Cencora(COR) - 2024 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes on significant accounting policies, acquisitions, debt, legal matters, and segment information for the periods ended March 31, 2024 and 2023 Consolidated Balance Sheets Total assets increased to $63.87 billion as of March 31, 2024, from $62.56 billion as of September 30, 2023, while total liabilities also rose to $59.76 billion from $57.88 billion Consolidated Balance Sheets (in thousands) | Metric | March 31, 2024 (in thousands) | September 30, 2023 (in thousands) | | :--------------------------- | :---------------------------- | :------------------------------ | | Total Assets | $63,868,046 | $62,558,746 | | Total Liabilities | $59,761,811 | $57,880,861 | | Total Stockholders' Equity | $1,227,022 | $666,287 | - Current assets increased primarily due to higher accounts receivable and inventories, while cash and cash equivalents decreased[49] - Current liabilities increased mainly due to higher accounts payable and short-term debt[49] Consolidated Statements of Operations For the three months ended March 31, 2024, revenue increased by 7.8% to $68.41 billion, but operating income slightly decreased by 1.3% to $553.26 million, and net income attributable to Cencora, Inc. decreased by 3.4% to $420.78 million Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Revenue | $68,414,307 | $63,457,205 | $140,667,140 | $126,304,037 | | Gross Profit | $2,538,023 | $2,295,442 | $5,006,835 | $4,441,395 | | Operating Income | $553,259 | $560,519 | $1,376,134 | $1,193,662 | | Net Income Attributable to Cencora, Inc. | $420,775 | $435,402 | $1,022,275 | $915,147 | | Basic EPS | $2.11 | $2.15 | $5.12 | $4.50 | | Diluted EPS | $2.09 | $2.13 | $5.07 | $4.46 | - Revenue increased by 7.8% for the three months and 11.4% for the six months ended March 31, 2024, primarily due to growth in the U.S. Healthcare Solutions segment[50] - Operating income decreased by 1.3% for the three months but increased by 15.3% for the six months ended March 31, 2024[50] Consolidated Statements of Comprehensive Income Total comprehensive income attributable to Cencora, Inc. decreased significantly for both the three and six months ended March 31, 2024, primarily due to negative foreign currency translation adjustments Consolidated Statements of Comprehensive Income (in thousands) | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net Income | $421,205 | $428,213 | $1,024,213 | $904,383 | | Foreign Currency Translation Adjustments | $(128,675) | $79,144 | $142,847 | $475,218 | | Total Comprehensive Income Attributable to Cencora, Inc. | $296,972 | $531,182 | $1,164,594 | $1,429,979 | - Foreign currency translation adjustments shifted from a gain of $79.14 million in Q1 2023 to a loss of $128.68 million in Q1 2024[52] Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased from $666.29 million as of September 30, 2023, to $1.23 billion as of March 31, 2024, primarily driven by net income and share-based compensation, partially offset by cash dividends and common stock repurchases Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net Income | $1,022,275 | $915,147 | | Cash Dividends | $(212,692) | $(201,479) | | Share-based Compensation Expense | $91,232 | $79,132 | | Purchases of Common Stock | $(439,752) | $(807,214) | | Total Stockholders' Equity (End of Period) | $1,227,022 | $511,137 | - The company purchased $439.75 million of common stock during the six months ended March 31, 2024, including $300 million from Walgreens Boots Alliance, Inc[82][130] - Cash dividends declared per share of common stock were $1.02 for the six months ended March 31, 2024, up from $0.97 in the prior year period[82][77] Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased to $6.71 million for the six months ended March 31, 2024, from $1.34 billion in the prior year, primarily due to increased working capital and higher opioid litigation settlement payments Consolidated Statements of Cash Flows (in thousands) | Metric | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net Cash Provided by Operating Activities | $6,714 | $1,339,588 | | Net Cash Used in Investing Activities | $(232,287) | $(1,599,895) | | Net Cash Used in Financing Activities | $(228,499) | $(1,733,391) | | Decrease in Cash, Cash Equivalents, and Restricted Cash | $(467,743) | $(1,904,876) | | Cash, Cash Equivalents, and Restricted Cash at End of Period | $2,285,146 | $1,688,663 | - The decrease in operating cash flow was primarily due to a $1.4 billion increase in net working capital account balances, including delayed collections from customers due to the February 2024 Change Healthcare cyberattack, and higher opioid litigation settlement payments ($250.1 million vs. $108.2 million)[196][216] - Net cash used in investing activities decreased significantly, mainly because the prior year included $1.44 billion for the PharmaLex acquisition[221][84] Notes to Consolidated Financial Statements The notes provide detailed disclosures on the company's accounting policies, recent acquisitions, debt structure, legal proceedings, and segment performance, offering crucial context to the financial statements Note 1. Summary of Significant Accounting