AMERISOURCEBERGEN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

Overview

The following discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto contained herein.
We are one of the largest global pharmaceutical sourcing and distribution
services companies, helping both healthcare providers and pharmaceutical and
biotech manufacturers improve patient access to products and enhance patient
care. We deliver innovative programs and services designed to increase the
effectiveness and efficiency of the pharmaceutical supply chain in both human
and animal health. We are organized based upon the products and services we
provide to our customers. Our operations are comprised of the Pharmaceutical
Distribution Services reportable segment and other operating segments that are
not significant enough to require separate reportable segment disclosure and,
therefore, have been included in Other for the purpose of our reportable segment
presentation.
Pharmaceutical Distribution Services Segment
The Pharmaceutical Distribution Services reportable segment distributes a
comprehensive offering of brand-name, specialty brand-name and generic
pharmaceuticals, over-the-counter healthcare products, home healthcare supplies
and equipment, outsourced compounded sterile preparations, and related services
to a wide variety of healthcare providers, including acute care hospitals and
health systems, independent and chain retail pharmacies, mail order pharmacies,
medical clinics, long-term care and alternate site pharmacies, and other
customers. Through a number of operating businesses, the Pharmaceutical
Distribution Services reportable segment provides pharmaceutical distribution
(including plasma and other blood products, injectible pharmaceuticals,
vaccines, and other specialty pharmaceutical products) and additional services
to physicians who specialize in a variety of disease states, especially
oncology, and to other healthcare providers, including hospitals and dialysis
clinics. Additionally, the Pharmaceutical Distribution Services reportable
segment provides data analytics, outcomes research, and additional services for
biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution
Services reportable segment also provides pharmacy management, staffing and
additional consulting services, and supply management software to a variety of
retail and institutional healthcare providers. Additionally, it delivers
packaging solutions to institutional and retail healthcare providers.
Other
Other consists of operating segments that focus on global commercialization
services and animal health (MWI Animal Health). The operating segments that
focus on global commercialization services include ABCS and World Courier.
MWI is a leading animal health distribution company in the United States and in
the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides,
diagnostics, micro feed ingredients, and various other products to customers in
both the companion animal and production animal markets. Additionally, MWI
offers demand-creating sales force services to manufacturers. ABCS, through a
number of operating businesses, provides a full suite of integrated manufacturer
services that range from clinical trial support to product post-approval and
commercialization support. World Courier, which operates in over 50 countries,
is a leading global specialty transportation and logistics provider for the
biopharmaceutical industry.







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Executive Summary
This executive summary provides highlights from the results of operations that
follow:
•         Revenue increased 6.9% from the prior fiscal year primarily due to the
          revenue growth of our Pharmaceutical Distribution Services segment;


•         Pharmaceutical Distribution Services' gross profit increased 6.2% from

the prior fiscal year primarily due to the increase in revenue largely

due to strong specialty product sales, the January 2018 consolidation

          of Profarma, and the January 2018 acquisition of H.D. Smith and was
          negatively impacted by our pharmaceutical compounding operations as
          production at our Memphis facility has been suspended since December
          2017. Gross profit in Other increased 4.3% from the prior fiscal year
          primarily due to growth at World Courier and MWI, the January 2018
          consolidation of the specialty joint venture in Brazil, and ABCS's
          growth in its Canadian operations. Total gross profit in the current

fiscal year was favorably impacted primarily by increases in gains from

          antitrust litigation settlements, a last-in, first-out ("LIFO") credit
          in the current year in comparison to a LIFO expense in the prior year,
          and the reversal of a previously-estimated assessment related to the
          New York State Opioid Stewardship Act;

• Distribution, selling, and administrative expenses increased 8.3% from

the prior fiscal year as the Pharmaceutical Distribution Services'

          segment expenses increased by 10.2% from the prior fiscal year
          primarily due to an increase in costs to support the increase in
          revenue, the January 2018 consolidation of Profarma, and the January
          2018 acquisition of H.D. Smith;

• Operating income decreased 23.0% in the current fiscal year primarily

          due to a $570.0 million impairment of PharMEDium's long-lived assets
          (see Note 1 of the Notes to Consolidated Financial Statements), and an

increase in employee severance, litigation, and other costs, offset in

          part by increases in gains from antitrust litigation settlements, a
          LIFO credit in the current fiscal year, and an increase in total
          operating segment income;

• Our effective tax rates were 11.7% and (37.2)% in the fiscal years

ended September 30, 2019 and 2018, respectively. Our effective tax rate

in the fiscal year ended September 30, 2019 was primarily impacted by

the $570.0 million impairment of long-lived assets (see Note 1 of the

Notes to Consolidated Financial Statements) and legal settlements,

          which changed the mix of domestic and international income. The
          effective tax rate in the fiscal year ended September 30, 2019 was also
          impacted by a $37.0 million decrease to the Company's transition tax
          related to the Tax Cuts and Jobs Act (the "2017 Tax Act"). Our
          effective tax rate in the fiscal year ended September 30, 2018 was

primarily impacted by the effect of 2017 Tax Act. Our total income tax

benefit in the fiscal year ended September 30, 2018 of $438.5 million

reflects $612.6 million of tax benefits recognized and a reduction in

          the U.S. federal income tax rate from 35% to 21%, both resulting from
          the 2017 Tax Act. Additionally, during the fourth quarter of fiscal
          2018, a portion of a 2017 legal settlement charge was determined to be
          deductible, which favorably impacted our effective tax rate for the
          fiscal year ended September 30, 2018. Our effective tax rates for the

fiscal years ended September 30, 2019 and 2018 were favorably impacted

by the Company's international businesses in Switzerland and Ireland,

          which have lower income tax rates, and the benefit from stock option
          exercises and restricted stock vesting; and


•         Net income and earnings per share were significantly lower in the

current fiscal year primarily due to the $570.0 million impairment of

long-lived assets and the significant income tax benefit recognized in

          the prior fiscal year as a result of the 2017 Tax Act.



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Results of Operations
Year ended September 30, 2019 compared to the Year ended September 30, 2018
Revenue
                                               Fiscal Year Ended
                                                 September 30,
(dollars in thousands)                      2019              2018         Change
Pharmaceutical Distribution Services   $ 172,813,537     $ 161,699,343      6.9%
Other:
MWI Animal Health                          3,975,232         3,789,759      

4.9%

Global Commercialization Services          2,893,109         2,542,971     13.8%
Total Other                                6,868,341         6,332,730      8.5%
Intersegment eliminations                    (92,757 )         (92,438 )
Revenue                                $ 179,589,121     $ 167,939,635      6.9%


We currently expect our revenue growth percentage to be in the mid to
high-single digits in fiscal 2020. Our future revenue growth will continue to be
affected by various factors, such as industry growth trends, including drug
utilization, the introduction of new, innovative brand therapies (including
biosimilars), the likely increase in the number of generic drugs that will be
available over the next few years as a result of the expiration of certain drug
patents held by brand-name pharmaceutical manufacturers and the rate of
conversion from brand products to those generic drugs, price inflation and price
deflation, general economic conditions in the United States, competition within
the industry, customer consolidation, changes in pharmaceutical manufacturer
pricing and distribution policies and practices, increased downward pressure on
government and other third-party reimbursement rates to our customers, and
changes in federal government rules and regulations.
Revenue increased by 6.9% from the prior fiscal year primarily due to the
revenue growth of our Pharmaceutical Distribution Services segment.
The Pharmaceutical Distribution Services segment grew its revenue by 6.9% from
the prior fiscal year, primarily due to the growth of some of its largest
customers, continued strong specialty product sales, and overall market growth.
In addition, revenue increased in the current fiscal year due to the January
2018 consolidation of Profarma and the January 2018 acquisition of H.D. Smith.
Revenue in Other increased 8.5% from the prior fiscal year, primarily due to
ABCS's growth in its Canadian operations, growth at MWI, growth at World
Courier, and the January 2018 consolidation of the specialty joint venture in
Brazil.
A number of our contracts with customers, including group purchasing
organizations, are typically subject to expiration each year. We may lose a
significant customer if an existing contract with such customer expires without
being extended, renewed, or replaced. During the fiscal year ended September 30,
2019, no significant contracts expired. Over the next twelve months, there are
no significant contracts scheduled to expire. Additionally, from time to time,
significant contracts may be terminated in accordance with their terms or
extended, renewed, or replaced prior to their expiration dates. If those
contracts are extended, renewed, or replaced at less favorable terms, they may
also negatively impact our revenue, results of operations, and cash flows.
Gross Profit
                                                   Fiscal Year Ended
                                                     September 30,
(dollars in thousands)                           2019            2018        Change

Pharmaceutical Distribution Services $ 3,682,986 $ 3,466,956

6.2%

Other                                          1,314,172       1,260,485    

4.3%

Intersegment eliminations                           (659 )          (609 )

Gain from antitrust litigation settlements 145,872 35,938 LIFO credit (expense)

                             22,544         (67,324 )
PharMEDium remediation costs                     (48,603 )       (61,129 )
New York State Opioid Stewardship Act             22,000         (22,000 )
Gross profit                                 $ 5,138,312     $ 4,612,317

11.4%

Gross profit increased 11.4%, or $526.0 million, from the prior fiscal year.
Gross profit in the current fiscal year was favorably impacted primarily by the
increase in gross profit in Pharmaceutical Distribution Services, the increase
in gross profit

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in Other, an increase in gains from antitrust litigation settlements, the LIFO
credit in the current year in comparison to a LIFO expense in the prior year,
and the reversal of a previously-estimated assessment related to the New York
State Opioid Stewardship Act.
Our cost of goods sold includes a LIFO provision that is affected by
manufacturer pricing practices, which may be impacted by market and other
external influences, changes in inventory quantities, and product mix, many of
which are difficult to predict. Changes to any of the above factors may have a
material impact to our annual LIFO provision. The LIFO credit in the current
fiscal year was primarily driven by lower brand inflation, offset in part by
lower generic deflation in comparison to the prior fiscal year.

