Owens & Minor(OMI) - 2020 Q4 - Annual Report

Part I Business Owens & Minor operates Global Solutions and Global Products segments, providing medical supplies, distribution, and manufactured products, following its 2020 European logistics divestiture General Overview Owens & Minor, a global healthcare solutions provider, serves over 70 countries and divested its Movianto European logistics business for $133 million in 2020 - The company is a global healthcare solutions provider serving customers in over 70 countries through integrated technologies, products, and services[9] - On June 18, 2020, the company divested its European logistics business, Movianto, for $133 million in cash consideration[11] Global Solutions The Global Solutions segment provides medical and surgical supplies, distribution, and logistics to healthcare providers, including direct-to-patient delivery via Byram Healthcare - This segment provides medical and surgical supplies, supplier and inventory management, and logistics solutions to healthcare providers and manufacturers[12][13][14] - Operates a network of 46 distribution centers across the continental United States, utilizing advanced information technology for warehouse management and supply-chain functions[15] - Byram Healthcare, part of this segment, focuses on direct-to-patient delivery of disposable medical supplies for conditions like diabetes, ostomy, and wound care[18] Global Products The Global Products segment manufactures and sources medical surgical products globally, including sterilization wrap and gowns, with costs sensitive to raw material price fluctuations - This segment manufactures and sources medical surgical products, including sterilization wrap, surgical drapes, gowns, and facial protection, with manufacturing facilities in the Americas, Asia, and Europe[20][21] - The most significant raw material purchases are polypropylene polymers and nitrile, making the segment's costs susceptible to fluctuations in global commodity prices[21] - Products are sold through a dedicated global sales force, strategic distribution partners, or on an intercompany basis to the Global Solutions segment[22][23] Our Customers The company serves thousands of healthcare provider customers, with a significant portion of 2020 revenue, 72%, derived from sales to members of its three largest GPOs | GPO | Year of Renewal or Extension | Term | Sales to Members as a % of Consolidated Net Revenue in 2020 | | :--- | :--- | :--- | :--- | | Vizient | 2020 | 2 years | 36% | | Premier | 2016 | 5 years | 21% | | HPG | 2017 | 4 years | 15% | - The termination of a GPO agreement would not necessarily result in the loss of all associated members as customers, as the company often has independent contractual relationships with them[25] Competition The company faces intense competition in both Global Solutions and Global Products segments from national distributors and other firms, based on price, innovation, and quality - Global Solutions competitors include national distributors like Cardinal Health and Medline, regional distributors, and customer self-distribution[30] - Global Products competitors include Cardinal Health, Medline, Hogy Medical, and others; competition also comes from distribution partners and GPOs that direct source their own products[31] Intellectual Property The company's business growth relies on its intellectual property, holding approximately 1,100 patents and 1,100 trademarks globally, including key brands like Halyard - The company holds approximately 1,100 patents and patent applications, with issued patents generally expiring between 2021 and 2040[36] - The company has approximately 1,100 trademarks and trademark applications, with well-known brands including "Halyard", Aero Blue, Quick Check, Smart-Fold, and Purple Nitrile[38][39] Human Capital Resources As of year-end 2020, the company employed approximately 18,800 teammates globally, focusing on talent retention and implementing extensive COVID-19 safety protocols - As of year-end 2020, the company employed approximately 6,300 full- and part-time teammates in the U.S. and 12,500 teammates internationally[48] - The Board of Directors' Compensation and Benefits Committee oversees human capital management, including corporate culture, diversity, talent development, and compensation[53][54] - In response to the COVID-19 pandemic, the company implemented numerous safety protocols, such as providing PPE to teammates, training on social distancing, implementing temperature scans, and increasing remote work[56][57] Risk Factors The company faces diverse risks including public health crises, intense competition, customer/supplier concentration, manufacturing interruptions, substantial debt, and regulatory compliance Public Health Crises (COVID-19) The COVID-19 pandemic significantly impacted 2020 results, reducing surgical procedures but increasing PPE sales, with future impacts remaining uncertain - The significant reduction in elective surgical procedures, which began in mid-March 2020, resulted in a material negative impact on revenue for 2020[62] - While sales of certain products like PPE have grown significantly, there is no guarantee these growth rates will be maintained after the pandemic subsides[63] Competition and Customer/Supplier Concentration The company faces intense competition and pricing pressure, with significant revenue concentration from its top three GPOs and dependence on its ten largest domestic suppliers - In 2020, approximately 72% of consolidated net revenue was from sales to member hospitals under contract with the three largest GPOs: Vizient, Premier, and HPG[70] - Sales of products from the ten largest domestic suppliers accounted for approximately 41% of consolidated net revenue in 2020, indicating a significant dependence on these