Cencora, Inc. quarterly report, Q3 FY2012

Business context and reporting period

This is AmerisourceBergen Corporation’s unaudited Form 10-Q for the fiscal quarter and nine months ended June 30, 2012. The filing identifies the issuer as AmerisourceBergen, not Cencora. The company distributes pharmaceuticals and provides related healthcare, specialty, consulting, and logistics services. Amounts below are in U.S. dollars.

Key financial metrics

For the nine months, distribution, selling, and administrative expense was $890.8 million, depreciation and amortization was $102.4 million, and interest expense, net, was $71.2 million. Effective tax rate was 38.3% for both the quarter and nine-month period.

At June 30, 2012, cash and cash equivalents were $1.656 billion, total debt was $1.876 billion, and stockholders’ equity was $2.930 billion. Current assets were $11.170 billion and current liabilities were $10.951 billion. The company reported $1.303 billion of additional availability under its revolving and receivables facilities. Capital expenditures were $127.6 million for the nine-month period.

Material changes versus prior periods

• Quarterly distribution-segment revenue declined 3.3%; management attributed the decline principally to a 5% drop in ABDC revenue, partly offset by 8% growth at ABSG. The nine-month distribution-segment revenue was down 0.3%.
• Other-segment revenue rose substantially, reflecting the acquisitions of TheraCom and World Courier. TheraCom was acquired in November 2011 for $257.2 million; World Courier was acquired in April 2012 for $520 million, subject to a working-capital adjustment.
• Gross profit increased, aided by acquisitions, non-specialty generic programs, and brand price increases. These gains were partly offset by lower gross profit from Oxaliplatin, Gemcitabine, and Docetaxel, which was down $55.8 million in the quarter and $111.4 million for the nine months versus the prior-year periods.
• Quarterly operating expenses rose 11.6%, including acquisition-related costs and higher depreciation and amortization. The nine-month increase was 5.1%.
• Net income was slightly lower, while diluted EPS increased as weighted-average diluted shares declined 8% for the quarter and 7% for the nine months, primarily reflecting repurchases.
• Total debt increased from $1.365 billion at September 30, 2011, chiefly reflecting the $500 million 2021 note issuance and borrowing activity. Cash declined by $170.2 million from fiscal year-end.

Outlook, risks, and unusual items

• Management expected fiscal 2012 revenue to be relatively flat or grow modestly year over year, operating cash flow of $1.0 billion to $1.1 billion, and capital expenditures of approximately $200 million. It expected the ongoing effective tax rate to be about 38.4% and interest expense to be significantly higher than in fiscal 2011.
• Management cited generic conversions, generic price deflation, competitive pressure, customer consolidation, reimbursement changes, and the loss of a large retail customer as factors affecting results. It noted that the relaunch of Oxaliplatin was expected in mid-August 2012, with materially lower margins than in fiscal 2011.
• Medco merged with Express Scripts in April 2012. The company signed a three-year supply agreement with Express Scripts effective October 1, 2012; fiscal 2013 sales were estimated at $18.5 billion, with an expected contribution of approximately 3% to earnings.
• Legal matters include an Ontario rebate order and related complaint, qui tam allegations and a government subpoena, federal subpoenas concerning controlled-substance diversion controls, and West Virginia’s June 2012 complaint alleging inadequate diversion controls, among other claims. The company said it could not predict the outcomes.
• Other notable items include $17.4 million of employee severance, litigation, and other charges for the nine months, including $10.6 million of acquisition costs; a $5.3 million gain on a note receivable; and $47.4 million of unrecognized tax benefits, including interest and penalties.
• Liquidity and operating risks include working-capital fluctuations, customer and supplier credit exposure, interest-rate and foreign-currency changes, ERP implementation and integration risks, and the potential effects of regulation, litigation, and reimbursement changes. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.

Important facts for investors to verify

• Whether fiscal 2012 operating cash flow met management’s $1.0–$1.1 billion outlook, given nine-month cash flow of $760.1 million and working-capital variability.
• How the Express Scripts agreement affected sales, margins, and earnings after its October 1, 2012 start, and the extent of customer-concentration exposure.
• The realized profitability of TheraCom and World Courier, and whether acquisition integration, goodwill, and intangible-asset valuations changed after the preliminary purchase-price allocations.
• The actual impact of generic conversions and the lower-margin Oxaliplatin relaunch on gross profit.
• Developments and potential financial exposure from the disclosed legal, controlled-substance, and tax matters; the filing does not provide clear ultimate outcomes.
• Debt refinancing and liquidity after the $392.3 million notes due September 2012, alongside remaining share-repurchase authorization of $744.1 million at June 30, 2012.