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Table of Contents

 
 
 
 
 
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, 2019
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 (804723-7000
    
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  x    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  x    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  x
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of October 31, 2019, was 62,851,754 shares.
 
 
 
 
 


Table of Contents

Owens & Minor, Inc. and Subsidiaries
Index
 
Page
 
 
 
Item 1.
 
Consolidated Statements of Income (Loss) —Three and Nine Months Ended September 30, 2019 and 2018
 
 
Consolidated Balance Sheets—September 30, 2019 and December 31, 2018
 
Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2019 and 2018
 
Consolidated Statements of Changes in Equity—Three and Nine Months Ended September 30, 2019 and 2018
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.

2


Table of Contents

Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
 
2019
 
2018
 
2019
 
2018
Net revenue
 
$
2,399,017

 
$
2,464,877

 
$
7,344,605

 
$
7,295,727

Cost of goods sold
 
2,036,530

 
2,112,303

 
6,255,266

 
6,293,474

Gross margin

362,487

 
352,574

 
1,089,339

 
1,002,253

Distribution, selling and administrative expenses
 
332,369

 
325,012

 
1,016,965

 
918,147

Goodwill and intangible asset impairment charges
 

 

 

 
165,447

Acquisition-related and exit and realignment charges
 
4,905

 
7,727

 
15,550

 
47,416

Other operating (income) expense, net
 
(101
)
 
(1,522
)
 
674

 
(2,281
)
Operating income (loss)
 
25,314

 
21,357

 
56,150

 
(126,476
)
Interest expense, net
 
25,938

 
23,826

 
80,718

 
52,651

Other (income) expense, net
 
(185
)
 

 
1,818

 

Loss before income taxes
 
(439
)
 
(2,469
)
 
(26,386
)
 
(179,127
)
Income tax benefit
 
(1,663
)
 
(1,904
)
 
(3,038
)
 
(3,936
)
Net income (loss)
 
$
1,224

 
$
(565
)
 
$
(23,348
)
 
$
(175,191
)
 
 
 
 
 
 
 
 
 
Net income (loss) per common share: basic and diluted
 
$
0.02

 
$
(0.01
)
 
$
(0.39
)
 
$
(2.92
)


See accompanying notes to consolidated financial statements.
3

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
 
2019

2018
 
2019
 
2018
Net income (loss)
 
$
1,224

 
$
(565
)
 
$
(23,348
)
 
$
(175,191
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2019 and 2018)
 
(9,038
)
 
350

 
(5,793
)
 
(11,407
)
Change in unrecognized net periodic pension costs (net of income tax of $61 and $187 in 2019 and $161 and $449 in 2018)
 
199

 
362

 
593

 
1,116

Net unrealized (loss) gain on derivative instruments and other (net of income tax of $1,225 and $4,866 in 2019 and $103 and $30 in 2018)
 
(1,789
)
 
2,320

 
(9,464
)
 
2,204

Total other comprehensive income (loss), net of tax
 
(10,628
)
 
3,032

 
(14,664
)
 
(8,087
)
Comprehensive income (loss)
 
$
(9,404
)
 
$
2,467

 
$
(38,012
)
 
$
(183,278
)


See accompanying notes to consolidated financial statements.
4

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
 
September 30,
 
December 31,
(in thousands, except per share data)
2019
 
2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
96,803

 
$
103,367

Accounts receivable, net of allowances of $21,043 and $19,618
741,670

 
823,418

Merchandise inventories
1,153,079

 
1,290,103

Other current assets
259,708

 
321,690

Total current assets
2,251,260

 
2,538,578

Property and equipment, net of accumulated depreciation of $309,259 and $270,105
383,825

 
386,723

Operating lease assets
234,853

 

Goodwill
398,065

 
414,122

Intangible assets, net
299,874

 
321,764

Other assets, net
120,542

 
112,601

Total assets
$
3,688,419

 
$
3,773,788

Liabilities and equity
 
 

Current liabilities
 
 

Accounts payable
$
873,743

 
$
1,109,589

Accrued payroll and related liabilities
62,081

 
48,203

Other current liabilities
359,965

 
314,219

Total current liabilities
1,295,789

 
1,472,011

Long-term debt, excluding current portion
1,553,991

 
1,650,582

Operating lease liabilities, excluding current portion
198,858

 

