OWENS & MINOR, INC. The following discussion and analysis describes results of operations and material changes in the financial condition ofOwens & Minor, Inc. and its subsidiaries sinceDecember 31, 2021 . 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 endedDecember 31, 2021 .
Overview
Owens & Minor, Inc. , along with its subsidiaries, (we, us, or our) is a leading global healthcare solutions company. To better reflect how we go to market as well as certain changes to the leadership team, organizational structure, budgeting and financial reporting processes, we have organized our business into two distinct segments: Products & Healthcare Services and Patient Direct. Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. Patient Direct expands our business along the continuum of care through delivery of disposable medical supplies sold directly to patients and home health agencies and is a leading provider of integrated home healthcare equipment and related services inthe United States . Beginning with the quarter endedMarch 31, 2022 , we now report financial results using this two segment structure and have recast prior year segment results on the same basis. 20
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OnMarch 29, 2022 (the Acquisition Date), we completed the acquisition of 100% ofApria, Inc. (Apria) pursuant to the Agreement and Plan of Merger (Apria Acquisition) datedJanuary 7, 2022 , in exchange for approximately$1.7 billion . The purchase was funded with a combination of debt and cash on hand. At the time of the Apria Acquisition, each share of Apria's common stock was converted into the right to receive$37.50 in cash. Apria is a leading provider of integrated home healthcare equipment and related services inthe United States . This business is reported as part of the Patient Direct segment. Net income per diluted share was$0.52 for the three months endedMarch 31, 2022 as compared to$0.98 for the three months endedMarch 31, 2021 . Products & Healthcare Services segment operating income was$89.1 million for the three months endedMarch 31, 2022 , compared to$150.4 million for the three months endedMarch 31, 2021 . The decrease was primarily the result of the timing of glove price changes, accelerating inflationary pressures, including commodities, transportation, and labor, partially offset by leveraging our fixed costs, and operating efficiencies. Patient Direct segment operating income was$15.8 million for the three months endedMarch 31, 2022 , compared to$12.3 million for the three months endedMarch 31, 2021 . The increase was primarily the result of strong revenue growth, leveraging our fixed costs, and operating efficiencies, partially offset by accelerating inflationary pressures.
COVID-19 Update
We are closely monitoring the impact of the 2019 novel coronavirus (COVID-19), including recent variants, on all aspects of our business, including how it impacts our customers, teammates, suppliers, vendors and distribution channels. We have taken actions to protect our teammates while maintaining business continuity as we respond to the needs from this global pandemic. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our teammates, customers, suppliers and shareholders. We are unable to predict the timing of the pandemic and the full impact that COVID-19 will have on our future operating results, financial position and cash flows due to numerous variables and continued uncertainties. Travel, transportation, and business operation restrictions arising from virus containment efforts of governments around the world have continued to impact our operations in certain locations, including withinAsia . Essential activity exceptions from these restrictions have allowed us to continue to operate but virus containment efforts have resulted in additional direct costs from supply chain challenges. Although we have experienced growth in sales volumes for certain of our products (such as personal protective equipment (PPE)) during the COVID-19 pandemic, as well as improved productivity and manufacturing output, there can be no assurance that such growth rates, increased sales volumes or other improvements will be maintained during or following the COVID-19 pandemic.
Philips Respironics Recall
InJune 2021 , one of Apria's suppliers,Philips Respironics , announced a voluntary recall (Recall) for continuous and non-continuous ventilators (certain CPAP, BiLevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices. TheFood and Drug Administration (FDA) has since identified this as a Class I recall, the most serious category of recall. Because we distribute these products and provide related home respiratory services and, in part, due to the substantial number of impacted devices, we will likely devote substantial time and resources to coordinating recall-related activity and to supporting our home healthcare patients' needs. This Recall may cause us to incur significant costs, some or all of which may not be recoverable from the product manufacturer. The Recall may also materially negatively affect our revenues and results of operations as a result of patients not using their impacted devices, current shortages in the availability of both replacement devices for impacted patients and new devices for new patients, patient hesitancy to use respiratory devices generally or other reasons. We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the Recall. There is an equipment shortage in the industry and the Recall or other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity. 21
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Results of Operations
Net revenue.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Products & Healthcare Services
1.2 %
Patient Direct 272,911 217,089 55,822 25.7 %
Net revenue $ 2,406,952 $ 2,326,534 $ 80,418 3.5 %
The increase in net revenue in our Patient Direct segment for the three months
ended March 31, 2022 was driven by continued strong performance in our Byram
business and the acquisition of Apria on March 29, 2022 . The increase in net
revenue in our Products & Healthcare Services segment for the three months ended
March 31, 2022 reflected market share gains and growth with existing customers,
along with an additional sales day, partially offset by a decline in PPE sales.
