Owens & Minor Misses on Earnings but Beats Revs - Analyst Blog

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Shares of Owens & Minor Inc. ( OMI ), a leading distributor of medical and surgical supplies, dropped following the Nov 4 release of its mixed third-quarter 2013 results and a tweaked outlook for the rest of the year. However, after declining for a couple of days, the stock has started to normalize Nov 8 onwards.

OMI's earnings (excluding acquisition-related and exit and realignment activities) of 47 cents per share in the third quarter of 2013 declined 4.1% from 49 cents per share reported in the year-ago period. Adjusted earnings also missed the Zacks Consensus Estimate of 49 cents by 4.08%. Adjusted net income dropped 4.2% to $29.9 million in the quarter.

However, on a reported basis, net earnings climbed 13.7% to $28.0 million or 44 cents per share, from $24.6 million or 39 cents in the year-ago period.

Revenues in the quarter grew 5.7% to $2,304.6 million and surpassed the Zacks Consensus Estimate of $2,264 million. The year-over-year growth was led by the Movianto acquisition, which boosted the company's international revenues.

OMI's gross margin rose 140 basis points (bps) to 11.86% in the third quarter, led by positive mix from the International segment. Selling, general and administrative expenses increased 27.8% to $211.3 million primarily due to the Movianto acquisition.

Adjusted operating income declined 4.6% to $52.0 million in the third quarter. The company reported adjusted operating margin of 2.25%, 10 bps lower than the year-ago figure of 2.50%.

Segments in Details

Revenues from the larger Domestic segment improved 2.1% to $2,175 million, largely due to an extra selling day in the reported quarter. The division continues to be plagued by sluggish healthcare utilization trends, soft government purchasing environment along with the company's continued rationalization of smaller, less profitable healthcare provider and supplier customers.

Operating margin from this segment slipped 24 bps to 2.35% as a result of lower margin on sales to hospital customers and higher healthcare spending. This was partially offset by gains from the company's sourcing efforts.

Revenues from the International segment rose 59.3% to $128.9 million, driven by the Movianto acquisition. Operating income from this segment was $0.7 million in the third quarter compared with an operating loss of $0.6 million in the prior-year quarter.

Balance Sheet

Owens & Minor exited the third quarter of 2013 with cash and cash equivalents of $153.8 million against $97.9 million at the end of 2012. Long-term debt (excluding current portion) slightly decreased to $214.4 million from $215.4 million at the end of 2012.

Cash provided by operating activities in the first nine months of 2013 was roughly $161 million versus $170 million in the same period last year. Capital expenditure was $25.1 million in the first nine months of 2013 versus $7.9 million in the year-ago period.

Guidance

OMI reiterated its revenue growth guidance in the range of 2% to 4% for 2013. However, management is now forecasting its adjusted earnings per share at the lower end of the previous range of $1.90 to $2.00. Adjusted earnings include contribution from Movianto but exclude exit and realignment costs, as well as acquisition-related charges.

Our Take

We remain on the sidelines regarding the mixed third-quarter results posted by Owen & Minor. Higher expenses are putting pressure on the company's margins and profitability. Moreover, management's tempered bottom-line outlook for the rest of the year raises concerns regarding the company's future performance. This indicates that there is significant end-market pressure in the underlying healthcare industry.

However, management's strategy to focus on emerging opportunities in an evolving healthcare environment is encouraging. Further, the company has signed a five-year contract with HealthTrust, a Group Purchasing Organization (GPO) to boost its top line. Additionally, accretion from the Movianto acquisition should help the business grow in the future.

Owen & Minor currently has a Zacks Rank #3 (Hold). However, other companies like Hill-Rom Holdings, Inc. ( HRC ), INSYS Therapeutics Inc. ( INSY ) and NuVasive, Inc. ( NUVA ) are expected to do well in the medical products industry. All of these carry a Zacks Rank #1 (Strong Buy).



HILL-ROM HLDGS (HRC): Free Stock Analysis Report

INSYS THERAP (INSY): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

OWENS & MINOR (OMI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: HRC , INSY , NUVA , OMI

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