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Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________ 
FORM 10-Q
________________________________________________ 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 28, 2016, was 61,509,219 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 September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Net revenue
$
2,415,601

 
$
2,471,669

 
$
7,355,069

 
$
7,285,032

Cost of goods sold
2,119,326

 
2,165,315

 
6,462,739

 
6,382,740

Gross margin
296,275

 
306,354

 
892,330


902,292

Distribution, selling, and administrative expenses
241,305

 
246,959

 
726,944

 
743,611

Acquisition-related and exit and realignment charges
2,739

 
6,134

 
19,974

 
21,757

Other operating income, net
(1,337
)
 
(311
)
 
(5,179
)
 
(5,484
)
Operating earnings
53,568

 
53,572

 
150,591

 
142,408

Interest expense, net
6,770

 
6,744

 
20,324

 
20,305

Income before income taxes
46,798

 
46,828

 
130,267

 
122,103

Income tax provision
16,967

 
18,652

 
48,585

 
50,761

Net income
$
29,831

 
$
28,176

 
$
81,682

 
$
71,342

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.45

 
$
1.32

 
$
1.14

Diluted
$
0.48

 
$
0.45

 
$
1.32

 
$
1.14

Cash dividends per common share
$
0.255

 
$
0.2525

 
$
0.765

 
$
0.7575



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)
2016
 
2015
 
2016
 
2015
Net income
$
29,831

 
$
28,176

 
$
81,682

 
$
71,342

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2016 and 2015)
1,401

 
2,054

 
2,443

 
(19,281
)
Change in unrecognized net periodic pension costs (net of income tax of $194 and $532 in 2016 and $117 and $402 in 2015)
218

 
284

 
701

 
802

Other (net of income tax of $0 in 2016 and 2015)
82

 
(105
)
 
119

 
(75
)
Total other comprehensive income (loss), net of tax
1,701

 
2,233

 
3,263

 
(18,554
)
Comprehensive income
$
31,532

 
$
30,409

 
$
84,945

 
$
52,788



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)
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
213,096

 
$
161,020

Accounts and notes receivable, net of allowances of $12,927 and $13,177
579,031

 
587,935

Merchandise inventories
944,897

 
940,775

Other current assets
283,753

 
284,970

Total current assets
2,020,777

 
1,974,700

Property and equipment, net of accumulated depreciation of $202,535 and $189,105
198,780

 
208,930

Goodwill, net
418,095

 
419,619

Intangible assets, net
86,982

 
95,250

Other assets, net
69,998

 
75,277

Total assets
$
2,794,632

 
$
2,773,776

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
768,570

 
$
710,609

Accrued payroll and related liabilities
41,424

 
45,907

Other current liabilities
283,831

 
307,073

Total current liabilities
1,093,825

 
1,063,589

Long-term debt, excluding current portion
566,474

 
568,495

Deferred income taxes
83,553

 
86,326

Other liabilities
64,097

 
62,776

Total liabilities
1,807,949

 
1,781,186

Commitments and contingencies

 

Equity
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 61,699 shares and 62,803 shares
123,398

 
125,606

Paid-in capital
216,866

 
211,943

Retained earnings
694,981

 
706,866

Accumulated other comprehensive loss
(48,562
)
 
(51,825
)
Total equity
986,683

 
992,590

Total liabilities and equity
$
2,794,632

 
$
2,773,776



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)
2016
 
2015
Operating activities:
 
 
 
Net income
$
81,682

 
$
71,342

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
42,182

 
51,871

Share-based compensation expense
8,934

 
7,611

Provision for losses on accounts and notes receivable
(216
)
 
(182
)
Deferred income tax (benefit) expense
(3,233
)
 
3,643

Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
5,023

 
(13,758
)
Merchandise inventories
(5,066
)
 
(25,339
)
Accounts payable
58,742

 
83,434

Net change in other assets and liabilities
(44,903
)
 
25,890

Other, net
686

 
1,526

Cash provided by operating activities
143,831

 
206,038

Investing activities:
 
 
 
Additions to property and equipment
(13,682
)
 
(15,321
)
Additions to computer software and intangible assets
(7,081
)
 
(16,876
)
Proceeds from sale of property and equipment
4,497

 
119

Cash used for investing activities
(16,266
)
 
(32,078
)
Financing activities:
 
 
 
Change in bank overdraft
21,753

 
—

Repayment of revolving credit facility
—

 
(33,700
)
Cash dividends paid
(47,802
)
 
