ACCENDRA HEALTH INC/VA/ (ACH) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations is intended to assist the reader in the understanding and assessment of significant changes and trends related to our results of operations. The discussion and analysis presented below refers to, and should be read in conjunction with, the consolidated financial statements and accompanying notes included in Item 8 of Part II of this Annual Report on Form 10-K.

Overview

Owens & Minor, Inc., along with its subsidiaries, is a global healthcare solutions company. Our business has two distinct segments: Products & Healthcare Services and Patient Direct. Products & Healthcare Services provides distribution, outsourced logistics and value-added services, and manufactures and sources medical surgical products through our production and kitting operations. Patient Direct expands our business along the continuum of care through delivery of disposable medical supplies sold directly to patients and home health agencies and is a leading provider of integrated home healthcare equipment and related services in the United States. Beginning in 2022, we have reported financial results using this two segment structure and have recast our prior period segment results on the same basis.

Net income per diluted share was $0.29 for the year ended December 31, 2022 as compared to $2.94 for the year ended December 31, 2021. Products & Healthcare Services segment operating income was $175 million for the year ended December 31, 2022, compared to $384 million for the year ended December 31, 2021. The decrease reflected overall reduced hospital demand, including reliance on stockpiles, and price changes, particularly for gloves, and headwinds created by macroeconomic conditions, including inflationary pressures, supply chain issues, and rising interest rates, partially offset by productivity gains derived from operating efficiencies, and changes in accrued incentive compensation. Patient Direct segment operating income was $194 million for the year ended December 31, 2022, compared to $58.0 million for the year ended December 31, 2021. The increase was primarily the result of the inclusion of Apria in the Patient Direct segment since March 29, 2022 (the Acquisition Date), strong revenue growth in our Byram business, leveraging our fixed costs, and operating efficiencies, partially offset by inflationary pressures. Net income per diluted share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.16 for the year ended December 31, 2022. Segment operating incomes exclude adjustments noted in Note 20, "Segments", in Notes to Consolidated Financial Statements, including a $92.3 million (approximately $69.6 million, net of tax) inventory valuation adjustment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

Acquisition of Apria

On the Acquisition Date, we completed the Apria Acquisition, in which we acquired 100% of Apria in exchange for approximately $1.7 billion, net of $144 million of cash acquired. The purchase was funded with a combination of debt and cash on hand. At the time of the Apria Acquisition, each share of Apria’s common stock was converted into the right to receive $37.50 in cash. Apria is a leading provider of integrated home healthcare equipment and related services in the United States. This business is reported as part of the Patient Direct segment.

COVID-19 Update

We continue to closely monitor the impact of COVID-19, including its variants and sub-variants, on all aspects of our business, including our customers, teammates, suppliers, vendors and distribution channels. We have taken actions to protect our teammates while maintaining business continuity as we respond to the needs from this global pandemic and may take further actions that may alter our business operations.

We are unable to predict the timing and the full impact that COVID-19 and any new pandemic(s) will have on our future operating results, financial position and cash flows due to numerous variables and continued uncertainties. Transportation and business operation restrictions arising from virus containment efforts of governments around the world have impacted our operations in certain locations, including within Asia. Essential activity exceptions from these restrictions have allowed us to continue to operate, but virus containment efforts have created supply chain challenges resulting in additional direct costs.

We have experienced growth in sales volumes for certain of our products (such as PPE) during the COVID-19 pandemic, as well as improved productivity and manufacturing output. During the COVID-19 pandemic, customers, state

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agencies and the federal government purchased a significant amount of PPE to serve patients, and to build stockpiles of product. There can be no assurance that such growth rates, increased sales volumes or other improvements will be maintained during or following the COVID-19 pandemic.

Our response to the COVID-19 pandemic was to manufacture and source as much PPE products as possible to enable front-line healthcare workers to perform their duties in the safest environment as possible, and to satisfy the U.S. government’s purchase requirements. Our efforts included a significant increase in PPE production in our manufacturing plants through expanding our production lines, hiring additional plant teammates, and increasing labor shifts. Furthermore, we sourced a greater level of PPE from our existing third-party suppliers than we historically have. One of the financial impacts from our response to this unprecedented crisis was an inventory build in the Products & Healthcare Services segment through the end of 2022. During 2022, overall reduced hospital demand and hospital reliance on stockpiles contributed to lower demand for PPE as compared to 2021.

