- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2002
-------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
Commission file number 1-16671
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AMERISOURCEBERGEN CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-3079390
- -------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1300 Morris Drive, Suite 100, Chesterbrook, PA 19087-5594
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 727-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
The number of shares of common stock of AmerisourceBergen Corporation
outstanding as of January 31, 2003 was 110,219,039.
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AMERISOURCEBERGEN CORPORATION
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets, December 31, 2002 3
and September 30, 2002
Consolidated Statements of Operations for the three 5
months ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the three 6
months ended December 31, 2002 and 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 29
About Market Risk
Item 4. Controls and Procedures 29
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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December 31, September 30,
ASSETS 2002 2002
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents .................................................. $ 366,776 $ 663,340
Accounts receivable, less allowance for doubtful accounts: $179,438 at
December 31, 2002 and $181,432 at September 30, 2002 ................... 2,328,398 2,222,156
Merchandise inventories .................................................... 6,381,477 5,437,878
Prepaid expenses and other ................................................. 19,120 26,263
------------- -------------
Total current assets ............................................... 9,095,771 8,349,637
------------- -------------
Property and equipment, at cost:
Land ....................................................................... 24,952 24,952
Buildings and improvements ................................................. 134,623 134,394
Machinery, equipment and other ............................................. 273,070 263,154
------------- -------------
Total property and equipment ....................................... 432,645 422,500
Less accumulated depreciation .............................................. 150,839 139,922
------------- -------------
Property and equipment, net ........................................ 281,806 282,578
------------- -------------
Other assets:
Goodwill ................................................................... 2,206,346 2,205,159
Deferred income taxes ...................................................... 9,351 12,400
Intangibles, deferred charges and other .................................... 365,898 363,238
------------- -------------
Total other assets ................................................. 2,581,595 2,580,797
------------- -------------
TOTAL ASSETS ....................................................... $ 11,959,172 $ 11,213,012
============= =============
- ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
3
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands, except share and per share data)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Current liabilities:
Accounts payable ............................................................. $ 5,542,195 $ 5,367,837
Accrued expenses and other ................................................... 449,368 433,835
Current portion of long-term debt ............................................ 210,998 60,819
Accrued income taxes ......................................................... 82,408 31,955
Deferred income taxes ........................................................ 220,439 205,071
---------------- ------------
Total current liabilities ............................................ 6,505,408 6,099,517
---------------- ------------
Long-term debt, net of current portion ............................................... 1,991,706 1,756,494
Other liabilities .................................................................... 42,034 40,663
Stockholders' equity:
Common stock, $.01 par value - authorized: 300,000,000 shares;
issued and outstanding: 106,998,419 at December 31, 2002
and 106,581,837 shares at September 30, 2002 ............................. 1,070 1,066
Additional paid-in capital ................................................... 2,872,214 2,858,596
Retained earnings ............................................................ 552,684 462,619
Accumulated other comprehensive loss ......................................... (5,944) (5,943)
---------------- ------------
Total stockholders' equity ........................................... 3,420,024 3,316,338
---------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $ 11,959,172 $ 11,213,012
================ ============
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
4
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
Three months ended December 31,
-----------------------------------
2002 2001
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Operating revenue ................................................................ $ 11,106,905 $ 9,686,276
Bulk deliveries to customer warehouses ........................................... 1,327,628 1,382,504
-----------------------------------
Total revenue .................................................................... 12,434,533 11,068,780
Cost of goods sold ............................................................... 11,913,108 10,597,347
-----------------------------------
Gross profit ..................................................................... 521,425 471,433
Operating expenses:
Distribution, selling and administrative ..................................... 317,682 297,592
Depreciation ................................................................. 15,803 14,247
Amortization ................................................................. 1,466 800
Facility consolidations and employee severance ............................... (1,381) -
Merger costs ................................................................. - 7,497
-----------------------------------
Operating income ................................................................. 187,855 151,297
Equity in losses of affiliates and other ......................................... 183 1,731
Interest expense ................................................................. 34,385 36,993
-----------------------------------
Income before taxes............................................................... 153,287 112,573
Income taxes ..................................................................... 60,548 44,690
-----------------------------------
Net income ............................................................... $ 92,739 $ 67,883
===================================
Earnings per share:
Basic ........................................................................ $ 0.87 $ 0.65
===================================
Diluted ...................................................................... $ 0.84 $ 0.63
===================================
Weighted average common shares outstanding:
Basic ........................................................................ 106,790 103,736
Diluted ...................................................................... 113,402 111,182
Cash dividends declared per share of common stock ................................ $ 0.025 $ 0.025
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
5
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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Three months ended December 31,
-------------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income .................................................................... $ 92,739 $ 67,883
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation ............................................................. 15,803 14,247
Amortization, including amounts charged to interest expense .............. 3,242 1,999
Provision for loss on accounts receivable ................................ 7,276 15,758
Loss on disposal of property and equipment ............................... 1,391 183
Equity in losses of affiliates and other ................................. 183 1,731
Provision for deferred income taxes ...................................... 18,417 17,795
Employee stock compensation .............................................. 206 205
Changes in operating assets and liabilities, excluding the
effects of acquisitions:
Accounts and notes receivable .................................... (113,715) 20,662
Merchandise inventories .......................................... (943,599) (722,648)
Prepaid expenses and other ....................................... 6,400 (1,721)
Accounts payable, accrued expenses and income taxes .............. 243,874 163,460
Other ............................................................ 1,434 1,897
-------------------------------------
NET CASH USED IN OPERATING ACTIVITIES .......................................... (666,349) (418,549)
-------------------------------------
INVESTING ACTIVITIES
Capital expenditures ........................................................... (16,487) (10,069)
Cost of acquired companies, net of cash acquired ............................... (1,427) -
Purchase of additional equity interests in businesses .......................... - (8,240)
Proceeds from sales of property and equipment .................................. 75 53
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ........................................ (17,839) (18,256)
-------------------------------------
FINANCING ACTIVITIES
Net borrowings under revolving credit and receivables
securitization facilities .................................................. 100,000 413,000
Long-term debt borrowings ...................................................... 300,000 -
Long-term debt repayments ...................................................... (15,000) (23,075)
Deferred financing costs and other ............................................. (4,525) (971)
Exercise of stock options ...................................................... 9,823 9,509
Cash dividends on common stock ................................................. (2,674) (2,595)
-------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...................................... 387,624 395,868
-------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS ............................................ (296,564) (40,937)
Cash and cash equivalents at beginning of period ................................. 663,340 297,626
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 366,776 $ 256,689
=====================================
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See notes to consolidated financial statements.
6
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying financial statements present the consolidated
financial position, results of operations and cash flows of AmerisourceBergen
Corporation and its wholly-owned subsidiaries (the "Company") as of the dates
and for the periods indicated. All material intercompany accounts and
transactions have been eliminated in consolidation.
The Company was formed in connection with the merger of AmeriSource
Health Corporation ("AmeriSource") and Bergen Brunswig Corporation ("Bergen"),
which was consummated on August 29, 2001.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly the financial position as of December 31, 2002 and the results of
operations and cash flows for the interim periods ended December 31, 2002 and
2001 have been included. Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States, but which are not required
for interim reporting purposes, have been omitted. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual amounts could differ from these
estimated amounts.
Certain reclassifications have been made to prior-year amounts in order
to conform to the current-year presentation.
Note 2. Recently Issued Financial Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." This statement supersedes
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs Incurred in a Restructuring." This
standard addresses the financial accounting and reporting for costs associated
with exit or disposal activities. These costs relate to termination benefits
provided to current employees that are involuntarily terminated, costs to
terminate a contract, and costs to consolidate facilities or relocate employees.
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under SFAS No.
146, an entity's commitment to a plan does not by itself create an obligation
that meets the definition of a liability. SFAS No. 146 also establishes fair
value as the basis for measuring the initial liability. The standard was
effective for exit costs or disposal activities initiated after December 31,
2002, although early adoption was encouraged. The Company elected to adopt this
standard in September 2002. The Company had previously recognized certain costs
associated with restructuring plans as of the date of commitment to the plan.
The adoption of SFAS No. 146 resulted in the deferral of recognition of such
restructuring costs from the date the Company committed to a plan to the date
the Company actually incurred the costs associated with a plan.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The adoption of the standard is
effective for fiscal years and interim periods beginning after December 15,
2002. The Company does not expect to adopt the fair value method of accounting
for stock-based compensation. As required, the Company will adopt the disclosure
provisions of this standard beginning with the quarter ending March 31, 2003.
7
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 3. Acquisitions and Other Investments
In May 2002, the Company's Pharmaceutical Distribution segment acquired
a 20% equity interest in a physician management consulting company for $5
million in cash, subject to a possible adjustment contingent on the entity
achieving defined earnings targets in calendar 2002. The Company currently
expects that there will be a $4 million increase in the purchase price related
to the acquisition of the first 20% equity interest. Additionally, the Company
has agreed to acquire, within the next two years, the remaining 80% equity
interest for a minimum of $10 million, subject to adjustment contingent on the
achievement of defined earnings targets. The Company currently expects to pay
between $20 million and $30 million for the next 40% equity interest to be
acquired in the second or third quarter of fiscal 2003. Under the terms of the
acquisition agreement, the total purchase price for 100% equity ownership of the
entity shall not exceed $100 million and is based on the entity's earnings
during calendar years 2002 through 2004. The Company currently expects to pay
between $70 million and $80 million, in the aggregate, for its 100% equity
ownership in the entity. The initial 20% investment has been accounted for using
the equity method of accounting.
