UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2019
OR
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o¨ | 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)
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Virginia | 54-1701843 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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9120 Lockwood Boulevard, Mechanicsville, Virginia | 23116 |
(Address of principal executive offices) | (Zip Code) |
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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
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.
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Large accelerated filer | x | Accelerated filer | o¨ |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o¨ |
Emerging growth company | o | | |
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. | o |
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 27, 2017,May 1, 2019, was 61,249,61362,935,985 shares.
Owens & Minor, Inc. and Subsidiaries
Index
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
Net revenue | $ | 2,333,961 |
| | $ | 2,415,601 |
| | $ | 6,928,441 |
| | $ | 7,355,069 |
|
Cost of goods sold | 2,032,019 |
| | 2,119,326 |
| | 6,071,787 |
| | 6,462,739 |
|
Gross margin | 301,942 |
| | 296,275 |
| | 856,654 |
|
| 892,330 |
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Distribution, selling, and administrative expenses | 261,045 |
| | 241,305 |
| | 735,353 |
| | 726,944 |
|
Acquisition-related and exit and realignment charges | 9,299 |
| | 2,739 |
| | 21,134 |
| | 19,974 |
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Other operating (income) expense, net | 1,927 |
| | (1,337 | ) | | 2,143 |
| | (5,179 | ) |
Operating earnings | 29,671 |
| | 53,568 |
| | 98,024 |
| | 150,591 |
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Interest expense, net | 8,737 |
| | 6,770 |
| | 22,218 |
| | 20,324 |
|
Income before income taxes | 20,934 |
| | 46,798 |
| | 75,806 |
| | 130,267 |
|
Income tax provision | 10,063 |
| | 16,967 |
| | 26,010 |
| | 48,585 |
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Net income | $ | 10,871 |
| | $ | 29,831 |
| | $ | 49,796 |
| | $ | 81,682 |
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Net income per common share: | | | | | | | |
Basic and diluted | $ | 0.18 |
| | $ | 0.48 |
| | $ | 0.82 |
| | $ | 1.32 |
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Cash dividends per common share | $ | 0.2575 |
| | $ | 0.255 |
| | $ | 0.7725 |
| | $ | 0.765 |
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| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands, except per share data) | | 2019 | | 2018 |
Net revenue | | $ | 2,461,388 |
| | $ | 2,372,579 |
|
Cost of goods sold | | 2,102,964 |
| | 2,047,892 |
|
Gross margin |
| 358,424 |
| | 324,687 |
|
Distribution, selling and administrative expenses | | 338,703 |
| | 284,361 |
|
Acquisition-related and exit and realignment charges | | 4,990 |
| | 14,760 |
|
Other operating expense, net | | 39 |
| | 1,349 |
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Operating income | | 14,692 |
| | 24,217 |
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Interest expense, net | | 29,101 |
| | 10,253 |
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Income (loss) before income taxes | | (14,409 | ) | | 13,964 |
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Income tax (benefit) provision | | (313 | ) | | 5,813 |
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Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
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| | | | |
Net income (loss) per common share: basic and diluted | | $ | (0.23 | ) | | $ | 0.13 |
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 10,871 |
| | $ | 29,831 |
| | $ | 49,796 |
| | $ | 81,682 |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Currency translation adjustments (net of income tax of $0 in 2017 and 2016) | 12,254 |
| | 1,401 |
| | 40,151 |
| | 2,443 |
|
Change in unrecognized net periodic pension costs (net of income tax of $220 and $665 in 2017 and $194 and $532 in 2016) | 236 |
| | 218 |
| | 702 |
| | 701 |
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Other (net of income tax of $0 in 2017 and 2016) | 94 |
| | 82 |
| | 288 |
| | 119 |
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Total other comprehensive income (loss), net of tax | 12,584 |
| | 1,701 |
| | 41,141 |
| | 3,263 |
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Comprehensive income | $ | 23,455 |
| | $ | 31,532 |
| | $ | 90,937 |
| | $ | 84,945 |
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| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2019 |
| 2018 |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
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Other comprehensive income (loss), net of tax: | | | | |
Currency translation adjustments (net of income tax of $0 in 2019 and 2018) | | (4,207 | ) | | 8,921 |
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Change in unrecognized net periodic pension costs (net of income tax of $69 in 2019 and $142 in 2018) | | 197 |
| | 380 |
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Net unrealized gain (loss) on derivative instruments and other (net of income tax of $658 in 2019 and $0 in 2018) | | (2,413 | ) | | 6 |
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Total other comprehensive income (loss), net of tax | | (6,423 | ) | | 9,307 |
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Comprehensive income (loss) | | $ | (20,519 | ) | | $ | 17,458 |
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Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| | | September 30, | | December 31, | March 31, | | December 31, |
(in thousands, except per share data) | 2017 | | 2016 | 2019 | | 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | $ | 98,415 |
| | $ | 185,488 |
| $ | 75,239 |
| | $ | 103,367 |
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Accounts receivable, net of allowances of $14,609 and $13,538 | 732,756 |
| | 606,084 |
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Accounts receivable, net of allowances of $21,572 and $19,618 | | 843,384 |
| | 823,418 |
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Merchandise inventories | 989,251 |
| | 916,311 |
| 1,210,558 |
| | 1,290,103 |
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Other current assets | 311,499 |
| | 254,156 |
| 336,065 |
| | 321,690 |
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Total current assets | 2,131,921 |
| | 1,962,039 |
| 2,465,246 |
| | 2,538,578 |
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Property and equipment, net of accumulated depreciation of $224,970 and $201,399 | 203,587 |
| | 191,718 |
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Goodwill, net | 690,230 |
| | 414,936 |
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Property and equipment, net of accumulated depreciation of $283,804 and $270,105 | | 386,135 |
| | 386,723 |
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Operating lease assets | | 197,200 |
| | — |
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Goodwill | | 413,235 |
| | 414,122 |
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Intangible assets, net | 231,886 |
| | 82,511 |
| 311,254 |
| | 321,764 |
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Other assets, net | 76,532 |
| | 66,548 |
| 109,294 |
| | 112,601 |
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Total assets | $ | 3,334,156 |
| | $ | 2,717,752 |
| $ | 3,882,364 |
| | $ | 3,773,788 |
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Liabilities and equity | | | | | |
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Current liabilities | | | | | |
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Accounts payable | $ | 875,630 |
| | $ | 750,750 |
| $ | 990,688 |
| | $ | 1,109,589 |
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Accrued payroll and related liabilities | 31,998 |
| | 45,051 |
| 40,999 |
| | 48,203 |
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Other current liabilities | 296,663 |
| | 238,837 |
| 377,989 |
| | 314,219 |
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Total current liabilities | 1,204,291 |
| | 1,034,638 |
| 1,409,676 |
| | 1,472,011 |
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Long-term debt, excluding current portion | 917,256 |
| | 564,583 |
| 1,685,135 |
| | 1,650,582 |
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Operating lease liabilities, excluding current portion | | 155,703 |
| | — |
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Deferred income taxes | 137,539 |
| | 90,383 |
| 42,144 |
| | 50,852 |
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Other liabilities | 71,286 |
| | 68,110 |
| 87,867 |
| | 81,924 |
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Total liabilities | 2,330,372 |
| | 1,757,714 |
| 3,380,525 |
| | 3,255,369 |
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Commitments and contingencies |
| |
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| |
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Equity | | | | | | |
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 61,249 shares and 61,031 shares | 122,499 |
| | 122,062 |
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Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 62,936 shares and 62,294 shares | | 125,872 |
| | 124,588 |
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Paid-in capital | 224,183 |
| | 219,955 |
| 241,547 |
| | 238,773 |
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Retained earnings | 683,444 |
| | 685,504 |
| 186,455 |
| | 200,670 |
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Accumulated other comprehensive loss | (26,342 | ) | | (67,483 | ) | (52,035 | ) | | (45,612 | ) |
Total equity | 1,003,784 |
| | 960,038 |
| 501,839 |
| | 518,419 |
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Total liabilities and equity | $ | 3,334,156 |
| | $ | 2,717,752 |
| $ | 3,882,364 |
| | $ | 3,773,788 |
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| | | Nine Months Ended September 30, | Three Months Ended March 31, |
(in thousands) | 2017 | | 2016 | 2019 | | 2018 |
Operating activities: | | | | | | |
Net income | $ | 49,796 |
| | $ | 81,682 |
| |
Adjustments to reconcile net income to cash provided by operating activities: | | | | |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
|
Adjustments to reconcile net income to cash (used for) provided by operating activities: | | | |
|
Depreciation and amortization | 41,060 |
| | 42,182 |
| 28,720 |
| | 17,911 |
|
Share-based compensation expense | 8,592 |
| | 8,934 |
| 4,505 |
| | 3,035 |
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Provision for losses on accounts receivable | 1,158 |
| | (216 | ) | 3,619 |
| | 1,073 |
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Deferred income tax (benefit) expense | (4,585 | ) | | (3,233 | ) | |
Deferred income tax benefit | | (8,613 | ) | | (1,482 | ) |
Changes in operating assets and liabilities: | | | | | |
|
Accounts receivable | (79,114 | ) | | 5,023 |
| (22,573 | ) | | (18,519 | ) |
Merchandise inventories | (56,134 | ) | | (5,066 | ) | 80,194 |
| | (30,556 | ) |
Accounts payable | 79,787 |
| | 58,742 |
| (120,480 | ) | | 9,478 |
|
Net change in other assets and liabilities | (40,634 | ) | | (44,903 | ) | (15,858 | ) | | 28,904 |
|
Other, net | 5,719 |
| | 1,366 |
| 3,678 |
| | 278 |
|
Cash provided by operating activities | 5,645 |
| | 144,511 |
| |
Cash (used for) provided by operating activities | | (60,904 | ) | | 18,273 |
|
Investing activities: | | | | | | |
Acquisition, net of cash acquired | (366,569 | ) | | — |
| |
Additions to property and equipment | (24,963 | ) | | (13,682 | ) | (11,674 | ) | | (7,074 | ) |
Additions to computer software and intangible assets | (12,826 | ) | | (7,081 | ) | (2,605 | ) | | (7,086 | ) |
Proceeds from sale of property and equipment | 780 |
| | 4,497 |
| 271 |
| | — |
|
Cash used for investing activities | (403,578 | ) | | (16,266 | ) | (14,008 | ) | | (14,160 | ) |
Financing activities: | | | | | | |
Change in bank overdraft | — |
| | 21,753 |
| |
Proceeds from debt issuance | 250,000 |
| | — |
| |
Borrowing under revolving credit facility | 117,200 |
| | — |
| |
Borrowings (repayments) under revolving credit facility | | 72,100 |
| | (300 | ) |
Repayments of debt | | (12,394 | ) | | (3,125 | ) |
Financing costs paid | (1,798 | ) | | — |
| (4,313 | ) | | — |
|
Cash dividends paid | (47,316 | ) | | (47,802 | ) | (4,764 | ) | | (16,074 | ) |
Repurchases of common stock | (5,000 | ) | | (48,654 | ) | |
Other, net | (7,363 | ) | | (8,118 | ) | (1,124 | ) | | (2,304 | ) |
Cash provided by (used for) financing activities | 305,723 |
| | (82,821 | ) | 49,505 |
| | (21,803 | ) |
Effect of exchange rate changes on cash and cash equivalents | 5,137 |
| | 6,652 |
| (2,721 | ) | | 800 |
|
Net increase (decrease) in cash and cash equivalents | (87,073 | ) | | 52,076 |
| |
Net decrease in cash and cash equivalents | | (28,128 | ) | | (16,890 | ) |
Cash and cash equivalents at beginning of period | 185,488 |
| | 161,020 |
| 103,367 |
| | 104,522 |
|
Cash and cash equivalents at end of period | $ | 98,415 |
| | $ | 213,096 |
| $ | 75,239 |
| | $ | 87,632 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Income taxes paid, net | $ | 26,917 |
| | $ | 57,996 |
| |
Income taxes paid, net of refunds | | $ | (12,388 | ) | | $ | 1,197 |
|
Interest paid | $ | 19,951 |
| | $ | 20,023 |
| $ | 24,504 |
| | $ | 9,661 |
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
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| | | | | | | | | | | | | | | | | | | | | | |
| |
(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, 2015 | 62,803 |
| | $ | 125,606 |
| | $ | 211,943 |
| | $ | 706,866 |
| | $ | (51,825 | ) | | $ | 992,590 |
|
Net income | | | | | | | 81,682 |
| | | | 81,682 |
|
Other comprehensive loss | | | | | | | | | 3,263 |
| | 3,263 |
|
Dividends declared ($0.765 per share) | | | | | | | (47,671 | ) | | | | (47,671 | ) |
Shares repurchased and retired | (1,378 | ) | | (2,757 | ) | | | | (45,896 | ) | | | | (48,653 | ) |
Share-based compensation expense, exercises and other | 274 |
| | 549 |
| | 4,923 |
| | | | | | 5,472 |
|
Balance September 30, 2016 | 61,699 |
| | $ | 123,398 |
| | $ | 216,866 |
| | $ | 694,981 |
| | $ | (48,562 | ) | | $ | 986,683 |
|
| | | | | | | | | | | |
Balance December 31, 2016 | 61,031 |
| | $ | 122,062 |
| | $ | 219,955 |
| | $ | 685,504 |
| | $ | (67,483 | ) | | $ | 960,038 |
|
Net income | | | | | | | 49,796 |
| | | | 49,796 |
|
Other comprehensive income | | | | | | | | | 41,141 |
| | 41,141 |
|
Dividends declared ($0.7725 per share) | | | | | | | (47,169 | ) | | | | (47,169 | ) |
Shares repurchased and retired | (155 | ) | | (310 | ) | | | | (4,687 | ) | | | | (4,997 | ) |
Share-based compensation expense, exercises and other | 373 |
| | 747 |
| | 4,228 |
| | | | | | 4,975 |
|
Balance September 30, 2017 | 61,249 |
| | $ | 122,499 |
| | $ | 224,183 |
| | $ | 683,444 |
| | $ | (26,342 | ) | | $ | 1,003,784 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
(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, 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 |
|
| | | | | | | | | | | |
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 |
|
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, unless otherwise indicated)
Note 1—BasisSummary of Presentation and Use of EstimatesSignificant 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 results of operations for interim periods are not necessarily indicative of the results expected for the full year. The Clinical & Procedural Solutions (CPS) business segment has been renamed "Proprietary Products" effective January 1, 2017. Byram Healthcare (Byram), acquired on August 1, 2017, is included in the Domestic segment. There have been no other changes to the segment composition or our method of measuring segment operating earnings.
Reclassifications
Certain prior year amounts have been reclassified to conform to 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.
See Note 15 for disaggregation of revenue by segment and geography as we believe that best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.
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 nature of these instruments. 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). We determine theThe fair value of our derivatives, if any,interest rate swaps and foreign currency contracts is determined based on estimated amounts that would be received or paid to terminate the contracts atpresent value of expected future cash flows considering the reporting date based on current market prices for applicable currencies. See Note 8risks involved, including non-performance risk, and using discount rates appropriate for the fairrespective maturities. Observable Level 2 inputs are used to determine the present value of long-term debt.expected future cash flows.
Note 3—AcquisitionAcquisitions
On August 1, 2017,April 30, 2018 (the Closing Date), we completed the acquisition of Byram Healthcare, a leading domestic distributorsubstantially all of reimbursable medical supplies sold directly to patientsAvanos Medical, Inc.'s (Avanos, previously Halyard Health, Inc.) Surgical and home health agencies.
The consideration was $367Infection 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, whichacquired. The Halyard business is subject to final working capital adjustments witha leading global provider of medical supplies and solutions for the seller. The purchase price was allocated on a preliminary basis to the underlying assets acquiredprevention of healthcare associated infections across acute care and liabilities assumed based upon our current estimate of their fair values at the date of acquisition. The purchase price exceeded the preliminary estimated fair valuenon-acute care markets. This business is reported as part of the net tangible and identifiable intangible assets by $263 million, which was allocated to goodwill. Global Products segment.
The following table presents the preliminary estimated 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. The allocation of purchase price to assets and liabilities acquired is not yet complete.complete, as valuations of certain tangible and intangible assets are still in process.
| | | Preliminary Fair Value Estimated as of Acquisition Date | Preliminary Fair Value Originally Estimated as of Acquisition Date (1) | | Differences Between Prior and Current Period Preliminary Fair Value | | Fair Value Estimated as of Acquisition Date |
Assets acquired: | | | | | | |
Current assets | $ | 62,902 |
| $ | 330,870 |
| | $ | — |
| | $ | 330,870 |
|
Goodwill | 263,155 |
| 130,364 |
| | — |
| | 130,364 |
|
Intangible assets | 156,000 |
| 191,230 |
| | — |
| | 191,230 |
|
Noncurrent assets | 3,615 |
| |
Other noncurrent assets | | 218,240 |
| | — |
| | 218,240 |
|
Total assets | 485,672 |
| 870,704 |
| | — |
| | 870,704 |
|
Liabilities assumed: | | | | | | |
Current liabilities | 72,397 |
| 92,438 |
| | — |
| | 92,438 |
|
Noncurrent liabilities | 46,706 |
| 20,217 |
| | — |
| | 20,217 |
|
Total liabilities | 119,103 |
| 112,655 |
| | — |
| | 112,655 |
|
Fair value of net assets acquired, net of cash | $ | 366,569 |
| $ | 758,049 |
| | $ | — |
| | $ | 758,049 |
|
(1) As previously reported in our 2018 Form 10-K.
