Executive Summary / Key Takeaways

• Owens & Minor is undergoing a significant strategic transformation, focusing capital and resources on its higher-growth, higher-margin Patient Direct segment while exploring a potential sale of its traditional Products & Healthcare Services business.
• The Patient Direct segment demonstrated strong performance in Q1 2025, with 6% reported revenue growth and a 31% increase in operating income, driven by investments in patient experience, commercial resources, and revenue cycle management.
• The planned acquisition of Rotech Healthcare Holdings for $1.36 billion is a key component of the Patient Direct growth strategy, expected to accelerate progress towards a $5 billion segment revenue target by 2028 and yield conservative synergy benefits.
• The company has reaffirmed its 2025 guidance, projecting Adjusted EBITDA growth of approximately 10% and Adjusted EPS growth of 13%, with a focus on generating at least $200 million in cash flow for debt reduction.
• Key factors for investors to monitor include the outcome and timing of the Rotech acquisition and the potential PHS segment sale, the impact of new tariffs on the PHS business and the company's ability to pass through costs, and execution on operational efficiencies and working capital improvements.

Owens & Minor's Strategic Transformation: Reshaping for Home Healthcare Dominance

Owens & Minor, Inc. (NYSE: OMI) operates at the intersection of healthcare distribution and patient solutions, serving hospitals, providers, and patients across the United States and internationally. Historically rooted in medical-surgical product distribution, the company has embarked on a profound strategic pivot, increasingly focusing its resources and future growth ambitions on the Patient Direct segment, which provides essential medical supplies and integrated home healthcare equipment directly to patients. This strategic shift, formalized at the company's December 2023 Investor Day, aims to optimize its traditional Products & Healthcare Services (PHS) segment while leveraging the higher-growth, higher-margin opportunities within home-based care. This transformation is not merely operational; it represents a fundamental reshaping of OMI's business model to align with evolving healthcare delivery trends and capitalize on favorable demographic tailwinds.

The strategic evolution gained significant momentum with the acquisition of Apria Healthcare Holdings, Inc., completed around three years prior to the Q2 2024 call. This move substantially bolstered OMI's presence in the home healthcare market and laid the foundation for the Patient Direct segment as it exists today. Building on this, the company announced a definitive agreement in July 2024 to acquire Rotech Healthcare Holdings Inc., a national leader in home medical equipment, for $1.36 billion in cash. This planned acquisition is central to OMI's strategy to strengthen and expand its Patient Direct business, aiming to improve capabilities, broaden reach, and accelerate progress towards a stated goal of achieving $5 billion in Patient Direct revenue by 2028.

Complementing this focus on Patient Direct expansion, OMI announced in February 2025 that it is actively engaged in discussions regarding the potential sale of its PHS segment. This exploration is described as a logical next step consistent with the strategy of directing capital towards the Patient Direct segment, driven by significant inbound interest in the PHS business. While the process is underway with no set timetable, the company continues to operate the PHS segment with commitment, recognizing its foundational role and the need to manage the potential divestiture carefully.

Operational Excellence and Technological Underpinnings

Underpinning OMI's strategic objectives is a focus on operational efficiency and leveraging technology across its segments. In the PHS segment, investments are being made in distribution network automation and IT strategic initiatives aimed at driving long-term efficiencies. While specific quantitative metrics on the performance benefits of these technologies are not detailed, the strategic intent is clearly to reduce costs and improve service levels within the distribution business. Recent operational achievements include the successful opening of new state-of-the-art distribution centers in Morgantown, West Virginia, and Sioux Falls, South Dakota, designed to enhance service capabilities in key regions.

In the Patient Direct segment, technology and process improvements are directly tied to enhancing the patient experience and improving financial outcomes. The company has invested in initiatives like the "Sleep Journey," aimed at streamlining the new patient start process and improving adherence for resupply, making it easier for customers to obtain needed products. Investments in revenue cycle management, particularly focusing on the Byram division initially and now being rolled out to Apria, are designed to enhance collection rates. Management reported a record collection rate in Q1 2025 for the Byram division as a result of these efforts. These technological and operational enhancements contribute to OMI's competitive positioning by improving service quality and efficiency in the complex home healthcare reimbursement landscape.

