Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2010
OR
     
o   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
AMERISOURCEBERGEN CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   23-3079390
     
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
1300 Morris Drive, Chesterbrook, PA   19087-5594
     
(Address of principal executive offices)   (Zip Code)
(610) 727-7000
(Registrant’s telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of common stock of AmerisourceBergen Corporation outstanding as of April 30, 2010 was 282,520,332.
 
 

 

 


 

AMERISOURCEBERGEN CORPORATION
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 Exhibit 3.1
 Exhibit 10.1
 Exhibit 10.2
 Exhibit 10.3
 Exhibit 10.4
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT

 

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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM I. Financial Statements (Unaudited)
AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    March 31,     September 30,  
(in thousands, except share and per share data)   2010     2009  
    (Unaudited)        
 
               
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 1,199,872     $ 1,009,368  
Accounts receivable, less allowances for returns and doubtful accounts:
               
$350,427 at March 31, 2010 and $370,303 at September 30, 2009
    3,948,478       3,916,509  
Merchandise inventories
    4,980,895       4,972,820  
Prepaid expenses and other
    37,785       55,056  
 
           
Total current assets
    10,167,030       9,953,753  
 
           
Property and equipment, at cost:
               
Land
    36,067       35,665  
Buildings and improvements
    295,685       292,903  
Machinery, equipment and other
    770,014       694,555  
 
           
Total property and equipment
    1,101,766       1,023,123  
Less accumulated depreciation
    (435,965 )     (403,885 )
 
           
Property and equipment, net
    665,801       619,238  
 
           
 
               
Goodwill and other intangible assets
    2,854,637       2,859,064  
Other assets
    134,820       140,685  
 
           
 
               
TOTAL ASSETS
  $ 13,822,288     $ 13,572,740  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Accounts payable
  $ 8,434,934     $ 8,517,162  
Accrued expenses and other
    312,169       315,657  
Current portion of long-term debt
    503       1,068  
Deferred income taxes
    678,792       645,723  
 
           
Total current liabilities
    9,426,398       9,479,610  
 
           
 
               
Long-term debt, net of current portion
    1,358,505       1,176,933  
Other liabilities
    205,463       199,728  
 
               
Stockholders’ equity:
               
Common stock, $0.01 par value — authorized: 600,000,000 shares; issued and outstanding: 486,662,447 shares and 281,578,939 shares at March 31, 2010, respectively, and 482,941,212 shares and 287,922,263 shares at September 30, 2009, respectively
    4,867       4,829  
Additional paid-in capital
    3,817,201       3,737,835  
Retained earnings
    3,206,322       2,919,760  
Accumulated other comprehensive loss
    (38,293 )     (46,096 )
 
           
 
    6,990,097       6,616,328  
Treasury stock, at cost: 205,083,508 shares at March 31, 2010 and 195,018,949 shares at September 30, 2009
    (4,158,175 )     (3,899,859 )
 
           
Total stockholders’ equity
    2,831,922       2,716,469  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 13,822,288     $ 13,572,740  
 
           
See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                                 
    Three months ended     Six months ended  
    March 31,     March 31,  
(in thousands, except per share data)   2010     2009     2010     2009  
 
                               
Revenue
  $ 19,300,627     $ 17,311,651     $ 38,636,486     $ 34,650,028  
Cost of goods sold
    18,688,559       16,759,180       37,461,048       33,607,709  
 
                       
Gross profit
    612,068       552,471       1,175,438       1,042,319  
Operating expenses:
                               
Distribution, selling, and administrative
    279,491       279,209       559,730       551,235  
Depreciation
    16,601       15,607       33,259       30,660  
Amortization
    4,086       3,827       8,225       7,683  
Facility consolidations, employee severance and other
    (37 )     4,262       (85 )     5,291  
Intangible asset impairments
    700       1,300       700       1,300  
 
                       
Operating income
    311,227       248,266       573,609       446,150  
Other loss
    268       504       545       933  
Interest expense, net
    19,279       14,521       36,546       28,704  
 
                       
Income from continuing operations before income taxes
    291,680       233,241       536,518       416,513  
Income taxes
    110,672       89,199       204,203       159,942  
 
                       
Income from continuing operations
    181,008       144,042       332,315       256,571  
Loss from discontinued operations, net of income taxes
          (655 )           (2,128 )
 
                       
Net income
  $ 181,008     $ 143,387     $ 332,315     $ 254,443  
 
                       
 
                               
Earnings per share:
                               
 
                               
Basic earnings per share:
                               
Continuing operations
  $ 0.64     $ 0.48     $ 1.17     $ 0.84  
Discontinued operations
                      (0.01 )
Rounding
          (0.01 )            
 
                       
Total
  $ 0.64     $ 0.47     $ 1.17     $ 0.83  
 
                       
 
                               
Diluted earnings per share:
                               
Continuing operations
  $ 0.63     $ 0.47     $ 1.15     $ 0.83  
Discontinued operations
                      (0.01 )
Rounding
                      0.01  
 
                       
Total
  $ 0.63     $ 0.47     $ 1.15     $ 0.83  
 
                       
 
                               
Weighted average common shares outstanding:
                               
Basic
    281,926       302,446       284,478       305,586  
Diluted
    287,162       304,584       289,262       307,446  
 
                               
Cash dividends declared per share of common stock
  $ 0.08     $ 0.05     $ 0.16     $ 0.10  
See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                 
    Six months ended  
    March 31,  
(in thousands)   2010     2009  
 
               
OPERATING ACTIVITIES
               
Net income
  $ 332,315     $ 254,443  
Loss from discontinued operations
          2,128  
 
           
Income from continuing operations
    332,315       256,571  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
Depreciation, including amounts charged to cost of goods sold
    39,607       36,131  
Amortization, including amounts charged to interest expense
    10,785       9,712  
Provision for doubtful accounts
    16,758       16,359  
Provision for deferred income taxes
    41,475       26,142  
Share-based compensation
    16,791       14,599  
Other
    3,379       (910 )
Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions:
               
Accounts receivable
    (21,006 )     (290,245 )
Merchandise inventories
    (22,943 )     (385,242 )
Prepaid expenses and other assets
    23,749       25,855  
Accounts payable, accrued expenses, and income taxes
    (94,583 )     322,296  
Other liabilities
    66       2,056  
 
           
Net cash provided by operating activities-continuing operations
    346,393       33,324  
Net cash used in operating activities-discontinued operations
          (906 )
 
           
NET CASH PROVIDED BY OPERATING ACTIVITIES
    346,393       32,418  
 
           
 
               
INVESTING ACTIVITIES
               
Capital expenditures
    (88,037 )     (68,587 )
Proceeds from sale of PMSI
          14,936  
Other
    134        
 
           
Net cash used in investing activities-continuing operations
    (87,903 )     (53,651 )
Net cash used in investing activities-discontinued operations
          (1,138 )
 
           
NET CASH USED IN INVESTING ACTIVITIES
    (87,903 )     (54,789 )
 
           
 
               
FINANCING ACTIVITIES
               
Long-term debt borrowings
    396,696        
Borrowings under revolving and securitization credit facilities
    561,459       1,604,658  
Repayments under revolving and securitization credit facilities
    (780,637 )     (1,596,360 )
Purchases of common stock
    (255,199 )     (179,879 )
Exercises of stock options, including excess tax benefits of $9,454 and $617 in fiscal 2010 and 2009, respectively
    64,496       4,415  
Cash dividends on common stock
    (45,754 )     (30,798 )
Debt issuance costs and other
    (9,047 )     (2,450 )
 
           
NET CASH USED IN FINANCING ACTIVITIES
    (67,986 )     (200,414 )
 
           
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    190,504       (222,785 )
Cash and cash equivalents at beginning of period
    1,009,368       878,114  
 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 1,199,872     $ 655,329  
 
           
See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Summary of Significant Accounting Policies
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 intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial position as of March 31, 2010 and the results of operations and cash flows for the interim periods ended March 31, 2010 and 2009 have been included. Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, 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, 2009.
The preparation of financial statements in conformity with U.S. GAAP 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.
The Company has three operating segments, which include the operations of AmerisourceBergen Drug Corporation (“ABDC”), AmerisourceBergen Specialty Group (“ABSG”), and AmerisourceBergen Packaging Group (“ABPG”). The Company has aggregated the operating results of ABDC, ABSG, and ABPG into one reportable segment, Pharmaceutical Distribution, which represents the consolidated operating results of the Company. The businesses of the Pharmaceutical Distribution operating segments are similar in that they service both healthcare providers and pharmaceutical manufacturers in the pharmaceutical supply channel. Prior to October 1, 2009, management considered gains on antitrust litigation settlements and costs related to facility consolidations, employee severance and other, to be reconciling items between the operating results of Pharmaceutical Distribution and the Company.
On June 15, 2009, the Company effected a two-for-one stock split of its outstanding shares of common stock in the form of a 100% stock dividend to stockholders of record at the close of business on May 29, 2009. All applicable share and per-share amounts in the consolidated financial statements and related disclosures have been retroactively adjusted to reflect this stock split.
Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation.
Recent Accounting Pronouncements
Effective October 1, 2009, the Company adopted the applicable sections of Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. Additionally, this ASC provides disclosure requirements to enable users of financial statements to evaluate the nature and financial effects of a business combination. The Company also adopted certain other applicable sections that address application issues raised on the initial recognition and measurement, subsequent measurement, and accounting and disclosure of assets and liabilities from contingencies from a business combination. The application of ASC 805 relating to a future acquisition or divestiture may have an impact to the Company’s financial position and/or results of operations.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2. Discontinued Operations
In October 2008, the Company completed the divestiture of its workers’ compensation business, PMSI, for approximately $31 million, net of a final working capital adjustment, including a $19 million subordinated note due from PMSI on the fifth anniversary of the closing date, of which $4 million may be payable in October 2010 if PMSI achieves certain revenue targets with respect to its largest customer during the twelve months ending September 30, 2010. Interest on the note accrues at an annual rate of LIBOR plus 4% (not to exceed 8%).
PMSI’s revenue and loss before income taxes were $29.0 million and $1.1 million, respectively, for the six months ended March 31, 2009. The Company classified PMSI’s October 2008 operating results and cash flows as discontinued in the consolidated financial statements. Loss from discontinued operations, net of income taxes, for the three and six months ended March 31, 2009 also included a charge of $0.7 million related to a prior period business disposition.
Note 3. Income Taxes
The Company files income tax returns in U.S. federal and state jurisdictions as well as various foreign jurisdictions. The U.S. Internal Revenue Service (“IRS”) completed its examination of the Company’s U.S. federal income tax returns for fiscal 2006 and 2007. In Canada, the Company is currently under examination for fiscal years 2007 and 2008.
As of March 31, 2010, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, of $55.1 million ($38.1 million net of federal benefit, which, if recognized, would reduce income tax expense). Included in this amount is $18.2 million of interest and penalties, which the Company records in income tax expense. During the six months ended March 31, 2010, unrecognized tax benefits increased by $0.7 million. During the next 12 months, it is reasonably possible that audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately $5.4 million.
Note 4. Goodwill and Other Intangible Assets
Following is a summary of the changes in the carrying value of goodwill for the six months ended March 31, 2010 (in thousands):
         
