News Column

AMERISOURCEBERGEN CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 7, 2014

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 pharmaceuticals (including specialty pharmaceutical products) and generic pharmaceuticals, 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 are 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 December 31, (dollars in thousands) 2013 2012 Change Pharmaceutical Distribution $ 28,622,591$ 20,599,048 39.0% Other 604,132 505,050 19.6% Intersegment eliminations (50,361 ) (44,287 ) 13.7% Revenue $ 29,176,362$ 21,059,811 38.5%



Revenue of $29.2 billion in the quarter ended December 31, 2013 increased 38.5% from the prior year quarter. 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 between 30% and 34%. 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. We are also forecasting a modest increase in revenue from the implementation of the Affordable Care Act. Our future revenue growth will continue to be affected by various factors such as industry growth trends, including 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 39.0% from the prior year quarter. 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 $976.8 million and $863.8 million in the quarters ended December 31, 2013 and 2012, respectively.

ABDC's revenue of $24.9 billion in the quarter ended December 31, 2013 increased 45.5%, or $7.8 billion, from the prior year quarter (before intrasegment eliminations). The increase in ABDC's revenue was primarily due to increased sales to Walgreens of $6.6 billion and increased sales to some of our other larger customers, including our largest pharmacy benefit manager ("PBM") customer. The increased sales were offset in part by a prior period loss of a food and drug group purchasing organization ("GPO") customer, which resulted in a $0.4 billion decrease in the fiscal quarter ended December 31, 2013.

ABSG's revenue of $4.7 billion in the quarter ended December 31, 2013 increased 8.2% from the prior year quarter (before intrasegment eliminations) primarily due to increased sales of certain 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

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ophthalmology drug. ABSG's revenue growth was partially offset by a decline in sales to community oncology practices. 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 experience declining 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 and anemia drugs. 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 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 quarter ended December 31, 2013, no significant contracts expired. Over the next twelve months, there are no significant contracts scheduled to expire.

Other



Revenue in Other increased 19.6%, or $99.1 million from the prior year quarter 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, and increased revenue from World Courier.

Gross Profit Three months ended December 31, (dollars in thousands) 2013 2012 Change Pharmaceutical Distribution $ 594,206$ 528,134 12.5% Other 130,578 121,553 7.4% Gain on antitrust litigation settlements 21,023 12,308 LIFO expense (57,582 ) (1,167 ) Gross profit $ 688,225$ 660,828 4.1%



Gross profit increased 4.1%, or $27.4 million, from the prior year quarter.

Pharmaceutical Distribution gross profit increased 12.5%, or $66.1 million, from the prior year quarter. This increase was primarily due to the higher sales volume to Walgreens and the growth of our non-community oncology specialty distribution businesses. This increase was offset, in part, by a prior period loss of a food and drug GPO customer.

As a percentage of revenue, Pharmaceutical Distribution gross profit margin of 2.08% in the quarter ended December 31, 2013 decreased 48 basis points from the prior year quarter. This decline was primarily due to a significant increase in lower margin brand business with Walgreens and some of our other larger customers, a prior period loss of a food and drug GPO customer, and competitive pressures on customer margins.

Gross profit in Other increased 7.4%, or $9.0 million, from the prior year quarter. This increase was primarily due to higher revenue in TheraCom's distribution business and World Courier. As a percentage of revenue, gross profit margin in Other of 21.61% in the quarter ended December 31, 2013 decreased from 24.07% in the prior year quarter. This decrease was primarily due to

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an increase in TheraCom's distribution revenue, which has a lower gross profit margin in comparison to other businesses within Other. This decrease was offset, in part, by an increase in the gross profit margin of World Courier.

We recognized gains of $21.0 million and $12.3 million from antitrust litigation settlements with pharmaceutical manufacturers during the quarters ended December 31, 2013 and 2012, 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. The annual LIFO provision, which we estimate on a quarterly basis, is affected by expected changes in inventory quantities, 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 December 31, (dollars in thousands) 2013 2012 Change



Distribution, selling and administrative $ 364,060$ 320,700 13.5% Depreciation and amortization

43,950 38,684 13.6% Warrants 116,297 -



Employee severance, litigation and other 4,302 2,004 Total operating expenses

$ 528,609$ 361,388 46.3%



Distribution, selling and administrative expenses increased 13.5%, or $43.4 million, from the prior year quarter, 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.

