OMI 3.31.2014-10Q
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, 2014
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 25, 2014, was 63,091,091 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)
 
2014
 
2013
Net revenue
 
$
2,256,380

 
$
2,246,384

Cost of goods sold
 
1,975,185

 
1,967,332

Gross margin

281,195


279,052

Selling, general and administrative expenses
 
225,610

 
217,721

Acquisition-related and exit and realignment charges
 
3,262

 
2,010

Depreciation and amortization
 
13,864

 
12,629

Other operating income, net
 
(7,825
)
 
(1,192
)
Operating earnings
 
46,284

 
47,884

Interest expense, net
 
3,246

 
3,199

Income before income taxes
 
43,038

 
44,685

Income tax provision
 
17,553

 
18,587

Net income
 
$
25,485

 
$
26,098

Net income per common share:
 
 
 
 
Basic
 
$
0.41

 
$
0.41

Diluted
 
$
0.41

 
$
0.41

Cash dividends per common share
 
$
0.25

 
$
0.24



See accompanying notes to consolidated financial statements.
3
Table of Contents

Owens & Minor, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2014
 
2013
Net income
 
$
25,485

 
$
26,098

Other comprehensive income (loss), net of tax:
 
 
 
 
Currency translation adjustments (net of income tax benefit of $0 in 2014 and of $385 in 2013)
 
467

 
(7,827
)
Change in unrecognized net periodic pension costs (net of income tax expense of $97 in 2014 and $134 in 2013)
 
107

 
208

Other (net of income tax benefit of $8 in 2014 and 2013)
 
(9
)
 
(13
)
Total other comprehensive income (loss), net of tax
 
565

 
(7,632
)
Comprehensive income
 
$
26,050

 
$
18,466



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)
2014
 
2013
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
182,373

 
$
101,905

Accounts and notes receivable, net of allowances of $15,330 and $15,030
543,214

 
572,854

Merchandise inventories
768,148

 
771,663

Other current assets
275,179

 
279,510

Total current assets
1,768,914

 
1,725,932

Property and equipment, net of accumulated depreciation of $136,782 and $137,526
192,245

 
191,961

Goodwill, net
275,562

 
275,439

Intangible assets, net
39,437

 
40,406

Other assets, net
93,042

 
90,304

Total assets
$
2,369,200

 
$
2,324,042

Liabilities and equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
659,550

 
$
643,872

Accrued payroll and related liabilities
21,741

 
23,296

Deferred income taxes
41,975

 
41,613

Other accrued liabilities
302,244

 
280,398

Total current liabilities
1,025,510

 
989,179

Long-term debt, excluding current portion
214,826

 
213,815

Deferred income taxes
42,779

 
43,727

Other liabilities
52,918

 
52,278

Total liabilities
1,336,033

 
1,298,999

Commitments and contingencies

 

Equity
 
 
 
Owens & Minor, Inc. shareholders’ equity:
 
 
 
Preferred stock, par value $100 per share, authorized - 10,000 shares, Series A Participating Cumulative Preferred Stock; none issued


 


Common stock, par value $2 per share; authorized - 200,000 shares; issued and outstanding - 63,091 shares and 63,096 shares
126,182

 
126,193

Paid-in capital
199,148

 
196,605

Retained earnings
696,574

 
691,547

Accumulated other comprehensive income
10,133

 
9,568

Total Owens & Minor, Inc. shareholders’ equity
1,032,037

 
1,023,913

Noncontrolling interest
1,130

 
1,130

Total equity
1,033,167

 
1,025,043

Total liabilities and equity
$
2,369,200

 
$
2,324,042



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)
2014
 
2013
Operating activities:
 
 
 
Net income
$
25,485

 
$
26,098

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
13,864

 
12,629

Share-based compensation expense
2,642

 
1,910

Provision for losses on accounts and notes receivable
54

 
107

Deferred income tax benefit
(822
)
 
(56
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
29,828

 
(34,575
)
Merchandise inventories
3,707

 
21,784

Accounts payable
15,815

 
98,198

Net change in other assets and liabilities
3,921

 
28,981

Other, net
(1,292
)
 
(465
)
Cash provided by operating activities
93,202

 
154,611

Investing activities:
 
 
 
Additions to property and equipment
(7,299
)
 
(7,513
)
Additions to computer software and intangible assets
(6,930
)
 
(7,264
)
Proceeds from sale of investment
1,937

 
—

Proceeds from sale of property and equipment
105

 
44

Cash used for investing activities
(12,187
)
 
(14,733
)
Financing activities:
 
 
 
Change in bank overdraft
20,578

 
—

Cash dividends paid
(15,785
)
 
(15,199
)
Repurchases of common stock
(5,000
)
 
(2,282
)
Excess tax benefits related to share-based compensation
346

 
207

Proceeds from exercise of stock options
937

 
1,792

Other, net
(1,868
)
 
(1,958
)
Cash used for financing activities
(792
)
 
(17,440
)
Effect of exchange rate changes on cash and cash equivalents
245

 
(1,763
)
Net increase in cash and cash equivalents
80,468

 
120,675

Cash and cash equivalents at beginning of period
101,905

 
97,888

Cash and cash equivalents at end of period
$
182,373

 
$
218,563

Supplemental disclosure of cash flow information:
 