(47,780
)
Repurchases of common stock
(48,654
)
 
(15,821
)
Excess tax benefits related to share-based compensation
680

 
521

Other, net
(8,118
)
 
(6,296
)
Cash used for financing activities
(82,141
)
 
(103,076
)
Effect of exchange rate changes on cash and cash equivalents
6,652

 
(2,411
)
Net increase (decrease) in cash and cash equivalents
52,076

 
68,473

Cash and cash equivalents at beginning of period
161,020

 
56,772

Cash and cash equivalents at end of period
$
213,096

 
$
125,245

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
57,996

 
$
38,709

Interest paid
$
20,023

 
$
20,195



See accompanying notes to consolidated financial statements.
6

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
 
 
 
(in thousands, except per share data)
Common
Shares
Outstanding
 
Common 
Stock
($ 2 par value )
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Total
Equity
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

 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2015
62,803

 
$
125,606

 
$
211,943

 
$
706,866

 
$
(51,825
)
 
$
992,590

Net income
 
 
 
 
 
 
81,682

 
 
 
81,682

Other comprehensive income
 
 
 
 
 
 
 
 
3,263

 
3,263

Dividends declared ($0.765 per share)
 
 
 
 
 
 
(47,671
)
 
 
 
(47,671
)
Shares repurchased and retired
(1,378
)
 
(2,757
)
 
 
 
(45,896
)
 
 
 
(48,653
)
Share-based compensation expense, exercises and other
274

 
549

 
4,923

 
 
 
 
 
5,472

Balance September 30, 2016
61,699

 
$
123,398

 
$
216,866

 
$
694,981

 
$
(48,562
)
 
$
986,683



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.
Recently, we have made certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting. These changes align our operations into three distinct business units: Domestic, International and Clinical & Procedural Solutions (CPS). Domestic is our U.S. distribution, logistics and value-added services business, while International is our European distribution, logistics and value-added services business. CPS provides product-related solutions, including surgical and procedural kitting and sourcing. Beginning with the quarter ended March 31, 2016, we now report our financial results using this three segment structure and have recast prior year segment results on the same basis.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. Depreciation and
amortization, previously reported as a separate financial statement line item in the consolidated statements of income is now
included in distribution, selling and administrative expenses for all periods presented.
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 estimated amounts that would be received or paid to terminate the contracts at the reporting date based on current market prices for applicable currencies. See Note 7 for the fair value of long-term debt and Note 8 for the fair value of derivatives.
Note 3—Financing Receivables and Payables
At September 30, 2016 and December 31, 2015, we had financing receivables of $190.7 million and $198.5 million and related payables of $98.4 million and $148.5 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
In connection with our new three segment structure, goodwill has been reallocated based on the relative fair value of the underlying reporting units. We performed an interim impairment analysis in the first quarter of 2016 as a result of this change and noted no impairment. The following table summarizes the changes in the carrying amount of goodwill through September 30, 2016:
 
Domestic
 
International
 
CPS
 
Consolidated
Carrying amount of goodwill, December 31, 2015
$
180,006

 
$
23,426

 
$
216,187

 
$
419,619

Currency translation adjustments
—

 
(2,022
)
 
498

 
(1,524
)
Carrying amount of goodwill, September 30, 2016
$
180,006

 
$
21,404

 
$
216,685

 
$
418,095


8


Intangible assets at September 30, 2016, and December 31, 2015, were as follows:
 
September 30, 2016
 
December 31, 2015
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
120,999

 
$
3,910

 
$
121,888

 
$
4,621

Accumulated amortization
(36,125
)
 
(1,802
)
 
(29,872
)
 
(1,387
)
Net intangible assets
$
84,874

 
$
2,108

 
$
92,016

 
$
3,234

At September 30, 2016, $12.2 million in net intangible assets were held in the Domestic segment, $12.0 million were held in the International segment and $62.8 million were held in the CPS segment. Amortization expense for intangible assets was $2.2 million and $2.4 million for the three months ended September 30, 2016 and 2015 and $6.6 million and $7.2 million for the nine months ended September 30, 2016 and 2015.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $2.7 million for the remainder of 2016, $9.7 million for 2017, $9.1 million for 2018, $9.0 million for 2019, $8.9 million for 2020 and $8.5 million for 2021.
Note 5—Exit and Realignment Charges
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 nine months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Domestic segment
$
1,224

