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| ABC > SEC Filings for ABC > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Results of Operations
AmerisourceBergen Corporation
Summary Financial Information
Three Months Ended March 31,
(dollars in thousands) 2009 2008 Change
Total revenue $ 17,311,651 $ 17,755,838 (2.5 )%
Total gross profit $ 552,471 $ 537,288 2.8 %
Pharmaceutical Distribution operating income $ 252,528 $ 236,385 6.8 %
Facility consolidations, employee severance
and other (4,262 ) (1,384 ) N/M
Total operating income $ 248,266 $ 235,001 5.6 %
Percentages of total revenue:
Pharmaceutical Distribution
Gross profit 3.19 % 3.03 %
Operating expenses 1.73 % 1.69 %
Operating income 1.46 % 1.33 %
AmerisourceBergen Corporation
Gross profit 3.19 % 3.03 %
Operating expenses 1.76 % 1.70 %
Operating income 1.43 % 1.32 %
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
AmerisourceBergen Corporation
Summary Financial Information
Six Months Ended March 31,
(dollars in thousands) 2009 2008 Change
Total revenue $ 34,650,028 $ 35,035,221 (1.1 )%
Pharmaceutical Distribution gross profit $ 1,042,319 $ 1,019,919 2.2 %
Gain on antitrust litigation settlements - 1,585 N/M
Total gross profit $ 1,042,319 $ 1,021,504 2.0 %
Pharmaceutical Distribution operating income $ 451,441 $ 427,620 5.6 %
Facility consolidations, employee severance
and other (5,291 ) (1,561 ) N/M
Gain on antitrust litigation settlements - 1,585 N/M
Total operating income $ 446,150 $ 427,644 4.3 %
Percentages of total revenue:
Pharmaceutical Distribution
Gross profit 3.01 % 2.91 %
Operating expenses 1.71 % 1.69 %
Operating income 1.30 % 1.22 %
AmerisourceBergen Corporation
Gross profit 3.01 % 2.92 %
Operating expenses 1.72 % 1.70 %
Operating income 1.29 % 1.22 %
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Operating Results
Total revenue of $17.3 billion in the quarter ended March 31, 2009, which
includes bulk deliveries to customer warehouses, decreased 2.5% from the prior
year quarter. This decline was primarily due to the July 1, 2008 loss of certain
business (approximately $3.0 billion on an annualized basis) with a national
retail drug chain customer and the impact of having one less business day in the
quarter as compared to the prior year quarter. Excluding the loss of the
above-mentioned business and the impact of one less business day in the current
year quarter, total revenue in the quarter ended March 31, 2009 would have
increased by approximately 3% from the prior year quarter. During the quarter
ended March 31, 2009, 68% of total revenue was from sales to institutional
customers and 32% was from sales to retail customers; this compared to a
customer mix in the prior year quarter of 66% institutional and 34% retail.
Sales to institutional customers increased 3% in the quarter ended March 31,
2009 primarily due to the 8% growth in ABSG. Sales to retail customers decreased
10% in the quarter ended March 31, 2009 primarily due to the loss of the
above-mentioned national chain business. Total revenue of $34.7 billion in the
six months ended March 31, 2009 decreased 1% from the prior year period due to
the 2% decline of ABDC's revenue, offset, in part, by a 7% increase in ABSG's
revenue.
Bulk deliveries of $378.9 million and $836.2 million in the quarter and six
months ended March 31, 2009 decreased 31% and 50%, respectively, from the prior
year periods. These declines were due to the prior fiscal year transition of a
significant amount of business previously conducted on a bulk delivery basis
with our largest customer to an operating revenue basis. Due to the
insignificant service fees generated from bulk deliveries, fluctuations in
volume have no significant impact on operating margins. However, revenue from
bulk deliveries has a positive impact on our cash flows due to favorable timing
between the customer payments to us and payments by us to our suppliers.
ABDC's total revenue decreased by 4% and 2% from the prior year quarter and six
month period primarily due to the loss of certain business with a large retail
drug chain customer, as mentioned above. ABDC's total revenue in the quarter and
six months ended March 31, 2009 was also impacted by having one less business
day in comparison to the prior year periods.
