Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.27M
2: EX-22.1 Published Report re: Matters Submitted to a Vote HTML 23K
of Security Holders
3: EX-22.2 Published Report re: Matters Submitted to a Vote HTML 23K
of Security Holders
4: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
7: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
13: R1 Cover page HTML 74K
14: R2 Consolidated Statements of Operations (Unaudited) HTML 94K
15: R3 Consolidated Statements of Comprehensive (Loss) HTML 52K
Income (Unaudited)
16: R4 Consolidated Balance Sheets (Unaudited) HTML 122K
17: R5 Consolidated Balance Sheets (Unaudited) HTML 39K
(Parenthetical)
18: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 120K
19: R7 Consolidated Statements of Changes in Equity HTML 80K
(Unaudited)
20: R8 Consolidated Statements of Changes in Equity HTML 24K
(Unaudited) (Parenthetical)
21: R9 Summary of Significant Accounting Policies HTML 40K
22: R10 Fair Value HTML 28K
23: R11 Acquisition HTML 41K
24: R12 Goodwill and Intangible Assets HTML 57K
25: R13 Exit and Realignment Costs HTML 49K
26: R14 Debt HTML 68K
27: R15 Retirement Plans HTML 41K
28: R16 Derivatives HTML 72K
29: R17 Income Taxes HTML 29K
30: R18 Net (Loss) Income per Common Share HTML 44K
31: R19 Accumulated Other Comprehensive (Loss) Income HTML 111K
32: R20 Segment Information HTML 92K
33: R21 Recent Accounting Pronouncements HTML 34K
34: R22 Legal Proceedings HTML 30K
35: R23 Commitments and Contingencies HTML 25K
36: R24 Pay vs Performance Disclosure HTML 35K
37: R25 Insider Trading Arrangements HTML 53K
38: R26 Summary of Significant Accounting Policies HTML 56K
(Policies)
39: R27 Summary of Significant Accounting Policies HTML 41K
(Tables)
40: R28 Acquisition (Tables) HTML 40K
41: R29 Goodwill and Intangible Assets (Tables) HTML 64K
42: R30 Exit and Realignment Costs (Tables) HTML 47K
43: R31 Debt (Tables) HTML 56K
44: R32 Retirement Plans (Tables) HTML 37K
45: R33 Derivatives (Tables) HTML 72K
46: R34 Net (Loss) Income per Common Share (Tables) HTML 43K
47: R35 Accumulated Other Comprehensive (Loss) Income HTML 111K
(Tables)
48: R36 Segment Information (Tables) HTML 93K
49: R37 Summary of Significant Accounting Policies - HTML 52K
Narrative (Details)
50: R38 Summary of Significant Accounting Policies - HTML 33K
Schedule of Cash, Cash Equivalents and Restricted
Cash (Details)
51: R39 Acquisition - Narrative (Details) HTML 66K
52: R40 Acquisition - Estimated Fair Value of The Assets HTML 48K
Acquired and Liabilities (Details)
53: R41 Acquisition - Pro Forma (Details) HTML 28K
54: R42 Goodwill and Intangible Assets - Changes in HTML 36K
Carrying Amount of Goodwill (Details)
55: R43 Goodwill and Intangible Assets - Intangible Assets HTML 40K
Subject to Amortization (Details)
56: R44 Goodwill and Intangible Assets - Narrative HTML 33K
(Details)
57: R45 Goodwill and Intangible Assets - Schedule of HTML 35K
Finite-Lived Intangible Assets, Future
Amortization Expense (Details)
58: R46 Exit and Realignment Costs - Narrative (Details) HTML 39K
59: R47 Exit and Realignment Costs - Accrual for Exit and HTML 41K
Realignment Costs (Details)
60: R48 Debt - Schedule of Debt, Net of Unamortized HTML 79K
Deferred Financing Costs (Details)
61: R49 Debt - Narrative (Details) HTML 116K
62: R50 Debt - Schedule of Future Principal Payments of HTML 41K
Debt (Details)
63: R51 Retirement Plans - Components of Net Periodic HTML 44K
Benefit Cost - Narrative (Details)
64: R52 Retirement Plans - Components of Net Periodic HTML 35K
Benefit Cost (Details)
65: R53 Derivatives - Schedule of the terms and fair value HTML 47K
of our outstanding derivative financial
instruments (Details)
66: R54 Derivatives - Narrative (Details) HTML 34K
67: R55 Derivatives - Schedule of the effect of cash flow HTML 38K
hedge (Details)
68: R56 Income Taxes - Narrative (Details) HTML 29K
69: R57 Net (Loss) Income per Common Share - Schedule of HTML 58K
Calculation of Net (Loss) Income Per Common Share
(Details)
70: R58 Net (Loss) Income per Common Share - Narrative HTML 26K
(Details)
71: R59 Accumulated Other Comprehensive (Loss) Income - HTML 85K
Changes in Accumulated Other Comprehensive (Loss)
Income By Component (Details)
72: R60 Segment Information - Financial Information by HTML 57K
Segment (Details)
73: R61 Segment Information - Consolidated Total Assets HTML 40K
(Details)
74: R62 Segment Information - Net revenue by geographic HTML 32K
area (Details)
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Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge accelerated
filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
The
number of shares of Owens & Minor, Inc.’s common stock outstanding as of October 30, 2023 was i76,501,043 shares.
Accounts
receivable, net of allowances of $i9,196 and $i9,063
i682,682
i763,497
Merchandise
inventories
i1,084,350
i1,333,585
Other current assets
i148,046
i128,636
Total
current assets
i2,130,269
i2,295,185
Property and equipment,
net of accumulated depreciation of $i532,399 and $i450,286
i540,419
i578,269
Operating
lease assets
i300,264
i280,665
Goodwill
i1,635,010
i1,636,705
Intangible
assets, net
i381,557
i445,042
Other
assets, net
i136,544
i150,417
Total
assets
$
i5,124,063
$
i5,386,283
Liabilities
and equity
Current liabilities
Accounts payable
$
i1,182,408
$
i1,147,414
Accrued
payroll and related liabilities
i106,194
i93,296
Other
current liabilities
i443,579
i325,756
Total
current liabilities
i1,732,181
i1,566,466
Long-term
debt, excluding current portion
i2,113,602
i2,482,968
Operating
lease liabilities, excluding current portion of $i85,149 and $i76,805
i225,208
i215,469
Deferred
income taxes, net
i45,616
i60,833
Other
liabilities
i120,596
i114,943
Total
liabilities
i4,237,203
i4,440,679
Commitments and contingencies
i
i
Equity
Common
stock, par value $ii2/ per share; authorized - ii200,000/
shares; issued and outstanding - ii76,499/ shares and ii76,279/
shares as of September 30, 2023 and December 31, 2022
i152,997
i152,557
Paid-in
capital
i427,895
i418,894
Retained
earnings
i350,923
i410,008
Accumulated
other comprehensive loss
(i44,955)
(i35,855)
Total
equity
i886,860
i945,604
Total liabilities
and equity
$
i5,124,063
$
i5,386,283
See
accompanying notes to consolidated financial statements.
(in thousands, except per share data, unless otherwise indicated)
Note
1—iSummary of Significant Accounting Policies
i
Basis of Presentation
The accompanying unaudited consolidated financial statements
include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, or our) and contain all adjustments (which are comprised only of normal recurring accruals and use of estimates) necessary to conform with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.
We report our business under itwo
segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States distribution division (Medical Distribution), outsourced logistics and value-added services, and Global Products division which manufactures and sources medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare divisions (Byram and Apria).
/i
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation.
i
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates.
i
Cash,
Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash includes cash and marketable securities with an original maturity or maturity at acquisition of three months or less. Cash, cash equivalents and restricted cash are stated at cost. Nearly all of our cash, cash equivalents and restricted cash are held in cash depository accounts in major banks in North America, Europe, and Asia. Cash that is held by a major bank and has restrictions on its availability to us is classified as restricted cash. Restricted cash as of September 30, 2023 and December 31, 2022 includes cash held in an escrow account as required by the Centers for Medicare & Medicaid Services in conjunction with the Bundled Payments for Care Improvement initiatives related to wind-down costs of Fusion5. Restricted cash as of September
30, 2023 also includes $i18.6 million of cash deposits received subject to limitations on use until remitted to a third-party financial institution (the Purchaser), pursuant to the Master Receivables Purchase Agreement (RPA).
