Filing identity and period
Important mismatch: The supplied 10-Q is for Owens & Minor, Inc., not ACCENDRA HEALTH INC. It reports the quarter and nine months ended September 30, 2014. Confirm that this is the intended filing before relying on the figures below.
Owens & Minor describes itself as a medical and surgical supplies distributor and healthcare logistics company, with Domestic and International segments. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $2,386.1 | $2,270.5 | $6,948.4 | $6,753.0 |
| Gross margin | $292.5 | $273.3 | $856.0 | $825.8 |
| Gross margin rate | 12.26% | 12.04% | 12.32% | 12.23% |
| Operating earnings | $35.4 | $49.2 | $118.8 | $147.2 |
| Net income | $7.2 | $28.0 | $52.5 | $82.9 |
| Diluted EPS | $0.11 | $0.44 | $0.84 | $1.31 |
- Q3 revenue rose 5.1%; nine-month revenue rose 2.9%. Domestic revenue increased 4.0% for the quarter and 1.9% year to date. International revenue rose 30.7% and 25.4%, respectively.
- GAAP operating earnings and net income fell despite higher revenue and gross margin. Higher SG&A, acquisition and restructuring charges, and a debt-retirement loss weighed on results.
- Management’s adjusted, non-GAAP diluted EPS was $0.42 for Q3 and $1.26 for nine months, versus $0.47 and $1.37 in 2013. Adjusted operating earnings were $49.3 million and $143.6 million, respectively; these measures exclude specified charges and are not GAAP.
- Q3 dividends were $0.25 per share, versus $0.24 a year earlier. Nine-month dividends were $0.75 versus $0.72.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $81.1 million, down from $161.2 million. Investing used $52.1 million, versus $43.5 million; financing provided $480.8 million, versus a $62.5 million use, mainly reflecting new debt issuance.
- Cash was $610.1 million at September 30, versus $101.9 million at December 31, 2013. Inventory increased 8.1% to $834.5 million; receivables rose 3.0% to $590.1 million. Inventory turnover declined to 10.0 from 10.4; DSO improved to 21.8 days from 22.1.
- Total debt was $766.3 million, versus $216.2 million at year-end 2013. The company issued $275 million of 3.875% notes due 2021 and $275 million of 4.375% notes due 2024. The $200 million 6.35% notes due 2016 were classified as current at quarter-end.
- The amended revolving credit facility increased to $450 million and was extended through 2019. At quarter-end, there were no borrowings and approximately $445 million was available after letters of credit. Credit agreement covenants include leverage and interest-coverage requirements.
Material changes, outlook and risks
- Domestic gross margin benefited in Q3 from manufacturer price changes and higher customer margin on increased volume. Year-to-date Domestic margin pressure from new and renewed contracts and product price changes offset those gains. International growth reflected new contracts, fee-for-service activity and favorable foreign exchange, but the segment reported an operating loss of $8.3 million for the first nine months.
- Acquisition-related and exit/realignment charges were $14.0 million in Q3 and $24.8 million year to date, compared with $2.7 million and $5.4 million in 2013. Management expected approximately $12 million of additional charges during the remainder of 2014.
- A $5.3 million recovery from a direct-purchaser antitrust settlement contributed to nine-month other operating income. The effective tax rate rose to 55.8% for Q3 and 43.5% year to date, primarily due to foreign taxes and nondeductible acquisition costs.
- Subsequent to quarter-end, Owens & Minor completed its Medical Action acquisition on October 1 for an approximately $207 million transaction value, including assumed debt, net of cash acquired. It also expected to close its ArcRoyal acquisition in Q4. On October 16, it redeemed the 2016 notes for approximately $217 million in cash, including a $17.4 million premium; the quarter included a $14.9 million loss on early retirement of debt.
- The company said available cash, operating cash flow and revolving-credit borrowings should fund working capital, capital expenditures, growth initiatives, debt service and shareholder returns. No specific revenue or earnings guidance is provided in the filing.
- Risks discussed include pricing and competitive pressure, customer and supplier concentration, acquisition integration, international and currency exposure, healthcare regulation, information-system or data-security disruptions, fuel costs, financing access, and customer or supplier inability to meet obligations.
- An International-segment customer dispute remained unresolved; related receivables were approximately $14.7 million. The company said a loss was not considered probable, but termination could create closure, personnel, transportation or contract costs. Outcomes of certain Movianto-related claims were not estimable.
Key facts for investors to verify
- Confirm the issuer: the supplied document is Owens & Minor’s 10-Q, despite the ACCENDRA HEALTH INC metadata.
- Review the GAAP-to-adjusted earnings reconciliation and the scale and timing of further restructuring charges.
- Assess post-quarter acquisition funding, integration costs and the debt balance after redemption of the 2016 notes.
- Track International-segment profitability and the outcome of the customer dispute, including collection of the $14.7 million receivable.
- Monitor operating cash conversion, inventory trends, credit-facility covenant headroom and the effects of customer pricing and contract renewals.