Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.13M
2: EX-10.1 Material Contract HTML 35K
3: EX-22.1 Published Report re: Matters Submitted to a Vote HTML 23K
of Security Holders
4: EX-22.2 Published Report re: Matters Submitted to a Vote HTML 25K
of Security Holders
5: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 27K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
14: R1 Cover page HTML 74K
15: R2 Consolidated Statements of Operations HTML 93K
16: R3 Consolidated Statements of Comprehensive (Loss) HTML 51K
Income
17: R4 Consolidated Balance Sheets HTML 121K
18: R5 Consolidated Balance Sheets (Parenthetical) HTML 35K
19: R6 Consolidated Statements of Cash Flows HTML 118K
20: R7 Consolidated Statements of Changes in Equity HTML 56K
21: R8 Consolidated Statements of Changes in Equity HTML 24K
(Parenthetical)
22: R9 Summary of Significant Accounting Policies HTML 37K
23: R10 Fair Value HTML 28K
24: R11 Acquisition HTML 38K
25: R12 Goodwill and Intangible Assets HTML 56K
26: R13 Exit and Realignment Costs HTML 35K
27: R14 Debt HTML 68K
28: R15 Retirement Plans HTML 35K
29: R16 Derivatives HTML 57K
30: R17 Income Taxes HTML 28K
31: R18 Net (Loss) Income per Common Share HTML 35K
32: R19 Shareholders' Equity HTML 28K
33: R20 Accumulated Other Comprehensive (Loss) Income HTML 68K
34: R21 Segment Information HTML 67K
35: R22 Recent Accounting Pronouncements HTML 34K
36: R23 Legal Proceedings HTML 29K
37: R24 Summary of Significant Accounting Policies HTML 51K
(Policies)
38: R25 Summary of Significant Accounting Policies HTML 40K
(Tables)
39: R26 Acquisition (Tables) HTML 38K
40: R27 Goodwill and Intangible Assets (Tables) HTML 63K
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44: R31 Derivatives (Tables) HTML 57K
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(Tables)
47: R34 Segment Information (Tables) HTML 68K
48: R35 Summary of Significant Accounting Policies - HTML 28K
Narrative (Details)
49: R36 Summary of Significant Accounting Policies - HTML 33K
Schedule of Cash, Cash Equivalents and Restricted
Cash (Details)
50: R37 Acquisition - Narrative (Details) HTML 63K
51: R38 Acquisition - Estimated Fair Value of The Assets HTML 48K
Acquired and Liabilities (Details)
52: R39 Acquisition - Pro Forma (Details) HTML 28K
53: R40 Goodwill and Intangible Assets - Changes in HTML 36K
Carrying Amount of Goodwill (Details)
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Subject to Amortization (Details)
55: R42 Goodwill and Intangible Assets - Narrative HTML 32K
(Details)
56: R43 Goodwill and Intangible Assets - Schedule of HTML 35K
Finite-Lived Intangible Assets, Future
Amortization Expense (Details)
57: R44 Exit and Realignment Costs - Narrative (Details) HTML 24K
58: R45 Exit and Realignment Costs - Accrual for Exit and HTML 36K
Realignment Costs (Details)
59: R46 Debt - Schedule of Debt, Net of Unamortized HTML 73K
Deferred Financing Costs (Details)
60: R47 Debt - Narrative (Details) HTML 99K
61: R48 Debt - Schedule of Future Principal Payments of HTML 41K
Debt (Details)
62: R49 Retirement Plans - Components of Net Periodic HTML 45K
Benefit Cost - Narrative (Details)
63: R50 Retirement Plans - Components of Net Periodic HTML 34K
Benefit Cost (Details)
64: R51 Derivatives - Schedule of the terms and fair value HTML 47K
of our outstanding derivative financial
instruments (Details)
65: R52 Derivatives - Narrative (Details) HTML 33K
66: R53 Derivatives - Schedule of the effect of cash flow HTML 36K
hedge (Details)
67: R54 Income Taxes - Narrative (Details) HTML 28K
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Calculation of Net (Loss) Income Per Common Share
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69: R56 Net (Loss) Income per Common Share - Narrative HTML 26K
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Changes in Accumulated Other Comprehensive (Loss)
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Segment (Details)
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(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 and posted on its corporate Web site, if any, 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
☐ (Do not check if a smaller reporting company)
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 ☐ iNo☒
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of April 28, 2023 was i76,205,567
shares.
