On January 31, 2019 AmerisourceBergen Corporation (NYSE:ABC) reported that in its fiscal year 2019 first quarter ended December 31, 2018, revenue increased 12.2 percent to $45.4 billion (Press release, AmerisourceBergen, JAN 31, 2019, View Source [SID1234532987]). On the basis of U.S. generally accepted accounting principles (GAAP), diluted earnings per share (EPS) was $1.84 for the December quarter of fiscal 2019, compared to $3.90 in the prior year quarter. Adjusted diluted EPS, which is a non-GAAP measure that excludes items described below, increased 3.2 percent to $1.60 in the fiscal first quarter.
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The Company narrowed its adjusted diluted EPS guidance for fiscal 2019 to $6.65 to $6.85. The Company does not provide forward-looking guidance on a GAAP basis, as discussed below in Fiscal Year 2019 Expectations.
"We are pleased with the strong start in the first quarter of fiscal 2019. The overall strength and performance of AmerisourceBergen’s portfolio of core Pharmaceutical Distribution businesses delivered outstanding results to help offset the headwind from PharMEDium. We are extremely proud and recognize that this would not have been possible without the execution by our dedicated associates," said Steven H. Collis, Chairman, President and Chief Executive Officer of AmerisourceBergen.
"Our fiscal 2019 outlook remains strong, even as we narrowed fiscal 2019 guidance to reflect the extended delay in the reopening of PharMEDium’s Memphis facility. AmerisourceBergen’s strategic partnerships, leadership in Specialty distribution and services, and strong balance sheet position the company to continue to deliver growth, while we actively work to resolve the challenges at PharMEDium," Mr. Collis continued. "We remain confident in our ability to execute, evolve and transform our business to meet the complex needs of our customers, drive long-term value for our shareholders and ultimately enable access for patients. More than ever, we are united in our responsibility to create healthier futures."
Below, AmerisourceBergen presents descriptive summaries of the Company’s GAAP quarterly results as well as its adjusted (non-GAAP) quarterly results. In the tables that follow, GAAP results and GAAP to non-GAAP reconciliations are presented. For more information related to non-GAAP financial measures, including our fiscal year 2019 expectations, please refer to the Supplemental Information Regarding non-GAAP Financial Measures following the tables.
First Quarter GAAP Results
Revenue: In the first quarter of fiscal 2019, revenue was $45.4 billion, up 12.2 percent compared to the same quarter in the previous fiscal year, reflecting a 12.3 percent increase in Pharmaceutical Distribution Services revenue and an 8.2 percent increase in revenue within Other. The significant increase in revenue growth of our Pharmaceutical Distribution Services segment is due primarily to growth of some of its largest customers, overall market growth, strong oncology product sales, the January 2018 acquisition of H. D. Smith and the January 2018 consolidation of Profarma.
Gross Profit: Gross profit in the fiscal 2019 first quarter was $1.3 billion, a 16.6 percent increase compared to the same period in the previous fiscal year. The increase was primarily due to a 10.8 percent increase in Pharmaceutical Distribution Services gross profit and a 1.4 percent increase in gross profit within Other. Pharmaceutical Distribution Services benefited from an increase in revenue, the January 2018 acquisition of H. D. Smith, and the January 2018 consolidation of Profarma, and was partially offset by a lower contribution from PharMEDium. Gross profit was also favorably impacted by gains from antitrust litigation settlements and the reversal of a previously-estimated assessment related to the New York State Opioid Stewardship Act, offset in part by PharMEDium remediation costs. Gross profit as a percentage of revenue was 2.86 percent, an increase of 11 basis points from the prior year quarter.
Operating Expenses: In the first quarter of fiscal 2019, operating expenses were $819.8 million, compared to $693.7 million in the same period last fiscal year. The increase in operating expenses was due to an increase in operating expenses within Pharmaceutical Distribution Services primarily driven by the January 2018 acquisition of H. D. Smith and the January 2018 consolidation of Profarma. Operating expenses as a percentage of revenue in the fiscal 2019 first quarter was 1.81 percent, compared to 1.71 percent for the same period in the previous fiscal year.
Operating Income: In the fiscal 2019 first quarter, operating income was $477.8 million versus $419.0 million in the prior year quarter as the increase in gross profit exceeded the increase in operating expenses. Operating income as a percentage of revenue increased 1 basis point to 1.05 percent in the fiscal 2019 first quarter compared to the previous fiscal year’s first quarter.
Interest Expense, Net: In the fiscal 2019 first quarter, net interest expense of $42.2 million was up 17.6 percent versus the prior year quarter, primarily due to the debt issued to finance the H. D. Smith acquisition and the consolidation of Profarma’s debt and related interest expense.
Effective Tax Rate: The effective tax rate was 9.4 percent for the first quarter of fiscal 2019 and (140.1) percent in the prior year quarter. The effective tax rates for both periods were significantly lower than the Company’s statutory tax rates due to the 2017 Tax Act.
