Good day, and thank you for standing by. Welcome to the Owens & Minor Third Quarter 2021 Financial Results Conference C all. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you would need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your first speaker today, to Jackie Marcus, Investor Relations. Ms. Marcus, you may begin.
Thank you, operator. Hello, everyone, and welcome to the Owens & Minor Third Quarter 2021 Earnings Call. Our comments on the call will be focused on financial results for the third quarter of 2021 and our outlook for 2021, both of which are included in today's press release. I'd also like to call your attention to the supplemental slides related to our 2021 outlook posted on our website in the Investor Relations section. Please note that certain statements made on this call are forward-looking statements which are subject to risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical facts, are forward-looking statements and include statements regarding our anticipated financial and operational performance.
Forward-looking statements made on this call represent management's current expectations and are based on the information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed, or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in the SEC filings, including in the Risk Factors section of its annual report on the Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements.
Additionally, in our discussion today, we will reference certain non-GAAP financial measures and information about these measures and reconciliations to the most comparable GAAP financial measures, which are included in our press release and our annual report on Form 10-K. Today, I am joined by Ed Pesicka, our President and Chief Executive Officer, and Andy Long, our Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Ed, who will start things off. Ed?
Thank you, Jackie. Good morning, everyone, and thank you for taking the time to join us on the call today. I'm extremely excited to be here today to discuss our third quarter, and I'm pleased that in the third quarter we continued on our path to a record-setting year. Our performance reflects the results of consistently providing high-quality service and value to our customers while strengthening the financial position of the company.
As I reflect on the key drivers of the third quarter as well as on our outlook, it is clear that our ability to deliver strong revenue growth across the entire business, combined with our focus on continuous improvement, has enabled us to effectively navigate a rapidly changing market that includes the COVID-19 pandemic, global supply chain crisis, inflation, and an acceleration in the shift of healthcare to the home, or as we talk about it internally, our new norm. I'll start with our Global Solutions segment, which I am pleased to note delivered significant top-line growth while nearly doubling operating margin year-over-year.
As I continue to dig a little deeper into this segment, and more specifically into our medical distribution business, it is great to see that the hard work we did to enhance our service levels and support our customers at the highest level during the pandemic is paying off. Our competitive position has clearly improved, and we continue to win new customers and consistently renew existing customer agreements. It is becoming clear that customers value our ability to provide scalable and flexible solutions due to our balance between technology and touch as we operate in these rapidly changing market conditions. Our medical distribution showed marked improvement, leading to higher revenue and meaningful operating income improvement. The business line is really starting to hit on all cylinders, and this is being recognized by customers as we solidify meaningful wins again this quarter.
Finally, in our Global Solutions segment, our Patient Direct business, already a leader in its space, once again posted growth rates ahead of the market. Patient Direct remains rock solid, and we continue to see strong underlying growth in the home health market as home treatments are becoming increasingly more commonplace. Next, in our Global Products segment, we showed solid growth in total. I want to focus you on the fact that when you strip out the price increase related to the glove cost pass-through , we delivered 8% volume growth. As we have stated in the past, the strong sales are a result of increased output of our previously adequate capacity to fulfill continued high PPE utilization due to the adoption of healthcare infection prevention protocols, share gain during the pandemic, and increased elective procedures.
In both our segments, it is clear that our customer wins and our strong overall growth have been facilitated by our business blueprint. Our business blueprint that is focused on our culture, our continuous improvement-based Owens & Minor business system, and our disciplined strategic investments, which ultimately drive an enhanced customer experience while also improving our financial performance. Our business blueprint continues to pay off and provides us with the confidence of delivering long-term profitable growth. Moving on to our balance sheet. While Andy will have more to share on this in his remarks, I'm pleased to report that we reduced our net debt by $42 million, down to $921 million, taking our net leverage to 1.7x . Just to put this into context, the last time our net leverage was this low was Q4 of 2016.
