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 March 31, 20182019
OR
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¨ | 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 | ¨ |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
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 May 7, 2018,1, 2019, was 61,791,91162,935,985 shares.
Owens & Minor, Inc. and Subsidiaries
Index
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| Page |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income (Loss)
(unaudited)
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
(in thousands, except per share data) | | 2018 | | 2017 | | 2019 | | 2018 |
Net revenue | | $ | 2,372,579 |
| | $ | 2,328,573 |
| | $ | 2,461,388 |
| | $ | 2,372,579 |
|
Cost of goods sold | | 2,047,892 |
| | 2,047,393 |
| | 2,102,964 |
| | 2,047,892 |
|
Gross margin |
| 324,687 |
| | 281,180 |
|
| 358,424 |
| | 324,687 |
|
Distribution, selling and administrative expenses | | 284,361 |
| | 237,693 |
| | 338,703 |
| | 284,361 |
|
Acquisition-related and exit and realignment charges | | 14,760 |
| | 8,942 |
| | 4,990 |
| | 14,760 |
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Other operating (income) expense, net | | 1,349 |
| | (972 | ) | |
Other operating expense, net | | | 39 |
| | 1,349 |
|
Operating income | | 24,217 |
| | 35,517 |
| | 14,692 |
| | 24,217 |
|
Interest expense, net | | 10,253 |
| | 6,744 |
| | 29,101 |
| | 10,253 |
|
Income before income taxes | | 13,964 |
| | 28,773 |
| |
Income tax provision | | 5,813 |
| | 9,988 |
| |
Net income | | $ | 8,151 |
| | $ | 18,785 |
| |
Income (loss) before income taxes | | | (14,409 | ) | | 13,964 |
|
Income tax (benefit) provision | | | (313 | ) | | 5,813 |
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Net income (loss) | | | $ | (14,096 | ) | | $ | 8,151 |
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| | | | | | | | |
Net income per common share: basic and diluted | | $ | 0.13 |
| | $ | 0.31 |
| |
Cash dividends per common share | | $ | 0.26 |
| | $ | 0.2575 |
| |
Net income (loss) per common share: basic and diluted | | | $ | (0.23 | ) | | $ | 0.13 |
|
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
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| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Net income | | $ | 8,151 |
| | $ | 18,785 |
|
Other comprehensive income, net of tax: | | | | |
Currency translation adjustments (net of income tax of $0 in 2018 and 2017) | | 8,921 |
| | 5,492 |
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Change in unrecognized net periodic pension costs (net of income tax of $142 in 2018 and $226 in 2017) | | 380 |
| | 236 |
|
Other (net of income tax of $0 in 2018 and 2017) | | 6 |
| | 110 |
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Total other comprehensive income, net of tax | | 9,307 |
| | 5,838 |
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Comprehensive income | | $ | 17,458 |
| | $ | 24,623 |
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| | | | | | | | |
| | Three Months Ended March 31, |
(in thousands) | | 2019 |
| 2018 |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
|
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)
| | | March 31, | | December 31, | March 31, | | December 31, |
(in thousands, except per share data) | 2018 | | 2017 | 2019 | | 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Cash and cash equivalents | $ | 87,632 |
| | $ | 104,522 |
| $ | 75,239 |
| | $ | 103,367 |
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Accounts receivable, net of allowances of $17,925 and $16,280 | 778,155 |
| | 758,936 |
| |
Accounts receivable, net of allowances of $21,572 and $19,618 | | 843,384 |
| | 823,418 |
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Merchandise inventories | 1,021,711 |
| | 990,193 |
| 1,210,558 |
| | 1,290,103 |
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Other current assets | 300,275 |
| | 328,254 |
| 336,065 |
| | 321,690 |
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Total current assets | 2,187,773 |
| | 2,181,905 |
| 2,465,246 |
| | 2,538,578 |
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Property and equipment, net of accumulated depreciation of $248,482 and $239,581 | 207,042 |
| | 206,490 |
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Goodwill, net | 715,445 |
| | 713,811 |
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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 | 178,880 |
| | 184,468 |
| 311,254 |
| | 321,764 |
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Other assets, net | 102,414 |
| | 89,619 |
| 109,294 |
| | 112,601 |
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Total assets | $ | 3,391,554 |
| | $ | 3,376,293 |
| $ | 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 | $ | 958,270 |
| | $ | 947,572 |
| $ | 990,688 |
| | $ | 1,109,589 |
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Accrued payroll and related liabilities | 30,480 |
| | 30,416 |
| 40,999 |
| | 48,203 |
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Other current liabilities | 337,230 |
| | 331,745 |
| 377,989 |
| | 314,219 |
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Total current liabilities | 1,325,980 |
| | 1,309,733 |
| 1,409,676 |
| | 1,472,011 |
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Long-term debt, excluding current portion | 897,071 |
| | 900,744 |
| 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 | 73,180 |
| | 74,247 |
| 42,144 |
| | 50,852 |
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Other liabilities | 76,405 |
| | 76,090 |
| 87,867 |
| | 81,924 |
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Total liabilities | 2,372,636 |
| | 2,360,814 |
| 3,380,525 |
| | 3,255,369 |
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Commitments and contingencies |
| |
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Equity | | | | | | |
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 61,812 shares and 61,476 shares | 123,624 |
| | 122,952 |
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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 | 228,273 |
| | 226,937 |
| 241,547 |
| | 238,773 |
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Retained earnings | 682,798 |
| | 690,674 |
| 186,455 |
| | 200,670 |
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Accumulated other comprehensive loss | (15,777 | ) | | (25,084 | ) | (52,035 | ) | | (45,612 | ) |
Total equity | 1,018,918 |
| | 1,015,479 |
| 501,839 |
| | 518,419 |
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Total liabilities and equity | $ | 3,391,554 |
| | $ | 3,376,293 |
| $ | 3,882,364 |
| | $ | 3,773,788 |
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
(in thousands) | 2018 | | 2017 | 2019 | | 2018 |
Operating activities: | | | | | | |
Net income | $ | 8,151 |
| | $ | 18,785 |
| |
Adjustments to reconcile net income to cash provided by (used for) operating activities: |
| | | |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
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Adjustments to reconcile net income to cash (used for) provided by operating activities: | | | |
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Depreciation and amortization | 17,911 |
| | 12,558 |
| 28,720 |
| | 17,911 |
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Share-based compensation expense | 3,035 |
| | 2,511 |
| 4,505 |
| | 3,035 |
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Provision for losses on accounts receivable | 1,073 |
| | (603 | ) | 3,619 |
| | 1,073 |
|
Deferred income tax expense (benefit) | (1,482 | ) | | (825 | ) | |
Deferred income tax benefit | | (8,613 | ) | | (1,482 | ) |
Changes in operating assets and liabilities: |
| | | | |
|
Accounts receivable | (18,519 | ) | | 1,554 |
| (22,573 | ) | | (18,519 | ) |
Merchandise inventories | (30,556 | ) | | (32,777 | ) | 80,194 |
| | (30,556 | ) |
Accounts payable | 9,478 |
| | (7,341 | ) | (120,480 | ) | | 9,478 |
|
Net change in other assets and liabilities | 28,904 |
| | (24,965 | ) | (15,858 | ) | | 28,904 |
|
Other, net | 278 |
| | 4,743 |
| 3,678 |
| | 278 |
|
Cash provided by (used for) operating activities | 18,273 |
| | (26,360 | ) | |
Cash (used for) provided by operating activities | | (60,904 | ) | | 18,273 |
|
Investing activities: | | | | | | |
Additions to property and equipment | (7,074 | ) | | (10,146 | ) | (11,674 | ) | | (7,074 | ) |
Additions to computer software and intangible assets | (7,086 | ) | | (4,622 | ) | (2,605 | ) | | (7,086 | ) |
Proceeds from sale of property and equipment | — |
| | 315 |
| 271 |
| | — |
|
Cash used for investing activities | (14,160 | ) | | (14,453 | ) | (14,008 | ) | | (14,160 | ) |
Financing activities: | | | | | | |
Borrowings (repayments) under revolving credit facility | (300 | ) | | — |
| 72,100 |
| | (300 | ) |
Repayments of debt | (3,125 | ) | | — |
| (12,394 | ) | | (3,125 | ) |
Financing costs paid | | (4,313 | ) | | — |
|
Cash dividends paid | (16,074 | ) | | (15,740 | ) | (4,764 | ) | | (16,074 | ) |
Other, net | (2,304 | ) | | (2,759 | ) | (1,124 | ) | | (2,304 | ) |
Cash used for financing activities | (21,803 | ) | | (18,499 | ) | |
Cash provided by (used for) financing activities | | 49,505 |
| | (21,803 | ) |
Effect of exchange rate changes on cash and cash equivalents | 800 |
| | 991 |
| (2,721 | ) | | 800 |
|
Net increase (decrease) in cash and cash equivalents | (16,890 | ) | | (58,321 | ) | |
Net decrease in cash and cash equivalents | | (28,128 | ) | | (16,890 | ) |
Cash and cash equivalents at beginning of period | 104,522 |
| | 185,488 |
| 103,367 |
| | 104,522 |
|
Cash and cash equivalents at end of period | $ | 87,632 |
| | $ | 127,167 |
| $ | 75,239 |
| | $ | 87,632 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Income taxes paid, net | $ | 1,197 |
| | $ | 2,825 |
| |
Income taxes paid, net of refunds | | $ | (12,388 | ) | | $ | 1,197 |
|
Interest paid | $ | 9,661 |
| | $ | 6,183 |
| $ | 24,504 |
| | $ | 9,661 |
|
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except per share data) | Common Shares Outstanding | | Common Stock ($2 par value ) | | Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Equity |
Balance December 31, 2016 | 61,031 |
| | $ | 122,062 |
| | $ | 219,955 |
| | $ | 685,504 |
| | $ | (67,483 | ) | | $ | 960,038 |
|
Net income | | | | | | | 18,785 |
| | | | 18,785 |
|
Other comprehensive income (loss) | | | | | | | | | 5,838 |
| | 5,838 |
|
Dividends declared ($0.2575 per share) | | | | | | | (15,698 | ) | | | | (15,698 | ) |
Share-based compensation expense, exercises and other | 171 |
| | 341 |
| | 653 |
| |
| | | | 994 |
|
Balance March 31, 2017 | 61,202 |
| | $ | 122,403 |
| | $ | 220,608 |
| | $ | 688,591 |
| | $ | (61,645 | ) | | $ | 969,957 |
|
| | | | | | | | | | | |
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 (loss) | | | | | | | | | 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 |
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Balance March 31, 2018 | 61,812 |
| | $ | 123,624 |
| | $ | 228,273 |
| | $ | 682,798 |
| | $ | (15,777 | ) | | $ | 1,018,918 |
|
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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, 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 |
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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.
Recently, we have made certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting. These changes align our operations into two distinct business units: Global Solutions and Global Products. Global Solutions (previously Domestic and International) is our U.S. and European distribution, logistics and value-added services business. Global Products (previously Proprietary Products) provides product-related solutions, including surgical and procedural kitting and sourcing. Beginning with the quarter ended March 31, 2018, we now report financial results using this two segment structure and have recast prior year segment results on the same basis.
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.
Revenue Recognition
On January 1, 2018, we adopted ASC 606 Revenue from Contracts with Customers, which establishes principles for recognizing revenue and reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We applied the guidance using the modified retrospective transition method. The adoption of this guidance had no impact on the amount and timing of revenue recognized, therefore, no adjustments were recorded to our consolidated financial statements upon adoption.
Our revenue is primarily generated from sales contracts with customers. Under most of our distribution arrangements, our performance obligations are limited to delivery of products to a customer upon receipt of a purchase order. For these arrangements, we recognize revenue at the point in time when shipment is completed, as control passes to the customer upon product receipt.
Revenue for activity-based fees and other services is recognized over time as activities are performed. Depending on the specific contractual provisions and nature of the performance obligation, revenue from services may be recognized on a straight-line basis over the term of the service, on a proportional performance model, based on level of effort, or when final deliverables have been provided.
Our contracts sometimes allow for forms of variable consideration including rebates, incentives and performance guarantees. In these cases, we estimate the amount of consideration to which we will be entitled in exchange for transferring the product or service to the customer. Rebates and customer incentives are estimated based on contractual terms or historical experience and we maintain a liability for rebates or incentives that have been earned but are unpaid. The amount accrued for rebates and incentives due to customers was $14.8 million at March 31, 2018 and $13.0 million at December 31, 2017.
Additionally, we generate fees from arrangements that include performance targets related to cost-saving initiatives for customers that result from our supply-chain management services. Achievement against performance targets, measured in accordance with contractual terms, may result in additional fees paid to us or, if performance targets are not achieved, we may be obligated to refund or reduce a portion of our fees or to provide credits toward future purchases by the customer. For these arrangements, contingent revenue is deferred and recognized as the performance target is achieved and the applicable contingency is released. When we determine that a loss is probable under a contract, the estimated loss is accrued. The amount deferred under these arrangements is not material.