 
 
Income taxes paid, net
$
15,161

 
$
1,540

Interest paid
$
539

 
$
698



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)
 
Noncontrolling
Interest
 
Total
Equity
Balance December 31, 2012
63,271

 
$
126,544

 
$
187,394

 
$
658,994

 
$
(406
)
 
$
1,130

 
$
973,656

Net income
 
 
 
 
 
 
26,098

 
 
 
 
 
26,098

Other comprehensive income
 
 
 
 
 
 
 
 
(7,632
)
 
 
 
(7,632
)
Dividends declared ($0.24 per share)
 
 
 
 
 
 
(15,176
)
 
 
 
 
 
(15,176
)
Shares repurchased and retired
(74
)
 
(148
)
 
 
 
(2,134
)
 
 
 
 
 
(2,282
)
Share-based compensation expense, exercises and other
138

 
276

 
2,610

 
 
 
 
 
 
 
2,886

Balance March 31, 2013
$
63,335

 
$
126,672

 
$
190,004

 
$
667,782

 
$
(8,038
)
 
$
1,130

 
$
977,550

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 
 
 
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



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). For the consolidated subsidiary in which our ownership is less than 100%, the outside stockholder’s interest is presented as a noncontrolling interest. All significant intercompany accounts and transactions have been eliminated. The results of operations for interim periods are not necessarily indicative of the results expected for the full year.
Reclassification and Correction
Certain prior year amounts have been reclassified to conform to current year presentation. In addition, after completing a review of customer contracts in the International segment in the fourth quarter of 2013, we determined a net presentation of revenues for certain contracts is more representative of the customer arrangement. Certain amounts in the prior period statement of income were revised to reflect this net presentation of revenues. As a result, net revenue and cost of goods sold each decreased by $29.3 million. The change did not affect cash flows, gross margin, operating earnings or net income in 2013.
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). See Note 7 for the fair value of long-term debt.
Note 3—Financing Receivables and Payables
At March 31, 2014 and December 31, 2013, we had financing receivables of $179.5 million and $198.5 million and related payables of $146.2 million and $165.3 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
The following table summarizes the changes in the carrying amount of goodwill through March 31, 2014:
 
Domestic
Segment
 
International
Segment
 
Total
Carrying amount of goodwill, December 31, 2013
$
248,498

 
$
26,941

 
$
275,439

Currency translation adjustments
—

 
123

 
123

Carrying amount of goodwill, March 31, 2014
$
248,498

 
$
27,064

 
$
275,562


8

Table of Contents

Intangible assets at March 31, 2014, and December 31, 2013, were as follows:
 
March 31, 2014
 
December 31, 2013
 
Customer
Relationships
 
Other
Intangibles
 
Customer
Relationships
 
Other
Intangibles
 
 
 
 
 
 
 
 
Gross intangible assets
$
51,686

 
$
3,957

 
$
51,544

 
$
3,933

Accumulated amortization
(15,461
)
 
(745
)
 
(14,281
)
 
(790
)
Net intangible assets
$
36,225

 
$
3,212

 
$
37,263

 
$
3,143

At March 31, 2014, $17.3 million in net intangible assets were held in the Domestic segment and $22.1 million were held in the International segment. Amortization expense for intangible assets was $1.1 million and $0.9 million for the three months ended March 31, 2014 and 2013.
Based on the current carrying value of intangible assets subject to amortization, estimated amortization expense is $3.4 million for the remainder of 2014, $5.1 million for 2015, $5.1 million for 2016, $5.0 million for 2017 and $4.1 million for 2018.
Note 5—Exit and Realignment Costs
We periodically incur exit and realignment and other charges associated with optimizing our operations, which includes the consolidation of distribution centers, the realignment of our distribution network, and the closure of offsite warehouses.
In the current quarter, we recognized total charges of $2.6 million associated with exit and realignment activities, of which $1.3 million was in the Domestic segment and $1.3 million was in the International segment. These charges include $1.3 million in loss accruals associated with our operating leases and estimated severance. The remaining charges of $1.3 million are comprised of costs that were expensed as incurred in the quarter and not reflected in the table below, 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 $2.2 million over the remainder of 2014 for activities initiated in the Domestic segment through March 31, 2014.
During the first three months of 2013, we recognized total charges of $0.9 million in the Domestic segment and $0.5 million in the International segment associated with these activities. These charges include $0.5 million in loss accruals for operating leases. The remaining charges of $0.9 million are comprised of costs that are expensed as incurred and not reflected in the table below, including losses on property and equipment and other expenses.
The following table summarizes the activity related to exit and realignment cost accruals through March 31, 2014 and 2013:
 
Lease
Obligations
 
Severance and
Other
 
Total
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

 
 
 
 
 
 
 
 
 
 
 
 
Accrued exit and realignment costs, December 31, 2012
$
5,098

 
$
1,116

 
$
6,214

Provision for exit and realignment activities
538

 
3

 
541

Cash payments, net of sublease income
(4,844
)
 
(147
)
 