Note 4. Earnings Per Share
Basic earnings per share is computed on the basis of the weighted
average number of shares of common stock outstanding during the periods
presented. Diluted earnings per share is computed on the basis of the weighted
average number of shares of common stock outstanding during the periods plus the
dilutive effect of stock options. Additionally, the diluted calculations
consider the 5% convertible subordinated notes as if converted and, therefore,
the after-tax effect of interest expense related to these notes is added back to
net income in determining income available to common stockholders.
Three months ended December 31,
-------------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------
Net income ..................................................... $ 92,739 $ 67,883
Interest expense - convertible subordinated notes,
net of income taxes ........................................ 2,489 2,481
-------------------------------
Income available to common stockholders ................ $ 95,228 $ 70,364
===============================
Weighted average common shares outstanding - basic ............. 106,790 103,736
Effect of dilutive securities:
Options to purchase common stock ........................... 948 1,782
Convertible subordinated notes ............................. 5,664 5,664
-------------------------------
Weighted average common shares outstanding - diluted ... 113,402 111,182
===============================
Note 5. Goodwill and Other Intangible Assets
Following is a summary of the changes in the carrying value of
goodwill, by reportable segment, for the three months ended December 31, 2002
(in thousands):
Pharmaceutical
Distribution PharMerica Total
- ---------------------------------------------------------------------------------------------------------
Goodwill at September 30, 2002 ..................... $ 1,936,203 $ 268,956 $ 2,205,159
Goodwill recognized in connection with the
acquisition of businesses ...................... 1,187 - 1,187
-------------------------------------------------
Goodwill at December 31, 2002 ...................... $ 1,937,390 $ 268,956 $ 2,206,346
=================================================
8
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Following is a summary of other intangible assets (in thousands):
December 31, 2002 September 30, 2002
--------------------------------------- -------------------------------------------
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
--------------------------------------- -------------------------------------------
Unamortized intangibles:
Tradenames .................... $ 226,781 $ - $ 226,781 $ 226,781 $ - $ 226,781
Amortized intangibles: ...........
Customer lists and other ...... 32,838 (8,462) 24,376 32,838 (6,996) 25,842
--------------------------------------- -------------------------------------------
Total other intangible assets .... $ 259,619 $ (8,462) $ 251,157 $ 259,619 $ (6,996) $ 252,623
======================================= ===========================================
Amortization expense for other intangible assets was $1.5 million and
$0.8 million in the three months ended December 31, 2002 and 2001, respectively.
Amortization expense for other intangible assets is estimated to be $4.5 million
in fiscal 2003, $3.7 million in each of fiscal 2004, fiscal 2005, and fiscal
2006 and $3.1 million in fiscal 2007.
Note 6. Debt
Debt consisted of the following (in thousands):
December 31, September 30,
2002 2002
----------------------------------------------------------------------------------------------------------
Term loan facility at 3.03% and 3.41%, respectively, due 2003 to 2006 ... $ 285,000 $ 300,000
Blanco revolving credit facility at 3.38% and 3.71%,
respectively, due 2003 ............................................. 55,000 55,000
AmeriSource receivables securitization financing due 2004, at 1.87% ..... 100,000 -
Bergen receivables securitization financing due 2005 .................... - -
Bergen 7 3/8% senior notes due 2003 ..................................... 150,066 150,419
Bergen 7 1/4% senior notes due 2005 ..................................... 99,781 99,758
8 1/8% senior notes due 2008 ............................................ 500,000 500,000
7 1/4% senior notes due 2012 ............................................ 300,000 -
PharMerica 8 3/8% senior subordinated notes due 2008 .................... 124,485 124,532
AmeriSource 5% convertible subordinated notes due 2007 .................. 300,000 300,000
Bergen 6 7/8% exchangeable subordinated debentures due 2011 ............. 8,425 8,425
Bergen 7.80% trust preferred securities due 2039 ........................ 275,456 275,288
Other ................................................................... 4,491 3,891
-------------------------------
Total debt ...................................................... 2,202,704 1,817,313
Less current portion .................................................... 210,998 60,819
-------------------------------
Total, net of current portion ................................... $ 1,991,706 $ 1,756,494
===============================
A description of the principal terms of the aforementioned debt is set
forth in Note 5 of the Company's consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2002.
9
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
In November 2002, the Company issued $300 million of 7 1/4% senior
notes due November 15, 2012 (the "7 1/4% Notes"). The 7 1/4% Notes are
redeemable at the Company's option at any time before maturity at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption and, under
some circumstances, a redemption premium. Interest on the 7 1/4% Notes is
payable semiannually in arrears, commencing May 15, 2003. The Company used the
net proceeds of the 7 1/4% Notes to repay $15 million of the term loan in
December 2002 and $150 million in aggregate principal of the Bergen 7 3/8%
senior notes in January 2003. Additionally, the Company intends to redeem the
PharMerica 8 3/8% senior subordinated notes due 2008, at a redemption price
equal to 104.19% of the principal amount thereof, when they become callable in
April 2003. In connection with the issuance of the 7 1/4% Notes, the Company
incurred approximately $5.1 million of costs which were deferred and are being
amortized over the ten-year term of the notes.
The Blanco Facility, which expires in May 2003, is not classified in
the current portion of long-term debt on the accompanying consolidated balance
sheet at December 31, 2002 because the Company has the ability and intent to
refinance it on a long-term basis. Additionally, since borrowings under the
Blanco Facility are secured by a standby letter of credit under the Senior
Credit Agreement, the Company is effectively financing this debt on a long-term
basis through that arrangement.
Note 7. Facility Consolidations and Employee Severance and Merger Costs
Facility Consolidations and Employee Severance
In connection with the Merger, the Company has developed integration
plans to consolidate its distribution network and eliminate duplicate
administrative functions, which are expected to result in synergies of
approximately $150 million annually by the end of fiscal 2004. The Company's
plan is to have a distribution facility network consisting of 30 facilities in
the next four to five years. This will be accomplished by building six new
facilities, expanding seven facilities, and closing 27 facilities. During fiscal
2002, the Company closed seven distribution facilities and plans to close
additional facilities in fiscal 2003.
In September 2001, the Company announced plans to close seven
distribution facilities in fiscal 2002, consisting of six former AmeriSource
facilities and one former Bergen facility. A charge of $10.9 million was
recognized in the fourth quarter of fiscal 2001 related to the AmeriSource
facilities, and included $6.2 million of severance for approximately 260
warehouse and administrative personnel to be terminated, $2.3 million in lease
and contract cancellations, and $2.4 million for the write-down of assets
related to the facilities to be closed. Approximately $0.2 million of costs
related to the Bergen facility were included in the purchase price allocation.
During the fiscal year ended September 30, 2002, the Company announced
further integration initiatives relating to the closure of Bergen's repackaging
facility and the elimination of certain Bergen administrative functions,
including the closure of a related office facility. The cost of these
initiatives of approximately $19.2 million, which included $15.8 million of
severance for approximately 310 employees to be terminated, $1.6 million for
lease cancellation costs, and $1.8 million for the write-down of assets related
to the facilities to be closed, resulted in additional goodwill being recorded
during fiscal 2002.
In September 2002, the Company announced the first of its facility
closures planned for fiscal 2003. The second and third facility closures planned
for fiscal 2003 were announced in December 2002. Employee severance and lease
cancellation costs related to the fiscal 2003 facility closures will be
recognized in accordance with the new provisions of SFAS No. 146. Employee
severance costs will generally be expensed during the employee service period
and lease cancellation and other costs will generally be expensed when the
Company enters into a contractual obligation. A charge of $1.1 million was
recognized in the three months ended December 31, 2002 for employee severance
related to the three announced fiscal 2003 facility closures. 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.
The Company paid a total of $4.5 million for employee severance and
lease and contract cancellation costs and terminated 103 employees in the first
quarter of fiscal 2003 related to the aforementioned integration plans.
10
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
During the three months ended December 31, 2002, severance accruals of $1.8
million recorded in September 2001 were reversed into income because certain
employees who were expected to be severed either voluntarily left the Company or
were retained in other positions within the Company. Additionally, $0.7 million
of the September 2001 write-down of assets related to facilities to be closed
was reversed into income because the Company was able to use certain equipment
that was previously expected to be abandoned or sold.
The following table displays the activity in accrued expenses and other
from September 30, 2002 to December 31, 2002 related to the integration plans
discussed above (in thousands):
Employee Lease Cancellation
Severance Costs and Other Total
- -------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2002 ............. $ 8,156 $ 955 $ 9,111
Employee severance expensed .................. 1,119 - 1,119
Payments made during period .................. (3,993) (540) (4,533)
Employee severance reduction ................. (1,754) - (1,754)
------------------- ---------------------- -----------------
Balance as of December 31, 2002 .............. $ 3,528 $ 415 $ 3,943
=================== ====================== =================
Merger Costs
During the three months ended December 31, 2001, the Company expensed
approximately $7.5 million of merger costs, primarily related to integrating the
operations of AmeriSource and Bergen. Such costs were comprised of $6.0 million
of consulting fees and $1.5 million of other items. Effective October 1, 2002,
the Company converted its merger integration office to an operations management
office. Accordingly, the costs of the operations management office are included
within distribution, selling and administrative expenses in the consolidated
statements of operations.