After FDA inspections of our compounding facilities, we voluntarily suspended
production activities in December 2017 at our largest compounding facility
located in Memphis pending execution of certain remedial measures (see Notes 1
and 13 of the Notes to Consolidated Financial Statements). We continue to incur
remediation costs in connection with our compounding operations. Additionally,
in April 2019, we ceased production at our compounding facility in Cleveland,
Mississippi.

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 required manufacturers, distributors, and
importers licensed in NYS to ratably source the Fund. The ratable share of the
assessment for each licensee was to be based upon opioids sold or distributed to
or within NYS. In September 2018, we accrued $22.0 million as an estimate of our
liability under the OSA for the period from January 1, 2017 through September
30, 2018. In December 2018, the OSA was ruled unconstitutional by the U.S.
District Court for the Southern District of New York, and, as a result, we
reversed the $22.0 million accrual in the quarter ended December 31, 2018. NYS
filed an appeal of the court decision on January 17, 2019; however, we do not
believe a loss contingency is probable.
Pharmaceutical Distribution Services gross profit increased 6.2%, or $216.0
million, from the prior fiscal year primarily due to the increase in revenue
largely due to strong specialty product sales, the January 2018 consolidation of
Profarma, and the January 2018 acquisition of H.D. Smith and was negatively
impacted by our pharmaceutical compounding operations as production at our
Memphis facility has been suspended since December 2017. As a percentage of
revenue, Pharmaceutical Distribution Services gross profit margin of 2.13% in
the current fiscal year remained relatively flat compared to the prior fiscal
year.
Gross profit in Other increased 4.3%, or $53.7 million, from the prior fiscal
year primarily due to growth at World Courier and MWI, the January 2018
consolidation of the specialty joint venture in Brazil, and ABCS's growth in its
Canadian operations. As a percentage of revenue, gross profit margin in Other of
19.13% in the current fiscal year decreased from 19.90% in the prior fiscal
year.
We recognized gains from antitrust litigation settlements with pharmaceutical
manufacturers of $145.9 million and $35.9 million during the fiscal years ended
September 30, 2019 and 2018, respectively. The gains were recorded as reductions
to cost of goods sold (see Note 14 of the Notes to Consolidated Financial
Statements).
Operating Expenses
                                                 Fiscal Year Ended
                                                   September 30,
(dollars in thousands)                          2019           2018       Change

Distribution, selling, and administrative $ 2,663,508 $ 2,460,301 8.3% Depreciation and amortization

                   462,407        465,127    

(0.6)%

Employee severance, litigation, and other 330,474 183,520 Goodwill impairment

                                   -         59,684
Impairment of long-lived assets                 570,000              -
Total operating expenses                    $ 4,026,389    $ 3,168,632

27.1%

Distribution, selling, and administrative expenses increased 8.3%, or $203.2
million, from the prior fiscal year. As a percentage of revenue, distribution,
selling, and administrative expenses were 1.48% in the current fiscal year, and
represents a 2 basis point increase compared to the prior fiscal year.
Pharmaceutical Distribution Services' segment expenses increased by 10.2% from
the prior fiscal year primarily due to an increase in costs to support revenue
growth, the January 2018 consolidation of Profarma, and the January 2018
acquisition of H.D. Smith. Distribution, selling, and administrative expenses in
Other increased by 2.7% in the current fiscal year due to an increase in costs
to support revenue growth at MWI, and the January 2018 consolidation of the
specialty joint venture in Brazil, offset in part by a reduction in
distribution, selling, and administrative expenses at ABCS.

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Depreciation expense increased 3.9% from the prior fiscal year primarily due to
the January 2018 acquisition of H.D. Smith and the January 2018 consolidation of
Profarma. Amortization expense decreased 7.6% from the prior fiscal year
primarily due to the impairment of PharMEDium intangible assets recorded in
March 2019, offset in part by the amortization of intangible assets originating
from our January 2018 acquisition of H.D. Smith and the January 2018
consolidation of Profarma.
Employee severance, litigation, and other in the fiscal year ended September 30,
2019 included $34.1 million of severance costs primarily related to PharMEDium
restructuring activities, position eliminations resulting from our business
transformation efforts and the integration of H.D. Smith, and restructuring
activities related to our consulting business, $185.1 million of litigation
costs that consisted of legal settlements totaling $116.7 million and legal fees
in connection with opioid lawsuits and investigations, $55.4 million related to
our business transformation efforts, $43.2 million of acquisition-related deal
and integration costs (primarily related to the integration of H.D. Smith), and
$12.6 million of other restructuring initiatives.
Employee severance, litigation, and other in the fiscal year ended September 30,
2018 included $36.7 million of severance costs primarily related to position
eliminations resulting from our business transformation efforts and
restructuring activities related to our consulting business, $61.5 million of
litigation costs primarily related to legal fees in connection with opioid
lawsuits and investigations, and related initiatives, $33.9 million of
acquisition-related deal and integration costs (primarily related to H.D.
Smith), $33.0 million related to our business transformation efforts, and $18.4
million of other restructuring initiatives.
We recorded a $570.0 million impairment of PharMEDium's long-lived assets in the
fiscal year ended September 30, 2019 (see Note 1 of the Notes to Consolidated
Financial Statements).
We recorded a $59.7 million goodwill impairment charge at our Profarma reporting
unit in the fiscal year September 30, 2018 in connection with our annual
goodwill impairment assessment.
Operating Income
                                                     Fiscal Year Ended
                                                       September 30,
(dollars in thousands)                             2019            2018        Change
Pharmaceutical Distribution Services           $ 1,671,251     $ 1,626,748      2.7%
Other                                              380,660         355,091      7.2%
Intersegment eliminations                             (659 )          (609 )
Total segment operating income                   2,051,252       1,981,230  

3.5%

Gain from antitrust litigation settlements 145,872 35,938 LIFO credit (expense)

                               22,544         (67,324 )
PharMEDium remediation costs                       (69,423 )       (66,204 )
New York State Opioid Stewardship Act               22,000         (22,000 )
Acquisition-related intangibles amortization      (159,848 )      (174,751 )
Employee severance, litigation, and other         (330,474 )      (183,520 )
Goodwill impairment                                      -         (59,684 )
Impairment of long-lived assets                   (570,000 )             -
Operating income                               $ 1,111,923     $ 1,443,685

(23.0)%

Segment operating income is evaluated excluding gain from antitrust litigation
settlements; LIFO credit (expense); PharMEDium remediation costs; New York State
Opioid Stewardship Act; acquisition-related intangibles amortization; employee
severance, litigation, and other; goodwill impairment; and impairment of
long-lived assets.
Pharmaceutical Distribution Services operating income increased 2.7%, or $44.5
million, from the prior fiscal year primarily due to the increase in gross
profit, offset in part by an increase in operating expenses. As a percentage of
revenue, Pharmaceutical Distribution Services operating income margin decreased
4 basis points from the prior fiscal year primarily due to a lower contribution
from our pharmaceutical compounding operations.
Operating income in Other increased 7.2%, or $25.6 million, from the prior
fiscal year primarily due to the increase in gross profit, offset in part by an
increase in operating expenses.
We recorded a $13.7 million gain on the sale of an equity investment in Other
(Income) Loss in the fiscal year ended September 30, 2019.

