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Owens & Minor Reports Financial Results for 2nd Quarter 2018

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Owens
& Minor, Inc.
(NYSE:OMI) today reported financial results for
the second quarter ended June 30, 2018, including consolidated revenues
of $2.46 billion, representing an increase of 8.5% when compared to
revenues of $2.27 billion in the second quarter of 2017. Quarterly
revenue growth included contributions from Byram Healthcare of $128
million and two months of revenue contribution from Halyard S&IP of $168
million (before eliminations of $31.1 million).

On a GAAP basis, the current quarter results were significantly affected
by a non-cash asset impairment charge related to goodwill and
intangibles of $165 million, or $2.73 per share, resulting in a
consolidated operating income (loss) for the second quarter of 2018 of
($172) million compared to $32.8 million in last year's second quarter.
Quarterly net income (loss) was ($183) million, or ($3.07) per share,
compared to $0.33 per share for the second quarter of last year.

Adjusted consolidated operating income (non-GAAP) for the second quarter
was $46.6 million compared to $41.4 million for the same period last
year. Adjusted net income (non-GAAP) was $19.4 million, or $0.32 per
share, compared to $0.43 per share in last year's second quarter.
Adjusted results included $2.5 million in severance expense related to
executive leadership transitions. A reconciliation of reported results
to adjusted (non-GAAP) measures is included below.

"Our teams remain laser focused on improving our operating performance.
Our new strategy and capabilities are resonating with our customers,
helping us to retain and win new business," said P. Cody Phipps,
Chairman, President & Chief Executive Officer of Owens & Minor.
"Additionally, we are pleased to report that the recent acquisitions of
Byram and Halyard are achieving our expectations. We believe the
strategic moves we have made across the continuum of care with Byram and
in meaningfully building our own brand products portfolio with Halyard
S&IP have strengthened and diversified our overall business and have
positioned Owens & Minor for sustained profitable growth in 2019 and
beyond."

For the six months ended June 30, 2018, consolidated revenues were $4.83
billion, an increase of 5.1% when compared to revenues of $4.59 billion
for the same period last year. On a GAAP basis, consolidated operating
income (loss) for the first half of 2018 was ($148) million, compared to
$68.4 million for the same period last year. Year-to-date net income
(loss) was ($175) million, or ($2.92) per share, compared to $0.64 per
share for the first half of last year. Operating results for the first
half of 2018 were affected by the impairment charge mentioned in the
quarterly results.

Adjusted consolidated operating income (non-GAAP) for the first six
months of 2018 was $94.2 million compared to $89.1 million for the same
period last year. Adjusted net income (non-GAAP) was $45.6 million, or
$0.75 per share, compared to $0.86 per share for the first six months of
2017. A reconciliation of reported results to adjusted (non-GAAP)
measures is included below.

Segment Results

Owens & Minor operates under two Strategic Business Units (SBUs)—Global
Solutions and Global Products—reflecting the company's focus areas.
Beginning in the current quarter, the company is excluding
acquisition-related intangible amortization from the measure of segment
operating income. Prior year amounts have been recast on a consistent
basis. Results for these two segments include the following:

The Global Solutions SBU is comprised of the former Domestic and
International segments, which includes our U.S. and European
distribution, logistics and value-added services business, as well as
Byram Healthcare. Revenues for the second quarter of 2018 were $2.29
billion compared to $2.23 billion a year ago. Global Solutions'
operating income was $24.0 million compared to $31.2 million a year ago.
The $7.2 million decline resulted primarily from continued margin
pressure and warehouse inefficiencies in certain facilities. Byram
Healthcare, acquired in August 2017, continued to make positive
contributions to quarterly results, adding $128 million to revenues,
which partially offset the aforementioned margin pressure and warehouse
inefficiencies.

The Global Products SBU is comprised of the former Proprietary
Products segment, which includes Global Sourcing, Clinical & Procedural
Solutions (CPS), and the Halyard S&IP business. Revenues in the second
quarter of 2018 were $280 million compared to $131 million for the same
period last year. Global Products' results reflect only two months of
contributions from Halyard S&IP revenues, or $168 million, because the
acquisition was completed on April 30, 2018. Global Products' operating
income increased by $12.3 million to $22.5 million, as a result of
contributions from the S&IP business.

