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
To the Stockholders and the 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2020, 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, 2020, 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, 2020 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 Matters and Contingencies - Opioid Lawsuits | |||||
| Description of the Matter | As discussed in Note 14 of the consolidated financial statements, the Company is involved in a significant number of lawsuits with counties, municipalities, and other governmental entities in a majority of U.S. states and Puerto Rico, as well as several tribes relating to the distribution of prescription opioid pain medications (“opioid litigation”). 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 has recognized a $6.6 billion ($5.5 billion after tax) charge related to the opioid litigation for the year ended September 30, 2020 and has disclosed that it is unable to estimate the range of possible loss in excess of the amount accrued. In connection with this charge, the Company recognized a related income tax benefit, which reflects an unrecognized tax benefit resulting from uncertainty in the amount that is more likely than not to be deductible for U.S. federal and state income tax purposes based in part upon the final terms and conditions of a settlement agreement. The Company used significant judgment in measuring the amount of income tax benefit that qualified for recognition and may ultimately be deductible for U.S. federal and state purposes. | ||||
| Auditing management’s determination of whether the opioid litigation liability is probable and reasonably estimable, and the related measurement and disclosures, is highly subjective and requires significant judgment. For instance, auditing management’s judgments related to the opioid litigation was challenging due to the significant judgment applied in determining the timing and magnitude of the liability and whether a range of possible loss in excess of the amount accrued is reasonably estimable, based upon the progress of settlement discussions and a potential settlement framework. In addition, auditing management's estimate of the amount of income tax benefit related to the Company's uncertain tax position that qualified for recognition was challenging because the assumptions and estimates require significant judgment as they are based upon settlement terms and documentation, including provisions related to deductibility, that have not been finalized. | |||||
| 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 the opioid litigation liability and related uncertain tax position. This included testing controls related to the Company’s process for identification, recognition, measurement and disclosure of the opioid litigation and testing controls related to the Company’s process to assess the technical merits of its tax position, including the Company’s assessment as to the amount of benefit that is more likely than not to be realized upon ultimate settlement with taxing authorities. For example, we inspected 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 the opioid litigation liability and the related financial statement footnote disclosures. | ||||
| To test the Company’s opioid litigation liability, our substantive audit procedures included, among others, testing the completeness of the opioid litigation contingencies subject to evaluation by the Company and evaluating the Company’s analysis of its assessment of the probability of outcome by considering the progress of settlement discussions involving the opioid litigation and communications with plaintiffs, as well as the experience of other similar entities when evaluating the Company’s conclusions. We inspected responses to inquiry letters sent to both internal and external legal counsel, held discussions with internal and external legal counsel to confirm our understanding of the settlement discussions, and obtained 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. In addition, we also evaluated the adequacy of the Company’s financial statement disclosures. | |||||
| We involved our tax subject matter professionals in assessing the technical merits and measurement of the Company’s tax position related to the opioid litigation liability. We examined the Company’s analysis and evaluated the underlying facts upon which the tax position was based. We used our knowledge of historical settlement activity to evaluate the Company’s measurement of the uncertain tax position associated with the opioid litigation. This included evaluating third-party advice obtained by the Company and performing inquiries of the Company’s external income tax advisers. We also evaluated the adequacy of the Company’s financial statement disclosures and obtained written representations from executives of the Company related to this income tax matter. | |||||
| Other Legal Matters and Contingencies | |||||
| Description of the Matter | As discussed in Note 14 of the consolidated financial statements, in addition to the opioid litigation addressed above, the Company is involved in government subpoenas, civil investigative demands, derivative actions, 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. | ||||
| Auditing management’s determination of whether a loss for a legal contingency is probable and reasonably estimable, reasonably possible or remote, and the related measurement and disclosures, is highly subjective and requires significant judgment. For instance, auditing management’s judgments was challenging due to the significant judgment applied in determining the likelihood of resolution of the matters through settlement or litigation. | |||||
| 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. 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 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 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. | |||||
| /s/ Ernst & Young LLP |
We have served as the Company's auditor since 1985.
Philadelphia, Pennsylvania
November 19, 2020
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||||||||
| (in thousands, except share and per share data) | 2020 | 2019 | ||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 4,597,746 | $ | 3,374,194 | ||||||||||
| Accounts receivable, less allowances for returns and doubtful accounts: 2020 — $1,417,308; 2019 — $1,222,906 | 13,846,301 | 12,386,879 | ||||||||||||
| Inventories | 12,589,278 | 11,060,254 | ||||||||||||
| Right to recover asset | 1,344,649 | 1,147,483 | ||||||||||||
| Income tax receivable (Note 5) | 488,428 | 5,859 | ||||||||||||
| Prepaid expenses and other | 189,300 | 157,385 | ||||||||||||
| Total current assets | 33,055,702 | 28,132,054 | ||||||||||||
| Property and equipment, net | 1,484,808 | 1,770,516 | ||||||||||||
| Goodwill | 6,706,719 | 6,705,507 | ||||||||||||
| Other intangible assets | 1,886,107 | 2,294,836 | ||||||||||||
| Deferred income taxes | 361,640 | — | ||||||||||||
| Other assets | 779,854 | 269,067 | ||||||||||||
| TOTAL ASSETS | $ | 44,274,830 | $ | 39,171,980 | ||||||||||
| LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 31,705,055 | $ | 28,385,074 | ||||||||||
| Accrued expenses and other | 1,646,763 | 1,057,208 | ||||||||||||
| Short-term debt | 501,259 | 139,012 | ||||||||||||
| Total current liabilities | 33,853,077 | 29,581,294 | ||||||||||||
| Long-term debt | 3,618,261 | 4,033,880 | ||||||||||||
| Long-term financing obligation (Note 1) | — | 320,518 | ||||||||||||
| Accrued income taxes | 284,845 | 284,075 | ||||||||||||
| Deferred income taxes | 686,485 | 1,860,195 | ||||||||||||
| Other liabilities | 472,855 | 98,812 | ||||||||||||
| Accrued litigation liability | 6,198,943 | — | ||||||||||||
| Commitments and contingencies (Note 14) | ||||||||||||||
| Stockholders' (deficit) equity: | ||||||||||||||
| Common stock, $0.01 par value — authorized, issued, and outstanding: 2020 — 600,000,000 shares, 287,790,479 shares and 204,226,465 shares; 2019 — 600,000,000 shares, 285,295,170 shares and 206,760,654 shares | 2,878 | 2,853 | ||||||||||||
| Additional paid-in capital | 5,081,776 | 4,850,142 | ||||||||||||
| Retained earnings | 518,335 | 4,235,491 | ||||||||||||
| Accumulated other comprehensive loss | (108,830) | (111,965) | ||||||||||||
| Treasury stock, at cost: 2020 — 83,564,014 shares; 2019 — 78,534,516 shares | (6,513,083) | (6,097,604) | ||||||||||||
| Total AmerisourceBergen Corporation stockholders' (deficit) equity | (1,018,924) | 2,878,917 | ||||||||||||
| Noncontrolling interest | 179,288 | 114,289 | ||||||||||||
| Total (deficit) equity | (839,636) | 2,993,206 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 44,274,830 | $ | 39,171,980 |
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) | 2020 | 2019 | 2018 | |||||||||||||||||
| Revenue | $ | 189,893,926 | $ | 179,589,121 | $ | 167,939,635 | ||||||||||||||
| Cost of goods sold | 184,702,042 | 174,450,809 | 163,327,318 | |||||||||||||||||
| Gross profit | 5,191,884 | 5,138,312 | 4,612,317 | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Distribution, selling, and administrative | 2,767,217 | 2,663,508 | 2,460,301 | |||||||||||||||||
| Depreciation | 280,187 | 294,965 | 283,971 | |||||||||||||||||
| Amortization | 110,875 | 167,442 | 181,156 | |||||||||||||||||
| Employee severance, litigation, and other (Note 13) | 6,807,307 | 330,474 | 183,520 | |||||||||||||||||
| Goodwill impairment | — | — | 59,684 | |||||||||||||||||
| Impairment of PharMEDium assets (Note 1) | 361,652 | 570,000 | — | |||||||||||||||||
| Operating (loss) income | (5,135,354) | 1,111,923 | 1,443,685 | |||||||||||||||||
| Other (income) loss | (1,581) | (12,952) | 25,469 | |||||||||||||||||
| Interest expense, net | 137,883 | 157,769 | 174,699 | |||||||||||||||||
| Loss on consolidation of equity investments | — | — | 42,328 | |||||||||||||||||
| Loss on early retirement of debt | 22,175 | — | 23,766 | |||||||||||||||||
| (Loss) income before income taxes | (5,293,831) | 967,106 | 1,177,423 | |||||||||||||||||
| Income tax (benefit) expense | (1,894,273) | 112,971 | (438,469) | |||||||||||||||||
| Net (loss) income | (3,399,558) | 854,135 | 1,615,892 | |||||||||||||||||
| Net (income) loss attributable to noncontrolling interest | (9,158) | 1,230 | 42,513 | |||||||||||||||||
| Net (loss) income attributable to AmerisourceBergen Corporation | $ | (3,408,716) | $ | 855,365 | $ | 1,658,405 | ||||||||||||||
| Earnings per share: | ||||||||||||||||||||
