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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-23 · 154 added, 148 removed, 149 unchanged (67% of the section changed)

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The discussion and analysis presented below refers to, and should be read in conjunction with, the consolidated financial statements and accompanying notes included in Item 8 of Part II of this Annual Report on Form 10-K.

Owens & Minor, Inc., along with its subsidiaries, (we, us, our or the Company) is a global healthcare solutions company that incorporates product manufacturing, distribution support and innovative technology services to deliver significant and sustained value across the breadth of the industry – from acute care to patients in their home.

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 differentiated products, services and U.S.

distribution businesses.

The net proceeds were used to repurchase our 2021 Notes (see Note 10, “Debt”).

We recorded a loss of $65.5 million in connection with the Divestiture for the year ended December 31, 2020.

As a result of the Divestiture, the results of operations from our Movianto business are reported as “Loss from discontinued operations, net of tax” through the Divestiture Date.

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.

On January 7, 2022, we entered into an Agreement and Plan of Merger to acquire Apria, Inc.

(Apria) for $37.50 in cash per share of common stock, representing an equity value of approximately $1.45 billion, as well as the assumption of debt and cash for a total transaction value of approximately $1.6 billion.

Apria is a provider of integrated home healthcare equipment and related services in the United States.

The Agreement and Plan of Merger contains certain termination rights for the Company and Apria.

In the event that Apria terminates the contract for a superior proposal, Apria will be required to pay the Company a termination fee of $42.0 million.

The transaction, which has been approved by the board of directors of both companies, is subject to customary closing conditions, including the Hart Scott Rodino Act and other regulatory approvals and the approval of Apria’s stockholders, and is expected to close during the first half of 2022.

Income from continuing operations per diluted share was $2.94 for the year ended December 31, 2021, an increase of $1.55 compared to 2020.

Global Solutions segment operating income was $66.6 million for the year ended December 31, 2021, compared to $30.9 million for 2020.

The increase was a result of strong revenue growth, leveraging our fixed costs, and operating efficiencies, partially offset by inflationary pressures later in the year.

Global Products segment operating income was $372 million for the year ended December 31, 2021, compared to $260 million for 2020.

The increase 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.

Owens & Minor, Inc., along with its subsidiaries, is a global healthcare solutions company.

Our business has two distinct segments:

Products & Healthcare Services and Patient Direct.

Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations.

Patient Direct expands our business along the continuum of care through delivery of disposable medical supplies sold directly to patients and home health agencies and is a leading provider of integrated home healthcare equipment and related services in the United States.

Beginning in 2022, we have reported financial results using this two segment structure and have recast our prior period segment results on the sa me basis.

Net income per diluted share was $0.29 for the year ended December 31, 2022 as compared to $2.94 for the year ended December 31, 2021.

Products & Healthcare Services segment operating income was $175 million for the year ended December 31, 2022, compared to $384 million for the year ended December 31, 2021.

The decrease reflected overall reduced hospital demand, including reliance on stockpiles, and price changes, particularly for gloves , and headwinds created by macroeconomic conditions, including inflationary pressures, supply chain issues, and rising interest rates, partially offset by productivity gains derived from operating efficiencies, and changes in accrued incentive compensation.

Patient Direct segment operating income was $194 million for the year ended December 31, 2022, compared to $58.0 million for the year ended December 31, 2021.

The increase was primarily the result of the inclusion of Apria in the Patient Direct segment since March 29, 2022 (the Acquisition Date), strong revenue growth in our Byram business, leveraging our fixed costs, and operating efficiencies, partially offset by inflationary pressures.

Net income per diluted share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.16 for the year ended December 31, 2022.

Segment operating incomes exclude adjustments noted in Note 20, "Segments", in Notes to Consolidated Financial Statements, including a $92.3 million (approximately $69.6 million, net of tax) inventory valuation adjustment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

Acquisition of Apria

On the Acquisition Date, we completed the Apria Acquisition, in which we acquired 100% of Apria in exchange for approximately $1.7 billion, net of $144 million of cash acquired.

The purchase was funded with a combination of debt and cash on hand.

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.

