Cencora, Inc. - Quarter Report: 2014 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2014

 

OR

 

 

FOR THE TRANSITION PERIOD FROM               TO          

 

Commission file number 1-16671

 

AMERISOURCEBERGEN CORPORATION

(Exact name of registrant as specified in its charter)

 

 

(610) 727-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The number of shares of common stock of AmerisourceBergen Corporation outstanding as of July 31, 2014 was 224,381,645.

 

 

Table of Contents

 

AMERISOURCEBERGEN CORPORATION

 

TABLE OF CONTENTS

 

			Page No.
Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
Consolidated Balance Sheets, June 30, 2014 and September 30, 2013			2
Consolidated Statements of Operations for the three and nine months ended June 30, 2014 and 2013			3
Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2014 and 2013			4
Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013			5
Notes to Consolidated Financial Statements			6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29
Item 4.	Controls and Procedures		29
Part II. OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Mine Safety Disclosures		30
Item 5.	Other Information		30
Item 6.	Exhibits		31
SIGNATURES			32

 

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PART I. FINANCIAL INFORMATION

 

ITEM I. Financial Statements (Unaudited)

 

AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

		June 30,			September 30,
(in thousands, except share and per share data)		2014			2013
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,261,864		$	1,231,006
Accounts receivable, less allowances for returns and doubtful accounts: $798,202 at June 30, 2014 and $358,161 at September 30, 2013		6,133,228			6,051,920
Merchandise inventories		8,421,977			6,981,494
Prepaid expenses and other		74,317			129,231
Total current assets		15,891,386			14,393,651
Property and equipment, at cost:
Land		37,538			37,538
Buildings and improvements		363,737			324,150
Machinery, equipment and other		1,259,309			1,109,731
Total property and equipment		1,660,584			1,471,419
Less accumulated depreciation		(778,422		)	(667,858		)
Property and equipment, net		882,162			803,561
Goodwill and other intangible assets		3,489,315			3,499,713
Other assets		367,743			221,713
TOTAL ASSETS		$	20,630,606		$	18,918,638
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	14,809,789		$	13,335,792
Accrued expenses and other		471,074			532,564
Deferred income taxes		1,058,496			1,002,279
Total current liabilities		16,339,359			14,870,635
Long-term debt		1,995,482			1,396,606
Other liabilities		309,410			331,652
Stockholders’ equity:
Common stock, $0.01 par value - authorized: 600,000,000 shares; issued and outstanding: 270,702,146 shares and 224,286,950 shares at June 30, 2014, respectively, and 267,789,992 shares and 229,994,216 shares at September 30, 2013, respectively		2,707			2,678
Additional paid-in capital		2,564,387			2,360,992
Retained earnings		1,555,538			1,508,414
Accumulated other comprehensive loss		(39,378		)	(35,483		)
Treasury stock, at cost: 46,415,196 shares at June 30, 2014 and 37,795,776 shares at September 30, 2013		(2,096,899		)	(1,516,856		)
Total stockholders’ equity		1,986,355			2,319,745
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	20,630,606		$	18,918,638

 

See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended						Nine months ended
		June 30,						June 30,
(in thousands, except per share data)		2014			2013			2014			2013
Revenue		$	30,348,154		$	21,906,648		$	87,980,419		$	63,490,127
Cost of goods sold		29,656,150			21,344,198			85,870,597			61,549,860
Gross profit		692,004			562,450			2,109,822			1,940,267
Operating expenses:
Distribution, selling, and administrative		387,611			331,173			1,128,012			975,409
Depreciation		40,880			34,395			116,167			99,338
Amortization		6,454			6,743			19,611			20,352
Warrants		145,040			35,815			267,000			39,576
Employee severance, litigation and other		1,142			19,678			7,411			21,383
Operating income		110,877			134,646			571,621			784,209
Other (income) loss		(1,312		)	525			(5,692		)	1,251
Interest expense, net		20,903			18,190			59,209			55,225
Loss on early retirement of debt		32,954			—			32,954			—
Income from continuing operations before income taxes		58,332			115,931			485,150			727,733
Income taxes		71,112			51,821			268,922			284,859
(Loss) income from continuing operations		(12,780		)	64,110			216,228			442,874
Income (loss) from discontinued operations, net of income taxes		—			104,329			(7,546		)	(60,190		)
Net (loss) income		$	(12,780	)	$	168,439		$	208,682		$	382,684
Earnings per share:
Basic earnings per share:
Continuing operations		$	(0.06	)	$	0.28		$	0.95		$	1.91
Discontinued operations		—			0.45			(0.03		)	(0.26		)
Rounding		—			—			(0.01		)	—
Total		$	(0.06	)	$	0.73		$	0.91		$	1.65
Diluted earnings per share:
Continuing operations		$	(0.06	)	$	0.27		$	0.92		$	1.88
Discontinued operations		—			0.44			(0.03		)	(0.26		)
Rounding		—			—			—			0.01
Total		$	(0.06	)	$	0.71		$	0.89		$	1.63
Weighted average common shares outstanding:
Basic		225,727			231,002			228,477			231,273
Diluted		225,727			235,669			235,532			235,428
Cash dividends declared per share of common stock		$	0.235		$	0.21		$	0.705		$	0.63

 

See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

		Three months ended						Nine months ended
		June 30,						June 30,
(in thousands)		2014			2013			2014			2013
Net (loss) income		$	(12,780	)	$	168,439		$	208,682		$	382,684
Other comprehensive income (loss):
Net change in foreign currency translation adjustments		5,223			1,067			(3,392		)	(22,574		)
Other		(87		)	80			(503		)	134
Total other comprehensive income (loss)		5,136			1,147			(3,895		)	(22,440		)
Total comprehensive (loss) income		$	(7,644	)	$	169,586		$	204,787		$	360,244

 

