OWENS & MINOR INC/VA/ - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number 1-9810
_______________________________________________________
Owens & Minor, Inc.
(Exact name of Registrant as specified in its charter)
_______________________________________________________
| Virginia | 54-1701843 | ||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| 9120 Lockwood Boulevard | Mechanicsville | Virginia | 23116 | ||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| Post Office Box 27626, Richmond, Virginia | 23261-7626 | ||||||||||
| (Mailing address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code (804) 723-7000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $2 par value per share | OMI | New York Stock Exchange | ||||||||||||
_________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | ||||||||
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☒ | ||||||||
| Emerging growth company | ☐ | ||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of October 29, 2020, was 73,512,279 shares.
Owens & Minor, Inc. and Subsidiaries
Index
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| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Net revenue | $ | 2,187,928 | $ | 2,292,752 | $ | 6,118,340 | $ | 7,020,296 | |||||||||||||||
| Cost of goods sold | 1,843,589 | 2,012,130 | 5,236,035 | 6,176,537 | |||||||||||||||||||
| Gross margin | 344,339 | 280,622 | 882,305 | 843,759 | |||||||||||||||||||
| Distribution, selling and administrative expenses | 262,538 | 248,661 | 758,320 | 767,986 | |||||||||||||||||||
| Acquisition-related and exit and realignment charges | 6,382 | 4,522 | 18,500 | 14,776 | |||||||||||||||||||
| Other operating (income) expense, net | (134) | 1,329 | (3,020) | 2,385 | |||||||||||||||||||
| Operating income | 75,553 | 26,110 | 108,505 | 58,612 | |||||||||||||||||||
| Interest expense, net | 20,975 | 24,050 | 65,923 | 75,557 | |||||||||||||||||||
| Other expense, net | 1,093 | 550 | 1,387 | 4,014 | |||||||||||||||||||
| Income (loss) from continuing operations before income taxes | 53,485 | 1,510 | 41,195 | (20,959) | |||||||||||||||||||
| Income tax provision (benefit) | 7,404 | (1,910) | 3,863 | (3,726) | |||||||||||||||||||
| Income (loss) from continuing operations, net of tax | 46,081 | 3,420 | 37,332 | (17,233) | |||||||||||||||||||
| Loss from discontinued operations, net of tax | — | (2,196) | (58,203) | (6,115) | |||||||||||||||||||
| Net income (loss) | $ | 46,081 | $ | 1,224 | $ | (20,871) | $ | (23,348) | |||||||||||||||
| Income (loss) from continuing operations per common share: basic and diluted | $ | 0.76 | $ | 0.06 | $ | 0.61 | $ | (0.28) | |||||||||||||||
| Loss from discontinued operations per common share: basic and diluted | — | (0.04) | (0.95) | (0.11) | |||||||||||||||||||
| Net income (loss) per common share: basic and diluted | $ | 0.76 | $ | 0.02 | $ | (0.34) | $ | (0.39) | |||||||||||||||
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Net income (loss) | $ | 46,081 | $ | 1,224 | $ | (20,871) | $ | (23,348) | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||||||||
Currency translation adjustments (net of income tax of $0 in 2020 and 2019) | 5,173 | (9,038) | 7,003 | (5,793) | |||||||||||||||||||||||||
Change in unrecognized net periodic pension costs (net of income tax of $47 and $135 in 2020, and $61 and $187 in 2019) | 167 | 199 | 932 | 593 | |||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of income tax of $831 and income tax benefit of $3,232 in 2020, and $1,225 and $4,866 in 2019) | 1,681 | (1,789) | (9,792) | (9,464) | |||||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | 7,021 | (10,628) | (1,857) | (14,664) | |||||||||||||||||||||||||
| Comprehensive income (loss) | $ | 53,102 | $ | (9,404) | $ | (22,728) | $ | (38,012) | |||||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| September 30, | December 31, | ||||||||||
| (in thousands, except per share data) | 2020 | 2019 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 77,256 | $ | 67,030 | |||||||
Accounts receivable, net of allowances of $20,135 and $21,015 | 688,884 | 674,706 | |||||||||
| Merchandise inventories | 1,095,410 | 1,146,192 | |||||||||
| Other current assets | 235,983 | 79,372 | |||||||||
| Current assets of discontinued operations | — | 439,983 | |||||||||
| Total current assets | 2,097,533 | 2,407,283 | |||||||||
Property and equipment, net of accumulated depreciation of $273,403 and $245,718 | 301,299 | 315,427 | |||||||||
| Operating lease assets | 143,362 | 142,219 | |||||||||
| Goodwill | 390,395 | 393,181 | |||||||||
| Intangible assets, net | 251,615 | 285,018 | |||||||||
| Other assets, net | 112,911 | 99,956 | |||||||||
| Total assets | $ | 3,297,115 | $ | 3,643,084 | |||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 946,116 | $ | 808,035 | |||||||
| Accrued payroll and related liabilities | 71,406 | 53,584 | |||||||||
| Other current liabilities | 412,483 | 231,029 | |||||||||
| Current liabilities of discontinued operations | — | 323,511 | |||||||||
| Total current liabilities | 1,430,005 | 1,416,159 | |||||||||
| Long-term debt, excluding current portion | 1,099,645 | 1,508,415 | |||||||||
| Operating lease liabilities, excluding current portion | 120,025 | 117,080 | |||||||||
| Deferred income taxes | 75,009 | 40,550 | |||||||||
| Other liabilities | 121,096 | 98,726 | |||||||||
| Total liabilities | 2,845,780 | 3,180,930 | |||||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 63,716 shares and 62,843 shares | 127,432 | 125,686 | |||||||||
| Paid-in capital | 262,002 | 251,401 | |||||||||
| Retained earnings | 116,465 | 137,774 | |||||||||
| Accumulated other comprehensive loss | (54,564) | (52,707) | |||||||||
| Total equity | 451,335 | 462,154 | |||||||||
| Total liabilities and equity | $ | 3,297,115 | $ | 3,643,084 | |||||||
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2020 | 2019 | |||||||||
| Operating activities: | |||||||||||
| Net loss | $ | (20,871) | $ | (23,348) | |||||||
| Adjustments to reconcile net loss to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 69,494 | 88,204 | |||||||||
| Share-based compensation expense | 15,275 | 12,057 | |||||||||
| Loss on divestiture | 65,472 | — | |||||||||
| Provision for losses on accounts receivable | 9,583 | 9,759 | |||||||||
| Deferred income tax expense (benefit) | 25,017 | (11,989) | |||||||||
| Changes in operating lease right-of-use assets and lease liabilities | (1,328) | (1,280) | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | (20,173) | 73,986 | |||||||||
| Merchandise inventories | 52,605 | 136,021 | |||||||||
| Accounts payable | 136,156 | (221,381) | |||||||||
| Net change in other assets and liabilities | (69,117) | 69,756 | |||||||||
| Other, net | 6,083 | 7,320 | |||||||||
| Cash provided by operating activities | 268,196 | 139,105 | |||||||||
| Investing activities: | |||||||||||
| Proceeds from divestiture | 133,000 | — | |||||||||
| Additions to property and equipment | (21,678) | (31,224) | |||||||||
| Additions to computer software | (4,702) | (6,928) | |||||||||
| Proceeds from sale of property and equipment | 178 | 220 | |||||||||
| Proceeds from cash surrender value of life insurance policies | 6,032 | — | |||||||||
| Cash provided by (used for) investing activities | 112,830 | (37,932) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of debt | 150,000 | — | |||||||||
| Repayments under revolving credit facility | (107,900) | (36,100) | |||||||||
| Repayments of debt | (270,399) | (40,700) | |||||||||
| Financing costs paid | (10,367) | (4,313) | |||||||||
| Cash dividends paid | (467) | (5,072) | |||||||||
| Other, net | (5,822) | (3,109) | |||||||||
| Cash used for financing activities | (244,955) | (89,294) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 6,721 | (2,243) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | 142,792 | 9,636 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 84,687 | 103,367 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 227,479 | $ | 113,003 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes received, net of payments | $ | (1,892) | $ | (12,085) | |||||||
| Interest paid | $ | 61,271 | $ | 76,470 | |||||||
See accompanying notes to consolidated financial statements.