(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, our or the Company) 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.
Our business has itwo
distinct segments: Products & Healthcare Services and Patient Direct. Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. Patient Direct expands our business along the continuum of care through delivery of disposable medical supplies sold directly to patients and home health agencies and is a leading provider of integrated home healthcare equipment and related services in the United States.
/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.
iCash,
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 March 31, 2023 and December 31, 2022 primarily represents cash held in an escrow account as required by the Centers for Medicare & Medicaid Services (CMS) in conjunction with the Bundled Payments for Care Improvement (BPCI) initiatives related to wind-down costs of Fusion5.
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 $i172 million
in revenue related to equipment we rent to patients for the three months ended March 31, 2023. Equipment rental revenue was not material for the three months ended March 31, 2022.
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, 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 carrying amount of restricted cash also approximates fair value due to its nature. 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 business is reported as part of the Patient Direct segment.
i
The
following table presents the 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. As of March 31, 2023, the allocation of purchase price to assets and liabilities acquired is finalized.
Current assets acquired includes $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 months ended March 31, 2022 as if Apria was acquired on January 1, 2022. 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 loss of $i78.9 million for the three months ended March 31, 2022 includes pro forma adjustments for interest expense of $i15.4 million,
net of tax, and amortization of intangible assets of $i8.9 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 $i1.3 million
and $i31.9 million for the three months ended March 31, 2023 and 2022, which consisted primarily of costs related to the Apria Acquisition.
Note 4—iGoodwill
and Intangible Assets
i
The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill through March 31, 2023:
At March 31, 2023 and December 31, 2022, $i294 million and $i308 million
in net intangible assets were held in the Patient Direct segment and $i131 million and $i137 million were held in the Products & Healthcare
Services segment. Amortization expense for intangible assets was $i20.9 million and $i10.3 million for the three months ended March
31, 2023 and 2022.
As of March 31, 2023, based on the current carrying value of
intangible assets subject to amortization, estimated amortization expense, were as follows:
Year
2023 (remainder)
$
i62,336
2024
i65,285
2025
i55,157
2026
i53,721
2027
i46,878
2028
i29,524
/
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 distribution and outsourced logistics centers, administrative offices and warehouses, and information technology strategic initiatives. These charges also include costs associated with our operating model realignment program, which include professional fees, severance and costs to streamline functions
and processes.
Exit and realignment charges for the three months ended March 31, 2023 and 2022 were $i15.7 million and $i1.7 million.
These amounts are excluded from our segments operating income. We expect material additional costs in 2023 associated with the operating model realignment program and information technology strategic initiatives.
i
The following table summarizes the activity related to exit and realignment cost accruals through March 31, 2023 and 2022:
On
March 29, 2022, we entered into an amendment to our accounts receivable securitization program (the 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 March 31, 2023 and $i96.0 million
outstanding at December 31, 2022 under our Receivables Financing Agreement. At March 31, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $i450 million and $i354 million
under our Receivables Financing Agreement.
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 March 31, 2023 and December 31, 2022, our Revolving Credit Agreement was undrawn and we had letters of credit, which reduce Revolver availability, totaling $i27.9 million
leaving $i422 million available for borrowing. We also had letters of credit and bank guarantees, which supports 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 $i2.0 million
and $i2.3 million as of March 31, 2023 and December 31, 2022.
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 payment of $i1.5 million on the Term
Loan B, we made unscheduled principal payments of $i10 million on Term Loan B and $i15 million on Term Loan A during
the three months ended March 31, 2023.
We have $i246 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.
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.
In March 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.
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.
The 2029 Unsecured Notes and the 2030 Unsecured Notes are subordinated to any of our secured indebtedness, including indebtedness under our credit agreements.
