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ABC > SEC Filings for ABC > Form 10-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for AMERISOURCEBERGEN CORP

Form 10-Q for AMERISOURCEBERGEN CORP


7-Feb-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

We are one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. We deliver innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain. 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.

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.

Both ABDC and ABSG distribute specialty drugs to their customers, with the principal difference between these two operating segments being that ABSG operates distribution facilities that focus primarily on complex disease treatment regimens. Therefore, a product distributed from one of ABSG's distribution facilities results in revenue reported under ABSG, and a product distributed from one of ABDC's distribution centers results in revenue reported under ABDC. Essentially all of ABSG sales consist of specialty pharmaceutical products. ABDC sales of specialty pharmaceutical products are a relatively small component of its overall revenue.

Other

Other consists of the AmerisourceBergen Consulting Services ("ABCS") operating segment and the World Courier Group, Inc. ("World Courier") operating segment. 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.


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ABCS, through a number of operating businesses, provides commercialization support services including reimbursement support programs, outcomes research, contract field staffing, patient assistance and co-pay 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)           2013           2012        Change
Pharmaceutical Distribution   $ 28,622,591   $ 20,599,048    39.0%
Other                              604,132        505,050    19.6%
Intersegment eliminations          (50,361 )      (44,287 )  13.7%
Revenue                       $ 29,176,362   $ 21,059,811    38.5%

Revenue of $29.2 billion in the quarter ended December 31, 2013 increased 38.5% from the prior year quarter. This increase was largely due to the revenue growth of Pharmaceutical Distribution and, to a lesser extent, the revenue growth of Other.

We currently expect our revenue in fiscal 2014 to increase between 30% and 34%. Our expected growth rate is driven primarily by our distribution contract with Walgreen Co. ("Walgreens"), which became effective on September 1, 2013. Fiscal 2014 will include eleven incremental months of brand drug distribution and the phase-in of generic drug distribution to Walgreens. We are also forecasting a modest increase in revenue from the implementation of the Affordable Care Act. 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 39.0% from the prior year quarter. Intrasegment revenues between ABDC and ABSG have been eliminated in the presentation of total Pharmaceutical Distribution revenue. These revenues primarily consisted of ABSG sales directly to ABDC customer sites or ABSG sales to ABDC's facilities. Total intrasegment revenues were $976.8 million and $863.8 million in the quarters ended December 31, 2013 and 2012, respectively.

ABDC's revenue of $24.9 billion in the quarter ended December 31, 2013 increased 45.5%, or $7.8 billion, from the prior year quarter (before intrasegment eliminations). The increase in ABDC's revenue was primarily due to increased sales to Walgreens of $6.6 billion and increased sales to some of our other larger customers, including our largest pharmacy benefit manager ("PBM") customer. The increased sales were offset in part by a prior period loss of a food and drug group purchasing organization ("GPO") customer, which resulted in a $0.4 billion decrease in the fiscal quarter ended December 31, 2013.

ABSG's revenue of $4.7 billion in the quarter ended December 31, 2013 increased 8.2% from the prior year quarter (before intrasegment eliminations) primarily due to increased sales of certain specialty products and growth in its blood products, vaccine, and physician office distribution businesses. The physician office distribution business continues to benefit from sales of an


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ophthalmology drug. ABSG's revenue growth was partially offset by a decline in sales to community oncology practices. 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. Under federal sequestration legislation, Medicare physician reimbursement rates for Part B drugs were reduced on April 1, 2013. Community oncologists and other specialty physicians that administer drugs under Medicare Part B continue to experience declining reimbursement rates for specialty pharmaceutical drugs. As a result, some physician practices continue to consider consolidation or selling their businesses to hospitals. While we service the needs of many hospitals, the continuing shift in this service channel has reduced community oncology revenue. (Refer to Item 1A. Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for a more detailed description of this business risk.) ABSG's business may continue to 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 additional revenue reductions.

A number of our contracts with customers or GPOs are typically subject to expiration each year. We may lose a significant customer or GPO relationship if any existing contract with such customer or GPO expires without being extended, renewed, or replaced. During the quarter ended December 31, 2013, no significant contracts expired. Over the next twelve months, there are no significant contracts scheduled to expire.

Other

Revenue in Other increased 19.6%, or $99.1 million from the prior year quarter primarily due to our TheraCom distribution business within ABCS, which benefited from the launch of two new products in the middle of the prior fiscal year, and increased revenue from World Courier.