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

Warrant expense was $116.3 million in the quarter ended December 31, 2013. The Warrants were issued in March 2013 in connection with the agreements and arrangements that define our strategic relationship with Walgreens and Alliance Boots. Future Warrant expense could fluctuate significantly. (Refer to "Critical Accounting Policies and Estimates - Warrants" in our 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.)

Employee severance, litigation and other for the quarter ended December 31, 2013 included $2.2 million of deal-related transaction costs and $2.1 million of employee severance and other costs. Employee severance, litigation and other for the prior year quarter included $1.5 million of employee severance and other costs and $0.5 million of deal-related transaction costs.

As a percentage of revenue, operating expenses were 1.81% in the quarter ended December 31, 2013, an increase of 9 basis points from the prior year quarter. This increase was due to the Warrant expense. For the Pharmaceutical Distribution segment, as a percentage of revenue, operating expenses were down 20 basis points from the prior year quarter.

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Table of Contents Operating Income Three months ended December 31, (dollars in thousands) 2013 2012 Change Pharmaceutical Distribution $ 286,782$ 266,677 7.5% Other 35,950 29,725 20.9% Total segment operating income 322,732 296,402 8.9% Gain on antitrust litigation settlements 21,023 12,308 LIFO expense (57,582 ) (1,167 )



Acquisition related intangibles amortization (5,958 ) (6,099 ) -2.3% Warrants

(116,297 ) - Employee severance, litigation and other (4,302 ) (2,004 ) Operating income $ 159,616$ 299,440 -46.7%



Segment operating income is evaluated before gains on antitrust litigation settlements; LIFO expense; acquisition related intangibles amortization; Warrant expense; and employee severance, litigation and other.

Pharmaceutical Distribution operating income increased 7.5%, or $20.1 million, from the prior year quarter, due to the increase in gross profit, offset in part by the increase in operating expenses. As a percentage of revenue, Pharmaceutical Distribution operating income margin declined 29 basis points from the prior year quarter due to a significant increase in lower margin brand business with Walgreens and some of our other larger customers, and a prior period loss of a food and drug GPO customer.

Operating income in Other increased 20.9%, or $6.2 million, from the prior year quarter due primarily to the World Courier revenue increase.

Interest expense, interest income, and the respective weighted average interest rates in the quarters ended December 31, 2013 and 2012 were as follows (in thousands): 2013 2012 Weighted Average Weighted Average Amount Interest Rate Amount Interest Rate Interest expense $ 19,043 4.71% $ 18,737 4.71% Interest income (211 ) 0.47% (212 ) 0.33% Interest expense, net $ 18,832$ 18,525



Interest expense was comparable to the prior year quarter. The increase in variable rate debt outstanding as of December 31, 2013 did not have a significant impact on interest expense in the current quarter as the borrowings were made near the end of the quarter.

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Income taxes in the quarter ended December 31, 2013 reflect an effective income tax rate of 65.4%, compared to 37.8% in the prior year quarter. Our effective tax rate is higher in fiscal 2014 because a significant portion of the Warrant expense is not tax deductible. Our future effective tax rate could fluctuate significantly depending upon the quarterly valuation of the Warrants for financial reporting purposes. Excluding the impact of Warrant expense, we expect that our effective tax rate in fiscal 2014 will be in the low 38% range.

Income from continuing operations of $48.9 million in the quarter ended December 31, 2013 decreased 72.0% from the prior year quarter. Diluted earnings per share from continuing operations of $0.21 in the quarter ended December 31, 2013 decreased 71.6% from $0.74 per share in the prior year quarter.

Loss from discontinued operations, net of income taxes, for all periods presented includes the operating results of AndersonBrecon ("AB") and AmerisourceBergen Canada Corporation ("ABCC").

Liquidity and Capital Resources

The following table illustrates our debt structure at December 31, 2013, including availability under the multi-currency revolving credit facility, the receivables securitization facility and the revolving credit note (in thousands):

Outstanding Additional Balance Availability Fixed-Rate Debt: $500,000, 5 7/8% senior notes due 2015 $ 499,444 $ - $400,000, 4 7/8% senior notes due 2019 397,881 - $500,000, 3 1/2% senior notes due 2021 499,451 - Total fixed-rate debt 1,396,776 -



Variable-Rate Debt: Multi-currency revolving credit facility due 2018 78,000 1,322,000 Receivables securitization facility due 2016

300,000 900,000 Revolving credit note 45,000 - Total variable-rate debt 423,000 2,222,000 Total debt $ 1,819,776$ 2,222,000



Along with our cash balances, our aggregate availability under our multi-currency revolving credit facility, our receivables securitization facility and the revolving credit note provides us sufficient sources of capital to fund our working capital requirements.

