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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, 2017
OR
o
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, a smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
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 27, 2017, was 61,249,613 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)
2017
 
2016
 
2017
 
2016
Net revenue
$
2,333,961

 
$
2,415,601

 
$
6,928,441

 
$
7,355,069

Cost of goods sold
2,032,019

 
2,119,326

 
6,071,787

 
6,462,739

Gross margin
301,942

 
296,275

 
856,654


892,330

Distribution, selling, and administrative expenses
261,045

 
241,305

 
735,353

 
726,944

Acquisition-related and exit and realignment charges
9,299

 
2,739

 
21,134

 
19,974

Other operating (income) expense, net
1,927

 
(1,337
)
 
2,143

 
(5,179
)
Operating earnings
29,671

 
53,568

 
98,024

 
150,591

Interest expense, net
8,737

 
6,770

 
22,218

 
20,324

Income before income taxes
20,934

 
46,798

 
75,806

 
130,267

Income tax provision
10,063

 
16,967

 
26,010

 
48,585

Net income
$
10,871

 
$
29,831

 
$
49,796

 
$
81,682

Net income per common share:
 
 
 
 
 
 
 
Basic and diluted
$
0.18

 
$
0.48

 
$
0.82

 
$
1.32

Cash dividends per common share
$
0.2575

 
$
0.255

 
$
0.7725

 
$
0.765



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)
2017
 
2016
 
2017
 
2016
Net income
$
10,871

 
$
29,831

 
$
49,796

 
$
81,682

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2017 and 2016)
12,254

 
1,401

 
40,151

 
2,443

Change in unrecognized net periodic pension costs (net of income tax of $220 and $665 in 2017 and $194 and $532 in 2016)
236

 
218

 
702

 
701

Other (net of income tax of $0 in 2017 and 2016)
94

 
82

 
288

 
119

Total other comprehensive income (loss), net of tax
12,584

 
1,701

 
41,141

 
3,263

Comprehensive income
$
23,455

 
$
31,532

 
$
90,937

 
$
84,945



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)
2017
 
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
98,415

 
$
185,488

Accounts receivable, net of allowances of $14,609 and $13,538
732,756

 
606,084

Merchandise inventories
989,251

 
916,311

Other current assets
311,499

 
254,156

Total current assets
2,131,921

 
1,962,039

Property and equipment, net of accumulated depreciation of $224,970 and $201,399
203,587

 
191,718

Goodwill, net
690,230

 
414,936

Intangible assets, net
231,886

 
82,511

Other assets, net
76,532

 
66,548

Total assets
$
3,334,156

 
$
2,717,752

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
875,630

 
$
750,750

Accrued payroll and related liabilities
31,998

 
45,051

Other current liabilities
296,663

 
238,837

Total current liabilities
1,204,291

 
1,034,638

Long-term debt, excluding current portion
917,256

 
564,583

Deferred income taxes
137,539

 
90,383

Other liabilities
71,286

 
68,110

Total liabilities
2,330,372

 
1,757,714

Commitments and contingencies

 

Equity
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 61,249 shares and 61,031 shares
122,499

 
122,062

Paid-in capital
224,183

 
219,955

Retained earnings
683,444

 
685,504

Accumulated other comprehensive loss
(26,342
)
 
(67,483
)
Total equity
1,003,784

 
960,038

Total liabilities and equity
$
3,334,156

 
$
2,717,752



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)
2017
 
2016
Operating activities:
 
 
 
Net income
$
49,796

 
$
81,682

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
41,060

 
42,182

Share-based compensation expense
8,592

 
8,934

Provision for losses on accounts receivable
1,158

 
(216
)
Deferred income tax (benefit) expense
(4,585
)
 
(3,233
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(79,114
)
 
5,023

Merchandise inventories
(56,134
)
 
(5,066
)
Accounts payable
79,787

 
58,742

Net change in other assets and liabilities
(40,634
)
 
(44,903
)
Other, net
5,719

 
1,366

Cash provided by operating activities
5,645

 
144,511

Investing activities:
 
 
 
Acquisition, net of cash acquired
(366,569
)
 
—

Additions to property and equipment
(24,963
)
 
(13,682
)
Additions to computer software and intangible assets
(12,826
)
 
(7,081
)
Proceeds from sale of property and equipment
780

 
4,497

Cash used for investing activities
(403,578
)
 
