10-Q
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, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 1-9810
_______________________________________________________
Owens & Minor, Inc.
(Exact name of Registrant as specified in its charter)
_______________________________________________________

Virginia
54-1701843
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
9120 Lockwood Boulevard,
Mechanicsville, Virginia
23116
(Address of principal executive offices)
(Zip Code)
 
 
Post Office Box 27626,
Richmond, Virginia
23261-7626
(Mailing address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (804) 723-7000
_________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “larger accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of Owens & Minor, Inc.’s common stock outstanding as of April 29, 2016, was 62,794,080 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.

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 
 March 31,
(in thousands, except per share data)
 
2016
 
2015
Net revenue
 
$
2,455,793

 
$
2,391,196

Cost of goods sold
 
2,159,157

 
2,093,595

Gross margin

296,636


297,601

Distribution, selling and administrative expenses
 
242,725

 
249,694

Acquisition-related and exit and realignment charges
 
10,483

 
9,916

Other operating income, net
 
(1,542
)
 
(2,984
)
Operating earnings
 
44,970

 
40,975

Interest expense, net
 
6,790

 
6,880

Income before income taxes
 
38,180

 
34,095

Income tax provision
 
14,045

 
15,155

Net income
 
$
24,135

 
$
18,940

Net income per common share:
 
 
 
 
Basic
 
$
0.39

 
$
0.30

Diluted
 
$
0.39

 
$
0.30

Cash dividends per common share
 
$
0.255

 
$
0.2525



See accompanying notes to consolidated financial statements.
3

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2016
 
2015
Net income
 
$
24,135

 
$
18,940

Other comprehensive income (loss), net of tax:
 
 
 
 
Currency translation adjustments (net of income tax of $0 in 2016 and 2015)
 
8,162

 
(27,941
)
Change in unrecognized net periodic pension costs (net of income tax of $171 in 2016 and $143 in 2015)
 
238

 
258

Other (net of income tax of $0 in 2016 and 2015)
 
19

 
38

Total other comprehensive income (loss), net of tax
 
8,419

 
(27,645
)
Comprehensive income (loss)
 
$
32,554

 
$
(8,705
)


See accompanying notes to consolidated financial statements.
4

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
 
March 31,
 
December 31,
(in thousands, except per share data)
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
190,323

 
$
161,020

Accounts and notes receivable, net of allowances of $13,234 and $13,177
615,750

 
587,935

Merchandise inventories
925,714

 
940,775

Other current assets
269,698

 
284,970

Total current assets
2,001,485

 
1,974,700

Property and equipment, net of accumulated depreciation of $197,285 and $189,105
208,033

 
208,930

Goodwill, net
420,071

 
419,619

Intangible assets, net
93,347

 
95,250

Other assets, net
73,905

 
75,277

Total assets
$
2,796,841

 
$
2,773,776

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
758,585

 
$
710,609

Accrued payroll and related liabilities
30,327

 
45,907

Other current liabilities
278,026

 
307,073

Total current liabilities
1,066,938

 
1,063,589

Long-term debt, excluding current portion
567,711

 
568,495

Deferred income taxes
93,275

 
86,326

Other liabilities
63,996

 
62,776

Total liabilities
1,791,920

 
1,781,186

Commitments and contingencies

 

Equity
 
 
 
Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 62,802 shares and 62,803 shares
125,604

 
125,606

Paid-in capital
213,016

 
211,943

Retained earnings
709,707

 
706,866

Accumulated other comprehensive income
(43,406
)
 
(51,825
)
Total equity
1,004,921

 
992,590

Total liabilities and equity
$
2,796,841

 
$
2,773,776



See accompanying notes to consolidated financial statements.
5

Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
 
 
Three Months Ended March 31,
(in thousands)
2016
 
2015
Operating activities:
 
 
 
Net income
$
24,135

 
$
18,940

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
14,218

 
19,123

Share-based compensation expense
2,603

 
2,597

Provision for losses on accounts and notes receivable
115

 
220

Deferred income tax expense
6,907

 
510

Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(26,815
)
 
27,356

Merchandise inventories
15,178

 
(3,888
)
Accounts payable
46,751

 
88,944

Net change in other assets and liabilities
(38,100
)
 
13,580

Other, net
(97
)
 
1,321

Cash provided by operating activities
44,895

 
168,703

Investing activities:
 
 
 
Additions to property and equipment
(5,283
)
 
(7,619
)
Additions to computer software and intangible assets
(1,777
)
 
(3,947
)
Proceeds from sale of property and equipment
4,599

 
50

Cash used for investing activities
(2,461
)
 
(11,516
)
Financing activities:
 
 
 
Change in bank overdraft
8,359

 
1,179

Repayment of revolving credit facility

 
(33,700
)
Cash dividends paid
(16,029
)
 
(15,934
)
Repurchases of common stock
(5,630
)
 

Excess tax benefits related to share-based compensation
250

 
240

Proceeds from exercise of stock options

 
125

Other, net
(3,016
)
 
(2,324
)
Cash used for financing activities
(16,066
)
 
(50,414
)
Effect of exchange rate changes on cash and cash equivalents
2,935

 
(4,489
)
Net increase in cash and cash equivalents
29,303

 
102,284

Cash and cash equivalents at beginning of period
161,020

 
56,772

Cash and cash equivalents at end of period
$
190,323

 
$
159,056

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
20,028

 
$
4,509

Interest paid
$
6,226

 
$
5,924




See accompanying notes to consolidated financial statements.
6

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)
 