We have a $1.4 billion multi-currency senior unsecured revolving credit facility, which is scheduled to expire 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 our 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 December 31, 2013). Additionally, interest on borrowings denominated in Canadian dollars may accrue at the greater of the Canadian prime rate or the CDOR rate. We pay facility fees to maintain the availability under the Multi-Currency Revolving Credit Facility at specified rates based on our debt rating, ranging from 7 basis points to 20 basis points, annually, of the total commitment (10 basis points at December 31, 2013). We may choose to repay or reduce our 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, which we are compliant with as of December 31, 2013.

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We have a commercial paper program whereby we may from time to time issue short-term promissory notes in an aggregate amount of up to $700 million 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 our borrowing capacity as it is fully backed by our Multi-Currency Revolving Credit Facility. There were no borrowings outstanding under our commercial paper program at December 31, 2013.

We have a $950 million receivables securitization facility ("Receivables Securitization Facility"), which is scheduled to expire in June 2016. We have available to us 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. During December 2013, we increased the availability of the Receivables Securitization Facility by $250 million under the accordion feature. Interest rates are based on prevailing market rates for short-term commercial paper or LIBOR plus a program fee of 75 basis points. We pay 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, which we are compliant with as of December 31, 2013.

We have an uncommitted, unsecured line of credit available to us pursuant to a revolving credit note ("Revolving Credit Note"). The Revolving Credit Note provides us with the ability to request short-term unsecured revolving credit loans from time to time in a principal amount not to exceed $45 million at any time outstanding.

We have $500 million of 5 7/8% senior notes due September 15, 2015 (the "2015 Notes"), $400 million of 4 7/8% senior notes due November 15, 2019 (the "2019 Notes") and $500 million of 3 1/2% senior notes due November 15, 2021 (the "2021 Notes"). Interest on the 2015 Notes, the 2019 Notes, and the 2021 Notes is payable semiannually in arrears. All of the senior notes rank pari passu to the Multi-Currency Revolving Credit Facility.

Our operating results have generated cash flow, which, together with availability under our debt agreements and credit terms from suppliers, has provided sufficient capital resources to finance working capital and cash operating requirements, and to fund capital expenditures, acquisitions, repayment of debt, the payment of interest on outstanding debt, dividends, and repurchases of shares of our common stock.

Our primary ongoing cash requirements will be to finance working capital, fund the repayment of debt, fund the payment of interest on debt, fund repurchases of our common stock, fund the payment of dividends, finance acquisitions, and fund capital expenditures and routine growth and expansion through new business opportunities. In November 2012, our board of directors approved a program allowing us to purchase up to $750 million shares of our common stock, subject to market conditions. During the fiscal year ended September 30, 2013, we purchased $387.0 million of our common stock under the share repurchase program. During the quarter ended December 31, 2013, we purchased $19.6 million of our common stock under the share repurchase program. As of December 31, 2013, we had $343.4 million of availability remaining on the $750 million share repurchase program. In August 2013, our board of directors approved a new program allowing us to purchase up to $750 million additional shares of our common stock, subject to market conditions. We currently expect to purchase $500 million of our common stock in fiscal 2014, subject to market conditions. Future cash flows from operations and borrowings are expected to be sufficient to fund our ongoing cash requirements.