| Basic | $ | (16.65) | $ | 4.07 | $ | 7.61 | ||||||||||||||
| Diluted | $ | (16.65) | $ | 4.04 | $ | 7.53 | ||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||
| Basic | 204,783 | 210,165 | 217,872 | |||||||||||||||||
| Diluted | 204,783 | 211,840 | 220,336 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net (loss) income | $ | (3,399,558) | $ | 854,135 | $ | 1,615,892 | ||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||
| Foreign currency translation adjustments | (7,872) | (32,957) | (36,904) | |||||||||||||||||
| Loss on consolidation of equity investments | — | — | 45,941 | |||||||||||||||||
| Other, net | (1,074) | (271) | (756) | |||||||||||||||||
| Total other comprehensive (loss) income | (8,946) | (33,228) | 8,281 | |||||||||||||||||
| Total comprehensive (loss) income | (3,408,504) | 820,907 | 1,624,173 | |||||||||||||||||
| Comprehensive loss attributable to noncontrolling interest | 2,923 | 1,746 | 50,829 | |||||||||||||||||
| Comprehensive (loss) income attributable to AmerisourceBergen Corporation | $ | (3,405,581) | $ | 822,653 | $ | 1,675,002 |
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, 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 | |||||||||||||||||||||||||||||||||||||
| Adoption of ASC 842, net of tax (Note 1) | — | — | 35,138 | — | — | — | 35,138 | |||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | (3,408,716) | — | — | 9,158 | (3,399,558) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 3,135 | — | (12,081) | (8,946) | |||||||||||||||||||||||||||||||||||||
| Cash dividends, $1.66 per share | — | — | (343,578) | — | — | — | (343,578) | |||||||||||||||||||||||||||||||||||||
| Exercises of stock options | 21 | 159,512 | — | — | — | — | 159,533 | |||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | 74,411 | — | — | — | — | 74,411 | |||||||||||||||||||||||||||||||||||||
| Purchases of common stock | — | — | — | — | (405,692) | — | (405,692) | |||||||||||||||||||||||||||||||||||||
| Profarma retail equity offering | — | (1,567) | — | — | — | 67,922 | 66,355 | |||||||||||||||||||||||||||||||||||||
| Employee tax withholdings related to restricted share vesting | — | — | — | — | (9,787) | — | (9,787) | |||||||||||||||||||||||||||||||||||||
| Other | 4 | (722) | — | — | — | — | (718) | |||||||||||||||||||||||||||||||||||||
| September 30, 2020 | $ | 2,878 | $ | 5,081,776 | $ | 518,335 | $ | (108,830) | $ | (6,513,083) | $ | 179,288 | $ | (839,636) |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||
| Net (loss) income | $ | (3,399,558) | $ | 854,135 | $ | 1,615,892 | ||||||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation, including amounts charged to cost of goods sold | 290,744 | 321,102 | 318,483 | |||||||||||||||||
| Amortization, including amounts charged to interest expense | 117,269 | 176,410 | 191,626 | |||||||||||||||||
| Provision for doubtful accounts | 11,912 | 25,196 | 16,660 | |||||||||||||||||
| (Benefit) provision for deferred income taxes | (1,544,971) | 28,537 | (795,524) | |||||||||||||||||
| Share-based compensation expense | 74,411 | 58,874 | 62,316 | |||||||||||||||||
| LIFO expense (credit) | 7,422 | (22,544) | 67,324 | |||||||||||||||||
| Impairment of PharMEDium assets | 361,652 | 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 | 22,175 | — | 23,766 | |||||||||||||||||
| Other, net | (3,044) | (23,193) | (19,078) | |||||||||||||||||
| Changes in operating assets and liabilities, excluding the effects of acquisitions and divestitures: | ||||||||||||||||||||
| Accounts receivable | (1,628,991) | (1,241,890) | (657,770) | |||||||||||||||||
| Inventories | (1,621,143) | (167,990) | (4,923) | |||||||||||||||||
| Income tax receivable | (482,569) | (2,834) | 4,566 | |||||||||||||||||
| Prepaid expenses and other assets | 28,050 | (3,899) | (61,777) | |||||||||||||||||
| Accounts payable | 3,300,832 | 1,561,048 | 859,036 | |||||||||||||||||
| Income taxes payable | (3,289) | (13,353) | 209,899 | |||||||||||||||||
| Accrued expenses | 524,021 | 239,688 | (537,905) | |||||||||||||||||
| Accrued litigation liability | 6,198,943 | — | — | |||||||||||||||||
| Other liabilities | (46,826) | (1,572) | (13,215) | |||||||||||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 2,207,040 | 2,344,023 | 1,411,388 | |||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||
| Capital expenditures | (369,677) | (310,222) | (336,411) | |||||||||||||||||
| Cost of acquired companies, net of cash acquired | — | (63,951) | (785,299) | |||||||||||||||||
| Cost of equity investments | (56,080) | — | — | |||||||||||||||||
| Proceeds on sale of property and equipment | 36,364 | 1,295 | 8,100 | |||||||||||||||||
| Other, net | 9,522 | (2,954) | 2,496 | |||||||||||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (379,871) | (375,832) | (1,111,114) | |||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||
| Senior notes and other loan borrowings | 599,480 | 506,948 | 1,314,430 | |||||||||||||||||
| Senior notes and other loan repayments | (598,452) | (510,863) | (681,001) | |||||||||||||||||
| Borrowings under revolving and securitization credit facilities | 116,946 | 640,126 | 25,129,704 | |||||||||||||||||
| Repayments under revolving and securitization credit facilities | (149,980) | (769,284) | (25,127,438) | |||||||||||||||||
| Payment of premium on early retirement of debt | (21,448) | — | (22,348) | |||||||||||||||||
| Purchases of common stock | (420,449) | (674,031) | (639,235) | |||||||||||||||||
| Exercises of stock options | 159,533 | 76,234 | 138,456 | |||||||||||||||||
| Cash dividends on common stock | (343,578) | (338,974) | (333,041) | |||||||||||||||||
| Profarma retail equity offering | 66,355 | — | — | |||||||||||||||||
| Tax withholdings related to restricted share vesting | (9,787) | (5,987) | (8,246) | |||||||||||||||||
| Other | (2,237) | (10,682) | (14,154) | |||||||||||||||||
| NET CASH USED IN FINANCING ACTIVITIES | (603,617) | (1,086,513) | (242,873) | |||||||||||||||||
| INCREASE IN CASH AND CASH EQUIVALENTS | 1,223,552 | 881,678 | 57,401 | |||||||||||||||||
| Cash and cash equivalents at beginning of year | 3,374,194 | 2,492,516 | 2,435,115 | |||||||||||||||||
| CASH AND CASH EQUIVALENTS AT END OF YEAR | $ | 4,597,746 | $ | 3,374,194 | $ | 2,492,516 |
See notes to consolidated financial statements.
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
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.
In March 2020, the World Health Organization ("WHO") declared a global pandemic attributable to the outbreak and continued spread of COVID-19. In connection with the mitigation and containment procedures recommended by the WHO and imposed by federal, state, and local governmental authorities, the Company implemented measures designed to keep its employees safe and address business continuity issues at its distribution centers and other locations. The Company continues to evaluate and plan for the potential effects of a prolonged disruption and the related impacts on its revenue, results of operations, and cash flows. These items include, but are not limited to, the financial condition of its customers and the realization of accounts receivable, decreased availability and demand for its products and services, and delays related to current and future projects. While the Company's operational and financial performance may be significantly impacted by COVID-19, it is not possible for the Company to predict the duration or magnitude of the outbreak and whether it could have a material adverse impact on the Company's financial position, results of operations, or cash flows. See Risk Factor - We face risks related to health epidemics and pandemics, and the continued spread of COVID-19 is adversely affecting our business.
Recently Adopted Accounting Pronouncements
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 did not 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.
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 was effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years.
The Company adopted ASC 842 as of October 1, 2019 and adopted it using the modified retrospective approach. The Company elected the transition package of practical expedients provided within the amended guidance, which eliminated the requirements to reassess lease identification, lease classification, and initial direct costs for leases that commenced before the effective date. The Company also elected 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.
In connection with the adoption of ASC 842, the Company recognized operating lease liabilities of $562.1 million, right-of-use ("ROU") assets of $526.3 million, and a $35.1 million, net of tax of $9.6 million, cumulative adjustment to retained earnings. The Company's lease liabilities were based on the present value of the remaining minimum lease commitments using the Company's incremental borrowing rates as of October 1, 2019, and the Company's ROU assets were based upon the operating lease liabilities adjusted for prepaid and deferred rents. The cumulative adjustment to retained earnings was primarily the result of derecognizing assets of $266.0 million in Property and Equipment, Net and $324.8 million of financing obligations in Long-Term Financing Obligation and Accrued Expenses and Other, all of which was associated with leased assets where the Company was deemed the owner of the leased assets for accounting purposes. The Company finalized the impact that the amended lease guidance had on its systems, processes, and internal controls. The adoption of ASC 842 did not and will not have a material impact on the Company's results of operations or cash flows.
For the Company's lease policy, refer to the "Leases" section of Note 1.
Recently Issued Accounting Pronouncements Not Yet Adopted
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. The Company does not expect the adoption of this new accounting guidance to have a material impact on its financial position, results of operations, or cash flows.
In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 removes certain exceptions to the general principles in ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those fiscal years, with certain amendments applied on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption, and others prospectively. Early adoption of this guidance is permitted, including the adoption in any interim period for public companies for periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of adopting this new accounting guidance.
