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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended September 30, 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
AMERISOURCEBERGEN CORPORATION
(Exact name of registrant as specified in its charter)
| Commission File Number |
Registrant, State of Incorporation Address and Telephone Number |
I.R.S. Employer Identification Number |
||
| 1-16671 | AmerisourceBergen Corporation | 23-3079390 |
(a Delaware Corporation)
1300 Morris Drive
Chesterbrook, PA 19087-5594
610-727-7000
1300 Morris Drive
Chesterbrook, PA 19087-5594
610-727-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
Common Stock, $0.01 par value per share
Securities Registered Pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act). Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
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 website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (Section 232.405 of this chapter) 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes o No þ
The aggregate market value of voting stock held by non-affiliates of the registrant on
March 31, 2010 based upon the closing price of such stock on the New York Stock Exchange on
March 31, 2010 was $6,885,364,872.
The number of shares of common stock of AmerisourceBergen Corporation outstanding as of
October 31, 2010 was 276,347,761.
Documents Incorporated by Reference
Portions of the following document are incorporated by reference in the Part of this report
indicated below:
Part III — Registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Table of Contents
PART I
ITEM 1. BUSINESS
As used herein, the terms “Company,” “AmerisourceBergen,” “we,” “us,” or “our” refer to
AmerisourceBergen Corporation, a Delaware corporation.
AmerisourceBergen Corporation is one of the world’s largest pharmaceutical services companies,
with operations primarily in the United States and Canada. Servicing both healthcare providers and
pharmaceutical manufacturers in the pharmaceutical supply channel, we provide drug distribution and
related services designed to reduce costs and improve patient outcomes. More specifically, we
distribute 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 primarily located in the United States and Canada, including acute care
hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies,
medical and dialysis clinics, physicians and physician group practices, long-term care and other
alternate site pharmacies, and other customers. We also provide pharmacy services to certain
specialty drug patients. Additionally, we furnish healthcare providers and pharmaceutical
manufacturers with an assortment of related services, including pharmaceutical packaging, pharmacy
automation, inventory management, reimbursement and pharmaceutical consulting services, logistics
services, and pharmacy management.
Industry Overview
Pharmaceutical sales in the United States, as recently estimated by IMS Healthcare, Inc.
(“IMS”), an independent third party provider of information to the pharmaceutical and healthcare
industry, are expected to grow between 3% and 5% in calendar 2011. 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 between 2% and 5% through 2014.
In addition to general economic conditions, factors that impact the growth of the
pharmaceutical industry in the United States, and other industry trends, include:
Aging Population. The number of individuals age 55 and over in the United States currently
exceeds 70 million and is one of the most rapidly growing segments of the population. This age
group suffers from more chronic illnesses and disabilities than the rest of the population and is
estimated to account for approximately 75% of total healthcare expenditures in the United States.
Introduction of New Pharmaceuticals. Traditional research and development, as well as the
advent of new research, production and delivery methods such as biotechnology and gene therapy,
continue to generate new pharmaceuticals and delivery methods that are more effective in treating
diseases. We believe ongoing research and development expenditures by the leading pharmaceutical
manufacturers will contribute to continued growth of the industry. In particular, we believe
ongoing research and development of biotechnology and other specialty pharmaceutical drugs will
provide opportunities for the continued growth of our specialty pharmaceuticals business.
Increased Use of Generic Pharmaceuticals. A significant number of patents for widely used
brand-name pharmaceutical products will expire during the next several years. In addition,
increased emphasis by managed care and other third-party payors on utilization of generics has
accelerated their growth. We consider the increase in generic usage a favorable trend because
generic pharmaceuticals have historically provided us with a greater gross profit margin
opportunity than brand-name products, although their lower prices reduce revenue growth.
Increased Use of Drug Therapies. In response to rising healthcare costs, governmental and
private payors have adopted cost containment measures that encourage the use of efficient drug
therapies to prevent or treat diseases. While national attention has been focused on the overall
increase in aggregate healthcare costs, we believe drug therapy has had a beneficial impact on
overall healthcare costs by reducing expensive surgeries and prolonged hospital stays.
Pharmaceuticals currently account for approximately 10% of overall healthcare costs.
Pharmaceutical manufacturers’ continued emphasis on research and development is expected to
result in the continuing introduction of cost-effective drug therapies and new uses for existing
drug therapies.
Legislative Developments. In recent years, regulation of the healthcare industry has
changed significantly in an effort to increase drug utilization and reduce costs. These changes
included expansion of Medicare coverage for outpatient prescription drugs, the enrollment
(beginning in 2006) of Medicare beneficiaries in prescription drug plans offered by private
entities, and cuts in Medicare and Medicaid reimbursement rates. More recently, in March 2010,
the United States Congress enacted major health reform legislation designed to expand access to
health insurance, which would increase the number of people in the United States who are eligible
to be reimbursed for all or a portion of prescription drug costs. The health reform law provides
for sweeping changes to
Medicare and Medicaid policies (including drug reimbursement policies), expanded disclosure
requirements regarding financial arrangements within the healthcare industry, enhanced
enforcement authority to prevent fraud and abuse, and new taxes and fees on pharmaceutical and
medical device manufacturers. These policies and other legislative developments may affect our
businesses directly and/or indirectly (see Government Regulation on
page 6 for further details).
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The Company
We currently serve our customers (healthcare providers, pharmaceutical manufacturers, and
certain specialty drug patients) through a geographically diverse network of distribution service
centers and other operations in the United States and Canada, and through packaging facilities in
the United States and the United Kingdom. In our pharmaceutical distribution business, we are
typically the primary source of supply of pharmaceutical and related products to our healthcare
provider customers. We offer a broad range of services to our customers designed to enhance the
efficiency and effectiveness of their operations, which allows them to improve the delivery of
healthcare to patients and to lower overall costs in the pharmaceutical supply channel.
Strategy
Our business strategy is focused solely on the pharmaceutical supply channel where we provide
value-added distribution and service solutions to healthcare providers (primarily pharmacies,
health systems, medical and dialysis clinics, and physicians) and pharmaceutical manufacturers that
increase channel efficiencies and improve patient outcomes. Implementing this disciplined, focused
strategy has allowed us to significantly expand our business, and we believe we are well-positioned
to continue to grow revenue and increase operating income through the execution of the following
key elements of our business strategy:
| • | Optimize and Grow Our Pharmaceutical Distribution and Service Businesses. We believe we
are well-positioned in size and market breadth to continue to grow our distribution business
as we invest to improve our operating and capital efficiencies. Distribution anchors our
growth and position in the pharmaceutical supply channel, as we provide superior
distribution services and deliver value-added solutions, which improve the efficiency and
competitiveness of both healthcare providers and pharmaceutical manufacturers, thus allowing
the pharmaceutical supply channel to better deliver healthcare to patients. |
With the rapid growth of generic pharmaceuticals in the U.S. market, we have introduced
strategies to enhance our position in the generic marketplace. We source generics globally,
offer a value-added generic formulary program to our healthcare provider customers, and monitor
our customers’ compliance with our generics program. We also provide data and other valuable
services to our generic manufacturing customers.
We believe we have one of the lowest cost operating structures among all pharmaceutical
distributors. AmerisourceBergen Drug Corporation has a distribution facility network totaling
26 distribution facilities in the U.S. We continue to seek opportunities to achieve
productivity and operating income gains as we invest in and continue to implement warehouse
automation technology, adopt “best practices” in warehousing activities, and increase operating
leverage by increasing volume per full-service distribution facility. Furthermore, we believe
that the investments we continue to make related to our Business Transformation project
through 2012 will reduce our operating expenses in the future (see Information Systems on
page 4 for further details).
We offer value-added services and solutions to assist healthcare providers and pharmaceutical
manufacturers to improve their efficiency and their patient outcomes. Services for
manufacturers include: assistance with rapid new product launches, promotional and marketing
services to accelerate product sales, product data reporting and logistical support. In
addition, we provide packaging services to manufacturers, including contract packaging.
Our provider solutions include: our Good Neighbor Pharmacy® program, which enables
independent community pharmacies to compete more effectively through pharmaceutical benefit and
merchandising programs; Good Neighbor Pharmacy Provider Network®, our managed care
network, which connects our retail pharmacy customers to payor plans throughout the country and
is the fourth-largest in the U.S.; generic product purchasing services; hospital pharmacy
consulting designed to improve operational efficiencies; scalable automated pharmacy dispensing
equipment; and packaging services that deliver unit dose, punch card and other compliance
packaging for institutional and retail pharmacy customers.
In an effort to supplement our organic growth, we continue to utilize a disciplined approach to
seek acquisitions that will assist us with our strategic growth plans.
In October 2007, we acquired Bellco Health (“Bellco”), a privately held New York distributor of
branded and generic pharmaceuticals. Bellco primarily services independent retail community
pharmacies in the metropolitan New York City area. The acquisition of Bellco expanded the
Company’s presence in this large community pharmacy market. Nationally, Bellco markets and
sells generic pharmaceuticals to individual retail pharmacies, and, through business operations
that are now part of
AmerisourceBergen Specialty Group, provides pharmaceutical products and services to dialysis
clinics. Bellco business operations have been integrated into the operations of
AmerisourceBergen Drug Corporation as well as AmerisourceBergen Specialty Group.
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In fiscal 2009, we acquired Innomar Strategies Inc. (“Innomar”), a Canadian pharmaceutical
services company, for a purchase price of $13.4 million. Innomar provides services within
Canada to pharmaceutical and biotechnology companies, including strategic consulting and access
solutions, specialty logistics management, patient assistance and nursing services, and
clinical research services. Innomar has increased our distribution and services presence in
Canada.
| • | Optimize and Grow Our Specialty Distribution and Service Businesses. Representing
$16.3 billion in total revenue in fiscal 2010, our specialty pharmaceuticals business has a
significant presence in this rapidly growing part of the pharmaceutical supply channel.
With distribution and value-added services to physicians and a broad array of pharmaceutical
and specialty services for manufacturers, our specialty pharmaceuticals business is a
well-developed platform for growth. We are the leader in distribution and services to
community oncologists and have leading positions in other physician-administered products.
We also distribute plasma and other blood products, injectible pharmaceuticals and vaccines.
Additionally, we are well-positioned to service and support many of the new biotech
therapies that will be coming to market in the near future. |
Our specialty service businesses help pharmaceutical manufacturers, especially in the
biotechnology sector, commercialize their products in the channel. We believe we are the
largest provider of reimbursement services that assist pharmaceutical companies to launch drugs
with targeted populations and support the products in the supply channel. We also provide
third party logistics, nursing services, and specialty pharmacy services to help speed products
to market.
Our acquisition of Bellco in fiscal 2008 allowed us to significantly increase our sales of
pharmaceutical products and services to dialysis clinics. We continue to seek opportunities to
expand our offerings in specialty distribution and services.
| • | Divestitures. In order to allow us to concentrate on our strategic focus areas of
pharmaceutical distribution and related services and specialty pharmaceutical distribution
and related services, we have divested certain non-core businesses and may, from time to
time, consider additional divestitures. |
In October 2008, we sold PMSI, our workers’ compensation business.
In 2007, the Company and Kindred Healthcare, Inc. (“Kindred”) completed the spin-offs and
subsequent combination of their institutional pharmacy businesses, PharMerica Long-Term Care
(“Long-Term Care”) and Kindred Pharmacy Services (“KPS”), to form a new, independent, publicly
traded company named PharMerica Corporation (“PMC”).
Operations
Operating Structure. We are organized based upon the products and services we provide to our
customers. Our operations as of September 30, 2010 are comprised of one reportable segment,
Pharmaceutical Distribution.
The Pharmaceutical Distribution reportable segment is comprised of three operating segments,
which include the operations of AmerisourceBergen Drug Corporation (“ABDC”), AmerisourceBergen
Specialty Group (“ABSG” or “Specialty Group”), and AmerisourceBergen Packaging Group (“ABPG” or
“Packaging Group”). 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.
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 plasma and other blood products, injectible pharmaceuticals and vaccines. In
addition, through its specialty service businesses, ABSG provides drug commercialization services,
third party logistics, reimbursement consulting, data analytics, outcomes research, and other
services for biotech and other pharmaceutical manufacturers, as well as practice management, and
group purchasing services for physician practices. Beginning in fiscal 2011, certain specialty
service businesses within ABSG
will be combined to form the operations of AmerisourceBergen Consulting Services (“ABCS”).
These businesses will principally provide drug commercialization services, reimbursement
consulting, data analytics, and outcomes research. ABCS revenue in
fiscal 2010 was less than 1% of our consolidated revenue.
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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 and has recently entered the clinical trials packaging service
business. Brecon is a United Kingdom-based provider of contract packaging and clinical trials
materials services for pharmaceutical manufacturers.
Sales and Marketing. The majority of ABDC’s sales force is organized regionally and
specialized by healthcare provider type. Customer service representatives are located in
distribution facilities in order to respond to customer needs in a timely and effective manner.
ABDC also has support professionals focused on its various technologies and service offerings.
ABDC’s national marketing organization designs and develops business management solutions for
AmerisourceBergen healthcare provider customers. Tailored to specific groups, these programs can
be further customized at the business unit or distribution facility level to adapt to local market
conditions. ABDC’s sales and marketing organization also serves national account customers through
close coordination with local distribution centers and ensures that our customers are receiving
service offerings that meet their needs. Our Specialty and Packaging groups each have independent
sales forces and marketing organizations that specialize in their respective product and service
offerings.
Customers. We have a diverse customer base that includes institutional and retail healthcare
providers as well as pharmaceutical manufacturers. Institutional healthcare providers include
acute care hospitals, health systems, mail order pharmacies, long-term care and other alternate
care pharmacies and providers of pharmacy services to such facilities, and physicians and physician
group practices. Retail healthcare providers include national and regional retail drugstore
chains, independent community pharmacies and pharmacy departments of supermarkets and mass
merchandisers. We are typically the primary source of supply for our healthcare provider
customers. Our manufacturing customers include branded, generic and biotech manufacturers of
prescription pharmaceuticals, as well as over-the-counter product and health and beauty aid
manufacturers. In addition, we offer a broad range of value-added solutions designed to enhance
the operating efficiencies and competitive positions of our customers, thereby allowing them to
improve the delivery of healthcare to patients and consumers. In fiscal 2010, total revenue was
comprised of 70% institutional customers and 30% retail customers.
In fiscal 2010, Medco Health Solutions, Inc., our largest customer, accounted for 18% of our
revenue. No other individual customer accounted for more than 5% of our fiscal 2010 revenue. Our
top ten customers represented approximately 42% of fiscal 2010 revenue. In addition, we have
contracts with group purchasing organizations (“GPOs”), each of which functions as a purchasing
agent on behalf of its members, who are healthcare providers. Approximately 10% of our revenue in
fiscal 2010 was derived from our three largest GPO relationships. The loss of any major customer or
GPO relationship could adversely affect future revenue and results of operations.
Suppliers. We obtain pharmaceutical and other products from manufacturers, none of which
accounted for 10% or more of our purchases in fiscal 2010. The loss of a supplier could adversely
affect our business if alternate sources of supply are unavailable since we are committed to be the
primary source of pharmaceutical products for a majority of our customers. We believe that our
relationships with our suppliers are good. The ten largest suppliers in fiscal 2010 accounted for
approximately 50% of our purchases.
Information Systems. ABDC operates its full-service wholesale pharmaceutical distribution
facilities in the U.S. on a centralized system. ABDC’s operating system provides for, among other
things, electronic order entry by customers, invoice preparation and purchasing, and inventory
tracking. As a result of electronic order entry, the cost of receiving and processing orders has
not increased as rapidly as sales volume. ABDC’s systems are intended to strengthen customer
relationships by allowing the customer to lower its operating costs and by providing a platform for
a number of the basic and value-added services offered to our customers, including marketing,
product demand data, inventory replenishment, single-source billing, third-party claims processing,
computer price updates and price labels.
ABDC continues to expand its electronic interface with its suppliers and currently processes a
substantial portion of its purchase orders, invoices and payments electronically. ABDC has a new
warehouse operating system, which is used to account for primarily all of ABDC’s transactional
volume. The new warehouse operating system has improved ABDC’s productivity and operating
leverage. ABDC will continue to invest in advanced information systems and automated warehouse
technology.
A significant portion of our information technology activities relating to ABDC and our
corporate functions are outsourced to IBM Global Services.
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In an effort to continue to make system investments to further improve our information
technology capabilities and meet our future customer and operational needs, we began to make significant
investments in fiscal 2008 relating to our Business Transformation project that will include a new
enterprise resource planning (“ERP”) platform. The ERP platform will be implemented throughout
ABDC and our corporate and administrative functions and will include the development and
implementation of integrated processes to enhance our business practices and lower costs.
Effective October 2010, the majority of our corporate and administrative functions began operating
on our new ERP platform. We expect to continue the implementation of the ERP platform and, as a
result, expect to continue to make significant investments in our Business Transformation project
through 2012.
ABSG operates the majority of its business on its own common, centralized platform resulting
in operating efficiencies as well as the ability to rapidly deploy new capabilities. The
convenience of ordering via the Internet is very important to ABSG’s customers. Over the past few
years, ABSG has enhanced its web capabilities such that a significant amount of orders are
initiated via the Internet.
Competition
We face a highly competitive environment in the distribution of pharmaceuticals and related
healthcare services. Our largest national competitors are Cardinal Health, Inc. (“Cardinal”) and
McKesson Corporation (“McKesson”). ABDC competes with both Cardinal and McKesson, as well as
national generic distributors and regional distributors within pharmaceutical distribution. In
addition, we compete with manufacturers who sell directly to customers, chain drugstores who manage
their own warehousing, specialty distributors, and packaging and healthcare technology companies.
The distribution and related service businesses in which ABSG engages are also highly competitive.
ABSG’s operating businesses face competition from a variety of competitors, including McKesson, US
Oncology, Inc. (which has signed an agreement to be acquired by McKesson), Cardinal, FFF
Enterprises, Henry Schein, Inc., Express Scripts, Inc., Covance Inc., and UPS Logistics, among
others. In all areas, competitive factors include price, product offerings, value-added service
programs, service and delivery, credit terms, and customer support.
Intellectual Property
We use a number of trademarks and service marks. All of the principal trademarks and service
marks used in the course of our business have been registered in the United States and, in some
cases, in foreign jurisdictions or are the subject of pending applications for registration.
We have developed or acquired various proprietary products, processes, software and other
intellectual property that are used either to facilitate the conduct of our business or that are
made available as products or services to customers. We generally seek to protect such
intellectual property through a combination of trade secret, patent and copyright laws and through
confidentiality and other contractually imposed protections.
We hold patents and have patent applications pending that relate to certain of our products,
particularly our automated pharmacy dispensing equipment, our medication and supply dispensing
equipment, certain warehousing equipment and some of our proprietary packaging solutions. We seek
patent protection for our proprietary intellectual property from time to time as appropriate.
Although we believe that our patents or other proprietary products and processes do not
infringe upon the intellectual property rights of any third parties, third parties may assert
infringement claims against us from time to time.
Employees
As of September 30, 2010, we had approximately 10,000 employees, of which approximately 9,100
were full-time employees. Approximately 4% of our employees are covered by collective bargaining
agreements. We believe that our relationship with our employees is good. If any of our employees
in locations that are unionized should engage in strikes or other such bargaining tactics in
connection with the negotiation of new collective bargaining agreements upon the expiration of any
existing collective bargaining agreements, such tactics could be disruptive to our operations and
adversely affect our results of operations, but we believe we have adequate contingency plans in
place to assure delivery of pharmaceuticals to our customers in the event of any such disruptions.
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Government Regulation
We are subject to oversight by various federal and state governmental entities and we are
subject to, and affected by, a variety of federal and state laws, regulations and policies.
Federal and State Statutes and Regulation
The U.S. Drug Enforcement Administration (“DEA”), the U.S. Food and Drug Administration
(“FDA”) and various state regulatory authorities regulate the purchase, storage, and/or
distribution of pharmaceutical products, including controlled substances. Wholesale distributors
of controlled substances are required to hold valid DEA licenses, meet various security and
operating standards, and comply with regulations governing their sale, marketing, packaging,
holding and distribution. The DEA, FDA and state regulatory authorities have broad enforcement
powers, including the ability to suspend our distribution centers from distributing controlled
substances, seize or recall products and impose significant criminal, civil and administrative
sanctions for violations of applicable laws and regulations. As a wholesale distributor of
pharmaceuticals and certain related products, we are subject to these laws and regulations. We
have all necessary licenses or other regulatory approvals and believe that we are in compliance
with all applicable pharmaceutical wholesale distribution requirements needed to conduct our
operations.
We and our customers are subject to fraud and abuse laws, including the federal anti-kickback
statutes. The anti-kickback statute, and the related regulations, prohibit persons from
soliciting, offering, receiving or paying any remuneration in order to induce the purchasing,
leasing or ordering, induce a referral to purchase, lease or order, or arrange for or recommend
purchasing, leasing or ordering items or services that are in any way paid for by Medicare,
Medicaid, or other federal healthcare programs. The fraud and abuse laws and regulations are broad
in scope and are subject to frequent modification and varied interpretation. ABSG’s operations and
certain aspects of ABDC’s operations are particularly subject to these laws and regulations.
In recent years, some states have passed or have proposed laws and regulations that are
intended to protect the safety of the pharmaceutical supply channel. These laws and regulations
are designed to prevent the introduction of counterfeit, diverted, adulterated or mislabeled
pharmaceuticals into the distribution system. For example, Florida has implemented and other
states are implementing pedigree requirements that require drugs to be accompanied by information
that allows for the tracking of the drugs back to the manufacturers. California has enacted a law
requiring chain of custody technology using electronic pedigrees, although the effective date has
been postponed until January 1, 2015 for pharmaceutical manufacturers and July 1, 2016 for
pharmaceutical wholesalers and repackagers. These and other requirements are expected to increase
our cost of operations. At the federal level, the FDA issued final regulations pursuant to the
Prescription Drug Marketing Act that became effective in December 2006. The FDA regulations impose
pedigree and other chain of custody requirements that increase our costs and/or burden of selling
to other pharmaceutical distributors and handling product returns. In December 2006, the federal
District Court for the Eastern District of New York issued a preliminary injunction temporarily
enjoining the implementation of certain of the FDA pedigree regulations in response to a case
initiated by secondary distributors. The federal Court of Appeals for the Second Circuit affirmed
this injunction on July 10, 2008. In late 2009, the parties filed a joint motion to stay discovery
and agreed to an administrative closing of the file to monitor the progress of counterfeit drug
enforcement legislation then pending in Congress. On September 30, 2010, the parties filed a
joint motion to extend this stay until June 30, 2011 because the bill that led to the
administrative closing was (and currently remains) pending in Congress. Either party may re-open
the file at any time before June 30, 2011; however, if no letter application is made to re-open the
file by that time, the parties may be considered to have abandoned their claims and/or defenses in
the case. We cannot predict the ultimate outcome of this legal proceeding.
In addition, the FDA Amendments Act of 2007 requires the FDA to establish standards and
identify and validate effective technologies for the purpose of securing the pharmaceutical supply
chain against counterfeit drugs. These standards may include track-and-trace or authentication
technologies, such as radio frequency identification devices and other technologies. The 2007 Act
requires the FDA to develop a standardized numerical identifier (SNI). In March 2010, the FDA
issued guidance regarding the development of SNIs for prescription drug packages. In this
guidance, the FDA identifies package-level SNIs, as an initial step in the FDA’s development and
implementation of additional measures to secure the drug supply chain.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education and Reconciliation Act of 2010 (collectively known as the “Affordable Care Act”) became
law. The Affordable Care Act is intended to expand health insurance coverage to approximately 32
million uninsured Americans through a combination of insurance market reforms, an expansion of
Medicaid, subsidies, and health insurance mandates. When fully implemented, these provisions are
expected to increase the number of people in the United States who have insurance coverage for at
least a portion of their prescription drug costs. Other provisions of the Affordable Care Act seek
to reduce health care spending, such as by increasing manufacturer Medicaid drug rebates, revising
the calculation of Medicaid drug reimbursements, establishing an Independent Payment Advisory Board
to achieve additional Medicare savings, and establishing a regulatory pathway for the approval of
follow-on biologicals, promoting value-based purchasing, and
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making other major changes to reimbursement to most types of Medicare providers and suppliers.
In addition, the Affordable Care Act makes a number of changes to the Medicare Part D program,
including providing for additional subsidies for beneficiaries in the Part D “coverage gap.” The
law requires drug and device manufacturers to disclose their relationships with physicians and
teaching hospitals. It also requires manufacturers and group purchasing organizations that do
business with federal health programs to disclose certain physician ownership and investment
interests. The Affordable Care Act imposes, among many other policy changes, significant new fees
and excise taxes on pharmaceutical and medical device manufacturers, expands enforcement authority
to prevent fraud and abuse, expands comparative effectiveness research and requires testing of
health care delivery reforms. While certain provisions of the Affordable Care Act took effect
immediately, others have delayed effective dates.
As a result of political, economic and regulatory influences, scrutiny of the healthcare
delivery system in the United States can be expected to continue at both the state and federal
levels. This process may result in additional legislation and/or regulation governing the delivery
or pricing of pharmaceutical products, as well as additional changes to the structure of the
present healthcare delivery system. We cannot predict what additional initiatives, if any, will be
adopted, when they may be adopted, or what impact they may have on us.
The costs, burdens, and/or impacts of complying with federal and state regulations could be
significant and the failure to comply with any such legal requirements could have a significant
impact on our results of operations and financial condition.
Medicare and Medicaid
The Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”) significantly
expanded Medicare coverage for outpatient prescription drugs through the new Medicare Part D
program. Beginning in 2006, Medicare beneficiaries became eligible to enroll in outpatient
prescription drug plans that are offered by private entities and became eligible for varying levels
of coverage for outpatient prescription drugs. Beneficiaries who participate select from a range of
stand-alone prescription drug plans or Medicare Advantage managed care plans that include
prescription drug coverage along with other Medicare services (“Part D Plans”). The Part D Plans
are required to make available certain drugs on their formularies. Each Part D Plan negotiates
reimbursement for Part D drugs with pharmaceutical manufacturers. The Part D Plan program has
increased the use of pharmaceuticals in the supply channel, which has a positive impact on our
revenues and profitability.
The Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”) established
timeframes for Part D Plan payments to pharmacies and long-term care pharmacy submission of claims;
required more frequent updating by Part D Plan sponsors of the drug pricing data they use to pay
pharmacies; modified statutory provisions regarding coverage of certain “protected classes” of
drugs; limited certain Part D sales and marketing activities; and made other Part D reforms. The
Affordable Care Act made additional changes to the Part D program, including, among other things:
providing a $250 payment in 2010 to beneficiaries who reach the Part D “coverage gap” (the period
after a beneficiary reaches the initial coverage limit and before “catastrophic coverage” is
triggered in which beneficiaries pay 100% of costs); phasing out the coverage gap by 2020,
establishing a discount program beginning January 1, 2011 under which Medicare beneficiaries in the
coverage gap will have access to manufacturer discounts equal to 50% of the negotiated price of
certain branded drugs and biologicals; allowing the Secretary of Health and Human Services to
designate certain categories of drugs as warranting special formulary treatment; mandating that
Part D plan sponsors provide additional medication therapy management services; reducing Part D
subsidies for certain high-income beneficiaries; and mandating that plan sponsors use “specific,
uniform dispensing techniques” when dispensing drugs to long-term care residents to reduce
prescription drug waste beginning in 2012. CMS continues to issue regulations and other guidance
to implement these statutory changes and further refine Medicare Part D program rules. On November
10, 2010, CMS published a proposed rule to implement several provisions of the Affordable Care Act
related to the Part D drug program and make other changes to the Part D regulations. There can be
no assurances that changes in the Part D program will not have an adverse impact on our business.
With regard to Medicaid, effective January 1, 2007, the Deficit Reduction Act of 2005 (“DRA”)
changed the federal upper payment limit for Medicaid reimbursement from 150% of the lowest
published price for generic pharmaceuticals to 250% of the lowest average manufacturer price
(“AMP”). On July 17, 2007, Centers for Medicare & Medicaid Services (“CMS”) published a final rule
implementing these provisions and clarifying, among other things, the AMP calculation methodology
and the DRA provision requiring the Secretary of Health and Human Services to provide AMP data to
the states on a monthly basis, and also to disclose, through a website accesible to the public, AMP
prices for branded and generic pharmaceuticals. In December 2007, the United States District Court
for the District of Columbia issued a preliminary injunction that enjoins CMS from implementing
certain provisions of the AMP rule to the extent that it affects Medicaid reimbursement rates for
retail pharmacies under the Medicaid program. The order also enjoined CMS from disclosing AMP data
to states and disclosing the pricing on a website accessible to the public. In October 2008, CMS
issued a separate final rule in which it stated that the federal upper limits will govern in all
states unless a state finds that a particular generic drug is not available within that state.
These payment limits remain unenforced as a result of the 2007 preliminary injunction. In
addition, MIPPA delayed the adoption of certain provisions of CMS’s July 17, 2007 rule and
prevented CMS from publishing AMP data before October 1, 2009. On November 15, 2010, CMS published
a final rule that withdraws certain
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provisions of the July 2007 and October 2008 final rules in light of the legal challenges to the rules
and the enactment of the Affordable Care Act, which includes provisions that redefined “average
manufacturer price” and “multiple source drug,” and established a new formula for calculating
federal upper limits. Under the Affordable Care Act, federal upper limits for multiple source
drugs available for purchase by retail community pharmacies on a nationwide basis are set at no
less than 175% of the weighted average (determined on the basis of utilization) of the most
recently reported monthly AMP (using a smoothing process). Any reduction in the Medicaid
reimbursement rates to our customers for certain generic pharmaceuticals may indirectly impact the
prices that we can charge our customers for generic pharmaceuticals and cause corresponding
declines in our profitability. The Affordable Care Act also amends the Medicaid rebate statute to,
among other things, increase minimum Medicaid rebates paid by pharmaceutical manufacturers,
increase “additional rebates” for new formulations of certain brand name drugs, establish a maximum
rebate, and extend rebates to the states for drugs dispensed to individuals who are enrolled in
Medicaid managed care organizations. The Affordable Care Act’s redefinition of AMP is expected to
result, in most instances, in a higher AMP. This higher AMP, coupled with the higher minimum
Medicaid rebate percentage, is expected to result in increased Medicaid rebate payments by
pharmaceutical manufacturers, which could indirectly impact our business. We are currently
assessing the potential impact of these provisions on our business. The federal government also
could take other actions in the future that impact Medicaid reimbursement, Medicaid rebate amounts,
or Medicare reimbursement under the average sales price calculation methodology. There can be no
assurance that recent or future changes in prescription drug reimbursement policies will not have
an adverse impact on our business. Unless we are able to develop plans to mitigate the potential
impact of these legislative and regulatory changes, these changes in reimbursement and related
reporting requirements could adversely affect our results of operations.
See “Risk Factors” below for a discussion of additional regulatory developments that may
affect our results of operations and financial condition.
