OMI 9.30.2014-10Q

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________ 
FORM 10-Q
________________________________________________ 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of October 24, 2014, was 63,079,623 shares.
 
 
 
 
 



Table of Contents

Owens & Minor, Inc. and Subsidiaries
Index
 
Page
 
 
 
 
 
 
 
 
 
 

2



Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Net revenue
$
2,386,126

 
$
2,270,547

 
$
6,948,365

 
$
6,753,008

Cost of goods sold
2,093,643

 
1,997,218

 
6,092,413

 
5,927,196

Gross margin
292,483

 
273,329

 
855,952


825,812

Selling, general and administrative expenses
231,377

 
211,344

 
682,825

 
641,613

Acquisition-related and exit and realignment charges
13,957

 
2,747

 
24,813

 
5,395

Depreciation and amortization
13,841

 
12,441

 
41,597

 
37,347

Other operating income, net
(2,069
)
 
(2,418
)
 
(12,046
)
 
(5,693
)
Operating earnings
35,377

 
49,215

 
118,763

 
147,150

Interest expense, net
4,304

 
3,389

 
10,893

 
9,835

Loss on early retirement of debt
14,890

 

 
14,890

 

Income before income taxes
16,183

 
45,826

 
92,980

 
137,315

Income tax provision
9,028

 
17,856

 
40,464

 
54,374

Net income
$
7,155

 
$
27,970

 
$
52,516

 
$
82,941

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.44

 
$
0.84

 
$
1.31

Diluted
$
0.11

 
$
0.44

 
$
0.84

 
$
1.31

Cash dividends per common share
$
0.25

 
$
0.24

 
$
0.75

 
$
0.72



See accompanying notes to consolidated financial statements.
3


Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Net income
$
7,155

 
$
27,970

 
$
52,516

 
$
82,941

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2014 and $1,072 and $533 in 2013)
(16,796
)
 
8,340

 
(16,899
)
 
2,196

Change in unrecognized net periodic pension costs (net of income tax of $57 and $245 in 2014 and $134 and $400 in 2013)
132

 
208

 
351

 
625

Other (net of income tax of $56 and $72 in 2014 and $8 and $24 in 2013)
(133
)
 
1

 
(127
)
 
(24
)
Total other comprehensive income (loss), net of tax
(16,797
)
 
8,549

 
(16,675
)
 
2,797

Comprehensive income (loss)
$
(9,642
)
 
$
36,519

 
$
35,841

 
$
85,738



See accompanying notes to consolidated financial statements.
4


Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
 
September 30,
 
December 31,
(in thousands, except per share data)
2014
 
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
610,147

 
$
101,905

Accounts and notes receivable, net of allowances of $15,067 and $15,030
590,140

 
572,854

Merchandise inventories
834,476

 
771,663

Other current assets
295,441

 
279,510

Total current assets
2,330,204

 
1,725,932

Property and equipment, net of accumulated depreciation of $157,331 and $137,526
203,955

 
191,961

Goodwill
274,533

 
275,439

Intangible assets, net
36,457

 
40,406

Other assets, net
98,749

 
90,304

Total assets
$
2,943,898

 
$
2,324,042

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
202,401

 
$
2,428

Accounts payable
692,616

 
643,872

Accrued payroll and related liabilities
28,709

 
23,296

Deferred income taxes
39,406

 
41,613

Other accrued liabilities
315,581

 
277,970

Total current liabilities
1,278,713

 
989,179

Long-term debt, excluding current portion
563,882

 
213,815

Deferred income taxes
41,725

 
43,727

Other liabilities
52,054

 
52,278

Total liabilities
1,936,374

 
1,298,999

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 - 63,080 shares and 63,096 shares
126,159

 
126,193

Paid-in capital
200,961

 
196,605

Retained earnings
687,511

 
691,547

Accumulated other comprehensive income (loss)
(7,107
)
 
9,568

Total Owens & Minor, Inc. shareholders’ equity
1,007,524

 
1,023,913

Noncontrolling interest

 
1,130

Total equity
1,007,524

 
1,025,043

Total liabilities and equity
$
2,943,898

 
$
2,324,042



See accompanying notes to consolidated financial statements.
5


Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
 
Nine Months Ended 
 September 30,
(in thousands)
2014
 
2013
Operating activities:
 
 
 
