AmerisourceBergen Corporation (now Cencora, Inc.) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2009. The filing is under the name AmerisourceBergen Corporation; it does not use the Cencora name. Financial statements are unaudited. Amounts below are in U.S. dollars.
Business context and reporting period
The company distributed pharmaceuticals and provided related services to healthcare providers and manufacturers, principally in the United States and Canada, with packaging operations in the United Kingdom. Its operating businesses were reported together as the Pharmaceutical Distribution segment. In May 2009, it acquired Canadian specialty-services company Innomar Strategies for $13.4 million. It had completed the sale of workers’ compensation business PMSI in October 2008.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue, including bulk deliveries | $18.394 billion, up 2% from $17.997 billion | $53.044 billion, essentially unchanged from $53.032 billion |
| Gross profit | $519.2 million, up 4%; gross margin 2.82% versus 2.77% | $1.562 billion, up 3%; gross margin 2.94% versus 2.87% |
| Operating income | $213.0 million, up 8%; operating margin 1.16% versus 1.10% | $659.1 million, up 5%; operating margin 1.24% versus 1.18% |
| Income from continuing operations | $125.1 million versus $112.8 million; diluted EPS $0.42 versus $0.35 | $381.7 million versus $354.0 million; diluted EPS $1.25 versus $1.08 |
| Net income (loss) | $118.8 million versus a loss of $108.0 million | $373.3 million versus $135.7 million |
For the nine months, operating cash flow was $430.5 million, compared with $223.0 million. Investing activities used $101.8 million, and financing activities used $293.8 million. Cash and equivalents were $912.9 million at June 30, 2009, versus $878.1 million at September 30, 2008. Total debt was $1.191 billion. The company reported $1.145 billion of additional availability under revolving and receivables-securitization facilities. Total current assets were $9.138 billion and current liabilities were $8.587 billion.
Material changes versus prior comparable periods
- Quarter revenue growth reflected two new large customers and growth at AmerisourceBergen Specialty Group (ABSG), partly offset by the loss of national retail-chain business effective July 1, 2008. Excluding that lost business, quarterly revenue would have grown 6%, according to management.
- Nine-month revenue was flat: ABSG revenue rose 6%, while AmerisourceBergen Drug Corporation (ABDC) revenue declined 1%. Bulk deliveries fell 42% for the nine months, primarily because business shifted to operating-revenue accounting; management said the change had no significant operating-margin impact.
- Gross-margin gains reflected generic-program growth, manufacturer service fees and brand-price appreciation. Nine-month results also included a $12.7 million loss on the influenza-vaccine program, including a $15.5 million excess-inventory write-down; the prior-year period benefited from $13.2 million in litigation settlements and a $1.6 million antitrust settlement gain.
- Net income comparisons were affected by PMSI discontinued operations. The prior-year quarter included a $222.5 million non-cash charge related to the PMSI divestiture; 2009 discontinued-operation losses were much smaller. Continuing-operations earnings provide a clearer view of the ongoing business.
- Share repurchases reduced weighted-average shares by about 7% year over year in both reported periods, contributing to diluted EPS growth. The company completed a two-for-one stock split in June 2009; reported share and per-share data are adjusted for it.
Outlook, management commentary, risks and unusual items
- Management expected fiscal 2009 total revenue growth of 1%–3%, with ABDC growth of 0%–2% and ABSG growth of 5%–7%. It expected the national retail-chain loss to be anniversary-comparable in the September quarter. Management cited industry competition, generic conversions and the economic slowdown as constraints on market growth.
- Management expected an approximately 38% fiscal 2009 effective tax rate and about $140 million in fiscal-year capital expenditures. It expected to repurchase approximately $350 million of shares in fiscal 2009, subject to cash generation and market conditions; $273.8 million had been repurchased in the first nine months. Operating-income growth was expected to be reduced by approximately 3% over the next twelve months following renewal of a large customer contract.
- Key business risks included continued declines in anemia-drug sales and possible changes to FDA guidance or Medicare reimbursement; customer or supplier loss, credit stress and disruption in credit markets; generic and brand pricing pressures; and execution, cost or systems risks associated with the new ERP platform. Management also highlighted possible Canadian provincial measures to lower drug prices and service fees.
- Ontario authorities ordered the Canadian subsidiary to pay C$5.8 million over alleged rebate violations; the company appealed and said it believed it had complied with applicable requirements. The matter had a $3.0 million legal accrual in the quarter. A related Health Canada complaint was reported, but the subsidiary had not received a copy at filing.
- The company appealed a court ruling that could require an additional approximately $6.6 million plus interest in the Bergen Brunswig executive-benefits matter. It also reported ongoing New York Attorney General inquiries and post-trial proceedings in the RxUSA case, where the jury had ruled in the company’s favor.
- Unrecognized tax benefits were $53.5 million, including interest and penalties; management said audit outcomes and statute expirations could reduce them by approximately $12.4 million within twelve months. Management did not believe pending litigation would materially affect financial condition, but noted adverse resolutions could materially affect results in a reporting period.
- Credit facilities were amended in April 2009: the receivables facility was reduced from $975 million to $700 million and extended to April 2010; the Blanco facility was extended to April 2010, with higher borrowing costs. The company cited a $55 million reduction in revolving-credit availability following a lender’s bankruptcy.
Important facts for investors to verify
- Whether revenue and earnings growth can be sustained after the national retail customer contract renewal and amid the disclosed customer and market pressures.
- Progress and costs of the ERP/business-transformation project, including whether it can be implemented without material disruption or overruns.
- Subsequent developments in the Ontario rebate matter, Bergen Brunswig appeal, NYAG inquiry, and tax examinations and uncertain tax positions.
- Cash conversion and working-capital trends, particularly accounts receivable, inventory, supplier-payment timing and the reliance on available credit facilities.
- Actual performance against fiscal 2009 revenue, capital-expenditure and share-repurchase expectations, and the impact of the anemia-drug and influenza-vaccine businesses.