filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors of AmerisourceBergen Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AmerisourceBergen Corporation and subsidiaries (the Company) as of September 30, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 19, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Legal Contingencies | |
| Description of the Matter | As discussed in Note 13 of the consolidated financial statements, the Company is involved in lawsuits, administrative proceedings, government subpoenas, government investigations and other disputes. The Company recognizes a liability for those legal contingencies for which it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount is reasonably estimable. The Company also performs an assessment of the materiality of legal contingencies where a loss is either reasonably possible or it is reasonably possible that an exposure to loss exists in excess of the amount accrued. If it is reasonably possible that such a loss or an additional loss may have been incurred and the effect on the consolidated financial statements is material, the Company discloses the nature of the loss contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made within the notes to the consolidated financial statements. |
| For example, as of September 30, 2019, a significant number of counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as several states and tribes, have filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and its subsidiary AmerisourceBergen Drug Corporation ("ABDC")), pharmaceutical manufacturers, retail chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications ("opioid matters"). Other lawsuits regarding the distribution of prescription opioid pain medications have been filed by other parties. While the Company is currently engaged in negotiations with plaintiffs’ representatives regarding a potential settlement framework, it continues to litigate the opioid matters. The Company has not recognized a liability related to the potential framework as of September 30, 2019. | |
| Auditing management's determination of whether a loss for a legal contingency is probable and reasonably estimable, reasonably possible or remote, and the related disclosures, is highly subjective and requires significant judgment. For instance, auditing management's judgments related to the opioid matters was challenging due to the significant judgment applied in determining the likelihood of resolution of the opioid matters through settlement or litigation given the current status of negotiations with plaintiffs' representatives and the complexity and uncertainty associated with any potential settlement. | |
| How We Addressed the Matter in Our Audit | We tested the Company's internal controls that address the risks of material misstatement related to the completeness, valuation, presentation and disclosure of legal contingencies. This included testing controls related to the Company's process for identification, recognition, measurement and disclosure of legal contingencies, including the opioid matters. For example, we tested controls over management’s review of correspondence from external legal counsel, historical legal settlements executed by the Company and those executed by other defendants, actions and statements made by the Company, and communications with the plaintiffs to determine the completeness and accuracy of legal contingencies and the related financial statement footnote disclosures. We also tested controls over management's assessment of the likelihood of the resolution of the opioid matters through settlement or litigation. |
| To test the Company's legal contingencies, our substantive audit procedures included, among others, testing the completeness of the legal contingencies subject to evaluation by the Company and evaluating the Company's analysis of its assessment of the probability of outcome for each material legal contingency through inspection of responses to inquiry letters sent to both internal and external legal counsel, discussions with internal and external legal counsel to confirm our understanding of the allegations, and obtaining written representations from executives of the Company. We also compared the Company's assessment with its relevant history of similar legal contingencies that have been settled or otherwise resolved to evaluate the consistency of the Company's assessment for outstanding legal contingencies at the balance sheet date. For example, for the opioid matters, we considered the litigation, claims or assessments, progress of the respective legal cases, communications with plaintiffs and the experience of other similar entities when evaluating the Company's conclusions. | |
| For those legal contingencies for which the Company has determined that a loss is probable and reasonably estimable and is therefore required to be recognized, and for those legal contingencies for which the Company has determined that a loss is either probable or reasonably possible, but the Company is unable to estimate the range of loss, and is therefore required to be disclosed, we evaluated the method of measuring the amounts of the recorded and disclosed contingencies. We assessed the Company’s estimate of the amount of the loss, for both contingencies that are probable and reasonably possible, through inspection of responses to inquiry letters sent to both internal and external legal counsel, direct discussions with internal and external legal counsel, inspection of court rulings, and inspection of settlement agreements. We also obtained written representations from executives of the Company. | |
| Goodwill - Identification of Reporting Units | |
| Description of the Matter | The Company tests goodwill for impairment at the level of reporting referred to as a reporting unit. As discussed in Note 1 of the consolidated financial statements, the Company identified its reporting units based upon its management reporting structure. Goodwill arising from acquisitions has been assigned to the reporting unit or units as of the acquisition date that are expected to benefit from the synergies of the combination. When identifying its reporting units, the Company has aggregated two or more components within an operating segment that have similar economic characteristics. |
| The determination of whether two or more components within an operating segment have similar economic characteristics requires the Company to evaluate the characteristics of the respective components, which include the similarity of long-term gross margins, the nature of the products and services, the nature of the production processes, the type or class of customer, the methods used to distribute products or provide their services, and the nature of the regulatory environment. However, not each of these factors must be met for two components to be considered economically similar, and the considerations are not limited to these factors. | |
| Auditing management's determination of reporting units is highly subjective and significant judgment is involved when evaluating whether two or more components have similar economic characteristics for purposes of aggregation into a single reporting unit. A change in the judgment used in the determination of a reporting unit could result in goodwill impairment. | |
| How We Addressed the Matter in Our Audit | We tested the Company's internal controls related to management's identification of its reporting units. For example, we tested controls over management's review of documentation of the criteria assessed when determining whether one or more components within an operating segment have similar economic characteristics. |
| To test the Company's aggregation of two or more components within an operating segment into a single reporting unit, our substantive audit procedures included, among others, evaluating whether the aggregated components have similar economic characteristics. As part of our evaluation, we considered (i) the similarity of long-term gross margins of the aggregated components; (ii) the similarity of the nature of the regulatory environments of the aggregated components; (iii) the similarity of the products and services of the aggregated components; (iv) the similarity of the types or classes of customer of the aggregated components, and (v) the methods used to distribute products or provide services of the aggregated components. We corroborated the Company’s assessment of aggregation of components by reviewing reports used by segment management, including the financial performance of the respective components, to assess the aggregation criteria. | |
| PharMEDium long-lived asset impairment | |
| Description of the Matter | As discussed in Note 1 of the consolidated financial statements, the Company recognized an impairment loss on PharMEDium's long-lived assets. The continued suspension of production activities at PharMEDium’s compounding facility in Memphis, Tennessee, and further negotiations with the FDA and DOJ regarding a potential consent decree resulted in the Company revising its long-range plan and identifying an impairment indicator of the asset group. At March 31, 2019, the Company evaluated the PharMEDium long-lived assets for recoverability utilizing undiscounted cash flows that were based on the weighted average of multiple strategic alternatives and determined that the assets were not recoverable and were therefore impaired. As a result, the Company recognized a $570 million impairment loss, which represented the amount by which the carrying value exceeded the estimated fair value of these assets. |
| Auditing the Company's impairment loss on PharMEDium's long-lived assets was complex due to the significant estimation uncertainty in determining the fair value of the PharMEDium asset group. Significant assumptions used in the Company's fair value estimate of the PharMEDium asset group included (i) the discount rate; (ii) the period in which PharMEDium will resume production at or near capacity; (iii) estimated revenue growth rates; (iv) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs; and (v) future economic conditions and demand. Each of these assumptions was forward-looking and could have been affected by the outcome of the negotiations with the FDA and DOJ, the provisions of the final consent decree, the results of the third-party audits, and future economic conditions and demand. |
| How We Addressed the Matter in Our Audit | We tested the Company's internal controls over the process for the recognition and measurement of the long-lived asset impairment. For example, we tested controls over management’s review of the forecasted cash flows and their review of the significant assumptions and other inputs used in the fair value measurement, such as the discount rate. |
| To test the PharMEDium long-lived asset impairment loss, our substantive audit procedures included, among others, the performance of a sensitivity analysis of the assumptions to evaluate the change in the fair value of the PharMEDium asset group resulting from changes in the assumptions and therefore identify the assumptions that have the most significant impact on the fair value calculation. We involved valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions used in the fair value measurement of the PharMEDium asset group, including the evaluation of the reasonableness of the discount rate selected by the Company. We compared the forecasted cash flows to business plans, current industry, market and economic trends, and information from discussions with management and external legal counsel about the status of negotiations with the FDA and DOJ, reviewed the provisions of the final consent decree and compared previous forecasts to actual results to assess the forecasted cash flows utilized in the fair value measurement. | |
| /s/ Ernst & Young LLP |
We have served as the Company's auditor since 1985.
Philadelphia, Pennsylvania
November 19, 2019
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||
| (in thousands, except share and per share data) | 2019 | 2018 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 3,374,194 | $ | 2,492,516 | ||||
| Accounts receivable, less allowances for returns and doubtful accounts: 2019 — $1,222,906; 2018 — $1,036,333 | 12,386,879 | 11,314,226 | ||||||
| Inventories (Note 1) | 11,060,254 | 11,918,508 | ||||||
| Right to recover asset (Note 1) | 1,147,483 | — | ||||||
| Prepaid expenses and other | 163,244 | 169,122 | ||||||
| Total current assets | 28,132,054 | 25,894,372 | ||||||
| Property and equipment, at cost: | ||||||||
| Land | 44,142 | 39,875 | ||||||
| Buildings and improvements | 942,129 | 1,086,909 | ||||||
| Machinery, equipment, and other | 2,362,869 | 2,281,124 | ||||||
| Total property and equipment | 3,349,140 | 3,407,908 | ||||||
| Less accumulated depreciation | (1,578,624 | ) | (1,515,484 | ) | ||||
| Property and equipment, net | 1,770,516 | 1,892,424 | ||||||
| Goodwill | 6,705,507 | 6,664,272 | ||||||
| Other intangible assets | 2,294,836 | 2,947,828 | ||||||
| Other assets | 269,067 | 270,942 | ||||||
| TOTAL ASSETS | $ | 39,171,980 | $ | 37,669,838 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 28,385,074 | $ | 26,836,873 | ||||
| Accrued expenses and other | 1,057,208 | 881,157 | ||||||
| Short-term debt | 139,012 | 151,657 | ||||||
| Total current liabilities | 29,581,294 | 27,869,687 | ||||||
| Long-term debt | 4,033,880 | 4,158,532 | ||||||
| Long-term financing obligation | 320,518 | 352,296 | ||||||
| Accrued income taxes | 284,075 | 299,600 | ||||||
| Deferred income taxes | 1,860,195 | 1,829,410 | ||||||
| Other liabilities | 98,812 | 110,352 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders' equity: | ||||||||
| Common stock, $0.01 par value — authorized, issued, and outstanding: 2019 — 600,000,000 shares, 285,295,170 shares and 206,760,654 shares; 2018 — 600,000,000 shares, 283,588,463 shares and 213,217,882 shares | 2,853 | 2,836 | ||||||
| Additional paid-in capital | 4,850,142 | 4,715,473 | ||||||
| Retained earnings | 4,235,491 | 3,720,582 | ||||||
| Accumulated other comprehensive loss | (111,965 | ) | (79,253 | ) | ||||
| Treasury stock, at cost: 2019 — 78,534,516 shares; 2018 — 70,370,581 shares | (6,097,604 | ) | (5,426,814 | ) | ||||
| Total AmerisourceBergen Corporation stockholders' equity | 2,878,917 | 2,932,824 | ||||||
| Noncontrolling interest | 114,289 | 117,137 | ||||||
| Total equity | 2,993,206 | 3,049,961 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 39,171,980 | $ | 37,669,838 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Revenue | $ | 179,589,121 | $ | 167,939,635 | $ | 153,143,826 | ||||||
| Cost of goods sold | 174,450,809 | 163,327,318 | 148,597,824 | |||||||||
| Gross profit | 5,138,312 | 4,612,317 | 4,546,002 | |||||||||
| Operating expenses: | ||||||||||||
| Distribution, selling, and administrative | 2,663,508 | 2,460,301 | 2,128,730 | |||||||||
| Depreciation | 294,965 | 283,971 | 237,100 | |||||||||
| Amortization | 167,442 | 181,156 | 160,503 | |||||||||
| Employee severance, litigation, and other | 330,474 | 183,520 | 959,327 | |||||||||
| Goodwill impairment | — | 59,684 | — | |||||||||
| Impairment of long-lived assets (Note 1) | 570,000 | — | — | |||||||||
| Operating income | 1,111,923 | 1,443,685 | 1,060,342 | |||||||||
| Other (income) loss | (12,952 | ) | 25,469 | (2,730 | ) | |||||||
| Interest expense, net | 157,769 | 174,699 | 145,185 | |||||||||
| Loss on consolidation of equity investments | — | 42,328 | — | |||||||||
| Loss on early retirement of debt | — | 23,766 | — | |||||||||
| Income before income taxes | 967,106 | 1,177,423 | 917,887 | |||||||||
| Income tax expense (benefit) | 112,971 | (438,469 | ) | 553,403 | ||||||||
| Net income | 854,135 | 1,615,892 | 364,484 | |||||||||
| Net loss attributable to noncontrolling interest | 1,230 | 42,513 | — | |||||||||
| Net income attributable to AmerisourceBergen Corporation | $ | 855,365 | $ | 1,658,405 | $ | 364,484 | ||||||
| Earnings per share: | ||||||||||||
| Basic | $ | 4.07 | $ | 7.61 | $ | 1.67 | ||||||
