Item 1. Financial Statements
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three Months Ended
March 31,
(in thousands, except per share data)
2024
2023
Net revenue
$
2,612,680
$
2,522,849
Cost of goods sold
2,077,151
2,025,542
Gross profit
535,529
497,307
Distribution, selling and administrative expenses
477,613
448,722
Acquisition-related charges and intangible amortization
20,313
22,188
Exit and realignment charges, net
27,356
15,674
Other operating expense, net
551
916
Operating income
9,696
9,807
Interest expense, net
35,655
42,198
Other expense, net
1,153
1,387
Loss before income taxes
( 27,112 )
( 33,778 )
Income tax benefit
( 5,226 )
( 9,360 )
Net loss
$
( 21,886 )
$
( 24,418 )
Net loss per common share
Basic
$
( 0.29 )
$
( 0.32 )
Diluted
$
( 0.29 )
$
( 0.32 )
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
(unaudited)
Three Months Ended
March 31,
(in thousands)
2024
2023
Net loss
$
( 21,886 )
$
( 24,418 )
Other comprehensive (loss) income net of tax:
Currency translation adjustments
( 13,266 )
5,118
Change in unrecognized net periodic pension costs
235
( 147 )
Change in gains and losses on derivative instruments
1,412
( 3,377 )
Total other comprehensive (loss) income, net of tax
( 11,619 )
1,594
Comprehensive loss
$
( 33,505 )
$
( 22,824 )
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
March 31,
December 31,
(in thousands, except per share data)
2024
2023
Assets
Current assets
Cash and cash equivalents
$
244,866
$
243,037
Accounts receivable, net of allowances of $ 7,005 and $ 7,861
669,861
598,257
Merchandise inventories
1,144,597
1,110,606
Other current assets
177,020
150,890
Total current assets
2,236,344
2,102,790
Property and equipment, net of accumulated depreciation and amortization of $ 546,326 and $ 546,397
501,385
543,972
Operating lease assets
349,984
296,533
Goodwill
1,635,368
1,638,846
Intangible assets, net
342,593
361,835
Other assets, net
142,319
149,346
Total assets
$
5,207,993
$
5,093,322
Liabilities and equity
Current liabilities
Accounts payable
$
1,218,817
$
1,171,882
Accrued payroll and related liabilities
79,480
116,398
Current portion of long-term debt
207,658
206,904
Other current liabilities
427,136
396,701
Total current liabilities
1,933,091
1,891,885
Long-term debt, excluding current portion
1,946,005
1,890,598
Operating lease liabilities, excluding current portion
276,327
222,429
Deferred income taxes, net
34,437
41,652
Other liabilities
123,265
122,592
Total liabilities
4,313,125
4,169,156
Commitments and contingencies
Equity
Common stock, par value $ 2 per share; authorized - 200,000 shares; issued and outstanding - 76,449 shares and 76,546 shares
152,897
153,092
Paid-in capital
438,587
434,185
Retained earnings
346,821
368,707
Accumulated other comprehensive loss
( 43,437 )
( 31,818 )
Total equity
894,868
924,166
Total liabilities and equity
$
5,207,993
$
5,093,322
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
(in thousands)
2024
2023
Operating activities:
Net loss
$
( 21,886 )
$
( 24,418 )
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization
74,095
70,926
Share-based compensation expense
6,866
6,463
Provision (benefit) for losses on accounts receivable
181
( 521 )
Loss on extinguishment of debt
—
564
Deferred income tax benefit
( 3,659 )
( 591 )
Changes in operating lease right-of-use assets and lease liabilities
1,139
( 225 )
Gain on sale and dispositions of property and equipment
( 15,619 )
( 8,269 )
Changes in operating assets and liabilities:
Accounts receivable
( 75,144 )
5,240
Merchandise inventories
( 35,412 )
45,832
Accounts payable
52,926
23,082
Net change in other assets and liabilities
( 39,617 )
36,483
Other, net
3,168
3,832
Cash (used for) provided by operating activities
( 52,962 )
158,398
Investing activities:
Additions to property and equipment
( 45,997 )
( 46,150 )
Additions to computer software
( 3,411 )
( 5,340 )
Proceeds from sale of property and equipment
49,538
17,306
Other
( 2,000 )
—
Cash used for investing activities
( 1,870 )
( 34,184 )
Financing activities:
Borrowings under amended Receivables Financing Agreement
205,000
232,100
Repayments under amended Receivables Financing Agreement
( 139,300 )
( 328,100 )
Repayments of term loans
( 4,625 )
( 26,500 )
Other, net
( 7,755 )
( 4,989 )
Cash provided by (used for) financing activities
53,320
( 127,489 )
Effect of exchange rate changes on cash, cash equivalents and restricted cash
( 618 )
284
Net decrease in cash, cash equivalents and restricted cash
( 2,130 )
( 2,991 )
Cash, cash equivalents and restricted cash at beginning of period
272,924
86,185
Cash, cash equivalents and restricted cash at end of period
$
270,794
$
83,194
Supplemental disclosure of cash flow information:
Income taxes paid, net
$
2,365
$
2,405
Interest paid
$
18,211
$
32,536
Noncash investing activity:
