Cencora, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2024; fiscal year ends September 30. Comparisons are with the corresponding 2023 periods. Amounts are in U.S. dollars.
Business context and results
Cencora distributes human and animal health products and provides healthcare-related services through U.S. Healthcare Solutions and International Healthcare Solutions. Revenue growth was led by U.S. volume, including GLP-1 products, specialty products, and COVID-19 vaccines.
| Metric | Three months ended Mar. 31, 2024 | Change year over year | Six months ended Mar. 31, 2024 | Change year over year |
|---|---|---|---|---|
| Revenue | $68.414 billion | +7.8% | $140.667 billion | +11.4% |
| Gross profit | $2.538 billion | +10.6% | $5.007 billion | +12.7% |
| Operating income | $553.3 million | -1.3% | $1.376 billion | +15.3% |
| Net income attributable to Cencora | $420.8 million | -3.4% | $1.022 billion | +11.7% |
| Diluted EPS | $2.09 | Down from $2.13 | $5.07 | Up from $4.46 |
| Operating cash flow | Six-month period: $6.7 million, versus $1.340 billion in 2023 | — |
Segment operating income, before specified items including opioid-related costs, amortization, restructuring, and LIFO effects, increased 10.9% in the quarter to $1.034 billion and 15.2% for six months to $1.920 billion. U.S. segment revenue rose 8.1% in the quarter and 12.0% year to date; International revenue rose 5.3% and 6.1%, respectively.
Financial position, cash flow, and capital allocation
- At March 31, cash and cash equivalents were $2.069 billion; total debt was $5.249 billion, including $1.069 billion of short-term debt. Long-term debt was $4.180 billion.
- Current assets were $44.161 billion and current liabilities $49.762 billion. Accounts payable of $46.321 billion is a major feature of the distributor’s working-capital structure.
- Six-month operating cash flow fell to $6.7 million from $1.340 billion. The company cited a $1.4 billion increase in net working-capital balances, including approximately $600 million of delayed customer collections following the February Change Healthcare cyberattack, timing of customer receipts and supplier payments, and $250.1 million of opioid settlement payments.
- Six-month investing cash outflow was $232.3 million, including $187.0 million of capital expenditures. Management expects approximately $500 million of fiscal 2024 capital expenditures, including technology investments.
- Six-month financing cash outflow was $228.5 million, including $436.4 million of share repurchases and $212.7 million of dividends, partly offset by issuance of $500 million of 5.125% senior notes due 2034. The notes’ proceeds were intended to repay $500 million of 3.400% notes due May 2024.
- The company reported $4.010 billion of additional availability under specified credit facilities at quarter-end and compliance with relevant facility covenants. In April 2024, it extended its receivables securitization facility to October 2026.
Material changes and unusual items
- Quarterly operating income and attributable net income declined despite higher revenue and gross profit, largely reflecting a $214 million accrual for opioid-related litigation; litigation and opioid-related expense was $226.0 million for the quarter, compared with $15.8 million a year earlier.
- For the six months, litigation and opioid-related expense was $147.1 million, versus $28.5 million in 2023. The current period included the $214 million accrual and a net $92.2 million reduction in an opioid settlement accrual, primarily due to prepayment of a future obligation.
- Gross profit benefited from LIFO credits ($22.8 million in the quarter; $71.3 million for six months), versus LIFO expense in the prior-year periods. Antitrust settlement gains reduced cost of goods sold by $8.7 million in the quarter and $57.0 million for six months.
- Quarterly amortization expense increased 17.6%; six-month amortization increased 55.7%, mainly due to accelerated amortization of certain trade names following the company’s name change.
- The company experienced a cybersecurity event in which data was exfiltrated, disclosed in February 2024. Related costs were recorded in restructuring and other expenses, but the filing text does not provide a clear separate cost total.
- Revenue from Walgreens Boots Alliance (WBA), a related party and shareholder, was $18.8 billion for the quarter and $36.9 billion for six months. The company’s net receivable from WBA was $7.8 billion at March 31.
Outlook, risks, and contingencies
The filing does not provide specific full-year revenue or earnings guidance. Management said operating cash flows and borrowings are expected to fund ongoing requirements, including opioid-related payments, which are expected to continue over approximately 14 years. The company expects to continue quarterly dividends, subject to board discretion.
Key operating sensitivities include customer and supplier contract terms, customer concentration, pharmaceutical pricing and reimbursement, GLP-1 product mix, generic and biosimilar competition, foreign exchange, interest rates, and economic conditions. Management noted no significant customer contracts expired during the six months and none were scheduled to expire over the following 12 months.
Opioid-related litigation remains a material contingency. The recorded opioid liability was approximately $5.1 billion at March 31, 2024, with about $407.5 million expected to be paid before March 31, 2025. Separately, the company recorded a $214 million liability for its expected share of potential settlements involving hospital and third-party-payor litigation. The company says possible losses outside recorded accruals are not reasonably estimable; actual outcomes could differ materially.
Other risks include a U.S. Department of Justice Controlled Substances Act case, ongoing opioid lawsuits and investigations, antitrust and other legal proceedings, cybersecurity and data privacy risks, and foreign-market exposure. The filing states that management judged disclosure controls effective at quarter-end and identified no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether working-capital cash conversion recovers, particularly collections affected by the Change Healthcare cyberattack and the timing of supplier payments.
- Updates to opioid and other litigation accruals, settlement participation, payment schedules, and potential losses not currently estimable.
- Progress on repayment of the 2024 senior notes and the company’s debt, liquidity, and facility availability after seasonal working-capital needs.
- Whether revenue growth and segment operating income persist as GLP-1 volumes, product mix, pricing, and customer concentration evolve.
- Further disclosure of cybersecurity-event costs, impacts, remediation, and any related operational or legal consequences.
- Execution of the announced share repurchase programs, including the new $2.0 billion authorization, and the sustainability of dividends alongside litigation payments and capital spending.