Cencora, Inc. annual report, FY2019

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AmerisourceBergen Corporation (now Cencora) — FY2019 Form 10-K

Reporting period: Fiscal year ended September 30, 2019. This is an annual report, not a quarterly filing; fourth-quarter results are noted separately below. The filing is under the name AmerisourceBergen, ticker ABC.

Business context

The company is a pharmaceutical sourcing and distribution business, with Pharmaceutical Distribution Services as its principal reportable segment. Other operations include animal health and global commercialization and logistics services. Walgreens Boots Alliance (WBA) is its largest customer and a related party.

Financial performance and liquidity

  • Revenue: $179.59 billion, up 6.9% from $167.94 billion. Pharmaceutical Distribution Services revenue grew 6.9%; Other revenue grew 8.5%.
  • Profitability: Gross profit was $5.14 billion, up 11.4%; reported gross margin was approximately 2.86%. Operating income was $1.11 billion, down 23.0%, and net income attributable to AmerisourceBergen was $855.4 million, down from $1.66 billion. Diluted EPS was $4.04 versus $7.53. Reported operating and net margins were approximately 0.62% and 0.48%, respectively.
  • Segment performance: Segment operating income, which excludes specified unusual and other items, increased 3.5% to $2.05 billion. Pharmaceutical Distribution Services segment operating income rose 2.7%; Other rose 7.2%.
  • Cash flow: Operating cash flow was $2.34 billion, compared with $1.41 billion in FY2018. Capital expenditures were $310.2 million; cash and cash equivalents increased to $3.37 billion from $2.49 billion.
  • Debt and liquidity: Total debt was $4.17 billion, down from $4.31 billion; cash exceeded reported debt by approximately $798.7 million. The company reported $2.58 billion of additional availability across listed credit facilities and was compliant with debt covenants at year-end. Seasonal working-capital needs can require intra-period borrowing.
  • Balance sheet: Total assets were $39.17 billion and total equity was $2.99 billion. Accounts payable was $28.39 billion, reflecting the scale of the distribution business.
  • Capital returns: Dividends declared were $1.60 per share. The company repurchased $674.0 million of stock during FY2019 and had $461.1 million remaining under its then-current $1.0 billion repurchase authorization.

Material changes and unusual items

  • Reported operating income included a $570 million PharMEDium long-lived asset impairment; the asset group’s estimated fair value was $222 million after impairment from a pre-impairment carrying value of $792 million. The company said the assets were recoverable at September 30, 2019.
  • Employee severance, litigation, and other costs increased to $330.5 million from $183.5 million, including opioid-related legal costs and settlements, integration and transformation costs, and restructuring.
  • Gross profit included $145.9 million of antitrust litigation settlement gains versus $35.9 million in FY2018, a $22.5 million LIFO credit versus a $67.3 million expense, and reversal of a $22 million estimated New York opioid assessment.
  • The effective tax rate was 11.7%, compared with negative 37.2% in FY2018. FY2018 earnings benefited substantially from tax reform-related tax benefits, contributing to the year-over-year decline in net income and EPS.
  • Fourth quarter: Revenue was $45.64 billion, gross profit $1.18 billion, operating income $179.8 million, net income $132.3 million, and diluted EPS $0.63. The quarter included a $66.7 million charge for a settlement with two Ohio counties in opioid litigation.

Outlook, commentary, and risks

  • Management expected FY2020 revenue growth in the mid- to high-single digits and capital expenditures of approximately $400 million. It expected unfavorable brand and generic pharmaceutical pricing trends to continue in FY2020.
  • PharMEDium’s Memphis facility had remained suspended since December 2017. A May 2019 consent decree allowed operations at the Dayton and Sugar Land facilities subject to compliance; Memphis required further FDA-approved remediation and certification before operations could resume. Management gave no timeline for reopening.
  • Opioid litigation and investigations remain a major contingency. The company was discussing a proposed global framework, but had not recognized a liability for it and said it could not estimate a range of possible losses. The framework announced after year-end contemplated up to $18 billion in aggregate distributor payments over 18 years, with the company’s indicated share of 31%, plus other obligations; terms remained under discussion and uncertain.
  • Customer concentration is significant: WBA represented approximately 34% of FY2019 revenue and 49% of net accounts receivable; Express Scripts represented 13% of revenue. The top ten customers and groups, including government agencies and GPOs, represented approximately 64% of revenue.
  • Other key risks include manufacturer price changes and generic deflation, reimbursement and regulatory changes, customer or supplier concentration and credit exposure, opioid-related operational and legal costs, and competition and consolidation. Diplomat Pharmacy reported liquidity and covenant concerns; AmerisourceBergen disclosed approximately $109.6 million receivable from Diplomat as of November 15, 2019, not then past due.
  • The company adopted ASC 606 in FY2019 with an immaterial impact. It expected FY2020 adoption of lease accounting rules to materially increase balance-sheet lease assets and liabilities, estimating approximately $550 million of operating lease liabilities.

Most important facts for investors to verify

  • Progress, costs, and any reopening timeline for PharMEDium’s Memphis facility, and compliance with the consent decree.
  • Status, terms, funding, and accounting treatment of any opioid litigation resolution; no global liability was accrued at year-end.
  • Whether FY2020 revenue guidance is achieved while brand and generic pricing trends pressure distribution profitability.
  • WBA relationship economics, renewal terms, and the continuing concentration of revenue and receivables in major customers.
  • Quality and sustainability of operating cash flow, including the impact of supplier payment timing and working-capital movements.