UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 1-9810
_______________________________________________________
(Exact name of Registrant as specified in its charter)
_______________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
| Post Office Box 27626, Richmond, Virginia | 23261-7626 | ||||||||||
| (Mailing address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code (804 ) 723-7000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
_________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of April 28, 2022 was 76,109,259 shares.
Owens & Minor, Inc. and Subsidiaries
Index
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 6. | ||||||||
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Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2022 | 2021 | |||||||||
| Net revenue | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross margin | |||||||||||
| Distribution, selling and administrative expenses | |||||||||||
| Acquisition-related and exit and realignment charges | |||||||||||
| Other operating income, net | ( | ( | |||||||||
| Operating income | |||||||||||
| Interest expense, net | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Other expense, net | |||||||||||
| Income before income taxes | |||||||||||
| Income tax provision | |||||||||||
| Net income | $ | $ | |||||||||
| Net income per common share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
3
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive (loss) income, net of tax: | |||||||||||
| Currency translation adjustments | ( | ( | |||||||||
| Change in unrecognized net periodic pension costs | |||||||||||
| Change in gains and losses on derivative instruments | |||||||||||
| Total other comprehensive (loss) income, net of tax | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
4
Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| March 31, | December 31, | ||||||||||
| (in thousands, except per share data) | 2022 | 2021 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Merchandise inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||
| Operating lease assets | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and related liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, excluding current portion | |||||||||||
| Operating lease liabilities, excluding current portion | |||||||||||
| Deferred income taxes | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Equity | |||||||||||
Common stock, par value $ | |||||||||||
| Paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
5
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2022 | 2021 | |||||||||
| Operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation expense | |||||||||||
Loss on extinguishment of debt | |||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Deferred income tax benefit | ( | ( | |||||||||
| Changes in operating lease right-of-use assets and lease liabilities | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Merchandise inventories | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Net change in other assets and liabilities | ( | ( | |||||||||
| Other, net | |||||||||||
| Cash provided by operating activities | |||||||||||
| Investing activities: | |||||||||||
| Acquisition, net of cash acquired | ( | ||||||||||
| Additions to property and equipment | ( | ( | |||||||||
| Additions to computer software | ( | ( | |||||||||
| Other, net | |||||||||||
| Cash used for investing activities | ( | ( | |||||||||
| Financing activities: | |||||||||||
| Proceeds from issuance of debt | |||||||||||
| Borrowings (repayments) under revolving credit facility, net and accounts receivable securitization program | ( | ||||||||||
| Repayments of debt | ( | ||||||||||
| Financing costs paid | ( | ( | |||||||||
| Cash dividends paid | ( | ||||||||||
Payment for termination of interest rate swaps | ( | ||||||||||
| Other, net | ( | ( | |||||||||
| Cash provided by (used for) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes paid, net of refunds | $ | $ | |||||||||
| Interest paid | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
| (in thousands, except per share data) | Common Shares Outstanding | Common Stock ($ | Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | ( | ( | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||||||||||||||
Dividends declared ($ | ( | ( | |||||||||||||||||||||||||||||||||
| Share-based compensation expense, exercises and other | ( | ( | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, except per share data, unless otherwise indicated)
Note 1—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, our or the Company) and contain all adjustments (which are comprised only of normal recurring accruals and use of estimates) necessary to conform with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.
To better reflect how we go to market as well as certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting, we have organized our business into 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 with the quarter ended March 31, 2022, we now report financial results using this two segment structure and have recast prior year segment results on the same basis.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the accompanying consolidated balance sheets that sum to the total of those same amounts presented in the accompanying consolidated statements of cash flows.
| March 31, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in Other assets, net | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
Patient Equipment
Patient equipment, which is included within property and equipment, net, is stated at cost less depreciation and reserves for non-recoverable and obsolete patient equipment. Patient equipment consists of medical equipment rented to patients on a month-to-month basis. Patient equipment is generally placed for rent; however, it could also be sold to customers. Once the rented equipment is returned to us, the patient equipment is assessed and repaired as necessary. Patient equipment is typically leased to subsequent patients if its condition is suitable.
