AmerisourceBergen Corporation — Form 10-Q Summary
Reporting period: Three months ended December 31, 2011 (fiscal 2012 first quarter), compared with the three months ended December 31, 2010. The filing entity was AmerisourceBergen Corporation; the filing predates the Cencora name. Financial statements are unaudited.
Business context and key financial metrics
- The company operated as a pharmaceutical services and distribution business, reporting one consolidated segment: Pharmaceutical Distribution.
- Revenue: $20.36 billion, up 2.4% year over year. Gross profit was $593.1 million, up 2.2%; operating income was $284.9 million, up 2.9%.
- Profit: Net income was $162.1 million, up 1.0%. Diluted EPS was $0.62 versus $0.57, an increase of about 9%, helped by a 6% reduction in weighted-average diluted shares.
- Margins: Gross margin was 2.91% versus 2.92%; operating margin was 1.40% versus 1.39%. The filing does not provide a net margin figure.
- Cash flow: Operating cash flow was $431.7 million, versus cash used of $99.2 million a year earlier. Investing activities used $298.6 million, including $250.5 million for acquisitions; financing activities provided $411.3 million. Cash increased $544.3 million to $2.37 billion.
- Liquidity and debt: Current assets were $11.96 billion and current liabilities $11.30 billion. Total debt was $1.93 billion, including $447.1 million current; cash exceeded reported debt by approximately $441 million. The company reported $1.30 billion of additional availability under revolving and receivables facilities.
- Returns to shareholders: Quarterly dividend declared was $0.13 per share, up from $0.10. The company repurchased 3.3 million shares for $119.9 million during the quarter.
Changes versus the prior comparable period
- Revenue and operating income rose modestly, while net income increased only 1%; diluted EPS grew faster, principally due to fewer shares outstanding.
- Operating cash flow improved substantially from the prior-year use of cash. Working-capital movements were significant: collections and higher payables supported cash generation, partly offset by inventory growth.
- Interest expense increased to $22.6 million from $19.1 million, reflecting higher average borrowings, including the new 2021 notes.
- The prior-year quarter included a nonrecurring $12 million gross-profit benefit related to a customer acquisition, tempering the year-over-year gross-margin comparison.
Outlook, management commentary, risks, and unusual items
- Management expected fiscal 2012 revenue to be relatively flat or grow modestly versus fiscal 2011. It expected fiscal-year operating cash flow of $850–$950 million and capital expenditures of approximately $150 million.
- Management expected fiscal 2012 interest expense to be significantly higher than fiscal 2011 and an ongoing effective tax rate of approximately 38.4%. It expected to repurchase approximately $400 million of stock in fiscal 2012, subject to market conditions.
- Management anticipated more than 30 brand-to-generic conversions, expected to substantially offset lower gross profit from three specialty generic oncology drugs. Actual generic launch economics could differ materially from expectations.
- The November 2011 acquisition of TheraCom cost $250 million. TheraCom provides pharmaceutical commercialization, reimbursement, and patient-support services; its annualized revenue was approximately $700 million. The acquisition added $172.4 million of goodwill and was described as immaterial to reported-period pro forma results.
- Customer concentration is a material risk. The company ceased serving a large retail customer, the former Long’s Drugs, effective October 1, 2011. Medco represented 19% of fiscal 2011 revenue and about 5% of earnings; its announced merger with Express Scripts could affect the relationship after the current contract, which runs at least through March 2013.
- Other risks include generic pricing and launch uncertainty, manufacturer pricing and distribution policies, customer consolidation and credit conditions, reimbursement and regulatory changes, IT/ERP implementation, and interest-rate and foreign-exchange movements.
- The company issued $500 million of 3.5% senior notes due 2021 and extended the maturities of its $700 million revolving credit and $700 million receivables securitization facilities to 2016 and 2014, respectively. The $392.3 million 5⅝% notes were due in September 2012.
- Legal matters include a preliminary qui tam settlement expected to be finalized in fiscal 2012; a $16 million charge had been recorded in fiscal 2011. The company also disclosed an unresolved Ontario rebate payment order for C$5.8 million and related proceedings. It stated it could not predict the outcomes of these matters.
- Unrecognized tax benefits were $45.8 million, including interest and penalties; approximately $5 million could be reduced within the next 12 months through audit resolutions or statute expirations.
Important facts for investors to verify
- Whether Medco’s merger affected renewal prospects or customer concentration after the existing contract period.
- Actual fiscal 2012 revenue, operating cash flow, capital spending, and share repurchases versus management’s stated expectations.
- Generic conversion profitability and the extent to which it offset lower contributions from the three named specialty generics.
- Repayment or refinancing of the September 2012 notes and compliance with credit-facility covenants.
- Final outcomes and any additional costs related to the qui tam settlement, Ontario proceedings, and other disclosed legal matters.
- Whether working-capital-driven cash flow and liquidity remained sustainable beyond this quarter.