AmerisourceBergen 2006 Annual Report Download

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to shareholders 2006
The Power of
Smart
Growth™
Scale and Service
page 7
The Right Markets
page 6
Report

Table of contents

  • Page 1
    Report to shareholders 2006 The Power of Smart Growth â„¢ The Right Markets page 6 Scale and Service page 7

  • Page 2
    ... logistics and pharmaceutical packaging to reimbursement and pharmaceutical care consulting services, as well as physician education. With more than $61 billion in annual revenue, AmerisourceBergen is headquartered in Valley Forge, PA, and employs more than 13,000 people. Richard C. Gozon Chairman...

  • Page 3
    2 7 9 12 13 The Power of Smart Growth Scale and Service = Value Across the Channel Specialty Distribution and Services Directors & Officers Management's Discussion and Analysis of Financial Condition and Results of Operations

  • Page 4
    ... in 2001 in AmerisourceBergen Drug Corporation's (ABDC) physical distribution capability with the opening of our final two "greenfield" state-of-the-art drug distribution centers in Kansas City, MO, and Bethlehem, PA, and completed six consolidations. We broke ground on an expansion of our specialty...

  • Page 5
    ...we see in Canada and have a great management team in place. Many of the programs that have proven successful to ABDC in the U.S. are applicable to the Canadian market. We identified the need for a European operation in our packaging business unit and targeted and acquired Brecon Pharmaceuticals, Ltd...

  • Page 6
    ...of value-added services in this industry, including reimbursement counseling and patient assistance, medical education, third party logistics, and analytical services. Our customer positioning in ABDC provides us great opportunity to capitalize on the heavy brand to generic product conversions begun...

  • Page 7
    Financial Highlights Financial Flexibility Solid revenue growth Operating margin expansion Return on invested capital focused No net debt Significant returns to shareholders Disciplined acquisitions

  • Page 8
    ... high end of projected market growth over the next several years. The Company's market-leading position in oncology product distribution is a key driver of revenue growth in its $10 billion AmerisourceBergen Specialty Group. The rich pipeline of specialty drugs and the value-added services that many...

  • Page 9
    ... specialty pharmaceuticals, over-the-counter medications, and other healthcare related items. Our scale in the industry and our commitment to excellent service combine to yield unique benefits for healthcare providers and product manufacturers alike. Within AmerisourceBergen Drug Corporation (ABDC...

  • Page 10
    ... while permitting the pharmacy owners to maintain control of their business. GNP members also have access to the wide array of other AmerisourceBergen programs and services, such as PRxO® Generics, our generic sourcing program, and an extensive private label program. Generic pharmaceuticals are an...

  • Page 11
    ...of the pharmaceutical market. ABSG's growth is anchored in specialty distribution and enhanced by related value-added services to physicians and manufacturers. We are the clear leader in distribution and services to community oncologists. ABSG is the nation's largest oncology product distributor. We...

  • Page 12
    ... services business specializing in the blood derivative IVIG. Adding IgG to our portfolio enhances the services we provide to specialty pharmaceutical manufacturers. In November 2006, AmerisourceBergen acquired Access M.D., Inc. (AMD), a Canadian company that provides reimbursement support programs...

  • Page 13
    ... outsource the packaging and distribution of their products, AmerisourceBergen is well positioned to take advantage of new product introductions of both branded and generic products and to contribute to improving the efficiency of the pharmaceutical supply channel. With the acquisition of Brecon...

  • Page 14
    ... of AmerisourceBergen Drug Corporation John G. Chou* Senior Vice President, General Counsel and Secretary Leonardo DeCandia Senior Vice President, Supply Chain Management Jeanne B. Fisher Senior Vice President, Human Resources Thomas H. Murphy Senior Vice President and Chief Information Officer Tim...

  • Page 15
    ...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 reflect this stock split. The Company is a pharmaceutical services company providing drug distribution and related healthcare services...