6
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
| (in thousands, except per share data) | Common Shares Outstanding | Common Stock ($2 par value ) | Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 62,843 | $ | 125,686 | $ | 251,401 | $ | 137,774 | $ | (52,707) | $ | 462,154 | ||||||||||||||||||||||||
| Net loss | (11,324) | (11,324) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (39,405) | (39,405) | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (127) | (127) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | 42 | 84 | 4,956 | 5,040 | |||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 62,885 | 125,770 | 256,357 | 126,323 | (92,112) | 416,338 | |||||||||||||||||||||||||||||
| Net loss | (55,627) | (55,627) | |||||||||||||||||||||||||||||||||
| Other comprehensive income | 30,527 | 30,527 | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (156) | (156) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | 852 | 1,704 | 2,376 | 4,080 | |||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 63,737 | 127,474 | 258,733 | 70,540 | (61,585) | 395,162 | |||||||||||||||||||||||||||||
| Net income | 46,081 | 46,081 | |||||||||||||||||||||||||||||||||
| Other comprehensive income | 7,021 | 7,021 | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (156) | (156) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | (21) | (42) | 3,269 | 3,227 | |||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 63,716 | $ | 127,432 | $ | 262,002 | $ | 116,465 | $ | (54,564) | $ | 451,335 | ||||||||||||||||||||||||
| Balance, December 31, 2018 | 62,294 | $ | 124,588 | $ | 238,773 | $ | 200,670 | $ | (45,612) | $ | 518,419 | ||||||||||||||||||||||||
| Net loss | (14,096) | (14,096) | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (6,423) | (6,423) | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (119) | (119) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | 642 | 1,284 | 2,774 | 4,058 | |||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | 62,936 | 125,872 | 241,547 | 186,455 | (52,035) | 501,839 | |||||||||||||||||||||||||||||
| Net loss | (10,476) | (10,476) | |||||||||||||||||||||||||||||||||
| Other comprehensive income | 2,387 | 2,387 | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (114) | (114) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | 28 | 56 | 3,209 | 3,265 | |||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 62,964 | 125,928 | 244,756 | 175,865 | (49,648) | 496,901 | |||||||||||||||||||||||||||||
| Net income | 1,224 | 1,224 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | (10,628) | (10,628) | |||||||||||||||||||||||||||||||||
Dividends declared ($0.0025 per share) | (175) | (175) | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | (102) | (204) | 4,160 | 3,956 | |||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | 62,862 | $ | 125,724 | $ | 248,916 | $ | 176,914 | $ | (60,276) | $ | 491,278 | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, unless otherwise indicated)
Note 1—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, or our) and contain all adjustments (which are comprised only of normal recurring accruals and use of estimates) necessary to conform with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The Movianto business represents a component that met accounting requirements to be classified as discontinued operations and held-for-sale beginning December 31, 2019. In accordance with GAAP, the results of operations and financial position of the Movianto business are presented as discontinued operations through June 18, 2020 (the Divestiture Date) and, as such, have been excluded from continuing operations for all periods presented. With the exception of Note 3, the Notes to Consolidated Financial Statements reflect the continuing operations of Owens & Minor, Inc. and its subsidiaries. See Note 3 for additional information regarding discontinued operations. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash includes cash and marketable securities with an original maturity or maturity at acquisition of three months or less. Cash, cash equivalents and restricted cash are stated at cost. Nearly all of our cash, cash equivalents and restricted cash are held in cash depository accounts in major banks in the United States, Europe, and Asia. Cash that is held by a major bank and has restrictions on its availability to us is classified as restricted cash. Restricted cash included in other current assets represents cash held in a designated account as of September 30, 2020 as required by the Fifth Amendment to the Credit Agreement, which stipulates that the cash held within this account is to be used to repay the 2021 Notes or the Term Loans. Restricted cash included in Other assets, net as of September 30, 2020 represents cash held in an escrow account as required by the Centers for Medicare & Medicaid Services (CMS) in conjunction with the Bundled Payments for Care Improvement (BPCI) Advanced Program.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of those same amounts presented in the accompanying consolidated statements of cash flows.
| September 30, 2020 | December 31, 2019 | ||||||||||
| Cash and cash equivalents | $ | 77,256 | $ | 67,030 | |||||||
| Restricted cash included in Other current assets | 133,899 | — | |||||||||
| Restricted cash included in Other assets, net | 16,324 | 16,261 | |||||||||
| Cash of discontinued operations | — | 1,396 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 227,479 | $ | 84,687 | |||||||
Note 2—Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The carrying amount of restricted cash also approximates fair value due to its nature. The fair value of debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings, and average remaining maturities (Level 2). See Note 6 for the fair value of debt. The fair value of interest rate swaps and foreign currency contracts is determined based on the present value of expected future cash flows considering the risks involved,
8
including non-performance risk, and using discount rates appropriate for the respective maturities. Observable Level 2 inputs are used to determine the present value of expected future cash flows. See Note 8 for the fair value of derivatives.
Note 3—Discontinued Operations
On June 18, 2020, we completed the previously announced divestiture of our European logistics business, Movianto (the Divestiture), as well as certain support functions in our Dublin office, to Walden Group SAS (the Buyer) and EHDH (as Buyer’s guarantor) for cash consideration of $133 million. We concluded that the Movianto business met the criteria for discontinued operations as of December 31, 2019 and through the Divestiture Date, as the intention to sell represented a strategic shift and the criteria for held-for-sale were met. Movianto was previously reported in the Global Solutions segment.
Accordingly, the results of operations from the Movianto business are reported in the accompanying consolidated statements of operations as Loss from discontinued operations, net of tax for the three and nine months ended September 30, 2020 and 2019, and the related assets and liabilities are classified as held-for-sale as of December 31, 2019 in the accompanying balance sheet. We are working with the Buyer on a final working capital adjustment that could result in a benefit in an amount up to $42 million. There is no benefit of any such adjustment reflected in our consolidated financial statements as of September 30, 2020.
The following table summarizes the financial results of our discontinued operations for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Net revenue | $ | — | $ | 106,265 | $ | 226,759 | $ | 324,308 | ||||||||||||||||||
| Cost of goods sold | — | 24,399 | 53,923 | 78,729 | ||||||||||||||||||||||
| Gross margin | — | 81,866 | 172,836 | 245,579 | ||||||||||||||||||||||
| Distribution, selling, and administrative expenses | — | 81,565 | 157,512 | 245,562 | ||||||||||||||||||||||
| Loss on divestiture | — | — | 65,472 | — | ||||||||||||||||||||||
| Acquisition-related and exit and realignment charges | — | 383 | 4,825 | 774 | ||||||||||||||||||||||
| Other operating income, net | — | (20) | (388) | (492) | ||||||||||||||||||||||
| Operating loss | — | (62) | (54,585) | (265) | ||||||||||||||||||||||
| Interest expense, net | — | 1,887 | 3,144 | 5,162 | ||||||||||||||||||||||
| Loss from discontinued operations before income taxes | — | (1,949) | (57,729) | (5,427) | ||||||||||||||||||||||
| Income tax provision from discontinued operations | — | 247 | 474 | 688 | ||||||||||||||||||||||
| Loss from discontinued operations, net of tax | $ | — | $ | (2,196) | $ | (58,203) | $ | (6,115) | ||||||||||||||||||
We suspended depreciation and amortization on assets that are held-for-sale, including right-of-use assets recorded in accordance with ASU No. 2016-02, for the nine months ended September 30, 2020.
All revenue and expense included in discontinued operations during the nine months ended September 30, 2020 relates to activity through the Divestiture Date. No revenue or expense have been recorded in discontinued operations related to the disposal group subsequent to the Divestiture Date.
We have entered into transition services agreements with a subsidiary of the Buyer, pursuant to which we and a subsidiary of the Buyer will provide to each other various transitional services. Certain transition service arrangement costs and reimbursements were recorded during the three and nine months ended September 30, 2020. These amounts were immaterial for the three and nine months ended September 30, 2020.
9
The assets and liabilities of the discontinued Movianto business reflected on the consolidated balance sheet at December 31, 2019 were as follows:
| December 31, 2019 | |||||||||||
| Assets of discontinued operations | |||||||||||
| Cash and cash equivalents | $ | 1,396 | |||||||||
| Accounts receivable, net | 78,643 | ||||||||||
| Merchandise inventories | 16,058 | ||||||||||
| Other current assets | 188,853 | ||||||||||
| Current assets of discontinued operations | 284,950 | ||||||||||
| Property and equipment, net | 65,710 | ||||||||||
| Intangible assets, net | 6,579 | ||||||||||
| Other assets, net | 27,431 | ||||||||||
| Operating lease assets | 87,425 | ||||||||||
| Valuation allowance on disposal group classified as held-for-sale | (32,112) | ||||||||||
| Total assets of discontinued operations | $ | 439,983 | |||||||||
| Liabilities of discontinued operations | |||||||||||
| Accounts payable | $ | 53,981 | |||||||||
| Other current liabilities | 182,980 | ||||||||||
| Current liabilities of discontinued operations | 236,961 | ||||||||||
| Long-term debt, excluding current portion | 5,523 | ||||||||||
| Operating lease liabilities, excluding current portion | 76,270 | ||||||||||
| Other liabilities | 4,757 | ||||||||||
| Total liabilities of discontinued operations | $ | 323,511 | |||||||||
Assets and liabilities held-for-sale as of December 31, 2019 were classified as current since we expected the Divestiture to be completed within one year of the balance sheet date.
The following table provides operating and investing cash flow information for our discontinued operations:
| September 30, 2020 | September 30, 2019 | ||||||||||
| Operating Activities: | |||||||||||
| Depreciation and amortization | $ | — | $ | 15,466 | |||||||
| Loss on divestiture | 65,472 | — | |||||||||
| Investing Activities: | |||||||||||
| Capital expenditures | 3,027 | 17,298 | |||||||||
Note 4—Goodwill and Intangible Assets
The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill through September 30, 2020:
| Global Solutions | Global Products | Consolidated | |||||||||||||||
| Carrying amount of goodwill, December 31, 2019 | $ | 283,905 | $ | 109,276 | $ | 393,181 | |||||||||||
| Currency translation adjustments | — | (2,786) | (2,786) | ||||||||||||||
| Carrying amount of goodwill, September 30, 2020 | $ | 283,905 | $ | 106,490 | $ | 390,395 | |||||||||||
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Intangible assets at September 30, 2020 and December 31, 2019 were as follows:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Customer Relationships | Tradenames | Other Intangibles | Customer Relationships | Tradenames | Other Intangibles | ||||||||||||||||||||||||||||||
| Gross intangible assets | $ | 268,179 | $ | 90,000 | $ | 43,238 | $ | 270,693 | $ | 90,000 | $ | 43,055 | |||||||||||||||||||||||
| Accumulated amortization | (113,999) | (22,791) | (13,012) | (92,947) | (16,520) | (9,263) | |||||||||||||||||||||||||||||
| Net intangible assets | $ | 154,180 | $ | 67,209 | $ | 30,226 | $ | 177,746 | $ | 73,480 | $ | 33,792 | |||||||||||||||||||||||
| Weighted average useful life | 10 years | 11 years | 8 years | 10 years | 11 years | 8 years | |||||||||||||||||||||||||||||
At September 30, 2020, $67.2 million in net intangible assets were held in the Global Solutions segment and $184.4 million were held in the Global Products segment. Amortization expense for intangible assets was $10.2 million and $10.6 million for the three months ended September 30, 2020 and 2019, respectively, and $31.5 million and $33.4 million for the nine months ended September 30, 2020 and 2019, respectively.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $10.4 million for the remainder of 2020, $39.8 million for 2021, $38.9 million for 2022, $38.7 million for 2023, $33.9 million for 2024 and $28.2 million for 2025.