(16,266
)
Financing activities:
 
 
 
Change in bank overdraft
—

 
21,753

Proceeds from debt issuance
250,000

 
—

Borrowing under revolving credit facility
117,200

 
—

Financing costs paid
(1,798
)
 
—

Cash dividends paid
(47,316
)
 
(47,802
)
Repurchases of common stock
(5,000
)
 
(48,654
)
Other, net
(7,363
)
 
(8,118
)
Cash provided by (used for) financing activities
305,723

 
(82,821
)
Effect of exchange rate changes on cash and cash equivalents
5,137

 
6,652

Net increase (decrease) in cash and cash equivalents
(87,073
)
 
52,076

Cash and cash equivalents at beginning of period
185,488

 
161,020

Cash and cash equivalents at end of period
$
98,415

 
$
213,096

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
26,917

 
$
57,996

Interest paid
$
19,951

 
$
20,023



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, 2015
62,803

 
$
125,606

 
$
211,943

 
$
706,866

 
$
(51,825
)
 
$
992,590

Net income
 
 
 
 
 
 
81,682

 
 
 
81,682

Other comprehensive loss
 
 
 
 
 
 
 
 
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

 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
61,031

 
$
122,062

 
$
219,955

 
$
685,504

 
$
(67,483
)
 
$
960,038

Net income
 
 
 
 
 
 
49,796

 
 
 
49,796

Other comprehensive income
 
 
 
 
 
 
 
 
41,141

 
41,141

Dividends declared ($0.7725 per share)
 
 
 
 
 
 
(47,169
)
 
 
 
(47,169
)
Shares repurchased and retired
(155
)
 
(310
)
 
 
 
(4,687
)
 
 
 
(4,997
)
Share-based compensation expense, exercises and other
373

 
747

 
4,228

 
 
 
 
 
4,975

Balance September 30, 2017
61,249

 
$
122,499

 
$
224,183

 
$
683,444

 
$
(26,342
)
 
$
1,003,784



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. The Clinical & Procedural Solutions (CPS) business segment has been renamed "Proprietary Products" effective January 1, 2017. Byram Healthcare (Byram), acquired on August 1, 2017, is included in the Domestic segment. There have been no other changes to the segment composition or our method of measuring segment operating earnings.
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, if any, 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 8 for the fair value of long-term debt.
Note 3—Acquisition
On August 1, 2017, we completed the acquisition of Byram Healthcare, a leading domestic distributor of reimbursable medical supplies sold directly to patients and home health agencies.
The consideration was $367 million, net of cash acquired, which is subject to final working capital adjustments with the seller. The purchase price was allocated on a preliminary basis to the underlying assets acquired and liabilities assumed based upon our current estimate of their fair values at the date of acquisition. The purchase price exceeded the preliminary estimated fair value of the net tangible and identifiable intangible assets by $263 million, which was allocated to goodwill. The following table presents the preliminary estimated fair value of the assets acquired and liabilities assumed recognized as of the acquisition date. The fair value of intangibles from this acquisition was primarily determined by applying the income approach, using several significant unobservable inputs for projected cash flows and a discount rate. These inputs are considered Level 3 inputs. The allocation of purchase price to assets and liabilities acquired is not yet complete.

8

Table of Contents

 
Preliminary Fair
Value Estimated as of
Acquisition Date
Assets acquired:
 
Current assets
$
62,902

Goodwill
263,155

Intangible assets
156,000

Noncurrent assets
3,615

Total assets
485,672

Liabilities assumed:
 
Current liabilities
72,397

Noncurrent liabilities
46,706

Total liabilities
119,103

Fair value of net assets acquired, net of cash
$
366,569

We are amortizing the preliminary fair value of acquired intangible assets, primarily customer relationships and a tradename, over their estimated remaining weighted average useful lives of 10 years.
Goodwill of $263 million, which we assigned to our Domestic segment, consists largely of expected opportunities to expand into the non-acute market with direct to patient distribution capabilities. None of the goodwill recognized is expected to be deductible for income tax purposes.
Pro forma results of operations for Byram has not been presented because the effects on revenue and net income were not material to our historic consolidated financial statements.
Acquisition-related expenses in the current year consisted primarily of transaction costs incurred to perform due diligence and to analyze, negotiate and consummate the Byram acquisition, and costs to transition the acquired operations. We recognized pre-tax acquisition-related expenses of $3.1 million in 2017 related to these activities.
Note 4—Financing Receivables and Payables
At September 30, 2017 and December 31, 2016, we had financing receivables of $176.9 million and $156.5 million and related payables of $105.5 million and $110.0 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, 2017:
 