Gross Profit



                                             Three months ended
                                                December 31,
(dollars in thousands)                        2013        2012      Change
Pharmaceutical Distribution                $  594,206   $ 528,134    12.5%
Other                                         130,578     121,553     7.4%
Gain on antitrust litigation settlements       21,023      12,308
LIFO expense                                  (57,582 )    (1,167 )
Gross profit                               $  688,225   $ 660,828     4.1%

Gross profit increased 4.1%, or $27.4 million, from the prior year quarter.

Pharmaceutical Distribution gross profit increased 12.5%, or $66.1 million, from the prior year quarter. This increase was primarily due to the higher sales volume to Walgreens and the growth of our non-community oncology specialty distribution businesses. This increase was offset, in part, by a prior period loss of a food and drug GPO customer.

As a percentage of revenue, Pharmaceutical Distribution gross profit margin of 2.08% in the quarter ended December 31, 2013 decreased 48 basis points from the prior year quarter. This decline was primarily due to a significant increase in lower margin brand business with Walgreens and some of our other larger customers, a prior period loss of a food and drug GPO customer, and competitive pressures on customer margins.

Gross profit in Other increased 7.4%, or $9.0 million, from the prior year quarter. This increase was primarily due to higher revenue in TheraCom's distribution business and World Courier. As a percentage of revenue, gross profit margin in Other of 21.61% in the quarter ended December 31, 2013 decreased from 24.07% in the prior year quarter. This decrease was primarily due to


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an increase in TheraCom's distribution revenue, which has a lower gross profit margin in comparison to other businesses within Other. This decrease was offset, in part, by an increase in the gross profit margin of World Courier.

We recognized gains of $21.0 million and $12.3 million from antitrust litigation settlements with pharmaceutical manufacturers during the quarters ended December 31, 2013 and 2012, respectively. The gains were recorded as reductions 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. The annual LIFO provision, which we estimate on a quarterly basis, is affected by expected changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences. Changes to any of the above factors can have a material impact to our annual LIFO provision.

Operating Expenses



                                             Three months ended
                                                December 31,
(dollars in thousands)                        2013        2012      Change
Distribution, selling and administrative   $  364,060   $ 320,700    13.5%
Depreciation and amortization                  43,950      38,684    13.6%
Warrants                                      116,297           -
Employee severance, litigation and other        4,302       2,004
Total operating expenses                   $  528,609   $ 361,388    46.3%

Distribution, selling and administrative expenses increased 13.5%, or $43.4 million, from the prior year quarter, primarily due to the on-boarding of our distribution agreement with Walgreens. More specifically, expenses relating to payroll, information technology and delivery were higher in the current year quarter.

Depreciation expense increased from the prior year quarter due to an increase in the amount of capital projects being depreciated. Amortization expense was comparable to the prior year quarter.

Warrant expense was $116.3 million in the quarter ended December 31, 2013. The Warrants were issued in March 2013 in connection with the agreements and arrangements that define our strategic relationship with Walgreens and Alliance Boots. Future Warrant expense could fluctuate significantly. (Refer to "Critical Accounting Policies and Estimates - Warrants" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for a more detailed description of the accounting for the Warrants.)

Employee severance, litigation and other for the quarter ended December 31, 2013 included $2.2 million of deal-related transaction costs and $2.1 million of employee severance and other costs. Employee severance, litigation and other for the prior year quarter included $1.5 million of employee severance and other costs and $0.5 million of deal-related transaction costs.

As a percentage of revenue, operating expenses were 1.81% in the quarter ended December 31, 2013, an increase of 9 basis points from the prior year quarter. This increase was due to the Warrant expense. For the Pharmaceutical Distribution segment, as a percentage of revenue, operating expenses were down 20 basis points from the prior year quarter.


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Operating Income



                                                 Three months ended
                                                    December 31,
(dollars in thousands)                            2013        2012      Change
Pharmaceutical Distribution                    $  286,782   $ 266,677     7.5%
Other                                              35,950      29,725    20.9%
Total segment operating income                    322,732     296,402     8.9%
Gain on antitrust litigation settlements           21,023      12,308
LIFO expense                                      (57,582 )    (1,167 )
Acquisition related intangibles amortization       (5,958 )    (6,099 )  -2.3%
Warrants                                         (116,297 )         -
Employee severance, litigation and other           (4,302 )    (2,004 )
Operating income                               $  159,616   $ 299,440   -46.7%

Segment operating income is evaluated before gains on antitrust litigation settlements; LIFO expense; acquisition related intangibles amortization; Warrant expense; and employee severance, litigation and other.