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 March 31, 2023.
i
As
of March 31, 2023, scheduled future principal payments of debt, excluding finance leases and other, were as follows:
Year
2023 (remainder)
$
i13,875
2024
i273,855
2025
i40,375
2026
i43,500
2027
i387,875
2028
i6,000
2029
i1,049,500
2030
i600,000
/
Of
the $i274 million due in 2024, $i254 million
is due in December 2024. Current maturities at March 31, 2023 include $i12.5 million in principal payments on our Term Loan A, $i6.0 million
in principal payments on our Term Loan B, and $i2.6 million in current portion of finance leases.
We have a frozen noncontributory, unfunded retirement plan for certain retirees in the United States (U.S. Retirement Plan). As of March 31, 2023and December 31, 2022, the accumulated benefit obligation of the U.S. Retirement Plan was $i38.9 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 months ended March 31, 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, 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.
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.
i
The
following table summarizes the terms and fair value of our outstanding derivative financial instruments as of March 31, 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 in March of each year until the maturity date.
i
The
following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three months ended March 31, 2023:
Amount of (Loss) 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 (Loss)
Interest rate swaps
$
(i2,387)
Interest
expense, net
$
(i42,198)
$
i2,176
/
The
amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the three months ended March 31, 2023 and 2022, we recognized ino gain (loss) and a loss of $i0.1 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 i27.7% for the three months ended March 31, 2023, compared to i18.6% in
the same quarter of 2022. The change in these rates resulted primarily from changes in income and losses and the incremental income tax benefit associated with the vesting of restricted stock recorded in the first quarter of 2022. The liability for unrecognized tax benefits was $i22.6 million at March 31, 2023 and $i22.5 million
at December 31, 2022. Included in the liability at March 31, 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 through the current date. 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 months ended March 31, 2023 and 2022:
Three
Months Ended March 31,
(in thousands, except per share data)
2023
2022
Net (loss) income
$
(i24,418)
$
i39,279
Weighted
average shares outstanding - basic
i75,177
i73,643
Dilutive
shares
i—
i2,376
Weighted
average shares outstanding - diluted
i75,177
i76,019
Net
(loss) income per common share:
Basic
$
(i0.32)
$
i0.53
Diluted
$
(i0.32)
$
i0.52
/
Share-based
awards for the three months ended March 31, 2023 of approximately i1.7 million shares were excluded from the calculation of net loss per diluted common share as the effect would be anti-dilutive.
Note 11—iShareholders'
Equity
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $i50.0 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of March 31, 2023, ino
shares were issued and $i50.0 million of common stock remained available under the at-the-market equity financing program.
Note 12—iAccumulated Other Comprehensive (Loss) Income
i
The following table shows
the changes in accumulated other comprehensive (loss) income by component for the three months ended March 31, 2023 and 2022:
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 13—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 business (Medical Distribution), outsourced logistics and value-added services business, and Global Products which manufactures and sources
medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare businesses (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
15—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. At present, our investigation has determined that there are a limited number of lots potentially implicated by the results of the NIOSH particulate filtration testing on model 46827. The vast majority of the products in those lots remain in our possession and under our control, and those lots that had products that did reach the market have passed internal follow-up testing.
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 fluid resistance. 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.
We are thoroughly investigating the matters identified by the FDA and NIOSH, and we are performing product retesting as we work closely with government agencies to resolve these matters. 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.
Other Litigation
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 March 31, 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.
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. Our business
has two distinct segments: Products & Healthcare Services and Patient Direct. Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. Patient Direct expands our business along the continuum of care through delivery of disposable medical supplies sold directly to patients and home health agencies and is a leading provider of integrated home healthcare equipment and related services in the United States.
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 business is reported as part of the Patient Direct segment.