COVID-19 Update

We are closely monitoring the impact of the 2019 novel coronavirus (COVID-19), including the related Delta and Omicron 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 year ended December 31, 2021 of $9.8 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 year ended December 31, 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 December 31, 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.

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 within Asia.

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.

We continue to closely monitor the impact of COVID-19, including its variants and sub-variants, on all aspects of our business, including 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 and may take further actions that may alter our business operations.

We are unable to predict the timing and the full impact that COVID-19 and any new pandemic(s) will have on our future operating results, financial position and cash flows due to numerous varia bles and continued uncertainties.

Transportation and business operation restrictions arising from virus containment efforts of governments around the world have impacted our operations in certain locations, including within Asia.

Essential activity exceptions from these restrictions have allowed us to continue to operate, but virus containment efforts have created supply chain challenges resulting in additional direct costs.

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.

During the COVID-19 pandemic, customers, state

agencies and the federal government purchased a significant amount of PPE to serve patients, and to build stockpiles of product.

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.

Our response to the COVID-19 pandemic was to manufacture and source as much PPE products as possible to enable front-line healthcare workers to perform their duties in the safest environment as possible, and to satisfy the U.S.

government’s purchase requirements.

Our efforts included a significant increase in PPE production in our manufacturing plants through expanding our production lines, hiring additional plant teammates, and increasing labor shifts.

Furthermore, we sourced a greater level of PPE from our existing third-party suppliers than we historically have.

One of the financial impacts from our response to this unprecedented crisis was an inventory build in the Products & Healthcare Services segment through the end of 2022.

During 2022, overall reduced hospital demand and hospital reliance on stockpiles contributed to lower demand for PPE as compared to 2021.

As of December 31, 2022, we had inventory valuation allowances of $128 million, inclusive of an inventory valuation adjustment of $92.3 million recorded in the three months ended December 31, 2022, primarily associated with an increase in the amount of excess PPE inventory.

Philips Respironics Recall

In June 2021, one of Apria's suppliers, Philips Respironics, announced a voluntary recall for continuous and non-continuous ventilators (certain CPAP, BiLevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices.

The Food and Drug Administration (FDA) has since identified this as a Class I recall, the most serious category of recall.

Philips Respironics issued a subsequent voluntary recall in December 2022 (together with the June 2021 recall, the Recall), related to deficiencies in repairs made to certain of the ventilators that had been recalled in June 2021.

Because we distribute these products and provide related home respiratory services and, in part, due to the substantial number of impacted devices, we have devoted, and will likely continue to devote, substantial time and resources to coordinating Recall-related activity and to supporting our home healthcare patients’ needs.

The Recall has caused us, and may continue to cause us, to incur significant costs, some or all of which may not be recoverable fro m the product manufacturer.

The Recall may also materially negatively affect our revenues and results of operations as a result of patients not using their impacted devices, current shortages in the availability of both replacement devices for impacted patients and new devices for new patients, patient hesitancy to use respiratory devices generally or other reasons.

We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the Recall.

While the equipment shortage in the industry has begun to ease for certain CPAP and BiLevel positive airway pressure devices, we do not know whether that will continue.

The Recall or other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.

Supplemental Financial Information

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Net revenue $ 9,955,475 $ 9,785,315 $ 8,480,177

Income (loss) from continuing operations $ 221,589 $ 88,074 $ (22,584)

Income from continuing operations $ 22,389 $ 221,589 $ 88,074

Per Common Share:

Income (loss) from continuing operations per share—basic $ 3.05 $ 1.39 $ (0.37)

Income (loss) from continuing operations per share—diluted $ 2.94 $ 1.39 $ (0.37)

Income from continuing operations per share—basic $ 0.30 $ 3.05 $ 1.39

Income from continuing operations per share—diluted $ 0.29 $ 2.94 $ 1.39

Cash dividends $ — $ 0.01 $ 0.01

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(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2022, 2021 and 2020.

The 2022 figure reflects the $92.3 million inventory valuation adjustment in our Products & Healthcare Services segment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Annual Report on Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of year-to-year comparisons between 2020 and 2019 are not included in this Annual Report on Form 10-K, but can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Annual Report on Form 10-K generally d iscusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of year-to-year comparisons between 2021 and 2020 can be found in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2021, which is incorporated by reference herein.

