Cencora, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended December 31, 2023; comparisons are with the three months ended December 31, 2022 unless otherwise noted. Figures are unaudited.
Business context and results
Cencora distributes pharmaceuticals and provides related healthcare services through U.S. Healthcare Solutions and International Healthcare Solutions. Revenue grew primarily on higher U.S. sales volumes, including GLP-1 products, specialty medicines and COVID-19 vaccines. The January 2023 PharmaLex acquisition also contributed to international growth.
| Metric | Q1 FY2024 | Prior year | Change |
|---|---|---|---|
| Revenue | $72.253 billion | $62.847 billion | +15.0% |
| Gross profit | $2.469 billion | $2.146 billion | +15.0% |
| Operating income | $822.9 million | $633.1 million | +30.0% |
| Net income attributable to Cencora | $601.5 million | $479.7 million | +25.4% |
| Diluted EPS | $2.98 | $2.33 | +27.9% |
| Operating cash flow | $885.2 million | $710.1 million | +$175.1 million |
Gross margin was approximately 3.42% of revenue. U.S. Healthcare Solutions revenue increased 15.9%; International Healthcare Solutions revenue increased 6.9%. U.S. segment operating income rose 22.0% and international segment operating income rose 16.3%. U.S. gross margin declined five basis points, partly because GLP-1 products carry lower margins; higher COVID-19 vaccine sales partly offset the decline. Company-wide operating income benefited from a LIFO credit versus a prior-year LIFO expense and a litigation-related credit.
Cash flow, balance sheet and capital
- Operating cash flow was $885.2 million. Working capital movements included a $1.096 billion inventory increase and a $504.1 million increase in receivables, partly offset by a $1.765 billion increase in accounts payable. Capital expenditures were $74.2 million.
- Cash and cash equivalents were $2.872 billion at December 31, 2023, versus $2.592 billion at September 30, 2023. Cash, cash equivalents and restricted cash totaled $3.036 billion.
- Total debt was $4.779 billion, including $592.8 million of short-term debt and $4.186 billion of long-term debt. Cash was below total debt by approximately $1.9 billion. The company reported compliance with its credit facility covenants.
- Available borrowing capacity under listed facilities was approximately $4.271 billion. The $2.4 billion revolving facility had no borrowings outstanding; the $1.45 billion receivables facility had $350 million outstanding. No commercial paper was outstanding.
- Current assets were $44.859 billion and current liabilities were $50.773 billion. Accounts payable was $47.743 billion, reflecting the working-capital-intensive distribution model.
- The company repurchased $385.5 million of shares, including $250 million from related party Walgreens Boots Alliance (WBA). $423.5 million remained under the $1 billion authorization. The quarterly dividend increased 5% to $0.51 per share.
Material changes and unusual items
- Revenue increased $9.4 billion; U.S. Healthcare Solutions contributed $8.9 billion of the increase. GLP-1 product sales rose by $2.1 billion, and sales including GLP-1 products and COVID-19 vaccines to the two largest customers increased $3.2 billion.
- Amortization expense rose to $166.4 million from $72.4 million, primarily due to accelerated amortization of certain trade names following the company name change and transition away from acquired brands.
- Operating expenses included a net $78.9 million litigation and opioid-related credit, versus $12.7 million of expenses in the prior-year quarter. The current-period credit included a $92.2 million reduction in opioid settlement accrual, primarily related to a commitment to prepay a future obligation, and $13.3 million of legal fees.
- A $48.2 million antitrust settlement gain was recorded as a reduction to cost of goods sold, compared with $49.9 million in the prior year. A $48.4 million LIFO credit compared with a $25.1 million LIFO expense in the prior year.
- Restructuring and other expenses increased to $34.4 million, including facility closures, workforce reductions, rebranding and operational/technology initiatives.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided in the supplied filing text. Management expects approximately $500 million of fiscal 2024 capital expenditures, including technology investments.
- Management stated operating cash flows and borrowing capacity are expected to fund ongoing needs, including opioid settlement payments. The company expects to continue quarterly dividends, subject to board discretion and business conditions.
- The company had approximately $5.4 billion of accrued opioid-related liabilities at December 31, 2023, primarily payable over 18 years under settlement arrangements. It estimated $645.2 million would be paid before December 31, 2024; a prepayment made in January 2024 reduced the accrual by approximately $0.1 billion. The ultimate loss on matters outside the accrual is not reasonably estimable and could differ materially from amounts recorded.
- An agreement in principle would resolve Alabama opioid claims for approximately $245 million jointly with another distributor; Cencora’s half is included in its accrual and the agreement remains subject to contingencies. Other opioid cases and a federal Controlled Substances Act case remain pending. The company denies the federal allegations and intends to defend itself.
- WBA-related agreements extend through 2029 and 2031. WBA accounted for $18.1 billion of quarterly revenue, and Cencora had a $7.5 billion receivable from WBA at quarter-end. Continued customer/supplier relationships and contract economics are important risks.
- Other disclosed risks include pharmaceutical pricing and reimbursement changes, customer and supplier concentration, foreign exchange and Turkish inflation exposure, interest rates, cybersecurity, regulatory compliance, and litigation. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether GLP-1 and other high-volume product growth translates into sustained profit growth despite distribution’s thin margins and product-mix effects.
- Cash conversion and seasonal working-capital needs, including reliance on supplier payment timing and customer collections.
- Opioid settlement payment schedule, remaining exposure outside recorded accruals, and developments in the federal and other pending litigation.
- WBA relationship concentration, receivable collection, and the terms and durability of the related commercial agreements.
- Debt maturities, facility availability, and the company’s ability to fund capital spending, dividends and repurchases while meeting settlement obligations.
- Whether management’s approximately $500 million fiscal 2024 capital expenditure expectation and its cash-flow outlook remain on track.