Note 5—Exit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations which includes the consolidation of certain distribution and outsourced logistics centers, administrative offices and warehouses, our client engagement center and IT restructuring charges. These charges also include costs associated with our strategic organizational realignment which include management changes, certain professional fees, and costs to streamline administrative functions and processes.
Exit and realignment charges by segment for the three and nine months ended September 30, 2020 and 2019 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Global Solutions segment | $ | 2,714 | $ | 969 | $ | 6,255 | $ | 3,149 | |||||||||||||||
| Global Products segment | 2,877 | 11 | 3,364 | 252 | |||||||||||||||||||
| Total exit and realignment charges | $ | 5,591 | $ | 980 | $ | 9,619 | $ | 3,401 | |||||||||||||||
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The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2020 and 2019:
| Total | ||||||||
| Accrued exit and realignment costs, December 31, 2019 | $ | 8,162 | ||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 1,391 | |||||||
| Information system restructuring costs | 183 | |||||||
| Other | 255 | |||||||
| Cash payments | (5,799) | |||||||
| Accrued exit and realignment costs, March 31, 2020 | 4,192 | |||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 809 | |||||||
| Information system restructuring costs | 671 | |||||||
| Other | 720 | |||||||
| Cash payments | (2,072) | |||||||
| Accrued exit and realignment costs, June 30, 2020 | 4,320 | |||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 1,950 | |||||||
| Information system restructuring costs | 77 | |||||||
| Other | 3,564 | |||||||
| Cash payments | (7,083) | |||||||
| Accrued exit and realignment costs, September 30, 2020 | $ | 2,828 | ||||||
| Accrued exit and realignment costs, December 31, 2018 | $ | 7,477 | ||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 360 | |||||||
| Information system restructuring costs | 261 | |||||||
| Other | 83 | |||||||
| Cash payments | (2,206) | |||||||
| Accrued exit and realignment costs, March 31, 2019 | 5,975 | |||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 1,008 | |||||||
| Information system restructuring costs | 705 | |||||||
| Other | 4 | |||||||
| Cash payments | (2,301) | |||||||
| Accrued exit and realignment costs, June 30, 2019 | 5,391 | |||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | 305 | |||||||
| Information system restructuring costs | 664 | |||||||
| Other | 11 | |||||||
| Cash payments | (2,586) | |||||||
| Accrued exit and realignment costs, September 30, 2019 | $ | 3,785 | ||||||
Acquisition-related and exit and realignment charges presented in our consolidated statements of operations includes acquisition-related charges of $0.8 million and $8.9 million for the three and nine months ended September 30, 2020 and $3.5 million and $11.4 million for the three and nine months ended September 30, 2019, respectively, and consisted primarily of transition costs for the Halyard acquisition.
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Note 6—Debt
Debt consists of the following:
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
3.875% Senior Notes, due September 2021 | $ | 178,485 | $ | 180,307 | $ | 236,234 | $ | 229,356 | |||||||||||||||
4.375% Senior Notes, due December 2024 | 244,697 | 245,122 | 273,978 | 212,086 | |||||||||||||||||||
| Term A Loans, due July 2022 | 196,489 | 199,619 | 377,420 | 383,050 | |||||||||||||||||||
| Term B Loan, due April 2025 | 478,127 | 475,913 | 480,337 | 442,217 | |||||||||||||||||||
| Revolver | 70,000 | 70,000 | 177,900 | 177,900 | |||||||||||||||||||
| Receivables Securitization Program | 147,580 | 150,000 | — | — | |||||||||||||||||||
| Finance leases and other | 13,371 | 13,371 | 13,783 | 13,783 | |||||||||||||||||||
| Total debt | 1,328,749 | 1,334,332 | 1,559,652 | 1,458,392 | |||||||||||||||||||
| Less current maturities | (229,104) | (230,784) | (51,237) | (51,237) | |||||||||||||||||||
| Long-term debt | $ | 1,099,645 | $ | 1,103,548 | $ | 1,508,415 | $ | 1,407,155 | |||||||||||||||
We have $178 million of 3.875% senior notes due in 2021 (the 2021 Notes) and $245 million of 4.375% senior notes due in 2024 (the 2024 Notes), with interest payable semi-annually. The 2021 Notes were sold at 99.5% of the principal amount with an effective yield of 3.951%. The 2024 Notes were sold at 99.6% of the principal amount with an effective yield of 4.422%. We have the option to redeem the 2021 Notes and 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100% of the principal amount or the present value of the remaining scheduled payments discounted at the applicable Benchmark Treasury Rate plus 25 basis points for the 2021 Notes and the applicable Benchmark Treasury Rate plus 30 basis points for the 2024 Notes. In June 2020, we announced cash tender offers for up to $240 million aggregate principal amount of our outstanding 2021 Notes and 2024 Notes. As of the Early Settlement Date of June 22, 2020, $54.1 million of the 2021 Notes and $29.0 million of the 2024 Notes were repaid. On the Early Settlement Date, the 2021 Notes were redeemed at 100% of par, and the 2024 Notes were redeemed at 90% of par, resulting in a net gain on extinguishment of debt of $2.9 million. The tender offers remained open through July 2, 2020, and an additional $0.1 million of the 2021 Notes were redeemed at the Base Consideration price of 95% of par by the time the offers closed. Including the tender offer, we used $83.3 million of cash to repurchase $87.9 million aggregate principal amount of the 2021 Notes and 2024 Notes during the first nine months of 2020. Consistent with the terms of the Fifth Amendment to the Credit Agreement, we used $54.1 million of the proceeds from the sale of Movianto to fund the repayment of the 2021 Notes, which were retired in the second quarter as part of the tender offer. As required by the Fifth Amendment to the Credit Agreement, the remaining $78.9 million of proceeds from the sale of Movianto were placed in a designated account and will be used to repurchase a portion of the outstanding 2021 Notes within 210 days of the Divestiture Date or repay a portion of our Term Loans.
We have a Credit Agreement (last amended February 13, 2020) with a $400 million revolving credit facility and $675 million in outstanding term loans. The interest rate on our revolving credit facility and Term A Loans is based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage which varies depending on Consolidated Total Leverage Ratio (each as defined in the Credit Agreement). Our credit spread on the revolving credit facility and Term A Loans at September 30, 2020 was Eurocurrency Rate plus 4.25%. Our Term B Loan accrues interest based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage of 3.50% per annum for Base Rate Loans and 4.50% per annum for Eurocurrency Rate Loans (each as defined in the Credit Agreement). Our credit spread on the Term B Loan at September 30, 2020 was Eurocurrency Rate plus 4.50%. We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the revolving credit facility. Our Credit Agreement has a “springing maturity date” with respect to the revolving credit facility, the Term A Loans, and the Term B Loan. If the outstanding balance of the 2021 Notes has not been paid in full as of the date 91 days prior to the maturity date of the 2021 Notes, then the Termination Date (as defined in the Credit Agreement) of the revolving credit facility, the Term A Loans, and the Term B Loan shall be the date that is 91 days prior to the maturity date of the 2021 Notes. Likewise, if the outstanding balance of the 2024 Notes has not been paid in full as of the date 91 days prior to the maturity date of the 2024 Notes, the Termination Date of the Term B Loan shall be the date that is 91 days prior to the maturity date of the 2024 Notes.
At September 30, 2020 and December 31, 2019, we had borrowings of $70.0 million and $177.9 million, respectively, under the revolver and letters of credit of $13.9 million and $11.7 million, respectively, outstanding under the Credit Agreement. At September 30, 2020 and December 31, 2019, we had $316.1 million and $209.3 million, respectively, available for borrowing. The December 31, 2019 availability reflected letters of credit associated with discontinued operations of $1.1 million. There were no letters of credit associated with discontinued operations as of September 30, 2020. We also had letters of credit and bank guarantees outstanding for $2.4 million, of which $0.8 million are in process of being transferred to
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the buyer of Movianto, and $1.6 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively, which supports certain leased facilities as well as other normal business activities in the United States and Europe. These letters of credit and guarantees were issued independent of the Credit Agreement.
We also have a Security and Pledge Agreement (the Security Agreement) pursuant to which we granted collateral on behalf of the holders of the 2021 Notes, the holders of the 2024 Notes, and the parties secured under the Credit Agreement (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Credit Parties (as defined) in the Credit Parties’ present and future subsidiaries of each Credit Party and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. The Fifth Amendment to the Credit Agreement included additional collateral requirements if the Credit Parties, including an obligation to pledge our owned U.S. real estate and the remaining equity interests in foreign subsidiaries.
On February 19, 2020, we entered into an accounts receivable securitization program (the Receivables Securitization Program). Pursuant to the Receivables Securitization Program the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed $325 million outstanding at any time. The interest rate under the Receivables Securitization Program is based on a spread over the London Interbank Offered Rate (LIBOR) dependent on the tranche period thereto and any breakage fees accrued. Under the Receivables Securitization Program, certain of our subsidiaries sell substantially all of their accounts receivable balances to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Securitization Program matures on February 17, 2023. Our Receivables Securitization Program has a “springing maturity date” with respect to the Term A Loans. If the outstanding balance of the Term A loans have not been paid in full as of the date 91 days prior to the maturity date of the Term A Loans, then the Scheduled Termination Date (as defined in the Receivables Financing Agreement) of the Receivables Securitization Program shall be the date that is 91 days prior to the maturity date of the Term A Loans. In February 2020, we drew $150 million from the Receivables Securitization Program to repay portions of the Term A Loans, consistent with the terms of the Fifth Amendment to the Credit Agreement. The Fifth Amendment to the Credit Agreement requires that any additional draws on the Receivables Securitization Program are restricted for use to repay the 2021 Notes or Term A loans to the extent those instruments are outstanding.