2022 compared to 2021

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(Dollars in thousands) 2022 2021 $ %

Global Solutions $ 7,860,475 $ 7,212,011 $ 648,464 9.0 %

Global Products 2,655,728 1,810,331 845,397 46.7 %

Inter-segment (730,888) (542,165) (188,723) (34.8) %

Products & Healthcare Services $ 7,898,397 $ 8,825,646 $ (927,249) (10.5) %

Patient Direct 2,057,078 959,669 1,097,409 114.4 %

Net revenue $ 9,955,475 $ 9,785,315 $ 170,160 1.7 %

The change in net revenue for the year ended December 31, 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 $19.5 million for the year ended December 31, 2021 as compared to the prior year.

The increase in net revenue in our Patient Direct segment for the year ended December 31, 2022 was driven by the acquisition of Apria on March 29, 2022 and continued strong performance in our Byram business.

The decrease in net revenue in our Products & Healthcare Services segment for the year ended December 31, 2022 reflected overall reduced hospital demand, including reliance on stockpiles and price changes, particularly for gloves.

Foreign currency translation had an unfavorable impact on net revenue of $43.5 million for the year ended December 31, 2022 as compared to the prior year.

Cost of goods sold.

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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 business.

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.

Cost of goods sold also includes direct and certain indirect labor, depreciation of certain property and equipment, product costs, and material and overhead costs.

Cost of goods sold compared to prior year reflects the inclusion of Apria since the Acquisition Date.

The decrease in cost of goods sold since the prior year was due to changes in sales activity, including product mix, partially offset by an inventory valuation adjustment in our Products & Healthcare Services segment primarily associated with PPE, inflationary pressures, and supply chain issues.

Gross margin.

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As a % of net revenue 18.35 % 15.46 %

Gross margin increase for the year ended December 31, 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.

Gross margin increas e for the year ended December 31, 2022 was driven by inclusion of Apria since the Acquisition Date and sales mix, partially offset by overall reduced hospital demand, including reliance on stockpiles, an inventory valuation adjustment in our Products & Healthcare Services segment primarily associated with PPE, price changes, particularly for gloves, inflationary pressures, and supply chain issues.

Foreign currency translation had an unfavorable impact on gross margin of $21.7 million for the year ended December 31, 2022 as compared to the prior year.

We value distribution inventory held in the United States under the LIFO method.

We value a portion of Products & Healthcare Services inventory held in the United States under the LIFO method.

Had inventory been valued under the first-in, first-out (FIFO) method, gross margin as a percentage of net revenue would have been 6 basis points higher in 2022 and 56 basis points higher in 2021.

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Acquisition-related and exit and realignment charges $ 55,022 $ 34,076 $ 20,946 61.5 %

Other operating (income) expense, net $ (6,191) $ (2,372) $ (3,819) (161.0) %

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 increased year over year primarily due to revenue growth, changes in salaries and incentive compensation, accelerating inflationary pressures, and charitable contributions, which were partially offset by operational efficiencies for the year ended December 31, 2021.

DS&A expenses also included an unfavorable impact for foreign currency translation of $1.8 million for the year ended December 31, 2021.

Acquisition-related charges were $3.0 million and $11.8 million for the years ended December 31, 2021 and 2020.

Amounts in 2021 consisted primarily of costs related to the pending Apria transaction.

Amounts in 2020 consisted primarily of transition costs for the Halyard acquisition.

Exit and realignment charges were $31.1 million and $25.9 million for the years ended December 31, 2021 and 2020.

Amounts in 2021 consisted of wind-down costs related to Fusion5, IT restructuring charges, costs associated with our strategic organizational realignment, and other items.

Amounts in 2020 were associated with severance from reduction in workforce, IT restructuring charges, post closing costs associated with the Movianto divestiture, costs associated with the sale of certain assets of Fusion5 and other costs related to the reorganization of the U.S.

commercial, operations and executive teams.

The change in other operating (income) expense, net for the year ended December 31, 2021 includes the impact of higher foreign currency transaction gains as compared to the prior year.

Other operating income, net $ (5,252) $ (6,191) $ 939 15.2 %

Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services.

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 and services to customers.

