Business context and reporting period
The filing is AmerisourceBergen Corporation’s unaudited Form 10-Q for the fiscal quarter and six months ended March 31, 2010. The company, now known as Cencora, Inc., reported one consolidated reportable segment, Pharmaceutical Distribution, serving healthcare providers and pharmaceutical manufacturers, principally in the United States and Canada.
Financial results and key metrics
Amounts are U.S. dollars; income statement and cash flow figures below are in millions unless stated otherwise.
| Metric | Fiscal Q2 2010 | Fiscal Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $19,300.6 | $17,311.7 | $38,636.5 | $34,650.0 |
| Gross profit | $612.1 | $552.5 | $1,175.4 | $1,042.3 |
| Operating income | $311.2 | $248.3 | $573.6 | $446.2 |
| Net income | $181.0 | $143.4 | $332.3 | $254.4 |
| Diluted EPS | $0.63 | $0.47 | $1.15 | $0.83 |
| Operating cash flow | Not presented quarterly | $346.4 | $32.4 |
- Q2 revenue rose 11.5%; gross profit rose 10.8%; operating income rose 25.4%; net income rose 26%; diluted EPS from continuing operations increased 34%.
- Six-month revenue rose 11.5%; gross profit increased 12.8%; operating income increased 28.6%; continuing-operations income rose 30%; diluted EPS from continuing operations increased 39%.
- Gross margin was 3.17% in Q2 versus 3.19% a year earlier; for six months it was 3.04% versus 3.01%. Operating margin improved to 1.61% from 1.43% in Q2 and to 1.48% from 1.29% for six months.
- At March 31, cash and equivalents were $1.20 billion, total debt was $1.36 billion, and stockholders’ equity was $2.83 billion. Debt increased from $1.18 billion at September 30, 2009. Current assets were $10.17 billion and current liabilities were $9.43 billion.
- Six-month capital expenditures were $88.0 million, versus $68.6 million. Cash increased by $190.5 million over the six months.
Material changes versus the prior comparable periods
- Growth reflected ABDC revenue increases of 13% and ABSG growth of 5% in the quarter and 6% for six months. New large buying-group customers added in March and April 2009, above-market growth at some major customers, and market growth contributed.
- More than half of Q2 gross-profit growth and about two-thirds of six-month growth came from new generic launches. Generic program revenue grew more than 20%; an oncology generic launched in August 2009 generated an unusually strong benefit. Q2 also included approximately $12 million from completing a generic-supplier rebate reconciliation.
- Operating expenses as a percentage of revenue fell to 1.56%, reflecting operating leverage and productivity. Prior-year expenses included higher facility-consolidation, severance, and impairment charges.
- Interest expense rose, mainly because average borrowings increased. The company issued $400 million of 4⅞% senior notes due 2019 and used most proceeds to repay revolving-credit borrowings. Average diluted shares declined about 6%, supporting EPS growth; share repurchases were $255.2 million in the six-month period.
- Operating cash flow increased from $32.4 million to $346.4 million. The prior-year period included substantial working-capital outflows; current-period cash generation was partly offset by lower payables and accrued liabilities and modest increases in receivables and inventory.
Outlook, risks, contingencies, and unusual items
- Management expected fiscal 2010 revenue growth of 7%–8%, with slower growth in the second half as the company lapped the prior-year addition of significant customers. No EPS forecast is provided in the supplied filing text.
- Management expected second-half gross-profit contribution from generic launches to be significantly below the unusually high first-half benefit. Operating expenses were expected to increase in the second half, including from annual merit increases and the Business Transformation/ERP project. Fiscal 2010 capital expenditures were estimated at about $140 million, potentially higher depending on project timing.
- Management said cash flows and borrowing capacity were expected to fund ongoing needs. Available capacity at March 31 included $672.7 million under the multi-currency revolver and $700 million under the receivables facility; the latter had no outstanding borrowings. The facilities and $55 million Blanco facility matured in 2011, with amendments extending facility terms described in the filing.
- Key business risks include competition and customer consolidation, customer or supplier credit problems, generic and branded drug pricing, reimbursement and regulatory changes, reliance on major customers, interest and foreign-exchange movements, and successful delivery of the ERP transformation.
- Legal matters include the Ontario Ministry of Health rebate-payment order of C$5.8 million, which the company appealed, and a Bergen Brunswig employment-benefit dispute with appellate argument scheduled for May 17, 2010. A federal qui tam case alleging conduct related to Amgen’s Aranesp was dismissed on April 23, 2010, after quarter-end; appeals remained possible and the DOJ investigation and related sealed allegations continued. A shareholder derivative action was also pending. Management said outcomes could not be predicted.
- The company recorded a $1.5 million antitrust-settlement gain in the six-month period. Separately, it reported that a May 5, 2010 settlement was expected to produce an $18.8 million gain in the quarter ending June 30, 2010. Unrecognized tax benefits were $55.1 million; approximately $5.4 million could be released within 12 months through audit resolutions or statute expirations.
Important facts for investors to verify
- Whether fiscal 2010 revenue growth reached the 7%–8% outlook, and how growth changed after the prior-year customer additions were lapped.
- How much gross profit depended on the exceptional generic-launch benefit and the $12 million rebate reconciliation, and whether margins held as those benefits faded.
- Whether operating cash flow remained strong after working-capital timing effects, and whether liquidity facilities were renewed on acceptable terms.
- Progress, costs, and operational risks associated with the ERP/Business Transformation project and expected capital spending.
- Developments in the Ontario, Bergen Brunswig, qui tam/DOJ, and derivative matters, including any appeals or material financial exposure.
- Actual completion and recognition of the expected $18.8 million antitrust-settlement gain, and movements in debt, repurchases, and dividends.