Net income
$
52,516

 
$
82,941

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
41,597

 
37,347

Loss on early retirement of debt
14,890

 

Share-based compensation expense
6,136

 
5,162

Provision for losses on accounts and notes receivable
(356
)
 
179

Deferred income tax (benefit) expense
(7,387
)
 
8,424

Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(21,456
)
 
(20,703
)
Merchandise inventories
(63,883
)
 
(23,690
)
Accounts payable
54,634

 
93,950

Net change in other assets and liabilities
3,131

 
(21,285
)
Other, net
1,322

 
(1,159
)
Cash provided by operating activities
81,144

 
161,166

Investing activities:
 
 
 
Additions to property and equipment
(36,169
)
 
(25,144
)
Additions to computer software and intangible assets
(17,988
)
 
(20,361
)
Proceeds from sale of investment
1,937

 

Proceeds from sale of property and equipment
151

 
2,020

Cash used for investing activities
(52,069
)
 
(43,485
)
Financing activities:
 
 
 
Long-term debt borrowings
547,693

 

Cash dividends paid
(47,335
)
 
(45,587
)
Repurchases of common stock
(9,934
)
 
(15,701
)
Excess tax benefits related to share-based compensation
514

 
733

Proceeds from exercise of stock options
1,180

 
4,821

Purchase of noncontrolling interest
(1,500
)
 

Debt issuance costs
(4,178
)
 

Other, net
(5,671
)
 
(6,769
)
Cash provided by (used for) financing activities
480,769

 
(62,503
)
Effect of exchange rate changes on cash and cash equivalents
(1,602
)
 
723

Net increase in cash and cash equivalents
508,242

 
55,901

Cash and cash equivalents at beginning of period
101,905

 
97,888

Cash and cash equivalents at end of period
$
610,147

 
$
153,789

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
65,140

 
$
51,567

Interest paid
$
8,417

 
$
7,926



See accompanying notes to consolidated financial statements.
6

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 Income
(Loss)
 
Noncontrolling
Interest
 
Total
Equity
Balance December 31, 2012
63,271

 
$
126,544

 
$
187,394

 
$
658,994

 
$
(406
)
 
$
1,130

 
$
973,656

Net income
 
 
 
 
 
 
82,941

 
 
 
 
 
82,941

Other comprehensive income
 
 
 
 
 
 
 
 
2,797

 
 
 
2,797

Dividends declared ($0.72 per share)
 
 
 
 
 
 
(45,466
)
 
 
 
 
 
(45,466
)
Shares repurchased and retired
(471
)
 
(942
)
 
 
 
(14,758
)
 
 
 
 
 
(15,700
)
Share-based compensation expense, exercises and other
362

 
724

 
7,368

 
 
 
 
 
 
 
8,092

Balance September 30, 2013
63,162

 
$
126,326

 
$
194,762

 
$
681,711

 
$
2,391

 
$
1,130

 
$
1,006,320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2013
63,096

 
$
126,193

 
$
196,605

 
$
691,547

 
$
9,568

 
$
1,130

 
$
1,025,043

Net income
 
 
 
 
 
 
52,516

 
 
 
 
 
52,516

Other comprehensive loss
 
 
 
 
 
 
 
 
(16,675
)
 
 
 
(16,675
)
Dividends declared ($0.75 per share)
 
 
 
 
 
 
(47,201
)
 
 
 
 
 
(47,201
)
Shares repurchased and retired
(291
)
 
(583
)
 
 
 
(9,351
)
 
 
 
 
 
(9,934
)
Share-based compensation expense, exercises and other
275

 
549

 
5,051

 
 
 
 
 
 
 
5,600

Purchase of noncontrolling interest
 
 
 
 
(695
)
 
 
 
 
 
(1,130
)
 
(1,825
)
Balance September 30, 2014
63,080

 
$
126,159

 
$
200,961

 
$
687,511

 
$
(7,107
)
 
