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 March 31, 2021
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
_______________________________________________________
(Exact name of Registrant as specified in its charter)
_______________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (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 | ||||||||||||
_________________________________________________________
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 | ☐ | ☒ | |||||||||
| 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 April 29, 2021, was 75,147,827 shares.
Owens & Minor, Inc. and Subsidiaries
Index
| Page | ||||||||
| 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 March 31, | |||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Net revenue | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross margin | |||||||||||
| Distribution, selling and administrative expenses | |||||||||||
| Acquisition-related and exit and realignment charges | |||||||||||
| Other operating income, net | ( | ( | |||||||||
| Operating income | |||||||||||
| Interest expense, net | |||||||||||
Loss on extinguishment of debt | |||||||||||
| Other expense, net | |||||||||||
| Income (loss) from continuing operations before income taxes | ( | ||||||||||
| Income tax provision (benefit) | ( | ||||||||||
| Income (loss) from continuing operations, net of tax | ( | ||||||||||
| Loss from discontinued operations, net of tax | ( | ||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Income (loss) from continuing operations per common share: basic and diluted | $ | $ | ( | ||||||||
| Loss from discontinued operations per common share: basic and diluted | ( | ||||||||||
| Net income (loss) per common share: basic and diluted | $ | $ | ( | ||||||||
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Currency translation adjustments | ( | ( | |||||||||
| Change in unrecognized net periodic pension costs | |||||||||||
| Net gain (loss) on derivative instruments | ( | ||||||||||
| Total other comprehensive income (loss), net of tax | ( | ||||||||||
| Comprehensive income (loss) | $ | $ | ( | ||||||||
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| March 31, | December 31, | ||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Merchandise inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and related liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, excluding current portion | |||||||||||
| Operating lease liabilities, excluding current portion | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
Common stock, par value $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
| Impairment charges | |||||||||||
Loss on extinguishment of debt | |||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Deferred income tax (benefit) expense | ( | ||||||||||
| Changes in operating lease right-of-use assets and lease liabilities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Merchandise inventories | ( | ||||||||||
| Accounts payable | |||||||||||
| Net change in other assets and liabilities | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Additions to property and equipment | ( | ( | |||||||||
| Additions to computer software | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Cash used for investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of debt | |||||||||||
| Repayments under revolving credit facility | ( | ( | |||||||||
| Repayments of debt | ( | ( | |||||||||
| Financing costs paid | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
Payment for termination of interest rate swaps | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Cash used for financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
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 ($ | Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net loss | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | |||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | ( | ( | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
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
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.
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.
| March 31, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in Other current assets | |||||||||||
| Restricted cash included in Other assets, net | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
Note 2—Fair Value
8
Note 3—Discontinued Operations
On June 18, 2020, we completed the 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 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 months ended March 31, 2020.
The following table summarizes the financial results of our discontinued operations for the three months ended March 31, 2020:
| Three Months Ended March 31, 2020 | |||||
| Net revenue | $ | ||||
| Cost of goods sold | |||||
| Gross margin | |||||
| Distribution, selling, and administrative expenses | |||||
| Asset impairment charges | |||||
| Acquisition-related and exit and realignment charges | |||||
| Other operating income, net | ( | ||||
| Operating income | |||||
| Interest expense, net | |||||
| Loss from discontinued operations before income taxes | ( | ||||
| Income tax provision from discontinued operations | |||||
| Loss from discontinued operations, net of tax | $ | ( | |||
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 three months ended March 31, 2020.
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 months ended March 31, 2021 and were immaterial for the period presented.
We had no
The following table provides operating and investing cash flow information for our discontinued operations:
| Three Months Ended March 31, 2020 | |||||
| Operating Activities: | |||||
| Depreciation and amortization | $ | ||||
| Impairment charges | |||||
| Investing Activities: | |||||
| Capital expenditures | |||||
9
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 March 31, 2021:
| Global Solutions | Global Products | Consolidated | |||||||||||||||
| Carrying amount of goodwill, December 31, 2020 | $ | $ | $ | ||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||
| Carrying amount of goodwill, March 31, 2021 | $ | $ | $ | ||||||||||||||
Intangible assets at March 31, 2021 and December 31, 2020 were as follows:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Customer Relationships | Tradenames | Other Intangibles | Customer Relationships | Tradenames | Other Intangibles | ||||||||||||||||||||||||||||||
| Gross intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Accumulated amortization | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Net intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Weighted average useful life | |||||||||||||||||||||||||||||||||||
At March 31, 2021, $59.1 million in net intangible assets were held in the Global Solutions segment and $173 million were held in the Global Products segment. Amortization expense for intangible assets was $10.0 million and $10.6 million for the three months ended March 31, 2021 and 2020.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $29.9 million for the remainder of 2021, $38.9 million for 2022, $38.7 million for 2023, $33.9 million for 2024, $28.2 million for 2025 and $26.8 million for 2026.