(4,991
)
Accrued exit and realignment costs, March 31, 2013
$
792

 
$
972

 
$
1,764


9

Table of Contents

Note 6—Retirement Plan
We have a noncontributory, unfunded retirement plan for certain officers and other key employees in the United States. Certain of our foreign subsidiaries also have defined benefit pension plans covering substantially all of their respective employees.
The components of net periodic benefit cost, which are included in selling, general and administrative expenses, for the three months ended March 31, 2014 and 2013, were as follows:
 
Three Months Ended 
 March 31,
 
2014
 
2013
Service cost
$
36

 
$
33

Interest cost
482

 
414

Recognized net actuarial loss
204

 
342

Net periodic benefit cost
$
722

 
$
789

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 $0.2 million for the three months ended March 31, 2014 and 2013.
Note 7—Debt
We have $200 million of senior notes outstanding, which mature on April 15, 2016 and bear interest at 6.35% payable semi-annually (Senior Notes). We may redeem the Senior Notes, in whole or in part, at a redemption price of the greater of 100% of the principal amount of the Senior Notes or the present value of remaining scheduled payments of principal and interest discounted at the applicable Treasury Rate plus 0.25%. As of March 31, 2014 and December 31, 2013, the estimated fair value of the Senior Notes was $217 million and $219 million, and the related carrying amount was $204 million for both periods. The observed yield of the Senior Notes at March 31, 2014 and December 31, 2013 was 2.00% and 2.12%.
We have a five-year $350 million Credit Agreement with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A. and a syndicate of financial institutions (the Credit Agreement) expiring June 5, 2017. Under the Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $150 million. The interest rate on the Credit Agreement, which is subject to adjustment quarterly, is based on the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread) as defined by the Credit Agreement. We are charged a commitment fee of between 17.5 and 42.5 basis points on the unused portion of the facility. The terms of the Credit Agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At March 31, 2014, we had no borrowings and letters of credit of approximately $5.0 million outstanding under the Credit Agreement, leaving $345.0 million available for borrowing. We also have a $1.5 million letter of credit outstanding as of March 31, 2014 and December 31, 2013, which supports our facilities leased in Europe.
Note 8—Income Taxes
The effective tax rate was 40.8% for the three months ended March 31, 2014, compared to 41.6% in the same quarter of 2013. The change in rate is due to the impact of foreign taxes. The liability for unrecognized tax benefits was $5.0 million at March 31, 2014, and $4.6 million at December 31, 2013. Included in the liability at March 31, 2014 were $3.7 million of tax positions for which ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.

10

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Note 9—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, 2014 and 2013.
 
Three Months Ended 
 March 31,
(in thousands, except per share data)
2014
 
2013
Numerator:
 
 
 
Net income
$
25,485

 
$
26,098

Less: income allocated to unvested restricted shares
(188
)
 
(195
)
Net income attributable to common shareholders - basic
25,297

 
25,903

Add: undistributed income attributable to unvested restricted shares - basic
51

 
58

Less: undistributed income attributable to unvested restricted shares - diluted
(51
)
 
(58
)
Net income attributable to common shareholders - diluted
$
25,297

 
$
25,903

Denominator:
 
 
 
Weighted average shares outstanding - basic
62,304

 
62,687

Dilutive shares - stock options
13

 
58

Weighted average shares outstanding - diluted
62,317

 
62,745

Net income per share attributable to common shareholders:
 
 
 
Basic
$
0.41

 
$
0.41

Diluted
$
0.41

 
$
0.41

Note 10—Shareholders’ Equity
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, 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, 2014, we repurchased in open-market transactions and retired approximately 143 thousand shares of our common stock for an aggregate of $5.0 million, or an average price per share of $34.99. As of March 31, 2014, we have approximately $95.0 million remaining under the repurchase program. We have elected to allocate any excess of share repurchase price over par value to retained earnings.

11

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Note 11—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, 2014 and 2013: 
 
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

 
 
Defined Benefit
Pension
Plans
 
Currency
Translation
Adjustments
 
Other
 
Total
Accumulated other comprehensive income (loss), December 31, 2012
$
(10,318
)
 
$
9,749

 
$
163

 
$
(406
)
Other comprehensive income (loss) before reclassifications
—

 
(8,212
)
 
 
 
(8,212
)
Income tax
—

 
385

 
—

 
385

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

 
(7,827
)
 
—

 
(7,827
)
Amounts reclassified from accumulated other comprehensive income (loss)
342

 
—

 
(21
)
 
321

Income tax
(134
)
 
—

 
8

 
(126
)
Amounts reclassified from accumulated other comprehensive income (loss), net of tax
208

 
—

 
(13
)
 
195

Other comprehensive income (loss)
208

 
(7,827
)
 
(13
)
 
(7,632
)
Accumulated other comprehensive income (loss), March 31, 2013
$
(10,110
)
 
$
1,922

 
$
150

 
$
(8,038
)
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, 2014 and 2013, we reclassified $0.2 million and $0.3 million of actuarial net losses.