$

 
$
1,007,524



See accompanying notes to consolidated financial statements.
7


Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, unless otherwise indicated)
Note 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). During the second quarter of 2014, we purchased the remaining outside stockholder's interest in a consolidated subsidiary that was partially owned. Therefore we do not present a noncontrolling interest as a component of equity as of September 30, 2014. 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.
Reclassification and Correction
Certain prior year amounts have been reclassified to conform to current year presentation. In addition, after completing a review of customer contracts in the International segment in the fourth quarter of 2013, we determined a net presentation of revenues for certain contracts is more representative of the customer arrangement. Certain amounts in the prior period statement of income were revised to reflect this net presentation of revenues. As a result, prior year net revenue and cost of goods sold each decreased by $34.1 million for the three month period and $94.0 million for the nine month period ended September 30, 2013. The change did not affect cash flows, gross margin, operating earnings or net income in 2013.
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.
Note 2—Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable, financing receivables, accounts payable and financing payables included 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 7 for the fair value of long-term debt.
Note 3—Financing Receivables and Payables
At September 30, 2014 and December 31, 2013, we had financing receivables of $186.8 million and $198.5 million and related payables of $163.4 million and $165.3 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.
Note 4—Goodwill and Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill through September 30, 2014:
 
Domestic
Segment
 
International
Segment
 
Total
Carrying amount of goodwill, December 31, 2013
$
248,498

 
$
26,941

 
$
275,439

Currency translation adjustments

 
(906
)
 
(906
)
Carrying amount of goodwill, September 30, 2014
$
248,498

 
$
26,035

 
$
274,533


8



Intangible assets at September 30, 2014, and December 31, 2013, were as follows:
 
September 30, 2014
 
December 31, 2013
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
50,995

 
$
3,805

 
$
51,544

 
$
3,933

Accumulated amortization
(17,706
)
 
(636
)
 
(14,281
)
 
(790
)
Net intangible assets
$
33,289

 
$
3,169

 
$
37,263

 
$
3,143

At September 30, 2014, $16.3 million in net intangible assets were held in the Domestic segment and $20.1 million were held in the International segment. Amortization expense for intangible assets was $1.1 million and $0.7 million for the three months ended September 30, 2014 and 2013 and $3.4 million and $2.7 million for the nine months ended September 30, 2014 and 2013.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $1.1 million for the remainder of 2014, $4.9 million for 2015, $5.0 million for 2016, $4.8 million for 2017, $4.1 million for 2018 and $3.9 million for 2019.
Note 5—Exit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations which include the closure and consolidation of certain distribution and logistics centers, administrative offices and warehouses in the United States and Europe. These charges also include other costs associated with our strategic organizational realignment which include management changes, certain professional fees, and costs to streamline administrative functions and processes.
Exit and realignment charges by segment for the three and nine month periods ended September 30, 2014 and 2013 were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Domestic segment
$
4,654

 
$
1,856

 
$
8,250

 
$
3,162

International segment
4,738

 
235

 
7,869

 
685

Total exit and realignment charges
$
9,392

 
$
2,091

 
$
16,119

 
$
3,847


    

9



The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2014 and 2013:
 
Lease
Obligations
 
Severance
 
Total
Accrued exit and realignment costs, December 31, 2013
$
2,434

 
$
475

 
$
2,909

Provision for exit and realignment activities
532

 
807

 
1,339

Cash payments, net of sublease income
(411
)
 
(327
)
 
(738
)
Accrued exit and realignment costs, March 31, 2014
2,555

 
955

 
3,510

Provision for exit and realignment activities
6

 
2,236

 
2,242

Cash payments, net of sublease income
(383
)
 
(1,095
)
 
(1,478
)
Accrued exit and realignment costs, June 30, 2014
2,178

 
2,096

 
4,274

Provision for exit and realignment activities
912

 
2,215

 
3,127

Cash payments, net of sublease income
(867
)
 
(460
)
 
(1,327
)
Accrued exit and realignment costs, September 30, 2014
$
2,223

 
$
3,851

 
$
6,074

 
 
 
 
 
 
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
(4,844
)
 
(147
)
 
(4,991
)
Accrued exit and realignment costs, March 31, 2013
792

 
972

 
1,764

Cash payments, net of sublease income
(118
)
 
