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 June 30, 2013

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 July 26, 2013, was 63,293,001 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 Six Months Ended June 30, 2013 and 2012      3   
   Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2013 and 2012      4   
   Consolidated Balance Sheets—June 30, 2013 and December 31, 2012      5   
   Consolidated Statements of Cash Flows—Six Months Ended June 30, 2013 and 2012      6   
   Consolidated Statements of Changes in Equity—Six Months Ended June 30, 2013 and 2012      7   
   Notes to Consolidated Financial Statements      8   

    Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

    Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      29   

    Item 4.

   Controls and Procedures      29   

Part II. Other Information

  

    Item 1.

   Legal Proceedings      30   

    Item 1A.

   Risk Factors      30   

    Item 2.

   Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities      30   

    Item 6.

   Exhibits      31   

 

2


Table of Contents

Part I. Financial Information

 

Item 1. Financial Statements

Owens & Minor, Inc. and Subsidiaries

Consolidated Statements of Income

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  

(in thousands , except per share data)

   2013     2012     2013     2012  

Net revenue

   $ 2,266,687      $ 2,185,444      $ 4,542,395      $ 4,403,326   

Cost of goods sold

     1,993,256        1,974,015        3,989,913        3,977,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     273,431        211,429        552,482        425,757   

Selling, general and administrative expenses

     212,548        150,288        430,269        305,860   

Acquisition-related and exit and realignment charges

     638        617        2,648        617   

Depreciation and amortization

     12,276        8,515        24,905        17,093   

Other operating income, net

     (2,081     (1,168     (3,274     (2,862
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings

     50,050        53,177        97,934        105,049   

Interest expense, net

     3,248        3,487        6,446        6,909   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     46,802        49,690        91,488        98,140   

Income tax provision

     17,930        19,577        36,518        38,667   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 28,872      $ 30,113      $ 54,970      $ 59,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.46      $ 0.48      $ 0.87      $ 0.94   

Diluted

   $ 0.46      $ 0.48      $ 0.87      $ 0.94   

Cash dividends per common share

   $ 0.24      $ 0.22      $ 0.48      $ 0.44   

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 June 30,     Six Months Ended June 30,  

(in thousands )

   2013     2012     2013     2012  

Net income

   $ 28,872      $ 30,113      $ 54,970      $ 59,473   

Other comprehensive income, net of tax:

        

Currency translation adjustments (net of income tax expense of $56 and benefit of $539 in 2013)

     1,683        —          (6,144     —     

Change in unrecognized net periodic pension costs (net of income tax benefit - $132 and $266 in 2013 and $92 and $317 in 2012)

     209        145        417        496   

Amounts recognized in interest expense (net of income tax benefit - $8 and $16 for 2013 and $8 and $16 for 2012)

     (12     (11     (25     (24
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,880        134        (5,752     472   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 30,752      $ 30,247      $ 49,218      $ 59,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Owens & Minor, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)

 

     June 30,     December 31,  

(in thousands , except share data)

   2013     2012  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 207,826      $ 97,888   

Accounts and notes receivable, net of allowances of $15,304 and $14,722

     550,642        553,502   

Merchandise inventories

     794,020        763,756   

Other current assets

     248,219        213,748   
  

 

 

   

 

 

 

Total current assets

     1,800,707        1,628,894   

Property and equipment, net of accumulated depreciation of $132,893 and $121,873

     187,512        191,841   

Goodwill, net

     272,597        274,884   

Intangible assets, net

     40,050        42,313   

Other assets, net

     78,628        69,769   
  

 

 

   

 

 

 

Total assets

   $ 2,379,494      $ 2,207,701   
  

 

 

   

 

 

 

Liabilities and equity

    

Current liabilities

    

Accounts payable

   $ 791,004      $ 603,137   

Accrued payroll and related liabilities

     27,106        25,468   

Deferred income taxes

     46,646        40,758   

Other accrued liabilities

     225,428        254,924   
  

 

 

   

 

 

 

Total current liabilities

     1,090,184        924,287   

Long-term debt, excluding current portion

     214,682        215,383   

Deferred income taxes

     29,501        30,921   

Other liabilities

     55,306        63,454   
  

 

 

   

 

 

 

Total liabilities

     1,389,673        1,234,045   
  

 

 

   

 

 

 

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 - 63,333 shares and 63,271 shares

     126,665        126,544   

Paid - in capital

     192,326        187,394   

Retained earnings

     675,858        658,994   

Accumulated other comprehensive loss

     (6,158     (406
  

 

 

   

 

 

 

Total Owens & Minor, Inc. shareholders’ equity

     988,691        972,526   

Noncontrolling interest

     1,130        1,130   
  

 

 

   

 

 

 

Total equity

     989,821        973,656   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 2,379,494      $ 2,207,701   
  

 

 

   

 

 

 

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)

 

     Six Months Ended June 30,  

(in thousands )

   2013     2012  

Operating activities:

    

Net income

   $ 54,970      $ 59,473   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     24,905        17,093   

Share-based compensation expense

     3,449        4,126   

Provision for losses on accounts and notes receivable

     315        270   

Deferred income tax expense (benefit)

     5,777        (1,146

Changes in operating assets and liabilities:

    

Accounts and notes receivable

     1,789        21,239   

Merchandise inventories

     (31,176     57,519   

Accounts payable

     191,406        (16,075

Net change in other assets and liabilities

     (69,462     684   

Other, net

     (2,794     (404
  

 

 

   

 

 

 

Cash provided by operating activities

     179,179        142,779   
  

 

 

   

 

 

 

Investing activities:

    

Additions to property and equipment

     (16,221     (5,460

Additions to computer software and intangible assets

     (14,826     (12,697

Proceeds from sale of property and equipment

     68        115   
  

 

 

   

 

 

 

Cash used for investing activities

     (30,979     (18,042
  

 

 

   

 

 

 

Financing activities:

    

Cash dividends paid

     (30,411     (27,956

Repurchases of common stock

     (8,297     (7,500

Financing costs paid

     —          (1,303

Excess tax benefits related to share-based compensation

     550        1,160   

Proceeds from exercise of stock options

     4,195        3,761   

Other, net

     (5,167     (3,900
  

 

 

   

 

 

 

Cash used for financing activities

     (39,130     (35,738

Effect of exchange rate changes on cash and cash equivalents

     868        —     
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     109,938        88,999   

Cash and cash equivalents at beginning of period

     97,888        135,938   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 207,826      $ 224,937   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Income taxes paid, net

   $ 40,364      $ 38,113   

Interest paid

   $ 7,691      $ 7,372   

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, 2011

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

Net income

            59,473             59,473   

Other comprehensive income

              472           472   

Dividends declared ($0.44 per share)

            (27,895          (27,895

Shares repurchased and retired

     (256     (513        (6,987          (7,500

Share-based compensation expense, exercises and other

     311        621        5,575                6,196   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance June 30, 2012

     63,504      $ 127,008      $ 184,627       $ 644,220      $ (7,022   $ 1,130       $ 949,963   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance December 31, 2012

     63,271      $ 126,544      $ 187,394       $ 658,994      $ (406   $ 1,130       $ 973,656   

Net income

            54,970             54,970   

Other comprehensive income

              (5,752        (5,752

Dividends declared ($0.48 per share)

            (30,324          (30,324

Shares repurchased and retired

     (257     (515        (7,782          (8,297

Share-based compensation expense, exercises and other

     319        636        4,932                5,568   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance June 30, 2013

     63,333      $ 126,665      $ 192,326       $ 675,858      $ (6,158   $ 1,130       $ 989,821   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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.     Fair Value

The carrying amounts of cash and cash equivalents, accounts receivable, financing receivables, accounts payable and financing payables 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.

