translation adjustments
|
|
(10,434
|
)
|
|
—
|
|
|
(10,434
|
)
|
Pension plan adjustment, net of tax of $19,054
|
|
31,538
|
|
|
—
|
|
|
31,538
|
|
Other
|
|
(585
|
)
|
|
—
|
|
|
(585
|
)
|
Total other comprehensive income
|
|
20,519
|
|
|
—
|
|
|
20,519
|
|
Total comprehensive income
|
|
$
|
350,896
|
|
|
$
|
(738
|
)
|
|
$
|
350,158
|
|
CONSOLIDATED STATEMENT OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31, 2015
|
(in thousands)
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
330,377
|
|
|
$
|
(738
|
)
|
|
$
|
329,639
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation, including amounts charged to cost of goods sold
|
|
53,668
|
|
|
1,524
|
|
|
55,192
|
|
Amortization, including amounts charged to interest expense
|
|
33,801
|
|
|
177
|
|
|
33,978
|
|
Provision for doubtful accounts
|
|
4,080
|
|
|
—
|
|
|
4,080
|
|
Benefit for deferred income taxes
|
|
(610,771
|
)
|
|
(429
|
)
|
|
(611,200
|
)
|
Warrants expense
|
|
467,375
|
|
|
—
|
|
|
467,375
|
|
Share-based compensation
|
|
22,255
|
|
|
—
|
|
|
22,255
|
|
LIFO expense
1
|
|
101,562
|
|
|
—
|
|
|
101,562
|
|
Pension settlement
|
|
48,731
|
|
|
—
|
|
|
48,731
|
|
Other
|
|
(7,982
|
)
|
|
—
|
|
|
(7,982
|
)
|
Changes in operating assets and liabilities, excluding the effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(76,261
|
)
|
|
—
|
|
|
(76,261
|
)
|
Merchandise inventories
1
|
|
(1,187,858
|
)
|
|
—
|
|
|
(1,187,858
|
)
|
Prepaid expenses and other assets
|
|
31,966
|
|
|
—
|
|
|
31,966
|
|
Accounts payable
|
|
1,623,290
|
|
|
—
|
|
|
1,623,290
|
|
Accrued expenses, income taxes, and other liabilities
|
|
(83,385
|
)
|
|
232
|
|
|
(83,153
|
)
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
750,848
|
|
|
766
|
|
|
751,614
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(90,110
|
)
|
|
—
|
|
|
(90,110
|
)
|
Cost of acquired companies, net of cash acquired
|
|
(2,726,632
|
)
|
|
—
|
|
|
(2,726,632
|
)
|
Proceeds from sales of investment securities available-for-sale
|
|
88,829
|
|
|
—
|
|
|
88,829
|
|
Purchases of investment securities available-for-sale
|
|
(41,136
|
)
|
|
—
|
|
|
(41,136
|
)
|
Other
|
|
(3,438
|
)
|
|
—
|
|
|
(3,438
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(2,772,487
|
)
|
|
—
|
|
|
(2,772,487
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Term loan borrowings
|
|
1,000,000
|
|
|
—
|
|
|
1,000,000
|
|
Borrowings under revolving and securitization credit facilities
|
|
1,755,310
|
|
|
—
|
|
|
1,755,310
|
|
Repayments under revolving and securitization credit facilities
|
|
(1,746,766
|
)
|
|
—
|
|
|
(1,746,766
|
)
|
Purchases of common stock
|
|
(118,575
|
)
|
|
—
|
|
|
(118,575
|
)
|
Exercises of stock options, including excess tax benefits of $17,436
|
|
33,980
|
|
|
—
|
|
|
33,980
|
|
Cash dividends on common stock
|
|
(71,199
|
)
|
|
—
|
|
|
(71,199
|
)
|
Tax withholdings related to restricted share vesting
|
|
(18,233
|
)
|
|
—
|
|
|
(18,233
|
)
|
Other
|
|
(2,230
|
)
|
|
(766
|
)
|
|
(2,996
|
)
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
832,287
|
|
|
(766
|
)
|
|
831,521
|
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(1,189,352
|
)
|
|
—
|
|
|
(1,189,352
|
)
|
Cash and cash equivalents at beginning of year
|
|
2,167,442
|
|
|
—
|
|
|
2,167,442
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
978,090
|
|
|
$
|
—
|
|
|
$
|
978,090
|
|
1
Amounts as previously reported have been revised to report LIFO Expense separately from the change in Merchandise Inventories.