Domestic
 
International
 
Proprietary Products
 
Consolidated
Carrying amount of goodwill, December 31, 2016
$
180,006

 
$
19,391

 
$
215,539

 
$
414,936

Acquisition (See Note 3)
263,155

 
—

 
—

 
263,155

Currency translation adjustments
—

 
10,001

 
2,138

 
12,139

Carrying amount of goodwill, September 30, 2017
$
443,161

 
$
29,392

 
$
217,677

 
$
690,230


9


Intangible assets at September 30, 2017, and December 31, 2016, were as follows:
 
September 30, 2017
 
December 31, 2016
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 

 
 
Gross intangible assets
$
241,444

 
$
41,483

 
$
118,223

 
$
4,045

Accumulated amortization
(48,757
)
 
(2,284
)
 
(38,429
)
 
(1,328
)
Net intangible assets
$
192,687

 
$
39,199

 
$
79,794

 
$
2,717

At September 30, 2017, $163.5 million in net intangible assets were held in the Domestic segment, $10.2 million were held in the International segment and $58.2 million were held in the Proprietary Products segment. Amortization expense for intangible assets was $5.1 million and $2.2 million for the three months ended September 30, 2017 and 2016 and $9.7 million and $6.6 million for the nine months ended September 30, 2017 and 2016.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $11.6 million for the remainder of 2017, $24.6 million for 2018, $24.7 million for 2019, $24.7 million for 2020, $24.4 million for 2021 and $23.5 million for 2022.
Note 6—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, 2017 and 2016 were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Domestic segment
$
3,880

 
$
1,224

 
$
12,421

 
$
14,194

International segment
574

 
457

 
1,406

 
3,284

Proprietary Products segment
592

 
465

 
1,015

 
1,574

Total exit and realignment charges
$
5,046

 
$
2,146

 
$
14,842

 
$
19,052


10


The following table summarizes the activity related to exit and realignment cost accruals through September 30, 2017 and 2016:
 
Lease
Obligations
 
Severance and
Other
 
Total
Accrued exit and realignment costs, December 31, 2016
$
—

 
$
2,238

 
$
2,238

Provision for exit and realignment activities
—

 
3,211

 
3,211

Change in estimate
—

 
(304
)
 
(304
)
Cash payments
—

 
(3,034
)
 
(3,034
)
Accrued exit and realignment costs, March 31, 2017
—

 
2,111

 
2,111

Provision for exit and realignment activities
—

 
1,382

 
1,382

Change in estimate
—

 
(18
)
 
(18
)
Cash payments
—

 
(667
)
 
(667
)
Accrued exit and realignment costs, June 30, 2017
—

 
2,808

 
2,808

Provision for exit and realignment activities
—

 
3,156

 
3,156

Cash payments
—

 
(423
)
 
(423
)
Accrued exit and realignment costs, September 30, 2017
$
—

 
$
5,541

 
$
5,541

 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $1.9 million of costs that were expensed as incurred for the three months ended September 30, 2017, including $1.7 million in information system restructuring costs, and $0.2 million in other costs. For the nine months ended September 30, 2017, we recognized $7.4 million of costs that were expensed as incurred, including $4.5 million in asset write-downs, $1.9 million in information system restructuring costs and $1.0 million in other costs.
We 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.

11

Table of Contents

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 distribution, selling and administrative expenses, for the three and nine months ended September 30, 2017 and 2016, were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
26