3.     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). 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 manufacturer 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 estimated fair value of the net tangible and identifiable intangible assets by approximately $25 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, pending completion of our valuation.

 

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Table of Contents
     Preliminary Fair Value
Orginally Estimated as
of Acquisition Date (1)
     Measurement
Period Adjustments
Recorded in 2013
    Preliminary Fair Value
Currently Estimated as
of Acquisition Date
 

Assets acquired:

       

Current assets

   $ 211,052       $ 295      $ 211,347   

Property and equipment

     90,729         (2,385     88,344   

Goodwill

     25,042         (528     24,514   

Intangible assets

     21,543         1,335        22,878   

Other noncurrent assets

     11,664         512        12,176   
  

 

 

    

 

 

   

 

 

 

Total assets

     360,030         (771     359,259   
  

 

 

    

 

 

   

 

 

 

Liabilities assumed:

       

Current liabilities

     190,485         (534     189,951   

Noncurrent liabilities

     12,237         (237     12,000   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     202,722         (771     201,951   
  

 

 

    

 

 

   

 

 

 

Fair value of net assets acquired, net of cash

   $ 157,308       $ —        $ 157,308   
  

 

 

    

 

 

   

 

 

 

 

(1) 

As previously reported in our 2012 Form 10-K

Measurement period adjustments primarily relate to additional market information obtained regarding acquired assets.

We are amortizing the fair value of acquired intangible assets, primarily customer relationships, over their remaining weighted average useful lives of 9 years.

Goodwill of $24,514 thousand 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 fair value of financial assets and financial liabilities acquired includes financing receivables with a fair value of $106.8 million and financing payables with a fair value of $130.4 million.

Acquisition-related costs consist primarily of transaction costs incurred to perform due diligence and to analyze, negotiate and consummate an acquisition, costs to perform post-closing activities to establish a tax-efficient organizational structure, and costs to transition the acquired company’s information technology and other operations and administrative functions from the former owner. We incurred $0.9 million in pre-tax acquisition-related costs in the first six months of 2013.

4.     Financing receivables

At June 30, 2013 and December 31, 2012, we had financing receivables of $150.8 million and $124.5 million and related payables of $107.1 million and $130.1 million outstanding under our order-to-cash program and product financing arrangements, which were included in other current assets and other current liabilities, respectively, in the consolidated balance sheets.

 

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Table of Contents

5.     Goodwill and Intangible Assets

The following table summarizes the changes in the carrying amount of goodwill through June 30, 2013:

 

     Domestic      International        
     Segment      Segment     Total  

Carrying amount of goodwill, December 31, 2012

   $ 248,498       $ 26,386      $ 274,884   

Currency translation adjustments

     —           (1,759     (1,759

Fair value adjustments (See Note 3)

     —           (528     (528
  

 

 

    

 

 

   

 

 

 

Carrying amount of goodwill, June 30, 2013

   $ 248,498       $ 24,099      $ 272,597   
  

 

 

    

 

 

   

 

 

 

Intangible assets at June 30, 2013, and December 31, 2012, were as follows:

 

     Customer
Relationships
    Other
Intangibles
    Total  

At June 30, 2013

      

Gross intangible assets

   $ 50,136      $ 3,612      $ 53,748   

Accumulated amortization

     (12,833     (865     (13,698
  

 

 

   

 

 

   

 

 

 

Net intangible assets, June 30, 2013

   $ 37,303      $ 2,747      $ 40,050   
  

 

 

   

 

 

   

 

 

 

At December 31, 2012

      

Gross intangible assets

   $ 51,603      $ 2,848      $ 54,451   

Accumulated amortization

     (11,717     (421     (12,138
  

 

 

   

 

 

   

 

 

 

Net intangible assets, December 31, 2012

   $ 39,886      $ 2,427      $ 42,313   
  

 

 

   

 

 

   

 

 

 

Amortization expense for intangible assets was $1.0 million and $0.5 million for the three months ended June 30, 2013 and 2012, and $1.9 million and $1.1 million for the six months ended June 30, 2013 and 2012.

Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $1.4 million for the remainder of 2013, $4.4 million for 2014, $5.0 million for 2015, $5.1 million for 2016, $4.9 million for 2017 and $4.1 million for 2018.

6.     Exit and Realignment Costs

We periodically incur exit and realignment and other charges associated with optimizing our operations, which includes the consolidation of distribution centers and closure of offsite warehouses. During the first six months of 2013, we recognized total charges of $1.3 million in the Domestic segment and $0.5 million in the International segment associated with these activities. These charges include $0.5 million in loss accruals for operating leases and the remainder was due to losses on property and equipment and other expenses. We expect additional exit and realignment charges of approximately $2.7 million over the remainder of 2013 for activities initiated in the Domestic segment through June 30, 2013.

 

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The following table summarizes the activity related to exit and realignment cost accruals through June 30, 2013:

 

     Lease
Obligations
    Severance and
Other
    Total  

Accrued exit and realignment costs, December 31, 2012

   $ 5,098      $ 1,116      $ 6,214   

Provision for exit and realignment activities

     538        3        541   

Cash payments, net of sublease income

     (4,962     (284     (5,246
  

 

 

   

 

 

   

 

 

 

Accrued exit and realignment costs, June 30, 2013

   $ 674      $ 835      $ 1,509   
  

 

 

   

 

 

   

 

 

 

7.     Retirement Plan

We have a noncontributory, unfunded retirement plan for certain officers and other key employees in the United States (Domestic Retirement Plan). 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.

The components of net periodic benefit cost, which are included in selling, general and administrative expenses, for the three and six months ended June 30, 2013 and 2012, were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended 
June 30,
 
     2013      2012      2013      2012  

Service cost

   $ 33       $ —         $ 66       $ 130   

Interest cost

     413         404         827         808   

Recognized net actuarial loss

     341         237         683         495   

Curtailment loss

     —           —           —           234   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 787       $ 641       $ 1,576       $ 1,667   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain of our foreign subsidiaries have defined benefit and health and welfare plans covering substantially all of their respective employees. Our expense for these plans totaled $0.6 million for the six months ended June 30, 2013.