12

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Note 12—Commitments and Contingencies
We have contractual obligations that are required to be paid to customers in the event that certain contractual performance targets are not achieved as of specified dates, generally within 36 months from inception of the contract. These contingent obligations totaled $1.0 million as of March 31, 2014. If none of the performance targets are met as of the specified dates, and customers have met their contractual commitments, payment will be due as follows: 2015 - $0.2 million; 2016 - $0.8 million. None of these contingent obligations were accrued at March 31, 2014, as we do not consider any of them probable. We deferred the recognition of fees that are contingent upon our future performance under the terms of these contracts. As of March 31, 2014, $0.9 million of deferred revenue related to outstanding contractual performance targets was included in other current liabilities.
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.
Various issues and potential claims related to the acquisition and transition of Movianto remain outstanding and under review and discussion with the former owner. The ultimate outcomes of these issues and potential claims, including their impact on future financial results, cannot be ascertained or estimated at this time.
Note 13—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,
 
2014
 
2013
Net revenue:
 
 
 
Domestic
$
2,148,915

 
$
2,154,715

International
107,465

 
91,669

Consolidated net revenue
$
2,256,380

 
$
2,246,384

 
 
 
 
Operating earnings (loss):
 
 
 
Domestic
$
52,734

 
$
52,907

International
(3,188
)
 
(3,013
)
Acquisition-related and exit and realignment charges
(3,262
)
 
(2,010
)
Consolidated operating earnings
$
46,284

 
$
47,884

 
 
 
 
Depreciation and amortization:
 
 
 
Domestic
$
8,975

 
$
9,082

International
4,889

 
3,547

Consolidated depreciation and amortization
$
13,864

 
$
12,629

 
 
 
 
Capital expenditures:
 
 
 
Domestic
$
10,175

 
$
11,602

International
4,054

 
3,175

Consolidated capital expenditures
$
14,229

 
$
14,777

 

13

Table of Contents

 
March 31, 2014
 
December 31, 2013
Total assets:
 
 
 
Domestic
$
1,712,214

 
$
1,747,572

International
474,613

 
474,565

Segment assets
2,186,827

 
2,222,137

Cash and cash equivalents
182,373

 
101,905

Consolidated total assets
$
2,369,200

 
$
2,324,042


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 Senior Notes, on a combined basis; and the non-guarantor subsidiaries of the Senior 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, 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


14

Table of Contents

Three Months Ended March 31, 2013
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Income
 
 
 
 
 
 
 
 
 
Net revenue
$
—

 
$
2,154,716

 
$
101,980

 
$
(10,312
)
 
$
2,246,384

Cost of goods sold
—

 
1,936,091

 
41,282

 
(10,041
)
 
1,967,332

Gross margin
—

 
218,625

 
60,698

 
(271
)
 
279,052

Selling, general and administrative expenses
654

 
156,347

 
60,720

 
—

 
217,721

Acquisition-related and exit and realignment charges
—

 
862

 
1,148

 
—

 
2,010

Depreciation and amortization
3

 
9,060

 
3,566

 
—

 
12,629

Other operating income, net
—

 
(643
)
 
(549
)
 
—

 
(1,192
)
Operating earnings (loss)
(657
)
 
52,999

 
(4,187
)
 
(271
)
 
47,884

Interest expense (income), net
4,395

 
(911
)
 
(285
)
 
—

 
3,199

Income (loss) before income taxes
(5,052
)
 
53,910

 
(3,902
)
 
(271
)
 
44,685

Income tax (benefit) provision
(1,962
)
 
21,455

 
(906
)
 
—

 
18,587

Equity in earnings of subsidiaries
29,188

 
—

 
—

 
(29,188
)
 
—

Net income (loss)
26,098

 
32,455

 
(2,996
)
 
(29,459
)
 
26,098

Other comprehensive income (loss)
(7,632
)
 
208

 
(7,828
)
 
7,620

 
(7,632
)
Comprehensive income (loss)
$
18,466

 
$
32,663

 
$
(10,824
)
 
$
(21,839
)
 
$
18,466


15

Table of Contents

 
 
March 31, 2014
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-
guarantor
Subsidiaries
 
Eliminations
 
Consolidated
 
 
Balance Sheets
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
133,300

 
$
25,569

 
$
23,504

 
$
—

 
$
182,373

 
Accounts and notes receivable, net
—

 
469,335

 
77,475

 
(3,596
)
 
543,214

 
Merchandise inventories
—

 
744,219

 
25,373

 
(1,444
)
 
768,148

 
Other current assets
—

 
71,141

 
203,846

 
192

 
275,179

 
Total current assets
133,300

 
1,310,264

 
330,198

 
(4,848
)
 
1,768,914

 
Property and equipment, net
—

 
95,814

 
96,431

 
—

 
192,245

 
Goodwill, net
—

 
247,271

 
28,291

 
—

 
275,562

 
Intangible assets, net
—

 
17,360

 
22,077

 
—

 
39,437

 
Due from O&M and subsidiaries
—

 
453,120

 
—

 
(453,120
)
 
—

 
Advances to and investment in consolidated subsidiaries
1,561,013

 
—

 
—

 
(1,561,013
)
 
—

 
Other assets, net
363

 
66,071

 
26,608

 
—

 
93,042

 
Total assets
$
1,694,676

 
$
2,189,900

 
$
503,605

 
$
(2,018,981
)
 
