OMI 3.31.2015-10Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________________ 
FORM 10-Q
________________________________________________ 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 23, 2015, was 63,102,497 shares.
 
 
 
 
 



Table of Contents

Owens & Minor, Inc. and Subsidiaries
Index
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.

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Table of Contents

Part I. Financial Information
Item 1. Financial Statements
Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
 
 
 
Three Months Ended 
 March 31,
(in thousands, except per share data)
 
2015
 
2014
Net revenue
 
$
2,391,196

 
$
2,256,380

Cost of goods sold
 
2,093,595

 
1,975,185

Gross margin

297,601


281,195

Selling, general and administrative expenses
 
233,825

 
225,610

Acquisition-related and exit and realignment charges
 
9,916

 
3,262

Depreciation and amortization
 
15,869

 
13,864

Other operating income, net
 
(2,984
)
 
(7,825
)
Operating earnings
 
40,975

 
46,284

Interest expense, net
 
6,880

 
3,246

Income before income taxes
 
34,095

 
43,038

Income tax provision
 
15,155

 
17,553

Net income
 
$
18,940

 
$
25,485

Net income per common share:
 
 
 
 
Basic
 
$
0.30

 
$
0.41

Diluted
 
$
0.30

 
$
0.41

Cash dividends per common share
 
$
0.2525

 
$
0.25



See accompanying notes to consolidated financial statements.
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Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2015
 
2014
Net income
 
$
18,940

 
$
25,485

Other comprehensive income (loss), net of tax:
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2015 and 2014)
 
(27,941
)
 
467

Change in unrecognized net periodic pension costs (net of income tax of $143 in 2015 and $97 in 2014)
 
258

 
107

Other (net of income tax of $0 in 2015 and $8 in 2014)
 
38

 
(9
)
Total other comprehensive income (loss), net of tax
 
(27,645
)
 
565

Comprehensive income (loss)
 
$
(8,705
)
 
$
26,050



See accompanying notes to consolidated financial statements.
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Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
 
March 31,
 
December 31,
(in thousands, except per share data)
2015
 
2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
159,056

 
$
56,772

Accounts and notes receivable, net of allowances of $13,295 and $13,306
597,235

 
626,192

Merchandise inventories
874,738

 
872,457

Other current assets
233,318

 
315,285

Total current assets
1,864,347

 
1,870,706

Property and equipment, net of accumulated depreciation of $167,835 and $163,377
221,950

 
232,979

Goodwill, net
419,453

 
423,276

Intangible assets, net
102,122

 
108,593

Other assets, net
91,638

 
99,852

Total assets
$
2,699,510

 
$
2,735,406

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
693,699

 
$
608,846

Accrued payroll and related liabilities
24,991

 
31,507

Deferred income taxes
37,820

 
37,979

Other accrued liabilities
273,104

 
326,223

Total current liabilities
1,029,614

 
1,004,555

Long-term debt, excluding current portion
574,606

 
608,551

Deferred income taxes
63,321

 
63,901

Other liabilities
63,696

 
67,561

Total liabilities
1,731,237

 
1,744,568

Commitments and contingencies

 

Equity
 
 
 
Owens & Minor, Inc. shareholders’ equity:
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 63,102 shares and 63,070 shares
126,205

 
126,140

Paid-in capital
204,901

 
202,934

Retained earnings
688,813

 
685,765

Accumulated other comprehensive income
(51,646
)
 
(24,001
)
Total equity
968,273

 
990,838

Total liabilities and equity
$
2,699,510

 
$
2,735,406



See accompanying notes to consolidated financial statements.
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Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
 
Three Months Ended March 31,
(in thousands)
2015
 
2014
Operating activities:
 
 
 
Net income
$
18,940

 
$
25,485

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
19,123

 
13,864

Share-based compensation expense
2,597

 
2,642

Provision for losses on accounts and notes receivable
220

 
54

Deferred income tax expense (benefit)
510

 
(822
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
27,356

 
29,828

Merchandise inventories
(3,888
)
 
3,707

Accounts payable
88,944

 
15,815

Net change in other assets and liabilities
13,580

 
3,921

Other, net
1,321

 
(1,292
)
Cash provided by operating activities
168,703

 
93,202

Investing activities:
 
 
 
Additions to property and equipment
(7,619
)
 
(7,299
)
Additions to computer software and intangible assets
(3,947
)
 
(6,930
)
Proceeds from sale of investment

 
1,937

Proceeds from sale of property and equipment
50

 
105

Cash used for investing activities
(11,516
)
 
(12,187
)
Financing activities:
 
 
 
Change in bank overdraft
1,179

 
20,578

Repayment of revolving credit facility
(33,700
)
 

Cash dividends paid
(15,934
)
 
(15,785
)
Repurchases of common stock

 
(5,000
)
Excess tax benefits related to share-based compensation
240

 
346

Proceeds from exercise of stock options
125

 
937

Other, net
(2,324
)
 
(1,868
)
Cash used for financing activities
(50,414
)
 
(792
)
Effect of exchange rate changes on cash and cash equivalents
(4,489
)
 
245

Net increase in cash and cash equivalents
102,284

 
80,468

Cash and cash equivalents at beginning of period
56,772

 
101,905

Cash and cash equivalents at end of period
$
159,056

 
$
182,373

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
4,509

 
$
15,161

Interest paid
$
5,924

 
$
539



See accompanying notes to consolidated financial statements.
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Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(unaudited)
 
 
Owens & Minor, Inc. Shareholders’ Equity
 
 
 
 
(in thousands, except per share data)
Common
Shares
Outstanding
 
Common 
Stock
($ 2 par value )
 
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Noncontrolling
Interest
 
Total
Equity
Balance December 31, 2013
63,096

 
$
126,193

 
$
196,605

 
$
691,547

 
$
9,568

 
$
1,130

 
$
1,025,043

Net income
 
 
 
 
 
 
25,485

 
 
 
 
 
25,485

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
565

 
 
 
565

Dividends declared ($0.25 per share)
 
 
 
 
 
 
(15,744
)
 
 
 
 
 
(15,744
)
Shares repurchased and retired
(143
)
 
(286
)
 
 
 
(4,714
)
 
 
 
 
 
(5,000
)
Share-based compensation expense, exercises and other
138

 
275

 
2,543

 
 
 
 
 
 
 
2,818

Balance March 31, 2014
63,091

 
$
126,182

 
$
199,148

 
$
696,574

 
$
10,133

 
$
1,130

 
$
1,033,167

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2014
63,070

 
$
126,140

 
$
202,934

 
$
685,765

 
$
(24,001
)
 
$

 
$
990,838

Net income
 
 
 
 
 
 
18,940

 
 
 
 
 
18,940

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
(27,645
)
 
 
 
(27,645
)
Dividends declared ($0.2525 per share)
 