 
$
1,582

 
$
14,194

 
$
4,096

International segment
457

 
3,217

 
3,284

 
12,135

CPS segment
465

 
—

 
1,574

 
—

Total exit and realignment charges
$
2,146

 
$
4,799

 
$
19,052

 
$
16,231


9


For the three and nine months ended September 30, 2016, $0.4 million and $11.6 million in charges were associated with our voluntary employee separation program and other severance activities. The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2016 and 2015:
 
Lease
Obligations
 
Severance and
Other
 
Total
Accrued exit and realignment costs, December 31, 2015
$
486

 
$
1,840

 
$
2,326

Provision for exit and realignment activities
—

 
9,895

 
9,895

Cash payments, net of sublease income
(486
)
 
(1,287
)
 
(1,773
)
Accrued exit and realignment costs, March 31, 2016
—

 
10,448

 
10,448

Provision for exit and realignment activities
—

 
1,254

 
1,254

Cash payments, net of sublease income
—

 
(7,087
)
 
(7,087
)
Accrued exit and realignment costs, June 30, 2016
—

 
4,615

 
4,615

Provision for exit and realignment activities
—

 
725

 
725

Change in Estimate
—

 
(268
)
 
(268
)
Cash payments, net of sublease income
—

 
(2,066
)
 
(2,066
)
Accrued exit and realignment costs, September 30, 2016
$
—

 
$
3,006

 
$
3,006

 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $1.7 million of costs that were expensed as incurred for the three months ended September 30, 2016, including $0.7 million in other facility costs, $0.5 million in labor costs, $0.4 million in information systems costs, and $0.1 million in other costs. For the nine months ended September 30, 2016, we recognized $7.4 million of costs that were expensed as incurred, including $3.6 million in consulting costs, $1.8 million in information system costs, $0.7 million in other facility costs, $0.5 million in labor costs, and $0.8 million in other costs.
In the three months ended September 30, 2015, we also incurred $3.8 million of costs that were expensed as incurred, including $1.2 million in information system costs, $1.0 million in labor costs, $0.5 million in professional fees, $0.4 million in other facility costs and asset write-downs, $0.3 million in accelerated amortization on an information system that has been replaced, and $0.4 million in other costs. For the nine months ended September 30, 2015, we also incurred $13.8 million of costs that were expensed as incurred, including $4.5 million in accelerated amortization on an information system that has been replaced, $3.0 million in other facility costs and asset write-downs, $2.5 million in labor costs, $2.2 million in information systems costs, $0.5 million in professional fees, and $1.1 million in other costs.

10

Table of Contents

Note 6—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 distribution, selling and administrative expenses, for the three and nine months ended September 30, 2016 and 2015, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
27

 
$
32

 
$
70

 
$
97

Interest cost
508

 
464

 
1,523

 
1,393

Recognized net actuarial loss
412

 
401

 
1,236

 
1,203

Net periodic benefit cost
$
947

 
$
897

 
$
2,829

 
$
2,693

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 for the three months ended September 30, 2016 and 2015 and $1.3 million and $1.4 million for the nine months ended September 30, 2016 and 2015.
Note 7—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, 2016 and December 31, 2015, the estimated fair value of the 2021 Notes was $284.5 million and $273.7 million and the estimated fair value of the 2024 Notes was $284.4 million and $272.8 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, 2016, the interest rate under the credit facility is LIBOR plus 1.375%.
At September 30, 2016, 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 September 30, 2016 and December 31, 2015, 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, 2016.
Note 8—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. At September 30, 2016, we did not have any derivatives outstanding. The total notional values of our foreign currency derivatives as of December 31, 2015 was $2.0 million. In 2016 and 2015, we did not have any derivatives designated as hedging instruments and all gains and losses resulting from changes in the fair value of derivative instruments were immediately recognized into earnings. At December 31, 2015, the fair value of our foreign currency contracts included in other assets on the consolidated balance sheet was $0.4 million. There was no impact from changes in the fair value of these foreign currency derivatives included in other operating expense for the three months ended September 30, 2016. The impact from changes in the fair value of these foreign currency derivatives included in other operating expense was $0.4 million for the nine months ended September 30, 2016. 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 consider the risk of counterparty default to be minimal.

11

Table of Contents

Note 9—Income Taxes
The effective tax rate was 36.3% and 37.3% for the three and nine months ended September 30, 2016, compared to 39.8% and 41.6% in the same periods of 2015. The change in rate resulted from a higher percentage of the company's pretax income earned in lower tax rate jurisdictions compared to prior year and the deductibility of certain prior year acquisition-related charges for income tax purposes. The liability for unrecognized tax benefits was $9.6 million at September 30, 2016, and $7.7 million at December 31, 2015. Included in the liability at September 30, 2016 were $4.6 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
Note 10—Net Income per Common Share
The following summarizes the calculation of net income per common share attributable to common shareholders for the three and nine months ended September 30, 2016 and 2015.
 