Financial Guidance

Based on year-to-date financial results, as well as expectations for the
remainder of the year, Owens & Minor is issuing guidance for 2018 of
adjusted net income per diluted share in a range of $1.40 to $1.50.

"As we look forward towards 2019, we have confidence in our ability to
achieve a double digit, year-over-year adjusted earnings growth rate
next year due to the expected contributions from our Halyard S&IP
acquisition and realization of its associated synergies, continued
strong Byram growth and our ability to realize operational
improvements," said Phipps.

Although the company does provide guidance for adjusted earnings per
share (which is a non-GAAP financial measure), it is not able to
forecast the most directly comparable measure calculated and presented
in accordance with GAAP without unreasonable effort. Certain elements of
the composition of the GAAP amounts are not predictable, making it
impracticable for the company to forecast. Such elements include, but
are not limited to restructuring and acquisition charges. As a result,
no GAAP guidance is provided. For the same reasons, the company is
unable to assess the probable significance of the unavailable
information, which could have a potentially significant impact on its
future GAAP financial results. The outlook is based on certain
assumptions that are subject to the risk factors discussed in the
company's filings with the Securities and Exchange Commission.

Upcoming Investor Events

Owens & Minor plans to participate in the following investor conferences
in the third quarter of 2018, and the company will post webcasts of
formal presentations on its corporate website:

  • Baird Global Healthcare Conference; New York; September 5
  • Wells Fargo Securities Healthcare Conference; Boston; September 6

Investors Conference Call & Supplemental
Material

Conference Call: Owens & Minor's management team will conduct a
conference call for investors on Tuesday, August 7, 2018, at 8:30 a.m.
EDT. The access code for the conference call, international dial-in and
replay is #8677529. Participants may access the call at 866-393-1604. The
international dial-in number is 224-357-2191. Replay: A replay of the
call will be available for one week by dialing 855-859-2056. Webcast: A
listen-only webcast of the call, along with supplemental information,
will be available on www.owens-minor.com
under the Investor
Relations section
.

Safe Harbor Statement

This release is intended to be disclosure through methods reasonably
designed to provide broad, non-exclusionary distribution to the public
in compliance with the SEC's Fair Disclosure Regulation. This release
contains certain ''forward-looking'' statements made pursuant to the
Safe Harbor provisions of the Private Securities Litigation Reform Act
of 1995, including financial guidance for 2018, earnings growth rate in
2019, and sustained profitable growth. These statements include, but are
not limited to, the statements in the section of this release entitled
"Financial Guidance" as well as other statements related to the
company's expectations regarding the performance of its business,
growth, improvement of operational performance, and the performance of
and synergies from the recently acquired Byram Healthcare and Halyard
S&IP businesses. Forward-looking statements involve known and unknown
risks and uncertainties that may cause our actual results in future
periods to differ materially from those projected or contemplated in the
forward-looking statements. Investors should refer to Owens & Minor's
Annual Report on Form 10-K for the year ended December 31, 2017, filed
with the SEC including in the sections captioned "Cautionary Note
Regarding Forward-Looking Statements" and "Item 1A. Risk Factors," and
subsequent quarterly reports on Form 10-Q and current reports on Form
8-K filed with or furnished to the SEC, for a discussion of certain
other known risk factors that could cause the company's actual results
to differ materially from its current estimates. These filings are
available at www.owens-minor.com. Given
these risks and uncertainties, Owens & Minor can give no assurance that
any forward-looking statements will, in fact, transpire and, therefore,
caution investors not to place undue reliance on them. Owens & Minor
specifically disclaims any obligation to update or revise any
forward-looking statements, whether as a result of new information,
future developments or otherwise.

Owens & Minor uses its web site, www.owens-minor.com,
as a channel of distribution for material company information, including
news releases, investor presentations and financial information. This
information is routinely posted and accessible under the Investor
Relations section.

Included with the press release financial tables are reconciliations of
the differences between the non-GAAP financial measures presented in
this news release, which exclude acquisition-related and exit and
realignment charges, and their most directly comparable GAAP financial
measures.

