Filing summary
Entity discrepancy: The supplied filing is Owens & Minor, Inc.’s Form 10-Q for the quarter ended June 30, 2013—not a filing for ACCENDRA HEALTH INC. The summary below reflects the filing text.
Business context and reporting period
Owens & Minor distributes medical and surgical supplies and provides healthcare logistics services. It reports Domestic and International segments; International includes the Movianto third-party logistics business acquired in August 2012. Results cover the second quarter and first six months of 2013, compared with the same 2012 periods.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $2,266.7m | $2,185.4m | $4,542.4m | $4,403.3m |
| Gross margin | $273.4m | $211.4m | $552.5m | $425.8m |
| Operating earnings | $50.1m | $53.2m | $97.9m | $105.0m |
| Net income | $28.9m | $30.1m | $55.0m | $59.5m |
| Diluted EPS | $0.46 | $0.48 | $0.87 | $0.94 |
| Operating cash flow | — | $179.2m | $142.8m |
- Q2 revenue rose 3.7%; six-month revenue rose 3.2%. Growth primarily reflected Movianto, while Domestic revenue fell $41.8m in Q2 and $104.9m year to date.
- Gross margin increased to 12.06% of revenue in Q2 from 9.67% a year earlier; for the first six months it was 12.16%, versus 9.67%. Management cited supplier price changes and sourcing efforts, while noting some benefit may be offset in later 2013 quarters.
- Reported operating earnings and net income declined despite higher revenue and gross margin. Adjusted operating earnings were $50.7m in Q2 and $100.6m for six months; adjusted diluted EPS was $0.46 and $0.90, respectively. These are non-GAAP measures.
- Six-month investing cash use was $31.0m, including $31.0m of capital expenditures; financing cash use was $39.1m. Cash increased to $207.8m from $97.9m at year-end, with operating cash flow helped by higher accounts payable, partly associated with inventory and payment timing.
- At June 30, current assets were $1,800.7m and current liabilities $1,090.2m. Long-term debt was $214.7m. The company had $200m principal of senior notes outstanding and no revolving-credit borrowings; $345m remained available under the $350m facility, after letters of credit.
Material changes and management commentary
- Movianto added International revenue and costs; the International segment reported operating losses of $0.6m in Q2 and $3.6m for the first half. Domestic operating earnings also declined year over year.
- Management attributed Domestic revenue weakness to lower healthcare utilization, reduced government purchases, and continued rationalization of smaller, less profitable customers and suppliers.
- Q2 SG&A included a $3.5m net reduction associated with a California municipal sales-tax-incentive settlement. The company expects about $4.3m total for the period beginning in 2009, including $0.8m recognized before 2013, and expects ongoing incentives to vary with eligible sales.
- The company recorded $2.6m of acquisition-related and exit/realignment charges in the first half. It expected approximately $2.7m of additional Domestic exit and realignment charges during the remainder of 2013.
- The effective tax rate was 38.3% in Q2 and 39.9% for the first half. Q2 tax benefits followed the conclusion of federal and state examinations; foreign taxes contributed to the higher year-to-date rate.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management said available cash and financing were expected to meet foreseeable working-capital, capital-spending, debt, dividend and other needs.
- Management identified risks including pricing and competitive pressure, customer or supplier concentration, customer retention, Movianto integration and international operations, healthcare regulation, supplier funding and pricing changes, fuel costs, information-system disruption or data breaches, litigation, and access to financing.
- The revolving facility and senior notes include financial covenants and cross-default provisions. The company reported covenant compliance at June 30, 2013; inability to access the revolving facility could affect funding capacity.
- Customer-contract performance obligations totaled $1.9m, none accrued because management did not consider payment probable. Deferred revenue related to performance targets was $1.2m.
- Fuel-price exposure remains: management estimated that a 10-cent-per-gallon increase in the benchmark would reduce Domestic annualized operating earnings by about $0.4m. A fixed-price agreement covered approximately one-third of anticipated 2013 Domestic fuel usage.
Important facts for investors to verify
- Confirm the issuer: the filing identifies Owens & Minor, Inc., not ACCENDRA HEALTH INC.
- Assess whether acquired Movianto revenue and expected integration benefits can offset ongoing Domestic revenue declines and International operating losses.
- Check whether supplier-price and sourcing benefits to gross margin persist, given management’s warning that some may reverse or be offset in later quarters.
- Review the drivers and sustainability of operating cash flow, particularly the contribution from accounts payable and working-capital timing.
- Monitor expected additional 2013 realignment charges, the California incentive’s recurring impact, and compliance with debt covenants.