See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended June 30,
(in thousands)		2014			2013
OPERATING ACTIVITIES
Net income		$	208,682		$	382,684
Loss from discontinued operations		7,546			60,190
Income from continuing operations		216,228			442,874
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation, including amounts charged to cost of goods sold		118,004			102,737
Amortization, including amounts charged to interest expense		23,214			23,908
Provision for doubtful accounts		16,626			7,922
(Benefit) provision for deferred income taxes		(27,661		)	12,390
Warrants		267,000			39,576
Share-based compensation		32,165			26,900
Loss on early retirement of debt		32,954			—
Other		(5,856		)	(5,873		)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable		(535,806		)	(835,697		)
Merchandise inventories		(1,002,589		)	(399,087		)
Prepaid expenses and other assets		29,528			(65,656		)
Accounts payable, accrued expenses, and income taxes		1,475,627			1,380,353
Other liabilities		607			4,692
Net cash provided by operating activities - continuing operations		640,041			735,039
Net cash (used in) provided by operating activities - discontinued operations		(7,546		)	84,025
NET CASH PROVIDED BY OPERATING ACTIVITIES		632,495			819,064
INVESTING ACTIVITIES
Capital expenditures		(198,670		)	(137,927		)
Cost of acquired companies, net of cash acquired		(9,103		)	—
Cost of equity investments		(117,794		)	—
Proceeds from sales of businesses		—			331,630
Other		6,366			523
Net cash (used in) provided by investing activities - continuing operations		(319,201		)	194,226
Net cash used in investing activities - discontinued operations		—			(11,672		)
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(319,201		)	182,554
FINANCING ACTIVITIES
Long-term debt borrowings		1,097,927			—
Long-term debt repayments		(531,525		)	—
Borrowings under revolving and securitization credit facilities		17,584,500			2,330,000
Repayments under revolving and securitization credit facilities		(17,584,500		)	(2,330,000		)
Purchases of common stock		(570,593		)	(401,091		)
Exercises of stock options, including excess tax benefits of $39,843 and $35,275 in fiscal 2014 and 2013, respectively		109,694			132,766
Cash dividends on common stock		(161,558		)	(147,005		)
Purchases of capped call options		(211,397		)	(27,906		)
Debt issuance costs and other		(14,984		)	(6,867		)
Net cash used in financing activities - continuing operations		(282,436		)	(450,103		)
Net cash used in financing activities - discontinued operations		—			(50,538		)
NET CASH USED IN FINANCING ACTIVITIES		(282,436		)	(500,641		)
INCREASE IN CASH AND CASH EQUIVALENTS		30,858			500,977
Cash and cash equivalents at beginning of period		1,231,006			1,066,608
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,261,864		$	1,567,585

 

See notes to consolidated financial statements.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements present the consolidated financial position, results of operations and cash flows of AmerisourceBergen Corporation and its wholly owned subsidiaries (the “Company”) as of the dates and for the periods indicated.  All intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  In the opinion of management, all adjustments (consisting only of normal recurring accruals, except as otherwise disclosed herein) considered necessary to present fairly the financial position as of June 30, 2014 and the results of operations and cash flows for the interim periods ended June 30, 2014 and 2013 have been included.  Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP, but which are not required for interim reporting purposes, have been omitted.  The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes.  Actual amounts could differ from these estimated amounts.

 

Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation.

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, “Revenue from Contacts with Customers (Topic 606)” (“ASU 2014-09”).  ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification 605 — Revenue Recognition and most industry-specific guidance throughout the Codification.  ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.  The standard’s core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application.  ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods.  Early adoption is not permitted.  The Company is currently evaluating the impact of adopting this new accounting guidance.

 

As of June 30, 2014, there were no other recently issued accounting standards that will have a material impact on the Company’s financial position or results of operations upon their adoption.

 

Note 2.  Investments

 

In June 2014, the Company completed the acquisition of a minority ownership interest in Profarma Distribuidora de Produtos Farmacêuticos S.A. (“Profarma”), a leading pharmacetucal wholesaler in Brazil.  In addition, the Company and Profarma launched a joint venture to provide enhanced specialty distribution and services to the Brazilian marketplace.  The Company invested a total of $117.8 million to acquire both a minority ownership interest in Profarma of approximately 19.9% and a 50% ownership interest in the specialty joint venture.

 

The Company accounts for its interests in both Profarma and the specialty joint venture as equity method investments, which are recorded as “Other Assets” on the consolidated balance sheet at June 30, 2014.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 3.  Discontinued Operations

 

In May 2013, the Company completed the divestiture of its packaging and clinical trials services business, AndersonBrecon (“AB”), and AmerisourceBergen Canada Corporation (“ABCC”).  The Company has classified AB and ABCC’s operating results, net of tax, as discontinued operations in the accompanying consolidated statements of operations for all periods presented.  Prior to being classified within discontinued operations, AB was included in Other and ABCC was included in Pharmaceutical Distribution for segment reporting.  AB and ABCC’s revenue and loss before income taxes were as follows:

 

		Three months ended June 30,						Nine months ended June 30,
(in thousands)		2014			2013			2014			2013
Revenue		$	—		$	265,724		$	—		$	1,181,232
Income (loss) before income taxes		$	—		$	105,950		$	(7,546	)	$	(50,663	)

 

The loss before income taxes in the nine months ended June 30, 2014 includes the impact of a final purchase price working capital adjustment related to the divestiture of ABCC.  The income before income taxes in the three months ended June 30, 2013 includes a $114.3 million gain on the sale of AB and an $8.9 million increase to the previously estimated loss on ABCC.  The loss before income taxes in the nine months ended June 30, 2013 also includes a goodwill impairment charge of $26.9 million and an estimated $134.8 million loss on the sale of ABCC.

 

Note 4.  Income Taxes

 

The Company files income tax returns in U.S. federal and state jurisdictions as well as various foreign jurisdictions.  As of June 30, 2014, the Company had unrecognized tax benefits, defined as the aggregate tax effect of differences between tax return positions and the benefits recognized in the Company’s financial statements, of $51.2 million ($36.2 million, net of federal benefit).  If recognized, these tax benefits would reduce income tax expense and the effective tax rate.  Included in this amount is $8.4 million of interest and penalties, which the Company records in income tax expense.  During the nine months ended June 30, 2014, unrecognized tax benefits decreased by $4.2 million.  During the next 12 months, it is reasonably possible that state tax audit resolutions and the expiration of statutes of limitations could result in a reduction of unrecognized tax benefits by approximately $5.4 million.

