Filing Summary: Owens & Minor, Inc. — Form 10-Q
Entity note: The supplied filing is for Owens & Minor, Inc. (NYSE: OMI), not Accendra Health Inc. It covers the quarter and six months ended June 30, 2019; figures below are in U.S. dollars.
Business context and results
Owens & Minor operates Global Solutions, its distribution and logistics business, and Global Products, which manufactures and sources medical products. Global Products includes the Halyard Surgical and Infection Prevention business acquired in April 2018.
- Second quarter: Revenue was $2.484 billion, up 1.1% year over year. Gross margin was $368.4 million, or 14.83% of revenue, versus $325.0 million, or 13.22%. Operating income was $16.1 million; net loss was $10.5 million, or $(0.18) per diluted share. Adjusted operating income was $36.7 million and adjusted EPS was $0.10 (both non-GAAP).
- First six months: Revenue was $4.946 billion, up 2.4%. Gross margin was $726.9 million, or 14.70%, versus $649.7 million, or 13.45%. Operating income was $30.8 million; net loss was $24.6 million, or $(0.41) per diluted share. Adjusted operating income was $67.2 million and adjusted EPS was $0.12 (non-GAAP).
- Costs and interest: Q2 SG&A rose 12.0% to $345.9 million; first-half SG&A rose 15.4% to $684.6 million. Net interest expense increased 49.1% in Q2 to $27.7 million and 97.0% for the half to $56.8 million, primarily reflecting acquisition-related borrowing and higher rates.
- Segments: Q2 Global Solutions revenue fell 2.1% to $2.242 billion, with segment operating income of $19.5 million versus $24.0 million. Global Products revenue increased 30.2% to $363.9 million, but segment operating income declined to $17.9 million from $22.5 million. Management attributed Global Solutions pressure to lower distribution revenue, margin pressure and higher transportation costs.
Cash flow, balance sheet and debt
- First-half operating cash flow was $29.0 million, down from $46.3 million in 2018. Investing used $25.2 million, mainly reflecting $25.5 million of capital expenditures. Financing used $16.1 million; cash declined $12.0 million to $91.3 million.
- At June 30, 2019, total debt carrying amount was $1.679 billion, including $230.0 million drawn on the revolver; long-term debt excluding current maturities was $1.625 billion. Cash was $91.3 million. The $400 million revolving facility also supported $11.7 million of letters of credit.
- Current assets were $2.475 billion and current liabilities were $1.470 billion. Accounts receivable were $843.3 million, inventories $1.238 billion and accounts payable $1.039 billion.
- The company reported compliance with debt covenants at June 30. It stated that cash and available financing were expected to be sufficient for foreseeable needs, while noting borrowing costs, customer and supplier performance, and financing access as potential constraints.
Material changes, outlook and risks
- Revenue growth primarily reflected Halyard, acquired in April 2018; Halyard sales from January through April 2019 were $255 million, net of intercompany sales. Global Solutions revenue was affected by customer non-renewals associated with service issues before early 2019; Byram growth partly offset the decline.
- Gross margin improved with Halyard contributions, Byram growth and increased fee-for-service revenue, partly offset by lower distribution revenue and margins, foreign-currency effects, and lower fixed-cost absorption in Global Products. Management cited favorable commodity pricing as a partial offset.
- The comparison with 2018 is affected by $165.4 million of goodwill and intangible impairment charges in the prior-year quarter and first half. Adjusted results are non-GAAP and exclude specified items; they should not be treated as substitutes for GAAP results.
- Lease accounting adoption in January 2019 added operating lease assets and liabilities; the company said adoption did not materially affect net loss or cash flows. At quarter-end it reported $206.2 million of operating lease assets and $210.7 million of operating lease liabilities.
- No specific earnings or revenue guidance was provided in the supplied filing. Management identified competitive pricing, customer retention and concentration, supplier dependence, Halyard integration, healthcare regulation, execution of efficiency initiatives, information-system and cybersecurity risks, foreign exchange, commodity and fuel costs, and substantial indebtedness as risks. A 100-basis-point rate increase was estimated to reduce annual pre-tax earnings by about $7 million after swaps.
- The company reported no material developments in previously disclosed legal proceedings and no material changes to the risk factors in its 2018 Form 10-K. It said disclosure controls were effective at June 30, 2019.
Important facts for investors to verify
- Confirm the issuer identity: this filing names Owens & Minor, Inc., not Accendra Health Inc.
- Review debt maturities, credit-agreement covenants and the springing-maturity provisions tied to the 2021 and 2024 notes.
- Assess whether Global Solutions can stabilize customer retention, distribution margins and transportation costs, and whether Global Products profitability improves.
- Reconcile GAAP losses with management’s non-GAAP adjusted measures and examine the assumptions behind excluded items.
- Monitor operating cash generation, working-capital movements, interest-rate exposure and the company’s ability to fund debt service and other commitments.