Unpaid purchases of property and equipment and computer software at end of period
$
69,368
$
64,658
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
Common
Accumulated
Common
Stock
Other
Shares
( $ 2 par
Paid-In
Retained
Comprehensive
Total
(in thousands, except per share data)
Outstanding
value)
Capital
Earnings
Loss
Equity
Balance, December 31, 2023
76,546
$
153,092
$
434,185
$
368,707
$
( 31,818 )
$
924,166
Net loss
—
—
—
( 21,886 )
—
( 21,886 )
Other comprehensive loss
—
—
—
—
( 11,619 )
( 11,619 )
Share-based compensation expense, exercises and other
( 97 )
( 195 )
4,402
—
—
4,207
Balance, March 31, 2024
76,449
$
152,897
$
438,587
$
346,821
$
( 43,437 )
$
894,868
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
See accompanying notes to consolidated financial statements.
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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 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.
We report our business under two distinct segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States (U.S.) distribution division (Medical Distribution), including outsourced logistics and value-added services and our 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).
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 March 31, 2024 and December 31, 2023 includes 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, as well as $ 9.5 million and $ 13.5 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.
March 31, 2024
December 31, 2023
Cash and cash equivalents
$
244,866
$
243,037
Restricted cash included in Other current assets
25,928
29,887
Total cash, cash equivalents, and restricted cash
$
270,794
$
272,924
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,
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Medicaid and patients. Rental revenue, less estimated adjustments, is recognized as earned on a straight-line basis over the noncancelable lease term. We recorded $ 147 million and $ 172 million for the three months ended March 31, 2024 and 2023 in revenue related to equipment we rent to patients.
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 March 31, 2024 and December 31, 2023, there were a total of $ 103 million and $ 124 million of uncollected accounts receivable, that had been sold and removed from our consolidated balance sheets. We account for these transactions as sales 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, net of payments made to the Purchaser, is reflected as cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $ 515 million for the three months ended March 31, 2024. During the three months ended March 31, 2024, we received net cash proceeds of $ 512 million from the sale of accounts receivable under the RPA and collected $ 536 million of the sold accounts receivable. No accounts receivables were sold under the RPA for the three months ended March 31, 2023. The losses on sale of accounts receivable, inclusive of professional fees incurred to establish the agreement, recorded in other operating expense, net in the consolidated statements of operations were $ 3.3 million and $ 0.8 million for the three months ended March 31, 2024 and 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 5 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 7 for the fair value of derivatives.
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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—Goodwill and Intangible Assets
The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill at March 31, 2024:
Products &
Healthcare
Patient Direct
Services
Consolidated
Carrying amount of goodwill, December 31, 2023
$
1,535,252
$
103,594
$
1,638,846
Currency translation adjustments
—
( 3,478 )
( 3,478 )
Carrying amount of goodwill, March 31, 2024
$
1,535,252
$
100,116
$
1,635,368
Intangible assets subject to amortization, which exclude indefinite-lived intangible assets, at March 31, 2024 and December 31, 2023 were as follows:
March 31, 2024
December 31, 2023
Customer
Other
Customer
Other
Relationships
Tradenames
Intangibles
Relationships
Tradenames
Intangibles
Gross intangible assets
$
397,193
$
202,000
$
73,055
$
433,750
$
202,000
$
73,958
Accumulated amortization
( 213,793 )
( 74,544 )
( 43,318 )
( 236,791 )
( 69,655 )
( 41,427 )
Net intangible assets
$
183,400
$
127,456
$
29,737
$
196,959
$
132,345
$
32,531
Weighted average useful life
14 years
10 years
6 years
13 years
10 years
6 years
At March 31, 2024 and December 31, 2023, $ 236 million and $ 250 million in net intangible assets were held in the Patient Direct segment and $ 107 million and $ 112 million were held in the Products & Healthcare Services segment. Amortization expense for intangible assets was $ 20.3 million and $ 20.9 million for the three months ended March 31, 2024 and 2023.