ABSG's total revenue of $3.7 billion and $7.5 billion in the quarter and six
months ended March 31, 2009 increased 8% and 7%, respectively, from the prior
year periods due to good growth broadly across its distribution and services
businesses, offset, in part, by declining anemia drug sales (see paragraph
below). The majority of ABSG's revenue is generated from the distribution of
pharmaceuticals to physicians who specialize in a variety of disease states,
especially oncology. ABSG also distributes vaccines, plasma, and other blood
products. ABSG's business may be adversely impacted in the future by changes in
medical guidelines and the Medicare reimbursement rates for certain
pharmaceuticals, including oncology drugs administered by physicians and anemia
drugs. Since ABSG provides a number of services to or through physicians, any
changes to this service channel could result in slower or reduced growth in
revenues.
Revenue related to the distribution of anemia-related products, which
represented approximately 5% of total revenue in the quarter ended March 31,
2009, decreased approximately 12% from the prior year quarter. The decline in
sales of anemia-related products has been most pronounced in the use of these
products for cancer treatment. Sales of oncology-related anemia products
represented approximately 1.7% of total revenue in the quarter ended March 31,
2009 and decreased approximately 30% from the prior year quarter. Several
developments have contributed to the decline in sales of anemia drugs, including
expanded warning and other product safety labeling requirements, more
restrictive federal policies governing Medicare reimbursement for the use of
these drugs to treat oncology patients with kidney failure and dialysis, and
changes in regulatory and clinical medical guidelines for recommended dosage and
use. As a result, oncology-related anemia drug sales have continued to decline
further in fiscal 2009 from our fiscal 2008 total. In addition, the U.S. Food
and Drug Administration ("FDA") is continuing to review clinical study data
concerning the possible risks associated with certain anemia products and on
July 30, 2008, the Centers for Medicare & Medicaid Services ("CMS") announced it
is considering a review of national Medicare coverage policy for these drugs for
patients who have cancer or pre-dialysis chronic kidney disease. The FDA or CMS
may take additional action regarding the use, safety labeling and/or Medicare
coverage of these drugs in the future. Further changes in medical guidelines for
anemia drugs may impact the availability and extent of reimbursement for these
drugs from third party payors, including federal and state governments and
private insurance plans. Our future revenue growth rate and/or profitability may
continue to be impacted by any future reductions in reimbursement for anemia
drugs or changes that limit the dosage and or use of anemia drugs.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
We continue to expect that our total revenue growth in fiscal 2009 will be
between 1% and 3%, with ABDC growing between 0% and 2% and ABSG growing between
5% and 7% for the fiscal year. ABDC revenue growth is expected to be higher in
the second-half of fiscal 2009 compared to the first-half due to the anniversary
of the national retail drug chain customer loss described above and the addition
of several new customers in the second half of fiscal 2009. The expected growth
also reflects U.S. pharmaceutical industry conditions, including increases in
prescription drug utilization, the introduction of new products, and higher
branded pharmaceutical prices, offset, in part, by the increased use of
lower-priced generics. Our growth has also been impacted by industry competition
and changes in customer mix. Industry sales in the United States, as recently
estimated by industry data firm IMS Healthcare, Inc. ("IMS"), are expected to
contract between 1% and 2% in 2009 and are expected to be flat over the
five-year period ending 2013 due to continued brand to generic conversions as
well as the economic slowdown in the United States in 2009. IMS expects that
certain sectors of the market, such as biotechnology and other specialty and
generic pharmaceuticals will grow faster than the overall market. Our future
revenue growth will continue to be affected by various factors such as: industry
growth trends, including the likely increase in the number of generic drugs that
will be available over the next few years as a result of the expiration of
certain drug patents held by brand manufacturers, general economic conditions in
the United States, competition within the industry, customer consolidation,
changes in pharmaceutical manufacturer pricing and distribution policies and
practices, increased downward pressure on reimbursement rates, and changes in
Federal government rules and regulations.
