UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from to
Commission file number
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | ||
(Address of principal executive offices) | (Zip Code) | ||
Post Office Box 27626, | 23261-7626 | ||
(Mailing address of principal executive | (Zip Code) | ||
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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.
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).
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.
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
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
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of July 26, 2024 was
Owens & Minor, Inc. and Subsidiaries
Index
2
Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| Three Months Ended |
| Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||||
(in thousands, except per share data) | 2024 |
| 2023 |
| 2024 |
| 2023 | ||||||
Net revenue | $ | | $ | | $ | | $ | | |||||
Cost of goods sold |
| |
| |
| |
| | |||||
Gross profit |
| |
| |
| |
| | |||||
Distribution, selling and administrative expenses |
| |
| |
| |
| | |||||
Acquisition-related charges and intangible amortization |
| |
| |
| |
| | |||||
Exit and realignment charges, net | | | | | |||||||||
Other operating expense, net |
| |
| |
| |
| | |||||
Operating income |
| |
| |
| |
| | |||||
Interest expense, net |
| |
| |
| |
| | |||||
Other expense, net |
| |
| |
| |
| | |||||
Loss before income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Income tax provision (benefit) |
| |
| ( |
| |
| ( | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per common share: |
|
|
|
|
|
|
|
| |||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(unaudited)
| Three Months Ended |
| Six Months Ended | ||||||||||
June 30, | June 30, | ||||||||||||
(in thousands) |
| 2024 | 2023 | 2024 | 2023 |
| |||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive (loss) income, net of tax: |
|
|
|
| |||||||||
Currency translation adjustments |
| ( |
| ( |
| ( |
| ( | |||||
Change in unrecognized net periodic pension costs |
| |
| |
| |
| ( | |||||
Change in gains and losses on derivative instruments |
| ( |
| |
| |
| ( | |||||
Total other comprehensive loss, net of tax |
| ( |
| ( |
| ( |
| ( | |||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| June 30, | December 31, | ||||
(in thousands, except per share data) | 2024 |
| 2023 | |||
Assets |
|
|
|
| ||
Current assets |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowances of $ |
| |
| | ||
Merchandise inventories |
| |
| | ||
Other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Property and equipment, net of accumulated depreciation and amortization of $ |
| |
| | ||
Operating lease assets |
| |
| | ||
Goodwill |
| |
| | ||
Intangible assets, net |
| |
| | ||
Other assets, net |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and equity |
|
|
|
| ||
Current liabilities |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued payroll and related liabilities |
| |
| | ||
Current portion of long-term debt | | | ||||
Other current liabilities |
| |
| | ||
Total current liabilities |
| |
| | ||
Long-term debt, excluding current portion |
| |
| | ||
Operating lease liabilities, excluding current portion |
| |
| | ||
Deferred income taxes, net |
| |
| | ||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies |
|
|
|
| ||
Equity |
|
|
|
| ||
Common stock, par value $ |
| |
| | ||
Paid-in capital |
| |
| | ||
Retained earnings |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total equity |
| |
| | ||
Total liabilities and equity | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Six Months Ended June 30, | |||||
(in thousands) | 2024 |
| 2023 | |||
Operating activities: | ||||||
Net loss | $ | ( | $ | ( | ||
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
| ||
Depreciation and amortization |
| |
| | ||
Share-based compensation expense |
| |
| | ||
Provision (benefit) for losses on accounts receivable |
| |
| ( | ||
Loss on extinguishment of debt |
| |
| | ||
Deferred income tax benefit |
| ( |
| ( | ||
Changes in operating lease right-of-use assets and lease liabilities |
| |
| ( | ||
Gain on sale and dispositions of property and equipment |
| ( |
| ( | ||
Changes in operating assets and liabilities: |
|
|
|
| ||
Accounts receivable |
| ( |
| | ||
Merchandise inventories |
| ( |
| | ||
Accounts payable |
| |
| | ||
Net change in other assets and liabilities |
| ( |
| | ||
Other, net |
| |
| | ||
Cash provided by operating activities |
| |
| | ||
Investing activities: |
|
|
|
| ||
Additions to property and equipment |
| ( |
| ( | ||
Additions to computer software |
| ( |
| ( | ||
Proceeds from sale of property and equipment |
| |
| | ||
Other, net |
| ( |
| ( | ||
Cash used for investing activities |
| ( |
| ( | ||
Financing activities: |
|
|
|
| ||
Borrowings under amended Receivables Financing Agreement |
| |
| | ||
Repayments under amended Receivables Financing Agreement |
| ( |
| ( | ||
Repayments of term loans |
| ( |
| ( | ||
Other, net |
| ( |
| ( | ||
Cash used for financing activities |
| ( |
| ( | ||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
| ( |
| | ||
Net increase in cash, cash equivalents and restricted cash |
| |
| | ||
Cash, cash equivalents and restricted cash at beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
Supplemental disclosure of cash flow information: |
|
|
|
| ||
Income taxes paid (received), net | $ | | $ | ( | ||
Interest paid | $ | | $ | | ||
Noncash investing activity: |
|
|
|
| ||
Unpaid purchases of property and equipment and computer software at end of period | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
6
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
|
| Common |
|
|
| Accumulated |
| ||||||||||
Common | Stock | Other | |||||||||||||||
Shares | ($ | Paid-In | Retained | Comprehensive | Total | ||||||||||||
(in thousands, except per share data) | Outstanding | value ) | Capital | Earnings | Loss | Equity | |||||||||||
Balance, December 31, 2023 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Share-based compensation expense, exercises and other |
| ( |
| ( |
| |
| — |
| — |
| | |||||
Balance, March 31, 2024 |
| | | | | ( | | ||||||||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Share-based compensation expense, exercises and other |
| |
| |
| |
| — |
| — |
| | |||||
Balance, June 30, 2024 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Balance, December 31, 2022 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive income |
| — |
| — |
| — |
| — |
| |
| | |||||
Share-based compensation expense, exercises and other |
| ( |
| ( |
| |
| — |
| — |
| | |||||
Balance, March 31, 2023 |
| |
| |
| |
| |
| ( |
| | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Share-based compensation expense, exercises and other |
| |
| |
| |
| — |
| — |
| | |||||
Balance, June 30, 2023 |
| | $ | | $ | | $ | | $ | ( | $ | | |||||
See accompanying notes to consolidated financial statements.
7
Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except per share data, unless otherwise indicated)
Note 1—Summary of Significant Accounting Policies
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 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
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
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.
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 June 30, 2024 and December 31, 2023 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, as well as $
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.
| June 30, 2024 |
| December 31, 2023 | |||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash included in Other current assets |
| |
| | ||
Restricted cash included in Other assets, net | | | ||||
Total cash, cash equivalents, and restricted cash | $ | | $ | | ||
8
Rental Revenue
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 noncancelable lease term. We recorded $
Sales of Accounts Receivable
On March 14, 2023, we entered into the RPA, pursuant to which accounts receivable with an aggregate outstanding amount not to exceed $
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 as cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $
Note 2—Fair Value
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 5 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 7 for the fair value of derivatives.
