What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-03 · 113 added, 146 removed, 153 unchanged (63% of the section changed)

5 unchanged sentences

Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading global healthcare solutions company.

On June 18, 2020 (the Divestiture Date), we completed the divestiture of our European logistics business, Movianto (the Divestiture), as well as certain support functions in our Dublin, Ireland office, to Walden Group SAS (the Buyer) and EHDH (as Buyer’s guarantor) for cash consideration of $133 million.

The Divestiture provides us with a greater ability to focus on and invest in our di fferentiated products, services and U.S.

distribution businesses.

As a result of the Divestiture, the results of operations from our Movianto business are reported as “Loss from discontinued operations, net of tax” for the three and nine months ended September 30, 2020.

See Note 3, “Discontinued Operations,” of the Notes to Consolidated Financial Statements for further information.

Unless otherwise indicated, the following information relates to continuing operations.

Income from continuing operations per diluted share was $0.58 and $2.38 for the three and nine months ended September 30, 2021 as compared to $0.76 and $0.61 for the three and nine months ended September 30, 2020.

Global Solutions segment operating income was $20.4 million and $47.7 million for the three and nine months ended September 30, 2021, compared to $11.0 million and $8.5 million for the three and nine months ended September 30, 2020.

These increases were a

result of strong revenue growth, leveraging our fixed costs, and operating efficiencies.

Global Products segment operating income was $51.3 million and $310 million for the three and nine months ended September 30, 2021, compared to $89.9 million and $160 million for the three and nine months ended September 30, 2020.

The decrease for the three months ended September 30, 2021 was primarily the result of the timing of glove cost pass-through, accelerating inflationary pressures, including commodities, transportation, and labor, partially offset by revenue growth.

The increase for the nine months ended September 30, 2021 was a result of higher personal protective equipment (PPE) sales, favorable timing of cost pass-through on gloves, productivity initiatives, favorable product mix, and improved fixed cost leverage, partially offset by higher commodity prices and rising transportation costs, compared to the prior year.

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 in the United States.

Beginning with the quarter ended March 31, 2022, we now report financial results using this two segment structure and have recast prior year segment results on the same basis.

On March 29, 2022 (the Acquisition Date), we completed the acquisition of 100% of Apria, Inc.

(Apria) pursuant to the Agreement and Plan of Merger (Apria Acquisition) dated January 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 in the 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 ended March 31, 2022 as compared to $0.98 for the three months ended March 31, 2021.

Products & Healthcare Services segment operating income was $89.1 million for the three months ended March 31, 2022, compared to $150.4 million for the three months ended March 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 ended March 31, 2022, compared to $12.3 million for the three months ended March 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 the related Delta variant, on all aspects of our business, including how it impacts our customers, teammates, suppliers, vendors and distribution channels.

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.

Revenue for the nine months ended September 30, 2021 of $7.3 billion continues to be impacted by COVID-19 and includes the effective response to the ongoing recovery of elective procedures, higher sales of PPE, and pass-through of elevated glove costs.

Operating income for the nine months ended September 30, 2021 also benefited from improved productivity and increased manufacturing output related to PPE, favorable product mix and operating efficiencies.

In 2020, we expanded our PPE production operations and have taken measures to increase and improve our production such as retooling existing equipment, installing and optimizing new production lines and ramping up our new non-woven fabric machinery.

We expect that we will continue servicing our customers' needs related to the heightened demand for our PPE as a result of various factors, including the implementation of new regulations and healthcare protocols calling for increased use of PPE, healthcare professional preference for medical grade PPE, stockpile PPE demand and the creation of new channels for PPE demand in healthcare, non-healthcare and international markets.

In March 2020, under the Defense Production Act (DPA), we were awarded a contract with the U.S.

Department of Health and Human Services to produce N-95 respirator masks in an effort to replenish the Strategic National Stockpile.

In April 2020, also under the DPA, the U.S.

Department of Defense initiated a technology investment agreement with us involving up to $30.0 million of anticipated funding of assets to expand capacity to supply N-95 respirator masks.

Through September 30, 2021, substantially all of the anticipated funding had been expended and reimbursed in accordance with this arrangement.