 

In March 2013, the Company issued Warrants (as defined in Note 7) in connection with various agreements and arrangements with Walgreen Co. (“Walgreens”) and Alliance Boots GmbH (“Alliance Boots”).  As of the date of issuance, the Warrants were valued at $242.4 million, which approximates the amount that will be deductible for income tax purposes.  The fair value of the Warrants as of June 30, 2014 was $948.5 million.  The excess of the fair value of the Warrants over the initial value is not tax deductible.  As a result, in periods where the fair value of the Warrants exceeds the initial value, the Company’s effective income tax rate will be higher than its normal historical rate.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 5.  Goodwill and Other Intangible Assets

 

Following is a summary of the changes in the carrying value of goodwill, by reportable segment, for the nine months ended June 30, 2014 (in thousands):

 

		Pharmaceutical Distribution			Other			Total
Goodwill at September 30, 2013		$	2,400,926		$	544,044		$	2,944,970
Goodwill recognized in connection with acquisition		—			5,715			5,715
Foreign currency translation		—			(737		)	(737		)
Goodwill at June 30, 2014		$	2,400,926		$	549,022		$	2,949,948

 

Following is a summary of other intangible assets (in thousands):

 

		June 30, 2014									September 30, 2013
		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount			Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Indefinite-lived intangibles - trade names		$	343,812		$	—		$	343,812		$	343,892		$	—		$	343,892
Finite-lived intangibles:
Customer relationships		268,565			(94,147		)	174,418			265,810			(80,767		)	185,043
Other		70,583			(49,446		)	21,137			69,350			(43,542		)	25,808
Total other intangible assets		$	682,960		$	(143,593	)	$	539,367		$	679,052		$	(124,309	)	$	554,743

 

Amortization expense for finite-lived intangible assets was $19.6 million and $20.4 million in the nine months ended June 30, 2014 and 2013, respectively.  Amortization expense for finite-lived intangible assets is estimated to be $25.9 million in fiscal 2014, $22.2 million in fiscal 2015, $21.6 million in fiscal 2016, $17.7 million in fiscal 2017, $15.5 million in fiscal 2018, and $112.3 million thereafter.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 6.  Debt

 

Debt consisted of the following (in thousands):

 

		June 30,			September 30,
		2014			2013
Multi-currency revolving credit facility due 2018		$	—		$	—
Receivables securitization facility due 2016		—			—
Revolving credit note		—			—
$500,000, 5.875% senior notes due 2015		—			499,377
$600,000, 1.15% senior notes due 2017		599,363			—
$400,000, 4.875% senior notes due 2019		398,041			397,803
$500,000, 3.50% senior notes due 2021		499,479			499,426
$500,000, 3.40% senior notes due 2024		498,599			—
Total debt		$	1,995,482		$	1,396,606

 

The Company has a $1.4 billion multi-currency senior unsecured revolving credit facility, which expires in July 2018 (the “Multi-Currency Revolving Credit Facility”), with a syndicate of lenders.  Interest on borrowings under the Multi-Currency Revolving Credit Facility accrues at specified rates based on the Company’s debt rating and ranges from 68 basis points to 130 basis points over LIBOR / EURIBOR / Bankers Acceptance Stamping Fee, as applicable (90 basis points over LIBOR / EURIBOR / Bankers Acceptance Stamping Fee at June 30, 2014).  Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate.  The Company pays facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on its debt rating, ranging from 7 basis points to 20 basis points, annually, of the total commitment (10 basis points at June 30, 2014).  The Company may choose to repay or reduce its commitments under the Multi-Currency Revolving Credit Facility at any time.  The Multi-Currency Revolving Credit Facility contains covenants, including compliance with a financial leverage ratio test, as well as others that impose limitations on, among other things, indebtedness of excluded subsidiaries and asset sales, with which the Company was compliant as of June 30, 2014.

 

The Company has a commercial paper program whereby it may from time to time issue short-term promissory notes in an aggregate amount of up to $1.4 billion at any one time.  Amounts available under the program may be borrowed, repaid, and re-borrowed from time to time.  The maturities on the notes will vary, but may not exceed 365 days from the date of issuance.  The notes will bear interest rates, if interest bearing, or will be sold at a discount from their face amounts.  The commercial paper program does not increase the Company’s borrowing capacity as it is fully backed by the Company’s Multi-Currency Revolving Credit Facility.

 

The Company has a $950 million receivables securitization facility (“Receivables Securitization Facility”), which expires in June 2016.  The Company has available to it an accordion feature whereby the commitment on the Receivables Securitization Facility may be increased by up to $250 million, subject to lender approval, for seasonal needs during the December and March quarters.  Interest rates are based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee of 75 basis points.  The Company pays an unused fee of 40 basis points, annually, to maintain the availability under the Receivables Securitization Facility.  The Receivables Securitization Facility contains similar covenants to the Multi-Currency Revolving Credit Facility, with which the Company was compliant as of June 30, 2014.

 

The Company has an uncommitted, unsecured line of credit available to it pursuant to a revolving credit note (“Revolving Credit Note”).  The Revolving Credit Note provides the Company with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $75 million.  The Revolving Credit Note may be decreased or terminated by the bank or the Company at any time without prior notice.