Our balance sheet strength gives us the opportunity to make strategic investments that will drive continued long-term profitable growth across our business. Looking ahead, like many businesses, we are monitoring the increasing inflationary environment and have begun to take steps to mitigate this impact. As I think to the balance of the year and into 2022, I'm excited about the many prospects we have. These prospects include one, the implementation of our new wins and the still large opportunity pipeline in medical distribution. Two, the continued expansion of new and future proprietary products through our existing customers, new wins, and channel expansion. Three, the continued strength of our Patient Direct business. Four, our disciplined approach to capital deployments. Lastly, our never-ending commitment towards operational excellence and continuous improvements.
As we look at the third quarter and full year, 2021 is shaping up largely as we previously indicated. The first half was very strong, and the back half of the year, albeit lower and facing tough comparisons, will still demonstrate that we're operating at a very high level. Andy will elaborate on these in a few minutes. Before I turn the call over to Andy, I'd like to emphasize that the strength of our year-to-date results and our continued execution of our long-term strategy gives us the confidence to narrow our range in 2021 guidance for both adjusted EPS and adjusted EBITDA, as well as reaffirm our previously issued full-year guidance for 2022. As I've said before, it is our focus on our customers, our culture, our business system, and our investments that allow us to build the Owens & Minor of today.
Everything we do at Owens & Minor is tied to our mission of serving our customers so that they are empowered to advance healthcare. Thank you. Now I'll turn the call over to Andy for a discussion of our financial results. Andy?
Thank you, Ed, and good morning, everyone. Today, I'll review our financial results for the third quarter and the key drivers for our performance, and then I'll discuss our expectations and assumptions for the balance of the year. Let's begin with the results for the third quarter, starting with the top line. Revenue for the third quarter was $2.5 billion compared to $2.2 billion for the prior year. This represents over 14% growth compared to this time last year, with both segments once again contributing to the improvement. Our growth in the third quarter was driven by share gains, the ongoing recovery of elective procedures, and other strong performance from our Patient Direct business, the pass-through of elevated glove costs, and higher usage of PPE. Excluding the pass-through of glove costs, our top-line growth was 7%.
Gross margin in the third quarter was 13.1%, which was lower than the prior year, mainly due to three drivers, the timing of our glove cost pass-through, as discussed last quarter, increasing inflationary pressures, which were partially offset by positive operating leverage on higher volumes. Distribution, selling, and administrative expenses of $262 million were essentially flat compared to the prior year. This was primarily a result of higher variable spending due to volume, inflationary pressures, and investments in growth, which were offset by productivity initiatives. The adjusted operating income for the quarter of $79 million and adjusted EBITDA of $92 million were $13 million and $12 million lower, respectively, than our record-setting third quarter in 2020.
Interest expense of $12 million in the third quarter was down 45% or $9 million year-over-year, which was driven by lower debt levels and effective interest rates. The adjusted effective tax rate of 16.3% compared favorably to 30.9% in Q3 of 2020. On a GAAP basis, income from continuing operations for the quarter was $44 million or $0.58 a share. Adjusted net income for the third quarter was $56 million, which yielded an adjusted EPS for the quarter of $0.74, which was $0.07 lower than Q3 of last year. It's important to note that the average dilutive shares outstanding of $76 million were 25% or $15 million higher during the quarter versus Q3 of last year, which resulted in year-over-year reduction of $0.19.
The year-over-year foreign currency impact in the quarter was unfavorable by $0.06. Let's turn to our quarterly performance in each of the segments. Global Solutions revenue of $2.02 billion represents $158 million or 8.5% growth over the year-ago quarter. The continued growth was largely driven by ongoing improvements in our medical distribution business and continued momentum in our Patient Direct business. Contributing to this growth was the ongoing recovery in volumes associated with elective procedures, which continued to trend at pre-pandemic levels. I'm also excited that we saw attractive sequential growth, which includes the contributions noted above, as well as recent customer wins. Global Solutions' operating income was $20 million, which was $9 million or 86% higher than the prior year, primarily driven by an improvement in our medical distribution business.
