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Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-03-04 · 175 added, 100 removed, 110 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations of the Company together with its subsidiaries.

The discussion and analysis presented below refers to, and should be read in conjunction with, the consolidated financial statements and accompanying notes included in Item 8 of Part II of this Annual Report on Form 10-K.

Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading global healthcare solutions company.

On April 30, 2018 (the Closing Date), we completed the acquisition of substantially all of Avanos Medical, Inc.'s (Avanos, previously Halyard Health, Inc.) Surgical and Infection Prevention business, the name “Halyard Health” (and all variations of that name and related intellectual property rights) and its information technology (IT) systems in exchange for $758 million, net of cash acquired.

The Halyard business is a leading global provider of medical supplies and solutions for the 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 provided 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 Avanos under which the Avanos affiliates served as limited risk distributors for our international customer orders on a transitional basis.

The services under the transition services agreements and distribution agreements generally commenced on the Closing Date and terminated by December 31, 2019.

On January 16, 2020, we announced our intention to sell our European logistics business, Movianto, to EHDH Holding Group (EHDH), a privately held French company.

The divestiture is intended to provide us with a greater ability to focus on and invest in our differentiated products, services and U.S.

Owens & Minor, Inc., along with its subsidiaries, (we, us, our or the Company) is a leading global healthcare solutions company.

On June 18, 2020 (the Divestiture Date), we completed the divestiture of our European logistics business, Movianto (the Divestiture), as well as certain support functions in our Dublin, Ireland office, to Walden Group SAS (the Buyer) and EHDH (as Buyer’s guarantor) for cash consideration of $133 million.

The Divestiture provides us with a greater ability to focus on and invest in our differentiated products, services and U.S.

distribution businesses.

See Note 3, “Discontinued Operations,” of the Notes to Consolidated Financial Statements included in this annual report for further information.

The net proceeds were used to repurchase our 2021 Notes (see Note 10, “Debt”).

We recorded a loss of $65.5 million in connection with the Divestiture for the year ended December 31, 2020.

As a result of the Divestiture, the results of operations from our Movianto business are reported as “Loss from discontinued operations, net of tax” through the Divestiture Date and the related assets and liabilities were classified as “held- for-sale” in the consolidated balance sheet as of December 31, 2019.

See Note 3, “Discontinued Operations,” of the Notes to Consolidated Financial Statements for further information.

Unless otherwise indicated, the following information relates to continuing operations.

Net loss per diluted share was $(1.03) for the year ended December 31, 2019, an increase of $6.25 compared to 2018.

Global Solutions segment operating income was $83.6 million for 2019, compared to $108.8 million for 2018.

The declines were a result of lower revenues, continued pressure on distribution margins, and higher transportation expenses compared to prior year.

Global Products segment operating income was $65.1 million for 2019, compared to $75.7 million for 2018, reflecting an unfavorable impact of $3.8 million in 2019 and a favorable impact of $0.1 million in 2018 from foreign currency translation.

Income from continuing operations per diluted share was $1.39 for the year ended December 31, 2020, an increase of $1.76 compared to 2019.

Global Solutions segment operating income was $30.9 million for the year ended December 31, 2020, compared to $83.6 million for 2019.

The decline was due to lower distribution revenues as a result of customer non-renewals that occurred in 2019 and a reduction in elective surgical procedures primarily due to the impact of COVID-19.

Global Products segment operating income was $260 million for the year ended December 31, 2020, compared to $65.1 million for 2019.

The increase was a result of higher revenues from greater market demand for personal protective equipment and favorable product mix combined with continued operating efficiencies compared to 2019.

COVID-19 Update

We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it impacts our customers, teammates, suppliers, vendors and distribution channels.

We have taken actions to protect our teammates while maintaining business continuity as we respond to the needs from this global pandemic.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our teammates, customers, suppliers and shareholders.

Revenue in 2020 of $8.5 billion includes a significant overall impact from COVID-19 related to the reduction of surgical procedures beginning in mid-March, which was partially offset by a greater demand for PPE.

Operating income also benefited from improved productivity and increased manufacturing output related to PPE, favorable product mix and operating efficiencies.

We have expanded our PPE production operations to 24 hours a day, 7 days a week, and have taken measures to increase and improve our production such as retooling existing equipment, installing and optimizing new production lines and ramping up our new non-woven fabric machinery.