 
Total
Equity
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
)
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

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2015
62,803

 
$
125,606

 
$
211,943

 
$
706,866

 
$
(51,825
)
 
 
$
992,590

Net income
 
 
 
 
 
 
24,135

 
 
 
 
24,135

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
8,419

 
 
8,419

Dividends declared ($0.255 per share)
 
 
 
 
 
 
(15,989
)
 
 
 
 
(15,989
)
Shares repurchased and retired
(163
)
 
(325
)
 
 
 
(5,305
)
 
 
 
 
(5,630
)
Share-based compensation expense, exercises and other
162

 
323

 
1,073

 
 
 
 
 
 
1,396

Balance March 31, 2016
62,802

 
$
125,604

 
$
213,016

 
$
709,707

 
$
(43,406
)
 
 
$
1,004,921



See accompanying notes to consolidated financial statements.
7

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.
Recently, we have made certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting. These changes align our operations into three distinct business units: Domestic, International and Clinical & Procedural Solutions (CPS). Domestic is our U.S.distribution, logistics and value-added services business, while International is our European distribution, logistics and value-added services business. CPS provides product-related solutions, including surgical and procedural kitting and sourcing. Beginning with the quarter ended March 31, 2016, we now report financial results using this three segment structure and have recast prior year segment results on the same basis.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation. Depreciation and amortization, previously reported as a separate financial statement line item in the consolidated statements of income is now included in distribution, selling and administrative expenses for all periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make assumptions and estimates that affect reported amounts and related disclosures. Actual results may differ from these estimates.
Note 2—Fair Value
The carrying amounts of cash and cash equivalents, accounts receivable, financing receivables, accounts payable and financing payables included in the consolidated balance sheets approximate fair value due to the short-term nature of these instruments. The fair value of long-term debt is estimated based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market (Level 1) or, if quoted market prices or dealer quotes are not available, on the borrowing rates currently available for loans with similar terms, credit ratings and average remaining maturities (Level 2). We determine the fair value of our derivatives based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on current market prices for applicable currencies. See Note 7 for the fair value of long-term debt and Note 8 for the fair value of derivatives.
Note 3—Financing Receivables and Payables
At March 31, 2016 and December 31, 2015, we had financing receivables of $165.5 million and $198.5 million and related payables of $105.4 million and $148.5 million outstanding under our order-to-cash program and product financing arrangements, which were included in other current assets and other current liabilities, respectively, in the consolidated balance sheets.
Note 4—Goodwill and Intangible Assets
In connection with our new three segment structure, goodwill has been reallocated based on the relative fair value of the underlying reporting units. We performed an interim impairment analysis as a result of this change and noted no impairment. The following table summarizes the reallocated goodwill balances by segment and the changes in the carrying amount of goodwill through March 31, 2016:
 
Domestic
 
International
 
CPS
 
Consolidated
Carrying amount of goodwill, December 31, 2015
$
180,006

 
$
23,426

 
$
216,187

 
$
419,619

Currency translation adjustments

 
(280
)
 
732

 
452

Carrying amount of goodwill, March 31, 2016
$
180,006

 
$
23,146

 
$
216,919

 
$
420,071


8


Table of Contents

Intangible assets at March 31, 2016, and December 31, 2015, were as follows:
 
March 31, 2016
 
December 31, 2015
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
122,467

 
$
4,733

 
$
121,888

 
$
4,621

Accumulated amortization
(32,419
)
 
(1,434
)
 
(29,872
)
 
(1,387
)
Net intangible assets
$
90,048

 
$
3,299

 
$
92,016

 
$
3,234

At March 31, 2016, $13.2 million in net intangible assets were held in the Domestic segment, $14.4 million were held in the International segment and $65.8 million were held in the CPS segment. Amortization expense for intangible assets was $2.2 million and $2.4 million for the three months ended March 31, 2016 and 2015.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $7.8 million for the remainder of 2016, $9.9 million for 2017, $9.3 million for 2018, $9.2 million for 2019, $9.0 million for 2020 and $8.6 million for 2021.
Note 5—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, 2016 and 2015 were as follows:
 
Three Months Ended March 31,
 
2016
 
2015
Domestic segment
$
8,074

 
$
2,639

International segment
1,700

 
4,672

CPS segment
1,108

 

Total exit and realignment charges
$
10,882

 
$
7,311

For the quarter ended March 31, 2016, $9.9 million in charges were associated with our voluntary employee separation program and other severance activities. The following table summarizes the activity related to exit and realignment cost accruals through March 31, 2016 and 2015:
 
Lease
Obligations
 
Severance and
Other
 
Total
Accrued exit and realignment costs, December 31, 2015
$
486

 
$
1,840

 
$
2,326

Provision for exit and realignment activities

 
9,895

 
9,895

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

 
$
10,448

 
$
10,448

 
 
 
 
 
 
 
 
 
 
 
 
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

In addition to the exit and realignment accruals in the preceding table, we also incurred $1.0 million of costs that were expensed as incurred for the quarter ended March 31, 2016, including $0.5 million in information systems costs, $0.4 million in consulting costs and $0.1 million in other costs.

