AmerisourceBergen Corporation (now Cencora, Inc.) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; unaudited. The filing is by AmerisourceBergen Corporation, not under the later Cencora name.
Business context
The company distributes pharmaceuticals and provides related healthcare services. Its reportable segments were Pharmaceutical Distribution and Other. AndersonBrecon and AmerisourceBergen Canada Corporation were sold in May 2013 and are presented as discontinued operations.
Key financial results
| Metric | Three months ended June 30, 2013 | Prior-year quarter | Nine months ended June 30, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $21.91 billion | $19.33 billion | $63.49 billion | $59.02 billion |
| Gross profit | $562.5 million | $667.9 million | $1.94 billion | $1.92 billion |
| Operating income | $134.6 million | $324.4 million | $784.2 million | $984.8 million |
| Continuing-operations income | $64.1 million | $190.2 million | $442.9 million | $570.9 million |
| Net income | $168.4 million | $181.3 million | $382.7 million | $555.5 million |
| Diluted EPS, continuing operations | $0.27 | $0.74 | $1.88 | $2.19 |
| Cash from operating activities | Not presented quarterly | $819.1 million | $760.1 million |
Quarterly revenue rose 13.3%, while gross profit fell 15.8% and operating income fell 58.5%. Nine-month revenue increased 7.6%, but operating income declined 20.4%. Management attributed much of the deterioration to a $122.1 million third-quarter LIFO charge related to inventory for the Walgreens contract, alongside lower distribution margins and new warrant expense. The filing reports gross margin of 2.6% for Pharmaceutical Distribution in the quarter excluding the LIFO charge, down 42 basis points year over year.
Reported third-quarter net income includes $104.3 million of after-tax income from discontinued operations, principally reflecting the AndersonBrecon sale gain. Nine-month discontinued operations recorded a $60.2 million loss, including the estimated AmerisourceBergen Canada sale loss and goodwill impairment.
Cash, debt and liquidity
- Cash and cash equivalents were $1.57 billion at June 30, 2013, up from $1.07 billion at September 30, 2012.
- Total debt was $1.40 billion, essentially unchanged from fiscal year-end; all reported debt was fixed-rate senior notes. No borrowings were outstanding under the revolving, receivables securitization, or commercial paper facilities.
- Available capacity at June 30 included $689.6 million under the revolving facility, $950 million under the receivables facility, and $45 million under the revolving credit note. A July 2013 amendment increased the revolving facility commitment to $1.4 billion and extended maturity to July 2018.
- Nine-month operating cash flow was $819.1 million, including $735.0 million from continuing operations and $84.0 million from discontinued operations. Working-capital movements included increased receivables of $835.7 million and inventory of $399.1 million, partly offset by a $1.38 billion increase in payables, accrued expenses and income taxes.
- Capital expenditures were $137.9 million for the nine months. The company repurchased $401.1 million of shares and paid $147.0 million in dividends during that period.
Outlook, material developments and risks
- Management expected fiscal 2013 revenue growth of 11%–13%, including an estimated $20 billion in Express Scripts sales and approximately $3 billion of incremental Walgreens sales. It expected Other-segment revenue growth of 30%–35%, largely reflecting a full year of World Courier.
- Management expected a material LIFO charge in the fourth quarter. It estimated more than $1 billion of branded inventory would be required by September 30 to support the Walgreens transition.
- The new Walgreens relationship includes a ten-year distribution agreement, global sourcing arrangements with Walgreens and Alliance Boots, and warrants potentially covering about 16% of shares on a fully diluted basis at issuance. The company recorded $39.6 million of warrant expense for the nine months; future expense could fluctuate significantly. Management expected the distribution and sourcing arrangements to be accretive in fiscal 2014, excluding specified transaction and non-recurring costs.
- Management forecast fiscal 2013 operating cash flow of $340 million–$440 million, despite $819.1 million reported for the first nine months; cash flow can vary significantly with working capital. It expected approximately $240 million of fiscal 2013 capital expenditures.
- Key business risks include thin distribution margins, competition and customer concentration, reimbursement reductions affecting physician-administered specialty drugs, generic and branded pricing shifts, and working-capital demands. The filing also describes government investigations and subpoenas concerning controlled-substance diversion and oncology distribution, plus West Virginia litigation; outcomes were uncertain.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile continuing-operations performance with the large LIFO charge, warrant remeasurement expense and discontinued-operation sale results.
- Verify the timing and eventual cost of Walgreens-related inventory build, fourth-quarter LIFO charges, and the expected fiscal 2014 benefits.
- Assess whether working-capital movements and management’s full-year operating-cash-flow forecast are consistent with seasonal cash needs.
- Review potential dilution and valuation volatility from the Walgreens/Alliance Boots warrants, along with the extent and effectiveness of capped-call hedging.
- Monitor final sale-price adjustments for AndersonBrecon and AmerisourceBergen Canada and developments in the disclosed legal and government matters.