We are amortizing the preliminary fair value of acquired intangible assets, primarily customer relationships, a trade name and a tradename,other intellectual property, over their estimated remaining weighted average useful lives of 10eight to 12 years.
Goodwill of $263$130 million, which we assigned to our DomesticGlobal Products segment, consists largely of expected opportunities to expand into new markets and further develop a presence in the non-acute market with direct to patient distribution capabilities.medical products segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
ProThe unaudited pro forma results of operationsnet revenue for Byram hasthe period ended March 31, 2018 as if Halyard was acquired on January 1, 2018 were $2,582,579. The pro forma results of net income (loss) and net income (loss) per common share have not been presentedrepresented because the effects on revenue and net income were not material to our historic consolidated financial statements.
Acquisition-related expenses 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 current year consisted primarily of transaction costs incurred to perform due diligence and to analyze, negotiate and consummate the Byram acquisition, and costs to transition the acquired operations. We recognized pre-tax acquisition-related expenses of $3.1 million in 2017 related to these activities.future.
Note 4—Financing Receivables and Payables
At September 30, 2017March 31, 2019 and December 31, 2016,2018, we had financing receivables of $176.9$209.7 million and $156.5$183.3 million, respectively, and related payables of $105.5$100.5 million and $110.0$100.3 million, respectively, outstanding under our order-to-cash program, and product financing arrangements, 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, 2017:March 31, 2019:
|
| | | | | | | | | | | | | | | |
| Domestic | | International | | Proprietary Products | | Consolidated |
Carrying amount of goodwill, December 31, 2016 | $ | 180,006 |
| | $ | 19,391 |
| | $ | 215,539 |
| | $ | 414,936 |
|
Acquisition (See Note 3) | 263,155 |
| | — |
| | — |
| | 263,155 |
|
Currency translation adjustments | — |
| | 10,001 |
| | 2,138 |
| | 12,139 |
|
Carrying amount of goodwill, September 30, 2017 | $ | 443,161 |
| | $ | 29,392 |
| | $ | 217,677 |
| | $ | 690,230 |
|
|
| | | | | | | | | | | |
| Global Solutions | | Global Products | | Consolidated |
Carrying amount of goodwill, December 31, 2018 | $ | 283,905 |
| | $ | 130,217 |
| | $ | 414,122 |
|
Currency translation adjustments | — |
| | (887 | ) | | (887 | ) |
Carrying amount of goodwill, March 31, 2019 | $ | 283,905 |
| | $ | 129,330 |
| | $ | 413,235 |
|
Intangible assets at September 30, 2017,March 31, 2019 and December 31, 2016,2018, were as follows:
| | | September 30, 2017 | | December 31, 2016 | March 31, 2019 | | December 31, 2018 |
| Customer Relationships | | Other Intangibles | | Customer Relationships | | Other Intangibles | Customer Relationships | | Tradenames | | Other Intangibles | | Customer Relationships | | Tradenames | | Other Intangibles |
| | | | |
| | | | | | | | | | | | | |
Gross intangible assets | $ | 241,444 |
| | $ | 41,483 |
| | $ | 118,223 |
| | $ | 4,045 |
| $ | 267,732 |
| | $ | 97,000 |
| | $ | 42,724 |
| | $ | 267,510 |
| | $ | 97,000 |
| | $ | 42,930 |
|
Accumulated amortization | (48,757 | ) | | (2,284 | ) | | (38,429 | ) | | (1,328 | ) | (79,999 | ) | | (10,779 | ) | | (5,424 | ) | | (72,947 | ) | | (8,544 | ) | | (4,185 | ) |
Net intangible assets | $ | 192,687 |
| | $ | 39,199 |
| | $ | 79,794 |
| | $ | 2,717 |
| $ | 187,733 |
| | $ | 86,221 |
| | $ | 37,300 |
| | $ | 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, 2017, $163.5March 31, 2019, $102.0 million in net intangible assets were held in the DomesticGlobal Solutions segment $10.2and $209.3 million were held in the International segment and $58.2 million were held in the ProprietaryGlobal Products segment. Amortization expense for intangible assets was $5.1$10.4 million and $2.2$6.4 million for the three months ended September 30, 2017March 31, 2019 and 2016 and $9.7 million and $6.6 million for the nine months ended September 30, 2017 and 2016.2018, respectively.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $11.6$31.2 million for the remainder of 2017, $24.6 million for 2018, $24.7 million for 2019, $24.7$40.7 million for 2020, $24.4$39.0 million for 2021, and $23.5$38.1 million for 2022.2022, $36.9 million for 2023 and $31.6 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. See Note 17 for additional information, including as it relates to the practical expedients.
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 five-year increments. The exercise of lease renewal options is at our sole discretion. Our lease terms may include those options to extend or terminate the lease 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 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. We use the implicit rate when readily determinable. The operating lease asset also includes any lease payments made and excludes lease incentives.
The components of lease expense were as follows:
|
| | | | | |
| Classification | | Three months ended March 31, 2019 |
Operating lease cost (1) | Distribution, selling and administrative expenses | | $ | 17,437 |
|
Finance lease cost: | | | |
Amortization of lease assets | Distribution, selling and administrative expenses | | 756 |
|
Interest on lease liabilities | Interest expense, net | | 334 |
|
Total finance lease cost | | | 1,090 |
|
Total lease cost | | | $ | 18,527 |
|
(1)Includes short-term lease and variable lease costs, which are immaterial.
Supplemental balance sheet information is as follows:
|
| | | | | |
| Classification | | As of March 31, 2019 |
Assets: | | | |
Operating lease assets | Operating lease assets | | $ | 197,200 |
|
Finance lease assets | Property and equipment, net | | 10,921 |
|
Total lease assets | | | $ | 208,121 |
|
Liabilities: | | | |
Current | | |
|
Operating | Other current liabilities | | $ | 44,876 |
|
Finance | Other current liabilities | | 2,365 |
|
Noncurrent | | | |
Operating | Operating lease liabilities, excluding current portion | | 155,703 |
|
Finance | Long-term debt, excluding current portion | | 12,820 |
|
Total lease liabilities | | | $ | 215,764 |
|
Other information related to leases was as follows:
|
| | | |
| Three months ended March 31, 2019 |
Supplemental cash flow information | |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating and finance leases | $ | 16,695 |
|
Financing cash flows from finance leases | $ | 674 |
|
| |
Right-of-use assets obtained in exchange for new operating and finance lease liabilities | $ | 5,635 |
|
| |
Weighted average remaining lease term (years) | |
Operating leases | 6.3 |
|
Finance leases | 8.3 |
|
| |
Weighted average discount rate | |
Operating leases | 12.3 | % |
Finance leases | 8.9 | % |
Maturities of lease liabilities as of March 31, 2019 were as follows:
|
| | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
2019 (remainder) | $ | 56,059 |
| | $ | 3,031 |
| | $ | 59,090 |
|
2020 | 57,703 |
| | 2,824 |
| | 60,527 |
|
2021 | 49,044 |
| | 2,268 |
| | 51,312 |
|
2022 | 30,612 |
| | 2,073 |
| | 32,685 |
|
2023 | 22,120 |
| | 1,952 |
| | 24,072 |
|
Thereafter | 83,122 |
| | 10,367 |
| | 93,489 |
|
Total lease payments | 298,660 |
| | 22,515 |
| | 321,175 |
|
Less: Interest | (98,081 | ) | | (7,330 | ) | | (105,411 | ) |
Present value of lease liabilities | $ | 200,579 |
| | $ | 15,185 |
| | $ | 215,764 |
|
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.
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 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.
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 record 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.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of March 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 2025 | | Other assets, net | | $ | — |
| | Other liabilities | | $ | 10,969 |
|
Foreign currency contracts | $ | 13,448 |
| | June 2019 to December 2019 | | Other assets, net | | $ | 317 |
| | Other liabilities | | $ | — |
|
| | | | | | | | | | | |
Economic (non-designated) hedges | | | | | | | | | | | |
Foreign currency contracts | $ | 10,610 |
| | April 2019 to May 2019 | | Other assets, net | | $ | 229 |
| | Other liabilities | | $ | 13 |
|
The following table summarizes the effect of cash flow hedge accounting on our consolidated statement of income for the period ended March 31, 2019:
|
| | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) | | Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income | | Total Amount of Income/(Expense) Line Items Presented in the Consolidated Statement of Income in Which the Effects are Recorded | | Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income |
Interest rate swaps | $ | (4,094 | ) | | Interest expense, net | | $ | (29,101 | ) | | $ | (321 | ) |
Foreign currency contracts | $ | 445 |
| | Cost of goods sold | | $ | (2,102,964 | ) | | $ | (257 | ) |
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the period ended March 31, 2019, we recognized a gain of $0.5 million associated with our economic (non-designated) foreign currency contracts.
We were not a party to any derivatives for the period ended March 31, 2018.
Note 8—Exit and Realignment ChargesCosts
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 in the United States and Europe. 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, 2017March 31, 2019 and 20162018 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Domestic segment | $ | 3,880 |
| | $ | 1,224 |
| | $ | 12,421 |
| | $ | 14,194 |
|
International segment | 574 |
| | 457 |
| | 1,406 |
| | 3,284 |
|
Proprietary Products segment | 592 |
| | 465 |
| | 1,015 |
| | 1,574 |
|
Total exit and realignment charges | $ | 5,046 |
| | $ | 2,146 |
| | $ | 14,842 |
| | $ | 19,052 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Global Solutions segment | $ | 824 |
| | $ | 2,708 |
|
Global Products segment | 7 |
| | (29 | ) |
Total exit and realignment charges | $ | 831 |
| | $ | 2,679 |
|
The following table summarizes the activity related to exit and realignment cost and related accruals through September 30, 2017March 31, 2019 and 2016:2018:
|
| | | | | | | | | | | |
| Lease Obligations | | Severance and Other | | Total |
Accrued exit and realignment costs, December 31, 2016 | $ | — |
| | $ | 2,238 |
| | $ | 2,238 |
|
Provision for exit and realignment activities | — |
| | 3,211 |
| | 3,211 |
|
Change in estimate | — |
| | (304 | ) | | (304 | ) |
Cash payments | — |
| | (3,034 | ) | | (3,034 | ) |
Accrued exit and realignment costs, March 31, 2017 | — |
| | 2,111 |
| | 2,111 |
|
Provision for exit and realignment activities | — |
| | 1,382 |
| | 1,382 |
|
Change in estimate | — |
| | (18 | ) | | (18 | ) |
Cash payments | — |
| | (667 | ) | | (667 | ) |
Accrued exit and realignment costs, June 30, 2017 | — |
| | 2,808 |
| | 2,808 |
|
Provision for exit and realignment activities | — |
| | 3,156 |
| | 3,156 |
|
Cash payments | — |
| | (423 | ) | | (423 | ) |
Accrued exit and realignment costs, September 30, 2017 | $ | — |
| | $ | 5,541 |
| | $ | 5,541 |
|
| | | | | |
Accrued exit and realignment costs, December 31, 2015 | $ | 486 |
| | $ | 1,840 |
| | $ | 2,326 |
|
Provision for exit and realignment activities | — |
| | 9,895 |
| | 9,895 |
|
Cash payments, net of sublease income | (486 | ) | | (1,287 | ) | | (1,773 | ) |
Accrued exit and realignment costs, March 31, 2016 | — |
| | 10,448 |
| | 10,448 |
|
Provision for exit and realignment activities | — |
| | 1,254 |
| | 1,254 |
|
Cash payments, net of sublease income | — |
| | (7,087 | ) | | (7,087 | ) |
Accrued exit and realignment costs, June 30, 2016 | — |
| | 4,615 |
| | 4,615 |
|
Provision for exit and realignment activities | — |
| | 725 |
| | 725 |
|
Change in Estimate | — |
| | (268 | ) | | (268 | ) |
Cash payments, net of sublease income | — |
| | (2,066 | ) | | (2,066 | ) |
Accrued exit and realignment costs, September 30, 2016 | $ | — |
| | $ | 3,006 |
| | $ | 3,006 |
|
|
| | | | |
| | 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 |
|
| | |
| | |
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 |
|
In addition to the(1)The accrued exit and realignment accruals in the preceding table, we also incurred $1.9 million of costs that were expensed as incurred for the three months ended September 30, 2017, including $1.7 million inat March 31, 2019 and 2018 related primarily to accrued information system restructuring costs and $0.2 million in other costs. For the nine months ended September 30, 2017, we recognized $7.4 million of costs that were expensed as incurred, including $4.5 million in asset write-downs, $1.9 million in information system restructuring costs and $1.0 million in other costs.accrued severance.
We incurred $1.7 million of costs that were expensed as incurred for the three months ended September 30, 2016, including $0.7 million in other facility costs, $0.5 million in labor costs, $0.4 million in information systems costs, and $0.1 million in other costs. For the nine months ended September 30, 2016, we recognized $7.4 million of costs that were expensed as incurred, including $3.6 million in consulting costs, $1.8 million in information system costs, $0.7 million in other facility costs, $0.5 million in labor costs, and $0.8 million in other costs.
Note 7—9—Retirement Plans
We have a noncontributory, unfunded retirement plan for certain officers and other key employeesretirees 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, which are included in distribution, selling and administrative expenses, for the three and nine months ended September 30, 2017March 31, 2019 and 2016,2018, were as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Service cost | $ | 26 |
| | $ | 27 |
| | $ | 53 |
| | $ | 70 |
| $ | 374 |
| | $ | 19 |
|
Interest cost | 474 |
| | 508 |
| | 1,422 |
| | 1,523 |
| 600 |
| | 419 |
|
Recognized net actuarial loss | 456 |
| | 412 |
| | 1,367 |
| | 1,236 |
| 260 |
| | 522 |
|
Net periodic benefit cost | $ | 956 |
| | $ | 947 |
| | $ | 2,842 |
| | $ | 2,829 |
| $ | 1,234 |
| | $ | 960 |
|
Certain of our foreign subsidiaries have health and welfare plans covering substantially all of their respective employees. Our expense for these plans totaled $0.5$0.6 million and $0.4$0.5 million for the three months ended September 30, 2017March 31, 2019 and 2016 and $1.3 million for the nine months ended September 30, 2017 and 2016.2018, respectively.
Note 8—10—Debt
Debt consists of the following:
|
| | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
3.875% Senior Notes, $275 million par value, due September 2021 | $ | 273,684 |
| | $ | 219,307 |
| | $ | 273,577 |
| | $ | 207,001 |
|
4.375% Senior Notes, $275 million par value, due December 2024 | 273,079 |
| | 177,298 |
| | 272,972 |
| | 174,859 |
|
Term A Loans, due July 2022 | 409,212 |
| | 409,212 |
| | 422,422 |
| | 422,422 |
|
Term B Loan, due April 2025 | 482,201 |
| | 388,050 |
| | 483,327 |
| | 385,284 |
|
Revolver | 282,200 |
| | 282,200 |
| | 210,100 |
| | 210,100 |
|
Finance leases and other | 16,777 |
| | 16,777 |
| | 18,774 |
| | 18,774 |
|
Total debt | 1,737,153 |
| | 1,492,844 |
| | 1,681,172 |
| | 1,418,440 |
|
Less current maturities | (52,018 | ) | | (52,018 | ) | | (30,590 | ) | | (30,590 | ) |
Long-term debt | $ | 1,685,135 |
| | $ | 1,440,826 |
| | $ | 1,650,582 |
| | $ | 1,387,850 |
|
We have $275 million of 3.875% senior notes due 2021 (the “2021 Notes”) and $275 million of 4.375% senior notes due 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 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 Treasury Rate plus 30 basis points. As of September 30, 2017 and December 31, 2016, the estimated fair value of the 2021 Notes was $280.1 million and $274.5 million and the estimated fair value of the 2024 Notes was $276.9 million and $270.0 million, respectively.
On July 27, 2017, we entered into a new Credit Agreement replacing the Amended Credit Agreement. The new agreement provides(amended February 2019) with a borrowing capacity of $600$400 million and a $250 million term loan. We make principal payments under the term loan on a quarterly basis with the remaining outstanding principal due in five years. The revolving credit facility has a five-year maturity. The proceeds from the new borrowing were primarily used to fund the Byram acquisition which closed on August 1, 2017. Under the Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $200 million.loans. The interest rate on the Credit Agreement, which is subject to adjustment quarterly,our revolving credit facility and Term A loans is based on the London Interbank OfferedEurocurrency Rate, (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread)Consolidated Total Leverage Ratio as defined by the Credit Agreement. Our Term B loan accrues interest based on the Eurocurrency Rate, the Federal Funds Rate or the Prime Rate, plus interest rate margin of 3.50% per annum with respect to Base Rate Loans (as defined in the Credit Agreement), and 4.50% per annum with respect to Eurocurrency Rate Loans (as defined in the Credit Agreement). We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the facility. The terms of the Credit Agreement limit the amount of indebtedness that we may incur and requirerequires us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. BasedOur credit spread at March 31, 2019 was Eurocurrency Rate plus 3.5%.
