Cencora(COR) - 2024 Q4 - Annual Report

Business Overview Cencora is a major global pharmaceutical sourcing and distribution services company, strategically enhancing core distribution and investing in high-growth adjacent services, including the planned $4.6 billion acquisition of RCA Company Overview and Strategy Cencora is a major global pharmaceutical sourcing and distribution services company, strategically enhancing core distribution and investing in high-growth adjacent services, including the planned $4.6 billion acquisition of RCA - Cencora is one of the largest global pharmaceutical sourcing and distribution services companies, serving healthcare providers and pharmaceutical manufacturers to improve patient access to products[13] - The company's strategy involves optimizing its U.S. and International Healthcare Solutions businesses, investing in high-growth adjacencies, and pursuing strategic acquisitions and divestitures[21][29][30] - A key strategic initiative is the planned acquisition of Retina Consultants of America (RCA) for an enterprise value of approximately $4.6 billion, with an expected cash outlay of $4.3 billion[29] Industry Overview The U.S. pharmaceutical market is projected to grow at an 8.2% CAGR from 2023-2028, driven by an aging population, new drug introductions, and increased generic and biosimilar use - The U.S. pharmaceutical sales are expected to grow at a compound annual rate of approximately 8.2% from 2023 to 2028[15] - Growth is driven by an aging population, new drug introductions (biotechnology and gene therapy), and increased use of generics and biosimilars[15][16][17] - Generic pharmaceuticals currently represent about 90% of prescription volume in the United States[16] Operations Cencora operates through U.S. and International Healthcare Solutions segments, serving a concentrated customer base with WBA and Evernorth as its largest, and faces intense competition from major distributors Operating Segments The company's two segments, U.S. Healthcare Solutions and International Healthcare Solutions, manage pharmaceutical distribution and related services domestically and globally, primarily in Europe and Canada - U.S. Healthcare Solutions: Distributes brand-name, specialty, and generic pharmaceuticals, OTC products, and provides services like data analytics, pharmacy management, and animal health products within the U.S[32][33] - International Healthcare Solutions: Focuses on international pharmaceutical wholesale (primarily in Europe), global specialty logistics, and commercialization services[34] Customers and Suppliers Cencora exhibits significant customer concentration, with WBA and Evernorth accounting for 26% and 13% of fiscal 2024 revenue respectively, while supplier concentration is lower FY2024 Customer Concentration | Customer | % of Revenue | | :--- | :--- | | Walgreens Boots Alliance, Inc. (WBA) | ~26% | | Evernorth Health Services | ~13% | | Top 10 Customers (including GPOs) | ~66% | - The top 10 largest suppliers accounted for approximately 53% of the company's purchases in fiscal 2024[37] Competition Cencora operates in a highly competitive global market, primarily competing with McKesson Corporation and Cardinal Health, Inc. in U.S. human health distribution - The company faces a highly competitive environment, with key competitors including McKesson Corporation, Cardinal Health, Inc., and UPS Logistics[43] Human Capital As of September 30, 2024, Cencora employed over 46,000 people globally, emphasizing talent development, DEI, and competitive compensation, with women comprising 51% of the global workforce Workforce Demographics (as of Sep 30, 2024) | Metric | Value | | :--- | :--- | | Total Employees | > 46,000 | | U.S.