We have delivered over 12 billion units of PPE to healthcare workers in the fight against COVID-19, of which approximately 5 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, since January 2020.

We expect that we will continue servicing our customers' needs related to the heightened demand for our PPE as a result of various factors, including the implementation of new regulations and healthcare protocols calling for increased use of PPE, healthcare professional preference for medical grade PPE, stockpile PPE demand and the creation of new channels for PPE demand in healthcare, non-healthcare and international markets.

We are evaluating various government-sponsored COVID-response stimulus, relief, and production initiatives such as under the DPA and recent CARES Act.

In March 2020, under the DPA, we were awarded a contract with the U.S.

Department of Health and Human Services (HHS) to produce N-95 respirator masks in an effort to replenish the Strategic National Stockpile.

In April 2020, also under the DPA, the U.S.

Department of Defense initiated a technology investment agreement with us involving up to $30.0 million of anticipated funding of assets to expand capacity to supply N-95 respirator masks.

Through December 31, 2020, approximately $27.0 million had been expended and $20.8 million had been reimbursed in accordance with this arrangement.

In addition, as allowed under the CARES Act, we filed for $13.7 million and $17.6 million income tax refunds with the Internal Revenue Service (IRS) related to the carryback of net operating losses (NOL) incurred in 2018 and 2019.

As of December 31, 2020, we have received substantially all of the refunds.

In connection with these NOL carryback items, we recorded a $12.5 million income tax benefit for the year ended December 31, 2020.

We are unable to predict the timing of the pandemic and the full impact that COVID-19 will have on our future financial position and operating results due to numerous variables and continued uncertainties.

Although we have experienced growth in sales volumes for certain of our products (such as PPE) during the COVID-19 pandemic, as well as improved productivity and manufacturing output, there can be no assurance that such growth rates, increased sales volumes or other improvements will be maintained during or following the COVID-19 pandemic.

Risk Factors — “We are subject to risks related to public health crises or future outbreaks of health crises or other adverse public health developments such as the global pandemic associated with the 2019 novel coronavirus (COVID-19).”

Supplemental Financial Information

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Summary of Operations:

Net income (loss)

Net revenue $ 8,480,177 $ 9,210,939

Income (loss) from continuing operations $ 88,074 $ (22,584)

Per Common Share:

Net income (loss) per share—basic and diluted

Income (loss) from continuing operations per share—basic and diluted $ 1.39 $ (0.37)

Cash dividends $ 0.01 $ 0.01

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Summary of Financial Position:

Total assets $ 3,335,639 $ 3,643,084

Cash and cash equivalents $ 83,058 $ 67,030

Total debt $ 1,025,967 $ 1,559,652

Total equity $ 712,054 $ 462,154

Selected Ratios:

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Distribution, selling and administrative expenses as a percent of revenue 12.28 % 11.11 %

Operating income (loss) as a percent of revenue

Operating income as a percent of revenue 2.41 % 0.79 %

Days sales outstanding (DSO) (1)

Average annual inventory turnover (2)

(1) Based on year end accounts receivable and net revenue for the fourth quarter of the year.

(2) Based on average annual inventory and cost of goods sold for the respective year.

Changes in inventory turnover since December 31, 2017 are also affected by the 2018 Halyard acquisition.

Inventory days (2)

(1) Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2020 and 2019

(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2020 and 2019

Results of Operations

2020 compared to 2019

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

2 unchanged sentences

Inter-segment (542,165) (466,905) (75,260) (16.1) %

The decrease in net revenue for the year reflected the impact of lower distribution revenues as a result of customer non-renewals, primarily resulting from service issues prior to early 2019, partially offset by revenue growth in other business lines.

The changes from prior year also include an unfavorable impact from foreign currency translation of $5.8 million.

Net revenue for Global Products benefited when compared to prior year from the acquisition of Halyard in April 2018.

Halyard sales from January through April 2019 were $255 million (net of $71 million of intercompany sales).

Net revenue $ 8,480,177 $ 9,210,939 $ (730,762) (7.9) %

The change in net revenue for the year ended December 31, 2020 reflected the impact of lower distribution revenues as a result of customer non-renewals that occurred in 2019 and a reduction in elective surgical procedures primarily due to the impact of COVID-19.

These were partially offset by revenue growth in Global Products from increased demand for PPE and growth in Byram, our Home Healthcare business.

