Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for AmerisourceBergen Corporation (the Company). The Company is a pharmaceutical services provider operating primarily in the United States and Canada through two reportable segments: Pharmaceutical Distribution (including AmerisourceBergen Drug Corporation, Specialty Group, and Packaging Group) and PharMerica (Long-Term Care and Workers' Compensation). The Company recently completed a two-for-one stock split in December 2005 and has been actively expanding its Canadian operations through acquisitions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 | Nine Months Ended June 30, 2006 |
|---|---|---|
| Operating Revenue | $14.45 billion | $42.03 billion |
| Total Revenue (incl. bulk) | $15.69 billion | $45.56 billion |
| Gross Profit | $557.2 million | $1.65 billion |
| Operating Income | $188.8 million | $553.4 million |
| Net Income | $119.5 million | $345.7 million |
| Diluted EPS | $0.58 | $1.65 |
| Cash and Cash Equivalents (End of Period) | $1.66 billion | $1.66 billion |
| Net Cash Provided by Operating Activities | N/A | $884.7 million |
| Total Debt (Outstanding) | $1.08 billion | $1.08 billion |
| Available Liquidity (Credit Facilities) | $1.42 billion | $1.42 billion |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Operating revenue increased 15% year-over-year for the quarter and 13% for the nine-month period, driven primarily by the Pharmaceutical Distribution segment and growth in institutional and retail customer sales.
- Profitability: Net income increased 26% for the quarter and 41% for the nine-month period. Operating income rose 12% (quarter) and 15% (nine months).
- Margin Trends: Gross profit margin as a percentage of operating revenue decreased slightly to 3.86% (quarter) and 3.92% (nine months) compared to the prior year, attributed to growth in lower-margin institutional customers and reduced antitrust litigation gains compared to the prior year.
- Interest Expense: Net interest expense decreased significantly (72% for the nine months) due to higher short-term investment rates, lower long-term borrowing rates from refinancing, and reduced net average borrowings.
- Acquisitions: The Company acquired Trent Drugs (Canada), Network for Medical Communication & Research (NMCR), Brecon Pharmaceuticals (UK), and Asenda Pharmaceutical Supplies (Canada) during the period, contributing to revenue and goodwill increases.
Guidance, Outlook, and Risks
- PharMerica Spin-off: On August 7, 2006, the Company announced a non-binding letter of intent to combine its PharMerica Long-Term Care business with Kindred Healthcare's institutional pharmacy business into a new, independent, publicly traded company. Completion is expected in the first quarter of 2007, subject to regulatory approval.
- Canadian Expansion: The Company signed an agreement in July 2006 to acquire Rep-Pharm, Inc., a Canadian distributor, for an estimated $44–$48 million, expected to close by September 30, 2006.
- Revenue Outlook: Management estimates operating revenue growth for the quarter ending September 30, 2006, to be between 9% and 11%, lower than the first nine months due to the loss of two customer accounts totaling $1.5 billion in annualized revenue.
- Medicare Part D Impact: The PharMerica segment faces reduced compensation for servicing Medicare Part D patients compared to prior Medicaid rates. The Company is monitoring potential reductions in manufacturer rebates.
- Legal Contingencies: A significant legal matter involves a former Bergen Brunswig CEO. A court ruling in July 2006 awarded the executive $19.4 million; the Company recorded a $13.9 million charge in the quarter and has appealed the ruling.
- Antitrust Settlements: Gains from antitrust litigation settlements were $4.6 million (quarter) and $32.0 million (nine months), recorded as reductions to cost of goods sold.
Investor Verification Checklist
- PharMerica Transaction Status: Verify the progress of the proposed combination with Kindred Healthcare and the likelihood of regulatory approval.
- Customer Concentration Risk: Assess the impact of the recent loss of two major customer accounts ($1.5 billion annualized revenue) on future growth rates.
- Medicare Part D Reimbursement: Monitor the long-term impact of Medicare Part D reimbursement rates and manufacturer rebate policies on the PharMerica segment's margins.
- Legal Exposure: Track the outcome of the appeal regarding the $19.4 million award to the former CEO.
- Acquisition Integration: Evaluate the integration and performance of recent acquisitions (Trent, NMCR, Brecon, Asenda) and the pending Rep-Pharm deal.
- Working Capital Management: Review the trend in accounts receivable and inventory levels, which increased significantly in the nine-month period, impacting operating cash flow.