Diluted Earnings Per Share: Diluted earnings per share was $1.84 in the first quarter of fiscal 2019 compared to $3.90 in the previous fiscal year’s first quarter. This decrease was primarily due to the significant income tax benefit recognized in the prior year period as a result of the 2017 Tax Act.
Diluted Shares Outstanding: Diluted weighted average shares outstanding for the first quarter of fiscal 2019 were 214 million, a 3.1 percent decline versus the prior fiscal year first quarter, due primarily to share repurchases, net of stock option exercises.
Definition of Adjusted (non-GAAP) Results
The comments below compare adjusted results, which exclude:
Gain from antitrust litigation settlements;
LIFO expense / credit;
PharMEDium remediation costs;
New York State Opioid Stewardship Act;
Acquisition-related intangibles amortization;
Employee severance, litigation, and other;
Loss on early retirement of debt; and
One-time tax reform adjustments.
First Quarter Adjusted (non-GAAP) Results
Revenue: No adjustments were made to the GAAP presentation of revenue. In the first quarter of fiscal 2019, revenue was $45.4 billion, up 12.2 percent compared to the same quarter in the previous fiscal year, reflecting a 12.3 percent increase in Pharmaceutical Distribution Services revenue and an 8.2 percent increase in revenue within Other. The significant increase in revenue growth of our Pharmaceutical Distribution Services segment is due primarily to growth of some of its largest customers, overall market growth, strong oncology product sales, the January 2018 acquisition of H. D. Smith and the January 2018 consolidation of Profarma.
Adjusted Gross Profit: Adjusted gross profit in the fiscal 2019 first quarter was $1.2 billion, which was up 8.1 percent when compared to the same period in the previous year, primarily due to the increase in adjusted gross profit in Pharmaceutical Distribution Services, which benefited from an increase in revenue, the January 2018 acquisition of H. D. Smith, and the January 2018 consolidation of Profarma, and was partially offset by a lower contribution from PharMEDium. Adjusted gross profit as a percentage of revenue was 2.65 percent, a decrease of 10 basis points from the prior year quarter.
Adjusted Operating Expenses: In the first quarter of fiscal 2019, adjusted operating expenses were $731.3 million, an increase of 17.1 percent compared to the same period in the last fiscal year, primarily due to the January 2018 acquisition of H. D. Smith and the January 2018 consolidation of Profarma. Adjusted operating expenses as a percentage of revenue in the fiscal 2019 first quarter was 1.61 percent, compared to 1.54 percent for the same period in the previous fiscal year.
Adjusted Operating Income: In the fiscal 2019 first quarter, adjusted operating income of $471.8 million decreased 3.3 percent from the prior year period due to a loss at PharMEDium. Adjusted operating income as a percentage of revenue decreased 17 basis points to 1.04 percent in the fiscal 2019 first quarter compared to the previous fiscal year’s first quarter.
Interest Expense, Net: No adjustments were made to the GAAP presentation of net interest expense. In the fiscal 2019 first quarter, net interest expense of $42.2 million was up 17.6 percent versus the prior year quarter, primarily due to the debt issued to finance the H. D. Smith acquisition and the consolidation of Profarma’s debt and related interest expense.
Adjusted Effective Tax Rate: The adjusted effective tax rate for the first quarter of fiscal 2019 was 19.9 percent and 24.2 percent in the previous fiscal year’s first quarter. The prior year adjusted effective tax rate did not benefit in full from the 2017 Tax Act, which was effective January 1, 2018.
Adjusted Diluted Earnings Per Share: Adjusted diluted earnings per share was up 3.2 percent to $1.60 in the first quarter of fiscal 2019 compared to $1.55 in the previous fiscal year’s first quarter, driven by the benefit from a lower share count.
Diluted Shares Outstanding: No adjustments were made to the GAAP presentation of diluted shares outstanding. Diluted weighted average shares outstanding for the first quarter of fiscal 2019 were 214 million, a 3.1 percent decline versus the prior fiscal year first quarter, due primarily to share repurchases, net of stock option exercises.
Segment Discussion
The Company’s operations are comprised of the Pharmaceutical Distribution Services reportable segment and other operating segments that are not significant enough to require separate reportable segment disclosure and, therefore, have been included in Other for the purpose of reportable segment presentation. Other consists of operating segments that focus on global commercialization services and animal health and includes AmerisourceBergen Consulting Services (ABCS), World Courier and MWI Animal Health (MWI).
Pharmaceutical Distribution Services Segment
Pharmaceutical Distribution Services revenue was $43.7 billion, an increase of 12.3 percent compared to the same quarter in the prior fiscal year. Segment operating income of $373.2 million in the December quarter of fiscal 2019 was down 3.9 percent compared to the same period in the previous fiscal year, due to a loss at PharMEDium compared to a significant contribution in the prior year period.