Foreign currency translation had a $2.6 million favorable impact on net revenue for the year ended December 31, 2020 as compared to the prior year.

Cost of goods sold.

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

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Cost of goods sold compared to prior year reflects changes in sales activity, including sales mix.

Cost of goods sold when compared to prior year was also impacted from the acquisition of Halyard in April 2018.

Halyard cost of goods sold from January through April 2019 were $210 million (net of $72 million of intercompany eliminations).

Gross margin.

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

Gross margin $ 1,280,834 $ 1,128,491 $ 152,343 13.5 %

As a % of net revenue 15.10 % 12.25 %

Gross margin for the year reflected strong revenue growth with Byram and overall improved sales mix, as the Global Products revenues constitute a higher percentage of revenue, which was partially offset by unfavorable impact from foreign currency translation of $4.8 million.

Gross margin for the year ended December 31, 2020 was impacted by improved sales mix and productivity, operating efficiencies in Global Products and a favorable impact from foreign currency translation of $7.3 million.

We value distribution inventory held in the United States under the LIFO method.

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Operating expenses.

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

2 unchanged sentences

Acquisition-related and exit and realignment charges $ 37,752 $ 30,050 $ 7,702 25.6 %

Other operating expense (income), net

Other operating (income) expense, net $ (2,372) $ 2,225 $ (4,597) (206.6) %

Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services and all costs associated with our fee-for-service arrangements.

Shipping and handling costs are primarily included in DS&A expenses and include costs to store, move, and prepare products for shipment, as well as costs to deliver products to customers.

Overall DS&A expenses compared to prior year reflected higher expenses to support a full year of Halyard, higher transportation expenses, increased expenses incurred for the development of new customer solutions and increased expenses to support the sale of Halyard products.

These increases were partially offset by favorable impacts for foreign currency translation of $1.0 million.

The change in other operating expense (income), net was attributed primarily to higher software as a service implementation expenses and an adverse foreign currency impact compared to prior year.

Acquisition-related and charges were $15.7 million and $45.0 million in 2019 and 2018, respectively, and consisted primarily of transition and transaction costs for the Halyard acquisition.

Exit and realignment charges were $14.4 million and $14.1 million in 2019 and 2018, respectively.

Exit and realignment charges in 2019 were associated with severance from reduction in force and other costs related to the reorganization of the U.S.

Overall DS&A expenses were affected by the revenue decline and change in mix and investments in the business, partially offset by operational efficiencies.

DS&A expenses also included an unfavorable impact for foreign currency translation of $0.5 million for the year ended December 31, 2020.

Acquisition-related charges were $11.8 million and $15.7 million for the years ended December 31, 2020 and 2019, and consisted primarily of transition costs for the Halyard acquisition.

Exit and realignment charges were $25.9 million and $14.4 million for the years ended December 31, 2020 and 2019.

Amounts in 2020 were associated with severance from reduction in workforce, IT restructuring charges, post closing costs associated with the Movianto divestiture, costs associated with the sale of certain assets of Fusion5 and other costs related to the reorganization of the U.S.

commercial, operations and executive teams.

Amounts in 2019 were associated with severance from reduction in workforce and other costs related to the reorganization of the U.S.

commercial and operations and executive teams, along with facility closures in the U.S.

and other IT restructuring charges.

Exit and realignment charges in 2018 were associated with severance from reduction in force and other employee costs associated with the establishment of our client engagement center, the writedown of information system assets which are no longer used and other IT restructuring charges.

The change in other operating (income) expense, net was attributed primarily to a gain on legal settlement and lower software as a service implementation expenses due to the adoption of ASU No.

2018-15 as of January 1, 2020.

See Note 1 in Notes to Consolidated Financial Statements.

Interest expense, net.

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

1 unchanged sentence

Effective interest rate 6.39 % 6.36 %

Interest expense increased year over year primarily due to an increase in borrowings under our revolving credit facility and term loans entered into to fund the Halyard acquisition in 2018 and an increase in our interest rate and amortized fees as a result of the Fourth Amendment to the Credit Agreement in February 2019 .

Interest expense decreased year over year primarily due to a reduction in debt, which was partially offset by the amortization of additional deferred financing costs as a result of the Fifth Amendment to the Credit Agreement in February 2020.

See Note 10 in Notes to Consolidated Financial Statements.

Other expense, net .

