10-Q

 
 
 
 
 
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, 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 October 23, 2015, was 62,885,282 shares.
 
 
 
 
 



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)
2015
 
2014
 
2015
 
2014
Net revenue
$
2,471,669

 
$
2,386,126

 
$
7,285,032

 
$
6,948,365

Cost of goods sold
2,165,315

 
2,093,643

 
6,382,740

 
6,092,413

Gross margin
306,354

 
292,483

 
902,292


855,952

Selling, general and administrative expenses
231,847

 
231,377

 
697,170

 
682,825

Acquisition-related and exit and realignment charges
6,134

 
13,957

 
21,757

 
24,813

Depreciation and amortization
15,112

 
13,841

 
46,441

 
41,597

Other operating income, net
(311
)
 
(2,069
)
 
(5,484
)
 
(12,046
)
Operating earnings
53,572

 
35,377

 
142,408

 
118,763

Interest expense, net
6,744

 
4,304

 
20,305

 
10,893

Loss on early retirement of debt

 
14,890

 

 
14,890

Income before income taxes
46,828

 
16,183

 
122,103

 
92,980

Income tax provision
18,652

 
9,028

 
50,761

 
40,464

Net income
$
28,176

 
$
7,155

 
$
71,342

 
$
52,516

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.11

 
$
1.14

 
$
0.84

Diluted
$
0.45

 
$
0.11

 
$
1.14

 
$
0.84

Cash dividends per common share
$
0.2525

 
$
0.25

 
$
0.7575

 
$
0.75



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)
2015
 
2014
 
2015
 
2014
Net income
$
28,176

 
$
7,155

 
$
71,342

 
$
52,516

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2015 and 2014)
2,054

 
(16,796
)
 
(19,281
)
 
(16,899
)
Change in unrecognized net periodic pension costs (net of income tax of $117 and $402 in 2015 and $57 and $245 in 2014)
284

 
132

 
802

 
351

Other (net of income tax of $0 in 2015 and $56 and $72 in 2014)
(105
)
 
(133
)
 
(75
)
 
(127
)
Total other comprehensive income (loss), net of tax
2,233

 
(16,797
)
 
(18,554
)
 
(16,675
)
Comprehensive income (loss)
$
30,409

 
$
(9,642
)
 
$
52,788

 
$
35,841



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)
2015
 
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
125,245

 
$
56,772

Accounts and notes receivable, net of allowances of $12,719 and $13,306
640,653

 
626,192

Merchandise inventories
896,722

 
872,457

Other current assets
265,758

 
315,285

Total current assets
1,928,378

 
1,870,706

Property and equipment, net of accumulated depreciation of $186,580 and $163,377
214,561

 
232,979

Goodwill
420,772

 
423,276

Intangible assets, net
98,084

 
108,593

Other assets, net
89,865

 
99,852

Total assets
$
2,751,660

 
$
2,735,406

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
690,134

 
$
608,846

Accrued payroll and related liabilities
38,834

 
31,507

Deferred income taxes
41,763

 
37,979

Other accrued liabilities
296,898

 
326,223

Total current liabilities
1,067,629

 
1,004,555

Long-term debt, excluding current portion
574,033

 
608,551

Deferred income taxes
61,037

 
63,901

Other liabilities
62,860

 
67,561

Total liabilities
1,765,559

 
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 - 62,932 shares and 63,070 shares
125,863

 
126,140

Paid-in capital
208,216

 
202,934

Retained earnings
694,577

 
685,765

Accumulated other comprehensive income (loss)
(42,555
)
 
(24,001
)
Total equity
986,101

 
990,838

Total liabilities and equity
$
2,751,660

 
$
2,735,406



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)
2015
 
2014
Operating activities:
 
 
 
Net income
$
71,342

 
$
52,516

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
51,871

 
41,597

Loss on early retirement of debt

 
14,890

Share-based compensation expense
7,611

 
6,136

Provision for losses on accounts and notes receivable
(182
)
 
(356
)
Deferred income tax (benefit) expense
3,643

 
(7,387
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(13,758
)
 
(21,456
)
Merchandise inventories
(25,339
)
 
(63,883
)
Accounts payable
83,434

 
54,634

Net change in other assets and liabilities
25,890

 
3,131

Other, net
1,526

 
1,322

Cash provided by operating activities
206,038

 
81,144

Investing activities:
 
