ACCENDRA HEALTH INC/VA/ (ACH) FY 2023 MD&A

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

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

Overview

Owens & Minor, Inc., along with its subsidiaries, is a global healthcare solutions company. 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 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 ($0.54) for the year ended December 31, 2023 as compared to net income per diluted share of $0.29 for the year ended December 31, 2022. The decrease reflected the decline in Products & Healthcare Services segment operating income of $118 million as described below, incremental exit and realignment charges of $92.2 million primarily related to our Operating Model Realignment Program and information technology (IT) strategic initiatives and higher interest expense of $29.0 million. These were partially offset by the non-recurrence of the 2022 inventory valuation allowance adjustment of $92.3 million primarily associated with PPE inventory built up and subsequent decline in demand as a result of the COVID-19 pandemic, Patient Direct segment operating income growth of $53.1 million as outlined below and lower acquisition-related charges and intangible amortization of $25.9 million.

Net (loss) per share was unfavorably impacted as compared to the prior year by foreign currency translation in the amount of $0.04 for the year ended December 31, 2023.

Products & Healthcare Services segment operating income was $57.8 million for the year ended December 31, 2023, compared to $175 million for the year ended December 31, 2022. The decrease reflected lower PPE net revenues, including COVID-19 related product purchases declining from elevated levels during the first half of 2022 and losses on sales of accounts receivable under the RPA in the amount of $10.6 million, partially offset by a benefit in excess of $40 million from the Operating Model Realignment Program, along with productivity gains derived from operating efficiencies. Patient Direct segment operating income was $247 million for the year ended December 31, 2023, compared to $194 million for the year ended December 31, 2022. The increase was primarily the result of the inclusion of a full year of Apria results in 2023, strong organic revenue growth and operating efficiencies. On a consolidated basis, teammate benefit costs increased by $57.4 million, which impacted both segments. Segment operating incomes exclude adjustments noted in Note 17, “Segments”, in Notes to Consolidated Financial Statements.

Refer to 'Results of Operations' for further detail of quantitative and qualitative drivers of our results.

O&M Halyard N95 Mask FDA Release

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On April 5, 2023, we received a communication from the National Institute for Occupational Safety & Health (NIOSH) that products from one lot of a model (No. 46827) of surgical N95 respirator manufactured by O&M Halyard did not pass laboratory tests for fluid resistance and for filtration efficiency, and that products from one lot of another model (No. 46727) did not pass fluid resistance testing, but did pass filtration efficiency testing. Our investigation determined that a limited number of lots were potentially implicated by the results of the NIOSH particulate filtration testing on model No. 46827, and that the vast majority of the products in those lots remained in our possession and under our control. Those lots have been segregated for disposal. We also determined that a limited quantity of products from one lot did reach the market. Although products from that lot passed internal and external follow-up testing for filtration

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efficiency, we initiated a voluntary recall of the lot on August 9, 2023 out of an abundance of caution. O&M Halyard has confirmed to NIOSH that the particle filtration issue was isolated to the identified lots.

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On April 12, 2023, the FDA recommended that consumers, health care providers, and facilities not use the two models (model numbers 46827 and 46727) of O&M Halyard surgical N95 respirators due to concerns about fluid resistance performance. In addition, the FDA also recommended against using certain of our surgical, procedure and pediatric face masks when fluid resistance is required. On or about that date, we voluntarily stopped the sale in the U.S. of the above-referenced surgical N95 respirators and similar models pending our investigation of the performance issues identified by the FDA and NIOSH. Regulatory bodies in other non-U.S. markets where we sell our facial protection products have inquired about the relevance of the FDA notification to products sold in their countries. The FDA updated its recommendation on April 21, 2023, to permit use of the model No. 46727 of Halyard N95 respirators when fluid resistance is not required. These items are included in our Products & Healthcare Services segment.