We experienced higher volumes coupled with productivity and efficiency gains in the quarter, which led to our strong results. In addition, we saw margin expansion year-over-year and sequentially. In our Global Products segment, revenue in the third quarter was $679 million compared to $474 million last year, an increase of $205 million or 43%. Revenue grew by 8%, excluding the $170 million impact of passing through higher glove costs. Volume growth was led by higher S&IP usage, including PPE volume, as we continued to benefit from our previous investments to expand capacity, meeting the requirements for stockpile fulfillment and the increase in elective procedure volumes. Sequentially, the segment grew in the low single digits, excluding the impact of glove cost pass-through, as demand for S&IP products remained strong compared to Q2.
Operating income for the Global Product segment was $51 million versus a difficult comp of $90 million in the third quarter of last year. The adverse impact was a result of the timing of glove cost pass-through, higher commodity prices and higher transportation costs, which we were able to partially offset through volume growth and productivity initiatives. As a reminder, we experienced a net benefit to operating income from the timing of glove cost pass-through during the first half of 2021. FX unfavorably impacted operating income by $6 million as compared to the prior year. Turning to our balance sheet and cash flow statements, year-to-date cash flow from operations was $74 million, of which $61 million was generated in the third quarter. This result was driven in part due to improved working capital management, such as improved payment terms with glove manufacturers.
This performance is in line with our previously communicated expectations. At the end of the third quarter, total net debt was $921 million, a reduction of $330 million compared to last year and down $42 million sequentially. Total net leverage is now at 1.7x trailing twelve months adjusted EBITDA. Our net leverage is now at the lowest point in nearly five years. I wanna emphasize that over the last two years, we've deployed capital to invest in infrastructure, technology and working capital to support customer service levels while driving down our leverage profile to below 2x adjusted EBITDA. Our enhanced capital structure provides us with operational flexibility, and we are very well-positioned to implement our growth strategy. Finally, turning to the outlook.
We are narrowing the range of our full- year expectation for adjusted EPS and adjusted EBITDA in 2021. We now expect adjusted EPS to be in a range of $3.90-$4.10, and adjusted EBITDA in the range of $475 million-$500 million. Our guidance for adjusted EPS is based on 76 million weighted average shares outstanding. Additionally, we're reaffirming our previously announced guidance for 2022. I'd like to spend a few minutes walking through the rationale for our guidance, and we'd like to point out that these key modeling assumptions for full year 2021 can be found in supplemental slides that were filed with the SEC on Form 8-K earlier today and have been posted to the Investor Relations section of our website.
We expect full-year revenue to be in the range of $9.6 billion-$9.8 billion. Key assumptions supporting this include glove cost pass-through in the range of $650 million-$700 million, of which approximately $530 million has been realized year- to- date, elective procedures remaining flat to Q3 at near pre-pandemic levels and a normal flu season. Note that Q4 will have two fewer selling days than in Q3 and one fewer day than in Q4 of last year, which is the main driver of an expected sequential decline in revenue versus Q3. We expect sequential margin expansion in the business, with both segments contributing to this expansion in the fourth quarter. Specifically in Q3, Global Products saw better than expected margins due to the timing of higher glove costs moving from Q3 to Q4.
We expect to see the delayed impact of the glove cost pass-through to hit in Q4. Even with this shift, we still expect sequential margin expansion in Q4. This timing issue does not change our outlook for the segment. Finally, regarding the balance sheet and cash flow, we anticipate carrying higher inventory levels throughout the rest of the year to support typical seasonal activity and the onboarding of new customers. This will be partially offset by lower inventory in our product segment as glove inventory levels continue to decline. We also expect the fourth quarter to have a higher level of CapEx spending compared to earlier in the year as we continue to invest in our business for the long-term profitable growth. In conclusion, I'm delighted with our performance in the third quarter.
We were able to show year-over-year and sequential growth in both of our segments after normalizing for glove cost pricing.
We've delivered another quarter with margin expansion in our Global Solutions segment, and our team continues to execute superbly in the face of challenging market dynamics. Despite a higher number of shares outstanding and accelerating headwinds due to inflation year-over-year, we've been able to find ways to hold adjusted EPS flat on an FX-neutral basis by expanding customer relationships to drive profitable growth while utilizing our business system to become more efficient in how we operate on a daily basis. It's incredibly exciting to see the significant progress we're making against our long-term strategic goals. At this point, I'll turn the call back over to the operator to begin the Q&A session. Operator?
