AmerisourceBergen profits off

Chain Drug Review, Oct 13, 2008

VALLEY FORGE, Pa. -- Income from continuing operations fell in the third quarter at AmerisourceBergen Corp., but results still beat Wall Street's expectations and management raised its guidance for the fourth quarter (see accompanying story). Deepening red ink at its PMSI workers' compensation unit, meanwhile, persuaded management to sell the business and reclassify it as a discontinued operation, resulting in a heavy charge that swung the bottom line to a loss from a prior-year profit.

Income from continuing lines for the three months ended June 30 tumbled 10.4% to $112.8 million, or 70 cents per diluted share, from $125.9 million, or 67 cents per share, in the prior-year quarter.

Results for both quarters were shaped by special items. The most recent quarter includes a $7.87 million pretax charge (mainly for employee severance) that deleted 3 cents per diluted share from continuing operations. The fiscal 2007 quarter reflected a $31.9 million pretax gain from the settlement of a pharmaceutical manufacturer antitrust litigation case, offset by a $3.5 million charge for facility consolidations, employee severance and other costs, for a net positive impact of 9 cents per diluted share. In addition, the company's PharMerica Long-Term Care unit, which was spun off in July 2007, contributed $6.1 million in pretax earnings.

As indicated before, the bottom line for the quarter was impacted by a $222 million noncash charge resulting from the decision to divest PMSI. As a result, AmerisourceBergen booked a $220.8 million net loss from discontinued operations, in contrast to income of $4.03 million in the prior-year period. Consequently the company recorded a net loss of $108 million, or 67 cents per diluted share, versus net profit of $129.9 million, or 69 cents per share, in the fiscal 2007 quarter.

In April management had declared that it expected business to begin improving at PMSI in the second half and continue into fiscal 2009. Clearly, the expected upturn did not materialize.

"We were very disappointed with PMSrs performance in this quarter and after reevaluating our alternatives, we decided to sell the PMSI workers' compensation business in order to focus our full attention on our pharmaceutical distribution and related businesses," explained president and chief executive officer R. David Yost in a statement.

Results on a per-share basis benefited from the company's share-repurchase program, which resulted in 14.3% fewer outstanding shares than in the prior-year period. The bottom line, however, was constrained by a higher effective tax rate of 37.6%, compared with 35% in the previous year's third quarter.

Factoring out the aforementioned onetime pretax charge of 3 cents per share, adjusted results from ongoing lines for the third quarter still beat by a penny the consensus estimate of 66 cents per share from analysts surveyed by Thomson Financial.

At the top line, operating revenue, which excludes bulk deliveries to customer warehouses, rose 14.5% to $17.51 billion. Bulk deliveries, though, plunged 53.6% to $489.2 million. As a result, total revenue advanced 10.1% to $18.0 billion from $16.34 billion, comfortably ahead of analysts' average revenue target of $17.63 billion.

Consolidated operating income declined 2.6% to $197.5 million, or 1.1% of total revenue--down from a 1.24% operating margin in the preceding year. Factoring out the aforementioned pretax items recorded in both years, adjusted consolidated operating income would have jumped 17.7% to $205.4 million. After further excluding last year's contribution from PharMerica, the gain rises to 21.9%.

Consolidated gross margin fell 72 basis points to 2.77%, but total operating expenses (which includes distribution, selling and administrative expense; depreciation and amortization; facility consolidations; and employee severance costs) contracted 58 basis points to 1.67% of revenue.

Other factors impacting the bottom line include the "other" loss line, which plunged 78.2% to $768,000 from $3.52 million in the year-ago quarter. Net interest expense, however, skyrocketed 152.9% to $16 million.

As a result, pretax income slipped 6.3% to $180.8 million.

"Our outstanding June quarter results in continuing operations were driven by excellent performance across the core distribution businesses, including our specialty business," said Yost. "Above-market revenue growth, solid manufacturer price appreciation and outstanding expense management all played a key role in delivering the results.

"This superior performance was achieved in a pharmaceutical market that was soft by historical standards."

Year-to-date income from continuing operations dipped 3% to $354 million from $365.1 million in the fiscal 2007 span, with various special items again coming into play. Bottom-line results for the most recent half include a $218.4 million loss from discontinued operations, in contrast to income of $16.5 million in the prior-year period. As a result, reported net income for the first nine months of fiscal 2008 plummeted 64.4% to $135.7 million from $381.6 million in the preceding year.