For our direct to patient and home health agency sales, revenues are recorded based upon the estimated amounts due from patients and third-party payors. Third-party payors include federal and state agencies (under Medicare and Medicaid programs), managed care health plans and commercial insurance companies. Estimates of contractual allowances are based upon historical collection rates for the related payor agreements. The estimated reimbursement amounts are made on a payor-specific basis and are recorded based on the best information available regarding management’s interpretation of the applicable laws, regulations and reimbursement terms.
In most cases, we record revenue gross, as we are the primary obligor in the arrangement and we obtain control of the products before they are transferred to the customer. When we act as an agent in a sales arrangement and do not bear a significant portion of inventory risks, primarily for our third-party logistics business, we record revenue net of product cost. Sales taxes collected from customers and remitted to governmental authorities are excluded from revenues.
See Note 1315 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—Acquisitions
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 $289 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, as final working capital adjustments with the sellervaluations of certain tangible and intangible assets are still pending.
|
| | | | | | | | | | | |
| Preliminary Fair Value Originally Estimated as of Acquisition Date (1) | | Differences Between Prior and the Current Periods Preliminary Fair Value Estimate | | Preliminary Fair Value Currently Estimated as of Acquisition Date |
Assets acquired: | | | | | |
Current assets | $ | 61,986 |
| | $ | — |
| | $ | 61,986 |
|
Goodwill | 288,691 |
| | — |
| | 288,691 |
|
Intangible assets | 115,000 |
| | — |
| | 115,000 |
|
Other noncurrent assets | 5,069 |
| | — |
| | 5,069 |
|
Total assets | 470,746 |
| | — |
| | 470,746 |
|
Liabilities assumed: | | | | | |
Current liabilities | 72,962 |
| | — |
| | 72,962 |
|
Noncurrent liabilities | 31,215 |
| | — |
| | 31,215 |
|
Total liabilities | 104,177 |
| | — |
| | 104,177 |
|
Fair value of net assets acquired, net of cash | $ | 366,569 |
| | $ | — |
| | $ | 366,569 |
|
in process.
|
| | | | | | | | | | | |
| 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 | $ | 330,870 |
| | $ | — |
| | $ | 330,870 |
|
Goodwill | 130,364 |
| | — |
| | 130,364 |
|
Intangible assets | 191,230 |
| | — |
| | 191,230 |
|
Other noncurrent assets | 218,240 |
| | — |
| | 218,240 |
|
Total assets | 870,704 |
| | — |
| | 870,704 |
|
Liabilities assumed: | | | | | |
Current liabilities | 92,438 |
| | — |
| | 92,438 |
|
Noncurrent liabilities | 20,217 |
| | — |
| | 20,217 |
|
Total liabilities | 112,655 |
| | — |
| | 112,655 |
|
Fair value of net assets acquired, net of cash | $ | 758,049 |
| | $ | — |
| | $ | 758,049 |
|
(1) As previously reported in our 20172018 Form 10-K.
We are amortizing the preliminary fair value of acquired intangible assets, primarily chronic customer relationships, and a trade name and other intellectual property, over their estimated weighted average useful lives of threeeight to 1012 years.
Goodwill of $289$130 million, which we assigned to our Global SolutionsProducts 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 quarter consist primarily of transition and transaction costs for the Halyard S&IP transaction (See Note 16) as well as Byram and in first quarter of 2017 consist primarily of transaction costs for Byram. We recognized pre-tax acquisition-related expenses of $12.1 million in 2018 and $1.3 million related to these activities in 2017.future.
Note 4—Financing Receivables and Payables
At March 31, 20182019 and December 31, 2017,2018, we had financing receivables of $170.5$209.7 million and $192.1$183.3 million, respectively, and related payables of $106.7$100.5 million and $124.9$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
In connection with our new segment structure, goodwill is now reported as part of Global Solutions or Global Products. There was no change to our underlying reporting units as part of this segment change and therefore no reallocation of goodwill. The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill through March 31, 2018:2019:
|
| | | | | | | | | | | |
| Global Solutions | | Global Products | | Consolidated |
Carrying amount of goodwill, December 31, 2017 | $ | 495,860 |
| | $ | 217,951 |
| | $ | 713,811 |
|
Currency translation adjustments | 1,070 |
| | 564 |
| | 1,634 |
|
Carrying amount of goodwill, March 31, 2018 | $ | 496,930 |
| | $ | 218,515 |
| | $ | 715,445 |
|
|
| | | | | | | | | | | |
| 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 March 31, 2018,2019 and December 31, 2017,2018, were as follows:
| | | March 31, 2018 | | December 31, 2017 | 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 | $ | 200,574 |
| | $ | 43,683 |
| | $ | 199,265 |
| | $ | 43,537 |
| $ | 267,732 |
| | $ | 97,000 |
| | $ | 42,724 |
| | $ | 267,510 |
| | $ | 97,000 |
| | $ | 42,930 |
|
Accumulated amortization | (60,641 | ) | | (4,736 | ) | | (54,757 | ) | | (3,577 | ) | (79,999 | ) | | (10,779 | ) | | (5,424 | ) | | (72,947 | ) | | (8,544 | ) | | (4,185 | ) |
Net intangible assets | $ | 139,933 |
| | $ | 38,947 |
| | $ | 144,508 |
| | $ | 39,960 |
| $ | 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 March 31, 2018, $122.82019, $102.0 million in net intangible assets were held in the Global Solutions segment and $56.1$209.3 million were held in the Global Products segment. Amortization expense for intangible assets was $6.4$10.4 million and $2.3$6.4 million for the three months ended March 31, 2019 and 2018, and 2017.respectively.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $19.2$31.2 million for the remainder of 2018, $25.6 million for 2019, $24.6$40.7 million for 2020, $22.9$39.0 million for 2021, $22.1$38.1 million for 2022, and $21.1$36.9 million for 2023.2023 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 Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations which includeincludes the closure and 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 months ended March 31, 20182019 and 20172018 were as follows:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Global Solutions segment | $ | 2,708 |
| | $ | 7,132 |
| $ | 824 |
| | $ | 2,708 |
|
Global Products segment | (29 | ) | | 463 |
| 7 |
| | (29 | ) |
Total exit and realignment charges | $ | 2,679 |
| | $ | 7,595 |
| $ | 831 |
| | $ | 2,679 |
|
The following table summarizes the activity related to exit and realignment cost and related accruals through March 31, 20182019 and 2017:2018:
| | | Lease Obligations | | Severance and Other | | Total | | 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 |
| | $ | 11,972 |
| | $ | 11,972 |
|
Provision for exit and realignment activities | — |
| | 2,295 |
| | 2,295 |
| |
Provision for exit and realignment activities: | | |
|
|
Severance | | | 2,295 |
|
Information system restructuring costs | | | 177 |
|
Other | | | 230 |
|
Change in estimate | — |
| | (23 | ) | | (23 | ) | | (23 | ) |
Cash payments | — |
| | (6,479 | ) | | (6,479 | ) | | (6,886 | ) |
Accrued exit and realignment costs, March 31, 2018 | $ | — |
| | $ | 7,765 |
| | $ | 7,765 |
| | $ | 7,765 |
|
| | | | | | |
| | | | | | |
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 |
| |
In addition to the(1)The accrued exit and realignment accruals in the preceding table, we also incurred $0.4 million in costs that were expensed as incurred for the quarter endedat March 31, 2019 and 2018 including $0.2 million inrelated primarily to accrued information system restructuring costs and $0.2 million in other costs.
We also incurred $4.7 million of costs that were expensed as incurred for the quarter ended March 31, 2017, including $4.5 million in asset write-downs and $0.2 million in other costs.accrued severance.
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 months ended March 31, 20182019 and 2017,2018, were as follows:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Service cost | $ | 19 |
| | $ | 12 |
| $ | 374 |
| | $ | 19 |
|
Interest cost | 419 |
| | 474 |
| 600 |
| | 419 |
|
Recognized net actuarial loss | 522 |
| | 462 |
| 260 |
| | 522 |
|
Net periodic benefit cost | $ | 960 |
| | $ | 948 |
| $ | 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 March 31, 2019 and 2018, and 2017.respectively.
Note 10—Debt
Debt consists of the following:
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 March 31, 2018 and December 31, 2017, the estimated fair value of the 2021 Notes was $272.7 million and $278.1 million and the estimated fair value of the 2024 Notes was $271.2 million and $277.9 million, respectively. |
| | | | | | | | | | | | | | | |
| 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 a Credit Agreement (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 July 2022. The revolving credit facility matures in July 2022. 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 Eurocurrency Rate, 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. Based on our Credit Spread, the interest rate under theOur credit facilityspread at March 31, 2018 is2019 was Eurocurrency Rate plus 1.5%3.5%.
We also have a Security and Pledge Agreement (the Security Agreement) pursuant to which we granted collateral on behalf of the holders of the 2021 Notes 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 91 days prior to the maturity date of the 2021 Notes.
At March 31, 2018,2019, we had borrowings of $104.3 million under the revolver and letters of credit of approximately $6.8$11.7 million outstanding under the Credit Agreement, leaving $488.9 million available for borrowing.Agreement. We also had a letterletters of credit and bank guarantees outstanding for $1.3$7.7 million as of March 31, 20182019 and December 31, 2017,2018, respectively, which supports ourcertain facilities leased as well as other normal business activities in Europe.
Scheduled future principal payments of debt are $12.5 million in 2018, $12.5 million in 2019, $14.1 million in 2020, $295.3 million in 2021, $291.8 million in 2022,the United States and $275.0 million thereafter.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 March 31, 2018.2019.
In connection with the Halyard S&IP acquisition, we have amended our Credit Agreement. See Note 16 for further information.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—11—Income Taxes
The effective tax rate was 41.6%2.2% for the three months ended March 31, 2018,2019, compared to 34.7%41.6% in the same quarter of 2017.2018. The increasedecrease in the rate resulted from the mixture of income and losses in jurisdictions within which the company operates, including those of which require a full valuation allowancesallowance, and additionalthe incremental income tax expense associated with the vesting of restricted stock. The liability for unrecognized tax benefits was $13.9$11.2 million at March 31, 20182019 and $13.6$9.6 million at December 31, 2017.2018. Included in the liability at March 31, 20182019 were $5.1$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.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the Act). While we substantially completed our analysis of the Act as of December 31, 2017, the amounts recorded for the Act remain provisional for the transition tax, the remeasurement of deferred taxes, our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances. These estimates may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of the global intangible low-taxed Income (GILTI) provisions. We included an estimate of the current GILTI impact in our tax provision for 2018, however, we have not yet determined our policy election with respect to whether such taxes are recorded as a current period expense when incurred or whether such amounts should be factored into a company’s measurement of its deferred taxes.
