AmerisourceBergen Corporation (filing metadata identifies Cencora, Inc.) — Q2 FY2016 10-Q
Reporting period: Quarter and six months ended March 31, 2016. Unaudited U.S. GAAP financial statements. The registrant named in the filing is AmerisourceBergen Corporation.
Business context and financial performance
AmerisourceBergen distributes pharmaceuticals and related services through its Pharmaceutical Distribution segment; “Other” includes consulting, specialty logistics and veterinary distribution. Unless noted otherwise, amounts below are in millions of U.S. dollars.
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $35,698 | $32,669 | $72,407 | $66,258 |
| Gross profit | $1,075 | $912 | $2,040 | $1,664 |
| Operating income (loss) | $949 | $(364) | $769 | $(453) |
| Net income (loss) | $604 | $(513) | $935 | $(713) |
| Diluted EPS | $2.68 | $(2.33) | $4.13 | $(3.24) |
| Operating cash flow | Not separately presented for quarter | $1,631 | $1,639 |
- Revenue grew 9.3% in both the quarter and six-month period. Pharmaceutical Distribution revenue rose 7.6% and 7.1%, respectively; “Other” rose 62.2% and 88.9%, largely reflecting MWI, acquired in February 2015.
- Gross profit increased 17.9% for the quarter and 22.6% for six months. Consolidated gross margin was approximately 3.01% versus 2.79% in the quarter and 2.82% versus 2.51% for six months. Lower LIFO expense materially contributed to the improvement.
- Segment operating income increased 7.2% for the quarter and 8.0% for six months. Pharmaceutical Distribution segment operating income was nearly flat over six months; “Other” grew substantially, primarily with MWI.
- Reported earnings were heavily affected by warrant remeasurement: Q2 included $504 million of warrant income versus $753 million of expense a year earlier; six months included $37 million of income versus $1,124 million of expense. These amounts make reported operating income and earnings comparisons unusually volatile.
- Six-month income tax included an approximately $456 million benefit adjustment following an IRS private letter ruling on tax deductions related to the WBA warrants. The quarter recorded tax expense of $312 million, while the six-month period recorded a tax benefit of $229 million.
- Six-month operating cash flow was $1,631 million, broadly level with the prior-year $1,639 million. Working capital was significant: inventory absorbed $853 million and receivables absorbed $472 million, partly offset by a $2,029 million increase in accounts payable, accrued expenses and income taxes. Investing cash outflow was $2,875 million, including $2,731 million for acquisitions.
- At March 31, cash and equivalents were $2,525 million; total debt was $4,488 million, including $120 million current debt. Net debt was approximately $1,963 million. Cash increased from $2,167 million at September 30, 2015. Current assets were $22,070 million and current liabilities $23,771 million.
Material changes and notable items
- In November 2015, the company acquired PharMEDium for $2.7 billion cash. The preliminary allocation included $1.8 billion of goodwill and $1.1 billion of acquired intangible assets; final purchase accounting remained pending.
- Debt increased from $3,493 million at September 30, 2015, primarily reflecting acquisition financing. The company reported $2,449 million of additional availability under specified variable-rate facilities and stated it was in compliance with applicable covenants.
- WBA exercised the 2016 warrants in March, buying 22.7 million shares for $1,169 million. The company said its hedging and repurchases fully mitigated the warrants’ EPS dilution. WBA-related revenue was $10.7 billion for the quarter and $21.7 billion for six months; distribution and sourcing agreements were extended to 2026.
- The quarterly dividend increased 17% to $0.34 per share. The company repurchased $437 million of shares during the six-month period, including repurchases associated with its warrant hedging strategy.
- A $47.6 million pension settlement charge was recorded for six months following settlement of the salaried defined-benefit plan. Amortization increased following the MWI and PharMEDium acquisitions.
Outlook, risks and contingencies
- Management expected FY2016 revenue growth of approximately 8% and capital expenditures of approximately $400 million. It expected operating cash flows and borrowings to fund ongoing needs. Management also anticipated higher days sales outstanding in the second half of FY2016 and FY2017 due to gradual changes in payment terms with its largest customer.
- Pharmaceutical Distribution gross-profit growth faced lower generic price appreciation, less favorable terms on a renewed Department of Defense contract, and a mix shift toward larger, lower-margin customers. The Kaiser contract was due to expire in June 2016; Express Scripts had elected to extend its contract for one year.
- Reported warrant values remain sensitive to share price and volatility; the remaining 2017 warrants were valued at $753 million at March 31. Management noted future warrant expense could fluctuate significantly.
- The filing describes ongoing federal investigations and subpoenas concerning oncology distribution and controlled-substance diversion, sealed qui tam allegations, and West Virginia litigation over controlled-substance distribution. Outcomes and potential financial impact were not estimable; possible consequences include significant settlements, restrictions, or penalties.
- Other stated risks include customer or supplier concentration and contract terms, pharmaceutical pricing and reimbursement changes, acquisition integration, regulation, interest and foreign-exchange movements, and product-quality risks in compounded sterile preparations.
Most important facts for investors to verify
- Separate underlying operating performance from warrant remeasurement, acquisition costs, LIFO effects, pension settlement and the one-time tax benefit.
- Track gross-profit and operating-income trends in Pharmaceutical Distribution, including the impact of generic pricing, DOD contract terms and customer mix.
- Assess working-capital cash conversion, especially receivables and inventory needs, supplier payment timing, and the anticipated customer payment-term changes.
- Review PharMEDium integration, final purchase-price allocation, acquisition-related amortization and the debt burden and financing costs.
- Monitor renewal terms for Kaiser and other significant customer contracts, the WBA relationship, and developments in the disclosed investigations and litigation.
- Confirm the issuer identity: this supplied 10-Q is filed by AmerisourceBergen Corporation, not under the name Cencora, Inc.