/ii
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of those same amounts presented in the accompanying consolidated statements of cash flows.
Within our Patient Direct segment, revenues are recognized under fee-for-service arrangements for equipment we rent to patients and sales of equipment, supplies and other items we sell to patients. Revenue that is generated from equipment that we rent to patients is primarily recognized over the noncancelable rental period, typically one month, and commences on delivery of the equipment to the patients. Revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including private insurers, prepaid health plans, Medicare, Medicaid and patients. Rental revenue, less estimated adjustments, is recognized as earned on a straight-line basis over the noncancellable lease term. We recorded $i158 million
and $i148 million for the three months ended September 30, 2023 and 2022 and $i504 million and $i299 million
for the nine months ended September 30, 2023 and 2022 in revenue related to equipment we rent to patients.
On March 14, 2023, we entered into the RPA, pursuant to which accounts receivable with an aggregate outstanding amount not to exceed $i200 million are sold, on a limited-recourse basis, to the Purchaser in exchange for cash. As of September 30, 2023, there were a total of $i89.1 million
of uncollected accounts receivable that had been sold and removed from our consolidated balance sheet. We account for these transactions as sales in accordance with ASC 860, Transfers and Servicing, with the sold receivables removed from our consolidated balance sheets. Under the RPA, we provide certain servicing and collection actions on behalf of the Purchaser; however, we do not maintain any beneficial interest in the accounts receivable sold. The RPA is separate and distinct from the accounts receivable securitization program (the Receivables Financing Agreement).
Proceeds from the sale of accounts receivable are recorded as an increase to cash and cash equivalents and a reduction to accounts receivable, net of allowances in the consolidated balance sheets. Cash received from the sale of accounts receivable, net of payments made to the Purchaser, is reflected in the change
in accounts receivable within cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $i482 million and $i894 million for the three and nine months ended September
30, 2023. During the three and nine months ended September 30, 2023, we received net cash proceeds of $i478 million and $i888 million from the sale of accounts receivable
under the RPA and collected $i508 million and $i805 million of the sold accounts receivable. The losses on sale of accounts receivable are recorded in other operating expense (income), net in the
consolidated statements of operations were $i3.5 million and $i7.1 million for the three and nine months ended September 30, 2023.
/
Note
2—iFair Value
i
Fair value is determined based on assumptions that a market participant would use in pricing an asset or liability. The assumptions used are in accordance with a three-tier hierarchy, defined by GAAP, that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted
prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the use of present value and other valuation techniques in the determination of fair value (Level 3).
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued payroll and related liabilities reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings, and average remaining maturities (Level 2). See Note 6
for the fair value of debt. The fair value of our derivative contracts is determined based on the present value of expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Observable Level 2 inputs are used to determine the present value of expected future cash flows. See Note 8 for the fair value of derivatives.
Our acquisitions may include contingent consideration as part of the purchase price. The fair value of contingent consideration is estimated as of the acquisition date and at the end of each subsequent reporting period based on the present value of the contingent payments to be made using a weighted probability of possible payments (Level 3). Subsequent changes in fair value are recorded as adjustments to acquisition-related charges
and intangible amortization within the consolidated statements of operations.
Note 3—iAcquisition
On March 29, 2022 (the Acquisition Date), we completed the acquisition (the Apria Acquisition) of i100%
of Apria Inc. (Apria) pursuant to the Agreement and Plan of Merger dated January 7, 2022, in exchange for approximately $i1.7 billion, net of $i144 million
of cash acquired. The purchase was funded with a combination of debt and cash on hand. Apria is a leading provider of integrated home healthcare equipment and related services in the United States. This division is reported as part of the Patient Direct segment.
iThe following table presents the final fair value of the assets acquired and liabilities assumed recognized as of the Acquisition Date. The fair value and useful lives of tangible and intangible assets acquired were determined based on various valuation
methods, including the income and cost approach, using several significant unobservable inputs including, but not limited to projected cash flows and a discount rate. These inputs are considered Level 3 inputs.
Current assets acquired include $i88.7 million
in fair value of receivables, which reflects the approximate amount contractually owed. We are amortizing the fair value of acquired intangible assets, primarily customer relationships, including payor and capitated relationships, and trade names over their estimated weighted average useful lives of one to i15 years.
Goodwill of $i1.3 billion,
which we assigned to our Patient Direct segment, consists largely of expected opportunities to expand into new markets and further develop a presence in the home healthcare business. Approximately $i33 million of the goodwill is deductible for income tax purposes.
i
The
following table provides pro forma results of net revenue and net loss for the three and nine months ended September 30, 2022 as if Apria was acquired on January 1, 2022, based on the final purchase price allocation. The pro forma results below are not necessarily indicative of the results that would have been if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future.
Pro
forma net income of $i6.4 million for the three months ended September 30, 2022 includes a pro forma adjustment for amortization of intangible assets of $i6.1 million,
net of tax. Pro forma net loss of $i38.0 million for the nine months ended September 30, 2022 includes pro forma adjustments for interest expense of $i15.4 million,
net of tax and amortization of intangible assets of $i9.1 million, net of tax. The pro forma net loss also includes $i39.4 million in seller
transaction expenses and stock compensation expense associated with $i108 million owed to the holders of Apria stock awards in connection with the Apria Acquisition.
Acquisition-related charges within acquisition-related charges and intangible amortization presented in our consolidated statements of operations were $i9.4 million
and $i6.9 million for the three months ended September 30, 2023 and 2022 and $i11.9 million
and $i45.2 million for the nine months ended September 30, 2023 and 2022.
As
compared to the date of the most recent annual goodwill impairment test performed as of October 1, 2022, the fair value of our Global Products and Apria reporting units have been adversely impacted by unfavorable industry and macroeconomic conditions, including higher interest rates, inflation, pricing pressures and lower demand for certain product categories. Adverse changes in these and other factors could result in future goodwill impairment.
At September 30, 2023 and December 31, 2022, $i265 million and $i308 million
in net intangible assets were held in the Patient Direct segment and $i117 million and $i137 million were held in the Products & Healthcare Services segment. Amortization expense for intangible assets was $i20.8 million
and $i14.3 million for the three months ended September 30, 2023 and 2022 and $i62.7 million and $i55.5 million
for the nine months ended September 30, 2023 and 2022.
i
As of September 30, 2023, based on the current carrying value of intangible assets subject to amortization, estimated amortization expense were as follows:
Year
2023
(remainder)
$
i20,456
2024
i64,569
2025
i54,441
2026
i50,088
2027
i41,787
2028
i32,039
/
Note
5—iExit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations which includes the consolidation of certain facilities, IT restructuring charges, and other strategic actions. These charges also include costs associated with our Operating Model Realignment Program, which include professional fees, severance and other costs to streamline functions and processes.
Exit and realignment charges were $i30.2
million and $i2.0 million for the three months ended September 30, 2023 and 2022 and $i74.8 million and $i4.9 million
for the nine months ended September 30, 2023 and 2022. These amounts are excluded from our segments' operating income.
We have incurred $i27.8 million and $i70.6 million
in charges under our Operating Model Realignment Program and IT restructuring charges for the three and nine months ended September 30, 2023, which are included in the total exit and realignment charges above. We expect to incur additional material costs relating to our Operating Model Realignment Program and IT restructuring charges, which we are not able to reasonably estimate.
i
The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2023 and
2022:
In addition to the exit and realignment accruals in the preceding table, we also incurred $ii1.3/ million
of iicosts that were expensed as incurred/
for the three and nine months ended September 30, 2023, which primarily related to charges associated with a lease termination. We incurred $ii0.7/ million
of costs that were expensed as incurred for the three and nine months ended September 30, 2022, which related to an increase in reserves associated with certain retained assets of Fusion5.
Note 6—iDebt
i
Debt,
net of unamortized deferred financing costs, consists of the following:
We
have $i172 million of i4.375% senior notes due in December 2024 (the 2024 Notes), with interest payable semi-annually. The 2024 Notes were sold at i99.6%
of the principal amount with an effective yield of i4.422%. We have the option to redeem the 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of i100% of the principal amount or the present value of the remaining
scheduled payments discounted at the applicable Benchmark Treasury Rate (as defined) plus i30 basis points. We used $i72.7 million of cash to repurchase $i73.8 million
aggregate principal of the 2024 Notes during the first nine months of 2023.