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On September 29, 2023, the FDA updated its previous recommendation to consumers, health care providers and facilities regarding the above-referenced models of O&M Halyard surgical N95 respirators based on extensive testing and performance data provided by O&M Halyard. Specifically, the FDA stated that both O&M Halyard respirator models could be used according to the product labeling for respiratory and fluid barrier protection to the wearer (excluding the one lot of products that O&M Halyard voluntarily recalled on August 9, 2023). Following the FDA’s update, we published a user notice on our website announcing the resumption of sales and shipments of O&M Halyard surgical N95 respirators, noting that the data provided to the FDA and NIOSH demonstrated that our products provide the levels of particle filtration and fluid resistance for which they are rated. NIOSH reviewed and concurred with the facts set forth in our user notice published on September 29, 2023.

While the FDA recommendation did not materially affect our results of operations for 2023, there is a risk that these matters and any other safety concerns could have a material adverse effect on our results of operations, financial condition, or cash flows, including as a result of a significant volume of customer product returns and/or recall of products, implementation of corrective action plans, and/or other costly remedial actions in the U.S. and elsewhere. In addition, these matters could potentially have other negative impacts including: government investigations and enforcement actions by the FDA or other U.S. or international regulators or governmental entities; the suspension or revocation of the authority to produce, distribute or sell products, and other sanctions; losses due to patient claims, including product liability claims and lawsuits; and customer claims related to their direct costs arising from supply disruption.

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Philips Respironics Recall

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

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

We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of Philips CPAPs and ventilators due to the Recall. While the equipment shortage in the industry has begun to ease for certain CPAP and BiLevel positive airway pressure devices, we do not know whether that will

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continue. The Recall or other supply chain disruptions may have a future material adverse effect on our financial condition or results of operations, cash flows and liquidity.

Supplemental Financial Information

(in thousands, except ratios and per share data)

(1)Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2023, 2022 and 2021. 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, 2023, 2022 and 2021. The decrease in inventory days as of December 31, 2023 is due to inventory management efforts in our Products & Healthcare Services segment. The 2022 figure reflects a $92.3 million inventory valuation adjustment in our Products & Healthcare Services segment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

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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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of year-to-year comparisons between 2022 and 2021 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, 2022, which is incorporated by reference herein.

2023 compared to 2022

Net revenue.

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The increase in net revenue for the year ended December 31, 2023 was driven primarily by $308 million in incremental net revenue due to the inclusion of a full year of Apria results in 2023 and strong organic revenue growth of $187 million in our Patient Direct segment, driven by growth across a number of product categories as compared to the prior year as a result of new patient starts and high retention of customers.

The decrease in our Products & Healthcare Services segment net revenue for the year ended December 31, 2023 was driven by an approximate $463 million decline in PPE net revenue due to glove pricing of $241 million and demand for COVID-19 related product purchases declining from elevated levels during the first half of 2022, partially offset by net revenue growth in the Medical Distribution division of 3.2%, driven by net new wins and growth with existing customers.

Foreign currency translation had an unfavorable impact on net revenue of $5.3 million for the year ended December 31, 2023 as compared to the prior year.

Cost of goods sold.

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The increase in cost of goods sold was driven by the same factors impacting net revenue including $114 million in incremental cost of goods sold due to the inclusion of a full year of Apria results in 2023 as compared to prior year, organic revenue growth in our Patient Direct segment, partially offset by a decline in Products & Healthcare Services segment net revenue of $117 million, the non-recurrence of the 2022 inventory valuation allowance adjustment of $92.3

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million primarily associated with PPE inventory built up and subsequent decline in demand as a result of the COVID-19 pandemic and cost reduction efforts in the Products & Healthcare Services segment.

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 2 basis points lower in 2023 and 6 basis points lower in 2022.

Foreign currency translation had a favorable impact on cost of goods sold of $0.9 million for the year ended December 31, 2023 as compared to the prior year.

Gross margin.

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Gross margin increase for the year ended December 31, 2023 was driven by the same factors impacting net revenue and cost of goods sold including $195 million in incremental gross margin due to the inclusion of a full year of Apria results in 2023 as compared to the prior year.

Foreign currency translation had an unfavorable impact on gross margin of $4.4 million for the year ended December 31, 2023 as compared to the prior year.

Operating expenses.