Three Months Ended    September 30,
 
Nine Months Ended    September 30,
(in thousands, except per share data)
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
29,831

 
$
28,176

 
$
81,682

 
$
71,342

Less: income allocated to unvested restricted shares
(291
)
 
(262
)
 
(855
)
 
(620
)
Net income attributable to common shareholders - basic
29,540

 
27,914

 
80,827

 
70,722

Add: undistributed income attributable to unvested restricted shares - basic
80

 
67

 
216

 
129

Less: undistributed income attributable to unvested restricted shares - diluted
(80
)
 
(67
)
 
(216
)
 
(129
)
Net income attributable to common shareholders - diluted
$
29,540

 
$
27,914

 
$
80,827

 
$
70,722

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
61,015

 
61,998

 
61,405

 
62,204

Dilutive shares - stock options
—

 
—

 
—

 
1

Weighted average shares outstanding - diluted
61,015

 
61,998

 
61,405

 
62,205

Net income per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic
$
0.48

 
$
0.45

 
$
1.32

 
$
1.14

Diluted
$
0.48

 
$
0.45

 
$
1.32

 
$
1.14

Note 11—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. Purchases under the share repurchase program are made either pursuant to 10b5-1 plans entered into by the company from time to time and/or during the company’s scheduled quarterly trading windows for officers and directors. During the nine months ended September 30, 2016, we repurchased in open-market transactions and retired approximately 1.4 million shares of our common stock for an aggregate of $48.7 million, or an average price per share of $35.29. As of September 30, 2016, we have approximately $21.3 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.
In October 2016, our Board of Directors authorized a new share repurchase program of up to $100 million of the company’s outstanding common stock to be executed at the discretion of management over a three-year period. The new authorization will take effect upon the earlier of the completion of the existing authorization, or its expiration. The timing of repurchases and the exact number of shares of common stock to be purchased will depend upon market conditions and other factors and may be suspended or discontinued at any time.

12


Note 12—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, 2016 and 2015: 
 
Retirement Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), June 30, 2016
$
(9,999
)
 
$
(40,186
)
 
$
(78
)
 
$
(50,263
)
Other comprehensive income (loss) before reclassifications
—

 
1,401

 
82

 
1,483

Income tax
—

 
—

 
—

 
—

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

 
1,401

 
82

 
1,483

Amounts reclassified from accumulated other comprehensive income (loss)
412

 
—

 
—

 
412

Income tax
(194
)
 
—

 
—

 
(194
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
218

—

—

 
—

 
218

Other comprehensive income (loss)
218

 
1,401

 
82

 
1,701

Accumulated other comprehensive income (loss), September 30, 2016
$
(9,781
)
 
$
(38,785
)
 
$
4

 
$
(48,562
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), June 30, 2015
$
(9,805
)
 
$
(34,982
)
 
$
(1
)
 
$
(44,788
)
Other comprehensive income (loss) before reclassifications
—

 
2,054

 
(105
)
 
1,949

Income tax
—

 
—

 
—

 
—

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

 
2,054

 
(105
)
 
1,949

Amounts reclassified from accumulated other comprehensive income (loss)
401

 
—

 
—

 
401

Income tax
(117
)
 
—

 
—

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

 
—

 
—

 
284

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
)
 
 
 
 
 
 
 
 
 


13


 
Retirement Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2015
$
(10,482
)
 
$
(41,228
)
 
$
(115
)
 
$
(51,825
)
Other comprehensive income (loss) before reclassifications
—

 
2,443

 
119

 
2,562

Income tax
—

 
—

 
—

 
—

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

 
2,443

 
119

 
2,562

Amounts reclassified from accumulated other comprehensive income (loss)
1,233

 
—

 
—

 
1,233

Income tax
(532
)
 
—

 
—

 
(532
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
701

 
—

 
—

 
701

Other comprehensive income (loss)
701

 
2,443

 
119

 
3,263

Accumulated other comprehensive income (loss), September 30, 2016
$
(9,781
)
 
$
(38,785
)
 
$
4

 
$
(48,562
)
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss), December 31, 2014
$
(10,323
)
 