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

Philips Respironics Recall

In June 2021, one of Apria's suppliers, Philips Respironics, announced a voluntary recall for continuous and non-continuous ventilators (certain CPAP, BiLevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices. The Food and Drug Administration (FDA) has since identified this as a Class I recall, the most serious category of recall. Philips Respironics issued a subsequent voluntary recall in December 2022 (together with the June 2021 recall, the Recall), related to deficiencies in repairs made to certain of the ventilators that had been recalled in June 2021.

Because we distribute these products and provide related home respiratory services and, in part, due to the substantial number of impacted devices, we have devoted, and will likely continue to devote, substantial time and resources to coordinating Recall-related activity and to supporting our home healthcare patients’ needs. The Recall has caused us, and may continue to cause us, to incur significant costs, some or all of which may not be recoverable from the product manufacturer. The Recall may also materially negatively affect our revenues and results of operations as a result of patients not using their impacted devices, current shortages in the availability of both replacement devices for impacted patients and new devices for new patients, patient hesitancy to use respiratory devices generally or other reasons.

We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the Recall. While the equipment shortage in the industry has begun to ease for certain CPAP and BiLevel positive airway pressure devices, we do not know whether that will continue. The Recall or other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.

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Supplemental Financial Information

(in thousands, except ratios and per share data)

(1) Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2022, 2021 and 2020.

(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2022, 2021 and 2020. The 2022 figure reflects the $92.3 million inventory valuation adjustment in our Products & Healthcare Services segment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of year-to-year comparisons between 2021 and 2020 can be found in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2021, which is incorporated by reference herein.

2022 compared to 2021

The increase in net revenue in our Patient Direct segment for the year ended December 31, 2022 was driven by the acquisition of Apria on March 29, 2022 and continued strong performance in our Byram business. The decrease in net revenue in our Products & Healthcare Services segment for the year ended December 31, 2022 reflected overall reduced hospital demand, including reliance on stockpiles and price changes, particularly for gloves. Foreign currency translation had an unfavorable impact on net revenue of $43.5 million for the year ended December 31, 2022 as compared to the prior year.

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Cost of goods sold includes the cost of the product (net of supplier incentives and cash discounts) and all costs incurred for shipments of products from manufacturers to our distribution centers for all customer arrangements where we are the primary obligor and bear risk of general and physical inventory loss. These are sometimes referred to as distribution contracts. Cost of goods sold also includes direct and certain indirect labor, depreciation of certain property and equipment, product costs, and material and overhead costs. Cost of goods sold compared to prior year reflects the inclusion of Apria since the Acquisition Date. The decrease in cost of goods sold since the prior year was due to changes in sales activity, including product mix, partially offset by an inventory valuation adjustment in our Products & Healthcare Services segment primarily associated with PPE, inflationary pressures, and supply chain issues.

Gross margin increase for the year ended December 31, 2022 was driven by inclusion of Apria since the Acquisition Date and sales mix, partially offset by overall reduced hospital demand, including reliance on stockpiles, an inventory valuation adjustment in our Products & Healthcare Services segment primarily associated with PPE, price changes, particularly for gloves, inflationary pressures, and supply chain issues. Foreign currency translation had an unfavorable impact on gross margin of $21.7 million for the year ended December 31, 2022 as compared to the prior year.

We value a portion of Products & Healthcare Services inventory held in the United States under the LIFO method. Had inventory been valued under the first-in, first-out (FIFO) method, gross margin as a percentage of net revenue would have been 6 basis points higher in 2022 and 56 basis points higher in 2021.