As of March 31, 2024, based on the current carrying value of intangible assets subject to amortization, estimated amortization expense were as follows:
Year
2024 (remainder)
$
44,080
2025
54,389
2026
50,036
2027
41,687
2028
32,008
Thereafter
118,393
Total future amortization
$
340,593
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Note 4—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, IT strategic initiatives and other strategic actions. 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, net were $ 27.4 million and $ 15.7 million for the three months ended March 31, 2024 and 2023. These amounts are excluded from our segments’ operating income.
During the three months ended March 31, 2024, exit and realignment charges, net included a gain of $ 7.4 million associated with the sale of our corporate headquarters and $ 34.7 million in charges under our Operating Model Realignment Program and IT strategic initiatives. We expect to incur material future costs relating to our Operating Model Realignment Program and IT strategic initiatives, which we are not able to reasonably estimate.
The following table summarizes the activity related to exit and realignment cost accruals, which are classified as other current liabilities in our consolidated balance sheets, through March 31, 2024 and 2023:
Total
Accrued exit and realignment costs, December 31, 2023
$
20,047
Provision for exit and realignment activities:
Severance
184
Professional fees
25,625
Other
2,493
Cash payments
( 11,728 )
Accrued exit and realignment costs, March 31, 2024
$
36,621
Accrued exit and realignment costs, December 31, 2022
$
969
Provision for exit and realignment activities:
Severance
4,127
Professional fees
9,012
Other
2,535
Cash payments
( 5,546 )
Accrued exit and realignment costs, March 31, 2023
$
11,097
In addition to the exit and realignment accruals in the preceding table and the $ 7.4 million gain associated with the sale of our corporate headquarters, we also incurred $ 6.5 million of costs that were expensed as incurred for the three months ended March 31, 2024, which primarily related to accelerated depreciation of certain assets held in our Products & Healthcare Services segment.
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Note 5—Debt
Debt, net of unamortized deferred financing costs, consists of the following:
March 31, 2024
December 31, 2023
Carrying
Estimated
Carrying
Estimated
Amount
Fair Value
Amount
Fair Value
4.375 % Senior Notes, due December 2024
$
171,306
$
169,816
$
171,232
$
168,754
Receivables Financing Agreement
64,438
65,700
—
—
Term Loan A
385,003
389,513
387,591
390,668
4.500 % Senior Notes, due March 2029
473,162
438,337
472,869
422,647
Term Loan B
502,481
518,722
503,212
518,293
6.625 % Senior Notes, due April 2030
540,947
547,661
540,445
529,472
Finance leases and other
16,326
16,326
22,153
22,153
Total debt
2,153,663
2,146,075
2,097,502
2,051,987
Less current maturities
( 207,658 )
( 207,658 )
( 206,904 )
( 206,904 )
Long-term debt
$
1,946,005
$
1,938,417
$
1,890,598
$
1,845,083
We have $ 171 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 in the Indenture which governs the 2024 Notes ) 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 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 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 $ 65.7 million in principal outstanding and no borrowings at March 31, 2024 and December 31, 2023 under our Receivables Financing Agreement. At March 31, 2024 and December 31, 2023, we had maximum revolving borrowing capacity of $ 384 million and $ 450 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 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.
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
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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 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 issued $ 600 million of 6.625 % senior unsecured 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.
We have a revolving credit agreement with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (Revolving Credit Agreement) with a maximum borrowing capacity of $ 450 million. The interest rate under our Revolving Credit Agreement is based on the Adjusted Term SOFR Rate (as defined in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027.
At March 31, 2024 and December 31, 2023, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce Revolver availability, totaling $ 26.7 million and $ 27.4 million, leaving $ 423 million available for borrowing at the end of each period. We also had letters of credit and bank guarantees which support certain leased facilities as well as other normal business activities in the U.S. and Europe that were issued outside of the Revolving Credit Agreement for $ 3.0 million as of March 31, 2024 and December 31, 2023.
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 March 31, 2024.
As of March 31, 2024, scheduled future principal payments of debt, excluding finance leases and other, were as follows:
Year
2024 (remainder)
$
194,572
2025
106,075
2026
43,500
2027
305,375
2028
6,000
2029
965,654
2030
552,189
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Of the $ 195 million due in 2024, $ 179 million is due in December 2024. Current maturities at March 31, 2024 include $ 171 million in principal payments on our 2024 Notes, $ 25.0 million in principal payments on our Term Loan A, $ 6.0 million in principal payments on our Term Loan B, and $ 5.3 million in current portion of finance leases and other.
