Leading distributor of medical and surgical supplies, Owens & Minor Inc. (OMI), reported mixed third-quarter 2014 results. While earnings per share (EPS) of 42 cents missed the Zack Consensus Estimate by 4 cents, revenues of $2.39 billion comfortably beat.
Despite a 4.8% year over year increase in net sales, EPS plunged 11.9% primarily due to higher operating expense. Shares declined 1.33% (44 cents) to $32.58 on Oct 29, 2014.
Segment Details
In the third quarter, Owens & Minor reported domestic segment revenues of $2.26 billion, which increased 3.8% on a year over year basis. The upside in revenues can be mainly attributed to growth in larger healthcare provider customer accounts.
The International segment contributed revenues of $124.0 million which spiked 23.5% from the year-ago quarter. The year-over-year growth was primarily driven by robust performance from fee-for-service businesses.
Operational Details
Gross margin expanded 30 basis points (bps) from the year-ago quarter to 12.3% on the back of higher sales volume.
Selling, general and administrative (SG&A) expense as percentage of revenues increased 40 bps from the year-ago quarter to 9.7%. The year-over-year growth was primarily driven by higher expenses related to fee-for-service activity and legal fees.
As a result, operating margin contracted 20 bps on a year-over-year basis to 2.1% in the reported quarter.
Financial Position
As of Sep 30, 2014, Owens & Minor had cash and cash equivalents of $610.1 million compared with $92.0 million as of June 30, 2014. Long-term debt borrowings amounted to $547.7 million.
Cash provided by operating activities totaled $81 million, up 9.3% from $73.4 million in the previous quarter.
Acquisition
In the third quarter, Owens & Minor completed the acquisition of Medical Action Industries and immediately launched an integration plan. Further, the company announced plans of taking over ArcRoyal, a surgical kitting company based in Ireland. These acquisitions are expected to enhance the long-term prospects of the company.
Outlook
Management expects to see continued sequential top line growth. Operation results for the International segment are also expected to improve in the coming quarter. Management believes that Q4 results should be stronger than the rest three, mainly due to factors such as supplier incentives and year-end product price changes.
Our Take
In spite of strong contributions from the International segment, we remain concerned about the company’s spiraling operating expenses which are impacting earnings considerably.
Currently, Owens & Minor retains a Zacks Rank #4 (Sell). Some better-ranked stocks in the medical products industry include GW Pharmaceuticals plc (GWPH), ZELTIQ Aesthetics, Inc. (ZLTQ), and Abaxis, Inc. (ABAX). GW Pharmaceuticals and ZELTIQ Aesthetics both sport a Zacks Rank #1(Strong Buy) while Abaxis carries a Zacks Rank #2 (Buy).
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