What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-02 · 139 added, 182 removed, 130 unchanged (71% of the section changed)

5 unchanged sentences

related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

Our business has two distinct segments:

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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 have reported financial results using this two segment structure and have recast our prior period 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, net of $144 million of cash acquired.

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

(Apria) pursuant to the Agreement and Plan of Merger dated January 7, 2022, in exchange for approximately $1.7 billion, net of $144 million of cash acquired.

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

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 $0.16 and $1.05 for the three and nine months ended September 30, 2022 as compared to $0.58 and $2.38 for the three and nine months ended September 30, 2021.

Products & Healthcare Services segment operating income was $23.8 million and $174 million for the three and nine months ended September 30, 2022, compared to $64.4 million and $316 million for the three and nine months ended September 30, 2021.

The decreases were primarily the result of overall reduced hospital demand, including reliance on stockpiles built up during the COVID-19 pandemic, the reduction of glove cost pass through, and headwinds created by macroeconomic conditions, including inflationary pressures, supply chain issues, and rising interest rates, partially offset by operating efficiencies and productivity gains derived from the Owens & Minor business system and changes in accrued incentive compensation.

Patient Direct segment operating income was $59.7 million and $127.8 million for the three and nine months ended September 30, 2022, compared to $14.9 million and $41.4 million for the three and nine months ended September 30, 2021.

The increase was primarily the result of the inclusion of Apria in the Patient Direct segment since 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 $0.04 and $0.13 for the three and nine months ended September 30, 2022.

COVID-19 Update

We continue to closely monitor the impact of the 2019 novel coronavirus (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.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our teammates, customers, suppliers and shareholders.

We are unable to predict the timing of the pandemic and the full impact that COVID-19 will have on our future operating results, financial position and cash flows due to numerous variables and continued uncertainties.

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 created supply chain challenges resulting in additional direct costs.

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.

Net loss per share was $0.32 for the three months ended March 31, 2023 as compared to net income per diluted share of $0.52 for the three months ended March 31, 2022.

Products & Healthcare Services segment operating income was $1.8 million for the three months ended March 31, 2023, compared to $89.1 million for the three months ended March 31, 2022.

The decreases reflected overall reduced hospital demand, including reliance on stockpiles and reduced 2019 novel coronavirus (COVID-19) related product purchases, price changes, particularly for gloves, and headwinds created by macroeconomic conditions, including inflationary pressures, partially offset by productivity gains derived from operating efficiencies.

Patient Direct segment operating income was $45.8 million for the three months ended March 31, 2023, compared to $15.8 million for the three months ended March 31, 2022.

The increase was primarily the result of the inclusion of Apria in our results since the Acquisition Date, strong revenue growth in our Byram business, leveraging our fixed costs, and operating efficiencies, partially offset by inflationary pressures.

Net loss per share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.01 for the three months ended March 31, 2023.

Philips Respironics Recall

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

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.

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.

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, 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.

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 an d liquidity.

O&M Halyard N95 Mask FDA Release

On April 5, 2023 we received a communication from the National Institute for Occupational Safety & Health (NIOSH) that products from one lot of a model (No.

46827) of surgical N95 respirator manufactured by O&M Halyard did not pass laboratory tests for fluid resistance and for filtration efficiency, and that products from one lot of another model (No.

46727) did not pass fluid resistance testing, but did pass filtration efficiency testing.

At present, our investigation has determined that there are a limited number of lots potentially implicated by the results of the NIOSH particulate filtration testing on model 46827.

The vast majority of the products in those lots remain in our possession and under our control, and those lots that had products that did reach the market have passed internal follow-up testing.

On April 12, 2023, the FDA recommended that consumers, health care providers, and facilities not use the two models (model numbers 46827 and 46727) of O&M Halyard surgical N95 respirators due to fluid resistance.

In addition, the FDA also

recommended against using certain of our surgical, procedure and pediatric face masks when fluid resistance is required.

On or about that date, we voluntarily stopped the sale in the U.S.

of the above-referenced surgical N95 respirators and similar models pending our investigation of the performance issues identified by the FDA and NIOSH.

Regulatory bodies in other non-U.S.

markets where we sell our facial protection products have inquired about the relevance of the FDA notification to products sold in their countries.

The FDA updated its recommendation on April 21, 2023, to permit use of the model 46727 of Halyard N95 respirators when fluid resistance is not required.

These items are included in our Products & Healthcare Services segment.