(137
)
 
(255
)
Accrued exit and realignment costs, June 30, 2013
674

 
835

 
1,509

Provision for exit and realignment activities
648

 
76

 
724

Change in estimate

 
(79
)
 
(79
)
Cash payments, net of sublease income
(463
)
 
(105
)
 
(568
)
Accrued exit and realignment costs, September 30, 2013
$
859

 
$
727

 
$
1,586

In addition to the exit and realignment accruals in the preceding table, we also incurred $6.3 million and $9.4 million of costs that were expensed as incurred for the three and nine months ended September 30, 2014, including $3.1 million and $4.3 million in other facility costs and asset write-downs, $0.6 million and $1.4 million in labor costs, $1.2 million and $1.3 million in professional fees, $0.7 million and $0.9 million in information systems costs and $0.7 million and $1.5 million in other costs.
We incurred $1.4 million and $2.5 million of costs that were expensed as incurred for the three and nine months ended September 30, 2013, including $0.7 million and $1.4 million in staff and labor costs and $0.7 million and $1.1 million in other facility costs and asset write-downs.
We expect additional charges of approximately $12.0 million over the remainder of 2014 for activities initiated in the Domestic and International segments through September 30, 2014.

Note 6—Retirement Plan
We have a noncontributory, unfunded retirement plan for certain officers and other key employees in the United States. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective employees.
The components of net periodic benefit cost, which are included in selling, general and administrative expenses, for the three and nine months ended September 30, 2014 and 2013, were as follows:

10



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
60

 
$
24

 
$
136

 
$
89

Interest cost
482

 
414

 
1,446

 
1,241

Recognized net actuarial loss
204

 
341

 
612

 
1,024

Net periodic benefit cost
$
746

 
$
779

 
$
2,194

 
$
2,354

Certain of our foreign subsidiaries have health and welfare plans covering substantially all of their respective employees. Our expense for these plans totaled $0.5 million and $0.2 million for the three months ended September 30, 2014 and 2013 and $1.4 million and $0.7 million for the nine months ended September 30, 2014 and 2013.

Note 7—Debt
Debt consists of the following:
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
6.35% Senior Notes, $200 million par value, maturing April 2016
$
200,000

 
$
217,352

 
$
204,028

 
$
218,750

3.875% Senior Notes, $275 million par value, maturing September 2021
273,732

 
274,973

 

 

4.375% Senior Notes, $275 million par value, maturing December 2024
273,961

 
276,430

 

 

Capital leases
18,590

 
18,590

 
12,215

 
12,215

Total debt
766,283

 
787,345

 
216,243

 
230,965

Less current maturities
(202,401
)
 
(219,753
)
 
(2,428
)
 
(2,428
)
Long-term debt
$
563,882

 
$
567,592

 
$
213,815

 
$
228,537


On September 16, 2014, we issued $275 million of 3.875% senior notes due September 2021 (the “2021 Notes”) and $275 million of 4.375% senior notes due December 2024 (the “2024 Notes”). The 2021 Notes were sold at 99.5% of the principal amount with an effective yield of 3.951%. The 2024 Notes were sold at 99.6% of the principal with an effective yield of 4.422%. Interest on the 2021 Notes and 2024 Notes is payable semiannually in arrears, commencing on March 15, 2015 and December 15, 2014, respectively. We have the option to redeem the 2021 Notes and 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100% of the principal amount or the present value of the remaining scheduled payments discounted at the Treasury Rate plus 25-30 basis points. We are deferring and amortizing over the respective terms $4.2 million in costs incurred through September 30, 2014 in connection with the issuance of the 2021 Notes and the 2024 Notes.
On October 16, 2014, we used a portion of the net proceeds from the 2021 Notes and the 2024 Notes to fund the early retirement of all of our $200 million of 6.35% senior notes due in 2016 (2016 Notes), which included the payment of a $17.4 million redemption premium. We recorded a net loss on the early retirement of our 2016 Notes of $14.9 million, which includes the redemption premium offset by the recognition of a gain on previously settled interest rate swaps. The 2016 Notes are reflected in current portion of long-term debt at September 30, 2014.
On September 17, 2014, we amended our existing Credit Agreement, increasing our borrowing capacity from $350 million to $450 million and extending the term through September 2019 (the Amended Credit Agreement). Under the Amended Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $200 million. The interest rate on the Amended Credit Agreement, 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 Amended Credit Agreement. We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the facility. The terms of the Amended Credit Agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At September 30, 2014, we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445.0 million available for