Policies This note outlines the basis of presentation for the unaudited consolidated financial statements, adherence to U.S. GAAP, and details on restricted cash and recently issued accounting pronouncements, including ASU 2023-07 and ASU 2023-09, which are currently being evaluated for impact - Financial statements are prepared in conformity with U.S. GAAP for interim information[62] Restricted Cash (in thousands) | Metric | March 31, 2024 (in thousands) | September 30, 2023 (in thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Cash and cash equivalents | $2,068,858 | $2,592,051 | | Restricted cash (Prepaid Expenses and Other) | $151,446 | $97,722 | | Restricted cash (Other Assets) | $64,842 | $63,116 | | Total Cash, Cash Equivalents, and Restricted Cash | $2,285,146 | $2,752,889 | - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), effective for future periods[63][91] Note 2. Acquisition The company completed the purchase price allocation for PharmaLex, acquired on January 1, 2023, for $1.473 billion, resulting in $1.01 billion in goodwill and $558.9 million in identifiable intangible assets, primarily customer relationships - PharmaLex Holding GmbH was acquired effective January 1, 2023, for $1.473 billion[92] - The purchase price exceeded the estimated fair value of net tangible and intangible assets by $1,010.2 million, allocated to goodwill[2] PharmaLex Intangible Assets | Intangible Asset | Fair Value (in thousands) | Useful Lives (years) | | :----------------------- | :------------------------ | :------------------- | | Customer relationships | $522,634 | 12 | | Trade names | $30,931 | 5 | | Software technology | $5,333 | 6 | | Total | $558,898 | | Note 3. Variable Interest Entity The company consolidates Profarma Distribuidora de Produtos Farmacêuticos S.A. (Profarma) due to substantial governance rights, with its assets and liabilities included in the consolidated balance sheets, and Profarma's creditors do not have recourse to the general credit of the company - The company consolidates Profarma due to substantial governance rights[119] Profarma Assets and Liabilities (in thousands) | Metric | March 31, 2024 (in thousands) | September 30, 2023 (in thousands) | | :--------------------------- | :---------------------------- | :------------------------------ | | Total Assets | $793,000 | $788,835 | | Total Liabilities | $593,404 | $582,329 | Note 4. Income Taxes The effective tax rates for the three and six months ended March 31, 2024, were 9.8% and 18.1%, respectively, lower than the prior year periods and the U.S. statutory rate, primarily due to foreign valuation allowance adjustments and non-U.S. income taxed at lower rates Effective Tax Rates | Period | Effective Tax Rate (2024) | Effective Tax Rate (2023) | | :------------------- | :------------------------ | :------------------------ | | Three Months Ended March 31 | 9.8% | 16.4% | | Six Months Ended March 31 | 18.1% | 18.2% | - Lower effective tax rates in 2024 were primarily due to discrete tax benefits from foreign valuation allowance adjustments, non-U.S. income taxed at lower rates, and tax benefits from equity compensation[122] - Unrecognized tax benefits were $574.2 million as of March 31, 2024, with $483.2 million potentially reducing income tax expense if recognized[95] Note 5. Goodwill and Other Intangible Assets Goodwill increased to $9.62 billion as of March 31, 2024, from $9.57 billion as of September 30, 2023, mainly due to foreign currency translation, while finite-lived intangible assets had a net carrying amount of $4.18 billion, with estimated amortization expense of $669.1 million for fiscal 2024 Goodwill by Segment (in thousands) | Segment | Goodwill as of September 30, 2023 (in thousands) | Goodwill as of March 31, 2024 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | U.S. Healthcare Solutions | $6,282,417 | $6,283,389 | | International Healthcare Solutions | $3,291,700 | $3,335,635 | | Total Goodwill | $9,574,117 | $9,619,024 | - Goodwill increased by $55.61 million, primarily due to foreign currency translation[123] Other Intangible Assets (in thousands) | Intangible Asset Type | Net Carrying Amount (March 31, 2024, in thousands) | Net Carrying Amount (September 30, 2023, in thousands) | | :--------------------------- | :----------------------------------- | :----------------------------------- | | Indefinite-lived trade names | $17,000 | $17,000 | | Customer relationships | $3,554,032 | $3,631,891 | | Trade names and other | $604,555 | $782,892 | | Total Other Intangible Assets | $4,175,587 | $4,431,783 | - Amortization expense for finite-lived intangible assets was $331.9 million for the six months ended March 31, 2024, and is estimated to be $669.1 million for fiscal 2024[124] Note 6. Debt Total debt increased to $5.25 billion as of March 31, 2024, from $4.79 billion as of September 30, 2023, including various senior notes, a $2.4 billion multi-currency revolving credit facility, and a $1.45 billion receivables securitization facility, which was extended to October 2026 Total Debt (in thousands) | Debt Type | March 31, 2024 (in thousands) | September 30, 2023 (in thousands) | | :--------------------------- | :---------------------------- | :------------------------------ | | Total Debt | $5,249,458 | $4,787,457 | | Less Current Portion | $(1,069,152) | $(641,344) | | Total, Net of Current Portion | $4,180,306 | $4,146,113 | - The company issued $500 million of 5.125% senior notes due February 2034, with proceeds to repay $500 million of 3.400% senior notes due May 2024[102] - The $1,450 million receivables securitization facility was amended in April 2024 to extend its expiration to October 2026[100] - No borrowings were outstanding under the $2.4 billion commercial paper program as of March 31, 2024[4] Note 7. Stockholders' Equity and Earnings per Share The company's Board authorized a new $2.0 billion share repurchase program in March 2024, with no shares purchased under it as of March 31, 2024, while under a prior program, $436.4 million of common stock was repurchased in the six months ended March 31, 2024, with $2.37 billion remaining available - A new share repurchase program for up to $2.0 billion was authorized in March 2024, but no shares were purchased under it as of March 31, 2024[5] - Under a previous program, the company purchased 2.2 million shares for $436.4 million in the six months ended March 31, 2024, including 1.5 million shares from WBA for $300.0 million[130] - As of March 31, 2024, $2,372.6 million remained available under the existing share repurchase program[130] Weighted Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Six Months Ended March 31, 2024 | Six Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Weighted Average Common Shares Outstanding - Basic | 199,406 | 202,316 | 199,747 | 203,188 | | Weighted Average Common Shares Outstanding - Diluted | 201,177 | 204,256 | 201,510 | 205,306 | Note 8. Related Party Transactions The company has significant agreements with Walgreens Boots Alliance, Inc. (WBA), a related party, generating $18.8 billion in revenue for the three months and $36.9 billion for the six months ended March 31, 2024 - WBA owns more than 10% of the company's common stock, making it a related party[105] Revenue from WBA (in billions) | Period | Revenue from WBA (in billions) | | :--------------------------- | :----------------------------- | | Three Months Ended March 31, 2024 | $18.8 | | Three Months Ended March 31, 2023 | $16.8 | | Six Months Ended March 31, 2024 | $36.9 | | Six Months Ended March 31, 2023 | $33.0 | Receivable from WBA (in billions) | Metric | March 31, 2024 (in billions) | September 30, 2023 (in billions) | | :--------------------------- | :--------------------------- | :----------------------------- | | Receivable from WBA, net of incentives | $7.8 | $8.1 | Note 9. Restructuring and Other Expenses Total restructuring and other expenses decreased to $75.63 million for the three months and $110.07 million for the six months ended March 31, 2024, including costs for facility closures, workforce reductions, rebranding, strategic initiatives, and a February 2024 cybersecurity event Restructuring and Other Expenses (in thousands) | Expense Category | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Restructuring and employee severance costs | $11,731 | $43,531 | $23,025 | $46,851 | | Business transformation efforts | $33,728 | $15,703 | $58,450 | $28,623 | | Other, net | $30,168 | $38,210 | $28,593 | $38,210 | | Total Restructuring and Other Expenses | $75,627 | $97,444 | $110,068 | $113,684 | - Restructuring and employee severance costs in 2024 were primarily due to facility closures and workforce reductions[106] - Business transformation efforts included rebranding costs for the name change to Cencora and expenses for operational efficiency initiatives[106] - The majority of 'Other, net' expenses for the three and six months ended March 31, 2024, related to a cybersecurity event where data was exfiltrated[163] Note 10. Legal Matters and Contingencies The company is involved in various legal proceedings, including opioid lawsuits, shareholder derivative actions, and government investigations, with an accrued liability for opioid litigation of $5.1 billion as of March 31, 2024, and an additional $214 million accrued for potential settlements with hospitals and third-party payors - The accrued litigation liability for opioid-related claims was $5.1 billion as of March 31, 2024, with $407.5 million expected to be paid by March 31, 2025[166] - An agreement was executed with the State of Alabama and its participating subdivisions to resolve opioid-related claims for approximately $245 million, with the company's 50% share included in the $5.1 billion liability[109] - A $214 million liability was recorded for expected settlements with classes of hospitals and third-party payors regarding opioid litigation[167] - A civil complaint filed by the Department of Justice against the company and its subsidiaries alleging Controlled Substances Act violations is ongoing, with the company vigorously defending itself[138] - Shareholder derivative actions related to controlled substance oversight and pre-filled syringe programs are in various stages, including appeals and special litigation committee investigations[112][168] Note 11. Antitrust Settlements The company recognized gains from antitrust