Business context and reporting period
AmerisourceBergen Corporation (now Cencora, Inc.) filed this unaudited Form 10-Q for fiscal Q1 2013, the three months ended December 31, 2012, compared with the quarter ended December 31, 2011. The company distributes pharmaceuticals and provides related healthcare services. AndersonBrecon was classified as held for sale and its results as discontinued operations.
Financial performance and position
| Metric | Q1 FY2013 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $21.466 billion | $20.312 billion; up 5.7% |
| Gross profit / margin | $671.9 million / 3.13% | $583.9 million / approximately 2.87%; margin up 26 basis points |
| Operating income | $287.3 million | $281.4 million; up 2.1% |
| Income from continuing operations | $162.2 million | $160.0 million; up 1.4% |
| Net income | $168.6 million | $162.1 million |
| Diluted EPS | $0.71 total; $0.69 continuing operations | $0.62 total; $0.61 continuing operations |
| Operating cash flow | $(241.7) million | $431.7 million provided |
| Cash and cash equivalents | $417.4 million | $1.067 billion at September 30, 2012 |
| Long-term debt | $1.396 billion | $1.447 billion at September 30, 2012 |
Cash used in operations primarily reflected a $429.8 million increase in receivables and a $272.4 million increase in inventory, partly offset by higher payables and accrued liabilities. Management attributed the receivables increase in part to the new Express Scripts contract’s longer payment terms. The company reported $1.642 billion of additional availability under its revolving and receivables facilities and no variable-rate debt outstanding at quarter-end. Current liabilities were $11.436 billion, including $9.880 billion of accounts payable.
Material changes and notable items
- Pharmaceutical Distribution revenue increased 4.7%; segment operating income fell 2.4%, reflecting lower generic-launch contributions, a lower-margin customer mix including Express Scripts, and higher Canadian operating costs.
- Other revenue more than doubled, primarily from the TheraCom and World Courier acquisitions; Other operating income rose 114%.
- Gross profit benefited from acquisitions, generic growth, non-oncology specialty distribution, and a $12.3 million antitrust-settlement gain recorded as a reduction to cost of goods sold. These benefits were partly offset by lower gross profit on the Express Scripts contract and certain oncology products.
- Distribution, selling and administrative expense increased 27.3%, largely due to acquired businesses and Canadian distribution costs. Diluted EPS growth also benefited from a 10% reduction in weighted-average shares, primarily from repurchases.
- The quarterly dividend increased 62%, from $0.13 to $0.21 per share. The company repurchased $284.7 million of stock during the quarter.
Guidance, risks and contingencies
- Management expected fiscal 2013 revenue growth of 6%–9%, Other revenue growth of 30%–35%, operating cash flow of $930 million–$1.030 billion, capital expenditures of approximately $180 million, and an effective tax rate of approximately 39.5%. It expected to repurchase $400 million of stock, subject to market conditions.
- Management cited risks including customer or supplier losses, generic and branded drug pricing and reimbursement changes, customer consolidation, controlled-substance diversion enforcement, regulatory changes, IT/ERP execution, acquisition integration, and litigation.
- Legal matters included unresolved allegations in other sealed qui tam proceedings, a U.S. Attorney/DEA inquiry into controlled-substance diversion controls, and West Virginia litigation concerning controlled-substance distribution. The company said outcomes could not be predicted. It finalized and paid a previously accrued $16 million qui tam settlement in December 2012.
- Unrecognized tax benefits were $47.7 million, including interest and penalties; approximately $3.2 million could be reduced over the next 12 months through audit resolutions or statute expirations.
- The $700 million revolving credit facility and $700 million receivables securitization facility were each extended to November 2017 and November 2015, respectively. The filing states an accordion feature could increase the securitization commitment by up to $250 million, subject to lender approval.
Important facts for investors to verify
- Whether Express Scripts’ volume and longer payment terms deliver the expected revenue and cash-flow benefits, and how the lower-margin contract affects distribution profitability.
- Whether management’s fiscal 2013 cash-flow and revenue guidance remains achievable given the quarter’s working-capital outflow and seasonal inventory needs.
- How much of the gross-profit improvement is recurring versus attributable to the $12.3 million antitrust gain and acquisition contributions.
- Developments in the controlled-substance, qui tam, and West Virginia matters, as well as the planned AndersonBrecon divestiture.
- Share-repurchase and dividend spending relative to liquidity, debt maturities, and working-capital requirements.