AmerisourceBergen Corporation — FY2016 Form 10-K Summary
Issuer and period: The supplied filing is for AmerisourceBergen Corporation, not a filing under the name Cencora. It reports the fiscal year ended September 30, 2016; the annual report also provides fourth-quarter results. Unless noted otherwise, financial amounts are in U.S. dollars.
Business context
AmerisourceBergen distributes branded, generic and specialty pharmaceuticals and related products and services to healthcare providers and manufacturers. Its reportable segments are Pharmaceutical Distribution and Other, which includes animal-health distributor MWI, World Courier and manufacturer-services businesses. Fiscal 2016 included PharMEDium, acquired in November 2015, for outsourced compounded sterile preparations; MWI, acquired in February 2015, also contributed to growth.
Key financial metrics
| Metric | FY2016 | FY2015 | Change or context |
|---|---|---|---|
| Revenue | $146.85 billion | $135.96 billion | Up 8.0% |
| Gross profit | $4.27 billion | $3.53 billion | Up 21.1%; included LIFO expense and antitrust settlement gains |
| Operating income | $1.53 billion | $422.2 million | Higher largely as warrant expense declined |
| Net income (loss) | $1.43 billion | $(138.2) million | Tax and warrant-related items materially affected both years |
| Diluted EPS | $6.32 | $(0.63) | FY2016 includes significant warrant-related tax benefits |
| Cash provided by operations | $3.18 billion | $3.92 billion | Lower year over year; heavily affected by working-capital movements |
| Capital expenditures | $464.6 million | $231.6 million | FY2016 free cash flow, defined as operating cash flow less capital expenditures, was approximately $2.71 billion |
| Cash and cash equivalents | $2.74 billion | $2.17 billion | At September 30 |
| Total debt | $4.21 billion | $3.49 billion | At September 30; FY2016 net debt was approximately $1.46 billion |
Reported gross margin was approximately 2.91% of revenue and operating margin approximately 1.04% in FY2016. Pharmaceutical Distribution revenue grew 7.0% and segment operating income grew 2.3%; its gross margin was 2.30%, down 9 basis points. Other revenue increased 33.8%, mainly reflecting MWI, while its gross margin declined to 17.32% from 18.14%.
For the fourth quarter of FY2016, revenue was $37.56 billion, gross profit $1.12 billion, operating income $224.8 million, net income $145.7 million and diluted EPS $0.64. Q4 included a $74.1 million LIFO credit; the filing does not provide a clearly identified, adjusted Q4 result excluding this and other unusual items.
Liquidity included $2.45 billion of additional availability under the listed revolving and securitization facilities at year-end. The company reported compliance with applicable credit-facility covenants. Seasonal working-capital needs can require intra-period borrowings.
Material changes versus prior period
- Revenue grew 8.0%; ABDC revenue rose 5.6% and ABSG revenue rose 17.1% before intrasegment eliminations. Lower Hepatitis C product sales weighed on ABDC, while oncology and other specialty businesses supported ABSG.
- Pharmaceutical Distribution gross-profit growth was constrained by lower generic price appreciation, increased generic price deflation and customer contract renewals at less favorable terms. The WBA global sourcing arrangement provided an offsetting benefit.
- Total gross profit rose 21.1%, aided by a $342.6 million reduction in LIFO expense and antitrust settlement gains of $133.8 million versus $65.5 million in FY2015.
- Warrant expense fell to $140.3 million from $912.7 million. WBA exercised the warrants in 2016, generating $2.36 billion in proceeds. Separately, a favorable IRS private-letter ruling led to an approximately $456 million tax benefit adjustment, with about $52 million of additional warrant-related tax benefit recognized in 2016.
- Operating cash flow declined to $3.18 billion from $3.92 billion. It was supported by a $3.01 billion increase in accounts payable and reduced by increases in receivables and inventory. The company also spent $2.27 billion on share repurchases.
- The company revised prior-period financial statements to correct lease accounting. The correction increased FY2015 total assets by $226.8 million and reduced FY2015 net income by $3.3 million; the filing says it did not change cash increases in the affected prior years.
Outlook, commentary and risks
Management expected FY2017 revenue growth of 6.5%–8% and approximately $500 million in capital expenditures. It expected unfavorable branded and generic drug-pricing trends to continue in FY2017 and days sales outstanding to increase as payment terms with its largest customer changed. No FY2017 earnings or EPS guidance is stated in the supplied filing text.
The ten-year distribution and global sourcing arrangements with Walgreens Boots Alliance (WBA) were extended through 2026. WBA accounted for 30% of FY2016 revenue and Express Scripts for 16%; the Express Scripts contract was scheduled to expire in September 2017. Management cited customer and supplier concentration, pricing and reimbursement pressure, competition, regulation of controlled substances and compounding, cybersecurity, and acquisition integration as material risks.
Legal matters include government investigations and subpoenas concerning controlled-substance distribution and oncology-related practices, a West Virginia controlled-substance case scheduled for trial in January 2017, and a customer dispute involving PharMerica. The company stated that possible losses for the specified matters were not reasonably estimable and cautioned that an adverse resolution could materially affect results or financial condition. PharMEDium had received an FDA warning letter before its acquisition and subsequent inspections generated FDA Form 483 reports; the company could not assure that all observations would be resolved satisfactorily. These items are contingencies, not findings of liability.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting. PharMEDium was excluded from management’s and the auditor’s internal-control assessment under the permitted acquired-business scope.
Important facts for investors to verify
- Separate recurring operating performance from warrant valuation expense, warrant-related tax benefits, LIFO charges or credits, antitrust settlement gains, acquisition amortization and pension or severance items.
- Track the renewal and economics of the Express Scripts contract, WBA relationship, and other major customer agreements; together, the top ten customers represented about 65% of FY2016 revenue.
- Review updates on the government investigations, controlled-substance litigation and PharMEDium FDA observations, including any changes to estimated exposure, licenses or operating requirements.
- Assess cash conversion and liquidity alongside working-capital movements, customer payment-term changes, acquisition spending, debt maturities and share repurchases.
- Confirm the status and impact of the lease-accounting revision and the company’s implementation of new revenue-recognition and lease-accounting standards.