Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein.

We are one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. We deliver innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health. We are organized based upon the products and services we provide to our customers. Our operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure and, therefore, have been included in Other for the purpose of our reportable segment presentation.

Pharmaceutical Distribution Services Segment

The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution (including plasma and other blood products, injectable pharmaceuticals, vaccines, and other specialty pharmaceutical products) and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, the Pharmaceutical Distribution Services reportable segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution Services reportable segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, it delivers packaging solutions to institutional and retail healthcare providers.

Other

Other consists of operating segments that focus on global commercialization services and animal health (MWI Animal Health or "MWI"). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services ("ABCS") and World Courier.

MWI is a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. Additionally, MWI offers demand-creating sales force services to manufacturers. ABCS, through a number of operating businesses, provides a full suite of integrated manufacturer services that range from clinical trial support to product post-approval and commercialization support. World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry.

Executive Summary

This executive summary provides highlights from the results of operations that follow:

In March 2020, the World Health Organization ("WHO") declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, we implemented measures designed to keep our employees safe and address business continuity issues at our distribution centers and other locations. We continue to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on our revenue, results of operations, and cash flows (refer to our COVID-19 risk factor in Item 1A. Risk Factors on page 8);
Revenue increased 5.7% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment;
Total gross profit increased 1.0% and was favorably impacted by increases in gross profit in Pharmaceutical Distribution Services and Other and was offset in part by lower gains from antitrust litigation settlements, last-in, first-out ("LIFO") expense in comparison to a LIFO credit in the prior fiscal year, and an estimated assessment related to the New York State Opioid Stewardship Act ("OSA") compared to a reversal of a previously-estimated assessment related to the OSA. Pharmaceutical Distribution Services' gross profit increased 3.8% from the prior fiscal year primarily due to the strong increase in specialty product sales. Gross profit in Other increased 6.5% from the prior fiscal year due to growth at World Courier, MWI, and ABCS;
Distribution, selling, and administrative expenses increased 3.9% from the prior fiscal year primarily due to an increase in operating costs to support our revenue growth;
Employee severance, litigation, and other increased $6.5 billion due to a legal accrual for litigation relating the distribution of prescription opioid pain medications. We are currently in advanced discussions, which are ongoing, with the states and various plaintiffs’ representatives that would be necessary to reach a global settlement of the Multidistrict Litigation ("MDL") and other related state-court litigation brought by certain state and local governmental entities to be paid over 18 years in which our payment would be $6.5 billion assuming all parties participate. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. While a global settlement remains subject to contingencies that could impact whether the parties ultimately decide to move forward, we believe a global settlement is probable and our loss related thereto can be reasonably estimated as of September 30, 2020;
Operating income decreased in the current fiscal year primarily due to the $6.6 billion legal accrual in connection with opioid lawsuits, offset in part by an increase in segment operating income, a lower impairment charge relating to PharMEDium's assets, and a decline in depreciation and amortization;
Our effective tax rates were 35.8% and 11.7% in the fiscal years ended September 30, 2020 and 2019, respectively. Our effective tax rate in the fiscal year ended September 30, 2020 was higher than the U.S. statutory rate due to our operating loss, the tax benefits associated with our decision to permanently exit the PharMEDium compounding business, Swiss Tax Reform, the CARES Act, and other discrete items (see Note 5 of the Notes to Consolidated Financial Statements) and offset in part by the tax impact of the portion of the opioid legal accrual that is not expected to be tax deductible. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium's assets (see Note 1 of the Notes to Consolidated Financial Statements) and legal settlements, which changed the mix of domestic and international income. The effective tax rate in the fiscal year ended September 30, 2019 was also impacted by a $37.0 million decrease to the Company's transition tax related to the U.S. Tax Cuts and Jobs Act (the "2017 Tax Act").

Results of Operations

Year ended September 30, 2020 compared to the Year ended September 30, 2019

Revenue


	Fiscal Year Ended September 30,
(dollars in thousands)	2020		2019		Change
Pharmaceutical Distribution Services	$	182,467,189	$	172,813,537	5.6%
Other:
MWI Animal Health	4,216,462		3,975,232		6.1%
Global Commercialization Services	3,308,640		2,893,109		14.4%
Total Other	7,525,102		6,868,341		9.6%
Intersegment eliminations	(98,365)		(92,757)
Revenue	$	189,893,926	$	179,589,121	5.7%

We currently expect our revenue growth percentage to be in the mid-single digits in fiscal 2021. Our future revenue growth will continue to be affected by various factors, such as industry growth trends, including drug utilization, the introduction of new, innovative brand therapies, the likely increase in the number of generic drugs and biosimilars that will be available over the next few years as a result of the expiration of certain drug patents held by brand-name pharmaceutical manufacturers and the rate of conversion from brand products to those generic drugs and biosimilars, price inflation and price deflation, general economic conditions in the United States, competition within the industry, customer consolidation, changes in pharmaceutical manufacturer pricing and distribution policies and practices, increased downward pressure on government and other third-party reimbursement rates to our customers, changes in federal government rules and regulations, and the impact of the COVID-19 pandemic (See Risk Factor - We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business).

Revenue increased by 5.7% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment.

The Pharmaceutical Distribution Services segment grew its revenue by 5.6%, or $9.7 billion, from the prior fiscal year, primarily due to the organic growth of some of its largest customers, continued strong increased specialty pharmaceutical product sales (which generally have higher selling prices), and overall market growth principally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.

More specifically, the increase in the Pharmaceutical Distribution Services segment revenue was largely attributable to the following (in billions):


Increased sales to Walgreens, our largest customer						$2.8
Increased sales to specialty physician practices						$2.8
Increased sales to other customers						$4.1

Revenue in Other increased 9.6% from the prior fiscal year due to growth at all three operating segments: ABCS, MWI, and World Courier.

A number of our contracts with customers, including group purchasing organizations, are typically subject to expiration each year. We may lose a significant customer if an existing contract with such customer expires without being extended, renewed, or replaced. During the fiscal year ended September 30, 2020, no significant contracts expired. Over the next twelve months, there are no significant contracts scheduled to expire. Additionally, from time to time, significant contracts may be terminated in accordance with their terms or extended, renewed, or replaced prior to their expiration dates. If those contracts are extended, renewed, or replaced at less favorable terms, they may also negatively impact our revenue, results of operations, and cash flows.

Gross Profit


	Fiscal Year Ended September 30,
(dollars in thousands)	2020		2019		Change
Pharmaceutical Distribution Services	$	3,824,129	$	3,682,986	3.8%
Other	1,399,553		1,314,172		6.5%
Intersegment eliminations	(6,096)		(659)
Gain from antitrust litigation settlements	9,076		145,872
LIFO (expense) credit	(7,422)		22,544
PharMEDium remediation costs	(7,135)		(48,603)
PharMEDium shutdown costs	(5,421)		—
New York State Opioid Stewardship Act	(14,800)		22,000
Gross profit	$	5,191,884	$	5,138,312	1.0%

Gross profit increased 1.0%, or $53.6 million, from the prior fiscal year. Gross profit in the current fiscal year was favorably impacted by increases in gross profit in Pharmaceutical Distribution Services and Other and lower PharMEDium remediation costs, and was offset in part by lower gains from antitrust litigation settlements, LIFO expense in comparison to a LIFO credit in the prior fiscal year, and an estimated assessment related to the New York State OSA compared to a reversal of a previously-estimated assessment related to the OSA (see below).