Goodwill at September 30, 2009
  $ 2,542,352  
Foreign currency translation
    2,768  
Other
    (707 )
 
     
Goodwill at March 31, 2010
  $ 2,544,413  
 
     

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a summary of other intangible assets (in thousands):
                                                 
    March 31, 2010     September 30, 2009  
    Gross             Net     Gross             Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Indefinite-lived intangibles-trade names
  $ 240,733     $     $ 240,733     $ 241,554     $     $ 241,554  
Finite-lived intangibles:
                                               
Customer relationships
    121,977       (63,142 )     58,835       121,419       (56,679 )     64,740  
Other
    35,442       (24,786 )     10,656       33,100       (22,682 )     10,418  
 
                                   
Total other intangible assets
  $ 398,152     $ (87,928 )   $ 310,224     $ 396,073     $ (79,361 )   $ 316,712  
 
                                   
Amortization expense for other intangible assets was $8.2 million and $7.7 million in the six months ended March 31, 2010 and 2009, respectively. Amortization expense for other intangible assets is estimated to be $16.3 million in fiscal 2010, $15.7 million in fiscal 2011, $13.3 million in fiscal 2012, $11.2 million in fiscal 2013, $8.0 million in fiscal 2014, and $13.2 million thereafter.
Note 5. Debt
Debt consisted of the following (in thousands):
                 
    March 31,     September 30,  
    2010     2009  
 
               
Blanco revolving credit facility at 2.23% and 2.25%, respectively, due 2011
  $ 55,000     $ 55,000  
Receivables securitization facility due 2011
           
Multi-currency revolving credit facility at 2.25% and 0.92%, respectively, due 2011
    8,790       224,026  
$400,000, 5 5/8% senior notes due 2012
    399,206       399,058  
$500,000, 5 7/8% senior notes due 2015
    498,457       498,339  
$400,000, 4 7/8% senior notes due 2019
    396,804        
Other
    751       1,578  
 
           
Total debt
    1,359,008       1,178,001  
Less current portion
    503       1,068  
 
           
Total, net of current portion
  $ 1,358,505     $ 1,176,933  
 
           

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has a $695 million multi-currency senior unsecured revolving credit facility, which expires in November 2011, (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 the Company’s debt rating and ranges from 19 basis points to 60 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (40 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at March 31, 2010). Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate. The Company pays quarterly facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on the Company’s debt rating, ranging from 6 basis points to 15 basis points of the total commitment (10 basis points at March 31, 2010). The Company may choose to repay or reduce its 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.
The Company has a $700 million receivables securitization facility (“Receivables Securitization Facility”). In April 2010, the Company amended this facility, which now expires in April 2011. The Company continues to have available to it 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 based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee. The Company pays a commitment fee to maintain the availability under the Receivables Securitization Facility. In connection with the April 2010 amendment, the program fee and the commitment fee were reduced to 125 basis points and 60 basis points, respectively. At March 31, 2010, there were no borrowings outstanding under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility.
In April 2010, the Company amended the $55 million Blanco revolving credit facility (the “Blanco Credit Facility”) to, among other things, extend the maturity date of the Blanco Credit Facility to April 2011. Borrowings under the Blanco Credit Facility are guaranteed by the Company. In connection with the April 2010 amendment, interest on borrowings under this facility continues to be 200 basis points over LIBOR.
In November 2009, the Company issued $400 million of 4 7/8% senior notes due November 15, 2019 (the “2019 Notes”). The 2019 Notes were sold at 99.174% of the principal amount and have an effective yield of 4.98%. The interest on the 2019 Notes is payable semiannually, in arrears, commencing May 15, 2010. The 2019 Notes rank pari passu to the Multi-Currency Revolving Credit Facility, the 5 5/8% senior notes due 2012, and the 5 7/8% senior notes due 2015. The Company used the net proceeds of the 2019 Notes to repay substantially all amounts then outstanding under its Multi-Currency Revolving Credit Facility, and the remaining net proceeds were used for general corporate purposes. Costs incurred in connection with the issuance of the 2019 Notes were deferred and are being amortized over the 10-year term of the notes.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Stockholders’ Equity and Earnings per Share
The following table illustrates comprehensive income for the three and six months ended March 31, 2010 and 2009 (in thousands):
                                 
    Three months ended     Six months ended  
    March 31,     March 31,  
    2010     2009     2010     2009  
Net income
  $ 181,008     $ 143,387     $ 332,315     $ 254,443  
Foreign currency translation adjustments and other
    4,525       (1,175 )     7,803       (11,241 )
 
                       
Comprehensive income
  $ 185,533     $ 142,212     $ 340,118     $ 243,202  
 
                       
In May 2009, the Company declared a two-for-one split of the Company’s outstanding shares of common stock.
In November 2008, the Company’s board of directors increased the quarterly dividend by 33% to $0.05 per common share. In May 2009, the Company’s board of directors increased the quarterly dividend by 20% to $0.06 per common share. In November 2009, the Company’s board of directors authorized another increase in the quarterly dividend by 33% to $0.08 per share.
In November 2008, the Company’s board of directors authorized a program allowing the Company to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions. During the six months ended March 31, 2009, the Company purchased 9.8 million shares under this program for $161.7 million and another 1.2 million shares for $18.1 million to complete its authorization under a prior share repurchase program.
In November 2009, the Company’s board of directors authorized a new program allowing the Company to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions. During the six months ended March 31, 2010, the Company purchased 2.8 million shares for $68.1 million to complete its authorization under the November 2008 program. During the six months ended March 31, 2010, the Company purchased 7.2 million shares for $186.9 million under the new program.
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 presented plus the dilutive effect of stock options, restricted stock, and restricted stock units.
                                 
    Three months ended     Six months ended  
    March 31,     March 31,  
(in thousands)   2010     2009     2010     2009  
Weighted average common shares outstanding-basic
    281,926       302,446       284,478       305,586  
Effect of dilutive securities: stock options, restricted stock, and restricted stock units
    5,236       2,138       4,784       1,860  
 
                       
Weighted average common shares outstanding-diluted
    287,162       304,584       289,262       307,446  
 
                       
The potentially dilutive stock options that were antidilutive for the three months ended March 31, 2010 and 2009 were 1.1 million and 12.2 million, respectively, and for the six months ended March 31, 2010 and March 31, 2009 were 0.6 million and 11.5 million, respectively.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. Facility Consolidations, Employee Severance and Other
During fiscal 2008, the Company 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, the Company reduced various operating costs and terminated certain positions. During the six months ended March 31, 2009, the Company terminated 183 employees and incurred $2.9 million of employee severance costs. Additionally, during the three months ended March 31, 2009, the Company recorded $2.2 million of additional costs relating to the Bergen Brunswig Matter as described in Note 8. Employees receive their severance benefits over a period of time, generally not in excess of 12 months, or in the form of a lump-sum payment.
The following table displays the activity in accrued expenses and other from September 30, 2009 to March 31, 2010 (in thousands):
                         
    Employee     Lease Cancellation        
    Severance     Costs and Other     Total  
Balance as of September 30, 2009
  $ 7,876     $ 3,549     $ 11,425  
Expense recorded during the period
    (85 )           (85 )
Payments made during the period
    (1,947 )     (411 )     (2,358 )
 