  • Page 16
    ...the operations of AmerisourceBergen Drug Corporation ("ABDC"), the AmerisourceBergen Specialty Group ("ABSG") and the AmerisourceBergen Packaging Group ("ABPG"). Servicing both pharmaceutical manufacturers and healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution...

  • Page 17
    ... Company and Kindred signed a master transaction agreement to combine their respective institutional pharmacy businesses, PharMerica Long-Term Care and KPS, into a new, independent, publicly traded company (see page 13 for further details). PMSI provides mail order and on-line pharmacy services to...

  • Page 18
    ...Reporting Revenue Gross as a Principal versus Net as an Agent," the Company records bulk deliveries to customer warehouses as gross revenues. Due to the insignificant service fees generated from bulk deliveries, fluctuations in volume have no significant impact on operating margins. However, revenue...

  • Page 19
    ...AmerisourceBergen Corporation 2006 former Bergen Brunswig headquarters building in Orange, California, and incurred a charge of $13.9 million for an increase in a compensation accrual due to an adverse decision in an employment-related dispute with a former Bergen Brunswig chief executive officer...

  • Page 20
    ... 30, 2006. Our operating revenue growth was higher than the market growth rate, and was driven by growth from a few of our larger institutional customers within ABDC, the continued strong growth of ABSG, principally in its distribution businesses, and new customers in all customer classes. During...

  • Page 21
    ... the Company's distribution network as a result of our Optimiz® program were partially offset by our acquisitions, our investments made to strengthen our sales and marketing and information technology infrastructures, and sharebased compensation expense. Pharmaceutical Distribution operating income...

  • Page 22
    ... in bad debt expense relating to one of the operating companies within the Specialty Group. Additionally, the prior year's bad debt expense was favorably impacted by $26.6 million of customer recoveries. In 2001, the Company developed an integration plan to consolidate its distribution network and...

  • Page 23
    ...Group's revenue is generated from the distribution of pharmaceuticals to physicians who specialize in a variety of disease states, such as oncology. Additionally, the Specialty Group distributes other physician administered products, vaccines and blood plasma. The Specialty Group's oncology business...

  • Page 24
    ... a complete list of significant accounting policies, see Note 1 to the consolidated financial statements. Allowance for Doubtful Accounts Trade receivables are primarily comprised of amounts owed to the Company for its pharmaceutical distribution and services activities and are presented net of an...

  • Page 25
    ...certain of its nursing home customers. During the fiscal year ended September 30, 2005, bad debt expense in the Pharmaceutical Distribution segment was significantly impacted due to a $15.5 million increase in bad debt relating to one of the operating companies within the Specialty Group. During the...

  • Page 26
    ... Corporation 2006 24 assumptions about expected future operating performance and appropriate discount rates determined by management. 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...

  • Page 27
    ... of the upgrade, a substantial number of covenants under the indenture governing its 55⁄8% senior notes due 2012 and 57⁄8% senior notes due 2015 were eliminated. On June 1, 2006, Moody's Investors Service raised the Company's corporate credit and senior unsecured debt ratings to 'Ba1' from 'Ba2...

  • Page 28
    ... will be to finance working capital, fund the payment of interest on debt, finance acquisitions and fund capital expenditures and routine growth and expansion through new business opportunities. Significant cash flows from operations primarily resulting from the business model transition, as...

  • Page 29
    ...of payments to our suppliers. The increase in inventory was due to the increase in operating revenue, net of the increase in the inventory turnover rate. The inventory turnover rate for the Pharmaceutical Distribution segment improved to 12.2 times in the fiscal year ended September 30, 2006 from 10...

  • Page 30
    ... to the sale of the former Bergen Brunswig headquarters in Orange, California), proceeds of $28.1 million from two sale-leaseback transactions entered into by the Company with financial institutions relating to equipment previously acquired for our new distribution facilities, and $7.6 million of...