Other
Revenue in Other was $1.7 billion in the first quarter of fiscal 2019, an increase of 8.2 percent compared to the same period in the prior fiscal year, primarily due to the January 2018 consolidation of the specialty joint venture in Brazil, growth at World Courier and ABCS’s growth in its Canadian operations. Operating income in Other decreased 1.3 percent to $98.9 million in the first quarter of fiscal 2019. This decrease was primarily driven by a decline in operating income at MWI and the Lash consulting group within ABCS, and was partially offset by the increased contribution from World Courier.
Recent Company Highlights & Milestones
AmerisourceBergen announced the appointment of Silvana Battaglia to its executive team as Executive Vice President and Chief Human Resources Officer.
Good Neighbor Pharmacy, AmerisourceBergen’s independent pharmacy network, was ranked #1 for "Best Customer Service" by Newsweek.
The AmerisourceBergen Foundation announced its collaboration with more than 20 not-for-profit organizations over the past year to provide necessary funding to mitigate prescription drug misuse and abuse. As part of the Foundation’s comprehensive approach, it has also distributed nearly one million drug deactivation resources through its Safe Disposal Support Program to 44 states and 140 organizations across the U.S.
World Courier, a worldwide leader in specialty logistics, announced a multimillion dollar technology transformation initiative to improve customer experience, quality assurance and operational efficiencies.
Biosimilars Canada, an association representing Canada’s biosimilar makers, announced that it had chosen AmerisourceBergen’s Canadian operations business unit, Innomar Strategies, to be the preferred provider for the association’s Patient Support Program (PSP) platform.
AmerisourceBergen announced the installation of more than two megawatts of solar arrays at its California Distribution Facility. As the Company’s most high-profile commitment to renewable energy to date and with a system capacity of nearly 2,300 kilowatts, the solar installation will reduce operating costs and offset more than 80 percent of the facility’s annual electricity consumption from the grid.
Lash Group, AmerisourceBergen’s patient support services business, received a Leadership in Energy and Environmental Design (LEED) Gold Certification for its newest building in Fort Mill, South Carolina.
AmerisourceBergen was named one of Philly.com’s Top Workplaces for the sixth consecutive year.
Fiscal Year 2019 Expectations
The Company does not provide forward-looking guidance on a GAAP basis as certain financial information, the probable significance of which cannot be determined, is not available and cannot be reasonably estimated. Please refer to the Supplemental Information Regarding Non-GAAP Financial Measures following the tables for additional information.
Fiscal Year 2019 Expectations on an Adjusted (non-GAAP) Basis
AmerisourceBergen has updated its fiscal year 2019 financial guidance based upon the Company’s evaluation of business expectations at PharMEDium which reflect the assumption that its Memphis facility will not reopen in this fiscal year. Updated guidance also incorporates the higher than anticipated level of share repurchases in the first quarter of the fiscal year. The company now expects:
Adjusted Diluted EPS range narrowed to $6.65 to $6.85 from the previous range of $6.65 to $6.95.
Additional expectations now include:
Adjusted operating income growth in the low-single digit percent range, down from low- to mid-single digit percent range;
Pharmaceutical Distribution Services segment operating income growth in the low-single digit percent range, down from low- to mid-single digit percent range;
Weighted average diluted shares are now expected to be approximately 215 million for the fiscal year, down from the previous expectation of 216 million.
All other previously communicated aspects of the Company’s fiscal year 2019 financial guidance and assumptions remain the same.
Conference Call & Slide Presentation
The Company will host a conference call to discuss the results at 8:30 a.m. ET on January 31, 2019. A slide presentation for investors has also been posted on the Company’s website at investor.amerisourcebergen.com. Participating in the conference call will be:
Steven H. Collis, Chairman, President & Chief Executive Officer
James F. Cleary, Jr., Executive Vice President & Chief Financial Officer
The dial-in number for the live call will be (612) 234-9960. No access code is required. The live call will also be webcast via the Company’s website at investor.amerisourcebergen.com. Users are encouraged to log on to the webcast approximately 10 minutes in advance of the scheduled start time of the call.
Replays of the call will be made available via telephone and webcast. A replay of the webcast will be posted on investor.amerisourcebergen.com approximately two hours after the completion of the call and will remain available for 30 days. The telephone replay will also be available approximately two hours after the completion of the call and will remain available for seven days. To access the telephone replay from within the U.S., dial (800) 475-6701. From outside the U.S., dial (320) 365-3844. The access code for the replay is 461495.
Upcoming Investor Events
AmerisourceBergen management will be attending the following investor conferences in the coming months:
CECP CEO Investor Forum, February 25, New York;
Barclays Global Healthcare Conference, March 12-14, Miami.
Please check the website for updates regarding the timing of the live presentation webcasts, if any, and for replay information.