ACCENDRA HEALTH INC/VA/ (ACH) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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. 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 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).
Net (loss) per share was $(4.73) for the year ended December 31, 2024 as compared to net (loss) per share of $(0.54) for the year ended December 31, 2023. Our financial results for the year ended December 31, 2024 as compared to the prior year were impacted by the following: (1) a goodwill impairment charge of $307 million related to our Apria reporting unit, or a $3.97 negative impact per share (see Notes 1 and 5 in the Notes to Consolidated Financial Statements); (2) the remeasurement of an uncertain tax position, including interest which resulted in a $19 million, or a $0.24 negative income tax charge per share (see Note 12 in the Notes to Consolidated Financial Statements); (3) legal settlements of $17 million related primarily to compensation and wage and hour disputes and (4) incremental exit and realignment charges of $11 million primarily related to our 2023-2024 Operating Model Realignment Program and information technology (IT) strategic initiatives and (5) the decline in Products & Healthcare Services segment operating income, as described below. These were partially offset by lower acquisition-related charges and intangible amortization of $14 million, lower interest expense of $14 million, and an increase in Patient Direct segment operating income as described below for the year ended December 31, 2024 as compared to the prior year.
Net (loss) per share was not impacted as compared to the prior year by foreign currency translation for the year ended December 31, 2024.
Products & Healthcare Services segment operating income was $53 million for the year ended December 31, 2024, compared to $58 million for the year ended December 31, 2023. The decline for the year ended December 31, 2024 as compared to the prior year was primarily due to (1) increased teammate benefit costs of $15 million and (2) competitive pricing pressures, including glove pricing, partially offset by revenue growth of 3.1% and savings derived by our sourcing initiatives of $15 million. Patient Direct segment operating income was $260 million for the year ended December 31, 2024, compared to $247 million for the year ended December 31, 2023. The increase for the year ended December 31, 2024 as compared to the prior year was primarily due to (1) 5.0% net revenue growth, (2) cost savings from IT strategic initiatives of $16 million, and (3) a benefit of $5.4 million from an agreement with Philips Respironics (Philips) for previously recalled equipment, partially offset by increased teammate benefit costs of $26 million and unfavorable changes in revenue mix. Segment operating incomes exclude adjustments noted in Note 16, “Segments”, in the Notes to Consolidated Financial Statements.
Refer to “Results of Operations” for further detail of quantitative and qualitative drivers of our results.
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Potential Sale of Products & Healthcare Services Segment
On February 28, 2025, we announced that we are actively engaged in discussions regarding the potential sale of our Products & Healthcare Services segment. There is no set timetable for the potential sale and there can be no assurance that we will complete a transaction.
Expected Acquisition of Rotech
On July 22, 2024, we entered into an Agreement and Plan of Merger to acquire 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 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.
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 (the June 2021 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 have incurred significant costs coordinating the Recall. During the second quarter of 2024, we reached an agreement with Philips requiring Philips to pay us for recalled equipment returned to Philips. During the year ended December 31, 2024, we received $18 million from Philips which was recorded in the ‘Other, net’ line item within investing activities of the consolidated statements of cash flows. The corresponding benefit of $5.4 million on the returned equipment for the year ended December 31, 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 the Recall matter with Philips has now been materially resolved and that we have access to a sufficient supply of CPAP, bilevel positive airway pressure and ventilator devices from other suppliers to service our home healthcare patients’ needs, other supply chain disruptions (including any future impact of the Recall and subsequent consent decree on our business) may have a 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)
