Business context and reporting period
The supplied filing is Owens & Minor, Inc.’s Form 10-K for the year ended December 31, 2011, filed February 24, 2012. This does not match the request metadata naming ACCENDRA HEALTH INC; the summary below describes the issuer identified in the filing. The filing reports annual results and selected unaudited quarterly data, including fourth-quarter 2011.
Owens & Minor distributes medical and surgical supplies and provides third-party logistics and supply-chain services to healthcare providers and suppliers. Product distribution represented more than 95% of revenue. The company served approximately 4,000 healthcare providers through 48 distribution and service centers.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $8.628 billion | $8.124 billion |
| Gross margin | $857.5 million; 9.94% of revenue | $807.7 million; 9.94% |
| Operating earnings | $203.5 million; 2.36% of revenue | $195.9 million; 2.41% |
| Net income | $115.2 million | $110.6 million |
| Diluted continuing-operations EPS | $1.81 | $1.75 |
| Cash from continuing operating activities | $68.4 million | $143.2 million |
| Capital expenditures | $36.3 million | $41.3 million |
| Cash and cash equivalents at year-end | $135.9 million | $159.2 million |
| Total debt at year-end | $214.6 million | $210.9 million |
Revenue rose 6.2%; operating earnings increased 3.9%, net income 4.2%, and diluted continuing-operations EPS 3.4%. SG&A rose 8.2% to $610.7 million, increasing to 7.08% of revenue from 6.94%. Gross margin dollars grew 6.2%, but the percentage margin was unchanged. Cash from operations fell by $74.8 million, principally reflecting approximately $100 million of inventory buildup for new business, higher receivables, and other growth-related working-capital needs. Year-end inventory was $806.4 million versus $720.1 million; DSO rose to 20.7 days from 19.6.
The company had $200 million par value of 6.35% senior notes due in 2016, plus capital leases. Its $350 million revolving facility had no borrowings and $345 million available at year-end, after $5 million of letters of credit. Management reported covenant compliance. Current assets were $1.526 billion and current liabilities $732.4 million.
Material changes and unusual items
- 2011 included $12.7 million of exit and realignment charges, including costs associated with closing two distribution centers; the after-tax EPS impact was $0.13. Fourth-quarter net income was $23.9 million and diluted EPS was $0.38.
- For comparison, 2010 included a $19.6 million pension settlement charge ($11.9 million after tax, or $0.19 per diluted share) following termination of the frozen defined-benefit pension plan. Excluding these respective charges, management reported non-GAAP 2011 and 2010 operating earnings of $216.2 million and $215.5 million, net income of $122.9 million and $122.5 million, and diluted EPS of $1.94 in both years.
- Fourth-quarter 2010 net income was $21.8 million and diluted EPS was $0.34. The 2011 fourth quarter included the exit and realignment charges; the filing’s quarterly table reports quarterly revenue of $2.196 billion and gross margin of $214.0 million.
- The company had exited its direct-to-consumer diabetes supply business in 2009; there was no discontinued-operations income or loss in 2011 or 2010.
- The filing reclassified changes in book overdrafts from financing to operating cash flows for 2010 and 2009. This reduced reported 2010 operating cash flow by $101.4 million and increased 2009 operating cash flow by $52.7 million, with no effect on earnings, financial position, or equity.
Outlook, risks and contingencies
Management expected 2012 capital expenditures to increase by $20–25 million compared with 2011, reflecting a multi-year information-technology infrastructure transformation. It targeted lower IT outsourcing and maintenance expense over the same timeframe to offset related operating-cost pressure; the filing provides no quantified earnings guidance. In February 2012, the board approved a 10% increase in the quarterly dividend to $0.22 per share.
- Customer and contract concentration: the four largest GPO relationships accounted for approximately 78% of 2011 revenue. Novation’s contract was due to expire in August 2012, Premier’s in December 2012, and MedAssets/Broadlane’s in May 2013. The top ten customers represented about 23% of revenue.
- Supplier concentration: the ten largest suppliers accounted for approximately 54% of revenue. Covidien and Johnson & Johnson-related products represented about 14% and 10%, respectively.
- Competitive pricing pressure and a shift toward larger, lower-margin health-system customers may pressure margins. Management cited private-label sourcing, supplier programs, distribution efficiencies, logistics, consulting, and non-acute-care growth as mitigation initiatives.
- Working-capital demands, customer credit risk, fuel-price volatility, healthcare policy and reimbursement changes, regulation, and reliance on information systems and the outsourced IT provider are identified risks. Management estimated that each one-day DSO increase would reduce cash by approximately $24 million; fuel-cost increases reduced 2011 operating earnings by an estimated $470,000 per 10-cent-per-gallon benchmark increase.
- Contractual obligations totaled $616.4 million, including operating leases, purchase obligations, senior-note payments including interest, and other listed commitments. Separately, the IT outsourcing agreement’s fixed and determinable remaining obligations totaled $126 million, subject to specified variability.
- Potential customer performance-target payments totaled $2.6 million but were not accrued because management did not consider them probable. A potential California sales-tax incentive gain was estimated at up to $7.4 million and remained contingent. The company reported ordinary-course legal matters and said pending matters were not expected to have a material adverse effect.
Most important facts to verify
- Confirm the intended issuer: the source is Owens & Minor, Inc., not ACCENDRA HEALTH INC.
- Review the quality and sustainability of 2011 operating cash flow given its decline and the substantial inventory buildup for new customers.
- Check renewal outcomes and economics for the Novation, Premier, and MedAssets/Broadlane contracts, and monitor customer and supplier concentration.
- Assess whether the planned IT transformation delivers targeted cost reductions, and whether higher 2012 investment affects cash flow or margins.
- Reconcile GAAP results with management’s non-GAAP adjustments, particularly 2011 exit charges and the 2010 pension settlement.