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The increase in DS&A expenses was driven by $171 million in incremental DS&A expense due to the inclusion of a full year of Apria results in 2023 as compared to the prior year, costs to support Patient Direct organic net revenue growth of $187 million, and an increase of $57.4 million in teammate benefit costs, partially offset by expense savings of $16.2 million from organizational structure redesign initiatives along with productivity gains derived from other operating efficiencies.

DS&A expenses also included a favorable impact from foreign currency translation of $0.7 million for the year ended December 31, 2023 as compared to the prior year.

Acquisition-related charges were $17.5 million for the year ended December 31, 2023 as compared to $48.1 million for the year ended December, 31, 2022. Acquisition-related charges in 2023 and 2022 consisted primarily of costs related to the Apria Acquisition. The decline in 2023 as compared to the prior year reflects the incurrence of most of these costs closer to the Acquisition Date. Intangible amortization was $83.5 million and $78.8 million for the years ended December 31, 2023 and 2022 and related primarily to intangible assets acquired in the Apria, Halyard, and Byram acquisitions.

Exit and realignment charges were $99.1 million and $6.9 million for the years ended December 31, 2023 and 2022. Amounts in 2023 were primarily related to our (1) Operating Model Realignment Program of $82.9 million, including professional fees, severance, and other costs to streamline functions and processes, (2) IT strategic initiatives

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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. Amounts in 2022 consisted primarily of severance and other charges associated with the reorganization of the Products & Healthcare Services segment and wind-down costs related to Fusion5. We expect to incur material future costs relating to our Operating Model Realignment Program and IT strategic initiatives, which we are not able to reasonably estimate.

The change in other operating expense (income), net for the year ended December 31, 2023 as compared to the prior year reflects $10.6 million of losses on sales of accounts receivable under the RPA, which we began executing sales during 2023. During the year ended December 31, 2023, we incurred an unfavorable change of $1.4 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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The increase in interest expense was primarily from the rise in the effective interest rate which increased interest expense by $29.7 million, and was driven primarily from higher interest rates on our term loans, net of the interest rate swap. Additionally, a full year of interest expense on the indebtedness incurred related to the Apria Acquisition contributed $24.1 million to the increase. This was partially offset by a significant reduction in indebtedness during 2023 of $403 million, which was funded by our strong operating cash flow of $741 million for the year ended December 31, 2023.

Gain on extinguishment of debt.

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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 9 for additional content related to the early retirement of indebtedness.

Other expense, net.

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Other expense, net in 2023 and 2022 primarily represented interest cost and net actuarial losses related to our retirement plans.

Income taxes.

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The change in the effective tax rate for the year ended December 31, 2023 compared to 2022 resulted primarily from changes in income and losses and a change in our foreign repatriation plans related to indefinite reinvestments of earnings associated with a subsidiary in Thailand in 2022.

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 Receivables Financing 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.

(1)Based on year end accounts receivable and net revenue for the fourth quarter ended December 31, 2023 and 2022. 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, 2023 and 2022. The decrease in inventory days as of December 31, 2023 is due to inventory management efforts in our Products & Healthcare Services segment. The 2022 figure reflects a $92.3 million inventory valuation adjustment in our Products & Healthcare Services segment, primarily associated with PPE inventory built up and a subsequent decline in demand as a result of the COVID-19 pandemic.

Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the year ended December 31, 2023 and 2022:

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Cash provided by operating activities for the year ended December 31, 2023 of $741 million was primarily from continued optimization of our inventory levels generating $224 million of operating cash flow and a $167 million reduction in accounts receivable, net from $124 million of net cash proceeds under the RPA along with improved collections.

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 $71.6 million in proceeds related to the sale of primarily patient service equipment. Cash used for investing activities in 2022 included net cash paid for the

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acquisition of Apria of $1.7 billion and capital expenditures of $167 million for patient service equipment and our strategic and operational efficiency initiatives, partially offset by $48.4 million in proceeds related to the sale of primarily patient service equipment.