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 months ended March 31, 20182019 and 2017.2018:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
(in thousands, except per share data) | 2018 | | 2017 | 2019 | | 2018 |
Numerator: | | | | | | |
Net income | $ | 8,151 |
| | $ | 18,785 |
| |
Net income (loss) | | $ | (14,096 | ) | | $ | 8,151 |
|
Less: income allocated to unvested restricted shares | (323 | ) | | (239 | ) | — |
| | (323 | ) |
Net income attributable to common shareholders - basic | 7,828 |
| | 18,546 |
| |
Add: undistributed income attributable to unvested restricted shares - basic | — |
| | 23 |
| |
Less: undistributed income attributable to unvested restricted shares - diluted | — |
| | (23 | ) | |
Net income attributable to common shareholders - diluted | $ | 7,828 |
| | $ | 18,546 |
| |
Net income (loss) attributable to common shareholders - basic and diluted | | $ | (14,096 | ) | | $ | 7,828 |
|
Denominator: | | | | | | |
Weighted average shares outstanding - basic and diluted | 59,969 |
| | 60,013 |
| 60,376 |
| | 59,969 |
|
Net income per share attributable to common shareholders: | | | | |
Net income (loss) per share attributable to common shareholders: | | | | |
Basic and diluted | $ | 0.13 |
| | $ | 0.31 |
| $ | (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. Our Credit Agreement contains restrictions on the amount and timing 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 during the three monthsquarters ended March 31, 2019 and 2018. As of March 31, 2018,2019, 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 months ended March 31, 20182019 and 2017:2018:
| | | Retirement Plans | | Currency Translation Adjustments | | Other | | Total | Retirement Plans | | Currency Translation Adjustments | | Derivatives and Other | | Total |
Accumulated other comprehensive income (loss), December 31, 2017 | $ | (12,066 | ) | | $ | (13,185 | ) | | $ | 167 |
| | $ | (25,084 | ) | |
Accumulated other comprehensive income (loss), December 31, 2018 | | $ | (8,146 | ) | | $ | (32,551 | ) | | $ | (4,915 | ) | | $ | (45,612 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | 8,921 |
| | 6 |
| | 8,927 |
| — |
| | (4,207 | ) | | (3,649 | ) | | (7,856 | ) |
Income tax | — |
| | — |
| | — |
| | — |
| — |
| | �� |
| | 808 |
| | 808 |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 8,921 |
| | 6 |
| | 8,927 |
| — |
| | (4,207 | ) | | (2,841 | ) | | (7,048 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | 522 |
| | — |
| | — |
| | 522 |
| 266 |
| | — |
| | 578 |
| | 844 |
|
Income tax | (142 | ) | | — |
| | — |
| | (142 | ) | (69 | ) | | — |
| | (150 | ) | | (219 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 380 |
| | — |
| | — |
| | 380 |
| 197 |
| | — |
| | 428 |
| | 625 |
|
Other comprehensive income (loss) | 380 |
| | 8,921 |
| | 6 |
| | 9,307 |
| 197 |
| | (4,207 | ) | | (2,413 | ) | | (6,423 | ) |
Accumulated other comprehensive income (loss), March 31, 2018 | $ | (11,686 | ) | | $ | (4,264 | ) | | $ | 173 |
| | $ | (15,777 | ) | |
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 | — |
| | 5,492 |
| | 110 |
| | 5,602 |
| — |
| | 8,921 |
| | 6 |
| | 8,927 |
|
Income tax | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) before reclassifications, net of tax | — |
| | 5,492 |
| | 110 |
| | 5,602 |
| — |
| | 8,921 |
| | 6 |
| | 8,927 |
|
Amounts reclassified from accumulated other comprehensive income (loss) | 462 |
| | — |
| |
|
| | 462 |
| 522 |
| | — |
| |
|
| | 522 |
|
Income tax | (226 | ) | | — |
| | — |
| | (226 | ) | (142 | ) | | — |
| | — |
| | (142 | ) |
Amounts reclassified from accumulated other comprehensive income (loss), net of tax | 236 |
| | — |
| | — |
| | 236 |
| 380 |
| | — |
| | — |
| | 380 |
|
Other comprehensive income (loss) | 236 |
| | 5,492 |
| | 110 |
| | 5,838 |
| 380 |
| | 8,921 |
| | 6 |
| | 9,307 |
|
Accumulated other comprehensive income (loss), March 31, 2017 | $ | (10,973 | ) | | $ | (50,753 | ) | | $ | 81 |
| | $ | (61,645 | ) | |
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 both the three months ended March 31, 20182019 and 2017,2018, we reclassified $0.3 million and $0.5 million, respectively, 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 two segments: Global Solutions and Global Products. The Global Solutions segment includes our United States and European distribution, logistics and value-added services business. Global Products provides product-related solutions, includingmanufactures and sources medical surgical products through our production and procedural kitting and sourcing.operations. The Halyard S&IP business, acquired on April 30, 2018, will beis part of Global Products.
We evaluate the performance of our segments based on their operating income excluding intangible amortization, acquisition-related and exit and realignment charges, certain purchase price fair value adjustments, and other substantive items
that, either as a result of their nature or size, would not be expected to occur as part of our normal business operations on a regular basis.
Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading 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 March 31, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Net revenue: | | | | | | |
Segment net revenue | | | | | | |
Global Solutions | $ | 2,341,122 |
| | $ | 2,288,955 |
| $ | 2,234,147 |
| | $ | 2,341,122 |
|
Global Products | 121,287 |
| | 137,153 |
| 347,085 |
| | 121,287 |
|
Total segment net revenue | 2,462,409 |
| | 2,426,108 |
| 2,581,232 |
| | 2,462,409 |
|
Inter-segment revenue | | | | | | |
Global Products | (89,830 | ) | | (97,535 | ) | (119,844 | ) | | (89,830 | ) |
Total inter-segment revenue | (89,830 | ) | | (97,535 | ) | (119,844 | ) | | (89,830 | ) |
Consolidated net revenue | $ | 2,372,579 |
| | $ | 2,328,573 |
| $ | 2,461,388 |
| | $ | 2,372,579 |
|
| | | | | | |
Operating income (loss): | | | | | | |
Global Solutions | $ | 31,625 |
| | $ | 37,951 |
| $ | 21,071 |
| | $ | 36,759 |
|
Global Products | 9,811 |
| | 8,128 |
| 7,724 |
| | 11,084 |
|
Inter-segment eliminations | (242 | ) | | (698 | ) | 1,747 |
| | (242 | ) |
Intangible amortization | | (10,361 | ) | | (6,407 | ) |
Acquisition-related and exit and realignment charges | (14,760 | ) | | (8,942 | ) | (4,990 | ) | | (14,760 | ) |
Other (1) | (2,217 | ) | | (922 | ) | (499 | ) | | (2,217 | ) |
Consolidated operating income | $ | 24,217 |
| | $ | 35,517 |
| $ | 14,692 |
| | $ | 24,217 |
|
| | | | | | |
Depreciation and amortization: | | | | | | |
Global Solutions | $ | 15,781 |
| | $ | 10,664 |
| $ | 16,113 |
| | $ | 15,781 |
|
Global Products | 2,130 |
| | 1,894 |
| 12,607 |
| | 2,130 |
|
Consolidated depreciation and amortization | $ | 17,911 |
| | $ | 12,558 |
| $ | 28,720 |
| | $ | 17,911 |
|
| | | | | | |
Capital expenditures: | | | | | | |
Global Solutions | $ | 13,602 |
| | $ | 13,840 |
| $ | 11,376 |
| | $ | 13,602 |
|
Global Products | 558 |
| | 928 |
| 2,903 |
| | 558 |
|
Consolidated capital expenditures | $ | 14,160 |
| | $ | 14,768 |
| $ | 14,279 |
| | $ | 14,160 |
|
(1) Other consists of Software as a Service (SaaS) implementation costs associated with significant global IT platforms in connection with the redesign of our global information system strategy.
| | | March 31, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
Total assets: | | | | | | |
Global Solutions | $ | 2,900,618 |
| | $ | 2,870,999 |
| $ | 2,673,148 |
| | $ | 2,618,759 |
|
Global Products | 403,304 |
| | 400,772 |
| 1,133,977 |
| | 1,051,662 |
|
Segment assets | 3,303,922 |
| | 3,271,771 |
| 3,807,125 |
| | 3,670,421 |
|
Cash and cash equivalents | 87,632 |
| | 104,522 |
| 75,239 |
| | 103,367 |
|
Consolidated total assets | $ | 3,391,554 |
| | $ | 3,376,293 |
| $ | 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, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
Net revenue: | | | | | | |
United States | $ | 2,252,634 |
| | $ | 2,220,649 |
| $ | 2,303,913 |
| | $ | 2,252,634 |
|
Outside of the United States | 119,945 |
| | 107,924 |
| |
International | | 157,475 |
| | 119,945 |
|
Consolidated net revenue | $ | 2,372,579 |
| | $ | 2,328,573 |
| $ | 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. The prior period has been recasted for the change in guarantor structure as a result of the amended Credit Agreement.
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2018 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,110,861 |
| | $ | 301,266 |
| | $ | (39,548 | ) | | $ | 2,372,579 |
|
Cost of goods sold | — |
| | 1,914,637 |
| | 172,726 |
| | (39,471 | ) | | 2,047,892 |
|
Gross margin | — |
| | 196,224 |
| | 128,540 |
| | (77 | ) | | 324,687 |
|
Distribution, selling and administrative expenses | (179 | ) | | 160,870 |
| | 123,670 |
| | — |
| | 284,361 |
|
Acquisition-related and exit and realignment charges | — |
| | 13,228 |
| | 1,532 |
| | — |
| | 14,760 |
|
Other operating income, net | — |
| | (583 | ) | | 1,932 |
| | — |
| | 1,349 |
|
Operating income (loss) | 179 |
| | 22,709 |
| | 1,406 |
| | (77 | ) | | 24,217 |
|
Interest expense (income), net | 6,741 |
| | 2,022 |
| | 1,490 |
| | — |
| | 10,253 |
|
Income (loss) before income taxes | (6,562 | ) | | 20,687 |
| | (84 | ) | | (77 | ) | | 13,964 |
|
Income tax (benefit) provision | — |
| | 4,456 |
| | 1,357 |
| | — |
| | 5,813 |
|
Equity in earnings of subsidiaries | 14,713 |
| | 2,210 |
| | — |
| | (16,923 | ) | | — |
|
Net income (loss) | 8,151 |
| | 18,441 |
| | (1,441 | ) | | (17,000 | ) | | 8,151 |
|
Other comprehensive income (loss) | 9,307 |
| | 9,363 |
| | 8,921 |
| | (18,284 | ) | | 9,307 |
|
Comprehensive income (loss) | $ | 17,458 |
| | $ | 27,804 |
| | $ | 7,480 |
| | $ | (35,284 | ) | | $ | 17,458 |
|
|
| | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Statements of Income | | | | | | | | | |
Net revenue | $ | — |
| | $ | 2,193,285 |
| | $ | 186,854 |
| | $ | (51,566 | ) | | $ | 2,328,573 |
|
Cost of goods sold | — |
| | 1,990,186 |
| | 108,185 |
| | (50,978 | ) | | 2,047,393 |
|
Gross margin | — |
| | 203,099 |
| | 78,669 |
| | (588 | ) | | 281,180 |
|
Distribution, selling and administrative expenses | 156 |
| | 161,235 |
| | 76,302 |
| | — |
| | 237,693 |
|
Acquisition-related and exit and realignment charges | — |
| | 7,799 |
| | 1,143 |
| | — |
| | 8,942 |
|
Other operating income, net | — |
| | (374 | ) | | (598 | ) | | — |
| | (972 | ) |
Operating income (loss) | (156 | ) | | 34,439 |
| | 1,822 |
| | (588 | ) | | 35,517 |
|
Interest expense (income), net | 6,848 |
| | (790 | ) | | 686 |
| | — |
| | 6,744 |
|
Income (loss) before income taxes | (7,004 | ) | | 35,229 |
| | 1,136 |
| | (588 | ) | | 28,773 |
|
Income tax (benefit) provision | — |
| | 8,013 |
| | 1,975 |
| | — |
| | 9,988 |
|
Equity in earnings of subsidiaries | 25,789 |
| | (1,105 | ) | | — |
| | (24,684 | ) | | — |
|
Net income (loss) | 18,785 |
| | 26,111 |
| | (839 | ) | | (25,272 | ) | | 18,785 |
|
Other comprehensive income (loss) | 5,838 |
| | 5,644 |
| | 5,492 |
| | (11,136 | ) | | 5,838 |
|
Comprehensive income (loss) | $ | 24,623 |
| | $ | 31,755 |
| | $ | 4,653 |
| | $ | (36,408 | ) | | $ | 24,623 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non- guarantor Subsidiaries | | Eliminations | | Consolidated |
|
| Balance Sheets | | | | | | | | | |
| Assets | | | | | | | | | |
| Current assets | | | | | | | | | |
| Cash and cash equivalents | $ | 13,271 |
| | $ | 1,018 |
| | $ | 73,343 |
| | $ | — |
| | $ | 87,632 |
|
| Accounts receivable, net | — |
| | 613,000 |
| | 172,044 |
| | (6,889 | ) | | 778,155 |
|
| Merchandise inventories | — |
| | 933,024 |
| | 90,342 |
| | (1,655 | ) | | 1,021,711 |
|
| Other current assets | 25 |
| | 111,987 |
| | 188,263 |
| | — |
| | 300,275 |
|
| Total current assets | 13,296 |
| | 1,659,029 |
| | 523,992 |
| | (8,544 | ) | | 2,187,773 |
|
| Property and equipment, net | — |
| | 108,770 |
| | 98,272 |
| | — |
| | 207,042 |
|
| Goodwill, net | — |
| | 180,006 |
| | 535,439 |
| | — |
| | 715,445 |
|
| Intangible assets, net | — |
| | 9,064 |
| | 169,816 |
| | — |
| | 178,880 |
|
| Due from O&M and subsidiaries | — |
| | 413,109 |
| | — |
| | (413,109 | ) | | — |
|
| Advances to and investment in consolidated subsidiaries | 2,129,567 |