11



borrowing. We also have a $1.3 million and $1.5 million letter of credit outstanding as of September 30, 2014 and December 31, 2013, which supports our facilities leased in Europe.
Note 8—Income Taxes
The effective tax rate was 55.8% and 43.5% for the three and nine months ended September 30, 2014, compared to 39.0% and 39.6% in the same periods of 2013. The change in rate is mainly due to the impact of foreign taxes and the effect of certain acquisition-related costs which are not deductible for tax purposes. The liability for unrecognized tax benefits was $5.0 million at September 30, 2014, and $4.6 million at December 31, 2013. Included in the liability at September 30, 2014 were $3.8 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Note 9—Net Income per Common Share
The following summarizes the calculation of net income per common share attributable to common shareholders for the three and nine months ended September 30, 2014 and 2013.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share data)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
7,155

 
$
27,970

 
$
52,516

 
$
82,941

Less: income allocated to unvested restricted shares
(150
)
 
(186
)
 
(453
)
 
(541
)
Net income attributable to common shareholders - basic
7,005

 
27,784

 
52,063

 
82,400

Add: undistributed income attributable to unvested restricted shares - basic

 
59

 
26

 
185

Less: undistributed income attributable to unvested restricted shares - diluted

 
(59
)
 
(26
)
 
(185
)
Net income attributable to common shareholders - diluted
$
7,005

 
$
27,784

 
$
52,063

 
$
82,400

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
62,175

 
62,605

 
62,238

 
62,678

Dilutive shares - stock options
4

 
26

 
7

 
41

Weighted average shares outstanding - diluted
62,179

 
62,631

 
62,245

 
62,719

Net income per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
0.11

 
$
0.44

 
$
0.84

 
$
1.31

Diluted
$
0.11

 
$
0.44

 
$
0.84

 
$
1.31

Note 10—Shareholders’ Equity
In February 2014, our Board of Directors authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2017. The program is intended, in part, to offset shares issued in conjunction with our stock incentive plans and return capital to shareholders. The program may be suspended or discontinued at any time. During the nine months ended September 30, 2014, we repurchased in open-market transactions and retired approximately 0.3 million shares of our common stock for an aggregate of $9.9 million, or an average price per share of $34.31. As of September 30, 2014, we have approximately $90.1 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

12



Note 11—Accumulated Other Comprehensive Income
The following table shows the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2014 and 2013: 
 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), June 30, 2014
$
(6,260
)
 
$
15,789

 
$
161

 
$
9,690

Other comprehensive income (loss) before reclassifications

 
(16,796
)
 
(44
)
 
(16,840
)
Income tax

 

 

 

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

 
(16,796
)
 
(44
)
 
(16,840
)
Amounts reclassified from accumulated other comprehensive income (loss)
189

 

 
(145
)
 
44

Income tax
(57
)
 

 
56

 
(1
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
132

 

 
(89
)
 
43

Other comprehensive income (loss)
132

 
(16,796
)
 
(133
)
 
(16,797
)
Accumulated other comprehensive income (loss), September 30, 2014
$
(6,128
)
 
$
(1,007
)
 
$
28

 
$
(7,107
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), June 30, 2013
$
(9,901
)
 
$
3,605

 
$
138

 
$
(6,158
)
Other comprehensive income (loss) before reclassifications

 
9,412

 
14

 
9,426

Income tax

 
(1,072
)
 

 
(1,072
)
Other comprehensive income (loss) before reclassifications, net of tax

 
8,340

 
14

 
8,354

Amounts reclassified from accumulated other comprehensive income (loss)
342

 

 
(21
)
 
321

Income tax
(134
)
 

 
8

 
(126
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
208

 

 
(13
)
 
195

Other comprehensive income (loss)
208

 
8,340

 
1

 
8,549

Accumulated other comprehensive income (loss), September 30, 2013
$
(9,693
)
 
