OMI 6.30.2015-10Q
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, 2015
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 July 24, 2015, was 63,018,058 shares.
 
 
 
 
 



Table of Contents

Owens & Minor, Inc. and Subsidiaries
Index
 
Page
 
 
 
 
 
 
 
 
 
 

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)
2015
 
2014
 
2015
 
2014
Net revenue
$
2,422,167

 
$
2,305,858

 
$
4,813,363

 
$
4,562,239

Cost of goods sold
2,123,830

 
2,023,586

 
4,217,425

 
3,998,771

Gross margin
298,337

 
282,272

 
595,938


563,468

Selling, general and administrative expenses
231,498

 
225,838

 
465,323

 
451,448

Acquisition-related and exit and realignment charges
5,707

 
7,593

 
15,623

 
10,855

Depreciation and amortization
15,460

 
13,892

 
31,329

 
27,756

Other operating income, net
(2,188
)
 
(2,152
)
 
(5,172
)
 
(9,978
)
Operating earnings
47,860

 
37,101

 
88,835

 
83,387

Interest expense, net
6,680

 
3,342

 
13,560

 
6,589

Income before income taxes
41,180

 
33,759

 
75,275

 
76,798

Income tax provision
16,954

 
13,883

 
32,109

 
31,436

Net income
$
24,226

 
$
19,876

 
$
43,166

 
$
45,362

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.32

 
$
0.69

 
$
0.72

Diluted
$
0.39

 
$
0.32

 
$
0.69

 
$
0.72

Cash dividends per common share
$
0.2525

 
$
0.25

 
$
0.505

 
$
0.50



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)
2015
 
2014
 
2015
 
2014
Net income
$
24,226

 
$
19,876

 
$
43,166

 
$
45,362

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2015 and 2014)
6,606

 
(570
)
 
(21,335
)
 
(103
)
Change in unrecognized net periodic pension costs (net of income tax of $141 and $285 in 2015 and $90 and $186 in 2014)
260

 
112

 
518

 
219

Other (net of income tax of $0 in 2015 and $8 and $16 in 2014)
(8
)
 
15

 
30

 
6

Total other comprehensive income (loss), net of tax
6,858

 
(443
)
 
(20,787
)
 
122

Comprehensive income
$
31,084

 
$
19,433

 
$
22,379

 
$
45,484



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 per share data)
2015
 
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
200,969

 
$
56,772

Accounts and notes receivable, net of allowances of $13,220 and $13,306
580,739

 
626,192

Merchandise inventories
903,501

 
872,457

Other current assets
275,481

 
315,285

Total current assets
1,960,690

 
1,870,706

Property and equipment, net of accumulated depreciation of $173,278 and $163,377
219,372

 
232,979

Goodwill, net
421,760

 
423,276

Intangible assets, net
100,904

 
108,593

Other assets, net
92,180

 
99,852

Total assets
$
2,794,906

 
$
2,735,406

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
753,495

 
$
608,846

Accrued payroll and related liabilities
34,797

 
31,507

Deferred income taxes
41,378

 
37,979

Other accrued liabilities
288,432

 
326,223

Total current liabilities
1,118,102

 
1,004,555

Long-term debt, excluding current portion
574,623

 
608,551

Deferred income taxes
62,282

 
63,901

Other liabilities
62,772

 
67,561

Total liabilities
1,817,779

 
1,744,568

Commitments and contingencies

 

Equity
 
 
 
Owens & Minor, Inc. shareholders’ equity:
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 63,018 shares and 63,070 shares
126,036

 
126,140

Paid-in capital
205,727

 
202,934

Retained earnings
690,152

 
685,765

Accumulated other comprehensive income
(44,788
)
 
(24,001
)
Total equity
977,127

 
990,838

Total liabilities and equity
$
2,794,906

 
$
2,735,406



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)
2015
 
2014
Operating activities:
 
 
 
Net income
$
43,166

 
$
45,362

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
36,138

 
27,756

Share-based compensation expense
5,048

 
4,190

Provision for losses on accounts and notes receivable
41

 
334

Deferred income tax (benefit) expense
2,992

 
(5,151
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
41,622

 
28,477

Merchandise inventories
(31,866
)
 