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 and divestiture related costs.
Exit and realignment charges by segment for the three months ended March 31, 2021 and 2020 were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Global Solutions segment | $ | $ | |||||||||
| Global Products segment | |||||||||||
| Total exit and realignment charges | $ | $ | |||||||||
10
The following table summarizes the activity related to exit and realignment cost accruals through March 31, 2021 and 2020:
`
| Total | ||||||||
| Accrued exit and realignment costs, December 31, 2020 | $ | |||||||
| Provision for exit and realignment activities: | ||||||||
| Information system restructuring costs | ||||||||
| Lease obligations | ||||||||
| Other | ||||||||
| Cash payments | ( | |||||||
| Accrued exit and realignment costs, March 31, 2021 | $ | |||||||
| Accrued exit and realignment costs, December 31, 2019 | $ | |||||||
| Provision for exit and realignment activities: | ||||||||
| Severance | ||||||||
| Information system restructuring costs | ||||||||
| Lease obligations | ||||||||
| Other | ||||||||
| Cash payments | ( | |||||||
| Accrued exit and realignment costs, March 31, 2020 | $ | |||||||
In addition to the exit and realignment accruals in the preceding table, we also incurred $3.8 million of costs that were expensed as incurred for the three months ended March 31, 2021, including $3.2 million related to an increase in reserves associated with certain retained assets of Fusion5, $0.5 million in impairment charges related to our client engagement center, and $0.1 million in other asset charges.
There were no acquisition-related charges included within acquisition-related and exit and realignment charges presented in our consolidated statements of operations for the three months ended March 31, 2021. Acquisition-related charges included within acquisition-related and exit and realignment charges presented in our consolidated statements of operations were $4.2 million for the three months ended March 31, 2020 and consisted primarily of transition costs for the Halyard acquisition.
Note 6—Debt
Debt consists of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Term Loan A-2 | |||||||||||||||||||||||
| Term Loan B | |||||||||||||||||||||||
| Revolver | |||||||||||||||||||||||
| Receivables Securitization Program | |||||||||||||||||||||||
| Finance leases and other | |||||||||||||||||||||||
| Total debt | |||||||||||||||||||||||
| Less current maturities | ( | ( | ( | ( | |||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | |||||||||||||||||||
11
We have $246 million, excluding debt issuance costs and deferred fees, of 4.375 % senior notes due in 2024 (the 2024 Notes), with interest payable semi-annually. 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 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 30 basis points.
In March 2021, we issued $500 million, excluding debt issuance costs and deferred fees, of 4.500 % senior unsecured notes due in 2029 (the 2029 Unsecured Notes), with interest payable semi-annually (the Notes Offering). The 2029 Unsecured Notes were sold at 100 % of the principal amount with an effective yield of 4.500 %. We used a portion of the net proceeds from the Notes Offering to repay our Term B Loan and borrowings under our revolving credit facility. In connection with these repayments, we recorded $15.3 million in write-offs of deferred financing costs and third party fees within loss on extinguishment of debt for the three months ended March 31, 2021. We may redeem all or part of the 2029 Unsecured Notes prior to March 31, 2024, at a price equal to 100 % of the principal amount of the 2029 Unsecured Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 10, 2021 (the Indenture). On or after March 31, 2024, we may redeem all or part of the 2029 Unsecured Notes at the applicable redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date. We may also redeem up to 40 % of the aggregate principal amount of the 2029 Unsecured Notes at any time prior to March 31, 2024, at a redemption price equal to 104.5 % with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
On March 10, 2021, we terminated our then existing credit agreement and all obligations thereunder were repaid. On that same date, we entered into a new credit agreement with Bank of America, N.A. and a syndicate of lenders (the Credit Agreement) with a $300 million revolving credit facility. The interest rate on our revolving credit facility is based on a spread over either the Eurocurrency Rate or the Base Rate (each as defined in the Credit Agreement). The Credit Agreement matures in March 2026.
