Overview

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

We are a pharmaceutical services company serving the United States, Canada, and select global markets. We provide drug distribution and related healthcare services and solutions to our pharmacy, physician, and manufacturer customers. We are organized based upon the products and services we provide to our customers. Our operations are comprised of the Pharmaceutical Distribution Reportable segment and Other.

We are committed to a plan to divest AndersonBrecon (a business unit within AmerisourceBergen Consulting Services); therefore, its operations are classified as discontinued operations for all periods presented. All historical information provided herein has been retroactively adjusted to conform to our current presentation.

Pharmaceutical Distribution Segment

The Pharmaceutical Distribution reportable segment is comprised of two operating segments, which include the operations of AmerisourceBergen Drug Corporation ("ABDC") and AmerisourceBergen Specialty Group ("ABSG"). Servicing healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment's operations provide drug distribution and related services designed to reduce healthcare costs and improve patient outcomes.

ABDC distributes a comprehensive offering of brand-name pharmaceuticals (including specialty pharmaceutical products) and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers. ABDC also provides pharmacy management, staffing and other consulting services; scalable automated pharmacy dispensing equipment; medication and supply dispensing cabinets; and supply management software to a variety of retail and institutional healthcare providers. Additionally, ABDC delivers packaging solutions to institutional and retail healthcare providers.

ABSG, through a number of operating businesses, provides pharmaceutical distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including dialysis clinics. ABSG also distributes plasma and other blood products, injectible pharmaceuticals and vaccines. Additionally, ABSG provides third party logistics and outcomes research, and other services for biotechnology and other pharmaceutical manufacturers.

Our use of the terms "specialty" and "specialty pharmaceutical products" refers to drugs used to treat complex diseases, such as cancer, diabetes and multiple sclerosis. Specialty pharmaceutical products are part of complex treatment regimens for serious conditions and diseases that generally require ongoing clinical monitoring. We believe the terms "specialty" and "specialty pharmaceutical products" are used consistently by industry participants and our competitors. However, we cannot be certain that other distributors of specialty products define these and other similar terms in exactly the same manner as we do.

Other

Other consists of the AmerisourceBergen Consulting Services ("ABCS") operating segment and the World Courier Group, Inc. ("World Courier") operating segment. World Courier was acquired on April 30, 2012. The results of operations of our ABCS and World Courier operating segments are not significant enough to require separate reportable segment disclosure, and therefore, have been included in "Other" for the purpose of our reportable segment presentation.

ABCS, through a number of operating businesses, provides commercialization support services including reimbursement support programs, outcomes research, contract field staffing, patient assistance and copay assistance programs, adherence programs, risk mitigation services, and other market access programs to pharmaceutical and biotechnology manufacturers. World Courier,

which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry.

Results of Operations



Revenue



                                  Three months ended
                                     December 31,
(dollars in thousands)            2012           2011       Change
Pharmaceutical Distribution   $ 21,082,711   $ 20,134,050      4.7 %
Other                              427,890        209,325    104.4 %
Intersegment eliminations          (44,287 )      (31,453 )   40.8 %
Revenue                       $ 21,466,314   $ 20,311,922      5.7 %

Revenue of $21.5 billion in the quarter ended December 31, 2012 increased 5.7% from the prior year quarter. This increase was largely due to the revenue growth of Pharmaceutical Distribution and the revenue growth of Other.

We continue to expect our revenue in fiscal 2013 to increase between 6% and 9%. Our expected growth rate reflects our new three-year contract with Express Scripts, Inc. ("Express Scripts"), which became effective on October 1, 2012, to supply primarily brand-name pharmaceuticals. Annual sales to Express Scripts in fiscal 2013 under this contract are estimated to be $18.5 billion. In addition, fiscal 2013 will include a full year's operating results of our fiscal 2012 acquisitions of TheraCom and World Courier. 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-name pharmaceutical 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 government and other third party reimbursement rates to our customers, and changes in Federal government rules and regulations.

Pharmaceutical Distribution Segment

The Pharmaceutical Distribution segment grew its revenue by 4.7%. Intrasegment revenues between ABDC and ABSG have been eliminated in the presentation of total Pharmaceutical Distribution revenue. Total intrasegment revenues were $865.9 million and $629.3 million in the quarters ended December 31, 2012 and 2011, respectively, and primarily consisted of ABSG sales directly to ABDC customer sites or ABSG sales to ABDC's facilities.

