Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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

 

 

Owens & Minor, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Virginia   54-1701843

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9120 Lockwood Boulevard, Mechanicsville, Virginia   23116
(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

 

 

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  x    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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of Owens & Minor, Inc.’s common stock outstanding as of October 26, 2012, was 63,397,422 shares.

 

 

 


Table of Contents

Owens & Minor, Inc. and Subsidiaries

Index

 

     Page  

Part I. Financial Information

  
  

Item 1.

 

Financial Statements

  
    

Consolidated Statements of Income—Three and Nine Months Ended September 30, 2012 and 2011

     3   
    

Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2012 and 2011

     4   
    

Consolidated Balance Sheets—September 30, 2012 and December 31, 2011

     5   
    

Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2012 and 2011

     6   
    

Consolidated Statements of Changes in Equity—Nine Months Ended September 30, 2012 and 2011

     7   
    

Notes to Consolidated Financial Statements

     8   
  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   
  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     28   
  

Item 4.

 

Controls and Procedures

     28   

Part II. Other Information

  
  

Item 1.

 

Legal Proceedings

     29   
  

Item 1A.

 

Risk Factors

     29   
  

Item 2.

 

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

     30   
  

Item 6.

 

Exhibits

     31   

 

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Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(in thousands, except per share data)

   2012     2011     2012     2011  

Net revenue

   $ 2,179,895      $ 2,176,759      $ 6,583,221      $ 6,432,022   

Cost of goods sold

     1,951,772        1,960,077        5,929,341        5,788,499   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     228,123        216,682        653,880        643,523   

Selling, general, and administrative expenses

     165,320        152,825        471,179        460,119   

Acquisition-related and exit and realignment charges

     7,831        351        8,448        351   

Depreciation and amortization

     10,090        8,463        27,184        25,479   

Other operating income, net

     (1,781     (3,422     (4,643     (2,927
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     46,663        58,465        151,712        160,501   

Interest expense, net

     3,066        3,426        9,975        10,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     43,597        55,039        141,737        150,338   

Income tax provision

     19,000        21,687        57,667        59,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 24,597      $ 33,352      $ 84,070      $ 91,256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.39      $ 0.53      $ 1.33      $ 1.44   

Diluted

   $ 0.39      $ 0.53      $ 1.33      $ 1.44   

Cash dividends per common share

   $ 0.22      $ 0.20      $ 0.66      $ 0.60   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(in thousands)

   2012     2011     2012     2011  

Net income

   $ 24,597      $ 33,352      $ 84,070      $ 91,256   

Other comprehensive income, net of tax:

        

Currency translation adjustments

     1,927        —          1,927        —     

Amounts recognized in net periodic benefit cost (net of income tax expense - $93 and $410 in 2012 and $85 and $256 in 2011)

     146        133        642        400   

Amounts recognized in interest expense, net (net of income tax benefit- $8 and $24 in 2012 and 2011)

     (14     (12     (38     (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     2,059        121        2,531        363   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 26,656      $ 33,473      $ 86,601      $ 91,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

 

(in thousands, except per share data)

   September 30,
2012
    December 31,
2011
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 79,667      $ 135,938   

Accounts and notes receivable, net of allowances of $16,228 and $15,622

     582,994        506,758   

Merchandise inventories

     776,898        806,366   

Other current assets

     211,967        76,763   
  

 

 

   

 

 

 

Total current assets

     1,651,526        1,525,825   

Property and equipment, net of accumulated depreciation of $113,137 and $102,904

     176,035        108,061   

Goodwill, net

     285,363        248,498   

Intangible assets, net

     44,540        22,142   

Other assets, net

     64,285        42,289   
  

 

 

   

 

 

 

Total assets

   $ 2,221,749      $ 1,946,815   
  

 

 

   

 

 

 

Liabilities and equity

    

Current liabilities

    

Accounts payable

   $ 642,123      $ 575,793   

Accrued payroll and related liabilities

     18,033        20,668   

Deferred income taxes

     36,982        42,296   

Other current liabilities

     252,131        93,608   
  

 

 

   

 

 

 

Total current liabilities

     949,269        732,365   

Long-term debt, excluding current portion

     214,795        212,681   

Deferred income taxes

     31,311        21,894   

Other liabilities

     66,312        60,658   
  

 

 

   

 

 

 

Total liabilities

     1,261,687        1,027,598   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Owens & Minor, Inc. shareholders’ equity:

    

Preferred stock, par value $100 per share, authorized - 10,000 shares, Series A Participating Cumulative Preferred Stock; none issued

     —          —     

Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 63,380 shares and 63,449 shares

     126,762        126,900   

Paid-in capital

     185,695        179,052   

Retained earnings

     651,438        619,629   

Accumulated other comprehensive loss

     (4,963     (7,494
  

 

 

   

 

 

 

Total Owens & Minor, Inc. shareholders’ equity

     958,932        918,087   

Noncontrolling interest

     1,130        1,130   
  

 

 

   

 

 

 

Total equity

     960,062        919,217   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,221,749      $ 1,946,815   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)

 

     Nine Months Ended
September 30,
 
(in thousands)    2012     2011  

Operating activities:

    

Net income

   $ 84,070      $ 91,256   

Adjustments to reconcile net income to cash provided by operating activities of continuing operations:

    

Depreciation and amortization

     27,184        25,479   

Provision for LIFO reserve

     5,223        11,265   

Share-based compensation expense

     4,844        4,335   

Deferred income tax expense

     1,098        908   

Provision for losses on accounts and notes receivable

     414        1,107   

Pension contributions

     —          (543

Changes in operating assets and liabilities:

    

Accounts and notes receivable

     (7,886     (36,598

Merchandise inventories

     40,078        (52,141

Accounts payable

     32,467        81,188   

Net change in other assets and liabilities

     (16,355     (18,465

Other, net

     (773     335   
  

 

 

   

 

 

 

Cash provided by operating activities of continuing operations

     170,364        108,126   
  

 

 

   

 

 

 

Investing activities:

    

Acquisition, net of cash acquired

     (149,910     —     

Additions to computer software and intangible assets

     (19,934     (8,035

Additions to property and equipment

     (7,890     (16,846

Proceeds from sale of property and equipment

     3,237        46   
  

 

 

   

 

 

 

Cash used for investing activities of continuing operations

     (174,497     (24,835
  

 

 

   

 

 

 

Financing activities:

    

Cash dividends paid

     (41,791     (38,156

Repurchases of common stock

     (11,250     (16,124

Financing costs paid

     (1,303     —     

Proceeds from termination of interest rate swap

     —          4,005   

Excess tax benefits related to share-based compensation

     1,223        1,977   

Proceeds from exercise of stock options

     4,114        7,937   

Other, net

     (4,444     (5,127
  

 

 

   

 

 

 

Cash used for financing activities of continuing operations

     (53,451     (45,488
  

 

 

   

 

 

 

Discontinued operations:

    

Operating cash flows

     —          (164
  

 

 

   

 

 

 

Net cash used for discontinued operations

     —          (164

Effect of exchange rate changes on cash and cash equivalents

     1,313        —     
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (56,271     37,639   

Cash and cash equivalents at beginning of period

     135,938        159,213   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 79,667      $ 196,852   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid, net

   $ 50,114      $ 53,356   

Interest paid

   $ 7,549      $ 7,220   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

(unaudited)

 

     Owens & Minor, Inc. Shareholders’ Equity               
(in thousands, except per share data)    Common
Shares
Outstanding
    Common
Stock

($2 par
value)
    Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest
     Total
Equity
 

Balance December 31, 2010

     63,433      $ 126,867      $ 165,447       $ 570,320      $ (5,116   $ —         $ 857,518   

Net income

            91,256             91,256   

Other comprehensive income

              363           363   
                

 

 

 

Comprehensive income

                   91,619   
                

 

 

 

Dividends declared ($0.60 per share)

            (38,156          (38,156

Shares repurchased and retired

     (524     (1,048        (15,076          (16,124

Share-based compensation expense, exercises and other

     515        1,029        11,093                12,122   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance September 30, 2011

     63,424      $ 126,848      $ 176,540       $ 608,344      $ (4,753   $ —         $ 906,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance December 31, 2011

     63,449      $ 126,900      $ 179,052       $ 619,629      $ (7,494   $ 1,130       $ 919,217   

Net income

            84,070             84,070   

Other comprehensive income

              2,531           2,531   
                

 

 

 

Comprehensive income

                   86,601   
                

 

 

 

Dividends declared ($0.66 per share)

            (41,791          (41,791

Shares repurchased and retired

     (390     (780        (10,470          (11,250

Share-based compensation expense, exercises and other

     321        642        6,643                7,285   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance September 30, 2012

     63,380      $ 126,762      $ 185,695       $ 651,438      $ (4,963   $ 1,130       $ 960,062   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, unless otherwise indicated)

 

1. Basis of Presentation and Use of Estimates

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, or our) 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). For the consolidated subsidiary in which our ownership is less than 100%, the outside stockholder’s interest is presented as a noncontrolling interest. 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.