Health Information Practices
The Health Information Portability and Accountability Act of 1996 (“HIPAA”) and its
accompanying federal regulations set forth health information standards in order to protect
security and privacy in the exchange of individually identifiable health information. In addition,
our operations, depending on their location, may be subject to additional state or foreign
regulations affecting personal data protection and the manner in which information services or
products are provided. Significant criminal and civil penalties may be imposed for violation of
HIPAA standards and other such laws. We have a HIPAA compliance program to facilitate our ongoing
effort to comply with the HIPAA regulations.
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment
Act (“ARRA”). Among other things, the law further strengthens federal privacy and security
provisions to protect personally-identifiable health information, including new notification
requirements related to health data security breaches. The ARRA also provides incentive payments
to eligible healthcare providers participating in Medicare and Medicaid programs that adopt and
successfully demonstrate meaningful use of certified electronic health record (EHR) technology.
There can be no assurances that compliance with the new privacy requirements and compliance with
EHR standards will not impose new costs on our business.
Available Information
For more information about us, visit our website at www.amerisourcebergen.com. The contents
of the website are not part of this Form 10-K. Our electronic filings with the Securities and
Exchange Commission (including all Forms 10-K, 10-Q and 8-K, and any amendments to these reports)
are available free of charge through the “Investors” section of our website immediately after we
electronically file with or furnish them to the Securities and Exchange Commission and may also be
viewed using their website at www.sec.gov.
ITEM 1A. RISK FACTORS
The following discussion describes certain risk factors that we believe could affect our
business and prospects. These risks factors are in addition to those set forth elsewhere in this
report.
Intense competition as well as industry consolidations may erode our profit margins.
The distribution of pharmaceuticals and related healthcare solutions is highly competitive.
We compete with two national wholesale distributors of pharmaceuticals, Cardinal and McKesson;
national generic distributors; regional and local distributors of pharmaceuticals; chain drugstores
that warehouse their own pharmaceuticals; manufacturers that distribute their products directly to
customers; specialty distributors; and packaging and healthcare technology companies (see
“Competition”). Competition continues to increase in specialty distribution and services, where
gross margins historically have been higher than in ABDC. Reflecting that increased competition,
recently, our two national competitors have announced or completed acquisitions to expand their
footprint in
the area of specialty distribution and services. If we were forced by competition to reduce
our prices or offer more favorable payment or other terms, our results of operations or liquidity
could be adversely affected. In addition, in recent years, the healthcare industry has been
subject to increasing consolidation. If this trend continues among our customers and suppliers, it
could give the resulting enterprises greater bargaining power, which may lead to greater pressure
to reduce prices for our products and services.
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Our results of operations continue to be subject to the risks and uncertainties of inflation
in branded pharmaceutical prices and deflation in generic pharmaceutical prices.
Certain distribution service agreements that we have entered into with branded pharmaceutical
manufacturers continue to have an inflation-based compensation component to them. Arrangements
with a small number of branded manufacturers continue to be solely inflation-based. As a result,
approximately 10% of our gross profit from brand-name manufacturers continues to be subject to
fluctuation based upon the timing and extent of price appreciation. If the frequency or rate of
branded pharmaceutical price inflation slows, our results of operations could be adversely
affected. In addition, we distribute generic pharmaceuticals, which are subject to price
deflation. If the frequency or rate of generic pharmaceutical price deflation accelerates, our
results of operations could be adversely affected.
Declining economic conditions could adversely affect our results of operations and financial
condition.
Our operations and performance depend on economic conditions in the United States and other
countries where we do business. 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, reduce purchases by our customers, which would negatively
affect our revenue growth and cause a decrease in our profitability. Interest rate fluctuations,
financial market volatility or credit market disruptions may also negatively affect our customers’
ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our
customers or changes in payment terms could adversely affect our revenue growth and cause a
decrease in our cash flow from operations. Bankruptcies or similar events affecting our customers
may cause us to incur bad debt expense at levels higher than historically experienced. Declining
economic conditions may also increase our costs. If the economic conditions in the United States
or in the regions outside the United States where we do business do not improve or deteriorate, our
results of operations or financial condition could be adversely affected.
Our stock price and our ability to access credit markets may be adversely affected by financial
market volatility and disruption.
The capital and credit markets experienced significant volatility and disruption, particularly
in the latter half of 2008 and in the first quarter of 2009. In some cases, the markets produced
downward pressure on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If the markets return to the levels of disruption
and volatility experienced in the latter half of 2008 and the first quarter of 2009, there can be
no assurance that we will not experience downward movement in our stock price without regard to our
financial condition or results of operations or an adverse effect, which may be material, on our
ability to access credit generally, and on our business, liquidity, financial condition and results
of operations.
Our receivables securitization facility expires in April 2011. While we did not have any
borrowings outstanding under this facility as of September 30, 2010, we have historically utilized
amounts available to us under this facility, from time to time, to meet our business needs.
Additionally, our multi-currency revolving credit facility expires in November 2011. In fiscal
2011, we will seek to renew these facilities at available market rates, which may be higher than
the rates currently available to us. While we believe we will be able to renew these facilities,
there can be no assurance that we will be able to do so.
Our revenue and results of operations may suffer upon the loss of a significant customer.
Our largest customer, Medco Health Solutions, Inc., accounted for 18% of our revenue in fiscal
2010. Our top ten customers represented approximately 42% of fiscal 2010 revenue. We also have
contracts with group purchasing organizations (“GPOs”), each of which functions as a purchasing
agent on behalf of its members, who are hospitals, pharmacies or other healthcare providers.
Approximately 10% of our revenue in fiscal 2010 was derived from our three largest GPO
relationships. We may lose a significant customer or GPO relationship if any existing contract
with such customer or GPO expires without being extended, renewed, renegotiated or replaced or is
terminated by the customer or GPO prior to expiration, to the extent such early termination is
permitted by the contract. A number of our contracts with significant customers or GPOs are
typically subject to expiration each year and we may lose any of these customers or GPO
relationships if we are unable to extend, renew, renegotiate or replace the contracts. The loss of
any significant customer or GPO relationship could adversely affect our revenue and results of
operations.
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Our revenue and results of operations may suffer upon the bankruptcy, insolvency or other credit
failure of a significant customer.
Most of our customers buy pharmaceuticals and other products and services from us on credit.
Credit is made available to customers based on our assessment and analysis of creditworthiness.
Although we often try to obtain a security interest in assets and other arrangements intended to
protect our credit exposure, we generally are either subordinated to the position of the primary
lenders to our customers or substantially unsecured. Volatility of the capital and credit markets,
general economic conditions, and regulatory changes, including changes in reimbursement, may
adversely affect the solvency or creditworthiness of our customers. The bankruptcy, insolvency or
other credit failure of any customer that has a substantial amount owed to us could have a material
adverse affect on our operating revenue and results of operations. At September 30, 2010, the
largest trade receivable balance due from a single customer represented approximately 8% of
accounts receivable, net.
Our results of operations may suffer upon the bankruptcy, insolvency or other credit failure of a
significant supplier.
Our
relationships with pharmaceutical suppliers, including generic
pharmaceutical manufacturers, give rise to substantial amounts that are due
to us from the suppliers, including amounts owed to us for returned goods or defective goods,
chargebacks, and amounts due to us for services provided to the suppliers. Volatility of the
capital and credit markets, general economic conditions, and regulatory changes may adversely
affect the solvency or creditworthiness of our suppliers. The bankruptcy, insolvency or other
credit failure of any supplier at a time when the supplier has a substantial account payable
balance due to us could have a material adverse affect on our results of operations.
Increasing governmental efforts to regulate the pharmaceutical supply channel may increase our
costs and reduce our profitability.
The healthcare industry is highly regulated at the federal and state level. Consequently, we
are subject to the risk of changes in various federal and state laws, which include operating and
security standards of the DEA, the FDA, various state boards of
pharmacy and comparable agencies.
In recent years, some states have passed or have proposed laws and regulations, including laws and
regulations obligating pharmaceutical distributors to provide prescription drug pedigrees, that are
intended to protect the safety of the supply channel but that also may substantially increase the
costs and burden of pharmaceutical distribution. For example, the Florida Prescription Drug
Pedigree laws and regulations that became effective in July 2006 imposed obligations upon us to
deliver prescription drug pedigrees to various categories of customers. In order to comply with
the Florida requirements, we implemented an e-pedigree system at our distribution center in Florida
that required significant capital outlays. Other states have adopted laws and regulations that
would require us to implement pedigree capabilities in those other states similar to the pedigree
capabilities implemented for Florida. For example, California has enacted a law requiring the
implementation of costly track and trace chain of custody technologies, such as radio frequency
identification device (“RFID”) technologies, although the effective date of the law has been
postponed until January 1, 2015 for pharmaceutical manufacturers and until July 1, 2016 for
pharmaceutical wholesalers and repackagers. At the federal level, the FDA issued final regulations
pursuant to the Prescription Drug Marketing Act that became effective in December 2006. The
regulations impose pedigree and other chain of custody requirements that increase the costs and/or
burden to us of selling to other pharmaceutical distributors and handling product returns. In
December 2006, the federal District Court for the Eastern District of New York issued a preliminary
injunction temporarily enjoining the implementation of certain of the FDA pedigree regulations in
response to a case initiated by secondary distributors. The federal Court of Appeals for the
Second Circuit affirmed this injunction on July 10, 2008. In late 2009, the parties filed a joint
motion to stay discovery and agreed to administrative closing of the file to monitor the progress
of counterfeit drug enforcement legislation then pending in Congress. On September 30, 2010, the
parties filed a joint motion to extend this stay until June 30, 2011 because the bill that led to
the administrative closing was (and currently remains) pending in Congress. Either party may
re-open the file at any time before June 30, 2011; however, if no letter application is made to
re-open the file by that time, the parties may be considered to have abandoned their claims and/or
defenses in the case. We cannot predict the ultimate outcome of this legal proceeding.
In addition, the FDA Amendments Act of 2007 requires the FDA to establish standards and
identify and validate effective technologies for the purpose of securing the pharmaceutical supply
chain against counterfeit drugs. These standards may include track-and-trace or authentication
technologies, such as RFID devices and other technologies. The 2007 Act requires the FDA to
develop a standardized numerical identifier (SNI) by April 1, 2010. In March 2010, FDA issued
guidance regarding the development of SNIs for prescription drug packages. In this guidance, FDA
identifies package-level SNIs, as an initial step in FDA’s development and implementation of
additional measures to secure the drug supply chain. The increased costs of complying with these
pedigree and other supply chain custody requirements could increase our costs or otherwise
significantly affect our results of operations.
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The suspension or revocation by the DEA of any of the registrations that must be in effect for our
distribution facilities to purchase, store and distribute controlled substances or the refusal by
DEA to issue a registration to any such facility that requires such registration may adversely
affect our reputation, our business and our results of operations.
The DEA, FDA and various state regulatory authorities regulate the distribution of
pharmaceuticals and controlled substances. We are required to hold valid DEA and state-level
licenses, meet various security and operating standards and comply with the Controlled Substance
Act and its accompanying regulations governing the sale, marketing, packaging, holding and
distribution of controlled substances. The DEA, FDA and state regulatory authorities have broad
enforcement powers, including the ability to suspend our distribution centers’ licenses to
distribute pharmaceutical products (including controlled substances), seize or recall products and
impose significant criminal, civil and administrative sanctions for violations of these laws and
regulations.
In 2007, our Orlando, Florida distribution center’s license to distribute controlled
substances and listed chemicals was suspended and later reinstated under an agreement with the DEA,
when we implemented an enhanced and more sophisticated order-monitoring program in all of our ABDC
distribution centers. In addition, in 2008, one of our subsidiaries, Bellco Drug Corp., received a
new DEA registration (following the suspension of its license and entry into a consent judgment
with the DEA prior to our acquisition of the business). While we expect to continue to comply with
all of the DEA’s requirements, there can be no assurance that the DEA will not require further
controls against the diversion of controlled substances in the future or will not take similar
action against any other of our distribution centers in the future.
Legal, regulatory and legislative changes reducing reimbursement rates for pharmaceuticals and/or
medical treatments or services may adversely affect our business and results of operations.
Both our business and the businesses of our customers may be adversely affected by laws and
regulations reducing reimbursement rates for pharmaceuticals and/or medical treatments or services
or changing the methodology by which reimbursement levels are determined.
In March 2010, the Patient Protection and Affordable Care Act and the Health Care and
Education and Reconciliation Act of 2010 (collectively known as the “Affordable Care Act”) became
law. The Affordable Care Act is intended to expand health insurance coverage to approximately 32
million uninsured Americans through a combination of insurance market reforms, an expansion of
Medicaid, subsidies, and health insurance mandates. When fully implemented, these provisions are
expected to increase the number of people in the United States who have insurance coverage for at
least a portion of prescription drug costs. Other provisions of the Affordable Care Act seek to
reduce health care spending, such as by increasing manufacturer Medicaid drug rebates, revising the
calculation of Medicaid drug reimbursement, establishing an Independent Payment Advisory Board to
achieve additional Medicare savings, and establishing a regulatory pathway for the approval of
follow-on biologicals, promoting value-based purchasing, and making other major changes to
reimbursement for most types of Medicare providers and suppliers. In addition, the Affordable Care
Act provides for a number of changes to the Medicare Part D program, including additional subsidies
for beneficiaries in the Part D “coverage gap.” The law also requires drug and device manufacturers
to disclose their relationships with physicians and teaching hospitals. It requires manufacturers
and group purchasing organizations that do business with federal health programs to disclose
certain physician ownership and investment interests. The Affordable Care Act also imposes, among
many other policy changes, significant new fees and excise taxes on pharmaceutical and medical
device manufacturers, expands enforcement authority to prevent fraud and abuse, expands comparative
effectiveness research and requires testing of health care delivery reforms. While certain
provisions of the Affordable Care Act took effect immediately, others have delayed effective dates.
Given the scope of the changes made by the Affordable Care Act and the ongoing implementation
efforts, we cannot predict at this time the impact of the new law on our operations.
Effective January 1, 2007, the Deficit Reduction Act of 2005 (“DRA”) changed the federal upper
payment limit for Medicaid reimbursement from 150% of the lowest published price for generic
pharmaceuticals to 250% of the lowest average manufacturer price (“AMP”). On July 17, 2007, CMS
published a final rule implementing these provisions and clarifying, among other things, the AMP
calculation methodology and the DRA provision requiring the Secretary of Health and Human Services
to provide AMP data to the states on a monthly basis, and also to disclose, through a website
accessible to the public, AMP prices for branded and generic pharmaceuticals. In December 2007,
the United States District Court for the District of Columbia issued a preliminary injunction that
enjoins CMS from implementing certain provisions of the AMP rule to the extent that it affects
Medicaid reimbursement rates for retail pharmacies under the Medicaid program. The order also
enjoins CMS from disclosing AMP data to states and disclosing the pricing on a website accessible
to the public. In October 2008, CMS issued a separate final rule stating that the federal upper
limits will govern in all states unless a state finds that a particular generic drug is not
available within that state. These payment limits remain unenforced as a result of the 2007
preliminary injunction. The outcome of the ongoing litigation in the District of Columbia is
unknown. The Medicaid Improvements for Patients and Providers Act of 2008 (“MIPPA”) delayed the
adoption of certain provisions of CMS’s July 17, 2007 rule and prevented CMS from publishing AMP
data before October 1, 2009. On November 15, 2010, CMS
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published a final rule withdrawing certain provisions of the July 2007 and October 2008 final
rules in light of the legal challenges to the rules and the enactment of the Affordable Care Act,
which includes provisions that redefined “average manufacturer price” and “multiple source drug,”
and established a new formula for calculating federal upper limits. Under the Affordable Care Act,
federal upper limits for multiple source drugs available for purchase by retail community
pharmacies on a nationwide basis are set at no less than 175% of the weighted average (determined
on the basis of utilization) of the most recently reported monthly AMP (using a smoothing process).
Any reduction in the Medicaid reimbursement rates to our customers for certain generic
pharmaceuticals may indirectly impact the prices that we can charge our customers for generic
pharmaceuticals and cause corresponding declines in our profitability. The Affordable Care Act
also amends the Medicaid rebate statute to, among other things, increase minimum Medicaid rebates
paid by pharmaceutical manufacturers, increase “additional rebates” for new formulations of certain
brand name drugs, establish a maximum rebate, and extend rebates to the states for drugs dispensed
to individuals who are enrolled in Medicaid managed care organizations. The Affordable Care Act’s
redefinition of AMP is expected to, result, in most instances, in a higher AMP. This higher AMP,
coupled with the higher minimum Medicaid rebate percentage, is expected to result in increased
Medicaid rebate payments by pharmaceutical manufacturers, which could indirectly impact our
business. We are currently assessing the potential impact of these provisions on our business.
The federal government also could take other actions in the future that impact Medicaid
reimbursement and rebate amounts. There can be no assurance that recent or future changes in
prescription drug reimbursement policies will not have an adverse impact on our business. Unless we
are able to develop plans to mitigate the potential impact of these legislative and regulatory
changes, these changes in reimbursement and related reporting requirements could adversely affect
our results of operations.
First DataBank, Inc. and Medi-Span publish drug databases that contain drug information and
pricing data. The pricing data includes average wholesale price, or AWP, which is a pricing
benchmark widely used to calculate a portion of the Medicaid and Medicare Part D reimbursements
payable to pharmacy providers. AWP is also used to establish the pricing of pharmaceuticals to
certain of our pharmaceutical distribution customers in Puerto Rico. On September 3, 2009, the
Court of Appeals for the First Circuit upheld settlements in class action litigation concerning the
calculations of AWP pricing data. Under the settlements, First DataBank, Inc. and Medi-Span
reduced to 20% the markup on about 1,400 drugs included in the litigation. The companies also
reduced to 20% the markup on all drugs with a mark-up higher than 20% and are expected to stop
publishing AWP in 2011. We continue to evaluate the impact that these actions could have on the
business of our customers and our business. There can be no assurances that these settlements and
related actions will not have an adverse impact on the business of our customers and/or our
business.
The Medicare, Medicaid, and SCHIP Extension Act of 2007, among other things, requires CMS to
adjust Medicare Part B drug average sales price (“ASP”) calculations to use volume-weighed ASPs
based on actual sales volume. This law, which became effective April 1, 2008, has reduced and
could continue to reduce Medicare reimbursement rates for some Part B drugs, which may indirectly
impact the prices we can charge our customers for pharmaceuticals and result in reductions in our
profitability. The reduction in reimbursement rates for Part B drugs particularly affects our ABSG
customers, some of whom have moved from private practice to hospital settings. ABSG’s business may
be adversely affected in the future by these and other changes in Medicare reimbursement rates for
certain pharmaceuticals, including oncology drugs administered by physicians. Since ABSG provides
a number of services to or through physicians, this could result in slower growth or lower revenues
for ABSG.
Our revenue growth rate has been negatively impacted by a reduction in sales of certain anemia
drugs, primarily those used in oncology, and may, in the future, be adversely affected by any
further reductions in sales or restrictions on the use of anemia drugs or a decrease in Medicare
reimbursement for these drugs. Several developments contributed to the decline in sales of anemia
drugs, including expanded warning and other product safety labeling requirements, more restrictive
federal policies governing Medicare reimbursement for the use of these drugs to treat oncology
patients with kidney failure and dialysis, and changes in regulatory and clinical medical
guidelines for recommended dosage and use. In addition, the FDA is requiring all erythropoiesis
stimulating agents (anemia drugs or ESAs) to be prescribed and used under a “risk evaluation and
mitigation strategy” (“REMS”), to ensure the safe use of these drugs and has announced that it is
reviewing new clinical study data concerning the possible risks associated with anemia drugs and
may take additional action with regard to these drugs. CMS also is reviewing Medicare coverage
policy for these drugs for treatment of anemia in adults with chronic kidney disease, and
additional reviews are possible in the future. Any further changes in the recommended dosage or
use of anemia drugs or reductions in reimbursement for such drugs could result in slower growth or
lower revenues. In addition, beginning in January 1, 2011, CMS is implementing a prospective
payment system for Medicare end-stage renal disease (ESRD) services, as mandated by MIPPA, that
provides a single bundled payment to dialysis facilities covering most ESRD services, including
ESAs (including any oral forms) that are furnished to individuals for the treatment of ESRD. We
cannot at this time assess the impact this upcoming payment system
will have on our business. Our sales of anemia drugs, including those used in
oncology, represented approximately 5% of revenue in fiscal 2010.
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The Medicare Prescription Drug Improvement and Modernization Act of 2003 (“MMA”) significantly
expanded Medicare coverage for outpatient prescription drugs through the new Medicare Part D
program. Beginning in 2006, Medicare beneficiaries became eligible to enroll in outpatient
prescription drug plans that are offered by private entities and became eligible for varying levels
of coverage for outpatient prescription drugs. The Part D Plan program has increased the use of
pharmaceuticals in the supply channel, which has a positive impact on our revenues and
profitability. MIPPA and the Affordable Care Act both made additional
changes to the Part D program. Notably, the Affordable Care Act provides additional
assistance to beneficiaries who reach the Part D “coverage gap” (including a manufacturer discount
program), mandates additional medication therapy management services, reduces Part D subsidies for
certain high-income beneficiaries, and mandates new dispensing techniques for dispensing drugs to
long-term care residents to reduce prescription drug waste beginning in 2012. CMS continues to
issue regulations and other guidance to implement these statutory changes and further refine
Medicare Part D program rules. There can be no assurances that recent and future changes to the
Part D program will not have an adverse impact on our business.
The federal government may adopt measures in the future that would further reduce Medicare
and/or Medicaid spending or impose additional requirements on health care entities. At this time,
we can provide no assurances that such changes, if adopted, would not have an adverse effect on our
business.
Changes to the United States healthcare environment may negatively impact our business and our
profitability.
Our products and services are intended to function within the structure of the healthcare
financing and reimbursement system currently existing in the United States. In recent years, the
healthcare industry has undergone significant changes in an effort to reduce costs and government
spending. These changes include an increased reliance on managed care; cuts in certain Medicare
funding affecting our healthcare provider customer base; consolidation of competitors, suppliers
and customers; and the development of large, sophisticated purchasing groups. We expect the
healthcare industry to continue to change significantly in the future. Some of these potential
changes, such as a reduction in governmental funding at the state or federal level for certain
healthcare services or adverse changes in legislation or regulations governing prescription drug
pricing, healthcare services or mandated benefits, may cause healthcare industry participants to
reduce the amount of our products and services they purchase or the price they are willing to pay
for our products and services. We expect continued government and private payor pressure to reduce
pharmaceutical pricing. Changes in pharmaceutical manufacturers’ pricing or distribution policies
could also significantly reduce our profitability.
If we fail to comply with laws and regulations in respect of healthcare fraud and abuse, we could
suffer penalties or be required to make significant changes to our operations.
We are subject to extensive and frequently changing federal and state laws and regulations
relating to healthcare fraud and abuse. The federal government continues to strengthen its
position and scrutiny over practices involving healthcare fraud affecting Medicare, Medicaid and
other government healthcare programs. Our relationships with healthcare providers and
pharmaceutical manufacturers subject our business to laws and regulations on fraud and abuse which,
among other things, (i) prohibit persons from soliciting, offering, receiving or paying any
remuneration in order to induce the referral of a patient for treatment or the ordering or
purchasing of items or services that are in any way paid for by Medicare, Medicaid or other
government-sponsored healthcare programs and (ii) impose a number of restrictions upon referring
physicians and providers of designated health services under Medicare and Medicaid programs.
Legislative provisions relating to healthcare fraud and abuse give federal enforcement personnel
substantially increased funding, powers and remedies to pursue suspected fraud and abuse, and these
enforcement authorities were further expanded by the Affordable Care Act. While we believe that we
are in compliance with all applicable laws and regulations, many of the regulations applicable to
us, including those relating to marketing incentives offered in connection with pharmaceutical
sales, are vague or indefinite and have not been interpreted by the courts. They may be
interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could
require us to make changes in our operations. If we fail to comply with applicable laws and
regulations, we could suffer civil and criminal penalties, including the loss of licenses or our
ability to participate in Medicare, Medicaid and other federal and state healthcare programs.
The enactment of provincial legislation or regulations in Canada to lower pharmaceutical product
pricing and service fees may adversely affect our pharmaceutical distribution business in Canada,
including the profitability of that business.
As in the United States, our products and services function within the existing regulatory
structure of the healthcare system in Canada. The purchase of pharmaceutical products in Canada is
funded in part by the provincial governments, which each regulate the financing and reimbursement
of drugs independently. In recent years, like the United States, the Canadian healthcare industry
has undergone significant changes in an effort to reduce costs and government spending. For
example, in 2006, the Ontario government enacted the Transparent Drug System for Patients Act,
which significantly revised the drug distribution system in Ontario. On July 1, 2010, the Ontario
government finalized regulatory changes to reform the rules regarding the sale of generic drugs in
Ontario to, among other things, reduce costs for taxpayers. These changes include the significant
lowering of prices for generic pharmaceuticals in both the public (government-sponsored plans) and
private markets and the elimination of professional allowances paid to pharmacists. Changes in
generic drug prices also affect the cash values of the percentage mark-ups that may be charged by
pharmacies. These reforms may result in lower service fees, cause healthcare industry
participants to reduce the amount of products and services they purchase from us or the price they
are willing to pay for our products and services. In addition, any fees based on percentage of
drug prices will be reduced by any reductions to generic drug prices themselves. Legislation
and/or regulations that may lower pharmaceutical product pricing and service fees are reportedly
under consideration by some other provinces as well. The legislative
changes in Ontario had an immediate impact on Quebec because it requires manufacturers to sell
pharmaceuticals to Quebec at the lowest price in Canada. The governments of Alberta and British
Columbia have also taken steps to reduce the prices for generic drugs listed on their formularies.
We expect continued government and private payor pressure to reduce pharmaceutical pricing.
Changes in pharmaceutical manufacturers’ pricing or distribution policies could also significantly
reduce our profitability in Canada. Revenue from our Canadian
operations in fiscal 2010 was less than 2% of our consolidated
revenue.
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Our business and results of operations could be adversely affected by qui tam litigation.
Violations of various federal and state laws governing the marketing, sale and purchase of
pharmaceutical products can result in criminal, civil, and administrative liability for which there
can be significant financial damages, criminal and civil penalties, and possible exclusion from
participation in federal and state health programs. Among other things, such violations can form
the basis for qui tam complaints to be filed. The qui tam provisions of both the federal civil
False Claims Act and various state civil False Claims Acts authorize a private person, known as a
“relator” (i.e. whistleblower), to file civil actions under these federal and state statutes on
behalf of the federal and state governments. Under the federal civil False Claims Act and the
applicable state civil False Claims Acts, the filing of a qui tam complaint by a relator imposes
obligations on federal and state government authorities to investigate the allegations and to
determine whether or not to intervene in the action. Such cases may involve allegations around the
marketing, sale and/or purchase of branded pharmaceutical products and wrongdoing in the marketing,
sale and/or purchase of such products. Such complaints are filed under seal and remain sealed
until the applicable court orders otherwise. Our business and results of operations could be
adversely affected if qui tam complaints are filed against us for alleged violations of any health
laws and regulations and for damages arising from resultant false claims and if government
authorities decide to intervene in any such matters and/or we are found liable for all or any
portion of violations alleged in any such matters.
A qui tam matter is pending in the United States District Court for the District of
Massachusetts (the “Federal District Court Action”) naming Amgen Inc. as well as two business units
of AmerisourceBergen Specialty Group, ASD Specialty Healthcare, Inc. (“ASD”), and International
Nephrology Network (“INN”), as defendants, as described in Note 12 (Legal Matters and
Contingencies) of the Notes to the Consolidated Financial Statements appearing in this Annual
Report on Form 10-K.
Under the federal civil False Claims Act and the applicable state civil False Claims Acts, the
filing of the original qui tam complaint by the former Amgen employee triggered obligations of
federal and certain state government authorities to investigate the allegations and to determine
whether or not to intervene in the action. In connection with this investigative process, the
Company has received subpoenas for records issued by the United States Attorney’s Office for the
Eastern District of New York (the “Department of Justice”). The allegations of the plaintiffs in
the Federal District Court Action are within the scope of the Department of Justice’s subpoenas.
The Company has been cooperating with the Department of Justice in the inquiry and is producing
records in response to the subpoenas.
The Company has learned that there are both prior and subsequent filings in another federal
district, including a complaint filed by a former employee of the
Company, that are under seal and
that involve allegations similar to those in the Federal District Court Action against the same
and/or additional subsidiaries or businesses of the Company that are defendants in the Federal
District Court Action, including the Company’s group purchasing organization for oncologists and
the Company’s oncology distribution business. The Department of Justice’s investigation of the
allegations being pursued in the Federal District Court Action appears to include investigation of
the allegations contained in some or all of these other filings.
Our business and results of operations could be adversely affected if we are found liable for
the violations alleged in the Federal District Court Action and/or if the Department of Justice
should elect to intervene in the pending case and/or if there should be any other qui tam cases
that arise against us or are pending but yet unsealed, including cases against the same and/or
additional subsidiaries or businesses of the Company that are defendants in the Federal District
Court action.
Our results of operations and financial condition may be adversely affected if we undertake
acquisitions of businesses that do not perform as we expect or that are difficult for us to
integrate.
We expect to continue to implement our growth strategy, in part, by acquiring companies. At
any particular time, we may be in various stages of assessment, discussion and negotiation with
regard to one or more potential acquisitions, not all of which will be consummated. We make public
disclosure of pending and completed acquisitions when appropriate and required by applicable
securities laws and regulations.
Acquisitions involve numerous risks and uncertainties. If we complete one or more
acquisitions, our results of operations and financial condition may be adversely affected by a
number of factors, including: the failure of the acquired businesses to achieve the results we have
projected in either the near or long term; the assumption of unknown liabilities; the fair value of
assets acquired and liabilities assumed; the difficulties of imposing adequate financial and
operating controls on the acquired companies and their management and the potential liabilities
that might arise pending the imposition of adequate controls; the difficulties in the integration
of the operations, technologies, services and products of the acquired companies; and the
failure to achieve the strategic objectives of these acquisitions.
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Our results of operations and our financial condition may be adversely affected by foreign
operations.
We have pharmaceutical distribution operations based in Canada and provide contract packaging
and clinical trials materials services in the United Kingdom. We may consider additional foreign
acquisitions in the future. Our existing foreign operations and any operations we may acquire in
the future carry risks in addition to the risks of acquisition, as described above. At any
particular time, foreign operations may encounter risks and uncertainties regarding the
governmental, political, economic, business and competitive environment within the countries in
which those operations are based. Additionally, foreign operations expose us to foreign currency
fluctuations that could impact our results of operations and financial condition based on the
movements of the applicable foreign currency exchange rates in relation to the U.S. dollar.
Risks generally associated with our sophisticated information systems may adversely affect our
business and results of operations.
Our businesses rely on sophisticated information systems to obtain, rapidly process, analyze,
and manage data to facilitate the purchase and distribution of thousands of inventory items from
numerous distribution centers; to receive, process, and ship orders on a timely basis; to account
for other product and service transactions with customers; to manage the accurate billing and
collections for thousands of customers; and to process payments to suppliers. Our business and
results of operations may be adversely affected if these systems are interrupted or damaged by
unforeseen events or if they fail for any extended period of time, including due to the actions of
third parties. A third party service provider (IBM) is responsible for managing a significant
portion of ABDC’s information systems. Our business and results of operations may be adversely
affected if the third party service provider does not perform satisfactorily.