At March 31, 2021 and December 31, 2020, we had borrowings of $6.7 million and $103 million and letters of credit of $11.4 million and $13.9 million outstanding under our revolving credit facilities. At March 31, 2021 and December 31, 2020, we had $282 million and $283 million available for borrowing. We also had letters of credit and bank guarantees outstanding for $1.9 million and $1.6 million as of March 31, 2021 and December 31, 2020, 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 entered into a Security and Pledge Agreement (the Security Agreement), dated March 10, 2021, pursuant to which we granted collateral on behalf of 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 and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. The Credit Agreement included additional collateral requirements of the Credit Parties, including an obligation to pledge our owned U.S. real estate and the remaining equity interests in foreign subsidiaries.
On March 10, 2021, we entered into an amendment to our accounts receivable securitization program (the Receivables Securitization Program). Pursuant to the amended Receivables Securitization Program, the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed $450 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) or successor rate. 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 in March 2024.
The Credit Agreement, Receivables Securitization Program, 2024 Notes and 2029 Unsecured 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 us 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 March 31, 2021.
As of March 31, 2021, scheduled future principal payments of debt, excluding finance leases and other, were $476 million in 2024, $6.7 million in 2026, and $500 million in 2029. Current maturities include $1.1 million in current portion of finance leases.
12
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 teammates.
The components of net periodic benefit cost for the three months ended March 31, 2021 and 2020 were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Service cost | $ | $ | |||||||||
| Interest cost | |||||||||||
| Recognized net actuarial loss | |||||||||||
| Net periodic benefit cost | $ | $ | |||||||||
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.
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 determine the fair value of our foreign currency derivatives 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 current assets and other current 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 March 31, 2021:
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Economic (non-designated) hedges | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | April 2021 | Other current assets | $ | Other current liabilities | $ | |||||||||||||||||||||||||||||
In March 2021, we terminated the remaining $300 million in notional value of interest rate swaps. In September 2020, we had previously terminated $150 million in notional value of interest rate swaps. The remaining balance of the fair value adjustments of $25.1 million, which related to these terminated interest rate swaps, within Accumulated other comprehensive loss was reclassified to Loss on extinguishment of debt within our Consolidated Statements of Operations for the three months ended March 31, 2021.
13
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | May 2022 and May 2025 | Other assets, net | $ | Other liabilities | $ | |||||||||||||||||||||||||||||
| Economic (non-designated) hedges | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | January 2021 | Other current assets | $ | Other current liabilities | $ | |||||||||||||||||||||||||||||
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three months ended March 31, 2021:
| Amount of Gain Recognized in Other Comprehensive Income | Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | |||||||||||||||||||||||
| Interest rate swaps | $ | Loss on extinguishment of debt | $ | ( | $ | ( | ||||||||||||||||||||
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three months ended March 31, 2020:
| Amount of Loss Recognized in Other Comprehensive Loss | Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | |||||||||||||||||||||||
| Interest rate swaps | $ | ( | Interest expense, net | $ | ( | $ | ( | |||||||||||||||||||
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the three months ended March 31, 2021 and 2020, we recognized losses of $1.0 million and $2.7 million 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, net for our foreign exchange contracts.
Note 9—Income Taxes
The effective tax rate was 24.4 % for the three months ended March 31, 2021, compared to a tax benefit of 48.9 % in the same quarter of 2020. The change in these rates resulted primarily from an income tax benefit recorded in the first quarter 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 benefit associated with the vesting of restricted stock recorded in the first quarter of 2021. The liability for unrecognized tax benefits was $21.0 million at March 31, 2021 and $20.8 million at December 31, 2020. Included in the liability at March 31, 2021 and December 31, 2020 were $2.7
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
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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 months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2021 | 2020 | |||||||||
| Weighted average shares outstanding - basic | |||||||||||
| Dilutive shares | |||||||||||
| Weighted average shares outstanding - diluted | |||||||||||
| Income (loss) from continuing operations | $ | $ | ( | ||||||||
| Basic and diluted per share | $ | $ | ( | ||||||||
| Loss from discontinued operations | $ | $ | ( | ||||||||
| Basic and diluted per share | $ | $ | ( | ||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Basic and diluted per share | $ | $ | ( | ||||||||
Note 11—Shareholders' Equity
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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 months ended March 31, 2021 and 2020:
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Income tax | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Income tax | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Accumulated other comprehensive loss, March 31, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | ( | ||||||||||||||||||||
| Income tax | |||||||||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Income tax | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
| Accumulated other comprehensive loss, March 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
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 and acquisition-related and exit and realignment charges 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.