Note 3. Income Taxes
The Company files income tax returns in U.S. federal and state jurisdictions as well as various foreign jurisdictions. As of
December 31, 2016
, 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
$92.2 million
(
$66.4 million
, net of federal benefit). If recognized, these tax benefits would reduce income tax expense and the effective tax rate. Included in this amount is
$13.0 million
of interest and penalties, which the Company records in income tax expense. During the
three
months ended
December 31, 2016
, unrecognized tax benefits increased by
$4.0 million
. Over the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately
$4.7 million
.
Note 4. Goodwill and Other Intangible Assets
Following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the
three
months ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Pharmaceutical
Distribution
|
|
Other
|
|
Total
|
Goodwill at September 30, 2016
|
|
$
|
4,264,485
|
|
|
$
|
1,727,012
|
|
|
$
|
5,991,497
|
|
Goodwill recognized in connection with acquisitions
|
|
—
|
|
|
1,016
|
|
|
1,016
|
|
Foreign currency translation
|
|
—
|
|
|
(1,843
|
)
|
|
(1,843
|
)
|
Other
|
|
—
|
|
|
(3,564
|
)
|
|
(3,564
|
)
|
Goodwill at December 31, 2016
|
|
$
|
4,264,485
|
|
|
$
|
1,722,621
|
|
|
$
|
5,987,106
|
|
Following is a summary of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
(in thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Indefinite-lived trade names
|
|
$
|
684,950
|
|
|
$
|
—
|
|
|
$
|
684,950
|
|
|
$
|
684,991
|
|
|
$
|
—
|
|
|
$
|
684,991
|
|
Finite-lived:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
2,320,630
|
|
|
(306,518
|
)
|
|
2,014,112
|
|
|
2,322,404
|
|
|
(273,638
|
)
|
|
2,048,766
|
|
Trade names and other
|
|
306,923
|
|
|
(78,792
|
)
|
|
228,131
|
|
|
307,234
|
|
|
(73,142
|
)
|
|
234,092
|
|
Total other intangible assets
|
|
$
|
3,312,503
|
|
|
$
|
(385,310
|
)
|
|
$
|
2,927,193
|
|
|
$
|
3,314,629
|
|
|
$
|
(346,780
|
)
|
|
$
|
2,967,849
|
|
Amortization expense for finite-lived intangible assets was
$40.2 million
and
$32.1 million
in the
three
months ended
December 31, 2016
and
2015
, respectively. Amortization expense for finite-lived intangible assets is estimated to be
$159.3 million
in fiscal
2017
,
$157.4 million
in fiscal
2018
,
$152.8 million
in fiscal
2019
,
$149.0 million
in fiscal
2020
,
$148.2 million
in fiscal
2021
, and
$1,515.7 million
thereafter.