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 June 30, 2013 and December 31, 2012, the estimated fair value of the Senior Notes was $216.8 million and $219.5 million, and the related carrying amount was $204.9 million and $205.8 million. The estimated fair value interest rate used to compute the fair value of the Senior Notes at June 30, 2013 and December 31, 2012 was 3.180% and 3.194%.

We have 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. Under this 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 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 June 30, 2013, we had no borrowings and letters of credit of approximately $5.0 million outstanding on the revolving credit facility, leaving $345.0 million available for borrowing. We also have a $1.4 million letter of credit outstanding as of June 30, 2013, which supports our facilities leased in Europe.

 

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9.     Income Taxes

The provision for income taxes was $17.9 million and $36.5 million for the three and six months ended June 30, 2013, compared to $19.6 million and $38.7 million for the same periods in 2012. The effective tax rate was 38.3% and 39.9% for the three and six months ended June 30, 2013, compared to 39.4% for the same periods in 2012. The decrease in the effective tax rate for the second quarter of 2013 is primarily the result of benefits recognized upon the conclusion of examinations of our 2009 and 2010 federal income tax returns and certain state income tax returns. These benefits were partially offset by the impact of foreign taxes. As a result of the conclusion of the examinations, we reduced the liability for unrecognized tax benefits to $4.7 million at June 30, 2013, from $12.3 million at December 31, 2012. Included in the liability at June 30, 2013 were $3.3 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The increase in the effective tax rate for the six months ended June 30, 2013 over the same period in 2012 was largely due to the impact of foreign taxes.

10.     Net Income per Common Share

The following summarizes the calculation of net income per common share attributable to common shareholders for the three and six months ended June 30, 2013 and 2012.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(in thousands, except per share data)

   2013     2012     2013     2012  

Numerator:

        

Net income

   $ 28,872      $ 30,113      $ 54,970      $ 59,473   

Less: income allocated to unvested restricted shares

     (156     (194     (351     (421
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders—basic

     28,716        29,919        54,619        59,052   

Add: undistributed income attributable to unvested restricted shares—basic

     64        87        122        176   

Less: undistributed income attributable to unvested restricted shares—diluted

     (64     (87     (122     (175
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common shareholders—diluted

   $ 28,716      $ 29,919      $ 54,619      $ 59,053   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted average shares outstanding—basic

     62,707        62,815        62,695        62,825   

Dilutive shares—stock options

     45        80        51        89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     62,752        62,895        62,746        62,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

        

Basic

   $ 0.46      $ 0.48      $ 0.87      $ 0.94   

Diluted

   $ 0.46      $ 0.48      $ 0.87      $ 0.94   

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 six months ended June 30, 2013, we repurchased in open-market transactions and retired approximately 257 thousand shares of our common stock for an aggregate of $8.3 million, or an average price per share of $32.22. As of June 30, 2013, we have approximately $10.6 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

 

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12.     Accumulated Other Comprehensive Income

The following table shows the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2013 and 2012:

 

     Defined  Benefit
Pension

Plans
    Currency
Translation
Adjustments
    Other     Total  

Accumulated other comprehensive income (loss), March 31, 2013

   $ (10,110   $ 1,922      $ 150      $ (8,038

Other comprehensive income (loss) before reclassifications

     —          1,739        —          1,739   

Income tax

     —          (56     —          (56
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of tax

     —          1,683        —          1,683   

Amounts reclassified from accumulated other comprehensive income (loss)

     341        —          (20     321   

Income tax

     (132     —          8        (124
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

     209        —          (12     197   

Other comprehensive income (loss)

     209        1,683        (12     1,880   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), June 30, 2013

   $ (9,901   $ 3,605      $ 138      $ (6,158
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), March 31, 2012

   $ (7,356   $ —        $ 200      $ (7,156

Other comprehensive income (loss) before reclassifications

     —          —          —          —     

Income tax

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of tax

     —          —          —          —     

Amounts reclassified from accumulated other comprehensive income (loss)

     237        —          (19     218   

Income tax

     (92     —          8        (84
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

     145        —          (11     134   

Other comprehensive income (loss)

     145        —          (11     134   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), June 30, 2012

   $ (7,211   $ —        $ 189      $ (7,022
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Other     Total  

Accumulated other comprehensive income (loss), December 31, 2012

   $ (10,318   $ 9,749      $ 163      $ (406

Other comprehensive income (loss) before reclassifications

     —          (6,683     —          (6,683

Income tax

     —          539        —          539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of tax

     —          (6,144     —          (6,144

Amounts reclassified from accumulated other comprehensive income (loss)

     683        —          (41     642   

Income tax

     (266     —          16        (250
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

     417        —          (25     392   

Other comprehensive income (loss)

     417        (6,144     (25     (5,752
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), June 30, 2013

   $ (9,901   $ 3,605      $ 138      $ (6,158
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), December 31, 2011

   $ (7,707   $ —        $ 213      $ (7,494

Other comprehensive income (loss) before reclassifications

     85        —          —          85   

Income tax

     (33     —          —          (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications, net of tax

     52        —          —          52   

Amounts reclassified from accumulated other comprehensive income (loss)

     728        —          (40     688   

Income tax

     (284     —          16        (268
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss), net of tax

     444        —          (24     420   

Other comprehensive income (loss)

     496        —          (24     472   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss), June 30, 2012

   $ (7,211   $ —        $ 189      $ (7,022
  

 

 

   

 

 

   

 

 

   

 

 

 

We include amounts reclassified out of accumulated other comprehensive income related to defined benefit pension plans as a component of net periodic pension cost recorded in selling, general & administrative expenses. For the three months ended June 30, 2012 we reclassified $0.2 million of prior service costs. For the three months ended June 30, 2013 and 2012, we reclassified $0.3 million and $0.2 million of actuarial net losses. For the six months ended June 30, 2013 and 2012, we reclassified $0.7 million and $0.5 million of actuarial net losses.

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 $1.9 million as of June 30, 2013. 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 2013 – $0.5 million; 2014 – $0.6 million; 2015 – $0.7 million; and 2016 – $0.1 million. None of these contingent obligations were accrued at June 30, 2013, 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 June 30, 2013, $1.2 million of deferred revenue related to outstanding contractual performance targets was included in other accrued liabilities.

 

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Table of Contents

During the second quarter of 2013, we reached a settlement in the administrative proceedings pending before the California Board of Equalization related to certain municipal sales tax incentives. Under the terms of the settlement, we expect to receive approximately $4.3 million for the period January 1, 2009 through June 30, 2013, of which $0.8 million was recognized prior to 2013. In subsequent quarters, the company will receive an ongoing tax incentive that will vary with eligible revenues generated by sales to California-based customers.

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.

In connection with the Movianto acquisition, we entered into transition services agreements with the former owner under which it provides certain information technology and support services. The contract terms range from six to 24 months and are cancellable without penalty with thirty days notice. Since the acquisition we have terminated certain of these agreements and the maximum aggregate fees payable in 2013 under these agreements is approximately $4.0 million.