 

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AMERISOURCEBERGEN CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In May 2014, the Company issued $600 million of 1.15% senior notes due May 15, 2017 (the “2017 Notes”) and $500 million of 3.40% senior notes due May 15, 2024 (the “2024 Notes”).  The 2017 Notes were sold at 99.892% of the principal amount and have an effective yield of 1.187%.  The 2024 Notes were sold at 99.715% of the principal amount and have an effective yield of 3.434%.  Interest on the 2017 Notes and 2024 Notes is payable semiannually in arrears, commencing on November 15, 2014.  The 2017 and 2024 Notes rank pari passu to the Multi-Currency Revolving Credit Facility, the Revolving Credit Note, the $400 million 4.875% senior notes due in 2019, and the $500 million 3.50% senior notes due in 2021.  Costs incurred in connection with the issuance of the 2017 Notes and the 2024 Notes were deferred and are being amortized over the terms of the notes.

 

The Company used a portion of the net proceeds from the 2017 Notes and the 2024 Notes to finance the early retirement of the $500 million 5.875% senior notes due 2015 (the “2015 Notes), including the payment of $31.5 million of premiums and other costs.  The Company used the remaining amount for general corporate purposes, including repurchases of shares of its common stock under its special share repurchase program authorized in May 2014.

 

Note 7.  Stockholders’ Equity and Earnings per Share

 

In November 2013, the Company’s board of directors increased the quarterly cash dividend by 12% from $0.21 per share to $0.235 per share.

 

In November 2012, the Company’s board of directors authorized a program allowing the Company to purchase up to $750 million of its outstanding shares of common stock, subject to market conditions.  During the nine months ended June 30, 2014, the Company purchased 5.5 million shares of its common stock for a total of $363.0 million to complete this program.  In August 2013, the Company’s board of directors authorized a program allowing the Company to purchase up to an additional $750 million of its outstanding shares of common stock, subject to market conditions.  During the nine months ended June 30, 2014, the Company purchased 1.0 million shares of its common stock for a total of $68.6 million under this program.  The Company had $681.4 million of availability remaining under this share repurchase program as of June 30, 2014.

 

In March 2013, the Company, Walgreens, and Alliance Boots entered into various agreements and arrangements pursuant to which Walgreens and Alliance Boots together were granted the right to purchase a minority equity position in the Company, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of the Company’s common stock (approximately 7% of the Company’s common stock, on a fully diluted basis as of the date of issuance, assuming the exercise in full of the Warrants, as defined below) in open market transactions.  In connection with these arrangements, Walgreens Pharmacy Strategies, LLC, a wholly owned subsidiary of Walgreens, was issued (a) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $51.50 per share exercisable during a six month period beginning in March 2016, and (b) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017 and Alliance Boots Luxembourg S.à.r.l., a wholly owned subsidiary of Alliance Boots, was issued (a) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $51.50 per share exercisable during a six-month period beginning in March 2016 and (b) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017 (collectively, the “Warrants”).

 

The Company valued these Warrants as of March 18, 2013 (date of issuance) and revised the valuation each subsequent quarter.  As of June 30, 2014, the Warrants with an exercise price of $51.50 were valued at $20.78 per share and the Warrants with an exercise price of $52.50 were valued at $21.01 per share.  In total, the Warrants were valued at $948.5 million as of June 30, 2014.  Refer to “Critical Accounting Policies and Estimates — Warrants” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for a more detailed description of the accounting for the Warrants.

 

The Company has taken steps to mitigate the potentially dilutive effect that the exercise of the Warrants could have by hedging a portion of its future obligation to deliver common stock with a financial institution and repurchasing additional shares of its

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

common stock for the Company’s own account over time.  In June 2013, the Company commenced its hedging strategy by entering into a contract with a financial institution pursuant to which it has executed a series of issuer capped call option transactions (“Capped Calls”).  The Capped Calls give the Company the right to buy 60% of the shares of its common stock subject to the Warrants at specified prices at maturity, should the Warrants be exercised in 2016 and 2017 and assuming the Company’s future share price does not exceed the “cap” price in the Capped Calls.  If the Company’s share price exceeds the “cap” price in the Capped Calls at the time the Warrants are exercised, the number of shares that will be delivered to the Company under the Capped Calls will be reduced, and accordingly, will cover less than 60% of the shares of common stock subject to the Warrants.

 

Through September 30, 2013, the Company purchased Capped Calls on 15.3 million shares of its common stock for a total premium of $163.4 million.  During the nine months ended June 30, 2014, the Company completed this hedge transaction by purchasing Capped Calls on an additional 11.9 million shares of its common stock for a total premium of $205.3 million.  The Capped Calls permit the Company to acquire shares of its common stock at strike prices of $51.50 and $52.50 and have expiration dates ranging from February 2016 through October 2017.  The Capped Calls permit net share settlement, which is limited by caps on the market price of the Company’s common stock.  The Company has accounted for the Capped Calls as equity contracts and therefore, the above premiums were recorded as a reduction to paid-in capital.

 

In May 2014, the Company’s board of directors authorized a special program allowing the Company to purchase up to $650 million of its outstanding shares of common stock, subject to market conditions, as an opportunity to further mitigate the potentially dilutive effect of the Warrants and supplements the Company’s previously executed warrant hedging strategy.  During the three months ended June 30, 2014, the Company purchased 2.0 million shares of its common stock for a total of $141.6 million under this program, which included $2.9 million of purchases that cash settled in July 2014.  The Company has $508.4 million of availability remaining under this special share repurchase program as of June 30, 2014.

 

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented.  Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented plus the dilutive effect of stock options, restricted stock, restricted stock units, and the Warrants.

 

		Three months ended				Nine months ended
		June 30,				June 30,
(in thousands)		2014		2013		2014		2013
Weighted average common shares outstanding - basic		225,727		231,002		228,477		231,273
Dilutive effect of stock options, restricted stock, and restricted stock units		—		4,667		4,834		4,155
Dilutive effect of Warrants		—		—		2,221		—
Weighted average common shares outstanding - diluted		225,727		235,669		235,532		235,428

 

The potentially dilutive stock options, restricted stock, restricted stock units, and Warrants that were antidilutive for the three and nine months ended June 30, 2014 were 9.9 million and 2.0 million, respectively.  There were no potentially dilutive stock options, restricted stock, or restricted stock units that were antidilutive for the three and nine months ended June 30, 2013.  All of the Warrants were antidilutive for the three and nine months ended June 30, 2013.