Thank you, sir. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Michael Cherny from Bank of America. Please go ahead.
Hi, good morning. This is Allen Lutz in for Mike. You mentioned market share gains in the PR and then followed up with talking about new customer wins. Can you talk about why you're winning in the market and, you know, or with that 8% growth, can you talk about how much some of these new wins are contributing to top-line growth?
Sure. Good morning, Allen. Thanks for the question. You know, first, you know, historically, I've talked about net new wins, and look, I don't wanna get into every quarter doing a tally sheet of what we have, but since you're asking, let me go in a little more detail. As I sit here today, if I look back in the last several months, you know, we've won between $300 million-$400 million of incremental business. And that's new wins. That's, you know, and you look at that, you know, you ask why, and it's clear from our conversation with the customer as well as what we're doing, you know, they like our operating model. We've proven that operating model out even in the height of a pandemic, so they really like what we were able to provide.
They like the value we can provide also. When I think about the operating model, what they really are excited about is that ability for us to be able to be flexible and scale very quickly, as well as that's based upon the investments we made to have the right level of technology that's out there, but still balance that with the ability to have the right human touch. You know, if I think about those wins, as I share with them this quarter here of where we are today, is, you know, it's also now moved on to some larger wins. It's not just the small or medium, it's now more medium and large wins to get to those numbers that we're starting to see. Then I'll make, you know, two other comments around that.
You know, when you win a customer, I've talked in the past, it could take up to three to six to nine months to implement. You know, we had one of our major wins just recently challenge us and say, "Hey, we wanna do this in 45 days." This customer's gonna go live within the next week. From, call it 35 days ago to 40 days ago, the customer signed with us. We leveraged our Owens & Minor business system to be able to put together this implementation very fast, and the expectation is the implementation will go, you know, be executed flawlessly. You know, the other last thing I'll talk about within the implementation, the new wins, and some of the things that makes it different and tie this all together is we talked about our debt ratio, the 1.7.
What that does is that also enables us to make the right investments we need in advance in working capital and inventory to make sure that we can have a flawless execution. You know, a lot of great stuff going on in our medical distribution business. You know, I'm extremely excited about where we are from that standpoint. Let me maybe add, you know, Allen, another comment. You know, a lot of times, you didn't ask this question, but a lot of times we get questioned about our GPO renewals, and I wanna note that just recently, we renewed with Premier for a five-year deal. We've reworked that contract where there's opportunity to provide more value for Premier as well as significant more value for Owens & Minor.
You know, another reason why when Premier looked at it, again, they like what they see in our operating model. They like our ability to help serve our joint customers. They like that ability for us to be flexible and scale quickly regardless of the circumstances in the market. If you consider the quickly changing market we have today, that's critical. That's really because of both the operating and capital investments we made in and around both the technology and touch. Allen hopefully, that helps frame how to answer that question.
Yes, that's really helpful. Last quarter, you mentioned that elective procedures were effectively back to pre-pandemic levels, and you kind of saw that continuing for the remainder of the year. I guess, can you just give us an update, what are you seeing there and, you know, what are your early thoughts into 2022 on that? Thanks.
Yeah, I'll start, you know, if Andy wants to add any more color. I mean, I think the clear answer is, yeah, we've absolutely seen elective procedures come back to the pre-pandemic levels. You know, if I look at it in a macro across the United States in the last quarter, in the third quarter, we did see some spots where there were COVID spikes where it constricted a little bit. The reality is, in aggregate across the U.S., we have seen elective procedures come back to pre-pandemic level. What we continue to do is making sure that we're prepared in advance with working capital investments as well as, you know, having our teammates ready to quickly adjust as that's moved.
You know, we see that back to where it was, and there's an expectation that that continues well into 2022.
Yeah, Allen, it's Andy, just to add a little more color there. So in our Q3 results, we did see a slight sequential improvement in elective procedures, not material, but it was a slight improvement. We are back to where we believe pre-pandemic levels are. Our Q4 forecast assumes that really that's gonna continue at that level. We don't assume a change up or down in that.