| Diluted | $ | 4.04 | $ | 7.53 | $ | 1.64 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 210,165 | 217,872 | 218,375 | |||||||||
| Diluted | 211,840 | 220,336 | 221,602 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 854,135 | $ | 1,615,892 | $ | 364,484 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Foreign currency translation adjustments | (32,957 | ) | (36,904 | ) | 16,540 | |||||||
| Loss on consolidation of equity investments | — | 45,941 | — | |||||||||
| Other | (271 | ) | (756 | ) | 1,918 | |||||||
| Total other comprehensive (loss) income | (33,228 | ) | 8,281 | 18,458 | ||||||||
| Total comprehensive income | 820,907 | 1,624,173 | 382,942 | |||||||||
| Comprehensive loss attributable to noncontrolling interest | 1,746 | 50,829 | — | |||||||||
| Comprehensive income attributable to AmerisourceBergen Corporation | $ | 822,653 | $ | 1,675,002 | $ | 382,942 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
| (in thousands, except per share data) | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Non-controlling Interest | Total | |||||||||||||||||||||
| September 30, 2016 | $ | 2,778 | $ | 4,333,001 | $ | 2,303,941 | $ | (114,308 | ) | $ | (4,396,008 | ) | $ | — | $ | 2,129,404 | ||||||||||||
| Adoption of ASU 2016-09 (see Note 1) | — | — | 47,063 | — | — | — | 47,063 | |||||||||||||||||||||
| Net income | — | — | 364,484 | — | — | — | 364,484 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | 18,458 | — | — | 18,458 | |||||||||||||||||||||
| Cash dividends, $1.46 per share | — | — | (320,270 | ) | — | — | — | (320,270 | ) | |||||||||||||||||||
| Exercises of stock options | 25 | 102,898 | — | — | — | — | 102,923 | |||||||||||||||||||||
| Share-based compensation expense | — | 62,206 | — | — | — | — | 62,206 | |||||||||||||||||||||
| Common stock purchases for employee stock purchase plan | — | (467 | ) | — | — | — | — | (467 | ) | |||||||||||||||||||
| Purchases of common stock | — | — | — | — | (329,929 | ) | — | (329,929 | ) | |||||||||||||||||||
| Settlement of accelerated share repurchase transaction | — | 20,000 | — | — | (20,000 | ) | — | — | ||||||||||||||||||||
| Employee tax withholdings related to restricted share vesting | — | — | — | — | (9,411 | ) | — | (9,411 | ) | |||||||||||||||||||
| Other | 3 | (3 | ) | — | — | — | — | — | ||||||||||||||||||||
| September 30, 2017 | 2,806 | 4,517,635 | 2,395,218 | (95,850 | ) | (4,755,348 | ) | — | 2,064,461 | |||||||||||||||||||
| Consolidation of variable interest entity | — | — | — | — | — | 167,966 | 167,966 | |||||||||||||||||||||
| Net income (loss) | — | — | 1,658,405 | — | — | (42,513 | ) | 1,615,892 | ||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 16,597 | — | (8,316 | ) | 8,281 | ||||||||||||||||||||
| Cash dividends, $1.52 per share | — | — | (333,041 | ) | — | — | — | (333,041 | ) | |||||||||||||||||||
| Exercises of stock options | 27 | 138,429 | — | — | — | — | 138,456 | |||||||||||||||||||||
| Share-based compensation expense | — | 62,316 | — | — | — | — | 62,316 | |||||||||||||||||||||
| Common stock purchases for employee stock purchase plan | — | (341 | ) | — | — | — | — | (341 | ) | |||||||||||||||||||
| Purchases of common stock | — | — | — | — | (663,220 | ) | — | (663,220 | ) | |||||||||||||||||||
| Employee tax withholdings related to restricted share vesting | — | — | — | — | (8,246 | ) | — | (8,246 | ) | |||||||||||||||||||
| Other | 3 | (2,566 | ) | — | — | — | — | (2,563 | ) | |||||||||||||||||||
| September 30, 2018 | 2,836 | 4,715,473 | 3,720,582 | (79,253 | ) | (5,426,814 | ) | 117,137 | 3,049,961 | |||||||||||||||||||
| Adoption of ASC 606 (Note 1) | — | — | (1,482 | ) | — | — | (1,102 | ) | (2,584 | ) | ||||||||||||||||||
| Net income (loss) | — | — | 855,365 | — | — | (1,230 | ) | 854,135 | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | (32,712 | ) | — | (516 | ) | (33,228 | ) | ||||||||||||||||||
| Cash dividends, $1.60 per share | — | — | (338,974 | ) | — | — | — | (338,974 | ) | |||||||||||||||||||
| Exercises of stock options | 15 | 76,219 | — | — | — | — | 76,234 | |||||||||||||||||||||
| Share-based compensation expense | — | 58,874 | — | — | — | — | 58,874 | |||||||||||||||||||||
| Purchases of common stock | — | — | — | — | (664,803 | ) | — | (664,803 | ) | |||||||||||||||||||
| Employee tax withholdings related to restricted share vesting | — | — | — | — | (5,987 | ) | — | (5,987 | ) | |||||||||||||||||||
| Other | 2 | (424 | ) | — | — | — | — | (422 | ) | |||||||||||||||||||
| September 30, 2019 | $ | 2,853 | $ | 4,850,142 | $ | 4,235,491 | $ | (111,965 | ) | $ | (6,097,604 | ) | $ | 114,289 | $ | 2,993,206 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 854,135 | $ | 1,615,892 | $ | 364,484 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation, including amounts charged to cost of goods sold | 321,102 | 318,483 | 262,420 | |||||||||
| Amortization, including amounts charged to interest expense | 176,410 | 191,626 | 169,911 | |||||||||
| Provision for doubtful accounts | 25,196 | 16,660 | 8,934 | |||||||||
| Provision (benefit) for deferred income taxes | 28,537 | (795,524 | ) | 319,069 | ||||||||
| Share-based compensation expense | 58,874 | 62,316 | 62,206 | |||||||||
| LIFO (credit) expense | (22,544 | ) | 67,324 | (157,782 | ) | |||||||
| Impairment of long-lived assets | 570,000 | — | — | |||||||||
| Gain on sale of an equity investment | (13,692 | ) | — | — | ||||||||
| Goodwill impairment | — | 59,684 | — | |||||||||
| Impairment of non-customer note receivable | — | 30,000 | — | |||||||||
| Loss on consolidation of equity investments | — | 42,328 | — | |||||||||
| Loss on early retirement of debt | — | 23,766 | — | |||||||||
| Other | (23,193 | ) | (19,078 | ) | 7,744 | |||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions and divestitures: | ||||||||||||
| Accounts receivable | (1,241,890 | ) | (657,770 | ) | (1,277,896 | ) | ||||||
| Inventories | (167,990 | ) | (4,923 | ) | (431,454 | ) | ||||||
| Prepaid expenses and other assets | (6,733 | ) | (57,211 | ) | 33,646 | |||||||
| Accounts payable | 1,561,048 | 859,036 | 1,473,389 | |||||||||
| Income taxes payable | (13,353 | ) | 209,899 | 27,192 | ||||||||
| Accrued expenses and other liabilities | 238,116 | (551,120 | ) | 642,275 | ||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 2,344,023 | 1,411,388 | 1,504,138 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Capital expenditures | (310,222 | ) | (336,411 | ) | (466,397 | ) | ||||||
| Cost of acquired companies, net of cash acquired | (63,951 | ) | (785,299 | ) | (61,648 | ) | ||||||
| Cost of equity investments | — | — | (11,347 | ) | ||||||||
| Proceeds from sale of business | — | — | 12,094 | |||||||||
| Proceeds from sales of investment securities available-for-sale | — | — | 74,778 | |||||||||
| Purchases of investment securities available-for-sale | — | — | (48,635 | ) | ||||||||
| Other | (1,659 | ) | 10,596 | 3,114 | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (375,832 | ) | (1,111,114 | ) | (498,041 | ) | ||||||
| FINANCING ACTIVITIES | ||||||||||||
| Senior notes and other loan borrowings | 506,948 | 1,314,430 | — | |||||||||
| Senior notes and other loan repayments | (510,863 | ) | (681,001 | ) | (750,000 | ) | ||||||
| Borrowings under revolving and securitization credit facilities | 640,126 | 25,129,704 | 9,336,400 | |||||||||
| Repayments under revolving and securitization credit facilities | (769,284 | ) | (25,127,438 | ) | (9,335,953 | ) | ||||||
| Payment of premium on early retirement of debt | — | (22,348 | ) | — | ||||||||
| Purchases of common stock | (674,031 | ) | (639,235 | ) | (329,929 | ) | ||||||
| Exercises of stock options | 76,234 | 138,456 | 102,923 | |||||||||
| Cash dividends on common stock | (338,974 | ) | (333,041 | ) | (320,270 | ) | ||||||
| Tax withholdings related to restricted share vesting | (5,987 | ) | (8,246 | ) | (9,411 | ) | ||||||
| Other | (10,682 | ) | (14,154 | ) | (6,574 | ) | ||||||
| NET CASH USED IN FINANCING ACTIVITIES | (1,086,513 | ) | (242,873 | ) | (1,312,814 | ) | ||||||
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 881,678 | 57,401 | (306,717 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 2,492,516 | 2,435,115 | 2,741,832 | |||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 3,374,194 | $ | 2,492,516 | $ | 2,435,115 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
Note 1. Summary of Significant Accounting Policies
AmerisourceBergen Corporation and its subsidiaries, including less than wholly-owned subsidiaries in which AmerisourceBergen Corporation has a controlling financial interest (the "Company"), is one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. The Company delivers innovative programs and services designed to improve the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health.
Basis of Presentation
The accompanying financial statements present the consolidated financial position, results of operations, and cash flows of the Company as of the dates and for the periods indicated. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual amounts could differ from these estimated amounts due to uncertainties inherent in such estimates. Management periodically evaluates estimates used in the preparation of the financial statements for continued reasonableness. Certain reclassifications have been made to prior-period amounts in order to conform to the current year presentation.
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are exercised. It also allows an employer to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU 2016-09 was effective for annual reporting periods beginning after December 15, 2016 and interim periods within those fiscal years. On October 1, 2016, the Company early adopted ASU 2016-09, which resulted in a cumulative adjustment to retained earnings and the establishment of a deferred tax asset of $47.1 million for previously unrecognized tax benefits. The Company elected to adopt the Statement of Cash Flows presentation of the excess tax benefits prospectively.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09"). ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") 605 - "Revenue Recognition" and most industry-specific guidance throughout the Codification. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard's core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In March 2016, the FASB issued ASU No. 2016-08, "Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations" ("ASU 2016-08"), which clarified the implementation guidance for principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU No. 2016-10, "Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which amended the guidance in ASU 2014-09 related to identifying performance obligations and accounting for licenses of intellectual property. The Company was required to adopt ASU 2016-08 and ASU 2016-10 with ASU 2014-09, collectively ASC 606.
The Company adopted ASC 606 as of October 1, 2018 on a modified retrospective basis for all open contracts as of October 1, 2018. The adoption had an immaterial impact on the Company's October 1, 2018 retained earnings and will not have a material impact on the Company's revenues, results of operations, or cash flows. The Company did not record any material contract assets, contract liabilities, or deferred contract costs in its Consolidated Balance Sheet upon adoption.
The Company elected the practical expedient to expense costs to obtain a contract when incurred when the amortization period would have been one year or less. Additionally, the Company elected the practical expedients to not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed, and (iii) for contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.
For the Company's revenue recognition policy, refer to the "Revenue Recognition" section of Note 1.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02" or "ASC 842")). ASU 2016-02 aims to increase transparency and comparability across organizations by requiring lease assets and lease liabilities to be recognized on the balance sheet as well as key information to be disclosed regarding lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.
The Company will adopt ASC 842 in the first quarter of fiscal 2020 and will adopt using the modified retrospective approach. The Company will elect the transition package of practical expedients provided within the amended guidance, which eliminates the requirements to reassess lease identification, lease classification, and initial direct costs for leases that commenced before the effective date. The Company will also elect to combine lease and non-lease components and to exclude short-term leases from its consolidated balance sheets. The Company did not elect the hindsight practical expedient in determining the lease term.
The adoption of the amended guidance is expected to have a material impact on the consolidated balance sheet from the recognition of lease assets and liabilities. While the Company continues to finalize the impact of adoption, it anticipates recognizing operating lease liabilities of approximately $550 million based on the present value of the remaining minimum lease commitments using the Company's incremental borrowing rates as of the effective date. The Company will also record corresponding right-of-use ("ROU") assets based upon the operating lease liabilities adjusted for prepaid and deferred rents. Upon adoption, the Company will also derecognize assets and liabilities associated with leased assets where the Company was deemed the owner of the leased assets for accounting purposes. The difference between the derecognized assets and liabilities will be recognized as a net of tax cumulative adjustment to retained earnings. The Company is finalizing the impact that the amended lease guidance will have on its consolidated financial statements, systems, processes, and internal controls. The Company does not expect that the adoption of ASC 842 will have a material impact on its results of operations or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"). ASU 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amounts. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, and a modified retrospective approach is required, with a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Entities are permitted to adopt the standard early in fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of adopting this new accounting guidance.
As of September 30, 2019, there were no other recently issued accounting standards that may have a material impact on the Company's financial position, results of operations, or cash flows upon their adoption.
Business Combinations
The assets acquired and liabilities assumed from the acquired business are recorded at fair value, with the residual of the purchase price recorded as goodwill. The results of operations of the acquired businesses are included in the Company's operating results from the dates of acquisition.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Concentrations of Credit Risk and Allowance for Doubtful Accounts
The Company sells its inventories to a large number of customers in the healthcare industry that include institutional and retail healthcare providers. Institutional healthcare providers include acute care hospitals, health systems, mail order pharmacies, long-term care and other alternate care pharmacies and providers of pharmacy services to such facilities, and physician offices. Retail healthcare providers include national and regional retail drugstore chains, independent community pharmacies, pharmacy departments of supermarkets and mass merchandisers, and veterinarians. The financial condition of the Company's customers can be affected by changes in government reimbursement policies as well as by other economic pressures in the healthcare industry.
The Company's trade accounts receivables are exposed to credit risk. Revenue from the various agreements and arrangements with the Company's largest customer in the fiscal year ended September 30, 2019, Walgreens Boots Alliance, Inc.