(48,575
)
Accounts payable
145,682

 
54,922

Net change in other assets and liabilities
2,771

 
(32,765
)
Other, net
1,196

 
(1,078
)
Cash provided by operating activities
246,790

 
73,472

Investing activities:
 
 
 
Additions to property and equipment
(12,009
)
 
(25,657
)
Additions to computer software and intangible assets
(10,816
)
 
(13,166
)
Proceeds from sale of investment

 
1,937

Proceeds from sale of property and equipment
837

 
45

Cash used for investing activities
(21,988
)
 
(36,841
)
Financing activities:
 
 
 
Change in bank overdraft
1,530

 

Repayment of revolving credit facility
(33,700
)
 

Cash dividends paid
(31,867
)
 
(31,564
)
Repurchases of common stock
(7,440
)
 
(9,448
)
Excess tax benefits related to share-based compensation
457

 
444

Proceeds from exercise of stock options

 
1,180

Purchase of noncontrolling interest

 
(1,500
)
Other, net
(5,112
)
 
(4,441
)
Cash used for financing activities
(76,132
)
 
(45,329
)
Effect of exchange rate changes on cash and cash equivalents
(4,473
)
 
(1,180
)
Net increase (decrease) in cash and cash equivalents
144,197

 
(9,878
)
Cash and cash equivalents at beginning of period
56,772

 
101,905

Cash and cash equivalents at end of period
$
200,969

 
$
92,027

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
27,542

 
$
56,837

Interest paid
$
13,260

 
$
7,402



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 Income
(Loss)
 
Noncontrolling
Interest
 
Total
Equity
Balance December 31, 2013
63,096

 
$
126,193

 
$
196,605

 
$
691,547

 
$
9,568

 
$
1,130

 
$
1,025,043

Net income
 
 
 
 
 
 
45,362

 
 
 
 
 
45,362

Other comprehensive income
 
 
 
 
 
 
 
 
122

 
 
 
122

Dividends declared ($0.50 per share)
 
 
 
 
 
 
(31,473
)
 
 
 
 
 
(31,473
)
Shares repurchased and retired
(277
)
 
(555
)
 
 
 
(8,893
)
 
 
 
 
 
(9,448
)
Share-based compensation expense, exercises and other
247

 
495

 
3,109

 
 
 
 
 
 
 
3,604

Purchase of noncontrolling interest
 
 
 
 
(695
)
 
 
 
 
 
(1,130
)
 
(1,825
)
Balance June 30, 2014
63,066

 
$
126,133

 
$
199,019

 
$
696,543

 
$
9,690

 
$

 
$
1,031,385

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
63,070

 
$
126,140

 
$
202,934

 
$
685,765

 
$
(24,001
)
 
$

 
$
990,838

Net income
 
 
 
 
 
 
43,166

 
 
 
 
 
43,166

Other comprehensive income
 
 
 
 
 
 
 
 
(20,787
)
 
 
 
(20,787
)
Dividends declared ($0.505 per share)
 
 
 
 
 
 
(31,779
)
 
 
 
 
 
(31,779
)
Shares repurchased and retired
(220
)
 
(440
)
 
 
 
(7,000
)
 
 
 
 
 
(7,440
)
Share-based compensation expense, exercises and other
168

 
336

 
2,793

 
 
 
 
 
 
 
3,129

Balance June 30, 2015
63,018

 
$
126,036

 
$
205,727

 
$
690,152

 
$
(44,788
)
 
$

 
$
977,127



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)
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). 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year 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.
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). We determine the fair value of our derivatives based on quoted market prices. See Note 8 for the fair value of long-term debt and Note 9 for the fair value of derivatives.
Note 3—Acquisitions
On October 1, 2014, we completed the acquisition of Medical Action Industries Inc. (Medical Action), a leading producer of surgical kits and procedure trays, which enabled an expansion of our capabilities in the assembly of kits, packs and trays for the healthcare market.
On November 1, 2014, we acquired ArcRoyal, a privately held surgical kitting company based in Ireland (ArcRoyal). The transaction expanded our capabilities in the assembly of kits, packs and trays in the European healthcare market.
The combined consideration for these two acquisitions was $261.6 million, net of cash acquired, and including debt assumed of $13.4 million (capitalized lease obligations).

