Filing identity and period
Important identification discrepancy: The supplied filing is Owens & Minor, Inc.’s Form 10-Q, not an Accendra Health Inc. filing. It covers the quarter and nine months ended September 30, 2019, and was filed November 6, 2019. Financial amounts below are in U.S. dollars; figures are converted to millions unless noted.
Business context and results
Owens & Minor operates Global Solutions, a healthcare distribution and logistics business, and Global Products, which manufactures and sources medical-surgical products. Global Products includes the Halyard Surgical and Infection Prevention business acquired in April 2018.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2,399.0m | $2,464.9m | $7,344.6m | $7,295.7m |
| Gross margin | $362.5m; 15.11% | $352.6m; 14.30% | $1,089.3m; 14.83% | $1,002.3m; 13.74% |
| Operating income (loss), GAAP | $25.3m | $21.4m | $56.2m | $(126.5)m |
| Net income (loss), GAAP | $1.2m | $(0.6)m | $(23.3)m | $(175.2)m |
| EPS, basic and diluted | $0.02 | $(0.01) | $(0.39) | $(2.92) |
| Adjusted operating income (non-GAAP) | $42.3m | $48.8m | $109.5m | $143.1m |
| Adjusted net income (non-GAAP) | $12.2m | $19.5m | $19.3m | $65.1m |
| Adjusted EPS (non-GAAP) | $0.20 | $0.32 | $0.32 | $1.06 |
Quarterly revenue declined 2.7%, while year-to-date revenue grew 0.7%. The year-to-date comparison benefited from Halyard, acquired in April 2018. Gross margin improved in both periods, which management attributed mainly to improved sales mix; foreign exchange partly offset the improvement. GAAP operating income improved year to date primarily because 2018 included $165.4 million of goodwill and intangible impairment charges. Adjusted operating income and adjusted earnings declined versus 2018.
Segments and operating commentary
- Global Solutions: Q3 revenue was $2,153.6m, down 4.0%; nine-month revenue was $6,629.8m, down 3.6%. Segment operating income was $25.6m in Q3, up $1.5m, and $66.2m year to date, down $18.6m. Management cited customer non-renewals, prior service issues, distribution-margin pressure and higher transportation costs.
- Global Products: Q3 revenue was $359.8m, up 2.8%; nine-month revenue was $1,070.8m, up 42.6%, reflecting the Halyard acquisition. Segment operating income was $16.9m in Q3, down $10.7m, and $42.6m year to date, down $18.8m.
- Management reported that lower distribution revenues and unfavorable foreign exchange were partly offset by growth in other business lines. Year-to-date foreign-exchange effects reduced revenue by $26.3m, according to the filing.
Cash flow, debt and liquidity
- Nine-month cash from operations was $139.1m, compared with $122.5m in 2018. Investing used $37.9m, versus $798.9m in 2018, which included the Halyard acquisition. Financing used $89.3m, versus $695.2m provided in 2018, when acquisition-related borrowings were raised.
- Cash and cash equivalents were $96.8m at September 30, 2019; cash, cash equivalents and restricted cash totaled $113.0m, including $16.2m restricted in a CMS escrow account. Cash declined $6.6m from December 31, 2018 on the balance sheet measure.
- Total debt was $1,606.9m, including $52.9m of current maturities; long-term debt was $1,554.0m. Debt was down from $1,681.2m at year-end 2018. The company had $174.0m drawn on its $400m revolver, $889m outstanding in term loans, and $11.7m of letters of credit under the Credit Agreement.
- Interest expense rose 8.9% in Q3 to $25.9m and 53.3% year to date to $80.7m. Management attributed the increase mainly to borrowing to fund Halyard. The reported effective interest rate was 6.35%.
- The company said it was in compliance with debt covenants at quarter-end and believed available financing and operating cash flow would meet foreseeable needs. The filing identifies scheduled debt principal payments of $321.0m in 2021 and $472.8m in 2022, among other amounts, and describes a springing maturity provision tied to the 2021 and 2024 notes.
- Working-capital balances fell: receivables were $741.7m, inventories $1,153.1m and accounts payable $873.7m. Consolidated DSO was 27.6 days versus 28.5 at year-end; inventory turnover was 6.8 versus 7.4.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management expressed confidence that financing sources would be adequate for working capital, capital expenditures, debt and lease payments, dividends and other expected requirements.
- Risks highlighted include customer losses and pricing pressure, dependence on key customers and suppliers, Halyard integration and realization of benefits, substantial indebtedness and refinancing costs, interest-rate and foreign-exchange exposure, volatile polypropylene, nitrile and fuel prices, regulatory and litigation matters, and information-system implementation and cybersecurity risks.
- A 100-basis-point interest-rate increase was estimated to reduce annual pre-tax earnings by approximately $6m after interest-rate swaps. A 10-cent-per-gallon increase in the diesel benchmark was estimated to reduce Global Solutions annualized operating income by about $0.4m.
- Q3 GAAP net income was modest despite a pretax loss of $0.4m, alongside a $1.7m income-tax benefit; reported effective tax rates were unusually high and management attributed rate variability to jurisdictional income and loss mix, valuation allowances and restricted-stock vesting.
- Halyard transition services were substantially completed at the end of October 2019. The company adopted lease accounting in 2019, recording about $197m of operating lease assets and $201m of lease liabilities at adoption, without material net-income or cash-flow impact.
- The company made no share repurchases in the first nine months of 2019 and had $94m remaining under its authorization, which was scheduled to expire in December 2019. The quarterly dividend was $0.0025 per share.
- The filing reported no material developments in previously disclosed legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were judged effective as of September 30, 2019.
Important facts for investors to verify
- Confirm the filing issuer: the source is Owens & Minor, Inc., not Accendra Health Inc.
- Assess whether the decline in adjusted earnings and segment operating income reflects sustained margin, customer-retention or cost pressures.
- Review debt maturities, covenant headroom, revolver availability, interest costs and the springing-maturity terms, especially around the 2021 notes.
- Evaluate the quality and sustainability of operating cash flow, including working-capital movements and the restricted cash balance.
- Reconcile GAAP and non-GAAP results and consider the tax-rate variability and excluded charges when comparing periods.
- Monitor Halyard integration, customer service and non-renewals, foreign-exchange and commodity exposure, and the company’s stated lack of quantified guidance.