 
 
Additions to property and equipment
(15,321
)
 
(36,169
)
Additions to computer software and intangible assets
(16,876
)
 
(17,988
)
Proceeds from sale of investment

 
1,937

Proceeds from sale of property and equipment
119

 
151

Cash used for investing activities
(32,078
)
 
(52,069
)
Financing activities:
 
 
 
Long-term debt borrowings

 
547,693

Repayment of revolving credit facility
(33,700
)
 

Cash dividends paid
(47,780
)
 
(47,335
)
Repurchases of common stock
(15,821
)
 
(9,934
)
Excess tax benefits related to share-based compensation
521

 
514

Proceeds from exercise of stock options

 
1,180

Purchase of noncontrolling interest

 
(1,500
)
Debt issuance costs

 
(4,178
)
Other, net
(6,296
)
 
(5,671
)
Cash provided by (used for) financing activities
(103,076
)
 
480,769

Effect of exchange rate changes on cash and cash equivalents
(2,411
)
 
(1,602
)
Net increase in cash and cash equivalents
68,473

 
508,242

Cash and cash equivalents at beginning of period
56,772

 
101,905

Cash and cash equivalents at end of period
$
125,245

 
$
610,147

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
38,709

 
$
65,140

Interest paid
$
20,195

 
$
8,417



See accompanying notes to consolidated financial statements.
6


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
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
63,070

 
$
126,140

 
$
202,934

 
$
685,765

 
$
(24,001
)
 
$

 
$
990,838

Net income
 
 
 
 
 
 
71,342

 
 
 
 
 
71,342

Other comprehensive loss
 
 
 
 
 
 
 
 
(18,554
)
 
 
 
(18,554
)
Dividends declared ($0.7575 per share)
 
 
 
 
 
 
(47,648
)
 
 
 
 
 
(47,648
)
Shares repurchased and retired
(469
)
 
(938
)
 
 
 
(14,882
)
 
 
 
 
 
(15,820
)
Share-based compensation expense, exercises and other
331

 
661

 
5,282

 
 
 
 
 
 
 
5,943

Balance September 30, 2015
62,932

 
$
125,863

 
$
208,216

 
$
694,577

 
$
(42,555
)
 
$

 
$
986,101



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). 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
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 estimate of their fair values at the date of acquisition, with certain exceptions permitted under GAAP. The combined purchase price exceeded the estimated fair value of the net tangible and identifiable intangible assets by $150.6 million, which was allocated to goodwill. The following table presents, in the aggregate, the estimated fair value of the assets acquired and liabilities assumed recognized as of the acquisition date.

8



 
Preliminary Fair
Value Estimated as of
Acquisition Date
 
Measurement Period Adjustments Recorded in 2015
 
Fair
Value as of
Acquisition Date
Assets acquired:
 
 
 
 
 
Current assets
$
90,608

 
$
(229
)
 
$
90,379

Property and equipment
34,048

 
(2,502
)
 
31,546

Goodwill
150,492

 
121

 
150,613

Intangible assets
77,623

 

 
77,623

Total assets
352,771

 
(2,610
)
 
350,161

Liabilities assumed:
 
 
 
 
 
Current liabilities
64,736

 
(1,187
)
 
63,549

Noncurrent liabilities
26,426

 
(1,423
)
 
25,003

Total liabilities
91,162

 
(2,610
)
 
88,552

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 $150.6 million consists largely of expected opportunities to expand our kitting capabilities. We assigned goodwill of $20.9 million to our International segment and $129.7 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 $1.3 million in the third quarter and $5.5 million year-to-date in 2015 related to these activities.
Acquisition-related expenses of $4.6 million and $8.7 million in the three and nine months ended September 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 and the transition of certain information technology functions.
Note 4—Financing Receivables and Payables
At September 30, 2015 and December 31, 2014, we had financing receivables of $156.1 million and $196.2 million and related payables of $101.9 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 September 30, 2015:
 
Domestic
Segment
 
International
Segment
 
Consolidated
Carrying amount of goodwill, December 31, 2014
$
377,089

 
$
46,187

 
$
423,276

Currency translation adjustments

 
(2,625
)
 
(2,625
)
Acquisitions (see Note 3)
1,109

 
(988
)
 
