Business context and reporting period
AmerisourceBergen Corporation (the historical registrant name; the request metadata identifies Cencora, Inc.) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2014. The company distributes pharmaceuticals and provides related services through its Pharmaceutical Distribution segment and its “Other” businesses.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $33,588.6 | $29,176.4 | +15.1% |
| Gross profit | $752.3 | $688.2 | +9.3% |
| Operating income (loss) | $(88.4) | $159.6 | Turned to loss |
| Net income (loss) | $(199.9) | $41.4 | Turned to loss |
| Diluted EPS | $(0.91) | $0.17 | Turned to loss |
| Operating cash flow | $897.0 | $(1,003.6) | Improved |
- Pharmaceutical Distribution revenue rose 15.2% to $33.0 billion; Other revenue rose 15.2% to $696.0 million. Segment operating income increased 35.0% to $435.6 million, including $390.4 million from Pharmaceutical Distribution.
- Pharmaceutical Distribution gross profit increased 26.6% to $752.1 million; its gross margin was 2.28%, up 20 basis points. Other gross margin fell to 20.73% from 21.61%, partly due to a greater share of lower-margin distribution revenue.
- Consolidated gross margin was approximately 2.24% versus 2.36% in the prior-year quarter. This comparison reflects higher LIFO expense and the prior-year antitrust settlement gains.
- Operating expenses were $840.7 million, up 59.0%, primarily because warrant expense rose to $371.4 million from $116.3 million. LIFO expense was $144.0 million versus $57.6 million.
- Income tax expense was $92.9 million despite the pretax loss; the filing says much of the warrant expense is not tax deductible, causing the effective tax rate to fluctuate.
- Cash and cash equivalents were $2,298.8 million at December 31, versus $1,808.5 million at September 30. Long-term debt was $1,995.9 million, with no revolving, securitization, or commercial-paper borrowings outstanding. Available credit facilities totaled $2,425 million; the company reported compliance with applicable covenants.
- Quarter-end current assets were $20,144.7 million and current liabilities $20,805.0 million. Accounts receivable was $7,144.0 million, inventory $10,628.3 million, and accounts payable $19,031.7 million.
Changes, drivers, and cash flow
Revenue growth reflected a full quarter of generic drug distribution to Walgreens Boots Alliance (WBA), increased brand and generic sales—including Hepatitis C therapies—and growth in specialty distribution and other businesses. Management cited better-than-expected brand and generic price appreciation and income from the WBA procurement joint venture. Distribution, selling, and administrative expense rose 14.4% to support higher volumes.
The reported operating loss and net loss were driven chiefly by higher warrant remeasurement expense and LIFO expense, notwithstanding higher segment operating income. Warrant expense varies with the company’s share price. The prior-year quarter also included $21.0 million of antitrust settlement gains and a $7.5 million discontinued-operations loss.
Operating cash flow improved to $897.0 million from cash used of $1,003.6 million. Current-quarter cash generation was substantially affected by a $3.5 billion increase in accounts payable, accrued expenses, and income taxes, offset in part by inventory growth of $2.1 billion and receivables growth of $766.7 million. Management cautioned that operating cash flow can vary significantly with working capital and seasonality. Capital expenditures were $52.6 million; share repurchases were $300.2 million and dividends paid were $64.0 million.
Guidance, outlook, risks, and notable items
- Management expected FY2015 revenue growth of 10%–11% and capital expenditures of approximately $250 million. It expected to repurchase $200 million of shares under the regular program, excluding the separate special program, subject to market conditions.
- In January 2015, the company agreed to acquire MWI Veterinary Supply for $190 per share, an approximately $2.5 billion fully diluted equity value. The tender offer was subject to shareholder tender, antitrust clearance, and customary conditions; closing was expected in the March 2015 quarter. Financing was expected to combine cash and long-term debt; a $2.15 billion 364-day bridge facility had been committed.
- The WBA warrants, exercisable in 2016 and 2017, were valued at $1,688.9 million at quarter-end. The company had hedged a portion of potential dilution with capped calls and share repurchases; it paid a further $100 million in January 2015 to increase certain capped-call caps.
- Key commercial exposure includes the Express Scripts contract, which accounted for approximately 17% of quarterly revenue and expires in September 2015, subject to Express Scripts’ option for an automatic one-year renewal.
- Disclosed contingencies include sealed qui tam matters and government subpoenas concerning oncology distribution, and federal investigations and subpoenas concerning controlled-substance diversion monitoring. The West Virginia controlled-substances case remained pending; the company said it could not predict outcomes. The filing reports no new risk factors in Part II, but discusses these and other risks in the notes and MD&A.
- Other stated risks include pharmaceutical pricing and reimbursement changes, customer or supplier concentration and contract terms, generic price and inventory effects, regulatory enforcement, acquisition execution, and interest-rate, foreign-exchange, and share-price volatility. The company reported $53.0 million of unrecognized tax benefits, including interest and penalties.
Important facts for investors to verify
- Whether the warrant and LIFO charges—and their effects on taxes, earnings, and EPS—persist or change materially in subsequent quarters.
- Whether FY2015 revenue and capital expenditure expectations were achieved, and whether working-capital movements support sustainable operating cash generation.
- The renewal and economics of the Express Scripts agreement and ongoing WBA relationship, including the procurement joint venture.
- Completion, final financing, and integration of the MWI acquisition, including the resulting debt and liquidity position.
- Developments in the controlled-substances and oncology-related legal and government matters, and any resulting financial exposure.
- Potential dilution from WBA warrants and the effectiveness and cost of capped calls and share repurchases.