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 combined purchase price exceeded the preliminary estimated fair value of the net tangible and identifiable intangible assets by $151.3 million, which was allocated to goodwill. The following table presents, in the aggregate, the preliminary estimated fair value of the assets acquired and liabilities assumed recognized as of the acquisition date. Adjustments relate to revised estimates pending completion of our valuation. The allocation of purchase price to assets and liabilities acquired is not yet complete as we are working to finalize the valuation of specific fixed assets and liabilities.

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Preliminary Fair
Value Estimated as of
Acquisition Date
 
Differences Between Prior and Current Period Preliminary Fair Value Estimate
 
Preliminary Fair
Value Currently Estimated as of
Acquisition Date
Assets acquired:
 
 
 
 
 
Current assets
$
90,608

 
$
147

 
$
90,755

Property and equipment
34,048

 
(1,234
)
 
32,814

Goodwill
150,492

 
773

 
151,265

Intangible assets
77,623

 

 
77,623

Total assets
352,771

 
(314
)
 
352,457

Liabilities assumed:
 
 
 
 

Current liabilities
64,736

 
(314
)
 
64,422

Noncurrent liabilities
26,426

 

 
26,426

Total liabilities
91,162

 
(314
)
 
90,848

Fair value of net assets acquired, net of cash
$
261,609

 
$

 
$
261,609

We are amortizing the fair value of acquired intangible assets, primarily customer relationships, over their remaining weighted average useful lives of 14 years.
Goodwill of $151.3 million consists largely of expected opportunities to expand our kitting capabilities. We assigned goodwill of $21.9 million to our International segment and $129.4 million to our Domestic segment. None of the goodwill recognized is expected to be deductible for income tax purposes.
Pro forma results of operations for these acquisitions have not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements.
Acquisition-related expenses in 2015 consisted primarily of transition costs incurred to integrate the acquired operations (including certain severance and contractual payments to former management). We recognized pre-tax acquisition-related expenses of $1.8 million in the second quarter and $4.4 million year-to-date in 2015 related to these activities.
Acquisition-related expenses of $3.5 million and $4.1 million in the three and six months ended June 30, 2014 consisted of costs to perform due diligence and analysis related to the Medical Action and ArcRoyal acquisitions, as well as certain costs in Movianto to resolve issues and claims with the former owner.
Note 4—Financing Receivables and Payables
At June 30, 2015 and December 31, 2014, we had financing receivables of $157.5 million and $196.2 million and related payables of $136.5 million and $168.8 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 5—Goodwill and Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill through June 30, 2015:
 
Domestic
Segment
 
International
Segment
 
Total
Carrying amount of goodwill, December 31, 2014
$
377,089

 
$
46,187

 
$
423,276

Currency translation adjustments

 
(2,289
)
 
(2,289
)
Acquisitions (see Note 3)
773

 

 
773

Carrying amount of goodwill, June 30, 2015
$
377,862

 
$
43,898

 
$
421,760


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Intangible assets at June 30, 2015, and December 31, 2014, were as follows:
 
June 30, 2015
 
December 31, 2014
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
123,222

 
$
2,695

 
$
125,448

 
$
3,405

Accumulated amortization
(24,905
)
 
(108
)
 
(19,773
)
 
(487
)
Net intangible assets
$
98,317

 
$
2,587

 
$
105,675

 
$
2,918

At June 30, 2015, $63.2 million in net intangible assets were held in the Domestic segment and $37.7 million were held in the International segment. Amortization expense for intangible assets was $2.4 million and $1.1 million for the three months ended June 30, 2015 and 2014 and $4.9 million and $2.2 million for the six months ended June 30, 2015 and 2014.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $5.0 million for the remainder of 2015, $10.2 million for 2016, $10.0 million for 2017, $9.4 million for 2018, $9.3 million for 2019 and $9.3 million for 2020.
Note 6—Exit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations, which includes the consolidation of certain distribution and logistics centers, administrative offices and warehouses in the United States and Europe. These charges also include 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 six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Domestic segment
$
(124
)
 