 

Note 8. Legal Matters and Contingencies

 

In the ordinary course of its business, the Company becomes involved in lawsuits, administrative proceedings, government subpoenas, and government investigations, including antitrust, commercial, environmental, product liability, intellectual property,

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

regulatory, employment discrimination, and other matters. Significant damages or penalties may be sought from the Company in some matters, and some matters may require years for the Company to resolve. The Company establishes reserves based on its periodic assessment of estimates of probable losses. There can be no assurance that an adverse resolution of one or more matters during any subsequent reporting period will not have a material adverse effect on the Company’s results of operations for that period or on the Company’s financial condition.

 

Qui Tam

 

The qui tam provisions of the federal civil False Claims Act and various state and local civil False Claims Acts permit a private person, known as a “relator” or whistleblower, to file civil actions under these statutes on behalf of the federal, state and local governments. Such cases may involve allegations around the marketing, sale and/or purchase of pharmaceutical products. Qui tam complaints are initially filed by the relator under seal (or on a confidential basis) and the filing of the complaint imposes obligations on government authorities to investigate the allegations in the complaint and to determine whether or not to intervene in the action. Qui tam complaints remain sealed until the court in which the case was filed orders otherwise.

 

The Company has learned that there are filings in one or more federal district courts, including a qui tam complaint filed by one of its former employees, that are under seal and may involve allegations against the Company (and/or subsidiaries or businesses of the Company, including its group purchasing organization for oncologists and its oncology distribution business) relating to its distribution of certain pharmaceutical products to providers. The Company and AmerisourceBergen Specialty Group (“ABSG”) have also received subpoenas from the United States Attorney’s Office for the Eastern District of New York (“USAO”) requesting production of documents and information relating to ABSG’s oncology distribution center and former pharmacy in Dothan, Alabama, its group purchasing organization for oncologists, and intercompany transfers of certain oncology products, which the Company believes could be related to one or more of the qui tam actions that remain under seal. The Company is in the process of responding to the subpoenas and is cooperating fully with the USAO. The Company cannot predict the outcome of any pending action in which any AmerisourceBergen entity is or may become a defendant.

 

Subpoenas from United States Attorney’s Offices

 

In fiscal 2012, the Company’s subsidiary, AmerisourceBergen Drug Corporation (“ABDC”), received a subpoena from the United States Attorney’s Office in New Jersey (the “USAO”) in connection with a grand jury proceeding requesting documents concerning ABDC’s program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific, and industrial purposes. ABDC also received a subpoena from the Drug Enforcement Administration (“DEA”) in connection with the matter.  In addition to requesting information on ABDC’s diversion control program generally, the subpoenas also request documents concerning specific customers’ purchases of controlled substances. ABDC has responded to the subpoenas and is cooperating fully with the USAO and the DEA. On August 30, 2013, ABDC received a second subpoena from the USAO and also a second subpoena from the DEA requesting additional information related to the documents produced in response to the first subpoena, as well as information regarding additional specific customers’ purchases of controlled substances.  On December 31, 2013, ABDC received a third subpoena from the USAO requesting additional information related to electronically stored information.  On June 20, 2014, ABDC received a fourth subpoena requesting additional information related to the documents produced in response to the first and second subpoenas.  The Company cannot predict the outcome of this matter.

 

In fiscal 2013 and in 2014, the Company or ABDC has also received similar subpoenas from the United States Attorney’s Office in the District of Kansas and the United States Attorney’s Office in the Northern District of Ohio in connection with grand jury proceedings requesting documents concerning ABDC’s program for controlling and monitoring diversion of controlled substances into channels other than for legitimate medical, scientific and industrial purposes.  As in the New Jersey matter described above, in addition to requesting information on ABDC’s diversion control program generally, the subpoenas also request documents concerning specific customers’ purchases of controlled substances. The Company is in the process of responding to the subpoenas and cannot predict the outcome of these matters.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

West Virginia Complaint

 

On June 26, 2012, the Attorney General of the State of West Virginia (“West Virginia”) filed a complaint (the “Complaint”) in the Circuit Court of Boone County, West Virginia, against a number of pharmaceutical wholesale distributors, including the Company’s subsidiary, ABDC, alleging, among other things, that the distributors failed to provide effective controls and procedures to guard against diversion of controlled substances for illegitimate purposes in West Virginia. The Complaint also alleges that the distributors acted negligently by distributing controlled substances to pharmacies that serve individuals who abuse prescription pain medication and were unjustly enriched by such conduct, violated consumer credit and protection laws, created a public nuisance, and violated state antitrust laws in connection with the distribution of controlled substances. West Virginia is seeking injunctive relief to enjoin alleged violations of state regulations requiring suspicious order monitoring and reporting and to require defendants to fund a medical monitoring treatment program. The Complaint also seeks a jury trial to determine any losses and damages sustained by West Virginia as a result of the defendants’ alleged conduct. On July 26, 2012, one of the defendants, J.M. Smith Corporation d/b/a Smith Drug Company, filed a Notice of Removal from the Circuit Court of Boone County, West Virginia to the United States District Court for the Southern District of West Virginia, and ABDC and all other defendants filed Consents to Removal. On August 27, 2012, West Virginia filed a Motion to Remand, to which J.M. Smith Corporate d/b/a Smith Drug Company, joined by all other defendants, filed a reply. On March 27, 2013, the Court granted West Virginia’s Motion to Remand and West Virginia notified the parties that they intended to file an amended complaint. In advance of filing an amended complaint, West Virginia served discovery requests and subsequently filed a motion to compel.  After responding to West Virginia’s motion to compel and oral argument, defendants were ordered to provide limited responses.  On January 2, 2014, West Virginia filed an amended complaint, which removed the claims for unjust enrichment, medical monitoring and antitrust violations.  On February 14, 2014, the defendants filed motions to dismiss the amended complaint.  The plaintiffs filed responses in opposition to the defendants’ motion to dismiss on May 6, 2014, and the defendants filed reply briefs in support of their motions on May 23, 2014.  The court held oral argument on June 5, 2014.  The motions to dismiss are currently pending before the court.  The Company cannot predict the outcome of this matter.

