AmerisourceBergen 2005 Annual Report Download - page 21

AmerisourceBergen Corporation 2005
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settlement with a pharmaceutical manufacturer. This gain was recorded
as a reduction of cost of goods sold and contributed 2% of gross profit
for the fiscal year ended September 30, 2004. As a percentage of
operating revenue, gross profit in the fiscal year ended September 30,
2004 was 4.44%, as compared to the prior-year percentage of 4.90%.
The decrease in 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 manufacturer price increases, changes in customer
mix and competitive selling price pressures, offset in part by the
antitrust litigation settlement.
DSAD&A of $1,258.0 million in the fiscal year ended September
30, 2004 reflects a decrease of 5% compared to $1,330.6 million in
the prior fiscal year. As a percentage of operating revenue, DSAD&A in
the fiscal year ended September 30, 2004 was 2.58% compared to
2.93% in the prior fiscal year. The decline in the DSAD&A percentage
from the prior fiscal year reflects improvements in both the
Pharmaceutical Distribution and PharMerica segments due to: (a) a
$56.3 million reduction of bad debt expense primarily due to a $17.5
million recovery from a former customer in the Pharmaceutical
Distribution segment, a $9.1 million recovery from a customer in the
PharMerica segment, and the continued improvements made in the
credit and collection practices in both segments (see further discussion
below); (b) a $12.1 million reduction in PharMerica’s sales and use tax
liability; (c) a reduction in employee headcount resulting from our
integration efforts; and (d) operational efficiencies primarily derived
from our integration plan.
Within Pharmaceutical Distribution, credit andcollection practices
improved following the consolidation and relocation of the national
account credit and collection process from Orange, California to the
Company’s executive headquarters in Chesterbrook, Pennsylvania in
early 2004. This consolidation led to increased management control
and facilitated the favorable resolution of certain long-standing
disputes with major national account customers. Additionally, the
Companyplaced significant emphasis on reducing past due and
disputed receivables that had accumulated at one of our distribution
centers as a result of a systems conversion in fiscal 2003. PharMerica’s
credit and collection practices were improved by consolidating all of
its billingandcollectionsonto one pharmacy system, establishing
consistent billing and collection policies and procedures, and
centralizing its collection efforts for national accounts. Additionally,
improvements in the financial strength of the nursing home industry
had a favorable impact on PharMerica’s bad debt expense.
In 2001, the Company developed an integration plan to consoli-
date its distribution network and eliminate duplicative administrative
functions. As of September 30, 2004, this plan resulted in synergies of
approximately $150 million on an annual basis. The Company’s plan, as
revised, is to have a distribution facility network numbering in the
mid-20’s within the next two years. The plan includes building six new
facilities and closing facilities. During fiscal 2004 and 2003, the
Company closed four and six distribution facilities, respectively.
Duringthe fiscal year ended September 30, 2003, the Company
closed six distribution facilities andeliminated 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 sev-
erance costs relating to 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 were
reversed into incomebecause certain employees whowereexpected to
be severed either voluntarily left the Company 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 termination of 230
employees relating to the fiscal 2004 initiatives. As of September 30,
2004, approximately 190 employees had been terminated and the
remainder were terminated in fiscal 2005.
The Company paid a total of $9.5 million and $13.8 million for
employee severance and lease and contract cancellation costs in the
fiscal years ended September 30, 2004 and 2003, respectively, related
to the aforementioned integration plan. Remaining unpaid amounts of
$3.1 million for employee severance and lease cancellation costs are
included in accrued expenses and other in the accompanying consoli-
dated balance sheet at September 30, 2004. 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.
Operating income of $901.0 million for the fiscal year ended
September 30, 2004 increased slightly compared to $886.1 million in
the prior fiscal year. The gain on litigation settlement less costs of
facility consolidations and employee severance increased the Company’s
operating income by $30.5 million in the fiscal year ended September
30, 2004 andcosts offacility consolidations and employee severance
reduced the Company’s operating income by $8.9 million in the prior
fiscal year. The Company’s operating income as a percentage of
operating revenue was 1.85% in thefiscal year ended September 30,
2004 compared to 1.95% in the prior fiscal year. The gain on litigation
settlement contributed approximately 8 basis points to the Company’s
operating income as a percentage of operating revenue for the fiscal
year ended September 30, 2004. The contribution provided by the
litigation settlement was offset by a decrease in gross margin in
excess of the aforementioned DSAD&A expense percentage reduction.
Duringthe fiscal year ended September 30, 2004, a technology
company in which the Company had an equity investment sold
substantially all ofits assets and paid a liquidating dividend. As a
result, the Company recorded a gain of $8.4 million in other income
duringthefiscal year ended September 30, 2004. During the fiscal year
ended September 30, 2003, the Company recorded losses of $8.0
million, which primarily consisted of a $5.5 million charge related to
the decline in fair value of its equity investment in the technology
companybecause thedecline was judged to be other-than-temporary.
Interest expense, net, decreased 22% in the fiscal year ended
September 30, 2004 to $112.7 million from $144.7 million in the prior
fiscal year. Average borrowings, net of cash, under the Company’s debt
facilities duringthe fiscal year ended September 30, 2004 were $1.1
billion as compared to average borrowings, net of cash, of $2.3 billion
in the prior fiscal year. The reduction in average borrowings, net of
cash, was achieved due to lower inventory levels in the fiscal year
ended September 30, 2004 due to the impact of inventory management
agreements, reductions in buy-side purchasing opportunities and the
reduced number ofdistribution facilities as a result of the Company’s
integration activities.
During the fiscal years ended September 30, 2004 and 2003,
theCompany recorded $23.6 million and $4.2 million, respectively,
in losses resulting from the early retirement of debt.
Income tax expense of $296.0 million in the fiscal year ended
September 30, 2004 reflects an effective income tax rate of 38.4%,
versus 39.2% in the prior fiscal year. The Company was able to lower
its effective income tax rate during fiscal 2004 by implementing
tax-planningstrategies.