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We recorded a $30.0 million impairment on a non-customer note receivable related
to a start-up venture in Other (Income ) Loss in the fiscal year ended September
30, 2018.
Interest expense, net and the respective weighted average interest rates were as
follows:
                                         Fiscal Year Ended September 30,
                                      2019                             2018
                                       Weighted Average                 Weighted Average
(dollars in thousands)     Amount       Interest Rate       Amount       Interest Rate
Interest expense         $ 195,474          3.73%         $ 189,640          3.59%
Interest income            (37,705 )        1.87%           (14,941 )        1.18%
Interest expense, net    $ 157,769                        $ 174,699


Interest expense, net decreased 9.7%, or $16.9 million, from the prior fiscal
year. The decrease in interest expense, net from the prior fiscal year was due
to an increase in interest income due to a $752 million increase in our average
invested cash balance during the current fiscal year and an increase in
investment interest rates, offset in part by an increase in interest expense due
to the December 2017 issuance of senior notes to finance our January 2018
acquisition of H.D. Smith and the January 2018 consolidation of Profarma's debt
and related interest expense.
Our interest expense in future periods may vary significantly depending upon
changes in net borrowings, interest rates, amendments to our current borrowing
facilities, and strategic decisions to deploy our invested cash.
For the fiscal year ended September 30, 2018, we recorded a $42.3 million loss
in connection with the January 2018 consolidations of Profarma and the specialty
joint venture in Brazil and a $23.8 million loss on the early retirement of our
$400 million of 4.875% senior notes that were due in 2019. The loss on the early
retirement of the debt included a $22.3 million prepayment premium and $1.5
million of an unamortized debt discount and unamortized debt issuance costs.
Our effective tax rates were 11.7% and (37.2)% in the fiscal years ended
September 30, 2019 and 2018, respectively. Our effective tax rate in the fiscal
year ended September 30, 2019 was primarily impacted by the $570.0 million
impairment of long-lived assets (see Note 1 of the Notes to Consolidated
Financial Statements) and legal settlements, which changed the mix of domestic
and international income. The effective tax rate in the fiscal year ended
September 30, 2019 was also impacted by a $37.0 million decrease to the
Company's transition tax related to the 2017 Tax Act. Our effective tax rate in
the fiscal year ended September 30, 2018 was primarily impacted by the effect of
2017 Tax Act. Our total income tax benefit in the fiscal year ended September
30, 2018 of $438.5 million reflects $612.6 million of tax benefits recognized
and a reduction in the U.S. federal income tax rate from 35% to 21%, both
resulting from the 2017 Tax Act. Additionally, during the fourth quarter of
fiscal 2018, a portion of a 2017 legal settlement charge was determined to be
deductible, which favorably impacted our effective tax rate for the fiscal year
ended September 30, 2018. Our effective tax rates for the fiscal years ended
September 30, 2019 and 2018 were also favorably impacted by the Company's
international businesses in Switzerland and Ireland, which have lower income tax
rates, and the benefit from stock option exercises and restricted stock vesting.
Net income and earnings per share were significantly lower in the current fiscal
year primarily due to the $570.0 million impairment of long-lived assets and the
significant income tax benefit recognized in the prior fiscal year as a result
of the 2017 Tax Act.
Year ended September 30, 2018 compared to the Year ended September 30, 2017
Revenue
                                               Fiscal Year Ended
                                                 September 30,
(dollars in thousands)                      2018              2017         Change
Pharmaceutical Distribution Services   $ 161,699,343     $ 147,453,495      9.7%
Other:
MWI Animal Health                          3,789,759         3,636,305      

4.2%

Global Commercialization Services          2,542,971         2,111,558     20.4%
Total Other                                6,332,730         5,747,863     10.2%
Intersegment eliminations                    (92,438 )         (57,532 )
Revenue                                $ 167,939,635     $ 153,143,826      9.7%



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Revenue increased by 9.7% from the prior fiscal year primary due to the revenue
growth of our Pharmaceutical Distribution Services segment.
The Pharmaceutical Distribution Services segment grew its revenue by 9.7% from
the prior fiscal year primarily due to the growth of some of its largest
customers, overall market growth, and especially strong oncology product sales.
In addition, revenue increased in the prior fiscal year due to the January 2018
acquisition of H.D. Smith and the January 2018 consolidation of Profarma.
Revenue in Other increased 10.2% from the prior fiscal year, primarily due to
the January 2018 consolidation of the specialty joint venture in Brazil, ABCS's
growth in its Canadian operations, and increased revenue from MWI and World
Courier, offset in part by a decrease in revenue at ABCS's Lash consulting
group.
Gross Profit
                                                   Fiscal Year Ended
                                                     September 30,
(dollars in thousands)                           2018            2017        Change

Pharmaceutical Distribution Services $ 3,466,956 $ 3,182,836

8.9%

Other                                          1,260,485       1,204,545    

4.6%

Intersegment eliminations                           (609 )          (556 )
Gain from antitrust litigation settlements        35,938           1,395
LIFO (expense) credit                            (67,324 )       157,782
PharMEDium remediation costs                     (61,129 )             -
New York State Opioid Stewardship Act            (22,000 )             -
Gross profit                                 $ 4,612,317     $ 4,546,002

1.5%

Gross profit increased 1.5%, or $66.3 million, from the prior fiscal year. Gross
profit in the fiscal year ended September 30, 2018 was favorably impacted by
increases in gross profit in Pharmaceutical Distribution Services and Other and
an increase in gains from antitrust litigation settlements. Gross profit was
negatively impacted by an increase in LIFO expense in comparison to the prior
fiscal year, PharMEDium remediation costs, and an estimated assessment related
to the New York State Opioid Stewardship Act.
Pharmaceutical Distribution Services gross profit increased 8.9%, or $284.1
million, from the prior fiscal year primarily due to the increase in revenue,
the January 2018 consolidation of Profarma, and the January 2018 acquisition of
H.D. Smith, offset in part by a lower contribution from our pharmaceutical
compounding operations as it shipped fewer units as we voluntarily suspended
production in December 2017 at our Memphis facility. As a percentage of revenue,
Pharmaceutical Distribution Services gross profit margin of 2.14% in the fiscal
year ended September 30, 2018 decreased 2 basis points from the prior fiscal
year. The decrease in gross profit margin from the prior fiscal year was
primarily due to a lower contribution from our pharmaceutical compounding
operations and due to increased sales to our larger customers, which typically
have lower gross profit margins, offset in part by the January 2018
consolidation of Profarma and the January 2018 acquisition of H.D. Smith.
Gross profit in Other increased 4.6%, or $55.9 million, from the prior fiscal
year primarily due to World Courier and the January 2018 consolidation of the
specialty joint venture in Brazil, offset in part by lower gross profit at ABCS,
specifically the Lash consulting group. As a percentage of revenue, gross profit
margin in Other of 19.90% in the fiscal year ended September 30, 2018 decreased
from 20.96% in the prior fiscal year. The decline in gross profit margin from
the prior fiscal year was primarily due to the decrease in gross profit margin
at ABCS, specifically the Lash consulting group.
We recognized gains from antitrust litigation settlements with pharmaceutical
manufacturers of $35.9 million and $1.4 million during the fiscal years ended
September 30, 2018 and 2017, respectively. The gains were recorded as reductions
to cost of goods sold (see Note 14 of the Notes to Consolidated Financial
Statements).

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Operating Expenses
                                                 Fiscal Year Ended
                                                   September 30,
(dollars in thousands)                          2018           2017       Change

Distribution, selling, and administrative $ 2,460,301 $ 2,128,730 15.6% Depreciation and amortization

                   465,127        397,603    

17.0%

Employee severance, litigation, and other       183,520        959,327
Goodwill impairment                              59,684              -
Total operating expenses                    $ 3,168,632    $ 3,485,660    (9.1)%


Distribution, selling, and administrative expenses decreased 15.6%, or $331.6
million, from the prior fiscal year as the Pharmaceutical Distribution Services'
segment expenses increased by 19.4% from the prior fiscal year primarily due to
the January 2018 consolidation of Profarma, the January 2018 acquisition of H.D.
Smith, and the duplicate costs resulting from the implementation of new
information technology systems. Distribution, selling, and administrative
expenses in Other increased by 8.2% in the fiscal year ended September 30, 2018
primarily to support its revenue growth, the January 2018 consolidation of the
specialty joint venture in Brazil, and due to duplicate costs resulting from the
implementation of new information technology systems. As a percentage of
revenue, distribution, selling, and administrative expenses were 1.46% in the
fiscal year ended September 30, 2018, and represents a 7 basis point increase
compared to the prior fiscal year. The increase in expense as a percentage of
revenue in comparison to the prior fiscal year was primarily due to the January
2018 consolidation of Profarma and the specialty joint venture in Brazil.
Depreciation expense increased 19.8% from the prior fiscal year due to an
increase in the amount of property and equipment placed into service relating to
our distribution infrastructure and various technology assets. Amortization
expense increased 12.9% from the prior fiscal year primarily due to the
amortization of intangible assets originating from our January 2018 acquisition
of H.D. Smith and the January 2018 consolidation of Profarma.
Employee severance, litigation, and other in the fiscal year ended September 30,
2018 included $36.7 million of severance costs primarily related to position
eliminations resulting from our business transformation efforts and
restructuring activities related to our consulting business, $61.5 million of
litigation costs primarily related to legal fees in connection with opioid
lawsuits and investigations, and related initiatives, $33.9 million of
acquisition-related deal and integration costs (primarily related to H.D.
Smith), $33.0 million related to our business transformation efforts, and $18.4
million of other restructuring initiatives.
Employee severance, litigation, and other in the fiscal year ended September 30,
2017 included $7.8 million of employee severance costs primarily related to
position eliminations as we began to reorganize to further align our
organization to our customers' needs, $917.6 million of litigation costs
primarily related to litigation settlements and accruals, $17.0 million of
acquisition-related deal and integration costs, $13.3 million of other
restructuring initiatives, and $3.7 million related to our business
transformation efforts.
Operating Income
                                                     Fiscal Year Ended
                                                       September 30,
(dollars in thousands)                             2018            2017        Change
Pharmaceutical Distribution Services           $ 1,626,748     $ 1,643,629     (1.0)%
Other                                              355,091         373,797     (5.0)%
Intersegment eliminations                             (609 )          (556 )
Total segment operating income                   1,981,230       2,016,870  

