ACCENDRA HEALTH INC annual report, FY2015

Filing and reporting period

Important filing-identity discrepancy: The request identifies ACCENDRA HEALTH INC, but the supplied Form 10-K is for Owens & Minor, Inc. This summary covers the filing provided, not Accendra Health. It reports the year ended December 31, 2015; the filing is an annual report, not a standalone fourth-quarter filing.

Owens & Minor provides healthcare product distribution, kitting, and logistics services through Domestic and International segments. Its 2014 acquisitions of Medical Action and ArcRoyal expanded its surgical kitting business.

Key financial results

Metric20152014Change
Net revenue$9.773 billion$9.440 billion+3.5%
Gross margin$1.215 billion; 12.43% of revenue$1.170 billion; 12.39%+3.8%; +4 bps
Operating earnings, GAAP$200.4 million; 2.05% of revenue$159.5 million; 1.69%+25.6%
Net income$103.4 million$66.5 million+55.5%
Diluted EPS$1.65$1.06+$0.59
Adjusted EPS (non-GAAP)$2.00$1.76+13.6%
Cash from operations$269.6 million$(3.8) millionImproved by $273.4 million

Adjusted operating earnings were $227.3 million, or 2.33% of revenue, versus $202.5 million, or 2.15%, in 2014. Adjusted figures exclude specified acquisition, exit and realignment, purchase-accounting, contract-settlement, and debt-retirement items; they are management-defined non-GAAP measures.

At year-end, cash was $161.0 million, total debt was $577.6 million, and shareholders’ equity was $992.6 million. The $450 million revolving facility had no borrowings and approximately $445 million available after letters of credit. Current assets were $1.975 billion and current liabilities $1.064 billion. Capital expenditures were $36.6 million. Dividends paid were $63.7 million; share repurchases were $20.0 million.

Changes versus prior year and segment trends

  • Domestic revenue rose 4.5% to $9.356 billion; segment operating earnings increased to $223.4 million from $209.3 million. Growth in large provider accounts, Medical Action, manufacturer price changes, expense controls, and lower fuel costs contributed.
  • International revenue fell 14.6% to $416.8 million, including a $52.5 million adverse currency translation effect. On the company’s stated adjusted comparison basis, revenue declined approximately 3.5%, reflecting a U.K. contract exit and other lost business. Segment operating results improved to $3.9 million from a $6.7 million loss, attributed to restructuring and efficiency measures.
  • Operating cash flow rebounded from negative $3.8 million in 2014, aided by higher earnings and favorable working-capital timing, particularly vendor payments. Inventory rose 7.8%, while accounts payable rose 16.7%; inventory turnover declined from 10.1 to 9.4.
  • Interest expense increased 49.5% to $27.1 million, primarily following the 2014 issuance of senior notes. The effective tax rate decreased to 40.3% from 47.4%.

Outlook, risks, and unusual items

  • Management said it expected approximately $20 million of acquisition-related and exit/realignment charges in 2016 for activities to be undertaken in both segments. Separately, the notes state that significant additional costs were not expected for activities initiated through year-end 2015.
  • Management believed cash generation and available credit would fund working capital, capital spending, debt service, dividends, repurchases, and other foreseeable needs. It anticipated continued quarterly dividends; the board approved a first-quarter 2016 dividend of $0.255 per share, up 1% from the 2015 quarterly rate.
  • Key exposures include intense distribution pricing pressure; reliance on major GPOs, provider customers, and suppliers; customer and supplier consolidation; healthcare-policy and reimbursement changes; foreign exchange and European market conditions; regulatory, privacy, cybersecurity, product-liability, and distribution-network risks.
  • Approximately 81% of consolidated revenue came from sales to hospitals under contract with Novation, MedAssets, and Premier. The top ten U.S. customers represented about 29% of consolidated revenue; the ten largest domestic suppliers accounted for about 57%.
  • 2015 included $28.4 million of acquisition-related and exit/realignment charges and a $1.5 million insurance recovery tied to a U.K. contract settlement. GAAP results also compare against a 2014 year that included a $14.9 million loss on early debt retirement.
  • Pending legal matters were described as ordinary and incidental; the company said probable-loss accruals were not material and did not expect current matters to materially affect results. The financial-statement audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting.

Important facts for investors to verify

  1. Confirm the issuer: the supplied filing is Owens & Minor, Inc., not ACCENDRA HEALTH INC.
  2. Review the full filing’s segment disclosures and the basis for International revenue comparisons, including currency translation, acquisitions, contract exits, and the buy-sell-to-fee-for-service transition.
  3. Assess whether cash-flow improvement is sustainable, given the stated working-capital timing benefit and the increase in accounts payable.
  4. Track the expected 2016 restructuring charges and reconcile planned new actions with the disclosure about costs for previously initiated activities.
  5. Evaluate concentration and contract-renewal risks involving GPOs, large customers, and significant suppliers, along with debt maturities, covenants, and fixed lease commitments.
  6. Compare GAAP performance with management’s non-GAAP adjustments and review the associated reconciliation before relying on adjusted EPS.