Cencora, Inc. (then AmerisourceBergen Corporation) — Fiscal Q1 2023 10-Q
Reporting period: Three months ended December 31, 2022. The filing was issued under the AmerisourceBergen name; the company announced it intended to begin operating as Cencora in the second half of calendar 2023.
Business context and results
The company distributes pharmaceuticals and provides related services through U.S. Healthcare Solutions and International Healthcare Solutions. Financial comparisons below are to the quarter ended December 31, 2021 unless otherwise noted.
| Metric | Q1 FY2023 | Prior period / change |
|---|---|---|
| Revenue | $62.85 billion | $59.63 billion; up 5.4% |
| Gross profit | $2.15 billion | $2.06 billion; up 4.2% |
| Operating income | $633.1 million | $644.4 million; down 1.7% |
| Net income attributable to AmerisourceBergen | $479.7 million | $449.1 million |
| Diluted earnings per share | $2.33 | $2.13 |
| Net cash provided by operating activities | $710.1 million | $863.4 million |
| Total debt | $5.64 billion | $5.70 billion at September 30, 2022 |
U.S. Healthcare Solutions revenue rose 6.1% to $56.24 billion; International Healthcare Solutions revenue fell 0.6% to $6.61 billion. U.S. segment operating income increased 0.6% to $572.4 million, while International segment operating income decreased 10.4% to $161.3 million. The filing reports U.S. segment operating margin of 1.02%, down 5 basis points year over year, and U.S. gross profit margin of 2.46%, up 5 basis points.
Cash flow, liquidity and capital allocation
- Operating cash flow was $710.1 million, with working capital movements significant: inventory increased $1.18 billion and accounts payable increased $1.38 billion.
- Investing cash outflow was $1.51 billion, including $1.44 billion prefunded for the PharmaLex acquisition. Financing cash outflow was $963.9 million, including $807.2 million of common-stock purchases and $99.7 million of dividends.
- Cash and cash equivalents were $1.69 billion at quarter-end, compared with $3.39 billion at September 30, 2022. The decrease primarily reflects PharmaLex prefunding and capital returns.
- Available borrowing capacity under specified credit facilities was $3.80 billion. The company reported compliance with credit facility covenants and no commercial paper outstanding.
- The company expected fiscal 2023 capital expenditures of approximately $500 million. It raised its quarterly dividend 5% to $0.485 per share and had $182.5 million remaining under its $1.0 billion share repurchase authorization.
Material changes, outlook and unusual items
- Revenue growth was driven mainly by U.S. market and unit-volume growth and increased sales to specialty physician practices; lower sales of COVID-19 treatments partly offset the increase. International revenue was affected by foreign exchange and the prior divestiture of the Brazil specialty business.
- Gross profit included a $49.9 million gain from antitrust litigation settlements. LIFO expense was $25.1 million, compared with a $44.7 million LIFO credit in the prior-year quarter. These items materially affect period-to-period comparability.
- Distribution, selling and administrative expense increased 10.3%, reflecting support for U.S. revenue growth and inflationary cost impacts. Total segment operating income decreased 2.1%, primarily due to lower International segment results and foreign exchange effects.
- PharmaLex acquisition control transferred January 1, 2023 for €1.381 billion, subject to customary adjustments; $1.438 billion was prefunded in December. Purchase price allocation was not yet complete. The acquisition is intended to expand life-sciences services and will be included in International Healthcare Solutions.
- The company had recorded a $5.9 billion opioid-related litigation liability. Its distributor settlement provides for payments of up to approximately $6.4 billion over 18 years; estimated payments before December 31, 2023 were $471.8 million. The company stated ultimate losses could differ materially from accruals.
- On December 29, 2022, the Department of Justice filed a civil complaint alleging controlled-substance reporting violations and seeking civil penalties and injunctive relief. The company denies the allegations and intends to defend itself. Other opioid claims and investigations remain ongoing.
- The name change is expected to shorten the useful lives of certain trade names, increasing acquisition-related amortization expense over the next few years. The filing provides no specific earnings guidance.
Management cited risks including opioid and other litigation, regulation of controlled-substance distribution, customer and supplier concentration and contract economics, inflation, foreign exchange, interest rates, reimbursement pressure, integration of acquisitions, cybersecurity, and macroeconomic and geopolitical conditions. Management said operating cash flows and borrowing capacity were expected to fund ongoing requirements, including opioid payments.
Important facts for investors to verify
- Whether operating cash flow remains sufficient as seasonal inventory needs and supplier/customer payment timing fluctuate.
- Actual integration costs, financing effects and results from PharmaLex, and the future amortization impact of the name change.
- Developments in the DOJ complaint and other opioid matters, including whether the recorded $5.9 billion liability remains adequate and how payment timing evolves.
- Whether U.S. margin performance can offset higher operating expenses and weaker International segment results.
- Future capital returns and liquidity after the substantial quarter’s repurchases, acquisition prefunding and dividend increase.