Certain prior period amounts have been reclassified to conform to the current period 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.

 

2. Acquisition

On August 31, 2012, we acquired from Celesio AG (Celesio) all of the voting interests of certain subsidiaries comprising the majority of Celesio’s healthcare third-party logistics business known as the Movianto Group (the acquired portion is referred to herein as Movianto) for consideration of approximately $157 million (€125 million), net of cash acquired and including debt assumed of $2.1 million (primarily capitalized lease obligations) and a remaining working capital adjustment due of $5.3 million. As a result of the acquisition of Movianto, we have entered into third-party logistics for the pharmaceutical and medical device industries in the European market with an existing platform that also expands our ability to serve our U.S.-based customers globally.

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon our preliminary estimate of their fair values at the date of acquisition, with certain exceptions permitted under GAAP. The purchase price exceeded the preliminary fair value of the net tangible and identifiable intangible assets by $36 million, which was allocated to goodwill. The following table presents the preliminary estimated fair value of the assets acquired and liabilities assumed recognized as of the acquisition date.

 

     Recognized as
of August 31,
2012
 

Assets acquired:

  

Current assets

   $ 219,810   

Property and equipment

     72,778   

Goodwill

     35,990   

Intangible assets

     24,278   

Other noncurrent assets

     12,109   
  

 

 

 

Total assets

     364,965   

Liabilities assumed:

  

Current liabilities

     197,742   

Noncurrent liabilities

     9,915   
  

 

 

 

Total liabilities

     207,657   
  
  

 

 

 

Fair value of net assets acquired, net of cash

   $ 157,308   
  

 

 

 

We are amortizing the fair value of acquired intangible assets, primarily customer relationships, over their remaining weighted average useful lives of 6 years.

 

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Goodwill of $36.0 million arising from the acquisition consists largely of expected opportunities to provide additional services to existing manufacturer customers and to expand our third-party logistics services globally. All of the goodwill was assigned to our International segment. None of the goodwill recognized is expected to be deductible for income tax purposes.

The allocation of the purchase price to the fair value of identifiable assets and liabilities acquired is preliminary pending receipt of final valuations.

Pro forma results of operations for this acquisition have not been presented because the effects of revenue and net income were not material to our historic consolidated financial statements.

We present costs incurred in connection with acquisitions in acquisition-related and exit and realignment charges in our consolidated statements of income. Acquisition-related costs consist primarily of transaction costs and integration costs. Transaction costs are incurred during the initial evaluation of a potential targeted acquisition and primarily relate to costs to analyze, negotiate and consummate the transaction as well as due diligence activities. Integration costs relate to activities needed to combine the operations of an acquired enterprise into our operations. We recognized acquisition-related expenses of $7.8 million and $8.4 million for the three and nine months ended September 30, 2012. Acquisition-related expenses includes transaction costs of $7.1 million and $7.7 million, respectively, and post-acquisition integration costs of $0.7 million for the three and nine month periods.

 

3. Fair Value

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable reported in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of long-term debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings and average remaining maturities (Level 2). See Note 8 for the fair value of long-term debt.

Property held for sale is reported at estimated fair value less selling costs with fair value determined based on recent sales prices for comparable properties in similar locations (Level 2). Property held for sale of $1.1 million at September 30, 2012, and $4.2 million at December 31, 2011, is included in other assets, net, in the consolidated balance sheets. We are actively marketing the property for sale; however, the ultimate timing of sale is dependent on local market conditions.

 

4. Financing Receivables

As a result of the Movianto acquisition we have an order-to-cash program under which we invoice manufacturer’s customers and remit collected amounts to the manufacturers. We had receivables for which we retain credit risk under this program (referred to as financing receivables) of $124.7 million and related amounts due (referred to as financing payables) of $118.4 million, included in other current assets and other current liabilities, respectively, in the consolidated balance sheet at September 30, 2012. Fees charged for this program are included in net revenue. Product pricing and related product risks are retained by the manufacturer.

 

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5. Intangible Assets

Intangible assets at September 30, 2012, and December 31, 2011, are as follows:

 

     Customer
Relationships
    Other
Intangibles
    Total  

At September 30, 2012:

      

Gross intangible assets

   $ 50,558      $ 10,122      $ 60,680   

Accumulated amortization

     (11,403     (4,737     (16,140
  

 

 

   

 

 

   

 

 

 

Net intangible assets

   $ 39,155      $ 5,385      $ 44,540   
  

 

 

   

 

 

   

 

 

 

At December 31, 2011:

      

Gross intangible assets

   $ 31,622      $ 4,720      $ 36,342   

Accumulated amortization

     (9,569     (4,631     (14,200
  

 

 

   

 

 

   

 

 

 

Net intangible assets

   $ 22,053      $ 89      $ 22,142   
  

 

 

   

 

 

   

 

 

 

Gross intangible assets increased $24.3 million from December 31, 2011 as a result of the Movianto acquisition.

Amortization expense for intangible assets was $0.8 million for the three-month periods ended September 30, 2012 and 2011, and $1.9 million and $2.4 million for the nine months ended September 30, 2012 and 2011.

Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $1.4 million for the remainder of 2012, $5.2 million for 2013, and $4.6 million annually for 2014 through 2017.

 

6. Exit and Realignment Costs

The following table summarizes the activity related to exit cost accruals for the nine months ended September 30, 2012:

 

Nine months ended September 30, 2012

   Lease
Obligations
    Severance
and Other
    Total  

Accrued exit costs, beginning of period

   $ 8,264      $ 1,831      $ 10,095   

Interest accretion

     211        —          211   

Cash payments, net of sublease income

     (1,160     (1,788     (2,948
  

 

 

   

 

 

   

 

 

 

Accrued exit costs, end of period

   $ 7,315      $ 43      $ 7,358   
  

 

 

   

 

 

   

 

 

 

We present charges for exit costs in acquisition-related and exit and realignment charges in our consolidated statements of income. There were no charges for exit costs for the nine months ended September 30, 2012 and 2011. Accrued exit costs at September 30, 2012 relate to exit activities and organizational realignment initiated during the fourth quarter of 2011.

 

7. Retirement Plan

We have a domestic noncontributory, unfunded retirement plan for certain officers and other key employees. We also sponsor defined benefit plans in some of the European countries in which we operate. In February 2012, our Board of Directors amended the domestic retirement plan to freeze benefit levels and modify vesting provisions under the plan effective as of March 31, 2012. As a result, we recognized a curtailment loss of $0.2 million for the nine months ended September 30, 2012. The reduction of the projected benefit obligation as a result of the amendment was less than $1 million.

 

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The components of net periodic benefit cost, which are included in selling, general and administrative expenses, for the three and nine months ended September 30, 2012 and 2011, are as follows:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Service cost

   $ 4       $ 326       $ 134       $ 977   

Interest cost

     410         451         1,218         1,353   

Amortization of prior service cost

     —           73         —           219   

Recognized net actuarial loss

     239         145         733         437   

Curtailment loss

     —           —           234         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 653       $ 995       $ 2,319       $ 2,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8. Debt

We have $200 million of senior notes outstanding, which mature on April 15, 2016 and bear interest at 6.35% payable semi-annually (Senior Notes). We may redeem the Senior Notes, in whole or in part, at a redemption price of the greater of 100% of the principal amount of the Senior Notes or the present value of remaining scheduled payments of principal and interest discounted at the applicable Treasury Rate plus 0.25%. As of September 30, 2012 and December 31, 2011, the estimated fair value of the Senior Notes was $220.8 million and $217.0 million, and the related carrying amount was $206.2 million and $207.5 million. The estimated fair value interest rate used to compute the fair value of the Senior Notes at September 30, 2012 was 3.22%.

On June 5, 2012, we entered into a five-year $350 million Credit Agreement with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A. and a syndicate of financial institutions (the Credit Agreement) expiring June 5, 2017. This agreement replaced an existing $350 million credit agreement set to expire June 7, 2013. Under the new credit facility, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $150 million. The interest rate on the new credit facility, which is subject to adjustment quarterly, is based on the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread) as defined by the Credit Agreement. We are charged a commitment fee of between 17.5 and 42.5 basis points on the unused portion of the facility. The terms of the Credit Agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At September 30, 2012, we had no borrowings and letters of credit of $5.0 million outstanding on the revolving credit facility, leaving $345.0 million available for borrowing.