In that level. Should elective procedures spike up in Q4, you know, we would now be ready for that based on the comments Ed made on our inventory levels, but that would be upside to our forecast. Again, I think, you know, we continue to play that into 2022 maintaining at pre-pandemic levels with those same dynamics. If it does improve, there would be upside to 2022 as a result.
Great. Thank you.
Thank you. Our next question comes from the line of Jailendra Singh from Credit Suisse. Please go ahead.
Thank you, and good morning. Good morning, everyone. Can you guys flesh out a little bit more on the accelerating inflationary pressure you guys called out multiple times in terms of the magnitude, where you are seeing that inflationary pressure across your business, and what are you assuming for the remainder of 2021 and as well as like next year? I understand that likely pressures gross margin, but I'm sure there must be some impact on SG&A too. How do I reconcile that with the sequential decline of $30 million in SG&A expense in the quarter?
Yeah. I'll cover it, and then Andy can add some color on it. Jailendra, you're absolutely right. You know, let's just look at inflation in the third quarter, first of all. We saw inflation ramp as the quarter progressed. I will tell you, our team did an incredible job in the third quarter. Really, we leveraged both productivity and that incremental volume and the fixed cost leverage on that to offset or virtually neutralize the impact of inflation in the third quarter. The team did a really good job around that.
You know, if I think about it prospectively going into the fourth quarter, you know, and frankly, you know, when we looked at the full year, we looked at the impact, you know, really on an abundance of caution, we wanted to make sure we focused on that. Because the reality is, had we not had inflation in the third quarter and the expectation to continue in the fourth quarter, we would have raised our guidance. You know, again, an abundance of caution. We saw the inflation in the third quarter, we see it in the fourth quarter. You know, again, in the fourth quarter, the expectation is our team knows the levers. You know, we're gonna continue to drive productivity. You're right, that productivity is both in margin as well as in SG&A.
You know, we will continue to pull those productivity levers. We're also gonna continue to look at volume to help offset that. You know, in addition to the volume, that volume can also drive additional fixed cost leverage. Then lastly, you know, where appropriate, you know, we will look at price as needed and as appropriate from a short-term standpoint, you know, continue to mitigate the risk of the inflation. You know, if I look at it prospectively into 2022, you know, the expectation is that inflation continues into 2022.
The positive is you have time to not just pull the traditional levers, but use the time between now and 2022 and early 2022 to continue to look at maybe broader scale ways to drive productivity and further integrate our business. That's what's in process today. You know, that's how we thought about inflation in Q3, as well as where we expect inflation to go and the levers we're gonna pull in Q4 to mitigate that, you know, and the expectation of that continuing into 2022 and the broader levers we'll pull. With that, you know, Andy, if you wanna add anything additional, please feel free.
Yeah, Jailendra, I think the only thing I would add is that, you know, at the end of your question, you did talk about the Q2 to Q3 sequential decline in SG&A, and I would say, you know, clearly there were drivers driving SG&A up, so there were volumes and whatnot, but the inflationary pressures as Ed mentioned. Again, in the quarter, we continue to drive efficiencies and productivity, and some of that decline sequentially is also just the lumpiness or timing of investments in the business.
Got it. A quick follow-up. You guys called out both sequential and year-over-year volume growth in PPE products. Can you help us understand the mix of that growth in terms of growth coming from expanding the number of customers, category expansion, and how much of that might be triggered by like hospitals preparing for the winter months? Any color you can provide there?
Yeah. I guess just at a macro level, we saw it pretty much across our entire base of customers. Again, this goes back to what we've talked about in the past is one is the protocols are in place, and the customers are continuing to use the PPE. You know, the elimination of the emergency use authorization that you know has people coming back and buying the PPE associated with you know medical grade. Then really what makes us different is the other reason why we also continue to see that volume strength. You know, one, we are a broad manufacturer of PPE you know across all the categories, everything from masks to respirators, N95s to isolation gowns, surgical gowns, drapes, wrap you know the broad base of PPE.