$
2,369,200

 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
619,240

 
$
43,906

 
$
(3,596
)
 
$
659,550

 
Accrued payroll and related liabilities
—

 
10,781

 
10,960

 
—

 
21,741

 
Deferred income taxes
—

 
41,855

 
120

 
—

 
41,975

 
Other accrued liabilities
9,747

 
101,643

 
190,854

 
—

 
302,244

 
Total current liabilities
9,747

 
773,519

 
245,840

 
(3,596
)
 
1,025,510

 
Long-term debt, excluding current portion
203,596

 
7,252

 
3,978

 
—

 
214,826

 
Due to O&M and subsidiaries
449,296

 
—

 
2,671

 
(451,967
)
 
—

 
Intercompany debt
—

 
138,890

 
—

 
(138,890
)
 
—

 
Deferred income taxes
—

 
31,285

 
11,494

 
—

 
42,779

 
Other liabilities
—

 
48,021

 
4,897

 
—

 
52,918

 
Total liabilities
662,639

 
998,967

 
268,880

 
(594,453
)
 
1,336,033

 
Equity
 
 
 
 
 
 
 
 
 
 
Common stock
126,182

 
—

 
1,500

 
(1,500
)
 
126,182

 
Paid-in capital
199,148

 
242,024

 
259,864

 
(501,888
)
 
199,148

 
Retained earnings (deficit)
696,574

 
955,374

 
(44,267
)
 
(911,107
)
 
696,574

 
Accumulated other comprehensive income (loss)
10,133

 
(6,465
)
 
16,498

 
(10,033
)
 
10,133

 
Total O&M shareholders’ equity
1,032,037

 
1,190,933

 
233,595

 
(1,424,528
)
 
1,032,037

 
Noncontrolling Interest
—

 
—

 
1,130

 
—

 
1,130

 
Total equity
1,032,037

 
1,190,933

 
234,725

 
(1,424,528
)
 
1,033,167

 
Total liabilities and equity
$
1,694,676

 
$
2,189,900

 
$
503,605

 
$
(2,018,981
)
 
$
2,369,200



16

Table of Contents

December 31, 2013
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Balance Sheets
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
74,391

 
$
2,012

 
$
25,502

 
$
—

 
$
101,905

Accounts and notes receivable, net
—

 
496,310

 
79,722

 
(3,178
)
 
572,854

Merchandise inventories
—

 
750,999

 
22,128

 
(1,464
)
 
771,663

Other current assets
201

 
72,049

 
207,058

 
202

 
279,510

Total current assets
74,592

 
1,321,370

 
334,410

 
(4,440
)
 
1,725,932

Property and equipment, net
2

 
96,500

 
95,459

 
—

 
191,961

Goodwill, net
—

 
247,271

 
28,168

 
—

 
275,439

Intangible assets, net
—

 
17,881

 
22,525

 
—

 
40,406

Due from O&M and subsidiaries
—

 
377,786

 
—

 
(377,786
)
 
—

Advances to and investments in consolidated subsidiaries
1,533,294

 
—

 
—

 
(1,533,294
)
 
—

Other assets, net
408

 
63,848

 
26,048

 
—

 
90,304

Total assets
$
1,608,296

 
$
2,124,656

 
$
506,610

 
$
(1,915,520
)
 
$
2,324,042

Liabilities and equity
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
595,865

 
$
51,185

 
$
(3,178
)
 
$
643,872

Accrued payroll and related liabilities
—

 
12,792

 
10,504

 
—

 
23,296

Deferred income taxes
—

 
41,464

 
149

 
—

 
41,613

Other current liabilities
6,811

 
87,795

 
185,792

 
—

 
280,398

Total current liabilities
6,811

 
737,916

 
247,630

 
(3,178
)
 
989,179

Long-term debt, excluding current portion
204,028

 
7,228

 
2,559

 
—

 
213,815

Due to O&M and subsidiaries
373,544

 
—

 
2,910

 
(376,454
)
 
—

Intercompany debt
—

 
138,890

 
—

 
(138,890
)
 
—

Deferred income taxes
—

 
32,173

 
11,554

 
—

 
43,727

Other liabilities
—

 
47,816

 
4,462

 
—

 
52,278

Total liabilities
584,383

 
964,023

 
269,115

 
(518,522
)
 
1,298,999

Equity
 
 
 
 
 
 
 
 
 
Common stock
126,193

 
—

 
1,500

 
(1,500
)
 
126,193

Paid-in capital
196,605

 
242,024

 
259,864

 
(501,888
)
 
196,605

Retained earnings (deficit)
691,547

 
925,184

 
(41,029
)
 
(884,155
)
 
691,547

Accumulated other comprehensive income (loss)
9,568

 
(6,575
)
 
16,030

 
(9,455
)
 
9,568

Total Owens & Minor, Inc. shareholders’ equity
1,023,913

 
1,160,633

 
236,365

 
(1,396,998
)
 
1,023,913

Noncontrolling interest
—

 
—

 
1,130

 
—

 
1,130

Total equity
1,023,913

 
1,160,633

 
237,495

 
(1,396,998
)
 
1,025,043

Total liabilities and equity
$
1,608,296

 
$
2,124,656

 
$
506,610

 
$
(1,915,520
)
 
$
2,324,042


 

17

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:
 
 
 
 
 
 
 
 


 
Proceeds from the sale of investment
—

 
1,937

 
—

 
—

 
1,937

 
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 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


18

Table of Contents

 
Three months ended March 31, 2013
Owens &
Minor, Inc.
 
