Item 7. Management’s Discussion and Analysis
Item 7. 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 our results of operations. 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.
Overview
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. 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.
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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.
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. See Item 1A. 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).”
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Supplemental Financial Information
(in thousands, except ratios and per share data)
At or for the years ended December 31,
2020 2019
Summary of Operations:
Net revenue $ 8,480,177 $ 9,210,939
Income (loss) from continuing operations $ 88,074 $ (22,584)
Per Common Share:
Income (loss) from continuing operations per share—basic and diluted $ 1.39 $ (0.37)
Cash dividends $ 0.01 $ 0.01
Stock price at year end $ 27.05 $ 5.17
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:
Gross margin as a percent of revenue 15.10 % 12.25 %
Distribution, selling and administrative expenses as a percent of revenue 12.28 % 11.11 %
Operating income as a percent of revenue 2.41 % 0.79 %
Days sales outstanding (DSO) (1)
26.0 27.1
Inventory days (2)
57.8 55.3
(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
Net revenue. For the years ended December 31, Change
(Dollars in thousands) 2020 2019 $ %
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 %
Inter-segment (542,165) (466,905) (75,260) (16.1) %
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, Change
(Dollars in thousands) 2020 2019 $ %
Cost of goods sold $ 7,199,343 $ 8,082,448 $ (883,105) (10.9) %
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Cost of goods sold includes the cost of the product (net of supplier incentives and cash discounts) and all costs incurred for shipments of products from manufacturers to our distribution centers for all customer arrangements where we are the primary obligor and bear risk of general and physical inventory loss. These are sometimes referred to as distribution contracts. Cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our Global Products business. There is no cost of goods sold associated with our fee-for-service arrangements. Cost of goods sold compared to prior year reflects changes in sales activity, including sales mix.
Gross margin. 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 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. Had inventory been valued under the first-in, first-out (FIFO) method, gross margin as a percentage of net revenue would have been 19 basis points higher in 2020 and 9 basis points higher in 2019.
Operating expenses. For the years ended December 31, Change
(Dollars in thousands) 2020 2019 $ %
Distribution, selling & administrative expenses $ 1,041,336 $ 1,023,065 $ 18,271 1.8 %
As a % of net revenue 12.28 % 11.11 %
Acquisition-related and exit and realignment charges $ 37,752 $ 30,050 $ 7,702 25.6 %
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 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.
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, Change
(Dollars in thousands) 2020 2019 $ %
Interest expense, net $ 83,398 $ 98,113 $ (14,715) (15.0) %
Effective interest rate 6.39 % 6.36 %
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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, Change
(Dollars in thousands) 2020 2019 $ %
Other expense, net $ 10,812 $ 3,757 $ 7,055 187.8 %
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, Change
(Dollars in thousands) 2020 2019 $ %
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 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.
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Financial Condition, Liquidity and Capital Resources
Financial condition. 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.
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in the United States, Europe, and Asia. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collection of accounts receivable, and payments to suppliers.
December 31, Change
(Dollars in thousands) 2020 2019 $ %
Cash and cash equivalents $ 83,058 $ 67,030 $ 16,028 23.9 %
Accounts receivable, net $ 700,792 $ 674,706 $ 26,086 3.9 %
Days sales outstanding (1)
26.0 27.1
Merchandise inventories $ 1,233,751 $ 1,146,192 $ 87,559 7.6 %
Inventory days (2)
57.8 55.3
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 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. The following table summarizes our consolidated statements of cash flows, which relates to continuing operations and discontinued operations:
For the years ended December 31,
(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)
Effect of exchange rate changes on cash 9,909 (2,671)
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 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.
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Capital resources. 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
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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). Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.
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.
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 $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. We have no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiary located in Thailand as of December 31, 2020. As such, we have recorded withholding tax liabilities that would be incurred upon future distribution to the U.S. There are no unrecognized deferred taxes as there is no outside basis difference unrelated to unremitted earnings for Thailand. 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:
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Summarized Consolidated Statement of Operations - Guarantor Group For the year ended December 31, 2020
(Dollars in thousands)
Net revenue (1)
$ 8,319,301
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
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on financial condition or liquidity.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We continually evaluate the accounting policies and estimates used to prepare the financial statements.
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Critical accounting policies are defined as those policies that relate to estimates that require us to make assumptions about matters that are highly uncertain at the time the estimate is made and could have a material impact on our results due to changes in the estimate or the use of different assumptions that could reasonably have been used. Our estimates are generally based on historical experience and various other assumptions that are judged to be reasonable in light of the relevant facts and circumstances. Because of the uncertainty inherent in such estimates, actual results may differ. We believe our critical accounting policies and estimates include accounting for goodwill.
Goodwill. Goodwill represents the excess of consideration paid over 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. Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed. The quantitative goodwill impairment test uses valuation techniques to determine fair value, including comparable multiples of reporting unit's earnings before interest, taxes, depreciation and amortization (EBITDA) and discounted cash flows. The EBITDA multiples are based on an analysis of current enterprise valuations and recent acquisition prices of similar companies, if available. Goodwill totaled $394.1 million at December 31, 2020.
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.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 of Notes to the Consolidated Financial Statements.