The Credit Agreement, Receivables Securitization Program, and Senior Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. The terms of the Credit Agreement also require the company to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture. We were in compliance with our debt covenants at September 30, 2020.
As of September 30, 2020, scheduled future principal payments of debt were $12.4 million in 2020, $228.5 million in 2021, $218.8 million in 2022, $155.0 million in 2023, $251.0 million in 2024, and $468.8 million thereafter. Current maturities include scheduled principal payments within the next 12 months of $44.6 million and $5.0 million for our Term A and Term B Loans, respectively, $1.0 million in short-term finance leases, and $178.5 million related to our 2021 Notes.
Note 7—Retirement Plans
We have a noncontributory, unfunded retirement plan for certain retirees in the United States. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective employees.
The components of net periodic benefit cost for the three and nine months ended September 30, 2020 and 2019, respectively, were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Service cost | $ | 362 | $ | 332 | $ | 1,073 | $ | 991 | |||||||||||||||
| Interest cost | 498 | 601 | 1,488 | 1,801 | |||||||||||||||||||
| Recognized net actuarial loss | 214 | 260 | 642 | 780 | |||||||||||||||||||
| Net periodic benefit cost | $ | 1,074 | $ | 1,193 | $ | 3,203 | $ | 3,572 | |||||||||||||||
Note 8—Derivatives
We are directly and indirectly affected by changes in foreign currency, which may adversely impact our financial performance and are referred to as “market risks.” When deemed appropriate, we use derivatives as a risk management tool to mitigate the potential impact of certain market risks. We do not enter into derivative financial instruments for trading purposes.
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We enter into foreign currency contracts to manage our foreign exchange exposure related to certain balance sheet items that do not meet the requirements for hedge accounting. These derivative instruments are adjusted to fair value at the end of each period through earnings. The gain or loss recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability.
We pay interest under our Credit Agreement and Receivables Securitization Program, which fluctuate based on changes in our benchmark interest rates. In order to mitigate the risk of increases in benchmark rates, we enter into interest rate swaps whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable amounts calculated by reference to the notional amount. The interest rate swaps were designated as cash flow hedges. Cash flows related to the interest rate swap agreements are included in interest expense.
We determine the fair value of our foreign currency derivatives and our interest rate swaps based on observable market-based inputs or unobservable inputs that are corroborated by market data. We do not view the fair value of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying exposure. All derivatives are carried at fair value in our consolidated balance sheets in other assets, net and other liabilities. We consider the risk of counterparty default to be minimal. We report cash flows from our hedging instruments in the same cash flow statement category as the hedged items.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of September 30, 2020:
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 300,000 | May 2022 and May 2025 | Other assets, net | $ | — | Other liabilities | $ | 19,807 | ||||||||||||||||||||||||||
| Economic (non-designated) hedges | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | 28,900 | October 2020 | Other assets, net | $ | 149 | Other liabilities | $ | — | ||||||||||||||||||||||||||
We terminated $150 million in notional value of interest rate swaps on September 30, 2020. The remaining balance of the fair value adjustments of $10.7 million, which related to these terminated interest rate swaps within accumulated other comprehensive loss, will be recognized in interest expense ratably over the remaining life of the Term B Loan.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2019:
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 450,000 | May 2022 and May 2025 | Other assets, net | $ | — | Other liabilities | $ | 17,436 | ||||||||||||||||||||||||||
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The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and nine months ended September 30, 2020:
| Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) | Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | Total Amount of Income/(Expense) Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded | Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (515) | $ | (19,913) | Interest expense, net | $ | (20,975) | $ | (65,923) | $ | (3,028) | $ | (6,889) | |||||||||||||||||||||||||||||||
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and nine months ended September 30, 2019:
| Amount of Gain/(Loss) Recognized in Other Comprehensive Loss | Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | Total Amount of Income/(Expense) Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded | Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | (3,356) | $ | (15,933) | Interest expense, net | $ | (24,050) | $ | (75,557) | $ | (632) | $ | (1,314) | |||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | (28) | $ | 608 | Cost of goods sold | $ | (2,012,130) | $ | (6,176,537) | $ | 262 | $ | 319 | |||||||||||||||||||||||||||||||
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the three and nine months ended September 30, 2020, we recognized losses of $0.9 million and $2.3 million, respectively, associated with our economic (non-designated) foreign currency contracts. For the three and nine months ended September 30, 2019, we recognized gains of $0.1 million and $1.1 million, respectively, associated with our economic (non-designated) foreign currency contracts.
We recorded the change in fair value of derivative instruments and the remeasurement adjustment of the foreign currency denominated asset or liability in other operating (income) expense, net for our foreign exchange contracts.
Note 9—Income Taxes
The effective tax rate was 13.8% and 9.4% for the three and nine months ended September 30, 2020, compared to (126.5)% and 17.8% in the same periods of 2019. The change in these rates resulted primarily from an income tax benefit recorded in the first and third quarters of 2020 associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the mixture of income and losses in jurisdictions in which we operate, and the incremental income tax expense associated with the vesting of restricted stock. In addition, the provision for income taxes reflects an increase in our reserve for uncertain tax positions for the three and nine months ended September 30, 2020 in connection with the IRS’ audit of our 2015 and 2016 consolidated income tax returns described in the subsequent paragraph. The liability for unrecognized tax benefits was $22.5 million at September 30, 2020 and $11.5 million at December 31, 2019. Included in the liability at September 30, 2020 and December 31, 2019 were $1.9 million and $3.1 million, respectively, of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the Internal Revenue Services (IRS) regarding our 2015 and 2016 Consolidated Income Tax Returns. Within the NOPA, the IRS has asserted that our taxable income for 2015 and 2016 should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United
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States by our domestic subsidiaries. Our amount of taxable income in the United States is based on our transfer pricing methodology, which has been consistently applied through the current date. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the additional tax, interest, and any potential penalties could have a material adverse impact on our financial position, results of operations or cash flows.
Note 10—Net Income (Loss) per Common Share
The following summarizes the calculation of net income (loss) per common share attributable to common shareholders for the three and nine months ended September 30, 2020 and 2019:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Weighted average shares outstanding - basic | 60,786 | 60,030 | 60,983 | 60,498 | |||||||||||||||||||
| Dilutive shares | 137 | — | — | — | |||||||||||||||||||
| Weighted average shares outstanding - diluted | 60,923 | 60,030 | 60,983 | 60,498 | |||||||||||||||||||
| Income (loss) from continuing operations | $ | 46,081 | $ | 3,420 | $ | 37,332 | $ | (17,233) | |||||||||||||||
| Basic and diluted per share | $ | 0.76 | $ | 0.06 | $ | 0.61 | $ | (0.28) | |||||||||||||||
| Loss from discontinued operations | $ | — | $ | (2,196) | $ | (58,203) | $ | (6,115) | |||||||||||||||
| Basic and diluted per share | $ | — | $ | (0.04) | $ | (0.95) | $ | (0.11) | |||||||||||||||
| Net income (loss) | $ | 46,081 | $ | 1,224 | $ | (20,871) | $ | (23,348) | |||||||||||||||
| Basic and diluted per share | $ | 0.76 | $ | 0.02 | $ | (0.34) | $ | (0.39) | |||||||||||||||
Note 11—Shareholders' Equity
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of September 30, 2020, no shares were issued and $50 million of common stock remained available under the at-the-market equity financing program.
On October 6, 2020, we completed a follow-on equity offering as further described in Note 15 - Subsequent Events.
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Note 12—Accumulated Other Comprehensive Loss
The following table shows the changes in accumulated other comprehensive loss by component for the three and nine months ended September 30, 2020 and 2019:
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, June 30, 2020 | $ | (13,926) | $ | (23,471) | $ | (24,188) | $ | (61,585) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | — | 5,173 | (516) | 4,657 | |||||||||||||||||||
| Income tax | — | — | 40 | 40 | |||||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | — | 5,173 | (476) | 4,697 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 214 | — | 3,028 | 3,242 | |||||||||||||||||||
| Income tax | (47) | — | (871) | (918) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 167 | — | 2,157 | 2,324 | |||||||||||||||||||
| Other comprehensive income | 167 | 5,173 | 1,681 | 7,021 | |||||||||||||||||||
| Accumulated other comprehensive loss, September 30, 2020 | $ | (13,759) | $ | (18,298) | $ | (22,507) | $ | (54,564) | |||||||||||||||
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, June 30, 2019 | $ | (7,752) | $ | (29,306) | $ | (12,590) | $ | (49,648) | |||||||||||||||
| Other comprehensive loss before reclassifications | — | (9,038) | (3,384) | (12,422) | |||||||||||||||||||
| Income tax | — | — | 1,314 | 1,314 | |||||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | — | (9,038) | (2,070) | (11,108) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 260 | — | 370 | 630 | |||||||||||||||||||
| Income tax | (61) | — | (89) | (150) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 199 | — | 281 | 480 | |||||||||||||||||||
| Other comprehensive income (loss) | 199 | (9,038) | (1,789) | (10,628) | |||||||||||||||||||
| Accumulated other comprehensive loss, September 30, 2019 | $ | (7,553) | $ | (38,344) | $ | (14,379) | $ | (60,276) | |||||||||||||||
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2019 | $ | (14,691) | $ | (25,301) | $ | (12,715) | $ | (52,707) | |||||||||||||||
| Other comprehensive loss before reclassifications | — | (8,577) | (19,913) | (28,490) | |||||||||||||||||||
| Income tax | — | — | 5,113 | 5,113 | |||||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | — | (8,577) | (14,800) | (23,377) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 1,067 | 15,580 | 6,889 | 23,536 | |||||||||||||||||||
| Income tax | (135) | — | (1,881) | (2,016) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 932 | 15,580 | 5,008 | 21,520 | |||||||||||||||||||
| Other comprehensive income (loss) | 932 | 7,003 | (9,792) | (1,857) | |||||||||||||||||||
| Accumulated other comprehensive loss, September 30, 2020 | $ | (13,759) | $ | (18,298) | $ | (22,507) | $ | (54,564) | |||||||||||||||
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| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2018 | $ | (8,146) | $ | (32,551) | $ | (4,915) | $ | (45,612) | |||||||||||||||
| Other comprehensive loss before reclassifications | — | (5,793) | (15,325) | (21,118) | |||||||||||||||||||
| Income tax | — | — | 5,204 | 5,204 | |||||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | — | (5,793) | (10,121) | (15,914) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 780 | — | 995 | 1,775 | |||||||||||||||||||
| Income tax | (187) | — | (338) | (525) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | 593 | — | 657 | 1,250 | |||||||||||||||||||
| Other comprehensive income (loss) | 593 | (5,793) | (9,464) | (14,664) | |||||||||||||||||||
| Accumulated other comprehensive loss, September 30, 2019 | $ | (7,553) | $ | (38,344) | $ | (14,379) | $ | (60,276) | |||||||||||||||
We include amounts reclassified out of accumulated other comprehensive loss related to defined benefit pension plans as a component of net periodic pension cost recorded in Other expense, net. For the three and nine months ended September 30, 2020, we reclassified $0.2 million and $1.1 million, which included $0.4 million as a result of the Divestiture, respectively, of actuarial net losses. Amounts reclassified from accumulated other comprehensive loss for the nine months ended September 30, 2020 include currency translation adjustments released as a result of the Divestiture. For the three and nine months ended September 30, 2019, we reclassified $0.3 million and $0.8 million, respectively, of actuarial net losses.