We assumed debt (primarily capitalized lease obligations) of approximately $2.1 million with the acquisition of Movianto.

 

9. Income Taxes

The provision for income taxes was $19.0 million and $57.7 million for the three and nine months ended September 30, 2012, compared to $21.7 million and $59.1 million for the same periods in 2011. The effective tax rate was 43.6% and 40.7% for the three and nine months ended September 30, 2012, compared to 39.4% and 39.3% for the same periods in 2011. The increases in the effective tax rate for the 2012 periods are related to non-deductible acquisition-related costs of $4.7 million incurred in the third quarter of 2012. The effective tax rate excluding acquisition-related costs was 39.4% for the three months and first nine months of 2012, which included a benefit to the rate of 0.7% in the third quarter primarily for the recognition of tax benefits due to the expiration of the statute of limitations for the 2008 U.S. federal income tax return, offset by the effect of valuation allowances recognized on potential income tax benefits from losses in certain foreign tax jurisdictions. A similar impact for both items exists for the year-to-date effective tax rate.

 

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Table of Contents
10. Net Income per Common Share

The following table summarizes the calculation of net income per share attributable to common shareholders for the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(in thousands, except per share data)

   2012     2011     2012     2011  

Numerator:

        

Net income

   $ 24,597      $ 33,352      $ 84,070      $ 91,256   

Less: income allocated to unvested restricted shares

     (153     (252     (574     (856
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders—basic

     24,444        33,100        83,496        90,400   

Add: undistributed income attributable to unvested restricted shares—basic

     53        136        229        397   

Less: undistributed income attributable to unvested restricted shares—diluted

     (53     (135     (228     (396
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders—diluted

   $ 24,444      $ 33,101      $ 83,497      $ 90,401   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average shares outstanding—basic

     62,763        62,802        62,806        62,801   

Dilutive shares—stock options

     78        145        84        183   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     62,841        62,947        62,890        62,984   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

        

Basic

   $ 0.39      $ 0.53      $ 1.33      $ 1.44   

Diluted

   $ 0.39      $ 0.53      $ 1.33      $ 1.44   

 

11. Shareholders’ Equity

In February 2011, our Board of Directors authorized a share repurchase program of up to $50 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2014. The program is intended to offset shares issued in conjunction with our stock incentive plans and may be suspended or discontinued at any time. During the nine months ended September 30, 2012, we repurchased in open-market transactions and retired approximately 390 thousand shares of our common stock for an aggregate of $11.3 million, or an average price per share of $28.84. As of September 30, 2012, we have approximately $22.6 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

 

12. Foreign Currency Translation

Our international subsidiaries generally consider their local currency to be their functional currency. Assets and liabilities of these international subsidiaries are translated into U.S. dollars at period-end exchange rates and revenues and expenses are translated at average exchange rates during the period. Cumulative currency translation adjustments are included in accumulated other comprehensive loss in shareholders’ equity. Realized gains and losses from currency exchange transactions are recorded in other operating income, net in the consolidated statements of operations and were not material to our consolidated results of operations for the three- and nine-month periods ended September 30, 2012.

 

13. Commitments and Contingencies

We have contractual obligations that are required to be paid to customers in the event that certain contractual performance targets are not achieved as of specified dates, generally within 36 months from inception of the contract. These contingent obligations totaled $3.6 million as of September 30, 2012. If none of the performance targets are met as of the specified dates, and customers have met their contractual commitments, payments will be due as follows: Remainder of 2012 - $0.5 million; 2013 - $2.5 million; 2014 - $0.4 million; and 2015 - $0.2 million. None of these contingent obligations were accrued at September 30, 2012, as we do not consider any of them probable. We deferred the recognition of fees that are contingent upon the company’s future performance under the terms of these contracts. As of September 30, 2012, $1.5 million of deferred revenue related to outstanding contractual performance targets is included in other current liabilities.

The state of California is continuing its administrative review of certain ongoing local sales tax incentives that may be available to us. Upon completion of this review, we could potentially receive tax incentive payments for all or some of the quarterly periods beginning with the first quarter of 2009. The exact amount, if any, is dependent upon a number of factors, including the timing of negotiation and execution of certain customer agreements, collection of amounts from the parties involved, the variability in sales and our operations in California. The estimated potential payment we may receive (and related contingent gain) related to prior periods could be more than $7 million.

In connection with the acquisition of Movianto, our commitments under operating leases increased by $12.7 million, due as follows: remainder of 2012 - $1.2 million; 2013 - $3.9 million; 2014 - $3.2 million; 2015 - $2.0 million; 2016 - $1.7 million; and 2017 - $0.7 million.

Prior to exiting the direct-to-consumer business in January 2009, we received reimbursements from Medicare, Medicaid, and private healthcare insurers for certain customer billings. We are subject to audits of these reimbursements for up to seven years from the date of the service.

 

12


Table of Contents
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. As a result of the August 31, 2012 acquisition of Movianto, we will now report Movianto as a separate International business segment. Prior to the acquisition, we had one reportable business segment, which now comprises the Domestic business segment. Accordingly, the Domestic business segment includes traditional distribution, OM HealthCare Logistics, and other supply-chain management services, such as OM SolutionsSM, which provide solutions to healthcare providers and suppliers of medical and surgical products in the United States.

The following tables present financial information by segment:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(in thousands)

   2012     2011     2012     2011  

Net revenue:

        

Domestic

   $ 2,130,226      $ 2,176,759      $ 6,533,552      $ 6,432,022   

International

     49,669        —          49,669        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net revenue

   $ 2,179,895      $ 2,176,759      $ 6,583,221      $ 6,432,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss):

        

Domestic

   $ 55,120      $ 58,816      $ 160,786      $ 160,852   

International

     (626     —          (626     —     

Acquisition-related and exit and realignment charges

     (7,831     (351     (8,448     (351
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating earnings

   $ 46,663      $ 58,465      $ 151,712      $ 160,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Domestic

   $ 8,801      $ 8,463      $ 25,895      $ 25,479   

International

     1,289        —          1,289        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated depreciation and amortization

   $ 10,090      $ 8,463      $ 27,184      $ 25,479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures:

        

Domestic

   $ 8,929      $ 11,133      $ 27,086      $ 24,881   

International

     738        —          738        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated capital expenditures

   $ 9,667      $ 11,133      $ 27,824      $ 24,881   
  

 

 

   

 

 

   

 

 

   

 

 

 
     September 30,
2012
    December 31,
2011
             

Total assets:

        

Domestic

   $ 1,732,460      $ 1,810,877       

International

     409,622        —         
  

 

 

   

 

 

     

Segment assets

     2,142,082        1,810,877       

Cash and cash equivalents

     79,667        135,938       
  

 

 

   

 

 

     

Consolidated total assets

   $ 2,221,749      $ 1,946,815       
  

 

 

   

 

 

     

 

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Table of Contents
15. Condensed Consolidating Financial Information

The following tables present condensed consolidating financial information for: Owens & Minor, Inc. (O&M), on a combined basis; the guarantors of O&M’s Senior Notes; and the subsidiaries of O&M that are not guarantors of the Senior Notes (Non-guarantor subsidiaries). Separate financial statements of the guarantor subsidiaries are not presented because the guarantors are jointly, severally and unconditionally liable under the guarantees and we believe the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries.

