10-QPeriod: Q1 FY2018

Cencora, Inc. Quarterly Report for Q1 Ended Dec 31, 2017

Filed February 6, 2018For Securities:COR

Summary

Cencora, Inc. (formerly AmerisourceBergen Corporation) reported a strong quarter ending December 31, 2017, with significant revenue growth and a substantial boost in net income, largely driven by the positive impact of the Tax Cuts and Jobs Act of 2017. Revenue increased by 6.0% year-over-year, primarily fueled by the Pharmaceutical Distribution Services segment. Despite increased operating expenses related to infrastructure and IT system implementations, operating income saw a modest increase. The company also made strategic moves, including the acquisition of NEVSCO and the completion of the significant H.D. Smith acquisition shortly after the quarter's end, which is expected to enhance its scale and support for independent pharmacies. The company also strengthened its international presence by increasing its ownership in Profarma and its joint venture in Brazil, with plans to consolidate their results going forward. Investors should note the substantial net income increase, which is heavily influenced by a large discrete tax benefit related to the 2017 Tax Act, lowering the effective tax rate significantly. While the core business demonstrated solid revenue growth, the company also faced operational challenges, such as the temporary suspension of production at a 503B outsourcing facility, impacting its pharmaceutical compounding operations. Management anticipates continued revenue growth and expects the lower tax rate to positively impact future effective tax rates.

Financial Statements
Beta

Key Highlights

  • 1Revenue increased 6.0% year-over-year to $40.5 billion, primarily driven by the Pharmaceutical Distribution Services segment.
  • 2Net income saw a substantial increase to $861.9 million, largely due to a $587.6 million discrete tax benefit from the Tax Cuts and Jobs Act of 2017, which reduced the effective tax rate to (140.1%).
  • 3The company completed the acquisition of H.D. Smith for $815.0 million shortly after the quarter end, strengthening its position as a pharmaceutical wholesaler.
  • 4Operating income increased by 4.7% to $419.0 million, reflecting an increase in gross profit offset by higher operating expenses.
  • 5Distribution, selling, and administrative expenses increased by 7.3% due to operating new distribution centers and IT system implementation costs.
  • 6The company acquired Northeast Veterinary Supply Company (NEVSCO) for $70.0 million to bolster its animal health business.
  • 7Cash provided by operating activities was $10.3 million, a significant improvement from the $430.4 million used in the prior year period, partly due to the tax reform's impact on deferred taxes and income taxes payable.

Frequently Asked Questions

The primary driver for the substantial increase in net income was the Tax Cuts and Jobs Act of 2017. This legislation resulted in a large discrete income tax benefit of $587.6 million, primarily from remeasuring deferred taxes at a lower U.S. federal income tax rate and a one-time transition tax on historical foreign earnings. This significantly reduced the company's effective tax rate for the quarter.

The acquisition of NEVSCO in December 2017 for $70.0 million is expected to strengthen MWI Animal Health's support for independent veterinary practices. The larger acquisition of H.D. Smith, completed in January 2018 for $815.0 million, is expected to significantly enhance the company's scale in pharmaceutical distribution and expand its support for independent community pharmacies. These acquisitions are strategic moves to grow market share and service offerings.

The company experienced operational challenges, including the voluntary suspension of production at its largest 503B outsourcing facility in Memphis in December 2017 due to FDA inspections. This led to $8.3 million in associated costs and a significant reduction in revenue and gross profit from its pharmaceutical compounding operations. Additionally, distribution, selling, and administrative expenses increased due to investments in new distribution centers and IT system implementations.

Management expects revenue to increase between 8% and 11% in fiscal 2018. The company anticipates that the lower U.S. federal corporate tax rate resulting from the 2017 Tax Act will continue to favorably impact its effective tax rate through fiscal 2019. The successful integration of H.D. Smith is also expected to contribute to future growth.