Navigating a Competitive Landscape

Owens & Minor operates within a competitive healthcare solutions market, facing large, diversified players like McKesson Corporation (MCK), Cardinal Health, Inc. (CAH), and Cencora, Inc. (COR) in distribution and supply chain services, and companies like Henry Schein, Inc. (HSIC) in medical supplies. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, OMI holds an estimated 5-10% aggregate market share in healthcare distribution.

Compared to its larger rivals, OMI's scale is a notable difference, potentially leading to higher costs per unit in certain areas compared to the bulk distribution efficiencies of MCK or COR. However, OMI aims to differentiate through operational efficiency in its specific niches and specialized services. For instance, its operational improvements in PHS are intended to reduce costs to serve, and its home-based care expertise in Patient Direct offers specialized service capabilities. While OMI's R&D investment may lag some competitors like CAH or HSIC, its focus on enhancing existing processes and leveraging technology for patient service and supply chain efficiency provides a competitive edge in its targeted segments.

The competitive environment is also shaped by external factors like tariffs and evolving healthcare delivery models such as telehealth. OMI's manufacturing footprint, with significant operations outside of China (including in the U.S., Mexico, and Honduras, and glove production in Southeast Asia), positions it differently regarding upcoming tariffs compared to competitors heavily reliant on Chinese sourcing. While tariffs are expected to impact the industry broadly, OMI's ability to offer alternative products and its planned price increases (effective early June 2025) are strategic responses to maintain competitiveness and profitability in the face of rising costs. The growth in home-based care and telehealth also plays to OMI's strengths in the Patient Direct segment, contrasting with competitors primarily focused on acute care settings.

Recent Performance and Financial Health

Owens & Minor's recent financial performance reflects the dynamics within its two segments and the impact of strategic initiatives and external factors. In the first quarter of 2025, the company reported a net loss per common share of $0.32, compared to $0.29 in the prior year period. This was influenced by acquisition-related charges ($16 million related to Rotech), increased exit and realignment charges ($31.2 million vs. $27.4 million in Q1 2024), partially offset by lower intangible amortization ($14 million vs. $20.3 million in Q1 2024). Foreign currency translation also had an unfavorable impact on net loss per share.

Consolidated net revenue in Q1 2025 was $2.63 billion, a slight increase from $2.61 billion in Q1 2024, despite being negatively impacted by approximately $41 million due to one less sales day. The Patient Direct segment was a key driver, reporting $673.9 million in revenue, a 6% increase year-over-year, fueled by strong growth in diabetes and sleep supplies. Patient Direct segment operating income saw significant growth, increasing 31% or $14 million to $60.1 million, resulting in a 173 basis point expansion, driven by revenue growth and reduced teammate benefit costs.

Conversely, the PHS segment saw net revenue decrease slightly to $1.96 billion from $1.97 billion, primarily due to the fewer sales day and competitive pricing pressures in the Global Products division (including gloves). PHS segment operating income decreased significantly to $1.2 million from $11.5 million, mainly due to the revenue decline, partially offset by lower teammate benefit costs. Consolidated gross profit decreased by 1.8% to $526 million, impacted by rising commodity costs (nitrile) and adverse foreign currency movements, particularly affecting the PHS segment. Distribution, selling, and administrative expenses decreased by 3.2% to $462.4 million, benefiting from lower teammate benefit costs and operating efficiencies, despite costs associated with new distribution centers. Adjusted EBITDA grew 5% to $122 million in Q1 2025.

From a liquidity standpoint, cash used for operating activities in Q1 2025 was $35.1 million, reflecting unfavorable changes in working capital, notably an increase in inventories ahead of new distribution center openings and in anticipation of tariffs, as well as payment of accrued teammate benefits. This was partially offset by an increase in accounts payable and a $130 million benefit from accounts receivable sold under the Receivables Sale Program. The company utilizes a Receivables Sale Program, under which $343 million of accounts receivable were sold in Q1 2025, with $200 million of uncollected receivables sold and removed from the balance sheet as of March 31, 2025. Cash used for investing activities was $48.2 million, including $65 million in capital expenditures. Cash provided by financing activities was $92.8 million, primarily from net borrowings under the Revolving Credit Facility ($98 million outstanding at March 31, 2025, with $318 million available).