 
 
 
 
 
(15,892
)
 
 
 
 
 
(15,892
)
Shares repurchased and retired


 


 
 
 


 
 
 
 
 

Share-based compensation expense, exercises and other
32

 
65

 
1,967

 
 
 
 
 
 
 
2,032

Balance March 31, 2015
63,102

 
$
126,205

 
$
204,901

 
$
688,813

 
$
(51,646
)
 
$

 
$
968,273



See accompanying notes to consolidated financial statements.
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Table of Contents

Owens & Minor, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
(in thousands, unless otherwise indicated)
Note 1—Basis of Presentation and Use of Estimates
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Owens & Minor, Inc. and the subsidiaries it controls (we, us, or our) and contain all adjustments (which are comprised only of normal recurring accruals and use of estimates) necessary to conform with U.S. generally accepted accounting principles (GAAP). All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates.
Note 2—Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable, financing receivables, accounts payable and financing payables included in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of long-term debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings and average remaining maturities (Level 2). We determine the fair value of our derivatives based on quoted market prices. See Note 8 for the fair value of long-term debt and Note 9 for the fair value of derivatives.
Note 3—Acquisitions
On October 1, 2014, we completed the acquisition of Medical Action Industries Inc., (Medical Action), a leading producer of surgical kits and procedure trays, which will enable 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).

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The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon our preliminary estimate of their fair values at the date of acquisition, with certain exceptions permitted under GAAP. The combined purchase price exceeded the preliminary estimated fair value of the net tangible and identifiable intangible assets by $150.6 million, which was allocated to goodwill. The following table presents, in the aggregate, the preliminary estimated fair value of the assets acquired and liabilities assumed recognized as of the acquisition date. Adjustments relate to revised estimates pending completion of our valuation. The allocation of purchase price to assets and liabilities acquired is not yet complete.
 
Preliminary Fair
Value Estimated as of
Acquisition Date
 
Differences Between Prior and Current Period Preliminary Fair Value Estimate
 
Preliminary Fair
Value Currently Estimated as of
Acquisition Date
Assets acquired:
 
 
 
 
 
Current assets
$
90,608

 
$
98

 
$
90,706

Property and equipment
34,048

 
(448
)
 
33,600

Goodwill
150,492

 
79

 
150,571

Intangible assets
77,623

 

 
77,623

Total assets
352,771

 
(271
)
 
352,500

Liabilities assumed:
 
 
 
 

Current liabilities
64,736

 
(271
)
 
64,465

Noncurrent liabilities
26,426

 

 
26,426

Total liabilities
91,162

 
(271
)
 
90,891

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 $21.9 million to our International segment and $128.7 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 the current quarter 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 $2.6 million in 2015 related to these activities.
Acquisition-related expenses of $0.6 million for the quarter ended March 31, 2014 consisted primarily of costs to resolve certain contingencies with the former Movianto owner as well as remaining costs to transition Movianto’s information technology and administrative functions.
Note 4—Financing Receivables and Payables
At March 31, 2015 and December 31, 2014, we had financing receivables of $135.1 million and $196.2 million and related payables of $133.7 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.

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Table of Contents

Note 5—Goodwill and Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill through March 31, 2015:
 
Domestic
Segment
 
International
Segment
 
Total
Carrying amount of goodwill, December 31, 2014
$
377,089

 
$
46,187

 
$
423,276

Currency translation adjustments

 
(3,902
)
 
(3,902
)
Acquisitions (see Note 3)
79

 

 
79

Carrying amount of goodwill, March 31, 2015
$
377,168

 
$
42,285

 
$
419,453

Intangible assets at March 31, 2015, and December 31, 2014, were as follows:
 
March 31, 2015
 
December 31, 2014
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
121,783

 
$
2,565

 
$
125,448

 
$
3,405

Accumulated amortization
(22,117
)
 
(109
)
 
(19,773
)
 
(487
)
Net intangible assets
$
99,666

 
$
2,456

 
$
105,675

 
$
2,918

At March 31, 2015, $64.6 million in net intangible assets were held in the Domestic segment and $37.5 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 March 31, 2015 and 2014.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $7.6 million for the remainder of 2015, $10.0 million for 2016, $9.9 million for 2017, $9.2 million for 2018, $9.1 million for 2019 and $9.1 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 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 months ended March 31, 2015 and 2014 were as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Domestic segment
$
2,639

 
$
1,294

International segment
4,672

 
1,330

Total exit and realignment charges
$
7,311

 
$
2,624


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

 
$
2,887

 
$
6,462

Provision for exit and realignment activities
256

 
142

 
398

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

 
$
2,156

 
$
5,602

 
 
 
 
 
 
 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $6.9 million of costs that were expensed as incurred for the quarter ended March 31, 2015, including $3.0 million in accelerated amortization of an information system that is being replaced, $1.8 million in facility costs, $1.3 million in labor costs, $0.3 million in information systems costs and $0.5 million in other costs.
We incurred $1.3 million in charges that were expensed as incurred for the quarter ended March 31, 2014 including $0.5 million in relocation costs, $0.5 million in property related costs, and $0.3 million in labor and other costs.
We expect additional exit and realignment charges of approximately $7.0 million over the remainder of 2015 for activities initiated through March 31, 2015.
Note 7—Retirement Plans
We have a noncontributory, unfunded retirement plan for certain officers and other key employees in the United States. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective employees.
The components of net periodic benefit cost, which are included in selling, general and administrative expenses, for the three months ended March 31, 2015 and 2014, were as follows:
 
Three Months Ended 
 March 31,
 
2015
 
2014
Service cost
$
33

 
$
36

Interest cost
464

 
482

Recognized net actuarial loss
401

 
204

Net periodic benefit cost
$
898

 
$
722

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 March 31, 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 March 31, 2015 and December 31, 2014, the estimated fair value of the 2021 Notes was $287.4 million and $275.1 million and the estimated fair value of the 2024 Notes was $291.4 million and $283.9 million, respectively.

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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 March 31, 2015, the interest rate under the credit facility is LIBOR plus 1.375%.
At March 31, 2015, we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445 million available for borrowing. We also have a $1.2 million letter of credit outstanding as of March 31, 2015 and 2014, which supports our facilities leased in Europe.
The Amended Credit Agreement and senior notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. We believe we were in compliance with our debt covenants at March 31, 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 $7.0 million at March 31, 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 March 31, 2015 and December 31, 2014 the fair value of our foreign currency contracts included in other assets on the consolidated balance sheet was $1.3 million and $0.7 million. The impact from changes in the fair value of these foreign currency derivatives included in other operating income, net was $0.8 million for the first quarter of 2015. We did not hold foreign currency contracts in the first quarter of 2014. We consider the risk of counterparty default to be minimal.
Note 10—Income Taxes
The effective tax rate was 44.4% for the three months ended March 31, 2015, compared to 40.8% in the same quarter of 2014. The change in rate is due to the impact of foreign taxes and certain acquisition-related charges which are not deductible for tax purposes. The liability for unrecognized tax benefits was $6.9 million at March 31, 2015 and $6.7 million at December 31, 2014. Included in the liability at March 31, 2015 were $4.3 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

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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 months ended March 31, 2015 and 2014.
 
