AmerisourceBergen Corporation (now Cencora, Inc.) — Form 10-Q Summary
Business context and reporting period. The filing is by AmerisourceBergen Corporation for the fiscal third quarter and nine months ended June 30, 2018. The company distributes pharmaceuticals and provides related healthcare services, with additional animal-health, logistics, and commercialization businesses. Financial statements are unaudited.
Financial performance and position
- Third-quarter revenue: $43.14 billion, up 11.5% from $38.71 billion. Gross profit was $1.21 billion, up 12.2%; operating income was $389.2 million versus $170.4 million; net income attributable to AmerisourceBergen was $275.8 million versus $50.4 million. Diluted EPS was $1.25 versus $0.23.
- Nine-month revenue: $124.64 billion, up 9.3%. Gross profit was $3.58 billion, up 6.1%; operating income was $1.29 billion versus $1.20 billion. Net income attributable to the company was $1.43 billion versus $709.1 million, and diluted EPS was $6.44 versus $3.20.
- Margins: Pharmaceutical Distribution Services gross margin was 2.07% for the quarter and 2.17% for nine months. Other-segment gross margin was 19.40% and 20.20%, respectively, down from prior-year periods. Consolidated gross profit increased, but higher selling and administrative costs and lower LIFO credits affected comparisons.
- Cash flow: Nine-month operating cash flow was $746.0 million, compared with $123.7 million a year earlier. Investing activities used $1.03 billion, including $783.3 million for acquired companies; financing activities provided $233.6 million. Cash declined $46.2 million to $2.39 billion.
- Debt and liquidity: Total debt was $4.39 billion, up from $3.44 billion at September 30, 2017. Cash was $2.39 billion. The company reported $2.44 billion of additional availability under specified credit facilities; it was compliant with relevant covenants. Current assets were $26.40 billion and current liabilities $28.10 billion.
- Other metrics: Nine-month dividends declared were $1.14 per share. The quarterly dividend had increased to $0.38 per share. The company repurchased $325.4 million of stock during the nine months and had $463.5 million remaining under its authorization.
Material changes versus prior periods
- Growth reflected strong pharmaceutical distribution sales, including growth from large customers and oncology products, as well as the January 2018 H.D. Smith acquisition and consolidation of Profarma in Brazil. The specialty joint venture in Brazil was also consolidated.
- Segment operating income was nearly flat: up 0.7% in the quarter and 0.2% for nine months. Higher distribution and administrative expenses—partly from acquisitions and duplicate IT-system implementation costs—offset gross-profit growth. Other-segment operating income declined.
- Reported net income comparisons were significantly affected by tax and litigation items. The nine-month 2018 tax benefit was $356.3 million, including $587.6 million of discrete benefits related to the 2017 Tax Act. Prior-year periods included substantial litigation settlement charges.
- Nine-month results also included a $42.3 million loss on consolidation and remeasurement of Brazil investments, a $23.8 million loss on early debt retirement, and a $30.0 million impairment of a non-customer note receivable. Third-quarter gross profit included a $35.6 million antitrust-settlement gain.
Outlook, risks, and contingencies
- Management expected fiscal 2018 revenue growth of 8%–11% and approximately $325 million of fiscal-year capital expenditures. It expected the federal corporate tax-rate reduction to benefit the effective tax rate through fiscal 2019.
- Following a voluntary suspension of production at PharMEDium’s Memphis facility in December 2017 after FDA inspections, the company said PharMEDium informed the FDA on July 19, 2018 of its intent to resume limited production and begin commercial distribution in August. Management expected a gradual ramp-up and full operation in fiscal 2019; remediation costs and reduced production had weighed on results.
- A $625 million reserve for an agreement in principle to resolve alleged civil claims with the U.S. Attorney’s Office for the Eastern District of New York remained unpaid and subject to final terms, related-party resolution, and court approval. The company also faced numerous opioid-related lawsuits and government investigations; it said outcomes and exposure could not be assessed.
- New York’s Opioid Stewardship Act took effect July 1, 2018. The company considered a liability probable but could not estimate its share and recorded no accrual as of June 30. Management did not expect the Act alone to have a material impact, while warning that similar laws in other jurisdictions could have an aggregate material effect.
- Other principal risks cited include pharmaceutical pricing and reimbursement pressures, customer or supplier concentration and contract terms, regulatory and controlled-substance enforcement, compounding-facility compliance, acquisition integration, litigation outcomes, working-capital volatility, interest rates, and foreign exchange.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus the 2017 Tax Act benefit, prior-year litigation charges, antitrust gains, and other unusual items.
- Final outcomes and cash timing for the $625 million civil settlement agreement in principle, opioid litigation and investigations, and the unaccrued New York assessment.
- PharMEDium’s FDA-related remediation progress, actual restart timing, production recovery, and associated costs.
- H.D. Smith and Brazil consolidation contributions, integration costs, and the effect of higher debt and interest expense.
- Cash conversion and working-capital trends, including customer receivables; Walgreens Boots Alliance-related revenue was $40.2 billion for nine months and the net receivable was $5.8 billion at June 30, 2018.
- The company reported that its revenue outlook was 8%–11% growth for fiscal 2018; confirm subsequent results against that guidance.