$
2,303

 
$
2,515

 
$
3,596

International segment
4,045

 
1,801

 
8,717

 
3,131

Total exit and realignment charges
$
3,921

 
$
4,104

 
$
11,232

 
$
6,727

The following table summarizes the activity related to exit and realignment cost accruals through June 30, 2015 and 2014:
 
Lease
Obligations
 
Severance and
Other
 
Total
Accrued exit and realignment costs, December 31, 2014
$
3,575

 
$
2,887

 
$
6,462

Provision for exit and realignment activities
256

 
142

 
398

Cash payments, net of sublease income
(385
)
 
(873
)
 
(1,258
)
Accrued exit and realignment costs, March 31, 2015
3,446

 
2,156

 
5,602

Provision for exit and realignment activities
572

 
392

 
964

Cash payments, net of sublease income
(349
)
 
(1,171
)
 
(1,520
)
Accrued exit and realignment costs, June 30, 2015
$
3,669

 
$
1,377

 
$
5,046

 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $2.9 million of costs that were expensed as incurred for the three months ended June 30, 2015, including $1.2 million in accelerated amortization of an

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information system that has been replaced, $0.8 million in property related costs, $0.7 million in information systems costs, and $0.2 million in other costs. In the first quarter of 2015, we also incurred $6.9 million of costs that were expensed as incurred, including $3.0 million in accelerated amortization of an information system that has been replaced, $1.8 million in facility costs, $1.3 million in labor costs, $0.3 million in information systems costs and $0.5 million in other costs.
For the three months ended June 30, 2014, we recognized $1.9 million in costs that were expensed as incurred, including $0.9 million in property related costs, $0.7 million in labor costs, and $0.2 million in information technology costs. Additional expense in the first quarter of 2014 of $1.3 million were comprised of $0.5 million in relocation costs, $0.5 million in property related costs, and $0.3 million in labor and other costs.
We expect additional exit and realignment charges of approximately $1.7 million over the remainder of 2015 for activities initiated in the Domestic and International segments through June 30, 2015.
Note 7—Retirement Plans
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 six months ended June 30, 2015 and 2014, were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
32

 
$
40

 
$
65

 
$
75

Interest cost
464

 
482

 
929

 
965

Recognized net actuarial loss
401

 
202

 
802

 
406

Net periodic benefit cost
$
897

 
$
724

 
$
1,796

 
$
1,446

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 $0.5 million for the three months ended June 30, 2015 and 2014 and $1.0 million and $1.0 million for the six months ended June 30, 2015 and 2014.
Note 8—Debt
We have $275 million of 3.875% senior notes due 2021 (the “2021 Notes”) and $275 million of 4.375% senior notes due 2024 (the “2024 Notes”), with interest payable semi-annually. 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%. 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 30 basis points. As of June 30, 2015 and December 31, 2014, the estimated fair value of the 2021 Notes was $280.7 million and $275.1 million and the estimated fair value of the 2024 Notes was $279.7 million and $283.9 million, respectively.
We have a Credit Agreement with a $450 million borrowing capacity which extends through September 2019. 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. Based on our leverage ratio at June 30, 2015, the interest rate under the credit facility is LIBOR plus 1.375%.
At June 30, 2015, we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445 million available for borrowing. We also have a $1.2 million letter of credit outstanding as of June 30, 2015 and December 31, 2014, which supports our facilities leased in Europe.
The Amended Credit Agreement 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 our debt covenants at June 30, 2015.