9


Table of Contents

We 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 has been replaced, $1.8 million in facility costs, $1.3 million in labor costs, $0.3 million in information systems costs and $0.5 million in other costs.
Note 6—Retirement Plans
We have a noncontributory, unfunded retirement plan for certain officers and other key employees in the United States. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective employees.
The components of net periodic benefit cost, which are included in distribution, selling and administrative expenses, for the three months ended March 31, 2016 and 2015, were as follows:
 
Three Months Ended 
 March 31,
 
2016
 
2015
Service cost
$
23

 
$
33

Interest cost
505

 
464

Recognized net actuarial loss
409

 
401

Net periodic benefit cost
$
937

 
$
898

Certain of our foreign subsidiaries have health and welfare plans covering substantially all of their respective employees. Our expense for these plans totaled $0.4 million and $0.5 million for the three months ended March 31, 2016 and 2015.
Note 7—Debt
We have $275 million of 3.875% senior notes due 2021 (the “2021 Notes”) and $275 million of 4.375% senior notes due 2024 (the “2024 Notes”), with interest payable semi-annually. The 2021 Notes were sold at 99.5% of the principal amount with an effective yield of 3.951%. The 2024 Notes were sold at 99.6% of the principal with an effective yield of 4.422%. We have the option to redeem the 2021 Notes and 2024 Notes in part or in whole prior to maturity at a redemption price equal to the greater of 100% of the principal amount or the present value of the remaining scheduled payments discounted at the Treasury Rate plus 30 basis points. As of March 31, 2016 and December 31, 2015, the estimated fair value of the 2021 Notes was $277.4 million and $273.7 million and the estimated fair value of the 2024 Notes was $277.0 million and $272.8 million, respectively.
We have a Credit Agreement with a $450 million borrowing capacity which extends through September 2019. Under the Amended Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $200 million. The interest rate on the Amended Credit Agreement, which is subject to adjustment quarterly, is based on the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread) as defined by the Amended Credit Agreement. We are charged a commitment fee of between 12.5 and 25.0 basis points on the unused portion of the facility. The terms of the Amended Credit Agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. Based on our leverage ratio at March 31, 2016, the interest rate under the credit facility is LIBOR plus 1.375%.
At March 31, 2016, we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445 million available for borrowing. We also have a $1.2 million letter of credit outstanding as of March 31, 2016 and 2015, which supports our facilities leased in Europe.
The Amended Credit Agreement and senior notes contain cross-default provisions which could result in the acceleration of payments due in the event of default of either agreement. We believe we were in compliance with our debt covenants at March 31, 2016.
Note 8—Derivatives
When deemed appropriate, we use derivatives, primarily forward contracts, as a risk management tool to mitigate the potential impact of foreign currency exchange risk. The total notional values of our foreign currency derivatives was $0.9 million at March 31, 2016 and $2.0 million as of December 31, 2015. 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, 2016 and December 31, 2015 the fair value of our foreign currency contracts included in other assets on the consolidated balance sheet was $0.1 million and $0.4 million. The impact from changes in the fair value

10


Table of Contents

of these foreign currency derivatives included in other operating income, net was a $0.3 million loss for the first quarter of 2016 and a $0.8 million gain for the first quarter of 2015. We consider the risk of counterparty default to be minimal.
Note 9—Income Taxes
The effective tax rate was 36.8% for the three months ended March 31, 2016, compared to 44.4% in the same quarter of 2015. The change in rate resulted from a higher percentage of the company's pretax income earned in lower tax rate jurisdictions compared to prior year and the deductibility of certain prior year acquisition-related charges for income tax purposes. The liability for unrecognized tax benefits was $8.5 million at March 31, 2016 and $7.7 million at December 31, 2015. Included in the liability at March 31, 2016 were $4.1 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 months ended March 31, 2016 and 2015.
 
Three Months Ended 
 March 31,
(in thousands, except per share data)
2016
 
2015
Numerator:
 
 
 
Net income
$
24,135

 
$
18,940

Less: income allocated to unvested restricted shares
(276
)
 
(161
)
Net income attributable to common shareholders - basic
23,859

 
18,779

Add: undistributed income attributable to unvested restricted shares - basic
57

 
18

Less: undistributed income attributable to unvested restricted shares - diluted
(57
)
 
(18
)
Net income attributable to common shareholders - diluted
$
23,859

 
$
18,779

Denominator:
 
 
 
Weighted average shares outstanding - basic
61,696

 
62,264

Dilutive shares - stock options

 
2

Weighted average shares outstanding - diluted
61,696

 
62,266

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

 
$
0.30

Diluted
$
0.39

 
$
0.30

Note 11—Shareholders’ Equity
Our Board of Directors has authorized a share repurchase program of up to $100 million of our outstanding common stock to be executed at the discretion of management over a three-year period, expiring in February 2017. The program is intended, in part, to offset shares issued in conjunction with our stock incentive plans and return capital to shareholders. The program may be suspended or discontinued at any time. During the three months ended March 31, 2016, we repurchased in open-market transactions and retired approximately 0.2 million shares of our common stock for an aggregate of $5.6 million, or an average price per share of $34.61. As of March 31, 2016, we have approximately $64.4 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

11


Table of Contents

Note 12—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, 2016 and 2015: 
 
Retirement Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2015
$
(10,482
)
 
$
(41,228
)
 