Cash used for financing activities in 2023 included repayments of debt of $321 million, including $170 million of unscheduled and $15.4 million of scheduled principal payments on the Term Loan A facility (Term Loan A) and the Term Loan B facility (Term Loan B), $135 million of cash to repurchase $144 million aggregate principal of the 4.375% senior notes due in 2024 (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 $96.0 million under our amended Receivables Financing Agreement. Cash provided by financing activities in 2022 included proceeds from borrowings of $1.7 billion related to the 2030 Unsecured Notes, Term Loan A, and Term Loan B, and borrowings under our revolving credit facility, net and Receivables Financing Agreement of $30.0 million. Repayments of debt during 2022 included $4.5 million on our Term Loan B. Gross issuances and repayments under our amended Receivables Financing Agreement program were $1.0 billion and $1.2 billion during 2022. We also paid $42.6 million in financing costs during 2022. Payments for taxes related to the vesting of restricted stock awards were $10.4 million and $45.0 million during 2023 and 2022, which are included in Other, net.

Capital resources. Our primary sources of liquidity include cash and cash equivalents, our amended Receivables Financing Agreement, our Revolving Credit Agreement and our RPA. The Receivables Financing Agreement provides a maximum revolving borrowing capacity of $450 million. The interest rate under the Receivables Financing Agreement is based on a spread over a benchmark SOFR rate (as described in the Fourth Amendment to the Receivables Financing Agreement, as further amended by the Fifth Amendment to the Receivables Financing Agreement). Under the Receivables Financing Agreement, certain of our accounts receivable balances are sold to our wholly owned special purpose entity, O&M Funding LLC. The Receivables Financing Agreement matures in March 2025. We had no borrowings at December 31, 2023 and $96.0 million outstanding at December 31, 2022 under our amended Receivables Financing Agreement. At December 31, 2023 and 2022, we had maximum revolving borrowing capacity of $450 million and $354 million available under our Receivables Financing Agreement.

The Revolving Credit Agreement provides a revolving borrowing capacity of $450 million. We have $910 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, 2023, and December 31, 2022, our Revolving Credit Agreement was undrawn, and we had letters of credit, which reduce revolver availability, of $27.4 million and $27.9 million, leaving $423 million and $422 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 $3.0 million and $2.3 million as of December 31, 2023 and 2022.

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

The Revolving Credit Agreement, the Credit Agreement, the Receivables Financing Agreement, the 2024 Notes, the 2029 Unsecured Notes, and the 2030 Unsecured Notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of any of the related agreements. The terms of the applicable

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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, 2023.

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 $1.4 billion during the year ended December 31, 2023. We collected $1.3 billion of the sold accounts receivable for the year ended December 31, 2023. The losses on sales of accounts receivable are recorded in other operating expense (income), net in the consolidated statements of operations and were $10.6 million for the year ended December 31, 2023.

We regularly evaluate market conditions, our liquidity profile and various financing alternatives to enhance our capital structure. We have from time to time, entered into, and from time to time in the future, we may enter into transactions to repay, repurchase or redeem our outstanding indebtedness (including by means of open market purchases, privately negotiated repurchases, tender or exchange offers and/or repayments or redemptions pursuant to the debt’s terms). Our ability to consummate any such transaction will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. We cannot provide any assurance as to if or when we will consummate any such transactions or the terms of any such transaction.

We believe cash generated by operating activities, including available cash proceeds from the RPA, available financing sources, and borrowings under the Receivables Financing Agreement and Revolving Credit Agreement, as well as cash on hand, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, debt repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.

We earn a portion of our operating income in foreign jurisdictions outside the U.S. Our cash and cash equivalents held by our foreign subsidiaries subject to repatriation totaled $22.0 million and $26.3 million at December 31, 2023 and 2022. As of December 31, 2023, we are permanently reinvested in our foreign subsidiaries.

Pillar 2 Global Minimum Tax

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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 expected to take effect by 2024 and 2025. We are continuing to evaluate the impact of these proposed and enacted legislative changes as new 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

As of December 31, 2023, material cash requirements, including known contractual and other obligations, in the next twelve months were primarily comprised of $204 million in principal debt payments, $113 million in operating leases and $65.3 million in fixed interest payments on our outstanding senior notes. Additionally, as of December 31, 2023, material cash requirements, including known contractual and other obligations, due beyond the next twelve months were primarily comprised of $1.9 billion in principal debt payments excluding finance leases, $284 million in fixed interest payments on our outstanding senior notes, $256 million in operating leases and $31.1 million in

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U.S. retirement plan benefits, based on the same assumptions used to measure our year-end benefit obligation. We cannot reasonably estimate the timing of cash settlement for the liability associated with unrecognized tax benefits, which was $22.7 million as of December 31, 2023. 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 7, “Leases”, Note 9, “Debt”, Note 11, “Retirement Plans” and Note 13, “Income Taxes” of the Notes to Consolidated Financial Statements.

