Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis describes results of operations and material changes in the financial condition of Owens & Minor, Inc. and its subsidiaries since December 31, 2023. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Overview
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a global healthcare solutions company. Our business has two distinct segments: Products & Healthcare Services and Patient Direct. Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare divisions (Byram and Apria).
On July 22, 2024, we entered into an Agreement and Plan of Merger to acquire Rotech Healthcare Holdings Inc., (Rotech) for $1.36 billion in cash. Given anticipated tax benefits of approximately $40 million from the transaction, the net purchase price is approximately $1.32 billion. Rotech is a national leader in providing home medical equipment in the US. The definitive agreement contains certain termination rights for the Company and Rotech. In the event that we terminate the contract, we will be required to pay Rotech a termination fee of $70.0 million. The transaction is subject to customary closing conditions, including expiration or termination of the applicable waiting period under the Hart Scott Rodino Act, and is expected to close in the first half of 2025. We have fully committed financing in place and expect to use a combination of cash and incremental borrowings to fund the purchase price.
Net (loss) per share was $(0.17) and $(0.87) for the three and nine months ended September 30, 2024 as compared to net (loss) per share of $(0.08) and $(0.78) for the three and nine months ended September 30, 2023. Our financial results for the three months ended September 30, 2024 as compared to the prior year periods were impacted by the following: (1) a decline in operating income of our Products & Healthcare Services segment as described below; (2) $10.0 million of expense primarily for a legal settlement and related charges for a compensation dispute, partially offset by (3) an increase in operating income by our Patient Direct segment as described below; (4) a decline in intangible amortization of $6.2 million; and (5) a decline in interest expense of $1.6 million. Our financial results for the nine months ended September 30, 2024 as compared to the prior year periods were impacted by the following: (1) the remeasurement of an uncertain tax position, including interest which resulted in a $17.9 million, or $(0.23) income tax charge per share for the nine months ended September 30, 2024 (see Note 8 in Notes to Consolidated Financial Statements); (2) legal settlements of $16.7 million related primarily to compensation and wage and hour disputes and (3) a $10.7 million increase in exit and realignment charges, net partially offset by (4) operating income increases in both of our segments as described below; (5) a decline in interest expense of $12.9 million; and (6) a decline in intangible amortization of $11.5 million. Net (loss) per share was favorably impacted as compared to the prior year by foreign currency translation in the amount of $0.02 and $0.01 for the three and nine months ended September 30, 2024.
Products & Healthcare Services operating income was $4.2 million and $27.2 million for the three and nine months ended September 30, 2024, compared to $19.8 million and $24.6 million for the three and nine months ended September 30, 2023. The decline for the three months ended September 30, 2024 was primarily due to (1) a $10.3 million increase in last in, first out (LIFO) charges, (2) $4.6 million of unfavorable changes in foreign currency transaction gains and losses, net of derivative adjustments, as compared to the prior year and (3) costs to support future revenue growth partially offset by (4) revenue growth of 4.7% and (5) approximately $11 million of savings derived
23
Table of Contents
sourcing initiatives and other operating efficiencies . The increase for the nine months ended September 30, 2024 was primarily due to revenue growth of 4.0% and savings derived by our sourcing initiatives of approximately $26 million, partially offset by a $14.2 million increase in LIFO charges, increased costs to support future revenue growth, and approximately $8 million of increased teammate benefit costs. Patient Direct operating income was $79.9 million and $191 million for the three and nine months ended September 30, 2024, compared to $64.4 million and $169 million for the three and nine months ended September 30, 2023. This segment’s results reflect revenue growth of 5.9% and 5.1% and cost savings from information technology (IT) strategic initiatives and other operating efficiencies. For the nine months ended September 30, 2024, we recognized a $5.1 million gain from an agreement with Philips Respironics (Philips) for previously recalled equipment, which was partially offset by unfavorable changes in revenue mix and approximately $15 million of increased teammate benefit costs.
Refer to ‘Results of Operations’ for further detail of quantitative and qualitative drivers of our results.
