AmerisourceBergen Corporation (now Cencora, Inc.) — Q3 FY2015 Form 10-Q
Business context and period: The filing covers the fiscal quarter and nine months ended June 30, 2015. AmerisourceBergen distributes pharmaceuticals and provides related services; its segments are Pharmaceutical Distribution and Other. Results include MWI Veterinary Supply, acquired February 24, 2015 for approximately $2.6 billion.
Financial performance
| Metric | Q3 FY2015 | Change vs. Q3 FY2014 | Nine months FY2015 |
|---|---|---|---|
| Revenue | $34.234 billion | +12.8% | $100.491 billion; +14.2% |
| Gross profit | $891.5 million | +28.8% | $2.556 billion; +21.1% |
| Operating income (loss) | $332.6 million | Compared with $110.9 million | $(120.1) million, versus $571.6 million |
| Net income (loss) | $214.2 million | Versus $(12.8) million | $(499.2) million, versus $208.7 million |
| Diluted EPS | $0.89 | Versus $(0.06) | $(2.27), versus $0.89 |
| Operating cash flow | Not separately reported for the quarter | $2.760 billion, versus $632.5 million |
- Q3 gross margin was approximately 2.60%, compared with approximately 2.28% a year earlier. Pharmaceutical Distribution gross margin was 2.28%, down 4 basis points; segment operating income rose 5.0% in the quarter.
- Cash and cash equivalents were $2.555 billion at June 30, 2015. Total debt was $3.750 billion, up from $1.996 billion at September 30, 2014. The company reported $2.449 billion of additional borrowing availability and compliance with credit-facility covenants.
- Current assets were $19.902 billion and current liabilities $21.117 billion. Nine-month operating cash flow reflected, among other factors, a $3.531 billion increase in accounts payable, accrued expenses and income taxes; receivables and inventory also increased.
Material changes and unusual items
- Revenue growth reflected increased brand and generic sales, WBA business volumes, growth in specialty distribution and ABCS, and MWI. MWI contributed $810 million of Q3 revenue and $1.1 billion for the nine-month period.
- Nine-month operating results included $1.109 billion of warrant expense, compared with $267.0 million a year earlier. The expense reflects changes in the fair value of warrants issued to Walgreens Boots Alliance (WBA), is sensitive to the company’s share price, and was largely nondeductible for tax purposes.
- LIFO expense rose to $158.7 million in Q3 and $453.9 million for nine months, versus $133.2 million and $293.6 million, respectively. Management attributed the increase mainly to higher brand inflation and lower generic drug deflation.
- Q3 included $43.6 million of gains from antitrust litigation settlements, recorded as a reduction of cost of goods sold. The nine-month amount was $65.1 million.
- The company financed part of MWI with a $1.0 billion term loan and $1.0 billion of newly issued long-term notes; it made a $250 million early principal payment on the term loan in June.
Outlook, commentary and risks
- Management expected fiscal 2015 revenue growth of 12% to 13% and approximately $215 million of capital expenditures. It expected future operating cash flows and borrowings to fund ongoing requirements; dividends were expected to continue, subject to the board’s discretion.
- Management cited the DOD contract renewal at less favorable terms and lower generic price appreciation as Q3 pressures. It identified the Kaiser Permanente contract, scheduled to expire in June 2016, as a significant renewal risk.
- WBA warrants exercisable in 2016 and 2017 could dilute shareholders. The company described hedging and repurchase measures and said it expected to deploy capital to cover 100% of the 2016 warrants; coverage depends on share price and other factors.
- Legal matters include government subpoenas and investigations concerning controlled-substance diversion controls, and sealed qui tam matters involving pharmaceutical distribution. The company stated it could not predict outcomes. It also disclosed West Virginia litigation; the Fulton County, Georgia case was dismissed without prejudice.
- Other risks discussed include reimbursement and regulatory changes, customer or supplier concentration and contract renewals, acquisition integration, interest and currency movements, and litigation. The filing’s Part II risk-factor item states “None.”
Investor verification priorities
- Assess how much of reported operating cash flow depends on working-capital timing and supplier payment terms.
- Track warrant fair-value changes, share-price sensitivity, dilution exposure, and the costs and actual coverage of hedging and repurchases.
- Review LIFO assumptions and the effects of brand inflation and generic pricing on margins.
- Evaluate MWI integration, contribution to results, acquisition-related debt, and the preliminary purchase-price allocation.
- Monitor the Kaiser contract renewal and the outcomes or financial effects, if any, of the disclosed investigations and litigation.