Pharmaceutical Distribution Services gross profit increased 3.8%, or $141.1 million, from the prior fiscal year due to the strong increase in specialty product sales. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.10% in the current fiscal year decreased 3 basis points compared to the prior fiscal year primarily due to increased sales to our larger customers, which typically have lower gross profit margins.

Gross profit in Other increased 6.5%, or $85.4 million, from the prior fiscal year due to growth at World Courier, MWI, and ABCS. As a percentage of revenue, gross profit margin in Other of 18.60% in the current fiscal year decreased from 19.13% in the prior fiscal year.

We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $9.1 million and $145.9 million during the fiscal years ended September 30, 2020 and 2019, respectively. The gains were recorded as reductions to cost of goods sold (see Note 15 of the Notes to Consolidated Financial Statements).

Our cost of goods sold includes a LIFO provision that is affected by manufacturer pricing practices, which may be impacted by market and other external influences, changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors may have a material impact to our annual LIFO provision. The LIFO expense in the current fiscal year was primarily driven by lower generic deflation, offset in part by a higher generic inventory mix in comparison to the prior fiscal year.

We incurred remediation costs in connection with the suspended production activities at PharMEDium. We also incurred shutdown costs in connection with permanently exiting the PharMEDium compounding business.

New York State ("NYS") enacted the OSA, which went into effect on July 1, 2018. The OSA established an annual $100 million Opioid Stewardship Fund (the "Fund") and required manufacturers, distributors, and importers licensed in NYS to ratably source the Fund. The ratable share of the assessment for each licensee was to be based upon opioids sold or distributed to or within NYS. In September 2018, we accrued $22.0 million as an estimate of our liability under the OSA for the period from January 1, 2017 through September 30, 2018. In December 2018, the OSA was ruled unconstitutional by the U.S. District Court for the Southern District of New York, and, as a result, we reversed the $22.0 million accrual in the quarter ended December 31, 2018. In September 2020, the United States Court of Appeals for the Second Circuit reversed the District Court’s decision, and, as a result, we accrued $14.8 million in the fourth quarter of the fiscal year ended September 30, 2020 as we revised our estimated liability for the 2017 and 2018 calendar years.

Operating Expenses


	Fiscal Year Ended September 30,
(dollars in thousands)	2020		2019		Change
Distribution, selling, and administrative	$	2,767,217	$	2,663,508	3.9%
Depreciation and amortization	391,062		462,407		(15.4)%
Employee severance, litigation, and other	6,807,307		330,474
Impairment of long-lived assets	361,652		570,000
Total operating expenses	$	10,327,238	$	4,026,389	156.5%

Distribution, selling, and administrative expenses increased 3.9%, or $103.7 million, from the prior fiscal year. The increase from the prior fiscal year was primarily due to an increase in operating costs to support our revenue growth and costs incurred in connection with permanently exiting the PharMEDium compounding business, such as contract termination fees, offset in part by operational synergies realized from the integration of H.D. Smith within Pharmaceutical Distribution Services. As a percentage of revenue, distribution, selling, and administrative expenses were 1.46% in the current fiscal year, and represents a 2-basis point decrease compared to the prior fiscal year.

Depreciation expense decreased 5.0% from the prior fiscal year primarily due to the reduction of H.D. Smith depreciable assets in connection with the integration of its operations. Amortization expense decreased 33.8% from the prior fiscal year primarily due to the fiscal 2020 and 2019 impairments of PharMEDium intangible assets.

Employee severance, litigation, and other in the fiscal year ended September 30, 2020 included a $6.6 billion legal accrual (see Note 14 of the Notes to Consolidated Financial Statements) and $115.4 million of litigation costs that related to legal fees in connection with opioid lawsuits and investigations, $34.4 million of severance costs primarily related to position eliminations resulting from our decision to permanently exit the PharMEDium compounding business, $38.0 million related to our business transformation efforts, and $12.6 million of acquisition-related deal and integration costs and other restructuring initiatives.

Employee severance, litigation, and other in the fiscal year ended September 30, 2019 included $34.1 million of severance costs primarily related to PharMEDium restructuring activities, position eliminations resulting from our business transformation efforts and the integration of H.D. Smith, and restructuring activities related to our consulting business, $185.1 million of litigation costs that consisted of legal settlements totaling $116.7 million and legal fees in connection with opioid lawsuits and investigations, $55.4 million related to our business transformation efforts, $43.2 million of acquisition-related deal and integration costs (primarily related to the integration of H.D. Smith), and $12.6 million of other restructuring initiatives.

We recorded a $361.7 million impairment of PharMEDium's assets in the fiscal year ended September 30, 2020 and a $570.0 million impairment of PharMEDium's assets in the fiscal year ended September 30, 2019 (see Note 1 of the Notes to Consolidated Financial Statements).

Operating Income


	Fiscal Year Ended September 30,
(dollars in thousands)	2020		2019		Change
Pharmaceutical Distribution Services	$	1,807,001	$	1,671,251	8.1%
Other	400,139		380,660		5.1%
Intersegment eliminations	(2,693)		(659)
Total segment operating income	2,204,447		2,051,252		7.5%

Gain from antitrust litigation settlements	9,076		145,872
LIFO (expense) credit	(7,422)		22,544
PharMEDium remediation costs	(16,165)		(69,423)
PharMEDium shutdown costs	(43,206)		—
New York State Opioid Stewardship Act	(14,800)		22,000
Contingent consideration adjustment	12,153		—
Acquisition-related intangibles amortization	(110,478)		(159,848)
Employee severance, litigation, and other	(6,807,307)		(330,474)
Impairment of PharMEDium assets	(361,652)		(570,000)
Operating (loss) income	$	(5,135,354)	$	1,111,923	(561.8)%

Segment operating income is evaluated before gain from antitrust litigation settlements; LIFO (expense) credit; PharMEDium remediation costs; PharMEDium shutdown costs; New York State Opioid Stewardship Act; contingent consideration adjustment; acquisition-related intangibles amortization; employee severance, litigation, and other; and impairment of PharMEDium assets.

Pharmaceutical Distribution Services operating income increased 8.1%, or $135.8 million, from the prior fiscal year primarily due to the increase in gross profit, as noted above. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin was 0.99% and represented an increase of 2 basis points compared to the prior fiscal year.

Operating income in Other increased 5.1%, or $19.5 million, from the prior fiscal year due to the increase in gross profit and was offset in part by an increase in operating expenses, primarily warehousing costs (including incremental COVID-19 expenses) and freight costs.

One of our non-wholly-owned subsidiaries, Profarma, which we consolidate based on certain governance rights (see Note 3 of the Notes to Consolidated Financial Statements), adjusted its previous estimate of contingent consideration related to the purchase price of one of its prior business acquisitions.

We recorded a $13.7 million gain on the sale of an equity investment in Other (Income) Loss in the fiscal year ended September 30, 2019.

Interest expense, net and the respective weighted average interest rates were as follows:


	Fiscal Year Ended September 30,
	2020			2019
(dollars in thousands)	Amount		Weighted Average Interest Rate	Amount		Weighted Average Interest Rate
Interest expense	$	158,522	3.42%	$	195,474	3.73%
Interest income	(20,639)		0.69%	(37,705)		1.87%
Interest expense, net	$	137,883		$	157,769

Interest expense, net decreased 12.6%, or $19.9 million, from the prior fiscal year primarily due to a decrease in interest expense resulting from the adoption of the new lease accounting standard. Prior to October 1, 2019, we recognized interest expense associated with financing obligations in connection with lease construction assets (see Note 1 of the Notes to Consolidated Financial Statements). Upon adoption of the new lease standard as of October 1, 2019, we began recognizing rent expense related to these leases in Distribution, Selling, and Administrative expenses in our Consolidated Statements of Operations. Interest income was lower in the current fiscal year as a result of a decline in investment interest rates, which was offset in part by a $1.0 billion increase in average invested cash balances compared to the prior fiscal year.