Net loss per share was $0.32 for the three months ended March 31, 2023 as compared to net income per diluted share of $0.52 for the three months ended March 31, 2022. Products & Healthcare Services segment operating income was $1.8 million for the three months ended March 31, 2023, compared to $89.1 million for the three months ended March 31, 2022. The decreases reflected overall reduced hospital demand,
including reliance on stockpiles and reduced 2019 novel coronavirus (COVID-19) related product purchases, price changes, particularly for gloves, and headwinds created by macroeconomic conditions, including inflationary pressures, partially offset by productivity gains derived from operating efficiencies. Patient Direct segment operating income was $45.8 million for the three months ended March 31, 2023, compared to $15.8 million for the three months ended March 31, 2022. The increase was primarily the result of the inclusion of Apria in our results since the Acquisition Date, strong revenue growth in our Byram business, leveraging our fixed costs, and operating efficiencies, partially offset by inflationary pressures. Net loss per share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.01 for the three months ended
March 31, 2023.
Philips Respironics Recall
In June 2021, one of Apria's suppliers, Philips Respironics, announced a voluntary recall for continuous and non-continuous ventilators (certain CPAP, BiLevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices. The Food and Drug Administration (FDA) has since identified this as a Class I recall, the most serious category of recall. Philips Respironics issued a subsequent voluntary recall in December 2022 (together with the June 2021 recall, the Recall), related to deficiencies in repairs made to certain of the ventilators that had been recalled in June 2021.
Because we distribute these products and provide related home respiratory services and, in part, due
to the substantial number of impacted devices, we have devoted, and will likely continue to devote, substantial time and resources to coordinating Recall-related activity and to supporting our home healthcare patients’ needs. The Recall has caused us, and may continue to cause us, to incur significant costs, some or all of which may not be recoverable from the product manufacturer. The Recall may also materially negatively affect our revenues and results of operations as a result of patients not using their impacted devices, current shortages in the availability of both replacement devices for impacted patients and new devices for new patients, patient hesitancy to use respiratory devices generally or other reasons.
We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the Recall. While the equipment
shortage in the industry has begun to ease for certain CPAP and BiLevel positive airway pressure devices, we do not know whether that will continue. The Recall or other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.
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. At present, our
investigation has determined that there are a limited number of lots potentially implicated by the results of the NIOSH particulate filtration testing on model 46827. The vast majority of the products in those lots remain in our possession and under our control, and those lots that had products that did reach the market have passed internal follow-up testing.
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 fluid resistance. 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.
We are thoroughly investigating the matters identified by the FDA
and NIOSH, and we are performing product retesting as we work closely with government agencies to resolve these matters. 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.
Results of Operations
Net revenue.
Three Months Ended March 31,
Change
(Dollars
in thousands)
2023
2022
$
%
Products & Healthcare Services
$
1,915,489
$
2,134,041
$
(218,552)
(10.2)
%
Patient
Direct
607,360
272,911
334,449
122.5
%
Net revenue
$
2,522,849
$
2,406,952
$
115,897
4.8
%
The
increase in net revenue in our Patient Direct segment for the three months ended March 31, 2023 was driven by the inclusion of Apria in our results since the Acquisition Date and continued strong performance in our Byram business. The decrease in net revenue in our Products & Healthcare Services segment for the three months ended March 31, 2023 reflected overall reduced hospital demand, including reliance on stockpiles and reduced COVID-19 related product purchases, as well as price changes, particularly for gloves. Foreign currency translation had an unfavorable impact on net revenue of $5.2 million for the three months ended March 31, 2023 as compared to the prior year.
Cost of goods sold.
Three
Months Ended March 31,
Change
(Dollars in thousands)
2023
2022
$
%
Cost of goods sold
$
2,025,542
$
2,033,504
$
(7,962)
(0.4)
%
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. Cost of goods sold compared to prior year reflects the inclusion of Apria in our results since the Acquisition Date and changes in sales activity, including product mix.
Gross margin increase in the three months ended March 31, 2023 was driven by inclusion of Apria in our results since the
Acquisition Date and sales mix, partially offset by overall reduced hospital demand, including reliance on stockpiles and reduced COVID-19 related product purchases, as well as price changes, particularly for gloves. Foreign currency translation had an unfavorable impact on gross margin of $1.9 million for the three months ended March 31, 2023 as compared to the prior year.
Operating expenses.