Philips Respironics Recall
In June 2021, one of Apria’s suppliers, Philips, announced a voluntary recall of its continuous and non-continuous ventilators (certain continuous positive airway pressure (CPAP), bilevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices, which the U.S. Food and Drug Administration (FDA) identified as a Class I recall, the most serious category of recall. In December 2022, Philips issued a subsequent voluntary recall related to deficiencies in repairs made to certain of the ventilators that had originally been recalled in June 2021 (together with the June 2021 recall, the Recall). In April 2024, Philips entered into a consent decree enjoining Philips from making and distributing non-medically necessary CPAP, bilevel positive airway pressure and ventilator devices at any of its Sleep and Respiratory Care Business facilities until the FDA determines that Philips has complied with the remediation and compliance activities set forth in the consent decree.
We continue to closely monitor the impact of the Recall and subsequent consent decree on our business. To date, we have incurred significant costs coordinating Recall-related activities, and we may continue to incur additional significant costs (including costs in completing the replacement of devices subject to the Recall). Some or all of these costs may not be recoverable from the product manufacturer. During the second quarter, we reached an agreement with Philips requiring Philips to pay us for recalled equipment returned to Philips. Refer to the ‘Overview’ section for details of the impacts to our statements of operations for the nine months ended September 30, 2024. During the three months ended September 30, 2024, we received $17.1 million from Philips which was recorded in the ‘other, net’ line item within investing activities of the consolidated statements of cash flows. The corresponding gain of $5.1 million on the returned equipment for the nine months ended September 30, 2024 is reflected in the ‘gain on sales and dispositions of property and equipment’ line item within operating activities of the consolidated statements of cash flows. While we believe we have access to a sufficient supply of CPAP, bilevel positive airway pressure and ventilator devices to service our home healthcare patients’ needs, other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.
Results of Operations
Net revenue.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Products & Healthcare Services
$
2,034,279
$
1,943,467
$
90,812
4.7
%
Patient Direct
686,846
648,275
38,571
5.9
%
Net revenue
$
2,721,125
$
2,591,742
$
129,383
5.0
%
24
Table of Contents
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Products & Healthcare Services
$
6,019,721
$
5,789,679
$
230,042
4.0
%
Patient Direct
1,985,089
1,888,138
96,951
5.1
%
Net revenue
$
8,004,810
$
7,677,817
$
326,993
4.3
%
The Products & Healthcare Services net revenue increase of $90.8 million for the three months ended September 30, 2024 was driven primarily from net revenue growth in the Medical Distribution division of 5.5%, which includes the benefit of one additional sales day. The Patient Direct segment net revenue growth for the three months ended September 30, 2024 of $38.6 million was driven by growth across most product categories, including diabetes and sleep supplies, as a result of patient growth and high retention of customers.
The Products & Healthcare Services net revenue increase of $230 million for the nine months ended September 30, 2024 was driven primarily from net revenue growth in the Medical Distribution division of 5.0%, which includes the benefit of one additional sales day and was partially offset by a slight decline in our Global Products division, primarily driven by a decline in international net revenue. The Patient Direct segment net revenue growth for the nine months ended September 30, 2024 of $97.0 million was driven by virtually the same factors impacting the third quarter of 2024.
Foreign currency translation had a favorable impact on net revenue of $0.2 million for the three months ended September 30, 2024 and an unfavorable impact of $3.0 million for the nine months ended September 30, 2024 as compared to the prior year periods.
Cost of goods sold.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Cost of goods sold
$
2,161,419
$
2,053,244
$
108,175
5.3
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Cost of goods sold
$
6,365,421
$
6,122,579
$
242,842
4.0
%
The increase in cost of goods sold for the three months ended September 30, 2024 reflects the increased cost associated with net revenue growth of 5.0% and a $10.3 million increase in LIFO charges, which reflects a $6.7 million LIFO liquidation credit for the three months ended September 30, 2023 as a result of a reduction in our Products & Healthcare Services segment inventory, as measured on a first in, first out basis. The increase was partially offset by cost reductions in our Global Products division, including approximately $11 million of savings associated with sourcing initiatives and other operating efficiencies.
The increase in cost of goods sold for the nine months ended September 30, 2024 reflects the increased cost associated with net revenue growth of 4.3% and a $14.2 million increase in LIFO charges , partially offset by cost reductions in our Global Products division, including approximately $26 million of savings associated with sourcing initiatives.
Foreign currency translation had a favorable impact on cost of goods sold of $2.2 million and $3.1 million for the three and nine months ended September 30, 2024 as compared to the prior year periods.