Note 8. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in
lawsuits, administrative proceedings and governmental investigations, including
antitrust, environmental, product liability, regulatory and other matters. Large
and sometimes unspecified damages or penalties may be sought from the Company in
some matters, and some matters may require years for the Company to resolve. The
Company establishes reserves from time to time based on its periodic assessment
of the potential outcomes of pending matters. There can be no assurance that an
adverse resolution of one or more matters during any subsequent reporting period
will not have a material adverse effect on the Company's results of operations
for that period. However, on the basis of information furnished by counsel and
others and taking into consideration the reserves established for pending
matters, the Company does not believe that the resolution of currently pending
matters (including those matters specifically described below), individually or
in the aggregate, will have a material adverse effect on the Company's financial
condition.
Environmental Remediation
The Company is subject to contingencies pursuant to environmental laws and
regulations at a former distribution center. The Company has an accrued
liability of $0.9 million as reflected in other liabilities in the accompanying
consolidated balance sheet at December 31, 2002. Such liability represents the
current estimate of the cost to remediate the site. However, changes in
regulations or technology or new information concerning the site could affect
the actual liability.
Proposition 65
In October 2001, the Center for Environmental Health filed a lawsuit
against the Company's then Bergen Brunswig Drug Company subsidiary ("BBDC"), a
predecessor to the Company's current AmerisourceBergen Drug Corporation
subsidiary, and several other defendants. The complaint alleged violations of
California's Proposition 65 and Unfair Trade Practices Act for
11
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
failure to provide clear and reasonable warnings regarding the carcinogenicity
and reproductive toxicity of lead and the reproductive toxicity of cadmium to
the users of FDA-approved anti-diarrheal medicines. The Company tendered its
defense to the manufacturer of its private label medicines. In January 2002, the
California Attorney General served an amended complaint against BBDC and several
of the defendants covering the same products and asserting similar allegations
and damages. On January 29, 2002, the State filed a motion to consolidate the
two actions in San Francisco County Superior Court. The Company has answered the
amended complaints. Settlement discussions are ongoing.
Contract Dispute
In January 2002, BBDC was served with a complaint filed in the United
States District Court for the District of New Jersey by one of its manufacturer
vendors, Bracco Diagnostics Inc. The complaint, which includes claims for fraud,
breach of New Jersey's Consumer Fraud Act, breach of contract and unjust
enrichment, involves disputes relating to chargebacks and credits. The Court
granted the Company's motion to dismiss the fraud and New Jersey Consumer Fraud
Act counts. The Company has answered the remaining counts of the complaint and
the parties have served each other with discovery requests and discovery is
ongoing.
PharMerica Matter
Prior to the acquisition of PharMerica by Bergen, the United States
Department of Health and Human Services ("HHS"), during the course of a Medicare
audit of various nursing homes, requested PharMerica to produce records related
to intravenous pharmaceuticals provided to certain nursing homes in 1997 and
1998. PharMerica has learned that HHS auditors alleged that during the 1997-1998
time frame, certain nursing homes, primarily operating in Texas, improperly
billed Medicare for intravenous pharmaceuticals and related services. In June
2000, the government sued Sensitive Care, a former chain of thirteen Texas
nursing homes, alleging that Sensitive Care filed false claims for Medicare
reimbursement. Because Sensitive Care has filed for bankruptcy, the government's
case has been filed in bankruptcy court as a creditor's claim. In its answer to
the government's lawsuit, Sensitive Care has denied liability and has brought a
third-party complaint alleging that PharMerica is liable for any false claims
liabilities that may be imposed against Sensitive Care under an indemnification
clause contained in the pharmacy services contracts between PharMerica and the
nursing homes Sensitive Care formerly operated. PharMerica denies that it has
any liability for fraudulent billings that Sensitive Care, an independent
third-party organization, may have submitted to the government. Nevertheless,
PharMerica has entered into settlement discussions with the government in the
interest of expeditiously resolving this matter.
Note 9. Business Segment Information
The Company is organized based upon the products and services it provides
to its customers. The Company's operations have been aggregated into two
reportable segments: Pharmaceutical Distribution and PharMerica.
The Pharmaceutical Distribution segment includes AmerisourceBergen Drug
Company ("ABDC") and AmerisourceBergen Specialty Group ("ABSG"). ABDC includes
the full-service pharmaceutical distribution facilities, American Health
Packaging, and other healthcare related businesses. ABDC sells pharmaceuticals,
over-the-counter medicines, health and beauty aids, and other health-related
products to hospitals, alternate care and mail order facilities, and independent
and chain retail pharmacies. American Health Packaging packages oral solid
medications for nearly any need in virtually all settings of patient care. ABDC
also provides promotional, inventory management, pharmacy automation and
information services to its customers. ABSG sells specialty pharmaceutical
products and services to physicians, clinics and other providers in the
oncology, nephrology, plasma and vaccines sectors. ABSG also provides third
party logistics and reimbursement consulting services to healthcare product
manufacturers.
The PharMerica segment consists solely of the Company's PharMerica
operations. PharMerica provides institutional pharmacy products and services to
patients in long-term care and alternate site settings, including skilled
nursing facilities, assisted living facilities, and residential living
communities. PharMerica also provides mail order pharmacy services to
chronically and catastrophically ill patients under workers' compensation
programs, and provides pharmaceutical claims administration services for payors.
12
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
All of the Company's operations are located in the United States, except
for one ABDC subsidiary, which operates in Puerto Rico.
The following tables present segment information for the three months ended
December 31 (in thousands):
Revenue
----------------------------------------
Three months ended December 31, 2002 2001
- ----------------------------------------------------------------------------------------------
Pharmaceutical Distribution ....................... $ 10,899,570 $ 9,522,076
PharMerica ........................................ 402,842 355,415
Intersegment eliminations ......................... (195,507) (191,215)
----------------------------------------
Operating revenue ............................ 11,106,905 9,686,276
Bulk deliveries to customer warehouses ............ 1,327,628 1,382,504
----------------------------------------
Total revenue ..................................... $ 12,434,533 $ 11,068,780
========================================
Management evaluates segment performance based on revenues excluding bulk
deliveries to customer warehouses. Intersegment eliminations represent the
elimination of the Pharmaceutical Distribution segment's sales to PharMerica.
ABDC is the principal supplier of pharmaceuticals to PharMerica.
Operating Income
----------------------------------------
Three months ended December 31, 2002 2001
- ----------------------------------------------------------------------------------------------
Pharmaceutical Distribution ......................... $ 162,935 $ 139,484
PharMerica .......................................... 23,539 19,310
Facility consolidations and employee severance and
Merger costs ("special items") ................. 1,381 (7,497)
----------------------------------------
Total operating income ......................... 187,855 151,297
Equity in losses of affiliates and other ............ (183) (1,731)
Interest expense .................................... (34,385) (36,993)
----------------------------------------
Income before taxes ........................ $ 153,287 $ 112,573
========================================
Segment operating income is evaluated before equity in losses of
affiliates, interest expense and special items. All corporate office expenses
are allocated to the two reportable segments.
13
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 10. Subsequent Events
Acquisition of Bridge Medical, Inc.
In January 2003, the Company acquired Bridge Medical, Inc. ("Bridge"), a
leading provider of barcode-enabled point-of-care software designed to reduce
medication errors, for a base purchase price of approximately $28 million. The
acquisition also provides for contingent payments of up to a maximum of $55
million based on Bridge achieving defined earnings targets through the end of
calendar 2004. The Company paid 83% of the base purchase price by issuing
401,780 shares of Common Stock. The remaining 17% of the base purchase price was
paid in cash. The Company also intends to pay any contingent amounts that may
become due primarily in shares of Common Stock. At the closing of the
acquisition, the Company issued an additional 401,780 shares of Common Stock
into an escrow account that may be used for the payment of contingent amounts,
if any, that may become due in the future. The Company will retire any unused
shares remaining in the escrow account after the end of calendar 2004 upon the
completion of the contingent payment determinations.
Acquisition of US Bioservices Corporation
In January 2003, the Company acquired US Bioservices Corporation ("US
Bio"), a national pharmaceutical services provider focused on the management of
high-cost complex therapies and reimbursement support with revenues of
approximately $120 million in calendar 2002, for a base purchase price of
approximately $159 million, which included the repayment of US Bio debt of
approximately $15 million. The Company issued 2,399,091 shares of Common Stock
with an aggregate market value of approximately $131 million and paid the
remaining $28 million of the base purchase price in cash. The agreement also
provides for contingent payments of up to $27.6 million in cash based on US Bio
achieving defined earnings targets through the end of the first quarter of
calendar 2004.
14
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
Note 11. Selected Consolidating Financial Statements of Parent, Guarantors and
Non-Guarantors
The Company's 8 1/8% Notes, 7 1/4% Notes and 5% Notes each are fully
and unconditionally guaranteed on a joint and several basis by a majority of the
Company's subsidiaries (the subsidiaries of the Company which are guarantors of
either the 8 1/8% Notes, 7 1/4% Notes and/or the 5% Notes being referred to
collectively as the "Guarantor Subsidiaries"). The only subsidiaries of the
Company which are not guarantors of either the 8 1/8% Notes, the 7 1/4% Notes
and/or the 5% Notes (the "Non-Guarantor Subsidiaries") are: (a) ARFC
Securitization Facility and Blue Hill Securitization Program, the receivables
securitization special purpose entities; (b) Capital I Trust, the issuer of the
Trust Preferred Securities; and (c) certain operating subsidiaries which are
collectively minor. The following tables present condensed consolidating
financial statements including AmerisourceBergen Corporation (the "Parent"), the
Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. Such financial
statements include balance sheets as of December 31, 2002 and September 30, 2002
and statements of operations and cash flows for the three months ended December
31, 2002 and 2001.