("WBA"), accounted for approximately 34% of revenue and represented approximately 49% of accounts receivable, net of incentives, as of September 30, 2019. Express Scripts, Inc., the Company's second largest customer in the fiscal year ended September 30, 2019, accounted for approximately 13% of revenue and represented approximately 8% of accounts receivable as of September 30, 2019. The Company generally does not require collateral for trade receivables. In determining the appropriate allowance for doubtful accounts, the Company considers a combination of factors, such as the aging of trade receivables, industry trends, and its customers' financial strength, credit standing, and payment and default history. Changes in these factors, among others, may lead to adjustments in the Company's allowance for doubtful accounts. The calculation of the required allowance requires judgment by Company management as to the impact of those and other factors on the ultimate realization of its trade receivables. Each of the Company's business units performs ongoing credit evaluations of its customers' financial condition and maintains reserves for probable bad debt losses based upon historical experience and for specific credit problems when they arise. There were no significant changes to this process during the fiscal years ended September 30, 2019, 2018, and 2017, and bad debt expense was computed in a consistent manner during these periods.
The Company maintains cash and cash equivalents with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and, therefore, bear minimal credit risk. The Company seeks to mitigate such risks by monitoring the risk profiles of these counterparties. The Company also seeks to mitigate risk by monitoring the investment strategy of money market accounts in which it is invested, which are classified as cash equivalents.
Contingencies
Loss Contingencies: In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, and other disputes, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. The Company also performs an assessment of the materiality of loss contingencies where a loss is either not probable or it is reasonably possible that a loss could be incurred in excess of amounts accrued. If a loss or an additional loss has at least a reasonable possibility of occurring and the impact on the financial statements would be material, the Company provides disclosure of the loss contingency in the notes to its financial statements. The Company reviews all contingencies at least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable estimate of the loss or the range of the loss can be made. Among the loss contingencies that the Company considered in accordance with the foregoing in connection with the preparation of the accompanying financial statements were the opioid matters described in Note 13. Although the Company is 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 the Company's results of operations, consolidated financial position, cash flows or liquidity.
Gain Contingencies: The Company records gain contingencies when they are realized. Gains from antitrust litigation settlements are realized upon the receipt of cash and recorded as a reduction to cost of goods sold because they represent a recovery of amounts historically paid to manufacturers to originally acquire the pharmaceuticals that were the subject of the antitrust litigation settlements (see Note 14).
Derivative Financial Instruments
The Company records all derivative financial instruments on the balance sheet at fair value and complies with established criteria for designation and effectiveness of hedging relationships. The Company's policy prohibits it from entering into derivative financial instruments for speculative or trading purposes.
Foreign Currency
When the functional currency of the Company's foreign operations is the applicable local currency, assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted average exchange rates for the period. The resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive Loss within Stockholders' Equity.
Goodwill and Other Intangible Assets
Goodwill arises from acquisitions or consolidations of specific operating companies and is assigned to the reporting unit in which a particular operating company resides. The Company identifies its reporting units based upon the Company's management reporting structure, beginning with its operating segments. The Company aggregates two or more components within an operating segment that have similar economic characteristics. The Company evaluates whether the components within its 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. The Company's reporting units include Pharmaceutical Distribution Services, Profarma Distribuidora de Produtos Farmacêuticos S.A. ("Profarma"), AmerisourceBergen Consulting Services ("ABCS"), World Courier, and MWI Animal Health ("MWI").
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, the Company 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 others, industry and market conditions, overall financial performance, and relevant entity-specific events. If the Company concludes based on its qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, it performs a quantitative analysis. The Company 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 its testing of goodwill in the Profarma reporting unit. In the fourth quarter of fiscal 2018 and 2017, the Company 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, the Company utilizes an income-based approach to value its reporting units, with the exception of the Profarma reporting unit, the fair value of which is based upon its publicly-traded stock price, plus an estimated control premium. The income-based approach relies on a discounted cash flow analysis, which considers forecasted cash flows discounted at an appropriate discount rate, to determine the fair value of each reporting unit. The Company generally believes that market participants would use a discounted cash flow analysis to determine the fair value of the Company's reporting units in a sale transaction. The annual goodwill impairment test requires the Company to make a number of assumptions and estimates concerning future levels of revenue growth, operating margins, depreciation, amortization, capital expenditures, and working capital requirements, which are based upon the Company's long-range plan. The discount rate is an estimate of the overall after-tax rate of return required by a market participant whose weighted average cost of capital includes both debt and equity, including a risk premium. While the Company uses the best available information to prepare its cash flows and discount rate assumptions, actual future cash flows and/or market conditions could differ significantly resulting in future impairment charges related to recorded goodwill balances. While there are always changes in assumptions to reflect changing business and market conditions, the Company's overall methodology and the population of assumptions used have remained unchanged.
The 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. The Company estimates the fair value of its indefinite-lived intangibles using the relief from royalty method. The Company believes the relief from royalty method is a widely used valuation technique for such assets. The fair value derived from the relief from royalty method is measured as the discounted cash flow savings realized from owning such indefinite-lived trademarks and trade names and not having to pay a royalty for their use.
The Company completed its required annual impairment tests relating to goodwill and indefinite-lived intangible assets in the fourth quarter of the fiscal years ended September 30, 2019, 2018, and 2017. The Company recorded a goodwill impairment of $59.7 million in its Profarma reporting unit in connection with its fiscal 2018 annual impairment test (see Note 5). No goodwill impairments were recorded in the fiscal years ended September 30, 2019 and 2017. No indefinite-lived intangible asset impairments were recorded in the fiscal years ended September 30, 2019, 2018, and 2017.
Finite-lived intangible assets are amortized using the straight-line method over the estimated useful lives of the assets. The Company performs a recoverability assessment of its long-lived assets when impairment indicators are present.
After U.S. Food and Drug Administration ("FDA") inspections of PharMEDium Healthcare Holdings, Inc.'s ("PharMEDium") compounding facilities, the Company voluntarily suspended production activities in December 2017 at its largest
compounding facility located in Memphis, Tennessee pending execution of certain remedial measures. 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 current Good Manufacturing Practice ("cGMP") expert of the Dayton and Sugar Land facilities. The cGMP expert has notified FDA that all of the short-term corrective actions taken are acceptable. The Company has submitted to 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.
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, the Company 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. The Company believes that its 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. The Company 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.
The Company updated its recoverability assessment of PharMEDium's long-lived assets as of September 30, 2019. The Company concluded that PharMEDium’s long-lived assets were recoverable as of September 30, 2019.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of the Company's assets and liabilities (commonly known as the asset and liability method). In assessing the need to establish a valuation allowance on deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, including resolutions of any related appeals or litigation processes, based upon the technical merits of the position. Tax benefits associated with uncertain tax positions that have met the recognition criteria are measured and recorded based upon the highest probable outcome that is more than 50% likely to be realized after full disclosure and resolution of a tax examination.
Inventories
Inventories are stated at the lower of cost or market. Cost for approximately 75% of the Company's inventories as of September 30, 2019 and 2018 has been determined using the last-in, first-out ("LIFO") method. If the Company had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,511.8 million and $1,534.4 million higher than the amounts reported as of September 30, 2019 and 2018, respectively. The Company recorded LIFO credits of $22.5 million and $157.8 million in the fiscal years ended September 30, 2019 and 2017, respectively, and 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 the Company's annual LIFO provision.
Investments
The Company first evaluates its investments in accordance with the variable interest model to determine whether it has a controlling financial interest in an investment. This evaluation is made as of the date on which the Company makes its initial investment, and subsequent evaluations are made if the structure of the investment changes. If it has determined that an investment is a variable interest entity ("VIE"), the Company evaluates whether the VIE is required to be consolidated. When the Company holds rights that give it the power to direct the activities of an entity that most significantly impact the entity's economic performance, combined with the obligation to absorb an entity's losses and the right to receive benefits, the Company consolidates a VIE. If it is determined that an investment is not a VIE, the Company then evaluates its investments under the voting interest model and generally consolidates investments in which it holds an ownership interest of greater than 50%. When the Company consolidates less than wholly-owned subsidiaries, it discloses its noncontrolling interest in its consolidated financial statements.
For equity securities without a readily determinable fair value, the Company uses the fair value measurement alternative and measures the securities at cost less impairment, if any, including adjustments for observable price changes in orderly transactions for an identical or similar investment of the same issuer. For investments in which the Company can exercise significant influence but does not control, it uses the equity method of accounting. The Company's share of earnings and losses is recorded in Other Income (Loss) in the Consolidated Statements of Operations. The Company monitors its investments for impairment by considering factors such as the operating performance of the investment and current economic and market conditions.
Leases
The Company is often involved in the construction of its distribution facilities. In certain cases, the Company makes payments for certain structural components included in the lessor's construction of the leased assets, which result in the Company being deemed the owner of the leased assets for accounting purposes. As a result, regardless of the significance of the payments, Accounting Standards Codification 840, Leases, ("ASC 840") defines those payments as automatic indicators of ownership and requires the Company to capitalize the lessor's total project cost with a corresponding financing obligation. Upon completion of the lessor's project, the Company performs a sale-leaseback analysis pursuant to ASC 840 to determine if these assets and the related financing obligations can be derecognized from the Company's Consolidated Balance Sheet. If the Company is deemed to have "continuing involvement," the leased assets and the related financing obligations remain on the Company's Consolidated Balance Sheet and are amortized over the life of the assets and the lease term, respectively. All other leases are considered operating leases in accordance with ASC 840. Assets subject to an operating lease and the related lease payments are not recorded on the Company's Consolidated Balance Sheet. Rent expense is recognized on a straight-line basis over the expected lease term and is recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Manufacturer Incentives
The Company considers fees and other incentives received from its suppliers relating to the purchase or distribution of inventory to represent product discounts, and, as a result, they are recognized within cost of goods sold upon the sale of the related inventory.
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years for buildings and improvements and from 3 to 10 years for machinery, equipment, and other. The costs of repairs and maintenance are charged to expense as incurred.
The Company capitalizes project costs relating to computer software developed or obtained for internal use when the activities related to the project reach the application development stage. Costs that are associated with preliminary stage activities, training, maintenance, and all other post-implementation stage activities are expensed as they are incurred. Software development costs are depreciated using the straight-line method over the estimated useful lives, which range from 3 to 10 years.
Revenue Recognition
The Company's revenues are primarily generated from the distribution of pharmaceutical products. The Company also generates revenues from global commercialization services, which include clinical trial support, post-approval and commercialization support, and global specialty transportation and logistics for the biopharmaceutical industry. See Note 15 for the Company's disaggregated revenue.
The Company recognizes revenue related to the distribution of products at a point in time when title and control transfers to customers and there is no further obligation to provide services related to such products. Service revenue is recognized over the period that services are provided to the customer. The Company is generally the principal in a transaction; therefore, revenue is primarily recorded on a gross basis. When the Company is the principal in a transaction, it has determined that it controls the ability to direct the use of the product or service prior to the transfer to a customer, it is primarily responsible for fulfilling the promise to provide the product or service to its customer, it has discretion in establishing pricing, and it controls the relationship with the customer. Revenue is recognized at the amount of consideration expected to be received. For the distribution business, revenue is primarily generated from a contract related to a confirmed purchase order with a customer in a distribution arrangement and is net of estimated sales returns and allowances, other customer incentives, and sales tax.
The Company's customer sales return policy generally allows customers to return products only if the products can be resold at full value or returned to suppliers for full credit. The Company records an accrual for estimated customer sales returns at the time of sale to the customer based upon historical return trends. As of September 30, 2019 and 2018, the Company's accrual for estimated customer sales returns was $1,147.5 million and $988.8 million, respectively. In fiscal 2019, due to the adoption of ASC 606, the Company records an asset for the right to recover products from its customers in Right to Recover Asset on its Consolidated Balance Sheet. The Company's asset for the right to recover products from its customers was included in Inventories on its Consolidated Balance Sheet as of September 30, 2018 and for all prior periods.
Share-Based Compensation
The Company accounts for the compensation cost of all share-based payments at fair value. The Company estimates the fair value of option grants using a binomial option pricing model. The fair value of restricted stock units and performance stock units is based upon the grant date market price of the Company’s common stock.
Share-based compensation expense is recognized over the requisite service period within Distribution, Selling, and Administrative in the Consolidated Statements of Operations to correspond with the same line item as the cash compensation paid to employees. Compensation expense associated with nonvested performance stock units is dependent upon the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued.
The income tax effects of awards are recognized when the awards vest or are settled and are recognized in Income Tax Expense in the Company’s Consolidated Statements of Operations and in cash flows from operations in the Consolidated Statements of Cash Flows. Prior to fiscal 2017, tax benefits from share-based compensation were recorded as adjustments to Additional Paid-in Capital within Stockholders’ Equity and as cash flows from financing activities within the Statement of Cash Flows (see Recently Adopted Accounting Pronouncements).
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack, and deliver inventory to customers. These costs, which were $619.7 million, $590.8 million, and $517.3 million for the fiscal years ended September 30, 2019, 2018, and 2017, respectively, are included in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Supplier Reserves
The Company establishes reserves against amounts due from its suppliers relating to various price and rebate incentives, including deductions or billings taken against payments otherwise due to them from the Company. These reserve estimates are established based upon the judgment of Company management after carefully considering the status of current outstanding claims, historical experience with the suppliers, the specific incentive programs, and any other pertinent information available to the Company. The Company evaluates the amounts due from its suppliers on a continual basis and adjusts the reserve estimates when appropriate based upon changes in factual circumstances. The ultimate outcome of any outstanding claim may be different than the Company's estimate.
Note 2**. Acquisitions and Investments**
NEVSCO
In December 2017, the Company acquired Northeast Veterinary Supply Company ("NEVSCO") for $70.0 million. NEVSCO was an independent, regional distributor of veterinary pharmaceuticals and medical supplies serving primarily the northeast region of the United States and strengthens MWI Animal Health's ("MWI") support of independent veterinary practices and provides even greater value and care to current and future animal health customers. NEVSCO is included within the MWI operating segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by $30.4 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was $8.5 million, $6.7 million, and $2.9 million, respectively. The fair value of the intangible assets acquired of $29.8 million primarily consisted of customer relationships, which the Company is amortizing over its estimated useful life of 15 years. Goodwill and intangible assets resulting from the acquisition are deductible for income tax purposes.
