01—Abstract
Summary
Summary of the 10-K filed November 25, 2014. Cited figures are marked; the original filing is the authoritative source.
AmerisourceBergen (ticker ABC, renamed Cencora later) reported fiscal 2014 (year ended September 30, 2014) revenue of $119.6 billiona, up 35.9% from $88.0 billion, driven mainly by the ten-year Walgreens distribution agreement, which lifted Walgreens to 28% of revenue.
Gross profit rose 18.9% to $2.98 billionb, but gross margin in Pharmaceutical Distribution slipped 28 basis points to 2.36% as lower-margin Walgreens volume grew. Operating income fell 13.3% to $778.9 million, and diluted EPS from continuing operations dropped 42.4% to $1.21, primarily because of a $422.7 million non-cash charge for warrants issued to Walgreens and Alliance Boots and a $348.1 million LIFO charge. Net income was $276.5 million, or $1.17 diluted EPS.
The balance sheet and cash flow picture is more favorable than the earnings decline suggests. Operating cash flow was $1.46 billionc, up from $788 million, helped by a $2.3 billion increase in payables, though working capital absorbed large receivables and inventory build-ups tied to Walgreens. Cash rose to $1.8 billion.
Long-term debt grew to $2.0 billiond after a May 2014 issuance of $1.1 billion in senior notes, which funded the early retirement of the $500 million 5.875% notes due 2015. Management also returned substantial capital through $754 million of buybacks and $214 million of dividends, and it announced a 23% dividend increase to $0.29 per quarter. Investors should note that the warrant expense is non-cash but dilutive, and that Walgreens and Express Scripts remain significant concentration risks.
Management guides fiscal 2015 revenue growth of 7% to 8%, plans roughly $400 million of share repurchases excluding special program purchases, and expects capital expenditures of about $300 million. Several risks remain prominent in the filing, including pending qui tam and DEA controlled-substance subpoenas, Medicaid reimbursement changes under the Affordable Care Act, and the possibility that the Express Scripts contract, which expires in September 2015, is not renewed.
02—Key points
Key Highlights
- Revenue rose 35.9% to $119.6 billion, driven mainly by the Walgreens distribution agreement. Walgreens now accounts for 28% of revenue and Express Scripts for 18%.
- Operating income fell 13.3% to $778.9 million. The decline reflects a $422.7 million non-cash warrant expense and $348.1 million in LIFO charges, not core operating deterioration.
- Diluted EPS from continuing operations fell 42.4% to $1.21 (GAAP diluted EPS $1.17). The effective tax rate rose to 57.8% because much of the warrant expense is not tax deductible.
- Operating cash flow more than doubled to $1.46 billion, supported by a $2.3 billion increase in payables. Cash ended the year at $1.8 billion.
- Gross margin in Pharmaceutical Distribution declined 28 basis points to 2.36%, reflecting the shift toward lower-margin Walgreens and other large-customer volume.
- Capital returned to shareholders included $754 million of share repurchases and $214 million of dividends. The quarterly dividend was raised 23% to $0.29, and management plans about $400 million of additional buybacks in fiscal 2015.
- Fiscal 2015 guidance calls for revenue growth of 7% to 8%. The Express Scripts contract expires in September 2015 and is subject to a one-year renewal at Express Scripts' election, a key risk to watch.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Cencora, Inc. kept $0.00.
- Revenue$119.57B100.0%
- Cost of revenue−$116.59B97.5%
- Gross profit$2.98B2.5%
- Operating costs−$2.20B1.8%
- Operating income$782.1M0.7%
- Interest, other & tax−$507.9M0.4%
- Net income$274.2M0.2%
Where FY2014 revenue went
$119.57B- Cost of revenue: $116.59B, 98% of revenue
- Net income: $274.2M, 0.2% of revenue
- SG&A: $1.58B, 1.3% of revenue
- Other operating costs: $619.6M, 0.5% of revenue
Kept 0.2% as net incomeNet income $274.2M · 0.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed November 25, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $119.57B$87.96B | +35.9% |
| Cost of Revenue | $116.59B$85.45B | +36.4% |
| Gross Profit | $2.98B$2.51B | +18.9% |
| SG&A Expenses | $1.58B$1.33B | +18.5% |
| Operating Income | $782.09M$898.40M | −12.9% |
| Net Income | $274.23M$433.71M | −36.8% |
| EPS (Basic) | $1.21$1.88 | −35.6% |
| EPS (Diluted) | $1.16$1.84 | −37.0% |
| Shares Outstanding (Basic) | 227.37M231K | +98298.7% |
| Shares Outstanding (Diluted) | 235.41M235K | +99925.5% |
05—Questions
Frequently Asked Questions
Why did earnings per share fall so sharply despite revenue growth of nearly 36%?
Most of the decline came from non-cash items. Warrant expense of $422.7 million relates to warrants issued to Walgreens and Alliance Boots and is marked to market each quarter, so it moves with the share price. LIFO expense of $348.1 million also reduced gross profit. Warrant expense is largely non-deductible for tax, which pushed the effective tax rate to 57.8%.
How concentrated is the customer base, and what is the risk?
Concentration is high. Walgreens (28% of revenue), Express Scripts (18%), and the top ten customers (about 58%) dominate sales. Walgreens also represents about 42% of accounts receivable. Losing or renegotiating either major contract could materially affect revenue and cash flow, and the Express Scripts contract is up for renewal in September 2015.
Will the Walgreens warrants dilute existing shareholders?
Potentially, yes. Warrants for up to about 22.7 million shares, at exercise prices of $51.50 and $52.50, become exercisable in 2016 and 2017. The company has hedged roughly 60% of this exposure with capped calls covering 27.2 million shares and is repurchasing shares to offset dilution, but the hedge is partial and its effectiveness depends on the future share price.
Is the balance sheet becoming more leveraged?
Modestly. Long-term debt rose to $2.0 billion from $1.4 billion after the May 2014 notes issuance, which refinanced the 2015 notes. Shareholders' equity fell to $1.96 billion from $2.32 billion, largely because of buybacks and the warrant expense. Cash of $1.8 billion and undrawn credit facilities of about $2.4 billion provide substantial liquidity.
What regulatory and legal risks could affect future results?
The filing highlights several. These include Medicaid reimbursement changes under the Affordable Care Act, including a move to average acquisition cost pricing; DEA and U.S. Attorney subpoenas related to controlled-substance diversion monitoring; sealed qui tam complaints; a West Virginia state lawsuit over controlled-substance distribution; and the Drug Quality and Security Act's pedigree tracking requirements, which will raise compliance costs.
06—Continue