$
11,945

 
$
139

 
$
2,391

 


13



 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2013
$
(6,479
)
 
$
15,892

 
$
155

 
$
9,568

Other comprehensive income (loss) before reclassifications

 
(16,899
)
 
(14
)
 
(16,913
)
Income tax

 

 

 

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

 
(16,899
)
 
(14
)
 
(16,913
)
Amounts reclassified from accumulated other comprehensive income (loss)
596

 

 
(185
)
 
411

Income tax
(245
)
 

 
72

 
(173
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
351

 

 
(113
)
 
238

Other comprehensive income (loss)
351

 
(16,899
)
 
(127
)
 
(16,675
)
Accumulated other comprehensive income (loss), September 30, 2014
$
(6,128
)
 
$
(1,007
)
 
$
28

 
$
(7,107
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), December 31, 2012
$
(10,318
)
 
$
9,749

 
$
163

 
$
(406
)
Other comprehensive income (loss) before reclassifications

 
2,729

 
14

 
2,743

Income tax

 
(533
)
 

 
(533
)
Other comprehensive income (loss) before reclassifications, net of tax

 
2,196

 
14

 
2,210

Amounts reclassified from accumulated other comprehensive income (loss)
1,025

 

 
(62
)
 
963

Income tax
(400
)
 

 
24

 
(376
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
625

 

 
(38
)
 
587

Other comprehensive income (loss)
625

 
2,196

 
(24
)
 
2,797

Accumulated other comprehensive income (loss), September 30, 2013
$
(9,693
)
 
$
11,945

 
$
139

 
$
2,391

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 and nine months ended September 30, 2014, we reclassified $0.2 million and $0.6 million of actuarial net losses. For the three and nine months ended September 30, 2013, we reclassified $0.3 million and $1.0 million of actuarial net losses.
Note 12—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 $0.9 million as of September 30, 2014. If none of the performance targets are met as of the specified dates, and customers have met their contractual commitments, payment will be due as follows: 2014 - $0.7 million; 2015 - $0.1 million; 2016 -$0.1 million. None of these contingent obligations were accrued at September 30, 2014, as we do not consider any of them probable. We deferred the recognition of fees that are contingent upon our future performance under the terms of these contracts. As of September 30, 2014, $0.9 million of deferred revenue related to outstanding contractual performance targets was included in other current liabilities.
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.
Various issues and claims related to the acquisition and transition of Movianto remain outstanding and under review and discussion with the former owner. The ultimate outcomes of these issues and claims, including their impact on future financial results, cannot be ascertained or estimated at this time.

14



We are in discussions with a customer in our International Segment to resolve a dispute related to services provided.  In the event we are unable to resolve this dispute, we may choose to terminate this relationship in which case we could potentially incur costs including but not limited to facility closures, personnel, transportation and/or other contract termination costs. We have outstanding accounts receivable totaling approximately $14.7 million at September 30, 2014 related to services provided to this customer.  The outcome of these discussions or the impact on financial results is not known at this time; however, we do not believe that loss with respect to this issue is probable.
During September 2014, we entered into a definitive agreement to acquire ArcRoyal, a privately held surgical kitting company based in Ireland. The transaction is expected to close in the fourth quarter of 2014.
Note 13—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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Net revenue:
 
 
 
 
 
 
 
Domestic
$
2,262,081

 
$
2,175,663

 
$
6,598,531

 
$
6,474,069

International
124,045

 
94,884

 
349,834

 
278,939

Consolidated net revenue
$
2,386,126

 
$
2,270,547

 
$
6,948,365

 
$
6,753,008

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Domestic
$
50,797

 
$
51,213

 
$
151,849

 
$
155,364

International
(1,463
)
 
749

 
(8,273
)
 
(2,819
)
Acquisition-related and exit and realignment charges
(13,957
)
 
(2,747
)
 
(24,813
)
 