H.D. Smith
In January 2018, the Company acquired H.D. Smith Holding Company ("H.D. Smith") for $815.0 million. The Company funded the acquisition through the issuance of new long-term debt (see Note 6). H.D. Smith was the largest independent pharmaceutical wholesaler in the United States and provides full-line distribution of brand, generic, and specialty drugs, as well as high-value services and solutions for manufacturers and healthcare providers. H.D. Smith's customers included retail pharmacies, specialty pharmacies, long-term care facilities, institutional/hospital systems, and independent physicians and clinics. The acquisition strengthens the Company's core business, expands and enhances its strategic scale in pharmaceutical distribution, and expands the Company's support for independent community pharmacies. H.D. Smith has been integrated into the Pharmaceutical Distribution reportable segment.
The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values on the date of acquisition. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by $499.9 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, and accounts payable and accrued expenses acquired was $163.1 million, $350.7 million, and $366.1 million, respectively. The fair value of the intangible assets acquired of $167.8 million consisted of customer relationships of $156.6 million and a tradename of $11.2 million. The Company is amortizing the fair value of the customer relationships and the tradename over their estimated useful lives of 12 years and 2 years, respectively. The Company established a deferred tax liability of $60.6 million primarily in connection with the intangible assets acquired. Goodwill and intangible assets resulting from the acquisition are not deductible for income tax purposes.
Profarma and Specialty Joint Venture
As of September 30, 2017, the Company held a noncontrolling ownership interest in Profarma, a leading pharmaceutical wholesaler in Brazil, and an ownership interest in a joint venture with Profarma to provide specialty distribution and services to the Brazilian marketplace (the "specialty joint venture"). The Company had accounted for these interests as equity method investments, which were reported in Other Assets on the Company's Consolidated Balance Sheets. In January 2018, the Company invested an additional $62.5 million in Profarma and an additional $15.6 million in the specialty joint venture to increase its ownership interests to 38.2% and 64.5%, respectively. In connection with the additional investment in Profarma, the Company received substantial governance rights, thereby requiring it to begin consolidating the operating results of Profarma as of March 31, 2018 (see Note 3). The Company also began to consolidate the operating results of the specialty joint venture as of March 31, 2018 due to its majority ownership interest. In September 2018, the Company made an additional investment of $23.6 million in the specialty joint venture to increase its ownership interest to 89.9%. Profarma and the specialty joint venture are included within the Pharmaceutical Distribution Services reportable segment and Other, respectively.
The fair value of Profarma, including the noncontrolling interest, was determined based upon an agreed-upon stock price and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of Profarma upon obtaining control exceeded the fair value of the net tangible and intangible assets consolidated by $142.0 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was $160.1 million, $190.5 million, and $167.7 million, respectively. The Company consolidated short-term debt and long-term debt of $209.9 million and $12.4 million, respectively, cash of $150.8 million, and recorded a noncontrolling interest of $168.0 million. The estimated fair value of the intangible assets consolidated of $84.6 million consisted of customer relationships of $25.9 million and a tradename of $58.7 million. The Company is amortizing the customer relationships over its estimated useful life of 15 years and the tradenames over their estimated useful lives of between 15 years and 25 years. The Company established a deferred tax liability of $50.1 million primarily in connection with the intangible assets that were recognized. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
The fair value of the specialty joint venture was determined based upon the cost of the incremental ownership percentage acquired from the January 2018 investment and was allocated to the underlying assets and liabilities consolidated based upon their fair values at the time of the January 2018 investment. The fair value of the specialty joint venture exceeded the fair value of the net tangible and intangible assets consolidated by $3.5 million, which was allocated to goodwill. The fair value of accounts receivable, inventory, accounts payable and accrued expenses was $65.0 million, $29.1 million, and $54.3 million, respectively. The Company consolidated short-term debt and cash of $32.7 million and $28.9 million, respectively. The estimated fair value of the intangible assets consolidated of $4.6 million is being amortized over its estimated useful life of 15 years. Goodwill and intangible assets resulting from the consolidation are not deductible for income tax purposes.
In connection with the incremental January 2018 Brazil investments, the Company adjusted the carrying values of its previously held equity interests in Profarma and the specialty joint venture to equal their fair values, which were determined to be $103.1 million and $31.2 million, respectively. These represent Level 2 nonrecurring fair value measurements. The adjustments resulted in a pretax loss of $42.3 million in fiscal 2018 and were comprised of foreign currency translation adjustments from Accumulated Other Comprehensive Loss of $45.9 million, a $12.4 million gain on the remeasurement of Profarma's previously held equity interest, and an $8.8 million loss on the remeasurement of the specialty joint venture's previously held equity interest.
Note 3**. Variable Interest Entity**
As discussed in Note 2, the Company made an additional investment in Profarma in January 2018. In connection with this investment, the Company obtained substantial governance rights, allowing it to direct the activities that significantly impact Profarma’s economic performance. As such, the Company consolidated the operating results of Profarma in its consolidated financial statements as of and for the periods ended September 30, 2019 and September 30, 2018. The Company is not obligated to provide future financial support to Profarma.
The following assets and liabilities of Profarma are included in the Company's Consolidated Balance Sheet:
| (in thousands) | September 30, 2019 | September 30, 2018 | ||||||
| Cash and cash equivalents | $ | 9,431 | $ | 26,801 | ||||
| Accounts receivables, net | 154,491 | 144,646 | ||||||
| Inventories | 185,602 | 168,931 | ||||||
| Prepaid expenses and other | 64,119 | 61,924 | ||||||
| Property and equipment, net | 30,961 | 32,667 | ||||||
| Goodwill | 82,309 | 82,309 | ||||||
| Other intangible assets | 74,429 | 80,974 | ||||||
| Other long-term assets | 9,169 | 8,912 | ||||||
| Total assets | $ | 610,511 | $ | 607,164 | ||||
| Accounts payable | $ | 165,053 | $ | 150,102 | ||||
| Accrued expenses and other | 49,191 | 37,195 | ||||||
| Short-term debt | 106,439 | 115,461 | ||||||
| Long-term debt | 60,973 | 39,704 | ||||||
| Deferred income taxes | 42,371 | 46,137 | ||||||
| Other long-term liabilities | 5,303 | 31,988 | ||||||
| Total liabilities | $ | 429,330 | $ | 420,587 |
Profarma's assets can only be used to settle its obligations, and its creditors do not have recourse to the general credit of the Company.
Note 4**. Income Taxes**
The following table summarizes the Company's income before income taxes for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | 336,150 | $ | 704,935 | $ | 394,721 | ||||||
| Foreign | 630,956 | 472,488 | 523,166 | |||||||||
| Total | $ | 967,106 | $ | 1,177,423 | $ | 917,887 |
The components of the Company's consolidated income tax expense (benefit) are summarized in the following table for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Current provision: | ||||||||||||
| Federal | $ | (12,801 | ) | $ | 247,755 | $ | 141,071 | |||||
| State and local | 15,246 | 39,328 | 35,950 | |||||||||
| Foreign | 81,989 | 69,972 | 57,313 | |||||||||
| Total current provision | 84,434 | 357,055 | 234,334 | |||||||||
| Deferred provision (benefit): | ||||||||||||
| Federal | 61,819 | (828,023 | ) | 265,074 | ||||||||
| State and local | (31,086 | ) | 33,887 | 54,995 | ||||||||
| Foreign | (2,196 | ) | (1,388 | ) | (1,000 | ) | ||||||
| Total deferred provision (benefit) | 28,537 | (795,524 | ) | 319,069 | ||||||||
| Provision (benefit) for income taxes | $ | 112,971 | $ | (438,469 | ) | $ | 553,403 |
A reconciliation of the statutory U.S. federal income tax rate to the Company's consolidated effective income tax rate is as follows for the periods indicated:
| Fiscal Year Ended September 30, | |||||
| 2019 | 2018 | 2017 | |||
| Statutory U.S. federal income tax rate | 21.0% | 24.5% | 35.0% | ||
| State and local income tax rate, net of federal tax benefit | 2.4 | (0.1) | 5.4 | ||
| Foreign tax rate differential | (6.7) | (6.2) | (14.6) | ||
| Valuation allowance | — | (1.4) | 2.2 | ||
| Excess tax benefits related to share-based compensation | (0.8) | (1.8) | (3.8) | ||
| Litigation settlements and accruals (see Note 14) | 0.1 | (6.3) | 34.3 | ||
| Goodwill impairment (see Note 5) | — | 1.7 | — | ||
| Tax reform | (3.6) | (52.0) | — | ||
| Capital gain on distribution | — | 3.6 | — | ||
| Other | (0.7) | 0.8 | 1.8 | ||
| Effective income tax rate | 11.7% | (37.2)% | 60.3% |
U.S. Tax Reform: Tax Cuts and Jobs Act
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law. The 2017 Tax Act included a broad range of tax reform provisions affecting businesses, including lower corporate tax rates, changes in business deductions, and new international tax provisions. In response to the 2017 Tax Act, the U.S. Securities and Exchange Commission staff issued guidance regarding the accounting for income taxes associated with the 2017 Tax Act to allow companies to record provisional amounts during a one-year measurement period. For the fiscal year ended September 30, 2018, the Company recognized income tax benefits of $612.6 million on the Company's Consolidated Statements of Operations related to effects of the 2017 Tax Act, which consisted of a deferred income tax benefit of $897.6 million as a result of applying a lower U.S. federal income tax rate to the Company's net deferred tax liabilities as of December 31, 2017 and a one-time transition tax on historical foreign earnings and profits. In the fiscal year ended September 30, 2018, the Company initially recorded a current U.S. income tax expense of $285.0 million on historical foreign earnings and profits through December 31, 2017. The Company completed the accounting for the effects of the 2017 Tax Act in the fiscal quarter ended December 31, 2018 and recognized an income tax benefit of $37.0 million related to a decrease in its foreign earnings and profits through December 31, 2017 (the "transition tax"). The Company expects to pay $182.6 million related to the transition tax, which is net of overpayments and tax credits, over a six-year period commencing in January 2021. There were no adjustments recorded to deferred income taxes related to the 2017 Tax Act during the one-year measurement period.
Prior to the 2017 Tax Act, the Company intended to indefinitely reinvest its foreign cash in foreign investments and foreign operations. After further assessment of the impact of the 2017 Tax Act, the Company reevaluated its position and determined that it was no longer reinvested with respect to foreign subsidiaries whose undistributed earnings are able to be repatriated with minimal to no additional tax impact. Cumulative undistributed earnings of international subsidiaries were $2.4 billion as of
September 30, 2019, $1.6 billion of which is considered permanently reinvested. It is not practicable to estimate the taxes that would be due if such earnings were to be repatriated in the future.
Deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts. Significant components of the Company's deferred tax liabilities (assets) are as follows:
| September 30, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Inventories | $ | 1,293,075 | $ | 1,189,801 | ||||
| Property and equipment | 143,851 | 133,417 | ||||||
| Goodwill and other intangible assets | 709,015 | 853,747 | ||||||
| Other | 1,892 | 747 | ||||||
| Gross deferred tax liabilities | 2,147,833 | 2,177,712 | ||||||
| Net operating loss and tax credit carryforwards | (318,868 | ) | (421,808 | ) | ||||
| Allowance for doubtful accounts | (22,544 | ) | (20,126 | ) | ||||
| Accrued expenses | (33,312 | ) | (17,363 | ) | ||||
| Employee and retiree benefits | (12,420 | ) | (10,210 | ) | ||||
| Share-based compensation | (39,961 | ) | (28,888 | ) | ||||
| Other | (60,215 | ) | (49,892 | ) | ||||
| Gross deferred tax assets | (487,320 | ) | (548,287 | ) | ||||
| Valuation allowance for deferred tax assets | 199,682 | 199,985 | ||||||
| Deferred tax assets, net of valuation allowance | (287,638 | ) | (348,302 | ) | ||||
| Net deferred tax liabilities | $ | 1,860,195 | $ | 1,829,410 |
The following tax net operating loss and credit carryforward information is presented as of September 30, 2019. The Company had $12.4 million of potential tax benefits from federal net operating loss carryforwards, which expire in 1 to 18 years, $171.0 million of potential tax benefits from state net operating loss carryforwards expiring in 1 to 20 years, and $58.7 million of potential tax benefits from foreign net operating loss carryforwards, which have varying expiration dates. The Company had $6.7 million of state tax credit carryforwards, $84.1 million in federal alternative minimum tax credit carryforwards, and $2.1 million in foreign alternative minimum tax credit carryforwards.
The Company assesses the available positive and negative evidence to determine whether deferred tax assets are more likely than not to be realized. As a result of this assessment, valuation allowances have been recorded on certain deferred tax assets. For the fiscal year ended September 30, 2019, the Company decreased the valuation allowance on deferred tax assets by $0.3 million primarily due to a legislative change which will enable the Company to utilize select net operating losses prospectively. This decrease was offset in part by the additional valuation allowances on certain state and foreign net operating loss carryforwards. In the fiscal year ended September 30, 2018, the Company decreased the valuation allowance on deferred tax assets by $11.1 million primarily due to the utilization of capital loss and foreign tax credit carryforwards for which a valuation allowance had been recorded.
In the fiscal year ended September 30, 2019, 2018, and 2017 tax benefits of $7.9 million, $22.7 million and $36.7 million, respectively, related to the exercise of employee stock options and lapses of restricted stock units were recorded in Income Tax Expense (Benefit) in the Company's Consolidated Statements of Operations. The tax benefits recognized in the fiscal years ended September 30, 2019, 2018, and 2017 are not necessarily indicative of amounts that may arise in future periods.
Income tax payments, net of refunds, were $117.7 million, $104.0 million, and $105.0 million in the fiscal years ended September 30, 2019, 2018, and 2017, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations by tax authorities for years before 2015.