The next is we do it on scale, so that is something that's important. The next is that, you know, we sell great high-grade medical-grade PPE products. Lastly, let's not forget this, is we're making it in the Americas with all the fabric or virtually most of the fabric coming from our facility in Lexington, North Carolina, to make those products. Then we make the bulk of that PPE in our factories. You know, you think about the supply chain impact that others may be having right now versus us, you know, that's another reason why we expect this to continue to grow.
You know, if I think about the seasonality, there may be some of that in there, you know, but I think most customers are really have been prepared as they continue to build the right level of stockpiles, and those continue to grow. I think it's all those factors, Jailendra. It's the value that makes us different. It's our manufacturing footprint. It's the vertical integration we have from raw material to finished goods. It's the broad portfolio, not just one category, all categories. Ability to make it on scale, where we make it, and our ability to deliver, as well as the market factors that are helping us too.
Great. Thanks, guys.
Thank you. I show our next question comes from the line of Eric Coldwell from Baird. Please go ahead.
Thanks very much. Good morning. I wanted to dig in on the gloves a little bit, and I apologize, I missed a couple of minutes of the call. Did you say specifically what the glove revenue was in 3Q, the pass-through revenue, and then what the EBIT impact in 3Q was, at this point?
Good morning, Eric. It's Andy. Yeah, regarding gloves, you know, just stepping back a little bit. We gave revised our full-year guidance on the expectation of glove pass-through. We're now at $650 million-$700 million. In terms of the quarterly impact in Q2, we saw about $170 million on the top line, and then bringing the year-to-date total to about $530 million of total glove cost impact on the top line through three quarters. And then what I talked about on the bottom line is really just the shift in margins based on glove costs shifting from Q3 to Q4.
Really, you know, the reason behind that, Eric, is that there's a fair amount of variability in the time it takes to get gloves from our manufacturing through the congestion in the ports on the West Coast and into our distribution centers to be sold. Some of the higher cost gloves that we expected to hit the P&L in Q3, you know, we believe now will slip into Q4 based on those transportation delays that I think we're all aware of. Overall, I view it as a right pocket, left pocket, net sum zero for the year. I think the important thing is that we still have an expectation that sequentially from Q3 to Q4, our global product segment will continue to have margin. We continue to believe that we'll have margin expansion sequentially into Q4.
Thanks, Andy, for all the detail. For the quarter itself, though, on gloves, was the contribution positive, neutral, slightly negative? What was the quarterly impact on EBIT?
Yeah. As you recall, kind of the cadence of gloves, you know, as you follow that, the impact by quarter, Q1 was our, you know, strongest quarter, where pricing was put into place before costs caught up. Q2 was where costs caught up to pricing. Q3, think of Q3 as that offset to the strong Q1. Q3 was our most difficult quarter in terms of margins in the Global Products segment, you know, largely driven by that cost dynamic in gloves.
If you think about it versus plan, it was actually favorable to our plan in the quarter, but unfavorable the prior year.
Got it. I don't suppose I could tempt you into quantifying that?
That would be correct. Yeah.
Gotta try. Byram or direct-to-patient talking about continued above-market growth, but I think there's a lot of debate about what the market is actually growing. I think in the past, you've talked about growth rates that, at least in your view, may be double or better than the market growth rate. I was hoping to get a little more detail on where you see the market growing and what kind of outperformance you're seeing in direct-to-patient versus that market view.
From that standpoint, you know, I guess we use a couple different proxies on the market. We look at what, you know, we hear from our suppliers. We also look at what we hear from our customers. We also look at what we're seeing some of our competitors in the market. You know, and the reality is, you know, we know our growth rates are greater, much greater than what we've seen historically year-to-date on what we continue to hear in the market, again, from both our suppliers, our customers, and what we see. You know, also got to remember, too, that, you know, some of the major categories we're in are some of the faster growing categories like diabetes.
That's one of our bigger categories, and it's that category alone is generally outpacing the general market from home health. You know, then you've got ostomy and wound care and other things. As elective procedures are ramping, you know, we also are seeing the downstream benefit of that, of when a person goes home, considering what type of surgery they have or what type of procedure, what type of doctor visit, we're now seeing additional volume come in there. That's why, you know, we continue to see why that is as good or much, I should say, you know, better than what we're seeing and what we're hearing from the data points we have today.