Three Months Ended 
 March 31,
(in thousands, except per share data)
2015
 
2014
Numerator:
 
 
 
Net income
$
18,940

 
$
25,485

Less: income allocated to unvested restricted shares
(161
)
 
(188
)
Net income attributable to common shareholders - basic
18,779

 
25,297

Add: undistributed income attributable to unvested restricted shares - basic
18

 
51

Less: undistributed income attributable to unvested restricted shares - diluted
(18
)
 
(51
)
Net income attributable to common shareholders - diluted
$
18,779

 
$
25,297

Denominator:
 
 
 
Weighted average shares outstanding - basic
62,264

 
62,304

Dilutive shares - stock options
2

 
13

Weighted average shares outstanding - diluted
62,266

 
62,317

Net income per share attributable to common shareholders:
 
 
 
Basic
$
0.30

 
$
0.41

Diluted
$
0.30

 
$
0.41

Note 12—Shareholders’ Equity
Our Board of Directors has authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2017. The program is intended, in part, to offset shares issued in conjunction with our stock incentive plans and return capital to shareholders. The program may be suspended or discontinued at any time. We did not purchase any shares during the three months ended March 31, 2015. As of March 31, 2015, we have approximately $90.1 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

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Note 13—Accumulated Other Comprehensive Income
The following table shows the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2015 and 2014: 
 
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

 
(27,941
)
 
38

 
(27,903
)
Income tax

 

 

 

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

 
(27,941
)
 
38

 
(27,903
)
Amounts reclassified from accumulated other comprehensive income (loss)
401

 

 

 
401

Income tax
(143
)
 

 

 
(143
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
258

 

 

 
258

Other comprehensive income (loss)
258

 
(27,941
)
 
38

 
(27,645
)
Accumulated other comprehensive income (loss), March 31, 2015
$
(10,065
)
 
$
(41,588
)
 
$
7

 
$
(51,646
)

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

 
$
155

 
$
9,568

Other comprehensive income (loss) before reclassifications

 
467

 

 
467

Income tax

 

 

 

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

 
467

 

 
467

Amounts reclassified from accumulated other comprehensive income (loss)
204

 

 
(17
)
 
187

Income tax
(97
)
 

 
8

 
(89
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
107

 

 
(9
)
 
98

Other comprehensive income (loss)
107

 
467

 
(9
)
 
565

Accumulated other comprehensive income (loss), March 31, 2014
$
(6,372
)
 
$
16,359

 
$
146

 
$
10,133

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 months ended March 31, 2015 and 2014, we reclassified $0.4 million and $0.2 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.

14


Table of Contents

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 
 March 31,
 
2015
 
2014
Net revenue:
 
 
 
Domestic
$
2,285,635

 
$
2,148,915

International
105,561

 
107,465

Consolidated net revenue
$
2,391,196

 
$
2,256,380

 
 
 
 
Operating earnings (loss):
 
 
 
Domestic
$
50,512

 
$
52,734

International
379

 
(3,188
)
Acquisition-related and exit and realignment charges (1)
(9,916
)
 
(3,262
)
Consolidated operating earnings
$
40,975

 
$
46,284

 
 
 
 
Depreciation and amortization:
 
 
 
Domestic
$
10,738

 
$
8,975

International
5,431

 
4,889

Consolidated depreciation and amortization
$
16,169

 
$
13,864

 
 
 
 
Capital expenditures:
 
 
 
Domestic
$
8,651

 
$
10,175

International
2,915

 
4,054

Consolidated capital expenditures
$
11,566

 
$
14,229

 
March 31, 2015
 
December 31, 2014
Total assets:
 
 
 
Domestic
$
2,101,477

 
$
2,139,972

International
438,977

 
538,662

Segment assets
2,540,454

 
2,678,634

Cash and cash equivalents
159,056

 
56,772

Consolidated total assets
$
2,699,510

 
$
2,735,406

 (1) The first quarter of 2015 includes $3.0 million in accelerated amortization related to an information system that is being replaced.



15


Table of Contents

Note 16—Condensed Consolidating Financial Information
The following tables present condensed consolidating financial information for: Owens & Minor, Inc. (O&M); the guarantors of Owens & Minor, Inc.’s 2021 Notes and 2024 Notes, on a combined basis; and the non-guarantor subsidiaries of the 2021 Notes and 2024 Notes, on a combined basis. The guarantor subsidiaries are 100% owned by Owens & Minor, Inc. Separate financial statements of the guarantor subsidiaries are not presented because the guarantees by our guarantor subsidiaries are full and unconditional, as well as joint and several, and we believe the condensed consolidating financial information is more meaningful in understanding the financial position, results of operations and cash flows of the guarantor subsidiaries.
 
Three Months Ended March 31, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Statements of Income
 
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,250,704

 
$
180,361

 
$
(39,869
)
 
$
2,391,196

 
Cost of goods sold

 
2,034,032

 
99,818

 
(40,255
)
 
2,093,595

 
Gross margin

 
216,672

 
80,543

 
386

 
297,601

 
Selling, general and administrative expenses
39

 
160,577

 
73,209

 

 
233,825

 
Acquisition-related and exit and realignment charges

 
3,577

 
6,339

 

 
9,916

 
Depreciation and amortization

 
9,103

 
6,766

 

 
15,869

 
Other operating income, net

 
(976
)
 
(2,008
)
 

 
(2,984
)
 
Operating earnings (loss)
(39
)
 
44,391

 
(3,763
)
 
386

 
40,975

 
Interest expense (income), net
5,947

 
764

 
169

 

 
6,880

 
Income (loss) before income taxes
(5,986
)
 
43,627

 
(3,932
)
 
386

 
34,095

 
Income tax (benefit) provision
(773
)
 
15,231

 
697

 

 
15,155

 
Equity in earnings of subsidiaries
24,153

 

 

 
(24,153
)
 

 
Net income (loss)
18,940

 
28,396

 
(4,629
)
 
(23,767
)
 
18,940

 
Other comprehensive income (loss)
(27,645
)
 
504

 
(28,149
)
 
27,645

 
(27,645
)
 
Comprehensive income (loss)
$
(8,705
)
 
$
28,900

 
$
(32,778
)
 
$
3,878

 
$
(8,705
)
Three Months Ended March 31, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,148,365

 
$
119,873

 
$
(11,858
)
 