On March 29, 2022, we entered into a Security Agreement supplement pursuant to which the Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 was supplemented to grant collateral on behalf of the holders of the 2024 Notes, and the parties secured under the credit agreements (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Grantors (as defined in the Security Agreement) in the Grantors’ present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Grantors, subject to certain
exceptions.
On March 29, 2022, we entered into an amendment to our Receivables Financing Agreement. The amended Receivables Financing Agreement has a maximum borrowing capacity of $i450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement). Under the Receivables
Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025.
We had ino borrowings at September 30, 2023 and $i96.0 million
outstanding at December 31, 2022 under our amended Receivables Financing Agreement. At September 30, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $i450 million and $i354 million
under our amended Receivables Financing Agreement.
On March 29, 2022, we entered into a term loan credit agreement with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (the Credit Agreement) that provides for itwo new credit facilities (i) a $i500 million
Term Loan A facility (the Term Loan A), and (ii) a $i600 million Term Loan B facility (the Term Loan B). The interest rate on the Term Loan A is based on the sum of either Term SOFR or the Base Rate and an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A will mature in March 2027 and the Term Loan B will mature in March 2029.
In addition to our scheduled principal payments of $i6.3 million on the Term Loan A and $i4.5 million on the Term Loan B, we made unscheduled principal payments of $i72.5 million
on Term Loan A and $i52.5 million on Term Loan B during the nine months ended September 30, 2023.
On March
10, 2021, we issued $i500 million of i4.500% senior unsecured notes due in March 2029 (the 2029 Unsecured Notes), with interest payable semi-annually (the Notes Offering). The 2029 Unsecured Notes were sold at i100%
of the principal amount with an effective yield of i4.500%. We may redeem all or part of the 2029 Unsecured Notes prior to March 31, 2024, at a price equal to i100% of the principal amount of the 2029 Unsecured
Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 10, 2021 (the Indenture). On or after March 31, 2024, we may redeem all or part of the 2029 Unsecured Notes at the applicable redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date. We may also redeem up to i40%
of the aggregate principal amount of the 2029 Unsecured Notes at any time prior to March 31, 2024, at a redemption price equal to i104.5% with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We used $i18.2 million
of cash to repurchase $i21.3 million aggregate principal of the 2029 Unsecured Notes during the first nine months of 2023.
On March 29, 2022, we completed the sale of $i600 million
in aggregate principal amount of our i6.625% senior notes due in April 2030 (the 2030 Unsecured Notes), with interest payable semi-annually. The 2030 Unsecured Notes were sold at i100% of the principal amount with an effective yield of i6.625%.
We may redeem all or part of the 2030 Unsecured Notes, prior to April 1, 2025, at a price equal to i100% of the principal amount of the 2030 Unsecured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 29, 2022 (the New Indenture).
From and after April 1, 2025, we may redeem all or part of the 2030 Unsecured Notes at the applicable redemption prices described in the New Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We may also redeem up to i40% of the aggregate principal amount of the 2030 Unsecured Notes at any time prior to April 1, 2025, at a redemption price
equal to i106.625% with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We used $i43.5 million of cash to repurchase $i47.8 million
aggregate principal of the 2030 Unsecured Notes during the first nine months of 2023.
The 2029 Unsecured Notes and the 2030 Unsecured Notes are subordinated to any of our secured indebtedness, including indebtedness under our credit agreements.
On March 29, 2022, we entered into an amendment to our revolving credit agreement, dated as of March 10, 2021 with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (Revolving Credit Agreement). The amendment (i) increased the aggregate revolving credit commitments under the Revolving Credit Agreement by $i150 million,
to an aggregate amount of $i450 million and (ii) replaced the Eurocurrency Rate with the Adjusted Term SOFR Rate (each as defined in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027.
At September 30, 2023 and December 31, 2022, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce revolver availability, totaling $i27.4 million
and $i27.9 million, leaving $i423 million and $i422 million
available for borrowing. We also had letters of credit and bank guarantees which support certain leased facilities as well as other normal business activities in the United States and Europe that were issued outside of the Revolving Credit Agreement for $i2.9 million and $i2.3 million
as of September 30, 2023 and December 31, 2022.
The Revolving Credit Agreement, the Credit Agreement, the Receivables Financing Agreement, the 2024 Notes, the 2029 Unsecured Notes, and the 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of any of the related agreements. The terms of the applicable credit agreements 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 September 30, 2023.
i
As
of September 30, 2023, scheduled future principal payments of debt, excluding finance leases and other, were as follows:
Of the $i200 million due in 2024, $i180 million
is due in December 2024. Current maturities at September 30, 2023 include $i18.8 million in principal payments on our Term Loan A, $i6.0 million
in principal payments on our Term Loan B, and $i7.7 million in current portion of finance leases and other.
Note 7—iRetirement
Plans
We have a frozen noncontributory, unfunded retirement plan for certain retirees in the United States (U.S. Retirement Plan). As of September 30, 2023 and December 31, 2022, the accumulated benefit obligation of the U.S. Retirement Plan was $i38.2 million and $i39.3 million.
Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective teammates.
iThe components of net periodic benefit cost for the three and nine months ended September 30, 2023 and 2022 were as follows:
We are directly and indirectly affected by changes in foreign currency, which may adversely impact our financial performance and are referred to as “market risks.” When deemed appropriate, we use derivatives as a risk management tool to mitigate the potential impact of certain market risks. We do not enter into derivative financial instruments for trading purposes.
We enter into foreign currency contracts
to manage our foreign exchange exposure related to certain balance sheet items that do not meet the requirements for hedge accounting. These derivative instruments are adjusted to fair value at the end of each period through earnings. The gain or loss recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability.
We pay interest on our Credit Agreement which fluctuates based on changes in our benchmark interest rates. In order to mitigate the risk of increases in benchmark rates on our term loans, we entered into an interest rate swap agreement whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable amounts calculated by reference to the notional amount. The interest rate swaps were designated as cash flow hedges. Cash flows related to the interest rate swap agreement are included in
interest expense, net.
We determine the fair value of our foreign currency derivatives and interest rate swaps based on observable market-based inputs or unobservable inputs that are corroborated by market data. We do not view the fair value of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying exposure. All derivatives are carried at fair value in our consolidated balance sheets. We consider the risk of counterparty default to be minimal. We report cash flows from our hedging instruments in the same cash flow statement category as the hedged items.
iThe
following table summarizes the terms and fair value of our outstanding derivative financial instruments as of September 30, 2023:
The
notional amount of the interest rate swaps represents the amount in effect at the end of the period. Based on contractual terms, the notional amount will decrease in increments of $i50 million on the last business day of March of each year until the maturity date.
The
following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and nine months ended September 30, 2023:
Amount
of Gain Recognized in Other Comprehensive Income (Loss)
Location of Gain Reclassified from Accumulated Other Comprehensive Loss into Income
Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded
Amount of Gain Reclassified from Accumulated Other Comprehensive Loss into Income
The
following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and nine months ended September 30, 2022:
Amount
of Gain Recognized in Other Comprehensive Income (Loss)
Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income
Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded
Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income
The
amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the three and nine months ended September 30, 2023, we recognized losses of $i2.4 million and $i3.3 million
associated with our economic (non-designated) foreign currency contracts. For the three and nine months ended September 30, 2022, we recognized losses of $i1.8 million and $i3.2 million
associated with our economic (non-designated) foreign currency contracts.
We recorded the change in fair value of derivative instruments and the remeasurement adjustment of the foreign currency denominated asset or liability in other operating expense (income), net for our foreign exchange contracts.
Note 9—iIncome
Taxes
The effective tax rate was i41.5% and i22.0% for the three and nine months ended September 30, 2023, compared to i36.2%
and i24.4% in the same periods of 2022. The change in these rates resulted primarily from changes in income and losses as well as the incremental income tax benefit recorded for foreign derived intangible income (FDII) in the three and nine months ended September 30, 2023.