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.

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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 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.

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

In June 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.

The Food 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.

Results of Operations

Three Months Ended

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Global Solutions $ 2,022,919 $ 1,865,182 $ 157,737 8.5 %

Global Products 679,067 473,797 205,270 43.3 %

Inter-segment (199,811) (151,051) (48,760) (32.3) %

Net revenue $ 2,502,175 $ 2,187,928 $ 314,247 14.4 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

Global Solutions $ 5,850,007 $ 5,261,415 $ 588,592 11.2 %

Global Products 2,026,385 1,235,391 790,994 64.0 %

Inter-segment (558,223) (378,466) (179,757) (47.5) %

Products & Healthcare Services $ 2,134,041 $ 2,109,445 $ 24,596 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 change in net revenue for the three and nine months ended September 30, 2021 reflected our market share gains, the effective response to the ongoing recovery of elective procedures, higher sales of surgical & infection prevention (S&IP) products, pass-through of elevated glove costs, as well as continued strong performance in our Patient Direct business.

Foreign currency translation had a favorable impact on net revenue of $1.8 million and $23.5 million for the three and nine months ended September 30, 2021 as compared to the prior year.

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

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Cost of goods sold $ 2,173,336 $ 1,843,589 $ 329,747 17.9 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

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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 Global Products segment.

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.

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Three Months Ended

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Gross margin $ 328,839 $ 344,339 $ (15,500) (4.5) %

As a % of net revenue 13.14 % 15.74 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

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As a % of net revenue 15.52 % 19.03 %

Gross margin decrease in the three months ended September 30, 2021 was driven by the timing of glove cost pass-through and accelerating inflationary pressures, partially offset by revenue growth.

Gross margin increase in the nine months ended September 30, 2021 was driven by revenue growth, market dynamics including timing of glove price and cost changes, an overall improved sales mix and operating efficiencies, partially offset by accelerating inflationary pressures.

currency translation had an unfavorable impact on gross margin of $6.2 million and $0.8 million for the three and nine months ended September 30, 2021 as compared to the prior year.

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

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Distribution, selling and administrative expenses $ 262,457 $ 262,538 $ (81) — %

As a % of net revenue 10.49 % 12.00 %

Acquisition-related and exit and realignment charges $ 6,380 $ 6,382 $ (2) — %

Other operating income, net $ (2,873) $ (134) $ (2,739) (2,044.0) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

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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, as well as costs to deliver products to customers.

Overall DS&A expenses were affected by revenue growth, changes in incentive compensation, teammate benefits, accelerating inflationary pressures, and operational efficiencies for the three and nine months ended September 30, 2021.

In addition, overall DS&A expenses were affected by charitable contributions for the nine months ended September 30, 2021.

DS&A expenses also included an unfavorable impact for foreign currency translation of $0.1 million and $2.3 million for the three and nine months ended September 30, 2021.

Acquisition-related and exit and realignment charges presented in our consolidated statements of operations of $6.4 million and $21.0 million for the three and nine months ended September 30, 2021 consisted primarily of wind-down costs related to Fusion5, leadership reorganization costs, IT restructuring charges, and other costs related to the reorganization of the U.S.

Acquisition-related charges within acquisition-related and exit and realignment charges presented in our consolidated statements of operations were $0.8 million and $8.9 million for the three and nine months ended September 30, 2020, which consisted primarily of transition costs for the Halyard acquisition.

Exit and realignment charges were $5.6 million and $9.6 million for the three and nine months ended September 30, 2020 and consisted primarily of severance from reduction in force, post divestiture costs related to the Movianto business, and other costs related to the reorganization of the U.S.

Shipping and handling costs are primarily included in DS&A expenses and include costs to store, move, and prepare products for shipment,

as well as costs to deliver products to customers.

Overall DS&A expenses were affected by 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 and nine months ended September 30, 2021 includes the impact of higher foreign currency transaction gains as compared to the prior year.

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

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Interest expense, net $ 11,572 $ 20,975 $ (9,403) (44.8) %

Effective interest rate 4.17 % 5.64 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

1 unchanged sentence

Effective interest rate 4.65 % 5.45 %

Interest expense, net and the effective interest rate fo r the three and nine months ended September 30, 2021 decreased primarily due to a reduction of debt and lower interest rates.