About Owens & Minor

Owens & Minor, Inc. (NYSE:OMI) is a global healthcare solutions company
with integrated technologies, products, and services aligned to deliver
significant and sustained value for healthcare providers and
manufacturers across the continuum of care. With 17,000 dedicated
teammates serving healthcare industry customers in 90 countries, Owens &
Minor helps to reduce total costs across the supply chain by optimizing
episode and point-of-care performance, freeing up capital and clinical
resources, and managing contracts to optimize financial performance. A
FORTUNE 500 company, Owens & Minor has annualized revenues of
approximately $10 billion, including contributions from Halyard Health
S&IP. Founded in 1882, Owens & Minor has operated continuously from its
Richmond, Virginia, headquarters. Today, the company now has
distribution, production, customer service and sales facilities located
across Asia, Europe, Latin America, and the U.S. For more information
about Owens & Minor, visit owens-minor.com,
follow @Owens_Minor
on Twitter
, and connect on LinkedIn at www.linkedin.com/company/owens-&-minor.

 

Owens & Minor, Inc.

Consolidated Statements of Income (Loss) (unaudited)

(dollars in thousands, except per share data)

 
Three Months Ended June 30,
2018   2017
Net revenue $ 2,458,271 $ 2,265,907
Cost of goods sold 2,133,277   1,992,374
Gross margin 324,994 273,533
Distribution, selling and administrative expenses 308,775 236,615
Goodwill and intangible asset impairment charges 165,447
Acquisition-related and exit and realignment charges 24,930 2,893
Other operating (income) expense, net (2,107 ) 1,188
Operating income (loss) (172,051 ) 32,837
Interest expense, net 18,571   6,736
Income (loss) before income taxes (190,622 ) 26,101
Income tax provision (benefit) (7,845 ) 5,960
Net income (loss) $ (182,777 ) $ 20,141
 
Net income (loss) per common share:
Basic and diluted $ (3.07 ) $ 0.33
 
 
Six Months Ended June 30,
2018 2017
Net revenue $ 4,830,850 $ 4,594,480
Cost of goods sold 4,181,170   4,039,768
Gross margin 649,680 554,712
Distribution, selling and administrative expenses 593,136 474,308
Goodwill and intangible asset impairment charges 165,447
Acquisition-related and exit and realignment charges 39,690 11,835
Other operating (income) expense, net (759 ) 216
Operating income (loss) (147,834 ) 68,353
Interest expense, net 28,824   13,480
Income (loss) before income taxes (176,658 ) 54,873
Income tax provision (benefit) (2,032 )   15,947
Net income (loss) $ (174,626 )   $ 38,926
 
Net income (loss) per common share:
Basic and diluted $ (2.92 ) $ 0.64
 
   

Owens & Minor, Inc.

Condensed Consolidated Balance Sheets (unaudited)

(dollars in thousands)

 
    June 30, 2018   December 31, 2017
 
Assets
Current assets
Cash and cash equivalents $ 118,188 $ 104,522
Accounts receivable, net 856,673 758,936
Merchandise inventories 1,220,115 990,193
Other current assets   320,206     328,254
Total current assets 2,515,182 2,181,905
Property and equipment, net 344,061 206,490
Goodwill, net 742,538 713,811
Intangible assets, net 342,542 184,468
Other assets, net   98,808     89,619
Total assets   $ 4,043,131     $ 3,376,293
Liabilities and equity
Current liabilities
Accounts payable $ 1,067,553 $ 947,572
Accrued payroll and related liabilities 37,366 30,416
Other current liabilities   315,842     331,745
Total current liabilities 1,420,761 1,309,733
Long-term debt, excluding current portion 1,669,478 900,744
Deferred income taxes 66,466 74,247
Other liabilities   84,218     76,090
Total liabilities 3,240,923 2,360,814
Total equity   802,208     1,015,479
Total liabilities and equity   $ 4,043,131     $ 3,376,293
 
 

Owens & Minor, Inc.