Certain of our businesses continue to make substantial investments in information systems. To
the extent the implementation of these systems fail, our business and results of operations may be
adversely affected.
Risks generally associated with implementation of an enterprise resource planning (ERP) system may
adversely affect our business and results of operations or the effectiveness of internal control
over financial reporting.
We have begun to implement an ERP system, which, when completed, will handle the business and
financial processes within ABDC’s operations and our corporate and administrative functions, such
as: (i) facilitating the purchase and distribution of inventory items from our distribution
centers; (ii) receiving, processing, and shipping orders on a timely basis, (iii) managing the
accuracy of billings and collections for our customers; (iv) processing payments to our suppliers;
and (v) generating financial transactions and information. ERP implementations are complex and
time-consuming projects that involve substantial expenditures on system software and implementation
activities that can continue for several years. ERP implementations also require transformation of
business and financial processes in order to reap the benefits of the ERP system. Our business and
results of operations may be adversely affected if we experience operating problems and/or cost
overruns during the ERP implementation process or if the ERP system, and the associated process
changes, do not give rise to the benefits that we expect.
Additionally, if we do not effectively implement the ERP system as planned or if the system
does not operate as intended, it could adversely affect our financial reporting systems, our
ability to produce financial reports, and/or the effectiveness of our internal controls over
financial reporting.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results
of operations and financial condition.
We are a large corporation with operations in the United States, Puerto Rico, Canada and the
United Kingdom. As such, we are subject to tax laws and regulations of the United States federal,
state and local governments and of certain foreign jurisdictions. From time to time, various
legislative initiatives may be proposed that could adversely affect our tax positions and/or our
tax liabilities. There can be no assurance that our effective tax rate or tax payments will not be
adversely affected by these initiatives. In addition, United States federal, state and local, as
well as foreign, tax laws and regulations, are extremely complex and subject to varying
interpretations. There can be no assurance that our tax positions will not be challenged by
relevant tax authorities or that we would be successful in any such challenge.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of September 30, 2010, we conducted our business from office and operating facilities at
owned and leased locations throughout the United States (including Puerto Rico), Canada, and the
United Kingdom. In the aggregate, our facilities occupy approximately 8.4 million square feet of
office and warehouse space, which is either owned or leased under agreements that expire from time
to time through 2021.
We lease approximately 154,000 square feet in Chesterbrook, Pennsylvania for our corporate and
ABDC headquarters.
We have 26 full-service ABDC wholesale pharmaceutical distribution facilities in the United
States, ranging in size from approximately 53,000 square feet to 310,000 square feet, with an
aggregate of approximately 4.7 million square feet. Leased facilities are located in Puerto Rico
plus the following states: Arizona, California, Colorado, Florida, Hawaii, Minnesota, New Jersey,
New York, North Carolina, Utah, and Washington. Owned facilities are located in the following
states: Alabama, California, Georgia, Illinois, Kentucky, Massachusetts, Michigan, Missouri, Ohio,
Pennsylvania, Texas and Virginia. As of September 30, 2010, ABDC had 8 wholesale pharmaceutical
distribution facilities in Canada. Two of these facilities are owned and are located in the
provinces of Newfoundland and Ontario. Six of these locations are leased and located in the
provinces of Alberta, British Columbia, Nova Scotia, Ontario, and Quebec.
As of September 30, 2010, the Specialty Group’s operations were conducted in 19 locations, two
of which are owned, comprising of approximately 1.3 million square feet. The Specialty Group’s
largest leased facility consisted of approximately 273,000 square feet. Its headquarters are
located in Texas and it has significant operations in the states of Alabama, Kentucky, Nevada,
North Carolina, and Ohio.
As of September 30, 2010, the Packaging Group’s operations in the U.S. consisted of 3 owned
facilities and 5 leased facilities totaling approximately 1.3 million square feet. The Packaging
Group’s operations in the U.S. are primarily located in the states of Illinois and Ohio. The
Packaging Group’s operations in the United Kingdom are located in 8 owned building units and one
leased building unit comprising a total of 107,000 square feet.
We consider all of our operating and office properties to be in satisfactory condition.
ITEM 3. LEGAL PROCEEDINGS
Legal proceedings in which we are involved are discussed in Note 12 (Legal Matters and
Contingencies) of the Notes to the Consolidated Financial Statements appearing in this Annual
Report on Form 10-K.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of our principal executive officers and their ages and positions as of
November 15, 2010.
| Name | Age | Current Position with the Company | ||
R. David Yost |
63 | Chief Executive Officer and Director | ||
Steven H. Collis |
49 | President and Chief Operating Officer | ||
Michael D. DiCandilo |
49 | Executive Vice President and Chief Financial Officer | ||
June Barry |
59 | Senior Vice President, Human Resources | ||
John G. Chou |
54 | Senior Vice President, General Counsel and Secretary | ||
James D. Frary |
38 | Senior Vice President and President, AmerisourceBergen Specialty Distribution and Services |
Unless indicated to the contrary, the business experience summaries provided below for our
executive officers describe positions held by the named individuals during the last five years.
Mr. Yost has been Chief Executive Officer and a Director of the Company since August 2001 and
was President of the Company until October 2002. He again assumed the position of President of the
Company in September 2007 until November 2010. He was Chief Executive Officer of AmeriSource Health
Corporation from May 1997 until August 2001 and Chairman of the Board of AmeriSource from December
2000 until August 2001. Mr. Yost has been employed by the Company or one of its predecessors for
36 years.
Mr. Collis has been President and Chief Operating Officer of the Company since November 2010.
He served as Executive Vice President and President of AmerisourceBergen Drug Corporation from
September 2009 to November 2010. He was Executive Vice President and President of
AmerisourceBergen Specialty Group from September 2007 to September 2009 and was Senior Vice
President of the Company and President of AmerisourceBergen Specialty Group from August 2001 to
September 2007. Mr. Collis has been employed by the Company or one of its predecessors for
16 years.
Mr. DiCandilo has been Chief Financial Officer of the Company since March 2002 and an
Executive Vice President of the Company since May 2005. From May 2008 to September 2009, he was
also Chief Operating Officer of AmerisourceBergen Drug Corporation. From March 2002 to May 2005,
Mr. DiCandilo was a Senior Vice President. Mr. DiCandilo has been employed by the Company or one of
its predecessors for 20 years.
Ms. Barry joined the Company in February 2010 as Senior Vice President, Human Resources.
Prior to joining the Company, she was the Senior Vice President of Human Resources for TD Bank,
N.A., from 2006 to 2010.
Mr. Chou was named Senior Vice President and General Counsel of the Company in January 2007.
He has served as Secretary of the Company since February 2006. He was Vice President and Deputy
General Counsel from November 2004 to January 2007 and Associate General Counsel from July 2002 to
November 2004. Mr. Chou has been employed by the Company for 8 years.
Mr. Frary was named Senior Vice President and President, AmerisourceBergen Specialty
Distribution and Services in April 2010. He was Regional Vice President, East Region, of
AmerisourceBergen Drug Corporation from October 2007 to April 2010, and Associate Regional Vice
President, East Region, from May 2007 to September 2007. Before joining the Company, Mr. Frary was
a Principal in Mercer Management Consulting’s Strategy Group.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s common stock is traded on the New York Stock Exchange under the trading symbol
“ABC.” As of October 31, 2010, there were 3,815 record holders of the Company’s common stock. The
following table sets forth the high and low closing sale prices of the Company’s common stock for
the periods indicated.
PRICE RANGE OF COMMON STOCK
| High | Low | |||||||
Fiscal Year Ended September 30, 2010 |
||||||||
First Quarter |
$ | 26.41 | $ | 21.62 | ||||
Second Quarter |
$ | 29.29 | $ | 25.77 | ||||
Third Quarter |
$ | 32.88 | $ | 28.59 | ||||
Fourth Quarter |
$ | 32.79 | $ | 27.28 | ||||
Fiscal Year Ended September 30, 2009 |
||||||||
First Quarter |
$ | 18.50 | $ | 13.74 | ||||
Second Quarter |
$ | 19.38 | $ | 14.10 | ||||
Third Quarter |
$ | 18.93 | $ | 16.26 | ||||
Fourth Quarter |
$ | 22.38 | $ | 17.72 | ||||
On June 15, 2009, the Company effected a two-for-one stock split of the Company’s outstanding
shares of common stock. The stock split occurred in the form of a stock dividend, where each
stockholder received one additional share for each share owned. The stock dividend was payable to
stockholders of record at the close of business on May 29, 2009.
On November 13, 2008, the Company’s board of directors increased the quarterly dividend by 33%
and declared a cash dividend of $0.05 per share. During the first three quarters of the fiscal year
ended September 30, 2009, the Company paid quarterly cash dividends of $0.05 per share. During the
fourth quarter of the fiscal year ended September 30, 2009, the Company increased the quarterly
cash dividend by 20% and paid a quarterly cash dividend of $0.06 per share. On November 12, 2009,
our board of directors increased the quarterly dividend by 33% from $0.06 per share to $0.08 per
share. On November 11, 2010, our board of directors increased the quarterly dividend by 25% from
$0.08 per share to $0.10 per share. The Company anticipates that it will continue to pay quarterly
cash dividends in the future. However, the payment and amount of future dividends remain within the
discretion of the Company’s board of directors and will depend upon the Company’s future earnings,
financial condition, capital requirements and other factors.
On November 12, 2009, the Company amended its rights agreement to accelerate the expiration
date of all outstanding rights issued under the rights agreement. As a result, any and all rights
issued under the rights agreement expired and were no longer outstanding as of the close of
business on November 20, 2009.
BNY Mellon is the Company’s transfer agent. BNY Mellon can be reached at (mail)
AmerisourceBergen Corporation c/o BNY Mellon Shareowner Services, P.O. Box 358015, Pittsburgh, PA
15252-8015; (telephone): Domestic 1-877-296-3711, Domestic TDD 1-800-231-5469, International
1-201-680-6578 or International TDD 1-201-680-6610; (internet) www.bnymellon.com/shareowner/isd;
and (e-mail) Shrrelations@bnymellon.com.
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ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth the total 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 fiscal year ended September 30, 2010.
| Approximate | ||||||||||||||||
| Total Number of | Dollar Value of | |||||||||||||||
| Average | Shares Purchased | Shares that May | ||||||||||||||
| Total Number | Price | as Part of Publicly | Yet Be Purchased | |||||||||||||
| of Shares | Paid per | Announced | Under the | |||||||||||||
| Period | Purchased | Share | Programs | Programs | ||||||||||||
October 1 to October 31 |
— | $ | — | — | $ | 68,083,237 | ||||||||||
November 1 to November 30 |
2,415,644 | $ | 24.49 | 2,415,217 | $ | 508,926,919 | ||||||||||
December 1 to December 31 |
3,385,450 | $ | 25.21 | 3,385,450 | $ | 423,567,908 | ||||||||||
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 | ||||||||||
April 1 to April 30 |
— | $ | — | — | $ | 313,078,127 | ||||||||||
May 1 to May 31 |
3,109,600 | $ | 30.54 | 3,109,600 | $ | 218,096,891 | ||||||||||
June 1 to June 30 |
— | $ | — | — | $ | 218,096,891 | ||||||||||
July 1 to July 31 |
2,476,997 | $ | 29.25 | 2,476,997 | $ | 145,643,283 | ||||||||||
August 1 to August 31 |
1,639,960 | $ | 29.00 | 1,639,960 | $ | 98,085,127 | ||||||||||
September 1 to September 30 |
— | $ | — | — | $ | 598,085,127 | ||||||||||
Total |
17,291,116 | $ | 27.36 | 17,177,086 | ||||||||||||
| (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 fiscal year
ended September 30, 2009, the Company purchased 23.3 million shares under this program for
$431.9 million. During the fiscal year ended September 30, 2010, the Company purchased 2.8
million shares for $68.1 million to complete this program. |
|
| (b) | In November 2009, the Company announced a program to purchase up to $500 million of
its outstanding shares of common stock, subject to market conditions. During the fiscal
year ended September 30, 2010, the Company purchased 14.4 million shares for $401.9 million
under the program. |
|
| (c) | In September 2010, the
Company announced a new program to purchase up to $500 million
of its outstanding shares of common stock, subject to market
conditions. |
|
| (d) | Employees surrendered 114,030 shares and 130,221 shares during the fiscal years ended
September 30, 2010 and 2009, respectively, to meet tax-withholding obligations upon vesting
of restricted stock. |
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STOCK PERFORMANCE GRAPH
This graph depicts the Company’s five year cumulative total stockholder returns relative to
the performance of an index of peer companies selected by the Company and of the Standard and
Poor’s 500 Composite Stock Index from the market close on September 30, 2005 to September 30, 2010.
The graph assumes $100 invested at the closing price of the common stock of the Company and of each
of the other indices on the New York Stock Exchange on September 30, 2005. The points on the graph
represent fiscal year-end index levels based on the last trading day in each fiscal quarter. The
historical prices of the Company’s common stock reflect the downward adjustment of approximately 3%
that was made by the NYSE in all of the historical prices to reflect the July 2007 divestiture of
Long-Term Care. The Peer Group index (which is weighted on the basis of market capitalization)
consists of the following companies engaged primarily in wholesale pharmaceutical distribution and
related services: Cardinal Health, Inc. and McKesson Corporation.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
| * | $100 invested on 9/30/05 in stock or index, including reinvestment of dividends. |
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ITEM 6. SELECTED FINANCIAL DATA
The following table should be read in conjunction with the consolidated financial statements,
including the notes thereto, and Management’s Discussion and Analysis of Financial Condition and
Results of Operations beginning on page 22. On June 15, 2009 and December 28, 2005, the Company
effected two-for-one stock splits of its outstanding shares of common stock in the form of a 100%
stock dividend. All applicable share and per-share amounts were retroactively adjusted to reflect
these stock splits.
| As of or for the Fiscal Year Ended September 30, | ||||||||||||||||||||
| 2010(a) | 2009(b) | 2008(c) | 2007(d) | 2006(e) | ||||||||||||||||
| (Amounts in thousands, except per share amounts) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenue |
$ | 77,953,979 | $ | 71,759,990 | $ | 70,189,733 | $ | 65,672,072 | $ | 60,812,421 | ||||||||||
Gross profit |
2,356,642 | 2,100,075 | 2,047,002 | 2,219,059 | 2,121,616 | |||||||||||||||
Operating expenses |
1,253,007 | 1,216,326 | 1,219,141 | 1,430,322 | 1,428,732 | |||||||||||||||
Operating income |
1,103,635 | 883,749 | 827,861 | 788,737 | 692,884 | |||||||||||||||
Interest expense, net |
72,494 | 58,307 | 64,496 | 32,244 | 12,464 | |||||||||||||||
Income from continuing operations |
636,748 | 511,852 | 469,064 | 474,803 | 434,463 | |||||||||||||||
Net income |
636,748 | 503,397 | 250,559 | 469,167 | 467,714 | |||||||||||||||
Earnings per share from continuing operations
— diluted |
$ | 2.22 | $ | 1.69 | $ | 1.44 | $ | 1.26 | $ | 1.05 | ||||||||||
Earnings per share — diluted |
$ | 2.22 | $ | 1.66 | $ | 0.77 | $ | 1.25 | $ | 1.13 | ||||||||||
Cash dividends declared per common share |
$ | 0.32 | $ | 0.21 | $ | 0.15 | $ | 0.10 | $ | 0.05 | ||||||||||
Weighted average common shares outstanding
— diluted |
287,246 | 302,754 | 324,920 | 375,772 | 414,892 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1,658,182 | $ | 1,009,368 | $ | 878,114 | $ | 640,204 | $ | 1,261,268 | ||||||||||
Short-term investment securities available
for sale |
— | — | — | 467,419 | 67,840 | |||||||||||||||
Accounts receivable, net |
3,827,484 | 3,916,509 | 3,480,267 | 3,415,772 | 3,364,806 | |||||||||||||||
Merchandise inventories |
5,210,098 | 4,972,820 | 4,211,775 | 4,097,811 | 4,418,717 | |||||||||||||||
Property and equipment, net |
711,712 | 619,238 | 552,159 | 493,647 | 497,959 | |||||||||||||||
Total assets |
14,434,843 | 13,572,740 | 12,217,786 | 12,310,064 | 12,783,920 | |||||||||||||||
Accounts payable |
8,833,285 | 8,517,162 | 7,326,580 | 6,964,594 | 6,474,210 | |||||||||||||||
Long-term debt, including current portion |
1,343,580 | 1,178,001 | 1,189,131 | 1,227,553 | 1,095,491 | |||||||||||||||
Stockholders’ equity |
2,954,297 | 2,716,469 | 2,710,045 | 3,099,720 | 4,141,157 | |||||||||||||||
Total liabilities and stockholders’ equity |
$ | 14,434,843 | $ | 13,572,740 | $ | 12,217,786 | $ | 12,310,064 | $ | 12,783,920 | ||||||||||
| (a) | Includes a $2.7 million litigation gain, net of income tax expense of $1.7 million,
intangible asset impairment charges of $2.0 million, net of income tax benefit of $1.2
million, and a $12.8 million gain from antitrust litigation settlements, net of income tax
expense of $7.9 million. |
|
| (b) | Includes $3.4 million of facility consolidations, employee severance and other costs,
net of income tax benefit of $2.0 million, intangible asset impairment charges of
$7.3 million, net of income tax benefit of $4.5 million, and an influenza vaccine inventory
write-down of $9.6 million, net of income tax benefit of $5.9 million. |
|
| (c) | Includes $7.6 million of facility consolidations, employee severance and other costs,
net of income tax benefit of $4.8 million, a $2.1 million gain from antitrust litigation
settlements, net of income tax expense of $1.4 million, and an intangible asset impairment
charge of $3.3 million, net of income tax benefit of $2.0 million. In fiscal 2008, the
Company recorded a non-cash charge to reduce the carrying value of PMSI by $224.9 million,
net of income tax benefit of $0.9 million. This non-cash charge, which is reflected in
discontinued operations, reduced diluted earnings per share by $0.69. |
|
| (d) | Includes $5.0 million of facility consolidations, employee severance and other costs,
net of income tax expense of $2.9 million and a $22.1 million gain from antitrust
litigation settlements, net of income tax expense of $13.7 million and also includes a
$17.5 million charge relating to the write-down of tetanus-diphtheria vaccine inventory to
its estimated net realizable value, net of income tax benefit of $10.3 million. |
|
As a result of the July 31, 2007 divestiture of Long-Term Care, the statement of operations
data includes the operations of Long-Term Care for the ten months ended July 31, 2007 and the
September 30, 2007 balance sheet data excludes Long-Term Care. |
||
| (e) | Includes $14.2 million of facility consolidations, employee severance and other costs,
net of income tax benefit of $5.9 million, a $25.8 million gain from antitrust litigation
settlements, net of income tax expense of $15.1 million, and a $4.1 million gain on the
sale of an equity investment and an eminent domain settlement, net of income tax expense of
$2.4 million. |
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ITEM 7. 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.
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. We are organized based upon the products and services we
provide to our customers. Substantially all of our operations are located in the United States and
Canada. We also have a pharmaceutical packaging operation in the United Kingdom.
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.
In October 2008, we completed the divestiture of our former workers’ compensation business,
PMSI. We classified PMSI’s operating results as discontinued in the consolidated financial
statements for all periods presented.
Pharmaceutical Distribution
Our operations are comprised of one reportable segment, Pharmaceutical Distribution. The
Pharmaceutical Distribution reportable segment represents the consolidated operating results of the
Company and is comprised of three operating segments, which include the operations of
AmerisourceBergen Drug Corporation (“ABDC”), AmerisourceBergen Specialty Group (“ABSG”), and
AmerisourceBergen Packaging Group (“ABPG”). 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.
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 plasma and other blood products, injectible pharmaceuticals and vaccines. In
addition, through its specialty services businesses, ABSG provides drug commercialization services,
third party logistics, reimbursement consulting, data analytics, and outcomes research, and other
services for biotech and other pharmaceutical manufacturers, as well as practice management, and
group purchasing services for physician practices. Beginning in fiscal 2011, certain specialty
service businesses within ABSG will be combined to form the operations of AmerisourceBergen
Consulting Services (“ABCS”). These businesses will principally provide drug commercialization
services, reimbursement consulting, data analytics, and outcomes research. ABCS revenue
in fiscal 2010 was less than 1% of our consolidated revenue.
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 and has recently entered the clinical trials packaging service
business. Brecon is a United Kingdom-based provider of contract packaging and clinical trials
materials services for pharmaceutical manufacturers.
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. Certain
reclassifications have been made to prior year amounts within this Management’s Discussion and
Analysis of Financial Condition and Results of Operations in order to conform to the current year
presentation.
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AmerisourceBergen Corporation
Summary Financial Information
Summary Financial Information
| 2010 | 2009 | |||||||||||||||||||
| vs. | vs. | |||||||||||||||||||
| Fiscal Year Ended September 30, | 2009 | 2008 | ||||||||||||||||||
| (dollars in thousands) | 2010 | 2009 | 2008 | Change | Change | |||||||||||||||
Revenue |
$ | 77,953,979 | $ | 71,759,990 | $ | 70,189,733 | 9 | % | 2 | % | ||||||||||
Gross profit |
$ | 2,356,642 | $ | 2,100,075 | $ | 2,047,002 | 12 | % | 3 | % | ||||||||||
Operating income |
$ | 1,103,635 | $ | 883,749 | $ | 827,861 | 25 | % | 7 | % | ||||||||||
Percentages of revenue: |
||||||||||||||||||||
Gross profit |
3.02 | % | 2.93 | % | 2.92 | % | ||||||||||||||
Operating expenses |
1.61 | % | 1.69 | % | 1.74 | % | ||||||||||||||
Operating income |
1.42 | % | 1.23 | % | 1.18 | % | ||||||||||||||
Year ended September 30, 2010 compared with Year ended September 30, 2009
Operating Results
Revenue of $78.0 billion in fiscal 2010, which included bulk deliveries to customer
warehouses, increased 8.6% from the prior fiscal year. The increase in revenue was due to the 10%
growth of ABDC and the 5% growth of ABSG. During fiscal 2010, 70% of revenue was from sales to
institutional customers and 30% was sales to retail customers; this compared to a customer mix in
fiscal 2009 of 69% institutional and 31% retail. Sales to institutional customers increased 10% in
the current fiscal year and sales to retail customers increased 6% in the current fiscal year.
ABDC’s revenue in fiscal 2010 increased by 10% from the prior fiscal year due to overall
pharmaceutical market growth; revenue from our new customers, primarily the new buying group
customers with which we started doing business in March and April of 2009 and a new alternate site
customer which we added in August 2009 (collectively representing approximately 4% of ABDC’s
revenue growth in fiscal 2010); and the above market growth of a few of our largest customers.
ABSG’s revenue in fiscal 2010 of $16.3 billion increased 5% from the prior fiscal year 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’s business may be adversely impacted in the future by changes in
medical guidelines and the Medicare reimbursement rates for certain pharmaceuticals, especially
oncology drugs administered by physicians and anemia drugs. Since ABSG provides a number of
services to or through physicians, any changes affecting this service channel could result in
slower or reduced growth in revenues.
We currently expect to grow our revenues between 2% and 4% in fiscal 2011. Our estimated
revenue growth in fiscal 2011 reflects the growth rate of the overall pharmaceutical market and the
September 2010 discontinuance of our contract with an ABSG third party logistics customer that has
transitioned to a direct manufacturer distribution model. This customer loss will impact our
revenue growth and ABSG’s revenue growth in fiscal 2011 by approximately 1% and 5%, respectively.
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 annually between 2% and 5% through 2014. 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.
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Gross profit of $2.4 billion in fiscal 2010 increased by $256.6 million or 12% from the prior
fiscal year. This increase was in large part attributable to our revenue growth, the continued
strong growth and profitability of our generic programs (with generic
revenue increasing by 17% in
comparison to the prior fiscal year) and increased contributions from fee-for-service agreements
with brand name pharmaceutical manufacturers. In August 2009, a generic oncology drug, Oxaliplatin,
was introduced (launched) and ABSG’s gross profit significantly benefited from this generic launch
in fiscal 2010. The gross profit benefit that we continue to receive from this generic launch
significantly exceeds the typical benefit we have experienced in the past from generic launches.
Approximately one-third of the gross profit increase for fiscal 2010 was derived from this new
generic product launch. While we expect an increase in the number of brand to generic conversions
in the future, the amount of gross profit attributable to each generic launch can vary
significantly depending on the individual characteristics of each new product. As a result, generic
launches can cause significant variability in our results of operations. There can be no assurance
that future generic launches will contribute as significantly to our gross profit as they did in
fiscal 2010. Additionally, in fiscal 2010, we recognized a gain of $20.7 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 13 of the Notes to the Consolidated Financial Statements).
Lastly, in fiscal 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 fiscal
2010 as a result of having completed this reconciliation.
As a percentage of revenue, our gross profit margin of 3.02% in fiscal 2010 improved by 9
basis points from the prior fiscal year due to the strong growth and profitability of our generic
programs, including new and recent generic launches, and increased contributions from
fee-for-service agreements with brand name pharmaceutical manufacturers. Additionally, the gain on
antitrust litigation settlements, as noted above, had the effect of increasing our gross profit
margin by 2 basis points in fiscal 2010. All of these factors more than offset the above market
growth of some of our largest customers, who benefit from our best pricing, and normal competitive
pressures on customer margins.
Our cost of goods sold includes a last-in, first-out (“LIFO”) provision that is affected by
changes in inventory, quantities, product mix, and manufacturer pricing practices, which may be
impacted by market and other external influences. We recorded a LIFO charge of $30.2 million and
$15.1 million in fiscal 2010 and 2009, respectively. The increase in our LIFO charge reflects
strong brand name price inflation and a year-over-year reduction in generic price deflation.
Operating expenses of $1.3 billion in fiscal 2010 increased by $36.7 million or 3% from the
prior fiscal year due to an increase in bad debt expense of $11.3 million primarily relating to
physician customers within ABSG’s oncology business, an increase in incentive compensation, an
increase in depreciation and amortization of $7.6 million, and additional expenses incurred
relating to our Business Transformation project, which includes a new enterprise resource planning
(“ERP”) platform. The above increases were offset, in part, by a $9.9 million reduction in facility
consolidations, employee severance and other costs and a $4.7 million reduction in asset impairment
charges. Asset impairment charges in the current fiscal year included a write-off of capitalized
software of $6.7 million (included within distribution, selling and administrative expenses) and
intangible asset impairment charges of $3.2 million. Asset impairment charges in the prior fiscal
year included intangible asset impairment charges of $11.8 million and the write-off of capitalized
software of $2.8 million (included within distribution, selling and administrative expenses). As a
percentage of revenue, operating expenses were 1.61% in fiscal 2010 and represented a significant
8 basis point decline in our operating expense ratio from the prior fiscal year, reflecting our
strong operating leverage particularly within ABDC as its operating expenses remained relatively
flat in fiscal 2010 in comparison to the prior fiscal year, despite its 10% revenue growth. Our
operating leverage has benefited from significant productivity increases achieved from our highly
automated distribution facilities and our cE2 initiative, as described below.
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In July 2010 and October 2010, we implemented the first and second phases of our new ERP
platform. As a result, we started to depreciate a significant portion of our capitalized project
costs in the fourth quarter of fiscal 2010. Additionally, we started to incur other significant
costs to support our new ERP platform as we have begun the transition from our legacy information
systems to our
ERP platform. This transition is expected to last through the end of 2012. The incremental
costs of maintaining dual information technology platforms, including depreciation, are expected to
be approximately $40 million per year during the transition period. We intend to mitigate the
impact of these incremental costs by reducing expenses elsewhere, but there can be no assurance
that we will be able to do so.
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.
In fiscal 2009, we terminated 197 employees and incurred $3.1 million of employee severance costs
relating to our cE2 initiative. Additionally, in fiscal 2009, we recorded $2.2 million of expense
to increase our liability relating to the Bergen Brunswig Matter as described in Note 12 (Legal
Matters and Contingencies) of the Notes to the Consolidated Financial Statements. In fiscal 2010,
we reversed our remaining $4.4 million liability relating to this matter.
Operating income of $1.1 billion in fiscal 2010 increased $219.9 million or 25% from the prior
fiscal year due to the increase in our gross profit. As a percentage of revenue, operating income
increased 19 basis points to 1.42% in fiscal 2010 due to the increase in our gross profit margin
and the decrease in our operating expense ratio.
The net impact of the gain on antitrust litigation settlements, the benefit from facility
consolidations, employee severance and other, and the intangible asset impairments increased
operating income as a percentage of revenue by 3 basis points in fiscal 2010. The costs of
facility consolidations, employee severance and other, and the intangible asset impairments
decreased operating income as a percentage of revenue by 2 basis points in fiscal 2009.
Interest expense, interest income, and their respective weighted average interest rates in
fiscal 2010 and 2009 were as follows (in thousands):
| 2010 | 2009 | |||||||||||||||
| Weighted-Average | Weighted-Average | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Interest expense |
$ | 74,805 | 5.19 | % | $ | 63,502 | 4.88 | % | ||||||||
Interest income |
(2,311 | ) | 0.21 | % | (5,195 | ) | 0.85 | % | ||||||||
Interest expense, net |
$ | 72,494 | $ | 58,307 | ||||||||||||
Interest expense increased from the prior fiscal year due to an increase of $183.2 million in
average borrowings, offset in part, by an increase in interest costs capitalized relating to our
Business Transformation project and a decrease in the weighted-average variable interest rate on
borrowings under our revolving credit facilities to 1.71% from 2.08% in the prior fiscal year.
Interest costs capitalized in fiscal 2010 and 2009 were $6.6 million and $2.9 million,
respectively. We expect to capitalize significantly less interest costs related to our Business
Transformation project in fiscal 2011, since we began to implement our new ERP platform in the
fourth quarter of fiscal 2010. Interest income decreased from the prior fiscal year primarily due
to a decrease in the weighted average interest rate, offset in part, by an increase in average
invested cash of $578.3 million.
Average borrowings increased in fiscal 2010 resulting from the November 2009 issuance of $400
million of new 10-year senior notes, offset in part, by the repayment of substantially all amounts
then outstanding under out multi-currency revolving credit facility (both described in Liquidity
and Capital Resources).
Our net interest expense in future periods may vary significantly depending upon changes in
net borrowings, interest rates, amendments and/or renewals to our current borrowing facilities, and
strategic decisions to deploy our invested cash.
Income taxes in fiscal 2010 reflect an effective income tax rate of 38.0%, compared to 37.9%
in the prior fiscal year. Due to the impact of discrete tax events, we were able to recognize
certain federal and state tax benefits in fiscal 2010 and 2009, thereby reducing our effective tax
rate from a normalized 38.4%.
Income from continuing operations of $636.7 million in fiscal 2010 increased 24% from $511.9
million in the prior fiscal year primarily due to the increase in operating income. Diluted
earnings per share from continuing operations of $2.22 in fiscal 2010 increased 31% from $1.69 per
share in the prior fiscal year. The difference between diluted earnings per share growth and the
increase in income from continuing operations was primarily due to the 5% reduction in
weighted average common shares outstanding, primarily from purchases of our common stock in
connection with our stock repurchase program (see Liquidity and Capital Resources), net of the
impact of stock option exercises.