As of September 30, 2019 and 2018, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company's financial statements, of $124.2 million and $112.9 million, respectively ($95.0 million and $89.4 million, net of federal tax benefit, respectively). If recognized in the fiscal years ended September 30, 2019 and 2018, $76.8 million and $71.1 million, respectively, of these benefits would have reduced income tax expense and the effective tax rate. As of September 30, 2019 and 2018, included in the unrecognized tax benefits are
$18.6 million and $14.8 million of interest and penalties, respectively, which the Company records in Income Tax Expense (Benefit) in the Company's Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the periods indicated is as follows:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Unrecognized tax benefits at beginning of period | $ | 98,124 | $ | 323,869 | $ | 75,766 | ||||||
| Additions of tax positions of the current year | 18,819 | 2,804 | 252,866 | |||||||||
| Additions to tax positions of the prior years | 751 | 558 | 1,049 | |||||||||
| Reductions of tax positions of the prior years | (10,317 | ) | (224,878 | ) | (668 | ) | ||||||
| Settlements with taxing authorities | — | (1,847 | ) | (3,285 | ) | |||||||
| Expiration of statutes of limitations | (1,720 | ) | (2,382 | ) | (1,859 | ) | ||||||
| Unrecognized tax benefits at end of period | $ | 105,657 | $ | 98,124 | $ | 323,869 |
Included in the additions of unrecognized tax positions in the fiscal year ended September 30, 2017 is approximately $235.1 million for an uncertain tax position related to the $625.0 million civil litigation reserve recognized during the fiscal year (see Note 13). In the fiscal year ended September 30, 2017, this reserve was considered to be non-deductible. In September 2018, the Company made a payment of $625.0 million, plus interest, to resolve this litigation and it was determined that a portion of the settlement was deductible. Accordingly, the Company reduced its uncertain tax position by $10.3 million and $224.9 million in the fiscal years ended September 30, 2019 and 2018, respectively. During the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately $12.4 million.
Note 5. Goodwill and Other Intangible Assets
The following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the fiscal years ended September 30, 2019 and 2018:
| (in thousands) | Pharmaceutical Distribution Services | Other | Total | |||||||||
| Goodwill as of September 30, 2017 | $ | 4,270,550 | $ | 1,773,731 | $ | 6,044,281 | ||||||
| Goodwill recognized in connection with acquisitions | 641,909 | 39,352 | 681,261 | |||||||||
| Goodwill impairment | (59,684 | ) | — | (59,684 | ) | |||||||
| Foreign currency translation | — | (1,586 | ) | (1,586 | ) | |||||||
| Goodwill as of September 30, 2018 | 4,852,775 | 1,811,497 | 6,664,272 | |||||||||
| Goodwill recognized in connection with acquisitions | — | 43,418 | 43,418 | |||||||||
| Foreign currency translation | — | (2,183 | ) | (2,183 | ) | |||||||
| Goodwill as of September 30, 2019 | $ | 4,852,775 | $ | 1,852,732 | $ | 6,705,507 |
In connection with the Company's annual goodwill impairment test as of July 1, 2018, the Company recorded a goodwill impairment of $59.7 million in its Profarma reporting unit. The fair value of the reporting unit was determined based upon Profarma's publicly-traded stock price, plus an estimated purchase premium. This represents a Level 2 nonrecurring fair value measurement.
The following is a summary of other intangible assets:
| September 30, 2019 | September 30, 2018 | |||||||||||||||||||||||||
| (dollars in thousands) | Weighted Average Remaining Useful Life | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||
| Indefinite-lived trade names | $ | 685,324 | $ | — | $ | 685,324 | $ | 685,380 | $ | — | $ | 685,380 | ||||||||||||||
| Finite-lived: | ||||||||||||||||||||||||||
| Customer relationships | 14 years | 1,931,212 | (489,471 | ) | 1,441,741 | 2,549,245 | (555,440 | ) | 1,993,805 | |||||||||||||||||
| Trade names and other | 13 years | 271,521 | (103,750 | ) | 167,771 | 397,946 | (129,303 | ) | 268,643 | |||||||||||||||||
| Total other intangible assets | $ | 2,888,057 | $ | (593,221 | ) | $ | 2,294,836 | $ | 3,632,571 | $ | (684,743 | ) | $ | 2,947,828 |
Amortization expense for finite-lived intangible assets was $167.4 million, $181.2 million, and $160.5 million in the fiscal years ended September 30, 2019, 2018, and 2017, respectively. Amortization expense for finite-lived intangible assets is estimated to be $134.1 million in fiscal 2020, $130.2 million in fiscal 2021, $128.5 million in fiscal 2022, $127.2 million in fiscal 2023, $126.2 million in 2024, and $963.3 million thereafter.
Note 6**. Debt**
Debt consisted of the following:
| September 30, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Revolving credit note | $ | — | $ | — | ||||
| Term loans due 2020 | 399,778 | 398,665 | ||||||
| Overdraft facility due 2021 (£30,000) | 32,573 | 13,269 | ||||||
| Receivables securitization facility due 2022 | 350,000 | 500,000 | ||||||
| Multi-currency revolving credit facility due 2024 | — | — | ||||||
| $500,000, 3.50% senior notes due 2021 | 498,908 | 498,392 | ||||||
| $500,000, 3.40% senior notes due 2024 | 497,744 | 497,255 | ||||||
| $500,000, 3.25% senior notes due 2025 | 496,311 | 495,632 | ||||||
| $750,000, 3.45% senior notes due 2027 | 743,099 | 742,258 | ||||||
| $500,000, 4.25% senior notes due 2045 | 494,514 | 494,298 | ||||||
| $500,000, 4.30% senior notes due 2047 | 492,488 | 492,222 | ||||||
| Capital lease obligations | — | 745 | ||||||
| Nonrecourse debt | 167,477 | 177,453 | ||||||
| Total debt | 4,172,892 | 4,310,189 | ||||||
| Less AmerisourceBergen Corporation current portion | 32,573 | 13,976 | ||||||
| Less nonrecourse current portion | 106,439 | 137,681 | ||||||
| Total, net of current portion | $ | 4,033,880 | $ | 4,158,532 |
Multi-Currency Revolving Credit Facility
The Company has a $1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), which was scheduled to expire in October 2023, with a syndicate of lenders. In September 2019, the Company 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 the Company's 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. The Company pays facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on its debt rating, ranging from 5 basis points to 12.5 basis points, annually, of the total commitment (9 basis points as of September 30, 2019). The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of subsidiaries and asset sales, with which the Company was compliant as of September 30, 2019.
Commercial Paper Program
The Company has a commercial paper program whereby it may from time to time issue short-term promissory notes in an aggregate amount of up to $1.4 billion at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase the Company's borrowing capacity as it is fully backed by the Company's Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under the commercial paper program as of September 30, 2019 and 2018.
Receivables Securitization Facility
The Company has a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which was scheduled to expire in October 2021. In September 2019, the Company entered into an amendment to extend the maturity to September 2022. The Company has available to it an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are based on prevailing market rates for short-term commercial paper or LIBOR, plus a program fee. The Company pays a customary unused fee at prevailing market rates, annually, to maintain the availability under the Receivables Securitization Facility.
In connection with the Receivables Securitization Facility, AmerisourceBergen Drug Corporation sells on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. The facility is a financing vehicle utilized by the Company because it generally offers an attractive interest rate relative to other financing sources. The Company securitizes its trade accounts, which are generally non-interest bearing, in transactions that are accounted for as borrowings. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of September 30, 2019.
Revolving Credit Note and Overdraft Facility
The Company has an uncommitted, unsecured line of credit available to it pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides the Company with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $75 million. The Revolving Credit Note may be decreased or terminated by the bank or the Company at any time without prior notice. The Company also has a £30 million uncommitted U.K. overdraft facility ("Overdraft Facility"), which expires in February 2021, to fund short-term normal trading cycle fluctuations related to its MWI business.
Term Loans
In October 2018, the Company refinanced $400 million of outstanding 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.
Senior Notes
In December 2017, the Company issued $750 million of 3.45% senior notes due December 15, 2027 (the "2027 Notes") and $500 million of 4.30% senior notes due December 15, 2047 (the "2047 Notes"). The 2027 Notes were sold at 99.76% of the principal amount and have an effective yield of 3.48%. The 2047 Notes were sold at 99.51% of the principal amount and have an effective yield of 4.33%. Interest on the 2027 Notes and the 2047 Notes is payable semi-annually in arrears and commenced on June 15, 2018. The 2027 and 2047 Notes rank pari passu to the Company's other senior notes, the Multi-Currency Revolving Credit Facility, the Revolving Credit Note, the Overdraft Facility, and the October 2018 Term Loan.
The Company used the proceeds from the 2027 Notes and the 2047 Notes to finance the early retirement of the $400 million of 4.875% senior notes that were due in 2019, including the payment of a $22.3 million prepayment premium, and to finance the acquisition of H.D. Smith, which was completed in January 2018 (see Note 2).
The senior notes are collectively referred to as the "Notes." Interest on the Notes is payable semiannually in arrears. The Notes were sold at small discounts to the principal amounts and, therefore, have effective yields that are greater than the stated interest rates in the table above. Costs incurred in connection with the issuance of the Notes were deferred and are being amortized over the terms of the Notes. The indentures governing the Notes contain restrictions and covenants, which include limitations on
additional indebtedness; distributions to stockholders; the repurchase of stock and the making of other restricted payments; issuance of preferred stock; creation of certain liens; transactions with subsidiaries and other affiliates; and certain corporate acts such as mergers, consolidations, and the sale of substantially all assets. An additional covenant requires compliance with a financial leverage ratio test, with which the Company was compliant as of September 30, 2019.
Nonrecourse Debt
Nonrecourse debt is comprised of short-term and long-term debt belonging to the Brazil subsidiaries and is repaid solely from the Brazil subsidiaries' cash flows and such debt agreements provide that the repayment of the loans (and interest thereon) is secured solely by the capital stock, physical assets, contracts, and cash flows of the Brazil subsidiaries.
Other Information
Scheduled future principal payments of debt are $111.2 million in fiscal 2020, $450.3 million in fiscal 2021, $877.8 million in fiscal 2022, $4.7 million in fiscal 2023, $501.4 million in fiscal 2024, and $2.3 billion thereafter.
Interest paid on the above indebtedness during the fiscal years ended September 30, 2019, 2018, and 2017 was $167.4 million, $162.1 million, and $125.3 million, respectively.
Total amortization of financing fees and the accretion of original issue discounts, which are recorded as components of Interest Expense, Net on the Consolidated Statements of Operations, were $7.1 million, $7.7 million, and $6.2 million, for the fiscal years ended September 30, 2019, 2018, and 2017, respectively.
Note 7**. Stockholders' Equity and Weighted Average Common Shares Outstanding**
The authorized capital stock of the Company consists of 600,000,000 shares of common stock, par value $0.01 per share (the "common stock"), and 10,000,000 shares of preferred stock, par value $0.01 per share (the "preferred stock").
The board of directors is authorized to provide for the issuance of shares of preferred stock in one or more series with various designations and preferences and relative, participating, optional, or other special rights and qualifications, limitations, or restrictions. Except as required by law, or as otherwise provided by the board of directors of the Company, the holders of preferred stock will have no voting rights and will not be entitled to notice of meetings of stockholders. Holders of preferred stock will be entitled to receive, when declared by the board of directors, out of legally available funds, dividends at the rates fixed by the board of directors for the respective series of preferred stock, and no more, before any dividends will be declared and paid, or set apart for payment, on common stock with respect to the same dividend period. No shares of preferred stock have been issued as of September 30, 2019.
The holders of the Company's common stock are entitled to one vote per share and have the exclusive right to vote for the board of directors and for all other purposes as provided by law. Subject to the rights of holders of the Company's preferred stock, holders of common stock are entitled to receive ratably on a per share basis such dividends and other distributions in cash, stock, or property of the Company as may be declared by the board of directors from time to time out of the legally available assets or funds of the Company.
The following illustrates the components of Accumulated Other Comprehensive Loss, net of income taxes:
| September 30, | ||||||||
| (in thousands) | 2019 | 2018 | ||||||
| Pension and postretirement adjustments | $ | (5,344 | ) | $ | (5,065 | ) | ||
| Foreign currency translation | (107,252 | ) | (74,811 | ) | ||||
| Other | 631 | 623 | ||||||
| Total accumulated other comprehensive loss | $ | (111,965 | ) | $ | (79,253 | ) |
In September 2016, the Company entered into an Accelerated Share Repurchase ("ASR") transaction with a financial institution and paid $400.0 million for the delivery of 4.5 million shares of its common stock. The initial payment of $400.0 million funded stock purchases of $380.0 million and a share holdback of $20.0 million. The ASR transaction was settled in November 2016, at which time the financial institution delivered an additional 0.5 million shares of the Company's common stock. The number of shares ultimately received was based upon the volume-weighted average price of the Company's common stock during the term of the ASR. The Company applied the 4.5 million shares from the ASR to the May 2016 share repurchase program. During the fiscal year ended September 30, 2017, the Company purchased 2.1 million shares of its common stock (included 0.5 million
shares of common stock received as part of the settlement of the ASR) for a total of $118.8 million to complete its authorization under the May 2016 program.
In November 2016, the Company's board of directors authorized a share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2017, the Company purchased 2.7 million shares of its common stock for a total of $211.1 million under this program. During the fiscal year ended September 30, 2018, the Company purchased 7.7 million shares of its common stock for a total of $663.1 million, which included $24.0 million of September 2018 purchases that cash settled in October 2018. During the fiscal year ended September 30, 2019, the Company purchased 1.4 million shares of its common stock for a total of $125.8 million, which excluded $24.0 million of September 2018 purchases that cash settled in October 2018, to complete its authorization under this program.
In October 2018, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $1.0 billion of its outstanding shares of common stock, subject to market conditions. During the fiscal year ended September 30, 2019, the Company purchased 6.7 million shares of its common stock for a total of $538.9 million under this program, which included $14.8 million of September 2019 purchases that cash settled in October 2019. As of September 30, 2019, the Company had $461.1 million of availability under this program.
Common Shares Outstanding
Basic earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed by dividing net income attributable to AmerisourceBergen Corporation by the weighted average number of shares of common stock outstanding, plus the dilutive effect of stock options and restricted stock units during the periods presented.