litigation settlements with pharmaceutical manufacturers of $8.7 million for the three months and $57.0 million for the six months ended March 31, 2024, recorded as reductions to Cost of Goods Sold Gains from Antitrust Litigation Settlements (in millions) | Period | Gains from Antitrust Litigation Settlements (in millions) | | :--------------------------- | :---------------------------------------- | | Three Months Ended March 31, 2024 | $8.7 | | Six Months Ended March 31, 2024 | $57.0 | | Six Months Ended March 31, 2023 | $49.9 | - These gains are net of attorney fees and estimated payments due to other parties[245] Note 12. Fair Value of Financial Instruments The fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates their recorded amounts due to their short-term nature, while long-term debt had a recorded amount of $4.18 billion and a fair value of $3.81 billion as of March 31, 2024 - Cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short-term nature[142] Long-term Debt Fair Value (in millions) | Metric | March 31, 2024 (in millions) | September 30, 2023 (in millions) | | :--------------------------- | :--------------------------- | :----------------------------- | | Long-term debt (recorded amount) | $4,180.3 | $4,146.1 | | Long-term debt (fair value) | $3,810.7 | $3,572.6 | Note 13. Business Segment Information The company operates under two reportable segments: U.S. Healthcare Solutions and International Healthcare Solutions, with U.S. Healthcare Solutions generating $61.29 billion in revenue and $841.06 million in operating income for the three months ended March 31, 2024 Segment Revenue and Operating Income (in thousands) | Segment | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Revenue: | | | | | | U.S. Healthcare Solutions | $61,292,897 | $56,693,456 | $126,476,699 | $112,930,035 | | International Healthcare Solutions | $7,123,385 | $6,764,935 | $14,193,612 | $13,376,213 | | Total Revenue | $68,414,307 | $63,457,205 | $140,667,140 | $126,304,037 | | Operating Income: | | | | | | U.S. Healthcare Solutions | $841,064 | $756,137 | $1,539,188 | $1,328,553 | | International Healthcare Solutions | $192,720 | $175,991 | $380,315 | $337,273 | | Total Segment Operating Income | $1,033,784 | $932,128 | $1,919,503 | $1,665,826 | - U.S. Healthcare Solutions revenue grew by 8.1% for the three months and 12.0% for the six months ended March 31, 2024[143] - International Healthcare Solutions revenue grew by 5.3% for the three months and 6.1% for the six months ended March 31, 2024[143] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of the company's financial performance, liquidity, and capital resources for the periods ended March 31, 2024 and 2023, highlighting key drivers of revenue, gross profit, operating expenses, and cash flow changes, along with market risk exposures Executive Summary The company reported a 7.8% increase in revenue for the quarter and 11.4% for the six-month period, primarily driven by the U.S. Healthcare Solutions segment, with gross profit and total segment operating income also increasing, while operating expenses rose due to litigation and amortization - Revenue increased by $5.0 billion (7.8%) for the quarter and $14.4 billion (11.4%) for the six-month period, driven by U.S. Healthcare Solutions[147] - Gross profit increased by $242.6 million (10.6%) for the quarter and $565.4 million (12.7%) for the six-month period, due to segment growth and LIFO credits[177] - Total segment operating income increased by $101.7 million (10.9%) for the quarter and $253.7 million (15.2%) for the six-month period[148] - Total operating expenses increased by $249.8 million (14.4%) for the quarter and $383.0 million (11.8%) for the six-month period, mainly due to litigation and opioid-related expenses and amortization[259] - Effective tax rates were 9.8% and 18.1% for the three and six months ended March 31, 2024, respectively, lower than prior periods due to foreign valuation allowance adjustments[178] Revenue Total revenue increased by 7.8% and 11.4% for the three and six months ended March 31, 2024, respectively, with U.S. Healthcare Solutions growing by 8.1% and 12.0% due to GLP-1 products, specialty products, and COVID-19 vaccines, and International Healthcare Solutions growing by 5.3% and 6.1% despite unfavorable foreign currency impacts Revenue by Segment (in thousands) | Segment | Three Months Ended March 31, 2024 (in thousands) | Change YoY | Six Months Ended March 31, 2024 (in thousands) | Change YoY | | :----------------------------------- | :----------------------------------- | :--------- | :----------------------------------- | :--------- | | U.S. Healthcare Solutions | $61,292,897 | 8.1% | $126,476,699 | 12.0% | | International Healthcare Solutions | $7,123,385 | 5.3% | $14,193,612 | 6.1% | | Total Revenue | $68,414,307 | 7.8% | $140,667,140 | 11.4% | - U.S. Healthcare Solutions growth was primarily driven by unit volume, including increased sales of GLP-1 class products for diabetes/weight loss, specialty products, and COVID-19 vaccines[10] - International Healthcare Solutions growth was driven by Alliance Healthcare (despite negative foreign currency impact), Canadian business, Brazil