 

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Table of Contents

14.     Segment Information

We evaluate the performance of our segments based on the operating earnings of the segments, excluding acquisition-related and exit and realignment charges.

The following tables present financial information by segment:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net revenue:

        

Domestic

   $ 2,143,690      $ 2,185,444      $ 4,298,406      $ 4,403,326   

International

     122,997        —          243,989        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net revenue

   $ 2,266,687      $ 2,185,444      $ 4,542,395      $ 4,403,326   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss):

        

Domestic

   $ 51,245      $ 53,794      $ 104,151      $ 105,666   

International

     (557     —          (3,569     —     

Acquisition-related and exit and realignment charges

     (638     (617     (2,648     (617
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating earnings

   $ 50,050      $ 53,177      $ 97,934      $ 105,049   
  

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

        

Domestic

   $ 8,887      $ 8,515      $ 17,969      $ 17,093   

International

     3,389        —          6,936        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated depreciation and amortization

   $ 12,276      $ 8,515      $ 24,905      $ 17,093   
  

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures:

        

Domestic

   $ 12,872      $ 9,781      $ 24,474      $ 18,157   

International

     3,398        —          6,573        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated capital expenditures

   $ 16,270      $ 9,781      $ 31,047      $ 18,157   
  

 

 

   

 

 

   

 

 

   

 

 

 
     June 30, 2013     December 31, 2012        

Total assets:

      

Domestic

   $ 1,757,369      $ 1,723,699     

International

     414,299        386,114     
  

 

 

   

 

 

   

Segment assets

     2,171,668        2,109,813     

Cash and cash equivalents

     207,826        97,888     
  

 

 

   

 

 

   

Consolidated total assets

   $ 2,379,494      $ 2,207,701     
  

 

 

   

 

 

   

 

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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); the guarantors of Owens & Minor, Inc.’s Senior Notes, on a combined basis; and the non-guarantor subsidiaries of the Senior Notes, on a combined basis. The guarantor subsidiaries are 100% owned by Owens & Minor, Inc. Separate financial statements of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several, 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.

 

Three months Ended June 30, 2013

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

Statements of Income

          

Net revenue

   $ —        $ 2,143,576      $ 134,869      $ (11,758   $ 2,266,687   

Cost of goods sold

     —          1,932,112        72,811        (11,667     1,993,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          211,464        62,058        (91     273,431   

Selling, general and administrative expenses

     221        152,387        59,940        —          212,548   

Acquisition-related and exit and realignment charges

     —          397        241        —          638   

Depreciation and amortization

     3        8,865        3,408        —          12,276   

Other operating (income) expense, net

     —          (1,498     (583     —          (2,081
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (224     51,313        (948     (91     50,050   

Interest expense (income), net

     5,154        (1,696     (210     —          3,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (5,378     53,009        (738     (91     46,802   

Income tax provision (benefit)

     (2,045     20,594        (618     (1     17,930   

Equity in earnings of subsidiaries

     32,205        —          —          (32,205     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     28,872        32,415        (120     (32,295     28,872   

Other comprehensive income (loss), net of tax

     1,880        209        1,682        (1,891     1,880   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 30,752      $ 32,624      $ 1,562      $ (34,186   $ 30,752   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Three months ended June 30, 2012

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

Statements of Income

          

Net revenue

   $ —        $ 2,185,444      $ 5,378      $ (5,378   $ 2,185,444   

Cost of goods sold

     —          1,974,114        5,053        (5,152     1,974,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          211,330        325        (226     211,429   

Selling, general and administrative expenses

     183        149,542        563        —          150,288   

Acquisition-related and exit and realignment charges

     —          397        220        —          617   

Depreciation and amortization

     —          8,494        21        —          8,515   

Other operating income, net

     —          (811     (357     —          (1,168
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (183     53,708        (122     (226     53,177   

Interest expense (income), net

     4,797        (1,334     24        —          3,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (4,980     55,042        (146     (226     49,690   

Income tax provision (benefit)

     (1,963     21,569        (29     —          19,577   

Equity in earnings of subsidiaries

     33,130        —          —          (33,130     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     30,113        33,473        (117     (33,356     30,113   

Other comprehensive income (loss), net of tax

     134        145        —          (145     134   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 30,247      $ 33,618      $ (117   $ (33,501   $ 30,247   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Financial Information

 

Six months ended June 30, 2013

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

Statements of Income

          

Net revenue

   $ —        $ 4,298,290      $ 266,174      $ (22,069   $ 4,542,395   

Cost of goods sold

     —          3,868,204        143,417        (21,708     3,989,913   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          430,086        122,757        (361     552,482   

Selling, general and administrative expenses

     874        308,735        120,660        —          430,269   

Acquisition-related and exit and realignment charges

     —          1,259        1,389        —          2,648   

Depreciation and amortization

     7        17,924        6,974        —          24,905   

Other operating (income) expense, net

     —          (2,142     (1,132     —          (3,274
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (881     104,310        (5,134     (361     97,934   

Interest expense (income), net

     9,549        (2,585     (518     —          6,446   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (10,430     106,895        (4,616     (361     91,488   

Income tax provision (benefit)

     (4,007     42,051        (1,526     —          36,518   

Equity in earnings of subsidiaries

     61,393        —          —          (61,393     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     54,970        64,844        (3,090     (61,754     54,970   

Other comprehensive income (loss), net of tax

     (5,752     416        (6,146     5,730        (5,752
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 49,218      $ 65,260      $ (9,236   $ (56,024   $ 49,218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Six months ended June 30, 2012

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

Statements of Income

          

Net revenue

   $ —        $ 4,403,326      $ 6,718      $ (6,718   $ 4,403,326   

Cost of goods sold

     —          3,977,692        6,318        (6,441     3,977,569   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     —          425,634        400        (277     425,757   

Selling, general and administrative expenses

     655        304,210        995        —          305,860   

Acquisition-related and exit and realignment charges

     —          397        220        —          617   

Depreciation and amortization

     —          17,058        35        —          17,093   

Other operating income, net

     —          (2,508     (354     —          (2,862
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating earnings (loss)

     (655     106,477        (496     (277     105,049   

Interest expense (income), net

     7,567        (705     47        —          6,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (8,222     107,182        (543     (277     98,140   

Income tax provision (benefit)

     (3,234     42,014        (113     —          38,667   

Equity in earnings of subsidiaries

     64,461        —          —          (64,461     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     59,473        65,168        (430     (64,738     59,473   

Other comprehensive income (loss), net of tax

     472        496        —          (496     472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 59,945      $ 65,664      $ (430   $ (65,234   $ 59,945   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Financial Information

 

June 30, 2013

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

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 158,697      $ 14,082      $ 35,047      $ —        $ 207,826   

Accounts and notes receivable, net

     —          471,174        81,017        (1,549     550,642   

Merchandise inventories

     —          773,197        21,866        (1,043     794,020   

Other current assets

     308        83,194        164,720        (3     248,219   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     159,005        1,341,647        302,650        (2,595     1,800,707   

