AmerisourceBergen 2005 Annual Report Download - page 23

AmerisourceBergen Corporation 2005
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the prior fiscal year. As a percentage of operating revenue, gross
profit in the fiscal year ended September 30, 2004 was 30.45%, as
compared to 32.69% in the prior fiscal year. The decline in gross profit
is primarily due to industry competitive pressures, and a reduction in
the rates of reimbursement for the services provided by PharMerica,
which continue to adversely affect gross profit margins in both the
Workers’ Compensation business and the Long-Term Care business.
PharMerica operating expenses of $357.9 million for the fiscal
year ended September 30, 2004 reflect a decrease of 15% from $421.8
million in the prior fiscal year. As a percentage of operating revenue,
operating expenses were reduced to 22.72% in the fiscal year ended
September 30, 2004 from 26.23% in the prior fiscal year. The percent-
age reduction was primarily due to aggressive cost reductions in
response to the decline in operating revenue, a significant reduction
in bad debt expense of $22.4 million (including a $9.1 million recovery
from a customer) due to continued improvements made in credit and
collection practices, a $12.1 million reduction in sales and use tax
liability due to favorable audit experience and other settlements, and
continued improvements in operating practices of both the Workers’
Compensation and the Long-Term Care businesses.
PharMerica operating income of $121.8 million for the fiscal year
ended September 30, 2004 increased by 17% from $103.8 million in
the prior fiscal year. As a percentage of operating revenue, operating
income in the fiscal year ended September 30, 2004 was 7.74%, as
compared to 6.46% in theprior fiscal year. The improvement was due
to theaforementioned reduction in the operating expense ratio, which
was greater than the reduction in gross profit margin.
Intersegment Eliminations
These amounts represent the elimination of the Pharmaceutical
Distribution segment’s sales to PharMerica. ABDC is the principal
supplier of pharmaceuticals to PharMerica.
Critical Accounting Policies and Estimates
Critical accounting estimates are those accounting estimates
and assumptions that can have a material impact on the Company’s
financial position and results of operations and require the use of
complexand subjective estimates based upon past experience and
management’s judgment. Because of the uncertainty inherent in such
estimates, actual results may differ from these estimates. Below are
those policies applied in preparing the Company’s financial statements
that management believes are the most dependent on the application
ofestimates and assumptions. For accounting policies, see Note 1 of
“Notes to Consolidated Financial Statements.”
Allowance for Doubtful Accounts
Tradereceivables are primarily comprised of amounts owed to the
Company for its pharmaceutical distribution and services activities and
arepresented net ofan allowance for doubtful accounts and a reserve
for customer sales returns. In determining the appropriate allowance
for doubtful accounts, the Company considers a combination of factors,
such as the aging of trade receivables, industry trends, its customers’
financial strength and credit standing, and payment and default
history. Changes in the aforementioned factors, among others, may
lead to adjustments in the Company’s allowance for doubtful accounts.
Thecalculation of the required allowance requires judgment by
Company management as to the impact of these and other factors on
theultimate 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 on historical experience and for specific credit problems when
they arise. The Company writes off balances against the reserves when
collectibility is deemed remote. Each business unit performs formal
documented reviews of the allowance at least quarterly and the
Company’s largest business units perform such reviews monthly. There
were no significant changes to this process during the fiscal years
ended September 30, 2005, 2004 and 2003 and bad debt expense was
computed in a consistent manner during these periods. The bad debt
expense for any period presented is equal to the changes in the period
end allowance for doubtful accounts, net of write-offs and recoveries.
Bad debt expense for the fiscal years ended September 30, 2005,
2004 and 2003 was $33.4 million, ($10.3) million and $46.0 million,
respectively. During the fiscal year ended September 30, 2005, bad
debt expense was significantly impacted due to a $15.5 million
increase in bad debt relating to one of the operating companies within
the Specialty Group. During the fiscal year ended September 30, 2004,
debt expense was favorably impacted by a $17.5 million recovery from
aformer 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. An increase or decrease of 0.1% in the 2005 allowance
as a percentage of trade receivables would result in an increase or
decrease in the provision on accounts receivable of approximately
$3.1 million.
Supplier Reserves
TheCompanyestablishes reserves against amounts due from its
suppliers relating to various price and rebate incentives, including
deductionsor billings taken against payments otherwise due them from
the Company. These reserve estimates are established based on 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 on changes in factual
circumstances. An increase or decrease of 0.1% in the 2005 supplier
reserve balances as a percentage of trade payables would result in
an increase or decrease in cost of goods sold by approximately
$5.3 million. Theultimate outcomeof any outstanding claim may
be different than the Company’s estimate.
Loss Contingencies
TheCompanyaccrues for loss contingencies related to litigation
in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 5, “Accounting for Contingencies.” An estimated loss
contingency is accrued in the Company’s consolidated financial
statements if it is probable that a liability has been incurred and
the amount of the loss can be reasonably estimated. Assessing
contingencies is highly subjective and requires judgments about
future events. The Company regularly reviews loss contingencies to
determine the adequacy of the accruals and related disclosures. The
amount of the actual loss may differ significantly from these estimates.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost for
approximately 87% and 92% of the Company’s inventories at
September 30, 2005 and 2004, respectively, are determined using
the last-in, first-out (“LIFO”) method. If the Company had used the
first-in, first-out (“FIFO”) method of inventory valuation, which
approximates current replacement cost, inventories would have been
approximately $159.8 million and $166.1 million higher than the
amounts reported at September 30, 2005 and 2004, respectively.