If Walgreens and/or Alliance Boots exercise their rights to purchase our common stock pursuant to the Warrants that we issued to them, the future issuances of shares of our common stock upon exercise of the Warrants will dilute the ownership interests of our then-existing stockholders and could adversely affect the market price of our common stock. We intend to mitigate the potentially dilutive effect that exercise of the Warrants could have by hedging a portion of our future obligation to deliver common stock with a financial institution and repurchasing additional shares of our common stock for our own account over time. In June 2013, we commenced our hedging strategy by entering into a contract with a financial institution pursuant to which it has executed a series of issuer capped call transactions ("Capped Calls"). The Capped Calls give us the right to buy 60% of the shares of our common stock subject to the Warrants at specified prices at maturity, should the Warrants be exercised in 2016 and 2017 and assuming our future share price does not exceed the "cap" price in the Capped Calls. If our share price exceeds the "cap" price in the Capped Calls at the

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time the Warrants are exercised, the number of shares that will be delivered to us under the Capped Calls will be reduced, and accordingly, will cover less than 60% of the shares of common stock subject to the Warrants. If our future share price at the exercise dates is lower than our breakeven share price, then our use of capital for the purchase of the Capped Calls would be ineffective. To the extent the Capped Calls do not mitigate the dilutive effect of the Warrants, we intend to consider repurchasing additional shares of our common stock. The amount of dilution that we would be able to mitigate will depend on the relative costs and benefits of such a transaction, considering factors such as: our financial performance, the current and future share price of our common stock, our expected cash flows, competing priorities for capital, and overall market conditions.

As of December 31, 2013, we completed 98% of the hedge transaction (described above). During the quarter ended December 31, 2013, we purchased Capped Calls on 11.3 million shares of our common stock for a total premium of $193.5 million, which included a $0.5 million increase to the accrued and unpaid hedge premium as of December 31, 2013, as compared to September 30, 2013. We completed the hedge transaction in January 2014.

Deterioration in general economic conditions could adversely affect the amount of prescriptions that are filled and the amount of pharmaceutical products purchased by consumers and, therefore, could reduce purchases by our customers. In addition, volatility in financial markets may also negatively impact our customers' ability to obtain credit to finance their businesses on acceptable terms. Reduced purchases by our customers or changes in the ability of our customers to remit payments to us could adversely affect our revenue growth, our profitability, and our cash flow from operations.

We have market risk exposure to interest rate fluctuations relating to our debt. We manage interest rate risk by using a combination of fixed-rate and variable-rate debt. At December 31, 2013, we had $423.0 million of variable-rate debt outstanding. The amount of variable-rate debt fluctuates during the year based on our working capital requirements. We periodically evaluate financial instruments to manage our exposure to fixed and variable interest rates. However, there are no assurances that such instruments will be available in the combinations we want and on terms acceptable to us. There were no such financial instruments in effect at December 31, 2013.

We also have market risk exposure to interest rate fluctuations relating to our cash and cash equivalents. We had $347.5 million in cash and cash equivalents at December 31, 2013. The unfavorable impact of a hypothetical decrease in interest rates on cash and cash equivalents would be partially offset by the favorable impact of such a decrease on variable-rate debt. For every $100 million of cash invested that is in excess of variable-rate debt, a 10 basis point decrease in interest rates would increase our annual net interest expense by $0.1 million.

We are exposed to foreign currency and exchange rate risk from our non-U.S. operations. Our largest exposure to foreign exchange rates exists primarily with the Canadian Dollar, the Euro, and the U.K. Pound Sterling. We may utilize foreign currency denominated forward contracts to hedge against changes in foreign exchange rates. We may use derivative instruments to hedge our foreign currency exposure, but not for speculative or trading purposes. As of December 31, 2013, we had one foreign currency denominated contract outstanding that hedges the foreign currency exchange risk of the C$50.0 million note that we received in conjunction with the sale of ABCC in May 2013.

Changes in the price and volatility of our common stock may have a significant impact on the fair value of the Warrants issued to Walgreens and Alliance Boots (see Note 6). As of December 31, 2013, a one dollar change in our common stock, holding other assumptions constant, would increase or decrease the fair value of the Warrants by approximately $37 million and a one percent change in volatility, holding other assumptions constant, would increase or decrease the fair value of the Warrants by approximately $14 million.

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Following is a summary of our contractual obligations for future principal and interest payments on our debt, minimum rental payments on our noncancelable operating leases and minimum payments on our other commitments at December 31, 2013 (in thousands): Payments Due by Period Within 1 After 5 Total Year 1-3 Years 4-5 Years Years Debt, including interest payments $ 2,144,405$ 495,030$ 603,375$ 74,000$ 972,000 Operating leases 283,300 54,719 90,762 62,472 75,347 Other commitments 108,218 63,273 44,945 - - Total $ 2,535,923$ 613,022$ 739,082$ 136,472$ 1,047,347



We have commitments to purchase product from influenza vaccine manufacturers through the 2015/2016 flu season. We are required to purchase doses at prices that we believe will represent market prices. We currently estimate our remaining purchase commitment under these agreements will be approximately $50.3 million as of December 31, 2013, of which $25.2 million represents our commitment over the next twelve months, and are included in "Other commitments" in the above table.

