Business context and reporting period
This is AmerisourceBergen Corporation’s unaudited Form 10-Q for the quarter ended March 31, 2019 (fiscal Q2) and the six months then ended. The request identifies Cencora, Inc.; the filing itself is under AmerisourceBergen, its historical name. The business comprises pharmaceutical distribution, animal health, and global commercialization services.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $43.32 billion | $41.03 billion | $88.71 billion | $81.50 billion |
| Gross profit | $1.425 billion | $1.256 billion | $2.722 billion | $2.368 billion |
| Operating income | $47.6 million | $481.4 million | $525.4 million | $900.4 million |
| Net income attributable to AmerisourceBergen | $27.1 million | $287.5 million | $420.8 million | $1.149 billion |
| Diluted EPS | $0.13 | $1.29 | $1.97 | $5.19 |
| Operating cash flow | Not presented by quarter | $1.103 billion | $(77.2) million |
- Q2 revenue rose 5.6%; six-month revenue rose 8.8%. Pharmaceutical Distribution Services drove growth, supported by large-customer and specialty-product sales; prior-year acquisitions and Brazil consolidations also benefited the six-month comparison.
- Reported gross margin was approximately 3.3% in Q2 and 3.1% for the six-month period. Distribution Services’ gross margin was 2.38% and 2.19%, respectively, each down 3 basis points year over year. Larger-customer sales and weaker compounding contribution pressured margins.
- Operating income fell 90.1% in Q2 and 41.6% for six months, primarily due to a $570 million PharMEDium long-lived-asset impairment. Prior-year six-month earnings also included a substantial tax benefit from the 2017 Tax Act.
- Six-month operating cash flow improved to $1.103 billion from cash use of $77.2 million. The improvement was substantially affected by a $1.351 billion increase in accounts payable, alongside increases in receivables and inventory. Capital expenditures were $161.5 million; cash flow less capital expenditures was approximately $941.8 million.
- At March 31, cash and equivalents were $2.876 billion; total debt was $4.292 billion, including $282.9 million of short-term debt and $4.010 billion of long-term debt. The company reported $2.449 billion of additional availability across specified credit facilities and was compliant with facility covenants. In April, it repaid $150 million of securitization-facility borrowings.
- Quarterly dividend increased 5% to $0.40 per share. The company repurchased $323.9 million of shares during the six months and had $801.9 million remaining under its new $1 billion repurchase authorization.
Material changes, outlook and risks
- Management expected fiscal 2019 revenue growth in the mid-single digits and approximately $300 million of capital expenditures. It said operating cash flows and borrowings were expected to meet ongoing cash requirements.
- The $570 million impairment reduced PharMEDium’s asset group to a measured fair value of $222 million from a $792 million carrying value. The estimate depends on uncertain FDA remediation costs and timing, resumption of production, and future margins.
- PharMEDium’s Memphis facility had been suspended since December 2017. Management considered a consent decree with the FDA and DOJ likely during the quarter ending June 30, 2019; continued operations at other facilities and resumption in Memphis were subject to conditions and audits. The company also reported ceasing production at its Cleveland, Mississippi facility in April 2019.
- Opioid-related lawsuits and government investigations remained ongoing; the company said it could not assess likely outcomes or exposure, and possible losses were generally not reasonably estimable. Legal and opioid-related costs were $28.4 million for the six-month period. The New York Opioid Stewardship Act accrual of $22 million was reversed after the Act was ruled unconstitutional; the state appealed, but the company did not consider a loss probable.
- Antitrust litigation settlement gains of $52.0 million in Q2 and $139.3 million for six months, and LIFO credits of $66.8 million and $69.8 million, respectively, boosted gross profit. These are unusual items; the LIFO credit followed a reduction in estimated fiscal-year brand inflation.
- Walgreens Boots Alliance generated $14.6 billion of Q2 revenue and $29.9 billion for six months under related agreements, representing significant customer concentration. The filing identifies contract renewal, reimbursement and pricing pressures, regulation, customer and supplier concentration, opioid litigation, and compounding compliance among material risks.
- ASC 606 adoption had an immaterial impact. The company expected adoption of lease accounting standard ASC 842 in fiscal Q1 2020 to materially affect the balance sheet; the effect on results and cash flows was not yet estimable.
Important facts for investors to verify
- Progress and financial impact of PharMEDium’s FDA/DOJ consent decree, remediation, and facility restart plans.
- Developments in opioid lawsuits and investigations, including whether any loss exposure becomes estimable.
- How much operating cash flow reflects sustainable earnings versus working-capital timing, especially supplier payments and receivables.
- Whether fiscal 2019 mid-single-digit revenue growth and approximately $300 million of capital spending remain achievable.
- Dependence on Walgreens Boots Alliance and the terms and continuity of the related agreements.
- Effects of litigation-settlement gains, LIFO estimates, and tax items on comparable underlying earnings.