-based Employees | ~36% | | Employees under Collective Bargaining | ~28% | - As of September 30, 2024, approximately 51% of the global workforce and 50% of the Executive Management Committee self-identified as female[53] - The company offers comprehensive benefits, including health insurance, paid leave, retirement plans, and tuition reimbursement, to support employee well-being and professional growth[50][61][62] Government Regulation Cencora is subject to extensive U.S. and international government oversight, including DEA and FDA regulations, DSCSA compliance, and federal anti-kickback and False Claims Act statutes - The company is regulated by numerous U.S. and international bodies, including the DEA, FDA, and Department of Justice[64] - Compliance with the Drug Supply Chain Security Act (DSCSA) is critical, which mandates an electronic, interoperable prescription drug traceability system[67] - The business is subject to fraud and abuse laws, such as the federal anti-kickback statute and the False Claims Act[65] Risk Factors The company faces multiple risks in supply chain, regulations, and international trade Business and Operational Risks The company faces significant business and operational risks, including key customer dependence, acquisition integration challenges, geopolitical instability, foreign currency fluctuations, and cybersecurity incidents - Significant customer concentration risk exists, with WBA and Evernorth Health Services accounting for approximately 26% and 13% of revenue in fiscal 2024, respectively; the top ten customers represent 66% of revenue[78] - Risks associated with acquisitions, such as the integration of PharmaLex and the potential acquisition of RCA, could fail to achieve expected financial performance and disrupt operations[86] - Cybersecurity incidents, such as those disclosed in February 2024 and March 2023, pose a significant risk; a failure or breach of information systems could disrupt business, lead to data misuse, and cause reputational damage[101][103][104] Industry and Economic Risks The company is exposed to industry and economic risks from manufacturer pricing changes, brand and generic price inflation/deflation, healthcare industry consolidation, and potential customer or supplier bankruptcies - Results could be adversely impacted by manufacturer pricing changes, as contracts often use Wholesale Acquisition Cost (WAC) as a reference; slower price inflation or accelerated deflation could negatively affect gross profit[105][106] - The bankruptcy or credit failure of a significant customer poses a risk; as of September 30, 2024, the two largest trade receivable balances represented approximately 37% and 5% of net accounts receivable[108][110] Litigation and Regulatory Risks Cencora faces substantial litigation and regulatory risks, including increased costs from pharmaceutical supply chain regulation, adverse effects from healthcare reform like the IRA, and extensive opioid distribution legal proceedings - The company is involved in extensive opioid-related legal proceedings; a Distributor Settlement Agreement became effective in April 2022, resulting in an accrued liability of $4.9 billion as of September 30, 2024, to be paid over 14 years[139] - Legal, regulatory, and legislative changes, such as the Inflation Reduction Act (IRA), could adversely affect drug pricing, reimbursement, and contracting, impacting profitability[121][125] - Increasing government efforts to regulate the pharmaceutical supply chain, such as the Drug Supply Chain Security Act (DSCSA), may increase costs and reduce profitability[115][117] Cybersecurity Cencora's cybersecurity risk management is a key part of its enterprise strategy, with oversight from executive leadership and the Board of Directors Risk Management and Strategy Cencora's cybersecurity risk management, led by its CDIO and CISO, is based on industry frameworks and includes third-party due diligence, with a recent incident deemed not materially impactful - The company maintains a comprehensive, company-wide information security program based on industry frameworks such as HITRUST CSF and ISO 27001[167] - A cybersecurity incident was disclosed in February 2024 involving exfiltrated data, but it has not had a material impact on the company's operations or financial condition[171] - The risk management program includes due diligence on third-party business partners, utilizing monitoring tools, questionnaires, and security addendums in contracts[170] Board and Management Oversight Cybersecurity oversight is managed by the CDIO and CISO at the executive level, with primary Board delegation to the Audit Committee for IT security and the Compliance and Risk Committee for operational risks - The Chief Data and Information Officer (CDIO) and Chief Information Security Officer (CISO) lead management's assessment of cybersecurity