We have outsourced to IBM Global Services ("IBM") a significant portion of our corporate and ABDC information technology activities. The remaining commitment under our 10-year arrangement, as amended, which expires in June 2015, is approximately $46.2 million as of December 31, 2013, of which $31.0 million represents our commitment over the next twelve months, and is included in "Other commitments" in the above table.

Our liability for uncertain tax positions was $55.2 million (including interest and penalties) as of December 31, 2013. This liability represents an estimate of tax positions that we have taken in our tax returns which may ultimately not be sustained upon examination by taxing authorities. Since the amount and timing of any future cash settlements cannot be predicted with reasonable certainty, the estimated liability has been excluded from the above contractual obligations table.

During the quarter ended December 31, 2013, our operating activities used $1.0 billion of cash in comparison to cash used of $241.7 million in the prior year quarter. Cash used in operations during the quarter ended December 31, 2013 was principally the result of an increase in merchandise inventories of $1.6 billion and an increase in accounts receivable of $159.1 million, offset, in part, by income from continuing operations of $48.9 million, an increase in accounts payable, accrued expenses and income taxes of $523.1 million, and non-cash items of $174.6 million. Accounts receivable increased from September 30, 2013, reflecting the increased volume associated with our new Walgreens business. We also increased our merchandise inventories at December 31, 2013 to support the increase in volume due to the new Walgreens business and consistent with prior years, due to seasonal needs. The increase in accounts payable, accrued expenses and income taxes was primarily driven by the increase in merchandise inventories and the timing of payments to our suppliers.

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We use days sales outstanding, days inventory on hand, and days payable outstanding to evaluate our working capital performance.

Quarter ended December 31, 2013 2012 Days sales outstanding 20.1 18.6 Days inventory on hand 27.0 25.6 Days payable outstanding 42.4 42.7



Our cash flow from operating activities can vary significantly from period to period based on fluctuations in our period end working capital. We expect cash from operating activities in fiscal 2014 to be between $800 million and $1.0 billion. Operating cash uses during the quarter ended December 31, 2013 included $18.8 million of interest payments and $3.5 million of income tax payments, net of refunds.

During the quarter ended December 31, 2012, our operating activities used $241.7 million of cash. Cash used in operating activities during the quarter ended December 31, 2012 was principally the result of an increase in accounts receivable of $429.1 million and an increase in merchandise inventories of $295.9 million, offset, in part, by income from continuing operations of $174.6 million, an increase in accounts payable, accrued expenses and income taxes of $211.4 million, and non-cash items of $66.6 million. Accounts receivable increased from September 30, 2012, reflecting the increased volume associated with our largest PBM customer contract, which became effective on October 1, 2012. Additionally, while the payment terms in the PBM customer contract are favorable, they are longer than the payment terms in the previous contract. As a result, there was a negative impact to our working capital in the prior year quarter. Consistent with prior years, we increased our merchandise inventories at December 31, 2012 due to seasonal needs and to support the increase in volume due to the PBM customer contract. The increase in accounts payable, accrued expenses and income taxes was primarily driven by the increase in merchandise inventories and the timing of payments to our suppliers. Operating cash uses during the quarter ended December 31, 2012 included $19.3 million of interest payments and $4.1 million of income tax payments, net of refunds.

Capital expenditures for the quarters ended December 31, 2013 and 2012 were $59.2 million and $56.3 million, respectively. Significant capital expenditures in the quarter ended December 31, 2013 included infrastructure and technology-related costs to on-board the incremental Walgreens distribution volume and other technology initiatives, including costs related to the further development of our ERP system. We expect to spend approximately $300 million for capital expenditures during fiscal 2014. Significant capital expenditures in the quarter ended December 31, 2012 included the purchase of one of our leased distribution facilities, technology initiatives including costs related to the further development of our ERP system, and expansion costs related to one of ABDC's facilities.