$
2,256,380

Cost of goods sold

 
1,939,464

 
47,599

 
(11,878
)
 
1,975,185

Gross margin

 
208,901

 
72,274

 
20

 
281,195

Selling, general and administrative expenses
47

 
154,156

 
71,407

 

 
225,610

Acquisition-related and exit and realignment charges

 
1,294

 
1,968

 

 
3,262

Depreciation and amortization
2

 
8,952

 
4,910

 

 
13,864

Other operating income, net

 
(7,062
)
 
(763
)
 

 
(7,825
)
Operating earnings (loss)
(49
)
 
51,561

 
(5,248
)
 
20

 
46,284

Interest expense (income), net
2,472

 
1,243

 
(469
)
 

 
3,246

Income (loss) before income taxes
(2,521
)
 
50,318

 
(4,779
)
 
20

 
43,038

Income tax (benefit) provision
(952
)
 
20,160

 
(1,655
)
 

 
17,553

Equity in earnings of subsidiaries
27,054

 

 

 
(27,054
)
 

Net income (loss)
25,485

 
30,158

 
(3,124
)
 
(27,034
)
 
25,485

Other comprehensive income (loss)
565

 
106

 
467

 
(573
)
 
565

Comprehensive income (loss)
$
26,050

 
$
30,264

 
$
(2,657
)
 
$
(27,607
)
 
$
26,050


16


Table of Contents

 
 
March 31, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Balance Sheets
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
115,613

 
$
10,135

 
$
33,308

 
$

 
$
159,056

 
Accounts and notes receivable, net

 
494,303

 
112,957

 
(10,025
)
 
597,235

 
Merchandise inventories

 
819,263

 
59,608

 
(4,133
)
 
874,738

 
Other current assets
15

 
78,295

 
155,008

 

 
233,318

 
Total current assets
115,628

 
1,401,996

 
360,881

 
(14,158
)
 
1,864,347

 
Property and equipment, net

 
110,753

 
111,197

 

 
221,950

 
Goodwill, net

 
247,271

 
172,182

 

 
419,453

 
Intangible assets, net

 
15,286

 
86,836

 

 
102,122

 
Due from O&M and subsidiaries

 
480,429

 

 
(480,429
)
 

 
Advances to and investment in consolidated subsidiaries
1,855,506

 

 

 
(1,855,506
)
 

 
Other assets, net
4,498

 
64,961

 
22,179

 

 
91,638

 
Total assets
$
1,975,632

 
$
2,320,696

 
$
753,275

 
$
(2,350,093
)
 
$
2,699,510

 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
659,644

 
$
43,038

 
$
(8,983
)
 
$
693,699

 
Accrued payroll and related liabilities

 
14,227

 
10,764

 

 
24,991

 
Deferred income taxes

 
39,602

 
(1,782
)
 

 
37,820

 
Other accrued liabilities
6,709

 
89,991

 
176,404

 

 
273,104

 
Total current liabilities
6,709

 
803,464

 
228,424

 
(8,983
)
 
1,029,614

 
Long-term debt, excluding current portion
547,834

 
5,728

 
21,044

 

 
574,606

 
Due to O&M and subsidiaries
452,816

 

 
62,924

 
(515,740
)
 

 
Intercompany debt

 
138,890

 

 
(138,890
)
 

 
Deferred income taxes

 
33,908

 
29,413

 

 
63,321

 
Other liabilities

 
56,079

 
7,617

 

 
63,696

 
Total liabilities
1,007,359

 
1,038,069

 
349,422

 
(663,613
)
 
1,731,237

 
Equity
 
 
 
 
 
 
 
 
 
 
Common stock
126,205

 

 

 

 
126,205

 
Paid-in capital
204,901

 
241,875

 
516,608

 
(758,483
)
 
204,901

 
Retained earnings (deficit)
688,813

 
1,050,782

 
(71,116
)
 
(979,666
)
 
688,813

 
Accumulated other comprehensive income (loss)
(51,646
)
 
(10,030
)
 
(41,639
)
 
51,669

 
(51,646
)
 
Total equity
968,273

 
1,282,627

 
403,853

 
(1,686,480
)
 
968,273

 
Total liabilities and equity
$
1,975,632

 
$
2,320,696

 
$
753,275

 
$
(2,350,093
)
 
$
2,699,510



17


Table of Contents

December 31, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22,013

 
$
3,912

 
$
30,847

 
$

 
$
56,772

Accounts and notes receivable, net

 
519,951

 
144,463

 
(38,222
)
 
626,192

Merchandise inventories

 
816,915

 
60,061

 
(4,519
)
 
872,457

Other current assets
(24,748
)
 
90,733

 
224,220

 
25,080

 
315,285

Total current assets
(2,735
)
 
1,431,511

 
459,591

 
(17,661
)
 
1,870,706

Property and equipment, net

 
110,076

 
122,903

 

 
232,979

Goodwill, net

 
247,271

 
176,005

 

 
423,276

Intangible assets, net

 
15,805

 
92,788

 

 
108,593

Due from O&M and subsidiaries

 
357,304

 

 
(357,304
)
 

Advances to and investments in consolidated subsidiaries
1,893,767

 

 

 
(1,893,767
)
 

Other assets, net
4,637

 
66,836

 
28,379

 

 
99,852

Total assets
$
1,895,669

 
$
2,228,803

 
$
879,666

 
$
(2,268,732
)
 
$
2,735,406

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
567,285

 
$
54,898

 
$
(13,337
)
 
$
608,846

Accrued payroll and related liabilities

 
16,434

 
15,073

 

 
31,507

Deferred income taxes

 
39,667

 
(1,688
)
 

 
37,979

Other current liabilities
6,441

 
83,698

 
236,084

 

 
326,223

Total current liabilities
6,441

 
707,084

 
304,367

 
(13,337
)
 
1,004,555

Long-term debt, excluding current portion
547,763

 
39,915

 
20,873

 

 
608,551

Due to O&M and subsidiaries
350,627

 

 
77,788

 
(428,415
)
 

Intercompany debt

 
138,890

 

 
(138,890
)
 

Deferred income taxes

 
33,162

 
30,739

 

 
63,901

Other liabilities

 
55,794

 
11,767

 

 
67,561

Total liabilities
904,831

 
974,845

 
445,534

 
(580,642
)
 
1,744,568

Equity
 
 
 
 
 
 
 
 

Common stock
126,140

 

 

 

 
126,140

Paid-in capital
202,934

 
241,877

 
514,314

 
(756,191
)
 
202,934

Retained earnings (deficit)
685,765

 
1,022,379

 
(66,479
)
 
(955,900
)
 
685,765

Accumulated other comprehensive income (loss)
(24,001
)
 
(10,298
)
 
(13,703
)
 
