Richmond, Va.-based leading distributor of medical and surgical supplies, Owens & Minor Inc. (OMI) posted about 26% rise in adjusted earnings to $33.0 million or 52 cents per share for the fourth quarter of 2013 from $26.2 million or 41 cents in the comparable quarter of 2012. Earnings per share exceeded the Zacks Consensus Estimate by a penny. Following the earnings release, shares of the company went up 2.6% till yesterday.
Revenues in the quarter inched up 1.1% to $2,318.5 million, missing the Zacks Consensus Estimate of $2,339 million. Thanks to the second consecutive quarter of modest growth in OMI’s domestic segment and strong growth in the International segment as Movianto contributed $105 million to overall revenues.
For full year 2013, OMI revealed a 2.2% rise in earnings to $1.90 per share from $1.86 a year ago. Revenues in the year escalated 2.3% to $9,071.5 million.
Gross profit increased 7.6% to $291.3 million while gross margin rose 80 basis points (bps) to 12.6% in the quarter. Adjusted operating earnings rose 24.0% to $58.0 million while adjusted operating margin grew 460 bps to 2.5% in the 2013-quarter.
Segment Results
Revenues from the Domestic segment inched up 0.7% to $2,213.9 million in the fourth quarter of 2013. However, segment revenues for the year slipped 0.5% to $8,688.0 million due to unfavorable market trends, including lower rates of healthcare utilization and reduced government spending, as well as the company’s continued rationalization of smaller, less profitable healthcare provider customers and suppliers.
Domestic segment operating earnings rose $5.0 million to $56.6 million in the quarter, driven by benefit from certain strategic initiatives, including growth in fee-for-service business. Further, segment earnings were positively affected by $2.0 million in legal expenses and loss contingencies associated with California-specific litigation and compensation and benefits requirements in 2012 that did not recur in 2013.
For the full year, Domestic operating earnings were flat at $212 million as benefit from certain California municipal sales tax incentives and supplier price changes in the first half of 2013, offset by increases in healthcare costs, workers’ compensation and other administrative expenses.
Revenues from the International segment grew 8.6% to $104.6 million in the quarter. Segment revenues for the year increased nearly threefold to $383.5 million.
International segment operating earnings increased $6.2 million to $1.4 million in the quarter. For the full year, the segment’s operating losses narrowed down by $4.0 million to $1.4 million due to increased utilization of network capacity, continued growth, and diminishing reliance on transition services from the former parent company, as well as benefit from seasonally stronger customer activity.
Financial Position
As of Dec 31, 2013, OMI had cash, cash equivalents of $101.9 million compared with $97.9 million as of Dec 31, 2012. Long-term debt fell 0.7% to $213.8 million as of Dec 31, 2013, compared with $215.4 million as of Dec 31, 2012. Consequently, long-term-debt-to-capitalization ratio fell 80 bps to 17.3% as of Dec 31, 2013 from 18.1% as of Dec 31, 2012.
For full year 2013, OMI had cash flow of $140.6 million from operations, down 35.7% from $218.5 million in the prior year mainly due to increases in accounts and notes receivable and merchandise inventories. Capital expenditures (net) nearly quadrupled to $25.1 million from $6.5 million in the 2012.
During the quarter, OMI repurchased shares worth $18.9 million. The company’s board of directors also approved a share repurchase program of $100 million over three years.
Outlook
OMI reiterated its 2014 financial guidance provided in December last year. The company expects revenue growth of up to 2% and adjusted earnings of $1.95 to $2.05 per share for the year, excluding exit and realignment and transaction-related costs. The current Zacks Consensus Estimate of $2.00 lies within the guided range.
Our Take
Despite strong International segment results, we are concerned about continued pressure on the company’s margins due to higher expenses and adverse market trends in the Domestic segment. Currently, OMI retains a Zacks Rank #4 (Sell).
Some better-ranked stocks in the medical instruments industry include NuVasive, Inc. (NUVA), Baxter International Inc. (BAX), and Stryker Corporation (SYK). NuVasive carries a Zacks Rank #1 (Strong Buy), while both Baxter International and Stryker carry a Zacks Rank #2 (Buy).
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