 

For the three months ended September 30, 2012

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Net revenue

   $ —        $ 2,130,226      $ 59,200      $ (9,531   $ 2,179,895   

Cost of goods sold

     —          1,921,975        39,074        (9,277     1,951,772   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          208,251        20,126        (254     228,123   

Selling, general and administrative expenses

     23        144,882        20,415        —          165,320   

Acquisition-related and exit and realignment charges

     —          104        7,727        —          7,831   

Depreciation and amortization

     —          8,783        1,307        —          10,090   

Other operating income, net

     —          (1,396     (385     —          (1,781
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) earnings

     (23     55,878        (8,938     (254     46,663   

Interest expense (income), net

     3,951        (866     (19     —          3,066   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (3,974     56,744        (8,919     (254     43,597   

Income tax (benefit) provision

     (1,634     23,411        (2,777     —          19,000   

Equity in earnings of subsidiaries

     26,937        —          —          (26,937     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     24,597        33,333        (6,142     (27,191     24,597   

Other comprehensive income

     2,059        146        1,926        (2,072     2,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 26,656      $ 33,479      $ (4,216   $ (29,263   $ 26,656   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the three months ended September 30, 2011

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Net revenue

   $ —        $ 2,176,759      $ —        $ —        $ 2,176,759   

Cost of goods sold

     —          1,960,077        —          —          1,960,077   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          216,682        —          —          216,682   

Selling, general and administrative expenses

     (574     153,319        80        —          152,825   

Acquisition-related and exit and realignment charges

     —          351        —          —          351   

Depreciation and amortization

     —          8,463        —          —          8,463   

Other operating expense, net

     —          (3,422     —          —          (3,422
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) earnings

     574        57,971        (80     —          58,465   

Interest expense, net

     2,249        1,155        22        —          3,426   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (1,675     56,816        (102     —          55,039   

Income tax (benefit) provision

     (662     22,389        (40     —          21,687   

Equity in earnings of subsidiaries

     34,365        —          —          (34,365     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     33,352        34,427        (62     (34,365     33,352   

Other comprehensive income (loss)

     121        133        —          (133     121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 33,473      $ 34,560      $ (62   $ (34,498   $ 33,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

Condensed Consolidating Financial Information

 

For the nine months ended September 30, 2012

   Owens &
Minor,  Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Net revenue

   $ —        $ 6,533,552      $ 65,918      $ (16,249   $ 6,583,221   

Cost of goods sold

     —          5,899,666        45,393        (15,718     5,929,341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          633,886        20,525        (531     653,880   

Selling, general and administrative expenses

     678        449,092        21,409        —          471,179   

Acquisition-related and exit and realignment charges

     —          721        7,727        —          8,448   

Depreciation and amortization

     —          25,842        1,342        —          27,184   

Other operating income, net

     —          (4,123     (520     —          (4,643
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) earnings

     (678     162,354        (9,433     (531     151,712   

Interest expense (income), net

     11,518        (1,573     30        —          9,975   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (12,196     163,927        (9,463     (531     141,737   

Income tax (benefit) provision

     (4,872     65,514        (2,975     —          57,667   

Equity in earnings of subsidiaries

     91,394        —          —          (91,394     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     84,070        98,413        (6,488     (91,925     84,070   

Other comprehensive income

     2,531        642        1,926        (2,568     2,531   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 86,601      $ 99,055      $ (4,562   $ (94,493   $ 86,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the nine months ended September 30, 2011

   Owens &
Minor,  Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Income

          

Net revenue

   $ —        $ 6,431,896      $ 126      $ —        $ 6,432,022   

Cost of goods sold

     —          5,788,483        16        —          5,788,499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          643,413        110        —          643,523   

Selling, general and administrative expenses

     280        459,505        334        —          460,119   

Acquisition-related and exit and realignment charges

     —          351        —          —          351   

Depreciation and amortization

     —          25,479        —          —          25,479   

Other operating expense, net

     148        (3,067     (8     —          (2,927
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) earnings

     (428     161,145        (216     —          160,501   

Interest expense, net

     7,010        3,097        56        —          10,163   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (7,438     158,048        (272     —          150,338   

Income tax (benefit) provision

     (2,923     62,112        (107     —          59,082   

Equity in earnings of subsidiaries

     95,771        —          —          (95,771     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     91,256        95,936        (165     (95,771     91,256   

Other comprehensive income

     363        400        —          (400     363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 91,619      $ 96,336      $ (165   $ (96,171   $ 91,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Condensed Consolidating Financial Information

 

September 30, 2012

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 29,538      $ 14,744      $ 35,385      $ —        $ 79,667   

Accounts and notes receivable, net

     —          491,008        94,602        (2,616     582,994   

Merchandise inventories

     —          750,958        26,470        (530     776,898   

Other current assets

     244        66,546        145,182        (5     211,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     29,782        1,323,256        301,639        (3,151     1,651,526   

Property and equipment, net

     —          102,508        73,527        —          176,035   

Goodwill, net

     —          247,271        38,092        —          285,363   

Intangible assets, net

     —          20,496        24,044        —          44,540   

Due from O&M and subsidiaries

     —          244,094        40,730        (284,824     —     

Advances to and investments in consolidated subsidiaries

     1,430,878        —          —          (1,430,878     —     

Other assets, net

     641        49,974        13,670        —          64,285   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,461,301      $ 1,987,599      $ 491,702      $ (1,718,853   $ 2,221,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Current liabilities

          

Accounts payable

   $ 1,575      $ 562,268      $ 80,901      $ (2,621   $ 642,123   

Accrued payroll and related liabilities

     —          11,801        6,232        —          18,033   

Deferred income taxes

     —          36,982        —          —          36,982   

Other current liabilities

     9,785        83,338        159,008        —          252,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     11,360        694,389        246,141        (2,621     949,269   

Long-term debt, excluding current portion

     206,185        6,349        2,261        —          214,795   

Due to O&M and subsidiaries

     284,824        —          —          (284,824     —     

Intercompany debt

     —          138,890        —          (138,890     —     

Deferred income taxes

     —          28,693        2,618        —          31,311   

Other liabilities

     —          58,855        7,457        —          66,312   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     502,369        927,176        258,477        (426,335     1,261,687   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

          

Common stock

     126,762        —          1,500        (1,500     126,762   

Paid-in capital

     185,695        242,024        258,635        (500,659     185,695   

Retained earnings (deficit)

     651,438        825,464        (29,967     (795,497     651,438   

Accumulated other comprehensive loss

     (4,963     (7,065     1,927        5,138        (4,963
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Owens & Minor, Inc. shareholders’ equity

     958,932        1,060,423        232,095        (1,292,518     958,932   

Noncontrolling interest

     —          —          1,130        —          1,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     958,932        1,060,423        233,225        (1,292,518     960,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,461,301      $ 1,987,599      $ 491,702      $ (1,718,853   $ 2,221,749   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

Condensed Consolidating Financial Information

 

December 31, 2011

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 120,010      $ 14,809      $ 1,119        —        $ 135,938   

Accounts and notes receivable, net

     —          506,633        125        —          506,758   

Merchandise inventories

     —          806,281        85        —          806,366   

Other current assets

     139        76,696        35        (107     76,763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     120,149        1,404,419        1,364        (107     1,525,825   

Property and equipment, net

     —          107,878        183        —          108,061   

Goodwill, net

     —          247,271        1,227        —          248,498   

Intangible assets, net

     —          22,142        —          —          22,142   

Due from O&M and subsidiaries

     —          —          40,888        (40,888     —     

Advances to and investments in consolidated subsidiaries

     1,142,592        —          —          (1,142,592     —     

Other assets, net

     779        41,373        137        —          42,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,263,520      $ 1,823,083      $ 43,799      $ (1,183,587   $ 1,946,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Current liabilities

          

Accounts payable

   $ 113,100      $ 462,604      $ 89      $ —        $ 575,793   

Accrued payroll and related liabilities

     —          20,653        15        —          20,668   

Deferred income taxes

     —          42,296        —          —          42,296   

Other current liabilities

     6,505        86,980        230        (107     93,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     119,605        612,533        334        (107     732,365   

Long-term debt, excluding current portion

     207,480        5,201        —          —          212,681   

Due to O&M and subsidiaries

     18,348        22,540        —          (40,888     —     

Intercompany debt

     —          138,890        —          (138,890     —     

Deferred income taxes

     —          21,894        —          —          21,894   

Other liabilities

     —          60,658        —          —          60,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     345,433        861,716        334        (179,885     1,027,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

          

Common stock

     126,900        —          1,500        (1,500     126,900   

Paid-in capital

     179,052        242,024        64,314        (306,338     179,052   

Retained earnings (deficit)

     619,629        727,050        (23,479     (703,571     619,629   

Accumulated other comprehensive loss

     (7,494     (7,707     —          7,707        (7,494
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Owens & Minor, Inc. shareholders’ equity

     918,087        961,367        42,335        (1,003,702     918,087   

Noncontrolling interest

     —          —          1,130        —          1,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     918,087        961,367        43,465        (1,003,702     919,217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,263,520      $ 1,823,083      $ 43,799      $ (1,183,587   $ 1,946,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

Condensed Consolidating Financial Information

 

Nine months ended September 30, 2012

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 84,070      $ 98,413      $ (6,488   $ (91,925   $ 84,070   

Adjustments to reconcile net income to cash provided by (used for) operating activities:

          