 
$
27

 
$
53

 
$
70

Interest cost
474

 
508

 
1,422

 
1,523

Recognized net actuarial loss
456

 
412

 
1,367

 
1,236

Net periodic benefit cost
$
956

 
$
947

 
$
2,842

 
$
2,829

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 $0.4 million for the three months ended September 30, 2017 and 2016 and $1.3 million for the nine months ended September 30, 2017 and 2016.
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, 2017 and December 31, 2016, the estimated fair value of the 2021 Notes was $280.1 million and $274.5 million and the estimated fair value of the 2024 Notes was $276.9 million and $270.0 million, respectively.
On July 27, 2017, we entered into a new Credit Agreement replacing the Amended Credit Agreement. The new agreement provides borrowing capacity of $600 million and a $250 million term loan. We make principal payments under the term loan on a quarterly basis with the remaining outstanding principal due in five years. The revolving credit facility has a five-year maturity. The proceeds from the new borrowing were primarily used to fund the Byram acquisition which closed on August 1, 2017. Under the 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 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 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 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, 2017, the interest rate under the credit facility is LIBOR plus 1.375%.
At September 30, 2017, we had borrowings of $117.2 million under the revolver and letters of credit of approximately $5.1 million outstanding under the Credit Agreement, leaving $477.7 million available for borrowing. We also had a letter of credit outstanding for $1.3 million as of September 30, 2017 and $1.1 million at December 31, 2016, which supports our facilities leased in Europe.
The 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, 2017.

12

Table of Contents

Note 9—Income Taxes
The effective tax rate was 48.1% and 34.3% for the three and nine months ended September 30, 2017, compared to 36.3% and 37.3% in the same periods of 2016. The changes in the effective tax rate compared to 2016 resulted primarily from a change in income mix among different tax rate jurisdictions and the effect of certain acquisition-related costs which were not deductible for tax purposes offset on a year to date basis by the release of an income tax valuation allowance in Europe for $3.4 million during the second quarter of 2017.
The liability for unrecognized tax benefits was $13.3 million at September 30, 2017, and $10.7 million at December 31, 2016. Included in the liability at September 30, 2017 were $5.0 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, 2017 and 2016.
 
Three Months Ended    September 30,
 
Nine Months Ended    September 30,
(in thousands, except per share data)
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income
$
10,871

 
$
29,831

 
$
49,796

 
$
81,682

Less: income allocated to unvested restricted shares
(279
)
 
(291
)
 
(738
)
 
(855
)
Net income attributable to common shareholders - basic
10,592

 
29,540

 
49,058

 
80,827

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

 
80

 
16

 
216

Less: undistributed income attributable to unvested restricted shares - diluted
—

 
(80
)
 
(16
)
 
(216
)
Net income attributable to common shareholders - diluted
$
10,592

 
$
29,540

 
$
49,058

 
$
80,827

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
59,849

 
61,015

 
60,010

 
61,405

Net income per share attributable to common shareholders:
 
 
 
 
 
 
 
Basic and diluted
$
0.18

 
$
0.48

 
$
0.82

 
$
1.32

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 December 2019. 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. 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, 2017, we repurchased in open-market transactions and retired approximately 0.2 million shares of our common stock for an aggregate of $5.0 million, or an average price per share of $32.27. As of September 30, 2017, we have approximately $94.0 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 12—Accumulated Other Comprehensive Income (Loss)
The following table shows the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2017 and 2016: 
 
Retirement Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), June 30, 2017
$
(10,743
)
 
$
(28,348
)
 
$
165

 
$
(38,926
)
Other comprehensive income (loss) before reclassifications
—

 
12,254

 
94

 
12,348

Income tax
—

 
—

 
—

 
—

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

 
12,254

 
94

 
12,348

Amounts reclassified from accumulated other comprehensive income (loss)
456

 
—

 
—

 
456

Income tax
(220
)
 
—

 
—

 
(220
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
236

—

—

 
—

 
236

Other comprehensive income (loss)
236

 
12,254

 
94

 
12,584

Accumulated other comprehensive income (loss), September 30, 2017
$
(10,507
)
 
$
(16,094
)
 
$
259

 
$
(26,342
)
 
 
 
 
 
 
 
 
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
)
 
 
 
 
 
 
 
 
 


14


 
Retirement Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2016
$
(11,209
)
 
$
(56,245
)
 
$
(29
)
 
$
(67,483
)
Other comprehensive income (loss) before reclassifications


 
40,151

 
288

 
40,439

Income tax
—

 
—

 
—

 
—

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

 
40,151

 
288

 
40,439

Amounts reclassified from accumulated other comprehensive income (loss)
1,367

 
—

 
—

 
1,367

Income tax
(665
)
 
—

 
—

 
(665
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
702

 
—

 
—

 
702

Other comprehensive income (loss)
702

 
40,151

 
288

 
41,141

Accumulated other comprehensive income (loss), September 30, 2017
$
(10,507
)
 
$
(16,094
)
 
$
259

 
$
(26,342
)
 
 
 
 
 
 
 
 
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
)
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 and nine months ended September 30, 2017, we reclassified $0.5 million and $1.4 million of actuarial net losses. For the three and nine months ended September 30, 2016, we reclassified $0.4 million and $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 Proprietary Products. The Domestic segment includes our United States distribution, logistics and value-added services business. Byram, acquired on August 1, 2017, is included in the Domestic segment. The International segment consists of our European distribution, logistics and value-added services business. Proprietary Products 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.