We also have a Security and Pledge Agreement (the Security Agreement) pursuant to which we granted collateral on our leverage ratio at September 30, 2017,behalf of the interest rateholders of the 2021 Notes and the 2024 Notes and parties secured on 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 (limited, in the case of controlled foreign corporations, to a pledge of 65% of the voting capital stock of each first-tier foreign subsidiary of each Credit Party) and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. Our Credit Agreement has a “springing maturity date” with respect to the revolving loans and the Term A loans and the Term B loan, if as of the date that is 91 days prior to the maturity date of the Company’s 2021 Notes or the 2024 Notes, respectively, all outstanding amounts owing under the 2021 Notes or the 2024 Notes, respectively, have not been paid in full then the Termination Date (as defined in the Credit Agreement) of the revolving credit facility, Term A loans and Term B loan shall be the date that is LIBOR plus 1.375%.91 days prior to the maturity date of the 2021 Notes.
At September 30, 2017,March 31, 2019, we had borrowings of $117.2 million under the revolver and letters of credit of approximately $5.1$11.7 million outstanding under the Credit Agreement, leaving $477.7 million available for borrowing.Agreement. We also had a letterletters of credit and bank guarantees outstanding for $1.3$7.7 million as of September 30, 2017March 31, 2019 and $1.1 million at December 31, 2016,2018, respectively, which supports ourcertain facilities leased as well as other normal business activities in the United States and Europe.
The Credit Agreement and senior notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. We believe we were in compliance with our debt covenants at September 30, 2017.March 31, 2019.
As of March 31, 2019, scheduled future principal payments of debt were $37.2 million in 2019, $49.6 million in 2020, $324.7 million in 2021, $581.0 million in 2022, $5.0 million in 2023, and $748.8 million thereafter.
Note 9—Income Taxes
The effective tax rate was 48.1% and 34.3%2.2% for the three and nine months ended September 30, 2017,March 31, 2019, compared to 36.3% and 37.3%41.6% in the same periodsquarter of 2016.2018. The changesdecrease in the effective tax rate compared to 2016 resulted primarily from the mixture of income and losses in jurisdictions in which the company operates, including those of which require a change in income mix among different tax rate jurisdictionsfull valuation allowance, and the effect of certain acquisition-related costs which were not deductible for tax purposes offset on a year to date basis by the release of anincremental income tax valuation allowance in Europe for $3.4 million duringexpense associated with the second quartervesting of 2017.
restricted stock. The liability for unrecognized tax benefits was $13.3$11.2 million at September 30, 2017,March 31, 2019 and $10.7$9.6 million at December 31, 2016.2018. Included in the liability at September 30, 2017March 31, 2019 were $5.0$3.3 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Note 10—12—Net Income per Common Share
The following summarizes the calculation of net income per common share attributable to common shareholders for the three and nine months ended September 30, 2017March 31, 2019 and 2016.2018:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended March 31, |
(in thousands, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 |
Numerator: | | | | | | | | | | |
Net income | $ | 10,871 |
| | $ | 29,831 |
| | $ | 49,796 |
| | $ | 81,682 |
| |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
|
Less: income allocated to unvested restricted shares | (279 | ) | | (291 | ) | | (738 | ) | | (855 | ) | — |
| | (323 | ) |
Net income attributable to common shareholders - basic | 10,592 |
| | 29,540 |
| | 49,058 |
| | 80,827 |
| |
Add: undistributed income attributable to unvested restricted shares - basic | — |
| | 80 |
| | 16 |
| | 216 |
| |
Less: undistributed income attributable to unvested restricted shares - diluted | — |
| | (80 | ) | | (16 | ) | | (216 | ) | |
Net income attributable to common shareholders - diluted | $ | 10,592 |
| | $ | 29,540 |
| | $ | 49,058 |
| | $ | 80,827 |
| |
Net income (loss) attributable to common shareholders - basic and diluted | | $ | (14,096 | ) | | $ | 7,828 |
|
Denominator: | | | | | | | | | | |
Weighted average shares outstanding - basic and diluted | 59,849 |
| | 61,015 |
| | 60,010 |
| | 61,405 |
| 60,376 |
| | 59,969 |
|
Net income per share attributable to common shareholders: | | | | | | | | |
Net income (loss) per share attributable to common shareholders: | | | | |
Basic and diluted | $ | 0.18 |
| | $ | 0.48 |
| | $ | 0.82 |
| | $ | 1.32 |
| $ | (0.23 | ) | | $ | 0.13 |
|
Note 11—13—Shareholders’ Equity
Our Board of Directors has authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year3-year period, expiring in December 2019. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors and may be suspended or discontinued at any time. Purchases under the share repurchase program are made either pursuant to 10b5-1 plans entered into by the company from time to time and/or during the company’s scheduled quarterly trading windows for officers and directors. DuringOur Credit Agreement contains restrictions on the nine months ended September 30, 2017, we repurchased in open-market transactionsamount and retired approximately 0.2 milliontiming of share repurchase activity. This includes prohibiting share repurchases should a default under the Credit Agreement exist prior to or immediately after any share repurchases. We did not repurchase any shares of our common stock for an aggregate of $5.0 million, or an average price per share of $32.27.during the quarters ended March 31, 2019 and 2018. As of September 30, 2017,March 31, 2019, we have approximately $94.0 million in remaining authorization available under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.
Note 12—14—Accumulated Other Comprehensive Income (Loss)
The following table shows the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2017March 31, 2019 and 2016:2018:
|
| | | | | | | | | | | | | | | | |
| Retirement Plans | | Currency Translation Adjustments | | Other | | Total |
Accumulated other comprehensive income (loss), June 30, 2017 | $ | (10,743 | ) | | $ | (28,348 | ) | | $ | 165 |
| | $ | (38,926 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 12,254 |
| | 94 |
| | 12,348 |
|
Income tax | — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 12,254 |
| | 94 |
| | 12,348 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 456 |
| | — |
| | — |
| | 456 |
|
Income tax | (220 | ) | | — |
| | — |
| | (220 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 236 |
| — |
| — |
| | — |
| | 236 |
|
Other comprehensive income (loss) | 236 |
| | 12,254 |
| | 94 |
| | 12,584 |
|
Accumulated other comprehensive income (loss), September 30, 2017 | $ | (10,507 | ) | | $ | (16,094 | ) | | $ | 259 |
| | $ | (26,342 | ) |
| | | | | | | |
Accumulated other comprehensive income (loss), June 30, 2016 | $ | (9,999 | ) | | $ | (40,186 | ) | | $ | (78 | ) | | $ | (50,263 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 1,401 |
| | 82 |
| | 1,483 |
|
Income tax | — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 1,401 |
| | 82 |
| | 1,483 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 412 |
| | — |
| | — |
| | 412 |
|
Income tax | (194 | ) | | — |
| | — |
| | (194 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 218 |
| — |
| — |
| | — |
| | 218 |
|
Other comprehensive income (loss) | 218 |
| | 1,401 |
| | 82 |
| | 1,701 |
|
Accumulated other comprehensive income (loss), September 30, 2016 | $ | (9,781 | ) | | $ | (38,785 | ) | | $ | 4 |
| | $ | (48,562 | ) |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Retirement Plans | | Currency Translation Adjustments | | Derivatives and Other | | Total |
Accumulated other comprehensive income (loss), December 31, 2018 | $ | (8,146 | ) | | $ | (32,551 | ) | | $ | (4,915 | ) | | $ | (45,612 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | (4,207 | ) | | (3,649 | ) | | (7,856 | ) |
Income tax | — |
| | �� |
| | 808 |
| | 808 |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | (4,207 | ) | | (2,841 | ) | | (7,048 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | 266 |
| | — |
| | 578 |
| | 844 |
|
Income tax | (69 | ) | | — |
| | (150 | ) | | (219 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 197 |
| | — |
| | 428 |
| | 625 |
|
Other comprehensive income (loss) | 197 |
| | (4,207 | ) | | (2,413 | ) | | (6,423 | ) |
Accumulated other comprehensive income (loss), March 31, 2019 | $ | (7,949 | ) | | $ | (36,758 | ) | | $ | (7,328 | ) | | $ | (52,035 | ) |
| | | Retirement Plans | | Currency Translation Adjustments | | Other | | Total | Retirement Plans | | Currency Translation Adjustments | | Derivatives and Other | | Total |
Accumulated other comprehensive income (loss), December 31, 2016 | $ | (11,209 | ) | | $ | (56,245 | ) | | $ | (29 | ) | | $ | (67,483 | ) | |
Accumulated other comprehensive income (loss), December 31, 2017 | | $ | (12,066 | ) | | $ | (13,185 | ) | | $ | 167 |
| | $ | (25,084 | ) |
Other comprehensive income (loss) before reclassifications |
|
| | 40,151 |
| | 288 |
| | 40,439 |
| — |
| | 8,921 |
| | 6 |
| | 8,927 |
|
Income tax | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 40,151 |
| | 288 |
| | 40,439 |
| — |
| | 8,921 |
| | 6 |
| | 8,927 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 1,367 |
| | — |
| | — |
| | 1,367 |
| 522 |
| | — |
| |
|
| | 522 |
|
Income tax | (665 | ) | | — |
| | — |
| | (665 | ) | (142 | ) | | — |
| | — |
| | (142 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 702 |
| | — |
| | — |
| | 702 |
| 380 |
| | — |
| | — |
| | 380 |
|
Other comprehensive income (loss) | 702 |
| | 40,151 |
| | 288 |
| | 41,141 |
| 380 |
| | 8,921 |
| | 6 |
| | 9,307 |
|
Accumulated other comprehensive income (loss), September 30, 2017 | $ | (10,507 | ) | | $ | (16,094 | ) | | $ | 259 |
| | $ | (26,342 | ) | |
| | | | | | | | |
Accumulated other comprehensive income (loss), December 31, 2015 | $ | (10,482 | ) | | $ | (41,228 | ) | | $ | (115 | ) | | $ | (51,825 | ) | |
Other comprehensive income (loss) before reclassifications | — |
| | 2,443 |
| | 119 |
| | 2,562 |
| |
Income tax | — |
| | — |
| | — |
| | — |
| |
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 2,443 |
| | 119 |
| | 2,562 |
| |
Amounts reclassified from accumulated other comprehensive income (loss) | 1,233 |
| | — |
| | — |
| | 1,233 |
| |
Income tax | (532 | ) | | — |
| | — |
| | (532 | ) | |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 701 |
| | — |
| | — |
| | 701 |
| |
Other comprehensive income (loss) | 701 |
| | 2,443 |
| | 119 |
| | 3,263 |
| |
Accumulated other comprehensive income (loss), September 30, 2016 | $ | (9,781 | ) | | $ | (38,785 | ) | | $ | 4 |
| | $ | (48,562 | ) | |
Accumulated other comprehensive income (loss), March 31, 2018 | | $ | (11,686 | ) | | $ | (4,264 | ) | | $ | 173 |
| | $ | (15,777 | ) |
We include amounts reclassified out of accumulated other comprehensive income (loss) related to defined benefit pension plans as a component of net periodic pension cost recorded in distribution, selling and administrative expenses. For the three and nine months ended September 30, 2017,March 31, 2019 and 2018, we reclassified $0.3 million and $0.5 million, and $1.4 million of actuarial net losses. For the three and nine months ended September 30, 2016, we reclassified $0.4 million and $1.2 millionrespectively, of actuarial net losses.
Note 13—15—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 threetwo segments: Domestic, InternationalGlobal Solutions and ProprietaryGlobal Products. The DomesticGlobal Solutions segment includes our United States distribution, logistics and value-added services business. Byram, acquired on August 1, 2017, is included in the Domestic segment. The International segment consists of our European distribution, logistics and value-added services business. ProprietaryGlobal Products provides product-related solutions, includingmanufactures and sources medical surgical products through our production and procedural kitting and sourcing.operations. The Halyard business, acquired on April 30, 2018, is part of Global Products.
We evaluate the performance of our segments based on their operating earningsincome 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 orand not meaningful. We believe all inter-segment sales are at prices that approximate market.
The following tables present financial information by segment:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net revenue: | | | | | | | |
Segment net revenue | | | | | | | |
Domestic | $ | 2,194,143 |
| | $ | 2,287,233 |
| | $ | 6,518,571 |
| | $ | 6,954,687 |
|
International | 96,661 |
| | 83,751 |
| | 287,555 |
| | 255,861 |
|
Proprietary Products | 124,542 |
| | 132,705 |
| | 392,654 |
| | 409,022 |
|
Total segment net revenue | $ | 2,415,346 |
| | $ | 2,503,689 |
| | $ | 7,198,780 |
| | $ | 7,619,570 |
|
Inter-segment revenue |
| | | |
| |
|
Proprietary Products | (81,385 | ) | | (88,088 | ) | | (270,339 | ) | | (264,501 | ) |
Total inter-segment revenue | (81,385 | ) | | (88,088 | ) | | (270,339 | ) | | (264,501 | ) |
Consolidated net revenue | $ | 2,333,961 |
| | $ | 2,415,601 |
| | $ | 6,928,441 |
| | $ | 7,355,069 |
|
| | | | | | | |
Operating earnings (loss): | | | | | | | |
Domestic | $ | 36,056 |
| | $ | 41,034 |
| | $ | 102,812 |
| | $ | 126,202 |
|
International | (2,163 | ) | | 1,382 |
| | (754 | ) | | 3,402 |
|
Proprietary Products | 9,102 |
| | 14,340 |
| | 26,040 |
| | 41,866 |
|
Inter-segment eliminations | 416 |
| | (449 | ) | | (266 | ) | | (905 | ) |
Acquisition-related and exit and realignment charges | (9,299 | ) | | (2,739 | ) | | (21,134 | ) | | (19,974 | ) |
Other(1) | (4,441 | ) | | — |
| | (8,674 | ) | | — |
|
Consolidated operating earnings | $ | 29,671 |
| | $ | 53,568 |
| | $ | 98,024 |
| | $ | 150,591 |
|
| | | | | | | |
Depreciation and amortization: | | | | | | | |
Domestic | $ | 9,602 |
| | $ | 7,360 |
| | $ | 23,233 |
| | $ | 22,399 |
|
International | 4,304 |
| | 4,259 |
| | 12,072 |
| | 13,125 |
|
Proprietary Products | 1,947 |
| | 2,218 |
| | 5,755 |
| | 6,658 |
|
Consolidated depreciation and amortization | $ | 15,853 |
| | $ | 13,837 |
| | $ | 41,060 |
| | $ | 42,182 |
|
| | | | | | | |
Capital expenditures: | | | | | | | |
Domestic | $ | 9,572 |
| | $ | 3,071 |
| | $ | 23,376 |
| | $ | 10,274 |
|
International | 3,206 |
| | 3,223 |
| | 11,659 |
| | 8,053 |
|
Proprietary Products | 718 |
| | 1,009 |
| | 2,754 |
| | 2,436 |
|
Consolidated capital expenditures | $ | 13,496 |
| | $ | 7,303 |
| | $ | 37,789 |
| | $ | 20,763 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Total assets: | | | |
Domestic | $ | 2,416,079 |
| | $ | 1,778,481 |
|
International | 418,331 |
| | 352,898 |
|
Proprietary Products | 401,331 |
| | 400,885 |
|
Segment assets | 3,235,741 |
| | 2,532,264 |
|
Cash and cash equivalents | 98,415 |
| | 185,488 |
|
Consolidated total assets | $ | 3,334,156 |
| | $ | 2,717,752 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Net revenue: | | | |
Segment net revenue | | | |
Global Solutions | $ | 2,234,147 |
| | $ | 2,341,122 |
|
Global Products | 347,085 |
| | 121,287 |
|
Total segment net revenue | 2,581,232 |
| | 2,462,409 |
|
Inter-segment revenue | | | |
Global Products | (119,844 | ) | | (89,830 | ) |
Total inter-segment revenue | (119,844 | ) | | (89,830 | ) |
Consolidated net revenue | $ | 2,461,388 |
| | $ | 2,372,579 |
|
| | | |
Operating income (loss): | | | |
Global Solutions | $ | 21,071 |
| | $ | 36,759 |
|
Global Products | 7,724 |
| | 11,084 |
|
Inter-segment eliminations | 1,747 |
| | (242 | ) |
Intangible amortization | (10,361 | ) | | (6,407 | ) |
Acquisition-related and exit and realignment charges | (4,990 | ) | | (14,760 | ) |
Other (1) | (499 | ) | | (2,217 | ) |
Consolidated operating income | $ | 14,692 |
| | $ | 24,217 |
|
| | | |
Depreciation and amortization: | | | |
Global Solutions | $ | 16,113 |
| | $ | 15,781 |
|
Global Products | 12,607 |
| | 2,130 |
|
Consolidated depreciation and amortization | $ | 28,720 |
| | $ | 17,911 |
|
| | | |
Capital expenditures: | | | |
Global Solutions | $ | 11,376 |
| | $ | 13,602 |
|
Global Products | 2,903 |
| | 558 |
|
Consolidated capital expenditures | $ | 14,279 |
| | $ | 14,160 |
|
(1)Other consists of Software as a Service (SaaS) implementation costs associated with the upgrading of oursignificant global IT platforms in connection with the redesign of our global information system strategy.