| | 566,615 |
| | — |
| | (2,696,182 | ) | | — |
|
| Other assets, net | — |
| | 67,071 |
| | 35,343 |
| | — |
| | 102,414 |
|
| Total assets | $ | 2,142,863 |
| | $ | 3,003,664 |
| | $ | 1,362,862 |
| | $ | (3,117,835 | ) | | $ | 3,391,554 |
|
| Liabilities and equity | | | | | | | | | |
| Current liabilities | | | | | | | | | |
| Accounts payable | $ | — |
| | $ | 841,364 |
| | $ | 123,814 |
| | $ | (6,908 | ) | | $ | 958,270 |
|
| Accrued payroll and related liabilities | — |
| | 14,888 |
| | 15,592 |
| | — |
| | 30,480 |
|
| Other accrued liabilities | 5,867 |
| | 166,738 |
| | 164,625 |
| | — |
| | 337,230 |
|
| Total current liabilities | 5,867 |
| | 1,022,990 |
| | 304,031 |
| | (6,908 | ) | | 1,325,980 |
|
| Long-term debt, excluding current portion | 545,603 |
| | 337,024 |
| | 14,444 |
| | — |
| | 897,071 |
|
| Due to O&M and subsidiaries | 572,475 |
| | — |
| | 460,381 |
| | (1,032,856 | ) | | — |
|
| Intercompany debt | — |
| | 138,890 |
| | — |
| | (138,890 | ) | | — |
|
| Deferred income taxes | — |
| | 24,058 |
| | 49,122 |
| | — |
| | 73,180 |
|
| Other liabilities | — |
| | 66,152 |
| | 10,253 |
| | — |
| | 76,405 |
|
| Total liabilities | 1,123,945 |
| | 1,589,114 |
| | 838,231 |
| | (1,178,654 | ) | | 2,372,636 |
|
| Equity | | | | | | | | | |
| Common stock | 123,624 |
| | — |
| | — |
| | — |
| | 123,624 |
|
| Paid-in capital | 228,273 |
| | 174,614 |
| | 583,866 |
| | (758,480 | ) | | 228,273 |
|
| Retained earnings (deficit) | 682,798 |
| | 1,254,606 |
| | (54,857 | ) | | (1,199,749 | ) | | 682,798 |
|
| Accumulated other comprehensive income (loss) | (15,777 | ) | | (14,670 | ) | | (4,378 | ) | | 19,048 |
| | (15,777 | ) |
| Total equity | 1,018,918 |
| | 1,414,550 |
| | 524,631 |
| | (1,939,181 | ) | | 1,018,918 |
|
| Total liabilities and equity | $ | 2,142,863 |
| | $ | 3,003,664 |
| | $ | 1,362,862 |
| | $ | (3,117,835 | ) | | $ | 3,391,554 |
|
|
| | | | | | | | | | | | | | | | | | | |
December 31, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
Balance Sheets | | | | | | | | | |
Assets | | | | | | | | | |
Current assets |
|
| |
|
| |
|
| |
|
| |
|
|
Cash and cash equivalents | $ | 13,700 |
| | $ | 865 |
| | $ | 89,957 |
| | $ | — |
| | $ | 104,522 |
|
Accounts receivable, net | — |
| | 559,269 |
| | 206,410 |
| | (6,743 | ) | | 758,936 |
|
Merchandise inventories | — |
| | 902,190 |
| | 89,580 |
| | (1,577 | ) | | 990,193 |
|
Other current assets | 100 |
| | 123,067 |
| | 205,087 |
| | — |
| | 328,254 |
|
Total current assets | 13,800 |
| | 1,585,391 |
| | 591,034 |
| | (8,320 | ) | | 2,181,905 |
|
Property and equipment, net | — |
| | 107,010 |
| | 99,480 |
| | — |
| | 206,490 |
|
Goodwill, net | — |
| | 180,006 |
| | 533,805 |
| | — |
| | 713,811 |
|
Intangible assets, net | — |
| | 9,582 |
| | 174,886 |
| | — |
| | 184,468 |
|
Due from O&M and subsidiaries | — |
| | 439,654 |
| | — |
| | (439,654 | ) | | — |
|
Advances to and investments in consolidated subsidiaries | 2,114,853 |
| | 558,429 |
| | — |
| | (2,673,282 | ) | | — |
|
Other assets, net | — |
| | 57,724 |
| | 31,895 |
| | — |
| | 89,619 |
|
Total assets | $ | 2,128,653 |
| | $ | 2,937,796 |
| | $ | 1,431,100 |
| | $ | (3,121,256 | ) | | $ | 3,376,293 |
|
Liabilities and equity | | | | | | | | | |
Current liabilities |
|
| |
|
| |
|
| |
|
| |
|
|
Accounts payable | $ | — |
| | $ | 824,307 |
| | $ | 130,028 |
| | $ | (6,763 | ) | | $ | 947,572 |
|
Accrued payroll and related liabilities | — |
| | 15,504 |
| | 14,912 |
| | — |
| | 30,416 |
|
Other current liabilities | 5,822 |
| | 140,048 |
| | 185,875 |
| | — |
| | 331,745 |
|
Total current liabilities | 5,822 |
| | 979,859 |
| | 330,815 |
| | (6,763 | ) | | 1,309,733 |
|
Long-term debt, excluding current portion | 545,352 |
| | 340,672 |
| | 14,720 |
| | — |
| | 900,744 |
|
Due to O&M and subsidiaries | 562,000 |
| | — |
| | 506,703 |
| | (1,068,703 | ) | | — |
|
Intercompany debt | — |
| | 138,890 |
| | — |
| | (138,890 | ) | | — |
|
Deferred income taxes | — |
| | 25,493 |
| | 48,754 |
| | — |
| | 74,247 |
|
Other liabilities | — |
| | 66,136 |
| | 9,954 |
| | — |
| | 76,090 |
|
Total liabilities | 1,113,174 |
| | 1,551,050 |
| | 910,946 |
| | (1,214,356 | ) | | 2,360,814 |
|
Equity |
|
| |
|
| |
|
| |
|
| |
|
|
Common stock | 122,952 |
| | — |
| | — |
| | — |
| | 122,952 |
|
Paid-in capital | 226,937 |
| | 174,614 |
| | 583,869 |
| | (758,483 | ) | | 226,937 |
|
Retained earnings (deficit) | 690,674 |
| | 1,236,165 |
| | (50,416 | ) | | (1,185,749 | ) | | 690,674 |
|
Accumulated other comprehensive income (loss) | (25,084 | ) | | (24,033 | ) | | (13,299 | ) | | 37,332 |
| | (25,084 | ) |
Total equity | 1,015,479 |
| | $ | 1,386,746 |
| | 520,154 |
| | (1,906,900 | ) | | 1,015,479 |
|
Total liabilities and equity | $ | 2,128,653 |
| | $ | 2,937,796 |
| | $ | 1,431,100 |
| | $ | (3,121,256 | ) | | $ | 3,376,293 |
|
|
| | | | | | | | | | | | | | | | | | | |
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 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| 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 |
| | $ | (1,441 | ) | | $ | (17,000 | ) | | $ | 8,151 |
|
| Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | | |
| Equity in earnings of subsidiaries | (14,713 | ) | | (2,210 | ) | | — |
| | 16,923 |
| | — |
|
| Depreciation and amortization | — |
| | 6,653 |
| | 11,258 |
| | — |
| | 17,911 |
|
| Share-based compensation expense | — |
| | 3,035 |
| | — |
| | — |
| | 3,035 |
|
| Provision for losses on accounts receivable | — |
| | (724 | ) | | 1,797 |
| | — |
| | 1,073 |
|
| Deferred income tax expense (benefit) | — |
| | (1,453 | ) | | (29 | ) | | — |
| | (1,482 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Accounts receivable | — |
| | (53,007 | ) | | 34,341 |
| | 147 |
| | (18,519 | ) |
| Merchandise inventories | — |
| | (30,834 | ) | | 202 |
| | 76 |
| | (30,556 | ) |
| Accounts payable | — |
| | 17,057 |
| | (7,439 | ) | | (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 provided by (used for) operating activities | (6,191 | ) | | (10,934 | ) | | 35,398 |
| | — |
| | 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 provided by (used for) investing activities | — |
| | (11,925 | ) | | (2,235 | ) | | — |
| | (14,160 | ) |
| Financing activities: | | | | | | | | |
|
| Borrowing (repayments) under revolving credit facility | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) |
| Repayment of debt | — |
| | (3,125 | ) | | — |
| | — |
| | (3,125 | ) |
| Change in intercompany advances | 22,949 |
| | 26,858 |
| | (49,807 | ) | | — |
| | — |
|
| Cash dividends paid | (16,074 | ) | | — |
| | — |
| | — |
| | (16,074 | ) |
| Other, net | (1,113 | ) | | (421 | ) | | (770 | ) | | — |
| | (2,304 | ) |
| Cash provided by (used for) financing activities | 5,762 |
| | 23,012 |
| | (50,577 | ) | | — |
| | (21,803 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 800 |
| | — |
| | 800 |
|
| Net increase (decrease) in cash and cash equivalents | (429 | ) | | 153 |
| | (16,614 | ) | | — |
| | (16,890 | ) |
| Cash and cash equivalents at beginning of period | 13,700 |
| | 865 |
| | 89,957 |
| | ��� |
| | 104,522 |
|
| Cash and cash equivalents at end of period | $ | 13,271 |
| | $ | 1,018 |
| | $ | 73,343 |
| | $ | — |
| | $ | 87,632 |
|
|
| | | | | | | | | | | | | | | | | | | |
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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 | Owens & Minor, Inc. | | Guarantor Subsidiaries | | Non-guarantor Subsidiaries | | Eliminations | | Consolidated |
|
| Statements of Cash Flows | | | | | | | | | |
| Operating activities: | | | | | | | | | |
| Net income (loss) | $ | 18,785 |
| | $ | 26,111 |
| | $ | (839 | ) | | $ | (25,272 | ) | | $ | 18,785 |
|
| Adjustments to reconcile net income to cash provided by (used for) operating activities: | | | | | | | | | |
| Equity in earnings of subsidiaries | (25,789 | ) | | 1,105 |
| | — |
| | 24,684 |
| | — |
|
| Depreciation and amortization | — |
| | 6,876 |
| | 5,682 |
| | — |
| | 12,558 |
|
| Share-based compensation expense | — |
| | 2,511 |
| | — |
| | — |
| | 2,511 |
|
| Provision for losses on accounts receivable | — |
| | (707 | ) | | 104 |
| | — |
| | (603 | ) |
| Deferred income tax expense (benefit) | — |
| | (825 | ) | | — |
| | — |
| | (825 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | |
| Accounts receivable | — |
| | 2,459 |
| | (131 | ) | | (774 | ) | | 1,554 |
|
| Merchandise inventories | — |
| | (3,311 | ) | | (30,154 | ) | | 688 |
| | (32,777 | ) |
| Accounts payable | 37 |
| | (15,051 | ) | | 6,999 |
| | 674 |
| | (7,341 | ) |
| Net change in other assets and liabilities | 164 |
| | (3,434 | ) | | (21,695 | ) | | — |
| | (24,965 | ) |
| Other, net | 214 |
| | 4,549 |
| | (20 | ) | | — |
| | 4,743 |
|
| Cash provided by (used for) operating activities | (6,589 | ) | | 20,283 |
| | (40,054 | ) | | — |
| | (26,360 | ) |
| Investing activities: | | | | | | | | | |
| Additions to property and equipment | — |
| | (8,141 | ) | | (2,005 | ) | | — |
| | (10,146 | ) |
| Additions to computer software and intangible assets | — |
| | (677 | ) | | (3,945 | ) | | — |
| | (4,622 | ) |
| Proceeds from the sale of property and equipment | — |
| | 45 |
| | 270 |
| | — |
| | 315 |
|
| Cash provided by (used for) investing activities | — |
| | (8,773 | ) | | (5,680 | ) | | — |
| | (14,453 | ) |
| Financing activities: | | | | | | | | | |
| Change in intercompany advances | 49,025 |
| | (56,375 | ) | | 7,350 |
| | — |
| | — |
|
| Cash dividends paid | (15,740 | ) | | — |
| | — |
| | — |
| | (15,740 | ) |
| Other, net | (1,541 | ) | | (516 | ) | | (702 | ) | | — |
| | (2,759 | ) |
| Cash provided by (used for) financing activities | 31,744 |
| | (56,891 | ) | | 6,648 |
| | — |
| | (18,499 | ) |
| Effect of exchange rate changes on cash and cash equivalents | — |
| | — |
| | 991 |
| | — |
| | 991 |
|
| Net increase (decrease) in cash and cash equivalents | 25,155 |
| | (45,381 | ) | | (38,095 | ) | | — |
| | (58,321 | ) |
| Cash and cash equivalents at beginning of period | 38,015 |
| | 61,266 |
| | 86,207 |
| | — |
| | 185,488 |
|
| Cash and cash equivalents at end of period | $ | 63,170 |
| | $ | 15,885 |
| | $ | 48,112 |
| | $ | — |
| | $ | 127,167 |
|
Note 15—Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. We adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. The impact on our consolidated financial statements is not material. See Note 1 for further information. |
| | | | | | | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | | | | | |
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 17—Recent Accounting Pronouncements
In 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, 2019, and interim periods within those fiscal years. The Company adopted ASU No. 2017-12 effective beginning January 1, 2019. Its adoption did not have a material impact on our consolidated financial statements.
On February 14, 2018, the Financial Accounting Standards Board (“FASB”)FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income which permits the reclassification of. ASU No. 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the "Act") from accumulated other comprehensive income (loss) to retained earnings. This new guidance isASU No. 2018-02 was effective for us beginningthe Company on January 1, 2019 with early adoption permitted, and must be applied eitherwe elected not to reclassify income tax effects due to the Act from accumulated other comprehensive income (loss) to retained earnings on the consolidated balance sheets in the period of adoption.
We adopted ASU No. 2016-02, Leases (Topic 842), as of January 1, 2019. We elected to use the adoption date as our date of initial application and thus have not restated comparative prior periods. We elected the ‘package of practical expedients’, which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or retrospectivelythe practical expedient pertaining to periodsland easements; the latter not being applicable to us.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in whichtransition. We also elected the effectspractical expedient to not separate lease and non-lease components for all of our leases.