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Year ended September 30, 2009 compared with Year ended September 30, 2008
Operating Results
Revenue of $71.8 billion in fiscal 2009 increased 2% from the prior fiscal year. This increase
was due to the 7% growth of ABSG and the 1.8% growth of ABDC, which was impacted by the July 1,
2008 loss of certain business (approximately $3 billion on an annualized basis) with a national
retail drug chain customer. Excluding the loss of the above-mentioned business, revenue in fiscal
2009 would have increased by 5% from the prior fiscal year. During fiscal 2009 and 2008, 69% of
revenue was from sales to institutional customers and 31% was from sales to retail customers. Sales
to institutional customers increased 3% primarily due to the growth of ABSG and the addition of a
new large hospital buying group customer. Sales to retail customers decreased slightly in the
current fiscal year as the loss of the above mentioned national chain business was offset, in part,
by market growth and the addition of a new large independent retail buying group customer.
ABDC’s revenue in fiscal 2009 increased by 1.8% from the prior fiscal year, primarily due to
revenue from two new large customers, and was partially offset by the loss of certain business with
a large retail drug chain customer, as mentioned above.
ABSG’s revenue in fiscal 2009 of $15.6 billion increased 7% from the prior fiscal year due to
good growth broadly across its distribution and service businesses offset, in part, by declining
anemia drug sales (see paragraph below). The majority of ABSG’s revenue is generated from the
distribution of pharmaceuticals to physicians who specialize in a variety of disease states,
especially oncology.
Revenue related to the distribution of anemia-related products, which represented 5% of
revenue in fiscal 2009, decreased approximately 7% from the prior fiscal year. The decline in sales
of anemia-related products has been most pronounced in the use of these products for cancer
treatment. Sales of oncology anemia-related products represented approximately 1.8% of total
revenue in fiscal 2009 and decreased approximately 25% from the prior fiscal year. Several
developments contributed to the decline in sales of anemia drugs, including expanded warning and
other product safety labeling requirements, more restrictive federal policies governing Medicare
reimbursement for the use of these drugs to treat oncology patients with undergoing dialysis or
experiencing kidney failure, and changes in regulatory and clinical medical guidelines for
recommended dosage and use. As a result, oncology-related anemia drug sales declined further in
fiscal 2009 from our fiscal 2008 total.
Gross profit of $2.1 billion in fiscal 2009 increased by $53.1 million or 3% from the prior
fiscal year. This increase was primarily due to the strong growth and increased profitability of
our generic programs, including specialty generics (with generic revenue increasing by 15% in
comparison to the prior fiscal year), increased contributions from our fee-for-service agreements
(including $10.2 million of fees relating to prior period sales resulting from the execution of new
agreements in the quarter ended December 31, 2008), and good growth from ABSG’s businesses, all of
which was offset, in part, by ABSG’s $15.5 million write-down of influenza vaccine inventory in the
December 2008 quarter, and normal competitive pressures on customer margins in the current fiscal
year. Gross profit in fiscal 2009 benefited from a settlement of $1.8 million with a former
customer. Gross profit in the prior fiscal year benefited from a gain of $13.2 million relating to
favorable litigation settlements with a former customer and a major competitor, and an $8.6 million
settlement of disputed fees with a supplier, and was partially offset by an $8.4 million inventory
write-down of certain pharmacy equipment. Additionally, in the prior fiscal year, we recognized a
gain of $3.5 million from antitrust litigation settlements with pharmaceutical manufacturers. As a
percentage of revenue, gross profit in fiscal 2009 was 2.93%, an increase of 1 basis point from the
prior fiscal year.
We recorded a LIFO charge of $15.1 million and $21.1 million in fiscal 2009 and 2008,
respectively. The fiscal 2009 and 2008 LIFO charges reflect brand name supplier price inflation,
which more than offset price deflation of generic drugs.
Operating expenses of $1.2 billion in fiscal 2009 declined by nearly $3.0 million when
compared to the prior fiscal year as a decrease in facility consolidations, employee severance and
other charges of $7.0 million, a decrease in depreciation and amortization expenses of $3.2
million, and a decrease in asset impairment charges of $1.5 million were offset, in part, by an
increase in bad debt expense of $4.2 million. Asset impairment charges in fiscal 2009 included
intangible asset impairment charges of $11.8 million and the write-off of certain capitalized
software totaling $2.8 million (included within distribution, selling and administrative expenses).
Asset impairment charges in fiscal 2008 included intangible asset impairment charges of $5.3
million related to certain of our smaller business units and impairment charges related to
capitalized equipment and software development costs totaling $10.8 million (included within
distribution, selling and administrative expenses), primarily due to ABDC’s decision to abandon the
use of certain software, which will be replaced in connection with our Business Transformation
project. Additionally, expenses incurred in fiscal
2009 in connection with our Business Transformation project increased by $13.8 million from
the prior fiscal year. As a result of our cE2 initiative described below, we were able to
substantially offset these incremental costs by reducing our warehouse operating costs through
continuing productivity improvements and by streamlining our organizational structures within ABDC
and ABSG. As a percentage of revenue, operating expenses were 1.69% and 1.74% in fiscal 2009 and
2008 respectively.
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The following table illustrates the charges incurred relating to facility consolidations,
employee severance and other for the fiscal years ended September 30, 2009 and 2008 (in thousands):
| 2009 | 2008 | |||||||
Facility consolidations and employee severance |
$ | 5,406 | $ | 9,741 | ||||
Costs relating to business divestitures |
— | 2,636 | ||||||
Total facility consolidations, employee severance and other |
$ | 5,406 | $ | 12,377 | ||||
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 fiscal 2009 and 2008, we terminated 197 and 130 employees and incurred $3.1 million and
$10.0 million of employee severance costs, respectively, relating to our cE2 initiative.
Additionally, in fiscal 2009, we recorded $2.2 million of additional expense relating to the Bergen
Brunswig Matter as described in Note 12 (Legal Matters and Contingencies) of the Notes to the
Consolidated Financial Statements. In fiscal 2008, we reversed $1.0 million of employee severance
charges previously estimated and recorded relating to a prior integration plan. Costs related to
business divestitures in fiscal 2008 related to the sale of our former workers’ compensation
business, PMSI.
Operating income of $883.7 million in fiscal 2009 increased 7% from the prior fiscal year
primarily due to the increase in gross profit. As a percentage of revenue, operating income of
1.23% in fiscal 2009 increased 5 basis points from the prior fiscal year due to the 2% increase in
revenue while operating expense dollars remained relatively flat.
The costs of facility consolidations, employee severance and other, and the charges relating
to intangible asset impairments, less the gain on antitrust litigation settlements had the effect
of decreasing operating income as a percentage of revenue by 2 basis points in each of fiscal 2009
and 2008.
Interest expense, interest income, and their respective weighted average interest rates in
fiscal 2009 and 2008 were as follows (in thousands):
| 2009 | 2008 | |||||||||||||||
| Weighted-Average | Weighted-Average | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Interest expense |
$ | 63,502 | 4.88 | % | $ | 75,099 | 5.48 | % | ||||||||
Interest income |
(5,195 | ) | 0.85 | % | (10,603 | ) | 3.33 | % | ||||||||
Interest expense, net |
$ | 58,307 | $ | 64,496 | ||||||||||||
Interest expense decreased from the prior fiscal year due to a decrease of $90.4 million in
average borrowings and a decrease in the weighted—average interest rate on borrowings under our
revolving credit facilities to 2.08% from 4.77% in the prior fiscal year. Interest income decreased
from the prior fiscal year primarily due to a decline in the weighted—average interest rate, offset
in part, by an increase in average invested cash of $218.5 million.
Income taxes in fiscal 2009 reflect an effective income tax rate of 37.9%, versus 38.4% in the
prior fiscal year. Due to the impact of discrete tax events, we were able to recognize certain
federal and state tax benefits in fiscal 2009, thereby reducing our effective tax rate from the
prior fiscal year.
Income from continuing operations of $511.9 million in fiscal 2009 increased 9% from $469.1
million in the prior fiscal year due to the increase in operating income, the decrease in interest
expense and the reduction in the effective income tax rate. Diluted earnings per share from
continuing operations of $1.69 in fiscal 2009 increased 17% from $1.44 per share in the prior
fiscal year. The difference between diluted earnings per share growth and the increase in income
from continuing operations was due to the 7% reduction in weighted average common shares
outstanding resulting from purchases of our common stock in connection with our stock repurchase
program (see Liquidity and Capital Resources), net of the impact of stock option exercises.
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Loss from discontinued operations, net of income taxes, in fiscal 2009 included a final PMSI
working capital adjustment of $2.8 million and costs in connection with a prior period business
disposition. Loss from discontinued operations, net of income taxes, in fiscal 2008 primarily
related to the PMSI business, and included a $224.8 million charge, net of income taxes, to reduce
its carrying value.
Critical Accounting Policies and Estimates
Critical accounting policies are those policies which involve accounting estimates and
assumptions that can have a material impact on our financial position and results of operations and
require the use of complex and subjective estimates based upon past experience and management’s
judgment. Actual results may differ from these estimates due to uncertainties inherent in such
estimates. Below are those policies applied in preparing our financial statements that management
believes are the most dependent on the application of estimates and assumptions. For a complete
list of significant accounting policies, see Note 1 of Notes to the Consolidated Financial
Statements.
Allowance for Doubtful Accounts
Trade receivables are primarily comprised of amounts owed to us for our pharmaceutical
distribution and services activities and are presented net of an allowance for doubtful accounts
and a reserve for customer sales returns. In determining the appropriate allowance for doubtful
accounts, we consider a combination of factors, such as the aging of trade receivables, industry
trends, and our customers’ financial strength, credit standing, and payment and default history.
Changes in the aforementioned factors, among others, may lead to adjustments in our allowance for
doubtful accounts. The calculation of the required allowance requires judgment by our management as
to the impact of these and other factors on the ultimate realization of our trade receivables. Each
of our business units performs ongoing credit evaluations of its customers’ financial condition and
maintains reserves for probable bad debt losses based on historical experience and for specific
credit problems when they arise. We write off balances against the reserves when collectability is
deemed remote. Each business unit performs formal documented reviews of the allowance at least
quarterly and our largest business units perform such reviews monthly. There were no significant
changes to this process during the fiscal years ended September 30, 2010, 2009 and 2008 and bad
debt expense was computed in a consistent manner during these periods. The bad debt expense for any
period presented is equal to the changes in the period end allowance for doubtful accounts, net of
write-offs, recoveries and other adjustments. Schedule II of this Form 10-K sets forth a
rollforward of the allowance for doubtful accounts.
Bad debt expense for the fiscal years ended September 30, 2010, 2009, and 2008 was
$43.1 million, $31.8 million, and $27.6 million respectively. An increase or decrease of 0.1% in
the 2010 allowance as a percentage of trade receivables would result in an increase or decrease in
the provision on accounts receivable of approximately $3.9 million.
Supplier Reserves
We establish reserves against amounts due from our suppliers relating to various price and
rebate incentives, including deductions or billings taken against payments otherwise due to them.
These reserve estimates are established based on the judgment of management after carefully
considering the status of current outstanding claims, historical experience with the suppliers, the
specific incentive programs and any other pertinent information available to us. We evaluate the
amounts due from our suppliers on a continual basis and adjust the reserve estimates when
appropriate based on changes in factual circumstances. An increase or decrease of 0.1% in the 2010
supplier reserve balances as a percentage of trade payables would result in an increase or decrease
in cost of goods sold by approximately $8.8 million. The ultimate outcome of any outstanding claim
may be different from our estimate.
Loss Contingencies
An estimated loss contingency is accrued in our consolidated financial statements if it is
probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Assessing contingencies is highly subjective and requires judgments about future events. We
regularly review loss contingencies to determine the adequacy of our accruals and related
disclosures. The amount of the actual loss may differ significantly from these estimates.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost for approximately 78% and 75% of
our inventories at September 30, 2010 and 2009, respectively, has been determined using the
last-in, first-out (“LIFO”) method. If we had used the first-in, first-out (“FIFO”) method of
inventory valuation, which approximates current replacement cost, inventories would have been
approximately $221.3 million and $191.1 higher than the amounts reported at September 30, 2010 and
2009, respectively. We recorded a LIFO charge of $30.2 million, $15.1 million, and $21.1 million in
fiscal 2010, 2009, and 2008 respectively.
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Business Combinations
The purchase price of an acquired company is allocated between tangible and intangible assets
acquired and liabilities assumed from the acquired business based on their estimated fair values,
with the residual of the purchase price recorded as goodwill. We engage third-party appraisal firms
to assist management in determining the fair values of certain assets acquired and liabilities
assumed. Such valuations require management to make significant judgments, estimates and
assumptions, especially with respect to intangible assets. Management makes estimates of fair value
based upon assumptions it believes to be reasonable. These estimates are based on historical
experience and information obtained from the management of the acquired companies, and are
inherently uncertain. Critical estimates in valuing certain of the intangible assets include but
are not limited to: future expected cash flows from and economic lives of customer relationships,
trade names, existing technology, and other intangible assets; and discount rates. Unanticipated
events and circumstances may occur which may affect the accuracy or validity of such assumptions,
estimates or actual events.
Goodwill and Intangible Assets
Goodwill represents the excess purchase price of an acquired entity over the net amounts
assigned to assets acquired and liabilities assumed. Goodwill and intangible assets with
indefinite lives are not amortized; rather, they are tested for impairment on at least an annual
basis. Intangible assets with finite lives, primarily customer relationships, non-compete
agreements, patents and software technology, are amortized over their estimated useful lives.
In order to test goodwill and intangible assets with indefinite lives, a determination of the
fair value of our reporting units and intangible assets with indefinite lives is required and is
based, among other things, on estimates of future operating performance of the reporting unit
and/or the component of the entity being valued. We are required to complete an impairment test for
goodwill and intangible assets with indefinite lives and record any resulting impairment losses at
least on an annual basis or more often if warranted by events or changes in circumstances
indicating that the carrying value may exceed fair value (“impairment indicators”). This impairment
test includes the projection and discounting of cash flows, analysis of our market capitalization
and estimating the fair values of tangible and intangible assets and liabilities. Estimating
future cash flows and determining their present values are based upon, among other things, certain
assumptions about expected future operating performance and appropriate discount rates determined
by management. In fiscal 2009, due to the existence of impairment indicators at U.S. Bioservices,
a specialty pharmacy company within the Company’s Specialty Group, we performed an impairment test
on the pharmacy’s trade name as of June 30, 2009, which resulted in an impairment charge of
$8.9 million. In fiscal 2008, our PMSI business unit (which we sold in fiscal 2009) experienced
certain customer losses and learned that it would lose its largest customer at the end of calendar
2008. As a result, and after considering other factors, we committed to a plan to divest PMSI. We
performed an interim impairment test of our PMSI reporting unit and determined that its goodwill
was impaired. Therefore, PMSI wrote-off the carrying value of its goodwill of $199.1 million. In
addition, we also recognized charges of $26.7 million to record the estimated loss on the sale of
PMSI (see Note 3 of the Notes to the Consolidated Financial Statements). We completed our required
annual impairment tests relating to goodwill and other intangible assets with indefinite lives in
the fourth quarter of fiscal 2010 and 2009 and, as a result, recorded $2.5 million and $1.6 million
of impairment charges, respectively. Our estimates of cash flows may differ from actual cash flows
due to, among other things, economic conditions, changes to the business model, or changes in
operating performance. Significant differences between these estimates and actual cash flows could
materially affect our future financial results.
Share-Based Compensation
We utilize a binomial option pricing model to determine the fair value of share-based
compensation expense, which involves the use of several assumptions, including expected term of the
option, future volatility, dividend yield and forfeiture rate. The expected term of options
represents the period of time that the options granted are expected to be outstanding and is based
on historical experience. Expected volatility is based on historical volatility of our common stock
as well as other factors, such as implied volatility.
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Income Taxes
Our income tax expense, deferred tax assets and liabilities, and uncertain tax positions
reflect management’s assessment of estimated future taxes to be paid on items in the financial
statements. Deferred income taxes arise from temporary differences between financial reporting and
tax reporting bases of assets and liabilities, as well as net operating loss and tax credit
carryforwards for tax purposes.
We have established a net valuation allowance against certain deferred tax assets for which
the ultimate realization of future benefits is uncertain. Expiring carryforwards and the required
valuation allowances are adjusted annually. After application of the valuation allowances described
above, we anticipate that no limitations will apply with respect to utilization of any of the other
net deferred income tax assets described above.
We prepare and file tax returns based on our interpretation of tax laws and regulations and
record estimates based on these judgments and interpretations. In the normal course of business,
our tax returns are subject to examination by various taxing authorities. Such examinations may
result in future tax and interest assessments by these taxing authorities. Inherent uncertainties
exist in estimates of tax contingencies due to changes in tax law resulting from legislation,
regulation and/or as concluded through the various jurisdictions’ tax court systems. We recognize
the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, including resolutions of any
related appeals or litigation processes, based on the technical merits of the position.
We believe that our estimates for the valuation allowances against deferred tax assets and the
amount of benefits recognized in our financial statements for uncertain tax positions are
appropriate based on current facts and circumstances. However, others applying reasonable judgment
to the same facts and circumstances could develop a different estimate and the amount ultimately
paid upon resolution of issues raised may differ from the amounts accrued.
The significant assumptions and estimates described in the preceding paragraphs are important
contributors to the ultimate effective tax rate in each year. If any of our assumptions or
estimates were to change, an increase or decrease in our effective tax rate by 1% on income from
continuing operations before income taxes would have caused income tax expense to change by
$10.3 million in fiscal 2010.
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Liquidity and Capital Resources
The following table illustrates our debt structure at September 30, 2010, including
availability under revolving credit facilities and the receivables securitization facility (in
thousands):
| Outstanding | Additional | |||||||
| Balance | Availability | |||||||
Fixed-Rate Debt: |
||||||||
$392,326, 5 5/8% senior notes due 2012 |
$ | 391,682 | $ | — | ||||
$500,000, 5 7/8% senior notes due 2015 |
498,568 | — | ||||||
$400,000, 4 7/8% senior notes due 2019 |
396,915 | — | ||||||
Other |
508 | — | ||||||
Total fixed-rate debt |
1,287,673 | — | ||||||
Variable-Rate Debt: |
||||||||
Blanco revolving credit facility due 2011 |
55,000 | — | ||||||
Multi-currency revolving credit facility
due 2011 |
907 | 682,407 | ||||||
Receivables securitization facility due 2011 |
— | 700,000 | ||||||
Other |
— | 1,572 | ||||||
Total variable-rate debt |
55,907 | 1,383,979 | ||||||
Total debt, including current portion |
$ | 1,343,580 | $ | 1,383,979 | ||||
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 (32 basis points over
LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at September 30, 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 (8 basis points at September 30, 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.
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 commitment, the program fee and commitment fee were reduced to 125 basis points and 60
basis points, respectively. At September 30, 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 connection with the Receivables
Securitization Facility, ABDC sells on a revolving basis certain accounts receivable to Amerisource
Receivables Financial Corporation, a wholly owned special purpose entity, which in turn sells a
percentage ownership interest in the receivables to commercial paper conduits sponsored by
financial institutions. ABDC is the servicer of the accounts receivable under the Receivables
Securitization Facility. After the maximum limit of receivables sold has been reached and as sold
receivables are collected, additional receivables may be sold up to the maximum amount available
under the facility. We use the facility as a financing vehicle because it generally offers an
attractive interest rate relative to other financing sources.
In fiscal 2011, we will seek to renew the Multi-Currency Revolving Credit Facility and the
Receivables Securitization Facility at available market rates, which may be higher than the rates
currently available to us.
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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. Interest on
borrowings under this facility continues to be 200 basis points over LIBOR. The Blanco Credit
Facility is not classified in the current portion of long-term debt on the consolidated balance
sheet at September 30, 2010 because we have the ability and intent to refinance it on a long-term
basis.
We have $392.3 million of 5 5/8% senior notes due September 15, 2012 (the “2012 Notes”),
$500 million of 5 7/8% senior notes due September 15, 2015 (the “2015 Notes”), and $400 million of 4 7/8%
senior notes due November 15, 2019 (the “2019 Notes”). The 2012 Notes and 2015 Notes each were sold
at 99.5% of the principal amount and have an effective yield of 5.71% and 5.94%, respectively. The
2019 Notes were sold in November 2009 at 99.174% of the principal amount and have an effective
yield of 4.98%. Interest on the 2012 Notes, the 2015 Notes, and the 2019 Notes is payable
semiannually in arrears. All of the senior notes rank pari passu to the Multi-Currency Revolving
Credit Facility.
Our operating results have generated cash flow, which, together with availability under our
debt agreements and credit terms from suppliers, has provided sufficient capital resources to
finance working capital and cash operating requirements, and to fund capital expenditures,
acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and
repurchases of shares of our common stock.
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, reduce purchases by our customers. In addition, volatility in financial markets may also
negatively impact our customers’ ability to obtain credit to finance their businesses on acceptable
terms. Reduced purchases by our customers or changes in the ability of our customers to remit
payments to us could adversely affect our revenue growth, our profitability, and our cash flow from
operations.
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 program authorizing us to purchase up to $500 million of our outstanding shares of common stock,
subject to market conditions. We purchased $470.0 million (excluding broker fees) of our common
stock in fiscal 2010, of which $68.1 million was purchased to close out our prior November 2008
share repurchase program and $401.9 million was purchased under the November 2009 share repurchase
program. As of September 30, 2010, we had $98.1 million of availability remaining on the November
2009 share repurchase program. In September 2010, our board of directors approved a new program
authorizing us to purchase up to an additional $500 million of our outstanding shares of common
stock, subject to market conditions, all of which was available for purchase as of September 30,
2010. We currently expect to purchase approximately $400 million of our common stock in fiscal
2011, subject to market conditions. Future cash flows from operations and borrowings are expected
to be sufficient to fund our ongoing cash requirements.
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 September 30, 2010 (in thousands):
| Payments Due by Period | ||||||||||||||||||||
| Within 1 | After 5 | |||||||||||||||||||
| Total | Year | 1-3 Years | 4-5 Years | Years | ||||||||||||||||
Debt, including interest payments |
$ | 1,726,048 | $ | 127,370 | $ | 513,178 | $ | 597,750 | $ | 487,750 | ||||||||||
Operating leases |
229,156 | 50,278 | 67,260 | 46,455 | 65,163 | |||||||||||||||
Other commitments |
382,905 | 164,346 | 176,276 | 42,283 | — | |||||||||||||||
Total |
$ | 2,338,109 | $ | 341,994 | $ | 756,714 | $ | 686,488 | $ | 552,913 | ||||||||||
The $55 million Blanco Credit Facility, which expires in April 2011, is included in the
“Within 1 year” column in the above table. However, this borrowing is not classified in the current
portion of long-term debt on the consolidated balance sheet at September 30, 2010 because we have
the ability and intent to refinance it on a long-term basis.
We have commitments to purchase product from influenza vaccine manufacturers for the 2010/2011
flu season. In our current fiscal year, we reduced our 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 $27.4 million as of September 30, 2010. These influenza vaccine commitments are
included in “Other commitments” in the above table.
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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
$209.5 million as of September 30, 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 ten-year
arrangement, as amended, which expires in June 2015, is approximately $136.8 million as of
September 30, 2010 and is included in “Other commitments” in the above table.
Our liability for uncertain tax positions was $55.9 million (including interest and penalties)
as of September 30, 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 fiscal 2010, our operating activities provided $1,108.6 million of cash as compared to
cash provided of $783.8 million in the prior fiscal year. Net cash provided by operating
activities in fiscal 2010 was principally the result of net income of $636.7 million, non-cash
items of $280.0 million, an increase in accounts payable, accrued expenses and income taxes of
$385.4 million, and a decrease in accounts receivable of $61.2 million, offset, in part, by an
increase in merchandise inventories of $243.0 million. Non-cash items included the provision for
deferred income taxes of $85.5 million, which primarily related to tax deductions associated with
merchandise inventories. Despite the 9% increase in revenue in fiscal 2010, accounts receivable at
September 30, 2010 decreased by 2% from September 30, 2009 as the average number of days sales
outstanding during fiscal 2010 decreased by nearly one day to 17.3 days from the prior fiscal year,
reflecting improved cash collection efforts, favorable customer mix, and timing of customer
receipts. Our inventory and accounts payable balances at September 30, 2010 were 5% higher and 4%
higher, respectively, than those balances at September 30, 2009. These increases were largely
attributed to the growth in our business in fiscal 2010. However, the increases were lower than
our revenue growth in fiscal 2010 because our inventory and accounts payable 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 purchases of the generic oncology drug launched
in August 2009 and purchases made in advance of a manufacturer’s temporary plant shutdown in
connection with its facility consolidation efforts. The average number of inventory days on hand
in fiscal 2010 was consistent with the prior fiscal year. The number of average days payable
outstanding in fiscal 2010 increased to 33.6 days from 32.8 days in the prior fiscal year. This
increase was primarily due to timing of payments to our suppliers and a change in product mix to
more generic pharmaceuticals which generally have more favorable payment terms. Operating cash
uses during fiscal 2010 included $63.8 million in interest payments and $257.8 million of income
tax payments, net of refunds.
During fiscal 2009, our operating activities provided $783.8 million of cash as compared to
cash provided of $737.1 million in the prior fiscal year. Net cash provided by operating activities
during fiscal 2009 was principally the result of income from continuing operations of $511.9
million, non-cash items of $254.0 million, and an increase in accounts payable, accrued expense and
income taxes of $1,259.6 million, offset, in part, by an increase in merchandise inventories of
$765.0 million and an increase in accounts receivable of $457.8 million. Non-cash items included
the provision for deferred income taxes of $84.3 million, which primarily related to income tax
deductions associated with merchandise inventories. The increase in accounts receivable,
merchandise inventories and accounts payable, accrued expenses and income taxes all principally
related to our 12% revenue growth in the month of September 2009 in comparison to the prior year
month. Additionally, our merchandise inventory and related accounts payable balances were also
impacted by 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 shut-down in connection with its facility
consolidation efforts. The average number of days sales outstanding in fiscal 2009 decreased to
18.1 days from 18.7 days in fiscal 2008 primarily due to favorable customer mix within ABDC. The
number of average inventory days on hand in fiscal 2009 and 2008 was consistent at 25 days.
Additionally, the number of average days payable outstanding in fiscal 2009 and 2008 was relatively
consistent at 32.8 days and 32.6 days, respectively. Operating cash uses during fiscal 2009
included $56.9 million in interest payments and $192.9 million of income tax payments, net of
refunds.
Operating cash uses during fiscal 2008 included $68.5 million in interest payments and
$262.9 million of income tax payments, net of refunds.
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Capital expenditures in fiscal 2010, 2009 and 2008 were $184.6 million, $145.8 million, and
$137.3 million, respectively. We currently expect to spend approximately $150 million for capital
expenditures during fiscal 2011. Our most significant capital expenditures in fiscal 2010 and 2009
related principally to our Business Transformation project, which includes a new ERP platform
that we have begun to implement in ABDC and our corporate office. Other capital expenditures
in fiscal 2010 included various enhancements made to our other business units’ information and
customer-related technology systems. Capital expenditures in fiscal 2008 related principally to improving our
information technology infrastructure, which included a significant purchase of software relating
to our Business Transformation project, the expansion of our ABPG production facility in Rockford,
Illinois, and investments in warehouse expansions and improvements.
In May 2009, we acquired Innomar, a Canadian specialty pharmaceutical services company, for a
purchase price of $13.4 million, net of a working capital adjustment.
In October 2008, we sold PMSI for approximately $31 million, net of a final working capital
adjustment. We received cash totaling $11.9 million and a $19 million subordinated note due from
PMSI on the fifth anniversary of the closing date. In October 2010, we received $4 million of the
total $19 million note due from PMSI as it achieved certain revenue targets with respect to its
largest customer.
In October 2007, we purchased Bellco, a privately held New York distributor of branded and
generic pharmaceuticals, for a purchase price of $162.2 million, net of cash acquired.
Net cash provided by investing activities in fiscal 2008 included purchases and sales of
short-term investment securities. Net purchases relating to these investment activities in fiscal
2008 were $467.4 million. These short-term investment securities primarily consisted of commercial
paper and tax-exempt variable rate demand notes used to maximize our after tax interest income. We
did not have any purchases or sales of short-term investment securities during fiscal 2010 and
2009.
Net cash used in financing activities in fiscal 2010 included $396.7 million of proceeds
received related to the November 2009 issuance of our 2019 Notes and net repayments of $226.0
million under our revolving and securitization credit facilities. Additionally, $7.7 million of
discretionary long-term debt repayments were made in fiscal 2010. Net cash used in financing
activities in fiscal 2009 and 2008 included net repayments of $8.8 million and $16.4 million,
respectively, under our revolving and securitization credit facilities.
During fiscal 2010, 2009, and 2008, we purchased a total of $470.4 million, $450.4 million,
and $679.7 million, respectively, of our common stock in connection with our share repurchase
programs, which are summarized below.
In May 2007, our board of directors authorized a program allowing the purchase of up to
$850 million of our outstanding shares of common stock, subject to market conditions. In November
2007, our board of directors authorized an increase to the $850 million share repurchase program by
$500 million, subject to market conditions. During fiscal 2008, we purchased $679.7 million under
this program and during fiscal 2009, we purchased 1.2 million shares of our common stock to
complete this program.
In November 2008, our board of directors authorized a program allowing the purchase of up to
$500 million of our outstanding shares of common stock, subject to market conditions. During fiscal
2009, we purchased $431.9 million under this program and during fiscal 2010, we purchased $68.1
million to complete the program.
In November 2009, our board of directors authorized a program allowing us to purchase up to
$500 million of our outstanding shares of common stock, subject to market conditions. During fiscal
2010, we purchased $401.9 million under this program.
In September 2010, 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, all of which
was available for purchase as of September 30, 2010.
During fiscal 2008, we paid quarterly cash dividends of $0.0375 per share. In November 2008,
our board of directors increased the quarterly dividend by 33% to $0.05 per share. During the first
three quarters of fiscal 2009, we paid quarterly cash dividends of $0.05 per share. In May 2009,
our board of directors increased the quarterly cash dividend by 20% to $0.06 per share and in the
fourth quarter of fiscal 2009, we paid a quarterly cash dividend of $0.06 per share. In
November 2009, our board of directors increased the quarterly dividend by 33% from $0.06 per share
to $0.08 per share. During fiscal 2010, we paid quarterly cash dividends of $0.08 per share. In
November 2010, our board of directors increased the quarterly dividend by 25% from $0.08 per share
to $0.10 per share. We anticipate that we will continue to pay quarterly cash dividends in the
future. However, the payment and amount of future dividends remain within the discretion of our
board of directors and will depend upon our future earnings, financial condition, capital
requirements and other factors.
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Market Risk
Our most significant market risk is the effect of fluctuations in interest rates relating to
our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt.
At September 30, 2010, we had $55.9 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 on terms acceptable
to us. There were no such financial instruments in effect at September 30, 2010.
We also have market risk exposure to interest rate fluctuations relating to our cash and cash
equivalents. We had $1.7 billion in cash and cash equivalents at September 30, 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 September 30, 2010. We may use derivative instruments to hedge our
foreign currency exposure but not for speculative or trading purposes.
