AmerisourceBergen Corporation (now identified in the request as Cencora, Inc.) — Fiscal 2020 Q2 10-Q
Reporting period: Quarter and six months ended March 31, 2020. The filing was submitted under the name AmerisourceBergen Corporation. Amounts below are in U.S. dollars.
Business context and financial performance
The company distributes pharmaceuticals and provides related services through its Pharmaceutical Distribution Services segment, alongside animal health and global commercialization businesses reported as Other. Fiscal Q2 coincided with the initial COVID-19 disruption.
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $47.418 billion, up 9.5% year over year | $95.282 billion, up 7.4% |
| Gross profit | $1.388 billion, down 2.6% | $2.619 billion, down 3.8% |
| Operating income | $309.5 million, versus $47.6 million | $573.0 million, up 9.1% |
| Net income attributable to AmerisourceBergen | $960.3 million, versus $27.1 million | $1.148 billion, versus $420.8 million |
| Diluted EPS | $4.64, versus $0.13 | $5.54, versus $1.97 |
| Net cash provided by operating activities | Six months: $995.7 million, versus $1.103 billion |
Reported earnings benefited substantially from discrete tax benefits: the company recognized $741.0 million in the quarter and six-month period, primarily related to the PharMEDium exit and CARES Act tax provisions. The effective tax rates were (251.6)% for the quarter and (128.9)% for the six months. Thus, the sharp increase in net income and EPS does not represent a comparable improvement in underlying operating performance.
Gross profit was pressured by LIFO expense versus a prior-year LIFO credit and substantially lower antitrust settlement gains. Pharmaceutical Distribution Services gross profit rose 6.6% in the quarter, but its gross margin declined six basis points to 2.32%, partly reflecting higher sales to large, lower-margin customers. Other gross profit increased 10.1%; its margin declined to 19.15% from 19.60%.
Liquidity, debt, and capital allocation
- At March 31, 2020, cash and cash equivalents were $3.692 billion; total debt was $4.145 billion, including $522.8 million of short-term debt and $3.622 billion of long-term debt. Total debt was $4.173 billion at September 30, 2019.
- Available borrowing capacity under listed credit facilities was approximately $2.580 billion. The company reported compliance with its revolving and securitization facility covenants.
- Six-month operating cash flow was $995.7 million. Working-capital movements included a $2.052 billion increase in receivables and a $2.396 billion increase in accounts payable; management said the latter was primarily payment timing.
- Six-month investing cash outflow was $167.8 million, including $144.4 million in capital expenditures. Fiscal 2020 capital expenditures were expected to be approximately $400 million.
- Six-month financing cash outflow was $510.2 million, including $407.2 million of share repurchases and $170.5 million of dividends. The quarterly dividend increased 5% to $0.42 per share. A new $500 million repurchase authorization was approved in May 2020.
Material changes, outlook, and unusual items
- COVID-19: Increased customer purchasing during Q2 lifted revenue and gross profit, while related operating costs meant the impact on operating income was not significant. Management expected Q3 revenue to be proportionately lower because some Q2 purchases were pulled forward. Beginning in April, the company reported lower revenue in certain specialty businesses amid reduced patient volumes and weaker demand for some animal-health products.
- Revenue outlook: Management expected fiscal 2020 revenue growth in the low- to mid-single digits, while cautioning that the pandemic and industry factors could affect results. The filing provides no specific earnings or EPS guidance.
- PharMEDium: The company decided in January 2020 to permanently exit the compounding business. It recorded a $223.7 million asset impairment in Q2 and $361.7 million for the six months, in addition to a $138.0 million impairment in Q1. Shutdown and severance costs were also incurred. The exit generated a major tax benefit.
- Legal contingencies: Opioid-related litigation and government investigations remain significant. A proposed framework announced by several attorneys general contemplated up to $18 billion over 18 years from major distributors, with a proposed 31% share for the company, plus other obligations. No liability for a global resolution was recorded; the company said the outcome and possible loss range could not be estimated.
- Other items: The company adopted lease-accounting guidance on October 1, 2019, recording operating lease liabilities of $562.1 million and right-of-use assets of $526.3 million at adoption. Management said adoption would not materially affect results or cash flows. A proposed New York opioid assessment had been reversed after the law was ruled unconstitutional; the state appealed, but the company did not consider a loss probable.
Key facts for investors to verify
- How much of the Q2 revenue increase was pulled forward from Q3, and how pandemic-related changes in demand, supply, receivables, and bad debts affected subsequent results.
- The company’s underlying earnings and margins excluding the $741.0 million of discrete tax benefits, PharMEDium charges, LIFO effects, and antitrust settlement gains.
- Progress, potential cost, and timing of the PharMEDium wind-down, including any remaining impairment or regulatory obligations under its consent decree.
- Developments in opioid litigation and settlement discussions, including potential financial and nonfinancial obligations; the filing states the possible loss was not reasonably estimable.
- Operating cash flow quality and working-capital timing, as well as upcoming debt maturities, facility availability, and the company’s planned capital spending and shareholder returns.