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Total assets: | | | |
Global Solutions | $ | 2,673,148 |
| | $ | 2,618,759 |
|
Global Products | 1,133,977 |
| | 1,051,662 |
|
Segment assets | 3,807,125 |
| | 3,670,421 |
|
Cash and cash equivalents | 75,239 |
| | 103,367 |
|
Consolidated total assets | $ | 3,882,364 |
| | $ | 3,773,788 |
|
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 March 31, |
| 2019 | | 2018 |
Net revenue: | | | |
United States | $ | 2,303,913 |
| | $ | 2,252,634 |
|
International | 157,475 |
| | 119,945 |
|
Consolidated net revenue | $ | 2,461,388 |
| | $ | 2,372,579 |
|
Note 14—16—Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information for: Owens & Minor, Inc. (O&M); the guarantors of Owens & Minor, Inc.’s 2021 Notes and 2024 Notes, on a combined basis; and the non-guarantor subsidiaries of the 2021 Notes and 2024 Notes, on a combined basis. The guarantor subsidiaries are 100% owned by Owens & Minor, Inc. Separate financial statements of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several, and we believe the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries. |
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,113,450 |
| | $ | 264,765 |
| | $ | (44,254 | ) | | $ | 2,333,961 |
|
Cost of goods sold | — |
| | 1,919,049 |
| | 157,439 |
| | (44,469 | ) | | 2,032,019 |
|
Gross margin | — |
| | 194,401 |
| | 107,326 |
| | 215 |
| | 301,942 |
|
Distribution, selling and administrative expenses | (117 | ) | | 159,108 |
| | 102,054 |
| | — |
| | 261,045 |
|
Acquisition-related and exit and realignment charges | — |
| | 6,960 |
| | 2,339 |
| | — |
| | 9,299 |
|
Other operating (income) expense, net | — |
| | 448 |
| | 1,479 |
| | — |
| | 1,927 |
|
Operating earnings (loss) | 117 |
| | 27,885 |
| | 1,454 |
| | 215 |
| | 29,671 |
|
Interest expense (income), net | 7,018 |
| | (1,184 | ) | | 2,903 |
| | — |
| | 8,737 |
|
Income (loss) before income taxes | (6,901 | ) | | 29,069 |
| | (1,449 | ) | | 215 |
| | 20,934 |
|
Income tax (benefit) provision | — |
| | 7,881 |
| | 2,182 |
| | — |
| | 10,063 |
|
Equity in earnings of subsidiaries | 17,772 |
| | — |
| | — |
| | (17,772 | ) | | — |
|
Net income (loss) | 10,871 |
| | 21,188 |
| | (3,631 | ) | | (17,557 | ) | | 10,871 |
|
Other comprehensive income (loss) | 12,584 |
| | 330 |
| | 12,254 |
| | (12,584 | ) | | 12,584 |
|
Comprehensive income (loss) | $ | 23,455 |
| | $ | 21,518 |
| | $ | 8,623 |
| | $ | (30,141 | ) | | $ | 23,455 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,287,335 |
| | $ | 168,216 |
| | $ | (39,950 | ) | | $ | 2,415,601 |
|
Cost of goods sold | — |
| | 2,070,639 |
| | 89,192 |
| | (40,505 | ) | | 2,119,326 |
|
Gross margin | — |
| | 216,696 |
| | 79,024 |
| | 555 |
| | 296,275 |
|
Distribution, selling and administrative expenses | (52 | ) | | 169,451 |
| | 71,906 |
| | — |
| | 241,305 |
|
Acquisition-related and exit and realignment charges | — |
| | 2,237 |
| | 502 |
| | — |
| | 2,739 |
|
Other operating income, net | — |
| | (1,205 | ) | | (132 | ) | | — |
| | (1,337 | ) |
Operating earnings (loss) | 52 |
| | 46,213 |
| | 6,748 |
| | 555 |
| | 53,568 |
|
Interest expense (income), net | 7,403 |
| | (1,345 | ) | | 712 |
| | — |
| | 6,770 |
|
Income (loss) before income taxes | (7,351 | ) | | 47,558 |
| | 6,036 |
| | 555 |
| | 46,798 |
|
Income tax (benefit) provision | — |
| | 14,131 |
| | 2,836 |
| | — |
| | 16,967 |
|
Equity in earnings of subsidiaries | 37,182 |
| | — |
| | — |
| | (37,182 | ) | | — |
|
Net income (loss) | 29,831 |
| | 33,427 |
| | 3,200 |
| | (36,627 | ) | | 29,831 |
|
Other comprehensive income (loss) | 1,701 |
| | 299 |
| | 1,402 |
| | (1,701 | ) | | 1,701 |
|
Comprehensive income (loss) | $ | 31,532 |
| | $ | 33,726 |
| | $ | 4,602 |
| | $ | (38,328 | ) | | $ | 31,532 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 6,436,599 |
| | $ | 635,900 |
| | $ | (144,058 | ) | | $ | 6,928,441 |
|
Cost of goods sold | — |
| | 5,845,789 |
| | 369,596 |
| | (143,598 | ) | | 6,071,787 |
|
Gross margin | — |
| | 590,810 |
| | 266,304 |
| | (460 | ) | | 856,654 |
|
Distribution, selling and administrative expenses | 434 |
| | 480,765 |
| | 254,154 |
| | — |
| | 735,353 |
|
Acquisition-related and exit and realignment charges | — |
| | 17,084 |
| | 4,050 |
| | — |
| | 21,134 |
|
Other operating (income) expense, net | — |
| | 1,481 |
| | 662 |
| | — |
| | 2,143 |
|
Operating earnings (loss) | (434 | ) | | 91,480 |
| | 7,438 |
| | (460 | ) | | 98,024 |
|
Interest expense (income), net | 20,756 |
| | (2,777 | ) | | 4,239 |
| | — |
| | 22,218 |
|
Income (loss) before income taxes | (21,190 | ) | | 94,257 |
| | 3,199 |
| | (460 | ) | | 75,806 |
|
Income tax (benefit) provision | — |
| | 23,303 |
| | 2,707 |
| | — |
| | 26,010 |
|
Equity in earnings of subsidiaries | 70,986 |
| | — |
| | — |
| | (70,986 | ) | | — |
|
Net income (loss) | 49,796 |
| | 70,954 |
| | 492 |
| | (71,446 | ) | | 49,796 |
|
Other comprehensive income (loss) | 41,141 |
| | 990 |
| | 40,151 |
| | (41,141 | ) | | 41,141 |
|
Comprehensive income (loss) | $ | 90,937 |
| | $ | 71,944 |
| | $ | 40,643 |
| | $ | (112,587 | ) | | $ | 90,937 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 6,954,983 |
| | $ | 516,131 |
| | $ | (116,045 | ) | | $ | 7,355,069 |
|
Cost of goods sold | — |
| | 6,305,489 |
| | 273,927 |
| | (116,677 | ) | | 6,462,739 |
|
Gross margin | — |
| | 649,494 |
| | 242,204 |
| | 632 |
| | 892,330 |
|
Distribution, selling and administrative expenses | 838 |
| | 504,984 |
| | 221,122 |
| | — |
| | 726,944 |
|
Acquisition-related and exit and realignment charges | — |
| | 15,888 |
| | 4,086 |
| | — |
| | 19,974 |
|
Other operating income, net | — |
| | (3,952 | ) | | (1,227 | ) | | — |
| | (5,179 | ) |
Operating earnings (loss) | (838 | ) | | 132,574 |
| | 18,223 |
| | 632 |
| | 150,591 |
|
Interest expense (income), net | 21,134 |
| | (2,808 | ) | | 1,998 |
| | — |
| | 20,324 |
|
Income (loss) before income taxes | (21,972 | ) | | 135,382 |
| | 16,225 |
| | 632 |
| | 130,267 |
|
Income tax (benefit) provision | — |
| | 40,237 |
| | 8,348 |
| | — |
| | 48,585 |
|
Equity in earnings of subsidiaries | 103,654 |
| | — |
| | — |
| | (103,654 | ) | | — |
|
Net income (loss) | 81,682 |
| | 95,145 |
| | 7,877 |
| | (103,022 | ) | | 81,682 |
|
Other comprehensive income (loss) | 3,263 |
| | 821 |
| | 2,442 |
| | (3,263 | ) | | 3,263 |
|
Comprehensive income (loss) | $ | 84,945 |
| | $ | 95,966 |
| | $ | 10,319 |
| | $ | (106,285 | ) | | $ | 84,945 |
|
The prior period has been recasted for the change in guarantor structure as a result of the amended Credit Agreement.
|
| | | | | | | | | | | | | | | | | | | |
September 30, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated |
Balance Sheets | | | | | | | | | |
Assets | | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | $ | 11,456 |
| | $ | 1,145 |
| | $ | 85,814 |
| | $ | — |
| | $ | 98,415 |
|
Accounts receivable, net | 30,770 |
| | 595,202 |
| | 114,563 |
| | (7,779 | ) | | 732,756 |
|
Merchandise inventories | — |
| | 909,406 |
| | 82,065 |
| | (2,220 | ) | | 989,251 |
|
Other current assets | 193 |
| | 117,403 |
| | 193,903 |
| | — |
| | 311,499 |
|
Total current assets | 42,419 |
| | 1,623,156 |
| | 476,345 |
| | (9,999 | ) | | 2,131,921 |
|
Property and equipment, net | — |
| | 103,765 |
| | 99,822 |
| | — |
| | 203,587 |
|
Goodwill, net | — |
| | 180,006 |
| | 510,224 |
| | — |
| | 690,230 |
|
Intangible assets, net | — |
| | 10,100 |
| | 221,786 |
| | — |
| | 231,886 |
|
Due from O&M and subsidiaries | — |
| | 645,264 |
| | — |
| | (645,264 | ) | | — |
|
Advances to and investment in consolidated subsidiaries | 2,094,759 |
| | — |
| | — |
| | (2,094,759 | ) | | — |
|
Other assets, net | — |
| | 43,521 |
| | 33,011 |
| | — |
| | 76,532 |
|
Total assets | $ | 2,137,178 |
| | $ | 2,605,812 |
| | $ | 1,341,188 |
| | $ | (2,750,022 | ) | | $ | 3,334,156 |
|
Liabilities and equity | | | | | | | | | |
Current liabilities | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 768,780 |
| | $ | 114,644 |
| | $ | (7,794 | ) | | $ | 875,630 |
|
Accrued payroll and related liabilities | — |
| | 18,615 |
| | 13,383 |
| | — |
| | 31,998 |
|
Other current liabilities | 7,127 |
| | 110,580 |
| | 178,956 |
| | — |
| | 296,663 |
|
Total current liabilities | 7,127 |
| | 897,975 |
| | 306,983 |
| | (7,794 | ) | | 1,204,291 |
|
Long-term debt, excluding current portion | 545,830 |
| | 6,743 |
| | 364,683 |
| | — |
| | 917,256 |
|
Due to O&M and subsidiaries | 580,437 |
| | — |
| | 65,002 |
| | (645,439 | ) | | — |
|
Intercompany debt | — |
| | 138,890 |
| | — |
| | (138,890 | ) | | — |
|
Deferred income taxes | — |
| | 69,722 |
| | 67,817 |
| | — |
| | 137,539 |
|
Other liabilities | — |
| | 61,142 |
| | 10,144 |
| | — |
| | 71,286 |
|
Total liabilities | 1,133,394 |
| | 1,174,472 |
| | 814,629 |
| | (792,123 | ) | | 2,330,372 |
|
Equity | | | | | | | | | |
Common stock | 122,499 |
| | — |
| | — |
| | — |
| | 122,499 |
|
Paid-in capital | 224,183 |
| | 174,613 |
| | 583,872 |
| | (758,485 | ) | | 224,183 |
|
Retained earnings (deficit) | 683,444 |
| | 1,267,294 |
| | (41,539 | ) | | (1,225,755 | ) | | 683,444 |
|
Accumulated other comprehensive income (loss) | (26,342 | ) | | (10,567 | ) | | (15,774 | ) | | 26,341 |
| | (26,342 | ) |
Total equity | 1,003,784 |
| | 1,431,340 |
| | 526,559 |
| | (1,957,899 | ) | | 1,003,784 |
|
Total liabilities and equity | $ | 2,137,178 |
| | $ | 2,605,812 |
| | $ | 1,341,188 |
| | $ | (2,750,022 | ) | | $ | 3,334,156 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2019 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,371,809 |
| | $ | 337,876 |
| | $ | (248,297 | ) | | $ | 2,461,388 |
|
Cost of goods sold | — |
| | 2,101,290 |
| | 251,419 |
| | (249,745 | ) | | 2,102,964 |
|
Gross margin | — |
| | 270,519 |
| | 86,457 |
| | 1,448 |
| | 358,424 |
|
Distribution, selling and administrative expenses | — |
| | 231,591 |
| | 107,112 |
| | — |
| | 338,703 |
|
Acquisition-related and exit and realignment charges | — |
| | 4,721 |
| | 269 |
| | — |
| | 4,990 |
|
Other operating expense, net | — |
| | (426 | ) | | 465 |
| | — |
| | 39 |
|
Operating income | — |
| | 34,633 |
| | (21,389 | ) | | 1,448 |
| | 14,692 |
|
Interest expense, net | 7,488 |
| | 18,467 |
| | 3,146 |
| | — |
| | 29,101 |
|
Income (loss) before income taxes | (7,488 | ) | | 16,166 |
| | (24,535 | ) | | 1,448 |
| | (14,409 | ) |
Income tax (benefit) provision | (771 | ) | | (816 | ) | | 1,274 |
| | — |
| | (313 | ) |
Equity in earnings of subsidiaries | (7,379 | ) | | (957 | ) | | — |
| | 8,336 |
| | — |
|
Net income (loss) | (14,096 | ) | | 16,025 |
| | (25,809 | ) | | 9,784 |
| | (14,096 | ) |
Other comprehensive income (loss) | (6,423 | ) | | (3,393 | ) | | (4,157 | ) | | 7,550 |
| | (6,423 | ) |
Comprehensive income (loss) | $ | (20,519 | ) | | $ | 12,632 |
| | $ | (29,966 | ) | | $ | 17,334 |
| | $ | (20,519 | ) |
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2016 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Balance Sheets | | | | | | | | | |
Assets | | | | | | | | | |
Current assets | | | | | | | | | |
Cash and cash equivalents | $ | 38,015 |
| | $ | 61,266 |
| | $ | 86,207 |
| | $ | — |
| | $ | 185,488 |
|
Accounts receivable, net | — |
| | 526,170 |
| | 90,016 |
| | (10,102 | ) | | 606,084 |
|
Merchandise inventories | — |
| | 856,566 |
| | 61,505 |
| | (1,760 | ) | | 916,311 |
|
Other current assets | 106 |
| | 86,907 |
| | 167,143 |
| | — |
| | 254,156 |
|
Total current assets | 38,121 |
| | 1,530,909 |
| | 404,871 |
| | (11,862 | ) | | 1,962,039 |
|
Property and equipment, net | — |
| | 97,725 |
| | 93,993 |
| | — |
| | 191,718 |
|
Goodwill, net | — |
| | 180,006 |
| | 234,930 |
| | — |
| | 414,936 |
|
Intangible assets, net | — |
| | 11,655 |
| | 70,856 |
| | — |
| | 82,511 |
|
Due from O&M and subsidiaries | — |
| | 573,395 |
| | — |
| | (573,395 | ) | | — |
|
Advances to and investments in consolidated subsidiaries | 2,044,963 |
| | — |
| | — |
| | (2,044,963 | ) | | — |
|
Other assets, net | — |
| | 49,887 |
| | 16,661 |
| | — |
| | 66,548 |
|
Total assets | $ | 2,083,084 |
| | $ | 2,443,577 |
| | $ | 821,311 |
| | $ | (2,630,220 | ) | | $ | 2,717,752 |
|
Liabilities and equity | | | | | | | | | |
Current liabilities | | | | | | | | | |
Accounts payable | $ | — |
| | $ | 683,189 |
| | $ | 75,512 |
| | $ | (7,951 | ) | | $ | 750,750 |
|
Accrued payroll and related liabilities | — |
| | 32,814 |
| | 12,237 |
| | — |
| | 45,051 |
|
Other current liabilities | 7,106 |
| | 93,327 |
| | 138,404 |
| | — |
| | 238,837 |
|
Total current liabilities | 7,106 |
| | 809,330 |
| | 226,153 |
| | (7,951 | ) | | 1,034,638 |
|
Long-term debt, excluding current portion | 544,838 |
| | 3,219 |
| | 16,526 |
| | — |
| | 564,583 |
|
Due to O&M and subsidiaries | 571,102 |
| | — |
| | 48,044 |
| | (619,146 | ) | | — |
|
Intercompany debt | — |
| | 138,890 |
| | — |
| | (138,890 | ) | | — |
|
Deferred income taxes | — |
| | 70,280 |
| | 20,103 |
| | — |
| | 90,383 |
|
Other liabilities | — |
| | 60,578 |
| | 7,532 |
| | — |
| | 68,110 |
|
Total liabilities | 1,123,046 |
| | 1,082,297 |
| | 318,358 |
| | (765,987 | ) | | 1,757,714 |
|
Equity | | | | | | | | | — |
|
Common stock | 122,062 |