9
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—Goodwill and Intangible Assets
The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill at June 30, 2024:
|
| Products & |
| ||||||
Healthcare | |||||||||
Patient Direct | Services | Consolidated | |||||||
Carrying amount of goodwill, December 31, 2023 | $ | | $ | | $ | | |||
Currency translation adjustments |
| |
| ( |
| ( | |||
Carrying amount of goodwill, June 30, 2024 | $ | | $ | | $ | | |||
Intangible assets subject to amortization, which exclude indefinite-lived intangible assets at June 30, 2024 and December 31, 2023 were as follows:
June 30, 2024 | December 31, 2023 | |||||||||||||||||
| Customer |
|
| Other |
| Customer |
|
| Other | |||||||||
Relationships | Tradenames | Intangibles | Relationships | Tradenames | Intangibles | |||||||||||||
Gross intangible assets | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Accumulated amortization |
| ( |
| ( |
| ( |
| ( |
| ( |
| ( | ||||||
Net intangible assets | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Weighted average useful life |
|
|
|
|
|
| ||||||||||||
At June 30, 2024 and December 31, 2023, $
As of June 30, 2024, based on the current carrying value of intangible assets subject to amortization, estimated amortization expense were as follows:
Year |
| ||
2024 (remainder) | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
Thereafter | | ||
Total future amortization | $ | |
10
Note 4—Exit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations which includes the consolidation of certain facilities, information technology (IT) strategic initiatives 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. These amounts are excluded from our segments’ operating income.
During the three months ended June 30, 2024 and 2023, exit and realignment charges, net of $
The following table summarizes the activity related to exit and realignment cost accruals, which are classified as other current liabilities in our consolidated balance sheets, through June 30, 2024 and 2023:
| Total | ||
Accrued exit and realignment costs, December 31, 2023 | $ | | |
Provision for exit and realignment activities: |
|
| |
Severance |
| | |
Professional fees |
| | |
IT strategic initiatives - related costs | | ||
Other |
| | |
Cash payments |
| ( | |
Accrued exit and realignment costs, March 31, 2024 |
| | |
Provision for exit and realignment activities: | |||
Severance | ( | ||
Professional fees | | ||
IT strategic initiatives - related costs | | ||
Other | | ||
Cash payments | ( | ||
Accrued exit and realignment costs, June 30, 2024 | $ | | |
Accrued exit and realignment costs, December 31, 2022 | $ | | |
Provision for exit and realignment activities: |
|
| |
Severance |
| | |
Professional fees | | ||
IT strategic initiatives - related costs | | ||
Other |
| | |
Cash payments |
| ( | |
Accrued exit and realignment costs, March 31, 2023 |
| | |
Provision for exit and realignment activities: |
|
| |
Severance |
| | |
Professional fees | | ||
IT strategic initiatives - related costs | | ||
Other |
| | |
Cash payments | ( | ||
Accrued exit and realignment costs, June 30, 2023 | $ | | |
11
In addition to the exit and realignment accruals in the preceding table and the $
Note 5—Debt
Debt, net of unamortized deferred financing costs, consists of the following:
| June 30, 2024 |
| December 31, 2023 | |||||||||
| Carrying |
| Estimated |
| Carrying |
| Estimated | |||||
Amount | Fair Value | Amount | Fair Value | |||||||||
$ | | $ | | $ | | $ | | |||||
Term Loan A |
| |
| |
| |
| | ||||
| |
| |
| |
| | |||||
Term Loan B |
| |
| |
| |
| | ||||
| |
| |
| |
| | |||||
Finance leases and other |
| |
| |
| |
| | ||||
Total debt |
| |
| |
| |
| | ||||
Less current maturities |
| ( |
| ( |
| ( |
| ( | ||||
Long-term debt | $ | | $ | | $ | | $ | | ||||
We have $
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 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 Receivables Financing Agreement has a maximum borrowing capacity of $
We had no borrowings at June 30, 2024 and December 31, 2023 under our Receivables Financing Agreement. At June 30, 2024 and December 31, 2023, we had maximum revolving borrowing capacity of $
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
12
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.
On March 10, 2021, we issued $
On March 29, 2022, we issued $
The 2029 Unsecured Notes and the 2030 Unsecured Notes are subordinated to any of our secured indebtedness, including indebtedness under our credit agreements.
We have a revolving credit agreement with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (Revolving Credit Agreement) with a maximum borrowing capacity of $
At June 30, 2024 and December 31, 2023, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce Revolving Credit Agreement availability, totaling $
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 June 30, 2024.
13
As of June 30, 2024, scheduled future principal payments of debt, excluding finance leases and other, were as follows:
Year |
| ||
2024 (remainder) | $ | | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
2028 |
| | |
2029 |
| | |
2030 |
| |
Of the $
Note 6—Retirement Plans
We have a frozen noncontributory, unfunded retirement plan for certain retirees in the U.S. (U.S. Retirement Plan). As of June 30, 2024 and December 31, 2023, the accumulated benefit obligation of the U.S. Retirement Plan was $
The components of net periodic benefit cost for the three and six months ended June 30, 2024 and 2023 were as follows:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Service cost | $ | | $ | | $ | | $ | | ||||
Interest cost | | | | | ||||||||
Recognized net actuarial loss |
| |
| |
| |
| | ||||
Net periodic benefit cost | $ | | $ | | $ | | $ | | ||||
Note 7—Derivatives
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
14
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.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of June 30, 2024:
|
|
|
| ||||||||||||
| Notional |
|
| Derivative Assets |
| Derivative Liabilities | |||||||||
| Amount |
| Maturity Date |
| Classification |
| Fair Value |
| Classification |
| Fair Value | ||||
Cash flow hedges |
|
|
|
|
|
|
|
|
| ||||||
Interest rate swaps | $ | | March 2027 |
| Other assets, net | $ | | Other liabilities | $ | | |||||
Economic (non-designated) hedges |
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency contracts | $ | | July 2024 |
| Other current assets | $ | | Other current liabilities | $ | | |||||
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2023:
|
|
|
| ||||||||||||
| Notional |
|
| Derivative Assets |
| Derivative Liabilities | |||||||||
| Amount |
| Maturity Date |
| Classification |
| Fair Value |
| Classification |
| Fair Value | ||||
Cash flow hedges |
|
|
|
|
|
| |||||||||
Interest rate swaps | $ | | March 2027 | Other assets, net | $ | | Other liabilities | $ | | ||||||
Economic (non-designated) hedges |
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency contracts | $ | | January 2024 |
| Other current assets | $ | | Other current liabilities | $ | | |||||
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 $
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and six months ended June 30, 2024:
|
|
| Total Amount of Expense |
| ||||||||||||||||
Amount of Gain | Line Items Presented in the | Amount of Gain Reclassified | ||||||||||||||||||
Recognized in Other | Location of Gain | Consolidated Statement of | from Accumulated Other | |||||||||||||||||
Comprehensive Income | Reclassified from | Operations in Which the | Comprehensive Loss into | |||||||||||||||||
| (Loss) |
| Accumulated Other |
| Effects are Recorded |
| Net Loss | |||||||||||||
Three months ended | Six months ended | Comprehensive Loss | Three months ended | Six months ended | Three months ended | Six months ended | ||||||||||||||
June 30, 2024 | June 30, 2024 | into Income | June 30, 2024 | June 30, 2024 | June 30, 2024 | June 30, 2024 | ||||||||||||||
Interest rate swaps | $ | | $ | |
| Interest expense, net | $ | | $ | | $ | | $ | | ||||||
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
15
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and six months ended June 30, 2023:
| ||||||||||||||||||||
|
| Total Amount of Expense |
| |||||||||||||||||
Amount of Gain | Line Items Presented in the | Amount of Gain Reclassified | ||||||||||||||||||
Recognized in Other | Location of Gain | Consolidated Statement of | from Accumulated Other | |||||||||||||||||
| Comprehensive Income | Reclassified from | Operations in Which the | Comprehensive Loss into | ||||||||||||||||
(Loss) |
| Accumulated Other |
| Effects are Recorded |
| Net Loss | ||||||||||||||
Three months ended | Six months ended | Comprehensive Loss | Three months ended | Six months ended | Three months ended | Six months ended | ||||||||||||||
June 30, 2023 | June 30, 2023 | into Income | June 30, 2023 | June 30, 2023 | June 30, 2023 | June 30, 2023 | ||||||||||||||
Interest rate swaps | $ | | $ | |
| Interest expense, net | $ | | $ | | $ | | $ | | ||||||
The amount of ineffectiveness associated with these contracts was immaterial for the periods presented.