SUMMARY CONSOLIDATING BALANCE SHEETS:
December 31, 2002
--------------------------------------------------------------------------------------
AmerisourceBergen Eliminations
Corporation Guarantor Non-Guarantor and Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Reclassifications Total
- ---------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 40,302 $ 202,143 $ 124,331 $ - $ 366,776
Accounts receivable, net 3 277,348 2,051,047 - 2,328,398
Merchandise inventories - 6,336,762 44,715 - 6,381,477
Prepaid expenses and other 158 18,329 633 - 19,120
---------------------------------------------------------------------------------------
Total current assets 40,463 6,834,582 2,220,726 - 9,095,771
Property and equipment, net - 280,903 903 - 281,806
Goodwill - 2,203,209 3,137 - 2,206,346
Intangibles, deferred charges and other 29,695 344,061 310,772 (309,279) 375,249
Intercompany investments and advances 4,357,313 1,009,761 (1,382,423) (3,984,651) -
--------------------------------------------------------------------------------------
Total assets $ 4,427,471 $ 10,672,516 $ 1,153,115 $ (4,293,930) $ 11,959,172
======================================================================================
Current liabilities:
Accounts payable $ - $ 5,533,019 $ 9,176 $ - $ 5,542,195
Accrued expenses and other 18,279 648,473 3,055 - 669,807
Accrued income taxes (55,595) 138,003 - - 82,408
Current portion of long-term debt 60,000 932 - - 60,932
--------------------------------------------------------------------------------------
Total current liabilities 22,684 6,320,427 12,231 - 6,355,342
Long-term debt, net of current portion 1,325,000 661,772 455,000 (300,000) 2,141,772
Other liabilities - 41,401 633 - 42,034
Stockholders' equity 3,079,787 3,648,916 685,251 (3,993,930) 3,420,024
--------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 4,427,471 $ 10,672,516 $ 1,153,115 $ (4,293,930) $ 11,959,172
======================================================================================
15
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
September 30, 2002
----------------------------------------------------------------------------------
AmerisourceBergen Eliminations
Corporation Guarantor Non-Guarantor and Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Reclassifications Total
- -------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 416,002 $ 172,058 $ 75,280 $ - $ 663,340
Accounts receivable, net 3,315 243,587 1,975,254 - 2,222,156
Merchandise inventories - 5,387,288 50,590 - 5,437,878
Prepaid expenses and other 218 25,082 963 - 26,263
----------------------------------------------------------------------------------
Total current assets 419,535 5,828,015 2,102,087 - 8,349,637
Property and equipment, net - 281,682 896 - 282,578
Goodwill - 2,202,023 3,136 - 2,205,159
Intangibles, deferred charges and other 26,082 348,657 310,791 (309,892) 375,638
Intercompany investments and advances 3,568,716 1,684,081 (1,439,566) (3,813,231) -
----------------------------------------------------------------------------------
Total assets $ 4,014,333 $10,344,458 $ 977,344 $ (4,123,123) $11,213,012
==================================================================================
Current liabilities:
Accounts payable $ - $ 5,350,189 $ 18,771 $ (1,123) $ 5,367,837
Accrued expenses and other 10,819 626,373 1,714 - 638,906
Accrued income taxes (62,360) 94,315 - - 31,955
Current portion of long-term debt 60,000 819 - - 60,819
----------------------------------------------------------------------------------
Total current liabilities 8,459 6,071,696 20,485 (1,123) 6,099,517
Long-term debt, net of current portion 1,040,000 661,494 355,000 (300,000) 1,756,494
Other liabilities - 40,038 625 - 40,663
Stockholders' equity 2,965,874 3,571,230 601,234 (3,822,000) 3,316,338
----------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 4,014,333 $10,344,458 $ 977,344 $ (4,123,123) $11,213,012
==================================================================================
SUMMARY CONSOLIDATING STATEMENTS OF OPERATIONS:
Three months ended December 31, 2002
----------------------------------------------------------------------------------
AmerisourceBergen Eliminations
Corporation Guarantor Non-Guarantor and Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Reclassifications Total
- -------------------------------------------------------------------------------------------------------------------------------
Operating revenue $ - $11,046,540 $ 60,365 $ - $11,106,905
Bulk deliveries to customer warehouses - 1,327,617 11 - 1,327,628
----------------------------------------------------------------------------------
Total revenue - 12,374,157 60,376 - 12,434,533
Cost of goods sold - 11,854,710 58,398 - 11,913,108
----------------------------------------------------------------------------------
Gross profit - 519,447 1,978 - 521,425
Operating expenses:
Distribution, selling and
administrative - 331,508 (13,826) - 317,682
Depreciation - 15,720 83 - 15,803
Amortization - 1,448 18 - 1,466
Facility consolidations and employee
severance - (1,381) - - (1,381)
----------------------------------------------------------------------------------
Operating income - 172,152 15,703 - 187,855
Equity in losses of affiliates and other - 183 - - 183
Interest expense (17,126) 44,170 7,341 - 34,385
----------------------------------------------------------------------------------
Income before taxes and equity in
earnings of subsidiaries 17,126 127,799 8,362 - 153,287
Income taxes 6,765 50,482 3,301 - 60,548
Equity in earnings of subsidiaries 92,739 - - (92,739) -
----------------------------------------------------------------------------------
Net income $ 103,100 $ 77,317 $ 5,061 $ (92,739) $ 92,739
==================================================================================
16
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Three months ended December 31, 2001
---------------------------------------------------------------------------------------
AmerisourceBergen Eliminations
Corporation Guarantor Non-Guarantor and Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Reclassifications Total
==================================================================================================================================
Operating revenue $ - $ 9,627,128 $ 59,148 $ - $ 9,686,276
Bulk deliveries to customer warehouses - 1,382,493 11 - 1,382,504
---------------------------------------------------------------------------------------
Total revenue - 11,009,621 59,159 - 11,068,780
Cost of goods sold - 10,543,275 54,072 - 10,597,347
---------------------------------------------------------------------------------------
Gross profit - 466,346 5,087 - 471,433
Operating expenses:
Distribution, selling and administrative - 310,815 (13,223) - 297,592
Depreciation - 14,177 70 - 14,247
Amortization - 800 - - 800
Merger costs - 7,497 - - 7,497
---------------------------------------------------------------------------------------
Operating income - 133,057 18,240 - 151,297
Equity in losses of affiliates and other - 1,731 - - 1,731
Interest expense - 22,015 14,978 - 36,993
---------------------------------------------------------------------------------------
Income before taxes and equity in
earnings of subsidiaries - 109,311 3,262 - 112,573
Income taxes - 43,307 1,383 - 44,690
Equity in earnings of subsidiaries 67,883 - - (67,883) -
---------------------------------------------------------------------------------------
Net income $ 67,883 $ 66,004 $ 1,879 $ (67,883) $ 67,883
=======================================================================================
SUMMARY CONSOLIDATING STATEMENTS OF CASH FLOWS:
Three months ended December 31, 2002
----------------------------------------------------------------------------------
AmerisourceBergen
Corporation Guarantor Non-Guarantor Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
=================================================================================================================================
Net income $ 103,100 $ 87,678 $ 5,061 $ (103,100) $ 92,739
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities (81,543) (702,912) (77,733) 103,100 (759,088)
----------------------------------------------------------------------------------
Net cash provided by (used in)operating
activities 21,557 (615,234) (72,672) - (666,349)
----------------------------------------------------------------------------------
Capital expenditures - (16,397) (90) - (16,487)
Cost of acquired companies, net of cash
acquired - (1,427) - - (1,427)
Other - 75 - - 75
----------------------------------------------------------------------------------
Net cash used in investing activities - (17,749) (90) - (17,839)
----------------------------------------------------------------------------------
Net repayments under revolving credit
and securitization facilities - - 100,000 - 100,000
Long-term debt borrowings 300,000 - - - 300,000
Long-term debt repayments (15,000) - - - (15,000)
Deferred financing costs and other (3,977) (548) - - (4,525)
Exercise of stock options 9,823 - - - 9,823
Cash dividends on Common Stock (2,674) - - - (2,674)
Intercompany investments and advances (685,429) 663,616 21,813 - -
----------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (397,257) 663,068 121,813 - 387,624
----------------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (375,700) 30,085 49,051 - (296,564)
Cash and cash equivalents at beginning of
period 416,002 172,058 75,280 - 663,340
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 40,302 $ 202,143 $ 124,331 $ - $ 366,776
==================================================================================
17
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
Three months ended December 31, 2001
-----------------------------------------------------------------------------------------
AmerisourceBergen
Corporation Guarantor Non-Guarantor Consolidated
(in thousands) (Parent) Subsidiaries Subsidiaries Eliminations Total
==================================================================================================================================
Net income $ 67,883 $ 66,004 $ 1,879 $ (67,883) $ 67,883
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities (149) (630,796) 76,630 67,883 (486,432)
--------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 67,734 (564,792) 78,509 - (418,549)
--------------------------------------------------------------------------------------
Capital expenditures - (10,041) (28) - (10,069)
Purchase of equity interests in
business - (8,240) - - (8,240)
Other - 53 - - 53
--------------------------------------------------------------------------------------
Net cash used in investing activities - (18,228) (28) - (18,256)
--------------------------------------------------------------------------------------
Net borrowings under revolving credit
and securitization facilities - - 413,000 - 413,000
Long-term debt borrowings - - - - -
Long-term debt repayments - (23,075) - - (23,075)
Deferred financing costs and other (1,024) 64 (11) - (971)
Exercise of stock options 9,509 - - - 9,509
Cash dividends on Common Stock (2,595) - - - (2,595)
Intercompany investments and advances (436,302) 931,243 (494,941) - -
--------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (430,412) 908,232 (81,952) - 395,868
--------------------------------------------------------------------------------------
(Decrease) increase in cash and
cash equivalents (362,678) 325,212 (3,471) - (40,937)
Cash and cash equivalents at beginning of
period 416,002 (218,844) 100,468 - 297,626
--------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 53,324 $ 106,368 $ 96,997 $ - $ 256,689
======================================================================================
18
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto contained herein:
The Company
AmerisourceBergen Corporation (the "Company") is a leading national
wholesale distributor of pharmaceutical products and related healthcare services
and solutions with over $40 billion in annualized operating revenue. The Company
was formed in connection with the merger of AmeriSource Health Corporation
("AmeriSource") and Bergen Brunswig Corporation ("Bergen"), which was
consummated on August 29, 2001 (the "Merger").