15


The following tables present financial information by segment:
 
Three Months Ended   September 30,
 
Nine Months Ended   September 30,
 
2017
 
2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Segment net revenue
 
 
 
 
 
 
 
Domestic
$
2,194,143

 
$
2,287,233

 
$
6,518,571

 
$
6,954,687

International
96,661

 
83,751

 
287,555

 
255,861

Proprietary Products
124,542

 
132,705

 
392,654

 
409,022

Total segment net revenue
$
2,415,346

 
$
2,503,689

 
$
7,198,780

 
$
7,619,570

Inter-segment revenue

 
 
 

 

Proprietary Products
(81,385
)
 
(88,088
)
 
(270,339
)
 
(264,501
)
Total inter-segment revenue
(81,385
)
 
(88,088
)
 
(270,339
)
 
(264,501
)
Consolidated net revenue
$
2,333,961

 
$
2,415,601

 
$
6,928,441

 
$
7,355,069

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Domestic
$
36,056

 
$
41,034

 
$
102,812

 
$
126,202

International
(2,163
)
 
1,382

 
(754
)
 
3,402

Proprietary Products
9,102

 
14,340

 
26,040

 
41,866

Inter-segment eliminations
416

 
(449
)
 
(266
)
 
(905
)
Acquisition-related and exit and realignment charges
(9,299
)
 
(2,739
)
 
(21,134
)
 
(19,974
)
Other(1)
(4,441
)
 
—

 
(8,674
)
 
—

Consolidated operating earnings
$
29,671

 
$
53,568

 
$
98,024

 
$
150,591

 
 
 
 
 
 
 
 
Depreciation and amortization:
 
 
 
 
 
 
 
Domestic
$
9,602

 
$
7,360

 
$
23,233

 
$
22,399

International
4,304

 
4,259

 
12,072

 
13,125

Proprietary Products
1,947

 
2,218

 
5,755

 
6,658

Consolidated depreciation and amortization
$
15,853

 
$
13,837

 
$
41,060

 
$
42,182

 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
Domestic
$
9,572

 
$
3,071

 
$
23,376

 
$
10,274

International
3,206

 
3,223

 
11,659

 
8,053

Proprietary Products
718

 
1,009

 
2,754

 
2,436

Consolidated capital expenditures
$
13,496

 
$
7,303

 
$
37,789

 
$
20,763

 
September 30, 2017
 
December 31, 2016
Total assets:
 
 
 
Domestic
$
2,416,079

 
$
1,778,481

International
418,331

 
352,898

Proprietary Products
401,331

 
400,885

Segment assets
3,235,741

 
2,532,264

Cash and cash equivalents
98,415

 
185,488

Consolidated total assets
$
3,334,156

 
$
2,717,752

(1) Software as a Service (SaaS) implementation costs associated with the upgrading of our global IT platforms in connection with the redesign of our global information system strategy.

16


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, 2017
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$
—

 
$
2,113,450

 
$
264,765

 
$
(44,254
)
 
$
2,333,961

Cost of goods sold
—

 
1,919,049

 
157,439

 
(44,469
)
 
2,032,019

Gross margin
—

 
194,401

 
107,326

 
215

 
301,942

Distribution, selling and administrative expenses
(117
)
 
159,108

 
102,054

 
—

 
261,045

Acquisition-related and exit and realignment charges
—

 
6,960

 
2,339

 
—

 
9,299

Other operating (income) expense, net
—

 
448

 
1,479

 
—

 
1,927

Operating earnings (loss)
117

 
27,885

 
1,454

 
215

 
29,671

Interest expense (income), net
7,018

 
(1,184
)
 
2,903

 
—

 
8,737

Income (loss) before income taxes
(6,901
)
 
29,069

 
(1,449
)
 