Foreign currency translation had an unfavorable impact on net revenue of $8.5
million for the three months ended March 31, 2022 as compared to the prior year.
Cost of goods sold.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Cost of goods sold $ 2,033,504 $ 1,883,783 $ 149,721 7.9 %
Cost of goods sold includes the cost of the product (net of supplier incentives
and cash discounts) and all costs incurred for shipments of products from
manufacturers to our distribution centers for all customer arrangements where we
are the primary obligor and bear risk of general and physical inventory loss.
These are sometimes referred to as distribution contracts. Cost of goods sold
also includes direct and certain indirect labor, material and overhead costs
associated with our Products & Healthcare Services segment. There is no cost of
goods sold associated with our fee-for-service arrangements. Cost of goods sold
compared to prior year reflects changes in sales activity, including sales mix,
and accelerating inflationary pressures.
Gross margin.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Gross margin $ 373,448 $ 442,751 $ (69,303) (15.7) %
As a % of net revenue 15.52 % 19.03 %
Gross margin decrease in the three months ended March 31, 2022 was driven by
market dynamics including timing of glove price and cost changes in the prior
year, accelerating inflationary pressures and sales mix, partially offset by
revenue growth. Foreign currency translation had an unfavorable impact on gross
margin of $4.0 million for the three months ended March 31, 2022 as compared to
the prior year.
Operating expenses.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Distribution, selling and administrative
expenses $ 279,740 $ 292,701 $ (12,961) (4.4) %
As a % of net revenue 11.62 % 12.58 %
Acquisition-related and exit and realignment
charges $ 33,548 $ 5,963 $ 27,585 462.6 %
Other operating income, net $ (899) $ (2,605) $ 1,706 65.5 %
Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services and all costs associated with our fee-for-service arrangements. Shipping and handling costs are primarily included in DS&A expenses and include costs to store, move, and prepare products for shipment,
22
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as well as costs to deliver products to customers. Overall DS&A expenses were
affected by changes in accrued incentive compensation, teammate benefits,
charitable contributions, and operational efficiencies, partially offset by
higher volume to support revenue growth and accelerating inflationary pressures
for the three months ended March 31, 2022 . DS&A expenses also included an
favorable impact for foreign currency translation of $0.9 million for the three
months ended March 31, 2022 .
Acquisition-related charges were $31.9 million for the three months ended March
31, 2022 as compared to no acquisition-related charges for the three months
ended March 31, 2021 . Acquisition-related costs in 2022 consisted primarily of
costs related to the Apria acquisition. Exit and realignment charges were $1.7
million for the three months ended March 31, 2022 , which consisted primarily of
severance and other charges associated with the reorganization of our segments.
Exit and realignment charges were $6.0 million for the three months ended March
31, 2021 , which consisted primarily of an increase in reserves associated with
certain retained assets of Fusion5 , IT restructuring charges and other costs
related to the reorganization of the U.S. commercial, operations and executive
teams.
The change in other operating income, net for the three months ended March 31,
2022 includes the impact of foreign currency transaction losses, as compared to
foreign currency transaction gains for the three months ended March 31, 2021 .
Interest expense, net.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Interest expense, net $ 12,019 $ 13,672 $ (1,653) (12.1) %
Effective interest rate 4.65 % 5.45 %
Interest expense, net and the effective interest rate for the three months ended
March 31, 2022 decreased primarily due to lower interest rates, partially offset
by the increase in debt associated with the Apria Acquisition on March 29, 2022 .
See Note 6 in Notes to Consolidated Financial Statements.