Interest expense, net and the effective interest rate fo r 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.

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Three Months Ended

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Loss on extinguishment of debt $ — $ 308 $ (308) (100.0) %

Nine Months Ended

September 30, Change

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 nine months ended September 30, 2021 includes the write-off of deferred financing costs and third party fees associated with the debt financing in March 2021 of $15.

Loss on extinguishment of debt for the three months ended March 31, 2021 includes the write-off of deferred financing costs and third party fees associated with the debt financing in March 2021 of $15.

3 million and amounts reclassified from accumulated other comprehensive loss as a result of the termination of our interest rate swaps of $25.1 million.

Loss on extinguishment of debt for the three and nine months ended September 30, 2020 primarily includes the write-off of deferred financing costs and third party fees, offset by the gain on extinguishment of debt related to the partial repurchase of our 2021 and 2024 Notes.

Other expense (income), net .

Other expense, net .

Three Months Ended

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Other expense (income), net $ 799 $ 785 $ 14 1.8 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

Other expense (income), net $ 2,397 $ (1,193) $ 3,590 300.9 %

Other expense (income), net for the three and nine months ended September 30, 2021 and 2020 represents interest cost and net actuarial losses related to our retirement plans.

Other expense (income), net for the nine months ended September 30, 2020 includes a gain from the surrender of company-owned life insurance policies.

Other expense, net $ 783 $ 569 $ 214 37.6 %

Other expense, net for the three months ended March 31, 2022 and 2021 represents interest cost and net actuarial losses related to our retirement plans.

Income taxes.

Three Months Ended

September 30, Change

(Dollars in thousands) 2021 2020 $ %

Income tax provision $ 6,375 $ 7,404 $ (1,029) (13.9) %

Effective tax rate 12.6 % 13.8 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2022 2021 $ %

1 unchanged sentence

Effective tax rate 18.6 % 24.4 %

The change in the effective tax rate for the three and nine months ended September 30, 2021 compared to the same periods in 2020 resulted primarily from an income tax benefit recorded in the first quarter of 2020 associated with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and in the third quarter of 2021 associated with the 2017 Tax Cuts and Jobs Act, 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.

The change in the effective tax rate for the three months ended March 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

4 unchanged sentences

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.

September 30, 2021 December 31, 2020 Change

2022 December 31, 2021 Change

(Dollars in thousands) $ %

5 unchanged sentences

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 ended September 30, 2021 and December 31, 2020

(2) Based on period end merchandise inventories and cost of goods sold for the quarters ended September 30, 2021 and December 31, 2020

(1) Based on period end accounts receivable and net revenue for the quarters ended March 31, 2022 and December 31, 2021, excluding the impact of the Apria Acquisition.

(2) Based on period end merchandise inventories and cost of goods sold for the quarters ended March 31, 2022 and December 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 nine months ended September 30, 2021 and 2020, which relates to continuing operations and discontinued operations:

The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 2022 and 2021:

(Dollars in thousands) 2022 2021

4 unchanged sentences

Effect of exchange rate changes (669) (2,139)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (78,424) $ 142,792

Cash provided by operating activities in the first nine months of 2021 and 2020 reflected fluctuations in net income along with changes in working capital.

Cash used for investing activities in the first nine months of 2021 and 2020 included capital expenditures of $32.6 million and $26.4 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas, and capitalized software.

Cash provided by investing activities in the first nine months of 2020 included cash consideration received of $133 million from the sale of Movianto and proceeds of $6.0 million from the surrender of company-owned life insurance policies.

C ash used for financing activities in the first nine months of 2021 included dividend payments of $0.5 million and net repayments of $90.9 million under our revolving credit facility, compared to $0.5 million and $108 million for the same period of 2020.

We also had proceeds from borrowings of $575 million related to the 2029 Unsecured Notes and Accounts Receivable Securitization Program for the first nine months of 2021, compared to $150 million related to the Accounts Receivable Securitization Program for the first nine months of 2020.