Recent Accounting Pronouncements
Effective October 1, 2009, we adopted the applicable sections of 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 acquired
business. Additionally, this ASC provides disclosure requirements to enable users of financial
statements to evaluate the nature and financial effects of the business combination. We 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 our results of operations.
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Forward-Looking Statements
Certain of the statements contained in this Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) 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. These statements are based on management’s current expectations
and are subject to uncertainty and change in circumstances. Among the factors that could cause
actual results to differ materially from those projected, anticipated or implied are the following:
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 fraud and abuse laws and regulations and/or other 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
pharmaceutical products 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 and
transactions (including processes and transactions relating to our customers and suppliers) of
AmerisourceBergen Drug Corporation operations and our corporate operations without functional
problems, unanticipated delays 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 and/or regulatory action by provincial
authorities in Canada to lower pharmaceutical product pricing or service fees; the impact of
divestitures or the acquisition of businesses that do not perform as we expect, are difficult for
us to integrate into our business operations or do not adhere to our system of internal controls;
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
elsewhere in this MD&A, in Item 1A (Risk Factors), Item 1 (Business) and elsewhere in this report.
ITEM 7A. 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 discussion on page 35 under the heading “Market Risk,” which is
incorporated by reference herein.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41 | ||||
| 42 | ||||
| 43 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of AmerisourceBergen Corporation
We have audited the accompanying consolidated balance sheets of AmerisourceBergen Corporation
and subsidiaries as of September 30, 2010 and 2009, and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended September 30, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of AmerisourceBergen Corporation and subsidiaries at
September 30, 2010 and 2009, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended September 30, 2010, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), internal control over financial reporting of AmerisourceBergen
Corporation and subsidiaries as of September 30, 2010, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated November 23, 2010 expressed an unqualified opinion thereon.
| /s/ Ernst & Young LLP |
Philadelphia, Pennsylvania
November 23, 2010
November 23, 2010
38
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | September 30, | |||||||
| 2010 | 2009 | |||||||
| (In thousands, except share and per | ||||||||
| share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,658,182 | $ | 1,009,368 | ||||
Accounts receivable, less allowances for returns and doubtful
accounts: 2010 — $366,477; 2009 — $370,303 |
3,827,484 | 3,916,509 | ||||||
Merchandise inventories |
5,210,098 | 4,972,820 | ||||||
Prepaid expenses and other |
52,586 | 55,056 | ||||||
Total current assets |
10,748,350 | 9,953,753 | ||||||
Property and equipment, at cost: |
||||||||
Land |
36,407 | 35,665 | ||||||
Buildings and improvements |
307,448 | 292,903 | ||||||
Machinery, equipment and other |
841,586 | 694,555 | ||||||
Total property and equipment |
1,185,441 | 1,023,123 | ||||||
Less accumulated depreciation |
(473,729 | ) | (403,885 | ) | ||||
Property and equipment, net |
711,712 | 619,238 | ||||||
Goodwill and other intangible assets |
2,845,343 | 2,859,064 | ||||||
Other assets |
129,438 | 140,685 | ||||||
TOTAL ASSETS |
$ | 14,434,843 | $ | 13,572,740 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 8,833,285 | $ | 8,517,162 | ||||
Accrued expenses and other |
369,016 | 315,657 | ||||||
Current portion of long-term debt |
422 | 1,068 | ||||||
Deferred income taxes |
703,621 | 645,723 | ||||||
Total current liabilities |
9,906,344 | 9,479,610 | ||||||
Long-term debt, net of current portion |
1,343,158 | 1,176,933 | ||||||
Other liabilities |
231,044 | 199,728 | ||||||
Stockholders’ equity: |
||||||||
Common stock, $0.01 par value — authorized, issued and outstanding: 600,000,000 shares, 489,831,248 shares and 277,521,183 shares at
September 30, 2010, respectively, and 600,000,000 shares, 482,941,212
shares and 287,922,263 shares at September 30, 2009, respectively |
4,898 | 4,829 | ||||||
Additional paid-in capital |
3,899,381 | 3,737,835 | ||||||
Retained earnings |
3,465,886 | 2,919,760 | ||||||
Accumulated other comprehensive loss |
(42,536 | ) | (46,096 | ) | ||||
| 7,327,629 | 6,616,328 | |||||||
Treasury stock, at cost: 2010 — 212,310,065 shares; 2009 — 195,018,949 shares |
(4,373,332 | ) | (3,899,859 | ) | ||||
Total stockholders’ equity |
2,954,297 | 2,716,469 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 14,434,843 | $ | 13,572,740 | ||||
See notes to consolidated financial statements.
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
Revenue |
$ | 77,953,979 | $ | 71,759,990 | $ | 70,189,733 | ||||||
Cost of goods sold |
75,597,337 | 69,659,915 | 68,142,731 | |||||||||
Gross profit |
2,356,642 | 2,100,075 | 2,047,002 | |||||||||
Operating expenses: |
||||||||||||
Distribution, selling and administrative |
1,167,828 | 1,120,240 | 1,119,393 | |||||||||
Depreciation |
70,004 | 63,488 | 64,954 | |||||||||
Amortization |
16,457 | 15,420 | 17,127 | |||||||||
Facility consolidations, employee severance and other |
(4,482 | ) | 5,406 | 12,377 | ||||||||
Intangible asset impairments |
3,200 | 11,772 | 5,290 | |||||||||
Operating income |
1,103,635 | 883,749 | 827,861 | |||||||||
Other loss |
3,372 | 1,368 | 2,027 | |||||||||
Interest expense, net |
72,494 | 58,307 | 64,496 | |||||||||
Income from continuing operations before income taxes |
1,027,769 | 824,074 | 761,338 | |||||||||
Income taxes |
391,021 | 312,222 | 292,274 | |||||||||
Income from continuing operations |
636,748 | 511,852 | 469,064 | |||||||||
Loss from discontinued operations, net of income tax
expense of $353 and
$2,150 for fiscal 2009 and 2008, respectively |
— | (8,455 | ) | (218,505 | ) | |||||||
Net income |
$ | 636,748 | $ | 503,397 | $ | 250,559 | ||||||
Earnings per share: |
||||||||||||
Basic earnings per share: |
||||||||||||
Continuing operations |
$ | 2.26 | $ | 1.70 | $ | 1.46 | ||||||
Discontinued operations |
— | (0.03 | ) | (0.68 | ) | |||||||
Total |
$ | 2.26 | $ | 1.67 | $ | 0.78 | ||||||
Diluted earnings per share: |
||||||||||||
Continuing operations |
$ | 2.22 | $ | 1.69 | $ | 1.44 | ||||||
Discontinued operations |
— | (0.03 | ) | (0.67 | ) | |||||||
Total |
$ | 2.22 | $ | 1.66 | $ | 0.77 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
282,258 | 300,573 | 321,284 | |||||||||
Diluted |
287,246 | 302,754 | 324,920 | |||||||||
See notes to consolidated financial statements.
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||||||
| Stock | Capital | Earnings | Loss | Stock | Total | |||||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||||||
September 30, 2007 |
$ | 4,759 | $ | 3,581,007 | $ | 2,286,489 | $ | (5,247 | ) | $ | (2,767,288 | ) | $ | 3,099,720 | ||||||||||
Net income |
250,559 | 250,559 | ||||||||||||||||||||||
Foreign currency translation |
(8,708 | ) | (8,708 | ) | ||||||||||||||||||||
Benefit plan funded status adjustment, net of tax of $3,157 |
(4,938 | ) | (4,938 | ) | ||||||||||||||||||||
Benefit plan actuarial loss amortization to earnings,
net of tax of $901 |
1,410 | 1,410 | ||||||||||||||||||||||
Other, net of tax |
993 | 993 | ||||||||||||||||||||||
Total comprehensive income |
239,316 | |||||||||||||||||||||||
Cash dividends, $0.15 per share |
(48,674 | ) | (48,674 | ) | ||||||||||||||||||||
Adoption of ASC 740 |
(9,296 | ) | (9,296 | ) | ||||||||||||||||||||
Exercise of stock options |
53 | 71,170 | 71,223 | |||||||||||||||||||||
Excess tax benefit from exercise of stock options |
11,988 | 11,988 | ||||||||||||||||||||||
Share-based compensation expense |
26,384 | 26,384 | ||||||||||||||||||||||
Common stock purchases for employee stock purchase plan |
(932 | ) | (932 | ) | ||||||||||||||||||||
Purchases of common stock |
(679,684 | ) | (679,684 | ) | ||||||||||||||||||||
September 30, 2008 |
4,812 | 3,689,617 | 2,479,078 | (16,490 | ) | (3,446,972 | ) | 2,710,045 | ||||||||||||||||
Net income |
503,397 | 503,397 | ||||||||||||||||||||||
Foreign currency translation |
(4,707 | ) | (4,707 | ) | ||||||||||||||||||||
Benefit plan funded status adjustment, net of
tax of $15,988 |
(25,007 | ) | (25,007 | ) | ||||||||||||||||||||
Other, net of tax |
108 | 108 | ||||||||||||||||||||||
Total comprehensive income |
473,791 | |||||||||||||||||||||||
Cash dividends, $0.21 per share |
(62,696 | ) | (62,696 | ) | ||||||||||||||||||||
Exercise of stock options |
13 | 20,543 | 20,556 | |||||||||||||||||||||
Excess tax benefit from exercise of stock options |
1,510 | 1,510 | ||||||||||||||||||||||
Share-based compensation expense |
27,138 | 27,138 | ||||||||||||||||||||||
Common stock purchases for employee stock purchase plan |
(985 | ) | (985 | ) | ||||||||||||||||||||
Purchases of common stock |
(450,350 | ) | (450,350 | ) | ||||||||||||||||||||
Employee tax withholdings related to restricted share
vesting |
(2,521 | ) | (2,521 | ) | ||||||||||||||||||||
Other |
4 | 12 | (19 | ) | (16 | ) | (19 | ) | ||||||||||||||||
September 30, 2009 |
4,829 | 3,737,835 | 2,919,760 | (46,096 | ) | (3,899,859 | ) | 2,716,469 | ||||||||||||||||
Net income |
636,748 | 636,748 | ||||||||||||||||||||||
Foreign currency translation |
6,608 | 6,608 | ||||||||||||||||||||||
Benefit plan funded status adjustment, net of tax of $2,019 |
(3,158 | ) | (3,158 | ) | ||||||||||||||||||||
Other, net of tax |
108 | 108 | ||||||||||||||||||||||
Total comprehensive income |
640,306 | |||||||||||||||||||||||
Cash dividends, $0.32 per share |
(90,622 | ) | (90,622 | ) | ||||||||||||||||||||
Exercise of stock options |
66 | 111,617 | 111,683 | |||||||||||||||||||||
Excess tax benefit from exercise of stock options |
21,036 | 21,036 | ||||||||||||||||||||||
Share-based compensation expense |
30,844 | 30,844 | ||||||||||||||||||||||
Common stock purchases for employee stock purchase plan |
(1,948 | ) | (1,948 | ) | ||||||||||||||||||||
Purchases of common stock |
(470,356 | ) | (470,356 | ) | ||||||||||||||||||||
Employee tax withholdings related to restricted share
vesting |
(3,117 | ) | (3,117 | ) | ||||||||||||||||||||
Other |
3 | (3 | ) | 2 | 2 | |||||||||||||||||||
September 30, 2010 |
$ | 4,898 | $ | 3,899,381 | $ | 3,465,886 | $ | (42,536 | ) | $ | (4,373,332 | ) | $ | 2,954,297 | ||||||||||
See notes to consolidated financial statements.
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 636,748 | $ | 503,397 | $ | 250,559 | ||||||
Loss from discontinued operations |
— | 8,455 | 218,505 | |||||||||
Income from continuing operations |
636,748 | 511,852 | 469,064 | |||||||||
Adjustments to reconcile income from continuing operations to net cash provided by
operating activities: |
||||||||||||
Depreciation, including amounts charged to cost of goods sold |
82,753 | 74,612 | 75,239 | |||||||||
Amortization, including amounts charged to interest expense |
21,419 | 19,704 | 20,643 | |||||||||
Provision for doubtful accounts |
43,124 | 31,830 | 27,630 | |||||||||
Provision for deferred income taxes |
85,478 | 84,324 | 62,112 | |||||||||
Share-based compensation |
30,844 | 27,138 | 25,503 | |||||||||
Loss on disposal of property and equipment |
8,795 | 3,318 | 5,036 | |||||||||
Other, including intangible asset impairments |
7,555 | 13,031 | 1,888 | |||||||||
Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions: |
||||||||||||
Accounts receivable |
61,160 | (457,771 | ) | 8,745 | ||||||||
Merchandise inventories |
(242,967 | ) | (765,011 | ) | (8,013 | ) | ||||||
Prepaid expenses and other assets |
10,325 | (15,379 | ) | (16,787 | ) | |||||||
Accounts payable, accrued expenses, and income taxes |
385,385 | 1,259,604 | 53,684 | |||||||||
Other liabilities |
(21,995 | ) | 3,744 | (5,120 | ) | |||||||
Net cash provided by operating activities-continuing operations |
1,108,624 | 790,996 | 719,624 | |||||||||
Net cash (used in) provided by operating activities-discontinued operations |
— | (7,233 | ) | 17,445 | ||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
1,108,624 | 783,763 | 737,069 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Capital expenditures |
(184,635 | ) | (145,837 | ) | (137,309 | ) | ||||||
Cost of acquired companies, net of cash acquired |
— | (13,422 | ) | (169,230 | ) | |||||||
Proceeds from sales of property and equipment |
264 | 108 | 3,020 | |||||||||
Proceeds from sale of PMSI |
— | 11,940 | — | |||||||||
Proceeds from sales of other assets |
— | — | 1,878 | |||||||||
Purchases of investment securities available-for-sale |
— | — | (909,105 | ) | ||||||||
Proceeds from sale of investment securities available-for-sale |
— | — | 1,376,524 | |||||||||
Net cash (used in) provided by investing activities-continuing operations |
(184,371 | ) | (147,211 | ) | 165,778 | |||||||
Net cash used in investing activities-discontinued operations |
— | (1,138 | ) | (2,357 | ) | |||||||
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
(184,371 | ) | (148,349 | ) | 163,421 | |||||||
FINANCING ACTIVITIES |
||||||||||||
Long-term debt borrowings |
396,696 | — | — | |||||||||
Long-term debt repayments |
(7,664 | ) | — | — | ||||||||
Borrowings under revolving and securitization credit facilities |
1,027,738 | 2,153,527 | 5,956,027 | |||||||||
Repayments under revolving and securitization credit facilities |
(1,253,731 | ) | (2,162,365 | ) | (5,972,423 | ) | ||||||
Purchases of common stock |
(470,356 | ) | (450,350 | ) | (679,684 | ) | ||||||
Exercises of stock options, including excess tax benefits of $21,036,
$1,510, and $11,988, in fiscal 2010, 2009, and 2008 respectively |
132,719 | 22,066 | 84,394 | |||||||||
Cash dividends on common stock |
(90,622 | ) | (62,696 | ) | (48,674 | ) | ||||||
Debt issuance costs and other |
(10,219 | ) | (4,342 | ) | (2,057 | ) | ||||||
Net cash used in financing activities-continuing operations |
(275,439 | ) | (504,160 | ) | (662,417 | ) | ||||||
Net cash used in financing activities-discontinued operations |
— | — | (163 | ) | ||||||||
NET CASH USED IN FINANCING ACTIVITIES |
(275,439 | ) | (504,160 | ) | (662,580 | ) | ||||||
INCREASE IN CASH AND CASH EQUIVALENTS |
648,814 | 131,254 | 237,910 | |||||||||
Cash and cash equivalents at beginning of year |
1,009,368 | 878,114 | 640,204 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
$ | 1,658,182 | $ | 1,009,368 | $ | 878,114 | ||||||
See notes to consolidated financial statements.
42
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
Note 1. Summary of Significant Accounting Policies
AmerisourceBergen Corporation (the “Company”) is a pharmaceutical services company providing
drug distribution and related healthcare services and solutions to its pharmacy, physician and
manufacturer customers, which are based primarily in the United States and Canada.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries as of the dates and for the fiscal years indicated. All intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Actual amounts could differ
from these estimated amounts due to uncertainties inherent in such estimates. Management
periodically evaluates estimates used in the preparation of the financial statements for continued
reasonableness.
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.
During the fiscal year ended September 30, 2008, the Company committed to a plan to divest its
workers’ compensation business, PMSI. In October 2008, the Company completed the sale of PMSI (see
Note 3). The Company has classified PMSI’s operating results as discontinued in the consolidated
financial statements for the fiscal years ended September 30, 2009 and 2008, as PMSI was eliminated
from the ongoing operations of the Company upon its divestiture and the Company will not have any
significant continuing involvement in the operations of the disposed component. Previously, PMSI
was included in the Company’s Other reportable segment.
Certain reclassifications have been made to prior-year amounts in order to conform to the
current-year presentation.
Business Combinations
The purchase price of an acquired company is allocated between tangible and intangible assets
acquired and liabilities assumed from the acquired business based on their estimated fair values,
with the residual of the purchase price recorded as goodwill. The results of operations of the
acquired businesses are included in the Company’s results from the dates of acquisition (see
Note 2).
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Concentrations of Credit Risk and Allowance for Doubtful Accounts
The Company sells its merchandise inventories to a large number of customers in the healthcare
industry that include institutional and retail healthcare providers. Institutional healthcare
providers include acute care hospitals, health systems, mail order pharmacies, long-term care and
other alternate care pharmacies and providers of pharmacy services to such facilities, and
physician offices. Retail healthcare providers include national and regional retail drugstore
chains, independent community pharmacies and pharmacy departments of supermarkets and mass
merchandisers. The financial condition of the Company’s customers can be affected by changes in
government reimbursement policies as well as by other economic pressures in the healthcare
industry.
43
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The Company’s trade accounts receivable are exposed to credit risk, but the risk is moderated
because the Company’s customer base is diverse and geographically widespread primarily within the
U.S. and Canada. The Company generally does not require collateral for trade receivables. The
Company performs ongoing credit evaluations of its customers’ financial condition and maintains an
allowance for doubtful accounts. In determining the appropriate allowance for doubtful accounts,
the Company considers a combination of factors, such as the aging of trade receivables, industry
trends, its customers’ financial strength, credit standing, and
payment and default history. Changes in these factors, among others, may lead to adjustments
in the Company’s allowance for doubtful accounts. The calculation of the required allowance
requires judgment by Company management as to the impact of those and other factors on the ultimate
realization of its trade receivables. Each of the Company’s business units performs ongoing credit
evaluations of its customers’ financial condition and maintains reserves for probable bad debt
losses based on historical experience and for specific credit problems when they arise. There were
no significant changes to this process during the fiscal years ended September 30, 2010, 2009, and
2008 and bad debt expense was computed in a consistent manner during these periods. The bad debt
expense for any period presented is equal to the changes in the period end allowance for doubtful
accounts, net of write-offs, recoveries and other adjustments. Schedule II of this Form 10-K sets
forth a rollforward of the allowance for doubtful accounts. At September 30, 2010, the largest
trade receivable due from a single customer represented approximately 8% of accounts receivable,
net. In fiscal 2010, Medco Health Solutions, Inc. (“Medco”), our largest customer, accounted for
18% of our revenue. No other single customer accounted for more than 5% of the Company’s revenue.
The Company maintains cash and cash equivalents with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits. These deposits may be
redeemed upon demand, and are maintained with financial institutions with reputable credit, and,
therefore, bear minimal credit risk. The Company seeks to mitigate such risks by monitoring the
risk profiles of these counterparties. The Company also seeks to mitigate risk by monitoring the
investment strategy of money market funds that it is invested in, which are classified as cash
equivalents.
Derivative Financial Instruments
The Company records all derivative financial instruments on the balance sheet at fair value
and complies with established criteria for designation and effectiveness of hedging relationships.
As of September 30, 2010 and 2009, there were no outstanding derivative financial instruments.
The Company’s policy prohibits it from entering into derivative financial instruments for
speculative or trading purposes.
Equity Investments
The Company uses the equity method of accounting for its investments in entities in which it
has significant influence; generally, this represents an ownership interest of between 20% and 50%.
The Company’s investments in marketable equity securities in which the Company does not have
significant influence are classified as “available for sale” and are carried at fair value, with
unrealized gains and losses excluded from earnings and reported in the accumulated other
comprehensive loss component of stockholders’ equity. Unrealized losses that are determined to be
other-than-temporary impairment losses are recorded as a component of earnings in the period in
which that determination is made.
Foreign Currency
The functional currency of the Company’s foreign operations is the applicable local currency.
Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect
at the balance sheet date, while revenues and expenses are translated at the weighted-average
exchange rates for the period. The resulting translation adjustments are recorded as a component of
accumulated other comprehensive loss within stockholders’ equity.
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price of an acquired entity over the net amounts
assigned to assets acquired and liabilities assumed. The Company does not amortize purchased
goodwill or intangible assets with indefinite lives; rather, they are tested for impairment on at
least an annual basis. Intangible assets with finite lives, primarily customer relationships,
non-compete agreements, patents and software technology, are amortized over their estimated useful
lives, which range from 2 to 15 years.
The Company’s operating segments are comprised of AmerisourceBergen Drug Corporation,
AmerisourceBergen Specialty Group, and AmerisourceBergen Packaging Group. Each operating segment
has an executive who is responsible for managing the segment and reporting directly to the
President and Chief Executive Officer of the Company, the Company’s Chief Operating Decision Maker
(“CODM”). Each operating segment is comprised of a number of operating units (components), for
which discrete financial information is available. These components are aggregated into reporting
units for purposes of goodwill impairment testing.
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In order to test goodwill and intangible assets with indefinite lives, a determination of the
fair value of the Company’s reporting units and intangible assets with indefinite lives is required
and is based, among other things, on estimates of future operating performance of the reporting
unit and/or the component of the entity being valued. The Company is required to complete an
impairment test for goodwill and intangible assets with indefinite lives and record any resulting
impairment losses at least on an
annual basis or more often if warranted by events or changes in circumstances indicating that
the carrying value may exceed fair value (“impairment indicators”). This impairment test includes
the projection and discounting of cash flows, analysis of the Company’s market capitalization and
estimating the fair values of tangible and intangible assets and liabilities. Estimates of future
cash flows and determination of their present values are based upon, among other things, certain
assumptions about expected future operating performance and appropriate discount rates determined
by management. In fiscal 2009, due to the existence of impairment indicators at U.S. Bioservices, a
specialty pharmacy company within AmerisourceBergen Specialty Group, the Company performed an
impairment test on the pharmacy’s trade name as of June 30, 2009, which resulted in an impairment
charge of $8.9 million. In fiscal 2008, PMSI (which the Company sold in fiscal 2009) experienced
certain customer losses and learned that it would lose its largest customer at the end of calendar
2008. As a result, and after considering other factors, the Company committed to a plan to divest
PMSI. The Company performed an interim impairment test of its PMSI reporting unit and determined
that its goodwill was impaired. Therefore, PMSI wrote-off the carrying value of its goodwill of
$199.1 million. In addition, it also recognized charges of $26.7 million to record the estimated
loss on the sale of PMSI (see Note 3). The Company completed its required annual impairment tests
relating to goodwill and other intangible assets with indefinite lives in the fourth quarter of
fiscal 2010, 2009, and 2008, and, as a result, recorded $2.5 million $1.6 million and $5.3 million
of trade name impairment charges, respectively. The Company’s estimates of cash flows may differ
from actual cash flows due to, among other things, economic conditions, changes to the business
model, or changes in operating performance. Significant differences between these estimates and
actual cash flows could materially affect the Company’s future financial results.
Income Taxes
The Company accounts for income taxes using a method that requires recognition of deferred tax
assets and liabilities for expected future tax consequences of temporary differences that currently
exist between tax bases and financial reporting bases of the Company’s assets and liabilities
(commonly known as the asset and liability method). In assessing the ability to realize deferred
tax assets, the Company considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
During fiscal 2008, the Company adopted Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740, “Income Taxes” (formerly referenced as FASB
Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109”), which changed the framework for accounting for uncertainty in income
taxes. The Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities,
including resolutions of any related appeals or litigation processes, based on the technical merits
of the position. The cumulative effect of this adoption resulted in a $9.3 million reduction to
retained earnings.
Loss Contingencies
The Company accrues for estimated loss contingencies related to litigation if it is probable
that a liability has been incurred and the amount of the loss can be reasonably estimated.
Assessing contingencies is highly subjective and requires judgments about future events. The
Company regularly reviews loss contingencies to determine the adequacy of its accruals and related
disclosures. The amount of the actual loss may differ significantly from these estimates.
Manufacturer Incentives
The Company accounts for fees and other incentives received from its suppliers, relating to
the purchase or distribution of inventory, as a reduction to cost of goods sold. The Company
considers these fees and other incentives to represent product discounts, and as a result, they are
capitalized as product costs and relieved through cost of goods sold upon the sale of the related
inventory.
Merchandise Inventories
Inventories are stated at the lower of cost or market. Cost for approximately 78% and 75% of
the Company’s inventories at September 30, 2010 and 2009, respectively, has been determined using
the last-in, first-out (LIFO) method. If the Company had used the first-in, first-out (FIFO) method
of inventory valuation, which approximates current replacement cost, inventories would have been
approximately $221.3 million and $191.1 million higher than the amounts reported at September 30,
2010 and 2009, respectively. The Company recorded a LIFO charge of $30.2 million, $15.1 million,
and $21.1 million in fiscal 2010, 2009, and 2008, respectively.
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Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over
the estimated useful lives of the assets, which range from 3 to 40 years for buildings and
improvements and from 3 to 10 years for machinery, equipment and other. The costs of repairs and
maintenance are charged to expense as incurred.
The Company capitalizes project costs relating to computer software developed or obtained for
internal use when the activities related to the project reach the application development stage.
Costs that are associated with preliminary stage activities, training, maintenance, and all other
post-implementation stage activites are expensed as they are incurred. Software development costs
are depreciated using the straight-line method over the estimated useful lives, which range from 5
to 10 years.
In connection with the Company’s Business Transformation project, which includes a new
enterprise resource planning (“ERP”) platform, the Company wrote-off capitalized software costs
totaling $6.7 million and $2.8 million in fiscal 2010 and 2009, respectively.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, product has
been delivered or services have been rendered, the price is fixed or determinable and
collectibility is reasonably assured. Revenue as reflected in the accompanying consolidated
statements of operations is net of estimated sales returns and allowances.
The Company’s customer sales return policy generally allows customers to return products only
if the products can be resold at full value or returned to suppliers for full credit. The Company
records an accrual for estimated customer sales returns at the time of sale to the customer. At
September 30, 2010 and 2009, the Company’s accrual for estimated customer sales returns was
$270.1 million and $279.3 million, respectively.
The Company reports the gross dollar amount of bulk deliveries to customer warehouses in
revenue and the related costs in cost of goods sold. Bulk delivery transactions are arranged by the
Company at the express direction of the customer, and involve either drop shipments from the
supplier directly to customers’ warehouse sites or cross-dock shipments from the supplier to the
Company for immediate shipment to the customers’ warehouse sites. The Company is a principal to
these transactions because it is the primary obligor and has the ultimate and contractual
responsibility for fulfillment and acceptability of the products purchased, and bears full risk of
delivery and loss for products, whether the products are drop-shipped or shipped via cross-dock.
The Company also bears full credit risk associated with the creditworthiness of any bulk delivery
customer. As a result, the Company records bulk deliveries to customer warehouses as gross
revenues. Gross profit earned by the Company on bulk deliveries was not material in any year
presented.
Share-Based Compensation
The Company accounts for the compensation cost of all share-based payments at fair value and
reports the related expense within distribution, selling and administrative expenses to correspond
with the same line item as the cash compensation paid to employees. The benefits of tax deductions
in excess of recognized compensation expense are reported as a financing cash flow ($21.0 million,
$1.5 million, and $12.0 million for the fiscal years ended September 30, 2010, 2009, and 2008
respectively).
Shipping and Handling Costs
Shipping and handling costs include all costs to warehouse, pick, pack and deliver inventory
to customers. These costs, which were $296.6 million, $293.9 million and $301.6 million for the
fiscal years ended September 30, 2010, 2009 and 2008, respectively, are included in distribution,
selling and administrative expenses.
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Supplier Reserves
The Company establishes reserves against amounts due from its suppliers relating to various
price and rebate incentives, including deductions or billings taken against payments otherwise due
them from the Company. These reserve estimates are established based on the judgment of Company
management after carefully considering the status of current outstanding claims, historical
experience with the suppliers, the specific incentive programs and any other pertinent information
available to the Company. The Company evaluates the amounts due from its suppliers on a continual
basis and adjusts the reserve estimates when appropriate based on changes in factual circumstances.
The ultimate outcome of any outstanding claim may be different than the Company’s estimate.
Recent Accounting Pronouncements
Effective October 1, 2009, the Company adopted the applicable sections of 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 acquired business.
Additionally, this ASC provides disclosure requirements to enable users of financial statements to
evaluate the nature and financial effects of the 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 results of operations.
Note 2. Acquisitions
In May 2009, the Company acquired Innomar Strategies Inc. (“Innomar”) for a purchase price of
$13.4 million, net of a working capital adjustment. Innomar is a Canadian pharmaceutical services
company that provides services within Canada to pharmaceutical and biotechnology companies,
including: strategic consulting and access solutions, specialty logistics management, patient
assistance and nursing services, and clinical research services. The acquisition of Innomar
expanded the Company’s business in Canada. The purchase price was allocated to the underlying
assets acquired and liabilities assumed based upon their fair values at the date of acquisition.
The purchase price exceeded the fair value of the net tangible and intangible assets acquired by
$8.3 million, which was allocated to goodwill. The fair value of the intangible assets acquired of
$4.6 million primarily consist of a trade name of $1.6 million and customer relationships of
$2.6 million. The Company is amortizing the fair value of the acquired customer relationships over
their weighted average life of 10 years.
In October 2007, the Company acquired Bellco Health (“Bellco”) for a purchase price of
$162.2 million, net of $20.7 million of cash acquired. Bellco is a pharmaceutical distributor in
the Metro New York City area, where it primarily services independent retail community pharmacies.
The acquisition of Bellco expanded the Company’s presence in this large community pharmacy market.
Nationally, Bellco markets and sells generic pharmaceuticals to individual retail pharmacies, and
provides pharmaceutical products and services to dialysis clinics. The purchase price was allocated
to the underlying assets acquired and liabilities assumed based upon their fair values at the date
of the acquisition. The purchase price exceeded the fair value of the net tangible and intangible
assets acquired by $139.8 million, which was allocated to goodwill. The fair values of the
significant tangible assets acquired and liabilities assumed were as follows: accounts receivable
of $112.2 million, merchandise inventories of $106.5 million, and accounts payable and accrued
expenses of $237.0 million. The fair values of the intangible assets acquired of $31.7 million
primarily consist of customer relationships of $28.7 million, which are being amortized over their
weighted average life of 8.9 years.
Pro forma results of operations for the aforementioned fiscal 2009 and 2008 acquisitions have
not been presented because the effects were not material to the consolidated financial statements
on either an individual or aggregate basis.