distribution, and incremental revenue from the PharmaLex acquisition[151] Gross Profit Gross profit increased by 10.6% and 12.7% for the three and six months ended March 31, 2024, respectively, driven by growth in both segments and LIFO credits, which contrasted with LIFO expense in the prior year due to lower brand pharmaceutical inflation Gross Profit by Segment (in thousands) | Metric | Three Months Ended March 31, 2024 (in thousands) | Change YoY | Six Months Ended March 31, 2024 (in thousands) | Change YoY | | :----------------------------------- | :----------------------------------- | :--------- | :----------------------------------- | :--------- | | U.S. Healthcare Solutions Gross Profit | $1,678,814 | 8.2% | $3,250,764 | 10.7% | | International Healthcare Solutions Gross Profit | $851,259 | 5.9% | $1,668,654 | 8.2% | | Total Gross Profit | $2,538,023 | 10.6% | $5,006,835 | 12.7% | | LIFO Credit (Expense) | $22,835 | N/A | $71,280 | N/A | - LIFO credits in the current year periods (vs. LIFO expense in prior year) were primarily driven by lower brand pharmaceutical inflation due to price decreases by manufacturers[154] - Gains from antitrust litigation settlements were $8.7 million for the three months and $57.0 million for the six months ended March 31, 2024, recorded as reductions to Cost of Goods Sold[184] - Expenses related to Turkey's highly inflationary impact were $23.1 million for the three months and $40.3 million for the six months ended March 31, 2024, due to the weakening Turkish Lira[185] Operating Expenses Total operating expenses increased by 14.4% and 11.8% for the three and six months ended March 31, 2024, respectively, mainly due to higher litigation and opioid-related expenses, increased amortization, and distribution, selling, and administrative expenses supporting revenue growth, with costs related to a February 2024 cybersecurity event also contributing Operating Expenses by Category (in thousands) | Expense Category | Three Months Ended March 31, 2024 (in thousands) | Change YoY | Six Months Ended March 31, 2024 (in thousands) | Change YoY | | :----------------------------------- | :----------------------------------- | :--------- | :----------------------------------- | :--------- | | Distribution, selling, and administrative | $1,388,810 | 5.1% | $2,787,557 | 6.7% | | Depreciation and amortization | $271,732 | 12.5% | $542,335 | 31.2% | | Litigation and opioid-related expenses, net | $225,985 | N/A | $147,068 | N/A | | Acquisition-related deal and integration expenses | $22,610 | N/A | $43,673 | N/A | | Restructuring and other expenses | $75,627 | N/A | $110,068 | N/A | | Total Operating Expenses | $1,984,764 | 14.4% | $3,630,701 | 11.8% | - Distribution, selling, and administrative expenses increased to support revenue growth, but declined as a percentage of revenue due to improved operating efficiency[261] - Amortization expense increased significantly (17.6% for three months, 55.7% for six months) due to accelerated amortization from the company's name change and transition away from certain tradenames[156] - Litigation and opioid-related expenses for the three months included a $214.0 million accrual for ongoing litigation, while the six-month period included this accrual offset by a $92.2 million reduction from prepayment of a future opioid settlement obligation[207][270] - The majority of 'Other, net' expenses for the three and six months ended March 31, 2024, related to costs incurred from a cybersecurity event[189] Operating Income U.S. Healthcare Solutions' operating income increased by 11.2% for the quarter and 15.9% for the six-month period, driven by gross profit increases and improved operating expense margins, while International Healthcare Solutions' operating income grew by 9.5% and 12.8%, primarily due to its Brazil and Canadian businesses and the PharmaLex acquisition, partially offset by foreign currency pressure and higher IT expenses Operating Income by Segment (in thousands) | Segment | Three Months Ended March 31, 2024 (in thousands) | Change YoY | Six Months Ended March 31, 2024 (in thousands) | Change YoY | | :----------------------------------- | :----------------------------------- | :--------- | :----------------------------------- | :--------- | | U.S. Healthcare Solutions Operating Income | $841,064 | 11.2% | $1,539,188 | 15.9% | | International Healthcare Solutions Operating Income | $192,720 | 9.5% | $380,315 | 12.8% | | Total Segment Operating Income | $1,033,784 | 10.9% | $1,919,503 | 15.2% | - U.S. Healthcare Solutions' operating income margin increased by 4 basis points due to a decline in operating expense margin[160] - International Healthcare Solutions' operating income growth was offset in part by foreign currency pressure and higher information technology operating expenses in its European distribution business[211] Interest Expense, Net Net interest expense remained flat for the three months ended March 31, 2024, at $64.13 million, as increased interest expense (due to variable-rate borrowings) was offset by higher interest income (due to higher investment rates), while for the six months, net interest expense decreased by 4.9% to $104.69 million, driven by