(1.8)%

Gain from antitrust litigation settlements          35,938           1,395
LIFO (expense) credit                              (67,324 )       157,782
PharMEDium remediation costs                       (66,204 )             -
New York State Opioid Stewardship Act              (22,000 )             -
Acquisition-related intangibles amortization      (174,751 )      (156,378 )
Employee severance, litigation, and other         (183,520 )      (959,327 )
Goodwill impairment                                (59,684 )             -
Operating income                               $ 1,443,685     $ 1,060,342     36.2%



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Segment operating income is evaluated excluding gain from antitrust litigation
settlements; LIFO (expense) credit; PharMEDium remediation costs; New York State
Opioid Stewardship Act; acquisition-related intangibles amortization; employee
severance, litigation, and other; and goodwill impairment.
Pharmaceutical Distribution Services operating income decreased 1.0%, or $16.9
million, from the prior fiscal year primarily due to an increase in operating
expenses, offset in part by an increase in gross profit. As a percentage of
revenue, Pharmaceutical Distribution Services operating income margin decreased
10 basis points from the prior fiscal year primarily due to a lower contribution
from our pharmaceutical compounding operations as it shipped fewer units as we
voluntarily suspended production in December 2017 at our Memphis facility.
Operating income in Other decreased 5.0%, or $18.7 million, from the prior
fiscal year primarily due to a decrease in operating income at ABCS,
specifically the Lash consulting group, offset in part by the operating income
increase at World Courier.
We recorded a $59.7 million goodwill impairment charge at our Profarma reporting
unit in connection with our annual goodwill impairment assessment.
We recorded a $30.0 million impairment on a non-customer note receivable related
to a start-up venture in Other (Income) Loss in the fiscal year ended September
30, 2018.
Interest expense, net and the respective weighted average interest rates were as
follows:
                                         Fiscal Year Ended September 30,
                                      2018                             2017
                                       Weighted Average                 Weighted Average
(dollars in thousands)     Amount       Interest Rate       Amount       Interest Rate
Interest expense         $ 189,640          3.59%         $ 149,042          2.99%
Interest income            (14,941 )        1.18%            (3,857 )        0.52%
Interest expense, net    $ 174,699                        $ 145,185


Interest expense, net increased 20.3%, or $29.5 million, from the prior fiscal
year. The increase in interest expense, net from the prior fiscal year was
primarily due to the December 2017 issuance of senior notes to finance our
January 2018 acquisition of H.D. Smith and the January 2018 consolidation of
Profarma's debt and related interest expense. Average borrowings increased by
$519.8 million in the current fiscal year in comparison to the prior fiscal
year.
In connection with our incremental Brazil investments, we adjusted the carrying
values of our previously held equity interests in Profarma and the specialty
joint venture to equal their fair values. The adjustments resulted in a loss of
$42.3 million, which was 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 interest, and an $8.8 million
loss on the remeasurement of the specialty joint venture's previously held
equity interest (see Note 2 of the Notes to Consolidated Financial Statements).
For the fiscal year ended September 30, 2018, we recorded a $23.8 million loss
on the early retirement of our $400 million of 4.875% senior notes that were due
in 2019 (see Note 6 of the Notes to Consolidated Financial Statements). The loss
on the early retirement of the debt included a $22.3 million prepayment premium
and $1.5 million of an unamortized debt discount and unamortized debt issuance
costs.
Our effective tax rates were (37.2)% and 60.3% in the fiscal years ended
September 30, 2018 and 2017, respectively. Our effective tax rate in the fiscal
year ended September 30, 2018 was primarily impacted by the effect of the 2017
Tax Act. Our total income tax benefit in the fiscal year ended September 30,
2018 of $438.5 million reflects $612.6 million of tax benefits recognized and a
reduction in the U.S. federal income tax rate from 35% to 21%, both resulting
from the 2017 Tax Act. Additionally, during the fourth quarter of fiscal 2018, a
portion of a 2017 legal settlement charge was determined to be deductible, which
favorably impacted our effective tax rate for the fiscal year ended September
30, 2018. The effective tax rate for the fiscal year ended September 30, 2017
was negatively impacted by non-deductible legal settlement charges. Our
effective tax rates for the fiscal years ended September 30, 2018 and 2017 were
favorably impacted by our international businesses in Switzerland and Ireland,
which have lower income tax rates, and the benefit from stock option exercises
and restricted stock vesting.
Net income attributable to AmerisourceBergen Corporation was significantly
higher in the fiscal year ended September 30, 2018 primarily due to the 2017 Tax
Act and legal settlement charges that were incurred in the prior fiscal year.

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Critical Accounting Policies and Estimates
Critical accounting policies are those policies that involve accounting
estimates and assumptions that can have a material impact on our financial
position and results of operations and require the use of complex and subjective
estimates based upon past experience and management's judgment. Actual results
may differ from these estimates due to uncertainties inherent in such estimates.
Below are those policies applied in preparing our financial statements that
management believes are the most dependent upon the application of estimates and
assumptions. For a complete list of significant accounting policies, see Note 1
of the Notes to Consolidated Financial Statements.
Allowances for Returns and Doubtful Accounts
Trade receivables are primarily comprised of amounts owed to us for our
pharmaceutical distribution and services activities and are presented net of an
allowance for customer sales returns and an allowance for doubtful accounts. Our
customer sales return policy generally allows customers to return products only
if the products can be resold at full value or returned to suppliers for full
credit. We record an accrual for estimated customer sales returns at the time of
sale to the customer based upon historical customer return trends. The allowance
for returns as of September 30, 2019 and 2018 was $1,147.5 million and $988.8
million, respectively.
In determining the appropriate allowance for doubtful accounts, we consider a
combination of factors, such as the aging of trade receivables, industry trends,
and our customers' financial strength, credit standing, and payment and default
history. Changes in the aforementioned factors, among others, may lead to
adjustments in our allowance for doubtful accounts. The calculation of the
required allowance requires judgment by our management as to the impact of these
and other factors on the ultimate realization of our trade receivables. Each of
our business units performs ongoing credit evaluations of its customers'
financial condition and maintains reserves for probable bad debt losses based
upon historical experience and for specific credit problems when they arise. We
write off balances against the reserves when collectability is deemed remote.
Each business unit performs formal, documented reviews of the allowance at least
quarterly, and our largest business units perform such reviews monthly. There
were no significant changes to this process during the fiscal years ended
September 30, 2019, 2018, and 2017, and bad debt expense was computed in a
consistent manner during these periods. The bad debt expense for any period
presented is equal to the changes in the period end allowance for doubtful
accounts, net of write-offs, recoveries, and other adjustments.
Bad debt expense for the fiscal years ended September 30, 2019, 2018, and 2017
was $25.2 million, $16.7 million, and $8.9 million, respectively. An increase or
decrease of 0.1% in the 2019 allowance as a percentage of trade receivables
would result in an increase or decrease in the provision on accounts receivable
of approximately $12.5 million. The allowance for doubtful accounts was $76.4
million and $61.1 million as of September 30, 2019 and 2018, respectively.
Schedule II of this Form 10-K sets forth a rollforward of allowances for returns
and doubtful accounts.
Business Combinations
The assets acquired and liabilities assumed upon the acquisition or
consolidation of a business are recorded at fair value, with the residual of the
purchase price allocated to goodwill. We engage third-party appraisal firms to
assist management in determining the fair values of certain assets acquired and
liabilities assumed. Such valuations require management to make significant
judgments, estimates, and assumptions, especially with respect to intangible
assets. Management makes estimates of fair value based upon assumptions it
believes to be reasonable. These estimates are based upon historical experience
and information obtained from the management of the acquired companies and are
inherently uncertain. Critical estimates in valuing certain of the intangible
assets include, but are not limited to: discount rates and expected future cash
flows from and economic lives of customer relationships, trade names, existing
technology, and other intangible assets. Unanticipated events and circumstances
may occur, which may affect the accuracy or validity of such assumptions or
estimates.
Goodwill and Other Intangible Assets
Goodwill arises from acquisitions or consolidations of specific operating
companies and is assigned to the reporting unit in which a particular operating
company resides. We identify our reporting units based upon our management
reporting structure, beginning with our operating segments. We aggregate two or
more components within an operating segment that have similar economic
characteristics. We evaluate whether the components within our operating
segments have similar economic characteristics, which include the similarity of
long-term gross margins, the nature of the components' products, services, and
production processes, the types of customers and the methods by which products
or services are delivered to customers, and the components' regulatory
environment. Our reporting units include Pharmaceutical Distribution Services,
Profarma, ABCS, World Courier, and MWI.