As of September 30, 2020, 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, 2020, Walgreens Boots Alliance, Inc. ("WBA"), accounted for approximately 33% of revenue and represented approximately 47% of accounts receivable, net of incentives, as of September 30, 2020. Express Scripts, Inc., the Company's second largest customer in the fiscal year ended September 30, 2020, accounted for approximately 12% of revenue and represented approximately 7% of accounts receivable as of September 30, 2020. 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, 2020, 2019, and 2018, 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, 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 liability when it is both probable that a loss has been incurred and the amount can be reasonably estimated. 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 14.
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 15).
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 2020, with the exception of its testing of goodwill and indefinite-lived intangibles in the MWI and Profarma reporting units. 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 the its testing of goodwill in the Profarma reporting unit. In the fourth quarter of fiscal 2018, the Company elected to bypass performing the qualitative assessment and went directly to performing its annual quantitative assessments of goodwill and indefinite-lived intangible assets.
The quantitative goodwill impairment test requires us to compare the carrying value of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further evaluation is required, and no impairment loss is recognized. If the carrying amount exceeds the fair value, the difference between the carrying value and the fair value is recorded as an impairment loss, the amount of which may not exceed the total amount of goodwill allocated to the reporting unit.
When performing a quantitative impairment assessment, 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, 2020, 2019, and 2018. The Company recorded a goodwill impairment of $59.7 million in its Profarma reporting unit in connection with its fiscal 2018 annual impairment test. No goodwill impairments were recorded in the fiscal years ended September 30, 2020 and 2019. No indefinite-lived intangible asset impairments were recorded in the fiscal years ended September 30, 2020, 2019, and 2018.
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.
As a result of the suspension of production activities at PharMEDium's compounding facility located in Memphis, Tennessee and the 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 was included in the Pharmaceutical Distribution Services reportable segment. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 15% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. The Company believed 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 were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represents a Level 3 nonrecurring fair value measurement. 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.
As a result of the continued suspension of the production activities at PharMEDium's compounding facility located in Memphis, Tennessee, certain regulatory matters, ongoing operational challenges, and lower-than-expected operating results, the Company updated its recoverability assessment of PharMEDium’s long-lived assets as of December 31, 2019. The recoverability assessment was based upon comparing PharMEDium's forecasted undiscounted cash flows to the carrying value of its asset group. Using forecasted undiscounted cash flows that were based on the weighted average of multiple strategic alternatives, the Company concluded that the carrying value of the PharMEDium long-lived asset group was not recoverable as of December 31, 2019. The forecasted undiscounted cash flows as of December 31, 2019 were lower than the forecasted undiscounted cash flows as of September 30, 2019 due to a change in weighting of multiple strategic alternatives and lower operating results in the three months ended December 31, 2019 compared to expectations. The Company then performed an impairment test by comparing the PharMEDium asset group's fair value of $145 million to its carrying value, which resulted in a $138.0 million impairment loss in the three months ended December 31, 2019. Significant assumptions used in estimating the fair value of PharMEDium's asset group included (i) a 17% discount rate, which contemplated a higher risk at PharMEDium; (ii) the period in which PharMEDium will resume production at or near capacity; and (iii) the estimated EBITDA (earnings before interest, taxes, depreciation, and amortization) margins when considering the likelihood of higher operating and compliance costs. The Company believed 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 were inherently uncertain and included assumptions that differed from actual results in future periods (see below). This represented a Level 3 nonrecurring fair value measurement. The Company allocated $123.2 million of the impairment to finite-lived intangibles, $11.6 million of the impairment to property and equipment, and $3.2 million to ROU assets.
In January 2020, the Company decided to permanently exit the PharMEDium compounding business, and, as a result, the Company ceased all commercial and administrative operations related to this business in fiscal 2020. The decision to permanently exit the PharMEDium business was due to a number of factors including, but not limited to, ongoing operational, regulatory, and commercial challenges, such as PharMEDium's decision in January 2020 to suspend production at the compounding facility in New Jersey pending facility upgrades related to the air handling and filtration systems. In connection with the decision to exit the PharMEDium business, the Company recorded an impairment of PharMEDium's assets of $223.7 million in the three months ended March 31, 2020, which included impairments of the remaining finite-lived intangible assets and the majority of the remaining tangible assets.
Income Taxes
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 settlements with tax authorities or 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 70% and 75% of the Company's inventories as of September 30, 2020 and 2019, respectively, has been determined using the last-in, first-out ("LIFO") method. If the Company had used the first-in, first-out method of inventory valuation, which approximates current replacement cost, inventories would have been approximately $1,519.2 million and $1,511.8 million higher than the amounts reported as of September 30, 2020 and 2019, respectively. The Company recorded LIFO expense of $7.4 million and $67.3 million in the fiscal years ended September 30, 2020 and 2018, respectively, and a LIFO credit of $22.5 million in the fiscal year ended September 30, 2019. The annual LIFO provision is affected by manufacturer pricing practices, which may be impacted by market and other external influences, changes in inventory quantities, and product mix, many of which are difficult to predict. Changes to any of the above factors can have a material impact to 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 presents 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 facilities. Prior to October 1, 2019, in certain cases, the Company made payments for certain structural components included in the lessor's construction of the leased assets, which resulted in the Company being deemed the owner of the leased assets for accounting purposes. As a result, regardless of the significance of the payments, ASC 840, Leases, defined those payments as automatic indicators of ownership and required the Company to capitalize the lessor's total project cost with a corresponding financing obligation. Upon completion of the lessor's project, the Company performed a sale-leaseback analysis pursuant to ASC 840 to determine if these assets and the related financing obligations could be derecognized from the Company's Consolidated Balance Sheet. If the Company was deemed to have had "continuing involvement," the leased assets and the related financing obligations remained on the Company's Consolidated Balance Sheet and were amortized over the life of the assets and the lease term, respectively. All other leases were considered operating leases in accordance with ASC 840. Assets subject to an operating lease and the related lease payments were not recorded on the Company's Consolidated Balance Sheet. Rent expense was recognized on a straight-line basis over the expected lease term and was recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations.
Subsequent to the adoption of ASC 842 on October 1, 2019, at the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the facts and circumstances present. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. At the lease commencement date, operating and finance lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable and, as such, the Company uses its incremental borrowing rate to discount the lease liabilities, which is the rate incurred to borrow on a collateralized basis over a similar term in a similar economic environment. Certain adjustments to the ROU asset may be required for items such as incentives received. The Company does not recognize on the balance sheet leases with terms of one year or less.
The Company has operating leases that are primarily comprised of buildings, office equipment, distribution center equipment, and vehicles. Some of the Company's leases include options to extend or early terminate the lease, which are included in the lease term when it is reasonably certain to exercise and there is a significant economic incentive to exercise that option. Certain lease agreements contain provisions for future rent increases. Lease payments included in the measurement of the lease liability comprise fixed payments. The Company combines lease and non-lease components as a single component. Operating lease cost is recognized over the expected lease term on a straight-line basis and is recorded in Distribution, Selling, and Administrative in the Company's Consolidated Statements of Operations. Variable lease payments, which are primarily comprised of maintenance, taxes, and other payments based on usage, are recognized when the expense is incurred. The Company's leases do not contain residual value guarantees.
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 16 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, 2020 and 2019, the Company's accrual for estimated customer sales returns was $1,344.7 million and $1,147.5 million, respectively.
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.
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack, and deliver inventory to customers. These costs, which were $665.3 million, $619.7 million, and $590.8 million for the fiscal years ended September 30, 2020, 2019, and 2018, 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 7). 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, 2020 and September 30, 2019. 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, 2020 | September 30, 2019 | ||||||||||||
| Cash and cash equivalents | $ | 96,983 | $ | 9,431 | ||||||||||
| Accounts receivables, net | 120,486 | 154,491 | ||||||||||||
| Inventories | 144,059 | 185,602 | ||||||||||||
| Prepaid expenses and other | 52,885 | 64,119 | ||||||||||||
| Property and equipment, net | 23,584 | 30,961 | ||||||||||||
| Goodwill | 82,309 | 82,309 | ||||||||||||
| Other intangible assets | 73,543 | 74,429 | ||||||||||||
| Other long-term assets | 53,513 | 9,169 | ||||||||||||
| Total assets | $ | 647,362 | $ | 610,511 | ||||||||||
| Accounts payable | $ | 141,147 | $ | 165,053 | ||||||||||
| Accrued expenses and other | 34,415 | 49,191 | ||||||||||||
| Short-term debt | 98,399 | 106,439 | ||||||||||||
| Long-term debt | 44,144 | 60,973 | ||||||||||||
| Deferred income taxes | 38,854 | 42,371 | ||||||||||||
| Other long-term liabilities | 43,413 | 5,303 | ||||||||||||
| Total liabilities | $ | 400,372 | $ | 429,330 |
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.
Profarma Retail Equity Offering
In August 2020, Profarma received $66.4 million through an equity offering of its retail business. The equity offering decreased Profarma's voting ownership interest in the retail business from 100% to 53.5%. Profarma continues to consolidate the operating results of the retail business in its consolidated financial statements.
