Filing identity and reporting period
Important: The supplied filing is Owens & Minor, Inc.’s Form 10-K for the year ended December 31, 2010, not a filing for Accendra Health Inc. It covers fiscal 2010; the filing also reports fourth-quarter results. The summary below describes the filing provided.
Business context
Owens & Minor distributes medical and surgical supplies and provides logistics and supply-chain services to healthcare providers and suppliers. Distribution accounted for more than 95% of revenue. The company reported about 4,400 healthcare-provider customers and operated 52 distribution and service centers.
Financial results and liquidity
- Revenue: $8.124 billion, up 1.1% from $8.038 billion in 2009. Provider revenue excluding new or acquired business grew 2.1%.
- Profit: Income from continuing operations was $110.6 million, down from $116.9 million; diluted continuing-operations EPS was $1.75 versus $1.86. Net income was $110.6 million, compared with $104.7 million in 2009, which included discontinued-operation losses.
- Margins: Gross margin was $807.7 million, or 9.94% of revenue, versus 10.13% in 2009. Operating earnings were $195.9 million, or 2.41% of revenue, versus $201.3 million and 2.50%.
- Cash flow: Continuing-operations operating cash flow was $244.6 million, compared with $165.3 million. Capital expenditures were $41.3 million. Cash and cash equivalents rose to $159.2 million from $96.1 million.
- Debt and liquidity: Total debt was $210.9 million, including $200 million principal of 6.35% senior notes due 2016. The $350 million revolving facility had no borrowings and $339.6 million available at year-end, after letters of credit. Debt-to-equity was 0.25.
- Working capital: Receivables were $471.7 million and DSO improved to 19.6 days from 21.4. Inventory increased 4.4% to $720.1 million, mainly to support new customers; turnover was 10.4 versus 10.6.
Material changes and unusual items
- Revenue growth was modest: increased sales to existing and new customers were partly offset by lost-customer sales. Gross margin dollars declined 0.8%, including an $8.4 million increase in the LIFO provision.
- SG&A fell $28.2 million to $564.2 million, but operating earnings declined 2.7%, principally because of lower gross margin and the pension settlement expense.
- The company terminated its frozen defined-benefit pension plan in 2010. The resulting $19.6 million pretax settlement charge reduced continuing-operations income by $11.9 million after tax, or $0.19 per diluted share; the company also contributed $13.9 million to the plan.
- The direct-to-consumer diabetes-supply business had been exited and was reported as discontinued operations. It produced no 2010 revenue or earnings.
- In February 2011, the board raised the quarterly dividend 13% to $0.20 per share and authorized up to $50 million of share repurchases over three years.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance. Management said available cash and financing sources should be sufficient for expected working capital, capital expenditures, debt service, dividends, share repurchases and other needs. Management expects continued pricing pressure and described profitability initiatives focused on consulting and outsourcing, private-label products, third-party logistics and technology-driven efficiency.
Key risks include dependence on major group purchasing organizations (GPOs)—their members represented about 79% of 2010 revenue—and significant suppliers, whose ten largest accounted for about 54% of revenue. The Novation agreement was due to expire in August 2011; Premier’s in December 2011. Other cited risks include intense price competition, customer credit and collection exposure, healthcare policy and regulatory changes, and reliance on information systems and Dell Perot Systems. The company reported ordinary-course legal matters and said it did not expect pending matters to materially affect its financial condition or results. It also disclosed $4.4 million of contingent customer obligations tied to performance targets, none accrued because payment was not considered probable.
Investor facts to verify
- Confirm the filing identity: this source is Owens & Minor, not Accendra Health Inc.
- Track renewal outcomes and economics for the Novation, Premier, Broadlane and MedAssets arrangements, given their revenue concentration and approaching expirations.
- Assess whether revenue growth and margins can improve despite customer losses, pricing pressure and the higher LIFO provision.
- Review cash-flow sustainability, inventory growth for new customers, and progress in collections and inventory turnover.
- Verify post-year-end capital allocation actions and the effect of the dividend increase and authorized buyback on liquidity.