For the three and six months ended June 30, 2024, we recognized losses of $
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, net for our foreign exchange contracts.
Note 8—Income Taxes
The effective tax rate was (
On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the 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. The transfer pricing methodology was consistently applied for all years subject to the NOPAs and 2019 into 2022, but is no longer employed.
During the three months ended June 30, 2024, the IRS and the relevant foreign taxing authority mutually agreed to proposed adjustments to our 2015 through 2018 consolidated tax returns. This was communicated to us in late June 2024. As a result, we remeasured the uncertain tax position for the 2015 through 2018 tax years, as well as the affected 2019 through 2022 tax years, to the amount expected to be paid upon a final agreement with the IRS. This matter does not impact our 2023, 2024 or future tax years. The total change in estimate, net of an income tax benefit from the foreign taxing authority, is $
The liability for unrecognized tax benefits was $
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
16
adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows beyond the amounts described herein.
Note 9—Net Loss per Common Share
The following summarizes the calculation of net loss per common share attributable to common shareholders for the three and six months ended June 30, 2024 and 2023:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
(in thousands, except per share data) |
| 2024 |
| 2023 |
| 2024 |
| 2023 | ||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average shares outstanding - basic |
| |
| |
| |
| | ||||
Dilutive shares |
| |
| |
| |
| | ||||
Weighted average shares outstanding - diluted |
| |
| |
| |
| | ||||
Net loss per common share: | ||||||||||||
Basic | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Diluted | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Share-based awards of approximately
Note 10—Accumulated Other Comprehensive (Loss) Income
The following table shows the changes in accumulated other comprehensive (loss) income by component for the three and six months ended June 30, 2024 and 2023:
|
| Currency |
|
| ||||||||
Retirement | Translation | |||||||||||
Plans | Adjustments | Derivatives | Total | |||||||||
Accumulated other comprehensive (loss) income, March 31, 2024 | $ | ( | $ | ( | $ | | $ | ( | ||||
Other comprehensive income (loss) before reclassifications |
| |
| ( |
| |
| ( | ||||
Income tax |
| ( |
| |
| ( |
| ( | ||||
Other comprehensive income (loss) before reclassifications, net of tax |
| |
| ( |
| |
| ( | ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| |
| |
| ( |
| ( | ||||
Income tax |
| ( |
| |
| |
| | ||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax |
| |
| |
| ( |
| ( | ||||
Other comprehensive income (loss) |
| |
| ( |
| ( |
| ( | ||||
Accumulated other comprehensive (loss) income, June 30, 2024 | $ | ( | $ | ( | $ | | $ | ( | ||||
17
|
| Currency |
|
| ||||||||
Retirement | Translation | |||||||||||
Plans | Adjustments | Derivatives | Total | |||||||||
Accumulated other comprehensive (loss) income, March 31, 2023 | $ | ( | $ | ( | $ | | $ | ( | ||||
Other comprehensive (loss) income before reclassifications |
| |
| ( |
| |
| | ||||
Income tax |
| |
| |
| ( |
| ( | ||||
Other comprehensive (loss) income before reclassifications, net of tax |
| |
| ( |
| |
| ( | ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| |
| |
| ( |
| ( | ||||
Income tax |
| |
| |
| |
| | ||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax |
| |
| |
| ( |
| ( | ||||
Other comprehensive income (loss) |
| |
| ( |
| |
| ( | ||||
Accumulated other comprehensive (loss) income, June 30, 2023 | $ | ( | $ | ( | $ | | $ | ( | ||||
|
| Currency |
|
| ||||||||
Retirement | Translation | |||||||||||
Plans | Adjustments | Derivatives | Total | |||||||||
Accumulated other comprehensive (loss) income, December 31, 2023 | $ | ( | $ | ( | $ | | $ | ( | ||||
Other comprehensive income (loss) before reclassifications |
| |
| ( |
| |
| ( | ||||
Income tax |
| ( |
| |
| ( |
| ( | ||||
Other comprehensive income (loss) before reclassifications, net of tax |
| |
| ( |
| |
| ( | ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| |
| |
| ( |
| ( | ||||
Income tax |
| ( |
| |
| |
| | ||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax |
| |
| |
| ( |
| ( | ||||
Other comprehensive income (loss) |
| |
| ( |
| |
| ( | ||||
Accumulated other comprehensive (loss) income, June 30, 2024 | $ | ( | $ | ( | $ | | $ | ( | ||||
|
| Currency |
|
| ||||||||
Retirement | Translation | |||||||||||
Plans | Adjustments | Derivatives | Total | |||||||||
Accumulated other comprehensive (loss) income, December 31, 2022 | $ | ( | $ | ( | $ | | $ | ( | ||||
Other comprehensive (loss) income before reclassifications |
| |
| ( |
| |
| | ||||
Income tax |
| |
| |
| ( |
| ( | ||||
Other comprehensive (loss) income before reclassifications, net of tax |
| |
| ( |
| |
| | ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| |
| |
| ( |
| ( | ||||
Income tax |
| ( |
| |
| |
| | ||||
Amounts reclassified from accumulated other comprehensive income (loss), net of tax |
| ( |
| |
| ( |
| ( | ||||
Other comprehensive loss |
| ( |
| ( |
| ( |
| ( | ||||
Accumulated other comprehensive (loss) income, June 30, 2023 | $ | ( | $ | ( | $ | | $ | ( | ||||
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 11—Segment Information
We 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
18
decisions and assessing performance. We report our business under
We evaluate the performance of our segments based on their operating income excluding acquisition-related charges and intangible amortization and exit and realignment charges, net, along with other adjustments, that, as a result of their nature, 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.