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Note 3. Discontinued Operations
In October 2008, the Company completed the divestiture of its workers’ compensation business,
PMSI. Accordingly, PMSI’s operating results have been classified as discontinued in the
consolidated financial statements for all periods presented. Previously, PMSI was included in the
Company’s Other reportable segment. PMSI’s revenue and loss before income taxes were as follows:
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Revenue |
$ | — | $ | 28,993 | $ | 403,759 | ||||||
Loss before income taxes |
$ | — | $ | (3,825 | ) | $ | (216,355 | ) | ||||
The Company sold PMSI for approximately $31 million, net of a final working capital
adjustment, including a $19 million subordinated note payable due from PMSI on the fifth
anniversary of the closing date (the “maturity date”), of which $4 million was paid in October 2010
as PMSI achieved certain revenue targets with respect to its largest customer. Interest, which
accrues at an annual rate of LIBOR plus 4% (not to exceed 8%), is payable in cash on a quarterly
basis if PMSI achieves a defined minimum fixed charge coverage ratio or will be compounded
quarterly and paid at maturity.
The Company recorded a non-cash charge of $225.8 million during fiscal 2008 to reduce the
carrying value of PMSI. This charge, which is included in the loss from discontinued operations for
the fiscal year ended September 30, 2008, was comprised of a $199.1 million write-off of PMSI’s
goodwill and a $26.7 million charge to record the Company’s loss on the sale of PMSI. The tax
benefit recorded in connection with the above charge was minimal, as the loss on the sale of PMSI
will be treated as a capital loss for income tax purposes, and the Company does not have
significant capital gains to offset the capital loss.
Note 4. Income Taxes
The income tax provision is as follows (in thousands):
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Current provision: |
||||||||||||
Federal |
$ | 269,218 | $ | 200,902 | $ | 198,187 | ||||||
State and local |
34,828 | 24,942 | 26,862 | |||||||||
Foreign |
1,497 | 2,054 | 5,113 | |||||||||
| 305,543 | 227,898 | 230,162 | ||||||||||
Deferred provision: |
||||||||||||
Federal |
69,295 | 81,711 | 55,137 | |||||||||
State and local |
12,995 | 6,178 | 9,824 | |||||||||
Foreign |
3,188 | (3,565 | ) | (2,849 | ) | |||||||
| 85,478 | 84,324 | 62,112 | ||||||||||
Provision for income taxes |
$ | 391,021 | $ | 312,222 | $ | 292,274 | ||||||
A reconciliation of the statutory federal income tax rate to the effective income tax rate is
as follows:
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income tax rate,
net of federal tax benefit |
3.3 | 2.3 | 3.2 | |||||||||
Foreign |
— | (0.1 | ) | 0.1 | ||||||||
Other |
(0.3 | ) | 0.7 | 0.1 | ||||||||
Effective income tax rate |
38.0 | % | 37.9 | % | 38.4 | % | ||||||
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Deferred income taxes reflect the future tax consequences of differences between the tax bases
of assets and liabilities and their financial reporting amounts. Significant components of the
Company’s deferred tax liabilities (assets) are as follows (in thousands):
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Merchandise inventories |
$ | 784,144 | $ | 723,464 | ||||
Property and equipment |
55,681 | 25,704 | ||||||
Goodwill and other intangible assets |
156,244 | 146,083 | ||||||
Other |
1,930 | 2,254 | ||||||
Gross deferred tax liabilities |
997,999 | 897,505 | ||||||
Net operating loss and tax credit carryforwards |
(43,149 | ) | (41,957 | ) | ||||
Capital loss carryforwards |
(226,322 | ) | (235,677 | ) | ||||
Allowance for doubtful accounts |
(36,217 | ) | (34,124 | ) | ||||
Accrued expenses |
(14,518 | ) | (19,491 | ) | ||||
Employee and retiree benefits |
(20,987 | ) | (28,367 | ) | ||||
Stock options |
(27,016 | ) | (24,532 | ) | ||||
Other |
(31,968 | ) | (28,242 | ) | ||||
Gross deferred tax assets |
(400,177 | ) | (412,390 | ) | ||||
Valuation allowance for deferred tax assets |
238,160 | 242,447 | ||||||
Deferred tax assets, net of valuation allowance |
(162,017 | ) | (169,943 | ) | ||||
Net deferred tax liabilities |
$ | 835,982 | $ | 727,562 | ||||
As of September 30, 2010, the Company had $7.2 million of potential tax benefits from federal
net operating loss carryforwards expiring in 11 to 12 years, and $31.8 million of potential tax
benefits from state net operating loss carryforwards expiring in 1 to 20 years and $1.9 million of
potential tax benefits from foreign net operating loss carryforwards expiring in 4 to 7 years. As
of September 30, 2010, the Company had $226.3 million of potential tax benefits from capital loss
carryforwards expiring in 4 years. As of September 30, 2010, the Company had $2.2 million of state
alternative minimum tax credit carryforwards.
In fiscal 2009, the Company increased the valuation allowance on deferred tax assets by $232.1
million primarily due to the addition of capital loss carryforwards resulting from the sale of
PMSI. In fiscal 2010, the Company decreased the valuation allowance on deferred tax assets by $4.3
million primarily due to an adjustment to the initial capital loss carryforward resulting from the
sale of PMSI.
In fiscal 2010, 2009 and 2008, tax benefits of $21.0 million, $1.5 million and $12.0 million,
respectively, related to the exercise of employee stock options were recorded as additional paid-in
capital.
Income tax payments, net of refunds, were $257.8 million, $192.9 million and $262.9 million in
the fiscal years ended September 30, 2010, 2009 and 2008, respectively.
The Company files income tax returns in U.S. federal and state jurisdictions as well as
various foreign jurisdictions. In fiscal 2010, the U.S. Internal Revenue Service (“IRS”) completed
its examination of the Company’s U.S. federal tax returns for fiscal 2006, 2007 and 2008. No
significant adjustments were made resulting from the IRS examination. In Canada, the Company is
currently under examination for fiscal years 2007 and 2008.
The Company recognizes the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities,
including resolutions of any related appeals or litigation processes, based on the technical merits
of the position. As of September 30, 2010 and 2009, 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 $55.9 million and $54.4 million, respectively
($38.7 million and $39.4 million, net of federal benefit, respectively). As of September 30, 2010
and 2009, included in these amounts are $19.1 million and $16.7 million of interest and penalties,
respectively, which the Company continues to record in income tax expense.
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A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding
interest and penalties, is as follows (in thousands):
Balance at September 30, 2008 |
$ | 34,020 | ||
Additions of tax positions of the current year |
8,250 | |||
Additions of tax positions of the prior years |
624 | |||
Reductions of tax positions of the prior years |
(2,114 | ) | ||
Settlements with taxing authorities |
(1,073 | ) | ||
Expiration of statutes of limitations |
(2,058 | ) | ||
Balance at September 30, 2009 |
37,649 | |||
Additions of tax positions of the current year |
6,710 | |||
Additions of tax positions of the prior years |
737 | |||
Reductions of tax positions of the prior years |
(4,826 | ) | ||
Settlements with taxing authorities |
(2,810 | ) | ||
Expiration of statutes of limitations |
(630 | ) | ||
Balance at September 30, 2010 |
$ | 36,830 | ||
If recognized as of September 30, 2010 and 2009, net of federal benefit, $38.7 million and
$39.4 million, respectively, of the Company’s unrecognized tax benefit would reduce income tax
expense and the effective tax rate. During the next 12 months, it is reasonably possible that state
tax audit resolutions and the expiration of statutes of limitations could result in a reduction of
unrecognized tax benefits by approximately $9.7 million.
Note 5. Goodwill and Other Intangible Assets
Following is a summary of the changes in the carrying value of goodwill for the fiscal years
ended September 30, 2010 and 2009 (in thousands):
Goodwill at September 30, 2008 |
$ | 2,536,945 | ||
Goodwill recognized in connection with acquisition (See Note 2) |
8,284 | |||
Foreign currency translation |
(4,153 | ) | ||
Adjustment to goodwill relating to deferred taxes |
1,276 | |||
Goodwill at September 30, 2009 |
2,542,352 | |||
Foreign currency translation |
2,722 | |||
Adjustment to goodwill relating to deferred taxes |
(707 | ) | ||
Goodwill at September 30, 2010 |
$ | 2,544,367 | ||
Following is a summary of other intangible assets (in thousands):
| September 30, 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 |
$ | 238,355 | $ | — | $ | 238,355 | $ | 241,554 | $ | — | $ | 241,554 | ||||||||||||
Finite-lived intangibles: |
||||||||||||||||||||||||
Customer relationships |
121,940 | (69,207 | ) | 52,733 | 121,419 | (56,679 | ) | 64,740 | ||||||||||||||||
Other |
36,330 | (26,442 | ) | 9,888 | 33,100 | (22,682 | ) | 10,418 | ||||||||||||||||
Total other intangible assets |
$ | 396,625 | $ | (95,649 | ) | $ | 300,976 | $ | 396,073 | $ | (79,361 | ) | $ | 316,712 | ||||||||||
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During the fiscal year ended September 30, 2010, the Company recorded trade name impairment
charges totaling $3.2 million relating to certain of its smaller business units.
During the fiscal year ended September 30, 2009, the Company recorded an $8.9 million trade
name impairment charge relating to U.S. Bioservices, a specialty pharmacy company within the
Company’s specialty group, and trade name impairment charges totaling $2.9 million relating to two
smaller business units.
During the fiscal year ended September 30, 2008, the Company recorded trade name impairment
charges totaling $5.3 million relating to certain of its smaller business units.
Amortization expense for other intangible assets was $16.5 million, $15.4 million, and
$17.1 million in the fiscal years ended September 30, 2010, 2009 and 2008, respectively.
Amortization expense for other intangible assets is estimated to be $15.9 million in fiscal 2011,
$13.6 million in fiscal 2012, $11.5 million in fiscal 2013, $8.3 million in fiscal 2014,
$3.7 million in 2015 and $9.6 million thereafter.
Note 6. Debt
Debt consisted of the following:
| September 30, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
Blanco revolving credit facility at 2.26% and 2.25%,
respectively,
due 2011 |
$ | 55,000 | $ | 55,000 | ||||
Receivables securitization facility due 2011 |
— | — | ||||||
Multi-currency revolving credit facility at 3.00% and 0.92%,
respectively, due 2011 |
907 | 224,026 | ||||||
$392,326, 5 5/8% senior notes due 2012 |
391,682 | 399,058 | ||||||
$500,000, 5 7/8% senior notes due 2015 |
498,568 | 498,339 | ||||||
$400,000, 4 7/8% senior notes due 2019 |
396,915 | — | ||||||
Other |
508 | 1,578 | ||||||
Total debt |
1,343,580 | 1,178,001 | ||||||
Less current portion |
422 | 1,068 | ||||||
Total, net of current portion |
$ | 1,343,158 | $ | 1,176,933 | ||||
Long-Term Debt
In April 2010, the Company amended the Blanco revolving credit facility (the “Blanco Credit
Facility”) to, among other things, extend the maturity date of the Blanco Credit Facility to April
2011. The Blanco Credit Facility is not classified in the current portion of long-term debt on the
accompanying consolidated balance sheet at September 30, 2010 because the Company has the ability
and intent to refinance it on a long-term basis. Borrowings under the Blanco Credit Facility are
guaranteed by the Company. Interest on borrowings under the Blanco Credit Facility accrues at
specific rates based on the Company’s debt rating (200 basis points over LIBOR at September 30,
2010).
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 (32 basis points over
LIBOR/EURIBOR/Bankers Acceptance Stamping Fee at September 30, 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 (8 basis points at
September 30, 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.
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The Company has $392.3 million of 5.625% senior notes due September 15, 2012 (the “2012
Notes”) and $500 million of 5.875% senior notes due September 15, 2015 (the “2015 Notes”). The 2012
Notes and 2015 Notes each were sold at 99.5% of the principal amount and have an effective interest
yield of 5.71% and 5.94%, respectively. Interest on the 2012 Notes and the 2015 Notes is payable
semiannually in arrears. Costs incurred in connection with the issuance of the 2012 Notes and the
2015 Notes were deferred and are being amortized over the terms of the notes.
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. The 2019 Notes
rank pari passu to the Multi-Currency Revolving Credit Facility, the 2012 Notes, and the 2015
Notes. 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 ten year term of the notes.
The indentures governing the Multi-Currency Revolving Credit Facility, the 2012 Notes, the
2015 Notes, and the 2019 Notes contain restrictions and covenants which include limitations on
additional indebtedness; distributions and dividends to stockholders; the repurchase of stock and
the making of other restricted payments; issuance of preferred stock; creation of certain liens;
transactions with subsidiaries and other affiliates; and certain corporate acts such as mergers,
consolidations, and the sale of substantially all assets. An additional covenant requires
compliance with a financial leverage ratio test.
Receivables Securitization Facility
The Company has a $700 million receivables securitization facility (“Receivables
Securitization Facility”), which expires in April 2011. The Company has 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 of 125 basis points. The Company pays a commitment fee of 60
basis points to maintain the availability under the Receivables Securitization Facility. At
September 30, 2010, there were no borrowings outstanding under the Receivables Securitization
Facility. In connection with the Receivables Securitization Facility, ABDC sells on a revolving
basis certain accounts receivable to Amerisource Receivables Financial Corporation, a wholly owned
special purpose entity, which in turn sells a percentage ownership interest in the receivables to
commercial paper conduits sponsored by financial institutions. ABDC is the servicer of the accounts
receivable under the Receivables Securitization Facility. After the maximum limit of receivables
sold has been reached and as sold receivables are collected, additional receivables may be sold up
to the maximum amount available under the facility. The facility is a financing vehicle utilized by
the Company because it generally offers an attractive interest rate relative to other financing
sources. The Company securitizes its trade accounts, which are generally non-interest bearing, in
transactions that are accounted for as borrowings. The Receivables Securitization Facility contains
similar covenants to the Multi—Currency Revolving Credit Facility.
Other Information
Scheduled future principal payments of long-term debt are $55.4 million in fiscal 2011,
$393.3 million in fiscal 2012, $500.0 million in fiscal 2015, and $400.0 million in fiscal 2019.
Interest paid on the above indebtedness during the fiscal years ended September 30, 2010, 2009
and 2008 was $63.8 million, $56.9 million, and $68.5 million, respectively.
Total amortization of financing fees and the accretion of original issue discounts, which are
recorded as components of interest expense, were $5.0 million, $4.3 million, and $3.5 million, for
the fiscal years ended September 30, 2010, 2009, and 2008, respectively.
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Note 7. Stockholders’ Equity and Earnings per Share
The authorized capital stock of the Company consists of 600,000,000 shares of common stock,
par value $0.01 per share (the “Common Stock”), and 10,000,000 shares of preferred stock, par value
$0.01 per share (the “Preferred Stock”).
The board of directors is authorized to provide for the issuance of shares of Preferred Stock
in one or more series with various designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions. Except as required by law,
or as otherwise provided by the board of directors of the Company, the holders of Preferred Stock
will have no voting rights and will not be entitled to notice of meetings of stockholders. Holders
of Preferred Stock will be entitled to receive, when declared by the board of directors, out of
legally available funds, dividends at the rates fixed by the board of directors for the respective
series of Preferred Stock, and no more, before any dividends will be declared and paid, or set
apart for payment, on Common Stock with respect to the same dividend period. No shares of Preferred
Stock have been issued as of September 30, 2010.
The holders of the Company’s Common Stock are entitled to one vote per share and have the
exclusive right to vote for the board of directors and for all other purposes as provided by law.
Subject to the rights of holders of the Company’s Preferred Stock, holders of Common Stock are
entitled to receive ratably on a per share basis such dividends and other distributions in cash,
stock or property of the Company as may be declared by the board of directors from time to time out
of the legally available assets or funds of the Company.
The following table illustrates the components of accumulated other comprehensive loss, net of
income taxes, as of September 30, 2010 and 2009 (in thousands):
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Pension and postretirement adjustments, net
of tax (See Note 8) |
$ | (44,227 | ) | $ | (41,069 | ) | ||
Foreign currency translation |
2,073 | (4,537 | ) | |||||
Other |
(382 | ) | (490 | ) | ||||
Total accumulated other comprehensive loss |
$ | (42,536 | ) | $ | (46,096 | ) | ||
In May 2007, the Company’s board of directors authorized a program allowing the Company to
purchase up to $850 million of its outstanding shares of Common Stock, subject to market
conditions. In November 2007, the Company’s board of directors authorized an increase to the
$850 million share repurchase program by $500 million, subject to market conditions. During the
fiscal year ended September 30, 2008, the Company purchased 31.8 million shares of Common Stock
under this program for a total of $679.7 million. During the fiscal year ended September 30, 2009,
the Company purchased 1.2 million shares of its Common Stock to complete its authorization under
this program.
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 fiscal year ended September 30, 2009, the Company purchased 23.3 million
shares of Common Stock under this program for a total of $431.9 million. During the fiscal year
ended September 30, 2010, the Company purchased 2.8 million shares of its Common Stock for a total
of $68.1 million to complete its authorization under this program.
In November 2009, 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 fiscal year ended September 30, 2010, the Company purchased 14.4 million
shares of its Common Stock under this program for a total of $401.9 million. The Company had $98.1
million of availability remaining under this share repurchase program as of September 30, 2010.
In September 2010, the Company’s board of directors approved a new program allowing the
Company to purchase up to $500 million of its outstanding shares of Common Stock, subject to market
conditions, all of which was available for purchase as of September 30, 2010.
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Basic earnings per share is computed on the basis of the weighted average number of shares of
Common Stock outstanding during the periods presented. Diluted earnings per share is computed on
the basis of the weighted average number of shares of Common Stock outstanding during the periods
plus the dilutive effect of stock options and restricted stock. The following table (in thousands)
is a reconciliation of the numerator and denominator of the computation of basic and diluted
earnings per share.
| September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Weighted average common shares outstanding — basic |
282,258 | 300,573 | 321,284 | |||||||||
Effect of dilutive securities — stock options and restricted stock |
4,988 | 2,181 | 3,636 | |||||||||
Weighted average common shares outstanding — diluted |
287,246 | 302,754 | 324,920 | |||||||||
The potentially dilutive employee stock options that were antidilutive for fiscal 2010, 2009
and 2008 were 2.1 million, 13.6 million and 10.6 million, respectively.
Note 8. Pension and Other Benefit Plans
The Company sponsors various retirement benefit plans, including defined benefit pension
plans, defined contribution plans, postretirement medical plans and a deferred compensation plan
covering eligible employees. Expenses relating to these plans were $22.2 million, $21.9 million,
and $20.0 million in fiscal 2010, 2009 and 2008, respectively.
The Company recognizes the funded status (the difference between the fair value of plan assets
and the projected benefit obligations) of its defined benefit pension plans and postretirement
benefit plans in its balance sheet, with a corresponding adjustment to accumulated other
comprehensive income (loss), net of income taxes. Included in accumulated other comprehensive
income (loss) at September 30, 2010 are net actuarial losses of $72.5 million ($44.2 million, net
of income taxes). The net actuarial loss in accumulated other comprehensive income (loss) that is
expected to be amortized into fiscal 2011 net periodic pension expense is $4.1 million
($2.5 million, net of income tax).
The Company adopted the measurement provisions of ASC 715, “Compensation-Retirement Benefits”
(formerly referred to as FASB Statement No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans”) in the fourth quarter of fiscal 2009. As required, defined benefit
plan assets and obligations are measured as of the Company’s fiscal year-end. The Company
previously performed this measurement at June 30. The Company’s adoption of the measurement
provisions of ASC 715 did not have a material impact on its financial position or results of
operations.
Defined Benefit Plans
The Company provides a benefit for certain employees under two different noncontributory
defined benefit pension plans consisting of a salaried plan and a supplemental executive retirement
plan. Additionally, the Company previously provided benefits to certain employees under a union
plan, which was merged with the salaried plan on October 1, 2005. For each employee, the benefits
are based on years of service and average compensation. Pension costs, which are computed using the
projected unit credit cost method, are funded to at least the minimum level required by government
regulations. Since 2002, the salaried and the supplemental executive retirement plans have been
closed to new participants and benefits that can be earned by active participants in the plan were
limited.
The Company has an unfunded supplemental executive retirement plan for its former Bergen
officers and key employees. This plan is a “target” benefit plan, with the annual lifetime benefit
based upon a percentage of salary during the five final years of pay at age 62, offset by several
other sources of income including benefits payable under a prior supplemental retirement plan.
Since 2002, the plan has been closed to new participants and benefits that can be earned by active
participants were limited.
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The following table sets forth (in thousands) a reconciliation of the changes in the
Company-sponsored defined benefit pension plans:
| Fiscal Year Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Change in Projected Benefit Obligations: |
||||||||
Benefit obligation at beginning of year |
$ | 128,928 | $ | 106,082 | ||||
Interest cost |
6,959 | 8,601 | ||||||
Actuarial losses |
11,801 | 22,208 | ||||||
Benefit payments |
(4,706 | ) | (7,872 | ) | ||||
Other |
— | (91 | ) | |||||
Benefit obligation at end of year |
$ | 142,982 | $ | 128,928 | ||||
Change in Plan Assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 81,294 | $ | 94,051 | ||||
Actual return on plan assets |
13,072 | (6,811 | ) | |||||
Employer contributions |
24,525 | 3,007 | ||||||
Expenses |
(710 | ) | (1,081 | ) | ||||
Benefit payments |
(4,706 | ) | (7,872 | ) | ||||
Fair value of plan assets at end of year |
$ | 113,475 | $ | 81,294 | ||||
Funded Status and Amounts Recognized: |
||||||||
Funded status |
$ | (29,507 | ) | $ | (47,634 | ) | ||
Net amount recognized |
$ | (29,507 | ) | $ | (47,634 | ) | ||
Amounts recognized in the balance sheets
consist of: |
||||||||
Current liabilities |
$ | (4,438 | ) | $ | (3,876 | ) | ||
Noncurrent liabilities |
(25,069 | ) | (43,758 | ) | ||||
Net amount recognized |
$ | (29,507 | ) | $ | (47,634 | ) | ||
Weighted average assumptions used (as of the end of the fiscal year) in computing the benefit
obligation were as follows:
| 2010 | 2009 | |||||||
Discount rate |
5.00 | % | 5.55 | % | ||||
Rate of increase in compensation levels |
N/A | N/A | ||||||
Expected long-term rate of return on assets |
8.00 | % | 8.00 | % | ||||
The expected long-term rate of return for the plans represents the average rate of return to
be earned on plan assets over the period the benefits included in the benefit obligation are to be
paid.
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The following table provides components of net periodic benefit cost for the Company-sponsored
defined benefit pension plans together with contributions charged to expense for multi-employer
union-administered defined benefit pension plans that the Company participates in (in thousands):
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||
Interest cost on projected benefit obligation |
$ | 6,958 | $ | 6,958 | $ | 6,791 | ||||||
Expected return on plan assets |
(7,918 | ) | (8,102 | ) | (8,170 | ) | ||||||
Recognized net actuarial loss |
3,964 | 1,313 | 1,481 | |||||||||
Loss due to curtailments, settlements and other |
53 | 297 | 971 | |||||||||
Net periodic pension cost of defined benefit
pension plans |
3,057 | 466 | 1,073 | |||||||||
Net pension cost of multi-employer plans |
364 | 385 | 469 | |||||||||
Total pension expense |
$ | 3,421 | $ | 851 | $ | 1,542 | ||||||
Weighted average assumptions used (as of the beginning of the fiscal year) in computing the
net periodic benefit cost were as follows:
| 2010 | 2009 | 2008 | ||||||||||
Discount rate |
5.55 | % | 6.85 | % | 6.30 | % | ||||||
Rate of increase in compensation levels |
N/A | N/A | N/A | |||||||||
Expected long-term rate of return on assets |
8.00 | % | 8.00 | % | 8.00 | % | ||||||
To determine the expected long-term rate of return on assets, the Company considered the
current and expected asset allocations, as well as historical and expected returns on various
categories of plan assets.
The Compensation and Succession Planning Committee (“Compensation Committee”) of the Company’s
board of directors has delegated the administration of the pension and benefit plans to the
Company’s Benefits Committee, an internal committee, composed of senior finance, human resources
and legal executives. The Benefits Committee is responsible for oversight of the investment
management of the assets of the Company’s pension plans and the investment options under the
Company’s savings plans as well as the performance of the investment advisers and plan
administrators. The Benefits Committee has adopted an investment policy for the Company’s pension
plan, which includes guidelines regarding, among other things, the selection of acceptable asset
classes, allowable ranges of holdings, rebalancing of assets, the definition of acceptable
securities within each class, and investment performance expectations.
The investment portfolio contains a diversified portfolio of investment categories, including
equities, fixed income securities and cash. Securities are also diversified in terms of domestic
and international securities and large cap and small cap stocks. The actual and target asset
allocations expressed as a percentage of the plans’ assets at the measurement date are as follows:
| Pension Benefits | Target | |||||||||||||||
| Allocation | Allocation | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Asset Category: |
||||||||||||||||
Equity securities |
60 | % | 49 | % | 60 | % | 70 | % | ||||||||
Debt securities |
40 | — | 40 | 30 | ||||||||||||
Cash and cash equivalents |
— | 51 | — | — | ||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
In August 2009, the Company elected to engage the services of a new investment manager for the
plans’ assets. As of September 30, 2009, 51% of the plans’ assets were temporarily invested in cash
in anticipation of transferring the plans’ assets to the new investment manager. In October 2009,
the transfer of the plans’ assets to the new investment manager was completed.
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The investment goals are to achieve the optimal return possible within the specific risk
parameters and, at a minimum, produce results, which achieve the plans’ assumed interest rate for
funding the plans over a full market cycle. High levels of risk and volatility are reduced by
maintaining diversified portfolios. Allowable investments include government-backed fixed income
securities, investment grade corporate bonds, residential backed mortgage securities, equity
securities and cash equivalents. Prohibited investments include unregistered or restricted stock,
commodities, margin trading, options and futures, short-selling, venture capital, private
placements, real estate and other high risk investments.
The
fair value of the Company’s pension plan assets, totaling
$113.5 million and $81.3 million at September 30, 2010
and 2009, respectively, is determined
using a fair value hierarchy by asset class. The fair value hierarchy has three levels based on
the reliability of the inputs to determine fair value. Level 1 refers to fair values determined
based on unadjusted quoted prices in active markets for identical assets. Level 2 refers to fair
values estimated using significant other observable inputs and Level 3 includes fair values
estimated using significant non-observable inputs.
The
Company’s pension plan assets at September 30, 2010 were comprised of $0.7 million invested in money market
funds, $69.7 million invested in commingled equity funds, and
$43.1 million invested in commingled
fixed-income funds. The Company’s pension plan assets at
September 30, 2009 were comprised of $41.4 million invested
in money market funds and $39.9 million invested in commingled
equity funds. The fair values of the money market funds were determined using the Level 1
hierarchy. The fair values of the equity and fixed-income commingled
funds, which have daily net asset values derived from the underlying
securities, were primarily
determined by using the Level 2 hierarchy.
As of September 30, 2010 and 2009 all of the Company’s defined benefit pension plans had
accumulated and projected benefit obligations in excess of plan assets. The amounts related to
these plans were as follows (in thousands):
| 2010 | 2009 | |||||||
Accumulated benefit obligation |
$ | 142,982 | $ | 128,928 | ||||
Projected benefit obligation |
$ | 142,982 | $ | 128,928 | ||||
Plan assets at fair value |
$ | 113,475 | $ | 81,294 | ||||
Although the Company was not required to contribute to its salaried benefit plan in fiscal
2010, it elected to make a $24.0 million contribution. Expected benefit payments over the next ten
years, are anticipated to be paid as follows (in thousands):
| Pension Benefits | ||||
Fiscal Year: |
||||
2011 |
$ | 8,994 | ||
2012 |
5,129 | |||
2013 |
12,389 | |||
2014 |
6,067 | |||
2015 |
6,183 | |||
2016-2020 |
37,704 | |||
Total |
$ | 76,466 | ||
Expected benefit payments are based on the same assumptions used to measure the benefit
obligations.
Postretirement Benefit Plans
The Company provides medical benefits to certain retirees, principally former employees of
Bergen. Employees became eligible for such postretirement benefits after meeting certain age and
years of service criteria. Since 2002, the plans have been closed to new participants and benefits
that can be earned by active participants were limited. As a result of special termination benefit
packages previously offered, the Company also provides dental and life insurance benefits to a
limited number of retirees and their dependents. These benefit plans are unfunded.
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The following table sets forth (in thousands) a reconciliation of the changes in the
Company-sponsored postretirement benefit plans:
| Fiscal Year Ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Change in Accumulated Benefit Obligations: |
||||||||
Benefit obligation at beginning of year |
$ | 12,251 | $ | 11,064 | ||||
Interest cost |
635 | 703 | ||||||
Actuarial losses |
1,287 | 1,876 | ||||||
Benefit payments |
(1,396 | ) | (1,392 | ) | ||||
Benefit obligation at end of year |
$ | 12,777 | $ | 12,251 | ||||
Change in Plan Assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | — | $ | — | ||||
Employer contributions |
1,396 | 1,392 | ||||||
Benefit payments |
(1,396 | ) | (1,392 | ) | ||||
Fair value of plan assets at end of year |
$ | — | $ | — | ||||
Funded Status and Amounts Recognized: |
||||||||
Funded status |
$ | (12,777 | ) | $ | (12,251 | ) | ||
Net amount recognized |
$ | (12,777 | ) | $ | (12,251 | ) | ||
Amounts recognized in the balance sheets consist of: |
||||||||
Current liabilities |
$ | (1,302 | ) | $ | (1,484 | ) | ||
Noncurrent liabilities |
(11,475 | ) | (10,767 | ) | ||||
Net amount recognized |
$ | (12,777 | ) | $ | (12,251 | ) | ||
Weighted average assumptions used (as of the end of the fiscal year) in computing the funded status
of the plans were as follows:
| 2010 | 2009 | |||||||
Discount rate |
5.00 | % | 5.55 | % | ||||
Health care trend rate assumed for next year |
8.39 | % | 8.25 | % | ||||
Rate to which the cost trend rate is assumed to decline |
4.50 | % | 5.00 | % | ||||
Year that the rate reaches the ultimate trend rate |
2020 | 2019 | ||||||
Assumed health care trend rates have a significant effect on the amounts reported for the health
care plans. A one-percentage-point change in assumed health care cost trend rates would have the
following effect (in thousands):
| One Percentage Point | ||||||||
| Increase | Decrease | |||||||
Effect on total service and interest cost components |
$ | 1,194 | $ | (1,015 | ) | |||
Effect on benefit obligation |
65 | (55 | ) | |||||
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The following table provides components of net periodic benefit cost for the Company-sponsored
postretirement benefit plans (in thousands):
| Fiscal Year Ended | ||||||||||||
| September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||
Interest cost on projected benefit obligation |
$ | 634 | $ | 703 | $ | 775 | ||||||
Recognized net actuarial gains |
(532 | ) | (879 | ) | (44 | ) | ||||||
Total postretirement benefit expense |
$ | 102 | $ | (176 | ) | $ | 731 | |||||
Weighted average assumptions used (as of the beginning of the fiscal year) in computing the
net periodic benefit cost were as follows:
| 2010 | 2009 | 2008 | ||||||||||
Discount rate |
5.55 | % | 6.85 | % | 6.30 | % | ||||||
Health care trend rate assumed for next year |
8.25 | % | 9.00 | % | 9.00 | % | ||||||
Rate to which the cost trend rate is assumed to decline |
5.00 | % | 5.00 | % | 5.00 | % | ||||||
Year that the rate reaches the ultimate trend rate |
2020 | 2019 | 2018 | |||||||||
Expected postretirement benefit payments over the next ten years are anticipated to be paid as
follows (in thousands):
| Postretirement | ||||
| Benefits | ||||
Fiscal Year: |
||||
2011 |
$ | 1,302 | ||
2012 |
1,177 | |||
2013 |
1,086 | |||
2014 |
925 | |||
2015 |
870 | |||
2016-2020 |
3,699 | |||
Total |
$ | 9,059 | ||
Defined Contribution Plans
The Company sponsors the AmerisourceBergen Employee Investment Plan, which is a defined
contribution 401(k) plan covering salaried and certain hourly employees. Eligible participants may
contribute to the plan from 1% to 25% of their regular compensation before taxes. The Company
contributes $1.00 for each $1.00 invested by the participant up to the first 3% of the
participant’s salary and $0.50 for each additional $1.00 invested by the participant of up to an
additional 2% of salary. An additional discretionary contribution, in an amount not to exceed the
limits established by the Internal Revenue Code, may also be made depending upon the Company’s
performance. All contributions are invested at the direction of the employee in one or more funds.