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

 
Six Months Ended June 30,
    2018   2017
 
Operating activities:
Net income (loss) $ (174,626 ) $ 38,926
Adjustments to reconcile net income to cash provided by (used for)
operating activities:
Depreciation and amortization 43,813 25,206
Share-based compensation expense 6,140 5,619
Goodwill and intangible asset impairment charges 165,447
Provision for losses on accounts receivable 2,867 (368 )
Deferred income tax (benefit) expense (6,172 ) (5,385 )
Changes in operating assets and liabilities:

Accounts receivable

(30,357 ) (41,863 )
Merchandise inventories 5,211 (86,234 )
Accounts payable 47,260 42,235
Net change in other assets and liabilities (14,629 ) (66,003 )
Other, net   1,299     5,371  
Cash provided by (used for) operating activities   46,253     (82,496 )
 
Investing activities:
Acquisitions, net of cash acquired (733,433 )
Additions to property and equipment (19,816 ) (16,433 )
Additions to computer software and intangible assets (10,238 ) (7,860 )
Proceeds from sale of property and equipment   12     573  
Cash used for investing activities   (763,475 )   (23,720 )
 
Financing activities:
Proceeds from issuance of debt 695,750
Financing costs paid (27,697 )
Repayments of debt (6,250 )
Proceeds from revolving credit facility 101,000 15,400
Cash dividends paid (32,284 ) (31,476 )
Repurchases of common stock (4,998 )
Other, net   (3,670 )   (5,658 )
Cash provided by (used for) financing activities   726,849     (26,732 )
         
Effect of exchange rate changes on cash and cash equivalents   4,039     4,526  
 
Net increase (decrease) in cash and cash equivalents 13,666 (128,422 )
Cash and cash equivalents at beginning of period   104,522     185,488  
Cash and cash equivalents at end of period   $ 118,188     $ 57,066  
 
 

Owens & Minor, Inc.

Summary Segment Information (unaudited)

(dollars in thousands)

 
Three Months Ended June 30,
2018   2017 (2)
  % of   % of
consolidated consolidated
Amount net revenue Amount net revenue
Net revenue:
Segment net revenue
Global Solutions $ 2,290,173 93.16 % $ 2,226,367 98.26 %
Global Products 279,588   11.38 % 130,959   5.77 %

Total segment net revenue

2,569,761 2,357,326
Inter-segment revenue
Global Products (111,490 ) (4.54 )% (91,419 ) (4.03 )%
Total inter-segment revenue (111,490 )   (91,419 )  
Consolidated net revenue $ 2,458,271   100.00 % $ 2,265,907   100.00 %
 
% of segment % of segment
Operating income (loss): net revenue net revenue
Global Solutions $ 23,977 1.05 % $ 31,177 1.40 %
Global Products 22,489 8.04 % 10,192 7.78 %
Inter-segment eliminations 167 19
Goodwill and intangible asset impairment charges (165,447 )
Acquisition-related intangible amortization (9,374 ) (2,347 )
Acquisition-related and exit and realignment charges (24,930 ) (2,893 )
Other (1) (18,933 ) (3,311 )
Consolidated operating income (loss) $ (172,051 ) (7.00 )% $ 32,837   1.45 %
 
Depreciation and amortization:
Global Solutions $ 15,854 $ 10,733
Global Products 10,048   1,915  
Consolidated depreciation and amortization $ 25,902   $ 12,648  
 
Capital expenditures:
Global Solutions $ 14,544 $ 8,417
Global Products 1,350   1,105  
Consolidated capital expenditures $ 15,894   $ 9,522  
 
 

Owens & Minor, Inc.

Summary Segment Information (unaudited)

(dollars in thousands)

 
Six Months Ended June 30,
2018   2017 (2)
  % of   % of
consolidated consolidated
Amount net revenue Amount net revenue
Net revenue:
Segment net revenue
Global Solutions $ 4,631,295 95.87 % $ 4,515,322 98.28 %
Global Products 400,875   8.30 % 268,112   5.83 %
Total segment net revenue 5,032,170 4,783,434
Inter-segment revenue
Global Products (201,320 ) (4.17 )% (188,954 ) (4.11 )%
Total inter-segment revenue (201,320 )   (188,954 )  
Consolidated net revenue $ 4,830,850   100.00 % $ 4,594,480   100.00 %
 
