Business context and reporting period
This is AmerisourceBergen Corporation’s unaudited Form 10-Q for its fiscal third quarter and nine months ended June 30, 2021. The filing registrant is AmerisourceBergen (ticker ABC). Its main business is pharmaceutical distribution; “Other” includes animal health, global commercialization services, and, from June 1, 2021, Alliance Healthcare.
Financial performance and position
| Metric | Three months ended June 30, 2021 | Change year over year | Nine months ended June 30, 2021 | Change year over year |
|---|---|---|---|---|
| Revenue | $53.406 billion | +17.7% | $155.076 billion | +10.3% |
| Gross profit | $1.888 billion | +54.0% | $4.874 billion | +26.8% |
| Operating income | $620.7 million | +53.3% | $1.792 billion | +83.3% |
| Net income attributable to AmerisourceBergen | $292.1 million | Up from $289.4 million | $1.102 billion | Down from $1.437 billion |
| Diluted EPS | $1.40 | Down from $1.41 | $5.31 | Down from $6.95 |
| Cash from operations | Not separately reported for the quarter | $1.657 billion | Up from $907.8 million |
Margins and earnings drivers: Pharmaceutical Distribution Services gross margin was 2.14% for the quarter and 2.19% for the nine-month period, improving year over year by 6 and 8 basis points, respectively. Company gross profit benefited from higher segment gross profit, LIFO credits versus prior-year LIFO expense, and $147.4 million of antitrust settlement gains in the quarter and nine-month period. The quarter also included a $113.9 million LIFO credit. These items, along with acquisition and litigation costs, affected comparability.
Cash, debt, and liquidity: At June 30, cash and cash equivalents were $2.553 billion, versus $4.598 billion at September 30, 2020; cash, cash equivalents, and restricted cash totaled $2.682 billion. Total debt was $7.103 billion, up from $4.120 billion, principally reflecting financing for Alliance Healthcare. The company reported $3.930 billion of additional availability across listed credit facilities and stated that it was compliant with applicable debt covenants. Nine-month investing cash use was $5.970 billion, including $5.537 billion net cash paid for Alliance Healthcare; capital expenditures were $273.4 million. Nine-month financing cash provided was $2.397 billion.
Material changes versus the prior comparable period
- Revenue growth reflected Pharmaceutical Distribution Services growth and the June 2021 Alliance Healthcare acquisition. Pharmaceutical Distribution Services revenue rose 13.2% in the quarter and 8.7% for nine months; Alliance Healthcare contributed $1.925 billion of revenue after closing and $20.6 million of pretax earnings.
- Alliance Healthcare was acquired for total estimated consideration of approximately $6.955 billion, including cash, shares, and accrued consideration. The purchase price allocation remains preliminary.
- Nine-month diluted EPS and net income were lower than the prior year, despite higher operating income. The prior-year period included substantial tax benefits related to PharMEDium and COVID-19 relief provisions; 2021 results included a $127.6 million deferred tax expense from UK tax reform.
- Distribution, selling, and administrative expenses rose 37.0% for the quarter and 16.2% for nine months, largely due to Alliance Healthcare and payroll costs. Employee severance, litigation, and other expense was $227.0 million for the quarter, including opioid-related accruals and acquisition costs.
- Quarterly dividends declared increased to $0.44 per share from $0.42. The company issued two million shares to WBA as part of the Alliance Healthcare consideration.
Outlook, commentary, risks, and contingencies
- Management expected fiscal 2021 revenue growth in the low double digits, reflecting the Alliance Healthcare acquisition, and expected approximately $400 million of fiscal-year capital expenditures. The filing provides no clear numerical earnings or EPS guidance.
- Management cited drug utilization, specialty product demand, new therapies, generic and biosimilar competition, price inflation or deflation, reimbursement pressure, customer and supplier terms, regulation, and COVID-19 effects as factors that could affect results.
- On July 21, 2021, after quarter-end, the company and two other national distributors announced a proposed opioid settlement, subject to participation conditions. AmerisourceBergen could pay up to approximately $6.4 billion over 18 years. The company had accrued approximately $6.7 billion for opioid matters, including an estimated $477 million short-term liability; it cautioned that ultimate loss could differ materially. A separate New York settlement agreement was also announced after quarter-end.
- Other notable exposures include ongoing opioid lawsuits and government investigations, other litigation and contingencies, uncertain tax positions of $512.8 million, and risks integrating Alliance Healthcare and operating across additional international markets. Management stated that future operating cash flows and borrowings were expected to fund ongoing needs, including anticipated opioid payments.
- The company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed opioid settlement conditions are met, the final payment obligations and timing, and whether the recorded accrual remains adequate.
- Alliance Healthcare’s final purchase-price allocation, integration costs, performance, and contribution to future results and cash flows.
- How much reported gross-profit and operating-income growth is sustainable apart from antitrust settlement gains and LIFO credits.
- The impact of higher debt and acquisition financing on interest expense, leverage, liquidity, and covenant headroom.
- Future tax expense and cash-tax effects, including UK tax reform and resolution of uncertain tax positions.