                 
Balance as of March 31, 2010
  $ 5,844     $ 3,138     $ 8,982  
 
                 
The employee severance balance set forth in the above table as of March 31, 2010 includes an accrual for the Bergen Brunswig Matter as described in Note 8. The lease cancellation costs and other balance set forth in the above table as of March 31, 2010 primarily consists of an accrual for information technology transition costs payable to IBM Global Services.
Note 8. Legal Matters and Contingencies
In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, and government investigations, including antitrust, commercial, environmental, product liability, intellectual property, regulatory, employment discrimination, and other matters. Significant 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 based on its periodic assessment of estimates of probable losses. 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 or on the Company’s financial condition.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Bergen Brunswig Matter
A former Bergen Brunswig chief executive officer who was terminated in 1999 filed an action that year in the Superior Court of the State of California, County of Orange (the “Superior Court”) claiming that Bergen Brunswig (predecessor in interest to AmerisourceBergen Corporation) had breached its obligations to him under his employment agreement. Shortly after the filing of the lawsuit, Bergen Brunswig made a California Civil Procedure Code § 998 Offer of Judgment to the executive, which the executive accepted. The resulting judgment awarded the executive damages and the continuation of certain employment benefits. Since then, the Company and the executive have engaged in litigation as to what specific benefits were included in the scope of the Offer of Judgment and the value of those benefits. The Superior Court entered an Order in Implementation of Judgment on June 7, 2001, which identified the specific benefits encompassed by the Offer of Judgment. Following submission by the executive of a claim for benefits pursuant to the Bergen Brunswig Supplemental Executive Retirement Plan (the “Plan”), the Company followed the administrative procedure set forth in the Plan. This procedure involved separate reviews by two independent parties, the first by the Review Official appointed by the Plan Administrator and second by the Plan Trustee, and resulted in a determination that the executive was entitled to a $1.9 million supplemental retirement benefit and such amount was paid. The executive challenged this award and on July 7, 2006, the Superior Court entered a Second Order in Implementation of Judgment determining that the executive was entitled to a supplemental retirement benefit, net of the $1.9 million previously paid to him, in the amount of $19.4 million, which included interest at the rate of ten percent per annum from August 29, 2001. The Company recorded a charge of $13.9 million in June 2006 to establish the total liability of $19.4 million on its balance sheet. Both the executive and the Company appealed the ruling of the Superior Court. On October 12, 2007, the Court of Appeal for the State of California, Fourth Appellate District (the “Court of Appeal”) made certain rulings, and reversed certain portions of the July 2006 decision of the Superior Court in a manner that was favorable to the Company. As a result, in fiscal 2007, the Company reduced its total liability to the executive by $10.4 million. The parties then entered into a stipulation to remand the calculation of the executive’s supplemental retirement benefit to the Plan Administrator in accordance with the Court of Appeal’s decision of October 12, 2007. On June 10, 2008, the Plan Administrator issued a decision that the executive was entitled to receive approximately $6.9 million in supplemental retirement benefits plus interest, less the $1.9 million already paid to the executive under the Plan. The executive appealed this determination and a hearing on his appeal was held in August 2008 before a Review Official appointed by the Plan Administrator. On October 31, 2008, the Review Official issued a decision affirming in most respects the Plan Administrator’s determination of the executive’s supplemental retirement benefit. On November 17, 2008, the executive filed a motion for a Third Order in Implementation of Judgment with the Superior Court asking the court to overturn the decision of the Review Official. On March 9, 2009, the Company paid the executive approximately $5.6 million, plus interest, for the executive’s supplemental retirement benefit, as determined by the Review Official. On April 9, 2009, the Superior Court affirmed most aspects of the Review Official’s determination of decision, but held that the Review Official had abused his discretion by discounting the executive’s supplemental retirement benefit to its present value. As a result, the Superior Court held that the executive was entitled to an additional supplemental retirement benefit of approximately $6.6 million, plus interest, beyond what has already been paid by the Company. During the fiscal year ended September 30, 2009, the Company accrued an additional $2.2 million related to this matter. The Company believes that the Superior Court’s holding is inconsistent with the 2007 Court of Appeal decision and on May 4, 2009, filed a Notice of Appeal appealing the Superior Court’s holding. The executive also appealed the Superior Court’s holding. The Court of Appeal will hold argument on the appeal on May 17, 2010.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Ontario Ministry of Health and Long-Term Care Civil Rebate Payment Order and Civil Complaint
On April 27, 2009, the Ontario Ministry of Health and Long-Term Care (“OMH”) notified the Company’s Canadian subsidiary, AmerisourceBergen Canada Corporation (“ABCC”), that it had entered a Rebate Payment Order requiring ABCC to pay C$5.8 million to the Ontario Ministry of Finance. OMH maintains that it has reasonable grounds to believe that ABCC accepted rebates, directly or indirectly, in violation of the Ontario Drug Interchangeability and Dispensing Fee Act. OMH at the same time announced similar rebate payment orders against other wholesalers, generic manufacturers, pharmacies, and individuals. ABCC was cooperating fully with OMH prior to the entry of the Order by responding fully to requests for information and/or documents and will continue to cooperate. ABCC filed an appeal of the Order pursuant to OMH procedures in May 2009. In addition, on the same day that the Order was issued, OMH notified ABCC that it had filed a civil complaint with Health Canada (department of the Canadian government responsible for national public health) against ABCC for potential violations of the Canadian Food and Drug Act. Health Canada subsequently conducted an audit of ABCC, and ABCC has cooperated fully with Health Canada in the conduct of the audit. The Company has met several times with representatives of OMH to present its position on the Rebate Payment Order. Although the Company believes that ABCC has not violated the relevant statutes and regulations and has conducted its business consistent with widespread industry practices, the Company cannot predict the outcome of these matters.
Qui Tam Matter and Related Shareholder Derivative Action
On October 30, 2009, 14 states (including New York and Florida) and the District of Columbia filed a complaint (the “Intervention Complaint”) in the United States District Court for the District of Massachusetts (the “Federal District Court”) naming Amgen Inc. as well as two business units of AmerisourceBergen Specialty Group, AmerisourceBergen Specialty Group, and AmerisourceBergen Corporation as defendants. The Intervention Complaint was filed to intervene in a pending civil case against the defendants filed under the qui tam provisions of the federal and various state civil False Claims Acts (the “Original Qui Tam Complaint”). The qui tam provisions permit a private person, known as a “relator” (i.e. whistleblower), to file civil actions under these statutes on behalf of the federal and state governments. The relator in the Original Complaint is a former Amgen employee. The Office of the New York Attorney General is leading the intervention on behalf of the state governments.
The Original Qui Tam Complaint was initially filed under seal. On January 21, 2009, the Company learned that the United States Attorney for the Eastern District of New York (the “DOJ”) was investigating allegations in a sealed civil complaint filed in the Federal District Court under the qui tam provisions of the federal civil False Claims Act. In February 2009, the Company received a redacted copy of the then current version of the Original Qui Tam Complaint, pursuant to a court order. However, the Company was never served with the Original Qui Tam Complaint. Based upon the disclosed portions of the redacted complaint, it appears that the relator initially filed the action on or about June 5, 2006 and a first amendment thereto on or about July 2, 2007. On May 18, 2009, the Federal District Court extended the time period for federal and state government authorities to conduct their respective investigations and to decide whether to intervene in the civil action. On September 1, 2009, 14 states and the District of Columbia filed notices of their intent to intervene. The 14 states and the District of Columbia were given leave by the Federal District Court to file a complaint within 60 days, or by October 30, 2009. The DOJ filed a notice that it was not intervening as of September 1, 2009, but stated that its investigation is continuing. The Company has received subpoenas for records issued by the DOJ in connection with its investigation. The Company has been cooperating with the DOJ and is producing records in response to the subpoenas.
Both the Intervention Complaint and the Original Qui Tam Complaint, as amended on October 30, 2009, allege that from 2002 through 2009, Amgen offered remuneration to medical providers in violation of federal and state health laws to increase purchases and prescriptions of Amgen’s anemia drug, Aranesp. Specifically with regard to the Company’s business units, the complaints allege that ASD Specialty Healthcare, Inc., which is a distributor of pharmaceuticals to physician practices (“ASD”), and International Nephrology Network, which was a business name for one of the Company’s subsidiaries and a group purchasing organization for nephrologists and nephrology practices (“INN”), conspired with Amgen to promote Aranesp in violation of federal and state health laws. The complaints further allege that the defendants caused medical providers to submit to state Medicaid programs false certifications and false claims for payment for Aranesp. According to the complaints, the latter conduct allegedly violated state civil False Claims Acts and constituted fraud and unjust enrichment. The Original Qui Tam Complaint, as amended, also alleges that the defendants caused medical providers to submit to other federal health programs, including Medicare, false certifications and false claims for payment for Aranesp.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 17, 2009, the states and the relator both filed amended complaints. The State of Texas, which was not one of the original 14 states intervening in the action, joined in the amended complaint. Between January 20, 2010 and February 23, 2010, the States of Florida, Texas, New Hampshire, Louisiana, Nevada and Delaware filed notices to voluntarily dismiss the Intervention Complaint, leaving 9 states and the District of Columbia as intervenors. On February 1, 2010, the Company filed a motion to dismiss the complaints. Amgen, Inc. filed a motion to dismiss as well. On April 23, 2010, the Federal District Court issued a written opinion and order dismissing the Original Qui Tam Complaint, as amended, and the Intervention Complaint. The relator and the intervenors may seek to appeal the order of the Federal District Court.
The Company has learned that there are prior filings in another federal district, which are under seal, that contain allegations similar to those in the Federal District Court action, including allegations against the same, additional and/or subsidiaries or businesses of the Company as are defendants in the Federal District Court action. The DOJ investigation of the allegations contained in the Original Qui Tam Complaint appears to include investigation of allegations contained in the prior filings.
The Company intends to continue to defend itself vigorously against the allegations contained in the Original Qui Tam Complaint, as amended, and the Intervention Complaint and against any appeal. The Company cannot predict the outcome of either the Federal District Court action (or any appeal thereof) or the DOJ investigation or the potential outcome of any other action involving similar allegations in which any AmerisourceBergen entity is or may become a defendant.
The Company was named as a nominal defendant in an alleged shareholder derivative action that was filed on March 26, 2010 in the U.S. District Court for the Eastern District of Pennsylvania. Also named as defendants in the action were all of the individuals who were serving as directors of the Company immediately prior to the date of filing of the action and certain current and former officers and directors of the Company. The derivative action alleges breach of fiduciary duty against all the individual defendants arising from the allegations contained in the complaints filed in the Qui Tam Matter described above. The derivative action seeks compensatory damages in favor of the Company, attorneys’ fees and costs, and further relief as may be determined by the court. Although the Company and the other defendants believe that the derivative action is wholly without merit and intend to defend themselves vigorously against the claims raised in this action, the Company cannot predict the outcome of this matter.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9. Litigation Settlements
Antitrust Settlements
During the last several years, numerous class action lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market. The Company has not been a named plaintiff in any of these class actions, but has been a member of the direct purchasers’ class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers). None of the class actions has gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds. Currently, there are several such class actions pending in which the Company is a class member. During the six months ended March 31, 2010, the Company recognized a gain of $1.5 million relating to the above-mentioned class action lawsuits. The gain, which was net of attorney fees and estimated payments due to other parties, was recorded as a reduction to cost of goods sold in the Company’s consolidated statements of operations.
Note 10. Financial Instruments
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable at March 31, 2010 and September 30, 2009 approximated their fair values due to the short-term nature of these financial instruments. Included in cash and cash equivalents at March 31, 2010 and September 30, 2009 are money market fund investments of $1,106.0 million and $928.3 million, respectively, which are reported at fair value. The fair value of these investments was determined by using quoted prices for identical investments in active markets, which are considered Level 1 inputs under ASC 820-10, “Fair Value Measurements and Disclosures.”
The carrying amounts and fair values of the Company’s debt were $1,359.0 million and $1,442.1 million at March 31, 2010 and $1,178.0 million and $1,246.4 million at September 30, 2009. The fair value of the Company’s debt was determined using quoted market prices that were derived from available market information.
Note 11. Subsequent Event
On May 5, 2010, the Company received a cash settlement from a pharmaceutical manufacturer relating to an antitrust litigation settlement and expects to realize a gain of $18.8 million (net of attorney fees and estimated payments due to other parties) in the quarter ending June 30, 2010.
Note 12. Selected Consolidating Financial Statements of Parent, Guarantors and Non-Guarantors
The Company’s 5 5/8% senior notes due September 15, 2012 (the “2012 Notes”), 5 7/8% senior notes due September 15, 2015 (the “2015 Notes”), and 4 7/8% senior notes due November 15, 2019 (the “2019 Notes” and, together with the 2012 Notes and 2015 Notes, the “Notes”) each are fully and unconditionally guaranteed on a joint and several basis by certain of the Company’s subsidiaries (the subsidiaries of the Company that are guarantors of any of the Notes being referred to collectively as the “Guarantor Subsidiaries”). The total assets, stockholders’ equity, revenue, earnings, and cash flows from operating activities of the Guarantor Subsidiaries reflect the majority of the consolidated total of such items as of or for the periods reported. The only consolidated subsidiaries of the Company that are not guarantors of the Notes (the “Non-Guarantor Subsidiaries”) are: (a) the receivables securitization special purpose entity, (b) the foreign operating subsidiaries, and (c) certain smaller operating subsidiaries. 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 March 31, 2010 and September 30, 2009, statements of operations for the three and six months ended March 31, 2010 and 2009, and statements of cash flows for the six months ended March 31, 2010 and 2009.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY CONSOLIDATING BALANCE SHEETS:
                                         
