Cencora, Inc. quarterly report, Q2 FY2021

Business context and reporting period

The supplied filing is AmerisourceBergen Corporation’s unaudited Form 10-Q for the quarter and six months ended March 31, 2021 (fiscal Q2 2021). The cover identifies the registrant as AmerisourceBergen Corporation, ticker ABC; the request metadata names Cencora, so verify the entity mapping. The company distributes pharmaceuticals and also operates animal-health and global commercialization and logistics businesses.

Financial performance and position

Quarterly revenue rose 3.7%; six-month revenue rose 6.7%. Gross margin was approximately 3.12% for the quarter and 2.94% for the six months, compared with 2.93% and 2.75%, respectively, a year earlier. Operating margin was approximately 1.27% for the quarter and 1.15% for the six months, versus 0.65% and 0.60%. Operating income benefited from higher gross profit and the absence of prior-year PharMEDium asset impairments. Net income and EPS comparisons are affected by unusually large prior-year tax benefits related to PharMEDium and the CARES Act.

For the six months, operating cash flow was $449m, down from $996m. Investing cash outflow was $314m, including $163m for equity investments; financing cash inflow was $1.91bn, principally reflecting debt issuance. Cash and cash equivalents were $6.64bn at March 31, 2021, up from $4.60bn at September 30, 2020. Total debt was $6.19bn, up from $4.12bn; current liabilities were $33.00bn and current assets $35.47bn. The company reported compliance with applicable credit-facility covenants.

Material changes versus prior comparable periods

• Revenue growth reflected specialty-product sales, including COVID-19 treatments, and market unit-volume growth. The prior-year March quarter had elevated customer purchasing at the onset of the pandemic, tempering the current quarter’s growth comparison.
• Six-month operating cash flow fell mainly because working-capital movements differed: inventories increased $314m, accounts payable decreased $293m, and accounts receivable increased $194m. Prior-year cash flow had included a substantial increase in accounts payable.
• The company issued $1.525bn of 0.737% notes due 2023 and $1.0bn of 2.700% notes due 2031 to help fund the planned Alliance Healthcare acquisition. Long-term debt increased, and management expected interest expense to rise beginning in the June 2021 quarter.
• Quarterly dividends declared increased to $0.44 per share from $0.42. Six-month dividends declared were $0.88 per share versus $0.82.

Outlook, risks, contingencies, and unusual items

• Management expected fiscal 2021 revenue growth in the high-single digits and approximately $400m of fiscal 2021 capital expenditures. It expected operating cash flows and borrowing capacity to fund ongoing needs.
• The planned acquisition of a majority of WBA’s Alliance Healthcare businesses was valued at approximately $6.5bn, including $6.275bn cash and 2 million shares, subject to adjustments and regulatory and other closing conditions. The company expected closing by September 30, 2021. Funding was to include cash and new debt; the filing describes the transaction as pending.
• Opioid litigation remains a major contingency. The company had recorded a $6.6bn liability in fiscal 2020 and accrued a further $17.1m for estimated injunctive-relief costs in the quarter. Advanced settlement discussions contemplated distributors paying $21bn over 18 years, with the company’s share estimated at $6.5bn if all parties participate. The outcome and ultimate loss could differ materially; the company reported $6.2bn in accrued litigation liability.
• Other key risks cited include regulatory approval and integration of Alliance Healthcare, customer and supplier concentration and contract economics, reimbursement and pharmaceutical pricing pressures, controlled-substance litigation and investigations, COVID-19 impacts, and interest-rate and foreign-currency movements.
• In fiscal 2020, tax benefits from the PharMEDium shutdown and CARES Act provisions materially affected the comparison. In the current six-month period, Swiss tax reform contributed discrete tax expense; the six-month effective tax rate was 25.7% versus (128.9)% a year earlier.

Important facts for investors to verify

• Confirm that the AmerisourceBergen filing and ABC registrant in the source are the intended entity for the Cencora request.
• Check the status, final consideration, financing, regulatory approvals, and integration plans for the Alliance Healthcare acquisition.
• Monitor opioid settlement negotiations, participation assumptions, payment timing, and whether the $6.6bn accrual remains adequate.
• Assess whether operating cash flow improves as inventory, receivables, and supplier-payment timing normalize; reconcile cash growth with the debt issuance and acquisition funding plan.
• Review the drivers of fiscal 2021 revenue growth and margins, including specialty sales, LIFO effects, and the unusually favorable prior-year impairment and tax comparisons.