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|---|---|---|---|---|---|---|---|---|---|---|
| | At or for the Years Ended December 31, | |||||||||
| | | 2024 | 2023 | 2022 | ||||||
| Summary of Operations: | | | | | ||||||
| Net revenue | | $ | 10,700,883 | | $ | 10,333,967 | | $ | 9,955,475 | |
| Net (loss) income | | $ | (362,686) | | $ | (41,301) | | $ | 22,389 | |
| | | | | | | | | | | |
| Per Common Share: | | | | | ||||||
| Net (loss) income per share—basic | | $ | (4.73) | | $ | (0.54) | | $ | 0.30 | |
| Net (loss) income per share—diluted | | $ | (4.73) | | $ | (0.54) | | $ | 0.29 | |
| Stock price at year end | | $ | 13.07 | | $ | 19.27 | | $ | 19.53 | |
| | | | | | | | | | | |
| Summary of Financial Position: | | | | | ||||||
| Total assets | | $ | 4,656,156 | | $ | 5,093,322 | | $ | 5,386,283 | |
| Cash and cash equivalents | | $ | 49,382 | | $ | 243,037 | | $ | 69,467 | |
| Total debt | | $ | 1,853,596 | | $ | 2,097,502 | | $ | 2,500,874 | |
| Total equity | | $ | 565,226 | | $ | 924,166 | | $ | 945,604 | |
| | | | | | | | | | | |
| Selected Ratios: | | | | | ||||||
| Gross profit as a percent of revenue | | 20.74 | % | 20.56 | % | 18.35 | % | |||
| Distribution, selling and administrative expenses as a percent of revenue | | 17.85 | % | 17.55 | % | 15.62 | % | |||
| Operating (loss) income as a percent of revenue | | (1.94) | % | 1.01 | % | 1.44 | % | |||
| DSO (1) | | 23.3 | | 20.5 | | 27.0 | | |||
| Inventory days (2) | | 49.2 | | 49.0 | | 57.2 | |
(1)Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2024, 2023 and 2022. DSO in 2024 reflected the impact of the reduction in accounts receivable, net due to sales of accounts receivable under the Receivables Sale Program. Excluding the impact of the Receivables Sale Program, DSO would have been 25.7 as of December 31, 2024. DSO in 2023 reflected the impact of the reduction in accounts receivable, net due to sales of accounts receivable under the RPA. Excluding the impact of the RPA, DSO would have been 24.8 as of December 31, 2023.
(2)Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2024, 2023 and 2022. The 2022 figure reflects a $92 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.
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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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of year-to-year comparisons between 2023 and 2022 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, 2023, which is incorporated by reference herein.
2024 compared to 2023
Net revenue.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | | |||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | |||||||
| Products & Healthcare Services | $ | 8,020,771 | | $ | 7,781,395 | | $ | 239,376 | | 3.1 | % |
| Patient Direct | 2,680,112 | | 2,552,572 | | | 127,540 | | 5.0 | % | ||
| Net revenue | $ | 10,700,883 | | $ | 10,333,967 | | $ | 366,916 | | 3.6 | % |
The increase in our Products & Healthcare Services segment net revenue for the year ended December 31, 2024 was driven by net revenue growth in the Medical Distribution division of 4.0%, driven by growth with existing customers, which was partially offset by a slight decline in our Global Products division, primarily driven by competitive pricing pressures, including glove pricing. The increase in our Patient Direct segment net revenue for the year ended December 31, 2024 was driven primarily by growth across a number of product categories, including diabetes and sleep supplies.
Foreign currency translation had an unfavorable impact on net revenue of $3.5 million for the year ended December 31, 2024 as compared to the prior year.
Cost of goods sold.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | | |||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | | $ | % | ||||||
| Cost of goods sold | $ | 8,481,728 | | $ | 8,208,806 | | $ | 272,922 | | 3.3 | % |
The increase in cost of goods sold reflects the increased cost associated with net revenue growth of 3.6%, as compared to prior year, partially offset by cost reductions in our Global Products division, including $15 million of savings associated with sourcing initiatives.
We value a portion of Products & Healthcare Services inventory held in the U.S. under the LIFO method. Had inventory been valued under the first-in, first-out (FIFO) method, cost of goods sold as a percentage of net revenue would have been 1 basis point higher in 2024 and 2 basis points lower in 2023.
Foreign currency translation had a favorable impact on cost of goods sold of $2.5 million for the year ended December 31, 2024 as compared to the prior year.
Gross profit.