The liability for unrecognized tax benefits was $i22.8 million
at September 30, 2023 and $i22.5 million at December 31, 2022. Included in the liability at September 30, 2023 and December 31, 2022 were $ii2.7/ million
of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the Internal Revenue Service (IRS) regarding our 2015 and 2016 consolidated income tax returns. On June 30, 2021, we received a NOPA from the IRS regarding our 2017 and 2018 consolidated income tax returns. Within the NOPAs, the IRS has asserted that our taxable income for the aforementioned years should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United States
by our domestic subsidiaries. Our amount of taxable income in the United States is based on our transfer pricing methodology, which has been consistently applied for all years subject to the NOPAs. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the
additional tax, interest, and any potential penalties could have a material adverse impact on our financial position, results of operations or cash flows.
The following summarizes the calculation of net (loss) income per common share attributable to common shareholders for the three and nine months ended September 30, 2023 and 2022:
Three
Months Ended September 30,
Nine Months Ended September 30,
(in thousands, except per share data)
2023
2022
2023
2022
Net (loss) income
$
(i6,426)
$
i12,497
$
(i59,085)
$
i80,381
Weighted
average shares outstanding - basic
i76,203
i74,905
i75,691
i74,376
Dilutive
shares
i—
i1,510
i—
i1,835
Weighted
average shares outstanding - diluted
i76,203
i76,415
i75,691
i76,211
Net
(loss) income per common share:
Basic
$
(i0.08)
$
i0.17
$
(i0.78)
$
i1.08
Diluted
$
(i0.08)
$
i0.16
$
(i0.78)
$
i1.05
/
Share-based
awards for the three and nine months ended September 30, 2023 of approximately i1.5 million and i1.6 million
shares were excluded from the calculation of net loss per diluted common share as the effect would be anti-dilutive.
Note 11—iAccumulated Other Comprehensive (Loss) Income
i
The
following table shows the changes in accumulated other comprehensive (loss) income by component for the three and nine months ended September 30, 2023 and 2022:
Retirement Plans
Currency Translation Adjustments
Derivatives
Total
Accumulated
other comprehensive (loss) income, June 30, 2023
$
(i7,212)
$
(i40,144)
$
i11,363
$
(i35,993)
Other
comprehensive (loss) income before reclassifications
i—
(i9,891)
i3,621
(i6,270)
Income
tax
i—
i—
(i941)
(i941)
Other
comprehensive (loss) income before reclassifications, net of tax
i—
(i9,891)
i2,680
(i7,211)
Amounts
reclassified from accumulated other comprehensive (loss) income
i124
i—
(i2,569)
(i2,445)
Income
tax
i28
i—
i666
i694
Amounts
reclassified from accumulated other comprehensive (loss) income, net of tax
We
include amounts reclassified out of accumulated other comprehensive (loss) income related to defined benefit pension plans as a component of net periodic pension cost recorded in Other expense, net.
Note 12—iSegment Information
iWe
periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under itwo segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States distribution division (Medical Distribution), outsourced logistics and value-added services, and Global Products division which manufactures and sources medical surgical products through our production
and kitting operations. The Patient Direct segment includes our home healthcare divisions (Byram and Apria)./
We evaluate the performance of our segments based on their operating income excluding acquisition-related charges and intangible amortization and exit and realignment charges, along with other adjustments, that, either as a result of their nature or size, would not be expected to occur as part of our normal business operations on a regular basis. Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading and not meaningful.
iThe
following tables present financial information by segment:
The
following table presents net revenue by geographic area, which were attributed based on the location from which we ship products or provide services:
iIn June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13 Financial Instruments
- Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. Subsequent to the issuance of ASU No. 2016-13, the FASB issued various ASUs related to Credit Losses, Measurement of Credit Losses on Financial Instruments. These ASUs do not change the core principle of the guidance in ASU No. 2016-13. Instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. We adopted ASU No. 2016-13 and subsequent amendments beginning January 1, 2023. The adoption did not have a material impact on our consolidated financial statements and related disclosures.
Note
14—iLegal Proceedings
O&M Halyard N95 Mask FDA Release
On April 5, 2023 we received a communication from the National Institute for Occupational Safety & Health (NIOSH) that products from one lot of a model (No. 46827) of surgical N95 respirator manufactured by O&M Halyard did not pass laboratory tests for fluid resistance and for filtration efficiency, and that products from one lot of another model (No. 46727) did not pass fluid resistance testing, but did pass filtration efficiency testing. Our
investigation determined that a limited number of lots were potentially implicated by the results of the NIOSH particulate filtration testing on model 46827, and that the vast majority of the products in those lots remained in our possession and under our control. Those lots have been segregated for disposal. We also determined that a limited quantity of products from one lot did reach the market. Although products from that lot passed internal and external follow-up testing for filtration efficiency, we initiated a voluntary recall of the lot on August 9, 2023 out of an abundance of caution. O&M Halyard has confirmed to NIOSH that the particle filtration issue was isolated to the identified lots.
On April 12, 2023, the U.S. Food and Drug Administration (FDA) recommended that consumers, health care providers, and facilities
not use the two models (model numbers 46827 and 46727) of O&M Halyard surgical N95 respirators due to concerns about fluid resistance performance. In addition, the FDA also recommended against using certain of our surgical, procedure and pediatric face masks when fluid resistance is required. On or about that date, we voluntarily stopped the sale in the U.S. of the above-referenced surgical N95 respirators and similar models pending our investigation of the performance issues identified by the FDA and NIOSH. Regulatory bodies in other non-U.S. markets where we sell our facial protection products have inquired about the relevance of the FDA notification to products sold in their countries. The FDA updated its recommendation on April 21, 2023, to permit use of the model 46727 of Halyard N95 respirators when fluid resistance is not required. These items are included in our Products & Healthcare Services segment.
On
September 29, 2023, the FDA updated its previous recommendation to consumers, health care providers and facilities regarding the above-referenced models of O&M Halyard surgical N95 respirators based on extensive testing and performance data provided by O&M Halyard. Specifically, the FDA stated that both O&M Halyard respirator models could be used according to the product labeling for respiratory and fluid barrier protection to the wearer (excluding the one lot of products that O&M Halyard voluntarily recalled on August 9, 2023). Following the FDA’s update, we published a user notice on our website announcing the resumption of sales and shipments of O&M Halyard surgical N95 respirators, noting that the data provided to the FDA and NIOSH
demonstrated that our products provide the levels of particle filtration and fluid resistance for which they are rated. NIOSH reviewed and concurred with the facts set forth in our user notice published on September 29, 2023.
We will continue to work with the FDA and NIOSH following the resolution of this matter to ensure that O&M Halyard products comply with regulatory requirements. We are unable to reasonably estimate the amount of any possible loss or range of possible losses or predict the ultimate outcome of these matters. However, there is a risk that these matters and any other safety concerns could have a material adverse effect on our results of operations, financial condition, or cash flows, including as a result of a significant volume of customer product returns and/or recall of products, implementation of corrective action plans, and/or other costly remedial
actions in the US and elsewhere. In addition, these matters could potentially have other negative impacts including: government investigations and enforcement actions by the FDA or other US or international regulators or governmental entities; the suspension or revocation of the authority to produce, distribute or sell products, and other sanctions; losses due to patient claims, including product liability claims and lawsuits; and customer claims related to their direct costs arising from supply disruption.
We are party to various legal claims that are ordinary and incidental to our business, including ones related to commercial disputes, employment, workers’ compensation, product liability, regulatory and other matters. We maintain insurance coverage for employment, product liability, workers’ compensation and other personal injury litigation matters, subject to policy limits, applicable deductibles and insurer solvency. We establish reserves from time to time based upon periodic assessment of the potential outcomes of pending matters.
Based on current knowledge and the advice of counsel, we believe that the accrual as of September 30, 2023 for currently pending matters considered probable of loss, which is not material, is sufficient. In addition, we believe that other currently pending matters are not reasonably possible
to result in a material loss, as payment of the amounts claimed is remote, the claims are immaterial, individually and in the aggregate, or the claims are expected to be adequately covered by insurance, subject to policy limits, applicable deductibles, exclusions, and insurer solvency.