$
(13,647
)
 
$
(31
)
 
$
(24,001
)
Other comprehensive income (loss) before reclassifications
—

 
(19,281
)
 
(75
)
 
(19,356
)
Income tax
—

 
—

 
—

 
—

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

 
(19,281
)
 
(75
)
 
(19,356
)
Amounts reclassified from accumulated other comprehensive income (loss)
1,204

 
—

 
—

 
1,204

Income tax
(402
)
 
—

 
—

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

 
—

 
—

 
802

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
)
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 distribution, selling and administrative expenses. For the three months ended September 30, 2016 and 2015, we reclassified $0.4 million of actuarial net losses. For the nine months ended September 30, 2016 and 2015, we reclassified $1.2 million of actuarial net losses.
Note 13—Segment Information
We periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under three segments: Domestic, International and Clinical & Procedural Solutions (CPS). The Domestic segment includes our United States distribution, logistics and value-added services business. The International segment consists of our European distribution, logistics and value-added services business. CPS provides product-related solutions, including surgical and procedural kitting and sourcing.
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 our normal business operations on a regular basis. Segment assets exclude inter-segment account balances as we believe their inclusion would be misleading or not meaningful. We believe all inter-segment sales are at prices that approximate market.

14


The following tables present financial information by segment:
 
Three Months Ended   September 30,
 
Nine Months Ended   September 30,
 
2016
 
2015
 
2016
 
2015
Net revenue:
 
 
 
 
 
 
 
Segment net revenue
 
 
 
 
 
 
 
Domestic
$
2,287,233

 
$
2,321,301

 
$
6,954,687

 
$
6,850,731

International
83,751

 
92,777

 
255,861

 
281,144

CPS
132,705

 
143,866

 
409,022

 
409,225

Total segment net revenue
$
2,503,689

 
$
2,557,944

 
$
7,619,570

 
$
7,541,100

Inter-segment revenue
 
 
 
 
 
 
 
CPS
(88,088
)
 
(86,275
)
 
(264,501
)
 
(256,068
)
Total inter-segment revenue
(88,088
)
 
(86,275
)
 
(264,501
)
 
(256,068
)
Consolidated net revenue
$
2,415,601

 
$
2,471,669

 
$
7,355,069

 
$
7,285,032

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Domestic
$
41,034

 
$
41,979

 
$
126,202

 
$
118,478

International
1,382

 
1,649

 
3,402

 
2,492

CPS
14,340

 
16,604

 
41,866

 
43,636

Inter-segment eliminations
(449
)
 
(526
)
 
(905
)
 
(441
)
Acquisition-related and exit and realignment charges (1)
(2,739
)
 
(6,134
)
 
(19,974
)
 
(21,757
)
Consolidated operating earnings
$
53,568

 
$
53,572

 
$
150,591

 
$
142,408

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Domestic
$
7,360

 
$
8,621

 
$
22,399

 
$
26,592

International
4,259

 
4,792

 
13,125

 
14,430

CPS
2,218

 
2,034

 
6,658

 
6,375

Consolidated depreciation and amortization
$
13,837

 
$
15,447

 
$
42,182

 
$
47,397

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Domestic
$
3,071

 
$
2,041

 
$
10,274

 
$
13,399

International
3,223

 
7,235

 
8,053

 
18,025

CPS
1,009

 
96

 
2,436

 
773

Consolidated capital expenditures
$
7,303

 
$
9,372

 
$
20,763

 
$
32,197

 
 
September 30, 2016
 
December 31, 2015
Total assets:
 
 
 
Domestic
$
1,677,898

 
$
1,728,345

International
460,616

 
464,003

CPS
443,022

 
420,408

Segment assets
2,581,536

 
2,612,756

Cash and cash equivalents
213,096

 
161,020

Consolidated total assets
$
2,794,632

 
$
2,773,776

(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 has been replaced in the International segment.