All contributions vest immediately except for the discretionary contributions made by the Company
that vest in full after five years of credited service.
The Company also sponsors the AmerisourceBergen Corporation Supplemental 401(k) Plan. This
unfunded plan provides benefits for selected key management, including all of the Company’s
executive officers. This plan will provide eligible participants with an annual amount equal to 4%
of the participant’s base salary and bonus incentive to the extent that his or her compensation
exceeds the annual compensation limit established by Section 401(a) (17) of the Internal Revenue
Code.
Costs of the defined contribution plans charged to expense for the fiscal years ended
September 30, 2010, 2009 and 2008 were $18.1 million, $21.1 million, and $18.8 million,
respectively.
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Deferred Compensation Plan
The Company sponsors the AmerisourceBergen Corporation 2001 Deferred Compensation Plan. This
unfunded plan, under which 2.96 million shares of Common Stock are authorized for issuance, allows
eligible officers, directors and key management employees to defer a portion of their annual
compensation. The amount deferred may be allocated by the employee to cash, mutual funds or stock
credits. Stock credits, including dividend equivalents, are equal to the full and fractional number
of shares of Common Stock that could be purchased with the participant’s compensation allocated to
stock credits based on the average of closing prices of Common Stock during each month, plus, at
the discretion of the board of directors, up to one-half of a share of Common Stock for each full
share credited. Stock credit distributions are made in shares of Common Stock. No shares of Common
Stock have been issued under the deferred compensation plan through September 30, 2010. The
Company’s liability relating to its deferred compensation plan as of September 30, 2010 and 2009
was $7.6 million and $6.5 million, respectively.
Note 9. Share-Based Compensation
Stock Option Plans
The Company’s employee stock option plans provide for the granting of incentive and
nonqualified stock options to acquire shares of Common Stock to employees at a price not less than
the fair market value of the Common Stock on the date the option is granted. Option terms and
vesting periods are determined at the date of grant by the Compensation Committee of the board of
directors. Employee options generally vest ratably, in equal amounts, over a four-year service
period and expire in ten years (seven years for all grants issued in February 2008 and thereafter).
The Company’s non-employee director stock option plans provide for the granting of nonqualified
stock options to acquire shares of Common Stock to non-employee directors at the fair market value
of the Common Stock on the date of the grant. Non-employee director options vest ratably, in equal
amounts, over a three-year service period, and options expire in ten years.
At September 30, 2010, options for an additional 26.7 million shares may be granted under the
AmerisourceBergen Corporation Equity Incentive Plan and options for an additional 64 thousand
shares may be granted under the Company’s Non-Employee Director Stock Option Plan.
The estimated fair values of options granted are expensed as compensation on a straight-line
basis over the requisite service periods of the awards and are net of estimated forfeitures. The
Company estimates the fair values of option grants using a binomial option pricing model. Expected
volatilities are based on the historical volatility of the Company’s Common Stock and other
factors, such as implied market volatility. The Company uses historical exercise data, taking into
consideration the optionees’ ages at grant date, to estimate the terms for which the options are
expected to be outstanding. The Company anticipates that the terms of options granted in the future
will be similar to those granted in the past. The risk-free rates during the terms of such options
are based on the U.S. Treasury yield curve in effect at the time of grant.
The weighted average fair values of the options granted during the fiscal years ended
September 30, 2010, 2009 and 2008 were $5.82, $4.18, and $4.92, respectively. The following
assumptions were used to estimate the fair values of options granted:
| Fiscal Year Ended September 30, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Weighted average risk-free interest rate |
1.76 | % | 1.59 | % | 2.79 | % | ||||||
Expected dividend yield |
1.14 | % | 1.13 | % | 0.70 | % | ||||||
Weighted average volatility of common stock |
27.11 | % | 31.82 | % | 28.14 | % | ||||||
Weighted average expected life of the options |
3.84 years | 3.83 years | 3.71 years | |||||||||
Changes to the above valuation assumptions could have a significant impact on share-based
compensation expense. During the fiscal years ended September 30, 2010, 2009 and 2008, the Company
recorded stock option expense of $22.5 million, $17.4 million, and $17.4 million, respectively.
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A summary of the Company’s stock option activity and related information for its option plans
for the fiscal year ended September 30, 2010 is presented below:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Exercise | Contractual | Intrinsic | ||||||||||||||
| Options | Price | Term | Value | |||||||||||||
| (000’s) | (000’s) | |||||||||||||||
Outstanding at September 30, 2009 |
25,012 | $ | 19 | 5 years | ||||||||||||
Granted |
3,743 | $ | 28 | |||||||||||||
Exercised |
(6,548 | ) | $ | 17 | ||||||||||||
Forfeited |
(918 | ) | $ | 22 | ||||||||||||
Outstanding at September 30, 2010 |
21,289 | $ | 21 | 5 years | $ | 212,223 | ||||||||||
Exercisable at September 30, 2010 |
13,182 | $ | 19 | 4 years | $ | 155,827 | ||||||||||
Expected to vest after September 30, 2010 |
7,163 | $ | 24 | 6 years | $ | 48,694 | ||||||||||
The intrinsic value of stock option exercises during fiscal 2010, 2009 and 2008 was
$75.0 million, $7.4 million, and $38.5 million, respectively.
A summary of the status of the Company’s nonvested options as of September 30, 2010 and
changes during the fiscal year ended September 30, 2010 is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Grant Date | ||||||||
| Options | Fair Value | |||||||
| (000’s) | ||||||||
Nonvested at September 30, 2009 |
8,452 | $ | 5 | |||||
Granted |
3,743 | 6 | ||||||
Vested |
(3,510 | ) | 5 | |||||
Forfeited |
(578 | ) | 5 | |||||
Nonvested at September 30, 2010 |
8,107 | $ | 5 | |||||
Expected future compensation expense relating to the 8.1 million nonvested options outstanding
as of September 30, 2010 is $35.6 million over a weighted-average period of 2 years.
Restricted Stock Plan
Restricted shares vest in full after three years. The estimated fair value of restricted
shares under the Company’s restricted stock plans is determined by the product of the number of
shares granted and the grant date market price of the Company’s Common Stock. The estimated fair
value of restricted shares is expensed on a straight-line basis over the requisite service period
of three years. During the fiscal years ended September 30, 2010, 2009 and 2008, the Company
recorded restricted stock expense of $6.9 million, $7.5 million, and $6.6 million, respectively.
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A summary of the status of the Company’s restricted shares as of September 30, 2010 and
changes during the fiscal year ended September 30, 2010 is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Restricted | Grant Date | |||||||
| Shares | Fair Value | |||||||
| (000’s) | ||||||||
Nonvested at September 30, 2009 |
1,097 | $ | 22 | |||||
Granted |
360 | 28 | ||||||
Vested |
(342 | ) | 28 | |||||
Forfeited |
(112 | ) | 22 | |||||
Nonvested at September 30, 2010 |
1,003 | $ | 23 | |||||
Expected future compensation expense relating to the 1.0 million restricted shares outstanding
as of September 30, 2010 is $10.9 million over a weighted-average period of 1.4 years.
Employee Stock Purchase Plan
The stockholders approved the adoption of the AmerisourceBergen 2002 Employee Stock Purchase
Plan, under which up to an aggregate of 16,000,000 shares of Common Stock may be sold to eligible
employees (generally defined as employees with at least 30 days of service with the Company). Under
this plan, the participants may elect to have the Company withhold up to 25% of base salary to
purchase shares of the Company’s Common Stock at a price equal to 95% of the fair market value of
the stock on the last business day of each six-month purchase period. Each participant is limited
to $25,000 of purchases during each calendar year. During the fiscal years ended September 30,
2010, 2009 and 2008, the Company acquired 220,367 shares, 331,639 shares, and 299,956 shares,
respectively, from the open market for issuance to participants in this plan. As of September 30,
2010, the Company has withheld $1.0 million from eligible employees for the purchase of additional
shares of Common Stock.
Note 10. Leases and Other Commitments
At September 30, 2010, future minimum payments totaling $229.2 million under noncancelable
operating leases with remaining terms of more than one fiscal year were due as follows; 2011 —
$50.3 million; 2012 — $38.3 million; 2013 — $28.9 million; 2014 — $24.5 million; 2015 — $22.0
million; and thereafter — $65.2 million. In the normal course of business, operating leases are
generally renewed or replaced by other leases. Certain operating leases include escalation
clauses. Total rental expense was $61.7 million in fiscal 2010, $62.8 million in fiscal 2009, and
$63.0 million in fiscal 2008.
The Company has commitments to purchase product from influenza vaccine manufacturers for the
2010/2011 flu season. During the fiscal year ended September 30, 2010, the Company reduced its
purchase commitment to only the 2010/2011 flu season. The Company is required to purchase doses at
prices it believes will represent market prices. The Company currently estimates its remaining
purchase commitment under these agreements, as amended, will be approximately $27.4 million as of
September 30, 2010.
The Company has commitments to purchase blood products from suppliers through December 31,
2012. The Company is required to purchase quantities at prices it believes will represent market
prices. The Company currently estimates its remaining purchase commitment under these agreements
will be approximately $209.5 million as of September 30, 2010, of which $93.6 million represents
the Company’s commitment in fiscal 2011.
The Company outsources to IBM Global Services (“IBM”) a significant portion of its corporate
and ABDC information technology activities including assistance with the implementation of the
Company’s new enterprise resource planning (“ERP”) platform. The remaining commitment under the
Company’s ten-year arrangement, as amended, which expires in June 2015, is approximately
$136.8 million as of September 30, 2010.
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Note 11. Facility Consolidations, Employee Severance and Other
The following table illustrates the charges incurred by the Company relating to facility
consolidations, employee severance and other for the three fiscal years ended September 30, 2010
(in thousands):
| 2010 | 2009 | 2008 | ||||||||||
Facility consolidations and employee severance |
$ | (4,482 | ) | $ | 5,406 | $ | 9,741 | |||||
Costs relating to business divestitures |
— | — | 2,636 | |||||||||
Total facility consolidations, employee severance and other |
$ | (4,482 | ) | $ | 5,406 | $ | 12,377 | |||||
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 has reduced various operating costs
and terminated certain positions. During fiscal 2009 and 2008, the Company terminated 197 and
130 employees and incurred $3.1 million and $10.0 million of employee severance costs,
respectively, relating to the cE2 initiative. 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.
During fiscal 2009, the Company recorded $2.2 million of expense to increase its liability
relating to the Bergen Brunswig Matter, as more fully described in Note 12. During fiscal 2010,
the Company reversed its liability relating to this matter by $4.4 million. All adjustments made
relating to the Bergen Brunswig matter are included within the facility consolidations and employee
severance line item above.
The following table, which includes the adjustments relating to the Bergen Brunswig Matter,
displays the activity in accrued expenses and other from September 30, 2008 to September 30, 2010
related to the matters discussed above (in thousands):
| Employee | Lease Cancellation | |||||||||||
| Severance | Costs and Other | Total | ||||||||||
Balance as of September 30, 2008 |
$ | 17,081 | $ | 4,356 | $ | 21,437 | ||||||
Expense recorded during the period |
5,255 | 151 | 5,406 | |||||||||
Payments made during the period |
(14,460 | ) | (958 | ) | (15,418 | ) | ||||||
Balance as of September 30, 2009 |
7,876 | 3,549 | 11,425 | |||||||||
Income recorded during the period |
(4,482 | ) | — | (4,482 | ) | |||||||
Payments made during the period |
(2,260 | ) | (692 | ) | (2,952 | ) | ||||||
Balance as of September 30, 2010 |
$ | 1,134 | $ | 2,857 | $ | 3,991 | ||||||
Note 12. 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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Bergen Brunswig Matter
In 1999, a former executive sued Bergen Brunswig (the Company’s predecessor in interest) for
breach of employment agreement in the Superior Court of the State of California, County of Orange
(the “Superior Court”). Shortly thereafter, the executive accepted an Offer of Judgment awarding
him damages and continuing certain employment benefits. Since then, the Company and the executive
have been engaged in litigation as to which benefits were included within the scope of the Offer of
Judgment and the value of those
benefits. Following a Superior Court ruling on June 7, 2001, which identified the specific
benefits included in the Offer of Judgment, the executive made a claim under the Bergen Brunswig
Supplemental Executive Retirement Plan (the “Plan”). The value of the supplemental retirement
benefits was initially determined to be $1.9 million pursuant to the Plan’s administrative review
procedure, and such amount was paid to the executive. On July 7, 2006, the Superior Court issued a
second ruling that the executive was entitled to $19.4 million (including specified interest and
net of amounts previously paid). Both the executive and the Company appealed this ruling to the
Court of Appeal for the State of California, Fourth Appellate District (the “Court of Appeal”),
which, on October 12, 2007, made certain rulings and reversed certain portions of the July 2006
Superior Court decision in a manner that was favorable to the Company. The parties agreed to remand
calculation of the executive’s supplemental retirement benefit to the Plan Administrator. On
June 10, 2008, the Plan Administrator issued a decision that the executive was entitled to receive
approximately $6.9 million in benefits plus interest, less the $1.9 million already paid to him.
This decision was ultimately affirmed in most respects by the Review Official appointed by the Plan
Administrator and on March 9, 2009, the Company paid the executive approximately $5.6 million, plus
interest. On April 9, 2009, the Superior Court affirmed in most respects the Review Official’s
determination, but held that the Review Official had abused his discretion by discounting the
benefit to its present value and therefore that the executive was entitled to additional
supplemental retirement benefits of approximately $6.6 million, plus interest, beyond what had
already been paid. Following appeal by both parties, on July 8, 2010, the Court of Appeal upheld
the Review Official’s decision regarding the amount of benefits due to the executive and ruled that
post-judgment interest, if any, on that award would run from April 9, 2009 forward. Because the
Company had already tendered payment to the executive in the full amount of the award, no further
payments were due and the Company reversed its total remaining reserve for this matter in April
2010. The Court of Appeal subsequently denied the executive’s petition for rehearing on August 30,
2010 and the California Supreme Court denied his petition for review on October 13, 2010.
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. 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.
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Both the Intervention Complaint and the Original Qui Tam Complaint, as amended on October 30,
2009, allege that from 2002 through 2009, Amgen and two of the Company’s business units 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.
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. Five states — California,
Illinois, Indiana, Massachusetts, and New York — filed notices of appeal to the U.S. Court of
Appeals for the First Circuit (the “First Circuit”) and the relator filed a notice of appeal to the
First Circuit on behalf of Georgia and New Mexico. On July 15, 2010, the First Circuit issued an
order requiring the Federal District Court to provide a written statement explaining why a final
judgment was entered with respect to the states in order for the First Circuit to determine whether
to allow the appeals to proceed, and the Federal District Court complied with the order. The
appeals are currently pending. The relator also sought and received permission from the Federal
District Court to file a further amended complaint (the “Fourth Amended Complaint”). On May 27,
2010, the relator filed a Fourth Amended Complaint with the Federal District Court, which names ASD
and INN, along with Amgen, as defendants. The Fourth Amended Complaint contains many of the same
allegations contained in the relator’s prior complaints, but adds a count based on allegations that
conduct by ASD, INN, and Amgen caused healthcare providers to submit false claims because it is
alleged that the healthcare providers billed the government for amounts of Aranesp that were either
not administered or administered, but medically unnecessary. On June 28, 2010, the Company and
Amgen filed motions to dismiss the Fourth Amended Complaint. The motions to dismiss were denied
following a hearing on July 21, 2010. A trial date is set in this matter for July 2011.
The Company has learned that there are both prior and subsequent filings in another federal
district, including a complaint filed by a former employee of the Company, that are under seal and
that contain allegations similar to those in the Federal District Court action against the same
and/or additional subsidiaries or businesses of the Company that are defendants in the Federal
District Court action, including the Company’s group purchasing organization for oncologists and the
Company’s oncology distribution business. The DOJ investigation of the allegations contained in
the Original Qui Tam Complaint appears to include investigation of allegations contained in some or
all of these other filings.
The Company intends to continue to defend itself vigorously against the allegations contained
in the Original Qui Tam Complaint, as amended (including the Fourth Amended Complaint), and the
Intervention Complaint and against any appeals. The Company cannot predict the outcome of either
the Federal District Court action (or any appeals 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. On May 20, 2010, the Company filed a motion to dismiss the derivative complaint. A hearing
on the Company’s motion to dismiss was held on August 23, 2010. The Company has also filed a
motion pursuant to Rule 11 of the Federal Rules of Civil Procedure for sanctions against the party
who filed the shareholder derivative action. On September 9, 2010, the Court issued an order
dismissing the complaint without prejudice and denying the motion for sanctions. Although the
Company and the other defendants believe that the derivative action is wholly without merit and
intend to defend themselves vigorously against any claims in the event that the action is refiled,
the Company cannot predict the outcome of this matter.
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Note 13. 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. During the fiscal years ended
September 30, 2010 and 2008, the Company recognized gains of $20.7 million and $3.5 million,
respectively, relating to the above-mentioned class action lawsuits. These gains, which are net of
attorney fees and estimated payments due to other parties, were recorded as reductions to cost of
goods sold in the Company’s consolidated statements of operations. There were no gains recognized
during the fiscal year ended September 30, 2009.
Other Settlements
During the fiscal year ended September 30, 2009, the Company recognized a gain of $1.8 million
resulting from a favorable litigation settlement with a former customer. During the fiscal year
ended September 30, 2008, the Company recognized a gain of $13.2 million resulting from favorable
litigation settlements with a former customer (an independent retail group purchasing organization)
and a major competitor. The above gains in fiscal 2009 and 2008 were recorded as a reduction to
cost of goods sold in the Company’s consolidated statements of operations.
Note 14. Business Segment Information
The Company is organized based upon the products and services it provides to its customers.
The Company’s operations as of September 30, 2010 are comprised of one reportable segment,
Pharmaceutical Distribution. The Pharmaceutical Distribution reportable segment is comprised of
three operating segments, which include the operations of AmerisourceBergen Drug Corporation
(“ABDC”), the AmerisourceBergen Specialty Group (“ABSG”), and the AmerisourceBergen Packaging Group
(“ABPG”). 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.
The Company has aggregated the operating segments of ABDC, ABSG, and ABPG into one reportable
segment, the Pharmaceutical Distribution segment. Its ability to aggregate these three operating
segments into one reportable segment was based on the following:
| • | the objective and basic principles of ASC 280; |
| • | the aggregation criteria as noted in ASC 280; and |
| • | the fact that ABDC, ABSG, and ABPG have similar economic characteristics. |
The chief operating decision maker for the Pharmaceutical Distribution segment is the
President and Chief Executive Officer of the Company whose function is to allocate resources to,
and assess the performance of, the ABDC, ABSG, and ABPG operating segments. ABDC, ABSG, and ABPG
each have an executive who functions as an operating segment manager whose role includes reporting
directly to the President and Chief Executive Officer of the Company on their respective operating
segment’s business activities, financial results and operating plans.
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. The distribution of pharmaceutical drugs has historically represented more than 95% of the
Company’s revenues. ABDC and ABSG each operate in a high volume and low margin environment and, as
a result, their economic characteristics are similar. Each operating segment warehouses and
distributes products in a similar manner. Additionally, each operating segment is subject, in whole
or in part, to the same extensive regulatory environment under which the pharmaceutical
distribution industry operates.
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.
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ABSG, through a number of individual operating businesses, provides distribution and other
services primarily to physicians who specialize in a variety of disease states, especially
oncology, and to other alternate healthcare providers, including dialysis clinics. ABSG also
distributes plasma and other blood products, injectible pharmaceuticals and vaccines. In addition,
through its specialty services businesses, ABSG provides a number of commercialization services,
third party logistics, reimbursement consulting, data analytics, and outcomes research, and other
services for biotech and other pharmaceutical manufacturers, as well as practice management, and
group purchasing services for physician practices. Beginning in fiscal 2011, certain specialty
service businesses within ABSG will be combined to form the operations of AmerisourceBergen
Consulting Services (“ABCS”). These businesses will principally provide drug commercialization
services, reimbursement consulting, data analytics, and outcomes
research. ABCS revenue in fiscal 2010 was less than 1% of the
Company’s consolidated revenue.
ABPG consists of American Health Packaging, Anderson Packaging (“Anderson”), and Brecon.
American Health Packaging delivers unit dose, punch card, unit-of-use, compliance 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 contracted packaging services for pharmaceutical
manufacturers and has recently entered the clinical trials packaging service business. Brecon is a
United Kingdom-based provider of contract packaging and clinical trial materials services for
pharmaceutical manufacturers.
The Company has a diverse customer base that includes institutional and retail healthcare
providers as well as pharmaceutical manufacturers. Institutional healthcare providers include acute
care hospitals, health systems, mail order pharmacies, long-term care and other alternate care
pharmacies and providers of pharmacy services to such facilities, and physician offices. Retail
healthcare providers include national and regional retail drugstore chains, independent community
pharmacies and pharmacy departments of supermarkets and mass merchandisers. The Company is
typically the primary source of supply for its healthcare provider customers. The Company’s
manufacturing customers include branded, generic and biotech manufacturers of prescribed
pharmaceuticals, as well as over-the-counter product and health and beauty aid manufacturers. In
addition, the Company offers a broad range of value-added solutions designed to enhance the
operating efficiencies and competitive positions of its customers, thereby allowing them to improve
the delivery of healthcare to patients and consumers. In fiscal 2010 revenue was comprised of 70%
institutional customers and 30% retail customers.
The Company operates as a single reportable segment as a provider of pharmaceutical
distribution and related services, with fiscal 2010 revenue of $78.0 billion, including foreign
operations in Canada and the United Kingdom. For the fiscal years ended September 30, 2010, 2009,
and 2008 the Company’s revenue from foreign operations in Canada and the United Kingdom totaled
$1.4 billion, $1.2 billion, and $1.4 billion, respectively. As of September 30, 2010, and 2009
long-lived assets of the Company’s foreign operations in Canada and the United Kingdom totaled
$148.4 million and $152.3 million, respectively.
Note 15. Fair Value of Financial Instruments
The recorded amounts of the Company’s cash and cash equivalents, accounts receivable and
accounts payable at September 30, 2010 and 2009 approximate fair value based upon the relatively
short-term nature of these financial instruments. Within cash and cash equivalents, the Company
had $1,552.4 million and $928.3 million of investments in money market accounts as of September 30,
2010 and 2009, respectively, which were valued as Level 1 investments. The fair values of the
Company’s debt instruments are estimated based on market prices. The recorded amount of debt (see
Note 6) and the corresponding fair value as of September 30, 2010 were $1,343.6 million and
$1,486.3 million, respectively. The recorded amount of debt and the corresponding fair value as of
September 30, 2009 were $1,178.0 million and $1,246.4 million, respectively.
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Note 16. Quarterly Financial Information (Unaudited)
| Fiscal Year Ended September 30, 2010 | ||||||||||||||||||||
| First | Second | Third | Fourth | Fiscal | ||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
Revenue |
$ | 19,335,859 | $ | 19,300,627 | $ | 19,602,120 | $ | 19,715,373 | $ | 77,953,979 | ||||||||||
Gross profit (a) (b) |
$ | 563,370 | $ | 612,068 | $ | 588,370 | $ | 592,834 | $ | 2,356,642 | ||||||||||
Distribution, selling and
administrative expenses,
depreciation, and
amortization (c) |
301,036 | 300,178 | 310,913 | 342,162 | 1,254,289 | |||||||||||||||
Facility consolidations,
employee severance and
other |
(48 | ) | (37 | ) | (4,397 | ) | — | (4,482 | ) | |||||||||||
Intangible asset impairments |
— | 700 | — | 2,500 | 3,200 | |||||||||||||||
Operating income |
$ | 262,382 | $ | 311,227 | $ | 281,854 | $ | 248,172 | $ | 1,103,635 | ||||||||||
Net income |
$ | 151,307 | $ | 181,008 | $ | 163,205 | $ | 141,228 | $ | 636,748 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 0.53 | $ | 0.64 | $ | 0.58 | $ | 0.51 | $ | 2.26 | ||||||||||
Diluted |
$ | 0.52 | $ | 0.63 | $ | 0.57 | $ | 0.50 | $ | 2.22 | ||||||||||
| (a) | The first and third quarters of fiscal 2010 include gains of $1.5 million and $19.1 million, respectively, from
antitrust litigation settlements. |
|
| (b) | The second quarter of fiscal 2010 benefited by approximately $12.0 million due to the completion of an account
reconciliation with one of the Company’s generic suppliers relating to rebate incentives owed to the Company. |
|
| (c) | The fourth quarter of fiscal 2010 includes a charge of $6.7 million relating to the write-down of capitalized software. |
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| Fiscal Year Ended September 30, 2009 | ||||||||||||||||||||
| First | Second | Third | Fourth | Fiscal | ||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Year | ||||||||||||||||
| (In thousands, except per share amounts) | ||||||||||||||||||||
Revenue |
$ | 17,338,377 | $ | 17,311,651 | $ | 18,393,899 | $ | 18,716,063 | $ | 71,759,990 | ||||||||||
Gross profit(a) |
$ | 489,848 | $ | 552,471 | $ | 519,223 | $ | 538,533 | $ | 2,100,075 | ||||||||||
Distribution, selling and
administrative expenses,
depreciation and amortization(b) |
290,935 | 298,643 | 297,123 | 312,447 | 1,199,148 | |||||||||||||||
Facility consolidations, employee
severance and other |
1,029 | 4,262 | 213 | (98 | ) | 5,406 | ||||||||||||||
Intangible asset impairments |
— | 1,300 | 8,900 | 1,572 | 11,772 | |||||||||||||||
Operating income |
$ | 197,884 | $ | 248,266 | $ | 212,987 | $ | 224,612 | $ | 883,749 | ||||||||||
Income from continuing operations |
$ | 112,529 | $ | 144,042 | $ | 125,134 | $ | 130,147 | $ | 511,852 | ||||||||||
Loss from discontinued
operations, net of tax |
(1,473 | ) | (655 | ) | (6,327 | ) | — | (8,455 | ) | |||||||||||
Net income |
$ | 111,056 | $ | 143,387 | $ | 118,807 | $ | 130,147 | $ | 503,397 | ||||||||||
Earnings per share from continuing
operations: |
||||||||||||||||||||
Basic |
$ | 0.36 | $ | 0.48 | $ | 0.42 | $ | 0.44 | $ | 1.70 | ||||||||||
Diluted |
$ | 0.36 | $ | 0.47 | $ | 0.42 | $ | 0.44 | $ | 1.69 | ||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 0.36 | $ | 0.47 | $ | 0.40 | $ | 0.44 | $ | 1.67 | ||||||||||
Diluted |
$ | 0.36 | $ | 0.47 | $ | 0.40 | $ | 0.44 | $ | 1.66 | ||||||||||
| (a) | The first quarter of fiscal 2009 includes $10.2 million of fees relating to prior
period sales due to the execution of new agreements in the first quarter and a $15.5
million write-down of influenza vaccine inventory. |
|
| (b) | The second quarter of fiscal 2009 includes a charge of $2.8 million relating to the
write-down of software. |
Note 17. Selected Consolidating Financial Statements of Parent, Guarantors and Non-Guarantors
The Company’s 2012 Notes, the 2015 Notes, the 2019 Notes (together, 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 the Notes being referred to
collectively as the “Guarantor Subsidiaries”). The total assets, stockholders’ equity, revenues,
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 described in Note 6,
(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 September 30, 2010 and 2009 and the related
statements of operations and cash flows for each of the three years in the period ended September
30, 2010.