24,001

 
(24,001
)
Total equity
990,838

 
1,253,958

 
434,132

 
(1,688,090
)
 
990,838

Total liabilities and equity
$
1,895,669

 
$
2,228,803

 
$
879,666

 
$
(2,268,732
)
 
$
2,735,406



18


Table of Contents

 
Three Months Ended March 31, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
18,940

 
$
28,396

 
$
(4,629
)
 
$
(23,767
)
 
$
18,940

 
Adjustments to reconcile net income to cash provided by (used for) operating activities:
 
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(24,153
)
 

 

 
24,153

 

 
Depreciation and amortization

 
9,105

 
10,018

 

 
19,123

 
Share-based compensation expense

 
2,597

 

 

 
2,597

 
Provision for losses on accounts and notes receivable

 
(36
)
 
256

 

 
220

 
Deferred income tax expense (benefit)

 
(373
)
 
883

 

 
510

 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts and notes receivable

 
26,519

 
(5,561
)
 
6,398

 
27,356

 
Merchandise inventories

 
(2,348
)
 
(3,928
)
 
2,388

 
(3,888
)
 
Accounts payable

 
92,359

 
3,424

 
(6,839
)
 
88,944

 
Net change in other assets and liabilities
541

 
16,418

 
(1,046
)
 
(2,333
)
 
13,580

 
Other, net
209

 
636

 
476

 

 
1,321

 
Cash provided by (used for) operating activities
(4,463
)
 
173,273

 
(107
)
 

 
168,703

 
Investing activities:
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment

 
(6,552
)
 
(1,067
)
 

 
(7,619
)
 
Additions to computer software and intangible assets

 
(1,457
)
 
(2,490
)
 

 
(3,947
)
 
Proceeds from the sale of property and equipment

 
50

 

 

 
50

 
Cash used for investing activities

 
(7,959
)
 
(3,557
)
 

 
(11,516
)
 
Financing activities:
 
 
 
 
 
 
 
 
 
 
Change in bank overdraft

 

 
1,179

 

 
1,179

 
Change in intercompany advances
114,499

 
(124,681
)
 
10,182

 

 

 
Repayment of revolving credit facility

 
(33,700
)
 

 

 
(33,700
)
 
Cash dividends paid
(15,934
)
 

 

 

 
(15,934
)
 
Excess tax benefits related to share-based compensation
240

 

 

 

 
240

 
Proceeds from exercise of stock options
125

 

 

 

 
125

 
Other, net
(867
)
 
(710
)
 
(747
)
 

 
(2,324
)
 
Cash provided by (used for) financing activities
98,063

 
(159,091
)
 
10,614

 

 
(50,414
)
 
Effect of exchange rate changes on cash and cash equivalents

 

 
(4,489
)
 

 
(4,489
)
 
Net increase (decrease) in cash and cash equivalents
93,600

 
6,223

 
2,461

 

 
102,284

 
Cash and cash equivalents at beginning of period
22,013

 
3,912

 
30,847

 
 
 
56,772

 
Cash and cash equivalents at end of period
$
115,613

 
$
10,135

 
$
33,308

 
$

 
$
159,056

 

19


Table of Contents

 
Three Months Ended March 31, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
25,485

 
$
30,158

 
$
(3,124
)
 
$
(27,034
)
 
$
25,485

 
Adjustments to reconcile net income to cash provided by (used for) operating activities:
 
 
 
 
 
 
 
 

 
Equity in earnings of subsidiaries
(27,054
)
 

 

 
27,054

 

 
Depreciation and amortization
2

 
8,952

 
4,910

 

 
13,864

 
Share-based compensation expense

 
2,570

 
72

 

 
2,642

 
Provision for losses on accounts and notes receivable

 
96

 
(42
)
 

 
54

 
Deferred income tax expense (benefit)

 
(588
)
 
(234
)
 

 
(822
)
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 

 
Accounts and notes receivable

 
26,879

 
2,530

 
419

 
29,828

 
Merchandise inventories

 
7,563

 
(3,835
)
 
(21
)
 
3,707

 
Accounts payable

 
23,375

 
(7,142
)
 
(418
)
 
15,815

 
Net change in other assets and liabilities
3,138

 
12,734

 
(11,951
)
 

 
3,921

 
Other, net
(388
)
 
(745
)
 
(159
)
 


 
(1,292
)
 
Cash provided by (used for) operating activities
1,183

 
110,994

 
(18,975
)
 

 
93,202

 
Investing activities:
 
 
 
 
 
 
 
 


 
Additions to property and equipment

 
(4,036
)
 
(3,263
)
 

 
(7,299
)
 
Additions to computer software and intangible assets

 
(6,139
)
 
(791
)
 

 
(6,930
)
 
Proceeds from investment sale

 
1,937

 

 

 
1,937

 
Proceeds from the sale of property and equipment

 
11

 
94

 

 
105

 
Cash used for investing activities

 
(8,227
)
 
(3,960
)
 

 
(12,187
)
 
Financing activities:
 
 
 
 
 
 
 
 

 
Change in bank overdraft

 

 
20,578

 

 
20,578

 
Change in intercompany advances
78,263

 
(78,631
)
 
368

 

 

 
Cash dividends paid
(15,785
)
 

 

 

 
(15,785
)
 
Repurchases of common stock
(5,000
)
 

 

 

 
(5,000
)
 
Excess tax benefits related to share-based compensation
346

 

 

 

 
346

 
Proceeds from exercise of stock options
937

 

 

 

 
937

 
Other, net
(1,035
)
 
(579
)
 
(254
)
 

 
(1,868
)
 
Cash provided by (used for) financing activities
57,726

 
(79,210
)
 
20,692

 

 
(792
)
 
Effect of exchange rate changes on cash and cash equivalents

 

 
245

 

 
245

 
Net increase (decrease) in cash and cash equivalents
58,909

 
23,557

 
(1,998
)
 

 
80,468

 
Cash and cash equivalents at beginning of period
74,391

 
2,012

 
25,502

 

 
101,905

 
Cash and cash equivalents at end of period
$
133,300

 
$
25,569

 
$
23,504

 
$

 
$
182,373


20


Table of Contents

 

Note 17—Recent Accounting Pronouncements
There has been no change in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2014. There are no new accounting pronouncements that we anticipate will have a material impact on our financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis describes results of operations and material changes in the financial condition of Owens & Minor, Inc. and its subsidiaries since December 31, 2014. Trends of a material nature are discussed to the extent known and considered relevant. This discussion should be read in conjunction with the consolidated financial statements, related notes thereto, and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Overview
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading national distributor of name-brand medical and surgical supplies and a healthcare logistics company. We report our business under two segments: Domestic and International. The Domestic segment includes all functions relating to our role as a medical supply logistics company providing distribution, packaging and logistics services to healthcare providers and manufacturers in the United States. The International segment consists of our European third-party logistics and packaging businesses. Segment financial information is provided in Note 15 of Notes to Consolidated Financial Statements included in this quarterly report.
Financial highlights. The following table provides a reconciliation of reported operating earnings, net income and net income per diluted common share to non-GAAP measures used by management.
 