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|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | For the Years Ended | | | | | ||||||
| | | December 31, | | Change | ||||||||
| (Dollars in thousands) | | 2024 | 2023 | | $ | | % | |||||
| Gross profit | | $ | 2,219,155 | | $ | 2,125,161 | | $ | 93,994 | | 4.4 | % |
| As a % of net revenue | | 20.74 | % | 20.56 | % | | |
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The increase in gross profit for the year ended December 31, 2024 was driven by the same factors impacting net revenue and cost of goods sold as compared to the prior year.
Foreign currency translation had an unfavorable impact on gross profit of $1.0 million for the year ended December 31, 2024 as compared to the prior year.
Operating expenses.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | ||||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | |||||||
| Distribution, selling and administrative expenses | $ | 1,909,791 | | $ | 1,813,559 | | $ | 96,232 | | 5.3 | % |
| As a % of net revenue | 17.85 | % | 17.55 | % | | | |||||
| Goodwill impairment charges | $ | 307,112 | | $ | — | | $ | 307,112 | | NM | |
| Acquisition-related charges and intangible amortization | $ | 86,543 | | $ | 101,037 | | $ | (14,494) | | (14.3) | % |
| Exit and realignment charges, net | $ | 110,162 | | $ | 99,127 | | $ | 11,035 | | 11.1 | % |
| Other operating expense (income), net | $ | 13,316 | | $ | 6,930 | | $ | 6,386 | | 92.2 | % |
NM – Not meaningful
The increase in DS&A expenses was driven primarily by incremental costs to support the $367 million, or 3.6% net revenue growth, along with future revenue growth and an increase of $41 million in teammate benefit costs, partially offset by $18 million in expense savings from our IT strategic initiatives, $7.4 million of personnel cost savings related to 2023 organizational changes, and other productivity gains derived from operating efficiencies.
DS&A expenses also included a favorable impact from foreign currency translation of $0.9 million for the year ended December 31, 2024 as compared to the prior year.
Goodwill impairment charges relates to impairment recognized in the Apria reporting unit during the quarter ended December 31, 2024 relating to a combination of factors occurring in the fourth quarter of 2024. The majority of these factors are related to financial market changes inclusive of a decline in Owens & Minor’s stock price and rising interest rates. Additionally, anticipated changes in pricing of a capitated contract also contributed to this charge.
Acquisition-related charges were $22 million for the year ended December 31, 2024 as compared to $18 million for the year ended December, 31, 2023. Acquisition-related charges in 2024 consisted of costs related to the expected acquisition of Rotech, which related primarily to legal and professional fees. Acquisition charges in 2023 consisted primarily of costs related to the Apria Acquisition. Intangible amortization was $65 million and $84 million for the years ended December 31, 2024 and 2023 and related primarily to intangible assets acquired in the Apria, Halyard, and Byram acquisitions. The decline is related to certain intangible assets being fully amortized. See Note 5 in the Notes to Consolidated Financial Statements.
Exit and realignment charges, net were $110 million and $99 million for the years ended December 31, 2024 and 2023. Amounts in 2024 were primarily related to our (1) 2023-2024 Operating Model Realignment Program of $95 million, including professional fees, severance, and other costs to streamline functions and processes, (2) IT strategic initiatives such as converting certain divisions to a common IT system of $15 million, (3) other costs associated with strategic initiatives of $7.5 million, including lease exit costs and (4) $7.4 million gain on the sale of our corporate headquarters for the year ended December 31, 2024. Amounts in 2023 were primarily related to our (1) 2023-2024 Operating Model Realignment Program of $82.9 million, including professional fees, severance, and other costs to streamline functions and processes, (2) IT strategic initiatives such as converting certain divisions to a common IT system of $9.2 million and, (3) other costs associated with strategic initiatives of $7.0 million, including lease exit costs.
The change in other operating expense (income), net for the year ended December 31, 2024 as compared to the prior year reflects $2.8 million higher losses on sales of accounts receivable under the RPA and Receivables Sale Program. Other operating expense (income), net for the year ended December 31, 2024 reflected legal settlements of $17
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million related primarily to compensation and hour wage disputes and a $5.4 million benefit for equipment returned to Philips, as described in the ‘Philips Respironics Recall’ section above.
