AmerisourceBergen Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2016; comparisons are with the three months ended December 31, 2015. The filing is under AmerisourceBergen Corporation, Cencora’s former name.
Business context and financial performance
The company distributes pharmaceuticals and provides related services. Its reportable segments are Pharmaceutical Distribution and Other, which includes consulting, specialty logistics, and animal health businesses.
- Revenue: $38.17 billion, up 4.0%. Pharmaceutical Distribution revenue increased 3.9%; Other increased 5.4%.
- Gross profit: $1.04 billion, up 7.5%. The decline in LIFO expense to $28.3 million from $101.6 million more than offset lower Pharmaceutical Distribution gross profit.
- Operating income: $400.0 million, versus an operating loss of $178.1 million a year earlier. Prior-year results included $467.4 million of warrant expense and a $48.7 million pension settlement charge. Segment operating income increased 2.0% to $486.2 million.
- Net income and EPS: Net income was $247.2 million, down from $329.6 million; diluted EPS was $1.11 versus $1.45. The prior-year quarter included a large tax benefit associated with exercised warrants, which outweighed the effect of the warrant expense on reported net income.
- Margins: Pharmaceutical Distribution gross margin was 2.06%, down 13 basis points; Other gross margin was 18.60%, up from 17.85%. Distribution, selling, and administrative expense was 1.36% of revenue, down 7 basis points.
- Cash flow: Operating activities used $430.4 million, compared with $751.6 million generated in the prior-year quarter. Inventory and receivables increases were the principal uses. Capital expenditures were $137.3 million; cash and cash equivalents fell by $950.7 million to $1.79 billion.
- Debt and liquidity: Total debt was $4.14 billion, including $608.0 million current debt; long-term debt was $3.53 billion. The company reported $2.45 billion of additional availability under facilities and stated it was compliant with debt covenants. Current assets were $23.08 billion and current liabilities $25.54 billion.
- Capital returns: The quarterly dividend rose 7% to $0.365 per share. The company repurchased $229.9 million of stock during the quarter.
Material changes and management commentary
- Pharmaceutical Distribution gross profit declined 2.2%, primarily reflecting less favorable terms from fiscal 2016 renewals with a significant GPO customer and Kaiser, lower price appreciation, and a mix shift toward larger, lower-margin customers. PharMEDium’s contribution partly offset these pressures.
- Other segment operating income increased 17.4%, with higher contributions from MWI and ABCS. Management attributed lower administrative costs to efficiency initiatives.
- Receivables and inventory rose with business growth and seasonal needs. Days sales outstanding increased to 22.7 from 20.8, partly due to extended payment terms for the largest customer; management expected this measure to rise further through the first half of fiscal 2017.
- Reported 2015 comparative figures were revised for lease accounting corrections, reducing prior-year diluted EPS by $0.01. The revision did not change cash flow for that quarter.
Outlook, risks, and contingencies
- Fiscal 2017 outlook: Revenue growth of 6.5%–8.0%; operating cash flow of $1.6–$1.9 billion; and capital expenditures of approximately $500 million. No earnings guidance is provided in the supplied filing text.
- Management cited pharmaceutical pricing and reimbursement pressure, customer and supplier consolidation, contract renewals, payment-term changes, and competition as factors that could affect results and cash generation. One significant customer contract, with Express Scripts, was scheduled to expire in September 2017.
- Walgreens Boots Alliance (WBA), a related party and significant shareholder, generated $11.2 billion of quarterly revenue under various arrangements; the company’s net receivable from WBA was $4.6 billion at quarter-end.
- Legal matters include federal investigations and subpoenas involving oncology distribution and controlled-substance diversion, and an investigation concerning a product dispensed by U.S. Bioservices. The company said outcomes and potential exposure were not estimable and could include significant settlements or penalties.
- A West Virginia state proceeding was settled for $16.0 million, recognized in the quarter, with the company denying wrongdoing. Related county and city claims were pending or threatened. In a separate customer dispute, ABDC had a $48.6 million partial judgment against PharMerica, but it was not collectible at the reporting date; trial was scheduled for January 2018.
- Unrecognized tax benefits were $92.2 million, including interest and penalties. The company also noted that forthcoming revenue-recognition and lease accounting standards were under evaluation.
Key facts for investors to verify
- Whether revenue growth and the fiscal 2017 revenue outlook were supported by subsequent customer volumes and contract renewals.
- How customer payment terms, seasonal inventory needs, and working-capital movements affected actual full-year operating cash flow.
- Whether lower price appreciation and unfavorable contract economics continued to pressure Pharmaceutical Distribution margins.
- The status and potential financial impact of the federal investigations, controlled-substance matters, and related West Virginia claims.
- WBA-related concentration, the Express Scripts contract renewal, debt maturities, and use of remaining share-repurchase authorization.