Amneal Pharmaceuticals, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results are compared with the three months ended March 31, 2019; balance-sheet figures are compared with December 31, 2019. Amounts below are in millions, except per-share data.
Business context
Amneal develops, manufactures, markets and distributes generic and branded pharmaceuticals. On January 31, 2020, it acquired a 65.1% controlling interest in AvKARE and R&S, adding a third reporting segment focused on government and other pharmaceutical distribution. The acquired businesses contributed $58.0 million of segment revenue and $0.3 million of operating income during the quarter.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $498.5 | $446.1 |
| Gross profit | $183.5 | $83.1 |
| Gross margin | 36.8% | 18.6% |
| Operating income (loss) | $57.8 | $(94.4) |
| Net income (loss) | $121.5 | $(124.8) |
| Net income (loss) attributable to Amneal | $115.1 | $(47.9) |
| Basic and diluted EPS attributable to Amneal | $0.78 | $(0.37) |
| Cash provided by (used in) operating activities | $49.0 | $(108.4) |
Revenue rose 12%. Growth from AvKARE, new generic launches and specialty-product volumes was partly offset by generic price erosion and divestitures. Generics revenue declined 8% to $352.6 million; Specialty revenue increased 38% to $88.0 million. The 2019 comparison included substantially higher impairment charges and $36 million of Levothyroxine transition-related cost of goods sold. Consequently, the year-over-year gross-margin and earnings improvement is not solely indicative of underlying operating growth.
Q1 2020 included a $108.2 million income-tax benefit, principally a discrete $110 million CARES Act benefit tied to carrying back 2018 net operating losses; the company expected approximately $110 million in cash refunds during 2020. The benefit materially increased reported net income.
Cash, debt and liquidity
- At March 31, cash and cash equivalents were $405.2 million; restricted cash was $1.7 million.
- Operating cash flow was $49.0 million. Investing activities used $262.0 million, primarily reflecting $253.6 million for acquisitions. Financing activities provided $468.0 million, including $300 million drawn on the revolving facility and $180 million in acquisition term-loan proceeds.
- Balance-sheet debt included $2.772 billion of long-term debt, net, $29.7 million of current long-term debt, $300 million outstanding on the revolving facility, and related-party notes payable of approximately $36.3 million. The company’s main term loan bears variable interest and matures in May 2025; the acquisition term loan was $180 million and matures in January 2025.
- The $500 million revolving facility had $194 million available at March 31. After repaying $200 million of the $300 million drawn in May, management reported $394 million of additional capacity as of May 11. The company said it expected available resources to fund operations and obligations over the next 12 months, while noting dependence on operating conditions and product demand.
- Amneal reported compliance with debt covenants at quarter-end. The AvKARE/R&S financing is held by Rondo; Amneal stated it is not a party to, or guarantor of, that facility.
Changes, outlook and risks
- Acquisition and financing: AvKARE and R&S expanded the business and increased debt and acquired intangible assets. Their purchase-price allocation remained preliminary.
- COVID-19: Management reported no significant Q1 operating impact, but warned that restrictions and staffing or operating challenges at New York and New Jersey facilities could cause manufacturing and packaging delays in April and May and materially affect Q2 results and cash flows. The company said it could increase production in Q3 and Q4 to offset lower output, if necessary. Supply-chain, customer-demand, liquidity and asset-impairment effects remained uncertain.
- Outlook: No numeric revenue, earnings or cash-flow guidance is provided in the filing. Management expressed confidence in liquidity for the next 12 months, subject to economic conditions and demand.
- Legal and regulatory matters: The company recorded $4.5 million of Q1 charges for commercial legal matters and reported $15 million of liabilities for commercial and governmental proceedings at March 31. It faces numerous generic-drug pricing and antitrust matters, opioid-related litigation and investigations, and ranitidine-related claims; the filing generally says potential losses cannot be estimated. A Texas Medicaid pricing matter was settled in March. A metformin demand letter and anticipated lawsuit were disclosed after quarter-end.
- Other unusual items: The cash-flow hedge generated a $62.7 million unrealized loss, net of tax, in other comprehensive income. Impairment charges were $2.4 million, primarily associated with products experiencing price erosion, delayed launches or a discontinued development partnership. The company also expects potential Tax Receivable Agreement obligations if tax attributes become realizable; no related liability was accrued at quarter-end.
Important facts for investors to verify
- How much of reported earnings and the expected cash refund depend on the CARES Act tax carryback, and when the refund is received.
- Whether Q2 manufacturing delays occurred, their effects on sales and cash flows, and whether later production could offset lost output.
- Post-acquisition performance, integration costs and final purchase-price allocation for AvKARE and R&S.
- Debt balances, variable-rate interest exposure, revolver availability and covenant headroom after the May repayment.
- Developments in antitrust, opioid, ranitidine and other legal matters, including any change in the ability to estimate losses.
- Exposure to customer concentration: the three largest customers represented approximately 81% of gross product sales in Q1 2020.