risk[172] - The Board has delegated oversight to its Audit Committee (for IT security programs) and Compliance and Risk Committee (for operational risk monitoring)[173] Market for Common Equity and Shareholder Matters This section details the company's common stock market information, dividend policy, and share repurchase activities Market Information and Dividends Cencora's common stock trades on the NYSE under 'COR', and in November 2024, the Board approved an 8% increase in the quarterly dividend to $0.550 per share Quarterly Dividend Increases | Date | New Rate | Old Rate | % Increase | | :--- | :--- | :--- | :--- | | Nov 2022 | $0.485 | $0.460 | 5% | | Nov 2023 | $0.510 | $0.485 | 5% | | Nov 2024 | $0.550 | $0.510 | 8% | Issuer Purchases of Equity Securities In March 2024, the Board authorized a new $2.0 billion share repurchase program, under which the company purchased $1.49 billion in shares during fiscal 2024, with $1.32 billion remaining available - In March 2024, a new share repurchase program was authorized for up to $2.0 billion[195] - As of September 30, 2024, the company had $1,317.7 million of availability under its current share repurchase program[195] Management's Discussion and Analysis (MD&A) This section provides management's perspective on the company's financial condition, results of operations, and critical accounting policies Executive Summary For fiscal 2024, revenue increased 12.1% to $294.0 billion, driven by U.S. Healthcare Solutions growth, while operating expenses surged 16.9% due to a $418.0 million goodwill impairment and higher litigation costs, increasing the effective tax rate to 24.2% - Revenue increased by 12.1% year-over-year, driven by the U.S. Healthcare Solutions segment, which saw growth from GLP-1 class drugs, specialty products, and COVID-19 therapies[212] - Total operating expenses increased by 16.9%, largely due to a $418.0 million goodwill impairment related to PharmaLex[214] - The effective tax rate for fiscal 2024 was 24.2%, up from 19.8% in fiscal 2023, primarily due to the non-deductible PharmaLex goodwill impairment[215] Results of Operations Fiscal 2024 saw a 12.1% revenue increase to $294.0 billion and 10.6% gross profit growth, but a 16.9% rise in operating expenses, primarily from a $418 million goodwill impairment, led to a 7.1% decline in consolidated operating income Revenue Total revenue for fiscal 2024 increased by 12.1% to $294.0 billion, primarily driven by a 13.0% growth in the U.S. Healthcare Solutions segment, significantly boosted by GLP-1 class drug sales Revenue by Segment (FY2024 vs FY2023) | Segment (in billions) | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | U.S. Healthcare Solutions | $265.3 | $234.8 | 13.0% | | International Healthcare Solutions | $28.6 | $27.4 | 4.4% | | Total Revenue | $294.0 | $262.2 | 12.1% | - Growth in the U.S. segment was significantly driven by an $8.6 billion (43.4%) increase in sales of products in the GLP-1 class (for diabetes/weight loss)[218] Gross Profit Gross profit increased 10.6% to $9.91 billion in fiscal 2024, driven by higher sales and a LIFO credit, partially offset by lower gains from antitrust litigation settlements Gross Profit Reconciliation (FY2024 vs FY2023) | Component (in millions) | FY 2024 | FY 2023 | | :--- | :--- | | U.S. Healthcare Solutions | $6,423.1 | $5,821.1 | | International Healthcare Solutions | $3,321.0 | $3,190.8 | | Gains from antitrust litigation | $170.9 | $239.1 | | LIFO credit (expense) | $52.2 | ($204.6) | | Total Gross Profit | $9,910.0 | $8,959.5 | Operating Expenses Total operating expenses increased 16.9% to $7.73 billion in fiscal 2024, primarily due to a $418.0 million goodwill impairment for PharmaLex and a significant increase in litigation and opioid-related expenses Operating Expenses Breakdown (FY2024 vs FY2023) | Expense Category (in millions) | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Distribution, selling, and administrative | $5,661.1 | $5,310.0 | 6.6% | | Depreciation and amortization | $1,092.0 | $963.9 | 13.3% | | Litigation and opioid-related expenses (credit) | $227.1 | ($24.7) | N/A | | Goodwill impairment | $418.0 | $0.0 | N/A | | Total Operating Expenses | $7,734.8 | $6,618.8 | 16.9% | Operating Income Total segment operating income increased 10.9% to $3.65 