(5,395
)
Consolidated operating earnings
$
35,377

 
$
49,215

 
$
118,763

 
$
147,150

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Domestic
$
8,986

 
$
8,805

 
$
26,772

 
$
26,775

International
4,855

 
3,636

 
14,825

 
10,572

Consolidated depreciation and amortization
$
13,841

 
$
12,441

 
$
41,597

 
$
37,347

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Domestic
$
11,077

 
$
10,032

 
$
40,110

 
$
34,506

International
4,257

 
4,426

 
14,047

 
10,999

Consolidated capital expenditures
$
15,334

 
$
14,458

 
$
54,157

 
$
45,505

 
 
September 30, 2014
 
December 31, 2013
Total assets:
 
 
 
Domestic
$
1,834,169

 
$
1,747,572

International
499,582

 
474,565

Segment assets
2,333,751

 
2,222,137

Cash and cash equivalents
610,147

 
101,905

Consolidated total assets
$
2,943,898

 
$
2,324,042



15



Note 14—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 September 30, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,261,448

 
$
141,086

 
$
(16,408
)
 
$
2,386,126

Cost of goods sold

 
2,047,328

 
62,850

 
(16,535
)
 
2,093,643

Gross margin

 
214,120

 
78,236

 
127

 
292,483

Selling, general and administrative expenses
25

 
155,950

 
75,402

 

 
231,377

Acquisition-related and exit and realignment charges

 
7,893

 
6,064

 

 
13,957

Depreciation and amortization

 
8,966

 
4,875

 

 
13,841

Other operating income, net

 
(1,167
)
 
(1,235
)
 
333

 
(2,069
)
Operating earnings (loss)
(25
)
 
42,478

 
(6,870
)
 
(206
)
 
35,377

Interest expense (income), net
3,925

 
1,002

 
(623
)
 

 
4,304

Loss on early retirement of debt
14,890

 

 

 

 
14,890

Income (loss) before income taxes
(18,840
)
 
41,476

 
(6,247
)
 
(206
)
 
16,183

Income tax (benefit) provision
(7,144
)
 
16,463

 
(291
)
 

 
9,028

Equity in earnings of subsidiaries
18,851

 

 

 
(18,851
)
 

Net income (loss)
7,155

 
25,013

 
(5,956
)
 
(19,057
)
 
7,155

Other comprehensive income (loss)
(16,797
)
 
131

 
(16,795
)
 
16,664

 
(16,797
)
Comprehensive income (loss)
$
(9,642
)
 
$
25,144

 
$
(22,751
)
 
$
(2,393
)
 
$
(9,642
)

16



Three Months Ended September 30, 2013
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,175,663

 
$
106,784

 
$
(11,900
)
 
$
2,270,547

Cost of goods sold

 
1,965,696

 
43,238

 
(11,716
)
 
1,997,218

Gross margin

 
209,967

 
63,546

 
(184
)
 
273,329

Selling, general and administrative expenses
264

 
151,107

 
59,973

 

 
211,344

Acquisition-related and exit and realignment charges

 
1,856

 
891

 

 
2,747

Depreciation and amortization
3

 
8,780

 
3,658

 

 
12,441

Other operating income, net

 
(1,454
)
 
(964
)
 

 
(2,418
)
Operating earnings (loss)
(267
)
 
49,678

 
(12
)
 
(184
)
 
49,215

Interest expense (income), net
5,791

 
(2,364
)
 
(38
)
 

 
3,389

Income (loss) before income taxes
(6,058
)
 
52,042

 
26

 
(184
)
 
45,826

Income tax (benefit) provision
(2,319
)
 
20,694

 
(519
)
 

 
17,856

Equity in earnings of subsidiaries
31,709

 

 

 
(31,709
)
 

Net income (loss)
27,970

 
31,348

 
545

 
(31,893
)
 
27,970

Other comprehensive income (loss)
8,549

 
207

 
8,341

 
(8,548
)
 
8,549

Comprehensive income (loss)
$
36,519

 
$
31,555

 
$
8,886

 
$
(40,441
)
 
$
36,519

Nine Months Ended September 30, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
6,596,941

 
$
398,646

 
$
(47,222
)
 
$
6,948,365

Cost of goods sold

 
5,965,607

 
173,747

 
(46,941
)
 
6,092,413

Gross margin

 
631,334

 
224,899

 
(281
)
 
855,952

Selling, general and administrative expenses
36

 
462,325

 
220,464

 