Note 15—iCommitments and Contingencies
We anticipate that the noncancellable
obligations beyond 12 months related to outsourced information technology operations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, will no longer be material as a result of executed contract terminations, expected contract terminations, and insourcing of information technology operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis describes results of operations and material
changes in the financial condition of Owens & Minor, Inc. and its subsidiaries since December 31, 2022. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Overview
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a global healthcare solutions company. We report our
business under two segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States distribution division (Medical Distribution), outsourced logistics and value-added services, and Global Products division which manufactures and sources medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare divisions (Byram and Apria).
On March 29, 2022 (the Acquisition Date), we completed the acquisition (the Apria Acquisition) of 100% of Apria, Inc. (Apria) pursuant to the Agreement and Plan of Merger dated January 7, 2022, in exchange for approximately $1.7 billion, net of $144 million of cash acquired. The
purchase was funded with a combination of debt and cash on hand. Apria is a leading provider of integrated home healthcare equipment and related services in the United States. This division is reported as part of the Patient Direct segment.
Net (loss) per share was $(0.08) and $(0.78) for the three and nine months ended September 30, 2023 as compared to net income per diluted share of $0.16 and $1.05 for the three and nine months ended September 30, 2022. The decreases reflected lower demand for personal protective equipment (PPE), including reduced COVID-19 related product purchases, in our Products & Healthcare Services segment, an increase in exit and realignment charges of $28.2 million and $69.9 million for the three and nine months ended September 30, 2023, primarily
related to our Operating Model Realignment Program and IT restructuring charges, partially offset by the inclusion of Apria in our results since the Acquisition Date, strong revenue growth in our Patient Direct segment, productivity gains derived from operating efficiencies, and Operating Model Realignment Program savings. The decrease for the nine months ended September 30, 2023 was offset by a reduction in acquisition-related charges as compared to the prior year period. Net (loss) per share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.01 and $0.02 for the three and nine months ended September 30, 2023.
Products & Healthcare Services segment operating income was $19.8 million and $24.6 million for the three and nine months ended September
30, 2023, compared to $23.8 million and $174 million for the three and nine months ended September 30, 2022. The decreases reflected changes in product sales mix, lower demand for PPE, including reduced COVID-19 related product purchases, partially offset by productivity gains derived from operating efficiencies and Operating Model Realignment Program savings. Patient Direct segment operating income was $64.4 million and $169 million for the three and nine months ended September 30, 2023, compared to $59.7 million and $128 million for the three and nine months ended September 30,
2022. The increases were primarily the result of the inclusion of Apria in our results since the Acquisition Date and strong revenue growth.
Refer to 'Results of Operations' for further detail of quantitative and qualitative drivers of our results.
O&M Halyard N95 Mask FDA Release
On April 5, 2023 we received a communication from the National Institute for Occupational Safety & Health (NIOSH) that products from one lot of a model (No. 46827) of surgical N95 respirator manufactured by O&M Halyard did not pass laboratory tests for fluid resistance and for filtration efficiency, and that products from one lot of another model (No. 46727) did not pass fluid resistance testing, but did pass
filtration efficiency testing. Our investigation determined that a limited number of lots were potentially implicated by the results of the NIOSH particulate filtration testing on model 46827, and that the vast majority of the products in those lots remained in our possession and under our control. Those lots have been segregated for disposal. We also determined that a limited quantity of products from one lot did reach the market. Although products from that lot passed internal and external follow-up testing for filtration efficiency, we initiated a voluntary recall of the lot on August 9, 2023 out of an abundance of caution. O&M Halyard has confirmed to NIOSH that the particle filtration issue was isolated to the identified lots.
On April 12, 2023, the FDA recommended that consumers, health care providers, and facilities
not use the two models (model numbers 46827 and 46727) of O&M Halyard surgical N95 respirators due to concerns about fluid resistance performance. In addition, the FDA also recommended against using certain of our surgical, procedure and pediatric face masks when fluid resistance is required. On or about that date, we voluntarily stopped the sale in the U.S. of the above-referenced surgical N95 respirators and similar models pending our investigation of the performance issues identified by the FDA and NIOSH. Regulatory bodies in other non-U.S. markets where we sell our facial protection products have inquired about the relevance of the FDA notification to products sold in their countries. The FDA updated its recommendation on April 21, 2023, to permit use of the model 46727 of Halyard N95 respirators when fluid resistance is not required. These items are included in our Products & Healthcare Services segment.
On
September 29, 2023, the FDA updated its previous recommendation to consumers, health care providers and facilities regarding the above-referenced models of O&M Halyard surgical N95 respirators based on extensive testing and performance data provided by O&M Halyard. Specifically, the FDA stated that both O&M Halyard respirator models could be used according to the product labeling for respiratory and fluid barrier protection to the wearer (excluding the one lot of products that O&M Halyard voluntarily recalled on August 9, 2023). Following the FDA’s update, we published a user notice on our website announcing the resumption of sales and shipments of O&M Halyard surgical N95 respirators, noting that the data provided to the FDA and NIOSH
demonstrated that our products provide the levels of particle filtration and fluid resistance for which they are rated. NIOSH reviewed and concurred with the facts set forth in our user notice published on September 29, 2023.
We will continue to work with the FDA and NIOSH following the resolution of this matter to ensure that O&M Halyard products comply with regulatory requirements. We are unable to reasonably estimate the amount of any possible loss or range of possible losses or predict the ultimate outcome of these matters. However, there is a risk that these matters and any other safety concerns could have a material adverse effect on our results of operations, financial condition, or cash flows, including as a result of a significant volume of customer product returns and/or recall of products, implementation of corrective action plans, and/or other costly remedial
actions in the US and elsewhere. In addition, these matters could potentially have other negative impacts including: government investigations and enforcement actions by the FDA or other US or international regulators or governmental entities; the suspension or revocation of the authority to produce, distribute or sell products, and other sanctions; losses due to patient claims, including product liability claims and lawsuits; and customer claims related to their direct costs arising from supply disruption.
The increase in net revenue for the three months ended September 30, 2023 was driven by strong revenue growth in a number of our Patient Direct segment product categories. Products & Healthcare Services segment net revenue for the three months ended September
30, 2023 increased compared to the three months ended September 30, 2022 due to net revenue growth in the Medical Distribution division of 5.4% with strong growth in non-PPE product categories, partially offset by an approximate $55 million decline in PPE net revenue due to a decrease related to glove pricing of $33 million and lower demand for PPE.
The increase in net revenue for the nine months ended September 30, 2023 was driven primarily by incremental Apria net revenue in the first quarter of 2023 of $308 million as compared to the first quarter of 2022 and strong revenue growth in a number of our Patient Direct segment product categories. The decrease in our Products & Healthcare Services segment net revenue for the nine months ended September 30, 2023 was driven
by an approximate $425 million decline in PPE net revenue due to a decrease related to glove pricing of $209 million and lower demand for PPE, including reduced COVID-19 related product purchases, partially offset by net revenue growth in the Medical Distribution division of 3.0% with strong growth in non-PPE product categories compared to the nine months ended September 30, 2022.
Foreign currency translation had a favorable impact on net revenue of $0.5 million and an unfavorable impact of $6.2 million for the three and nine months ended September 30, 2023 as compared to the prior year periods.
Cost of goods sold.
Three
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Cost of goods sold
$
2,053,244
$
1,984,122
$
69,122
3.5
%
Nine
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Cost of goods sold
$
6,122,579
$
5,985,136
$
137,443
2.3
%
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, depreciation of certain property and equipment, product costs, and material and overhead costs. The increase in cost of goods sold for the three months ended September 30, 2023 reflects higher costs of goods sold driven by net revenue growth, partially offset by a $6.7 million last in, first out (LIFO) liquidation credit for the three months ended September
30, 2023 as a result of a $101 million reduction in our Products & Healthcare Services segment inventory, as measured on a first in, first out basis, and Operating Model Realignment Program savings.
The increase in cost of goods sold for the nine months ended September 30, 2023 was driven primarily by the incremental Apria cost of goods sold in the first quarter of 2023 of $114 million as compared to the first quarter of 2022 and net revenue growth in our Patient Direct segment, partially offset by a decline in Products
& Healthcare Services segment net revenue of $175 million and an $11.6 million LIFO liquidation credit as a result of a $305 million reduction in our Products & Healthcare Services segment inventory, as measured on a first in, first out basis.