Deferred income taxes
50,553

 
50,852

Other liabilities
97,950

 
81,924

Total liabilities
3,197,141

 
3,255,369

Commitments and contingencies

 

Equity
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 62,862 shares and 62,294 shares
125,724

 
124,588

Paid-in capital
248,916

 
238,773

Retained earnings
176,914

 
200,670

Accumulated other comprehensive loss
(60,276
)
 
(45,612
)
Total equity
491,278

 
518,419

Total liabilities and equity
$
3,688,419

 
$
3,773,788



See accompanying notes to consolidated financial statements.
5

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
Operating activities:
 
 
 
Net loss
$
(23,348
)
 
$
(175,191
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 

Depreciation and amortization
88,204

 
73,596

Share-based compensation expense
12,057

 
10,499

Goodwill and intangible asset impairment charges

 
165,447

Provision for losses on accounts receivable
9,759

 
5,757

Deferred income tax benefit
(11,989
)
 
(6,754
)
Changes in operating lease right-of-use assets and lease liabilities
(1,280
)


Changes in operating assets and liabilities:
 
 

Accounts receivable
73,986

 
(51,603
)
Merchandise inventories
136,021

 
21,244

Accounts payable
(221,381
)
 
88,198

Net change in other assets and liabilities
69,756

 
(11,522
)
Other, net
7,320

 
2,838

Cash provided by operating activities
139,105

 
122,509

Investing activities:
 
 
 
Acquisitions, net of cash acquired

 
(751,834
)
Additions to property and equipment
(31,224
)
 
(32,489
)
Additions to computer software
(6,928
)
 
(14,816
)
Proceeds from sale of property and equipment
220

 
258

Cash used for investing activities
(37,932
)
 
(798,881
)
Financing activities:
 
 
 
Proceeds from issuance of debt

 
695,750

(Repayments) borrowings under revolving credit facility
(36,100
)
 
74,762

Repayments of debt
(40,700
)
 
(9,375
)
Financing costs paid
(4,313
)
 
(28,512
)
Cash dividends paid
(5,072
)
 
(32,151
)
Other, net
(3,109
)
 
(5,308
)
Cash (used for) provided by financing activities
(89,294
)
 
695,166

Effect of exchange rate changes on cash and cash equivalents
(2,243
)
 
1,574

Net increase in cash, cash equivalents and restricted cash
9,636

 
20,368

Cash, cash equivalents and restricted cash at beginning of period
103,367

 
104,522

Cash, cash equivalents and restricted cash at end of period
$
113,003

 
$
124,890

Supplemental disclosure of cash flow information:
 
 
 
Income taxes (received) paid, net of refunds
$
(12,085
)
 
$
18,238

Interest paid
$
76,470

 
$
45,313




See accompanying notes to consolidated financial statements.
6

Table of Contents

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 Income
(Loss)
 
Total
Equity
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

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
61,476

 
$
122,952

 
$
226,937

 
$
690,674

 
$
(25,084
)
 
$
1,015,479

Net income
 
 
 
 
 
 
8,151

 
 
 
8,151

Other comprehensive income
 
 
 
 
 
 
 
 
9,307

 
9,307

Dividends declared ($0.26 per share)
 
 
 
 
 
 
(16,027
)
 
 
 
(16,027
)
Share-based compensation expense, exercises and other
336

 
672

 
1,336

 
 
 
 
 
2,008

Balance, March 31, 2018
61,812

 
123,624

 
228,273

 
682,798

 
(15,777
)
 
1,018,918

Net loss
 
 
 
 
 
 
(182,777
)
 
 
 
(182,777
)
Other comprehensive loss
 
 
 
 
 
 
 
 
(20,426
)
 
(20,426
)
Dividends declared ($0.26 per share)
 
 
 
 
 
 
(16,175
)
 
 
 
(16,175
)
Share-based compensation expense, exercises and other
529

 
1,057

 
1,611

 
 
 
 
 
2,668

Balance, June 30, 2018
62,341

 
124,681

 
229,884

 
483,846

 
(36,203
)
 
802,208

Net loss
 
 
 
 
 
 
(565
)
 
 
 
(565
)
Other comprehensive loss
 
 
 
 
 
 
 
 
3,032

 
3,032

Dividends declared ($0.26 per share)
 
 
 
 
 
 
(16,155
)
 
 
 
(16,155
)
Share-based compensation expense, exercises and other
(72
)
 
(143
)
 
4,036

 
 
 
 
 
3,893

Balance, September 30, 2018
62,269

 
$
124,538

 
$
233,920

 
$
467,126

 
$
(33,171
)
 
$
792,413



See accompanying notes to consolidated financial statements.
7

Table of Contents

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, our or the Company) 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 results of operations for interim periods are not necessarily indicative of the results expected for the full year.
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 represents $16.2 million held in an escrow account as of September 30, 2019 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. The restricted cash presented below is classified as non-current in Other assets, net within the accompanying consolidated balance sheets.
 