$
(115
)
 
$
(51,825
)
Other comprehensive income (loss) before reclassifications

 
8,162

 

 
8,162

Income tax

 

 

 

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

 
8,162

 

 
8,162

Amounts reclassified from accumulated other comprehensive income (loss)
409

 

 
19

 
428

Income tax
(171
)
 

 

 
(171
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
238

 

 
19

 
257

Other comprehensive income (loss)
238

 
8,162

 
19

 
8,419

Accumulated other comprehensive income (loss), March 31, 2016
$
(10,244
)
 
$
(33,066
)
 
$
(96
)
 
$
(43,406
)

 
Retirement 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
)
We include amounts reclassified out of accumulated other comprehensive income related to defined benefit pension plans as a component of net periodic pension cost recorded in distribution, selling and administrative expenses. For the three months ended March 31, 2016 and 2015, we reclassified $0.4 million of actuarial net losses.
Note 13—Segment Information
We periodically evaluate our application of accounting guidance for reportable segments and disclose information about reportable segments based on the way management organizes the enterprise for making operating decisions and assessing performance. We report our business under three segments: Domestic, International and Clinical & Procedural Solutions (CPS). The Domestic segment includes our United States distribution, logistics and value-added services business. The International segment consists of our European distribution, logistics and value-added services business. CPS provides product-related solutions, including surgical and procedural kitting and sourcing.

12


Table of Contents

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.
The following tables present financial information by segment:
 
Three Months Ended March 31,
 
2016
 
2015
Net revenue:
 
 
 
Segment net revenue
 
 
 
Domestic
$
2,321,708

 
$
2,249,705

International
83,551

 
95,511

CPS
141,353

 
129,645

Total segment net revenue
2,546,612

 
2,474,861

Inter-segment revenue
 
 
 
CPS
(90,819
)
 
(83,665
)
       Total inter-segment revenue
(90,819
)
 
(83,665
)
Consolidated net revenue
$
2,455,793

 
$
2,391,196

 
 
 
 
Operating earnings (loss):
 
 
 
Domestic
$
41,718

 
$
38,106

International
1,128

 
(337
)
CPS
13,271

 
13,182

Inter-segment eliminations
(664
)
 
(60
)
Acquisition-related and exit and realignment charges (1)
(10,483
)
 
(9,916
)
Consolidated operating earnings
$
44,970

 
$
40,975

 
 
 
 
Depreciation and amortization:
 
 
 
Domestic
$
7,542

 
$
9,083

International
4,450

 
4,895

CPS
2,226

 
2,191

Consolidated depreciation and amortization
$
14,218

 
$
16,169

 
 
 
 
Capital expenditures:
 
 
 
Domestic
$
4,543

 
$
8,009

International
1,970

 
2,915

CPS
547

 
642

Consolidated capital expenditures
$
7,060

 
$
11,566

 
 
 
 
(1) The first quarter of 2015 included $3.0 million in accelerated amortization related to an information system that was replaced in the International segment.

13


Table of Contents

 
March 31, 2016
 
December 31, 2015
Total assets:
 
 
 
Domestic
$
1,742,187

 
$
1,728,345

International
448,969

 
464,003

CPS
415,362

 
420,408

Segment assets
2,606,518

 
2,612,756

Cash and cash equivalents
190,323

 
161,020

Consolidated total assets
$
2,796,841

 
$
2,773,776

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 March 31, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Statements of Income
 
 
 
 
 
 
 
 
 
 
Net revenue
$

 
$
2,321,708

 
$
172,101

 
$
(38,016
)
 
$
2,455,793

 
Cost of goods sold

 
2,105,264

 
92,075

 
(38,182
)
 
2,159,157

 
Gross margin

 
216,444

 
80,026

 
166

 
296,636

 
Distribution, selling and administrative expenses
534

 
169,310

 
72,881

 

 
242,725

 
Acquisition-related and exit and realignment charges

 
8,402

 
2,081

 

 
10,483

 
Other operating income, net

 
(1,384
)
 
(158
)
 

 
(1,542
)
 
Operating earnings (loss)
(534
)
 
40,116

 
5,222

 
166

 
44,970

 
Interest expense (income), net
6,840

 
(629
)
 
579

 

 
6,790

 
Income (loss) before income taxes
(7,374
)
 
40,745

 
4,643

 
166

 
38,180

 
Income tax (benefit) provision

 
11,547

 
2,498

 

 
14,045

 
Equity in earnings of subsidiaries
31,509

 

 

 
(31,509
)
 

 
Net income (loss)
24,135

 
29,198

 
2,145

 
(31,343
)
 
24,135

 
Other comprehensive income (loss)
8,419

 
257

 
8,162

 
(8,419
)
 
8,419

 
Comprehensive income (loss)
$
32,554

 
$
29,455

 
$
10,307

 
$
(39,762
)
 
$
32,554


14


Table of Contents

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

Distribution, selling and administrative expenses
39

 
169,680

 
79,975

 

 
249,694

Acquisition-related and exit and realignment charges

 
3,577

 
6,339

 

 
9,916

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
)

15


Table of Contents

 
 
March 31, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Balance Sheets
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
132,179

 
$
9,514

 
$
48,630

 
$

 
$
190,323

 
Accounts and notes receivable, net

 
530,547

 
94,335

 
(9,132
)
 