The adoption of the Act are recognized. We are currently evaluatingnew standard resulted in the effects that the adoptionrecording of this guidance will have onoperating lease assets and lease liabilities of approximately $197 million and $201 million, respectively, as of January 1, 2019. The standard did not materially impact our consolidated financial statementsnet income and the related disclosures. had no impact on cash flows.
There have been no further changes in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Note 16—Subsequent Events
On April 30, 2018 (the “Closing Date”), we completed the previously announced acquisition of substantially all of Halyard Health, Inc.’s (“Halyard”) Surgical and Infection Prevention (“S&IP”) business, the name “Halyard Health” (and all variations of that name and related intellectual property rights) and Halyard’s IT system (collectively, the “Acquisition”), contemplated by the Amended and Restated Purchase Agreement, in exchange for $710 million, subject to certain adjustments as provided in the Amended and Restated Purchase Agreement based on the cash, indebtedness and net working capital transferred at the closing. Halyard's S&IP business is a leading global provider of medical supplies and solutions for the prevention of healthcare-associated infections across acute care and non-acute care markets. This business will be reported as part of the Global Products segment.The initial allocation of purchase price to assets and liabilities acquired is not yet complete.
We entered into transition services agreements with Halyard 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 Closing Date, certain of our affiliates also entered into transitional distribution agreements with affiliates of Halyard under which the Halyard affiliates will serve as limited risk distributors for our international customer orders on a transitional basis. The services under the transition services agreements and distribution agreements generally will commence on the Closing Date and terminate within 18 months thereafter.
In connection with the Halyard S&IP acquisition, we amended our Credit Agreement. The amendments contain the following principal terms, among others:
lender commitments and funding for a $195.75 million term A-2 loan with a four-year maturity and a $254.25 million term B loan with a seven-year maturity;
lender commitments and funding for an additional $245.75 million of term B loans with a seven-year maturity;
interest rate pricing grid based on the better of debt to EBITDA ratio or credit ratings for all loans other than the term B loans;
a new interest rate margin for term B loans 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);
amended financial covenant-related definitions and amendments to certain customary affirmative and negative covenants;
the addition of collateral for the benefit of the Secured Parties (as defined), first priority liens and security interests (“Liens”) 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;
addition of a “springing maturity date” with respect to (i) the term B loans, if as of the date that is 91 days prior to the maturity date of the Company’s 3.875% senior notes due 2021 (the “2021 Notes”) or 4.375% senior notes due 2024 (the “2024 Notes”), all outstanding amounts owing under the 2021 Notes or the 2024 Notes, respectively, have not been paid in full and (ii) the revolving loans and the term A loans, if as of the date that is 91 days prior to the 2021 Notes maturity date, all outstanding amounts owing under the 2021 Notes have not been paid in full; and
extension of the “soft call” provision from six months to twelve months.
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, 2017.2018. 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, 2017.2018.
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 company that connectsaligned to deliver significant and sustained value for healthcare providers and manufacturers across the world of medical products to the pointcontinuum of care. Recently, we have made certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting. These changes align our operations into two distinct business units: Global Solutions and Global Products. Global Solutions (previously Domestic and International) is our U.S. and European distribution, logistics and value-added services business. Global Products (previously Proprietary Products) provides product-related solutions, including surgical and procedural kitting and sourcing. The Halyard S&IP business, acquired on April 30, 2018 (see below), will be reported as part of the Global Products segment. Beginning with the quarter ended March 31, 2018, we now report financial results using this two segment structure and have recast prior year segment results on the same basis.
On April 30, 2018 (the “Closing Date”)Closing Date), we completed the previously announced acquisition ofacquired substantially all of Avanos Medical, Inc.'s (Avanos, previously Halyard Health, Inc.’s (“Halyard”) Surgical and Infection Prevention (“S&IP”) business, the name “Halyard Health” (and all variations of that name and related intellectual property rights) and Halyard’s IT system (collectively, the “Acquisition”), contemplated by the Amended and Restated Purchase Agreement,its information technology (IT) systems in exchange for $710$758 million, subjectnet of cash acquired. The Halyard business is a leading global provider of medical supplies and solutions for the prevention of healthcare associated infections across acute care and non-acute care markets. 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 Closing Date, certain adjustmentsof our affiliates also entered into transitional distribution agreements with affiliates of Avanos under which the Avanos affiliates will serve as provided inlimited risk distributors for our international customer orders on a transitional basis. The services under the Amendedtransition services agreements and Restated Purchase Agreement baseddistribution agreements generally commenced on the cash, indebtednessClosing Date and net working capital transferred at the closing. See Note 16 in the Notes to Consolidated Financial Statements for further information.terminate within 18 months thereafter.
Financial highlights. The following table provides a reconciliation of reported operating income, net income and net income per diluted common share to non-GAAP measures used by management.
| | | Three Months Ended March 31, | Three Months Ended March 31, |
(Dollars in thousands except per share data) | 2018 | | 2017 | 2019 | | 2018 |
Operating income, as reported (GAAP) | $ | 24,217 |
| | $ | 35,517 |
| $ | 14,692 |
| | $ | 24,217 |
|
Acquisition-related intangible amortization (1) | 6,407 |
| | 2,319 |
| |
Intangible amortization (1) | | 10,361 |
| | 6,407 |
|
Acquisition-related and exit and realignment charges (2) | 14,760 |
| | 8,942 |
| 4,990 |
| | 14,760 |
|
Other (3) | 2,217 |
| | 922 |
| 499 |
| | 2,217 |
|
Operating income, adjusted (non-GAAP) (Adjusted Operated Income) | $ | 47,601 |
| | $ | 47,700 |
| $ | 30,542 |
| | $ | 47,601 |
|
Operating Income as a percent of revenue (GAAP) | 1.02 | % | | 1.53 | % | 0.60 | % | | 1.02 | % |
Adjusted Operating Income as a percent of revenue (non-GAAP) | 2.01 | % | | 2.05 | % | 1.24 | % | | 2.01 | % |
| | | | | | |
Net income, as reported (GAAP) | $ | 8,151 |
| | $ | 18,785 |
| |
Acquisition-related intangible amortization (1) | 6,407 |
| | 2,319 |
| |
Income tax expense (benefit) (4) | (1,557 | ) | | (696 | ) | |
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) | 14,760 |
| | 8,942 |
| 4,990 |
| | 14,760 |
|
Income tax expense (benefit) (4) | (3,576 | ) | | (3,505 | ) | |
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) | 2,217 |
| | 922 |
| 499 |
| | 2,217 |
|
Income tax expense (benefit) (4) | (228 | ) | | (354 | ) | |
Income tax expense (benefit) (5) | | (55 | ) | | (228 | ) |
Net income, adjusted (non-GAAP) (Adjusted Net Income) | $ | 26,174 |
| | $ | 26,413 |
| $ | 965 |
| | $ | 26,174 |
|
| | | | | | |
Net income per diluted common share, as reported (GAAP) | $ | 0.13 |
| | $ | 0.31 |
| |
Acquisition-related intangible amortization (1) | 0.08 |
| | 0.03 |
| |
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) | 0.19 |
| | 0.09 |
| 0.07 |
| | 0.19 |
|
Write-off of deferred financing costs (4) | | 0.03 |
| | — |
|
Other (3) | 0.03 |
| | 0.01 |
| 0.01 |
| | 0.03 |
|
Net income per diluted common share, adjusted (non-GAAP)(Adjusted EPS) | $ | 0.43 |
| | $ | 0.44 |
| $ | 0.02 |
| | $ | 0.43 |
|
Net income (loss) per diluted share was $0.13$(0.23) for the three months ended March 31, 2018,2019, a decline of $0.18$0.36 compared to 2017.2018. Adjusted EPS (non-GAAP) was $0.43$0.02 in the first quarter of 2018,2019, a decline of $0.01$0.41 when compared to prior year. Global Solutions segment operating income of $31.6$21.1 million declined $6.3$15.7 million from the first quarter of 20172018 as a result of lower revenues, continued pressure on providerdistribution margins, and and warehouse inefficiencies in our distribution centers.higher supply chain costs. Global Products operating income, which includes Halyard, was $7.7 million in the first quarter of $9.82019 and $11.1 million increased $1.7 million from 2017 as a resultin the first quarter of improved operational efficiency.2018.
Use of Non-GAAP Measures
Adjusted operating 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 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.
(2) Acquisition-related charges pre-tax, were $12.1$4.2 million and $1.3$12.1 million in the first quarter of 2019 and 2018, respectively. Acquisition-related charges in 2019 and 2017. Acquisition related expenses in the current quarter2018 consist primarily of transition and transaction costs for the Halyard S&IP transaction. Expenses in 2017 consisted primarily of transaction costs for Byram.
Exit and realignment charges pre-tax, were $0.8 million in the first quarter of 2019 and $2.7 million in the first quarter of 20182018. Amounts in 2019 were associated with the establishment of our client engagement centers and $7.6 million in the first quarter of 2017.IT restructuring charges. Amounts in 2018 were associated with the establishment of our client engagement centers. Amounts in 2017 were associated with the write-down of information system assets which are no longer used and severance charges from reduction in force and other employee costs associated with the establishment of our new client engagement center.
(3) Other consists of Software as a Service (SaaS) implementation costs associated with significant 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
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Global Solutions | $ | 2,341,122 |
| | $ | 2,288,955 |
| | $ | 52,167 |
| | 2.3 | % | $ | 2,234,147 |
| | $ | 2,341,122 |
| | $ | (106,975 | ) | | (4.6 | )% |
Global Products | 121,287 |
| | 137,153 |
| | (15,866 | ) | | (11.6 | )% | 347,085 |
| | 121,287 |
| | 225,798 |
| | 186.2 | % |
Inter-segment | (89,830 | ) | | (97,535 | ) | | 7,705 |
| | 7.9 | % | (119,844 | ) | | (89,830 | ) | | (30,014 | ) | | (33.4 | )% |
Net revenue | $ | 2,372,579 |
| | $ | 2,328,573 |
| | $ | 44,006 |
| | 1.9 | % | $ | 2,461,388 |
| | $ | 2,372,579 |
| | $ | 88,809 |
| | 3.7 | % |
Consolidated net revenue increased primarily as a result of the acquisition of ByramHalyard in August 2017April 2018, which contributed revenue of $118$188.7 million to Global Solutions(net of intercompany eliminations) in the quarter. The increase also included favorable impact from foreign exchange of $16.0 million, offset by reducedLower distribution revenues as a result of customer non-renewals, primarily resulting from lost customers. A decrease in sales of custom procedure traysservice issues, contributed to the year over year change in the Global Products segment.Solutions segment, which was partially offset by sales growth from Byram.
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Cost of goods sold | $ | 2,047,892 |
| | $ | 2,047,393 |
| | $ | 499 |
| | — | % | $ | 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. These are sometimes referred to as distribution or buy/sell contracts. Cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our Global Products business. There is no cost of goods sold associated with our fee-for-service arrangements. Cost of
goods sold compared to prior year reflects changes in sales activity, including sales mix, and improved operational performance in our kitting operations.mix.
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Gross margin | $ | 324,687 |
| | $ | 281,180 |
| | $ | 43,507 |
| | 15.5 | % | $ | 358,424 |
| | $ | 324,687 |
| | $ | 33,737 |
| | 10.4 | % |
As a % of net revenue | 13.68 | % | | 12.08 | % | | | | | 14.56 | % | | 13.68 | % | | | | |
Gross margin in the first quarter of 20182019 included positive contributioncontributions from Halyard, strong revenue growth with Byram, and favorableincreased fee-for-service revenues, which were partially offset by the impact from lower distribution revenues, a decline in distribution margins, and unfavorable impact from foreign exchangecurrency translation of $9.9 million, offset by a decline in provider margin compared to the prior year. With increasing customer cost pressures and competitive dynamics in healthcare, we believe the current trend$6.6 million.
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Distribution, selling & administrative expenses | $ | 284,361 |
| | $ | 237,693 |
| | $ | 46,668 |
| | 19.6 | % | |
Distribution, selling and administrative expenses | | $ | 338,703 |
| | $ | 284,361 |
| | $ | 54,342 |
| | 19.1 | % |
As a % of net revenue | 11.99 | % | | 10.21 | % | |
| |
| 13.76 | % | | 11.99 | % | |
| |
|
Other operating (income) expense, net | $ | 1,349 |
| | $ | (972 | ) | | $ | 2,321 |
| | 238.8 | % | |
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.
Excluding Byram, DS&A expenses for the three months ended March 31, 2018 were 11.05% of net revenues. Overall DS&A expenses compared to prior year reflected unfavorableincreased 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 and delivery expenses, and increased expenses incurred for the development of new customer solutions, partially offset by favorable impacts for foreign currency translation impacts of $10.3 million, as well as higher warehouse and delivery expenses.$6.6 million.
The decrease in other operating income,expense, net was attributed primarily to higherlower software as a service implementation expenses.
A discussion of the acquisition-related and exit and realignment charges is included above in the Overview section.
