COR

Business Context and Reporting Period

This Form 10-Q covers the fiscal quarter ended December 31, 2001, for AmerisourceBergen Corporation (the Company). The Company was formed on August 29, 2001, through the merger of AmeriSource Health Corporation and Bergen Brunswig Corporation. The financial statements reflect the consolidated results of the merged entity, with the prior-year comparative period (Q1 2000) reflecting only AmeriSource's historical results. Pro forma data is provided to show combined results as if the merger had occurred at the beginning of the prior year.

Key Financial Metrics

Note: All figures in thousands except per share data. Pro forma figures exclude goodwill amortization and reflect full allocation of Bergen's former Corporate segment.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 193% year-over-year (actual) and 20% on a pro forma basis, driven by the inclusion of Bergen Brunswig and PharMerica operations.
• Profitability: Operating income rose 181% year-over-year. On a pro forma basis, operating income increased 19% to $158.8 million (excluding merger costs).
• Margin Compression: Gross profit margin decreased to 4.87% from 5.47% (pro forma) due to competitive pricing pressures and a shift in customer mix toward lower-margin institutional accounts.
• Debt Structure: Total debt increased significantly to approximately $2.0 billion due to the merger financing. Interest expense rose 185% to $31.0 million, though average borrowing rates decreased to 3.68% from 7.26%.
• Cash Flow: Operating cash flow was negative $412.7 million, primarily due to a $722.6 million increase in merchandise inventories to support revenue growth and buy-side opportunities.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Merger Integration: The Company expects to achieve approximately $150 million in annual synergies by the end of the third year post-merger. Plans include reducing distribution facilities from 51 to approximately 30 over the next 3-4 years.
• Merger Costs: $7.5 million was expensed in Q1 2001. Total merger costs for fiscal year 2002 are expected to be between $20 million and $30 million.
• Capital Expenditures: Expected to be between $85 million and $95 million for fiscal year 2002.
• Dividends: A quarterly dividend of $0.025 per share was declared and paid; another $0.025 dividend was declared in January 2002.

Risks and Contingencies

• Legal Matters: The Company is involved in various antitrust, environmental, and product liability lawsuits. Notable cases include antitrust actions regarding prescription drug pricing (dismissed in federal court, pending in state courts) and Proposition 65 litigation regarding coal tar and lead/cadmium warnings (tentative settlement reached for coal tar; lead/cadmium settlement discussions ongoing).
• Market Risk: Significant exposure to interest rate fluctuations. The Company has $805 million in variable-rate debt. A 33 basis-point increase in rates would increase annual interest expense by $0.33 million per $100 million of unhedged debt.
• Goodwill Impairment: The Company adopted SFAS No. 142, discontinuing goodwill amortization. An initial impairment test is expected by March 31, 2002; management currently does not anticipate an impairment charge.

Investor Verification Checklist

• Merger Synergies: Verify the timeline and cost savings associated with the planned closure of 21 distribution facilities.
• Inventory Levels: Assess the sustainability of the $722 million inventory build-up and its impact on future working capital requirements.
• Debt Covenants: Review compliance with leverage and fixed charge coverage ratios under the $1.3 billion Senior Credit Agreement.
• Legal Reserves: Monitor the status of the Proposition 65 litigation and potential liability from the PharMerica Medicare audit matters.
• Pro Forma Adjustments: Understand the specific adjustments made to pro forma data to ensure accurate year-over-year comparisons.