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, 2018; it does not identify Accendra Health Inc. Owens & Minor distributes medical products and provides healthcare logistics and product-related services through its Global Solutions and Global Products segments.
On April 30, 2018, the company acquired Avanos Medical’s Surgical and Infection Prevention business (Halyard) for approximately $740 million, net of cash acquired. Halyard is included in Global Products. The company also acquired Byram Healthcare in August 2017.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $2,458.3 million | $2,265.9 million | $4,830.9 million | $4,594.5 million |
| Gross margin | $325.0 million; 13.22% | $273.5 million; 12.07% | $649.7 million; 13.45% | $554.7 million; 12.07% |
| Operating income (loss), GAAP | $(172.1) million | $32.8 million | $(147.8) million | $68.4 million |
| Net income (loss), GAAP | $(182.8) million | $20.1 million | $(174.6) million | $38.9 million |
| Diluted EPS, GAAP | $(3.07) | $0.33 | $(2.92) | $0.64 |
Management’s non-GAAP adjusted operating income was $46.6 million in Q2 and $94.2 million year to date; adjusted EPS was $0.32 and $0.75, respectively, down from $0.43 and $0.86 in the comparable 2017 periods. These measures exclude specified impairment, acquisition, purchase-accounting, amortization and other items and are not substitutes for GAAP results.
For the first six months, operating cash flow was $46.3 million, versus cash used of $82.5 million in 2017. Investing used $763.5 million, including $739.6 million for Halyard; financing provided $726.8 million, mainly through acquisition-related borrowing. Cash rose to $118.2 million from $104.5 million at year-end 2017.
At June 30, 2018, total assets were $4.04 billion and total liabilities $3.24 billion. Long-term debt, excluding current portion, was $1.67 billion. The filing reports $936.4 million of term-loan borrowings, $205.6 million drawn on the revolver and $380.5 million of remaining revolver availability. Current assets were $2.52 billion versus current liabilities of $1.42 billion. The company said it was in compliance with debt covenants.
Changes versus prior periods
- Revenue increased 8.5% in Q2 and 5.1% year to date, reflecting Byram and Halyard contributions and favorable foreign exchange, partly offset by lost-customer revenue. Halyard contributed $168 million of Q2 revenue; Byram contributed $128 million.
- GAAP results swung to substantial losses, primarily after $165.4 million of goodwill and intangible impairment charges, including $149.0 million of goodwill and $16.5 million of customer-relationship intangible impairment. The company cited customer losses, operational inefficiencies, revised expectations and a decline in market capitalization.
- Interest expense increased to $18.6 million for Q2 and $28.8 million year to date, reflecting new term loans and revolver borrowings.
- Global Solutions operating income declined year over year to $24.0 million in Q2 and $60.6 million year to date amid provider-margin pressure and warehouse inefficiencies. Global Products operating income rose to $22.5 million and $33.7 million, respectively, with Halyard contributing.
- Inventory increased 23.2% from year-end to $1.22 billion; inventory turnover fell to 7.2 from 8.5. Accounts receivable rose 12.9%, and DSO increased to 29.6 days from 28.7.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management expects provider-margin pressure to continue through 2018, citing customer cost pressures and competition. Management said available cash and financing sources should be sufficient for foreseeable needs, but future dividends remain at board discretion.
Key risks include intense pricing competition and customer consolidation; dependence on major customers, GPOs and suppliers; execution and integration of Halyard and Byram; leverage, variable interest rates and covenant restrictions; potential further goodwill impairment; healthcare regulation and reimbursement changes; commodity and fuel-price volatility; foreign-exchange exposure; and information-system, cybersecurity, product-liability and supply-chain risks. Halyard integration and transition services are subject to execution risks. The company estimates that a 100-basis-point interest-rate increase would reduce annual pre-tax earnings by approximately $7 million after considering swaps entered into in July 2018.
The company adopted ASC 606 in 2018 with no material financial-statement impact. It expects the lease-accounting standard effective in 2019 to materially affect its balance sheet. Disclosure controls were reported effective as of June 30, 2018; acquired businesses were excluded from the internal-control evaluation under the permitted transition.
Important facts for investors to verify
- Confirm the issuer: this text is Owens & Minor, Inc., not Accendra Health Inc.
- Review the Halyard acquisition’s final purchase-price allocation, integration progress, and realized revenue and earnings contribution.
- Assess the assumptions behind the $165.4 million impairment and whether further impairment indicators or charges arise.
- Monitor leverage, interest expense, covenant headroom, debt maturities and revolver availability following the acquisition.
- Track provider-margin trends, customer retention, warehouse efficiency, working capital and operating cash generation.
- Evaluate the difference between GAAP losses and management’s adjusted results, including the nature and recurrence of excluded charges.