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Goodwill and other intangible assets with indefinite lives, such as certain
trademarks and trade names, are not amortized; rather, they are tested for
impairment at least annually. For the purpose of these impairment tests, we can
elect to perform a qualitative assessment to determine if it is more likely than
not that the fair values of its reporting units and indefinite-lived intangible
assets are less than the respective carrying values of those reporting units and
indefinite-lived intangible assets, respectively. Such qualitative factors can
include, among other, industry and market conditions, overall financial
performance, and relevant entity-specific events. If we conclude based on our
qualitative assessment that it is more likely than not that the fair value of a
reporting unit is less than its carrying value, we perform a quantitative
analysis. We elected to perform a qualitative impairment assessment of goodwill
and indefinite-lived intangible assets in the fourth quarter of fiscal 2019,
with the exception of our testing in the Profarma reporting unit. In the fourth
quarter of fiscal 2018 and 2017, we elected to bypass performing the qualitative
assessment and went directly to performing our annual quantitative assessments
of the goodwill and indefinite-lived intangible assets.
The quantitative goodwill impairment test requires us to compare the carrying
value of the reporting unit's net assets to the fair value of the reporting
unit. If the fair value exceeds the carrying value, no further evaluation is
required, and no impairment loss is recognized. If the carrying amount exceeds
the fair value, the difference between the carrying value and the fair value is
recorded as an impairment loss, the amount of which may not exceed the total
amount of goodwill allocated to the reporting unit.
When performing a quantitative impairment assessment, we utilize an income-based
approach to value our reporting units, with the exception of the Profarma
reporting unit, the fair value of which is based upon its publicly-traded stock
price, plus an estimated control premium. The income-based approach relies on a
discounted cash flow analysis, which considers forecasted cash flows discounted
at an appropriate discount rate, to determine the fair value of each reporting
unit. We generally believe that market participants would use a discounted cash
flow analysis to determine the fair value of our reporting units in a sale
transaction. The annual goodwill impairment test requires us to make a number of
assumptions and estimates concerning future levels of revenue growth, operating
margins, depreciation, amortization, capital expenditures, and working capital
requirements, which are based upon our long-range plan. The discount rate is an
estimate of the overall after-tax rate of return required by a market
participant whose weighted average cost of capital includes both debt and
equity, including a risk premium. While we use the best available information to
prepare our cash flows and discount rate assumptions, actual future cash flows
and/or market conditions could differ significantly resulting in future
impairment charges related to recorded goodwill balances. While there are always
changes in assumptions to reflect changing business and market conditions, our
overall methodology and the population of assumptions used have remained
unchanged.
The quantitative impairment test for indefinite-lived intangibles other than
goodwill (certain trademarks and trade names) consists of a comparison of the
fair value of the indefinite-lived intangible asset to the carrying value of the
asset as of the impairment testing date. We estimate the fair value of our
indefinite-lived intangibles using the relief from royalty method. We believe
the relief from royalty method is a widely used valuation technique for such
assets. The fair value derived from the relief from royalty method is measured
as the discounted cash flow savings realized from owning such indefinite-lived
trademarks and trade names and not having to pay a royalty for their use.
We completed our required annual impairment tests of goodwill and
indefinite-lived intangible assets in the fourth quarter of the fiscal years
ended September 30, 2019, 2018, and 2017. We recorded a goodwill impairment of
$59.7 million in our Profarma reporting unit in connection with our fiscal 2018
annual impairment test (see Note 5 of the Notes to Consolidated Financial
Statements). No goodwill impairments were recorded in the fiscal years ended
September 30, 2019 and 2017. No indefinite-lived intangible impairments were
recorded in the fiscal years ended September 30, 2019, 2018, and 2017.
We perform a recoverability assessment of our long-lived assets when impairment
indicators are present.
PharMEDium's long-lived assets were tested for recoverability in fiscal 2019 and
2018 due to the existence of impairment indicators. After U.S. Food and Drug
Administration ("FDA") inspections of PharMEDium compounding facilities, we
voluntarily suspended production activities in December 2017 at our largest
compounding facility located in Memphis, Tennessee pending execution of certain
remedial measures. On May 17, 2019, PharMEDium reached an agreement on the terms
of a consent decree (the "Consent Decree") with the FDA and the Consumer
Protection Branch of the Civil Division of the Department of Justice ("DOJ")
that was entered by the United States District Court for the Northern District
of Illinois on May 22, 2019. The Consent Decree permits commercial operations to
continue at PharMEDium's Dayton, New Jersey and Sugar Land, Texas compounding
facilities and administrative operations to continue at its Lake Forest,
Illinois headquarters subject to compliance with requirements set forth therein.
As required by the Consent Decree, initial audit inspections were conducted by
an independent cGMP expert of the Dayton and Sugar Land facilities. The cGMP
expert has notified the FDA that all of the short-term corrective actions taken
are acceptable. PharMEDium has submitted to the FDA several additional
longer-term corrective actions, and the independent cGMP expert will assess the
effectiveness of the implementation of these items in future audits. Additional
audit inspections by the independent cGMP expert of the Sugar Land and Dayton
facilities are also required at least annually for a period of four years.

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The Consent Decree also establishes requirements that must be satisfied prior to
the resumption of commercial operations at the Memphis, Tennessee facility. The
requirements include a work plan approved by the FDA and an audit inspection and
certification by an independent cGMP expert that the facilities, methods and
controls at the Memphis facility and PharMEDium's Lake Forest, Illinois
headquarters comply with the Consent Decree. If PharMEDium receives written
notification from the FDA of compliance with the requirements to resume
operations at the Memphis facility, additional audit inspections are required
for five years, during which time PharMEDium must correct any deviations from
the Consent Decree observed by the independent cGMP expert.
After five years, PharMEDium may petition the district court for full relief
from the Consent Decree, or for specific relief with regard to one or more
facilities. If, at the time of such petition, all obligations under the Consent
Decree with respect to the specific facilities for which PharMEDium is seeking
relief have been satisfied, and there has been continuous compliance with the
Consent Decree for at least five years, the federal government will not oppose
the petition, and PharMEDium may request that the district court grant such
relief.
As a result of the suspension of production activities at PharMEDium's
compounding facility located in Memphis, Tennessee and the aforementioned
regulatory matters, we performed a recoverability assessment of PharMEDium's
long-lived assets and recorded a $570.0 million impairment loss in the quarter
ended March 31, 2019 for the amount that the carrying value of the PharMEDium
asset group exceeded its fair value. Prior to the impairment, the carrying value
of the asset group was $792 million. The fair value of the asset group was $222
million as of March 31, 2019. The PharMEDium asset group is included in the
Pharmaceutical Distribution Services reportable segment. Significant assumptions
used in estimating the fair value of PharMEDium's asset group included (i) a 15%
discount rate, which contemplated a higher risk at PharMEDium; (ii) the period
in which PharMEDium will resume production at or near capacity; and (iii) the
estimated EBITDA (earnings before interest, taxes, depreciation, and
amortization) margins when considering the likelihood of higher operating and
compliance costs. We believe that our fair value assumptions were representative
of market participant assumptions; however, the forecasted cash flows used to
estimate fair value and measure the related impairment are inherently uncertain
and include assumptions that could differ from actual results in future periods.
This represents a Level 3 nonrecurring fair value measurement. We allocated
$522.1 million of the impairment to finite-lived intangibles ($420.8 million of
customer relationships, $79.9 million of a trade name, and $21.4 million of
software technology) and $47.9 million of the impairment to property and
equipment.
We updated our recoverability assessment of PharMEDium's long-lived assets as of
September 30, 2019. We concluded that PharMEDium's long-lived assets were
recoverable as of September 30, 2019.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and uncertain tax
positions reflect management's assessment of estimated future taxes to be paid
on items in the financial statements. Deferred income taxes arise from temporary
differences between financial reporting and tax reporting bases of assets and
liabilities, as well as net operating loss and tax credit carryforwards for tax
purposes.
We have established a valuation allowance against certain deferred tax assets
for which the ultimate realization of future benefits is uncertain. Expiring
carryforwards and the required valuation allowances are adjusted annually. After
application of the valuation allowances described above, we anticipate that no
limitations will apply with respect to utilization of any of the other deferred
income tax assets described above.
We prepare and file tax returns based upon our interpretation of tax laws and
regulations and record estimates based upon these judgments and interpretations.
In the normal course of business, our tax returns are subject to examination by
various taxing authorities. Such examinations may result in future tax and
interest assessments by these taxing authorities. Inherent uncertainties exist
in estimates of tax contingencies due to changes in tax law resulting from
legislation, regulation, and/or as concluded through the various jurisdictions'
tax court systems. Significant judgment is exercised in applying complex tax
laws and regulations across multiple global jurisdictions where we conduct our
operations. We recognize the tax benefit from an uncertain tax position only if
it is more likely than not that the tax position will be sustained upon
examination by the taxing authorities, including resolutions of any related
appeals or litigation processes, based upon the technical merits of the
position.
We believe that our estimates for the valuation allowances against deferred tax
assets and the amount of benefits recognized in our financial statements for
uncertain tax positions are appropriate based upon current facts and
circumstances. However, others applying reasonable judgment to the same facts
and circumstances could develop a different estimate and the amount ultimately
paid upon resolution of issues raised may differ from the amounts accrued.
The significant assumptions and estimates described in the preceding paragraphs
are important contributors to the ultimate effective tax rate in each year. If
any of our assumptions or estimates were to change, an increase or decrease in
our effective tax rate by 1% on income before income taxes would have caused
income tax expense to change by $9.7 million in the fiscal year ended September
30, 2019.