Property and equipment, net

     9        97,559        89,944        —          187,512   

Goodwill, net

     —          247,271        25,326        —          272,597   

Intangible assets, net

     —          18,927        21,123        —          40,050   

Due from O&M and subsidiaries

     —          451,918        —          (451,918     —     

Advances to and investment in consolidated subsidiaries

     1,489,851        —          —          (1,489,851     —     

Other assets, net

     504        62,819        15,305        —          78,628   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,649,369      $ 2,220,141      $ 454,348      $ (1,944,364   $ 2,379,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Current liabilities

          

Accounts payable

   $ —        $ 715,053      $ 77,503      $ (1,552   $ 791,004   

Accrued payroll and related liabilities

     —          18,955        8,151        —          27,106   

Deferred income taxes

     —          47,473        (827     —          46,646   

Other accrued liabilities

     7,013        87,879        130,536        —          225,428   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     7,013        869,360        215,363        (1,552     1,090,184   

Long-term debt, excluding current portion

     204,891        7,054        2,737        —          214,682   

Due to O&M and subsidiaries

     448,774        —          2,014        (450,788     —     

Intercompany debt

     —          138,890        —          (138,890     —     

Deferred income taxes

     —          25,657        3,844        —          29,501   

Other liabilities

     —          50,885        4,421        —          55,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     660,678        1,091,846        228,379        (591,230     1,389,673   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

          

Common stock

     126,665        —          1,500        (1,500     126,665   

Paid-in capital

     192,326        242,025        259,864        (501,889     192,326   

Retained earnings (deficit)

     675,858        896,171        (40,129     (856,042     675,858   

Accumulated other comprehensive income (loss)

     (6,158     (9,901     3,604        6,297        (6,158
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     988,691        1,128,295        224,839        (1,353,134     988,691   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling Interest

     —          —          1,130        —          1,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     988,691        1,128,295        225,969        (1,353,134     989,821   

Total liabilities and equity

   $ 1,649,369      $ 2,220,141      $ 454,348      $ (1,944,364   $ 2,379,494   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Financial Information

 

December 31, 2012

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

Balance Sheets

          

Assets

          

Current assets

          

Cash and cash equivalents

   $ 58,190      $ 13,641      $ 26,057      $ —       $ 97,888   

Accounts and notes receivable, net

     —         474,533        82,216        (3,247     553,502   

Merchandise inventories

     —         750,046        14,391        (681     763,756   

Other current assets

     1,627        76,036        137,593        (1,508     213,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     59,817        1,314,256        260,257        (5,436     1,628,894   

Property and equipment, net

     16        95,516        96,309        —         191,841   

Goodwill, net

     —         247,271        27,613        —         274,884   

Intangible assets, net

     —         19,972        22,341        —         42,313   

Due from O&M and subsidiaries

     —         236,612        34,248        (270,860     —    

Advances to and investments in consolidated subsidiaries

     1,434,186        —         —         (1,434,186     —    

Other assets, net

     6,885        55,781        14,238        (7,135     69,769   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,500,904      $ 1,969,408      $ 455,006      $ (1,717,617   $ 2,207,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Current liabilities

          

Accounts payable

   $ 45,300      $ 518,545      $ 42,542      $ (3,250   $ 603,137   

Accrued payroll and related liabilities

     —         18,201        7,267        —         25,468   

Deferred income taxes

     —         43,110        —         (2,352     40,758   

Other current liabilities

     6,464        92,318        156,142        —         254,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     51,764        672,174        205,951        (5,602     924,287   

Long-term debt, excluding current portion

     205,754        6,592        3,037        —         215,383   

Due to O&M and subsidiaries

     270,860        —         —         (270,860     —    

Intercompany debt

     —         138,890        —         (138,890     —    

Deferred income taxes

     —         30,141        7,069        (6,289     30,921   

Other liabilities

     —         58,578        4,876        —         63,454   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     528,378        906,375        220,933        (421,641     1,234,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

          

Common stock

     126,544        —         1,500        (1,500     126,544   

Paid-in capital

     187,394        242,024        258,635        (500,659     187,394   

Retained earnings (deficit)

     658,994        831,327        (36,941     (794,386     658,994   

Accumulated other comprehensive income (loss)

     (406     (10,318     9,749        569        (406
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     972,526        1,063,033        232,943        (1,295,976     972,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interest

     —         —         1,130        —         1,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     972,526        1,063,033        234,073        (1,295,976     973,656   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,500,904      $ 1,969,408      $ 455,006      $ (1,717,617   $ 2,207,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Condensed Consolidating Financial Information

 

Six months ended June 30, 2013

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

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 54,970      $ 64,844      $ (3,090   $ (61,754   $ 54,970   

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

          

Equity in earnings of subsidiaries

     (61,393     —          —          61,393        —     

Depreciation and amortization

     7        17,924        6,974        —          24,905   

Share-based compensation expense

     —          3,449        —          —          3,449   

Provision for losses on accounts and notes receivable

     —          297        18        —          315   

Deferred income tax expense (benefit)

     —          7,443        (1,666     —          5,777   

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     —          3,061        426        (1,698     1,789   

Merchandise inventories

     —          (23,151     (8,386     361        (31,176

Accounts payable

     —          151,208        38,500        1,698        191,406   

Net change in other assets and liabilities

     636        (24,934     (45,164     —          (69,462

Other, net

     (809     331        (2,316     —          (2,794
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) operating activities

     (6,589     200,472        (14,704     —          179,179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

          

Additions to property and equipment

     —          (12,640     (3,581     —          (16,221

Additions to computer software and intangible assets

     —          (11,816     (3,010     —          (14,826

Proceeds from the sale of property and equipment

     —          59        9        —          68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for investing activities

     —          (24,397     (6,582     —          (30,979
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Change in intercompany advances

     143,569        (174,270     30,701        —          —     

Cash dividends paid

     (30,411     —          —          —          (30,411

Repurchases of common stock

     (8,297     —          —          —          (8,297

Excess tax benefits related to share-based compensation

     550        —          —          —          550   

Proceeds from exercise of stock options

     4,195        —          —          —          4,195   

Other, net

     (2,510     (1,364     (1,293     —          (5,167
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) financing activities

     107,096        (175,634     29,408        —          (39,130

Effect of exchange rate changes on cash and cash equivalents

     —          —          868        —          868   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     100,507        441        8,990        —          109,938   

Cash and cash equivalents at beginning of period

     58,190        13,641        26,057        —          97,888   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 158,697      $ 14,082      $ 35,047      $ —        $ 207,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

Condensed Consolidating Financial Information

 

Six months ended June 30, 2012

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

Statements of Cash Flows

          

Operating activities:

          

Net income (loss)

   $ 59,473      $ 65,168      $ (430   $ (64,738   $ 59,473   

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

          

Equity in earnings of subsidiaries

     (64,461     —         —         64,461        —    

Depreciation and amortization

     —         17,058        35        —         17,093   

Share-based compensation expense

     —         4,126        —         —         4,126   

Provision for losses on accounts and notes receivable

     —         270        —         —         270   

Deferred income tax expense (benefit)