    March 31, 2010  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 1,115,717     $ 56,383     $ 27,772     $     $ 1,199,872  
Accounts receivable, net
    128       1,275,592       2,672,758             3,948,478  
Merchandise inventories
          4,863,790       117,105             4,980,895  
Prepaid expenses and other
    180       35,647       1,958             37,785  
 
                             
Total current assets
    1,116,025       6,231,412       2,819,593             10,167,030  
 
                                       
Property and equipment, net
          637,070       28,731             665,801  
Goodwill and other intangible assets
          2,716,667       137,970             2,854,637  
Other assets
    11,848       122,421       551             134,820  
Intercompany investments and advances
    2,723,824       1,953,282       (144,753 )     (4,532,353 )      
 
                             
 
                                       
Total assets
  $ 3,851,697     $ 11,660,852     $ 2,842,092     $ (4,532,353 )   $ 13,822,288  
 
                             
 
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 8,272,750     $ 162,184     $     $ 8,434,934  
Accrued expenses and other
    (274,692 )     578,683       8,178             312,169  
Current portion of long-term debt
          346       157             503  
Deferred income taxes
          678,792                   678,792  
 
                             
 
                                       
Total current liabilities
    (274,692 )     9,530,571       170,519             9,426,398  
 
                                       
Long-term debt, net of current portion
    1,294,467       249       63,789             1,358,505  
Other liabilities
          203,166       2,297             205,463  
 
                                       
Total stockholders’ equity
    2,831,922       1,926,866       2,605,487       (4,532,353 )     2,831,922  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 3,851,697     $ 11,660,852     $ 2,842,092     $ (4,532,353 )   $ 13,822,288  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY CONSOLIDATING BALANCE SHEETS:
                                         
    September 30, 2009  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 927,049     $ 58,900     $ 23,419     $     $ 1,009,368  
Accounts receivable, net
    66       1,292,822       2,623,621             3,916,509  
Merchandise inventories
          4,856,637       116,183             4,972,820  
Prepaid expenses and other
    67       52,816       2,173             55,056  
 
                             
 
                                       
Total current assets
    927,182       6,261,175       2,765,396             9,953,753  
 
                                       
Property and equipment, net
          589,838       29,400             619,238  
Goodwill and other intangible assets
          2,719,324       139,740             2,859,064  
Other assets
    9,645       129,817       1,223             140,685  
Intercompany investments and advances
    2,405,087       1,938,742       (152,302 )     (4,191,527 )      
 
                             
 
                                       
Total assets
  $ 3,341,914     $ 11,638,896     $ 2,783,457     $ (4,191,527 )   $ 13,572,740  
 
                             
 
                                       
Current liabilities:
                                       
Accounts payable
  $     $ 8,360,776     $ 156,386     $     $ 8,517,162  
Accrued expenses and other
    (271,952 )     581,354       6,255             315,657  
Current portion of long-term debt
          346       722             1,068  
Deferred income taxes
          645,723                   645,723  
 
                             
 
                                       
Total current liabilities
    (271,952 )     9,588,199       163,363             9,479,610  
 
                                       
Long-term debt, net of current portion
    897,397       412       279,124             1,176,933  
Other liabilities
          197,496       2,232             199,728  
 
                                       
Total stockholders’ equity
    2,716,469       1,852,789       2,338,738       (4,191,527 )     2,716,469  
 
                             
 
                                       
Total liabilities and stockholders’ equity
  $ 3,341,914     $ 11,638,896     $ 2,783,457     $ (4,191,527 )   $ 13,572,740  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
                                         
    Three months ended March 31, 2010  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Revenue
  $     $ 18,884,847     $ 446,948     $ (31,168 )   $ 19,300,627  
Cost of goods sold
          18,292,376       396,183             18,688,559  
 
                             
 
                                       
Gross profit
          592,471       50,765       (31,168 )     612,068  
Operating expenses:
                                       
Distribution, selling, and administrative
          300,865       9,794       (31,168 )     279,491  
Depreciation
          15,750       851             16,601  
Amortization
          3,241       845             4,086  
Facility consolidations, employee severance and other
          (37 )                 (37 )
Intangible asset impairments
          700                   700  
 
                             
 
                                       
Operating income
          271,952       39,275             311,227  
Other loss (income)
          271       (3 )           268  
Interest expense, net
    675       15,815       2,789             19,279  
 
                             
 
                                       
(Loss) income before income taxes and equity in earnings of subsidiaries
    (675 )     255,866       36,489             291,680  
Income taxes
    (236 )     98,105       12,803             110,672  
Equity in earnings of subsidiaries
    181,447                   (181,447 )      
 
                             
 
                                       
Net income
  $ 181,008     $ 157,761     $ 23,686     $ (181,447 )   $ 181,008  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
                                         
    Three months ended March 31, 2009  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Revenue
  $     $ 16,974,495     $ 364,649     $ (27,493 )   $ 17,311,651  
Cost of goods sold
          16,437,775       321,405             16,759,180  
 
                             
 
                                       
Gross profit
          536,720       43,244       (27,493 )     552,471  
Operating expenses:
                                       
Distribution, selling, and administrative
          293,287       13,415       (27,493 )     279,209  
Depreciation
          14,922       685             15,607  
Amortization
          3,149       678             3,827  
Facility consolidations, employee severance and other
          4,262                   4,262  
Intangible asset impairments
          1,300                   1,300  
 
                             
 
                                       
Operating income
          219,800       28,466             248,266  
Other loss
          503       1             504  
Interest (income) expense, net
    (890 )     12,389       3,022             14,521  
 
                             
 
                                       
Income from continuing operations before income taxes and equity in earnings of subsidiaries
    890       206,908       25,443             233,241  
Income taxes
    311       80,172       8,716             89,199  
Equity in earnings of subsidiaries
    142,808                   (142,808 )      
 
                             
Income from continuing operations
    143,387       126,736       16,727       (142,808 )     144,042  
Loss from discontinued operations
          (655 )                 (655 )
 
                             
 
                                       
Net income
  $ 143,387     $ 126,081     $ 16,727     $ (142,808 )   $ 143,387  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
                                         
    Six months ended March 31, 2010  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Revenue
  $     $ 37,791,819     $ 906,776     $ (62,109 )   $ 38,636,486  
Cost of goods sold
          36,655,488       805,560             37,461,048  
 
                             
 
                                       
Gross profit
          1,136,331       101,216       (62,109 )     1,175,438  
Operating expenses:
                                       