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SUMMARY CONSOLIDATING BALANCE SHEETS:
| September 30, 2010 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 1,552,122 | $ | 79,700 | $ | 26,360 | $ | — | $ | 1,658,182 | ||||||||||
Accounts receivable, net |
227 | 1,303,333 | 2,523,924 | — | 3,827,484 | |||||||||||||||
Merchandise inventories |
— | 5,090,604 | 119,494 | — | 5,210,098 | |||||||||||||||
Prepaid expenses and other |
87 | 49,753 | 2,746 | — | 52,586 | |||||||||||||||
Total current assets |
1,552,436 | 6,523,390 | 2,672,524 | — | 10,748,350 | |||||||||||||||
Property and equipment, net |
— | 683,855 | 27,857 | — | 711,712 | |||||||||||||||
Goodwill and other intangible assets |
— | 2,708,901 | 136,442 | — | 2,845,343 | |||||||||||||||
Other assets |
10,332 | 116,917 | 2,189 | — | 129,438 | |||||||||||||||
Intercompany investments and
advances |
2,404,018 | 1,905,733 | 23,401 | (4,333,152 | ) | — | ||||||||||||||
Total assets |
$ | 3,966,786 | $ | 11,938,796 | $ | 2,862,413 | $ | (4,333,152 | ) | $ | 14,434,843 | |||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable |
$ | — | $ | 8,680,923 | $ | 152,362 | $ | — | $ | 8,833,285 | ||||||||||
Accrued expenses and other |
(274,676 | ) | 634,437 | 9,255 | — | 369,016 | ||||||||||||||
Current portion of long-term debt |
— | 346 | 76 | — | 422 | |||||||||||||||
Deferred income taxes |
— | 703,621 | — | — | 703,621 | |||||||||||||||
Total current liabilities |
(274,676 | ) | 10,019,327 | 161,693 | — | 9,906,344 | ||||||||||||||
Long-term debt, net of current
portion |
1,287,165 | 86 | 55,907 | — | 1,343,158 | |||||||||||||||
Other liabilities |
— | 228,768 | 2,276 | — | 231,044 | |||||||||||||||
Total stockholders’ equity |
2,954,297 | 1,690,615 | 2,642,537 | (4,333,152 | ) | 2,954,297 | ||||||||||||||
Total liabilities and stockholders’
equity |
$ | 3,966,786 | $ | 11,938,796 | $ | 2,862,413 | $ | (4,333,152 | ) | $ | 14,434,843 | |||||||||
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SUMMARY CONSOLIDATING BALANCE SHEETS:
| September 30, 2009 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
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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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
| Fiscal Year Ended September 30, 2010 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Revenue |
$ | — | $ | 76,268,384 | $ | 1,810,873 | $ | (125,278 | ) | $ | 77,953,979 | |||||||||
Cost of goods sold |
— | 73,993,459 | 1,603,878 | — | 75,597,337 | |||||||||||||||
Gross profit |
— | 2,274,925 | 206,995 | (125,278 | ) | 2,356,642 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and
administrative |
— | 1,228,523 | 64,583 | (125,278 | ) | 1,167,828 | ||||||||||||||
Depreciation |
— | 66,610 | 3,394 | — | 70,004 | |||||||||||||||
Amortization |
— | 13,195 | 3,262 | — | 16,457 | |||||||||||||||
Facility consolidations, employee severance and other |
— | (4,482 | ) | — | — | (4,482 | ) | |||||||||||||
Intangible asset impairments |
— | 3,200 | — | — | 3,200 | |||||||||||||||
Operating income |
— | 967,879 | 135,756 | — | 1,103,635 | |||||||||||||||
Other loss
(income) |
— | 3,383 | (11 | ) | — | 3,372 | ||||||||||||||
Interest expense, net |
1,609 | 59,961 | 10,924 | — | 72,494 | |||||||||||||||
(Loss) income before income taxes and equity
in earnings of subsidiaries |
(1,609 | ) | 904,535 | 124,843 | — | 1,027,769 | ||||||||||||||
Income taxes |
(563 | ) | 347,957 | 43,627 | — | 391,021 | ||||||||||||||
Equity in earnings of subsidiaries |
637,794 | — | — | (637,794 | ) | — | ||||||||||||||
Net income |
$ | 636,748 | $ | 556,578 | $ | 81,216 | $ | (637,794 | ) | $ | 636,748 | |||||||||
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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
| Fiscal Year Ended September 30, 2009 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Revenue |
$ | — | $ | 70,282,349 | $ | 1,591,713 | $ | (114,072 | ) | $ | 71,759,990 | |||||||||
Cost of goods sold |
— | 68,248,235 | 1,411,680 | — | 69,659,915 | |||||||||||||||
Gross profit |
— | 2,034,114 | 180,033 | (114,072 | ) | 2,100,075 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
— | 1,173,009 | 61,303 | (114,072 | ) | 1,120,240 | ||||||||||||||
Depreciation |
— | 60,552 | 2,936 | — | 63,488 | |||||||||||||||
Amortization |
— | 12,422 | 2,998 | — | 15,420 | |||||||||||||||
severance and other |
— | 3,996 | 1,410 | — | 5,406 | |||||||||||||||
Intangible asset impairments |
— | 10,200 | 1,572 | — | 11,772 | |||||||||||||||
Operating income |
— | 773,935 | 109,814 | — | 883,749 | |||||||||||||||
Other loss |
— | 1,305 | 63 | — | 1,368 | |||||||||||||||
Interest (income) expense, net |
(3,040 | ) | 48,207 | 13,140 | — | 58,307 | ||||||||||||||
Income from continuing operations
before income taxes and equity in
earnings of subsidiaries |
3,040 | 724,423 | 96,611 | — | 824,074 | |||||||||||||||
Income taxes |
1,064 | 276,979 | 34,179 | — | 312,222 | |||||||||||||||
Equity in earnings of subsidiaries |
501,421 | — | — | (501,421 | ) | — | ||||||||||||||
Income from continuing operations |
503,397 | 447,444 | 62,432 | (501,421 | ) | 511,852 | ||||||||||||||
Loss from discontinued operations |
— | (8,455 | ) | — | — | (8,455 | ) | |||||||||||||
Net income |
$ | 503,397 | $ | 438,989 | $ | 62,432 | $ | (501,421 | ) | $ | 503,397 | |||||||||
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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS:
| Fiscal Year Ended September 30, 2008 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Revenue |
$ | — | $ | 68,383,860 | $ | 1,917,114 | $ | (111,241 | ) | $ | 70,189,733 | |||||||||
Cost of goods sold |
— | 66,427,143 | 1,715,588 | — | 68,142,731 | |||||||||||||||
Gross profit |
— | 1,956,717 | 201,526 | (111,241 | ) | 2,047,002 | ||||||||||||||
Operating expenses: |
||||||||||||||||||||
Distribution, selling and administrative |
— | 1,165,604 | 65,030 | (111,241 | ) | 1,119,393 | ||||||||||||||
Depreciation |
— | 62,227 | 2,727 | — | 64,954 | |||||||||||||||
Amortization |
— | 13,665 | 3,462 | — | 17,127 | |||||||||||||||
Facility consolidations, employee
severance and other |
— | 12,377 | — | — | 12,377 | |||||||||||||||
Intangible asset impairments |
— | 3,130 | 2,160 | — | 5,290 | |||||||||||||||
Operating income |
— | 699,714 | 128,147 | — | 827,861 | |||||||||||||||
Other loss |
— | 1,991 | 36 | — | 2,027 | |||||||||||||||
Interest (income) expense, net |
(17,630 | ) | 60,314 | 21,812 | — | 64,496 | ||||||||||||||
Income from continuing operations
before income taxes and equity in
earnings of subsidiaries |
17,630 | 637,409 | 106,299 | — | 761,338 | |||||||||||||||
Income taxes |
6,170 | 247,559 | 38,545 | — | 292,274 | |||||||||||||||
Equity in earnings of subsidiaries |
239,099 | — | — | (239,099 | ) | — | ||||||||||||||
Income from continuing operations |
250,559 | 389,850 | 67,754 | (239,099 | ) | 469,064 | ||||||||||||||
Loss from discontinued operations |
— | (218,505 | ) | — | — | (218,505 | ) | |||||||||||||
Net income |
$ | 250,559 | $ | 171,345 | $ | 67,754 | $ | (239,099 | ) | $ | 250,559 | |||||||||
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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
| Twelve Months Ended September 30, 2010 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Net income |
$ | 636,748 | $ | 556,578 | $ | 81,216 | $ | (637,794 | ) | $ | 636,748 | |||||||||
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities |
(637,701 | ) | 369,175 | 102,608 | 637,794 | 471,876 | ||||||||||||||
Net cash provided by (used in) operating
activities |
(953 | ) | 925,753 | 183,824 | — | 1,108,624 | ||||||||||||||
Capital expenditures |
— | (181,260 | ) | (3,375 | ) | — | (184,635 | ) | ||||||||||||
Proceeds from the sale of property and
equipment |
— | 145 | 119 | — | 264 | |||||||||||||||
Net cash used in investing activities |
— | (181,115 | ) | (3,256 | ) | — | (184,371 | ) | ||||||||||||
Net long-term debt borrowings |
389,032 | — | — | — | 389,032 | |||||||||||||||
Net repayments under revolving and
securitization credit facilities |
— | — | (225,993 | ) | — | (225,993 | ) | |||||||||||||
Other |
(8,750 | ) | (564 | ) | (905 | ) | — | (10,219 | ) | |||||||||||
Purchases of common stock |
(470,356 | ) | — | — | — | (470,356 | ) | |||||||||||||
Exercise of stock options, including
excess tax benefit |
132,719 | — | — | — | 132,719 | |||||||||||||||
Cash dividends on common stock |
(90,622 | ) | — | — | — | (90,622 | ) | |||||||||||||
Intercompany financing and advances |
674,003 | (723,274 | ) | 49,271 | — | — | ||||||||||||||
Net cash provided by (used in) financing
activities |
626,026 | (723,838 | ) | (177,627 | ) | — | (275,439 | ) | ||||||||||||
Increase (decrease) in cash and cash
equivalents |
625,073 | 20,800 | 2,941 | — | 648,814 | |||||||||||||||
Cash and cash equivalents at beginning of year |
927,049 | 58,900 | 23,419 | — | 1,009,368 | |||||||||||||||
Cash and cash equivalents at end of year |
$ | 1,552,122 | $ | 79,700 | $ | 26,360 | $ | — | $ | 1,658,182 | ||||||||||
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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
| Twelve Months Ended September 30, 2009 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Net income |
$ | 503,397 | $ | 438,989 | $ | 62,432 | $ | (501,421 | ) | $ | 503,397 | |||||||||
Loss from discontinued operations |
— | 8,455 | — | — | 8,455 | |||||||||||||||
Income from continuing operations |
503,397 | 447,444 | 62,432 | (501,421 | ) | 511,852 | ||||||||||||||
Adjustments to reconcile income from
continuing operations to net cash provided
by (used in) operating activities |
(436,182 | ) | 625,614 | (411,709 | ) | 501,421 | 279,144 | |||||||||||||
Net cash provided by (used in) operating
activities — continuing operations |
67,215 | 1,073,058 | (349,277 | ) | — | 790,996 | ||||||||||||||
Net cash used in operating activities
— discontinued operations |
— | (7,233 | ) | — | — | (7,233 | ) | |||||||||||||
Net cash provided by (used in) operating
activities |
67,215 | 1,065,825 | (349,277 | ) | — | 783,763 | ||||||||||||||
Capital expenditures |
— | (138,865 | ) | (6,972 | ) | — | (145,837 | ) | ||||||||||||
Cost of acquired company, net of cash acquired |
— | — | (13,422 | ) | — | (13,422 | ) | |||||||||||||
Proceeds from the sale of PMSI |
— | 11,940 | — | — | 11,940 | |||||||||||||||
Proceeds from the sale of property and equipment |
— | 73 | 35 | — | 108 | |||||||||||||||
Net cash used in investing activities —
continuing operations |
— | (126,852 | ) | (20,359 | ) | — | (147,211 | ) | ||||||||||||
Net cash used in investing activities —
discontinued operations |
— | (1,138 | ) | — | — | (1,138 | ) | |||||||||||||
Net cash used in investing activities |
— | (127,990 | ) | (20,359 | ) | — | (148,349 | ) | ||||||||||||
Net repayments under revolving and
securitization credit facilities |
— | — | (8,838 | ) | — | (8,838 | ) | |||||||||||||
Other |
(3,506 | ) | 273 | (1,109 | ) | — | (4,342 | ) | ||||||||||||
Purchases of common stock |
(450,350 | ) | — | — | — | (450,350 | ) | |||||||||||||
Exercise of stock options, including
excess tax benefit |
22,066 | — | — | — | 22,066 | |||||||||||||||
Cash dividends on common stock |
(62,696 | ) | — | — | — | (62,696 | ) | |||||||||||||
Intercompany financing and advances |
634,750 | (979,831 | ) | 345,081 | — | — | ||||||||||||||
Net cash provided by (used in) financing
activities |
140,264 | (979,558 | ) | 335,134 | — | (504,160 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents |
207,479 | (41,723 | ) | (34,502 | ) | — | 131,254 | |||||||||||||
Cash and cash equivalents at beginning of year |
719,570 | 100,623 | 57,921 | — | 878,114 | |||||||||||||||
Cash and cash equivalents at end of year |
$ | 927,049 | $ | 58,900 | $ | 23,419 | $ | — | $ | 1,009,368 | ||||||||||
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CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS:
| Twelve Months Ended September 30, 2008 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | Consolidated | ||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
Net income |
$ | 250,559 | $ | 171,345 | $ | 67,754 | $ | (239,099 | ) | $ | 250,559 | |||||||||
Loss from discontinued operations |
— | 218,505 | — | — | 218,505 | |||||||||||||||
Income from continuing operations |
250,559 | 389,850 | 67,754 | (239,099 | ) | 469,064 | ||||||||||||||
Adjustments to reconcile income from
continuing operations to net cash (used
in) provided by operating activities |
(290,515 | ) | 190,561 | 111,415 | 239,099 | 250,560 | ||||||||||||||
Net cash (used in) provided by operating
activities — continuing operations |
(39,956 | ) | 580,411 | 179,169 | — | 719,624 | ||||||||||||||
Net cash provided by operating activities
— discontinued operations |
— | 17,445 | — | — | 17,445 | |||||||||||||||
Net cash (used in) provided by operating
activities |
(39,956 | ) | 597,856 | 179,169 | — | 737,069 | ||||||||||||||
Capital expenditures |
— | (128,214 | ) | (9,095 | ) | — | (137,309 | ) | ||||||||||||
Cost of acquired company, net of cash acquired |
— | (169,230 | ) | — | — | (169,230 | ) | |||||||||||||
Proceeds from sales of investment securities
available-for-sale |
467,419 | — | — | — | 467,419 | |||||||||||||||
Proceeds from the sales of other assets |
— | 1,878 | — | — | 1,878 | |||||||||||||||
Proceeds from the sales of property and
equipment |
— | 2,964 | 56 | — | 3,020 | |||||||||||||||
Net cash provided by (used in) investing
activities — continuing operations |
467,419 | (292,602 | ) | (9,039 | ) | — | 165,778 | |||||||||||||
Net cash used in investing activities —
discontinued operations |
— | (2,357 | ) | — | — | (2,357 | ) | |||||||||||||
Net cash provided by (used in) investing
activities |
467,419 | (294,959 | ) | (9,039 | ) | — | 163,421 | |||||||||||||
Net repayments under revolving and
securitization
credit facilities |
— | — | (16,396 | ) | — | (16,396 | ) | |||||||||||||
Other |
(932 | ) | (602 | ) | (523 | ) | — | (2,057 | ) | |||||||||||
Purchases of common stock |
(679,684 | ) | — | — | — | (679,684 | ) | |||||||||||||
Exercise of stock options, including excess
tax benefit |
84,394 | — | — | — | 84,394 | |||||||||||||||
Cash dividends on common stock |
(48,674 | ) | — | — | — | (48,674 | ) | |||||||||||||
Intercompany financing and advances |
436,757 | (259,768 | ) | (176,989 | ) | — | — | |||||||||||||
Net cash used in financing activities
— continuing operations |
(208,139 | ) | (260,370 | ) | (193,908 | ) | — | (662,417 | ) | |||||||||||
Net cash used in financing activities
— discontinued operations |
— | (163 | ) | — | — | (163 | ) | |||||||||||||
Net cash used in financing activities |
(208,139 | ) | (260,533 | ) | (193,908 | ) | — | (662,580 | ) | |||||||||||
Increase (decrease) in cash and cash equivalents |
219,324 | 42,364 | (23,778 | ) | — | 237,910 | ||||||||||||||
Cash and cash equivalents at beginning of year |
500,246 | 58,259 | 81,699 | — | 640,204 | |||||||||||||||
Cash and cash equivalents at end of year |
$ | 719,570 | $ | 100,623 | $ | 57,921 | $ | — | $ | 878,114 | ||||||||||
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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 Securities
Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the 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 September 30, 2010 in the Company’s
internal control over financial reporting that materially affected, or are reasonably likely to
materially affect, those controls.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of AmerisourceBergen Corporation (“AmerisourceBergen” or the “Company”) is
responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.
AmerisourceBergen’s internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. The
Company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
AmerisourceBergen’s management assessed the effectiveness of AmerisourceBergen’s internal
control over financial reporting as of September 30, 2010. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on management’s assessment and those
criteria, management has concluded that AmerisourceBergen’s internal control over financial
reporting was effective as of September 30, 2010. AmerisourceBergen’s independent registered public
accounting firm, Ernst & Young LLP, has issued an attestation report on the effectiveness of
AmerisourceBergen’s internal control over financial reporting. This report is set forth on the next
page.
78
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders of AmerisourceBergen Corporation
We have audited internal control over financial reporting of AmerisourceBergen Corporation and
subsidiaries as of September 30, 2010, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). AmerisourceBergen Corporation’s management is responsible for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AmerisourceBergen Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of September 30, 2010, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of AmerisourceBergen Corporation
and subsidiaries as of September 30, 2010 and 2009, and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the three years in the
period ended September 30, 2010 and our report dated November 23, 2010 expressed an unqualified
opinion thereon.
| /s/ Ernst & Young LLP |
Philadelphia, Pennsylvania
November 23, 2010
November 23, 2010
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ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information appearing in our Notice of Annual Meeting of Stockholders and Proxy Statement for
the 2011 annual meeting of stockholders (the “2011 Proxy Statement”) including information under
“Election of Directors,” “Additional Information about the Directors, the Board and the Board
Committees,” “Codes of Ethics,” “Audit Matters,” and “Section 16 (a) Beneficial Reporting
Compliance,” is incorporated herein by reference. We will file the 2011 Proxy Statement with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of
the fiscal year.
Information with respect to Executive Officers of the Company appears in Part I of this
report.
We adopted a Code of Ethics for Designated Senior Officers that applies to our Chief Executive
Officer, Chief Financial Officer and Corporate Controller. A copy of this Code of Ethics is filed
as an exhibit to this report and is posted on our Internet website, which is
www.amerisourcebergen.com. Any amendment to, or waiver from, any provision of this Code of Ethics
will be posted as well on our Internet website.
ITEM 11. EXECUTIVE COMPENSATION
Information contained in the 2011 Proxy Statement, including information appearing under
“Compensation Matters” and “Executive Compensation” in the 2011 Proxy Statement, is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information contained in the 2011 Proxy Statement, including information appearing under
“Beneficial Ownership of Common Stock” and “Equity Compensation Plan Information” in the 2011 Proxy
Statement, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information contained in the 2011 Proxy Statement, including information appearing under
“Additional Information about the Directors, the Board, and the Board Committees,” “Corporate
Governance,” “Agreements with Employees” and “Certain Transactions” in the 2011 Proxy Statement, is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information contained in the 2011 Proxy Statement, including information appearing under
“Audit Matters” in the 2011 Proxy Statement, is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) List of Financial Statements and Schedules.
Financial Statements: The following consolidated financial statements are submitted in
response to Item 15(a)(1):
| Page | ||||
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm |
38 | |||
Consoldiated Balance Sheets as of September 30, 2010 and 2009 |
39 | |||
Consolidated Statements of Operations for the fiscal years ended September 30,
2010, 2009 and 2008 |
40 | |||
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years
ended September 30,
2010, 2009 and 2008 |
41 | |||
Consolidated Statements of Cash Flows for the fiscal years ended September 30,
2010, 2009 and 2008 |
42 | |||
Notes to Consolidated Financial Statements |
43 | |||
Financial Statement Schedule: The following financial statement schedule is
submitted in response to
Item 15(a)(2): |
||||
Schedule II — Valuation and Qualifying Accounts |
87 | |||
All other schedules for which provision is made in the applicable accounting regulations of
the Securities and Exchange Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
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(a) (3) List of Exhibits.*
| Exhibit | ||||
| Number | Description | |||
| 2 | Agreement and Plan of Merger dated as of March 16, 2001 by and
among AABB Corporation, AmeriSource Health Corporation, Bergen
Brunswig Corporation, A-Sub Acquisition Corp. and B-Sub
Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the
Registrant’s Registration Statement No. 333-71942 on Form S-4,
dated October 19, 2001). |
|||
| 3.1 | Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference Exhibit 3.1 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 2010). |
|||
| 3.2 | Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3(ii) to the Registrant’s Current Report on
Form 8-K filed on March 9, 2010). |
|||
| 4.1 | Purchase Agreement, dated September 8, 2005, by and among the
Registrant, the Subsidiary Guarantors named therein, Lehman
Brothers Inc., Banc of America Securities LLC, J.P. Morgan
Securities Inc., Scotia Capital (USA) Inc., Wachovia Securities,
Inc. and Wells Fargo Securities, LLC (incorporated by reference to
Exhibit 4.4 to the Registrant’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2005). |
|||
| 4.2 | Indenture, dated as of September 14, 2005, among the Registrant,
certain of the Registrant’s subsidiaries as guarantors thereto and
J.P. Morgan Trust Company, National Association, as trustee,
related to the Registrant’s 5 5/8% Senior
Notes due 2012 and 5 7/8% Senior Notes due
2015 (incorporated by reference to Exhibit 4.5 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2005). |
|||
| 4.3 | Form of 5 5/8% Senior Notes due 2012
(incorporated by reference to Exhibit 4.6 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2005). |
|||
| 4.4 | Form of 5 7/8% Senior Notes due 2015
(incorporated by reference to Exhibit 4.7 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2005). |
|||
| 4.5 | Exchange and Registration Rights Agreement, dated September 14,
2005, by and among the Registrant, the Subsidiary Guarantors named
therein, and Lehman Brothers Inc. on behalf of the Initial
Purchasers under the Purchase Agreement dated September 8, 2005
(incorporated by reference to Exhibit 4.8 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30,
2005). |
|||
| 4.6 | Underwriting Agreement, dated November 16, 2009, between the
Registrant and J.P. Morgan Securities Inc. and Banc of America
Securities LLC (incorporated by reference to Exhibit 1.1 to the
Registrant’s Current Report on Form 8-K filed on November 17,
2009). |
|||
| 4.7 | Indenture, dated as of November 19, 2009, among the Registrant and
U.S. Bank National Association, as trustee (incorporated by
reference to Exhibit 4.1 to the Registrant’s Current Report on
Form 8-K filed on November 23, 2009). |
|||
| 4.8 | First Supplemental Indenture, dated as of November 19, 2009, among
the Registrant, the Guarantors named therein and U.S. Bank
National Association, as trustee (incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed
on November 23, 2009). |
|||
| 4.9 | Form of 4.875% Senior Notes due 2019 (incorporated by reference to
Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed
on November 23, 2009). |
|||
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Table of Contents
| Exhibit | ||||
| Number | Description | |||
| ‡10.1 | AmeriSource Master Pension Plan (incorporated by reference to Exhibit 10.9 to Registration
Statement on Form S-1 of AmeriSource Health Corporation, Registration No. 33-27835, filed
March 29, 1989). |
|||
| ‡10.2 | AmerisourceBergen Drug Corporation Supplemental Retirement Plan, as amended and restated
as of November 24, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2008). |
|||
| ‡10.3 | AmeriSource Health Corporation 1999 Stock Option Plan (incorporated by reference to
Appendix B to Proxy Statement of AmeriSource Health Corporation dated February 5, 1999 for
the Annual Meeting of Stockholders held on March 3, 1999). |
|||
| ‡10.4 | AmeriSource Health Corporation 2001 Stock Option Plan (incorporated by reference to
Exhibit 99.1 to the Registration Statement on Form S-8 of AmeriSource Health Corporation,
filed May 4, 2001). |
|||
| ‡10.5 | Bergen Brunswig Corporation 1999 Management Stock Incentive Plan (incorporated by
reference to Annex F to Registration Statement No. 333-7445 of Form S-4 of Bergen Brunswig
Corporation dated March 16, 1999). |
|||
| ‡10.6 | AmerisourceBergen Corporation 2001 Non-Employee Directors’ Stock Option Plan, as amended
and restated November 9, 2005 (incorporated by reference to Exhibit 10.17 to the
Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005). |
|||
| ‡10.7 | AmerisourceBergen Corporation 2001 Restricted Stock Plan, as amended and restated as of
November 12, 2008 (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008). |
|||
| ‡10.8 | AmerisourceBergen Corporation 2001 Deferred Compensation Plan, as amended and restated as
of November 24, 2008 (incorporated by reference to Exhibit 10.19 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended September 30, 2008). |
|||
| ‡10.9 | AmerisourceBergen Corporation Supplemental 401(k) Plan, as amended and restated as of
November 24, 2008 (incorporated by reference to Exhibit 10.20 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2008). |
|||
| ‡10.10 | Registrant’s 2002 Employee Stock Purchase Plan, as amended, dated as of January 1, 2010
(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 2010). |
|||
| ‡10.11 | AmerisourceBergen Corporation Management Incentive Plan, effective as of February 19, 2009
(incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K
filed on February 19, 2009). |
|||
| ‡10.12 | Amended and Restated Employment Agreement, dated as of November 24, 2008, between the
Registrant and R. David Yost (incorporated by reference to Exhibit 10.6 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2008). |
|||
| ‡10.13 | Letter Agreement, dated January 7, 2009, between the Registrant and R. David Yost
(incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 2008). |
|||
| ‡10.14 | AmerisourceBergen Corporation Amended and Restated Long-Term Incentive Award Agreement,
dated December 22, 2008, for R. David Yost (incorporated by reference to Exhibit 10.8 to
the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2008). |
|||
| ‡10.15 | Amended and Restated Employment Agreement, dated as of November 24, 2008, between the
Registrant and Michael D. DiCandilo (incorporated by reference to Exhibit 10.9 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2008). |
|||
| ‡10.16 | Letter Agreement, dated January 7, 2009, between the Registrant and Michael D. DiCandilo
(incorporated by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on
Form 10-Q for the fiscal quarter ended December 31, 2008). |
|||
| ‡10.17 | Second Amendment and Restatement of
Employment Agreement, dated and effective as of November 11, 2010, between the
Registrant and Steven H. Collis.
|
|||
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Table of Contents
| Exhibit | ||||
| Number | Description | |||
| ‡10.18 | Amended and Restated Employment Agreement, dated as of November 24, 2008, between the
Registrant and John G. Chou (incorporated by reference to Exhibit 10.15 to the
Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
2008). |
|||
| ‡10.19 | Letter Agreement, dated January 7, 2009, between the Registrant and John G. Chou
(incorporated by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form
10-Q for the fiscal quarter ended December 31, 2008). |
|||
| ‡10.20 | Employment Agreement, dated as of February 1, 2010, between the Registrant and June Barry. |
|||
| ‡10.21 | Employment Agreement, dated as of April 8, 2010, between the Registrant and James D. Frary. |
|||
| 10.22 | Receivables Sale Agreement between AmerisourceBergen Drug Corporation, as Originator, and
AmeriSource Receivables Financial Corporation, as Buyer, dated as of July 10, 2003
(incorporated by reference to Exhibit 10.2 to the Registrant’s Quarter Report on
Form 10-Q for the fiscal quarter ended March 31, 2010). |
|||
| 10.23 | First Amendment to Receivables Sale Agreement, dated as of April 29, 2010, by and between
Amerisource Receivables Financial Corporation, as Buyer, and AmerisourceBergen Drug
Corporation as Originator (incorporated by reference to Exhibit 99.2 to the Registrant’s
Current Report on Form 8-K filed on May 5, 2010). |
|||
| 10.24 | Amended and Restated Receivables Purchase Agreement, dated as of April 29, 2010, among
AmeriSource Receivables Financial Corporation, as Seller, AmerisourceBergen Drug
Corporation, as Initial Servicer, Bank of America, National Association, as Administrator
and various purchaser groups, dated as of July 10, 2003 (incorporated by reference to
Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on May 5, 2010). |
|||
| 10.25 | Performance Undertaking, dated July 10, 2003, executed by the Registrant, as Performance
Guarantor, in favor of Amerisource Receivables Financial Corporation, as Recipient
(incorporated by reference to Exhibit 4.24 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended September 30, 2003). |
|||
| 10.26 | Intercreditor Agreement, dated July 10, 2003, executed by Wachovia Bank, National
Association, as administrator under the Receivables Purchase Agreement and JPMorgan Chase
Bank (f/k/a The Chase Manhattan Bank), as administrative agent under the Credit Agreement
(incorporated by reference to Exhibit 4.25 to the Registrant’s Annual Report on Form 10-K
for the fiscal year ended September 30, 2003). |
|||
| 10.27 | Credit Agreement dated as of April 21, 2005 between J.M. Blanco, Inc. and The Bank of Nova
Scotia (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2005). |
|||
| 10.28 | 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 (incorporated by reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010). |
|||
| 10.29 | First Amendment and Waiver, dated as of April 15, 2010, to the Credit Agreement, dated as
of November 14, 2006, among the Registrant, the Borrowing Subsidiaries party thereto, the
Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan
Europe Limited, as London Agent, and The Bank of Nova Scotia, as Canadian Agent (incorporated by reference to
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 2010). |
|||
| 10.30 | Master Transaction Agreement, dated as of October 25, 2006, among the Registrant,
Pharmerica, Inc., Kindred Healthcare, Inc., Kindred Pharmacy Services, Inc., Kindred
Healthcare Operating, Inc., Safari Holding Corporation, Hippo Merger Corporation and Rhino
Merger Corporation (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual
Report for the fiscal year ended September 30, 2006). |
|||
| 10.31 | Amendment No. 1 to the Master Transaction Agreement, dated as of June 4, 2007, among the
Registrant, PharMerica, Inc., Kindred Healthcare, Inc., Kindred Healthcare Operating,
Inc., Kindred Pharmacy Services, Inc., Safari Holding Corporation, Hippo Merger
Corporation and Rhino Merger Corporation (incorporated by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on June 6, 2007). |
|||
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Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 14 | AmerisourceBergen Corporation Code of Ethics for Designated Senior Officers
(incorporated by reference to Exhibit 14 to the Registrant’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2003). |
|||
| 21 | Subsidiaries of the Registrant. |
|||
| 23 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
|||
| 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 Annual Report on Form 10-K of
AmerisourceBergen Corporation for the fiscal year ended September 30, 2009,
formatted in Extensible Business Reporting Language (XBRL): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of
Operations, (iii) the Consolidated Statements of Changes in Stockholders’
Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes
to Consolidated Financial Statements. |
|||
| * | Copies of the exhibits will be furnished to any security holder of the Registrant upon
payment of the reasonable cost of reproduction. |
|
| ‡ | 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. |
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Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||||||
Date: November 23, 2010
|
By: | /s/ R. DAVID YOST
Chief Executive Officer and Director |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below as of November 23, 2010 by the following persons on behalf of the Registrant and in
the capacities indicated.
| Signature | Title | |||
/s/ R. David Yost
|
Chief Executive Officer and Director (Principal Executive Officer) |
|||
/s/ Michael D. DiCandilo
|
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
/s/ Tim G. Guttman
|
Vice President, Corporate Controller | |||
/s/ Richard W. Gochnauer
|
Director | |||
/s/ Richard C. Gozon
|
Director and Chairman | |||
/s/ Charles H. Cotros
|
Director | |||
/s/ Edward E. Hagenlocker
|
Director | |||
/s/ Jane E. Henney, M.D.
|
Director | |||
/s/ Kathleen W. Hyle
|
Director | |||
/s/ Michael J. Long
|
Director | |||
/s/ Henry W. McGee
|
Director |
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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| Additions | ||||||||||||||||||||
| Balance at | Charged to | Charged to | Balance at | |||||||||||||||||
| Beginning | Costs and | Other | Deductions- | End of | ||||||||||||||||
| Description | of Period | Expenses (1) | Accounts (2) | Describe (3) | Period | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
Year Ended September 30, 2010 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 90,998 | $ | 43,124 | $ | — | $ | (37,777 | ) | $ | 96,345 | |||||||||
Year Ended September 30, 2009 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 111,128 | $ | 31,830 | $ | — | $ | (51,960 | ) | $ | 90,998 | |||||||||
Year Ended September 30, 2008 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 98,698 | $ | 27,630 | $ | 2,573 | $ | (17,773 | ) | $ | 111,128 | |||||||||
| (1) | Represents the provision for doubtful accounts. |
|
| (2) | Represents the aggregate allowances of acquired entities at the respective acquisition dates. |
|
| (3) | Represents accounts written off during year, net of recoveries. |
87