Note 5. Debt
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31,
2016
|
|
September 30,
2016
|
Revolving credit note
|
|
$
|
—
|
|
|
$
|
—
|
|
Receivables securitization facility due 2019
|
|
500,000
|
|
|
500,000
|
|
Term loans due in 2020
|
|
647,257
|
|
|
697,055
|
|
Multi-currency revolving credit facility due 2021
|
|
—
|
|
|
—
|
|
Overdraft facility due 2021
|
|
8,615
|
|
|
11,275
|
|
$600,000, 1.15% senior notes due 2017
|
|
599,365
|
|
|
598,935
|
|
$400,000, 4.875% senior notes due 2019
|
|
397,850
|
|
|
397,669
|
|
$500,000, 3.50% senior notes due 2021
|
|
497,490
|
|
|
497,361
|
|
$500,000, 3.40% senior notes due 2024
|
|
496,399
|
|
|
496,276
|
|
$500,000, 3.25% senior notes due 2025
|
|
494,437
|
|
|
494,266
|
|
$500,000, 4.25% senior notes due 2045
|
|
493,920
|
|
|
493,866
|
|
Total debt
|
|
4,135,333
|
|
|
4,186,703
|
|
Less current portion
|
|
607,980
|
|
|
610,210
|
|
Total, net of current portion
|
|
$
|
3,527,353
|
|
|
$
|
3,576,493
|
|
The Company has a
$1.4 billion
multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which expires in
November 2021
, with a syndicate of lenders. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on the Company’s debt rating and ranges from
70 basis points
to
110 basis points
over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (
91 basis points
over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at
December 31, 2016
) 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
at
December 31, 2016
). The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which the Company was compliant as of
December 31, 2016
.
The Company has a commercial paper program whereby it may from time to time issue short-term promissory notes in an aggregate amount of up to
$1.4 billion
at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed
365 days
from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase the Company’s borrowing capacity as it is fully backed by the Company’s Multi-Currency Revolving Credit Facility. There were
no
borrowings outstanding under the commercial paper program as of
December 31, 2016
.
The Company has a
$1,450 million
receivables securitization facility (“Receivables Securitization Facility”), which expires in
November 2019
. The Company has available to it an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to
$250 million
, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based on
prevailing market rates for short-term commercial paper or LIBOR, plus a program fee.
The Company pays a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of
December 31, 2016
.
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 Animal Health ("MWI") business.
In February 2015, the Company entered into a
$1.0 billion
variable-rate term loan (“February 2015 Term Loan”), which matures in 2020. Through
December 31, 2016
, the Company elected to make principal payments, prior to the scheduled repayment dates, of
$725 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
at
December 31, 2016
) 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
December 31, 2016
.
In November 2015, the Company entered into a
$1.0 billion
variable-rate term loan (“November 2015 Term Loan”), which matures in 2020. Through
December 31, 2016
, the Company elected to make principal payments, prior to the scheduled repayment date, of
$600 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
at
December 31, 2016
) 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
December 31, 2016
.
Note 6. Stockholders’ Equity and Earnings per Share
In
November 2016
, the Company’s board of directors increased the quarterly cash dividend by
7%
from
$0.34
per share to
$0.365
per share.
In May 2016, the Company's board of directors authorized a share repurchase program that, together with availability remaining under the previously approved 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. During the three months ended
December 31, 2016
, the Company purchased
2.1 million
shares of its common stock (includes
0.5 million
shares of common stock received as part of the settlement of the September 2016 accelerated share repurchase transaction) 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 new share repurchase program allowing the Company to purchase up to
$1.0 billion
of its outstanding shares of common stock, subject to market conditions. During the three months ended December 31, 2016, the Company purchased
1.4 million
shares of its common stock for a total of
$111.1 million
. As of December 31, 2016, the Company had
$888.9 million
of availability remaining under the November 2016 share repurchase program.
Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented, plus the dilutive effect of stock options, restricted stock, restricted stock units, and Warrants.
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Weighted average common shares outstanding - basic
|
|
218,661
|
|
|
206,180
|
|
Dilutive effect of stock options, restricted stock, and restricted stock units
|
|
3,318
|
|
|
3,858
|
|
Dilutive effect of Warrants
|
|
—
|
|
|
16,680
|
|
Weighted average common shares outstanding - diluted
|
|
221,979
|
|
|
226,718
|
|
The potentially dilutive stock options, restricted stock, restricted stock units, and Warrants that were antidilutive for the
three
months ended
December 31, 2016
and 2015 were
5.3 million
and
1.5 million
, respectively.
