Filing summary
Company identification: The request metadata identifies ACCENDRA HEALTH INC, but the supplied Form 10-Q is for Owens & Minor, Inc. The figures below summarize the filing provided, not an Accendra Health filing.
Business context and reporting period
Owens & Minor distributes medical and surgical supplies and provides healthcare logistics services. It reports Domestic and International segments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $2,305.9m | $2,236.1m | $4,562.2m | $4,482.5m |
| Gross margin | $282.3m | $273.4m | $563.5m | $552.5m |
| Gross margin percentage | 12.24% | 12.23% | 12.35% | 12.33% |
| Operating earnings, GAAP | $37.1m | $50.1m | $83.4m | $97.9m |
| Net income | $19.9m | $28.9m | $45.4m | $55.0m |
| Diluted EPS | $0.32 | $0.46 | $0.72 | $0.87 |
- Revenue grew 3.1% in Q2 and 1.8% year to date. Domestic revenue increased 2.0% and 0.9%, respectively; International revenue rose 28.1% and 22.7%.
- GAAP operating earnings fell 25.9% in Q2 and 14.9% year to date. Adjusted operating earnings were $44.7m in Q2 and $94.2m year to date; adjusted diluted EPS was $0.40 and $0.84, respectively, down $0.06 from the comparable periods.
- For the six months, operating cash flow was $73.5m, versus $179.2m in 2013. Investing activities used $36.8m and financing activities used $45.3m; cash declined $9.9m to $92.0m. Property, software and intangible-asset additions totaled $38.8m.
- At June 30, cash was $92.0m, current assets $1,745.9m and current liabilities $1,018.3m. Long-term debt, excluding current portion, was $219.1m; total liabilities were $1,332.4m. The reported current ratio was not specified.
- The company had $200m of senior notes outstanding, maturing in April 2016 at 6.35%. Its $350m revolving facility had no borrowings and approximately $345m available after letters of credit. Management said it was in compliance with debt covenants.
Material changes and management commentary
- Gross margin percentage was nearly flat year over year. Management attributed improvement to higher International fee-for-service activity, partly offset by lower Domestic benefits from supplier price changes and lower margins on new and renewed contracts.
- SG&A rose 6.3% in Q2 and 4.9% year to date, with increases in International salaries, delivery costs and costs of integrating a significant UK customer. Domestic productivity and efficiency savings partly offset these increases.
- International reported operating losses of $3.6m in Q2 and $6.8m for the first six months, compared with losses of $0.6m and $3.6m in 2013. Domestic operating earnings were also lower.
- Six-month other operating income included a $5.3m recovery from settlement of a direct-purchaser antitrust class action, as well as an investment-sale gain and higher finance-charge income.
- Six-month acquisition-related and exit/realignment charges totaled $10.9m, versus $2.6m in 2013. Management expected approximately $5.0m of additional exit and realignment charges during the remainder of 2014 for activities already initiated.
- During Q2, the company agreed to acquire Medical Action Industries for $13.80 per share in cash, with total transaction value of approximately $208m including assumed debt, net of cash. Closing was expected in Q4 2014, subject to customary conditions, shareholder approval and regulatory clearances.
- The filing does not provide formal earnings or revenue guidance. Management said available cash and financing sources were expected to be sufficient for working capital, capital expenditures, growth, debt and lease payments, dividends and repurchases.
Risks, contingencies and other items
- Customer-contract performance contingencies totaled $1.4m, but none were accrued because management did not consider payment probable. Deferred revenue related to outstanding targets was $0.9m.
- Claims related to the acquisition and transition of Movianto remained under review; their outcomes and financial effects could not be estimated. The company also remained subject to audits of certain historical Medicare, Medicaid and private-insurer reimbursements.
- Management cited pricing and competitive pressure, customer and supplier concentration, acquisition integration, healthcare regulation, international and foreign-exchange risks, fuel costs, information-system and data-security risks, litigation, taxes and access to financing among forward-looking risks.
- The company noted that a change in IRS rules affecting inventory costs and tax LIFO calculations could make a related deferred tax liability payable and affect future cash flow; the impact was still being analyzed.
- Prior-period 2013 revenue and cost of goods sold were revised to present certain International contracts net. The revisions reduced both figures by $30.6m for Q2 and $59.9m for the six-month period, without changing gross margin, operating earnings, net income or cash flow.
- Disclosure controls were deemed effective as of June 30, 2014, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Owens & Minor, Inc., notwithstanding the ACCENDRA HEALTH INC metadata.
- Review the causes and durability of lower operating earnings and the International segment’s continuing losses, including the costs and expected benefits of integrating the UK customer.
- Assess cash-flow conversion and working-capital movements: management attributed the year-over-year operating cash-flow decline primarily to routine working-capital timing.
- Track the Medical Action acquisition’s approval, financing, closing, integration and effect on debt covenants and liquidity.
- Monitor the expected additional realignment charges, unresolved Movianto claims, customer-contract contingencies and potential tax LIFO cash impact.