Note 4. Property and Equipment
The following table summarizes the Company's property and equipment balances for the periods indicated:
| (in thousands) | September 30, 2020 | September 30, 2019 | ||||||||||||
| Property and equipment, at cost: | ||||||||||||||
| Land | $ | 39,572 | $ | 44,142 | ||||||||||
| Buildings and improvements | 586,551 | 942,129 | ||||||||||||
| Machinery, equipment, and other | 2,618,354 | 2,362,869 | ||||||||||||
| Total property and equipment | 3,244,477 | 3,349,140 | ||||||||||||
| Less accumulated depreciation | (1,759,669) | (1,578,624) | ||||||||||||
| Property and equipment, net | $ | 1,484,808 | $ | 1,770,516 |
Note 5. Income Taxes
The following table summarizes the Company's (loss) income before income taxes for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Domestic | $ | (5,961,269) | $ | 336,150 | $ | 704,935 | ||||||||||||||
| Foreign | 667,438 | 630,956 | 472,488 | |||||||||||||||||
| Total | $ | (5,293,831) | $ | 967,106 | $ | 1,177,423 |
The components of the Company's consolidated income tax (benefit) expense are summarized in the following table for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Current (benefit) provision: | ||||||||||||||||||||
| Federal | $ | (473,751) | $ | (12,801) | $ | 247,755 | ||||||||||||||
| State and local | 30,236 | 15,246 | 39,328 | |||||||||||||||||
| Foreign | 94,213 | 81,989 | 69,972 | |||||||||||||||||
| Total current (benefit) provision | (349,302) | 84,434 | 357,055 | |||||||||||||||||
| Deferred (benefit) provision: | ||||||||||||||||||||
| Federal | (914,613) | 61,819 | (828,023) | |||||||||||||||||
| State and local | (264,409) | (31,086) | 33,887 | |||||||||||||||||
| Foreign | (365,949) | (2,196) | (1,388) | |||||||||||||||||
| Total deferred (benefit) provision | (1,544,971) | 28,537 | (795,524) | |||||||||||||||||
| (Benefit) provision for income taxes | $ | (1,894,273) | $ | 112,971 | $ | (438,469) |
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, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Statutory U.S. federal income tax rate | 21.0% | 21.0% | 24.5% | ||||||||||||||
| State and local income tax rate, net of federal tax benefit | (0.5) | 2.4 | (0.1) | ||||||||||||||
| Foreign tax rate differential | 1.0 | (6.7) | (6.2) | ||||||||||||||
| Litigation settlements and accruals (see Note 14) | (6.2) | 0.1 | (6.3) | ||||||||||||||
| U.S. Tax reform | — | (3.6) | (52.0) | ||||||||||||||
| PharMEDium worthless stock deduction | 12.4 | — | — | ||||||||||||||
| Swiss Tax reform | 6.8 | — | — | ||||||||||||||
| CARES Act | 1.2 | — | — | ||||||||||||||
| Goodwill impairment (see Note 1) | — | — | 1.7 | ||||||||||||||
| Capital gain on distribution | — | — | 3.6 | ||||||||||||||
| Other | 0.1 | (1.5) | (2.4) | ||||||||||||||
| Effective income tax rate | 35.8% | 11.7% | (37.2)% |
The Coronavirus Aid, Relief, and Economic Security Act
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act became law on March 27, 2020. The CARES Act was a response to the market volatility and instability resulting from the coronavirus pandemic and included provisions to support businesses in the form of loans, grants, and tax changes, among other types of relief that were not previously available under the U.S. Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"). As it relates to the Company, the CARES Act provided relief through adjustments to net operating loss rules and the acceleration of available refunds for alternative minimum tax credit carryforwards.
PharMEDium
As discussed in Note 1, the Company decided in January 2020 to shut down and permanently exit the PharMEDium Healthcare Holdings LLC ("PharMEDium") compounding business. Following the decision to exit PharMEDium and in connection with the permanent shutdown of this business, PharMEDium underwent a voluntary change in tax status, which resulted in the Company recognizing a worthless stock ordinary income tax deduction of approximately $2.4 billion and, in turn, yielded a tax benefit of approximately $655 million. The estimated tax benefit is higher than it would have been prior to the enactment of the CARES Act as the net operating losses resulting from the worthless stock deduction can now be carried back to years with higher statutory tax rates.
In addition to the PharMEDium worthless stock deduction, the Company recognized other discrete tax benefits primarily resulting from the CARES Act. In the aggregate, the Company recognized discrete tax benefits of $720.6 million in the fiscal year ended September 30, 2020.
The Company's September 30, 2020 Consolidated Balance Sheet includes a net current income tax receivable balance of $488.4 million primarily resulting from the recognition of the above discrete tax benefits.
Swiss Tax Reform
In August 2020, the Canton of Bern enacted tax reforms to comply with requirements imposed by earlier Swiss federal tax reforms, which are retroactively effective as of January 1, 2020. A key provision of the Swiss federal tax reforms was the elimination of cantonal preferential tax regimes, which had the effect of increasing overall tax rates on Swiss income. To phase in the tax rate increase, the canton of Bern has granted a tax ruling to the Company that effectively reduces the Company's Swiss tax rate for a period of 10 years.
As a result of the aforementioned Swiss tax law change and ruling, the Company recorded a $582.4 million gross deferred tax asset, which was offset in part by a $221.7 million valuation allowance for amounts that it is more likely than not will not be realized. The net $360.7 million deferred tax asset is expected to be realized over the next 10 years resulting in an increase in the Company’s consolidated effective tax rates.
Opioid Legal Accrual
In the fourth quarter of fiscal 2020, the Company recorded a $6.6 billion legal accrual in connection with litigation relating to the distribution of prescription opioid pain medications. The Company is currently in advanced discussions, which are ongoing, with the states and various plaintiff's representatives that would be necessary to reach a global settlement of the Multidistrict Litigation ("MDL") and related state-court litigation brought by certain state and local governmental entities to be paid over 18 years assuming all parties participate (see Note 14). As a result, the Company recognized a deferred tax benefit of $1.1 billion, which reflects an unrecognized tax benefit of $359.5 million
U.S. Tax Reform: Tax Cuts and Jobs Act
On December 22, 2017, 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 $3
billion as of September 30, 2020, $2.3 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) | 2020 | 2019 | ||||||||||||
| Inventories | $ | 1,309,815 | $ | 1,293,075 | ||||||||||
| Property and equipment | 94,521 | 143,851 | ||||||||||||
| Goodwill and other intangible assets | 613,123 | 709,015 | ||||||||||||
| Right-of-use assets (Note 12) | 113,220 | — | ||||||||||||
| Other | 1,888 | 1,892 | ||||||||||||
| Gross deferred tax liabilities | 2,132,567 | 2,147,833 | ||||||||||||
| Net operating loss and tax credit carryforwards | (263,171) | (318,868) | ||||||||||||
| Allowance for doubtful accounts | (20,051) | (22,544) | ||||||||||||
| Accrued expenses | (21,284) | (33,312) | ||||||||||||
| Accrued litigation liability | (1,078,555) | — | ||||||||||||
| Employee and retiree benefits | (13,891) | (12,420) | ||||||||||||
| Goodwill and other intangible assets | (582,406) | — | ||||||||||||
| Lease liabilities (Note 12) | (121,182) | — | ||||||||||||
| Share-based compensation | (38,914) | (39,961) | ||||||||||||
| Other | (79,916) | (60,215) | ||||||||||||
| Gross deferred tax assets | (2,219,370) | (487,320) | ||||||||||||
| Valuation allowance for deferred tax assets | 411,648 | 199,682 | ||||||||||||
| Deferred tax assets, net of valuation allowance | (1,807,722) | (287,638) | ||||||||||||
| Net deferred tax liabilities | $ | 324,845 | $ | 1,860,195 |
The following tax net operating loss and credit carryforward information is presented as of September 30, 2020. The Company had $12.4 million of potential tax benefits from federal net operating loss carryforwards, which expire in 1 to 17 years, $201.2 million of potential tax benefits from state net operating loss carryforwards and $58.9 million of potential tax benefits from foreign net operating loss carryforwards, which have varying expiration dates. The Company had $12.8 million of 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, 2020 and 2019, the Company increased the valuation allowance on deferred tax assets by $212.0 million and $0.3 million, respectively. The increase in the valuation allowance in the fiscal year ended September 30, 2020 was primarily due to the valuation allowance associated with the deferred tax asset established in connection with Swiss Tax Reform (see above).
In the fiscal year ended September 30, 2020, 2019, and 2018 tax benefits of $3.9 million, $7.9 million and $22.7 million, respectively, related to the exercise of employee stock options and lapses of restricted stock units were recorded in Income Tax (Benefit) Expense in the Company's Consolidated Statements of Operations. The tax benefits recognized in the fiscal years ended September 30, 2020, 2019, and 2018 are not necessarily indicative of amounts that may arise in future periods.
Income tax payments, net of refunds, were $139.4 million, $117.7 million, and $104.0 million in the fiscal years ended September 30, 2020, 2019, and 2018, respectively.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. The Company is currently undergoing a U.S. federal income tax audit for fiscal year 2018 and certain state and local income tax audits for various years. 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 2016. The Company believes it has adequate tax reserves to cover potential federal, state or foreign tax exposures.
As of September 30, 2020 and 2019, 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 $498.3 million and $124.2 million, respectively ($455.5 million and $95.0 million, net of federal tax benefit, respectively). If
recognized in the fiscal years ended September 30, 2020 and 2019, $437.2 million and $76.8 million, respectively, of these benefits would have reduced income tax expense and the effective tax rate. As of September 30, 2020 and 2019, included in the unrecognized tax benefits are $19.9 million and $18.6 million of interest and penalties, respectively, which the Company records in Income Tax (Benefit) Expense in the Company's Consolidated Statements of Operations.
