Business context and reporting period
The supplied filing is Owens & Minor, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018; it does not identify Accendra Health Inc. The company distributes healthcare products and provides logistics and related services through Global Solutions and Global Products. Prior-year segment results were recast to match the new reporting structure.
Financial results and condition
| Metric | Q1 2018 | Q1 2017 or comparison |
|---|---|---|
| Net revenue | $2.373 billion | $2.329 billion; up 1.9% |
| Gross margin | $324.7 million; 13.68% of revenue | $281.2 million; 12.08% |
| Operating income | $24.2 million; 1.02% of revenue | $35.5 million; 1.53% |
| Adjusted operating income (non-GAAP) | $47.6 million; 2.01% of revenue | $47.7 million; 2.05% |
| Net income / diluted EPS | $8.2 million / $0.13 | $18.8 million / $0.31 |
| Adjusted net income / adjusted EPS (non-GAAP) | $26.2 million / $0.43 | $26.4 million / $0.44 |
| Cash from operations | $18.3 million provided | $26.4 million used |
| Cash and cash equivalents | $87.6 million at March 31 | $104.5 million at December 31, 2017 |
| Debt and revolver availability | $897.1 million long-term debt on balance sheet; $104.3 million revolver borrowings and $488.9 million availability | Debt balance at December 31 was $900.7 million |
| Current assets / current liabilities | $2.188 billion / $1.326 billion | $2.182 billion / $1.310 billion at December 31 |
Cash used in investing was $14.2 million, primarily for capital expenditures and software/intangible assets; financing used $21.8 million, including $16.1 million of dividends and $3.1 million of debt repayment. Cash declined by $16.9 million during the quarter. Dividends declared were $0.26 per share, versus $0.2575 a year earlier.
Material changes and management commentary
- Revenue increased mainly due to Byram Healthcare, acquired in August 2017, which contributed $118 million in quarterly Global Solutions revenue, and favorable foreign exchange. These were partly offset by lost distribution customers and lower custom procedure tray sales.
- Gross margin improved, reflecting Byram, favorable currency effects and improved kitting operations; management also cited lower provider margins and ongoing competitive and customer cost pressure.
- Distribution, selling and administrative expenses rose 19.6% to $284.4 million, or 11.99% of revenue, partly due to Byram, unfavorable currency translation, and higher warehouse and delivery costs. Excluding Byram, the expense ratio was 11.05%.
- Global Solutions operating income fell $6.3 million to $31.6 million, with provider margin pressure and warehouse inefficiencies cited. Global Products operating income rose $1.7 million to $9.8 million, attributed to improved operational efficiency.
- GAAP earnings fell substantially, while adjusted EPS was nearly flat. Adjustments included acquisition-related amortization and charges, exit and realignment costs, and software-as-a-service implementation costs; review the filing’s reconciliation when assessing the non-GAAP measures.
- Operating cash flow improved year over year mainly from working-capital timing, including supplier and vendor payments; receivables and inventory absorbed cash in Q1 2018.
Outlook, events, risks and contingencies
- Management expects pricing and provider-margin pressure to continue through 2018. It believes available cash and financing will fund foreseeable needs and anticipates continuing quarterly dividends, subject to board discretion and financial conditions. The filing provides no quantitative earnings or revenue guidance.
- On April 30, 2018, after quarter-end, the company completed its acquisition of Halyard Health’s Surgical and Infection Prevention business for $710 million, subject to purchase-price adjustments. The business is to be included in Global Products. The acquisition financing amended the credit agreement and added secured term loans; the filing states pro forma consolidated debt would have been approximately $1.7 billion and pro forma undrawn credit availability $367 million.
- A further credit-agreement amendment on May 9, 2018 provided $245.75 million of seven-year term B loans, used to repay acquisition-related revolving borrowings. The amended facilities include collateral, covenant changes and springing maturity provisions linked to the 2021 and 2024 notes.
- Key risks include intense pricing and customer consolidation, customer and supplier concentration, acquisition integration and synergy execution, leverage and variable-rate debt, covenant compliance, healthcare regulation, Byram’s Corporate Integrity Agreement, product liability and recalls, supply/manufacturing interruptions, cybersecurity and information systems, foreign currency, and tax uncertainty.
- The effective tax rate was 41.6%, up from 34.7%, due primarily to losses in jurisdictions with valuation allowances and tax expense related to restricted-stock vesting. Tax Act-related estimates remained provisional. The filing reports no material developments in previously disclosed legal proceedings.
- The company reported compliance with debt covenants at March 31, 2018. Disclosure controls were assessed as effective; management excluded Byram from its internal-control evaluation under the permitted acquisition transition period.
Important facts for investors to verify
- Confirm the issuer: this filing is for Owens & Minor, not the company named in the request.
- Review the Halyard purchase price, post-quarter financing amendments, secured debt, covenant terms and resulting leverage and interest burden.
- Assess whether reported gross-margin gains and adjusted earnings can be sustained amid continued provider pricing pressure, lost customers and higher operating costs.
- Examine working-capital trends, cash conversion, dividend funding and the company’s dependence on revolving-credit availability.
- Track Halyard integration, expected benefits, transitional services, and Byram compliance obligations; the filing provides no quantified acquisition synergy or forward earnings target.
- Consider the limitations of non-GAAP adjusted measures and the provisional tax estimates when comparing results.