615,750

 
Merchandise inventories

 
872,376

 
55,558

 
(2,220
)
 
925,714

 
Other current assets
7

 
85,246

 
184,445

 

 
269,698

 
Total current assets
132,186

 
1,497,683

 
382,968

 
(11,352
)
 
2,001,485

 
Property and equipment, net

 
102,937

 
105,096

 

 
208,033

 
Goodwill, net

 
180,006

 
240,065

 

 
420,071

 
Intangible assets, net

 
13,213

 
80,134

 

 
93,347

 
Due from O&M and subsidiaries

 
564,018

 

 
(564,018
)
 

 
Advances to and investment in consolidated subsidiaries
1,991,311

 

 

 
(1,991,311
)
 

 
Other assets, net

 
56,005

 
17,900

 

 
73,905

 
Total assets
$
2,123,497

 
$
2,413,862

 
$
826,163

 
$
(2,566,681
)
 
$
2,796,841

 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
707,358

 
$
60,359

 
$
(9,132
)
 
$
758,585

 
Accrued payroll and related liabilities

 
18,287

 
12,040

 

 
30,327

 
Other accrued liabilities
7,488

 
117,778

 
152,760

 

 
278,026

 
Total current liabilities
7,488

 
843,423

 
225,159

 
(9,132
)
 
1,066,938

 
Long-term debt, excluding current portion
544,197

 
4,121

 
19,393

 

 
567,711

 
Due to O&M and subsidiaries
566,891

 

 
59,213

 
(626,104
)
 

 
Intercompany debt

 
138,890

 

 
(138,890
)
 

 
Deferred income taxes

 
71,484

 
21,791

 

 
93,275

 
Other liabilities

 
57,586

 
6,410

 

 
63,996

 
Total liabilities
1,118,576

 
1,115,504

 
331,966

 
(774,126
)
 
1,791,920

 
Equity
 
 
 
 
 
 
 
 
 
 
Common stock
125,604

 

 

 

 
125,604

 
Paid-in capital
213,016

 
174,612

 
583,867

 
(758,479
)
 
213,016

 
Retained earnings (deficit)
709,707

 
1,133,985

 
(56,503
)
 
(1,077,482
)
 
709,707

 
Accumulated other comprehensive income (loss)
(43,406
)
 
(10,239
)
 
(33,167
)
 
43,406

 
(43,406
)
 
Total equity
1,004,921

 
1,298,358

 
494,197

 
(1,792,555
)
 
1,004,921

 
Total liabilities and equity
$
2,123,497

 
$
2,413,862

 
$
826,163

 
$
(2,566,681
)
 
$
2,796,841



16


Table of Contents

December 31, 2015
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
103,284

 
$
5,614

 
$
52,122

 
$

 
$
161,020

Accounts and notes receivable, net

 
507,673

 
89,895

 
(9,633
)
 
587,935

Merchandise inventories

 
883,232

 
59,930

 
(2,387
)
 
940,775

Other current assets
104

 
72,683

 
212,183

 

 
284,970

Total current assets
103,388

 
1,469,202

 
414,130

 
(12,020
)
 
1,974,700

Property and equipment, net

 
103,219

 
105,711

 

 
208,930

Goodwill, net

 
180,006

 
239,613

 

 
419,619

Intangible assets, net

 
13,731

 
81,519

 

 
95,250

Due from O&M and subsidiaries

 
518,473

 

 
(518,473
)
 

Advances to and investments in consolidated subsidiaries
1,967,176

 

 

 
(1,967,176
)
 

Other assets, net

 
57,409

 
17,868

 

 
75,277

Total assets
$
2,070,564

 
$
2,342,040

 
$
858,841

 
$
(2,497,669
)
 
$
2,773,776

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
662,909

 
$
56,073

 
$
(8,373
)
 
$
710,609

Accrued payroll and related liabilities

 
32,094

 
13,813

 

 
45,907

Other current liabilities
6,924

 
109,137

 
191,012

 

 
307,073

Total current liabilities
6,924

 
804,140

 
260,898

 
(8,373
)
 
1,063,589

Long-term debt, excluding current portion
543,982

 
4,527

 
19,986

 

 
568,495

Due to O&M and subsidiaries
527,068

 

 
70,089

 
(597,157
)
 

Intercompany debt

 
138,890

 

 
(138,890
)
 

Deferred income taxes

 
67,562

 
18,764

 

 
86,326

Other liabilities

 
57,573

 
5,203

 

 
62,776

Total liabilities
1,077,974

 
1,072,692

 
374,940

 
(744,420
)
 
1,781,186

Equity
 
 
 
 
 
 
 
 

Common stock
125,606

 

 

 

 
125,606

Paid-in capital
211,943

 
174,612

 
583,873

 
(758,485
)
 
211,943

Retained earnings (deficit)
706,866

 
1,104,787

 
(58,648
)
 
(1,046,139
)
 
706,866

Accumulated other comprehensive income (loss)
(51,825
)
 
(10,051
)
 
(41,324
)
 
51,375

 
(51,825
)
Total equity
992,590

 
1,269,348

 
483,901

 
(1,753,249
)
 
992,590

Total liabilities and equity
$
2,070,564

 
$
2,342,040

 
$
858,841

 
$
(2,497,669
)
 
$
2,773,776



17


Table of Contents

 
Three Months Ended March 31, 2016
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
24,135