     —         (1,146     —         —         (1,146

Changes in operating assets and liabilities:

          

Accounts and notes receivable

     —         23,560        (2,218     (103     21,239   

Merchandise inventories

     —         57,158        85        276        57,519   

Accounts payable

     (113,100     94,311        2,714        —         (16,075

Net change in other assets and liabilities

     19        874        (313     104        684   

Other, net

     (862     596        (138     —         (404
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash (used for) provided by operating activities

     (118,931     261,975        (265     —         142,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

          

Additions to property and equipment

     —         (5,452     (8     —         (5,460

Additions to computer software and intangible assets

     —         (12,695     (2     —         (12,697

Proceeds from sale of property and equipment

     —         115        —         —         115   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash used for investing activities

     —         (18,032     (10     —         (18,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Change in intercompany advances

     246,583        (247,066     483        —         —    

Cash dividends paid

     (27,956     —         —         —         (27,956

Repurchases of common stock

     (7,500     —         —         —         (7,500

Financing costs paid

     —         (1,303     —         —         (1,303

Excess tax benefits related to share-based compensation

     1,160        —         —         —         1,160   

Proceeds from exercise of stock options

     3,761        —         —         —         3,761   

Other, net

     (2,879     (1,021     —         —         (3,900
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used for) financing activities

     213,169        (249,390     483        —         (35,738
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     94,238        (5,447     208        —         88,999   

Cash and cash equivalents at beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 214,248      $ 9,362      $ 1,327      $ —       $ 224,937   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


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, 2012, except as discussed below.

We adopted an Accounting Standard Update (ASU) issued by the Financial Accounting Standards Board (FASB) for clarifying disclosures of offsetting assets and liabilities. This clarifies the scope and treatment of derivatives that are offset or subject to an enforceable master netting arrangements. The adoption of this guidance did not have an impact on our financial position or results of operations.

We adopted an ASU for reporting amounts reclassified out of accumulated other comprehensive income. This update requires entities to disclose the amounts reclassified out of accumulated other comprehensive income by component. The adoption of this guidance did not have an impact on our financial position or results of operations.

We adopted an ASU for reporting cumulative translation adjustment upon derecognition of foreign subsidiaries, assets or investments. This update requires the release of related cumulative translation adjustment when the parent ceases to have a controlling financial interest. The adoption of this guidance did not have an impact on our financial position or results of operations.

 

23


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, 2012. 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, 2012.

Second quarter and first six months of 2013 compared with 2012

Overview

Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading national distributor of name-brand medical and surgical supplies and a healthcare logistics company. We report our business under two segments: Domestic and International. The Domestic segment includes all services in the United States relating to our role as a medical supply logistics company serving healthcare providers and manufacturers. The International segment provides third-party logistics for the pharmaceutical and medical device industries in the European market. Segment financial information is provided in Note 14 of Notes to the Consolidated Financial Statements included in this quarterly report.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in thousands except per share data)

   2013     2012     2013     2012  

Operating earnings, as reported (GAAP)

   $ 50,050      $ 53,177      $ 97,934      $ 105,049   

Acquisition-related and exit and realignment charges

     638        617        2,648        617   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 50,688      $ 53,794      $ 100,582      $ 105,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     2.24     2.46     2.21     2.40

Net income, as reported (GAAP)

   $ 28,872      $ 30,113      $ 54,970      $ 59,473   

Acquisition-related and exit and realignment charges, net of tax

     412        375        1,933        375   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 29,284      $ 30,488      $ 56,903      $ 59,848   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.46      $ 0.48      $ 0.87      $ 0.94   

Acquisition-related and exit and realignment charges, per diluted common share

     —          —          0.03        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.46      $ 0.48      $ 0.90      $ 0.94   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EPS (non-GAAP) declined to $0.46 in the second quarter of 2013 compared with $0.48 in the second quarter of 2012 due to a decrease in Adjusted Operating Earnings (non-GAAP) of $3.1 million. Adjusted EPS (non-GAAP) declined to $0.90 for the six months ended June 30, 2013 compared with $0.94 in the same period of 2012 due to a decrease in Adjusted Operating Earnings (non-GAAP) of $5.1 million. Domestic segment operating earnings decreased $2.5 million to $51.2 million for the second quarter of 2013 and decreased $1.5 million to $104.2 million for the six months ended June 30, 2013. International segment operating losses were $0.6 million and $3.6 million for the three and six months ended June 30, 2013.

Use of Non-GAAP Measures

This 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 our 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 and reconciliations to those financial statements set forth above should be carefully evaluated.

 

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Acquisition-related charges in the first six months of 2013 consist primarily of costs to transition Movianto’s information technology and other operations and administrative functions from the former owner. Exit and realignment charges are associated with optimizing our operations and include the consolidation of distribution centers and closure of offsite warehouses in the United States and Europe. Unless otherwise stated, our analysis hereinafter excludes acquisition-related and exit and realignment charges. More information about these charges is provided in Notes 3 and 6 of Notes to Consolidated Financial Statements included in this quarterly report.

Results of Operations

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

 

     Three  Months
Ended
June 30,
    Six Months
Ended
June 30,
 
      
     2013     2012     2013     2012  

Gross margin

     12.06     9.67     12.16 %      9.67

Selling, general, and administrative expenses

     9.38     6.88     9.47 %      6.95

Adjusted Operating Earnings (non-GAAP)

     2.24     2.46     2.21 %      2.40

Net revenue. Net revenue was $2.27 billion and $4.54 billion for the three and six months ended June 30, 2013, representing an increase of 3.7% and 3.2% from $2.19 billion and $4.40 billion for the same periods in 2012. For the three and six months ended June 30, 2013, Domestic segment net revenue was $2.14 billion and $4.30 billion. International segment net revenue was $123.0 million and $244.0 million for the three and six months ended June 30, 2013, of which approximately 50% was fee-for-service revenues. The increases in consolidated net revenue were primarily due to net revenues contributed by Movianto, which was acquired in the third quarter of 2012.

Declines in Domestic segment net revenues of $41.8 million in the second quarter and $104.9 million in the first six months of 2013, compared to the same periods of 2012, are primarily due to ongoing market trends, including lower rates of healthcare utilization and reduced government purchases, as well as our continued rationalization of smaller, less profitable healthcare provider customers and suppliers. Domestic segment revenue declined 1.9% quarter-over-quarter.

Gross margin. Gross margin dollars increased 29.3% to $273.4 million for the second quarter of 2013 from $211.4 million for the second quarter of 2012. Gross margin dollars increased 29.8% to $552.5 million for the first six months of 2013 from $425.8 million for the same period of 2012. Domestic segment gross margin as a percentage of segment net revenues for the three and six months ended June 30, 2013 versus 2012 benefitted from supplier price changes and our sourcing efforts, partially offsetting a decline in gross margin as a percentage of revenue from customers. We are expecting a portion of the benefit from supplier price changes to be offset in future quarters of 2013 as other contract terms are affected by the supplier price changes. International segment gross margin as a percentage of segment net revenue was approximately 50% for the second quarter and year-to-date period of 2013. We expect this metric to vary in future quarters based on seasonality and mix of buy-sell versus fee-for-service business.