| | — |
| | — |
| | — |
| | 122,062 |
|
Paid-in capital | 219,955 |
| | 174,614 |
| | 583,872 |
| | (758,486 | ) | | 219,955 |
|
Retained earnings (deficit) | 685,504 |
| | 1,196,341 |
| | (42,032 | ) | | (1,154,309 | ) | | 685,504 |
|
Accumulated other comprehensive income (loss) | (67,483 | ) | | (9,675 | ) | | (38,887 | ) | | 48,562 |
| | (67,483 | ) |
Total equity | 960,038 |
| | 1,361,280 |
| | 502,953 |
| | (1,864,233 | ) | | 960,038 |
|
Total liabilities and equity | $ | 2,083,084 |
| | $ | 2,443,577 |
| | $ | 821,311 |
| | $ | (2,630,220 | ) | | $ | 2,717,752 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,228,490 |
| | $ | 183,637 |
| | $ | (39,548 | ) | | $ | 2,372,579 |
|
Cost of goods sold | — |
| | 1,994,151 |
| | 93,212 |
| | (39,471 | ) | | 2,047,892 |
|
Gross margin | — |
| | 234,339 |
| | 90,425 |
| | (77 | ) | | 324,687 |
|
Distribution, selling and administrative expenses | (179 | ) | | 196,369 |
| | 88,171 |
| | — |
| | 284,361 |
|
Acquisition-related and exit and realignment charges | — |
| | 13,815 |
| | 945 |
| | — |
| | 14,760 |
|
Other operating expense, net | — |
| | (583 | ) | | 1,932 |
| | — |
| | 1,349 |
|
Operating income | 179 |
| | 24,738 |
| | (623 | ) | | (77 | ) | | 24,217 |
|
Interest expense, net | 6,741 |
| | 1,991 |
| | 1,521 |
| | — |
| | 10,253 |
|
Income (loss) before income taxes | (6,562 | ) | | 22,747 |
| | (2,144 | ) | | (77 | ) | | 13,964 |
|
Income tax (benefit) provision | — |
| | 4,456 |
| | 1,357 |
| | — |
| | 5,813 |
|
Equity in earnings of subsidiaries | 14,713 |
| | 150 |
| | — |
| | (14,863 | ) | | — |
|
Net income (loss) | 8,151 |
| | 18,441 |
| | (3,501 | ) | | (14,940 | ) | | 8,151 |
|
Other comprehensive income (loss) | 9,307 |
| | 9,363 |
| | 8,921 |
| | (18,284 | ) | | 9,307 |
|
Comprehensive income (loss) | $ | 17,458 |
| | $ | 27,804 |
| | $ | 5,420 |
| | $ | (33,224 | ) | | $ | 17,458 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Cash Flows | | | | | | | | | |
Operating activities: | | | | | | | | | |
Net income (loss) | $ | 49,796 |
| | $ | 70,954 |
| | $ | 492 |
| | $ | (71,446 | ) | | $ | 49,796 |
|
Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | |
|
Equity in earnings of subsidiaries | (70,986 | ) | | — |
| | — |
| | 70,986 |
| | — |
|
Depreciation and amortization | — |
| | 23,281 |
| | 17,779 |
| | — |
| | 41,060 |
|
Share-based compensation expense | — |
| | 8,592 |
| | — |
| | — |
| | 8,592 |
|
Provision for losses on accounts receivable | — |
| | (377 | ) | | 1,535 |
| | — |
| | 1,158 |
|
Deferred income tax expense (benefit) | — |
| | (1,208 | ) | | (3,377 | ) | | — |
| | (4,585 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
|
Accounts receivable | — |
| | (68,655 | ) | | (8,047 | ) | | (2,412 | ) | | (79,114 | ) |
Merchandise inventories | — |
| | (52,840 | ) | | (3,753 | ) | | 459 |
| | (56,134 | ) |
Accounts payable | — |
| | 85,591 |
| | (8,217 | ) | | 2,413 |
| | 79,787 |
|
Net change in other assets and liabilities | (65 | ) | | (25,431 | ) | | (15,138 | ) | | — |
| | (40,634 | ) |
Other, net | (1 | ) | | 5,716 |
| | 4 |
| | — |
| | 5,719 |
|
Cash provided by (used for) operating activities | (21,256 | ) | | 45,623 |
| | (18,722 | ) | | — |
| | 5,645 |
|
Investing activities: | | | | | | | | |
|
|
Acquisitions, net of cash acquired | — |
| | — |
| | (366,569 | ) | | — |
| | (366,569 | ) |
Additions to property and equipment | — |
| | (17,884 | ) | | (7,079 | ) | | — |
| | (24,963 | ) |
Additions to computer software and intangible assets | — |
| | (5,333 | ) | | (7,493 | ) | | — |
| | (12,826 | ) |
Proceeds from the sale of property and equipment | — |
| | 198 |
| | 582 |
| | — |
| | 780 |
|
Cash used for investing activities | — |
| | (23,019 | ) | | (380,559 | ) | | — |
| | (403,578 | ) |
Financing activities: | | | | | | | | |
|
Change in intercompany advances | 50,452 |
| | (87,278 | ) | | 36,826 |
| | — |
| | — |
|
Proceeds from debt issuance | — |
| | — |
| | 250,000 |
| | — |
| | 250,000 |
|
Borrowing under revolving credit facility | — |
| | 6,013 |
| | 111,187 |
| | — |
| | 117,200 |
|
Financing costs paid | — |
| | — |
| | (1,798 | ) | | — |
| | (1,798 | ) |
Cash dividends paid | (47,316 | ) | | — |
| | — |
| | — |
| | (47,316 | ) |
Repurchases of common stock | (5,000 | ) | | — |
| | — |
| | — |
| | (5,000 | ) |
Other, net | (3,439 | ) | | (1,460 | ) | | (2,464 | ) | | — |
| | (7,363 | ) |
Cash provided by (used for) financing activities | (5,303 | ) | | (82,725 | ) | | 393,751 |
| | — |
| | 305,723 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 5,137 |
| | — |
| | 5,137 |
|
Net increase (decrease) in cash and cash equivalents | (26,559 | ) | | (60,121 | ) | | (393 | ) | | — |
| | (87,073 | ) |
Cash and cash equivalents at beginning of period | 38,015 |
| | 61,266 |
| | 86,207 |
| | — |
| | 185,488 |
|
Cash and cash equivalents at end of period | $ | 11,456 |
| | $ | 1,145 |
| | $ | 85,814 |
| | $ | — |
| | $ | 98,415 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated |
|
| Balance Sheets | | | | | | | | | |
| Assets | | | | | | | | | |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | $ | 5,971 |
| | $ | 43,611 |
| | $ | 25,657 |
| | $ | — |
| | $ | 75,239 |
|
| Accounts receivable, net | — |
| | 887,822 |
| | 598,948 |
| | (643,386 | ) | | 843,384 |
|
| Merchandise inventories | — |
| | 980,441 |
| | 233,425 |
| | (3,308 | ) | | 1,210,558 |
|
| Other current assets | 29 |
| | 99,190 |
| | 236,846 |
| | — |
| | 336,065 |
|
| Total current assets | 6,000 |
| | 2,011,064 |
| | 1,094,876 |
| | (646,694 | ) | | 2,465,246 |
|
| Property and equipment, net | — |
| | 197,088 |
| | 189,047 |
| | — |
| | 386,135 |
|
| Operating lease assets | 2,768 |
| | 128,775 |
| | 65,657 |
| | — |
| | 197,200 |
|
| Goodwill | — |
| | 413,235 |
| | — |
| | — |
| | 413,235 |
|
| Intangible assets, net | — |
| | 269,143 |
| | 42,111 |
| | — |
| | 311,254 |
|
| Due from O&M and subsidiaries | — |
| | 988,509 |
| | — |
| | (988,509 | ) | | — |
|
| Advances to and investment in consolidated subsidiaries | 1,689,812 |
| | 88,164 |
| | — |
| | (1,777,976 | ) | | — |
|
| Other assets, net | — |
| | 52,910 |
| | 56,384 |
| | — |
| | 109,294 |
|
| Total assets | $ | 1,698,580 |
| | $ | 4,148,888 |
| | $ | 1,448,075 |
| | $ | (3,413,179 | ) | | $ | 3,882,364 |
|
| Liabilities and equity | | | | | | | | | |
| Current liabilities | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 1,233,448 |
| | $ | 411,353 |
| | $ | (654,113 | ) | | $ | 990,688 |
|
| Accrued payroll and related liabilities | — |
| | 20,714 |
| | 20,285 |
| | — |
| | 40,999 |
|
| Other current liabilities | 5,488 |
| | 222,202 |
| | 150,299 |
| | — |
| | 377,989 |
|
| Total current liabilities | 5,488 |
| | 1,476,364 |
| | 581,937 |
| | (654,113 | ) | | 1,409,676 |
|
| Long-term debt, excluding current portion | 626,771 |
| | 1,044,342 |
| | 14,022 |
| | — |
| | 1,685,135 |
|
| Operating lease liabilities, excluding current portion | 1,661 |
| | 108,810 |
| | 45,232 |
| | — |
| | 155,703 |
|
| Due to O&M and subsidiaries | 552,974 |
| | — |
| | 683,403 |
| | (1,236,377 | ) | | — |
|
| Intercompany debt | — |
| | 1,246,785 |
| | 322,105 |
| | (1,568,890 | ) | | — |
|
| Deferred income taxes | — |
| | 16,829 |
| | 25,315 |
| | — |
| | 42,144 |
|
| Other liabilities | 9,847 |
| | 58,994 |
| | 19,026 |
| | — |
| | 87,867 |
|
| Total liabilities | 1,196,741 |
| | 3,952,124 |
| | 1,691,040 |
| | (3,459,380 | ) | | 3,380,525 |
|
| Equity | | | | | | | | | |
| Common stock | 125,872 |
| | — |
| | — |
| | — |
| | 125,872 |
|
| Paid-in capital | 241,547 |
| | 174,614 |
| | 123,865 |
| | (298,479 | ) | | 241,547 |
|
| Retained earnings (deficit) | 186,455 |
| | 53,802 |
| | (345,445 | ) | | 291,643 |
| | 186,455 |
|
| Accumulated other comprehensive income (loss) | (52,035 | ) | | (31,652 | ) | | (21,385 | ) | | 53,037 |
| | (52,035 | ) |
| Total equity | 501,839 |
| | 196,764 |
| | (242,965 | ) | | 46,201 |
| | 501,839 |
|
| Total liabilities and equity | $ | 1,698,580 |
| | $ | 4,148,888 |
| | $ | 1,448,075 |
| | $ | (3,413,179 | ) | | $ | 3,882,364 |
|
|
| | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Cash Flows | | | | | | | | | |
Operating activities: | | | | | | | | | |
Net income (loss) | $ | 81,682 |
| | $ | 95,145 |
| | $ | 7,877 |
| | $ | (103,022 | ) | | $ | 81,682 |
|
Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | | |
Equity in earnings of subsidiaries | (103,654 | ) | | — |
| | — |
| | 103,654 |
| | — |
|
Depreciation and amortization | — |
| | 22,497 |
| | 19,685 |
| | — |
| | 42,182 |
|
Share-based compensation expense | — |
| | 8,934 |
| | — |
| | — |
| | 8,934 |
|
Provision for losses on accounts receivable | — |
| | (84 | ) | | (132 | ) | | — |
| | (216 | ) |
Deferred income tax expense (benefit) | — |
| | (3,233 | ) | | — |
| | — |
| | (3,233 | ) |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable | — |
| | 14,107 |
| | (9,385 | ) | | 301 |
| | 5,023 |
|
Merchandise inventories | — |
| | (3,662 | ) | | (771 | ) | | (633 | ) | | (5,066 | ) |
Accounts payable | — |
| | 55,060 |
| | 3,982 |
| | (300 | ) | | 58,742 |
|
Net change in other assets and liabilities | 2,277 |
| | (512 | ) | | (46,668 | ) | | — |
| | (44,903 | ) |
Other, net | 1,321 |
| | 319 |
| | (274 | ) | | — |
| | 1,366 |
|
Cash provided by (used for) operating activities | (18,374 | ) | | 188,571 |
| | (25,686 | ) | | — |
| | 144,511 |
|
Investing activities: | | | | | | | | | |
Additions to property and equipment | — |
| | (7,337 | ) | | (6,345 | ) | | — |
| | (13,682 | ) |
Additions to computer software and intangible assets | — |
| | (2,937 | ) | | (4,144 | ) | | — |
| | (7,081 | ) |
Proceeds from the sale of property and equipment | — |
| | 78 |
| | 4,419 |
| | — |
| | 4,497 |
|
Cash used for investing activities | — |
| | (10,196 | ) | | (6,070 | ) | | — |
| | (16,266 | ) |
Financing activities: | | | | | | | | | |
Change in intercompany advances | 172,057 |
| | (162,206 | ) | | (9,851 | ) | | — |
| | — |
|
Change in bank overdraft | — |
| | — |
| | 21,753 |
| | — |
| | 21,753 |
|
Cash dividends paid | (47,802 | ) | | — |
| | — |
| | — |
| | (47,802 | ) |
Repurchases of common stock | (48,654 | ) | | — |
| | — |
| | — |
| | (48,654 | ) |
Other, net | (4,027 | ) | | (1,782 | ) | | (2,309 | ) | | — |
| | (8,118 | ) |
Cash provided by (used for) financing activities | 71,574 |
| | (163,988 | ) | | 9,593 |
| | — |
| | (82,821 | ) |
Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 6,652 |
| | — |
| | 6,652 |
|
Net increase (decrease) in cash and cash equivalents | 53,200 |
| | 14,387 |
| | (15,511 | ) | | — |
| | 52,076 |
|
Cash and cash equivalents at beginning of period | 103,284 |
| | 5,614 |
| | 52,122 |
| | — |
| | 161,020 |
|
Cash and cash equivalents at end of period | $ | 156,484 |
| | $ | 20,001 |
| | $ | 36,611 |
| | $ | — |
| | $ | 213,096 |
|
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2018 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Balance Sheets | | | | | | | | | |
Assets | | | | | | | | | |
Current assets |
|
| |
|
| |
|
| |
|
| |
|
|
Cash and cash equivalents | $ | 37,254 |
| | $ | 5,294 |
| | $ | 60,819 |
| | $ | — |
| | $ | 103,367 |
|
Accounts receivable, net | — |
| | 804,638 |
| | 482,675 |
| | (463,895 | ) | | 823,418 |
|
Merchandise inventories | — |
| | 1,060,083 |
| | 234,778 |
| | (4,758 | ) | | 1,290,103 |
|
Other current assets | 117 |
| | 117,163 |
| | 205,678 |
| | (1,268 | ) | | 321,690 |
|
Total current assets | 37,371 |
| | 1,987,178 |
| | 983,950 |
| | (469,921 | ) | | 2,538,578 |
|
Property and equipment, net | — |
| | 201,055 |
| | 185,668 |
| | — |
| | 386,723 |
|
Goodwill | — |
| | 414,122 |
| | — |
| | — |
| | 414,122 |
|
Intangible assets, net | — |
| | 290,814 |
| | 30,950 |
| | — |
| | 321,764 |
|
Due from O&M and subsidiaries | — |
| | 880,901 |
| | — |
| | (880,901 | ) | | — |
|
Advances to and investments in consolidated subsidiaries | 1,697,191 |
| | 93,278 |
| | — |
| | (1,790,469 | ) | | — |
|
Other assets, net | 1,788 |
| | 56,221 |
| | 54,592 |
| | — |
| | 112,601 |
|
Total assets | $ | 1,736,350 |
| | $ | 3,923,569 |
| | $ | 1,255,160 |
| | $ | (3,141,291 | ) | | $ | 3,773,788 |
|
Liabilities and equity | | | | | | | | | |
Current liabilities |
|
| |
|
| |
|
| |
|
| |
|
|
Accounts payable | $ | — |
| | $ | 1,190,283 |
| | $ | 394,664 |
| | $ | (475,358 | ) | | $ | 1,109,589 |
|
Accrued payroll and related liabilities | — |
| | 23,071 |
| | 25,132 |
| | — |
| | 48,203 |
|
Other current liabilities | 9,641 |
| | 161,371 |
| | 143,207 |
| | — |
| | 314,219 |
|
Total current liabilities | 9,641 |
| | 1,374,725 |
| | 563,003 |
| | (475,358 | ) | | 1,472,011 |
|
Long-term debt, excluding current portion | 595,856 |
| | 1,040,664 |
| | 14,062 |
| | — |
| | 1,650,582 |
|
Due to O&M and subsidiaries | 605,558 |
| | — |
| | 67,900 |
| | (673,458 | ) | | — |
|
Intercompany debt | — |
| | 1,246,787 |
| | 322,101 |
| | (1,568,888 | ) | | — |
|
Deferred income taxes | — |
| | 29,288 |
| | 21,564 |
| | — |
| | 50,852 |
|
Other liabilities | 6,876 |
| | 51,366 |
| | 23,682 |
| | — |
| | 81,924 |
|
Total liabilities | 1,217,931 |
| | 3,742,830 |
| | 1,012,312 |
| | (2,717,704 | ) | | 3,255,369 |
|
Equity |
|
| |
|
| |
|
| |
|
| |
|
|
Common stock | 124,588 |