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Note 9—Derivatives
When deemed appropriate, we use derivatives, primarily forward contracts, as a risk management tool to mitigate the potential impact of foreign currency exchange risk. The total notional values of our foreign currency derivatives was $5.7 million at June 30, 2015 and $10.0 million as of December 31, 2014. We do not currently have any derivatives designated as hedging instruments and all gains and losses resulting from changes in the fair value of derivative instruments are immediately recognized into earnings. At June 30, 2015 and December 31, 2014 the fair value of our foreign currency contracts included in other assets on the consolidated balance sheet was $0.9 million and $0.7 million. The impact from changes in the fair value of these foreign currency derivatives included in other operating expense was $0.5 million and other operating income was $0.3 million for the three and six months ended June 30, 2015. We did not hold foreign currency contracts in the first six months of 2014. We consider the risk of counterparty default to be minimal.
Note 10—Income Taxes
The effective tax rate was 41.2% and 42.7% for the three and six months ended June 30, 2015, compared to 41.1% and 40.9% in the same periods of 2014. 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 $6.0 million at June 30, 2015, and $6.7 million at December 31, 2014. Included in the liability at June 30, 2015 were $3.6 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. In the current quarter, the Company concluded the examinations of our 2012 and 2013 federal income tax returns.  The impact of these examinations on our financial statements was not material.
Note 11—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, 2015 and 2014.
 
Three Months Ended    June 30,
 
Six Months Ended    June 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
24,226

 
$
19,876

 
$
43,166

 
$
45,362

Less: income allocated to unvested restricted shares
(195
)
 
(159
)
 
(359
)
 
(345
)
Net income attributable to common shareholders - basic
24,031

 
19,717

 
42,807

 
45,017

Add: undistributed income attributable to unvested restricted shares - basic
42

 
19

 
63

 
68

Less: undistributed income attributable to unvested restricted shares - diluted
(42
)
 
(19
)
 
(63
)
 
(68
)
Net income attributable to common shareholders - diluted
$
24,031

 
$
19,717

 
$
42,807

 
$
45,017

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
62,226

 
62,311

 
62,281

 
62,271

Dilutive shares - stock options

 
5

 
1

 
9

Weighted average shares outstanding - diluted
62,226

 
62,316

 
62,282

 
62,280

Net income per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.32

 
$
0.69

 
$
0.72

Diluted
$
0.39

 
$
0.32

 
$
0.69

 
$
0.72

Note 12—Shareholders’ Equity
Our Board of Directors has 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 six months ended June 30, 2015, we repurchased in open-market transactions and retired approximately 0.2 million shares of our common stock for an aggregate of $7.4 million, or an average price per share of $33.82. As of June 30, 2015, we have approximately $82.6 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

12


Table of Contents

Note 13—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, 2015 and 2014: 
 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), March 31, 2015
$
(10,065
)
 
$
(41,588
)
 
$
7

 
$
(51,646
)
Other comprehensive income (loss) before reclassifications

 
6,606

 

 
6,606

Income tax

 

 

 

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

 
6,606

 

 
6,606

Amounts reclassified from accumulated other comprehensive income (loss)
401

 

 
(8
)
 
393

Income tax
(141
)
 

 

 
(141
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
260



 
(8
)
 
252

Other comprehensive income (loss)
260

 
6,606

 
(8
)
 
6,858

Accumulated other comprehensive income (loss), June 30, 2015
$
(9,805
)
 
$
(34,982
)
 
$
(1
)
 
$
(44,788
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), March 31, 2014
$
(6,372
)
 
$
16,359

 
$
146

 
$
10,133

Other comprehensive income (loss) before reclassifications

 
(570
)
 
29

 
(541
)
Income tax

 

 

 

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

 
(570
)
 
29

 
(541
)
Amounts reclassified from accumulated other comprehensive income (loss)
202

 

 
(22
)
 
180

Income tax
(90
)
 

 
8

 
(82
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
112

 

 
(14
)
 
98

Other comprehensive income (loss)
112

 
(570
)
 
15

 
(443
)
Accumulated other comprehensive income (loss), June 30, 2014
$
(6,260
)
 
$
15,789

 
$
161

 
$
9,690

 
 
 
 
 
 
 
 
 


13


Table of Contents

 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2014
$
(10,323
)
 