Our interest expense in future periods may vary significantly depending upon changes in net borrowings, interest rates, amendments to our current borrowing facilities, and strategic decisions to deploy our invested cash.

Our effective tax rates were 35.8% and 11.7% in the fiscal years ended September 30, 2020 and 2019, respectively. Our effective tax rate in the fiscal year ended September 30, 2020 was higher than the U.S. statutory rate due to our operating loss, the tax benefits associated with our decision to permanently exit the PharMEDium compounding business, Swiss Tax Reform, the CARES Act, and other discrete items (see Note 5 of the Notes to Consolidated Financial Statements) and offset in part by the tax impact of the portion of the opioid legal accrual that is not expected to be tax deductible. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium's assets (see Note 1 of the Notes to Consolidated Financial Statements) and legal settlements, which changed the mix of domestic and international income. The effective tax rate in the fiscal year ended September 30, 2019 was also impacted by a $37.0 million decrease to the Company's transition tax related to the 2017 Tax Act.

Net income attributable to AmerisourceBergen and diluted earnings per share were significantly lower in the current fiscal year primarily due to the legal accrual recognized in connection with opioid lawsuits.

Year ended September 30, 2019 compared to the Year ended September 30, 2018

Revenue


	Fiscal Year Ended September 30,
(dollars in thousands)	2019		2018		Change
Pharmaceutical Distribution Services	$	172,813,537	$	161,699,343	6.9%
Other:
MWI Animal Health	3,975,232		3,789,759		4.9%
Global Commercialization Services	2,893,109		2,542,971		13.8%
Total Other	6,868,341		6,332,730		8.5%
Intersegment eliminations	(92,757)		(92,438)
Revenue	$	179,589,121	$	167,939,635	6.9%

Revenue increased by 6.9% from the prior fiscal year primarily due to the revenue growth of our Pharmaceutical Distribution Services segment.

The Pharmaceutical Distribution Services segment grew its revenue by 6.9%, or by $11.1 billion, primarily due to the organic growth of some of its largest customers, continued strong increased specialty pharmaceutical product sales (which generally have higher selling prices), the impact of business combinations, and overall market growth principally driven by unit volume growth and, to a lesser extent, inflationary increases in brand drugs.

More specifically, the increase in the Pharmaceutical Distribution Services segment revenue was largely attributable to the following (in billions):


Increased sales to Walgreens, our largest customer						$5.6
Increased sales to specialty physician practices						$3.0
Increased sales to other customers						$1.7
Increased sales due to Profarma and H.D. Smith business combinations						$0.8

Revenue in Other increased 8.5% from the prior fiscal year, primarily due to ABCS's growth in its Canadian operations, growth at MWI, growth at World Courier, and the January 2018 consolidation of the specialty joint venture in Brazil.

Gross Profit


	Fiscal Year Ended September 30,
(dollars in thousands)	2019		2018		Change
Pharmaceutical Distribution Services	$	3,682,986	$	3,466,956	6.2%
Other	1,314,172		1,260,485		4.3%
Intersegment eliminations	(659)		(609)
Gain from antitrust litigation settlements	145,872		35,938
LIFO credit (expense)	22,544		(67,324)
PharMEDium remediation costs	(48,603)		(61,129)
New York State Opioid Stewardship Act	22,000		(22,000)
Gross profit	$	5,138,312	$	4,612,317	11.4%

Gross profit increased 11.4%, or $526.0 million, from the prior fiscal year. Gross profit in the fiscal year ended September 30, 2019 was favorably impacted primarily by the increase in gross profit in Pharmaceutical Distribution Services, the increase in gross profit in Other, an increase in gains from antitrust litigation settlements, the LIFO credit in the current year in comparison to a LIFO expense in the prior year, and the reversal of a previously-estimated assessment related to the New York State Opioid Stewardship Act.

Pharmaceutical Distribution Services gross profit increased 6.2%, or $216.0 million, from the prior fiscal year primarily due to the increase in revenue largely due to strong specialty product sales, the January 2018 consolidation of Profarma, and the January 2018 acquisition of H.D. Smith and was negatively impacted by our pharmaceutical compounding operations as production at our Memphis facility had been suspended since December 2017. As a percentage of revenue, Pharmaceutical Distribution Services gross profit margin of 2.13% in the fiscal year ended September 30, 2019 remained relatively flat compared to the prior fiscal year.

Gross profit in Other increased 4.3%, or $53.7 million, from the prior fiscal year primarily due to growth at World Courier and MWI, the January 2018 consolidation of the specialty joint venture in Brazil, and ABCS's growth in its Canadian operations. As a percentage of revenue, gross profit margin in Other of 19.13% in the fiscal year ended September 30, 2019 decreased from 19.90% in the prior fiscal year.

We recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $145.9 million and $35.9 million during the fiscal years ended September 30, 2019 and 2018, respectively. The gains were recorded as reductions to cost of goods sold (see Note 15 of the Notes to Consolidated Financial Statements).

Operating Expenses


	Fiscal Year Ended September 30,
(dollars in thousands)	2019		2018		Change
Distribution, selling, and administrative	$	2,663,508	$	2,460,301	8.3%
Depreciation and amortization	462,407		465,127		(0.6)%
Employee severance, litigation, and other	330,474		183,520
Goodwill impairment	—		59,684
Impairment of PharMEDium assets	570,000		—
Total operating expenses	$	4,026,389	$	3,168,632	27.1%

Distribution, selling, and administrative expenses increased 8.3%, or $203.2 million, from the prior fiscal year. As a percentage of revenue, distribution, selling, and administrative expenses were 1.48% in the fiscal year ended September 30, 2019, and represents a 2-basis point increase compared to the prior fiscal year. Pharmaceutical Distribution Services' segment expenses increased by 10.2% from the prior fiscal year primarily due to an increase in costs to support revenue growth, the January 2018 consolidation of Profarma, and the January 2018 acquisition of H.D. Smith. Distribution, selling, and administrative expenses in Other increased by 2.7% in the fiscal year ended September 30, 2019 due to an increase in costs to support revenue growth at MWI and the January 2018 consolidation of the specialty joint venture in Brazil, offset in part by a reduction in distribution, selling, and administrative expenses at ABCS.

Depreciation expense increased 3.9% from the prior fiscal year primarily due to the January 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma. Amortization expense decreased 7.6% from the prior fiscal year primarily due to the impairment of PharMEDium intangible assets recorded in March 2019, offset in part by the amortization of intangible assets originating from our January 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma.

Employee severance, litigation, and other in the fiscal year ended September 30, 2018 included $36.7 million of severance costs primarily related to position eliminations resulting from our business transformation efforts and restructuring activities related to our consulting business, $61.5 million of litigation costs primarily related to legal fees in connection with opioid lawsuits and investigations and related initiatives, $33.9 million of acquisition-related deal and integration costs (primarily related to H.D. Smith), $33.0 million related to our business transformation efforts, and $18.4 million of other restructuring initiatives.

We recorded a $570.0 million impairment of PharMEDium's long-lived assets in the fiscal year ended September 30, 2019 (see Note 1 of the Notes to Consolidated Financial Statements).

