Cencora (then AmerisourceBergen) — Fiscal Q2 2023 10-Q
Business context and period. This unaudited Form 10-Q covers the three and six months ended March 31, 2023, the company’s fiscal second quarter and first half. The company distributes pharmaceuticals and provides related services through U.S. Healthcare Solutions and International Healthcare Solutions. It announced plans to begin operating as Cencora in the second half of calendar 2023.
Financial performance
Quarterly results (three months ended March 31; prior-year comparison):
- Revenue was $63.46 billion, up 9.9% from $57.72 billion. Growth was led by U.S. Healthcare Solutions; sales to the two largest customers increased by $1.9 billion, while COVID-19 treatment revenue declined by $0.4 billion.
- Gross profit was $2.30 billion, up 2.7%. Operating income fell 28.2% to $560.5 million; net income attributable to the company fell 20.5% to $435.4 million.
- Diluted EPS was $2.13, versus $2.59. The quarterly dividend declared was $0.485 per share, versus $0.460.
First-half results (six months ended March 31):
- Revenue was $126.30 billion, up 7.6%; gross profit was $4.44 billion, up 3.4%.
- Operating income decreased 16.2% to $1.19 billion. Net income attributable to the company decreased to $915.1 million from $997.1 million; diluted EPS was $4.46 versus $4.71.
- Cash flow from operations was $1.34 billion, compared with $1.13 billion. Investing activities used $1.60 billion, including $1.41 billion for acquired companies; financing activities used $1.73 billion. Cash, cash equivalents and restricted cash ended at $1.69 billion, down $1.90 billion from the fiscal-year start.
Margins, segments and drivers
- U.S. Healthcare Solutions revenue increased 11.3% for the quarter and 8.7% for the first half. Segment operating income rose 3.6% and 2.3%, respectively. U.S. gross profit margin was 2.74% for the quarter and 2.60% for the first half; the filing reports year-over-year declines of 13 and 4 basis points.
- International Healthcare Solutions revenue declined 0.2% for the quarter and 0.4% for the first half. Segment operating income declined 5.9% and 8.1%, respectively, with unfavorable foreign exchange affecting European distribution results. PharmaLex acquisition contribution partly offset other pressures.
- Company-wide operating income was affected by higher distribution, selling and administrative costs, acquisition-related amortization and expenses, restructuring and other costs, and LIFO expense. First-half gross profit also benefited from $49.9 million of antitrust settlement gains; the prior-year first half included $1.8 million.
Liquidity, debt and capital allocation
- At March 31, cash and cash equivalents were $1.54 billion; total debt was $4.93 billion, including $266.3 million classified as short-term debt. The company repaid $675 million of senior notes that matured in March.
- Available borrowing capacity under listed facilities was approximately $3.89 billion. The company reported compliance with applicable revolving-credit and securitization covenants and no commercial paper outstanding.
- First-half operating cash flow reflected a $2.39 billion increase in accounts payable, partly offset by increases in inventories of $1.41 billion and accounts receivable of $861.2 million. Cash generation therefore depended in part on working-capital movements.
- The company repurchased $778.8 million of shares in the first half, including $700 million from Walgreens Boots Alliance (WBA); $182.5 million remained under that program at March 31. A new $1 billion authorization had no purchases by that date. Management expected fiscal 2023 capital expenditures of approximately $500 million.
Developments, outlook and risks
- PharmaLex was acquired effective January 1, 2023 for $1.473 billion, subject to customary adjustments. Its preliminary purchase-price allocation included approximately $1.02 billion of goodwill.
- On April 20, 2023, the company announced a planned approximately $685 million investment for a 35% interest in a joint venture acquiring OneOncology for approximately $2.1 billion. Closing was expected by the end of September 2023, subject to customary conditions and regulatory approvals.
- The filing gives no specific revenue or earnings guidance in the provided text. Management said operating cash flows and borrowings were expected to fund ongoing needs, including opioid-related payments; fiscal 2023 capital expenditure expectations were approximately $500 million.
- Opioid-related accrued litigation liability was approximately $5.9 billion at March 31, 2023, including an estimated $434.2 million payable before March 31, 2024 and $5.4 billion recorded as long-term. The distributor settlement covers 48 of 49 eligible states and 99% by population of eligible subdivisions in settling states, with payments of up to approximately $6.4 billion over 18 years. The company cautions that ultimate losses may differ materially from its accrual.
- The Department of Justice filed a civil Controlled Substances Act complaint in December 2022 alleging negligent failure to report suspicious orders. The company moved to dismiss in March 2023, denies the allegations, and says it will defend itself. Other opioid, antitrust, shareholder, and government matters remain pending; possible losses for many matters are not reasonably estimable.
- A March 2023 cybersecurity event disrupted a foreign business unit in one country for approximately two weeks. The company reported restoration of operations and said it believed the event had not materially affected its business or results, while noting its assessment was continuing.
- Other stated exposures include customer and supplier concentration, pricing and reimbursement pressure, inflation, foreign exchange and interest rates, acquisition integration, regulatory requirements, cybersecurity, and litigation. WBA-related revenue was $16.8 billion for the quarter and $33.0 billion for the first half; WBA receivables were $7.2 billion at March 31.
Important facts for investors to verify
- Whether U.S. volume-led revenue growth can translate into improved operating income and EPS amid thin distribution margins and higher operating costs.
- How working-capital balances, seasonal inventory needs, and payment terms affect operating cash flow and liquidity.
- The adequacy and timing of opioid-related accruals and payments, and developments in the DOJ complaint and other unresolved proceedings.
- PharmaLex integration and returns, the OneOncology transaction’s closing and investment economics, and the expected costs of the Cencora rebrand and amortization changes.
- Whether cybersecurity remediation, regulatory compliance, and foreign-exchange and interest-rate exposures lead to further costs or operational disruption.