Distribution, selling, and administrative
          594,460       27,379       (62,109 )     559,730  
Depreciation
          31,577       1,682             33,259  
Amortization
          6,501       1,724             8,225  
Facility consolidations, employee severance and other
          (85 )                 (85 )
Intangible asset impairments
          700                   700  
 
                             
 
                                       
Operating income
          503,178       70,431             573,609  
Other loss (income)
          550       (5 )           545  
Interest expense, net
    1,225       29,400       5,921             36,546  
 
                             
 
                                       
(Loss) income before income taxes and equity in earnings of subsidiaries
    (1,225 )     473,228       64,515             536,518  
Income taxes
    (429 )     181,640       22,992             204,203  
Equity in earnings of subsidiaries
    333,111                   (333,111 )      
 
                             
 
                                       
Net income
  $ 332,315     $ 291,588     $ 41,523     $ (333,111 )   $ 332,315  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
                                         
    Six months ended March 31, 2009  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Revenue
  $     $ 33,949,092     $ 755,922     $ (54,986 )   $ 34,650,028  
Cost of goods sold
          32,940,994       666,715             33,607,709  
 
                             
 
                                       
Gross profit
          1,008,098       89,207       (54,986 )     1,042,319  
Operating expenses:
                                       
Distribution, selling, and administrative
          578,133       28,088       (54,986 )     551,235  
Depreciation
          29,271       1,389             30,660  
Amortization
          6,295       1,388             7,683  
Facility consolidations, employee severance and other
          5,291                   5,291  
Intangible asset impairments
          1,300                   1,300  
 
                             
 
                                       
Operating income
          387,808       58,342             446,150  
Other loss
          932       1             933  
Interest (income) expense, net
    (3,061 )     24,843       6,922             28,704  
 
                             
 
                                       
Income from continuing operations before income taxes and equity in earnings of subsidiaries
    3,061       362,033       51,419             416,513  
Income taxes
    1,071       140,873       17,998             159,942  
Equity in earnings of subsidiaries
    252,453                   (252,453 )      
 
                             
Income from continuing operations
    254,443       221,160       33,421       (252,453 )     256,571  
Loss from discontinued operations
          (2,128 )                 (2,128 )
 
                             
 
                                       
Net income
  $ 254,443     $ 219,032     $ 33,421     $ (252,453 )   $ 254,443  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
                                         
    Six months ended March 31, 2010  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Net income
  $ 332,315     $ 291,588     $ 41,523     $ (333,111 )   $ 332,315  
Adjustments to reconcile net income to net cash (used in) provided by operating activities
    (334,544 )     53,515       (38,004 )     333,111       14,078  
 
                             
Net cash (used in) provided by operating activities
    (2,229 )     345,103       3,519             346,393  
 
                             
Capital expenditures
          (86,157 )     (1,880 )           (88,037 )
Other
          22       112             134  
 
                             
Net cash used in investing activities
          (86,135 )     (1,768 )           (87,903 )
 
                             
Long-term debt borrowings
    396,696                         396,696  
Net repayments under revolving and securitization credit facilities
                (219,178 )           (219,178 )
Purchases of common stock
    (255,199 )                       (255,199 )
Exercise of stock options, including excess tax benefit
    64,496                         64,496  
Cash dividends on common stock
    (45,754 )                       (45,754 )
Debt issuance costs and other
    (8,687 )     (357 )     (3 )           (9,047 )
Intercompany financing and advances
    39,345       (261,128 )     221,783              
 
                             
Net cash provided by (used in) financing activities
    190,897       (261,485 )     2,602             (67,986 )
 
                             
Increase (decrease) in cash and cash equivalents
    188,668       (2,517 )     4,353             190,504  
Cash and cash equivalents at beginning of period
    927,049       58,900       23,419             1,009,368  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 1,115,717     $ 56,383     $ 27,772     $     $ 1,199,872  
 
                             

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
                                         
    Six months ended March 31, 2009  
            Guarantor     Non-Guarantor             Consolidated  
(in thousands)   Parent     Subsidiaries     Subsidiaries     Eliminations     Total  
 
                                       
Net income
  $ 254,443     $ 219,032     $ 33,421     $ (252,453 )   $ 254,443  
Loss from discontinued operations
          2,128                   2,128  
 
                             
Income from continuing operations
    254,443       221,160       33,421       (252,453 )     256,571  
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities
    (188,879 )     11,244       (298,065 )     252,453       (223,247 )
 
                             
 
                                       
Net cash provided by (used in) operating activities — continuing operations
    65,564       232,404       (264,644 )           33,324  
Net cash used in operating activities — discontinued operations
          (906 )                 (906 )
 
                             
Net cash provided by (used in) operating activities
    65,564       231,498       (264,644 )           32,418  
 
                             
Capital expenditures
          (62,911 )     (5,676 )           (68,587 )
Proceeds from the sale of PMSI
          14,936                   14,936  
 
                             
Net cash used in investing activities — continuing operations
          (47,975 )     (5,676 )           (53,651 )
Net cash used in investing activities — discontinued operations
          (1,138 )                 (1,138 )
 
                             
Net cash used in investing activities
          (49,113 )     (5,676 )           (54,789 )
 
                             
 
                                       
Net borrowings under revolving and securitization credit facilities
                8,298             8,298  
Purchases of common stock
    (179,879 )                       (179,879 )
Debt issuance costs and other
    (2,890 )     601       (161 )           (2,450 )
Exercise of stock options, including excess tax benefit
    4,415                         4,415  
Cash dividends on common stock
    (30,798 )                       (30,798 )
Intercompany financing and advances
    (51,166 )     (203,237 )     254,403              
 
                             
 
                                       
Net cash (used in) provided by financing activities
    (260,318 )     (202,636 )     262,540             (200,414 )
 
                             
Decrease in cash and cash equivalents
    (194,754 )     (20,251 )     (7,780 )           (222,785 )
Cash and cash equivalents at beginning of period
    719,570       100,623       57,921             878,114  
 
                             
 
                                       
Cash and cash equivalents at end of period
  $ 524,816     $ 80,372     $ 50,141     $     $ 655,329  
 
                             

 

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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 notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.
In May 2009, we declared a two-for-one stock split of our outstanding shares of common stock. The stock split occurred in the form of a 100% stock dividend, whereby each stockholder received one additional share for each share owned. The shares were distributed on June 15, 2009 to stockholders of record at the close of business on May 29, 2009. All applicable share and per share data in this Management’s Discussion and Analysis of Financial Condition and Results of Operations have been retroactively adjusted to give effect to this stock split.
We are a pharmaceutical services company providing drug distribution and related healthcare services and solutions to our pharmacy, physician, and manufacturer customers, which are based primarily in the United States and Canada. Substantially all of our operations are located in the United States and Canada. We also have a pharmaceutical packaging operation in the United Kingdom.
We have three operating segments, which include the operations of AmerisourceBergen Drug Corporation (“ABDC”), AmerisourceBergen Specialty Group (“ABSG”), and AmerisourceBergen Packaging Group (“ABPG”). We have aggregated the operating results of ABDC, ABSG, and ABPG into one reportable segment, Pharmaceutical Distribution, which represents the consolidated operating results of the Company. Servicing both healthcare providers and pharmaceutical manufacturers 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.
Prior to October 1, 2009, management considered gains on antitrust litigation settlements and costs related to facility consolidations, employee severance and other, to be reconciling items between the operating results of Pharmaceutical Distribution and the Company.
ABDC distributes a comprehensive offering of brand-name 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.
ABSG, through a number of individual 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 vaccines, other injectables, and plasma and other blood products. In addition, through its specialty services businesses, ABSG provides drug commercialization services, third party logistics, and other services for biotech and other pharmaceutical manufacturers, as well as reimbursement consulting, data analytics, outcomes research, practice management, and group purchasing services for physician practices.
ABPG consists of American Health Packaging, Anderson Packaging (“Anderson”), and Brecon Pharmaceuticals Limited (“Brecon”). American Health Packaging delivers unit dose, punch card, unit-of-use, and other packaging solutions to institutional and retail healthcare providers. American Health Packaging’s largest customer is ABDC and, as a result, its operations are closely aligned with the operations of ABDC. Anderson is a leading provider of contract packaging services for pharmaceutical manufacturers. Brecon is a United Kingdom-based provider of contract packaging and clinical trials materials services for pharmaceutical manufacturers.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary Financial Information
                         
    Three months ended March 31,        
(dollars in thousands)   2010     2009     Change  
 
                       
Revenue
  $ 19,300,627     $ 17,311,651       11.5 %
 
                   
 
                       
Gross profit
  $ 612,068     $ 552,471       10.8 %
 
                   
 
                       
Operating income
  $ 311,227     $ 248,266       25.4 %
 
                   
 
                       
Percentages of revenue:
                       
Gross profit
    3.17 %     3.19 %        
Operating expenses
    1.56 %     1.76 %        
Operating income
    1.61 %     1.43 %        
                         
    Six months ended March 31,        
(dollars in thousands)   2010     2009     Change  
 
                       
Revenue
  $ 38,636,486     $ 34,650,028       11.5 %
 
                   
 
                       
Gross profit
  $ 1,175,438     $ 1,042,319       12.8 %
 
                   
 
                       
Operating income
  $ 573,609     $ 446,150       28.6 %
 
                   
 
                       
Percentages of revenue:
                       
