Filing summary
Entity note: The request identifies ACCENDRA HEALTH INC, but the supplied Form 10-K is for Owens & Minor, Inc. Confirm the filing belongs to the intended company before relying on this summary.
Business context and reporting period
This is Owens & Minor’s annual report for the fiscal year ended December 31, 2017. The company distributes healthcare products and provides logistics and related services through Domestic, International and Proprietary Products segments. Byram Healthcare, acquired August 1, 2017, is included in Domestic.
Financial results and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net revenue | $9.318 billion | $9.723 billion |
| Gross margin | $1.172 billion; 12.58% | $1.187 billion; 12.21% |
| Operating earnings (GAAP) | $89.3 million; 0.96% of revenue | $199.6 million; 2.05% |
| Net income | $72.8 million | $108.8 million |
| Diluted EPS | $1.20 | $1.76 |
| Operating cash flow | $56.8 million | $187.7 million |
| Capital expenditures | $50.7 million | $30.1 million |
| Cash and cash equivalents at year-end | $104.5 million | $185.5 million |
| Total debt at year-end | $917.4 million | $569.4 million |
Operating cash flow less capital expenditures was approximately $6.0 million in 2017, before acquisition spending, dividends and other financing items. Cash used in investing activities was $416.6 million, including approximately $366.6 million for Byram. The company reported $490.3 million of available borrowing capacity under its credit agreement at year-end. Debt-to-equity was approximately 90%; the filing also disclosed approximately $283 million of lease obligations in its risk discussion.
Reported 2017 results included $60.7 million of acquisition-related and exit/realignment charges and $13.4 million of software-as-a-service implementation costs. Management’s non-GAAP adjusted operating earnings were $179.8 million and adjusted diluted EPS was $1.61, versus $234.3 million and $2.17 in 2016. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Fourth-quarter 2017 revenue was $2.390 billion and net income was $23.0 million, compared with $2.368 billion and $27.1 million in fourth-quarter 2016. Quarterly diluted EPS was $0.38 versus $0.45.
Material changes versus 2016
- Revenue declined 4.2%, primarily due to the loss of a large Domestic customer in 2016 and lower growth with existing Domestic customers. Byram contributed $209 million of 2017 revenue.
- Domestic revenue fell 4.3%; segment operating earnings declined to $134.1 million from $165.5 million.
- International revenue rose 14.0%, but the segment recorded a $3.9 million operating loss, compared with $5.6 million of operating earnings in 2016, reflecting costs to obtain and support new business.
- Proprietary Products revenue fell 6.6% and operating earnings declined to $33.0 million from $53.8 million, amid lower revenue and higher production costs.
- Gross margin dollars fell 1.3%, although gross margin percentage improved to 12.58% from 12.21%. Management attributed pressure to lower provider margins and lower manufacturer price-change income, partly offset by Byram.
- DS&A expense increased 4.8% to $1.017 billion; as a share of revenue it rose to 10.91% from 9.98%. Operating earnings were also affected by higher acquisition/realignment charges, SaaS implementation costs and interest expense.
- DSO rose to 28.7 days from 23.1, and inventory turnover declined to 8.5 from 9.2.
Outlook, risks and unusual items
- Management expected gross-margin pressure to continue into 2018 and anticipated further repositioning charges. The filing provides no quantified earnings or revenue guidance.
- The company had agreed to acquire Halyard Health’s Surgical and Infection Prevention business for $710 million cash, subject to adjustments, with closing then expected early in the second quarter of 2018. The acquisition was pending at the filing date and was expected to increase borrowing; completion and integration were not assured.
- The 2017 tax provision included an estimated $34.6 million benefit from the Tax Cuts and Jobs Act and a $3.4 million benefit from releasing a European valuation allowance. The company said its tax-reform estimate was provisional and could change; certain tax provisions remained under evaluation.
- Key risks include competitive pricing and margin pressure; dependence on major GPOs, customers and suppliers; acquisition execution and integration; leverage and debt-service capacity; healthcare regulation and reimbursement; Byram’s Medicare/Medicaid participation and Corporate Integrity Agreement; cybersecurity and privacy; foreign-currency and international risks; and potential goodwill impairment.
- Approximately 78% of consolidated revenue came from hospitals under contract with the three largest GPOs. The top ten U.S. customers represented about 23% of consolidated revenue. Products from the ten largest domestic suppliers represented about 54% of consolidated revenue.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Byram was excluded from the 2017 internal-control assessment because of the timing of its acquisition.
Important facts for investors to verify
- Confirm the apparent mismatch between the requested company, ACCENDRA HEALTH INC, and the Owens & Minor filing supplied.
- Review whether operating cash flow and working-capital performance improve, given the sharp decline in operating cash flow and increased DSO.
- Assess debt capacity, covenant compliance and financing needs, particularly in light of the proposed $710 million Halyard acquisition.
- Track Domestic and Proprietary Products margins, International segment performance, and management’s stated expectation of continued margin pressure.
- Check final purchase accounting and integration results for Byram, and any subsequent completion, financing and realized benefits of the Halyard transaction.
- Monitor revisions to the provisional tax-reform accounting and compliance with Byram’s Corporate Integrity Agreement.