The following illustrates the components of diluted weighted average shares outstanding:
| Fiscal Year Ended September 30, | |||||||||
| (in thousands) | 2019 | 2018 | 2017 | ||||||
| Weighted average common shares outstanding - basic | 210,165 | 217,872 | 218,375 | ||||||
| Effect of dilutive securities - stock options and restricted stock units | 1,675 | 2,464 | 3,227 | ||||||
| Weighted average common shares outstanding - diluted | 211,840 | 220,336 | 221,602 |
The potentially dilutive stock options and restricted stock units that were antidilutive for the fiscal years ended September 30, 2019, 2018, and 2017 were 4.6 million, 3.2 million, and 4.1 million, respectively.
Note 8. Related Party Transactions
WBA owns more than 10% of the Company's outstanding common stock and is, therefore, considered a related party. The Company operates under various agreements and arrangements with WBA, including a pharmaceutical distribution agreement pursuant to which the Company distributes pharmaceutical products to WBA and an agreement that provides the Company the ability to access favorable economic pricing and generic products through a generic purchasing services arrangement with Walgreens Boots Alliance Development GmbH. Both of these agreements expire in 2026.
Revenue from the various agreements and arrangements with WBA was $60.3 billion, $54.7 billion, and $45.4 billion in the fiscal years ended September 30, 2019, 2018, and 2017, respectively. The Company's receivable from WBA, net of incentives, was $6.1 billion and $5.6 billion as of September 30, 2019 and 2018, respectively.
Note 9**. Retirement and Other Benefit Plans**
The Company sponsors various retirement benefit plans and a deferred compensation plan covering eligible employees.
The Compensation and Succession Planning Committee ("Compensation Committee") of the Company's board of directors has delegated the administration of the Company's retirement and other benefit plans to its Benefits Committee, an internal committee, comprised of senior finance, human resources, and legal executives. The Benefits Committee is responsible for the investment options under the Company's savings plans, as well as performance of the investment advisers and plan administrators.
Defined Contribution Plans
The Company sponsors the AmerisourceBergen Employee Investment Plan (the "Plan"), which is a defined contribution 401(k) plan covering salaried and certain hourly employees. Eligible participants may contribute to the plan from 1% to 50% of their regular compensation before taxes. Prior to January 1, 2017, the Company contributed $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary and $0.50 for each additional $1.00 invested by the participant of up to an additional 2% of salary. Effective January 1, 2017, the Company contributed $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary. Effective January 1, 2019, the Company contributes $1.00 for each $1.00 invested by the participant up to the first 3% of the participant's salary and $0.50 for each additional $1.00 invested by the participant of up to an additional 2% of salary. An additional discretionary contribution, in an amount not to exceed the limits established by the Internal Revenue Code ("IRC"), may also be made depending upon the Company's performance. Based on the Company's performance in fiscal 2019 and 2018, the Company recognized an expense for a discretionary contribution to the Plan in the fiscal years ended September 30, 2019 and 2018. There were no discretionary contributions recognized in the fiscal year ended September 30, 2017. All contributions are invested at the direction of the employee in one or more funds. All contributions vest immediately except for the discretionary contributions made by the Company, which vest in full after five years of credited service.
The Company also sponsors the AmerisourceBergen Corporation Benefit Restoration Plan. This unfunded plan provides benefits to selected key management, including all of the Company's executive officers. Prior to January 1, 2017, the Company contributed an amount equal to 4% of the participant's total cash compensation to the extent that his or her compensation exceeded the annual compensation limit established by Section 401(a) (17) of the IRC. Effective January 1, 2017, this plan provided eligible participants with an annual amount equal to 3% of the participant's total cash compensation to the extent that his or her compensation exceeds the annual compensation limit established by Section 401(a) (17) of the IRC. Effective January 1, 2019, this plan provides eligible participants with an annual amount equal to 4% of the participant's total cash compensation to the extent that his or her compensation exceeds the annual compensation limit established by Section 401(a) (17) of the IRC.
Costs of the defined contribution plans charged to expense for the fiscal years ended September 30, 2019, 2018, and 2017 were $51.0 million, $37.9 million, and $28.3 million, respectively.
Deferred Compensation Plan
The Company sponsors the AmerisourceBergen Corporation 2001 Deferred Compensation Plan. This unfunded plan, under which 2.96 million shares of common stock are authorized for issuance, allows eligible officers, directors, and key management employees to defer a portion of their annual compensation. The amount deferred may be allocated by the employee to cash, mutual funds, or stock credits. Stock credits, including dividend equivalents, are equal to the full and fractional number of shares of common stock that could be purchased with the participant's compensation allocated to stock credits based upon the average of closing prices of common stock during each month, plus, at the discretion of the board of directors, up to one-half of a share of common stock for each full share credited. Stock credit distributions are made in shares of common stock. No shares of common stock have been issued under the deferred compensation plan through September 30, 2019. The Company's liability relating to its deferred compensation plan as of September 30, 2019 and 2018 was $28.0 million and $27.5 million, respectively.
Note 10**. Share-Based Compensation**
Stock Options
The Company's employee stock option plans provide for the granting of incentive and nonqualified stock options to acquire shares of common stock to employees at a price not less than the fair market value of the common stock on the date the option is granted. Option terms and vesting periods are determined at the date of grant by the Compensation Committee of the board of directors. Employee options generally vest ratably, in equal amounts, over a four-year service period and expire in seven years. The Company's non-employee director stock option plans provide for the granting of nonqualified stock options to acquire shares of common stock to non-employee directors at the fair market value of the common stock on the date of the grant. Non-employee director options vest ratably, in equal amounts, over a three-year service period and expire in ten years. Non-employee director options have not been granted since February 2011.
As of September 30, 2019, employee and non-employee director stock options for an additional 12.8 million shares may be granted under the AmerisourceBergen Corporation Omnibus Incentive Plan (the "Plan").
The estimated fair value of options granted is expensed on a straight-line basis over the requisite service periods of the awards and are net of estimated forfeitures. The Company estimates the fair values of option grants using a binomial option pricing model. Expected volatilities are based upon the historical volatility of the Company's common stock and other factors, such as implied market volatility. The Company uses historical exercise data, taking into consideration the optionees' ages at grant date, to estimate the terms for which the options are expected to be outstanding. The Company anticipates that the terms of options
granted in the future will be similar to those granted in the past. The risk-free rates during the terms of such options are based upon the U.S. Treasury yield curve in effect at the time of grant.
The weighted average fair values of the options granted during the fiscal years ended September 30, 2019, 2018, and 2017 were $18.60, $14.16, and $13.57, respectively. The following weighted average assumptions were used to estimate the fair values of options granted:
| Fiscal Year Ended September 30, | |||||
| 2019 | 2018 | 2017 | |||
| Risk-free interest rate | 2.91% | 1.89% | 1.26% | ||
| Expected dividend yield | 1.79% | 1.96% | 1.80% | ||
| Volatility of common stock | 27.67% | 26.54% | 26.78% | ||
| Expected life of the options | 3.77 years | 3.76 years | 3.74 years |
During the fiscal years ended September 30, 2019, 2018, and 2017, the Company recognized stock option expense of $21.0 million, $22.6 million, and $28.6 million, respectively.
A summary of the Company's stock option activity and related information for its option plans for the fiscal year ended September 30, 2019 is presented below:
| (in thousands, except exercise price and contractual term) | Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||
| Outstanding as of September 30, 2018 | 8,421 | $77 | 4 years | $ | 142,557 | ||||||
| Granted | 1,137 | $90 | |||||||||
| Exercised | (1,531 | ) | $50 | ||||||||
| Forfeited | (213 | ) | $84 | ||||||||
| Expired | (155 | ) | $97 | ||||||||
| Outstanding as of September 30, 2019 | 7,659 | $83 | 4 years | $ | 35,319 | ||||||
| Exercisable as of September 30, 2019 | 4,395 | $83 | 3 years | $ | 25,049 | ||||||
| Expected to vest after September 30, 2019 | 3,162 | $83 | 5 years | $ | 10,010 |
The intrinsic value of stock option exercises during the fiscal years ended September 30, 2019, 2018, and 2017 was $51.2 million, $116.7 million, and $116.6 million, respectively.
A summary of the status of the Company's nonvested options as of September 30, 2019 and changes during the fiscal year ended September 30, 2019 is presented below:
| (in thousands, except grant date fair value) | Options | Weighted Average Grant Date Fair Value | |||
| Nonvested as of September 30, 2018 | 3,860 | $15 | |||
| Granted | 1,137 | $19 | |||
| Vested | (1,519 | ) | $15 | ||
| Forfeited | (213 | ) | $16 | ||
| Nonvested as of September 30, 2019 | 3,265 | $16 |
During the fiscal years ended September 30, 2019, 2018, and 2017, the total fair values of options vested were $22.7 million, $25.8 million, and $25.2 million, respectively. Expected future compensation expense relating to the 3.3 million nonvested options outstanding as of September 30, 2019 is $21.6 million, which will be recognized over a weighted average period of 2.0 years.
Restricted Stock Units
Restricted stock units vest in full after three years. The estimated fair value of restricted stock units under the Company's restricted stock unit plans is determined by the product of the number of shares granted and the grant date market price of the Company's common stock. The estimated fair value of restricted stock units is expensed on a straight-line basis over the requisite service period, net of estimated forfeitures. During the fiscal years ended September 30, 2019, 2018, and 2017, the Company recognized restricted stock unit expense of $29.2 million, $26.8 million, and $25.1 million, respectively.
A summary of the status of the Company's nonvested restricted stock units as of September 30, 2019 and changes during the fiscal year ended September 30, 2019 are presented below:
| (in thousands, except grant date fair value) | Restricted Stock Units | Weighted Average Grant Date Fair Value | |||
| Nonvested as of September 30, 2018 | 1,023 | $80 | |||
| Granted | 442 | $89 | |||
| Vested | (152 | ) | $95 | ||
| Forfeited | (91 | ) | $81 | ||
| Nonvested as of September 30, 2019 | 1,222 | $81 |
During the fiscal years ended September 30, 2019, 2018, and 2017, the total fair values of restricted stock units vested were $14.5 million, $15.8 million, and $13.8 million, respectively. Expected future compensation expense relating to the 1.2 million restricted stock units outstanding as of September 30, 2019 is $30.1 million, which will be recognized over a weighted average period of 1.2 years.
Performance Stock Units
Performance stock units are granted to certain executive employees under the Plan and represent common stock potentially issuable in the future. Performance stock units vest at the end of a three-year performance period based upon achievement of specific performance goals. Based upon the extent to which the targets are achieved, vested shares for awards granted prior to fiscal 2018 may range from 0% to 150% of the target award amount. For awards granted beginning in fiscal 2018, vested shares may range from 0% to 200% of the target award amount. The fair value of performance stock units is determined by the grant date market price of the Company's common stock. Compensation expense associated with nonvested performance stock units is recognized over the requisite service period and is dependent on the Company's periodic assessment of the probability of the targets being achieved and its estimate of the number of shares that will ultimately be issued. During the fiscal years ended September 30, 2019, 2018, and 2017, the Company recognized performance stock expense of $8.5 million, $12.8 million, and $8.4 million, respectively.
A summary of the status of the Company's nonvested performance stock units as of September 30, 2019 and changes during the fiscal year ended September 30, 2019 is presented below (based upon target award amounts).
| (in thousands, except grant date fair value) | Performance Stock Units | Weighted Average Grant Date Fair Value | |||
| Nonvested as of September 30, 2018 | 244 | $77 | |||
| Granted | 147 | $90 | |||
| Vested | (105 | ) | $76 | ||
| Forfeited | (3 | ) | $90 | ||
| Nonvested as of September 30, 2019 | 283 | $84 |
Shares that vested over the three-year performance period ended September 30, 2019 were distributed to employees in November 2019.
Note 11. Lease Commitments
The Company has long-term leases for facilities and equipment. In the normal course of business, leases are generally renewed or replaced by other leases. Certain leases include escalation clauses. During the fiscal years ended September 30, 2019, 2018, and 2017, the Company recorded rental expense of $108.9 million, $114.9 million, and $80.7 million, respectively, in Distribution, Selling, and Administrative in the Consolidated Statements of Operations.
As of September 30, 2019, future minimum rental payments under noncancelable operating leases and financing obligations were as follows:
| Payments Due by Fiscal Year (in thousands) | Operating Leases | Financing Obligations 1 | Total | |||||||||
| 2020 | $ | 94,958 | $ | 22,468 | $ | 117,426 | ||||||
| 2021 | 84,002 | 29,790 | 113,792 | |||||||||
| 2022 | 72,224 | 36,914 | 109,138 | |||||||||
| 2023 | 63,507 | 35,950 | 99,457 | |||||||||
| 2024 | 56,377 | 35,276 | 91,653 | |||||||||
| Thereafter | 177,267 | 270,410 | 447,677 | |||||||||
| Total minimum lease payments | $ | 548,335 | $ | 430,808 | $ | 979,143 | ||||||
| 1 Represents the portion of future minimum lease payments relating to facility leases where the Company was determined to be the accounting owner (see Note 1). These payments are recognized as reductions to the financing obligation and as interest expense and exclude the future non-cash termination of the financing obligation. |
Note 12. Employee Severance, Litigation, and Other
The following illustrates the charges incurred by the Company relating to Employee Severance, Litigation, and Other for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Employee severance | $ | 34,147 | $ | 36,694 | $ | 7,767 | ||||||
| Litigation and opioid-related costs | 185,145 | 61,527 | 917,573 | |||||||||
| Acquisition-related deal and integration costs | 43,184 | 33,912 | 16,990 | |||||||||
| Business transformation efforts | 55,437 | 32,963 | 3,700 | |||||||||
| Other restructuring initiatives | 12,561 | 18,424 | 13,297 | |||||||||
| Total employee severance, litigation, and other | $ | 330,474 | $ | 183,520 | $ | 959,327 |
Employee severance in the fiscal year ended September 30, 2019 included 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. Employee severance in the fiscal year ended September 30, 2018 included costs primarily related to position eliminations resulting from the Company's business transformation efforts and restructuring activities related to our consulting business. Employee severance in the fiscal year ended September 30, 2017 included costs primarily related to position eliminations as the Company began to reorganize to further align the organization to its customers' needs.