Three Months Ended March 31,
(Dollars in thousands except per share data)
2015
 
2014
Operating earnings, as reported (GAAP)
$
40,975

 
$
46,284

Acquisition-related and exit and realignment charges
9,916

 
3,262

Operating earnings, adjusted (non-GAAP) (Adjusted Operated Earnings)
$
50,891

 
$
49,546

Adjusted Operating Earnings as a percent of revenue (non-GAAP)
2.13
%
 
2.20
%
Net income, as reported (GAAP)
$
18,940

 
$
25,485

Acquisition-related and exit and realignment charges, net of tax
8,592

 
2,222

Net income, adjusted (non-GAAP) (Adjusted Net Income)
$
27,532

 
$
27,707

Net income per diluted common share, as reported (GAAP)
$
0.30

 
$
0.41

Acquisition-related and exit and realignment charges, per diluted common share
0.14

 
0.03

Net income per diluted common share, adjusted (non-GAAP)(Adjusted EPS)
$
0.44

 
$
0.44

Adjusted EPS (non-GAAP) was $0.44 in the first quarter of 2015, unchanged when compared with prior year. Domestic segment operating earnings of $50.5 million decreased $2.2 million from the first quarter of 2014. The prior year included the recovery of $5.3 million related to the settlement of a direct purchaser anti-trust class action lawsuit. The International segment improved in the first quarter of 2015 to operating income of $0.4 million compared to a loss of $3.2 million in the same period of 2014.
Use of Non-GAAP Measures
Adjusted operating earnings, adjusted net income and adjusted EPS are an alternative view of performance used by management, and we believe that investors' understanding of our performance is enhanced by disclosing these performance measures In general, the measures exclude items and charges that (i) management does not believe reflect our core business and relate more to strategic, multi-year corporate activities; or (ii) relate to activities or actions that may have occurred over multiple or in prior periods without predictable trends. Management uses these non-GAAP financial measures internally to evaluate our performance, evaluate the balance sheet, engage in financial and operational planning and determine incentive compensation.

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Management provides these non-GAAP financial measures to investors as supplemental metrics to assist readers in assessing the effects of items and events on our financial and operating results and in comparing our performance to that of our competitors. However, the non-GAAP financial measures used by us may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.
The non-GAAP financial measures disclosed by us should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements set forth above should be carefully evaluated.
Acquisition-related charges, pre-tax, were $2.6 million and $0.6 million in the first quarter of 2015 and 2014. Current quarter charges consist primarily of costs to continue the integration of Medical Action and ArcRoyal which were acquired in the fourth quarter of 2014 including certain severance and contractual payments to former management and costs to transition information technology and other administrative functions.
Exit and realignment charges, pre-tax, of $7.3 million and $2.6 million in the first quarter of 2015 and 2014 were associated with optimizing our operations and include the consolidation of distribution and logistics centers and closure of offsite warehouses in the United States and Europe, as well as other costs associated with our strategic organizational realignment which include certain professional fees and costs to streamline administrative functions and processes in Europe.
These charges have been tax effected in the preceding table by determining the income tax rate depending on the amount of charges incurred in different tax jurisdictions and the deductibility of those charges for income tax purposes. Unless otherwise stated, our analysis hereinafter excludes acquisition-related and exit and realignment charges. More information about these charges is provided in Notes 3 and 6 of Notes to Consolidated Financial Statements included in this quarterly report.
Results of Operations
Net revenue.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
Domestic
$
2,285,635

 
$
2,148,915

 
$
136,720

 
6.4
 %
International
105,561

 
107,465

 
(1,904
)
 
(1.8
)%
Net revenue
$
2,391,196

 
$
2,256,380

 
$
134,816

 
6.0
 %
Consolidated net revenue improved in the first quarter of 2015 as a result of strong growth in our Domestic segment. Excluding the impact of the 2014 fourth quarter acquisitions, net revenue increased by 4.7% in our Domestic segment and declined by 11.1% in our International segment. In the Domestic segment, the continued trend of growth in our existing large healthcare provider customer accounts and new business exceeded declines from smaller customers and lost business when compared to prior year. Domestic segment growth rates are impacted by ongoing market trends including healthcare utilization rates. The decrease in the International segment was driven by unfavorable foreign currency translation impacts of $17.0 million which was partially offset by organic growth. Fee-for-service business generally represents approximately two-thirds of net revenue in the International segment.
Cost of goods sold.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
Cost of goods sold
$
2,093,595

 
$
1,975,185

 
$
118,410

 
6.0
%
Cost of goods sold includes the cost of the product (net of supplier incentives and cash discounts) and all costs incurred for shipments of products from manufacturers to our distribution centers for all customer arrangements where we are the primary obligor, bear risk of general and physical inventory loss and carry all credit risk associated with sales. These are sometimes referred to as distribution or buy/sell contracts. Beginning in the fourth quarter of 2014, cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our packaging operations. There is no cost of goods sold associated with our fee-for-service business. As a result of the increase in sales activity through our distribution and packaging businesses, cost of goods sold increased $118.4 million compared to the first quarter of 2014.


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Gross margin.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
Gross margin
$
297,601

 
$
281,195

 
$
16,406

 
5.8
%
As a % of net revenue
12.45
%
 
12.46
%
 
 
 
 
The increase in gross margin compared to the first quarter of 2014 is largely attributable to revenue growth in the Domestic segment as described above. The International segment also experienced an increase in gross margin from revenue growth though these benefits were offset by $11.9 million in unfavorable impacts of foreign currency translation.
Operating expenses.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
SG&A expenses
$
233,825

 
$
225,610

 
$
8,215

 
3.6
 %
As a % of net revenue
9.78
%
 
10.00
%
 

 

Depreciation and amortization
$
15,869

 
$
13,864

 
$
2,005

 
14.5
 %
Other operating income, net
$
(2,984
)
 
$
(7,825
)
 
$
4,841

 
(61.9
)%
Selling, general and administrative (SG&A) expenses include labor and warehousing costs associated with our distribution and logistics services and all costs associated with our fee-for-service arrangements. Shipping and handling costs are included in SG&A expenses and include costs to store, move, and prepare products for shipment, as well as costs to deliver products to customers. The costs to convert new customers to our information systems are generally incurred prior to the recognition of revenues from the new customers.
The increase in SG&A expenses compared to prior year is largely attributable to increased warehouse expenses, salaries and transportation costs associated with incremental sales activity in both segments partially offset by favorable foreign currency translation impacts of $11.1 million in the International segment. The Domestic segment also incurred $0.4 million in costs associated with our previously announced CEO search which includes professional fees, consulting, meeting and travel expenses and other costs associated with the leadership succession plan.
Depreciation and amortization expense increased in the first quarter of 2015 compared to the same period of the prior year as a result of property, equipment and intangible assets acquired with business combinations in the fourth quarter of 2014. In connection with our packaging businesses, approximately $0.3 million in depreciation for the first quarter of 2015 and $0.0 million for the first quarter of 2014 is also included in cost of goods sold. Additional amortization of $3.0 million related to the accelerated amortization of an information system which is being replaced in the International segment is included in acquisition-related and exit and realignment charges for the current quarter.
The decrease in other operating income, net compared to 2014 is attributed primarily to the benefit in the prior year of $5.3 million from the settlement of a direct purchaser anti-trust class action lawsuit which did not re-occur in the current year.