$
(13,647
)
 
$
(31
)
 
$
(24,001
)
Other comprehensive income (loss) before reclassifications

 
(21,335
)
 

 
(21,335
)
Income tax

 

 

 

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

 
(21,335
)
 

 
(21,335
)
Amounts reclassified from accumulated other comprehensive income (loss)
803

 

 
30

 
833

Income tax
(285
)
 

 

 
(285
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
518

 

 
30

 
548

Other comprehensive income (loss)
518

 
(21,335
)
 
30

 
(20,787
)
Accumulated other comprehensive income (loss), June 30, 2015
$
(9,805
)
 
$
(34,982
)
 
$
(1
)
 
$
(44,788
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), December 31, 2013
$
(6,479
)
 
$
15,892

 
$
155

 
$
9,568

Other comprehensive income (loss) before reclassifications

 
(103
)
 
31

 
(72
)
Income tax

 

 

 

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

 
(103
)
 
31

 
(72
)
Amounts reclassified from accumulated other comprehensive income (loss)
405

 

 
(41
)
 
364

Income tax
(186
)
 

 
16

 
(170
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
219

 

 
(25
)
 
194

Other comprehensive income (loss)
219

 
(103
)
 
6

 
122

Accumulated other comprehensive income (loss), June 30, 2014
$
(6,260
)
 
$
15,789

 
$
161

 
$
9,690

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 six months ended June 30, 2015, we reclassified $0.4 million and $0.8 million of actuarial net losses. For the three and six months ended June 30, 2014, we reclassified $0.2 million and $0.4 million of actuarial net losses.
Note 14—Commitments and Contingencies
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 the first quarter of 2015, we settled our dispute and terminated the service contract with a customer in the United Kingdom. As part of the settlement, we entered into a transition agreement for the transfer of services back to this customer and paid approximately $3.9 million that was fully accrued at December 31, 2014. Substantially all outstanding accounts receivable as of December 31, 2014 related to this contract have been received.
Note 15—Segment Information
We evaluate the performance of our segments based on their operating earnings excluding acquisition-related and exit and realignment charges, certain purchase price fair value adjustments, and other substantive items that, either as a result of their nature or size, would not be expected to occur as part of the our normal business operations on a regular basis.


14


Table of Contents

The following tables present financial information by segment:
 
Three Months Ended   June 30,
 
Six Months Ended   June 30,
 
2015
 
2014
 
2015
 
2014
Net revenue:
 
 
 
 
 
 
 
Domestic
$
2,317,661

 
$
2,187,535

 
$
4,603,296

 
$
4,336,451

International
104,506

 
118,323

 
210,067

 
225,788

Consolidated net revenue
$
2,422,167

 
$
2,305,858

 
$
4,813,363

 
$
4,562,239

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Domestic
$
52,390

 
$
48,317

 
$
102,901

 
$
101,053

International
1,177

 
(3,623
)
 
1,557

 
(6,811
)
Acquisition-related and exit and realignment charges (1)
(5,707
)
 
(7,593
)
 
(15,623
)
 
(10,855
)
Consolidated operating earnings
$
47,860

 
$
37,101

 
$
88,835

 
$
83,387

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Domestic
$
10,504

 
$
8,812

 
$
21,242

 
$
17,787

International
5,277

 
5,080

 
10,708

 
9,969

Consolidated depreciation and amortization
$
15,781

 
$
13,892

 
$
31,950

 
$
27,756

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Domestic
$
3,384

 
$
18,858

 
$
12,035

 
$
29,033

International
7,875

 
5,737

 
10,790

 
9,790

Consolidated capital expenditures
$
11,259

 
$
24,595

 
$
22,825

 
$
38,823

 
 
June 30, 2015
 
December 31, 2014
Total assets:
 
 
 
Domestic
$
2,130,996

 
$
2,139,972

International
462,941

 
538,662

Segment assets
2,593,937

 
2,678,634

Cash and cash equivalents
200,969

 
56,772

Consolidated total assets
$
2,794,906

 
$
2,735,406

(1) The three and six months ended June 30, 2015 include $1.2 million and $4.2 million, respectively in accelerated amortization related to an information system that is being replaced.


