AmerisourceBergen Corporation — Q2 FY2012 10-Q
Reporting period: Quarter and six months ended March 31, 2012; interim financial statements are unaudited. The filing is by AmerisourceBergen Corporation, the company now known as Cencora, Inc. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
The company distributes pharmaceuticals and provides related services, primarily in the United States and Canada. Its reportable segment is Pharmaceutical Distribution, encompassing drug distribution, specialty services, and commercialization support. It acquired TheraCom on November 1, 2011, expanding reimbursement and patient-support services.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Revenue | $20.071 billion | $19.760 billion | $40.432 billion | $39.649 billion |
| Gross profit | $695.1 million | $687.3 million | $1.288 billion | $1.268 billion |
| Operating income | $368.1 million | $365.2 million | $653.0 million | $642.0 million |
| Net income | $212.1 million | $214.4 million | $374.2 million | $374.9 million |
| Diluted EPS | $0.81 | $0.77 | $1.42 | $1.34 |
| Gross margin | 3.46% | 3.48% | 3.19% | 3.20% |
| Operating margin | 1.83% | 1.85% | 1.62% | 1.62% |
Quarterly revenue rose 1.6%, while net income declined about 1%; diluted EPS increased 5%, supported in part by a 6% reduction in weighted-average diluted shares. For the six-month period, revenue rose 2.0%, net income was nearly flat, and diluted EPS increased 6%. Gross profit growth reflected revenue growth, generic-program performance, brand price increases, and acquisitions, partly offset by lower contributions from three generic oncology drugs and competitive margin pressure.
Cash flow and liquidity: Six-month operating cash flow was $668.1 million, up from $577.2 million. Investing cash outflow was $345.9 million, including $257.7 million for acquisitions; capital expenditures were $88.2 million. Financing provided $178.8 million. Cash ended the period at $2.327 billion, versus $1.826 billion at September 30, 2011. Management expected FY2012 operating cash flow of $1.0–$1.1 billion and capital expenditures of approximately $200 million.
Debt: Total debt was $1.882 billion, including $392.2 million current debt, compared with $1.365 billion at September 30, 2011. The increase primarily reflected issuance of $500 million of 3.5% notes due 2021. At March 31, $94.3 million was outstanding under the multi-currency revolver, with $595.3 million available; the $700 million receivables facility was undrawn. Total disclosed additional availability under those facilities was approximately $1.297 billion. The $392.3 million 5⅝% notes were due September 2012.
Changes, outlook, and notable items
- ABSG revenue grew 6% in the quarter and 5% over six months, with growth primarily from third-party logistics. ABDC revenue was relatively flat for the quarter and up 1% for six months; growth in institutional customers was offset by the loss of a large retail customer and increased use of lower-priced generics.
- Gross-profit contributions from Oxaliplatin, Gemcitabine, and Docetaxel were approximately $53 million lower in Q2 and $56 million lower in the six-month period than in the comparable periods. Oxaliplatin was not available in Q2; management expected relaunch in August 2012. The company expected lower FY2012 contributions from these products, partly offset by more than 30 anticipated brand-to-generic conversions; launch profitability could differ materially from expectations.
- Management expected FY2012 revenue to be relatively flat or grow modestly versus FY2011 and an ongoing effective tax rate of approximately 38.4%. Interest expense was expected to be significantly higher in FY2012, chiefly because of the 2021 notes.
- Medco, which represented 19% of FY2011 revenue and approximately 5% of earnings, merged with Express Scripts in early April 2012. The existing agreement was amended to end when new distribution agreements are awarded and implemented; the combined company expected new contracts to begin October 1, 2012. Management warned that failure to retain this business could significantly affect revenue, earnings, and cash flow beginning FY2013.
- On April 30, 2012, after quarter-end, the company acquired World Courier for $520 million, subject to working-capital adjustment. Its 2012 revenue was estimated at approximately $500 million. The company also reported completing the remaining $179.7 million of availability under its prior buyback authorization after quarter-end and approving a new $750 million repurchase program on May 10, 2012.
- Q2 included $9.0 million of employee severance, litigation, and other charges; six-month charges were $12.6 million. The company had recorded a $16 million charge in FY2011 for a preliminary qui tam settlement and expected to finalize a written agreement in FY2012. It also described an unresolved Ontario rebate-order appeal and related complaint, and other possible sealed litigation; outcomes were uncertain.
- Key risks cited include customer or supplier losses or consolidation, pharmaceutical pricing and generic conversion dynamics, reimbursement and regulatory changes, controlled-substance enforcement, litigation, ERP implementation and system interruptions, acquisition integration, and interest-rate and foreign-currency exposure. Management said disclosure controls were effective and reported no material change in internal control during the quarter.
Most important facts to verify
- Outcome and timing of the Express Scripts RFP, and the potential impact on FY2013 results if the Medco business is not retained.
- Actual FY2012 operating cash flow, revenue growth, and gross-profit contributions from expected generic launches and the three oncology products.
- Funding, integration, and realized performance of the World Courier acquisition, including final purchase-price adjustments.
- Repayment or refinancing of the 2012 notes, debt levels, and compliance with credit-facility covenants.
- Final resolution and financial exposure from the qui tam settlement, Ontario matter, other potential litigation, and uncertain tax positions.