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Interest expense, net | $ | 10,253 |
| | $ | 6,744 |
| | $ | 3,509 |
| | 52.0 | % | $ | 29,101 |
| | $ | 10,253 |
| | $ | 18,848 |
| | 183.8 | % |
Effective interest rate | 4.52 | % | | 4.59 | % | | | | | 6.34 | % | | 4.52 | % | | | | |
Interest expense in the first quarter of 20182019 was higher than prior year primarily as a result of borrowings under our revolving credit facility and term loan.loans entered into in the second quarter of 2018. In addition, interest expense included $2.0 million related to write-off of deferred financing costs associated with the revolving credit facility as a result of the debt amendment in February 2019. See Note 10 in Notes to Consolidated Financial Statements.
| | | Three Months Ended March 31, | | Change | Three Months Ended March 31, | | Change |
(Dollars in thousands) | 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Income tax provision | $ | 5,813 |
| | $ | 9,988 |
| | $ | (4,175 | ) | | (41.8 | )% | $ | (313 | ) | | $ | 5,813 |
| | $ | (6,126 | ) | | (105.4 | )% |
Effective tax rate | 41.6 | % | | 34.7 | % | | | | | 2.2 | % | | 41.6 | % | | | | |
The increase in the effective tax rate was 2.2% for the quarter ended March 31, 2019, compared to 201741.6% in the same quarter of 2018. The decrease in the rate resulted primarily from the mixture of income and losses in jurisdictions within which the Company operates, including those of which require a full valuation allowancesallowance, and additionalthe incremental income tax expense associated with the vesting of 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 $26$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, collectionscollection of accounts receivable, and paymentspayment to suppliers and vendors.
| | | March 31, 2018 | | December 31, 2017 | | Change | March 31, 2019 | | December 31, 2018 | | Change |
(Dollars in thousands) | | $ | | % | | $ | | % |
Cash and cash equivalents | $ | 87,632 |
| | $ | 104,522 |
| | $ | (16,890 | ) | | (16.2 | )% | $ | 75,239 |
| | $ | 103,367 |
| | $ | (28,128 | ) | | (27.2 | )% |
Accounts receivable, net of allowances | $ | 778,155 |
| | $ | 758,936 |
| | $ | 19,219 |
| | 2.5 | % | $ | 843,384 |
| | $ | 823,418 |
| | $ | 19,966 |
| | 2.4 | % |
Consolidated DSO (1) | 28.9 |
| | 28.7 |
| |
| |
| 29.4 |
| | 28.5 |
| |
| |
|
Merchandise inventories | $ | 1,021,711 |
| | $ | 990,193 |
| | $ | 31,518 |
| | 3.2 | % | $ | 1,210,558 |
| | $ | 1,290,103 |
| | $ | (79,545 | ) | | (6.2 | )% |
Consolidated inventory turnover (2) | 8.3 |
| | 8.5 |
| |
| |
| 6.8 |
| | 7.4 |
| |
| |
|
Accounts payable | $ | 958,270 |
| | $ | 947,572 |
| | $ | 10,698 |
| | 1.1 | % | $ | 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 costs of goods sold for the quarter ended March 31, 20182019 and year ended December 31, 20172018
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 20182019 and 2017:2018:
| | (Dollars in thousands) | 2018 | | 2017 | 2019 | | 2018 |
Net cash provided by (used for): | | | | | | |
Operating activities | $ | 18,273 |
| | $ | (26,360 | ) | $ | (60,904 | ) | | $ | 18,273 |
|
Investing activities | (14,160 | ) | | (14,453 | ) | (14,008 | ) | | (14,160 | ) |
Financing activities | (21,803 | ) | | (18,499 | ) | 49,505 |
| | (21,803 | ) |
Effect of exchange rate changes | 800 |
| | 991 |
| (2,721 | ) | | 800 |
|
Increase (decrease) in cash and cash equivalents | $ | (16,890 | ) | | $ | (58,321 | ) | $ | (28,128 | ) | | $ | (16,890 | ) |
Cash provided byused for (provided by) operating activities was $18.3 million in the first three months of 2018, compared to $26.4 million2019 reflected fluctuations in cash used for operating activities for the same period of 2017. The increase in cash from operating activities for the first three months of 2018 compared to the same period in 2017 was primarily due to routinenet income along with changes in working capital, including timing of payments to suppliers and vendors.capital.
Cash used for investing activities was $14.2 million in the first three months of 2018, compared to $14.5 million in the same period of 2017. Investing activities in 2018 and 2017 relate 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.equipment and capitalized software.
Cash used forprovided by (used for) financing activities included dividend payments of $4.8 million in the first three months of 2018 was $21.8 million,2019, compared to $18.5 million used in the same period of 2017. During the first three months of 2018, we paid dividends of $16.1 million (compared to $15.7 million in the same period of 2017)2018. In the first quarter of 2019 and repaid2018, cash provided by (used for) financing activities included proceeds from borrowings of $72.1 million and $(0.3) million under our revolving credit facility. Financing activities in the first quarter of 2019 and 2018 also included the repayment of $12.4 million and $3.1 million in debt.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 under our 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 Eurocurrency Rate, 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 Credit Spread,maturity date of the interest rate under the credit facility at March 31, 2018 is Eurocurrency Rate plus 1.5%.2021 Notes.
At March 31, 2018,2019, we had borrowings of $104.3$282.2 million under the revolver and letters of credit of approximately $6.8$11.7 million outstanding under the Credit Agreement leaving $488.9along 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 March 31, 20182019 and December 31, 20172018, which supports ourcertain facilities leased as well as other normal business activities in the United States and Europe.
In connection with the Halyard S&IP acquisition, we amended our Credit Agreement. See Note 16The fourth quarter dividend of Notes to Consolidated Financial Statements for further information.
We have $275 million of 3.875% senior notes due 2021 (the “2021 Notes”)$0.075 per share was accrued at December 31, 2018 and $275 million of 4.375% senior notes due 2024 (the “2024 Notes”).paid in January 2019. 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 first quarter dividend of 2018, we paid quarterly cash dividends on our outstanding common stock at the rate of $0.26$0.0025 per share which represents a 1% increase over the rate of $0.2575 per sharewas paid in the first quarter of 2017. 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. However, our Credit Agreement contains restrictions on the amount and timing 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 purchaserepurchase any shares in the first quarter of 2018.during 2019. At March 31, 2018,2019, the remaining amount authorized for repurchase under this program was $94.0 million.
We believe available financing sources, including cash generated by operating activities and borrowings under the Amended Credit Agreement, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, payments of quarterly cash dividends, 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 short-term investments, and marketable securities held by our foreign subsidiaries totaled $60.8 million and $79.1$61.2 million at March 31, 20182019 and $64.9 million at December 31, 2017.2018. Upon enactment, the Act imposedimposes a tax on our total post-1986 foreign earnings at various tax rates. In 2017, theThe Company has recognized a provisionalan amount offor 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 these amounts continueof March 31, 2019. As such, we have recorded withholding tax liabilities that would be incurred upon future distribution to be indefinitely reinvested in foreign operations. Determining the amount ofU.S. There are no unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additionaltaxes as there is no outside basis difference in these entities (i.e., basis difference in excess of that subjectunrelated to the one-time transition tax) is not practicable.unremitted earnings for Thailand. The Company continueswill continue to evaluate its foreign earnings repatriation policy during 2019 for all other foreign subsidiaries in 2018.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, 20172018 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 March 31, 2018.2019.
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, 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 of our Rapid Business Transformation (RBT);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 detailed from time to time in the 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 a $243.8 million term loan, borrowings of $104.3 million under the revolverfacility and $6.8$12 million in letters of credit under the Credit Agreement at March 31, 2018. A hypothetical2019. 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 Global Solutions segment distribution services, we are exposed to potential volatility in fuel prices. Our strategies for helping to mitigate our exposure to changing domestic fuel prices 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 $3.02 per gallon in the first three months of 2018, increased 17.5% from $2.57 per gallon in the first three months of 2017.2019 and 2018. Based on our fuel consumption in the first three months of 2018,2019, we estimate that every 10 cents per gallon increase in the benchmark would reduce our Global 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 March 31, 2018. There2019.
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 March 31, 2018, 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 first year following such acquisition. Company'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 $479$682 million of total assets and $118$189 million of revenues (net of intercompany eliminations) as of and for the three months ended March 31, 2018.2019. 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 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, 2017.2018. Through March 31, 2018,2019, there have been no material developments in any legal proceedings reported in such Annual Report.
Item 1A. Risk Factors
The following description of risk factors includes any material changes to, and supersedes the description of, risk factors associated with the Company’s business previously disclosed in Part I, Item 1A of the 2017 Form 10-K, under the heading “Risk Factors.” Set forth below are certainCertain risk factors that we currently believe could materially and adversely affect
our business, financial condition and results of operations. These risk factors are in addition to those mentioned in other parts of this report and are not all of the risks that we face. We could also be affected by risks that we currently are not aware of or that we currently do not consider material to our business.
Risks Related to Our Current Operations
We face competition and accelerating pricing pressure.
The medical/surgical supply distribution industry in the United States is highly competitive and characterized by pricing pressure which accelerated in 2017 and put further margin pressure on our business. We expect this margin pressure to continue through 2018. We compete with other national distributors and a number of regional and local distributors, as well as customer self-distribution models and, to a lesser extent, certain third-party logistics companies. Competitive factors within the medical/surgical supply distribution industry include market pricing, total delivered product cost, product availability, the ability to fill and invoice orders accurately, delivery time, range of services provided, efficient product sourcing, inventory management, information technology, electronic commerce capabilities, and the ability to meet customer-specific requirements. Our success is dependent on the ability to compete on the above factors, while managing internal costs and expenses. These competitive pressures could have a material adverse effect on our results of operations.
In addition, in recent years, the healthcare industry in the United States has experienced and continues to experience significant consolidation in response to cost containment legislation and general market pressures to reduce costs. This consolidation of our customers and suppliers generally gives them greater bargaining power to reduce the pricing available to them, which may adversely impact our results of operations and financial condition.
The healthcare third-party logistics business in both the United States and Europe also is characterized by intense competition from a number of international, regional and local companies, including large conventional logistics companies and internet based non-traditional competitors that are moving into the healthcare and pharmaceutical distribution business. This competitive market places continuous pricing pressure on us from customers and manufacturers that could adversely affect our results of operations and financial condition if we are unable to continue to increase our revenues and to offset margin reductions caused by pricing pressures through cost control measures.
We have significant concentration in and dependence on Group Purchasing Organizations and certain healthcare provider customers.
In 2017, our top ten customers in the United States represented approximately 23% of our consolidated net revenue. In addition, in 2017, approximately 78% of our consolidated net revenue was from sales to member hospitals under contract with our largest group purchasing organizations (GPO): Vizient, Premier and HPG. We could lose a significant healthcare provider customer or GPO relationship if an existing contract expires without being replaced or is terminated by the customer or GPO prior to its expiration. For example, in April 2016, we announced the loss of our largest IDN customer which had accounted for approximately $525 million of revenue in 2015. Although the termination of our relationship with a given GPO would not necessarily result in the loss of all of the member hospitals as customers, any such termination of a GPO relationship, or a significant individual healthcare provider customer relationship, could have a material adverse effect on our results of operations and financial condition.
Our operating earnings are dependent on certain significant domestic suppliers.
In the United States, we distribute products from nearly 1,100 suppliers and are dependent on these suppliers for the continuing supply of products. In 2017, sales of products of our ten largest domestic suppliers accounted for approximately 54% of consolidated net revenue. In the Global Solutions segment, sales of products supplied by Medtronic, Johnson & Johnson and Becton Dickinson accounted for approximately 11%, 9% and 9% of our consolidated net revenue for 2017, respectively. We rely on suppliers to provide agreeable purchasing and delivery terms and performance incentives. Our ability to sustain adequate operating income has been, and will continue to be, dependent upon our ability to obtain favorable terms and incentives from suppliers, as well as suppliers continuing use of third-party distributors to sell and deliver their products. A change in terms by a significant supplier, or the decision of such a supplier to distribute its products directly to healthcare providers rather than through third-party distributors, could have a material adverse effect on our results of operations and financial condition.
Our inability to adequately integrate acquisitions could have a material adverse effect on our operations.
In connection with our growth strategy, we from time to time acquire other businesses, including recently, Byram Healthcare (Byram) and Halyard Health's S&IP business (S&IP), that we believe will expand or complement our existing businesses and operations. The integration of acquisitions involves a number of significant risks, which may include but are not limited to, the following:
Expenses and difficulties in the transition and integration of operations and systems;
Retention of current customers and the ability to obtain new customers;
The assimilation and retention of personnel, including management personnel, in the acquired businesses;
Accounting, tax, regulatory and compliance issues that could arise;
Difficulties in implementing uniform controls, procedures and policies in our acquired companies, or in remediating control deficiencies in acquired companies not formerly subject to the Sarbanes-Oxley Act of 2002;
Unanticipated expenses incurred or charges to earnings based on unknown circumstances or liabilities;
Failure to realize the synergies and other benefits we expect from the acquisition at the pace we anticipate;
General economic conditions in the markets in which the acquired businesses operate; and
Difficulties encountered in conducting business in markets where we have limited experience and expertise.