  • Page 31
    ... 2006. The Company is currently evaluating the impact of adopting this interpretation. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit and Other Postretirement Plans," which generally requires an employer to recognize the funded status of a defined benefit...

  • Page 32
    ... pharmacy business of Kindred Healthcare, Inc. into a new public company that will be owned 50% by the Company's shareholders (the "PharMerica LTC Transaction"); the inability of the Company to successfully complete the PharMerica LTC Transaction; fluctuations in market interest rates; operational...

  • Page 33
    ... Corporation 2006 Consolidated Balance Sheets Financial Statements (in thousands, except share and per share data) September 30, 2006 2005 Assets Current assets: Cash and cash equivalents Short-term investment securities available-for-sale Accounts receivable, less allowances for returns...

  • Page 34
    AmerisourceBergen Corporation 2006 32 Consolidated Statements of Operations (in thousands, except per share data) Fiscal year ended September 30, Operating revenue Bulk deliveries to customer warehouses Total revenue Cost of goods sold Gross profit Operating expenses: Distribution, selling and ...

  • Page 35
    ... Reduction in minimum pension liability, net of tax of $399 Total comprehensive income Cash dividends declared, $0.05 per share Exercise of stock options Tax benefit from exercise of stock options Restricted shares earned Common stock purchases for employee stock purchase plan Accelerated vesting of...

  • Page 36
    ... credit facilities Long-term debt borrowings Long-term debt repayments Deferred financing costs and other Purchases of common stock Exercise of stock options, including excess tax benefit of $21,878 in 2006 Cash dividends on common stock Common stock purchases for employee stock purchase plan NET...

  • Page 37
    ... 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 currently are based primarily in the United States and Canada...

  • Page 38
    ... Corporation 2006 36 with several large creditworthy banks and money-market funds located in the United States. The Company does not believe there is significant credit risk related to its cash and cash equivalents. Derivative Financial Instruments The Company accounts for derivative financial...

  • Page 39
    ... full credit risk associated with the creditworthiness of any bulk delivery customer. As a result, and in accordance with the EITF No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," the Company records bulk deliveries to customer warehouses as gross revenues. Gross profit...

  • Page 40
    ...86.6 million, net of a working capital adjustment. The acquisition of NMCR expands AmerisourceBergen Specialty Group's presence in its market-leading oncology distribution and services businesses. The CME business of NMCR complements Imedex, Inc., the Company's accredited CME business. In the twelve...

  • Page 41
    ... amortized over their weighted average life of 7 years. In May 2006, the Long-Term Care business of the Company's PharMerica reporting segment acquired certain assets of a technology solution company for $12.6 million. The purchase price exceeded the fair value of the net tangible and identifiable...

  • Page 42
    ... 33,490 (161,545) $ 409,200 Inventory Fixed assets Goodwill Other Gross deferred tax liabilities Net operating loss and tax credit carryovers Capital loss carryover Allowance for doubtful accounts Accrued expenses Employee and retiree benefits Stock options Other Gross deferred tax assets Valuation...

  • Page 43
    ... 2009 with a financial institution in connection with the Company's acquisition of Brecon. Interest on borrowings under the UK Credit Facility accrues at specific rates based on the Company's debt rating (0.575% over LIBOR or EURIBOR at September 30, 2006). The Company pays quarterly facility fees...

  • Page 44
    ... of the upgrade, a substantial number of covenants under the indenture governing its 55⁄8% senior notes due 2012 and 57⁄8% senior notes due 2015 were eliminated. On June 1, 2006, Moody's Investors Service raised the Company's corporate credit and senior unsecured debt ratings to 'Ba1' from 'Ba2...

  • Page 45
    ...out of the legally available assets or funds of the Company. In November 2005, the Company's board of directors declared a 100% increase in the Company's quarterly dividend rate per share of Common Stock. Additionally, the Company declared a two-forone stock split of the Company's outstanding shares...

  • Page 46
    ...defined benefit pension plans consisting of a salaried plan, a union plan and a supplemental executive retirement plan. 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...

