Income Taxes

12 Months Ended

Sep. 30, 2020

Income Tax Disclosure [Abstract]

Income Taxes

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.