We recorded a $59.7 million goodwill impairment charge at our Profarma reporting unit in the fiscal year September 30, 2018 in connection with our annual goodwill impairment assessment.

Operating Income


	Fiscal Year Ended September 30,
(dollars in thousands)	2019		2018		Change
Pharmaceutical Distribution Services	$	1,671,251	$	1,626,748	2.7%
Other	380,660		355,091		7.2%
Intersegment eliminations	(659)		(609)
Total segment operating income	2,051,252		1,981,230		3.5%

Gain from antitrust litigation settlements	145,872		35,938
LIFO credit (expense)	22,544		(67,324)
PharMEDium remediation costs	(69,423)		(66,204)
New York State Opioid Stewardship Act	22,000		(22,000)
Acquisition-related intangibles amortization	(159,848)		(174,751)
Employee severance, litigation, and other	(330,474)		(183,520)
Goodwill impairment	—		(59,684)
Impairment of PharMEDium assets	(570,000)		—
Operating income	$	1,111,923	$	1,443,685	(23.0)%

Segment operating income is evaluated excluding gain from antitrust litigation settlements; LIFO credit (expense); PharMEDium remediation costs; New York State Opioid Stewardship Act; acquisition-related intangibles amortization; employee severance, litigation, and other; goodwill impairment; and impairment of PharMEDium assets.

Pharmaceutical Distribution Services operating income increased 2.7%, or $44.5 million, from the prior fiscal year primarily due to the increase in gross profit, offset in part by an increase in operating expenses. As a percentage of revenue, Pharmaceutical Distribution Services operating income margin decreased 4 basis points from the prior fiscal year primarily due to a lower contribution from our pharmaceutical compounding operations.

Operating income in Other increased 7.2%, or $25.6 million, from the prior fiscal year primarily due to the increase in gross profit, offset in part by an increase in operating expenses.

We recorded a $13.7 million gain on the sale of an equity investment in Other (Income) Loss in the fiscal year ended September 30, 2019.

We recorded a $30.0 million impairment on a non-customer note receivable related to a start-up venture in Other (Income) Loss in the fiscal year ended September 30, 2018.

Interest expense, net and the respective weighted average interest rates were as follows:


	Fiscal Year Ended September 30,
	2019			2018
(dollars in thousands)	Amount		Weighted Average Interest Rate	Amount		Weighted Average Interest Rate
Interest expense	$	195,474	3.73%	$	189,640	3.59%
Interest income	(37,705)		1.87%	(14,941)		1.18%
Interest expense, net	$	157,769		$	174,699

Interest expense, net decreased 9.7%, or $16.9 million, from the prior fiscal year. The decrease in interest expense, net from the prior fiscal year was due to an increase in interest income due to a $752 million increase in our average invested cash balance during the fiscal year ended September 30, 2019 and an increase in investment interest rates, offset in part by an increase in interest expense due to the December 2017 issuance of senior notes to finance our January 2018 acquisition of H.D. Smith and the January 2018 consolidation of Profarma's debt and related interest expense.

For the fiscal year ended September 30, 2018, we recorded a $42.3 million loss in connection with the January 2018 consolidations of Profarma and the specialty joint venture in Brazil and a $23.8 million loss on the early retirement of our $400 million of 4.875% senior notes that were due in 2019. The loss on the early retirement of the debt included a $22.3 million prepayment premium and $1.5 million of an unamortized debt discount and unamortized debt issuance costs.

Our effective tax rates were 11.7% and (37.2)% in the fiscal years ended September 30, 2019 and 2018, respectively. Our effective tax rate in the fiscal year ended September 30, 2019 was primarily impacted by the $570.0 million impairment of PharMEDium assets (see Note 1 of the Notes to Consolidated Financial Statements) and legal settlements, which changed the mix of domestic and international income. The effective tax rate in the fiscal year ended September 30, 2019 was also impacted by a $37.0 million decrease to the Company's transition tax related to the 2017 Tax Act. Our effective tax rate in the fiscal year ended September 30, 2018 was primarily impacted by the effect of 2017 Tax Act. Our total income tax benefit in the fiscal year ended September 30, 2018 of $438.5 million reflects $612.6 million of tax benefits recognized and a reduction in the U.S. federal income tax rate from 35% to 21%, both resulting from the 2017 Tax Act. Additionally, during the fourth quarter of fiscal 2018, a portion of a 2017 legal settlement charge was determined to be deductible, which favorably impacted our effective tax rate for the fiscal year ended September 30, 2018. Our effective tax rates for the fiscal years ended September 30, 2019 and 2018 were also favorably impacted by the Company's international businesses in Switzerland and Ireland, which have lower income tax rates, and the benefit from stock option exercises and restricted stock vesting.

Net income and earnings per share were significantly lower in the fiscal year ended September 30, 2019 primarily due to the $570.0 million impairment of PharMEDium assets and the significant income tax benefit recognized in the prior fiscal year as a result of the 2017 Tax Act.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies that involve accounting estimates and assumptions that can have a material impact on our financial position and results of operations and require the use of complex and subjective estimates based upon past experience and management's judgment. Actual results may differ from these estimates due to uncertainties inherent in such estimates. Below are those policies applied in preparing our financial statements that management believes are the most dependent upon the application of estimates and assumptions. For a complete list of significant accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.

Allowances for Returns and Doubtful Accounts

Trade receivables are primarily comprised of amounts owed to us for our pharmaceutical distribution and services activities and are presented net of an allowance for customer sales returns and an allowance for doubtful accounts. Our customer sales return policy generally allows customers to return products only if the products can be resold at full value or returned to suppliers for full credit. We record an accrual for estimated customer sales returns at the time of sale to the customer based upon historical customer return trends. The allowance for returns as of September 30, 2020 and 2019 was $1,344.6 million and $1,147.5 million, respectively.

In determining the appropriate allowance for doubtful accounts, we consider a combination of factors, such as the aging of trade receivables, industry trends, and our customers' financial strength, credit standing, payment and default history, and macroeconomic conditions. Changes in the aforementioned factors, among others, may lead to adjustments in our allowance for doubtful accounts. The calculation of the required allowance requires judgment by our management as to the impact of these and other factors on the ultimate realization of our trade receivables. Each of our business units performs

ongoing credit evaluations of its customers' financial condition and maintains reserves for probable bad debt losses based upon historical experience and for specific credit problems when they arise. We write off balances against the reserves when collectability is deemed remote. Each business unit performs formal, documented reviews of the allowance at least quarterly, and our largest business units perform such reviews monthly. There were no significant changes to this process during the fiscal years ended September 30, 2020, 2019, and 2018, and bad debt expense was computed in a consistent manner during these periods. The bad debt expense for any period presented is equal to the changes in the period end allowance for doubtful accounts, net of write-offs, recoveries, and other adjustments.

Bad debt expense for the fiscal years ended September 30, 2020, 2019, and 2018 was $11.9 million, $25.2 million, and $16.7 million, respectively. An increase or decrease of 0.1% in the 2020 allowance as a percentage of trade receivables would result in an increase or decrease in the provision on accounts receivable of approximately $13.9 million. The allowance for doubtful accounts was $72.7 million and $76.4 million as of September 30, 2020 and 2019, respectively.

Schedule II of this Form 10-K sets forth a rollforward of allowances for returns and doubtful accounts.

Business Combinations

The assets acquired and liabilities assumed upon the acquisition or consolidation of a business are recorded at fair value, with the residual of the purchase price allocated to goodwill. We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require management to make significant judgments, estimates, and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based upon historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets include, but are not limited to: discount rates and expected future cash flows from and economic lives of customer relationships, trade names, existing technology, and other intangible assets. Unanticipated events and circumstances may occur, which may affect the accuracy or validity of such assumptions or estimates.