ABDC's revenue increased 4.8% from the prior year quarter, before intrasegment eliminations. The increase in ABDC's revenue was primarily due to the new contract with Express Scripts, which became effective on October 1, 2012, offset in part by the loss of a food and drug retail group purchasing organization ("GPO") customer and an increase in the use of lower priced generics.

ABSG's revenue of $4.4 billion in the quarter ended December 31, 2012 increased 9.6% from the prior year quarter (before intrasegment eliminations) primarily due to the growth in its third-party logistics business and growth in its blood products, vaccine, and physician office distribution business. The physician office distribution business continues to benefit from sales of a new ophthalmology drug. ABSG's revenue growth was partially offset by a decline in sales of certain specialty oncology drugs. 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's business may be adversely impacted in the future by changes in medical guidelines and the Medicare reimbursement rates for certain pharmaceuticals, especially oncology drugs administered by physicians and anemia drugs. Since ABSG provides a number of services to or through physicians, any changes affecting this service channel could result in slower growth or reduced revenues.

Other

Other revenue increased $218.6 million from the prior year quarter primarily due to the incremental revenue contributions from TheraCom and World Courier, which were acquired in November 2011 and April 2012, respectively. We expect Other revenue to increase between 30% and 35% in fiscal 2013 primarily due to the inclusion of World Courier's revenue for a full fiscal year.

Gross Profit

Gross profit in the quarter ended December 31, 2012 increased $88.0 million from the prior year quarter due to the incremental contributions made by our fiscal 2012 acquisitions (primarily World Courier), our overall generic revenue growth, and the growth of our non-oncology specialty distribution businesses. These increases were offset in part by the lower gross profit related to the new Express Scripts contract, the lower number of generic launches and the reduced contribution from the sales of certain specialty oncology drugs. Also, in the current quarter, we recognized a gain of $12.3 million from antitrust litigation settlements with pharmaceutical manufacturers. This gain was recorded as a reduction to cost of goods sold. There were no antitrust litigation settlements in the prior year quarter.

As a percentage of revenue, our gross profit margin of 3.13% in the quarter ended December 31, 2012 increased by 26 basis points from the prior year quarter. The gross profit margin increase was due to the gross profit contributions from our fiscal 2012 acquisitions, primarily World Courier, our overall generic revenue growth and the above-mentioned antitrust litigation settlements, all of which was offset in part by the lower gross profit margin related to the new Express Scripts contract and competitive pressures on customer margins.

Operating Expenses



                                             Three months ended
                                                December 31,
(dollars in thousands)                        2012        2011      Change
Distribution, selling and administrative   $  342,213   $ 268,893     27.3 %
Depreciation and amortization                  40,523      30,046     34.9 %
Employee severance, litigation and other        1,929       3,559    -45.8 %
Total operating expenses                   $  384,665   $ 302,498     27.2 %

Distribution, selling and administrative expenses in the quarter ended December 31, 2012 increased $73.3 million, or 27.3%, primarily due to the incremental operating costs of our fiscal 2012 acquired companies and an increase in operating costs of our Canadian drug distribution business to support a higher revenue base resulting from the implementation of a large customer contract in the second half of fiscal 2012.

Depreciation and amortization expense increased from the prior year quarter largely due to our fiscal 2012 acquisitions.

Employee severance, litigation and other for the quarter ended December 31, 2012 included $1.4 million of facility closure costs and $0.5 million of acquisition costs related to business combinations. Employee severance, litigation and other for the quarter ended December 31, 2011 included $3.6 million of acquisition costs related to business combinations.

As a percentage of revenue, operating expenses were 1.79% in the quarter ended December 31, 2012, an increase of 30 basis points from the prior year quarter. This increase was primarily due to the additions of our fiscal 2012 acquisitions, which have higher operating expenses as a percentage of revenue. For the Pharmaceutical Distribution segment, as a percentage of revenue, operating expenses were down 1 basis point from the prior year quarter.

Operating Income



                                             Three months ended
                                                December 31,
(dollars in thousands)                        2012        2011      Change
Pharmaceutical Distribution                $  268,629   $ 275,372     -2.4 %
Other                                          20,559       9,606    114.0 %
Employee severance, litigation and other       (1,929 )    (3,559 )  -45.8 %
Operating income                           $  287,259   $ 281,419      2.1 %

Segment operating income is evaluated before employee severance, litigation and other.