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.

SG&A expenses increased $62.3 million and $124.4 million to $212.5 million and $430.3 million for the three and six months ended June 30, 2013 compared to $150.3 million and $305.9 million for the same periods in 2012, primarily as a result of the acquisition of Movianto in the third quarter of 2012. International segment SG&A expenses also include ongoing costs for information technology and other transition services. During the second quarter of 2013, we reached a settlement in the administrative proceedings pending before the California Board of Equalization related to certain municipal sales tax incentives. As a result, SG&A expenses were reduced by a net amount of $3.5 million. The majority of the benefit to SG&A expenses was offset by certain expenses, including greater healthcare costs, litigation expenses, adjustments to benefit accruals, and expenses associated with the transition to a new fleet contract. In subsequent quarters, the company will receive an ongoing tax incentive that will vary with eligible revenues generated by sales to California-based customers. More information about this incentive is provided in Note 13 of Notes to Consolidated Financial Statements included in this quarterly report.

 

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Depreciation and amortization expense. Depreciation and amortization expense increased $3.8 million to $12.3 million for the second quarter of 2013 and increased $7.8 million to $24.9 million for the first six months of 2013, compared to the same periods in 2012, primarily related to warehouse equipment and information technology hardware and software acquired with Movianto. In addition, depreciation and amortization expense increased $0.9 million in the Domestic segment primarily due to software enhancements for operational efficiency improvements.

Other operating income, net. Net other operating income was $2.1 million for the second quarter of 2013 compared to $1.2 million for the second quarter of 2012, including finance charge income of $1.2 million and $1.0 million, respectively. Net other operating income includes $0.6 million of income associated with product financing arrangements with customers in Europe.

Net other operating income was $3.3 million for the first six months of 2013 compared to $2.9 million for the comparable period of 2012, including finance charge income of $1.8 million and $2.1 million, respectively.

Interest expense, net. Interest expense, net of interest earned on cash balances, was $3.2 million for the second quarter of 2013, as compared with $3.5 million for the second quarter of 2012, and $6.4 million for the first six months of 2013 as compared with $6.9 million for the first six months of 2012. The following table presents the components of our effective interest rate and average total debt for the six month periods ended June 30, 2013 and 2012.

 

(Dollars in millions)       

Six months ended June 30,

   2013     2012  

Interest on senior notes

     6.35     6.35

Commitment and other fees

     0.36     0.69

Interest rate swaps

     (1.04 )%      (1.09 )% 

Other, net of interest income

     0.33     0.54
  

 

 

   

 

 

 

Total effective interest rate

     6.00     6.49
  

 

 

   

 

 

 

Average total debt

   $ 216.6      $ 214.0   
  

 

 

   

 

 

 

Income taxes. The provision for income taxes, including income taxes on acquisition-related and exit and realignment charges, was $17.9 million and $36.5 million for the second quarter and first six months of 2013, compared to $19.6 million and $38.7 million for the comparable periods in 2012. The effective tax rate was 38.3% for the second quarter and 39.9% for the first six months of 2013, compared to 39.4% for the comparable periods of 2012. The decrease in the effective tax rate for the second quarter of 2013 is primarily the result of benefits recognized upon the conclusion of examinations of our 2009 and 2010 federal income tax returns and certain state income tax returns. These benefits were partially offset by the impact of foreign taxes. The increase in the effective tax rate for the six months ended June 30, 2013 over the same period in 2012 was largely due to the impact of foreign taxes.

Financial Condition, Liquidity and Capital Resources

Financial condition. Cash and cash equivalents increased to $207.8 million at June 30, 2013 from $97.9 million at December 31, 2012. Nearly all of our cash and cash equivalents are held in cash depository accounts with major banks in the United States and Europe or invested in high-quality, short-term liquid investments.

Accounts receivable, net of allowances, decreased $2.9 million, or 0.5%, to $550.6 million at June 30, 2013, from $553.5 million at December 31, 2012. Consolidated accounts receivable days outstanding (DSO) were 21.4 days and 21.2 days at June 30, 2013 and December 31, 2012. Domestic segment DSO was 19.3 days at June 30, 2013, and 19.1 days at December 31, 2012, based on three months’ sales, and has ranged from 19.1 to 19.7 days over the prior four quarters.

Merchandise inventories increased 4.0% to $794.0 million at June 30, 2013, from $763.8 million at December 31, 2012. Consolidated average inventory turnover was 10.4 for the second quarter of 2013. Domestic segment average inventory turnover was 10.3 in the second quarter of 2013, based on three months’ sales, and has ranged from 10.2 to 10.8 over the prior four quarters.

The International segment’s net working capital of approximately $53.3 million at June 30, 2013, excluding cash and cash equivalents, is comprised of accounts receivable of $78.7 million, financing receivables and other current assets of $163.8 million, inventories of $21.9 million, accounts payable of $73.6 million and financing payables and other current liabilities of approximately $137.5 million. See Note 4 to the Notes to Consolidated Financial Statements for further information regarding financing receivables.

 

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Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the six months ended June 30, 2013 and 2012:

 

(in millions)             

Six months ended June 30,

   2013     2012  

Net cash provided by (used for):

    

Operating activities

   $ 179.2      $ 142.7   

Investing activities

     (31.0     (18.0

Financing activities

     (39.1     (35.7

Effect of exchange rate changes

     1.0        —    
  

 

 

   

 

 

 

Increase in cash and cash equivalents

   $ 110.1      $ 89.0   
  

 

 

   

 

 

 

Cash provided by operating activities was $179.2 million in the first six months of 2013, compared to $142.8 million in the same period of 2012. The increase in cash from operating activities for the first six months of 2013 compared to same period in 2012 was primarily the result of an increase in accounts payable primarily due to an increase in inventories and timing of payments. Cash from operating activities in the first six months of 2012 was a result of operating earnings, a decrease in inventories and a decrease in DSO of 1.2 days (favorable impact on cash of approximately $29 million), partially offset by a decrease in accounts payable.

Capital expenditures were $31.0 million in the first six months of 2013, compared to $18.2 million in the same period of 2012. Capital expenditures in 2013 and 2012 primarily relate to our strategic and operational efficiency initiatives, particularly initiatives relating to information technology enhancements and optimizing our distribution network.

Cash used for financing activities in the first six months of 2013 was $39.1 million, compared to $35.7 million used in the first six months of 2012. During the first six months of 2013, we paid dividends of $30.4 million, repurchased common stock under a share repurchase program for $8.3 million of cash, and received proceeds of $4.2 million from the exercise of stock options. During the first six months of 2012, we paid dividends of $27.9 million, repurchased common stock under a share repurchase program for $7.5 million, paid financing costs of $1.3 million related to a new credit facility, and received proceeds of $3.8 million from the exercise of stock options.

