AmerisourceBergen 2005 Annual Report Download - page 24

AmerisourceBergen Corporation 2005
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During the fiscal years ended September 30, 2005 and 2004, inventory
balances declined, which resulted in liquidation of LIFO layers carried
at lower costs prevailing in prior years. The effect of the liquidation
in fiscal 2005 was to decrease cost of goods sold by $30.6 million
and increase diluted earnings per share by $0.17. The effect of the
liquidation in fiscal 2004 was to decrease cost of goods sold by
$10.3 million and increase diluted earnings per share by $0.05.
Goodwill and Intangible Assets
The Company accounts for purchased goodwill and intangible
assets in accordance with Financial Accounting Standards Board
(“FASB”) SFAS No. 142 “Goodwill and Other Intangible Assets.” Under
SFAS No. 142, purchased goodwill and intangible assets with indefinite
lives are not amortized; rather, they are tested for impairment on at
least an annual basis. Intangible assets with finite lives, primarily
customer relationships, non-compete agreements, patents and software
technology, will continue to be amortized over their useful lives.
In order to test goodwill and intangible assets with indefinite
lives under SFAS No. 142, a determination of the fair value of the
Company’s reporting units and intangible assets with indefinite lives
is required and is based, among other things, on estimates of future
operating performance of the reporting unit and/or the component
of the entity being valued. The Company is required to complete an
impairment test for goodwill and intangible assets with indefinite lives
and record any resulting impairment losses at least on an annual basis.
TheCompanyuses an income approach to determine the fair value of
its reporting units and intangible assets with indefinite lives. Changes
in market conditions, among other factors, may have an impact
on these fair values. The Company completed its required annual
impairment tests in the fourth quarters of fiscal 2005 and 2004 and
determined that there was no impairment.
During the second quarter of fiscal 2005, the Company performed
an impairment test on certain intangible assets within the technology
operations of ABDC due to the existence of impairment indicators. As
a result, the Company recorded an impairment charge of $5.3 million
relating to certain of those intangible assets. The charge has been
reflected in theCompany’s results of operations for the fiscal year
ended September 30, 2005.
Stock Options
The Company may elect to account for stock options using either
Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees,” (“APB 25”) or SFAS No. 123, “Accounting for
Stock-Based Compensation.” The Company has elected to use the
accounting method under APB 25 and the related interpretations to
account for its stock options. Under APB 25, generally, when the
exercise price of the Company’s stock options equals the market price
of the underlying stock on the date of grant, no compensation expense
is recognized. Had the Company elected to use SFAS No. 123 to
account for its stock options under the fair value method, it would
have been required to record compensation expense and as a result,
diluted earnings per share for the fiscal years ended September 30,
2005, 2004 and2003 would have been lower by $0.04, $0.74 and
$0.16, respectively. Effective September 1, 2004, the Company vested
all employee options then outstanding with an exercise price in excess
of$54.10 (theclosingstock price on August 31, 2004). The acceler-
ated vesting was approved by the Compensation and Succession
Planning Committee of the Company’s board of directors for employee
retention purposes and in anticipation of the requirements of SFAS
No. 123R. As a result of the accelerated vesting, the pro-forma
compensation expense and the corresponding reduction in diluted
earnings per share in fiscal 2004 was significantly greater than the
pro-forma compensation expense and the corresponding reduction in
diluted earnings per share in fiscal 2005 and 2003.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based
Payment,” which requires companies to measure compensation cost for
all share-based payments (including employee stock options) at fair
value for interim or annual periods beginning after June 15, 2005. In
April 2005, the U.S. Securities and Exchange Commission issued a new
rule allowing public companies to delay the adoption of SFAS No. 123R
to annual periods beginning after June 15, 2005. As a result, the
Company will adopt SFAS No. 123R, using the modified-prospective
transition method beginning on October 1, 2005, and therefore, will
begin to expense the fair value of all outstanding options over their
remaining service periods to the extent the options are not fully vested
as of the adoption date and will expense the fair value of all future
options granted subsequent to September 30, 2005 over their service
periods. The Company estimates it will record pre-tax share-based
compensation expense of approximately $14 million in fiscal 2006.
This estimate may be impacted by potential changes to the structure
of the Company’s share-based compensation plans which could
impact the number of stock options granted in fiscal 2006, changes
in valuation assumptions, the market price of the Company’s common
stock, among other things and, as a result, the actual pre-tax share-
based compensation expense in fiscal 2006 may differ from the
Company’s current estimate.
Liquidity and Capital Resources
Thefollowing table illustrates the Company’s debt structure at
September 30, 2005, including availability under revolving credit
facilities andthe receivables securitization facility (in thousands):
Outstanding Additional
Balance Availability
Fixed-Rate Debt:
$400,000, 55⁄8%senior notes
due 2012 $398,010 $—
$500,000, 57⁄8%senior notes
due 2015 497,508 —
Other 2,193 —
Total fixed-rate debt 897,711 —
Variable-Rate Debt:
Blanco revolving credit facility
due 2006 55,000 —
Revolving credit facility due 2009 — 687,985
Receivables securitization facility
due 2007 — 1,050,000
Total variable-rate debt 55,000 1,737,985
Total debt, includingcurrent
portion $952,711 $1,737,985
The Company’s $1.7 billion of aggregate availability under its
revolving credit facility and its receivables securitization facility provide
sufficientsources of capital to fund the Company’s working capital
requirements. The Company’s aggregate availability was reduced to $1.4
billion as ofOctober 31, 2005, because it elected to terminate the364-
day tranche under its receivables securitization facility (defined below).
In an effort to reduce its interest expense, extend maturities of
its long-term debt and ease its debt covenant restrictions, the
Company refinanced its long-term debt in September 2005. The
Company issued $400 million of 5.625% senior notes due September