15


Table of Contents

Note 16—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 2021 Notes and 2024 Notes, on a combined basis; and the non-guarantor subsidiaries of the 2021 Notes and 2024 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, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,279,725

 
$
178,844

 
$
(36,402
)
 
$
2,422,167

Cost of goods sold

 
2,064,515

 
95,570

 
(36,255
)
 
2,123,830

Gross margin

 
215,210

 
83,274

 
(147
)
 
298,337

Selling, general and administrative expenses
626

 
160,348

 
70,524

 

 
231,498

Acquisition-related and exit and realignment charges

 
256

 
5,451

 

 
5,707

Depreciation and amortization

 
8,910

 
6,550

 

 
15,460

Other operating income, net

 
(1,354
)
 
(834
)
 

 
(2,188
)
Operating earnings (loss)
(626
)
 
47,050

 
1,583

 
(147
)
 
47,860

Interest expense (income), net
6,938

 
(233
)
 
(25
)
 

 
6,680

Income (loss) before income taxes
(7,564
)
 
47,283

 
1,608

 
(147
)
 
41,180

Income tax (benefit) provision

 
16,973

 
(19
)
 

 
16,954

Equity in earnings of subsidiaries
31,790

 

 

 
(31,790
)
 

Net income (loss)
24,226

 
30,310

 
1,627

 
(31,937
)
 
24,226

Other comprehensive income (loss)
6,858

 
(21,839
)
 
28,696

 
(6,857
)
 
6,858

Comprehensive income (loss)
$
31,084

 
$
8,471

 
$
30,323

 
$
(38,794
)
 
$
31,084


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Table of Contents

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

 
$
2,187,130

 
$
137,683

 
$
(18,955
)
 
$
2,305,858

Cost of goods sold

 
1,978,815

 
63,299

 
(18,528
)
 
2,023,586

Gross margin

 
208,315

 
74,384

 
(427
)
 
282,272

Selling, general and administrative expenses
61

 
152,122

 
73,655

 

 
225,838

Acquisition-related and exit and realignment charges

 
3,886

 
3,707

 

 
7,593

Depreciation and amortization
2

 
8,790

 
5,100

 

 
13,892

Other operating income, net

 
(814
)
 
(1,338
)
 

 
(2,152
)
Operating earnings (loss)
(63
)
 
44,331

 
(6,740
)
 
(427
)
 
37,101

Interest expense (income), net
2,924

 
791

 
(373
)
 

 
3,342

Income (loss) before income taxes
(2,987
)
 
43,540

 
(6,367
)
 
(427
)
 
33,759

Income tax (benefit) provision
(1,200
)
 
17,808

 
(2,725
)
 

 
13,883

Equity in earnings of subsidiaries
21,663

 

 

 
(21,663
)
 

Net income (loss)
19,876

 
25,732

 
(3,642
)
 
(22,090
)
 
19,876

Other comprehensive income (loss)
(443
)
 
111

 
(570
)
 
459

 
(443
)
Comprehensive income (loss)
$
19,433

 
$
25,843

 
$
(4,212
)
 
$
(21,631
)
 
$
19,433

Six Months Ended June 30, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
4,529,430

 
$
360,204

 
$
(76,271
)
 
$
4,813,363

Cost of goods sold

 
4,098,327

 
195,608

 
(76,510
)
 
4,217,425

Gross margin

 
431,103

 
164,596

 
239

 
595,938

Selling, general and administrative expenses
665

 
320,925

 
143,733

 

 
465,323

Acquisition-related and exit and realignment charges

 
3,833

 
11,790

 

 
15,623

Depreciation and amortization

 
18,014

 
13,315

 

 
31,329

Other operating income, net

 
(2,331
)
 
(2,841
)
 

 
(5,172
)
Operating earnings (loss)
(665
)
 
90,662

 
(1,401
)
 
239

 
88,835

Interest expense (income), net
12,885

 
581

 
94

 