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Note 2—Fair Value
Note 3—Acquisition
On March 29, 2022 (the Acquisition Date), we completed the acquisition of 100 % of Apria, Inc. (Apria) pursuant to the Agreement and Plan of Merger (Apria Acquisition) dated January 7, 2022, in exchange for approximately $1.7 billion, including $108 million owed to holders of Apria stock awards as of March 31, 2022 that was paid in April 2022, 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.
The following table presents the preliminary estimated fair value of the assets acquired and liabilities assumed recognized as of the Acquisition Date. The fair value and useful lives of tangible and intangible assets acquired have been estimated based on a review of publicly available data for transactions involving companies deemed comparable to the Company. The allocation of purchase price to assets and liabilities acquired is not yet complete, as valuations of tangible and intangible assets and liabilities are still in process.
| Preliminary Fair Value Currently Estimated as of Acquisition Date | |||||
| Assets acquired: | |||||
| Current assets | $ | ||||
| Goodwill | |||||
| Intangible assets | |||||
| Other non-current assets | |||||
| Total assets | |||||
| Liabilities assumed: | |||||
| Current liabilities | |||||
| Noncurrent liabilities | |||||
| Total liabilities | |||||
| Fair value of net assets acquired, net of cash | $ | ||||
Current assets acquired includes $89.3 million in fair value of receivables, which reflects the approximate amount contractually owed. We are amortizing the preliminary fair value of acquired intangible assets, primarily customer contracts, trade names and payor and capitated relationships, over their estimated weighted average useful lives of to 15 years.
Goodwill of $1.3 billion, which we assigned to our Patient Direct segment, consists largely of expected opportunities to expand into new markets and further develop a presence in the home healthcare business. No ne of the goodwill recognized is expected to be deductible for income tax purposes.
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenue | $ | $ | |||||||||
| Net (loss) income | $ | ( | $ | ||||||||
Note 4—Goodwill and Intangible Assets
In connection with our new segment structure, which began in the first quarter of 2022, goodwill is now reported as part of Products & Healthcare Services or Patient Direct. There was no change to our underlying reporting units as part of that segment change and therefore no reallocation of goodwill. The following table summarizes the goodwill balances by segment and the changes in the carrying amount of goodwill through March 31, 2022:
| Products & Healthcare Services | Patient Direct | Consolidated | |||||||||||||||
| Carrying amount of goodwill, December 31, 2021 | $ | $ | $ | ||||||||||||||
| Acquisition | |||||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||
| Carrying amount of goodwill, March 31, 2022 | $ | $ | $ | ||||||||||||||
Intangible assets subject to amortization at March 31, 2022 and December 31, 2021 were as follows:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| Customer Relationships | Tradenames | Other Intangibles | Customer Relationships | Tradenames | Other Intangibles | |||||||||||||||||||||||||||||||||||||||
| Gross intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Accumulated amortization | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||
| Net intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Weighted average useful life | ||||||||||||||||||||||||||||||||||||||||||||
At March 31, 2022 and December 31, 2021, $158 million and $164 million in net intangible assets were held in the Products & Healthcare Services segment and $337 million and $45.7 million were held in the Patient Direct segment. Amortization expense for intangible assets was $10.3 million and $10.0 million for the three months ended March 31, 2022 and 2021. At March 31, 2022, other intangibles includes preliminary estimated fair values of payor relationships, customer list and other intangible assets acquired as part of the Apria Acquisition.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is approximately $96 million for the remainder of 2022, $126 million for 2023, $67 million for 2024, $42 million for 2025, $41 million for 2026 and $38 million for 2027.
Note 5—Exit and Realignment Costs
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realignment which include leadership reorganization costs, certain professional fees, and costs to streamline administrative functions and processes and divestiture related costs.
Exit and realignment charges by segment for the three months ended March 31, 2022 and 2021 were as follows:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Products & Healthcare Services | $ | $ | |||||||||
| Patient Direct | |||||||||||
| Total exit and realignment charges | $ | $ | |||||||||
The following table summarizes the activity related to exit and realignment cost accruals through March 31, 2022 and 2021:
| Total | |||||
| Accrued exit and realignment costs, December 31, 2021 | $ | ||||
| Provision for exit and realignment activities: | |||||
| Severance | |||||
| Other | |||||
| Cash payments | ( | ||||
| Accrued exit and realignment costs, March 31, 2022 | $ | ||||
| Accrued exit and realignment costs, December 31, 2020 | $ | ||||
| Provision for exit and realignment activities: | |||||
| Information system restructuring costs | |||||
| Lease obligations | |||||
| Other | |||||
| Cash payments | ( | ||||
| Accrued exit and realignment costs, March 31, 2021 | $ | ||||
In addition to the exit and realignment accruals in the preceding table, we also incurred $3.8 million of costs that were expensed as incurred for the three months ended March 31, 2021, including $3.2 million related to an increase in reserves associated with certain retained assets of Fusion5, $0.5 million in impairment charges related to our client engagement center, and $0.1 million in other asset charges.
