AmerisourceBergen 2005 Annual Report Download - page 35

AmerisourceBergen Corporation 2005
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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.
At September 30, 2005, the largest trade receivable due from a single
customer represented approximately 13% of accounts receivable, net.
Sales to the Company’s largest non-bulk customer represented 7.5% of
operating revenue in fiscal 2005. Sales to Medco Health Solutions, Inc.
(“Medco”) represented 6% of operating revenue and represented 93%
of bulk deliveries in fiscal 2005. No other single customer accounted
for more than 5% of the Company’s operating revenue.
The Company maintains cash balances and cash equivalents with
several large creditworthy banks and money-market funds located in
the United States. The Company does not believe there is significant
credit risk related to its cash and cash equivalents.
Goodwill and Intangible Assets
The Company accounts for purchased goodwill and intangible
assets in accordance with Financial Accounting Standards Board
(“FASB”) Statement of Financial Accounting Standards (“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 relation-
ships, non-compete agreements, patents and software technology, are
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
impairmenttest for goodwill and intangible assets with indefinite lives
and record any resulting impairment losses at least on an annual basis.
TheCompanyuses an incomeapproach 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
impairmenttests 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 its technology
operations 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
the Company’s results of operations for the fiscal year ended
September 30, 2005.
Income Taxes
In accordance with provisions of SFAS No. 109, “Accounting for
Income Taxes,” the Company accounts for income taxes using the asset
and liability method. The asset and liability method requires recognition
of deferred tax assets and liabilities for expected future tax conse-
quences of temporary differences that currently exist between tax bases
and financial reporting bases of the Company’s assets and liabilities.
Investments
TheCompanyuses theequity method ofaccounting for its invest-
ments in entities in which it has significant influence; generally,
this represents an ownership interest of between 20% and 50%.
The Company’s investments in marketable equity securities in which
the Company does not have significant influence are classified as
“available for sale” and are carried at fair value, with unrealized gains
and losses excluded from earnings and reported in the accumulated
other comprehensive loss component of stockholders’ equity.
Loss Contingencies
The Company accrues for loss contingencies related to litigation
in accordance 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.
Manufacturer Incentives
The Company generally accounts for fees and other incentives
received from its suppliers, relating to the purchase or distribution
of inventory, as a reduction to cost of goods sold, in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by
aCustomer for Certain Consideration Received from a Vendor.” The
Companyconsiders these fees to represent product discounts, and
as a result, the fees are capitalized as a product cost and relieved
through cost of goods sold upon thesale ofthe related inventory.
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, were 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, consolidated inventories would have been
approximately $159.8 million and $166.1 million higher than the
amounts reported at September 30, 2005 and 2004, respectively.
Duringthefiscal 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
andincrease 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.
Property and Equipment
Property and equipment are stated at cost and depreciated on
the straight-line method over the estimated useful lives of the assets,
which range from 3 to 40 years for buildings and improvements and
from 3 to 10 years for machinery, equipment and other. The costs of
repairs and maintenance are charged to expense as incurred.
Revenue Recognition
The Company recognizes revenue when products are delivered to
customers.Service revenues are recognized as services are performed.
Revenues as reflected in the accompanying consolidated statement of
operations are net of sales returns and allowances.
The Company’s customer sales return policy generally allows
customers to return products only if the products can be resold at
full value or returned to suppliers for full credit. During the fiscal
year ended September 30, 2004, theCompanychanged its accounting
AmerisourceBergen Corporation 2005