billion in fiscal 2024, but consolidated operating income declined 7.1% to $2.18 billion due to a $418 million goodwill impairment and higher litigation and amortization expenses Operating Income Reconciliation (FY2024 vs FY2023) | Line Item (in millions) | FY 2024 | FY 2023 | | :--- | :--- | | Total segment operating income | $3,648.3 | $3,289.1 | | Goodwill impairment | ($418.0) | $0.0 | | Acquisition-related intangibles amortization | ($660.3) | ($551.0) | | Litigation and opioid-related (expenses) credit | ($227.1) | $24.7 | | Other reconciling items | ($240.4) | ($417.1) | | Operating Income | $2,175.2 | $2,340.7 | Critical Accounting Policies and Estimates Management identifies critical accounting policies requiring significant judgment, including allowances for returns and credit losses, business combination valuations, goodwill impairment testing, income taxes, LIFO inventory valuation, and loss contingency estimations - Key estimates include allowances for customer sales returns ($1.18 billion) and credit losses ($132.1 million) as of Sep 30, 2024[238][239] - Goodwill is tested for impairment annually; a quantitative test of the PharmaLex reporting unit in fiscal 2024 resulted in a $418.0 million impairment charge[245][247] - The company uses the LIFO method for approximately 65% of its inventory; this resulted in a $52.2 million LIFO credit in fiscal 2024, compared to a $204.6 million expense in fiscal 2023[253] Liquidity and Capital Resources Cencora's liquidity primarily stems from operations and debt facilities, with major cash uses including working capital, debt repayment, dividends, share repurchases, and funding a $4.9 billion opioid litigation liability Cash Flows Net cash from operating activities was $3.5 billion in fiscal 2024, a decrease from the prior year, while investing and financing activities primarily involved capital expenditures, share repurchases, and debt repayments Cash Flow Summary (FY2024 vs FY2023) | Cash Flow Activity (in billions) | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $3.5 | $3.9 | | Net Cash Used in Investing Activities | ($0.6) | ($2.6) | | Net Cash Used in Financing Activities | ($2.3) | ($2.2) | Debt and Credit Facilities As of September 30, 2024, total debt was $4.4 billion, supported by a $2.4 billion revolving credit facility and a $1.45 billion receivables securitization facility, with new senior notes issued and maturing notes repaid in fiscal 2024 Debt Structure (as of Sep 30, 2024) | Facility | Outstanding Balance (in millions) | Additional Availability (in millions) | | :--- | :--- | :--- | | Total Fixed-Rate Debt | $4,290.4 | $0 | | Total Variable-Rate Debt | $97.6 | $4,427.9 | | Total Debt | $4,388.1 | $4,427.9 | Commitments and Obligations As of September 30, 2024, the company has significant future commitments totaling $7.8 billion, including debt, operating leases, and a $4.9 billion accrued opioid litigation liability payable over 14 years - The company has an accrued litigation liability of $4.9 billion related to opioid settlements, which is expected to be paid over the next 14 years[284] Contractual Obligations Summary (as of Sep 30, 2024) | Commitment Type (in billions) | Total | | :--- | :--- | | Debt, Including Interest | $6.0 | | Operating Leases | $1.5 | | Other Commitments | $0.3 | | Total | $7.8 | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements, including the balance sheets, statements of operations, cash flows, and comprehensive notes Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued unqualified opinions on Cencora's consolidated financial statements and internal controls for fiscal 2024, highlighting opioid-related legal contingencies and PharmaLex goodwill impairment as critical audit matters - The auditor, Ernst & Young LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[298][299] - Critical Audit Matters identified were: (1) Legal Matters and Contingencies related to Opioid Lawsuits and Investigations, and (2) the Goodwill Impairment Evaluation of the PharmaLex Reporting Unit[302][303][312] Consolidated Financial Statements The consolidated financial statements present Cencora's financial position, operations, and cash flows, reporting total assets of $67.1 billion, liabilities of $66.3 billion, and net income of $1.51 billion for