Gross profit of $552.5 million in the quarter ended March 31, 2009 increased 3%
from the prior year quarter. As a percentage of total revenue, gross profit in
the quarter ended March 31, 2009 was 3.19%, an increase of 16 basis points from
the prior year quarter. These increases were primarily due to the strong growth
and increased profitability of our generic programs (with generic revenue
increasing by 11% in comparison to the prior year quarter), increased
contributions from our fee-for-service agreements, and ABSG's 8% growth at
higher profit margins than ABDC. All of these positive factors combined to more
than offset normal competitive pressures on customer margins in the current year
quarter. Gross profit in the current year quarter benefited from a settlement of
$1.8 million with a former customer. Gross profit in the prior year quarter
benefited from a gain of $3.2 million relating to a favorable litigation
settlement with a former customer and a $2.4 million gain resulting from a
settlement of disputes that ABSG had with a vaccine manufacturer. Gross profit
of $1.0 billion in the six months ended March 31, 2009 increased 2% from the
prior year period. As a percentage of total revenue, gross profit in the six
months ended March 31, 2009 was 3.01%, an increase of 9 basis points from the
prior year period. These increases were primarily due to the strong growth and
increased profitability of our generic programs, increased contributions from
our fee-for-service agreements, including $10.2 million of fees relating to
prior period sales due to the execution of new agreements in the quarter ended
December 31, 2008, and good growth from ABSG's businesses, all of which were
partially offset by ABSG's $12.7 million loss on its influenza vaccine program,
which included a $15.5 million write-down of excess influenza vaccine inventory.
The gross profit in the prior year six month period benefited from a gain of
$13.2 million relating to favorable litigation settlements with a former
customer and a major competitor. Additionally, in the prior year six month
period, we recognized a gain of $1.6 million from antitrust litigation
settlements with pharmaceutical manufacturers. This gain, which was excluded
from the determination of Pharmaceutical Distribution segment's gross profit,
was recorded as reduction to cost of goods sold.
Our cost of goods sold for interim periods includes a last-in, first-out
("LIFO") provision that is based on our estimated annual LIFO provision. We
recorded a LIFO charge of $11.6 million and $9.6 million in the quarters ended
March 31, 2009 and 2008, respectively. Our LIFO charge was $16.6 million and
$12.7 million in the six months ended March 31, 2009 and 2008, respectively. 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.
Operating expenses of $304.2 million and $596.2 million in the quarter and six
months ended March 31, 2009, which include facility consolidations, employee
severance and other charges of $4.3 million and $5.3 million, respectively, as
described below, were relatively flat in comparison to the prior year periods,
despite the significant investments made in our Business Transformation project,
which includes a new enterprise resource planning ("ERP") platform. When
compared to the prior year quarter and six month periods, our Business
Transformation expenses increased by $9.1 million and $18.3 million,
respectively. We have been able to offset these incremental costs by reducing
our warehouse operating costs from continuing productivity improvements and by
streamlining our organizational structures within ABDC and ABSG, as a result of
our cE2 initiative described below. Operating expenses in the quarters ended
March 31, 2009 and 2008 included certain asset impairment charges totaling
$4.1 million and $4.7 million, respectively. As a percentage of total revenue,
operating expenses were 1.76% and 1.72% in the quarter and six months ended
March 31, 2009. These percentages were slightly higher than the percentages in
the prior year periods due to the declines in total revenue as operating expense
dollars were relatively flat compared to the prior year periods, as noted above.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The following table illustrates the charges incurred relating to facility
consolidations, employee severance and other, (which are excluded from the
operating expenses of the Pharmaceutical Distribution segment), for the quarter
and six months ended March 31, 2009 and 2008 (in thousands):
Three months ended Six months ended
March 31, March 31,
2009 2008 2009 2008
Facility consolidations and
employee severance $ 4,262 $ 246 $ 5,291 $ (512 )
Costs related to business
divestitures - 1,138 - 2,073
Total facility consolidations,
employee severance and other $ 4,262 $ 1,384 $ 5,291 $ 1,561
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In fiscal 2008, we announced a more streamlined organizational structure and
introduced an initiative ("cE2") designed to drive increased customer efficiency
and cost effectiveness. In connection with these efforts, we continue to reduce
various operating costs and terminate certain positions. During the six months
ended March 31, 2009, we terminated 183 employees and incurred $2.9 million of
employee severance costs. Additionally, during the three months ended March 31,
2009, we recorded $2.2 million of additional expense relating to the Bergen
Brunswig Matter as described in Note 8 (Legal Matters and Contingencies) of the
Notes to the Consolidated Financial Statements. During the six months ended
March 31, 2008, we reversed $1.0 million of employee severance charges
previously estimated and recorded relating to a prior integration plan. Costs
related to business divestitures in the quarter and six months ended March 31,
2008 related to the sale of our former workers' compensation business, PMSI.
