Cencora (then AmerisourceBergen) — Q3 FY2023 10-Q
Business context and period: The filing covers the fiscal quarter and nine months ended June 30, 2023. The company distributes human- and animal-health products and provides healthcare and life-sciences services through U.S. Healthcare Solutions and International Healthcare Solutions. It planned to begin operating as Cencora on August 30, 2023.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $66.95B | $60.06B | $193.25B | $177.41B |
| Gross profit | $2.26B | $2.02B | $6.71B | $6.31B |
| Operating income | $670M | $487M | $1.86B | $1.91B |
| Net income attributable to company | $480M | $407M | $1.39B | $1.40B |
| Diluted EPS | $2.35 | $1.92 | $6.80 | $6.63 |
| Operating cash flow | — | $2.08B | $1.54B |
- Quarterly revenue rose 11.5%; nine-month revenue rose 8.9%, primarily on U.S. Healthcare Solutions growth. Sales of GLP-1 products increased $2.4B in the quarter and $5.6B year to date; COVID-19 treatment sales declined $0.1B and $0.8B, respectively.
- Quarterly operating income increased 37.5%, while nine-month operating income declined 2.5%. Nine-month segment operating income rose 2.7%; International Healthcare Solutions operating income fell 3.5%, partly due to foreign exchange and the Brazil specialty-business divestiture.
- U.S. Healthcare Solutions gross margin was 2.36% for the quarter and 2.52% for the nine-month period, down 13 and 7 basis points year over year, respectively. Management attributed pressure mainly to higher GLP-1 sales, which carry lower margins, and lower COVID-19 treatment sales, which carry higher margins.
- At June 30, cash and cash equivalents were $1.39B, total debt was $5.02B ($861M short-term and $4.16B long-term), and available capacity under listed credit facilities was approximately $3.87B. Debt was down from $5.70B at September 30, 2022. The company reported compliance with its credit-facility covenants.
- Operating cash flow improved year over year, but reflected substantial working-capital movements: accounts payable provided $3.51B, while accounts receivable and inventory uses were $2.25B and $1.37B. Investing activities used $2.42B, including the PharmaLex acquisition and OneOncology investment.
Material changes, outlook, and key risks
- PharmaLex was acquired effective January 1, 2023 for approximately $1.47B. In June, the company invested $718M for a 34.9% interest in a joint venture that acquired OneOncology. The joint venture put/call options were recorded as an $807M fair-value liability; future purchase pricing is tied to 19 times adjusted EBITDA, subject to terms and adjustments.
- Antitrust settlement gains of $119M in the quarter and $169M year to date reduced cost of goods sold. The quarter also included an $83M receipt from an opioid-litigation indemnity escrow. These items materially affected comparisons and reported results.
- Opioid-related accrued liabilities were approximately $5.9B at June 30, including an estimated $427M payable within a year; payments are expected over 16 years. The company said the ultimate loss could differ materially from the accrual. A Department of Justice civil complaint alleging failures to report suspicious controlled-substance orders remained pending; the company denied the allegations and said it would defend itself.
- Restructuring and other expenses were $178M year to date, including workforce reductions, rebranding and efficiency initiatives, and costs related primarily to a March 2023 cybersecurity incident that disrupted one foreign business unit for about two weeks. Amortization also increased following shortened useful lives for certain trade names in connection with the planned name change.
- The company expected fiscal 2023 capital expenditures of approximately $500M and stated that operating cash flows and borrowings were expected to fund ongoing needs, including opioid payments. The filing provides no clear numeric earnings or revenue guidance.
- Other cited risks include pricing and reimbursement changes, customer and supplier concentration or contract economics, foreign exchange and interest rates, inflation, acquisitions and integration, cybersecurity, and ongoing legal and regulatory matters. Revenue from WBA-related arrangements was $17.4B in the quarter and $50.4B year to date; WBA receivables were $7.4B at June 30.
Important facts for investors to verify
- Whether opioid settlement assumptions remain adequate and how the DOJ case and other opioid proceedings develop.
- Whether GLP-1-driven volume growth translates into earnings despite lower product margins, and how sales concentration with major customers evolves.
- The cash-flow sustainability of working-capital movements and the effect of acquisition spending, debt costs, and planned repurchases and dividends.
- OneOncology’s performance and the potential future cash exposure under the joint venture put/call options.
- Progress and costs associated with the Cencora rebrand, restructuring, integration, and cybersecurity remediation.