Business context and reporting period
The supplied filing is Owens & Minor, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2010—not a filing for Accendra Health Inc. The company discusses healthcare product distribution, customer services, and third-party logistics. Its direct-to-consumer diabetes supply business had been exited in 2009 and is reported as discontinued operations.
Key financial metrics
Amounts below are in millions of dollars except per-share data. Year-over-year comparisons are for the corresponding 2009 period.
| Metric | Three months ended September 30, 2010 | Nine months ended September 30, 2010 |
|---|---|---|
| Revenue | $2,063.9; +1.4% | $6,053.4; +0.9% |
| Gross margin | $197.7; 9.58% of revenue, versus 10.04% | $580.4; 9.59% of revenue, versus 9.77% |
| Operating earnings | $55.3; down 2.4% | $156.6; up 7.6% |
| Continuing-operations income | $31.5, versus $34.7 | $88.8, versus $84.8 |
| Net income | $31.5, versus $34.7 | $88.8, versus $72.3 |
| Diluted continuing-operations EPS | $0.50, versus $0.55 | $1.40, versus $1.35 |
- Operating cash flow from continuing operations was $214.5 million for the first nine months, versus $161.5 million. Investing activities used $24.7 million and financing activities used $139.4 million. Cash increased $48.9 million to $145.1 million.
- At September 30, 2010, current assets were $1,429.0 million and current liabilities $740.8 million. Long-term debt was $208.6 million; the company also had $200 million of senior notes outstanding. There were no revolver borrowings, and $339.5 million remained available after $10.5 million of letters of credit.
- Cash dividends were $0.177 per share for the quarter and $0.531 per share year to date.
Material changes versus prior comparable periods
- Quarterly revenue rose modestly, but gross margin dollars fell 3.2% and operating earnings fell 2.4%; quarterly continuing-operations diluted EPS declined to $0.50 from $0.55. Management attributed the operating-earnings decline mainly to lower gross margin, partly offset by lower SG&A.
- Year-to-date operating earnings and continuing-operations income increased despite lower gross margin dollars. Lower SG&A was the principal support; continuing-operations diluted EPS rose to $1.40 from $1.35.
- Gross margin comparisons were affected by prior-year items: third-quarter 2009 included an $11.5 million LIFO inventory credit and $1.6 million of previously deferred customer-contract revenue. For the first nine months, the 2010 LIFO provision was $3.5 million higher, and acute-care distribution margins also pressured results.
- SG&A declined 4.8% for the quarter and 5.0% year to date, including lower labor and incentive compensation costs. Higher third-party logistics expenses partly offset the savings.
- Year-to-date 2009 results included a $12.5 million after-tax discontinued-operations loss related to exiting the DTC business; 2010 reported no discontinued-operations income or loss.
Outlook, risks, contingencies, and unusual items
- The company gave no specific numerical earnings or revenue guidance in the supplied filing. Management said available cash, operating cash flow, and revolver capacity should fund working capital, capital expenditures, strategic growth, debt and lease payments, dividends, and other requirements. It expected to continue quarterly dividends, subject to board discretion and business conditions.
- Management said unfavorable economic conditions and related hospital utilization trends weighed on revenue growth. Risks identified include healthcare reform and reimbursement changes, customer concentration and creditworthiness, customer retention, supplier funding and pricing, competition, operating costs, technology and systems, financing costs, acquisitions, litigation, and tax contingencies.
- A new $350 million revolving credit agreement was entered into in June 2010 and expires June 7, 2013, with possible extensions. It includes leverage and interest-coverage requirements and cross-default provisions with the senior notes. The company reported covenant compliance at September 30, 2010.
- The company contributed $8.3 million to its defined-benefit pension plan during the first nine months and estimated additional contributions to complete plan termination would not exceed $1 million.
- Potential customer-contract payments totaled $6.5 million if performance targets are missed; none was accrued because management did not consider payment probable. Separately, California was reviewing possible sales-tax incentives of up to $1.05 million per quarter for some or all of a period beginning in 2007; the amount and outcome were uncertain, and resolution was expected possibly in 2011.
- Management identified no material developments in previously reported legal proceedings. Disclosure controls were concluded to be effective as of September 30, 2010.
Important facts for investors to verify
- Confirm the issuer: the supplied filing names Owens & Minor, Inc., not Accendra Health Inc.
- Assess whether modest sales growth can offset customer losses, economic pressure on hospital utilization, and acute-care margin weakness.
- Track LIFO inventory effects, supplier incentives, and customer-contract performance revenue, which affected period-to-period gross margin comparisons.
- Review working-capital needs and cash-flow sustainability: inventory rose to $733.3 million, while year-to-date operating cash flow benefited from a $147.6 million increase in accounts payable.
- Monitor pension termination contributions, California tax-incentive proceedings, contingent customer payments, and compliance with debt covenants.