 

Note 9.  Litigation Settlements

 

Antitrust Settlements

 

Numerous class action lawsuits have been filed against certain brand pharmaceutical manufacturers alleging that the manufacturer, by itself or in concert with others, took improper actions to delay or prevent generic drugs from entering the market.  The Company has not been named a plaintiff in any of these class actions, but has been a member of the direct purchasers’ class (i.e., those purchasers who purchase directly from these pharmaceutical manufacturers).  None of the class actions have gone to trial, but some have settled in the past with the Company receiving proceeds from the settlement funds.  During the three and nine months ended June 30, 2014, the Company recognized gains of $2.5 million and $24.4 million, respectively, relating to the above-mentioned class action lawsuits.  During the three and nine months ended June 30, 2013, the Company recognized gains of $6.0 million and $21.7 million, respectively, relating to the above-mentioned class action lawsuits.  These gains, which are net of attorney fees and estimated payments due to other parties, were recorded as reductions to cost of goods sold in the Company’s consolidated statements of operations.

 

Note 10.  Fair Value of Financial Instruments

 

The recorded amounts of the Company’s cash and cash equivalents, accounts receivable, and accounts payable at June 30, 2014 and September 30, 2013 approximate fair value based upon the relatively short-term nature of these financial instruments.  Within cash and cash equivalents, the Company had $100.0 million of investments in money market accounts as of June 30, 2014.  The Company had no investments in money market accounts as of September 30, 2013.  The fair values of the money market accounts were based on unadjusted quoted prices in active markets for identical assets, otherwise known as Level 1 inputs.  The recorded amount of long-term debt and the corresponding fair value as of June 30, 2014 were $1,995.5 million and $2,070.1 million,

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

respectively.  The recorded amount of long-term debt and the corresponding fair value as of September 30, 2013 were $1,396.6 million and $1,502.0 million, respectively.  The fair values of debt were determined based on quoted market prices, otherwise known as Level 2 inputs.

 

Note 11.  Business Segment Information

 

The Company is organized based upon the products and services it provides to its customers.  The Company’s operations are comprised of the Pharmaceutical Distribution reportable segment and Other.  The Pharmaceutical Distribution reportable segment consists of the AmerisourceBergen Drug Corporation (“ABDC”) and AmerisourceBergen Specialty Group (“ABSG”) operating segments.  Other consists of the AmerisourceBergen Consulting Services (“ABCS”) and World Courier Group, Inc. (“World Courier”) operating segments.

 

The following tables illustrate reportable segment information for the three and nine months ended June 30, 2014 and 2013 (in thousands):

 

		Revenue
		Three months ended						Nine months ended
		June 30,						June 30,
		2014			2013			2014			2013
Pharmaceutical Distribution		$	29,812,837		$	21,407,853		$	86,367,923		$	62,061,060
Other		620,275			549,400			1,796,910			1,569,392
Intersegment eliminations		(84,958		)	(50,605		)	(184,414		)	(140,325		)
Revenue		$	30,348,154		$	21,906,648		$	87,980,419		$	63,490,127

 

Intersegment eliminations primarily represent the elimination of certain ABCS sales to the Pharmaceutical Distribution reportable segment.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

		Operating Income
		Three months ended						Nine months ended
		June 30,						June 30,
		2014			2013			2014			2013
Pharmaceutical Distribution		$	359,795		$	278,728		$	1,019,506		$	866,482
Other		33,678			33,600			113,261			98,260
Total segment operating income		393,473			312,328			1,132,767			964,742
Gains on antitrust litigation settlements		2,524			5,984			24,396			21,748
LIFO expense		(133,237		)	(122,077		)	(293,647		)	(123,029		)
Acquisition related intangibles amortization		(5,701		)	(6,096		)	(17,484		)	(18,293		)
Warrants		(145,040		)	(35,815		)	(267,000		)	(39,576		)
Employee severance, litigation and other		(1,142		)	(19,678		)	(7,411		)	(21,383		)
Operating income		110,877			134,646			571,621			784,209
Other (income) loss		(1,312		)	525			(5,692		)	1,251
Interest expense, net		20,903			18,190			59,209			55,225
Loss on early retirement of debt		32,954			—			32,954			—
Income from continuing operations before income taxes		$	58,332		$	115,931		$	485,150		$	727,733

 

Segment operating income is evaluated by the chief operating decision maker for the Company before gains on antitrust litigation settlements; LIFO expense; acquisition related intangibles amortization; Warrants; employee severance, litigation and other; other (income) loss; interest expense, net; and loss on early retirement of debt.  All corporate office expenses are allocated to ABDC and ABSG within the Pharmaceutical Distribution reportable segment and to ABCS and World Courier within Other.  Management believes that evaluating segment performance excluding the above items is meaningful because it provides insight with respect to operating results of the Company.

 

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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto contained herein and in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013.

 

We are one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care.  We deliver innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain.  We are organized based upon the products and services we provide to our customers.  Our operations are comprised of the Pharmaceutical Distribution reportable segment and Other.

 

Pharmaceutical Distribution Segment

 

The Pharmaceutical Distribution reportable segment is comprised of two operating segments, which include the operations of AmerisourceBergen Drug Corporation (“ABDC”) and AmerisourceBergen Specialty Group (“ABSG”).  Servicing healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment’s operations provide drug distribution and related services designed to reduce healthcare costs and improve patient outcomes.

 

ABDC distributes a comprehensive offering of brand-name and generic pharmaceuticals (including specialty pharmaceutical products), over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers.  ABDC also provides pharmacy management, staffing and other consulting services; scalable automated pharmacy dispensing equipment; medication and supply dispensing cabinets; and supply management software to a variety of retail and institutional healthcare providers.  Additionally, ABDC delivers packaging solutions to institutional and retail healthcare providers.