Note 6—Retirement Plans
We have a frozen noncontributory, unfunded retirement plan for certain retirees in the U.S. (U.S. Retirement Plan). As of March 31, 2024 and December 31, 2023, the accumulated benefit obligation of the U.S. Retirement Plan was $ 33.7 million and $ 34.1 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 months ended March 31, 2024 and 2023 were as follows:
Three Months Ended
March 31,
2024
2023
Service cost
$
458
$
441
Interest cost
645
710
Recognized net actuarial loss
81
123
Net periodic benefit cost
$
1,184
$
1,274
Note 7—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.
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The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of March 31, 2024:
Notional
Derivative Assets
Derivative Liabilities
Amount
Maturity Date
Classification
Fair Value
Classification
Fair Value
Cash flow hedges
Interest rate swaps
$
300,000
March 2027
Other assets, net
$
10,356
Other liabilities
$
—
Economic (non-designated) hedges
Foreign currency contracts
$
69,335
April 2024
Other current assets
$
129
Other current liabilities
$
44
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2023:
Notional
Derivative Assets
Derivative Liabilities
Amount
Maturity Date
Classification
Fair Value
Classification
Fair Value
Cash flow hedges
Interest rate swaps
$
350,000
March 2027
Other assets, net
$
8,447
Other liabilities
$
—
Economic (non-designated) hedges
Foreign currency contracts
$
78,436
January 2024
Other current assets
$
1,043
Other current liabilities
$
—
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 months ended March 31, 2024:
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 Net Loss
Interest rate swaps
$
4,557
Interest expense, net
$
( 35,655 )
$
2,649
The amount of ineffectiveness associated with these contracts was immaterial for the period presented.
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three months ended March 31, 2023:
Amount of Loss 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 Net Loss
Interest rate swaps
$
( 2,387 )
Interest expense, net
$
( 42,198 )
$
2,176
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The amount of ineffectiveness associated with these contracts was immaterial for the period presented.
For the three months ended March 31, 2024 and 2023, we recognized a loss of $ 4.2 million and no gain (loss) 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, net for our foreign exchange contracts.
Note 8—Income Taxes
The effective tax rate was 19.3 % for the three months ended March 31, 2024, compared to 27.7 % in the same period of 2023. The change in these rates were primarily from changes in results of operations in the jurisdictions in which we operate and changes in forecasted results reflected in the tax rates.
The liability for unrecognized tax benefits was $ 22.8 million at March 31, 2024 and $ 22.7 million at December 31, 2023. Included in the liability at March 31, 2024 and December 31, 2023 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.
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 9—Net Loss per Common Share
The following summarizes the calculation of net loss per common share attributable to common shareholders for the three months ended March 31, 2024 and 2023:
Three Months Ended
March 31,
(in thousands, except per share data)
2024
2023
Net loss
$
( 21,886 )
$
( 24,418 )
Weighted average shares outstanding - basic
76,319
75,177
Dilutive shares
—
—
Weighted average shares outstanding - diluted
76,319
75,177
Net loss per common share:
Basic
$
( 0.29 )
$
( 0.32 )
Diluted
$
( 0.29 )
$
( 0.32 )
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Share-based awards for the three months ended March 31, 2024 and 2023 of approximately 1.6 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 10—Accumulated Other Comprehensive (Loss) Income
The following table shows the changes in accumulated other comprehensive (loss) income by component for the three months ended March 31, 2024 and 2023:
Currency
Retirement
Translation
Plans
Adjustments
Derivatives
Total
Accumulated other comprehensive (loss) income, December 31, 2023
$
( 5,115 )
$
( 32,954 )
$
6,251
$
( 31,818 )
Other comprehensive income (loss) before reclassifications
234
( 13,266 )
4,557
( 8,475 )
Income tax
( 59 )
—
( 1,185 )
( 1,244 )
Other comprehensive income (loss) before reclassifications, net of tax
175
( 13,266 )
3,372
( 9,719 )
Amounts reclassified from accumulated other comprehensive income (loss)
81
—
( 2,649 )
( 2,568 )
Income tax
( 21 )
—
689
668
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
60
—
( 1,960 )
( 1,900 )
Other comprehensive income (loss)
235
( 13,266 )
1,412
( 11,619 )
Accumulated other comprehensive (loss) income, March 31, 2024
$
( 4,880 )
$
( 46,220 )
$
7,663
$
( 43,437 )
Currency
Retirement
Translation
Plans
Adjustments
Derivatives
Total
Accumulated other comprehensive (loss) income, December 31, 2022
$
( 7,201 )
$
( 40,095 )
$
11,441
$
( 35,855 )
Other comprehensive income (loss) before reclassifications
—
5,118
( 2,387 )
2,731
Income tax
—
—
621
621
Other comprehensive income (loss) before reclassifications, net of tax
—
5,118
( 1,766 )
3,352
Amounts reclassified from accumulated other comprehensive income (loss)
123
—
( 2,176 )
( 2,053 )
Income tax
( 270 )
—
565
295
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
( 147 )
—
( 1,611 )
( 1,758 )
Other comprehensive (loss) income
( 147 )
5,118
( 3,377 )
1,594
Accumulated other comprehensive (loss) income, March 31, 2023
$
( 7,348 )
$
( 34,977 )
$
8,064
$
( 34,261 )
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 11—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 U.S. distribution division (Medical Distribution), including our outsourced logistics and value-added services businesses, and our 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).