Three
Months Ended March 31,
Change
(Dollars in thousands)
2023
2022
$
%
Distribution, selling and administrative expenses
$
448,722
$
269,471
$
179,251
66.5
%
As
a % of net revenue
17.79
%
11.20
%
Acquisition-related charges and intangible amortization
$
22,188
$
42,135
$
(19,947)
(47.3)
%
Exit
and realignment charges
$
15,674
$
1,682
$
13,992
831.9
%
Other operating expense (income), net
$
916
$
(899)
$
1,815
201.9
%
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. Overall DS&A expenses were affected by inclusion of Apria in our results since the Acquisition Date and inflationary pressures for the three months ended March 31, 2023, partially offset by operating efficiencies and productivity gains. DS&A expenses also included a favorable impact for foreign currency translation of $0.8 million for the three months ended March 31, 2023.
Acquisition-related
charges were $1.3 million for the three months ended March 31, 2023 and $31.9 million for the three months ended March 31, 2022 consisted primarily of costs related to the Apria Acquisition. Intangible amortization was $20.9 million for the three months ended March 31, 2023 and related primarily to intangible assets acquired in the Apria, Halyard and Byram acquisitions. Intangible amortization was $10.3 million for the three months ended March 31, 2022 related primarily to intangible assets acquired in the Halyard and Byram acquisitions.
Exit and realignment charges were $15.7 million for the three months ended March 31, 2023, which consisted primarily of costs related to our operating
model realignment program, including professional fees, severance and costs to streamline functions and processes. Exit and realignment charges were $1.7 million for the three months ended March 31, 2022, which consisted primarily of severance and other charges associated with the reorganization of our segments.
Other operating expense (income), net for the three months ended March 31, 2023 and 2022 includes the impact of foreign currency transaction losses.
Interest expense, net.
Three
Months Ended March 31,
Change
(Dollars in thousands)
2023
2022
$
%
Interest expense, net
$
42,198
$
12,019
$
30,179
251.1
%
Effective
interest rate
6.83
%
4.65
%
Interest expense, net and the effective interest rate for the three months ended March 31, 2023 increased primarily due to the increase in debt associated with the Apria Acquisition, along with higher market interest rates. See Note 6 in Notes to Consolidated Financial Statements.
Other
expense, net for the three months ended March 31, 2023 and 2022 includes interest cost and net actuarial losses related to our retirement plans.
Income taxes.
Three Months Ended March 31,
Change
(Dollars
in thousands)
2023
2022
$
%
Income tax (benefit) provision
$
(9,360)
$
8,978
$
(18,338)
(204.3)
%
Effective
tax rate
27.7
%
18.6
%
The change in the effective tax rate for the three months ended March 31, 2023 compared to the same period in 2022 resulted primarily from changes in income and losses and the incremental income tax benefit associated with the vesting of restricted stock recorded in the first quarter of 2022.
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.
(2) Based on period end merchandise inventories and cost of goods sold for the
quarters ended March 31, 2023 and December 31, 2022.
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 2023 and 2022:
(Dollars in thousands)
2023
2022
Net
cash provided by (used for):
Operating activities
$
158,398
$
79,699
Investing activities
(34,184)
(1,587,236)
Financing activities
(127,489)
1,664,194
Effect
of exchange rate changes
284
(669)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(2,991)
$
155,988
Cash provided by operating activities in the first three months of 2023 reflected a net loss, as compared to net income in the first three months of 2022. The increase in cash provided by operating activities
in 2023 as compared to 2022 reflected changes in working capital and the inclusion of Apria in our results since the Acquisition Date.
Cash used for investing activities in the first three months of 2023 included capital expenditures of $51.5 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $17.3 million in proceeds related primarily to the sale of patient equipment. Cash used for investing activities in the first three months of 2022 included
cash paid for the acquisition of Apria of $1.6 billion and capital expenditures of $11.0 million for our strategic and operational efficiency initiatives associated with property and equipment and capitalized software.