Overall DS&A expenses were affected by inclusion of Apria in our results since the Acquisition Date, and inflationary pressures for the year ended December 31, 2022, partially offset by operating efficiencies and productivity gains, and changes in accrued incentive compensation.

DS&A expenses also included a favorable impact for foreign currency translation of $5.7 million for the year ended December 31, 2022 as compared to the prior year.

Acquisition-related charges were $48.1 million for the year ended December 31, 2022 as compared to $3.0 million for the year ended December, 31, 2021.

Acquisition-related charges in 2022 and 2021 consisted primarily of costs related to the Apria Acquisition.

Exit and realignment charges were $6.9 million and $31.1 million for the years ended Decemb er 31, 2022 and 2021.

Amounts in 2022 consisted primarily of severance and other charges associated with the reorganization of the Products & Healthcare Services segment and wind-down costs related to Fusion5.

Amoun ts in 2021 consisted of wind-down costs related to Fusion5, IT restructuring charges, costs associated with our strategic organizational realignment, and other items.

We do not expect material additional costs in 2023 for activities that were initiated through December 31, 2022.

We expect material costs in 2023 for new actions taken in 2023.

The change in other operating income, net for the year ended December 31, 2022 includes the impact of foreign currency transaction losses, as compared to prior year gains.

Interest expense, net.

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Effective interest rate 5.70 % 4.61 %

Interest expense decreased year over year primarily due to a reduction in debt and lower interest rates, including the affect of our debt refinancing in March 2021.

Interest expense, net and the effective interest rate for the year ended December 31, 2022 increased primarily due to the increase in debt associated with the Apria Acquisition on March 29, 2022, along with rising market interest rates.

See Note 10 in Notes to Consolidated Financial Statements.

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Loss on extinguishment of debt for the year ended December 31, 2021 included 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 in 2020 primarily included a make-whole premium related to the extinguishment of our 2021 Notes, the write-off of deferred financing costs and third party fees, partially 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 .

For the years ended December 31, Change

(Dollars in thousands) 2022 2021 $ %

Other expense (income), net $ 3,196 $ (407) $ 3,603 885.3 %

Other expense (income), net in 2021 and 2020 represented interest cost and net actuarial losses related to our retirement plans.

Other expense (income), net in 2020 also includes a gain from the surrender of company-owned life insurance policies.

Other expense, net $ 3,131 $ 3,196 $ (65) (2.0) %

Other expense, net in 2022 and 2021 represented interest cost and net actuarial losses related to our retirement plans.

Income taxes.

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(Dollars in thousands) 2022 2021 $ %

Income tax provision $ 55,165 $ 21,834 $ 33,331 152.7 %

Income tax (benefit) provision $ (11,498) $ 55,165 $ (66,663) (120.8) %

Effective tax rate (105.6) % 19.9 %

The effective tax rates in 2021 and 2020 reflect an income tax benefit recorded in the first quarter of 2020 associated with the CARES Act and income tax benefits recorded in the third and fourth quarters of 2021 for Foreign Derived Intangible Income (FDII), 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 year ended December 31, 2022 compared to 2021 resulted primarily from changes in income and losses and a change in our foreign repatriation plans related to the indefinite reinvestment of earnings associated with a subsidiary in Thailand.

Financial Condition, Liquidity and Capital Resources

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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 $28 million.

The majority of our cash and cash equivalents are held in cash depository accounts with major banks in the United States, Europe, and Asia.

Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collection of accounts receivable, and payments to suppliers.

The increase in merchandise inventories is associated with inventories to support revenue growth and the increased cost of gloves.

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.

December 31, Change

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(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2022 and 2021.

Liquidity and capital expenditures.

The following table summarizes our consolidated statements of cash flows.

For the year ended December 31, 2020, cash flows relate to continuing operations and discontinued operations.

The following table summarizes our consolidated statements of cash flows for the year ended December 31, 2022 and 2021:

For the years ended December 31,

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Effect of exchange rate changes on cash, cash equivalents, and restricted cash (3,485) (3,540)

Net (decrease) increase in cash, cash equivalents and restricted cash $ (62,471) $ 49,819

Net increase (decrease) in cash, cash equivalents and restricted cash $ 14,150 $ (62,471)

Cash provided by operating activities in 2022 and 2021 reflected cash generated by net income along with changes in working capital.

