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Business Context and Reporting Period

This Form 10-K covers the fiscal year ended September 30, 2002, for AmerisourceBergen Corporation (the Company). The Company is the largest pharmaceutical services company in the United States, formed by the August 2001 merger of AmeriSource Health Corporation and Bergen Brunswig Corporation. It operates through two primary segments: Pharmaceutical Distribution (wholesale and specialty drug distribution) and PharMerica (institutional pharmacy services). The Company serves hospitals, retail pharmacies, and long-term care facilities across the U.S. and Puerto Rico.

Key Financial Metrics

Margins: Gross profit margin was 5.03% of operating revenue (down from 5.44% pro forma in 2001). Operating income margin was 1.79% (up from 1.64% historical in 2001).

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 154% year-over-year, primarily driven by the inclusion of the Bergen Brunswig business following the 2001 merger. On a pro forma basis, revenue grew 16%.
• Profitability: Net income increased 179% to $344.9 million. Operating income rose 177% to $718.4 million.
• Segment Performance:
  • Pharmaceutical Distribution: Revenue grew 151% (16% pro forma). Gross margin declined slightly to 3.87% due to competitive pricing and customer mix shifts toward institutional accounts.
  • PharMerica: Revenue grew 9% pro forma. Operating income increased 21% pro forma, driven by expense reductions and a shift in mix toward workers' compensation business.
• Acquisitions: The Company acquired AutoMed Technologies, Inc. for approximately $120 million in cash during fiscal 2002.
• Merger Integration: The Company incurred $24.2 million in merger costs and $19.2 million in facility consolidation/severance costs, though it closed seven distribution facilities to improve efficiency.

Guidance, Outlook, and Risks

• Strategic Outlook: Management expects to realize $150 million in annual synergies by the end of fiscal 2004 through facility consolidation (targeting 30 facilities) and elimination of duplicate functions. Capital expenditures are estimated at $100 million to $130 million for fiscal 2003.
• Future Acquisitions: The Company signed agreements in late 2002 to acquire Bridge Medical, Inc. (approx. $27 million) and US Bioservices Corporation (approx. $160 million), subject to regulatory approval.
• Debt Management: In November 2002, the Company issued $300 million of 7.25% senior notes to refinance maturing debt and fund redemptions.
• Risks:
  • Margin Pressure: Intense competition and industry consolidation continue to erode gross profit margins in the wholesale distribution segment.
  • Regulatory Environment: Changes in government reimbursement policies (Medicare/Medicaid) and fraud/abuse laws significantly impact the PharMerica segment.
  • Integration Risks: Failure to realize anticipated merger synergies or difficulties in integrating acquired businesses could adversely affect results.

Key Facts for Investor Verification

• Merger Synergies: Verify progress toward the $150 million annual synergy target and the timeline for closing 27 facilities.
• Margin Trends: Monitor the Pharmaceutical Distribution gross margin, which has declined from 4.7% in 1997 to 3.87% in 2002, and assess if competitive pressures will continue to compress margins.
• Customer Concentration: Sales to the federal government represented 9% of revenue, and sales to Merck-Medco Managed Care LLC represented 11% of total revenue. Loss of these customers could be material.
• Debt Structure: Review the mix of fixed vs. variable rate debt ($1.5 billion fixed, $355 million variable) and the impact of interest rate fluctuations on interest expense.
• Contingent Liabilities: Note the potential for additional payments on acquisitions (AutoMed, Bridge, US Bioservices) based on future earnings targets, totaling up to $140 million in contingent consideration.