AmerisourceBergen Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2014. The filing is for AmerisourceBergen Corporation, now known as Cencora, Inc. Financial amounts below are in millions unless stated otherwise.
Business context and results
The company distributes pharmaceuticals and provides related services through Pharmaceutical Distribution and Other. Growth was driven principally by the Walgreens distribution agreement, which began in September 2013 and was being phased in for generic drugs.
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $30,348 | $21,907 | $87,980 | $63,490 |
| Gross profit | $692 | $562 | $2,110 | $1,940 |
| Operating income | $111 | $135 | $572 | $784 |
| Continuing operations income (loss) | $(13) | $64 | $216 | $443 |
| Net income (loss) | $(13) | $168 | $209 | $383 |
| Diluted EPS | $(0.06) | $0.71 | $0.89 | $1.63 |
Quarter revenue rose 38.5%; nine-month revenue rose 38.6%. Gross profit rose 23.0% for the quarter and 8.7% year to date, but operating income fell 17.7% and 27.1%, respectively. Reported operating income included warrant expense of $145 million in the quarter and $267 million year to date, and LIFO expense of $133 million and $294 million, respectively. Pharmaceutical Distribution gross margin was 2.32% in the quarter and 2.29% year to date, down 26 and 40 basis points year over year, primarily reflecting the larger mix of lower-margin Walgreens and other large-customer brand business. The quarter’s net loss also reflected the $33 million loss on early retirement of debt and a 121.9% effective tax rate, which management attributed largely to non-deductible warrant revaluation expense.
Cash, liquidity and capital
- Cash and equivalents were $1,262 million at June 30, 2014, versus $1,231 million at September 30, 2013. Current assets were $15,891 million and current liabilities $16,339 million.
- Long-term debt was $1,995 million, up from $1,397 million at September 30, 2013. The company had no variable-rate debt outstanding at quarter-end and reported $2,425 million of available capacity under revolving, receivables-securitization and revolving-note facilities; it was compliant with facility covenants.
- Nine-month operating cash flow was $632 million, down from $819 million. Working-capital movements included a $1,003 million inventory increase and a $536 million accounts-receivable increase, partly offset by a $1,476 million increase in accounts payable, accrued expenses and income taxes.
- Capital expenditures were $199 million for the nine months. The company invested $118 million in a Brazilian pharmaceutical wholesaler and specialty joint venture, repurchased $571 million of shares, paid $162 million in dividends, and spent $211 million on capped-call hedges.
Material developments, outlook and risks
- Management expected fiscal 2014 revenue growth of approximately 35%, operating cash flow of $800–$1,000 million, and capital expenditures of approximately $275 million. Excluding warrant expense, it expected a fiscal 2014 effective tax rate of approximately 38%.
- In May 2014, the company issued $600 million of 1.15% notes due 2017 and $500 million of 3.40% notes due 2024; proceeds partly funded early retirement of $500 million of 5.875% notes due 2015, including premiums and costs.
- Walgreens-related volume materially increased revenue and working-capital needs. Management cited changing pharmaceutical prices and mix, reimbursement pressure, customer concentration and contract renewals as relevant risks. The significant Department of Defense contract was scheduled to expire in April 2015.
- Warrants issued to Walgreens and Alliance Boots could dilute existing shareholders if exercised in 2016 and 2017. The company had completed capped-call hedges intended to cover 60% of warrant shares, subject to share-price caps, and authorized a separate $650 million repurchase program to help mitigate dilution.
- Legal matters included sealed qui tam allegations and government subpoenas concerning oncology distribution, as well as federal investigations into controlled-substance diversion controls and a West Virginia controlled-substances complaint. The company said it could not predict the outcomes. It also disclosed $51.2 million of unrecognized tax benefits, including interest and penalties.
Important facts for investors to verify
- Whether Walgreens growth, contract economics and associated receivables and inventory requirements support sustainable earnings and cash conversion.
- How LIFO expense, warrant fair-value changes and their tax treatment affect reported earnings and the effective tax rate.
- Progress and potential outcomes of controlled-substance and qui tam investigations, and the West Virginia litigation.
- Renewal terms for the Department of Defense contract and the extent to which warrant hedges and repurchases offset potential dilution.
- Whether fiscal 2014 revenue, operating-cash-flow and capital-expenditure expectations were achieved; this filing provides forecasts, not final outcomes.