Cash used for investing activities in 2021 and 2020 included capital expenditures of $49.7 million and $59.2 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas and Thailand, as well as capitalized software.

Cash provided by investing activities in 2020 also 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.

Cash used for financing activities in 2021 included dividend payments of $0.7 million and net repayments of $103.2 million under our revolving credit facility, compared to $0.6 million and $74.7 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 in 2021, compared to $155 million related to the Accounts Receivable Securitization Program in 2020.

In 2020, we also had proceeds from the issuance of common stock of $190 million related to our follow-on equity offering.

Financing activities also included repayments of $553 million in 2021 on our term loans, 2021 and 2024 Notes, and Accounts Receivable Securitization Program, compared to $617 million in the same period of 2020 on our term loans and 2021 and 2024 Notes.

We used $269 million of cash to repurchase $267 million aggregate principal amount of the 2021 and 2024 Notes, which included a $5.0 million make-whole premium paid to fully retire the 2021 Notes in November 2020.

We also paid $13.9 million in financing costs in 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 2021.

Payments for taxes related to the vesting of restricted stock awards were $20.2 million and $4.3 million in 2021 and 2020, which are included in Other, net.

The increase in cash provided by operating activities in 2022 as compared to 2021 reflected changes in working capital and the inclusion of Apria since the Acquisition Date.

Cash used for investing activities in 2022 included cash paid for the acquisition of Apria of $1.7 billion and capital expenditures of $167 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $48.4 million in proceeds related primarily to the sale of patient equipment.

Cash used for investing activities in 2021 included capital expenditures of $49.7 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas and Thailand, as well as capitalized software.

Cash provided by financing activities in 2022 included proceeds from borrowings of $1.7 billion related to the 6.625% senior notes due in 2030 (the 2030 Unsecured Notes), Term Loan A (as defined below), and Term Loan B (as defined below), compared to $575 million in proceeds related to the 4.500% senior unsecured notes due in 2029 (the 2029 Unsecured Notes) and the accounts receivable securitization program during 2021.

In 2022, borrowings under our revolving credit facility, net and accounts receivable securitization program were $30.0 million compared to net repayments of $103 million during 2021.

Repayments of debt during 2022 included $4.5 million on our Term Loan B.

Repayments of debt during 2021 included $553 million on our previous Term Loan A-2, previous Term Loan B, 3.875% Senior Notes due 2021 and 2024 Notes, and accounts receivable securitization program.

Gross issuances and repayments under our amended accounts receivable securitization program were $1.0 billion and $1.2 billion during 2022.

We also paid $42.6 million in financing costs during 2022, as compared to $13.9 million during 2021.

We paid $15.4 million to terminate the remaining $300 million in notional value of

interest rate swaps during 2021.

Payments for taxes related to the vesting of restricted stock awards were $45.0 million and $20.2 million during 2022 and 2021, which are included in Other, net.

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

At December 31, 2020, we had borrowings of $103 million and letters of credit of $13.9 million outstanding under our revolving credit facilities.

At December 31, 2021 and 2020, we had $291 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 December 31, 2021 and 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.

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).

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.

At December 31, 2022 and 2021, we had borrowings of $96.0 million and $200 million outstanding under our Receivables Financing Agreement.

At December 31, 2022 and 2021, we had maximum revolving borrowing capacity of $354 million and $100 million available under our Receivable Financing Agreement.

The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million.

We have $1.1 billion in outstanding term loans under a term loan credit agreement (the Credit Agreement).

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

The Revolving Credit Agreement matures in March 2027.

The interest rate on the Term Loan A 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 matures in March 2027 and the Term Loan B matures in March 2029.

At December 31, 2022, we had no borrowings and letters of credit of $27.9 million outstanding under our revolving credit facility.

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

At December 31, 2022 and 2021, we had $422 million and $291 million available for borrowing under our Revolving Credit Agreement.

We also had letters of credit and bank guarantees, which were issued outside of the Revolving Credit Agreement for $2.3 million and $2.2 million as of December 31, 2022 and 2021, which supports certain leased facilities as well as other normal business activities in the United States and Europe.