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest and penalties, for the periods indicated is as follows:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Unrecognized tax benefits at beginning of period | $ | 105,657 | $ | 98,124 | $ | 323,869 | ||||||||||||||
| Additions of tax positions of the current year | 385,797 | 18,819 | 2,804 | |||||||||||||||||
| Additions to tax positions of the prior years | 5,599 | 751 | 558 | |||||||||||||||||
| Reductions of tax positions of the prior years | (6,480) | (10,317) | (224,878) | |||||||||||||||||
| Settlements with taxing authorities | — | — | (1,847) | |||||||||||||||||
| Expiration of statutes of limitations | (12,222) | (1,720) | (2,382) | |||||||||||||||||
| Unrecognized tax benefits at end of period | $ | 478,351 | $ | 105,657 | $ | 98,124 |
In the fiscal year ended September 30, 2017, the Company recorded a reserve associated with civil litigation that 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 unrecognized tax benefit by $10.3 million and $224.9 million in the fiscal years ended September 30, 2019 and 2018, respectively. Included in the additions of unrecognized tax benefits in the fiscal year ended September 30, 2020 is $371.5 million for an unrecognized tax benefit related to the $6.6 billion legal accrual for litigation related to the distribution of prescription opioid pain medications, as disclosed in Note 14. As of September 30, 2020, a settlement has not been reached, and, therefore, the Company applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible for U.S. federal and state purposes. In estimating the amount that would ultimately be deductible, the Company considered prior U.S. tax case law, the amount and character of the damages sought in the opioid litigation, the inherent uncertainty related to litigation of this nature and magnitude, and other relevant factors. While the Company believes that its estimate of the uncertain tax benefit appropriately reflects these considerations, it is reasonably possible that the unrecognized tax benefit recorded as of September 30, 2020 may be revised in future periods as the settlement with the various plaintiffs is finalized. 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 $13.9 million.
Note 6. 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, 2020 and 2019:
| (in thousands) | Pharmaceutical Distribution Services | Other | Total | |||||||||||||||||
| 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 | |||||||||||||||||
| Foreign currency translation | — | 1,212 | 1,212 | |||||||||||||||||
| Goodwill as of September 30, 2020 | $ | 4,852,775 | $ | 1,853,944 | $ | 6,706,719 |
The following is a summary of other intangible assets:
| September 30, 2020 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||
| (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 | $ | 685,312 | $ | — | $ | 685,312 | $ | 685,324 | $ | — | $ | 685,324 | ||||||||||||||||||||||||||||||||
| Finite-lived: | ||||||||||||||||||||||||||||||||||||||||||||
| Customer relationships | 13 years | 1,671,888 | (565,372) | 1,106,516 | 1,931,212 | (489,471) | 1,441,741 | |||||||||||||||||||||||||||||||||||||
| Trade names and other | 14 years | 210,394 | (116,115) | 94,279 | 271,521 | (103,750) | 167,771 | |||||||||||||||||||||||||||||||||||||
| Total other intangible assets | $ | 2,567,594 | $ | (681,487) | $ | 1,886,107 | $ | 2,888,057 | $ | (593,221) | $ | 2,294,836 |
Amortization expense for finite-lived intangible assets was $110.9 million, $167.4 million, and $181.2 million in the fiscal years ended September 30, 2020, 2019, and 2018, respectively. Amortization expense for finite-lived intangible assets is estimated to be $101.9 million in fiscal 2021, $100.3 million in fiscal 2022, $98.8 million in fiscal 2023, $97.4 million in fiscal 2024, $96.6 million in 2025, and $705.8 million thereafter.
Note 7. Debt
Debt consisted of the following:
| September 30, | ||||||||||||||
| (in thousands) | 2020 | 2019 | ||||||||||||
| Revolving credit note | $ | — | $ | — | ||||||||||
| Term loan due October 2020 | 399,982 | 399,778 | ||||||||||||
| Overdraft facility due 2021 (£30,000) | — | 32,573 | ||||||||||||
| Receivables securitization facility due 2022 | 350,000 | 350,000 | ||||||||||||
| Multi-currency revolving credit facility due 2024 | — | — | ||||||||||||
| $500,000, 3.50% senior notes due 2021 | — | 498,908 | ||||||||||||
| $500,000, 3.40% senior notes due 2024 | 498,232 | 497,744 | ||||||||||||
| $500,000, 3.25% senior notes due 2025 | 496,990 | 496,311 | ||||||||||||
| $750,000, 3.45% senior notes due 2027 | 743,940 | 743,099 | ||||||||||||
| $500,000, 2.80% senior notes due 2030 | 494,045 | — | ||||||||||||
| $500,000, 4.25% senior notes due 2045 | 494,730 | 494,514 | ||||||||||||
| $500,000, 4.30% senior notes due 2047 | 492,755 | 492,488 | ||||||||||||
| Nonrecourse debt | 148,846 | 167,477 | ||||||||||||
| Total debt | 4,119,520 | 4,172,892 | ||||||||||||
| Less AmerisourceBergen Corporation current portion | 399,982 | 32,573 | ||||||||||||
| Less nonrecourse current portion | 101,277 | 106,439 | ||||||||||||
| Total, net of current portion | $ | 3,618,261 | $ | 4,033,880 |
Multi-Currency Revolving Credit Facility
The Company has a $1.4 billion multi-currency senior unsecured revolving credit facility ("Multi-Currency Revolving Credit Facility"), is scheduled to expire in September 2024, with a syndicate of lenders. 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, 2020) 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, 2020). 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, 2020. The opioid litigation accrual discussed in Note 14 has not and is not expected to have an impact on the Company's compliance with its debt covenants.
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, 2020 and 2019.
Receivables Securitization Facility
The Company has a $1,450 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in 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 and a specialty distribution subsidiary sell on a revolving basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly-owned special purpose entity, which in turn sells a percentage ownership interest in the receivables to financial institutions and commercial paper conduits sponsored by financial institutions. AmerisourceBergen Drug Corporation is the servicer of the accounts receivable under the Receivables Securitization Facility. As sold receivables are collected, additional receivables may be sold up to the maximum amount available under the facility. 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, 2020.
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 matured and was repaid in October 2020.
Senior Notes
In May 2020, the Company issued $500 million of 2.80% senior notes due May 15, 2030 (the "2030 Notes"). The 2030 Notes were sold at 99.71% of the principal amount and have an effective yield of 2.81%. Interest on the 2030 Notes is payable semi-annually in arrears, commencing on November 15, 2020. The 2030 Notes rank pari passu to the Company's other senior notes, the Multi-Currency Revolving Credit Facility, the Revolving Credit Note, the and Overdraft Facility.
The Company used the proceeds from the 2030 Notes to finance the early retirement of the $500 million of 3.50% senior notes that were due in 2021 and made a $21.4 million prepayment premium in connection with this early retirement.
In December 2017, 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. The Company was compliant with all covenants as of September 30, 2020.
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 $493.1 million in fiscal 2021, $383.9 million in fiscal 2022, $8.0 million in fiscal 2023, $503.7 million in fiscal 2024, $500.0 million in fiscal 2025, and $2.3 billion thereafter.
Interest paid on the above indebtedness during the fiscal years ended September 30, 2020, 2019, and 2018 was $150.7 million, $167.4 million, and $162.1 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 $6.4 million, $7.1 million, and $7.7 million, for the fiscal years ended September 30, 2020, 2019, and 2018, respectively.
Note 8. 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, 2020.
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 opioid litigation accrual discussed in Note 14 has not and is not expected to impact the Company's ability to pay dividends.
The following illustrates the components of Accumulated Other Comprehensive Loss, net of income taxes:
| September 30, | ||||||||||||||
| (in thousands) | 2020 | 2019 | ||||||||||||
| Pension and postretirement adjustments | $ | (5,761) | $ | (5,344) | ||||||||||
| Foreign currency translation | (103,043) | (107,252) | ||||||||||||
| Other | (26) | 631 | ||||||||||||
| Total accumulated other comprehensive loss | $ | (108,830) | $ | (111,965) |
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, 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 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. During the fiscal year ended September 30, 2020, the Company purchased 4.9 million shares of its common stock for a total of $405.6 million, which excluded $14.8 million of September 2019 purchases that cash settled in October 2019. As of September 30, 2020, the Company had $55.5 million of availability under this program.
In May 2020, the Company's board of directors authorized a new share repurchase program allowing the Company to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions.
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) | 2020 | 2019 | 2018 | |||||||||||||||||
| Weighted average common shares outstanding - basic | 204,783 | 210,165 | 217,872 | |||||||||||||||||
| Effect of dilutive securities - stock options and restricted stock units | — | 1,675 | 2,464 | |||||||||||||||||
| Weighted average common shares outstanding - diluted | 204,783 | 211,840 | 220,336 |
The potentially dilutive stock options and restricted stock units that were antidilutive for the fiscal years ended September 30, 2020, 2019, and 2018 were 4.2 million, 4.6 million, and 3.2 million, respectively.
Note 9. 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 $63.1 billion, $60.3 billion, and $54.7 billion in the fiscal years ended September 30, 2020, 2019, and 2018, respectively. The Company's receivable from WBA, net of incentives, was $6.6 billion and $6.1 billion as of September 30, 2020 and 2019, respectively.
Note 10. 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. 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 2020, 2019, and 2018, the Company recognized an expense for discretionary contributions to the Plan in the fiscal years ended September 30, 2020, 2019, and 2018. 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. 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, 2020, 2019, and 2018 were $45.9 million, $51.0 million, and $37.9 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, 2020. The Company's liability relating to its deferred compensation plan as of September 30, 2020 and 2019 was $31.1 million and $28.0 million, respectively.