Eric, it's Andy, just to add a little color to that as well.
Just, you know, when we talk about organic investments in the business, reinvesting in the business, this is clearly an area where we've put investments in both the technology and in terms of expanding the sales force, moving into new geographies where we maybe don't occupy, you know, currently. That's another just evidence of where we're investing and where we're seeing growth as a result of those investments.
If I could ask for just one more, back to the glove topic. There's been incredible negative headlines on some of your competition from Asia and in terms of, you know, working conditions, labor issues, quality, and now more recently, there's headlines of, you know, effectively criminal organizations that are taking used gloves and recycling them and trying to, you know, pass them off as new. What kind of an impact is that having on, one, spot pricing in the marketplace, and then two, on, you know, my assumption would be that it would actually help a company like Owens & Minor, where people can have higher trust in quality and be confident in the product.
It would actually seem to be a long-term driver of, you know, not only goodwill, but significant share win in that marketplace as you roll out new capacity. I'd love to give your.
Sure.
Get your thoughts on that.
Sure. I think, you know, absolutely all those factors we see. You know, what gives the customer confidence is that we're different. You know, we are making a good percentage of our gloves in our own facilities. That level of operating control is vastly different than going and sourcing a glove from some company in China. You know, that's the first and foremost. Second of all, we talked about in the past, you know, we're in the process continuing to add capacity that'll add between 1 billion and 1.5 billion incremental gloves a year, which gives us more control over that.
Next, Eric, we have a very rigorous and disciplined process that when we do source gloves to validate, you know, our suppliers that have provided the incremental gloves beyond what we make in the factory. You know, there's a lot of suppliers, frankly, or manufacturers that we just won't do business with regardless of what they're offering or what's out there. I think that has been translated, and that has been recognized and seen both from our customers because of what they're seeing in the market. You know, regarding pricing, we haven't seen it drastically change, you know, the market pricing yet.
The other aspect that what we're seeing is because of, you know, the amount of product that is coming from China and the shipping delays, it is creating a bit of a supply chain issue on products. You know, ours are made not in China, we make ours in Thailand, so it's a little bit of a different shipping route for us, which has helped us too. You're absolutely right. You know, we've all read the articles about the labor issues. We've all recently saw the articles about used gloves that are being repacked and sold. You know, again, when you make them yourself, you can control a good portion of that. Just by having that manufacturing capacity also gives you a different leverage against the other manufacturers, whereas we can be much more selective than others.
You know, that's why I think our strategy is the right strategy, and we're actually seeing benefit from that.
Thanks very much, guys.
Thank you. As a reminder, to ask a question, you would need to press star one on your telephone. To withdraw your question, please press the pound key. Our next question comes from the line of Daniel Grosslight from Citi. Please go ahead.
Thanks for taking the question, and congrats on another strong quarter here. You know
Thanks, Daniel.
It's great to see that you renewed that Premier contract, which comes on the heels of the Vizient renewal earlier this year. I think before you mentioned that the other kind of big GPO outstanding would be with HealthTrust in terms of a renewal. Can you provide any update on that one, and if there are any other large reprocurements upcoming for the next year or so?
Yeah, in HealthTrust, we're actively working with them. You know, we've got a great relationship, and that relationship expanded during the pandemic. You know, that's just going through very similar to Vizient and Premier going through the process where, you know, we're having open dialogue, transparent dialogue, and trying to find ways that can be beneficial to both. You know, we are. That's the process on that one. It's just part of the normal cycle of what we're going through. That's really the last major one that's out there.
Got it. Okay. You're throwing off a fair amount of free cash flow now, and your leverage ratio is pretty healthy. Can you rank your capital deployment priorities for the next year, you know, investments in the business and perhaps an increased dividend, share repurchase, continued debt pay down?