| | — |
| | — |
| | — |
| | 124,588 |
|
Paid-in capital | 238,773 |
| | 174,614 |
| | 583,869 |
| | (758,483 | ) | | 238,773 |
|
Retained earnings (deficit) | 200,670 |
| | 37,777 |
| | (319,636 | ) | | 281,859 |
| | 200,670 |
|
Accumulated other comprehensive income (loss) | (45,612 | ) | | (31,652 | ) | | (21,385 | ) | | 53,037 |
| | (45,612 | ) |
Total equity | 518,419 |
| | $ | 180,739 |
| | 242,848 |
| | (423,587 | ) | | 518,419 |
|
Total liabilities and equity | $ | 1,736,350 |
| | $ | 3,923,569 |
| | $ | 1,255,160 |
| | $ | (3,141,291 | ) | | $ | 3,773,788 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
|
| Statements of Cash Flows | | | | | | | | | |
| Operating activities: | | | | | | | | | |
| Net income (loss) | $ | (14,096 | ) | | $ | 16,025 |
| | $ | (25,809 | ) | | $ | 9,784 |
| | $ | (14,096 | ) |
| Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | | |
| Equity in earnings of subsidiaries | 7,379 |
| | 957 |
| | — |
| | (8,336 | ) | | — |
|
| Depreciation and amortization | — |
| | 16,339 |
| | 12,381 |
| | — |
| | 28,720 |
|
| Share-based compensation expense | — |
| | 4,505 |
| | — |
| | — |
| | 4,505 |
|
| Provision for losses on accounts receivable | — |
| | 3,644 |
| | (25 | ) | | — |
| | 3,619 |
|
| Deferred income tax expense (benefit) | — |
| | (4,851 | ) | | (3,762 | ) | | — |
| | (8,613 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Accounts receivable | — |
| | (86,828 | ) | | (115,237 | ) | | 179,492 |
| | (22,573 | ) |
| Merchandise inventories | — |
| | 79,642 |
| | 2,001 |
| | (1,449 | ) | | 80,194 |
|
| Accounts payable | — |
| | 43,165 |
| | 15,105 |
| | (178,750 | ) | | (120,480 | ) |
| Net change in other assets and liabilities | (2,276 | ) | | 56,354 |
| | (69,195 | ) | | (741 | ) | | (15,858 | ) |
| Other, net | 213 |
| | 3,483 |
| | (18 | ) | | — |
| | 3,678 |
|
| Cash (used for) provided by operating activities | (8,780 | ) | | 132,435 |
| | (184,559 | ) | | — |
| | (60,904 | ) |
| Investing activities: | | | | | | | | | |
| Additions to property and equipment | — |
| | (3,666 | ) | | (8,008 | ) | | — |
| | (11,674 | ) |
| Additions to computer software and intangible assets | — |
| | (2,124 | ) | | (481 | ) | | — |
| | (2,605 | ) |
| Proceeds from sale of property and equipment | — |
| | — |
| | 271 |
| | — |
| | 271 |
|
| Cash used for investing activities | — |
| | (5,790 | ) | | (8,218 | ) | | — |
| | (14,008 | ) |
| Financing activities: | | | | | | | | |
|
| Borrowing (repayments) under revolving credit facility | — |
| | 72,100 |
| | — |
| | — |
| | 72,100 |
|
| Repayment of debt | — |
| | (12,394 | ) | | — |
| | — |
| | (12,394 | ) |
| Financing costs paid | — |
| | (4,313 | ) | | — |
| | — |
| | (4,313 | ) |
| Change in intercompany advances | (17,292 | ) | | (143,485 | ) | | 160,777 |
| | — |
| | — |
|
| Cash dividends paid | (4,764 | ) | | — |
| | — |
| | — |
| | (4,764 | ) |
| Other, net | (447 | ) | | (236 | ) | | (441 | ) | | — |
| | (1,124 | ) |
| Cash provided by (used for) financing activities | (22,503 | ) | | (88,328 | ) | | 160,336 |
| | — |
| | 49,505 |
|
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | (2,721 | ) | | — |
| | (2,721 | ) |
| Net increase (decrease) in cash and cash equivalents | (31,283 | ) | | 38,317 |
| | (35,162 | ) | | — |
| | (28,128 | ) |
| Cash and cash equivalents at beginning of period | 37,254 |
| | 5,294 |
| | 60,819 |
| | — |
| | 103,367 |
|
| Cash and cash equivalents at end of period | $ | 5,971 |
| | $ | 43,611 |
| | $ | 25,657 |
| | $ | — |
| | $ | 75,239 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
|
| Statements of Cash Flows | | | | | | | | | |
| Operating activities: | | | | | | | | | |
| Net income (loss) | $ | 8,151 |
| | $ | 18,441 |
| | $ | (3,501 | ) | | $ | (14,940 | ) | | $ | 8,151 |
|
| Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | | |
| Equity in earnings of subsidiaries | (14,713 | ) | | (150 | ) | | — |
| | 14,863 |
| | — |
|
| Depreciation and amortization | — |
| | 11,207 |
| | 6,704 |
| | — |
| | 17,911 |
|
| Share-based compensation expense | — |
| | 3,035 |
| | — |
| | — |
| | 3,035 |
|
| Provision for losses on accounts receivable | — |
| | 1,219 |
| | (146 | ) | | — |
| | 1,073 |
|
| Deferred income tax expense (benefit) | — |
| | (1,453 | ) | | (29 | ) | | — |
| | (1,482 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Accounts receivable | — |
| | (60,302 | ) | | 41,636 |
| | 147 |
| | (18,519 | ) |
| Merchandise inventories | — |
| | (29,606 | ) | | (1,026 | ) | | 76 |
| | (30,556 | ) |
| Accounts payable | — |
| | 13,696 |
| | (4,078 | ) | | (140 | ) | | 9,478 |
|
| Net change in other assets and liabilities | 121 |
| | 31,976 |
| | (3,187 | ) | | (6 | ) | | 28,904 |
|
| Other, net | 250 |
| | 132 |
| | (104 | ) | | — |
| | 278 |
|
| Cash (used for) provided by operating activities | (6,191 | ) | | (11,805 | ) | | 36,269 |
| | — |
| | 18,273 |
|
| Investing activities: | | | | | | | | | |
| Additions to property and equipment | — |
| | (5,847 | ) | | (1,227 | ) | | — |
| | (7,074 | ) |
| Additions to computer software and intangible assets | — |
| | (6,078 | ) | | (1,008 | ) | | — |
| | (7,086 | ) |
| Cash used for investing activities | — |
| | (11,925 | ) | | (2,235 | ) | | — |
| | (14,160 | ) |
| Financing activities: | | | | | | | | | |
| Borrowings (repayments) under revolving credit facility | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) |
| Repayment of debt | — |
| | (3,125 | ) | | — |
| | — |
| | (3,125 | ) |
| Change in intercompany advances | 22,949 |
| | 22,151 |
| | (45,100 | ) | | — |
| | — |
|
| Cash dividends paid | (16,074 | ) | | — |
| | — |
| | — |
| | (16,074 | ) |
| Other, net | (1,113 | ) | | (421 | ) | | (770 | ) | | — |
| | (2,304 | ) |
| Cash provided by (used for) financing activities | 5,762 |
| | 18,305 |
| | (45,870 | ) | | — |
| | (21,803 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 800 |
| | — |
| | 800 |
|
| Net increase (decrease) in cash and cash equivalents | (429 | ) | | (5,425 | ) | | (11,036 | ) | | — |
| | (16,890 | ) |
| Cash and cash equivalents at beginning of period | 13,700 |
| | 11,080 |
| | 79,742 |
| | — |
| | 104,522 |
|
| Cash and cash equivalents at end of period | $ | 13,271 |
| | $ | 5,655 |
| | $ | 68,706 |
| | $ | — |
| | $ | 87,632 |
|
Note 15—17—Recent Accounting Pronouncements
OnIn August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU No. 2017-12 is intended to simplify the application of hedge accounting and provide increased transparency as to the scope and results of hedging programs. For calendar year-end entities, the update will be effective for annual periods beginning January 1, 2017, we2019, and interim periods within those fiscal years. The Company adopted ASU No. 2016-09, 2017-12 effective beginning January 1, 2019. Its adoption did not have a material impact on our consolidated financial statements.Improvements to Employee Share-Based Payment Accounting. The amendments in this updated guidance included changes to simplify the Codification for several aspects
In May 2014,On February 14, 2018, the FASB issued an ASU No. 2018-02, Income Statement - Reporting Comprehensive Income Revenue(Topic 220): Reclassification of Certain Tax Effects from Contracts with CustomersAccumulated Other Comprehensive Income. The amended guidance eliminates industry specific guidanceASU No. 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and appliesJobs Act from accumulated other comprehensive income (loss) to all companies. Revenue will be recognized when an entity satisfies a performance obligation by transferring control of a promised good or service to a customer in an amount that reflects the consideration to which the entity expects to be entitled for that good or service. Revenue from a contract that contains multiple performance obligations is allocated to each performance obligation generally on a relative standalone selling price basis. Amended guidanceretained earnings. ASU No. 2018-02 was issued on: principal versus agent considerations, shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good, clarification on how an entity should evaluate the collectibility threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The amended guidance also requires additional quantitative and qualitative disclosures. These amended standards are all effective for us beginningthe Company on January 1, 20182019 and allow for either full retrospective adoption or modified retrospective adoption (cumulative effect). We have substantially completed our evaluation of the amended guidance, including identification of revenue streams and customer contract reviews. Our revenue is primarily distribution revenue, which we recognize at the time shipment is completed and title passeselected not to reclassify income tax effects due to the customer. Although we are continuingAct from accumulated other comprehensive income (loss) to assessretained earnings on the impactconsolidated balance sheets in the period of the amended guidance, including impact on financial disclosures, we generally anticipate that the timingadoption.
We adopted ASU No. 2016-02, Leases (Topic 842), as of recognition of distribution revenue will be substantially unchanged under the amended guidance.January 1, 2019. We intendelected to use the modified retrospective methodadoption date as our date of adoption.initial application and thus have not restated comparative prior periods. We are finalizingelected the ‘package of practical expedients’, which permits us not to reassess our evaluationprior 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 howthose assets in transition. We also elected the guidance may require changespractical expedient to not separate lease and non-lease components for all of our business processes, systemsleases.
The adoption of the new standard resulted in the recording of operating lease assets and controls to support the additional required disclosures.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 and had no impact on cash flows.
There hashave been no changefurther changes in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Note 16—Subsequent Events
On October 31, 2017, we entered into a Purchase Agreement to acquire the Surgical and Infection Prevention (“S&IP”) business of Halyard Health, Inc. ("Halyard") for $710 million in cash, subject to certain adjustments as provided in the Purchase Agreement. Halyard’s S&IP business is a leading global provider of medical supplies and solutions for the prevention of healthcare-associated infections across the acute and alternate site channels. The transaction, which has been approved by the boards of directors of both companies, is expected to close in the first quarter of 2018, subject to customary closing conditions and regulatory approvals, including Hart-Scott-Rodino.
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, 2016.2018. 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, 2016.2018.
Overview
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading global healthcare solutions company with integrated technologies, products and services companyaligned to deliver significant and sustained value for healthcare providers and manufacturers across the continuum of care.
On April 30, 2018 (the Closing Date), we acquired substantially all of Avanos Medical, Inc.'s (Avanos, previously Halyard Health, Inc.) Surgical and Infection Prevention business, the name “Halyard Health” (and all variations of that connects the worldname 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 productssupplies and solutions for the prevention of healthcare associated infections across acute care and non-acute care markets. This business is reported as part of the Global Products segment.
We entered into transition services agreements with Avanos pursuant to which they and we will provide to each other various transitional services, including, but not limited to, facilities, product supply, financial and business services, procurement, human resources, research and development, regulatory affairs and quality assurance, sales and marketing, information technology and other support services. On the pointClosing Date, certain of care. We reportour affiliates also entered into transitional distribution agreements with affiliates of Avanos under three business units: Domestic, Internationalwhich the Avanos affiliates will serve as limited risk distributors for our international customer orders on a transitional basis. The services under the transition services agreements and Proprietary Products (formerly Clinical & Procedural Solutions (CPS) which has been renamed "Proprietary Products" effective January 1, 2017). Domestic is our U.S. distribution logisticsagreements generally commenced on the Closing Date and value-added services business. Byram, acquired on August 1, 2017, is included in the Domestic segment. International is our European distribution, logistics and value-added services business. Proprietary Products provides product-related solutions, including surgical and procedural kitting and sourcing. Segment financial information is provided in Note 13terminate within 18 months thereafter.