If we are unable to successfully complete and integrate our strategic acquisitions in a timely manner, our business, growth strategies and results of operations could be adversely affected.
Our global operations increase the extent of our exposure to the economic, political, currency and other risks of international operations.
Our global operations involve issues and risks, including but not limited to the following, any of which could have an adverse effect on our business and results of operations:
Lack of familiarity with and expertise in conducting business in foreign markets;
Foreign currency fluctuations and exchange risk;
Unexpected changes in foreign regulations or conditions relating to labor, economic or political environment, and social norms or requirements;
Adverse tax consequences and difficulties in repatriating cash generated or held abroad;
Local economic environments, such as in the European markets served by Movianto, ArcRoyal and Halyard Health’s S&IP business, including recession, inflation, indebtedness, currency volatility and competition; and
Changes in trade protection laws and other laws affecting trade and investment, including import/export regulations in both the United States and foreign countries.
Our operations are also subject to risks of violation of laws that prohibit improper payments to and bribery of government officials and other individuals and organizations. These laws include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other similar laws and regulations in foreign jurisdictions, any violation of which could result in substantial liability and a loss of reputation in the marketplace. Failure to comply with these laws also could subject us to civil and criminal penalties that could adversely affect our business and results of operations.
Changing conditionsprospects are described in our Annual Report on Form 10-K for the United States healthcare industry may impact our results of operations.
We, along with our customers and suppliers, are subject to extensive federal and state regulations relating to healthcare as well as the policies and practices of the private healthcare insurance industry. In recent years,year ended December 31, 2018. Through March 31, 2019, there have been a number of government and private initiatives to reduce healthcare costs and government spending. These changes have included an increased reliance on managed care; reductions in Medicare and Medicaid reimbursement levels; consolidation of competitors, suppliers and customers; a shift in healthcare provider venues from acute care settings to clinics, physician offices and home care; and the development of larger, more sophisticated purchasing groups. All of these changes place additional financial pressure on healthcare provider customers, who in turn seek to reduce the costs and pricing of products and services provided by us. We expect the healthcare industry to continue to change significantly and these potential changes, which may include a reduction in government support of healthcare services, adverse changes in legislation or regulations, and further reductions in healthcare reimbursement practices, could have ano material adverse effect on our business, results of operations and financial condition.
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 in the United States and other countries where we operate. We also are required to hold permits and licenses and to comply with the operational and security standards of various governmental bodies and agencies. Any failure to comply with these laws and regulations or any failure to maintain the necessary permits, licenses or approvals, or to comply with the required standards, could disrupt our operations and/or adversely affect our results of operations and financial condition.
Among the healthcare related laws that we are subject to include the U.S. federal Anti-kickback Statute, the U.S. federal Stark Law, the False Claims Act and similar state laws relating to fraud, waste 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.
We may be unable to realize anticipated cost savings and efficiency and productivity gains or may incur additional and/or unexpected costs in order to realize them.
In the first quarter of 2017, we unveiled our Rapid Business Transformation (RBT) process to reduce expenses, increase efficiency and productivity and add significant operating income (to replace lost margin). Throughout 2017, the RBT process identified and implemented initiatives designed to drive better earnings and cash flow through efficiency and productivity gains, expense reduction and diversification of our business. However, our expectations pertaining to run-rate cost savings and efficiency and productivity increases are inherently estimates that are difficult to predict and are necessarily speculative in nature, and we cannot assure you that we will achieve expected or any actual run-rate cost savings or efficiency and productivity gains. A variety of factors could cause us not to realize some or all of the expected run-rate cost savings, including, among others, macroeconomic conditions, regulatory changes, delays in the anticipated timing of activities related to our cost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business and our ability to achieve the efficiencies contemplated by the cost savings initiative. We may be unable to realize all of these run-rate cost savings within the expected timeframe, or at all, and we may incur additional or unexpected costs in order to realize them.
These cost savings and efficiency and productivity gains are based upon a number of assumptions and estimates that are in turn based on our analysis of the various factors which currently, and could in the future, impact our business. These assumptions and estimates are inherently uncertain and subject to significant business, operational, economic and competitive uncertainties and contingencies. Certain of the assumptions relate to business decisions that are subject to change, including, among others, our anticipated business strategies, our marketing strategies, our product development and licensing strategies and our ability to anticipate and react to business trends. Other assumptions relate to risks and uncertainties beyond our control, including, among others, the economic environment in which we operate, healthcare regulation and other developments in our industry as well as capital markets conditions from time to time. The actual results of implementing the various cost savings and efficiency and productivity initiatives may differ materially from our estimates. Moreover, our continued efforts to implement these cost savings and efficiency and productivity initiatives may divert management attention from the rest of our business and may preclude us from seeking attractive opportunities, any of which may materially and adversely affect our business.
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 condition.
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.
Risks Related to our Borrowings and Leverage
We may not be able to generate sufficient cash to service our debt and other obligations.
As of March 31, 2018, on a consolidated basis we had approximately $898 million of aggregate principal amount of unsecured indebtedness as well as approximately $266 million in obligations under our leasing arrangements and $489 million of undrawn availability under our credit facilities. Our ratio of total debt to total shareholders’ equity as of March 31, 2018 was approximately 90%.
Our ability to make payments on our indebtedness and our other obligations will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. We cannot assure you that we would be able to implement any of these alternatives on satisfactory terms or at all. In the absence of such operating results and resources, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and these proceeds may not be adequate to meet any debt service obligations then due.
If we are unable to service our debt obligations from cash flows, we may need to refinance all or a portion of our debt obligations prior to maturity. Our ability to refinance or restructure our debt will depend upon the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all.
Despite current indebtedness levels, we may still be able to incur substantially more debt. This could further exacerbate the risks described herein.
As of March 31, 2018, on a pro forma basis after giving effect to the Halyard S&IP acquisition, we would have had $1.7 billion of consolidated total indebtedness outstanding, all of which would have been secured indebtedness, and we would have had $367 million available for borrowing under our credit facilities, all of which would be secured when drawn.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, including secured indebtedness. If additional indebtedness is added to our current debt levels, the related risks that we and our subsidiaries could face to fund our future debt service obligations and the risks associated with failure to adequately service our debt could intensify. Additionally, the incurrence of any new indebtedness could make it more difficult to refinance our existing indebtedness and make it more likely that any refinancing of such indebtedness may not be on commercially reasonable terms.
Our credit facilities and our existing notes have restrictive covenants that could limit our financial flexibility.
The indentures that govern our existing notes and our credit facilities contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests.
Our credit facilities and the indentures governing our existing notes include restrictions that, among other things, limit our ability to: incur indebtedness; grant liens; engage in mergers, consolidations and liquidations; make asset dispositions, restricted payments and investments; enter into transactions with affiliates; and amend, modify or prepay certain indebtedness. Under our credit facilities, we are subject to financial covenants that require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition.
Our failure to comply with these restrictions or covenants could result in a default under the agreements governing the relevant indebtedness. If a default under the credit facilities and the indentures governing our existing notes is not cured or waived, such default could result in the acceleration of debt or other payment obligations under our debt or other agreements that contain cross-acceleration, cross-default or similar provisions, which could require us to repurchase or pay debt or other obligations prior to the date it is otherwise due.
Our ability to comply with covenants contained in the credit facilities and the indentures governing our existing notes and any other debt or other agreements to which we are or may become a party, may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under our Credit Agreement bear interest at variable rates and expose us to interest rate risk. If interest rates were to increase, our debt service obligations on our variable rate indebtedness would increase even though the amount borrowed remained the same, and our earnings and cash flows will correspondingly decrease.
Risks Related to Our Halyard S&IP Acquisition
We may fail to realize the anticipated benefits of the S&IP Acquisition or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating the S&IP business into our operations.
Our ability to realize the anticipated benefits and synergies of the S&IP Acquisition will depend, to a large extent, on our ability to integrate the S&IP business into ours. We may devote significant management attention and resources preparing for and then integrating the business practices and operations of the S&IP business with ours. This integration process may be disruptive to our and the S&IP businesses, and, if implemented ineffectively, could restrict realization of the expected benefits. In addition, we may fail to realize some of the anticipated benefits and synergies of the S&IP Acquisition if the integration process takes longer than expected or is more costly than expected. Potential difficulties we may encounter in the integration process include:
The inability to successfully combine operations in a manner that would result in the anticipated benefits of the S&IP Acquisition in the time frame currently anticipated or at all;
Complexities associated with managing the expanded operations;
Integrating personnel;
Creation of uniform standards, internal controls, procedures, policies and information systems;
Unforeseen increased expenses, delays or regulatory issues associated with integrating the operations; and
Performance shortfalls as a result of the diversion of management attention caused by completing the integration of the operations.
Even if we are able to integrate the S&IP business successfully, this integration may not result in the realization of the full benefits that we currently expect, nor can we give assurances that these benefits will be achieved when expected or at all. Moreover, the integration of the S&IP business may result in unanticipated problems, expenses, liabilities, regulatory risks and competitive responses that could have material adverse consequences.
In connection with the S&IP Acquisition, we and Halyard have agreed to indemnify each other with respect to certain matters, and such indemnities may not be adequate.
The Amended and Restated Purchase Agreement contains customary representations, warranties and covenants from both us and Halyard. Subject to certain exceptions and limitations, we and Halyard have agreed to indemnify each other for breaches of representations, warranties, covenants and other specified matters contained in the Amended and Restated Purchase
Agreement. Among these other specified matters, Halyard has agreed to indemnify us for losses related to certain pending litigation against the S&IP business, including with respect to the matter styled Bahamas Surgery Center, LLC v. Kimberly-Clark Corporation and Halyard Health, Inc., No. 2:14-cv-08390-DMG-SH (C.D. Cal.), certain previously initiated actions arising out of the same or similar products and any future action, whether known or unknown, that both (i) concerns a product or products of Halyard that is or are the subjects of the actions already identified as being covered and (ii) is based on a claim that is substantially similar to a claim alleged by a plaintiff in the actions already identified as being covered or relates to or arises out of substantially similar facts and circumstances or substantially similar courses of conduct as those alleged in the actions already identified as being covered. We cannot assure you that the indemnity from Halyard will be sufficient to protect us against the full amount of such liabilities, or that Halyard will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from Halyard any amounts for which the S&IP business is held liable, we may be temporarily required to bear these losses ourselves.
Any failure by Halyard or one of its affiliates to deliver the services to be provided under the transition services agreement could have a material adverse effect on our business, financial condition and results of operations.
Pursuant to the terms of the Amended and Restated Purchase Agreement, at the closing of the S&IP acquisition, we and Halyard entered into transition services agreements pursuant to which we, Halyard and each party’s respective affiliates 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. At the closing of the S&IP Acquisition, certain of our affiliates also entered into transitional distribution agreements with affiliates of Halyard under which the Halyard affiliates will serve as limited risk distributors for our international customer orders on a transitional basis. If Halyard or its affiliates fail to provide or procure the services prescribed by the transition services agreements or distribution agreements, or fail to provide such services in a consistent and/or timely manner, such failure could have a material adverse effect on our business, financial condition and results of operations. Further, if the transition services agreements or distribution agreements are terminated, we would need to make alternative arrangements for the performance of these services. We may not be able to obtain these services promptly or at reasonable rates, if at all.
The S&IP business is exposed to price fluctuations of key commodities, which may negatively impact our results of operations.
The S&IP business relies on product inputs, such as polypropylene and nitrile, as well as other commodities, in the manufacture of its products. Prices of these commodities are volatile and have fluctuated significantly in recent years, which may contribute to fluctuations in our results of operations. Our ability to hedge commodity price volatility is limited. Furthermore, due to competitive dynamics, we may be unable to pass along commodity-driven cost increases through higher prices. If we cannot fully offset cost increases through other cost reductions, or recover these costs through price increases or surcharges, we could experience lower margins and profitability which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
An inability to obtain key components, raw materials or manufactured products from third parties may have a material adverse effect on the S&IP business.
The S&IP business depends on the availability of various components, raw materials and manufactured products supplied by others for its operations. If the capabilities of suppliers and third-party manufacturers are limited or stopped, due to quality, regulatory or other reasons, that could negatively impact our ability to manufacture or deliver S&IP products and could lead to exposure to regulatory actions. Further, for quality assurance or cost effectiveness, Halyard has purchased from sole suppliers certain components and raw materials such as polymers used in the S&IP products, and we expect to continue to purchase these components and raw materials from these sole suppliers. Although there are other sources in the market place for these items, we may not be able to quickly establish additional or replacement sources for certain components or materials due to regulations and requirements of the FDA and other regulatory authorities regarding the manufacture of S&IP products. The loss of any sole supplier or any sustained supply interruption that affects the ability to manufacture or deliver S&IP products in a timely or cost effective manner could have a material adverse effect on our business, results of operations, financial condition and cash flows.
An interruption in the ability of the S&IP business to manufacture products may have a material adverse effect on our business.