121

Carrying amount of goodwill, September 30, 2015
$
378,198

 
$
42,574

 
$
420,772


9



Intangible assets at September 30, 2015, and December 31, 2014, were as follows:
 
September 30, 2015
 
December 31, 2014
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
123,013

 
$
2,574

 
$
125,448

 
$
3,405

Accumulated amortization
(27,513
)
 
10

 
(19,773
)
 
(487
)
Net intangible assets
$
95,500

 
$
2,584

 
$
105,675

 
$
2,918

At September 30, 2015, $61.6 million in net intangible assets were held in the Domestic segment and $36.5 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 September 30, 2015 and 2014 and $7.2 million and $3.4 million for the nine months ended September 30, 2015 and 2014.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $2.6 million for the remainder of 2015, $10.1 million for 2016, $10.0 million for 2017, $9.4 million for 2018, $9.2 million for 2019 and $9.2 million for 2020.
Note 6—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, 2015 and 2014 were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Domestic segment
$
1,582

 
$
4,654

 
$
4,096

 
$
8,250

International segment
3,217

 
4,738

 
12,135

 
7,869

Consolidated exit and realignment charges
$
4,799

 
$
9,392

 
$
16,231

 
$
16,119


    

10



The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2015 and 2014:
 
Lease
Obligations
 
Severance
 
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

Provision for exit and realignment activities

 
1,033

 
1,033

Cash payments, net of sublease income
(446
)
 
(285
)
 
(731
)
Accrued exit and realignment costs, September 30, 2015
$
3,223

 
$
2,125

 
$
5,348

 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $3.8 million and $13.8 million of costs that were expensed as incurred for the three and nine months ended September 30, 2015, including $0.3 million and $4.5 million in accelerated amortization on an information system that has been replaced, $0.4 million and $3.0 million in other facility costs and asset write-downs, $1.0 million and $2.5 million in labor costs, $0.5 million and $0.5 million in professional fees, $1.2 million and $2.2 million in information systems costs and $0.4 million and $1.1 million in other costs.
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 expect additional charges of approximately $3.5 million over the remainder of 2015 for activities initiated in the Domestic and International segments through September 30, 2015.
Note 7—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, 2015 and 2014, were as follows:

11



 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
32

 
$
60

 
$
97

 
$
136

Interest cost
464

 
482

 
1,393

 
1,446

Recognized net actuarial loss
401

 
204

 
1,203

 
612

Net periodic benefit cost
$
897

 
$
746

 
$
2,693

 
$
2,194

Certain of our foreign subsidiaries have health and welfare plans covering substantially all of their respective employees. Our expense for these plans totaled $0.4 million and $0.5 million for the three months ended September 30, 2015 and 2014 and $1.4 million and $1.4 million for the nine months ended September 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 September 30, 2015 and December 31, 2014, the estimated fair value of the 2021 Notes was $279.4 million and $275.1 million and the estimated fair value of the 2024 Notes was $276.2 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 September 30, 2015, the interest rate under the credit facility is LIBOR plus 1.375%.
At September 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 and $1.5 million letter of credit outstanding as of September 30, 2015 and December 31, 2014, respectively, 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 September 30, 2015.
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 $3.9 million at September 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 September 30, 2015 and December 31, 2014 the fair value of our foreign currency contracts included in other assets on the consolidated balance sheet was $0.7 million. The impact from changes in the fair value of these foreign currency derivatives included in other operating expense was $0.3 million and $0.1 million for the three and nine months ended September 30, 2015. We did not hold foreign currency contracts in the first nine months of 2014. We consider the risk of counterparty default to be minimal.
Note 10—Income Taxes
The effective tax rate was 39.8% and 41.6% for the three and nine months ended September 30, 2015, compared to 55.8% and 43.5% 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 $6.2 million at September 30, 2015, and $6.7 million at December 31, 2014. Included in the liability at September 30, 2015 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.