During the year ended December 31, 2024, we incurred a favorable change of $6.0 million in foreign currency transaction gains and losses, net of derivative adjustments, as compared to the prior year.
Interest expense, net.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | | |||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | |||||||
| Interest expense, net | $ | 143,804 | | $ | 157,915 | | $ | (14,111) | | (8.9) | % |
| Effective interest rate | 7.09 | % | 6.96 | % | | |
The decrease in interest expense was primarily due to lower average outstanding borrowings of $227 million, partially offset by an increase in the effective interest rate of 13 basis points.
Loss (gain) on extinguishment of debt.
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|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | For the Years Ended | | | | | | |||||
| | | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | ||||||||
| Loss (gain) on extinguishment of debt | | $ | 1,101 | | $ | (3,518) | | $ | 4,619 | | 131.3 | % |
Loss on extinguishment of debt for the year ended December 31, 2024 represents the loss associated with early retirement of indebtedness of $45 million for our Term Loan A. Gain on extinguishment of debt for the year ended December 31, 2023 represented the gain associated with early retirement of indebtedness of $314 million. Refer to Note 8 in the Notes to Consolidated Financial Statements for additional content related to the early retirement of indebtedness.
Other expense, net.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | | |||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | |||||||
| Other expense, net | $ | 4,683 | $ | 4,837 | $ | (154) | (3.2) | % |
Other expense, net in 2024 and 2023 primarily represented interest cost and net actuarial losses related to our retirement plans.
Income taxes.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | For the Years Ended | | | | | | |||||
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | | $ | % | ||||||
| Income tax provision (benefit) | $ | 5,329 | $ | (13,425) | $ | 18,754 | 139.7 | % | |||
| Effective tax rate | | (1.5) | % | | 24.5 | % | | | | | |
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The change in the effective tax rate for the year ended December 31, 2024 compared to 2023 resulted primarily from the pre-tax goodwill impairment charge of $307 million ($305 million net of tax), related to the Apria reporting unit and a one-time income tax charge of $19 million, or a $0.24 negative impact per share, related to a recent decision associated with Notices of Proposed Adjustments (NOPA) that we received in 2020 and 2021. The decision was communicated to us in late June 2024 and is related to past transfer pricing methodology, which is no longer employed. See Notes 5 and 12 in the Notes to Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources
Financial condition. We monitor operating working capital through 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 a combination thereof of approximately $29 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.
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|---|---|---|---|---|---|---|---|---|---|---|---|
| | December 31, | | Change | ||||||||
| (Dollars in thousands) | 2024 | 2023 | $ | % | |||||||
| Cash and cash equivalents | $ | 49,382 | | $ | 243,037 | | $ | (193,655) | | (79.7) | % |
| Accounts receivable, net | $ | 690,241 | | $ | 598,257 | | $ | 91,984 | | 15.4 | % |
| DSO (1) | | 23.3 | | | 20.5 | | | | | | |
| Merchandise inventories | $ | 1,131,879 | | $ | 1,110,606 | | $ | 21,273 | | 1.9 | % |
| Inventory days (2) | | 49.2 | | | 49.0 | | | | | | |
| Accounts payable | $ | 1,251,964 | $ | 1,171,882 | $ | 80,082 | 6.8 | % |
(1)Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2024 and 2023. DSO in 2024 reflected the impact of the reduction in accounts receivable, net due to sales of accounts receivable under the Receivables Sale Program. Excluding the impact of the Receivables Sale Program, DSO would have been 25.7 as of December 31, 2024. DSO in 2023 reflected the impact of the reduction in accounts receivable, net due to sales of accounts receivable under the RPA. Excluding the impact of the RPA, DSO would have been 24.8 as of December 31, 2023.
(2) Based on year end merchandise inventories and cost of goods sold for the fourth quarter ended December 31, 2024 and 2023.
