Business context and reporting period
This summary covers Cencora, Inc., then named AmerisourceBergen Corporation, and its unaudited fiscal third quarter and first nine months ended June 30, 2016. The business distributes pharmaceuticals and provides related healthcare services; its reportable segments are Pharmaceutical Distribution and Other.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Revenue | $36.882 billion; up 7.7% | $109.289 billion; up 8.8% |
| Gross profit | $1.108 billion; up 24.3% | $3.148 billion; up 23.2% |
| Operating income (loss) | $526.6 million, versus $332.6 million | $1.295 billion, versus a $120.1 million loss |
| Net income (loss) | $349.8 million, versus $214.2 million | $1.284 billion, versus a $499.2 million loss |
| Diluted EPS | $1.56, versus $0.89 | $5.69, versus $(2.27) |
| Operating cash flow | Not separately presented | $1.822 billion, versus $2.760 billion |
Quarterly gross margin was approximately 3.0% (2.6% prior year); nine-month gross margin was approximately 2.9% (2.5%). Net cash used in investing was $3.021 billion, including $2.731 billion for acquisitions and $310 million in capital expenditures. Cash ended at $1.865 billion, down from $2.167 billion at September 30, 2015. Total debt was $4.407 billion, including $613 million current and $3.794 billion long-term. The company reported $2.452 billion of additional borrowing availability under facilities. Current assets were $21.457 billion against current liabilities of $23.997 billion.
Material changes versus prior comparable periods
- Growth reflected higher ABDC brand and generic sales, strong ABSG growth, and acquisitions. PharMEDium was acquired for approximately $2.7 billion in November 2015; MWI, acquired in February 2015, boosted nine-month Other-segment results.
- Pharmaceutical Distribution revenue grew 8.0% in the quarter and 7.4% year to date. ABSG revenue rose 20.2% and 17.8%, respectively; ABDC growth was 6.5% and 5.7%. Hepatitis C product sales were lower.
- Reported gross profit benefited from lower LIFO expense and higher antitrust settlement gains. LIFO expense was $80.4 million in the quarter and $274.3 million year to date, versus $158.7 million and $453.9 million. Antitrust settlement gains were $121.0 million and $133.8 million, versus $43.6 million and $65.1 million.
- Operating cash flow declined by $938 million year over year, with working-capital movements significant. Receivables and inventory increases used $705 million and $676 million, partly offset by a $1.812 billion increase in accounts payable, accrued expenses and income taxes.
- Interest expense rose to $96.1 million for nine months from $70.1 million, mainly due to higher average borrowings used to finance acquisitions.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2016 revenue growth of approximately 8% and capital expenditures of approximately $400 million. It expected cash flows and borrowing capacity to fund ongoing requirements and anticipated continuing quarterly dividends, subject to board discretion.
- Pharmaceutical Distribution margins faced pressure from lower generic price appreciation, less favorable Department of Defense and GPO contract renewals, and increased sales to large, lower-margin customers. Kaiser Permanente’s five-year contract began July 1, 2016 on less favorable terms; management also expected days sales outstanding to rise as payment terms with its largest customer gradually changed.
- Unusual earnings items materially affect comparisons: a roughly $456 million tax benefit from an IRS ruling on warrant exercise deductions; warrant fair-value income of $120.3 million year to date versus $1.109 billion expense a year earlier; a $47.6 million pension settlement charge; and antitrust settlement gains. Warrant income or expense may fluctuate with the share price.
- Legal matters include sealed qui tam allegations concerning pharmaceutical distribution and ongoing federal investigations involving oncology operations and controlled-substance diversion controls. The company said outcomes and potential penalties or settlements were not estimable; a West Virginia controlled-substance case was scheduled for trial in January 2017.
- Other stated risks include customer or supplier loss or contract repricing, reimbursement and regulatory changes, generic price deflation, acquisition integration, litigation, and interest-rate and share-price volatility. The company reported compliance with debt covenants and effective disclosure controls, with no material internal-control change in the quarter.
Important facts for investors to verify
- How much of reported profit growth reflects recurring operations versus the tax ruling, warrant valuation changes, LIFO, antitrust gains and pension costs.
- Whether working-capital needs, including the expected increase in days sales outstanding, constrain future cash generation.
- Whether acquired PharMEDium and MWI businesses deliver expected growth and whether acquisition-related amortization and debt remain manageable.
- The outcome and potential financial or operating impact of the disclosed investigations, qui tam matters and West Virginia litigation.
- Whether contract renewals and pricing pressure affect distribution margins, and whether the approximately 8% fiscal 2016 revenue outlook is achieved.