Filing summary: Owens & Minor, Inc. 10-Q, quarter ended September 30, 2013
Important identification issue: The supplied filing is for Owens & Minor, Inc., not ACCENDRA HEALTH INC. The summary below reflects the filing text and should not be attributed to Accendra without verification.
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. The filing covers the third quarter and first nine months of 2013, compared with the corresponding 2012 periods. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,304.6 | $2,179.9 | $6,847.0 | $6,583.2 |
| Gross margin | $273.3 | $228.1 | $825.8 | $653.9 |
| Operating earnings (GAAP) | $49.2 | $46.7 | $147.2 | $151.7 |
| Net income | $28.0 | $24.6 | $82.9 | $84.1 |
| Diluted EPS | $0.44 | $0.39 | $1.31 | $1.33 |
| Operating cash flow | — | $161.2 | $170.4 |
- Revenue grew 5.7% in Q3 and 4.0% year to date, primarily reflecting Movianto. Gross margin was 11.86% of revenue in Q3 and 12.06% year to date, compared with 10.46% and 9.93%.
- SG&A rose to $211.3 million in Q3 and $641.6 million year to date; as a share of revenue, it increased to 9.17% and 9.37%, respectively. GAAP operating margin was approximately 2.14% in Q3 and 2.15% year to date.
- Management’s adjusted, non-GAAP diluted EPS was $0.47 for Q3 and $1.37 year to date, versus $0.49 and $1.44. Adjusted operating earnings were $52.0 million and $152.5 million, respectively.
- Cash and equivalents were $153.8 million at September 30, up from $97.9 million at year-end 2012. Current assets were $1,759.3 million and current liabilities $1,040.9 million. Cash from operations was $161.2 million; investing used $43.5 million and financing used $62.5 million. Cash increased $55.9 million.
- Long-term debt was $214.4 million, including $200 million principal amount of 6.35% senior notes due in 2016. The $350 million revolving facility had no borrowings and $345 million available after letters of credit. The company reported compliance with debt covenants.
- Quarterly dividends were $0.24 per share, up from $0.22; year-to-date dividends paid were $45.6 million. The company repurchased $15.7 million of stock year to date, with $3.2 million remaining under the program.
Material changes versus prior periods
- Domestic revenue rose $45.4 million in Q3, partly due to one additional sales day, but declined $59.5 million year to date amid lower healthcare utilization, reduced government purchases, and customer and supplier rationalization. Domestic operating earnings fell $3.9 million in Q3 and $5.4 million year to date.
- International revenue was $128.9 million in Q3 and $372.9 million year to date, substantially higher because 2012 included Movianto only after its August acquisition. International operating earnings were $0.7 million in Q3; the year-to-date operating loss was $2.8 million.
- Year-to-date GAAP operating earnings declined $4.6 million and net income declined $1.1 million, despite higher gross margin, as SG&A and depreciation and amortization increased. Operating cash flow fell $9.2 million year over year, principally due to working-capital effects and accounts-payable timing.
- 2012 investing cash outflow included approximately $149.9 million for the Movianto acquisition; there was no acquisition cash outflow in the 2013 period.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific revenue or EPS forecast. Management expected approximately $3.0 million of additional exit and realignment charges during the remainder of 2013 for activities already initiated.
- Management said available operating cash and revolving-credit capacity should fund working capital, capital expenditures, strategic growth, debt and lease payments, dividends, and repurchases. It anticipated continuing quarterly dividends, subject to Board discretion and business conditions.
- Key stated risks include pricing and competitive pressure, customer or supplier concentration and creditworthiness, healthcare utilization and regulation, Movianto integration and international operating risks, fuel and foreign-exchange exposure, information-system disruption or data breach, litigation, and access to financing.
- Potential customer performance-related obligations totaled $2.6 million and were not accrued because management did not consider payment probable; $1.2 million of related contingent fees was deferred. Movianto-related claims and issues with the former owner remained under review, with outcomes not estimable.
- A California municipal sales-tax-incentive settlement was expected to yield about $4.3 million for 2009 through June 2013, of which $0.8 million had been recognized before 2013. The filing reports a further $0.4 million incentive in Q3 and a $3.9 million year-to-date net reduction in SG&A from the settlement.
- The effective tax rate was 39.0% in Q3 and 39.6% year to date, below 2012 levels; year-to-date benefits included conclusions of federal and state tax examinations. Management reported no material changes in previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Confirm the issuer and filing match the intended company: this document identifies Owens & Minor, Inc., not Accendra Health Inc.
- Review the drivers and sustainability of higher gross margin against rising SG&A, and the weakness in Domestic year-to-date revenue and operating earnings.
- Assess Movianto’s ongoing contribution, transition costs, integration progress, and unresolved claims with the former owner.
- Verify working-capital trends, particularly receivables, inventory, payables, and the effect of accounts-payable timing on operating cash flow.
- Monitor debt covenants, revolving-credit availability, dividend and repurchase spending, and the estimated additional 2013 realignment charges.