Guarantor and Collateral Group Summarized Financial Information

We are providing the following information in compliance with Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and Rule 13-02 of Regulation S-X, with respect to our 2024 Notes. See Note 9 of the accompanying consolidated financial statements for additional information regarding the terms of the 2024 Notes.

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

Summarized financial information of the Guarantor Group is as follows:

Summarized Consolidated Statement of Operations - Guarantor Group

(1)Includes $127 million in sales to non-guarantor subsidiaries for the year ended December 31, 2023.

Summarized Consolidated Balance Sheets – Guarantor Group

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

Summarized financial information of the Collateral Group is as follows:

Summarized Consolidated Balance Sheets – Collateral Group

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

Off-Balance Sheet Arrangements

We do not have 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 (Testing Date), 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 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, 2023.

Due to changes in our long-term financial plan assumptions made during the current year, we elected to bypass the qualitative test and a quantitative goodwill impairment test was performed to compare the estimated fair value for all reporting units with goodwill to the respective carrying amount.

The 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 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.

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Although we believe our assumptions and estimates are reasonable and appropriate as of the Testing Date, any significant adverse changes in one or a combination of key assumptions, including, but not limited to, a failure of a reporting unit to meet our business plans or expected earnings and cash flows, unanticipated events and circumstances such as changes in assumptions about the duration and magnitude of increased supply chain expense, commodities costs or inflationary pressures and our planned efforts to mitigate such impacts, disruptions in the supply chain, estimated demand and selling prices for PPE or other products, an increase in the discount rate, a decrease in the terminal growth rate, increases in tax rates (including potential tax reform) or a significant change in industry or economic trends, 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.

The annual impairment testing performed for 2023, 2022, and 2021 did not indicate any impairment of goodwill; however, in the current year the estimated fair value of our Apria and Global Products reporting units exceeded the carrying amount by less than 10% as of the Testing Date. The estimated fair value of our Byram reporting unit was substantially in excess of the carrying value.

Apria

The results of the Apria reporting unit are within expectations given the close proximity of the acquisition and the performance of the reporting unit. The goodwill balance of this reporting unit was $1.3 billion at December 31, 2023, or approximately 76% of the consolidated goodwill balance. Adverse changes in one or a combination of significant assumptions, such as an increase in the discount rate, a decrease in the terminal growth rate, or an increase in tax rates, failure of the Apria reporting unit to meet expected earnings and cash flows, or unanticipated events and circumstances may materially affect the estimated fair value of the Apria reporting unit and potentially result in goodwill impairment. A decline in the terminal growth rate or an increase in the discount rate of approximately 100 basis points could result in an indication of goodwill impairment for this reporting unit in future reporting periods under the income-based approach.

Global Products

As previously disclosed, the Global Products reporting unit has been adversely affected by unfavorable industry and macroeconomic conditions, including higher interest rates, inflation, pricing pressures and lower demand for certain product categories, specifically PPE. The goodwill balance of this reporting unit was $104 million at December 31, 2023, or approximately 6% of the consolidated goodwill balance. Adverse changes in one or a combination of significant assumptions, such as an increase in the discount rate, a decrease in the terminal growth rate, or an increase in tax rates, failure of the Global Products reporting unit to meet expected earnings and cash flows, or unanticipated events and circumstances such as further decline in PPE demand, an increase in commodity costs, or an increase in supply chain expenses may materially affect the estimated fair value of the Global Products reporting unit and potentially result in goodwill impairment. A decline in the terminal growth rate or an increase in the discount rate of approximately 100 basis points could result in an indication of goodwill impairment for this reporting unit in future reporting periods under the income-based approach.

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.

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

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

Recent Accounting Pronouncements

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