AmerisourceBergen Corporation (now Cencora, Inc.) — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015; comparative period is the three months ended December 31, 2014. The filing was made under the name AmerisourceBergen Corporation.
Business context and results
The company distributes pharmaceuticals and provides related services through its Pharmaceutical Distribution segment and other businesses. On November 6, 2015, it acquired PharMEDium, a provider of outsourced compounded sterile preparations, for approximately $2.7 billion in cash.
- Revenue rose 9.3% to $36.709 billion. Pharmaceutical Distribution revenue increased 6.7%; Other revenue rose 126.7%, primarily reflecting MWI, acquired in February 2015.
- Gross profit increased 28.3% to $964.9 million. The filing cites the MWI contribution, lower LIFO expense ($101.6 million versus $144.0 million), and $12.8 million of antitrust settlement gains. Pharmaceutical Distribution gross profit rose 2.6%, but its margin fell 9 basis points to 2.19%.
- Operating expenses were $1.145 billion, including $467.4 million of warrant expense and a $48.7 million pension settlement charge. The company reported an operating loss of $179.8 million, versus an $88.4 million loss.
- Net income was $330.4 million, or $1.46 diluted EPS, versus a net loss of $199.9 million, or $0.91 loss per diluted share. The turnaround was primarily due to a $540.8 million income tax benefit, substantially related to an IRS ruling on deductions for WBA warrants; the prior-year period had $92.9 million of income tax expense.
- Net interest expense increased 78.1% to $30.9 million, largely due to higher average borrowings following acquisition-related financing.
Cash flow, liquidity, and debt
- Operating cash flow was $750.8 million, down from $897.0 million. Investing cash outflow was $2.772 billion, including $2.727 billion for acquisitions; financing cash inflow was $832.3 million.
- Cash and cash equivalents were $978.1 million at December 31, 2015, down from $2.167 billion at September 30, 2015. The filing attributes working-capital movements to seasonal inventory needs and payment timing.
- Total debt was $4.502 billion, up from $3.493 billion at September 30, 2015; $108.4 million was classified as short-term. The company had $2.446 billion of additional availability across listed revolving, securitization, revolving-note, and overdraft facilities. It reported compliance with applicable debt covenants.
- Capital expenditures were $90.1 million; management expected approximately $400 million for fiscal 2016. The quarterly dividend increased 17% to $0.34 per share.
Material changes, outlook, and risks
- Management expected fiscal 2016 revenue growth of 8% to 10%. It also cited lower generic price appreciation and a Department of Defense contract renewal on less favorable terms as pressures on Pharmaceutical Distribution gross profit.
- Warrant expense rose year over year and is sensitive to the company’s stock price. WBA warrant exercises could dilute existing shareholders; hedges and repurchases were intended to mitigate, but not necessarily eliminate, dilution.
- Contracts with Kaiser Permanente and Express Scripts were scheduled to expire in June and September 2016, respectively; nonrenewal or less favorable terms could affect results and cash flow.
- The filing describes ongoing government investigations and subpoenas concerning oncology distribution and controlled-substance diversion, as well as West Virginia litigation over controlled-substance distribution. Outcomes and potential penalties or settlements were not estimable.
- Other stated risks include acquisition integration and performance, pharmaceutical pricing and reimbursement pressures, customer and supplier concentration or contract changes, regulation, interest and foreign-exchange rates, and the accuracy of estimates including LIFO expense.
Important facts for investors to verify
- How much reported earnings depended on the warrant-related tax benefit, and whether such benefits recur.
- PharMEDium’s final purchase-price allocation, integration progress, and contribution to earnings and cash flow.
- Renewal terms for the Kaiser Permanente and Express Scripts contracts, and the effect of the DOD contract renewal on distribution margins.
- Potential financial and operational effects of the disclosed investigations, litigation, and controlled-substance compliance matters.
- Debt repayment capacity, seasonal working-capital needs, and the extent to which warrant hedges and repurchases offset potential dilution.