Business context and reporting period
AmerisourceBergen Corporation’s Form 10-K covers the fiscal year ended September 30, 2018. The requested “2018 Q4” is the three months ended that date; the filing is an annual report, not a standalone quarterly filing. The company distributes pharmaceuticals and provides related services, with Pharmaceutical Distribution Services as its principal reportable segment and global commercialization and animal health businesses reported in “Other.”
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Revenue | $167.94 billion | $153.14 billion |
| Gross profit | $4.61 billion | $4.55 billion |
| Operating income | $1.44 billion | $1.06 billion |
| Net income attributable to AmerisourceBergen | $1.66 billion | $364.5 million |
| Diluted EPS | $7.53 | $1.64 |
| Operating cash flow | $1.41 billion | $1.50 billion |
| Capital expenditures | $336.4 million | $466.4 million |
| Cash and cash equivalents, at year end | $2.49 billion | $2.44 billion |
| Total debt, at year end | $4.31 billion | $3.44 billion |
Fiscal 2018 gross margin was approximately 2.75% and operating margin approximately 0.86%. Pharmaceutical Distribution Services gross margin was 2.14%, down 2 basis points year over year. Net income included a $438.5 million income tax benefit; the company recognized $612.6 million of tax benefits related to the 2017 Tax Act.
Fourth-quarter results
Fiscal Q4 revenue was $43.30 billion, gross profit $1.03 billion, operating income $154.1 million, net income $194.0 million, and diluted EPS $1.07. Versus Q4 fiscal 2017, revenue rose from $39.12 billion, while gross profit declined from $1.17 billion; operating results improved from a $135.0 million loss. Q4 gross profit included $83.5 million of LIFO expense, $26.6 million of PharMEDium remediation costs, and a $22.0 million estimate for the New York opioid assessment. Q4 net income also reflected discrete tax benefits associated with tax reform.
Material changes versus the prior comparable period
- Annual revenue grew 9.7%, principally from Pharmaceutical Distribution Services growth, the H.D. Smith acquisition, and consolidation of Brazilian operations. H.D. Smith was acquired for $815 million; the company also acquired NEVSCO for $70 million.
- Gross profit increased only 1.5%, as segment growth was partly offset by a $67.3 million LIFO expense (versus a $157.8 million LIFO credit in 2017), PharMEDium remediation costs, and the New York opioid assessment.
- Reported operating income rose 36.2%, primarily because 2017 included substantial litigation charges. In contrast, total segment operating income declined 1.8%; Pharmaceutical Distribution Services segment operating income fell 1.0% and Other fell 5.0%.
- Operating cash flow decreased to $1.41 billion from $1.50 billion. Working-capital movements included higher receivables and lower accrued expenses, partly offset by increased accounts payable.
- Debt increased by approximately $868 million, reflecting acquisition financing and consolidation of Brazilian debt. The company repurchased $663.1 million of shares and paid $333.0 million in dividends during fiscal 2018.
Outlook, risks, contingencies, and unusual items
- Management expected mid-single-digit revenue growth in fiscal 2019 and approximately $300 million in capital expenditures.
- Management expected the lower U.S. corporate tax rate to continue benefiting the effective tax rate through fiscal 2019.
- PharMEDium’s Memphis facility remained suspended following FDA inspections. The company was in discussions with FDA and DOJ about remediation and whether a consent decree was necessary; operations and results remained adversely affected, with no assured restart date stated.
- Opioid-related lawsuits and government investigations remained ongoing. The company said it could not assess likely outcomes or exposure. Fiscal 2018 included $61.5 million of opioid-related litigation costs and a $22.0 million New York assessment accrual; potential future assessments or legal outcomes could materially affect results.
- A five-year Corporate Integrity Agreement took effect in September 2018 following resolution of specified federal civil claims, including a $625 million payment plus interest. The company also disclosed a separate three-year DOJ Compliance Agreement arising from a subsidiary’s guilty plea.
- Key business risks include customer concentration (Walgreens Boots Alliance represented approximately 33% of revenue; Express Scripts 13%), pricing and generic-drug deflation, reimbursement and regulatory changes, and integration and impairment risks. The company recorded a $59.7 million goodwill impairment at Profarma.
- After year end, revolving-credit and receivables-facility maturities were extended, and the board authorized a new $1 billion share-repurchase program. These are subsequent events, not year-end balances.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded acquired H.D. Smith and Brazilian businesses, which represented 5% of assets, 2% of revenue, and 3% of net income.
Important facts for investors to verify
- Whether the Memphis PharMEDium facility resumes commercial distribution, and the timing and cost of remediation or any consent decree.
- The company’s ultimate exposure from opioid litigation, investigations, and assessments beyond the $22 million New York accrual.
- How much of reported earnings growth reflects tax reform and prior-year litigation charges versus sustainable operating improvement; compare segment operating income with GAAP results.
- Whether revenue growth translates into stronger margins and cash generation amid customer concentration, pricing pressure, and rising debt.
- Progress on H.D. Smith and Brazil integration, the Profarma impairment outlook, and the effect of subsequent financing changes.