Foreign currency translation had an unfavorable impact on cost of goods sold of $0.9 million and a favorable impact of $3.1 million for the three and nine months ended September 30, 2023 as compared to the prior year periods.
Gross margin.
Three
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Gross margin
$
538,498
$
513,279
$
25,219
4.9
%
As
a % of net revenue
20.78
%
20.55
%
Nine
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Gross margin
$
1,555,238
$
1,419,232
$
136,006
9.6
%
As
a % of net revenue
20.26
%
19.17
%
The changes in gross margin for the three and nine months ended September 30, 2023 were driven by the same factors impacting net revenue and cost of goods sold. The gross margin for the nine months ended September 30, 2023 includes incremental Apria gross margin in the first quarter of 2023 of $195 million as compared to the first quarter of 2022. Foreign currency translation had an unfavorable impact on gross margin
of $0.4 million and $3.1 million for the three and nine months ended September 30, 2023 as compared to the prior year periods.
Operating expenses.
Three Months Ended September 30,
Change
(Dollars
in thousands)
2023
2022
$
%
Distribution, selling and administrative expenses
$
452,583
$
430,957
$
21,626
5.0
%
As
a % of net revenue
17.46
%
17.26
%
Acquisition-related charges and intangible amortization
$
30,217
$
21,217
$
9,000
42.4
%
Exit
and realignment charges
$
30,180
$
1,983
$
28,197
1,421.9
%
Other operating expense (income), net
$
1,677
$
(1,125)
$
2,802
249.1
%
Nine
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Distribution, selling and administrative expenses
$
1,356,334
$
1,122,353
$
233,981
20.8
%
As
a % of net revenue
17.67
%
15.16
%
Acquisition-related charges and intangible amortization
$
74,609
$
100,628
$
(26,019)
(25.9)
%
Exit
and realignment charges
$
74,817
$
4,879
$
69,938
1,433.4
%
Other operating expense (income), net
$
4,991
$
(5,020)
$
10,011
199.4
%
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 in our Products & Healthcare Services segment. 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. The increase in DS&A expenses for the three months ended September 30, 2023 was driven primarily by incremental costs to support net revenue growth of $94.3 million, or 3.8%, an increase of $15.4 million in teammate benefit costs including incentives, partially offset by productivity gains derived from operating efficiencies and Operating Model Realignment Program savings.
The increase in DS&A expenses for the nine months ended September 30, 2023 was driven by Apria incremental DS&A expense in the first quarter of 2023 of $171 million as compared to the first quarter of 2022, Patient Direct net revenue growth, an increase of $27.7 million in teammate benefit costs including incentives, partially offset by productivity gains derived from operating efficiencies and Operating Model Realignment Program savings.
Foreign currency translation had an unfavorable impact on DS&A of $0.1 million and a favorable impact of $0.9 million for the three and nine months ended September 30, 2023 as compared to the prior year periods.
Acquisition-related charges were $9.4 million and $11.9 million
for the three and nine months ended September 30, 2023 and $6.9 million and $45.2 million for the three and nine months ended September 30, 2022 consisting primarily of costs related to the Apria Acquisition. The decline for the nine months ended September 30, 2023 as compared to the prior year period reflects the incurrence of most of these costs closer to the Acquisition Date. Intangible amortization was $20.8 million and $62.7 million for the three and nine months ended September 30, 2023 and $14.3 million and $55.5 million for the three and nine months ended September 30, 2022 related primarily to intangible assets acquired in the Apria, Halyard and Byram acquisitions. Intangible amortization for the third quarter of
2023 increased as compared to the prior year primarily due to purchase price accounting changes to the estimated value assigned to certain intangible assets recorded in the third quarter of 2022.
Exit and realignment charges were $30.2 million and $74.8 million for the three and nine months ended September 30, 2023. These charges primarily related to our (1) Operating Model Realignment Program of $24.5 million and $63.9 million, including professional fees, severance, and other costs to streamline functions and processes, (2) IT restructuring charges such as converting certain divisions to a common information technology system of $3.3 million and $6.7 million and, (3) other costs associated with strategic initiatives of $2.4 million and $4.1 million for the three and nine months ended September 30, 2023.
Exit and realignment charges were $2.0 million and $4.9 million for the three and nine months ended September 30, 2022, which consisted primarily of wind-down costs related to Fusion5, leadership reorganization costs, IT restructuring charges, and other costs related to the reorganization of our U.S. operations.
The increases in other operating expense (income), net for the three and nine months ended September 30, 2023 as compared to the prior year periods reflect $3.5 million and $7.1 million of losses on sale of accounts receivable under the RPA, through which we began executing sales during the second quarter of 2023. During the three and nine months ended September 30, 2023, we incurred a favorable change of $0.6 million and an unfavorable change of $2.0 million in foreign
currency transaction gains and losses, net of derivative adjustments, as compared to the prior year periods.
Interest expense, net.
Three Months Ended September 30,
Change
(Dollars
in thousands)
2023
2022
$
%
Interest expense, net
$
38,127
$
39,869
$
(1,742)
(4.4)
%
Effective
interest rate
7.01
%
5.96
%
Nine
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Interest expense, net
$
121,053
$
87,727
$
33,326
38.0
%
Effective
interest rate
6.92
%
5.47
%
Interest expense, net for the three months ended September 30, 2023 decreased primarily due to lower average outstanding borrowings driven by $188 million and $355 million reductions in total debt during the three and nine months ended September 30, 2023, partially offset by an increase in the effective interest
rate due to higher interest rates on our term loans, net of interest rate swaps, which contributed $3.6 million in interest expense as compared to the prior year period. Interest expense, net for the nine months ended September 30, 2023 increased due to higher average outstanding borrowings and higher interest rates on our term loans, net of interest rate swaps, which contributed $29.3 million to the increase, and to higher average outstanding borrowings on our 2030 Unsecured Notes, which were issued on the Acquisition Date and contributed $9.1 million to the increase, partially offset by a reduction in average borrowings under our amended Receivables Financing Agreement. See Note 6 in Notes to Consolidated Financial
Statements.
Other
(income) expense, net for the three and nine months ended September 30, 2023 and 2022 includes interest cost and net actuarial losses related to our retirement plans. In addition, other (income) expense, net for the three and nine months ended September 30, 2023 includes the gain on extinguishment of debt of $5.2 million and $4.4 million associated with the early retirement of indebtedness of $195 million and $268 million.
Income taxes.
Three
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Income tax (benefit) provision
$
(4,558)
$
7,098
$
(11,656)
(164.2)
%
Effective
tax rate
41.5
%
36.2
%
Nine
Months Ended September 30,
Change
(Dollars in thousands)
2023
2022
$
%
Income tax (benefit) provision
$
(16,638)
$
25,937
$
(42,575)
(164.1)
%
Effective
tax rate
22.0
%
24.4
%
The change in the effective tax rate for the three and nine months ended September 30, 2023 compared to the same periods in 2022 resulted primarily from changes in income and losses, as well as the incremental income tax benefit recorded for FDII in the three and nine months ended September 30, 2023.
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 Agreement or Receivables Financing Agreement, or a combination thereof of approximately $28 million.
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in North America, Europe, and Asia. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collections
of accounts receivable, and payments to suppliers.
(1)
Based on period end accounts receivable and net revenue for the quarters ended September 30, 2023 and December 31, 2022. DSO reflected the impact of the reduction in accounts receivable, net of allowances, due to sales of accounts receivable under the RPA. Excluding the impact of the RPA, DSO would have been 27.0 as of September 30, 2023.
(2) Based on period end merchandise inventories and cost of goods sold for the quarters ended September 30, 2023 and December 31, 2022. The decrease in inventory days is due to inventory management efforts in our Products & Healthcare Services segment.
Liquidity and capital
expenditures. The following table summarizes our consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022:
(Dollars in thousands)
2023
2022
Net cash provided by (used for):
Operating
activities
$
628,945
$
238,045
Investing activities
(98,340)
(1,771,705)
Financing activities
(366,115)
1,560,585
Effect of exchange rate changes
(515)
(5,752)
Net
increase in cash, cash equivalents and restricted cash
$
163,975
$
21,173
Cash provided by operating activities in the first nine months of 2023 reflected a net loss, as compared to net income in the first nine months of 2022. The increase in cash provided by operating activities in 2023 as compared to 2022 reflected changes in working capital, including a cash benefit of $247 million from reduction in inventory and a cash benefit of $108 million from net cash proceeds under the RPA, and the inclusion of Apria in our results since the Acquisition Date.