During the quarters ended December 31, 2013 and 2012, we paid $19.7 million and $284.7 million, respectively, for purchases of our common stock. During the quarter ended December 31, 2013, we paid $193.0 million to purchase Capped Calls to hedge the potential dilution associated with the Warrants upon their exercise.

In November 2012, our board of directors increased the quarterly cash dividend by 62% from $0.13 per share to $0.21 per share. In November 2013, our board of directors increased the quarterly cash dividend by 12% from $0.21 per share to $0.235 per share. We anticipate that we will continue to pay quarterly cash dividends in the future. However, the payment and amount of future dividends remains within the discretion of our board of directors and will depend upon our future earnings, financial condition, capital requirements, and other factors.

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Cautionary Note Regarding Forward-Looking Statements

Certain of the statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as "expect," "likely," "outlook," "forecast," "would," "could," "should," "can," "will," "project," "intend," "plan," "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and are subject to uncertainty and change in circumstances. These statements are not guarantees of future performance and are based on assumptions that could prove incorrect or could cause actual results to vary materially from those indicated. Among the factors that could cause actual results to differ materially from those projected, anticipated, or implied are the following: changes in pharmaceutical market growth rates; the loss of one or more key customer or supplier relationships; the retention of key customer or supplier relationships under less favorable economics; changes in customer mix; customer delinquencies, defaults or insolvencies; supplier defaults or insolvencies; changes in branded and/or generic pharmaceutical manufacturers' pricing and distribution policies or practices; adverse resolution of any contract or other dispute with customers or suppliers; federal and state government enforcement initiatives to detect and prevent suspicious orders of controlled substances and the diversion of controlled substances, federal and state prosecution of alleged violations of related laws and regulations, and any related litigation, including shareholder derivative lawsuits or other disputes relating to our distribution of controlled substances; qui tam litigation for alleged violations of fraud and abuse laws and regulations and/or any other laws and regulations governing the marketing, sale, purchase and/or dispensing of pharmaceutical products or services and any related litigation, including shareholder derivative lawsuits; changes in federal and state legislation or regulatory action affecting pharmaceutical product pricing or reimbursement policies, including under Medicaid and Medicare, and the effect of such changes on our customers; changes in regulatory or clinical medical guidelines and/or labeling for the pharmaceutical products we distribute, including certain anemia products; price inflation in branded and generic pharmaceuticals and price deflation in generics; greater or less than anticipated benefit from launches of the generic versions of previously patented pharmaceutical products; significant breakdown or interruption of our information technology systems; our inability to realize the anticipated benefits of the implementation of an enterprise resource planning (ERP) system; interest rate and foreign currency exchange rate fluctuations; risks associated with international business operations, including non-compliance with the U.S. Foreign Corrupt Practices Act, anti-bribery laws and economic sanctions and import laws and regulations; economic, business, competitive and/or regulatory developments outside of the United States; risks associated with the strategic, long-term relationship among Walgreen Co., Alliance Boots GmbH, and AmerisourceBergen, the occurrence of any event, change or other circumstance that could give rise to the termination, cross-termination or modification of any of the transaction documents among the parties (including, among others, the distribution agreement or the generics agreement), an impact on our earnings per share resulting from the issuance of the Warrants, an inability to realize anticipated benefits (including benefits resulting from participation in the Walgreens Boots Alliance Development GmbH joint venture), the disruption of AmerisourceBergen's cash flow and ability to return value to its stockholders in accordance with its past practices, disruption of or changes in vendor, payer and customer relationships and terms, and the reduction of AmerisourceBergen's operational, strategic or financial flexibility; the acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control; our inability to successfully complete any other transaction that we may wish to pursue from time to time; changes in tax laws or legislative initiatives that could adversely affect our tax positions and/or our tax liabilities or adverse resolution of challenges to our tax positions; increased costs of maintaining, or reductions in our ability to maintain, adequate liquidity and financing sources; volatility and deterioration of the capital and credit markets; natural disasters or other unexpected events that affect our operations; and other economic, business, competitive, legal, tax, regulatory and/or operational factors affecting our business generally. Certain additional factors that management believes could cause actual outcomes and results to differ materially from those described in forward-looking statements are set forth (i) elsewhere in this report, (ii) in Item 1A (Risk Factors) in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2013 and elsewhere in that report and (iii) in other reports filed by the Company pursuant to the Securities Exchange Act.

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