Cencora, Inc. quarterly report, Q1 FY2019

Business context and reporting period

Cencora, Inc. (then AmerisourceBergen Corporation) filed this unaudited Form 10-Q for its fiscal first quarter ended December 31, 2018; comparisons are with the quarter ended December 31, 2017 unless noted. The business distributes pharmaceuticals and provides animal-health and global commercialization services.

Key financial metrics

Gross margin was approximately 2.86% versus 2.75%; operating margin was approximately 1.05% versus 1.04%. The reported net-income decline primarily reflects the prior-year quarter’s $502.8M income-tax benefit from the 2017 Tax Act, rather than a comparable deterioration in operating income. The current quarter’s 9.4% effective tax rate included a $37.0M favorable adjustment to the transition tax.

At December 31, 2018, cash and cash equivalents were $2.54B, total debt was $4.32B, and current liabilities were $29.35B versus current assets of $27.48B. Long-term debt, net of current portions, was $4.17B. The company reported $2.44B of additional availability under listed credit and securitization facilities and was compliant with applicable financial covenants.

Material changes versus the prior comparable period

• Pharmaceutical Distribution Services revenue grew 12.3%, reflecting customer and market growth and the inclusion of H.D. Smith and Profarma. Global Commercialization Services revenue increased 22.2%; MWI Animal Health revenue declined 0.4%.
• Segment operating income decreased 3.3% to $471.8M, despite higher revenue; distribution costs and lower contribution from compounding operations weighed on performance.
• Operating cash flow rose to $479.0M from $10.3M, significantly affected by a $1.50B increase in accounts payable. Receivables and inventories also increased by $658.9M and $898.8M, respectively.
• Interest expense, net, increased 17.6% to $42.2M, mainly reflecting debt issued for the H.D. Smith acquisition and consolidated Profarma debt.
• The company repurchased $239.0M of stock in the quarter and declared a $0.40 quarterly dividend per share, up from $0.38.

Outlook, commentary, risks and unusual items

• Management expected fiscal 2019 revenue growth in the mid-single digits and approximately $300M of capital expenditures. It expected operating cash flows and borrowing capacity to fund ongoing requirements.
• Gross profit included $87.3M of antitrust settlement gains, a $22.0M reversal of the previously accrued New York Opioid Stewardship Act assessment, and a $3.0M LIFO credit; PharMEDium remediation costs were $20.5M. These items make reported profit less representative of recurring operations.
• Production remained suspended at PharMEDium’s Memphis facility following FDA inspections. Management said a consent decree was likely, but its scope and timing were unresolved; further remediation costs were expected. The company concluded the related long-lived assets remained recoverable, based on uncertain forecasts.
• Opioid-related lawsuits and government investigations remained active. The company could not assess likely outcomes or exposure, and stated that possible losses for many matters were not reasonably estimable.
• New York appealed the ruling that invalidated its Opioid Stewardship Act; the company did not consider a loss contingency probable at quarter end.
• The company adopted ASC 606 on October 1, 2018, with an immaterial impact. It anticipated that lease-accounting adoption in fiscal 2020 would materially affect its balance sheet; the income-statement and cash-flow effects were not yet estimable.
• Other disclosed risks include drug pricing and reimbursement pressure, customer and supplier concentration and contract terms, regulation of controlled substances and compounding, interest rates, and integration of acquisitions.

Most important facts for investors to verify

• How much of gross-profit and operating-income growth came from recurring operations versus antitrust settlements, the opioid-assessment reversal, LIFO, and remediation items.
• Progress and potential financial impact of the PharMEDium FDA/DOJ negotiations, any consent decree, and the Memphis facility restart.
• Developments in opioid litigation and investigations, for which the company reported no reasonably estimable overall exposure.
• Sustainability of working-capital-driven operating cash flow and the company’s ability to manage seasonal inventory, payables, and receivables.
• Execution of the mid-single-digit fiscal 2019 revenue outlook and planned capital spending, alongside debt, repurchases, and dividends.