Cash
used for investing activities in the first nine months of 2023 included capital expenditures of $152 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $53.6million in proceeds related to the sale of property and equipment. Cash used for investing activities in the first nine months of 2022 included cash paid for the acquisition of Apria of $1.7 billion and capital expenditures of $115 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $29.7 million in proceeds related to the sale of property and equipment.
Cash used for financing activities in the first nine months of 2023 included repayments of debt of $270 million, including $125 million of unscheduled and $10.8 million of scheduled principal payments on the Term Loan A and the Term Loan B, $134 million of cash to repurchase $143 million aggregate principal of the 2024 Notes, the 2029 Unsecured Notes and the 2030 Unsecured Notes. We had no borrowings under our revolving credit facility on a net basis for the first nine months of 2023 and made net repayments of $96.0 million under our amended Receivables Financing Agreement. Cash provided by financing activities in the first nine months of 2022 included proceeds from borrowings of $1.7 billion related to the 2030 Unsecured Notes, Term Loan A, and Term Loan B for the first nine months of 2022 and borrowings under our revolving credit facility, net and Receivables Financing Agreement
of $30.0 million. Net repayments under our amended Receivables Financing Agreement program were $73.0 million for the first nine months of 2022. We also paid $42.6 million in financing costs in the first nine months of 2022. Payments for taxes related to the vesting of restricted stock awards were $44.6 million for the first nine months of 2022, which are included in Other, net.
Capital resources. Our primary sources of liquidity include cash and cash equivalents, our amended Receivables Financing Agreement, and our Revolving Credit Agreement. The Receivables Financing Agreement provides a maximum revolving borrowing capacity of $450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement).
Under the Receivables Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025. We had no borrowings at September 30, 2023 and $96.0 million outstanding at December 31, 2022 under our amended Receivables Financing Agreement. At September 30, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $450 million and $354 million under our amended Receivables Financing Agreement.
The Revolving Credit Agreement provides a revolving borrowing
capacity of $450 million. We have $960 million in outstanding term loans under a term loan credit agreement (the Credit Agreement). The interest rate on our Revolving Credit Agreement is based on a spread over a benchmark rate (as described in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027. The interest rate on the Term Loan A is based on either the Term SOFR or the Base Rate plus an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A matures in March 2027 and the Term Loan B matures in March 2029.
At September 30, 2023 and December
31, 2022, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce revolver availability, of $27.4 million and $27.9 million, leaving $423 million and $422 million available for borrowing. We also had letters of credit and bank guarantees which support certain leased facilities as well as other normal business activities in the United States and Europe that were issued outside of the Revolving Credit Agreement for $2.9 million and $2.3 million as of September 30, 2023 and December 31, 2022.
On March 29, 2022, we entered into a Security Agreement supplement pursuant to which the Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 was supplemented to
grant collateral on behalf of the holders of the 2024 Notes, and the parties secured under the credit agreements (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Grantors (as defined in the Security Agreement) in the Grantors’ present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Grantors, subject to certain exceptions.
The Revolving Credit Agreement, the Credit Agreement,Receivables Financing Agreement, the 2024 Notes, the 2029 Unsecured Notes, and the 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in
the event of default of any of the related agreements. The terms of the applicable credit agreements 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 September 30, 2023.
On March 14, 2023, we entered into the RPA, pursuant to which accounts receivable with an aggregate outstanding amount not to exceed $200 million are sold, on a limited-recourse basis, to the Purchaser in exchange for cash. Cash received from the sale of accounts receivable, net of payments made to the Purchaser, is reflected in the change in accounts receivable within cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $482 million
and $894 million for the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2023, we received net cash proceeds of $478 million and $888 million from the sale of accounts receivable under the RPA and collected $508 million and $805 million of the sold accounts receivable. For the nine months ended September 30, 2023, we received a cash benefit of $108 million from net cash proceeds under the RPA.
We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. We have from time to time, entered into, and from time to time in the future 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.
We believe cash generated by operating activities, available financing sources, and borrowings under the Receivables Financing Agreement and Revolving Credit Agreement, as well as cash on hand, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, 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 subject to repatriation totaled $39.5 million and $26.3 million at September 30, 2023 and December 31, 2022. As of September 30, 2023, we are permanently reinvested in
our foreign subsidiaries.
Goodwill
As compared to the date of the most recent annual goodwill impairment test performed as of October 1, 2022, the fair value of our Global Products and Apria reporting units have been adversely impacted by unfavorable industry and macroeconomic conditions, including higher interest rates, inflation, pricing pressures and lower demand for certain product categories. Adverse changes in these and other factors could result in future goodwill impairment.
Seasonality
Our business is affected by seasonality, which historically has resulted in higher sales volume during our third and fourth quarters, ending September 30 and December
31.
Contractual obligations
We anticipate that the noncancellable obligations beyond 12 months related to outsourced information technology operations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, will no longer be material as a result of executed contract terminations, expected contract terminations, and insourcing of information technology operations. Refer to our Annual Report on Form 10-K for the year ended December 31, 2022 for disclosure of other material contractual obligations.
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, with respect to our 2024 Notes. See Note 6 of the accompanying consolidated financial statements for additional information regarding the terms of the 2024 Notes.
The following tables present summarized financial information for Owens & Minor, Inc. and the guarantors of Owens & Minor, Inc.’s 2024 Notes (together, the Guarantor Group), on a combined basis with intercompany balances and transactions between entities in the Guarantor Group eliminated. The guarantor subsidiaries are 100% owned by Owens & Minor, Inc. Separate financial statements
of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several.
Summarized financial information of the Guarantor Group is as follows:
Summarized Consolidated Statement of Operations - Guarantor Group
The following tables present summarized financial information for Owens & Minor, Inc. and the pledged subsidiaries of Owens & Minor, Inc.’s 2024 Notes 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 Sheets - Collateral Group
The
results of operations of the Collateral Group are not materially different from the corresponding amounts presented in our consolidated statements of operations.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2022 and Note 13 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on September 30, 2023.
Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995. Although we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:
•risks related to public health crises or future outbreaks of health crises or other adverse public health developments such as the novel coronavirus (COVID-19) global pandemic;
•increasing competitive and pricing pressures in the marketplace;
•our
ability to retain existing and attract new customers and our dependence on sales to certain customers;
•our dependence on certain vendors, suppliers and third-parties for key components, raw materials, equipment and services;
•our ability to successfully identify, manage or integrate acquisitions, including Apria;
•our ability to successfully implement our Operating Model Realignment Program and our strategic initiatives;
•our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, adverse tax consequences, and other risks of operating in international markets;
•uncertainties
related to, and our ability to adapt to and comply with, changes in government regulations, including healthcare, tax and product licensing laws and regulations;
•risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;
•uncertainties related to general economic, regulatory and business conditions and our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;
•our
ability to meet the terms to qualify for supplier funding programs;
•the ability of customers and suppliers to meet financial commitments due to us;
•changes in manufacturer preferences between direct sales and wholesale distribution;
•changing trends in customer profiles and ordering patterns;
•our ability to manage operating expenses and improve operational efficiencies;
•availability of, and our ability to access, special inventory buying opportunities;
•our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate
risk, and our ability to refinance, extend or repay our substantial indebtedness;
•our ability to attract and retain talented and qualified teammates;
•recalls of any of our products, or safety risks or the discovery of serious safety issues with our products;
•changes, delays and uncertainties in the reimbursement process;
•our ability to adequately establish, maintain, protect and enforce our intellectual property and proprietary rights as well as avoid infringement, misappropriation or other violations of the intellectual property and proprietary rights of third parties;
•our ability to engage in transactions that may be limited by
the restrictive covenants in our credit facilities and existing notes;
•the risk that information systems are interrupted or damaged or fail for any extended period of time, that new information systems are not successfully implemented or integrated, or that there is a data security breach in our information systems;
•the risk of an impairment to goodwill or other long-lived assets;
•our ability to timely or adequately respond to technological advances;
•our failure to adequately insure against losses, including from substantial claims and litigation;
•our ability to meet performance targets specified by customer contracts
under contractual commitments;
•our capitation arrangements may prove unprofitable if actual utilization rates exceed our assumptions;
•the outcome of outstanding and any future litigation, including product and professional liability claims;
•volatility in the price of our common stock and securities;
•other factors detailed from time to time in the reports we file with the SEC, including those described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.
