Business context and reporting period
The filing is AmerisourceBergen Corporation’s Form 10-K for the fiscal year ended September 30, 2009; it is not a quarterly filing. The registrant named in the filing is AmerisourceBergen Corporation, notwithstanding the Cencora company label in the request. The company distributes pharmaceuticals and provides related services, primarily in the United States and Canada. Its sole reportable segment is Pharmaceutical Distribution, comprising ABDC, AmerisourceBergen Specialty Group and AmerisourceBergen Packaging Group.
Financial performance and liquidity
- Fiscal 2009: Total revenue was $71.76 billion, up 2%; gross profit was $2.10 billion, up 3%; operating income was $883.7 million, up 7%; income from continuing operations was $511.9 million, up 9%; and net income was $503.4 million. Diluted EPS was $1.69 from continuing operations and $1.66 overall.
- Margins: Gross margin was 2.93% and operating margin 1.23%, compared with 2.92% and 1.18%, respectively, in fiscal 2008.
- Cash flow: Operating cash flow was $783.8 million, versus $737.1 million in 2008. Capital expenditures were $145.8 million; operating cash flow less capital expenditures was approximately $637.9 million.
- Balance sheet at September 30, 2009: Cash and equivalents were $1.009 billion; debt was $1.178 billion; accounts receivable were $3.917 billion; inventory was $4.973 billion; and stockholders’ equity was $2.716 billion. Current assets of $9.954 billion slightly exceeded current liabilities of $9.480 billion, with inventory representing a substantial portion of current assets.
- Borrowing capacity: The company reported $1.158 billion of additional availability under revolving and receivables facilities. The $700 million receivables securitization facility had no borrowings outstanding and was due to expire in April 2010.
- Fiscal 2009 fourth quarter: Revenue was $18.716 billion, operating income $224.6 million, continuing-operations income $130.1 million, net income $130.1 million and diluted EPS $0.44. Comparable 2008 fourth-quarter figures were revenue of $17.158 billion, operating income of $202.7 million, continuing-operations income of $115.1 million, net income of $114.9 million and diluted EPS of $0.36.
Material changes versus prior comparable periods
- ABDC revenue grew 1.8%, partly offset by the loss of retail-chain business representing approximately $3 billion in annualized revenue beginning July 2008. Management said fiscal 2009 revenue growth would have been 5% excluding that loss.
- Specialty Group revenue rose 7% to $15.6 billion. Anemia-related product revenue fell approximately 7%; oncology-related anemia product sales fell approximately 25%.
- Gross profit improved on generic-program growth, higher fee-for-service contributions and Specialty Group growth, partly offset by a $15.5 million influenza-vaccine inventory write-down and competitive pressure. A $10.2 million fee relating to prior-period sales also benefited fiscal 2009.
- Net income increased sharply from fiscal 2008’s $250.6 million, which included a $225.8 million after-tax discontinued-operations charge to reduce the carrying value of PMSI. Fiscal 2009 included an $8.5 million discontinued-operations loss.
- Operating cash flow rose year over year, aided by higher accounts payable and accrued liabilities; it also reflected significant increases in receivables and inventory. Management attributed much of the year-end working-capital movement to 12% September revenue growth and roughly $400 million of late-September inventory purchases.
- The company repurchased $450.4 million of stock and paid $62.7 million in dividends in fiscal 2009. It completed a two-for-one stock split in June 2009.
Outlook, commentary, risks and unusual items
- Management forecast fiscal 2010 revenue growth of 5%–7% for ABDC and ABSG, with stronger growth expected in the first half because of two significant customers added in March and April 2009. It estimated U.S. pharmaceutical market growth of 3%–5% for calendar 2010. No specific fiscal 2010 earnings guidance is stated in the supplied filing text.
- Management expected approximately $140 million of fiscal 2010 capital expenditures and approximately $350 million of fiscal 2010 share repurchases, subject to market conditions. A new $500 million repurchase authorization was approved in November 2009. The quarterly dividend was raised to $0.08 per share in November 2009.
- The Business Transformation project, including a new ERP platform, was expected to require significant investment through fiscal 2011. Risks include implementation cost overruns, operating disruption and potential effects on financial reporting controls.
- Key business risks include intense price competition; customer and supplier consolidation; dependence on major customers (Medco represented 17% of fiscal 2009 revenue); branded-price inflation and generic-price deflation; customer or supplier credit failures; and changes to Medicare, Medicaid and other reimbursement policies.
- Regulatory and legal matters include a pending qui tam case alleging improper promotion of Amgen’s Aranesp involving company business units, and an Ontario Ministry of Health and Long-Term Care C$5.8 million rebate-payment order that the Canadian subsidiary appealed. The company said it could not predict the outcomes. The filing also describes an ongoing Department of Justice investigation and related subpoenas.
- Fiscal 2009 included $11.8 million of intangible-asset impairment charges, $5.4 million of facility-consolidation, severance and other charges, and the influenza-vaccine inventory write-down. A $1.8 million favorable customer-litigation settlement partly offset costs. The company also reported an $11.4 million balance of unpaid severance, lease-cancellation and other charges at year-end.
- After year-end, the company issued $400 million of 4.875% senior notes due 2019 and used the proceeds to repay substantially all amounts outstanding under its multicurrency revolver. Renewal of the receivables facility and refinancing of the Blanco facility, both due in 2010, remain relevant liquidity items.
Most important facts for investors to verify
- Whether fiscal 2010 growth guidance was achieved, particularly after the large retail-chain loss and the first-half customer additions.
- Customer concentration and contract-renewal exposure, especially Medco’s 17% revenue share and the top ten customers’ approximately 41% share.
- Cash conversion and working-capital sustainability, given the year-end increases in accounts payable, receivables and inventory.
- Renewal and terms of the receivables securitization facility and refinancing of other facilities due in 2010; confirm the effect of the November 2009 note issuance.
- Developments and potential financial exposure from the Aranesp qui tam litigation, DOJ investigation and Ontario rebate-payment order; the filing does not provide a clear quantified loss estimate for these matters.
- ERP implementation progress, associated spending and whether expected efficiency gains materialize.