fiscal 2024 Key Financial Data (FY2024 vs FY2023) | Metric (in billions) | Sep 30, 2024 | Sep 30, 2023 | | :--- | :--- | :--- | | Balance Sheet: | | | | Total Assets | $67.1 | $62.6 | | Total Liabilities | $66.3 | $62.0 | | Total Stockholders' Equity | $0.8 | $0.7 | | Income Statement: | | | | Revenue | $294.0 | $262.2 | | Gross Profit | $9.9 | $9.0 | | Operating Income | $2.2 | $2.3 | | Net Income Attributable to Cencora | $1.5 | $1.7 | Notes to Consolidated Financial Statements The notes detail key financial disclosures, including the PharmaLex acquisition, OneOncology investment, a $418 million goodwill impairment, debt structure, related-party transactions, the $4.9 billion opioid liability, and the subsequent RCA acquisition Note 2: Acquisition and Equity Method Investment In fiscal 2023, Cencora acquired PharmaLex for $1.47 billion and invested $718.4 million for a 34.9% equity interest in OneOncology, a network of oncology practices - Acquired PharmaLex for $1.473 billion in January 2023, resulting in $1.01 billion of goodwill[375][377] - Invested $718.4 million for a 34.9% equity method interest in OneOncology in June 2023[378] Note 5: Goodwill and Other Intangible Assets A $418.0 million goodwill impairment was recorded for the PharmaLex reporting unit in fiscal 2024 due to weakened demand for specialized life sciences services and a revised long-range forecast - A goodwill impairment of $418.0 million was recorded in the PharmaLex reporting unit during fiscal 2024[398] - The impairment was due to weakened demand for specialized life sciences services, negatively impacting PharmaLex's operating results and long-range forecast[398] Note 13: Legal Matters and Contingencies As of September 30, 2024, Cencora has a $4.9 billion accrued opioid litigation liability, with recent settlements for third-party payors and hospitals, while defending a DOJ civil complaint - As of September 30, 2024, the accrued litigation liability for opioid-related matters was $4.9 billion, to be paid over 14 years[456] - In fiscal 2024, the company entered into proposed class action settlements to resolve opioid claims with third-party payors and hospitals[454][455] - The Department of Justice filed a civil complaint against the company in December 2022 for alleged violations of the Controlled Substances Act, which the company is vigorously defending[456][458] Note 17: Subsequent Events Subsequent to fiscal year-end, Cencora announced the planned acquisition of Retina Consultants of America for approximately $4.6 billion and increased its quarterly dividend by 8% to $0.55 per share - On November 5, 2024, the company agreed to acquire Retina Consultants of America (RCA) with an expected cash outlay at closing of approximately $4.3 billion[481] - In November 2024, the quarterly dividend was increased by 8% to $0.55 per share[482] Controls and Procedures This section details management's evaluation of the company's disclosure controls and internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management concluded that Cencora's disclosure controls and procedures were effective as of September 30, 2024, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2024[484] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2024, that materially affected, or are reasonably likely to materially affect, those controls[485] Management's Report on Internal Control Over Financial Reporting Management assessed Cencora's internal control over financial reporting as effective as September 30, 2024, based on the COSO framework, a conclusion concurred by Ernst & Young LLP - Management assessed Cencora's internal control over financial reporting as effective as of September 30, 2024, using the COSO framework[487] - The independent registered public accounting firm, Ernst & Young LLP, issued an attestation report concurring with management's assessment of effectiveness[488][492] Directors, Executive Officers, and Corporate Governance Information for Part III, including details on directors, executive officers, corporate governance, executive compensation, security ownership, and related transactions, is incorporated by reference from the 2025 Proxy Statement - Information for Items 10 through 14 is incorporated by reference from the registrant's 2025 Proxy Statement[502][504][505]