We undertake no obligation to update or revise any forward-looking statements, except as required by
applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to price risk for our raw materials, the most significant of which relates to the cost of polypropylene and nitrile used in the manufacturing processes of our Products & Healthcare Services segment. Prices of the commodities underlying these raw materials are volatile and have fluctuated significantly in recent years and in the future may contribute to fluctuations in our results of operations. The ability to hedge these commodity prices is limited.
We are exposed to risks of changes in shipping
and freight costs, including container and other third party fees associated with the transportation of our products. Shipping and freight costs have fluctuated significantly in recent years and in the future may contribute to changes in our results of operations.
In the normal course of business, we are exposed to foreign currency translation and transaction risks. Our business transactions outside of the United States are denominated in the euro, Malaysian ringgit, Mexican peso, Thai baht and other currencies. We may use foreign currency forwards, swaps and options, where possible, to manage our risk related to certain
foreign
currency fluctuations. As of September 30, 2023 and December 31, 2022, we held contracts with notional amounts of $78.2 million and $58.3 million to exchange the U.S. dollar, Euro, and Thai baht. See Note 8 of Notes to Consolidated Financial Statements.
We are exposed to market risk from changes in interest rates related to our borrowing under our Revolving Credit Agreement and Receivables Financing Agreement, and related to our participation in the RPA. Excluding deferred financing costs and third party fees, we had $421 million in borrowings under our Term Loan A, $539 million in borrowings under our Term Loan B, and no borrowings under our Revolving Credit Agreement and under our amended Receivables Financing Agreement at September
30, 2023. After considering the effects of our interest rate swap agreement (see Note 8 of Notes to Consolidated Financial Statements), we estimate an increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately$8 million per year based on our borrowings at September 30, 2023 and the maximum aggregate outstanding accounts receivable amount of $200 million under the RPA.
Due to the nature and pricing of ourProducts & Healthcare Services segment distribution services, we are exposed to potential volatility in fuel prices. Our strategies for helping to mitigate our exposure to changing domestic fuel prices have included using trucks with improved fuel efficiency.
We benchmark our domestic diesel fuel purchase prices against the U.S. Weekly Retail On-Highway Diesel Prices (benchmark) as quoted by the U.S. Energy Information Administration. The benchmark averaged $4.20 and $5.00 per gallon in the first nine months of 2023 and 2022. Based on business activity during the first nine months of 2023, we estimate that every 10 cents per gallon increase in the benchmark would reduce our annual operating income by approximately $0.6 million. We are also indirectly exposed to increased shipping and freight costs, including container and other third party fees associated with the transportation of our products due to changes in fuel prices. Changes in fuel prices have contributed to significant shipping and freight costs in recent years and in the future may contribute to changes in our results of operations.
Item 4.
Controls and Procedures
We carried out an evaluation, with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023. Beginning with the first quarter of 2023, management's evaluation and conclusion as to the effectiveness of the design and operation of our disclosure controls and procedures as of and for the period covered by this report includes the evaluation of the internal control over financial reporting of Apria, Inc.
There were no other changes in our internal control over financial reporting that occurred during the period of this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against us are described in our Annual Report on Form 10-K for the year ended December 31, 2022. Through September
30, 2023, there have been no material developments in any legal proceedings reported in such Annual Report.
O&M Halyard N95 Mask FDA Release
On April 5, 2023 we received a communication from the National Institute for Occupational Safety & Health (NIOSH) that products from one lot of a model (No. 46827) of surgical N95 respirator manufactured by O&M Halyard did not pass laboratory tests for fluid resistance and for filtration efficiency, and that products from one lot of another model (No. 46727) did not pass fluid resistance testing, but did pass filtration efficiency testing. Our investigation determined that a limited number of lots were potentially implicated by the results of the NIOSH particulate filtration testing on model 46827, and that the vast majority of the products in those lots remained in our possession
and under our control. Those lots have been segregated for disposal. We also determined that a limited quantity of products from one lot did reach the market. Although products from that lot passed internal and external follow-up testing for filtration efficiency, we initiated a voluntary recall of the lot on August 9, 2023 out of an abundance of caution. O&M Halyard has confirmed to NIOSH that the particle filtration issue was isolated to the identified lots.
On April 12, 2023, the FDA recommended that consumers, health care providers, and facilities not use the two models (model numbers 46827 and 46727) of O&M Halyard surgical N95 respirators due to concerns about fluid resistance performance. In addition, the FDA also recommended against using certain of our surgical, procedure and pediatric face masks
when fluid resistance is required. On or about that date, we voluntarily stopped the sale in the U.S. of the above-referenced surgical N95 respirators and similar models pending our investigation of the performance issues identified by the FDA and NIOSH. Regulatory bodies in other non-U.S. markets where we sell our facial protection products have inquired about the relevance of the FDA notification to products sold in their countries. The FDA updated its recommendation on April 21, 2023, to permit use of the model 46727 of Halyard N95 respirators when fluid resistance is not required. These items are included in our Products & Healthcare Services segment.
On September 29, 2023, the FDA updated its previous recommendation to consumers, health care providers
and facilities regarding the above-referenced models of O&M Halyard surgical N95 respirators based on extensive testing and performance data provided by O&M Halyard. Specifically, the FDA stated that both O&M Halyard respirator models could be used according to the product labeling for respiratory and fluid barrier protection to the wearer (excluding the one lot of products that O&M Halyard voluntarily recalled on August 9, 2023). Following the FDA’s update, we published a user notice on our website announcing the resumption of sales and shipments of O&M Halyard surgical N95 respirators, noting that the data provided to the FDA and NIOSH demonstrated that our products provide the levels of particle filtration and fluid resistance for which they are rated. NIOSH reviewed and concurred
with the facts set forth in our user notice published on September 29, 2023.
We will continue to work with the FDA and NIOSH following the resolution of this matter to ensure that O&M Halyard products comply with regulatory requirements. We are unable to reasonably estimate the amount of any possible loss or range of possible losses or predict the ultimate outcome of these matters. However, there is a risk that these matters and any other safety concerns could have a material adverse effect on our results of operations, financial condition, or cash flows, including as a result of a significant volume of customer product returns and/or recall of products, implementation of corrective action plans, and/or other costly remedial actions in the US and elsewhere. In addition, these matters could potentially have other negative impacts including: government investigations and enforcement
actions by the FDA or other US or international regulators or governmental entities; the suspension or revocation of the authority to produce, distribute or sell products, and other sanctions; losses due to patient claims, including product liability claims and lawsuits; and customer claims related to their direct costs arising from supply disruption.
Item 1A. Risk Factors
Certain risk factors that we believe could affect our business and prospects are described in our Annual Report on Form 10-K for the year ended December 31, 2022. Through September 30, 2023, there have been no material changes in the risk factors
described in such Annual Report.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
iOn iAugust 8, 2023, iAlexander
Bruni, iExecutive Vice President & Chief Financial Officer, iadopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to i12,996
shares of Owens & Minor, Inc. common stock between November 10, 2023 and November 17, 2023, subject to certain conditions./
iOn iAugust
9, 2023, iJonathan Leon, iSenior Vice President, Corporate Treasurer, iadopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to i40,282
shares of Owens & Minor, Inc. common stock between November 20, 2023 and November 29, 2024, subject to certain conditions./
iOn iAugust
10, 2023, iHeath Galloway, iExecutive Vice President, General Counsel & Corporate Secretary, iadopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to i17,486
shares of Owens & Minor, Inc. common stock between November 10, 2023 and June 14, 2024, subject to certain conditions./
iOn iAugust
11, 2023, iPerry Bernocchi, iExecutive Vice President and Chief Executive Officer, Patient Direct, iadopted a trading plan intended to satisfy Rule 10b5-1(c) to sell up to i58,342
shares of Owens & Minor, Inc. common stock between November 21, 2023 and May 16, 2024, subject to certain conditions./
Inline
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.