Loss on extinguishment of debt.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Loss on extinguishment of debt $ - $ 40,433 $ (40,433) (100.0) %
Loss on extinguishment of debt for the three months ended
Other expense, net.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Other expense, net $ 783 $ 569 $ 214 37.6 %
Other expense, net for the three months ended
Income taxes.
Three Months Ended
March 31, Change
(Dollars in thousands) 2022 2021 $ %
Income tax provision $ 8,978 $ 22,429 $ (13,451) (60.0) %
Effective tax rate 18.6 % 24.4 %
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-------------------------------------------------------------------------------- Table of Contents The change in the effective tax rate for the three months endedMarch 31, 2022 compared to the same period in 2021 resulted primarily from the mixture of income and losses in jurisdictions in which we operate and the incremental income tax benefit associated with the vesting of restricted stock recorded in the first quarter of 2022.
Financial Condition, Liquidity and Capital Resources
Financial condition. We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory days. We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our revolving credit facility or receivables securitization program, or a combination thereof of approximately$27 million . The majority of our cash and cash equivalents are held in cash depository accounts with major banks inthe United States ,Europe , andAsia . 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. March 31, December 31, Change (Dollars in thousands) 2022 2021 $ % Cash and cash equivalents$ 211,298 $ 55,712 $ 155,586 279.3 % Accounts receivable, net of allowances$ 775,779 $ 681,564 $ 94,215 13.8 % Consolidated DSO (1) 24.9 24.6 Merchandise inventories$ 1,447,383 $ 1,495,972 $ (48,589) (3.2) % Inventory days (2) 63.7 64.7 Accounts payable$ 1,115,400 $ 1,001,959 $ 113,441 11.3 % (1) Based on period end accounts receivable and net revenue for the quarters endedMarch 31, 2022 andDecember 31, 2021 , excluding the impact of the Apria Acquisition. (2) Based on period end merchandise inventories and cost of goods sold for the quarters endedMarch 31, 2022 andDecember 31, 2021 , excluding the impact of the Apria Acquisition.
Liquidity and capital expenditures. The following table summarizes our
consolidated statements of cash flows for the three months ended
(Dollars in thousands) 2022 2021 Net cash provided by (used for): Operating activities$ 79,699 $ 25,423 Investing activities (1,587,236) (6,619) Financing activities 1,664,194 (80,394) Effect of exchange rate changes (669) (2,139) Net increase (decrease) in cash, cash equivalents and restricted cash$ 155,988 $ (63,729)
Cash provided by operating activities in the first three months of 2022 and 2021 reflected cash generated by net income along with changes in working capital.
Cash used for investing activities in the first three months of 2022 included cash paid for the acquisition of Apria of$1.6 billion and capital expenditures of$11.0 million for our strategic and operational efficiency initiatives associated with property and equipment and capitalized software. Cash used for investing activities in the first three months of 2021 included capital expenditures of$6.6 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in theAmericas , and capitalized software. Cash used for financing activities in the first three months of 2022 included borrowings under our revolving credit facility, net and accounts receivable securitization program of$41.7 million compared to net repayments of$21.6 million for the same period of 2021. We also had proceeds from borrowings of$1.7 billion related to the 2030 Unsecured Notes, Term Loan A, and Term Loan B for the first three months of 2022, compared to$500 million related to the 2029 Unsecured Notes for the first three months of 2021. We also paid$33.7 million in financing costs in the first three months of 2022, as compared to$11.7 million for the same period of 2021. Payments for taxes related to the vesting of restricted stock awards were$35.7 million and$8.0 million for the first three months of 2022 and 2021, which are included in Other, net. Financing activities in the first three months of 2021 included repayments of$523 million on our previous Term Loan A-2 and previous Term Loan B. In addition, we paid$15.4 million to terminate the remaining$300 million in notional value of interest rate swaps during the first three months of 2021. 24
