Filing summary: Owens & Minor, Inc. — 2017 Q2
Entity note: The supplied filing is Owens & Minor, Inc.’s Form 10-Q, not a filing for ACCENDRA HEALTH INC. It covers the quarter and six months ended June 30, 2017; the interim financial statements are unaudited.
Business context and results
Owens & Minor distributes and provides logistics services for medical products in the U.S. and Europe, and sells proprietary products including surgical and procedural kits. Its reportable segments are Domestic, International and Proprietary Products.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $2,265.9 million | $2,483.7 million | $4,594.5 million | $4,939.5 million |
| Gross margin | $273.5 million; 12.07% | $299.4 million; 12.06% | $554.7 million; 12.07% | $596.1 million; 12.07% |
| Operating earnings | $32.8 million | $52.1 million | $68.4 million | $97.0 million |
| Net income | $20.1 million | $27.7 million | $38.9 million | $51.9 million |
| Diluted EPS | $0.33 | $0.45 | $0.64 | $0.83 |
Material changes and management commentary
- Revenue fell 8.8% for the quarter and 7.0% for the first half, principally because of the exit of a large Domestic customer in 2016. Domestic revenue decreased 9.2% in Q2 and 7.3% year to date. International revenue grew 8.3% and 10.9%, respectively, while Proprietary Products revenue declined 3.0% in both periods.
- Gross margin percentage was essentially unchanged, but management cited provider margin compression, lower manufacturer price-change income year to date, currency effects and competitive pressures. Management expects revenue and gross margin to remain affected by the customer loss and said increased gross-margin pressure is expected to continue.
- DS&A expense declined in dollars but rose as a share of revenue: 10.44% in Q2 versus 9.78% a year earlier. Operating earnings declined in all three segments for the first half, especially Proprietary Products, reflecting lower revenue and higher production costs; International results also faced new-business onboarding costs.
- Reported results included $2.9 million of acquisition-related and exit/realignment charges in Q2 and $11.8 million in the first half. First-half charges included information-system asset write-downs, severance and Byram transaction and transition costs. The company also recorded SaaS implementation costs of $3.3 million in Q2 and $4.2 million year to date.
- The effective tax rate fell to 22.8% for Q2 and 29.1% for the first half, partly due to a $3.4 million release of a European valuation allowance. Management said this release benefited 2017 net income by approximately $3.4 million, or $0.06 per share.
- Management presented non-GAAP adjusted EPS of $0.43 for Q2 and $0.86 for the first half, down from $0.55 and $1.08, respectively. These measures exclude specified charges and acquisition-related intangible amortization and are not substitutes for GAAP results.
Cash flow, financial position and liquidity
- First-half operating cash flow was negative $82.5 million, compared with positive $43.2 million in the prior-year period. Management attributed the deterioration mainly to working-capital outflows, including inventory, receivables and order-to-cash program balances.
- Investing cash outflow was $23.7 million, including $16.4 million for property and equipment and $7.9 million for software and intangible assets. Financing cash outflow was $26.7 million, including $31.5 million of dividends, $5.0 million of share repurchases and $15.4 million of revolver borrowings.
- Cash declined to $57.1 million at June 30 from $185.5 million at year-end. Receivables were $655.3 million and inventory $1,004.1 million; reported days sales outstanding increased to 25.6 from 23.1 and inventory turnover declined to 8.2 from 9.2.
- Total current assets were $2,022.9 million and current liabilities $1,063.4 million. Long-term debt, excluding any current portion, was $579.1 million. The filing reports $15.4 million of revolver borrowings and $429.5 million available under the existing facility at June 30. The company said it believed it was in compliance with debt covenants.
- On July 27, after quarter-end, the company replaced its credit agreement with a five-year facility comprising a $600 million revolver and a $250 million term loan. It said proceeds were primarily used to fund the Byram acquisition.
Outlook, subsequent events and risks
No quantified company-wide earnings or revenue guidance is provided. The company expected to continue quarterly dividends, subject to Board discretion and business conditions, and stated that available financing sources should be sufficient for anticipated needs. It cautioned that economic conditions could affect financing access and cost, and customers’ and suppliers’ ability to meet obligations.
Owens & Minor completed its acquisition of Byram Healthcare on August 1, 2017, for $380 million plus cash, less assumed debt and debt-like items. Byram is a distributor of reimbursable medical supplies to patients and home health agencies. Management expected approximately $450 million in annual revenue and modest accretion to 2017 results; purchase-price allocation was incomplete at the filing date.
Risks highlighted include customer concentration and loss, pricing and margin pressure, supplier funding and product pricing, acquisition integration, foreign exchange, healthcare regulation, information-system and data-security issues, and access to financing. The filing added specific risks related to Byram’s Medicare and Medicaid participation, handling of sensitive health information, and its five-year Corporate Integrity Agreement with the HHS Inspector General. Noncompliance could result in penalties or exclusion from government healthcare programs.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Owens & Minor, not ACCENDRA HEALTH INC.
- Assess whether customer losses, competitive pressures and provider margin compression continue to weigh on Domestic revenue and profitability.
- Track working capital, inventory turnover, operating cash flow and the extent to which liquidity depends on borrowing.
- Review the financing, integration, purchase-price allocation and realized contribution of the Byram acquisition, including compliance with its Corporate Integrity Agreement.
- Separate GAAP performance from management’s adjusted measures, and consider the impact of the one-time European tax valuation allowance release.