Gross profit
    3.04 %     3.01 %        
Operating expenses
    1.56 %     1.72 %        
Operating income
    1.48 %     1.29 %        
Results of Operations
Revenue of $19.3 billion, which included bulk deliveries to customer warehouses of $351.3 million, in the quarter ended March 31, 2010 increased 11.5% from the prior year quarter. The increase in revenue was due to the 13% growth of ABDC and the 5% growth of ABSG. During the quarter ended March 31, 2010, 68% of 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 67% institutional and 33% retail. Sales to institutional customers increased 13% in the current year quarter due to the above market growth of a few of our largest customers, the April 2009 addition of a new large hospital buying group customer, and overall market growth. Sales to retail customers increased 9% in the current year quarter primarily due to the March 2009 addition of a new large independent retail buying group customer. Revenue of $38.6 billion, which included bulk deliveries to customer warehouses of $776.4 million, in the six months ended March 31, 2010 increased 11.5% from the prior year period as ABDC’s revenue grew 13% and ABSG’s revenue grew 6%.
ABDC’s revenue increased by 13% from the prior year quarter and six month period due to revenue from our new customers, primarily the new buying group customers with which we started doing business in March and April of 2009 (representing approximately 5.5% and 6.4% of ABDC’s revenue growth in the quarter and six month period, respectively), the above market growth of a few of our largest customers, and overall market growth.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ABSG’s revenue of $3.9 billion and $8.0 billion in the quarter and six months ended March 31, 2010 increased 5% and 6%, respectively, from the prior year periods due to growth of its distribution businesses, primarily relating to the distribution of nephrology and blood products and its third party logistics business. 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 affecting this service channel could result in slower or reduced growth in revenues.
We currently expect to grow our revenues between 7% and 8% in fiscal 2010. As we have reached the anniversary date of the addition of our new significant customers, which we added primarily in March and April of 2009, we expect revenue growth will be lower in the second half of fiscal 2010 than it was in the first half. Our expected growth 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 also may be impacted, among other things, 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 grow between 3% and 5% in calendar 2010. IMS expects that certain sectors of the market, such as biotechnology and other specialty and generic pharmaceuticals, will grow faster than the overall market. Additionally, IMS expects the U.S. pharmaceutical industry to grow annually in the low to mid-single digit percentages through 2013. 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 reimbursement rates, and changes in Federal government rules and regulations.
Gross profit of $612.1 million in the quarter ended March 31, 2010 increased by $59.6 million or 11% from the prior year quarter. Gross profit of $1.2 billion in the six months ended March 31, 2010 increased by $133.1 million or 13% from the prior year period. Slightly more than one-half and approximately two-thirds, respectively, of the gross profit increases for the quarter and six months ended March 31, 2010 were derived from new generic product introductions (generic launches). The remaining increases were attributable to the continued strong growth and profitability of our generic programs (with generic revenue increasing by more than 20% in comparison to the prior year periods) and increased contributions from our branded fee-for-service agreements. The amount of gross profit attributable to generic launches can vary significantly depending on the individual characteristics of each new product and, as a result, generic launches can cause significant variability in our quarterly results of operations. In August 2009, a generic oncology drug was launched and ABSG’s gross profit significantly benefited from this generic launch in the six months ended March 31, 2010. The gross profit benefit received from this and other generic launches in the six months ended March 31, 2010 significantly exceeded the typical benefit we have experienced in the past from these product introductions. We expect the gross profit contribution from generic launches in the second half of fiscal 2010 will be significantly less than the benefit received in the first half of fiscal 2010. There can be no assurance that future generic launches will contribute significantly to our gross profit as they did in the six months ended March 31, 2010. Additionally, in the quarter ended March 31, 2010, we completed a reconciliation with one of our generic suppliers relating to rebate incentives owed to us. Our gross profit benefited by approximately $12 million in the current quarter as a result of having completed this reconciliation. Gross profit in the prior year quarter benefited from a settlement of $1.8 million with a former customer.
As a percentage of revenue, our gross profit margin of 3.17% in the quarter ended March 31, 2010 declined by 2 basis points from the prior year quarter as the contributions from the generic launches, the strong growth and profitability of our generic programs, and branded fee-for-service agreements largely offset the above market growth of some of our largest customers, who benefit from our best pricing, and normal competitive pressures on customer margins. As a percentage of revenue, our gross profit margin of 3.04% in the six months ended March 31, 2010 improved by 3 basis points from the prior year period due to generic launches, the strong growth and profitability of our generic programs, and increased contributions from our branded fee-for-service agreements. All of these factors more than offset the above market growth of some of our largest customers and normal competitive pressures on customer margins.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In the current year six-month period, we recognized a gain of $1.5 million from antitrust litigation settlements with pharmaceutical manufacturers. This gain was recorded as a reduction to cost of goods sold. We are unable to estimate future gains, if any, we will recognize as a result of antitrust settlements (see Note 9 of the Notes to Consolidated Financial Statements).
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 $10.7 million and $11.6 million in the quarters ended March 31, 2010 and 2009, respectively. Our LIFO charge was $18.5 million and $16.6 million in the six months ended March 31, 2010 and 2009, 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 $300.8 million in the quarter ended March 31, 2010 decreased by 1% from the prior year quarter. Operating expenses in the prior year quarter included costs related to facility consolidations and employee severance totaling $4.3 million. Operating expenses in the quarters ended March 31, 2010 and 2009 included certain intangible and other asset impairment charges totaling $0.7 million and $4.1 million, respectively. Operating expenses of $601.8 million in the six months ended March 31, 2010 increased by 1% from the prior year period due to an increase in incentive compensation and health benefit costs, both of which were largely offset by a $5.4 million reduction in facility consolidations and employee severance costs and a $3.4 million reduction in asset impairment charges. We expect that our operating expenses will increase in the second half of fiscal 2010 when compared to the first half of the fiscal year primarily due to anticipated increases in employee compensation arising from our annual merit review cycle and expenses related to our Business Transformation project, which includes a new enterprise resource planning (“ERP”) platform. As a percentage of revenue, operating expenses were 1.56% in the quarter and six months ended March 31, 2010 and represented a significant 20 basis point and 16 basis point decline in our operating expense ratios from the prior year periods, reflecting our strong operating leverage particularly within ABDC as revenue increased by 11.5% from the prior year periods. Our operating leverage has benefited from significant productivity increases achieved from our highly automated distribution facilities and our cE2 initiative, as described below.
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 reduced various operating costs and terminated certain positions. During the six months ended March 31, 2009, we terminated 183 employees and incurred $2.9 million of employee severance costs relating to our cE2 initiative. Additionally, during the quarter 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.
We paid a total of $2.4 million and $12.3 million for employee severance, lease cancellation and other costs during the six months ended March 31, 2010 and 2009, respectively. Remaining unpaid amounts of $9.0 million for employee severance, lease cancellation and other costs are included in accrued expenses and other in the accompanying balance sheet at March 31, 2010. 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 $311.2 million and $573.6 million in the quarter and six months ended March 31, 2010 increased 25% and 29%, respectively, from the prior year periods primarily due to the increases in our gross profit. As a percentage of revenue, operating income increased 18 basis points to 1.61% and 19 basis points to 1.48% in the quarter and six months ended March 31, 2010, respectively, from the prior year periods primarily due to the decrease in our operating expense ratios.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest expense, interest income, and the respective weighted-average interest rates in the quarters ended March 31, 2010 and 2009 were as follows (in thousands):
                                 
    2010     2009  
            Weighted-Average             Weighted-Average  
    Amount     Interest Rate     Amount     Interest Rate  
Interest expense
  $ 19,598       5.31 %   $ 15,900       4.83 %
Interest income
    (319 )     0.16 %     (1,379 )     1.03 %
 
                           
Interest expense, net
  $ 19,279             $ 14,521          
 
                           
Interest expense increased from the prior year quarter primarily due to an increase of $181.4 million in average borrowings. 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 $543.6 million.
Interest expense, interest income, and the respective weighted-average interest rates in the six months ended March 31, 2010 and 2009 were as follows (in thousands):
                                 
    2010     2009  
            Weighted-Average             Weighted-Average  
    Amount     Interest Rate     Amount     Interest Rate  
Interest expense
  $ 37,240       5.04 %   $ 32,262       5.06 %
Interest income
    (694 )     0.17 %     (3,558 )     1.76 %
 
                           
Interest expense, net
  $ 36,546             $ 28,704          
 
                           
Interest expense increased from the prior year six-month period due to an increase of $186.6 million in average borrowings, offset in part, by a decrease in the weighted-average variable interest rate on borrowings under our revolving credit facilities to 1.46% from 2.82% in the prior year period. Interest income decreased from the prior year six-month period primarily due to a decrease in the weighted-average interest rate, offset in part, by an increase in average invested cash of $504.7 million.
Average borrowings increased in the current year quarter and six months ended March 31, 2010 resulting from the issuance of our new 10-year, $400 million senior notes, offset, in part, by the repayment of substantially all amounts then outstanding under our multi-currency revolving credit facility (both described in Liquidity and Capital Resources on the following page). Our interest expense in fiscal 2010 will exceed our interest expense in the prior fiscal year due to the issuance of our new 10-year senior notes. However, our financial position has been improved by extending our debt maturities, increasing our liquidity, and securing attractive long-term debt rates.
Income taxes in the quarter ended March 31, 2010 reflect an effective income tax rate of 37.9%, compared to 38.2% in the prior year quarter. Income taxes in the six months ended March 31, 2010 and 2009 reflect an effective income tax rate of 38.1% and 38.4%, respectively.
Income from continuing operations of $181.0 million in the quarter ended March 31, 2010 increased 26% from the prior year quarter primarily due to the increase in operating income. Diluted earnings per share from continuing operations of $0.63 in the quarter ended March 31, 2010 increased 34% from $0.47 per share in the prior year quarter. Income from continuing operations of $332.3 million in the six months ended March 31, 2010 increased 30% from the prior year period due to the increase in operating income. Diluted earnings per share from continuing operations of $1.15 in the six months ended March 31, 2010 increased 39% from $0.83 per share in the prior year period. The differences between diluted earnings per share growth and the increase in income from continuing operations for the quarter and six months ended March 31, 2010 was primarily due to the 6% reduction in weighted average common shares outstanding in both periods, primarily from purchases of our common stock, net of the impact of stock option exercises.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Loss from discontinued operations, net of income taxes, for the six months ended March 31, 2009 primarily related to the PMSI business, which was sold in October 2008. Loss from discontinued operations, net of income taxes, in the quarter and six months ended March 31, 2009 also included a charge of $0.7 million related to a prior period business disposition.
Liquidity and Capital Resources
The following table illustrates our debt structure at March 31, 2010, including availability under revolving credit facilities and the receivables securitization facility (in thousands):
                 