  • Page 47
    ... expected returns on various categories of plan assets. The Compensation and Succession Planning Committee ("Compensation Committee") of the Company's board of directors is responsible for establishing the investment policy of any retirement plan, including the selection of acceptable asset classes...

  • Page 48
    ... 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...

  • Page 49
    ... of the employee in one or more investment funds. All contributions vest immediately. During fiscal 2006, the Compensation Committee approved the AmerisourceBergen Corporation Executive Retirement Plan. This unfunded plan provides benefits for selected key management, including all of the Company...

  • Page 50
    AmerisourceBergen Corporation 2006 48 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...

  • Page 51
    49 AmerisourceBergen Corporation 2006 A summary of the Company's stock option activity and related information for its option plans for the fiscal year ended September 30, 2006 is presented below: Weighted Average Remaining Contractual Term Outstanding at September 30, 2005 Granted Exercised ...

  • Page 52
    ... Company's current plan is to have a distribution facility network numbering in the mid-20s by the end of fiscal 2007. The plan includes building six new facilities (all of which are currently operational) and closing facilities (29 of which have been closed through September 30, 2006). The last new...

  • Page 53
    51 AmerisourceBergen Corporation 2006 incurred expenses relating to the planned spin-off of its PharMerica long-term care business (see Note 17 for further information), realized a $17.3 million gain from the sale of the former Bergen Brunswig headquarters building in Orange, California, and ...

  • Page 54
    ... customers. ABDC also provides 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 distribution...

  • Page 55
    ...Care pharmacies dispense pharmaceuticals in patient-specific packaging in accordance with physician orders. In addition, Long-Term Care provides infusion therapy services, as well as formulary management and other pharmacy consulting services. In October 2006, the Company and Kindred Healthcare, Inc...

  • Page 56
    ... consist of major financial institutions. The recorded amounts of the Company's cash and cash equivalents, short-term investments available-for-sale, accounts receivable and accounts payable at September 30, 2006 and 2005 approximate fair value. The fair values of the Company's debt instruments are...

  • Page 57
    ... customer warehouses Total revenue Gross profit (a) Distribution, selling and administrative expenses, depreciation and amortization Facility consolidations, employee severance and other (see Note 11) Operating income Income from continuing operations Loss (income) from discontinued operations, net...

  • Page 58
    ...of specialty pharmaceuticals, such as injectable and biological therapies. The acquisition of AMD expands our specialty services businesses into Canada and complements the distribution services offered by ABCC. On November 9, 2006, the Company's board of directors increased the quarterly dividend by...

  • Page 59
    ... 2006 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, 2006 and 2005, and the related...

  • Page 60
    ...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, 2006 and 2005, and the related consolidated statements of operations, changes in...

  • Page 61
    ..., whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: December 8, 2006 R. David Yost, Chief Executive Officer Michael D. DiCandilo, Executive Vice President and Chief Financial Officer

  • Page 62
    ...2006 Michael D. DiCandilo, Executive Vice President and Chief Financial Officer December 8, 2006 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...

  • Page 63
    61 AmerisourceBergen Corporation 2006 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 ...

  • Page 64
    ... Short-term investment securities available for sale Accounts receivable - net (i) Merchandise inventories (i) Property and equipment - net Total assets Accounts payable Long-term debt, including current portion Stockholders' equity Total liabilities and stockholders' equity 2006 (a) $56,672...

  • Page 65
    ... Email: [email protected] Mail: The Bank of New York Investor Services Department P.O. Box 11258 New York, NY 10286-1258 Additional Information Financial documents, such as our Annual Report on Form 10-K, and quarterly reports on Form 10-Q, the Company's Code of Ethics and Business Conduct...

  • Page 66
    AmerisourceBergen Corporation P.O. Box 959 Valley Forge, Pennsylvania 19482 610-727-7000 www.amerisourcebergen.com