Distribution, selling and administrative (DS&A) expenses include labor and warehousing costs associated with our distribution and outsourced logistics services. Shipping and handling costs are primarily included in DS&A expenses and include costs to store, move, and prepare products for shipment, as well as costs to deliver products and services to customers. Overall DS&A expenses were affected by inclusion of Apria in our results since the Acquisition Date, and inflationary pressures for the year ended December 31, 2022, partially offset by operating efficiencies and productivity gains, and changes in accrued incentive compensation. DS&A expenses also included a favorable impact for foreign currency translation of $5.7 million for the year ended December 31, 2022 as compared to the prior year.

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Acquisition-related charges were $48.1 million for the year ended December 31, 2022 as compared to $3.0 million for the year ended December, 31, 2021. Acquisition-related charges in 2022 and 2021 consisted primarily of costs related to the Apria Acquisition. Exit and realignment charges were $6.9 million and $31.1 million for the years ended December 31, 2022 and 2021. Amounts in 2022 consisted primarily of severance and other charges associated with the reorganization of the Products & Healthcare Services segment and wind-down costs related to Fusion5. Amounts in 2021 consisted of wind-down costs related to Fusion5, IT restructuring charges, costs associated with our strategic organizational realignment, and other items. We do not expect material additional costs in 2023 for activities that were initiated through December 31, 2022. We expect material costs in 2023 for new actions taken in 2023.

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

Interest expense, net and the effective interest rate for the year ended December 31, 2022 increased primarily due to the increase in debt associated with the Apria Acquisition on March 29, 2022, along with rising market interest rates. See Note 10 in Notes to Consolidated Financial Statements.

Loss on extinguishment of debt for the year ended December 31, 2021 included the write-off of deferred financing costs and third party fees associated with the debt financing in March 2021 of $15.3 million and amounts reclassified from accumulated other comprehensive loss as a result of the termination of our interest rate swaps of $25.1 million.

Other expense, net.

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

The change in the effective tax rate for the year ended December 31, 2022 compared to 2021 resulted primarily from changes in income and losses and a change in our foreign repatriation plans related to the indefinite reinvestment of earnings associated with a subsidiary in Thailand.

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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 facility or Receivables Securitization Program, or a combination thereof of approximately $28 million.

The majority of our cash and cash equivalents are held in cash depository accounts with major banks in 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.

(1) Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2022 and 2021

(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2022 and 2021. The 2022 figure reflects the $92.3 million inventory valuation adjustment in our Products & Healthcare Services segment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

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

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

Cash used for investing activities in 2022 included cash paid for the acquisition of Apria of $1.7 billion and capital expenditures of $167 million for patient equipment and our strategic and operational efficiency initiatives associated with property and equipment and capitalized software, partially offset by $48.4 million in proceeds related primarily to the sale of patient equipment. Cash used for investing activities in 2021 included capital expenditures of $49.7 million for our strategic and operational efficiency initiatives associated with property and equipment, investments for increased manufacturing capacity in the Americas and Thailand, as well as capitalized software.

Cash provided by financing activities in 2022 included proceeds from borrowings of $1.7 billion related to the 6.625% senior notes due in 2030 (the 2030 Unsecured Notes), Term Loan A (as defined below), and Term Loan B (as defined below), compared to $575 million in proceeds related to the 4.500% senior unsecured notes due in 2029 (the 2029 Unsecured Notes) and the accounts receivable securitization program during 2021. In 2022, borrowings under our revolving credit facility, net and accounts receivable securitization program were $30.0 million compared to net repayments of $103 million during 2021. Repayments of debt during 2022 included $4.5 million on our Term Loan B. Repayments of debt during 2021 included $553 million on our previous Term Loan A-2, previous Term Loan B, 3.875% Senior Notes due 2021 and 2024 Notes, and accounts receivable securitization program. Gross issuances and repayments under our amended accounts receivable securitization program were $1.0 billion and $1.2 billion during 2022. We also paid $42.6 million in financing costs during 2022, as compared to $13.9 million during 2021. We paid $15.4 million to terminate the remaining $300 million in notional value of

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

Capital resources. Our primary sources of liquidity include cash and cash equivalents, our Receivables Financing Agreement, and our Revolving Credit Agreement. The Receivables Financing Agreement provides a maximum revolving borrowing capacity of $450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement). Under the Receivables Financing Agreement, certain of our subsidiaries sell substantially all of their accounts receivable balances to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025. At December 31, 2022 and 2021, we had borrowings of $96.0 million and $200 million outstanding under our Receivables Financing Agreement. At December 31, 2022 and 2021, we had maximum revolving borrowing capacity of $354 million and $100 million available under our Receivable Financing Agreement.