 

ABSG, through a number of operating businesses, provides pharmaceutical distribution and other services primarily to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including dialysis clinics.  ABSG also distributes plasma and other blood products, injectible pharmaceuticals and vaccines.  Additionally, ABSG provides third party logistics and outcomes research, and other services for biotechnology and other pharmaceutical manufacturers.

 

Our use of the terms “specialty” and “specialty pharmaceutical products” refers to drugs used to treat complex diseases, such as cancer, diabetes and multiple sclerosis.  Specialty pharmaceutical products are part of complex treatment regimens for serious conditions and diseases that generally require ongoing clinical monitoring.  We believe the terms “specialty” and “specialty pharmaceutical products” are used consistently by industry participants and our competitors.  However, we cannot be certain that other distributors of specialty products define these and other similar terms in exactly the same manner as we do.

 

Both ABDC and ABSG distribute specialty drugs to their customers, with the principal difference between these two operating segments being that ABSG operates distribution facilities that focus primarily on complex disease treatment regimens.  Therefore, a product distributed from one of ABSG’s distribution facilities results in revenue reported under ABSG, and a product distributed from one of ABDC’s distribution centers results in revenue reported under ABDC.  Essentially all of ABSG sales consist of specialty pharmaceutical products.  ABDC sales of specialty pharmaceutical products have historically been a relatively small component of its overall revenue.

 

Other

 

Other consists of the AmerisourceBergen Consulting Services (“ABCS”) operating segment and the World Courier Group, Inc. (“World Courier”) operating segment.  The results of operations of our ABCS and World Courier operating segments are not significant enough to require separate reportable segment disclosure, and therefore, have been included in “Other” for the purpose of our reportable segment presentation.

 

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ABCS, through a number of operating businesses, provides commercialization support services including reimbursement support programs, outcomes research, contract field staffing, patient assistance and co-pay assistance programs, adherence programs, risk mitigation services, and other market access programs to pharmaceutical and biotechnology manufacturers.  World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry.

 

Results of Operations

 

Revenue

 

		Three months ended								Nine months ended
		June 30,								June 30,
(dollars in thousands)		2014			2013			Change		2014			2013			Change
Pharmaceutical Distribution		$	29,812,837		$	21,407,853		39.3%		$	86,367,923		$	62,061,060		39.2%
Other		620,275			549,400			12.9%		1,796,910			1,569,392			14.5%
Intersegment eliminations		(84,958		)	(50,605		)	67.9%		(184,414		)	(140,325		)	31.4%
Revenue		$	30,348,154		$	21,906,648		38.5%		$	87,980,419		$	63,490,127		38.6%

 

Revenue increased by 38.5% and 38.6% from the prior year quarter and nine month period, respectively.  This increase was largely due to the revenue growth of Pharmaceutical Distribution and, to a lesser extent, the revenue growth of Other.

 

We currently expect our revenue in fiscal 2014 to increase approximately 35%.  Our expected growth rate is driven primarily by our distribution contract with Walgreen Co. (“Walgreens”), which became effective on September 1, 2013.  Fiscal 2014 will include eleven incremental months of brand drug distribution and the phase-in of generic drug distribution to Walgreens.  Our future revenue growth will continue to be affected by various factors such as industry growth trends, including the introduction of new innovative brand therapies, the likely increase in the number of generic drugs that will be available over the next few years as a result of the expiration of certain drug patents held by brand-name pharmaceutical manufacturers, general economic conditions in the United States, competition within the industry, customer consolidation, changes in pharmaceutical manufacturer pricing and distribution policies and practices, increased downward pressure on government and other third party reimbursement rates to our customers, and changes in Federal government rules and regulations.

 

Pharmaceutical Distribution Segment

 

The Pharmaceutical Distribution segment grew its revenue by 39.3% and 39.2% from the prior year quarter and nine month period, respectively.  Intrasegment revenues between ABDC and ABSG have been eliminated in the presentation of total Pharmaceutical Distribution revenue.  These revenues primarily consisted of ABSG sales directly to ABDC customer sites or ABSG sales to ABDC’s facilities.  Total intrasegment revenues were $1.1 billion and $809.2 million in the quarters ended June 30, 2014 and 2013, respectively.  Total intrasegment revenues were $3.0 billion and $2.4 billion in the nine months ended June 30, 2014 and 2013, respectively.

 

ABDC’s revenue of $25.9 billion and $75.1 billion in the quarter and nine months ended June 30, 2014 increased 45.5% and 45.7%, respectively, from the prior year periods (before intrasegment eliminations).  The increase in ABDC’s revenue was primarily due to increased sales to Walgreens of $6.6 billion and $19.7 billion in the quarter and nine months ended June 30, 2014, respectively, and increased sales (including new Hepatitis C drugs) to some of our other larger customers.

 

ABSG’s revenue of $5.0 billion and $14.3 billion in the quarter and nine months ended June 30, 2014 increased 12.8%  and 10.3%, respectively, from the prior year periods (before intrasegment eliminations) primarily due to increased sales of certain

 

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specialty products and growth in its blood products, vaccine, and physician office distribution businesses.  The physician office distribution business continues to benefit from sales of an ophthalmology drug.

 

The majority of ABSG’s revenue is generated from the distribution of pharmaceuticals to physicians who specialize in a variety of disease states, especially oncology.  Under federal sequestration legislation, Medicare physician reimbursement rates for Part B drugs were reduced on April 1, 2013.  Community oncologists and other specialty physicians that administer drugs under Medicare Part B continue to be impacted by lower reimbursement rates for specialty pharmaceutical drugs.  As a result, some physician practices continue to consider consolidation or selling their businesses to hospitals.  While we service the needs of many hospitals, the continuing shift in this service channel has reduced community oncology revenue.  (Refer to Item 1A. Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 for a more detailed description of this business risk.)  ABSG’s business may continue to be adversely impacted in the future by changes in medical guidelines and the Medicare reimbursement rates for certain pharmaceuticals, especially oncology drugs administered by physicians.  Since ABSG provides a number of services to or through physicians, any changes affecting this service channel could result in additional revenue reductions.