 
$
29,198

 
$
2,145

 
$
(31,343
)
 
$
24,135

 
Adjustments to reconcile net income to cash provided by (used for) operating activities:
 
 
 
 
 
 
 
 
 
 
Equity in earnings of subsidiaries
(31,509
)
 

 

 
31,509

 

 
Depreciation and amortization

 
7,569

 
6,649

 

 
14,218

 
Share-based compensation expense

 
2,603

 

 

 
2,603

 
Provision for losses on accounts and notes receivable

 
128

 
(13
)
 

 
115

 
Deferred income tax expense (benefit)

 
3,922

 
2,985

 

 
6,907

 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts and notes receivable

 
(23,002
)
 
(4,569
)
 
756

 
(26,815
)
 
Merchandise inventories

 
10,856

 
4,490

 
(168
)
 
15,178

 
Accounts payable

 
44,449

 
3,056

 
(754
)
 
46,751

 
Net change in other assets and liabilities
661

 
(15,780
)
 
(22,981
)
 

 
(38,100
)
 
Other, net
214

 
123

 
(434
)
 

 
(97
)
 
Cash provided by (used for) operating activities
(6,499
)
 
60,066

 
(8,672
)
 

 
44,895

 
Investing activities:
 
 
 
 
 
 
 
 
 
 
Additions to property and equipment

 
(3,928
)
 
(1,355
)
 

 
(5,283
)
 
Additions to computer software and intangible assets

 
(615
)
 
(1,162
)
 

 
(1,777
)
 
Proceeds from the sale of property and equipment

 
3

 
4,596

 

 
4,599

 
Cash provided by (used for) investing activities

 
(4,540
)
 
2,079

 

 
(2,461
)
 
Financing activities:
 
 
 
 
 
 
 
 
 
 
Change in bank overdraft

 

 
8,359

 

 
8,359

 
Change in intercompany advances
58,435

 
(51,009
)
 
(7,426
)
 

 

 
Cash dividends paid
(16,029
)
 

 

 

 
(16,029
)
 
Repurchases of common stock
(5,630
)
 

 

 

 
(5,630
)
 
Excess tax benefits related to share-based compensation
250

 

 

 

 
250

 
Other, net
(1,632
)
 
(617
)
 
(767
)
 

 
(3,016
)
 
Cash provided by (used for) financing activities
35,394

 
(51,626
)
 
166

 

 
(16,066
)
 
Effect of exchange rate changes on cash and cash equivalents

 

 
2,935

 

 
2,935

 
Net increase (decrease) in cash and cash equivalents
28,895

 
3,900

 
(3,492
)
 

 
29,303

 
Cash and cash equivalents at beginning of period
103,284

 
5,614

 
52,122

 

 
161,020

 
Cash and cash equivalents at end of period
$
132,179

 
$
9,514

 
$
48,630

 
$

 
$
190,323

 

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 provided by (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

Note 15—Recent Accounting Pronouncements
On January 1, 2016, we adopted ASU 2015-03, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that our $3.9 million in debt issuance costs at March 31, 2016 related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. As a result of this adoption, we have also presented $4.1 million in debt issuance costs from our December 31, 2015 balance sheet in a manner that conforms to the new presentation. The adoption of this standard did not affect our results of operations or cash flows in either the current or prior interim or annual periods.
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and should be applied using a modified retrospective approach. We are in the process of evaluating the potential impacts of this new guidance on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this updated guidance include changes to simplify the Codification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted. We are in the process of evaluating the potential impacts of this new guidance on our consolidated financial statements.
There have been no changes in our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2015.
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, 2015. 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, 2015.
Overview
Owens & Minor, Inc., along with its subsidiaries, (we, us, or our) is a leading global healthcare services company that connects the world of medical products to the point of care. Recently, we have made certain changes to the leadership team, organizational structure, budgeting and financial reporting processes which drive changes to segment reporting. These changes align our operations into three distinct business units: Domestic, International and Clinical & Procedural Solutions (CPS). Domestic is our U.S. distribution, logistics and value-added services business, while International is our European distribution, logistics and value-added services business. CPS provides product-related solutions, including surgical and procedural kitting and sourcing. Furthermore, the basis for segment reporting shifts from the geography of the end customer to the business unit selling the product or providing the service. This includes intercompany transactions as well. Beginning with this quarter, we now report financial results using this three segment structure and have recast prior year segment results on the same basis. Segment financial information is provided in Note 13 of Notes to Consolidated Financial Statements included in this quarterly report.