September 30, 2019

 
December 31, 2018

Cash and cash equivalents
$
96,803

 
$
103,367

Restricted cash included in Other assets, net
16,200

 

Total cash, cash equivalents and restricted cash
$
113,003

 
$
103,367



Note 2—Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable, financing receivables, accounts payable and financing payables included in the consolidated balance sheets approximate fair value due to the short-term maturities of these instruments. The carrying amount of restricted cash also approximates fair value due to its nature. The fair value of long-term 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). 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, 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.
Note 3—Acquisition
On April 30, 2018 (the Acquisition Date), we completed the acquisition of substantially all of Avanos Medical, Inc.'s (Avanos, previously Halyard Health, Inc.) Surgical and Infection Prevention (S&IP) business, the name “Halyard Health” (and all variations of that name and related intellectual property rights) and its information technology (IT) systems in exchange for $758 million, net of cash acquired. The Halyard business is a leading global provider of medical supplies and solutions for the

8


Table of Contents

prevention of healthcare associated infections across acute care and non-acute care markets. This business is reported as part of the Global Products segment.
The following table presents the fair value of the assets acquired and liabilities assumed recognized as of the Acquisition Date. The fair value of intangibles from this acquisition was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs.
 
Preliminary Fair Value
Originally Estimated as of
Acquisition Date
(1)
 
Differences Between Prior and Current Period Fair Value
 
Fair Value as of Acquisition Date
Assets acquired:
 
 
 
 
 
Current assets
$
330,870

 
$

 
$
330,870

Goodwill
130,217

 
(17,844
)
 
112,373

Intangible assets
191,230

 
13,000

 
204,230

Other noncurrent assets
218,387

 
5,616

 
224,003

Total assets
870,704

 
772

 
871,476

Liabilities assumed:
 
 
 
 
 
Current liabilities
92,438

 
(12,428
)
 
80,010

Noncurrent liabilities
20,217

 
13,200

 
33,417

Total liabilities
112,655

 
772

 
113,427

Fair value of net assets acquired, net of cash
$
758,049

 
$

 
$
758,049

(1) As previously reported in our 2018 Form 10-K.
We are amortizing the fair value of acquired intangible assets, primarily customer relationships, a trade name and other intellectual property, over their estimated weighted average useful lives of eight to 12 years.
Goodwill of $112 million, which we assigned to our Global Products segment, consists largely of expected opportunities to expand into new markets and further develop a presence in the medical products segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
The unaudited pro forma results of net revenue for the three and nine months ended September 30, 2018 as if Halyard was acquired on January 1, 2018 were $2,464,877 and $7,575,727, respectively. The pro forma results of net income (loss) and net income (loss) per common share have not been represented because the effects were not material to our historic consolidated financial statements. Accordingly, the pro forma results noted above are not necessarily indicative of the results that would have been if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future.
Note 4—Financing Receivables and Payables
At September 30, 2019 and December 31, 2018, we had financing receivables of $165.4 million and $183.3 million, respectively, and related payables of $93.5 million and $100.3 million, respectively, outstanding under our order-to-cash program, which were included in other current assets and other current liabilities, respectively, in the consolidated balance sheets.
Note 5—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, 2019:
 
Global Solutions
 
Global Products
 
Consolidated
Carrying amount of goodwill, December 31, 2018
$
283,905

 
$
130,217

 
$
414,122

Currency translation adjustments

 
1,787

 
1,787

Acquisition

 
(17,844
)
 
(17,844
)
Carrying amount of goodwill, September 30, 2019
$
283,905

 
$
114,160

 
$
398,065



9


Table of Contents

Intangible assets at September 30, 2019 and December 31, 2018, were as follows:
 
September 30, 2019
 
December 31, 2018
 
Customer
Relationships
 
Tradenames
 
Other
Intangibles
 
Customer
Relationships
 
Tradenames
 
Other
Intangibles
 
 
 