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

Other expense, net $ 10,812 $ 3,757 $ 7,055 187.8 %

Other expense, net in 2019 includes the write-off of $2.0 million of deferred financing costs associated with the revolving credit facility as a result of the Fourth Amendment to the Credit Agreement in February 2019, and a $1.2 million gain on extinguishment of debt related to the partial repurchases of our 2021 Notes.

2019 and 2018 also include interest cost and net actuarial losses related to the U.S.

Retirement Plan of $2.9 million and $3.8 million, respectively.

Other expense, net in 2020 includes a make-whole premium related to the extinguishment of our 2021 Notes, the write-off of deferred financing costs, third party fees incurred and interest cost and net actuarial losses related to the U.S.

Retirement Plan, offset by a gain from the surrender of company-owned life insurance policies and gain on extinguishment of debt related to the partial repurchase of our 2021 and 2024 Notes.

Other expense, net in 2019 includes interest cost and net actuarial losses related to the U.S.

Retirement Plan, the write-off of deferred financing costs associated with the revolving credit facility as a result of the Fourth Amendment to the Credit Agreement in February 2019, and a gain on extinguishment of debt related to the partial repurchase of our 2021 Notes.

Income taxes.

For the years ended December 31,

For the years ended December 31, Change

(Dollars in thousands) 2020 2019 $ %

Income tax benefit

Income tax provision (benefit) $ 21,834 $ (6,135) $ 27,969 455.9 %

Effective tax rate 19.9 % 21.4 %

The change in the effective tax rate resulted primarily from goodwill and intangible asset impairment charges in 2018 which were mostly not deductible for income tax purposes.

The change in the effective tax rates compared to 2019 resulted primarily from income tax benefits recorded in 2020 associated with the CARES Act and year over year changes in, and mixture of, income and losses in jurisdictions in which we operate.

In addition, the provision for income taxes reflects an increase in our reserve for uncertain tax positions for the year ended December 31, 2020 in connection with the IRS audit of our 2015 and 2016 consolidated income tax returns described in Note 14 in the Notes to Consolidated Financial Statements.

Financial Condition, Liquidity and Capital Resources

Financial condition.

We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory turnover.

We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory days.

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 million.

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Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collection of accounts receivable, and payments to suppliers.

December 31, Change

(Dollars in thousands) 2020 2019 $ %

3 unchanged sentences

Merchandise inventories $ 1,233,751 $ 1,146,192 $ 87,559 7.6 %

Inventory turnover (2)

Inventory days (2)

Accounts payable $ 1,000,186 $ 808,035 $ 192,151 23.8 %

(1) Based on year end accounts receivable and net revenue for the fourth quarter

(2) Based on average annual inventory and costs of goods sold for the years ended December 31, 2019 and 2018

(1) Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2020 and 2019

(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2020 and 2019

Liquidity and capital expenditures.

7 unchanged sentences

Effect of exchange rate changes on cash 9,909 (2,671)

Decrease in cash, cash equivalents and restricted cash

Increase (decrease) in cash, cash equivalents and restricted cash $ 49,819 $ (18,680)

Cash provided by operating activities in 2020 and 2019 reflected fluctuations in net income along with favorable changes in working capital.

Cash used for investing activities in 2019 and 2018 included capital expenditures of $52.2 million and $65.7 million, respectively, for our strategic and operational efficiency initiatives, particularly initiatives relating to information technology enhancements and optimizing our distribution network.

Cash used for investing activities in 2018 included cash paid for the acquisition of Halyard of $758 million.

Cash (used for) provided by financing activities for the year ended December 31, 2019 included dividend payments of $5.2 million and repayments of $32.2 million under our revolving credit facility, compared to dividend payments of $48.2 million and proceeds from borrowings of $105.5 million for the same period of 2018.

Financing activities also included repayments of $85.6 million in 2019 compared to $16.3 million in the same period of 2018 on our term loans (under the Credit Agreement) and 2021 Notes.

We used $36.2 million of cash to repurchase $37.3 million aggregate principal amount of the 2021 Notes during 2019.

In 2018, we used net proceeds of $695.8 million from term loans and $74.8 million under our revolving credit facility primarily to fund the Halyard acquisition.

We also paid $4.3 million in financing costs related to the Fourth Amendment to the Credit Agreement in February 2019.

Cash provided by investing activities in 2020 included cash consideration received of $133 million from the sale of Movianto, proceeds of $6.0 million from the surrender of company-owned life insurance policies, and capital expenditures of $59.2 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas, and capitalized software.