20


Table of Contents

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)
2016
 
2015
Operating earnings, as reported (GAAP)
$
44,970

 
$
40,975

Acquisition-related and exit and realignment charges
10,483

 
9,916

Operating earnings, adjusted (non-GAAP) (Adjusted Operated Earnings)
$
55,453

 
$
50,891

Adjusted Operating Earnings as a percent of revenue (non-GAAP)
2.26
%
 
2.13
%
Net income, as reported (GAAP)
$
24,135

 
$
18,940

Acquisition-related and exit and realignment charges, net of tax
7,129

 
8,592

Net income, adjusted (non-GAAP) (Adjusted Net Income)
$
31,264

 
$
27,532

Net income per diluted common share, as reported (GAAP)
$
0.39

 
$
0.30

Acquisition-related and exit and realignment charges, per diluted common share
0.11

 
0.14

Net income per diluted common share, adjusted (non-GAAP)(Adjusted EPS)
$
0.50

 
$
0.44

Adjusted EPS (non-GAAP) was $0.50 in the first quarter of 2016, an improvement of $0.06 when compared to prior year primarily as a result of improved operating earnings across all three segments. Domestic segment operating earnings of $41.7 million improved $3.6 million from the first quarter of 2015 as a result of revenue growth, expense control initiatives and higher income from manufacturer product price changes. The International segment improved in the first quarter of 2016 to operating income of $1.1 million, compared to an operating loss of $0.3 million in the same period of 2015, as a result of continued cost control and improved operational efficiency. CPS operating earnings of $13.3 million improved slightly compared to $13.2 million in 2015 primarily due to higher sales.
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.
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 $(0.4) million and $2.6 million in the first quarter of 2016 and 2015. The current quarter amount related to the gain on the sale of property acquired with the Medical Action acquisition. Charges in 2015 consisted 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 the former owner and costs to transition information technology and other administrative functions.
Exit and realignment charges, pre-tax, were $10.9 million and $7.3 million in the first quarter of 2016 and 2015. Charges in the first quarter of 2016 primarily included costs associated with our voluntary employee separation program and other severance charges. Amounts in 2015 were associated with optimizing our operations and included costs for 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 included 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 Note 5 of Notes to Consolidated Financial Statements included in this quarterly report.

21


Table of Contents

Results of Operations
Net revenue.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Domestic
$
2,321,708

 
$
2,249,705

 
$
72,003

 
3.2
 %
International
83,551

 
95,511

 
(11,960
)
 
(12.5
)%
CPS
141,353

 
129,645

 
11,708

 
9.0
 %
Inter-segment
(90,819
)
 
(83,665
)
 
(7,154
)
 
8.6
 %
Net revenue
$
2,455,793

 
$
2,391,196

 
$
64,597

 
2.7
 %
Consolidated net revenue improved in the first quarter of 2016 as a result of the increase in our Domestic segment which resulted primarily from growth in larger healthcare provider customer accounts and an additional sales day in the first quarter of 2016 compared to 2015. 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 $3.3 million and the exit of a U.K. customer contract in mid-2015. An increase in sales of custom procedure trays was the primary driver of the increase in CPS revenue compared to prior year.
Cost of goods sold.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Cost of goods sold
$
2,159,157

 
$
2,093,595

 
$
65,562

 
3.1
%
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. Cost of goods sold also includes direct and certain indirect labor, material and overhead costs associated with our kitting businesses. 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 kitting businesses, cost of goods sold increased $65.6 million compared to the first quarter of 2015.
Gross margin.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Gross margin
$
296,636

 
$
297,601

 
$
(965
)
 
(0.3
)%
As a % of net revenue
12.08
%
 
12.45
%
 
 
 
 
Gross margin benefitted from the sales growth in the Domestic segment and higher income from manufacturer product price changes which were offset by the impacts of the U.K. customer exit in mid-2015 and $2.1 million in unfavorable impacts of foreign currency translation.
Operating expenses.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Distribution, selling & administrative expenses
$
242,725

 
$
249,694

 
$
(6,969
)
 
(2.8
)%
As a % of net revenue
9.88
%
 
10.44
%
 

 

Other operating income, net
$
(1,542
)
 
$
(2,984
)
 
$
1,442

 
(48.3
)%
Distribution, selling and administrative (DS&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 DS&A expenses and include costs to store, move, and prepare products for shipment, as well as costs to deliver

22


Table of Contents

products to customers. The costs to convert new customers to our information systems are included in DS&A and are generally incurred prior to the recognition of revenues from the new customers.
The decrease in DS&A expenses compared to prior year reflected the benefits of cost control initiatives, lower fuel costs and improved operational efficiency as well as favorable foreign currency translation impacts of $2.2 million.
The decrease in other operating income, net compared to 2015 was attributed primarily to changes in fair value of derivatives compared to prior year.
Interest expense, net.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Interest expense, net
$
6,790

 
$
6,880

 
$
(90
)
 
(1.3
)%
Effective interest rate
4.79
%
 
4.73
%
 
 
 
 
Interest expense in the first quarter of 2016 was consistent with prior year.
Income taxes.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2016
 
2015
 
$
 
%
Income tax provision
$
14,045

 
$
15,155

 
$
(1,110
)
 
(7.3
)%
Effective tax rate
36.8
%
 
44.4
%
 
 
 
 
The change in the effective tax rate compared to 2015, including income taxes on acquisition-related and exit and realignment charges, resulted from a higher percentage of the company's pretax income earned in lower tax rate jurisdictions compared to prior year and the deductibility of certain prior year acquisition-related charges for income tax purposes.