12



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 nine months ended September 30, 2015 and 2014.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share data)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income
$
28,176

 
$
7,155

 
$
71,342

 
$
52,516

Less: income allocated to unvested restricted shares
(262
)
 
(150
)
 
(620
)
 
(453
)
Net income attributable to common shareholders - basic
27,914

 
7,005

 
70,722

 
52,063

Add: undistributed income attributable to unvested restricted shares - basic
67

 

 
129

 
26

Less: undistributed income attributable to unvested restricted shares - diluted
(67
)
 

 
(129
)
 
(26
)
Net income attributable to common shareholders - diluted
$
27,914

 
$
7,005

 
$
70,722

 
$
52,063

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
61,998

 
62,175

 
62,204

 
62,238

Dilutive shares - stock options

 
4

 
1

 
7

Weighted average shares outstanding - diluted
61,998

 
62,179

 
62,205

 
62,245

Net income per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.11

 
$
1.14

 
$
0.84

Diluted
$
0.45

 
$
0.11

 
$
1.14

 
$
0.84

Note 12—Shareholders’ Equity
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, 2015, we repurchased in open-market transactions and retired approximately 0.5 million shares of our common stock for an aggregate of $15.8 million, or an average price per share of $33.72. As of September 30, 2015, we have approximately $74.2 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

13



Note 13—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, 2015 and 2014: 
 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), June 30, 2015
$
(9,805
)
 
$
(34,982
)
 
$
(1
)
 
$
(44,788
)
Other comprehensive income (loss) before reclassifications

 
2,054

 

 
2,054

Income tax

 

 

 

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

 
2,054

 

 
2,054

Amounts reclassified from accumulated other comprehensive income (loss)
401

 

 
(105
)
 
296

Income tax
(117
)
 

 

 
(117
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
284

 

 
(105
)
 
179

Other comprehensive income (loss)
284

 
2,054

 
(105
)
 
2,233

Accumulated other comprehensive income (loss), September 30, 2015
$
(9,521
)
 
$
(32,928
)
 
$
(106
)
 
$
(42,555
)
 
 
 
 
 
 
 
 
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
)
 


14



 
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

 
(19,281
)
 

 
(19,281
)
Income tax

 

 

 

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

 
(19,281
)
 

 
(19,281
)
Amounts reclassified from accumulated other comprehensive income (loss)
1,204

 

 
(75
)
 
1,129

Income tax
(402
)
 

 

 
(402
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
802

 

 
(75
)
 
727

Other comprehensive income (loss)
802

 
(19,281
)
 
(75
)
 
(18,554
)
Accumulated other comprehensive income (loss), September 30, 2015
$
(9,521
)
 
$
(32,928
)
 
$
(106
)
 
$
(42,555
)
 
 
 
 
 
 
 
 
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
)
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, 2015, we reclassified $0.4 million and $1.2 million of actuarial net losses. For the three and nine months ended September 30, 2014, we reclassified $0.2 million and $0.6 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.

15



Note 15—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,
 
2015
 
2014
 
2015
 
2014
Net revenue:
 
 
 
 
 
 
 
Domestic
$
2,368,008

 
$
2,262,081

 
$
6,971,304

 
$
6,598,531

International
103,661

 
124,045

 
313,728

 
349,834

Consolidated net revenue
$
2,471,669

 
$
2,386,126


$
7,285,032


$
6,948,365

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Domestic
$
58,002

 
$
50,797

 
$
160,904

 
$
151,849

International
1,704

 
(1,463
)
 
3,261

 
(8,273
)
Acquisition-related and exit and realignment charges (1)
(6,134
)
 
(13,957
)
 
(21,757
)
 
(24,813
)
Consolidated operating earnings
$
53,572


$
35,377


$
142,408


$
118,763

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Domestic
$
10,197

 
$
8,986

 
$
31,439

 
$
26,772

International
5,250

 
4,855

 
15,958

 
14,825

Consolidated depreciation and amortization
$
15,447

 
$
13,841


$
47,397


$
41,597

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Domestic
$
2,137

 
$
11,077

 
$
14,172

 
$
40,110

International
7,235

 
4,257

 
18,025

 
14,047

Consolidated capital expenditures
$
9,372


$
15,334


$
32,197


$
54,157

 
 
September 30, 2015
 
December 31, 2014
Total assets:
 
 
 
Domestic
$
2,135,572

 
$
2,139,972

International
490,843

 
538,662

Segment assets
2,626,415

 
2,678,634

Cash and cash equivalents
125,245

 
56,772

Consolidated total assets
$
2,751,660

 
$
2,735,406


( 1) The three and nine months ended September 30, 2015 include $0.3 million and $4.5 million , respectively in accelerated amortization related to an information system that was replaced.


