Business context and reporting period
This is AmerisourceBergen Corporation’s unaudited Form 10-Q for its fiscal first quarter ended December 31, 2019, compared with the quarter ended December 31, 2018. The filing identifies the issuer as AmerisourceBergen, ticker ABC. Its business includes pharmaceutical distribution, animal health, and global commercialization services.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $47.865 billion | $45.392 billion | +5.4% |
| Gross profit | $1.231 billion | $1.298 billion | -5.1% |
| Operating income | $263.4 million | $477.8 million | -44.9% |
| Net income attributable to AmerisourceBergen | $187.6 million | $393.7 million | -52.3% |
| Diluted EPS | $0.90 | $1.84 | Down |
| Operating cash flow | $142.8 million | $479.0 million | Down |
- Approximate gross margin was 2.57% versus 2.86%; operating margin was 0.55% versus 1.05%. The filing does not present a consolidated EBITDA figure.
- Cash and cash equivalents were $3.233 billion at December 31, 2019. Total debt was $4.169 billion, including $532.5 million of short-term debt; long-term debt was $3.636 billion. The company reported $2.583 billion of additional availability under specified credit facilities.
- Operating cash flow reflected working-capital movements: accounts payable increased $787.0 million, while inventories increased $631.0 million and receivables increased $307.2 million. Investing cash outflow was $62.3 million; financing cash outflow was $222.1 million. Cash declined $141.6 million during the quarter.
- Quarterly dividends declared were $0.40 per share. In January 2020, the board raised the quarterly dividend 5% to $0.42.
Material changes versus the prior period
- Revenue grew, led by Pharmaceutical Distribution Services (+5.2%) and Other (+10.5%). Growth reflected specialty product sales, customer growth, and gains in animal health and commercialization services.
- Gross profit fell despite higher segment operating income. Lower antitrust settlement gains ($8.5 million versus $87.3 million), a $13.3 million LIFO expense versus a $3.0 million credit, and the prior-year $22.0 million reversal of a New York opioid assessment weighed on comparison.
- Operating income included a $138.0 million PharMEDium long-lived-asset impairment, with no comparable charge in the prior-year quarter. Prior-year net income also benefited from a $37.0 million tax adjustment related to the Tax Cuts and Jobs Act.
- Operating cash flow was substantially lower year over year, reflecting working-capital timing and lower earnings. Share repurchases were $135.1 million in cash-flow terms, versus $239.0 million a year earlier.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2020 revenue growth in the mid- to high-single digits and capital expenditures of approximately $400 million.
- In late January 2020, the company decided to exit PharMEDium. It expected additional impairment of most remaining tangible assets ($55 million) and all remaining intangible assets ($185 million) in the March 2020 quarter, plus $80 million to $100 million of exit-related costs during fiscal 2020. It estimated a $500 million to $600 million cash tax benefit over fiscal 2020–2022.
- PharMEDium’s compounding operations faced regulatory and operational challenges, including a consent decree and suspended production at its Memphis facility; New Jersey production was also suspended pending facility upgrades. The quarter’s $138.0 million impairment was based on uncertain forecasts and Level 3 fair-value assumptions.
- Opioid litigation and investigations remain a major contingency. The company had not accrued a liability for a potential global resolution because it could not conclude one was probable or estimate possible losses. Management warned an adverse judgment or settlement could materially affect financial position, cash flows, or liquidity. The company paid $66.7 million in December 2019 to settle claims by two Ohio counties; that amount had been accrued in fiscal 2019.
- Walgreens Boots Alliance generated $15.6 billion of quarterly revenue under related agreements and had a $6.5 billion receivable balance, making the relationship and contract economics material to monitor.
- Management cited pricing and reimbursement pressure, customer and supplier concentration, regulatory and controlled-substance enforcement, litigation, contract renewals, interest rates, and foreign exchange among risks. The company reported compliance with its credit-facility covenants and effective disclosure controls.
Key facts investors should verify
- Progress and financial consequences of the PharMEDium exit, including the projected impairments, exit costs, and tax benefits.
- Developments in opioid litigation, government investigations, and any settlement terms; potential losses remained unestimable in the filing.
- Whether revenue growth converts to durable gross-profit and operating-margin improvement, given distribution’s low margins and volatile settlement and LIFO items.
- Working-capital and operating-cash-flow trends, seasonal borrowing needs, and repayment of the term loan due in 2020.
- Walgreens Boots Alliance contract performance and receivable collection, along with customer and supplier concentration exposure.
- Actual fiscal 2020 revenue growth and capital spending compared with management’s stated expectations.