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, 2011; it does not identify Accendra Health Inc. Investors should verify the company and filing match before relying on this summary. Owens & Minor provides medical supply distribution and related logistics and supply-chain services. Its direct-to-consumer diabetes supply business, exited in 2009, is reported as discontinued operations.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,176.8 | $2,063.9 | $6,432.0 | $6,053.4 |
| Gross margin | $216.7 | $204.0 | $643.5 | $599.9 |
| Operating earnings | $58.5 | $55.3 | $160.5 | $156.6 |
| Net income | $33.4 | $31.5 | $91.3 | $88.8 |
| Diluted EPS | $0.53 | $0.50 | $1.44 | $1.40 |
- Gross margin as a percentage of revenue was 9.95% for Q3 and 10.00% year to date, versus 9.88% and 9.91% in 2010. Operating margin was 2.69% for Q3 and 2.50% year to date, versus 2.68% and 2.59%. Net margin was 1.53% for Q3 and 1.42% year to date, versus 1.53% and 1.47%.
- For the nine months, operating cash flow was $29.9 million, down from $214.5 million; investing cash outflow was $24.8 million, and financing cash inflow was $32.7 million. The filing attributes the weak operating cash flow principally to working-capital movements; prior-year cash flow benefited substantially from accounts-payable changes.
- Cash was $196.9 million at September 30, 2011. Current assets were $1,529.6 million and current liabilities $759.9 million. Accounts receivable was $507.2 million, with DSO of 20.6 days; inventory was $761.0 million.
- Long-term debt, excluding current portion, was $213.1 million. The company had $200 million principal amount of 6.35% senior notes due in 2016 and no revolving-credit borrowings. Of its $350 million revolver, $345 million was available after $5 million of letters of credit. Management reported covenant compliance.
- Capital expenditures were $24.8 million year to date. Dividends paid were $38.2 million, and the company repurchased $16.1 million of shares under a $50 million authorization.
Material changes versus the prior comparable period
- Q3 revenue increased 5.5%; nine-month revenue rose 6.3%. Management attributed growth mainly to existing customers, with additional contributions from net new customers and fee-for-service revenue.
- Q3 net income rose 5.9% and diluted EPS increased 6.0%; year-to-date net income rose 2.8% and diluted EPS increased 2.9%.
- Gross margin dollars grew, and gross margin rate improved modestly, supported by fee-for-service growth. Lower margins on new customer contracts, reduced supplier incentives, and higher LIFO expense partly offset that benefit.
- SG&A increased 8.3% in Q3 and 9.1% year to date, reflecting fee-for-service and customer-conversion costs, labor, delivery, and consulting expenses. Depreciation and amortization also increased, partly from distribution-center and technology investments.
- Operating cash flow fell sharply year over year, while cash increased by $37.6 million during the nine months, supported in part by a $78.2 million increase in drafts payable classified as financing activity.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management expected available cash and financing sources to cover working capital, capital spending, strategic growth, debt and lease payments, dividends, repurchases, and other needs; it anticipated continuing quarterly dividends, subject to Board discretion.
- As healthcare customers consolidate into larger systems, management said customer mix is shifting toward lower-margin, higher-scale accounts. The company is adjusting its infrastructure, including closing two distribution centers, and expected approximately $12 million of charges in Q4 2011, much of it for operating-lease loss accruals.
- Q3 other operating income included a $2.2 million antitrust class-action settlement benefit. Separately, the filing says a $4.6 million settlement receipt, net of $0.4 million administrative fees, was held in accrued liabilities because the company was acting as an administrative agent for purchasers; do not treat that receipt as ordinary operating income.
- Contingent customer payments of $3.0 million tied to contract performance targets were not accrued because management did not consider them probable. The company also disclosed a California review of potential sales-tax incentives, with amount and timing uncertain, and ongoing exposure to audits of historical reimbursements for its discontinued diabetes business.
- Key risks identified include economic conditions, customer concentration and credit, retention and acquisition of customers, supplier programs and pricing, healthcare regulation, competition, operating-cost control, financing access and interest rates, technology and information-system disruptions, litigation, and tax contingencies. Management reported no material changes to previously disclosed risk factors and no material legal-proceeding developments.
Important facts for investors to verify
- Confirm that Owens & Minor—not Accendra Health—is the issuer intended by the request.
- Assess whether the $29.9 million year-to-date operating cash flow reflects temporary working-capital timing or a sustained cash-conversion issue; review drafts payable, receivables, and inventory trends.
- Track execution and total costs of the two distribution-center closures and the expected approximately $12 million Q4 charge.
- Monitor customer mix, fee-for-service growth, new-contract margins, supplier incentives, and LIFO effects on profitability.
- Verify subsequent developments in the California tax-incentive review, customer performance obligations, and historical reimbursement audits.
- Review the revolver’s covenant headroom and refinancing or rate exposure, including the effect of the terminated interest-rate swaps and the senior notes due in 2016.