23


Table of Contents

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, 2016
 
December 31, 2015
 
Change
(Dollars in thousands)
 
 
$
 
%
Cash and cash equivalents
$
190,323

 
$
161,020

 
$
29,303

 
18.2
 %
Accounts and notes receivable, net of allowances
$
615,750

 
$
587,935

 
$
27,815

 
4.7
 %
Consolidated DSO (1)
21.8

 
21.0

 

 

Merchandise inventories
$
925,714

 
$
940,775

 
$
(15,061
)
 
(1.6
)%
Consolidated inventory turnover (2)
9.3

 
9.4

 

 

Accounts payable
$
758,585

 
$
710,609

 
$
47,976

 
6.8
 %
(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, 2016 and year ended December 31, 2015
Liquidity and capital expenditures. The following table summarizes our consolidated statements of cash flows for the three months ended March 31, 2016 and 2015:
(Dollars in thousands)
2016
 
2015
Net cash provided by (used for):
 
 
 
Operating activities
$
44,895

 
$
168,703

Investing activities
(2,461
)
 
(11,516
)
Financing activities
(16,066
)
 
(50,414
)
Effect of exchange rate changes
2,935

 
(4,489
)
Increase in cash and cash equivalents
$
29,303

 
$
102,284

Cash provided by operating activities was $44.9 million in the first three months of 2016, compared to $168.7 million in the same period of 2015. The decrease in cash from operating activities for the first three months of 2016 compared to the same period in 2015 was primarily due to routine changes in working capital, including timing of payments to vendors in the prior year. Depreciation and amortization in the first quarter of 2015 included $3.0 million in accelerated amortization related to an information system that was replaced in the International segment.
Cash used for investing activities was $2.5 million in the first three months of 2016, compared to $11.5 million in the same period of 2015. Investing activities in 2016 and 2015 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 investing activities in 2016 was partially offset by $4.6 million in proceeds from the sale of property.
Cash used for financing activities in the first three months of 2016 was $16.1 million, compared to $50.4 million used in the same period of 2015. During the first three months of 2016, we paid dividends of $16.0 million (compared to $15.9 million in the same period of 2015) and repurchased $5.6 million in common stock. Financing activities in the first quarter of 2015 included a $33.7 million repayment under our revolving credit facility.
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

24


Table of Contents

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, 2016, the interest rate under the credit facility is LIBOR plus 1.375%.
At March 31, 2016 , we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Amended Credit Agreement, leaving $445 million available for borrowing. We also have a $1.2 million letter of credit outstanding as of March 31, 2016 and December 31, 2015 which supports our facilities leased in Europe.
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”). 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, which commenced 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 2016, we paid cash dividends on our outstanding common stock at the rate of $0.255 per share, which represents a 1.0% increase over the rate of $0.2525 per share paid in the first quarter of 2015. 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.
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 return capital to shareholders, and may be suspended or discontinued at any time. During the first quarter of 2016, we repurchased 0.2 million shares at $5.6 million. At March 31, 2016, the remaining amount authorized for repurchase under this program was $64.4 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 $46.5 million and $46.0 million as of March 31, 2016 and December 31, 2015. 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 U.S.-based 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 our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 15 in the Notes to Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 2016.
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;

25


Table of Contents

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;
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, that new information systems are not successfully implemented or integrated, or that there is a data security breach in our information systems;
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, 2015.
We undertake no obligation to update or revise any forward-looking statements, except as required by applicable law.

26


Table of Contents

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 $5.0 million in letters of credit under the revolving credit facility at March 31, 2016. 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. 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 $2.07 per gallon in the first three months of 2016, a decrease from $2.92 per gallon in the first three months of 2015. Based on our fuel consumption in the first three months of 2016, 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.
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, 2016. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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, 2015. Through March 31, 2016, 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, 2015. Through March 31, 2016, there have been no material changes in the risk factors described in such Annual Report.

27


Table of Contents

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. 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. For the three months ended March 31, 2016, we repurchased in open-market transactions and retired 0.2 million shares of our common stock for an aggregate of $5.6 million, or an average price per share of $34.61. The following table summarizes share repurchase activity by month during the three months ended March 31, 2016.
Period
Total number
of shares purchased
 
Average price paid per share
 
Total number of
shares purchased
as part of a
publicly announced program
 
Maximum dollar
value of shares
that may yet
be purchased under the program
January 2016
111,680

 
$
33.89

 
111,680

 
$
66,725,109

February 2016
34,918

 
$
34.80

 
34,918

 
$
65,000,070

March 2016
16,099

 
$
39.16

 
16,099

 
$
64,369,676

Total
162,697

 
 
 
162,697

 
 


28


Table of Contents

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:
May 4, 2016
 
/s/ Paul C. Phipps
 
 
 
Paul C. Phipps
 
 
 
President & Chief Executive Officer
 
 
 
 
Date:
May 4, 2016
 
/s/ Richard A. Meier
 
 
 
Richard A. Meier
 
 
 
Executive Vice President, Chief Financial Officer & President, International
 

29


Table of Contents

Item 6. Exhibits
 
(a)
Exhibits
 
 
 
10.1
 
Form of Restricted Stock Unit Agreement under the Company’s 2015 Stock Incentive Plan (“2015 Plan”)
 
 
 
10.2
 
Form of Restricted Stock Agreement under the 2015 Plan
 
 
 
10.3
 
Form of Director Restricted Stock Agreement under the 2015 Plan
 
 
 
10.4
 
Form of 2016 Performance Share Award Agreement
 
 
 
10.5
 
Form of 2016 Executive Incentive Program
 
 
 
10.6
 
Amendment effective March 1, 2016 of the Company’s Supplemental Executive Retirement Plan (“SERP”)
 
 
 
10.7
 
Amendment effective March 1, 2016 of Exhibit II of the Company’s SERP
 
 
 
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