Filing summary
Issuer discrepancy: The supplied filing is Owens & Minor, Inc., not ACCENDRA HEALTH INC. It is a Form 10-Q for the quarter ended September 30, 2012, covering the three- and nine-month periods ended on that date. Verify the intended company and filing before relying on this summary.
Business context and reporting period
Owens & Minor distributes medical and surgical supplies and provides healthcare supply-chain services. On August 31, 2012, it acquired Movianto, a European healthcare third-party logistics business, and began reporting it as a separate International segment. Movianto contributed one month of results in the quarter.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,179.9 million | $2,176.8 million | $6,583.2 million | $6,432.0 million |
| Gross margin | $228.1 million; 10.46% | $216.7 million; 9.95% | $653.9 million; 9.93% | $643.5 million; 10.00% |
| Operating earnings, reported | $46.7 million | $58.5 million | $151.7 million | $160.5 million |
| Net income | $24.6 million | $33.4 million | $84.1 million | $91.3 million |
| Diluted EPS | $0.39 | $0.53 | $1.33 | $1.44 |
| Adjusted diluted EPS (non-GAAP) | $0.49 | $0.53 | $1.44 | $1.44 |
Q3 revenue was essentially flat, while nine-month revenue grew 2.4%. Reported net income fell about 26% in Q3 and 8% year to date. Adjusted operating earnings were $54.5 million in Q3, or 2.50% of revenue, versus $58.8 million, or 2.70%, a year earlier; nine-month adjusted operating earnings were $160.2 million versus $160.9 million.
Q3 Domestic revenue declined $46.5 million year over year, partly offset by $49.7 million of International revenue from Movianto. Domestic gross margin fell $8.2 million in Q3 and $9.2 million year to date; lower Domestic SG&A partially offset the pressure. The filing cites fewer sales days, lower healthcare utilization and product price inflation, reduced government purchasing, supplier-base rationalization, customer mix and competitive pressure.
Cash flow, balance sheet and debt
- Nine-month cash from operating activities was $170.4 million, versus $108.1 million in 2011. Inventory reductions contributed to 2012 operating cash flow.
- Investing cash outflow was $174.5 million, principally reflecting the Movianto acquisition; financing cash outflow was $53.5 million. Cash declined $56.3 million from $135.9 million at year-end 2011 to $79.7 million at September 30, 2012.
- Total assets were $2,221.7 million and current liabilities $949.3 million at September 30. Accounts receivable was $583.0 million and inventory $776.9 million.
- Long-term debt, excluding current portion, was $214.8 million. The company had $200 million principal amount of 6.35% senior notes due in 2016 and had assumed approximately $2.1 million of Movianto debt, primarily capital leases.
- The $350 million revolving credit facility had no borrowings and $5.0 million of letters of credit outstanding, leaving $345.0 million available. Management reported compliance with debt covenants and expected available liquidity to meet foreseeable needs.
- Cash dividends were $0.22 per share for Q3, up from $0.20. The company repurchased $11.3 million of stock during the first nine months, with approximately $22.6 million remaining under its authorization.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management anticipated continuing quarterly dividends, subject to Board discretion, and stated that available financing sources were expected to be sufficient for foreseeable requirements.
- Movianto’s preliminary acquisition accounting included $36.0 million of goodwill, assigned to International, and $24.3 million of acquired intangible assets. Valuations were not final. Acquisition-related costs were $7.8 million in Q3 and $8.4 million year to date; about $4.7 million was identified as nondeductible, contributing to a higher reported Q3 tax rate of 43.6%.
- Movianto generated a $0.6 million operating loss in its first month. The company highlighted integration, foreign-market, currency, regulatory, tax and compliance risks, as well as customer concentration and competitive pricing pressures.
- Potential customer performance payments totaled $3.6 million but were not accrued because management did not consider them probable. A California administrative review could result in tax incentive payments exceeding $7 million for prior periods; the amount and timing were uncertain.
- Management said customary legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective; Movianto was excluded from the 2012 internal-control assessment under the acquisition scope exception, while oversight processes were extended to its operations.
Important facts for investors to verify
- Confirm that Owens & Minor, rather than ACCENDRA HEALTH INC, is the intended issuer and reporting period.
- Track Movianto integration, final purchase-price allocation, segment profitability and the realization of expected strategic benefits.
- Assess whether Domestic revenue and gross-margin pressures continue, and whether cost reductions can offset them.
- Review cash conversion and working-capital trends following the acquisition, alongside debt covenants and access to the revolving facility.
- Monitor the California tax incentive review, customer performance commitments, and the company’s exposure to foreign-market, currency and compliance risks.