The following tables present financial information by segment:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Net revenue: |
|
|
|
|
|
|
|
| ||||
Products & Healthcare Services | $ | | $ | | $ | | $ | | ||||
Patient Direct |
| |
| |
| |
| | ||||
Consolidated net revenue | $ | | $ | | $ | | $ | | ||||
Operating income: |
|
|
|
|
|
|
|
| ||||
Products & Healthcare Services | $ | | $ | | $ | | $ | | ||||
Patient Direct |
| |
| |
| |
| | ||||
Acquisition-related charges and intangible amortization |
| ( |
| ( |
| ( |
| ( | ||||
Exit and realignment charges, net | ( | ( | ( | ( | ||||||||
Litigation and related charges(1) |
| ( |
| — |
| ( |
| — | ||||
Consolidated operating income | $ | | $ | | $ | | $ | | ||||
Depreciation and amortization: |
|
|
|
|
|
|
|
| ||||
Products & Healthcare Services | $ | | $ | | $ | | $ | | ||||
Patient Direct |
| |
| |
| |
| | ||||
Consolidated depreciation and amortization | $ | | $ | | $ | | $ | | ||||
Share-based compensation: | ||||||||||||
Products & Healthcare Services | $ | | $ | | $ | | $ | | ||||
Patient Direct | | | | | ||||||||
Other(2) | | | | |||||||||
Consolidated share-based compensation | $ | | $ | | $ | | $ | | ||||
Capital expenditures: |
|
|
|
|
|
|
|
| ||||
Products & Healthcare Services | $ | | $ | | $ | | $ | | ||||
Patient Direct |
| |
| |
| |
| | ||||
Consolidated capital expenditures | $ | | $ | | $ | | $ | | ||||
(1) Litigation and related charges includes settlement costs and related fees of legal matters within our Apria division, which do not occur in the ordinary course of our business, are non-recurring/infrequent and are inherently unpredictable in timing and amount. These charges are reported within Other operating expense, net in our Statements of Operations for the three and six months ended June 30, 2024.
(2) Other share-based compensation expense is captured within Exit and realignment charges, net or Acquisition-related charges for the three and six months ended June 30, 2024 and 2023.
19
June 30, 2024 | December 31, 2023 | |||||
Total assets: |
|
|
|
| ||
Products & Healthcare Services | $ | | $ | | ||
Patient Direct | | | ||||
Segment assets | | | ||||
Cash and cash equivalents |
| |
| | ||
Consolidated total assets | $ | | $ | | ||
Non-cash charges (credits) to merchandise inventories valued at the lower of cost or market, with the approximate cost determined by the last-in, first-out (LIFO) method for distribution inventories in the U.S. within our Products & Healthcare Services segment were $(
The following table presents net revenue by geographic area, which were attributed based on the location from which we ship products or provide services:
| Three Months Ended | Six Months Ended | ||||||||||
June 30, | June 30, | |||||||||||
2024 |
| 2023 |
| 2024 |
| 2023 | ||||||
Net revenue: |
|
|
|
|
|
|
|
| ||||
United States | $ | | $ | | $ | | $ | | ||||
International |
| |
| |
| |
| | ||||
Consolidated net revenue | $ | | $ | | $ | | $ | | ||||
Note 12—Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require disclosure of additional detailed information about a reportable segment’s expenses, including significant segment expenses regularly provided to the Chief Operating Decision Maker (CODM), the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment’s profit or loss. This ASU is effective for us in annual periods beginning after December 15, 2023 and interim periods within annual years beginning after December 15, 2024. The amendments in this ASU must be applied on a retrospective basis to all prior periods presented in the financial statements and early adoption is permitted. We expect this ASU to only impact our disclosures with no impacts to our results of operations, financial condition and cash flows.
In December 2023, the FASB Issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require additional annual income tax disclosures, including disclosure of reconciling items by jurisdiction and nature to the extent those items exceed a specified threshold. In addition, this ASU will require disclosure of income taxes paid, net of refunds received disaggregated by federal, state, and foreign and by jurisdiction if the amount is more than 5% of total income tax payments, net of refunds received. The amendments in this ASU are effective for us in annual periods beginning after December 15, 2024. The amendments in this ASU are required to be applied on a prospective basis and retrospective adoption is permitted. We expect this ASU to only impact our disclosures with no impacts to our results of operations, financial condition and cash flows.
Note 13—Commitments, Contingent Liabilities, and Legal Proceedings
Commitments include $
20
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 June 30, 2024 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 14—Subsequent Events
On July 22, 2024, we entered into an Agreement and Plan of Merger to acquire Rotech Healthcare Holdings Inc., (Rotech) for $
On July 31, 2024, we provided notice that we intend to exercise the redemption option on our 2024 Notes effective September 16, 2024. As disclosed in Note 5 in Notes to Consolidated Financial Statements, for redemptions on and after September 15, 2024, we have the option to redeem the 2024 Notes in part or in whole prior to maturity at a redemption price equal to
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, 2023. 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, 2023.
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. The Patient Direct segment includes our home healthcare divisions (Byram and Apria).
On July 22, 2024, we entered into an Agreement and Plan of Merger to acquire Rotech Healthcare Holdings Inc., (Rotech) for $1.36 billion in cash. Given anticipated tax benefits of approximately $40 million from the transaction, the net purchase price is approximately $1.32 billion. Rotech is a national leader in providing home medical equipment in the US. The definitive agreement contains certain termination rights for the Company and Rotech. In the event that we terminate the contract, we will be required to pay Rotech a termination fee of $70.0 million. The transaction is subject to customary closing conditions, including expiration or termination of the applicable waiting period under the Hart Scott Rodino Act, and is expected to close by the end of 2024. We have fully committed financing in place and expect to use a combination of cash and incremental borrowings to fund the purchase price.
21
Net (loss) per share was $(0.42) and $(0.70) for the three and six months ended June 30, 2024 as compared to net (loss) per share of $(0.37) and $(0.70) for the three and six months ended June 30, 2023. Our financial results for the three and six months ended June 30, 2024 as compared to the prior year periods were impacted by the following: (1) the remeasurement of an uncertain tax position, which resulted in a $17.2 million, or $(0.22) income tax charge per share for the three and six months ended June 30, 2024 (see Note 8 in Notes to Consolidated Financial Statements); (2) increased exit and realignment charges; partially offset by (3) improvements in the operating results by both of our segments as described below; (4) lower interest expense; and (5) lower intangible amortization. Net (loss) per share was not impacted as compared to the prior year by foreign currency translation for the three months ended June 30, 2024 and was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $(0.01) for the six months ended June 30, 2024.