Cash used for investing activities in 2019 included capital expenditures of $52.2 million for our strategic and operational efficiency initiatives associated with property and equipment and capitalized software.

Cash used for financing activities in 2020 included dividend payments of $0.6 million and repayments of $74.7 million under our revolving credit facility, compared to $5.2 million and $32.2 million, for the same period of 2019.

We also had proceeds from borrowings in 2020 of $155 million related to the Accounts Receivable Securitization Program and proceeds from the issuance of common stock in 2020 of $190 million related to our follow-on equity offering.

Financing activities also included repayments of $617 million in 2020, compared to $85.6 million in the same period of 2019, on our term loans (under the Credit Agreement) and 2021 and 2024 Notes.

We used $269 million of cash to repurchase $267 million aggregate principal amount of the 2021 and 2024 Notes during 2020, which included a $5.0 million make-whole premium paid to fully retire the 2021 Notes in November 2020.

In 2019, we used $36.2 million of cash to repurchase $37.3 million aggregate principal amount of the 2021 Notes.

We also paid $10.4 million in financing costs related to the Fifth Amendment to the Credit Agreement in 2020, as compared to $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 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 $400 million and $858 million outstanding in term loans.

The interest rate on 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 our Consolidated Total Leverage Ratio as defined by the Credit Agreement.

Our credit spread at December 31, 2019 was Eurocurrency Rate plus 3.5%.

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 requires us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition.

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 loans.

If as of the date 91 days prior to the maturity date of our 2021 Notes all outstanding amounts under the 2021 Notes have not been paid in full, then the Termination Date (as defined in the Credit Agreement) of the revolving credit facility and the Term A loans shall be the date that is 91 days prior to the maturity date of the 2021 Notes.

Likewise, if as of the date 91 days prior to the maturity date of our 2024 Notes, all outstanding amounts under the 2024 Notes have not been paid in full, the Termination Date of the Term B loan shall be the date that is 91 days prior to the maturity date of the 2024 Notes.

At December 31, 2019 and 2018, we had borrowings of $177.9 million and $210.1 million, respectively, under the revolver and letters of credit of $11.7 million and $15.2 million, respectively, outstanding under the Credit Agreement along with $512.7 million and $550.0 million, respectively, in Senior Notes.

We also had letters of credit and bank guarantees outstanding for $1.5 million and $4.4 million as of December 31, 2019 and 2018, respectively, which supports certain facilities leased as well as other normal business activities in the United States and Europe.

Our sources of liquidity include cash and cash equivalents, a revolving credit facility under our Credit Agreement with Bank of America, N.A, JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., and a syndicate of lenders (the Credit Agreement), and the Receivables Securitization Program.

The Credit Agreement provides a revolving borrowing capacity of $400 million.

The interest rate on our revolving credit facility and Term A Loans is based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage which varies depending on Consolidated Total Leverage Ratio (each as defined in the Credit Agreement).

Our interest rate on the revolving credit facility at December 31, 2020 was Eurocurrency Rate plus 2.75%.

Our Term B Loan accrues interest based on 1) either the Eurocurrency Rate or the Base Rate plus 2) an Applicable Percentage of 3.50% per annum for Base Rate Loans and 4.50% per annum for Eurocurrency Rate Loans (each as defined in the Credit Agreement).

Our interest rate on the Term B Loan at December 31, 2020 was Eurocurrency Rate plus 4.50%.

We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the revolving credit facility.

At December 31, 2020 and 2019, we had borrowings of $103 million and $178 million, and letters of credit of $13.9 million and $11.7 million, outstanding under the revolving credit facility.

At December 31, 2020 and 2019, we had $283 million and $209 million, available for borrowing.

The December 31, 2019 availability reflected letters of credit associated with discontinued operations of $1.1 million.

We also had letters of credit and bank guarantees outstanding for $1.6 million and $1.5 million as of December 31, 2020 and 2019, which supports certain leased facilities as well as other normal business activities in the United States and Europe.

These letters of credit and guarantees were issued independent of the Credit Agreement.

We 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 holders of the 2024 Notes and the parties secured under the Credit Agreement (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Credit Parties (as defined) in the Credit Parties’ present and future subsidiaries and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions.