25
Table of Contents
Gross profit.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Gross profit
$
559,706
$
538,498
$
21,208
3.9
%
As a % of net revenue
20.57
%
20.78
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Gross profit
$
1,639,389
$
1,555,238
$
84,151
5.4
%
As a % of net revenue
20.48
%
20.26
%
The changes in gross profit for the three and nine months ended September 30, 2024 was driven by net revenue growth and other factors impacting net revenue and cost of goods sold described above. Foreign currency translation had a favorable impact on gross profit of $2.4 million and $0.1 million for the three and nine months ended September 30, 2024 as compared to the prior year periods.
Operating expenses.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Distribution, selling and administrative expenses
$
469,798
$
452,583
$
17,215
3.8
%
As a % of net revenue
17.26
%
17.46
%
Acquisition-related charges and intangible amortization
$
21,097
$
30,217
$
(9,120)
(30.2)
%
Exit and realignment charges, net
$
28,880
$
30,180
$
(1,300)
(4.3)
%
Other operating expense, net
$
15,727
$
1,677
$
14,050
837.8
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Distribution, selling and administrative expenses
$
1,416,724
$
1,356,334
$
60,390
4.5
%
As a % of net revenue
17.70
%
17.67
%
Acquisition-related charges and intangible amortization
$
61,395
$
74,609
$
(13,214)
(17.7)
%
Exit and realignment charges, net
$
85,530
$
74,817
$
10,713
14.3
%
Other operating expense, net
$
21,542
$
4,991
$
16,551
331.6
%
The increase in Distribution, selling and administrative (DS&A) expenses for the three months ended September 30, 2024 was driven primarily by incremental costs to support the $129 million, or 5.0%, net revenue growth, along with future revenue growth, partially offset by productivity gains derived from operating efficiencies.
The increase in DS&A expenses for the nine months ended September 30, 2024 was driven primarily by incremental costs to support the $327 million, or 4.3%, net revenue growth, along with future revenue growth and an increase of approximately $22 million in teammate benefit costs, partially offset by approximately $14 million in expense savings from our IT strategic initiatives, approximately $8 million of personnel cost savings related to 2023 organizational changes, and other productivity gains derived from operating efficiencies.
Foreign currency translation had an unfavorable impact on DS&A expenses of $0.1 million and favorable impact on DS&A expenses of $0.8 million for the three and nine months ended September 30, 2024 as compared to the prior year periods.
Intangible amortization was $14.6 million and $51.2 million for the three and nine months ended September 30, 2024 and $20.8 million and $62.7 million for the three and nine months ended September 30, 2023
26
Table of Contents
related primarily to intangible assets acquired in the Apria, Halyard Health, Inc. and Byram Healthcare Centers, Inc. acquisitions. The declines as compared to the prior periods of $6.2 million and $11.5 million, respectively, was related to certain intangible assets being fully amortized. See Note 3 in Notes to Consolidated Financial Statements. Acquisition-related charges were $6.5 million and $10.2 million for the three and nine months ended September 30, 2024 consisting of costs related to the expected acquisition of Rotech. Acquisition-related charges were $9.4 million and $11.9 million for the three and nine months ended September 30, 2023 consisting primarily of costs related to the acquisition of Apria. See Note 1 in Notes to Consolidated Financial Statements.
Exit and realignment charges, net were $28.9 million and $85.5 million for the three and nine months ended September 30, 2024. These charges were primarily related to our (1) Operating Model Realignment Program of $19.5 million and $75.9 million, including professional fees, severance, and other costs to streamline functions and processes, (2) costs related to IT strategic initiatives such as converting certain divisions to common IT systems of $7.6 million and $14.3 million and, (3) other costs associated with strategic initiatives of $1.8 million and $2.8 million for the three and nine months ended September 30, 2024. Exit and realignment charges, net also included a $7.4 million gain on the sale of our corporate headquarters for the nine months ended September 30, 2024. Exit and realignment charges, net were $30.2 million and $74.8 million for the three and nine months ended September 30, 2023. These charges primarily related to our (1) Operating Model Realignment Program of $24.5 million and $63.9 million, including professional fees, severance, and other costs to streamline functions and processes, (2) IT restructuring charges such as converting certain divisions to a common information technology system of $3.3 million and $6.7 million and, (3) other costs associated with strategic initiatives of $2.4 million and $4.1 million for the three and nine months ended September 30, 2023. We may incur material future costs relating to certain exit and realignment actions, which remain underway and we are not able to reasonably estimate.
