Business context and reporting period
This is Owens & Minor, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The request metadata names ACCENDRA HEALTH INC, but the filing identifies Owens & Minor; verify the issuer before relying on this summary. Owens & Minor operates Domestic, International, and Proprietary Products segments. It acquired Byram Healthcare on August 1, 2017, and includes Byram in Domestic.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $2,334.0 | $2,415.6 | $6,928.4 | $7,355.1 |
| Gross margin | $301.9; 12.94% | $296.3; 12.27% | $856.7; 12.36% | $892.3; 12.13% |
| Operating earnings | $29.7 | $53.6 | $98.0 | $150.6 |
| Net income | $10.9 | $29.8 | $49.8 | $81.7 |
| GAAP diluted EPS | $0.18 | $0.48 | $0.82 | $1.32 |
| Adjusted diluted EPS (non-GAAP) | $0.40 | $0.54 | $1.26 | $1.62 |
| Operating cash flow | Not provided separately for the quarter | $5.6 | $144.5 |
- Q3 operating and net margins were approximately 1.27% and 0.47%, respectively, versus 2.22% and 1.23% a year earlier.
- At September 30, cash was $98.4 million; current assets were $2,131.9 million and current liabilities $1,204.3 million. Long-term debt, excluding current portion, was $917.3 million.
- The company had $117.2 million drawn on its revolving credit facility and approximately $477.7 million of remaining availability, after outstanding letters of credit. Management said it was in compliance with debt covenants.
- Nine-month investing cash outflow was $403.6 million, including $366.6 million for Byram. Financing provided $305.7 million, including a $250 million term loan and revolver borrowings. Cash declined $87.1 million from year-end 2016.
Material changes versus the prior comparable period
- Revenue fell 3.4% in Q3 and 5.8% for the first nine months. Management cited the loss of a large domestic customer in 2016, weaker growth with existing domestic customers, and one fewer sales day. Byram contributed $80.3 million of revenue in Q3 and year to date.
- Q3 net income fell 63.6%; nine-month net income fell 39.0%. Adjusted EPS, a non-GAAP measure, also declined: $0.40 versus $0.54 in Q3 and $1.26 versus $1.62 year to date.
- Domestic segment operating earnings were $36.1 million in Q3 and $102.8 million year to date, down from $41.0 million and $126.2 million. International moved to operating losses of $2.2 million in Q3 and $0.8 million year to date; Proprietary Products earnings declined to $9.1 million and $26.0 million.
- Working capital absorbed cash: receivables rose $126.7 million and inventory rose $72.9 million from December 31, 2016. DSO increased from 23.1 to 27.6 days and inventory turnover declined from 9.2 to 8.1.
- Debt and interest expense increased following the July credit agreement and borrowing to fund Byram. The nine-month effective tax rate was 34.3%, down from 37.3%, including a $3.4 million European valuation-allowance release; Q3’s effective rate was 48.1%, up from 36.3%.
Outlook, risks, contingencies, and unusual items
- Management expected increased gross-margin pressure to continue, citing customer cost pressures and healthcare competition. No numerical earnings or revenue guidance is provided in the filing.
- On October 31, 2017, the company agreed to acquire Halyard Health’s Surgical and Infection Prevention business for $710 million in cash, subject to adjustments. Closing was expected in Q1 2018, subject to customary conditions and regulatory approvals.
- Key risks include pricing and customer concentration pressures, customer retention, supplier funding and product terms, acquisition integration, healthcare regulation, foreign currency exposure, financing and interest-rate costs, and information-system disruption or data-security breaches.
- Byram is a Medicare-certified supplier and is subject to a five-year Corporate Integrity Agreement with the HHS Office of Inspector General beginning in April 2016. Noncompliance could result in penalties or exclusion from federal healthcare programs.
- Charges included $9.3 million of acquisition-related and exit/realignment charges in Q3 and $21.1 million year to date. The company also recorded SaaS implementation costs of $4.4 million in Q3 and $8.7 million year to date, excluded from its adjusted non-GAAP measures.
- Management reported disclosure controls and procedures were effective as of September 30, 2017; the internal-control evaluation excluded Byram. The filing reports no material legal-proceeding developments through quarter-end.
Important facts for investors to verify
- Confirm issuer identity: the supplied metadata says ACCENDRA HEALTH INC, while the filing is for Owens & Minor, Inc.
- Assess whether Byram can be integrated successfully and whether its growth and margins support the acquisition price and added debt.
- Track operating cash conversion, receivables, inventory turnover, and the durability of the increase in reported gross-margin percentage amid management’s warning of continued pressure.
- Review covenant headroom, floating-rate debt exposure, and financing needs related to the announced Halyard transaction.
- Evaluate the compliance, reporting, and potential financial consequences of Byram’s Corporate Integrity Agreement and healthcare-program requirements.
- Interpret adjusted earnings alongside GAAP results; the company’s non-GAAP measures exclude specified charges and may not be comparable with similarly titled measures at other companies.