AmerisourceBergen Corporation (now Cencora, Inc.) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; unaudited. This filing is 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. Results benefited from the Walgreens distribution agreement, which began September 1, 2013; fiscal 2014 included eleven incremental months of brand distribution and a phased introduction of generic distribution for Walgreens.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $29.176 billion | $21.060 billion | +38.5% |
| Gross profit | $688.2 million | $660.8 million | +4.1% |
| Operating income | $159.6 million | $299.4 million | -46.7% |
| Income from continuing operations | $48.9 million | $174.6 million | -72.0% |
| Net income | $41.4 million | $168.6 million | Lower |
| Diluted EPS from continuing operations | $0.21 | $0.74 | -71.6% |
| Gross margin | 2.36% | 3.14% | Lower |
| Operating margin | 0.55% | 1.42% | Lower |
Revenue rose sharply, led by Pharmaceutical Distribution revenue growth of 39.0%. ABDC revenue increased 45.5%, including $6.6 billion of additional Walgreens sales; ABSG revenue increased 8.2%. Other revenue grew 19.6%. Pharmaceutical Distribution segment operating income increased 7.5%, while Other segment operating income increased 20.9%.
Cash flow, liquidity, and debt
- Operating cash flow was a use of $1.004 billion, versus a $241.7 million use in the prior-year quarter. The principal driver was a $1.627 billion inventory increase, alongside a $159.1 million increase in receivables; higher payables and accrued items partly offset these uses.
- Cash and cash equivalents fell to $347.5 million from $1.231 billion at September 30, 2013. Capital expenditures were $59.2 million; investing cash use was $68.2 million.
- Total debt was $1.820 billion, including $423.0 million of variable-rate borrowings and $1.397 billion of fixed-rate senior notes. The company reported $2.222 billion of additional availability across its revolving and receivables facilities and stated it was compliant with facility covenants.
- Current assets were $15.228 billion and current liabilities $15.829 billion. Accounts payable were $13.859 billion. Short-term debt was $423.0 million.
- Cash dividends declared were $0.235 per share, up from $0.21. The company repurchased $19.7 million of shares during the quarter and paid $193.0 million for capped-call hedges.
Material changes and unusual items
- Operating income included $116.3 million of warrant expense associated with warrants issued to Walgreens and Alliance Boots. The warrants’ reported fair value was $895.2 million at December 31, 2013; revaluation may cause significant earnings and tax-rate fluctuations.
- LIFO expense was $57.6 million, compared with $1.2 million in the prior-year quarter. Antitrust settlement gains partially offset these items: $21.0 million versus $12.3 million.
- The effective tax rate was 65.4%, compared with 37.8%, principally because much of the warrant expense was not tax deductible. Excluding warrant effects, management expected a fiscal 2014 tax rate in the low 38% range.
- Discontinued operations generated a $7.5 million after-tax loss, including a final working-capital adjustment related to the prior divestiture of AmerisourceBergen Canada; the comparable-period loss was $6.0 million.
- Management reported that the company completed its warrant hedge transaction in January 2014. Capped calls were intended to hedge 60% of warrant-related shares, subject to share-price caps.
Guidance, commentary, and risks
Management forecast fiscal 2014 revenue growth of 30%–34%, operating cash flow of $800 million–$1.0 billion, and capital expenditures of approximately $300 million. It expected to purchase approximately $500 million of its own shares in fiscal 2014, subject to market conditions. Management attributed the revenue outlook primarily to Walgreens and expected a modest revenue benefit from the Affordable Care Act.
Risks cited include lower distribution margins and customer concentration; customer or supplier relationship changes; generic-drug pricing and competition; reimbursement and regulatory changes affecting physician-administered specialty drugs; and the possible dilution, earnings effects, and strategic risks of the Walgreens/Alliance Boots arrangements. The filing also describes government subpoenas and investigations concerning controlled-substance diversion and oncology distribution, sealed qui tam matters, and litigation including a West Virginia complaint. The company said outcomes could not be predicted. It also identified interest-rate, foreign-exchange, common-stock-price, and working-capital risks.
Key facts for investors to verify
- Whether Walgreens-related volume growth can translate into improved margins, given lower-margin brand sales and reported margin compression.
- Whether the substantial first-quarter working-capital outflow reverses as seasonal inventory is sold and receivables collected, supporting management’s full-year cash-flow forecast.
- The future fair-value expense, tax impact, and potential dilution from the Walgreens and Alliance Boots warrants, and the effectiveness and cost of the capped-call hedge.
- Developments, potential liabilities, and financial impacts from the controlled-substance and oncology-related investigations and litigation.
- Execution of fiscal 2014 revenue, cash-flow, capital-spending, and share-repurchase plans, including the effect of debt maturities and facility availability.