Financial highlights. The following table provides a reconciliation of reported operating earnings,income, net income and net income per diluted common share to non-GAAP measures used by management. In the second quarter of 2017 we began to exclude acquisition-related intangible amortization from our non-GAAP measures, along with the previously excluded items. Intangible amortization amounts are highly dependent on the size and frequency of acquisitions and are being excluded to
allow for a more consistent comparison with forecasted, current and historical results and the results of our peers. Prior period amounts have been recast on the same basis.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
Operating earnings, as reported (GAAP) | $ | 29,671 |
| | $ | 53,568 |
| | $ | 98,024 |
| | $ | 150,591 |
|
Acquisition-related and exit and realignment charges (1) | 9,299 |
| | 2,739 |
| | 21,134 |
| | 19,974 |
|
Acquisition-related intangible amortization (2) | 5,071 |
| | 2,489 |
| | 9,737 |
| | 7,552 |
|
Other (3) | 4,441 |
| | — |
| | 8,674 |
| | — |
|
Operating earnings, adjusted (non-GAAP) (Adjusted Operating Earnings) | $ | 48,482 |
| | $ | 58,796 |
| | $ | 137,569 |
| | $ | 178,117 |
|
| | | | | | | |
Net income, as reported (GAAP) | $ | 10,871 |
| | $ | 29,831 |
| | $ | 49,796 |
| | $ | 81,682 |
|
Acquisition-related and exit and realignment charges (1) | 9,299 |
| | 2,739 |
| | 21,134 |
| | 19,974 |
|
Income tax expense (benefit) (4) | (2,854 | ) | | (1,015 | ) | | (7,367 | ) | | (6,615 | ) |
Acquisition-related intangible amortization (2) | 5,071 |
| | 2,489 |
| | 9,737 |
| | 7,552 |
|
Income tax expense (benefit) (4) | (1,601 | ) | | (645 | ) | | (2,993 | ) | | (1,956 | ) |
Other (3) | 4,441 |
| | — |
| | 8,674 |
| | — |
|
Income tax expense (benefit) (4) | (973 | ) | | — |
| | (2,465 | ) | | — |
|
Net income, adjusted (non-GAAP) (Adjusted Net Income) | $ | 24,254 |
| | $ | 33,399 |
| | $ | 76,516 |
| | $ | 100,637 |
|
| | | | | | | |
Net income per diluted common share, as reported (GAAP) | $ | 0.18 |
| | $ | 0.48 |
| | $ | 0.82 |
| | $ | 1.32 |
|
Acquisition-related and exit and realignment charges, per diluted common share (1) | 0.11 |
| | 0.03 |
| | 0.23 |
| | 0.21 |
|
Acquisition-related intangible amortization, per diluted common share (2) | 0.06 |
| | 0.03 |
| | 0.11 |
| | $ | 0.09 |
|
Other, per diluted common share (3) | 0.05 |
| | — |
| | 0.10 |
| | — |
|
Net income per diluted common share, adjusted (non-GAAP)(Adjusted EPS) | $ | 0.40 |
| | $ | 0.54 |
| | $ | 1.26 |
| | $ | 1.62 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
(Dollars in thousands except per share data) | 2019 | | 2018 |
Operating income, as reported (GAAP) | $ | 14,692 |
| | $ | 24,217 |
|
Intangible amortization (1) | 10,361 |
| | 6,407 |
|
Acquisition-related and exit and realignment charges (2) | 4,990 |
| | 14,760 |
|
Other (3) | 499 |
| | 2,217 |
|
Operating income, adjusted (non-GAAP) (Adjusted Operated Income) | $ | 30,542 |
| | $ | 47,601 |
|
Operating Income as a percent of revenue (GAAP) | 0.60 | % | | 1.02 | % |
Adjusted Operating Income as a percent of revenue (non-GAAP) | 1.24 | % | | 2.01 | % |
| | | |
Net income (loss), as reported (GAAP) | $ | (14,096 | ) | | $ | 8,151 |
|
Intangible amortization (1) | 10,361 |
| | 6,407 |
|
Income tax expense (benefit) (5) | (1,664 | ) | | (1,557 | ) |
Acquisition-related and exit and realignment charges (2) | 4,990 |
| | 14,760 |
|
Income tax expense (benefit) (5) | (760 | ) | | (3,576 | ) |
Write-off of deferred financing costs (4) | 2,003 |
| | — |
|
Income tax expense (benefit) (5) | (313 | ) | | — |
|
Other (3) | 499 |
| | 2,217 |
|
Income tax expense (benefit) (5) | (55 | ) | | (228 | ) |
Net income, adjusted (non-GAAP) (Adjusted Net Income) | $ | 965 |
| | $ | 26,174 |
|
| | | |
Net income (loss) per diluted common share, as reported (GAAP) | $ | (0.23 | ) | | $ | 0.13 |
|
Intangible amortization (1) | 0.14 |
| | 0.08 |
|
Acquisition-related and exit and realignment charges (2) | 0.07 |
| | 0.19 |
|
Write-off of deferred financing costs (4) | 0.03 |
| | — |
|
Other (3) | 0.01 |
| | 0.03 |
|
Net income per diluted common share, adjusted (non-GAAP)(Adjusted EPS) | $ | 0.02 |
| | $ | 0.43 |
|
Net income (loss) per diluted share was $0.18 and $0.82$(0.23) for the three and nine months ended September 30, 2017,March 31, 2019, a decreasedecline of $0.30 and $0.50 when$0.36 compared to the same periods of 2016.2018. Adjusted EPS (non-GAAP) was $0.40 and $1.26 for$0.02 in the three and nine months ended September 30, 2017,first quarter of 2019, a decreasedecline of $0.14 and $0.36$0.41 when compared to prior year. NetGlobal Solutions segment operating income in the year to date period of 2017 benefitted by $3.4$21.1 million or $0.06 per sharedeclined $15.7 million from the releasefirst quarter of an income tax valuation allowance in Europe during the second quarter. Domestic segment operating earnings were $36.1 million in the quarter and $102.8 million for the year to date period compared to $41.0 million and $126.2 million in the prior year comparative periods. The declines were largely a result of provider margin compression, the exit of a large customer in 2016 and lower income from manufacturer product price changes on a year to date basis. We expect the current trend of increased gross margin pressure to continue. The International segment operating losses were $2.2 million for the quarter and $0.8 million year to date, compared to operating earnings of $1.4 million and $3.4 million in the prior year. The change compared to prior year resulted primarily from increased costs to support new business. Proprietary Products operating earnings were $9.1 million and $26.0 million, reflecting decreases of $5.2 million and $15.8 million2018 as a result of lower revenues, compared to prior yearcontinued pressure on distribution margins, and increased productionhigher supply chain costs. Global Products operating income, which includes Halyard, was $7.7 million in the first quarter of 2019 and $11.1 million in the first quarter of 2018.
Use of Non-GAAP Measures
Adjusted operating earnings,income, adjusted net income and adjusted EPS are an alternative view of performance used by management, and we believe that investors' understanding of our performance is enhanced by disclosing these performance measures. In general, the measures exclude items and charges that (i) management does not believe reflect our core business and relate more to strategic, multi-year corporate activities; or (ii) relate to activities or actions that may have occurred over multiple or in prior periods without predictable trends. Management uses these non-GAAP financial measures internally to evaluate our performance, evaluate the balance sheet, engage in financial and operational planning and determine incentive compensation.
Management provides these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results and in comparing our performance to that of our
competitors. However, the non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
The non-GAAP financial measures disclosed by us should not be considered a substitutesubstitutes for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth above should be carefully evaluated.
The following items have been excluded in our non-GAAP financial measures:
(1) Acquisition-related charges were $4.3 million and $6.3 million for the three and nine months ended September 30, 2017 compared to $0.6 million and $0.9 million for the same periods of 2016. Current year charges were primarily transaction and transition costs associated with the acquisition of Byram and the upcoming Halyard S&IP transaction. The prior year amounts related primarily to costs incurred to settle certain obligations and address other on-going matters associated with the acquisitions of ArcRoyal and Medical Action.
Exit and realignment charges were $5.0 million and $14.8 million for the three and nine months ended September 30, 2017. Current year charges were associated with severance from reduction in force and other employee costs associated with the establishment of our new client engagement centers, the write-down of information system assets which are no longer used and other IT restructuring charges. Expenses associated with the establishment of the client engagement center will continue to be recorded throughout 2017. Exit and realignment charges were $2.1 million and $19.1 million for the three and nine months ended September 30, 2016. These included severance activities (including our voluntary employee separation program in the first quarter of 2016), and other costs associated with our strategic organizational realignment which include certain professional fees and costs to streamline administrative functions and processes in the United States and Europe. More information about these charges is provided in Note 6 of Notes to Consolidated Financial Statements included in this quarterly report.
(2) Acquisition-related intangibleIntangible amortization includes amortization of certain intangible assets established during purchase accounting for business combinations. These amounts are highly dependent on the size and frequency of acquisitions and are being excluded to allow for a more consistent comparison with forecasted, current and historical results and the results of our peers. We have begun to exclude these
(2) Acquisition-related charges from our non-GAAP resultswere $4.2 million and $12.1 million in the secondfirst quarter of 20172019 and thus prior year amounts have been recast on2018, respectively. Acquisition-related charges in 2019 and 2018 consist primarily of transition and transaction costs for the same basis.Halyard transaction.
Exit and realignment charges were $0.8 million in the first quarter of 2019 and $2.7 million in the first quarter of 2018. Amounts in 2019 were associated with the establishment of our client engagement centers and IT restructuring charges. Amounts in 2018 were associated with the establishment of our client engagement centers.
(3) Includes software Other consists of Software as a serviceService (SaaS) implementation costs associated with the upgrading of oursignificant global IT platforms in connection with the redesign of our global information system strategy.
(4) Write-off of deferred financing costs associated with the revolving credit facility as a result of the Fourth Amendment to the Credit Agreement.
(5) These charges have been tax effected in the preceding table by determining the income tax rate depending on the amount of charges incurred in different tax jurisdictions and the deductibility of those charges for income tax purposes.
Results of Operations
Net revenue. |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Domestic | $ | 2,194,143 |
| | $ | 2,287,233 |
| | $ | (93,090 | ) | | (4.1 | )% |
International | 96,661 |
| | 83,751 |
| | 12,910 |
| | 15.4 | % |
Proprietary Products | 124,542 |
| | 132,705 |
| | (8,163 | ) | | (6.2 | )% |
Inter-segment | (81,385 | ) | | (88,088 | ) | | 6,703 |
| | (7.6 | )% |
Net revenue | $ | 2,333,961 |
| | $ | 2,415,601 |
| | $ | (81,640 | ) | | (3.4 | )% |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Domestic | $ | 6,518,571 |
| | $ | 6,954,687 |
| | $ | (436,116 | ) | | (6.3 | )% | |
International | 287,555 |
| | 255,861 |
| | 31,694 |
| | 12.4 | % | |
Proprietary Products | 392,654 |
| | 409,022 |
| | (16,368 | ) | | (4.0 | )% | |
Global Solutions | | $ | 2,234,147 |
| | $ | 2,341,122 |
| | $ | (106,975 | ) | | (4.6 | )% |
Global Products | | 347,085 |
| | 121,287 |
| | 225,798 |
| | 186.2 | % |
Inter-segment | (270,339 | ) | | (264,501 | ) | | (5,838 | ) | | 2.2 | % | (119,844 | ) | | (89,830 | ) | | (30,014 | ) | | (33.4 | )% |
Net revenue | $ | 6,928,441 |
| | $ | 7,355,069 |
| | $ | (426,628 | ) | | (5.8 | )% | $ | 2,461,388 |
| | $ | 2,372,579 |
| | $ | 88,809 |
| | 3.7 | % |
Consolidated net revenue declined for both the three and nine months ended September 30, 2017,increased primarily as a result of the exitacquisition of a large domestic customerHalyard in 2016, lower growth with existing domestic customers and one less sales day compared to prior year. ByramApril 2018, which contributed $80.3revenue of $188.7 million in revenue to the Domestic segment for the quarter and year to date. The
increase(net of intercompany eliminations) in the International segment was driven by growth with existing customers and new business as wellquarter. Lower distribution revenues as a favorable foreign currency translation impactresult of $2.8 million for the quarter but offset by an unfavorable impact of $12.4 million year to date. A decrease in sales of our sourced productscustomer non-renewals, primarily resulting from service issues, contributed to the year over year change in the Proprietary Products segment.Global Solutions segment, which was partially offset by sales growth from Byram.
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Cost of goods sold | $ | 2,032,019 |
| | $ | 2,119,326 |
| | $ | (87,307 | ) | | (4.1 | )% |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Cost of goods sold | $ | 6,071,787 |
| | $ | 6,462,739 |
| | $ | (390,952 | ) | | (6.0 | )% | $ | 2,102,964 |
| | $ | 2,047,892 |
| | $ | 55,072 |
| | 2.7 | % |
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 and carry all credit risk associated with sales.loss. These are sometimes referred to as distribution including products sold through Byram, or buy/sell contracts. Cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our ProprietaryGlobal Products business. There is no cost of goods sold associated with our fee-for-service business. As a resultarrangements. Cost of the decreasegoods sold compared to prior year reflects changes in sales activity, through our distribution business, cost of goods sold decreased from prior year by $87.3 million and $391.0 million for the three and nine months ended September 30, 2017, respectively.including sales mix.
Gross margin. |
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Gross margin | $ | 301,942 |
| | $ | 296,275 |
| | $ | 5,667 |
| | 1.9 | % |
As a % of net revenue | 12.94 | % | | 12.27 | % | | | | |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Gross margin | $ | 856,654 |
| | $ | 892,330 |
| | $ | (35,676 | ) | | (4.0 | )% | $ | 358,424 |
| | $ | 324,687 |
| | $ | 33,737 |
| | 10.4 | % |
As a % of net revenue | 12.36 | % | | 12.13 | % | | | | | 14.56 | % | | 13.68 | % | | | | |
Gross margin forin the first quarter of 2019 included positive contributioncontributions from Halyard, strong revenue growth with Byram, and a change in revenue mixincreased fee-for-service revenues, which were partially offset by the impact of overallfrom lower distribution revenues, a decline in provider margindistribution margins, and lower incomeunfavorable impact from manufacturer product price changes (on a year to date basis). The impact of foreign currency translation was favorable for the quarter by $2.3 million and unfavorable by $6.1 million for the year to date. With increasing customer cost pressures and competitive dynamics in healthcare, we believe the current trend of increased gross margin pressure will continue.$6.6 million.
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Distribution, selling and administrative expenses | $ | 261,045 |
| | $ | 241,305 |
| | $ | 19,740 |
| | 8.2 | % |
As a % of net revenue | 11.18 | % | | 9.99 | % | |
| |
|
Other operating (income) expense, net | $ | 1,927 |
| | $ | (1,337 | ) | | $ | 3,264 |
| | (244.1 | )% |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Distribution, selling and administrative expenses | $ | 735,353 |
| | $ | 726,944 |
| | $ | 8,409 |
| | 1.2 | % | $ | 338,703 |
| | $ | 284,361 |
| | $ | 54,342 |
| | 19.1 | % |
As a % of net revenue | 10.61 | % | | 9.88 | % | | | | | 13.76 | % | | 11.99 | % | |
| |
|
Other operating (income) expense, net | $ | 2,143 |
| | $ | (5,179 | ) | | $ | 7,322 |
| | (141.4 | )% | |
Other operating expense, net | | $ | 39 |
| | $ | 1,349 |
| | $ | (1,310 | ) | | (97.1 | )% |
Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and 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. The
Overall DS&A expenses compared to prior year reflected increased expenses related to expenses to support the Halyard business, strong revenue growth with Byram, and fee-for-service arrangements within Manufacturer Solutions, higher transportation fleet costs to convert new customers to our information systems are included in DS&A and are generallydelivery expenses, and increased expenses incurred prior to the recognition of revenues from the new customers.
Excluding Byram, DS&A as a percentage of revenue was 10.55% and 10.40% for the three and nine months ended September 30, 2017. Overall expenses reflected decreased sales activity in the quarter and year to date, benefitsdevelopment of cost control and productivity initiatives, and anew customer solutions, partially offset by favorable impacts for foreign currency translation impact of $6.2 million year to date. These were offset in part by increased costs to support new business and unfavorable foreign currency translation impacts of $2.3 million in the quarter. As a percentage of net revenue, the increases related to the large customer loss in 2016.$6.6 million.
The changesdecrease in other operating (income) expense, net werewas attributed primarily to lower software as a service implementation expenses which were not incurred in 2016.expenses.
A discussion of the acquisition-related and exit and realignment charges is included above in the Overview section.
Interest expense, net.net. | | | Three Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Interest expense, net | $ | 8,737 |
| | $ | 6,770 |
| | $ | 1,967 |
| | 29.1 | % | $ | 29,101 |
| | $ | 10,253 |
| | $ | 18,848 |
| | 183.8 | % |
Effective interest rate | 4.15 | % | | 4.76 | % | | | | | 6.34 | % | | 4.52 | % | | | | |
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Interest expense, net | $ | 22,218 |
| | $ | 20,324 |
| | $ | 1,894 |
| | 9.3 | % |
Effective interest rate | 4.52 | % | | 4.79 | % | | | | |
The increaseInterest expense in the first quarter of 2019 was higher than prior year primarily as a result of borrowings under our revolving credit facility and term loans entered into in the second quarter of 2018. In addition, interest expense and change in effective interest rate forincluded $2.0 million related to write-off of deferred financing costs associated with the three and nine months ended September 30, 2017 wererevolving credit facility as a result of the borrowings under our new Credit Agreement entereddebt amendment in July 2017.February 2019. See Note 10 in Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % |
Income tax provision | $ | 10,063 |
| | $ | 16,967 |
| | $ | (6,904 | ) | | (40.7 | )% |
Effective tax rate | 48.1 | % | | 36.3 | % | | | | |
| | | Nine Months Ended September 30, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2017 | | 2016 | | $ | | % | 2019 | | 2018 | | $ | | % |
Income tax provision | $ | 26,010 |
| | $ | 48,585 |
| | $ | (22,575 | ) | | (46.5 | )% | $ | (313 | ) | | $ | 5,813 |
| | $ | (6,126 | ) | | (105.4 | )% |
Effective tax rate | 34.3 | % | | 37.3 | % | | | | | 2.2 | % | | 41.6 | % | | | | |
The changes in the effective tax rate was 2.2% for the quarter ended March 31, 2019, compared to 201641.6% in the same quarter of 2018. The decrease in the rate resulted primarily from the mixture of income and losses in jurisdictions in which the Company operates, including those of which require a change in income mix among different tax rate jurisdictionsfull valuation allowance, and the effect of certain acquisition-related costs which were not deductible for tax purposes offset on a year to date basis by the release of anincremental income tax valuation allowance in Europe for $3.4 million duringexpense associated with the second quartervesting of 2017.restricted stock.
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 $25$27 million.