Guarantor
Subsidiaries
 
Non-guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Statements of Cash Flows
 
 
 
 
 
 
 
 
 
Operating activities:
 
 
 
 
 
 
 
 
 
Net income (loss)
$
26,098

 
$
32,455

 
$
(2,996
)
 
$
(29,459
)
 
$
26,098

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

Equity in earnings of subsidiaries
(29,188
)
 
—

 
—

 
29,188

 
—

Depreciation and amortization
3

 
9,060

 
3,566

 
—

 
12,629

Share-based compensation expense
—

 
1,910

 
—

 
—

 
1,910

Deferred income tax expense
—

 
626

 
(682
)
 
—

 
(56
)
Provision for losses on accounts and notes receivable
—

 
53

 
54

 
—

 
107

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
—

Accounts and notes receivable
—

 
(11,755
)
 
(22,344
)
 
(476
)
 
(34,575
)
Merchandise inventories
—

 
24,300

 
(2,786
)
 
270

 
21,784

Accounts payable
—

 
60,533

 
37,188

 
477

 
98,198

Net change in other assets and liabilities
3,720

 
2,813

 
22,448

 


 
28,981

Other, net
(406
)
 
(39
)
 
(20
)
 
 
 
(465
)
Cash provided by (used for) operating activities
227

 
119,956


34,428


—


154,611

Investing activities:
 
 
 
 
 
 
 
 

Additions to computer software and intangible assets
—

 
(5,786
)
 
(1,478
)
 
—

 
(7,264
)
Additions to property and equipment
—

 
(5,816
)
 
(1,697
)
 
—

 
(7,513
)
Proceeds from the sale of property and equipment
—

 
45

 
(1
)
 
—

 
44

Cash used for investing activities
—

 
(11,557
)
 
(3,176
)
 
—

 
(14,733
)
Financing activities:
 
 
 
 
 
 
 
 

Change in intercompany advances
106,661

 
(106,529
)
 
(132
)
 
—

 
—

Cash dividends paid
(15,199
)
 
—

 
—

 
—

 
(15,199
)
Repurchases of common stock
(2,282
)
 
—

 
—

 
—

 
(2,282
)
Excess tax benefits related to share-based compensation
207

 
—

 
—

 
—

 
207

Proceeds from exercise of stock options
1,792

 
—

 
—

 
—

 
1,792

Other, net
(985
)
 
(725
)
 
(248
)
 
—

 
(1,958
)
Cash provided by (used for) financing activities
90,194

 
(107,254
)
 
(380
)
 
—

 
(17,440
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(1,763
)
 
 
 
(1,763
)
Net (decrease) increase in cash and cash equivalents
90,421

 
1,145


29,109


—


120,675

Cash and cash equivalents at beginning of period
58,190

 
13,641

 
26,057

 
—

 
97,888

Cash and cash equivalents at end of period
$
148,611


$
14,786


$
55,166


$
—


$
218,563


19

Table of Contents

Note 15—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, 2013.

We adopted an Accounting Standard Update (ASU) issued by the Financial Accounting Standards Board (FASB) for presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of this guidance did not have an impact on our financial position or results of operations.
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, 2013. 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, 2013.
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 services in the United States relating to our role as a medical supply logistics company serving healthcare providers and manufacturers. The International segment provides third-party logistics for the pharmaceutical and medical device industries in the European market. Segment financial information is provided in Note 13 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. GAAP and non-GAAP results discussed below for the three months ended March 31, 2014 include a recovery of $5.3 million recorded in other operating income, net related to the settlement of a direct purchaser anti-trust class action lawsuit.
 
Three Months Ended March 31,
(Dollars in thousands except per share data)
2014
 
2013
Operating earnings, as reported (GAAP)
$
46,284

 
$
47,884

Acquisition-related and exit and realignment charges
3,262

 
2,010

Operating earnings, adjusted (non-GAAP) (Adjusted Operated Earnings)
$
49,546

 
$
49,894

Adjusted Operating Earnings as a percent of revenue (non-GAAP)
2.20
%
 
2.22
%
Net income, as reported (GAAP)
$
25,485

 
$
26,098

Acquisition-related and exit and realignment charges, net of tax
2,222

 
1,521

Net income, adjusted (non-GAAP) (Adjusted Net Income)
$
27,707

 
$
27,619

Net income per diluted common share, as reported (GAAP)
$
0.41

 
$
0.41

Acquisition-related and exit and realignment charges, per diluted common share
0.03

 
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 2014, unchanged when compared with prior year. Domestic segment operating earnings (including the recovery of $5.3 million noted above) decreased $0.2 million to $52.7 million for the first quarter of 2014. The International segment had an operating loss of $3.2 million for the three months ended March 31, 2014 compared to a loss of $3.0 million for the comparable prior year period.
Use of Non-GAAP Measures
This management’s discussion and analysis contains financial measures that are not calculated in accordance with U.S. generally accepted accounting principles (GAAP). 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