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the year ended December 31, 2024 and 2023:
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|---|---|---|---|---|---|
| | For the Years Ended | ||||
| | December 31, | ||||
| (Dollars in thousands) | 2024 | 2023 | |||
| Net cash provided by (used for): | | | |||
| Operating activities | $ | 161,495 | | $ | 740,710 |
| Investing activities | (116,533) | | (137,254) | ||
| Financing activities | (267,603) | | (417,330) | ||
| Effect of exchange rate changes | (901) | | 613 | ||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (223,542) | | $ | 186,739 |
Cash provided by operating activities for the year ended December 31, 2024 reflected positive cash generated by a net loss after the effects of reconciling non-cash adjustments. Cash provided by operating activities was negatively impacted by unfavorable changes in working capital for the year ended December 31, 2024 and was positively impacted by changes in working capital for the year ended December 31, 2023. For the year ended December 31, 2024, unfavorable changes in working capital were driven by an increase in accounts receivable, including a $54 million
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reduction in accounts receivable that had been sold and removed from our consolidated balance sheets under the Receivables Sale Program and the RPA, partially offset by an increase in accounts payable. For the year ended December 31, 2023, favorable changes in working capital were 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 year ended December 31, 2023.
Cash used for investing activities in 2024 included capital expenditures of $228 million for patient service equipment and our strategic and operational efficiency initiatives, partially offset by $103 million in proceeds related to the sale and disposal of property and equipment, which included sales of patient service equipment and $34 million in gross proceeds related to the sale of our corporate headquarters, and $18 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 2023 included capital expenditures of $208 million for patient service equipment and our strategic and operational efficiency initiatives, partially offset by $72 million in proceeds primarily related to the sale of patient service equipment.
Cash used for financing activities in 2024 included repayments of debt of $244 million, including the $171 million paid to redeem the outstanding principal of the 4.375% senior notes due in 2024 (the 2024 Notes), unscheduled principal payments of $45 million on the Term Loan A facility (Term Loan A) and scheduled principal payments of $28 million on our Term Loan A and Term Loan B facility (Term Loan B). We had no borrowings under our revolving credit facility on a net basis for 2024 and the activity under our amended Receivables Financing Agreement netted to no impact to our outstanding borrowings. Cash used for financing activities in 2023 included repayments of debt of $321 million including $170 million of unscheduled and $15 million of scheduled principal payments on our Term Loan A and Term Loan B, $135 million of cash to repurchase $144 million aggregate principal of the 2024 Notes, the 4.500% senior unsecured notes due in 2029 (2029 Unsecured Notes) and the 6.625% senior notes due in 2030 (the 2030 Unsecured Notes). We had no borrowings under our revolving credit facility on a net basis for 2023 and made net repayments of $96 million under our amended Receivables Financing Agreement. Payments for taxes related to the vesting of restricted stock awards were $8.1 million and $10 million during 2024 and 2023, which are included in Other, net.
Capital resources. Our primary sources of liquidity include cash and cash equivalents, our Receivables Sale Program, our Revolving Credit Agreement and our Receivables Purchase Agreement (RPA).
On October 18, 2024, O&M Funding and Owens & Minor Medical, LLC., each a wholly-owned subsidiary of the Company, entered into a Receivables Purchase Agreement (the Receivables Sale Program) with persons from time to time, as Purchasers, PNC Bank, National Association, as Administrative Agent, and PNC Capital Markets LLC, as Structuring Agent, pursuant to which accounts receivable with an aggregate outstanding amount not to exceed $450 million are sold, on a limited-recourse basis, to the Purchasers in exchange for cash. The Receivables Sale Program amends and restates in its entirety, the Receivables Financing Agreement. Transactions under this agreement are accounted for as sales in accordance with ASC 860, Transfers and Servicing, with the sold receivables removed from our consolidated balance sheets. Total accounts receivable sold under the Receivables Sale Program and net cash proceeds were $168 million during the year ended December 31, 2024. We collected $98 million of the sold accounts receivable for the year ended December 31, 2024. The losses on sales of accounts receivable are recorded in other operating expense (income), net in the consolidated statements of operations and were $1.9 million for the year ended December 31, 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 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 and net cash proceeds were $1.7 billion during the year ended December 31, 2024. We collected $1.9 billion of the sold accounts receivable for the year ended December 31, 2024. The losses on sales of accounts receivable are recorded in other operating expense (income), net in the consolidated statements of operations and were $11 million for the year ended December 31, 2024. As a result of an amendment to the Receivables Financing Agreement during the fourth quarter of 2024, we do not expect to utilize the RPA in the future.