The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million. We have $1.1 billion in outstanding term loans under a term loan credit agreement (the Credit Agreement). The interest rate on our Revolving Credit Agreement is based on a spread over a benchmark rate (as described in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027. The interest rate on the Term Loan A facility (Term Loan A) is based on either the Term SOFR or the Base Rate plus an Applicable Rate which varies depending on the current Debt Ratings or Total Leverage Ratio, determined as to whichever shall result in more favorable pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B facility (Term Loan B) is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A matures in March 2027 and the Term Loan B matures in March 2029.

At December 31, 2022, we had no borrowings and letters of credit of $27.9 million outstanding under our revolving credit facility. At December 31, 2021, we had no borrowings and letters of credit of $9.4 million outstanding under our revolving credit facility. At December 31, 2022 and 2021, we had $422 million and $291 million available for borrowing under our Revolving Credit Agreement. We also had letters of credit and bank guarantees, which were issued outside of the Revolving Credit Agreement for $2.3 million and $2.2 million as of December 31, 2022 and 2021, which supports certain leased facilities as well as other normal business activities in the United States and Europe.

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

The Revolving Credit Agreement, the Credit Agreement, Receivables Financing Agreement, 2024 Notes, 2029 Unsecured Notes, and 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of any of the related agreements. The terms of the applicable credit agreements also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture. We were in compliance with our debt covenants at December 31, 2022.

In May 2020, we entered into an equity distribution agreement, pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million. We intend to use the net proceeds from the sale of our securities offered by this program for the repayment of indebtedness and/or for general corporate and working capital purposes. As of December 31, 2022 no shares were issued and $50.0 million of common stock remained available under the at-the-market equity financing program.

We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. From time to time, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms). 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, available financing sources, and borrowings under the Receivables Financing Agreement and Revolving Credit Agreement, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, debt repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.

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We earn a portion of our operating income in foreign jurisdictions outside the United States. Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $26.3 million and $26.9 million at December 31, 2022 and 2021. As of December 31, 2022, we are permanently reinvested in our foreign subsidiaries.

Impact of Inflation

The cost to manufacture and distribute our products is influenced by the cost of raw materials, finished goods, labor, and transportation. During 2022, we have experienced continued inflationary pressure and higher costs as a result of the increasing cost of raw materials, finished goods, labor, transportation, and other administrative costs associated with the normal course of business. The increase in cost of raw materials and finished goods are due in part to a shortage in the availability of certain products, the higher cost of shipping, and inflation. We can only pass elevated costs onto customers in an effort to offset inflationary pressures on a limited basis. Future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect our financial results.

Contractual Obligations

As of December 31, 2022, material cash requirements, including known contractual and other obligations, in the next twelve months were primarily comprised of $100 million in operating leases, $73.0 million in fixed interest payments on our outstanding senior notes, $32.6 million in purchase obligations related to outsourced information technology operations, $15.4 million in principal debt payments, $3.6 million in retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation, and $3.6 million in finance leases. Additionally, as of December 31, 2022, material cash requirements, including known contractual and other obligations, due beyond the next twelve months were primarily comprised of $2.5 billion in principal debt payments, $377 million in fixed interest payments on our outstanding senior notes, $262 million in operating leases, which excludes $40.2 million of legally binding lease payments for the Morgantown, West Virginia center of excellence lease not yet commenced, $48.0 million in purchase obligations related to outsourced information technology operations, $35.7 million in retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation, and $14.3 million in finance leases. Due to the uncertainty of forecasting variable interest rate payments, interest payment amounts on our variable rate debt are excluded from the contractual obligations disclosed in this section. See Note 8, "Leases", Note 10, "Debt", Note 12, "Retirement Plans", Note 14, "Income Taxes", and Note 18, "Commitments and Contingencies" of the Notes to Consolidated Financial Statements.