The Company is organized based upon the products and services it provides
to its customers. The Company's operating segments have been aggregated into two
reportable segments: Pharmaceutical Distribution and PharMerica.
The Pharmaceutical Distribution segment includes AmerisourceBergen Drug
Company ("ABDC") and AmerisourceBergen Specialty Group ("ABSG"). ABDC includes
the full-service pharmaceutical distribution facilities, American Health
Packaging, and other healthcare related businesses. ABDC sells pharmaceuticals,
over-the-counter medicines, health and beauty aids, and other health-related
products to hospitals, managed care facilities and independent and chain retail
pharmacies. American Health Packaging packages oral solid medications for nearly
any need in virtually all settings of patient care. ABDC also provides
promotional, inventory management, pharmacy automation and information services
to its customers. ABSG sells specialty pharmaceutical products and services to
physicians, clinics and other providers in the oncology, nephrology, plasma and
vaccines sectors. ABSG also provides third party logistics and reimbursement
consulting services to healthcare product manufacturers.
The PharMerica segment consists solely of the Company's PharMerica
operations. PharMerica provides institutional pharmacy products and services to
patients in long-term care and alternate site settings, including skilled
nursing facilities, assisted living facilities, and residential living
communities. It also provides mail order and on-line pharmacy services to
chronically and catastrophically ill patients under workers' compensation
programs, and provides pharmaceutical claims administration services for payors.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Results of Operations
AmerisourceBergen Corporation
Summary Segment Information
Operating Revenue
Three Months Ended December 31,
-----------------------------------------------
(dollars in thousands) 2002 2001 Change
---------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution $ 10,899,570 $ 9,522,076 14%
PharMerica 402,842 355,415 13
Intersegment eliminations (195,507) (191,215) 2
--------------------------------
Total $ 11,106,905 $ 9,686,276 15%
===============================================
Operating Income
Three Months Ended December 31,
-----------------------------------------------
(dollars in thousands) 2002 2001 Change
---------------------------------------------------------------------------------------------------------
Pharmaceutical Distribution $ 162,935 $ 139,484 17%
PharMerica 23,539 19,310 22
Facility consolidations and employee severance and
Merger costs ("special items") 1,381 (7,497)
--------------------------------
Total $ 187,855 $ 151,297 24%
===============================================
Percentages of operating revenue:
Pharmaceutical Distribution
Gross profit 3.59% 3.70%
Operating expenses 2.10% 2.23%
Operating income 1.49% 1.46%
PharMerica
Gross profit 32.18% 33.62%
Operating expenses 26.33% 28.18%
Operating income 5.84% 5.43%
AmerisourceBergen Corporation
Gross profit 4.69% 4.87%
Operating expenses 3.00% 3.31%
Operating income 1.69% 1.56%
-----------------------------------------------------------------------------
20
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Consolidated Results
Operating revenue, which excludes bulk deliveries, for the quarter ended
December 31, 2002 increased 15% to $11.1 billion from $9.7 billion in the
prior-year quarter. This increase is primarily due to increased operating
revenue in the Pharmaceutical Distribution segment.
The Company reports as revenue bulk deliveries to customer warehouses,
whereby the Company acts as an intermediary in the ordering and delivery of
pharmaceutical products. Bulk deliveries decreased by $54.9 million or 4.0% in
the quarter ended December 31, 2002 compared to the prior-year quarter. Due to
the insignificant service fees generated from these bulk deliveries,
fluctuations in volume have no significant impact on operating margins. However,
revenue from bulk deliveries has a positive impact to the Company's cash flows
due to favorable timing between the customer payments to us and the payments by
us to our suppliers.
Gross profit of $521.4 million in the quarter ended December 31, 2002
reflects an increase of 11% from $471.4 million in the prior-year quarter. As a
percentage of operating revenue, gross profit in the quarter ended December 31,
2002 was 4.69%, as compared to the prior-year percentage of 4.87%. The decrease
in gross profit percentage in comparison with the prior-year percentage reflects
declines in both the Pharmaceutical Distribution and PharMerica segments due to
changes in customer mix and competitive selling price pressures.
Distribution, selling and administrative expenses, depreciation and
amortization ("DSAD&A") of $335.0 million in the quarter ended December 31, 2002
reflects an increase of 7% compared to $312.6 million in the prior-year quarter.
As a percentage of operating revenue, DSAD&A in the quarter ended December 31,
2002 was 3.02%, as compared to the prior-year percentage of 3.23%. The decrease
in the DSAD&A percentage from the prior-year ratio reflects improvements in both
the Pharmaceutical Distribution and PharMerica segments due to customer mix
changes, operational efficiencies and continued benefits from the merger
integration effort.
In connection with the Merger, the Company has developed integration plans
to consolidate its distribution network and eliminate duplicate administrative
functions, which are expected to result in synergies of approximately $150
million annually by the end of fiscal 2004. The Company's plan is to have a
distribution facility network consisting of 30 facilities in the next four to
five years. This will be accomplished by building six new facilities, expanding
seven facilities, and closing 27 facilities. During fiscal 2002, the Company
closed seven distribution facilities and is planning to close additional
facilities in fiscal 2003.
In September 2001, the Company announced plans to close seven distribution
facilities in fiscal 2002, consisting of six former AmeriSource facilities and
one former Bergen facility. A charge of $10.9 million was recognized in the
fourth quarter of fiscal 2001 related to the AmeriSource facilities, and
included $6.2 million of severance for approximately 260 warehouse and
administrative personnel to be terminated, $2.3 million in lease and contract
cancellations, and $2.4 million for the write-down of assets related to the
facilities to be closed. Approximately $0.2 million of costs related to the
Bergen facility were included in the Merger purchase price allocation.
During the fiscal year ended September 30, 2002, the Company announced
further integration initiatives relating to the closure of Bergen's repackaging
facility and the elimination of certain Bergen administrative functions,
including the closure of a related office facility. The cost of these
initiatives of approximately $19.2 million, which included $15.8 million of
severance for approximately 310 employees to be terminated, $1.6 million for
lease cancellation costs, and $1.8 million for the write-down of assets related
to the facilities to be closed, resulted in additional goodwill being recorded
during fiscal 2002.
In September 2002, the Company announced the first of its facility closures
planned for fiscal 2003. The second and third facility closures planned for
fiscal 2003 were announced in December 2002. Employee severance and lease
cancellation costs related to the fiscal 2003 facility closures will be
recognized in accordance with the new provisions of Statement of Financial
Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which the Company elected to adopt early in
September 2002. Employee severance costs will generally be expensed during the
employee service period and lease cancellation and other costs will generally be
expensed when the Company enters into a contractual obligation. The Company
expects to incur charges of approximately $10 million to $12 million relating to
these
21
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
efforts in fiscal 2003. A charge of $1.1 million was recognized in the three
months ended December 31, 2002 for employee severance related to the three
announced fiscal 2003 facility closures. 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.
The Company paid a total of $4.5 million for employee severance and
lease and contract cancellation costs and terminated 103 employees in the first
quarter of fiscal 2003 related to the aforementioned integration plans.
During the three months ended December 31, 2002, severance accruals of $1.8
million recorded in September 2001 were reversed into income because certain
employees who were expected to be severed either voluntarily left the Company or
were retained in other positions within the Company. Additionally, $0.7 million
of the September 2001 write-down of assets related to facilities to be closed
was reversed into income because the Company was able to use certain equipment
that was previously expected to be abandoned or sold.
During the three months ended December 31, 2001, the Company expensed
approximately $7.5 million of merger costs, primarily related to integrating the
operations of AmeriSource and Bergen. Such costs were comprised of $6.0 million
of consulting fees and $1.5 million of other items. Effective October 1, 2002,
the Company converted its merger integration office to an operations management
office. Accordingly, the costs of the operations management office are included
within distribution, selling and administrative expenses in the consolidated
statements of operations.
