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Text: The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its Annual Report on Form 10-K and quarterly report on Form 10-Q.
Additionally, in our discussion today we will reference certain non-GAAP financial measures.
Today I'm joined by Ed Pesicka, our President and Chief Executive Officer, who will provide commentary on the third quarter and an update on our ongoing efforts to help those on the frontlines of the COVID-19 pandemic.
And Andy Long, our Executive Vice President and Chief Financial Officer, who will discuss our financial results for the quarter and provide additional insight into our outlook for the remainder of the year.
I'm extremely pleased to be here today and report another strong quarter.
The strength of this quarter has been driven by our exceptional operating performance supported by our dedicated teammates.
It is our ability to support the complete value chain which makes us different.
The value chain starts with our America's owned and operated manufacturing facilities, combined with our broad external supplier base, and finally integrated with our robust distribution network.
This approach allows us to operate at the highest levels of performance and provide an enhanced customer experience, enabling us to best serve our customers and fulfill our mission to empower our customers to advance healthcare.
While the performance in the third quarter was strong, it doesn't stand alone.
In the past 18 months, we have significantly repositioned our organization by focusing on the customer, investing in the business and delivering on productivity and operational improvements.
This strategy has delivered compelling results for the third quarter, as well as accelerating performance during the past year plus.
Let me start by sharing a few examples from Q3 that demonstrate the strong performance.
First, we achieved an increase of more than 250% in adjusted net income per share compared to the third quarter in 2019.
Two, we expanded adjusted operating margin by 240 basis points versus prior year.
Three, we generated operating cash flow $118 million as a result of increased earnings and working capital improvements.
Fourth, we continue to make investments in infrastructure, service and technology.
Fifth, we reduced total debt by $70 million in the quarter.
And six, we launched a $200 million follow-on equity offering, which has since closed.
Specifically related to the global solutions segment, we grew revenue $317 million sequentially from Q2 to Q3.
The segment returned to profitability and we maintained our industry leading service levels.
Next, related to our global products segment, we achieved record profit levels, and we manufactured record levels of PPE.
And finally, we reached a milestone in the COVID fight, with nearly 11 billion units of PPE delivered, of which approximately 4 billion units were produced with materials manufactured in our American factories or Owens & Minor owned facilities, all of that being done since the beginning of this year.
While the third quarter was strong, this is just a continuation of our demonstrated track record of strong performance.
Here are a few examples of our consistency.
One, we achieve year-over-year gross margin expansion for the sixth consecutive quarter.
Two, we generated positive operating cash flow, again, for the sixth consecutive quarter.
We paid down debt by $231 million year-to-date and by $402 million in the last six quarters.
In addition to that, we have another $130 million in cash on hand that is specifically earmarked to pay down additional debts.
Next, we delivered a fourth consecutive quarter of year-over-year adjusted earnings per share growth on a constant currency basis.
And finally, today we are pleased to raise our 2020 full year adjusted earnings per share guidance to a range of $1.90 to $2.
And we are reconfirming double digit adjusted earnings per share growth in 2021.
It is clear that a robust operational execution combined with strategic investments have fueled increased output and improved efficiency across the entire business, thus enabling us to better serve our customers.
Continuing with this approach as a foundation of our strategy, we are well positioned to address the current and future needs of healthcare.
I will now talk about our focus areas that will shape the remainder of 2020 and the future of Owens & Minor.
These areas of focus are investments, operational improvements, and continued financial strengths.
Let's begin with our investments.
Our disciplined investment strategy has been and will continue to focus on infrastructure, technology and operational effectiveness into the future.
Let me start with investments in our global products segments.
During the third quarter, we continue to expand our manufacturing output through capital investment, operational improvement, and long-term partnerships with our customers.
Here are just a few examples of these investments.
One, we completed the installation of new N95 production line in our US based manufacturing facilities.
Next, we continue to invest in nonwoven fabric manufacturing in our Lexington, North Carolina facility.
And we continue to expand our isolation and surgical gown production capacity.
These investments in our America's based locations enable us to continue to be a leader in the manufacturing of PPE across the broad continuum of PPE products.
It should be noted that we also expect the PPE supply demand imbalance to continue into the future.
Moving now to investments in our global solutions segment, where we expanded our low unit of measure warehouse infrastructure system, we improved our inventory planning process and algorithms, we enhanced our data management services offering through myOM and QSight and improved our B2B and B2C offerings in our home healthcare business.
These investments differentiate Owens & Minor in supporting our customers across the value chain.
Again, this starts with products, products that are manufactured in our factories, most of which are in the America's, with our teammates, with our technology, with our patents, with our processes, with our quality control, with our regulatory affair.
I think you get the picture.