Goodwill and Other Intangible Assets

Goodwill arises from acquisitions or consolidations of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. We identify our reporting units based upon our management reporting structure, beginning with our operating segments. We aggregate two or more components within an operating segment that have similar economic characteristics. We evaluate whether the components within our operating segments have similar economic characteristics, which include the similarity of long-term gross margins, the nature of the components' products, services, and production processes, the types of customers and the methods by which products or services are delivered to customers, and the components' regulatory environment. Our reporting units include Pharmaceutical Distribution Services, Profarma, ABCS, World Courier, and MWI.

Goodwill and other intangible assets with indefinite lives, such as certain trademarks and trade names, are not amortized; rather, they are tested for impairment at least annually. For the purpose of these impairment tests, we can elect to perform a qualitative assessment to determine if it is more likely than not that the fair values of its reporting units and indefinite-lived intangible assets are less than the respective carrying values of those reporting units and indefinite-lived intangible assets, respectively. Such qualitative factors can include, among other, industry and market conditions, overall financial performance, and relevant entity-specific events. If we conclude based on our qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative analysis. We elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2020, with the exception of our testing of goodwill and indefinite-lived intangibles in the MWI and the Profarma reporting units. We elected to perform a qualitative impairment assessment of goodwill and indefinite-lived intangible assets in the fourth quarter of fiscal 2019, with the exception of our testing in the Profarma reporting unit. In the fourth quarter of fiscal 2018, we elected to bypass performing the qualitative assessment and went directly to performing our annual quantitative assessments of goodwill and indefinite-lived intangible assets.

The quantitative goodwill impairment test requires us to compare the carrying value of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount exceeds the fair value, the difference between the carrying value and the fair value is recorded as an impairment loss, the amount of which may not exceed the total amount of goodwill allocated to the reporting unit.

When performing a quantitative impairment assessment, we utilize an income-based approach to value our reporting units, with the exception of the Profarma reporting unit, the fair value of which is based upon its publicly-traded stock price, plus an estimated control premium. The income-based approach relies on a discounted cash flow analysis, which considers forecasted cash flows discounted at an appropriate discount rate, to determine the fair value of each reporting unit. We generally

believe that market participants would use a discounted cash flow analysis to determine the fair value of our reporting units in a sale transaction. The annual goodwill impairment test requires us to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization, capital expenditures, and working capital requirements, which are based upon our long-range plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While we use the best available information to prepare our cash flows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, our overall methodology and the population of assumptions used have remained unchanged.

The quantitative impairment test for indefinite-lived intangibles other than goodwill (certain trademarks and trade names) consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of our indefinite-lived intangibles using the relief from royalty method. We believe the relief from royalty method is a widely used valuation technique for such assets. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such indefinite-lived trademarks and trade names and not having to pay a royalty for their use.

We completed our required annual impairment tests of goodwill and indefinite-lived intangible assets in the fourth quarter of the fiscal years ended September 30, 2020, 2019, and 2018. We recorded a goodwill impairment of $59.7 million in our Profarma reporting unit in connection with our fiscal 2018 annual impairment test. No goodwill impairments were recorded in the fiscal years ended September 30, 2020 and 2019. No indefinite-lived intangible impairments were recorded in the fiscal years ended September 30, 2020, 2019, and 2018.

We perform a recoverability assessment of our long-lived assets when impairment indicators are present.

After U.S. Food and Drug Administration ("FDA") inspections of PharMEDium's compounding facilities, we voluntarily suspended production activities in December 2017 at its largest compounding facility located in Memphis, Tennessee pending execution of certain remedial measures.

As a result of the suspension of production activities at PharMEDium's compounding facility located in Memphis, Tennessee and the regulatory matters, we performed a recoverability assessment of PharMEDium's long-lived assets and recorded a $570.0 million impairment loss in the quarter ended March 31, 2019 for the amount that the carrying value of the PharMEDium asset group exceeded its fair value. Prior to the impairment, the carrying value of the asset group was $792 million. The fair value of the asset group was $222 million as of March 31, 2019. The PharMEDium asset group was included in the Pharmaceutical Distribution Services reportable segment. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 15% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. We believed that our fair value assumptions were representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represents a Level 3 nonrecurring fair value measurement. We allocated $522.1 million of the impairment to finite-lived intangibles ($420.8 million of customer relationships, $79.9 million of a trade name, and $21.4 million of software technology) and $47.9 million of the impairment to property and equipment.

We updated our recoverability assessment of PharMEDium's long-lived assets as of September 30, 2019, and we concluded that PharMEDium’s long-lived assets were recoverable as of September 30, 2019.

As a result of the continued suspension of the production activities at PharMEDium's compounding facility located in Memphis, Tennessee, certain regulatory matters, ongoing operational challenges, and lower-than-expected operating results, we updated our recoverability assessment of PharMEDium’s long-lived assets as of December 31, 2019. The recoverability assessment was based upon comparing PharMEDium's forecasted undiscounted cash flows to the carrying value of its asset group. Using forecasted undiscounted cash flows that were based on the weighted average of multiple strategic alternatives, we concluded that the carrying value of the PharMEDium long-lived asset group was not recoverable as of December 31, 2019. The forecasted undiscounted cash flows as of December 31, 2019 were lower than the forecasted undiscounted cash flows as of September 30, 2019 due to a change in weighting of multiple strategic alternatives and lower operating results in the three months ended December 31, 2019 compared to expectations. We then performed an impairment test by comparing the PharMEDium asset group's fair value of $145 million to its carrying value, which resulted in a $138.0 million impairment loss in the three months ended December 31, 2019. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 17% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. We believed

that our fair value assumptions were representative of market participant assumptions; however, the forecasted cash flows used to estimate fair value and measure the related impairment were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represented a Level 3 nonrecurring fair value measurement. We allocated $123.2 million of the impairment to finite-lived intangibles, $11.6 million of the impairment to property and equipment, and $3.2 million to ROU assets.

In January 2020, we decided to permanently exit the PharMEDium compounding business, and, as a result, we ceased all commercial and administrative operations related to this business in fiscal 2020. The decision to permanently exit the PharMEDium business was due to a number of factors including, but not limited to, ongoing operational, regulatory, and commercial challenges, such as PharMEDium's decision in January 2020 to suspend production at the compounding facility in New Jersey pending facility upgrades related to the air handling and filtration systems. In connection with the decision to exit the PharMEDium business, we recorded an impairment of PharMEDium's assets of $223.7 million in the three months ended March 31, 2020, which included impairments of the remaining finite-lived intangible assets and the majority of the remaining tangible assets.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and uncertain tax positions reflect management's assessment of estimated future taxes to be paid on items in the financial statements. Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, as well as net operating loss and tax credit carryforwards for tax purposes.

We have established a valuation allowance against certain deferred tax assets for which the ultimate realization of future benefits is uncertain. Expiring carryforwards and the required valuation allowances are adjusted annually. After application of the valuation allowances described above, we anticipate that no limitations will apply with respect to utilization of any of the other deferred income tax assets described above.

We prepare and file tax returns based upon our interpretation of tax laws and regulations and record estimates based upon these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions' tax court systems. Significant judgment is exercised in applying complex tax laws and regulations across multiple global jurisdictions where we conduct our operations. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based upon the technical merits of the position.