Note 13—Segment Information
We periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under two segments: Global Solutions and Global Products. The Global Solutions segment includes our United States distribution, outsourced logistics and value-added services business. Global Products manufactures and sources medical surgical products through our production and kitting operations.
We evaluate the performance of our segments based on their operating income excluding intangible amortization, acquisition-related and exit and realignment charges, certain purchase price fair value adjustments, and other substantive items that, either as a result of their nature or size, would not be expected to occur as part of our normal business operations on a regular basis.
Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading and not meaningful. We believe all inter-segment sales are at prices that approximate market.
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The following tables present financial information by segment:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| Global Solutions | $ | 1,865,182 | $ | 2,047,379 | $ | 5,261,415 | $ | 6,305,448 | |||||||||||||||
| Global Products | 473,797 | 359,835 | 1,235,391 | 1,070,808 | |||||||||||||||||||
| Total segment net revenue | 2,338,979 | 2,407,214 | 6,496,806 | 7,376,256 | |||||||||||||||||||
| Inter-segment revenue | |||||||||||||||||||||||
| Global Products | (151,051) | (114,462) | (378,466) | (355,960) | |||||||||||||||||||
| Total inter-segment revenue | (151,051) | (114,462) | (378,466) | (355,960) | |||||||||||||||||||
| Consolidated net revenue | $ | 2,187,928 | $ | 2,292,752 | $ | 6,118,340 | $ | 7,020,296 | |||||||||||||||
| Operating income: | |||||||||||||||||||||||
| Global Solutions | $ | 10,972 | $ | 24,916 | $ | 8,522 | $ | 64,292 | |||||||||||||||
| Global Products | 89,923 | 16,897 | 160,268 | 42,570 | |||||||||||||||||||
| Inter-segment eliminations | (8,718) | (243) | (10,322) | 774 | |||||||||||||||||||
| Intangible amortization | (10,242) | (10,614) | (31,463) | (33,395) | |||||||||||||||||||
| Acquisition-related and exit and realignment charges | (6,382) | (4,522) | (18,500) | (14,776) | |||||||||||||||||||
Other (1) | — | (324) | — | (853) | |||||||||||||||||||
| Consolidated operating income | $ | 75,553 | $ | 26,110 | $ | 108,505 | $ | 58,612 | |||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Global Solutions | $ | 9,572 | $ | 11,477 | $ | 31,273 | $ | 31,756 | |||||||||||||||
| Global Products | 11,118 | 13,128 | 38,221 | 40,982 | |||||||||||||||||||
| Discontinued operations | — | 4,697 | — | 15,466 | |||||||||||||||||||
| Consolidated depreciation and amortization | $ | 20,690 | $ | 29,302 | $ | 69,494 | $ | 88,204 | |||||||||||||||
| Capital expenditures: | |||||||||||||||||||||||
| Global Solutions | $ | 3,582 | $ | 2,743 | $ | 7,545 | $ | 7,280 | |||||||||||||||
| Global Products | 10,656 | 6,791 | 15,808 | 13,574 | |||||||||||||||||||
| Discontinued operations | — | 3,087 | 3,027 | 17,298 | |||||||||||||||||||
| Consolidated capital expenditures | $ | 14,238 | $ | 12,621 | $ | 26,380 | $ | 38,152 | |||||||||||||||
(1) 2019 included interest cost and net actuarial losses related to the U.S. Retirement Plan as well as Software as a Service (SaaS) implementation costs associated with the upgrading of our global IT platforms in connection with the redesign of our global information system strategy.
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| September 30, 2020 | December 31, 2019 | ||||||||||
| Total assets: | |||||||||||
| Global Solutions | $ | 2,161,158 | $ | 2,205,134 | |||||||
| Global Products | 1,058,701 | 930,937 | |||||||||
| Segment assets | 3,219,859 | 3,136,071 | |||||||||
| Discontinued operations | — | 439,983 | |||||||||
| Cash and cash equivalents | 77,256 | 67,030 | |||||||||
| Consolidated total assets | $ | 3,297,115 | $ | 3,643,084 | |||||||
The following table presents net revenue by geographic area, which were attributed based on the location from which we ship products or provide services.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net revenue: | |||||||||||||||||||||||
| United States | $ | 2,101,074 | $ | 2,200,284 | $ | 5,872,143 | $ | 6,774,965 | |||||||||||||||
| International | 86,854 | 92,468 | 246,197 | 245,331 | |||||||||||||||||||
| Consolidated net revenue | $ | 2,187,928 | $ | 2,292,752 | $ | 6,118,340 | $ | 7,020,296 | |||||||||||||||
Note 14—Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. This ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income (loss). We adopted ASU No. 2018-13 effective beginning January 1, 2020. Its adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 removes disclosures that no longer are considered cost beneficial, clarifies the specific requirements of disclosures and adds disclosure requirements identified as relevant for companies with defined benefit retirement plans. The amendments in ASU No. 2018-14 are effective for fiscal years ending after December 15, 2020 and we do not expect this to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other (Topic 350): Internal-Use Software. This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted ASU No. 2018-15 effective beginning January 1, 2020. Its adoption did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We do not expect this to have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. The Standard is part of FASB’s ongoing project to improve and clarify its Accounting Standards Codification and avoid unintended application. The items addressed are not expected to significantly affect current practice or create a significant administrative cost for most entities. The amendment is divided into issues 1 to 7 with different effective dates as follows: The amendments related to Issue 1, Issue 2, Issue 4, and Issue 5 are conforming amendments. The amendments are effective upon issuance of this update. The amendment related to Issue 3 is a conforming amendment that affects the guidance related to the amendments in ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
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Financial Liabilities. The effective date of this update for the amendments to ASU No. 2016-01 is for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments related to Issue 6 and Issue 7 affect the guidance in the amendments in ASU No. 2016-13, Financial 5 Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. For entities that have not yet adopted the amendments related to ASU No. 2016-13, the effective dates and the transition requirements for these amendments are the same as the effective date and transition requirements in ASU No. 2016-13, which will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted ASU No. 2020-03 effective beginning January 1, 2020 for Issues 1 through 5. Its adoption did not have a material impact on our consolidated financial statements. We are currently evaluating the potential impact of adopting this guidance for Issues 6 and 7 on our consolidated financial statements and disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We do not expect this to have a material impact on our consolidated financial statements.
There have been no further changes in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
Note 15—Subsequent Events
On October 6, 2020, we completed a follow-on equity offering wherein we sold an aggregate of 8,475,000 shares of our common stock at an offering price of $20.50, resulting in net proceeds to us of approximately $165 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions. Pursuant to the underwriting agreement, we granted the underwriters an option to purchase up to an additional 1,271,250 shares of our common stock, which the underwriters exercised in full. Inclusive of this exercised option, net proceeds to us were approximately $190 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.
We used the proceeds from the follow-on equity offering to repay the remaining $109 million outstanding balance of Term Loan A-1 at par on October 8, 2020, to repay $52 million of our Term Loan A-2 at par on October 15, 2020, and to repay $30 million of borrowings under the revolving credit facility.
On October 30, 2020, we issued a notice of redemption to redeem all of our outstanding 2021 Notes on November 30, 2020 (the “Redemption Date”). The redemption price will include accrued and unpaid interest to, but not including, the Redemption Date, and a redemption premium, equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the Redemption Date) discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis describes results of operations and material changes in the financial condition of Owens & Minor, Inc. and its subsidiaries since December 31, 2019. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview and Divestiture of Movianto
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading global healthcare solutions company. On June 18, 2020 (the Divestiture Date), we completed the previously announced divestiture of our European logistics business, Movianto (the Divestiture), as well as certain support functions in our Dublin, Ireland office, to Walden Group SAS (the Buyer) and EHDH (as Buyer’s guarantor) for cash consideration of $133 million. The Divestiture provides us with a greater ability to focus on and invest in our differentiated products, services and U.S. distribution businesses. A portion of the net proceeds was used to repurchase $54.1 million of our 2021 Notes through a tender offer (see Note 6, “Debt”). We recorded a loss of $65.5 million in connection with the Divestiture for the nine months ended September 30, 2020.