We know how to manufacture products and seamlessly get them into the hands of the healthcare providers through our distribution channels.
As you can tell, we are in a strong position to meet the demands of the changing landscape in the healthcare industry, as regulations and protocols call for increased usage of PPE and as more patients return to care and also as more patients rely on home healthcare.
Let me now discuss operational improvements.
In the past several quarters we have significantly transformed the operational landscape to deliver an improve customer experience and do it more efficiently.
We are doing this by focusing on operational effectiveness and continuous improvement.
Let me give you a few examples.
One, we invested in technological process improvements to increase accuracies within our distribution centers.
Next, we continue to partner with our suppliers using data to better manage demand planning and supply chain efficiency.
While doing these, we continue to emphasize on the safety of our teammates so we can retain our skilled workforce.
Finally, we are enhancing our business system approach to ensure that continuous improvement will be at the core of our organizational culture.
All of these will allow us to remain at the forefront with our industry leading service levels.
Finally, let's talk about our financial position.
As noted in the beginning of my comments today, our financial profile is strong.
We are deleveraging the balance sheet and investing in our future.
Based on the achievements I've walked you through, we have created a track record of delivering on our commitments.
The midpoint of our guidance represents a threefold increase improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
The long-term outlook is based on our improved companywide operating performance from operating efficiency initiatives combined with investment.
Here are a few reasons for the expected continued positive momentum.
First, we expect the demand for PPE to continue to remain high.
With changes in healthcare protocols, stockpiling requirements, new win markets we believe higher demand for PPE is here to stay.
As a result, we continue to invest and ramp up our production to help service this demand.
Secondly, as elective procedures continue to recover toward pre-pandemic levels, we are able to leverage our distribution infrastructure to service our customers.
And finally, our home healthcare business continues to see an increase in demand in one of the fastest growing healthcare markets.
As I've just discussed, we had a solid third quarter and I'm immensely proud of our accomplishments over the past several quarters.
But we recognize we're not done yet.
And good evening, everyone.
Today, I'll review our third quarter financial results and the key drivers of our better than expected quarterly performance.
And then I'll discuss our expectations and assumptions for the rest of 2020.
We are pleased to report a strong third quarter and we're excited about our recent equity issuance and continued deleveraging of the balance sheet.
Our Q3 performance is a testament to our ability to adapt and execute during challenging times.
Over the last several quarters, we have demonstrated our ability to consistently deliver improved financial results and enhance our financial position despite the challenging business environment.
Earlier today, we announced our revised full year adjusted net income guidance, which has been increased to $1.90 to $2 per share with a continued expectation of double digit growth in 2021.
Later in my remarks, I'll cover the details of the factors that gave us confidence in raising our guidance.
Let's start with the highlights of our Q3 performance.
Beginning with the top line, net revenue in the third quarter was $2.2 billion, compared to $2.3 billion for the prior year.
This change was primarily driven by the impact of past account non-renewals from 2019 and to a lesser extent by the COVID-19 pandemic related reductions in elective procedures.
This was partially offset by greater sales of PPE coupled with growth in sales from existing customers in our home healthcare business lines within global solutions.
Although the revenue impact of elective procedures was better than expected, we continue to trail pre-pandemic levels.
Gross Margin in the third quarter was 15.7%, an improvement of 350 basis points over prior year, as a greater portion of sales came from the higher margin global products segment and is evidence of the increasing level of operating efficiencies, productivity and fixed cost leverage we've achieved.
This represents the sixth consecutive quarter of year-over-year gross margin expansion, illustrating our improving performance.
Distribution, selling and administrative expense of $263 million in the quarter increased $14 million compared to the third quarter of 2019, primarily as a result of continued investments in the business, partially offset by ongoing productivity gains.
Interest expense of $21 million in the third quarter was $3 million lower than the prior year as a result of lower debt levels due to improved operating cash flows and working capital.
In addition, lower base rates and utilization of our accounts receivable securitization program have contributed to the reduction in interest expense.
The combined impact from the strong operational performance and execution resulted in income from continuing operations for the quarter of $46 million, an improvement of $43 million compared to prior year.
GAAP income from continuing operations per share for the quarter was $0.76, an increase of $0.70 versus the same period last year.
The resulting adjusted earnings per share for the quarter was $0.81, which represents a year-over-year increase of over 250% and a fourfold improvement sequentially versus Q2.
The foreign currency impact in the quarter was $0.06 favorable.
Now let me review results by segment for the third quarter.
Revenue for the global solutions segment was $1.9 billion, compared to $2 billion for the same period in the prior year.
The change comes from a decline in our medical distribution business due to the previously mentioned impact of customer non-renewals from 2019 and the impact that the COVID-19 pandemic has had on elective procedures, partially offset by another quarter of solid growth in the home healthcare business.