We believe that our estimates for the valuation allowances against deferred tax assets and the amount of benefits recognized in our financial statements for uncertain tax positions are appropriate based upon current facts and circumstances. However, others applying reasonable judgment to the same facts and circumstances could develop a different estimate and the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.

The significant assumptions and estimates described in the preceding paragraphs are important contributors to the ultimate effective tax rate in each year. If any of our assumptions or estimates were to change, an increase or decrease in our effective tax rate by 1% on income before income taxes would have caused income tax expense to change by $52.9 million in the fiscal year ended September 30, 2020.

For a complete discussion of the impact of the CARES Act, the PharMEDium worthless stock deduction, Swiss Tax Reform, the legal accrual related to opioid litigation, and the 2017 Tax Act, refer to Note 5 of the Notes to Consolidated Financial Statements.

Inventories

Inventories are stated at the lower of cost or market. Cost for approximately 70% and 75% of our inventories as of September 30, 2020 and 2019, respectively, has been determined using the LIFO method. If we had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,519.2 million and $1,511.8 million higher than the amounts reported as of September 30, 2020 and 2019, respectively. We recorded LIFO expenses of $7.4 million and $67.3 million in the fiscal years ended September 30, 2020 and 2018, respectively. We recorded a LIFO credit of $22.5 million in the fiscal year ended September 30, 2019. The annual LIFO provision is affected by manufacturer pricing practices, which may be impacted by market and other external influences, changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors can have a material impact to our annual LIFO provision.

Loss Contingencies

In the ordinary course of business, we become involved in lawsuits, administrative proceedings, government subpoenas, government investigations, stockholder demands, and other disputes, including antitrust, commercial, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought in some matters, and some matters may require years to resolve. We record a liability when it is both probable that a loss has been incurred and the amount can be reasonably estimated. We also perform an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the loss contingency and whether a reasonable estimate of the loss or the range of the loss can made in the footnotes to our financial statements. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made. Among the loss contingencies we considered in accordance with the foregoing in connection with the preparation of the accompanying financial statements were the opioid matters described in Note 14 of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

The following illustrates our debt structure as of September 30, 2020, including availability under the multi-currency revolving credit facility, the receivables securitization facility, the revolving credit note, and the overdraft facility:


(in thousands)	Outstanding Balance		Additional Availability
Fixed-Rate Debt:
$500,000, 3.40% senior notes due 2024	498,232		—
$500,000, 3.25% senior notes due 2025	496,990		—
$750,000, 3.45% senior notes due 2027	743,940		—
$500,000, 2.80% senior notes due 2030	494,045		—
$500,000, 4.25% senior notes due 2045	494,730		—
$500,000, 4.30% senior notes due 2047	492,755		—
Nonrecourse debt	58,081		—
Total fixed-rate debt	3,278,773		—

Variable-Rate Debt:
Revolving credit note	—		75,000
Term loan due October 2020	399,982		—
Overdraft facility due 2021 (£30,000)	—		38,770
Receivables securitization facility due 2022	350,000		1,100,000
Multi-currency revolving credit facility due 2024	—		1,400,000
Nonrecourse debt	90,765		—
Total variable-rate debt	840,747		2,613,770
Total debt	$	4,119,520	$	2,613,770

Our operating results have generated cash flows, which, together with availability under our debt agreements and credit terms from suppliers, have provided sufficient capital resources to finance working capital and cash operating requirements, and to fund capital expenditures, acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and purchases of shares of our common stock.

Our primary ongoing cash requirements will be to finance working capital, fund the repayment of debt, fund the payment of interest on debt, fund purchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures and routine growth and expansion through new business opportunities. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements, including the opioid litigation payments that are expected to be made over 18 years (see below).

As discussed in Note 14 of the Notes to Consolidated Financial Statements, in the fourth quarter of fiscal 2020, with regard to litigation relating to the distribution of prescription opioid pain medications, we recorded a $6.6 billion ($5.5 billion, net of an income tax benefit) charge. We are in advanced discussions, which are ongoing, to reach a global settlement of the MDL and related state-court litigation brought by certain state and local governmental entities in which our payment would be over 18 years to resolve cases currently filed and that could be filed by states, counties, municipalities, and other government entities. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. The

aforementioned litigation accrual has not and is not expected to have an impact on our compliance with our debt covenants or our ability to pay dividends.

As of September 30, 2020 and 2019, our cash and cash equivalents held by foreign subsidiaries were $675.9 million and $826.8 million, respectively, and are generally based in U.S. dollar denominated holdings. We have the ability to repatriate the majority of our cash and cash equivalents held by our foreign subsidiaries without incurring significant additional taxes upon repatriation.

We have increased seasonal needs related to our inventory build during the December and March quarters that, depending on our cash balance, may require the use of our credit facilities to fund short-term capital needs. Our cash balance in the fiscal years ended September 30, 2020 and 2019 needed to be supplemented by intra-period credit facility borrowings to cover short-term working capital needs. The largest amount of intra-period borrowings under our revolving and securitization credit facilities that was outstanding at any one time during the fiscal years ended September 30, 2020 and 2019 was $39.6 million and $240.6 million, respectively. We had $117.4 million, $606.0 million, and $25,115.3 million of cumulative intra-period borrowings that were repaid under our credit facilities during the fiscal years ended September 30, 2020, 2019, and 2018, respectively.

In May 2020, we issued $500 million of 2.80% senior notes due May 15, 2030 (the "2030 Notes"). The 2030 Notes were sold at 99.71% of the principal amount and have an effective yield of 2.81%. Interest on the 2030 Notes is payable semi-annually in arrears, commencing on November 15, 2020.

We used the proceeds from the 2030 Notes to finance the early retirement of the $500 million of 3.50% senior notes that were due in 2021 and made a $21.4 million prepayment premium in connection with this early retirement.

In December 2017, we issued $750 million of 3.45% senior notes due December 15, 2027 (the "2027 Notes") and $500 million of 4.30% senior notes due December 15, 2047 ("the 2047 Notes"). The 2027 Notes were sold at 99.76% of the principal amount and have an effective yield of 3.48%. The 2047 Notes were sold at 99.51% of the principal amount and have an effective yield of 4.33%. Interest on the 2027 Notes and the 2047 Notes is payable semi-annually in arrears and commenced on June 15, 2018.

We used the proceeds from the 2027 Notes and the 2047 Notes to finance the early retirement of our $400 million of 4.875% senior notes that were due in 2019, including the payment of a $22.3 million prepayment premium, and to finance the acquisition of H.D. Smith, which was completed in January 2018.

We have a $1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility") with a syndicate of lenders, which is scheduled to expire in September 2024. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based upon our debt rating and ranges from 70 basis points to 112.5 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (91 basis points over CDOR/LIBOR/EURIBOR/Bankers Acceptance Stamping Fee as of September 30, 2020) and from 0 basis points to 12.5 basis points over the alternate base rate and Canadian prime rate, as applicable. We pay facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based upon our debt rating, ranging from 5 basis points to 12.5 basis points, annually, of the total commitment (9 basis points as of September 30, 2020). We may choose to repay or reduce our commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which we were compliant as of September 30, 2020.

We have a commercial paper program whereby we may from time to time issue short-term promissory notes in an aggregate amount of up to $1.4 billion at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase our borrowing capacity as it is fully backed by our Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under our commercial paper program as of September 30, 2020 and 2019.

We have a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in September 2022. We have available to us an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based upon prevailing market rates for short-term commercial paper or LIBOR plus a program fee. We pay a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which we were compliant as of September 30, 2020.