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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 $0.7 million and $0.6 million in the first quarter of 2014 and 2013. Current quarter charges consist primarily of costs to resolve certain contingencies with the former owner as well as remaining costs to transition Movianto’s information technology and administrative functions. Exit and realignment charges, pre-tax, of $2.6 million and $1.4 million in the first quarter of 2014 and 2013 are 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. These charges have been tax effected in the preceding table using a blended income tax rate depending on the amount of charges incurred in different tax jurisdictions. Unless otherwise stated, our analysis hereinafter excludes acquisition-related and exit and realignment charges. More information about these charges is provided in Notes 5 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)
2014
 
2013
 
$
 
%
Domestic
$
2,148,915

 
$
2,154,715

 
$
(5,800
)
 
(0.3
)%
International
107,465

 
91,669

 
15,796

 
17.2
 %
Net revenue
$
2,256,380

 
$
2,246,384

 
$
9,996

 
0.4
 %
Consolidated net revenue improved slightly over prior year fueled by growth in fee-for-service revenues. Domestic segment revenue was impacted by ongoing market trends including continued lower rates of healthcare utilization. In addition, our continued rationalization of smaller, less profitable healthcare provider customers and suppliers were not fully offset by growth in existing customers and new business. The increase in the International segment was largely a result of growth in fee-for-service business as well as positive impacts from foreign exchange. Fee-for-service business represents approximately two-thirds of net revenue in the International segment.
Gross margin.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2014
 
2013
 
$
 
%
Gross margin
$
281,195

 
$
279,052

 
$
2,143

 
0.8
%
As a % of net revenue
12.46
%
 
12.42
%
 
 
 
 
The growth in fee-for-service activity drove the overall improvement in gross margin as the International segment had an $11.4 million increase over prior year. This was mostly offset by a decline in the Domestic segment gross margin mainly as a result of lower benefits from supplier price changes in the first quarter of 2014 when compared to the first quarter of 2013, as well as lower margins on new and renewed contracts.
Operating expenses.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2014
 
2013
 
$
 
%
SG&A expenses
$
225,610

 
$
217,721

 
$
7,889

 
3.6
%
As a % of net revenue
10.00
%
 
9.69
%
 

 

Depreciation and amortization
$
13,864

 
$
12,629

 
$
1,235

 
9.8
%
Other operating income, net
$
(7,825
)
 
$
(1,192
)
 
$
(6,633
)
 
556.5
%
Selling, general and administrative (SG&A) expenses include labor, warehousing, handling and delivery costs associated with our distribution and logistics services and all costs associated with our fee-for-service arrangements. The costs

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to convert new customers to our information systems are generally incurred prior to the recognition of revenues from the new customers.
International segment SG&A increased over the prior year period by $10.6 million due mainly to increased salaries and delivery costs associated with higher fee-for-service activity as well as on-boarding costs in advance of a significant new customer in the United Kingdom. This increase was partially offset by a $2.7 million decline in the Domestic segment driven by cost benefits realized from our strategic initiatives and improvement in workers' compensation claims experience.
Depreciation and amortization expense increased primarily in the International segment due to increases in computer software amortization for assets placed in service and amortization from purchase price accounting adjustments.
The increase in other operating income, net over the prior year period is attributed primarily to the recovery of $5.3 million from the settlement of a direct purchaser anti-trust class action lawsuit relating to the recovery of costs from purchases of medical devices over a multi-year period, as well as a gain on the sale of an investment and an increase in finance charge income.
Interest expense, net.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2014
 
2013
 
$
 
%
Interest expense, net
$
3,246

 
$
3,199

 
$
47

 
1.5
%
Effective interest rate
6.08
%
 
5.99
%
 
 
 
 
Interest expense is consistent with the prior year period.
Income taxes.
 
Three Months Ended March 31,
 
Change
(Dollars in thousands)
2014
 
2013
 
$
 
%
Income tax provision
$
17,553

 
$
18,587

 
$
(1,034
)
 
(5.6
)%
Effective tax rate
40.8
%
 
41.6
%
 
 
 
 
The provision for income taxes, including income taxes on acquisition-related and exit and realignment charges, decreased from the prior year largely due to the impact of foreign taxes.
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, 2014
 
December 31, 2013
 
Change
(Dollars in thousands)
 
 
$
 
%
Cash and cash equivalents
$
182,373

 
$
101,905

 
$
80,468

 
79.0
 %
Accounts and notes receivable, net of allowances
$
543,214

 
$
572,854

 
$
(29,640
)
 
(5.2
)%
Consolidated DSO (1)
20.5

 
22.1

 

 

Merchandise inventories
$
768,148

 
$
771,663

 
$
(3,515
)
 
(0.5
)%
Consolidated inventory turnover (2)
10.4

 
10.4

 

 

Accounts payable
$
659,550

 
$
643,872

 
$
15,678

 
2.4
 %
(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, 2014 and December 31, 2013

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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, 2014 and 2013:
(Dollars in thousands)
2014
 
2013
Net cash provided by (used for):
 
 
 
Operating activities
$
93,202

 
$
154,611

Investing activities
(12,187
)
 