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| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net revenue: | |||||||||||
| Global Solutions | $ | $ | |||||||||
| Global Products | |||||||||||
| Total segment net revenue | |||||||||||
| Inter-segment revenue | |||||||||||
| Global Products | ( | ( | |||||||||
| Total inter-segment revenue | ( | ( | |||||||||
| Consolidated net revenue | $ | $ | |||||||||
| Operating income: | |||||||||||
| Global Solutions | $ | $ | |||||||||
| Global Products | |||||||||||
| Inter-segment eliminations | ( | ||||||||||
| Intangible amortization | ( | ( | |||||||||
| Acquisition-related and exit and realignment charges | ( | ( | |||||||||
| Consolidated operating income | $ | $ | |||||||||
| Depreciation and amortization: | |||||||||||
| Global Solutions | $ | $ | |||||||||
| Global Products | |||||||||||
| Consolidated depreciation and amortization | $ | $ | |||||||||
| Capital expenditures: | |||||||||||
| Global Solutions | $ | $ | |||||||||
| Global Products | |||||||||||
| Discontinued operations | |||||||||||
| Consolidated capital expenditures | $ | $ | |||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Total assets: | |||||||||||
| Global Solutions | $ | $ | |||||||||
| Global Products | |||||||||||
| Segment assets | |||||||||||
| Cash and cash equivalents | |||||||||||
| Consolidated total assets | $ | $ | |||||||||
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| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net revenue: | |||||||||||
| United States | $ | $ | |||||||||
| International | |||||||||||
| Consolidated net revenue | $ | $ | |||||||||
Note 14—Recent Accounting Pronouncements
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. 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 adopted ASU No. 2019-12 effective beginning January 1, 2021. Its adoption did not have a material impact on our consolidated financial statements.
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. At the present time, none of our lenders have requested that we transition away from LIBOR for our borrowings that bear interest based on LIBOR and we will continue to evaluate the impact through transition.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements, to improve consistency by amending the FASB Accounting Standards Codification (the Codification) to include all disclosure guidance in the appropriate disclosure sections. This ASU also clarifies application of various provisions in the Codification by amending and adding new headings, cross referencing to other guidance, and refining or correcting terminology. The amendments in this ASU do not change GAAP and, therefore, are not expected to result in a significant change in practice. We adopted ASU No. 2020-10 effective beginning January 1, 2021. Its adoption did not have a material impact on our consolidated financial statements.
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, 2020. 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, 2020.
Overview
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 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.
As a result of the Divestiture, the results of operations from our Movianto business are reported as “Loss from discontinued operations, net of tax” for the three months ended March 31, 2020. 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 $0.98 for the three months ended March 31, 2021 as compared to $(0.15) for the three months ended March 31, 2020. Global Solutions segment operating income was $8.9 million for the three months ended March 31, 2021, compared to $7.7 million for the three months ended March 31, 2020. Global Products segment operating income was $164 million for the three months ended March 31, 2021, compared to $18.6 million
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for the three months ended March 31, 2020. The increase was a result of higher revenues and favorable product mix combined with continued operating efficiencies compared to the prior year.
COVID-19 Update
We are closely monitoring the impact of the 2019 novel coronavirus (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 for the three months ended March 31, 2021 of $2.3 billion includes an increase in demand for personal protective equipment (PPE), which was partially offset by a reduction in elective surgical procedures primarily due to the impact of COVID-19. 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 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 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.