Financing activities also included repayments of $553 million for the first nine months of 2021 on our term loans, 2021 and 2024 Notes, and Accounts Receivable Securitization Program, compared to $270 million in the same period of 2020 on our term loans and 2021 and 2024 Notes.

We used $83.3 million of cash to repurchase $87.9 million aggregate principal amount of the 2021 and 2024 Notes during the first nine months of 2020.

We also paid $13.9 million in financing costs in the first nine months of 2021 , as compared to $10.4 million in financing costs for the same period of 2020.

In addition, we paid $15.4 million to terminate the remaining $300 million in notional value of interest rate swaps during the first nine months of 2021.

Payments for taxes related to the vesting of restricted stock awards were $19.3 million and $3.6 million for the first nine months of 2021 and 2020, which are included in Other, net.

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 the Americas, and capitalized software.

C ash 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.

Capital resources.

Our sources of liquidity include cash and cash equivalents, a revolving credit facility under our Credit Agreement with Bank of America, N.A, as an administrative agent and collateral agent, and a syndicate of financial institutions, as lenders (the Credit Agreement), and the Receivables Securitization Program.

The Credit Agreement provides a revolving borrowing capacity of $300 million.

The interest rate on our revolving credit facility is based on a spread over a benchmark rate (as described in the Credit Agreement) .

The Credit Agreement matures in March 2026.

At September 30, 2021 and December 31, 2020, we had borrowings of $12.3 million and $103 million, and letters of credit of $9.4 million and $13.9 million outstanding under our credit agreements.

At September 30, 2021 and December 31, 2020, we had $278 million and $283 million, available for borrowing.

We also had letters of credit and bank guarantees outstanding for $2.2 million and $1.6 million as of September 30, 2021 and December 31, 2020, which supports certain leased facilities as well as other normal business activities in the United States and Europe.

These letters of credit and guarantees were issued outside of the revolving credit facility.

We entered into a Security and Pledge Agreement (the Security Agreement), dated March 10, 2021, pursuant to which we granted collateral on behalf of the holders of the 2024 Notes, and the parties secured under the Credit Agreement (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.

On March 10, 2021, we entered into an amendment to our accounts receivable securitization program (the Receivables Securitization Program).

Pursuant to the amended Receivables Securitization Program, 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 Securitization Program is based on a spread over a benchmark rate (as described in the Third Amendment to the Receivables Financing Agreement).

Under the Receivables Securitization Program, 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 Securitization Program matures in March 2024.

The Credit Agreement, Receivables Securitization Program, 2024 Notes and 2029 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 Agreement also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture.

We were in compliance with our debt covenants at September 30, 2021.

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 in March 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 in March 2027 and the Term Loan B will mature in March 2029.

At March 31, 2022 and December 31, 2021, we had borrowings of $11.7 million and letters of credit of $28.0 million.

At December 31, 2021, we had no borrowings and letters of credit of $9.4 million outstanding under our credit agreements.

At March 31, 2022 and December 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 of March 31, 2022 and December 31, 2021, which supports certain leased facilities as well as other normal business activities in the United States and Europe.

We entered into a Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 and amended March 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.

On March 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 in March 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 at March 31, 2022.

In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million.

We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes.

As of September 30, 2021 no shares were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.

As of March 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.

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We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.

The third quarter dividend of $0.0025 per share was paid in September 2021.

The payment of future dividends remains within the discretion of the Board of Directors and will depend upon our results of operations, financial condition, capital requirements, current and future limitations under our Credit Agreement and other factors.

We believe available financing sources, including cash generated by operating activities and borrowings under the Credit Agreement and Receivables Securitization Program, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, payments of quarterly cash dividends, debt repurchases and other cash requirements.

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 outside the United States.

Our cash and cash equivalents held by our foreign subsidiaries totaled $28.7 million and $72.0 million at September 30, 2021 and December 31, 2020.

Our cash and cash equivalents held by our foreign subsidiaries totaled $51.1 million and $26.9 million at March 31, 2022 and December 31, 2021.

We continue to remain permanently reinvested in our foreign subsidiaries, with the exception of a subsidiary in Thailand.