Note 11. 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, 2020, employee and non-employee director stock options and restricted stock units for an additional 9.2 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 it not will grant any stock options in fiscal 2021. 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, 2020, 2019, and 2018 were $16.61, $18.60, and $14.16, respectively. The following weighted average assumptions were used to estimate the fair values of options granted:
| Fiscal Year Ended September 30, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Risk-free interest rate | 1.66% | 2.91% | 1.89% | ||||||||||||||
| Expected dividend yield | 1.86% | 1.79% | 1.96% | ||||||||||||||
| Volatility of common stock | 28.17% | 27.67% | 26.54% | ||||||||||||||
| Expected life of the options | 3.79 years | 3.77 years | 3.76 years |
During the fiscal years ended September 30, 2020, 2019, and 2018, the Company recognized stock option expense of $13.0 million, $21.0 million, and $22.6 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, 2020 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, 2019 | 7,659 | $83 | 4 years | $ | 35,319 | |||||||||||||||||||||
| Granted | 383 | $86 | ||||||||||||||||||||||||
| Exercised | (2,242) | $76 | ||||||||||||||||||||||||
| Forfeited | (166) | $83 | ||||||||||||||||||||||||
| Expired | (75) | $95 | ||||||||||||||||||||||||
| Outstanding as of September 30, 2020 | 5,559 | $86 | 3 years | $ | 62,770 | |||||||||||||||||||||
| Exercisable as of September 30, 2020 | 3,430 | $88 | 2 years | $ | 33,107 | |||||||||||||||||||||
| Expected to vest after September 30, 2020 | 2,072 | $83 | 5 years | $ | 29,032 |
The intrinsic value of stock option exercises during the fiscal years ended September 30, 2020, 2019, and 2018 was $42.6 million, $51.2 million, and $116.7 million, respectively.
A summary of the status of the Company's nonvested options as of September 30, 2020 and changes during the fiscal year ended September 30, 2020 is presented below:
| (in thousands, except grant date fair value) | Options | Weighted Average Grant Date Fair Value | ||||||||||||
| Nonvested as of September 30, 2019 | 3,265 | $16 | ||||||||||||
| Granted | 383 | $17 | ||||||||||||
| Vested | (1,353) | $16 | ||||||||||||
| Forfeited | (166) | $16 | ||||||||||||
| Nonvested as of September 30, 2020 | 2,129 | $16 |
During the fiscal years ended September 30, 2020, 2019, and 2018, the total fair values of options vested were $21.3 million, $22.7 million, and $25.8 million, respectively. Expected future compensation expense relating to the 2.1 million nonvested options outstanding as of September 30, 2020 is $10.3 million, which will be recognized over a weighted average period of 1.7 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, 2020, 2019, and 2018, the Company recognized restricted stock unit expense of $39.8 million, $29.2 million, and $26.8 million, respectively.
A summary of the status of the Company's nonvested restricted stock units as of September 30, 2020 and changes during the fiscal year ended September 30, 2020 are presented below:
| (in thousands, except grant date fair value) | Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||||||||
| Nonvested as of September 30, 2019 | 1,222 | $81 | ||||||||||||
| Granted | 760 | $86 | ||||||||||||
| Vested | (346) | $76 | ||||||||||||
| Forfeited | (124) | $84 | ||||||||||||
| Nonvested as of September 30, 2020 | 1,512 | $85 |
During the fiscal years ended September 30, 2020, 2019, and 2018, the total fair values of restricted stock units vested were $26.4 million, $14.5 million, and $15.8 million, respectively. Expected future compensation expense relating to the 1.5 million restricted stock units outstanding as of September 30, 2020 is $43.4 million, which will be recognized over a weighted average period of 1.4 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, 2020, 2019, and 2018, the Company recognized performance stock expense of $21.5 million, $8.5 million, and $12.8 million, respectively.
A summary of the status of the Company's nonvested performance stock units as of September 30, 2020 and changes during the fiscal year ended September 30, 2020 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, 2019 | 283 | $84 | ||||||||||||
| Granted | 150 | $86 | ||||||||||||
| Vested | (139) | $78 | ||||||||||||
| Forfeited | (6) | $89 | ||||||||||||
| Nonvested as of September 30, 2020 | 288 | $88 |
Shares that vested over the three-year performance period ended September 30, 2020 were distributed to employees in November 2020.
Note 12. Leases
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.
The following illustrates the components of lease cost for the period presented:
| (in thousands) | Fiscal year ended September 30, 2020 | |||||||
| Operating lease cost | $ | 118,144 | ||||||
| Short-term lease cost | 4,632 | |||||||
| Variable lease cost | 17,814 | |||||||
| Total lease cost | $ | 140,590 |
The Company recorded rental expense of $108.9 million and $114.9 million in the fiscal years ended September 30, 2019 and 2018, respectively.
The following summarizes balance sheet information related to operating leases:
| (in thousands, except for lease term and discount rate) | September 30, 2020 | |||||||
| Right of use assets | ||||||||
| Other assets | $ | 443,522 | ||||||
| Lease liabilities | ||||||||
| Accrued expenses and other | $ | 92,587 | ||||||
| Other long-term liabilities | 385,507 | |||||||
| Total lease liabilities | $ | 478,094 | ||||||
| Weighted-average remaining lease term | 6.50 years | |||||||
| Weighted-average discount rate | 3.72% |
Other cash flow information related to operating leases is as follows:
| (in thousands) | Fiscal year ended September 30, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating lease cash payments | $ | 115,028 | ||||||
| Right-of-use assets obtained in exchange for lease liabilities | ||||||||
| New operating leases | $ | 61,779 | ||||||
| Leases recognized upon adoption of ASC 842 | $ | 526,281 |
Future minimum rental payments under noncancellable operating leases were as follows:
| Payments Due by Fiscal Year (in thousands) | As of September 30, 2020 | |||||||
| 2021 | $ | 117,680 | ||||||
| 2022 | 113,632 | |||||||
| 2023 | 102,564 | |||||||
| 2024 | 93,464 | |||||||
| 2025 | 83,789 | |||||||
| Thereafter | 376,396 | |||||||
| Total future undiscounted lease payments | 887,525 | |||||||
| Less: Future payments for leases that have not yet commenced 1 | (308,431) | |||||||
| Less: Imputed interest | (101,000) | |||||||
| Total lease liabilities | $ | 478,094 | ||||||
| 1 The Company has certain leases that it has executed for which it does not control the underlying assets; therefore, lease liabilities and ROU assets were not recorded on the Company's Consolidated Balance Sheet as of September 30, 2020. These future commitments primarily relate to the Company's new general corporate and administrative office. |
Under the prior accounting guidance, the future minimum rental payments under noncancellable operating leases and financing obligations as of September 30, 2019 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 were recognized as reductions to the financing obligation and as interest expense and excluded the future non-cash termination of the financing obligation. |
Note 13. 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) | 2020 | 2019 | 2018 | |||||||||||||||||
| Employee severance | $ | 34,401 | $ | 34,147 | $ | 36,694 | ||||||||||||||
| Litigation and opioid-related costs | 6,722,346 | 185,145 | 61,527 | |||||||||||||||||
| Acquisition-related deal and integration costs | 15,958 | 43,184 | 33,912 | |||||||||||||||||
| Business transformation efforts | 37,961 | 55,437 | 32,963 | |||||||||||||||||
| Other restructuring initiatives | (3,359) | 12,561 | 18,424 | |||||||||||||||||
| Total employee severance, litigation, and other | $ | 6,807,307 | $ | 330,474 | $ | 183,520 |
Employee severance in the fiscal year ended September 30, 2020 included costs primarily related to position eliminations resulting from the Company's decision to permanently exit the PharMEDium compounding business. 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.
Litigation and opioid-related costs in the fiscal year ended September 30, 2020 included costs primarily related to a $6.6 billion legal accrual ($5.5 billion, net of an income tax benefit) (see Note 14) and legal fees in connection with opioid lawsuits and investigations. 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.
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 included 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, 2020, 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, including certain technology initiatives.
Other restructuring initiatives in the fiscal year ended September 30, 2020 included a $19.1 million gain on the sale of property.
Note 14. 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 numerous states and tribes, have filed lawsuits in various federal, state and other courts against pharmaceutical wholesale distributors (including the Company and certain subsidiaries, such as AmerisourceBergen Drug Corporation ("ABDC") and H.D. Smith), 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. In December 2018, the Court issued an order selecting two additional cases for a second bellwether discovery and trial track. In November 2019 and January 2020, the Court filed Suggestions of
Remand with the Judicial Panel on Multidistrict Litigation that identified four cases filed against the Company, including the two additional bellwether cases, for potential transfer from the MDL back to federal courts in California, Oklahoma, and West Virginia for the completion of discovery, motion practice, and trial. All four cases have now been remanded to those federal district courts and discovery has commenced. The two consolidated cases in West Virginia that were scheduled to commence trial on October 19, 2020 were postponed to January 4, 2021 due to COVID-19. For the California case, the current trial date is October 25, 2021. No trial date has been established for the Oklahoma case, in which the plaintiff is the Cherokee Nation.
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. Pursuant to the settlement, claims against the Company were dismissed with prejudice and the Company made a payment of $66.7 million in December 2019. The Company had previously 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.
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 state and local government entity lawsuits in the MDL and in state courts, including cases currently filed and that could be filed. The attorneys general's announcement outlined that the three 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. Since that time, the Company has engaged in discussions that include the four attorneys general, as well as other attorneys general, plaintiffs' lawyers representing local governments, and other parties with the objective of reaching potential terms for a global resolution.