Sure. I'll start, and you know, Andy can add some color. You know, I would say that the team has done an excellent job paying down debt. I don't wanna just focus on that because over the last two years, we haven't just paid down debt. While we paid down debt, we made substantial investments in the business in additional operating, you know, operating-type initiatives to drive more efficiency. It wasn't like we just, we focused completely on debt. We paid down debt, but yet we still reinvested in the business in CapEx as well as from an operational standpoint. You know, if I think about it going forward, yeah, you're right. We're at 1.7, I think, and you know, Andy made the comment it's the lowest we've been in nearly five years.
We've talked about this throughout the years. You know, we're gonna continue to look at capital deployment you know, from a fungible capital deployment standpoint. You know, we're gonna look at what provides the best long-term ability to provide long-term profitable growth to our shareholders. You know, that could be internal capital organic investments, that could be inorganic investments, as well as continuing to invest in operations. We believe right now we have, you know, significant opportunities to reinvest in the business for long-term profitable growth as of today versus share buybacks or dividend increases. We're gonna be very disciplined as we have been in the past on that.
Yeah, Daniel, it's Andy. The only thing I would add to that is, you know, and I think that's a really thorough answer and covers our strategy, very nicely. I think the only thing I would add is just in recognition of the lower debt levels, just to mention within the last week or two, we did get another upgrade from the rating agencies. This time it was Moody's upgraded us a couple of weeks ago, so I just wanted to mention that.
Yep.
Got it. Very helpful. Thanks, guys.
Thank you. I show our last question comes from the line of Michael Minchak from J.P. Morgan. Please go ahead.
Good morning, and thanks for taking the question. As we think about your Global Products business, the margin rate there has bounced around quite a bit this year, obviously, with the gloves pass-through on pricing dynamics and some of the other unique drivers in 2020. How should we think about the baseline margin profile of that business if we do sort of normalize for some of the various puts and takes that you've experienced over the past 18 months?
Yeah, Michael, good morning, and thanks for the question. So you're absolutely right. There's been a lot of movement this year. I think the cadence of the year in 2021, and even going back to 2020, quite frankly, the cadence of the year has been very disrupted. That typical seasonality that we see in the business has really not applied over the last, you know, 18 to 24 months. And certainly no quarter within 2021 would be a quarter where you would want to take our margins in the Global Products business and annualize them, right? There's just too much distortion caused by the glove cost pricing.
Originally, you know, when we talked back in Q2, I would've said that we were planning to exit the year in 2021 with glove costs, you know, starting to see some normalization and Q4 being relatively clean. I'll say with the shift that I talked about of costs moving from Q3 into Q4 due to those delays in transportation that we referenced, Q4 is not as clean as we once thought it would be. Again, I think that slippage is contained to 2021, which is good. You saw that it doesn't impact our total outlook for the year. You know, we're not exiting the year at a place where I would take any kind of run rate in the business.
I still think sequentially from Q3 to Q4, Global Products will have margin expansion, but we just won't be at Q4 at that level of where you'd wanna annualize going into our expectation for 2022.
Got it. Appreciate the color on that. You'd previously talked about the opportunity to sell through PPE products into some newer verticals, both within healthcare, either nursing homes or dental, and outside of healthcare, you know, you mentioned clean room, consumer retail, international markets. Any update on the progress you're making around those efforts at this point?
Yeah. Those are all the factors I should have added earlier that really are driving that continued growth of our Global Products when you exclude the glove cost pass-through impact. That's just another factor of those, you know, the launching of the products into retail, into, you know, other ancillary healthcare markets as well as the global market. That's another factor that is driving that growth.
Got it. Appreciate the color.
Thank you. This concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Ed Pesicka for closing comments. Please go ahead.
Thanks everyone for joining. You know, I'll just close with this. I'm extremely pleased at how we performed in the third quarter. I don't wanna miss this and the fact that this is a continuation of our path onto really a record-setting year for the company from a profit standpoint. If I think about our performance in the quarter, it was exceptional, and it's really our business model that the customers appreciate and the customers are, you know, looking for. It's that focus on high- quality service while still providing value and that vertical integration to make sure that they could have the continuity of supply. Lastly, we continue to strengthen our financial position, which gives us tremendous flexibility going forward.
You know, I look forward to the conversation in after the end of the fourth quarter, and then at that call, sharing a lot more insight into 2022. Thank you, everyone.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.