Operating income of $187.9 million for the quarter ended December 31,
2002 reflects an increase of 24% from $151.3 million in the prior-year quarter.
Special items increased the Company's operating income in the quarter ended
December 31, 2002 by $1.4 million and reduced the Company's operating income in
the prior-year quarter by $7.5 million. The Company's operating income as a
percentage of operating revenue was 1.69% in the quarter ended December 31, 2002
in comparison to 1.56% in the prior-year quarter. The improvement is due to the
reduction of the special items and the aforementioned DSAD&A expense percentage
reduction more than offsetting the reduction in gross margin.
Interest expense decreased 7% in the quarter ended December 31, 2002 to
$34.4 million compared to $37.0 million in the prior-year quarter. Average
borrowings, net of cash, under the Company's debt facilities during the quarter
ended December 31, 2002 were $1.8 billion as compared to average borrowings, net
of cash, of $2.2 billion in the prior-year quarter. The reduction in average
borrowings, net of cash, was achieved due to improvements in the management of
the Company's working capital. Average borrowing rates under the Company's
variable-rate debt facilities decreased to 3.26% in the current year quarter
from 3.61% in the prior-year quarter, due to lower market interest rates.
Income tax expense of $60.5 million in the quarter ended December 31,
2002, reflects an effective tax rate of 39.5% versus 39.7% in the prior-year
quarter. The tax provision for the quarter ended December 31, 2002 was computed
based on an estimate of the annual effective rate.
Net income of $92.7 million for the quarter ended December 31, 2002
reflects an increase of 37% from $67.9 million in the prior-year quarter.
Diluted earnings per share of $0.84 in the quarter ended December 31, 2002
reflects a 33% increase as compared to $0.63 per share in the prior-year
quarter. Special items had the effect of increasing net income and diluted
earnings per share for the quarter ended December 31, 2002 by $0.8 million and
$0.01, respectively. Special items had the effect of reducing net income and
diluted earnings per share for the quarter ended December 31, 2001 by $4.5
million and $0.04, respectively.
Segment Information
Pharmaceutical Distribution Segment
Pharmaceutical Distribution operating revenue of $10.9 billion for the
quarter ended December 31, 2002 reflects an increase of 14% from $9.5 billion in
the prior-year quarter. During the quarter ended December 31, 2002, 55% of
operating revenue was from sales to institutional customers and 45% was from
retail customers; this compares to a customer mix in the prior-year quarter of
52% institutional and 48% retail. In comparison with the prior-year results,
sales to institutional customers increased 19% for the quarter primarily due to
higher revenues from mail order customers and the ABSG specialty pharmaceutical
business. Sales to retail customers increased 10% over the prior-year quarter,
principally due to higher revenues
22
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
from drug store chains, including the pharmacy departments of supermarkets. This
segment's growth largely reflects national industry economic conditions,
including increases in prescription drug usage and higher pharmaceutical prices.
Future operating revenue growth may be impacted by customer consolidation and
competition within the industry, as well as by industry growth rates. Industry
growth rates, as estimated by IMS Healthcare, Inc., are expected to be between
11% and 14% over the next four years, reflecting the impact of brand name drug
patent expirations expected between 2003 and 2005 and a slowdown in the
introduction of significant new drugs in 2003.
Pharmaceutical Distribution gross profit of $391.8 million in the
quarter ended December 31, 2002 reflects an increase of 11% from $352.0 million
in the prior-year quarter. As a percentage of operating revenue, gross profit in
the first quarter of fiscal 2003 was 3.59%, as compared to the prior-year
percentage of 3.70%. The gross profit decline reflects the net impact of a
number of factors, including the change in customer mix to a higher percentage
of large institutional, mail order and chain accounts, and the continuing
competitive pricing environment, offset, in part, by higher buy-side margins
than in the prior year. Downward pressures on sell-side gross profit margin are
expected to continue and there can be no assurance that increases in the
buy-side component of the gross margin, including manufacturer price increases
and negotiated deals, will be available in the future to fully or partially
offset the anticipated decline. The Company's cost of goods sold for interim
periods includes a last-in, first-out ("LIFO") provision that is based on the
Company's estimated annual LIFO provision. The annual LIFO provision is affected
by changes in inventory quantities, product mix, and manufacturer pricing
practices, which may be impacted by market and other external influences.
Pharmaceutical Distribution operating expenses of $228.9 million in the
quarter ended December 31, 2002 reflect an increase of 8% from $212.5 million in
the prior-year quarter. As a percentage of operating revenue, operating expenses
in the first quarter of fiscal 2003 were 2.10%, as compared to the prior-year
percentage of 2.23%. This decrease in expense percentage reflects the changing
customer mix described above, efficiencies of scale, the elimination of
redundant costs through the merger integration process, the continued emphasis
on productivity throughout the Company's distribution network and a reduction of
bad debt expense.
Pharmaceutical Distribution operating income of $162.9 million in the
quarter ended December 31, 2002 reflects an increase of 17% from $139.5 million
in the prior-year quarter. As a percentage of operating revenue, operating
income in the first quarter of fiscal 2003 was 1.49%, as compared to the
prior-year percentage of 1.46%. The improvement over the prior-year percentage
was due to a reduction in the operating expense ratio, which was greater than
the reduction in gross profit margin. The reduction of the operating expense
ratio was partially due to the Company's ability to capture synergy cost savings
from the Merger. While management historically has been able to lower expense
ratios and expects to continue to do so, there can be no assurance that
reductions will occur in the future, or that expense ratio reductions will
exceed possible declines in gross margins. Additionally, there can be no
assurance that merger integration efforts will proceed as planned and result in
the desired synergies.
PharMerica Segment
PharMerica's operating revenue increased 13% for the quarter December
31, 2002 to $402.8 million compared to $355.4 million in the prior-year quarter.
This increase is principally attributable to growth in PharMerica's workers'
compensation business, which has grown at a faster rate than its long-term care
business.
PharMerica's gross profit of $129.6 million for the quarter ended
December 31, 2002 increased 8% from gross profit of $119.5 million in the
prior-year quarter. As a percentage of operating revenue, gross profit in the
first quarter of fiscal 2003 was 32.18%, as compared to prior-year percentage of
33.62%. This decrease is primarily the result of a change in the sales mix, with
a greater proportion of PharMerica's current year revenues coming from its
workers' compensation business, which has lower gross profit margins and lower
operating expenses than its long-term care business. In addition, industry
competitive pressures continue to adversely affect gross profit margins.
PharMerica's operating expenses of $106.1 million for the quarter ended
December 31, 2002 increased 6% increase from operating expenses of $100.2
million in the prior-year quarter. As a percentage of operating revenue,
operating expenses in the first quarter of fiscal 2003 were 26.33%, as compared
to the prior-year percentage of 28.18%. The percentage reduction is due to
several factors, including the aforementioned shift in customer mix towards the
workers' compensation business, continued improvements in operating practices,
and a reduction in bad debt expense.
23
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
PharMerica's operating income of $23.5 million for the quarter ended
December 31, 2002 increased 22% compared to operating income of $19.3 million in
the prior-year quarter. As a percentage of operating revenue, operating income
in the first quarter of fiscal 2003 was 5.84%, as compared to the prior-year
percentage of 5.43%. The improvement was due to the aforementioned 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. AmerisourceBergen Drug Company is
the principal supplier of pharmaceuticals to PharMerica.
Liquidity and Capital Resources
The following table illustrates the Company's debt structure at
December 31, 2002, including availability under revolving credit facilities and
receivables securitization facilities (in thousands):
Outstanding Additional
Balance Availability
- ----------------------------------------------------------------------------------------------------------------------
Fixed-Rate Debt:
Bergen 7 3/8% senior notes due 2003 .......................................... $ 150,066 $ -
Bergen 7 1/4% senior notes due 2005 .......................................... 99,781 -
8 1/8% senior notes due 2008 ................................................. 500,000 -
7 1/4% senior notes due 2012 ................................................. 300,000 -
PharMerica 8 3/8% senior subordinated notes due 2008 ......................... 124,485 -
AmeriSource 5% convertible subordinated notes due 2007 ....................... 300,000 -
Bergen 6 7/8% exchangeable subordinated debentures due 2011 .................. 8,425 -
Bergen 7.80% trust preferred securities due 2039 ............................. 275,456 -
Other ........................................................................ 4,491 -
------------- -----------
Total fixed-rate debt ................................................... 1,762,704 -
------------- -----------
Variable-Rate Debt:
Term loan facility due 2003 to 2006 .......................................... 285,000 -
Blanco revolving credit facility due 2003 .................................... 55,000 -
Revolving credit facility due 2006 ........................................... - 937,615
AmeriSource receivables securitization financing due 2004 .................... 100,000 300,000
Bergen receivables securitization financing due 2005 ......................... - 700,000
------------- -----------
Total variable-rate debt ................................................ 440,000 1,937,615
------------- -----------
Total debt, including current portion ................................ $ 2,202,704 $ 1,937,615
============= ===========
The Company's working capital usage fluctuates widely during the year,
generally peaking in the second fiscal quarter due to seasonal inventory buying
requirements and buy-side purchasing opportunities. During the second quarter of
fiscal 2003, the Company expects to utilize up to 70% of the $2.1 billion of
aggregate availability under its revolving credit facility and receivables
securitization facilities, which are described below.