The S&IP business manufactures approximately 75% of its products in five facilities, one each in the United States, Thailand and Honduras and two in Mexico. If one or more of these facilities experience damage, or if these manufacturing
capabilities are otherwise limited or stopped due to quality, regulatory or other reasons, including natural disasters, prolonged power or equipment failures or labor disputes, it may not be possible to timely manufacture the relevant products at previous levels or at all. A reduction or interruption in any of these manufacturing processes could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The S&IP business must obtain clearance or approval from the appropriate regulatory authorities prior to introducing a new product or a modification to an existing product. The regulatory clearance process may result in substantial costs, delays and limitations on the types and uses of products the S&IP business can bring to market, any of which could have a material adverse effect on the S&IP business.
In the United States, before the S&IP business can market a new product, or a new use of, or claim for, or significant modification to, an existing product, the S&IP business generally must first receive clearance or approval from the U.S. Food and Drug Administration and certain other regulatory authorities. Most major markets for medical products outside the United States also require clearance, approval or compliance with certain standards before a product can be commercially marketed. The process of obtaining regulatory clearances and approvals to market a medical product can be costly and time consuming, involve rigorous pre- clinical and clinical testing, require changes in products or result in limitations on the indicated uses of products. We cannot assure you that these clearances and approvals will be granted on a timely basis, or at all. In addition, once a medical product has been cleared or approved, a new clearance or approval may be required before it may be modified, its labeling changed or marketed for a different use. Medical products are cleared or approved for one or more specific intended uses and promoting a device for an off-label use could result in government enforcement action. Furthermore, a product approval or clearance can be withdrawn or limited due to unforeseen problems with the medical product or issues relating to its application. The regulatory clearance and approval process may result in, among other things, delayed, if at all, realization of product net sales, substantial additional costs and limitations on the types of products the S&IP business may bring to market or their indicated uses, any one of which could have a material adverse effect on our results of operations, financial condition and cash flows.
The S&IP business may incur product liability losses, litigation liability, product recalls, safety alerts or regulatory action associated with the S&IP business’s products which can be costly and disruptive to the S&IP business.
The risk of product liability claims is inherent in the design, manufacture and marketing of the medical products of the type the S&IP business produces and sells. A number of factors could result in an unsafe condition or injury to, or death of, a patient with respect to the products that the S&IP business manufactures or sells, including physician technique and experience in performing the relevant surgical procedure, component failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or information.
In addition to product liability claims and litigation, an unsafe condition or injury to, or death of, a patient associated with our products could lead to a recall of, or issuance of a safety alert relating to, our products, or suspension or delay of regulatory product approvals or clearances, product seizures or detentions, governmental investigations, civil or criminal sanctions or injunctions to halt manufacturing and distribution of our products. Any one of these could result in significant costs and negative publicity resulting in reduced market acceptance and demand for the S&IP business’s products and harm its reputation. In addition, a recall or injunction affecting the S&IP business’s products could temporarily shut down production lines or place products on a shipping hold.
All of the foregoing types of legal proceedings and regulatory actions are inherently unpredictable and, regardless of the outcome, could disrupt the S&IP business, result in substantial costs or the diversion of management attention and could have a material adverse effect on the S&IP business’s results of operations, financial condition and cash flows.
Other Risks Related to Our Business
Products we source, assemble and sell may be subject to recalls and product liability claims.
Certain of the products that we sell and distribute are sourced and sold under one or more private labels or are assembled by us into custom trays and minor procedure kits. If these products do not function as designed, are inappropriately designed or are not properly produced, we may have to withdraw such products from the market and/or be subject to product liability claims. Although we maintain insurance against product liability and defense costs in amounts believed to be reasonable, we cannot assure you that we can successfully defend any such claims or that the insurance we carry will be sufficient. A successful claim against us in excess of insurance coverage could have a material adverse impact on our business, financial condition and results of operations.
General economic conditions may adversely affect demand for our products and services.
Poor or deteriorating economic conditions in the United States and the other countries in which we conduct business could adversely affect the demand for healthcare services and consequently, the demand for our products and services. Poor economic conditions also could lead our suppliers to offer less favorable terms of purchase to distributors, which would negatively affect our profitability. These and other possible consequences of financial and economic decline could have a material adverse effect on our business, results of operations and financial condition.
Our results of operations may suffer upon the bankruptcy, insolvency, or other credit failure of a customer that has a substantial amount owed to us.
We provide credit in the normal course of business to customers. We perform initial and ongoing credit evaluations of customers and maintain reserves for credit losses. The bankruptcy, insolvency or other credit failure of one or more customers with substantial balances due to us could have a material adverse effect on our results of operations and financial condition.
Our operations depend on the proper functioning of information systems, and our business could be adversely affected if we experience a cyber-attack or other systems breach.
We rely on information systems to receive, process, analyze and manage data in distributing thousands of inventory items to customers from numerous distribution and logistics centers. These systems are also relied upon for billings to and collections from customers, as well as the purchase of and payment for inventory and related transactions from our suppliers. In addition, the success of our long-term growth strategy is dependent upon the ability to continually monitor and upgrade our information systems to provide better service to customers. Our business and results of operations may be materially adversely affected if systems are interrupted or damaged by unforeseen events (including cyber-attacks) or fail to operate for an extended period of time, or if we fail to appropriately enhance our systems to support growth and strategic initiatives.
Our distribution and logistics services include acting as the primary billing, order-to-cash and collections function for many of our customers. These services rely on the performance and upkeep of our information systems. If our information systems are interrupted, damaged or fail to operate, our customers could be negatively impacted which could have a material adverse effect on our results of operations.
We could be subject to adverse changes in the tax laws or challenges to our tax positions.
We operate throughout the United States and other countries. As a result, we are subject to the tax laws and regulations of the United States federal, state and local governments and of various foreign jurisdictions. From time to time, legislative and regulatory initiatives are proposed, including but not limited to proposals to repeal LIFO (last-in, first-out) treatment of inventoryrisk factors described in the United States or changes in tax accounting methods for inventory, import tariffs and taxes, or other tax items. In 2017, we recorded a provisional estimate of the impact of The Tax Cuts and Jobs Act (the "Act") based on our initial analysis of the Act. Given the significant complexity of the Act, anticipated guidance from the U. S. Treasury about implementing the Act, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Act, these estimates may be adjusted during 2018. These and other changes in tax laws and regulations could adversely affect our tax positions, tax rate or cash payments for taxes.
Our business and operations depend on the proper functioning of critical facilities and distribution networks.
Damage or disruption to our distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, the financial and/or operational instability of key suppliers, geo-political events or other reasons could impair our ability to distribute our products and conduct our business. To the extent that we are unable, or it is not financially feasible, to mitigate the likelihood or potential impact of such events, or to manage effectively such events if they occur, there could be a material adverse effect on our business, financial condition or results of operations.
Our goodwill may become impaired, which would require us to record a significant charge to earnings in accordance with generally accepted accounting principles.
U.S. GAAP requires us to test our goodwill for impairment on an annual basis, or more frequently if indicators for potential impairment exist. The testing required by GAAP involves estimates and judgments by management. Although we believe our assumptions and estimates are reasonable and appropriate, any changes in key assumptions, including a failure to meet business plans or other unanticipated events and circumstances such as a rise in interest rates, may affect the accuracy or validity of such estimates. We may be required to record a significant charge to earnings in our consolidated financial
statements during the period in which any impairment of our goodwill is determined, which charge could adversely affect our results of operations.
We operate within the European Union, including in the United Kingdom and therefore may be affected by the United Kingdom's withdrawal from the European Union.
We operate within the European Union (the “E.U.”), including the United Kingdom (the “U.K.”). On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. A withdrawal could, among other outcomes, disrupt the free movement of goods, services and people between the U.K. and the E.U., and disrupt trade between the U.K. and the E.U. Given the lack of comparable precedent and recent occurrence of these events, we are monitoring the situation but it is unclear what financial, trade and legal implications the withdrawal of the U.K. from the E.U. would have and how such withdrawal may affect our operations or financial performance.Annual Report.
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 March 31, 2018.2019.
Item 5. Other Information
On May 9, 2018, Owens & Minor, Inc. (the “Company”) entered into a Third Amendment to Credit Agreement (the “Third Amendment”), by and among O&M Halyard, Inc., Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc., Barista Acquisition I, LLC and Barista Acquisition II, LLC (the “Borrowers”), the Company and each other domestic subsidiary of the Company party thereto from time to time as guarantors (collectively, the “Guarantors” and, together with the Borrowers, the “Credit Parties”), Wells Fargo Bank, N.A., as administrative agent for certain of the credit facilities, (the “Administrative Agent”), Bank of America, N.A., as collateral agent (the “Collateral Agent”) and administrative agent for the term B facility, the other agents party thereto and a syndicate of financial institutions specified therein. The Third Amendment amends the Credit Agreement, dated as of July 27, 2017 (as amended by the First Amendment to Credit Agreement, dated as of March 29, 2018, and the Second Amendment to Credit Agreement dated as of April 30, 2018, the “Credit Agreement”), by and among the Borrowers, the Company, the other Guarantors party thereto, the Administrative Agent and the other agents party thereto and the syndicate of financial institutions specified therein. The Third Amendment contains the following principal terms, among others:
lender commitments for an additional $245.75 million of term B loans with a seven-year maturity funded on May 9, 2018 (the proceeds of which were used to pay down outstanding revolving borrowings incurred in connection with the Company’s acquisition of Halyard Health, Inc.’s Surgical and Infection Prevention business (the “Acquisition”));
a new interest rate margin for term B loans 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);
addition of a “springing maturity date” with respect to (i) the term B loans, if as of the date that is 91 days prior to the maturity date of the Company’s 3.875% senior notes due 2021 (the “2021 Notes”) or 4.375% senior notes due 2024 (the “2024 Notes”), all outstanding amounts owing under the 2021 Notes or the 2024 Notes, respectively, have not been paid in full and (ii) the revolving loans and the term A loans, if as of the date that is 91 days prior to the 2021 Notes maturity date, all outstanding amounts owing under the 2021 Notes have not been paid in full; and
extension of the “soft call” provision from six months to twelve months.
The foregoing description of the Third Amendment does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Third Amendment attached hereto as Exhibit 10.9, which is incorporated herein by reference.
Wells Fargo Bank, N.A., Bank of America, N.A. and several of the lenders under the Credit Agreement and their affiliates have various relationships with the Company and its subsidiaries involving the provision of financial services, including investment banking, commercial banking, advisory, cash management, custody and trust services, for which they have received customary fees, and may do so again in the future. Additionally, an affiliate of Bank of America, N.A. served as a lead financial advisor to the Company in connection with the Acquisition.
Item 6. Exhibits
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10.3 | | |
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10.6 | | First Amendment to Credit Agreement, dated as of March 29, 2018, by and among Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc., Barista Acquisition I, LLC, and Barista Acquisition II, LLC, as Borrowers, Owens & Minor, Inc. and certain of its domestic subsidiaries, as Guarantors, the banks party thereto and Wells Fargo Bank, N.A., as Administrative Agent for the banks party thereto (incorporated herein by reference to our Current Report on Form 8-K, Exhibit 10.1, dated April 18, 2018) |
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10.7 | | Second Amendment to Credit Agreement, dated as of April 30, 2018, by and among O&M Halyard, Inc., Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc., Barista Acquisition I, LLC and Barista Acquisition II, LLC, Owens & Minor, Inc. and each other domestic subsidiary of the Company party thereto from time to time, Wells Fargo Bank, N.A., as administrative agent for certain of the credit facilities, Bank of America, N.A., as collateral agent and administrative agent for the term B facility, and the other agents party thereto. (incorporated herein by reference to our Current Report on Form 8-K, Exhibit 10.1, dated May 4, 2018)* |
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10.8 | | Security and Pledge Agreement, dated as of April 30, 2018, by and among Owens & Minor, Inc., O&M Halyard, Inc., Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc., Barista Acquisition I, LLC and Barista Acquisition II, LLC, Bank of America, N.A., U.S. Bank National Association, and the other secured parties thereto. (incorporated herein by reference to our Current Report on Form 8-K, Exhibit 10.2, dated May 4, 2018)* |
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10.9 | | Third Amendment to Credit Agreement, dated as of May 9, 2018, by and among O&M Halyard, Inc., Owens & Minor Distribution, Inc., Owens & Minor Medical, Inc., Barista Acquisition I, LLC and Barista Acquisition II, LLC, Owens & Minor, Inc. and each other domestic subsidiary of the Company party thereto from time to time, Wells Fargo Bank, N.A., as administrative agent for certain of the credit facilities, Bank of America, N.A., as collateral agent and administrative agent for the term B facility, and the other agents party thereto. |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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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: | May 10, 20187, 2019 | | /s/ Paul C. PhippsEdward A. Pesicka |
| | | Paul C. PhippsEdward A. Pesicka |
| | | President & Chief Executive Officer |
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Date: | May 10, 20187, 2019 | | /s/ Richard A. MeierRobert K. Snead |
| | | Richard A. MeierRobert K. Snead |
| | | Executive Vice President & Chief Financial Officer & President, International |