Owens & Minor, Inc. — Q1 2011 Form 10-Q
Entity note: The filing identifies Owens & Minor, Inc. as the registrant, not Accendra Health Inc. The filing covers the three months ended March 31, 2011; comparative results are for Q1 2010. Financial amounts below are in U.S. dollars.
Business context and reporting period
Owens & Minor reports a medical products distribution and supply-chain services business. Results exclude its direct-to-consumer diabetes supply business, which it exited in 2009 and reports as discontinued operations. The statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net revenue | $2,123.8 million | $1,969.7 million; up 7.8% |
| Gross margin | $210.8 million; 9.92% of revenue | $197.0 million; 10.00% |
| Operating earnings | $51.0 million; 2.40% of revenue | $49.2 million; 2.50%; up 3.8% |
| Net income | $28.7 million; 1.35% of revenue | $27.8 million; 1.41%; up 3.3% |
| Diluted earnings per share | $0.45 | $0.44 |
| Cash from operating activities | $51.4 million | $139.5 million |
| Cash and cash equivalents | $185.9 million at March 31, 2011 | $159.2 million at December 31, 2010 |
| Total long-term debt | $209.0 million at March 31, 2011 | $209.1 million at December 31, 2010 |
Cash used in investing activities was $7.1 million, primarily for property, equipment, software and intangible assets. Cash used in financing activities was $17.6 million, including $12.8 million of dividends paid. The company reported no revolver borrowings and $5.0 million of letters of credit outstanding, leaving $345.0 million available under its $350 million revolving facility. Current assets were $1,493.2 million and current liabilities were $760.8 million at quarter-end.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by $134.1 million more sales to existing customers and $102.9 million in sales to new customers, partly offset by $84.4 million less sales to lost customers.
- Gross margin dollars rose 7.0%, but gross margin rate declined 8 basis points. Management attributed the pressure mainly to a $3.0 million higher LIFO provision amid greater inventory purchase-price inflation and lower supplier incentives as a share of revenue; higher fee-for-service revenue partly offset the decline.
- SG&A increased 7.5% to $151.6 million, including higher labor, delivery and third-party logistics support costs. Depreciation and amortization increased 29% to $8.8 million, reflecting distribution-center and technology investments.
- Operating cash flow declined to $51.4 million from $139.5 million, primarily reflecting increases in receivables and inventory; the prior-year comparison benefited from decreases in both. Accounts receivable days outstanding rose to 21.1 from 19.6 days at year-end.
- Q1 2010 included $5.0 million in contributions to the defined-benefit pension plan, which was terminated in 2010; no pension-plan expense was reported in Q1 2011.
Outlook, risks, contingencies and unusual items
- Management said existing cash, operating cash generation and revolver capacity should be sufficient for working capital, capital spending, strategic growth, debt and lease payments, dividends and share repurchases. No numerical full-year earnings or revenue guidance is provided in the filing text.
- In April 2011, after quarter-end, the company entered into interest-rate swaps converting $175 million of fixed-rate debt to variable-rate debt through April 15, 2016. Management estimated an approximately 200-basis-point reduction in the effective annual rate on that amount for the first six-month pricing period. This exposes the company to variable-rate interest costs.
- The $200 million senior notes mature in April 2016 and bear interest at 6.35%. The revolver expires in June 2013 and includes leverage and interest-coverage covenants; management reported covenant compliance at March 31, 2011. The debt agreements have cross-default provisions.
- A $50 million share-repurchase program was authorized in February 2011, to be executed at management’s discretion through February 2014; no shares had been repurchased by quarter-end. The quarterly dividend was $0.20 per share, up from $0.177 a year earlier; future dividends remain at the board’s discretion.
- Customer-contract performance obligations totaled $5.2 million but were not accrued because management did not consider payment probable. Separately, $1.2 million of deferred revenue related to outstanding contract performance targets. A California review could result in tax-incentive payments, but the amount, if any, is uncertain. The company also remains subject to audits of certain reimbursements related to its exited diabetes business.
- Management cited risks including customer concentration and credit, customer retention and new-business growth, supplier funding and pricing, healthcare regulation, competition, commodity and fuel-price volatility, financing access and rates, information systems, acquisitions, litigation and tax matters. It reported no material developments in previously disclosed legal proceedings or material changes to the prior annual report’s risk factors.
- Disclosure controls and procedures were judged effective at March 31, 2011, and the filing reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: this source is Owens & Minor, Inc.’s 10-Q, despite the request metadata naming Accendra Health Inc.
- Review the drivers and sustainability of revenue growth, particularly retention of existing customers, new-customer sales and lost-customer reductions.
- Monitor gross-margin pressure from LIFO inflation and supplier incentives, along with operating expenses and third-party logistics growth.
- Track working-capital conversion and cash generation, especially receivable days and inventory levels, and reconcile the substantial year-over-year operating-cash-flow decline.
- Assess the post-quarter interest-rate swaps, resulting rate exposure, debt covenants and available revolver capacity.
- Follow the California tax-incentive review, customer-contract contingencies, legacy reimbursement audits and execution of the share-repurchase and dividend plans.