16



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

 
$
2,321,301

 
$
194,659

 
$
(44,291
)
 
$
2,471,669

Cost of goods sold

 
2,106,623

 
102,923

 
(44,231
)
 
2,165,315

Gross margin

 
214,678

 
91,736

 
(60
)
 
306,354

Selling, general and administrative expenses
27

 
162,697

 
69,123

 

 
231,847

Acquisition-related and exit and realignment charges

 
1,980

 
4,154

 

 
6,134

Depreciation and amortization

 
8,639

 
6,473

 

 
15,112

Other operating income, net

 
(28
)
 
(283
)
 

 
(311
)
Operating earnings (loss)
(27
)
 
41,390

 
12,269

 
(60
)
 
53,572

Interest expense (income), net
7,257

 
(1,235
)
 
722

 

 
6,744

Income (loss) before income taxes
(7,284
)
 
42,625

 
11,547

 
(60
)
 
46,828

Income tax (benefit) provision

 
10,927

 
7,725

 

 
18,652

Equity in earnings of subsidiaries
35,460

 

 

 
(35,460
)
 

Net income (loss)
28,176

 
31,698

 
3,822

 
(35,520
)
 
28,176

Other comprehensive income (loss)
2,233

 
179

 
2,054

 
(2,233
)
 
2,233

Comprehensive income (loss)
$
30,409

 
$
31,877

 
$
5,876

 
$
(37,753
)
 
$
30,409



17



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

 
$
6,850,731

 
$
554,862

 
$
(120,561
)
 
$
7,285,032

Cost of goods sold

 
6,204,950

 
298,530

 
(120,740
)
 
6,382,740

Gross margin

 
645,781

 
256,332

 
179

 
902,292

Selling, general and administrative expenses
696

 
483,616

 
212,858

 

 
697,170

Acquisition-related and exit and realignment charges

 
5,813

 
15,944

 

 
21,757

Depreciation and amortization

 
26,653

 
19,788

 

 
46,441

Other operating income, net

 
(2,360
)
 
(3,124
)
 

 
(5,484
)
Operating earnings (loss)
(696
)
 
132,059

 
10,866

 
179

 
142,408

Interest expense (income), net
20,142

 
(654
)
 
817

 

 
20,305

Income (loss) before income taxes
(20,838
)
 
132,713

 
10,049

 
179

 
122,103

Income tax (benefit) provision
(773
)
 
42,683

 
8,851

 

 
50,761

Equity in earnings of subsidiaries
91,407

 

 

 
(91,407
)
 

Net income (loss)
71,342

 
90,030

 
1,198

 
(91,228
)
 
71,342

Other comprehensive income (loss)
(18,554
)
 
726

 
(19,280
)
 
18,554

 
(18,554
)
Comprehensive income (loss)
$
52,788

 
$
90,756

 
$
(18,082
)
 
$
(72,674
)
 
$
52,788



18



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



19



September 30, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
82,189

 
$
18,768

 
$
24,288

 
$

 
$
125,245

Accounts and notes receivable, net

 
506,406

 
142,912

 
(8,665
)
 
640,653

Merchandise inventories

 
839,533

 
61,416

 
(4,227
)
 
896,722

Other current assets
202

 
89,582

 
174,706

 
1,268

 
265,758

Total current assets
82,391

 
1,454,289

 
403,322

 
(11,624
)
 
1,928,378

Property and equipment, net

 
104,905

 
109,656

 

 
214,561

Goodwill

 
247,271

 
173,501

 

 
420,772

Intangible assets, net

 
14,249

 
83,835

 

 
98,084

Due from O&M and subsidiaries

 
509,462

 

 
(509,462
)
 

Advances to and investment in consolidated subsidiaries
1,965,108

 

 

 
(1,965,108
)
 

Other assets, net
4,226

 
59,846

 
25,793

 

 
89,865

Total assets
$
2,051,725

 
$
2,390,022

 
$
796,107

 
$
(2,486,194
)
 
$
2,751,660

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
644,126

 
$
53,607

 
$
(7,599
)
 
$
690,134

Accrued payroll and related liabilities

 
26,541

 
12,293

 

 
38,834

Deferred income taxes