We have entered into transition services agreements with a subsidiary of the Buyer, pursuant to which we and a subsidiary of the Buyer will provide to each other various transitional services. Transition service expenses and reimbursements were immaterial for the three and nine months ended September 30, 2020.
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As a result of the Divestiture, the results of operations from our Movianto business are reported as “Loss from discontinued operations, net of tax” through the Divestiture Date and the related assets and liabilities were classified as “held-for-sale” in the consolidated balance sheet as of December 31, 2019. See Note 3, “Discontinued Operations,” of the Notes to Consolidated Financial Statements for further information. Unless otherwise indicated, the following information relates to continuing operations.
Income (loss) from continuing operations per diluted share was $0.76 and $0.61 for the three and nine months ended September 30, 2020, respectively, as compared to $0.06 and $(0.28) for the three and nine months ended September 30, 2019, respectively. Global Solutions segment operating income was $11.0 million and $8.5 million for the three and nine months ended September 30, 2020, respectively, compared to $24.9 million and $64.3 million for the three and nine months ended September 30, 2019, respectively. The declines were a result of lower revenues in part from a reduction in elective surgeries as compared to prior year. Global Products segment operating income was $89.9 million and $160.3 million for the three and nine months ended September 30, 2020, respectively, compared to $16.9 million and $42.6 million for the three and nine months ended September 30, 2019, respectively. The increases were a result of higher revenues from greater market demand for personal protective equipment and favorable product mix combined with continued operating efficiencies compared to 2019.
COVID-19 Update
We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it impacts our customers, teammates, suppliers, vendors and distribution channels. We have taken actions to protect our teammates while maintaining business continuity as we respond to the needs from this global pandemic. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our teammates, customers, suppliers and shareholders.
Revenue in the first nine months of 2020 of $6.1 billion includes a significant overall impact from COVID-19 related to the reduction of surgical procedures beginning in mid-March, which was partially offset by a greater demand for personal protective equipment (PPE). Operating income also benefited from improved productivity and increased manufacturing output related to PPE, favorable product mix and operating efficiencies. We have expanded our PPE production operations to 24 hours a day, 7 days a week, and have taken measures to increase and improve our production such as retooling existing equipment, installing and optimizing new production lines and ramping up our new non-woven fabric machinery. We have delivered nearly 11 billion units of PPE, of which approximately 4 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, since January 2020. We expect that we will continue servicing our customers' needs related to the heightened demand for our PPE as a result of various factors, including the implementation of new regulations and healthcare protocols calling for increased use of PPE, healthcare professional preference for medical grade PPE, stockpile PPE demand and the creation of new channels for PPE demand in healthcare, non-healthcare and international markets.
We are evaluating various government-sponsored COVID-response stimulus, relief, and production initiatives such as under the Defense Production Act (DPA) and recent Coronavirus Aid, Relief and Economic Security (CARES) Act. In April 2020, under the DPA, the U.S. Department of Defense initiated a technology investment agreement with us involving up to $30 million of anticipated funding of assets to expand capacity to supply N-95 respirator masks to the U.S. government. The
nature of the agreement provides a program of expedited partial funding to begin expansion while final terms are completed. Through September 30, 2020, approximately $20.4 million had been expended and reimbursed in accordance with this arrangement. In addition, as allowed under the CARES Act, we filed for $13.0 million and $17.6 million income tax refunds with the Internal Revenue Service (IRS) related to the carryback of net operating losses (NOL) incurred in 2018 and 2019, respectively. As of September 30, 2020, the $13.0 million refund was received and the $17.6 million refund was included in other current assets on our consolidated balance sheet. In connection with these NOL carryback items, we recorded a $7.0 million and $12.2 million benefit to the income tax benefit for the three and nine months ended September 30, 2020.
We are unable to predict the length of the pandemic and the full impact that COVID-19 will have on our future financial position and operating results due to numerous variables and continued uncertainties. Although we have experienced growth in sales volumes for certain of our products (such as PPE) during the COVID-19 pandemic, as well as improved productivity and manufacturing output, there can be no assurance that such growth rates, increased sales volumes or other improvements will be maintained during or following the COVID-19 pandemic.
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Results of Operations
Net revenue.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Global Solutions | $ | 1,865,182 | $ | 2,047,379 | $ | (182,197) | (8.9) | % | |||||||||||||||
| Global Products | 473,797 | 359,835 | 113,962 | 31.7 | % | ||||||||||||||||||
| Inter-segment | (151,051) | (114,462) | (36,589) | (32.0) | % | ||||||||||||||||||
| Net revenue | $ | 2,187,928 | $ | 2,292,752 | $ | (104,824) | (4.6) | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Global Solutions | $ | 5,261,415 | $ | 6,305,448 | $ | (1,044,033) | (16.6) | % | |||||||||||||||
| Global Products | 1,235,391 | 1,070,808 | 164,583 | 15.4 | % | ||||||||||||||||||
| Inter-segment | (378,466) | (355,960) | (22,506) | (6.3) | % | ||||||||||||||||||
| Net revenue | $ | 6,118,340 | $ | 7,020,296 | $ | (901,956) | (12.8) | % | |||||||||||||||
The change in net revenue for the three and nine months ended September 30, 2020 reflected the impact of a reduction in elective surgical procedures, primarily due to the impact of COVID-19, and lower distribution revenues as a result of customer non-renewals that occurred in 2019. These were partially offset by revenue growth in Global Products from increased demand for PPE and growth in Byram, our Home Healthcare business. Foreign currency translation had a favorable impact on net revenue of $1.9 million for the three months ended September 30, 2020 and an unfavorable impact on net revenue of $1.7 million for the nine months ended September 30, 2020, as compared to the prior year.
Cost of goods sold.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Cost of goods sold | $ | 1,843,589 | $ | 2,012,130 | $ | (168,541) | (8.4) | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Cost of goods sold | $ | 5,236,035 | $ | 6,176,537 | $ | (940,502) | (15.2) | % | |||||||||||||||
Cost of goods sold includes the cost of the product (net of supplier incentives and cash discounts) and all costs incurred for shipments of products from manufacturers to our distribution centers for all customer arrangements where we are the primary obligor and bear risk of general and physical inventory loss. These are sometimes referred to as distribution contracts. Cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our Global Products business. There is no cost of goods sold associated with our fee-for-service arrangements. Cost of goods sold compared to prior year reflects changes in sales activity, including sales mix.
Gross margin.
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| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Gross margin | $ | 344,339 | $ | 280,622 | $ | 63,717 | 22.7 | % | |||||||||||||||
| As a % of net revenue | 15.74 | % | 12.24 | % | |||||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Gross margin | $ | 882,305 | $ | 843,759 | $ | 38,546 | 4.6 | % | |||||||||||||||
| As a % of net revenue | 14.42 | % | 12.02 | % | |||||||||||||||||||
Gross margin in the three and nine months ended September 30, 2020 were impacted by improved sales mix and productivity, operating efficiencies in Global Products and a favorable impact from foreign currency translation of $5.4 million and $1.1 million, respectively.
Operating expenses.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Distribution, selling and administrative expenses | $ | 262,538 | $ | 248,661 | $ | 13,877 | 5.6 | % | |||||||||||||||
| As a % of net revenue | 12.00 | % | 10.85 | % | |||||||||||||||||||
| Acquisition-related and exit and realignment charges | $ | 6,382 | $ | 4,522 | $ | 1,860 | 41.1 | % | |||||||||||||||
| Other operating (income) expense, net | $ | (134) | $ | 1,329 | $ | (1,463) | (110.1) | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Distribution, selling and administrative expenses | $ | 758,320 | $ | 767,986 | $ | (9,666) | (1.3) | % | |||||||||||||||
| As a % of net revenue | 12.39 | % | 10.94 | % | |||||||||||||||||||
| Acquisition-related and exit and realignment charges | $ | 18,500 | $ | 14,776 | $ | 3,724 | 25.2 | % | |||||||||||||||
| Other operating (income) expense, net | $ | (3,020) | $ | 2,385 | $ | (5,405) | (226.6) | % | |||||||||||||||
Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services and all costs associated with our fee-for-service arrangements. Shipping and handling costs are primarily included in DS&A expenses and include costs to store, move, and prepare products for shipment, as well as costs to deliver products to customers.
Overall DS&A expenses were affected by the revenue decline and change in mix and investments in the business, partially offset by operational efficiencies. DS&A expenses also included an unfavorable impact for foreign currency translation of $0.3 million for the three months ended September 30, 2020 and a favorable impact for foreign currency translation of $0.3 million for the nine months ended September 30, 2020.
Acquisition-related charges were $0.8 million and $8.9 million for the three and nine months ended September 30, 2020, compared to $3.5 million and $11.4 million for the same periods of 2019. Acquisition-related charges in 2020 and 2019 consist primarily of transition costs for the Halyard acquisition. Exit and realignment charges were $5.6 million and $9.6 million for the three and nine months ended September 30, 2020, compared to $1.0 million and $3.4 million for the same periods of 2019. Amounts in 2020 were associated with severance from reduction in force, post divestiture costs related to the Movianto business and other costs related to the reorganization of the U.S. commercial, operations and executive teams. Amounts in 2019 were associated with severance costs, the establishment of our client engagement center, and IT restructuring charges.
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The change in other operating (income) expense, net was attributed primarily to higher foreign currency transaction gains compared to prior year, gain on legal settlement, and lower software as a service implementation expenses due to the adoption of ASU No. 2018-15 as of January 1, 2020. See Note 14 in Notes to Consolidated Financial Statements.