The Company is currently in advanced discussions, which are ongoing, with the states and various plaintiffs’ representatives that would be necessary to reach a global settlement of the MDL and related state-court litigation brought by certain state and local governmental entities by the three largest U.S. pharmaceutical distributors of $21.0 billion to be paid over 18 years in which the Company’s payment would be $6.5 billion assuming all parties participate. A portion of this amount relating to plaintiff attorney fees would be payable over a shorter time period. The discussions also involve certain changes to the Company's anti-diversion programs. While a global settlement remains subject to contingencies that could impact whether the parties ultimately decide to move forward, the Company believes a global settlement is probable and its loss related thereto can be reasonably estimated as of September 30, 2020. The Company has recorded a charge of $6.6 billion in the fourth quarter of the fiscal year ended September 30, 2020 within Employee Severance, Litigation and Other in its Statement of Operations related to the global settlement as well as other opioid-related litigation. The Company currently estimates that $408.0 million will be paid prior to September 30, 2021, which is recorded in Accrued Expenses and Other on the Company’s Consolidated Balance Sheet. The remaining liability of $6.2 billion is recorded in Accrued Litigation Liability on the Company's Consolidated Balance Sheet. While the Company has accrued its estimated liability for this matter, it is unable to estimate the range of possible loss associated with these opioid litigation matters. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment is highly subjective and requires judgments about future events. The Company will regularly review these opioid litigation matters to determine whether its accrual is adequate. The amount of ultimate loss may differ materially from the $6.6 billion accrual. Until such time as a plaintiff participates in a global settlement or otherwise resolves its lawsuit, the Company will continue to litigate and prepare for trial in the cases pending in the MDL, those remanded from the MDL to federal district courts, as well as in state courts where lawsuits have been filed, and intends to continue to vigorously defend itself in all such cases. Since these matters are still developing, the Company is unable to predict the outcome, but the result of these lawsuits could include excessive monetary verdicts and/or injunctive relief that may affect the Company's operations. Further, any final settlement among parties may differ materially from the Company's advanced discussions related to global resolution of the MDL and related state-court litigation involving certain state and local governmental entities.
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 filed an appeal with the U.S. Court of Appeals for the Sixth Circuit. On September 24, 2020, the Sixth Circuit reversed the Court's prior order. On October 8, 2020, certain of the plaintiffs filed a petition asking the Sixth Circuit to rehear the matter en banc, which has not yet been decided.
Notwithstanding the Company's accrual of $6.6 billion, a trial in New York state for cases brought by Nassau and Suffolk Counties and the New York Attorney General against a variety of defendants, including the Company, was scheduled to
begin on March 20, 2020. The trial is not part of the MDL and has been delayed due to the COVID-19 outbreak. The court has not yet set a new trial date but has expressed an intention to commence trial early in 2021, if possible. A trial in Ohio state court for a case brought by the Ohio Attorney General against ABDC and certain other pharmaceutical wholesale distributors was scheduled to begin trial on October 19, 2020 but has been postponed to March 8, 2021. Several other cases filed in various state courts have trial dates scheduled in 2021 and later, although all such dates are subject to change.
Aside from those parties that have already filed suit, other entities, including additional attorneys general’s offices, counties, and cities in multiple states, may continue to file additional lawsuits or enforcement proceedings. The Company is vigorously defending itself in the pending lawsuits and intends to vigorously defend itself against any threatened lawsuits or enforcement proceedings.
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. The Company cannot predict how these matters would be affected by a global settlement.
Since July 2017, the Company has received subpoenas from several U.S. Attorney's Offices, including grand jury subpoenas from the U.S. Attorney's Office for the District of New Jersey ("USAO-NJ") and the U.S. Attorney's Office for the Eastern District of New York ("USAO-EDNY"). Those subpoenas request the production of a broad range of documents pertaining to the Company's distribution of controlled substances through its various subsidiaries, including ABDC, and its 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 USAO-NJ, and has been producing documents in response to the subpoenas.
Government Enforcement and Related Litigation Matters
On May 17, 2019, PharMEDium reached an agreement on the terms of the Consent Decree with the U.S. Food and Drug Administration ("FDA") and the DOJ that was entered by the United States District Court for the Northern District of Illinois on May 22, 2019. As previously disclosed, in late January 2020 the Company decided to permanently exit the PharMEDium compounding business. As a result the Company ceased all commercial operations related to this business as well as all administrative operations other than those needed to complete the shutdown. While PharMEDium has ceased commercial operations, it remains subject to the terms of the Consent Decree and continues to work with the FDA and the DOJ to comply with applicable laws and regulations.
Subpoenas, Ongoing Investigations, and Other Contingencies
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 USAO-EDNY relating to its activities in connection with billing for products and making returns of potential overpayments to government payers. A filed qui tam complaint related to the investigation was unsealed in April 2019 and the relator filed an amended complaint under seal in the U.S. District Court for the Eastern District of New York. In December 2019, the government filed a notice that it was declining to intervene. The court ordered that the relator's complaint against the Company, including subsidiaries AmerisourceBergen Specialty Group, LLC and U.S. Bio, be unsealed. The relator’s complaint alleged violations of the federal False Claims Act and the false claims acts of various states. The relator filed a second amended complaint, removing one state false claims act count. The Company filed a motion to dismiss the second amended complaint and all briefing on the motion was filed with the court on October 9, 2020.
On October 11, 2019, Teamsters Local 443 Health Services & Insurance Plan, St. Paul Electrical Construction Pension Plan, St. Paul Electrical Construction Workers Supplemental Pension Plan (2014 Restatement), Retirement Medical Funding Plan for the St. Paul Electrical Workers, and San Antonio Fire & Police Pension Fund filed a complaint for a purported derivative action in the Delaware Court of Chancery against the Company and certain of its current and former officers and directors (collectively, "Defendants"). The complaint alleges that the Defendants breached their fiduciary duties by failing to oversee the compliance by certain of the Company's subsidiaries (including the Company's former subsidiary Medical Initiatives, Inc. ("MII")) with federal regulations, allegedly resulting in the payment of fines and penalties in connection with the settlements with the USAO-EDNY in fiscal 2017 and 2018 that resolved claims arising from MII's pre-filled syringe program. In December 2019, Defendants filed a motion to dismiss the complaint. After briefing and oral argument, on August 24, 2020 the Delaware Court of Chancery denied Defendants' motion to dismiss. On September 24, 2020, the Board of Directors of the Company established a Special Litigation Committee to conduct an investigation concerning the plaintiffs’ allegations. On October 28, 2020, the Special Litigation Committee filed a motion to stay the litigation pending completion of its investigation. On November 10, 2020, the Delaware Court of Chancery granted the Special Litigation Committee’s motion to stay the litigation.
On July 17, 2020, CCAR Investments, Inc. filed a complaint for a purported derivative action in the United States District Court for the District of Delaware against the Company and certain of its current and former officers and directors (“CCAR Defendants”). The complaint alleges claims for breach of fiduciary duty, corporate waste and unjust enrichment allegedly arising from the Company’s controlled substance diversion control programs and violation of Section 14(a) of the Securities Exchange Act of 1934. On July 30, 2020, a group of interested stockholders (the “Proposed Intervenors”) filed a motion to intervene and stay the proceedings filed by CCAR Investments, Inc. The CCAR Defendants opposed the motion to intervene and stay on August 13, 2020. CCAR Investments, Inc. also filed an opposition to the motion to intervene and stay. On August 14, 2020, the CCAR Defendants answered the complaint and filed a motion for judgment on the pleadings. On October 13, 2020, the United States District Court for the District of Delaware heard oral arguments on the Proposed Intervenors' motion to intervene and stay the litigation and denied Proposed Intervenors' motion without prejudice. On October 29, 2020 the parties filed a stipulation permitting CCAR Investments, Inc. to file an amended complaint on or before November 20, 2020, and CCAR Defendants shall respond to the amended complaint on or before December 18, 2020.
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. In September 2020, the United States Court of Appeals for the Second Circuit reversed the District Court's decision, and, as a result, the Company accrued $14.8 million in the fourth quarter of the fiscal year ended September 30, 2020 as it revised its estimated liability for the 2017 and 2018 calendar years. The Company has been in compliance with subsequent legislation passed by NYS regarding sales of prescription opioids for calendar years beginning in 2019.
In December 2019, Reliable Pharmacy, together with other retail pharmacies and North Sunflower Medical Center, filed a civil antitrust complaint against multiple generic drug manufacturers, and also included claims against the Company, H.D. Smith, and other drug distributors and industry participants. The case is filed as a putative class action and plaintiffs purport to represent a class of drug purchasers including other retail pharmacies and healthcare providers. The case has been consolidated for multidistrict litigation proceedings before the United States District Court for the Eastern District of Pennsylvania. The complaint alleges that the Company and others in the industry participated in a conspiracy to fix prices, allocate markets and rig bids regarding generic drugs. In March 2020, the plaintiffs filed a further amended complaint. On July 15, 2020, the Company and other industry participants filed a motion to dismiss the complaint.
Note 15. 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, 2020, 2019, and 2018, the Company recognized gains of $9.1 million, $145.9 million, and $35.9 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 16. 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 CODM does not review assets by operating segment for the purpose of assessing performance or allocating resources.