 
 
 
 
 
 
 
 
 
Gross intangible assets
$
283,912

 
$
90,000

 
$
45,600

 
$
267,510

 
$
97,000

 
$
42,930

Accumulated amortization
(96,873
)
 
(14,429
)
 
(8,336
)
 
(72,947
)
 
(8,544
)
 
(4,185
)
Net intangible assets
$
187,039

 
$
75,571

 
$
37,264

 
$
194,563

 
$
88,456

 
$
38,745

Weighted average useful life
10 years

 
11 years

 
8 years

 
10 years

 
11 years

 
8 years


At September 30, 2019, $91.7 million in net intangible assets were held in the Global Solutions segment and $208.1 million were held in the Global Products segment. Amortization expense for intangible assets was $10.9 million and $10.4 million for the three months ended September 30, 2019 and 2018 and $34.4 million and $26.1 million for the nine months ended September 30, 2019 and 2018, respectively.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $11.0 million for the remainder of 2019, $43.0 million for 2020, $41.3 million for 2021, $40.4 million for 2022, $39.2 million for 2023 and $35.3 million for 2024.
Note 6—Leases
We adopted ASU No. 2016-02, Leases (Topic 842), as of January 1, 2019. We elected to use the adoption date as our date of initial application and thus have not restated comparative prior periods. We elected the ‘package of practical expedients’, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also elected the practical expedient to not separate lease and non-lease components for all of our leases.
The adoption of the new standard resulted in the recording of operating lease assets and lease liabilities of approximately $197 million and $201 million, respectively, as of January 1, 2019. The standard did not materially impact our consolidated net income (loss) and had no impact on cash flows.
We enter into non-cancelable agreements to lease most of our office and warehouse facilities with remaining terms generally ranging from one to 20 years. Certain leases include renewal options, generally for one to five-year increments. The exercise of lease renewal options is at our sole discretion. We include options to renew (or terminate) in our lease term, and as part of our right-of-use assets and lease liabilities, when it is reasonably certain that we will exercise that option. We also lease some of our transportation and material handling equipment for terms generally ranging from three to 10 years. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The depreciable life of right-of-use assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. We use the implicit rate when readily determinable. The operating lease asset also includes adjustments for any lease payments made and lease incentives.

10


Table of Contents

The components of lease expense were as follows:
 
Classification
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease cost
Distribution, selling and administrative expenses
 
$
22,358

 
$
56,597

Finance lease cost:
 
 
 
 
 
Amortization of lease assets
Distribution, selling and administrative expenses
 
1,946

 
3,157

Interest on lease liabilities
Interest expense, net
 
625

 
1,258

Total finance lease cost
 
 
2,571

 
4,415

Short-term lease cost
Distribution, selling and administrative expenses
 
180

 
570

Variable lease cost
Distribution, selling and administrative expenses
 
5,363

 
14,844

Total lease cost
 
 
$
30,472

 
$
76,426


Variable lease cost consists primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.

Supplemental balance sheet information is as follows:
 
Classification
 
As of September 30, 2019
Assets:
 
 
 
Operating lease assets
Operating lease assets
 
$
234,853

Finance lease assets
Property and equipment, net
 
12,561

Total lease assets
 
 
$
247,414

Liabilities:
 
 
 
Current
 
 

Operating
Other current liabilities
 
$
41,206

Finance
Other current liabilities
 
2,729

Noncurrent
 
 
 
Operating
Operating lease liabilities, excluding current portion
 
198,858

Finance
Long-term debt, excluding current portion
 
15,190

Total lease liabilities
 
 
$
257,983



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Table of Contents

Other information related to leases was as follows:
 
Nine Months Ended September 30, 2019
 
Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating and finance leases
$
56,576

 
Financing cash flows from finance leases
$
3,036

 
 
 
 
Right-of-use assets obtained in exchange for new operating and finance lease liabilities
$
69,171

 
 
 
 
Weighted average remaining lease term (years)
 
 
Operating leases
6.5

 
Finance leases
8.0

 
 
 
 
Weighted average discount rate
 
 
Operating leases
11.8
%
 
Finance leases
9.9
%
 

Maturities of lease liabilities as of September 30, 2019 were as follows:
 