Litigation and opioid-related costs in the fiscal year ended September 30, 2019 consisted of $116.7 million of legal settlements and accruals and $68.5 million of legal fees in connection with opioid lawsuits and investigations. Litigation and opioid-related costs in the fiscal year ended September 30, 2018 primarily related to opioid lawsuits, investigations, and related initiatives. Litigation and opioid-related costs in the fiscal year ended September 30, 2017 primarily related to litigation settlements and accruals.
Acquisition-related deal and integration costs in the fiscal year ended September 30, 2019 are primarily related to the integration of H.D. Smith. Integration costs primarily include costs to transition servicing legacy H.D. Smith customers to existing company distribution facilities and operating systems. Acquisition-related deal and integration costs in the fiscal year ended September 30, 2018 were primarily related to the acquisition of H.D. Smith.
Business transformation efforts in the fiscal years ended September 30, 2019 and 2018 were primarily related to costs associated with reorganizing the Company to further align the organization to its customers' needs. The majority of these costs were related to services provided by third-party consultants.
Note 13**. Legal Matters and Contingencies**
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, government investigations, 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 from the Company in some matters, and some matters may require years for the Company to resolve. The Company records a reserve for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
For those matters for which the Company has not recognized a liability, the Company cannot predict the outcome of their impact on the Company as uncertainty remains with regard to whether such matters will proceed to trial, whether settlements will be reached, and the amount and terms of any such settlements. Outcomes may include settlements in significant amounts that are not currently estimable, limitations on the Company's conduct, the imposition of corporate integrity agreement obligations, consent decrees, and/or other civil and criminal penalties. From time to time, the Company is also involved in disputes with its customers, which the Company generally seeks to resolve through commercial negotiations. If negotiations are unsuccessful, the parties may litigate the dispute or otherwise attempt to settle the matter.
With respect to the specific legal proceedings and claims described below, unless otherwise noted, the amount or range of possible losses is not reasonably estimable. There can be no assurance that the settlement, resolution, or other outcome of one or more matters, including the matters set forth below, during any subsequent reporting period will not have a material adverse effect on the Company's results of operations or cash flows for that period or on the Company's financial condition.
Opioid Lawsuits and Investigations
A significant number of counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as several states and tribes, have filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and its subsidiaries AmerisourceBergen Drug Corporation ("ABDC") and H.D. Smith, which was acquired in January 2018), pharmaceutical manufacturers, retail chains, medical practices, and physicians relating to the distribution of prescription opioid pain medications. Other lawsuits regarding the distribution of prescription opioid pain medications have been filed by: third-party payors and similar entities; hospitals; hospital groups; and individuals, including cases styled as putative class actions. The lawsuits, which have been and continue to be filed in federal, state, and other courts, generally allege violations of controlled substance laws and various other statutes as well as common law claims, including negligence, public nuisance, and unjust enrichment, and seek equitable relief and monetary damages. An initial group of cases was consolidated for Multidistrict Litigation ("MDL") proceedings before the United States District Court for the Northern District of Ohio (the "Court") in December 2017. Additional cases have been, and will likely continue to be, transferred to the MDL. Further, in June 2018, the Court granted a motion permitting the United States, through the DOJ, to participate in settlement discussions and as a friend of the Court by providing information to facilitate non-monetary remedies.
In April 2018, the Court issued an order creating a litigation track, which includes dispositive motion practice, discovery, and trials in certain bellwether jurisdictions. On December 31, 2018, the Court issued an order selecting two additional cases for a second bellwether discovery and trial track. The timing of discovery, motion practice, and trials for the second set of bellwether cases has not yet been determined.
On October 21, 2019, the Company announced an agreement in principle with two Ohio counties, Cuyahoga and Summit, to settle all claims brought by the two counties against the Company in the first track of the MDL. All claims against the Company were dismissed with prejudice pursuant to the settlement. As a result, the Company recorded a charge of $66.7 million in the fourth quarter of the fiscal year ended September 30, 2019 within Employee Severance, Litigation and Other in its Statement of Operations and in Accrued Expenses and Other on the Company’s Consolidated Balance Sheet.
The Court has continued to oversee court-ordered settlement discussions with attorneys for the plaintiffs and certain states that it instituted at the beginning of the MDL proceedings. On October 21, 2019, the Attorneys General for North Carolina, Pennsylvania, Tennessee, and Texas announced certain proposed settlement terms intended to provide a potential framework for a global resolution of the MDL and other related state court litigation, including cases currently filed and that could be filed. The attorneys general's announcement outlined that the largest U.S. pharmaceutical distributors would be expected to pay an aggregate amount of up to $18.0 billion over 18 years, of which the Company's portion would be 31%, in addition to the development and participation in a program for free or rebated distribution of opioid-abuse medications for a period of 10 years and the implementation of industry-wide changes to be specified to controlled substance anti-diversion programs. The Company is currently engaged in discussions that include the four attorneys general and other parties with the objective of reaching potential terms for a global resolution. The Company is also engaged in related discussions with plaintiffs' lawyers representing local governments and other parties with the same goal of reaching a global resolution with all parties. If agreed, the potential terms for a global resolution would then need to be presented to numerous other states and local governments, and a significant number of such jurisdictions would need to accept the proposed terms in order to achieve an agreement in principle that would provide the finality that the Company requires from a global resolution. Given the large number of parties involved, the complexity and difficulty of the underlying issues, and the resulting uncertainty of achieving a potential global resolution, the Company continues to litigate and
prepare for trial in the cases pending in the MDL as well as in state courts where lawsuits have been filed, and intends to continue to vigorously defend itself in all such cases. A liability associated with a global resolution has not been recognized as of September 30, 2019, since the Company is unable to predict the outcome of settlement discussions with the states and local governments that will need to participate and, therefore, a global resolution cannot be considered probable. Furthermore, significant uncertainty remains with regard to whether such matters will proceed to trial, and, given the inherent uncertainty related to such litigation, the Company is not in a position to assess the likely outcome, and therefore unable to estimate the range of possible loss.
In June 2019, attorneys for some of the plaintiffs filed a motion proposing a procedure to certify a nationwide "negotiation class" of cities and counties for the purpose of negotiating and settling with defendants engaged in the nationwide manufacturing, sale, or distribution of opioids. The attorneys subsequently withdrew the motion and refiled an amended motion on July 9, 2019. The Court granted the motion on September 11, 2019 and certain defendants, including ABDC, are appealing.
On November 6, 2019, a New York state court entered an order accelerating the trial date for cases brought by Nassau and Suffolk Counties and the New York Attorney General against a variety of defendants, including the Company. Pursuant to that order, the trial, which is not part of the MDL, was scheduled to begin on January 20, 2020, however during a subsequent meeting on November 13, 2019, the court amended the trial date to begin in March 2020.
Aside from those parties that have already filed suit, other entities, including additional attorneys general’s offices, counties, and cities in multiple states, have indicated their intent to sue. The Company is vigorously defending itself in the pending lawsuits and intends to vigorously defend itself against any threatened lawsuits. The Company is not in a position to assess the likely outcome or its exposure, if any, with respect to these matters.
The Company has also received subpoenas, civil investigative demands, and other requests for information, requesting the production of documents regarding the distribution of prescription opioid pain medications from government agencies in other jurisdictions, including certain states. The Company is engaged in discussions with representatives from these government agencies regarding the requests and has been producing responsive documents.
Since July 2017, the Company has received subpoenas from several U.S. Attorney's Offices. Those subpoenas request the production of a broad range of documents pertaining to ABDC's distribution of controlled substances and diversion control programs. The Company has been engaged in discussions with the various U.S. Attorney’s Offices, including the Health Care and Government Fraud Unit of the Criminal Division of the U.S. Attorney's Office for the District of New Jersey, and has been producing documents in response to the subpoenas.
In June 2012, the Attorney General of the State of West Virginia ("West Virginia AG") filed complaints, which were amended, in the Circuit Court of Boone County, West Virginia, against a number of pharmaceutical wholesale distributors, including the Company's subsidiary ABDC, alleging, among other claims, that the distributors failed to provide effective controls and procedures to guard against diversion of controlled substances for illegitimate purposes in West Virginia, acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse controlled substances, and failed to report suspicious orders of uncontrolled substances in accordance with state regulations. The West Virginia AG was seeking monetary damages and injunctive and other equitable relief. This matter was dismissed with prejudice on January 9, 2017 pursuant to a settlement agreement that provided for the payment of $16.0 million and express denial of the allegations in the complaints and any wrongdoing. During the fiscal year ended September 30, 2017, the Company recognized the $16.0 million settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations. The Company paid the $16.0 million settlement in fiscal 2017.
Government Enforcement and Related Litigation Matters
Various government agencies, including the FDA, the Consumer Protection Branch of the Civil Division of the DOJ, and state boards of pharmacy, regulate the compounding of pharmaceutical products. The Company’s subsidiary, PharMEDium, operates Section 503B outsourcing facilities that must comply with current Good Manufacturing Practice ("cGMP") requirements and are inspected by the FDA periodically to determine compliance. The FDA and the DOJ have broad enforcement powers, including the authority to enjoin PharMEDium's Section 503B outsourcing facilities from distributing pharmaceutical products.
On May 17, 2019, PharMEDium reached an agreement on the terms of the Consent Decree with the FDA and the 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. The Company 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 required at least annually for a period of four years.
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.
Additionally, state boards of pharmacy may revoke, limit, or deny approval of licenses required under state law to compound or distribute pharmaceutical products. As a result of reciprocal state actions initiated due to the FDA’s inspectional observations, PharMEDium has suspended shipping of its compounded sterile preparations into several states, either voluntarily, by consent or pursuant to orders of state licensing authorities.
Subpoenas and Ongoing Investigations
From time to time, the Company receives subpoenas or requests for information from various government agencies relating to the Company's business or to the business of a customer, supplier, or other industry participant. The Company's responses often require time and effort and can result in considerable costs being incurred. Most of these matters are resolved without incident; however, such subpoenas or requests can lead to the assertion of claims or the commencement of civil or criminal legal proceedings against the Company and other members of the healthcare industry, as well as to substantial settlements.
In January 2017, the Company's subsidiary U.S. Bioservices Corporation ("U.S. Bio") received a subpoena for information from the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY") relating to its activities in connection with billing for products and making returns of potential overpayments to government payers. The Company engaged in discussions with the USAO-EDNY and produced documents in response to the subpoena. In April 2019, the government informed the Company that it had filed a notice with the U.S. District Court for the Eastern District of New York that it was declining to intervene in a filed qui tam action related to its investigation. The case was unsealed in April 2019 and counsel for the relator has stated that they intend to file an amended complaint under seal, which they intend to submit to the USAO-EDNY for further consideration.
The Company and its subsidiary AmerisourceBergen Specialty Group ("ABSG") had previously responded to subpoenas from the USAO-EDNY requesting production of documents and information relating to the pre-filled syringe program of ABSG’s subsidiary Medical Initiatives, Inc., ABSG's oncology distribution center, its group purchasing organization for oncologists, and intercompany transfers of certain oncology products. Medical Initiatives, Inc. voluntarily ceased operations in early 2014.
On September 27, 2017, pursuant to the terms of a plea agreement, ABSG entered a guilty plea to a one-count strict-liability misdemeanor violation of the Federal Food, Drug, and Cosmetic Act in the United States District Court of the Eastern District of New York. Under the terms of the agreement, which were approved by the Court, ABSG paid a total criminal fine and forfeiture of $260.0 million in fiscal 2017. The guilty plea resolves the federal criminal investigation related to the failure of Medical Initiatives, Inc. to duly register with the FDA. The Company also entered into a Compliance Agreement with the United States Department of Justice for a period of three years. During the fiscal year ended September 30, 2017, the Company recognized the $260.0 million settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
The USAO-EDNY also pursued alleged civil claims under the False Claims Act. ABSG reached an agreement in principle with the USAO-EDNY during the fiscal quarter ended December 31, 2017, which the Company expected would resolve the alleged civil claims in their entirety. In the fourth quarter of the fiscal year ended September 30, 2018, the Company reached final terms of the settlement agreement with the USAO-EDNY, resolved potential administrative action by the Office of Inspector General of the U.S. Department of Health and Human Services by entering into a Corporate Integrity Agreement, and obtained dismissal
with prejudice of the potential civil claims. The Corporate Integrity Agreement has a five-year term, which commenced on September 28, 2018, and requires, among other things, the maintenance of a compliance program, an independent review organization and a financial recoupment program. Pursuant to the terms of the settlement agreement with the USAO-EDNY, ABSG made a payment on September 28, 2018 to resolve the civil litigation without making any admission of liability in the amount of $625.0 million, plus interest from December 1, 2017. As a result of the agreement in principle, the Company had previously accrued a reserve in the amount of $625.0 million in the fiscal year ended September 30, 2017. The reserve was recognized in Employee Severance, Litigation, and Other on the Company's Statement of Operations.
The Company’s subsidiary U.S. Bio settled claims with the U.S. Attorney’s Office for the Southern District of New York ("USAO-SDNY") and with various states arising from the previously disclosed matter involving the dispensing of one product and U.S. Bio’s relationship with the manufacturer of that product. In accordance with the settlement agreements, the United States’ complaint against U.S. Bio was dismissed and the participating states agreed not to bring, and to dismiss with prejudice, any state law claims that they had the authority to bring against U.S. Bio. The Company paid the United States $10.7 million in fiscal 2017 and paid the participating states $2.8 million in fiscal 2018. During the year ended September 30, 2017, the Company recognized the $13.4 million settlement in Employee Severance, Litigation, and Other on the Company's Consolidated Statements of Operations.