Guarantor and Collateral Group Summarized Financial Information

We are providing the following information in compliance with Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and Rule 13-02 of Regulation S-X, of with respect to our 2024 Notes. See Note 10 of the accompanying consolidated financial statements for additional information regarding the terms of the 2024 Notes.

The following tables present summarized financial information for Owens & Minor, Inc. and the guarantors of Owens & Minor, Inc.’s 2024 Notes (together, the Guarantor Group), on a combined basis with intercompany balances and transactions between entities in the Guarantor Group eliminated. The guarantor subsidiaries are 100% owned by Owens & Minor, Inc. Separate financial statements of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several.

Summarized financial information of the Guarantor Group is as follows:

(1)Includes $248 million in sales to non-guarantor subsidiaries for the year ended December 31, 2022.

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The following tables present summarized financial information for Owens & Minor, Inc. and the subsidiaries of Owens & Minor, Inc.’s 2024 Notes pledged that constitute a substantial portion of collateral (together, the Collateral Group), on a combined basis with intercompany balances and transactions between entities in the Collateral Group eliminated. The pledged subsidiaries are 100% owned by Owens & Minor, Inc. No trading market for the subsidiaries included in the Collateral Group exists.

Summarized financial information of the Collateral Group is as follows:

The results of operations of the Collateral Group are not materially different from the corresponding amounts presented in our consolidated statements of operations.

Off-Balance Sheet Arrangements

We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, which we believe could have a material impact on financial condition or liquidity.

Critical Accounting Estimates

Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements.

Critical accounting estimates are defined as those estimates that require us to make assumptions about matters that are highly uncertain at the time the estimate is made and could have a material impact on our results due to changes in the estimate or the use of different assumptions that could reasonably have been used. Our estimates are generally based on historical experience and various other assumptions that are judged to be reasonable in light of the relevant facts and circumstances. Because of the uncertainty inherent in such estimates, actual results may differ. We believe our critical accounting estimates include accounting for business combinations, revenue recognition, and inventory.

Business Combinations. We apply the acquisition method of accounting for business combinations. We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the date of acquisition. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. We may adjust the preliminary purchase price allocation, as we obtain more information regarding asset valuations and liabilities assumed that existed but were not available at the acquisition date, generally for up to one year subsequent to the acquisition closing date.

Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships, royalty rates, and discount rates. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ materially from estimates.

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Revenue Recognition. Due to the nature of our industry and the reimbursement environment in which we operate, revenue recognition requires significant estimates and judgements. We determine the transaction price based on contractually agreed-upon amounts or rates, adjusted for estimates of variable consideration including but not limited to rebates, discounts, performance guarantees, and implicit price concessions. The Company utilizes the expected value method to estimate the amount of variable consideration that should be included to arrive at the transaction price, using contractual agreements, historical experience, and other operating trends. The Company applies constraint to the transaction price, such that net revenue is recorded only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future. The complexity of many third-party billing arrangements, contractual terms and the uncertainty of reimbursement amounts may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. If actual amounts of consideration ultimately received differ from the Company’s estimates, the Company adjusts these estimates, which would affect net revenue in the period such adjustments become known.

Inventory. Merchandise inventories are valued at the lower of cost or market, with the approximate cost determined by the LIFO method for distribution inventories in the U.S. within our Products & Healthcare Services segment. Cost of remaining inventories are determined using the FIFO or weighted-average cost method at the lower of cost or net realizable value.

We periodically evaluate whether inventory valuation allowance adjustments are required, which includes consideration of recent sales trends. In our evaluation, we review for expired or obsolete inventory and slow-moving inventory. We write down inventories which are considered excess and obsolete as a result of these assessments. Shifts in market trends and conditions, as well as changes in customer preferences and behavior could affect the value of our inventories.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1 of Notes to the Consolidated Financial Statements.