The company has made significant strides in deleveraging, having repaid $647 million of debt over the two years leading up to Q4 2024, and over $0.75 billion since the Apria acquisition. Total debt (excluding finance leases) was approximately $1.95 billion at March 31, 2025. The company was in compliance with its debt covenants at that date.

Outlook and Future Trajectory

Owens & Minor has reaffirmed its guidance for the full year 2025, projecting consolidated revenue in the range of $10.85 billion to $11.15 billion (midpoint $11.0 billion). Adjusted EBITDA is expected to be between $560 million and $590 million (midpoint $575 million), representing approximately 10% growth over 2024. Adjusted EPS is guided to be in the range of $1.60 to $1.85 (midpoint $1.73), reflecting approximately 13% growth. This guidance excludes any impact from the planned Rotech acquisition or the potential sale of the PHS segment.

Management anticipates improving results in each subsequent quarter of 2025, with at least 70% of earnings and cash flow expected to be generated in the second half of the year, following a typical seasonal pattern where Q1 is the lowest earning quarter. The outlook is supported by expected mid-single-digit growth in the Patient Direct segment, driven by the continued benefits of recent investments and the clearing of the patient eligibility backlog that impacted earlier periods. For the PHS segment, the outlook assumes stability and the successful implementation of price increases to offset the impact of new tariffs, which are estimated to have an annual exposure of $100 million to $150 million on OMI's products.

A key focus for 2025 is cash flow generation and debt reduction. The company expects marked improvement in cash flow compared to 2024, projecting at least $200 million available for further debt reduction. This is based on the expected Adjusted EBITDA growth, lower anticipated cash spend on strategic initiatives (acquisition/realignment costs), and an expected $100 million improvement from working capital management. The company remains committed to its target leverage range of 2 to 3 times EBITDA and intends to use free cash flow for debt reduction. Additionally, a $100 million share repurchase program has been authorized, which will be used opportunistically when the stock is deemed undervalued.

Risks and Considerations

While the strategic pivot offers potential upside, several risks and challenges could impact OMI's trajectory. The planned acquisition of Rotech is subject to regulatory approval, with the FTC review having a timing agreement until June 10, 2025. Failure to close the acquisition by October 6, 2025, could trigger a special mandatory redemption of the $1 billion senior secured notes issued for financing, potentially impacting liquidity and capital structure. Integration risks also exist post-closing.

The potential sale of the PHS segment introduces uncertainty. There is no guarantee a transaction will be completed, and unanticipated developments could cause delays or prevent a sale. If completed, the company would become smaller and less diversified, potentially increasing vulnerability to market changes. The process itself could disrupt business relationships and impact teammate retention. The proceeds from any sale and their use (debt reduction, PD investment) will be critical factors.

New tariffs, particularly on products sourced from China and other countries, pose a significant challenge to the PHS segment's already thin margins. While OMI plans to pass these costs through via price increases, customer acceptance and competitive responses (e.g., competitors not passing on costs fully or using different pricing strategies) could impact demand, market share, and profitability. Supply chain disruptions, as experienced in late 2024 due to hurricane impacts, and ongoing challenges like the patient eligibility backlog in Patient Direct, can also affect operational performance and financial results. Competitive pressures across both segments remain a constant factor.

Conclusion

Owens & Minor is in the midst of a significant strategic transformation, actively reshaping its business around the higher-growth Patient Direct segment while evaluating the future of its traditional PHS business. The planned Rotech acquisition is a bold move to accelerate growth in home healthcare, leveraging existing infrastructure and aiming for meaningful synergies. Despite recent operational headwinds like tariffs and backlogs, the company's Q1 2025 results demonstrated strong momentum in the Patient Direct segment, validating the strategic focus.

The reaffirmed 2025 guidance signals confidence in continued growth and profitability improvement, heavily weighted towards the second half of the year. A key financial priority is deleveraging, supported by expected strong cash flow generation. While risks related to the Rotech acquisition, the potential PHS sale, and tariff impacts warrant close monitoring, OMI's strategic initiatives, investments in operational efficiency and patient experience, and differentiated positioning in the growing home healthcare market provide a compelling narrative for investors focused on the company's long-term evolution and potential value creation. The successful execution of the Patient Direct growth strategy and the outcome of the PHS sale process will be pivotal in realizing the full potential of this transformation.