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For a complete discussion on the impact of the 2017 Tax Act, refer to Note 4 of
the Notes to Consolidated Financial Statements.
Inventories
Inventories are stated at the lower of cost or market. Cost for approximately
75% of our inventories as of September 30, 2019 and 2018 has been determined
using the LIFO method. If we had used the first-in, first-out method of
inventory valuation, which approximates current replacement cost, inventories
would have been approximately $1,511.8 million and $1,534.4 million higher than
the amounts reported as of September 30, 2019 and 2018, respectively. We
recorded LIFO credits of $22.5 million and $157.8 million in the fiscal years
ended September 30, 2019 and 2017, respectively. We recorded LIFO expense of
$67.3 million in the fiscal year ended September 30, 2018. 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 our annual LIFO provision.
Loss Contingencies
In the ordinary course of business, we become 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 in some matters,
and some matters may require years to resolve. We record a liability when it is
probable that a loss has been incurred and the amount is reasonably estimable.
We also perform an assessment of the materiality of loss contingencies where a
loss is either not probable or it is reasonably possible that a loss could be
incurred in excess of amounts accrued. If a loss or an additional loss has at
least a reasonable possibility of occurring and the impact on the financial
statements would be material, we provide disclosure of the loss contingency in
the footnotes to our financial statements. We review all contingencies at least
quarterly to determine whether the likelihood of loss has changed and to assess
whether a reasonable estimate of the loss or the range of the loss can be made.
Among the loss contingencies we considered in accordance with the foregoing in
connection with the preparation of the accompanying financial statements were
the opioid matters described in Note 13 of the Notes to Consolidated Financial
Statements. Although we are not able to predict the outcome or reasonably
estimate a range of possible losses in these matters, an adverse judgment or
negotiated resolution in any of these matters could have a material adverse
effect on our results of operations, consolidated financial position, cash flows
or liquidity.
Liquidity and Capital Resources
The following illustrates our debt structure as of September 30, 2019, including
availability under the multi-currency revolving credit facility, the receivables
securitization facility, the revolving credit note, and the overdraft facility:
                                                     Outstanding      Additional
(in thousands)                                         Balance       Availability
Fixed-Rate Debt:
$500,000, 3.50% senior notes due 2021               $    498,908    $       

-

$500,000, 3.40% senior notes due 2024                    497,744            

-

$500,000, 3.25% senior notes due 2025                    496,311            

-

$750,000, 3.45% senior notes due 2027                    743,099            

-

$500,000, 4.25% senior notes due 2045                    494,514            

-

$500,000, 4.30% senior notes due 2047                    492,488                 -
Nonrecourse debt                                          75,196                 -
Total fixed-rate debt                                  3,298,260                 -

Variable-Rate Debt:
Revolving credit note                                          -            75,000
Term loan due 2020                                       399,778                 -
Overdraft facility due 2021 (£30,000)                     32,573           

4,314

Receivables securitization facility due 2022             350,000         

1,100,000

Multi-currency revolving credit facility due 2024              -         1,400,000
Nonrecourse debt                                          92,281                 -
Total variable-rate debt                                 874,632         2,579,314
Total debt                                          $  4,172,892    $    2,579,314



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Our operating results have generated cash flows, which, together with
availability under our debt agreements and credit terms from suppliers, have
provided sufficient capital resources to finance working capital and cash
operating requirements, and to fund capital expenditures, acquisitions,
repayment of debt, the payment of interest on outstanding debt, dividends, and
repurchases of shares of our common stock.
 Our primary ongoing cash requirements will be to finance working capital, fund
the repayment of debt, fund the payment of interest on debt, fund repurchases of
our common stock, fund the payment of dividends, finance acquisitions, and fund
capital expenditures and routine growth and expansion through new business
opportunities. Future cash flows from operations and borrowings are expected to
be sufficient to fund our ongoing cash requirements.
As discussed in the Risk Factors and in Note 13 of the Notes to Consolidated
Financial Statements, we are a party to discussions with the objective of
reaching potential terms of a broad resolution of the remaining
opioid-litigation and claims. Although we are not able to predict the outcome or
reasonably estimate a range of possible losses in these matters, an adverse
judgment or negotiated resolution in any of these matters could have a material
adverse impact on our financial position, cash flows or liquidity.
As of September 30, 2019 and 2018, our cash and cash equivalents held by foreign
subsidiaries were $826.8 million and $842.5 million, respectively, and are
generally based in U.S. dollar denominated holdings. Our position is that we are
not permanently reinvested with respect to foreign subsidiaries whose
undistributed earnings are able to be repatriated with minimal to no additional
tax impact. In fiscal year ended September 30, 2019, we repatriated $350.0
million of cash held by foreign subsidiaries to use for general corporate
purposes.
We have increased seasonal needs related to our inventory build during the
December and March quarters that, depending on our cash balance, may require the
use of our credit facilities to fund short-term capital needs. Our cash balance
in the fiscal years ended September 30, 2019 and 2018 needed to be supplemented
by intra-period credit facility borrowings to cover short-term working capital
needs. The largest amount of intra-period borrowings under our revolving and
securitization credit facilities that was outstanding at any one time during the
fiscal years ended September 30, 2019 and 2018 was $240.6 million and $1,508.2
million, respectively. We had $606.0 million, $25,115.3 million, and $9,324.7
million of cumulative intra-period borrowings that were repaid under our credit
facilities during the fiscal years ended September 30, 2019, 2018, and 2017,
respectively.
In December 2017, we issued $750 million of 3.45% senior notes due December 15,
2027 (the "2027 Notes") and $500 million of 4.30% senior notes due December 15,
2047 ("the 2047 Notes"). The 2027 Notes were sold at 99.76% of the principal
amount and have an effective yield of 3.48%. The 2047 Notes were sold at 99.51%
of the principal amount and have an effective yield of 4.33%. Interest on the
2027 Notes and the 2047 Notes is payable semi-annually in arrears and commenced
on June 15, 2018.
We used the proceeds from the 2027 Notes and the 2047 Notes to finance the early
retirement of our $400 million of 4.875% senior notes that were due in 2019,
including the payment of a $22.3 million prepayment premium, and to finance the
acquisition of H.D. Smith, which was completed in January 2018.
In the fiscal year ended September 30, 2017, we repaid the $600 million of 1.15%
senior notes that became due, and we repaid $150.0 million of amounts
outstanding under our Term Loans (defined below).
We have a $1.4 billion multi-currency senior unsecured revolving credit facility
("Multi-Currency Revolving Credit Facility") with a syndicate of lenders, which
was scheduled to expire in October 2023. In September 2019, we entered into an
amendment to, among other things, extend the maturity to September 2024.
Interest on borrowings under the Multi-Currency Revolving Credit Facility
accrues at specified rates based upon our debt rating and ranges from 70 basis
points to 112.5 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping
Fee, as applicable (91 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance
Stamping Fee as of September 30, 2019) and from 0 basis points to 12.5 basis
points over the alternate base rate and Canadian prime rate, as applicable. We
pay facility fees to maintain the availability under the Multi-Currency
Revolving Credit Facility at specified rates based upon our debt rating, ranging
from 5 basis points to 12.5 basis points, annually, of the total commitment (9
basis points as of September 30, 2019). We may choose to repay or reduce our
commitments under the Multi-Currency Revolving Credit Facility at any time. The
Multi-Currency Revolving Credit Facility contains covenants, including
compliance with a financial leverage ratio test, as well as others that impose
limitations on, among other things, indebtedness of subsidiaries and asset
sales, with which we were compliant as of September 30, 2019.
We have a commercial paper program whereby we may from time to time issue
short-term promissory notes in an aggregate amount of up to $1.4 billion at any
one time. Amounts available under the program may be borrowed, repaid, and
re-borrowed from time to time. The maturities on the notes will vary, but may
not exceed 365 days from the date of issuance. The notes will bear interest, if
interest bearing, or will be sold at a discount from their face amounts. The
commercial paper program does not increase our borrowing capacity as it is fully
backed by our Multi-Currency Revolving Credit Facility. There were no borrowings
outstanding under our commercial paper program as of September 30, 2019 and
2018.