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Capital resources. Our sources of liquidity include cash and cash equivalents, a revolving credit facility with an administrative and collateral agent and a syndicate of financial institutions, as lenders (the Revolving Credit Agreement), and a receivables securitization program. The Revolving Credit Agreement provides a revolving borrowing capacity of$450 million . We have$1.1 billion in outstanding term loans under a term loan credit agreement (the Credit Agreement). The interest rate on our revolving credit facility is based on a spread over a benchmark rate (as described in the Revolving Credit Agreement). The Revolving Credit Agreement matures inMarch 2026 . The interest rate on the Term Loan A facility (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 facility (Term Loan B) is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A will mature inMarch 2027 and the Term Loan B will mature inMarch 2029 . AtMarch 31, 2022 andDecember 31, 2021 , we had borrowings of$11.7 million and letters of credit of$28.0 million . AtDecember 31, 2021 , we had no borrowings and letters of credit of$9.4 million outstanding under our credit agreements. AtMarch 31, 2022 andDecember 31, 2021 , we had$410 million and$291 million , available for borrowing. We also had letters of credit and bank guarantees, which were issued outside of the Revolving Credit Facility for$2.1 million and$2.2 million as ofMarch 31, 2022 andDecember 31, 2021 , which supports certain leased facilities as well as other normal business activities inthe United States andEurope . We entered into a Security and Pledge Agreement (the Security Agreement), datedMarch 10, 2021 and amendedMarch 29, 2022 , pursuant to which we granted collateral on behalf of the holders of the 2024 Notes, and the parties secured under the credit agreements (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Credit Parties (as defined) in the Credit Parties' present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions. OnMarch 29, 2022 , we entered into an amendment to our accounts receivable securitization program (the Receivables Financing Agreement). Pursuant to the amended Receivables Financing Agreement, the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed$450 million outstanding at any time. 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). Under the Receivables Financing Agreement, certain of our subsidiaries sell substantially all of their accounts receivable balances to our wholly owned special purpose entity,O&M Funding LLC . The Receivables Financing Agreement matures inMarch 2025 . The Revolving Credit Agreement, Term Loan A, Term Loan B, Receivables Financing Agreement, 2024 Notes, 2029 Unsecured Notes, and 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 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 atMarch 31, 2022 . InMay 2020 , we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to$50.0 million . We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As ofMarch 31, 2022 no shares were issued and$50.0 million of common stock remained available under the at-the-market equity financing program. We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt's terms). Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction. We believe available financing sources, including cash generated by operating activities and borrowings under the Revolving Credit Agreement and Receivables Financing Agreement, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, debt repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing. We earn a portion of our operating income in foreign jurisdictions outsidethe United States . Our cash and cash equivalents held by our foreign subsidiaries totaled$51.1 million and$26.9 million atMarch 31, 2022 andDecember 31, 2021 . We continue to remain permanently reinvested in our foreign subsidiaries, with the exception of a subsidiary inThailand . We 25
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have no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiary located inThailand as ofMarch 31, 2022 . As such, we have recorded withholding tax liabilities that would be incurred upon future distribution to theU.S. There are no unrecognized deferred taxes as there is no outside basis difference unrelated to unremitted earnings forThailand . We will continue to evaluate our foreign earnings repatriation policy in 2022 for all our foreign subsidiaries.
Guarantor and Collateral Group Summarized Financial Information
We are providing the following information in compliance with Rule 13-01, "Financial Disclosures about Guarantors and Issuers ofGuaranteed Securities " and Rule 13-02 of Regulation S-X, of with respect to our 2024 Notes. See Note 6 of the accompanying consolidated financial statements for additional information regarding the terms of the 2024 Notes. The following tables present summarized financial information forOwens & Minor, Inc. and the guarantors ofOwens & Minor, Inc.'s 2024 Notes (together, "theGuarantor Group "), on a combined basis with intercompany balances and transactions between entities in theGuarantor Group eliminated. The guarantor subsidiaries are 100% owned byOwens & Minor, Inc. Separate financial statements of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several. Summarized financial information of theGuarantor Group is as follows: Summarized Consolidated Statement of Operations - Guarantor Group Three Months Ended (Dollars in thousands) March 31, 2022 Net revenue(1)$ 2,320,785 Gross margin 326,742 Operating income 31,159 Net income 20,742
(1)Includes
Summarized Consolidated Balance Sheets -
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