Equity in earnings of subsidiaries

     (91,394     —          —          91,394        —     

Depreciation and amortization

     —          25,842        1,342        —          27,184   

Provision for LIFO reserve

     —          5,223        —          —          5,223   

Share-based compensation expense

     —          4,844        —          —          4,844   

Deferred income tax expense

     —          1,098        —          —          1,098   

Provision for losses on accounts and notes receivable

     —          311        103        —          414   

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     —          15,314        (25,817     2,617        (7,886

Merchandise inventories

     —          50,100        (10,552     530        40,078   

Accounts payable

     (111,525     99,664        46,949        (2,621     32,467   

Net change in other assets and liabilities

     3,070        (3,214     (16,216     5        (16,355

Other, net

     (1,270     712        (215     —          (773
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) operating activities

     (117,049     298,307        (10,894     —          170,364   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

          

Acquisition, net of cash acquired

         (149,910       (149,910

Additions to computer software and intangible assets

     —          (18,911     (1,023     —          (19,934

Additions to property and equipment

     —          (8,159     269        —          (7,890

Proceeds from the sale of property and equipment

     —          3,237        —          —          3,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for investing activities

     —          (23,833     (150,664     —          (174,497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Change in intercompany advances

     77,168        (271,650     194,482        —          —     

Cash dividends paid

     (41,791     —          —          —          (41,791

Repurchases of common stock

     (11,250     —          —          —          (11,250

Financing costs paid

     —          (1,303       —          (1,303

Excess tax benefits related to share-based compensation

     1,223        —          —          —          1,223   

Proceeds from exercise of stock options

     4,114        —          —          —          4,114   

Other, net

     (2,887     (1,586     29        —          (4,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) financing activities

     26,577        (274,539     194,511        —          (53,451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          1,313        —          1,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (90,472     (65     34,266        —          (56,271

Cash and cash equivalents at beginning of period

     120,010        14,809        1,119        —          135,938   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 29,538      $ 14,744      $ 35,385      $ —        $ 79,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Financial Information

 

Nine months ended September 30, 2011

   Owens &
Minor, Inc.
    Guarantor
Subsidiaries
    Non-guarantor
Subsidiaries
    Eliminations     Consolidated  

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 91,256      $ 95,936      $ (165   $ (95,771   $ 91,256   

Adjustments to reconcile net income to cash provided by (used for) operating activities:

          

Equity in earnings of subsidiaries

     (95,771     —          —          95,771        —     

Depreciation and amortization

     —          25,479        —          —          25,479   

Provision for LIFO reserve

     —          11,265        —          —          11,265   

Share-based compensation expense

     —          4,335        —          —          4,335   

Deferred income tax expense

     —          908        —          —          908   

Provision for losses on accounts and notes receivable

     —          1,107        —          —          1,107   

Pension contributions

     —          (543     —          —          (543

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     313        (36,911     —          —          (36,598

Merchandise inventories

     —          (52,141     —          —          (52,141

Accounts payable

     —          81,187        1        —          81,188   

Net change in other assets and liabilities

     2,882        (21,286     (61     —          (18,465

Other, net

     70        265        —          —          335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) operating activities

     (1,250     109,601        (225     —          108,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

          

Additions to computer software and intangible assets

     —          (8,035     —          —          (8,035

Additions to property and equipment

     —          (16,846     —          —          (16,846

Proceeds from the sale of property and equipment

     —          46        —          —          46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for investing activities

     —          (24,835     —          —          (24,835
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Change in intercompany advances

     78,610        (79,015     405        —          —     

Cash dividends paid

     (38,156     —          —          —          (38,156

Repurchases of common stock

     (16,124     —          —          —          (16,124

Proceeds from termination of interest rate swap

     4,005        —          —          —          4,005   

Excess tax benefits related to share-based compensation

     1,977        —          —          —          1,977   

Proceeds from exercise of stock options

     7,937        —          —          —          7,937   

Other, net

     (3,563     (1,564     —          —          (5,127
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) financing activities

     34,686        (80,579     405        —          (45,488
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations:

          

Operating cash flows

     —          —          (164     —          (164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used for discontinued operations

     —          —          (164     —          (164
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     33,436        4,187        16        —          37,639   

Cash and cash equivalents at beginning of period

     156,897        2,316        —          —          159,213   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 190,333      $ 6,503      $ 16      $ —        $ 196,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents
16. Recent Accounting Pronouncements

There has been no change in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2011, except as discussed below.

In the first quarter of 2012, we adopted an Accounting Standard Update (ASU) issued by the Financial Accounting Standards Board (FASB) for fair value measurement. This update amends and clarifies certain measurement principles and disclosure requirements for fair value measurement. The adoption of this guidance did not have an impact on our financial position or results of operations.

In the first quarter of 2012, we adopted an ASU regarding the presentation of comprehensive income. This update requires entities to report comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The adoption of this guidance did not have an impact on our financial position or results of operations.

In the first quarter of 2012, we adopted an ASU for the testing of goodwill. This update allows entities the option to first assess qualitative factors as a basis for determining whether it is necessary to perform the two-step impairment test for goodwill. The adoption of this guidance did not have an impact on our financial position or results of operations.

In the third quarter of 2012, we adopted an ASU for the testing of long-lived assets. This update allows entities the option to first assess qualitative factors as a basis for determining whether it is necessary to perform the quantitative test. The adoption of this guidance did not have an impact on our financial position or results of operations.

 

20


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis describes results of operations and material changes in the financial condition of Owens & Minor, Inc. and its subsidiaries since December 31, 2011. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview

Third quarter and first nine months of 2012 compared with 2011

Acquisition. Owens & Minor, Inc. (we, us, or our) is a leading national distributor of name-brand medical and surgical supplies and a healthcare supply-chain management company. As a result of the August 31, 2012 acquisition of Movianto, we will now report Movianto as a separate International business segment. Prior to the acquisition, we had one reportable business segment, which now comprises the Domestic business segment. Accordingly, the Domestic business segment includes traditional distribution, OM HealthCare Logistics, and other supply-chain management services, such as OM SolutionsSM, which provide solutions to healthcare providers and suppliers of medical and surgical products in the United States. Segment information for revenues, operating earnings, depreciation and amortization, capital expenditures and total assets are provided in Note 14 of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Financial Highlights. The following table provides a reconciliation of reported operating earnings, net income and diluted net income per common share to non-GAAP measures used by management:

 

      Three Months Ended     Nine Months Ended  
(Dollars in thousands except EPS data)    September 30,     September 30,  
     2012     2011     2012     2011  

Operating earnings, as reported (GAAP)

   $ 46,663      $ 58,465      $ 151,712      $ 160,501   

Acquisition-related and exit and realignment charges

     7,831        351        8,448        351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings, adjusted (Non-GAAP) (Adjusted Operated Earnings)

   $ 54,494      $ 58,816      $ 160,160      $ 160,852   

Adjusted Operating Earnings as a percent of revenue (Non-GAAP)

     2.50     2.70     2.43     2.50

Net income, as reported (GAAP)

   $ 24,597      $ 33,352      $ 84,070      $ 91,256   

Acquisition-related and exit and realignment charges, after-tax

     6,588        213        6,963        213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income, adjusted (Non-GAAP) (Adjusted Net Income)

   $ 31,185      $ 33,565      $ 91,033      $ 91,469   

Net income per diluted common share, as reported (GAAP)

   $ 0.39      $ 0.53      $ 1.33      $ 1.44   

Acquisition-related and exit and realignment charges

     0.10        —          0.11        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per diluted common share, adjusted (Non-GAAP) (Adjusted EPS)

   $ 0.49      $ 0.53      $ 1.44      $ 1.44   

Use of Non-GAAP Measures

Our management’s discussion and analysis contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). In general, the measures exclude items and charges that (i) management does not believe reflect our core business and relate more to strategic, multi-year corporate activities; or (ii) relate to activities or actions that may have occurred over multiple or in prior periods without predictable trends. Management uses these non-GAAP financial measures internally to evaluate our performance, evaluate the balance sheet, engage in financial and operational planning and determine incentive compensation.

Management provides these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on its financial and operating results and in comparing our performance to that of our competitors. However, the non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

The non-GAAP financial measures disclosed by us should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP.

There were no exit and realignment expenses in the first nine months of 2012 or 2011. Acquisition-related expenses are associated with Movianto in 2012 and with the establishment of our joint venture in China in 2011. During the third quarter and first nine months of 2012 and 2011, the difference between our GAAP and Non-GAAP measures were related entirely to acquisition-related costs. Unless otherwise stated, our analysis hereinafter excludes acquisition-related and exit and realignment expenses.