We are thoroughly investigating the matters identified by the FDA and NIOSH, and we are performing product retesting as we work closely with government agencies to resolve these matters.

We are unable to reasonably estimate the amount of any possible loss or range of possible losses or predict the ultimate outcome of these matters.

However, there is a risk that these matters and any other safety concerns could have a material adverse effect on our results of operations, financial condition, or cash flows, including as a result of a significant volume of customer product returns and/or recall of products, implementation of corrective action plans, and/or other costly remedial actions in the US and elsewhere.

In addition, these matters could potentially have other negative impacts including:

government investigations and enforcement actions by the FDA or other US or international regulators or governmental entities;

the suspension or revocation of the authority to produce, distribute or sell products, and other sanctions;

losses due to patient claims, including product liability claims and lawsuits;

and customer claims related to their direct costs arising from supply disruption.

Results of Operations

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Products & Healthcare Services $ 1,903,356 $ 2,256,295 $ (352,939) (15.6) %

Patient Direct 594,045 245,880 348,165 141.6 %

Net revenue $ 2,497,401 $ 2,502,175 $ (4,774) (0.2) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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Net revenue $ 2,522,849 $ 2,406,952 $ 115,897 4.8 %

The increase in net revenue in our Patient Direct segment for the three and nine months ended September 30, 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 three and nine months ended September 30, 2022 reflected overall reduced hospital demand, including reliance on stockpiles and the reduction of glove cost pass through.

Foreign currency translation had an unfavorable impact on net revenue of $12.0 million and $33.2 million for the three and nine months ended September 30, 2022 as compared to the prior year.

The increase in net revenue in our Patient Direct segment for the three months ended March 31, 2023 was driven by the inclusion of Apria in our results since the Acquisition Date and continued strong performance in our Byram business.

The decrease in net revenue in our Products & Healthcare Services segment for the three months ended March 31, 2023 reflected overall reduced hospital demand, including reliance on stockpiles and reduced COVID-19 related product purchases, as well as price changes, particularly for gloves.

Foreign currency translation had an unfavorable impact on net revenue of $5.2 million for the three months ended March 31, 2023 as compared to the prior year.

Cost of goods sold.

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Cost of goods sold $ 1,984,122 $ 2,173,336 $ (189,214) (8.7) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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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, changes in sales activity, including product mix, inflationary pressures, and supply chain issues.

Cost of goods sold compared to prior year reflects the inclusion of Apria in our results since the Acquisition Date and changes in sales activity, including product mix.

Gross margin.

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Gross margin $ 513,279 $ 328,839 $ 184,440 56.1 %

As a % of net revenue 20.55 % 13.14 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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As a % of net revenue 19.71 % 15.52 %

Gross margin increase in the three and nine months ended September 30, 2022 was driven by inclusion of Apria in the Patient Direct segment since the Acquisition Date and sales mix, partially offset by overall reduced hospital demand, including reliance on stockpiles, the reduction of glove cost pass through, inflationary pressures, and supply chain issues.

Foreign currency translation had an unfavorable impact on gross margin of $6.4 million and $17.3 million for the three and nine months ended September 30, 2022 as compared to the prior year.

Gross margin increase in the three months ended March 31, 2023 was driven by inclusion of Apria in our results since the Acquisition Date and sales mix, partially offset by overall reduced hospital demand, including reliance on stockpiles and reduced COVID-19 related product purchases, as well as price changes, particularly for gloves.

Foreign currency translation had an unfavorable impact on gross margin of $1.9 million for the three months ended March 31, 2023 as compared to the prior year.

Operating expenses.

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Distribution, selling and administrative expenses $ 445,259 $ 262,457 $ 182,802 69.7 %

As a % of net revenue 17.83 % 10.49 %

Acquisition-related and exit and realignment charges $ 8,898 $ 6,380 $ 2,518 39.5 %

Other operating income, net $ (1,125) $ (2,873) $ 1,748 60.8 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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As a % of net revenue 17.79 % 11.20 %

Acquisition-related and exit and realignment charges $ 50,048 $ 20,967 $ 29,081 138.7 %

Other operating income, net $ (5,020) $ (5,016) $ (4) (0.1) %

Acquisition-related charges and intangible amortization $ 22,188 $ 42,135 $ (19,947) (47.3) %

Exit and realignment charges $ 15,674 $ 1,682 $ 13,992 831.9 %

Other operating expense (income), net $ 916 $ (899) $ 1,815 201.9 %

Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services and all costs associated with our fee-for-service arrangements in our Products & Healthcare Services segment.