 

A number of our contracts with customers or group purchasing organizations (“GPOs”) are typically subject to expiration each year.  We may lose a significant customer or GPO relationship if any existing contract with such customer or GPO expires without being extended, renewed, or replaced.  During the nine months ended June 30, 2014, no significant contracts expired.  Over the next twelve months, the only significant contract scheduled to expire is our contract with the Department of Defense (“DOD”), which expires in April 2015.  Our revenue, results of operations, and cash flows will be negatively impacted if the DOD contract is not renewed or the terms of the renewed contract are less favorable than the existing contract.

 

Other

 

Revenue in Other increased 12.9% and 14.5% from the prior year quarter and nine month period, respectively, primarily due to our TheraCom distribution business within ABCS, which benefited from the launch of two new products in the middle of the prior fiscal year.  Increased revenue from World Courier also contributed to the nine month period revenue growth.

 

Gross Profit

 

		Three months ended								Nine months ended
		June 30,								June 30,
(dollars in thousands)		2014			2013			Change		2014			2013			Change
Pharmaceutical Distribution		$	691,303		$	551,985		25.2%		$	1,980,711		$	1,667,811		18.8%
Other		131,414			126,558			3.8%		398,362			373,737			6.6%
Gains on antitrust litigation settlements		2,524			5,984					24,396			21,748
LIFO expense		(133,237		)	(122,077		)			(293,647		)	(123,029		)
Gross profit		$	692,004		$	562,450		23.0%		$	2,109,822		$	1,940,267		8.7%

 

Gross profit increased 23.0%, or $129.6 million, and 8.7%, or $169.6 million, from the prior year quarter and nine month period, respectively.

 

Pharmaceutical Distribution gross profit increased 25.2%, or $139.3 million, and 18.8%, or $312.9 million, from the prior year quarter and nine month period, respectively.  These increases were primarily due to the higher brand and generic sales volume to Walgreens, brand and generic price appreciation, and the growth of our non-community oncology specialty distribution businesses.  Gross profit in the quarter ended June 30, 2014 also benefited from supplier fee income resulting from our participation in the Walgreens and Alliance Boots procurement joint venture.  As a percentage of revenue, Pharmaceutical Distribution gross profit margin of 2.32% and 2.29% in the quarter and nine months ended June 30, 2014 decreased 26 basis points and 40 basis points from

 

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the prior year quarter and nine month period, respectively.  These declines were primarily due to a significant increase in lower margin brand business with Walgreens and some of our other larger customers and competitive pressures on customer margins.

 

Gross profit in Other increased 3.8%, or $4.9 million, and 6.6%, or $24.6 million, from the prior year quarter and nine month period, respectively.  These increases were primarily due to improved gross margin in World Courier and higher revenue in TheraCom’s distribution business.  As a percentage of revenue, gross profit margin in Other of 21.19% in the quarter ended June 30, 2014 decreased from 23.04% in the prior year quarter.  As a percentage of revenue, gross profit margin in Other of 22.17% in the nine months ended June 30, 2014 decreased from 23.81% in the prior year nine month period.  These decreases were primarily due to increases in TheraCom’s distribution revenue, which has a lower gross profit margin in comparison to other businesses within Other.  These decreases were offset, in part, by increases in the gross profit margin of World Courier.

 

We recognized gains of $2.5 million and $6.0 million from antitrust litigation settlements with pharmaceutical manufacturers during the quarters ended June 30, 2014 and 2013, respectively.  We recognized gains of $24.4 million and $21.7 million from antitrust litigation settlements with pharmaceutical manufacturers during the nine months ended June 30, 2014 and 2013, respectively.  The gains were recorded as reductions to cost of goods sold.

 

Our cost of goods sold for interim periods includes a last-in, first-out (“LIFO”) provision that is based on our estimated annual LIFO provision.  We recorded LIFO expense of $133.2 million and $122.1 million in the quarters ended June 30, 2014 and 2013, respectively.  Our LIFO expense was $293.6 million and $123.0 million in the nine months ended June 30, 2014 and 2013, respectively.  The annual LIFO provision, which we estimate on a quarterly basis, is affected by expected changes in inventory quantities (such as the inventory build for the Walgreens business), product mix, and manufacturer pricing practices, which may be impacted by market and other external influences.  Changes to any of the above factors can have a material impact to our annual LIFO provision.

 

Operating Expenses

 

		Three months ended								Nine months ended
		June 30,								June 30,
(dollars in thousands)		2014			2013			Change		2014			2013			Change
Distribution, selling and administrative		$	387,611		$	331,173		17.0%		$	1,128,012		$	975,409		15.6%
Depreciation and amortization		47,334			41,138			15.1%		135,778			119,690			13.4%
Warrants		145,040			35,815					267,000			39,576
Employee severance, litigation and other		1,142			19,678					7,411			21,383
Total operating expenses		$	581,127		$	427,804		35.8%		$	1,538,201		$	1,156,058		33.1%

 

Distribution, selling and administrative expenses increased 17.0%, or $56.4 million, from the prior year quarter, and increased 15.6%, or $152.6 million from the prior year nine month period, primarily due to the on-boarding of our distribution agreement with Walgreens.  More specifically, expenses relating to payroll, information technology and delivery were higher in the current year quarter and nine month period.

 

Depreciation expense increased from the prior year periods due to an increase in the amount of capital projects being depreciated.  Amortization expense was comparable to the prior year periods.

 

Warrant expense was $145.0 million and $267.0 million in the quarter and nine month period ended June 30, 2014, respectively, compared to $35.8 million and $39.6 million in the prior year quarter and nine month period, respectively.  The Warrants were issued in March 2013 in connection with the agreements and arrangements that define our strategic relationship with Walgreens

 

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