Acquisition-related charges within acquisition-related and exit and realignment charges presented in our consolidated statements of operations were $31.9 million for the three months ended March 31, 2022, which consisted primarily of costs related to the Apria acquisition. There were no acquisition-related charges included within acquisition-related and exit and realignment charges presented in our consolidated statements of operations for the three months ended March 31, 2021.
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Note 6—Debt
Debt consists of the following:
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| Receivables Securitization Program | $ | $ | $ | $ | |||||||||||||||||||
| Revolver | |||||||||||||||||||||||
| Term Loan A | |||||||||||||||||||||||
| Term Loan B | |||||||||||||||||||||||
| Finance leases and other | |||||||||||||||||||||||
| Total debt | |||||||||||||||||||||||
| Less current maturities | ( | ( | ( | ( | |||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | |||||||||||||||||||
We have $246 million, excluding deferred financing costs and third party fees, of 4.375 % senior notes due in 2024 (the 2024 Notes), with interest payable semi-annually. The 2024 Notes were sold at 99.6 % of the principal amount with an effective yield of 4.422 %. We have the option to redeem the 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100 % of the principal amount or the present value of the remaining scheduled payments discounted at the applicable Benchmark Treasury Rate (as defined) plus 30 basis points.
In March 2021, we issued $500 million, excluding deferred financing costs and third party fees, of 4.500 % senior unsecured notes due in 2029 (the 2029 Unsecured Notes), with interest payable semi-annually (the Notes Offering). The 2029 Unsecured Notes were sold at 100 % of the principal amount with an effective yield of 4.500 %. We may redeem all or part of the 2029 Unsecured Notes prior to March 31, 2024, at a price equal to 100 % of the principal amount of the 2029 Unsecured Notes redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date, plus a “make-whole” premium, as described in the Indenture dated March 10, 2021 (the Indenture). On or after March 31, 2024, we may redeem all or part of the 2029 Unsecured Notes at the applicable redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date. We may also redeem up to 40 % of the aggregate principal amount of the 2029 Unsecured Notes at any time prior to March 31, 2024, at a redemption price equal to 104.5 % with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
On March 29, 2022, we completed the sale of $600 million in aggregate principal amount of our 6.625 % senior notes due 2030 (the 2030 Unsecured Notes), with interest payable semi-annually. The 2030 Unsecured Notes were sold at 100 % of the principal amount with an effective yield of 6.625 %.
We may redeem all or part of the 2030 Unsecured Notes, prior to April 1, 2025, at a price equal to 100 % of the principal amount of the 2030 Unsecured Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, plus a “make-whole” premium, as described in the New Indenture. From and after April 1, 2025, we may redeem all or part of the 2030 Unsecured Notes at the applicable redemption prices described in the New Indenture, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. We may also redeem up to 40 % of the aggregate principal amount of 2030 Unsecured Notes at any time prior to April 1, 2025, at a redemption price equal to 106.625 % with an amount equal to or less than the net cash proceeds from certain equity offerings, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
The 2029 Unsecured Notes and 2030 Unsecured Notes will be effectively subordinated to any of our secured indebtedness, including indebtedness under the credit agreements.
On March 29, 2022, we entered into a term loan credit agreement with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (the Credit Agreement) that provides for two new credit facilities (i) a $500 million Term Loan A facility (the Term Loan A), and (ii) a $600 million Term Loan B facility (the Term Loan B). The interest rate on the Term Loan A is based on 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
12
pricing to the Borrowers (each as defined in the Credit Agreement). The interest rate on the Term Loan B is based on either the Term SOFR or the Base Rate plus an Applicable Rate. The Term Loan A will mature in March 2027 and the Term Loan B will mature in March 2029.