In March 2020, under the Defense Production Act (DPA), we were awarded a contract with the U.S. Department of Health and Human Services to produce N-95 respirator masks in an effort to replenish the Strategic National Stockpile. In April 2020, also under the DPA, the U.S. Department of Defense initiated a technology investment agreement with us involving up to $30.0 million of anticipated funding of assets to expand capacity to supply N-95 respirator masks. Through March 31, 2021, approximately $27.8 million had been expended, substantially all of which had been reimbursed in accordance with this arrangement.
We are unable to predict the timing 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.
Results of Operations
Net revenue.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Global Solutions | $ | 1,849,509 | $ | 1,847,593 | $ | 1,916 | 0.1 | % | |||||||||||||||
| Global Products | 658,750 | 391,192 | 267,558 | 68.4 | % | ||||||||||||||||||
| Inter-segment | (181,725) | (116,092) | (65,633) | (56.5) | % | ||||||||||||||||||
| Net revenue | $ | 2,326,534 | $ | 2,122,693 | $ | 203,841 | 9.6 | % | |||||||||||||||
The change in net revenue for the three months ended March 31, 2021 reflected the impact of revenue growth in Global Products from increased demand for PPE, higher cost pass-through in gloves, along with strong performance in our Byram Patient Direct business. These were partially offset by a reduction in elective surgical procedures, primarily due to the impact of COVID-19, and one less selling day. Foreign currency translation had a favorable impact on net revenue of $9.3 million for the three months ended March 31, 2021 as compared to the prior year.
Cost of goods sold.
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| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Cost of goods sold | $ | 1,883,783 | $ | 1,854,134 | $ | 29,649 | 1.6 | % | |||||||||||||||
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.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Gross margin | $ | 442,751 | $ | 268,559 | $ | 174,192 | 64.9 | % | |||||||||||||||
| As a % of net revenue | 19.03 | % | 12.65 | % | |||||||||||||||||||
Gross margin increase in the three months ended March 31, 2021 was driven by sales growth, market dynamics including timing of cost changes, an overall improved sales mix, operating efficiencies primarily in Global Products and a favorable impact from foreign currency translation of $6.2 million.
Operating expenses.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Distribution, selling and administrative expenses | $ | 292,701 | $ | 254,048 | $ | 38,653 | 15.2 | % | |||||||||||||||
| As a % of net revenue | 12.58 | % | 11.97 | % | |||||||||||||||||||
| Acquisition-related and exit and realignment charges | $ | 5,963 | $ | 6,064 | $ | (101) | (1.7) | % | |||||||||||||||
| Other operating income, net | $ | (2,605) | $ | (2,309) | $ | (296) | 12.8 | % | |||||||||||||||
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 revenue growth, higher accrued incentive compensation, teammate benefits and charitable contributions, partially offset by operational efficiencies. DS&A expenses also included an unfavorable impact for foreign currency translation of $1.0 million for the three months ended March 31, 2021.
There were no acquisition-related charges for the three months ended March 31, 2021 compared to $4.2 million for the same period of 2020, which consisted primarily of transition costs for the Halyard acquisition. Exit and realignment charges were $6.0 million for the three months ended March 31, 2021 and consisted primarily of an increase in reserves associated with certain retained assets of Fusion5, IT restructuring charges and other costs related to the reorganization of the U.S. commercial, operations and executive teams. Exit and realignment charges were $1.8 million for the three months ended March 31, 2020 and consisted primarily of IT restructuring charges and other costs related to the reorganization of the U.S. commercial, operations and executive teams.
The change in other operating income, net was attributed primarily to lower foreign currency transaction gains offset by lower losses from the adjustments to fair value on our foreign currency contracts compared to prior year.
Interest expense, net.
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| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Interest expense, net | $ | 13,672 | $ | 23,342 | $ | (9,670) | (41.4) | % | |||||||||||||||
| Effective interest rate | 5.45 | % | 7.17 | % | |||||||||||||||||||
Interest expense, net and the effective interest rate for the three months ended March 31, 2021 decreased primarily due to a reduction of debt and lower interest rates. See Note 6 in Notes to Consolidated Financial Statements.
Loss on extinguishment of debt.
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | $ | % | |||||||||||||||||||
| Loss on extinguishment of debt | $ | 40,433 | $ | 4,127 | $ | 36,306 | 879.7 | % | |||||||||||||||
Loss on extinguishment