Business context and reporting period
This is AmerisourceBergen Corporation’s unaudited Form 10-Q for the fiscal third quarter and nine months ended June 30, 2011. The filing company is AmerisourceBergen, not Cencora as stated in the request metadata. The company operates primarily in U.S. and Canadian pharmaceutical distribution and reports one consolidated segment.
Financial performance
Amounts are U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | Three months ended June 30, 2011 | Change year over year | Nine months ended June 30, 2011 | Change year over year |
|---|---|---|---|---|
| Revenue | $20,161 | +2.9% | $59,810 | +2.7% |
| Gross profit | $654 | +11.1% | $1,921 | +8.9% |
| Operating income | $317 | +12.5% | $959 | +12.1% |
| Net income | $184 | +13.0% | $559 | +12.9% |
| Diluted EPS | $0.66 | +15.8% | $2.00 | +16.3% |
| Gross margin | 3.24% | +24 bps | 3.21% | +18 bps |
| Operating margin | 1.57% | +13 bps | 1.60% | +13 bps |
- Operating cash flow for the nine months was $808 million, up from $559 million; capital expenditures were $127 million. Cash and cash equivalents were $2.00 billion at June 30, 2011, versus $1.66 billion at September 30, 2010.
- Total debt was $1.36 billion, including $392 million of 5⅝% senior notes due 2012. The company reported $670.5 million of available capacity on its multi-currency revolver and $700 million on its receivables facility, which had no borrowings outstanding. Current assets were $11.12 billion and current liabilities $10.01 billion.
- Cash returned to shareholders included $400 million of share repurchases and $87 million of dividends during the nine months. The quarterly dividend was increased to $0.115 per share in May 2011.
Material changes versus the prior comparable period
- ABDC revenue grew 4%, while ABSG revenue declined 2% for the quarter and 3% for the nine months. ABSG weakness reflected a lost third-party logistics contract, lower dialysis-provider sales, and greater use of specialty generics.
- Gross profit and margins benefited from specialty generic launches, non-specialty generic programs, and manufacturer fee-for-service agreements. The combined benefit from Oxaliplatin, Gemcitabine, and Docetaxel exceeded the prior-year Oxaliplatin-only benefit by about $50 million for the quarter and $77 million for the nine months.
- Operating expenses rose 9.8% for the quarter and 5.9% for the nine months, notably due to ERP transition costs, Energiz consulting, pension expense, and incentive compensation. The prior-year quarter included a favorable $4.4 million legal adjustment.
- EPS grew faster than net income, in part because weighted-average shares declined about 3%, primarily reflecting repurchases net of stock-option exercises.
- Operating cash flow improved, but included a $122 million deferred-tax provision, primarily associated with tax bonus depreciation on Business Transformation capital expenditures. Receivables increased $94 million, partly offset by a $56 million inventory decrease.
Outlook, commentary, risks and unusual items
- Management continued to expect fiscal 2011 revenue growth of 2%–4% and an ongoing effective tax rate of approximately 38.4%. It expected about $175 million of fiscal 2011 capital expenditures and approximately $40 million annually in incremental dual-platform IT costs during the ERP transition, expected to continue through calendar 2012.
- Management expected the current $500 million repurchase authorization to be completed by fiscal year-end; $198 million remained at June 30. Future operating cash flows and borrowing capacity were expected to fund ongoing requirements.
- Oxaliplatin inventory was fully depleted in the quarter; further supply was not expected until a planned August 2012 relaunch. Contributions from Gemcitabine and Docetaxel were expected to moderate from the September 2011 quarter as additional suppliers entered and customer reimbursement rates declined.
- A large retail customer, formerly Long’s Drugs, was expected to leave after September 30, 2011. Medco, which generated 18% of fiscal 2010 revenue and approximately 5% of earnings, announced its planned merger with Express Scripts in July 2011. The existing Medco contract ran at least through March 2013; failure to retain the combined entity could significantly affect revenue, earnings, and cash flow.
- In July 2011, an appellate court reinstated certain state False Claims Act claims in the Aranesp qui tam matter; related proceedings were scheduled for trial in October 2011. The company said it could not predict the outcome. The Ontario rebate-payment order and related complaint also remained unresolved. Management cautioned that adverse litigation outcomes could materially affect results or financial condition.
- Other risks include generic and branded drug pricing, reimbursement and regulatory changes, customer or supplier concentration and loss, controlled-substance enforcement, competition, interest-rate and currency movements, and ERP implementation delays, control issues, or cost overruns. Disclosure controls were assessed effective at quarter-end; the ERP-related internal-control changes remained in progress.
- Unusual items included $1.2 million of antitrust settlement gains in the current quarter and nine-month period, compared with $19.1 million and $20.7 million, respectively, in the prior-year periods. The nine-month period also included a $1.9 million gain on a note receivable from a prior business disposition.
Important facts for investors to verify
- Confirm the legal issuer and reporting period: the supplied filing is AmerisourceBergen’s quarter ended June 30, 2011, not a filing under the Cencora name.
- Track the Medco merger and post-March 2013 contract renewal prospects, as well as the retail customer departure after September 2011.
- Monitor generic-drug supply, margin normalization, and the timing and impact of the Oxaliplatin relaunch.
- Review the ERP implementation timetable, incremental costs, and related financial-reporting controls.
- Follow the qui tam and Ontario proceedings, and the near-term 2012 senior-note maturity and refinancing plans.