similar factors Interest Expense, Net (Three Months Ended March 31, in thousands) | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :--------------------------- | :----------------------------------- | :----------------------------------- | | Interest Expense | $76,810 | $72,272 | | Interest Income | $(12,680) | $(8,163) | | Interest Expense, Net | $64,130 | $64,109 | | Weighted Average Interest Rate (Expense) | 4.18% | 3.55% | | Weighted Average Interest Rate (Income) | 4.77% | 3.34% | Interest Expense, Net (Six Months Ended March 31, in thousands) | Metric | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :--------------------------- | :----------------------------------- | :----------------------------------- | | Interest Expense | $135,426 | $133,078 | | Interest Income | $(30,732) | $(22,953) | | Interest Expense, Net | $104,694 | $110,125 | | Weighted Average Interest Rate (Expense) | 3.98% | 3.39% | | Weighted Average Interest Rate (Income) | 4.98% | 3.03% | - The increase in interest expense was primarily driven by increased variable-rate borrowings, partially offset by the divestiture of the Egypt subsidiary[212] - The increase in interest income was primarily driven by higher investment interest rates, partially offset by lower average investment cash balances[212] Income Tax Expense The effective tax rates for the three and six months ended March 31, 2024, were 9.8% and 18.1%, respectively, which were lower than the prior year periods and the U.S. statutory rate, primarily due to discrete tax benefits from foreign valuation allowance adjustments, non-U.S. income taxed at lower rates, and tax benefits associated with equity compensation Effective Tax Rates | Period | Effective Tax Rate (2024) | Effective Tax Rate (2023) | | :------------------- | :------------------------ | :------------------------ | | Three Months Ended March 31 | 9.8% | 16.4% | | Six Months Ended March 31 | 18.1% | 18.2% | - The lower effective tax rates were primarily due to discrete tax benefits associated with foreign valuation allowance adjustments[193] - Additional factors contributing to lower rates included the benefit of non-U.S. income taxed at rates lower than the U.S. statutory rate and tax benefits associated with equity compensation, offset in part by U.S. state income taxes[193] Liquidity and Capital Resources The company's liquidity is supported by cash flows from operations, debt agreements, and credit terms, which are expected to be sufficient to fund working capital, debt repayment, interest, dividends, share repurchases, acquisitions, and capital expenditures, including opioid litigation payments over the next 14 years - Primary cash requirements include financing working capital, debt repayment, interest payments, dividends, common stock purchases, acquisitions, and capital expenditures[213] - Future cash flows from operations and borrowings are expected to be sufficient to fund ongoing cash requirements, including opioid litigation payments[213] Cash Flows Net cash provided by operating activities decreased significantly to $6.7 million for the six months ended March 31, 2024, from $1.34 billion in the prior year, primarily due to a $1.4 billion increase in net working capital (including delayed collections from the Change Healthcare cyberattack) and higher opioid litigation settlement payments Cash Flows (in thousands) | Metric | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Net Cash Provided by Operating Activities | $6,714 | $1,339,588 | | Net Cash Used in Investing Activities | $(232,287) | $(1,599,895) | | Net Cash Used in Financing Activities | $(228,499) | $(1,733,391) | - The decrease in operating cash flow was primarily due to a $1.4 billion increase in net working capital, including approximately $600 million in delayed collections from customers due to the February 2024 Change Healthcare cyberattack[196][216] - Opioid litigation settlement payments adversely impacted operating cash flows by $250.1 million in the current six-month period, compared to $108.2 million in the prior year[196][216] - Cash and cash equivalents held by foreign subsidiaries were $666.6 million as of March 31, 2024, with the majority repatriable without significant additional taxes[195] Working Capital Working capital performance is evaluated using days sales outstanding (DSO), days inventory on hand (DIOH), and days payable outstanding (DPO), with DSO increasing to 29.6 days, DIOH decreasing to 28.0 days, and DPO increasing to 62.4 days as of March 31, 2024, compared to the prior year quarter Working Capital Metrics (Days) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Six Months Ended March 31, 2024 | Six Months Ended March 31, 2023 | | :--------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Days Sales Outstanding (DSO) | 29.6 | 27.4 | 28.8 | 27.5 | | Days Inventory on Hand (DIOH) | 28.0 | 29.1 | 27.3 | 28.3 | | Days Payable Outstanding (DPO) | 62.4 | 60.5 | 61.0 | 60.0 | - These metrics can be impacted by the timing of cash receipts and disbursements[219] Capital Expenditures Capital expenditures for the six months ended March 31, 2024, were $187.0 million, slightly up from $178.6 million in the prior year, with the