The Fifth Amendment to the Credit Agreement included additional collateral requirements of the Credit Parties, including an obligation to pledge our owned U.S.

real estate and the remaining equity interests in foreign subsidiaries.

Our Credit Agreement has a “springing maturity date” with respect to the Term B Loan.

If the outstanding balance of the 2024 Notes has not been paid in full as of the date 91 days prior to the maturity date of the 2024 Notes, the Termination Date of the Term B Loan shall be the date that is 91 days prior to the maturity date of the 2024 Notes.

The revolving credit facility matures in July 2022 and the Term B Loan matures in April 2025.

On February 19, 2020, we entered into an accounts receivable securitization program (the Receivables Securitization Program).

Pursuant to the Receivables Securitization Program the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed $325 million outstanding at any time.

The interest rate under the Receivables Securitization Program is based on a spread over the London Interbank Offered Rate (LIBOR) dependent on the tranche period thereto and any breakage fees accrued.

Under the Receivables Securitization Program, certain of our subsidiaries sell substantially all of their accounts receivable balances to our wholly owned special purpose entity, O&M Funding LLC.

The Receivables Securitization Program matures on February 17, 2023.

In February 2020, we drew $150 million from the Receivables Securitization Program to repay portions of the Term A Loans, consistent with the terms of the Fifth Amendment to the Credit Agreement.

The Fifth Amendment to the Credit Agreement requires that any additional draws on the Receivables Securitization Program are restricted for use to repay the 2021 Notes or Term A Loans to the extent those instruments are outstanding.The Credit Agreement, Receivables Securitization Program, and Senior Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement.

The terms of the Credit Agreement also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture.

We were in compliance with our debt covenants at December 31, 2020.

Current maturities include $34.4 million of the remaining Term A-2 Loan principal balance, which was repaid in full on January 4, 2021, scheduled principal payments within the next 12 months of $5.0 million for our Term B Loan, and $1.1 million in short-term finance leases.

In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million.

We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes.

As of December 31, 2020 no shares were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.

On October 6, 2020, we completed a follow-on equity offering wherein we sold an aggregate of 8,475,000 shares of our common stock at an offering price of $20.50, resulting in net proceeds to us of approximately $165 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.

Pursuant to the

underwriting agreement, we granted the underwriters an option to purchase up to an additional 1,271,250 shares of our common stock, which the underwriters exercised in full.

Inclusive of this exercised option, net proceeds to us were approximately $190 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.

We used the proceeds from the follow-on equity offering completed on October 6, 2020 to repay the remaining $109 million outstanding balance of Term Loan A-1 at par on October 8, 2020, to repay $51.7 million of our Term Loan A-2 at par on October 15, 2020, and to repay $30.0 million of borrowings under the revolving credit facility.

On November 30, 2020 (Redemption Date), we elected to redeem all of our outstanding 2021 Notes.

As required by the Fourth Supplemental Indenture, the redemption price included accrued and unpaid interest to, but not including, the Redemption Date, and a redemption premium of $5.0 million, which reflected the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the Redemption Date) discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points.

Including the tender offer, we used $269 million of cash to repurchase $267 million aggregate principal amount of the 2021 Notes and 2024 Notes during 2020.

We used $36.2 million of cash to repurchase $37.3 million aggregate principal amount of the 2021 Notes during 2019.

We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure.

From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms).

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We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.

We paid cash dividends on our outstanding common stock at the rate of $0.0025 per common share for each of the four quarters of 2019.

In 2018, we paid quarterly dividends of $0.26 per common share for the first three quarters and $0.075 for the fourth quarter dividend was accrued at December 31, 2018 and paid in January 2019.

In 2018, the fourth quarter dividend was accrued at December 31, 2018 and paid in January 2019.

We paid cash dividends on our outstanding common stock at the rate of $0.0025 per common share for each of the four quarters of 2020 and 2019.

In February 2021, the Board of Directors approved the first quarter dividend of $0.0025 per common share.

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, the Board of Directors authorized an up to three-year 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 authorization took effect in December 2016 upon the completion of the previous authorization and ended in December 2019.

We did not repurchase any shares during the years ended December 31, 2019 and 2018.

We believe available financing sources, including cash generated by operating activities and borrowings under the 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 and debt repurchases and other cash requirements.

We believe available financing sources, including cash generated by operating activities and borrowings under the Credit Agreement and Receivables Securitization Program, 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, debt 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.