215

 
20,934

Income tax (benefit) provision
—

 
7,881

 
2,182

 
—

 
10,063

Equity in earnings of subsidiaries
17,772

 
—

 
—

 
(17,772
)
 
—

Net income (loss)
10,871

 
21,188

 
(3,631
)
 
(17,557
)
 
10,871

Other comprehensive income (loss)
12,584

 
330

 
12,254

 
(12,584
)
 
12,584

Comprehensive income (loss)
$
23,455

 
$
21,518

 
$
8,623

 
$
(30,141
)
 
$
23,455

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


17


Nine Months Ended September 30, 2017
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$
—

 
$
6,436,599

 
$
635,900

 
$
(144,058
)
 
$
6,928,441

Cost of goods sold
—

 
5,845,789

 
369,596

 
(143,598
)
 
6,071,787

Gross margin
—

 
590,810

 
266,304

 
(460
)
 
856,654

Distribution, selling and administrative expenses
434

 
480,765

 
254,154

 
—

 
735,353

Acquisition-related and exit and realignment charges
—

 
17,084

 
4,050

 
—

 
21,134

Other operating (income) expense, net
—

 
1,481

 
662

 
—

 
2,143

Operating earnings (loss)
(434
)
 
91,480

 
7,438

 
(460
)
 
98,024

Interest expense (income), net
20,756

 
(2,777
)
 
4,239

 
—

 
22,218

Income (loss) before income taxes
(21,190
)
 
94,257

 
3,199

 
(460
)
 
75,806

Income tax (benefit) provision
—

 
23,303

 
2,707

 
—

 
26,010

Equity in earnings of subsidiaries
70,986

 
—

 
—

 
(70,986
)
 
—

Net income (loss)
49,796

 
70,954

 
492

 
(71,446
)
 
49,796

Other comprehensive income (loss)
41,141

 
990

 
40,151

 
(41,141
)
 
41,141

Comprehensive income (loss)
$
90,937

 
$
71,944

 
$
40,643

 
$
(112,587
)
 
$
90,937

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



18


September 30, 2017
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
11,456

 
$
1,145

 
$
85,814

 
$
—

 
$
98,415

Accounts receivable, net
30,770

 
595,202

 
114,563

 
(7,779
)
 
732,756

Merchandise inventories
—

 
909,406

 
82,065

 
(2,220
)
 
989,251

Other current assets
193

 
117,403

 
193,903

 
—

 
311,499

Total current assets
42,419

 
1,623,156

 
476,345

 
(9,999
)
 
2,131,921

Property and equipment, net
—

 
103,765

 
99,822

 
—

 
203,587

Goodwill, net
—

 
180,006

 
510,224

 
—

 
690,230

Intangible assets, net
—

 
10,100

 
221,786

 
—

 
231,886

Due from O&M and subsidiaries
—

 
645,264

 
—

 
(645,264
)
 
—

Advances to and investment in consolidated subsidiaries
2,094,759

 
—

 
—

 
(2,094,759
)
 
—

Other assets, net
—

 
43,521

 
33,011

 
—

 
76,532

Total assets
$
2,137,178

 
$
2,605,812

 
$
1,341,188

 
$
(2,750,022
)
 
$
3,334,156

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
768,780

 
$
114,644

 
$
(7,794
)
 
$
875,630

Accrued payroll and related liabilities
—

 
18,615

 
13,383

 
—

 
31,998

Other current liabilities
7,127

 
110,580

 
178,956

 
—

 
296,663

Total current liabilities
7,127

 
897,975

 
306,983

 
(7,794
)
 
1,204,291

Long-term debt, excluding current portion
545,830

 
6,743

 
364,683

 
—

 
917,256

Due to O&M and subsidiaries
580,437

 
—

 
65,002

 
(645,439
)
 
—

Intercompany debt
—

 
138,890

 
—

 
(138,890
)
 
—

Deferred income taxes
—

 
69,722

 
67,817

 
—

 
137,539

Other liabilities
—

 
61,142

 
10,144

 
—

 
71,286

Total liabilities
1,133,394

 
1,174,472

 
814,629

 
(792,123
)
 
2,330,372

Equity
 
 
 
 
 
 
 
 
 
Common stock
122,499

 
—

 
—

 
—

 
122,499

Paid-in capital
224,183

 
174,613

 
583,872