The change in other operating expense, net for the three and nine months ended September 30, 2024 reflects $3.6 million and $10.8 million of losses on sales of accounts receivable under the Master Receivables Purchase Agreement (RPA) as compared to $3.5 million and $7.1 million of losses for the three and nine months ended September 30, 2023. Other operating expense, net for the three months ended September 30, 2024 reflects $10.0 million of expense primarily for a legal settlement and related charges for a compensation dispute. Other operating expense, net for the nine months ended September 30, 2024 reflects $16.7 million related primarily to the legal settlements of a compensation dispute and a wage and hour dispute in the state of California within our Apria division and gains related to an agreement with Philips for previously recalled equipment of $5.1 million.
During the three and nine months ended September 30, 2024, we incurred an unfavorable change of $4.6 million and $1.4 million in foreign currency transaction gains and losses, net of derivative adjustments, as compared to the prior year.
Interest expense, net.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Interest expense, net
$
36,554
$
38,127
$
(1,573)
(4.1)
%
Effective interest rate
7.12
%
7.01
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Interest expense, net
$
108,108
$
121,053
$
(12,945)
(10.7)
%
Effective interest rate
7.14
%
6.92
%
Interest expense, net for the three and nine months ended September 30, 2024 decreased due to lower average outstanding borrowings of $148 million and $260 million, partially offset by an increase in the effective interest rate of
27
Table of Contents
11 basis points and 22 basis points as compared to the three and nine months ended September 30, 2023. See Note 5 in Notes to Consolidated Financial Statements.
Other expense (income), net.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Other expense (income), net
$
1,438
$
(3,302)
$
4,740
143.5
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Other expense (income), net
$
3,796
$
(843)
$
4,639
550.3
%
Other expense (income), net for the three and nine months ended September 30, 2024 and 2023 includes interest cost and net actuarial losses related to our retirement plans. In addition, other expense (income), net for the three and nine months ended September 30, 2024 includes a loss on extinguishment of debt of $0.3 million compared to a gain on extinguishment of debt, of $5.2 million and $4.4 million associated with the early retirement of indebtedness of $195 million and $268 million for the three and nine months ended September 30, 2023.
Income taxes.
Three Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Income tax benefit
$
(1,018)
$
(4,558)
$
3,540
77.7
%
Effective tax rate
7.4
%
41.5
%
Nine Months Ended
September 30,
Change
(Dollars in thousands)
2024
2023
$
%
Income tax provision (benefit)
$
8,864
$
(16,638)
$
25,502
153.3
%
Effective tax rate
(15.4)
%
22.0
%
The change in the effective tax rate for the three months ended September 30, 2024 compared to the same period in 2023 resulted primarily from changes in results of operations in the jurisdictions in which we operate and a tax benefit recorded for foreign derived intangible income during the three months ended September 30, 2023. The change in the effective tax rate for the nine months ended September 30, 2024 compared to the same period in 2023 resulted primarily from a one-time income tax charge of $17.9 million, or $(0.23) per share, related to a recent decision associated with Notices of Proposed Adjustments (NOPA) that we received in 2020 and 2021 as well as the factors described for the three month period. The NOPA was communicated to us in late June 2024. The matter at hand is related to past transfer pricing methodology, which is no longer employed. See Note 8 in Notes to Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources
Financial condition . We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory days. We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our Revolving Credit Agreement or Receivables Financing Agreement, or a combination thereof of approximately $30 million.
28
Table of Contents
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in North America, Europe, and Asia. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collections of accounts receivable, and payments to suppliers.
Change
(Dollars in thousands)
September 30, 2024
December 31, 2023
$
%
Cash and cash equivalents
$
45,454
$
243,037
$
(197,583)
(81.3)
%
Accounts receivable, net
$
661,664
$
598,257
$
63,407
10.6
%
DSO (1)
22.0
20.5
Merchandise inventories
$
1,242,453
$
1,110,606
$
131,847
11.9
%
Inventory days (2)
52.9
49.0
Accounts payable
$
1,338,021
$
1,171,882
$
166,139
14.2
%
(1) Based on period ended accounts receivable and net revenue for the quarters ended September 30, 2024 and December 31, 2023. Consolidated DSO reflected the impact of the reduction in accounts receivable, net of allowances, due to sales of accounts receivable under the RPA. Excluding the impact of the RPA, Consolidated DSO would have been 26.1 as of September 30, 2024 and 24.8 as of December 31, 2023.