Capital resources. Our sources of liquidity include cash and cash equivalents and a revolving credit facility. We have 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). Under this 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 June 30, 2013, we had no borrowings and letters of credit of approximately $5.0 million outstanding on the revolving credit facility, leaving $345.0 million available for borrowing. We also have a $1.4 million letter of credit outstanding as of June 30, 2013, which supports facilities leased in Europe.

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 six months of 2013, we had no borrowings or repayments under the credit facilities. Based on our leverage ratio at June 30, 2013, the interest rate under the 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 June 30, 2013.

In the second quarter of 2013, we paid cash dividends on our outstanding common stock at the rate of $0.24 per share, which represents a 9% increase over the rate of $0.22 per share paid in the second quarter of 2012. 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.

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 second quarter of 2013, we repurchased approximately 183,400 shares for $6.0 million under this program. The remaining amount authorized for repurchases under this program is $10.6 million at June 30, 2013.

We earn a portion of our operating earnings in foreign jurisdictions outside the U.S., which we consider to be indefinitely reinvested. Accordingly, no U.S. federal and state income taxes and withholding taxes have been provided on these earnings. Our cash, cash-equivalents, short-term investments, and marketable securities held by our foreign subsidiaries totaled $35.0 million as of June 30, 2013. We do not intend, nor do we foresee a need, to repatriate these funds or other assets held outside the U.S. In the future,

 

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should we require more capital to fund discretionary activities in the U.S. than is generated by our domestic operations and is available through our borrowings, we could elect to repatriate cash or other assets from foreign jurisdictions that have previously been considered to be indefinitely reinvested. Upon distribution of these assets, we could be subject to additional U.S. federal and state income taxes and withholding taxes payable to foreign jurisdictions, where applicable.

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 June 30, 2013.

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 our 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:

 

   

competitive pressures in the marketplace, including intense pricing pressure;

 

   

our ability to retain existing and attract new customers in a market characterized by significant customer consolidation and intense cost-containment initiatives;

 

   

our dependence on sales to certain customers or the loss or material reduction in purchases by key customers;

 

   

our dependence on distribution of product of certain suppliers;

 

   

our ability to successfully identify, manage or integrate acquisitions, including the management and integration of our acquisition of Movianto;

 

   

our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, changes in regulatory conditions, deteriorating economic conditions, adverse tax consequences, and other risks of operating in international markets;

 

   

uncertainties related to and our ability to adapt to changes in government regulations, including healthcare laws and regulations (including the Affordable Care Act);

 

   

risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;

 

   

uncertainties related to general economic, regulatory and business conditions;

 

   

our ability to successfully implement our strategic initiatives;

 

   

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;

 

   

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

 

   

changes in manufacturer preferences between direct sales and wholesale distribution;

 

   

changing trends in customer profiles and ordering patterns and our ability to meet customer demand for additional value-added services;

 

   

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

 

   

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

 

   

availability of and our ability to access special inventory buying opportunities;

 

   

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

 

   

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

 

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

 

   

the risk that information systems are interrupted or damaged or fail for any extended period of time or that there is a data security breach;

 

   

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

 

   

adverse changes in U.S. and foreign tax laws and the outcome of outstanding tax contingencies and legislative and tax proposals; and

 

   

other factors described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012.

We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.

 

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 June 30, 2013, were approximately $550.6 million, and consolidated DSO at June 30, 2013, was 21.4 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 approximately $5 million in letters of credit under the revolving credit facility at June 30, 2013. 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 and pricing of our Domestic segment distribution services, we are exposed to potential volatility in fuel prices. Our strategies for helping to mitigate our exposure to changing domestic fuel prices has included entering into leases for trucks with improved fuel efficiency and entering into fixed–price agreements for diesel fuel. We benchmark our domestic diesel fuel purchase prices against the U.S. Weekly Retail On-Highway Diesel Prices (benchmark) as quoted by the U.S. Energy Information Administration. The benchmark averaged $3.87 per gallon in the first six months of 2013, decreased 2% from $3.96 per gallon in the first six months of 2012. Based on our fuel consumption in the first six months of 2013, we estimate that every 10 cents per gallon increase in the benchmark would reduce our Domestic segment operating earnings by approximately $400,000 on an annualized basis. In January 2013, we entered into a fixed-price purchase agreement with one of our diesel fuel suppliers for approximately one-third of our anticipated Domestic segment fuel usage for 2013 at an equivalent benchmark price of $3.91 per gallon.

In the normal course of business, we are exposed to foreign currency translation and transaction risks. Our business transactions outside of the United States 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 June 30, 2013. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

29


Table of Contents

Part II. Other Information

 

Item 1. Legal Proceedings

Certain legal proceedings pending against us are described in our Annual Report on Form 10-K for the year ended December 31, 2012. Through June 30, 2013, there have been no material developments in any legal proceedings reported in such Annual Report.

 

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, 2012. Through June 30, 2013, there have been no material changes in the risk factors described in such Annual Report.

 

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

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 plan and may be suspended or discontinued at any time. During the second quarter of 2013, we repurchased in open-market transactions and retired 183,368 shares of our common stock for an aggregate of $6.0 million, or an average price per share of $32.80. The following table summarizes share repurchase activity by month during the second quarter of 2013.

 

Period

   Total number
of shares
purchased
     Average price paid
    per share    
     Total number of
shares purchased
as part of a
publicly announced
program
     Maximum dollar
value of shares
that may yet
be purchased
under the program
 

April 2013

     86,595       $ 31.38         86,595       $ 13,875,663   

May 2013

     5,000       $ 34.32         5,000       $ 13,704,050   

June 2013

     91,773       $ 34.06         91,773       $ 10,578,502   
  

 

 

       

 

 

    

Total

     183,368            183,368      
  

 

 

       

 

 

    

 

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Item 6. Exhibits

 

(a) Exhibits

 

  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Owens & Minor, Inc.
  (Registrant)

Date: August 2, 2013

  /s/ Craig R. Smith
 

 

  Craig R. Smith
  Chief Executive Officer

Date: August 2, 2013

  /s/ Richard A. Meier
 

 

  Richard A. Meier
  Executive Vice President & Chief Financial Officer

 

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Exhibits Filed with SEC

 

Exhibit #

    
  31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

33

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Craig R. Smith, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, of Owens & Minor, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 2, 2013

/s/ Craig R. Smith

Craig R. Smith
Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard A. Meier, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, of Owens & Minor, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 2, 2013

/s/ Richard A. Meier

Richard A. Meier

Executive Vice President & Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Owens & Minor, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig R. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Craig R. Smith

Craig R. Smith

Chief Executive Officer

Owens & Minor, Inc.

 

August 2, 2013

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Owens & Minor, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Meier, Executive Vice president & Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Richard A. Meier

Richard A. Meier

Executive Vice President & Chief Financial Officer

Owens & Minor, Inc.

 

August 2, 2013