Amneal Pharmaceuticals, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Amneal develops, manufactures, markets and distributes generic and specialty pharmaceuticals. Its Generics and Specialty businesses were joined by AvKARE after Amneal acquired a 65.1% controlling interest in AvKARE and R&S Northeast on January 31, 2020. The acquisition expanded distribution and sales to government and institutional customers.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $464.7 | $404.6 | $963.2 | $850.8 |
| Gross profit (margin) | $144.2 (31%) | $105.2 (26%) | $327.7 (34%) | $188.3 (22%) |
| Operating income (loss) | $10.8 | $(18.9) | $68.5 | $(113.3) |
| Consolidated net income (loss) | $(23.9) | $(50.5) | $97.6 | $(175.3) |
| Net income (loss) attributable to Amneal | $(12.0) | $(16.9) | $103.1 | $(64.8) |
| Operating cash flow | Not presented quarterly | $228.3 | $(87.3) |
Q2 revenue increased 15%; the principal contributor was $67 million from the acquisitions, alongside new generic launches and higher Specialty volumes. Six-month revenue increased 13%, with acquisition contributions and new launches partly offset by erosion in Generics and international divestitures. Generics revenue declined 9% in Q2 and 8% for the six-month period; Specialty revenue rose 35% and 37%, respectively. AvKARE contributed $63.8 million of Q2 revenue and reported a $2.3 million segment operating loss.
Gross margin improved chiefly because impairment and inventory-related charges were lower than in the prior-year periods. Six-month 2020 income also benefited substantially from a $106 million income tax benefit under the CARES Act; the company received $106 million of the related refund in July and expected the remaining $4 million by year-end. Thus, reported six-month net income is not solely reflective of operating performance.
Cash and cash equivalents were $266.1 million at June 30, 2020, compared with $151.2 million at year-end 2019. Working capital was approximately $825.9 million. Net cash used in investing was $271.0 million, including $254.0 million paid for acquisitions; net cash provided by financing was $157.9 million, including proceeds from acquisition financing.
Debt, net of issuance costs, was $2.794 billion at June 30, 2020, including the $2.645 billion principal-term-loan balance and $177.8 million Rondo term loan. The balance sheet also showed approximately $36.7 million of related-party seller notes. The main term loan bears variable interest at one-month LIBOR plus 3.5% and matures in 2025. Amneal drew $300 million on its revolver in March as a precaution and repaid it by quarter-end; $414 million of revolver capacity was reported available in July. Amneal and Rondo reported compliance with their respective debt covenants.
Material changes, outlook and risks
- Management reported temporary manufacturing and packaging delays at certain New York and New Jersey facilities during April and May because of COVID-19 restrictions. Facilities returned to normal productivity in June and July; management planned to increase production in the second half to offset reduced Q2 output. Further disruption could materially affect Q3 and Q4 results and cash flows. No numerical earnings or revenue guidance was provided.
- The company continued a restructuring plan targeting a reduction of approximately 300–350 employees through December 31, 2020, primarily involving cessation of manufacturing at its Hauppauge, New York facility.
- A material weakness in internal controls over cash disbursements arose from inadequate controls over changes to vendor banking details, which allowed payments to be redirected. Management reported no financial loss or material financial-statement impact, but concluded disclosure controls were ineffective at June 30. Remediation was expected before year-end 2020.
- Contingencies include generic-drug pricing and antitrust litigation, opioid-related claims, ranitidine/NDMA and metformin/NDMA litigation, patent disputes, and government investigations. The company recorded $5.8 million of net legal charges for the first half. It stated that potential losses in several proceedings could not be estimated; adverse outcomes could materially affect results, cash flows or financial condition.
- Three customers represented approximately 84% of Q2 gross product sales, highlighting customer concentration. The company also cited generic price erosion, competition, supply-chain dependence, product approvals and substantial indebtedness as ongoing risks.
- The cash-flow hedge generated a substantial unrealized loss: the six-month statement reported a $72.4 million loss, net of tax, attributable across the company and non-controlling interests. The related fair-value swap liability was $56.1 million at June 30.
Important facts for investors to verify
- How much of revenue and operating performance growth is sustainable after separating AvKARE and R&S acquisition contributions, new launches, and lower prior-year impairments?
- Whether the company achieves its planned second-half production recovery and avoids further COVID-related supply disruption.
- Debt balances, variable-rate exposure, available revolver capacity, covenant headroom and the cash-flow demands of servicing debt.
- The status and potential financial exposure of antitrust, opioid, ranitidine, metformin and government-investigation matters; many loss amounts are not estimable in the filing.
- Progress in remediating the vendor-banking control weakness and the outcome of subsequent control testing.
- The timing and amount of remaining CARES Act tax refunds, and any future tax receivable agreement obligations; the filing describes an approximately $202 million contingent TRA liability if related tax benefits become realizable.