AmerisourceBergen Corporation (now Cencora, Inc.) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. The filing was issued under the name AmerisourceBergen Corporation.
Business context
The company distributes pharmaceuticals and provides related services through Pharmaceutical Distribution Services, with manufacturer services, logistics, and animal-health businesses reported in Other. Walgreens Boots Alliance (WBA), a related party and major customer, generated $11.0 billion of revenue in the quarter and $22.2 billion for the six-month period.
Financial performance
| Metric | Quarter ended March 31, 2017 | Comparable 2016 period |
|---|---|---|
| Revenue | $37.15 billion, up 4.1% | $35.70 billion |
| Gross profit | $1.26 billion, up 16.8% | $1.08 billion |
| Operating income | $625.0 million | $950.5 million |
| Net income | $411.5 million | $603.5 million |
| Diluted EPS | $1.86 | $2.68 |
- For the six months, revenue was $75.32 billion, up 4.0%; net income was $658.7 million versus $933.1 million, and diluted EPS was $2.97 versus $4.13.
- Quarterly gross profit benefited substantially from an $86.5 million LIFO credit, compared with a $92.4 million LIFO expense a year earlier. Distribution Services gross profit nevertheless fell 1.5%; its operating income fell 3.6%. Other segment operating income rose 13.0%.
- Prior-year operating income and earnings included $503.9 million of warrant income. The warrants had been exercised by 2016, so there was no comparable income in 2017. The prior-year six-month tax rate also benefited from an IRS ruling related to warrant exercises.
- Quarterly SG&A was $521.8 million, or 1.40% of revenue. Net interest expense was $37.3 million, up from $36.0 million.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $368.4 million, down from $1.63 billion. Inventory and receivables increases used $556.1 million and $417.7 million, respectively; accounts payable provided $351.0 million.
- Cash and cash equivalents were $2.40 billion at March 31, 2017. Total debt was $4.09 billion, including $615.8 million current debt; long-term debt was $3.48 billion. The company reported $2.45 billion of additional availability across listed credit facilities and was compliant with its debt covenants.
- Six-month capital expenditures were $262.7 million. Financing activities included $229.9 million of share repurchases and $160.1 million of dividends paid.
- Current assets of $23.49 billion were below current liabilities of $25.53 billion, reflecting substantial accounts payable typical of the distribution business.
Outlook, changes, and risks
- Management expected fiscal 2017 revenue growth of 5.5%–6.5%, operating cash flow of $1.6–$1.9 billion, and capital expenditures of approximately $500 million. No EPS guidance is stated in the supplied filing text.
- In April 2017, the company signed a new five-year Express Scripts agreement, extending the relationship through September 2022. The prior agreement had been scheduled to expire in September 2017; fiscal 2016 revenue under it was approximately $23 billion.
- Management attributed growth to larger ABDC customers, specialty and oncology sales, and growth at MWI and ABCS. Pressure on distribution profitability reflected less favorable customer contract renewals, sales mix, lower price appreciation, and reduced PharMEDium shipments while quality systems were enhanced. Management expected a lower PharMEDium contribution in the second half of fiscal 2017.
- Uncertainties include pharmaceutical price inflation and generic deflation, customer and supplier concentration and contract terms, reimbursement and regulatory changes, and working-capital swings. Management noted that changes in large-customer payment terms can materially affect operating cash flow.
- Legal matters include ongoing federal investigations involving oncology distribution, compounding, controlled-substance diversion, and other pharmacy activities; related outcomes and possible losses were not reasonably estimable. A $16.0 million West Virginia state settlement was recorded in the six-month period, with allegations denied. The filing also describes pending West Virginia claims and a customer dispute with claimed damages exceeding $100 million; the company said its exposure was not assessable.
- The company revised prior-period statements for lease accounting. The corrections changed certain expenses and balance-sheet presentation but did not affect diluted EPS or the net change in cash for the cited 2016 periods. Adoption of new share-based compensation accounting also produced $24.0 million of tax benefits in the six-month 2017 period.
Important facts for investors to verify
- Whether fiscal 2017 revenue and operating-cash-flow guidance was achieved, and how much cash flow reflects sustainable earnings versus working-capital timing.
- Whether LIFO credits, generic deflation, and brand-price trends materially change gross profit in subsequent periods.
- Progress on PharMEDium quality-system improvements, shipments, and contribution to profitability.
- Economics and performance of the renewed Express Scripts agreement, other major customer contracts, and WBA-related sales and receivables.
- Developments, potential financial impact, and any settlements or restrictions arising from the investigations and litigation disclosed in the filing.
- Repayment or refinancing plans for the $599.8 million senior notes due in 2017, and continued compliance with credit-facility covenants.