AmerisourceBergen Corporation (now Cencora, Inc.) — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing is an annual report, not a standalone fourth-quarter filing. It reports fourth-quarter results separately below. Unless otherwise stated, amounts are U.S. dollars.
Business context
AmerisourceBergen distributed pharmaceuticals and related products and services to healthcare providers and manufacturers. Its reportable segments were Pharmaceutical Distribution and Other, which included consulting services, World Courier and MWI Veterinary Supply. Growth was supported by the full-year contribution from Walgreens Boots Alliance (WBA) distribution, specialty pharmaceuticals and the February 2015 MWI acquisition.
Financial performance
| Metric | FY2015 | FY2014 | Change / context |
|---|---|---|---|
| Revenue | $135.96 billion | $119.57 billion | +13.7%; excluding incremental WBA sales, +7.6% |
| Gross profit | $3.53 billion | $2.98 billion | +18.3%; gross margin approximately 2.60% vs. 2.49% |
| Operating income | $417.4 million | $778.9 million | Down; FY2015 included higher warrant and LIFO expenses |
| Net income (loss) | $(134.9) million | $276.5 million | FY2015 diluted EPS $(0.62), versus $1.17 |
| Operating cash flow | $3.92 billion | $1.46 billion | Boosted chiefly by a $5.13 billion increase in accounts payable, accrued expenses and income taxes |
| Capital expenditures | $231.6 million | $264.5 million | FY2016 estimate: approximately $400 million |
| Cash and cash equivalents | $2.17 billion | $1.81 billion | At September 30 |
| Total debt | $3.49 billion | $2.00 billion | Net debt approximately $1.33 billion |
| Stockholders’ equity | $633.5 million | $1.96 billion | Lower amid repurchases, warrant accounting and the annual loss |
At September 30, current assets were $20.33 billion and current liabilities $22.70 billion. The resulting current ratio was approximately 0.90; the filing describes substantial credit-facility availability to support working capital. Outstanding balances under the listed revolving and receivables facilities were zero at year-end; disclosed additional availability was approximately $2.46 billion.
Fourth quarter: Revenue was $35.47 billion, gross profit $973.6 million, operating income $537.5 million, net income $364.3 million and diluted EPS $1.56. Warrant expense was a $196.5 million credit for the quarter, illustrating its volatility.
Material changes and unusual items
- WBA-related sales rose $7.3 billion year over year; WBA accounted for 30% of FY2015 revenue. Express Scripts accounted for 16%; the top 10 customers represented approximately 64%.
- MWI was acquired in February 2015 for approximately $2.6 billion. It contributed approximately $1.9 billion of FY2015 revenue. The acquisition was funded partly with new debt.
- Warrant expense was $912.7 million, versus $422.7 million in FY2014, primarily reflecting the rise in the Company’s share price. The warrants’ year-end fair value was $1.92 billion.
- LIFO expense was $542.8 million, up from $348.1 million, reflecting higher brand inflation and lower generic deflation. Antitrust litigation settlement gains were $65.5 million, versus $24.4 million.
- Pharmaceutical Distribution gross profit rose 13.3%; its gross margin improved 3 basis points to 2.39%. The Department of Defense contract renewal at less favorable terms and lower generic price appreciation restrained growth.
- FY2015 included a $30.6 million impairment of the Company’s minority investment in Brazilian wholesaler Profarma and $37.9 million of severance, litigation and other costs, including $32.6 million of deal-related costs.
Outlook, risks and contingencies
- Management expected FY2016 revenue growth of 8%–10%, capital spending of about $400 million, higher interest expense due to acquisition financing, and reduced share repurchases.
- After year-end, the Company acquired PharMEDium for $2.7 billion in cash, financed partly with a new $1.0 billion term loan. Management noted integration, regulatory and product-quality risks associated with the business.
- In November 2015, the IRS issued a private letter ruling on warrant tax treatment. The Company expected an approximately $456 million tax benefit in the quarter ending December 31, 2015; this is a subsequent event, not FY2015 earnings.
- Significant customer concentration and renewal exposure remain: Kaiser Permanente and Express Scripts contracts were scheduled to expire in June and September 2016, respectively. WBA’s 10-year distribution agreement is strategically important.
- Pending matters include sealed qui tam complaints, federal investigations and subpoenas concerning oncology distribution and controlled-substance diversion controls, and West Virginia litigation over controlled-substance distribution. Outcomes and potential exposure were not clearly quantifiable in the filing.
- PharMEDium had received an FDA Warning Letter in 2014; the FDA reinspected facilities in 2015. The filing said the resolution and sufficiency of corrective actions were uncertain.
- Other principal risks include generic price deflation and manufacturer pricing, reimbursement and regulatory changes, competition and customer consolidation, credit exposure, cyber and privacy risks, and potential dilution from WBA warrants. The Company reported compliance with its debt covenants at year-end.
Key facts for investors to verify
- Whether FY2016 revenue guidance and projected capital spending were achieved, and the organic contribution excluding WBA and acquisitions.
- How much of the FY2015 operating cash flow reflected sustainable earnings versus working-capital timing and supplier-payment changes.
- The subsequent PharMEDium acquisition’s financing, integration, FDA remediation and operating performance.
- Renewal terms and economics for the Kaiser and Express Scripts contracts, and ongoing WBA relationship benefits and concentration risk.
- Actual warrant-related dilution, hedging effectiveness and tax benefits, including whether the anticipated $456 million tax benefit was realized.
- Developments, accruals or settlements in controlled-substance, qui tam, West Virginia and other regulatory or legal matters.