Filing summary
Entity and period: The supplied filing is Owens & Minor, Inc.’s Form 10-K for the year ended December 31, 2018, not a filing for Accendra Health Inc. The request metadata also says “2018 Q4,” while the filing is an annual report; fourth-quarter results are separately disclosed below.
Business context and reporting period
Owens & Minor is a global healthcare distribution, logistics, and medical-products company. It reported two segments: Global Solutions, covering distribution, logistics, and related services; and Global Products, covering manufacturing and sourcing. The company acquired substantially all of Halyard Health’s Surgical and Infection Prevention business on April 30, 2018, for approximately $758 million net of cash acquired. Byram Healthcare, acquired in 2017, expanded its direct-to-patient business.
In 2018, the company changed its segment structure and recast prior-year segment results. It also adopted ASC 606; management said adoption did not change the amount or timing of revenue recognized.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $9.839 billion | $9.318 billion |
| Gross margin | $1.367 billion; 13.89% of revenue | $1.172 billion; 12.58% |
| Operating income (loss), GAAP | $(392.2) million | $89.3 million |
| Net income (loss), GAAP | $(437.0) million | $72.8 million |
| Diluted EPS, GAAP | $(7.28) | $1.20 |
| Operating cash flow | $115.6 million | $56.8 million |
| Cash and cash equivalents at year-end | $103.4 million | $104.5 million |
| Total debt at year-end | $1.681 billion | $917.4 million |
Revenue increased 5.6%, primarily reflecting Halyard and Byram contributions, partly offset by lost distribution customers. Management-reported adjusted operating income was $176.8 million, adjusted net income was $70.4 million, and adjusted diluted EPS was $1.15; these are non-GAAP measures and exclude specified charges.
Cash used in investing activities was $815.8 million, including $751.8 million for acquisitions; capital expenditures were $65.7 million. Financing activities provided $701.1 million, including new debt proceeds. Inventory was $1.290 billion, accounts payable $1.110 billion, and the current ratio was approximately 1.72 based on reported current assets and liabilities. Inventory turnover fell to 7.4 from 8.5. The filing reported $374.7 million of undrawn credit availability at December 31, 2018, before a subsequent amendment reduced the revolver commitment.
Fourth-quarter 2018 revenue was $2.543 billion, gross margin was $364.7 million, net loss was $261.8 million, and diluted loss per share was $4.37. Fourth-quarter 2017 revenue was $2.390 billion, net income was $23.0 million, and diluted EPS was $0.38.
Material changes versus the prior period
- GAAP results moved from net income of $72.8 million in 2017 to a net loss of $437.0 million in 2018. The principal unusual item was $439.6 million of goodwill and intangible-asset impairment charges, including $423.1 million for goodwill.
- Revenue rose, but Global Solutions operating income declined to $104.1 million from $141.1 million. Management cited lower distribution revenue, pricing and margin pressure, warehouse inefficiencies, new-solution development costs, and higher severance and restricted-stock expense.
- Global Products operating income increased to $75.7 million from $38.5 million, primarily due to Halyard’s contribution.
- Interest expense rose to $77.0 million from $31.8 million following additional borrowing for the Halyard acquisition. Total debt increased substantially, and total equity declined to $518.4 million from $1.015 billion.
- Cash dividends were $0.86 per share for 2018 versus $1.03 in 2017. In February 2019, the board approved a first-quarter dividend of $0.0025 per share.
Outlook, risks, and unusual items
- Management expected continued pricing and margin pressure in distribution. It said available financing sources should be sufficient for foreseeable needs, while acknowledging that economic conditions, customers, suppliers, and borrowing costs could affect liquidity.
- On February 12, 2019, the company amended its credit agreement, reducing the revolving facility from $600 million to $400 million, revising leverage and interest-coverage covenants, adding an anti-cash-hoarding covenant, tightening certain restrictions, and removing the incremental facility.
- The company had $275 million of 3.875% senior notes due in 2021 and $275 million of 4.375% notes due in 2024. It warned that failure to repay or refinance these notes could trigger springing maturities under its credit agreement and create default and enforcement risks. Reported debt-to-equity was approximately 324%.
- Key risks include customer and GPO concentration, supplier dependence, continued competitive pricing pressure, acquisition integration, commodity-price exposure, variable-rate debt, covenant compliance, and operational or cyber disruption. The filing reported that the top ten U.S. customers represented about 23% of consolidated revenue and the three largest GPOs about 72%.
- Halyard integration and purchase accounting remained significant; the company excluded Halyard’s internal controls from its 2018 control assessment under the SEC acquisition scope exception. Management and the auditor otherwise concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
- Fusion5 had not generated revenue and had incurred losses as of year-end. The company also disclosed leadership turnover, including a CEO transition planned for March 2019, and uncertainty surrounding Brexit.
- The company recorded a $16.5 million intangible-asset impairment in addition to the goodwill impairment. Acquisition-related and exit/realignment charges were $62.2 million; purchase-accounting fair-value adjustments were $27.1 million.
Important facts for investors to verify
- Confirm that the intended issuer is Owens & Minor, Inc.; the supplied filing does not match the requested company name, Accendra Health Inc.
- Review the amended credit agreement, covenant headroom, actual revolver availability, debt maturities, and refinancing plans for the 2021 and 2024 notes.
- Assess whether distribution margin pressure, customer losses, and warehouse inefficiencies persist, and whether Halyard delivers the expected contribution and integration benefits.
- Examine the assumptions behind the $423.1 million goodwill impairment and the possibility of further impairment or restructuring charges.
- Verify the sustainability of operating cash flow, working-capital trends, dividend policy, and management’s adjusted results alongside GAAP performance.