Find Over 8.5% YTM with Owens & Minor, Bonds Mature September 2021

  • In its first full quarter since being acquired, Halyard’s S&IP business contributed $240 million to revenue growth.
  • Overall, consolidated revenues for Q3 were up 5.6% as compared to the prior year period.
  • Cash provided by operating activities for the nine months ended September 30, 2018 was $122.5 million.
  • Interest coverage for the nine months ending September 30, 2018 was 2.1x.

This week, Durig Capital looks to the healthcare industry, where a medical supply logistics provider has made some key acquisitions to broaden its revenue sources. Over the past 18 months, Owens & Minor has acquired Byram Healthcare, a direct to patient medical supply distributor, along with Halyard’s surgical and infection prevention (S&IP) business.  Combined, these two acquisitions are slated to add $1.45 billion in annual revenues for Owens & Minor. The company’s last reported quarterly results (third quarter 2018) show revenue growth coming through these most recent additions.

 

  • Byram contributed $61 million toward revenue growth in Q3.

  • In its first full quarter since being acquired, Halyard’s S&IP business contributed $240 million to revenue growth.

  • Overall, consolidated revenues for Q3 were up 5.6% as compared to the prior year period.

  • Cash provided by operating activities for the nine months ended September 30, 2018 was $122.5 million.

  • Interest coverage for the nine months ending September 30, 2018 was 2.1x.


Owens & Minor has a long and successful history in medical supply logistics. The company now has additional international market opportunities through its most recent Halyard acquisition. Owens & Minor’s 2021 bonds are currently trading at a discount, giving them a very competitive yield-to-maturity of about 8.75%. Healthcare is an essential industry and these bonds provide an excellent diversification opportunity for Durig Capital’s
Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown below.

 


Owens & Minor Third Quarter Results

 

Owens & Minor’s most recent reported quarterly results for the third quarter and year-to-date 2018 show a company that is experiencing growth from some recent, significant acquisitions that have diversified its revenues.

 

  • Consolidated revenues for the third quarter registered $2.46 billion. This represents an increase of 5.6% when compared to third quarter 2017 revenues of $2.33 billion.

  • For the nine months ended September 30, 2018, Owens & Minor recorded consolidated revenues of $7.30 billion, an increase of 5.3% compared to revenues of $6.93 billion from the same period in 2017.

  • Cash provided by operating activities for the nine months ending September 30, 2018 totaled $122.5 million.

     

Since mid-2017, Owens & Minor has made two accretive acquisitions which are only beginning to impact the company’s revenues. Cody Phipps, former CEO of Owens & Minor, commented on the company’s recent additions, “We continue to take bold and decisive steps to position our business to deliver additional value to our customers and invest in capabilities and assets that enhance our value proposition in the marketplace.

 

About Owens & Minor

 

Owens & Minor, Inc. (NYSE: OMI) is a global healthcare solutions company with integrated technologies, products, and services aligned to deliver significant and sustained value for healthcare providers and manufacturers across the continuum of care. With 17,000 employees serving healthcare industry customers in 90 countries, Owens & Minor helps to reduce total costs across the supply chain by optimizing episode and point-of-care performance, freeing up capital and clinical resources, and managing contracts to optimize financial performance. As a FORTUNE 500 company, Owens & Minor has annualized revenues of approximately $10 billion, including contributions from Halyard Health S&IP. Founded in 1882, Owens & Minor has operated continuously from its Richmond, Virginia, headquarters. The company has distribution, production, customer service and sales facilities located across Asia, Europe, Latin America, and the U.S.

 

Accretive Growth through Acquisition

 

Owens & Minor has made two acquisitions over the past few years that have helped to increase and diversify its revenue sources. In May 2017, the company acquired Byram Healthcare. Byram, founded in 1968, is a market-leading distributor of reimbursable medical supplies to home patients and home health agencies in the United States.  Byram has strong positions in its principal product lines of ostomy, wound care, urology, diabetes, and incontinence supplies, which are sold nationwide.

 

The acquisition was anticipated to contribute $450 million in annual revenues for Owens & Minor. This acquisition expanded the company’s reach from the hospital setting to the patient’s home. In the most recent reported quarterly results, Byram contributed $61 million towards revenue growth.

 

The second and most significant acquisition was just completed in May 2018, where Owens & Minor completed the acquisition of the surgical and infection prevention (S&IP) business of Halyard Health. This transaction was the largest in Owens & Minor’s history and is expected to contribute a whopping $1 billion in annual revenues. The S&IP business is a leading global provider of medical supplies and solutions for the prevention of healthcare-associated infections across acute care and non-acute care markets around the globe. Also, it provides a global manufacturing network, a strong pipeline of new products, and a successful track record of product development. It also enables Owens & Minor the ability to pursue growth opportunities in 90 countries around the world. The third quarter 2018 results are beginning to show the anticipated revenue growth, registering $240 million in revenues from the Halyard S&IP business.

 

Interest Coverage and Liquidity

 

Interest coverage is of utmost importance to bondholders as it indicates the issuer’s ability to service its existing debt level.  For the nine months ending September 30, 2018, Owens & Minor had operating income (without the effects of non-cash impairment charges and depreciation) of $112.6 million and interest expense of $52.7 million for interest coverage of 2.1x.

 

In terms of liquidity, as of September 30, 2018, Owens & Minor had cash and cash equivalents of $124.9 million with an additional $406.7 million available through its revolvers and lines of credit, giving the company total liquidity of $531.6 million.

 

Risks

 

The risk for bondholders is whether Owens & Minor can continue to differentiate itself in an increasingly competitive industry. Most recently, Amazon has entered the medical supply space, in many instances reducing the margins of the many distributor middlemen in the medical supply space. In answer to this, Owens & Minor has become one the many distributors through the Amazon Business platform, albeit with decreased margins on its products. However, with the company’s purchase of Byram Healthcare 18 months ago, the company is adding diverse revenue sources to its bottom line. And the Halyard acquisition, which is slated to contribute an additional $1 billion in revenues, has given the company an international presence, with access to many additional markets. Given these factors, the very competitive yield-to-maturity of about 8.75% on the company’s 2021 bonds does appear to outweigh the risks identified.

 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.

 


Summary and Conclusion

 

Owens & Minor has a long and successful history in medical supply logistics. As the industry becomes more competitive, especially in light of the increasing costs of healthcare and care providers looking to cut costs wherever possible, the company has begun to take steps to broaden and diversify its revenue sources. Its acquisition of Byram Healthcare has broadened the company’s reach beyond providing medical supplies to hospitals and healthcare providers and added an additional distribution channel direct to the patient. In addition, the massive Halyard acquisition brings a myriad of opportunities in the international marketplace for Owens & Minor. The company’s 2021 bonds provide an excellent opportunity for diversification into the essential healthcare industry and with the excellent yield-to-maturity of about 8.75%, these bonds are an ideal candidate for Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown above.

 

Issuer: Owens & Minor Inc.

Ticker: (NYSE: OMI)

Coupon: 3.875%

Ratings: B1 / B

Maturity: 09/15/2021

Pays:  Semi-annually

Price: ~89.0

Yield to Maturity: ~8.75%

 

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Disclosure: Durig Capital and certain clients may hold positions in Owens & Minor’s September 2021 bonds.

 

Disclaimer: Please note that all yield and price indications are shown from the time of our research.  Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients.

 

Disclaimer: The high yield strategies presented in this review by Durig Capital may not be suitable for all investors.  This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.

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