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

Overall DS&A expenses were affected by inclusion of Apria in our results since the Acquisition Date, and inflationary pressures for the three and nine months ended September 30, 2022, partially offset by operating efficiencies and productivity gains derived from the Owens & Minor business system, and changes in accrued incentive compensation.

DS&A expenses also included a favorable impact for foreign currency translation of $1.8 million and $4.2 million for the three and nine months ended September 30, 2022.

Acquisition-related charges were $6.9 million and $45.2 million for the three and nine months ended September 30, 2022 as compared to no acquisition-related charges for the three and nine months ended September 30, 2021.

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

Exit and realignment charges were $2.0 million and $4.9 million for the three and nine months ended September 30, 2022, which consisted primarily of wind-down costs related to Fusion5 and severance and other charges associated with the reorganization of our segments.

Exit and realignment charges were $6.4 million and $21.0 million for the three and nine months ended September 30, 2021 and 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.

Other operating income, net for the three and nine months ended September 30, 2022 and 2021 includes the impact of foreign currency transaction gains.

Overall DS&A expenses were affected by inclusion of Apria in our results since the Acquisition Date and inflationary pressures for the three months ended March 31, 2023, partially offset by operating efficiencies and productivity gains.

DS&A expenses also included a favorable impact for foreign currency translation of $0.8 million for the three months ended March 31, 2023.

Acquisition-related charges were $1.3 million for the three months ended March 31, 2023 and $31.9 million for the three months ended March 31, 2022 consisted primarily of costs related to the Apria Acquisition.

Intangible amortization was $20.9 million for the three months ended March 31, 2023 and related primarily to intangible assets acquired in the Apria, Halyard and Byram acquisitions.

Intangible amortization was $10.3 million for the three months ended March 31, 2022 related primarily to intangible assets acquired in the Halyard and Byram acquisitions.

Exit and realignment charges were $15.7 million for the three months ended March 31, 2023, which consisted primarily of costs related to our operating model realignment program, including professional fees, severance and costs to streamline functions and processes.

Exit and realignment charges were $1.7 million for the three months ended March 31, 2022, which consisted primarily of severance and other charges associated with the reorganization of our segments.

Other operating expense (income), net for the three months ended March 31, 2023 and 2022 includes the impact of foreign currency transaction losses.

Interest expense, net .

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Interest expense, net $ 39,869 $ 11,572 $ 28,297 244.5 %

Effective interest rate 5.96 % 4.17 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

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Effective interest rate 6.83 % 4.65 %

Interest expense, net and the effective interest rate fo r the three and nine months ended September 30, 2022 increased primarily due to the increase in debt associated with the Apria Acquisition on March 29, 2022, along with rising market interest rates.

Interest expense, net and the effective interest rate fo r the three months ended March 31, 2023 increased primarily due to the increase in debt associated with the Apria Acquisition, along with higher market interest rates.

See Note 6 in Notes to Consolidated Financial Statements.

Loss on extinguishment of debt.

Nine Months Ended

September 30, 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.

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.

Other expense, net .

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Other expense, net $ 783 $ 799 $ (16) (2.0) %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

Other expense, net $ 1,387 $ 783 $ 604 77.1 %

Other expense, net for the three and nine months ended September 30, 2022 and 2021 represents interest cost and net actuarial losses related to our retirement plans.

Other expense, net for the three months ended March 31, 2023 and 2022 includes interest cost and net actuarial losses related to our retirement plans.

Income taxes.

Three Months Ended

September 30, Change

(Dollars in thousands) 2022 2021 $ %

Income tax provision $ 7,098 $ 6,375 $ 723 11.3 %

Effective tax rate 36.2 % 12.6 %

Nine Months Ended

September 30, Change

March 31, Change

(Dollars in thousands) 2023 2022 $ %

Income tax provision $ 25,937 $ 47,224 $ (21,287) (45.1) %

Income tax (benefit) provision $ (9,360) $ 8,978 $ (18,338) (204.3) %

Effective tax rate 27.7 % 18.6 %

The change in the effective tax rate for the three and nine months ended September 30, 2022 compared to the same periods in 2021 resulted primarily from the mixture of income and losses in jurisdictions in which we operate, as well as the as the utilization of foreign tax benefits in the three and nine months ended September 30, 2021.

The change in the effective tax rate for the three months ended March 31, 2023 compared to the same period in 2022 resulted primarily from changes in income and losses and the incremental income tax benefit associated with the vesting of restricted stock recorded in the first quarter of 2022.

Financial Condition, Liquidity and Capital Resources

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We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory days.

We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our Revolving Credit Agreement (as defined below) or Receivables Financing Agreement (as defined below), or a combination thereof of approximately $27 million.

We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our Revolving Credit Agreement or Receivables Financing Agreement, or a combination thereof of approximately $28 million.

The majority of our cash and cash equivalents are held in cash depository accounts with major banks in North America, Europe, and Asia.

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

September 30, 2022 December 31, 2021 Change

March 31, 2023 December 31, 2022 Change

(Dollars in thousands) $ %

5 unchanged sentences

Accounts payable $ 1,165,799 $ 1,147,414 $ 18,385 1.6 %

(1) Based on period end accounts receivable and net revenue for the quarters ended September 30, 2022 and December 31, 2021.

(2) Based on period end merchandise inventories and cost of goods sold for the quarters ended September 30, 2022 and December 31, 2021.

(1) Based on period end accounts receivable and net revenue for the quarters ended March 31, 2023 and December 31, 2022.

(2) Based on period end merchandise inventories and cost of goods sold for the quarters ended March 31, 2023 and December 31, 2022.

Liquidity and capital expenditures.

The following table summarizes our consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021:

The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 2023 and 2022:

(Dollars in thousands) 2023 2022

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Effect of exchange rate changes 284 (669)

Net increase (decrease) in cash, cash equivalents and restricted cash $ 21,173 $ (78,424)

Cash provided by operating activities in the first nine 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 nine months of 2022 included cash paid for the acquisition of Apria of $1.7 billion and capital expenditures of $115 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $29.7 million in proceeds related to the sale of property and equipment.

Cash used for investing activities in the first nine months of 2021 included capital expenditures of $32.6 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 nine months of 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) for the first nine months of 2022, compared to $575 million related to the 4.500% senior unsecured notes due in 2029 (the 2029 Unsecured Notes) and the accounts receivable securitization program for the first nine months of 2021.

Borrowings under our revolving credit facility, net and accounts receivable securitization program of $30.0 million compared to net repayments of $90.9 million for the same period of 2021.

Repayments of debt in the first nine months of 2022 included $3.0 million on our Term Loan B compared to 2021 included repayments of $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 $697.7 million and $770.7 million for the first nine months of 2022.

We also paid $42.6 million in financing costs in the first nine months of 2022 , as compared to $13.9 million for the same period of 2021.

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 $44.6 million and $19.3 million for the first nine months of 2022 and 2021, which are included in Other, net.

Net (decrease) increase in cash, cash equivalents and restricted cash $ (2,991) $ 155,988

Cash provided by operating activities in the first three months of 2023 reflected a net loss, as compared to net income in the first three months of 2022.

The increase in cash provided by operating activities in 2023 as compared to 2022 reflected changes in working capital and the inclusion of Apria in our results since the Acquisition Date.

Cash used for investing activities in the first three months of 2023 included capital expenditures of $51.5 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $17.3 million in proceeds related primarily to the sale of patient equipment.

Cash used for investing activities in the first three months of 2022 included cash paid for the acquisition of Apria of $1.6 billion and capital expenditures of $11.0 million for our strategic and operational efficiency initiatives associated with property and equipment and capitalized software.

C ash used for financing activities in the first three months of 2023 included repayments of debt of $26.5 million.

We had no borrowings under our revolving credit facility on a net basis for the first three months of 2023 and made net repayments of $96.0 million under our amended Receivables Financing Agreement.

Payments for taxes related to the vesting of restricted stock awards, which are included in Other, net, were $5.8 million for the first three months of 2023.

C ash provided by financing activities in the first three months of 2022 included proceeds from borrowings of $1.7 billion related to the 6.625% senior notes due in April 2030 (the 2030 Unsecured Notes), Term Loan A facility (Term Loan A), and Term Loan B facility (Term Loan B).

We had borrowings under our revolving credit facility of $41.7 million for the first three months of 2022.

We also paid $33.7 million in financing costs in the first three months of 2022.

Payments for taxes related to the vesting of restricted stock awards were $35.7 million for the first three months of 2022.

Capital resources.

Our sources of liquidity include cash and cash equivalents, our Revolving Credit Agreement, and our Receivables Financing Agreement.

Our primary sources of liquidity include cash and cash equivalents, our Receivables Financing Agreement, and our Revolving Credit Agreement.

The Receivables Financing Agreement provides a maximum revolving borrowing capacity of $450 million.

The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement).

Under the Receivables Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC.

The Receivables Financing Agreement matures in March 2025.

We had no borrowings at March 31, 2023 and $96.0 million outstanding at December 31, 2022 under our Receivables Financing Agreement.

At March 31, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $450 million and $354 million under our Receivable Financing Agreement.

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

2 unchanged sentences

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

At September 30, 2022, we had no borrowings and letters of credit of $27.9 million outstanding under our Revolving Credit Agreement.

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

At September 30, 2022 and December 31, 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 September 30, 2022 and December 31, 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.

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 September 30, 2022.

The interest rate on the Term Loan A is based on either the Term SOFR or the Base Rate plus an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement).

The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate.

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

At March 31, 2023 and December 31, 2022, our Revolving Credit Agreement was undrawn and we had letters of credit, which reduce Revolver availability, totaling $27.9 million leaving $422 million available for borrowing.

We also had letters of credit and bank guarantees, which supports certain leased facilities as well as other normal business activities in the United States and Europe that were issued outside of the Revolving Credit Agreement for $2.0 million and $2.3 million as of March 31, 2023 and December 31, 2022.

On March 29, 2022, we entered into a Security Agreement Supplement pursuant to which the Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 was supplemented to grant collateral on behalf of the holders of the 4.375% senior notes due in December 2024 (the 2024 Notes), and the parties secured under the credit agreements (the Secured Parties) including first priority liens and security interests in (a) all present and future shares of capital stock owned by the Grantors (as defined in the Security Agreement) in the Grantors’ present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Grantors, subject to certain exceptions.

The Revolving Credit Agreement, the Credit Agreement, Receivables Financing Agreement, the 2024 Notes, 4.500% senior unsecured notes due in March 2029 (the 2029 Unsecured Notes), and the 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of any of the related agreements.

The terms of the applicable credit agreements also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture.

We were in compliance with our debt covenants at March 31, 2023.

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

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

As of September 30, 2022 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, 2023 no shares were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.

We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure.

From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms).

From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness

(including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms).

Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

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

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

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

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

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

Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $25.2 million and $26.9 million at September 30, 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, 2022.

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.

Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $29.2 million and $26.3 million at March 31, 2023 and December 31, 2022.

As of March 31, 2023, we are permanently reinvested in our foreign subsidiaries.

Impact of Inflation

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

We have recently experienced 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.

During the first three months of 2023, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of labor, occupancy and other administrative costs associated with the normal course of business.

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

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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, 2022

Summarized Consolidated Statement of Operations - Guarantor Group Three Months Ended March 31, 2023

(Dollars in thousands)

2 unchanged sentences

Operating income 8,449

Net income 67,007

(1) Includes $200 million in sales to non-guarantor subsidiaries for the nine months ended September 30, 2022.

Summarized Consolidated Balance Sheets - Guarantor Group September 30, 2022 December 31, 2021

Net loss (22,098)

(1) Includes $32 million in sales to non-guarantor subsidiaries for the three months ended March 31, 2023.

Summarized Consolidated Balance Sheets - Guarantor Group March 31, 2023 December 31, 2022

(Dollars in thousands)

1 unchanged sentence

Total assets 4,746,152 4,658,382

Current liabilities 1,677,527 1,399,499

Total current liabilities 1,678,842 1,613,228

Total liabilities 4,398,785 4,360,673

4 unchanged sentences

Summarized financial information of the Collateral Group is as follows:

Summarized Consolidated Balance Sheets - Collateral Group September 30, 2022 December 31, 2021

Summarized Consolidated Balance Sheets - Collateral Group March 31, 2023 December 31, 2022

(Dollars in thousands)

1 unchanged sentence

Total assets 4,695,846 4,614,380

Current liabilities 1,599,546 1,341,691

Total current liabilities 1,627,279 1,562,680

Total liabilities 4,382,452 4,343,750

1 unchanged sentence

Recent Accounting Pronouncements

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 September 30, 2022.

For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2022 and Note 14 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on March 31, 2023.

Forward-looking Statements

2 unchanged sentences

Such forward-looking statements involve known and unknown risks, including, but not limited to:

• our ability to achieve revenue and operating income goals may be affected by:

COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, and any worsening of the pandemic, including through any new variant strains of the underlying virus, or future pandemics, related governmental responses, the effectiveness, availability, and public acceptance of vaccines, a decrease in revenue ultimately resulting in less cash flow, longer duration in receivables collection, the need to expedite payments to important suppliers may grow, shifts in demand away from certain products we manufacture and distribute, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government vaccine and other mandates, temporary production and distribution center and office closures due to reduced workforces or government vaccine and other mandates, availability of raw materials, potential labor negotiations or disputes, changes in the types and numbers of businesses that compete with us, including non-traditional competitors, and the aggressiveness of that competition, impacts of the pandemic or future pandemics on other third parties with whom we conduct business, the healthcare industry, and the broader business environment, and trends in elective surgeries and other healthcare spending not directly associated with COVID-19;

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

• 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;

• our dependence on distribution of product of certain suppliers;

• our ability to successfully identify, manage or integrate acquisitions;

• 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;

• risks related to public health crises or future outbreaks of health crises or other adverse public health developments such as the novel coronavirus (COVID-19) global pandemic;

• increasing competitive and pricing pressures in the marketplace;

• our ability to retain existing and attract new customers and our dependence on sales to certain customers;

• our dependence on certain vendors, suppliers and third-parties for key components, raw materials, equipment and services;

• our ability to successfully identify, manage or integrate acquisitions, including Apria;

• our ability to successfully implement our Operating Model Realignment Program and our strategic initiatives;

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

• uncertainties related to, and our ability to adapt to and comply with, changes in government regulations, including healthcare, tax and product licensing laws and regulations;

• risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;

• uncertainties related to general economic, regulatory and business conditions;

• our ability to successfully implement our strategic initiatives;

• the availability of and modifications to existing supplier funding programs and our ability to meet the terms to qualify for certain of these programs;

• the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;

• our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;

• uncertainties related to general economic, regulatory and business conditions and our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;

• our ability to meet the terms to qualify for supplier funding programs;

• the ability of customers and suppliers to meet financial commitments due to us;

• changes in manufacturer preferences between direct sales and wholesale distribution;

• changing trends in customer profiles and ordering patterns and our ability to meet customer demand for additional value-added services;

• our ability to manage operating expenses and improve operational efficiencies in response to changing customer profiles;

• our ability to meet performance targets specified by customer contracts under contractual commitments;

• changing trends in customer profiles and ordering patterns;

• our ability to manage operating expenses and improve operational efficiencies;

• availability of, and our ability to access, special inventory buying opportunities;

• the ability of business partners and financial institutions to perform their contractual responsibilities;

• our ability to continue to obtain financing, obtain financing at reasonable rates and to manage financing costs and interest rate risk, and our ability to refinance, extend or repay our substantial indebtedness;

• our financial flexibility may be limited by the restrictive covenants in our credit facilities and existing notes;

• our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk, and our ability to refinance, extend or repay our substantial indebtedness;

• our ability to attract and retain talented and qualified teammates;

• recalls of any of our products, or safety risks or the discovery of serious safety issues with our products;

• changes, delays and uncertainties in the reimbursement process;

• our ability to adequately establish, maintain, protect and enforce our intellectual property and proprietary rights as well as avoid infringement, misappropriation or other violations of the intellectual property and proprietary rights of third parties;

• our ability to engage in transactions that may be limited by the restrictive covenants in our credit facilities and existing notes;

• the risk that information systems are interrupted or damaged or fail for any extended period of time, that new information systems are not successfully implemented or integrated, or that there is a data security breach in our information systems;

• 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, which would require us to record a significant charge to earnings in accordance with generally accepted accounting principles;

• 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;

• the risk of an impairment to goodwill or other long-lived assets;

• our ability to timely or adequately respond to technological advances;

• our failure to adequately insure against losses, including from substantial claims and litigation;

• our ability to meet performance targets specified by customer contracts under contractual commitments;

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

• 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;

• the market price for our common stock may be highly volatile;

• adverse changes in U.S.

and foreign tax laws and the outcome of outstanding tax contingencies and legislative and tax proposals;

• 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 Apria’s Corporate Integrity Agreement;

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

• volatility in the price of our common stock and securities;

• other factors detailed from time to time in the reports we file with the SEC, including those described in “Item 1A.

Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 our Form 10-Q for the three months ended March 31, 2022, and our Form 10-Q for the three and six months ended June 30, 2022

Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022.

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

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