On March 29, 2022, we entered into an amendment to our revolving credit agreement, dated as of March 10, 2021 with an administrative agent and collateral agent and a syndicate of financial institutions, as lenders (Revolving Credit Agreement). The amendment will (i) increase the aggregate revolving credit commitments under the Revolving Credit Agreement by $150 million, to an aggregate amount of $450 million and (ii) replace the Eurocurrency Rate with the Adjusted Term SOFR Rate (each as defined in the Revolving Credit Agreement). The Revolving Credit Agreement matures in March 2027.
At March 31, 2022, we had borrowings of $11.7 million and letters of credit of $28.0 million 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 facilities. At March 31, 2022 and December 31, 2021, we had $410 million and $291 million available for borrowing. We also had letters of credit and bank guarantees, which were issued outside of the Revolving Credit Facility for $2.1 million and $2.2 million as of March 31, 2022 and December 31, 2021, which supports certain leased facilities as well as other normal business activities in the United States and Europe.
We entered into a Security and Pledge Agreement (the Security Agreement), dated March 10, 2021 and amended March 29, 2022, pursuant to which we granted 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 Credit Parties (as defined) in the Credit Parties’ present and future subsidiaries, subject to certain customary exceptions, and (b) all present and future personal property and assets of the Credit Parties, subject to certain exceptions.
On March 29, 2022, we entered into an amendment to our accounts receivable securitization program (the Receivables Financing Agreement). Pursuant to the amended Receivables Financing Agreement, the aggregate principal amount of the loans made by the Lenders (as defined) will not exceed $450 million outstanding at any time. 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.
The Revolving Credit Agreement, Term Loan A, Term Loan B, 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 credit agreements also require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition or divestiture. We were in compliance with our debt covenants at March 31, 2022.
As of March 31, 2022, scheduled future principal payments of debt, excluding finance leases and other, were $4.5 million in 2022, $15.4 million in 2023, $274 million in 2024, $270 million in 2025, $43.5 million due in 2026, $415 million in 2027, $6.0 million due in 2028, $1.1 billion in 2029, and $600 million in 2030. Current maturities at March 31, 2022 include $6.0 million in principal payments on our Term Loan B and $2.2 million in current portion of finance leases.
Note 7—Retirement Plans
We have a frozen noncontributory, unfunded retirement plan for certain retirees in the United States (U.S. Retirement Plan). As of March 31, 2022 and December 31, 2021, the accumulated benefit obligation of the U.S. Retirement Plan was $49.6 million and $50.2 million. Certain of our foreign subsidiaries also have defined benefit covering substantially all of their respective teammates.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Service cost | $ | $ | |||||||||
| Interest cost | |||||||||||
| Recognized net actuarial loss | |||||||||||
| Net periodic benefit cost | $ | $ | |||||||||
13
Note 8—Derivatives
We are directly and indirectly affected by changes in foreign currency, which may adversely impact our financial performance and are referred to as “market risks.” When deemed appropriate, we use derivatives as a risk management tool to mitigate the potential impact of certain market risks. We do not enter into derivative financial instruments for trading purposes.
We enter into foreign currency contracts to manage our foreign exchange exposure related to certain balance sheet items that do not meet the requirements for hedge accounting. These derivative instruments are adjusted to fair value at the end of each period through earnings. The gain or loss recorded on these instruments is substantially offset by the remeasurement adjustment on the foreign currency denominated asset or liability.
We determine the fair value of our foreign currency derivatives based on observable market-based inputs or unobservable inputs that are corroborated by market data. We do not view the fair value of our derivatives in isolation, but rather in relation to the fair values or cash flows of the underlying exposure. All derivatives are carried at fair value in our consolidated balance sheets in other current assets and other current liabilities. We consider the risk of counterparty default to be minimal. We report cash flows from our hedging instruments in the same cash flow statement category as the hedged items.
In April 2022, in order to mitigate the risk of increases in benchmark rates, we entered into an interest rate swap agreement whereby we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable amounts calculated by reference to the notional amount.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of March 31, 2022:
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Economic (non-designated) hedges | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | April 2022 | Other current assets | $ | Other current liabilities | $ | |||||||||||||||||||||||||||||
In March 2021, we terminated the remaining $300 million in notional value of interest rate swaps concurrent with the debt financing transaction. The remaining balance of the fair value adjustments of $25.1 million, which related to these terminated interest rate swaps, within Accumulated other comprehensive loss was reclassified to Loss on extinguishment of debt within our consolidated statements of operations for the three months ended March 31, 2021.