(2) Based on period ended merchandise inventories and cost of goods sold for the quarters ended September 30, 2024 and December 31, 2023.
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023:
Nine Months Ended
September 30,
(Dollars in thousands)
2024
2023
Net cash provided by (used for):
Operating activities
$
90,494
$
628,945
Investing activities
(64,229)
(98,340)
Financing activities
(224,507)
(366,115)
Effect of exchange rate changes
408
(515)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(197,834)
$
163,975
Cash provided by operating activities in the first nine months of 2024 and 2023 reflected net losses and changes in working capital. The change in cash provided by operating activities was primarily driven by the reduction in accounts receivable, net from the initial accounts receivable sold through the RPA and the significant reduction in inventory levels during the nine months ended September 30, 2023, as these items did not recur during the nine months ended September 30, 2024.
Cash used for investing activities in the first nine months of 2024 included capital expenditures of $157 million, primarily for patient service equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, offset by $84.8 million in proceeds from sales and dispositions of property and equipment, which included sales of patient service equipment and $33.5 million in gross proceeds related to the sale of our corporate headquarters, and $17.1 million included in the ‘other, net’ line item for a settlement with Philips for returned equipment as described in the ‘Philips Respironics Recall’ section above. Cash used for investing activities in the first nine months of 2023 included capital expenditures of $152 million for patient service equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $53.6 million in proceeds related primarily to the sale of patient service equipment.
Cash used for financing activities in the first nine months of 2024 included repayments of debt of $211 million including the $171 million paid to redeem the outstanding 4.375% seniors notes due in December 2024 (the 2024 Notes), an unscheduled principal payment of $20.0 million on the Term Loan A and scheduled principal payments of $20.1 million on our Term Loans. We had no borrowings under our revolving credit facility for the first nine months of 2024 and the activity under our amended Receivables Financing Agreement netted to no impact to our outstanding borrowings. Payments for taxes related to the vesting of restricted stock awards, which are included in Other, net, were
29
Table of Contents
$8.1 million for the first nine months of 2024. Cash used for financing activities in the first nine months of 2023 included repayments of debt of $270 million, including $125 million of unscheduled and $10.8 million of scheduled principal payments on the Term Loan A and the Term Loan B, $134 million of cash to repurchase $143 million aggregate principal of the 2024 Notes, the 2029 Unsecured Notes and the 2030 Unsecured Notes. We had no borrowings under our revolving credit facility on a net basis for the first nine months of 2023 and made net repayments of $96.0 million under our amended Receivables Financing Agreement.
Capital resources. Our primary sources of liquidity include cash and cash equivalents, our Receivables Financing Agreement, and our Revolving Credit Agreement. The Receivables Financing Agreement provides a maximum revolving borrowing capacity of $450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement). Under the Receivables Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025. We had no borrowings at September 30, 2024 and December 31, 2023 under our Receivables Financing Agreement. At September 30, 2024 and December 31, 2023, we had maximum revolving borrowing capacity of $450 million under our Receivable Financing Agreement.
The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million. We have $870 million in outstanding term loans under a term loan credit agreement (the Credit Agreement). The interest rate on our Revolving Credit Agreement is based on a spread over a benchmark rate (as described in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027. The interest rate on the Term Loan A is based on either the Term SOFR or the Base Rate plus an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A matures in March 2027 and the Term Loan B matures in March 2029.
At September 30, 2024 and December 31, 2023, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce Revolver availability, totaling $31.5 million and $27.4 million, leaving $419 million and $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 United States and Europe that were issued outside of the Revolving Credit Agreement for $3.0 million as of September 30, 2024 and December 31, 2023.
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. On September 16, 2024, we redeemed all of our outstanding 2024 Notes, see Note 5 in Notes to Consolidated Financial Statements.
The Revolving Credit Agreement, the Credit Agreement, the Receivables Financing Agreement, the 4.500% senior unsecured notes due in March 2029, and the 6.625% senior unsecured notes due in April 2030 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 September 30, 2024.