Relative to the second quarter, global solutions revenue grew by $317 million attributable to the increase in elective procedures.
To help put this in perspective, revenue improved from about 80% of pre-COVID levels in Q2 to the mid 90s in Q3.
Global solutions posted operating income of $11 million for the third quarter compared to income of $25 million last year, driven by lower volume.
Sequentially, global solutions operating income increased by $21 million or 7% of incremental revenue as volumes improved against our largely stable cost base.
Now turning to the global products segment, revenue was $474 million, compared to $360 million in the third quarter of last year, driven by growth in PPE sales net of the impact of lower elective procedures.
Sequentially, global products revenue increased by $103 million.
As new America's based PPE production capacity expanded, and elective procedures began to ramp up.
Global products reported operating income of $90 million, which increased by $73 million over last year.
The increase is attributable to higher revenue of PPE products, favorable product mix, productivity initiatives, improved cost leverage, operating expense discipline, and favorable foreign exchange.
We continue to operate at very high levels of efficiency, and these factors should continue for the remainder of 2020 and are reflected in our revised projections for the year.
Let's turn our focus to cash flow, the balance sheet and capital structure.
In the third quarter, we generated operating cash flow of $118 million and $268 million year-to-date on a consolidated basis as a result of improved profitability and stringent working capital management.
Looking ahead to Q4, we expect a number of factors to weigh on cash flow.
First, we anticipate carrying higher levels of inventory in preparation for the traditional flu and holiday seasons, and an expectation of a slight increase in elective procedures above our previous forecast.
These inventory changes will help ensure that we are prepared to meet customer requirements in a very dynamic environment.
Also, the fourth quarter will experience a higher level of capex spend compared to earlier in the year.
These actions demonstrate our continued commitment to invest in the business to help ensure long term profitable growth and to provide customers with the highest level of service.
Total debt was $1.3 billion at September 30, representing a sequential reduction of $70 million since the second quarter, and $231 million decline since year-end.
Recently, we executed the next step in our financial strategy to further strengthen our balance sheet with a successful equity raise netting $190 million, closing on October 6.
This offering resulted in the issuance of 9.7 million additional shares, which is expected to negatively impact earnings per share by $0.05 for 2020.
The impact of dilution is reflected on our revised annual guidance.
We've already used the net proceeds from our equity offering to reduce debt early in the fourth quarter.
In addition, we have recently issued a redemption notice for our outstanding 2021 notes to be completed by the end of the year.
We plan to utilize $134 million held as restricted cash at the end of September, plus other available funds to retire these notes.
Our leverage profile is well enhanced.
And as we continue to strengthen our balance sheet, we are very well positioned financially to execute our growth strategy by continuing to invest across our businesses.
Finally, let me provide some color on our outlook for the remainder of 2020.
As I mentioned earlier in my remarks, we revised our full year adjusted net income guidance upwards to a range of $1.90 to $2 per share, inclusive of the dilution from our recent equity raise.
The midpoint of our current guidance represents a threefold improvement over 2019 results, and we continue to expect double digit earnings per share growth in 2021.
Let me walk through the assumptions that went into developing the revised guidance.
First of all, we expect the demand for PPE products to remain strong.
And our America's based manufacturing capacity expansion programs will remain on schedule for the rest of the year and into 2021.
We also expect strong performance in Byram, our home healthcare business to continue.
The level of elective procedures across the nation continues to influence our performance.
In Q3, we experienced a faster than expected recovery in this area contributing to our over performance in both segments in the quarter.
Q3 revenue associated with elective procedures increased to the mid 90% of pre-COVID levels.
And our expectation for the fourth quarter is that these volumes will remain at Q3 levels.
We do not expect to see elective procedures return to pre-COVID levels until the middle of 2021 at the earliest.
Furthermore, our outlook on the strong demand for PPE going forward, along with our ability to leverage our captive North American centric supply chain for raw material input through distribution gives us confidence in achieving double digit earnings growth in 2021.
We are seeing increasingly strong indications of sustainable PPE demand for the many reasons we have previously cited.
Please note that key modeling assumptions for the full year 2020 have been updated on supplemental slides filed with the SEC on form 8-K earlier today, and posted to the investor relations section of our website.
We are moving forward with sustainable operational and financial improvements that will provide the roadmap for years to come.
While improving Owens & Minor's financial profile remains a top priority, our core focus continues to be on our customers.
We put our commitment to serving clinicians and caregivers at the center of everything we do.

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sees fy 2020 adjusted earnings per share $1.90 to $2.00.
continues to believe that it remains positioned to deliver double-digit earnings growth in 2021.

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