 
682,825

Acquisition-related and exit and realignment charges

 
13,074

 
11,739

 

 
24,813

Depreciation and amortization
2

 
26,703

 
14,892

 

 
41,597

Other operating income, net

 
(9,043
)
 
(3,336
)
 
333

 
(12,046
)
Operating earnings (loss)
(38
)
 
138,275

 
(18,860
)
 
(614
)
 
118,763

Interest expense (income), net
9,328

 
3,502

 
(1,937
)
 

 
10,893

Loss on early retirement of debt
14,890

 

 

 

 
14,890

Income (loss) before income taxes
(24,256
)
 
134,773

 
(16,923
)
 
(614
)
 
92,980

Income tax (benefit) provision
(9,299
)
 
53,989

 
(4,226
)
 

 
40,464

Equity in earnings of subsidiaries
67,473

 

 

 
(67,473
)
 

Net income (loss)
52,516

 
80,784

 
(12,697
)
 
(68,087
)
 
52,516

Other comprehensive income (loss)
(16,675
)
 
350

 
(16,898
)
 
16,548

 
(16,675
)
Comprehensive income (loss)
$
35,841

 
$
81,134

 
$
(29,595
)
 
$
(51,539
)
 
$
35,841


17



Nine Months Ended September 30, 2013
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
6,473,954

 
$
313,023

 
$
(33,969
)
 
$
6,753,008

Cost of goods sold

 
5,833,900

 
126,720

 
(33,424
)
 
5,927,196

Gross margin

 
640,054

 
186,303

 
(545
)
 
825,812

Selling, general and administrative expenses
1,138

 
459,780

 
180,695

 

 
641,613

Acquisition-related and exit and realignment charges

 
3,116

 
2,279

 

 
5,395

Depreciation and amortization
10

 
26,705

 
10,632

 

 
37,347

Other operating income, net

 
(3,597
)
 
(2,096
)
 

 
(5,693
)
Operating earnings (loss)
(1,148
)
 
154,050

 
(5,207
)
 
(545
)
 
147,150

Interest expense (income), net
15,340

 
(5,096
)
 
(409
)
 

 
9,835

Income (loss) before income taxes
(16,488
)
 
159,146

 
(4,798
)
 
(545
)
 
137,315

Income tax (benefit) provision
(6,327
)
 
62,758

 
(2,057
)
 

 
54,374

Equity in earnings of subsidiaries
93,102

 

 

 
(93,102
)
 

Net income (loss)
82,941

 
96,388

 
(2,741
)
 
(93,647
)
 
82,941

Other comprehensive income (loss)
2,797

 
623

 
2,195

 
(2,818
)
 
2,797

Comprehensive income (loss)
$
85,738

 
$
97,011

 
$
(546
)
 
$
(96,465
)
 
$
85,738



18



September 30, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
563,559

 
$
32,924

 
$
13,664

 
$

 
$
610,147

Accounts and notes receivable, net

 
496,444

 
97,325

 
(3,629
)
 
590,140

Merchandise inventories

 
804,409

 
31,811

 
(1,744
)
 
834,476

Other current assets
253

 
91,582

 
204,901

 
(1,295
)
 
295,441

Total current assets
563,812

 
1,425,359

 
347,701

 
(6,668
)
 
2,330,204

Property and equipment, net

 
105,689

 
98,266

 

 
203,955

Goodwill

 
247,271

 
27,262

 

 
274,533

Intangible assets, net

 
16,323

 
20,134

 

 
36,457

Due from O&M and subsidiaries

 
409,280

 

 
(409,280
)
 

Advances to and investment in consolidated subsidiaries
1,587,331

 

 

 
(1,587,331
)
 

Other assets, net
4,178

 
68,606

 
25,965

 

 
98,749

Total assets
$
2,155,321

 
$
2,272,528

 
$
519,328

 
$
(2,003,279
)
 
$
2,943,898

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
$
200,000

 
$
2,401

 
$

 
$

 
$
202,401

Accounts payable
6

 
649,274

 
46,965

 
(3,629
)
 
692,616

Accrued payroll and related liabilities

 
17,033

 
11,676