Products & Healthcare Services segment operating income was $11.5 million and $23.0 million for the three and six months ended June 30, 2024, compared to $2.9 million and $4.8 million for the three and six months ended June 30, 2023. The increases were primarily from revenue growth of 4.1% and 3.6% and savings derived by our Operating Model Realignment Program of approximately $18 million and $42 million, partially offset by changes in product sales mix, increased costs to support future revenue growth, and approximately $3 million and $8 million of increased teammate benefit costs for the three and six months ended June 30, 2024. Patient Direct segment operating income was $64.8 million and $111 million for the three and six months ended June 30, 2024, compared to $59.1 million and $105 million for the three and six months ended June 30, 2023. This segment’s results reflect revenue growth of 4.4% and 4.7%, savings derived by our Operating Model Realignment Program of approximately $3 million and $5 million, a $4.2 million gain related to an agreement with Philips Respironics (Philips) for previously recalled equipment, and cost savings from information technology (IT) strategic initiatives and other operating efficiencies, which were partially offset by unfavorable changes in revenue mix and approximately $8 million and $14 million of increased teammate benefit costs for the three and six months ended June 30, 2024.
Refer to ‘Results of Operations’ for further detail of quantitative and qualitative drivers of our results.
Philips Respironics Recall
In June 2021, one of Apria’s suppliers, Philips, announced a voluntary recall of its continuous and non-continuous ventilators (certain continuous positive airway pressure (CPAP), bilevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices, which the U.S. Food and Drug Administration (FDA) identified as a Class I recall, the most serious category of recall. In December 2022, Philips issued a subsequent voluntary recall related to deficiencies in repairs made to certain of the ventilators that had originally been recalled in June 2021 (together with the June 2021 recall, the Recall). In April 2024, Philips entered into a consent decree enjoining Philips from making and distributing non-medically necessary CPAP, bilevel positive airway pressure and ventilator devices at any of its Sleep and Respiratory Care Business facilities until the FDA determines that Philips has complied with the remediation and compliance activities set forth in the consent decree.
We continue to closely monitor the impact of the Recall and subsequent consent decree on our business. To date, we have incurred significant costs coordinating Recall-related activities, and we may continue to incur additional significant costs (including costs in completing the replacement of devices subject to the Recall). Some or all of these costs may not be recoverable from the product manufacturer. During the second quarter, we reached an agreement with Philips which requires Philips to pay us approximately $14 million for recalled equipment which we will return to Philips. Refer to the ‘Overview’ section for details of the impacts to our statements of operations for the three and six months ended June 30, 2024. The amount owed from Philips was accrued within other current assets on our consolidated balance sheet as of June 30, 2024. While we believe we have access to a sufficient supply of CPAP, bilevel positive airway pressure and ventilator devices to service our home healthcare patients’ needs, other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.
22
Results of Operations
Net revenue.
| Three Months Ended |
| ||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Products & Healthcare Services | $ | 2,010,605 | $ | 1,930,723 |
| $ | 79,882 | 4.1 | % | |||
Patient Direct |
| 660,401 |
| 632,503 |
| 27,898 | 4.4 | % | ||||
Net revenue | $ | 2,671,006 | $ | 2,563,226 |
| $ | 107,780 | 4.2 | % | |||
| Six Months Ended |
| ||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) | 2024 |
| 2023 |
| $ |
| % |
| ||||
Products & Healthcare Services | $ | 3,985,442 | $ | 3,846,212 | $ | 139,230 | 3.6 | % | ||||
Patient Direct |
| 1,298,244 |
| 1,239,863 | 58,381 | 4.7 | % | |||||
Net revenue | $ | 5,283,686 | $ | 5,086,075 | $ | 197,611 | 3.9 | % | ||||
The Products & Healthcare Services net revenue increase of $79.9 million for the three months ended June 30, 2024 was driven primarily from net revenue growth in the Medical Distribution division of 4.9%. The Patient Direct segment net revenue growth for the three months ended June 30, 2024 of $28 million was driven by growth across certain product categories, including diabetes and sleep supplies, as a result of new patient starts and high retention of customers.
The Products & Healthcare Services net revenue increase of $139 million for the six months ended June 30, 2024 was driven primarily from net revenue growth in the Medical Distribution division of 4.8% which was partially offset by a slight decline in our Global Products division, primarily driven by a decline in international net revenue. The Patient Direct segment net revenue growth for the six months ended June 30, 2024 of $58 million was driven by virtually the same factors impacting the second quarter of 2024.
Foreign currency translation had an unfavorable impact on net revenue of $1.9 million and $3.2 million for the three and six months ended June 30, 2024 as compared to the prior year periods.
Cost of goods sold.
| Three Months Ended |
|
| |||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Cost of goods sold | $ | 2,126,853 | $ | 2,043,794 | $ | 83,059 | 4.1 | % | ||||
| Six Months Ended |
| ||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) | 2024 |
| 2023 |
| $ |
| % |
| ||||
Cost of goods sold | $ | 4,204,003 | $ | 4,069,336 | $ | 134,667 | 3.3 | % | ||||
The increase in cost of goods sold for the three months ended June 30, 2024 reflects the increased cost associated with net revenue growth of 4.2%, partially offset by cost reductions in our Global Products division, including approximately $9.5 million of savings associated with sourcing initiatives.
The increase in cost of goods sold for the six months ended June 30, 2024 reflects the increased cost associated with net revenue growth of 3.9%, partially offset by cost reductions in our Global Products division, including approximately $15.0 million of savings associated with sourcing initiatives.
Foreign currency translation had a favorable impact on cost of goods sold of $1.9 million and $0.9 million for the three and six months ended June 30, 2024 as compared to the prior year periods.
23
Gross profit.
| Three Months Ended |
|
|
|
|
| ||||||
June 30, | Change | |||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Gross profit | $ | 544,153 | $ | 519,432 | $ | 24,721 | 4.8 | % | ||||
As a % of net revenue |
| 20.37 | % | 20.26 | % |
|
|
| ||||
| Six Months Ended |
|
| ||||||||||
June 30, | Change |
| |||||||||||
(Dollars in thousands) | 2024 |
| 2023 |
| $ | % |
| ||||||
Gross profit | $ | 1,079,683 | $ | 1,016,739 | $ | 62,944 | 6.2 | % | |||||
As a % of net revenue |
| 20.43 | % |
| 19.99 | % |
|
|
| ||||
The changes in gross profit for the three and six months ended June 30, 2024 was driven by net revenue growth and other factors impacting net revenue and cost of goods sold described above. Foreign currency translation had an unfavorable impact on gross profit of $0.1 million and $2.3 million for the three and six months ended June 30, 2024 as compared to the prior year periods.