The following table summarizes the terms and fair value of our outstanding derivative financial instruments as of December 31, 2021:
| Derivative Assets | Derivative Liabilities | ||||||||||||||||||||||||||||||||||
| Notional Amount | Maturity Date | Classification | Fair Value | Classification | Fair Value | ||||||||||||||||||||||||||||||
| Economic (non-designated) hedges | |||||||||||||||||||||||||||||||||||
| Foreign currency contracts | $ | January 2022 | Other current assets | $ | Other current liabilities | $ | |||||||||||||||||||||||||||||
The following table summarizes the effect of cash flow hedge accounting on our consolidated statements of operations for the three months ended March 31, 2021:
| Amount of Gain Recognized in Other Comprehensive Income | Location of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | Total Amount of Expense Line Items Presented in the Consolidated Statement of Operations in Which the Effects are Recorded | Amount of Loss Reclassified from Accumulated Other Comprehensive Loss into Income | ||||||||||||||||||||
| Interest rate swaps | $ | Loss on extinguishment of debt | $ | ( | $ | ( | |||||||||||||||||
The amount of ineffectiveness associated with these contracts was immaterial for the period presented.
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For the three months ended March 31, 2022 and 2021, we recognized losses of $0.1 million and $1.0 million associated with our economic (non-designated) foreign currency contracts.
We recorded the change in fair value of derivative instruments and the remeasurement adjustment of the foreign currency denominated asset or liability in other operating income, net for our foreign exchange contracts.
Note 9—Leases
| Three Months Ended March 31, | |||||||||||||||||
| Classification | 2022 | 2021 | |||||||||||||||
| Operating lease cost | DS&A Expenses | $ | $ | ||||||||||||||
| Finance lease cost: | |||||||||||||||||
| Amortization of lease assets | DS&A Expenses | ||||||||||||||||
| Interest on lease liabilities | Interest expense, net | ||||||||||||||||
| Total finance lease cost | |||||||||||||||||
| Short-term lease cost | DS&A Expenses | ||||||||||||||||
| Variable lease cost | DS&A Expenses | ||||||||||||||||
| Total lease cost | $ | $ | |||||||||||||||
Variable lease cost consists primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities which are paid as incurred.
| Classification | March 31, 2022 | December 31, 2021 | |||||||||||||||
| Assets: | |||||||||||||||||
| Operating lease assets | Operating lease assets | $ | $ | ||||||||||||||
| Finance lease assets | |||||||||||||||||
| Total lease assets | $ | $ | |||||||||||||||
| Liabilities: | |||||||||||||||||
| Current | |||||||||||||||||
| Operating | $ | $ | |||||||||||||||
| Finance | |||||||||||||||||
| Noncurrent | |||||||||||||||||
| Operating | Operating lease liabilities, excluding current portion | ||||||||||||||||
| Finance | |||||||||||||||||
| Total lease liabilities | $ | $ | |||||||||||||||
The gross value recorded under finance leases was $20.7 million and $20.6 million with associated accumulated amortization of $12.0 million and $11.7 million as of March 31, 2022 and December 31, 2021. Operating lease assets include $69.1 million in right-of-use assets and $70.3 million of operating lease liabilities acquired as a result of the Apria Acquisition, as of March 31, 2022.
