Business context and reporting period
This is AmerisourceBergen Corporation’s unaudited Form 10-Q for the fiscal quarter and six months ended March 31, 2011 (fiscal Q2 2011). The filing predates the company’s later name, Cencora. Its sole reportable segment was Pharmaceutical Distribution, serving healthcare providers and pharmaceutical manufacturers, primarily in the United States and Canada.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
| Metric | Quarter ended Mar. 31, 2011 | Quarter ended Mar. 31, 2010 | Six months ended Mar. 31, 2011 | Six months ended Mar. 31, 2010 |
|---|---|---|---|---|
| Revenue | $19,760M | $19,301M | $39,649M | $38,636M |
| Gross profit | $687M | $612M | $1,268M | $1,175M |
| Operating income | $365M | $311M | $642M | $574M |
| Net income | $214M | $181M | $375M | $332M |
| Diluted EPS | $0.77 | $0.63 | $1.34 | $1.15 |
| Gross margin | 3.48% | 3.17% | 3.20% | 3.04% |
| Operating margin | 1.85% | 1.61% | 1.62% | 1.48% |
- Quarterly revenue grew 2.4%; gross profit rose 12.3%, operating income 17.4%, and diluted EPS 22%. For the six-month period, revenue increased 2.6%, gross profit 7.8%, operating income 11.9%, and diluted EPS 17%.
- Six-month operating cash flow was $577M, versus $346M a year earlier. Capital expenditures were $94M, compared with $88M. Cash and cash equivalents were $1.912B at March 31, 2011, up from $1.658B at September 30, 2010.
- Total debt was $1.343B, nearly unchanged from fiscal year-end; $55M was variable-rate borrowings. Cash exceeded debt by approximately $570M. Current assets were $10.956B and current liabilities $9.950B.
- Quarterly dividends declared were $0.10 per share, up from $0.08 a year earlier. The company repurchased $255M of shares in the first half.
Material changes and management commentary
- Management attributed margin and profit improvement chiefly to specialty generic launches, continued strength in non-specialty generics, and increased manufacturer fee-for-service revenue. Normal competitive pressure on customer margins partly offset those gains.
- Generic oncology products Oxaliplatin, Gemcitabine, and Docetaxel contributed a combined gross-profit benefit approximately $47M greater in the quarter and $27M greater in the six-month period than Oxaliplatin alone contributed in the comparable 2010 periods. Oxaliplatin contributed about $54M in the quarter and $72M in the six months; existing inventory was expected to be depleted in fiscal Q3, with further supply not expected until a relaunch in August 2012.
- ABDC revenue grew 4% in both the quarter and six-month period. ABSG revenue declined 2% and 3%, respectively, principally after ending a third-party logistics contract in September 2010; quarterly weakness also reflected lower dialysis-provider sales and greater specialty-generic utilization.
- Six-month gross profit included a nonrecurring $12M benefit related to a customer being acquired by a third party. Comparisons also reflect a prior-year $12M generic-supplier rebate reconciliation benefit in the quarter and a $1.5M antitrust settlement gain in the prior-year six-month period.
- Operating expenses increased 7% for the quarter and 4% for the six months, including costs of maintaining legacy and new IT platforms, higher quarterly bad-debt expense, and incentive compensation. The ERP transition was expected to continue through the end of calendar 2012, with incremental platform costs estimated at about $40M annually.
Outlook, liquidity, and risks
- Management maintained fiscal 2011 revenue growth expectations of 2%–4%. The ended logistics contract was expected to reduce company revenue growth by about 1% and ABSG growth by about 5% for the year. The former Long’s Drugs customer, with approximately $2B in annual revenue, was expected to leave after September 30, 2011.
- Management expected approximately $175M of fiscal 2011 capital expenditures and an ongoing effective tax rate of about 38.4%. It expected operating cash flows and borrowing capacity to fund ongoing requirements. The company expected to complete its current $500M share-repurchase authorization by fiscal year-end; $343M remained at March 31.
- A new $700M multi-currency revolving facility was entered into in March 2011, with no borrowings outstanding at quarter-end and approximately $688M available. The $700M receivables securitization facility had no quarter-end borrowings and was amended in April 2011 to extend maturity to April 2014. The $55M Blanco facility maturity was extended to April 2012. Credit facilities contain covenants, including a financial leverage ratio test.
- Risks include changes in generic and branded drug economics, customer or supplier losses and consolidation, reimbursement and regulatory changes, controlled-substance enforcement, interest-rate and foreign-exchange exposure, and execution or cost overruns in the ERP transition. Management reported disclosure controls effective at period-end; ERP-related internal control changes remained under evaluation and testing.
- Contingencies include an Ontario rebate-payment order of C$5.8M, which the company appealed, and related Canadian regulatory matters. A qui tam case concerning alleged promotion and government claims related to Amgen’s Aranesp remained active; appeals and summary-judgment motions were pending, and trial had been moved to October 2011. The company stated it could not predict the outcomes.
- Other commitments included approximately $48M for influenza vaccine purchases, $200M for blood products, and $164M remaining under an IT outsourcing arrangement. Unrecognized tax benefits were $47.1M, including interest and penalties; the company said approximately $2.5M might be reduced over the next 12 months through audit resolutions or statute expirations.
Important facts for investors to verify
- Whether generic oncology-product contributions and gross margins remain sustainable, particularly after expected Oxaliplatin inventory depletion in fiscal Q3.
- Actual revenue and profit effects of the ended logistics contract and the Long’s Drugs customer departure after September 2011.
- Progress, costs, and internal-control outcomes of the ERP implementation, including whether management can offset its estimated incremental costs.
- Developments in the Aranesp litigation and Ontario proceedings, including potential financial exposure not quantified clearly in the filing.
- Use of remaining repurchase authorization, cash generation, and compliance with debt-facility covenants.