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Interest expense, net.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
Interest expense, net
$
6,880

 
$
3,246

 
$
3,634

 
112.0
%
Effective interest rate
4.73
%
 
6.08
%
 
 
 
 
The increase in interest expense in the first quarter of 2015 compared to the same period of 2014 is a result of the new Senior Notes issued on September 16, 2014.
Income taxes.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2015
 
2014
 
$
 
%
Income tax provision
$
15,155

 
$
17,553

 
$
(2,398
)
 
(13.7
)%
Effective tax rate
44.4
%
 
40.8
%
 
 
 
 
The change in the provision for income taxes compared to 2014, including income taxes on acquisition-related and exit and realignment charges, is a result of the amount of pretax income earned in different tax jurisdictions and the deductibility of certain acquisition-related charges for income tax purposes.
Financial Condition, Liquidity and Capital Resources
Financial condition. We monitor operating working capital through days sales outstanding (DSO) and merchandise inventory turnover. We estimate a hypothetical increase (decrease) in DSO of one day would result in a decrease (increase) in our cash balances, an increase (decrease) in borrowings against our revolving credit facility, or a combination thereof of approximately $25 million.
The majority of our cash and cash equivalents are held in cash depository accounts with major banks in the United States and Europe or invested in high-quality, short-term liquid investments. Changes in our working capital can vary in the normal course of business based upon the timing of inventory purchases, collection of accounts receivable, and payment to suppliers.
 
March 31, 2015
 
December 31, 2014
 
Change
(Dollars in thousands)
 
 
$
 
%
Cash and cash equivalents
$
159,056

 
$
56,772

 
$
102,284

 
180.2
 %
Accounts and notes receivable, net of allowances
$
597,235

 
$
626,192

 
$
(28,957
)
 
(4.6
)%
Consolidated DSO (1)
21.2

 
22.1

 

 

Merchandise inventories
$
874,738

 
$
872,457

 
$
2,281

 
0.3
 %
Consolidated inventory turnover (2)
9.7

 
10.1

 

 

Accounts payable
$
693,699

 
$
608,846

 
$
84,853

 
13.9
 %
(1) Based on period end accounts receivable and net revenue for the quarter
(2) Based on average annual inventory and costs of goods sold for the quarter ended March 31, 2015 and December 31, 2014

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Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 2015 and 2014:
(Dollars in thousands)
2015
 
2014
Net cash provided by (used for):
 
 
 
Operating activities
$
168,703

 
$
93,202

Investing activities
(11,516
)
 
(12,187
)
Financing activities
(50,414
)
 
(792
)
Effect of exchange rate changes
(4,489
)
 
245

Increase in cash and cash equivalents
$
102,284

 
$
80,468

Cash provided by operating activities was $168.7 million in the first three months of 2015, compared to $93.2 million in the same period of 2014. The increase in cash from operating activities for the first three months of 2015 compared to the same period in 2014 was primarily due to routine changes in working capital including timing of payments to vendors.
Cash used for investing activities was $11.5 million in the first three months of 2015, compared to $12.2 million in the same period of 2014. Investing activities in 2015 and 2014 relate to capital expenditures for our strategic and operational efficiency initiatives, particularly initiatives relating to information technology enhancements and optimizing our distribution network.
Cash used for financing activities in the first three months of 2015 was $50.4 million, compared to $0.8 million used in the same period of 2014. During the first three months of 2015, we paid dividends of $15.9 million (compared to $15.8 million in the same period of 2014) and repaid $33.7 million in borrowings on our Amended Credit Agreement. Financing activities in the first quarter of 2014 also included $20.6 million in a bank overdraft related to timing of payments and collections in our order-to-cash business at March 31, 2014.
Capital resources. Our sources of liquidity include cash and cash equivalents and a revolving credit facility. On September 17, 2014, we amended our existing Credit Agreement with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Bank of America, N.A. and a syndicate of financial institutions (the Amended Credit Agreement) increasing our borrowing capacity from $350 million to $450 million and extending the term through 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. We may utilize the revolving credit facility for long-term strategic growth, capital expenditures, working capital and general corporate purposes. If we were unable to access the revolving credit facility, it could impact our ability to fund these needs. Based on our leverage ratio at March 31, 2015, the interest rate under the credit facility is LIBOR plus 1.375%.
At March 31, 2015 , we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445 million available for borrowing. We also have a $1.2 million letter of credit outstanding as of March 31, 2015 and December 31, 2014 which supports our facilities leased in Europe.
On September 16, 2014, we issued $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”). 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 amount with an effective yield of 4.422%. Interest on the 2021 Notes and 2024 Notes is payable semiannually in arrears, commencing on March 15, 2015 and December 15, 2014, respectively. We have the option to redeem the 2021 Notes and 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100% of the principal amount or the present value of the remaining scheduled payments discounted at the Treasury Rate plus 30 basis points.
In the first quarter of 2015, we paid cash dividends on our outstanding common stock at the rate of $0.2525 per share, which represents a 1.0% increase over the rate of $0.25 per share paid in the first quarter of 2014. We anticipate continuing to pay quarterly cash dividends in the future. However, the payment of future dividends remains within the discretion of the Board of Directors and will depend upon our results of operations, financial condition, capital requirements and other factors.

