Business context and reporting period
This is AmerisourceBergen Corporation’s Form 10-K for the fiscal year ended September 30, 2017; the filing reports fiscal-year results, not a stand-alone fourth quarter. The company is now known as Cencora. It distributes pharmaceuticals and provides related services, with Pharmaceutical Distribution Services as its main reportable segment and other businesses including animal health, global logistics and manufacturer services.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $153.14 billion | $146.85 billion |
| Gross profit | $4.55 billion | $4.27 billion |
| Operating income | $1.06 billion | $1.53 billion |
| Net income | $364.5 million | $1.43 billion |
| Diluted EPS | $1.64 | $6.32 |
| Cash from operating activities | $1.50 billion | $3.18 billion |
- Revenue increased 4.3%, led by 4.1% growth in Pharmaceutical Distribution Services and 10.4% growth in Other.
- Gross profit rose 6.4%, but benefited substantially from a $157.8 million LIFO credit versus $200.2 million of LIFO expense in 2016. The core distribution segment’s gross profit fell 1.5%; its gross margin declined to 2.16% from 2.28%.
- Operating expenses increased 26.9%, chiefly due to $914.4 million of litigation settlements and accruals. The effective tax rate was 60.3%, with litigation-related charges currently estimated to be nondeductible. FY 2016 earnings benefited from a tax ruling related to WBA warrants, making the year-over-year earnings comparison unusually difficult.
- Operating cash flow fell to $1.50 billion, partly reflecting higher receivables and inventory. Receivables also rose amid changed payment terms with the largest customer; days sales outstanding increased to 23.8 from 21.6.
- At year-end, cash was $2.44 billion and total debt was $3.44 billion, down from $4.19 billion. The company reported $2.45 billion of additional availability across specified credit facilities. Capital expenditures were $466.4 million; management expected about $325 million in FY 2018.
- Dividends declared were $1.46 per share for FY 2017. The board raised the quarterly dividend to $0.38 in November 2017. The company repurchased $329.9 million of shares during FY 2017.
Changes, outlook and management commentary
- In June 2017, the company announced and, effective at fiscal year-end, implemented an organizational reorganization that combined its legacy drug and specialty distribution segments. Management said it was intended to better align the business with customer needs and support growth and efficiency; benefits are not assured.
- Management expected FY 2018 revenue growth of 8%–11%, based in part on the planned H.D. Smith acquisition. Announced November 20, 2017, the proposed $815 million cash acquisition was expected to close in early 2018, subject to regulatory review and other conditions, and was to be funded with new long-term debt.
- Management said unfavorable brand and generic pricing trends experienced in FY 2017 were expected to continue in FY 2018. Lower price appreciation, generic deflation and customer contract renewals at less favorable terms weighed on distribution profitability.
- Walgreens Boots Alliance (WBA) represented about 30% of revenue and 49% of net accounts receivable; Express Scripts represented about 15% of revenue. The WBA distribution and generic purchasing arrangements run through 2026, but customer concentration and renewal economics remain important risks.
Risks, contingencies and unusual items
- Major legal matter: In September 2017, a subsidiary entered a guilty plea to a misdemeanor FDA-registration violation and paid $260 million in criminal fine and forfeiture. The company also accrued $625 million for an agreement in principle intended to resolve related civil False Claims Act claims; final terms, approvals and resolution of related issues remained outstanding.
- The company faced ongoing government inquiries into controlled-substance distribution and diversion controls, as well as numerous opioid-related lawsuits and investigations. It said it could not assess likely outcomes or exposure for these matters.
- Other disclosed legal matters included sealed qui tam filings involving distribution of certain pharmaceutical products and an investigation concerning a subsidiary’s billing and returns. Outcomes for matters without recorded reserves were generally not reasonably estimable.
- Additional risks include pharmaceutical pricing and reimbursement changes, customer or supplier consolidation, dependence on major customers, regulatory and quality requirements for compounded sterile preparations, cybersecurity and privacy, and execution of the reorganization and acquisitions.
Most important facts for investors to verify
- Final resolution, payment timing and any remaining obligations associated with the $625 million civil settlement agreement in principle, and the tax treatment of litigation charges.
- Developments and potential financial exposure from opioid litigation and government investigations, including controlled-substance diversion-control matters.
- Whether the FY 2018 revenue outlook and H.D. Smith acquisition assumptions were achieved, including acquisition financing and integration costs.
- Underlying distribution profitability excluding the volatile LIFO credit, and the effects of pricing, generic deflation, contract terms and customer mix.
- Cash conversion and working-capital trends, particularly customer payment terms and the concentration of receivables with WBA.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; verify subsequent filings for material changes.