Other Contingencies
New York State ("NYS") enacted the Opioid Stewardship Act ("OSA"), which went into effect on July 1, 2018. The OSA established an annual $100 million Opioid Stewardship Fund (the "Fund") and requires manufacturers, distributors, and importers licensed in NYS to ratably source the Fund. The ratable share of the assessment for each licensee was to be based upon opioids sold or distributed to or within NYS. In the fourth quarter of the fiscal year ended September 30, 2018, the Company accrued $22.0 million as an estimate of its liability under the OSA for opioids distributed from January 1, 2017 through September 30, 2018 and recognized this reserve in Cost of Goods Sold on its Consolidated Statement of Operations and in Accrued Expenses and Other on its Consolidated Balance Sheet as of September 30, 2018. In December 2018, the OSA was ruled unconstitutional by the U.S. District Court for the Southern District of New York, and, as a result, the Company reversed the $22.0 million accrual in the fiscal quarter ended December 31, 2018. NYS filed an appeal of the court decision on January 17, 2019; however, the Company does not believe a loss contingency is probable.
Note 14**. Litigation Settlements**
Antitrust Settlements
Numerous lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. These lawsuits are generally brought as class actions. The Company has not been a named a plaintiff in any of these lawsuits, but has been a member of the direct purchasers' class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the lawsuits has gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds. During the fiscal years ended September 30, 2019, 2018, and 2017, the Company recognized gains of $145.9 million, $35.9 million, and $1.4 million, respectively, relating to these lawsuits. These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold in the Company's Consolidated Statements of Operations.
Note 15**. Business Segment Information**
The Company is organized based upon the products and services it provides to its customers. The Company's operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure and, therefore, have been included in Other for the purpose of reportable segment presentation. Other consists of operating segments that focus on global commercialization services and animal health (MWI Animal Health). The operating segments that focus on global commercialization services include AmerisourceBergen Consulting Services ("ABCS") and World Courier.
The chief operating decision maker ("CODM") of the Company is the Chairman, President & Chief Executive Officer of the Company, whose function is to allocate resources to, and assess the performance of, the Company's operating segments.
The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, outsourced compounded sterile preparations, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services
reportable segment provides pharmaceutical distribution (including plasma and other blood products, injectible pharmaceuticals, vaccines, and other specialty pharmaceutical products) and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. Additionally, the Pharmaceutical Distribution Services reportable segment provides data analytics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers. The Pharmaceutical Distribution Services reportable segment also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, it delivers packaging solutions to institutional and retail healthcare providers.
ABCS, through a number of operating businesses, provides a full suite of integrated manufacturer services that range from clinical trial support to product post-approval and commercialization support. World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. MWI is a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. Additionally, MWI offers demand-creating sales force services to manufacturers.
The following illustrates reportable and operating segment revenue information for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Pharmaceutical Distribution Services | $ | 172,813,537 | $ | 161,699,343 | $ | 147,453,495 | ||||||
| Other: | ||||||||||||
| MWI Animal Health | 3,975,232 | 3,789,759 | 3,636,305 | |||||||||
| Global Commercialization Services | 2,893,109 | 2,542,971 | 2,111,558 | |||||||||
| Total Other | 6,868,341 | 6,332,730 | 5,747,863 | |||||||||
| Intersegment eliminations | (92,757 | ) | (92,438 | ) | (57,532 | ) | ||||||
| Revenue | $ | 179,589,121 | $ | 167,939,635 | $ | 153,143,826 |
Intersegment eliminations primarily represent the elimination of certain Pharmaceutical Distribution Services reportable segment sales to MWI.
The following illustrates reportable segment operating income information for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Pharmaceutical Distribution Services | $ | 1,671,251 | $ | 1,626,748 | $ | 1,643,629 | ||||||
| Other | 380,660 | 355,091 | 373,797 | |||||||||
| Intersegment eliminations | (659 | ) | (609 | ) | (556 | ) | ||||||
| Total segment operating income | $ | 2,051,252 | $ | 1,981,230 | $ | 2,016,870 |
The following reconciles total segment operating income to income before income taxes for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Total segment operating income | $ | 2,051,252 | $ | 1,981,230 | $ | 2,016,870 | ||||||
| Gain from antitrust litigation settlements | 145,872 | 35,938 | 1,395 | |||||||||
| LIFO credit (expense) | 22,544 | (67,324 | ) | 157,782 | ||||||||
| 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 | ) | (156,378 | ) | ||||||
| Employee severance, litigation, and other | (330,474 | ) | (183,520 | ) | (959,327 | ) | ||||||
| Goodwill impairment | — | (59,684 | ) | — | ||||||||
| Impairment of long-lived assets | (570,000 | ) | — | — | ||||||||
| Operating income | 1,111,923 | 1,443,685 | 1,060,342 | |||||||||
| Other (income) loss | (12,952 | ) | 25,469 | (2,730 | ) | |||||||
| Interest expense, net | 157,769 | 174,699 | 145,185 | |||||||||
| Loss on consolidation of equity investments | — | 42,328 | — | |||||||||
| Loss on early retirement of debt | — | 23,766 | — | |||||||||
| Income before income taxes | $ | 967,106 | $ | 1,177,423 | $ | 917,887 |
Segment operating income is evaluated by the CODM of the Company and excludes 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. Segment measures were adjusted in fiscal 2019 to exclude impairment of long-lived assets as the CODM excludes these costs in the measurement of segment performance. All corporate office expenses are allocated to the operating segment level.
The Company incurred remediation costs in connection with the suspended production activities at PharMEDium (see Notes 1 and 13). These remediation costs are primarily classified in Cost of Goods sold in the Consolidated Statements of Operations. Future remediation costs will also include costs related to remediation activities responsive to FDA inspectional observations generally applicable to all of PharMEDium’s 503B outsourcing facilities, including product stability studies.
The Company recorded a $13.7 million gain on the sale of an equity investment in Other (Income) Loss in the Company's Consolidated Statement of Operations in the fiscal year ended September 30, 2019.
The Company recorded a $30.0 million impairment of a non-customer note receivable related to a start-up venture in Other (Income) Loss in the Company's Consolidated Statement of Operations in the fiscal year ended September 30, 2018.
The following illustrates total assets by reportable segment for the periods indicated:
| September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Pharmaceutical Distribution Services | $ | 33,160,529 | $ | 31,892,621 | $ | 29,691,127 | ||||||
| Other | 6,011,451 | 5,777,217 | 5,625,343 | |||||||||
| Total assets | $ | 39,171,980 | $ | 37,669,838 | $ | 35,316,470 |
The CODM does not review assets by operating segment for the purpose of assessing performance or allocating resources.
The following illustrates depreciation and amortization by reportable segment for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Pharmaceutical Distribution Services | $ | 232,735 | $ | 225,608 | $ | 188,065 | ||||||
| Other | 69,824 | 64,768 | 53,160 | |||||||||
| Acquisition-related intangibles amortization | 159,848 | 174,751 | 156,378 | |||||||||
| Total depreciation and amortization | $ | 462,407 | $ | 465,127 | $ | 397,603 |
Depreciation and amortization includes depreciation and amortization of property and equipment and intangible assets, but excludes amortization of deferred financing costs and other debt-related items, which are included in interest expense, net.
The following illustrates capital expenditures by reportable segment for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||
| (in thousands) | 2019 | 2018 | 2017 | |||||||||
| Pharmaceutical Distribution Services | $ | 210,161 | $ | 190,191 | $ | 339,478 | ||||||
| Other | 100,061 | 146,220 | 126,919 | |||||||||
| Total capital expenditures | $ | 310,222 | $ | 336,411 | $ | 466,397 |
Note 16. Fair Value of Financial Instruments
The recorded amounts of the Company's cash and cash equivalents, accounts receivable, and accounts payable as of September 30, 2019 and 2018 approximate fair value based upon the relatively short-term nature of these financial instruments. Within Cash and Cash Equivalents, the Company had $1,552.0 million and $1,050.0 million of investments in money market accounts as of September 30, 2019 and 2018. The fair value of the money market accounts was determined based upon unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.
The recorded amount of long-term debt (see Note 6) and the corresponding fair value as of September 30, 2019 were $4,033.9 million and $4,158.4 million, respectively. The recorded amount of long-term debt and the corresponding fair value as of September 30, 2018 were $4,158.5 million and $4,000.1 million, respectively. The fair value of long-term debt was determined based upon inputs other than quoted prices, otherwise known as Level 2 inputs.
Note 17. Quarterly Financial Information (Unaudited)
| Fiscal Year Ended September 30, 2019 | ||||||||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||||
| Revenue | $ | 45,392,452 | $ | 43,319,602 | $ | 45,239,265 | $ | 45,637,802 | $ | 179,589,121 | ||||||||||
| Gross profit (a) | $ | 1,297,580 | $ | 1,424,756 | $ | 1,231,239 | $ | 1,184,737 | $ | 5,138,312 | ||||||||||
| Distribution, selling, and administrative expenses; depreciation; and amortization | 779,085 | 751,802 | 764,539 | 830,489 | 3,125,915 | |||||||||||||||
| Employee severance, litigation, and other | 40,672 | 55,389 | 60,006 | 174,407 | 330,474 | |||||||||||||||
| Impairment of long-lived assets | — | 570,000 | — | — | 570,000 | |||||||||||||||
| Operating income | $ | 477,823 | $ | 47,565 | $ | 406,694 | $ | 179,841 | $ | 1,111,923 | ||||||||||
| Net income (b) | $ | 391,753 | $ | 28,073 | $ | 302,002 | $ | 132,307 | $ | 854,135 | ||||||||||
| Net income attributable to AmerisourceBergen Corporation (b) | $ | 393,652 | $ | 27,135 | $ | 301,959 | $ | 132,619 | $ | 855,365 | ||||||||||
| Earnings per share operations: | ||||||||||||||||||||
| Basic | $ | 1.86 | $ | 0.13 | $ | 1.44 | $ | 0.64 | $ | 4.07 | ||||||||||
| Diluted | $ | 1.84 | $ | 0.13 | $ | 1.43 | $ | 0.63 | $ | 4.04 |
| (a) | The first, second, third, and fourth quarters of the fiscal year ended September 30, 2019 include gains from antitrust litigation settlements of $87.3 million, $52.0 million, $3.5 million, and $3.1 million, respectively. The first, second, and third quarter of the fiscal year ended September 30, 2019 include LIFO credits of $3.0 million, $66.8 million, and $9.9 million, respectively. The fourth quarter of the fiscal year ended September 30, 2019 includes LIFO expense of $57.2 million. The first, second, third, and fourth quarters of the fiscal year ended September 30, 2019 include PharMEDium remediation costs of $17.9 million, $12.3 million, $11.7 million, and $6.7 million, respectively. The first quarter of the fiscal year ended September 30, 2019 includes a $22.0 million reversal of a previous estimate of our liability under the New York State Opioid Stewardship Act. |
| (b) | The first quarter of the fiscal year ended September 30, 2019 includes a $37.0 million income tax benefit adjustment to the one-time transition tax on historical foreign earnings and profits through December 31, 2017. The second quarter of the fiscal year ended September 30, 2019 includes a gain on the sale of an equity investment of $13.7 million. |
| Fiscal Year Ended September 30, 2018 | ||||||||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||||
| Revenue | $ | 40,466,332 | $ | 41,033,858 | $ | 43,142,309 | $ | 43,297,136 | $ | 167,939,635 | ||||||||||
| Gross profit (a) | $ | 1,112,652 | $ | 1,255,683 | $ | 1,211,341 | $ | 1,032,641 | $ | 4,612,317 | ||||||||||
| Distribution, selling, and administrative expenses; depreciation; and amortization | 663,658 | 736,814 | 746,593 | 778,363 | 2,925,428 | |||||||||||||||
| Employee severance, litigation, and other | 30,021 | 37,449 | 75,553 | 40,497 | 183,520 | |||||||||||||||
| Goodwill impairment | — | — | — | 59,684 | 59,684 | |||||||||||||||
| Operating income | $ | 418,973 | $ | 481,420 | $ | 389,195 | $ | 154,097 | $ | 1,443,685 | ||||||||||
| Net income (b) | $ | 861,853 | $ | 282,160 | $ | 277,875 | $ | 194,004 | $ | 1,615,892 | ||||||||||
| Net income attributable to AmerisourceBergen Corporation (b) | $ | 861,853 | $ | 287,455 | $ | 275,809 | $ | 233,288 | $ | 1,658,405 | ||||||||||
| Earnings per share operations: | ||||||||||||||||||||
| Basic | $ | 3.95 | $ | 1.31 | $ | 1.26 | $ | 1.08 | $ | 7.61 | ||||||||||
| Diluted | $ | 3.90 | $ | 1.29 | $ | 1.25 | $ | 1.07 | $ | 7.53 |
| (a) | The second and third quarters of the fiscal year ended September 30, 2018 include gains from antitrust litigation settlements of $0.3 million and $35.6 million, respectively. The third quarter of the fiscal year ended September 30, 2018 includes a LIFO credit of $16.1 million. The fourth quarter of the fiscal year ended September 30, 2018 includes LIFO expense of $83.5 million. The second, third, and fourth quarters of the fiscal year ended September 30, 2018 include PharMEDium remediation costs of $22.5 million, $12.0 million, and $26.6 million, respectively. The fourth quarter of the fiscal year ended September 30, 2018 includes a $22.0 million estimate of our liability under the New York State Opioid Stewardship Act. |
| (b) | The first quarter of the fiscal year ended September 30, 2018 includes a loss on early retirement of debt of $23.8 million. The second quarter of the fiscal year ended September 30, 2018 includes a $42.3 million loss on consolidation of equity investments and a $30.0 million impairment of a non-customer note receivable. The first and fourth quarters of the fiscal year ended September 30, 2018 included discrete income tax benefits recognized in connection with the 2017 Tax Act of $587.6 million and $25.0 million, respectively. |
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