    Outstanding     Additional  
    Balance     Availability  
 
               
Fixed-Rate Debt:
               
$400,000, 5 5/8% senior notes due 2012
  $ 399,206     $  
$500,000, 5 7/8% senior notes due 2015
    498,457        
$400,000, 4 7/8% senior notes due 2019
    396,804        
Other
    751        
 
           
 
               
Total fixed-rate debt
    1,295,218        
 
           
 
               
Variable-Rate Debt:
               
Blanco revolving credit facility due 2011
    55,000        
Multi-currency revolving credit facility due 2011
    8,790       672,706  
Receivables securitization facility due 2011
          700,000  
Other
          1,518  
 
           
Total variable-rate debt
    63,790       1,374,224  
 
           
 
               
Total debt, including current portion
  $ 1,359,008     $ 1,374,224  
 
           
Along with our cash balances, our aggregate availability under our revolving credit facilities and our receivables securitization facility provides us sufficient sources of capital to fund our working capital requirements.
We have a $695 million multi-currency senior unsecured revolving credit facility, which expires in November 2011, (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 19 basis points to 60 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee, as applicable (40 basis points over LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at March 31, 2010). Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate. We pay quarterly facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on our debt rating, ranging from 6 basis points to 15 basis points of the total commitment (10 basis points at March 31, 2010). 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.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We have a $700 million receivables securitization facility (“Receivables Securitization Facility”). In April 2010, we amended this facility, which now expires in April 2011. We continue to 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 based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee. We pay a commitment fee to maintain the availability under the Receivables Securitization Facility. In connection with the April 2010 amendment, the program fee and commitment fee were reduced to 125 basis points and 60 basis points, respectively. At March 31, 2010, there were no borrowings outstanding under the Receivables Securitization Facility. The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility.
In April 2010, we amended the $55 million Blanco revolving credit facility (the “Blanco Credit Facility”) to, among other things, extend the maturity date of the Blanco Credit Facility to April 2011. Borrowings under the Blanco Credit Facility are guaranteed by us. In connection with the April 2010 amendment, interest on borrowings under this facility continues to be 200 basis points over LIBOR.
In November 2009, we issued $400 million of 4 7/8% senior notes due November 15, 2019 (the “2019 Notes”). The 2019 Notes were sold at 99.174% of the principal amount and have an effective yield of 4.98%. The interest on the 2019 Notes is payable semiannually, in arrears, commencing May 15, 2010. The 2019 Notes rank pari passu to the Multi-Currency Revolving Credit Facility, the 5 5/8% senior notes due 2012, and the 5 7/8% senior notes due 2015. We used the net proceeds of the 2019 Notes to repay substantially all amounts then outstanding under our Multi-Currency Revolving Credit Facility, and the remaining net proceeds were used for general corporate purposes. Costs incurred in connection with the issuance of the 2019 Notes were deferred and are being amortized over the 10-year term of the notes.
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.
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, reduces 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 monitor the creditworthiness of our lenders and while we do not currently anticipate the failure of any lenders under our revolving credit facilities and/or our receivables securitization facility, the failure of any lender could have an adverse effect on our ability to finance our business operations.
Our primary ongoing cash requirements will be to finance working capital, fund the payment of interest on debt, fund repurchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures (including our Business Transformation project, which involves the implementation of our new enterprise resource planning platform) and routine growth and expansion through new business opportunities. In November 2009, our board of directors approved a new program allowing us to purchase up to $500 million of our outstanding shares of common stock, subject to market conditions. We expect to purchase approximately $350 million of our common stock in fiscal 2010. During the six months ended March 31, 2010, we purchased $255.0 million of our common stock, of which $68.1 million was purchased to close out our prior November 2008 share repurchase program and $186.9 million was purchased under the current $500 million share repurchase program. As of March 31, 2010, we had $313.1 million of availability remaining on our current $500 million share repurchase program. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our most significant market risk historically has been the effect of fluctuations in interest rates related to our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt. At March 31, 2010, we had $63.8 million of 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 March 31, 2010.
We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $1.2 billion in cash and cash equivalents at March 31, 2010. 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. 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 March 31, 2010. 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 March 31, 2010 (in thousands):
                                         
    Payments Due by Period  
            Within 1                     After 5  
    Total     Year     1-3 Years     4-5 Years     Years  
Debt, including interest payments
  $ 1,777,784     $ 127,171     $ 540,675     $ 97,750     $ 1,012,188  
Operating leases
    242,982       52,071       73,490       37,482       79,939  
Other commitments
    518,319       222,635       240,851       46,912       7,921  
 
                             
Total
  $ 2,539,085     $ 401,877     $ 855,016     $ 182,144     $ 1,100,048  
 
                             
We have commitments to purchase product from influenza vaccine manufacturers for the 2010/2011 flu season. In our current fiscal year, we reduced our purchase commitment to only the 2010/2011 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, as amended, will be approximately $70.0 million as of March 31, 2010. These influenza vaccine commitments are included in “Other commitments” in the above table.
We have commitments to purchase blood products from suppliers through December 31, 2012. 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 $273.6 million as of March 31, 2010. 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 the implementation of our new enterprise resource planning (“ERP”) platform. The remaining commitment under our 10-year arrangement, as amended, which expires in June 2015, is approximately $154.8 million as of March 31, 2010 and is included in “Other commitments” in the above table.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our liability for uncertain tax positions was $55.1 million as of March 31, 2010. This liability represents an estimate of tax positions that we have taken in our tax returns, which may ultimately not be sustained upon examination by taxing authorities. Since the amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated liability has been excluded from the above contractual obligations table.
During the six months ended March 31, 2010, our operating activities provided $346.4 million of cash in comparison to cash provided of $32.4 million in the prior year period. Cash provided by operations during the six months ended March 31, 2010 was principally the result of income from continuing operations of $332.3 million and non-cash items of $128.8 million, offset, in part, by a decrease in accounts payable, accrued expenses and income taxes of $94.6 million, an increase in merchandise inventories of $22.9 million, and an increase in accounts receivable of $21.0 million. Despite the significant increase in revenue in the six months ended March 31, 2010, accounts receivable increased by less than 1% from September 30, 2009 as the average number of days sales outstanding during the current year six-month period decreased by one day to 17.2 days from the prior year period, reflecting improved cash collection efforts and timing of customer receipts. Our accounts payable and inventory balances at September 30, 2009 were higher than normal as we made inventory purchases of approximately $400 million in the month of September 2009, primarily relating to the purchase of generic products due to a recent product launch and purchases made in advance of a manufacturer’s temporary plant shutdown in connection with its facility consolidation efforts. Despite our higher than normal accounts payable balance at September 30, 2009, accounts payable, accrued expenses and income taxes decreased only by 1% from September 30, 2009 to March 31, 2010 due to the growth in our business. Our merchandise inventories at March 31, 2010 remained relatively flat when compared to September 30, 2009 as our strong revenue growth was offset by the reduction in the higher than normal September 30, 2009 inventory balance. The average number of inventory days on hand in the six months ended March 31, 2010 was slightly lower when compared to the prior year period. Operating cash uses during the six months ended March 31, 2010 included $27.4 million in interest payments and $126.4 million of income tax payments, net of refunds.
During the six months ended March 31, 2009, our operating activities provided $32.4 million of cash in comparison to cash provided of $92.3 million in the prior year period. Cash provided by operations during the six months ended March 31, 2009 was principally the result of income from continuing operations of $256.6 million, an increase in accounts payable, accrued expense and income taxes of $322.3 million, and non-cash items of $102.0 million, primarily offset by an increase in merchandise inventories of $385.2 million and an increase in accounts receivable of $290.2 million. Although accounts receivable increased by 7% during the six month period due to a 9% increase in sales in the month of March 2009 compared to sales in the month of September 2008, the average number of days sales outstanding during the six months ended March 31, 2009 decreased by one-half day from the prior year six month period. The decline in average days sales outstanding was primarily due to favorable customer mix within ABDC. Merchandise inventories increased by 9% during the six month period due to timing and normal seasonal increases as the average number of days on hand in the six months ended March 31, 2009 was essentially the same as the prior year period. The increase in accounts payable, accrued expenses and income taxes was primarily driven by the increase in merchandise inventories. Operating cash uses during the six months ended March 31, 2009 included $28.9 million in interest payments and $114.3 million of income tax payments, net of refunds.
Capital expenditures for the six months ended March 31, 2010 and 2009 were $88.0 million and $68.6 million, respectively, and related principally to our Business Transformation project, which includes a new ERP platform that will be implemented in ABDC and our corporate office. Capital expenditures in the six months ended March 31, 2010 also included improvements made to our operating facilities and other information technology initiatives. We continue to expect that we will spend approximately $140 million for capital expenditures during fiscal 2010; however, we may spend more than the expected amount depending on the timing of certain expenditures related to our Business Transformation project.
In October 2008, we sold PMSI for approximately $31 million, net of a final working capital adjustment, including a $19 million subordinated note due from PMSI on the fifth anniversary of the closing date.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In November 2009, we issued our 2019 Notes for net proceeds of $396.7 million. We used the net proceeds of the 2019 Notes to repay substantially all amounts then outstanding under our Multi-Currency Revolving Credit Facility and the remaining net proceeds were used for general corporate purposes.
During the six months ended March 31, 2010, we purchased 10.0 million shares of our common stock for a total of $255.2 million. During the six months ended March 31, 2009, we purchased 11.0 million shares of our common stock for a total of $179.9 million.
In November 2008, our board of directors increased the quarterly dividend by 33% to $0.05 per share and in May 2009, our board of directors increased the quarterly cash dividend by 20% to $0.06 per share. On November 12, 2009, our board of directors increased the quarterly cash dividend again by 33% to $0.08 per share. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remains within the discretion of our board of directors and will depend upon our future earnings, financial condition, capital requirements, and other factors.
Recent Accounting Pronouncements
Effective October 1, 2009, we adopted the applicable sections of Accounting Standards Codification (“ASC”) 805, “Business Combinations,” which provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. Additionally, this ASC provides disclosure requirements to enable users of financial statements to evaluate the nature and financial effects of a business combination. We also adopted certain other applicable sections that address application issues raised on the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities from contingencies from a business combination. The application of ASC 805 relating to an acquisition or divestiture subsequent to September 30, 2009 may have an impact to our financial position and/or results of operations.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (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 following factors, among others, could cause actual results to differ materially from those described in any forward-looking statements: changes in pharmaceutical market growth rates; the loss of one or more key customer or supplier relationships; changes in customer mix; customer delinquencies, defaults or insolvencies; supplier defaults or insolvencies; changes in pharmaceutical manufacturers’ pricing and distribution policies or practices; adverse resolution of any contract or other dispute with customers or suppliers; federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances; qui tam litigation for alleged violations of laws and regulations governing the marketing, sale and purchase of pharmaceutical products or any related litigation, including shareholder derivative lawsuits; changes in U.S. legislation or regulatory action affecting pharmaceutical product pricing or reimbursement policies, including under Medicaid and Medicare; changes in regulatory or clinical medical guidelines and/or labeling for the pharmaceuticals we distribute, including certain anemia products; price inflation in branded pharmaceuticals and price deflation in generics; greater or less than anticipated benefit from launches of the generic versions of previously patented pharmaceutical products; significant breakdown or interruption of our information technology systems; our inability to implement an enterprise resource planning (ERP) system to handle business and financial processes within AmerisourceBergen Drug Corporation’s operations and our corporate functions without operating problems and/or cost overruns; success of integration, restructuring or systems initiatives; interest rate and foreign currency exchange rate fluctuations; economic, business, competitive and/or regulatory developments in Canada, the United Kingdom and elsewhere outside of the United States, including potential changes in Canadian provincial legislation affecting pharmaceutical product pricing or service fees or regulatory action by provincial authorities in Canada to lower pharmaceutical product pricing and service fees; the impact of divestitures or the acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control; our inability to successfully complete any other transaction that we may wish to pursue from time to time; changes in tax legislation or adverse resolution of challenges to our tax positions; increased costs of maintaining, or reductions in our ability to maintain, adequate liquidity and financing sources; volatility and deterioration of the capital and credit markets; and other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting our business generally. 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 (i) elsewhere in this report, (ii) in Item 1A (Risk Factors) in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009 and elsewhere in that report and (iii) in other reports filed by the Company pursuant to the Exchange Act.