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 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, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$
—

 
$
2,287,335

 
$
168,216

 
$
(39,950
)
 
$
2,415,601

Cost of goods sold
—

 
2,070,639

 
89,192

 
(40,505
)
 
2,119,326

Gross margin
—

 
216,696

 
79,024

 
555

 
296,275

Distribution, selling and administrative expenses
(52
)
 
169,451

 
71,906

 
—

 
241,305

Acquisition-related and exit and realignment charges
—

 
2,237

 
502

 


 
2,739

Other operating income, net
—

 
(1,205
)
 
(132
)
 
—

 
(1,337
)
Operating earnings (loss)
52

 
46,213

 
6,748

 
555

 
53,568

Interest expense (income), net
7,403

 
(1,345
)
 
712

 
—

 
6,770

Income (loss) before income taxes
(7,351
)
 
47,558

 
6,036

 
555

 
46,798

Income tax (benefit) provision
—

 
14,131

 
2,836

 
—

 
16,967

Equity in earnings of subsidiaries
37,182

 
—

 
—

 
(37,182
)
 
—

Net income (loss)
29,831

 
33,427

 
3,200

 
(36,627
)
 
29,831

Other comprehensive income (loss)
1,701

 
299

 
1,402

 
(1,701
)
 
1,701

Comprehensive income (loss)
$
31,532

 
$
33,726

 
$
4,602

 
$
(38,328
)
 
$
31,532

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

Distribution, selling and administrative expenses
27

 
171,336

 
75,596

 
—

 
246,959

Acquisition-related and exit and realignment charges
—

 
1,980

 
4,154

 
—

 
6,134

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


16


Nine Months Ended September 30, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$
—

 
$
6,954,983

 
$
516,131

 
$
(116,045
)
 
$
7,355,069

Cost of goods sold
—

 
6,305,489

 
273,927

 
(116,677
)
 
6,462,739

Gross margin
—

 
649,494

 
242,204

 
632

 
892,330

Distribution, selling and administrative expenses
838

 
504,984

 
221,122

 
—

 
726,944

Acquisition-related and exit and realignment charges
—

 
15,888

 
4,086

 
—

 
19,974

Other operating income, net
—

 
(3,952
)
 
(1,227
)
 
—

 
(5,179
)
Operating earnings (loss)
(838
)
 
132,574

 
18,223

 
632

 
150,591

Interest expense (income), net
21,134

 
(2,808
)
 
1,998

 
—

 
20,324

Income (loss) before income taxes
(21,972
)
 
135,382

 
16,225

 
632

 
130,267

Income tax (benefit) provision
—

 
40,237

 
8,348

 
—

 
48,585

Equity in earnings of subsidiaries
103,654

 
—

 
—

 
(103,654
)
 
—

Net income (loss)
81,682

 
95,145

 
7,877

 
(103,022
)
 
81,682

Other comprehensive income (loss)
3,263

 
821

 
2,442

 
(3,263
)
 
3,263

Comprehensive income (loss)
$
84,945

 
$
95,966

 
$
10,319

 
$
(106,285
)
 
$
84,945

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

Distribution, selling and administrative expenses
696

 
510,269

 
232,646

 
—

 
743,611

Acquisition-related and exit and realignment charges
—

 
5,813

 
15,944

 
—

 
21,757

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



17


September 30, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
156,484

 
$
20,001

 
$
36,611

 
$
—

 
$
213,096

Accounts and notes receivable, net
—

 
493,650

 
95,000

 
(9,619
)
 
579,031

Merchandise inventories
—

 
886,894

 
59,758

 
(1,755
)
 
944,897

Other current assets
73

 
81,341

 
202,339

 
—

 
283,753

Total current assets
156,557

 
1,481,886

 
393,708

 
(11,374
)
 
2,020,777

Property and equipment, net
—

 
98,570

 
100,210

 
—

 
198,780

Goodwill, net
—

 
180,006

 
238,089

 
—

 
418,095

Intangible assets, net
—

 
12,174

 
74,808

 
—

 
86,982

Due from O&M and subsidiaries
—

 
671,236

 
—

 
(671,236
)
 
—

Advances to and investment in consolidated subsidiaries
2,048,858

 
—

 
—

 
(2,048,858
)
 
—

Other assets, net
—

 
52,287

 
17,711

 
—

 
69,998

Total assets
$
2,205,415

 
$
2,496,159

 
$
824,526

 
$
(2,731,468
)
 
$
2,794,632

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
717,969

 
$
59,834

 
$
(9,233
)
 
$
768,570

Accrued payroll and related liabilities
—

 
31,562

 
9,862

 
—

 
41,424

Other current liabilities
9,170

 
119,756

 
154,905

 
—

 
283,831

Total current liabilities
9,170

 
869,287

 
224,601

 
(9,233
)
 
1,093,825

Long-term debt, excluding current portion
544,624

 
3,577

 
18,273

 
—

 
566,474

Due to O&M and subsidiaries
664,938

 
—

 
59,328

 
(724,266
)
 
—

Intercompany debt
—

 
138,890

 
—