% of segment % of segment
Operating income (loss): net revenue net revenue
Global Solutions $ 60,593 1.31 % $ 70,079 1.55 %
Global Products 33,717 8.41 % 19,689 7.34 %
Inter-segment eliminations (75 ) (681 )
Goodwill and intangible asset impairment charges (165,447 )
Acquisition-related intangible amortization (15,781 ) (4,666 )
Acquisition-related and exit and realignment charges (39,690 ) (11,835 )
Other (1) (21,151 ) (4,233 )
Consolidated operating income (loss) $ (147,834 ) (3.06 )% $ 68,353   1.49 %
 
Depreciation and amortization:
Global Solutions $ 31,635 $ 21,398
Global Products 12,178   3,808  
Consolidated depreciation and amortization $ 43,813   $ 25,206  
 
Capital expenditures:
Global Solutions $ 28,146 $ 22,257
Global Products 1,908   2,036  
Consolidated capital expenditures $ 30,054   $ 24,293  
 

(1)

Software as a Service (SaaS) implementation costs associated with
significant global IT platforms in connection with the redesign of
our global information system strategy ($0.9 million and $3.3
million for the second quarter of 2018 and 2017 and $3.1 million
and $4.2 million for the year-to-date period of 2018 and 2017) and
incremental charge to cost of goods sold for inventory fair value
adjustments associated with purchase accounting ($18.1 million in
the second quarter and year-to-date of 2018).

(2) Prior year segment results have been recast to exclude
acquisition-related intangible amortization to be consistent with
management's new measure of segment operating income.
 
   

Owens & Minor, Inc.

Net Income (Loss) Per Common Share (unaudited)

(dollars in thousands, except per share data)

 

Three Months Ended
June 30,

Six Months Ended
June 30,

2018   2017 2018   2017
Numerator:  

Net income (loss)

$ (182,777 ) $ 20,141 $ (174,626 ) $ 38,926
Less: income allocated to unvested restricted shares   (229 )     (469 )
Net income (loss) attributable to common shareholders - basic (182,777 ) 19,912 (174,626 ) 38,457
Add: undistributed income attributable to unvested restricted shares
-basic
27 51
Less: undistributed income attributable to unvested restricted
shares -diluted
  (27 )     (51 )
Net income (loss) attributable to common shareholders - diluted $ (182,777 ) $ 19,912   $ (174,626 )   $ 38,457  
Denominator:          
Weighted average shares outstanding - basic and diluted 59,750   59,863   60,022     60,020  
 
 
Net income (loss) per share attributable to common shareholders:
Basic and diluted $ (3.07 ) $ 0.33 $ (2.92 ) $ 0.64
 

Owens & Minor, Inc.

GAAP/Non-GAAP Reconciliations (unaudited)

 
(dollars in thousands, except per share data)

Three Months Ended
June 30,

Six Months Ended
June 30,

    2018   2017 2018   2017
   
Operating income (loss), as reported (GAAP) $ (172,051 ) $ 32,837 $ (147,834 ) $ 68,353
Acquisition-related intangible amortization (1) 9,374 2,347 15,781 4,666
Goodwill and intangible asset impairment charges (2) 165,447 165,447
Acquisition-related and exit and realignment charges (3) 24,930 2,893 39,690 11,835
Fair value adjustments related to purchase accounting (4) 18,059 18,059
Other (5) 874     3,311   3,092     4,233  
Operating income, adjusted (non-GAAP) (Adjusted Operating Income) $ 46,633     $ 41,388   $ 94,235     $ 89,087  
 
Net income (loss), as reported (GAAP) $ (182,777 ) $ 20,141 $ (174,626 ) $ 38,926
Acquisition-related intangible amortization (1) 9,374 2,347 15,781 4,666
Income tax expense (benefit) (6) (2,519 ) (696 ) (4,075 ) (1,392 )
Goodwill and intangible asset impairment charges (2) 165,447 165,447
Income tax expense (benefit) (6) (2,060 ) (2,060 )
Acquisition-related and exit and realignment charges (3) 24,930 2,893 39,690 11,835
Income tax expense (benefit) (6) (6,693 ) (1,008 ) (10,268 ) (4,513 )
Fair value adjustments related to purchase accounting (4) 18,059 18,059
Income tax expense (benefit) (6) (4,950 ) (4,950 )
Other (5) 874 3,311 3,092 4,233
Income tax expense (benefit) (6) (242 )   (1,139 ) (474 )   (1,492 )
Net income, adjusted (non-GAAP) (Adjusted Net Income) $ 19,443     $ 25,849   $ 45,616     $ 52,263  
 