Note 7. Related Party Transactions
Walgreens Boots Alliance, Inc. ("WBA") owns more than
10%
of the Company’s outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement, pursuant to which the Company distributes branded and generic pharmaceutical products to WBA, and an agreement that provides the Company the ability to access generics and related pharmaceutical products through a global sourcing arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Revenue from the various agreements and arrangements with WBA was
$11.2 billion
and
$11.0 billion
in the
three
months ended
December 31, 2016
and 2015, respectively. The Company’s receivable from WBA (after incentives owed to it) was
$4.6 billion
and
$4.0 billion
at
December 31, 2016
and
September 30, 2016
, respectively.
Note 8
. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, and government investigations, 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, 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 for that period or on the Company's financial condition.
Government Enforcement and Related Litigation Matters
The Company is 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 civil False Claims Act and various state and local civil False Claims Acts permit a private person, known as a "relator" or whistleblower, to file civil actions under these statutes on behalf of the federal, state, and local governments. Qui tam complaints are initially filed by the relator under seal (or on a confidential basis) 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 allegedly false claim submitted to the government for payment. Generally speaking, these cases take several years for the investigation to be completed and, ultimately, to be resolved (either through litigation or settlement) after the complaint is unsealed. In addition, some states have pursued investigations under state false claims statutes or consumer protection laws, either in conjunction with a government investigation or separately. There is often collateral litigation that arises from public disclosures of government investigations, including the filing of class action lawsuits by third party payors or by shareholders alleging violations of the securities laws.
The federal Food, Drug, and Cosmetic Act (“FDCA”) contains provisions relating to the sale and distribution of pharmaceutical products that are alleged to be adulterated or misbranded. The FDCA includes strict-liability criminal offenses that can be pursued by the government for violations of the FDCA and which can result in the imposition of substantial fines and penalties against corporations and individuals.
The Company has learned that there are filings in one or more federal district courts, including a qui tam complaint filed by one of its former employees, that are under seal and may involve allegations against the Company (and/or subsidiaries or businesses of the Company, including its group purchasing organization for oncologists and its oncology distribution business) relating to its distribution of certain pharmaceutical products to providers.
Subpoenas and Ongoing Investigations
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 health care industry, as well as to substantial settlements.
Since fiscal 2012, the Company and AmerisourceBergen Specialty Group ("ABSG") have been responding to subpoenas from the United States Attorney's Office for the Eastern District of New York ("USAO-EDNY") requesting production of documents and information relating to ABSG's oncology distribution center and former pharmacy in Dothan, Alabama (including the practices and procedures of the former pharmacy's pre-filled syringe program), its group purchasing organization for oncologists, and intercompany transfers of certain oncology products, which the Company believes could be related in whole or in part to one or more of the qui tam actions that remain under seal. The Company has produced documents and has engaged in ongoing dialogue with the USAO-EDNY. The USAO-EDNY has expressed an intention to pursue potential civil and criminal charges based upon the FDCA and the False Claims Act. The Company is engaged in discussions with the USAO-EDNY to attempt to reach a negotiated settlement. No conclusion can be drawn at this time as to any likely outcome in this matter.
In fiscal 2012, the Company's subsidiary AmerisourceBergen Drug Corporation ("ABDC") received a subpoena from the United States 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. The Company continues to engage in dialogue with the USAO-NJ, including discussions to attempt to reach a negotiated settlement.
Since fiscal 2013, the Company or ABDC has received subpoenas from the United States Attorney's Office for the District of Kansas and the United States Attorney's Office for the Northern District of Ohio in connection with grand jury proceedings requesting documents concerning ABDC's program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific and industrial purposes. As in the USAO-NJ matter described above, in addition to requesting information on ABDC's diversion control program generally, the subpoenas have also requested documents concerning specific customers' purchases of controlled substances. The Company has responded to the subpoenas and requests for information.
Since fiscal 2016, the Company’s subsidiary U.S. Bioservices (“US Bio”) has received requests for information from the United States Attorney’s Office for the Southern District of New York (“USAO-SDNY”), on behalf of itself and a number of states, relating to US Bio’s dispensing of one product and US Bio’s relationship with the manufacturer of the product. The Company is engaged in discussions with the USAO-SDNY and representatives on behalf of a number of states.
The Company cannot predict the outcome of these ongoing investigations, or the impact on the Company as a result of these matters, which 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.
State Proceedings
In June 2012, the Attorney General of the State of West Virginia ("West Virginia AG") filed complaints, which have been amended, in the Circuit Court of Boone County, West Virginia, against a number of pharmaceutical wholesale distributors, including the Company's subsidiary ABDC, alleging, among other claims, that the distributors failed to provide effective controls and procedures to guard against diversion of controlled substances for illegitimate purposes in West Virginia, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of uncontrolled substances in accordance with state regulations. The West Virginia AG was seeking monetary damages and injunctive and other equitable relief. On April 6, 2015, ABDC filed a motion to dismiss, which was subsequently denied on September 8, 2015. On October 23, 2015, ABDC, together with all other defendants, filed a writ of prohibition to the Supreme Court of Appeals of West Virginia. On October 30, 2015, ABDC filed an answer to the West Virginia AG's second amended complaint. The writ of prohibition filed on October 23, 2015 was denied on January 5, 2016. Trial was scheduled for January 2017. This matter was dismissed with prejudice on January 9, 2017 pursuant to a settlement agreement that provides for the payment of
$16.0 million
and express denial of the allegations in the complaints and any wrongdoing. During the three months ended December
31, 2016, the Company recognized the
$16.0 million
settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statement of Operations.
ABDC was sued by McDowell County, West Virginia on December 23, 2016, asserting substantially similar claims to the West Virginia AG action, including for negligence, violation of the West Virginia Controlled Substances Act, and unjust enrichment. ABDC filed a notice of removal of this matter on January 26, 2017 and a motion to dismiss all claims with prejudice will be filed on or before February 1, 2017. ABDC was sued by the City of Huntington, West Virginia on January 20, 2017, asserting similar claims to the West Virginia AG and McDowell County actions, including for negligence, violation of the West Virginia Controlled Substances Act, and unjust enrichment. Other West Virginia County Commissions have indicated their intent to sue. ABDC intends to vigorously defend itself against the pending and any threatened lawsuits. The Company is not in a position to assess the likely outcome or its exposure, if any, with respect to these matters.
Other Litigation
On September 10, 2014, PharMerica Corp., Pharmacy Corporation of America and Chem Rx Pharmacy Services, LLC (collectively, “PMC”), customers of ABDC until March 3, 2015, filed a complaint in Jefferson Circuit Court in Louisville, Kentucky against ABDC. The original complaint alleged that ABDC failed to pay in excess of
$8 million
in rebates pursuant to a prime vendor agreement between PMC and ABDC under which ABDC distributed pharmaceuticals and other products to PMC. PMC subsequently amended its complaint
three
times. PMC’s current complaint alleges unpaid-rebate claims in excess of
$33 million
and additional breaches and damages for unspecified amounts, which amounts may exceed
$100 million
.
ABDC answered all of the complaints, denied PMC’s allegations, and filed counterclaims alleging, among other things, that PMC failed to pay nearly
$50 million
in invoices from ABDC. On April 1, 2016, the Jefferson Circuit Court granted ABDC’s motion for partial summary judgment on
one
counterclaim and entered judgment in the amount of
$48.6 million
against PMC. The Court determined that its ruling will not be final and appealable until after the other issues in the case are resolved, so the
$48.6 million
judgment is not collectible at this time. Trial is currently scheduled for January 30, 2018. Fact discovery has ended, and the Company expects the parties to conclude expert discovery in early 2017. The Company is not in a position to assess the likely outcome or its exposure, if any, with respect to this matter.
Note 9. 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 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
three
months ended
December 31, 2016
and
2015
, the Company recognized gains of
$1.4 million
and
$12.8 million
, respectively, relating to the above-mentioned 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 10. Fair Value of Financial Instruments
The recorded amounts of the Company’s cash and cash equivalents, accounts receivable, and accounts payable at
December 31, 2016
and
September 30, 2016
approximate fair value based upon the relatively short-term nature of these financial instruments. Within cash and cash equivalents, the Company had
$15.0 million
and
$650.0 million
of investments in money market accounts as of
December 31, 2016
and
September 30, 2016
, respectively. The fair value of the money market accounts was determined based on unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.
