AmerisourceBergen 2005 Annual Report Download - page 18

AmerisourceBergen Corporation 2005
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ended September 30, 2005 and 2004. As a percentage of operating
revenue, gross profit in the fiscal year ended September 30, 2005
was 3.96%, as compared to the prior-year percentage of 4.44%. The
decrease in gross profit and gross profit percentage in comparison
with the prior fiscal year reflects declines in both the Pharmaceutical
Distribution and PharMerica segments due to a decline in profits
related to pharmaceutical price increases and other buy-side profits,
changes in customer mix and competitive selling price pressures.
Distribution, selling and administrative expenses, depreciation
and amortization (“DSAD&A”) of $1,315.3 million in the fiscal year
ended September 30, 2005 reflects an increase of 4.6% from $1,258.0
million in the prior fiscal year. As a percentage of operating revenue,
DSAD&A in the fiscal year ended September 30, 2005 was 2.63%,
compared to 2.58% in the prior fiscal year. The increase in the DSAD&A
and the DSAD&A percentage in the fiscal year ended September 30,
2005 from the prior fiscal year was due to an increase in the
Pharmaceutical Distribution segment DSAD&A, including bad debt
expenses. Total bad debt expense increased to $33.4 million in the
fiscal year ended September 30, 2005 from a benefit of $10.3 million
in the prior fiscal year. This increase was primarily due to a $15.5
million increase in bad debt expense relating to one of the operating
companies within the Specialty Group. Additionally, the prior year’s
bad debt expense was favorably impacted by $26.6 million of
customer recoveries.
In 2001, theCompanydeveloped an integration plan to consoli-
date its distribution network and eliminate duplicative administrative
functions. During the fiscal year ended September 30, 2005, the
Company decided to outsource a significant portion of its information
technology activities as part of the integration plan. The Company’s
plan, as revised, is to have a distribution facility network numbering
in the mid-20s within the next two years and to have successfully
completed the outsourcing of such information technology activities
by the end of fiscal 2006. The plan includes building six new facilities
(four of which were operational as of September 30, 2005) and closing
facilities (twenty-three of which have been closed through September
30, 2005). The fifth facility opened in October 2005 and the sixth
facility is scheduled to open during fiscal 2006, thereby reducing the
total number of distribution facilities to 28 by the end of fiscal 2006.
Duringfiscal 2005 and2004, theCompanyclosed six and four
distribution facilities, respectively. The Company anticipates closing
six additional facilities in fiscal 2006.
During the fiscal year ended September 30, 2003, the Company
closed six distribution facilities and eliminated certain administrative
and operational functions (“the fiscal 2003 initiatives”). During the
fiscal years ended September 30, 2004 and 2003, the Company
recorded $0.9 million and $10.3 million, respectively, of employee
severance costs relatingto the fiscal 2003 initiatives. Through
September 30, 2004, approximately 780 employees received
termination notices as a result of the fiscal 2003 initiatives, of which
substantially all have been terminated. During the fiscal year ended
September 30, 2003, severance accruals of $1.8 million recorded in
September 2001 werereversed into income because certain employees
whowere expected to be severed either voluntarily left theCompany
or were retained in other positions within the Company.
During the fiscal year ended September 30, 2004, the Company
closed four distribution facilities and eliminated duplicative adminis-
trative functions (“the fiscal 2004 initiatives”). During the fiscal year
ended September 30, 2004, the Company recorded $5.4 million of
employee severance costs in connection with the fiscal 2004 initiatives.
During the fiscal year ended September 30, 2005, the Company
announced plans to continue to consolidate and eliminate certain
administrative functions,and to outsource a significant portion of the
Company’s information technology activities (the “fiscal 2005
initiatives”).
As of September 30, 2005, approximately 700 employees had
received termination notices as a result of the 2004 and 2005
initiatives, of which approximately 630 have been terminated.
Additional amounts for integration initiatives will be recognized in
subsequent periods as facilities to be consolidated are identified
and specific plans are approved and announced.
During the fiscal year ended September 30, 2005, the Company
recorded $13.3 million of employee severance and lease cancellation
costs primarily related to the 2005 initiatives and $9.4 million of
transition costs associated with the outsourcing of information
technology activities.
The Company paid a total of $13.5 million and $9.5 million for
employee severance, lease cancellation and other costs in the fiscal
years ended September 30, 2005 and 2004, respectively, related to
the aforementioned integration plan. Remaining unpaid amounts of
$12.3 million for employee severance, lease cancellation and other
costs are included in accrued expenses and other in the accompanying
consolidated balance sheet at September 30, 2005. Most employees
receive their severance benefits over a period of time, generally not to
exceed 12 months, while others may receive a lump-sum payment.
During the fiscal year ended September 30, 2005, the
Company recorded an impairment charge of $5.3 million relating
to certain intangible assets within the technology operations
ofABDC.
Operating income of $636.9 million for the fiscal year ended
September 30, 2005 reflects a decrease of29% compared to $901.0
million in the prior fiscal year. The Company’s operating income as a
percentage of operating revenue was 1.27% in the fiscal year ended
September 30, 2005 compared to 1.85% in the prior fiscal year. The
decline in operating income was primarily due to the decline in gross
profit. The gain on litigation settlements, less the costs of facility
consolidations, employee severance and other, and the impairment
charge increased operating income by $12.1 million in the fiscal year
ended September 30, 2005. The gain on litigation settlement, less
thecosts of facility consolidations, employee severance and other,
increased operating income by $30.5 million in the fiscal year ended
September 30, 2004.
During the fiscal year ended September 30, 2004, a technology
company in which the Company had an equity investment sold
substantially all of its assets and paid a liquidating dividend. As a
result, theCompany recorded a gain of $8.4 million in other income
during the fiscal year ended September 30, 2004.
Interest expense, net, decreased 49% in the fiscal year ended
September 30, 2005 to $57.2 million from $112.7 million in the
prior fiscal year due to a net decline in average borrowings. Average
borrowings, net of cash, under the Company’s debt facilities during the
fiscal year ended September 30, 2005 were $183.1 million as compared
to average borrowings, net of cash, of $1.1 billion in the prior fiscal
year. The reductions in average borrowings, net of cash, were achieved
due to the Company’s strong cash flows generated from operations,
including reduced merchandise inventories resulting from the afore-
mentioned business model transition.
During the fiscal years ended September 30, 2005 and 2004, the
Company recorded $111.9 million and $23.6 million, respectively, in
losses resulting from the early retirement of debt.
Income tax expense of $176.9 million in the fiscal year ended
September 30, 2005 reflects an effective income tax rate of 37.7%,
versus 38.4% in the prior fiscal year. The reduction in tax rates
resulted from the resolution of certain federal and state income tax
issues duringthefiscal year ended September 30, 2005. TheCompany