Net income (loss) per diluted common share, as reported (GAAP) $ (3.07 ) $ 0.33 $ (2.92 ) $ 0.64
Acquisition-related intangible amortization, per diluted common
share (1)
0.12 0.03 0.19 0.05
Goodwill and intangible asset impairment charges (2) 2.73 2.73
Acquisition-related and exit and realignment charges, per diluted
common share (3)
0.31 0.03 0.49 0.12
Fair value adjustments related to purchase accounting (4) 0.22 0.22
Other, per diluted common share (5) 0.01     0.04   0.04     0.05  
Net income per diluted common share, adjusted (non-GAAP) (Adjusted
EPS)
$ 0.32     $ 0.43   $ 0.75     $ 0.86  
 

The following items have been excluded in our non-GAAP financial
measures:

(1) Acquisition-related intangible amortization includes
amortization of certain intangible assets established during purchase
accounting for business combinations. These amounts are highly dependent
on the size and frequency of acquisitions and are being excluded to
allow for a more consistent comparison with forecasted, current and
historical results and the results of our peers.

(2) Includes $149 million in goodwill and $16.5 million in
intangible assets impairment charges in our Global Products segment. The
charges resulted from our interim goodwill impairment testing performed
as a result of lower than projected financial results of certain
reporting units due to customer losses and operational inefficiencies,
which have caused us to revise our expectations with regard to future
performance and a decline in market capitalization of the Company.

(3) Acquisition-related charges, pre-tax, were $23.2 million
and $35.3 million for the three and six months ended June 30, 2018,
compared to $0.7 million and $2.0 million for the same period of 2017.
Acquisition related expenses in 2018 consisted primarily of transition
and transaction costs for the Halyard S&IP acquisition. Expenses in 2017
consisted primarily of transaction costs for Byram.

Exit and realignment charges, pre-tax, were $1.7 million and $4.4
million for the three and six months ended June 30, 2018. Amounts in
2018 were associated with establishment of our client engagement
centers. Exit and realignment charges were $2.2 million and $9.8 million
for the three and six months ended June 30, 2017. Charges in 2017 were
associated with the write-down of information system assets which are no
longer used and severance charges from reduction in force and other
employee costs associated with the establishment of our new client
engagement center.

(4) The second quarter of 2018 includes an incremental charge
to cost of goods sold from purchase accounting impacts related to the
sale of acquired inventory that was written up to fair value in
connection with the Halyard S&IP acquisition.

(5) Software as a Service (SaaS) implementation costs
associated with significant global IT platforms in connection with the
redesign of our global information system strategy.

(6) These charges have been tax effected in the preceding
table by determining the income tax rate depending on the amount of
charges incurred in different tax jurisdictions and the deductibility of
those charges for income tax purposes.

Use of Non-GAAP Measures

This earnings release contains financial measures that are not
calculated in accordance with U.S. generally accepted accounting
principles ("GAAP"). In general, the measures exclude items and charges
that (i) management does not believe reflect Owens & Minor, Inc.'s (the
"Company") core business and relate more to strategic, multi-year
corporate activities; or (ii) relate to activities or actions that may
have occurred over multiple or in prior periods without predictable
trends. Management uses these non-GAAP financial measures internally to
evaluate the Company's performance, evaluate the balance sheet, engage
in financial and operational planning and determine incentive
compensation.

Management provides these non-GAAP financial measures to investors as
supplemental metrics to assist readers in assessing the effects of items
and events on its financial and operating results and in comparing the
Company's performance to that of its competitors. However, the non-GAAP
financial measures used by the Company may be calculated differently
from, and therefore may not be comparable to, similarly titled measures
used by other companies.

The non-GAAP financial measures disclosed by the Company should not be
considered a substitute for, or superior to, financial measures
calculated in accordance with GAAP, and the financial results calculated
in accordance with GAAP and reconciliations to those financial
statements set forth above should be carefully evaluated.

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