Operating expenses.
| Three Months Ended |
|
|
|
|
| ||||||
June 30, | Change | |||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Distribution, selling and administrative expenses | $ | 469,313 | $ | 455,030 | $ | 14,283 | 3.1 | % | ||||
As a % of net revenue |
| 17.57 | % | 17.75 | % |
|
|
| ||||
Acquisition-related charges and intangible amortization | $ | 19,985 | $ | 22,203 | $ | (2,218) | (10.0) | % | ||||
Exit and realignment charges, net | $ | 29,293 | $ | 28,963 | $ | 330 | 1.1 | % | ||||
Other operating expense, net | $ | 5,263 | $ | 2,397 | $ | 2,866 | 119.6 | % | ||||
| Six Months Ended |
|
| |||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Distribution, selling and administrative expenses | $ | 946,926 | $ | 903,752 | $ | 43,174 | 4.8 | % | ||||
As a % of net revenue |
| 17.92 | % |
| 17.77 | % |
|
|
| |||
Acquisition-related charges and intangible amortization | $ | 40,298 | $ | 44,392 | $ | (4,094) | (9.2) | % | ||||
Exit and realignment charges, net | $ | 56,649 | $ | 44,637 | $ | 12,012 | 26.9 | % | ||||
Other operating expense, net | $ | 5,815 | $ | 3,312 | $ | 2,503 | 75.6 | % | ||||
The increase in Distribution, selling and administrative (DS&A) expenses for the three months ended June 30, 2024 was driven primarily by incremental costs to support the $108 million, or 4.2%, net revenue growth, along with future revenue growth and an increase of approximately $11 million in teammate benefit costs, partially offset by approximately $4 million in expense savings from our IT strategic initiatives, approximately $2 million of personnel cost savings related to 2023 organizational changes, and other productivity gains derived from operating efficiencies.
The increase in DS&A expenses for the six months ended June 30, 2024 was driven primarily by incremental costs to support the $198 million, or 3.9%, net revenue growth, along with future revenue growth and an increase of approximately $22 million in teammate benefit costs, partially offset by approximately $13 million in expense savings from our IT strategic initiatives, approximately $7 million of personnel cost savings related to 2023 organizational changes, and other productivity gains derived from operating efficiencies.
Foreign currency translation had a favorable impact on DS&A expenses of $0.5 million and $0.8 million for the three and six months ended June 30, 2024 as compared to the prior year periods.
24
Intangible amortization was $16.3 million and $36.5 million for the three and six months ended June 30, 2024 and $20.9 million and $41.8 million for the three and six months ended June 30, 2023 related primarily to intangible assets acquired in the Apria, Halyard and Byram acquisitions. Acquisition-related charges were $3.7 million for the three and six months ended June 30, 2024 consisting of costs related to the pending Rotech transaction. Acquisition-related charges were $1.3 million and $2.5 million for the three and six months ended June 30, 2023 consisting primarily of costs related to the acquisition of Apria, Inc. The decline from the three and six month prior year periods reflect the incurrence of most of these costs closer to the March 29, 2022 acquisition date, and intangible amortization expense reduction of $4.7 million and $5.3 million, as certain intangible assets are fully amortized.
Exit and realignment charges, net were $29.3 million and $56.6 million for the three and six months ended June 30, 2024. These charges were primarily related to our (1) Operating Model Realignment Program of $22.9 million and $56.4 million, including professional fees, severance, and other costs to streamline functions and processes, (2) costs related to IT strategic initiatives such as converting certain divisions to common IT systems of $5.4 million and $6.7 million and, (3) other costs associated with strategic initiatives of $1.0 million and $1.1 million for the three and six months ended June 30, 2024. Exit and realignment charges, net also included a $7.4 million gain on the sale of our corporate headquarters for the six months ended June 30, 2024. Exit and realignment charges, net were $29.0 million and $44.6 million for the three and six months ended June 30, 2023. These charges primarily related to our (1) Operating Model Realignment Program of $24.3 million and $39.3 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 $3.4 million and $3.5 million and, (3) other costs associated with strategic initiatives of $1.3 million and $1.8 million for the three and six months ended June 30, 2023. We expect to incur material future costs relating to our Operating Model Realignment Program and IT strategic initiatives, which we are not able to reasonably estimate.
The change in other operating expense, net for the three and six months ended June 30, 2024 reflects $3.9 million and $7.2 million of losses on sales of accounts receivable under the Master Receivables Purchase Agreement (RPA) as compared to $2.9 million and $3.6 million of losses for the three and six months ended June 30, 2023. Other operating expense, net for the three and six months ended June 30, 2024 reflects $6.7 million related to the settlement of a wage and hour dispute in the state of California within our Apria division and a $4.2 million gain related to an agreement with Philips for previously recalled equipment.
During the three and six months ended June 30, 2024, we incurred a favorable change of $0.8 million and $3.3 million in foreign currency transaction gains and losses, net of derivative adjustments, as compared to the prior year.
Interest expense, net.
| Three Months Ended |
|
|
|
|
| ||||||
June 30, | Change | |||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Interest expense, net | $ | 35,899 | $ | 40,728 | $ | (4,829) | (11.9) | % | ||||
Effective interest rate |
| 7.09 | % | 6.93 | % |
|
|
| ||||
Six Months Ended |
| |||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Interest expense, net | $ | 71,554 | $ | 82,926 | $ | (11,372) | (13.7) | % | ||||
Effective interest rate |
| 7.15 | % |
| 6.86 | % |
|
|
| |||
Interest expense, net for the three and six months ended June 30, 2024 decreased due to lower average outstanding borrowings of $267 million and $325 million, partially offset by an increase in the effective interest rate of 16 basis points and 29 basis points as compared to the three and six months ended June 30, 2023. See Note 5 in Notes to Consolidated Financial Statements.
25
Other expense, net.
| Three Months Ended |
|
|
|
|
| ||||||
June 30, | Change | |||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Other expense, net | $ | 1,205 | $ | 1,072 | $ | 133 | 12.4 | % | ||||
Six Months Ended |
| |||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) |
| 2024 |
| 2023 | $ |
| % |
| ||||
Other expense, net |
| $ | 2,358 |
| $ | 2,458 |
| $ | (100) |
| (4.1) | % |
Other expense, net for the three and six months ended June 30, 2024 and 2023 includes interest cost and net actuarial losses related to our retirement plans. In addition, other expense, net for the three and six months ended June 30, 2023 includes the loss on extinguishment of debt, of $0.3 million and $0.8 million associated with the early retirement of indebtedness of $48.0 million and $73.0 million.