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We have a $1,450 million receivables securitization facility ("Receivables
Securitization Facility"), which was scheduled to expire in October 2021. In
September 2019, we entered into an amendment to extend the maturity to September
2022. We have available to us an accordion feature whereby the commitment on the
Receivables Securitization Facility may be increased by up to $250 million,
subject to lender approval, for seasonal needs during the December and March
quarters. Interest rates are based upon prevailing market rates for short-term
commercial paper or LIBOR plus a program fee. We pay a customary unused fee at
prevailing market rates, annually, to maintain the availability under the
Receivables Securitization Facility. The Receivables Securitization Facility
contains similar covenants to the Multi-Currency Revolving Credit Facility, with
which we were compliant as of September 30, 2019.
In April 2019, we elected to repay $150.0 million of our outstanding Receivables
Securitization Facility balance prior to the scheduled maturity date.
In connection with the Receivables Securitization Facility, AmerisourceBergen
Drug Corporation 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. We use the facility as a financing vehicle because
it generally offers an attractive interest rate relative to other financing
sources.
We have an uncommitted, unsecured line of credit available to us pursuant to a
revolving credit note ("Revolving Credit Note"). The Revolving Credit Note
provides us with the ability to request short-term unsecured revolving credit
loans from time to time in a principal amount not to exceed $75 million. The
Revolving Credit Note may be decreased or terminated by the bank or us at any
time without prior notice. We also have a £30 million uncommitted U.K. overdraft
facility ("Overdraft Facility"), which expires in February 2021, to fund
short-term, normal trading cycle fluctuations related to our MWI business.
In October 2018, we refinanced $400 million of outstanding term loans by issuing
a new $400 million variable-rate term loan ("October 2018 Term Loan"), which
matures in October 2020. The October 2018 Term Loan bears interest at a rate
equal to a base rate or LIBOR, plus a margin of 65 basis points. The October
2018 Term Loan contains similar covenants to the Multi-Currency Revolving Credit
Facility, with which we were compliant as of September 30, 2019
In addition to the 2027 Notes and the 2047 Notes, both of which were issued in
the fiscal year ended September 30, 2018, we have $500 million of 3.50% senior
notes due November 15, 2021, $500 million of 3.40% senior notes due May 15,
2024, $500 million of 3.25% senior notes due March 1, 2025, and $500 million of
4.25% senior notes due March 1, 2045 (collectively, the "Notes"). Interest on
the Notes is payable semiannually in arrears.
Nonrecourse debt is comprised of short-term and long-term debt belonging to the
Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash
flows and such debt agreements provide that the repayment of the loans (and
interest thereon) is secured solely by the capital stock, physical assets,
contracts, and cash flows of the Brazil subsidiaries.
In September 2016, we entered into an Accelerated Share Repurchase ("ASR")
transaction with a financial institution and paid $400.0 million for shares of
our 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
additional shares to us. The number of shares ultimately received was based upon
the volume-weighted average price of our common stock during the term of the
ASR. We applied the $400.0 million ASR to the May 2016 share repurchase program.
During the fiscal year ended September 30, 2017, we purchased an additional
$118.8 million of our common stock to complete our authorization under this
program.
In November 2016, our board of directors authorized a share repurchase program
allowing us to purchase up to $1.0 billion in shares of our common stock,
subject to market conditions. During the fiscal year ended September 30, 2017,
we purchased $211.1 million under this share repurchase program. During the
fiscal year ended September 30, 2018, we purchased $663.1 million of our common
stock under this program, which included $24.0 million of September 2018
purchases that cash settled in October 2018. During the fiscal year ended
September 30, 2019, we purchased $125.8 million of our common stock under this
program, which excluded $24.0 million of September 2018 purchases that cash
settled in October 2018, to complete our authorization under this program.
In October 2018, our board of directors authorized a new share repurchase
program allowing us to purchase up to $1.0 billion of our shares of common
stock, subject to market conditions. During the fiscal year ended September 30,
2019, we purchased $538.9 million of our common stock under this program, which
included $14.8 million of September 2019 purchases that cash settled in October
2019. As of September 30, 2019, we had $461.1 million of availability remaining
under this program.

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The following is a summary of our contractual obligations for future principal
and interest payments on our debt, minimum rental payments on our noncancelable
operating leases and financing obligations, and minimum payments on our other
commitments as of September 30, 2019:

                             Debt,
Payments Due by            Including
Period (in                 Interest        Operating         Financing
thousands)                 Payments          Leases        Obligations 1       Other Commitments         Total
Within 1 year            $   260,630     $     94,958     $       22,468     $           107,167     $   485,223
1-3 years                  1,584,747          156,226             66,704                  64,575       1,872,252
4-5 years                    710,156          119,884             71,226                  56,023         957,289
After 5 years              3,291,377          177,267            270,410                 105,105       3,844,159
Total                    $ 5,846,910     $    548,335     $      430,808     $           332,870     $ 7,158,923

1 Represents the portion of future minimum lease payments relating to facility leases where we were determined to
be the accounting owner (see Note 1 of the Notes to Consolidated Financial Statements). These payments are
recognized as reductions to the financing obligation and as interest expense and exclude the future non-cash
termination of the financing obligation.



The 2017 Tax Act requires a one-time transition tax to be recognized on
historical foreign earnings and profits. We currently estimate that our
liability related to the transition tax is $182.6 million, net of overpayments
and tax credits, as of September 30, 2019, which is payable in installments over
a six-year period commencing in January 2021. The transition tax commitment is
included in "Other Commitments" in the above table.
Our liability for uncertain tax positions was $124.2 million (including interest
and penalties) as of September 30, 2019. This liability represents an estimate
of tax positions that we have taken in our tax returns which may ultimately not
be sustained upon examination by taxing authorities. Since the amount and timing
of any future cash settlements cannot be predicted with reasonable certainty,
the estimated liability has been excluded from the above contractual obligations
table.
During the fiscal years ended September 30, 2019 and 2018, our operating
activities provided cash of $2,344.0 million and $1,411.4 million, respectively.
Cash provided by operations in the fiscal year ended September 30, 2019 was
principally the result of an increase in accounts payable of $1,561.0 million,
non-cash items of $1,120.7 million, and net income of $854.1 million, offset in
part by an increase in accounts receivable of $1,241.9 million. The increase in
accounts payable was primarily driven by the timing of scheduled payments to
suppliers. Non-cash items were comprised primarily of a $570 million impairment
of PharMEDium's long-lived assets (see Note 1 of the Notes to Consolidated
Financial Statements), $321.1 million of depreciation expense, and $176.4
million of amortization expense. The increase in accounts receivable was the
result of our revenue growth and the timing of payments from our customers.
Deterioration of general economic conditions, among other factors, could
adversely affect the number of prescriptions that are filled and the amount of
pharmaceutical products purchased by consumers and, therefore, could reduce
purchases by our customers. In addition, volatility in financial markets may
also negatively impact our customers' ability to obtain credit to finance their
businesses on acceptable terms. Reduced purchases by our customers or changes in
the ability of our customers to remit payments to us could adversely affect our
revenue growth, our profitability, and our cash flow from operations.
We use days sales outstanding, days inventory on hand, and days payable
outstanding to evaluate our working capital performance. The below financial
metrics are calculated based upon an annual average and can be impacted by the
timing of cash receipts and disbursements, which can vary significantly
depending upon the day of the week in which the month ends.
                              Fiscal Year Ended September 30,
                             2019          2018          2017
Days sales outstanding       25.2          24.5          23.8
Days inventory on hand       28.4          29.9          30.1
Days payable outstanding     57.6          56.7          57.4


Our cash flows from operating activities can vary significantly from period to
period based upon fluctuations in our period end working capital. Additionally,
any changes to payment terms with a significant customer or manufacturer
supplier could have a material impact to our cash flows from operations.
Operating cash flows during the fiscal year ended September 30, 2019 included
$167.4 million of interest payments and $117.7 million of income tax payments,
net of refunds. Operating cash flows during the fiscal year ended September 30,
2018 included $162.1 million of interest payments and $104.0 million of income
tax payments, net of refunds. Operating cash flows during the fiscal year ended
September 30, 2017 included $125.3 million of interest payments and $105.0
million of income tax payments, net of refunds.