Pharmaceutical Distribution operating income increased 7.5%, or $20.1 million, from the prior year quarter, due to the increase in gross profit, offset in part by the increase in operating expenses. As a percentage of revenue, Pharmaceutical Distribution operating income margin declined 29 basis points from the prior year quarter due to a significant increase in lower margin brand business with Walgreens and some of our other larger customers, and a prior period loss of a food and drug GPO customer.

Operating income in Other increased 20.9%, or $6.2 million, from the prior year quarter due primarily to the World Courier revenue increase.

Interest expense, interest income, and the respective weighted average interest rates in the quarters ended December 31, 2013 and 2012 were as follows (in thousands):

                                   2013                          2012
                                   Weighted Average              Weighted Average
                         Amount     Interest Rate      Amount     Interest Rate
Interest expense        $ 19,043              4.71%   $ 18,737              4.71%
Interest income             (211 )            0.47%       (212 )            0.33%
Interest expense, net   $ 18,832                      $ 18,525

Interest expense was comparable to the prior year quarter. The increase in variable rate debt outstanding as of December 31, 2013 did not have a significant impact on interest expense in the current quarter as the borrowings were made near the end of the quarter.


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Income taxes in the quarter ended December 31, 2013 reflect an effective income tax rate of 65.4%, compared to 37.8% in the prior year quarter. Our effective tax rate is higher in fiscal 2014 because a significant portion of the Warrant expense is not tax deductible. Our future effective tax rate could fluctuate significantly depending upon the quarterly valuation of the Warrants for financial reporting purposes. Excluding the impact of Warrant expense, we expect that our effective tax rate in fiscal 2014 will be in the low 38% range.

Income from continuing operations of $48.9 million in the quarter ended December 31, 2013 decreased 72.0% from the prior year quarter. Diluted earnings per share from continuing operations of $0.21 in the quarter ended December 31, 2013 decreased 71.6% from $0.74 per share in the prior year quarter.

Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of AndersonBrecon ("AB") and AmerisourceBergen Canada Corporation ("ABCC").

Liquidity and Capital Resources

The following table illustrates our debt structure at December 31, 2013, including availability under the multi-currency revolving credit facility, the receivables securitization facility and the revolving credit note (in thousands):

                                                    Outstanding      Additional
                                                      Balance       Availability
Fixed-Rate Debt:
$500,000, 5 7/8% senior notes due 2015              $    499,444   $            -
$400,000, 4 7/8% senior notes due 2019                   397,881                -
$500,000, 3 1/2% senior notes due 2021                   499,451                -
Total fixed-rate debt                                  1,396,776                -

Variable-Rate Debt:
Multi-currency revolving credit facility due 2018         78,000        1,322,000
Receivables securitization facility due 2016             300,000          900,000
Revolving credit note                                     45,000                -
Total variable-rate debt                                 423,000        2,222,000
Total debt                                          $  1,819,776   $    2,222,000

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

We have a $1.4 billion multi-currency senior unsecured revolving credit facility, which is scheduled to expire in July 2018, (the "Multi-Currency Revolving Credit Facility") with a syndicate of lenders. 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 130 basis points over LIBOR / EURIBOR / Bankers Acceptance Stamping Fee, as applicable (90 basis points over LIBOR / EURIBOR / Bankers Acceptance Stamping Fee at December 31, 2013). 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, 2013). 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, 2013.


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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, 2013.

We have a $950 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in June 2016. 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. During December 2013, we increased the availability of the Receivables Securitization Facility by $250 million under the accordion feature. Interest rates are based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee of 75 basis points. We pay an unused fee of 40 basis points, annually, to maintain the availability under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, which we are compliant with as of December 31, 2013.

We have an uncommitted, unsecured line of credit available to us pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides us with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $45 million at any time outstanding.

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 November 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 fiscal year ended September 30, 2013, we purchased $387.0 million of our common stock under the share repurchase program. During the quarter ended December 31, 2013, we purchased $19.6 million of our common stock under the share repurchase program. As of December 31, 2013, we had $343.4 million of availability remaining on the $750 million share repurchase program. In August 2013, our board of directors approved a new program allowing us to purchase up to $750 million additional shares of our common stock, subject to market conditions. We currently expect to purchase $500 million of our common stock in fiscal 2014, subject to market conditions. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements.

If Walgreens and/or Alliance Boots exercise their rights to purchase our common stock pursuant to the Warrants that we issued to them, the future issuances of shares of our common stock upon exercise of the Warrants will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock. We intend to mitigate the potentially dilutive effect that exercise of the Warrants could have by hedging a portion of our future obligation to deliver common stock with a financial institution and repurchasing additional shares of our common stock for our own account over time. In June 2013, we commenced our hedging strategy by entering into a contract with a financial institution pursuant to which it has executed a series . . .

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