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s most significant market risks are the effects of changing interest rates and foreign currency risk. See the discussion under “Liquidity and Capital Resources” in Item 2 on page 30.
ITEM 4. Controls and Procedures
Evaluation of Disclosure 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 Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. 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.
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 — 15(e) and 15d — 15(e) under the Exchange Act) and have concluded that the Company’s disclosure controls and procedures were effective for their intended purposes as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes during the fiscal quarter ended March 31, 2010 in the Company’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, those controls.

 

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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See Note 8 (Legal Matters and Contingencies) of the Notes to the Consolidated Financial Statements set forth under Item 1 of Part I of this report for the Company’s current description of legal proceedings.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
The following table sets forth the number of shares purchased, the average price paid per share, the total number of shares purchased as part of publicly announced programs, and the approximate dollar value of shares that may yet be purchased under the programs during each month in the quarter ended March 31, 2010.
                                 
                    Total Number of     Approximate Dollar  
    Total             Shares Purchased     Value of  
    Number of     Average Price     as Part of Publicly     Shares that May Yet Be  
    Shares     Paid per     Announced     Purchased  
Period   Purchased     Share     Programs     Under the Programs  
January 1 to January 31
    1,654,827     $ 25.93       1,654,827     $ 380,658,677  
February 1 to February 28
    2,326,638     $ 27.00       2,213,035     $ 320,950,633  
March 1 to March 31
    282,000     $ 27.92       282,000     $ 313,078,127  
 
                           
Total
    4,263,465               4,149,862          
 
                           
     
a)  
In November 2008, the Company announced a program to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions. During the six months ended March 31, 2010, the Company purchased 2.8 million shares for $68.1 million to complete its authorization under this program.
 
b)  
In November 2009, the Company announced a new program to purchase up to $500 million of its outstanding shares of common stock, subject to market conditions. During the six months ended March 31, 2010, the Company purchased 7.2 million shares under this program for $186.9 million. There is no expiration date related to this new program.
 
c)  
Employees surrendered 113,603 shares in February 2010 to meet tax-withholding obligations upon vesting of restricted stock.

 

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ITEM 6. Exhibits
(a) Exhibits:
The Registrant is filing Exhibits 10.2, 10.3 and 10.4 to this Report in order to include certain schedules and exhibits to those Exhibits that were not previously filed with the Exhibits.
         
  3.1    
Amended and Restated Certificate of Incorporation of the Registrant.
       
 
  3.2    
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on March 9, 2010).
       
 
  ‡10.1    
Registrant’s 2002 Employee Stock Purchase Plan, as amended, dated as of January 1, 2010.
       
 
  10.2    
Receivables Sale Agreement, dated as of July 10, 2003, between AmerisourceBergen Drug Corporation, as Originator, and Amerisource Receivables Financial Corporation, as Buyer.*
       
 
  10.3    
Receivables Purchase Agreement, dated as of July 10, 2003, among Amerisource Receivables Financial Corporation, as Seller, AmerisourceBergen Drug Corporation, as Initial Servicer, Wachovia Bank, National Association, as Administrator and various purchaser groups.*
       
 
  10.4    
Credit Agreement, dated as of November 14, 2006, among Registrant, JP Morgan Chase Bank, N.A., J.P. Morgan Europe Limited, The Bank of Nova Scotia and the other financial institutions party thereto.
       
 
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
       
 
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
       
 
  32.1    
Section 1350 Certification of Chief Executive Officer
       
 
  32.2    
Section 1350 Certification of Chief Financial Officer
       
 
  101    
Financial statements from the Quarterly Report on Form 10-Q of AmerisourceBergen Corporation for the quarter ended March 31, 2010, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Statements tagged as blocks of text.
 
     
 
Each marked exhibit is a management contract or a compensatory plan, contract or arrangement in which a director or executive officer of the Registrant participates or has participated.
 
*  
Portions of certain exhibits to this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Such information has been filed separately with the Securities and Exchange Commission.

 

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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
 
 
May 7, 2010  /s/ R. David Yost    
  R. David Yost   
  President and Chief Executive Officer   
     
May 7, 2010  /s/ Michael D. DiCandilo    
  Michael D. DiCandilo   
  Executive Vice President and Chief Financial Officer   

 

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EXHIBIT INDEX
         
Exhibit    
Number   Description
       
 
The Registrant is filing Exhibits 10.2, 10.3 and 10.4 to this Report in order to include certain schedules and exhibits to those Exhibits that were not previously filed with the Exhibits.
       
 
  3.1    
Amended and Restated Certificate of Incorporation of the Registrant.
       
 
  3.2    
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on March 9, 2010).
       
 
  ‡10.1    
Registrant’s 2002 Employee Stock Purchase Plan, as amended, dated as of January 1, 2010.
       
 
  10.2    
Receivables Sale Agreement, dated as of July 10, 2003, between AmerisourceBergen Drug Corporation, as Originator, and Amerisource Receivables Financial Corporation, as Buyer.*
       
 
  10.3    
Receivables Purchase Agreement, dated as of July 10, 2003, among AmeriSource Receivables Financial Corporation, as Seller, AmerisourceBergen Drug Corporation, as Initial Servicer, Wachovia Bank, National Association, as Administrator and various purchaser groups.*
       
 
  10.4    
Credit Agreement, dated as of November 14, 2006, among Registrant, JP Morgan Chase Bank, N.A., J.P. Morgan Europe Limited, The Bank of Nova Scotia and the other financial institutions party thereto.
       
 
  31.1    
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
       
 
  31.2    
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
       
 
  32.1    
Section 1350 Certification of Chief Executive Officer
       
 
  32.2    
Section 1350 Certification of Chief Financial Officer
       
 
  101    
Financial statements from the Quarterly Report on Form 10-Q of AmerisourceBergen Corporation for the quarter ended March 31, 2010, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) the Notes to Consolidated Statements tagged as blocks of text.
 
     
 
Each marked exhibit is a management contract or a compensatory plan, contract or arrangement in which a director or executive officer of the Registrant participates or has participated.
 
*  
Portions of certain exhibits to this agreement have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Such information has been filed separately with the Securities and Exchange Commission.

 

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