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In February 2014, the 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 to offset shares issued in conjunction with our stock incentive plan and may be suspended or discontinued at any time. During the first quarter of 2015, we did not repurchase any shares under this program. At March 31, 2015, the remaining amount authorized for repurchase under this program was $90.1 million.
We earn a portion of our operating earnings in foreign jurisdictions outside the U.S., which we consider to be indefinitely reinvested. Accordingly, no U.S. federal and state income taxes and withholding taxes have been provided on these earnings. Our cash, cash-equivalents, short-term investments, and marketable securities held by our foreign subsidiaries totaled $33.0 million and $31.5 million as of March 31, 2015 and December 31, 2014. We do not intend, nor do we foresee a need, to repatriate these funds or other assets held outside the U.S. In the future, should we require more capital to fund discretionary activities in the U.S. than is generated by our domestic operations and is available through our borrowings, we could elect to repatriate cash or other assets from foreign jurisdictions that have previously been considered to be indefinitely reinvested.
We believe available financing sources, including cash generated by operating activities and borrowings under the Amended Credit Agreement, will be sufficient to fund our working capital needs, capital expenditures, long-term strategic growth, payments under long-term debt and lease arrangements, payments of quarterly cash dividends, share repurchases and other cash requirements. While we believe that we will have the ability to meet our financing needs in the foreseeable future, changes in economic conditions may impact (i) the ability of financial institutions to meet their contractual commitments to us, (ii) the ability of our customers and suppliers to meet their obligations to us or (iii) our cost of borrowing.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 16 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 2015.
Forward-looking Statements
Certain statements in this discussion constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe our expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, all forward-looking statements involve risks and uncertainties and, as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including, but not limited to:
competitive pressures in the marketplace, including intense pricing pressure;
our ability to retain existing and attract new customers in a market characterized by significant customer consolidation and intense cost-containment initiatives;
our dependence on sales to certain customers or the loss or material reduction in purchases by key customers;
our dependence on distribution of product of certain suppliers;
our ability to successfully identify, manage or integrate acquisitions;
our ability to successfully manage our international operations, including risks associated with changes in international trade regulations, foreign currency volatility, changes in regulatory conditions, deteriorating economic conditions, adverse tax consequences, and other risks of operating in international markets;
uncertainties related to and our ability to adapt to changes in government regulations, including healthcare laws and regulations (including the Affordable Care Act);
risks arising from possible violations of legal, regulatory or licensing requirements of the markets in which we operate;
uncertainties related to general economic, regulatory and business conditions;
our ability to successfully implement our strategic initiatives;
the availability of and modifications to existing supplier funding programs and our ability to meet the terms to qualify for certain of these programs;
our ability to adapt to changes in product pricing and other terms of purchase by suppliers of product;
the ability of customers and suppliers to meet financial commitments due to us;
changes in manufacturer preferences between direct sales and wholesale distribution;

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changing trends in customer profiles and ordering patterns and our ability to meet customer demand for additional value-added services;
our ability to manage operating expenses and improve operational efficiencies in response to changing customer profiles;
our ability to meet performance targets specified by customer contracts under contractual commitments;
availability of and our ability to access special inventory buying opportunities;
the ability of business partners and financial institutions to perform their contractual responsibilities;
the effect of price volatility in the commodities markets, including fuel price fluctuations, on our operating costs and supplier product prices;
our ability to continue to obtain financing at reasonable rates and to manage financing costs and interest rate risk;
the risk that information systems are interrupted or damaged or fail for any extended period of time or that there is a data security breach;
the risk that a decline in business volume or profitability could result in an impairment of goodwill or other long-lived assets;
our ability to timely or adequately respond to technological advances in the medical supply industry;
the costs associated with and outcome of outstanding and any future litigation, including product and professional liability claims;
adverse changes in U.S. and foreign tax laws and the outcome of outstanding tax contingencies and legislative and tax proposals; and
other factors described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014.
We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in interest rates related to our revolving credit facility. We had no outstanding borrowings and approximately $5 million in letters of credit under the revolving credit facility at March 31, 2015. A hypothetical increase in interest rates of 100 basis points would result in a potential reduction in future pre-tax earnings of approximately $0.1 million per year for every $10 million of outstanding borrowings under the revolving credit facility.
Due to the nature and pricing of our Domestic segment distribution services, we are exposed to potential volatility in fuel prices. Our strategies for helping to mitigate our exposure to changing domestic fuel prices has included entering into leases for trucks with improved fuel efficiency and entering into fixed–price agreements for diesel fuel. We benchmark our domestic diesel fuel purchase prices against the U.S. Weekly Retail On-Highway Diesel Prices (benchmark) as quoted by the U.S. Energy Information Administration. The benchmark averaged $2.92 per gallon in the first three months of 2015, a decrease from $3.96 per gallon in the first three months of 2014. Based on our fuel consumption in the first three months of 2015, we estimate that every 10 cents per gallon increase in the benchmark would reduce our Domestic segment operating earnings by approximately $0.3 million on an annualized basis.
In the normal course of business, we are exposed to foreign currency translation and transaction risks. Our business transactions outside of the United States are primarily denominated in the Euro and British Pound. We may use foreign currency forwards, swaps and options, where possible, to manage our risk related to certain foreign currency fluctuations. However, we believe that our foreign currency transaction risks are low since our revenues and expenses are typically denominated in the same currency.

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Table of Contents

Item 4. Controls and Procedures
We carried out an evaluation, with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2015. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
SEC guidance permits the exclusion of an evaluation of the effectiveness of a registrant's disclosure controls and procedures as they relate to the internal control over financial reporting for an acquired business during the first year following such acquisition. In the fourth quarter of 2014, we acquired Medical Action and ArcRoyal. These acquisitions represent $333 million of total assets and $45.6 million of revenues as of and for the three months ended March 31, 2015. Management's evaluation and conclusion as to the effectiveness of the design and operation of the Company's disclosure controls and procedures as of and for the period covered by this report excludes any evaluation of the internal control over financial reporting of these acquisitions.
Part II. Other Information
Item 1. Legal Proceedings
Certain legal proceedings pending against us are described in our Annual Report on Form 10-K for the year ended December 31, 2014. Through March 31, 2015, there have been no material developments in any legal proceedings reported in such Annual Report.
Item 1A. Risk Factors
Certain risk factors that we believe could affect our business and prospects are described in our Annual Report on Form 10-K for the year ended December 31, 2014. Through March 31, 2015, there have been no material changes in the risk factors described in such Annual Report.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In February 2014, our Board of Directors authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2017. The program is intended to offset shares issued in conjunction with our stock incentive plan and return capital to shareholders. The program may be suspended or discontinued at any time.
We did not repurchase any shares during the first quarter of 2015.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
Owens & Minor, Inc.
 
 
 
(Registrant)
 
 
 
 
Date:
April 28, 2015
 
/s/ James L. Bierman
 
 
 
James L. Bierman
 
 
 
President & Chief Executive Officer
 
 
 
 
Date:
April 28, 2015
 
/s/ Richard A. Meier
 
 
 
Richard A. Meier
 
 
 
Executive Vice President & Chief Financial Officer
 

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Table of Contents

Item 6. Exhibits
 
(a)
Exhibits
 
 
 
10.1
 
Form of Performance Share Award Agreement
 
 
 
10.2
 
Form of Annual Executive Incentive Program
 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
  
XBRL Taxonomy Definition Linkbase Document
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document

30