Operating Leases
 
Finance Leases
 
Total
2019 (remainder)
$
11,045

 
$
1,276

 
$
12,321

2020
72,839

 
3,832

 
76,671

2021
64,396

 
2,972

 
67,368

2022
46,674

 
2,722

 
49,396

2023
36,122

 
2,443

 
38,565

Thereafter
121,248

 
13,058

 
134,306

Total lease payments
352,324

 
26,303

 
378,627

Less: Interest
(112,260
)
 
(8,384
)
 
(120,644
)
Present value of lease liabilities
$
240,064

 
$
17,919

 
$
257,983


At December 31, 2018, future minimum annual payments under non-cancelable lease agreements with original terms in excess of one year, and including payments required under operating leases for facilities we have vacated, were as follows:
 
Total
2019
$
64,082

2020
53,138

2021
42,480

2022
26,445

2023
19,895

Thereafter
45,708

Total minimum payments
$
251,748


Rent expense for all operating leases for the year ended December 31, 2018 was $78.3 million.
Note 7—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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Table of Contents

We use a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in cash flows. We account for the designated foreign exchange forward contracts as cash flow hedges. These foreign exchange forward contracts generally have maturities up to 12 months and the counterparties to the transactions are typically large international financial institutions.
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 which fluctuates based on changes in our benchmark interest rates. In order to mitigate the risk of increases in benchmark rates, we entered into interest rate swaps during the third quarter of 2018 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. Our derivatives are over-the-counter instruments with liquid markets. All derivatives are carried at fair value in our consolidated balance sheets in other assets 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, 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
 
$
21,494

Foreign currency contracts
$
439

 
December 2019
 
Other assets, net
 
$
25

 
Other liabilities
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Economic (non-designated) hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
17,695

 
October 2019 - November 2019
 
Other assets, net
 
$
126

 
Other liabilities
 
$


The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2018:

 
 
 
 
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
 
$
6,875

Foreign currency contracts
$
25,592

 
January 2019 - December 2019
 
Other assets, net
 
$
20

 
Other liabilities
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Economic (non-designated) hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
32,683

 
January 2019 - April 2019
 
Other assets, net
 
$

 
Other liabilities
 
$
198



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Table of Contents

The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of income (loss) for the three and nine months ended September 30, 2019:
 
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 Income (Loss) 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
$
(25,938
)
$
(80,718
)
$
(632
)
$
(1,314
)
Foreign currency contracts
$
(28
)
$
608

Cost of goods sold
$
(2,036,530
)
$
(6,255,266
)
$
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, 2019, we recognized gains less than $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 on the foreign currency denominated asset or liability in acquisition-related and exit and realignment charges for contracts assumed with the Halyard acquisition and in other operating expense, net for all other foreign exchange contracts.
Note 8—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 logistics centers, administrative offices and warehouses. 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, 2019 and 2018 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Global Solutions segment
$
1,352

 
$
2,085

 
$
3,952

 
$
6,523

Global Products segment

 
(80
)
 
214

 
(108
)
Total exit and realignment charges
$
1,352

 
$
2,005

 
$
4,166

 
$
6,415






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The following table summarizes the activity related to exit and realignment cost and related accruals through September 30, 2019 and 2018:
 
 
Total (1)
Accrued exit and realignment costs, December 31, 2018
 
$
8,214

Provision for exit and realignment activities:
 


Severance
 
360

Information system restructuring costs
 
515

Other
 
83

Change in estimate
 
(127
)
Cash payments
 
(3,079
)
Accrued exit and realignment costs, March 31, 2019
 
5,966

Provision for exit and realignment activities:
 
 
Severance
 
1,008

Information system restructuring costs
 
948

Other
 
27

Cash payments
 
(2,569
)
Accrued exit and realignment costs, June 30, 2019
 
5,380

Provision for exit and realignment activities:
 
 
Severance
 
305

Information system restructuring costs
 
1,035

Other
 
11

Cash payments
 
(2,965
)
Accrued exit and realignment costs, September 30, 2019
 
$
3,766

 
 
 
Accrued exit and realignment costs, December 31, 2017
 
$
11,972

Provision for exit and realignment activities:
 


Severance
 
2,295

Information system restructuring costs
 
177

Other
 
230

Change in estimate
 
(23
)
Cash payments
 
(6,886
)
Accrued exit and realignment costs, March 31, 2018
 
7,765

Provision for exit and realignment activities:
 
 
Severance
 
(415
)
Information system restructuring costs