company forecasting approximately $500 million in capital expenditures for fiscal 2024, focusing on technology initiatives at Alliance Healthcare Capital Expenditures (in thousands) | Metric | Six Months Ended March 31, 2024 (in thousands) | Six Months Ended March 31, 2023 (in thousands) | | :--------------------------- | :----------------------------------- | :----------------------------------- | | Capital Expenditures | $(186,970) | $(178,581) | - Fiscal 2024 capital expenditures are expected to be approximately $500 million, focusing on technology investments at Alliance Healthcare[199] Debt and Credit Facility Availability As of March 31, 2024, total debt was $5.25 billion, comprising $4.78 billion in fixed-rate debt and $467.48 million in variable-rate debt, with significant liquidity through a $2.4 billion multi-currency revolving credit facility and a $1.45 billion receivables securitization facility (extended to October 2026), and no outstanding borrowings under its commercial paper program Debt and Availability (in thousands) | Debt Type | Outstanding Balance (in thousands) | Additional Availability (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | | Fixed-Rate Debt | $4,781,978 | — | | Variable-Rate Debt | $467,480 | $4,009,685 | | Total Debt | $5,249,458 | $4,009,685 | - The $2.4 billion multi-currency revolving credit facility expires in October 2028, with no outstanding borrowings as of March 31, 2024[223][4] - The $1,450 million receivables securitization facility was extended to October 2026 and has an accordion feature for up to $250 million additional commitment[246] - In February 2024, $500 million of 5.125% senior notes due 2034 were issued to repay existing notes due May 2024[248] Share Purchase Programs and Dividends A new $2.0 billion share repurchase program was authorized in March 2024, with no purchases under it as of March 31, 2024, while under a prior program, $436.4 million of common stock was repurchased in the six months ended March 31, 2024, leaving $2.37 billion available, and the quarterly dividend was increased by 5% to $0.51 per share in November 2023 - A new share repurchase program for up to $2.0 billion was authorized in March 2024[228] - Under a prior program, $436.4 million of common stock was purchased in the six months ended March 31, 2024, including $300.0 million from WBA[204] - As of March 31, 2024, $2,372.6 million remained available under the existing share repurchase program[204] - The quarterly dividend was increased by 5% to $0.51 per share in November 2023[205] Commitments and Obligations The company's remaining estimated liability for opioid-related litigation is approximately $5.1 billion, payable over the next 14 years, with total contractual obligations for future principal and interest payments on debt, leases, and other commitments amounting to $8.79 billion, of which $1.64 billion is due within one year - The remaining estimated liability for opioid-related litigation is approximately $5.1 billion as of March 31, 2024, expected to be paid over 14 years[229] Contractual Obligations (in thousands) | Payment Period | Interest Payments (in thousands) | Leases (in thousands) | Commitments (in thousands) | Total (in thousands) | | :--------------------------- | :------------------------------- | :-------------------- | :------------------------- | :------------------- | | Within 1 year | $1,268,261 | $229,613 | $143,767 | $1,641,641 | | 1-3 years | $734,043 | $405,771 | $169,964 | $1,309,778 | | 4-5 years | $1,035,136 | $311,614 | $67,598 | $1,414,348 | | After 5 years | $3,951,625 | $474,828 | — | $4,426,453 | | Total | $6,989,065 | $1,421,826 | $381,329 | $8,792,220 | - A remaining $104.2 million transition tax liability (net of overpayments and tax credits) is expected to be paid over the next two years[230] - The liability for uncertain tax positions was $574.2 million as of March 31, 2024, excluded from the contractual obligations table due to uncertainty in timing and amount of future cash settlements[231][233] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates (primarily GBP, Euro, Turkish Lira, Brazilian Real, Canadian Dollar), interest rate fluctuations on debt and cash, general economic conditions, inflation, and geopolitical events, and uses forward contracts to hedge foreign currency exposure and manages interest rate risk through a mix of fixed-rate and variable-rate debt - Major foreign currency exposures include the U.K. Pound Sterling, Euro, Turkish Lira, Brazilian Real, and Canadian Dollar, with forward contracts used for hedging[234] - Interest rate risk is managed through a combination of fixed-rate and variable-rate debt; $467.5 million of variable-rate debt was outstanding as of March 31, 2024[235] - Deterioration of economic conditions could adversely affect prescription volumes, customer purchases, and their ability to remit payments[237] - Elevated inflation levels could adversely affect operations and financial results, particularly in certain global markets[238] - Geopolitical trends and events, such as conflicts in Ukraine and between Israel and Hamas, have not had a material financial impact to date[250] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed discussion under 'Market Risks' within Management's Discussion and Analysis, covering the company's exposure to foreign currency risk, changing interest rates, and the price and volatility of its common stock - The company's most significant market risks are foreign currency risk, changing interest rates, and the price and volatility of its common stock[239] Item 4. Controls and Procedures The company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2024, and no material changes in internal control over financial reporting were identified during the second quarter of fiscal 2024 - The company's disclosure controls and procedures were effective as of March 31, 2024[240] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2024[19] Part II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 10 of the Consolidated Financial Statements for a comprehensive description of the company's current legal proceedings, which include opioid lawsuits, shareholder derivative actions, and government investigations - Refer to Note 10 (Legal Matters and Contingencies) for the company's current description of legal proceedings[26] Item 1A. Risk Factors This section refers to the company's Form 10-K for the fiscal year ended September 30, 2023, for a detailed description of significant business risks, encompassing profitability, economic conditions, customer/supplier relationships, regulatory environment, litigation, and cybersecurity, among others - Significant business risks are described in Item 1A of the Form 10-K for the fiscal year ended September 30, 2023[24] - Key risk factors include the ability to achieve profitability, disruption of cash flow, response to general economic conditions (inflation, market volatility), retention of key customer/supplier relationships, risks with WBA relationship, acquisitions, foreign expansion, interest rate and foreign currency fluctuations, regulatory environment, pharmaceutical pricing trends, competition, litigation (opioid, antitrust), tax laws, cybersecurity, data privacy, and natural disasters[45][46] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 232,215 shares of common stock during the second fiscal quarter ended March 31, 2024, at an average price of $235.49 per share, and a new share repurchase program for up to $2.0 billion was authorized in March 2024, but was not available until May 2024 Common Stock Purchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | | :--------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------ | :---------------------------------------------------------------------------- | | January 1 to January 31 | 86 | $210.33 | — | $423,491,280 | | February 1 to February 29 | 231,042 | $235.49 | 216,008 | $372,646,048 | | March 1 to March 31 | 1,087 | $237.25 | — | $2,372,646,048 | | Total | 232,215 | | 216,008 | | - In March 2024, a new share repurchase program allowing the company to purchase up to $2.0 billion of its outstanding shares was authorized, but it was not available until May 2024[15] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - None[16] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[17] Item 5. Other Information During the quarter ended March 31, 2024, no director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement - No director or officer adopted, modified, or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement' during the quarter ended March 31, 2024[25] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents, debt instruments, share repurchase agreements, employment agreements, certifications, and financial statements in iXBRL format Exhibits | Exhibit Number | Description | | :------------- | :---------- | | 3.1 | Amended and Restated Certificate of Incorporation of Cencora, Inc., effective March 14, 2024 | | 4.1 | Twelfth Supplemental Indenture, dated February 7, 2024 | | 10.1 | Share Repurchase Agreement, dated as of February 7, 2024, by and between Cencora, Inc. and Walgreens Boots Alliance Holdings LLC | | ‡10.2 | Amended and Restated Employment Agreement, dated as of March 12, 2024, between the Company and Robert P. Mauch | | ‡10.3 | Employment, Transition, and Release Agreement, dated as of March 12, 2024, between the Company and Steven H. Collis | | ‡10.4 | Form of Restricted Stock Unit Award to Executive (2024) under the Registrant's 2022 Omnibus Incentive Plan | | 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | | 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | | 32 | Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer | | 101 | Financial statements from the Quarterly Report on Form 10-Q of Cencora, Inc. for the quarter ended March 31, 2024, formatted in Inline Extensible Business Reporting Language (iXBRL) | | 104 ‡ | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | SIGNATURES The report is duly signed on behalf of Cencora, Inc. by its Chairman, President & Chief Executive Officer, Steven H. Collis, and Executive Vice President & Chief Financial Officer, James F. Cleary, on May 1, 2024 - The report was signed by Steven H. Collis, Chairman, President & Chief Executive Officer, and James F. Cleary, Executive Vice President & Chief Financial Officer, on May 1, 2024[32]