 
13,560

Income (loss) before income taxes
(13,550
)
 
90,081

 
(1,495
)
 
239

 
75,275

Income tax (benefit) provision
(773
)
 
31,759

 
1,123

 

 
32,109

Equity in earnings of subsidiaries
55,943

 

 

 
(55,943
)
 

Net income (loss)
43,166

 
58,322

 
(2,618
)
 
(55,704
)
 
43,166

Other comprehensive income (loss)
(20,787
)
 
(21,335
)
 
548

 
20,787

 
(20,787
)
Comprehensive income (loss)
$
22,379

 
$
36,987

 
$
(2,070
)
 
$
(34,917
)
 
$
22,379


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Table of Contents

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

 
$
4,335,495

 
$
257,558

 
$
(30,814
)
 
$
4,562,239

Cost of goods sold

 
3,918,280

 
110,897

 
(30,406
)
 
3,998,771

Gross margin

 
417,215

 
146,661

 
(408
)
 
563,468

Selling, general and administrative expenses
14

 
306,372

 
145,062

 

 
451,448

Acquisition-related and exit and realignment charges

 
5,180

 
5,675

 

 
10,855

Depreciation and amortization
1

 
17,741

 
10,014

 

 
27,756

Other operating income, net

 
(7,877
)
 
(2,101
)
 

 
(9,978
)
Operating earnings (loss)
(15
)
 
95,799

 
(11,989
)
 
(408
)
 
83,387

Interest expense (income), net
5,399

 
2,034

 
(844
)
 

 
6,589

Income (loss) before income taxes
(5,414
)
 
93,765

 
(11,145
)
 
(408
)
 
76,798

Income tax (benefit) provision
(2,155
)
 
37,994

 
(4,403
)
 

 
31,436

Equity in earnings of subsidiaries
48,621

 

 

 
(48,621
)
 

Net income (loss)
45,362

 
55,771

 
(6,742
)
 
(49,029
)
 
45,362

Other comprehensive income (loss)
122

 
218

 
(103
)
 
(115
)
 
122

Comprehensive income (loss)
$
45,484

 
$
55,989

 
$
(6,845
)
 
$
(49,144
)
 
$
45,484



18


Table of Contents

June 30, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
105,427

 
$
46,639

 
$
48,903

 
$

 
$
200,969

Accounts and notes receivable, net

 
485,256

 
105,346

 
(9,863
)
 
580,739

Merchandise inventories

 
852,396

 
55,272

 
(4,167
)
 
903,501

Other current assets
299

 
94,214

 
179,717

 
1,251

 
275,481

Total current assets
105,726

 
1,478,505

 
389,238

 
(12,779
)
 
1,960,690

Property and equipment, net

 
108,373

 
110,999

 

 
219,372

Goodwill, net

 
247,271

 
174,489

 

 
421,760

Intangible assets, net

 
14,768

 
86,136

 

 
100,904

Due from O&M and subsidiaries

 
513,448

 

 
(513,448
)
 

Advances to and investment in consolidated subsidiaries
1,897,461

 

 

 
(1,897,461
)
 

Other assets, net
4,347

 
62,413

 
25,420

 

 
92,180

Total assets
$
2,007,534

 
$
2,424,778

 
$
786,282

 
$
(2,423,688
)
 
$
2,794,906

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
713,907

 
$
48,470

 
$
(8,882
)
 
$
753,495

Accrued payroll and related liabilities

 
23,485

 
11,312

 

 
34,797

Deferred income taxes

 
43,160

 
(1,782
)
 

 
41,378

Other accrued liabilities
7,004

 
99,024

 
182,404

 

 
288,432

Total current liabilities
7,004

 
879,576

 
240,404

 
(8,882
)
 
1,118,102

Long-term debt, excluding current portion
547,905

 
5,395

 
21,323

 

 
574,623

Due to O&M and subsidiaries
475,498

 

 
77,464

 
(552,962
)
 

Intercompany debt

 
138,890

 

 
(138,890
)
 

Deferred income taxes

 
32,974

 
29,308

 

 
62,282