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in the United States, Europe, and Europe or invested in high-quality, short-term liquid investments.Asia. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collection of accounts receivable, and payment to suppliers. Changes in shipping terms with certain of our suppliers have contributed to increased inventory and accounts payable and had an unfavorable impact on inventory turnover. | | | September 30, 2017 | | December 31, 2016 | | Change | March 31, 2019 | | December 31, 2018 | | Change |
(Dollars in thousands) | | $ | | % | | $ | | % |
Cash and cash equivalents | $ | 98,415 |
| | $ | 185,488 |
| | $ | (87,073 | ) | | (46.9 | )% | $ | 75,239 |
| | $ | 103,367 |
| | $ | (28,128 | ) | | (27.2 | )% |
Accounts and notes receivable, net of allowances | $ | 732,756 |
| | $ | 606,084 |
| | $ | 126,672 |
| | 20.9 | % | |
Accounts receivable, net of allowances | | $ | 843,384 |
| | $ | 823,418 |
| | $ | 19,966 |
| | 2.4 | % |
Consolidated DSO (1) | 27.6 |
| | 23.1 |
| |
| |
| 29.4 |
| | 28.5 |
| |
| |
|
Merchandise inventories | $ | 989,251 |
| | $ | 916,311 |
| | $ | 72,940 |
| | 8.0 | % | $ | 1,210,558 |
| | $ | 1,290,103 |
| | $ | (79,545 | ) | | (6.2 | )% |
Consolidated inventory turnover (2) | 8.1 |
| | 9.2 |
| |
| |
| 6.8 |
| | 7.4 |
| |
| |
|
Accounts payable | $ | 875,630 |
| | $ | 750,750 |
| | $ | 124,880 |
| | 16.6 | % | $ | 990,688 |
| | $ | 1,109,589 |
| | $ | (118,901 | ) | | (10.7 | )% |
(1) Based on period end accounts receivable and net revenue for the quarter
(2) Based on average annual inventory and annualized costcosts of goods sold for the quarter ended September 30, 2017March 31, 2019 and year ended December 31, 20162018
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the ninethree months ended September 30, 2017March 31, 2019 and 2016:2018:
| | (Dollars in thousands) | 2017 | | 2016 | 2019 | | 2018 |
Net cash provided by (used for): | | | | | | |
Operating activities | $ | 5,645 |
| | $ | 144,511 |
| $ | (60,904 | ) | | $ | 18,273 |
|
Investing activities | (403,578 | ) | | (16,266 | ) | (14,008 | ) | | (14,160 | ) |
Financing activities | 305,723 |
| | (82,821 | ) | 49,505 |
| | (21,803 | ) |
Effect of exchange rate changes | 5,137 |
| | 6,652 |
| (2,721 | ) | | 800 |
|
Increase (decrease) in cash and cash equivalents | $ | (87,073 | ) | | $ | 52,076 |
| $ | (28,128 | ) | | $ | (16,890 | ) |
Cash provided byused for (provided by) operating activities was $5.6 million in the first ninethree months of 2017, compared to $144.5 million2019 reflected fluctuations in the same period of 2016. The decrease in cash from operating activities for the first nine months of 2017 compared to the same period in 2016 was primarily due to unfavorablenet income along with changes in working capital including inventory and accounts receivable balances.capital.
Cash used for investing activities was $403.6 million in the first ninethree months of 2017, compared to $16.3 million in the same period of 2016. Investing activities in 2017 and 2016 related to2019 included capital expenditures of $14.3 million for our strategic and operational efficiency initiatives, particularly initiatives relating to information technology enhancementscapital expenditures of property and optimizing our distribution network. Cash used for investing activities in 2017 also includes the acquisition of Byram Healthcare for $367 million.equipment and capitalized software.
Cash provided by (used for) financing activities included dividend payments of $4.8 million in the first ninethree months of 2017 was $305.7 million,2019, compared to cash used of $82.8$16.1 million in the same period of 2016. During2018. In the first nine monthsquarter of 2017, we paid dividends2019 and 2018, cash provided by (used for) financing activities included proceeds from borrowings of $47.3$72.1 million (compared to $47.8and $(0.3) million in 2016), repurchased common stock under a share repurchase program for $5.0 million (compared to $48.7 million in 2016) and borrowed on our new Credit Agreement ($250 million term loan and $117.2 million on our revolving credit facility). There were no borrowingsfacility. Financing activities in the prior year period.first quarter of 2019 and 2018 also included the repayment of $12.4 million and $3.1 million in borrowings on our Credit Agreement. The Company also paid $4.3 million in financing costs related to the Fourth Amendment to the Credit Agreement in February 2019.
Capital resources. Our sources of liquidity include cash and cash equivalents and a revolving credit facility. On July 27, 2017, we entered into a newfacility under our Credit Agreement replacing the Amended Credit Agreement(amended February 2019) with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Bank of America, N.A. and a syndicate of financial institutions (the Credit Agreement). The Credit Agreement provides a borrowing capacity of $600$400 million and a $250$914 million outstanding in term loan. We make principal payments under the term loan on a quarterly basis with the remaining outstanding principal due in five years. The revolving credit facility has a five-year maturity. Under the Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $200 million.loans. The interest rate on the Credit Agreement, which is subject to
adjustment quarterly,our revolving credit facility and Term A loans is based on the London Interbank OfferedEurocurrency Rate, (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread)Consolidated Total Leverage Ratio as defined by the Credit Agreement. Our Term B loan accrues interest based on the Eurocurrency Rate, the Federal Funds Rate or the Prime Rate, plus interest rate margin of 3.50% per annum with respect to Base Rate Loans (as defined in the Credit Agreement), and 4.50% per annum with respect to Eurocurrency Rate Loans (as defined in the Credit Agreement). We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the facility. The terms of the Credit Agreement limit the amount of indebtedness that we may incur and requirerequires us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. Our credit spread at March 31, 2019 was Eurocurrency Rate plus 3.5%.
We may utilizealso have a Security and Pledge Agreement (the Security Agreement) pursuant to which we granted collateral on behalf of the holders of the 2021 Notes and the 2024 Notes and parties secured on 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 (limited, in the case of controlled foreign corporations, to a pledge of 65% of the voting capital stock of each first-tier foreign subsidiary of each Credit Party) and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. Our Credit Agreement has a “springing maturity date” with respect to the revolving loans and the Term A loans and the Term B loan, if as of the date that is 91 days prior to the maturity date of the Company’s 2021 Notes or the 2024 Notes, respectively, all outstanding amounts owing under the 2021 Notes or the 2024 Notes, respectively, have not been paid in full then the Termination Date (as defined in the Credit Agreement) of the revolving credit facility, for long-term strategic growth, capital expenditures, working capitalTerm A loans and general corporate purposes. If we were unableTerm B loan shall be the date that is 91 days prior to access the revolving credit facility, it could impact our ability to fund these needs. Based on our leverage ratio at September 30, 2017,maturity date of the interest rate under the credit facility is LIBOR plus 1.375%.2021 Notes.
At September 30, 2017,March 31, 2019, we had borrowings of $117.2$282.2 million under the revolver and letters of credit of approximately $5.1$11.7 million outstanding under the Credit Agreement leaving $477.7along with $550 million available for borrowing.in Senior Notes. We also have a $1.3 million letterhad letters of credit and bank guarantees outstanding for $7.7 million as of September 30, 2017March 31, 2019 and December 31, 20162018, which supports ourcertain facilities leased as well as other normal business activities in the United States and Europe.
We have $275 millionThe fourth quarter dividend of 3.875% senior notes due 2021 (the “2021 Notes”) and $275 million of 4.375% senior notes due 2024 (the “2024 Notes”). 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%. Interest on the 2021 Notes and 2024 Notes is payable semiannually in arrears, which commenced on March 15, 2015 and December 15, 2014, respectively. 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 Treasury Rate plus 30 basis points.
In the third quarter of 2017, we paid cash dividends on our outstanding common stock at the rate of $0.2575$0.075 per share which represents a 1.0% increase over the ratewas accrued at December 31, 2018 and paid in January 2019. The first quarter dividend of $0.255$0.0025 per share was paid in the third quarter of 2016. We anticipate continuing to pay quarterly cash dividends in the future. However, theMarch 2019. 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.
In October 2016, theOur Board of Directors authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in December 2019. The program is intended to offset shares issued in conjunction with our stock incentive plan and return capital to shareholders, and may be suspended or discontinued at any time. DuringHowever, our Credit Agreement contains restrictions on the first nine monthsamount and timing of 2017, we repurchased approximately 0.2 millionshare repurchase activity. This includes prohibiting share repurchases should a default under the Credit Agreement exist prior to or immediately after any share repurchases. We did not repurchase any shares for $5.0 million under this program.during 2019. At September 30, 2017,March 31, 2019, the remaining amount authorized for repurchase under this program was $94.0 million.
We earn a portion of our operating earnings in foreign jurisdictions outside the U.S., which we consider to be indefinitely reinvested. Accordingly, no U.S. federal and state income taxes and withholding taxes have been provided on these earnings. Our cash, cash-equivalents, short-term investments, and marketable securities held by our foreign subsidiaries totaled $60.7 million and $82.1 million as of September 30, 2017 and December 31, 2016. We do not intend, nor do we foresee a need, to repatriate these funds or other assets held outside the U.S. In the future, should we require more capital to fund discretionary activities in the U.S. than is generated by our domestic operations and is available through our borrowings, we could elect to repatriate cash or other assets from foreign jurisdictions that have previously been considered to be indefinitely reinvested.
We believe available financing sources, including cash generated by operating activities and borrowings under the Credit Agreement, and other committed financing, 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, share 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. Prior to the reporting period in which the Tax Cuts and Jobs Act (the Act) was enacted we considered foreign earnings to be indefinitely reinvested and provided no United States federal and state taxes or withholding taxes on those earnings. Our cash and cash equivalents held by our foreign subsidiaries totaled $61.2 million at March 31, 2019 and $64.9 million at December 31, 2018. Upon enactment, the Act imposes a tax on our total post-1986 foreign earnings at various tax rates. The Company has recognized an amount for this one-time transition tax. The Company continues to remain permanently reinvested in its foreign subsidiaries, with the exception of our newly acquired subsidiary in Thailand. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities in which we assert permanent reinvestment. Management has no specific plans to indefinitely reinvest the unremitted earnings of our newly acquired foreign subsidiary located in Thailand as of March 31, 2019. 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. The Company will continue to evaluate its foreign earnings repatriation policy during 2019 for all other foreign subsidiaries in which we operate.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 20162018 and Note 1517 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended on September 30, 2017.
March 31, 2019.
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:
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;acquisitions, including our ability to successfully integrate the S&IP business into our operations and to realize the anticipated benefits and synergies from the S&IP acquisition;
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 (including the Affordable Care Act);
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;
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;
the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;
our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk;
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 planned withdrawal from the European Union; and
other factors describeddetailed from time to time in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016.reports we file with the SEC.
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 exposed to market risk from changes in interest rates related to our borrowing under our Credit Agreement. However, we enter into interest rate swap agreements to manage our exposure to interest rate changes. We had $914 million in borrowings under our term loans, $282 million in borrowings under our revolving credit facility. We had $117.2 million in outstanding borrowingsfacility and approximately $5.1$12 million in letters of credit under the revolving credit facilityCredit Agreement at September 30, 2017. A hypotheticalMarch 31, 2019. After considering the effects of interest rate swap agreements entered into during July 2018, we estimate an increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1$7 million per year for every $10 million ofbased on our borrowings outstanding borrowings underand the revolving credit facility.effective interest rates at March 31, 2019.
Due to the nature and pricing of our DomesticGlobal 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 hashave included entering into leases forusing 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$3.02 per gallon in the first ninethree months of 2017, a increase from $2.25 per gallon in the first nine months of 2016.2019 and 2018. Based on our fuel consumption in the first ninethree months of 2017,2019, we estimate that every 10 cents per gallon increase in the benchmark would reduce our DomesticGlobal Solutions segment operating earningsincome by approximately $0.3$0.4 million on an annualized basis.
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 Euroeuro, British pound and British Pound.Thai baht. We may use foreign currency forwards, swaps and options, where possible, to manage our risk related to certain foreign currency fluctuations. However, we believe that
We are subject to price risk for our foreign currency transaction risks are low since our revenuesraw materials, the most significant of which relates to the cost of polypropylene and expenses are typically denominatednitrile used in the same currency.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.
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, 2017. ThereMarch 31, 2019.
In connection with the Halyard acquisition, we entered into transition services agreements with Avanos pursuant to which they and we will provide to each other various transitional services, including, but not limited to, facilities, product supply, financial and business services, procurement, human resources, regulatory affairs and quality assurance, sales and marketing, information technology and other support services for a period of up to 18 months after the closing date. Management has been no change in our internal controlestablished controls to mitigate the risk over financial reporting duringand will continue to monitor and evaluate the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
SEC guidance permits the exclusion of an evaluationsufficiency of the effectivenesscontrols. We are currently evaluating the acquired processes, information technology systems and other components of a registrant's disclosureinternal controls and procedures as they relate to the internal control over financial reporting for an acquired business duringas part of the yearCompany's integration activities which may result in periodic changes. Such changes will be disclosed as required by applicable SEC guidance.
In the thirdsecond quarter of 2017,2018, we acquired Byram Healthcare.the Halyard Surgical & Infection Prevention business. This acquisition represented $477$682 million of total assets and $80.3$189 million of revenues (net of intercompany eliminations) as of and for the three months ended September 30, 2017.March 31, 2019. Management's evaluation and conclusion as to the effectiveness of the design and operation of the Company's disclosure controls and procedures as of and for the period covered by this report excludes any evaluation of the internal control over financial reporting of these acquisitions.this acquisition.
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. We implemented internal controls to ensure we adequately assessed the adoption impact of the new lease standard, and its related amendments, on our consolidated financial statements. There were no significant changes to our internal control over financial reporting due to the adoption of the new standard.
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, 2016.2018. Through September 30, 2017,March 31, 2019, 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, 2016.2018. Through September 30, 2017, we have added the following risk factors. ThereMarch 31, 2019, there have been no other material changes in the risk factors described in such Annual Report.
We are subject to stringent regulatory and licensing requirements
We are required to comply with extensive and complex laws and regulations at the federal, state and local government levels. Among these laws are the federal Anti-kickback Statute, the federal Stark Law, the False Claims Act and similar state laws relating to healthcare fraud and abuse. The requirements of these laws are complex and subject to varying interpretations, and it is possible that regulatory authorities could challenge our policies and practices. If we fail to comply with these laws, we could be subject to federal or state government investigations or qui tam actions (false claims cases initiated by private parties purporting to act on behalf of federal or state governments), which could result in civil or criminal sanctions, including the loss of licenses or the ability to participate in Medicare, Medicaid and other federal and state healthcare programs. Such sanctions and damages could adversely affect our results of operations and financial condition.
Our Byram business is a Medicare-certified supplier and participates in state Medicaid programs. Failure to comply with applicable standards and regulations could result in civil or criminal sanctions, including the loss of our ability to participate in Medicare, Medicaid and other federal and state healthcare programs.
We collect, handle and maintain patient-identifiable health information and other sensitive personal and financial information, which are subject to federal, state and foreign laws that regulate the use and disclosure of such information. Regulations currently in place continue to evolve, and new laws in this area could further restrict our ability to collect, handle and maintain personal or patient information, or could require us to incur additional compliance costs, either of which could have an adverse impact on our results of operations. Violations of federal, state or foreign laws concerning privacy and data protection could subject us to civil or criminal penalties, breach of contract claims, costs for remediation and harm to our reputation.
Compliance with the terms and conditions of Byram’s Corporate Integrity Agreement requires significant resources and, if we fail to comply, we could be subject to penalties or excluded from participation in government healthcare programs, which could seriously harm our results of operations, liquidity and financial results.
Prior to its acquisition by Owens & Minor, Byram entered into a five-year Corporate Integrity Agreement beginning April 2016 with the Office of Inspector General of the United States Department of Health and Human Services (“OIG”). The Corporate Integrity Agreement provides that Byram shall, among other things, establish and maintain a compliance program, including a corporate compliance officer and committee, a code of conduct, comprehensive compliance policies and procedures, training and monitoring, a review process for certain arrangements between Byram and referral sources, a compliance hotline, an open door policy and a disciplinary process for compliance violations. The Corporate Integrity Agreement further provides that Byram shall provide periodic reports to the OIG, complete certain regular certifications and engage an Independent Review Organization to perform reviews of certain arrangements between Byram and referral sources.
Failing to meet the Corporate Integrity Agreement obligations could have material adverse consequences for Byram including monetary penalties for each instance of non-compliance. In addition, in the event of an uncured material breach or deliberate violation of the Corporate Integrity Agreement, we could be excluded from participation in Federal healthcare programs, or other significant penalties, which could seriously harm our results of operations, liquidity and financial results.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In October 2016, our Board of Directors authorized a share repurchase program of up to $100 million of the company’s outstanding common stock to be executed at the discretion of management over a three-year period. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors and may be suspended or discontinued at any time. Purchases under the share repurchase program are made either pursuant to 10b5-1 plans entered into by the company from time to time and/or during the company’s scheduled quarterly trading windows for officers and directors. We did not repurchase any shares for the three months ended September 30, 2017.March 31, 2019.
Item 6. Exhibits
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101.INS | | XBRL Instance Document |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
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| | * Certain exhibits and schedules been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish copies of such omitted materials supplementally upon request by the SEC. |
| | ** Management contract or compensatory plan or arrangement |
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.
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| | | Owens & Minor, Inc. |
| | | (Registrant) |
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Date: | November 1, 2017May 7, 2019 | | /s/ Paul C. PhippsEdward A. Pesicka |
| | | Paul C. PhippsEdward A. Pesicka |
| | | President & Chief Executive Officer |
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Date: | November 1, 2017May 7, 2019 | | /s/ Richard A. MeierRobert K. Snead |
| | | Richard A. MeierRobert K. Snead |
| | | Executive Vice President & Chief Financial Officer & President, International |