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, 2019. The filing identifies the issuer as AmerisourceBergen; the request metadata identifies the company as Cencora. Its principal business is pharmaceutical distribution, supplemented by animal health and global commercialization services.
Financial performance
Amounts below are in U.S. dollars. Quarter comparisons are against the three months ended June 30, 2018; year-to-date comparisons are against the nine months ended June 30, 2018.
| Metric | Fiscal Q3 2019 | Fiscal Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $45.24 billion | $43.14 billion | $133.95 billion | $124.64 billion |
| Gross profit | $1.23 billion | $1.21 billion | $3.95 billion | $3.58 billion |
| Operating income | $406.7 million | $389.2 million | $932.1 million | $1.29 billion |
| Net income attributable to AmerisourceBergen | $302.0 million | $275.8 million | $722.7 million | $1.43 billion |
| Diluted EPS | $1.43 | $1.25 | $3.42 | $6.44 |
- Quarter revenue increased 4.9%; nine-month revenue increased 7.5%. Pharmaceutical Distribution Services revenue rose 4.7% and 7.5%, respectively. Other revenue rose 8.6% and 7.1%.
- Quarter gross margin was approximately 2.72% versus 2.81%; nine-month gross margin was approximately 2.95% versus 2.87%. Pharmaceutical Distribution Services’ disclosed gross margin was 2.08% for the quarter and 2.15% year to date.
- Quarter operating income increased 4.5%. Nine-month operating income declined 27.7%, principally due to a $570 million PharMEDium asset impairment.
- Quarter net income and diluted EPS improved year over year. Nine-month net income and EPS fell substantially, reflecting the impairment and the prior-year period’s significant tax benefit from U.S. tax reform.
- Nine-month operating cash flow was $1.67 billion, versus $746.0 million. The 2019 total included a $964.7 million increase in accounts payable and was partly offset by increases in receivables of $672.7 million and inventory of $280.1 million. Capital expenditures were $230.8 million.
- Cash and cash equivalents were $3.00 billion at June 30, 2019. Total debt was $4.18 billion, including $178.98 million of nonrecourse debt; reported long-term debt, net of current portion, was $4.02 billion. The company reported $2.58 billion of additional availability under listed credit facilities and was compliant with relevant covenants.
- Current assets were $27.40 billion and current liabilities $28.79 billion. The filing notes that supplier credit and operating cash generation support working-capital and other funding needs.
Material changes versus the prior comparable period
- Nine-month revenue growth benefited in part from the prior-year consolidation of Profarma and acquisition of H.D. Smith; these transactions also affected comparability of expenses and segment results.
- The $570 million PharMEDium impairment was recorded in fiscal Q2 2019 after production suspension at its Memphis facility and related regulatory matters. It reduced nine-month operating income and was allocated primarily to intangible assets.
- Nine-month antitrust settlement gains were $142.7 million, compared with $35.9 million a year earlier; the current-year quarter gains were $3.5 million, versus $35.6 million.
- The company reversed a previously accrued $22 million New York opioid stewardship assessment after the law was ruled unconstitutional; the state appealed.
- Cash dividends declared rose to $0.40 per share per quarter from $0.38. The company repurchased $522.8 million of shares during the nine-month period.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2019 revenue growth in the mid-single digits and approximately $300 million of capital expenditures for the year. It expected operating cash flow and borrowing capacity to fund ongoing cash requirements.
- PharMEDium’s Memphis facility remained suspended. A May 2019 consent decree permits operations at Dayton and Sugar Land subject to compliance, independent audits and other conditions; resumption in Memphis requires FDA-approved remediation and certification. The company recorded ongoing remediation costs and ceased production at its Cleveland, Mississippi facility in April 2019.
- The company faces numerous opioid-related lawsuits and government investigations. It said it could not assess likely outcomes or exposure for these matters; potential losses for many proceedings were not reasonably estimable and could materially affect results, cash flows or financial condition.
- Other stated risks include pharmaceutical pricing and reimbursement pressure, customer or supplier concentration and contract terms, regulation of controlled substances and compounding, litigation, and execution and integration risks. Walgreens Boots Alliance accounted for $15.1 billion of quarterly revenue and $45.0 billion year to date; the related agreements expire in 2026.
- The company reported $112.5 million of unrecognized tax benefits, including interest and penalties. It expected to pay $182.6 million of transition tax in installments beginning January 2021.
- Management anticipated adopting the lease accounting standard in fiscal Q1 2020 and expected a material balance-sheet impact; it could not yet reasonably estimate effects on results or cash flows.
Important facts for investors to verify
- Whether PharMEDium meets consent-decree requirements and whether Memphis production can resume, including the financial effects of continued disruption.
- Developments in opioid litigation, government investigations and related potential settlements or penalties, for which the company said exposure was not estimable.
- How much reported cash generation reflects sustainable operating performance versus working-capital timing, particularly changes in accounts payable and receivables.
- Whether mid-single-digit fiscal 2019 revenue growth and the approximately $300 million capital expenditure expectation remain achievable.
- The sustainability and comparability of antitrust settlement gains, LIFO credits and tax benefits in reported earnings.