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The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million. We have $837 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 December 31, 2024, and December 31, 2023, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce revolver availability, of $31 million and $27 million, leaving $419 million and $423 million available for borrowing. We also had letters of credit and bank guarantees, which support certain leased facilities as well as other normal business activities in the U.S. and Europe that were issued outside of the Revolving Credit Agreement for $2.9 million and $3.0 million as of December 31, 2024 and 2023.
The Revolving Credit Agreement, the Credit Agreement, the Receivables Sale Program, 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 December 31, 2024.
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 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.
On February 26, 2025, the Owens & Minor Board of Directors authorized a share repurchase program of up to $100 million over the next 24 months. Under the program, Owens & Minor may repurchase shares of common stock on a discretionary basis from time to time through open market repurchases, privately negotiated transactions and 10b5-1 trading plans.
We believe cash generated by operating activities, including available cash proceeds from the Receivables Sale Program, available financing sources, and borrowings under the 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, share 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 million at December 31, 2024 and 2023. As of December 31, 2024, we are permanently reinvested in our foreign subsidiaries.
Pillar 2 Global Minimum Tax
In December 2021, the Organization for Economic Cooperation and Development (OECD) released Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large corporations at a minimum rate of 15%. The OECD continues to release additional guidance on how the Pillar Two rules should be interpreted and applied. Law enactment by the OECD and various countries is currently being implemented and is expected to continue to take effect during 2025. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new
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guidance becomes available and do not expect Pillar Two to have a material impact on our financial position, results of operations and cash flows.
Seasonality
Our business is affected by seasonality, which historically has resulted in higher sales volume during our third and fourth quarters, ending September 30 and December 31.
Contractual Obligations
On July 22, 2024, we entered into an Agreement and Plan of Merger to acquire 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 U.S. 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 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.
As of December 31, 2024, other material cash requirements, including known contractual and other obligations, in the next twelve months were primarily comprised of $40 million in principal debt payments, $123 million in operating leases, $58 million in fixed interest payments on our outstanding senior notes, and $43 million associated with the NOPA matter, which includes $12 million of interest accrued on the matter through December 31, 2024. Additionally, as of December 31, 2024, material cash requirements, including known contractual and other obligations, due beyond the next twelve months were primarily comprised of $1.8 billion in principal debt payments excluding finance leases, $225 million in fixed interest payments on our outstanding senior notes, $347 million in operating leases and $28 million in U.S. retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation. 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 6, “Leases”, Note 8, “Debt”, Note 10, “Retirement Plans”, Note 12, “Income Taxes”, and Note 15, “Commitments, Contingent Liabilities, and Legal Proceedings” in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have off-balance sheet financing arrangements or guarantees, 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 goodwill valuation, revenue recognition, and inventory valuation.
Goodwill. Goodwill is evaluated for impairment annually, as of October 1, and if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Qualitative factors are first assessed to determine if it is more likely than not that the fair value of a reporting unit is less
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than its carrying amount. If it is determined that it is more likely than not that the fair value does not exceed the carrying amount, or if elected to bypass the qualitative test, then a quantitative test is performed. The quantitative goodwill impairment test involves a comparison of the estimated fair value of the reporting unit to the respective carrying amount.
Goodwill impairment testing is conducted at the reporting unit level, which is generally defined as an operating segment or a component, one level below our operating segments, for which discrete financial information is available and where segment management regularly reviews the operating results of that reporting unit. Our reporting units are: Global Products, Medical Distribution (including Services and Outsourced Logistics), Apria, and Byram. The Medical Distribution reporting unit does not have any goodwill as of December 31, 2024.