In April 2019, we elected to repay $150.0 million of our outstanding Receivables Securitization Facility balance prior to the scheduled maturity date.

In connection with the Receivables Securitization Facility, AmerisourceBergen Drug Corporation and a specialty distribution subsidiary sell on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. We use the facility as a financing vehicle because it generally offers an attractive interest rate relative to other financing sources.

We have an uncommitted, unsecured line of credit available to us pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides us with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $75 million. The Revolving Credit Note may be decreased or terminated by the bank or us at any time without prior notice. We also have a £30 million uncommitted U.K. overdraft facility ("Overdraft Facility"), which expires in February 2021, to fund short-term, normal trading cycle fluctuations related to our MWI business.

In October 2018, we refinanced $400 million of outstanding term loans by issuing a new $400 million variable-rate term loan ("October 2018 Term Loan"), which matures in October 2020. The October 2018 Term Loan bears interest at a rate equal to a base rate or LIBOR, plus a margin of 65 basis points. The October 2018 Term Loan contains similar covenants to the Multi-Currency Revolving Credit Facility, with which we were compliant as of September 30, 2020.

In October 2020, we repaid the $400 million October 2018 Term Loan that became due.

In addition to the 2027 Notes, the 2030 Notes, and the 2047 Notes, we have $500 million of 3.40% senior notes due May 15, 2024, $500 million of 3.25% senior notes due March 1, 2025, and $500 million of 4.25% senior notes due March 1, 2045 (collectively, the "Notes"). Interest on the Notes is payable semiannually in arrears.

Nonrecourse debt is comprised of short-term and long-term debt belonging to the Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiaries.

In November 2016, our board of directors authorized a share repurchase program allowing us to purchase up to $1.0 billion in shares of our common stock, subject to market conditions. During the fiscal year ended September 30, 2018, we purchased $663.1 million of our common stock under this program, which included $24.0 million of September 2018 purchases that cash settled in October 2018. During the fiscal year ended September 30, 2019, we purchased $125.8 million of our common stock under this program, which excluded $24.0 million of September 2018 purchases that cash settled in October 2018, to complete our authorization under this program.

In October 2018, our board of directors authorized a share repurchase program allowing us to purchase up to $1.0 billion of our shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2019, we purchased $538.9 million of our common stock under this program, which included $14.8 million of September 2019 purchases that cash settled in October 2019. During the fiscal year ended September 30, 2020, we purchased $405.6 million of our common stock, which excluded $14.8 million of September 2019 purchases that cash settled in October 2019. As of September 30, 2020, we had $55.5 million of availability remaining under this program.

In May 2020, our board of directors authorized a new share repurchase program allowing us to purchase up to $500 of our outstanding shares of common stock, subject to market conditions.

The following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancellable operating leases, and minimum payments on our other commitments as of September 30, 2020:


Payments Due by Period (in thousands)	Debt, Including Interest Payments		Operating Leases		Other Commitments		Total
Within 1 year	$	617,096	$	117,680	$	97,192	$	831,968
1-3 years	628,756		216,196		66,970		911,922
4-5 years	1,210,455		177,253		84,898		1,472,606
After 5 years	3,285,045		376,396		58,251		3,719,692
Total	$	5,741,352	$	887,525	$	307,311	$	6,936,188

The 2017 Tax Act required a one-time transition tax to be recognized on historical foreign earnings and profits. We currently estimate that our liability related to the transition tax is $182.6 million, net of overpayments and tax credits, as of September 30, 2020, which is payable in installments over a six-year period commencing in January 2021. The transition tax commitment is included in "Other Commitments" in the above table.

Our liability for uncertain tax positions was $498.3 million (including interest and penalties) as of September 30, 2020. Included in this balance is $371.5 million for an uncertain tax position related to the $6.6 billion legal accrual for litigation related to the distribution of prescription opioid pain medications, as disclosed in Note 14 of the Notes to Consolidated Financial Statements. As of September 30, 2020, a settlement has not been reached, and, therefore, we applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible for U.S. federal and state purposes. In estimating the amount that would ultimately be deductible, we considered prior U.S. tax case law, the amount and character of the damages sought in the opioid litigation, the inherent uncertainty related to litigation of this nature and magnitude, and other relevant factors. While we believe that our estimate of the uncertain tax position appropriately reflects these considerations, it is reasonably possible that the uncertain tax position recognized as of September 30, 2020 may be revised in future periods as the settlement with the various plaintiffs is finalized. The remaining amount of the liability represents an estimate of tax positions that we have taken in our tax returns or expect to take in future tax returns which may ultimately not be sustained upon examination by taxing authorities. Since the amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated liability has been excluded from the above contractual obligations table.

During the fiscal years ended September 30, 2020 and 2019, our operating activities provided cash of $2,207.0 million and $2,344.0 million, respectively. Cash provided by operations in the fiscal year ended September 30, 2020 was principally the result of an increase in the accrued litigation liability of $6,198.9 million, an increase in accounts payable of $3,300.8 million, and an increase in accrued expenses of $524.0 million, largely offset in part by a net loss of $3,399.6 million, an increase in accounts receivable of $1,629.0 million, an increase in inventories of $1,621.1 million, non-cash items of $662.4 million, and an increase in income taxes receivable of $482.6 million. The increases in the accrued litigation liability and accrued expenses were primarily due to a legal accrual for litigation relating to the distribution of prescription opioid pain medications (see Note 14 of the Notes to Consolidated Financial Statements). The increase in accounts payable was primarily driven by the increase in inventories and the timing of scheduled payments to suppliers. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers. The increase in inventories was due to an increase in business volume. Non-cash items were comprised primarily of a deferred income tax benefit of $1,545.0 million primarily related to a legal accrual in connection with opioid lawsuits and Swiss Tax Reform, offset in part by a $361.7 million impairment of PharMEDium's long-lived assets (see Note 1 of the Notes to Consolidated Financial Statements), $290.7 million of depreciation expense, and $117.3 million of amortization expense. The increase in income taxes receivable was the result of a benefit recorded in connection with certain discrete items (see Note 5 of the Notes to Consolidated Financial Statements).

Deterioration of general economic conditions, among other factors, could adversely affect the number of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, could reduce purchases by our customers. In addition, volatility in financial markets may also negatively impact our customers' ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our customers or changes in the ability of our customers to remit payments to us could adversely affect our revenue growth, our profitability, and our cash flow from operations.

We use days sales outstanding, days inventory on hand, and days payable outstanding to evaluate our working capital performance. The below financial metrics are calculated based upon an annual average and can be impacted by the timing of cash receipts and disbursements, which can vary significantly depending upon the day of the week in which the month ends.


	Fiscal Year Ended September 30,
	2020	2019	2018
Days sales outstanding	24.8	25.2	24.5
Days inventory on hand	28.9	28.4	29.9
Days payable outstanding	57.8	57.6	56.7

Our cash flows from operating activities can vary significantly from period to period based upon fluctuations in our period end working capital. Additionally, any changes to payment terms with a significant customer or manufacturer supplier could have a material impact to our cash flows from operations. Operating cash flows during the fiscal year ended September 30, 2020 included $150.7 million of interest payments and $139.4 million of income tax payments, net of refunds. Operating cash flows during the fiscal year ended September 30, 2019 included $167.4 million of interest payments and $117.7 million of income tax payments, net of refunds. Operating cash flows during the fiscal year ended September 30, 2018 included $162.1 million of interest payments and $104.0 million of income tax payments, net of refunds.

