AmerisourceBergen Corporation — Form 10-Q Summary
Reporting period: Unaudited fiscal first quarter ended December 31, 2010; comparisons are with the three months ended December 31, 2009 unless otherwise noted. The filing’s registrant name is AmerisourceBergen Corporation (now Cencora, Inc.). Amounts below are in U.S. dollars.
Business context
The company operates a pharmaceutical distribution and related services business, reported as one segment. Its activities include drug distribution, specialty pharmaceuticals, commercialization support, and pharmaceutical packaging, primarily in the United States and Canada.
Financial performance and position
- Revenue: $19.889 billion, up 2.9%. ABDC revenue rose 5%; ABSG revenue fell 4%, partly reflecting a third-party logistics customer’s move to direct manufacturer distribution.
- Profitability: Gross profit was $580.2 million, up 3.0%; operating income was $276.8 million, up 5.5%; net income was $160.5 million, up 6.1%. Gross margin was 2.92% versus 2.91%, and operating margin was 1.39% versus 1.36%.
- Per-share results: Diluted EPS was $0.57 versus $0.52, up 10%; reduced weighted-average shares, partly due to repurchases, contributed to the faster EPS growth. The declared quarterly dividend increased to $0.10 per share from $0.08.
- Cash flow: Operating activities used $99.2 million, compared with $41.7 million used in the prior-year quarter. Investing activities used $50.1 million, including $50.1 million of capital expenditures. Financing activities used $108.0 million. Cash declined $257.3 million to $1.401 billion.
- Balance sheet and liquidity: At December 31, cash was $1.401 billion, current assets $10.428 billion, and current liabilities $9.641 billion. Total debt was $1.403 billion, including $115.4 million classified as current; stockholders’ equity was $2.962 billion. The company reported $1.325 billion of additional availability under revolving and receivables facilities.
Material changes and drivers
- Gross profit benefited from growth in generic programs (generic revenue rose 10%), fee-for-service agreements, favorable price appreciation, and a one-time $12 million customer-related benefit. These gains were partly offset by competitive pressure and lower specialty-generic profit: the combined Oxaliplatin and Gemcitabine benefit in the current quarter was about $20 million below the prior-year Oxaliplatin benefit.
- Operating expenses rose 1% to $303.5 million, with ERP-related costs and depreciation partly offset by lower bad-debt and incentive-compensation costs. Operating expenses were 1.53% of revenue, down from 1.56%.
- Interest expense, net, rose to $19.1 million from $17.3 million, primarily reflecting the 2019 senior notes being outstanding for the full quarter.
- Cash used in operations reflected a $399.7 million reduction in accounts payable, accrued expenses, and income taxes, and a $227.7 million inventory increase, partly offset by a $275.8 million reduction in receivables and net income. Management attributed the payable decline largely to timing of supplier payments, including at ABSG.
- The company repurchased 6.0 million shares for $185.4 million during the quarter. The prior $500 million authorization was completed; $412.9 million remained under the new $500 million program at quarter-end.
Outlook, risks, and unusual items
- Management expected fiscal 2011 revenue growth of 2%–4%, including an estimated impact of about 1 percentage point on company growth from the discontinued logistics contract. It expected an approximately 38.4% effective tax rate and about $150 million of fiscal 2011 capital expenditures.
- The company intended to renew or refinance its multi-currency revolving facility, receivables securitization facility, and Blanco facility, expiring in November 2011, April 2011, and April 2011, respectively. Renewals could be at higher market rates. Management said cash, facility availability, operating cash flows, and supplier credit were expected to fund ongoing needs.
- The ERP rollout was expected to continue through the end of calendar 2012. Dual-system costs, including depreciation, were estimated at approximately $40 million annually during the transition; management intended to offset them through other expense reductions, with no assurance of success. The filing identifies implementation delays, cost overruns, and system disruption as risks. Disclosure controls were deemed effective, while internal controls were being modified and evaluated during the rollout.
- Key risks cited include pharmaceutical pricing and reimbursement changes, generic launch variability, customer or supplier loss or default, competition, regulatory changes, controlled-substance enforcement, interest-rate and foreign-exchange exposure, and liquidity or credit-market conditions.
- Legal matters include an Ontario rebate payment order of C$5.8 million, which the company appealed, and qui tam/False Claims Act litigation concerning alleged promotion and billing practices related to Aranesp. Appeals and a DOJ investigation were pending; a trial was scheduled for July 2011. The company said outcomes could not be predicted.
- Other notable items: a $1.9 million gain on a note receivable relating to a prior business disposition; $49.4 million of unrecognized tax benefits, including interest and penalties; and no outstanding receivables-securitization borrowings at quarter-end.
Important facts for investors to verify
- Whether the fiscal 2011 revenue-growth outlook and the estimated lost-contract impacts were achieved.
- Renewal terms, pricing, and covenant compliance for the facilities due to expire in 2011.
- ERP implementation progress, transition costs, and any effect on internal controls or operations.
- Cash conversion and working-capital trends, particularly supplier payments, inventory, and receivables.
- Developments in the Aranesp-related litigation and investigation, the Ontario matter, and tax examinations or uncertain tax positions.
- How much of gross profit reflects recurring distribution economics versus generic-launch benefits and the $12 million customer-related item.