Cencora, Inc. — FY2023 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2023; comparisons are with fiscal 2022 unless noted. The filing reports annual results, not standalone fourth-quarter results. AmerisourceBergen changed its name to Cencora on August 30, 2023. Cencora distributes pharmaceuticals and provides related healthcare and life-sciences services through U.S. Healthcare Solutions and International Healthcare Solutions.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change or context |
|---|---|---|---|
| Revenue | $262.17 billion | $238.59 billion | Up 9.9% |
| Gross profit | $8.96 billion | $8.30 billion | Up 8.0%; gross margin about 3.42% versus 3.48% |
| Operating income | $2.34 billion | $2.37 billion | Down 1.1%; GAAP operating margin about 0.89% |
| Net income attributable to Cencora | $1.75 billion | $1.70 billion | Diluted EPS $8.53, up from $8.04 |
| Net cash from operations | $3.91 billion | $2.70 billion | Growth reflected substantial working-capital movements |
| Capital expenditures | $458 million | $496 million | FY2024 estimate: approximately $500 million |
| Total debt at year-end | $4.79 billion | $5.70 billion | Cash and cash equivalents were $2.59 billion; reported debt less cash was about $2.20 billion |
Year-end current assets were $42.80 billion and current liabilities were $48.83 billion. Cash generation was supported by a $6.10 billion increase in accounts payable, while receivables rose $2.71 billion and inventory rose $2.18 billion. The company had $4.15 billion of additional availability across listed credit facilities; its $2.4 billion revolving facility had no balance outstanding. Cencora reported compliance with applicable debt covenants.
Material changes versus FY2022
- U.S. Healthcare Solutions revenue grew 10.7% to $234.76 billion, primarily on volume growth, including $7.7 billion of additional sales of GLP-1 products labeled for diabetes and/or weight loss, and increased specialty sales. COVID-19 treatment revenue fell $1.0 billion.
- International Healthcare Solutions revenue increased 3.5% to $27.42 billion. Growth included PharmaLex, acquired January 1, 2023, and higher distribution and logistics sales; unfavorable currency effects and the Brazil specialty-business divestiture partly offset gains.
- U.S. segment operating income rose 5.7% to $2.60 billion; International segment operating income declined 2.0% to $693 million, including foreign-exchange pressure and a decline in Egypt operations. Total segment operating income increased 4.0% to $3.29 billion.
- GAAP operating income was pressured by higher amortization, restructuring and other expenses, and LIFO expense. Amortization rose to $554 million, partly because the Cencora rebrand shortened the useful lives of certain acquired trade names. Restructuring and other expenses increased to $230 million from $63 million and included workforce reductions, transformation initiatives, rebranding, and costs related to a cybersecurity event.
- Gross profit included $239 million of antitrust settlement gains, compared with $2 million in FY2022. LIFO expense increased to $205 million from $67 million. The effective tax rate declined to 19.8% from 23.7%.
- Cash and cash equivalents declined to $2.59 billion from $3.39 billion. Cencora used $2.60 billion in investing activities, including $1.41 billion for PharmaLex and $718 million for its OneOncology investment. Financing activities used $2.22 billion, including $1.18 billion of share repurchases and $399 million of dividends.
Outlook, risks, contingencies, and unusual items
- Outlook: Management expected operating cash flow and borrowing capacity to fund ongoing needs, including opioid-related payments. It estimated FY2024 capital expenditures of approximately $500 million. The filing does not provide a clear FY2024 revenue, earnings, or EPS guidance figure.
- Customer concentration: Walgreens Boots Alliance (WBA) generated about 26% of revenue and Express Scripts about 14%; the top 10 customers represented about 66%. WBA also accounted for about 38% of net accounts receivable. The WBA U.S. distribution and generic purchasing arrangements run through 2029, and the Boots UK distribution agreement through 2031.
- Opioid matters: The recorded opioid-related litigation liability was $5.5 billion at year-end, including an estimated $407.5 million payable before September 30, 2024 and $5.1 billion recorded as long-term. The national distributor settlement provides for payments of up to approximately $6.4 billion over 18 years. Cencora could not estimate the possible loss for matters outside its accrual. A federal DOJ complaint alleges Controlled Substances Act violations; the company denies the allegations and is defending the case. As of the filing, a State of Alabama trial was scheduled for February 26, 2024.
- Other legal and regulatory exposure: The company faces healthcare fraud and abuse, antitrust, controlled-substance, tax, privacy, and other proceedings and compliance obligations. It remains subject to a Corporate Integrity Agreement. The filing states that the amount or range of possible losses for various matters generally could not be reasonably estimated.
- Acquisitions and investment: PharmaLex was acquired for $1.47 billion. Cencora invested $718 million for a 34.9% interest in the OneOncology joint venture. TPG has a future put option that could require Cencora to buy the other joint-venture interests under specified terms; the recorded fair value of the net put option was $873 million.
- Other operating risks: Management highlighted pharmaceutical pricing and reimbursement changes, generic deflation, competition and customer consolidation, inflation, foreign exchange, cybersecurity, acquisition integration, and supply-chain regulation. A March 2023 cyber event disrupted one foreign business unit for about two weeks; the company said prior cyber incidents had not materially affected it.
- Shareholder returns: The board raised the quarterly dividend 5% to $0.51 per share in November 2023. The company had $809 million remaining under a $1 billion repurchase authorization at September 30, 2023 and subsequently reported additional purchases through November 20, 2023.
Most important facts for investors to verify
- Whether high revenue growth translates into sustained profit growth, given thin distribution margins, lower-margin GLP-1 mix, and the loss of COVID-19 treatment sales.
- Cash-flow quality and seasonal funding needs, including the effect of supplier payment timing and growth in receivables and inventories.
- WBA relationship economics, customer concentration, receivable exposure, and the effect of WBA share sales or pledges.
- The ultimate opioid-related liability, payment schedule, litigation outcomes, and tax deductibility of settlements.
- Integration and performance of PharmaLex and Alliance Healthcare, and the financial implications of the OneOncology put and call options.
- Execution of FY2024 capital plans and the sustainability of dividends and share repurchases alongside debt and litigation payments.
The audited financial statements received an unqualified opinion. Management and the auditor reported effective internal control over financial reporting as of September 30, 2023, although PharmaLex was excluded from that assessment.