We paid a total of $12.3 million and $2.2 million for employee severance, lease
cancellation and other costs during the six months ended March 31, 2009 and
2008, respectively. Employees receive their severance benefits over a period,
generally not in excess of 12 months, or in the form of a lump-sum payment.
Operating income of $248.3 million and $446.2 million in the quarter and six
months ended March 31, 2009 increased 6% and 4%, respectively, from the prior
year periods. As a percentage of total revenue, operating income in the quarter
and six months ended March 31, 2009 increased 11 basis points and 7 basis
points, respectively, from the prior year periods. These increases were due to
our gross profit growth as operating expenses were relatively flat in comparison
to the prior year periods.
The costs of facility consolidations, employee severance and other, and the gain
on antitrust litigation settlements had the following net effects on operating
income as a percentage of total revenue:
• Quarter ended March 31, 2009 - decreased operating income as a percentage
of total revenue by 3 basis points.
• Quarter ended March 31, 2008 - decreased operating income as a percentage of total revenue by 1 basis point.
• Six months ended March 31, 2009 - decreased operating income as a percentage of total revenue by 1 basis point.
• Six months ended March 31, 2008 - had no impact on operating income as a percentage of total revenue.
Interest expense, interest income, and the respective weighted-average interest rates in the quarters ended March 31, 2009 and 2008 were as follows (in thousands):
2009 2008
Weighted-Average Weighted-Average
Amount Interest Rate Amount Interest Rate
Interest expense $ 15,900 4.83 % $ 20,347 5.60 %
Interest income (1,379 ) 1.03 % (1,646 ) 3.68 %
Interest expense, net $ 14,521 $ 18,701
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Interest expense decreased from the prior year quarter due to a decrease of $169.6 million in average borrowings and a decrease in the weighted-average variable interest rate on borrowings under our revolving credit facilities to 1.99% from 5.29% in the prior year quarter. Interest income decreased from the prior year quarter primarily due to a decline in the weighted-average interest rate, offset, in part, by an increase in average invested cash of $113.5 million.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Interest expense, interest income, and the respective weighted-average interest
rates in the six months ended March 31, 2009 and 2008 were as follows (in
thousands):
2009 2008
Weighted-Average Weighted-Average
Amount Interest Rate Amount Interest Rate
Interest expense $ 32,262 5.06 % $ 40,582 5.66 %
Interest income (3,558 ) 1.76 % (5,467 ) 4.19 %
Interest expense, net $ 28,704 $ 35,115
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Interest expense decreased from the prior year six month period due to a
decrease of $126.2 million in average borrowings and a decrease in the
weighted-average variable interest rate on borrowings under our revolving credit
facilities to 2.82% from 5.43% in the prior year period. Interest income
decreased from the prior year six month period primarily due to a decline in the
weighted-average interest rate, offset, in part, by an increase in average
invested cash of $88.7 million. Our net interest expense in future periods may
vary significantly depending upon changes in net borrowings, interest rates and
strategic decisions made by us to deploy our invested cash and short-term
investments.
Income taxes reflect an effective income tax rate of 38.2% in the quarter ended
March 31, 2009, versus 38.9% in the prior year quarter. Income taxes reflect an
effective income tax rate of 38.4% in the six months ended March 31, 2009,
versus 38.6% in the prior year period. We expect that our effective tax rate in
fiscal 2009 will be approximately 38.4%.
Income from continuing operations of $144.0 million in the quarter ended
March 31, 2009 increased 8% from the prior year quarter due to the increase in
operating income, the decrease in interest expense, and the reduction in the
effective income tax rate. Diluted earnings per share from continuing operations
of $0.95 in the quarter ended March 31, 2009 increased 17% from $0.81 per share
in the prior year quarter. Income from continuing operations of $256.6 million
in the six months ended March 31, 2009 increased 6% from the prior year period
due to the increase in operating income and the decrease in interest expense.
Diluted earnings per share from continuing operations of $1.67 in the six months
. . .
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