During the fiscal years ended September 30, 2019 and 2018, our operating activities provided cash of $2,344.0 million and $1,411.4 million, respectively. Cash provided by operations in the fiscal year ended September 30, 2019 was principally the result of an increase in accounts payable of $1,561.0 million, non-cash items of $1,120.7 million, and net income of $854.1 million, offset in part by an increase in accounts receivable of $1,241.9 million. The increase in accounts payable was primarily driven by the timing of scheduled payments to suppliers. Non-cash items were comprised primarily of a $570 million impairment of PharMEDium's long-lived assets (see Note 1 of the Notes to Consolidated Financial Statements), $321.1 million of depreciation expense, and $176.4 million of amortization expense. The increase in accounts receivable was the result of our revenue growth and the timing of payments from our customers.

Capital expenditures in the fiscal years ended September 30, 2020, 2019, and 2018 were $369.7 million, $310.2 million, and $336.4 million, respectively. Significant capital expenditures in fiscal 2020 included investments in various technology initiatives, including costs related to enhancing and upgrading our primary information technology operating systems. Significant capital expenditures in fiscal 2019 included costs associated with the construction of a new support facility and technology initiatives, including costs related to enhancing and upgrading our information technology systems. Significant capital expenditures in fiscal 2018 included technology initiatives, including costs related to enhancing and upgrading our information technology systems and costs associated with expanding distribution capacity.

We currently expect to spend approximately $400 million for capital expenditures during fiscal 2021. Larger 2021 capital expenditures will include investments related to various technology initiatives and new facilities.

We acquired businesses to support our animal health business for $54.0 million and $70.0 million in the fiscal years ended September 30, 2019 and 2018, respectively. In the fiscal year ended September 30, 2018, we acquired H.D. Smith, the largest independent pharmaceutical wholesaler in the United States, for $815.0 million. In addition, we made incremental investments in Brazil totaling $78.1 million. The cash used for the above investments was offset by $179.6 million of cash consolidated in connection with the Brazil investments (see Note 2 of the Notes to Consolidated Financial Statements).

Net cash used in financing activities in the fiscal year ended September 30, 2020 principally related to $420.4 million in purchases of our common stock, and $343.6 million in cash dividends paid on our common stock.

Net cash used in financing activities in the fiscal year ended September 30, 2019 principally related to $674.0 million in purchases of our common stock and $339.0 million in cash dividends paid on our common stock.

Net cash used in financing activities in the fiscal year ended September 30, 2018 principally included the early retirement of the $400 million of 4.875% senior notes, $639.2 million in purchases of our common stock, and $333.0 million in cash dividends paid on our common stock, offset in part by the issuance of $750.0 million of 3.45% senior notes and $500 million of 4.3% senior notes.

Our board of directors approved the following quarterly dividend increases:


Dividend Increases
	Per Share
Date	New Rate	Old Rate	% Increase
November 2017	$0.380	$0.365	4%
November 2018	$0.400	$0.380	5%
January 2020	$0.420	$0.400	5%
November 2020	$0.440	$0.420	5%

We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remain within the discretion of our board of directors and will depend upon our future earnings, financial condition, capital requirements, and other factors.

Market Risk

We have market risk exposure to interest rate fluctuations relating to our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt. The amount of variable-rate debt fluctuates during the year based on our working capital requirements. We had $0.8 billion of variable-rate debt outstanding as of September 30, 2020. We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such instruments will be available in the combinations we want and/or on terms acceptable to us. There were no such financial instruments in effect as of September 30, 2020.

We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $4,597.7 million in cash and cash equivalents as of September 30, 2020. The unfavorable impact of a hypothetical decrease in

interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every $100 million of cash invested that is in excess of variable-rate debt, a 10-basis point decrease in interest rates would increase our annual net interest expense by $0.1 million.

We have minimal exposure to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Euro, the U.K. Pound Sterling, the Canadian Dollar, and the Brazilian Real. Revenue from our foreign operations is approximately two percent of our consolidated revenue. We may utilize foreign currency denominated forward contracts to hedge against changes in foreign exchange rates. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes.

Cautionary Note Regarding Forward-Looking Statements

Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expect," "likely," "outlook," "forecast," "would," "could," "should," "can," "project," "intend," "plan," "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances and speak only as of the date hereof. These statements are not guarantees of future performance and are based on assumptions and estimates that could prove incorrect or could cause actual results to vary materially from those indicated. Among the factors that could cause actual results to differ materially from those projected, anticipated, or implied are the following: unfavorable trends in brand and generic pharmaceutical pricing, including in rate or frequency of price inflation or deflation; competition and industry consolidation of both customers and suppliers resulting in increasing pressure to reduce prices for our products and services; changes in the United States healthcare and regulatory environment, including changes that could impact prescription drug reimbursement under Medicare and Medicaid; increasing governmental regulations regarding the pharmaceutical supply channel; declining reimbursement rates for pharmaceuticals; continued federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances; continued prosecution or suit by federal, state and other governmental entities of alleged violations of laws and regulations regarding controlled substances, including due to failure to achieve a global resolution of the multi-district opioid litigation and other related state court litigation, and any related disputes, including shareholder derivative lawsuits; increased federal scrutiny and litigation, including qui tam litigation, for alleged violations of laws and regulations governing the marketing, sale, purchase and/or dispensing of pharmaceutical products or services, and associated reserves and costs; failure to comply with the Corporate Integrity Agreement; material adverse resolution of pending legal proceedings; the retention of key customer or supplier relationships under less favorable economics or the adverse resolution of any contract or other dispute with customers or suppliers; changes to customer or supplier payment terms, including as a result of the COVID-19 impact on such payment terms; risks associated with the strategic, long-term relationship between Walgreens Boots Alliance, Inc. and the Company, including principally with respect to the pharmaceutical distribution agreement and/or the global generic purchasing services arrangement; changes in tax laws or legislative initiatives that could adversely affect the Company’s tax positions and/or the Company’s tax liabilities or adverse resolution of challenges to the Company’s tax positions; managing foreign expansion, including non-compliance with the U.S. Foreign Corrupt Practices Act, anti-bribery laws, economic sanctions and import laws and regulations; substantial defaults in payment, material reduction in purchases by or the loss, bankruptcy or insolvency of a major customer, including as a result of COVID-19; the loss, bankruptcy or insolvency of a major supplier, including as a result of COVID-19; financial market volatility and disruption; financial and other impacts of COVID-19 on our operations or business continuity; changes to the customer or supplier mix; malfunction, failure or breach of sophisticated information systems to operate as designed; risks generally associated with data privacy regulation and the international transfer of personal data; natural disasters or other unexpected events that affect the Company’s operations; the impairment of goodwill or other intangible assets (including any additional impairments with respect to foreign operations), resulting in a charge to earnings; the acquisition of businesses that do not perform as expected, or that are difficult to integrate or control, or the inability to capture all of the anticipated synergies related thereto or to capture the anticipated synergies within the expected time period; the Company's ability to manage and complete divestitures; the disruption of the Company’s cash flow and ability to return value to its stockholders in accordance with its past practices; interest rate and foreign currency exchange rate fluctuations; declining economic conditions in the United States and abroad; and other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting the Company’s business generally. Certain additional factors that management believes could cause actual outcomes and results to differ materially from those described in forward-looking statements are set forth (i) elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations, (ii) in Item 1A (Risk Factors), (iii) Item 1 (Business), (iv) elsewhere in this report, and (v) in other reports filed by the Company pursuant to the Securities Exchange Act. The Company undertakes no obligation to publicly update or revise any forward-looking statements, except as required by the federal securities laws.

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