In November 2002, the Company issued $300 million of 7 1/4% senior
notes due November 15, 2012 (the "7 1/4% Notes"). The 7 1/4% Notes are
redeemable at the Company's option at any time before maturity at a redemption
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest and liquidated damages, if any, to the date of redemption and, under
some circumstances, a redemption premium. Interest on the 7 1/4% Notes is
payable semiannually in arrears, commencing May 15, 2003. The 7 1/4% Notes rank
junior to the Senior Credit Agreement (defined below) and equal to the Company's
other senior unsecured notes. The Company used the net proceeds of the 7 1/4%
Notes to repay $15 million of the
24
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Term Facility (defined below) in December 2002 and $150 million in aggregate
principal of the Bergen 7 3/8% senior notes in January 2003. Additionally, the
Company intends to redeem the PharMerica 8 3/8% senior subordinated notes due
2008, at a redemption price equal to 104.19% of the principal amount thereof,
when they become callable in April 2003. In connection with the issuance of the
7 1/4% Notes, the Company incurred approximately $5.1 million of costs which
were deferred and are being amortized over the ten-year term of the notes.
The Senior Credit Agreement consists of a $1.0 billion revolving credit
facility (the "Revolving Facility") and a $300 million term loan facility (the
"Term Facility"), both maturing in August 2006. The Term Facility has scheduled
maturities on a quarterly basis beginning December 31, 2002, totaling $60
million in each of fiscal 2003 and 2004, and $80 million and $100 million in
fiscal 2005 and 2006, respectively. The first scheduled term loan payment of $15
million was made on December 31, 2002. There were no borrowings outstanding
under the Revolving Facility at December 31, 2002. Interest on borrowings under
the Senior Credit Agreement accrues at specified rates based on the Company's
debt ratings. Such rates range from 1.0% to 2.5% over LIBOR or 0% to 1.5% over
prime. Currently, the rate is 1.5% over LIBOR or .50% over prime. Availability
under the Revolving Facility is reduced by the amount of outstanding letters of
credit ($62.4 million at December 31, 2002). The Company pays quarterly
commitment fees to maintain the availability under the Revolving Facility at
specified rates based on the Company's debt ratings ranging from .25% to .50% of
the unused availability. Currently, the rate is .375%. The Senior Credit
Agreement contains restrictions on, among other things, additional indebtedness,
distributions and dividends to stockholders, investments and capital
expenditures. Additional covenants require compliance with financial tests,
including leverage and fixed charge coverage ratios, and maintenance of minimum
tangible net worth. The Company can choose to repay or reduce its commitments
under the Senior Credit Agreement at any time. Substantially all of the
Company's assets, except for trade receivables sold into the AmeriSource and
Bergen receivables securitization facilities (as described below), collateralize
the Senior Credit Agreement.
At December 31, 2002, there was $100 million outstanding under the
AmeriSource $400 million receivables securitization facility. The facility has
an expiration date of May 2004 and interest rates are based on prevailing market
rates for short-term commercial paper plus a program fee of 38.5 basis points
(1.87% as of December 31, 2002). In order to borrow available amounts under this
securitization facility, a back-up 364-day liquidity facility is required to be
in place. The current liquidity facility expires in May 2003, but the Company
currently expects that it will be renewed through May 2004. The $450 million
Bergen receivables securitization facility expires in December 2005, and
interest rates are based on prevailing market rates for short-term commercial
paper plus a program fee of 75 basis points. In December 2002, the Company
obtained an increase to its availability under the Bergen receivables
securitization facility up to $700 million through December 2003 to fund
discretionary inventory buying opportunities. In order to borrow available
amounts in excess of $450 million under the Bergen receivables securitization
facility, a back-up 364-day liquidity facility is required to be in place. The
current liquidity facility expires in December 2003. The Bergen receivables
securitization facility may be subject to termination in the event of a material
adverse effect, among other things, on the financial condition, business,
operations or prospects of AmerisourceBergen. If a termination were to occur, a
cross-default might be triggered under the Senior Credit Agreement. Management
believes that the likelihood of such a termination being triggered is remote. At
December 31, 2002, there were no borrowings outstanding under the Bergen
receivables securitization facility. The receivables securitization facilities
represent financing vehicles utilized by the Company because of the availability
of attractive interest rates relative to other financing sources. The Company
securitizes its trade accounts and notes receivable, which are generally
non-interest bearing, in transactions that are accounted for as borrowings under
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
The Company's most significant market risk is the effect of changing
interest rates. The Company manages this risk by using a combination of fixed-
and variable-rate debt. At December 31, 2002, the Company had approximately $1.8
billion of fixed-rate debt with a weighted average interest rate of 7.3% and
$440 million of variable-rate debt with a weighted average interest rate of
2.8%. The amount of variable-rate debt fluctuates during the year based on the
Company's working capital requirements. The Company periodically evaluates
various financial instruments that could mitigate a portion of its exposure to
variable interest rates. However, there are no assurances that such instruments
will be available on terms acceptable to the Company. There were no such
financial instruments in effect at December 31, 2002. For every $100 million of
unhedged variable-rate debt outstanding, a 28 basis-point increase in interest
rates (one-tenth of the average variable rate at December 31, 2002) would
increase the Company's annual interest expense by $0.28 million.
The Company's operating results have generated sufficient cash flow
which, together with borrowings under its debt agreements and credit terms from
suppliers, have provided sufficient capital resources to finance working capital
and cash
25
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
operating requirements, fund capital expenditures, and fund the payment of
interest on outstanding debt. The Company's primary ongoing cash requirements
will be to finance working capital, fund the payment of interest on
indebtedness, finance Merger integration initiatives and fund capital
expenditures and routine growth and expansion through new business
opportunities. Future cash flows from operations and borrowings are expected to
be sufficient to fund the Company's ongoing cash requirements.
Following is a summary of the Company's contractual obligations for future
principal payments on its debt, minimum rental payments on its noncancelable
operating leases and minimum payments on its other commitments at December 31,
2002 (in thousands):
Payments Due by Period
-----------------------------------------------------------------------
Within 1 1-3 4-5 After 5
Total year years years years
-------------------------------------------------------------------------------------------------------
Debt ...................... $ 2,226,400 $ 265,932 $ 351,424 $ 376,424 $ 1,232,620
Operating leases .......... 169,695 52,451 64,356 28,840 24,048
Other commitments ......... 30,145 24,145 6,000 - -
-----------------------------------------------------------------------
Total ................... $ 2,426,240 $ 342,528 $ 421,780 $ 405,264 $ 1,256,668
=======================================================================
The debt amounts in the above table differ from the related carrying
amounts on the consolidated balance sheet due to the purchase accounting
adjustments recorded in order to reflect Bergen's obligations at fair value on
the effective date of the Merger. These differences are being amortized over the
terms of the respective obligations.
In addition, the $55 million Blanco revolving credit facility, which
expires in May 2003, is included in the "Within 1 year" column in the above
repayment table. However, this borrowing is not classified in the current
portion of long-term debt on the consolidated balance sheet at December 31, 2002
because the Company has the ability and intent to refinance it on a long-term
basis. Additionally, borrowings under the Blanco facility are secured by a
standby letter of credit under the Senior Credit Agreement, and therefore the
Company is effectively financing this debt on a long-term basis through that
arrangement.
Other commitments include a future minimum payment of $10 million, as
described in Note 3 to the Company's consolidated financial statements, relating
to the Company's acquisition of a physician management consulting company. The
Company has paid $5 million for a 20% equity interest and currently expects to
pay between $70 million and $80 million during fiscal years 2003 through 2005,
of which $60 million to $70 million is contingent upon the entity's ability to
achieve defined earnings targets, for its 100% equity ownership in the entity.
Contingent payments relating to this acquisition, in addition to any other
contingent payments outstanding, are not reflected in the above table.
In connection with its merger integration plans, the Company intends to
build six new distribution facilities and expand seven others over the next 3 to
4 years. The Company has begun to enter into various commitments with third
parties relating to site selection, purchase of land, design and construction of
the new facilities. As of December 31, 2002, the Company has entered into $20.1
million of commitments relating to the construction of the new facilities. The
facility commitments are included in Other Commitments in the above table. In
December 2002, the Company entered into a 15-year lease obligation totaling
$17.4 million for one of the facilities; this obligation is reflected in the
above table.
26
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
During the quarter ended December 31, 2002, the Company's operating
activities used $666.3 million of cash as compared to $418.5 million of cash
used in the prior-year quarter. Cash used in operations during the quarter ended
December 31, 2002 was principally the result of a $943.6 million increase in
merchandise inventories and a $113.7 million increase in accounts and notes
receivable partially offset by a $243.9 million increase in accounts payable,
accrued expenses and income taxes, net income of $92.7 million and non-cash
items of $46.5 million. The increase in merchandise inventories reflects
inventory required to support the revenue increase, additional safety stock
purchased to protect against manufacturer shipping delays during the holiday
season, as well as inventory purchased to take advantage of buy-side gross
profit opportunities including opportunities associated with manufacturer price
increases and negotiated deals. Accounts and notes receivable, before changes in
the allowance for doubtful accounts, increased only 4%, despite the 15% increase
in operating revenues. During the quarter ended December 31, 2002, the Company's
days sales outstanding improved as a result of customer mix and continued
emphasis on receivables management at the local level. Days sales outstanding
for the Pharmaceutical Distribution segment improved to 16.1 days in the first
quarter of fiscal 2003 from 16.9 days in the prior-year quarter. Days sales
outstanding for the PharMerica segment improved to 40.0 days in the first
quarter of fiscal 2003 from 44.4 days in the prior-year quarter. The $174.4
million increase in accounts payable was primarily due to the merchandise
inventory increase. Operating cash uses during the quarter ended December 31,
2002 included $26.8 million in interest payments less $11.3 million in income
tax refunds, net of payments. The Company has historically used cash in
operations during its first fiscal quarter ending December 31. It is anticipated
that cash to be provided by operations for the remaining nine months of fiscal
2003 will more than offset the cash used in operations during the first quarter
of fiscal 2003.