On March 29, 2022, we entered into a Security Agreement Supplement pursuant to which the Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 was supplemented to grant collateral on behalf of the holders of the 2024 Notes, and the parties secured under the credit agreements (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Grantors (as defined in the Security Agreement) in the Grantors’ present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Grantors, subject to certain exceptions.

The Revolving Credit Agreement, the Credit Agreement, Receivables Financing Agreement, 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 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 December 31, 2022.

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As of December 31, 2022 no shares were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.

On October 6, 2020, we completed a follow-on equity offering wherein we sold an aggregate of 8,475,000 shares of our common stock at an offering price of $20.50, resulting in net proceeds to us of approximately $165 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.

Pursuant to the underwriting agreement, we granted the underwriters an option to purchase up to an additional 1,271,250 shares of our common stock, which the underwriters exercised in full.

Inclusive of this exercised option, net proceeds to us were approximately $190 million, after deducting expenses relating to the follow-on equity offering, including the underwriters’ discounts and commissions.

We used the proceeds from the follow-on equity offering completed on October 6, 2020 to repay the remaining $109 million outstanding balance of Term Loan A-1 at par on October 8, 2020, to repay $51.7 million of our Term Loan A-2 at par on October 15, 2020, and to repay $30.0 million of borrowings under the revolving credit facility.

On November 30, 2020 (Redemption Date), we elected to redeem all of our outstanding 2021 Notes.

As required by the Fourth Supplemental Indenture, the redemption price included accrued and unpaid interest to, but not including, the Redemption Date, and a redemption premium of $5.0 million, which reflected the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the Redemption Date) discounted to the Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 25 basis points.

Including the tender offer, we used $269 million of cash to repurchase $267 million aggregate principal amount of the 2021 Notes and 2024 Notes during 2020.

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.

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 paid cash dividends on our outstanding common stock at the rate of $0.0025 per common share for each of the four quarters of 2021 and 2020.

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 (as amended) 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, future payments of quarterly cash dividends, debt repurchases and other cash requirements.

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

While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.

We earn a portion of our operating income in foreign jurisdictions outside the United States.

Our cash and cash equivalents held by our foreign subsidiaries totaled $26.9 million and $72.0 million at December 31, 2021 and 2020.

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 December 31, 2021.

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

There are no unrecognized deferred taxes as there is no outside basis difference unrelated to unremitted earnings for Thailand.

We will continue to evaluate our foreign earnings repatriation policy in 2022 for all our foreign subsidiaries.

Contractual Obligations

As of December 31, 2021, material cash requirements, including known contractual and other obligations, in the next twelve months primarily comprise of $58.5 million in operating leases, $35.9 million in purchase obligations related to outsourced information technology operations and management of our U.S.

private fleet transportation, $21.4 million in unrecognized tax benefits, $3.6 million in retirement plan benefits, and $2.7 million in finance leases.

Additionally, as of December 31, 2021, material cash requirements, including known contractual and other obligations, due beyond the next twelve months primarily comprise of $946 million in principal debt payments, $195 million in operating leases, $85.0 million in purchase obligations related to outsourced information technology operations and management of our U.S.

private fleet transportation, $26.4 million in retirement plan benefits, and $15.7 million in finance leases.

We cannot reasonably estimate the timing of cash settlement for the $21.4 million liability associated with unrecognized tax benefits.

See Note 8, “Leases,”, Note 10, "Debt", Note 12 "Retirement Plans", Note 14 "Income Taxes", and Note 18 "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

On January 7, 2022, we entered into an Agreement and Plan of Merger to acquire Apria, Inc.

for $37.50 in cash per share of common stock, representing an equity value of approximately $1.45 billion, as well as the assumption of debt and cash for a total transaction value of approximately $1.6 billion.

See Note 21, "Subsequent Events" for additional information.

Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $26.3 million and $26.9 million at December 31, 2022 and 2021.

As of December 31, 2022, we are permanently reinvested in our foreign subsidiaries.

Impact of Inflation

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation.

We have recently experienced higher costs as a result of the increasing cost of raw materials, finished goods, labor, and transportation.

During 2022, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business.

The increase in cost of raw materials and finished goods are due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation.

Additionally, there is uncertainty that we will be able to pass elevated costs onto customers in an effort to offset inflationary pressures.

We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis.

Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Contractual Obligations

As of December 31, 2022, material cash requirements, including known contractual and other obligations, in the next twelve months were primarily comprised of $100 million in operating leases, $73.0 million in fixed interest payments on our outstanding senior notes, $32.6 million in purchase obligations related to outsourced information technology operations, $15.4 million in principal debt payments, $3.6 million in retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation, and $3.6 million in finance leases.

Additionally, as of December 31, 2022, material cash requirements, including known contractual and other obligations, due beyond the next twelve months were primarily comprised of $2.5 billion in principal debt payments, $377 million in fixed interest payments on our outstanding senior notes, $262 million in operating leases, which excludes $40.2 million of legally binding lease payments for the Morgantown, West Virginia center of excellence lease not yet commenced, $48.0 million in purchase obligations related to outsourced information technology operations, $35.7 million in retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation, and $14.3 million in finance leases.

Due to the uncertainty of forecasting variable interest rate payments, interest payment amounts on our variable rate debt are excluded from the contractual obligations disclosed in this section.

See Note 8, "Leases", Note 10, "Debt", Note 12, "Retirement Plans", Note 14, "Income Taxes", and Note 18, "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

Guarantor and Collateral Group Summarized Financial Information

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Operating income 111,754

Income from continuing operations, net of tax 193,303

Net income 1,984

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Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S.

generally accepted accounting principles.

The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures.

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Because of the uncertainty inherent in such estimates, actual results may differ.

We believe our critical accounting estimates include accounting for goodwill.

Goodwill represents the excess of consideration paid over the fair value of identifiable net assets acquired.

We evaluate goodwill for impairment annually, as of October 1, and whenever events occur or changes in circumstance indicate that the carrying amount of goodwill may not be recoverable.

Qualitative factors may first be assessed to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If it is determined that it is more likely than not that the fair value does not exceed the carrying amount, then a quantitative test is performed.

The quantitative test, when performed, uses valuation techniques to determine fair value, including comparable multiples of reporting unit's earnings before interest, taxes, depreciation and amortization (EBITDA) and discounted cash flows.

The EBITDA multiples are based on an analysis of current enterprise valuations and recent acquisition prices of similar companies, if available.

Goodwill totaled $390 million at December 31, 2021.

The quantitative impairment review of goodwill requires the extensive use of accounting estimates and assumptions.

The application of alternative assumptions or inability to meet certain financial projections, could produce materially different results.

We believe our critical accounting estimates include accounting for business combinations, revenue recognition, and inventory.

Business Combinations.

We apply the acquisition method of accounting for business combinations.

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the date of acquisition.

The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.

When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets.

We may adjust the preliminary purchase price allocation, as we obtain more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, generally for up to one year subsequent to the acquisition closing date.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships, royalty rates, and discount rates.

Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ materially from estimates.

Revenue Recognition.

Due to the nature of our industry and the reimbursement environment in which we operate, revenue recognition requires significant estimates and judgements.

We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration including but not limited to rebates, discounts, performance guarantees, and implicit price concessions.

The Company utilizes the expected value method to estimate the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements, historical experience, and other operating trends.

The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future.

The complexity of many third-party billing arrangements, contractual terms and the uncertainty of reimbursement amounts may result in adjustments to amounts originally recorded.

Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review.

If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

Merchandise inventories are valued at the lower of cost or market, with the approximate cost determined by the LIFO method for distribution inventories in the U.S.

within our Products & Healthcare Services segment.

Cost of remaining inventories are determined using the FIFO or weighted-average cost method at the lower of cost or net realizable value.

We periodically evaluate whether inventory valuation allowance adjustments are required, which includes consideration of recent sales trends.

In our evaluation, we review for expired or obsolete inventory and slow-moving inventory.

We write down inventories which are considered excess and obsolete as a result of these assessments.

Shifts in market trends and conditions, as well as changes in customer preferences and behavior could affect the value of our inventories.

Recent Accounting Pronouncements

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Item 7. Management’s Discussion and Analysis