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 a third-party financial institution (the Purchaser) in exchange for cash. Cash received from the sales of accounts receivable, net of payments made to the Purchaser, is reflected in the change in accounts receivable within cash provided by operating activities in the consolidated statements of cash flows. Total accounts receivable sold under the RPA were $542 million and $1.6 billion for the three and nine months ended September 30, 2024. During the three and nine months ended September 30, 2024,
30
Table of Contents
we received net cash proceeds of $538 million and $1.6 billion from the sale of accounts receivable under the RPA and collected $550 million and $1.6 billion of the sold accounts receivable. Total accounts receivable sold under the RPA were $482 million and $894 million for the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2023, we received net cash proceeds of $478 million and $888 million from the sale of accounts receivable under the RPA and collected $508 million and $805 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 $3.6 million and $3.5 million for the three months ended September 30, 2024 and 2023 and $10.8 million and $7.1 million for the nine months ended September 30, 2024 and 2023. The RPA is separate and distinct from the accounts receivable securitization program (the Receivables Financing Agreement).
We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. We have from time to time, entered into, and from time to time in the future, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms). Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.
We believe cash generated by operating activities, including available cash proceeds from the RPA, available financing sources, and borrowings under the Receivables Financing Agreement and Revolving Credit Agreement, as well as cash on hand, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, debt repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.
We earn a portion of our operating income in foreign jurisdictions outside the U.S. Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $22.2 million and $22.0 million at September 30, 2024 and December 31, 2023. As of September 30, 2024, we are permanently reinvested in our foreign subsidiaries.
Contractual Obligations
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.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see our Annual Report on Form 10-K for the year ended December 31, 2023 and Note 12 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the period ended on September 30, 2024.
Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from
31
Table of Contents
those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:
● increasing competitive and pricing pressures in the marketplace;
● our ability to retain existing and attract new customers and our dependence on sales to certain customers;
● our dependence on certain vendors, suppliers and third-parties for key components, raw materials, finished goods, equipment and services;
● our ability to successfully identify, close, manage or integrate acquisitions, including Rotech;
● our ability to successfully implement our strategic initiatives;
● our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, adverse tax consequences, and other risks of operating in international markets;
● uncertainties related to, and our ability to adapt to and comply with, changes in government regulations, including healthcare, tax and product licensing laws and regulations;
● risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;
● uncertainties related to general economic, regulatory and business conditions and our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;
● our ability to meet the terms to qualify for supplier funding programs;
● the ability of customers and suppliers to meet financial commitments due to us;
● changes in manufacturer preferences between direct sales and wholesale distribution;
● changing trends in customer profiles and ordering patterns;
● our ability to manage operating expenses and improve operational efficiencies;
● availability of, and our ability to access, special inventory buying opportunities;
● our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk, and our ability to refinance, extend or repay our substantial indebtedness;
● our ability to attract and retain talented and qualified teammates;
● recalls of any of our products, or safety risks or the discovery of serious safety issues with our products;
● changes, delays and uncertainties in the reimbursement process;
● our ability to adequately establish, maintain, protect and enforce our intellectual property and proprietary rights as well as avoid infringement, misappropriation or other violations of the intellectual property and proprietary rights of third parties;
32
Table of Contents
● our ability to engage in transactions that may be limited by the restrictive covenants in our credit facilities and existing notes;
● the risk that information systems are interrupted or damaged or fail for any extended period of time, that new information systems are not successfully implemented or integrated, or that there is a data security breach in our information systems or a third party’s information systems that impacts our business;
● risks related to public health crises or future outbreaks of health crises or other adverse public health developments such as the novel coronavirus (COVID-19) global pandemic;
● the risk of an impairment to goodwill or other long-lived assets;
● our ability to timely or adequately respond to technological advances;
● our failure to adequately insure against losses, including from substantial claims and litigation;
● our ability to meet performance targets specified by customer contracts under contractual commitments;
● our capitation arrangements may prove unprofitable if actual utilization rates exceed our assumptions;
● the outcome of outstanding and any future litigation, including product and professional liability claims;
● volatility in the price of our common stock and securities; and
● other factors detailed from time to time in the reports we file with the SEC, including those described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023.
We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Certain quantitative and qualitative market risk disclosures are described in our Annual Report on Form 10-K for the year ended December 31, 2023. Through September 30, 2024, there have been no material changes in the quantitative and qualitative market risk disclosures described in such Annual Report.
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.