During the quarter ended December 31, 2001, the Company's operating
activities used $418.6 million in cash. Such cash usage primarily resulted from
increases of $722.6 million in merchandise inventories, partially offset by a
decrease in accounts receivable of $20.7 million, an increase in accounts
payable, accrued expenses and income taxes of $163.5 million, and net income of
$67.9 million. The increase in merchandise inventories reflects inventory
required to support the revenue increase, as well as inventory purchased to take
advantage of buy-side gross profit opportunities including manufacturer price
increases and negotiated deals. Operating cash uses during the three months
ended December 31, 2001 included $30.5 million in interest payments and $7.8
million in income tax payments, net of refunds.
Capital expenditures for the quarter ended December 31, 2002 were $16.5
million and relate principally to investments in warehouse improvements,
information technology and warehouse automation. The Company estimates that it
will spend approximately $100 million to $130 million for capital expenditures
during fiscal 2003.
Capital expenditures for the quarter ended December 31, 2001 were $10.1
million and relate principally to investments in warehouse improvements,
information technology and warehouse automation.
During the quarter ended December 31, 2001, the Company used cash of $8.2
million to purchase additional equity interests in four businesses related to
the Pharmaceutical Distribution segment.
During the quarter ended December 31, 2002, the Company had net borrowings
of $100.0 million on its receivables securitization facilities, principally to
meet seasonal working capital requirements, as described above. In November
2002, the Company issued the aforementioned $300 million of 7 1/4% Notes. In
December 2002, a portion of the proceeds received from the issuance was used to
repay $15.0 million of the Term Facility, as described above.
During the quarter ended December 31, 2001, the Company had net borrowings
of $413.0 million on its receivables securitization facilities, principally to
meet seasonal working capital requirements. The Company repaid debt of $23.1
million during the quarter, principally consisting of $20.6 million for the
retirement of Bergen's 7% debentures pursuant to a tender offer which was
required as a result of the Merger.
The Company paid a quarterly cash dividend of $0.025 per share on common
stock on December 2, 2002 to stockholders of record at the close of business on
November 18, 2002. The Company has paid quarterly cash dividends of $0.025 per
share on common stock, since the first quarter of fiscal 2002. The Company
anticipates that it will continue to pay quarterly cash dividends in the future.
However, the payment and amount of future dividends remain within the discretion
of the Company's board of directors and will depend upon the Company's future
earnings, financial condition, capital requirements and other factors.
27
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Recently Issued Financial Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This statement supersedes Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs Incurred
in a Restructuring." This standard addresses the financial accounting and
reporting for costs associated with exit or disposal activities. These costs
relate to termination benefits provided to current employees that are
involuntarily terminated, costs to terminate a contract, and costs to
consolidate facilities or relocate employees. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under SFAS No. 146, an entity's commitment to a
plan does not by itself create an obligation that meets the definition of a
liability. SFAS No. 146 also establishes fair value as the basis for measuring
the initial liability. The standard was effective for exit costs or disposal
activities initiated after December 31, 2002, although early adoption was
encouraged. The Company elected to adopt this standard in September 2002. The
Company had previously recognized certain costs associated with restructuring
plans as of the date of commitment to the plan. The adoption of SFAS No. 146
resulted in the deferral of recognition of such costs for restructuring plans
from the date the Company committed to a plan to the date the Company actually
incurred the costs associated with a plan.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. The adoption of the standard is effective for fiscal years and
interim periods beginning after December 15, 2002. The Company does not expect
to adopt the fair value method of accounting for stock-based compensation. As
required, the Company will adopt the disclosure provisions of this standard
beginning with the quarter ending March 31, 2003.
Forward-Looking Statements
Certain of the statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
report are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. These statements are based
on management's current expectations and are subject to uncertainty and changes
in circumstances. Actual results may vary materially from the expectations
contained in the forward-looking statements. The forward-looking statements
herein include statements addressing management's views with respect to future
financial and operating results and the benefits and other aspects of the merger
between AmeriSource Health Corporation and Bergen Brunswig Corporation. Various
factors, including competitive pressures, success of integration, restructuring
or systems initiatives, market interest rates, regulatory changes, changes in
customer mix, changes in pharmaceutical manufacturers' pricing and distribution
policies, changes in U.S. Government policies, customer insolvencies, or the
loss of one or more key customer or supplier relationships, could cause actual
outcomes and results to differ materially from those described in
forward-looking statements. Certain additional factors that management believes
could cause actual outcomes and results to differ materially from those
described in forward-looking statements are set forth in Item 1 (Business) under
the heading "Certain Risk Factors" in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2002 and elsewhere in this report.
28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's most significant market risk is the effect of changing
interest rates. See discussion under "Liquidity and Capital Resources" in Item 2
above.
ITEM 4. Controls and Procedures.
The Company maintains disclosure controls and procedures that are intended
to ensure that information required to be disclosed in the Company's reports
submitted under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
These controls and procedures also are intended to ensure that information
required to be disclosed in such reports is accumulated and communicated to
management to allow timely decisions regarding required disclosures.
Based on their evaluation as of a date within 90 days prior to the filing
date of this quarterly report, the Company's Chief Executive Officer and Chief
Financial Officer, with the participation of other members of the Company's
management, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules 13a - 14(c) and 15d -
14(c) under the Exchange Act) and have concluded that the Company's disclosure
controls and procedures are effective for their intended purposes. There have
been no significant changes in the Company's internal controls or in those
factors that could significantly affect those controls since the date of their
most recent evaluation.
29
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
4.1 Third Amendment dated December 2, 2002 to Purchase
Agreement under AmeriSource receivables securitization
facility.
4.2 Tenth Amendment dated December 2, 2002 to Receivables
Purchase Agreement under AmeriSource receivables
securitization facility.
4.3 Second Amendment dated December 2, 2002 to Sale and
Contribution Agreement under Bergen receivables
securitization facility.
4.4 Fourth Amendment dated December 2, 2002 to Receivables
Purchase and Servicing Agreement and Annex X under Bergen
receivables securitization facility.
4.5 Third Amendment dated December 20, 2002 to Sale and
Contribution Agreement under Bergen receivables
securitization facility.
4.6 Amended and Restated Receivables Purchase and Servicing
Agreement dated December 20, 2002 under Bergen
receivables securitization facility.
4.7 Amended and Restated Annex X dated December 20, 2002
under Bergen receivables securitization facility.
4.8 RPSA Supplement Agreement dated December 20, 2002
(relating to Bergen receivables securitization facility)
among Blue Hill II, Inc., Liberty Street Funding Corp.
and The Bank of Nova Scotia (with the consent of General
Electric Capital Corporation.)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer.)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer.)
(b) Reports on Form 8-K:
On November 5, 2002, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company announced its
earnings for the fiscal quarter and fiscal year ended
September 30, 2002 and the Company announced the signing of a
definitive agreement to purchase Bridge Medical, Inc.
On November 12, 2002, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 certain material information.
On November 13, 2002, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company agreed to
issue $300 million 7 1/4% senior notes due 2012 in a private
placement.
On December 6, 2002, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company issued a press
release providing information about an investor meeting held
December 5, 2002 by the Company, providing disclosure of the
Company's financial expectations for the fiscal quarter
ending December 31, 2002 and affirming the Company's
financial expectations for the fiscal year ending September
30, 2003.
On December 16, 2002, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company had announced
the signing of a definitive agreement to purchase US
Bioservices Corporation on December 13, 2002.
On January 6, 2003, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company had closed the
acquisition of Bridge Medical, Inc. on January 3, 2003.
On January 17, 2003, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company closed the
acquisition of US Bioservices Corporation.
On January 24, 2003, a Current Report on Form 8-K was filed,
reporting under items 5 and 7 that the Company announced its
earnings for the fiscal quarter ended December 31, 2002.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
AMERISOURCEBERGEN CORPORATION
By /s/ R. David Yost
---------------------------------------------------
R. David Yost
Chief Executive Officer
By /s/ Michael D. DiCandilo
---------------------------------------------------
Michael D. DiCandilo
Senior Vice President and
Chief Financial Officer
February 13, 2003
31
CERTIFICATIONS PURSUANT TO
18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
Certification of Chief Executive Officer of AmerisourceBergen Corporation
I, R. David Yost, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "quarterly report")
of AmerisourceBergen Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14 and 15 d - 14) for the Registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003 /s/ R. David Yost
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R. David Yost
Chief Executive Officer
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Certification of Chief Financial Officer of AmerisourceBergen Corporation
I, Michael D. DiCandilo, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (the "quarterly report")
of AmerisourceBergen Corporation (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a - 14 and 15 d - 14) for the Registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls;
and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003 /s/ Michael D. DiCandilo
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Michael D. DiCandilo
Senior Vice President and Chief
Financial Officer
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