suppliers[71] Operational and Manufacturing Risks Operational risks include manufacturing and distribution interruptions, with Global Products vulnerable to sole-sourced raw material supply and price volatility impacting margins - A reduction or interruption in manufacturing processes at any of the nine primary production facilities could materially harm the business[72] - The Global Products segment depends on sole suppliers for certain raw materials, and establishing replacement sources could be difficult and time-consuming due to regulatory requirements[73] Financial and Debt-Related Risks The company carries substantial debt, approximately $1.0 billion as of December 31, 2020, with servicing dependent on cash flow, subject to restrictive covenants and interest rate risk - As of December 31, 2020, the company had approximately $1.0 billion of aggregate principal amount of secured indebtedness[78] - Credit facilities and indentures contain restrictive covenants that limit the ability to incur more debt, grant liens, make acquisitions, and make certain investments or payments[86] - The Credit Agreement has a "springing maturity date" for the Term B Loan, which could be accelerated if the 2024 Notes are not paid off 91 days prior to their maturity[82] Legal, Regulatory, and Compliance Risks The company faces extensive legal and regulatory risks, including healthcare fraud and abuse laws, data privacy, and product liability, with Byram under a Corporate Integrity Agreement - The company is subject to complex healthcare regulations, including the federal Anti-kickback Statute and False Claims Act, violations of which could lead to civil or criminal sanctions[101] - The Byram business is subject to a five-year Corporate Integrity Agreement with the OIG, and failure to comply could result in monetary penalties or exclusion from federal healthcare programs[105][107] Properties As of December 31, 2020, the company operated 99 principal facilities globally, with 8 owned and 90 leased, including its corporate headquarters and various production and distribution centers | | Owned | Leased | Other | Total Location | | :--- | :--- | :--- | :--- | :--- | | Production | 6 | 3 | — | 9 United States, Europe, Honduras, Mexico and Thailand | | Distribution | 1 | 48 | 1 | 50 United States, Canada and India | | Storage | — | 10 | — | 10 United States, Honduras and Mexico | | Office | 1 | 29 | — | 30 United States, Asia, Australia, Canada and Europe | | Total | 8 | 90 | 1 | 99 | - The company owns its corporate headquarters building in Mechanicsville, Virginia[122] Legal Proceedings The company is involved in various legal actions incidental to its business, with management believing their outcome will not materially adversely affect financial condition or operations - The company is subject to various legal actions that are ordinary and incidental to its business[124] - Management believes that the outcome of currently pending matters will not have a material adverse effect on the company's financial condition or results of operations[124] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Owens & Minor's common stock trades on the NYSE (OMI); in 2020, the company completed a $190 million equity offering, using proceeds to repay outstanding debt - In May 2020, an at-the-market equity program was established to offer and sell up to $50.0 million of common stock; no shares were issued under this program as of December 31, 2020[128] - On October 6, 2020, a follow-on equity offering was completed, selling 8,475,000 shares at $20.50 per share, resulting in net proceeds of approximately $190 million after the underwriters exercised their option in full[129][166] - The proceeds from the equity offering were used to repay $109 million of Term Loan A-1, $51.7 million of Term Loan A-2, and $30.0 million of borrowings under the revolving credit facility[129] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, net revenue decreased 7.9% to $8.5 billion, while operating income significantly increased, and debt was reduced by over $530 million through divestiture proceeds and an equity offering Overview The company divested Movianto for $133 million in June 2020, with income from continuing operations rising to $1.39 per diluted share, driven by Global Products' strong PPE demand - Completed the divestiture of the Movianto business on June 18, 2020, for $133 million, resulting in a recorded loss of $65.5 million[132] - Income from continuing operations per diluted share increased to $1.39 in 2020 from a loss of ($0.37) in 2019[134][139] - Global Products operating income surged to $260 million from $65.1 million in 2019, driven by PPE demand, while Global Solutions operating income fell to $30.9 million from $83.6 million[134] COVID-19 Update COVID-19 reduced surgical procedures but boosted PPE demand, leading to expanded production and government contracts, while the full future impact remains uncertain - Revenue in 2020 was impacted by a reduction in surgical procedures, which was partially offset by greater demand for Personal Protective Equipment (PPE)[136] - The company was awarded a contract under the Defense Production Act (DPA) to produce N-95 respirator masks and received funding to expand capacity[137] - Utilizing the CARES Act, the company filed for and received income tax refunds related to the carryback of net operating losses (NOLs) from 2018 and 2019, resulting in a $12.5 million income tax benefit in 2020[137] Results of Operations In 2020, consolidated net revenue decreased 7.9% to $8.48 billion, while gross margin improved to 15.10%, and operating income more than doubled to $204.1 million | (Dollars in thousands) | 2020 | 2019 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Net Revenue | | | | | | Global Solutions | $7,212,011 | $8,243,867 | $(1,031,856) | (12.5%) | | Global Products | $1,810,331 | $1,433,977 | $376,354 | 26.2% | | Total Net Revenue | $8,480,177 | $9,210,939 | $(730,762) | (7.9%) | | (Dollars in thousands) | 2020 | 2019 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Gross Margin | $1,280,834 | $1,128,491 | $152,343 | 13.5% | | As a % of net revenue | 15.10% | 12.25% | | | - Interest expense decreased by $14.7 million (15.0%) year-over-year due to a reduction in debt[148][149] Financial Condition, Liquidity and Capital Resources The company's financial condition strengthened in 2020, reducing total debt from $1.56 billion to $1.03 billion, with operating cash flow increasing to $339.2 million | (Dollars in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by (used for): | | | | Operating activities | $339,223 | $166,085 | | Investing activities | $80,073 | $(51,897) | | Financing activities | $(379,386) | $(130,197) | - Total debt decreased from $1,559.7 million at year-end 2019 to $1,026.0 million at year-end 2020[139] - At December 31, 2020, the company had $283 million available for borrowing under its revolving credit facility[159] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity prices, foreign currency, and variable interest rates, with a 100 basis point rate increase potentially reducing pre-tax earnings by $4.8 million - The company is subject to price risk for raw materials, particularly polypropylene and nitrile, used in the Global Products segment[184] - A 100 basis point increase in interest rates would result in a potential reduction in future pre-tax earnings of approximately $4.8 million per year, after considering interest rate swaps[186] - A 10-cent per gallon increase in diesel fuel prices would reduce Global Solutions segment operating income by approximately $0.2 million on an annualized basis[187] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes in the fourth quarter - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of December 31, 2020[190] - Management assessed internal control over financial reporting using the COSO criteria and believes it was effective as of December 31, 2020[194] Part III Directors, Executive Officers, Executive Compensation, Security Ownership, and Principal Accountant Fees Information for Items 10-14, covering directors, executive compensation, and security ownership, is incorporated by reference from the company's 2021 Proxy Statement - Information required by Items 10-14 is incorporated by reference from the registrant's 2021 Proxy Statement[206] Part IV Exhibits and Financial Statement Schedules This section lists the Consolidated Financial Statements and other documents filed as part of the Form 10-K report, with a complete index to all exhibits - This item lists the financial statements and schedules filed with the report and provides an index to all exhibits[210] Consolidated Financial Statements Financial Statements For 2020, net revenue was $8.48 billion, with operating income rising to $204.1 million and net income reaching $29.9 million, while total equity increased to $712.1 million | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net revenue | $8,480,177 | $9,210,939 | | Gross margin | $1,280,834 | $1,128,491 | | Operating income | $204,118 | $73,151 | | Net income (loss) | $29,871 | $(62,371) | | Net income (loss) per share | $0.47 | $(1.03) | | (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total assets | $3,335,639 | $3,643,084 | | Total liabilities | $2,623,585 | $3,180,930 | | Total equity | $712,054 | $462,154 | Notes to Consolidated Financial Statements The notes detail accounting policies, business segments, and financial items, including the Movianto divestiture, debt composition, segment performance, and income taxes Note 3—Discontinued Operations The company divested its Movianto business on June 18, 2020, for $133 million, reporting its results as discontinued operations with a $65.5 million loss on divestiture - On June 18, 2020, the company completed the divestiture of its Movianto business for cash consideration of $133 million[279] | (in thousands) | 2020 (through Divestiture Date) | 2019 | | :--- | :--- | :--- | | Net revenue | $226,759 | $439,104 | | Loss on divestiture | $65,472 | — | | Loss from discontinued operations, net of taxes | $(58,203) | $(39,787) | Note 10—Debt As of December 31, 2020, total debt decreased to $1.03 billion from $1.56 billion, funded by the Movianto sale, an equity offering, and operating cash | (in thousands) | Carrying Amount Dec 31, 2020 | Carrying Amount Dec 31, 2019 | | :--- | :--- | :--- | | 4.375% Senior Notes, due 2024 | $244,780 | $273,978 | | Term Loan A-2 | $33,865 | $170,899 | | Term Loan B | $477,525 | $480,337 | | Revolver | $103,200 | $177,900 | | Receivable Securitization | $152,929 | — | | Total debt | $1,025,967 | $1,559,652 | - In 2020, the company used $269 million in cash to repurchase $267 million aggregate principal of its 2021 and 2024 Notes, including fully retiring the 2021 Notes[307] - In February 2020, the company entered into a $325 million accounts receivable securitization program and drew $150 million to repay portions of its Term A Loans[312][313] Note 20—Segment Information In 2020, Global Solutions generated $7.21 billion in revenue and $30.9 million in operating income, while Global Products generated $1.81 billion in revenue and $259.9 million in operating income | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Revenue | | | | Global Solutions | $7,212,011 | $8,243,867 | | Global Products | $1,810,331 | $1,433,977 | | Operating Income | | | | Global Solutions | $30,946 | $83,592 | | Global Products | $259,929 | $65,054 | | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Revenue by Geography | | | | United States | $8,130,411 | $8,871,599 | | International | $349,766 | $339,340 |