ACCENDRA HEALTH INC quarterly report, Q2 FY2015

Filing and business context

Important issuer mismatch: The supplied filing is Owens & Minor, Inc.’s Form 10-Q, not an Accendra Health Inc. filing. It covers the unaudited quarter and six months ended June 30, 2015, with comparisons to 2014. Owens & Minor distributes medical and surgical supplies and provides healthcare logistics services through Domestic and International segments.

Financial performance

Amounts below are in millions of dollars, except per-share data and percentages.

• Q2 operating margin was approximately 1.98%, versus 1.61%; six-month operating margin was approximately 1.85%, versus 1.83%. Q2 net margin was approximately 1.00%, versus 0.86%; six-month net margin was approximately 0.90%, versus 0.99%.
• Adjusted diluted EPS, a non-GAAP measure excluding acquisition-related and exit/realignment charges, was $0.46 for Q2 and $0.90 year to date, up $0.06 in each period. Adjusted figures should be considered alongside GAAP results.
• Operating cash flow was $246.8 million for the first six months, compared with $73.5 million. Investing cash outflow was $22.0 million and financing cash outflow was $76.1 million. Capital expenditures and software/intangible additions totaled $22.8 million, implying approximate operating cash flow less those additions of $224.0 million; the filing attributes much of the cash-flow improvement to payment timing with vendors and working-capital changes.
• Cash increased to $201.0 million from $56.8 million at year-end 2014. Current assets were $1,960.7 million and current liabilities $1,118.1 million (current ratio approximately 1.75). Long-term debt, excluding current portion, was $574.6 million. The company had $445 million of revolver availability after letters of credit and reported covenant compliance.

Material changes versus prior period

• Q2 revenue rose 5.0% and six-month revenue rose 5.5%. Domestic revenue increased 5.9% in Q2 and 6.2% year to date; excluding the 2014 acquisition effect, management reported growth of 4.2% and 4.5%, respectively. International revenue fell 11.7% in Q2 and 7.0% year to date, primarily reflecting foreign-currency translation.
• Q2 net income increased 21.9%, while six-month net income declined 4.8%. Six-month 2014 results benefited from a $5.3 million direct-purchaser antitrust settlement recovery that did not recur. Higher interest expense—up $3.3 million in Q2 and $7.0 million year to date—reflected senior notes issued in September 2014.
• Domestic operating earnings increased $4.1 million in Q2 and $1.8 million year to date. International moved from an operating loss to income: $1.2 million in Q2 versus a $3.6 million loss, and $1.6 million year to date versus a $6.8 million loss.
• The company completed acquisitions of Medical Action Industries and ArcRoyal in late 2014 for combined consideration of approximately $261.6 million net of cash acquired. The acquisitions expanded surgical kitting and packaging capabilities; purchase-price allocation remained preliminary.

Outlook, risks, and unusual items

• The filing provides no specific revenue, earnings, or EPS guidance. Management expected approximately $1.7 million of additional 2015 exit and realignment charges related to activities initiated through June 30.
• Management said available operating cash flow, cash, and revolver borrowings should be sufficient for working capital, capital spending, strategic growth, debt and lease payments, dividends, and repurchases. Future dividends remain subject to board discretion.
• Key disclosed risks include competitive pricing pressure, customer and supplier concentration, healthcare utilization and regulatory changes, acquisition integration, international and foreign-exchange exposure, information-system and cybersecurity risks, fuel costs, financing access, and litigation or tax contingencies.
• Q2 and year-to-date acquisition and exit/realignment charges were $5.7 million and $15.6 million, respectively. These included integration and restructuring costs, including accelerated amortization of a replaced information system. The six-month currency translation adjustment reduced other comprehensive income by $21.3 million.
• The company reported effective disclosure controls as of June 30, 2015, and no material change in internal control over financial reporting during the quarter. The controls evaluation excluded the acquired Medical Action and ArcRoyal businesses.

Investor verification points

• Confirm the issuer identity: this source is Owens & Minor, not Accendra Health.
• Assess how much of the sharp operating cash-flow increase reflects sustainable working-capital improvement versus timing of vendor payments.
• Review the acquired businesses’ ongoing contribution, integration costs, and completion of the preliminary purchase-price allocation.
• Reconcile GAAP earnings with management’s adjusted measures and track restructuring charges and the prior-year settlement comparison.
• Monitor international constant-currency performance, currency impacts, leverage and covenant headroom, and the company’s stated operational and regulatory risks.