Income taxes.
| Three Months Ended |
|
|
|
|
| ||||||
June 30, | Change | |||||||||||
(Dollars in thousands) | 2024 |
| 2023 | $ |
| % |
| |||||
Income tax provision (benefit) | $ | 15,108 | $ | (2,720) | $ | 17,828 | 655.4 | % | ||||
Effective tax rate |
| (89.9) | % | 8.8 | % |
|
|
| ||||
Six Months Ended |
| |||||||||||
June 30, | Change |
| ||||||||||
(Dollars in thousands) |
| 2024 |
| 2023 |
| $ |
| % |
| |||
Income tax provision (benefit) |
| $ | 9,882 |
| $ | (12,079) |
| $ | 21,961 |
| 181.8 | % |
Effective tax rate |
| (22.5) | % | 18.7 | % | |||||||
The change in the effective tax rate for the three and six months ended June 30, 2024 compared to the same periods in 2023 resulted primarily from a one-time income tax charge of $17.2 million, or $(0.22) per share, related to a recent decision associated with Notices of Proposed Adjustments that we received in 2020 and 2021, for the three and six months ended June 30, 2024. This was communicated to us in late June 2024. The matter at hand is related to past transfer pricing methodology, which is no longer employed. See Note 8 in Notes to Consolidated Financial Statements.
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 $29 million.
26
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.
Change |
| |||||||||||
(Dollars in thousands) |
| June 30, 2024 |
| December 31, 2023 |
| $ |
| % |
| |||
Cash and cash equivalents | $ | 243,671 | $ | 243,037 | $ | 634 | 0.3 | % | ||||
Accounts receivable, net | $ | 662,444 | $ | 598,257 | $ | 64,187 | 10.7 | % | ||||
DSO (1) | 22.1 | 20.5 | ||||||||||
Merchandise inventories | $ | 1,231,413 | $ | 1,110,606 | $ | 120,807 | 10.9 | % | ||||
Inventory days (2) | 52.7 | 49.0 | ||||||||||
Accounts payable |
| $ | 1,381,871 |
| $ | 1,171,882 |
| $ | 209,989 |
| 17.9 | % |
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the six months ended June 30, 2024 and 2023:
Six Months Ended | ||||||
June 30, | ||||||
(Dollars in thousands) |
| 2024 |
| 2023 | ||
Net cash provided by (used for): |
|
|
|
| ||
Operating activities | $ | 63,187 | $ | 471,510 | ||
Investing activities |
| (37,040) |
| (65,668) | ||
Financing activities |
| (24,920) |
| (183,120) | ||
Effect of exchange rate changes |
| (682) |
| 196 | ||
Net increase in cash, cash equivalents and restricted cash | $ | 545 | $ | 222,918 | ||
Cash provided by operating activities in the first six months of 2024 reflected a net loss and favorable changes in working capital. Cash provided by operating activities in the first six months of 2023 reflected a net loss and favorable changes in working capital. The change in cash provided by operating activities is primarily driven by the reduction in accounts receivable, net from the initial favorability of uncollected accounts receivable sold through the RPA and the significant reduction in inventory levels during the six months ended June 30, 2023, as these items did not recur during the six months ended June 30, 2024.
Cash used for investing activities in the first six months of 2024 included capital expenditures of $95.2 million for patient service equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, offset by $67.0 million in proceeds from sale of property and equipment, which included sales of patient service equipment and $33.5 million in gross proceeds related to the sale of our corporate headquarters. Cash used for investing activities in the first six months of 2023 included capital expenditures of $101 million for patient service equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $35.7 million in proceeds related primarily to the sale of patient service equipment.
Cash used for financing activities in the first six months of 2024 included repayments of term loans of $12.4 million. We had no borrowings under our revolving credit facility for the first six months of 2024 and the activity under our amended Receivables Financing Agreement netted to no impact to our outstanding borrowings. Payments for taxes related to the vesting of restricted stock awards, which are included in Other, net, were $8.0 million for the first six months of 2024. Cash used for financing activities in the first six months of 2023 included repayments of term loans of $78.3 million, including $65.0 million of unscheduled principal payments on the Term Loan A and the Term Loan B.
27
We had no borrowings under our revolving credit facility on a net basis for the first six 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 $10.2 million for the first six months of 2023.
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 June 30, 2024 and December 31, 2023 under our Receivables Financing Agreement. At June 30, 2024 and December 31, 2023, we had maximum revolving borrowing capacity of $450 million under our Receivable Financing Agreement.
The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million. We have $898 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 June 30, 2024 and December 31, 2023, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce Revolver availability, totaling $31.5 million and $27.4 million, leaving $419 million and $423 million available for borrowing at the end of each period. 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 $3.0 million as of June 30, 2024 and December 31, 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 4.375% senior notes due in December 2024 (the 2024 Notes), and the parties secured under the credit agreements 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 July 31, 2024, we provided notice that we intend to redeem the 2024 Notes, see Note 14 in Notes to Consolidated Financial Statements.
The Revolving Credit Agreement, the Credit Agreement, the Receivables Financing Agreement, the 2024 Notes, the 4.500% senior unsecured notes due in March 2029, and the 6.625% senior unsecured notes due in April 2030 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 June 30, 2024.
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 a third-party financial institution (the Purchaser) in exchange for cash. Cash received from the sales 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 $573 million and $1.1 billion for the three and six months ended June 30, 2024. During the three and six months ended June 30, 2024, we received net cash proceeds of $569 million and $1.1 billion from the sale of accounts receivable under the RPA and collected $547
28
million and $1.1 billion of the sold accounts receivable. Total accounts receivable sold under the RPA were $412 million for the three and six months ended June 30, 2023. During the three and six months ended June 30, 2023, we received net cash proceeds of $409 million from the sale of accounts receivable under the RPA and collected $297 million of the sold accounts receivable. No accounts receivables were sold under the RPA for the three months ended March 31, 2023.The losses on sale of accounts receivable, inclusive of professional fees incurred to establish the agreement, recorded in other operating expense, net in the consolidated statements of operations were $3.9 million and $2.9 million for the three months ended June 30, 2024 and 2023 and $7.2 million and $3.6 million for the six months ended June 30, 2024 and 2023. The RPA is separate and distinct from the accounts receivable securitization program (the Receivables Financing Agreement).
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, including available cash proceeds from the RPA, 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 U.S. Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $21.8 million and $22.0 million at June 30, 2024 and December 31, 2023. As of June 30, 2024, we are permanently reinvested in our foreign subsidiaries.
Contractual obligations
Commitments include $48.4 million of legally binding lease payments for the Morgantown, West Virginia center of excellence for medical supplies and logistics lease signed, but not yet commenced. Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 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, of with respect to our 2024 Notes. See Note 5 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.
29
Summarized financial information of the Guarantor Group is as follows:
Summarized Consolidated Statement of Operations - Guarantor Group
| Six Months Ended | ||
(Dollars in thousands) | June 30, 2024 | ||
Net revenue(1) | $ | 5,201,722 | |
Gross profit |
| 1,038,640 | |
Operating income |
| 14,708 | |
Net loss |
| (58,636) | |
(1)Includes $59.1 million in sales to non-guarantor subsidiaries for the six months ended June 30, 2024.