Pharmaceutical Distribution operating income decreased $6.7 million from the prior year quarter due to a 10 basis point decline in operating margin due to decreased contributions from generic launches, customer mix shift towards lower margin business in ABDC (most notably the new Express Scripts contract), and an increase in operating costs related to our Canadian distribution business, all of which was offset in part by strong growth of certain of our specialty distribution businesses. Other operating income increased $11.0 million from the prior year quarter due to the contribution made by our World Courier acquisition and due to the increase in operating income from our ABCS businesses.

Interest expense, interest income, and the respective weighted average interest rates in the quarters ended December 31, 2012 and 2011 were as follows (in thousands):

                                   2012                          2011
                                   Weighted Average              Weighted Average
                         Amount     Interest Rate      Amount     Interest Rate
Interest expense        $ 18,909               4.69 % $ 22,780               4.97 %
Interest income             (211 )             0.33 %     (204 )             0.15 %
Interest expense, net   $ 18,698                      $ 22,576

Interest expense decreased from the prior year quarter due to a decrease of $204.2 million in average borrowings, primarily due to the repayment of our $392 million, 5 5/8% senior notes in September 2012.

Income taxes in the quarter ended December 31, 2012 reflect an effective income tax rate of 39.6%, compared to 38.2% in the prior year quarter. In the quarter ended December 31, 2012, our Canadian drug distribution business continued to generate operating losses. As a result, we were not able to recognize a tax benefit related to these losses, and therefore our income tax rate was higher. We expect that our effective tax rate in fiscal 2013 will be approximately 39.5%.

Income from continuing operations of $162.2 million in the quarter ended December 31, 2012 increased 1.4% from the prior year quarter. Diluted earnings per share from continuing operations of $0.69 in the quarter ended December 31, 2012 increased 13.1% from $0.61 per share in the prior year quarter. The difference between diluted earnings per share growth and the increase in income from continuing operations was due to the 10% reduction in weighted average common shares outstanding, primarily from purchases of our common stock, net of the impact of stock option exercises.

Income from discontinued operations, net of income taxes, of $6.4 million and $2.2 million, represents the income of AndersonBrecon for the quarters ended December 31, 2012 and 2011, respectively.

Liquidity and Capital Resources



The following table illustrates our debt structure at December 31, 2012,
including availability under the multi-currency revolving credit facility and
the receivables securitization facility (in thousands):



                                                    Outstanding      Additional
                                                      Balance       Availability
Fixed-Rate Debt:
$ 500,000, 5 7/8% senior notes due 2015             $    499,160   $            -
$ 400,000, 4 7/8% senior notes due 2019                  397,574                -
$ 500,000, 3 1/2% senior notes due 2021                  499,373                -
Total fixed-rate debt                                  1,396,107                -

Variable-Rate Debt:
Multi-currency revolving credit facility due 2017              -          690,036
Receivables securitization facility due 2015                   -          950,000
Other                                                          -            1,625
Total variable-rate debt                                       -        1,641,661
Total long-term debt                                $  1,396,107   $    1,641,661

Along with our cash balances, our aggregate availability under our multi-currency revolving credit facility and our receivables securitization facility provides us sufficient sources of capital to fund our working capital requirements.

We have a $700 million multi-currency senior unsecured revolving credit facility, which was scheduled to expire in October 2016, (the "Multi-Currency Revolving Credit Facility") with a syndicate of lenders. In November 2012, we entered into an amendment with the syndicate of lenders to extend the maturity date of the Multi-Currency Revolving Credit Facility to November 2017. Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on our debt rating and ranges from 68 basis points to 155 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (90 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at December 31, 2012). Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate. We pay facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on our debt rating, ranging from 7 basis points to 20 basis points, annually, of the total commitment (10 basis points at December 31, 2012). We may choose to repay or reduce our commitments under the Multi-Currency Revolving Credit Facility at any time. The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of excluded subsidiaries and asset sales, which we are compliant with as of December 31, 2012.

We have a commercial paper program whereby we may from time to time issue short-term promissory notes in an aggregate amount of up to $700 million at any one time. Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time. The maturities on the notes will vary, but may not exceed 365 days from the date of issuance. The notes will bear interest rates, if interest bearing, or will be sold at a discount from their face amounts. The commercial paper program does not increase our borrowing capacity as it is fully backed by our Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under our commercial paper program at December 31, 2012.