Adjusted EPS (Non-GAAP) declined by four cents in the third quarter of 2012 compared with the third quarter of last year due to a decrease in Adjusted Operating Earnings (Non-GAAP) of $4.3 million or 7.3%. The decrease in Adjusted Operating Earnings (Non-GAAP) for this period was primarily due to lower Domestic segment revenues and gross margin (Domestic gross margin declined by $8.2 million) and an operating loss of $0.6 million for the International segment, partially offset by lower Domestic segment SG&A expenses of $6.6 million. In addition, the third quarter of 2011 included income of $2.2 million relating to an anti-trust lawsuit that did not exist in 2012.

 

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Table of Contents

Adjusted EPS (Non-GAAP) for the first nine months of this year was flat compared with the same period last year. Adjusted Operating Earnings (Non-GAAP) for the first nine months of 2012 declined slightly ($0.7 million or 0.4%) compared to last year as lower Domestic segment gross margin of $9.2 million was partially offset by lower Domestic SG&A expenses of $8.1 million. Also contributing to the change between these periods was higher other operating income of $1.7 million in 2012 partially offset by the International segment operating loss of $0.6 million and higher Domestic depreciation and amortization in 2012 of $0.4 million.

The following table presents our consolidated statements of income on a percentage of revenue basis:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2012             2011             2012             2011      

Gross margin

     10.46     9.95     9.93     10.00

Selling, general and administrative expenses

     7.58     7.02     7.16     7.15

Adjusted Operating Earnings (Non-GAAP)

     2.50     2.70     2.43     2.50

Results of Operations

Net revenue. Net revenue was $2.18 billion for the third quarter of 2012 and 2011. Net revenue increased 2.4% to $6.58 billion for the first nine months of 2012 from $6.43 billion for the comparable period in 2011.

The following tables present the components of the increase in net revenue for the three- and nine-month periods ended September 30, 2012 and 2011, compared with the same periods in the prior year, and present Domestic segment new customer changes net of lost customer activity (“net new (lost)”). Domestic segment fee-for-service revenue represents revenue from services provided to customers in the U.S. that are not directly related to sales of product through our traditional distribution services and includes revenue from our OM Healthcare Logistics and OM SolutionsSM businesses.

 

(Dollars in millions)                          

Increase (decrease) for the three months ended September 30,

   2012 versus 2011     2011 versus 2010  
     Net Revenue     Contribution
to Total
    Net Revenue      Contribution
to Total
 

Domestic segment:

         

Revenue from sales of products to:

         

Existing customers

   $ (29.5     (1.4 )%    $ 89.0         4.3

Net new (lost) customers

     (13.7     (0.6 )%      13.6         0.7

Fee-for-service revenue

     (3.3     (0.2 )%      10.3         0.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Domestic segment

     (46.5     (2.2 )%      112.9         5.5

International segment

     49.7        2.3     —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Consolidated

   $ 3.2        0.1   $ 112.9         5.5
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents
(Dollars in millions)                           

Increase (decrease) for the nine months ended September 30,

   2012 versus 2011     2011 versus 2010  
     Net Revenue      Contribution
to Total
    Net Revenue      Contribution
to Total
 

Domestic segment:

          

Revenue from sales of products to:

          

Existing customers

   $ 84.1         1.3   $ 305.5         5.1

Net new (lost) customers

     15.3         0.2     53.3         0.9

Fee-for-service revenue

     2.1         0.1     19.8         0.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Domestic segment

     101.5         1.6     378.6         6.3

International segment

     49.7         0.8     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated

   $ 151.2         2.4   $ 378.6         6.3
  

 

 

    

 

 

   

 

 

    

 

 

 

In the third quarter of 2012, Domestic segment revenues were $2.13 billion, a decrease of $46.5 million compared to the same quarter of 2011. The decline resulted from a combination of factors, including: one less sales day in the quarter, lower comparative utilization of healthcare services coupled with reduced product price inflation, and a lower level of government purchasing, as well as ongoing rationalization of the company’s supplier base. The decline in the existing Domestic segment sales growth rate for the first nine months was primarily due to the same factors.

The International segment net revenue represents the net revenue of Movianto for one month since its acquisition on August 31, 2012.

Gross margin. The following tables present gross margin information by segment for the three- and nine-month periods ended September 30, 2012 and 2011.

 

(Dollars in millions)                         

Gross margin

   Three months ended
September 30,
    Nine months ended
September 30,
 
           2012                 2011                 2012                 2011        

Domestic segment

   $ 208.5      $ 216.7      $ 634.3      $ 643.5   

International segment

     19.6        —          19.6        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated gross margin

   $ 228.1      $ 216.7      $ 653.9      $ 643.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin by segment as a percentage of related revenue

   Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Domestic segment

     9.79     9.95     9.71     10.00

International segment

     39.39     —          39.39     —     

Consolidated gross margin as percentage of revenue

     10.46     9.95     9.93     10.00

The following tables present the components of the increase or decrease in consolidated gross margin for the three- and nine-month periods ended September 30, 2012 and 2011. Domestic segment gross margin includes gross margin from customer contracts related to sales of product and contribution to gross margin relating to supplier incentives (traditional distribution), fees generated from other services, including OM Healthcare Logistics, OM Solutions and other supply-chain services that are not directly related to sales of product (fee-for-service) and the effect of inventory valuation and other operational components, excluding the impact of applying the last-in first-out (LIFO) method (other).

 

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(Dollars in millions)                         

Increase (decrease) for the three months ended September 30,

   2012 versus 2011     2011 versus 2010  
     Gross
Margin
    Impact on
gross
margin as a
percent of
revenue
    Gross
Margin
    Impact on
gross
margin as a
percent of
revenue
 

Domestic segment:

        

Traditional distribution

   $ (5.5     (0.06 )%    $ 4.9        (0.20 )% 

Fee-for-service

     (3.3     (0.14 )%      10.3        0.43

Provision for LIFO

     —          —          —          —     

Other

     0.6        0.04     (2.5     (0.16 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Domestic segment

     (8.2     (0.16 )%      12.7        0.07

International segment

     19.6        0.67     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 11.4        0.51   $ 12.7        0.07
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)                         

Increase (decrease) for the nine months ended September 30,

   2012 versus 2011     2011 versus 2010  
     Gross
Margin
    Impact on
gross
margin as a
percent of
revenue
    Gross
Margin
    Impact on
gross
margin as a
percent of
revenue
 

Domestic segment:

        

Traditional distribution

   $ (9.4     (0.26 )%    $ 26.7        (0.10 )% 

Fee-for-service

     2.1        0.03     19.8        0.28

Provision for LIFO

     6.0        0.09     (2.8     (0.04 )% 

Other

     (7.9     (0.15 )%      (0.1     (0.04 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Domestic segment

     (9.2     (0.29 )%      43.6        0.10

International segment

     19.6        0.22     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

   $ 10.4        (0.07 )%    $ 43.6        0.10
  

 

 

   

 

 

   

 

 

   

 

 

 

The decline in Domestic gross margin in the third quarter of 2012 versus last year is primarily due to lower sales resulting in $4.0 million of the $5.5 million decline for traditional distribution. Lower fee-for-service revenue also contributed to the lower gross margin for the quarter, including OM Healthcare Logistics which had higher fees last year from higher costs incurred to convert a large new customer.

The decline in Domestic gross margin for the first nine months of 2012 versus last year is primarily due to lower percentage margins driven by changes in customer mix, including lower margin on new contracts with large integrated health networks and competitive pressures representing 26 basis points of the decline. The decline in gross margin dollars resulting from these new contracts was partially offset by an increase in gross margin of $9.3 million from increased sales for the year-to-date period.

The International segment gross margin represents the gross margin for Movianto for one month since its acquisition on August 31, 2012, which resulted in a contribution to consolidated gross margin as a percentage of net revenue of 67 basis points in the third quarter and 22 basis points for the first nine months of 2012 compared with 2011.

Selling, general and administrative (SG&A) expenses. SG&A expenses include labor, warehousing, handling and delivery costs associated with our distribution and third-party logistics services, as well as labor costs for our supply-chain consulting services. The costs to convert new customers to our information systems are generally incurred prior to the recognition of revenues from the new customers.

The following table presents SG&A expenses by segment for the three- and nine-month periods ended September 30, 2012 and 2011.

