Business context and reporting period
The supplied filing is AmerisourceBergen Corporation’s Form 10-K for the fiscal year ended September 30, 2012, not a standalone quarterly filing. The filing includes unaudited fourth-quarter results. The company, now known as Cencora, distributed pharmaceuticals and provided related services to healthcare providers and manufacturers.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $79.490 billion | $80.004 billion |
| Gross profit | $2.669 billion | $2.502 billion |
| Gross margin | 3.36% | 3.13% |
| Operating income | $1.253 billion | $1.187 billion |
| Income from continuing operations | $708 million | $696 million |
| Net income | $719 million | $707 million |
| Diluted EPS from continuing operations | $2.76 | $2.51 |
| Cash from operating activities | $1.305 billion | $1.168 billion |
- Operating margin was approximately 1.58% in FY 2012, calculated from reported operating income and revenue.
- Fourth-quarter revenue was $19.453 billion; gross profit $720 million; operating income $296 million; continuing-operations income $159 million; diluted EPS $0.66.
- At September 30, cash was $1.067 billion, total debt $1.447 billion, and total stockholders’ equity $2.457 billion. Cash decreased $759 million year over year.
- Available capacity under the revolving credit and receivables securitization facilities totaled approximately $1.340 billion; neither facility had material borrowings outstanding at year-end aside from $50.8 million under the revolver.
- FY 2012 capital expenditures were $164 million. Operating cash flow less capital expenditures was approximately $1.141 billion, a derived measure.
Material changes versus the prior comparable period
- Revenue declined 0.6%, while gross profit rose 6.7% and operating income rose 5.6%. Higher gross profit reflected acquisitions, generic programs, brand-price increases, and $14.8 million of antitrust settlement gains.
- Pharmaceutical Distribution revenue fell 1.8%; ABDC revenue declined 3%, while ABSG revenue grew 6%. Other-segment revenue increased substantially, primarily from acquisitions.
- Diluted continuing-operations EPS increased 10%, faster than continuing income, partly because weighted-average diluted shares fell 8% amid repurchases.
- The company spent $1.162 billion repurchasing shares and paid $133 million in dividends. It acquired TheraCom for $257 million and World Courier for $518 million; the acquisitions contributed $960 million of revenue and $24 million of pretax earnings from their acquisition dates.
- Cash from operations increased, supported in part by a $421 million increase in accounts payable, accrued expenses, and income taxes; inventory growth used $200 million of cash.
Outlook, commentary, risks and unusual items
- Management expected FY 2013 revenue growth of 6%–9%, including estimated Express Scripts sales of $18.5 billion under a new three-year agreement effective October 1, 2012. Management expected operating income margin to decline, citing the contract’s lower-margin brand mix, a lost large food/drug customer, contract renewals, and fewer expected brand-to-generic conversions.
- Management expected an ongoing effective tax rate of approximately 39%, lower FY 2013 interest expense after repaying $392 million of notes, and approximately $180 million of FY 2013 capital expenditures. It expected to repurchase at least $200 million of stock in FY 2013, subject to market conditions.
- Key exposures include customer concentration (Medco/Express Scripts generated 17% of FY 2012 revenue; top 10 customers 41%), intense pricing competition, branded-price inflation and generic-price deflation, customer and supplier credit risk, reimbursement changes, and regulation of controlled substances and pharmaceutical distribution.
- Legal matters include a preliminary $16 million qui tam settlement charge recorded in FY 2011, other sealed qui tam allegations, federal subpoenas concerning controlled-substance monitoring, and a West Virginia complaint regarding alleged diversion-control failures. The company said it could not predict outcomes of the pending matters.
- AndersonBrecon, with FY 2012 revenue of $231 million and pretax income of $16 million, was classified as discontinued operations and held for sale following a decision to divest it. FY 2012 also included $46 million of severance, litigation and other costs, including $35 million of severance and related costs; the company recorded $14.8 million of antitrust settlement gains.
- The external auditor gave an unqualified opinion on the financial statements and internal controls. World Courier was excluded from the year-end internal-control assessment as a newly acquired business; management planned to evaluate its controls in FY 2013.
Important facts for investors to verify
- Whether the Express Scripts agreement delivers the forecast sales and how its lower-margin mix affects operating income and cash conversion.
- Customer retention and contract-renewal outcomes, especially given the concentration of sales among major customers and GPO relationships.
- Progress and final terms of the AndersonBrecon divestiture, and integration and performance of TheraCom and World Courier.
- Developments and potential financial exposure from the qui tam matters, controlled-substance investigations, and West Virginia litigation.
- Whether operating cash flow remains strong when supplier-payment timing and inventory movements are less favorable; also monitor debt, share repurchases, dividends, and facility availability.