We have no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiary located in Thailand as of September 30, 2021.

have no specific plans to indefinitely reinvest the unremitted earnings of our foreign subsidiary located in Thailand as of March 31, 2022.

As such, we have recorded withholding tax liabilities that would be incurred upon future distribution to the U.S.

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Summarized financial information of the Guarantor Group is as follows:

Summarized Consolidated Statement of Operations - Guarantor Group Nine Months Ended September 30, 2021

Summarized Consolidated Statement of Operations - Guarantor Group Three Months Ended March 31, 2022

(Dollars in thousands)

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Operating income 31,159

Income from continuing operations, net of tax 158,735

Net income 20,742

(1) Includes $297 million in sales to non-guarantor subsidiaries for the nine months ended September 30, 2021.

Summarized Consolidated Balance Sheets - Guarantor Group September 30, 2021 December 31, 2020

(1) Includes $62 million in sales to non-guarantor subsidiaries for the three months ended March 31, 2022.

Summarized Consolidated Balance Sheets - Guarantor Group March 31, 2022 December 31, 2021

(Dollars in thousands)

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Summarized financial information of the Collateral Group is as follows:

Summarized Consolidated Balance Sheets - Collateral Group September 30, 2021 December 31, 2020

Summarized Consolidated Balance Sheets - Collateral Group March 31, 2022 December 31, 2021

(Dollars in thousands)

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Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2020 and Note 14 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on September 30, 2021.

For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2021 and Note 15 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on March 31, 2022.

Forward-looking Statements

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• competitive pressures in the marketplace, including intense pricing pressure;

• our ability to retain existing and attract new customers in a market characterized by significant customer consolidation and intense cost-containment initiatives;

• our ability to retain existing and attract new customers in a market characterized by consolidation among significant customers, health insurers and/or other industry participants, and intense cost-containment initiatives;

• our dependence on sales to certain customers or the loss or material reduction in purchases by key customers;

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• our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, changes in regulatory conditions, deteriorating economic conditions, adverse tax consequences, and other risks of operating in international markets;

• the risk that problems may arise in successfully integrating the businesses of Apria and the Company, which may result in the combined company not operating as effectively and efficiently as expected and the risk that the combined company may be unable to achieve the anticipated synergies or cost savings, or it may take longer than expected to achieve those synergies;

• the effect of our acquisition of Apria and any developments relating thereto on our relationships with customers, suppliers and other third parties, as well as our operating results and business;

• uncertainties related to and our ability to adapt to changes in government regulations, including healthcare laws and regulations;

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• 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;

• we depend on reimbursements by payors, which could lead to delays and uncertainties in the reimbursement process;

• the home healthcare industry is highly competitive and fragmented, with limited barriers to entry which may make it susceptible to vertical integration by manufacturers, payors, providers (such as hospital systems) or disruptive new entrants;

• the risk that a decline in business volume or profitability could result in an impairment of goodwill or other long-lived assets;

• our ability to timely or adequately respond to technological advances in the medical supply industry;

• our ability to timely or adequately respond to technological advances in the medical supply and home healthcare industries and/or product and therapy innovations may make the services we currently provide obsolete or less competitive;

• our failure to adequately insure against losses, including from substantial claims and litigation, could have an adverse impact on our operations, financial condition, or prospects;

• recalls of any of our products, either voluntarily or at the direction of the Food and Drug Administration or another governmental authority, or safety risks or the discovery of serious safety issues with our products;

• our capitation arrangements may prove unprofitable if actual utilization rates exceed our assumptions;

• reductions in Medicare, Medicaid and commercial payor reimbursement rates could have a material adverse effect on our results of operations and financial condition;

• the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims;

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• our ability to successfully implement the expense reduction and productivity and efficiency initiatives;

• our ability to continue to comply with the terms and conditions of Byram Healthcare’s Corporate Integrity Agreement;

• our ability to continue to comply with the terms and conditions of Apria’s Corporate Integrity Agreement;

• 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, 2020, our Form 10-Q for the three months ended March 31, 2021, and our Form 10-Q for the three and six months ended June 30, 2021.

Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021.

We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis