ACCENDRA HEALTH INC/VA/ 10-Q

Item 1. Financial Statements Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2023 2022 2023 2022 Net revenue $ 2,563,226 $ 2,500,015 $ 5,086,075 $ 4,906,967 Cost of goods sold 2,043,794 1,967,510 4,069,336 4,001,014 Gross margin 519,432 532,505 1,016,739 905,953 Distribution, selling and administrative expenses 455,030 421,925 903,752 691,397 Acquisition-related charges and intangible amortization 22,203 37,276 44,392 79,410 Exit and realignment charges 28,963 1,214 44,637 2,896 Other operating expense (income), net 2,397 ( 2,995 ) 3,312 ( 3,894 ) Operating income 10,839 75,085 20,646 136,144 Interest expense, net 40,728 35,839 82,926 47,858 Other expense, net 1,072 783 2,458 1,565 (Loss) income before income taxes ( 30,961 ) 38,463 ( 64,738 ) 86,721 Income tax (benefit) provision ( 2,720 ) 9,859 ( 12,079 ) 18,837 Net (loss) income $ ( 28,241 ) $ 28,604 $ ( 52,659 ) $ 67,884 Net (loss) income per common share: Basic $ ( 0.37 ) $ 0.38 $ ( 0.70 ) $ 0.92 Diluted $ ( 0.37 ) $ 0.37 $ ( 0.70 ) $ 0.89 See accompanying notes to consolidated financial statements. 3 Table of Contents Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Comprehensive (Loss) Income (unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2023 2022 2023 2022 Net (loss) income $ ( 28,241 ) $ 28,604 $ ( 52,659 ) $ 67,884 Other comprehensive income (loss) net of tax: Currency translation adjustments ( 5,167 ) ( 18,831 ) ( 49 ) ( 19,618 ) Change in unrecognized net periodic pension costs 136 297 ( 11 ) 486 Change in gains and losses on derivative instruments 3,299 2,764 ( 78 ) 2,764 Total other comprehensive loss, net of tax ( 1,732 ) ( 15,770 ) ( 138 ) ( 16,368 ) Comprehensive (loss) income $ ( 29,973 ) $ 12,834 $ ( 52,797 ) $ 51,516 See accompanying notes to consolidated financial statements. 4 Table of Contents Owens & Minor, Inc. and Subsidiaries Consolidated Balance Sheets (unaudited) June 30, December 31, (in thousands, except per share data) 2023 2022 Assets Current assets Cash and cash equivalents $ 286,307 $ 69,467 Accounts receivable, net of allowances of $ 9,270 and $ 9,063 672,511 763,497 Merchandise inventories 1,168,227 1,333,585 Other current assets 135,409 128,636 Total current assets 2,262,454 2,295,185 Property and equipment, net of accumulated depreciation of $ 510,394 and $ 450,286 559,508 578,269 Operating lease assets 292,809 280,665 Goodwill 1,637,149 1,636,705 Intangible assets, net 403,020 445,042 Other assets, net 133,060 150,417 Total assets $ 5,288,000 $ 5,386,283 Liabilities and equity Current liabilities Accounts payable $ 1,194,173 $ 1,147,414 Accrued payroll and related liabilities 92,264 93,296 Other current liabilities 405,204 325,756 Total current liabilities 1,691,641 1,566,466 Long-term debt, excluding current portion 2,309,853 2,482,968 Operating lease liabilities, excluding current portion of $ 86,437 and $ 76,805 214,905 215,469 Deferred income taxes 55,354 60,833 Other liabilities 120,018 114,943 Total liabilities 4,391,771 4,440,679 Commitments and contingencies Equity Common stock, par value $ 2 per share; authorized - 200,000 shares; issued and outstanding - 76,440 shares and 76,279 shares as of June 30, 2023 and December 31, 2022 152,880 152,557 Paid-in capital 421,993 418,894 Retained earnings 357,349 410,008 Accumulated other comprehensive loss ( 35,993 ) ( 35,855 ) Total equity 896,229 945,604 Total liabilities and equity $ 5,288,000 $ 5,386,283 See accompanying notes to consolidated financial statements. 5 Table of Contents Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (in thousands) 2023 2022 Operating activities: Net (loss) income $ ( 52,659 ) $ 67,884 Adjustments to reconcile net (loss) income to cash provided by operating activities: Depreciation and amortization 142,988 97,286 Share-based compensation expense 11,675 11,210 (Benefit) provision for losses on accounts receivable ( 900 ) 4,512 Loss on extinguishment of debt 843 — Deferred income tax (benefit) provision ( 6,758 ) 1,601 Changes in operating lease right-of-use assets and lease liabilities ( 3,077 ) 606 (Gain) loss on sale and dispositions of property and equipment ( 18,563 ) 226 Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 90,203 16,275 Merchandise inventories 165,651 ( 24,438 ) Accounts payable 52,159 12,349 Net change in other assets and liabilities 82,954 ( 23,945 ) Other, net 6,994 5,958 Cash provided by operating activities 471,510 169,524 Investing activities: Acquisition, net of cash acquired — ( 1,684,607 ) Additions to property and equipment ( 92,750 ) ( 62,236 ) Additions to computer software ( 8,229 ) ( 3,463 ) Proceeds from sale of property and equipment 35,729 5,846 Other, net ( 418 ) ( 839 ) Cash used for investing activities ( 65,668 ) ( 1,745,299 ) Financing activities: Borrowings under amended Receivables Financing Agreement 348,200 347,800 Repayments under amended Receivables Financing Agreement ( 444,200 ) ( 402,800 ) Repayments of debt ( 78,301 ) ( 1,500 ) Proceeds from issuance of debt — 1,691,000 Borrowings under revolving credit facility, net and Receivables Financing Agreement — 30,000 Financing costs paid — ( 41,479 ) Other, net ( 8,819 ) ( 42,388 ) Cash (used for) provided by financing activities ( 183,120 ) 1,580,633 Effect of exchange rate changes on cash, cash equivalents and restricted cash 196 ( 3,864 ) Net increase in cash, cash equivalents and restricted cash 222,918 994 Cash, cash equivalents and restricted cash at beginning of period 86,185 72,035 Cash, cash equivalents and restricted cash at end of period $ 309,103 $ 73,029 Supplemental disclosure of cash flow information: Income taxes (received) paid, net $ ( 10,506 ) $ 25,782 Interest paid $ 78,625 $ 32,417 Noncash investing activity: Unpaid purchases of property and equipment and computer software at end of period $ 65,808 $ 56,429 See accompanying notes to consolidated financial statements. 6 Table of Contents Owens & Minor, Inc. and Subsidiaries Consolidated Statements of Changes in Equity (unaudited) (in thousands, except per share data) Common Shares Outstanding Common Stock ($ 2 par value ) Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Equity Balance, December 31, 2022 76,279 $ 152,557 $ 418,894 $ 410,008 $ ( 35,855 ) $ 945,604 Net loss — — — ( 24,418 ) — ( 24,418 ) Other comprehensive income — — — — 1,594 1,594 Share-based compensation expense, exercises and other ( 83 ) ( 166 ) 1,786 — — 1,620 Balance, March 31, 2023 76,196 152,391 420,680 385,590 ( 34,261 ) 924,400 Net loss — — — ( 28,241 ) — ( 28,241 ) Other comprehensive loss — — — — ( 1,732 ) ( 1,732 ) Share-based compensation expense, exercises and other 244 489 1,313 — — 1,802 Balance, June 30, 2023 76,440 $ 152,880 $ 421,993 $ 357,349 $ ( 35,993 ) $ 896,229 Balance, December 31, 2021 75,433 $ 150,865 $ 440,608 $ 387,619 $ ( 40,591 ) $ 938,501 Net income — — — 39,279 — 39,279 Other comprehensive loss — — — — ( 598 ) ( 598 ) Share-based compensation expense, exercises and other 653 1,307 ( 30,867 ) — — ( 29,560 ) Balance, March 31, 2022 76,086 152,172 409,741 426,898 ( 41,189 ) 947,622 Net income — — — 28,604 — 28,604 Other comprehensive loss — — — — ( 15,770 ) ( 15,770 ) Share-based compensation expense, exercises and other 85 171 ( 1,968 ) — — ( 1,797 ) Balance, June 30, 2022 76,171 $ 152,343 $ 407,773 $ 455,502 $ ( 56,959 ) $ 958,659 See accompanying notes to consolidated financial statements. 7 Table of Contents Owens & Minor, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) (in thousands, except per share data, unless otherwise indicated) Note 1— Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, or our) and contain all adjustments (which are comprised only of normal recurring accruals and use of estimates) necessary to conform with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. 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. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates. Cash, Cash Equivalents and Restricted Cash Cash, cash equivalents and restricted cash includes cash and marketable securities with an original maturity or maturity at acquisition of three months or less. Cash, cash equivalents and restricted cash are stated at cost. Nearly all of our cash, cash equivalents and restricted cash are held in cash depository accounts in major banks in North America, Europe, and Asia. Cash that is held by a major bank and has restrictions on its availability to us is classified as restricted cash. Restricted cash as of June 30, 2023 and December 31, 2022 primarily represents cash held in an escrow account as required by the Centers for Medicare & Medicaid Services in conjunction with the Bundled Payments for Care Improvement initiatives related to wind-down costs of Fusion5. Restricted cash as of June 30, 2023 also includes $ 6.4 million of cash deposits received subject to limitations on use until remitted to a third-party financial institution (the Purchaser), pursuant to the Master Receivables Purchase Agreement (RPA). The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of those same amounts presented in the accompanying consolidated statements of cash flows. June 30, 2023 December 31, 2022 Cash and cash equivalents $ 286,307 $ 69,467 Restricted cash included in Other current assets 22,796 — Restricted cash included in Other assets, net — 16,718 Total cash, cash equivalents, and restricted cash $ 309,103 $ 86,185 Rental Revenue Within our Patient Direct segment, revenues are recognized under fee-for-service arrangements for equipment we rent to patients and sales of equipment, supplies and other items we sell to patients. Revenue that is generated from equipment that we rent to patients is primarily recognized over the noncancelable rental period, typically one month, and commences on delivery of the equipment to the patients. Revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including private insurers, prepaid health plans, Medicare, Medicaid and patients. Rental re venue, less estimated a djustments, is recognized as earned on a straight-line basis over the noncancellable lease term. We recorded $ 175 million and $ 144 million for the three months ended June 30, 2023 and 2022 and $ 346 million and $ 151 million for the six months ended June 30, 2023 and 2022 in revenue related to equipment we rent to patients . 8 Table of Contents Sales of Accounts Receivable On March 14, 2023, we entered into the RPA, pursuant to which accounts receivable with an aggregate outstanding amount not to exceed $ 200 million are sold, on a limited-recourse basis, to the Purchaser in exchange for cash. As of June 30, 2023 there were a total of $ 115 million of uncollected accounts receivable, that had been sold and removed from our consolidated balance sheet. We account for these transactions as sales in accordance with ASC 860, Transfers and Servicing, with the sold receivables removed from our consolidated balance sheets. Under the RPA, we provide certain servicing and collection actions on behalf of the Purchaser; however, we do not maintain any beneficial interest in the accounts receivable sold. Proceeds from the sale of accounts receivable are recorded as an increase to cash and cash equivalents and a reduction to accounts receivable, net of allowances in the consolidated balance sheets. Cash received from the sale of accounts receivable is reflected as cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $ 412 million for the three and six months ended June 30, 2023. During the three and six months ended June 30, 2023, we received net cash proceeds of $ 409 million from the sale of accounts receivable under the RPA and collected $ 297 million of the sold accounts receivable. The losses on sale of accounts receivable, inclusive of professional fees incurred to establish the agreement, recorded in other operating expense (income), net in the consolidated statements of operations were $ 2.9 million and $ 3.6 million for the three and six months ended June 30, 2023. The RPA is separate and distinct from the accounts receivable securitization program (the Receivables Financing Agreement) . Note 2— Fair Value Fair value is determined based on assumptions that a market participant would use in pricing an asset or liability. The assumptions used are in accordance with a three-tier hierarchy, defined by GAAP, that draws a distinction between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the use of present value and other valuation techniques in the determination of fair value (Level 3). The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued payroll and related liabilities reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings, and average remaining maturities (Level 2). See Note 6 for the fair value of debt. The fair value of our derivative contracts is determined based on the present value of expected future cash flows considering the risks involved, including non-performance risk, and using discount rates appropriate for the respective maturities. Observable Level 2 inputs are used to determine the present value of expected future cash flows. See Note 8 for the fair value of derivatives. Our acquisitions may include contingent consideration as part of the purchase price. The fair value of contingent consideration is estimated as of the acquisition date and at the end of each subsequent reporting period based on the present value of the contingent payments to be made using a weighted probability of possible payments (Level 3). Subsequent changes in fair value are recorded as adjustments to acquisition-related charges and intangible amortization within the consolidated statements of operations. Note 3— Acquisition 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. Apria is a leading provider of integrated home healthcare equipment and related services in the United States. This division is reported as part of the Patient Direct segment. The following table presents the final fair value of the assets acquired and liabilities assumed recognized as of the Acquisition Date. The fair value and useful lives of tangible and intangible assets acquired were determined based on various valuation methods, including the income and cost approach, using several significant unobservable inputs including, but not limited to projected cash flows and a discount rate. These inputs are considered Level 3 inputs. 9 Table of Contents Fair Value as of Acquisition Date Assets acquired: Current assets $ 139,560 Goodwill 1,251,347 Intangible assets 315,300 Other non-current assets 354,237 Total assets $ 2,060,444 Liabilities assumed: Current liabilities $ 247,276 Noncurrent liabilities 128,561 Total liabilities 375,837 Fair value of net assets acquired, net of cash $ 1,684,607 Current assets acquired include $ 88.7 million in fair value of receivables, which reflects the approximate amount contractually owed. We are amortizing the fair value of acquired intangible assets, primarily customer relationships, including payor and capitated relationships, and trade names over their estimated weighted average useful lives of one to 15 years. Goodwill of $ 1.3 billion, which we assigned to our Patient Direct segment, consists largely of expected opportunities to expand into new markets and further develop a presence in the home healthcare business. Approximately $ 33 million of the goodwill is deductible for income tax purposes. The following table provides pro forma results of net revenue and net loss for the three and six months ended June 30, 2022 as if Apria was acquired on January 1, 2022, based on the final purchase price allocation. The pro forma results below are not necessarily indicative of the results that would have been if the acquisition had occurred on the dates indicated, nor are the pro forma results indicative of results which may occur in the future. Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Net revenue $ 2,500,015 $ 5,184,080 Net income (loss) $ 34,408 $ ( 44,454 ) Pro forma net income of $ 34.4 million for the three months ended June 30, 2022 includes a pro forma adjustment for amortization of intangible assets, net of tax of ($ 5.8 ) million. Pro forma net loss of $ 44.5 million for the six months ended June 30, 2022 includes pro forma adjustments for interest expense of $ 15.4 million, net of tax and amortization of intangible assets, net of tax of $ 3.1 million. The pro forma net loss also includes $ 39.4 million in seller transaction expenses and stock compensation expense associated with $ 108 million owed to the holders of Apria stock awards in connection with the Apria Acquisition. Acquisition-related charges within acquisition-related charges and intangible amortization presented in our consolidated statements of operations were $ 1.3 million and $ 6.4 million for the three months ended June 30, 2023 and 2022 and $ 2.5 million and $ 38.3 million for the six months ended June 30, 2023 and 2022. 10 Table of Contents Note 4— Goodwill and Intangible Assets The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill through June 30, 2023: Patient Direct Products & Healthcare Services Consolidated Carrying amount of goodwill, December 31, 2022 $ 1,533,670 $ 103,035 $ 1,636,705 Acquisition adjustment 1,582 — 1,582 Currency translation adjustments — ( 1,138 ) ( 1,138 ) Carrying amount of goodwill, June 30, 2023 $ 1,535,252 $ 101,897 $ 1,637,149 Intangible assets subject to amortization at June 30, 2023 and December 31, 2022 were as follows: June 30, 2023 December 31, 2022 Customer Relationships Tradenames Other Intangibles Customer Relationships Tradenames Other Intangibles Gross intangible assets $ 446,344 $ 202,000 $ 73,184 $ 447,107 $ 202,000 $ 73,181 Accumulated amortization ( 224,154 ) ( 59,874 ) ( 34,480 ) ( 197,540 ) ( 50,094 ) ( 29,612 ) Net intangible assets $ 222,190 $ 142,126 $ 38,704 $ 249,567 $ 151,906 $ 43,569 Weighted average useful life 13 years 10 years 6 years 13 years 10 years 6 years At June 30, 2023 and December 31, 2022, $ 279 million and $ 308 million in net intangible assets were held in the Patient Direct segment and $ 124 million and $ 137 million were held in the Products & Healthcare Services segment. Amortization expense for intangible assets was $ 20.9 million and $ 30.9 million for the three months ended June 30, 2023 and 2022 and $ 41.8 million and $ 41.2 million for the six months ended June 30, 2023 and 2022. As of June 30, 2023, based on the current carrying value of intangible assets subject to amortization, estimated amortization expense were as follows: Year 2023 (remainder) $ 41,489 2024 65,285 2025 55,157 2026 53,721 2027 46,878 2028 28,867 Note 5— Exit and Realignment Costs We periodically incur exit and realignment and other charges associated with optimizing our operations which includes the consolidation of certain facilities and IT restructuring charges. These charges also include costs associated with our Operating Model Realignment Program, which include professional fees, severance and other costs to streamline functions and processes. Exit and realignment charges were $ 29.0 million and $ 1.2 million for the three months ended June 30, 2023 and 2022 and $ 44.6 million and $ 2.9 million for six months ended June 30, 2023 and 2022. These amounts are excluded from our segments operating income. We expect material additional costs in 2023 associated with the Operating Model Realignment Program and IT restructuring charges. 11 Table of Contents The following table summarizes the activity related to exit and realignment cost accruals through June 30, 2023 and 2022: Total Accrued exit and realignment costs, December 31, 2022 $ 969 Provision for exit and realignment activities: Severance 4,127 Professional fees 9,012 Vendor contract and lease termination costs 1,824 Other 711 Cash payments ( 5,546 ) Accrued exit and realignment costs, March 31, 2023 11,097 Provision for exit and realignment activities: Severance 505 Professional fees 22,953 Vendor contract and lease termination costs 1,707 Other 3,798 Cash payments ( 20,196 ) Accrued exit and realignment costs, June 30, 2023 $ 19,864 Accrued exit and realignment costs, December 31, 2021 $ 8,306 Provision for exit and realignment activities: Severance 811 Other 871 Cash payments ( 6,903 ) Accrued exit and realignment costs, March 31, 2022 3,085 Provision for exit and realignment activities: Severance 246 Other 968 Cash payments ( 3,477 ) Accrued exit and realignment costs, June 30, 2022 $ 822 12 Table of Contents Note 6— Debt Debt, net of unamortized deferred financing costs, consists of the following: June 30, 2023 December 31, 2022 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 4.375 % Senior Notes, due December 2024 $ 245,659 $ 240,032 $ 245,510 $ 237,772 Receivables Securitization Program — — 93,142 96,000 Term Loan A 454,349 452,060 490,816 485,000 4.500 % Senior Notes, due March 2029 492,703 417,752 492,762 396,625 Term Loan B 546,014 563,203 576,587 597,733 6.625 % Senior Notes, due April 2030 579,023 538,085 585,180 516,060 Finance leases and other 16,508 16,508 16,877 16,877 Total debt 2,334,256 2,227,640 2,500,874 2,346,067 Less current maturities ( 24,403 ) ( 24,403 ) ( 17,906 ) ( 17,906 ) Long-term debt $ 2,309,853 $ 2,203,237 $ 2,482,968 $ 2,328,161 We have $ 246 million of 4.375 % senior notes due in December 2024 (the 2024 Notes), with interest payable semi-annually. The 2024 Notes were sold at 99.6 % of the principal amount with an effective yield of 4.422 %. We have the option to redeem the 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100 % of the principal amount or the present value of the remaining scheduled payments discounted at the applicable Benchmark Treasury Rate (as defined) plus 30 basis points. 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 Receivables Financing Agreement. The amended Receivables Financing Agreement has a maximum borrowing capacity of $ 450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement). Under the Receivables Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025. We had no borrowings at June 30, 2023 and $ 96.0 million outstanding at December 31, 2022 under our Receivables Financing Agreement. At June 30, 2023 and December 31, 2022, we had maximum revolving borrowing capacity of $ 450 million and $ 354 million under our Receivables Financing Agreement. On March 29, 2022, we entered into a term loan credit agreement with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (the Credit Agreement) that provides for two new credit facilities (i) a $ 500 million Term Loan A facility (the Term Loan A), and (ii) a $ 600 million Term Loan B facility (the Term Loan B). The interest rate on the Term Loan A is based on the sum of either Term SOFR or the Base Rate and an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A will mature in March 2027 and the Term Loan B will mature in March 2029. In addition to our scheduled principal payments of $ 3.1 million on the Term Loan A and $ 3.0 million on the Term Loan B, we made unscheduled principal payments of $ 35 million on Term Loan A and $ 30 million on Term Loan B during the six months ended June 30, 2023. On March 10, 2021, we issued $ 500 million of 4.500 % senior unsecured notes due in March 2029 (the 2029 Unsecured Notes), with interest payable semi-annually (the Notes Offering). The 2029 Unsecured Notes were sold at 100 % of the principal amount with an effective yield of 4.500 %. We may redeem all or part of the 2029 Unsecured Notes prior to March 31, 2024, at a price equal to 100 % of the principal amount of the 2029 Unsecured Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 10, 2021 (the Indenture). On or after March 31, 2024, we may redeem all or part of the 2029 Unsecured Notes at the 13 Table of Contents applicable redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date. We may also redeem up to 40 % of the aggregate principal amount of the 2029 Unsecured Notes at any time prior to March 31, 2024, at a redemption price equal to 104.5 % with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. On March 29, 2022, we completed the sale of $ 600 million in aggregate principal amount of our 6.625 % senior notes due in April 2030 (the 2030 Unsecured Notes), with interest payable semi-annually. The 2030 Unsecured Notes were sold at 100 % of the principal amount with an effective yield of 6.625 %. We may redeem all or part of the 2030 Unsecured Notes, prior to April 1, 2025, at a price equal to 100 % of the principal amount of the 2030 Unsecured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 29, 2022 (the New Indenture). From and after April 1, 2025, we may redeem all or part of the 2030 Unsecured Notes at the applicable redemption prices described in the New Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We may also redeem up to 40 % of the aggregate principal amount of the 2030 Unsecured Notes at any time prior to April 1, 2025, at a redemption price equal to 106.625 % with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. The 2029 Unsecured Notes and the 2030 Unsecured Notes are subordinated to any of our secured indebtedness, including indebtedness under our credit agreements. On March 29, 2022, we entered into an amendment to our revolving credit agreement, dated as of March 10, 2021 with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (Revolving Credit Agreement). The amendment (i) increased the aggregate revolving credit commitments under the Revolving Credit Agreement by $ 150 million, to an aggregate amount of $ 450 million and (ii) replaced the Eurocurrency Rate with the Adjusted Term SOFR Rate (each as defined in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027. At June 30, 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 support certain leased facilities as well as other normal business activities in the United States and Europe that were issued outside of the Revolving Credit Agreement for $ 2.1 million and $ 2.3 million as of June 30, 2023 and December 31, 2022. The Revolving Credit Agreement, the Credit Agreement, the Receivables Financing Agreement, the 2024 Notes, the 2029 Unsecured Notes, and the 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of any of the related agreements. The terms of the applicable credit agreements also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture. We were in compliance with our debt covenants at June 30, 2023. As of June 30, 2023, scheduled future principal payments of debt, excluding finance leases and other, were as follows: Year 2023 (remainder) $ 9,250 2024 273,855 2025 40,375 2026 43,500 2027 367,875 2028 6,000 2029 1,028,845 2030 592,670 Of the $ 274 million due in 2024, $ 254 million is due in December 2024. Current maturities at June 30, 2023 include $ 15.6 million in principal payments on our Term Loan A, $ 6.0 million in principal payments on our Term Loan B, and $ 2.8 million in current portion of finance leases. 14 Table of Contents Note 7— Retirement Plans We have a frozen noncontributory, unfunded retirement plan for certain retirees in the United States (U.S. Retirement Plan). As of June 30, 2023 and December 31, 2022, the accumulated benefit obligation of the U.S. Retirement Plan was $ 38.5 million and $ 39.3 million. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective teammates. The components of net periodic benefit cost for the three and six months ended June 30, 2023 and 2022 were as follows: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Service cost $ 446 $ 617 $ 887 $ 1,250 Interest cost 714 519 1,423 1,042 Recognized net actuarial loss 123 267 246 534 Net periodic benefit cost $ 1,283 $ 1,403 $ 2,556 $ 2,826 Note 8— Derivatives We are directly and indirectly affected by changes in foreign currency, which may adversely impact our financial performance and are referred to as “market risks.” When deemed appropriate, we use derivatives as a risk management tool to mitigate the potential impact of certain market risks. We do not enter into derivative financial instruments for trading purposes. We enter into foreign currency contracts to manage our foreign exchange exposure related to certain balance sheet items that do not meet the requirements for hedge accounting. These derivative instruments are adjusted to fair value at the end of each period through earnings. The gain or loss recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability. We pay interest on our Credit Agreement which fluctuates based on changes in our benchmark interest rates. In order to mitigate the risk of increases in benchmark rates on our term loans, we entered into an interest rate swap agreement whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable amounts calculated by reference to the notional amount. The interest rate swaps were designated as cash flow hedges. Cash flows related to the interest rate swap agreement are included in interest expense, net. We determine the fair value of our foreign currency derivatives and interest rate swaps based on observable market-based inputs or unobservable inputs that are corroborated by market data. We do not view the fair value of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying exposure. All derivatives are carried at fair value in our consolidated balance sheets. We consider the risk of counterparty default to be minimal. We report cash flows from our hedging instruments in the same cash flow statement category as the hedged items. The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of June 30, 2023: Derivative Assets Derivative Liabilities Notional Amount Maturity Date Classification Fair Value Classification Fair Value Cash flow hedges Interest rate swaps $ 350,000 March 2027 Other assets, net $ 15,355 Other liabilities $ — Economic (non-designated) hedges Foreign currency contracts $ 76,916 July - August 2023 Other current assets $ 269 Other current liabilities $ 2 The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2022: 15 Table of Contents Derivative Assets Derivative Liabilities Notional Amount Maturity Date Classification Fair Value Classification Fair Value Cash flow hedges Interest rate swaps $ 400,000 March 2027 Other assets, net $ 15,461 Other liabilities $ — Economic (non-designated) hedges Foreign currency contracts $ 58,321 January 2023 Other current assets $ 440 Other current liabilities $ 42 The notional amount of the interest rate swaps represents the amount in effect at the end of the period. Based on contractual terms, the notional amount will decrease in increments of $ 50 million on the last business day of March of each year until the maturity date. The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and six months ended June 30, 2023: Amount of Gain Recognized in Other Comprehensive Income (Loss) Location of Gain Reclassified from Accumulated Other Comprehensive Loss into Income Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded Amount of Gain Reclassified from Accumulated Other Comprehensive Loss into Income Three months ended June 30, 2023 Six months ended June 30, 2023 Three months ended June 30, 2023 Six months ended June 30, 2023 Three months ended June 30, 2023 Six months ended June 30, 2023 Interest rate swaps $ 6,792 $ 4,405 Interest expense, net $ ( 40,728 ) $ ( 82,926 ) $ 2,335 $ 4,511 The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three and six months ended June 30, 2022: Amount of Gain Recognized in Other Comprehensive Income (Loss) Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income Three months ended June 30, 2022 Six months ended June 30, 2022 Three months ended June 30, 2022 Six months ended June 30, 2022 Three months ended June 30, 2022 Six months ended June 30, 2022 Interest rate swaps $ 2,044 $ 2,044 Interest expense, net $ ( 35,839 ) $ ( 47,858 ) $ ( 1,692 ) $ ( 1,692 ) The amount of ineffectiveness associated with these contracts was immaterial for the periods presented. For the three and six months ended June 30, 2023, we recognized a loss of $ 0.9 million associated with our economic (non-designated) foreign currency contracts. For the three and six months ended June 30, 2022, we recognized losses of $ 1.3 million and $ 1.4 million associated with our economic (non-designated) foreign currency contracts. We recorded the change in fair value of derivative instruments and the remeasurement adjustment of the foreign currency denominated asset or liability in other operating expense (income), net for our foreign exchange contracts. Note 9— Income Taxes The effective tax rate was 8.8 % and 18.7 % for the three and six months ended June 30, 2023, compared to 25.6 % and 21.7 % in the same periods of 2022. The change in these rates resulted primarily from changes in income and losses. The liability for unrecognized tax benefits was $ 22.7 million at June 30, 2023 and $ 22.5 million at December 31, 2022. Included in the liability at June 30, 2023 and December 31, 2022 were $ 2.7 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. 16 Table of Contents On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the Internal Revenue Service (IRS) regarding our 2015 and 2016 consolidated income tax returns. On June 30, 2021, we received a NOPA from the IRS regarding our 2017 and 2018 consolidated income tax returns. Within the NOPAs, the IRS has asserted that our taxable income for the aforementioned years should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United States by our domestic subsidiaries. Our amount of taxable income in the United States is based on our transfer pricing methodology, which has been consistently applied for all years subject to the NOPAs. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the additional tax, interest, and any potential penalties could have a material adverse impact on our financial position, results of operations or cash flows. Note 10— Net (Loss) Income per Common Share The following summarizes the calculation of net (loss) income per common share attributable to common shareholders for the three and six months ended June 30, 2023 and 2022: Three Months Ended June 30, Six Months Ended June 30, (in thousands, except per share data) 2023 2022 2023 2022 Net (loss) income $ ( 28,241 ) $ 28,604 $ ( 52,659 ) $ 67,884 Weighted average shares outstanding - basic 75,801 74,710 75,559 74,158 Dilutive shares — 1,587 — 2,011 Weighted average shares outstanding - diluted 75,801 76,297 75,559 76,169 Net (loss) income per common share: Basic $ ( 0.37 ) $ 0.38 $ ( 0.70 ) $ 0.92 Diluted $ ( 0.37 ) $ 0.37 $ ( 0.70 ) $ 0.89 Share-based awards for the three and six months ended June 30, 2023 of approximately 1.8 million and 1.7 million shares were excluded from the calculation of net loss per diluted common share as the effect would be anti-dilutive. Note 11— Accumulated Other Comprehensive (Loss) Income The following table shows the changes in accumulated other comprehensive (loss) income by component for the three and six months ended June 30, 2023 and 2022: 17 Table of Contents Retirement Plans Currency Translation Adjustments Derivatives Total Accumulated other comprehensive (loss) income, March 31, 2023 $ ( 7,348 ) $ ( 34,977 ) $ 8,064 $ ( 34,261 ) Other comprehensive (loss) income before reclassifications — ( 5,167 ) 6,792 1,625 Income tax — — ( 1,766 ) ( 1,766 ) Other comprehensive (loss) income before reclassifications, net of tax — ( 5,167 ) 5,026 ( 141 ) Amounts reclassified from accumulated other comprehensive income (loss) 123 — ( 2,335 ) ( 2,212 ) Income tax 13 — 608 621 Amounts reclassified from accumulated other comprehensive income (loss), net of tax 136 — ( 1,727 ) ( 1,591 ) Other comprehensive income (loss) 136 ( 5,167 ) 3,299 ( 1,732 ) Accumulated other comprehensive (loss) income, June 30, 2023 $ ( 7,212 ) $ ( 40,144 ) $ 11,363 $ ( 35,993 ) Retirement Plans Currency Translation Adjustments Derivatives Total Accumulated other comprehensive loss, March 31, 2022 $ ( 14,408 ) $ ( 26,781 ) $ — $ ( 41,189 ) Other comprehensive (loss) income before reclassifications — ( 18,831 ) 2,044 ( 16,787 ) Income tax — — ( 532 ) ( 532 ) Other comprehensive (loss) income before reclassifications, net of tax — ( 18,831 ) 1,512 ( 17,319 ) Amounts reclassified from accumulated other comprehensive loss 386 — 1,692 2,078 Income tax ( 89 ) — ( 440 ) ( 529 ) Amounts reclassified from accumulated other comprehensive loss, net of tax 297 — 1,252 1,549 Other comprehensive income (loss) 297 ( 18,831 ) 2,764 ( 15,770 ) Accumulated other comprehensive (loss) income, June 30, 2022 $ ( 14,111 ) $ ( 45,612 ) $ 2,764 $ ( 56,959 ) Retirement Plans Currency Translation Adjustments Derivatives Total Accumulated other comprehensive (loss) income, December 31, 2022 $ ( 7,201 ) $ ( 40,095 ) $ 11,441 $ ( 35,855 ) Other comprehensive (loss) income before reclassifications — ( 49 ) 4,405 4,356 Income tax — — ( 1,145 ) ( 1,145 ) Other comprehensive (loss) income before reclassifications, net of tax — ( 49 ) 3,260 3,211 Amounts reclassified from accumulated other comprehensive income (loss) 246 — ( 4,511 ) ( 4,265 ) Income tax ( 257 ) — 1,173 916 Amounts reclassified from accumulated other comprehensive income (loss), net of tax ( 11 ) — ( 3,338 ) ( 3,349 ) Other comprehensive loss ( 11 ) ( 49 ) ( 78 ) ( 138 ) Accumulated other comprehensive (loss) income, June 30, 2023 $ ( 7,212 ) $ ( 40,144 ) $ 11,363 $ ( 35,993 ) 18 Table of Contents Retirement Plans Currency Translation Adjustments Derivatives Total Accumulated other comprehensive loss, December 31, 2021 $ ( 14,597 ) $ ( 25,994 ) $ — $ ( 40,591 ) Other comprehensive (loss) income before reclassifications — ( 19,618 ) 2,044 ( 17,574 ) Income tax — — ( 532 ) ( 532 ) Other comprehensive (loss) income before reclassifications, net of tax — ( 19,618 ) 1,512 ( 18,106 ) Amounts reclassified from accumulated other comprehensive loss 635 — 1,692 2,327 Income tax ( 149 ) — ( 440 ) ( 589 ) Amounts reclassified from accumulated other comprehensive loss, net of tax 486 — 1,252 1,738 Other comprehensive (loss) income 486 ( 19,618 ) 2,764 ( 16,368 ) Accumulated other comprehensive (loss) income, June 30, 2022 $ ( 14,111 ) $ ( 45,612 ) $ 2,764 $ ( 56,959 ) We include amounts reclassified out of accumulated other comprehensive (loss) income related to defined benefit pension plans as a component of net periodic pension cost recorded in Other expense, net. Note 12— Segment Information We periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under two segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States distribution division (Medical Distribution), outsourced logistics and value-added services, and Global Products division which manufactures and sources medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare divisions (Byram and Apria). We evaluate the performance of our segments based on their operating income excluding acquisition-related charges and intangible amortization and exit and realignment charges, along with other adjustments, that, either as a result of their nature or size, would not be expected to occur as part of our normal business operations on a regular basis. Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading and not meaningful. The following tables present financial information by segment: 19 Table of Contents Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net revenue: Products & Healthcare Services $ 1,930,723 $ 1,927,388 $ 3,846,212 $ 4,061,429 Patient Direct 632,503 572,627 1,239,863 845,538 Consolidated net revenue $ 2,563,226 $ 2,500,015 $ 5,086,075 $ 4,906,967 Operating income: Products & Healthcare Services $ 2,940 $ 61,243 $ 4,761 $ 150,325 Patient Direct 59,065 52,332 104,914 68,125 Acquisition-related charges and intangible amortization ( 22,203 ) ( 37,276 ) ( 44,392 ) ( 79,410 ) Exit and realignment charges ( 28,963 ) ( 1,214 ) ( 44,637 ) ( 2,896 ) Consolidated operating income $ 10,839 $ 75,085 $ 20,646 $ 136,144 Depreciation and amortization: Products & Healthcare Services $ 18,772 $ 19,209 $ 37,338 $ 38,203 Patient Direct 53,290 53,952 105,650 59,083 Consolidated depreciation and amortization $ 72,062 $ 73,161 $ 142,988 $ 97,286 Capital expenditures: Products & Healthcare Services $ 6,602 $ 18,418 $ 12,934 $ 29,061 Patient Direct 42,887 36,320 88,045 36,638 Consolidated capital expenditures $ 49,489 $ 54,738 $ 100,979 $ 65,699 June 30, 2023 December 31, 2022 Total assets: Products & Healthcare Services $ 2,492,214 $ 2,809,600 Patient Direct 2,509,479 2,507,216 Segment assets 5,001,693 5,316,816 Cash and cash equivalents 286,307 69,467 Consolidated total assets $ 5,288,000 $ 5,386,283 The following table presents net revenue by geographic area, which were attributed based on the location from which we ship products or provide services: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net revenue: United States $ 2,498,536 $ 2,376,573 $ 4,951,472 $ 4,638,592 International 64,690 123,442 134,603 268,375 Consolidated net revenue $ 2,563,226 $ 2,500,015 $ 5,086,075 $ 4,906,967 20 Table of Contents Note 13— Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes the way entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net earnings. Subsequent to the issuance of ASU No. 2016-13, the FASB issued various ASUs related to Credit Losses, Measurement of Credit Losses on Financial Instruments. These ASUs do not change the core principle of the guidance in ASU No. 2016-13. Instead these amendments are intended to clarify and improve operability of certain topics included within the credit losses standard. We adopted ASU No. 2016-13 and subsequent amendments beginning January 1, 2023. The adoption did not have a material impact on our consolidated financial statements and related disclosures. Note 14— Legal Proceedings 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. Other Litigation We are party to various legal claims that are ordinary and incidental to our business, including ones related to commercial disputes, employment, workers’ compensation, product liability, regulatory and other matters. We maintain insurance coverage for employment, product liability, workers’ compensation and other personal injury litigation matters, subject to policy limits, applicable deductibles and insurer solvency. We establish reserves from time to time based upon periodic assessment of the potential outcomes of pending matters. Based on current knowledge and the advice of counsel, we believe that the accrual as of June 30, 2023 for currently pending matters considered probable of loss, which is not material, is sufficient. In addition, we believe that other currently pending matters are not reasonably possible to result in a material loss, as payment of the amounts claimed is remote, the claims are immaterial, individually and in the aggregate, or the claims are expected to be adequately covered by insurance, subject to policy limits, applicable deductibles, exclusions, and insurer solvency. 21 Table of Contents Note 15— Commitments and Contingencies We anticipate that the noncancellable obligations beyond 12 months related to outsourced information technology operations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, will no longer be material as a result of executed contract terminations, expected contract terminations, and insourcing of information technology operations.