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We evaluate the performance of our segments based on their operating income excluding acquisition-related charges and intangible amortization and exit and realignment charges, net, 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:
Three Months Ended
March 31,
2024
2023
Net revenue:
Products & Healthcare Services
$
1,974,837
$
1,915,489
Patient Direct
637,843
607,360
Consolidated net revenue
$
2,612,680
$
2,522,849
Operating income:
Products & Healthcare Services
$
11,486
$
1,820
Patient Direct
45,879
45,849
Acquisition-related charges and intangible amortization
( 20,313 )
( 22,188 )
Exit and realignment charges, net
( 27,356 )
( 15,674 )
Consolidated operating income
$
9,696
$
9,807
Depreciation and amortization:
Products & Healthcare Services
$
23,366
$
18,566
Patient Direct
50,729
52,360
Consolidated depreciation and amortization
$
74,095
$
70,926
Share-based compensation:
Products & Healthcare Services
$
4,769
$
4,498
Patient Direct
1,407
1,852
Other (1)
690
113
Consolidated share-based compensation
$
6,866
$
6,463
Capital expenditures:
Products & Healthcare Services
$
8,250
$
6,332
Patient Direct
41,158
45,158
Consolidated capital expenditures
$
49,408
$
51,490
(1) Other share-based compensation expense is captured within exit and realignment charges, net or acquisition-related charges for the three months ended March 31, 2024 and 2023.
March 31, 2024
December 31, 2023
Total assets:
Products & Healthcare Services
$
2,456,341
$
2,359,825
Patient Direct
2,506,786
2,490,460
Segment assets
4,963,127
4,850,285
Cash and cash equivalents
244,866
243,037
Consolidated total assets
$
5,207,993
$
5,093,322
For the three months ended March 31, 2024 and 2023, non-cash adjustments to merchandise inventories valued at the lower of cost or market, with the approximate cost determined by the last-in, first-out (LIFO) method for distribution inventories in the U.S. within our Products & Healthcare Services segment were $ 5.4 million and $ 4.9
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million. The net book value of patient service equipment dispositions were $ 9.6 million and $ 9.0 million for the three months ended March 31, 2024 and 2023, within the Patient Direct segment.
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
March 31,
2024
2023
Net revenue:
United States
$
2,550,610
$
2,452,936
International
62,070
69,913
Consolidated net revenue
$
2,612,680
$
2,522,849
Note 12—Recent Accounting Pronouncements
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which will require disclosure of additional detailed information about a reportable segment’s expenses, including significant segment expenses regularly provided to the Chief Operating Decision Maker (CODM), the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment’s profit or loss. This ASU is effective for us in annual periods beginning after December 15, 2023 and interim periods within annual years beginning after December 15, 2024. The amendments in this ASU must be applied on a retrospective basis to all prior periods presented in the financial statements and early adoption is permitted. We expect this ASU to only impact our disclosures with no impacts to our results of operations, financial condition and cash flows.
In December 2023, the FASB Issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require additional annual income tax disclosures, including disclosure of reconciling items by jurisdiction and nature to the extent those items exceed a specified threshold. In addition, this ASU will require disclosure of income taxes paid, net of refunds received disaggregated by federal, state, and foreign and by jurisdiction if the amount is more than 5% of total income tax payments, net of refunds received. The amendments in this ASU are effective for us in annual periods beginning after December 15, 2024. The amendments in this ASU are required to be applied on a prospective basis and retrospective adoption is permitted. We expect this ASU to only impact our disclosures with no impacts to our results of operations, financial condition and cash flows.
Note 13—Commitments, Contingent Liabilities, and Legal Proceedings
Commitments include $ 48.4 million of legally binding lease payments for the Morgantown, West Virginia center of excellence for medical supplies and logistics lease signed, but not yet commenced. Refer to our Annual Report on Form 10-K for the year ended December 31, 2023 for disclosure of other material contractual obligations.
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 March 31, 2024 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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.