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| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Supplemental cash flow information | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating and finance leases | $ | $ | ||||||||||||
| Financing cash flows from finance leases | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for new operating and finance lease liabilities | $ | $ | ||||||||||||
| Weighted average remaining lease term (years) | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted average discount rate | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
Maturities of lease liabilities as of March 31, 2022 were as follows:
| Operating Leases | Finance Leases | Total | |||||||||||||||
| 2022 | $ | $ | $ | ||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total lease payments | |||||||||||||||||
| Less: Interest | ( | ( | ( | ||||||||||||||
| Present value of lease liabilities | $ | $ | $ | ||||||||||||||
Note 10—Income Taxes
The effective tax rate was 18.6 % for the three months ended March 31 2022, compared to 24.4 % in the same quarter of 2021. The change in these rates resulted primarily from the mixture of income and losses in jurisdictions in which we operate and the incremental income tax benefit associated with the vesting of restricted stock recorded in the first quarter of 2022. The liability for unrecognized tax benefits was $21.6 million at March 31, 2022 and $21.4 million at December 31, 2021. Included in the liability at March 31, 2022 and December 31, 2021 were $2.7
On August 26, 2020, we received a Notice of Proposed Adjustment (NOPA) from the Internal Revenue Service (IRS) regarding our 2015 and 2016 consolidated income tax returns. On June 30, 2021, we received a NOPA from the IRS regarding our 2017 and 2018 consolidated income tax returns. Within the NOPAs, the IRS has asserted that our taxable income for the aforementioned years should be higher based on their assessment of the appropriate amount of taxable income that we should report in the United States in connection with our sourcing of products by our foreign subsidiaries for sale in the United States by our domestic subsidiaries. Our amount of taxable income in the United States is based on our transfer pricing methodology, which has been consistently applied through the current date. We strongly disagree with the IRS position and will pursue all available administrative and judicial remedies, including those available under the U.S. - Ireland Income Tax Treaty to alleviate double taxation. We regularly assess the likelihood of adverse outcomes resulting from examinations such as this to determine the adequacy of our tax reserves. We believe that we have adequately reserved for this matter and that the final adjudication of this matter will not have a material impact on our consolidated financial position, results of operations or cash flows. However, the ultimate outcome of disputes of this nature is uncertain, and if the IRS were to prevail on its assertions, the additional tax,
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Note 11—Net Income per Common Share
The following summarizes the calculation of net income per common share attributable to common shareholders for the three months ended March 31, 2022 and 2021:
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share data) | 2022 | 2021 | |||||||||
| Net income | $ | $ | |||||||||
| Weighted average shares outstanding - basic | |||||||||||
| Dilutive shares | |||||||||||
| Weighted average shares outstanding - diluted | |||||||||||
| Net income per common share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
Note 12—Shareholders' Equity
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Note 13—Accumulated Other Comprehensive Loss
The following table shows the changes in accumulated other comprehensive loss by component for the three months ended March 31, 2022 and 2021:
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Other comprehensive loss before reclassifications | ( | ( | |||||||||||||||||||||
| Income tax | |||||||||||||||||||||||
| Other comprehensive loss before reclassifications, net of tax | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Income tax | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Accumulated other comprehensive loss, March 31, 2022 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Retirement Plans | Currency Translation Adjustments | Derivatives | Total | ||||||||||||||||||||
| Accumulated other comprehensive loss, December 31, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||||||||||||||
| Income tax | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of tax | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||
| Income tax | ( | ( | ( | ||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of tax | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Accumulated other comprehensive loss, March 31, 2021 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
Note 14—Segment Information
We periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under two segments: Products & Healthcare Services and Patient Direct. The Products & Healthcare Services segment includes our United States distribution business (Medical Distribution), outsourced logistics and value-added services business, and Global Products which manufactures and sources medical surgical products through our production and kitting operations. The Patient Direct segment includes our home healthcare businesses (Byram and Apria).
We evaluate the performance of our segments based on their operating income excluding intangible amortization and acquisition-related and exit and realignment charges that, either as a result of their nature or size, would not be expected to occur as part of our normal business operations on a regular basis. Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading and not meaningful.
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| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net revenue: | |||||||||||
| Products & Healthcare Services | $ | $ | |||||||||
| Patient Direct | |||||||||||
| Consolidated net revenue | $ | $ | |||||||||
| Operating income: | |||||||||||
| Products & Healthcare Services | $ | $ | |||||||||
| Patient Direct | |||||||||||
| Intangible amortization | ( | ( | |||||||||
| Acquisition-related and exit and realignment charges | ( | ( | |||||||||
| Consolidated operating income | $ | $ | |||||||||
| Depreciation and amortization: | |||||||||||
| Products & Healthcare Services | $ | $ | |||||||||
| Patient Direct | |||||||||||
| Consolidated depreciation and amortization | $ | $ | |||||||||
| Capital expenditures: | |||||||||||
| Products & Healthcare Services | $ | $ | |||||||||