Cash used for financing activities in the first three months of 2023 included repayments of debt of $26.5 million. We had no borrowings under our revolving credit facility on a net basis for the first three months of 2023 and made net repayments of $96.0 million under our amended Receivables Financing Agreement. Payments for taxes related to the vesting of restricted stock awards, which are included in Other, net, were $5.8 million for the first three months of 2023. Cash provided by financing activities in the first three months of 2022 included proceeds from borrowings of $1.7 billion related to the 6.625% senior notes due in April 2030
(the 2030 Unsecured Notes), Term Loan A facility (Term Loan A), and Term Loan B facility (Term Loan B). We had borrowings under our revolving credit facility of $41.7 million for the first three months of 2022. We also paid $33.7 million in financing costs in the first three months of 2022. Payments for taxes related to the vesting of restricted stock awards were $35.7 million for the first three months of 2022.
Capital resources. Our primary sources of liquidity include cash and cash equivalents, our 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 March 31, 2023 and $96.0 million outstanding at December 31, 2022 under our Receivables Financing Agreement. At March 31, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $450 million and $354 million under our Receivable Financing Agreement.
The Revolving Credit Agreement provides a revolving borrowing
capacity of $450 million. We have $1.1 billion 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 March 31, 2023 and December
31, 2022, our Revolving Credit Agreement was undrawn and we had letters of credit, which reduce Revolver availability, totaling $27.9 million leaving $422 million available for borrowing. We also had letters of credit and bank guarantees, which supports 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 $2.0 million and $2.3 million as of March 31, 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 4.375% senior notes due in December 2024 (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, 4.500% senior unsecured notes due in March 2029 (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 March 31, 2023.
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of March 31, 2023 no shares were issued and $50.0 million of common
stock remained available under the at-the-market equity financing program.
We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness
(including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms). Our ability to consummate any such transaction will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.
We believe cash generated by operating activities, available financing sources, and borrowings under the Receivables Financing Agreement and Revolving Credit Agreement, 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 $29.2 million and $26.3 million at March 31, 2023 and December 31, 2022. As of March 31, 2023, we are permanently reinvested in our foreign subsidiaries.
Impact of Inflation
The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation. During the first three months of 2023,
we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of labor, occupancy and other administrative costs associated with the normal course of business. We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.
Guarantor and Collateral Group Summarized Financial Information
We are providing the following information in compliance with Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and Rule 13-02 of Regulation S-X, of with respect to our 2024 Notes. See Note 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 subsidiaries of Owens & Minor, Inc.’s 2024 Notes pledged that constitute a substantial portion of collateral (together, "the Collateral Group"),
on a combined basis with intercompany balances and transactions between entities in the Collateral Group eliminated. The pledged subsidiaries are 100% owned by Owens & Minor, Inc. No trading market for the subsidiaries included in the Collateral Group exists.
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 14 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on March 31, 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 March 31, 2023 and December 31, 2022, we held contracts with notional amounts of $70.5 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. Excluding deferred financing costs and third party fees, we had $485 million in borrowings under our Term Loan A, $584 million in borrowings under our Term Loan B, no borrowings under our Revolving Credit Agreement and under our Receivables Financing Agreement at March 31, 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 $7.2 million per year based on our borrowings outstanding at March 31, 2023.
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 $4.38 and $4.30 per gallon in the first three months of 2023 and 2022. Based on business activity during the first three months of 2023, we estimate that every 10 cents per gallon increase in the benchmark would reduce our operating income by
approximately $0.5 million on an annualized basis. 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 March 31, 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 March 31, 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. At present, our investigation has determined that there are a limited number of lots potentially implicated by the results of the NIOSH particulate filtration testing on model 46827. The vast majority of the products in those lots remain in our possession and under our control, and those lots that had products that did reach the market have passed internal follow-up testing.
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 fluid
resistance. 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.
We are thoroughly investigating the matters identified by the FDA and NIOSH, and we are performing
product retesting as we work closely with government agencies to resolve these matters. 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.
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 March
31, 2023, there have been no material changes in the risk factors described in such Annual Report and First Quarter 2023 Form 10-Q.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of March 31, 2023, no shares
were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.
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.