As of October 1, 2024, we performed our annual impairment test and there were no impairments of goodwill. During the three months ended December 31, 2024, we experienced financial market changes inclusive of a decline in Owens & Minor’s stock price and an increase in the risk free interest rate resulting in an increase in the discount rate used for impairment analysis. Additionally, anticipated changes in pricing of a capitated contract contributed to a reduction in projected future cash flows within our Apria reporting unit. As a result of these factors during the three months ended December 31, 2024, we performed an interim quantitative goodwill impairment test.
The quantitative impairment review of goodwill requires the extensive use of accounting estimates and assumptions. We determine the estimated fair value of our reporting units by using an equally weighted combination of the income-based approach and the market-based approach. The income-based approach is dependent upon several significant assumptions and estimates regarding future period cash flows, including assumptions with respect to future sales growth and a terminal growth rate. In addition, a weighted average cost of capital (WACC) is used to discount future estimated cash flows to their present values. The WACC is based on externally observable data considering market participants’ cost of equity and debt, optimal capital structure and interest rates, as well as the risk and uncertainty with respect to the reporting unit and internally developed financial projections. Under the market-based approach, significant estimates and assumptions also include the selection of appropriate guideline public companies whose stock is actively traded in public markets and the determination of appropriate valuation multiples to apply to the reporting unit. In addition, we compared the aggregate of the reporting units’ estimated fair values to our market capitalization, as further corroboration of the reasonableness of our concluded fair values.
Although we believe our assumptions and estimates are reasonable and appropriate, any significant adverse changes in one or a combination of key assumptions, including, but not limited to, a further decrease in our market capitalization, an increase in the discount rate, inflationary pressures and our planned efforts to mitigate such impacts, disruptions in the supply chain, a decrease in the terminal growth rate, increases in tax rates (including potential tax reform), a significant change in industry or economic trends, or the reporting unit specific factors described in the paragraphs below may materially affect the estimated fair-value of each reporting unit and potentially result in goodwill impairment. We may be required to record a material charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill is determined, which could adversely affect our results of operations.
Our 2024 interim quantitative goodwill impairment test concluded that the fair value for our Apria reporting unit within our Patient Direct segment was below its carrying amount. The amount by which the carrying value of the impaired reporting unit’s goodwill exceeded its fair value was $305 million ($307 million pre-tax), which was recognized as an impairment loss during the three months ended December 31, 2024. Inclusive of the impairment recorded, the goodwill balance of this reporting unit was $944 million at December 31, 2024, or approximately 71% of the consolidated goodwill balance. Adverse changes in one or a combination of significant assumptions, such as the factors described above, as well as, failure of the Apria reporting unit to meet expected earnings and cash flows, or unanticipated events and circumstances such as a loss of a contract with a large payor may materially affect the estimated fair value of the Apria reporting unit and potentially result in further goodwill impairment. A decline in the terminal growth rate or an increase in the discount rate of approximately 100 basis points would have increased the impairment charge by approximately $25 million and approximately $45 million.
The estimated fair value of our Global Products reporting unit was substantially in excess of the carrying value. For Global Products, adverse changes in one or a combination of significant assumptions, such as the factors described
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above, as well as, failure of the Global Products reporting unit to meet expected earnings and cash flows, changes in assumptions about the duration and magnitude of increased supply chain expense, increases in commodities costs, or unanticipated events and circumstances such as pricing pressures and lower demand for certain product categories, including PPE, may materially affect the estimated fair value of the Global Products reporting unit and potentially result in goodwill impairment.
The estimated fair value of our Byram reporting unit was substantially in excess of the carrying value. The impairment testing performed for 2023 and 2022 did not indicate any impairment of goodwill.
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 last-in, first-out (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. Non-cash LIFO charges to merchandise inventories 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, were $0.9 million, $2.4 million, and $5.4 million for the years ended December 31, 2024, 2023 and 2022. Excess and obsolete inventory adjustments included in our Products & Healthcare Services segment were $12 million, $7.3 million and $17 million for the years ended December 31 2024, 2023, and 2022. For the year ended December 31, 2022, we recorded a $92 million inventory valuation adjustment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic that was not allocated to the Products & Healthcare Services segment due to its one time nature and size.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 in the Notes to Consolidated Financial Statements.