Summarized Consolidated Balance Sheets - Guarantor Group
(Dollars in thousands) |
| June 30, 2024 |
| December 31, 2023 | ||
Total current assets | $ | 1,656,446 | $ | 1,472,999 | ||
Total assets |
| 4,797,778 |
| 4,601,026 | ||
Total current liabilities |
| 2,241,249 |
| 2,002,468 | ||
Total liabilities |
| 4,521,706 |
| 4,243,230 | ||
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.
Summarized financial information of the Collateral Group is as follows:
Summarized Consolidated Balance Sheets - Collateral Group
(Dollars in thousands) |
| June 30, 2024 |
| December 31, 2023 | ||
Total current assets | $ | 1,495,870 | $ | 1,280,045 | ||
Total assets |
| 4,425,775 |
| 4,220,357 | ||
Total current liabilities |
| 2,064,898 |
| 1,821,030 | ||
Total liabilities |
| 4,077,513 |
| 3,801,549 | ||
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, 2023 and Note 12 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on June 30, 2024.
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
30
those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:
| ● | 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, finished goods, equipment and services; |
| ● | our ability to successfully identify, close, manage or integrate acquisitions, including Rotech; |
| ● | 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; |
31
| ● | 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 or a third party’s information systems that impacts our business; |
| ● | 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; |
| ● | 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; and |
| ● | 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, 2023. |
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
Certain quantitative and qualitative market risk disclosures are described in our Annual Report on Form 10-K for the year ended December 31, 2023. Through June 30, 2024, there have been no material changes in the quantitative and qualitative market risk disclosures described in such Annual Report.
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) and 15d-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 June 30, 2024. There was no change 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, 2023. Through June 30, 2024, there have been no material developments in any legal proceedings reported in such Annual Report.
32
Item 1A. Risk Factors
The following description of risk factors updates and supplements risk factors associated with our business previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. These risk factors are in addition to those mentioned in other parts of this report and are not all of the risks that we face. We could also be affected by risks that we currently are not aware of or that we currently do not consider material to our business.
We cannot assure you that the proposed acquisition of Rotech (Rotech Acquisition) will be completed.
There are a number of risks and uncertainties relating to the Rotech Acquisition. For example, the Rotech Acquisition may not be completed, or may not be completed in the timeframe, on the terms or in the manner currently anticipated, as a result of a number of factors, including, among other things, the failure of one or more of the conditions to closing in the Agreement and Plan of Merger. There can be no assurance that the conditions to closing of the Rotech Acquisition will be satisfied or waived or that other events will not intervene to delay or result in the failure to close the Rotech Acquisition. The Agreement and Plan of Merger may be terminated by the parties thereto under certain circumstances, including, without limitation, if the Rotech Acquisition has not been completed by July 22, 2025. Any delay in closing the Rotech Acquisition or a failure to close the Rotech Acquisition could have a negative impact on our business and the trading prices of our common stock and debt.
We may fail to realize the anticipated benefits of the Rotech Acquisition or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating the Rotech business into our operations.
Our ability to realize the anticipated benefits of the Rotech Acquisition will depend, to a large extent, on our ability to integrate the Rotech business into ours. We may devote significant management attention and resources preparing for and then integrating the business practices and operations of the Rotech business with ours. This integration process may be disruptive to our and the Rotech businesses, and, if implemented ineffectively, could restrict realization of the expected benefits. In addition, we may fail to realize some of the anticipated benefits of the Rotech Acquisition if the integration process takes longer than expected or is more costly than expected. Potential difficulties we may encounter in the integration process include:
| ● | The inability to successfully combine operations in a manner that would result in the anticipated benefits of the Rotech Acquisition in the time frame currently anticipated or at all; |
| ● | Complexities associated with managing the expanded operations; |
| ● | Integrating personnel; |
| ● | Creation of uniform standards, internal controls, procedures, policies and information systems; |
| ● | Unforeseen increased expenses, delays or regulatory issues associated with integrating the operations; and |
| ● | Performance shortfalls as a result of the diversion of management attention caused by completing the integration of the operations. |
Even if we are able to integrate the Rotech business successfully, this integration may not result in the realization of the full benefits that we currently expect, nor can we give assurances that these benefits will be achieved when expected or at all. Moreover, the integration of the Rotech business may result in unanticipated problems, expenses, liabilities, regulatory risks and competitive responses that could have material adverse consequences.
We and the Rotech business will be subject to business uncertainties while the Rotech Acquisition is pending that could adversely affect our business and the Rotech business.
Uncertainty about the effect of the Rotech Acquisition on teammates, customers and suppliers may have an adverse effect on us and the Rotech business. Although we and Rotech intend to take actions to reduce any adverse effects, these uncertainties could cause customers, suppliers and others that deal with us and/or the Rotech business to seek to change existing business relationships. In addition, teammate retention could be negatively impacted during the pendency of the Rotech Acquisition. If key teammates depart because of concerns relating to the uncertainty and difficulty of the integration process, our business could be harmed.
33
The pendency of the Rotech Acquisition could adversely affect our business, financial results, and operations.
The announcement and pendency of the Rotech Acquisition could cause disruptions and create uncertainty surrounding our business and affect our relationships with our customers, suppliers and teammates. In addition, we have diverted, and will continue to divert, significant management resources to complete the Rotech Acquisition, which could have a negative impact on our ability to manage existing operations or pursue alternative strategic transactions, which could adversely affect our business, financial condition and results of operations. Investor perceptions about the terms or benefits of the Rotech Acquisition could have a negative impact on our business and the trading prices of our common stock and debt.
Despite current indebtedness levels, we will incur substantially more debt to complete the acquisition of Rotech.
We and our subsidiaries will incur substantial additional indebtedness in the future in order to complete the Rotech Acquisition, which could significantly increase our leverage. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face to service debt levels and the risks associated with failure to adequately service our debt could intensify.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Item 5. Other Information.
During the three months ended June 30, 2024,
34
Item 6. Exhibits
| (a) | Exhibits |
10.1 | ||
22.1 |
| |
22.2 | ||
31.1 |
| |
31.2 |
| |
32.1 |
| |
32.2 |
| |
101.INS |
| 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. |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
| Inline XBRL Taxonomy Definition Linkbase Document |
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) |
** Management contract or compensatory plan or arrangement
35
SIGNATURES
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.
Owens & Minor, Inc. | |
(Registrant) | |
Date: August 2, 2024 | /s/ Edward A. Pesicka |
Edward A. Pesicka | |
President, Chief Executive Officer & Director | |
Date: August 2, 2024 | /s/ Jonathan A. Leon |
Jonathan A. Leon | |
Senior Vice President, Corporate Treasurer & Interim Chief Financial Officer |
36