 

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(Dollars in millions)                            

SG&A expenses

   Three months ended
September 30,
     Nine months ended
September 30,
 
     2012      2011      2012      2011  

Domestic segment

   $ 146.1       $ 152.8       $ 452.0       $ 460.1   

International segment

     19.2         —           19.2         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated selling, general, and administrative expenses

   $ 165.3       $ 152.8       $ 471.2       $ 460.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

SG&A by segment as a percentage of related revenue

   Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Domestic segment

     6.86     7.02     6.92     7.15

International segment

     38.56     —          38.56     —     

Consolidated SG&A as a percentage of revenue

     7.58     7.02     7.16     7.15

The International segment represents SG&A expenses of Movianto for one month since its acquisition on August 31, 2012.

The decrease in Domestic segment SG&A expenses of $6.6 million or 4.3% for the third quarter of 2012 compared to the third quarter of 2011 is primarily due to decreases of $4.5 million for fee-for-service operations, including lower costs for our third-party logistics business that was converting a large new customer during the second and third quarters of 2011. SG&A expenses unrelated to fee-for-service operations decreased by $2.1 million due mainly to lower incentive compensation and benefit costs and lower expenses resulting from our organizational realignment in the fourth quarter of 2011.

The decrease in Domestic segment SG&A expenses of $8.1 million or 1.8% for the first nine months of 2012 compared to the same period in 2011 is primarily due to decreases of $5.3 million related to fee-for service operations and a decline of $2.8 million in other SG&A expenses. The reason for the decline in Domestic SG&A expenses in these areas for the first nine months is primarily the same as the third quarter described above.

Depreciation and amortization expense. Depreciation and amortization expense increased to $10.1 million from $8.5 million for the third quarter and to $27.2 million from $25.5 million for the first nine months of 2012 compared with the same periods of 2011. The increase is primarily related to the Movianto acquisition, which resulted in additional depreciation and amortization expense of $1.3 million.

Other operating income, net. Other operating income, net, was $1.8 million for the third quarter of 2012 compared to other operating income, net of $3.4 million for the third quarter of 2011, including finance charge income of $0.8 million in both of the quarterly periods. Other operating income, net, was $4.6 million for the first nine months of 2012 compared to $2.9 million for the comparable period of 2011, including finance charge income of $2.8 million and $2.2 million, respectively. Other operating income for the third quarter and year-to-date period of 2011 benefitted from $2.2 million received from settlement of an anti-trust class action lawsuit. In addition, other operating income in the first nine months of 2011 included expenses of $1.7 million primarily for the development of a model for partnering with customers.

Interest expense, net. Interest expense, net of interest earned on cash balances, was $3.1 million for the third quarter of 2012, as compared with $3.4 million for the third quarter of 2011, and $10.0 million for the first nine months of 2012 as compared with $10.2 million for the first nine months of 2011.

The following table presents the components of our effective interest rate and average borrowings for first nine months of September 30, 2012 and 2011.

 

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(Dollars in millions)             

Nine months ended September 30,

   2012     2011  

Interest on senior notes

     6.35     6.35

Commitment and other fees

     0.83     1.27

Interest rate swaps

     (1.08 )%      (1.33 )% 

Other, net of interest income

     0.16     0.11
  

 

 

   

 

 

 

Total effective interest rate

     6.26     6.40
  

 

 

   

 

 

 

Average total debt

   $ 214.0      $ 212.4   
  

 

 

   

 

 

 

For the nine months ended September 30, 2012, the effective interest rate decreased 14 basis points, primarily due to a 44 basis point decrease as a result of replacing our revolving credit facility in June 2012 with a new revolving credit facility with lower commitment fees (refer to Capital Resources in Management’s Discussion and Analysis of Financial Condition for a description of the new revolving credit facility). The decrease in commitment fees was partially offset by a decline in interest income from interest rate swaps, which were terminated in the third quarter of 2012.

Income taxes. The provision for income taxes was $19.0 million and $57.7 million for the third quarter and first nine months of 2012, compared to $21.7 million and $59.1 million for the comparable periods in 2011. The effective tax rate was 43.6% and 40.7% for the third quarter and first nine months of 2012, compared to 39.4% and 39.3% for the comparable periods of 2011. Excluding the acquisition-related costs in 2012, of which approximately $4.7 million are not expected to be tax deductible, the effective tax rate was 39.4% for the third quarter and first nine months of 2012. The 39.4% effective tax rate for the third quarter of 2012 included a benefit to the rate of 0.7% primarily for the recognition of tax benefits due to the expiration of the statute of limitations for the 2008 U.S. federal income tax return, offset by the effect of valuation allowances recognized on potential income tax benefits from losses in certain foreign jurisdictions. A similar impact for both items exists for the year-to-date effective income tax rate.

Net income. Adjusted Net Income (Non-GAAP) declined to $31.2 million in the third quarter of 2012 compared with $33.6 million in the third quarter of 2011. Adjusted Net Income (Non-GAAP) declined to $91.0 million in the first nine months of 2012 from $91.5 million in the first nine months of 2011. The changes in Adjusted Net Income (Non-GAAP) were due to the changes in Adjusted Operating Earnings (Non-GAAP), net interest expense and income taxes discussed above.

Financial Condition, Liquidity and Capital Resources

Financial condition. Cash and cash equivalents decreased to approximately $80 million at September 30, 2012 from $136 million at December 31, 2011, primarily as a result of the Movianto acquisition in the third quarter of 2012. Nearly all of our cash and cash equivalents are held in cash depository accounts with major banks or invested in high-quality, short-term liquid investments.

Accounts receivable, net of allowances, increased $76 million, or 15.0%, to $583 million at September 30, 2012, from $507 million at December 31, 2011, primarily as a result of acquiring accounts receivable of approximately $79 million in the Movianto acquisition. Accounts receivable days outstanding (DSO) of the Domestic segment were 20.7 days at September 30, 2012, and 20.7 days at December 31, 2011, based on three months’ sales, and has ranged from 19.5 to 20.7 days over the prior four quarters.

Merchandise inventories decreased 3.7% to $777 million at September 30, 2012, from $806 million at December 31, 2011. Average inventory turnover of the Domestic segment was 10.2 in the third quarter of 2012, based on three months’ sales, and has ranged from 10.0 to 10.8 over the prior four quarters.

The International segment’s net working capital of approximately $25 million at September 30, 2012, excluding cash and cash equivalents, is comprised of accounts and financing receivables of $215 million, inventories of $26 million and other current assets of $20 million and accounts payable and other current liabilities of $236 million. See Note 4 to the Notes to Consolidated Financial Statements for further information on financing receivables.

 

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Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011:

 

(in millions)             

Nine months ended September 30,

   2012     2011  

Net cash provided by (used for) continuing operations:

    

Operating activities

   $ 170.4      $ 108.1   

Investing activities

     (174.5     (24.8

Financing activities

     (53.5     (45.5

Discontinued operations

     —          (0.2

Effect of exchange rate changes

     1.3        —     
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (56.3   $ 37.6   
  

 

 

   

 

 

 

Cash provided by operating activities was $170.4 million in the first nine months of 2012, compared to $108.1 million for the same period of 2011. Cash from operating activities in the first nine months of 2012 was a result of operating earnings and a decrease in Domestic segment merchandise inventories. Cash from operating activities in the first nine months of 2011 was a result of operating earnings, partially offset by an increase in working capital. We had a buildup of inventory levels during the third and fourth quarter of 2011 to support the conversion of large new customers. Domestic segment inventories returned to normalized levels post-conversion in the first half of 2012.

Cash used for investing activities in the year-to-date period of 2012 was largely due to the acquisition of Movianto. We acquired Movianto in exchange for approximately $150 million of cash plus assumed third-party debt (primarily capitalized leases) of $2.1 million plus a remaining working capital adjustment due of $5.3 million. Capital expenditures of the Domestic segment were $27.1 million in the first nine months of 2012, compared to $24.9 million in the same period of 2011. Capital expenditures in 2012 primarily related to our strategic and operational efficiency initiatives, particularly initiatives relating to information technology enhancements. Capital expenditures in the first nine months of 2011 primarily included leasehold improvements and warehouse equipment for our distribution centers and third-party logistics facilities, as well as investments in operational software improvements and certain customer-facing technologies.

Cash used for financing activities in the first nine months of 2012 was $53.5 million, compared to $45.5 million used in the first nine months of 2011. During the first nine months of 2012, we paid dividends of $41.8 million, repurchased common stock under a share repurchase program for $11.3 million of cash, paid financing costs of $1.3 million related to a new credit facility, and received proceeds of $4.1 million from the exercise of stock options. During the first nine months of 2011, we paid dividends of $38.2 million, repurchased common stock under a share repurchase program for $16.1 million and received proceeds of $7.9 million from the exercise of stock options.