Interest expense, net.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Interest expense, net | $ | 20,975 | $ | 24,050 | $ | (3,075) | (12.8) | % | |||||||||||||||
| Effective interest rate | 5.64 | % | 6.04 | % | |||||||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Interest expense, net | $ | 65,923 | $ | 75,557 | $ | (9,634) | (12.8) | % | |||||||||||||||
| Effective interest rate | 6.35 | % | 7.38 | % | |||||||||||||||||||
Interest expense, net for the three and nine months ended September 30, 2020 decreased primarily due to a reduction in debt and a decrease in our effective interest rate, which were partially offset by the amortization of additional deferred financing costs as a result of the Fifth Amendment to the Credit Agreement in February 2020. See Note 6 in Notes to Consolidated Financial Statements.
Other expense, net.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Other expense, net | $ | 1,093 | $ | 550 | $ | 543 | 98.7 | % | |||||||||||||||
| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Other expense, net | $ | 1,387 | $ | 4,014 | $ | (2,627) | (65.4) | % | |||||||||||||||
Other expense, net for the three months ended September 30, 2020 and September 30, 2019 primarily relate to interest cost and net actuarial losses related to the U.S. Retirement Plan. Other expense, net for the nine months ended September 30, 2020 includes the write-off of deferred financing costs, third party fees incurred, and interest cost and net actuarial losses related to the U.S. Retirement Plan, offset by a gain from the surrender of company-owned life insurance policies and gain on extinguishment of debt related to the partial repurchase of our 2021 and 2024 Notes. Other expense, net for the nine months ended September 30, 2019 includes interest cost and net actuarial losses related to the U.S. Retirement Plan, the write-off of deferred financing costs associated with the revolving credit facility as a result of the Fourth Amendment to the Credit Agreement in February 2019, and gain on extinguishment of debt related to the partial repurchase of our 2021 Notes.
Income taxes.
| Three Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Income tax provision (benefit) | $ | 7,404 | $ | (1,910) | $ | 9,314 | 487.6 | % | |||||||||||||||
| Effective tax rate | 13.8 | % | -126.5 | % | |||||||||||||||||||
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| Nine Months Ended September 30, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | $ | % | |||||||||||||||||||
| Income tax provision (benefit) | $ | 3,863 | (3,726) | $ | 7,589 | 203.7 | % | ||||||||||||||||
| Effective tax rate | 9.4 | % | 17.8 | % | |||||||||||||||||||
The change in the effective tax rates compared to 2019 resulted primarily from an income tax benefit recorded in the first and third quarters of 2020 associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act, year over year changes in, and mixture of, income and losses in jurisdictions in which we operate, and the incremental income tax expense associated with the vesting of restricted stock. In addition, the provision for income taxes reflects an increase in our reserve for uncertain tax positions for the three and nine months ended September 30, 2020 in connection with the IRS’ audit of our 2015 and 2016 consolidated income tax returns described in Note 9 in the Notes to Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources
Financial condition. We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory turnover. We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our revolving credit facility, or a combination thereof of approximately $24 million.
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in the United States, Europe, and Asia. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collections of accounts receivable, and payments to suppliers.
| September 30, 2020 | December 31, 2019 | Change | |||||||||||||||||||||
| (Dollars in thousands) | $ | % | |||||||||||||||||||||
| Cash and cash equivalents | $ | 77,256 | $ | 67,030 | $ | 10,226 | 15.3 | % | |||||||||||||||
| Accounts receivable, net of allowances | $ | 688,884 | $ | 674,706 | $ | 14,178 | 2.1 | % | |||||||||||||||
Consolidated DSO (1) | 27.7 | 27.1 | |||||||||||||||||||||
| Merchandise inventories | $ | 1,095,410 | $ | 1,146,192 | $ | (50,782) | (4.4) | % | |||||||||||||||
Consolidated inventory turnover (2) | 6.8 | 6.6 | |||||||||||||||||||||
| Accounts payable | $ | 946,116 | $ | 808,035 | $ | 138,081 | 17.1 | % | |||||||||||||||
(1) Based on period end accounts receivable and net revenue for the quarter
(2) Based on average inventory and annualized costs of goods sold for the quarter ended September 30, 2020 and year ended December 31, 2019
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, which relates to continuing operations and discontinued operations:
| (Dollars in thousands) | 2020 | 2019 | |||||||||
| Net cash provided by (used for): | |||||||||||
| Operating activities | $ | 268,196 | $ | 139,105 | |||||||
| Investing activities | 112,830 | (37,932) | |||||||||
| Financing activities | (244,955) | (89,294) | |||||||||
| Effect of exchange rate changes | 6,721 | (2,243) | |||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 142,792 | $ | 9,636 | |||||||
Cash provided by operating activities in the first nine months of 2020 reflected fluctuations in net income along with favorable changes in working capital.
Cash provided by investing activities in the first nine months of 2020 included cash consideration received of $133.0 million from the sale of Movianto, proceeds of $6.0 million from the surrender of company-owned life insurance policies, and capital expenditures of $26.4 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas, and capitalized software. Cash used for investing activities in 2019 included capital expenditures for our strategic and operational efficiency initiatives associated with property and equipment and capitalized software.
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Cash used for financing activities in the first nine months of 2020 included dividend payments of $0.5 million and repayments of $107.9 million under our revolving credit facility, compared to $5.1 million and $36.1 million, respectively, for the same period of 2019. We also had proceeds from borrowings of $150.0 million related to the Accounts Receivable Securitization Program in the first nine months of 2020. Financing activities also included repayments of $270.4 million in the first nine months of 2020 compared to $40.7 million in the same period of 2019 on our term loans (under the Credit Agreement) and 2021 and 2024 Notes. We used $83.3 million of cash to repurchase $87.9 million aggregate principal amount of the 2021 and 2024 Notes during the first nine months of 2020. We also paid $10.4 million in financing costs related to the February 2020 Accounts Receivable Securitization Program and the February 2020 Fifth Amendment to the Credit Agreement, as compared to $4.3 million in financing costs related to the February 2019 Fourth Amendment to the Credit Agreement.
Capital resources. Our sources of liquidity include cash and cash equivalents, a revolving credit facility under our Credit Agreement with Bank of America, N.A, JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., and a syndicate of lenders (the Credit Agreement), and the Receivables Securitization Program. The Credit Agreement provides a revolving borrowing capacity of $400 million. The interest rate on our revolving credit facility and Term A Loans is based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage which varies depending on Consolidated Total Leverage Ratio (each as defined in the Credit Agreement). Our credit spread on the revolving credit facility and Term A Loans at September 30, 2020 was Eurocurrency Rate plus 4.25%. Our Term B Loan accrues interest based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage of 3.50% per annum for Base Rate Loans, and 4.50% per annum for Eurocurrency Rate Loans (each as defined in the Credit Agreement). Our credit spread on the Term B Loan at September 30, 2020 was Eurocurrency Rate plus 4.50%. We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the revolving credit facility.
At September 30, 2020 and December 31, 2019, we had borrowings of $70.0 million and $177.9 million, respectively, under the revolver and letters of credit of $13.9 million and $11.7 million, respectively, outstanding under the Credit Agreement. At September 30, 2020 and December 31, 2019, we had $316.1 million and $209.3 million, respectively, available for borrowing. The December 31, 2019 availability reflected letters of credit associated with discontinued operations of $1.1 million. There were no letters of credit associated with discontinued operations as of September 30, 2020. We also had letters of credit and bank guarantees outstanding for $2.4 million, of which $0.8 million are in process of being transferred to the buyer of Movianto, and $1.6 million and $1.5 million as of September 30, 2020 and December 31, 2019, respectively, which supports certain leased facilities as well as other normal business activities in the United States and Europe. These letters of credit and guarantees were issued independent of the Credit Agreement.
We also have a Security and Pledge Agreement (the Security Agreement) pursuant to which we granted collateral on behalf of the holders of the 2021 Notes, the holders of the 2024 Notes, and the parties secured under the Credit Agreement (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Credit Parties (as defined) in the Credit Parties’ present and future subsidiaries of each Credit Party and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. The Fifth Amendment to the Credit Agreement included additional collateral requirements if the Credit Parties, including an obligation to pledge our owned U.S. real estate and the remaining equity interests in foreign subsidiaries.
Our Credit Agreement has a “springing maturity date” with respect to the revolving credit facility, the Term A Loans, and the Term B Loan. If the outstanding balance of the 2021 Notes has not been paid in full as of the date 91 days prior to the maturity date of the 2021 Notes, then the Termination Date (as defined in the Credit Agreement) of the revolving credit facility, the Term A Loans, and the Term B Loan shall be the date that is 91 days prior to the maturity date of the 2021 Notes. Likewise, if the outstanding balance of the 2024 Notes has not been paid in full as of the date 91 days prior to the maturity date of the 2024 Notes, the Termination Date of the Term B Loan shall be the date that is 91 days prior to the maturity date of the 2024 Notes.
On February 19, 2020, we entered into an accounts receivable securitization program (the Receivables Securitization Program). Pursuant to the Receivables Securitization Program the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed $325 million outstanding at any time. The interest rate under the Receivables Securitization Program is based on a spread over the London Interbank Offered Rate (LIBOR) dependent on the tranche period thereto and any breakage fees accrued. Under the Receivables Securitization Program, certain of our subsidiaries sell substantially all of their accounts receivable balances to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Securitization Program matures on February 17, 2023. Our Receivables Securitization Program has a “springing maturity date” with respect to the Term A Loans. If the outstanding balance of the Term A loans have not been paid in full as of the date 91 days prior to the maturity date of the Term A Loans, then the Scheduled Termination Date (as defined in the Receivables Financing Agreement) of the Receivables Securitization Program shall be the date that is 91 days prior to the maturity date of the Term A Loans. In February 2020, we drew $150 million from the Receivables Securitization Program to repay portions of the Term A Loans, consistent with the terms of the Fifth Amendment to the Credit Agreement. The Fifth Amendment to the
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Credit Agreement requires that any additional draws on the Receivables Securitization Program are restricted for use to repay the 2021 Notes or Term A loans to the extent those instruments are outstanding.
