AmerisourceBergen Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. Although the request references 2013 Q4, this is an annual filing; it also provides unaudited fourth-quarter results. The company’s historical name in the filing is AmerisourceBergen, not Cencora.
Business context
The company distributes branded and generic pharmaceuticals and related products and services to healthcare providers, and provides specialty distribution, manufacturer support and global biopharmaceutical logistics. Its reportable segments are Pharmaceutical Distribution and Other. In March 2013, it agreed to a ten-year distribution relationship with Walgreens and a global generic sourcing arrangement with Walgreens and Alliance Boots. In May 2013, it sold AndersonBrecon and AmerisourceBergen Canada.
Financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $88.0B | $78.1B | +12.7% |
| Gross profit | $2.508B | $2.635B | -4.8% |
| Operating income | $898.4M | $1.304B | -31.1% |
| Income from continuing operations | $493.4M | $761.4M | -35.2% |
| Net income | $433.7M | $719.0M | -39.7% |
| Diluted EPS | $1.84 | $2.80 | -34.3% |
| Cash from operating activities | $788.1M | $1.305B | -39.6% |
Reported gross margin was approximately 2.85% versus 3.38%; operating margin was approximately 1.02% versus 1.67%. The $277.0M FY2013 LIFO charge was a major drag on gross profit, driven by Walgreens-related branded inventory and drug price dynamics. Management reported continuing-operations diluted EPS of $3.14 excluding the LIFO charge and warrant expense, up 6.1% year over year; this is a non-GAAP comparison, not reported EPS.
Pharmaceutical Distribution revenue rose 12.3%, while its gross profit fell 13.2% and operating income fell 27.9%. Other revenue grew 33.1%, substantially reflecting World Courier, acquired in April 2012. Reported results also included $90.1M of warrant expense, $23.5M of severance, litigation and other costs, and $22.9M of antitrust settlement gains. Discontinued operations recorded a $59.7M loss, including a $143.7M loss on the ABCC sale, partly offset by a $114.1M gain on the AndersonBrecon sale.
Operating cash flow declined as receivables increased $2.313B and inventory rose $1.487B, partly offset by a $3.818B increase in accounts payable, accrued expenses and taxes. Walgreens onboarding contributed an estimated $500M working-capital cash use. Capital expenditures were $202.5M.
Debt and liquidity
At September 30, 2013, cash was $1.231B and debt was $1.397B, consisting of fixed-rate senior notes due 2015, 2019 and 2021. No borrowings were outstanding under the $1.4B revolving credit facility, $950M receivables securitization facility, or $45M revolving credit note; reported additional availability across these facilities was approximately $2.395B. The company also had a $700M commercial paper program backed by its revolving facility. Current liabilities exceeded current assets, reflecting the working-capital-intensive distribution model. Management stated that available capital sources were sufficient for working capital and other requirements.
Changes, outlook and principal risks
- FY2013 revenue growth was driven in part by higher sales to Express Scripts and Walgreens, partly offset by the loss of a retail GPO customer. Express Scripts represented 24% of revenue; the ten largest customers represented approximately 48%. Walgreens was expected to become the largest customer in FY2014.
- Management forecast FY2014 revenue growth of 28%–31%, primarily from the Walgreens contract’s incremental branded distribution and phased generic distribution. It expected FY2014 earnings accretion from the Walgreens arrangements, excluding warrant-related, nonrecurring and start-up costs. The filing also anticipated approximately $300M of FY2014 capital expenditures and approximately $500M of share repurchases, subject to market conditions.
- The Walgreens/Alliance Boots arrangements included warrants potentially covering approximately 16% of shares on a fully diluted basis at issuance. Warrant fair value was $572.0M at year-end and related expense may fluctuate; capped calls were intended to hedge part of potential dilution.
- Key exposures include customer concentration and credit risk, competition and margin pressure, generic price deflation, reimbursement reductions, Walgreens transition execution and working-capital needs, and pharmaceutical supply-chain regulation. The company disclosed sealed qui tam complaints and government subpoenas relating to oncology distribution, as well as controlled-substance diversion investigations and a West Virginia complaint. Outcomes were not predictable from the filing.
- Other notable items include the $55.4M liability for uncertain tax positions and $2.121B of scheduled debt, lease and other commitment payments. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether Walgreens distribution ramped as planned and delivered the forecast revenue growth, accretion and operating efficiencies.
- How much reported earnings and margins were affected by LIFO and remeasured warrant expense, and whether adjusted comparisons reconcile to GAAP results.
- Whether working-capital requirements, especially receivables and inventory, normalize and support stronger operating cash flow.
- Developments and potential financial exposure from the sealed qui tam matters, controlled-substance inquiries and related litigation.
- Customer concentration, contract economics, generic pricing trends, and the ability to maintain liquidity while funding investment, dividends and buybacks.