Capital resources. Our sources of liquidity include cash and cash equivalents and a revolving credit facility. On June 5, 2012, we entered into a five-year $350 million Credit Agreement with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A. and a syndicate of financial institutions (the Credit Agreement). This agreement replaced an existing $350 million credit agreement set to expire on June 7, 2013. Under the new credit facility, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $150 million. The interest rate on the new credit facility, which is subject to adjustment quarterly, is based on the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread) as defined by the Credit Agreement. We are charged a commitment fee of between 17.5 and 42.5 basis points on the unused portion of the facility. The terms of the credit agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At September 30, 2012, we had no borrowings and letters of credit of $5.0 million outstanding on the revolving credit facility, leaving $345.0 million available for borrowing.

We may utilize the revolving credit facility for long-term strategic growth, capital expenditures, working capital and general corporate purposes. If we were unable to access the revolving credit facility, it could impact our ability to fund these needs. During the first nine months of 2012, we had no borrowings or repayments under the credit facilities. Based on our leverage ratio at September 30, 2012, the interest rate under the new credit facility is LIBOR plus 1.375%. We have $200 million of senior notes outstanding, which mature in 2016 and bear interest at 6.35%, payable semi-annually on April 15 and October 15. The revolving credit facility and senior notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. We believe we were in compliance with the debt covenants at September 30, 2012.

In the third quarter of 2012, we paid cash dividends on our outstanding common stock at the rate of $0.22 per share, which represents a 10% increase over the rate of $0.20 per share paid in the third quarter of 2011. We anticipate continuing to pay quarterly cash dividends in the future. However, the payment of future dividends remains within the discretion of the Board of Directors and will depend upon our results of operations, financial condition, capital requirements and other factors.

 

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In February 2011, the Board of Directors authorized a share repurchase program of up to $50 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2014. During the third quarter of 2012, we repurchased approximately 133,000 shares at $3.7 million under this program. The remaining amount authorized for repurchases under this program is approximately $22.6 million at September 30, 2012.

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

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 16 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended on September 30, 2012.

Forward-looking Statements

Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of our business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:

 

   

general economic and business conditions in both the United States and international marketplaces in which we operate or that we serve;

 

   

changing trends in customer profiles, including continued consolidation in the healthcare industry that may result in greater bargaining power of our customers to achieve lower prices for our products and services;

 

   

competition in the marketplace and related pressure to reduce pricing;

 

   

our ability to implement strategic initiatives;

 

   

our ability to integrate and realize the synergies and benefits we expect from our acquisition of Movianto in a timely manner while managing costs and any unanticipated expenses and compliance issues;

 

   

our ability to manage risks associated with operating in foreign markets, including but not limited to, currency exchange risks, the political, economic and regulatory environments in these markets, potential adverse tax and cash repatriation issues and compliance with applicable anti-bribery/anti-corruption and other laws and regulations;

 

   

the availability of and modifications to existing supplier funding programs and our ability to meet the terms to qualify for certain of these programs;

 

   

our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;

 

   

dependence on sales to certain customers;

 

   

the ability of customers to meet financial commitments due to us;

 

   

our ability to retain existing customers and the success of marketing and other programs in attracting new customers;

 

   

changes in government regulations, including healthcare laws and regulations;

 

   

changes in manufacturer preferences between direct sales and wholesale distribution;

 

   

our ability to meet customer demand for additional value-added services;

 

   

our ability to meet performance targets specified by customer contracts under contractual commitments;

 

   

access to special inventory buying opportunities;

 

   

the ability of business partners and financial institutions to perform their contractual responsibilities;

 

   

our ability to manage operating expenses and improve operational efficiencies in response to changing customer profiles;

 

   

the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;

 

   

our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk;

 

   

the risk that a decline in business volume or profitability could result in an impairment of goodwill or other long-lived assets;

 

   

our ability to timely or adequately respond to technological advances in the medical supply industry;

 

   

the risk that information systems are interrupted or damaged by unforeseen events or fail for any extended period of time;

 

   

our ability to successfully identify, manage or integrate future acquisitions;

 

   

the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims; and

 

   

the outcome of outstanding tax contingencies and legislative and tax proposals.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We provide credit in the normal course of business to our customers and are exposed to losses resulting from nonpayment or delinquent payment by customers. We perform initial and ongoing credit evaluations of our customers and maintain reserves for estimated credit losses. We measure our performance in collecting customer accounts receivable in terms of days sales outstanding (DSO). Accounts receivable at September 30, 2012, were approximately $583 million, and consolidated DSO at September 30, 2012, was 22.9 days, based on three months’ sales. A hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our revolving credit facility, or a combination thereof, of approximately $25 million.

We are exposed to market risk from changes in interest rates related to our revolving credit facility. We had no outstanding borrowings and $5.0 million in letters of credit under the revolving credit facility at September 30, 2012. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding borrowings under the revolving credit facility.

Due to the nature of our distribution services, which generally include delivery of product to specified locations, we are exposed to potential volatility in fuel prices. The price and availability of fuel fluctuates due to market conditions generally outside of our control. Increased fuel costs may have a negative impact on our results of operations by increasing the costs we incur to deliver product, either through utilizing our own fleet or third-party carriers.

We estimate that approximately $0.6 million of an increase in delivery costs for the first nine months of 2012 was related to increases in diesel prices. We benchmark our Domestic diesel fuel purchase prices against the U.S. Weekly Retail On-Highway Diesel Prices (the “Diesel Benchmark Price”) as quoted on the website of the U.S. Energy Information Administration. The Diesel Benchmark Price averaged $3.95 per gallon for nine months ended September 30, 2012, representing an increase of 3.2% from $3.83 per gallon for the same period in 2011. Accordingly, on an annualized basis, we estimate that every 10 cents per gallon increase in the Diesel Benchmark Price reduced our operating earnings by approximately $650,000, excluding the effect of mitigating strategies. Our strategies for helping to mitigate Domestic segment exposure to changing fuel prices include the use of fuel surcharges, activity-based pricing, fixed-price contracts with suppliers and a new truck lease program with improved fuel efficiency.

On January 31, 2012, we entered into a fixed-price purchase agreement with one of our diesel fuel suppliers for approximately one-third of our anticipated fuel usage for 2012 at an equivalent Diesel Benchmark Price of $3.90 per gallon.

In the normal course of business, we are exposed to foreign currency translation and transaction risks. Our business transactions outside of the U.S. are primarily denominated in the Euro and British Pound. We may use foreign currency forwards, swaps and options, where possible, to manage our risk related to certain foreign currency fluctuations. However, we believe that our foreign currency transaction risks are low since our revenues and expenses are typically denominated in the same currency.

 

Item 4. Controls and Procedures

We carried out an evaluation, with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

On August 31, 2012, we completed our acquisition of Movianto. As permitted by the SEC under the current year acquisition scope exception, we plan to exclude the Movianto acquisition from our 2012 assessment of the effectiveness of our internal controls over financial reporting. However, we have extended our oversight and monitoring processes that support our internal control over financial reporting to include Movianto’s operations. Except for the effect of the Movianto acquisition, there has been no change in our internal control over financial reporting during the quarter ended September 30, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

We are subject to customary legal proceedings of the type described in our Annual Report on Form 10-K for the year ended December 31, 2011. As of September 30, 2012, we do not believe these proceedings, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

 

Item 1A. Risk Factors

Certain risk factors that we believe could affect our business and prospects are described in our Annual Report on Form 10-K for the year ended December 31, 2011. Through September 30, 2012, other than the additional risk factors described below, there have been no material changes in the risk factors described in such Annual Report.

Integration of Acquisitions

In connection with our growth strategy, we from time to time acquire other businesses that we believe will expand or complement our existing businesses and operations. On August 31, 2012, we completed our first international acquisition through our purchase of Movianto, which has facilities in 11 European countries and operates throughout the European marketplace. The integration of acquisitions, particularly international acquisitions, involves a number of significant risks, which may include but are not limited to, the following:

 

   

Difficulties in the transition and integration of operations and systems

 

   

The assimilation and retention of personnel, including management personnel, in the acquired businesses

 

   

Accounting, tax, regulatory and compliance issues that could arise

 

   

Difficulties in implementing uniform controls, procedures and policies in our acquired companies, or in remediating control deficiencies in acquired companies not formerly subject to the Sarbanes-Oxley Act of 2002

 

   

Retention of current customers and the ability to obtain new customers

 

   

Unanticipated expenses incurred or charges to earnings based on unknown circumstances or liabilities