Our cash and cash equivalents held by our foreign subsidiaries totaled $52.9 million and $27.9 million at December 31, 2019 and 2018, respectively.

Our cash and cash equivalents held by our foreign subsidiaries totaled $72.0 million and $52.9 million at December 31, 2020 and 2019.

We continue to remain permanently reinvested in our foreign subsidiaries, with the exception of a subsidiary in Thailand.

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We will continue to evaluate our foreign earnings repatriation policy in 2021 for all our foreign subsidiaries.

Guarantor and Collateral Group Summarized Financial Information

We are providing the following information in compliance with Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and Rule 13-02 of Regulation S-X, of with respect to our 2024 Notes.

See Note 10 of the accompanying consolidated financial statements for additional information regarding the terms of the 2024 Notes.

The following tables present summarized financial information for Owens & Minor, Inc.

and the guarantors of Owens & Minor, Inc.’s 2024 Notes (together, "the Guarantor Group"), on a combined basis with intercompany balances and transactions between entities in the Guarantor Group eliminated.

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.

Summarized financial information of the Guarantor Group is as follows:

Summarized Consolidated Statement of Operations - Guarantor Group For the year ended December 31, 2020

(Dollars in thousands)

Net revenue (1)

Gross margin 1,202,019

Operating income 166,761

Income from continuing operations, net of tax 60,783

Net income 60,783

(1) Includes $190 million in sales to non-guarantor subsidiaries for the year ended December 31, 2020.

Summarized Consolidated Balance Sheet - Guarantor Group December 31, 2020

(Dollars in thousands)

Total current assets $ 1,559,248

Intercompany receivable 399,484

Total assets 2,943,125

Current liabilities 1,374,800

Intercompany payable 89,040

Total liabilities 2,465,894

The following tables present summarized financial information for Owens & Minor, Inc.

and the subsidiaries of Owens & Minor, Inc.’s 2024 Notes pledged that constitute a substantial portion of collateral (together, "the Collateral Group"), on a combined basis with intercompany balances and transactions between entities in the Collateral Group eliminated.

The pledged subsidiaries are 100% owned by Owens & Minor, Inc.

No trading market for the subsidiaries included in the Collateral Group exists.

Summarized financial information of the Collateral Group is as follows:

Summarized Consolidated Balance Sheet - Collateral Group December 31, 2020

(Dollars in thousands)

Total current assets $ 1,651,460

Intercompany receivable 158,651

Total assets 2,851,226

Current liabilities 1,356,024

Intercompany payable 486,491

Total liabilities 2,480,953

The results of operations of the Collateral Group are not materially different from the corresponding amounts presented in our Consolidated Statements of Operations.

Off-Balance Sheet Arrangements

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Because of the uncertainty inherent in such estimates, actual results may differ.

We believe our critical accounting policies and estimates include accounting for goodwill and long-lived assets and business combinations.

Goodwill and long-lived assets.

We believe our critical accounting policies and estimates include accounting for goodwill.

Goodwill represents the excess of consideration paid over the fair value of identifiable net assets acquired.

Long-lived assets, which are a component of identifiable net assets, include intangible assets with finite useful lives, property and equipment, right-of-use assets, and computer software costs.

Intangible assets with finite useful lives consist primarily of customer relationships, tradenames, and other intangibles acquired through business combinations.

Certain assumptions and estimates are employed in determining the fair value of identifiable net assets acquired.

We evaluate goodwill for impairment annually, as of October 1, and whenever events occur or changes in circumstance indicate that the carrying amount of goodwill may not be recoverable.

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Goodwill totaled $394.1 million at December 31, 2020.

Long-lived assets, which exclude goodwill, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable.

We assess long-lived assets for potential impairment by comparing the carrying value of an asset, or group of related assets, to its estimated undiscounted future cash flows.

At December 31, 2019 , long-lived assets included property and equipment of $ 315.4 million, net of accumulated depreciation;

intangible assets of $ 285.0 million, net of accumulated amortization;

operating lease assets of $142.2 million, net of accumulated amortization, and computer software of $43.6 million, net of accumulated amortization.

The impairment review of goodwill and long-lived assets requires the extensive use of accounting estimates and assumptions.

The impairment review of goodwill requires the extensive use of accounting estimates and assumptions.

The application of alternative assumptions or inability to meet certain financial projections, could produce materially different results.

Business Combinations.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and discount rates.

Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis