Business context and reporting period
AmerisourceBergen Corporation’s unaudited Form 10-Q covers its fiscal first quarter ended December 31, 2017, compared with the quarter ended December 31, 2016. The company distributes pharmaceuticals and provides related services; its segments are Pharmaceutical Distribution Services and Other, which includes animal health and commercialization/logistics businesses.
Financial performance
Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Revenue | $40,466 | $38,169 | Up 6.0% |
| Gross profit | $1,113 | $1,038 | Up 7.2%; prior period included $28.3 million LIFO expense |
| Operating income | $419 | $400 | Up 4.7% |
| Income before taxes | $359 | $363 | Down modestly; includes $23.8 million debt-retirement loss |
| Net income | $862 | $247 | Increase primarily reflects tax reform benefits |
| Diluted EPS | $3.90 | $1.11 | Increase primarily reflects tax reform benefits |
| Cash from operating activities | $10 | $(430) | Improved year over year, but remained low |
| Capital expenditures | $74 | $137 | Management expects approximately $325 million for FY2018 |
Pharmaceutical Distribution Services revenue rose 5.8%; Other revenue rose 11.6%. Distribution segment gross margin was 2.04%, down 1 basis point year over year; Other gross margin was 20.75%, compared with 22.36%. Distribution, selling and administrative expense increased 7.3% and was 1.38% of revenue, up 2 basis points.
Liquidity and debt
At December 31, 2017, cash and cash equivalents were $3.038 billion, total debt was $4.287 billion (including $4.267 billion long-term), and current liabilities were $26.740 billion. The company reported $2.445 billion of additional availability under specified credit facilities and was compliant with its debt covenants. Operating cash flow reflected the seasonal $460 million inventory build and tax-related cash-flow items; management cited working-capital timing as a source of significant period-to-period cash-flow variation. Days sales outstanding increased to 24.4 from 22.7, attributed to payment-term changes with the largest customer.
Quarter-end cash flow included $735 million net cash from financing, principally new senior notes, and cash increased to $3.038 billion. The company issued $1.25 billion of notes, used proceeds in part to retire $400 million of 2019 notes, and completed the $815 million H.D. Smith acquisition on January 2, 2018, funded with new long-term debt. The filing says cash flows and borrowing capacity are expected to fund ongoing requirements.
Material changes and unusual items
- The Tax Cuts and Jobs Act produced a provisional $587.6 million discrete tax benefit: a $897.6 million deferred tax benefit from remeasuring deferred taxes, partly offset by $310.0 million of transition-tax expense. The reported income tax benefit was $502.8 million and the effective tax rate was (140.1)%, versus a 31.9% tax rate a year earlier. Management expected the lower federal rate to benefit the effective tax rate through fiscal 2019; tax accounting remained provisional, with completion expected by September 30, 2018.
- Pharmaceutical compounding revenue and gross profit were reduced after production at the Memphis 503B outsourcing facility was voluntarily suspended in December pending remedial measures. The quarter included $8.3 million of related fixed costs and scrapped inventory. Management anticipated resumption in the March 2018 quarter but said results would remain adversely affected until the facility was fully operational.
- Employee severance, litigation and other costs were $30.0 million, including $23.1 million severance and other costs, $4.1 million deal-related costs and $2.8 million litigation costs. The prior-year quarter included a $16.0 million litigation settlement.
- In December, the company acquired NEVSCO for $70 million. In January, it completed the H.D. Smith acquisition for $815 million and invested a further $78.1 million in Profarma and its Brazilian specialty joint venture, obtaining controlling interests to be consolidated in future periods.
- The quarterly dividend increased 4% to $0.38 per share. The company repurchased $22.5 million of shares during the quarter; $766.4 million remained available under its repurchase authorization.
Outlook, risks and contingencies
Management expected FY2018 revenue to increase 8%–11%. The outlook is subject to pharmaceutical market growth, brand and generic pricing, reimbursement pressure, competition and customer consolidation, contract economics, and regulatory changes. Management also cited ongoing distribution-center and IT implementation costs.
Legal exposures include opioid-related lawsuits and government investigations; the company said it could not assess likely outcomes or estimate exposure for those matters. A separate agreement in principle with the U.S. Attorney’s Office for the Eastern District of New York would resolve specified civil False Claims Act claims for $625 million, subject to final terms, related-party resolutions and court approval. The reserve had been accrued in fiscal 2017 and remained unpaid at quarter end. Other investigations and claims could result in significant, currently unestimable settlements, penalties or operating restrictions.
Additional risks include prolonged interruption at the Memphis compounding facility, integration and performance of acquisitions, dependence on significant customer and supplier relationships, working-capital and payment-term changes, variable interest rates, and tax-position uncertainty. The company reported $249 million of unrecognized tax benefits, including interest and penalties. It also expected the adoption of the lease accounting standard to materially affect its balance sheet; the effect on results and cash flows was not yet estimable.
Key facts for investors to verify
- How much of the reported earnings increase is attributable to the one-time, provisional tax benefit, and what tax effects are finalized?
- Whether the Memphis 503B facility resumed production as anticipated and how its interruption affected subsequent revenue, gross profit and costs.
- Final settlement terms and payment timing for the $625 million federal civil matter, and developments in opioid litigation and other investigations.
- H.D. Smith’s post-acquisition contribution, financing impact and integration progress, alongside the consolidation of the Brazilian investments.
- Whether revenue growth meets the 8%–11% FY2018 outlook while margins, operating costs and working-capital cash flow remain under pressure.
- The company’s exposure to Walgreens Boots Alliance: related-party revenue was $12.2 billion for the quarter and the receivable was $5.3 billion at December 31, 2017.