The Company had
$118.7 million
of investment securities available-for-sale,
$72.7 million
of which were within cash and cash equivalents, at
December 31, 2016
. The amortized cost of the investments was
$118.7 million
at
December 31, 2016
. The Company had
$39.1 million
of investment securities available-for-sale,
$13.0 million
of which were within cash and cash equivalents, at
September 30, 2016
. The amortized cost of the investments was
$39.1 million
at
September 30, 2016
. The fair value of the investments was based on inputs other than quoted market prices, otherwise known as Level 2 inputs. The investments held as of
December 31, 2016
consisted of fixed-income securities with maturities ranging from January 2017 to July 2017.
The recorded amount of long-term debt (see Note 5) and the corresponding fair value as of
December 31, 2016
were
$3,527.4 million
and
$3,568.8 million
, respectively. The recorded amount of long-term debt and the corresponding fair value as of
September 30, 2016
were
$3,576.5 million
and
$3,750.9 million
, respectively. The fair value of long-term debt was determined based on Level 2 inputs, as defined above.
Note 11. 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 reportable segment and Other. The Pharmaceutical Distribution reportable segment consists of the ABDC and ABSG operating segments. Other consists of AmerisourceBergen Consulting Services ("ABCS"), World Courier, and the MWI operating segments.
The following tables illustrate reportable segment information for the
three
months ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Three months ended
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
Pharmaceutical Distribution
|
|
$
|
36,575,967
|
|
|
$
|
35,194,679
|
|
Other
|
|
1,663,654
|
|
|
1,577,815
|
|
Intersegment eliminations
|
|
(70,356
|
)
|
|
(63,448
|
)
|
Revenue
|
|
$
|
38,169,265
|
|
|
$
|
36,709,046
|
|
Intersegment eliminations primarily represent the elimination of certain ABCS sales to the Pharmaceutical Distribution reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
|
|
|
Three months ended
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
|
|
|
(As Revised)
|
Pharmaceutical Distribution
|
|
$
|
374,002
|
|
|
$
|
381,254
|
|
Other
|
|
112,206
|
|
|
95,565
|
|
Intersegment eliminations
|
|
(13
|
)
|
|
—
|
|
Total segment operating income
|
|
$
|
486,195
|
|
|
$
|
476,819
|
|
The following table reconciles total segment operating income to income (loss) from operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) From
Operations Before Income Taxes
|
|
|
Three months ended
December 31,
|
(in thousands)
|
|
2016
|
|
2015
|
|
|
|
|
(As Revised)
|
Total segment operating income
|
|
$
|
486,195
|
|
|
$
|
476,819
|
|
Gain from antitrust litigation settlements
|
|
1,395
|
|
|
12,791
|
|
LIFO expense
|
|
(28,308
|
)
|
|
(101,562
|
)
|
Acquisition-related intangibles amortization
|
|
(38,229
|
)
|
|
(31,210
|
)
|
Warrants expense
|
|
—
|
|
|
(467,375
|
)
|
Employee severance, litigation, and other
|
|
(21,066
|
)
|
|
(18,868
|
)
|
Pension settlement
|
|
—
|
|
|
(48,731
|
)
|
Operating income (loss)
|
|
399,987
|
|
|
(178,136
|
)
|
Other income
|
|
(123
|
)
|
|
(310
|
)
|
Interest expense, net
|
|
36,972
|
|
|
33,741
|
|
Income (loss) before income taxes
|
|
$
|
363,138
|
|
|
$
|
(211,567
|
)
|
Segment operating income is evaluated by the chief operating decision maker of the Company before gain from antitrust litigation settlements; LIFO expense; acquisition-related intangibles amortization; Warrants expense; employee severance,
litigation, and other; pension settlement; other income; and interest expense, net. All corporate office expenses are allocated to each operating segment.