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During the fiscal years ended September 30, 2018 and 2017, our operating
activities provided cash of $1,411.4 million and $1,504.1 million, respectively.
Cash provided by operations in the fiscal year ended September 30, 2018 was
principally the result of net income of $1,615.9 million, an increase in
accounts payable of $859.0 million, an increase in income taxes payable of
$209.9 million, offset in part by an increase in accounts receivable of $657.8
million and a decrease in accrued expenses and other liabilities of $551.1
million. The increase in accounts payable was primarily driven by the timing of
scheduled payments to our suppliers. The increase in income taxes payable was
primarily driven by a one-time transition tax on historical foreign earnings and
profits through December 31, 2017 in connection with tax reform. The decrease in
accrued expenses was primarily driven by the payment of a legal settlement of
$625.0 million, plus interest (see Note 13 of the Notes to the Consolidated
Financial Statements). The increase in accounts receivable was the result of our
revenue growth and the timing of payments from our customers. Non-cash items
were comprised primarily of a $795.5 million deferred income tax benefit, $318.5
million of depreciation expense, and $191.6 million of amortization expense. The
deferred income tax benefit was primarily the result of applying a lower U.S.
federal income tax rate to our net deferred tax liabilities as of December 31,
2017 in connection with tax reform.
Capital expenditures in the fiscal years ended September 30, 2019, 2018, and
2017 were $310.2 million, $336.4 million, and $466.4 million, respectively.
Significant capital expenditures in fiscal 2019 included costs associated with
the construction of a new support facility and technology initiatives, including
costs related to enhancing and upgrading our information technology systems.
Significant capital expenditures in fiscal 2018 and 2017 included technology
initiatives, including costs related to enhancing and upgrading our information
technology systems and costs associated with expanding distribution capacity.
We currently expect to spend approximately $400 million for capital expenditures
during fiscal 2020. Larger 2020 capital expenditures will include costs related
to new facilities and various technology initiatives.
We acquired businesses to support our animal health business for $54.0 million
and $70.0 million in the fiscal years ended September 30, 2019 and 2018,
respectively. In the fiscal year ended September 30, 2018, we acquired H.D.
Smith, the largest independent pharmaceutical wholesaler in the United States,
for $815.0 million. In addition, we made incremental investments in Brazil
totaling $78.1 million. The cash used for the above investments was offset by
$179.6 million of cash consolidated in connection with the Brazil investments
(see Note 2 of the Notes to Consolidated Financial Statements).
Net cash used in financing activities in the fiscal year ended September 30,
2019 principally resulted from $674.0 million in purchases of our common stock,
and $339.0 million in cash dividends paid on our common stock.
Net cash used in financing activities in the fiscal year ended September 30,
2018 principally included the early retirement of the $400 million of 4.875%
senior notes, $639.2 million in purchases of our common stock, and $333.0
million in cash dividends paid on our common stock, offset in part by the
issuance of $750.0 million of 3.45% senior notes and $500 million of 4.3% senior
notes.
Net cash provided by financing activities in the fiscal year ended September 30,
2017 primarily included the $600.0 million repayment of our 1.15% senior notes,
$329.9 million in purchases of our common stock, and $320.3 million in cash
dividends paid on our common stock.
Our board of directors approved the following quarterly dividend increases:
               Dividend Increases
                     Per Share
Date            New Rate   Old Rate   % Increase
November 2016    $0.365     $0.340        7%
November 2017    $0.380     $0.365        4%
November 2018    $0.400     $0.380        5%


We anticipate that we will continue to pay quarterly cash dividends in the
future. However, the payment and amount of future dividends remain within the
discretion of our board of directors and will depend upon our future earnings,
financial condition, capital requirements, and other factors.
Market Risk
We have market risk exposure to interest rate fluctuations relating to our debt.
We manage interest rate risk by using a combination of fixed-rate and
variable-rate debt. The amount of variable-rate debt fluctuates during the year
based on our working capital requirements. We had $0.9 billion of variable-rate
debt outstanding as of September 30, 2019. We periodically evaluate financial
instruments to manage our exposure to fixed and variable interest rates.
However, there are no assurances that such instruments will be available in the
combinations we want and/or on terms acceptable to us. There were no such
financial instruments in effect as of September 30, 2019.

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We also have market risk exposure to interest rate fluctuations relating to our
cash and cash equivalents. We had $3,374.2 million in cash and cash equivalents
as of September 30, 2019. The unfavorable impact of a hypothetical decrease in
interest rates on cash and cash equivalents would be partially offset by the
favorable impact of such a decrease on variable-rate debt. For every
$100 million of cash invested that is in excess of variable-rate debt, a 10
basis point decrease in interest rates would increase our annual net interest
expense by $0.1 million.
We have minimal exposure to foreign currency and exchange rate risk from our
non-U.S. operations. Our largest exposure to foreign exchange rates exists
primarily with the Euro, the U.K. Pound Sterling, the Canadian Dollar, and the
Brazilian Real. Revenue from our foreign operations is approximately two percent
of our consolidated revenue. We may utilize foreign currency denominated forward
contracts to hedge against changes in foreign exchange rates. We may use
derivative instruments to hedge our foreign currency exposure, but not for
speculative or trading purposes.



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Cautionary Note Regarding Forward-Looking Statements
Certain of the statements contained in this Management's Discussion and Analysis
of Financial Condition and Results of Operations and elsewhere in this report
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Words such as "expect," "likely," "outlook," "forecast," "would," "could,"
"should," "can," "project," "intend," "plan," "continue," "sustain," "synergy,"
"on track," "believe," "seek," "estimate," "anticipate," "may," "possible,"
"assume," variations of such words, and similar expressions are intended to
identify such forward-looking statements. These statements are based on
management's current expectations and are subject to uncertainty and changes in
circumstances and speak only as of the date hereof. These statements are not
guarantees of future performance and are based on assumptions and estimates that
could prove incorrect or could cause actual results to vary materially from
those indicated. Among the factors that could cause actual results to differ
materially from those projected, anticipated, or implied are the following:
unfavorable trends in brand and generic pharmaceutical pricing, including in
rate or frequency of price inflation or deflation; competition and industry
consolidation of both customers and suppliers resulting in increasing pressure
to reduce prices for our products and services; changes in the United States
healthcare and regulatory environment, including changes that could impact
prescription drug reimbursement under Medicare and Medicaid; increasing
governmental regulations regarding the pharmaceutical supply channel and
pharmaceutical compounding; declining reimbursement rates for pharmaceuticals;
continued federal and state government enforcement initiatives to detect and
prevent suspicious orders of controlled substances and the diversion of
controlled substances; continued prosecution or suit by federal, state and other
governmental entities of alleged violations of laws and regulations regarding
controlled substances, including due to failure to achieve a global resolution
of the multi-district opioid litigation and other related state court
litigation, and any related disputes, including shareholder derivative lawsuits;
increased federal scrutiny and litigation, including qui tam litigation, for
alleged violations of laws and regulations governing the marketing, sale,
purchase and/or dispensing of pharmaceutical products or services, and
associated reserves and costs; failure to comply with the Corporate Integrity
Agreement; material adverse resolution of pending legal proceedings; the
retention of key customer or supplier relationships under less favorable
economics or the adverse resolution of any contract or other dispute with
customers or suppliers; changes to customer or supplier payment terms; risks
associated with the strategic, long-term relationship between Walgreens Boots
Alliance, Inc. and the Company, including principally with respect to the
pharmaceutical distribution agreement and/or the global generic purchasing
services arrangement; changes in tax laws or legislative initiatives that could
adversely affect the Company's tax positions and/or the Company's tax
liabilities or adverse resolution of challenges to the Company's tax positions;
regulatory or enforcement action in connection with the production, labeling or
packaging of products compounded by our compounded sterile preparations (CSP)
business or the related consent decree; suspension of production of CSPs,
including continued suspension at PharMEDium's Memphis facility; managing
foreign expansion, including non-compliance with the U.S. Foreign Corrupt
Practices Act, anti-bribery laws, economic sanctions and import laws and
regulations; financial market volatility and disruption; the loss, bankruptcy or
insolvency of a major supplier; substantial defaults in payment, material
reduction in purchases by or the loss, bankruptcy or insolvency of a major
customer; changes to the customer or supplier mix; malfunction, failure or
breach of sophisticated information systems to operate as designed; risks
generally associated with data privacy regulation and the international transfer
of personal data; natural disasters or other unexpected events that affect the
Company's operations; the impairment of goodwill or other intangible assets
(including any additional impairments with respect to foreign operations or
PharMEDium), resulting in a charge to earnings; the acquisition of businesses
that do not perform as expected, or that are difficult to integrate or control,
including the integration of PharMEDium, or the inability to capture all of the
anticipated synergies related thereto or to capture the anticipated synergies
within the expected time period; the Company's ability to manage and complete
divestitures; the disruption of the Company's cash flow and ability to return
value to its stockholders in accordance with its past practices; interest rate
and foreign currency exchange rate fluctuations; declining economic conditions
in the United States and abroad; and other economic, business, competitive,
legal, tax, regulatory and/or operational factors affecting the Company's
business generally. Certain additional factors that management believes could
cause actual outcomes and results to differ materially from those described in
forward-looking statements are set forth (i) elsewhere in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, (ii)
in Item 1A (Risk Factors), (iii) Item 1 (Business), (iv) elsewhere in this
report, and (v) in other reports filed by the Company pursuant to the Securities
Exchange Act. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, except as required by the federal securities
laws.

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