We have a $700 million receivables securitization facility ("Receivables Securitization Facility"), which was scheduled to expire in October 2014. In November 2012, we entered into an amendment to the Receivables Securitization Facility to extend the maturity date to November 2015. We have available to us an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs during the December and March quarters. Interest rates are currently based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee of 75 basis points. We currently pay an unused fee of 37.5 basis points, annually, to maintain the availability under the Receivables Securitization Facility. At December 31, 2012, there were no borrowings outstanding under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility.

We have $500 million of 5 7/8% senior notes due September 15, 2015 (the "2015 Notes"), $400 million of 4 7/8% senior notes due November 15, 2019 (the "2019 Notes") and $500 million of 3 1/2% senior notes due November 15, 2021 (the "2021 Notes"). Interest on the 2015 Notes, the 2019 Notes, and the 2021 Notes is payable semiannually in arrears. All of the senior notes rank pari passu to the Multi-Currency Revolving Credit Facility.

Our operating results have generated cash flow, which, together with availability under our debt agreements and credit terms from suppliers, has provided sufficient capital resources to finance working capital and cash operating requirements, and to fund capital expenditures, acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and repurchases of shares of our common stock.

Our primary ongoing cash requirements will be to finance working capital, fund the repayment of debt, fund the payment of interest on debt, fund repurchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures and routine growth and expansion through new business opportunities. In May 2012, our board of directors approved a program allowing us to purchase up to $750 million shares of our common stock, subject to market conditions. During the quarter ended December 31, 2012, we purchased $96.9 million of our common stock to complete our authorization under the $750 million share repurchase program. In November 2012, our board of directors approved a new program allowing us to purchase up to $750 million shares of our common stock, subject to market conditions. During the quarter ended December 31, 2012, we purchased $187.6 million of our common stock under the new share repurchase program. As of December 31, 2012, we had $562.4 million of availability remaining on the new $750 million share repurchase program. We currently expect to purchase $400 million of our common stock in fiscal 2013, subject to market conditions. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements.

Deterioration in general economic conditions could adversely affect the amount of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, could reduce purchases by our customers. In addition, volatility in financial markets may also negatively impact our customers' ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our customers or changes in the ability of our customers to remit payments to us could adversely affect our revenue growth, our profitability, and our cash flow from operations.

We have market risk exposure to interest rate fluctuations relating to our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt. At December 31, 2012, we had no variable-rate debt outstanding. The amount of variable-rate debt fluctuates during the year based on our working capital requirements. We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such instruments will be available in the combinations we want and on terms acceptable to us. There were no such financial instruments in effect at December 31, 2012.

We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $417.4 million in cash and cash equivalents at December 31, 2012, none of which was invested in money market accounts at financial institutions. The unfavorable impact of a hypothetical decrease in interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every $100 million of cash invested that is in excess of variable-rate debt, a 10 basis point decrease in interest rates would increase our annual net interest expense by $0.1 million.

We are exposed to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Canadian Dollar, the U.K. Pound Sterling, and the Euro. We may utilize foreign currency denominated forward contracts to hedge against changes in foreign exchange rates. Such contracts generally have durations of less than one year. We had no foreign currency denominated forward contracts at December 31, 2012. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes.

Following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancelable operating leases and minimum payments on our other commitments at December 31, 2012 (in thousands):

                                                 Payments Due by Period
                                         Within 1                                     After 5
                            Total          Year        1-3 Years      4-5 Years        Years
Debt, including
interest payments        $ 1,782,125    $   66,375    $   632,750    $    74,000    $ 1,009,000
Operating leases             299,285        55,388         93,311         64,693         85,893
Other commitments            175,987        97,335         77,982            670              -
Total                    $ 2,257,397    $  219,098    $   804,043    $   139,363    $ 1,094,893

We have commitments to purchase product from influenza vaccine manufacturers through the 2014/2015 flu season. We are required to purchase doses at prices that we believe will represent market prices. We currently estimate our remaining purchase commitment under these agreements will be approximately $62.9 million as of December 31, 2012, of which $37.7 million represents our commitment over the next twelve months. These influenza vaccine commitments are included in "Other commitments" in the above table.

We have commitments to purchase blood plasma products from suppliers through February 2013. We are required to purchase quantities at prices that we believe will represent market prices. We currently estimate our remaining purchase commitment under these agreements will be approximately $10.4 million as of December 31, 2012, all of which represents our commitment over the next twelve months. These blood product commitments are included in "Other commitments" in the above table.

We have outsourced to IBM Global Services ("IBM") a significant portion of our corporate and ABDC information technology activities, including assistance with . . .