AmerisourceBergen Corporation — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2013 (fiscal Q2); comparisons are with the quarter and six months ended March 31, 2012. The filing is for AmerisourceBergen Corporation, not a registrant named Cencora. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Business context
The company distributes pharmaceuticals and provides related healthcare services. Its reportable operations are Pharmaceutical Distribution and Other. AndersonBrecon and AmerisourceBergen Canada Corporation were classified as discontinued operations following plans to divest them.
Financial results and liquidity
| Metric | Fiscal Q2 2013 | Fiscal Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $20,523.7 | $19,708.4 | $41,583.5 | $39,689.6 |
| Gross profit | $717.0 | $679.7 | $1,377.8 | $1,253.0 |
| Operating income | $350.1 | $377.1 | $649.6 | $660.5 |
| Income from continuing operations | $204.1 | $219.1 | $378.8 | $380.7 |
| Net income | $45.6 | $212.1 | $214.2 | $374.2 |
| Diluted EPS, continuing operations | $0.87 | $0.84 | $1.61 | $1.45 |
| Diluted EPS, total | $0.19 | $0.81 | $0.91 | $1.42 |
- Quarterly revenue grew 4.1%; six-month revenue grew 4.8%. Gross profit rose 5.5% and 10.0%, respectively. Gross margin was 3.49% for the quarter versus 3.45%, and 3.31% for six months versus 3.16%.
- Operating income fell 7.1% in the quarter and 1.7% for six months. Quarterly operating expenses increased 21.2%, including World Courier costs and $3.8 million of warrant expense.
- Net income was sharply lower mainly because discontinued operations recorded a $158.5 million after-tax loss in the quarter, including a $26.9 million goodwill impairment and an estimated $134.8 million loss on the planned sale of ABCC. Six-month discontinued-operations loss was $164.5 million.
- Continuing-operations diluted EPS increased despite lower continuing-operations income, mainly because weighted-average diluted shares fell approximately 10% year over year, reflecting share repurchases.
- Cash from operating activities was $743.7 million for six months, including $698.2 million from continuing operations, versus $668.1 million total in the prior-year period. Working-capital movements included higher receivables and inventories, offset by higher payables and accrued liabilities. Capital expenditures were $88.4 million.
- At March 31, cash and equivalents were $1,347.3 million; current assets were $11,724.8 million and current liabilities $12,042.7 million. Long-term debt was $1,396.3 million, consisting of fixed-rate notes. No borrowings were outstanding under the revolving, receivables securitization, or commercial paper facilities; reported additional facility availability totaled approximately $1,428.0 million.
Changes, outlook and management commentary
- In March 2013, the company announced a ten-year pharmaceutical distribution agreement with Walgreens, expected to begin implementation September 1, 2013, and a generics sourcing arrangement with Walgreens and Alliance Boots. Management expected the agreements to be earnings-accretive in fiscal 2014, excluding warrant expense, specified nonrecurring costs, and start-up expenses.
- Walgreens and Alliance Boots received rights to buy shares and warrants exercisable in 2016 and 2017. The warrants were valued at $314.1 million at March 31; future warrant expense may fluctuate significantly, and exercise could dilute existing shareholders.
- Management forecast fiscal 2013 revenue growth of 11%–13%, citing the Express Scripts contract, the Walgreens agreement, and a full year of World Courier results. It expected Other segment revenue growth of 30%–35%.
- The filing states expected fiscal 2013 operating cash flow of $320 million–$420 million and capital expenditures of at least $220 million. Investors should note the cash-flow forecast alongside the $743.7 million generated in the first six months and confirm the forecast's basis.
- Management expected a fiscal 2013 effective tax rate of approximately 38.2%, and expected to repurchase $400 million of shares during the year, subject to market conditions. Quarterly dividend was raised 62% to $0.21 per share.
- Management anticipated a potentially material change in the estimated annual LIFO provision due to branded inventory needed for Walgreens; it expected to update the estimate in the quarter ending June 30, 2013, with three quarters of the estimated annual expense then recorded cumulatively.
Risks, contingencies and unusual items
- Risks include Walgreens transition and execution, customer and supplier concentration or disruption, reimbursement pressure and generic competition, controlled-substance regulation, and possible dilution from warrants.
- The company disclosed a U.S. Attorney/DEA inquiry into controlled-substance diversion controls and a West Virginia complaint concerning distributor monitoring and alleged diversion. Outcomes were not predictable. Other sealed qui tam matters and a subpoena relating to an oncology distribution business were also disclosed.
- The company finalized a previously accrued $16 million qui tam settlement payment; the settlement with the states was completed in April 2013 with no additional payment required. It stated that the relevant businesses did not admit liability.
- Six-month antitrust settlement gains of $15.8 million reduced cost of goods sold, including $3.5 million in the quarter. Unrecognized tax benefits were $49.4 million, including interest and penalties.
- Management concluded disclosure controls were effective at period-end and reported no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Walgreens contract transition milestones, implementation costs, expected contribution, and the assumptions behind fiscal 2014 accretion.
- Actual fiscal 2013 revenue, operating cash flow, capital expenditure, and share repurchase outcomes versus management's forecasts.
- The subsequent LIFO estimate and inventory requirements tied to Walgreens, including effects on gross margin and cash conversion.
- Progress and financial effects of divesting AndersonBrecon and ABCC, including the estimated ABCC sale loss and any final sale terms.
- Developments in controlled-substance investigations, litigation, and regulatory matters, and any effects on licenses or distribution operations.
- Warrant remeasurement, potential future expense and dilution, and the terms or costs of any hedge strategy.