The Credit Agreement, Receivables Securitization Program, and Senior Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. The terms of the Credit Agreement also require the company to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture. We were in compliance with our debt covenants at September 30, 2020.
Current maturities include scheduled principal payments within the next 12 months of $44.6 million and $5.0 million for our Term A and Term B Loans, respectively, $1.0 million in short-term finance leases, and $178.5 million related to our 2021 Notes.
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of September 30, 2020 no shares were issued and $50 million of common stock remained available under the at-the-market equity financing program.
On October 6, 2020, we completed a follow-on equity offering wherein we sold an aggregate of 8,475,000 shares of our common stock at an offering price of $20.50, resulting in net proceeds to us of approximately $165 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions. Pursuant to the underwriting agreement, we granted the underwriters an option to purchase up to an additional 1,271,250 shares of our common stock, which the underwriters exercised in full. Inclusive of this exercised option, net proceeds to us were approximately $190 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.
We used the proceeds from the follow-on equity offering to repay the remaining $109 million outstanding balance of Term Loan A-1 at par on October 8, 2020, to repay $52 million of our Term Loan A-2 at par on October 15, 2020, and to repay $30 million of borrowings under the revolving credit facility.
On October 30, 2020, we issued a notice of redemption to redeem all of our outstanding 2021 Notes on November 30, 2020 (the “Redemption Date”). The redemption price will include accrued and unpaid interest to, but not including, the Redemption Date, and a redemption premium, equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the Redemption Date) discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points.
From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms). Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.
The third quarter dividend of $0.0025 per share was paid in September 2020. The payment of future dividends remains within the discretion of the Board of Directors and will depend upon our results of operations, financial condition, capital requirements, current and future limitations under our Credit Agreement (as amended) and other factors.
We believe available financing sources, including cash generated by operating activities and borrowings under the Credit Agreement, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, payments of quarterly cash dividends, debt repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.
We earn a portion of our operating income in foreign jurisdictions outside the United States. Our cash and cash equivalents held by our foreign subsidiaries totaled $32.0 million and $52.9 million at September 30, 2020 and December 31, 2019, respectively. We continue to remain permanently reinvested in our foreign subsidiaries, with the exception of a subsidiary in Thailand. We have no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiary located in Thailand as of September 30, 2020. As such, we have recorded withholding tax liabilities that would be incurred upon future distribution to the U.S. There are no unrecognized deferred taxes as there is no outside basis difference unrelated to unremitted earnings for Thailand. We will continue to evaluate our foreign earnings repatriation policy in 2020 for all our foreign subsidiaries.
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Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2019 and Note 14 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended on September 30, 2020.
Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:
•our ability to achieve revenue and operating income goals may be affected by: COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, and any worsening of the pandemic or future pandemics, related governmental responses, a decrease in revenue ultimately resulting in less cash flow, longer duration in receivables collection, the need to expedite payments to important suppliers may grow, shifts in demand away from certain products we manufacture and distribute, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, or temporary production and distribution center and office closures due to reduced workforces or government mandates, availability of raw materials, potential resulting labor negotiations or disputes, changes in the types and numbers of businesses that compete with us, including non-traditional competitors, and the aggressiveness of that competition, impacts of the pandemic or future pandemics on other third parties with whom we conduct business, the healthcare industry, and the broader business environment, and trends in elective surgeries and other healthcare spending not directly associated with COVID-19;
•competitive pressures in the marketplace, including intense pricing pressure;
•our ability to retain existing and attract new customers in a market characterized by significant customer consolidation and intense cost-containment initiatives;
•our dependence on sales to certain customers or the loss or material reduction in purchases by key customers;
•our dependence on distribution of product of certain suppliers;
•our ability to successfully identify, manage or integrate acquisitions;
•our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, changes in regulatory conditions, deteriorating economic conditions, adverse tax consequences, and other risks of operating in international markets;
•uncertainties related to and our ability to adapt to changes in government regulations, including healthcare laws and regulations;
•risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;
•uncertainties related to general economic, regulatory and business conditions;
•our ability to successfully implement our strategic initiatives;
•the availability of and modifications to existing supplier funding programs and our ability to meet the terms to qualify for certain of these programs;
•the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;
•our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;
•the ability of customers and suppliers to meet financial commitments due to us;
•changes in manufacturer preferences between direct sales and wholesale distribution;
•changing trends in customer profiles and ordering patterns and our ability to meet customer demand for additional value-added services;
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•our ability to manage operating expenses and improve operational efficiencies in response to changing customer profiles;
•our ability to meet performance targets specified by customer contracts under contractual commitments;
•availability of and our ability to access special inventory buying opportunities;
•the ability of business partners and financial institutions to perform their contractual responsibilities;
•our ability to continue to obtain financing, obtain financing at reasonable rates and to manage financing costs and interest rate risk, and our ability to refinance, extend or repay our substantial indebtedness;
•the risk that information systems are interrupted or damaged or fail for any extended period of time, that new information systems are not successfully implemented or integrated, or that there is a data security breach in our information systems;
•the risk that a decline in business volume or profitability could result in an impairment of goodwill or other long-lived assets;
•our ability to timely or adequately respond to technological advances in the medical supply industry;
•the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims;
•adverse changes in U.S. and foreign tax laws and the outcome of outstanding tax contingencies and legislative and tax proposals;
•our ability to successfully implement the expense reduction and productivity and efficiency increasing initiatives;
•our ability to continue to comply with the terms and conditions of Byram Healthcare’s Corporate Integrity Agreement;
•the potentially adverse impact of the United Kingdom’s withdrawal from the European Union; and
•other factors detailed from time to time in the reports we file with the SEC, including those described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, as updated and supplemented by Item 8.01 of our Current Report on Form 8-K filed with the SEC on March 27, 2020 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.
We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to price risk for our raw materials, the most significant of which relates to the cost of polypropylene and nitrile used in the manufacturing processes of our Global Products segment. Prices of the commodities underlying these raw materials are volatile and have fluctuated significantly in recent years and in the future may contribute to fluctuations in our results of operations. The ability to hedge these commodity prices is limited.
In the normal course of business, we are exposed to foreign currency translation and transaction risks. Our business transactions outside of the United States are primarily denominated in the Euro, Thai baht and Mexican Peso. We may use foreign currency forwards, swaps and options, where possible, to manage our risk related to certain foreign currency fluctuations.
We are exposed to market risk from changes in interest rates related to our borrowing under our Credit Agreement and Receivables Securitization Program. However, we enter into interest rate swap agreements to manage our exposure to interest rate changes. We had $675 million in borrowings under our term loans, $70 million in borrowings under our revolving credit facility, $148 million in borrowings under our Receivables Securitization Program, and $14 million in letters of credit under the Credit Agreement at September 30, 2020. After considering the effects of interest rate swap agreements outstanding as of September 30, 2020, we estimate an increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $6 million per year based on our borrowings outstanding at September 30, 2020.
Due to the nature and pricing of our Global Solutions segment distribution services, we are exposed to potential volatility in fuel prices. Our strategies for helping to mitigate our exposure to changing domestic fuel prices have included using trucks with improved fuel efficiency. We benchmark our domestic diesel fuel purchase prices against the U.S. Weekly Retail On-Highway Diesel Prices (benchmark) as quoted by the U.S. Energy Information Administration. The benchmark averaged $2.58 and $3.06 per gallon in the first nine months of 2020 and 2019, respectively. Based on our fuel consumption in the first
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nine months of 2020, we estimate that every 10 cents per gallon increase in the benchmark would reduce our Global Solutions segment operating income by approximately $0.2 million on an annualized basis.
Item 4. Controls and Procedures
We carried out an evaluation, with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2020. There was no change in our internal control over financial reporting that occurred during the period of this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against us are described in our Annual Report on Form 10-K for the year ended December 31, 2019. Through September 30, 2020, there have been no material developments in any legal proceedings reported in such Annual Report.
Item 1A. Risk Factors
Certain risk factors that we believe could affect our business and prospects are described in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Form 10-Q for the three months ended March 31, 2020. Through September 30, 2020, there have been no material changes in the risk factors described in such Annual Report and also no material changes in the risk factors described in the First Quarter 2020 Form 10-Q quarterly report.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of September 30, 2020, no shares were issued and $50 million of common stock remained available under the at-the-market equity financing program.
On October 6, 2020, we completed a follow-on equity offering wherein we sold an aggregate of 8,475,000 shares of our common stock at an offering price of $20.50, resulting in net proceeds to us of approximately $165 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions. Pursuant to the underwriting agreement, we granted the underwriters an option to purchase up to an additional 1,271,250 shares of our common stock, which the underwriters exercised in full. Inclusive of this exercised option, net proceeds to us were approximately $190 million after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.
Item 6. Exhibits
(a)Exhibits
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| 10.1 | ||||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
| * Certain exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. We hereby undertake to furnish copies of such omitted materials supplementally upon request by the SEC. | ||||||||
| ** Management contract or compensatory plan or arrangement | ||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Owens & Minor, Inc. | |||||||||||
| (Registrant) | |||||||||||
| Date: | November 2, 2020 | /s/ Edward A. Pesicka | |||||||||
| Edward A. Pesicka | |||||||||||
| President & Chief Executive Officer | |||||||||||
| Date: | November 2, 2020 | /s/ Andrew G. Long | |||||||||
| Andrew G. Long | |||||||||||
| Executive Vice President & Chief Financial Officer | |||||||||||
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