(14,733
)
Financing activities
(792
)
 
(17,440
)
Effect of exchange rate changes
245

 
(1,763
)
Increase in cash and cash equivalents
$
80,468

 
$
120,675

Cash provided by operating activities was $93.2 million in the first three months of 2014, compared to $154.6 million in the same period of 2013. The decrease in cash from operating activities for the first three months of 2014 compared to the same period in 2013 was primarily due to routine changes in working capital including timing of payments.
Cash used for investing activities was $12.2 million in the first three months of 2014, compared to $14.7 million in the same period of 2013. Investing activities in 2014 and 2013 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 2014 was $0.8 million, compared to $17.4 million used in the same period of 2013. During the first three months of 2014, we paid dividends of $15.8 million, repurchased common stock under a share repurchase program for $5.0 million of cash, and received proceeds of $1.0 million from the exercise of stock options. Financing activities in the current quarter also include $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. We have a five-year $350 million Credit Agreement with Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A. and a syndicate of financial institutions (the Credit Agreement). Under the Credit Agreement, we have the ability to request two one-year extensions and to request an increase in aggregate commitments by up to $150 million. The interest rate, which is subject to adjustment quarterly, is based on the London Interbank Offered Rate (LIBOR), the Federal Funds Rate or the Prime Rate, plus an adjustment based on the better of our debt ratings or leverage ratio (Credit Spread) as defined by the Credit Agreement. We are charged a commitment fee of between 17.5 and 42.5 basis points on the unused portion of the facility. The terms of the Credit Agreement limit the amount of indebtedness that we may incur and require us to maintain ratios for leverage and interest coverage, including on a pro forma basis in the event of an acquisition. At March 31, 2014, we had no borrowings and letters of credit of approximately $5.0 million outstanding on the revolving credit facility, leaving $345.0 million available for borrowing.
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. During the first three months of 2014, we had no borrowings or repayments under the credit facility. Based on our leverage ratio at March 31, 2014, the interest rate under the credit facility is LIBOR plus 1.375%. We have $200 million of senior notes outstanding, which mature in 2016 and bear interest at 6.35%, payable semi-annually on April 15 and October 15. The revolving credit facility 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 the debt covenants at March 31, 2014.
In the first quarter of 2014, we paid cash dividends on our outstanding common stock at the rate of $0.25 per share, which represents a 4% increase over the rate of $0.24 per share paid in the first quarter of 2013. 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 timing of purchases and the number of shares of common stock to be repurchased will be determined by management based upon market conditions and other factors. 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. During the first quarter of 2014, we repurchased approximately 143 thousand shares for $5.0 million under this program. The remaining amount authorized for repurchases under this program is $95.0 million at March 31, 2014.

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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 $18.9 million and $22.2 million as of March 31, 2014 and December 31, 2013. 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. Upon distribution of these assets, we could be subject to additional U.S. federal and state income taxes and withholding taxes payable to foreign jurisdictions, where applicable.
The IRS on January 10, 2014 released final regulations relating to the adjustment of inventory costs for certain sales-based vendor charge-backs and the allowable treatment of these charge-backs in tax LIFO calculations. We are currently analyzing the impact of this regulatory change on our tax LIFO position, which could cause our related deferred tax liability to become due and payable, impacting future cash flow.
We believe available financing sources, including cash generated by operating activities and borrowings under the revolving credit facility, 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 and/or (iii) our cost of borrowing.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see 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, 2014.
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, including the management and integration of our acquisition of Movianto;
•
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;

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•
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 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, 2013.
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, 2014. 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 $3.96 per gallon in the first three months of 2014, a decrease from $4.03 per gallon in the first three months of 2013. Based on our fuel consumption in the first three months of 2014, we estimate that every 10 cents per gallon increase in the benchmark would reduce our Domestic segment operating earnings by approximately $450,000 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, 2014. There has been no change in our internal control over financial reporting during the quarter ended March 31, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, 2013. Through March 31, 2014, 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, 2013. Through March 31, 2014, 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. For the three months ended March 31, 2014, we repurchased in open-market transactions and retired 142,904 shares of our common stock for an aggregate of $5.0 million, or an average price per share of $34.99. The following table summarizes share repurchase activity by month during the three months ended March 31, 2014.
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 2014
—

 
$
—

 
—

 
$
—

February 2014
50,000

 
$
34.93

 
50,000

 
$
98,253,402

March 2014
92,904

 
$
35.02

 
92,904

 
$
95,000,018

Total
142,904

 
 
 
142,904

 
 

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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:
May 1, 2014
 
/s/ Craig R. Smith
 
 
 
Craig R. Smith
 
 
 
Chairman & Chief Executive Officer
 
 
 
 
Date:
May 1, 2014
 
/s/ Richard A. Meier
 
 
 
Richard A. Meier
 
 
 
Executive Vice President & Chief Financial Officer
 

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Item 6. Exhibits
 
(a)
Exhibits
 
 
 
3.1
  
Amended and Restated Bylaws of Owens & Minor, Inc. (incorporated herein by reference to our Current Report on Form 8-K, Exhibit 3.1, dated November 5, 2013).
 
 
 
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

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