Business context and reporting period
The supplied filing is Owens & Minor, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2010—not a filing for Accendra Health Inc. The company’s results reflect medical-supply distribution and related services, including third-party logistics. The direct-to-consumer diabetes-supply business was sold in January 2009 and is reported as discontinued operations.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $2,019.9 | $2,013.8 | $3,989.6 | $3,962.4 |
| Gross margin | $192.2 | $197.7 | $382.7 | $381.3 |
| Operating earnings | $52.2 | $48.9 | $101.3 | $88.8 |
| Continuing-operations income | $29.5 | $27.8 | $57.3 | $50.1 |
| Net income | $29.5 | $23.6 | $57.3 | $37.6 |
| Diluted continuing-operations EPS | $0.46 | $0.44 | $0.91 | $0.80 |
- Gross margin was 9.52% in Q2 2010 versus 9.82% a year earlier; first-half margin was 9.59% versus 9.62%. Operating margin improved to 2.58% from 2.43% in Q2 and to 2.54% from 2.24% for the first half.
- Cash from continuing operating activities was $183.1 million for the first half, compared with $123.4 million in 2009. Investing activities used $18.7 million and financing activities used $102.0 million. Cash increased $61.5 million to $157.6 million.
- At June 30, current assets were $1,391.9 million and current liabilities $720.1 million. Accounts receivable was $468.0 million; inventory was $712.1 million.
- Long-term debt carrying value was $207.9 million. The company also reported $200 million principal amount of 6.35% senior notes due 2016. It had no revolver borrowings and $339.5 million available under its $350 million revolving facility.
Material changes versus the prior comparable period
- Q2 revenue rose only 0.3%; first-half revenue increased 0.7%. Management attributed growth to existing and new customers, partly offset by lost-customer sales, and said weak economic conditions and hospital utilization trends weighed on growth.
- Q2 gross-margin dollars fell 2.8%, with lower acute-care distribution margins, product mix and pricing pressure, and a prior-year benefit from $2.7 million of previously deferred customer-contract revenue. First-half gross-margin dollars increased modestly, aided by a lower LIFO provision and third-party logistics revenue.
- SG&A declined 7.2% in Q2 and 5.2% for the first half, including lower labor and technology-related costs and the absence of prior-year Burrows acquisition transition expenses. This was the principal driver of improved operating earnings.
- Net income comparisons also benefited from the absence of 2009 discontinued-operation losses: $4.1 million for Q2 and $12.5 million for the first half. Continuing-operations income rose 6.1% and 14.3%, respectively.
- Receivables declined from year-end and DSO improved to 19.8 days from 21.4. Inventory increased to $712.1 million from $689.9 million.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said available cash, operating cash generation and revolver capacity should meet working-capital, capital, debt, lease and dividend needs; it anticipated continuing quarterly dividends, subject to board discretion.
- A new $350 million revolving credit agreement was signed June 7, 2010, replacing a $306 million facility; it matures in 2013, with possible extensions and commitment increases. Covenants limit indebtedness and require leverage and interest-coverage ratios. Management reported covenant compliance at June 30. The facility and senior notes have cross-default provisions.
- Risks highlighted include economic weakness and healthcare reimbursement or regulatory changes, customer and supplier concentration or performance, pricing and product mix, competition, technology and information-system risks, financing costs, and litigation and tax contingencies. Management specifically noted uncertainty about the effects of 2010 healthcare reform legislation.
- Customer-contract performance obligations totaled $5.4 million and were not accrued because management did not consider payment probable; $0.9 million of related deferred revenue was recorded. California was reviewing potential sales-tax incentives that could be worth up to $1.05 million per quarter, but timing and amount were uncertain.
- The company contributed $8.3 million to its pension plan during the first half and expected about $1.0 million more through termination, expected in late 2010 or early 2011. A three-for-two stock split was effected in March 2010; share and per-share figures were retroactively adjusted.
- Management said disclosure controls were effective and there was no material change in internal control over financial reporting. The filing reported no material developments in previously disclosed legal proceedings.
Important facts for investors to verify
- Confirm the issuer: the provided filing is for Owens & Minor, Inc., not Accendra Health Inc.
- Review whether operating-earnings growth and cash generation are sustainable given modest sales growth, lower Q2 gross margin, and the contribution of working-capital movements.
- Assess customer retention, acute-care pricing and mix, hospital utilization, and the growth and costs of third-party logistics.
- Verify revolver covenant headroom, the terms and availability of the credit facility, and the impact of cross-default provisions.
- Track pension-plan termination costs, the California tax-incentive review, customer-contract contingencies, and potential healthcare reimbursement audits.