The Pharmaceutical Distribution Services reportable segment distributes a comprehensive offering of brand-name, specialty brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. Through a number of operating businesses, the Pharmaceutical Distribution Services reportable segment provides pharmaceutical distribution (including plasma and other blood products, 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.
MWI is a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets. Additionally, MWI offers demand-creating sales force services to manufacturers. ABCS, through a number of operating businesses, provides a full suite of integrated manufacturer services that range from clinical trial support to product post-approval and commercialization support. World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry.
The following illustrates reportable and operating segment disaggregated revenue as required by ASC 606 for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Pharmaceutical Distribution Services | $ | 182,467,189 | $ | 172,813,537 | $ | 161,699,343 | ||||||||||||||
| Other: | ||||||||||||||||||||
| MWI Animal Health | 4,216,462 | 3,975,232 | 3,789,759 | |||||||||||||||||
| Global Commercialization Services | 3,308,640 | 2,893,109 | 2,542,971 | |||||||||||||||||
| Total Other | 7,525,102 | 6,868,341 | 6,332,730 | |||||||||||||||||
| Intersegment eliminations | (98,365) | (92,757) | (92,438) | |||||||||||||||||
| Revenue | $ | 189,893,926 | $ | 179,589,121 | $ | 167,939,635 |
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) | 2020 | 2019 | 2018 | |||||||||||||||||
| Pharmaceutical Distribution Services | $ | 1,807,001 | $ | 1,671,251 | $ | 1,626,748 | ||||||||||||||
| Other | 400,139 | 380,660 | 355,091 | |||||||||||||||||
| Intersegment eliminations | (2,693) | (659) | (609) | |||||||||||||||||
| Total segment operating income | $ | 2,204,447 | $ | 2,051,252 | $ | 1,981,230 |
The following reconciles total segment operating income to income before income taxes for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Total segment operating income | $ | 2,204,447 | $ | 2,051,252 | $ | 1,981,230 | ||||||||||||||
| Gain from antitrust litigation settlements | 9,076 | 145,872 | 35,938 | |||||||||||||||||
| LIFO (expense) credit | (7,422) | 22,544 | (67,324) | |||||||||||||||||
| PharMEDium remediation costs | (16,165) | (69,423) | (66,204) | |||||||||||||||||
| PharMEDium shutdown costs | (43,206) | — | — | |||||||||||||||||
| New York State Opioid Stewardship Act | (14,800) | 22,000 | (22,000) | |||||||||||||||||
| Contingent consideration adjustment | 12,153 | — | — | |||||||||||||||||
| Acquisition-related intangibles amortization | (110,478) | (159,848) | (174,751) | |||||||||||||||||
| Employee severance, litigation, and other | (6,807,307) | (330,474) | (183,520) | |||||||||||||||||
| Goodwill impairment | — | — | (59,684) | |||||||||||||||||
| Impairment of PharMEDium assets | (361,652) | (570,000) | — | |||||||||||||||||
| Operating (loss) income | (5,135,354) | 1,111,923 | 1,443,685 | |||||||||||||||||
| Other (income) loss | (1,581) | (12,952) | 25,469 | |||||||||||||||||
| Interest expense, net | 137,883 | 157,769 | 174,699 | |||||||||||||||||
| Loss on consolidation of equity investments | — | — | 42,328 | |||||||||||||||||
| Loss on early retirement of debt | 22,175 | — | 23,766 | |||||||||||||||||
| (Loss) income before income taxes | $ | (5,293,831) | $ | 967,106 | $ | 1,177,423 |
Segment operating income is evaluated by the CODM of the Company and excludes gain from antitrust litigation settlements; LIFO (expense) credit; PharMEDium remediation costs; PharMEDium shutdown costs; New York State Opioid Stewardship Act; contingent consideration adjustment; acquisition-related intangibles amortization; employee severance, litigation, and other; goodwill impairment; and impairment of PharMEDium assets. Segment measures were adjusted in fiscal 2020 to exclude PharMEDium shutdown costs and contingent consideration adjustment 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 Note 1). These remediation costs are primarily classified in Cost of Goods sold in the Consolidated Statements of Operations. The Company incurred costs in connection with exiting the PharMEDium compounding business. These shutdown costs are primarily classified in Distribution, Selling, and Administrative expenses in the Consolidated Statement of Operations.
One of the Company's non-wholly-owned subsidiaries, Profarma, which the Company consolidates based on certain governance rights (see Note 3), adjusted its previous estimate of contingent consideration related to the purchase price of one of its prior business acquisitions.
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 depreciation and amortization by reportable segment for the periods indicated:
| Fiscal Year Ended September 30, | ||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| Pharmaceutical Distribution Services | $ | 203,062 | $ | 232,735 | $ | 225,608 | ||||||||||||||
| Other | 77,522 | 69,824 | 64,768 | |||||||||||||||||
| Acquisition-related intangibles amortization | 110,478 | 159,848 | 174,751 | |||||||||||||||||
| Total depreciation and amortization | $ | 391,062 | $ | 462,407 | $ | 465,127 |
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) | 2020 | 2019 | 2018 | |||||||||||||||||
| Pharmaceutical Distribution Services | $ | 201,144 | $ | 210,161 | $ | 190,191 | ||||||||||||||
| Other | 168,533 | 100,061 | 146,220 | |||||||||||||||||
| Total capital expenditures | $ | 369,677 | $ | 310,222 | $ | 336,411 |
Note 17. 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, 2020 and 2019 approximate fair value based upon the relatively short-term nature of these financial instruments. Within Cash and Cash Equivalents, the Company had $2,548.0 million and $1,552.0 million of investments in money market accounts as of September 30, 2020 and 2019. 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 7) and the corresponding fair value as of September 30, 2020 were $3,618.3 million and $4,026.4 million, respectively. The recorded amount of long-term debt and the corresponding fair value as of September 30, 2019 were $4,033.9 million and $4,158.4 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 18. Quarterly Financial Information (Unaudited)
| Fiscal Year Ended September 30, 2020 | ||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Fiscal Year | |||||||||||||||||||||||||||
| Revenue | $ | 47,864,742 | $ | 47,417,639 | $ | 45,366,777 | $ | 49,244,768 | $ | 189,893,926 | ||||||||||||||||||||||
| Gross profit (a) | $ | 1,231,214 | $ | 1,388,107 | $ | 1,225,716 | $ | 1,346,847 | $ | 5,191,884 | ||||||||||||||||||||||
| Distribution, selling, and administrative expenses; depreciation; and amortization | 790,468 | 787,208 | 762,300 | 818,303 | 3,158,279 | |||||||||||||||||||||||||||
| Employee severance, litigation, and other (b) | 39,309 | 67,732 | 58,585 | 6,641,681 | 6,807,307 | |||||||||||||||||||||||||||
| Impairment of PharMEDium assets | 138,000 | 223,652 | — | — | 361,652 | |||||||||||||||||||||||||||
| Operating income (loss) | $ | 263,437 | $ | 309,515 | $ | 404,831 | $ | (6,113,137) | $ | (5,135,354) | ||||||||||||||||||||||
| Net income (loss) (c) | $ | 186,568 | $ | 971,111 | $ | 287,268 | $ | (4,844,505) | $ | (3,399,558) | ||||||||||||||||||||||
| Net income (loss) attributable to AmerisourceBergen Corporation (c) | $ | 187,640 | $ | 960,277 | $ | 289,439 | $ | (4,846,072) | $ | (3,408,716) | ||||||||||||||||||||||
| Earnings per share operations: | ||||||||||||||||||||||||||||||||
| Basic | $ | 0.91 | $ | 4.68 | $ | 1.42 | $ | (23.74) | $ | (16.65) | ||||||||||||||||||||||
| Diluted | $ | 0.90 | $ | 4.64 | $ | 1.41 | $ | (23.74) | $ | (16.65) |
(a)The first, second, and fourth quarters of the fiscal year ended September 30, 2020 include gains from antitrust litigation settlements of $8.5 million, $0.1 million, and $0.5 million, respectively. The first, second, and third quarters of the fiscal year ended September 30, 2020 include LIFO expense of $13.3 million, $23.9 million, and $6.1 million. The fourth quarter of the fiscal year ended September 30, 2020 includes LIFO credit of $35.8 million. The first quarter of the fiscal year ended September 30, 2020 includes PharMEDium remediation costs of $7.1 million. The second and third quarters of the fiscal year ended September 30, 2020 include PharMEDium shutdown costs of $5.0 million and $0.4 million, respectively.
(b)The fourth quarter of the fiscal year ended September 30, 2020 includes a $6.6 billion legal expense accrual in connection with opioid lawsuits.
(c)The second quarter of the fiscal year ended September 30, 2020 includes discrete tax benefits of $741.0 million primarily related to the permanent shutdown of the PharMEDium business. The third quarter of the fiscal year ended September 30, 2020 includes a loss on the early retirement of debt of $22.2 million. The fourth quarter of the fiscal year ended September 30, 2020 includes tax benefits of $1.1 billion relating to the $6.6 billion legal expense accrual in connection with opioid lawsuits, $360.7 million relating to Switzerland tax reform, and a $20.4 million adjustment to the discrete tax benefits previously recognized primarily attributable to the income tax deductions resulting from the permanent shutdown of the PharMEDium business.
| 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 PharMEDium 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 quarters 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 a 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.
Note 19. Subsequent Event
In November 2020, the Company's board of directors increased the quarterly dividend paid on common stock by 5% and declared a regular quarterly cash dividend of $0.44 per share, payable on November 30, 2020 to shareholders of record on November 16, 2020.
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