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Business Context and Reporting Period

This Form 10-Q covers the fiscal quarter ended December 31, 2002 for AmerisourceBergen Corporation (now Cencora, Inc.). The Company is a leading national wholesale distributor of pharmaceutical products and related healthcare services, formed by the 2001 merger of AmeriSource Health Corporation and Bergen Brunswig Corporation. Operations are aggregated into two reportable segments: Pharmaceutical Distribution and PharMerica.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 15% year-over-year, driven by a 14% increase in the Pharmaceutical Distribution segment and a 13% increase in PharMerica.
• Profitability: Net income rose 37% to $92.7 million. Operating income increased 24% to $187.9 million, aided by a reduction in special items (which were a $7.5 million expense in the prior year vs. a $1.4 million benefit in the current year) and improved operating expense ratios.
• Margins: Gross profit margin declined slightly from 4.87% to 4.69% due to competitive pricing pressures and customer mix changes. However, the operating expense ratio improved from 3.31% to 3.00% of revenue.
• Cash Flow: Operating cash outflows increased significantly to $666.3 million (from $418.5 million), primarily due to a $943.6 million increase in merchandise inventories to support revenue growth and take advantage of buy-side opportunities.
• Debt: Total debt increased to $2.20 billion following the issuance of $300 million in 7 1/4% senior notes in November 2002.

Guidance, Outlook, and Risks

• Merger Integration: The Company expects to achieve approximately $150 million in annual synergies by the end of fiscal 2004 through facility consolidations (closing 27 facilities, building 6 new ones) and administrative efficiencies. Additional charges of $10 million to $12 million are expected in fiscal 2003 for these initiatives.
• Capital Expenditures: Estimated at $100 million to $130 million for fiscal 2003, focused on warehouse improvements and automation.
• Acquisitions: Subsequent to the period end, the Company acquired Bridge Medical, Inc. (base price ~$28 million) and US Bioservices Corporation (base price ~$159 million).
• Liquidity: The Company maintains $1.94 billion in additional availability under revolving credit and securitization facilities. Management anticipates utilizing up to 70% of this availability in the second fiscal quarter due to seasonal inventory requirements.
• Risks: Key risks include competitive pricing pressures, potential declines in gross margins, customer consolidation, and the impact of brand name drug patent expirations. Legal contingencies include environmental remediation, Proposition 65 litigation, and a Medicare audit matter involving PharMerica.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $943.6 million inventory build-up and its impact on future working capital needs.
• Margin Compression: Monitor the trend of gross profit margins (currently 4.69%) against competitive pricing pressures and customer mix shifts toward lower-margin institutional accounts.
• Debt Refinancing: Track the redemption of the PharMerica 8 3/8% notes (callable April 2003) and the refinancing of the Blanco revolving credit facility (expires May 2003).
• Integration Costs: Confirm the realization of the projected $150 million in annual synergies and the timing of remaining restructuring charges.
• Legal Exposure: Review the status of the PharMerica Medicare audit matter and Proposition 65 litigation for potential material liabilities.